<PAGE>
 
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                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
 
                               ----------------
 
                                  FORM 10-K/A
 
                                AMENDMENT NO. 1
                                      TO
                            ANNUAL REPORT PURSUANT
                                      TO
                              SECTION 13 OR 15(d)
                         OF THE SECURITIES ACT OF 1934
 
                               ----------------
 
                                  (MARK ONE)
 
[XANNUAL]REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
  OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
 
                                      OR
 
[_TRANSITION]REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
  ACT OF 1934 FOR THE TRANSITION PERIOD FROM
 
                                      TO
 
                        COMMISSION FILE NUMBER: 0-21425
 
                               ----------------
                      HEALTHCARE FINANCIAL PARTNERS, INC.
            (Exact name of registrant as specified in its charter)
 
              DELAWARE                                 52-1844418
   (State or other jurisdiction of                  (I.R.S. Employer)
   incorporation or organization)                  Identification No.)
 
  2 Wisconsin Circle, Fourth Floor
        Chevy Chase, Maryland                             20815
   (Address of principal executive                     (Zip Code)
              offices)
 
      Registrant's telephone number, including area code: (301) 961-1640
 
                               ----------------
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
 
<TABLE>
<CAPTION>
                                                           Name of Each Exchange
             Title of Each Class                            on which Registered
             -------------------                           ---------------------
<S>                                            <C>
        Common Stock, $.01 par value                      New York Stock Exchange
</TABLE>
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                                     None
 
                               ----------------
  Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
 
  Indicate by check mark if disclosure of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [_]
 
  As of March 17, 1999, the aggregate market value of the Common Stock held by
non-affiliates of the Registrant was not less than $290,732,487.
 
  As of March 17, 1999, there were 13,420,539 shares of Common Stock
outstanding.
 
                               ----------------
 
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<PAGE>
 
                                    PART I
 
ITEM 1. BUSINESS
 
  This Report contains certain statements that are "forward-looking
statements." Those statements include, among other things, the discussions of
the Company's business strategy and expectations concerning the Company's
market position, future operations, margins, profitability, funding sources,
liquidity and capital resources. Reliance on any forward-looking statement
involves risks and uncertainties. Although the Company believes that the
assumptions on which the forward-looking statements contained in the report
are based are reasonable, any of the assumptions could prove to be inaccurate.
If so, the forward-looking statements based on those assumptions also could be
incorrect. In light of these and other uncertainties, the inclusion of a
forward-looking statement in the report should not be regarded as a
representation by the Company that the Company's plans and objectives will be
achieved.
 
Recent Development
 
  On April 19, 1999, HealthCare Financial Partners, Inc. (the "Company")
entered into an Agreement and Plan of Merger with Heller Financial, Inc.
("Heller") and its wholly-owned subsidiary. The merger agreement provides for,
among other things, the acquisition of the Company by Heller pursuant to the
merger of the Company with and into such Heller subsidiary. In light of the
merger agreement with Heller, the Company has postponed its 1999 Annual
Meeting of Stockholders pending, among other things, approval of the merger by
the Company's stockholders. A special meeting of the Company's stockholders
will be scheduled at a later date to vote upon the merger.
 
General
 
  The Company is a specialty finance company offering asset-based and related
financing to healthcare providers with a primary focus on clients operating in
sub-markets of the healthcare industry, including long-term care, hospitals,
and physician practices. The Company also provides asset-based financing to
clients in other sub-markets of the healthcare industry, including pharmacies,
durable medical equipment suppliers, home healthcare, mental health providers,
contract research organizations, and other providers of finance and management
services to the healthcare industry. The Company targets small and middle
market healthcare service providers with financing needs in the $100,000 to
$30 million range in healthcare sub-markets which have favorable
characteristics for working capital financing, such as those where growth,
consolidation or restructuring appear likely in the near to medium term.
Management believes, based on its experience, that the Company's healthcare
industry expertise and specialized information systems, combined with its
responsiveness to clients, willingness to finance relatively small
transactions, and flexibility in structuring transactions, give it a
competitive advantage in its target markets over commercial banks, diversified
finance companies and traditional asset-based lenders.
 
  From its inception in 1993 through December 31, 1998, the Company has
advanced $4.3 billion to its clients in over 1,064 transactions, including
$2.4 billion advanced during the year ended December 31, 1998. The Company had
209 clients as of December 31, 1998, of which 68 were affiliates of one or
more other clients. The average amount outstanding per client or affiliated
client group at December 31, 1998 was approximately $2.7 million. For the year
ended December 31, 1996, the Company's pro forma net income was $3 million.
For the years ended December 31, 1998 and 1997, the Company's consolidated net
income was $19.8 and $8 million, respectively. For the year ended December 31,
1998, the Company's yield on finance receivables (total interest and fee
income divided by average finance receivables for the period) was 16.2%.
 
  At December 31, 1998, 72.8% of the Company's portfolio consisted of finance
receivables from businesses in the long-term care, hospital, and physician
practice sub-markets. According to Healthcare Financing Administration
("HCFA"), estimated expenditures in 1999 for those sub-markets, which the
Company currently targets, collectively constituted approximately $726 billion
of the over $1.22 trillion U.S. healthcare market. These sub-markets are
highly fragmented, and companies operating in these sub-markets generally have
significant working capital finance requirements. The Company's clients
operating in these sub-markets tend to be smaller, growing companies with
limited access to traditional sources of working capital financing from
 
                                       1
<PAGE>
 
commercial banks, diversified finance companies and asset-based lenders
because many such lenders have not developed the healthcare industry expertise
needed to underwrite smaller healthcare service companies or the specialized
systems necessary to track and monitor healthcare accounts receivable
transactions. Some of the Company's clients are also constrained from
obtaining financing from more traditional working capital sources due to their
inadequate equity capitalization, limited operating history, lack of
profitability, or financing needs below commercial bank size requirements.
 
  The Company provides financing to its clients through (i) revolving lines of
credit secured by, and advances against, accounts receivable (the "Accounts
Receivable Program"), and (ii) term loans (accompanied, in certain cases, by
warrants) secured by first or second liens on real estate, accounts receivable
or other assets (the "STL Program"). Loans under the STL Program are often
made in conjunction with financing provided under the Accounts Receivable
Program. Through December 31, 1998, the Company has incurred minor credit
losses in its Accounts Receivable Program and no credit losses in its STL
Program, although it periodically makes provisions for possible future losses
inherent in the portfolio.
 
  Under the Accounts Receivable Program, the accounts receivable are
obligations of third-party payors, such as federal and state Medicare and
Medicaid programs and other government financed programs ("Government
Programs"), commercial insurance companies, health maintenance organizations
and other managed healthcare concerns, self-insured corporations and, to a
limited extent, other healthcare service providers. The Company generally
advances 65% to 85% of the Company's estimate of the net collectible value of
client receivables from third-party payors. The Company's credit risk is
mitigated by the Company's ownership of or security interest in the remaining
balance of such receivables ("Excess Collateral"). Clients continue to bill
and collect the accounts receivable, subject to lockbox collection and sweep
arrangements established for the benefit of the Company. The Company uses its
proprietary information systems to monitor its clients' accounts receivable
base on a daily basis and to assist its clients in improving and streamlining
their billing and collection efforts with respect to such receivables. The
Company conducts extensive due diligence on potential clients for all its
financing programs and follows written underwriting and credit policies in
providing financing to clients.
 
  Through the STL Program, the Company serves clients that have more diverse
and complex financing needs, such as healthcare facility acquisitions and
expansions. In addition to the collateral securing the loans, which often
includes real estate, the Company generally has recourse to the borrower. STL
Program loans generally have terms of one to three years. As a result of the
Company's expansion of the STL Program, loans under that program comprised
33.7% of finance receivables at December 31, 1998. While yields on STL Program
loans are generally lower than the yields generated from the Accounts
Receivable Program, some STL Program loans also include warrants and other
fees that may enhance their effective yields.
 
  In order to enhance its underwriting capabilities, reduce its reliance on
third parties and increase its fee revenue, the Company established a
subsidiary, HealthCare Analysis Corporation ("HCAC"), in March 1997. HCAC
specializes in due diligence, reimbursement consulting and audit services for
businesses in the healthcare industry. As of January 31, 1999, HCAC employed
21 healthcare auditors and had offices in Maryland, California, and New York.
Prior to establishing HCAC, the Company used third parties for the due
diligence and audit work necessary in connection with financings provided to
its clients. By using HCAC to provide all of such services, the Company has
become more responsive to its clients while benefiting from HCAC's high
quality due diligence and consistent audit documentation. Fees charged by HCAC
for its services are passed on to such clients and prospective clients.
 
  In order to meet all or substantially all of the financing needs of its
clients and potential clients, in January 1998, certain senior executive
officers of the Company formed a real estate investment trust known as
HealthCare Financial Partners REIT, Inc. (the "REIT"). As of December 31,
1998, the Company owned approximately 9% of the REIT. The REIT was formed to
invest in income producing real estate and real estate related assets in the
healthcare industry. In May 1998, the REIT received approximately $136.2
million in net proceeds from a private placement of its securities.
Contemporaneously with the private placement, the REIT entered into a
management agreement (the "Management Agreement") with HCFP REIT Management,
Inc. (the "Manager"), a wholly-owned subsidiary of the Company, pursuant to
which the Manager managed the day-to-day operations of the REIT and was paid a
fee for its services. The Management Agreement had an initial term of three
years. On
 
                                       2
<PAGE>
 
December 11, 1998, the Company and the REIT terminated the Management
Agreement by mutual agreement, and in connection with such termination,
certain employees of the Manager became employees of the REIT. In addition,
the Company and the REIT entered into an origination agreement (the
"Origination Agreement") effective on the termination of the Management
Agreement which has an initial term of four years under which the Company
receives a fee of 2.5% of the purchase price or principal amount of each
investment which it originates on behalf of the REIT. The fee is paid upon
closing of the applicable investment. See Note 5 of Notes to Consolidated
Financial Statements included in Item 8.
 
  Additionally, during 1998, the Company purchased a 49% membership interest
in a limited liability company known as ZA Consulting, LLC ("ZA") that
provides consulting services to the healthcare industry from which it has
received, and expects to continue to receive income.
 
  The Company has developed low cost means of marketing its services on a
nationwide basis to selected healthcare sub-markets. The Company primarily
markets its services by telemarketing to prospective clients identified by the
Company, advertising in industry-specific periodicals and participating in
industry trade shows. The Company also markets its services by developing
referral relationships with accountants, lawyers, venture capital firms,
billing and collection companies and investment banks. The Company's clients
also assist the Company's marketing efforts by providing referrals and
references.
 
  The Company currently funds its operations through: (i) a $50 million
revolving line of credit (the "Bank Facility") with Fleet Capital Corporation
("Fleet"); (ii) an investment-grade asset-based commercial paper program (the
"CP Facility") with ING Baring (U.S.) Capital Markets, Inc. ("ING") which
enables the Company to borrow up to $200 million; (iii) a $100 million
revolving warehouse line of credit (the "Warehouse Facility") with Credit
Suisse First Boston ("First Boston"); and (iv) a $150 million asset backed
securitization facility (the "CP Conduit Facility") with Variable Funding
Capital Corporation ("VFCC") an issuer of commercial paper sponsored by First
Union National Bank.
 
Healthcare Industry
 
  According to HCFA, projected total domestic healthcare expenditures for 1999
will exceed $1.2 trillion, or 13.9% of gross domestic product, compared to
expenditures of $428.2 billion or 10.2% of gross domestic product in 1985. The
annual compound growth rate of healthcare expenditures from 1985 to 1998 was
8.3%. The breakdown of projected healthcare expenditures for 1999 is as
follows (dollars in billions):
 
<TABLE>
<CAPTION>
                                                                  Projected 1999
     Healthcare Industry Segment                                   Expenditures
     ---------------------------                                  --------------
     <S>                                                          <C>
     Acute-Care (hospital).......................................    $  398.9
     Physician Services..........................................       235.8
     Other Medical Non-Durables..................................       114.9
     Long-Term Care (nursing homes)..............................        91.3
     Other Professional Services.................................        71.9
     Insurance-Net Healthcare Costs..............................        82.2
     Dental Services.............................................        57.1
     Home Healthcare.............................................        35.7
     Government Public Health....................................        43.8
     Other Personal Care.........................................        35.5
     Research....................................................        19.2
     Vision Products and Other Medical Durables..................        15.0
     Construction................................................        15.5
                                                                     --------
       Total.....................................................    $1,216.8
                                                                     ========
</TABLE>
    --------
    Source: HCFA, Office of the Actuary.
 
  The Company believes that there are several distinct trends that will
continue to fuel the demand for and the dollar value of healthcare services in
the United States and the demand for the Company's services, including: (i)
dramatic change driven by governmental and market forces which have put
pressure on healthcare service providers to reduce healthcare delivery costs
and increase efficiency, often resulting in short-term
 
                                       3
<PAGE>
 
working capital needs by such providers as their businesses grow; (ii)
favorable demographic trends, including both the general increase in the U.S.
population and the aging of the U.S. population, which should increase the
size of the Company's principal target markets; (iii) growth, consolidation
and restructuring of fragmented sub-markets of healthcare, including long-term
care, hospitals, and physician practices; and (iv) advances in medical
technology, which have increased demand for healthcare services by expanding
the types of diseases that can be effectively treated and by extending the
population's life expectancy.
 
  According to HCFA, total annual expenditures in the long-term care market
are expected to grow from $50.9 billion in 1990 to a projected $91.3 billion
in 1999, and are projected to grow to $96.4 billion by 2000. The Company's
long-term care clients include single nursing home operators (1-2 homes),
small nursing home chains (3-10 homes) and regional nursing home chains (1-50
homes). According to the Guide to the Nursing Home Industry published in 1998
by HCIA, Inc., a healthcare information services company, the long-term care
industry remains widely diversified and fragmented, with all nursing home
chains controlling only 52% of the market.
 
  According to HCFA, total annual hospital care expenditures are expected to
grow from $256.4 billion in 1990 to a projected $398.9 billion in 1999, and
are projected to grow to $418.4 billion by 2000. According to the American
Hospital Association, by September 30, 1997, the number of hospitals in the
United States actively delivering patient care, was approximately 6,100.
 
  According to HCFA, total annual physician services expenditures are expected
to grow from $146.3 billion in 1990 to a projected $235.8 billion in 1999, and
are projected to grow to $253.1 billion by 2000. The American Medical
Association ("AMA") reports that, as of December 31, 1997, approximately
604,000 physicians were actively involved in patient care in the U.S., with a
growing number participating in multispecialty or single-specialty groups.
 
Market for Healthcare Asset-Based Financing
 
  Businesses generally utilize working capital or accounts receivable
financing to bridge the shortfall between the turnover of current assets and
the maturity of current liabilities. A business will often experience this
shortfall during periods of revenue growth because cash flow from new revenues
lags behind cash outlays required to produce new revenues. For example, a
growing labor intensive business will often need to fund payroll obligations
before payments are received on new services provided or products produced.
Many of the Company's clients are labor intensive and growing and therefore
require accounts receivable financing to fund their growth.
 
  In addition to the Company, working capital financing for small and middle
market healthcare service providers is currently provided by several different
sources. Some commercial banks and diversified finance companies have formed
groups or divisions to provide working capital financing for healthcare
service providers. Such groups or divisions generally focus on providing
financing to companies with borrowing needs in excess of $10 million, and
often require more extensive operating history before providing such
financing. As a general matter, these lenders typically have been less willing
to provide financing to healthcare service providers of the types served by
the Company because such lenders have not developed the healthcare industry
expertise needed to underwrite smaller healthcare service companies or the
specialized systems necessary for tracking and monitoring healthcare
receivables transactions, which are different from traditional accounts
receivable finance transactions. Several independent healthcare finance
companies that have raised funds through securitization programs also provide
financing to healthcare service providers. However, many of the financing
programs offered by such securitization companies are often rigid and
cumbersome for healthcare service providers to implement because, among other
things, securitization programs typically impose more stringent and inflexible
qualification requirements on borrowers and also impose concentration and
other limitations on the asset portfolio, as a result of rating agencies and
other requirements.
 
  In addition to working capital, small to middle market healthcare service
providers often require additional sources of financing, including term loans
to facilitate the growth or restructuring of their businesses. A majority of
the Company's clients are facility-based health care service providers, such
as nursing homes, that grow through the acquisition of additional facilities.
Facility-based healthcare service providers can often acquire additional
facilities at attractive valuations if, after identifying an opportunity, such
providers can obtain the
 
                                       4
<PAGE>
 
necessary financing to quickly close on the acquisition. Many of the Company's
clients also have a need for term loans as their businesses grow in order to
support expanding infrastructure requirements such as information systems,
enhanced professional management and marketing and business development costs.
To address this market need, the Company introduced the STL Program in late
1996.
 
  Management believes that the growth in healthcare expenditures, the
consolidation of certain segments of the healthcare market, and the
reorganization of the healthcare delivery system (caused by both cost
containment pressure and the introduction of new products and services) will
have positive effects on the demand for the Company's services since they in
many cases will increase the working capital needs of the Company's clients.
Historically, these trends have affected different sub-markets of the
healthcare industry at different times. The Company expects these trends to
continue, thereby providing the Company with long-term growth opportunities.
 
Strategy
 
  The Company's goal is to be the leading finance company in its targeted sub-
markets of the healthcare services industry and to become the primary source
for all of the financing needs of its clients. The Company's strategy for
growth is based on the following key elements:
 
  Target sub-markets within the healthcare industry that have favorable
characteristics for working capital financing, such as fragmented sub-markets
experiencing growth, consolidation or restructuring. At December 31, 1998,
72.8% of the Company's portfolio consisted of finance receivables from
businesses in the long-term care, hospital, and physician practice sub-
markets. Management believes that growth, consolidation and restructuring in
these sub-markets will continue to provide opportunities for the Company to
expand. By continuing to focus on these sub-markets, the Company seeks to
achieve attractive returns while controlling overall credit risk. In the
future, different healthcare sub-markets may experience increased demand for
working capital and the Company intends to be in a position to move into these
new markets as opportunities arise.
 
  Focus on healthcare service providers with financing needs of between
$100,000 and $30 million, a market that has been underserved by commercial
banks, diversified finance companies, traditional asset-based lenders and
other competitors of the Company. Most commercial banks, diversified finance
companies and traditional asset-based lenders have typically focused on
providing financing to companies with borrowing needs in excess of $10
million. The Company believes that its target market for transactions between
$100,000 and $30 million is much larger, in terms of the number of available
financing opportunities, and is less competitive than the market servicing
larger borrowing needs, thereby producing growth opportunities at attractive
rates.
 
  Become the primary source for all of the financing needs of clients by
introducing new financial products to leverage the Company's existing
expertise in healthcare finance and its origination, underwriting and
servicing capabilities within its target sub-markets. The Company employs
significant resources in the origination, underwriting and servicing of
clients in its target sub-markets. To further deepen its penetration of these
sub-markets and to meet the changing financial needs of new and existing
clients with a broader array of financial products, the Company began in late
1996 to offer additional financing products through the STL Program. In
addition, in 1998, certain senior executive officers of the Company formed the
REIT to meet the long-term real estate financing needs of its clients. The
Company expects to continue to selectively introduce new products to existing
and new clients, depending upon the needs of its clients, general economic
conditions, the Company's resources and other relevant factors. In some cases,
the Company anticipates that new products may be introduced as part of
cooperative arrangements with other lenders where the origination and
servicing relationship will remain with the Company.
 
  Increase the Company's offering of fee-based and value-added services to
clients such as the reimbursement consulting and clinical auditing services
provided by HCAC and ZA. The Company constantly seeks to increase the range of
fee-based services which it offers its clients in order to (i) reduce its
dependence on profits derived from the difference between the yield on finance
receivables and its cost of funds, (ii) supplement its total revenues by the
amount of such fees, and (iii) offer a broader range of services to its
clients. The fee-generating
 
                                       5
<PAGE>
 
capabilities of HCAC and ZA and the Origination Agreement connected with the
REIT are expected to increase other income of the Company.
 
  Seek to make strategic acquisitions of and investments in businesses that
are engaged in the same or similar business as the Company or that are engaged
in lines of business complementary to the Company's business. Because of the
growth of the Company's core finance receivable business, the Company
increasingly is offered opportunities to invest in, or acquire interests in,
healthcare service businesses that are involved in financial services,
receivables management, outsourcing, or financial and administrative
infrastructure development activities. The Company believes that businesses in
these areas are synergistic with the Company's core lending business and could
allow the Company to leverage its expertise in healthcare to meet the needs of
the Company's customer base. The Company will also seek to take advantage of
appropriate opportunities to acquire portfolios of loans backed by healthcare
receivables and to invest in or acquire companies in the same or similar lines
of business as the Company.
 
  Enhance the Company's credit risk management and improve servicing
capabilities through continued development of information management
systems. The Company has developed proprietary information systems which
effectively monitor its assets and which also serve as valuable tools to the
Company's smaller less sophisticated clients in managing their working capital
resources and streamlining their billing and collection efforts. The Company
believes that this "servicing" capability provides a competitive advantage by
strengthening relationships with clients, providing early identification of
dilution of client accounts receivable and increasing the Company's
understanding of its clients' operational needs.
 
Financing Programs
 
  The Company provides asset-based financing to healthcare service providers
through the Accounts Receivable Program and the STL Program.
 
  Accounts Receivable Program. Under the Accounts Receivable Program, the
Company offers healthcare service providers revolving lines of credit secured
by, and advances against, accounts receivable. Revolving lines of credit
offered through the Accounts Receivable Program permit a client to borrow, on
a revolving basis, 65% to 85% of the estimated net collectible value of the
client's accounts receivable due from third-party payors, which are pledged to
the Company. The Company charges its clients a base floating interest rate
ranging from one to three percent above the then applicable prime rate and a
variety of other fees, which may include a loan management fee, a commitment
fee, a set-up fee and an unused line fee, which fees collectively range from
one to four percent. The Company targets larger healthcare service providers
for these revolving lines of credit secured by accounts receivable, for which
the minimum commitment amount is generally $1 million and the maximum
commitment amount is generally $30 million. Such financings are recourse to
the client and generally have a term of one to three years.
 
  In connection with advances against receivables under the Accounts
Receivable Program, the Company purchases, on a revolving basis, a specified
batch of a client's accounts receivable owed to such client from third-party
payors. The purchase price for each batch of receivables is the estimated net
collectible value of such batch less a purchase discount, comprised of funding
and servicing fees. The purchase discount can be either a onetime fee for each
batch of receivables purchased or a periodic fee based on the average
outstanding balance of a batch of receivables ranging from one to five percent
of the net collectible value of such batch. With each purchase of a batch of
receivables, the Company advances to the client 65% to 85% of the purchase
price (which is equal to aggregate net collectible value minus a purchase
discount) of such batch. The Company assigns a collection period to batches of
receivables purchased which period generally ranges from 60 to 120 days from
the purchase date depending on the type of receivables purchased. The excess
of the purchase price for a batch of receivables over the amount advanced with
respect to such batch (a "client holdback") is treated as a reserve and
provides additional security to the Company. The Company targets smaller
healthcare service providers for financings involving advances against
receivables. Commitments for such financings are generally less than $1
million and terms are generally for one year with renewal options.
 
                                       6
<PAGE>
 
  At December 31, 1998, the outstanding balance of finance receivables under
the Accounts Receivable Program, which was financing 185 clients, was $289.7
million or 66.3% of the total finance receivable balance at that date. Of the
amounts outstanding under the Accounts Receivable Program at December 31,
1998, $278 million or 96% were in the form of revolving lines of credit and
$11.7 million or 4% were amounts advanced against accounts receivable. Of the
total balance in the Accounts Receivable Program at December 31, 1998, 28%
represented receivables from commercial insurers or other non-governmental
third-party payors, 29.2% represented receivables from Medicare, and 42.8%
represented receivables from Medicaid. The yield on finance receivables
generated under the Accounts Receivable Program for the year ended December
31, 1998 was 16.5%.
 
  STL Program. Under the STL Program, the Company provides its clients with
term loans for up to three years secured by first or second liens on real
estate, accounts receivable or other assets, such as equipment, inventory and
stock. The Company introduced the STL Program in late 1996, in an effort to
service clients' financing needs which the Company could not provide through
its Accounts Receivable Program. Such loans have been made to clients to
finance acquisitions and expansions of existing healthcare facilities, as well
as to provide working capital, and are generally provided to clients in
conjunction with financing under the Accounts Receivable Program. Such loans
are generally recourse to the borrower.
 
  At December 31, 1998, the outstanding balance of finance receivables under
the STL Program, which was financing 55 clients, was $147.6 million or 33.7%
of the total finance receivable balances at that date. The yield on finance
receivables generated under the STL Program for the year ended December 31,
1998 was 15.7%. While yields on such loans are generally lower than the yields
generated by the Accounts Receivable Program, some term loans under the STL
Program also include warrants or success fees that may enhance the effective
yield on such loans.
 
  The following table presents information about the Company's portfolio at
the periods indicated (dollars in thousands):
 
<TABLE>
<CAPTION>
                                            March             Sept.
                                             31,    June 30,   30,    Dec. 31,
                                             1997     1997     1997     1997
                                           -------- -------- -------- --------
<S>                                        <C>      <C>      <C>      <C>
Accounts Receivable Program Balance....... $104,865 $118,960 $172,171 $185,728
Total Accounts Receivable Program
 Clients..................................      137      145      171      161
Average Accounts Receivable Program
 Balance.................................. $    765 $    820 $  1,007 $  1,154
STL Program Balance....................... $ 11,923 $ 33,420 $ 46,331 $ 64,961
Total STL Program Clients.................       20       25       32       39
Average STL Program Balance............... $    596 $  1,337 $  1,448 $  1,666
 
<CAPTION>
                                            March             Sept.
                                             31,    June 30,   30,    Dec. 31,
                                             1998     1998     1998     1998
                                           -------- -------- -------- --------
<S>                                        <C>      <C>      <C>      <C>
Accounts Receivable Program Balance....... $221,241 $252,198 $262,052 $289,718
Total Accounts Receivable Program
 Clients..................................      188      178      173      185
Average Accounts Receivable Program
 Balance.................................. $  1,177 $  1,417 $  1,515 $  1,566
STL Program Balance....................... $ 81,127 $100,340 $127,632 $147,570
Total STL Program Clients.................       46       46       54       55
Average STL Program Balance............... $  1,764 $  2,181 $  2,364 $  2,683
</TABLE>
 
Operations
 
  Portfolio Development. The Company has established a portfolio development
group which is primarily responsible for new business generation, including
both marketing and underwriting.
 
  Marketing. The Company has developed low cost means of marketing its
services on a nationwide basis to selected healthcare sub-markets. The Company
primarily markets it services by telemarketing to prospective clients
identified by the Company, advertising in industry specific periodicals and
participating in industry trade shows. The Company's clients also assist the
Company's marketing efforts by providing referrals and references.
 
                                       7
<PAGE>
 
The Company has and will continue to rely primarily on direct marketing
efforts to generate new clients for its services.
 
  The Company also markets its services by developing referral relationships
with accountants, venture capital firms, billing and collection companies and
investment banks (which typically are professionals focusing on the healthcare
industry and who have a pre-existing relationship with a prospective client).
The Company usually does not pay a fee for referrals from professional firms.
However, the Company has closed transactions with clients through referrals
from independent brokers that generally specialize in the healthcare industry,
which brokers have been paid a one-time brokerage commission upon the closing
of a transaction. While not a primary focus of its marketing efforts, the
Company expects to continue to generate referrals through independent brokers.
 
  At February 25, 1999, the Company employed a staff of 12 sales and marketing
representatives at its headquarters in Chevy Chase, Maryland. In November
1997, the Company opened an office for marketing in Dallas, Texas, and
currently has two employees in its Dallas office. In July 1998, the Company
opened an office for marketing in Nashville, Tennessee and currently has one
employee in its Nashville office. Marketing personnel are compensated with a
base salary plus performance bonuses.
 
  Underwriting. The Company follows written underwriting and credit policies,
and its credit committee, consisting of senior officers of the company, must
unanimously approve each transaction which is proposed for the Accounts
Receivable Program or STL Program with a prospective client. The Company's
underwriting policies require a due diligence review of the prospective
client, its principals, its financial condition and strategic position,
including a review of all available financial statements and other financial
information, legal documentation and operational matters. The Company's due
diligence review also includes a detailed examination of a prospective
client's accounts receivable, accounts payable, billing and collection systems
and procedures, management information systems and real and personal property
and other collateral. Such a review is conducted after the Company and the
prospective client execute a non-binding term sheet, which requires the
prospective client to pay a due diligence deposit to defray the Company's
expenses. The Company's due diligence review is organized by the Company's
underwriters and supervised by the Company's chief operating officer, who is a
member of the credit committee. At March 17, 1999, the Company employed six
underwriters at its headquarters in Maryland. HCAC independently confirms
certain matters with respect to the prospective client's business and the
collectibility of its accounts receivable and any other collateral by
conducting public record searches, and, where appropriate, by contacting
third-party payors about the prospective client's receivables. For loans
primarily secured by real property, the Company requires third-party
appraisals and Phase I environmental surveys prior to making such loans.
 
  In order to determine its estimate of the net collectible value of a
prospective client's accounts receivable, HCAC conducts extensive due
diligence to evaluate the receivables likely to be paid within a defined
collection period. This evaluation typically includes: (i) a review of
historical collections by type of third-party payor; (ii) a review of
remittance advice and information relating to claim denials (including
explanations of benefits); (iii) a review of claims files and related medical
records; and (iv) an analysis of billing and collections staff and procedures.
HCAC may also periodically employ third-party claim verifiers to assist it in
determining the net collectible value of a client's accounts receivable. Claim
verifiers include healthcare billing and collection companies, healthcare
accounting firms with expertise in reviewing cost reports filed with Medicaid
and Medicare, and specialized consultants with expertise in certain sub-
markets of the healthcare industry. Claim verifiers are pre-approved by the
Company's credit committee. When deemed necessary by the Company for credit
approval, the Company may obtain corporate or personal guaranties or other
collateral in connection with the closing of a transaction.
 
  Loan Administration. The Company has established a loan administration group
which is primarily responsible for monitoring the performance of its loans, as
well as its collection procedures. The Company monitors the collections of
client accounts receivable and its finance receivables on a daily basis. Each
client is assigned an account manager, who receives draw and advance requests,
posts collections and serves as the
 
                                       8
<PAGE>
 
primary contact between the Company and the client. Each client is also
assigned to a loan officer who is primarily responsible for monitoring that
client's financial condition and the adequacy of the Company's collateral with
respect to loans to such client. All draw or advance requests must be approved
by the client's loan officer and by the Company's senior credit officer or
chief operating officer. At March 17, 1999, the Company employed eleven
account managers and ten loan officers in its Maryland headquarters. The
Company's proprietary information system enables the Company to monitor each
client's account, as well as permit management to evaluate and mitigate
against risks on a portfolio basis. See "--Information Systems." In addition,
the Company conducts audits of its clients' billing and collection procedures,
financial condition and operating strategies at least annually, and more
frequently if warranted, particularly with respect to the loans with
outstanding balances of more than $1.5 million, where audits are usually
conducted on a quarterly basis. Such audits are conducted by HCAC.
 
  The Company grades STL Program loans on a scale of 1 to 6. Performing STL
Program loans are graded 1 to 4, with grade 1 assigned to those loans
involving the least amount of risk. The grading system is intended to reflect
the performance of a borrower's business, the collateral coverage of the loan
and other factors considered relevant to healthcare service businesses. Each
loan is initially graded based on the financial performance of the borrower
and other specific risk factors associated with the borrower, including
growth, collateral coverage, capitalization, quality of management, value of
intangible assets and availability of working capital. All new loans are
assigned grade 3 for a period of six months in the absence of an extraordinary
event during that period. After the initial six months, loans are reassigned a
grade of 1 to 6. Thereafter, all loans are reviewed and graded on at least a
quarterly basis. Performing loans are generally serviced by the Company's
account managers, with non-performing loans being serviced in some cases by a
member of the Company's loan workout group, which currently consists of the
Vice President of Special Assets, a loan officer, and the Company's senior
credit officer.
 
  Non-performing loans are assigned a grade of either 5 or 6. Grade 5 is
assigned to a non-performing loan which the Company believes may be brought
back into compliance by the borrower's current management. Non-performing
loans are placed on the Company's watch list and are serviced by a member of
the loan workout group. Grade 6 is assigned to a loan that the Company
believes cannot be brought back into compliance. Such loans are liquidated
either informally or through legal proceedings.
 
  Collection Procedures. The Company's cash collection procedures vary by (i)
the type of program provided by the Company and (ii) the type of accounts
receivable due and owing to clients from either insurance companies and health
maintenance organizations ("Commercial Insurers"), Government Programs, or in
certain limited circumstances, other healthcare service providers.
 
  Receivables due and owing from Government Programs are subject to certain
laws and regulations not applicable to Commercial Insurers. Except in certain
limited cases, Medicare and Medicaid laws and regulations provide that the
payments for services rendered under Government Programs can only be made to
the healthcare service provider that has rendered the services.
 
  With respect to the Accounts Receivable Program, clients continue to bill
and collect accounts receivable in the ordinary course of business; provided,
however, that subject to certain limitations applicable to Government Program-
related receivables, the Company retains the right to assume the billing and
collection process upon notice to the client. The Company maintains a general
lockbox in the Company's name into which payments with respect to all
receivables purchased from clients in the Accounts Receivable Program, other
than Government Program-related receivables, are required to be remitted. If a
client in the Accounts Receivable Program generates Government Program-related
receivables, the client is required to establish a lockbox in the client's
name into which payments on such receivables are to be directed. Balances from
all lockboxes maintained in connection with the Accounts Receivable Program
are swept on a daily basis to the Company.
 
  With respect to the STL Program, clients make periodic interest and/or
principal payments, generally monthly. The Company will undertake collection
efforts if such payments are not made on a timely basis. Such efforts may
include acceleration of amounts due under the loan and institution of
foreclosure proceedings with
 
                                       9
<PAGE>
 
respect to any property securing the loan. In addition, if the loan is secured
by personal guaranties, the Company may pursue remedies to collect amounts
owed by the guarantors.
 
  Documentation. The Company's documentation for the Accounts Receivable and
STL Program is described below.
 
  Accounts Receivable Program. Revolving lines of credit secured by accounts
receivable are made pursuant to a loan and security agreement (the "AR Loan
Agreement"), a note, and ancillary documents. The AR Loan Agreements generally
have stated terms of one to three years, with automatic one-year extensions,
and provide for payment of liquidated damages to the Company in the event of
early termination by the client. The Company generally advances only 65% to
85% of the Company's estimate of the net collectible value of client
receivables from third-party payors. As security for such advances, the
Company is granted a first priority security interest in all of the client's
then-existing and future accounts receivable, and frequently obtains a
security interest in inventory, goods, general intangibles, equipment, deposit
accounts, cash, other assets and proceeds.
 
  The AR Loan Agreement contains a number of negative covenants, which
generally include covenants limiting additional borrowings, prohibiting the
client's ability to pledge assets, restricting payment by the client of
dividends or management fees or returning capital to investors, and imposing
minimum net worth and, if applicable, minimum census requirements. In the
event of a client default, all debt owing under the AR Loan Agreement may be
accelerated and the Company may exercise its rights, including foreclosing on
the collateral.
 
  Advances against accounts receivable under the Accounts Receivable Program
are made pursuant to a Receivables Purchase and Sale Agreement (the "AR
Agreement") and are structured as purchases of eligible accounts receivable
designated from time to time on a "batch" basis. AR Agreements provide for the
Company's purchase of eligible accounts receivable offered by the client from
time to time to the Company. AR Agreements generally have stated terms of one
to three years, with automatic one-year extensions. The client is required to
sell to the Company a minimum amount of eligible accounts receivable each
month during the term of an AR Agreement; however, the Company's total
investment in eligible accounts receivable under an AR Agreement is limited to
a specific "commitment" amount. The Company may accept or reject in its
discretion any portion of eligible accounts receivable offered for sale by the
client to the Company. Although accounts receivable purchased by the Company
under the Accounts Receivable Program are assigned to the Company pursuant to
the AR Agreement, the client retains its rights to receive payment and to make
claims with respect to Government Program-related receivables.
 
  The purchase price for each batch of eligible accounts receivable under the
AR Agreements is the estimated net collectible value of such receivables less
a purchase discount, comprised of funding and servicing fees. An amount equal
to 65% to 85% of the purchase price is paid to the client; the Company retains
the balance of the purchase price as a client holdback, held as additional
security for the client's obligations under the AR Agreement. The client
holdback is released to the client (i) upon receipt by the Company of payments
relating to the receivables in an amount equal to the estimated net
collectible value of the receivables or (ii) upon expiration of the collection
period assigned to the respective batch of receivables, except that if the
Company has not received payments at least equal to the purchase price for the
receivables, then the Company may at its option either (x) offset any
shortfall against client holdbacks relating to other batches or from amounts
due to the client from the sale of other batches, or (v) require the client to
replace the uncollected receivables with substitute eligible accounts
receivable.
 
  The AR Agreement also contemplates that the client may grant to the Company
a security interest in other assets of the client as may be mutually agreed.
In addition, pursuant to the AR Agreement, the client agrees to indemnify the
Company for all losses arising out of or relating to the AR Agreement.
 
  Under the AR Agreement, the client covenants to notify payors of the sale of
accounts receivable to the Company and to assist the Company in collecting
payments on the purchased receivables and causing such payments to be remitted
to the Company. The client agrees to instruct all payors that payments are to
be made to such lockbox or other account as the Company may direct.
 
                                      10
<PAGE>
 
  STL Program. Because of the nature of the STL Program loans, which are made
to finance particular needs of clients such as acquisitions and expansions of
existing healthcare facilities, the Company's documentation for loans under
the STL Program is tailored to the needs of the particular borrower and type
of available collateral. Such documentation generally includes a term loan
agreement and promissory note (the "STL Loan Agreement") and a mortgage and
security agreement with respect to the collateral for the loan. The STL Loan
Agreement contains financial and other covenants similar to those in the AR
Loan Agreement. In the event of a client default, all debt owed under the STL
Loan Agreement may be accelerated and the Company may exercise its rights,
including foreclosing on the collateral. The Company requires an appraisal and
a Phase I environmental survey for real property collateral securing an STL
Program Loan.
 
  STL Program loans often include provision for warrants or other equity
interests in the borrower. Documentation of the warrant or other equity
interest may include provisions relating to, among other things, anti-dilution
protection, registration rights, put and call features and representation of
the Company on the board of directors or similar body of the borrower in
certain circumstances.
 
Clients
 
  The Company's client base is diversified. As of December 31, 1998, the
Company was servicing clients located in 35 states across the country,
operating in a number of different sub-markets of the healthcare industry,
with a concentration in the long-term care, hospital, and physician practice
sub-markets.
 
                              PORTFOLIO ANALYSIS
 
<TABLE>
<CAPTION>
                                  Number of  Percent of   Finance    Percent of
                                  Clients(1)  Clients   Receivables  Portfolio
                                  ---------- ---------- ------------ ----------
<S>                               <C>        <C>        <C>          <C>
Industry Group
Long Term Care...................     84        40.2%   $205,079,301    46.9%
Hospital.........................     17         8.1      59,422,956    13.6
Home Healthcare..................     39        18.7      54,998,831    12.6
Physician Practice...............     30        14.4      53,877,675    12.3
Mental Health....................     18         8.6      36,721,639     8.4
Other............................      9         4.3      12,790,453     2.9
Rehabilitation...................      5         2.4       8,161,484     1.9
Diagnostic.......................      3         1.3       3,627,451     0.8
Ambulatory Services..............      2         1.0       2,028,831     0.5
Durable Medical Equipment........      2         1.0         578,816     0.1
                                     ---       -----    ------------   -----
  Total..........................    209       100.0%   $437,287,437   100.0%
                                     ===       =====    ============   =====
Program Breakdown
Accounts Receivable Program......    185        77.1%   $289,717,840    66.3%
STL Program......................     55        22.9     147,569,597    33.7
                                     ---       -----    ------------   -----
  Total..........................    240       100.0%   $437,287,437   100.0%
                                     ===       =====    ============   =====
</TABLE>
--------
(1) At December 31, 1998, 31 clients participated in both the Accounts
    Receivable Program and STL Program.
 
  Sources of capital available to the Company to fund finance receivables
under the Accounts Receivable and STL Programs include the Bank Facility, the
CP Facility, the Warehouse Facility, the CP Conduit Facility, and
stockholders' equity.
 
  Bank Facility. The Bank Facility is a revolving line of credit for up to $50
million. The interest rates payable by the Company under the Bank Facility
adjust, based on Fleet's prime rate; however, the Company has the option to
borrow any portion of the Bank Facility in an integral multiple of $500,000
based on the one-month,
 
                                      11
<PAGE>
 
two-month, three-month or six-month LIBOR plus 2.0%. The Bank Facility
contains certain financial covenants which must be maintained by the Company
in order to obtain funds. The expiration date for the Bank Facility is March
29, 2002, subject to automatic renewal for one-year periods thereafter unless
terminated by either party.
 
  CP Facility. Under the terms of the CP Facility, the Company may borrow up
to $200 million. The Company formed a bankruptcy remote, special purpose
corporation to which the Company has transferred loans and receivables which
meet certain conditions required by the CP Facility. The special purpose
corporation pledges the loans and receivables to a commercial paper conduit,
which lends against such assets through the issuance of commercial paper. The
maturity date for the CP Facility is December 5, 2001. However, the program
may be terminated by the Company at any time after December 5, 1999, without
penalty.
 
  Warehouse Facility. Under the terms of the Warehouse Facility, the Company
may borrow up to $100 million. The Company formed a bankruptcy remote, special
purpose corporation to which the Company has transferred loans under the STL
Program which meet certain conditions required by the Warehouse Facility. The
amount outstanding under the Warehouse Facility may not exceed 88% of the
principal amount of the loans transferred, subject to a $100 million maximum.
Interest accrues under the Warehouse Facility at a rate equal to LIBOR plus
3.75% on the first $50 million of amounts outstanding under the Warehouse
Facility and LIBOR plus 3.0% on amounts over $50 million. The Warehouse
Facility expires on June 27, 1999, as to new loans. However, previous loans
securitized under the Warehouse Facility remain outstanding following such
expiration until such loans are fully repaid or expire by their terms.
 
  CP Conduit Facility. The total borrowing capacity under the CP Conduit
Facility is $150 million. In connection with the CP Conduit Facility, the
Company formed a wholly-owned special purpose corporation to which the Company
has transferred loans. The special purpose corporation pledges the loans to a
commercial paper conduit, which lends against such assets through the issuance
of commercial paper. The rate of interest charged under this agreement is the
one-month LIBOR plus 1.2%. The CP Conduit Facility terminates on December 28,
2001 and may be extended by agreement in writing with VFCC.
 
  In March 1999, the Company engaged First Union Capital Markets, Inc. ("First
Union") to arrange a $500 million financing that is expected to significantly
restructure its overall debt facilities and lower the Company's overall cost
of funds by approximately 15%. The Company anticipates completing this
transaction prior to June 30, 1999. The transaction is subject to the approval
of First Union, rating agencies, and potential additional participants.
 
Credit Loss Policy and Experience
 
  The Company regularly reviews its outstanding finance receivables to
determine the adequacy of its allowance for losses on receivables. The
allowance for losses on receivables is maintained at an amount estimated to be
sufficient to absorb future losses, net of recoveries, inherent in the finance
receivables. In evaluating the adequacy of the allowance, management of the
Company considers trends in healthcare sub-markets, past-due accounts,
historical charge-off and recovery rates, credit risk indicators, economic
conditions, on-going credit evaluations, overall portfolio size, average
client balances, Excess Collateral, real estate collateral valuations and
underwriting policies, among other items. As of December 31, 1996, the
Company's reserve was $1.1 million or 1.2% of finance receivables; at December
31, 1997, it was $2.7 million or 1.1% of finance receivables; and at December
31, 1998, it was $6.4 million or 1.5% of finance receivables. To the extent
that management deems specific finance receivable advances to be wholly or
partially uncollectible, the Company establishes a specific loss reserve equal
to such amount. At December 31, 1996 and 1997, the Company had no specific
reserves. Included in the reserve balance at December 31, 1998, was specific
reserves amounting to $1.8 million. In the opinion of management, based on a
review of the company's portfolio, the allowance for losses on receivables is
adequate at this time, although there can be no assurance that such reserve
will be adequate in the future.
 
                                      12
<PAGE>
 
Information Systems
 
  The Company owns a proprietary information system to monitor the Accounts
Receivable and STL Programs, which it refers to as the Receivables Tracking
System (the "RTS"). The RTS was developed by Creative Information Systems,
Inc., a stockholder of the Company. The RTS gives the Company the ability to
track and reconcile receivables that the Company loans or advances against
under the Accounts Receivable Program and loans made under the STL Program.
 
  With respect to the loans under the Accounts Receivable and STL Programs,
the amount of any advances, collections and adjustments are entered manually
into the RTS by the Company's account managers on a daily basis. With respect
to advances against client receivables under the Accounts Receivable Program,
certain client parameters are entered manually into the RTS, and more detailed
information on each batch of receivables is generally entered electronically
based on pre-established formats tailored to the client's software systems.
Upon the collection of funds advanced, information about such collections are
entered into the RTS by the Company's account managers who then apply the
funds by directing RTS to search its data base to locate the receivable and
batch that has received a payment.
 
  The RTS generates daily, weekly and monthly reports summarizing the current
status of each batch of receivables in the Accounts Receivable Program, and
indicating draws and collections, trend analysis, and interest and fee charges
for management's review. The RTS is also able to generate reports for the
Company's lenders with respect to pledged loans and batches of receivables,
along with concentrations in the Accounts Receivable Program portfolios by
client and third-party payor type.
 
  Certain reports generated through the RTS, including cash application
detail, batch summary and trend analysis reports, can also be used to assist
the Company's clients in monitoring changes in their cash flow and managing
the growth of their businesses. These reports are provided to all of the
Company's clients on a weekly basis and are generally relied upon as a
management tool more frequently by smaller clients in the Accounts Receivable
Program, which tend to have less sophisticated management information systems.
 
Competition
 
  The Company encounters significant competition in its healthcare finance
business from numerous commercial banks, diversified finance companies, asset-
based lenders and specialty healthcare finance companies. Additionally,
healthcare service providers often seek alternative sources of financing from
a number of sources, including venture capital firms, small business
investment companies, suppliers and individuals. As a result, the Company
competes with a significant number of local and regional sources of financing
and several large national competitors. Many of these competitors have greater
financial and other resources than the Company and may have significantly
lower cost of funds. Competition can take many forms, including, among others,
the pricing of financing, transaction structuring (e.g., securitization vs.
portfolio lending), timeliness and responsiveness in processing a client's
financing application, and customer service.
 
Government Regulation
 
  The Company's healthcare finance business is required to be licensed in
certain states, and the Company's clients are generally subject to federal and
state regulation. In addition, the Company is subject to applicable usury and
other similar laws in the jurisdictions where the Company operates. These laws
generally limit the amount of interest and other fees and charges that a
lender may contract for, charge or receive in connection with a loan.
Applicable local law typically establishes penalties for violations of these
laws in that jurisdiction. These penalties could include the forfeiture to the
lender of usurious interest contracted for, charged or received and, in some
cases, all principal as well as all interest and other charges that the lender
has charged or received.
 
  Government at both the federal and state levels has continued in its efforts
to reduce, or at least limit the growth of, spending for healthcare services.
On August 5, 1997, President Clinton signed into law The Balanced Budget Act
of 1997 (the "BBA") which contains numerous Medicare and Medicaid cost-saving
measures. The
 
                                      13
<PAGE>
 
BBA has been projected to save $115 billion in Medicare spending over the next
five years, and $13 billion in the Medicaid program. Section 4711 of the BBA,
entitled "Flexibility in Payment Methods for Hospital, Nursing Facility,
ICF/MR, and Home Health Services," repealed the Boren Amendment, which had
required that state Medicaid programs pay to nursing home providers amounts
reasonable and adequate to meet the costs which must be incurred by
efficiently and economically operated facilities in order to provide care and
services in conformity with applicable state and federal laws, regulations and
quality and safety standards and to assure access to hospital services. The
Boren Amendment was previously the foundation of litigation by healthcare
facilities seeking rate increases. In place of the Boren amendment, the BBA
requires only that, for services and items furnished on or after October 1,
1997, state Medicaid programs must provide for a public process for
determination of Medicaid rates of payment for nursing facility services,
under which proposed rates, the methodologies underlying the establishment of
such rates, and justification for the proposed rates are published, and which
gives providers, beneficiaries and other concerned state residents a
reasonable opportunity for review and comment on the proposed rates,
methodologies and justifications. States are actively seeking ways to reduce
Medicaid spending for healthcare by such methods as capitated payments and
substantial reductions in reimbursement rates. The BBA also requires that
nursing homes transition to a prospective payment system ("PPS") under the
Medicare program during a three-year "transition period" commencing with the
first cost reporting period beginning on or after July 1, 1998. The BBA also
contains several new antifraud provisions. Given the recent enactment of the
BBA, the Company is unable to predict the impact of the BBA and potential
changes in state Medicaid reimbursement methodologies on the revenues of its
clients.
 
  In addition to the inability of the Company to directly collect receivables
under Government Programs and the right of payors under such programs to
offset against unrelated receivables, the Company's healthcare finance
business is indirectly affected by healthcare regulation to the extent that
any of its clients' failure to comply with such regulation affects such
clients' ability to collect receivables or repay loans made by the Company.
The most significant healthcare regulations that could potentially affect the
Company are: (i) certificate of need regulation, which many states require
upon the provision of new health services, particularly for long-term care and
home healthcare companies; (ii) Medicare--Medicaid fraud and abuse statues,
which prohibit, among other things, the offering, payment, solicitation, or
receipt of remuneration directly or indirectly, as an inducement to refer
patients to facilities owned by physicians if such facilities receive
reimbursement from Medicare or Medicaid; and (iii) other prohibitions of
physician self-referral that have been promulgated by the states.
 
  Certificate of Need Regulation. Many states regulate the provision of new
healthcare service or acquisition of healthcare equipment through certificate
of need or similar programs. The Company believes these requirements have had
a limited effect on its business, although there can be no assurance that
future changes in those laws will not adversely affect the Company.
Additionally, repeal of existing regulations of this type in jurisdictions
where the Company's customers have met the specific requirements could
adversely affect the Company since such customers could face increased
competition. In addition, there is no assurance that expansion of the
Company's health care financing business within the nursing home and home care
industries will not be increasingly affected by regulations of this type.
 
  Medicare--Medicaid Fraud and Abuse Statutes. The Department of Health and
Human Services ("HHS") has increased its enforcement efforts under the
Medicare--Medicaid fraud and abuse statutes in cases where physicians own an
interest in a facility to which they refer their patients for treatment or
diagnosis. These statutes prohibit the offering, payment, solicitation or
receipt of remuneration, directly or indirectly, as an inducement to refer
patients for services reimbursable in whole or in part by the Medicare--
Medicaid programs. HHS has taken the position that distributions of profits
from corporations or partnerships to physician investors who refer patients to
the entity for a procedure which is reimbursable under Medicare or Medicaid
may be prohibited by the statute. Since the Company's clients often rely on
prompt payment from the Government Program to satisfy their obligations to the
Company, reduced or denied payments under the Government Programs could have
an adverse effect on the Company's business.
 
  Further Regulation of Physician Self-Referral. Additional regulatory
attention has been directed toward physician-owned healthcare facilities and
other arrangements whereby physicians are compensated, directly or
 
                                      14
<PAGE>
 
indirectly, for referring patients to such healthcare facilities. In 1988,
legislation entitled the "Ethics in Patient Referrals Act" (H.R. 5198) was
introduced which would have prohibited Medicare payments for all patient
services performed by an entity which a patient's referring physician had an
investment interest. As enacted, the law prohibited only Medicare payments for
patient services performed by a clinical laboratory. The Comprehensive
Physician Ownership and Referral Act (H.R. 345), which was enacted by Congress
in 1993 as part of the Deficit Reduction Package, is more comprehensive than
H.R. 5198 and covers additional medical services including medical imaging
radiation therapy, physical rehabilitation and others. A variety of existing
and pending state laws prohibit or limit a physician from referring patients
to a facility in which that physician has a proprietary or ownership interest.
Many states also have laws similar to the Medicare fraud and abuse statute
which are designed to prevent the receipt or payment of consideration in
connection with the referral of a patient. Accounts receivable resulting from
a referral in violation of these laws could be denied from payment which could
adversely affect the Company's clients and the Company.
 
Employees
 
  As of March 17, 1999, the Company employed 121 people on a full-time basis.
The Company believes that its relations with employees are good.
 
ITEM 2. PROPERTIES
 
  The Company's headquarters occupy approximately 24,000 square feet at 2
Wisconsin Circle, Chevy Chase Maryland. This space is provided under the terms
of a lease that expires in January 2003, with a five-year renewal option. The
current cost is approximately $63,000 per month. In addition, as of December
31, 1998, the Company leased marketing offices in Dallas, Texas and Nashville,
Tennessee at monthly rental of approximately $1,400 and $1,625, respectively.
HCAC rents approximately 2,200 square feet in its Orchard Park, New York
office paying $2,300 per month. Additionally, the Company rents an office in
Birmingham, Alabama for approximately $2,300 per month. The Company believes
that its current facilities are adequate for its existing needs and that
additional suitable space will be available as required.
 
ITEM 3. LEGAL PROCEEDINGS
 
  The Company is currently not a party to any material litigation although it
is involved from time to time in routine litigation incidental to its
business.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
  None.
 
                                      15
<PAGE>
 
                                    PART II
 
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
        MATTERS
 
  Since the Company's initial public offering (November 21, 1996) through
December 30, 1998, the Company's Common Stock was listed for trading on the
Nasdaq National Market ("Nasdaq") under the trading symbol "HCFP." On December
31, 1998, the Company's Common Stock began trading on the New York Stock
Exchange (the "NYSE") under the trading symbol "HCF" and ceased trading on
Nasdaq under "HCFP." The following table sets forth the high and low sales
prices of the Common Stock as reported by Nasdaq or the NYSE, when applicable,
for each of the calendar quarters indicated:
 
<TABLE>
<CAPTION>
     Quarter                                                     High     Low
     -------                                                    ------- -------
     <S>                                                        <C>     <C>
     1996
       Fourth (from November 21, 1996)......................... $14.000 $12.125
     1997
       First................................................... $19.000 $12.375
       Second.................................................. $20.500 $ 9.750
       Third................................................... $31.500 $19.000
       Fourth.................................................. $37.375 $28.875
     1998
       First................................................... $49.500 $32.500
       Second.................................................. $61.500 $45.375
       Third................................................... $60.250 $30.000
       Fourth.................................................. $41.438 $25.500
</TABLE>
 
  On March 30, 1999, the closing sale price of the Common Stock as reported on
the NYSE was $26.000.
 
  As of March 17, 1999, there were 13,420,539 shares outstanding held by
approximately 2,500 beneficial owners.
 
                                DIVIDEND POLICY
 
  The Company intends to retain all future earnings for the operation and
expansion of it business, and does not anticipate paying cash dividends in the
foreseeable future. Any future determination as to the payment of cash
dividends will depend upon the Company's results of operations, financial
condition and capital requirements and any regulatory restrictions or
restrictions under credit agreements or other funding sources of the Company
existing from time to time, as well as other matters which the Company's Board
of Directors may consider. In addition, certain current financing arrangements
impose (and future financing arrangements may impose) minimum net worth
covenants, debt-to-equity covenants and other limitations that could restrict
the Company's ability to pay dividends.
 
ITEM 6. SELECTED FINANCIAL DATA
 
  The following table sets forth historical financial data. The selected
historical statements of operations and balance sheet data presented below
were derived from the combined financial statements of HealthCare Financial
Partners, Inc. and HealthPartners DEL, LP (a former partnership, "DEL") for
the years ended December 31, 1994 and 1995, and the consolidated financial
statements of HealthCare Financial Partners, Inc. as of and for the years
ended December 31, 1996, 1997, and 1998. The data set forth below should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the combined financial statements,
including the notes thereto, of HealthCare Financial Partners, Inc. and DEL
and the consolidated financial statements of HealthCare Financial Partners,
Inc., including the notes thereto, appearing in Item 8.
 
                                      16
<PAGE>
 
                      HEALTHCARE FINANCIAL PARTNERS, INC.
 
                        (and DEL from inception through
                              December 31, 1995)
 
<TABLE>
<CAPTION>
                                          As or for the Year Ended December 31,
                          ------------------------------------------------------------------------
                             1994        1995          1996           1997           1998
                          ----------  ----------  -------------- -------------- --------------
                          (Combined)  (Combined)  (Consolidated) (Consolidated) (Consolidated)
<S>                       <C>         <C>         <C>            <C>            <C>            <C>
Statement of Operations
 Data
Fee and interest
 income.................  $  13,036   $  565,512   $ 12,015,971   $ 27,745,077   $ 57,706,860
Interest expense........      3,975       79,671      3,408,562      7,921,330     13,629,466
                          ---------   ----------   ------------   ------------   ------------
Net fee and interest
 income.................      9,061      485,841      8,607,409     19,823,747     44,077,394
Provision for losses on
 receivables............      2,102       45,993        656,116      1,315,122      3,953,498
                          ---------   ----------   ------------   ------------   ------------
Net fee and interest
 income after provision
 for losses on
 receivables............      6,959      439,848      7,951,293     18,508,625     40,123,896
Asset management
 income.................                                                            1,576,597
Operating expenses......    439,514    1,472,240      3,326,994      7,219,372     13,434,451
Other income............    106,609    1,221,837        233,982      1,582,852      4,805,909
                          ---------   ----------   ------------   ------------   ------------
Income (loss) before
 deduction of
 preacquisition earnings
 and income taxes
 (benefit)..............   (325,946)     189,445      4,858,281     12,872,105     33,071,951
Deduction of
 preacquisition
 earnings...............                              4,289,859
Income taxes (benefit)..                  (5,892)        38,860      4,877,257     13,264,049
                          ---------   ----------   ------------   ------------   ------------
Net income (loss).......  $(325,946)  $  195,337   $    529,562   $  7,994,848   $ 19,807,902
                          =========   ==========   ============   ============   ============
Basic earnings per
 share(1)...............                           $        .13   $        .99   $       1.57
                                                   ============   ============   ============
Weighted average shares
 outstanding(1).........                              4,030,416      8,087,857     12,627,536
                                                   ============   ============   ============
Diluted earnings per
 share(1)...............                           $        .13   $        .96   $       1.52
                                                   ============   ============   ============
Diluted weighted
 averages shares
 outstanding(1).........                              4,055,572      8,310,111     13,002,260
                                                   ============   ============   ============
Balance Sheet Data
Finance receivables.....  $ 279,148   $2,552,441   $ 89,328,928   $250,688,138   $437,287,437
Allowance for losses on
 receivables............     20,847       66,840      1,078,992      2,654,114      6,401,916
Total assets............    344,850    2,669,939    101,273,089    272,354,946    504,671,115
Client holdbacks........    112,374      814,607      1,739,326      6,173,260      4,208,859
Line of credit..........               1,433,542     21,829,737     40,157,180     32,503,243
Commercial paper
 facility...............                             37,209,098    101,179,354    114,207,270
Warehouse facility......                                            27,932,520     49,632,760
CP Conduit facility.....                                                           42,440,000
  Total liabilities.....    558,759    2,795,404     74,552,113    184,524,758    257,117,548
  Total stockholders'
   equity (deficit).....   (213,909)    (125,465)    26,720,976     87,830,188    247,553,567
</TABLE>
-------
(1) Historical earnings per share for periods prior to 1996 are not presented
    here because it is not meaningful due to the partnership reporting basis
    for DEL. See "Management's Discussion and Analysis of Financial Condition
    and Results of Operations--Pro Forma Financial Information" for pro forma
    income per share information.
 
                                      17
<PAGE>
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS
 
Overview
 
  The Company is a specialty finance company offering asset-based financing to
healthcare providers, with a primary focus on clients operating in sub-markets
of the healthcare industry, including long-term care, hospitals, and physician
practices.
 
  From its inception in September 1993, through the year ended December 31,
1995, the Company principally originated finance receivables through advances
against accounts receivable. Advances against accounts receivable were
characterized by high and varying yields, as a result of the differing terms
of the transactions negotiated with individual clients. The yield on finance
receivables generated through advances against accounts receivable was 26.9%
during the year ended December 31, 1995 and 19.2% during the year ended
December 31, 1996. By December 31, 1997, the finance receivables originated
through revolving lines of credit secured by accounts receivable had grown to
89.5% of finance receivables in the Company's Accounts Receivable Program, as
the Company focused its marketing efforts on larger balance, prime rate based
revolving loans to more creditworthy borrowers. Although revolving lines of
credit are characterized by lower overall yields than advances against
accounts receivable, these arrangements provide the Company with the
opportunity to expand its range of potential clients and are less costly to
administer then the advances against accounts receivable. As a result, the
Company's overall yield on finance receivables in the Accounts Receivable
Program, which was 18.4% for the year ended December 31, 1996, declined to 17%
for the year ended December 31, 1997. For the year ended December 31, 1998,
the yield on the Accounts Receivable Program was 16.5%. The reduction from the
prior year's 17% was attributable to reductions in the prime rate that
occurred during 1998 and, again, the continuing trend of revolving lines of
credit comprising the majority of the Accounts Receivable Program.
 
  During 1997, the Company expanded its STL Program to increase its
penetration of targeted healthcare sub-markets. Through the STL Program, the
Company serves clients that have more diverse and complex financing needs,
such as healthcare facility acquisitions and expansions. STL Program loans
generally have terms of one to three years. As a result of the Company's
continued expansion of the STL Program, loans under that program comprised
25.9% of finance receivables at December 31, 1997 and 33.7% at December 31,
1998. The yields on the STL Program for the years ended December 31, 1997 and
1998 were 16.3% and 15.7%, respectively. While yields on STL Program loans are
generally lower than the yields generated from the Accounts Receivable
Program, some STL Program loans also include warrants and other fees that may
enhance their effective yields.
 
Year 2000
 
  The Company has implemented a plan designed to ensure that all software used
by the Company in connection with its services will manage and manipulate data
involving the transition of dates from 1999 to 2000 (the "Year 2000 Problem")
without functional or data abnormality and without inaccurate results related
to such data. The Company believes that all software presently in use that is
significant to day-to-day operations can effectively manage the Year 2000
Problem without the issues enumerated above.
 
  The Company is also assessing the ability of certain computing applications
which are not considered essential to day-to-day operations, such as various
desk top applications, to manage the Year 2000 Problem. The Company expects to
have completed this aspect of its review and to have replaced or remediated
these applications by mid-1999.
 
  To date, the execution of this plan has not had a material effect on the
Company's operating results, and the Company does not anticipate that the
continued execution of this plan will have a material effect on its operating
results. However, the Company is aware that some of its clients and payors may
not have implemented such programs. The failure by clients and payors to
implement necessary software changes may disrupt clients' computerized billing
and collection systems and adversely affect clients' cash flow and
collectibility of the Company's finance receivables. The Company is unable to
predict the effects that any such failure may have on
 
                                      18
<PAGE>
 
the financial condition and results of the operations of the Company. However,
the Company recently initiated a survey of its clients regarding their year
2000 compliance. Through February 1999, only 16% had replied. Of those that
have responded, all have indicated that they are either compliant or will be
compliant shortly. The Company is in the process of sending second requests to
clients who have not responded. The Company will actively pursue clients for
responses prior to April 30, 1999. If some clients do not address this
problem, the Company is in the process of identifying medical billing and
collection companies that are compliant and can assist any non-compliant
clients in their billing and collection process.
 
  The Company also works directly with several banks, including accessing cash
transactions information electronically on a real time basis. Discussions with
the banks have occurred concerning the Year 2000 Problem. The Company has been
informed that these banks anticipate no significant year 2000 disruption of
their systems. The Company also makes extensive daily use of the Federal
Reserve's Fedwire transfer application. Accordingly, the Company has reviewed
the Year 2000 Quarterly Report of the Federal Reserve System dated December
11, 1998. According to that report, testing of the Fedwire transfer system for
compliance has been, and continues to be, performed. No significant disruption
of the Company's business is expected as a result of its use of the Fedwire
Transfer Service.
 
  In addition, the Company may be subject to general economic disruptions
stemming from problems related to year 2000 computer issues. Such
circumstances may unfavorably affect the manner in which the Company presently
conducts its business and, in turn, may negatively affect the Company's
operating results.
 
The Reorganization
 
  The Company is a Delaware corporation which was organized in April 1993 and
commenced its business in September 1993. Until September 13, 1996, the
Company's name was HealthPartners Financial Corporation. On that date its
corporate name was changed to HealthCare Financial Partners, Inc.
 
  Prior to the Company's initial public offering ("the Offering"), the Company
conducted its operations principally in its capacity as the general partner of
HealthPartners Funding, L.P. (a former partnership, "Funding") and DEL.
Management concluded that the Company's future financial position and results
of operations would be enhanced if the Company directly owned the portfolio
assets of each of these limited partnerships and the transactions described
below (the "Reorganization") were effected by the Company prior to or
simultaneously with the Offering.
 
  Effective as of September 1, 1996, Funding acquired all of the net assets of
DEL, consisting principally of finance receivables, for $486,630 in cash,
which amount approximated the fair value of DEL's net assets. Following the
acquisition, DEL distributed the purchase price to its partners and was
dissolved. The purpose of this transaction was to consolidate the assets of
DEL and Funding in anticipation of the acquisition by the Company of the
limited partnership interests of Funding described below.
 
  Effective upon completion of the Offering, the Company acquired from
HealthPartners Investors, L.L.C. ("HP Investors"), the sole limited partner of
Funding, all of the limited partnership interests in Funding and paid the
$21.8 million purchase price for such assets from the proceeds of the
Offering. Such purchase price represented the limited partner's interest in
the net assets of funding and approximated both the fair value and book value
of the net assets. Funding was subsequently liquidated and dissolved, and all
of its net assets at the date of transfer, consisting principally of advances
made under the Accounts Receivable Program, were transferred to the Company.
 
  In connection with the liquidation of Funding, Farallon Capital Partners,
L.P. ("Farallon") and RR Capital Partners, L.P. ("RR Partners"), the only two
members of HP Investors, exercised warrants for the purchase of an aggregate
of 379,998 shares of Common Stock acquired on December 28, 1994 for an
aggregate payment of $500, which represented the fair value of the warrants at
that date. No additional consideration was paid in
 
                                      19
<PAGE>
 
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 operation is most
effectively presented on a pro forma basis for the years before 1997. To
provide a context for this, the following information reflects pro forma
statements of operations for the year ended December 31, 1996 as if the
Reorganization had occurred as of the beginning of that operating period.
 
                      PRO FORMA STATEMENTS OF OPERATIONS
 
<TABLE>
<CAPTION>
                                  For The Year Ended December 31, 1996
                             --------------------------------------------------
                             HealthCare Financial
                                Partners, Inc.
                                (Consolidated)      Pro Forma        Pro Forma
                                 (Historical)     Adjustments(1)    As Adjusted
                             -------------------- --------------    -----------
<S>                          <C>                  <C>               <C>
Fee and interest income
  Fee income...............      $ 8,518,215                        $8,518,215
  Interest income..........        3,497,756                         3,497,756
                                 -----------                        ----------
  Total fee and interest
   income..................       12,015,971
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
                                                                    ==========
</TABLE>
--------
(1) Pro Forma Statements of Operations adjustments reflect the following:
  (a) The elimination of preacquisition earnings allocated to limited
      partners of Funding and DEL.
  (b) The provisions for income taxes (at an estimated effective rate of 39%)
      on the pro forma earnings of the consolidated Company, including those
      of DEL and Funding which were previously not subject to income taxes as
      partnerships.
(2) Pro forma earnings per share was computed by dividing pro forma net income
    by the pro forma weighted average shares outstanding and pro forma diluted
    weighted average shares outstanding, which gives effect to the
    Reorganization.
 
                                      20
<PAGE>
 
Financial Information
 
  The following discussion should be read in conjunction with the information
under "Selected Financial Data" and the consolidated financial statements,
including the notes thereto of HealthCare Financial Partners, Inc. appearing
elsewhere in Item 8.
 
Results of Operations
 
 Year ended December 31, 1998 Compared to the Year Ended December 31, 1997
 
  Fee and interest income increased to $56.9 million for the year ended
December 31, 1998 from $27.4 million for the year ended December 31, 1997, an
increase of 107.6%. The increase principally resulted from an increase of
$188.2 million in average finance receivables outstanding due to the Company's
growth in the Accounts Receivable and STL Programs during the year. Interest
earned from the Accounts Receivable and STL Programs increased to $39.4
million for the year ended December 31, 1998 from $16.3 million for the year
ended December 31, 1997, which accounted for $23.2 million of the $29.5
million growth in total fee and interest income between the years. The Company
increased its net client base to 209 clients at December 31, 1998 from 174
clients at December 31, 1997. This net increase resulted from the addition of
136 clients which replaced 101 clients that generally maintained smaller
average balances and whose obligations either matured or were otherwise paid
off. Additionally, clients borrowing at both December 31, 1998 and 1997
generally increased their average borrowings from the Company during the year
ended December 31, 1998 as compared to the prior year. The overall yields on
finance receivables were 16.2% and 16.8% for the years ended December 31, 1998
and 1997, respectively. The yields on the Accounts Receivable Program for the
years ended December 31, 1998 and 1997 were 16.5% and 17%, respectively. The
yields on the STL Program for the years ended December 31, 1998 and 1997 were
15.7% and 16.3%, respectively. Therefore, the increase in fee and interest
income was due to the growth in volume of finance receivables which more than
offset the decrease in yields.
 
  The decline in overall yields in 1998 was attributable to several factors.
First, the prime rate was reduced by 75 basis points over the third and fourth
quarters of 1998 which directly lowered the rates outstanding on the majority
of the Company's finance receivable portfolio. Second, the STL Program, which
generally has a lower yield than the Accounts Receivable Program, comprised a
greater proportion of the portfolio during 1998 than in the prior year, ending
the year at 33.7% of total finance receivables compared to 25.9% at December
31, 1997. Another factor contributing to these lower yields in 1998 was the
degree to which the Company made larger loans to larger, more creditworthy
borrowers. The creditworthiness of the borrowers warranted, in some cases,
lower lending rates. Additionally, the STL program is designed to offer short-
term, bridge financing to clients. The yields on this program are enhanced by
commitment fees and success fees. The program is structured to encourage pre-
term refinancing by clients, upon which any unamortized commitment and success
fees would be recognized as income. In the latter half of 1998, such
prepayments were fewer than the prepayment trends noted in the prior year.
 
  Interest expense increased to $13.6 million for the year ended December 31,
1998 from $7.9 million for the year ended December 31, 1997, while the
Company's average cost of borrowed funds decreased to 8.1% for the year ended
December 31, 1998 from 8.6% for the year ended December 31, 1997, as a result
of utilizing the lower-cost commercial paper facility for a greater proportion
of the borrowings during 1998 as compared to the prior year. (See "Liquidity
and Capital Resources".) The increase in interest expense was the result of
higher average borrowings required to support the Company's growth. Because of
the Company's overall growth in finance receivables, net fee and interest
income increased 122.3%, to $44.1 million for the year ended December 31, 1998
from $19.8 million for the year ended December 31, 1997. In general, the lower
yield on finance receivables offset by the decrease in the average cost of
borrowed funds experienced in 1998 resulted in a slight increase in the
annualized net interest margin to 12.3% for the year ended December 31, 1998
from 12.2% for the year ended December 31, 1997.
 
  The Company's provision for losses on receivables increased to $4 million
for the year ended December 31, 1998 from $1.3 million for the year ended
December 31, 1997. The provision recognized during both periods
 
                                      21
<PAGE>
 
was the amount estimated by management that was necessary to maintain a
sufficient allowance for losses on receivables based on the composition of the
finance receivable portfolio at those times. As of December 31, 1998, the
Company's general allowance for losses on receivables was $4.6 million or 1%
of finance receivables. As of December 31, 1997, the Company's general
allowance for losses on receivables was $2.7 million or 1% of finance
receivables. At December 31, 1998, the Company had a $1.8 million specific
allowance for certain finance receivables. At December 31, 1997, no specific
allowance was present. In 1998, the Company charged off four loans totaling
$206,000 in the ordinary course of business.
 
  During 1998, the Company provided management services through subsidiaries
to the REIT and Health Charge, Inc., a company that offers a private label
credit card to hospitals and other healthcare providers which can be used by
patients as a means of paying the private pay portion of their treatment.
Management fees earned in connection with these activities were $1.6 million
for the period during 1998 during which these services were provided. Expenses
directly related to these activities for the same period were $1.8 million.
These expenses are included in the Company's operating expenses.
 
  As discussed in the footnotes to the financial statements, on December 11,
1998, the Management Agreement with the REIT was terminated and certain
employees of the Manager became employees of the REIT. Upon termination, the
Company and the REIT approved an agreement under which the REIT will pay the
Company a fee of 2.5% for each transaction which it originates on the REIT's
behalf. In accordance with this agreement, the Company earned $872,000 in
December 1998, which was included in other income.
 
  Operating expenses increased from $7.2 million for the year ended December
31, 1997 to $13.4 million for the year ended December 31, 1998, a 86.1%
increase. This increase resulted from a 54% increase in compensation and
benefits, a 232.3% increase in occupancy expenses, a 167.1% increase in
professional fees, and a 114.4% increase in other expenses, all resulting from
Company growth and from hiring personnel to support the management and
origination functions described above.
 
  In addition to investing in finance receivables and the management
activities discussed above, the Company generates other income from various
other healthcare-related endeavors. Other income for the year ended December
31, 1998, was $4.8 million compared to $1.6 million for 1997. Of these other
healthcare-related endeavors, certain recurring activities conducted in both
years included investments in marketable and non-marketable securities of
healthcare companies, investments in limited partnerships, and consulting
fees. Other income producing activities new in 1998 and from which the Company
expects recurring other income included the Company's investment in ZA, a
healthcare consulting firm, dividend income from the Company's investment in
the REIT and commissions from the origination agreement with the REIT, as
discussed above. These activities generated $2.9 million during 1998, which
comprised substantially all of the increase in other income from 1997.
 
  Net income increased from $8 million for the year ended December 31, 1997 to
$19.8 million for the year ended December 31, 1998, a 147.8% increase,
primarily as a result of the overall growth in the Company's finance
receivables as described above, and the diversification of the Company through
its expansion in 1998 of other income producing activities.
 
 Year ended December 31, 1997 Compared to the Year Ended December 31, 1996
 (including pro forma adjustments).
 
  Total fee and interest income increased to $27.7 million for the year ended
December 31, 1997 from $12 million for the year ended December 31, 1996, an
increase of 130.9%. The increase principally resulted from an increase of
$85.1 million in average finance receivables outstanding due to the growth in
the Company's Accounts Receivable Program and the Company's expansion of its
STL Program, which resulted in increases of $62.5 million and $98.9 million,
respectively, from December 31, 1997 to December 31, 1996. Fees and interest
earned from the STL Program grew to $5 million for the year ended December 31,
1997 from an immaterial amount in the year ended December 31, 1996 which
accounted for 32% of the $15.7 million growth in total fee and interest income
between the periods. During the year ended December 31, 1997, the Company
increased its
 
                                      22
<PAGE>
 
client base to 161 clients from 129 clients in its Accounts Receivable
Program, and to 39 clients from 8 clients in its STL Program. Additionally,
average borrowings from the Company increased by 109.6% in 1997 as compared to
the prior year. Yield on finance receivables declined to 16.8% in the year
ended December 31, 1997 from 18.4% in the year ended December 31, 1996. As a
result, the increase in fee and interest income was due to growth in the
volume of finance receivables. The yield on finance receivables for the year
ended December 31, 1997 was lower because the composition of the Company's
finance receivable portfolio contained a greater percentage of lower-yielding
STL Program loans and a lower percentage of higher-yielding advances against
accounts receivable in its Accounts Receivable Program.
 
  Interest expense increased to $7.9 million for the year ended December 31,
1997 from $3.4 million in 1996. However, the Company's average cost of
borrowed funds decreased to 8.6% for the year ended December 31, 1997 from
9.7% for the year ended December 31, 1996. The increase in interest expense
was the result of higher average borrowings required to support the Company's
growth. Because of the Company's overall growth in finance receivables, net
fee and interest income increased to $19.8 million for the year ended December
31, 1997 from $8.6 million for the year ended December 31, 1996. The increased
interest expense from increased borrowings, combined with a lower yield on
finance receivables, resulted in a decrease in the annualized net interest
margin to 12.2% for the year ended December 31, 1997 from 13.2% for the year
ended December 31, 1996.
 
  The Company's provision for losses on receivables increased to $1.3 million
for the year ended December 31, 1997 from $656,000 for the year ended December
31, 1996. This increase was attributable to an increase in outstanding finance
receivables, which is among the factors considered by the Company in assessing
the adequacy of its allowance for losses on receivables. The Company
experienced no credit losses in either period.
 
  Operating expenses increased to $7.2 million for the year ended December 31,
1997 from $3.3 million for the year ended December 31, 1996, a 117% increase.
This increase was the result of a 195.2% increase in compensation and benefits
due to hiring additional personnel, as well as increases in other operating
expenses, all relating to the expansion of the Company's operations.
 
  Other income increased to $1.6 million for the year ended December 31, 1997
from $234,000 for the year ended December 31, 1996. This increase was mainly
attributable to the Company receiving fees from clients for legal services
performed by inhouse personnel. These fees were previously paid by the clients
but passed through to outside firms that performed the services.
 
  Net income increased to $8 million for the year ended December 31, 1997 from
$3 million for the year ended December 31, 1996, a 169.8% increase, primarily
as a result of the overall growth in the Company's finance receivables
described above.
 
                                      23
<PAGE>
 
Quarterly Financial Data
 
  The following table summarizes unaudited quarterly operating results for the
most recent eight fiscal quarters.
 
<TABLE>
<CAPTION>
                                           For the 1997 Quarters Ended
                                 -----------------------------------------------
                                  March 31     June 30    Sept. 30     Dec. 31
                                 ----------- ----------- ----------- -----------
<S>                              <C>         <C>         <C>         <C>
Total fee and interest income..  $ 4,488,333 $ 5,460,542 $ 7,951,873 $ 9,844,329
Interest expense...............    1,133,156   1,968,569   1,984,344   2,835,261
                                 ----------- ----------- ----------- -----------
  Net fee and interest income..    3,355,177   3,491,973   5,967,529   7,009,068
Provision for losses on
 receivables...................      150,000     250,000     605,000     310,122
                                 ----------- ----------- ----------- -----------
  Net fee and interest income
   after provision for losses
   on receivables..............    3,205,177   3,241,973   5,362,529   6,698,946
Operating expenses.............    1,866,483   1,422,901   1,672,075   2,257,913
Other income...................      429,399     380,723     300,004     472,726
                                 ----------- ----------- ----------- -----------
Income before income taxes.....    1,768,093   2,199,795   3,990,458   4,913,759
Income taxes...................      647,089     749,956   1,532,034   1,948,178
                                 ----------- ----------- ----------- -----------
Net income.....................  $ 1,121,004 $ 1,449,839 $ 2,458,424 $ 2,965,581
                                 =========== =========== =========== ===========
 
<CAPTION>
                                           For the 1998 Quarters Ended
                                 -----------------------------------------------
                                  March 31     June 30    Sept. 30     Dec. 31
                                 ----------- ----------- ----------- -----------
<S>                              <C>         <C>         <C>         <C>
Total fee and interest income..  $12,491,956 $15,310,238 $14,770,244 $15,134,422
Interest expense...............    3,800,254   2,870,086   3,173,511   3,785,615
                                 ----------- ----------- ----------- -----------
  Net fee and interest income..    8,691,702  12,440,152  11,596,733  11,348,807
Provision for losses on
 receivables...................      651,014   1,555,558     393,737   1,353,189
                                 ----------- ----------- ----------- -----------
  Net fee and interest income
   after provision for losses
   on receivables..............    8,040,688  10,884,594  11,202,996   9,995,618
Asset management income........                  313,268     673,834     589,495
                                 ----------- ----------- ----------- -----------
  Operating income.............    8,040,688  11,197,862  11,876,830  10,585,113
Operating expenses.............    2,613,657   3,166,291   3,929,477   3,725,026
Other income...................      634,302     433,752     978,942   2,758,913
                                 ----------- ----------- ----------- -----------
Income before income taxes.....    6,061,333   8,465,323   8,926,295   9,619,000
Income taxes...................    2,440,771   3,371,854   3,582,812   3,868,612
                                 ----------- ----------- ----------- -----------
Net income.....................  $ 3,620,562 $ 5,093,469 $ 5,343,483 $ 5,750,388
                                 =========== =========== =========== ===========
</TABLE>
 
  The Company's quarterly results of operations are not generally affected by
seasonal factors.
 
Collateral
 
  The Company's primary protection against credit losses on its Accounts
Receivable Program is the collateral, which consists of client accounts
receivable due from third-party payors which collateralize revolving lines of
credit secured by, and advances against, accounts receivable. The Company
obtains a first priority security interest in all of the client's accounts
receivable, including receivables not financed by the Company (excess
collateral). As a result, amounts loaned or advanced to clients with respect
to specific accounts receivable are cross-collateralized by the Company's
security interest in other accounts receivable of the client.
 
  With respect to revolving lines of credit secured by accounts receivable,
the Company will extend credit only up to a maximum percentage, ranging from
65% to 85%, of the estimated net collectible value of the accounts receivable
due from third-party payors. The Company obtains a first priority security
interest in all of a client's accounts receivable, and may apply payments
received with respect to the full amount of the client's
 
                                      24
<PAGE>
 
accounts receivable to offset any amounts due from the client. The estimated
net collectible value of a client's accounts receivable thus exceeds at any
time balances under lines of credit secured by such accounts receivable.
 
  With respect to advances against accounts receivable, the Company purchases
a client's accounts receivable at a discount from the estimated net
collectible value of the accounts receivable. The Company will advance only
65% to 85% of the purchase price (which is equal to aggregate net collectible
value minus a purchase discount) of any batch of accounts receivable
purchased. The excess of the purchase price for a batch of receivables over
the amount advanced with respect to such batch (a "client holdback") is
treated as a reserve and provides additional security to the Company, insofar
as holdback amounts may be applied to offset amounts due with respect to the
related batch of client receivables, or any other batch of client receivables.
As is the case with the revolving lines of credit, the Company obtains a first
priority security interest in all of the client's accounts receivable.
 
  In addition, under both programs, the Company frequently obtains a security
interest in other assets of a client and generally has recourse against the
clients, and often, the personal assets of the principals or parent companies
of clients.
 
  Under the STL Program, the Company's term loans to clients are secured by a
first or second lien on various types of collateral, such as real estate,
accounts receivable, equipment, inventory and stock, depending on the
circumstances of each loan and the availability of collateral.
 
Turnover
 
  With respect to the Accounts Receivable Program, a general measure of the
rate at which draws under the Program are paid back to the Company is the
Company's finance receivable turnover. The Company's turnover of its finance
receivables in its Accounts Receivable Program, is calculated by dividing
total collections of client accounts receivable for each quarter by the
average month-end balance of finance receivables during the quarter. The table
below presents the turnover statistics for the applicable quarters and years
ended:
 
<TABLE>
<CAPTION>
                                                                1996  1997  1998
                                                                ----- ----- ----
     <S>                                                        <C>   <C>   <C>
     Quarters ended March 31,..................................  2.4x  2.6x 2.6x
     Quarters ended June 30,...................................  2.4x  2.8x 2.3x
     Quarters ended September 30,..............................  3.7x  2.7x 2.4x
     Quarters ended December 31,...............................  3.5x  2.7x 2.3x
     Years ended December 31,.................................. 11.0x 11.4x 9.2x
</TABLE>
 
Provision and Allowance for Losses on Receivables
 
  The Company regularly reviews its outstanding finance receivables to
determine the adequacy of its allowance for losses on receivables. The
allowance for losses on receivables is maintained at an amount estimated to be
sufficient to absorb future losses, net of recoveries, inherent in the finance
receivables. In evaluating the adequacy of the allowance, management of the
Company considers trends in healthcare sub-markets, past-due accounts,
historical charge-off and recovery rates, credit risk indicators, economic
conditions, on-going credit evaluations, overall portfolio size, average
client balances, excess collateral, real estate collateral valuations, and
underwriting policies, among other items. Over time, the general reserve has
been maintained at an amount which approximates 1% of the outstanding finance
receivables. At December 31, 1996, the Company's general reserve was $1.1
million or 1.2% of finance receivables; at December 31, 1997, it was $2.7
million or 1.1% of finance receivables; at December 31, 1998, it was $4.6
million or 1% of finance receivables. To the extent that management deems
specific finance receivable advances to be wholly or partially uncollectible,
the Company establishes a specific loss reserve equal to such amount. At
December 31, 1996 and 1997, the Company had no specific reserves. At December
31, 1998, the Company had $1.8 million of specific reserves as a component of
its allowance. The Company had no charge-offs in 1996 and 1997, and charged-
off $206,000 in 1998. In connection with its historical loss experience, the
Company believes that, generally, credit issues with
 
                                      25
<PAGE>
 
respect to current originations become more apparent as the credits season;
therefore, the Company expects that future charge-offs will bear a closer
correlation to the present provisions. In the opinion of management, based on
a review of the Company's portfolio, the allowance for losses on receivables
is adequate at this time, although there can be no assurance that such reserve
will be adequate in the future.
 
Liquidity and Capital Resources
 
  Cash flows resulting from operating activities provided sources of cash
amounting to $17.9 million for the year ended December 31, 1998. This compares
to operating cash flows of $12.5 million in 1997 and pro forma operating cash
flows of $6.2 million for 1996. The most significant source of cash from
operating activities is derived from the Company's generation of net fee and
interest income from its finance receivables, and the more significant uses of
cash from internal operating activities include cash payments for compensation
and employee benefits, rent expense, and professional fees. As the Company's
number of clients and resulting business opportunities have grown, the Company
has primarily used cash in the acquisition of finance receivables under its
Accounts Receivable and STL Programs. The Company's financing activities have
provided the necessary source of funds for the acquisition of receivables.
Financing has been obtained from both debt and equity sources. The debt
financing has been generated from draws on the Bank facility, the Warehouse
Facility, the sale of commercial paper through the CP Facility, and, more
recently, draws on the CP Conduit Facility. The sources of equity financing
were primarily from limited partner capital contributions prior to the
Reorganization and the Offering. Subsequent to the Offering, the limited
partnership interest was purchased using a significant portion of the offering
proceeds, the limited partnership was dissolved and its assets transferred to
the Company. Subsequent sources of equity financing were from sales of common
stock through two subsequent public offerings of the Company's common stock.
 
  In conjunction with the Reorganization and in contemplation of the Offering,
at the request of the Company, Fleet increased the committed line of credit
under the Bank Facility from $35 million to $50 million. The Bank Facility is
a revolving line of credit. The interest rates payable by the Company under
the Bank Facility adjust, based on the prime rate of Fleet National Bank
("Fleet's prime rate"); however, the Company has the option to borrow any
portion of the Bank Facility in an integral multiple of $500,000 based on the
one-month, two-month, three-month or six-month LIBOR plus 2%. As of December
31, 1996, 1997 and 1998, $21.8, $40.2, and $32.5 million, respectively, was
outstanding under the Bank Facility. The Bank Facility contains financial and
operating covenants, including the requirement that the Company maintain an
adjusted tangible net worth of not less than $5 million and a ratio of total
debt to equity of not more than 3.0 to 1.0. In addition, under the Bank
Facility the Company is not allowed to have at any time a cumulative negative
cash flow (as defined in the Bank Facility) in excess of $1 million. The
inter-creditor arrangements entered into in connection with the CP Facility
excludes borrowings under the CP Facility from debt for purposes of
calculating the debt-to-equity ratio. At December 31, 1996, 1997, and 1998,
the Company was in compliance with its financial covenants under the Bank
Facility. The expiration date for the Bank Facility is March 29, 2002, subject
to automatic renewal for one-year periods thereafter unless terminated by
either party which requires six months prior written notice.
 
  In December 1996, the Company entered into an agreement with ING for $100
million commitment under the CP Facility. On December 30, 1997, that
commitment was increased to $200 million. As of December 31, 1996, $37.2
million of commercial paper was outstanding under the CP Facility. As of
December 31, 1997, $101.2 million of commercial paper was outstanding under
the CP Facility and at December 31, 1998, $114.2 million was outstanding. The
CP Facility requires the Company to transfer advances and related receivables
under its Accounts Receivable Program which meet certain criteria to a
bankruptcy remote, special purpose subsidiary of the Company. The special
purpose subsidiary pledges the finance receivables transferred by the Company
to Holland Limited Securitization Inc., a commercial paper conduit which is an
affiliate of ING (the "Conduit"). The Conduit lends against such pledged
assets through the issuance of commercial paper. The CP Facility generally
requires the maintenance of a minimum overcollateralization percentage of
125%. Under the CP Facility, ING can refuse to make any advances in the event
the Company fails to maintain a tangible net worth of at least $50 million. At
December 31, 1996, 1997 and 1998, the Company was in compliance with its
financial covenants under the CP Facility. The maturity date for the CP
Facility is December 5, 2001. However,
 
                                      26
<PAGE>
 
the CP Facility may be terminated by the Company at any time after December 5,
1999, without penalty. See "Business--Capital Resources."
 
  On June 27, 1997, the Company entered into an agreement with First Boston
under the Warehouse Facility. Under the terms of the Warehouse Facility, the
Company is able to securitize certain loans under the Company's STL Program.
The Company had a total borrowing capacity under the agreement of $50 million
as of December 31, 1997. In January 1998, that commitment was raised to $60
million and in February 1998, to $100 million. As of December 31, 1998 and
December 31, 1997, the Company had borrowed $49.6 and $27.9 million,
respectively, under the Warehouse Facility. The Warehouse Facility requires
that the amount outstanding under the financing agreement may not exceed 88%
of the principal amount of the STL Program loans securitized. Interest will
accrue under the financing agreement at a rate of one-month LIBOR plus 3.75%
on the first $50 million and one-month LIBOR plus 3.0% on the second $50
million. The Warehouse Facility requires that the loans advanced by the
Company not exceed 95% of the appraised value of the real estate, or a
multiple of the underwritten cash flow of the borrower, that the weighted
average yield of advances under the Warehouse Facility exceeds the prime rate
of interest plus 3%, that the maximum weighted average loan to value of
advances under the Warehouse Facility be no greater than 85%, and that no loan
in the portfolio have a life greater than five years. Additionally, the
Warehouse Facility requires that, to the extent that the Company makes
advances in amounts greater than $7.5 million to any borrower, that excess is
advanced by the Company through other sources. The commitment to make advances
under the Warehouse Facility terminates on June 27, 1999. Subsequent to that
date, no new loans may be securitized under the existing agreement; however
previous loans securitized will remain outstanding until they have been fully
repaid. Additionally, under the terms of the Warehouse Facility, the Company
has the right to repurchase any assets securitized at a price equal to the
fair market value of such assets. At December 31, 1997 and 1998, the Company
was in compliance with its covenants under the Warehouse Facility.
 
  On December 28, 1998, the Company committed to the CP Conduit Facility with
VFCC, an issuer of commercial paper sponsored by First Union National Bank.
The total borrowing capacity under this facility is $150 million. The facility
expires in December 2001. The Company, through a single-purpose subsidiary,
pledges receivables on a revolving line of credit with VFCC. VFCC issues
commercial paper or other indebtedness to fund the CP Conduit Facility with
the Company. The rate of interest charged under this agreement is the one-
month LIBOR plus 1.2%. In conjunction with the initial draw on this facility,
which took place on December 31, 1998, the Company entered into an interest
rate swap agreement. Under the agreement, the Company exchanges the prime-
based rate of interest which is accruing on finance receivables pledged under
the facility for a LIBOR-based rate of interest. At any point in time, the
amount of collateral subject to the swap agreement is equal to at least 75% of
the balance drawn on the CP Conduit Facility. At December 31, 1998, $42.4
million was outstanding under this facility. The CP Conduit Facility will
generally lend up to 80% of the collateral pledged and requires (i) a minimum
over-collateralization percentage of 125%, (ii) the average loan outstanding
shall be $2.75 million or less, (iii) the weighted maturity of all STL loans
be three years or less, (iv) the portfolio yield equals or exceeds a minimum
yield, (v) certain third party payor concentration limits not be exceeded, and
(vi) that the Company maintain a minimum tangible net worth of $175 million.
The CP Conduit Facility terminates on December 28, 2001 and may be extended by
agreement in writing with VFCC. At December 31, 1998, the Company was in
compliance with its covenants under the CP Conduit Facility.
 
  The Company requires substantial capital to finance its business.
Consequently, the Company's ability to grow and the future of its operations
will be affected by the availability and the terms of financing. The Company
expects to fund its future financing activities principally from (i) the CP
Facility, (ii) the Bank Facility, (iii) the Warehouse Facility, and (iv) the
CP Conduit Facility. While the Company expects to be able to obtain new
financing facilities or renew these existing financing facilities and to have
continued access to other sources of credit after expiration of these
facilities, there is no assurance that such financing will be available, or,
if available, that it will be on terms favorable to the Company.
 
Inflation
 
  Inflation has not had a significant effect on the Company's operating
results to date.
 
                                      27
<PAGE>
 
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
  The Company's primary market risk exposure is the volatility of interest
rates on its finance receivables and borrowings, its only market risk
sensitive instruments. However, this risk is mitigated because substantially
all, over 95%, of the Company's finance receivables are floating rate
instruments that are based on the prime rate and all of the Company's
borrowings are on a floating-rate basis. The interest payable under the Bank
Facility adjusts based on Fleet's prime rate, or, at the Company's discretion,
based on LIBOR. The interest rate on the CP Facility adjusts based on changes
in commercial paper rates. The interest rate on the CP Conduit Facility and
the Warehouse Facility adjust based on LIBOR. And although the prime rate and
the rates on the Company's borrowings do not change in perfect
synchronization, the Company has noted that changes in these rates have been
closely correlated. Additionally, under the terms of the CP Conduit Facility,
the Company entered into an interest rate swap agreement in which the Company
exchanges the prime based rate of interest which accrues on finance
receivables pledged under the facility for a LIBOR based rate of interest for
at least 75% of the balance drawn on the CP Conduit Facility, which further
mitigates the impact of interest rate market risk.
 
  The relative degrees to which the Company funds its finance receivable
portfolio using its equity and its borrowing facilities are relevant when
assessing the effects of interest rate changes. The impact of a change in the
rates earned on the portion of the portfolio funded by equity would result in
a similar change to the net interest margin, and, thus, a change which may be
significant to net income. The impact of a change in rates earned on the
portion of the portfolio funded by borrowings would be accompanied by a
similar change on the rates paid to fund the portfolio and would, therefore,
result in a minimal change to the net interest margin and to net income. At
December 31, 1998, 54.6% of the Company's finance receivables was funded
through borrowings. The Company anticipates that the portion of its portfolio
funded through borrowings during 1999 will increase as necessary to support
Company growth.
 
  The Company uses a sensitivity analysis model to measure the exposure of its
net income to increases or decreases in interest rates. The model measures the
change in annual net income if interest rates increase or decrease by 50 and
by 100 basis points, respectively. Based on the model used, which considers
the Company's 1999 growth projections, a 100 basis point increase or decrease,
respectively, in interest rates would increase or decrease, accordingly, net
income in 1999 by approximately 4%.
 
  As with any model, there are limitations inherent in the interest rate risk
measurements above. Modeling changes requires certain assumptions be made that
may simplify the way actual yields and costs respond to changes in interest
rates. For example, the model projects certain static growth assumptions that
are more likely to be correct on the average, but not necessarily to be
correct on a day-to-day, month-to-month basis. Thus, although the sensitivity
analysis model provides an indication of the Company's interest rate exposure
at a particular point in time, it cannot provide a precise forecast of the
effect of changes in market interest rates on the Company's net income.
 
                                      28
<PAGE>
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY FINANCIAL DATA
 
                         INDEX TO FINANCIAL STATEMENTS
 
HEALTHCARE FINANCIAL PARTNERS, INC.
 
<TABLE>
<S>                                                                        <C>
Report of Independent Auditors, Ernst & Young LLP.........................  30
 
Consolidated Balance Sheets as of December 31, 1998 and 1997..............  31
 
Consolidated Statements of Income for the years ended December 31, 1998,
 1997 and 1996............................................................  32
 
Consolidated Statements of Equity for the years ended December 31, 1998,
 1997 and 1996............................................................  33
 
Consolidated Statements of Cash Flows for the years ended December 31,
 1998, 1997 and 1996......................................................  34
 
Notes to Consolidated Financial Statements................................  35
</TABLE>
 
                                       29
<PAGE>
 
                        REPORT OF INDEPENDENT AUDITORS
 
Board of Directors and Stockholders
HealthCare Financial Partners, Inc.
 
  We have audited the accompanying consolidated balance sheets of HealthCare
Financial Partners, Inc. as of December 31, 1998 and 1997, and the related
consolidated statements of income, equity, and cash flows for each of the
three years in the period ended December 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
 
  We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the accounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
 
  In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of HealthCare
Financial Partners, Inc. at December 31, 1998 and 1997, and the consolidated
results of its operations and cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted
accounting principles.
 
                                          /s/ Ernst & Young LLP
 
Washington, D.C.
February 11, 1999
 
                                      30
<PAGE>
 
                      HEALTHCARE FINANCIAL PARTNERS, INC.
 
                          CONSOLIDATED BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                           December 31,
                                                     --------------------------
                                                         1998          1997
                                                     ------------  ------------
<S>                                                  <C>           <C>
                       ASSETS
Cash and cash equivalents........................... $ 39,551,044  $ 18,668,703
Finance receivables.................................  437,287,437   250,688,138
Less:
  Allowance for losses on receivables...............    6,401,916     2,654,114
  Unearned fees.....................................    3,802,302     3,161,237
                                                     ------------  ------------
    Net finance receivables.........................  427,083,219   244,872,787
Prepaid expenses and other assets...................    9,455,219     3,405,497
Deferred income taxes...............................    2,112,383     1,041,520
Investments in affiliates...........................   11,397,194       767,244
Investment securities...............................   11,755,628     1,442,814
Property and equipment, net.........................    1,753,208       416,284
Goodwill............................................    1,563,220     1,740,097
                                                     ------------  ------------
    Total assets.................................... $504,671,115  $272,354,946
                                                     ============  ============
        LIABILITIES AND STOCKHOLDERS' EQUITY
Borrowings.......................................... $238,783,273  $169,269,054
Client holdbacks....................................    4,208,859     6,173,260
Accounts payable to clients.........................      540,205       834,367
Income taxes payable................................    1,918,084     5,138,144
Accounts payable and accrued expenses...............    6,180,833     2,217,947
Notes payable.......................................    3,380,828       115,286
Accrued interest....................................    1,454,297       776,700
Due to affiliates, net..............................      651,169
                                                     ------------  ------------
    Total liabilities...............................  257,117,548   184,524,758
                                                     ============  ============
Stockholders' equity
Preferred stock, par value $.01 per share;
 10,000,000 shares authorized; none outstanding
  Common stock, par value $.01 per share; 60,000,000
   shares authorized; 13,414,189 and 9,670,291
   shares issued and outstanding, respectively......      134,142        96,703
  Paid-in-capital...................................  219,822,293    79,784,045
  Retained earnings.................................   27,757,342     7,949,440
  Accumulated other comprehensive income............     (160,210)
                                                     ------------  ------------
    Total stockholders' equity......................  247,553,567    87,830,188
                                                     ------------  ------------
    Total liabilities and stockholders' equity...... $504,671,115  $272,354,946
                                                     ============  ============
</TABLE>
 
                            See accompanying notes.
 
                                       31
<PAGE>
 
                      HEALTHCARE FINANCIAL PARTNERS, INC.
 
                       CONSOLIDATED STATEMENTS OF INCOME
 
<TABLE>
<CAPTION>
                                                 Year Ended December 31,
                                           -----------------------------------
                                              1998        1997        1996
                                           ----------- ----------- -----------
<S>                                        <C>         <C>         <C>
Fee and interest income:
  Finance receivables..................... $56,889,198 $27,401,653 $11,971,886
  Other...................................     817,662     343,424      44,085
                                           ----------- ----------- -----------
    Total fee and interest income.........  57,706,860  27,745,077  12,015,971
Interest expense..........................  13,629,466   7,921,330   3,408,562
                                           ----------- ----------- -----------
Net fee and interest income...............  44,077,394  19,823,747   8,607,409
Provision for losses on receivables.......   3,953,498   1,315,122     656,116
                                           ----------- ----------- -----------
Net fee and interest income after
 provision for losses on receivables......  40,123,896  18,508,625   7,951,293
Asset management income...................   1,576,597
                                           ----------- ----------- -----------
Operating income..........................  41,700,493  18,508,625   7,951,293
Operating expenses:
  Compensation and benefits...............   5,762,158   3,741,827   1,267,625
  Professional fees.......................   1,370,434     512,989     283,935
  Occupancy...............................     726,436     218,636     196,319
  Commissions.............................      65,624     176,282     463,499
  Other...................................   5,509,799   2,569,638   1,115,616
                                           ----------- ----------- -----------
    Total operating expenses..............  13,434,451   7,219,372   3,326,994
Other income:
  Dividend income from investment in
   REIT...................................     378,249
  Equity in earnings from unconsolidated
   entity.................................   1,622,833
  Commissions on REIT originations........     871,875
  Other...................................   1,932,952   1,582,852     233,982
                                           ----------- ----------- -----------
    Total other income....................   4,805,909   1,582,852     233,982
                                           ----------- ----------- -----------
Income before deduction of preacquisition
 earnings.................................  33,071,951  12,872,105   4,858,281
Deduction of preacquisition earnings......                           4,289,859
                                           ----------- ----------- -----------
Income before income taxes................  33,071,951  12,872,105     568,422
Income taxes..............................  13,264,049   4,877,257      38,860
                                           ----------- ----------- -----------
Net income................................ $19,807,902 $ 7,994,848 $   529,562
                                           =========== =========== ===========
Basic earnings per share.................. $      1.57 $       .99 $       .13
                                           =========== =========== ===========
Diluted earnings per share................ $      1.52 $       .96 $       .13
                                           =========== =========== ===========
</TABLE>
 
                            See accompanying notes.
 
                                       32
<PAGE>
 
                      HEALTHCARE FINANCIAL PARTNERS, INC.
 
                              STATEMENTS OF EQUITY
 
<TABLE>
<CAPTION>
                                                    Stockholders' Equity (Deficit)
                                     --------------------------------------------------------------
                                                                          Accumulated
                           Limited                           Retained        Other                      Total
                          Partners'   Common    Paid-In      Earnings    Comprehensive                  Equity
                           Capital    Stock     Capital      (Deficit)      Income        Total       (Deficit)
                          ---------  -------- ------------  -----------  ------------- ------------  ------------
<S>                       <C>        <C>      <C>           <C>          <C>           <C>           <C>
Balance at January 1,
 1996 (combined)........  $ 415,305  $ 34,200               $  (574,970)               $   (540,770) $   (125,465)
Net and Comprehensive
 Income.................                                        529,562                     529,562       529,562
Issuance of 2,415,000
 shares of $.01par 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 distribution to
 partners...............   (415,305)                                                                     (415,305)
                          ---------  -------- ------------  -----------    ---------   ------------  ------------
Balance at December 31,
 1996...................               62,150   26,704,234      (45,408)                 26,720,976    26,720,976
Net and Comprehensive
 Income.................                                      7,994,848                   7,994,848     7,994,848
Issuance of 3,450,000
 shares of $.01par value
 common stock...........               34,500   53,005,310                               53,039,810    53,039,810
Common stock issuable
 and issued under option
 plans..................                   53       74,501                                   74,554        74,554
                                     -------- ------------  -----------    ---------   ------------  ------------
Balance at December 31,
 1997...................               96,703   79,784,045    7,949,440                  87,830,188    87,830,188
Comprehensive income:
 Net income.............                                     19,807,902                  19,807,902    19,807,902
 Unrealized loss on
  investment securities
  available-for-sale,
  net of tax............                                                   $(160,210)      (160,210)     (160,210)
                                                                                       ------------  ------------
 Comprehensive Income...                                                                 19,647,692    19,647,692
                                                                                       ------------  ------------
Issuance of 3,657,500
 shares of $.01 par
 value common stock.....               36,575  137,895,839                              137,932,414   137,932,414
Common stock issuable
 and issued under option
 plans..................                  864    2,142,409                                2,143,273     2,143,273
                          ---------  -------- ------------  -----------    ---------   ------------  ------------
Balance at December 31,
 1998...................  $          $134,142 $219,822,293  $27,757,342    $(160,210)  $247,553,567  $247,553,567
                          =========  ======== ============  ===========    =========   ============  ============
</TABLE>
 
                            See accompanying notes.
 
                                       33
<PAGE>
 
                      HEALTHCARE FINANCIAL PARTNERS, INC.
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                            Year Ended December 31,
                                    ------------------------------------------
                                        1998           1997           1996
                                    -------------  -------------  ------------
<S>                                 <C>            <C>            <C>
Operating activities
  Net income....................... $  19,807,902  $   7,994,848  $    529,562
  Adjustments to reconcile net
   income to net cash provided by
   operations:
    Depreciation...................       223,981        113,550        77,916
    Amortization of goodwill.......       176,877         92,248
    Stock compensation plans.......        86,478         15,989
    Provision for losses on
     receivables...................     3,953,498      1,315,122       656,116
    Deferred income taxes..........      (964,923)      (660,058)     (351,127)
    Net gains on investment
     securities....................      (528,393)
    Equity in earnings from
     unconsolidated entity.........    (1,622,833)
    Changes in assets and
     liabilities:
      Increase in prepaid expenses
       and other...................    (6,049,722)    (1,998,104)     (670,709)
      (Decrease) increase in income
       taxes payable...............    (2,155,150)     4,748,552       278,418
      Increase in accounts payable
       and accrued expenses........     3,668,724        496,271     1,265,420
      Increase in accrued
       interest....................       677,597        392,765        79,586
      Increase in amount due to
       affiliates, net.............       651,169
                                    -------------  -------------  ------------
        Net cash provided by
         operating activities......    17,925,205     12,511,183     1,865,182
Investing activities
  Increase in finance receivables,
   net.............................  (191,069,396)  (151,189,744)  (10,338,502)
  Investment in affiliates.........   (10,629,950)      (767,244)
  Net cash used for investment
   securities......................    (1,963,452)      (925,002)
  Purchase of property and
   equipment, net..................    (1,477,520)      (306,436)     (225,173)
  Purchase of limited partnership
   interest, net of cash required..                  (15,200,257)  (16,138,888)
  Other............................                     (188,000)
                                    -------------  -------------  ------------
        Net cash used in investing
         activities................  (205,140,318)  (168,576,683)  (26,702,563)
Financing activities
  Net borrowings...................    69,514,219    110,230,219    10,225,016
  Issuance of common stock, net of
   expenses........................   138,924,298     53,098,375    26,732,184
  Net (payments) borrowings under
   notes payable...................      (341,063)       (11,103)      105,191
  Distributions to limited
   partners, net...................                     (317,993)     (415,305)
  Decrease in notes payable to
   related parties.................                                    (75,000)
                                    -------------  -------------  ------------
        Net cash provided by
         financing activities......   208,097,454    162,999,498    36,572,086
                                    -------------  -------------  ------------
  Net increase in cash and cash
   equivalents.....................    20,882,341      6,933,998    11,734,705
  Cash and cash equivalents at
   beginning of period.............    18,668,703     11,734,705
                                    -------------  -------------  ------------
  Cash and cash equivalents at end
   of period....................... $  39,551,044  $  18,668,703  $ 11,734,705
                                    =============  =============  ============
Supplemental disclosure of cash
 flow information
  Cash payments for interest....... $  12,951,869  $   7,528,565  $  3,037,218
                                    =============  =============  ============
  Cash payments for income taxes... $  16,351,530  $     788,764  $     23,839
                                    =============  =============  ============
</TABLE>
                            See accompanying notes.
 
                                       34
<PAGE>
 
                      HEALTHCARE FINANCIAL PARTNERS, INC.
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1. BASIS OF PRESENTATION
 
  The consolidated financial statements of Healthcare Financial Partners, Inc.
(the "Company") for 1998 include the accounts of the Company and the accounts
of its wholly-owned subsidiaries, HCFP Funding, Inc., HCFP Funding II, Inc.,
HCFP Funding III, Inc., Wisconsin Circle Funding Corporation, Wisconsin Circle
II Funding Corporation, Wisconsin Circle III Funding Corporation, HCFP Funding
of California, Inc., HCFP/HC Management, Inc., HCFP REIT Origination, Inc.,
and HealthCare Analysis Corporation. Significant intercompany accounts and
transactions have been eliminated in consolidation. The Company's principal
activity is providing financing to healthcare providers and to businesses in
sub-markets of the healthcare industry throughout the United States.
 
  The Company, which was incorporated and previously doing business as
HealthPartners Financial Corporation from inception to September 13, 1996, was
formed in 1993 under the laws of the state of Delaware. The Company issued 2.4
million shares of common stock, including underwriters over allotment, in an
initial public offering (the "Offering") in November 1996. In connection with
the Offering, the Company increased its authorized common shares from one
million shares to 30 million and effected a 4.56-to-1 split of the common
stock in the form of a stock dividend, including outstanding warrants and
options, on September 13, 1996. Shares of common stock outstanding for all
periods presented have been retroactively restated to give effect to the stock
split. Effective upon the completion of the offering, the Company used the
proceeds of the Offering to acquire, using the purchase method of accounting,
all the limited partnership interests in HealthPartners Funding, L.P.
("Funding") and Funding was liquidated (the "Acquisition") (See Note 14). The
amount paid to acquire the limited partnership interest approximated both the
fair value and the book value of Funding at the date of the Acquisition. Prior
to the Offering and the acquisition of Funding by the Company, the Company
owned a 1% general partner interest in HealthPartners DEL, L.P. ("DEL") and
Funding. In addition, the majority owners of the Company owned all of the
limited partnership interests of DEL. Prior to the offering, the Company's
principal activity was its interest in Funding. Additionally, the Company
provided operational and management support to Funding for a fee. Funding's
principal activity was providing financing to healthcare providers and to
businesses in sub-markets of the healthcare industry throughout the United
States.
 
  The financial statements of the Company for 1996 were consolidated assuming
the acquisition of Funding occurred as of January 1, 1996 under the provisions
of Accounting Research Bulletin No. 51. The deduction of preacquisition
earnings reflects the operations of Funding and DEL allocated to the limited
partners of Funding and DEL prior to the acquisition.
 
  Effective September 1, 1996, in contemplation of the offering, Funding
acquired, using the purchase method of accounting, the assets of DEL
(consisting principally of client receivables) by assuming DEL's liabilities
and paying approximately $472,000 in cash. The cash payment approximated the
fair value and book value of DEL's net assets. Immediately following the
acquisition, DEL was dissolved.
 
2. SIGNIFICANT ACCOUNTING POLICIES
 
 Cash and Cash Equivalents
 
  Cash and cash equivalents includes cash and other liquid financial
instruments with an original maturity of three months or less.
 
 Finance Receivables
 
  The Accounts Receivable Program includes asset-based lending and purchased
finance receivables. Asset-based lending is provided in the form of a
revolving line of credit. The amount of credit granted is based on a
predetermined percentage of the client total accounts receivable. Purchased
finance receivables are recorded at the contractual purchase amount, less the
discount fee (the "amount purchased"). The difference between the
 
                                      35
<PAGE>
 
                      HEALTHCARE FINANCIAL PARTNERS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
amount purchased and the amount paid to acquire such receivables is reflected
as client holdbacks. In the event purchased receivables become delinquent, the
Company has certain rights of offset to apply client holdbacks (or future
fundings) against delinquent accounts receivable.
 
  Secured term loans are loans up to three years in duration secured by real
estate, accounts receivable, and other assets, such as equipment, inventory,
and stock. These loans are often provided to clients currently borrowing under
the aforementioned Accounts Receivable Program. In connection with secured
term loans, the Company may receive stock, or warrants to convert to stock, in
the client entity.
 
 Allowance for Losses on Receivables
 
  The allowance for losses on receivables is maintained at the amount
estimated to be sufficient to absorb future losses, net of recoveries,
inherent in the finance receivables. The provision for losses on receivables
is the periodic cost of maintaining an adequate allowance. In evaluating the
adequacy of the allowance, management considers trends in past-due accounts,
historical charge-off and recovery rates, credit risk indicators, economic
conditions, on-going credit evaluations, overall portfolio size, average
client balances, excess collateral and underwriting policies, among other
items. The Company performs an account-by-account review to identify finance
receivables to be specifically provided for and charged off. Additionally,
client holdbacks are available to offset losses on certain receivables. And,
under certain circumstances, credit losses can be offset against client
holdbacks related to other financings.
 
 Investments in Affiliates
 
  Investments in affiliates are investments in entities for which the Company
may provide management and/or administrative services. In all cases, the
Company does not have sufficient control to warrant consolidation. As such,
the Company's investments in affiliates are accounted for using either the
cost or equity methods of accounting, depending upon the degree of the
Company's ownership interest. Investments in affiliates accounted for under
the cost method are carried at the initial costs of the investments and are
evaluated periodically for impairment.
 
 Investment Securities
 
  Investment securities are comprised of marketable equity securities
consisting primarily of publicly traded common stock and related warrants,
securities which have no ready market and which are primarily investments in
the common stock and related warrants of private companies, and minority
membership interests in limited liability companies. Marketable equity
securities are classified as securities available for sale and, accordingly,
are stated at fair market value, with unrealized gains and losses, net of tax,
reported as a component of accumulated other comprehensive income. Investment
securities which have no ready market are carried at cost and evaluated
periodically for impairment. Minority interests in limited liability companies
are accounted for under either the cost or equity methods of accounting,
depending upon the degree of the Company's membership interest. Investments
accounted for under the cost method are carried at the initial costs of the
investments and are evaluated periodically for impairment.
 
 Property and Equipment, net
 
  Property and equipment, principally computer and related peripherals, were
stated at cost less accumulated depreciation of approximately $422,000 and
$203,000 at December 31, 1998 and 1997, respectively. Depreciation expense is
computed primarily using the straight-line method.
 
 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
 
                                      36
<PAGE>
 
                      HEALTHCARE FINANCIAL PARTNERS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
uncollectible amounts against these holdbacks. Holdbacks are assigned to
specific purchased receivables. The client holdbacks are payable upon
collection of the respective purchased receivable amount.
 
 Borrowings
 
  Direct costs of borrowings, including fees, commissions, and professional
services, are deferred and included in other assets and amortized into
operating expenses over the lives of the respective borrowings.
 
 Comprehensive Income
 
  As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130
establishes new rules for the reporting and display of comprehensive income
and its components; however, the adoption of SFAS 130 had no impact on the
Company's net income or stockholders' equity. SFAS 130 requires unrealized
gains or losses on the Company's investment securities available for sale,
which prior to adoption would have been reported separately in stockholders'
equity, to be included in other comprehensive income. Prior years' financial
statements have been conformed to the requirements of SFAS 130.
 
 Revenue Recognition
 
  Fee and interest income from finance receivables includes accrued interest
on finance receivables, including discount fees, commitment fees, management,
termination, success and set-up fees and is recognized in income over the
periods earned under methods that approximate the effective interest method.
 
  Finance receivables are generally placed on non-accrual status when
principal or interest is past due 90 days or more and when, in the opinion of
management, full collection of principal or interest is unlikely. After a
finance receivable is placed on non-accrual status, income is recognized only
to the extent of cash received and collection of principal is not in doubt.
Finance receivables are returned to accrual status when they become
contractually current, and past due income is recognized at that time.
 
 Income Taxes
 
  The Company uses the liability method of accounting for income taxes as
required by Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes." Under the liability method, deferred tax assets and
liabilities are determined based on differences between the financial
statement carrying amounts and the tax basis of existing assets and
liabilities (i.e., temporary differences) and are measured at the enacted
rates that will be in effect when these temporary differences reverse.
 
 Earnings per Share
 
  Basic earnings per share is based on the weighted average number of common
shares outstanding excluding any dilutive effects of options, warrants and
other dilutive securities. Diluted earnings per share reflects the assumed
conversion of all dilutive securities.
 
 Use of Estimates
 
  The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
 
                                      37
<PAGE>
 
                      HEALTHCARE FINANCIAL PARTNERS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
 Fair Value of Financial Instruments
 
  Due to the variable rates associated with most of the Company's financial
instruments, there are no significant differences between recorded values and
fair values.
 
 Reclassifications
 
  Certain reclassifications were made to the prior years' financial statements
to conform to the current year's presentation.
 
3. FINANCE RECEIVABLES
 
  Finance receivables consisted of the following:
 
<TABLE>
<CAPTION>
                                                            December 31,
                                                      -------------------------
                                                          1998         1997
                                                      ------------ ------------
   <S>                                                <C>          <C>
   Accounts receivable program....................... $289,717,840 $185,727,628
   Secured term loan program.........................  147,569,597   64,960,510
                                                      ------------ ------------
                                                      $437,287,437 $250,688,138
                                                      ============ ============
</TABLE>
 
  In connection with certain finance receivables, the Company maintained cash
balances in escrow at December 31, 1998 and 1997 of $4.6 million and $721,000,
respectively.
 
  At December 31, 1998 and 1997, finance receivables totaling approximately
$11.6 and $1.4 million, respectively, were on non-accrual status and
considered impaired. At December 31, 1998, the allowance allocated to these
finance receivables was approximately $1.8 million. No amount of the allowance
was specifically allocated to finance receivables on non-accrual status at
December 31, 1997. The average recorded investment in non-accrual finance
receivables during the years ended December 31, 1998 and 1997 was
approximately $6.3 million and $333,000, respectively. During 1998 and 1997,
no income was recognized on finance receivables while they were under the non-
accrual status.
 
4. ALLOWANCE FOR LOSSES ON RECEIVABLES
 
  Changes in the allowance for losses on receivables were as follows:
 
<TABLE>
<CAPTION>
                                                  Year Ended December 31,
                                              ---------------------------------
                                                 1998        1997       1996
                                              ----------  ---------- ----------
   <S>                                        <C>         <C>        <C>
   Balance, beginning of year...............  $2,654,114  $1,078,992 $   66,840
   Allowance acquired from purchased finance
    receivables.............................                 260,000    356,036
   Provision for losses on finance
    receivables.............................   3,953,498   1,315,122    656,116
   Amounts charged off......................    (205,696)
                                              ----------  ---------- ----------
   Balance, end of year.....................  $6,401,916  $2,654,114 $1,078,992
                                              ==========  ========== ==========
</TABLE>
 
5. INVESTMENTS IN AND TRANSACTIONS WITH AFFILIATES
 
 HealthCare Financial Partners REIT, Inc.
 
  In January 1998, a real estate investment trust known as HealthCare
Financial Partners REIT, Inc. (the "REIT") was formed. Certain senior officers
of the Company who founded the REIT became senior officers of the REIT. The
REIT's principal activity is investing in income-producing real estate and
real estate related assets
 
                                      38
<PAGE>
 
                      HEALTHCARE FINANCIAL PARTNERS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
in the healthcare industry, consisting principally of purchase leaseback
transactions of long-term care facilities, acquisitions of medical office
buildings, and mortgage lending.
 
  In connection with the formation of the REIT, the Company made investments
in the REIT. In January 1998, the Company acquired 241,665 shares of the
REIT's common stock in a private placement. In May 1998, in a private
placement of units (the "Units"), the Company acquired 100,000 Units. Each
Unit consisted of five shares of the REIT's common stock and one warrant to
purchase one share of common stock. In connection with an amendment made to a
registration rights agreement regarding the aforementioned Units, the REIT
granted all Unit holders of record on October 30, 1998 one additional warrant
to purchase one share of common stock for each Unit held. The warrants
acquired as part of the Units purchased in May 1998 and the additional
warrants granted, as mentioned above, have exercise prices of $20, became
exercisable in November 1998, and expire in April 2001.
 
  At December 31, 1998, the Company's investment in the REIT, accounted for
under the cost method, was approximately $10.1 million and consisted of
741,665 shares of common stock and 200,000 common stock purchase warrants. For
the year ended December 31, 1998, dividend income related to the Company's
investment in the REIT was approximately $378,000. At December 31, 1998,
$111,000 of the dividend income was receivable from the REIT. This amount was
included as a component of "due to affiliates, net" at that date, and was
subsequently collected in January 1999.
 
  In 1998, a wholly-owned subsidiary of the Company known as HCFP REIT
Management, Inc. (the "Manager") entered a management agreement (the
"Management Agreement") with the REIT. Under the Management Agreement, the
Manager advised the REIT as to the activities and operations of the REIT and
was responsible for the day-to-day operations of the REIT pursuant to
authority granted to it by the REIT's Board of Directors. Pursuant to the
Management Agreement, the Manager was paid a management fee. Among other
things, this management fee was paid to compensate the employees of the
Manager who conducted the business of the REIT; the majority of personnel
managing the REIT were employees of the Manager. The fee was calculated and
paid quarterly. The amount was equal to a percentage of the REIT's average
invested assets (as defined by the Management Agreement) over the year. The
percentages applied were to range from 1.5% for the first $300 million of
average invested assets to 0.5% for average invested assets exceeding $1.2
billion. From the inception of the Management Agreement through December 11,
1998, the Company earned a management fee in connection with the REIT of
approximately $1.3 million.
 
  On December 11, 1998, the Management Agreement was terminated and certain
employees of the Manager became employees of the REIT. Upon this termination,
the Company and the REIT approved an agreement under which the Company is paid
by the REIT a fee of 2.5% of the purchase price or principal amount of each
transaction which it originates on the REIT's behalf. In connection with this
agreement, the Company earned approximately $872,000 in December 1998.
 
  At December 31, 1998, the REIT owed the Company approximately $1.2 million
in connection with a prorated fourth quarter management fee in accordance with
the Management Agreement, the fee earned in December 1998 as discussed above,
and other amounts attributable to reimbursable expenditures made by the
Company on the REIT's behalf. This amount was included as a component of "due
to affiliates, net" at December 31, 1998.
 
  As of December 31, 1998, the Company had a $6.75 million outstanding secured
term loan to the REIT. The loan is secured by a skilled nursing facility owned
by the REIT which is leased to an operator independent of both the Company and
the REIT. The loan matures in November 1999, and is interest-only at the rate
of 11%. During 1998, $66,000 of interest was paid to the Company by the REIT
under this note.
 
 
                                      39
<PAGE>
 
                      HEALTHCARE FINANCIAL PARTNERS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 Funding III, L.P.
 
  In August 1997, the Company formed HealthCare Financial Partners--Funding
III, L.P. ("Funding III, L.P."), a limited partnership in which HCFP Funding
III, Inc., a wholly-owned subsidiary of the Company ("Funding III"), was the
general partner. Funding III, L.P. participated in a Department of Housing &
Urban Development auction of a distressed mortgage loan portfolio. Funding III
holds a 1% general and 49% limited partnership interest in Funding III, L.P.
and receives 60% of the income from the partnership's activities. The Company
accounts for its investment in Funding III, L.P. under the equity method of
accounting, as it does not have sufficient control to warrant consolidation.
At December 31, 1998 and 1997, the investment in Funding III, L.P. was
$1,304,000 and $767,000, respectively. For the years ended December 31, 1998
and 1997, income relating to the investment in Funding III, L.P. was
approximately $537,000 and $2,000, respectively. At December 31, 1998, the
Company owed Funding III, L.P. approximately $2 million. This amount was
included as a component of "due to affiliates, net" at December 31, 1998.
 
 Funding II, L.P.
 
  In March 1997, the Company formed HealthCare Financial Partners--Funding II,
L.P. ("Funding II, L.P."), a limited partnership in which HCFP Funding II,
Inc., a wholly-owned subsidiary of the Company ("Funding II"), was the general
partner. Funding II, L.P. was established to develop the secured term loan
program. In June 1997, using proceeds from the Company's secondary offering of
shares of common stock to the public, Funding II acquired all of the limited
partnership interests in Funding II, L.P., utilizing the purchase method of
accounting, for a purchase price of $15.5 million. Funding II, L.P. was then
liquidated. This payment reflected the fair value of the business and exceeded
the book value by $1.6 million, which was recorded as goodwill, and is being
amortized over ten years using a straight-line method. For the year ended
December 31, 1997, income relating to the investment in Funding II, L.P. was
approximately $83,000.
 
6. INVESTMENT SECURITIES
 
  At December 31, 1998, the Company's marketable equity securities, which are
designated as available for sale, had a fair market value of $170,000 and a
cost basis of $436,000. At December 31, 1997, the Company's marketable equity
securities designated as available for sale had a fair market value and a cost
basis both equal to $357,000. At December 31, 1998 and 1997, the Company's
non-marketable equity securities were carried at an aggregate cost of $1.3
million and $1.1 million, respectively. During the years ended December 31,
1998 and 1997, marketable and non-marketable equity securities received in
connection with the secured term loan program had a combined initial market or
initial estimated value of $664,000 and $518,000, respectively.
 
  During 1998, the Company acquired a 49% membership interest in a limited
liability company (the "LLC") which it accounts for under the equity method.
To obtain this interest, the Company paid $3.5 million in cash, converted a $2
million finance receivable owed by the LLC, and executed a $3.5 million note
payable to the LLC. For the year ended December 31, 1998, income relating to
this investment was $1.6 million, and of that amount, $343,000 was distributed
by the LLC to the Company during the year. The carrying value of this
investment at December 31, 1998 was $10.3 million.
 
7. BORROWINGS
 
 Line of Credit
 
  The Company maintains a revolving line of credit with Fleet Capital
Corporation ("Fleet"). At December 31, 1998, the facility limit under this
line of credit was $40 million; however, the Company was permitted to borrow
up to $50 million during 1998 and 1997 and as of December 31, 1997. This
agreement is in effect through March 2002, and will automatically renew for
one-year periods thereafter, unless terminated by Fleet or the Company,
subject to certain periods of notice as required in the agreement.
 
                                      40
<PAGE>
 
                      HEALTHCARE FINANCIAL PARTNERS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
  The line of credit is collateralized by the Company's finance receivables.
The rate of interest charged under the agreement from the beginning of 1998
through the end of October 1998 was Fleet's prime rate plus 1.25% or the
revolving credit LIBOR rate plus 2.75% determined at the option of the Company
upon each additional draw, subject to certain limitations. On October 28,
1998, the rate charged under the agreement was reduced to Fleet's prime rate
or the revolving credit LIBOR plus 2.0% determined at the option of the
Company upon each additional draw, subject to certain limitations. The Company
pays an unused line fee of .05% based on the average unused capacity in the
line. For the years ended December 31, 1998, 1997, and 1996, the weighted
average interest rate paid under the line of credit was 10.4%, 9.7%, and
10.3%, respectively. In 1998, 1997, and 1996, amortization of the direct costs
of establishing this facility was $66,000, $316,000, and $46,000,
respectively. At December 31, 1998 and 1997, $32.5 million and $40.2 million,
respectively, were outstanding under the line of credit.
 
 Commercial Paper Facility
 
  In December 1996, the Company committed to an asset-backed securitization
facility (the "Commercial Paper Facility") with Holland Limited
Securitization, Inc. ("HLS"), a multi-seller commercial paper issuer sponsored
by ING Baring (U.S.) Capital Markets, Inc. ("ING"). The total borrowing
capacity under this facility is $200 million, and $150 million was authorized
for use at December 31, 1998. Increases in the authorized borrowing capacity
are at the Company's discretion and are subject to over-collateralization
levels. The securitization facility expires in December 2001.
 
  In connection with the Commercial Paper Facility, the Company formed a
wholly-owned subsidiary, Wisconsin Circle Funding Corporation ("Wisconsin") to
purchase receivables from the Company. Wisconsin pledges receivables on a
revolving line of credit with HLS. HLS issues commercial paper or other
indebtedness to fund the Commercial Paper Facility with Wisconsin. HLS is not
affiliated with the Company or its affiliates. Interest is payable on the
Commercial Paper Facility based on certain commercial paper rates combined
with a monthly facility fee.
 
  The net assets of Wisconsin, totaling approximately $52.9 million at
December 31, 1998 and $38.3 million at December 31, 1997 were restricted as
over-collateralization to the Commercial Paper Facility, including
approximately $17.6 million and $14.3 million of cash held at Wisconsin at
December 31, 1998 and 1997, respectively. The weighted average rate paid,
including the aforementioned facility fee, in 1998, 1997, and 1996 under the
Commercial Paper Facility was 7.66%, 7.65%, and 7.53%, respectively. In 1998
and 1997, amortization of the direct costs of establishing this facility was
$348,000 and $189,000, respectively. At December 31, 1998 and 1997, $114.2
million and $101.2 million, respectively, were outstanding under this
facility.
 
 Warehouse Facility
 
  In June 1997, the Company and Funding II entered into a financing agreement
(the "Warehouse Facility") with Credit Suisse First Boston Mortgage Capital,
LLC ("CSFB") to securitize certain secured term loans. The Company had total
borrowing capacity under the agreement of $50 million at December 31, 1997. In
February 1998, the capacity was increased to $100 million. The facility is in
place until June 27, 1999. Subsequent to that date, no new loans may be
securitized under the existing agreement; however, previous loans securitized
will remain outstanding until they have been fully repaid.
 
  In connection with this Warehouse Facility, Funding II formed a wholly-owned
subsidiary, Wisconsin Circle II Funding Corporation ("Wisconsin II"), a
single-purpose bankruptcy remote corporation, to purchase qualifying secured
term loans from Funding II, which are subsequently securitized. The amount
outstanding under the Warehouse Facility may not exceed 88% of the principal
amount of the securitized loans. Additionally,
 
                                      41
<PAGE>
 
                      HEALTHCARE FINANCIAL PARTNERS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
under the terms of the agreement, Wisconsin II has the right to repurchase any
assets securitized at a price equal to the fair market value of such assets.
Interest accrues under the Warehouse Facility at a rate of LIBOR plus 3.75% on
the initial $50 million and LIBOR plus 3.0% on the second $50 million. For the
year ended December 31, 1998 and 1997, the weighted average rates paid under
the Warehouse Facility were 9.65% and 9.16%, respectively. In 1998 and 1997,
amortization of the direct costs of establishing this facility was $495,000
and $154,000, respectively. At December 31, 1998 and 1997, $49.6 million and
$27.9 million, respectively, were outstanding under this facility.
 
 CP Conduit Facility
 
  In December 1998, the Company committed to an asset-backed securitization
facility (the "CP Conduit Facility") with Variable Funding Capital Corporation
("VFCC"), an issuer of commercial paper sponsored by First Union National
Bank. The total borrowing capacity under this facility is $150 million, and
the facility expires in December 2001.
 
  In connection with the CP Conduit Facility, the Company formed a wholly-
owned subsidiary, Wisconsin Circle III Funding Corporation ("Wisconsin III")
to purchase receivables from the Company. Wisconsin III pledges receivables on
a revolving line of credit with VFCC. VFCC issues commercial paper or other
indebtedness to fund the CP Conduit Facility with Wisconsin III. The rate of
interest charged under this agreement is the 30-day LIBOR plus 1.2%. In
conjunction with the initial draw on this facility, which took place on
December 31, 1998, Wisconsin III entered into an interest rate swap agreement.
Under the agreement, Wisconsin III exchanges the prime-based rate of interest,
which is accruing on finance receivables pledged under the facility, for a
LIBOR-based rate of interest. The interest rate swap agreement has a notional
amount of $36 million and expires in December 1999. The interest rate swap is
accounted for on the accrual basis. At December 31, 1998, $42.4 million was
outstanding under this facility.
 
8. STOCK OPTION PLANS
 
  During September 1996, the Company adopted the HealthCare Financial
Partners, Inc. 1996 Stock Incentive Plan (the "Incentive Plan") and the
HealthCare Financial Partners, Inc. 1996 Director Stock Option Plan (the
"Director Plan"). At December 31, 1998, under these plans, the Company has
reserved approximately 227,000 shares of common stock for future grants.
Options issued under the Incentive Plan generally vest and become exercisable
over a four to five year period following the grant date and expire ten years
from the grant date. Options issued under the Director Plan vest upon grant
and are exercisable one year after the grant date. Under the Director Plan,
during 1998 and 1997, the Company granted certain directors, in lieu of
director fees, 914 and 2,510 options, respectively, with an exercise price
below the market price at the grant date.
 
  The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," ("APB 25") and related interpretations in
accounting for its stock-based compensation plans. In accordance with APB 25,
no compensation cost is recognized for the Company's stock options where the
exercise price equals the market price of the underlying stock on the date of
grant.
 
  Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" ("SFAS 123") required companies that follow APB 25 to
provide additional pro forma disclosures regarding net income and earnings per
share in the footnotes to the financial statements as if the fair value
recognition provisions of SFAS 123 had been adopted for the periods being
presented.
 
  The fair value of options granted during each of the three years ended
December 31, 1998 was estimated at the date of grant using a Black-Scholes
option pricing model. The weighted average risk-free interest rate assumptions
used for the respective years ended December 31, 1998, 1997, and 1996 were
5.5%, 6.0%, and
 
                                      42
<PAGE>
 
                      HEALTHCARE FINANCIAL PARTNERS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
6.0%, respectively. For these same years, the assumptions regarding the
volatility factor of the expected market price of the Company's common stock
were .68, .52, and .62, respectively. The assumption regarding the expected
lives of the options, measured in years, for the respective years was five,
and for all years the dividend yield was zero.
 
  The Black-Scholes option valuation model was developed for certain tradable
types of options. In addition, this option valuation model requires the input
of highly subjective assumptions. Since changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
 
  As a result of applying the model as explained above for the purpose of
providing the required pro forma disclosures of SFAS 123, pro forma net income
for the years ended December 31, 1998, 1997, and 1996 would have been $17.7
million, $7.6 million, and $495,000, respectively. Pro forma basic earnings
per share for these same years would have been $1.40, $.94, and $.12,
respectively, and for these same periods, pro forma diluted earnings per share
would have been $1.36, $.92, and $.12, respectively.
 
  A summary of the Company's stock option activity for the years ended
December 31 was as follows:
 
<TABLE>
<CAPTION>
                                 1998               1997              1996
                          ------------------- ----------------- ----------------
                                     Weighted          Weighted         Weighted
                                     Average           Average          Average
                                     Exercise          Exercise         Exercise
                           Options    Price   Options   Price   Options  Price
                          ---------  -------- -------  -------- ------- --------
<S>                       <C>        <C>      <C>      <C>      <C>     <C>
Outstanding--beginning
 of year................    630,591   $13.71  338,381   $10.57   38,381  $2.61
  Granted...............  1,024,165    40.89  301,260    17.14  300,000  11.59
  Exercised.............    (86,398)   11.48   (5,300)   11.05
  Forfeited.............    (37,251)   32.10   (3,750)   11.28
                          ---------           -------           -------
Outstanding--end of
 year...................  1,531,107           630,591           338,381
                          =========           =======           =======
Outstanding--end of year
  Exercise prices at
   $2.61 to $6.37.......     25,891     2.97   40,891     2.84   38,381   2.61
  Exercise prices at
   $11.05 to $13.50.....    439,851    12.22  509,950    12.31  300,000  11.59
  Exercise prices at
   $17.50 to $35.00.....    441,614    31.09   79,750    28.25
  Exercise prices at
   $40.00 to $53.00.....    623,751    46.69
                          ---------           -------           -------
    Total...............  1,531,107           630,591           338,381
                          =========           =======           =======
Exercisable--end of year
  Exercise prices at
   $2.61to $6.37........     25,891     2.97   38,381     2.61   38,381   2.61
  Exercise prices at
   $11.05 to $13.50.....    165,498    12.08   71,336    11.84
  Exercise prices at
   $17.50 to $30.50.....     26,200    28.98
                          ---------           -------           -------
    Total...............    217,589           109,717            38,381
                          =========           =======           =======
</TABLE>
 
  Of the options granted under the Incentive Plan in 1998, 500,000 were
granted with exercise prices that differed from the market value of the
Company's common stock on the date of grant. The weighted average exercise
price and the weighted average estimated fair market value of these options
were $46.53 and $34.42, respectively. The remaining options granted under the
Incentive Plan during 1998 had exercise prices that equaled the market value
of the Company's common stock on the date of grant, and the weighted average
exercise price and the weighted average estimated fair market value of these
options were $35.53 and $19.27, respectively. The weighted average estimated
fair value of options granted during 1997 and 1996 was $7.62 and $6.76,
respectively. The weighted average remaining contractual life of all
outstanding options as of December 31, 1998 was nine years.
 
                                      43
<PAGE>
 
                      HEALTHCARE FINANCIAL PARTNERS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
9. DEFINED CONTRIBUTION PLAN
 
  During the years ended December 31, 1998 and 1997, the Company had a 401(k)
plan that covered all employees who were employed on a full-time basis and who
were at least twenty-one years old. Under the plan, participants may
contribute up to 18% of their annual salary, subject to certain limitations.
After one year of service, participants become eligible for a matching
employer contribution which may be as much as 3% of the employee's salary not
to exceed $5,000. In 1998 and 1997, the Company's matching contributions were
$55,000 and $42,000, respectively.
 
10. EQUITY
 
  For each year presented, basic earnings per share were computed by dividing
net income by the weighted average number of shares of common stock
outstanding during the year. The weighted average shares of common stock
outstanding during the years ended December 31, 1998, 1997 and 1996, were
approximately 12,628,000, 8,088,000 and 4,030,000, respectively.
 
  For each year presented, diluted earnings per share were computed by
dividing net income by the weighted average shares of commons stock
outstanding during the year plus the number of dilutive common stock
equivalents related to outstanding stock options at the end of each year. The
number of dilutive common stock equivalents related to outstanding stock
options at December 31, 1998, 1997, and 1996, was approximately 375,000,
222,000 and 25,000, respectively.
 
  The Company has authorized 10 million shares of preferred stock. The rights
and preferences of the preferred stock are established by the Board of
Directors in its sole discretion. The specific rights and preferences have not
been established and no preferred stock has been issued.
 
11. LEASE COMMITMENTS
 
  The Company leases office space under noncancelable operating leases. The
future minimum lease payments as of December 31, 1998 were as follows:
 
<TABLE>
        <S>                                                           <C>
        1999......................................................... $  822,000
        2000.........................................................    817,000
        2001.........................................................    827,000
        2002.........................................................    830,000
        2003.........................................................    854,000
                                                                      ----------
                                                                      $4,150,000
                                                                      ==========
</TABLE>
 
  Rent expense for the years ended December 31, 1998, 1997, and 1996 was
$726,000, $217,000, and $118,000, respectively.
 
                                      44
<PAGE>
 
                      HEALTHCARE FINANCIAL PARTNERS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
12. INCOME TAXES
 
  Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets and liabilities as of December 31, were
as follows:
 
<TABLE>
<CAPTION>
                                                            1998        1997
                                                         ----------  ----------
   <S>                                                   <C>         <C>
   Deferred tax assets:
     Allowance for losses on receivables................ $2,429,128  $1,031,087
     Amortization of goodwill...........................     59,926      10,733
     Investment securities..............................    105,940
     Stock options......................................     12,637       6,211
                                                         ----------  ----------
                                                          2,607,631   1,048,031
   Deferred tax liabilities:
     Depreciation.......................................    (51,166)     (6,511)
     Equity investee income.............................   (444,082)
                                                         ----------  ----------
                                                           (495,248)     (6,511)
                                                         ----------  ----------
     Net deferred tax asset............................. $2,112,383  $1,041,520
                                                         ==========  ==========
</TABLE>
 
  Significant components of the provision for income taxes for the years ended
December 31, were as follows:
 
<TABLE>
<CAPTION>
                                                1998         1997       1996
                                             -----------  ----------  ---------
   <S>                                       <C>          <C>         <C>
   Federal taxes............................ $11,697,937  $4,539,321  $ 316,455
   State taxes..............................   2,531,035     997,994     73,532
   Deferred income taxes....................    (964,923)   (660,058)  (351,127)
                                             -----------  ----------  ---------
     Income taxes........................... $13,264,049  $4,877,257  $  38,860
                                             ===========  ==========  =========
</TABLE>
 
  The reconciliations of income tax attributable to continuing operations
computed at the U.S. federal statutory tax rates to income tax expense for the
years ended December 31, were:
 
<TABLE>
<CAPTION>
                                               1998        1997       1996
                                            ----------- ----------  ---------
   <S>                                      <C>         <C>         <C>
   Income tax at statutory federal tax
    rate................................... $11,575,183 $4,376,516  $ 193,264
   State taxes, net of federal benefit.....   1,523,691    592,270     26,261
   Reversal of deferred tax assets
    valuation allowance....................                          (183,218)
   Other...................................     165,175    (91,529)     2,553
                                            ----------- ----------  ---------
     Income taxes.......................... $13,264,049 $4,877,257  $  38,860
                                            =========== ==========  =========
</TABLE>
 
13. COMMITMENTS AND CONCENTRATIONS OF CREDIT RISK
 
  At December 31, 1998 and 1997, the Company had committed lines of credit to
its clients of approximately $681.7 and $275.4 million of which approximately
$257 and $107 million, respectively were unused. The Company extends credit
based upon qualified client receivables outstanding and is subject to
contractual collateral and loan-to-value ratios.
 
                                      45
<PAGE>
 
                      HEALTHCARE FINANCIAL PARTNERS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
  The Company earned fee and interest income from one client, aggregating 11%
of total fee and interest income for the year ended December 31, 1996. For the
years ended December 31, 1998 and 1997, no one client accounted for 10% or
more of total fee and interest income.
 
  At December 31, 1998 and 1997, outstanding finance receivables to three
clients comprised approximately 14% of the total finance receivable
portfolios. At December 31, 1996, outstanding finance receivables to seven
clients comprised approximately 50% of the total finance receivable portfolio.
 
  The Company has provided one-year letter of credit guarantees to three
clients totaling $4.5 million, which are substantially collateralized by
finance receivables. If the clients were to default on their commitments, the
Company would be responsible to meet the client's financial obligation. The
revenue earned by the Company is being recognized ratably over the lives of
the letters of credit under the effective interest method and is included in
fee and interest income. The Company currently does not anticipate that it
will be required to fund any of these commitments.
 
14. PURCHASE OF FUNDING
 
  Effective upon the completion of the Offering described in Note 1, the
Company acquired, using the purchase method of accounting, the limited
partnership interest in Funding, consisting primarily of finance receivables
and related borrowings. The amount paid to acquire Funding, net of cash
acquired, of $16.2 million approximated both the fair value and book value of
Funding at the date of acquisition.
 
  The financial statements of the Company for 1996 are consolidated assuming
the acquisition of Funding occurred as of January 1, 1996 under the provisions
of Accounting Research Bulletin No. 51. The pro forma results of operations
following reflect the operating results of the Company for the year ended
December 31, 1996 as if the acquisition of Funding had occurred on January 1,
1996, and Funding operations were included with the Company.
 
<TABLE>
<CAPTION>
                                                                        1996
                                                                     ----------
     <S>                                                             <C>
     Net fee and interest income.................................... $8,607,409
     Provision for losses on receivables............................    656,116
     Net operating expenses.........................................  4,987,742
                                                                     ----------
       Net income................................................... $2,963,551
                                                                     ==========
</TABLE>
 
  The stand-alone results of operations of Funding for the period January 1,
1996 to November 26, 1996 (date of acquisition by the Company of Funding) were
as follows:
 
<TABLE>
     <S>                                                             <C>
     Net fee and interest income.................................... $6,588,579
     Provision for losses on receivables............................    537,805
     Net operating expenses.........................................  1,604,389
                                                                     ----------
       Income before income taxes and deduction of preacquisition
        earnings.................................................... $4,446,385
                                                                     ==========
</TABLE>
 
                                      46
<PAGE>
 
                      HEALTHCARE FINANCIAL PARTNERS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
15. HEALTHCARE FINANCIAL PARTNERS, INC. (PARENT COMPANY ONLY)
   CONDENSED FINANCIAL INFORMATION
 
<TABLE>
<CAPTION>
                                                             December 31,
                                                       ------------------------
                                                           1998        1997
                                                       ------------ -----------
<S>                                                    <C>          <C>
Balance Sheets
Assets
Cash and cash equivalents............................. $    286,906 $    65,294
Investment in subsidiaries............................  225,808,298  87,338,737
Investments in affiliates.............................   10,092,794
Other.................................................   11,440,369     608,921
                                                       ------------ -----------
  Total Assets........................................ $247,628,367 $88,012,952
                                                       ============ ===========
Liabilities and Equity
Accounts payable and accrued expenses................. $     74,800 $   182,764
Stockholders' equity..................................  247,553,567  87,830,188
                                                       ------------ -----------
  Total Liabilities and Equity........................ $247,628,367 $88,012,952
                                                       ============ ===========
</TABLE>
 
<TABLE>
<CAPTION>
                                                 Year Ended December 31,
                                            ---------------------------------
                                               1998        1997       1996
                                            ----------- ---------- ----------
<S>                                         <C>         <C>        <C>
Statements of Income
Income..................................... $ 3,897,948 $2,576,597 $1,401,025
Operating expenses.........................   2,826,970  2,419,875  1,784,272
                                            ----------- ---------- ----------
Income (loss) before income taxes and
 equity in undistributed earnings of
 subsidiary................................   1,070,978    156,722   (383,247)
Income tax expense.........................     594,228      1,485     27,358
                                            ----------- ---------- ----------
Income (loss) before equity in
 undistributed earnings of subsidiary......     476,750    155,237   (410,605)
Equity in undistributed earnings of
 subsidiaries..............................  19,331,152  7,839,611    940,167
                                            ----------- ---------- ----------
Net income................................. $19,807,902 $7,994,848 $  529,562
                                            =========== ========== ==========
</TABLE>
 
                                       47
<PAGE>
 
                      HEALTHCARE FINANCIAL PARTNERS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
 
<TABLE>
<CAPTION>
                                             Year Ended December 31,
                                     -----------------------------------------
                                         1998           1997          1996
                                     -------------  ------------  ------------
<S>                                  <C>            <C>           <C>
Statements of Cash Flows
Operating Activities
 Net income......................... $  19,807,902  $  7,994,848  $    529,562
 Adjustments to reconcile net income
  to net cash used by operations:
  Stock compensation................        15,989        15,989
  Equity in undistributed earnings
   of subsidiary....................   (19,331,152)   (7,839,611)     (940,167)
  Other.............................    (9,964,222)     (727,088)      131,028
                                     -------------  ------------  ------------
    Net cash used in operating
     activities.....................    (9,471,483)     (555,862)     (279,577)
Investing Activities
Increase in investment in
 subsidiary.........................  (119,138,409)  (52,512,661)  (26,046,298)
Investment in affiliates............   (10,092,794)
Payment of amounts due to
 affiliates.........................                                  (149,537)
Other...............................                                  (221,330)
                                     -------------  ------------  ------------
    Net cash used in investing
     activities.....................  (129,231,203)  (52,512,661)  (26,417,165)
Financing Activities
Issuance of common stock and
 warrants...........................   138,924,298    53,098,375    26,732,184
                                     -------------  ------------  ------------
    Net cash provided by financing
     activities.....................   138,924,298    53,098,375    26,732,184
                                     -------------  ------------  ------------
Increase in cash and cash
 equivalents........................       221,612        29,852        35,442
Cash and cash equivalents at
 beginning of year..................        65,294        35,442
                                     -------------  ------------  ------------
Cash and cash equivalents at end of
 year............................... $     286,906  $     65,294  $     35,442
                                     =============  ============  ============
</TABLE>
 
                                       48
<PAGE>
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE
 
  Although not dissatisfied with the performance of McGladrey & Pullen,
L.L.P., the Company's Board of Directors determined that, in contemplation of
becoming a publicly-owned company, the Company would be better served by the
engagement of a big-six accounting firm. Accordingly, on June 21, 1996, the
Company dismissed McGladrey & Pullen, LLP, and subsequently decided to engage
Ernst & Young LLP, as the Company's independent accountants for the year
beginning January 1, 1996. The reports of McGladrey & Pullen, LLP, for the
years ended December 31, 1995 and 1994 did not contain an adverse opinion or
disclaimer of opinion and were not qualified as to uncertainty, audit scope or
accounting principles. During such years and for the period January 1, 1996
through June 21, 1996 there was no disagreement with McGladrey & Pullen, LLP
on any matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedures. During the Company's two most
recent fiscal years and during the current fiscal year prior to its
engagement, neither the Company nor anyone acting on its behalf consulted
Ernst & Young LLP, regarding either the application of accounting principles
to a specified transaction (either completed or proposed) or the type of audit
opinion that might be rendered on the Company's financial statements.
 
                                      49
<PAGE>
 
                                   PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
  The Company's Amended and Restated Certificate of Incorporation and Amended
and Restated Bylaws provide that the Board of Directors of the Company shall
be divided into three approximately equal classes of Directors. The Company's
Board of Directors is currently comprised of five Directors, two classes
consisting of two Directors each and one class consisting of one Director.
Each Director is elected for a three-year term, with one class of Directors
being elected at each annual meeting of stockholders.
 
  Set forth below with respect to each Director of the Company is his name,
age, principal occupation and business experience for the past five years and
length of service as a director.
 
  Geoffrey E.D. Brooke (age 42) became a Director of the Company in January
1997. Dr. Brooke is Director, Rothschild Bioscience Unit, a division of
Rothschild Asset Management Limited, and is responsible for its venture
capital operations in the Asian Pacific region. Dr. Brooke resides in
Australia. Prior to joining Rothschild, from June 1992 to September 1996, Dr.
Brooke was President of MedVest, Inc., a healthcare venture capital firm in
Washington, D.C. which he co-founded with Johnson & Johnson, Inc. Prior to co-
founding MedVest, Inc., Dr. Brooke managed the life sciences portfolio of a
publicly traded group of Australian venture capital funds. Dr. Brooke is
licensed in clinical medicine by the Medical Board of Victoria, Australia. Dr.
Brooke earned his medical degree from the University of Melbourne, Australia
and a M.B.A. from IMD in Lausanne, Switzerland. Dr. Brooke's term as a
Director of the Company will expire at the 2000 Annual Meeting of
Stockholders. Dr. Brooke serves on the Audit and Compensation Committees of
the Board of Directors of the Company.
 
  John F. Dealy (age 59) became a Director of the Company in January 1997. Mr.
Dealy has been President of The Dealy Strategy Group, a management consulting
firm, since 1983. In addition, Mr. Dealy was Senior Counsel to Shaw, Pittman,
Potts & Trowbridge in Washington, D.C. from 1982 through 1996, as well as a
professor in the Georgetown University School of Business from 1982 through
1998. Mr. Dealy is currently a director of First Maryland Bancorp. From 1976
to 1982, Mr. Dealy was President of Fairchild Industries, Inc. Prior to 1976,
Mr. Dealy held a number of management positions at Fairchild Industries, Inc.
Mr. Dealy received his B.S. degree from Fordham College in 1961 and his L.L.B.
degree from the New York University School of Law in 1964. Mr. Dealy's term as
a Director of the Company will expire at the 1999 Annual Meeting of
Stockholders. Mr. Dealy serves on the Audit and Compensation Committees of the
Board of Directors of the Company.
 
  John K. Delaney (age 36) serves as Chairman of the Board, Chief Executive
Officer and Director of the Company. Mr. Delaney co-founded the Company in
1993 and has served as Chairman of the Board, Chief Executive Officer and
President since the formation of the Company until March 1997, when he was
elected to his current positions. From 1990 through 1992, Mr. Delaney co-owned
and operated American Home Therapies, Inc., a provider of home care and home
infusion therapy services, which was sold in 1992. Prior to 1990, Mr. Delaney
was a practicing attorney with Shaw, Pittman, Potts & Trowbridge in
Washington, D.C. Mr. Delaney received his A.B. degree from Columbia University
in 1985 and his J.D. degree from Georgetown University Law Center in 1988. Mr.
Delaney's term as Director of the Company will expire at the 1999 Annual
Meeting of Stockholders. Mr. Delaney serves on the Executive Committee of the
Board of Directors of the Company.
 
  Ethan D. Leder (age 36) serves as Vice-Chairman of the Board, President and
Director of the Company. Mr. Leder co-founded the Company in 1993 and served
as Vice-Chairman of the Board and Executive Vice President since the formation
of the Company until March 1997, when he was elected to his current positions.
From 1993 through September 1996, Mr. Leder also served as Treasurer of the
Company. From 1990 through 1992, Mr. Leder co-owned and operated American Home
Therapies, Inc., a provider of home care and home infusion therapy services,
which was sold in 1992. Prior to 1990, Mr. Leder was engaged in the private
practice of law in Baltimore, Maryland and Washington, D.C. Mr. Leder received
his B.A. degree from John Hopkins University in 1984 and his J.D. degree from
the Georgetown University Law Center in 1987. Mr. Leder's term as Director of
the Company will expire at the 2001 Annual Meeting of Stockholders. Mr. Leder
serves on the Executive Committee of the Board of Directors of the Company.
 
                                      50
<PAGE>
 
  Edward P. Nordberg, Jr. (age 39) serves as Executive Vice President, Chief
Financial Officer and Director of the Company. Mr. Nordberg co-founded the
Company in 1993 and served as Senior Vice President and Secretary of the
Company since the formation of the Company until March 1997 when he was
elected to his current positions. From 1993 through April 1996, Mr. Nordberg
also served as General Counsel of the Company. Prior to 1993, Mr. Nordberg was
a practicing attorney with Williams & Connolly in Washington, D.C.
Mr. Nordberg received his B.A. degree from Washington College in 1982, his
M.B.A. degree from Loyola College in 1985, and his J.D. degree from the
Georgetown University Law Center in 1989. Mr. Nordberg's term as a Director of
the Company will expire at the 2000 Annual Meeting of Stockholders. Mr.
Nordberg serves on the Executive Committee of the Board of Directors of the
Company.
 
  The executive officers and directors of the Company and their ages as of
March 31, 1999 are as follows:
 
<TABLE>
<CAPTION>
            Name            Age                    Position
            ----            ---                    --------
 <C>                        <C> <S>
                                Chairman of the Board, Chief Executive Officer
 John K. Delaney(1)          36 and Director
                                Vice-Chairman of the Board, President and
 Ethan D. Leder(1)           36 Director
                                Executive Vice President, Chief Financial
 Edward P. Nordberg, Jr.(1)  39 Officer and Director
 Hilde M. Alter              57 Treasurer and Chief Accounting Officer
                                Senior Vice President, General Counsel and
 Steven M. Curwin            40 Secretary
 Steven I. Silver            38 Senior Vice President Marketing
                                Senior Vice President and Chief Operating
 Howard T. Widra             30 Officer
                                Senior Vice President and Chief Administrative
 Chris J. Woods              48 Officer
 John F. Dealy(2)(3)         59 Director
 Geoffrey E.D. Brooke(2)(3)  42 Director
</TABLE>
--------
(1) Member of Executive Committee.
(2) Member of Compensation Committee.
(3) Member of Audit Committee.
 
  Hilde M. Alter serves as Treasurer and Chief Accounting Officer of the
Company. Ms. Alter joined the Company in September, 1996. From 1982 to joining
the Company, Ms. Alter was a partner with the accounting firm of Keller,
Bruner & Company in Bethesda, Maryland. Ms. Alter is a certified public
accountant. Ms. Alter received her B.A. degree from American University in
1966.
 
  Steven M. Curwin serves as Senior Vice President, General Counsel and
Secretary of the Company. Mr. Curwin jointed the Company in August, 1996, and
has served as a Vice President from August 1996 and as a full-time consultant
to the Company since May 1996. From September 1994 to joining the Company,
Mr. Curwin was a practicing attorney with Shulman, Rogers, Gandal, Pordy &
Ecker, P.A. in Rockville,
 
                                      51
<PAGE>
 
Maryland. From January 1989 to August 1994, Mr. Curwin was a practicing
attorney with Dewey Ballantine in Washington, D.C. Mr. Curwin received his
B.A. degree from Franklin & Marshall College in 1980 and his J.D. degree from
the Boston University School of Law in 1985.
 
  Steven I. Silver serves as Senior Vice President--Marketing. He has been
associated with the Company since November 1995, initially as a marketing
consultant and subsequently as an officer in portfolio development activities.
Prior to joining the Company, Mr. Silver was a vice president with MediMax,
Inc., in New York, New York from 1993 to 1995, where he was principally
responsible for business development in the healthcare finance industry. From
1987 to 1993, Mr. Silver was employed by several commercial finance and
brokerage firms in New York, New York. From 1983 to 1987, Mr. Silver was an
accountant with Coopers & Lybrand in New York, New York. Mr. Silver received a
B.S. in accounting from the State University of New York at Albany in 1983.
 
  Howard T. Widra serves as Senior Vice President and Chief Operating Officer
of the Company. Mr. Widra joined the Company in January 1997. From June 1996
until joining the Company, Mr. Widra was general counsel to America Long
Lines, Inc., a long distance phone carrier. From October 1993 until May 1996,
Mr. Widra was a practicing attorney with Steptoe & Johnson, L.L.P. in
Washington, D.C. Mr. Widra received his B.A. degree from the University of
Michigan in 1990 and his J.D. degree from Harvard Law School in 1993.
 
  Chris J. Woods serves as Senior Vice President and Chief Administrative
Officer of the Company. Mr. Woods joined the Company in March 1997. From 1991
to the time Mr. Woods joined the Company, he was an independent technical
consultant for clients primarily in the health care and telecommunications
industries. In 1983, Mr. Woods co-founded a technical consulting company and
served as Executive Vice President of such company until his departure until
1991. Prior to 1983, Mr. Woods worked for Control Data Corporation. Mr. Woods
received his B.S. degrees in Computer Science and Geology from the State
University of New York at Buffalo in 1972.
 
                     COMPLIANCE WITH SECTION 16(a) OF THE
                        SECURITIES EXCHANGE ACT OF 1934
 
  Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's directors, executive officers and
persons who beneficially own more than 10% of the Company's Common Stock to
file with the Securities and Exchange Commission (the "Commission") initial
reports of beneficial ownership and reports of changes in beneficial ownership
of the Common Stock. Directors, executive officers and beneficial owners of
more than 10% of the Company's Common Stock are required by Commission rules
to furnish the Company with copies of all such reports.
 
  Based solely on the Company's review of Forms 3, 4 and 5, and amendments
thereto, furnished to the Company through the date of this filing, all
required reports were timely filed, except that a sale transaction in March
1998 by the wife of Michael G. Gardullo, Vice President, as custodian for
their minor son, was not reported until July 1998.
 
 
                                      52
<PAGE>
 
ITEM 11. EXECUTIVE COMPENSATION
 
  The following table presents information concerning compensation earned for
services rendered in all capacities to the Company for the years ended
December 31, 1996, 1997 and 1998 by the Chief Executive Officer and the four
other most highly compensated executive officers (the "Named Executives").
 
                          Summary Compensation Table
 
<TABLE>
<CAPTION>
                                                                Long-term
                                                               Compensation
                                   Annual Compensation ($)        Award
                               ------------------------------- ------------
                                                                Number of
                                                Other Annual      Shares       All Other
   Name and Principal          Salary   Bonus  Compensation(1)  Underlying  Compensation(2)
       Positions          Year    $       $           $          Options           $
------------------------  ---- ------- ------- --------------- ------------ ---------------
<S>                       <C>  <C>     <C>     <C>             <C>          <C>
John K. Delaney.........  1998 309,000 161,833       --          204,999        92,137
Chairman, Chief
 Executive                1997 306,515 230,000       --              --            --
Officer                   1996 245,400     --        --           37,000           --
Ethan D. Leder..........  1998 283,250 157,531       --          185,001        92,833
Vice Chairman of the
 Board                    1997 286,633 210,000       --              --            --
and President             1996 242,502     --        --           37,000           --
Edward P. Nordberg,
 Jr.....................  1998 257,500  22,071       --          110,001        92,377
Executive Vice President
 and                      1997 243,450  75,000       --              --            --
Chief Financial Officer   1996 212,790     --        --           37,000           --
Steven I. Silver........  1998 187,396  80,000       --           50,000         5,000
Senior Vice President,    1997 165,855  75,000       --              --            --
Marketing                 1996  52,127     --        --           20,000           --
Steven M. Curwin........  1998 177,396  50,000       --           50,000         5,000
Senior Vice President,    1997 156,227  20,000       --              --            --
and General Counsel       1996  36,502     --        --           20,000           --
</TABLE>
--------
(1) Certain of the Company's executive officers receive benefits in addition
    to salary and cash bonuses. The aggregate amount of such benefits,
    however, do not exceed the lesser of $50,000 or 10% of the total annual
    salary and bonus of such executive officer.
(2) Reflects for 1998 the dollar value of the portion of the premiums paid by
    the Company on split-dollar life insurance policies maintained for Messrs.
    Delaney, Leder and Nordberg in the amounts of $92,137, $92,833 and
    $87,377, respectively. Premiums paid by the Company for each employee are
    required to be refunded to the Company upon the earlier to occur of the
    death or termination of employment of such employee. The policies were
    issued in 1998 and at December 31, 1998 had no cash surrender value. Also
    reflects employer contributions to the Company's 401(k) plan on behalf of
    Mr. Nordberg, Mr. Silver and Mr. Curwin in the amounts of $5,000, $5,000
    and $5,000, respectively.
 
                                      53
<PAGE>
 
  The following table summarizes options granted during 1998 to the Named
Executives. The Company has not granted any stock appreciation rights.
 
                            Options Granted in 1998
 
<TABLE>
<CAPTION>
                                                                                  Potential
                                                                                 Realizable
                                                                              Value of Assumed
                                                                               Annual Rates of
                                                                                    Stock
                                                                             Price Appreciation
                                         Individual Grants                     for Option Term
                         --------------------------------------------------- -------------------
                                      Percent of
                           Shares    Total Options
                         Underlying   Granted to   Exercise Price Expiration
          Name           Options(#)  Employees(%)   Per Share($)     Date      5%($)    10%($)
          ----           ----------  ------------- -------------- ---------- --------- ---------
<S>                      <C>         <C>           <C>            <C>        <C>       <C>
John K. Delaney.........   68,333(1)     6.76%         40.00        5/28/08  2,484,208 5,574,721
                           68,333(1)     6.76%         46.50        5/28/08  2,040,043 5,130,556
                           68,333(1)     6.76%         53.00        5/28/08  1,595,879 4,686,392
Ethan D. Leder..........   61,667(1)     6.10%         40.00        5/28/08  2,241,869 5,030,897
                           61,667(1)     6.10%         46.50        5/28/08  1,841,033 4,630,062
                           61,667(1)     6.10%         53.00        5/28/08  1,440,198 4,229,226
Edward P. Nordberg,
 Jr.....................   36,667(1)     3.63%         40.00        5/28/08  1,333,008 2,991,355
                           36,667(1)     3.63%         46.50        5/28/08  1,094,673 2,753,020
                           36,667(1)     3.63%         53.00        5/28/08    856,337 2,514,684
Steven I. Silver........   10,000(2)     0.99%         35.00        1/16/08    220,113   557,810
                           40,000(2)     3.96%         29.25       12/18/08    735,807 1,864,679
Steven M. Curwin........   25,000(2)     2.47%         35.00        1/16/08    550,283 1,394,525
                           25,000(2)     2.47%         29.25       12/18/08    459,879 1,165,424
</TABLE>
--------
(1) Such options vest at the rate of 10% per year over a ten-year period
beginning on the date of grant.
(2) Such options vest at the rate of 25% per year over a four-year period
beginning on the date of grant.
 
  The following table summarizes options exercised by the named executives
during 1998 and presents the value of unexercised options held by the Named
Executives at December 31, 1998.
 
                      Total Options Exercised in 1998 and
                            Year-End Option Values
 
<TABLE>
<CAPTION>
                                                     Number of Shares
                                                  Underlying Unexercised     Value of Unexercised
                                                        Options at           In-the-Money Options
                                                   December 31, 1998(#)     at December 31, 1998($)
                                                 ------------------------- -------------------------
                           Shares
                         Acquired on    Value
          Name           Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
          ----           ----------- ----------- ----------- ------------- ----------- -------------
<S>                      <C>         <C>         <C>         <C>           <C>         <C>
John K. Delaney.........      --           --      14,800       227,199       405,150     607,725
Ethan D. Leder..........      --           --      14,800       207,201       405,150     607,725
Edward P. Nordberg,
 Jr.....................      --           --      14,800       132,201       405,150     607,725
Steven I. Silver........   20,000      939,132     28,381        60,000     1,015,418     762,000
Steven M. Curwin........    5,000      193,938      5,000        60,000       144,125     675,750
</TABLE>
 
  During 1998, 1,032,165 options were granted under the Incentive Plan to new
and current employees, 86,398 options were exercised and 37,251 options were
forfeited.
 
 
                                      54
<PAGE>
 
Employment and Non-Competition Agreements
 
  Mr. Delaney serves as Chairman of the Board and Chief Executive Officer of
the Company pursuant to the terms of an employment agreement that continues in
effect until January 1, 2004. On each anniversary of the date of the
employment agreement, the employment period is extended for an additional one-
year period, unless the Company or Mr. Delaney notifies the other of its or
his intention not to extend the employment period. Under the terms of the
employment agreement, Mr. Delaney currently receives an annual salary of
$321,000, and in future years under his employment agreement, he will receive
an annual salary that is not less than the greater of (i) $300,000 or (ii) any
subsequently established base salary, in either case increased annually by not
less than 50% of the annual increase in the Consumer Price Index for Urban
Wage Earners and Clerical Workers ("CPI-W"). Commencing on March 31, 1997, and
on the last day of each calendar quarter thereafter during the term of the
employment agreement, Mr. Delaney is paid a quarterly bonus of $25,000,
provided that the Company has achieved profitability for such quarter. If the
Company has not achieved profitability in a quarter in any calendar year but
the Company's profits in any subsequent quarter of that year are equal to the
losses in all prior quarters of that year plus one dollar, Mr. Delaney will be
paid his then current quarterly bonus, plus any bonus amount not paid for any
prior unprofitable quarter of that year. If the Company terminates Mr.
Delaney's employment without cause, Mr. Delaney will be entitled to receive
his compensation and benefits for the remainder of the term of the employment
agreement. The first three years of such payments of compensation and benefits
is guaranteed and not subject to reduction or offset. If Mr. Delaney's
employment is terminated, he will be restricted from competing with the
Company for 18 months.
 
  Mr. Leder serves as Vice-Chairman of the Board and President of the Company
pursuant to the terms of an employment agreement that continues in effect
until January 1, 2004. On each anniversary of the date of the employment
agreement, the employment period is extended for an additional one-year
period, unless the Company or Mr. Leder notifies the other of its or his
intention not to extend the employment period. Under the terms of the
employment agreement, Mr. Leder currently receives an annual salary of
$295,000, and in future years under his employment agreement, he will receive
an annual salary that is not less than the greater of (1) $275,000 or (ii) any
subsequently established base salary, in either case increased annually by not
less than 50% of the annual increase in the CPI-W. Commencing on March 31,
1997, and on the last day of each calendar quarter thereafter during the term
of the employment agreement, Mr. Leder is paid a quarterly bonus of $25,000,
provided that the Company has achieved profitability for such quarter. If the
Company has not achieved profitability in a quarter in any calendar year but
the Company's profits in any subsequent quarter of that year are equal to the
losses in all prior quarters of that year plus one dollar, Mr. Leder will be
paid his then current quarterly bonus, plus any bonus amount not paid for any
prior unprofitable quarter of that year. If the Company terminates Mr. Leder's
employment without cause, Mr. Leder will be entitled to receive his
compensation and benefits for the remainder of the term of the employment
agreement. The first three years of such payments of compensation and benefits
is guaranteed and not subject to reduction or offset. If Mr. Leder's
employment is terminated, he will be restricted from competing with the
Company for 18 months.
 
  Mr. Nordberg serves as Executive Vice President and Chief Financial Officer
of the Company pursuant to the terms of an employment agreement that continues
in effect until January 1, 2004. On each anniversary of the date of the
employment agreement, the employment period is extended for an additional one-
year period, unless the Company or Mr. Nordberg notifies the other of its or
his intention not to extend the employment period. Under the terms of the
employment agreement, Mr. Nordberg currently receives an annual salary of
$265,225, and in future years under his employment agreement, he will receive
an annual salary which is not less than the greater of (i) $250,000 or (ii)
any subsequently established base salary, in either case increased annually by
not less than 50% of the annual increase in the CPI-W. If the Company
terminates Mr. Nordberg's employment without cause, Mr. Nordberg will be
entitled to receive his compensation and benefits for the remainder of the
term of the employment agreement. The first three years of such payments of
compensation and benefits is guaranteed and not subject to reduction or
offset. If Mr. Nordberg's employment is terminated, he will be restricted from
competing with the Company for 18 months.
 
  Mr. Silver serves as Senior Vice President--Marketing of the Company
pursuant to the terms of an employment agreement that continues in effect
until September 30, 2001. On each anniversary of the date of the
 
                                      55
<PAGE>
 
employment agreement, the employment agreement is extended for an additional
one-year period, unless the Company or Mr. Silver notifies the other of its or
his intention not to extend the employment period. Under the terms of the
employment agreement, Mr. Silver currently receives an annual salary of
$193,000, and in future years under his employment agreement, he will receive
an annual salary which is not less that the greater of (i) $185,000 or (ii)
any subsequently established higher annual base salary, in either case
increased annually by not less than 50% of the annual increase in the CPI-W.
If the Company terminates Mr. Silver's employment without cause, Mr. Silver
will be entitled to receive immediately after such termination a lump-sum
payment equal to the compensation and benefits that would otherwise have been
payable to him. for the remainder of the term of the employment agreement. If
Mr. Silver's employment is terminated, he will be restricted from competing
with the Company for one year.
 
  Mr. Curwin serves as Senior Vice President, Secretary and General Counsel of
the Company pursuant to the terms of an employment agreement that continues in
effect until August 31, 2003. On each anniversary of the date of the
employment agreement, the employment agreement is extended for an additional
one-year period, unless the Company or Mr. Curwin notifies the other of its or
his intention not to extend the employment period. Under the terms of the
employment agreement, Mr. Curwin currently receives an annual salary of
$185,000, and in future years under his employment agreement, he will receive
an annual salary that is not less than the greater of (i) $170,000 or (ii) any
subsequently established higher annual base salary, in either case increased
annually by not less than 50% of the annual increase in the CPI-W. If the
Company terminates Mr. Curwin's employment without cause, Mr. Curwin will be
entitled to receive immediately after such termination a lump-sum payment
equal to the compensation and benefits that would otherwise have been payable
to him for the remainder of the term of the employment agreement, but not less
than three (3) years' aggregate cash compensation. If Mr. Curwin's employment
is terminated, he will be restricted from competing with the Company for one
year.
 
Indemnification Arrangements
 
  The Company has entered into indemnification agreements pursuant to which it
has agreed to indemnify certain of its directors and officers against
judgments, claims, damages, losses and expenses incurred as a result of the
fact that any director or officer, in his or her capacity as such, is made or
threatened to be made a party to any suit or proceeding. Such persons are
indemnified to the fullest extent now or hereafter permitted by the Delaware
General Corporation Law (the "DGCL"). The indemnification agreements also
provide for the advancement of certain expenses to such directors and officers
in connection with any such suit or proceeding. The Company's Amended and
Restated Certificate of Incorporation and Amended and Restated Bylaws provide
for the indemnification of the Company's directors and officers to the fullest
extent permitted by the DGCL.
 
Committees of the Board of Directors
 
  The Board of Directors has established an Executive Committee, a
Compensation Committee and an Audit Committee. The Executive Committee,
comprised of Messrs. Delaney, Leder and Nordberg, may exercise all of the
powers and authority of the Board of Directors during the periods between
regularly scheduled Board meetings, except that the Executive Committee may
not approve a merger or consolidation involving the Company or a sale of all
or substantially all of the Company's assets, amend the Company's Certificate
of Incorporation or Bylaws, or authorize the issuance of capital stock of the
Company. The Compensation Committee, comprised of Messrs. Dealy and Brooke,
has the authority to determine compensation for the Company's executive
officers and to administer the Incentive Plan. Messrs. Dealy and Brooke are
"disinterested persons" within the meaning of Section 162(m) of the Internal
Revenue Code of 1986, as amended (the "Code"). The Audit Committee, comprised
of Messrs. Dealy and Brooke, has the authority to make recommendations
concerning the engagement of independent public accountants, review with the
independent public accountants the plan and results of the audit engagement,
review the independence of the independent public accountants, consider the
range of audit and non-audit fees and review the adequacy of the Company's
internal accounting controls.
 
                                      56
<PAGE>
 
Director Compensation
 
  Outside directors are paid $2,000 per meeting. Upon election to the Board of
Directors, outside directors are granted options to purchase 10,000 shares of
Common Stock at the then-prevailing fair market value, and are granted options
to purchase 5,000 shares of Common Stock at the then-prevailing fair market
value annually thereafter. See "--1996 Director Stock Option Plan" for a
description of the material terms of these options.
 
  Pursuant to the Director Plan, each of Dr. Brooke and Mr. Dealy elected to
forgo receipt of cash fees for 1998 and each was granted an option to acquire
457 shares of Common Stock, at an exercise price of $17.50 per share. In
addition, pursuant to the Director Plan, Dr. Brooke and Mr. Dealy were each
granted options to purchase 5,000 shares of Common Stock at an exercise price
of $47.438 as of May 28, 1998, the date of the 1998 Annual Meeting of
Stockholders of the Company.
 
Meetings
 
  The Board of Directors, and each Board committee, other than the Executive
Committee, held four meetings in 1998. As the Executive Committee is
responsible for the day-to-day management of the Company, it meets as
necessary, on a far more frequent basis than the other Board committees. All
directors attended at least 75% of the meetings of the Board of Directors and
of the Board committees on which they served, either by attending in person or
by telephone conference call.
 
1996 Director Stock Option Plan
 
  The Company maintains the HealthCare Financial Partners, Inc. 1996 Director
Stock Option Plan (the "Director Plan"). The Board of Directors has reserved
100,000 shares of Common Stock for issuance pursuant to awards that may be
under the Director Plan, subject to adjustment as provided in the Director
Plan.
 
  Awards under the Director Plan are determined by the express terms of the
Director Plan. Rules, regulations and interpretations necessary for the
ongoing administration of the Director Plan will be made by the full
membership of the Board of Directors.
 
  Only non-employee directors of the Company are eligible to participate in
the Director Plan. The Director Plan contemplates three types of non-statutory
option awards: (a) initial appointment awards that are granted upon a non-
employee director's initial appointment to the Board of Directors providing an
option to purchase 10,000 shares of Common Stock at a per share exercise price
equal to the then fair market value of a share of Common Stock; (b) annual
service awards that are granted to each non-employee director who continues to
serve as a non-employee director as of each annual meeting of the stockholders
of the Company following his or her initial appointment providing an option to
purchase 5,000 shares of Common Stock at a per share exercise price equal to
the then fair market value of a share of Common Stock; and (c) discount awards
under which each non-employee director also has the opportunity to elect
annually, subject to rules established by the Board of Directors, to forgo
receipt of cash retainer and fees for scheduled meetings of the Board of
Directors and committees thereof that would otherwise be paid during each
fiscal year of the Company, and in lieu thereof be granted an option to
acquire shares of Common Stock with an exercise price per share equal to 50%
of the then fair market value of a share of Common Stock. The number of shares
of Common Stock subject to any option of this type granted for a fiscal year
is determined by taking the amount of cash foregone by the director for the
fiscal year in question and dividing that amount by the per share option
exercise price.
 
  Each option granted pursuant to the Director Plan is immediately vested,
becomes exercisable 12 months following the date of grant, and expires upon
the earlier to occur of the tenth anniversary of the grant date or 18 months
following the director's termination of service upon the Board of Directors
for any reason. The options generally are not transferable or assignable
during a holder's lifetime.
 
  The number of shares of Common Stock reserved for issuance upon exercise of
options granted under the Director Plan, the number of shares of Common Stock
subject to outstanding options and the exercise price of
 
                                      57
<PAGE>
 
each option are subject to adjustment in the event of any recapitalization of
the Company or similar event, effected without the receipt of consideration.
The number of shares of stock subject to options granted in connection with
initial appointments or as annual service awards are also subject to
adjustment in such events. In the event of certain corporation reorganizations
and similar events, the options may be adjusted or cashed-out, depending upon
the nature of the event.
 
            COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
 
  Under the SEC rules for disclosure of executive compensation, the
Compensation Committee of the Board of Directors of the Company has prepared
the following report on executive compensation. Set forth below is a
discussion of the Company's executive compensation philosophy and policies as
established and implemented by the Compensation Committee for 1998.
 
Compensation Committee Report on Executive Compensation
 
  In early 1998, the Compensation Committee established general guidelines for
the allocation of 1998 executive officers' compensation among base salary,
short-term incentive and long-term incentive compensation components. The
guidelines were based generally upon (i) perceived levels and types of
compensation paid by the Company's competitors to their executive officers,
(ii) the desire to have some portion of each executive officer's compensation
be incentive in nature, and (iii) an evaluation of each executive officer's
ability to contribute to the continued success of the Company.
 
  In determining appropriate compensation packages for employees, the
Compensation Committee has worked toward establishing an increasingly
objective policy designed to:
 
  .  Provide for an annual evaluation of the base salaries and incentive
     compensation paid to executive officers in an effort to maintain the
     Company's competitive position;
 
  .  Emphasize the incentive aspect of compensation for executive officers by
     making the incentive element (primarily bonuses) comprise as much as 25%
     to 75% of the total compensation package for such officers;
 
  .  Motivate and reward executive officers and align their interests with
     the interests of stockholders through the grant of stock options; and
 
  .  Establish compensation packages such that the Company's executive
     officers and other key employees are paid in the upper half of the
     "market" for comparable positions.
 
  As noted above, the Compensation Committee annually evaluates and adjusts,
if necessary, the proportions of the base, short-term incentive and long-term
incentive compensation components of each executive officer's compensation
package to accommodate changes in the market for such officer's services and
to encourage desired individual performance modifications. Changes in total
compensation levels are made annually based on an assessment of each executive
officer's performance and the composition of the officer's current
compensation package. Changes in annual compensation are generally effective
on January 1 of each year. Performance is judged according to the following
criteria:
 
    (1) The officer's ability to meet financial and non-financial performance
  goals and objectives of the Company for which he or she has significant
  responsibility;
 
    (2) The officer's ability to manage projects and implement strategies in
  a timely manner within his or her department or functional unit in the
  context of Company plans;
 
    (3) The officer's ability to use problem-solving, communication and
  technical skills effectively; and
 
    (4) The officer's ability to handle administrative matters and
  relationships with other employees and third parties competently and
  professionally.
 
                                      58
<PAGE>
 
  In light of the Company's compensation policy, the components of its
executive compensation program in 1998 are, and in 1999 will be, base
salaries, short-term incentive awards in the form of cash bonuses and long-
term incentive awards in the form of stock options. The procedure used to
determine the level of each of these components of compensation is discussed
in more detail below.
 
  Base Salaries. The Compensation Committee typically reviews various studies
and reports regarding base salary levels for executive officers of other
public companies in its industry (defined generally as companies included in
the NASDAQ Financial Stocks Index) who hold positions similar to those of the
executive officers of the Company. The Compensation Committee then sets each
executive officer's salary level based on the officer's experience level, the
scope and complexity of the position held (taking into account any expected
changes in duties) and the officer's performance during the past year.
Generally, base salaries are targeted to be in the upper half of compensation
paid by such other comparable companies, although in certain instances base
salaries may be set higher in order to retain and reward exceptional
employees.
 
  Short-Term Incentive Compensation--Bonuses and Commissions. The goal of the
short-term incentive component of the Company's compensation packages is to
place a significant portion of each executive officer's compensation at risk
to encourage and reward a high level of performance each year. The incentive
component of an executive officer's compensation package consists of an annual
cash bonus, which for 1998 was determined based on the Compensation
Committee's assessment of the officer's overall contribution to the Company's
performance for the year and an assessment of the officer's performance of his
or her particular job responsibilities. No specific weight was given to, any
single factor. Bonuses for 1998 paid to executive officers ranged from 25% to
75% of base salary. Under the terms of the employment agreements between the
Company and certain executive officers, including the chief executive officer,
the executive officers are entitled to receive at least a minimum bonus based
on the achievement of criteria specified in the employment agreement. See
"Executive Compensation--Employment and Non-Competition Agreements."
 
  Generally, the Compensation Committee seeks to set short-term incentive
compensation or bonus levels at 25% to 75% of salary. The criteria for earning
bonuses differ slightly for each executive officer depending upon his or her
functional duties. For 1998 the criteria were entirely subjective, based on
the Compensation Committee's assessment of the officer's overall contribution
to the Company's success during 1998.
 
  Long-Term Incentive Compensation--Stock Options. The goal of the long-term
incentive component of the Company's compensation packages is to secure,
motivate and reward officers and align their interests with the interests of
stockholders through the grant of stock options. Under the Incentive Plan, the
Compensation Committee is authorized to grant incentive and non-qualified
stock options to key employees. The number of options granted is based on the
position held by the individual, his or her performance, the prior level of
equity holdings by the officer and the Compensation Committee's assessment of
the officer's ability to contribute to the long-term success of the Company.
No specific weight is given to any single factor. For a summary of option
grants in 1998 to the Company's named executive officers, see "Executive
Compensation--Options Granted in 1998."
 
  Compensation of the Chief Executive Officer. Mr. Delaney's minimum base
salary and bonuses are set forth in his employment agreement. Additional base
salary for Mr. Delaney was then established for 1998 by the Compensation
Committee, resulting in a 1998 base salary of $309,000. The salary was based
on the Compensation Committee's assessment of Mr. Delaney's contributions to
the Company and his experience and capabilities in the Company's industry. Mr.
Delaney's short-term incentive compensation consisted of the bonus of $100,000
(payable quarterly) provided in his employment agreement. Pursuant to the
criteria set forth above under "--Long Term Incentive Compensation--Stock
Options," options to purchase a total of 204,999 shares of Common Stock were
awarded to Mr. Delaney for 1998. See "Executive Compensation--Options Granted
in 1998."
 
 
                                      59
<PAGE>
 
  Limitations on Deductibility of Compensation. Under the Omnibus Budget
Reconciliation Act, a portion of annual compensation payable to any of the
Company's five highest paid executive officers would not be deductible by the
Company for federal income tax purposes to the extent such officer's overall
compensation exceeds $1,000,000. Qualifying performance-based incentive
compensation, however, would be both deductible and excluded for purposes of
calculating the $1,000,000 base. Although the Compensation Committee has not
and does not currently intend to award compensation in excess of the
$1,000,000 cap, it will continue to address this issue when formulating
compensation arrangements for executive officers.
 
                                          THE COMPENSATION COMMITTEE OF THE
                                          BOARD OF DIRECTORS
 
                                          John F. Dealy
                                          Geoffrey E.D. Brooke
 
Compensation Committee Interlocks and Insider Participation
 
  The Compensation Committee of the Board of Directors was established in
January 1997 and consists of Geoffrey E.D. Brooke and John F. Dealy, neither
of whom serves as an officer or employee of the Company or any of its
subsidiaries. On September 15, 1996, the company entered into an Advisory
Services Agreement with The Dealy Strategy Group ("DSG"), a consulting firm
controlled by Mr. Dealy, for DSG to provide business advisory services to the
Company for the period from January 1, 1997 through December 31, 1998. The
term of the Advisory Services Agreement was extended to December 31, 1999, in
1998. Pursuant to the Advisory Services Agreement, the Company agreed to pay
DSG $50,000 in each of 1997 and 1998, which was paid in quarterly
installments, and $50,000 in 1999. Pursuant to the Advisory Services
Agreement, the Company also granted DSG options to purchase 15,000 shares of
Common Stock at a price of $11.05 per share. The options vest in increments of
1,875 shares at the end of each quarter that DSG is furnishing business
advisory services, beginning with the quarter ending March 31, 1997, and are
exercisable for a period of ten years from the date of grant. As of the date
hereof, 15,000 options are currently exercisable.
 
                                      60
<PAGE>
 
Stockholder Return Performance Graph
 
  The Company's Common Stock is currently traded on the New York Stock Exchange
under the symbol "HCF". From November 21, 1996 (the date of the Company's
initial public offering of Common Stock) to December 30, 1998, the Common Stock
was quoted on the Nasdaq Stock Market under the symbol "HCFP". The following
graph compares for the period beginning November 21, 1996 and ending December
31, 1998, the percentage change in the cumulative total stockholder return on
the Company's Common Stock with the cumulative total return of the Nasdaq Stock
Market Index and the cumulative total return of Nasdaq Financial Stocks (SIC
6000-6799, U.S. and foreign companies), a regularly published index consisting
of companies whose lines of business are comparable to those of the Company.
 
 
 
 
* Assumes $100 investment in the common stock of Healthcare Financial Partners,
  Inc., Nasdaq Financial Stocks Index, and Nasdaq Financial Stocks (SIC 6000-
  6799), derived from compounded daily returns with dividend reinvestment on
  the exdate.
 
Table I--Cumulative Value of $100 Investment
 
<TABLE>
<CAPTION>
                                         11/12/96 12/31/96 12/31/97 12/31/98
                                         -------- -------- -------- --------
<S>                                      <C>      <C>      <C>      <C>
Nasdaq Stock Market (U.S. Companies)     $100.00  $101.51  $124.59  $ 175.40
Nasdaq Financial Stocks (SIC 6000-6799)  $100.00  $102.75  $156.97  $ 152.10
Healthcare Financial Partners, Inc.      $100.00  $102.00  $284.00  $ 319.00
 
Table II--Non-Cumulative Annual Return
 
<CAPTION>
                                         11/22/96 12/31/96 12/31/97 12/31/98
                                         -------- -------- -------- --------
<S>                                      <C>      <C>      <C>      <C>
Nasdaq Stock Market (U.S. Companies)        NA      1.51%   22.74%    40.78%
Nasdaq Financial Stocks (SIC 6000-6799)     NA      2.75%   52.77%    (3.10%)
Healthcare Financial Partners, Inc.         NA      2.00%  178.43%    12.32%
</TABLE>
 
 
                                       61
<PAGE>
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
  The following table sets forth certain information with respect to
beneficial ownership of the Company's Common Stock as of March 31, 1999,
except as otherwise noted, by: (i) each person or entity known by the Company
to own beneficially five percent or more of the outstanding Common Stock, (ii)
each member of the Board of Directors of the Company, (iii) each executive
officer of the Company, and (iv) all executive officers of the Company and all
members of the Board of Directors as a group. Unless otherwise indicated, the
address of the stockholders shown as beneficially owning more than five
percent of the Common Stock listed below is that of the Company's principal
executive offices. Stock ownership information has been furnished to the
Company by such beneficial owners or is based upon information contained in
filings made by such beneficial owners with the Securities and Exchange
Commission. Except as indicated in the footnotes to the table, the persons and
entities named in the table have sole voting and investment power with respect
to all shares beneficially owned.
 
<TABLE>
<CAPTION>
                                                Shares Beneficially Owned
                                                --------------------------
             Name of Beneficial Owner             Number(1)      Percent
             ------------------------           -------------- -----------
     <S>                                        <C>            <C>        
     EnTrust Capital Inc.(2)..................       1,364,400        9.98%
     Janus Capital Corporation(3).............       1,205,014        8.81%
     Fiduciary Trust Company
      International(4)........................         727,400        5.32%
     Franklin Resources, Inc.(5)..............         710,750        5.20%
     John K. Delaney (6)......................         490,869        3.59%
     Ethan D. Leder (6).......................         458,022        3.35%
     Edward P. Nordberg, Jr. (6)..............         484,414        3.54%
     Hilde M. Alter...........................          29,000           *
     Steven M. Curwin.........................          12,250           *
     Steven I. Silver.........................          30,881           *
     Howard T. Widra..........................          12,250           *
     Chris J. Woods...........................          13,750           *
     John F. Dealy............................          36,712           *
     Geoffrey E. D. Brooke....................          21,712           *
     All directors and executive officers as a
      group (10 persons)......................       1,589,860       11.62%
</TABLE>
--------
*Less than one percent
(1) Includes shares subject to options that are currently exercisable or that
    become exercisable within 60 days of March 31, 1999 in the following
    amounts: Mr. Delaney, 35,302 Mr. Leder, 33,301; Mr. Nordberg, 25,801; Ms.
    Alter, 28,500; Mr. Curwin, 11,250; Mr. Silver, 30,881; Mr. Widra, 11,250;
    Mr. Woods, 13,750; Mr. Dealy, 36,712; Mr. Brooke, 21,712.
 
(2) Based on Schedule 13G, as amended, filed by EnTrust Capital Inc. with the
    Securities and Exchange Commission, reporting beneficial ownership as of
    February 28, 1999. EnTrust Partners LLC, an affiliated company of EnTrust
    Capital Inc., also filed a Schedule 13G with the Securities and Exchange
    Commission which, as amended, reports beneficial ownership of 30,500
    shares as of February 28, 1999. The address for each of EnTrust Capital
    Inc. and EnTrust Partners LLC is 650 Madison Avenue, New York, New York,
    10022.
 
(3) Based on Schedule 13G, as amended, filed by Janus Capital Corporation with
    the Securities and Exchange Commission, reporting beneficial ownership as
    of December 31, 1998. Thomas H. Bailey, a significant stockholder of Janus
    Capital Corporation, also filed a Schedule 13G with the Securities and
    Exchange Commission which, as amended, reports beneficial ownership of
    1,205,014 shares as of December 31, 1998. The address for each of Janus
    Capital Corporation and Mr. Bailey is 100 Fillmore Street, Denver,
    Colorado 80206-4923.
 
                                      62
<PAGE>
 
(4) Based on Schedule 13G, filed by Fiduciary Trust Company International with
    the Securities and Exchange Commission, reporting beneficial ownership as
    of December 31, 1998. The address for Fiduciary Trust Company
    International is Two World Trade Center, New York, New York 10048.
(5) Based on Schedule 13G, filed by Franklin Resources, Inc. with the
    Securities and Exchange Commission, reporting beneficial ownership as of
    December 31, 1998. Charles B. Johnson and Rupert H. Johnson, Jr., each a
    significant stockholder of Franklin Resources, Inc., each filed a Schedule
    13G with the Securities and Exchange Commission reporting beneficial
    ownership of 710,750 shares apiece as of December 31, 1998. Franklin
    Advisers, Inc. also filed a Schedule 13G with the Securities and Exchange
    Commission reporting beneficial ownership of 696,100 shares as of December
    31, 1998. The address for each of Franklin Resources, Inc., Charles B.
    Johnson, Rupert H. Johnson, Jr. and Franklin Advisers, Inc. is 777
    Mariners Island Boulevard, San Mateo, California 94404.
(6) Does not include 227,199, 207,201 and 132,201 shares, respectively,
    subject to options not exercisable within 60 days of March 31, 1999.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
 HealthCare Financial Partners REIT, Inc.
 
  In January 1998, a real estate investment trust known as HealthCare
Financial Partners REIT, Inc. (the "REIT") was formed. Certain senior officers
of the Company who founded the REIT became senior officers of the REIT. The
REIT's principal activity is investing in income-producing real estate and
real estate related assets in the healthcare industry, consisting principally
of purchase leaseback transactions of long-term care facilities, acquisitions
of medical office buildings, and mortgage lending.
 
  In connection with the formation of the REIT, the Company made investments
in the REIT. In January 1998, the Company acquired 241,665 shares of the
REIT's common stock in a private placement. In May 1998, in a private
placement of units (the "Units"), the Company acquired 100,000 Units. Each
Unit consisted of five shares of the REIT's common stock and one warrant to
purchase one share of common stock. In connection with an amendment made to a
registration rights agreement regarding the aforementioned Units, the REIT
granted all Unit holders of record on October 30, 1998 one additional warrant
to purchase one share of common stock for each Unit held. The warrants
acquired as part of the Units purchased in May 1998 and the additional
warrants granted, as mentioned above, have exercise prices of $20, became
exercisable in November 1998, and expire in April 2001.
 
  At December 31, 1998, the Company's investment in the REIT, accounted for
under the cost method, was approximately $10.1 million and consisted of
741,665 shares of common stock and 200,000 common stock purchase warrants. For
the year ended December 31, 1998, dividend income related to the Company's
investment in the REIT was approximately $378,000. At December 31, 1998,
$111,000 of the dividend income was receivable from the REIT. This amount was
included as a component of "due to affiliates, net" at that date, and was
subsequently collected in January 1999.
 
  In 1998, a wholly-owned subsidiary of the Company known as HCFP REIT
Management, Inc. (the "Manager") entered into a management agreement (the
"Management Agreement") with the REIT. Under the Management Agreement, the
Manager advised the REIT as to the activities and operations of the REIT and
was responsible for the day-to-day operations of the REIT pursuant to
authority granted to it by the REIT's Board of Directors. Pursuant to the
Management Agreement, the Manager was paid a management fee. Among other
things, this management fee was paid to compensate the employees of the
Manager who conducted the business of the REIT; the majority of personnel
managing the REIT were employees of the Manager. The fee was calculated and
paid quarterly. The amount was equal to a percentage of the REIT's average
invested assets (as defined by the Management Agreement) over the year. The
percentages applied were to range from 1.5% for the first $300 million of
average invested assets to 0.5% for average invested assets exceeding $1.2
billion. From the inception of the Management Agreement through December 11,
1998, the Company earned a management fee in connection with the REIT of
approximately $1.3 million.
 
                                      63
<PAGE>
 
  On December 11, 1998, the Management Agreement was terminated and certain
employees of the Manager became employees of the REIT. Upon this termination,
the Company and the REIT approved an agreement under which the Company is paid
by the REIT a fee of 2.5% of the purchase price or principal amount of each
transaction which it originates on the REIT's behalf. In connection with this
agreement, the Company earned approximately $872,000 in December 1998.
 
  At December 31, 1998, the REIT owed the Company approximately $1.2 million
in connection with a prorated fourth quarter management fee in accordance with
the Management Agreement, the fee earned in December 1998 as discussed above,
and other amounts attributable to reimbursable expenditures made by the
Company on the REIT's behalf. This amount was included as a component of "due
to affiliates, net" at December 31, 1998.
 
  As of December 31, 1998, the Company had a $6.75 million outstanding secured
term loan to the REIT. The loan is secured by a skilled nursing facility owned
by the REIT which is leased to an operator independent of both the Company and
the REIT. The loan matures in November 1999, and is interest-only at the rate
of 11%. During 1998, $66,000 of interest was paid to the Company by the REIT
under this note.
 
Funding III, L.P.
 
  In August 1997, the Company formed HealthCare Financial Partners Funding
III, L.P. ("Funding III, L.P."), a limited partnership in which HCFP Funding
III, Inc., a wholly-owned subsidiary of the Company ("Funding III"), was the
general partner and the limited partner was an unaffiliated third party.
Funding III, L.P. participated in a Department of Housing and Urban
Development auction of a distressed mortgage loan portfolio. Funding III holds
a 1% general and 49% limited partnership interest in Funding III, L.P. and
receives 60% of the income from the partnership's activities. The Company
accounts for its investment in Funding III, L.P. under the equity method of
accounting, as it does not have sufficient control to warrant consolidation.
At December 31, 1998 and 1997, the investment in Funding III, L.P. was
$1,304,000 and $767,000, respectively. For the years ended December 31, 1998
and 1997, income relating to the investment in Funding III, L.P. was
approximately $537,000 and $2,000, respectively. At December 31, 1998, the
Company owed Funding III, L.P. approximately $2 million. This amount was
included as a component of "due to affiliates, net" at December 31, 1998.
 
Funding II, L.P.
 
  In March 1997, the Company formed HealthCare Financial Partners Funding II,
L.P. ("Funding II, L.P."), a limited partnership in which HCFP Funding II,
Inc., a wholly-owned subsidiary of the Company ("Funding II"), was the general
partner and the limited partner was an unaffiliated third party. Funding II,
L.P. was established to develop the STL Program. In June 1997, using proceeds
from the Company's secondary offering of shares of Common Stock to the public,
Funding II acquired all of the limited partnership interests in Funding II,
L.P., utilizing the purchase method of accounting, for a purchase price of
$15.5 million. Funding II, L.P. was then liquidated. This payment reflected
the fair value of the business and exceeded the book value by $1.6 million,
which was recorded as goodwill, and is being amortized over ten years using a
straight-line method. For the year ended December 31, 1997, income relating to
the investment in Funding II, L.P. was approximately $83,000.
 
                                      64
<PAGE>
 
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND
         REPORTS ON FORM 8K
 
  (a) 1. Financial Statements. See Index to Financial Statements in Item 8
hereof.
 
  The financial statement schedules are either not applicable or the
information is otherwise included in the footnotes to the financial
statements.
 
  Exhibits required by Item 601 of Regulation S-K.
 
<TABLE>
<CAPTION>
 Exhibit
 Number                               Description
 -------                              -----------
 <C>     <S>
   2.1   Assignment and Assumption of Partnership Interest, dated as of
         November 21, 1996, between the Company and HealthPartners Investors,
         L.L.C.(1)
 
   3.1   Amended and Restated Certificate of Incorporation of the Company, as
         amended.(2)
 
   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 Stock Incentive 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.(4)
 
  10.10  Office Lease, dated January 4, 1996, between Two Wisconsin Circle
         Joint Venture and the Company, as amended on July 26, 1996 and August
         13, 1996.(1)
 
  10.11  Software Purchase and License Agreement, dated as of September 1,
         1996, between Creative Systems, L.L.C. and the Company.(1)
 
  10.12  Amended and Restated Limited Partnership Agreement of HealthPartners
         Funding, L.P., dated as of December 1, 1995, among the Company,
         Farrallon Capital Partners, L.P. and RR Capital Partners, L.P., as
         amended and assigned on March 28, 1996.(1)
</TABLE>
 
                                      65
<PAGE>
 
<TABLE>
 
<CAPTION>
 Exhibit
 Number                                Description
 -------                               -----------
 <C>     <S>
  10.13  Limited Partnership Agreement of HealthCare Financial Partners--
         Funding II, L.P. dated as of March 5, 1997 between HCFP Funding II,
         Inc., as general partners and HealthPartners Investors II, LLC, as
         limited partner, and Guaranty Agreement dated as of March 5, 1997
         between HealthCare Financial Partners, Inc. and HealthPartners
         Investors, LLC.(3)
 
  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.(4)
 
  10.15  Employment Agreement between the Company and Hilde M. Alter, dated as
         of July 1, 1997.*(5)
 
  10.16  Employment Agreement between the Company and Steven M. Curwin, dated
         as of September 1, 1997.*(5)
 
  10.17  Employment Agreement between the Company and Steven I. Silver, dated
         as of October 1, 1996.*(5)
 
  10.18  Amendment No. 1 to Employment Agreement between the Company and Steven
         I. Silver, dated as of July 1, 1997.*(5)
 
  10.19  Purchase and Sale Agreement dated as of June 17, 1997 between HCFP
         Funding II, Inc., as Seller, and Wisconsin Circle II Funding
         Corporation, as Buyer; Pooling and Servicing Agreement dated as of
         June 27, 1997 among Wisconsin Circle II Funding Corporation, as
         Transferor, HCFP Funding II, Inc. as Servicer and First Bank National
         Association, as Trustee; Certificate Purchase Agreement dated as of
         June 27, 1997 among Wisconsin Circle II Funding Corporation, as
         Transferor, and The Purchasers described therein; Appendix--
         Definitions; and Guarantee by HealthCare Financial Partners, Inc.(6)
 
  10.20  Assignment and Assumption Agreement by and among HealthPartners
         Investors II, LLC, HCFP Funding, Inc., and HealthCare Financial
         Partners, Inc.(7)
 
  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.(8)
 
  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.(8)
 
  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.(8)
 
  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.(8)
 
  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.(8)
 
  10.26  Amendment No. 3 to Office Lease dated July 17, 1997, between Two
         Wisconsin Circle Joint Venture and HealthCare Financial Partners,
         Inc.(8)
 
  10.27  Amendment to Loan and Security Agreement dated as of April 15, 1997
         among Fleet Capital Corporation and HCFP Funding, Inc.(8)
 
</TABLE>
 
 
                                       66
<PAGE>
 
<TABLE>
<CAPTION>
 Exhibit
 Number                               Description
 -------                              -----------
 <C>     <S>
  10.28  Amendment No. 4 to Office Lease dated February 27, 1998, between Two
         Wisconsin Circle Joint Venture and HealthCare Financial Partners,
         Inc.(2)
 
  10.29  Amendment No. 5 to Office Lease dated February 27, 1998, between Two
         Wisconsin Circle Joint Venture and HealthCare Financial Partners,
         Inc.(2)
 
  10.30  Amendment No. 6 to Office Lease dated July 17, 1998, between Two
         Wisconsin Circle Joint Venture and HealthCare Financial Partners,
         Inc.(2)
 
  10.31  Amendment No. 7 to Office Lease dated July 24, 1998, between Two
         Wisconsin Circle Joint Venture and HealthCare Financial Partners,
         Inc.(2)
 
  10.32  Amendment No. 8 to Office Lease dated December 23, 1998, between Two
         Wisconsin Circle Joint Venture and HealthCare Financial Partners,
         Inc.(2)
 
  10.33  Management Agreement dated as of May 6, 1998 between HealthCare
         Financial Partners REIT, Inc. and HCFP REIT Management, Inc., as
         amended.(2)
 
  21.1   List of Subsidiaries of the Registrant.
 
  27     Financial Data Schedule.(2)
 
  99     Supplementary Data Sheet.(2)
</TABLE>
--------
 *  Indicates management contract or compensatory plan or arrangement.
(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 the document filed under the same Exhibit
    number to the Company's Annual Report on Form 10-K for the fiscal year
    ended December 31, 1998 filed with the Commission on March 31, 1999.
(3) 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.
(4) 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.
(5) 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.
(6) 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.
(7) 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.
(8) 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.
 
                                      67

<PAGE>
 
                                   SIGNATURES
 
  Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this amendment to be
signed on its behalf by the undersigned, thereunto duly authorized.
 
                                          Healthcare Financial Partners, Inc.
 
                                                /s/ Edward P. Nordberg, Jr.
                                          By: _________________________________
                                                  EDWARD P. NORDBERG, JR.
                                                Executive Vice President and
                                                  Chief Financial Officer
 
Dated: April 29, 1999
 
 
                                       68