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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: MARCH 31, 1999
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
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, 4TH FLOOR
CHEVY CHASE, MARYLAND 20815
(Address of principal executive offices) (Zip code)
(301) 961-1640
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all documents
and reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes [X] No [_]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock ($.01 par value) 13,421,039 as of March 31, 1999
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HEALTHCARE FINANCIAL PARTNERS, INC.
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Balance Sheets at March 31, 1999
and December 31, 1998 (Unaudited)................................................. 1
Consolidated Statements of Income for the three months ended
March 31, 1999 and March 31, 1998 (Unaudited)..................................... 2
Consolidated Statements of Equity for the year and three months ended
December 31, 1998 and March 31, 1999 (Unaudited).................................. 3
Consolidated Statements of Cash Flows for the three months ended
March 31, 1999 and March 31, 1998 (Unaudited)..................................... 4
Notes to Consolidated Financial Statements (Unaudited)............................ 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations....................................... 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................... 15
Item 2. Changes in Securities............................................................... 15
Item 3. Defaults Upon Senior Securities..................................................... 15
Item 4. Submission of Matters to a Vote of Security Holders................................. 15
Item 5. Other Information................................................................... 15
Item 6. Exhibits and Reports on Form 8-K.................................................... 15
SIGNATURES.................................................................................... 16
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HEALTHCARE FINANCIAL PARTNERS, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS March 31, December 31,
1999 1998
------------ ------------
Cash and cash equivalents $ 25,115,934 $ 39,551,044
Finance receivables 480,014,695 437,287,437
Less:
Allowance for losses on receivables 7,097,710 6,401,916
Unearned fees 4,065,092 3,802,302
------------ ------------
Net finance receivables 468,851,893 427,083,219
Prepaid expenses and other assets 10,323,117 9,455,219
Due from affiliate 1,518,371
Deferred income taxes 2,660,795 2,112,383
Investments in affiliates 10,092,794 11,397,194
Investment securities 11,932,691 11,755,628
Property and equipment, net 2,110,897 1,753,208
Goodwill 2,069,563 1,563,220
------------ ------------
Total assets $534,676,055 $504,671,115
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Borrowings $261,138,372 $238,783,273
Client holdbacks 4,436,788 4,208,859
Accounts payable to clients 462,219 540,205
Income taxes payable 4,623,102 1,918,084
Accounts payable and accrued expenses 7,026,341 6,180,833
Notes payable 2,149,633 3,380,828
Accrued interest 930,304 1,454,297
Due to affiliates, net 651,169
------------ ------------
Total liabilities 280,766,759 257,117,548
Stockholders' equity
Preferred stock, par value $.01 per share; 10,000,000 shares
authorized; none outstanding
Common stock, par value $.01 per share; 60,000,000 shares
authorized; 13,421,039 and 13,414,189 shares issued and
outstanding, respectively 134,211 134,142
Paid-in-capital 220,050,251 219,822,293
Retained earnings 33,897,396 27,757,342
Accumulated other comprehensive income (172,562) (160,210)
------------ ------------
Total stockholders' equity 253,909,296 247,553,567
------------ ------------
Total liabilities and stockholders' equity $534,676,055 $504,671,115
============ ============
See accompanying notes.
1
HEALTHCARE FINANCIAL PARTNERS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended
March 31,
-------------------------------
1999 1998
----------- -----------
Fee and interest income:
Finance receivables $17,275,634 $12,304,780
Other 284,729 187,176
----------- -----------
Total fee and interest income 17,560,363 12,491,956
Interest expense 4,370,059 3,800,254
----------- -----------
Net fee and interest income 13,190,304 8,691,702
Provision for losses on receivables 862,150 651,014
----------- -----------
Net fee and interest income after provision
for losses on receivables 12,328,154 8,040,688
Other operating income:
Commissions on REIT originations 987,500
Asset management income 60,000
Consulting income 114,147 118,050
----------- -----------
Total other operating income 1,161,647 118,050
----------- -----------
Total operating income 13,489,801 8,158,738
Operating expenses:
Compensation and benefits 1,580,518 1,116,334
Professional fees 754,294 178,081
Occupancy 158,413 123,669
Other 1,396,620 1,195,573
----------- -----------
Total operating expenses 3,889,845 2,613,657
Other income 553,179 516,252
----------- -----------
Income before income taxes 10,153,135 6,061,333
Income taxes 4,013,081 2,440,771
----------- -----------
Net income $ 6,140,054 $ 3,620,562
=========== ===========
Basic earnings per share $ .46 $ .35
=========== ===========
Weighted average shares outstanding 13,419,709 10,283,279
=========== ===========
Diluted earnings per share $ .45 $ .34
=========== ===========
Diluted weighted average shares outstanding 13,675,790 10,668,910
=========== ===========
See accompanying notes.
2
HEALTHCARE FINANCIAL PARTNERS, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(UNAUDITED)
ACCUMULATED
OTHER
COMMON PAID-IN RETAINED COMPREHENSIVE TOTAL
STOCK CAPITAL EARNINGS INCOME EQUITY
--------- ------------- ------------ ------------- ------------
Balance at December 31, 1997 $ 96,703 $ 79,784,045 $ 7,949,440 $ 87,830,188
Comprehensive income:
Net Income 19,807,902 19,807,902
Unrealized holding loss on
investment securities available-for-
sale, net of tax
$ (160,210) (160,210)
------------
Comprehensive income 19,647,692
------------
Issuance of 3,657,500 shares of $.01
par value common stock 36,575 137,895,839 137,932,414
Common stock issuable and issued
under option plans 864 2,142,409 2,143,273
-------- ------------ ----------- ---------- ------------
Balance at December 31, 1998 134,142 219,822,293 27,757,342 (160,210) 247,553,567
------------
Comprehensive income:
Net income 6,140,054 6,140,054
Unrealized holding loss on
investment securities available-for-
sale, net of tax (12,352) (12,352)
------------
Comprehensive income 6,127,702
------------
Common stock issuable and issued
under option plans 69 227,958 228,027
-------- ------------ ----------- ---------- ------------
Balance at March 31, 1999 $134,211 $220,050,251 $33,897,396 $ (172,562) $253,909,296
======== ============ =========== ========== ============
See accompanying notes.
3
HEALTHCARE FINANCIAL PARTNERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
--------------------------------------
1999 1998
------------------ -----------------
OPERATING ACTIVITIES
Net income $ 6,140,054 $ 3,620,562
Adjustments to reconcile net income to
net cash provided by operations:
Depreciation 76,122 43,023
Amortization of goodwill 43,656 43,656
Stock compensation plan 34,208 3,990
Net loss on investment securities 330,000
Equity in earnings from unconsolidated entity (527,313)
Provision for losses on receivables 862,150 651,014
Deferred income taxes (540,515) (243,145)
Changes in assets and liabilities:
(Decrease) increase in accounts payable to related parties (2,169,540) 1,673,889
Increase in prepaid expenses and other (867,898) (165,122)
Increase (decrease) in income taxes payable 2,734,144 (2,384,036)
(Decrease) increase in accrued interest (523,993) 70,282
Increase in accounts payable and accrued expenses 217,523 1,839,862
------------- ------------
Net cash provided by operating activities 5,808,598 5,153,975
INVESTING ACTIVITIES
Increase in net finance receivables (42,402,896) (51,958,843)
Increase (decrease) in investment in limited partnership 1,304,400 (499,872)
Purchase of property and equipment, net (381,309) (746,864)
Purchase of investment securities (167,794)
------------- ------------
Net cash used in investing activities (41,479,805) (53,373,373)
FINANCING ACTIVITIES
Net borrowings 22,355,099 (85,989,588)
Issuance of common stock 164,693 138,098,916
Decrease in notes payable (1,283,695) (22,872)
------------ ------------
Net cash provided by financing activities 21,236,097 52,086,456
------------ ------------
Net (decrease) increase in cash and cash equivalents (14,435,110) 3,867,058
Cash and cash equivalents at beginning of period 39,551,044 18,668,703
------------ ------------
Cash and cash equivalents at end of period $ 25,115,934 $ 22,535,761
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash payments for interest $ 4,894,052 $ 3,729,971
============ ============
Cash payments for income taxes $ 1,848,578 $ 5,067,952
============ ============
See accompanying notes.
4
HEALTHCARE FINANCIAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated financial statements of Healthcare Financial Partners,
Inc. (the "Company") for 1999 include the accounts of the Company and the
accounts of its wholly-owned subsidiaries, HCFP Funding, Inc., HCFP Funding II,
Inc., HCFP Funding III, Inc., Wisconsin Circle Funding Corporation, Wisconsin
Circle II Funding Corporation, Wisconsin Circle III Funding Corporation, HCFP of
California, Inc., HCFP HC Management, Inc., HCFP REIT Origination, Inc., and
HealthCare Analysis Corporation ("HCAC"). 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 accompanying unaudited consolidated financial statements of the Company
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete consolidated financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates. Operating results for the three months ended March 31,
1999 are not necessarily indicative of the results for the year ending December
31, 1999. The notes to the consolidated financial statements contained in the
Company's Annual Report on Form 10-K/A for the year ended December 31, 1998
should be read in conjunction with these financial statements.
2. SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes cash and other liquid financial
instruments with an original maturity of three months or less.
EARNINGS PER SHARE
Basic earnings per share are based on the weighted average number of common
shares outstanding excluding any dilutive effects of options, warrants and other
dilutive securities. Diluted earnings per share reflect the assumed conversion
of all dilutive securities.
INCOME STATEMENT INFORMATION
Income statement information for the three months ended March 31, 1998 has
been reformatted to be consistent with the presentation for the three months
ended March 31, 1999.
5
HEALTHCARE FINANCIAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. HEALTHCARE ANALYSIS CORPORATION
On January 1, 1999, two employees of HCAC, in accordance with the terms of
the original acquisition of an operating company, each exercised a warrant for
3-3/4% ownership of HCAC. Each of these interests may be redeemed for cash on
or prior to January 1, 2000, for a sum certain of $275,000, at the option of
each employee.
4. BUSINESS COMBINATIONS
On April 19, 1999, the Company and Heller Financial, Inc. ("Heller"), a
diversified commercial holding company having assets of approximately $14
billion at December 31, 1998 and which is headquartered in Chicago, Illinois,
announced the signing of a definitive agreement for the purchase of the Company
by Heller. Under the agreement, the Company will become one of Heller's
domestic business units. The business combination will be accounted for using
purchase accounting. The purchase price is approximately $35 per share of the
Company's common stock, subject to adjustment based upon the average of the
closing prices for Heller class A stock during a 10-day pricing period ending on
the trading day immediately prior to the special meeting of the Company's
shareholders to vote upon the acquisition. It is anticipated that 41% of the
purchase price will be paid with Heller class A common stock in a tax free
exchange and 59% of the purchase price will be paid in cash. The proposed
acquisition is expected to close during the third quarter of 1999, subject to
approval of the Company's shareholders and receipt of certain regulatory
approvals and other conditions.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
HealthCare Financial Partners, Inc. (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. The Company targets
small and middle market healthcare service providers with financing needs that
range from $100,000 to $10 million in healthcare sub-markets where growth,
consolidation or restructuring appear likely in the near to medium term. The
Company had 209 clients as of March 31, 1999, of which 64 were affiliates of one
or more clients. The average amount outstanding per client or affiliated client
group at March 31, 1999 was approximately $2.9 million. For the three month
period ended March 31, 1999, the Company's net income was $6.1 million and for
the three month period ended March 31, 1998, the Company's net income was $3.6
million.
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.
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.
YEAR 2000
The Company has implemented a plan designed to ensure that all software
used by the Company in connection with its services will manage and manipulate
data involving the transition of dates from 1999 to 2000 (the "Year 2000
Problem") without functional or data abnormality and without inaccurate results
related to such data. The Company believes that all software presently in use
that is significant to day-to-day operations can effectively manage the Year
2000 Problem without the issues enumerated above.
The Company is also assessing the ability of certain computing applications
which are not considered essential to day-to-day operations, such as various
desk top applications, to manage the Year 2000 Problem. The Company expects to
have completed this aspect of its review and to have replaced or remediated
these applications by mid-1999.
To date, the execution of this plan has not had a material effect on the
Company's operating results, and the Company does not anticipate that the
continued execution of this plan will have a material effect on its operating
results. However, the Company is aware that some of its clients and payors may
not have implemented such programs. The failure by clients and payors to
implement necessary software changes may disrupt clients' computerized billing
and collection systems and adversely affect clients' cash flow and
collectibility of the Company's finance receivables. The Company is unable to
predict the effects that any such failure may have on the financial condition
and results of the operations of the Company. However, the Company continues to
pursue a survey of its clients regarding their year 2000 compliance. Through
April 13, 1999, 40% had replied. Of those that have responded, 66% have
indicated that they are either compliant or will be compliant shortly. The
Company is in the process of pursuing second requests for clients who have not
responded, and the Company will continue to actively pursue clients for
responses. If some clients do not
7
address this problem, the Company is in the process of identifying medical
billing and collection companies that are compliant and can assist any non-
compliant clients in their billing and collection process.
The Company also works directly with several banks, including accessing
cash transactions information electronically on a real time basis. Discussions
with the banks have occurred concerning the Year 2000 Problem. The Company has
been informed that these banks anticipate no significant year 2000 disruption of
their systems. The Company also makes extensive daily use of the Federal
Reserve's Fedwire transfer application. Accordingly, the Company has reviewed
the Year 2000 Quarterly Report of the Federal Reserve System dated December 11,
1998. According to that report, testing of the Fedwire transfer system for
compliance has been, and continues to be, performed. No significant disruption
of the Company's business is expected as a result of its use of the Fedwire
Transfer Service.
In addition, the Company may be subject to general economic disruptions
stemming from problems related to year 2000 computer issues. Such circumstances
may unfavorably affect the manner in which the Company presently conducts its
business and, in turn, may negatively affect the Company's operating results.
FINANCIAL INFORMATION
The following discussion should be read in conjunction with the
consolidated financial statements, including the notes thereto, of HealthCare
Financial Partners, Inc.
8
RESULTS OF OPERATIONS
THREE MONTH PERIOD ENDED MARCH 31, 1999 COMPARED TO THE THREE MONTH PERIOD ENDED
MARCH 31, 1998
Total fee and interest income increased to $17.6 million for the three
month period ended March 31, 1999 from $12.5 million for the three month period
ended March 31, 1998, an increase of 40.6%. The increase principally resulted
from an increase of $165.3 million in average finance receivables outstanding
due to the Company's growth in the Accounts Receivable and STL Programs during
the period. The Company had 209 clients at March 31, 1999 and 206 clients at
March 31, 1998. However, the Company's finance receivables increased to $480
million at March 31, 1999 from $302.4 million at March 31, 1998, a 58.8%
increase, which resulted from the addition of 116 clients who replaced 113
clients that generally maintained smaller average balances and whose obligations
either matured or were otherwise paid off. Additionally, clients borrowing both
at March 31, 1999 and 1998 generally had greater average borrowings from the
Company during the three month period ended March 31, 1999 as compared to the
first quarter of 1998. The yield on finance receivables decreased to 15.2% for
the three month period ended March 31, 1999 from 17.1% for the three month
period ended March 31, 1998. Therefore, the increase in fee and interest income
was due to growth in the volume of finance receivables which more than offset
the decrease in yields.
The decline in overall yields in 1999 was attributable to several factors.
First, the prime rate was 75 basis points lower in 1999's first quarter than it
was in 1998's first quarter which directly lowered the rates outstanding on the
majority of the Company's finance receivable portfolio. Second, the STL Program,
which generally has a lower yield than the Accounts Receivable Program,
comprised a greater proportion of the portfolio during the first quarter of 1999
than in the same period in the prior year, ending the quarter at 34.6% of total
finance receivables compared to 26.8% at March 31, 1998. Another factor
contributing to the reduction in yields in 1999 was the degree to which the
Company made larger loans to larger, more creditworthy borrowers.
The yields on the Accounts Receivable Program for the three month periods
ended March 31, 1999 and 1998 were 16.6% and 16.8%, respectively. The yields on
the STL Program for the same periods were 12.7% and 17.6%, respectively. The
decrease of 490 basis points for the STL Program noted for the periods being
compared stems from the activity within the STL Program. The STL program is
designed to offer short-term, bridge financing to clients. The yields on this
program are enhanced by commitment fees and success fees. The program is
structured to encourage pre-term refinancing by clients, upon which any
unamortized commitment and success fees would be recognized as income. In the
three month period ended March 31, 1999, such prepayments were substantially
less than the prepayments that occurred in the same period of the prior year,
resulting in an above-normal yield for the first quarter of 1998. The Company
generally expects the yields under the Accounts Receivable Program to be greater
than STL Program yields, but because of the higher-than-average number of
payoffs in the first quarter of 1998, this was not the case for that period.
Interest expense increased to $4.4 million for the three month period ended
March 31, 1999 from $3.8 million for the three month period ended March 31,
1998, and the Company's average cost of borrowed funds decreased to 7.1% for the
three month period ended March 31, 1999 to 8.1% for the three month period ended
March 31, 1998. Two primary factors resulted in the lower cost of funds: the
Company began to fund its business using its newly obtained (December 28, 1998)
CP Conduit Facility, which is the Company's least expensive borrowing facility,
and interest rates on the Company's borrowings during the first quarter of 1999
were generally lower than those outstanding during the first quarter of 1998 due
to the overall decline in interest rates experienced in the second and fourth
quarters of 1998. See "Liquidity and Capital Resources." The increase in
interest expense was the result of higher average borrowings required to support
the Company's growth. Because of the Company's overall growth in finance
receivables, net fee and interest
9
income from finance receivables increased 51.8%, to $13.2 million for the three
month period ended March 31, 1999 from $8.5 million for the three month period
ended March 31, 1998. The decreased yield on finance receivables which was
somewhat offset by the decreased cost of borrowings, resulted in only a small
decrease in the annualized net interest margin to 11.4% for the three month
period ended March 31, 1999 from 11.8% for the three month period ended March
31, 1998.
The Company's provision for losses on receivables increased to $862,000 for
the three months ended March 31, 1999 from $651,000 for the three months ended
March 31, 1998. The provision recognized during both periods was the amount
estimated by management that was necessary to maintain a sufficient allowance
for losses on receivables based on the composition of the finance receivable
portfolio at those dates. As of March 31, 1999, the Company's general allowance
for losses on receivables was $5.1 million or 1.1% of finance receivables. As of
March 31, 1998, the Company's general allowance for losses on receivables was
$3.3 million or 1.1% of finance receivables. At March 31, 1999, the Company had
a $2 million specific allowance for certain finance receivables. At March 31,
1998, no specific allowance was present. In the three months ended March 31,
1999, the Company charged off three loans totaling $166,000 in the ordinary
course of business.
The Company generates operating income in addition to fee and interest
income. Such additional operating income includes commissions, management fees,
and consulting fees. Expenses incurred in generating this additional operating
income are included in the operating expenses of the Company. During the first
three months of 1999, the Company originated transactions for Healthcare
Financial Partners REIT, Inc. (the "REIT") through a subsidiary and earned
$988,000 in commissions. The Company also provided management services through a
subsidiary to Health Charge, Inc., a company that offers a private label credit
card to hospitals and other health care providers which can be used by patients
as a means of paying the private pay portion of their treatment. Management fees
earned in connection with Health Charge were $60,000 in the three months ended
March 31, 1999. There were no such fees in the three month period ended March
31, 1998. Additionally, a subsidiary of the Company, HCAC, provided consulting
services to clients and others and generated $114,000 in fees in the first three
months of 1999, compared to consulting fees of $118,000 generated in the first
three months of 1998.
Operating expenses increased to $3.9 million for the three month period
ended March 31, 1999 from $2.6 million for the three month period ended March
31, 1998, a 48.8% increase. This increase was the result of a 41.6% increase in
compensation and benefits due to hiring additional personnel to support the
Company's growth. The large increase in personnel resulted in the need to lease
additional office space. As a result, occupancy costs increased by 28.1%. The
Company also experienced an increase of 16.8% in other operating costs in the
first quarter of 1999 as compared to the same period in 1998, all as a result of
the expansion of the Company's operations.
In addition to investing in finance receivables and the management
activities discussed above, the Company generates other non-operating income
from various other healthcare-related endeavors. Other non-operating income for
the three months ended March 31, 1999, was $553,000 compared to $516,000 for the
same period in 1998. Activities resulting in other income include investments in
marketable and non-marketable securities of healthcare companies, investments in
limited partnerships and limited liability companies, and dividend income from
the Company's investment in the REIT. The Company expects that these activities
will generally result in recurring income.
Net income increased to $6.1 million for the three month period ended March
31, 1999 from $3.6 million for the three month period ended March 31, 1998, a
69.6% increase, primarily as a result of the overall growth
10
in the Company's finance receivables as described above, and the diversification
of the Company through its expansion in 1999 of other operating income producing
activities.
COLLATERAL
The Company's primary protection against credit losses on its Accounts
Receivable Program is the collateral, which consists of client accounts
receivable due from third-party payors, and which collateralizes revolving lines
of credit secured by, and advances against, accounts receivable from clients.
The Company obtains a first priority security interest in all of the client's
accounts receivable, including receivables not financed by the Company (excess
collateral). As a result, amounts loaned or advanced to clients with respect to
specific accounts receivable are cross-collateralized by the Company's security
interest in other accounts receivable of the client.
With respect to revolving lines of credit secured by accounts receivable,
the Company will extend credit only up to a maximum percentage, ranging from 65%
to 85%, of the estimated net collectible value of the accounts receivable due
from third-party payors. The Company obtains a first priority security interest
in all of a client's accounts receivable, and may apply payments received with
respect to the full amount of the client's accounts receivable to offset any
amounts due from the client. The estimated net collectible value of a client's
accounts receivable thus exceeds at any time balances under lines of credit
secured by such accounts receivable.
With respect to advances against accounts receivable, the Company purchases
a client's accounts receivable at a discount from the estimated net collectible
value of the accounts receivable. The Company will advance only 65% to 85% of
the purchase price (which is equal to aggregate net collectible value minus a
purchase discount) of any batch of accounts receivable purchased. The excess of
the purchase price for a batch of receivables over the amount advanced with
respect to such batch (a "client holdback") is treated as a reserve and provides
additional security to the Company, insofar as holdback amounts may be applied
to offset amounts due with respect to the related batch of client receivables,
or any other batch of client receivables. As is the case with the revolving
lines of credit, the Company obtains a first priority security interest in all
of the client's accounts receivable.
In addition, under both programs, the Company frequently obtains a security
interest in other assets of a client and generally has recourse against the
clients, and often, the personal assets of the principals or parent companies of
clients.
Under the STL Program, the Company's term loans to clients are secured by a
first or second lien on various types of collateral, such as real estate,
accounts receivable, equipment, inventory and stock, depending on the
circumstances of each loan and the availability of collateral.
TURNOVER
With respect to the Accounts Receivable Program, a general measure of the
rate at which draws under the Program are paid back to the Company is the
Company's finance receivable turnover. The Company's turnover of its finance
receivables in its Accounts Receivable Program is calculated by dividing total
collections of client accounts receivable for each quarter by the average month-
end balance of finance receivables during the quarter. The table below presents
the turnover statistics for the applicable quarters and years ended:
11
1997 1998 1999
----- ---- ----
Quarters ended March 31, 2.6x 2.6x 2.6x
Quarters ended June 30, 2.8x 2.3x
Quarters ended September 30, 2.7x 2.4x
Quarters ended December 31, 2.7x 2.3x
Years ended December 31, 11.4x 9.2x
LIQUIDITY AND CAPITAL RESOURCES
Cash flows resulting from operating activities provided sources of cash
amounting to $5.8 million for the three month period ended March 31, 1999. This
compares to operating cash flows of $5.2 million in the same period in 1998.
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 other administrative expenses. 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 Company's current debt financing includes: (i) a
$50 million revolving line of credit (the "Bank Facility") with Fleet Capital
Corporation ("Fleet"); (ii) an investment-grade asset-based commercial paper
program (the "CP Facility") with ING Baring (U.S.) Capital Markets, Inc. ("ING")
which enables the Company to borrow up to $200 million; (iii) a $100 million
revolving warehouse line of credit (the "Warehouse Facility") with Credit Suisse
First Boston ("First Boston"); and (iv) a $150 million asset backed
securitization facility (the "CP Conduit Facility") with Variable Funding
Capital Corporation ("VFCC") an issuer of commercial paper sponsored by First
Union National Bank. The sources of equity financing were from sales of common
stock through the initial public offering and two subsequent public offerings of
the Company's common stock.
The Bank Facility is a revolving line of credit. The interest rates payable
by the Company under the Bank Facility adjust, based on the prime rate of Fleet
National Bank ("Fleet's prime rate"); however, the Company has the option to
borrow any portion of the Bank Facility in an integral multiple of $500,000
based on the one-month, two-month, three-month or six-month LIBOR plus 2%. As of
March 31, 1999 and December 31, 1998, $20.1 and $32.5 million, respectively, was
outstanding under the Bank Facility. The Bank Facility contains financial and
operating covenants, including the requirement that the Company maintain an
adjusted tangible net worth of not less than $5 million and a ratio of total
debt to equity of not more than 3.0 to 1.0. In addition, under the Bank Facility
the Company is not allowed to have at any time a cumulative negative cash flow
(as defined in the Bank Facility) in excess of $1 million. The inter-creditor
arrangements entered into in connection with the CP Facility excludes borrowings
under the CP Facility from debt for purposes of calculating the debt-to-equity
ratio. At March 31, 1999, the Company was in compliance with its financial
covenants under the Bank Facility. The expiration date for the Bank Facility is
March 29, 2002, subject to automatic renewal for one-year periods thereafter
unless terminated by either party which requires six months prior written
notice.
In December 1996, the Company entered into an agreement with ING for $100
million commitment under the CP Facility. On December 30, 1997, that commitment
was increased to $200 million. As of March 31, 1999, $128.2 million of
commercial paper was outstanding under the CP Facility and at December 31, 1998,
$114.2 million was outstanding. The CP Facility requires the Company to transfer
advances and related
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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 March 31, 1999 and
December 31, 1998, 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.
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 March 31, 1999 and December 31,
1998, the Company had borrowed $42.8 and $49.6 million, respectively, under the
Warehouse Facility. The Warehouse Facility requires that the amount outstanding
under the financing agreement may not exceed 88% of the principal amount of the
STL Program loans securitized. Interest will accrue under the financing
agreement at a rate of one-month LIBOR plus 3.75% on the first $50 million and
one-month LIBOR plus 3.0% on the second $50 million. The Warehouse Facility
requires that the loans advanced by the Company not exceed 95% of the appraised
value of the real estate, or a multiple of the underwritten cash flow of the
borrower, that the weighted average yield of advances under the Warehouse
Facility exceeds the prime rate of interest plus 3%, that the maximum weighted
average loan to value of advances under the Warehouse Facility be no greater
than 85%, and that no loan in the portfolio have a life greater than five years.
Additionally, the Warehouse Facility requires that, to the extent that the
Company makes advances in amounts greater than $7.5 million to any borrower,
that excess is advanced by the Company through other sources. The commitment to
make advances under the Warehouse Facility terminates on June 27, 1999.
Subsequent to that date, no new loans may be securitized under the existing
agreement; however previous loans securitized will remain outstanding until they
have been fully repaid. Additionally, under the terms of the Warehouse Facility,
the Company has the right to repurchase any assets securitized at a price equal
to the fair market value of such assets. At March 31, 1999 and December 31,
1998, the Company was in compliance with its covenants under the Warehouse
Facility.
On December 28, 1998, the Company committed to the CP Conduit Facility with
VFCC, an issuer of commercial paper sponsored by First Union National Bank. The
total borrowing capacity under this facility is $150 million. The facility
expires in December 2001. The Company, through a single-purpose subsidiary,
pledges receivables on a revolving line of credit with VFCC. VFCC issues
commercial paper or other indebtedness to fund the CP Conduit Facility with the
Company. The rate of interest charged under this agreement is the one-month
LIBOR plus 1.2%. In conjunction with the initial draw on this facility, which
took place on December 31, 1998, the Company entered into an interest rate swap
agreement. Under the agreement, the Company exchanges the prime-based rate of
interest which is accruing on finance receivables pledged under the facility for
a LIBOR-based rate of interest. At any point in time, the amount of collateral
subject to the swap agreement is equal to at least 75% of the balance drawn on
the CP Conduit Facility. At March 31, 1999 and December 31, 1998, $70 million
and $42.4 million, respectively, was outstanding under this facility. The CP
Conduit Facility will generally lend up to 80% of the collateral pledged and
requires (i) a minimum over-collateralization percentage of 125%, (ii) the
average loan outstanding shall be $2.75 million or less, (iii) the weighted
maturity of all STL loans be three years or less, (iv) the portfolio yield
equals or exceeds a minimum yield, (v) certain third party payor concentration
limits not be exceeded, and (vi) that the Company maintain a minimum tangible
net worth of $175 million. The CP Conduit Facility terminates on
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December 28, 2001 and may be extended by agreement in writing with VFCC. At
March 31, 1999 and December 31, 1998, the Company was in compliance with its
covenants under the CP Conduit Facility.
The Company requires substantial capital to finance its business.
Consequently, the Company's ability to grow and the future of its operations
will be affected by the availability and the terms of financing. The Company
expects to fund its future financing activities principally from (i) the CP
Facility, (ii) the Bank Facility, (iii) the Warehouse Facility, and (iv) the CP
Conduit Facility. While the Company expects to be able to obtain new financing
facilities or renew these existing financing facilities and to have continued
access to other sources of credit after expiration of these facilities, there is
no assurance that such financing will be available, or, if available, that it
will be on terms favorable to the Company.
INFLATION
Inflation has not had a significant effect on the Company's operating
results to date.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings -- Not Applicable
Item 2. Changes in Securities -- Not Applicable
Item 3. Defaults Upon Senior Securities -- Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders -- Not Applicable
Item 5. Other Information -- Not Applicable
Item 6. Exhibits and Reports on Form 8-K -- Not Applicable
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
HEALTHCARE FINANCIAL PARTNERS, INC.
DATE: May 13, 1999 /s/ EDWARD P. NORDBERG, JR.
-----------------------------------
By: Edward P. Nordberg, Jr.
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
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