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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
AMENDMENT NO. 1
TO
ANNUAL REPORT PURSUANT
TO
SECTION 13 OR 15(d)
OF THE SECURITIES ACT OF 1934
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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, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
TO
COMMISSION FILE NUMBER: 0-21425
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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 20815
CHEVY CHASE, MARYLAND (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
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 filed 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. [_]
As of February 18, 1998, the aggregate market value of the Common Stock held
by non-affiliates of the Registrant was not less than $256,598,875.
As of February 18, 1998, there were 9,673,978 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 28, 1998, WHICH WAS FILED
ON APRIL 24, 1998.
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PART I
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ITEM 1. BUSINESS
This Report contains certain statements that are "forward-looking
statements." Those statements include, among other things, the discussions of
the Company's business strategy and expectations concerning the Company's
market position, future operations, margins, profitability, funding sources,
liquidity and capital resources. Reliance on any forward-looking statement
involves risks and uncertainties, and although the Company believes that the
assumptions on which the forward-looking statements contained herein are based
are reasonable, any of the assumptions could prove to be inaccurate, and as a
result, the forward-looking statements based on those assumptions also could
be incorrect. In light of these and other uncertainties, the inclusion of a
forward-looking statement herein should not be regarded as a representation by
the Company that the Company's plans and objectives will be achieved.
GENERAL
HealthCare Financial Partners, Inc. (the "Company") is a specialty finance
company offering asset-based financing to healthcare service providers, with a
primary focus on clients operating in sub-markets of the healthcare industry,
including long-term care, home healthcare and physician practice. The Company
also provides asset-based financing to clients in other sub-markets of the
healthcare industry, including pharmacies, durable medical equipment
suppliers, hospitals, mental health providers, rehabilitation companies,
disease state management companies and other providers of finance and
management services to the healthcare industry. The Company targets small and
middle market healthcare service providers with financing needs in the
$100,000 to $10 million range in healthcare sub-markets which have favorable
characteristics for working capital financing, such as those where growth,
consolidation or restructuring appear likely in the near to medium term.
Management believes, based on its industry experience, that the Company's
healthcare industry expertise and specialized information systems, combined
with its responsiveness to clients, willingness to finance relatively small
transactions, and flexibility in structuring transactions, give it a
competitive advantage in its target markets over commercial banks, diversified
finance companies and traditional asset-based lenders.
From its inception in 1993 through December 31, 1997, the Company has
advanced $1.9 billion to its clients in over 560 transactions, including $1.2
billion advanced during the year ended December 31, 1997. The Company had 174
clients as of December 31, 1997, of which 60 were affiliates of one or more
other clients. The average amount outstanding per client or affiliated client
group at December 31, 1997 was approximately $1.5 million. For the years ended
December 31, 1995 and 1996, the Company's pro forma net income was $1.5
million and $3.0 million, respectively. For the year ended December 31, 1997,
the Company's consolidated net income was $8.0 million. For the year ended
December 31, 1997, the Company's yield on finance receivables (total interest
and fee income divided by average finance receivables for the period) was
16.8%.
At December 31, 1997, 69.2% of the Company's portfolio consisted of finance
receivables from businesses in the long-term care, home healthcare and
physician practice sub-markets. Estimated expenditures in 1997 for the long-
term care, home healthcare and physician practice sub-markets, which the
Company currently emphasizes, collectively constituted approximately $399.9
billion of the over $1.3 trillion U.S. healthcare market. These sub-markets
are highly fragmented, and companies operating in these sub-markets generally
have significant working capital finance requirements. The Company's clients
operating in these sub-markets tend to be smaller, growing companies with
limited access to traditional sources of working capital financing from
commercial 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.
1
The Company currently provides financing to its clients through (i)
revolving lines of credit secured by, and advances against, accounts
receivable (the "Accounts Receivable Program"), and (ii) term loans
(accompanied, in certain cases, by warrants) secured by first or second liens
on real estate, accounts receivable or other assets (the "STL Program"). Loans
under the STL Program are often made in conjunction with financing provided
under the Accounts Receivable Program. To date, the Company has not incurred
any credit losses in either program, although it periodically makes provisions
for possible future losses in the ordinary course of its business.
Under the Accounts Receivable Program, the accounts receivable are
obligations of third-party payors, such as federal and state Medicare and
Medicaid programs and other government financed programs ("Government
Programs"), commercial insurance companies, health maintenance organizations
and other managed healthcare concerns, self-insured corporations and, to a
limited extent, other healthcare service providers. The Company generally
advances only 65% to 85% of the Company's estimate of the net collectible
value of client receivables from third-party payors. The Company's credit risk
is mitigated by the Company's ownership of or security interest in the
remaining balance of such receivables ("Excess Collateral"). Clients continue
to bill and collect the accounts receivable, subject to lockbox collection and
sweep arrangements established for the benefit of the Company. The Company
uses its proprietary information systems to monitor its clients' accounts
receivable base on a daily basis and to assist its clients in improving and
streamlining their billing and collection efforts with respect to such
receivables. The Company conducts extensive due diligence on potential clients
for all its financing programs and follows written underwriting and credit
policies in providing financing to clients.
During 1997, the Company expanded the STL Program to increase its
penetration of targeted healthcare sub-markets. Through the STL Program, the
Company serves clients that have more diverse and complex financing needs,
such as healthcare facility acquisitions and expansions. In addition to the
collateral securing the loans, the Company generally has recourse to the
borrower. STL Program loans generally have terms of one to three years. As a
result of the Company's expansion of the STL Program, loans under that program
comprised 25.9% of finance receivables at December 31, 1997. While yields on
STL Program loans are generally lower than the yields generated from the
Accounts Receivable Program, some STL Program loans also include warrants and
other fees that may enhance their effective yields.
In order to enhance its underwriting capabilities, reduce its reliance on
third parties and increase its fee revenue, the Company established a new
subsidiary, HealthCare Analysis Corporation ("HCAC"), in March 1997. HCAC
specializes in due diligence, reimbursement consulting and audit services for
businesses in the healthcare industry. As of January 31, 1998, HCAC employed
17 healthcare auditors and had offices in Maryland, California, Georgia,
Massachusetts and New York. Prior to establishing HCAC, the Company used third
parties for the due diligence and audit work necessary in connection with
financings provided to its clients. By using HCAC to provide all of such
services, the Company has become more responsive to its clients while
benefitting from HCAC's high quality due diligence and consistent audit
documentation. Fees charged by HCAC for its services are passed on to such
clients and prospective clients.
The Company has developed low cost means of marketing its services on a
nationwide basis to selected healthcare sub-markets. The Company primarily
markets its services by telemarketing to prospective clients identified by the
Company, advertising in industry specific periodicals and participating in
industry trade shows. The Company also markets its services by developing
referral relationships with accountants, lawyers, venture capital firms,
billing and collection companies and investment banks. The Company's clients
also assist the Company's marketing efforts by providing referrals and
references.
The Company currently funds its operations through: (i) a $50 million
revolving line of credit (the "Bank Facility") with Fleet Capital Corporation
("Fleet"); (ii) an investment-grade asset-based commercial paper program (the
"CP Program") with ING Baring (U.S.) Capital Markets, Inc. ("ING") which
enables the Company to borrow up to $200 million; and (iii) a $100 million
revolving warehouse line of credit (the "Warehouse Facility") with Credit
Suisse First Boston ("First Boston").
2
RECENT DEVELOPMENTS
The Company's assets increased 168.9% from $101.3 million at January 1, 1997
to $272.4 million at December 31, 1997, and growth continued in early 1998 as
the Company's assets increased to $296.2 million at January 31, 1998.
On February 9, 1998, the Company announced that it had formed HealthCare
Financial Partners REIT, Inc., an entity that will elect to be taxed as a real
estate investment trust (the "HCFP REIT"). The HCFP REIT will be managed by a
newly formed subsidiary of the Company that will be compensated on a fee basis
for its management services. The Company's management believes that the HCFP
REIT represents an effective means for the Company to enhance its client
relationships by referring such clients' long-term real estate financing needs
to the HCFP REIT.
It is anticipated that the HCFP REIT will fund its operations with the
proceeds of an initial public offering (the "REIT Offering") (estimated to be
approximately $200 million, less underwriting discounts and commissions), and
that the Company will purchase up to a 9.9% ownership position in the HCFP
REIT in the REIT Offering. The Company's management anticipates that the HCFP
REIT will invest in financing products not offered by the Company, which
include permanent (long-term) mortgage loans, real estate, purchase-leaseback
transactions and other income-producing real estate-related assets in the
healthcare industry. The Company's management expects that the REIT Offering
will be consummated in the second quarter of 1998.
HEALTHCARE INDUSTRY
According to Healthcare Financing Administration ("HCFA") projected total
domestic healthcare expenditures for 1998 will exceed $1.2 trillion, or 15.2% of
gross domestic product, compared to expenditures of $428.2 billion or 10.2% of
gross domestic product in 1985. The annual compound growth rate of healthcare
expenditures from 1985 to 1998 was 8.7%. The breakdown of projected healthcare
expenditures for 1998 is as follows (dollars in billions):
PROJECTED 1998
HEALTHCARE INDUSTRY SEGMENT EXPENDITURES
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Acute-Care (hospitals)............................................ $ 449.0
Physician Services................................................ 258.9
Other Medical Non-Durables........................................ 105.5
Long-Term Care (nursing homes).................................... 102.6
Other Professional Services....................................... 85.2
Insurance-net healthcare costs.................................... 64.7
Dental Services................................................... 52.2
Home Healthcare................................................... 38.4
Government Public Health.......................................... 33.5
Other Personal Care............................................... 30.1
Research.......................................................... 17.9
Vision Products and Other Medical Durables........................ 16.2
Construction...................................................... 15.2
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Total............................................................ $1,269.4
========
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, home healthcare and
physician services; and (iv) advances in medical technology, which have
increased demand for healthcare services by expanding the types of diseases
that can be effectively treated and by extending the population's life
expectancy.
3
According to HCFA, total annual expenditures in the long-term care market
grew from $30.7 billion in 1985 to a projected $102.6 billion in 1998, and
are projected to grow to $121.2 billion by the year 2000. The Company's long-
term care clients include single nursing home operators (1-2 homes), small
nursing home chains (3-10 homes) and regional nursing home chains (11-50
homes). According to the Guide to the Nursing Home Industry published in 1996
by HCIA, Inc., a healthcare information services company, the long-term care
industry remains widely diversified and fragmented, with all nursing home
chains controlling only 34.5% of the market, and the largest 20 chains
constituting only 18.0% of the market.
According to HCFA, total annual home healthcare expenditures grew from $5.6
billion in 1985 to a projected $38.4 billion in 1998, and are projected to
grow to $45.9 billion by the year 2000. According to the National Association
of Health Care, the number of Medicare certified home health agencies has
grown from 5,983 in 1985 to 10,027 in 1996. The home healthcare business
remains highly fragmented, with only a small percentage of such companies
having any significant market share.
According to HCFA, total annual physician services expenditures, grew from
$83.6 billion in 1985 to a projected $258.9 billion in 1998, and are
projected to grow to $309.8 billion by the year 2000. The American Medical
Association ("AMA") reports that, as of December 31, 1996, approximately
580,706 physicians were actively involved in patient care in the U.S., with a
growing number participating in multispecialty or single-specialty groups.
According to the AMA, as of December 31, 1995, there were 19,787 physician
groups with three or more physicians, while over two-thirds of all physicians
still work in practices of one or two persons.
MARKET FOR HEALTHCARE ASSET-BASED FINANCING
Businesses generally utilize working capital or accounts receivable
financing to bridge the shortfall between the turnover of current assets and
the maturity of current liabilities. A business will often experience this
shortfall during periods of revenue growth because cash flow from new revenues
lags behind cash outlays required to produce new revenues. For example, a
growing labor intensive business will often need to fund payroll obligations
before payments are received on new services provided or products produced.
Many of the Company's clients are labor intensive and growing and therefore
require accounts receivable financing to fund their growth.
In addition to the Company, working capital financing for small and middle
market healthcare service providers is currently provided by several different
sources. Some commercial banks and diversified finance companies have formed
groups or divisions to provide working capital financing for healthcare
service providers. Such groups or divisions generally focus on providing
financing to companies with borrowing needs in excess of $5 million, and often
require more extensive collateral in addition to accounts receivable to secure
such financing. As a general 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
4
term loans as their businesses grow in order to support expanding
infrastructure requirements such as information systems, enhanced professional
management and marketing and business development costs. To address this
market need, the Company introduced the STL Program in late 1996.
Management believes that the growth in healthcare expenditures, the
consolidation of certain segments of the healthcare market, and the
reorganization of the healthcare delivery system (caused by both cost
containment pressures and the introduction of new products and services) will
have positive effects on the demand for the Company's services since they in
many cases will increase the working capital needs of the Company's clients.
Historically, these trends have affected different sub-markets of the
healthcare industry at different times. The Company expects these trends to
continue, thereby providing the Company with long-term growth opportunities.
STRATEGY
The Company's goal is to be the leading finance company in its targeted sub-
markets of the healthcare services industry and to become the primary source
for all of the financing needs of its clients. The Company's strategy for
growth is based on the following key elements:
Target sub-markets within the healthcare industry that have favorable
characteristics for working capital financing, such as fragmented sub-markets
experiencing growth, consolidation or restructuring. At December 31, 1997,
69.2% of the Company's portfolio consisted of finance receivables from
businesses in the long-term care, home healthcare and physician practice sub-
markets, and management believes that growth, consolidation and restructuring
in these sub-markets will continue to provide opportunities for the Company to
expand. By continuing to focus on these sub-markets, the Company seeks to
achieve attractive returns while controlling overall credit risk. In the
future different healthcare sub-markets may experience increased demand for
working capital and the Company intends to be in a position to move into these
new markets as opportunities arise.
Focus on healthcare service providers with financing needs of between
$100,000 and $10 million, a market that has been underserved by commercial
banks, diversified finance companies, traditional asset-based lenders and
other competitors of the Company. Most commercial banks, diversified finance
companies and traditional asset-based lenders have typically focused on
providing financing to companies with borrowing needs in excess of $5 million.
The Company believes that its target market for transactions between $100,000
and $10 million is much larger, in terms of the number of available financing
opportunities, and is less competitive than the market servicing larger
borrowing needs, thereby producing growth opportunities at attractive rates.
Become the primary source for all of the financing needs of clients by
introducing new financial products to leverage the Company's existing
expertise in healthcare finance and its origination, underwriting and
servicing capabilities within its target sub-markets. The Company employs
significant resources in the origination, underwriting and servicing of
clients in its target sub-markets. To further deepen its penetration of these
sub-markets and to meet the changing financial needs of new and existing
clients with a broader array of financial products, the Company began in late
1996 to offer additional financing products through the STL Program. The
Company expects to continue to selectively introduce new products to existing
and new clients, depending upon the needs of its clients, general economic
conditions, the Company's resources and other relevant factors. In some cases,
the Company anticipates that new products may be introduced as part of
cooperative arrangements with other lenders where the origination and
servicing relationship will remain with the Company.
Increase the Company's offering of fee-based and value-added services to
clients such as the reimbursement consulting and clinical auditing services
provided by HCAC. The Company constantly seeks to increase the range of fee-
based services which it offers its clients in order to (i) reduce its
dependence on profits derived from the difference between the yield on finance
receivables and its cost of funds, (ii) supplement its total revenues by the
amount of such fees, and (iii) offer a broader range of services to its
clients. The fee-generating capabilities of HCAC and the HCFP REIT (via the
management agreement, if the REIT Offering is consummated) are expected to
increase fee income of the Company.
5
Seek to make strategic acquisitions of and investments in businesses that
are engaged in the same or similar business as the Company or that are engaged
in lines of business complementary to the Company's business. Because of the
growth of the Company's core finance receivables business, the Company
increasingly is offered opportunities to invest in, or acquire interests in,
healthcare service businesses that are involved in financial services,
receivables management, outsourcing, or financial and administrative
infrastructure development activities. The Company believes that businesses in
these areas are synergistic with the Company's core lending business and could
allow the Company to leverage its expertise in healthcare to meet the needs of
the Company's customer base. See "--Recent Developments." The Company will
also seek to take advantage of appropriate opportunities to acquire portfolios
of loans backed by healthcare receivables and to invest in or acquire
companies in the same or similar lines of business as the Company.
Enhance the Company's credit risk management and improve servicing
capabilities through continued development of information management
systems. The Company has developed proprietary information systems that
effectively monitor its assets and which also serve as valuable tools to the
Company's smaller less sophisticated clients in managing their working capital
resources and streamlining their billing and collection efforts. The Company
believes that this "servicing" capability provides a competitive advantage by
strengthening relationships with clients, providing early identification of
dilution of client accounts receivable and increasing the Company's
understanding of its clients' operational needs.
FINANCING PROGRAMS
The Company provides asset-based financing to healthcare service providers
through the Accounts Receivable Program and the STL Program.
Accounts Receivable Program. Under the Accounts Receivable Program, the
Company offers healthcare service providers revolving lines of credit secured
by, and advances against, accounts receivable. Revolving lines of credit
offered through the Accounts Receivable Program permit a client to borrow, on
a revolving basis, 65% to 85% of the estimated net collectible value of the
client's accounts receivable due from third-party payors, which are pledged to
the Company. The Company charges its clients a base floating interest rate
ranging from one to three percent above the then applicable prime rate and a
variety of other fees, which may include a loan management fee, a commitment
fee, a set-up fee and an unused line fee, which fees collectively range from
one to four percent. The Company targets larger healthcare service providers
for revolving lines of credit secured by accounts receivable, for which the
minimum commitment amount is generally $1 million and the maximum commitment
amount is generally $10 million. Such financings are recourse to the client
and generally have a term of one to three years.
In connection with advances against receivables, the Company purchases, on a
revolving basis, a specified batch of a client's accounts receivable owed to
such client from third-party payors. The purchase price for each batch of
receivables is the estimated net collectible value of such batch less a
purchase discount, comprised of funding and servicing fees. The purchase
discount can be either a onetime fee for each batch of receivables purchased
or a periodic fee based on the average outstanding balance of a batch of
receivables ranging from one to five percent of the net collectible value of
such batch. With each purchase of a batch of receivables, the Company advances
to the client 65% to 85% of the purchase price (which is equal to aggregate
net collectible value minus a purchase discount) of such batch. The Company
assigns a collection period to batches of receivables purchased, which period
generally ranges from 60 to 120 days from the purchase date depending on the
type of receivables purchased. The excess of the purchase price for a batch of
receivables over the amount advanced with respect to such batch (a "client
holdback") is treated as a reserve and provides additional security to the
Company. The Company targets smaller healthcare service providers for
financings involving advances against receivables. Commitments for such
financings are generally less than $1 million and terms are generally .7 for
one year with renewal options.
As of December 31, 1997, the Company was financing 161 clients in its
Accounts Receivable Program, and the finance receivables originated through
the Accounts Receivable Program constituted 74.1% of total finance
receivables. The yield on finance receivables generated under the Accounts
Receivable Program for the year ended December 31, 1997 was 17.0%. Of the
Company's finance receivables in its Accounts Receivables Program at December
31, 1997, 32.6% represented payables by commercial insurers or other non-
governmental third-party payors, 25.9% represented payables from Medicare and
41.5% represented payables from Medicaid.
6
STL Program. Under the STL Program, the Company provides its clients with
term loans for up to three years secured by first or second liens on real
estate, accounts receivable or other assets, such as equipment, inventory and
stock. The Company introduced the STL Program in late 1996, in an effort to
service clients' financing needs which the Company could not provide through
its Accounts Receivable Program. Such loans have been made to clients to
finance acquisitions and expansions of existing healthcare facilities, as well
as to provide working capital, and are often provided to clients in
conjunction with financing under the Accounts Receivable Program. Such loans
are generally recourse to the borrower.
At December 31, 1997, the Company had $65.0 million in STL Program loans
outstanding. The yield on finance receivables generated under the STL Program
for the year ended December 31, 1997, was 16.3%. At December 31, 1997, STL
Program loans comprised 25.9% of the Company's total finance receivables.
While yields on such loans are generally lower than the yields generated by
the Accounts Receivable Program, some term loans under the STL Program also
include warrants or success fees that may enhance the effective yield on such
loans.
The following table sets forth the Company's portfolio activity at or for
the periods indicated:
PORTFOLIO ACTIVITY
(DOLLARS IN THOUSANDS)
AS OF AND FOR THE QUARTERS ENDED
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MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1996 1996 1996 1996 1997 1997 1997 1997
--------- -------- --------- -------- --------- -------- --------- --------
Balance Outstanding:
AR Program............. $57,448 $65,914 $79,567 $86,876 $104,865 $118,960 $172,171 $185,728
STL Program............ -- -- -- 2,453 11,923 33,420 46,331 64,961
Total AR Program
Clients................ 90 98 112 129 137 145 171 161
New AR Program Clients.. 23 14 15 35 26 29 27 28
Total STL Program
Clients................ -- -- -- 8 20 25 32 39
New STL Program
Clients................ -- -- -- -- 14 8 9 10
Avg. Finance
Receivables/ Client:
AR Program............. $ 638 $ 673 $ 710 $ 673 $ 765 $ 820 $ 1,007 $ 1,154
STL Program............ -- -- -- 307 596 1,337 1,448 1,666
- --------
*"AR" means Accounts Receivable
OPERATIONS
Portfolio Development. The Company has established a portfolio development
group which is primarily responsible for new business generation, including
both marketing and underwriting.
Marketing. The Company has developed low cost means of marketing its
services on a nationwide basis to selected healthcare sub-markets. The Company
primarily markets its services by telemarketing to prospective clients
identified by the Company, advertising in industry specific periodicals and
participating in industry trade shows. The Company's clients also assist the
Company's marketing efforts by providing referrals and references. The Company
has and will continue to rely primarily on direct marketing efforts to
generate new clients for its services.
The Company also markets its services by developing referral relationships
with accountants, lawyers, venture capital firms, billing and collection
companies and investment banks (which typically are professionals focusing on
the healthcare industry and who have a pre-existing relationship with a
prospective client). The Company usually does not pay a fee for referrals from
professional firms. However, the Company has closed transactions with clients
through referrals from independent brokers that generally specialize in the
healthcare industry, which brokers have been paid a one-time brokerage
commission upon the closing of a transaction. While not a primary focus of its
marketing efforts, the Company expects to continue to generate referrals
through independent brokers.
7
At January 31, 1998, the Company employed a staff of 11 sales and marketing
representatives at its headquarters in Chevy Chase, Maryland. In November
1997, the Company opened an office for marketing in Dallas, Texas, and
currently has one employee in its Dallas office. Marketing personnel are
compensated with a base salary plus performance bonuses.
Underwriting. The Company follows written underwriting and credit policies,
and its credit committee, consisting of senior officers of the Company, must
unanimously approve each transaction which is proposed for the Accounts
Receivable Program or STL Program with a prospective client. The Company's
underwriting policies require a due diligence review of the prospective
client, its principals, its financial condition and strategic position,
including a review of all available financial statements and other financial
information, legal documentation and operational matters. The Company's due
diligence review also includes a detailed examination of a prospective
client's accounts receivable, accounts payable, billing and collection systems
and procedures, management information systems and real and personal property
and other collateral. Such a review is conducted after the Company and the
prospective client execute a non-binding term sheet, which requires the
prospective client to pay a due diligence deposit to defray the Company's
expenses. The Company's due diligence review is organized by the Company's
underwriters and supervised by the sponsoring member of the credit committee.
At January 31, 1998, the Company employed four underwriters at its
headquarters in Maryland. HCAC independently confirms certain matters with
respect to the prospective client's business and the collectibility of its
accounts receivable and any other collateral by conducting public record
searches, and, where appropriate, by contacting third-party payors about the
prospective client's receivables. For loans primarily secured by real
property, the Company requires third-party appraisals and Phase I
environmental surveys prior to making such loans.
In order to determine its estimate of the net collectible value of a
prospective client's accounts receivable, HCAC conducts extensive due
diligence to evaluate the receivables likely to be paid within a defined
collection period. This evaluation typically includes: (i) a review of
historical collections by type of third-party payor; (ii) a review of
remittance advice and information relating to claim denials (including
explanations of benefits); (iii) a review of claims files and related medical
records; and (iv) an analysis of billing and collections staff and procedures.
HCAC may also periodically employ third-party claim verifiers to assist it in
determining the net collectible value of a client's accounts receivable. Claim
verifiers include healthcare billing and collection companies, healthcare
accounting firms with expertise in reviewing cost reports filed with Medicaid
and Medicare, and specialized consultants with expertise in certain sub-
markets of the healthcare industry. Claim verifiers are pre-approved by the
Company's credit committee. When deemed necessary by the Company for credit
approval, the Company may obtain corporate or personal guaranties or other
collateral in connection with the closing of a transaction.
Loan Administration. The Company has established a loan administration group
which is primarily responsible for monitoring the performance of its loans, as
well as its collection procedures.
Monitoring. The Company monitors the collections of client accounts
receivable and its finance receivables on a daily basis. Each client is
assigned an account manager, who receives draw and advance requests, posts
collections and serves as the primary contact between the Company and the
client. Each client is also assigned to a loan officer who is primarily
responsible for monitoring that client's financial condition and the adequacy
of the Company's collateral with respect to loans to such client. All draw or
advance requests must be approved by the client's loan officer and by the
Company's senior credit officer or a portfolio manager. At January 31, 1998,
the Company employed ten account managers and four loan officers in its
Maryland headquarters. The Company's proprietary information system enables
the Company to monitor each client's account, as well as permit management to
evaluate and mitigate against risks on a portfolio basis. See "--Information
Systems." In addition, the Company conducts audits of its clients' billing and
collection procedures, financial condition and operating strategies at least
annually, and more frequently if warranted, particularly with respect to the
loans with outstanding balances of more than $1.5 million, where audits are
usually conducted on a quarterly basis. Such audits are conducted by HCAC.
8
The Company grades performing STL Program loans on a scale of 1 to 4, with
grade 1 assigned to those loans involving the least amount of risk. The
grading system is intended to reflect the performance of a borrower's
business, the collateral coverage of the loan and other factors considered
relevant. Each loan is initially graded based on the financial performance of
the borrower and other specific risk factors associated with the borrower,
including growth, collateral coverage, capitalization, quality of management,
value of intangible assets and availability of working capital. All new loans
are assigned a grade 3 for a period of six months in the absence of an
extraordinary event during that period. After the initial six months, loans
are assigned a grade of 1 to 4. Thereafter, all loans are reviewed and graded
on at least a quarterly basis. Performing loans are generally serviced by the
Company's account managers, with loans in grade 4 being serviced in some cases
by a member of the Company's loan workout group, which currently consists of a
loan officer and the Company's Senior Credit Officer.
Non-performing loans are graded on a scale of N1 or N2. Grade N1 is assigned
to a non-performing loan which the Company believes may be brought back into
compliance by the borrower's current management. Non-performing loans are
placed on the Company's watch list and are serviced by a member of the loan
workout group. Grade N2 is assigned to a loan that the Company believes cannot
be brought back into compliance. Such loans are liquidated either informally
or through legal proceedings.
Collection Procedures. The Company's cash collection procedures vary by (i)
the type of program provided by the Company and (ii) the type of accounts
receivable due and owing to clients from either insurance companies and health
maintenance organizations ("Commercial Insurers"), Government Programs, or in
certain limited circumstances, other healthcare service providers.
Receivables due and owing from Government Programs are subject to certain
laws and regulations not applicable to Commercial Insurers. Except in certain
limited cases, Medicare and Medicaid laws and regulations provide that
payments for services rendered under Government Programs can only be made to
the healthcare service provider that has rendered the services.
With respect to the Accounts Receivable Program, clients continue to bill
and collect accounts receivable in the ordinary course of business; provided,
however, that subject to certain limitations applicable to Government Program-
related receivables, the Company retains the right to assume the billing and
collection process upon notice to the client. The Company maintains a general
lockbox in the Company's name into which payments with respect to all
receivables purchased from clients in the Accounts Receivable Program, other
than Government Program-related receivables, are required to be remitted. If a
client in the Accounts Receivable Program generates Government Program-related
receivables, the client is required to establish a lockbox in the client's
name into which payments on such receivables are to be directed. Balances from
all lockboxes maintained in connection with the Accounts Receivable Program
are swept on a daily basis to the Company.
With respect to the STL Program, clients make periodic interest and/or
principal payments, generally monthly. The Company will undertake collection
efforts if such payments are not made on a timely basis. Such efforts may
include acceleration of amounts due under the loan and institution of
foreclosure proceedings with respect to any property securing the loan. In
addition, if the loan is secured by personal guaranties, the Company may
pursue remedies to collect amounts owed by the guarantors.
Documentation. The Company's documentation for the Accounts Receivable and
STL Programs is described below.
Accounts Receivable Program. Revolving lines of credit secured by accounts
receivable are made pursuant to a loan and security agreement (the "AR Loan
Agreement"), a note, and ancillary 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.
9
The AR Loan Agreement contains a number of negative covenants, including
covenants limiting additional borrowings, prohibiting the client's ability to
pledge assets, restricting payment by the client of dividends or management
fees or returning capital to investors, and imposing minimum net worth and, if
applicable, minimum census requirements. In the event of a client default, all
debt owing under the AR Loan Agreement may be accelerated and the Company may
exercise its rights, including foreclosing on the collateral.
Advances against accounts receivable under the Accounts Receivable Program
are made pursuant to a Receivables Purchase and Sale Agreement (the "AR
Agreement") and are structured as purchases of eligible accounts receivable
designated from time to time on a "batch" basis. AR Agreements provide for the
Company's purchase of eligible accounts receivable offered by the client from
time to time to the Company. AR Agreements generally have stated terms of one
to three years, with automatic one-year extensions. The client is required to
sell to the Company a minimum amount of eligible accounts receivable each
month during the term of an AR Agreement; however, the Company's total
investment in eligible accounts receivable under an AR Agreement is limited to
a specified "commitment" amount. The Company may accept or reject in its
discretion any portion of eligible accounts receivable offered for sale by the
client to the Company. Although accounts receivable purchased by the Company
under the Accounts Receivable Program are assigned to the Company pursuant to
the AR Agreement, the client retains its rights to receive payment and to make
claims with respect to Government Program-related receivables.
The purchase price for each batch of eligible accounts receivable under the
AR Agreements is the estimated net collectible value of such receivables less
a purchase discount, comprised of funding and servicing fees. An amount equal
to 65% to 85% of the purchase price is paid to the client; the Company retains
the balance of the purchase price as a client holdback, held as additional
security for the client's obligations under the AR Agreement. The client
holdback is released to the client (i) upon receipt by the Company of payments
relating to the receivables in an amount equal to the estimated net
collectible value of the receivables or (ii) upon expiration of the collection
period assigned to the respective batch of receivables, except that if the
Company has not received payments at least equal to the purchase price for the
receivables, then the Company may at its option either (x) offset any
shortfall against client holdbacks relating to other batches or from amounts
due to the client from the sale of other batches, or (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 the
type of available collateral. Such documentation generally includes a term
loan agreement and promissory note (the "STL Loan Agreement") and a mortgage
and security agreement with respect to the collateral for the loan. The STL
Loan Agreement contains financial and other covenants similar to those in the
AR Loan Agreement. In the event of a client default, all debt owed under the
STL Loan Agreement may be accelerated and the Company may exercise its rights,
including foreclosing on the collateral. The Company requires an appraisal and
a Phase I environmental survey for real property collateral securing an STL
Program Loan.
STL Program loans often include provision for warrants or other equity
interests in the borrower. Documentation of the warrant or other equity
interest may include provisions relating to, among other things, anti-dilution
protection, registration rights, put and call features and representation of
the Company on the board of directors or similar body of the borrower in
certain circumstances.
10
CLIENTS
The Company's client base is diversified. As of December 31, 1997, the
Company was servicing clients located in 37 states across the country, in a
number of different sub-markets of the healthcare industry, with a
concentration in the long-term care, home healthcare and physician practice
sub-markets.
PORTFOLIO ANALYSIS
AS OF DECEMBER 31, 1997
------------------------------------------
NUMBER
OF PERCENT OF FINANCE PERCENT OF
CLIENTS CLIENTS RECEIVABLES PORTFOLIO
------- ---------- ------------ ----------
INDUSTRY GROUP
Long Term Care...................... 62 35.6% $104,992,876 41.9%
Home Healthcare..................... 42 24.1 42,616,475 17.0
Physician Practice.................. 25 14.4 25,773,842 10.3
Mental Health....................... 12 6.9 23,931,715 9.5
Hospital............................ 7 4.0 16,331,760 6.5
Rehabilitation...................... 11 6.3 14,013,363 5.6
Other............................... 6 3.4 9,483,990 3.8
Disease State Management............ 2 1.2 6,213,990 2.5
Ambulatory Services................. 3 1.7 4,270,334 1.7
Diagnostic.......................... 2 1.2 2,112,557 0.8
Durable Medical Equipment........... 2 1.2 947,236 0.4
--- ----- ------------ -----
Total............................. 174 100.0% $250,688,138 100.0%
=== ===== ============ =====
PROGRAM BREAKDOWN(1)
Accounts Receivable Program......... 161 80.5% $185,727,628 74.1%
STL Program......................... 39 19.5 64,960,510 25.9
--- ----- ------------ -----
Total............................. 200 100.0% $250,688,138 100.0%
=== ===== ============ =====
- --------
(1) At December 31, 1997, 26 clients were in both the Accounts Receivable and
STL Programs.
CAPITAL RESOURCES
Sources of capital available to the Company to fund finance receivables
under the Accounts Receivable and STL Programs include the Bank Facility, the
CP Facility, the Warehouse Facility and stockholders' equity.
Bank Facility. The Bank Facility is a revolving line of credit for up to $50
million. The interest rates payable by the Company under the Bank Facility
adjust, based on Fleet's prime rate; however, the Company has the option to
borrow any portion of the Bank Facility in an integral multiple of $500,000
based on the one-month, two-month, three-month or six-month LIBOR plus 2.75%.
The Bank Facility contains certain financial covenants which must be
maintained by the Company in order to obtain funds. The expiration date for
the Bank Facility is March 29, 2002, subject to automatic renewal for one-year
periods thereafter unless terminated by either party.
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
11
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.
CREDIT LOSS POLICY AND EXPERIENCE
The Company regularly reviews its outstanding finance receivables to
determine the adequacy of its allowance for losses on receivables. To date,
the Company has not experienced any credit losses. The allowance for losses on
receivables is maintained at an amount estimated to be sufficient to absorb
future losses, net of recoveries, inherent in the finance receivables. In
evaluating the adequacy of the allowance, management of the Company considers
trends in healthcare sub-markets, past-due accounts, historical charge-off and
recovery rates, credit risk indicators, economic conditions, on-going credit
evaluations, overall portfolio size, average client balances, Excess
Collateral, real estate collateral valuations and underwriting policies, among
other items. As of December 31, 1996, the Company's general reserve was $1.1
million or 1.2% of finance receivables; at December 31, 1997, it was $2.7
million or 1.1% of finance receivables. To the extent that management deems
specific finance receivable advances to be wholly or partially uncollectible,
the Company establishes a specific loss reserve equal to such amount. At
December 31, 1996 and 1997, the Company had no specific reserves. In the
opinion of management, based on a review of the Company's portfolio, the
allowance for losses on receivables is adequate at this time, although there
can be no assurance that such reserve will be adequate in the future.
INFORMATION SYSTEMS
The Company owns a proprietary information system to monitor the Account
Receivable and STL Programs, which it refers to as the Receivables Tracking
System (the "RTS"). The RTS was developed by Creative Information Systems,
Inc., a stockholder of the Company. The RTS gives the Company the ability to
track and reconcile receivables that the Company loans or advances against
under the Accounts Receivable Program and loans made under the STL Program.
With respect to the loans under the Accounts Receivable and STL Programs,
the amount of any advances, collections and adjustments are entered manually
into the RTS by the Company's account managers on a daily basis. With respect
to advances against client receivables under the Accounts Receivable Program,
certain client parameters are entered manually into the RTS, and more detailed
information on each batch of receivables is generally entered electronically
based on pre-established formats tailored to the client's software systems.
Upon the collection of funds advanced, information about such collections are
entered into the RTS by the Company's account managers who then apply the
funds by directing the RTS to search its data base to locate the receivable
and batch that has received a payment.
The RTS generates daily, weekly and monthly reports summarizing the current
status of each batch of receivables in the Accounts Receivable Program, and
indicating draws and collections, trend analysis, and interest and fee charges
for management's review. The RTS is also able to generate reports for the
Company's lenders with respect to pledged loans and batches of receivables,
along with concentrations in the Accounts Receivable Program portfolios by
client and third-party payor type.
Certain reports generated through the RTS, including cash application
detail, batch summary and trend analysis reports, can also be used to assist
the Company's clients in monitoring changes in their cash flow and managing
the growth of their businesses. These reports are provided to all of the
Company's clients on a weekly basis, and are generally relied upon as a
management tool more frequently by smaller clients in the Accounts Receivable
Program, which tend to have less sophisticated management information systems.
COMPETITION
The Company encounters significant competition in its healthcare finance
business from numerous commercial banks, diversified finance companies, asset-
based lenders and specialty healthcare finance companies. Additionally,
healthcare service providers often seek alternative sources of financing from
a number of sources, including venture capital firms, small business
investment companies, suppliers and individuals. As a
12
result, the Company competes with a significant number of local and regional
sources of financing and several large national competitors. Many of these
competitors have greater financial and other resources than the Company and
may have significantly lower cost of funds. Competition can take many forms,
including, among others, the pricing of financing, transaction structuring
(e.g., securitization vs. portfolio lending), timeliness and responsiveness in
processing a client's financing application, and customer service.
GOVERNMENT REGULATION
The Company's healthcare finance business is subject to federal and state
regulation and supervision and is required to be licensed or registered in
various states. In addition, the Company is subject to applicable usury and
other similar laws in the jurisdictions where the Company operates. These laws
generally limit the amount of interest and other fees and charges that a
lender may contract for, charge or receive in connection with a loan.
Applicable local law typically establishes penalties for violations of these
laws in that jurisdiction. These penalties could include the forfeiture to the
lender of usurious interest contracted for, charged or received and, in some
cases, all principal as well as all interest and other charges that the lender
has charged or received.
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, a state Medicaid program must provide for a
public process for determination of Medicaid rates of payment for nursing
facility services, under which proposed rates, the methodologies underlying
the establishment of such rates, and justification for the proposed rates are
published, and which gives providers, beneficiaries and other concerned state
residents a reasonable opportunity for review and comment on the proposed
rates, methodologies and justifications. States are actively seeking ways to
reduce Medicaid spending for healthcare by such methods as capitated payments
and substantial reductions in reimbursement rates. The BBA also requires that
nursing homes transition to a prospective payment system under the Medicare
program during a three-year "transition period" commencing with the first cost
reporting period beginning on or after July 1, 1998. The BBA also contains
several new antifraud provisions. Given the recent enactment of the BBA, the
Company is unable to predict the impact of the BBA and potential changes in
state Medicaid reimbursement methodologies on the revenues of its clients.
In addition to the inability of the Company to directly collect receivables
under Government Programs and the right of payors under such programs to
offset against unrelated receivables, the Company's healthcare finance
business is indirectly affected by healthcare regulation to the extent that
any of its clients' failure to comply with such regulation affects such
clients' ability to collect receivables or repay loans made by the Company.
The most significant healthcare regulations that could potentially affect the
Company are: (i) certificate of need regulation, which many states require
upon the provision of new health services, particularly for long-term care and
home healthcare companies; (ii) Medicare--Medicaid fraud and abuse statutes,
which prohibit, among other things, the offering, payment, solicitation, or
receipt of remuneration, directly or indirectly, as an inducement to refer
patients to facilities owned by physicians if such facilities receive
reimbursement from Medicare or Medicaid; and (iii) other prohibitions of
physician self-referral that have been promulgated by the states.
Certificate of Need Regulation. Many states regulate the provision of new
healthcare service or acquisition of healthcare equipment through Certificate
of Need or similar programs. The Company believes these requirements have had
a limited effect on its business, although there can be no assurance that
future changes in those laws will not adversely affect the Company.
Additionally, repeal of existing regulations of this type in
13
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 per-formed by a clinical laboratory. The Comprehensive Physician
Ownership and Referral Act (H.R. 345), which was enacted by Congress in 1993
as part of the Deficit Reduction Package, is more comprehensive than H.R. 5198
and covers additional medical services including medical imaging radiation
therapy, physical rehabilitation and others. A variety of existing and pending
state laws prohibit or limit a physician from referring patients to a facility
in which that physician has a proprietary or ownership interest. Many states
also have laws similar to the Medicare fraud and abuse statute which are
designed to prevent the receipt or payment of consideration in connection with
the referral of a patient. Accounts receivable resulting from a referral in
violation of these laws could be denied from payment which could adversely
affect the Company's clients and the Company.
EMPLOYEES
As of January 31, 1998, the Company employed 71 people on a full-time basis.
The Company believes that its relations with employees are good.
ITEM 2. PROPERTIES
The Company's headquarters occupy approximately 15,600 square feet at 2
Wisconsin Circle, Chevy Chase, Maryland. This space is provided under the
terms of a lease that expires in January, 2003, with a five-year renewal
option. The current cost is approximately $40,000 per month. In addition, as
of December 31, 1997, the Company leased a small marketing office in Dallas,
Texas at a monthly rental of approximately $870. HCAC rents approximately
1,000 square feet in its Orchard Park, New York office paying $700 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
14
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Common Stock is listed for trading on the Nasdaq National Market under
the trading symbol "HCFP." The following table sets forth the high and low
sales prices of the Common Stock as reported by the Nasdaq National Market for
each of the calendar quarters indicated:
QUARTER HIGH LOW
------- ------- -------
1996
Fourth (from November 21, 1996)........................... $14.000 $12.125
1997
First..................................................... $19.000 $12.375
Second.................................................... $20.500 $ 9.750
Third..................................................... $31.500 $19.000
Fourth.................................................... $37.375 $28.875
1998
First (through February 18, 1998)......................... $42.375 $32.500
On February 18, 1998, the closing sale price of the Common Stock, as
reported on the Nasdaq National Masrket, was $38.125.
As of December 31, 1997, there were 9,670,291 shares outstanding.
As of January 31, 1998 there were 33 record holders of the Company's common
stock and approximately 832 beneficiary owners.
DIVIDEND POLICY
The Company intends to retain all future earnings for the operation and
expansion of its business, and does not anticipate paying cash dividends in
the foreseeable future. Any future determination as to the payment of cash
dividends will depend upon the Company's results of operations, financial
condition and capital requirements and any regulatory restrictions or
restrictions under credit agreements or other funding sources of the Company
existing from time to time, as well as other matters which the Company's Board
of Directors may consider. In addition, the Bank Facility and the CP Facility
currently, and financing arrangements in the future may, impose minimum net
worth covenants, debt-to-equity covenants and other limitations that could
restrict the Company's ability to pay dividends.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected historical financial data. The
selected historical statements of operations and balance sheet data presented
below were derived from the combined financial statements of HealthCare
Financial Partners, Inc. and HealthPartners DEL, L.P. (a former partnership,
"DEL") as of and for the period from inception (April 22, 1993) through
December 31, 1993, and for the years ended December 31, 1994 and 1995, and the
consolidated financial statements of HealthCare Financial Partners, Inc. as of
and for the years ended December 31, 1996 and 1997. 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.
15
HEALTHCARE FINANCIAL PARTNERS, INC.
(AND DEL FROM INCEPTION THROUGH
DECEMBER 31, 1995)
AT OR FOR PERIOD
FROM INCEPTION AT OR FOR THE
(APRIL 22, 1993) YEAR ENDED
THROUGH DECEMBER 31,
DECEMBER 31, -----------------------------------------------------
1993 1994 1995 1996 1997
---------------- ---------- ---------- -------------- --------------
(COMBINED) (COMBINED) (COMBINED) (CONSOLIDATED) (CONSOLIDATED)
STATEMENT OF OPERATIONS
DATA
Fee and interest
income................. $ 856 $ 13,036 $ 565,512 $12,015,971 $ 27,745,077
Interest expense........ 3,975 79,671 3,408,562 7,921,330
--------- ---------- ----------- ------------
Net fee and interest
income................ 856 9,061 485,841 8,607,409 19,823,747
Provision for losses on
receivables........... 18,745 2,102 45,993 656,116 1,315,122
--------- ---------- ----------- ------------
Net fee and interest
income after provision
for losses on
receivables........... (17,889) 6,959 439,848 7,951,293 18,508,625
Operating expenses..... 30,204 439,514 1,472,240 3,326,994 7,219,372
Other income........... 23,772 106,609 1,221,837 233,982 1,582,852
-------- --------- ---------- ----------- ------------
Income (loss) before
deduction of
preacquisition
earnings and income
taxes (benefit)....... (24,321) (325,946) 189,445 4,858,281 12,872,105
Deduction of
preacquisition
earnings.............. 4,289,859
Income taxes
(benefit)............. (5,892) 38,860 4,877,257
---------- ----------- ------------
Net income (loss)...... $(24,321) $(325,946) $ 195,337 $ 529,562 $ 7,994,848
======== ========= ========== =========== ============
Basic earnings per
share(1).............. $ .13 $ .99
Weighted average shares
outstanding(1)........ 4,030,416 8,087,857
Diluted earnings per
share(1).............. $ .13 $ .96
Diluted weighted
averages shares
outstanding(1)........ 4,055,572 8,310,111
BALANCE SHEET DATA
Finance receivables.... $115,454 $ 279,148 $2,552,441 $89,328,928 $250,688,138
Allowance for losses on
receivables........... 18,475 20,847 66,840 1,078,992 2,654,114
Total assets........... 329,588 344,850 2,669,939 101,273,089 272,354,946
Client holdbacks....... 21,729 112,374 814,607 11,739,326 6,173,260
Line of credit......... 1,433,542 21,829,737 40,157,180
Commercial paper
facility.............. 37,209,098 101,179,354
Warehouse facility..... 27,932,520
Total liabilities...... 203,534 558,759 2,795,404 74,552,113 184,524,758
Total stockholders'
equity (deficit)...... 126,054 (213,909) (125,465) 26,720,976 87,830,188
(1) Historical earnings per share for periods prior to 1996 are not presented
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 net
income per share information.
16
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, home healthcare 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. Revolving lines of credit are
characterized by lower overall yields than advances against accounts
receivable, but provide the Company with the opportunity to expand its range
of potential clients while reducing costs as a percentage of finance
receivables. 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 17.0% for the year ended December 31, 1997.
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. In addition to the
collateral securing the loans, the Company generally has recourse to the
borrower. STL Program loans generally have terms of one to three years. As a
result of the Company's expansion of the STL Program, loans under that program
comprised 25.9% of finance receivables at December 31, 1997. The yield on
finance receivables under the STL Program for the year ended December 31, 1997
was 16.3%. 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.
The Company has implemented a program designed to ensure that all software
used by the Company in connection with its services will manage and manipulate
data involving the transition of dates from 1999 to 2000 without functional or
data abnormality and without inaccurate results related to such data. The
Company does not anticipate that execution of this program will have a
material effect on its operating results. However, the Company believes that
some of its clients and payors may not have implemented such programs. The
failure by clients and payors to implement necessary software changes may
disrupt client billing and reimbursement cycles and adversely affect clients'
cash flow and collectability of pledged accounts receivable. The Company is
unable to predict the effects that any such failure may have on the financial
condition and results of the operations of the Company.
The Company is a Delaware corporation which was organized in April, 1993 and
commenced its business in September, 1993. Until September 13, 1996 the
Company's name was HealthPartners Financial Corporation. On that date its
corporate name was changed to HealthCare Financial Partners, Inc.
THE REORGANIZATION
Prior to the 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.
17
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.
PRO FORMA FINANCIAL INFORMATION
In recognition of the Reorganization, management believes a discussion and
analysis of the Company's financial condition and results of operations is
most effectively presented on a pro forma basis for the years before 1997. To
provide a context for this, the following information reflects pro forma
statements of operations for each of the years in the two year period ended
December 31, 1996 as if the Reorganization had occurred as of the beginning of
that operating period.
18
PRO FORMA STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
--------------------------------------------------
HEALTHCARE FINANCIAL
PARTNERS, INC.
(CONSOLIDATED) PRO FORMA PRO FORMA,
(HISTORICAL) ADJUSTMENTS (1) AS ADJUSTED
-------------------- --------------- -----------
Fee and interest income
Fee income................. $ 8,518,215 $8,518,215
Interest income............ 3,497,756 3,497,756
----------- ----------
Total fee and interest
income.................... 12,015,971 12,015,971
Interest expense............ 3,408,562 3,408,562
----------- ----------
Net fee and interest
income.................... 8,607,409 8,607,409
Provision for losses on
receivables................ 656,116 656,116
----------- ----------
Net fee and interest income
after provision for losses
on receivables............. 7,951,293 7,951,293
Operating expenses.......... 3,326,994 3,326,994
Other income................ 233,982 233,982
Income before deduction of
preacquisition earnings and
income taxes............... 4,858,281 4,858,281
Deduction of preacquisition
earnings................... 4,289,859 $(4,289,859)(a)
----------- ----------- ----------
Income before income taxes.. 568,422 4,289,859 4,858,281
Income taxes................ 38,860 1,855,870 (b) 1,894,730
----------- ----------- ----------
Net income.................. $ 529,562 $ 2,433,989 $2,963,551
=========== =========== ==========
Pro forma 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
==========
- --------
(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.
19
FOR THE YEAR ENDED DECEMBER 31, 1995
----------------------------------------------------------------
HEALTHCARE FINANCIAL
PARTNERS, INC.
AND DEL
(COMBINED) FUNDING PRO FORMA PRO FORMA,
(HISTORICAL) (HISTORICAL) ADJUSTMENTS (1) AS ADJUSTED
-------------------- ------------ --------------- -----------
Fee and interest income
Fee income............. $ 565,512 $4,248,992 $4,814,504
Interest income........ 403,659 403,659
---------- ----------
Total fee and interest
income................ 565,512 4,652,651 5,218,163
Interest expense........ 79,671 554,885 634,556
--------- ---------- ----------
Net fee and interest
income................ 485,841 4,097,766 4,583,607
--------- ---------- ----------
Provision for losses on
receivables............ 45,993 171,395 217,388
--------- ---------- ----------
Net fee and interest
income after provision
for losses on
receivables............ 439,848 3,926,371 4,366,219
Operating expenses...... 1,472,240 1,024,057 $ (400,000) (a) 2,096,297
Other income............ 1,221,837 (997,146) (a) 224,691
--------- ---------- ----------- ----------
Income before income
taxes (benefit)........ 189,445 2,902,314 (597,146) 2,494,613
Income taxes (benefit).. (5,892) 978,791 (b) 972,899
--------- ----------- ----------
Net income.............. $ 195,337 $2,902,314 $(1,575,937) $1,521,714
========= ========== =========== ==========
Pro forma basic earnings
per share(2)........... $ .26
==========
Pro forma weighted
average shares
outstanding(2)......... 5,899,991
==========
Pro forma diluted
earnings per share(2).. $ .26
==========
Pro forma diluted
weighted average shares
outstanding(2)......... 5,903,078
==========
- --------
(1) Pro Forma Statements of Operations adjustments reflect the following:
(a) The elimination of transactions between the Company and Funding, which
consist of management fees paid/received and the elimination of the
Company's income from its investment in Funding.
(b) The provisions for income taxes (at an estimated effective rate of 39%)
for DEL and Funding which previously were not subject to such 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
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the information
under "Selected Financial Data" and the combined financial statements,
including the notes thereto, of HealthCare Financial Partners, Inc. and DEL,
the consolidated financial statements, including the notes thereto, of
HealthCare Financial Partners, Inc. appearing elsewhere in Item 8.
Year ended December 31, 1997 Compared to the Year Ended December 31, 1996
(including pro forma adjustments).
Total fee and interest income increased from $12.0 million for the year
ended December 31, 1996 to $27.7 million for the year ended December 31, 1997,
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 $98.9 million and $62.5 million,
respectively, from December 31, 1996 to December 31, 1997. Fees and interest
earned from the STL Program grew from an immaterial amount in the year ended
December 31, 1996 to $5.0 million for the year ended December 31, 1997, which
accounted for 32.0% 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 from 129 clients to 161 clients in its
Accounts Receivable Program, and from 8 clients to 39 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
from 18.4% in the year ended December 31, 1996 to 16.8% in the year ended
December 31, 1997. 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 from $3.4 million for the year ended December 31,
1996 to $7.9 million in 1997. However, the Company's average cost of borrowed
funds decreased from 9.7% for the year ended December 31, 1996 to 8.6% for the
year ended December 31, 1997. 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 from $8.6 million for the year ended December 31, 1996 to
$19.8 million for the year ended December 31, 1997. 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 from
13.2% for the year ended December 31, 1996 to 12.2% for the year ended
December 31, 1997.
The Company's provision for losses on receivables increased from $656,116
for the year ended December 31, 1996 to $1.3 million for the year ended
December 31, 1997. 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 from $3.3 million for the year ended December
31, 1996 to $7.2 million for the year ended December 31, 1997, a 117.0%
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 from $233,982 for the year ended December 31, 1996 to
$1.6 million for the year ended December 31, 1997. This increase was mainly
attributable to the Company receiving fees from clients for legal services
performed by in house personnel. These fees were previously paid by the
clients but passed through to the outside firm that performed the services.
Net income increased from $3.0 million for the year ended December 31, 1996
to $8.0 million for the year ended December 31, 1997, a 169.8% increase,
primarily as a result of the overall growth in the Company's finance
receivables described above.
21
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
(including pro forma adjustments)
Total fee and interest income increased from $5.2 million for the year ended
December 31, 1995 to $12.0 million for the year ended December 31, 1996, an
increase of 130.3%. The increase principally resulted from an increase of
$45.6 million in average finance receivables outstanding due to the Company's
introduction of revolving lines of credit secured by accounts receivable
during the last quarter of 1995 and a corresponding increase of $41.0 million
in such revolving lines of credit secured by accounts receivable from December
31, 1995 to December 31, 1996. Interest earned from revolving lines of credit
secured by accounts receivable increased from $403,659 for the year ended
December 31, 1995 to $3.5 million for the year ended December 31, 1996, which
accounted for $3.1 million of the $6.8 million growth in total fee and
interest income between the periods. During the year ended December 31, 1996,
the Company increased its client base with respect to advances against
accounts receivable from 72 clients to 84 clients. Additionally, existing
clients increased their average borrowings from the Company in 1996 as
compared to the prior year. Because the yield on finance receivables declined
markedly from 26.4% in the year ended December 31, 1995 to 18.4% in the year
ended December 31, 1996, the increase in fee and interest income was due to
growth in the volume of finance receivables, and was somewhat offset by the
decline in yield. The yield on finance receivables for the year ended December
31, 1996 was lower due to a substantially greater volume of revolving lines of
credit secured by accounts receivable outstanding during the year ended
December 31 1996, which have lower yields when compared to advances against
accounts receivable. Interest expense increased from $634,556 for the year
ended December 31, 1995 to $3.4 million for 1996. However, the Company's
average cost of borrowed funds decreased from 11.8% for the year ended
December 31, 1995 to 9.7% for the year ended December 31, 1996. This increase
in interest expense was the result of higher average borrowings required to
support the Company's growth. Prior to March 1995, the Company's financing was
solely obtained through equity. Subsequent to March 1995, the Company
increasingly relied on borrowed funds to finance its growth. Because of the
Company's overall growth in finance receivables and increased leverage, net
fee and interest income increased from $4.6 million for the year ended
December 31, 1995 to $8.6 million for the year ended December 31, 1996. The
increased interest expense from increased borrowings, combined with a lower
yield on finance receivables, resulted in a significant decrease in the
annualized net interest margin from 23.2% for the year ended December 31, 1995
to 13.2% for the year ended December 31, 1996.
The Company's provision for losses on receivables increased from $217,388
for the year ended December 31, 1995 to $656,116 for the year ended December
31, 1996. This increase was attributable to an increase in outstanding finance
receivables and an increase in the Company's average client balances, which
are among the factors considered by the Company in assessing the adequacy of
its allowance for losses on receivables. The Company experienced no credit
losses in either period.
Operating expenses increased from $2.1 million for the year ended December
31, 1995 to $3.3 million for the year ended December 31, 1996, a 58.7%
increase. This increase was the result of a 36.1% increase in compensation and
benefits due to hiring additional personnel as well as increases in other
operating expenses, all relating to the expansion of the Company's operations.
Other income increased from $224,691 for the year ended December 31, 1995 to
$233,982 for the year ended December 31, 1996.
Net income increased from $1.5 million for the year ended December 31, 1995
to $3.0 million for the year ended December 31, 1996, a 94.8% increase,
primarily as a result of the overall growth in the Company's finance
receivables described above.
22
QUARTERLY FINANCIAL DATA
The following table summarizes unaudited quarterly operating results for the
most recent eight fiscal quarters. The 1996 quarterly financial data reflect
the Reorganization and are prepared on the same basis as the Pro Forma
Financial Statements of Operations. The 1997 information reflects actual
historical results.
FOR THE QUARTERS ENDED
-------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1996 1996 1996 1996
---------- ---------- ---------- ----------
Fee and interest income
Fee income....................... $1,869,433 $2,090,853 $2,117,004 $2,440,925
Interest income.................. 411,703 792,307 1,006,997 1,286,749
---------- ---------- ---------- ----------
Total fee and interest income.. 2,281,136 2,883,160 3,124,001 3,727,674
Interest expense................... 580,030 801,126 923,175 1,104,231
---------- ---------- ---------- ----------
Net fee and interest income...... 1,701,106 2,082,034 2,200,826 2,623,443
Provision for losses on
receivables....................... 343,155 53,646 216,315 43,000
---------- ---------- ---------- ----------
Net fee and interest income after
provision for losses on
receivables..................... 1,357,951 2,028,388 1,984,511 2,580,443
Operating expenses................. 676,627 809,392 796,226 1,044,749
Other income....................... 10,000 8,000 153,651 62,331
---------- ---------- ---------- ----------
Income before income taxes......... 691,324 1,226,996 1,341,936 1,598,025
Income taxes....................... 269,617 478,528 523,355 623,230
---------- ---------- ---------- ----------
Net income......................... $ 421,707 $ 748,468 $ 818,581 $ 974,795
========== ========== ========== ==========
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1997 1997
---------- ---------- ---------- ----------
Fee and interest income
Fee income....................... $2,570,411 $2,447,452 $3,015,605 $3,460,307
Interest income.................. 1,917,922 3,013,090 4,936,268 6,384,022
---------- ---------- ---------- ----------
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
========== ========== ========== ==========
The Company's quarterly results of operations are not generally affected by
seasonal factors.
CLIENT HOLDBACKS
The Company's primary protection against credit losses on its Accounts
Receivable Program is the Excess 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. 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.
23
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 may have recourse against personal
assets of the principals or parent company of a client.
Under the STL Program, the Company's term loans to clients are secured by a
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
The Company's results of operations are affected by its collections of
client accounts receivable. The Company's turnover of its finance receivables
in its Accounts Receivable Program, calculated by dividing total collections
of client accounts receivable for each of the following quarters by the
average month-end balance of finance receivables during such quarter, was 2.4x
for the quarter ended March 31, 1996, 2.4x for the quarter ended June 30,
1996, 3.7x for the quarter ended September 30, 1996, 3.5x for the quarter
ended December 31, 1996, 2.6x for the quarter ended March 31, 1997, 2.8x for
the quarter ended June 30, 1997, 2.7x for the quarter ended September 30, 1997
and 2.7x for the quarter ended December 31, 1997. For the year ended December
31, 1996, the Company's turnover of its finance receivables in its Accounts
Receivable Program was 11.0x, as compared to 11.4x for the year ended December
31, 1997.
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. To date,
the Company has not experienced any credit losses. The allowance for losses on
receivables is maintained at an amount estimated to be sufficient to absorb
future losses, net of recoveries, inherent in the finance receivables. In
evaluating the adequacy of the allowance, management of the Company considers
trends in healthcare sub-markets, past-due accounts, historical charge-off and
recovery rates, credit risk indicators, economic conditions, on-going credit
evaluations, overall portfolio size, average client balances, Excess
Collateral, real estate collateral valuations, and underwriting policies,
among other items. As of December 31, 1996, the Company's general reserve was
$1.1 million or 1.2% of finance receivables; at December 31, 1997, it was $2.7
million or 1.1% of finance receivables. To the extent that management deems
specific finance receivable advances to be wholly or partially uncollectible,
the Company establishes a specific loss reserve equal to such amount. At
December 31, 1996 and 1997, the Company had no specific reserves. In the
opinion of management, based on a review of the Company's portfolio, the
allowance for losses on receivables is adequate at this time, although there
can be no assurance that such reserve will be adequate in the future.
24
LIQUIDITY AND CAPITAL RESOURCES
Cash flows resulting from operating activities provided sources of cash
amounting to $12.5 million for the year ended December 31, 1997. This compares
to pro forma operating cash flows of $3.8 million and $6.2 million for 1995
and 1996, respectively. The most significant source of cash from operating
activities is derived from the Company's generation of net fee and interest
income from its finance receivables, and the more significant uses of cash
from internal operating activities 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 and the sale of commercial paper through the CP Facility. The sources
of equity financing were primarily from limited partner capital contributions
prior to the Reorganization and the Offering and the Secondary 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.
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 2.75%. As of
December 31, 1996 and 1997, $21.8 and $40.2 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 $5.0 million and a ratio of total
debt to equity of not more than 3.0 to 1.0. In addition, under the Bank
Facility the Company is not allowed to have at any time a cumulative negative
cash flow (as defined in the Bank Facility) in excess of $1.0 million. The
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 and 1997, the
Company was in compliance with all of its 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. 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 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, 1997, the Company was in compliance with all of
its covenants under the CP Facility. The maturity date for the CP Facility is
December 5, 2001. However, the 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, 1997, the
Company had borrowed $27.9 million under the Warehouse Facility. The
25
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
LIBOR plus 3.75% on the first $50 million and 3.0% on the second $50 million.
The Warehouse Facility requires that the loans advanced by the Company do 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 must exceed the prime rate of interest
plus 3%, that the maximum weighted average loan to value of advances under the
Warehouse Facility must be no greater than 85%, and that no loan in the
portfolio has 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 agreement, 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, the Company was in compliance with all of
the covenants of the agreement.
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, which expires on December 5, 2001, (ii) the Bank Facility, which
expires on March 29, 2002, subject to automatic renewals for one-year periods
thereafter unless terminated by either party and (iii) the Warehouse Facility,
which expires on June 27, 1999. In addition, on February 9, 1998, the Company
announced its intention to file a registration statement for an offering of
2.95 million shares of its common stock. While the Company expects to be able
to obtain new financing facilities or renew these existing financing
facilities and to have continued access to other sources of credit after
expiration of these facilities, there is no assurance that such financing will
be available, or, if available, that it will be on terms favorable to the
Company.
INTEREST RATE SENSITIVITY
Interest rate sensitivity refers to the change in interest spread between
the yield on the Company's portfolio and the cost of funds necessary to
finance the portfolio (i.e., the Bank Facility, the CP Facility and the
Warehouse Facility) resulting from changes in interest rates. To the extent
that interest income and interest expense do not respond equally to changes in
interest rates, or that all rates do not change uniformly, earnings are
affected. The interest rates charged on revolving lines of credit secured by
accounts receivable adjust based upon changes in the prime rate. The fees
charged on advances against accounts receivable are fixed at the time of any
advance against a batch of receivables, although such fees may increase
depending upon the timing of collections of receivables within the batch. The
interest rates on the Company's term loans generally adjust based on the prime
rate. The interest rates payable by the Company under the Bank Facility
adjust, based on Fleet's prime rate; however, the Company has the option to
borrow any portion of the Bank Facility in an integral multiple of $500,000
based on the one-month, two-month, three-month or six-month LIBOR plus 2.75%.
The interest rate on the CP Facility adjusts based upon changes in commercial
paper rates. Because the Company finances most of the Accounts Receivable
Program's activity through the CP Facility, there exists some interest rate
risk since the interest rate on advances to the Company's clients under the
Accounts Receivable Program will adjust based on the prime rate, and the
interest rate on most of the Company's liabilities under the CP Facility will
adjust based on commercial paper rates. Such limited interest rate sensitivity
on the Accounts Receivable Program portfolio is not expected to have a
material effect on the Company's net interest income if interest rates change.
Additionally, because advances against accounts receivable are generally fixed
and financed with the CP Facility, which has rates that adjust with changes in
commercial paper rates, there exists interest rate sensitivity with respect to
advances against accounts receivable, and if interest rates increase
significantly, such an increase could have an adverse effect on the Company's
net interest income. However, this interest rate sensitivity is mitigated by
the fact that (i) advances against accounts receivable comprise only 10.5% of
the finance receivables in the Accounts Receivable Program as of December 31,
1997, and (ii) the Company does not make long-term commitments with respect to
advances against accounts receivable and therefore, retains substantial
flexibility to negotiate fees based on changes in interest rates.
INFLATION
Inflation has not had a significant effect on the Company's operating
results to date.
26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY FINANCIAL DATA
INDEX TO FINANCIAL STATEMENTS
HEALTHCARE FINANCIAL PARTNERS, INC.
Report of Independent Auditors, Ernst & Young LLP......................... 28
Report of Independent Auditors, McGladrey & Pullen, LLP................... 29
Consolidated Balance Sheets as of December 31, 1997 and 1996.............. 30
Statements of Income for the years ended December 31, 1997, 1996, and
1995..................................................................... 31
Statements of Equity for the years ended December 31, 1997, 1996 and
1995..................................................................... 32
Statements of Cash Flows for the years ended December 31, 1997, 1996 and
1995..................................................................... 33
Notes to Financial Statements............................................. 34
27
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, 1997 and 1996, and the related
consolidated statements of income, equity, and cash flows for each of the two
years in the period ended December 31, 1997. 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 amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of HealthCare
Financial Partners, Inc. at December 31, 1997 and 1996, and the consolidated
results of its operations and its cash flows for each of the two years in the
period ended December 31, 1997, in conformity with generally accepted
accounting principles.
Ernst & Young LLP
Washington, D.C.
February 12, 1998
28
REPORT OF INDEPENDENT AUDITORS
Board of Directors
HealthCare Financial Partners, Inc.
We have audited the accompanying combined statements of income, equity, and
cash flows of HealthCare Financial Partners, Inc. and HealthPartners DEL,
L.P., a limited partnership, for the year ended December 31, 1995. These
financial statements are the responsibility of management of the Company and
the Partnership. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined results of operations and cash
flows for the year ended December 31, 1995 of HealthCare Financial Partners,
Inc. and HealthPartners DEL, L.P., in conformity with generally accepted
accounting principles.
McGladrey & Pullen, LLP
Richmond, Virginia
September 13, 1996
29
HEALTHCARE FINANCIAL PARTNERS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-------------------------
1997 1996
------------ ------------
ASSETS
Cash and cash equivalents............................ $ 18,668,703 $ 11,734,705
Finance receivables.................................. 250,688,138 89,328,928
Less:
Allowance for losses on receivables................ 2,654,114 1,078,992
Unearned fees...................................... 3,161,237 723,804
------------ ------------
Net finance receivables.......................... 244,872,787 87,526,132
Prepaid expenses and other assets.................... 3,405,497 1,407,393
Deferred income taxes................................ 1,041,520 381,462
Investment securities................................ 1,442,814
Investment in limited partnership.................... 767,244
Property and equipment, net.......................... 416,284 223,397
Goodwill............................................. 1,740,097
------------ ------------
Total assets..................................... $272,354,946 $101,273,089
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Line of credit...................................... $ 40,157,180 $ 21,829,737
Commercial paper facility........................... 101,179,354 37,209,098
Warehouse facility.................................. 27,932,520
Client holdbacks.................................... 6,173,260 11,739,326
Accounts payable to clients......................... 834,367 1,020,131
Income taxes payable................................ 5,138,144 389,592
Accounts payable and accrued expenses............... 2,217,947 1,853,905
Notes payable....................................... 115,286 126,389
Accrued interest.................................... 776,700 383,935
------------ ------------
Total liabilities............................... 184,524,758 74,552,113
Stockholders' equity:
Preferred stock, par value $0.01 per share;
10,000,000 shares authorized; none outstanding
Common stock, par value $.01 per share;
30,000,000 shares authorized; 9,670,291 and
6,214,991 shares issued and outstanding,
respectively.....................................
96,703 62,150
Paid-in-capital..................................... 79,784,045 26,704,234
Retained equity (deficit)........................... 7,949,440 (45,408)
------------ ------------
Total stockholders' equity...................... 87,830,188 26,720,976
------------ ------------
Total liabilities and stockholders' equity...... $272,354,946 $101,273,089
============ ============
See accompanying notes.
30
HEALTHCARE FINANCIAL PARTNERS, INC.
STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
-------------- -------------- ----------
(CONSOLIDATED) (CONSOLIDATED) (COMBINED)
Fee and interest income:
Fee income.......................................................................... $11,493,775 $ 8,518,215 $ 565,512
Interest income..................................................................... 16,251,302 3,497,756
----------- ----------- ----------
Total fee and interest income........................................................ 27,745,077 12,015,971 565,512
Interest expense..................................................................... 7,921,330 3,408,562 79,671
----------- ----------- ----------
Net fee and interest income.......................................................... 19,823,747 8,607,409 485,841
Provision for losses on receivables.................................................. 1,315,122 656,116 45,993
----------- ----------- ----------
Net fee and interest income after provision for losses on receivables................ 18,508,625 7,951,293 439,848
Operating expenses:
Compensation and benefits........................................................... 3,741,827 1,267,625 931,189
Commissions......................................................................... 176,282 463,499
Professional fees................................................................... 512,989 283,935 153,948
Occupancy........................................................................... 218,636 196,319 156,720
Other............................................................................... 2,569,638 1,115,616 230,383
----------- ----------- ----------
Total operating expenses............................................................. 7,219,372 3,326,994 1,472,240
Other income:
Management fees..................................................................... 624,691
Income from limited partnerships.................................................... 84,988 597,146
Other............................................................................... 1,497,864 233,982
----------- ----------- ----------
Total other income................................................................... 1,582,852 233,982 1,221,837
----------- ----------- ----------
Income before deduction of preacquisition earnings and income taxes (benefit)........ 12,872,105 4,858,281 189,445
Deduction of preacquisition earnings................................................. 4,289,859
----------- ----------- ----------
Income before income taxes (benefit)................................................. 12,872,105 568,422 189,445
Income taxes (benefit)............................................................... 4,877,257 38,860 (5,892)
----------- ----------- ----------
Net income........................................................................... $ 7,994,848 $ 529,562 $ 195,337
=========== =========== ==========
Basic earnings per share............................................................. $ .99 $ .13
=========== ===========
Diluted earnings per share........................................................... $ .96 $ .13
=========== ===========
See accompanying notes.
31
HEALTHCARE FINANCIAL PARTNERS, INC.
STATEMENTS OF EQUITY
STOCKHOLDERS' EQUITY (DEFICIT)
---------------------------------------------------------
LIMITED RETAINED TOTAL
PARTNERS' COMMON PAID-IN EARNINGS EQUITY
CAPITAL STOCK CAPITAL (DEFICIT) TOTAL (DEFICIT)
--------- ------- ----------- ---------- ----------- -----------
Balance at January 1,
1995 (combined)........ $ 144,857 $34,200 $ (392,966) $ (358,766) $ (213,909)
Capital contributions... 89,021 89,021
Net income (loss)....... 377,341 (182,004) (182,004) 195,337
Distributions to
partners............... (195,914) (195,914)
--------- ------- ----------- ---------- ----------- -----------
Balance at December 31,
1995 (combined)........ 415,305 34,200 (574,970) (540,770) (125,465)
Issuance of 2,415,000
shares of $.01 par
value common stock..... 24,150 $26,708,034 26,732,184 26,732,184
Conversion of common
stock warrants to
379,998 shares of $.01
par value common
stock.................. 3,800 (3,800)
Net distributions to
partners............... (415,305) (415,305)
Net income.............. 529,562 529,562 529,562
--------- ------- ----------- ---------- ----------- -----------
Balance at December 31,
1996 (consolidated).... 62,150 26,704,234 (45,408) 26,720,976 26,720,976
Issuance of 3,450,000
shares of $.01 par
value common stock..... 34,500 53,005,310 53,039,810 53,039,810
Common stock issuable
under directors' option
plan................... 15,989 15,989 15,989
Common stock issued
under employee option
plans.................. 53 58,512 58,565 58,565
Net income.............. 7,994,848 7,994,848 7,994,848
--------- ------- ----------- ---------- ----------- -----------
Balance at December 31,
1997 (consolidated).... $ -- $96,703 $79,784,045 $7,949,440 $87,830,188 $87,830,188
========= ======= =========== ========== =========== ===========
See accompanying notes.
32
HEALTHCARE FINANCIAL PARTNERS, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1996 1995
-------------- -------------- -----------
(CONSOLIDATED) (CONSOLIDATED) (COMBINED)
OPERATING ACTIVITIES
Net income......................... $ 7,994,848 $ 529,562 $ 195,337
Adjustments to reconcile net income
to net cash provided by (used in)
operations:
Depreciation....................... 113,550 77,916 17,309
Amortization of goodwill........... 92,248
Provision for losses on
receivables....................... 1,315,122 656,116 45,993
Income from unconsolidated limited
partnership....................... (597,146)
Deferred income tax benefit........ (660,058) (351,127) (17,067)
Stock compensation plan............ 15,989
Changes in assets and liabilities:
Increase in prepaid expenses and
other............................ (1,998,104) (670,709) (102,986)
Increase in accrued interest...... 392,765 79,586 12,591
Increase in income taxes
payable.......................... 4,748,552 278,418
Increase in accounts payable and
accrued expenses................. 496,271 1,265,420 174,435
------------- ------------ -----------
Net cash provided by (used in)
operating activities.............. 12,511,183 1,865,182 (271,534)
INVESTING ACTIVITIES
Increase in net finance
receivables...................... (151,189,744) (10,338,502) (1,527,448)
Acquisition of limited
partnership, net of cash
acquired......................... (15,200,257) (16,138,888)
Purchase of investment
securities....................... (925,002)
(Increase) decrease in investment
in limited partnership........... (767,244) 489,792
Purchase of property and
equipment, net................... (306,436) (225,173) (45,635)
Other............................. (188,000)
------------- ------------ -----------
Net cash used in investing
activities........................ (168,576,683) (26,702,563) (1,083,291)
FINANCING ACTIVITIES
Net borrowings (payments) under
line of credit.................... 18,327,443 (26,984,082) 1,433,542
Net borrowings under commercial
paper facility.................... 63,970,256 37,209,098
Net borrowings under warehouse
facility.......................... 27,932,520
Decrease in notes payable to
related parties................... (75,000)
(Decrease) increase in notes
payable........................... (11,103) 105,191 21,198
Issuance of common stock........... 53,098,375 26,732,184
Distributions to partners, net..... (317,993) (415,305) (106,893)
------------- ------------ -----------
Net cash provided by financing
activities...................... 162,999,498 36,572,086 1,347,847
------------- ------------ -----------
Net increase (decrease) in cash
and cash equivalents.............. 6,933,998 11,734,705 (6,978)
------------- ------------ -----------
Cash and cash equivalents at
beginning of period............... 11,734,705 6,978
------------- ------------ -----------
Cash and cash equivalents at end
of period......................... $ 18,668,703 $ 11,734,705 $ --
============= ============ ===========
Supplemental disclosure of cash
flow information:
Cash payments for interest........ $ 7,528,565 $ 3,037,218 $ 67,080
============= ============ ===========
Cash payments for income taxes..... $ 788,764 $ 23,839 $ --
============= ============ ===========
See accompanying notes.
33
HEALTHCARE FINANCIAL PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The consolidated financial statements of HealthCare Financial Partners, Inc.
(the "Company") for 1997 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, 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
2,415,000 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
1,000,000 shares to 30,000,000 and effected a 4.56-to-1 split of the common
stock in the form of a stock dividend, including outstanding warrants and
options, on September 13, 1996. Shares of common stock outstanding for all
periods presented have been retroactively restated to give effect to the stock
split. Effective upon the completion of the offering, the Company used the
proceeds of the offering to acquire, using the purchase method of accounting,
all the limited partnership interests in HealthPartners Funding, L.P.
("Funding") and Funding was liquidated (the acquisition) (See Note 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 are consolidated assuming
the acquisition of Funding occurred as of January 1, 1996 under the provisions
of Accounting Research Bulletin No. 51. The deduction of preacquisition
earnings reflects the operations of Funding and DEL allocated to the limited
partners of Funding and DEL prior to the acquisition. The financial statements
for 1995 are combined to include the accounts and operations of the Company
and DEL. The 1995 financial statements are combined as a result of common
control and management between the Company and DEL. All transactions between
the Company and DEL have been eliminated in preparation of the combined
financial statements. The Company accounted for its investment in Funding on
the equity basis, as the Company did not have sufficient control to warrant
consolidation.
Effective September 1, 1996, in contemplation of the offering, Funding
acquired, using the purchase method of accounting, the assets of DEL
(consisting principally of client receivables) by assuming DEL's liabilities
and paying $472,369 in cash. The cash payment approximated the fair value and
book value of DEL's net assets. Immediately following the acquisition, DEL was
dissolved.
2. SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
Cash and cash equivalents includes cash and other liquid financial
instruments with an original maturity of three months or less.
Finance Receivables
The Accounts Receivable Program includes purchased finance receivables and
asset-based lending. 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
34
HEALTHCARE FINANCIAL PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
receivables is reflected as client holdbacks. In the event purchased
receivables become delinquent, the Company has certain rights of offset to
apply client holdbacks (or future fundings) against delinquent accounts
receivable. Asset-based lending is provided in the form of a revolving line of
credit. The amount of credit granted is based on a predetermined percentage of
the client total 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 conjunction with secured
term loans, the Company may receive stock, or warrants to convert to stock, in
the client entity. Securities received in conjunction with such loans totaled
$517,812 for the year ended December 31, 1997.
Allowance for Losses on Receivables
The allowance for losses on receivables is maintained at the amount
estimated to be sufficient to absorb future losses, net of recoveries,
inherent in the finance receivables. The provision for losses on receivables
is the periodic cost of maintaining an adequate allowance. In evaluating the
adequacy of the allowance, management considers trends in past-due accounts,
historical charge-off and recovery rates, credit risk indicators, economic
conditions, on-going credit evaluations, overall portfolio size, average
client balances, excess collateral, and underwriting policies, among other
items. The Company performs a loan-by-loan review to identify loans to be
charged off.
Additionally, client holdbacks are available to offset losses on
receivables. And, under certain circumstances, credit losses can be offset
against client holdbacks related to other financings.
Investment Securities
Marketable equity securities are classified as securities available for
sale. These securities are stated at fair value, with unrealized gains and
losses, net of tax, reported as a component of stockholders' equity.
Investment securities which have no ready market (private companies) are
carried at cost and evaluated periodically for impairment.
Property and Equipment
Property and equipment, principally computer and related peripherals, are
stated at cost less accumulated depreciation ($202,938, $90,772, and $29,868,
at December 31, 1997, 1996 and 1995, respectively). Depreciation expense is
computed primarily using the straight-line method.
Client Holdbacks
Client holdbacks represent the excess of the net recorded amount of
purchased receivables over the amount advanced. In its purchase agreements
with clients, the Company retains the right to apply any past-due or
uncollectible amounts against these holdbacks. Holdbacks are assigned to
specific purchased receivables. The client holdbacks are payable upon
collection of the respective purchased receivable amount.
Revenue Recognition
Fee income, including discount fees, commitment fees, management,
termination, success and set-up fees, is recognized in income over the periods
earned under methods that approximate the effective interest method.
Accrual of interest income on finance receivables is suspended when a loan
is contractually delinquent for 90 days or more. The accrual of interest is
renewed when the loan becomes contractually current, and past due interest
income is recognized at that time.
35
HEALTHCARE FINANCIAL PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Income Taxes
The Company uses the liability method of accounting for income taxes as
required by Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes." Under the liability method, deferred-tax assets and
liabilities are determined based on differences between the financial
statement carrying amounts and the tax basis of existing assets and
liabilities (i.e. temporary differences) and are measured at the enacted rates
that will be in effect when these temporary differences reverse.
DEL elected partnership reporting status under the Internal Revenue Code.
Accordingly, taxable income or loss of DEL was allocated to the partners in
accordance with the partnership agreement and was reported on the individual
partner's income tax return. Therefore, no provision for income tax is
included in the historical financial statements for DEL.
Earnings per Share
In 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"),
replacing the presentation required under Accounting Principles Board Opinion
No. 15, "Earnings Per Share." Under SFAS 128, 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, while
diluted earnings per share reflects the assumed conversion of all dilutive
securities. All prior period earnings per share have been restated to conform
with SFAS 128. Earnings per share is not presented for periods prior to 1996
because it is not meaningful due to the partnership reporting basis of DEL and
to the reorganization and offering described in Note 1.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments," requires disclosure of fair value information
about financial instruments, whether or not recognized on the balance sheet,
for which it is practicable to estimate that value. Due to the 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 year financial statements
to conform to current year presentation.
3. FINANCE RECEIVABLES
Finance receivables consisted of the following:
DECEMBER 31,
------------------------
1997 1996
------------ -----------
Accounts receivable program........................ $185,727,628 $86,875,670
Secured term loans................................. 64,960,510 2,453,258
------------ -----------
$250,688,138 $89,328,928
============ ===========
At December 31, 1997, loans totaling $1,433,644 were on non-accrual status.
The Company anticipates that all of these loans will be collected in full, and
therefore, there is no specific allowance for these loans. The average
recorded investment in non-accrual loans during the year ended December 31,
1997 was $332,992. No interest income was recognized on any of these loans
after they were placed on non-accrual status. There were no loans placed on
non-accrual status during the year ended December 31, 1996.
36
HEALTHCARE FINANCIAL PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. ALLOWANCE FOR LOSSES ON RECEIVABLES
Activity in the allowance for losses on receivables was as follows:
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
---------- ---------- -------
Beginning of period.......................... $1,078,992 $ 66,840 $20,847
Allowance acquired from purchased finance
receivables................................. 260,000 356,036
Provision for losses on receivables.......... 1,315,122 656,116 45,993
---------- ---------- -------
End of period................................ $2,654,114 $1,078,992 $66,840
========== ========== =======
5. INVESTMENT SECURITIES
Marketable equity securities, consisting primarily of publicly traded common
stock and related warrants, totaled $357,488 as of December 31, 1997, which
reflected both the cost and market value at that date.
Non-marketable equity securities, consisting primarily of common stock in
privately held companies and related warrants, totaled $1,085,326 at December
31, 1997 and were carried at cost.
6. INVESTMENTS IN LIMITED PARTNERSHIPS
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"), became the
General Partner. Funding II, L.P. was established to develop a secured term
lending 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.
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"), became
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
basis of accounting, as it does not have sufficient control to warrant
consolidation.
7. BORROWINGS
Line Of Credit
The Company maintains a revolving line of credit with Fleet Capital
Corporation ("Fleet"). At December 31, 1997, the facility limit under this
line of credit was $40,000,000; however, the Company was permitted to borrow
up to $50,000,000 during 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.
The line of credit is collateralized by the Company's finance receivables.
The rate of interest charged under the agreement is Fleet's prime rate, plus
1.25%, or the revolving credit LIBOR rate plus 2.75% determined at
37
HEALTHCARE FINANCIAL PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
the option of the Company upon each additional draw, subject to certain
limitations. In addition, the Company pays an unused line fee of .05% based on
the average unused capacity in the line. For the years ended December 31, 1997
and 1996, the weighted average interest rate paid under the line of credit was
9.7% and 10.3%, respectively.
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 $200,000,000, and $125,000,000 was authorized
for use at December 31, 1997. Increases in the authorized borrowing capacity
are at the Company's discretion and are subject to over-collateralization
levels. The securitization facility expires in December 2001. However, the
program may be terminated by the Company at any time after December 5, 1999.
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 $38,347,000 at December
31, 1997 and $10,637,000 at December 31, 1996 were restricted as over-
collateralization to the Commercial Paper Facility, including approximately
$14,306,000 and $7,568,000 of cash held at Wisconsin at December 31, 1997 and
1996, respectively. The weighted average rate paid, including the
aforementioned facility fee, in 1997 and 1996 under the Commercial Paper
Facility was 7.65% and 7.53%, respectively.
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 $50,000,000 at December 31, 1997. In
February 1998, the capacity was increased to $100,000,000. 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, 1997, the weighted average rate paid under the Warehouse Facility
was 9.16%.
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"). Under these plans, the Company has reserved 258,740 shares
of common stock for future
38
HEALTHCARE FINANCIAL PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 1997, the Company granted certain directors,
in lieu of director fees, 2,510 options with an exercise price below the
market price at the grant date. These options fully vest one year from the
grant date.
Prior to adopting the aforementioned plans, in November 1995, the Company
issued stock options to purchase 38,381 shares of the Company's common stock
at an exercise price of $2.61 per share. The stock options expire in 2005 and
are exercisable at December 31, 1997.
In December 1994, the Company issued warrants providing the right to receive
379,998 shares of the Company's common stock for $500 of consideration which,
in the opinion of management, approximated the fair value of the warrants at
that date. The warrants were exercised in connection with the reorganization
and offering described in Note 1.
The Company 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.
In October 1995, the FASB issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock Based Compensation" ("SFAS 123"), which
requires, for companies electing to continue to follow the recognition
provisions of APB 25, pro forma disclosures of what net income and earnings
per share would have been had the recognition provisions of SFAS 123 been
adopted. For purposes of pro forma disclosure, the estimated fair value of the
options is amortized to expense over the option's vesting period. For the
years ended December 31, 1997 and 1996, the Company's pro forma net income and
earnings per share would have been:
YEAR ENDED DECEMBER 31,
------------------------
1997 1996
------------ -----------
Pro forma net income................................ $ 7,610,754 $ 494,648
============ ==========
Pro forma basic net income per share................ $ .94 $ .12
============ ==========
Pro forma diluted net income per share.............. $ .92 $ .12
============ ==========
The effects of applying SFAS 123 for pro forma disclosures are not likely to
be representative of the effects for future years.
For purposes of the pro forma disclosures above, the fair value of options
was estimated at the date of grant using a Black-Scholes option-pricing model
with the following weighted average assumptions: dividend yield 0%; volatility
factors of the expected market price of the Company's common stock of .519% in
1997 and .623% in 1996; risk-free interest rate of 6.0% for both years and
expected option lives of five years.
39
HEALTHCARE FINANCIAL PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
A summary of the Company's stock option activity for the years ended
December 31 was as follows:
1997 1996 1995
----------------- ---------------- ----------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- -------- ------- -------- ------- --------
Outstanding--beginning of
year..................... 338,381 $10.57 38,381 $2.61
Granted.................. 291,260 17.26 300,000 11.59 $38,381 $2.61
Exercised................ (5,300) 11.05
Forfeited................ (3,750) 11.28
------- ------- -------
Outstanding--end of
year.................... 620,591 338,381 38,381
======= ======= =======
Outstanding--end of
year....................
Exercise price at $2.61.. 38,381 2.61 38,381 2.61 38,381 2.61
Exercise price at $6.37.. 2,510 6.37
Exercise prices at $11.05
to $13.50............... 499,950 12.29 300,000 11.59
Exercise price at
$28.25.................. 79,750 28.25
------- ------- -------
Total................... 620,591 338,381 38,381
======= ======= =======
Exercisable--end of
year....................
Exercise price at $2.61.. 38,381 2.61 38,381 2.61 38,381 2.61
Exercise prices at $11.05
to $13.50............... 61,336 11.57
Total................... 99,717 38,381 38,381
======= ======= =======
The weighted average fair value of options granted during 1997 and 1996 was
$7.62 and $6.76, respectively. The weighted average remaining contractual life
of outstanding options as of December 31, 1997 was 8.96 years.
9. EQUITY
For each year presented, basic earnings per share were computed by dividing
net income by the weighted average number of shares outstanding during the
year. The weighted average number of shares outstanding during the years ended
December 31, 1997 and 1996, was 8,087,857 and 4,030,416, respectively.
For each year presented, diluted earnings per share were computed by
dividing net income by the weighted average number of shares 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,
1997 and 1996, was 222,254 and 25,156, respectively.
The Company has authorized 10,000,000 shares of preferred stock. The rights
and preferences of the preferred stock are established by the Board of
Directors in its sole discretion. The specific rights and preferences have not
been established and no preferred stock has been issued.
10. LEASE COMMITMENTS
The Company leases office space under noncancelable operating leases. The
future minimum lease payments as of December 31, 1997 were as follows:
1998.............................................................. $ 487,000
1999.............................................................. 498,000
2000.............................................................. 514,000
2001.............................................................. 530,000
Thereafter........................................................ 545,000
----------
$2,574,000
==========
40
HEALTHCARE FINANCIAL PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Rent expense for the year ended December 31, 1997, 1996 and 1995 was
$216,503, $118,400, and $156,720, respectively.
11. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. As stated in Note 2,
DEL was a partnership under the Internal Revenue Code. Accordingly, income
taxes are not material nor meaningful for years prior to 1996. Significant
components of the Company's deferred tax assets as of December 31, were as
follows:
1997 1996
---------- --------
Deferred tax assets:
Allowance for losses on receivables.................. $1,031,087 $381,462
Amortization of goodwill............................. 10,733
Depreciation......................................... (6,511)
Stock options........................................ 6,211
---------- --------
$1,041,520 $381,462
========== ========
Significant components of the provision for income taxes for the years ended
December 31, were as follows:
1997 1996
---------- ---------
Federal taxes......................................... $4,539,321 $ 316,455
State taxes........................................... 997,994 73,532
Deferred income taxes................................. (660,058) (351,127)
---------- ---------
Income taxes........................................ $4,877,257 $ 38,860
========== =========
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:
1997 1996
---------- ---------
Income tax at statutory
federal tax rate......... $4,376,516 $ 193,264
State taxes, net of
federal benefit.......... 592,270 26,261
Reversal of deferred tax
assets valuation
allowance................ (183,218)
Other..................... (91,529) 2,553
---------- ---------
Income taxes............ $4,877,257 $ 38,860
========== =========
The reversal of the deferred tax asset valuation allowance in 1996 results
from the Company's generation of sufficient taxable income to ensure the
recoverability of deferred tax assets arising from the deductible temporary
differences.
12. RELATED PARTY TRANSACTIONS
Prior to the reorganization and offering, the Company had an agreement with
Funding, whereby Funding paid a monthly management fee for operational and
management support provided. Management fees under this agreement were
$400,000 for the year ended December 31, 1995.
41
HEALTHCARE FINANCIAL PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
13. COMMITMENTS AND CONCENTRATIONS OF CREDIT RISK
The Company earned fee income in excess of 10% of total fee income from one
client, aggregating 11% of total fee income for the year ended December 31,
1996. For the year ended December 31, 1997, no one client accounted for 10% or
more of total fee income.
At December 31, 1997 and 1996, the Company had committed lines of credit to
its clients of approximately $275,432,000 and $84,600,000 of which
approximately $107,500,000 and $37,400,000, respectively were unused. The
Company extends credit based upon qualified client receivables outstanding and
is subject to contractual collateral and loan-to-value ratios.
At December 31, 1997, outstanding finance receivables to three clients
comprised approximately 14% of the total finance receivable portfolio. 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 $4.8 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 by the effective interest method. Additionally, the Company
has extended a corporate guarantee of $1 million on behalf of a client. If
that client were to default on its obligation, the Company would be similarly
liable. The Company recognizes the revenue earned on this guarantee ratably
over the one year life of the guarantee using the effective interest method.
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 $16,200,000 approximated both the fair value and book value of
Funding at the date of acquisition.
The financial statements of the Company for 1996 are consolidated assuming
the acquisition of Funding occurred as of January 1, 1996 under the provisions
of Accounting Research Bulletin No. 51. The pro forma results of operations
following reflect the operating results of the Company for the years ended
December 31, 1996 and 1995 as if the acquisition of Funding had occurred on
January 1, 1995, and Funding operations were included with the Company.
1996 1995
---------- ----------
Net fee and interest income........................... $8,607,409 $4,583,607
Provision for losses on receivables................... 656,116 217,388
Net operating expenses................................ 4,987,742 2,844,505
---------- ----------
Net income.......................................... $2,963,551 $1,521,714
========== ==========
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:
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
==========
42
HEALTHCARE FINANCIAL PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
15. HEALTHCARE FINANCIAL PARTNERS, INC. (PARENT COMPANY ONLY) CONDENSED
FINANCIAL INFORMATION
DECEMBER 31,
-----------------------
1997 1996
----------- -----------
BALANCE SHEET
ASSETS:
Cash and cash equivalents......................... $ 65,294 $ 35,442
Investment in subsidiaries........................ 87,338,737 26,986,465
Other............................................. 608,921 3,373
----------- -----------
Total Assets.................................... $88,012,952 $27,025,280
=========== ===========
LIABILITIES AND EQUITY:
Accounts payable and accrued expenses............. $ 182,764 $ 304,304
Stockholders' equity.............................. 87,830,188 26,720,976
----------- -----------
Total Liabilities and Equity.................... $88,012,952 $27,025,280
=========== ===========
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996
----------- -----------
STATEMENT OF OPERATIONS
Income............................................ $ 2,576,597 $ 1,401,025
Operating expenses................................ 2,419,875 1,784,272
----------- -----------
Income (loss) before income taxes and equity in
undistributed earnings of subsidiary............. 156,722 (383,247)
Income tax expense................................ 1,485 27,358
----------- -----------
Income (loss) before equity in undistributed
earnings of subsidiary........................... 155,237 (410,605)
Equity in undistributed earnings of subsidiaries.. 7,839,611 940,167
----------- -----------
Net income........................................ $ 7,994,848 $ 529,562
=========== ===========
43
HEALTHCARE FINANCIAL PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
YEAR ENDED DECEMBER 31,
--------------------------
1997 1996
------------ ------------
STATEMENT OF CASH FLOWS
Operating Activities
Net income....................................... $ 7,994,848 $ 529,562
Adjustments to reconcile net income to net cash
used by operations:
Depreciation.................................... 113,550 54,401
Stock compensation.............................. 15,989
Equity in undistributed earnings of subsidiary.. (7,839,611) (940,167)
Other........................................... (840,638) 76,627
------------ ------------
Net cash used by operating activities.......... (555,862) (279,577)
INVESTING ACTIVITIES
Increase in investment in subsidiary............... (52,512,661) (26,046,298)
Payment of amounts due to affiliates............... (149,537)
Other.............................................. (221,330)
------------ ------------
Net cash used in investing activities.......... (52,512,661) (26,417,165)
FINANCING ACTIVITIES
Issuance of common stock and warrants.............. 53,098,375 26,732,184
------------ ------------
Net cash provided by financing activities...... 53,098,375 26,732,184
------------ ------------
Increase in cash and cash equivalents.............. 29,852 35,442
Cash and cash equivalents at beginning of year..... 35,442
------------ ------------
Cash and cash equivalents at end of year........... $ 65,294 $ 35,442
============ ============
44
HEALTHCARE FINANCIAL PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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. According, 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.
45
PART III
The Proxy Statement for the Annual Meeting of Stockholders to be held May
29, 1998 (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.
EXHIBIT
NUMBER DESCRIPTION
------- -----------
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.(1)
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)
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)
46
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 partner and HealthPartners Investors II, LLC, as limited
partner, and Guaranty Agreement dated as of March 5, 1997 between
HealthCare Financial Partners, Inc. and HealthPartners Investors II,
LLC.(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 27, 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 April 15, 1997 among
Fleet Capital Corporation and HCFP Funding, Inc.(7)
21.1 List of Subsidiaries of the Registrant.(7)
- -------
(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).
(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.
47
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS AMENDMENT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
Healthcare Financial Partners, Inc.
By: /s/ Edward P. Nordberg, Jr.
---------------------------------
EDWARD P. NORDBERG, JR.
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
Dated: May 19, 1998
HEALTHCARE FINANCIAL PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
8. STOCK OPTION PLANS (CONTINUED)
In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock Based Compensation" ("SFAS 123"), which
requires, for companies electing to continue to follow the recognition
provisions of APB 25, pro forma disclosures of what net income and earnings per
share would have been had the recognition provisions of SFAS 123 been adopted.
For purposes of pro forma disclosure, the estimated fair value of the options is
amortized to expense over the option's vesting period. For the years ended
December 31, 1997 and 1996, the Company's pro forma net income and earnings per
share would have been:
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996
---------- ---------
Pro forma net income $7,610,754 $494,648
========== ========
Pro forma basic net income per share $ .94 $ .12
========== ========
Pro forma diluted net income per share $ .92 $ .12
========== ========
The effects of applying SFAS 123 for pro forma disclosures are not
likely to be representative of the effects for future years.
For purposes of the pro forma disclosures above, the fair value of
options was estimated at the date of grant using a Black-Scholes option-pricing
model with the following weighted average assumptions: dividend yield 0%;
volatility factors of the expected market price of the Company's common stock of
.519% in 1997 and .623% in 1996; risk-free interest rate of 6.0% for both years
and expected option lives of five years.
49
HEALTHCARE FINANCIAL PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
8. STOCK OPTION PLANS (CONTINUED)
A summary of the Company's stock option activity for the years ended
December 31 was as follows:
1997 1996 1995
--------------------- ---------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
-------- -------- ------- --------- -------- --------
Outstanding - beginning of year 338,381 $10.57 38,381 $ 2.61
Granted 291,260 17.26 300,000 11.59 $38,381 $2.61
Exercised (5,300) 11.05
Forfeited (3,750) 11.28
------- ------- --------
Outstanding - end of year 620,591 338,381 38,381
======= ======= ========
Outstanding - end of year
Exercise price at $2.61 38,381 2.61 38,381 2.61 38,381 2.61
Exercise price at $6.37 2,510 6.37
Exercise prices at $11.05 to
$13.50 499,950 12.29 300,000 11.59
Exercise price at $28.25 79,750 28.25
------- ------- --------
Total 620,591 338,381 38,381
======= ======= ========
Exercisable - end of year
Exercise price at $2.61 38,381 2.61 38,381 2.61 38,381 2.61
Exercise prices at $11.05 to
$13.50 61,336 11.57
Total ------- ------- --------
99,717 38,381 38,381
======= ======= ========
The weighted average fair value of options granted during 1997 and
1996 was $7.62 and $6.76, respectively. The weighted average remaining
contractual life of outstanding options as of December 31, 1997 was 8.96 years.
9. EQUITY
For each year presented, basic earnings per share were computed by
dividing net income by the weighted average number of shares outstanding during
the year. The weighted average number of shares outstanding during the years
ended December 31, 1997 and 1996, was 8,087,857 and 4,030,416, respectively.
50
HEALTHCARE FINANCIAL PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
9. EQUITY (CONTINUED)
For each year presented, diluted earnings per share were computed by
dividing net income by the weighted average number of shares 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,
1997 and 1996, was 222,254 and 25,156, respectively.
The Company has authorized 10,000,000 shares of preferred stock. The
rights and preferences of the preferred stock are established by the Board of
Directors in its sole discretion. The specific rights and preferences have not
been established and no preferred stock has been issued.
10. LEASE COMMITMENTS
The Company leases office space under noncancelable operating leases.
The future minimum lease payments as of December 31, 1997 were as follows:
1998 $ 487,000
1999 498,000
2000 514,000
2001 530,000
Thereafter 545,000
----------
$2,574,000
==========
Rent expense for the year ended December 31, 1997, 1996 and 1995 was
$216,503, $118,400, and $156,720, respectively.
11. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. As stated in
Note 2, DEL was a partnership under the Internal Revenue Code. Accordingly,
income taxes are not material nor meaningful for years prior to 1996.
Significant components of the Company's deferred tax assets as of December 31,
were as follows:
1997 1996
----------- --------
Deferred tax assets:
Allowance for losses on receivables $1,031,087 $381,462
Amortization of goodwill 10,733
Depreciation (6,511)
Stock options 6,211
---------- --------
$1,041,520 $381,462
========== ========
51
HEALTHCARE FINANCIAL PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
11. INCOME TAXES (CONTINUED)
Significant components of the provision for income taxes for the years
ended December 31, were as follows:
1997 1996
----------- ----------
Federal taxes $4,539,321 $ 316,455
State taxes 997,994 73,532
Deferred income taxes (660,058) (351,127)
---------- ---------
Income taxes $4,877,257 $ 38,860
========== =========
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:
1997 1996
----------- ----------
Income tax at statutory federal tax rate $4,376,516 $ 193,264
State taxes, net of federal benefit 592,270 26,261
Reversal of deferred tax assets valuation allowance (183,218)
Other (91,529) 2,553
---------- ---------
Income taxes $4,877,257 $ 38,860
========== =========
The reversal of the deferred tax asset valuation allowance in 1996
results from the Company's generation of sufficient taxable income to ensure the
recoverability of deferred tax assets arising from the deductible temporary
differences.
12. RELATED PARTY TRANSACTIONS
Prior to the reorganization and offering, the Company had an agreement
with Funding, whereby Funding paid a monthly management fee for operational and
management support provided. Management fees under this agreement were $400,000
for the year ended December 31, 1995.
13. COMMITMENTS AND CONCENTRATIONS OF CREDIT RISK
The Company earned fee income in excess of 10% of total fee income
from one client, aggregating 11% of total fee income for the year ended December
31, 1996. For the year ended December 31, 1997, no one client accounted for 10%
or more of total fee income.
At December 31, 1997 and 1996, the Company had committed lines of
credit to its clients of approximately $275,432,000 and $84,600,000 of which
approximately $107,500,000 and $37,400,000, respectively were unused. The
Company extends credit based upon qualified client receivables outstanding and
is subject to contractual collateral and loan-to-value ratios.
52
HEALTHCARE FINANCIAL PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
13. COMMITMENTS AND CONCENTRATIONS OF CREDIT RISK (CONTINUED)
At December 31, 1997, outstanding finance receivables to three clients
comprised approximately 14% of the total finance receivable portfolio. 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 $4.8 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 by the effective interest method. Additionally, the Company has
extended a corporate guarantee of $1 million on behalf of a client. If that
client were to default on its obligation, the Company would be similarly liable.
The Company recognizes the revenue earned on this guarantee ratably over the one
year life of the guarantee using the effective interest method. 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 $16,200,000 approximated both the fair value and book value of Funding at the
date of acquisition.
The financial statements of the Company for 1996 are consolidated
assuming the acquisition of Funding occurred as of January 1, 1996 under the
provisions of Accounting Research Bulletin No. 51. The pro forma results of
operations following reflect the operating results of the Company for the years
ended December 31, 1996 and 1995 as if the acquisition of Funding had occurred
on January 1, 1995, and Funding operations were included with the Company.
1996 1995
---------- ----------
Net fee and interest income $8,607,409 $4,583,607
Provision for losses on receivables 656,116 217,388
Net operating expenses 4,987,742 2,844,505
---------- ----------
Net income $2,963,551 $1,521,714
========== ==========
53
HEALTHCARE FINANCIAL PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
14. PURCHASE OF FUNDING (CONTINUED)
The stand-alone results of operations of Funding for the period January 1, 1996
to November 26, 1996 (date of acquisition by the Company of Funding) were as
follows:
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
===========
15. HEALTHCARE FINANCIAL PARTNERS, INC. (PARENT COMPANY ONLY) CONDENSED
FINANCIAL INFORMATION
DECEMBER 31,
---------------------------
BALANCE SHEET 1997 1996
------------- ------------
Assets:
Cash and cash equivalents $ 65,294 $ 35,442
Investment in subsidiaries 87,338,737 26,986,465
Other 608,921 3,373
---------- -----------
Total Assets
$88,012,952 $27,025,280
=========== ===========
Liabilities and Equity:
Accounts payable and accrued expenses $ 182,764 $ 304,304
Stockholders' equity 87,830,188 26,720,976
---------- -----------
Total Liabilities and Equity $88,012,952 $27,025,280
========== ===========
YEAR ENDED DECEMBER 31,
-------------------------
STATEMENT OF OPERATIONS 1997 1996
----------- -----------
Income $ 2,576,597 $ 1,401,025
Operating expenses 2,419,875 1,784,272
----------- -----------
Income (loss) before income taxes and
equity in undistributed earnings of
subsidiary 156,722 (383,247)
Income tax expense 1,485 27,358
----------- -----------
Income (loss) before equity in
undistributed earnings of subsidiary 155,237 (410,605)
Equity in undistributed earnings of
subsidiaries 7,839,611 940,167
----------- -----------
Net income $ 7,994,848 $ 529,562
=========== ===========
54
HEALTHCARE FINANCIAL PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
15. HEALTHCARE FINANCIAL PARTNERS, INC. (PARENT COMPANY ONLY) CONDENSED
FINANCIAL INFORMATION (CONTINUED)
YEAR ENDED DECEMBER 31,
-------------------------
STATEMENT OF CASH FLOWS 1997 1996
----------- ------------
OPERATING ACTIVITIES
Net income $ 7,994,848 $ 529,562
Adjustments to reconcile net income to
net cash used by operations:
Depreciation 113,550 54,401
Stock compensation 15,989
Equity in undistributed earnings of
subsidiary (7,839,611) (940,167)
Other (840,638) 76,627
------------- ------------
Net cash used by operating activities (555,862) (279,577)
INVESTING ACTIVITIES
Increase in investment in subsidiary (52,512,661) (26,046,298)
Payment of amounts due to affiliates (149,537)
Other (221,330)
------------ ------------
Net cash used in investing activities (52,512,661) (26,417,165)
FINANCING ACTIVITIES
Issuance of common stock and warrants 53,098,375 26,732,184
------------- ------------
Net cash provided by financing
activities 53,098,375 26,732,184
------------- ------------
Increase in cash and cash equivalents 29,852 35,442
Cash and cash equivalents at beginning
of year 35,442
------------- ------------
Cash and cash equivalents at end of year $ 65,294 $ 35,442
============= ============
55
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. According, 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.
56
PART III
--------
The Proxy Statement for the Annual Meeting of Stockholders to be held
May 29, 1998 (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.
EXHIBIT
NUMBER DESCRIPTION
- --------------------------------------------------------------------------------
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.(1)
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)
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)
57
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 partner and HealthPartners Investors II,
LLC, as limited partner, and Guaranty Agreement dated as of March
5, 1997 between HealthCare Financial Partners, Inc. and
HealthPartners Investors II, LLC.(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 27, 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 April 15, 1997
among Fleet Capital Corporation and HCFP Funding, Inc.(7)
21.1 List of Subsidiaries of the Registrant.(7)
- ---------------------
(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).
(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.
58
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this amendment to be signed
on its behalf by the undersigned, thereunto duly authorized.
HEALTHCARE FINANCIAL PARTNERS, INC.
DATE: May 18, 1998 By: /s/ Edward P. Nordberg, Jr.
------------------------------
EDWARD P. NORDBERG, JR.
Executive Vice President and
Chief Financial Officer
59