<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
TO
COMMISSION FILE NUMBER: 0-21425
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HEALTHCARE FINANCIAL PARTNERS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 52-1844418
(State or other jurisdiction of (I.R.S. Employer)
incorporation or organization) Identification No.)
2 Wisconsin Circle, Fourth Floor
Chevy Chase, Maryland 20815
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (301) 961-1640
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.01 par value
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [X]
As of March 17, 1999, the aggregate market value of the Common Stock held by
non-affiliates of the Registrant was not less than $290,732,487.
As of March 17, 1999, there were 13,420,539 shares of Common Stock
outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE: THE INFORMATION CALLED FOR BY PART III
IS INCORPORATED BY REFERENCE TO THE DEFINITIVE PROXY STATEMENT FOR THE ANNUAL
MEETING OF STOCKHOLDERS OF THE COMPANY TO BE HELD MAY 27, 1999, WHICH WILL BE
FILED PRIOR TO APRIL 30, 1999.
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<PAGE>
PART I
ITEM 1. BUSINESS
This Report contains certain statements that are "forward-looking statements."
Those statements include, among other things, the discussions of the Company's
business strategy and expectations concerning the Company's market position,
future operations, margins, profitability, funding sources, liquidity and
capital resources. Reliance on any forward-looking statement involves risks and
uncertainties. Although the Company believes that the assumptions on which the
forward-looking statements contained in the report are based are reasonable, any
of the assumptions could prove to be inaccurate. If so, the forward-looking
statements based on those assumptions also could be incorrect. In light of
these and other uncertainties, the inclusion of a forward-looking statement in
the report should not be regarded as a representation by the Company that the
Company's plans and objectives will be achieved.
General
HealthCare Financial Partners, Inc. (the "Company") is a specialty finance
company offering asset-based and related financing to healthcare providers with
a primary focus on clients operating in sub-markets of the healthcare industry,
including long-term care, hospitals, 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, home
healthcare, mental health providers, contract research organizations, 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 $30 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 experience, that the Company's
healthcare industry expertise and specialized information systems, combined with
its responsiveness to clients, willingness to finance relatively small
transactions, and flexibility in structuring transactions, give it a competitive
advantage in its target markets over commercial banks, diversified finance
companies and traditional asset-based lenders.
From its inception in 1993 through December 31, 1998, the Company has advanced
$4.3 billion to its clients in over 1,064 transactions, including $2.4 billion
advanced during the year ended December 31, 1998. The Company had 209 clients
as of December 31, 1998, of which 68 were affiliates of one or more other
clients. The average amount outstanding per client or affiliated client group
at December 31, 1998 was approximately $2.7 million. For the year ended
December 31, 1996, the Company's pro forma net income was $3 million. For the
years ended December 31, 1998 and 1997, the Company's consolidated net income
was $19.8 and $8 million, respectively. For the year ended December 31, 1998,
the Company's yield on finance receivables (total interest and fee income
divided by average finance receivables for the period) was 16.2%.
At December 31, 1998, 72.8% of the Company's portfolio consisted of finance
receivables from businesses in the long-term care, hospital, and physician
practice sub-markets. According to Healthcare Financing Administration
("HCFA"), estimated expenditures in 1999 for those sub-markets, which the
Company currently targets, collectively constituted approximately $726 billion
of the over $1.22 trillion U.S. healthcare market. These sub-markets are highly
fragmented, and companies operating in these sub-markets generally have
significant working capital finance requirements. The Company's clients
operating in these sub-markets tend to be smaller, growing companies with
limited access to traditional sources of working capital financing from
commercial banks, diversified finance companies and asset-based lenders because
many such lenders have not developed the healthcare industry expertise needed to
underwrite smaller healthcare service companies or the specialized systems
necessary to track and monitor healthcare accounts receivable transactions.
Some of the Company's clients are also constrained from obtaining financing from
more traditional working capital sources due to their inadequate equity
capitalization, limited operating history, lack of profitability, or financing
needs below commercial bank size requirements.
The Company 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
1
<PAGE>
Accounts Receivable Program. Through December 31, 1998, the Company has incurred
minor credit losses in its Accounts Receivable Program and no credit losses in
its STL Program, although it periodically makes provisions for possible future
losses inherent in the portfolio.
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 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.
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, which often
includes real estate, 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 33.7%
of finance receivables at December 31, 1998. 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
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, 1999, HCAC employed 21
healthcare auditors and had offices in Maryland, California, 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 clients while benefiting 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.
In order to meet all or substantially all of the financing needs of its
clients and potential clients, in January 1998, certain senior executive
officers of the Company formed a real estate investment trust known as
HealthCare Financial Partners REIT, Inc. (the "REIT"). As of December 31, 1998,
the Company owned approximately 9% of the REIT. The REIT was formed to invest
in income producing real estate and real estate related assets in the
healthcare industry. In May 1998, the REIT received approximately $136.2
million in net proceeds from a private placement of its securities.
Contemporaneously with the private placement, the REIT entered into a management
agreement (the "Management Agreement") with HCFP REIT Management, Inc. (the
"Manager"), a wholly-owned subsidiary of the Company, pursuant to which the
Manager managed the day-to-day operations of the REIT and was paid a fee for its
services. The Management Agreement had an initial term of three years. On
December 11, 1998, the Company and the REIT terminated the Management Agreement
by mutual agreement, and in connection with such termination, certain employees
of the Manager became employees of the REIT. In addition, the Company and the
REIT entered into an origination agreement (the "Origination Agreement")
effective on the termination of the Management Agreement which has an initial
term of four years under which the Company receives a fee of 2.5% of the
purchase price or principal amount of each investment which it originates on
behalf of the REIT. The fee is paid upon closing of the applicable investment.
See Note 5 of Notes to Consolidated Financial Statements included in Item 8.
Additionally, during 1998, the Company purchased a 49% membership interest in
a limited liability company known as ZA Consulting, LLC ("ZA") that provides
consulting services to the healthcare industry from which it has received, and
expects to continue to receive income.
2
<PAGE>
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 Facility") with ING Baring (U.S.) Capital Markets, Inc. ("ING") which
enables the Company to borrow up to $200 million; (iii) a $100 million revolving
warehouse line of credit (the "Warehouse Facility") with Credit Suisse First
Boston ("First Boston"); and (iv) a $150 million asset backed securitization
facility (the "CP Conduit Facility") with Variable Funding Capital Corporation
("VFCC") an issuer of commercial paper sponsored by First Union National Bank.
Healthcare Industry
According to HCFA, projected total domestic healthcare expenditures for 1999
will exceed $1.2 trillion, or 13.9% 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
8.3%. The breakdown of projected healthcare expenditures for 1999 is as follows
(dollars in billions):
<TABLE>
<CAPTION>
Projected 1999
Expenditures
Healthcare Industry Segment ------------------
- ---------------------------
<S> <C>
Acute-Care (hospital)........................................................................ $ 398.9
Physician Services........................................................................... 235.8
Other Medical Non-Durables................................................................... 114.9
Long-Term Care (nursing homes)............................................................... 91.3
Other Professional Services.................................................................. 71.9
Insurance-Net Healthcare Costs............................................................... 82.2
Dental Services.............................................................................. 57.1
Home Healthcare.............................................................................. 35.7
Government Public Health..................................................................... 43.8
Other Personal Care.......................................................................... 35.5
Research..................................................................................... 19.2
Vision Products and Other Medical Durables................................................... 15.0
Construction................................................................................. 15.5
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Total..................................................................................... $1,216.8
========
</TABLE>
Source: HCFA, Office of the Actuary.
The Company believes that there are several distinct trends that will continue
to fuel the demand for and the dollar value of healthcare services in the United
States and the demand for the Company's services, including: (i) dramatic change
driven by governmental and market forces which have put pressure on healthcare
service providers to reduce healthcare delivery costs and increase efficiency,
often resulting in short-term working capital 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, hospitals, and physician practices; 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 are
expected to grow from $50.9 billion in 1990 to a projected $91.3 billion in
1999, and are projected to grow to $96.4 billion by 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 (1-50 homes).
According to the Guide to the Nursing Home
3
<PAGE>
Industry published in 1998 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 52% of the market.
According to HCFA, total annual hospital care expenditures are expected to
grow from $256.4 billion in 1990 to a projected $398.9 billion in 1999, and are
projected to grow to $418.4 billion by 2000. According to the American Hospital
Association, by September 30, 1997, the number of hospitals in the United States
actively delivering patient care, was approximately 6,100.
According to HCFA, total annual physician services expenditures are expected
to grow from $146.3 billion in 1990 to a projected $235.8 billion in 1999, and
are projected to grow to $253.1 billion by 2000. The American Medical
Association ("AMA") reports that, as of December 31, 1997, approximately 604,000
physicians were actively involved in patient care in the U.S., with a growing
number participating in multispecialty or single-specialty groups.
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 $10 million, and often require more
extensive operating history before providing such financing. As a general
matter, these lenders typically have been less willing to provide financing to
healthcare service providers of the types served by the Company because such
lenders have not developed the healthcare industry expertise needed to
underwrite smaller healthcare service companies or the specialized systems
necessary for tracking and monitoring healthcare receivables transactions, which
are different from traditional accounts receivable finance transactions.
Several independent healthcare finance companies that have raised funds through
securitization programs also provide financing to healthcare service providers.
However, many of the financing programs offered by such securitization companies
are often rigid and cumbersome for healthcare service providers to implement
because, among other things, securitization programs typically impose more
stringent and inflexible qualification requirements on borrowers and also impose
concentration and other limitations on the asset portfolio, as a result of
rating 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 pressure 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.
4
<PAGE>
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, 1998,
72.8% of the Company's portfolio consisted of finance receivables from
businesses in the long-term care, hospital, and physician practice sub-markets.
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 $30 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 financing to companies with borrowing needs in excess of $10 million.
The Company believes that its target market for transactions between $100,000
and $30 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. In addition, in 1998, certain
senior executive officers of the Company formed the REIT to meet the long-term
real estate financing needs of its clients. 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 and ZA. 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 ZA and the Origination Agreement
connected with the REIT are expected to increase other 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 receivable 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. 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.
5
<PAGE>
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 which 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.
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
these 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 $30 million. Such financings are recourse to the client and
generally have a term of one to three years.
In connection with advances against receivables under the Accounts Receivable
Program, the Company purchases, on a revolving basis, a specified batch of a
client's accounts receivable owed to such client from third-party payors. The
purchase price for each batch of receivables is the estimated net collectible
value of such batch less a purchase discount, comprised of funding and
servicing fees. The purchase discount can be either a 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.
At December 31, 1998, the outstanding balance of finance receivables under the
Accounts Receivable Program, which was financing 185 clients, was $289.7 million
or 66.3% of the total finance receivable balance at that date. Of the amounts
outstanding under the Accounts Receivable Program at December 31, 1998, $278
million or 96% were in the form of revolving lines of credit and $11.7 million
or 4% were amounts advanced against accounts receivable. Of the total balance
in the Accounts Receivable Program at December 31, 1998, 28% represented
receivables from commercial insurers or other non-governmental third-party
payors, 29.2% represented receivables from Medicare, and 42.8% represented
receivables from Medicaid. The yield on finance receivables generated under the
Accounts Receivable Program for the year ended December 31, 1998 was 16.5%.
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 generally provided to clients in conjunction
with financing under the Accounts Receivable Program. Such loans are generally
recourse to the borrower.
6
<PAGE>
At December 31, 1998, the outstanding balance of finance receivables under the
STL Program, which was financing 55 clients, was $147.6 million or 33.7% of the
total finance receivable balances at that date. The yield on finance receivables
generated under the STL Program for the year ended December 31, 1998 was 15.7%.
While yields on such loans are generally lower than the 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 presents information about the Company's portfolio at the
periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
March 31, June 30, Sept. 30, Dec. 31,
--------- --------- --------- ---------
1997 1997 1997 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Accounts Receivable Program Balance.................. $104,865 $118,960 $172,171 $185,728
Total Accounts Receivable Program Clients............ 137 145 171 161
Average Accounts Receivable Program Balance.......... $ 765 $ 820 $ 1,007 $ 1,154
STL Program Balance.................................. $ 11,923 $ 33,420 $ 46,331 $ 64,961
Total STL Program Clients............................ 20 25 32 39
Average STL Program Balance.......................... $ 596 $ 1,337 $ 1,448 $ 1,666
</TABLE>
<TABLE>
<CAPTION>
March 31, June 30, Sept. 30, Dec. 31,
--------- --------- --------- ---------
1998 1998 1998 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Accounts Receivable Program Balance.................. $221,241 $252,198 $262,052 $289,718
Total Accounts Receivable Program Clients............ 188 178 173 185
Average Accounts Receivable Program Balance.......... $ 1,177 $ 1,417 $ 1,515 $ 1,566
STL Program Balance.................................. $ 81,127 $100,340 $127,632 $147,570
Total STL Program Clients............................ 46 46 54 55
Average STL Program Balance.......................... $ 1,764 $ 2,181 $ 2,364 $ 2,683
</TABLE>
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 it 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, 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.
7
<PAGE>
At February 25, 1999, the Company employed a staff of 12 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
two employees in its Dallas office. In July 1998, the Company opened an office
for marketing in Nashville, Tennessee and currently has one employee in its
Nashville 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 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 Company's chief operating officer, who is a member of the credit
committee. At March 17, 1999, the Company employed six 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. 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 chief operating officer. At March 17, 1999,
the Company employed eleven account managers and ten 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 STL Program loans on a scale of 1 to 6. Performing STL
Program loans are graded 1 to 4, with grade 1 assigned to those loans involving
the least amount of risk. The grading system is intended to reflect the
performance of a borrower's business, the collateral coverage of the loan and
other factors considered relevant to healthcare service businesses. Each loan
is initially graded based on the financial performance of the borrower and
8
<PAGE>
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 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 reassigned a grade of 1 to 6.
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
non-performing loans being serviced in some cases by a member of the Company's
loan workout group, which currently consists of the Vice President of Special
Assets, a loan officer, and the Company's senior credit officer.
Non-performing loans are assigned a grade of either 5 or 6. Grade 5 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 6 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 the
payments for services rendered under Government Programs can only be made to the
healthcare service provider that has rendered the services.
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 Program 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 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, which generally
include 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
9
<PAGE>
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 specific "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 (v) require the client to replace the uncollected
receivables with substitute eligible accounts receivable.
The AR Agreement also contemplates that the client may grant to the Company a
security interest in other assets of the client as may be mutually agreed. In
addition, pursuant to the AR Agreement, the client agrees to indemnify the
Company for all losses arising out of or relating to the AR Agreement.
Under the AR Agreement, the client covenants to notify payors of the sale of
accounts receivable to the Company and to assist the Company in collecting
payments on the purchased receivables and causing such payments to be remitted
to the Company. The client agrees to instruct all payors that payments are to
be made to such lockbox or other account as the Company may direct.
STL Program. 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 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.
Clients
The Company's client base is diversified. As of December 31, 1998, the
Company was servicing clients located in 35 states across the country, operating
in a number of different sub-markets of the healthcare industry, with a
concentration in the long-term care, hospital, and physician practice sub-
markets.
10
<PAGE>
PORTFOLIO ANALYSIS
<TABLE>
<CAPTION>
Number of Percent of Finance Percent of
Clients (1) Clients Receivables Portfolio
----------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
Industry Group
Long Term Care.................................. 84 40.2% $205,079,301 46.9%
Hospital........................................ 17 8.1 59,422,956 13.6
Home Healthcare................................. 39 18.7 54,998,831 12.6
Physician Practice.............................. 30 14.4 53,877,675 12.3
Mental Health................................... 18 8.6 36,721,639 8.4
Other........................................... 9 4.3 12,790,453 2.9
Rehabilitation.................................. 5 2.4 8,161,484 1.9
Diagnostic...................................... 3 1.3 3,627,451 0.8
Ambulatory Services............................. 2 1.0 2,028,831 0.5
Durable Medical Equipment 2 1.0 578,816 0.1
--- ----- ------------ -----
Total......................................... 209 100.0% $437,287,437 100.0%
=== ===== ============ =====
Program Breakdown
Accounts Receivable Program..................... 185 77.1% $289,717,840 66.3%
STL Program..................................... 55 22.9 147,569,597 33.7
--- ----- ------------ -----
Total......................................... 240 100.0% $437,287,437 100.0%
=== ===== ============ =====
</TABLE>
_________
(1) At December 31, 1998, 31 clients participated in both the Accounts
Receivable Program and STL Program.
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, the CP Conduit 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 2.0%.
The Bank Facility contains certain financial covenants which must be maintained
by the Company in order to obtain funds. The expiration date for the Bank
Facility is March 29, 2002, subject to automatic renewal for one-year periods
thereafter unless terminated by either party.
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 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.
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.
CP Conduit Facility. The total borrowing capacity under the CP Conduit
Facility is $150 million. In connection with the CP Conduit Facility, the
Company formed a wholly-owned special purpose corporation to which the Company
has transferred loans. The special purpose corporation pledges the loans to a
commercial paper
11
<PAGE>
conduit, which lends against such assets through the issuance of commercial
paper. The rate of interest charged under this agreement is the one-month LIBOR
plus 1.2%. The CP Conduit Facility terminates on December 28, 2001 and may be
extended by agreement in writing with VFCC.
In March 1999, the Company engaged First Union Capital Markets, Inc. ("First
Union") to arrange a $500 million financing that is expected to significantly
restructure its overall debt facilities and lower the Company's overall cost of
funds by approximately 15%. The Company anticipates completing this transaction
prior to June 30, 1999. The transaction is subject to the approval of First
Union, rating agencies, and potential additional participants.
Credit Loss Policy and Experience
The Company regularly reviews its outstanding finance receivables to determine
the adequacy of its allowance for losses on receivables. 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 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; and at December 31, 1998, it was $6.4 million or 1.5% 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. Included in the reserve balance
at December 31, 1998, was specific reserves amounting to $1.8 million. 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 Accounts
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 RTS to search its data base to locate the receivable and batch that
has received a payment.
The RTS generates daily, weekly and monthly reports summarizing the current
status of each batch of receivables in the 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.
12
<PAGE>
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 required to be licensed in
certain states, and the Company's clients are generally subject to federal and
state regulation. In addition, the Company is subject to applicable usury and
other similar laws in the jurisdictions where the Company operates. These laws
generally limit the amount of interest and other fees and charges that a lender
may contract for, charge or receive in connection with a loan. Applicable local
law typically establishes penalties for violations of these laws in that
jurisdiction. These penalties could include the forfeiture to the lender of
usurious interest contracted for, charged or received and, in some cases, all
principal as well as all interest and other charges that the lender has charged
or received.
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 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, state Medicaid
programs 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
("PPS") 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. 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 statues, 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.
13
<PAGE>
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.
Further Regulation of Physician Self-Referral. Additional regulatory
attention has been directed toward physician-owned healthcare facilities and
other arrangements whereby physicians are compensated, directly or indirectly,
for referring patients to such healthcare facilities. In 1988, legislation
entitled the "Ethics in Patient Referrals Act" (H.R. 5198) was introduced which
would have prohibited Medicare payments for all patient services performed by an
entity which a patient's referring physician had an investment interest. As
enacted, the law prohibited only Medicare payments for patient services
performed by a clinical laboratory. The Comprehensive Physician Ownership and
Referral Act (H.R. 345), which was enacted by Congress in 1993 as part of the
Deficit Reduction Package, is more comprehensive than H.R. 5198 and covers
additional medical services including medical imaging radiation therapy,
physical rehabilitation and others. A variety of existing and pending state
laws 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.
Employees
As of March 17, 1999, the Company employed 121 people on a full-time basis.
The Company believes that its relations with employees are good.
ITEM 2. PROPERTIES
The Company's headquarters occupy approximately 24,000 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 $63,000 per month. In addition, as of December
31, 1998, the Company leased marketing offices in Dallas, Texas and Nashville,
Tennessee at monthly rental of approximately $1,400 and $1,625, respectively.
HCAC rents approximately 2,200 square feet in its Orchard Park, New York office
paying $2,300 per month. Additionally, the Company rents an office in
Birmingham, Alabama for approximately $2,300 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.
ITEM 3. LEGAL PROCEEDINGS
The Company is currently not a party to any material litigation although it is
involved from time to time in routine litigation incidental to its business.
14
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
15
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Since the Company's initial public offering (November 21, 1996) through
December 30, 1998, the Company was listed for trading on the Nasdaq National
Market ("Nasdaq") under the trading symbol "HCFP." On December 31, 1998, the
Company began trading on the New York Stock Exchange (the "NYSE") under the
trading symbol "HCF" and ceased trading on Nasdaq under "HCFP." The following
table sets forth the high and low sales prices of the Common Stock as reported
by Nasdaq or the NYSE, when applicable, 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........................................................ $49.500 $32.500
Second....................................................... $61.500 $45.375
Third........................................................ $60.250 $30.000
Fourth....................................................... $41.438 $25.500
</TABLE>
On March 30, 1999, the closing sale price of the Common Stock as reported on
the NYSE was $26.000.
As of March 17, 1999, there were 13,420,539 shares outstanding.
As of March 17, 1999, there were 38 record holders of the Company's common
stock and approximately 2,500 beneficiary owners.
DIVIDEND POLICY
The Company intends to retain all future earnings for the operation and
expansion of it 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, certain current financing arrangements
impose (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.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth historical financial data. The selected
historical statements of operations and balance sheet data presented below were
derived from the combined financial statements of HealthCare Financial Partners,
Inc. and HealthPartners DEL, LP (a former partnership, "DEL") for the years
ended December 31, 1994 and 1995, and the consolidated financial statements of
HealthCare Financial Partners, Inc. as of and for the years ended December 31,
1996, 1997, and 1998. The data set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the combined financial statements, including the notes thereto,
of HealthCare Financial Partners, Inc. and DEL and the consolidated financial
statements of HealthCare Financial Partners, Inc., including the notes thereto,
appearing in Item 8.
16
<PAGE>
HEALTHCARE FINANCIAL PARTNERS, INC.
(and DEL from inception through
December 31, 1995)
<TABLE>
<CAPTION>
As or for the Year Ended December 31,
--------------------------------------------------------------------------
1994 1995 1996 1997 1998
----------- ------------ -------------- -------------- --------------
(Combined) (Combined) (Consolidated) (Consolidated) (Consolidated)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data
Fee and interest income............... $ 13,036 $ 565,512 $ 12,015,971 $ 27,745,077 $ 57,706,860
Interest expense...................... 3,975 79,671 3,408,562 7,921,330 13,629,466
--------- ---------- ------------ ------------ ------------
Net fee and interest income 9,061 485,841 8,607,409 19,823,747 44,077,394
Provision for losses on receivables... 2,102 45,993 656,116 1,315,122 3,953,498
--------- ---------- ------------ ------------ ------------
Net fee and interest income after
provision for losses on 6,959 439,848 7,951,293 18,508,625 40,123,896
receivables.....................
Asset management income............... 1,576,597
Operating expenses.................... 439,514 1,472,240 3,326,994 7,219,372 13,434,451
Other income.......................... 106,609 1,221,837 233,982 1,582,852 4,805,909
--------- ---------- ------------ ------------ ------------
Income (loss) before deduction of
preacquisition earnings and income
taxes (benefit)..................... (325,946) 189,445 4,858,281 12,872,105 33,071,951
Deduction of preacquisition earnings.. 4,289,859
Income taxes (benefit)................ (5,892) 38,860 4,877,257 13,264,049
--------- ---------- ------------ ------------ ------------
Net income (loss)..................... $(325,946) $ 195,337 $ 529,562 $ 7,994,848 $ 19,807,902
========= ========== ============ ============ ============
Basic earnings per share(1)........... $.13 $.99 $1.57
============ ============ ============
Weighted average shares
outstanding(1)...................... 4,030,416 8,087,857 12,627,536
============ ============ ============
Diluted earnings per share(1)......... $.13 $.96 $1.52
============ ============ ============
Diluted weighted averages shares
outstanding(1)...................... 4,055,572 8,310,111 13,002,260
============ ============ ============
Balance Sheet Data
Finance receivables................... $ 279,148 $2,552,441 $ 89,328,928 $250,688,138 $437,287,437
Allowance for losses on receivables... 20,847 66,840 1,078,992 2,654,114 6,401,916
Total assets.......................... 344,850 2,669,939 101,273,089 272,354,946 504,671,115
Client holdbacks...................... 112,374 814,607 1,739,326 6,173,260 4,208,859
Line of credit........................ 1,433,542 21,829,737 40,157,180 32,503,243
Commercial paper facility............. 37,209,098 101,179,354 114,207,270
Warehouse facility.................... 27,932,520 49,632,760
CP Conduit facility 42,440,000
Total liabilities..................... 558,759 2,795,404 74,552,113 184,524,758 257,117,548
Total stockholders' equity (deficit).. (213,909) (125,465) 26,720,976 87,830,188 247,553,567
</TABLE>
(1) Historical earnings per share for periods prior to 1996 are not presented
here because it is not meaningful due to the partnership reporting basis for
DEL. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Pro Forma Financial Information" for pro forma income
per share information.
17
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
The Company is a specialty finance company offering asset-based financing to
healthcare providers, with a primary focus on clients operating in sub-markets
of the healthcare industry, including long-term care, hospitals, and physician
practices.
From its inception in September 1993, through the year ended December 31,
1995, the Company principally originated finance receivables through advances
against accounts receivable. Advances against accounts receivable were
characterized by high and varying yields, as a result of the differing terms of
the transactions negotiated with individual clients. The yield on finance
receivables generated through advances against accounts receivable was 26.9%
during the year ended December 31, 1995 and 19.2% during the year ended December
31, 1996. By December 31, 1997, the finance receivables originated through
revolving lines of credit secured by accounts receivable had grown to 89.5% of
finance receivables in the Company's Accounts Receivable Program, as the Company
focused its marketing efforts on larger balance, prime rate based revolving
loans to more creditworthy borrowers. Although revolving lines of credit are
characterized by lower overall yields than advances against accounts receivable,
these arrangements provide the Company with the opportunity to expand its range
of potential clients and are less costly to administer then the advances against
accounts receivable. As a result, the Company's overall yield on finance
receivables in the Accounts Receivable Program, which was 18.4% for the year
ended December 31, 1996, declined to 17% for the year ended December 31, 1997.
For the year ended December 31, 1998, the yield on the Accounts Receivable
Program was 16.5%. The reduction from the prior year's 17% was attributable to
reductions in the prime rate that occurred during 1998 and, again, the
continuing trend of revolving lines of credit comprising the majority of the
Accounts Receivable Program.
During 1997, the Company expanded its 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. STL Program loans generally have terms of
one to three years. As a result of the Company's continued expansion of the STL
Program, loans under that program comprised 25.9% of finance receivables at
December 31, 1997 and 33.7% at December 31, 1998. The yields on the STL Program
for the years ended December 31, 1997 and 1998 were 16.3% and 15.7%,
respectively. 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.
Year 2000
The Company has implemented a plan 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 (the "Year 2000 Problem")
without functional or data abnormality and without inaccurate results related to
such data. The Company believes that all software presently in use that is
significant to day-to-day operations can effectively manage the Year 2000
Problem without the issues enumerated above.
The Company is also assessing the ability of certain computing applications
which are not considered essential to day-to-day operations, such as various
desk top applications, to manage the Year 2000 Problem. The Company expects to
have completed this aspect of its review and to have replaced or remediated
these applications by mid-1999.
To date, the execution of this plan has not had a material effect on the
Company's operating results, and the Company does not anticipate that the
continued execution of this plan will have a material effect on its operating
results. However, the Company is aware 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 clients' computerized billing
and collection systems and adversely affect clients' cash flow and
collectibility of the Company's finance receivables. 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. However, the Company recently
initiated a survey of its clients regarding their year 2000 compliance. Through
February 1999, only 16% have replied. Of those that
18
<PAGE>
have responded, all have indicated that they are either compliant or will be
compliant shortly. The Company is in the process of sending second requests to
clients who have not responded. The Company will actively pursue clients for
responses prior to April 30, 1999. If some clients do not address this problem,
the Company is in the process of identifying medical billing and collection
companies that are compliant and can assist any non-compliant clients in their
billing and collection process.
The Company also works directly with several banks, including accessing cash
transactions information electronically on a real time basis. Discussions with
the banks have occurred concerning the Year 2000 Problem. The Company has been
informed that these banks anticipate no significant year 2000 disruption of
their systems. The Company also makes extensive daily use of the Federal
Reserve's Fedwire transfer application. Accordingly, the Company has reviewed
the Year 2000 Quarterly Report of the Federal Reserve System dated December 11,
1998. According to that report, testing of the Fedwire transfer system for
compliance has been, and continues to be, performed. No significant disruption
of the Company's business is expected as a result of its use of the Fedwire
Transfer Service.
In addition, the Company may be subject to general economic disruptions
stemming from problems related to year 2000 computer issues. Such circumstances
may unfavorably affect the manner in which the Company presently conducts its
business and, in turn, may negatively affect the Company's operating results.
The Reorganization
The Company is a Delaware corporation which was organized in April 1993 and
commenced its business in September 1993. Until September 13, 1996, the
Company's name was HealthPartners Financial Corporation. On that date its
corporate name was changed to HealthCare Financial Partners, Inc.
Prior to the Company's initial public offering ("the Offering"), the Company
conducted its operations principally in its capacity as the general partner of
HealthPartners Funding, L.P. (a former partnership, "Funding") and DEL.
Management concluded that the Company's future financial position and results of
operations would be enhanced if the Company directly owned the portfolio assets
of each of these limited partnerships and the transactions described below (the
"Reorganization") were effected by the Company prior to or simultaneously with
the Offering.
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 this transaction was to consolidate the assets of DEL
and Funding in anticipation of the acquisition by the Company of the limited
partnership interests of Funding described below.
Effective upon completion of the Offering, the Company acquired from
HealthPartners Investors, L.L.C. ("HP Investors"), the sole limited partner of
Funding, all of the limited partnership interests in Funding and paid the $21.8
million purchase price for such assets from the proceeds of the Offering. Such
purchase price represented the limited partner's interest in the net assets of
funding and approximated both the fair value and book value of the net assets.
Funding was subsequently liquidated and dissolved, and all of its net assets at
the date of transfer, consisting principally of advances made under the Accounts
Receivable Program, were transferred to the Company.
In connection with the liquidation of Funding, Farallon Capital Partners, L.P.
("Farallon") and RR Capital Partners, L.P. ("RR Partners"), the only two members
of HP Investors, exercised warrants for the purchase of an aggregate of 379,998
shares of Common Stock acquired on December 28, 1994 for an aggregate payment of
$500, which represented the fair value of the warrants at that date. No
additional consideration was paid in connection with the exercise of the
warrants. HP Investors transferred the warrants to Farallon and RR Partners in
contemplation of the liquidation of Funding.
19
<PAGE>
Pro Forma Financial Information
In recognition of the Reorganization, management believes a discussion and
analysis of the Company's financial condition and results of operation is most
effectively presented on a pro forma basis for the years before 1997. To
provide a context for this, the following information reflects pro forma
statements of operations for the year ended December 31, 1996 as if the
Reorganization had occurred as of the beginning of that operating period.
PRO FORMA STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For The Year Ended December 31, 1996
-------------------------------------------------------
HealthCare Financial
Partners, Inc.
(Consolidated) Pro Forma Pro Forma
(Historical) Adjustments (1) As Adjusted
--------------------- ----------------- -----------
<S> <C> <C> <C>
Fee and interest income
Fee income................................................. $ 8,518,215 $ 8,518,215
Interest income............................................ 3,497,756 3,497,756
----------- -----------
Total fee and interest income.............................. 12,015,971 12,015,971
Interest expense............................................ 3,408,562 3,408,562
----------- -----------
Net fee and interest income................................ 8,607,409 8,607,409
Provision for losses on
receivables................................................ 656,116 656,116
----------- -----------
Net fee and interest after provision for losses
on receivables............................................. 7,951,293 7,951,293
Operating expenses.......................................... 3,326,994 3,326,994
Other income................................................ 233,982 233,982
Income before deduction of preacquisition
earnings and income taxes.................................. 4,858,281 4,858,281
Deduction of preacquisition earnings........................ 4,289,859 $ (4,289,859)(a)
----------- ---------------- -----------
Income before income taxes.................................. 568,422 4,289,859 4,858,281
Income taxes................................................ 38,860 1,855,870(b) 1,894,730
----------- ---------------- -----------
Net income.................................................. $ 529,562 $ 2,433,989 $ 2,963,551
=========== ================ ===========
Pro forma basic earnings per share(2)....................... $.50
===========
Pro forma weighted average shares outstanding(2)............ 5,906,032
===========
Pro forma diluted earnings per share(2)..................... $.50
===========
Pro forma diluted weighted average shares
outstanding(2)............................................. 5,931,188
===========
</TABLE>
__________
(1) Pro Forma Statements of Operations adjustments reflect the following:
(a) The elimination of preacquisition earnings allocated to limited
partners of Funding and DEL.
(b) The provisions for income taxes (at an estimated effective rate of 39%)
on the pro forma earnings of the consolidated Company, including those
of DEL and Funding which were previously not subject to income taxes as
partnerships.
(2) Pro forma earnings per share was computed by dividing pro forma net income
by the pro forma weighted average shares outstanding and pro forma diluted
weighted average shares outstanding, which gives effect to the
Reorganization.
20
<PAGE>
Financial Information
The following discussion should be read in conjunction with the information
under "Selected Financial Data" and the consolidated financial statements,
including the notes thereto of HealthCare Financial Partners, Inc. appearing
elsewhere in Item 8.
Results of Operations
Year ended December 31, 1998 Compared to the Year Ended December 31, 1997
Fee and interest income increased to $56.9 million for the year ended December
31, 1998 from $27.4 million for the year ended December 31, 1997, an increase of
107.6%. The increase principally resulted from an increase of $188.2 million in
average finance receivables outstanding due to the Company's growth in the
Accounts Receivable and STL Programs during the year. Interest earned from the
Accounts Receivable and STL Programs increased to $39.4 million for the year
ended December 31, 1998 from $16.3 million for the year ended December 31, 1997,
which accounted for $23.2 million of the $29.5 million growth in total fee and
interest income between the years. The Company increased its net client base to
209 clients at December 31, 1998 from 174 clients at December 31, 1997. This
net increase resulted from the addition of 136 clients which replaced 101
clients that generally maintained smaller average balances and whose obligations
either matured or were otherwise paid off. Additionally, clients borrowing at
both December 31, 1998 and 1997 generally increased their average borrowings
from the Company during the year ended December 31, 1998 as compared to the
prior year. The overall yields on finance receivables were 16.2% and 16.8% for
the years ended December 31, 1998 and 1997, respectively. The yields on the
Accounts Receivable Program for the years ended December 31, 1998 and 1997 were
16.5% and 17%, respectively. The yields on the STL Program for the years ended
December 31, 1998 and 1997 were 15.7% and 16.3%, respectively. Therefore, the
increase in fee and interest income was due to the growth in volume of finance
receivables which more than offset the decrease in yields.
The decline in overall yields in 1998 was attributable to several factors.
First, the prime rate was reduced by 75 basis points over the third and fourth
quarters of 1998 which directly lowered the rates outstanding on the majority of
the Company's finance receivable portfolio. Second, the STL Program, which
generally has a lower yield than the Accounts Receivable Program, comprised a
greater proportion of the portfolio during 1998 than in the prior year, ending
the year at 33.7% of total finance receivables compared to 25.9% at December 31,
1997. Another factor contributing to these lower yields in 1998 was the degree
to which the Company made larger loans to larger, more creditworthy borrowers.
The creditworthiness of the borrowers warranted, in some cases, lower lending
rates. Additionally, the STL program is designed to offer short-term, bridge
financing to clients. The yields on this program are enhanced by commitment
fees and success fees. The program is structured to encourage pre-term
refinancing by clients, upon which any unamortized commitment and success fees
would be recognized as income. In the latter half of 1998, such prepayments
were fewer than the prepayment trends noted in the prior year.
Interest expense increased to $13.6 million for the year ended December 31,
1998 from $7.9 million for the year ended December 31, 1997, while the Company's
average cost of borrowed funds decreased to 8.1% for the year ended December 31,
1998 from 8.6% for the year ended December 31, 1997, as a result of utilizing
the lower-cost commercial paper facility for a greater proportion of the
borrowings during 1998 as compared to the prior year. (See "Liquidity and
Capital Resources".) The increase in interest expense was the result of higher
average borrowings required to support the Company's growth. Because of the
Company's overall growth in finance receivables, net fee and interest income
increased 122.3%, to $44.1 million for the year ended December 31, 1998 from
$19.8 million for the year ended December 31, 1997. In general, the lower yield
on finance receivables offset by the decrease in the average cost of borrowed
funds experienced in 1998 resulted in a slight increase in the annualized net
interest margin to 12.3% for the year ended December 31, 1998 from 12.2% for the
year ended December 31, 1997.
The Company's provision for losses on receivables increased to $4 million for
the year ended December 31, 1998 from $1.3 million for the year ended December
31, 1997. The provision recognized during both periods was the amount estimated
by management that was necessary to maintain a sufficient allowance for losses
on receivables based on the composition of the finance receivable portfolio at
those times. As of December 31, 1998, the Company's general allowance for
losses on receivables was $4.6 million or 1% of finance receivables. As of
21
<PAGE>
December 31, 1997, the Company's general allowance for losses on receivables was
$2.7 million or 1% of finance receivables. At December 31, 1998, the Company
had a $1.8 million specific allowance for certain finance receivables. At
December 31, 1997, no specific allowance was present. In 1998, the Company
charged off four loans totaling $206,000 in the ordinary course of business.
During 1998, the Company provided management services through subsidiaries to
the REIT and Health Charge, Inc., a company that offers a private label credit
card to hospitals and other healthcare providers which can be used by patients
as a means of paying the private pay portion of their treatment. Management
fees earned in connection with these activities were $1.6 million for the period
during 1998 during which these services were provided. Expenses directly
related to these activities for the same period were $1.8 million. These
expenses are included in the Company's operating expenses.
As discussed in the footnotes to the financial statements, on December 11,
1998, the Management Agreement with the REIT was terminated and certain
employees of the Manager became employees of the REIT. Upon termination, the
Company and the REIT approved an agreement under which the REIT will pay the
Company a fee of 2.5% for each transaction which it originates on the REIT's
behalf. In accordance with this agreement, the Company earned $872,000 in
December 1998, which was included in other income.
Operating expenses increased from $7.2 million for the year ended December 31,
1997 to $13.4 million for the year ended December 31, 1998, a 86.1% increase.
This increase resulted from a 54% increase in compensation and benefits, a
232.3% increase in occupancy expenses, a 167.1% increase in professional fees,
and a 114.4% increase in other expenses, all resulting from Company growth and
from hiring personnel to support the management and origination functions
described above.
In addition to investing in finance receivables and the management activities
discussed above, the Company generates other income from various other
healthcare-related endeavors. Other income for the year ended December 31, 1998,
was $4.8 million compared to $1.6 million for 1997. Of these other healthcare-
related endeavors, certain recurring activities conducted in both years included
investments in marketable and non-marketable securities of healthcare companies,
investments in limited partnerships, and consulting fees. Other income producing
activities new in 1998 and from which the Company expects recurring other income
included the Company's investment in ZA, a healthcare consulting firm, dividend
income from the Company's investment in the REIT and commissions from the
origination agreement with the REIT, as discussed above. These activities
generated $2.9 million during 1998, which comprised substantially all of the
increase in other income from 1997.
Net income increased from $8 million for the year ended December 31, 1997 to
$19.8 million for the year ended December 31, 1998, a 147.8% increase, primarily
as a result of the overall growth in the Company's finance receivables as
described above, and the diversification of the Company through its expansion in
1998 of other income producing activities.
Year ended December 31, 1997 Compared to the Year Ended December 31, 1996
(including pro forma adjustments).
Total fee and interest income increased to $27.7 million for the year ended
December 31, 1997 from $12 million for the year ended December 31, 1996, an
increase of 130.9%. The increase principally resulted from an increase of $85.1
million in average finance receivables outstanding due to the growth in the
Company's Accounts Receivable Program and the Company's expansion of its STL
Program, which resulted in increases of $62.5 million and $98.9 million,
respectively, from December 31, 1997 to December 31, 1996. Fees and interest
earned from the STL Program grew to $5 million for the year ended December 31,
1997 from an immaterial amount in the year
22
<PAGE>
ended December 31, 1996 which accounted for 32% of the $15.7 million growth in
total fee and interest income between the periods. During the year ended
December 31, 1997, the Company increased its client base to 161 clients from 129
clients in its Accounts Receivable Program, and to 39 clients from 8 clients in
its STL Program. Additionally, average borrowings from the Company increased by
109.6% in 1997 as compared to the prior year. Yield on finance receivables
declined to 16.8% in the year ended December 31, 1997 from 18.4% in the year
ended December 31, 1996. As a result, the increase in fee and interest income
was due to growth in the volume of finance receivables. The yield on finance
receivables for the year ended December 31, 1997 was lower because the
composition of the Company's finance receivable portfolio contained a greater
percentage of lower-yielding STL Program loans and a lower percentage of higher-
yielding advances against accounts receivable in its Accounts Receivable
Program.
Interest expense increased to $7.9 million for the year ended December 31,
1997 from $3.4 million in 1996. However, the Company's average cost of borrowed
funds decreased to 8.6% for the year ended December 31, 1997 from 9.7% for the
year ended December 31, 1996. The increase in interest expense was the result
of higher average borrowings required to support the Company's growth. Because
of the Company's overall growth in finance receivables, net fee and interest
income increased to $19.8 million for the year ended December 31, 1997 from $8.6
million for the year ended December 31, 1996. The increased interest expense
from increased borrowings, combined with a lower yield on finance receivables,
resulted in a decrease in the annualized net interest margin to 12.2% for the
year ended December 31, 1997 from 13.2% for the year ended December 31, 1996.
The Company's provision for losses on receivables increased to $1.3 million
for the year ended December 31, 1997 from $656,000 for the year ended December
31, 1996. This increase was attributable to an increase in outstanding finance
receivables, which is among the factors considered by the Company in assessing
the adequacy of its allowance for losses on receivables. The Company
experienced no credit losses in either period.
Operating expenses increased to $7.2 million for the year ended December 31,
1997 from $3.3 million for the year ended December 31, 1996, a 117% increase.
This increase was the result of a 195.2% increase in compensation and benefits
due to hiring additional personnel, as well as increases in other operating
expenses, all relating to the expansion of the Company's operations.
Other income increased to $1.6 million for the year ended December 31, 1997
from $234,000 for the year ended December 31, 1996. This increase was mainly
attributable to the Company receiving fees from clients for legal services
performed by inhouse personnel. These fees were previously paid by the clients
but passed through to outside firms that performed the services.
Net income increased to $8 million for the year ended December 31, 1997 from
$3 million for the year ended December 31, 1996, a 169.8% increase, primarily as
a result of the overall growth in the Company's finance receivables described
above.
23
<PAGE>
Quarterly Financial Data
The following table summarizes unaudited quarterly operating results for the
most recent eight fiscal quarters.
<TABLE>
<CAPTION>
For the 1997 Quarters Ended
--------------------------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Total fee and interest income....................... 4,488,333 5,460,542 7,951,873 9,844,329
Interest expense.................................... 1,133,156 1,968,569 1,984,344 2,835,261
---------- ---------- ---------- ----------
Net fee and interest income....................... 3,355,177 3,491,973 5,967,529 7,009,068
Provision for losses on receivables................. 150,000 250,000 605,000 310,122
---------- ---------- ---------- ----------
Net fee and interest income after provision for
losses on receivables............................ 3,205,177 3,241,973 5,362,529 6,698,946
Operating expenses.................................. 1,866,483 1,422,901 1,672,075 2,257,913
Other income........................................ 429,399 380,723 300,004 472,726
---------- ---------- ---------- ----------
Income before income taxes.......................... 1,768,093 2,199,795 3,990,458 4,913,759
Income taxes........................................ 647,089 749,956 1,532,034 1,948,178
---------- ---------- ---------- ----------
Net income.......................................... $1,121,004 $1,449,839 $2,458,424 $2,965,581
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
For the 1998 Quarters Ended
--------------------------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
<S> <C> <C> <C> <C>
Total fee and interest income....................... 12,491,956 15,310,238 14,770,244 15,134,422
Interest expense.................................... 3,800,254 2,870,086 3,173,511 3,785,615
----------- ----------- ----------- -----------
Net fee and interest income....................... 8,691,702 12,440,152 11,596,733 11,348,807
Provision for losses on receivables................. 651,014 1,555,558 393,737 1,353,189
----------- ----------- ----------- -----------
Net fee and interest income after provision for
losses on receivables............................ 8,040,688 10,884,594 11,202,996 9,995,618
Asset management income............................. 313,268 673,834 589,495
----------- ----------- ----------- -----------
Operating income.................................. 8,040,688 11,197,862 11,876,830 10,585,113
Operating expenses.................................. 2,613,657 3,166,291 3,929,477 3,725,026
Other income........................................ 634,302 433,752 978,942 2,758,913
----------- ----------- ----------- -----------
Income before income taxes.......................... 6,061,333 8,465,323 8,926,295 9,619,000
Income taxes........................................ 2,440,771 3,371,854 3,582,812 3,868,612
----------- ----------- ----------- -----------
Net income.......................................... $ 3,620,562 $ 5,093,469 $ 5,343,483 $ 5,750,388
=========== =========== =========== ===========
</TABLE>
The Company's quarterly results of operations are not generally affected by
seasonal factors.
24
<PAGE>
Collateral
The Company's primary protection against credit losses on its Accounts
Receivable Program is the collateral, which consists of client accounts
receivable due from third-party payors which collateralize revolving lines of
credit secured by, and advances against, accounts receivable. The Company
obtains a first priority security interest in all of the client's accounts
receivable, including receivables not financed by the Company (excess
collateral). As a result, amounts loaned or advanced to clients with respect to
specific accounts receivable are cross-collateralized by the Company's security
interest in other accounts receivable of the client.
With respect to revolving lines of credit secured by accounts receivable, the
Company will extend credit only up to a maximum percentage, ranging from 65% to
85%, of the estimated net collectible value of the accounts receivable due from
third-party payors. The Company obtains a first priority security interest in
all of a client's accounts receivable, and may apply payments received with
respect to the full amount of the client's accounts receivable to offset any
amounts due from the client. The estimated net collectible value of a client's
accounts receivable thus exceeds at any time balances under lines of credit
secured by such accounts receivable.
With respect to advances against accounts receivable, the Company purchases a
client's accounts receivable at a discount from the estimated net collectible
value of the accounts receivable. The Company will advance only 65% to 85% of
the purchase price (which is equal to aggregate net collectible value minus a
purchase discount) of any batch of accounts receivable purchased. The excess of
the purchase price for a batch of receivables over the amount advanced with
respect to such batch (a "client holdback") is treated as a reserve and provides
additional security to the Company, insofar as holdback amounts may be applied
to offset amounts due with respect to the related batch of client receivables,
or any other batch of client receivables. As is the case with the revolving
lines of credit, the Company obtains a first priority security interest in all
of the client's accounts receivable.
In addition, under both programs, the Company frequently obtains a security
interest in other assets of a client and generally has recourse against the
clients, and often, the personal assets of the principals or parent companies of
clients.
Under the STL Program, the Company's term loans to clients are secured by a
first or second lien on various types of collateral, such as real estate,
accounts receivable, equipment, inventory and stock, depending on the
circumstances of each loan and the availability of collateral.
Turnover
With respect to the Accounts Receivable Program, a general measure of the rate
at which draws under the Program are paid back to the Company is the Company's
finance receivable turnover. The Company's turnover of its finance receivables
in its Accounts Receivable Program, is calculated by dividing total collections
of client accounts receivable for each quarter by the average month-end balance
of finance receivables during the quarter. The table below presents the
turnover statistics for the applicable quarters and years ended:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Quarter ended March 31, 2.4x 2.6x 2.6x
Quarter ended June 30, 2.4x 2.8x 2.3x
Quarter ended September 30, 3.7x 2.7x 2.4x
Quarter ended December 31, 3.5x 2.7x 2.3x
Year ended December 31, 11.0x 11.4x 9.2x
</TABLE>
Provision and Allowance for Losses on Receivables
The Company regularly reviews its outstanding finance receivables to determine
the adequacy of its allowance for losses on receivables. 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,
25
<PAGE>
overall portfolio size, average client balances, excess collateral, real estate
collateral valuations, and underwriting policies, among other items. Over time,
the general reserve has been maintained at an amount which approximates 1% of
the outstanding finance receivables. At 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; at December 31, 1998, it was
$4.6 million or 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. At December
31, 1998, the Company had $1.8 million of specific reserves as a component of
its allowance. The Company had no charge-offs in 1996 and 1997, and charged-off
$206,000 in 1998. In connection with its historical loss experience, the Company
believes that, generally, credit issues with respect to current originations
become more apparent as the credits season; therefore, the Company expects that
future charge-offs will bear a closer correlation to the present provisions. 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.
Liquidity and Capital Resources
Cash flows resulting from operating activities provided sources of cash
amounting to $17.9 million for the year ended December 31, 1998. This compares
to operating cash flows of $12.5 million in 1997 and pro forma operating cash
flows of $6.2 million for 1996. The most significant source of cash from
operating activities is derived from the Company's generation of net fee and
interest income from its finance receivables, and the more significant uses of
cash from internal operating activities include cash payments for compensation
and employee benefits, rent expense, and professional fees. As the Company's
number of clients and resulting business opportunities have grown, the Company
has primarily used cash in the acquisition of finance receivables under its
Accounts Receivable and STL Programs. The Company's financing activities have
provided the necessary source of funds for the acquisition of receivables.
Financing has been obtained from both debt and equity sources. The debt
financing has been generated from draws on the Bank facility, the Warehouse
Facility, the sale of commercial paper through the CP Facility, and, more
recently, draws on the CP Conduit Facility. The sources of equity financing
were primarily from limited partner capital contributions prior to the
Reorganization and the Offering. Subsequent to the Offering, the limited
partnership interest was purchased using a significant portion of the offering
proceeds, the limited partnership was dissolved and its assets transferred to
the Company. Subsequent sources of equity financing were from sales of common
stock through two subsequent public offerings of the Company's common stock.
In conjunction with the Reorganization and in contemplation of the Offering,
at the request of the Company, Fleet increased the committed line of credit
under the Bank Facility from $35 million to $50 million. The Bank Facility is a
revolving line of credit. The interest rates payable by the Company under the
Bank Facility adjust, based on the prime rate of Fleet National Bank ("Fleet's
prime rate"); however, the Company has the option to borrow any portion of the
Bank Facility in an integral multiple of $500,000 based on the one-month, two-
month, three-month or six-month LIBOR plus 2%. As of December 31, 1996, 1997
and 1998, $21.8, $40.2, and $32.5 million, respectively, was outstanding under
the Bank Facility. The Bank Facility contains financial and operating
covenants, including the requirement that the Company maintain an adjusted
tangible net worth of not less than $5 million and a ratio of total debt to
equity of not more than 3.0 to 1.0. In addition, under the Bank Facility the
Company is not allowed to have at any time a cumulative negative cash flow (as
defined in the Bank Facility) in excess of $1 million. The inter-creditor
arrangements entered into in connection with the CP Facility excludes borrowings
under the CP Facility from debt for purposes of calculating the debt-to-equity
ratio. At December 31, 1996, 1997, and 1998, the Company was in compliance with
its financial covenants under the Bank Facility. 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 which requires six months
prior written notice.
In December 1996, the Company entered into an agreement with ING for $100
million commitment under the CP Facility. On December 30, 1997, that commitment
was increased to $200 million. As of December 31, 1996, $37.2 million of
commercial paper was outstanding under the CP Facility. As of December 31,
1997, $101.2 million of commercial paper was outstanding under the CP Facility
and at December 31, 1998, $114.2 million was outstanding. The CP Facility
requires the Company to transfer advances and related receivables under its
Accounts Receivable Program which meet certain criteria to a bankruptcy remote,
special purpose subsidiary of the Company. The special purpose subsidiary
pledges the finance receivables transferred by the Company to Holland Limited
26
<PAGE>
Securitization Inc., a commercial paper conduit which is an affiliate of ING
(the "Conduit"). The Conduit lends against such pledged assets through the
issuance of commercial paper. The CP Facility generally requires the
maintenance of a minimum overcollateralization percentage of 125%. Under the CP
Facility, ING can refuse to make any advances in the event the Company fails to
maintain a tangible net worth of at least $50 million. At December 31, 1996,
1997 and 1998, the Company was in compliance with its financial covenants under
the CP Facility. The maturity date for the CP Facility is December 5, 2001.
However, the CP Facility may be terminated by the Company at any time after
December 5, 1999, without penalty. See "Business--Capital Resources."
On June 27, 1997, the Company entered into an agreement with First Boston
under the Warehouse Facility. Under the terms of the Warehouse Facility, the
Company is able to securitize certain loans under the Company's STL Program.
The Company had a total borrowing capacity under the agreement of $50 million as
of December 31, 1997. In January 1998, that commitment was raised to $60
million and in February 1998, to $100 million. As of December 31, 1998 and
December 31, 1997, the Company had borrowed $49.6 and $27.9 million,
respectively, under the Warehouse Facility. The Warehouse Facility requires
that the amount outstanding under the financing agreement may not exceed 88% of
the principal amount of the STL Program loans securitized. Interest will accrue
under the financing agreement at a rate of one-month LIBOR plus 3.75% on the
first $50 million and one-month LIBOR plus 3.0% on the second $50 million. The
Warehouse Facility requires that the loans advanced by the Company not exceed
95% of the appraised value of the real estate, or a multiple of the underwritten
cash flow of the borrower, that the weighted average yield of advances under the
Warehouse Facility exceeds the prime rate of interest plus 3%, that the maximum
weighted average loan to value of advances under the Warehouse Facility be no
greater than 85%, and that no loan in the portfolio have a life greater than
five years. Additionally, the Warehouse Facility requires that, to the extent
that the Company makes advances in amounts greater than $7.5 million to any
borrower, that excess is advanced by the Company through other sources. The
commitment to make advances under the Warehouse Facility terminates on June 27,
1999. Subsequent to that date, no new loans may be securitized under the
existing agreement; however previous loans securitized will remain outstanding
until they have been fully repaid. Additionally, under the terms of the
Warehouse Facility, the Company has the right to repurchase any assets
securitized at a price equal to the fair market value of such assets. At
December 31, 1997 and 1998, the Company was in compliance with its covenants
under the Warehouse Facility.
On December 28, 1998, the Company committed to the CP Conduit Facility with
VFCC, an issuer of commercial paper sponsored by First Union National Bank. The
total borrowing capacity under this facility is $150 million. The facility
expires in December 2001. The Company, through a single-purpose subsidiary,
pledges receivables on a revolving line of credit with VFCC. VFCC issues
commercial paper or other indebtedness to fund the CP Conduit Facility with the
Company. The rate of interest charged under this agreement is the one-month
LIBOR plus 1.2%. In conjunction with the initial draw on this facility, which
took place on December 31, 1998, the Company entered into an interest rate swap
agreement. Under the agreement, the Company exchanges the prime-based rate of
interest which is accruing on finance receivables pledged under the facility for
a LIBOR-based rate of interest. At any point in time, the amount of collateral
subject to the swap agreement is equal to at least 75% of the balance drawn on
the CP Conduit Facility. At December 31, 1998, $42.4 million was outstanding
under this facility. The CP Conduit Facility will generally lend up to 80% of
the collateral pledged and requires (i) a minimum over-collateralization
percentage of 125%, (ii) the average loan outstanding shall be $2.75 million or
less, (iii) the weighted maturity of all STL loans be three years or less, (iv)
the portfolio yield equals or exceeds a minimum yield, (v) certain third party
payor concentration limits not be exceeded, and (vi) that the Company maintain a
minimum tangible net worth of $175 million. The CP Conduit Facility terminates
on December 28, 2001 and may be extended by agreement in writing with VFCC. At
December 31, 1998, the Company was in compliance with its covenants under the CP
Conduit Facility.
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. The Company
expects to fund its future financing activities principally from (i) the CP
Facility, (ii) the Bank Facility, (iii) the Warehouse Facility, and (iv) the CP
Conduit Facility. While the Company expects to be able to obtain new financing
facilities or renew these existing financing facilities and to have continued
access to other sources of credit after expiration of these facilities, there is
no assurance that such financing will be available, or, if available, that it
will be on terms favorable to the Company.
27
<PAGE>
Inflation
Inflation has not had a significant effect on the Company's operating
results to date.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk exposure is the volatility of interest
rates on its finance receivables and borrowings, its only market risk sensitive
instruments. However, this risk is mitigated because substantially all, over
95%, of the Company's finance receivables are floating rate instruments that are
based on the prime rate and all of the Company's borrowings are on a floating-
rate basis. The interest payable under the Bank Facility adjusts based on
Fleet's prime rate, or, at the Company's discretion, based on LIBOR. The
interest rate on the CP Facility adjusts based on changes in commercial paper
rates. The interest rate on the CP Conduit Facility and the Warehouse Facility
adjust based on LIBOR. And although the prime rate and the rates on the
Company's borrowings do not change in perfect synchronization, the Company has
noted that changes in these rates have been closely correlated. Additionally,
under the terms of the CP Conduit Facility, the Company entered into an interest
rate swap agreement in which the Company exchanges the prime based rate of
interest which accrues on finance receivables pledged under the facility for a
LIBOR based rate of interest for at least 75% of the balance drawn on the CP
Conduit Facility, which further mitigates the impact of interest rate market
risk.
The relative degrees to which the Company funds its finance receivable
portfolio using its equity and its borrowing facilities is relevant when
assessing the effects of interest rate changes. The impact of a change in the
rates earned on the portion of the portfolio funded by equity would result in a
similar change to the net interest margin, and, thus, a change which may be
significant to net income. The impact of a change in rates earned on the
portion of the portfolio funded by borrowings would be accompanied by a similar
change on the rates paid to fund the portfolio and would, therefore, result in a
minimal change to the net interest margin and to net income. At December 31,
1998, 54.6% of the Company's finance receivables was funded through borrowings.
The Company anticipates that the portion of its portfolio funded through
borrowings during 1999 will increase as necessary to support Company growth.
The Company uses a sensitivity analysis model to measure the exposure of
its net income to increases or decreases in interest rates. The model measures
the change in annual net income if interest rates increase or decrease by 50 and
by 100 basis points, respectively. Based on the model used, which considers the
Company's 1999 growth projections, a 100 basis point increase or decrease,
respectively, in interest rates would increase or decrease, accordingly, net
income in 1999 by approximately 4%.
As with any model, there are limitations inherent in the interest rate risk
measurements above. Modeling changes requires certain assumptions be made that
may simplify the way actual yields and costs respond to changes in interest
rates. For example, the model projects certain static growth assumptions that
are more likely to be correct on the average, but not necessarily to be correct
on a day-to-day, month-to-month basis. Thus, although the sensitivity analysis
model provides an indication of the Company's interest rate exposure at a
particular point in time, it cannot provide a precise forecast of the effect of
changes in market interest rates on the Company's net income.
28
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY FINANCIAL DATA
INDEX TO FINANCIAL STATEMENTS
HEALTHCARE FINANCIAL PARTNERS, INC.
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Auditors, Ernst & Young LLP........................................... 30
Consolidated Balance Sheets as of December 31, 1998 and 1997................................ 31
Consolidated Statements of Income for the years ended December 31, 1998, 1997 and 1996...... 32
Consolidated Statements of Equity for the years ended December 31, 1998, 1997 and 1996...... 33
Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996.. 34
Notes to Consolidated Financial Statements.................................................. 35
</TABLE>
29
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
HealthCare Financial Partners, Inc.
We have audited the accompanying consolidated balance sheets of HealthCare
Financial Partners, Inc. as of December 31, 1998 and 1997, and the related
consolidated statements of income, equity, and cash flows for each of the three
years in the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the accounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of HealthCare
Financial Partners, Inc. at December 31, 1998 and 1997, and the consolidated
results of its operations and cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Washington, D.C.
February 11, 1999
30
<PAGE>
HEALTHCARE FINANCIAL PARTNERS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS December 31,
----------------------------------------
1998 1997
-------------------- ------------------
<S> <C> <C>
Cash and cash equivalents $ 39,551,044 $ 18,668,703
Finance receivables 437,287,437 250,688,138
Less:
Allowance for losses on receivables 6,401,916 2,654,114
Unearned fees 3,802,302 3,161,237
------------ ------------
Net finance receivables 427,083,219 244,872,787
Prepaid expenses and other assets 9,455,219 3,405,497
Deferred income taxes 2,112,383 1,041,520
Investments in affiliates 11,397,194 767,244
Investment securities 11,755,628 1,442,814
Property and equipment, net 1,753,208 416,284
Goodwill 1,563,220 1,740,097
------------ ------------
Total assets $504,671,115 $272,354,946
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Borrowings $238,783,273 $169,269,054
Client holdbacks 4,208,859 6,173,260
Accounts payable to clients 540,205 834,367
Income taxes payable 1,918,084 5,138,144
Accounts payable and accrued expenses 6,180,833 2,217,947
Notes payable 3,380,828 115,286
Accrued interest 1,454,297 776,700
Due to affiliates, net 651,169
------------ ------------
Total liabilities 257,117,548 184,524,758
Stockholders' equity
Preferred stock, par value $.01 per share; 10,000,000 shares
authorized; none outstanding
Common stock, par value $.01 per share; 60,000,000 shares
authorized; 13,414,189 and 9,670,291 shares issued and
outstanding, respectively 134,142 96,703
Paid-in-capital 219,822,293 79,784,045
Retained earnings 27,757,342 7,949,440
Accumulated other comprehensive income (160,210)
------------ ------------
Total stockholders' equity 247,553,567 87,830,188
------------ ------------
Total liabilities and stockholders' equity $504,671,115 $272,354,946
============ ============
</TABLE>
See accompanying notes.
31
<PAGE>
HEALTHCARE FINANCIAL PARTNERS, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Fee and interest income:
Finance receivables $56,889,198 $27,401,653 $11,971,886
Other 817,662 343,424 44,085
----------- ----------- -----------
Total fee and interest income 57,706,860 27,745,077 12,015,971
Interest expense 13,629,466 7,921,330 3,408,562
----------- ----------- -----------
Net fee and interest income 44,077,394 19,823,747 8,607,409
Provision for losses on receivables 3,953,498 1,315,122 656,116
----------- ----------- -----------
Net fee and interest income after provision
for losses on receivables 40,123,896 18,508,625 7,951,293
Asset management income 1,576,597
----------- ----------- -----------
Operating income 41,700,493 18,508,625 7,951,293
Operating expenses:
Compensation and benefits 5,762,158 3,741,827 1,267,625
Professional fees 1,370,434 512,989 283,935
Occupancy 726,436 218,636 196,319
Commissions 65,624 176,282 463,499
Other 5,509,799 2,569,638 1,115,616
----------- ----------- -----------
Total operating expenses 13,434,451 7,219,372 3,326,994
Other income:
Dividend income from investment in REIT 378,249
Equity in earnings from unconsolidated entity 1,622,833
Commissions on REIT originations 871,875
Other 1,932,952 1,582,852 233,982
----------- ----------- -----------
Total other income 4,805,909 1,582,852 233,982
Income before deduction of preacquisition
earnings 33,071,951 12,872,105 4,858,281
Deduction of preacquisition earnings 4,289,859
----------- ----------- -----------
Income before income taxes 33,071,951 12,872,105 568,422
Income taxes 13,264,049 4,877,257 38,860
----------- ----------- -----------
Net income $19,807,902 $ 7,994,848 $ 529,562
=========== =========== ===========
Basic earnings per share $1.57 $.99 $.13
=========== =========== ===========
Diluted earnings per share $1.52 $.96 $.13
=========== =========== ===========
</TABLE>
See accompanying notes.
32
<PAGE>
HEALTHCARE FINANCIAL PARTNERS, INC.
STATEMENTS OF EQUITY
<TABLE>
<CAPTION>
Stockholders' Equity (Deficit)
----------------------------------------------------------------------
Accumulated
Limited Retained Other
Partners' Common Paid-In Earnings Comprehensive
Capital Stock Capital (Deficit) Income
-------------- -------------- ----------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996 (combined) $ 415,305 $ 34,200 $ (574,970)
Net and Comprehensive Income 529,562
Issuance of 2,415,000 shares of $.01par
value common stock 24,150 $ 26,708,034
Conversion of common stock warrants
to 379,998 shares of $.01 par value
common stock 3,800 (3,800)
Net distribution to partners (415,305)
-------------- -------------- ----------- ------------- ----------------
Balance at December 31, 1996 62,150 26,704,234 (45,408)
Net and Comprehensive Income 7,994,848
Issuance of 3,450,000 shares of $.01par
value common stock 34,500 53,005,310
Common stock issuable and issued under
option plans 53 74,501
-------------- ----------- ------------- ----------------
Balance at December 31, 1997 96,703 79,784,045 7,949,440
Comprehensive income:
Net income 19,807,902
Unrealized loss on investment
securities available-for-sale, net of tax $ (160,210)
Comprehensive Income
Issuance of 3,657,500 shares of $.01
par value common stock 36,575 137,895,839
Common stock issuable and issued under
option plans 864 2,142,409
-------------- -------------- ------------ ------------- ----------------
Balance at December 31, 1998 $ $134,142 $219,822,293 $27,757,342 $ (160,210)
============== ============== ============ ============= ================
</TABLE>
<TABLE>
<CAPTION>
Total
Equity
Total (Deficit)
-------------- --------------
<S> <C> <C>
Balance at January 1, 1996 (combined) $ (540,770) $ (125,465)
Net and Comprehensive Income 529,562 529,562
Issuance of 2,415,000 shares of $.01par
value common stock 26,732,184 26,732,184
Conversion of common stock warrants
to 379,998 shares of $.01 par value
common stock
Net distribution to partners (415,305)
------------- ------------
Balance at December 31, 1996 26,720,976 26,720,976
Net and Comprehensive Income 7,994,848 7,994,848
Issuance of 3,450,000 shares of $.01par
value common stock 53,039,810 53,039,810
Common stock issuable and issued under
option plans 74,554 74,554
------------- ------------
Balance at December 31, 1997 87,830,188 87,830,188
Comprehensive income:
Net income 19,807,902 19,807,902
Unrealized loss on investment
securities available-for- sale, net of tax (160,210) (160,210)
------------- ------------
Comprehensive Income 19,647,692 19,647,692
------------- ------------
Issuance of 3,657,500 shares of $.01
par value common stock 137,932,414 137,932,414
Common stock issuable and issued under
option plans 2,143,273 2,143,273
------------- ------------
Balance at December 31, 1998 $247,553,567 $247,553,567
============= ============
</TABLE>
See accompanying notes.
33
<PAGE>
HEALTHCARE FINANCIAL PARTNERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1998 1997 1996
-------------- -------------- -------------
<S> <C> <C> <C>
Operating activities
Net income $ 19,807,902 $ 7,994,848 $ 529,562
Adjustments to reconcile net income to
net cash provided by operations:
Depreciation 223,981 113,550 77,916
Amortization of goodwill 176,877 92,248
Stock compensation plans 86,478 15,989
Provision for losses on receivables 3,953,498 1,315,122 656,116
Deferred income taxes (964,923) (660,058) (351,127)
Net gains on investment securities (528,393)
Equity in earnings from investments (1,622,833)
Changes in assets and liabilities:
Increase in prepaid expenses and other (6,049,722) (1,998,104) (670,709)
(Decrease) increase in income taxes payable (2,155,150) 4,748,552 278,418
Increase in accounts payable and accrued
expenses 3,668,724 496,271 1,265,420
Increase in accrued interest 677,597 392,765 79,586
Increase in amount due to affiliates, net 651,169
-------------- -------------- -------------
Net cash provided by operating activities 17,925,205 12,511,183 1,865,182
Investing activities
Increase in finance receivables, net (191,069,396) (151,189,744) (10,338,502)
Investment in affiliates (10,629,950) (767,244)
Net cash used for investment securities (1,963,452) (925,002)
Purchase of property and equipment, net (1,477,520) (306,436) (225,173)
Purchase of limited partnership interest, net
of cash required (15,200,257) (16,138,888)
Other (188,000)
-------------- -------------- -------------
Net cash used in investing activities (205,140,318) (168,576,683) (26,702,563)
Financing activities
Net borrowings 69,514,219 110,230,219 10,225,016
Issuance of common stock, net of expenses 138,924,298 53,098,375 26,732,184
Net (payments) borrowings under notes payable (341,063) (11,103) 105,191
Distributions to limited partners, net (317,993) (415,305)
Decrease in notes payable to related parties (75,000)
-------------- -------------- -------------
Net cash provided by financing activities 208,097,454 162,999,498 36,572,086
------------- ------------- ------------
Net increase in cash and cash equivalents 20,882,341 6,933,998 11,734,705
Cash and cash equivalents at beginning of period 18,668,703 11,734,705
------------- ------------- ------------
Cash and cash equivalents at end of period $ 39,551,044 $ 18,668,703 $ 11,734,705
============= ============= ============
Supplemental disclosure of cash flow information
information
Cash payments for interest $ 12,951,869 $ 7,528,565 $ 3,037,218
============= ============= ============
Cash payments for income taxes $ 16,351,530 $ 788,764 $ 23,839
============= ============= ============
</TABLE>
See accompanying notes.
34
<PAGE>
HEALTHCARE FINANCIAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The consolidated financial statements of Healthcare Financial Partners, Inc.
(the "Company") for 1998 include the accounts of the Company and the accounts of
its wholly-owned subsidiaries, HCFP Funding, Inc, HCFP Funding II, Inc., HCFP
Funding III, Inc., Wisconsin Circle Funding Corporation, Wisconsin Circle II
Funding Corporation, Wisconsin Circle III Funding Corporation, HCFP of
California, Inc., HCFP REIT Management, Inc., HCFP HC Management, Inc., HCFP
REIT Origination, Inc., and HealthCare Analysis Corporation. Significant
intercompany accounts and transactions have been eliminated in consolidation.
The Company's principal activity is providing financing to healthcare providers
and to businesses in sub-markets of the healthcare industry throughout the
United States.
The Company, which was incorporated and previously doing business as
HealthPartners Financial Corporation from inception to September 13, 1996, was
formed in 1993 under the laws of the state of Delaware. The Company issued 2.4
million shares of common stock, including underwriters over allotment, in an
initial public offering (the "offering") in November 1996. In connection with
the offering, the Company increased its authorized common shares from one
million shares to 30 million and effected a 4.56-to-1 split of the common stock
in the form of a stock dividend, including outstanding warrants and options, on
September 13, 1996. Shares of common stock outstanding for all periods
presented have been retroactively restated to give effect to the stock split.
Effective upon the completion of the offering, the Company used the proceeds of
the offering to acquire, using the purchase method of accounting, all the
limited partnership interests in HealthPartners Funding, L.P. ("Funding") and
Funding was liquidated (the acquisition) (See Note 14). The amount paid to
acquire the limited partnership interest approximated both the fair value and
the book value of Funding at the date of the acquisition. Prior to the offering
and the acquisition of Funding by the Company, the Company owned a 1% general
partner interest in HealthPartners DEL, L.P. ("DEL") and Funding. In addition,
the majority owners of the Company owned all of the limited partnership
interests of DEL. Prior to the offering, the Company's principal activity was
its interest in Funding. Additionally, the Company provided operational and
management support to Funding for a fee. Funding's principal activity was
providing financing to healthcare providers and to businesses in sub-markets of
the healthcare industry throughout the United States.
The financial statements of the Company for 1996 were consolidated assuming
the acquisition of Funding occurred as of January 1, 1996 under the provisions
of Accounting Research Bulletin No. 51. The deduction of preacquisition
earnings reflects the operations of Funding and DEL allocated to the limited
partners of Funding and DEL prior to the acquisition.
Effective September 1, 1996, in contemplation of the offering, Funding
acquired, using the purchase method of accounting, the assets of DEL (consisting
principally of client receivables) by assuming DEL's liabilities and paying
approximately $472,000 in cash. The cash payment approximated the fair value
and book value of DEL's net assets. Immediately following the acquisition, DEL
was dissolved.
2. SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
Cash and cash equivalents includes cash and other liquid financial instruments
with an original maturity of three months or less.
35
<PAGE>
HEALTHCARE FINANCIAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Finance Receivables
The Accounts Receivable Program includes asset-based lending and purchased
finance receivables. Asset-based lending is provided in the form of a revolving
line of credit. The amount of credit granted is based on a predetermined
percentage of the client total accounts receivable. Purchased finance
receivables are recorded at the contractual purchase amount, less the discount
fee (the "amount purchased"). The difference between the amount purchased and
the amount paid to acquire such receivables is reflected as client holdbacks.
In the event purchased receivables become delinquent, the Company has certain
rights of offset to apply client holdbacks (or future fundings) against
delinquent accounts receivable.
Secured term loans are loans up to three years in duration secured by real
estate, accounts receivable, and other assets, such as equipment, inventory, and
stock. These loans are often provided to clients currently borrowing under the
aforementioned Accounts Receivable Program. In connection with secured term
loans, the Company may receive stock, or warrants to convert to stock, in the
client entity.
Allowance for Losses on Receivables
The allowance for losses on receivables is maintained at the amount estimated
to be sufficient to absorb future losses, net of recoveries, inherent in the
finance receivables. The provision for losses on receivables is the periodic
cost of maintaining an adequate allowance. In evaluating the adequacy of the
allowance, management considers trends in past-due accounts, historical charge-
off and recovery rates, credit risk indicators, economic conditions, on-going
credit evaluations, overall portfolio size, average client balances, excess
collateral and underwriting policies, among other items. The Company performs
an account-by-account review to identify finance receivables to be specifically
provided for and charged off. Additionally, client holdbacks are available to
offset losses on certain receivables. And, under certain circumstances, credit
losses can be offset against client holdbacks related to other financings.
Investments in Affiliates
Investments in affiliates are investments in entities for which the Company
may provide management and/or administrative services. In all cases, the
Company does not have sufficient control to warrant consolidation. As such, the
Company's investments in affiliates are accounted for using either the cost or
equity methods of accounting, depending upon the degree of the Company's
ownership interest. Investments in affiliates accounted for under the cost
method are carried at the initial costs of the investments and are evaluated
periodically for impairment.
Investment Securities
Investment securities are comprised of marketable equity securities consisting
primarily of publicly traded common stock and related warrants, securities which
have no ready market and which are primarily investments in the common stock and
related warrants of private companies, and minority membership interests in
limited liability companies. Marketable equity securities are classified as
securities available for sale and, accordingly, are stated at fair market value,
with unrealized gains and losses, net of tax, reported as a component of
accumulated other comprehensive income. Investment securities which have no
ready market are carried at cost and evaluated periodically for impairment.
Minority interests in limited liability companies are accounted for under either
the cost or equity methods of accounting, depending upon the degree of the
Company's membership interest. Investments accounted for under the cost method
are carried at the initial costs of the investments and are evaluated
periodically for impairment.
Property and Equipment, net
Property and equipment, principally computer and related peripherals, were
stated at cost less accumulated depreciation of approximately $422,000 and
$203,000 at December 31, 1998 and 1997, respectively. Depreciation expense is
computed primarily using the straight-line method.
36
<PAGE>
HEALTHCARE FINANCIAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Client Holdbacks
Client holdbacks represent the excess of the net recorded amount of purchased
receivables over the amount advanced. In its purchase agreements with clients,
the Company retains the right to apply any past-due or uncollectible amounts
against these holdbacks. Holdbacks are assigned to specific purchased
receivables. The client holdbacks are payable upon collection of the respective
purchased receivable amount.
Borrowings
Direct costs of borrowings, including fees, commissions, and professional
services, are deferred and included in other assets and amortized into operating
expenses over the life of the respective borrowings.
Comprehensive Income
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130
establishes new rules for the reporting and display of comprehensive income and
its components; however, the adoption of SFAS 130 had no impact on the Company's
net income or stockholders' equity. SFAS 130 requires unrealized gains or
losses on the Company's investment securities available-for-sale, which prior to
adoption would have been reported separately in stockholders' equity, to be
included in other comprehensive income. Prior years' financial statements have
been conformed to the requirements of SFAS 130.
Revenue Recognition
Fee and interest income from finance receivables includes accrued interest on
finance receivables, including discount fees, commitment fees, management,
termination, success and set-up fees and is recognized in income over the
periods earned under methods that approximate the effective interest method.
Finance receivables are generally placed on non-accrual status when principal
or interest is past due 90 days or more and when, in the opinion of management,
full collection of principal or interest is unlikely. After a finance
receivable is placed on non-accrual status, income is recognized only to the
extent of cash received and collection of principal is not in doubt. Finance
receivables are returned to accrual status when they become contractually
current, and past due income is recognized at that time.
Income Taxes
The Company uses the liability method of accounting for income taxes as
required by Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes." Under the liability method, deferred tax assets and liabilities
are determined based on differences between the financial statement carrying
amounts and the tax basis of existing assets and liabilities (i.e., temporary
differences) and are measured at the enacted rates that will be in effect when
these temporary differences reverse.
Earnings per Share
Basic earnings per share is based on the weighted average number of common
shares outstanding excluding any dilutive effects of options, warrants and other
dilutive securities. Diluted earnings per share reflects the assumed conversion
of all dilutive securities.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
37
<PAGE>
HEALTHCARE FINANCIAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Fair Value of Financial Instruments
Due to the variable rates associated with most of the Company's financial
instruments, there are no significant differences between recorded values and
fair values.
Reclassifications
Certain reclassifications were made to the prior years' financial statements
to conform to the current year's presentation.
3. FINANCE RECEIVABLES
Finance receivables consisted of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------
1998 1997
----------------------- -------------------
<S> <C> <C>
Accounts receivable program.......................................... $289,717,840 $185,727,628
Secured term loans................................................... 147,569,597 64,960,510
------------ ------------
$437,287,437 $250,688,138
============ ============
</TABLE>
In connection with certain finance receivables, the Company maintained cash
balances in escrow at December 31, 1998 and 1997 of $4.6 million and $721,000,
respectively.
At December 31, 1998 and 1997, finance receivables totaling approximately
$11.6 and $1.4 million, respectively, were on non-accrual status and considered
impaired. At December 31, 1998, the allowance allocated to these finance
receivables was approximately $1.8 million. No amount of the allowance was
specifically allocated to finance receivables on non-accrual status at December
31, 1997. The average recorded investment in non-accrual finance receivables
during the years ended December 31, 1998 and 1997 was approximately $6.3 million
and $333,000, respectively. During 1998 and 1997, no income was recognized on
finance receivables while they were under the non-accrual status.
4. ALLOWANCE FOR LOSSES ON RECEIVABLES
Changes in the allowance for losses on receivables were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1998 1997 1996
---------------- --------------- ---------------
<S> <C> <C> <C>
Balance, beginning of year......................................... $2,654,114 $1,078,992 $ 66,840
Allowance acquired from purchased finance receivables.............. 260,000 356,036
Provision for losses on finance receivables........................ 3,953,498 1,315,122 656,116
Amounts charged off................................................ (205,696)
---------- ---------- ----------
Balance, end of year............................................... $6,401,916 $2,654,114 $1,078,992
========== ========== ==========
</TABLE>
38
<PAGE>
HEALTHCARE FINANCIAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. INVESTMENTS IN AND TRANSACTIONS WITH AFFILIATES
HealthCare Financial Partners REIT, Inc.
In January 1998, a real estate investment trust known as HealthCare Financial
Partners REIT, Inc. (the "REIT") was formed. Certain senior officers of the
Company who founded the REIT became senior officers of the REIT. The REIT's
principal activity is investing in income-producing real estate and real estate
related assets in the healthcare industry, consisting principally of purchase
leaseback transactions of long-term care facilities, acquisitions of medical
office buildings, and mortgage lending.
In connection with the formation of the REIT, the Company made investments in
the REIT. In January 1998, the Company acquired 241,665 shares of the REIT's
common stock in a private placement. In May 1998, in a private placement of
units (the "Units"), the Company acquired 100,000 Units. Each Unit consisted of
five shares of the REIT's common stock and one warrant to purchase one share of
common stock. In connection with an amendment made to a registration rights
agreement regarding the aforementioned Units, the REIT granted all Unit holders
of record on October 30, 1998 one additional warrant to purchase one share of
common stock for each Unit held. The warrants acquired as part of the Units
purchased in May 1998 and the additional warrants granted, as mentioned above,
have exercise prices of $20, became exercisable in November 1998, and expire in
April 2001.
At December 31, 1998, the Company's investment in the REIT, accounted for
under the cost method, was approximately $10.1 million and consisted of 741,665
shares of common stock and 200,000 common stock purchase warrants. For the year
ended December 31, 1998, dividend income related to the Company's investment in
the REIT was approximately $378,000. At December 31, 1998, $111,000 of the
dividend income was receivable from the REIT. This amount was included as a
component of "due to affiliates, net" at that date, and was subsequently
collected in January 1999.
In 1998, a wholly-owned subsidiary of the Company known as HCFP REIT
Management, Inc. (the "Manager") entered a management agreement (the "Management
Agreement") with the REIT. Under the Management Agreement, the Manager advised
the REIT as to the activities and operations of the REIT and was responsible for
the day-to-day operations of the REIT pursuant to authority granted to it by the
REIT's Board of Directors. Pursuant to the Management Agreement, the Manager
was paid a management fee. Among other things, this management fee was paid to
compensate the employees of the Manager who conducted the business of the REIT;
the majority of personnel managing the REIT were employees of the Manager. The
fee was calculated and paid quarterly. The amount was equal to a percentage of
the REIT's average invested assets (as defined by the Management Agreement) over
the year. The percentages applied were to range from 1.5% for the first $300
million of average invested assets to 0.5% for average invested assets exceeding
$1.2 billion. From the inception of the Management Agreement through December
11, 1998, the Company earned a management fee in connection with the REIT of
approximately $1.3 million.
On December 11, 1998, the Management Agreement was terminated and certain
employees of the Manager became employees of the REIT. Upon this termination,
the Company and the REIT approved an agreement under which the Company is paid
by the REIT a fee of 2.5% of the purchase price or principal amount of each
transaction which it originates on the REIT's behalf. In connection with this
agreement, the Company earned approximately $872,000 in December 1998.
At December 31, 1998, the REIT owed the Company approximately $1.2 million in
connection with a prorated fourth quarter management fee in accordance with the
Management Agreement, the fee earned in December 1998 as discussed above, and
other amounts attributable to reimbursable expenditures made by the Company on
the REIT's behalf. This amount was included as a component of "due to
affiliates, net" at December 31, 1998.
As of December 31, 1998, the Company had a $6.75 million outstanding secured
term loan to the REIT. The loan is secured by a skilled nursing facility owned
by the REIT which is leased to an operator independent of both the Company and
the REIT. The loan matures in November 1999, and is interest-only at the rate
of 11%. During 1998, $66,000 of interest was paid to the Company by the REIT
under this note.
39
<PAGE>
HEALTHCARE FINANCIAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Funding III, L.P.
In August 1997, the Company formed HealthCare Financial Partners--Funding III,
L.P. ("Funding III, L.P."), a limited partnership in which HCFP Funding III,
Inc., a wholly-owned subsidiary of the Company ("Funding III"), was the General
Partner. Funding III, L.P. participated in a Department of Housing & Urban
Development auction of a distressed mortgage loan portfolio. Funding III holds
a 1% General and 49% limited partnership interest in Funding III, L.P. and
receives 60% of the income from the partnership's activities. The Company
accounts for its investment in Funding III, L.P. under the equity method of
accounting, as it does not have sufficient control to warrant consolidation. At
December 31, 1998 and 1997, the investment in Funding III, L.P. was $1,304,000
and $767,000, respectively. For the years ended December 31, 1998 and 1997,
income relating to the investment in Funding III, L.P. was approximately
$537,000 and $2,000, respectively. At December 31, 1998, the Company owed
Funding III, L.P. approximately $2 million. This amount was included as a
component of "due to affiliates, net" at December 31, 1998.
Funding II, L.P.
In March 1997, the Company formed HealthCare Financial Partners--Funding II,
L.P. ("Funding II, L.P."), a limited partnership in which HCFP Funding II, Inc.,
a wholly-owned subsidiary of the Company ("Funding II"), was the General
Partner. Funding II, L.P. was established to develop the secured term loan
program. In June 1997, using proceeds from the Company's secondary offering of
shares of common stock to the public, Funding II acquired all of the limited
partnership interests in Funding II, L.P., utilizing the purchase method of
accounting, for a purchase price of $15.5 million. Funding II, L.P. was then
liquidated. This payment reflected the fair value of the business and exceeded
the book value by $1.6 million, which was recorded as goodwill, and is being
amortized over ten years using a straight-line method. For the year ended
December 31, 1997, income relating to the investment in Funding II, L.P. was
approximately $83,000.
6. INVESTMENT SECURITIES
At December 31, 1998, the Company's marketable equity securities, which are
designated as available-for-sale, had a fair market value of $170,000 and a cost
basis of $436,000. At December 31, 1997, the Company's marketable equity
securities designated as available-for-sale had a fair market value and a cost
basis both equal to $357,000. At December 31, 1998 and 1997, the Company's non-
marketable equity securities were carried at an aggregate cost of $1.3 million
and $1.1 million, respectively. During the years ended December 31, 1998 and
1997, marketable and non-marketable equity securities received in connection
with the secured term loan program had a combined initial market or initial
estimated value of $664,000 and $518,000, respectively.
During 1998, the Company acquired a 49% membership interest in a limited
liability company (the "LLC") which it accounts for under the equity method. To
obtain this interest, the Company paid $3.5 million in cash, converted a $2
million finance receivable owed by the LLC, and executed a $3.5 million note
payable to the LLC. For the year ended December 31, 1998, income relating to
this investment was $1.6 million, and of that amount, $343,000 was distributed
by the LLC to the Company during the year. The carrying value of this
investment at December 31, 1998 was $10.3 million.
7. BORROWINGS
Line of Credit
The Company maintains a revolving line of credit with Fleet Capital
Corporation ("Fleet"). At December 31, 1998, the facility limit under this line
of credit was $40 million; however, the Company was permitted to borrow up to
$50 million during 1998 and 1997 and as of December 31, 1997. This agreement is
in effect through March 2002, and will automatically renew for one-year periods
thereafter, unless terminated by Fleet or the Company, subject to certain
periods of notice as required in the agreement.
40
<PAGE>
HEALTHCARE FINANCIAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The line of credit is collateralized by the Company's finance receivables.
The rate of interest charged under the agreement from the beginning of 1998
through the end of October 1998 was Fleet's prime rate plus 1.25% or the
revolving credit LIBOR rate plus 2.75% determined at the option of the Company
upon each additional draw, subject to certain limitations. On October 28, 1998,
the rate charged under the agreement was reduced to Fleet's prime rate or the
revolving credit LIBOR plus 2.0% determined at the option of the Company upon
each additional draw, subject to certain limitations. The Company pays an unused
line fee of .05% based on the average unused capacity in the line. For the
years ended December 31, 1998, 1997, and 1996, the weighted average interest
rate paid under the line of credit was 10.4%, 9.7%, and 10.3%, respectively. In
1998, 1997, and 1996, amortization of the direct costs of establishing this
facility was $66,000, $316,000, and $46,000, respectively. At December 31, 1998
and 1997, $32.5 million and $40.2 million, respectively, were outstanding under
the line of credit.
Commercial Paper Facility
In December 1996, the Company committed to an asset-backed securitization
facility (the "Commercial Paper Facility") with Holland Limited Securitization,
Inc. ("HLS"), a multi-seller commercial paper issuer sponsored by ING Baring
(U.S.) Capital Markets, Inc. ("ING"). The total borrowing capacity under this
facility is $200 million, and $150 million was authorized for use at December
31, 1998. Increases in the authorization borrowing capacity are at the
Company's discretion and are subject to over-collateralization levels. The
securitization facility expires in December 2001.
In connection with the Commercial Paper Facility, the Company formed a wholly-
owned subsidiary, Wisconsin Circle Funding Corporation ("Wisconsin") to purchase
receivables from the Company. Wisconsin pledges receivables on a revolving line
of credit with HLS. HLS issues commercial paper or other indebtedness to fund
the Commercial Paper Facility with Wisconsin. HLS is not affiliated with the
Company or its affiliates. Interest is payable on the Commercial Paper Facility
based on certain commercial paper rates combined with a monthly facility fee.
The net assets of Wisconsin, totaling approximately $52.9 million at December
31, 1998 and $38.3 million at December 31, 1997 were restricted as over-
collateralization to the Commercial Paper Facility, including approximately
$17.6 million and $14.3 million of cash held at Wisconsin at December 31, 1998
and 1997, respectively. The weighted average rate paid, including the
aforementioned facility fee, in 1998, 1997, and 1996 under the Commercial Paper
Facility was 7.66%, 7.65%, and 7.53%, respectively. In 1998 and 1997,
amortization of the direct costs of establishing this facility was $348,000 and
$189,000, respectively. At December 31, 1998 and 1997, $114.2 million and
$101.2 million, respectively, were outstanding under this facility.
Warehouse Facility
In June 1997, the Company and Funding II entered into a financing agreement
(the "Warehouse Facility") with Credit Suisse First Boston Mortgage Capital, LLC
("CSFB") to securitize certain secured term loans. The Company had total
borrowing capacity under the agreement of $50 million at December 31, 1997. In
February 1998, the capacity was increased to $100 million. The facility is in
place until June 27, 1999. Subsequent to that date, no new loans may be
securitized under the existing agreement; however, previous loans securitized
will remain outstanding until they have been fully repaid.
In connection with this Warehouse Facility, Funding II formed a wholly-owned
subsidiary, Wisconsin Circle II Funding Corporation ("Wisconsin II"), a single-
purpose bankruptcy remote corporation, to purchase qualifying secured term loans
from Funding II, which are subsequently securitized. The amount outstanding
under the Warehouse Facility may not exceed 88% of the principal amount of the
securitized loans. Additionally, under the terms of the agreement, Wisconsin II
has the right to repurchase any assets securitized at a price equal to the fair
market value of such assets. Interest accrues under the Warehouse Facility at a
rate of LIBOR plus 3.75% on the initial $50 million and LIBOR plus 3.0% on the
second $50 million. For the year ended December 31, 1998 and 1997, the weighted
average rates paid under the Warehouse Facility were 9.65% and 9.16%,
respectively. In 1998 and 1997, amortization of the direct costs of
establishing this facility was $495,000 and $154,000, respectively. At December
31, 1998 and 1997, $49.6 million and $27.9 million, respectively, were
outstanding under this facility.
41
<PAGE>
HEALTHCARE FINANCIAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CP Conduit Facility
In December 1998, the Company committed to an asset-backed securitization
facility (the "CP Conduit Facility") with Variable Funding Capital Corporation
("VFCC"), an issuer of commercial paper sponsored by First Union National Bank.
The total borrowing capacity under this facility is $150 million, and the
facility expires in December 2001.
In connection with the CP Conduit Facility, the Company formed a wholly-owned
subsidiary, Wisconsin Circle III Funding Corporation ("Wisconsin III") to
purchase receivables from the Company. Wisconsin III pledges receivables on a
revolving line of credit with VFCC. VFCC issues commercial paper or other
indebtedness to fund the CP Conduit Facility with Wisconsin III. The rate of
interest charged under this agreement is the 30-day LIBOR plus 1.2%. In
conjunction with the initial draw on this facility, which took place on December
31, 1998, Wisconsin III entered into an interest rate swap agreement. Under the
agreement, Wisconsin III exchanges the prime-based rate of interest, which is
accruing on finance receivables pledged under the facility, for a LIBOR-based
rate of interest. The notional amount of the interest rate swap agreement is
$36 million, and it expires in December 1999, coincident with the term of the CP
Conduit Facility. The interest rate swap is accounted for on the accrual basis.
At December 31, 1998, $42.4 million was outstanding under this facility.
8. STOCK OPTION PLANS
During September 1996, the Company adopted the HealthCare Financial Partners,
Inc. 1996 Stock Incentive Plan (the "Incentive Plan") and the HealthCare
Financial Partners, Inc. 1996 Director Incentive Plan (the "Director Plan"). At
December 31, 1998, under these plans, the Company has reserved approximately
227,000 shares of common stock for future grants. Options issued under the
Incentive Plan generally vest and become exercisable over a four to five year
period following the grant date and expire ten years from the grant date.
Options issued under the Director Plan vest upon grant and are exercisable one
year after the grant date. Under the Director Plan, during 1998 and 1997, the
Company granted certain directors, in lieu of director fees, 914 and 2,510
options, respectively, with an exercise price below the market price at the
grant date.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," ("APB 25") and related interpretations in
accounting for its stock-based compensation plans. In accordance with APB 25,
no compensation cost is recognized for the Company's stock options where the
exercise price equals the market price of the underlying stock on the date of
grant.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" ("SFAS 123") required companies that follow APB 25 to
provide additional pro forma disclosures regarding net income and earnings per
share in the footnotes to the financial statements as if the fair value
recognition provisions of SFAS 123 had been adopted for the periods being
presented.
The fair value of options granted during each of the three years ended
December 31, 1998 was estimated at the date of grant using a Black-Scholes
option pricing model. The weighted average risk-free interest rate assumptions
used for the respective years ended December 31, 1998, 1997, and 1996 were 5.5%,
6.0%, and 6.0%, respectively. For these same years, the assumptions regarding
the volatility factor of the expected market price of the Company's common stock
were .68, .52, and .62, respectively. The assumption regarding the expected
lives of the options, measured in years, for the respective years was five, and
for all years the dividend yield was zero.
The Black-Scholes option valuation model was developed for certain tradable
types of options. In addition, this option valuation model requires the input
of highly subjective assumptions. Since changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
42
<PAGE>
HEALTHCARE FINANCIAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As a result of applying the model as explained above for the purpose of
providing the required pro forma disclosures of SFAS 123, pro forma net income
for the years ended December 31, 1998, 1997, and 1996 would have been $17.7
million, $7.6 million, and $495,000, respectively. Pro forma basic earnings per
share for these same years would have been $1.40, $.94, and $.12, respectively,
and for these same periods, pro forma diluted earnings per share would have been
$1.36, $.92, and $.12, respectively.
A summary of the Company's stock option activity for the years ended December
31 was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------- ----------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
---------- ------------- -------- ------------- ------- -------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding--beginning of year................. 630,591 $13.71 338,381 $10.57 38,381 $ 2.61
Granted....................................... 1,024,165 40.89 301,260 17.14 300,000 11.59
Exercised..................................... (86,398) 11.48 (5,300) 11.05
Forfeited..................................... (37,251) 32.10 (3,750) 11.28
--------- ------- -------
Outstanding--end of year....................... 1,531,107 630,591 338,381
========= ======= =======
Outstanding--end of year
Exercise prices at $2.61 to $6.37............. 25,891 2.97 40,891 2.84 38,381 2.61
Exercise prices at $11.05 to $13.50........... 439,851 12.22 509,950 12.31 300,000 11.59
Exercise prices at $17.50 to $35.00........... 441,614 31.09 79,750 28.25
Exercise prices at $40.00 to $53.00........... 623,751 46.69
--------- ------- -------
Total..................................... 1,531,107 630,591 338,381
========= ======= =======
Exercisable--end of year
Exercise prices at $2.61to $6.37.............. 25,891 2.97 38,381 2.61 38,381 2.61
Exercise prices at $11.05 to $13.50........... 165,498 12.08 71,336 11.84
Exercise prices at $17.50 to $30.50........... 26,200 28.98
--------- ------- -------
Total..................................... 217,589 109,717 38,381
========= ======= =======
</TABLE>
Of the options granted under the Incentive Plan in 1998, 500,000 were granted
with exercise prices that differed from the market value of the Company's common
stock on the date of grant. The weighted average exercise price and the
weighted average estimated fair market value of these options were $46.53 and
$34.42, respectively. The remaining options granted under the Incentive Plan
during 1998 had exercise prices that equaled the market value of the Company's
common stock on the date of grant, and the weighted average exercise price and
the weighted average estimated fair market value of these options were $35.53
and $19.27, respectively. The weighted average estimated fair value of options
granted during 1997 and 1996 was $7.62 and $6.76, respectively. The weighted
average remaining contractual life of all outstanding options as of December 31,
1998 was nine years.
9. DEFINED CONTRIBUTION PLAN
During the years ended December 31, 1998 and 1997, the Company had a 401(k)
plan that covered all employees who were employed on a full-time basis and who
were at least twenty-one years old. Under the plan, participants may contribute
up to 18% of their annual salary, subject to certain limitations. After one
year of service, participants become eligible for a matching employer
contribution which may be as much as 3% of the employee's salary not to exceed
$5,000. In 1998 and 1997, the Company's matching contributions were $55,000 and
$42,000, respectively.
43
<PAGE>
HEALTHCARE FINANCIAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. EQUITY
For each year presented, basic earnings per share were computed by dividing
net income by the weighted average number of shares of common stock outstanding
during the year. The weighted average shares of common stock outstanding during
the years ended December 31, 1998, 1997 and 1996, were approximately 12,628,000,
8,088,000 and 4,030,000, respectively.
For each year presented, diluted earnings per share were computed by dividing
net income by the weighted average shares of commons stock outstanding during
the year plus the number of dilutive common stock equivalents related to
outstanding stock options at the end of each year. The number of dilutive
common stock equivalents related to outstanding stock options at December 31,
1998, 1997, and 1996, was approximately 375,000, 222,000 and 25,000,
respectively.
The Company has authorized 10 million shares of preferred stock. The rights
and preferences of the preferred stock are established by the Board of Directors
in its sole discretion. The specific rights and preferences have not been
established and no preferred stock has been issued.
11. LEASE COMMITMENTS
The Company leases office space under noncancelable operating leases. The
future minimum lease payments as of December 31, 1998 were as follows:
<TABLE>
<S> <C>
1999................................................. $ 822,000
2000................................................. 817,000
2001................................................. 827,000
2002................................................. 830,000
2003................................................. 854,000
----------
$4,150,000
==========
</TABLE>
Rent expense for the years ended December 31, 1998, 1997, and 1996 was
$726,000, $217,000, and $118,000, respectively.
12. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets and liabilities as of December 31, were as
follows:
<TABLE>
<CAPTION>
1998 1997
---------------------- ------------------------
Deferred tax assets:
<S> <C> <C>
Allowance for losses on receivables................. $2,429,128 $1,031,087
Amortization of goodwill............................ 59,926 10,733
Investment securities............................... 105,940
Stock options....................................... 12,637 6,211
---------- ----------
2,607,631 1,048,031
Deferred tax liabilities:
Depreciation........................................ (51,166) (6,511)
Equity investee income.............................. (444,082)
---------- ----------
(495,248) (6,511)
---------- ----------
Net deferred tax asset.............................. $2,112,383 $1,041,520
========== ==========
</TABLE>
44
<PAGE>
HEALTHCARE FINANCIAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Significant components of the provision for income taxes for the years ended
December 31, were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------ ----------
<S> <C> <C> <C>
Federal taxes........................................ $11,697,937 $4,539,321 $ 316,455
State taxes.......................................... 2,531,035 997,994 73,532
Deferred income taxes................................ (964,923) (660,058) (351,127)
----------- ---------- ---------
Income taxes........................................ $13,264,049 $4,877,257 $ 38,860
=========== ========== =========
</TABLE>
The reconciliations of income tax attributable to continuing operations
computed at the U.S. federal statutory tax rates to income tax expense for the
years ended December 31, were:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------- ------------------------ ------------------------
<S> <C> <C> <C>
Income tax at statutory federal tax rate............. $11,575,183 $4,376,516 $ 193,264
State taxes, net of federal benefit.................. 1,523,691 592,270 26,261
Reversal of deferred tax assets valuation
allowance........................................... (183,218)
Other................................................ 165,175 (91,529) 2,553
----------- ---------- ---------
Income taxes........................................ $13,264,049 $4,877,257 $ 38,860
=========== ========== =========
</TABLE>
13. COMMITMENTS AND CONCENTRATIONS OF CREDIT RISK
At December 31, 1998 and 1997, the Company had committed lines of credit to
its clients of approximately $681.7 and $275.4 million of which approximately
$257 and $107 million, respectively were unused. The Company extends credit
based upon qualified client receivables outstanding and is subject to
contractual collateral and loan-to-value ratios.
The Company earned fee and interest income from one client, aggregating 11% of
total fee and interest income for the year ended December 31, 1996. For the
years ended December 31, 1998 and 1997, no one client accounted for 10% or more
of total fee and interest income.
At December 31, 1998 and 1997, outstanding finance receivables to three
clients comprised approximately 14% of the total finance receivable portfolios.
At December 31, 1996, outstanding finance receivables to seven clients comprised
approximately 50% of the total finance receivable portfolio.
The Company has provided one-year letter of credit guarantees to three clients
totaling $4.5 million, which are substantially collateralized by finance
receivables. If the clients were to default on their commitments, the Company
would be responsible to meet the client's financial obligation. The revenue
earned by the Company is being recognized ratably over the life of the letters
of credit under the effective interest method and is included in fee and
interest income. The Company currently does not anticipate that it will be
required to fund any of these commitments.
14. PURCHASE OF FUNDING
Effective upon the completion of the offering described in Note 1, the Company
acquired, using the purchase method of accounting, the limited partnership
interest in Funding, consisting primarily of finance receivables and related
borrowings. The amount paid to acquire Funding, net of cash acquired, of $16.2
million approximated both the fair value and book value of Funding at the date
of acquisition.
45
<PAGE>
HEALTHCARE FINANCIAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The financial statements of the Company for 1996 are consolidated assuming the
acquisition of Funding occurred as of January 1, 1996 under the provisions of
Accounting Research Bulletin No. 51. The pro forma results of operations
following reflect the operating results of the Company for the year ended
December 31, 1996 as if the acquisition of Funding had occurred on January 1,
1996, and Funding operations were included with the Company.
<TABLE>
<CAPTION>
1996
----------
<S> <C>
Net fee and interest income......................................... $8,607,409
Provision for losses on receivables................................. 656,116
Net operating expenses.............................................. 4,987,742
----------
Net income......................................................... $2,963,551
==========
</TABLE>
The stand-alone results of operations of Funding for the period January 1,
1996 to November 26, 1996 (date of acquisition by the Company of Funding) were
as follows:
<TABLE>
<S> <C>
Net fee and interest income......................................... $6,588,579
Provision for losses on receivables................................. 537,805
Net operating expenses.............................................. 1,604,389
----------
Income before income taxes and deduction of
preacquisition earnings.......................................... $4,446,385
==========
</TABLE>
15. HEALTHCARE FINANCIAL PARTNERS, INC. (PARENT COMPANY ONLY) CONDENSED
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
December 31,
----------------------------------------------
Balance Sheets 1998 1997
--------------------- -----------------------
Assets:
<S> <C> <C>
Cash and cash equivalents................................ $ 286,906 $ 65,294
Investment in subsidiaries............................... 225,808,298 87,338,737
Investments in affiliates................................ 10,092,794
Other.................................................... 11,440,369 608,921
------------ -----------
Total Assets............................................ $247,628,367 $88,012,952
============ ===========
Liabilities and Equity:
Accounts payable and accrued expenses.................... $ 74,800 $ 182,764
Stockholders' equity..................................... 247,553,567 87,830,188
------------ -----------
Total Liabilities and Equity............................ $247,628,367 $88,012,952
============ ===========
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------
Statements of Operations 1998 1997 1996
--------------------- --------------------- ------------------------
<S> <C> <C> <C>
Income................................................... $ 3,897,948 $2,576,597 $1,401,025
Operating expenses....................................... 2,826,970 2,419,875 1,784,272
----------- ---------- ----------
Income (loss) before income taxes and equity in
undistributed earnings of subsidiary.................... 1,070,978 156,722 (383,247)
Income tax expense....................................... 594,228 1,485 27,358
----------- ---------- ----------
Income (loss) before equity in undistributed earnings
of subsidiary........................................... 476,750 155,237 (410,605)
Equity in undistributed earnings of subsidiaries......... 19,331,152 7,839,611 940,167
----------- ---------- ----------
Net income............................................... $19,807,902 $7,994,848 $ 529,562
=========== ========== ==========
</TABLE>
46
<PAGE>
HEALTHCARE FINANCIAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
Statements of Cash Flows 1998 1997 1996
-------------- ------------- -------------
Operating Activities
<S> <C> <C> <C>
Net income.............................................. $ 19,807,902 $ 7,994,848 $ 529,562
Adjustments to reconcile net income to net cash
used by operations:
Stock compensation.................................... 15,989 15,989
Equity in undistributed earnings of subsidiary........ (19,331,152) (7,839,611) (940,167)
Other................................................. (9,964,222) (727,088) 131,028
------------- ------------ ------------
Net cash used in operating activities............... (9,471,483) (555,862) (279,577)
Investing Activities
Increase in investment in subsidiary..................... (119,138,409) (52,512,661) (26,046,298)
Investment in affiliates................................. (10,092,794)
Payment of amounts due to affiliates..................... (149,537)
Other.................................................... (221,330)
------------- ------------ ------------
Net cash used in investing activities............... (129,231,203) (52,512,661) (26,417,165)
Financing Activities
Issuance of common stock and warrants.................... 138,924,298 53,098,375 26,732,184
------------- ------------ ------------
Net cash provided by financing activities........... 138,924,298 53,098,375 26,732,184
------------- ------------ ------------
Increase in cash and cash equivalents.................... 221,612 29,852 35,442
Cash and cash equivalents at beginning of year........... 65,294 35,442
------------- ------------ ------------
Cash and cash equivalents at end of year................. $ 286,906 $ 65,294 $ 35,442
============= ============ ============
</TABLE>
47
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Although not dissatisfied with the performance of McGladrey & Pullen, L.L.P.,
the Company's Board of Directors determined that, in contemplation of becoming a
publicly-owned company, the Company would be better served by the engagement of
a big-six accounting firm. Accordingly, on June 21, 1996, the Company dismissed
McGladrey & Pullen, LLP, and subsequently decided to engage Ernst & Young LLP,
as the Company's independent accountants for the year beginning January 1, 1996.
The reports of McGladrey & Pullen, LLP, for the years ended December 31, 1995
and 1994 did not contain an adverse opinion or disclaimer of opinion and were
not qualified as to uncertainty, audit scope or accounting principles. During
such years and for the period January 1, 1996 through June 21, 1996 there was no
disagreement with McGladrey & Pullen, LLP on any matter of accounting principles
or practices, financial statement disclosure or auditing scope or procedures.
During the Company's two most recent fiscal years and during the current fiscal
year prior to its engagement, neither the Company nor anyone acting on its
behalf consulted Ernst & Young LLP, regarding either the application of
accounting principles to a specified transaction (either completed or proposed)
or the type of audit opinion that might be rendered on the Company's financial
statements.
48
<PAGE>
PART III
The Proxy Statement for the Annual Meeting of Stockholders to be held May 27,
1999 (other than the portions thereof not deemed to be "filed" for the purposes
of Section 18 of the Securities Exchange Act of 1934), which when filed pursuant
to Regulation 14A under the Securities Exchange Act of 1934 will be incorporated
by reference in this Annual Report on Form 10-K pursuant to General Instruction
G(3) of Form 10-K, will provide the information required under Part III (Items
10, 11, 12 and 13).
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8K
(a) 1. Financial Statements. See Index to Financial Statements in Item 8
hereof.
The financial statement schedules are either not applicable or the
information is otherwise included in the footnotes to the financial statements.
Exhibits required by Item 601 of Regulation S-K.
<TABLE>
<CAPTION>
Exhibit
Number Description
---------------------------------------------------------------------------------------------------
<S> <C>
2.1 Assignment and Assumption of Partnership Interest, dated as of November 21, 1996, between the
Company and HealthPartners Investors, L.L.C.(1)
3.1 Amended and Restated Certificate of Incorporation of the Company, as amended.
3.2 Amended and Restated Bylaws of the Company. (1)
4.1 Specimen Common Stock certificate.(1)
4.2 See Exhibits 3.1 and 3.2 for the provisions of the Company's Amended and Restated Certificate of
Incorporation and Amended and Restated Bylaws governing the rights of holders of securities of the
Company.
10.1 Employment Agreement, dated as of January 1, 1996, between the Company and John K. Delaney, as
amended September 19, 1996.(1)
10.2 Employment Agreement, dated as of January 1, 1996, between the Company and Ethan D. Leder, as
amended September 19, 1996.(1) 1
10.3 Employment Agreement, dated as of January 1, 1996, between the Company and Edward P. Nordberg,
Jr.(1)
10.4 HealthCare Financial Partners, Inc. 1996 Incentive Stock Plan, together with form of Incentive
Stock Option award.(1)
10.5 HealthCare Financial Partners, Inc. 1996 Director Stock Option Plan.(1)
10.6 Form of Indemnification Agreement between the Company and each of its directors and executive
officers.(1)
10.7 Form of Registration Rights Agreement between the Company and certain stockholders.(1)
10.8 Marketing Services Agreement, dated as of November 1, 1995, among HealthPartners Funding, L.P.,
the Company and Steven Silver and assignment by Steven Silver to Medical Marketing and Services,
Inc. dated January 1, 1996.(1)
10.9 Loan and Security Agreement, dated as of November 27, 1996, between Fleet Capital Corporation and
HCFP Funding, Inc.(3)
10.10 Office Lease, dated January 4, 1996, between Two Wisconsin Circle Joint Venture and the Company,
as amended on July 26, 1996 and August 13, 1996.(1)
10.11 Software Purchase and License Agreement, dated as of September 1, 1996, between Creative Systems,
L.L.C. and the Company.(1)
10.12 Amended and Restated Limited Partnership Agreement of HealthPartners Funding, L.P., dated as of
December 1, 1995, among the Company, Farrallon Capital Partners, L.P. and RR Capital Partners,
L.P., as amended and assigned on March 28, 1996.(1)
10.13 Limited Partnership Agreement of HealthCare Financial Partners--Funding II, L.P. dated as of March
5, 1997 between HCFP Funding II, Inc., as general partners and HealthPartners Investors II,
</TABLE>
49
<PAGE>
<TABLE>
<S> <C>
LLC, as limited partner, and Guaranty Agreement dated as of March 5, 1997 between HealthCare Financial Partners, Inc.
and HealthPartners Investors, LLC.(2)
10.14 Receivables Loan and Security Agreement dated as of December 5, 1996 among Wisconsin Circle
Funding Corporation, as Borrower, HCFP Funding, Inc. as Servicer, Holland Limited Securitization,
Inc., as Lender, and ING Baring (U.S.) Capital Markets, Inc. and Purchase and Contribution
Agreement dated as of December 5, 1996 between HCFP Funding, Inc. and Wisconsin Circle Funding
Corporation (3).
10.15 Employment Agreement between the Company and Hilde M. Alter, dated as of July 1, 1997.(4)
10.16 Employment Agreement between the Company and Steven M. Curwin, dated as of September 1, 1997.(4)
10.17 Employment Agreement between the Company and Steven I. Silver, dated as of October 1, 1996.(4)
10.18 Amendment No. 1 to Employment Agreement between the Company and Steven I. Silver, dated as of July
1, 1997.(4)
10.19 Purchase and Sale Agreement dated as of June 17, 1997 between HCFP Funding II, Inc., as Seller,
and Wisconsin Circle II Funding Corporation, as Buyer; Pooling and Servicing Agreement dated as of
June 27, 1997 among Wisconsin Circle II Funding Corporation, as Transferor, HCFP Funding II, Inc.
as Servicer and First Bank National Association, as Trustee; Certificate Purchase Agreement dated
as of June 27, 1997 among Wisconsin Circle II Funding Corporation, as Transferor, and The
Purchasers described therein; Appendix--Definitions; and Guarantee by HealthCare Financial
Partners, Inc.(5)
10.20 Assignment and Assumption Agreement by and among HealthPartners Investors II, LLC, HCFP Funding,
Inc., and HealthCare Financial Partners, Inc.(6)
10.21 First Supplemental Pooling and Servicing Agreement dated as of August 21, 1997 among Wisconsin
Circle II Funding Corporation, HCFP Funding II, Inc. and U.S. Bank National Association.(7)
10.22 Second Supplemental Pooling and Servicing Agreement dated as of September 22, 1997 among Wisconsin
Circle II Funding Corporation, HCFP Funding II, Inc. and U.S. Bank National Association.(7)
10.23 Modification Agreement dated January 15, 1998 among Wisconsin Circle II Funding Corporation, HCFP
Funding II, Inc., Credit Suisse First Boston Mortgage Capital, LLC, HealthCare Financial Partners,
Inc. and U.S. Bank National Association.(7)
10.24 Second Modification Agreement dated February 6, 1998 among Wisconsin Circle II Funding
Corporation, HCFP Funding II, Inc., Credit Suisse First Boston Mortgage Capital, LLC, HealthCare
Financial Partners, Inc. and U.S. Bank National Association.(7)
10.25 First Amendment Agreement dated as of December 30, 1997 among Wisconsin Circle Funding
Corporation, HCFP Funding, Inc., ING Baring (U.S.) Capital Markets, Inc. and Holland Limited
Securitization, Inc.(7)
10.26 Amendment No. 3 to Office Lease dated July 17, 1997, between Two Wisconsin Circle Joint Venture
and HealthCare Financial Partners, Inc.(7)
10.27 Amendment to Loan and Security Agreement dated as of April 15, 1997 among Fleet Capital
Corporation and HCFP Funding, Inc.(7)
10.28 Amendment No. 4 to Office Lease dated February 27, 1998, between Two Wisconsin Circle Joint
Venture and HealthCare Financial Partners, Inc.
10.29 Amendment No. 5 to Office Lease dated February 27, 1998, between Two Wisconsin Circle Joint
Venture and HealthCare Financial Partners, Inc.
10.30 Amendment No. 6 to Office Lease dated July 17, 1998, between Two Wisconsin Circle Joint Venture
and HealthCare Financial Partners, Inc.
10.31 Amendment No. 7 to Office Lease dated July 24, 1998, between Two Wisconsin Circle Joint Venture
and HealthCare Financial Partners, Inc.
10.32 Amendment No. 8 to Office Lease dated December 23, 1998, between Two Wisconsin Circle Joint
Venture and HealthCare Financial Partners, Inc.
10.33 Management Agreement dated as of May 6, 1998 between HealthCare Financial Partners REIT, Inc. and
HCFP REIT Management, Inc., as amended.
21.1 List of Subsidiaries of the Registrant.(7)
23.1 Consent of Independent Auditors
99 Supplementary Data Sheet
</TABLE>
(1) Incorporated by reference to the document filed under the same Exhibit
number to the Company's Registration Statements on Form S-1 (No. 333-
12479).
50
<PAGE>
(2) Incorporated by reference to Exhibit 99.1 to the Company's Current Report
on Report 8-K filed with the Commission on March 13, 1997.
(3) Incorporated by reference to the document filed under the same Exhibit
number to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996.
(4) Incorporated by reference to the document filed under the same Exhibit
number to the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997.
(5) Incorporated by reference to the documents filed under Exhibit numbers
10.15, 10.16, 10.17, 10.18 and 10.19 to the Company's Current Report on
Form 8-K filed with the Commission on July 18, 1997.
(6) Incorporated by reference to the document filed under Exhibit number 99.2
to the Company's Current Report on Form 8-K filed with the Commission on
July 18, 1997.
(7) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997 filed with the Commission on February
20, 1998.
Reports on Form 8-K.
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C>
Date: March 30, 1999 /s/ John K. Delaney
--------------------------------------------------
By: JOHN K. DELANEY
Chairman of the Board, Chief Executive Officer
and Director (principal executive officer)
Date: March 30, 1999 /s/ Ethan D. Leder
--------------------------------------------------
By: ETHAN D. LEDER
Vice-Chairman of the Board, President and
Director
Date: March 30, 1999 /s/ Edward P. Nordberg, Jr.
--------------------------------------------------
By: EDWARD P. NORDBERG, JR.
Executive Vice President, Chief Financial Officer
and Director (principal financial officer)
Date: March 30, 1999 /s/ Hilde M. Alter
--------------------------------------------------
By: HILDE M. ALTER
Treasurer (principal accounting officer)
Date: March 30, 1999 /s/ Geoffrey E.D. Brooke
--------------------------------------------------
By: GEOFFREY E.D. BROOKE
Director
Date: March 30, 1999 /s/ John F. Dealy
--------------------------------------------------
By: JOHN F. DEALY
Director
</TABLE>
51
<PAGE>
Exhibit 3.1
CERTIFICATE OF AMENDMENT
OF THE
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
HEALTHCARE FINANCIAL PARTNERS, INC.
__________________________________________________
HEALTHCARE FINANCIAL PARTNERS, INC., a corporation organized and
existing under the General Corporation Law of the State of Delaware (the
"Corporation"), does hereby certify as follows:
FIRST: That the directors of the Corporation, by written consent,
adopted a resolution proposing and declaring advisable an amendment to the
Amended and Restated Certificate of Incorporation of the Corporation to
increase the number of shares of Common Stock which the Corporation is
authorized to issue from 30,000,000 to 60,000,000 shares.
SECOND: That thereafter, pursuant to resolution of the directors,
by majority vote of all outstanding stock entitled to vote thereon at a
meeting of stockholders of the Corporation in accordance with Section 222
of the General Corporation Law of the State of Delaware, the stockholders
voted in favor of this amendment to the Amended and Restated Certificate of
Incorporation.
THIRD: That the first paragraph of Article IV of the
Corporation's Amended and Restated Certificate of Incorporation as amended
shall read as follows:
<PAGE>
"The total number of shares of capital stock which the Corporation is
authorized to issue is 70,000,000 divided into two classes as follows:
(1) 60,000,000 shares of common stock, $.01 par value per share
("Common Stock"); and
(2) 10,000,000 shares of preferred stock, $.01 par value per share
("Preferred Stock")."
FOURTH: This amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Amendment to be signed and attested by its duly authorized officers, this 29th
day of May, 1998.
HEALTHCARE FINANCIAL PARTNERS, INC.
By: /s/ John K. Delaney
-------------------
John K. Delaney
Chairman of the Board
ATTESTED BY:
/s/ Steven M. Curwin
- --------------------
Steven M. Curwin
Secretary
-2-
<PAGE>
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
HEALTHPARTNERS FINANCIAL CORPORATION
(Pursuant to Section 245 of the
General Corporation Law of the State of Delaware)
HEALTHPARTNERS FINANCIAL CORPORATION (the "Corporation") is a
corporation duly organized and existing under the General Corporation Law of the
State of Delaware and does hereby certify as follows:
1. The Corporation's original Certificate of Incorporation was filed
with the Secretary of State of the State of Delaware on April 23, 1993, as
amended on December 28, 1994.
2. This Amended and Restated Certificate of Incorporation amends and
restates the provisions of the Certificate of Incorporation, as amended, and was
duly adopted by the written consent of the stockholders of the Corporation
entitled to vote thereon in accordance with the provisions of Sections 242 and
245 of the General Corporation Law of the State of Delaware.
3. The Certificate of Incorporation of the Corporation, as amended and
restated hereby, shall, upon its filing with the Secretary of State of the State
of Delaware, read in its entirety as follows:
Article I. Name
The name of the corporation is Healthcare Financial Partners, Inc. (the
"Corporation").
Article II. Registered Office
The registered office of the Corporation in the State of Delaware is
located at 1013 Centre Road, in the City of Wilmington, 19805, County of New
Castle. The name of the registered agent at such address is The Prentice-Hall
Corporation System, Inc.
Article III. Purpose
The purpose for which the Corporation is organized is to engage in any
lawful act or activity for which corporations may be organized under the General
Corporation Law of the State of Delaware (the "GCL").
<PAGE>
Article IV. Capital Stock
The total number of shares of capital stock which the Corporation is
authorized to issue is 40,000,000 divided into two classes as follows:
(1) 30,000,000 shares of common stock, $.01 par value per share
("Common Stock"); and
(2) 10,000,000 shares of preferred stock, $.01 par value per
share ("Preferred Stock").
The designations, preferences, qualifications, limitations, restrictions
and the special or relative rights granted to or imposed upon the Common Stock
and Preferred Stock of the Corporation are as follows:
(a) Provisions Relating to the Common Stock
---------------------------------------
(1) Each holder of Common Stock shall be entitled to one
vote for each share of Common Stock standing in such holder's name
on the records of the Corporation on each matter submitted to a
vote of the stockholders.
(2) Subject to the rights of the holders of the Preferred
Stock, the holders of the Common Stock shall be entitled to receive
when, as, and if declared by the Board of Directors of the
Corporation, out of funds legally available therefor, dividends
payable in cash, stock or otherwise.
(3) Upon any liquidation, dissolution, or winding up of the
Corporation, whether voluntary or involuntary, and after the
holders of the Preferred Stock and the holders of any bonds,
debentures, or other obligations of the Corporation shall have been
paid in full the amounts to which they shall be entitled (if any),
or a sum sufficient for such payment in full shall have been set
aside, the remaining net assets of the Corporation shall be
distributed pro rata to the holders of the Common Stock in
accordance with their respective rights and interests, to the
exclusion of the holders of the Preferred Stock and any bonds,
debentures, or other obligations of the Corporation.
-2-
<PAGE>
(b) Provisions Relating to the Preferred Stock
------------------------------------------
(1) The Preferred Stock may be issued from time to time in
one or more classes or series, the shares of each class or series
to have such designations and powers, preferences and rights, and
the qualifications, limitations, and restrictions thereof as are
stated and expressed herein and in the resolution or resolutions
providing for the issuance of such class or series adopted by the
Board of Directors of the Corporation as hereafter prescribed.
(2) Authority is hereby expressly granted to and vested in
the Board of Directors of the Corporation to authorize the issuance
of the Preferred Stock from time to time in one or more classes or
series, and with respect to each such class or series of the
Preferred Stock, to fix and state by the resolution or resolutions
from time to time adopted providing for the issuance thereof the
following:
(i) whether or not such class or series is to have
voting rights, full, special, or limited, or is to be without
voting rights, and whether or not such class or series is to be
entitled to vote as a separate class either alone or together
with the holders of one or more other classes or series of
stock;
(ii) the number of shares to constitute such class or
series and the designations thereof;
(iii) the preferences, and relative, participating,
optional, or other special rights, if any, and the
qualifications, limitations, or restrictions thereof, if any,
with respect to any such class or series;
(iv) whether or not the shares of any such class or
series shall be redeemable at the option of the Corporation or
the holders thereof or upon the happening of any specified
event, and, if redeemable, the redemption price or prices
(which may be payable in the form of cash, notes, securities,
or other property), and the time or times at which, and the
terms and conditions upon which, such shares shall be
redeemable and the manner of redemption;
(v) whether or not the shares of such class or series
shall be subject to the operation of retirement or sinking
funds to be applied to the purchase or redemption of such
shares for retirement, and, if such retirement or sinking fund
or funds are to be established, the annual amount thereof, and
the terms and provisions relative to the operation thereof;
(vi) the dividend rate, whether dividends are payable
in cash, stock of the Corporation, or other property, or a
combination thereof, the conditions upon which and the times
when such dividends are payable, the preference to
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<PAGE>
or the relation to the payment of dividends payable on any
other class or classes or series of stock, whether such
dividends shall be cumulative or noncumulative, and if
cumulative, the date or dates from which such dividends shall
accumulate;
(vii) the preferences, if any, and the amounts thereof
which the holders of any such class or series shall be entitled
to receive upon the voluntary and involuntary dissolution of,
or upon any distribution of the assets of, the Corporation;
(viii) whether or not the shares of any such class or
series, at the option of the Corporation or the holder thereof
or upon the happening of any specified event, shall be
convertible into or exchangeable for the shares of any other
class or classes or of any other series of the same or any
other class or classes of stock, securities, or other property
of the Corporation, and the conversion price or prices, ratio
or ratios, or the rate or rates at which such exchange may be
made, with such adjustments, if any, as shall be stated and
expressed or provided for in such resolution or resolutions;
and
(ix) such other special rights and provisions with
respect to any such class or series as may seem advisable to
the Board of Directors of the Corporation.
(3) The shares of each class or series of the Preferred
Stock may vary from the shares of any other class or series thereof in
any or all of the foregoing respects. The Board of Directors of the
Corporation may increase the number of shares of Preferred Stock
designated for any existing class or series by a resolution adding to
such class or series authorized and unissued shares of the Preferred
Stock not designated for any other class or series. The Board of
Directors of the Corporation may decrease the number of shares of the
Preferred Stock designated for any existing class or series by a
resolution, subtracting from such series unissued shares of the Preferred
Stock designated for such class or series, and the shares so subtracted
shall become authorized, unissued, and undesignated shares of the
Preferred Stock.
(c) General
-------
(1) Subject to the foregoing provisions of this Amended and
Restated Certificate of Incorporation, the Corporation may issue shares
of its Preferred Stock and Common Stock from time to time for such
consideration (in any form, but not less in value than the par value
thereof) as may be fixed by the Board of Directors of the Corporation,
which is expressly authorized to fix the same in its absolute and
uncontrolled discretion subject to the foregoing conditions. Shares so
issued for which the consideration shall have been paid or delivered to
the Corporation shall be deemed fully paid stock and shall not be liable
to any further call or assessment thereon, and the holders of such shares
shall not be liable for any further payments in respect of such shares.
-4-
<PAGE>
(2) The Corporation shall have authority to create and issue
rights and options entitling their holders to purchase or otherwise
acquire shares of the Corporation's capital stock of any class or
series or other securities of the Corporation, and such rights and
options shall be evidenced by instrument(s) approved by the Board of
Directors of the Corporation or any committee thereof. The Board of
Directors of the Corporation or any committee thereof shall be
empowered to set the exercise price, duration, times for exercise, and
other terms of such options or rights; provided, however, that the
consideration to be received (which may be in any form) for any shares
of capital stock subject thereto shall have a value not less than the
par value thereof.
Article V. Transactions With Officers, Directors or Stockholders
No contract or transaction between the Corporation and one or more of
its directors, officers, or stockholders or between the Corporation and any
person (as used herein "person" means any other corporation, partnership,
association, firm, trust, joint venture, political subdivision, or
instrumentality) or other organization in which one or more of its directors,
officers, or stockholders are directors, officers, or stockholders, or have a
financial interest, shall be void or voidable solely for this reason, or solely
because the director or officer is present at or participates in the meeting of
the Board of Directors or committee which authorizes the contract or
transaction, or solely because his, her or their votes are counted for such
purpose, if: (a) the material facts as to his or her relationship or interest
and as to the contract or transaction are disclosed to or are known by the Board
of Directors or the committee, and the Board of Directors or committee in good
faith authorizes the contract or transaction by the affirmative vote of a
majority of the disinterested directors, even though the disinterested directors
be less than a quorum; or (b) the material facts as to his or her relationship
or interest and as to the contract or transaction are disclosed to or are known
by the stockholders entitled to vote thereon, and the contract or transaction is
specifically approved in good faith by vote of the stockholders; or (c) the
contract or transaction is fair as to the Corporation as of the time it is
authorized, approved, or ratified by the Board of Directors, a committee thereof
(to the extent permitted by applicable law), or the stockholders. Common or
interested directors may be counted in determining the presence of a quorum at a
meeting of the Board of Directors or of a committee which authorizes the
contract or transaction .
Article VI. Indemnification
(a) The Corporation shall indemnify to the fullest extent authorized or
permitted by law (as now or hereafter in effect) any person who is or was made,
or threatened to be made, a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative, including, without limitation, an action by or in the right of
the Corporation to procure a judgment in its favor, by reason of the fact that
such person, or a person of whom such person is the legal representative, is or
was a director or officer of the Corporation, or is or was serving in any
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<PAGE>
capacity at the request of the Corporation for any other corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise (an
"Other Entity"), against judgments, fines, penalties, excise taxes, amounts paid
in settlement and costs, charges and expenses (including attorneys' fees and
disbursements). Persons who are not directors or officers of the Corporation may
be similarly indemnified in respect of service to the Corporation to the extent
the Board of Directors at any time specifies that such persons are entitled to
the benefits of this Article.
(b) The Corporation shall have power to purchase and maintain insurance
on behalf of any person who is or was a director, officer, employee or agent of
the Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of an Other Entity, against any liability
asserted against such person and incurred by such person in any such capacity,
or arising out of such person's status as such, whether or not the Corporation
would have the power to indemnify such person against such liability under the
provisions of this Article, the Amended and Restated Bylaws or under Section 145
of the GCL or any other provision of law.
(c) Any director or officer of the Corporation serving in any capacity
for (i) another corporation of which a majority of the shares entitled to vote
in the election of its directors is held, directly or indirectly, by the
Corporation or (ii) any employee benefit plan of the Corporation or any
corporation referred to in clause (i) of this paragraph shall be deemed to be
doing so at the request of the Corporation.
Article VII. Amendment of Bylaws
All the powers of the Corporation, insofar as the same may be lawfully
vested by this Amended and Restated Certificate of Incorporation in the Board of
Directors, are hereby conferred upon the Board of Directors. In furtherance and
not in limitation of that power, the Board of Directors shall have the power,
upon the affirmative vote of a majority of the Classified Directors (as
hereinafter defined) at a meeting lawfully convened, to make, adopt, alter,
amend, and repeal from time to time the Bylaws of the Corporation and to make
from time to time new Bylaws of the Corporation, subject to the right of the
stockholders entitled to vote thereon to adopt, alter, amend, and repeal Bylaws
made by the Board of Directors or to make new Bylaws.
Article VIII. Reservation of Right to Amend the Certificate of Incorporation
Except for the provisions of Articles VI and IX herein, the Corporation
reserves the right to amend, alter, change, or repeal any provision contained in
this Amended and Restated Certificate of Incorporation in the manner now or
hereafter prescribed by law and all rights conferred on officers, directors, and
stockholders herein are granted subject to this reservation.
Article IX. Exculpation of Directors
A director of the Corporation shall not be personally liable to the
Corporation or its
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<PAGE>
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (a) for any breach of the director's duty of loyalty to the
Corporation or its stockholders, (b) for acts or omissions not in good faith or
which involve intentional misconduct or knowing violation of law, (c) under
Section 174 of the GCL, or (d) for any transaction from which the director
derived an improper personal benefit. Any repeal or amendment of this Article by
the stockholders of the Corporation shall be prospective only, and shall not
adversely affect any limitation on the personal liability of a director of the
Corporation arising from an act or omission occurring prior to the time of such
repeal or amendment. In addition to the circumstances in which a director of the
Corporation is not personally liable as set forth in the foregoing provisions of
this Article, a director shall not be liable to the Corporation or its
stockholders to such further extent as permitted by any law hereafter enacted,
including without limitation any subsequent amendment to the GCL.
Article X. Board of Directors
(a) The number of directors constituting the Board of Directors shall
be fixed by, or in the manner provided in, the Amended and Restated Bylaws of
the Corporation, provided that such number shall be no fewer than three (3) and
no more than ten (10) (plus such number of directors as may be elected from time
to time pursuant to the terms of any series of Preferred Stock that may be
issued and outstanding from time to time). The directors of the Corporation
(exclusive of directors who are elected pursuant to the terms of, and serve as
representatives of the holders of, any series of Preferred Stock) shall be
referred to herein as "Classified Directors" and shall be divided into three
classes, with the first class referred to herein as "Class I," the second class
as "Class II," and the third class as "Class III." Each class shall consist as
nearly as possible of one-third (1/3) of the total number of directors making up
the entire Board of Directors. The term of office of the initial Class I
directors shall expire at the 1997 annual meeting of stockholders, the term of
office of the initial Class II directors shall expire at the 1998 annual meeting
of stockholders, and the term of office of the initial Class III directors shall
expire at the 1999 annual meeting of stockholders, with each director to hold
office until his or her successor shall have been duly elected and qualified. At
each annual meeting of stockholders, directors elected to succeed those
directors whose terms then expire shall be elected for a term of office to
expire at the third succeeding annual meeting of stockholders after their
election, with each director to hold office until his or her successor shall
have been duly elected and qualified.
(b) Notwithstanding the foregoing, whenever the holders of any one or
more classes or series of Preferred Stock issued by the Corporation shall have
the right, voting separately by series or by class (excluding holders of Common
Stock), to elect directors at an annual or special meeting of stockholders, the
election, term of office, filling of vacancies, and other features of such
directorships shall be governed by the terms of this Amended and Restated
Certificate of Incorporation (including any amendment to this Amended and
Restated Certificate of Incorporation that designates a series of Preferred
Stock), and such directors so elected by the holders of Preferred Stock shall
not be divided into classes pursuant to this Article unless expressly provided
by such terms.
(c) Any or all Classified Directors may be removed, with cause, at any
annual or special meeting of stockholders, upon the affirmative vote of the
holders of a majority of the outstanding shares of each class of capital stock
of the Corporation then entitled to vote in person or by proxy at an
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<PAGE>
election of such Classified Directors, provided that notice of the intention to
act upon such matter shall have been given in the notice calling such meeting.
(d) Election of directors, whether Classified Directors or otherwise,
need not be by written ballot.
Article XI. Business Combinations
The Corporation expressly elects to be governed by Section 203 of the
GCL.
Article XII. Special Meetings of Stockholders
Special meetings of stockholders of the Corporation may be called by the
Board of Directors pursuant to a resolution adopted by a majority of the
Classified Directors then serving, by the Chairman of the Board, or by any
holder or holders of at least forty percent (40%) of the outstanding shares of
capital stock of the Corporation then entitled to vote on any matter for which
the respective special meeting is being called.
Article XIII. Existence
The existence of the Corporation shall be perpetual.
IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be
hereunto affixed and this Amended and Restated Certification of Incorporation to
be executed by John K. Delaney, its Chairman, President and Chief Executive
Officer, and Edward P. Nordberg, Jr., its Senior Vice President and Secretary,
this 11th day of September, 1996.
By: /s/ Edward P. Nordberg, Jr.
---------------------------
John K. Delaney
Chairman of the Board, President
and Chief Executive Officer
ATTEST:
/s/ Edward P. Nordberg, Jr.
- ---------------------------
Edward P. Nordberg, Jr.
Senior Vice President - Legal and Financial
Affairs and Secretary
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<PAGE>
TWO WISCONSIN CIRCLE
ADDENDUM NO. 4 TO OFFICE LEASE
------------------------------
THIS ADDENDUM NO. 4 TO OFFICE LEASE (this "Addendum") is made and
entered into this 27th day of February, 1998, by and between TWO WISCONSIN
CIRCLE JOINT VENTURE, a Maryland joint venture, hereinafter called "Lessor," and
HEALTHCARE FINANCIAL PARTNERS, INC., formerly known as Health Partners Financial
Corporation, a Delaware corporation, hereinafter called "Lessee."
WITNESSETH:
WHEREAS, by Office Lease dated the 4th day of January 1996, as amended
by Addendum No. 1 to Office Lease dated the 26th day of July 1996, Addendum No.
2 to Office Lease dated the 13th day of August 1996, and Addendum No. 3 to
Office Lease dated the 17th day of July 1997 (as so amended, the "Lease7"),
Lessor currently leases to Lessee approximately 15,577 square feet of rentable
area on the fourth (4th) floor (the "Existing Demised Premises"), in the
building situated at Two Wisconsin Circle, Chevy Chase, Maryland (the
"Building"); and
WHEREAS, Lessor and Lessee desire to expand the Existing Demised
Premises by adding thereto and incorporating therein, upon the terms and
conditions hereinafter set forth, additional space on the fourth (4th) floor of
the Building comprising approximately 1,116 square feet of rentable area (the
"Additional Space").
NOW, THEREFORE, in consideration of the mutual covenants and
agreements hereinafter set forth, the parties hereto do mutually agree that the
Lease shall be and is hereby amended to provide as follows, all capitalized
terms being as defined in the Lease unless otherwise noted herein:
1. ADDITIONAL SPACE
----------------
There is hereby added to the Existing Demised Premises, and Lessor
does hereby lease to Lessee, and Lessee does hereby lease from Lessor, the
Additional Space, subject to and upon all of the terms and conditions of the
Lease, as amended hereby, to the end that the Demised Premises under the Lease
shall be approximately 16,693 square feet of rentable area on the fourth (4th)
floor of the Building, as outlined on the floor plan attached hereto and made a
part hereof as Exhibit A.
2. TERM
----
(A) The Additional Space shall be added to the Existing Demised
Premises on the Addition Date, which shall be the 1st day of April, 1998 (the
"Anticipated Addition Date"), or such later date as may be established pursuant
to the provisions below in this Section 2. The term of the Lease as to the
Additional Space shall expire on the same date as the term of the
<PAGE>
Lease as to the Existing Demised Premises so as to be coterminous for all
purposes with the term of the Lease as to the Existing Demised Premises.
(B) It is understood and agreed that the obligations of Lessor and
Lessee under this Addendum are contingent upon the existing tenant of the
Additional Space vacating and surrendering full possession of the same on or
about March 31, 1998. In the event Lessor is unable to deliver possession of the
Additional Space on the Anticipated Addition Date, because the existing tenant
has failed to so vacate, Lessor shall not be liable or responsible for any
claims, damages or liability arising in connection therewith or by reason
thereof, nor shall Lessee be excused or released from the Lease, as amended
hereby, because of Lessor's inability to deliver possession of the Additional
Space on that date. The Addition Date, however, shall be extended to the earlier
of (i) the date the Additional Space is occupied by Lessee or (ii) the date
which is ten (10) days after the date Lessor has notified Lessee in writing that
the existing tenant has vacated the Additional Space and possession thereof is
available to Lessee; provided, however, that if the existing tenant fails to
vacate and surrender full possession of the Additional Space on or before May
31, 1998, then either Lessor or Lessee shall have the right to cancel and
terminate this Addendum without further liability by giving written notice of
such cancellation and termination to the other on or before June 15, 1998, and
this Addendum shall be null and void and of no further force or effect upon the
delivery of such notice. Lessor shall endeavor to keep Lessee informed as to the
status of its efforts to recapture possession of the Additional Space from the
existing tenant. When Lessee accepts possession of the Additional Space, Lessor
and Lessee shall execute the "Declaration as to Date of Delivery and Acceptance
of Possession of Premises," attached hereto as Exhibit B, which shall specify
the Addition Date.
3. RENT
----
The additional monthly rent for the Additional Space (hereinafter
referred to as "Additional Monthly Rent"), which Lessee hereby agrees to pay in
advance to Lessor and Lessor hereby agrees to accept, shall be as follows:
Lease Period Additional Monthly Rent
------------ -----------------------
From the Addition Date through
the twelfth (12th) full calendar
month thereafter $2,790.00
From the thirteenth (13th) full calendar
month through the twenty-fourth (24th)
full calendar month $2,883.00
From the twenty-fifth (25th)
full calendar month through the
thirty-sixth (36th)
full calendar month thereafter $2,976.00
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<PAGE>
From the thirty-seventh (37th)
full calendar Month through the
forty-eighth (48th)
full calendar month $3,069.00
From the forty-ninth (49th)
full calendar Month through
the expiration of the
initial term of the Lease $3,162.00
If the Addition Date is a date other than the first day of a calendar month, the
Additional Monthly Rent from such date until the first day of the following
calendar month shall be prorated at the rate of one-thirtieth (1/30th) of the
Additional Monthly Rent for each day, payable in advance. Additional Monthly
Rent as specified above shall be payable as additional rent under the Lease, as
amended hereby, simultaneously with each payment of Monthly Rent in advance on
the first day of each calendar month during the term of the Lease.
4. PRE-OCCUPANCY TENANT WORK
-------------------------
The Additional Space has been previously occupied, and it is
acknowledged that Lessor has heretofore completed tenant work within the
Additional Space substantially in accordance with the provisions of Exhibit B of
the Lease. Lessee shall accept the Additional Space "as is" upon the Addition
Date, and Lessor shall have no obligation to furnish or install any items
whatsoever of tenant work within the Additional Space. All tenant work and
installations desired by Lessee for its occupancy of the Additional Space shall
be undertaken by Lessee at its cost and expense pursuant to Section 9 of the
Lease.
5. ADDITIONAL DEPOSIT
------------------
Lessor currently holds the sum of Forty-Five Thousand Four Hundred
Thirty-Two and 92/100 Dollars ($45,432.92) as a non-interest bearing cash
security deposit under the Lease. Upon the Addition Date and as a condition to
delivery of possession of the Additional Space, Lessee shall deposit with Lessor
the additional sum of Three Thousand One Hundred Sixty-Two and 00/ 100 Dollars
($3,162.00). The resulting sum in the amount of Forty-Eight Thousand Five
Hundred Ninety Four 92/100 Dollars ($48 594.92) shall continue to be held by
Lessor as a non-interest bearing cash security deposit under the Lease, as
amended hereby, pursuant to and in accordance with the provisions of Section 6
of the Lease. If Lessor elects to apply all or any portion of the increased cash
deposit to cure Lessee's default, Lessee shall be obligated to promptly deposit
with Lessor cash in an amount sufficient to restore the cash security deposit to
Forty-Eight Thousand Five Hundred Ninety Four and 92/100 Dollars ($48,594.92).
6. LEASE PROVISIONS APPLICABLE
---------------------------
All of the terms and conditions of the Lease, as amended or
supplemented hereby, shall be applicable to the Additional Space hereby added to
the Existing Demised Premises. Once
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<PAGE>
added to the Existing Demised Premises, the Additional Space shall be deemed to
be a part of the premises demised under the Lease for all purposes. All terms
and conditions of the Lease, as amended or supplemented hereby, are hereby
ratified and affirmed and shall remain in full force and effect.
IN WITNESS WHEREOF, Lessor and Lessee have caused this Addendum to be
signed in their names by their duly authorized representatives and delivered as
their act and deed, intending to be legally bound by its terms and provisions.
LESSOR:
TWO WISCONSIN CIRCLE JOINT VENTURE,
a Maryland joint venture
Attest: By: The Chevy Chase Land Company of
Montgomery County, Maryland, a General
Partner
[SIGNATURE APPEARS HERE] By: /s/ Edward Hall Asher
- ------------------------ ---------------------------------
VICE PRESIDENT Name: Edward Hall Asher
[SEAL APPEARS HERE] Title: President
STATE OF MARYLAND
COUNTY OF MONTGOMERY, ss:
I, Donna Geraci, a Notary Public in and for the State of Maryland, do
hereby certify that Edward Hall Asher, who is personally well known to me as the
person who executed the foregoing and annexed Addendum, dated the 27 day of
Feb., 1998, on behalf of the Lessor, to acknowledge the same, personally
appeared before me in said jurisdiction and acknowledged said Addendum to be the
act and deed of The Chevy Chase Land Company of Montgomery County, Maryland, as
a general partner of and for and on behalf of the Lessor, and delivered the same
as such.
GIVEN under my hand and seal this 9th day of March, 1998.
/s/ Donna Geraci
---------------------------
Notary Public
My Commission Expires 5/19/99
(Signatures Continue on the Following Page)
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<PAGE>
LESSEE:
Attest: HEALTHCARE FINANCIAL PARTNERS, INC.,
a Delaware corporation
[SIGNATURE APPEARS HERE] By: /s/ Edward P. Nordberg, Jr.
- --------------------- -------------------------------
Secretary Name: Edward P. Nordberg, Jr.
(SEAL) Title: EVP
STATE OF MARYLAND
COUNTY OF MONTGOMERY, ss:
I, Sue E. Murray, a Notary Public in and for the State of Maryland, do
hereby certify that Edward P. Nordberg, Jr., who is personally well known to me
as the person who executed the foregoing and annexed Addendum, dated the 27th
day of February, 1998, on behalf of the Lessee, to acknowledge the same,
personally appeared before me in said jurisdiction and acknowledged said
Addendum to be the act and deed of Healthcare Financial Partners, Inc. and
delivered the same as such.
GIVEN under my hand and seal this 9th day of March, 1998.
/s/ Sue E. Murray
-------------------------------------
Notary Public
Sue E. Murray
My Commission Expires 8/7/01
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<PAGE>
TWO WISCONSIN CIRCLE
EXHIBIT "B"
DECLARATION AS TO DATE OF DELIVERY AND
ACCEPTANCE OF POSSESSION OF PREMISES
Attached to and made a part of the Addendum, dated the _____ day of
January, 1998, entered into by and between Two Wisconsin Circle Joint Venture,
as Lessor, and Healthcare Financial Partners, Inc., as Lessee.
Lessor and Lessee do hereby declare and evidence that possession of the
Additional Space was accepted by Lessee on the _________ day of _________, 1998.
The Addendum is now in full force and effect. For the purpose of the Addendum,
the Addition Date is established as being on the said date.
LESSEE: LESSOR:
HEALTHCARE FINANCIAL TWO WISCONSIN CIRCLE JOINT VENTURE
PARTNERS, INC.
By: The Chevy Chase Land Company of
Montgomery County, Maryland
By: By:
---------------------------- ------------------------
Name: Name:
Title: Title:
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<PAGE>
TWO WISCONSIN CIRCLE
ADDENDUM NO. 5 TO OFFICE LEASE
------------------------------
THIS ADDENDUM NO. 5 TO OFFICE LEASE (this "Addendum") is made and
entered into this 27th day of February, 1998, by and between TWO WISCONSIN
CIRCLE JOINT VENTURE, a Maryland joint venture, hereinafter called "Lessor," and
HEALTHCARE FINANCIAL PARTNERS, INC., formerly known as Health Partners Financial
Corporation, a Delaware corporation, hereinafter called "Lessee."
WITNESSETH:
WHEREAS, by Office Lease dated the 4th day of January 1996, as amended
by Addendum No. I to Office Lease dated the 26th day of July 1996, Addendum No.
2 to Office Lease dated the 13th day of August 1996, Addendum No. 3 to Office
Lease dated the 17th day of July 1997, and Addendum No. 4. to Office Lease dated
the 27 day of Feb 1998 (as so amended, the "Lease"), Lessor currently leases to
Lessee approximately 16,693 square feet of rentable area on the fourth (4th)
floor (the "Existing Demised Premises"), in the building situated at Two
Wisconsin Circle, Chevy Chase, Maryland (the "Building"); and
WHEREAS, Lessor and Lessee desire to expand the Existing Demised
Premises by adding thereto and incorporating therein, upon the terms and
conditions hereinafter set forth, additional space on the fourth (4th) floor of
the Building comprising approximately 5,127 square feet of rentable area (the
"Additional Space").
NOW, THEREFORE, in consideration of the mutual covenants and
agreements hereinafter set forth, the parties hereto do mutually agree that the
Lease shall be and is hereby amended to provide as follows, all capitalized
terms being as defined in the Lease unless otherwise noted herein:
1. ADDITIONAL SPACE
----------------
There is hereby added to the Existing Demised Premises, and Lessor
does hereby lease to Lessee, and Lessee does hereby lease from Lessor, the
Additional Space, subject to and upon all of the terms and conditions of the
Lease, as amended hereby, to the end that the Demised Premises under the Lease
shall be approximately 21,820 square feet of rentable area on the fourth (4th)
floor of the Building, as outlined on the floor plan attached hereto and made a
part hereof as Exhibit A.
2. TERM
----
(A) The Additional Space shall be added to the Existing Demised
Premises on the Addition Date, which shall be the 1st day of October, 1998 (the
"Anticipated Addition Date") , or such later date as may be established pursuant
to the provisions below in this Section 2. The
<PAGE>
term of the Lease as to the Additional Space shall expire on the same date as
the term of the Lease as to the Existing Demised Premises so as to be
coterminous for all purposes with the term of the Lease as to the Existing
Demised Premises.
(B) It is understood and agreed that the obligations of Lessor and
Lessee under this Addendum are contingent upon the existing tenant of the
Additional Space vacating and surrendering full possession of the same on or
about July 31, 1998. In the event Lessor is unable to deliver possession of the
Additional Space on the Anticipated Addition Date, because the existing tenant
has failed to so vacate, Lessor shall not be liable or responsible for any
claims, damages or liability arising in connection therewith or by reason
thereof, nor shall Lessee be excused or released from the Lease, as amended
hereby, because of Lessor's inability to deliver possession of the Additional
Space on that date. The Addition Date, however, shall be extended to the earlier
of (i) the date the Additional Space is occupied by Lessee or (ii) the date
which is ten (10) days after the date Lessor has notified Lessee in writing that
the existing tenant has vacated the Additional Space and possession thereof is
available to Lessee; provided, however, that if the existing tenant fails to
vacate and surrender full possession of the Additional Space on or before
September 30, 1998, then either Lessor or Lessee shall have the right to cancel
and terminate this Addendum without further liability by giving written notice
of such cancellation and termination to the other on or before October 15, 1998,
and this Addendum shall be null and void and of no further force or effect upon
the delivery of such notice. Lessor shall endeavor to keep Lessee informed as to
the status of its efforts to recapture possession of the Additional Space from
the existing tenant. When Lessee accepts possession of the Additional Space,
Lessor and Lessee shall execute the "Declaration as to Date of Delivery and
Acceptance of Possession of Premises," attached hereto as Exhibit B, which shall
specify the Addition Date.
3. RENT
----
The additional monthly rent for the Additional Space (hereinafter
referred to as "Additional Monthly Rent"), which Lessee hereby agrees to pay in
advance to Lessor and Lessor hereby-agrees to accept, shall be as follows:
Lease Period Additional Monthly Rent
------------ -----------------------
From the Addition Date through
the twelfth (12th) full calendar
month thereafter $12,817.50
From the thirteenth (13th)
full calendar month through the
twenty-fourth (24th)
full calendar month $13,244.75
From the twenty-fifth (25th)
full calendar month through the
thirty-sixth (36th)
full calendar month thereafter $13,672.00
-2-
<PAGE>
From the thirty-seventh (37th)
full calendar month through
the forty-eighth (48th)
full calendar month $14,099.25
From the forty-ninth (49th)
full calendar month through
the expiration of the
initial term of the Lease $14,526.50
If the Addition Date is a date other than the first day of a calendar month, the
Additional Monthly Rent from such date until the first day of the following
calendar month shall be prorated at the rate of one-thirtieth (1/30th) of the
Additional Monthly Rent for each day, payable in advance. Additional Monthly
Rent as specified above shall be payable as additional rent under the Lease, as
amended hereby, simultaneously with each payment of Monthly Rent in advance on
the first day of each calendar month during the term of the Lease.
4. PRE-OCCUPANCY TENANT WORK
-------------------------
The Additional Space has been previously occupied, and it is
acknowledged that Lessor has heretofore completed tenant work within the
Additional Space substantially in accordance with the provisions of Exhibit B of
the Lease. Lessee shall accept the Additional Space "as is" upon the Addition
Date, and Lessor shall have no obligation to furnish or install any items
whatsoever of tenant work within the Additional Space. All tenant work and
installations desired by Lessee for its occupancy of the Additional Space shall
be undertaken by Lessee at its cost and expense pursuant to Section 9 of the
Lease.
5. ADDITIONAL DEPOSIT
------------------
Lessor currently holds the sum of Forty-Five Thousand Four Hundred
Thirty-Two and 92/100 Dollars ($45,432.92) as a non-interest bearing cash
security deposit under the Lease. Upon the Addition Date under the said
Addendum No. 4 to Office Lease and Lessee's payment of the additional deposit
due thereunder, Lessor will hold the sum of Forty-Eight Thousand Five Hundred
Ninety Four 92/100ths Dollars ($48,594.92) as a non-interest bearing cash
security deposit under the Lease. Upon the Addition Date under this Addendum
and as a condition to delivery of possession of the Additional Space, Lessee
shall deposit with Lessor the additional sum of Fourteen Thousand Five
Hundred Twenty-Six and 50/100 Dollars ($14,526.50). The resulting sum in the
amount of Sixty-Three Thousand One Hundred Twenty-One and 42/100 Dollars
($63,121.42) shall continue to be held by Lessor as a non-interest
bearing cash security deposit under the Lease, as amended hereby, pursuant
to and in accordance with the provisions of Section 6 of the Lease. If Lessor
elects to apply all or any portion of the increased cash deposit to cure
Lessee's default, Lessee shall be obligated to promptly deposit with Lessor
cash in an amount sufficient to restore the cash security deposit to
Sixty-Three Thousand One Hundred Twenty-One and 42/100 Dollars ($63,121.42).
-3-
<PAGE>
6. LEASE PROVISIONS APPLICABLE
---------------------------
All of the terms and conditions of the Lease, as amended or supplemented
hereby, shall be applicable to the Additional Space hereby added to the Existing
Demised Premises. Once added to the Existing Demised Premises, the Additional
Space shall be deemed to be a part of the premises demised under the Lease for
all purposes. All terms and conditions of the Lease, as amended or supplemented
hereby, are hereby ratified and affirmed and shall remain in full force and
effect.
IN WITNESS WHEREOF, Lessor and Lessee have caused this Addendum to be
signed in their names by their duly authorized representatives and delivered as
their act and deed, intending to be legally bound by its terms and provisions.
LESSOR:
TWO WISCONSIN CIRCLE JOINT VENTURE,
a Maryland joint venture
Attest: By: The Chevy Chase Land Company of
Montgomery County, Maryland, a General
Partner
[ILLEGIBLE SIGNATURE] By: /s/ Edward Hall Asher
- ---------------------------- -------------------------------
Vice President Name: Edward Hall Asher
(SEAL) Title: President
STATE OF MARYLAND
COUNTY OF MONTGOMERY, ss:
I, Donna Geraci, a Notary Public in and for the State of Maryland, do
------------
hereby certify that Edward Hail Asher, who is personally well known to me as
-----------------
the person who executed the foregoing and annexed Addendum, dated the 27th day
----
of February, 1998, on behalf of the Lessor, to acknowledge the same, personally
appeared before me in said jurisdiction and acknowledged said Addendum to be
the act and deed of The Chevy Chase Land Company of Montgomery County, Maryland,
as a general partner of and for and on behalf of the Lessor, and delivered the
same as such.
GIVEN under my hand and seal this 9th day of March, 1998.
--- -----
/s/ Donna Geraci
----------------------------------
My Commission Expires 5/19/99 Notary Public
(Signatures Continue on the Following Page)
-4-
<PAGE>
LESSEE:
Attest: HEALTHCARE FINANCIAL PARTNERS, INC.,
a Delaware corporation
[ILLEGIBLE SIGNATURE] By: /s/ Edward P. Nordberg, Jr.
- -------------------------- --------------------------------
Secretary Name: Edward P. Nordberg, Jr.
(SEAL) Title: EVP
STATE OF MARYLAND
COUNTY OF MONTGOMERY, ss:
I, Sue E. Murray, a Notary Public in and for the State of Maryland, do
hereby certify that Edward P. Nordberg, Jr., who is personally well known to me
as the person who executed the foregoing and an Addendum, dated the 27th day of
February, 1998, on behalf of the Lessee, to acknowledge the same, personally
appeared before me in said jurisdiction and acknowledged said Addendum to be the
act and deed of Healthcare Financial Partners, Inc. and delivered the same as
such.
GIVEN under my hand and seal this 9th day of March, 1998.
/s/ Sue E. Murray
-----------------------------------
Sue E. Murray
Notary Public
My Commission Expires 8/7/01
-5-
<PAGE>
TWO WISCONSIN CIRCLE
EXHIBIT "B"
DECLARATION AS TO DATE OF DELIVERY AND
ACCEPTANCE OF POSSESSION OF PREMISES
Attached to and made a part of the Addendum, dated the ____ day of
February, 1998, entered into by and between Two Wisconsin Circle Joint Venture,
as Lessor, and Healthcare Financial Partners, Inc., as Lessee.
Lessor and Lessee do hereby declare and evidence that possession of the
Additional Space was accepted by Lessee on the _________ day of __________,
1998. The Addendum is now in full force and effect. For the purpose of the
Addendum, the Addition Date is established as being on the said date.
LESSEE: LESSOR:
HEALTHCARE FINANCIAL TWO WISCONSIN CIRCLE JOINT VENTURE
PARTNERS, INC.
By: The Chevy Chase Land Company of
Montgomery County, Maryland
By: By:
-------------------------- ------------------------------
Name: Name:
Title: Title:
-6-
<PAGE>
TWO WISCONSIN CIRCLE
ADDENDUM NO. 6 TO OFFICE LEASE
------------------------------
THIS ADDENDUM NO. 6 TO OFFICE LEASE (this "Addendum") is made and
entered into this __ day of July, 1998, by and between TWO WISCONSIN CIRCLE
JOINT VENTURE, a Maryland joint venture, hereinafter called "Lessor," and
HEALTHCARE FINANCIAL PARTNERS, INC., formerly known as Health Partners Financial
Corporation, a Delaware corporation, hereinafter called "Lessee."
WITNESSETH:
-----------
WHEREAS, by Office Lease dated the 4th day of January 1996, as amended
by Addendum No. 1 to Office Lease dated the 26th day of July 1996, Addendum No.
2 to Office Lease dated the 13th day of August 1996, Addendum No. 3 to Office
Lease dated the 17th day of July 1997, Addendum No." 4 to Office Lease dated the
27th day of February, 1998 and Addendum No. 5 to Office Lease also dated the
27th day of February, 1998 (as so amended, the "Lease"), Lessor currently leases
to Lessee approximately 21,820 square feet of rentable area on the fourth (4th)
floor (the "Existing Demised Premises"), in the building situated at Two
Wisconsin Circle, Chevy Chase, Maryland (the "Building"); and
WHEREAS, Lessor and Lessee desire to expand the Existing Demised
Premises by adding thereto and incorporating therein, on a month-to-month basis
upon the terms and conditions hereinafter set forth. additional space on the
eighth (8th) floor of the Building comprising approximately 2,201 square feet of
rentable area (the "Additional Space").
NOW, THEREFORE, in consideration of the mutual covenants and
agreements hereinafter set forth, the parties hereto do mutually agree that the
Lease shall be and is hereby amended to provide as follows, all capitalized
terms being as defined in the Lease unless otherwise noted herein:
1. ADDITIONAL SPACE
----------------
There is hereby added to the Existing Demised Premises, and Lessor
does hereby lease to Lessee, and Lessee does hereby lease from Lessor, the
Additional Space, on a month-to-month basis and otherwise subject to and upon
all of the terms and conditions of the Lease, as amended hereby, to the end that
the Demised Premises under the Lease shall be the said approximately 21,820
square feet of rentable area on the fourth (4th) floor of the Building, as well
as 2,201 square feet of rentable area on the eighth (8th) floor of the Building,
as such eighth (8th) floor space is outlined on the floor plan attached hereto
and made a part hereof as Exhibit A.
<PAGE>
2. TERM
----
(A) The Additional Space shall be added to the Existing Demised Premises
on the Addition Date, which shall be the 24th day of July, 1998 (the
"Anticipated Addition Date"), or such later date as may be established pursuant
to the provisions below in this Section 2, and the term of the Lease as to the
Additional Space only shall thereafter continue on a month-to-month basis. It is
expressly understood and agreed that the term of the Lease as to the Existing
Demised Premises shall remain unaffected. Lessee shall give to Lessor at least
thirty (30) days' written notice of its intention to quit the Additional Space,
and Lessee shall be entitled to at least thirty (30) days' written notice from
Lessor to quit the Additional Space, unless Lessee is in default under the
Lease, as hereby amended, in which event Lessee shall not be entitled to any
notice to quit, the usual thirty (30) days' notice to quit being hereby
expressly waived, From and after the Addition Date and continuing for so long as
the month-to-month tenancy on the Additional Space shall continue, the
Additional Space shall be deemed to be part of the premises demised under the
Lease for all purposes, and the term "Demised Premises" as used throughout the
Lease shall be construed to include both the Existing Premises and the
Additional Space.
(B) It is understood and agreed that the obligations of Lessor and
Lessee under this Addendum are contingent upon the existing tenant of the
Additional Space vacating and surrendering full possession of the same on or
about July 15, 1998. In the event Lessor is unable to deliver possession of the
Additional Space on the Anticipated Addition Date, because the existing tenant
has failed to so vacate, Lessor shall not be liable or responsible for any
claims, damages or liability arising in connection therewith or by reason
thereof, nor shall Lessee be excused or released from the Lease, as amended
hereby, because of Lessor's inability to deliver possession of the Additional
Space on that date. The Addition Date, however, shall be extended to the earlier
of (i) the date the Additional Space is occupied by Lessee or (ii) the date
which is ten (10) days after the date Lessor has notified Lessee in writing that
the existing tenant has vacated the Additional Space and possession thereof is
available to Lessee; provided. however, that if the existing tenant fails to
vacate and surrender full possession of the Additional Space on or before August
31, 1998, then either Lessor or Lessee shall have the right to cancel and
terminate this Addendum without further liability by giving written notice of
such cancellation and termination to the other on or before September 15, 1998,
and this Addendum shall be null and void and of no further force or effect upon
the delivery of such notice. Lessor shall endeavor to keep Lessee informed as to
the status of its efforts to recapture possession of the Additional Space from
the existing tenant. When Lessee accepts possession of the Additional Space,
Lessor and Lessee shall execute the "Declaration as to Date of Delivery and
Acceptance of Possession of Premises," attached hereto as Exhibit B, which shall
specify the Addition Date.
3. RENT
----
The additional monthly rent for the Additional Space (hereinafter
referred to as "Additional Monthly Rent"), which Lessee hereby agrees to pay in
advance to Lessor and Lessor hereby agrees to accept, shall be the sum of Five
Thousand Three Hundred Nineteen and 08/100ths Dollars ($5,319.08).
-2-
<PAGE>
If the Addition Date is a date other than the first day of a calendar
month, the Additional Monthly Rent from such date until the first day of the
following calendar month shall be prorated at the rate of one-thirtieth (1/30th)
of the Additional Monthly Rent for each day, payable in advance. Additional
Monthly Rent as specified above shall be payable as additional rent under the
Lease, as amended hereby, simultaneously with each payment of Monthly Rent in
advance on the first day of each calendar month during the month-to-month
tenancy on the Additional Space.
Effective on each anniversary of the Addition Date, if Lessee is then
in occupancy of the Additional Space (it being understood and agreed that
nothing in this paragraph shall alter, modify or affect the month-to-month
tenancy as to the Additional Space), the Additional Monthly Rent shall be
increased by adding thereto One Hundred Eighty-Three Dollars and 42/ lOOths
Dollars ($183.42). For example, on the first (1st) anniversary of the Addition
Date, the Additional Monthly Rent shall be increased to Five Thousand Five
Hundred Two and 50/100ths Dollars ($5,502.50), on the second (2nd) anniversary
of the Addition Date, the Additional Monthly Rent shall be increased to Five
Thousand Six Hundred Eighty-Five and 92/100ths Dollars ($5,685.92), and so
forth.
4. PRE-OCCUPANCY TENANT WORK
-------------------------
The Additional Space has been previously occupied, and it is acknowledged
that Lessor has heretofore completed tenant work within the Additional Space
substantially in accordance with the provisions of Exhibit B of the Lease.
Lessee shall accept the Additional Space "as is" upon the Addition Date;
provided, however, that Lessor shall repaint the Additional Space at its expense
prior to the Addition Date in accordance with the "Painting" specification set
forth in Exhibit B to the Lease, Any tenant work and installations desired by
Lessee for its occupancy of the Additional Space shall be undertaken by Lessee
at its cost and expense pursuant to Section 9 of the Lease.
5. LEASE PROVISIONS APPLICABLE
---------------------------
Subject to the month-to-month tenancy on the Additional Space, all of the
terms and conditions of the Lease, as amended or supplemented hereby, shall be
applicable to the Additional Space hereby added to the Existing Demised
Premises. All terms and conditions of the Lease, as amended or supplemented
hereby, are hereby ratified and affirmed and shall remain in full force and
effect.
(Signatures appear on the following pages)
-3-
<PAGE>
IN WITNESS WHEREOF, Lessor and Lessee have caused this Addendum to be
signed in their names by their duly authorized representatives and delivered as
their act and deed, intending to be legally bound by its terms and provisions.
LESSOR:
TWO WISCONSIN CIRCLE JOINT VENTURE,
a Maryland joint venture
Attest: By: The Chevy Chase Land Company of
Montgomery County, Maryland, a General
Partner
/s/ David G. Dolan By: /s/ Gavin M. Farr
- --------------------------- ----------------------------------
Vice President Name: Gavin M. Farr
(SEAL) Title: Chairman
STATE OF MARYLAND
COUNTY OF MONTGOMERY, ss:
I, Ellen M. Gott, a Notary Public in and for the State of Maryland, do
hereby certify that Gavin M. Farr, who is personally well known to me as the
person who executed the foregoing and annexed Addendum, dated the 17th day of
July, 1998, on behalf of the Lessor, to acknowledge the same, personally
appeared before me in said jurisdiction and acknowledged said Addendum to be the
act and deed of The Chevy Chase Land Company of Montgomery County, Maryland, as
a general partner of and for and on behalf of the Lessor, and delivered the same
as such.
GIVEN under my hand and seal this 17th day of July, 1998.
/s/ Ellen M. Gott
------------------------------
Notary Public
My Commission Expires
ELLEN M. GOTT
NOTARY PUBLIC STATE OF MARYLAND
My Commission Expires July 21, 2001
-4-
<PAGE>
LESSEE:
HEALTHCARE FINANCIAL PARTNERS, INC.,
a Delaware corporation
Attest:
[ILLEGIBLE SIGNATURE] By: /s/ Edward P. Nordberg, Jr.
- ----------------------------- --------------------------------
Secretary Name: Edward P. Nordberg, Jr.
(SEAL) Title: EVP
STATE OF MARYLAND
COUNTY OF MONTGOMERY, ss:
I, Christa D. Dale, a Notary Public in and for the State of Maryland, do
hereby certify that Edward P. Nordberg, Jr., who is personally well known to me
as the person who executed the foregoing and annexed Addendum, dated the 17 day
of July, 1998, on behalf of the Lessee, to acknowledge the same, personally
appeared before me in said jurisdiction and acknowledged said Addendum to be the
act and deed of Healthcare Financial Partners, Inc. and delivered the same as
such.
GIVEN under my hand and seal this 17 day of July, 1998.
/s/ Christa D. Dale
---------------------------------
Notary Public
My Commission Expires
Christa D. Dale, Notary Public
Montgomery County
State of Maryland
My Commission Expires Feb. 13, 1999
-5-
<PAGE>
TWO WISCONSIN CIRCLE
EXHIBIT "B"
DECLARATION AS TO DATE OF DELIVERY AND
ACCEPTANCE OF POSSESSION OF PREMISES
Attached to and made a part of the Addendum, dated the _____ day of
July, 1998, entered into by and between Two Wisconsin Circle Joint Venture, as
Lessor, and Healthcare Financial Partners, Inc., as Lessee.
Lessor and Lessee do hereby declare and evidence that possession of
the Additional Space was accepted by Lessee on the ________ day of________,
1998. The Addendum is now in full force and effect. For the purpose of the
Addendum, the Addition Date is established as being on the said date.
LESSEE: LESSOR:
HEALTHCARE FINANCIAL TWO WISCONSIN CIRCLE JOINT VENTURE
PARTNERS, INC.
By: The Chevy Chase Land Company of
Montgomery County, Maryland
By: By:
--------------------------- ---------------------------
Name: Name:
Title: Title:
-6-
<PAGE>
TWO WISCONSIN CIRCLE
ADDENDUM NO. 7 TO OFFICE LEASE
------------------------------
THIS ADDENDUM NO. 7 TO OFFICE LEASE (this "Addendum") is made and
entered into this 24th day of July, 1998, by and between TWO WISCONSIN CIRCLE
JOINT VENTURE, a Maryland joint venture, hereinafter called "Lessor," and
HEALTHCARE FINANCIAL PARTNERS, INC., formerly known as Health Partners Financial
Corporation, a Delaware corporation, hereinafter called "Lessee."
WITNESSETH:
WHEREAS, by Office Lease dated the 4th day of January 1996, as amended
by Addendum No. 1 to Office Lease dated the 26th day of July 1996, Addendum No.
2 to Office Lease dated the 13th day of August 1996, Addendum No. 3 to Office
Lease dated the 17th day of July 1997, Addendum No. 4 to Office Lease dated the
27th day of February, 1998, Addendum No. 5 to Office Lease also dated the 27th
day of February, 1998, and Addendum No. 6 to Office Lease dated the 17th day of
July, 1998 (as so amended, the "Lease"), Lessor currently leases to Lessee
approximately 21,820 square feet of rentable area on the fourth (4th) floor, and
approximately 2,201 square feet of rentable area on the eighth (8th) floor
(collectively, the "Existing Demised Premises"), in the building situated at
Two Wisconsin Circle, Chevy Chase, Maryland (the "Building"); and
WHEREAS, Lessor and Lessee desire to expand the Existing Demised
Premises by adding thereto and incorporating therein, upon the terms and
conditions hereinafter set forth, additional space on the seventh (7th) floor of
the Building comprising approximately 17,261 square feet of rentable area and
being the entirety of the seventh (7th) floor (the "Additional Space").
NOW, THEREFORE, in consideration of the mutual covenants and
agreements hereinafter set forth, the parties hereto do mutually agree that the
Lease shall be and is hereby amended to provide as follows, all capitalized
terms being as defined in the Lease unless otherwise noted herein:
1. ADDITIONAL SPACE
----------------
There is hereby added to the Existing Demised Premises, and Lessor
does hereby lease to Lessee, and Lessee does hereby lease from Lessor, the
Additional Space, subject to and upon all of the terms and conditions of the
Lease, as amended hereby, to the end that the Demised Premises under the Lease
shall be the said approximately 21,820 square feet of rentable area on the
fourth (4th) floor of the Building, the said approximately 2,201 square feet of
rentable area on the eighth (8th) floor of the Building, as well as the said
approximately 17,261 square feet of rentable area on the seventh (7th) floor of
the Building, as such seventh (7th) floor space is outlined on the floor plan
attached hereto and made a part hereof as Exhibit A.
---------
<PAGE>
2. TERM AND RENEWAL
----------------
(A) The Additional Space shall be added to the Existing Demised
Premises on the Addition Date, which shall be the earlier of (i) Lessee's
occupancy of the Additional Space for the conduct of its business, or (ii) sixty
(60) days after the Possession Date, which shall be the date Lessor has
confirmed to Lessee in writing that the existing tenant of the Additional Space
has vacated the same and possession thereof is thereby delivered to Lessee for
the purpose of enabling Lessee to undertake its Pre-occupancy Tenant Work (as
defined below). The Possession Date is currently anticipated to occur on or
about November 1, 1998, thereby resulting in an outside Addition Date on or
about January 1, 1999. The term of the Lease as to the Additional Space shall
expire on the last day of the calendar month during which the fifth (5th)
anniversary of the Addition Date occurs, and the initial term of the Lease as to
the Existing Demised Premises shall be extended accordingly as hereinafter
provided, to the end that the initial term of the Lease as to both the
Additional Space and the Existing Demised Premises (other than the said eighth
(8th) floor space which Lessee occupies on a month-to-month basis) shall be
coterminous for all purposes.
(B) Pursuant to the terms of the said Addendum No. 3 to Office Lease.
the initial term of the Lease has heretofore been extended and renewed to expire
on the 17th day of December 2002. Effective upon and subject to occurrence of
the Possession Date, the initial term of the Lease shall be and is hereby
further extended and renewed for a period to expire on the last day of the
calendar month during which the fifth (5th) anniversary of the Addition Date
occurs, subject to further extension pursuant to Section 35 of the Lease. Upon
the Addition Date, Lessor and Lessee shall execute the "Declaration as to
Addition Date" attached hereto as Exhibit B, which shall specify both the
Addition Date and the expiration date of the initial term of the Lease as so
extended and renewed.
(C) It is understood and agreed that the obligations of Lessor and
Lessee under this Addendum are contingent upon the existing tenant of the
Additional Space vacating and surrendering full possession of the same on or
about October 31, 1998. In the event Lessor is unable to deliver possession of
the Additional Space on the anticipated Possession Date, because the existing
tenant has failed to so vacate, Lessor shall not be liable or responsible for
any claims, damages or liability arising in connection therewith or by reason
thereof, nor shall Lessee be excused or released from the Lease, as amended
hereby, because of Lessor's inability to deliver possession of the Additional
Space on that date. The Addition Date, however, shall be extended to the earlier
of (i) the date the Additional Space is occupied by Lessee for the conduct of
its business, or (ii) the date which is sixty (60) days after the date Lessor
has notified Lessee in writing that the existing tenant has vacated the
Additional Space and possession thereof is available to Lessee; provided,
however, that if the existing tenant fails to vacate and surrender full
possession of the Additional Space on or before December 31, 1998, then either
Lessor or Lessee shall have the right to cancel and terminate this Addendum
without further liability by giving written notice of such cancellation and
termination to the other on or before January 15, 1999, and this Addendum shall
be null and void and of no further force or effect upon the delivery of such
notice. Lessor shall endeavor to keep Lessee informed as to the status of its
efforts to recapture possession of the Additional Space from the existing
tenant.
-2-
<PAGE>
3. RENT
----
The additional monthly rent for the Additional Space (hereinafter
referred to as "Additional Monthly Rent"), which Lessee hereby agrees to pay in
advance to Lessor and Lessor hereby agrees to accept, shall be as follows:
<TABLE>
<CAPTION>
Lease Period Additional Monthly Rent
------------ -----------------------
<S> <C>
From the Addition Date through
December 31, 1999 $46,029.33
From January 1, 2000 through
December 31, 2001 $47,467.75
From January 1, 2001 through
December 31, 2002 $48,906.17
From January 1, 2002 through
December 31, 2003 $50,344.58
From January 1, 2003 through
the expiration of the
initial term of the Lease $51,783.00
</TABLE>
If the Addition Date is a date other than the first day of a calendar month, the
Additional Monthly Rent from such date until the first day of the following
calendar month shall be prorated at the rate of one-thirtieth (1/30th) of the
Additional Monthly Rent for each day, payable in advance. Additional Monthly
Rent as specified above shall be payable as additional rent under the Lease, as
amended hereby, simultaneously with each payment of Monthly Rent in advance on
the first day of each calendar month during the term of the Lease, as hereby
extended and renewed.
4. RENTAL ESCALATION FOR INCREASES IN EXPENSES
-------------------------------------------
In the event the Operating Expenses of the Building during any
calendar year commencing January 1, 2001 and thereafter exceed the amount of
"Base Operating Expenses," defined to be the amount of Operating Expenses
actually incurred by Lessor in calendar year 2000, Lessee shall pay to Lessor,
as additional rent, Lessee's proportionate share (allocable only to the
Additional Space, not the Existing Demised Premises) of the portion of the
Operating Expenses that exceeds the amount of the Base Operating Expenses. The
proportionate share to be so paid by Lessee shall be the percentage which the
total square feet of the Additional Space bears to the total square feet of all
office and retail space in the Building, which is 7.78%, and the amount of said
proportionate share to be paid by Lessee shall be the same proportion as the
number of days in such calendar year the Additional Space was leased by Lessee
bears to three hundred sixty (360). The term "Operating Expenses" is defined as
meaning (i) any and all
-3-
<PAGE>
expenses, charges and fees incurred in connection with managing, operating,
maintaining, servicing, insuring and repairing the Building and related exterior
appurtenances, and (ii) Real Estate Taxes and impositions, general and special,
of whatever kind or description levied against the Building or land. The term
"Real Estate Taxes" for any calendar year is hereby defined to mean the total
amount of all taxes and assessments, general and special, ordinary and
extraordinary, foreseen and unforeseen, now or hereafter assessed, levied or
imposed upon the Building and the land on which the Building is situated ("the
Land") for such year, together with any tax in the nature of a real estate tax,
and ad valorem tax on rent or any tax on income if imposed in lieu of or in
addition to real estate taxes and assessments, and any taxes and assessments
which may hereafter be substituted for Real Estate Taxes and together with the
amount of any fees incurred in the setting of the amount of these taxes. In the
event that the method currently used for the computation of the assessed market
value of the Building and/or the Land is discontinued or revised, the
determination of the increases in Real Estate Taxes under this Section 4 shall
thereafter be made according to a formula and procedure which most nearly
approximates the method of determination hereinabove set forth. In the event
that any business, rent, or other taxes which are now or hereafter levied upon
Lessee's use or occupancy of the Additional Space, on Lessee's leasehold
improvements therein, on Lessee's business at the Additional Space or on Lessor
by virtue of Lessee's occupancy of the Additional Space, are enacted, changed or
altered so that any such taxes are levied against Lessor or in the event that
the mode of collection of such taxes is changed so that Lessor is responsible
for collection or payment of such taxes, any and all such taxes shall be deemed
to be a part of the increase in Real Estate Taxes and Lessee shall pay Lessor
Lessee's proportionate share of the full amount of such taxes. Operating
Expenses shall not include the Operating Costs listed in the next paragraph
below, nor shall Operating Expenses include the cost of capital improvements
(unless such improvements are reasonably expected to reduce the expenses of the
Building or are made to comply with governmental requirements imposed after the
date of this Addendum, in which event the cost of any such improvement amortized
over the life of the improvement will be included in Operating Expenses),
painting or decoration other than public areas, interest and amortization of
mortgages, depreciation of the Building, or compensation paid to officers or
executives of the Lessor or its Management Agent (as defined in Section 29 of
the Lease).
In the event the Operating Costs of the Building during any calendar
year commencing January 1, 2001 and thereafter exceed the amount of "Base
Operating Costs," defined to be the amount of Operating Costs actually incurred
by Lessor in calendar year 2000, Lessee shall pay to Lessor, as additional rent,
Lessee's proportionate share (allocable only to the Additional Space, not the
Existing Demised Premises) of the portion of the Operating Costs that exceeds
the amount of the Base Operating Costs. The term "Operating Costs" is defined as
meaning the costs of the cleaning contract and cleaning supplies, and
electricity for the Building. The proportionate share to be so paid by Lessee
shall be the percentage which the total square feet of the Additional Space
bears to the total square feet of all office space in the Building, which is
8.38% and the amount of said proportionate share to be paid by Lessee shall be
the same proportion as the number of days in the calendar year the Additional
Space was leased by Lessee bears to three hundred sixty (360). In the event
Lessor installs a separate electric meter or meters for the premises occupied by
any other tenant or tenants of the Building, an appropriate adjustment as
reasonably determined by Lessor will be made in the electricity cost component
of Operating Costs for the tenants of the Building not separately metered.
-4-
<PAGE>
As soon as practicable after the first day of January, 2001, and as
soon as practicable after each first day of January thereafter during the term
of the Lease, as hereby extended and renewed, Lessor shall submit to Lessee a
statement of Lessor's estimate of the amount by which Operating Expenses and
Operating Costs for the applicable calendar year (as estimated by Lessor) are
expected to exceed the amount of the Base Operating Expenses and the Base
Operating Costs, respectively. Commencing with the first day of the month
immediately following the delivery of such statement, Lessee will pay to Lessor,
as additional rent with Monthly Rent and the Additional Monthly Rent,
one-twelfth (1/12th) of Lessee's proportionate share of such excess of estimated
Operating Expenses and Operating Costs over Base Operating Expenses and Base
Operating Costs, respectively. Lessee shall continue to make said payment
monthly thereafter on the first day of each calendar month until the amount of
such payment is next adjusted after January 1st of the following calendar year
for increases in the amounts of Lessee's proportionate share of Operating
Expenses and/or Operating Costs as provided for herein.
As soon as practicable after the expiration of each applicable
calendar year, a determination shall be made of the Operating Expenses and
Operating Costs for such calendar year and the amount of the increase (if any)
in the Operating Expenses and Operating Costs for such calendar year over the
amount of the Base Operating Expenses and the Base Operating Costs respectively.
Operating Expenses and Operating Costs for each calendar year shall be those
actually incurred, provided, however, that if the Building was not at least
eighty-five percent (85%) occupied during the entire calendar year, the
Operating Expenses and Operating Costs shall be adjusted to project the
Operating Expenses and Operating Costs as if the Building were eighty-five
percent (85%) occupied. Lessor shall submit to Lessee a statement of the
aforesaid determination, including Lessee's aforesaid proportionate share of any
increase.
Within thirty (30) days after the delivery of such statement
(including any statement delivered after the expiration or termination of the
term of the Lease, as hereby extended and renewed), Lessee shall pay to Lessor
an amount equal to (i) its proportionate share of the increase, if any, in the
actual amount of Operating Expenses and/or Operating Costs for the just expired
calendar year over the Base Operating Expenses and the Base Operating Costs,
respectively, less (ii) the aggregate amount of monthly payments toward
additional rent made by Lessee during such calendar year and attributed to the
estimated increases in Operating Expenses and/or Operating Costs for such
calendar year. If the aggregate amounts of such payments toward additional rent
for estimated increases in Operating Expenses and/or Operating Costs paid by
Lessee during such calendar year exceeds Lessee's proportionate share of the
actual increases in Operating Expenses and/or Operating Costs, the excess shall
be credited toward payment of the next installment of Monthly Rent to be paid by
Lessee after Lessee receives said statement of Operating Expenses and Operating
Costs from Lessor, or, in the event the term of the Lease, as hereby extended
and renewed, has previously expired or been terminated, such excess shall be
refunded to Lessee within thirty (30) days after the delivery of such statement,
less such portion of such excess as Lessor shall have retained to cure any
default by Lessee under the Lease, as amended hereby or as subsequently amended.
-5-
<PAGE>
5. PRE-OCCUPANCY TENANT WORK
-------------------------
The Additional Space has been previously occupied, and it is
acknowledged that Lessor has heretofore completed tenant work within the
Additional Space substantially in accordance with the provisions of Exhibit B of
---------
the Lease. Lessee shall accept the Additional Space "as is" upon the Possession
Date, and Lessor shall have no obligation to furnish or install any items
whatsoever of tenant work within the Additional Space. All tenant work and
installations desired by Lessee for its occupancy of the Additional Space
("Pre-occupancy Tenant Work") shall be undertaken by Lessee at its cost and
expense pursuant to Section 9 of the Lease, subject to the Tenant Allowance as
hereinafter defined and provided.
Lessor shall pay to Lessee, on the following terms and conditions, a
cash allowance of up to Two Hundred Fifty-Eight Thousand Nine Hundred Fifteen
and 00/l00ths Dollars ($258,915.00) (the "Tenant Allowance") to be applied to
the cost of completion of the Preoccupancy Tenant Work undertaken by Lessee in
the Additional Space concurrent with its initial occupancy thereof (exclusive of
movable trade fixtures and equipment). The Tenant Allowance shall be disbursed
as the Pre-occupancy Tenant Work progresses and upon Lessee's submission of a
requisition statement not more frequently than monthly and within six (6) months
following the Possession Date, with supporting invoices representing the cost of
all Pre-occupancy Tenant Work since the last requisition, together with evidence
of payment of the cost of all Preoccupancy Tenant Work covered by the last
requisition. If requested by Lessor, Lessee shall also submit lien waivers by
all contractors or suppliers employed by Lessee. Lessor shall have the right to
verify all such invoices, and after inspection and approval by Lessor or its
architect of the Pre-occupancy Tenant Work, which inspection and/or approval
shall not be unreasonably withheld or delayed, Lessor shall pay to Lessee an
amount equal to the approved requisitioned sum; provided, however, that in no
event shall Lessor's total liability for such payments exceed the Tenant
Allowance, and in no event shall Lessor have any liability to disburse any sum
pursuant to a requisition statement submitted later than six (6) months
following the Possession Date.
6. ADDITIONAL DEPOSIT
------------------
Lessor currently holds the sum of Sixty-Thee Thousand One Hundred
Twenty-One and 42/100 Dollars ($63,121.42) as a non-interest bearing cash
security deposit under the Lease. Upon the Possession Date under this Addendum
and as a condition to delivery of possession of the Additional Space, Lessee
shall deposit with Lessor the additional sum of Fifty-One Thousand Seven Hundred
Eighty-Three and 00/l00ths Dollars ($51,783.00). The resulting sum in the
amount of One Hundred Fourteen Thousand Nine Hundred Four and 42/100ths Dollars
($114,904.42) shall continue to be held by Lessor as a non-interest bearing cash
security deposit under the Lease, as amended hereby, pursuant to and in
accordance with the provisions of Section 6 of the Lease. If Lessor elects to
apply all or any portion of the increased cash deposit to cure Lessee's default,
Lessee shall be obligated to promptly deposit with Lessor cash in an amount
sufficient to restore the cash security deposit to One Hundred Fourteen Thousand
Nine Hundred Four and 42/100ths Dollars ($114,904.42).
-6-
<PAGE>
7. LEASE PROVISIONS APPLICABLE
---------------------------
All of the terms and conditions of the Lease, as amended or
supplemented hereby, shall be applicable to the Additional Space hereby added to
the Existing Demised Premises. Once added to the Existing Demised Premises, the
Additional Space shall be deemed to be a part of the premises demised under the
Lease for all purposes. All terms and conditions of the Lease, as amended or
supplemented hereby, are hereby ratified and affirmed and shall remain in full
force and effect.
IN WITNESS WHEREOF, Lessor and Lessee have caused this Addendum to be
signed in their names by their duly authorized representatives and delivered as
their act and deed, intending to be legally bound by its terms and provisions.
LESSOR:
TWO WISCONSIN CIRCLE JOINT VENTURE,
a Maryland joint venture
Attest: By: The Chevy Chase Land Company of
Montgomery County, Maryland, a
General Partner
/s/ David G. Dolan By:/s/ Edward Hall Asher
- ------------------------------ -------------------------------
Vice President Name: Edward Hall Asher
(SEAL) Title: President
STATE OF MARYLAND
COUNTY OF MONTGOMERY, ss:
I, Susan L. Exclesheimer a Notary Public in and for the State of Maryland,
----------------------
do hereby certify that Edward Hall Asher , who is personally well known to me as
------------------
the person who executed the foregoing and annexed Addendum, dated the 24th day
-----
of July, 1998, on behalf of the Lessor, to acknowledge the same, personally
appeared before me in said jurisdiction and acknowledged said Addendum to be the
act and deed of The Chevy Chase Land Company of Montgomery County, Maryland, as
a general partner of and for and on behalf of the Lessor, and delivered the same
as such.
GIVEN under my hand and seal this 24th day of July , 1998.
----- -----
Susan L. Exclesheimer
------------------------------
My Commission Expires 8/1/00 Notary Public
(Signatures Continue on the Following Page)
-7-
<PAGE>
LESSEE:
Attest: HEALTHCARE FINANCIAL PARTNERS, INC.,
a Delaware corporation
/s/ [SIGNATURE ILLEGIBLE] By: /s/ Edward P. Noldberg, Jr.
- ---------------------------- -------------------------------
Secretary Name: Edward P. Noldberg, Jr.
(SEAL) Title: EVP
STATE OF MARYLAND
COUNTY OF MONTGOMERY, ss:
I, ELLEN M. GOTT, a Notary Public in and for the State of Maryland,
--------------
do hereby certify that EDWARD P. NOLDBERG, JR., who is personally well known to
------------------------
me as the person who executed the foregoing and annexed Addendum, dated the
______ day of July, 1998, on behalf of the Lessee, to acknowledge the same,
personally appeared before me in said jurisdiction and acknowledged said
Addendum to be the act and deed of Healthcare Financial Partners, Inc. and
delivered the same as such.
GIVEN under my hand and seal this 24th, day of July, 1998.
----- ----
/s/ Ellen M. Gott
-------------------------------
Notary Public
My Commission Expires ELLEN M. GOTT
NOTARY PUBLIC STATE OF MARYLAND
My Commission Expires July 21, 2001
-8-
<PAGE>
- --------------------------------------------------------------------------------
[BUILDING FLOOR PLAN APPEARS HERE]
Sq.Ft.: 17,261
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2 Wisconsin Circle Chevy Chase
Seventh Floor Land Company
301-986-8809
- --------------------------------------------------------------------------------
-9-
<PAGE>
TWO WISCONSIN CIRCLE
EXHIBIT "B"
DECLARATION AS TO ADDITION DATE
Attached to and made a part of the Addendum No. 7 to Office Lease,
dated the ______ day of July, 1998, entered into by and between Two Wisconsin
Circle Joint Venture, as Lessor, and Healthcare Financial Partners, Inc., as
Lessee.
Lessor and Lessee do hereby declare and evidence that possession of
the Additional Space was accepted by Lessee on the ________ day of _________,
1998 and either Lessee has occupied the Additional Space for the conduct of its
business or sixty (60) days has expired. Accordingly, the Addition Date is
established as being the ______ day of________, 199_ , and the initial term of
the Lease, as extended and renewed by the said Addendum, shall expire on the
_____ day of _________, 200_.
LESSEE: LESSOR:
HEALTHCARE FINANCIAL TWO WISCONSIN CIRCLE JOINT VENTURE
PARTNERS, INC.
By: The Chevy Chase Land Company of
Montgomery County, Maryland
By: By:
------------------------ -----------------------------
Name: Name:
Title: Title:
B-1
<PAGE>
TWO WISCONSIN CIRCLE
ADDENDUM NO. 8 TO OFFICE LEASE
------------------------------
THIS ADDENDUM NO. 8 TO OFFICE LEASE (this "Addendum") is made and
entered into this __ day of December, 1998, by and between TWO WISCONSIN CIRCLE
JOINT VENTURE, a Maryland joint venture, hereinafter called "Lessor," and
HEALTHCARE FINANCIAL PARTNERS, INC., formerly known as Health Partners Financial
Corporation, a Delaware corporation, hereinafter called "Lessee."
WITNESSETH:
WHEREAS, by Office Lease dated the 4th day of January 1996, as amended
by Addendum No. 1 to Office Lease dated the 26th day of July 1996, Addendum No.
2 to Office Lease dated the 13th day of August 1996, Addendum No. 3 to Office
Lease dated the 17th day of July 1997, Addendum No. 4 to Office Lease dated the
27th day of February, 1998. Addendum No. 5 to Office Lease also dated the 27th
day of February, 1998, Addendum No. 6 to Office Lease dated the 17th day of
----
July, 1998. Addendum No. 7 to Office Lease dated the 24th day of July, 1998, and
letter agreement dated the 4th day of November 1998, which among other things
terminated and cancelled the said Addendum No. 7 to Office Lease (as so amended,
the "Lease"), Lessor currently leases to Lessee approximately 21,820 square feet
of rentable area on the fourth (4th) floor (the "4th Floor Space"), and
approximately 2,201 square feet of rentable area on the eighth (8th) floor (the
"8th Floor Space"), in the building situated at Two Wisconsin Circle, Chevy
Chase, Maryland (the "Building"); and
WHEREAS, the 8th Floor Space is currently occupied by Lessee on a
month-to-month basis pursuant to the said Addendum No. 6 to Office Lease; and
WHEREAS, Lessor desires to lease to Lessee, and Lessee desires to
lease from Lessor, the 8th Floor Space on a fixed term basis.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements hereinafter set forth, the parties hereto do mutually agree that the
Lease shall be and is hereby amended to provide as follows, all capitalized
terms being as defined in the Lease unless otherwise noted herein:
1. 8th FLOOR SPACE
---------------
Lessor does hereby lease to Lessee, and Lessee does hereby lease from
Lessor, the 8th Floor Space for a fixed term as set forth below, subject to and
upon all of the terms and conditions of the Lease, as amended hereby, to the end
that the Demised Premises under the Lease shall be the 4th Floor Space, as well
as the 8th Floor Space.
<PAGE>
2. TERM AND RENEWAL
----------------
(A) The fixed term of the Lease as to the 8th Floor Space shall
commence on the 1st day of January 1999. The fixed term of the Lease as to the
8th Floor Space shall expire on the 31st day of December 2003 so as to be
coterminous for all purposes with the initial term of the Lease as to the 4th
Floor Space, as extended and renewed pursuant to the terms of the said letter
agreement and as confirmed below.
(B) Lessor and Lessee hereby acknowledge and confirm their agreement
as set forth in the said letter agreement, that the initial term of the Lease
has been extended and renewed for a period to expire on the 31st day of December
2003, subject to further extension pursuant to Section 35 of the Lease.
3. RENT
----
The additional monthly rent for the 8th Floor Space (hereinafter
referred to as "Additional Monthly Rent"), which Lessee hereby agrees to pay in
advance to Lessor and Lessor hereby agrees to accept, shall be as follows:
Lease Period Additional Monthly Rent
------------ -----------------------
From January 1, 1999 through
December 31, 1999 $5,548.35
From January 1, 2000 through
December 31, 2000 $5,715.26
From January 1, 2001 through
December 31, 2001 $5,885.84
From January 1, 2002 through
December 31, 2002 $6,061.92
From January 1, 2003 through
December 31, 2003 $6,245.34
Additional Monthly Rent as specified above shall be payable as additional rent
under the Lease, as amended hereby, simultaneously with each payment of Monthly
Rent in advance on the first day of each calendar month during the initial term
of the Lease, as hereby extended and renewed.
-2-
<PAGE>
4. RENTAL ESCALATION FOR INCREASES IN EXPENSES
-------------------------------------------
In the event the Operating Expenses of the Building during any
calendar year commencing January 1, 2001 and thereafter exceed the amount of
"Base Operating Expenses," defined to be the amount of Operating Expenses
actually incurred by Lessor in calendar year 2000, Lessee shall pay to Lessor,
as additional rent, Lessee's proportionate share (allocable only to the 8th
Floor Space, not the 4th Floor Space) of the portion of the Operating Expenses
that exceeds the amount of the Base Operating Expenses. The proportionate share
to be so paid by Lessee shall be the percentage which the total square feet of
the 8th Floor Space bears to the total square feet of all office and retail
space in the Building, which is 0.99%, and the amount of said proportionate
share to be paid by Lessee shall be the same proportion as the number of days in
such calendar year the 8th Floor Space was leased by Lessee bears to three
hundred sixty (360). The term "Operating Expenses" is defined as meaning (i) any
and all expenses, charges and fees incurred in connection with managing,
operating, maintaining, servicing, insuring and repairing the Building and
related exterior appurtenances, and (ii) Real Estate Taxes and impositions,
general and special, of whatever kind or description levied against the Building
or land. The term "Real Estate Taxes" for any calendar year is hereby defined to
mean the total amount of all taxes and assessments, general and special,
ordinary and extraordinary, foreseen and unforeseen, now or hereafter assessed,
levied or imposed upon the Building and the land on which the Building is
situated ("the Land") for such year, together with any tax in the nature of a
real estate tax, and ad valorem tax on rent or any tax on income if imposed in
lieu of or in addition to real estate taxes and assessments, and any taxes and
assessments which may hereafter be substituted for Real Estate Taxes and
together with the amount of any fees incurred in the setting of the amount of
these taxes. In the event that the method currently used for the computation of
the assessed market value of the Building and/or the Land is discontinued or
revised, the determination of the increases in Real Estate Taxes under this
Section 4 shall thereafter be made according to a formula and procedure which
most nearly approximates the method of determination hereinabove set forth. In
the event that any business, rent, or other taxes which are now or hereafter
levied upon Lessee's use or occupancy of the 8th Floor Space, on Lessee's
leasehold improvements therein, on Lessee's business at the 8th Floor Space or
on Lessor by virtue of Lessee's occupancy of the 8th Floor Space, are enacted,
changed or altered so that any such taxes are levied against Lessor or in the
event that the mode of collection of such taxes is changed so that Lessor is
responsible for collection or payment of such taxes, any and all such taxes
shall be deemed to be a part of the increase in Real Estate Taxes and Lessee
shall pay Lessor Lessee's proportionate share of the full amount of such taxes.
Operating Expenses shall not include the Operating Costs listed in the next
paragraph below, nor shall Operating Expenses include the cost of capital
improvements (unless such improvements are reasonably expected to reduce the
expenses of the Building or are made to comply with governmental requirements
imposed after the date of this Addendum, in which event the cost of any such
improvement amortized over the life of the improvement will be included in
Operating Expenses), painting or decoration other than public areas, interest
and amortization of mortgages, depreciation of the Building, or compensation
paid to officers or executives of the Lessor or its Management Agent (as defined
in Section 29 of the Lease).
In the event the Operating Costs of the Building during any calendar
year commencing January 1, 2001 and thereafter exceed the amount of "Base
Operating Costs," defined to be the amount of Operating Costs actually
incurred by Lessor in calendar year 2000, Lessee shall pay
-3-
<PAGE>
to Lessor, as additional rent, Lessee's proportionate share (allocable only to
the 8th Floor Space, not the 4th Floor Space) of the portion of the Operating
Costs that exceeds the amount of the Base Operating Costs. The term "Operating
Costs" is defined as meaning the costs of the cleaning contract and cleaning
supplies, and electricity for the Building. The proportionate share to be so
paid by Lessee shall be the percentage which the total square feet of the 8th
Floor Space bears to the total square feet of all office space in the Building,
which is 1.07% and the amount of said proportionate share to be paid by Lessee
shall be the same proportion as the number of days in the calendar year the 8th
Floor Space was leased by Lessee bears to three hundred sixty (360). In the
event Lessor installs a separate electric meter or meters for the premises
occupied by any other tenant or tenants of the Building, an appropriate
adjustment as reasonably determined by Lessor will be made in the electricity
cost component of Operating Costs for the tenants of the Building not separately
metered.
As soon as practicable after the first day of January, 2001, and as
soon as practicable after each first day of January thereafter during the term
of the Lease, as hereby extended and renewed, Lessor shall submit to Lessee a
statement of Lessor's estimate of the amount by which Operating Expenses and
Operating Costs for the applicable calendar year (as estimated by Lessor) are
expected to exceed the amount of the Base Operating Expenses and the Base
Operating Costs, respectively. Commencing with the first day of the month
immediately following the delivery of such statement. Lessee will pay to Lessor,
as additional rent with Monthly Rent and the 8th Floor Monthly Rent. one-twelfth
(1/12th) of Lessee's proportionate share of such excess of estimated Operating
Expenses and Operating Costs over Base Operating Expenses and Base Operating
Costs, respectively. Lessee shall continue to make said payment monthly
thereafter on the first day of each calendar month until the amount of such
payment is next adjusted after January 1st of the following calendar year for
increases in the amounts of Lessee's proportionate share of Operating Expenses
and/or Operating Costs as provided for herein.
As soon as practicable after the expiration of each applicable
calendar year , a determination shall be made of the Operating Expenses and
Operating Costs for such calendar year and-the amount of the increase (if any)
in the Operating Expenses and Operating Costs for such calendar year over the
amount of the Base Operating Expenses and the Base Operating Costs respectively.
Operating Expenses and Operating Costs for each calendar year shall be those
actually incurred, provided, however, that if the Building was not at least
eighty-five percent (85 %) occupied during the entire calendar year, the
Operating Expenses and Operating Costs shall be adjusted to project the
Operating Expenses and Operating Costs as if the Building were eighty-five
percent (85 %) occupied. Lessor shall submit to Lessee a statement of the
aforesaid determination, including Lessee's aforesaid proportionate share of any
increase.
Within thirty (30) days after the delivery of such statement
(including any statement delivered after the expiration or termination of the
term of the Lease, as hereby extended and renewed) , Lessee shall pay to Lessor
an amount equal to (i) its proportionate share of the increase, if any, in the
actual amount of Operating Expenses and/or Operating Costs for the just expired
calendar year over the Base Operating Expenses and the Base Operating Costs,
respectively, less (ii) the aggregate amount of monthly payments toward
additional rent made by Lessee during such calendar year and attributed to the
estimated increases in Operating Expenses and/or Operating Costs for such
calendar year. If the aggregate amounts of such
-4-
<PAGE>
payments toward additional rent for estimated increases in Operating Expenses
and/or Operating Costa paid by Lessee during such calendar year exceeds Lessee's
proportionate share of the actual increases in Operating Expenses and/or
Operating Costs, the excess shall be credited toward payment of the next
installment of Monthly Rent to be paid by Lessee after Lessee receives said
statement of Operating Expenses and Operating Costs from Lessor, or, in the
event the term of the Lease, as hereby extended and renewed, has previously
expired or been terminated, such excess shall be refunded to Lessee within
thirty (30) days after the delivery of such statement, less such portion of such
excess as Lessor shall have retained to cure any default by Lessee under the
Lease, as amended hereby or as subsequently amended.
5. PRE-OCCUPANCY TENANT WORK
-------------------------
Lessee currently occupies the 8th Floor Space on a month-to-month
basis, and it is acknowledged that Lessor has heretofore completed tenant work
within the 8th Floor Space substantially in accordance with the provisions of
Exhibit B of the Lease. Lessee shall accept the 8th Floor Space "as is" upon the
- ---------
1st day of January 1999, and Lessor shall have no obligation to furnish or
install any items whatsoever of tenant work within the 8th Floor Space. All
tenant work and installations desired by Lessee for its occupancy of the 8th
Floor Space shall be undertaken by Lessee at its cost and expense pursuant to
Section 9 of the Lease.
6. ADDITIONAL DEPOSIT
------------------
Lessor currently holds the sum of Sixty-Three Thousand One Hundred
Twenty-One and 42/.100 Dollars ($63,121.42) as a non-interest bearing cash
security deposit under the Lease. Upon Lessee's execution and delivery of this
Addendum and as a condition to delivery of possession of the 8th Floor Space,
Lessee shall deposit with Lessor the additional sum of Six Thousand Two Hundred
Forty-Five and 34/100ths Dollars ($6,245.34). The resulting sum in the amount of
Sixty-Nine Thousand Three Hundred Sixty-Six and 76/100ths Dollars ($69,366.76)
shall continue to be held by Lessor as a non-interest bearing cash security
deposit under the Lease, as amended hereby, pursuant to and in accordance with
the provisions of Section 6 of the Lease. If Lessor elects to apply all or any
portion of the increased cash deposit to cure Lessee's default, Lessee shall be
obligated to promptly deposit with Lessor cash in an amount sufficient to
restore the cash security deposit to Sixty-Nine Thousand Three Hundred Sixty-Six
and 76/100ths Dollars ($69,366.76).
7. LEASE PROVISIONS APPLICABLE
---------------------------
All of the terms and conditions of the Lease, as amended or
supplemented hereby, shall be applicable to the 8th Floor Space. The 8th Floor
Space shall be deemed to be a part of the premises demised under the Lease for
all purposes. All terms and conditions of the Lease, as amended or supplemented
hereby, are hereby ratified and affirmed and shall remain in full force and
effect.
-5-
<PAGE>
IN WITNESS WHEREOF. Lessor and Lessee have caused this Addendum to be
signed in their names by their duly authorized representatives and delivered as
their act and deed, intending to be legally bound by its terms and provisions.
LESSOR:
TWO WISCONSIN CIRCLE JOINT VENTURE,
a Maryland joint venture
Attest: By: The Chevy Chase Land Company of
Montgomery County, Maryland, a General
Partner
[SIGNATURE APPEARS HERE] By: /s/ Edward Hall Asher
- -------------------------- ----------------------------------
Vice President Name: Edward Hall Asher
(SEAL) Title: President
STATE OF MARYLAND
COUNTY OF MONTGOMERY, ss:
I, Susan L. Eyclesheimer a Notary Public in and for the State of
----------------------
Maryland, do hereby certify that Edward Hall Asher ,who is personally well known
-----------------
to me as the person who executed the foregoing and annexed Addendum, dated the
23rd day of December, 1998, on behalf of the Lessor, to acknowledge the same,
- ----
personally appeared before me in said jurisdiction and acknowledged said
Addendum to be the act and deed of The Chevy Chase Land Company of Montgomery
County, Maryland, as a general partner of and for and on behalf of the Lessor,
and delivered the same as such.
GIVEN under my hand and seal this 23rd day of December, 1998.
---- --------
/s/ Susan L. Eyclesheimer
-----------------------------
Notary Public
MY COMMISSION EXPIRES 8-1-00
SUSAN L. EYCLESHEIMER
NOTARY PUBLIC STATE OF MARYLAND
MY COMMISSION EXPIRES AUGUST 1, 2000
(Signatures Continue on the Following Page)
-6-
<PAGE>
LESSEE:
Attest: HEALTHCARE FINANCIAL PARTNERS, INC
a Delaware corporation
[SIGNATURE APPEARS HERE] By:[SIGNATURE APPEARS HERE]
- -------------------------------- -----------------------------------
Secretary Name:
(SEAL) Title:
STATE OF MARYLAND
COUNTY OF MONTGOMERY, ss:
I , Lucretia M. Dawson, , a Notary Public in and for the State of
Maryland, do hereby certify that Edward Nordburg , who is personally well known
to me as the person who executed the foregoing and annexed Addendum, dated the
23rd day of December, 1998, on behalf of the Lessee, to acknowledge the same,
personally appeared before me in said jurisdiction and acknowledged said
Addendum to be the act and deed of Healthcare Financial Partners, Inc. and
delivered the same as such.
GIVEN under my hand and seal this 23rd day of December 1998.
/s/ Lucretia M. Dawson
-------------------------------
Notary Public
My Commission Expires
5/1/2000
-7-
<PAGE>
EXHIBIT 10.33
MANAGEMENT AGREEMENT
THIS AGREEMENT, dated as of May 6, 1998 by and among HEALTHCARE FINANCIAL
PARTNERS REIT, INC., a Maryland corporation (the "Company"), and HCFP REIT
MANAGEMENT, INC., a Maryland corporation (the "Manager");
WITNESSETH:
WHEREAS, the Company intends to invest in mortgage loans, real property and
non-real estate assets ("REIT Investments") and expects to qualify for the tax
benefits of a real estate investment trust (a "REIT") accorded by Sections 856
through 860 of the Internal Revenue Code of 1986, as amended (the "Code"); and
WHEREAS, the Company desires to retain the Manager to advise and counsel the
Company as to the acquisition and sale of, and to otherwise manage the
investments of, the Company and to perform administrative services for the
Company in the manner and on the terms set forth herein;
NOW THEREFORE, in consideration of the mutual agreements herein set forth,
the parties hereto agree as follows:
SECTION 1. Definitions. Capitalized terms used but not defined herein
-----------
shall have the respective meanings assigned them in the Offering Memorandum of
the Company dated April 29, 1998. In addition, the following terms shall have
the following:
(a) "Agreement" means this Management Agreement, as amended from time to
time.
(b) "Closing Date" means the date of closing of the Offering.
(c) "GMAC" means GMAC Commercial Mortgage Corporation, a California
corporation.
(d) "Governing Instruments" means the charter and bylaws in the case of a
corporation, or the partnership agreement in the case of a partnership.
(e) "HCFP" means HealthCare Financial Partners, Inc., a Delaware
corporation.
(f) "Loan Servicing Agreement" means the Loan Servicing Agreement between
GMAC and the Company dated May 6, 1998.
(g) The term "permanent mortgage loan" means a loan secured by real
property collateral which has an initial term of more than three years.
(h) "Subsidiary" means any subsidiary of the Company and any partnership,
a general partner of which is the Company or any subsidiary of the Company.
<PAGE>
SECTION 2. Duties of the Manager.
---------------------
(a) The Manager at all times will be subject to the supervision of the Board
of Directors and will have only such functions and authority as the Company
delegates to it. The Manager will advise the Board of Directors as to the
activities and operations of the Company. The Manager may enter into sub-
contracts with other parties, including HCFP and its affiliates, to provide
certain services to the Company. The Manager will be responsible for the day-
to-day operations of the Company pursuant to the authority granted to it by the
Board of Directors under this Agreement, and the Manager will perform (or cause
to be performed) such services and activities relating to the assets and
operations of the Company as may be directed by the Board of Directors or as the
Manager otherwise considers appropriate, including:
(i) serving as the Company's consultant with respect to formulation of
investment criteria and preparation of policy Guidelines by the Board of
Directors;
(ii) advising and representing the Company in connection with the
acquisition and commitment to acquire assets, the sale and commitment to sell
assets, and the maintenance and administration of its portfolio of assets and
making available to the Company its knowledge and experience with respect to the
healthcare industry, mortgage loans, real estate and real estate related assets;
(iii) advising and representing the Company in connection with defaults
by the Company's borrowers and lessees, including the exercise of remedies and
collection of amounts owed to the Company.
(iv) advising the Company regarding, and arranging for, borrowings and
the raising of equity capital, as appropriate;
(v) furnishing reports and statistical and economic research to the
Company regarding the Company's activities and the services performed for the
Company by the Manager and regarding market conditions in the area in which the
Company proposes to invest;
(vi) providing executive and administrative personnel, office space and
office services required in rendering services to the Company; administering
the day-to-day operations of the Company; establishing and maintaining records
of the Company's activities; and performing and supervising the performance of
such other administrative functions necessary in the management of the Company,
including the collection of revenues and the payment of the Company's debts and
obligations and the maintenance of appropriate data processing and computer
services to perform such administrative functions;
(vii) providing marketing services and assistance to the Company;
(viii) communicating on behalf of the Company with the holders of any
equity or debt securities of the Company as required to satisfy the reporting
and other requirements of any governmental bodies or agencies or trading markets
and to maintain effective relations with such holders;
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(ix) to the extent not otherwise subject to an agreement executed by
the Company, designating a servicer for mortgage loans held by the Company and
arranging for the monitoring and administering of such servicer;
(x) counseling the Company in connection with policy decisions to be
made by the Board of Directors;
(xi) engaging in hedging activities on behalf of the Company which are
consistent with the Company's status as a REIT and with the Guidelines; and upon
request by the Board of Directors and in accordance with the Guidelines,
investing or reinvesting any money of the Company;
(xii) counseling the Company regarding (A) the maintenance of its
exemption from the Investment Company Act and monitoring compliance with the
requirements for maintaining exemption from that Act; (B) the maintenance of its
status as a REIT and monitoring compliance with the various REIT qualification
tests and other rules set out in the Code and the income tax regulations
promulgated thereunder (the "Treasury Regulations"); and (C) compliance with all
applicable laws, including those that would require the Company to qualify to do
business in particular jurisdictions;
(xiii) assisting the Company in complying with all regulatory
requirements applicable to the Company in respect of its business activities,
including preparing or causing to be prepared all financial statements required
under applicable regulations and contractual undertakings and all reports and
documents, if any, required under the Securities and Exchange Act of 1934, as
amended (the "Exchange Act");
(xiv) taking all necessary actions to enable the Company to make
required tax filings and reports, including soliciting stockholders for required
information to the extent provided in the Code and the Treasury Regulations;
(xv) handling and resolving all claims, disputes or controversies
(including all litigation, arbitration, settlement or other proceedings or
negotiations) in which the Company may be involved or to which the Company may
be subject arising out of the Company's day-to-day operations, subject to such
limitations or parameters as may be imposed from time to time by the Board of
Directors;
(xvi) using commercially reasonable efforts to cause expenses incurred
by or on behalf of the Company to be reasonable or customary and within any
budgeted parameters or the Guidelines set by the Board of Directors from time to
time;
(xvii) performing such other services as may be required from time to
time for management and other activities relating to the assets of the Company
as the Board of Directors shall reasonably request or the Manager shall deem
appropriate under the particular circumstances; and
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(xviii) using commercially reasonable efforts to cause the Company to
comply with all applicable laws.
(b) Portfolio Management. The Manager will perform portfolio management
--------------------
services on behalf of the Company with respect to the Company's investments.
Such services will include, but not be limited to, consulting the Company on
purchase, sale and other opportunities, collection of information and submission
of reports pertaining to the Company's assets, interest rates, and general
economic conditions, periodic review and evaluation of the performance of the
Company's portfolio of assets, acting as liaison between the Company and
banking, mortgage banking, investment banking and other parties with respect to
the purchase, financing and disposition of assets, and other customary functions
related to portfolio management. The Manager may enter into subcontracts with
other parties, including HCFP and its affiliates, to provide any such services
to the Company.
(c) Primary Servicing. The Company has entered into the Loan Servicing
-----------------
Agreement with GMAC for certain loan servicing activities with respect to the
Company's mortgage loans. The Manager will monitor and administer the loan
servicing activities provided by third-party servicers of the Company's mortgage
loans (including, without limitation, GMAC). Such monitoring and administrative
services will include, but not be limited to, the following activities: serving
as the Company's consultant with respect to the servicing of loans; collection
of information and submission of reports pertaining to the mortgage loans and to
moneys remitted to the Manager or the Company by servicers; periodic review and
evaluation of the performance of each servicer to determine its compliance with
the terms and conditions of the servicing agreement and, if deemed appropriate,
recommending to the Company the termination of such servicing agreement; acting
as a liaison between servicers and the Company and working with servicers to the
extent necessary to improve their servicing performance. The Manager will
provide all loan servicing activities which are not provided by third-party
servicers. Such services shall include, but not be limited to, the following
activities: review of and recommendations as to fire losses, easement problems
and condemnation, delinquency and foreclosure procedures with regard to the
mortgage loans; preparation of delinquency, foreclosing and other reports on
mortgage loans; and advising as to and supervising claims filed under any
insurance policies.
(d) Efforts. The Manager agrees to use commercially reasonable efforts at
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all times in performing services for the Company hereunder.
SECTION 3. Additional Activities of Manager. Nothing herein shall limit
--------------------------------
or restrict the right of the Manager or any of its officers, directors,
employees or Affiliates to engage in any business or to render services of any
kind to any other person including the purchase of, or rendering advice to
others purchasing, assets that meet the Company's policies and criteria, except
that so long as this Agreement is in effect, the Manager (i) may not manage or
advise another REIT or other entity that invests or intends to invest primarily
in permanent mortgage loans or purchase lease back transactions with respect to
healthcare facilities and (ii) may not directly or through an affiliate invest
in real property or originate or acquire permanent mortgage loans.
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Directors, officers, employees and agents of the Manager or affiliates of
the Manager may serve as directors, officers, employees, agents, nominees or
signatories for the Company or any of its Subsidiaries, to the extent permitted
by their Governing Instruments, as from time to time amended, or by any
resolutions duly adopted by the Board of Directors pursuant to the Company's or
any of its Subsidiaries' Governing Instruments. When executing documents or
otherwise acting in such capacities for the Company, such persons shall use
their respective titles in the Company.
SECTION 4. Commitments. In order to meet the investment requirements of
-----------
the Company, as determined by the Board of Directors from time to time, the
Manager agrees at the direction of the Board of Directors to issue on behalf of
the Company commitments on such terms as are established by the Board of
Directors, for the acquisition by the Company of assets.
SECTION 5. Bank Accounts. At the direction of the Board of Directors, the
-------------
Manager may establish and maintain one or more bank accounts in the name of the
Company or any of its Subsidiaries, and may collect and deposit funds into any
such account or accounts, and disburse funds from any such account or accounts,
under such terms and conditions as the Board of Directors may approve; and the
Manager shall from time to time render appropriate accountings of such
collections and payments to the Board of Directors and, upon request, to the
auditors of the Company or any of its Subsidiaries.
SECTION 6. Records; Confidentiality. The Manager shall maintain
------------------------
appropriate books of accounts and records relating to services performed
hereunder, and such books of account and records shall be accessible for
inspection by representatives of the Company or any of its Subsidiaries at any
time during normal business hours. The Manager shall keep confidential any and
all information obtained in connection with the services rendered hereunder and
shall not disclose any such information to nonaffiliated third parties except
with the prior written consent of the Board of Directors or as may be required
by law or order of a court or other tribunal having requisite jurisdiction.
SECTION 7. Obligations of Manager.
----------------------
(a) The Manager shall require each borrower or lessee of the Company to make
such representations and warranties regarding the applicable facilities financed
by the Company as may be directed by the Board of Directors, or, if no such
directions are given, as may, in the judgment of the Manager, be necessary and
appropriate. In addition, the Manager shall take such other action as may be
directed by the Board of Directors, or, if no such directions are given, as it
deems necessary or appropriate with regard to the protection of the Company's
assets.
(b) The Manager shall refrain from any action that, in its sole judgment
made in good faith, would adversely affect the status of the Company as a REIT,
or as exempt from regulation under the Investment Company Act or that, in its
sole judgment made in good faith, would violate any law, rule or regulation of
any governmental body or agency having jurisdiction over the Company or any of
its Subsidiaries or that would otherwise not be permitted by their respective
Governing Instruments. If the Manager is ordered to take any such action by the
Board of Directors, the Manager shall promptly notify the Board of Directors of
the Manager's
5
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judgment that such action would adversely affect such status or violate any such
law, rule or regulation or the Governing Instruments. Notwithstanding the
foregoing, the Manager, its directors, officers, stockholders and employees
shall not be liable to the Company or any of its Subsidiaries, the Independent
Directors, or the Company's or any of its Subsidiaries' stockholders or partners
for any act or omission by the Manager, its directors, officers, stockholders or
employees except as provided in Section 11 of this Agreement.
SECTION 8. Compensation.
------------
(a) Commencing with the first fiscal quarter after the Closing Date, the
Company shall pay to the Manager, for services rendered under this Agreement, a
base management fee (the "Base Management Fee") payable and calculated quarterly
(prorated based on the number of days elapsed during any partial fiscal quarter)
in an amount equal to a percentage (the "Percentage Amount") of the Average
Invested Assets for such quarter. The term "Average Invested Assets" for any
quarter means the average of the aggregate book value of the consolidated assets
of the Company, before reserves for depreciation or bad debts or other non-cash
reserves, computed by dividing the sum of such values for each of the three
months during such quarter (based on the book value of such assets on the last
day of such month) by three. The "Percentage Amount" shall be 1.50% for Average
Invested Assets up to and including $300 million; 1.25% for Average Invested
Assets in excess of $300 million up to and including $600 million; 1.00% for
Average Invested Assets in excess of $600 million up to and including $900
million; 0.75% for Average Invested Assets in excess of $900 million up to and
including $1.2 billion; and 0.50% for Average Invested Assets in excess of $1.2
billion.
(b) The Company shall pay to the Manager incentive compensation (the
"Incentive Compensation") for each fiscal quarter in an amount equal the product
of (A) 25% of the dollar amount by which (1)(a) Funds From Operations of the
Company (before the Incentive Compensation) per share of Common Stock (based on
the weighted average number of shares outstanding) for such quarter plus (b)
gains (or minus losses) from debt restructuring and sales of property per share
of Common Stock (based on the weighted average number of shares outstanding),
exceeds (2) an amount equal to the weighted average of the prices per share of
Common Stock issued by the Company (including shares of Common Stock issued upon
the exercise of options or warrant and assuming a price of $20 per share for
shares sold in the Offering) multiplied by (b) the Ten Year U.S. Treasury Rate
for such quarter plus 3.50% multiplied by (B) the weighted average number of
shares of Common Stock outstanding during such quarter. "Funds From Operations"
as defined by NAREIT means net income (computed in accordance with generally
accepted accounting principles) ("GAAP") excluding gains (or losses) from debt
restructuring and sales of property, plus depreciation and amortization on real
estate assets, and after adjustments for unconsolidated partnerships and joint
ventures. Funds From Operations does not represent cash generated from operating
activities in accordance with GAAP and should not be considered as an
alternative to net income as an indication of the Company's performance or to
cash flows as a measure of liquidity or ability to make distributions. As used
in calculating the Manager's compensation, the term "Ten Year U.S. Treasury
Rate" means the arithmetic average of the weekly average yield to maturity for
actively traded current coupon U.S. Treasury fixed interest rate securities
(adjusted to constant maturities of ten years) published by the Federal Reserve
Board during a quarter, or, if such rate is not published by the
6
<PAGE>
Federal Reserve Board, any Federal Reserve Bank or agency or department of the
federal government selected by the Company. If the Company determines in good
faith that the Ten Year U.S. Treasury Rate cannot be calculated as provided
above, then the rate shall be the arithmetic average of the per annum average
yields to maturities, based upon closing asked prices on each business day
during a quarter, for each actively traded marketable U.S. Treasury fixed
interest rate security with a final maturity date not less than eight nor more
than twelve years from the date of the closing asked prices as chosen and quoted
for each business day in each such quarter in New York City by at least three
recognized dealers in U.S. government securities selected by the Company.
(c) The Manager is expected to use the proceeds from its Base Management Fee
and Incentive Compensation in part to pay compensation to its officers and
employees who, notwithstanding that certain of them are officers of the Company,
will initially receive no cash compensation directly from the Company. The Base
Management Fee and Incentive Compensation are payable in arrears. The Manager
shall compute the compensation payable under Sections 8(a) and 8(b) of this
Agreement within 45 days after the end of each fiscal quarter. A copy of the
computations made by the Manager to calculate its compensation shall thereafter
promptly be delivered to the Board of Directors and, upon such delivery, payment
of the compensation earned under Sections 8(a) and 8(b) of this Agreement shown
therein shall be due and payable within 60 days after the end of such fiscal
quarter.
(d) The Manager may charge the Company for any out of pocket expenses that
the Manager incurs in connection with employing unaffiliated third parties to
conduct due diligence on assets considered for purchase by the Company.
SECTION 9. Expenses of the Company. The Company or any Subsidiary shall
-----------------------
pay all of its expenses and shall reimburse the Manager for documented expenses
of the Manager incurred on its behalf.
SECTION 10. Calculations of Expenses. Expenses incurred by the Manager on
------------------------
behalf of the Company shall be reimbursed quarterly to the Manager within 60
days after the end of each quarter. The Manager shall prepare a statement
documenting the expenses of the Company and those incurred by the Manager on
behalf of the Company during each quarter, and shall deliver such statement to
the Company within 45 days after the end of each quarter.
SECTION 11. Limits of Manager Responsibility. The Manager assumes no
--------------------------------
responsibility under this Agreement other than to render the services called for
hereunder in good faith and shall not be responsible for any action of the Board
of Directors in following or declining to follow any advice or recommendations
of the Manager, including as set forth in Section 7(b) of this Agreement. The
Manager, its directors, officers, stockholders and employees under or in
connection with this Agreement, except by reason of acts constituting bad faith,
willful misconduct, gross negligence or reckless disregard of their duties. The
Manager and its directors and officers will not be liable to the Company, any
subsidiary of the Company, the Independent Directors, the Company's stockholders
or any subsidiary's stockholders for acts performed in accordance with and
pursuant to this Agreement, except by reason of acts constituting bad faith,
willful misconduct, gross negligence or reckless disregard of their duties
7
<PAGE>
under this Agreement. The Company and its Subsidiaries shall reimburse,
indemnify, defend and hold harmless the Manager, its stockholders, directors,
officers and employees of and from any and all expenses, losses, damages,
liabilities, demands, charges and claims of any nature whatsoever, (including
attorneys' fees) in respect of or arising from any acts or omissions of the
Manager, its stockholders, directors, officers and employees made in good faith
in the performance of the Manager's duties under this Agreement and not
constituting bad faith, willful misconduct, gross negligence or reckless
disregard of its duties.
SECTION 12. No Joint Venture. The Company and the Manager are not partners
----------------
or joint venturers with each other and nothing herein shall be construed to make
them such partners or joint venturers or impose any liability as such on either
of them.
SECTION 13. Term.
----
(a) This Agreement shall continue in force and effect for an initial term
(the "Initial Term") expiring on the third anniversary of the Closing Date,
subject to being terminated for cause as provided in Section 14 herein.
Thereafter, the term of this Agreement may be extended by agreement between the
Company and the Manager, subject to the affirmative vote of a majority of the
Independent Directors. Each extension shall be executed in writing by all
parties hereto before the expiration of this Agreement or, if applicable, the
most recent extension thereof. Each such extension shall be effective for a
period of one year. At any time after the Initial Term, the Company may
terminate, or decline to renew the term of, this Agreement without cause upon 90
day(s) written notice by a majority vote of the Independent Directors; provided
that the Company will be required upon such termination or nonrenewal, at the
option of the Company, either (i) to acquire the Manager from HCFP for a
purchase price equal to the Acquisition Price, as hereinafter defined, or (ii)
to pay the Manager a termination or nonrenewal fee ("Termination Fee") equal to
80% of the Acquisition Price. The Acquisition Price is an amount equal to 10
times the Manager's earnings before taxes for the latest twelve calendar months
immediately preceding the date of termination or nonrenewal. Such termination
or nonrenewal shall first become effective as of the 90th day after the receipt
by the Manager of such written notice of such termination or nonrenewal from the
Company. A failure to extend the term of this Agreement at the expiration of
its term (or, if the term of this Agreement shall have been extended pursuant to
this Section 13, at the expiration of the most recent extension) shall be deemed
for all purposes of this Agreement to be a termination of this Agreement
pursuant to this Section 13. The Company shall pay the Acquisition Price or
Termination Fee, as applicable, to HCFP on or before the effective termination
date. In the event the Company elects to acquire the Manager in connection with
such termination, HCFP will, upon receipt of the Acquisition Price, deliver
stock certificates representing all of such capital stock endorsed to the order
of the Company.
(b) In addition, the Company has the right at any time during the term of
this Agreement to terminate this Agreement without the payment of any
termination or nonrenewal fee and without acquiring the Manager upon, among
other things, a material breach by the Manager of any provision contained in the
Management Agreement (including the failure of the Manager to use reasonable
efforts to comply with the Guidelines).
8
<PAGE>
SECTION 14. Termination for Cause. This Agreement, or any extension
---------------------
hereof, may be terminated by either party for cause immediately upon written
notice, (i) by a majority vote of the Independent Directors in the case of
termination by the Company, or (ii) by a majority vote of the directors of the
Manager, in the case of termination by the Manager. Grounds for termination for
cause will occur with respect to a party if:
(i) Such party shall have violated any provision of this Agreement
and, after notice of such violation, shall not have cured such default
within 30 days; or
(ii) There is entered an order for relief or similar decree or order
with respect to the other party by a court having jurisdiction in an
involuntary case under the federal bankruptcy laws as now or hereafter
constituted or under any applicable federal or state bankruptcy, insolvency
or other similar laws; or the other party (A) admits in writing its
inability to pay its debts as they become due and payable, or makes a
general assignment for the benefit of, or enters into any composition or
arrangement with, creditors; (B) applies for, or consents (by admission of
material allegations of a petition or otherwise) to the appointment of a
receiver, trustee, assignee, custodian, liquidator or sequestrator (or
other similar official) of the other party or of any substantial part of
its properties or assets, or authorizes such an application or consent, or
proceedings seeking such appointment are commenced without such
authorization, consent or application against the other party and continue
undismissed for 30 days; (C) authorizes or files a voluntary petition in
bankruptcy, or applies for or consents (by admission of material
allegations of a petition or otherwise) to the application of any
bankruptcy, reorganization, arrangement, readjustment of debt, insolvency,
dissolution, liquidation or other similar law of any jurisdiction, or
authorizes such application or consent, or proceedings to such end are
instituted against the other party without such authorization, application
or consent and are approved as properly instituted and remain undismissed
for 30 days or results in adjudication of bankruptcy or insolvency; or (D)
permits or suffers all or any substantial part of its properties or assets
to be sequestered or attached by court order and the order remains
undismissed for 30 days.
Each party agrees that if any of the events specified in this Section 14
shall occur, it will give prompt written notice thereof to the other party's
Board of Directors after the happening of such event.
If this Agreement is terminated pursuant to this Section 14, such
termination shall be without any further liability or obligation of either party
to the other, except as provided in Section 16 of this Agreement.
SECTION 15. Assignment; Subcontract.
-----------------------
(a) This Agreement shall terminate automatically in the event of its
assignment, in whole or in part, by the Manager, unless such assignment is to a
corporation, association, trust or other organization which shall acquire the
property and carry on the business of the Manager, if at the time of such
assignment a majority of the voting stock of such assignee organization shall be
owned, directly or indirectly, by HCFP or unless such assignment is consented to
in writing
9
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by the Company with the consent of a majority of the Independent Directors. Such
an assignment shall bind the assignee hereunder in the same manner as the
Manager is bound hereunder and, to further evidence its obligations hereunder
the assignee shall execute and deliver to the Company a counterpart of this
Agreement. This Agreement shall not be assignable by the Company without the
consent of the Manager, except in the case of assignment by the Company to a
REIT or other organization which is a successor (by merger, consolidation or
purchase of assets) to the Company, in which case such successor organization
shall be bound hereunder and by the terms of said assignment in the same manner
as the Company is bound hereunder.
(b) Notwithstanding the foregoing, the Company and the Manager agree that
the Manager may enter into a subcontract with any third party, which third party
shall be approved by the Company's Board of Directors, pursuant to which such
third party will provide such of the management services required hereunder as
the Manager deems necessary, and the Company hereby consents to the entering
into and performance of such subcontract; provided, however, that no such
arrangement between the Manager and any third party shall relieve the Manager of
any of its duties or obligations hereunder.
SECTION 16. Action Upon Termination. From and after the effective date of
-----------------------
termination of this Agreement pursuant to Sections 13 or 14 hereof, the Manager
shall not be entitled to compensation for further services hereunder, but shall
be paid all compensation accruing to the date of termination and, if such
termination is not pursuant to Section 14, the termination fee determined
pursuant to Section 13. The Manager shall forthwith upon such termination
deliver to the Board of Directors all funds and property, documents, corporate
records, reports and software of the Company or any Subsidiary of the Company
then in the custody of Manager.
SECTION 17. Release of Money or Other Property Upon Written Request. The
-------------------------------------------------------
Manager agrees that any money or other property of the Company and its
Subsidiaries held by the Manager under this Agreement shall be held by the
Manager as custodian for the Company and its Subsidiaries, and the Manager's
records shall be appropriately marked clearly to reflect the ownership of such
money or other property by the Company and its Subsidiaries. Upon the receipt
by the Manager of a written request signed by a duly authorized officer of the
Company requesting the Manager to release to the Company or any such Subsidiary,
respectively, any money or other property then held by the Manager for the
account of the Company or any such Subsidiary under this Agreement, the Manager
shall release such money or other property to the Company or any of its
Subsidiaries within a reasonable period of time, but in no event later than 60
days following such request. The Manager shall not be liable to the Company,
the Independent Directors, or the Company's or any of its Subsidiaries'
stockholders or partners for any acts performed or omissions to act by the
Company or any of its Subsidiaries in connection with the money or other
property released to the Company or any of its Subsidiaries in accordance with
this Section. The Company and its Subsidiaries jointly and severally shall
indemnify, defend and hold harmless the Manager, its directors, officers,
stockholders and employees against any and all expenses, losses, damages,
liabilities, demands, charges and claims of any nature whatsoever, which arise
in connection with the Manager's release of such money or other property to the
Company or any of its Subsidiaries in accordance with the terms
10
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of this Section 17 of this Agreement. Indemnification pursuant to this provision
shall be in addition to any right of the Manager to indemnification under
Section 11 of this Agreement.
SECTION 18. Representations and Warranties.
------------------------------
(a) The Company hereby represents and warrants to the Manager as follows:
(i) The Company is duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation, has the
corporate power to own its assets and to transact the business in which it
is now engaged and is duly qualified as a foreign corporation and in good
standing under the laws of each jurisdiction where its ownership or lease
of property or the conduct of its business requires such qualification,
except for failures to be so qualified, authorized or licensed that could
not in the aggregate have a material adverse effect on the business
operations, assets or financial condition of the Company and its
Subsidiaries, taken as a whole. The Company does not do business under any
fictitious business name.
(ii) The Company has the corporate power and authority to execute,
deliver and perform this Agreement and all obligations required hereunder
and has taken all necessary corporate action to authorize this Agreement on
the terms and conditions hereof and the execution, delivery and performance
of this Agreement and all obligations required hereunder. No consent of
any other person including, without limitation, stockholders and creditors
of the Company, and no license, permit, approval or authorization of,
exemption by, notice or report to, or registration, filing or declaration
with, any governmental authority is required by the Company in connection
with this Agreement or the execution, delivery, performance, validity or
enforceability of this Agreement and all obligations required hereunder.
This Agreement has been, and each instrument or document required hereunder
will be, executed and delivered by a duly authorized officer of each of the
Company, and this Agreement constitutes, and each instrument or document
required hereunder when executed and delivered hereunder will constitute,
the legally valid and binding obligation of the Company enforceable against
the Company in accordance with its terms.
(iii) The execution, delivery and performance of this Agreement and
the documents or instruments required hereunder will not violate any
provision of any existing law or regulation binding on the Company or any
of its subsidiaries, or any order, judgment, award or decree of any court,
arbitrator or governmental authority binding on the Company or any of its
Subsidiaries, or the Governing Instruments of, or any securities issued by
the Company or any of its Subsidiaries, or of any mortgage, indenture,
lease, contract or other agreement, instrument or undertaking to which the
Company or any of its Subsidiaries is a party or by which the Company or
any of its Subsidiaries, or any of their respective assets, may be bound,
the violation of which would have a material adverse effect on the business
operations, assets or financial condition of the Company and its
Subsidiaries, taken as a whole ' and will not result in, or require, the
creation or imposition of any lien on any of its property, assets or
revenues
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pursuant to the provisions of any such mortgage, indenture, lease, contract
or other agreement, instrument or undertaking.
(b) The Manager hereby represents and warrants to the Company as follows:
(i) the Manager is duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation, has the
corporate power to own its assets and to transact the business in which it
is now engaged and is duly qualified to do business and is in good standing
under the laws of each jurisdiction where its ownership or lease of
property or the conduct of its business requires such qualifications,
except for failures to be so qualified, authorized or licensed that could
not in the aggregate have a material adverse effect on the business
operations, assets or financial condition of the Manager and its
subsidiaries, taken as a whole. The Manager does not do business under any
fictitious name.
(ii) The Manager has the corporate power and authority to execute,
deliver and perform this Agreement and all obligations required hereunder
and has taken all necessary corporate action to authorize, execute and
deliver this Agreement and perform all obligations required hereunder. No
consent of any other person including, without limitation, stockholders and
creditors of the Manager, and no license, permit, approval or authorization
of, exemption by, notice or report to, or registration, filing or
declaration with, any governmental authority is required by the Manager in
connection with this Agreement or the execution and delivery of this
Agreement and the performance all obligations required hereunder. This
Agreement has been, and each instrument or document required hereunder will
be, executed and delivered by a duly authorized agent of the Manager, and
this Agreement constitutes, and each instrument or document required
hereunder when executed and delivered hereunder will constitute, the
legally valid and binding obligation of the Manager enforceable against the
Manager in accordance with its terms.
(iii) The execution, delivery and performance of this Agreement and
the documents or instruments required hereunder will not violate any
provision of any existing law or regulation binding on the Manager, or any
order, judgment, award or decree of any court, arbitrator or governmental
authority binding on the Manager, or the Governing Instruments of, or any
securities issued by, the Manager or of any mortgage, indenture, lease,
contract or other agreement, instrument or undertaking to which the Manager
is a party or by which the Manager or any of its assets may be bound, the
violation of which would have a material adverse effect on the business
operations, assets or financial condition of the Manager and its
subsidiaries, taken as a whole, and will not result in, or require, the
creation or imposition of any lien on any of its property, assets or
revenues pursuant to the provisions of any such mortgage, indenture, lease,
contract or other agreement, instrument or undertaking.
SECTION 19. Notices. Unless expressly provided otherwise herein, all
-------
notices, requests, demands and other communications required or permitted under
this Agreement shall be in writing and shall be deemed to have been duly given,
made and received when delivered against
12
<PAGE>
receipt or upon actual receipt of registered or certified mail, postage prepaid,
return receipt requested, addressed as set forth below:
(a) If to the Company:
HealthCare Financial Partners REIT, Inc.
2 Wisconsin Circle
Fourth Floor
Chevy Chase, Maryland 20815
Attention: Edward P. Nordberg, Jr.
Telephone: (301) 664-9823
Fax: (301) 664-9880
(b) If to the Manager:
HCFP REIT Management, Inc.
2 Wisconsin Circle
Fourth Floor
Chevy Chase, Maryland 20815
Attention: Edward P. Nordberg, Jr.
Telephone: (301) 664-9823
Fax: (301) 664-9880
with a copy given in the manner prescribed above to:
G. William Speer, Esq.
Powell, Goldstein, Frazer & Murphy, LLP
191 Peachtree Street, N.E.
Sixteenth Floor
Atlanta, Georgia 30303
Either party may alter the address to which communications or copies are to
be sent by giving notice of such change of address in conformity with the
provisions of this Section 19 for the giving of notice.
SECTION 20. Entire Agreement. This Agreement contains the entire agreement
----------------
and understanding among the parties hereto with respect to the subject matter
hereof, and supersedes all prior and contemporaneous agreements, understandings,
inducements and conditions, express or implied, oral or written, of any nature
whatsoever with respect to the subject matter hereof. The express terms hereof
control and supersede any course of performance and/or usage of the trade
inconsistent with any of the terms hereof. This Agreement may not be modified
or amended other than by an agreement in writing.
SECTION 21. Binding Nature of Agreement; Successors and Assigns. This
---------------------------------------------------
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective heirs, personal representatives, successors and assigns as
provided herein.
13
<PAGE>
SECTION 22. Third Party Beneficiaries. This Agreement shall be binding
-------------------------
upon and inure solely to the benefit of the parties hereto, and nothing in this
Agreement, express or implied, is intended to confer upon any other rights or
remedies of any nature whatsoever under or by reason of this Agreement.
SECTION 23. Schedules and Exhibits. All Schedules and Exhibits referred to
----------------------
herein or attached hereto are hereby incorporated by reference into, and made a
part of, this Agreement.
SECTION 24. Indulgences, Not Waivers. Neither the failure nor any delay on
------------------------
the part of a party to exercise any right, remedy, power or privilege under this
Agreement shall operate as a waiver thereof, nor shall any single or partial
exercise of any right, remedy, power or privilege preclude any other or further
exercise of the same or of any other right, remedy, power or privilege, nor
shall any waiver of any right, remedy, power or privilege with respect to any
occurrence be construed as a waiver of such right, remedy, power or privilege
with respect to any other occurrence. No waiver shall be effective unless it is
in writing and is signed by the party asserted to have granted such waiver.
SECTION 25. Costs and Expenses. Each party hereto shall bear its own costs
------------------
and expenses (including the fees and disbursements of counsel and accountants)
incurred in connection with the negotiations and preparation of and the closing
under this Agreement, and all matters incidental thereto.
SECTION 26. Titles Not to Affect Interpretation. The titles of paragraphs
-----------------------------------
and subparagraphs contained in this Agreement are for convenience only, and they
neither form a part of this Agreement nor are they to be used in the
construction or interpretation hereof.
SECTION 27. Execution in Counterparts. This Agreement may be executed in
-------------------------
any number of counterparts, each of which shall be deemed to be an original as
against any party whose signature appears thereon, and all of which shall
together constitute one and the same instrument. This Agreement shall become
binding when one or more counterparts hereof, individually or taken together,
shall bear the signatures of all of the parties reflected hereon as the
signatories.
SECTION 28. Provisions Separable. The provisions of this Agreement are
--------------------
independent of and separable from each other, and no provision shall be affected
or rendered invalid or unenforceable by virtue of the fact that for any reason
any other or others of them may be invalid or unenforceable in whole or in part.
SECTION 29. Gender. Words used herein regardless of the number and gender
------
specifically used, shall be deemed and construed to include any other number,
singular or plural, and any other gender, masculine, feminine or neuter, as the
context requires.
SECTION 30. Computation of Interest. Interest will be computed on the
-----------------------
basis of a 360-day year consisting of twelve months of thirty days each.
14
<PAGE>
SECTION 31. Professional Fees. If any party becomes involved in litigation
-----------------
(including bankruptcy proceedings) or arbitration against any other party
arising out of or relating to this Agreement, the court in the litigation
(including bankruptcy proceedings) or arbitrator in the arbitration shall award
legal expenses (including, but not limited to attorneys' fees, court costs and
other legal expenses) to the prevailing party. The award for legal expenses
shall not be computed in accordance with any court schedule, but shall be as
necessary to fully reimburse all attorneys' fees and other legal expenses
actually incurred in good faith, regardless of the size of the judgment, it
being the intention of the parties to fully compensate for all the attorneys'
fees and other legal expenses paid in good faith. For the purpose of this
Agreement, the terms "attorneys' fees" or "attorneys' fees and costs" shall mean
the reasonable fees and expenses of counsel to the parties hereto (including,
without limitation, the cost of in-house counsel employed by such party, such
cost to be determined by imputing a cost for those services commensurate with
such counsel's skills and experience), which may include printing, duplicating
and other expenses, air freight charges, and fees billed for law clerks,
paralegals, librarians and others not admitted to the bar but performing
services under the supervision of an attorney. The terms "attorneys' fees" or
"attorneys' fees and costs" shall also include, without limitation, all
reasonable fees and expenses incurred with respect to appeals, arbitrations and
bankruptcy proceedings, and whether or not any action or proceeding is brought
with respect to the matter for which said fees and expenses were incurred.
SECTION 32. Controlling Law. This Agreement and all questions relating to
---------------
its validity, interpretation, performance and enforcement shall be governed by
and construed, interpreted and enforced in accordance with the laws of the State
of Maryland, notwithstanding any Maryland or other conflict-of-law provisions to
the contrary.
15
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
HEALTHCARE FINANCIAL
PARTNERS REIT, INC.
By: /s/ Edward P. Nordberg, Jr.
-----------------------------------
Executive Vice President and Chief
Financial Officer
HCFP REIT MANAGEMENT, INC.
By: /s/ Edward P. Nordberg, Jr.
-----------------------------------
Executive Vice President and Chief
Financial Officer
16
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-60387) of HealthCare Financial Partners, Inc. of our report dated
February 11, 1999, with respect to the consolidated financial statements of
HealthCare Financial Partners, Inc. included in this Form 10-K for the year
ended December 31, 1998.
/s/ Ernst & Young LLP
Washington, D.C.
March 30, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 39,551,044 18,668,703
<SECURITIES> 11,755,628 1,442,814
<RECEIVABLES> 437,287,437 250,688,138
<ALLOWANCES> 6,401,916 2,654,114
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 2,175,188 619,222
<DEPRECIATION> 421,980 202,938
<TOTAL-ASSETS> 504,671,115 272,354,946
<CURRENT-LIABILITIES> 257,117,548 184,524,758
<BONDS> 0 0
0 0
0 0
<COMMON> 134,142 96,703
<OTHER-SE> 247,419,425 87,733,485
<TOTAL-LIABILITY-AND-EQUITY> 504,671,115 272,354,946
<SALES> 57,706,860 27,745,077
<TOTAL-REVENUES> 64,089,366 29,327,929
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 13,434,451 7,219,372
<LOSS-PROVISION> 3,953,498 1,315,122
<INTEREST-EXPENSE> 13,629,466 7,921,330
<INCOME-PRETAX> 33,071,951 12,872,105
<INCOME-TAX> 13,264,049 4,877,257
<INCOME-CONTINUING> 19,807,902 7,994,848
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 19,807,902 7,994,848
<EPS-PRIMARY> 1.57 .99
<EPS-DILUTED> 1.52 .96
</TABLE>
<PAGE>
Supplementary Data
<TABLE>
<CAPTION>
1) CONDENSED BALANCE SHEETS (UNAUDITED):
December 31, December 31,
1998 1997
------------ -----------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 39,551,044 $ 18,668,703
Finance receivables 437,287,437 250,688,138
Less:
Allowance for losses on receivables 6,401,916 2,654,114
Unearned fees 3,802,302 3,161,237
------------- -------------
Net finance receivables 427,083,219 244,872,787
Deferred income taxes 2,112,383 1,041,520
Property and equipment, net 1,753,208 416,284
Goodwill 1,563,220 1,740,097
Investments in affiliates 11,397,194 767,244
Other investment securities 11,755,628 1,442,814
Prepaid expenses and other assets 9,455,219 3,405,497
------------- -------------
Total assets $ 504,671,115 $ 272,354,946
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Line of credit $ 32,503,243 $ 40,157,180
Commercial paper facility 114,207,270 101,179,354
CP conduit facility 42,440,000
Warehouse facility 49,632,760 27,932,520
Client holdbacks 4,208,859 6,173,260
Accounts payable to clients 540,205 834,367
Income taxes payable 1,918,084 5,138,144
Due to affiliates, net 651,169
Accounts payable and accrued expenses 6,180,833 2,217,947
Notes payable 3,380,828 115,286
Accrued interest 1,454,297 776,700
------------- -------------
Total liabilities 257,117,548 184,524,758
Stockholders' equity
Preferred stock, par value $.01 per share;
10,000,000 shares authorized; none outstanding
Common stock, par value $.01 per share;
60,000,000 shares authorized;
13,414,189 and 9,670,291 shares
issued and outstanding respectively 134,142 96,703
Paid-in-capital 219,822,293 79,784,045
Retained earnings 27,597,132 7,949,440
------------- -------------
Total stockholders' equity 247,553,567 87,830,188
------------- -------------
Total liabilities and equity $ 504,671,115 $ 272,354,946
============= =============
</TABLE>
Note: The balance sheet as of December 31, 1997 has been derived from audited
financial statements, but does not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements.
<PAGE>
2) KEY BALANCE SHEET DATA:
<TABLE>
<CAPTION>
As of Dec. 31, As of Dec. 31,
1998 1997
---------------------------------------------------------
<S> <C> <C>
Finance Receivables:
Accounts Receivable Program $ 289,717,840 66% $ 185,727,628 74%
STL Program 147,569,597 34% 64,960,510 26%
---------------------------------------------------------
Total $ 437,287,437 100% $ 250,688,138 100%
=========================================================
Allowance for losses on receivables $ 6,401,916 $ 2,654,114
===================== ====================
Total Assets $ 504,671,115 $ 272,354,946
===================== ====================
Debt
Line of credit $ 32,503,243 13% $ 40,157,180 24%
Commercial paper facility 114,207,270 48% 101,179,354 60%
CP conduit facility 42,440,000 18%
Warehouse facility 49,632,760 21% 27,932,520 16%
---------------------------------------------------------
Total $ 238,783,273 100% $ 169,269,054 100%
=========================================================
Total Liabilities $ 257,117,548 $ 184,524,758
===================== ====================
Client Holdbacks $ 4,208,859 $ 6,173,260
===================== ====================
Total Debt $ 238,783,273 49% $ 169,269,054 66%
Total Stockholders' Equity 247,553,567 51% 87,830,188 34%
---------------------------------------------------------
Capitalization $ 486,336,840 100% $ 257,099,242 100%
========================================================
Book Value Per Share $ 18.45 $ 9.08
===================== ====================
</TABLE>
Note: See attached Balance Sheets for additional information
3) CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Quarter For the Year
Ended December 31, Ended December 31,
------------------------------- --------------------------
1998 1997 1998 1997
------------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Fee and interest income
Fee and interest income from finance receivables........... $ 14,964,816 $ 9,712,639 $ 56,889,198 $ 27,401,653
Other interest income...................................... 169,606 131,690 817,662 343,424
------------- ----------- ------------ ------------
Total fee and interest income..................... 15,134,422 9,844,329 57,706,860 27,745,077
Interest expense................................................ 3,785,615 2,835,261 13,629,466 7,921,330
------------- ----------- ------------ ------------
Net fee and interest income....................... 11,348,807 7,009,068 44,077,394 19,823,747
Provision for losses on receivables............................. 1,353,189 310,122 3,953,498 1,315,122
------------- ----------- ------------ ------------
Net fee and interest income after provision
for losses on receivables.................. 9,995,618 6,698,946 40,123,896 18,508,625
Asset management income......................................... 589,495 1,576,597
------------- ----------- ------------ ------------
Operating income.................................. 10,585,113 6,698,946 41,700,493 18,508,625
Operating expenses.............................................. 3,725,026 2,257,913 13,434,451 7,219,372
Other income.................................................... 2,758,913 472,726 4,805,909 1,582,852
------------- ----------- ------------ ------------
Income before income taxes...................................... 9,619,000 4,913,759 33,071,951 12,872,105
Income taxes.................................................... 3,868,612 1,948,178 13,264,049 4,877,257
------------- ----------- ------------ ------------
Net income...................................................... $ 5,750,388 $ 2,965,581 $ 19,807,902 $ 7,994,848
============= =========== ============ ============
Basic earnings per share........................................ $ 0.43 $ 0.31 $ 1.57 $ 0.99
Weighted average shares outstanding............................. 13,408,824 9,669,793 12,627,536 8,087,857
Diluted earnings per share...................................... $ 0.42 $ 0.30 $ 1.52 $ 0.96
Diluted weighted average shares outstanding..................... 13,688,967 10,015,643 13,002,260 8,310,111
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
4) COMMON SHARES INFORMATION:
As of and for the As of and for the As of and for the As of and for the
Quarter Ended Quarter Ended Year Ended Year Ended
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1998 1997 1998 1997
---------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Total Shares Outstanding 13,414,189 9,670,291 13,414,189 9,670,291
Weighted Average Shares
Outstanding 13,408,824 9,669,793 12,627,536 8,087,857
Diluted Weighted Average Shares
Outstanding 13,688,967 10,015,643 13,002,260 8,310,111
</TABLE>
5) SELECTED FINANCIAL DATA:
<TABLE>
<CAPTION>
As of or for the Quarter ended As of or for the year ended
1998 1997 1998 1997
---------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Number of clients being financed (1) 209 174 209 174
Number of loans to clients 240 200 240 200
Yield Statistics:
- --------------------------
Yield on finance receivables 14.70% 17.28% 16.21% 16.83%
Yield on Accounts Receivable Program receivables 15.64% 17.70% 16.45% 16.96%
Yield on STL Program receivables 12.87% 16.32% 15.67% 16.31%
Finance Spread and Margin:
- -----------------------------------------
Average yield on finance receivables 14.70% 17.28% 16.21% 16.83%
Average cost of debt 7.68% 8.62% 8.10% 8.57%
---------------- ----------------- ----------------- -----------------
Net fee and interest spread 7.02% 8.66% 8.11% 8.26%
Net fee and interest margin 10.98% 12.52% 12.32% 12.17%
Year-to-Year Growth Statistics:
- -----------------------------------------
Finance Receivables 74.43% 180.63% 74.43% 180.63%
Total fee and interest income 53.74% 164.09% 107.99% 130.90%
Net income (1996 data pro forma) 93.90% 204.23% 147.76% 169.77%
Diluted earnings per share (1996 data pro forma) 41.87% 81.19% 58.35% 92.55%
Other Operating Statistics:
- -----------------------------------------
Return on average working assets 5.65% 5.30% 5.64% 4.91%
Finance receivable turnover ratio (# times 2.3 2.7 9.24 11.42
Allowance for losses as a percentage of
finance receivables 1.46% 1.06% 1.46% 1.06%
Total operating expenses as a percentage
of average earning assets 3.66% 4.03% 3.83% 4.43%
Efficiency ratio (Operating expenses/ gross 22.02% 22.94% 22.03% 26.02%
operating income)
Leverage ratio (debt/equity) 0.96 1.93 0.96 1.93
Equity/Assets 49.05% 32.25% 49.05% 32.25%
</TABLE>
(1) Includes 68 and 60 clients who were affiliates of one or more clients in
1998 and 1997, respectively.
