<PAGE> 1
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
Filed by the registrant /X/
Filed by a party other than the registrant / /
Check the appropriate box:
/ / Preliminary proxy statement
/ / Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
/x/ Definitive proxy statement
/ / Definitive additional materials
/ / Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
DVI, INC.
(Name of Registrant as Specified in Its Charter)
Payment of filing fee (Check the appropriate box):
/x/ $125 per Exchange Act Rule 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A
/ / $500 per each party to the controversy pursuant to Exchange Act
Rule 14a-6(i)(3).
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transactions applies:
(3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11:
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
/x/ Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE> 2
DVI, INC.
500 HYDE PARK
DOYLESTOWN, PENNSYLVANIA 18901
---------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
DECEMBER 15, 1995
---------------
To the Stockholders of DVI, Inc.:
NOTICE IS HEREBY GIVEN that the Annual Meeting of the Stockholders of
DVI, Inc. (the "Company") will be held at the Cock 'N Bull Restaurant, Lahaska,
Pennsylvania, on Friday, December 15, 1995, at 10:30 a.m., local time, for the
following purposes:
1. To elect six directors to constitute the Board of Directors, each
to serve until the next meeting of Stockholders;
2. To consider and act upon a proposal to amend Article Fourth of the
Company's Certificate of Incorporation to increase the number of
shares of common stock, $.005 par value per share ("Common
Stock"), which the Company is authorized to issue from 13,000,000
shares to 75,000,000 shares;
3. To consider and act upon a proposal to (i) ratify and approve
Amendment No. 1 to Stock Purchase Agreement dated as of June 14,
1995 ("Amendment No. 1"), between the Company and MEFC Partners,
L.P., and (ii) authorize and approve the issuance of an aggregate
of 400,000 shares of Common Stock pursuant to the terms of
Amendment No. 1;
4. To consider and act upon a proposal to authorize and approve the
DVI, Inc. 1995 Stock Bonus Plan which will provide for the
issuance, under certain circumstances, of up to 200,000 shares of
Common Stock in the aggregate to certain key employees;
5. To ratify the appointment of Deloitte & Touche LLP as independent
public accountants for the Company for the fiscal year ending June
30, 1996; and
6. To transact such other business as may properly come before the
Annual Meeting or any adjournment thereof.
The close of business on October 16, 1995 has been fixed as the record
date for the determination of all stockholders entitled to receive notice of the
Annual Meeting and to vote at such meeting or any adjournment thereof.
<PAGE> 3
Holders of a majority of the outstanding shares of the Company's Common
Stock must be present either in person or by proxy in order for the meeting to
be held and it is important that your stock be represented regardless of the
number of shares you hold. If you do not expect to attend the meeting, or if you
do plan to attend but wish to vote by proxy, please date, sign and mail promptly
the enclosed proxy for which a return envelope is provided.
By Order of the Board of Directors
/s/ Melvin C. Breaux
Melvin C. Breaux
Secretary
Dated: October 28, 1995
PLEASE SIGN, DATE AND RETURN THE ENCLOSED PROXY PROMPTLY IN THE ENCLOSED
ADDRESSED ENVELOPE, EVEN IF YOU PLAN TO ATTEND THE MEETING. IF YOU ATTEND THE
MEETING AND VOTE IN PERSON, THE PROXY WILL NOT BE USED.
<PAGE> 4
DVI, INC.
500 HYDE PARK
DOYLESTOWN, PENNSYLVANIA 92714
---------------
PROXY STATEMENT
---------------
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON DECEMBER 15, 1995
---------------
The Board of Directors of DVI, Inc., a Delaware corporation (the
"Company"), is soliciting the enclosed proxy for use at the Company's Annual
Meeting of Stockholders, to be held on Friday, December 15, 1995, at 10:30 a.m.,
local time, at the Cock 'N Bull Restaurant, Lahaska, Pennsylvania (the "Annual
Meeting") and at any adjournment thereof. Whether or not you plan to attend the
Annual Meeting, you are requested to date, sign and return the proxy to the
Company as promptly as possible in the enclosed envelope. The shares of the
Company's common stock, par value $.005 per share (the "Common Stock"),
represented by proxies will be voted in accordance with the Board of Directors'
recommendations unless the proxy indicates otherwise. Any stockholder giving a
proxy may revoke it at any time prior to its use by filing with the Secretary of
the Company a written revocation or a proxy bearing a later date, or by voting
in person at the Annual Meeting.
The close of business on October 16, 1995 has been fixed as the record
date (the "Record Date") for the determination of the stockholders entitled to
receive notice of and to vote at the Annual Meeting. At such date, the Company
had outstanding 9,620,898 shares of Common Stock. Each holder of Common Stock on
the record date will be entitled to one vote for each share registered in such
stockholder's name on each of the matters to come before the meeting. A majority
of the outstanding shares of Common Stock will constitute a quorum. A list of
stockholders entitled to vote will be available for examination by interested
stockholders at the corporate headquarters of the Company, office of the
Secretary, 500 Hyde Park, Doylestown, Pennsylvania 18901 during ordinary
business hours from December 5, 1995 to the date of the meeting.
If a stockholder abstains from voting on a proposal described in this
Proxy Statement as to some or all of that stockholder's shares, that abstention
will have the same effect as voting those shares against such proposal. If
proxies are not furnished as to shares registered in the names of brokers or
other "street name" nominees because the beneficial owner has not provided
voting instructions (commonly referred to as "broker non-votes"), that will have
the same effect as voting those shares against the proposal relating to
increasing the authorized capital of the Company described in this Proxy
Statement, but will have no effect on the outcome of the vote on the other
proposals described in this Proxy Statement. Abstentions and broker non-votes
are counted for purposes of determining the presence of a quorum for the
transaction of business at the Annual Meeting.
The approximate date on which this Proxy Statement and form of proxy is
first being sent or given to the Company's stockholders is November 9, 1995.
<PAGE> 5
The Company's Annual Report to Stockholders for the fiscal year ended
June 30, 1995 is being mailed concurrently with the mailing of this Proxy
Statement. This Annual Report shall not be deemed to be soliciting material or
incorporated in this Proxy Statement by reference. Brokerage houses, custodians,
nominees and others may obtain additional copies of the Annual Report or this
Proxy Statement by request to the Company.
2
<PAGE> 6
PROPOSAL 1.
ELECTION OF DIRECTORS
Six Directors are to be elected at the Annual Meeting of Stockholders to
serve one-year terms until the 1996 Annual Meeting of Stockholders and until
their respective successors are elected and shall qualify. The persons named in
the accompanying proxy intend to vote for the election of the nominees
identified below unless authority to vote for one or more of such nominees is
specifically withheld in the proxy. All except two of the nominees are currently
directors of the Company and were elected Directors at the 1994 Annual Meeting
of Stockholders. The Board of Directors is informed that all the nominees are
willing to serve as Directors, but if any of them should decline to serve or
become unavailable for election as a Director at the meeting, an event which the
Board of Directors does not anticipate, the persons named in the proxy will vote
for such nominee or nominees as may be designated by the Board of Directors,
unless the Board of Directors reduces the number of Directors accordingly.
Nominations for the election of Directors, other than by the Board of
Directors, must be made by a stockholder entitled to vote for the election of
Directors by giving timely written notice to the Secretary of the Company at the
Company's principal offices. Such notice must be received not less than 60
calendar days nor more than 90 calendar days prior to the meeting; provided
that, if in the event that notice or prior public disclosure of the date of the
meeting is given or made to the stockholders for a meeting date that is not
within 30 days before or after the anniversary of the immediately preceding
annual meeting of stockholders, notice by the stockholder will be timely if
received not later than the close of business on the tenth calendar day
following the day on which such notice was mailed or such public disclosure was
made. Such stockholder's notice must be in writing and must set forth as to each
proposed nominee all information relating to such person that is required to be
disclosed in solicitations of proxies pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended ("Exchange Act"), including, but not
limited to such person's written consent to being named in the proxy statement
as a nominee and to serving as a Director if elected. Such stockholder notice
must also set forth the name and address, as they appear on the Company's books,
of the nominating stockholder and the class and number of shares of Common Stock
beneficially owned by such stockholder.
THE BOARD OF DIRECTORS
The following table sets forth information concerning the Company's
nominees for Director and information concerning a Director Emeritus:
<TABLE>
<CAPTION>
NAME AND AGE PRESENT POSITION WITH THE COMPANY
------------ ---------------------------------
<S> <C>
David L. Higgins (49) Chief Executive Officer and Director since 1986.
Gerald L. Cohn (67) Director since 1986.
John E. McHugh (67) Director since 1990.
Michael A. O'Hanlon (48) President since 1994 and Director since 1993.
Nathan Shapiro (59) Nominee for Director.
William S. Goldberg (39) Nominee for Director.
Sidney Luckman (78)* Director since 1987.
</TABLE>
- ------------
* Mr. Luckman does not seek re-election to the Board of Directors but is
expected to be elected by the Board of Directors to the position of
Director Emeritus following the Annual Meeting. As a Director Emeritus,
Mr. Luckman will be permitted to attend (but not vote at) meetings of the
Board of Directors.
3
<PAGE> 7
Mr. Higgins is the Company's Chairman and Chief Executive Officer. Mr.
Higgins founded the Company and served as the Company's President until
September 1994. Mr. Higgins was the President and Chief Executive Officer of
Delta Health, Inc., the predecessor company to DVI, Inc. that was acquired by
the Company in 1986. Prior to founding the Company, Mr. Higgins managed the
North America sales and service operations of Elscint, Inc. ("Elscint"), a
full-line manufacturer of diagnostic imaging equipment for two years.
Previously, he held the same position for one year with Xonics Medical Systems
("Xonics"), also a full-line manufacturer of medical imaging equipment. The
business and operations of Xonics were acquired by Elscint in 1983. For five
years prior, Mr. Higgins served as President and Chief Executive Officer of
Radiographic Development Corporation ("RDC"), which was acquired by Xonics in
1982. RDC was a manufacturer of products to upgrade diagnostic imaging
equipment. Mr. Higgins also serves on the Board of Directors of Healthcare
Imaging Services, Inc. ("HIS").
Mr. Cohn is a Director of the Company and has served in that capacity
since 1986. Mr. Cohn is a private investor. Mr. Cohn presently serves as a
director of HIS, Diagnostic Imaging Services, Inc. ("DIS"), SMT Health Services
Inc., I.V.I. Publishing, Inc. and International Metals Acquisition Corp. In
addition to his responsibilities as a Director, Mr. Cohn also acts as a
consultant to the Company and serves on the Company's senior credit committee.
Mr. Cohn is the father of Cynthia J. Cohn, a Company Vice President.
Mr. McHugh is a Director of the Company and has served in that capacity
since 1990. Mr. McHugh was formerly the President of, and now serves in a
marketing and public relations capacity with, McHugh Construction and
Developers, a firm he has been associated with since 1954.
Mr. O'Hanlon is the Company's President and Chief Operating Officer and
has served as such since September 1994. Mr. O'Hanlon became a Director in
November 1993. From the time Mr. O'Hanlon joined the Company in March 1993 until
September 1994 he served as Executive Vice President of the Company. Before
joining the Company, for nine years, he served as President and Chief Executive
Officer of Concord Leasing, Inc. ("Concord Leasing"), a major source of medical,
aircraft, ship and industrial equipment financing. Previously, Mr. O'Hanlon was
a senior executive with Pitney Bowes Credit Corporation. Mr. O'Hanlon is a
director of DIS.
Mr. Shapiro is a founder and President of SF Investments, Inc., a
registered broker/dealer in business since 1972. Since 1979 he has been a
director of Baldwin & Lyons, Inc., a publicly traded property and casualty
insurance company. Mr. Shapiro is also the Chairman of the investment committee
of Baldwin & Lyons, Inc. He is a trustee for CT&T Funds, a family of mutual
funds sponsored by Chicago Title and Trust Company. Mr. Shapiro is also a
director of Amli Realty Co.
Mr. Goldberg is currently Managing Director of GKH Partners, L.P., a
private equity investment and venture capital partnership with which he has been
involved since 1988. Mr. Goldberg is a current or former director and/or
executive officer of several public and privately-owned companies controlled by
GKH Partners, L.P. One of the general partners of GKH Partners, L.P. is HGM
Associates, L.P., an investment partnership that is controlled by certain
descendants of Nicholas J. Pritzker, deceased, trusts for their benefit and/or
entities controlled thereby.
Mr. Luckman is presently a Director of the Company and has served in that
capacity since 1987. Mr. Luckman does not seek re-election to the Board of
Directors but is expected to be elected by the Board of Directors to the
position of Director Emeritus following the Annual Meeting. As Director
Emeritus, Mr. Luckman will be permitted to attend (but not vote at) all meetings
of the Board of Directors. Mr. Luckman is currently a national sales manager of
Cellucraft Products Inc., a company engaged in the manufacturing and marketing
of flexible packaging, and with which he has been associated for over 40 years.
Mr. Luckman is a member of the National Football League Hall of Fame.
4
<PAGE> 8
COMMITTEES OF THE BOARD OF DIRECTORS
During the fiscal year ended June 30, 1995, the Company paid $500 to
non-employee directors for each meeting attended in person and $100 for each
meeting attended by telephone. During the fiscal year ended June 30, 1995, the
Board of Directors met a total of 12 times, including actions taken by unanimous
written consent.
Each of the incumbent directors attended at least 75% of the aggregate of
all meetings of the Board and committees of which he was a member held during
the period he served on the Board or committee.
The Board of Directors has a standing Executive Committee, Audit
Committee and a Compensation Committee. The Executive Committee consists of
Messrs. Higgins, Cohn and O'Hanlon and reviews certain policies and operations
of the Company. The Executive Committee met frequently during the fiscal year
ended June 30, 1995. The Board has no nominating committee.
The Audit Committee consists of Messrs. Cohn, Luckman and McHugh and
makes recommendations concerning the engagement of the Company's independent
auditors, consults with the independent auditors concerning the audit plan and
thereafter concerning the auditor's report and management letter. Following the
Annual Meeting, Mr. Luckman will be removed from the Audit Committee and will be
replaced by an independent Director. During the fiscal year ended June 30, 1995,
the Audit Committee met one time.
The Compensation Committee (the "Compensation Committee") consists of the
entire Board of Directors and did not meet at any times other than in the normal
course of the Board of Directors' meetings. Following the Annual Meeting, Mr.
Luckman, as Director Emeritus, will not serve on the Compensation Committee. The
Board of Directors, sitting as the Compensation Committee, reviews the annual
compensation rates of the officers and key employees of the Company, administers
the Company's compensation plans and makes recommendations in connection with
such plans.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
As permitted by the Delaware General Corporation Law, the Company's
Certificate of Incorporation limits the personal liability of a Director of the
Company for monetary damages for breach of fiduciary duty of care as a Director.
Liability is not eliminated for (i) any breach of the Director's duty of loyalty
to the Company or its stockholders, (ii) acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii)
unlawful payment of dividends or stock purchases or redemptions pursuant to
Section 174 of the Delaware General Corporation Law, or (iv) any transaction
from which the Director derived an improper personal benefit.
COMPLIANCE WITH REPORTING REQUIREMENTS OF SECTION 16 OF THE EXCHANGE ACT
Under Section 16(a) of the Exchange Act, the Company's Directors,
executive officers and any persons holding 10% or more of the Company's Common
Stock are required to report their ownership of Common Stock and any changes in
that ownership to the Securities and Exchange Commission (the "SEC") and to
furnish the Company with copies of such report. Specific due dates for these
reports have been established and the Company is required to report in this
Proxy Statement any failure to file on a timely basis by such persons. Based
solely upon a review of copies filed with the SEC during the
5
<PAGE> 9
fiscal year ended June 30, 1995, all persons subject to the reporting
requirements of Section 16(a) filed all required reports on a timely basis.
COMPENSATION COMMITTEE INTERLOCK AND INSIDER PARTICIPATION
The Compensation Committee consists of the entire Board of Directors. No
Directors other than those currently serving on the Board of Directors served as
members of the Compensation Committee during the last completed fiscal year. No
member of that Committee, other than Messrs. Higgins, Cohn, Luckman and O'Hanlon
was an officer or employee of the Company or any of its subsidiaries during the
year. None of the executive officers of the Company has served on the board of
directors or on the compensation committee of any other entity, any of whose
officers served either on the Board of Directors or on the Compensation
Committee of the Company.
EXECUTIVE COMPENSATION
The following table sets forth information concerning the annual and
long-term compensation for services in all capacities to the Company for the
fiscal year ended June 30, 1995 (the "1995 fiscal year"), of those persons who
were, at June 30, 1995, executive officers of the Company or who served as the
Company's Chief Executive Officer during the 1995 fiscal year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
------------------------------- Awards
---------------------------------
Name and Principal Position Year Salary(1) Bonus Stock Options and Grants (Shares)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
David L. Higgins 1995 $200,000 -0- -0-
Chairman of the Board and 1994 $176,923 -0- -0-
Chief Executive Officer 1993 $216,779 -0- 50,000
Michael A. O'Hanlon 1995 $228,654 -0- 132,000(2)
President and Director 1994 $175,000 -0- 75,000
1993 $ 77,404(3) -0- 15,000
Richard E. Miller 1995 $256,248(4) -0- -0-
Vice President 1994 $ 26,442(5) -0- 70,000
1993 $ -0- -0- -0-
Dominic A. Guglielmi 1995 $169,932 -0- 88,000(6)
Vice President 1994 $184,545(7) -0- 10,000
1993 $ 52,885(8) -0- 10,000
James G. Costello (9) 1995 $159,327 -0- -0-
Vice President and 1994 $101,769(10) -0- 25,000
Chief Financial Officer 1993 $ -0- -0- -0-
</TABLE>
- ---------------
(1) Indicates salary paid through June 30, 1995, the last regular payment
date prior to the end of the 1995 fiscal year.
(2) Under the terms of Amendment No. 1 to the Stock Purchase Agreement dated
as of June 14, 1995 ("Amendment No.
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<PAGE> 10
1"), between the Company and MEFC Partners, L.P., Mr. O'Hanlon is
entitled to receive 132,000 shares of Common Stock if stockholder
approval of Proposal 3 described herein is obtained. See "Certain
Transactions -- Medical Equipment Finance Corp." and Proposal 3. Based on
the closing price of $11.00 for the Common Stock on the New York Stock
Exchange ("NYSE") on June 14, 1995 (the date such shares were granted),
the aggregate dollar value of such shares was $1.425 million. In
addition, these shares will be entitled to receive only those dividends,
if any, that are declared and paid after the date on which stockholder
approval of Proposal 3 is obtained.
(3) Includes compensation from February 16, 1993, the date which Mr. O'Hanlon
began employment with the Company.
(4) Includes a base salary of $125,000 and commissions earned for financing
transactions of $131,248 for the fiscal year ended June 30, 1995.
(5) Mr. Miller's salary for the 1994 fiscal year, if stated on an annualized
basis, would have been $125,000. Mr. Miller also was granted 70,000 stock
options upon joining the Company in 1994.
(6) Under the terms of Amendment No. 1, Mr. Guglielmi is entitled to receive
88,000 shares of Common Stock if stockholder approval of Proposal 3
described herein is obtained. See "Certain Transactions -- Medical
Equipment Finance Corp." and Proposal 3. Based on the closing price of
$11.00 for the Common Stock on the NYSE on June 14, 1995 (the date such
shares were granted), the aggregate dollar value of such shares was
$968,000. In addition, these shares will be entitled to receive only
those dividends, if any, that are declared and paid after the date on
which stockholder approval of Proposal 3 is obtained.
(7) Includes a base salary of $110,000 and commissions earned for financing
transactions of $74,545 for the fiscal year ended June 30, 1994.
(8) Includes compensation from January 4, 1993, the date which Mr. Guglielmi
began employment with the Company. Mr. Guglielmi's salary for the 1994
fiscal year, if stated on an annualized basis, would have been $110,000.
Mr. Guglielmi also received 10,000 stock options upon joining the
Company.
(9) Mr. Costello passed away on August 29, 1995.
(10) Includes compensation from October 5, 1993, the date which Mr. Costello
began employment with the Company. Mr. Costello's salary for the 1994
fiscal year, if stated on an annualized basis, would have been $140,000.
Mr. Costello also received 25,000 stock options upon joining the Company.
OPTION GRANTS IN 1995 FISCAL YEAR
During the 1995 fiscal year, no stock options were granted to the
executive officers listed in the Summary Compensation Table.
AGGREGATE OPTION EXERCISES IN THE LAST FISCAL YEAR END AND FISCAL YEAR END
OPTION VALUES
The following table sets forth further information for the executive
officers listed in the Summary Compensation Table with respect to previously
granted options.
<TABLE>
<CAPTION>
Shares Number of Securities Underlying Value of Unexercised
Acquired on Value Unexercised Options at In-The-Money Options at
Name Exercise (#)(1)Realized ($)(1) Fiscal Year-End(#) Fiscal Year-End($)(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
David L. Higgins -0- N/A 87,500 57,500 $344,375 -0-
Michael A. O'Hanlon -0- N/A 24,750 65,250 $ 93,032 -0-
Richard E. Miller -0- N/A 14,000 56,000 $ 33,250 -0-
</TABLE>
7
<PAGE> 11
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Dominic A. Guglielmi -0- N/A 6,500 13,500 $33,688 -0-
James G. Costello -0- N/A 5,000 20,000 $15,625 -0-
</TABLE>
- ----------
(1) During the 1995 fiscal year, no stock options were exercised by the named
officers.
(2) Represents the difference between the closing price of the Company's
Common Stock on June 30, 1995 and the exercise price of the options.
EMPLOYMENT AGREEMENTS AND INCENTIVE COMPENSATION
The Company has not entered into any employment agreements with any of
its executive officers or employees and, other than the Company's Incentive
Stock Option Plan (the "Plan"), has no long-term incentive compensation plan.
The Company, however, does provide short-term incentive compensation to certain
executive officers through the award of quarterly and/or annual bonuses based
upon certain agreed upon performance criteria.
The Board of Directors and stockholders of the Company adopted the Plan
in 1986. The Plan has been amended to increase the number of shares of Common
Stock for which options could be issued. Currently, the total number of shares
of Common Stock for which options could be issued is 1,250,000. Under the Plan,
the number of shares which may be issued on exercise of the options is subject
to adjustment by reason of stock splits or other similar capital events.
The Plan provides for the granting of nonstatutory stock options, as well
as incentive stock options to certain key employees and provides that the option
price per share for options granted under the Plan must be at least 100% of the
fair market value of Common Stock on the date such options were granted. Options
are not transferrable under the Plan other than by will or by laws of descent
and distribution, and during the participant's lifetime are exercisable only by
participant.
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS ON EXECUTIVE
COMPENSATION
The report of the Compensation Committee shall not be deemed incorporated
by reference to any general statement incorporating by reference this Proxy
Statement into any filing under the Securities Act of 1933 or under the Exchange
Act, except to the extent that the Company specifically incorporates this
information by reference, and shall not otherwise be deemed filed under such
Acts.
A publicly held corporation may not, subject to limited exceptions,
deduct for federal income tax purposes certain compensation paid to certain
executives in excess of $1 million in any taxable year (the "Deduction
Limitation"). It is not expected that compensation to executives of the Company
will exceed the Deduction Limitation in the foreseeable future, and, therefore,
the Company generally has not attempted to qualify any of its compensation
plans, programs and arrangements for any of the exceptions to the Deduction
Limitation. However, even though it is not expected that compensation to
executives of the Company will exceed the Deduction Limitation in the
foreseeable future, the Company has endeavored to qualify the Stock Bonus Plan
(as defined below) for such an exception.
OVERVIEW AND PHILOSOPHY
The entire Board of Directors sitting as the Compensation Committee is
responsible for developing the Company's executive compensation policies. The
Compensation Committee determines
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<PAGE> 12
the compensation to be paid to the Chief Executive Officer and each of the other
executives of the Company. The Compensation Committee is responsible for setting
and administering the policies which govern annual compensation, the Plan, and
determination of bonuses for executives.
There are three elements in the Company's executive compensation
program:
- Base salary compensation.
- Short-term incentive compensation (bonuses).
- Long-term incentive compensation (stock options and stock
grants).
In designing its compensation programs, the Company believes that executive
compensation should reflect the value created for stockholders and support the
Company's strategic goals. Specifically, the objectives of the program are as
follows:
- Attract and retain key executives important to the
long-term success of the Company.
- Provide incentives for performance with respect to the
goals established for each executive by management.
- Provide incentives for performance with respect to the
Company's goals.
- Align the executive's interests with those of the Company's
stockholders through participation in stock based plans.
- Reward individuals for outstanding contributions to the
Company's success.
The executive compensation program provides an overall level of
compensation opportunity that is competitive within the medical equipment
finance industry. Actual compensation levels may be greater or less than average
competitive levels in other companies based upon annual and long-term Company
performance as well as individual performance.
EXECUTIVE OFFICER COMPENSATION PROGRAM
BASE SALARY AND SHORT-TERM INCENTIVE COMPENSATION
The Company's general approach to base salary and short-term incentive
compensation is to pay salaries which when combined with bonuses are competitive
with the salaries and bonuses paid to executives of other companies in the
medical equipment finance industry based upon the individual's experience and
past and potential contribution to the Company. As described in the Company's
Proxy Statement, the base salary for the Company's executive officers for fiscal
year 1995 reflects levels deemed by the Company to have been appropriate in view
of the prior and expected contribution of the executives to the Company's
development. The Company believes that a significant part of the overall
compensation paid to executives should consist of bonuses paid annually or
quarterly based on the ability of the executive to achieve specified Company,
departmental and individual goals.
STOCK OPTION PLAN AND STOCK BONUS PLAN
The Board of Directors and the Compensation Committee believe that stock
ownership is a
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<PAGE> 13
significant incentive in building stockholder wealth and aligning the interest
of employees and stockholders. Stock options will only have value if the
Company's stock price increases. Stock options utilize vesting periods to
encourage key employees to continue in the employ of the Company. The Plan
authorizes the Compensation Committee to award key employees stock options at
exercise prices, vesting schedules and with terms established by the
Compensation Committee.
The Board of Directors believes that the DVI, Inc. 1995 Stock Bonus Plan
(the "Stock Bonus Plan") is instrumental in securing and retaining the services
of key employees of the Company by allowing them to participate in the ownership
and growth of the Company through the issuance of Stock Bonus Plan shares. The
Stock Bonus Plan provides key employees an additional inducement to remain in
the services of the Company and provides them with an increased incentive to
work towards the Company's success. The Stock Bonus Plan authorizes the Stock
Bonus Plan Committee, which is comprised of members of the Board of Directors
who are not employees of the Company and have not received Stock Bonus Plan
shares or any other equity securities of the Company under any plans maintained
by the Company at any time within one year prior to, or during, such member's
term of service on the Stock Bonus Plan Committee, to, among other things,
determine which key employees will receive awards of the right to receive Stock
Bonus Plan shares.
October 28, 1995 Compensation Committee
Gerald L. Cohn
David L. Higgins
William R. Ingles
Sidney Luckman
John E. McHugh
Michael A. O'Hanlon
PRICE PERFORMANCE GRAPH
Set forth below is a line graph comparing the Company's total stockholder
return on Common Stock with the S&P 500 Index ("S&P"), and the Bridge Leasing
Company Index for listed stocks ("Lease Co. Index"), as of the market close on
June 30, 1990 through the end of the fiscal year ended June 30, 1995.
10
<PAGE> 14
PERFORMANCE CHART
<TABLE>
<CAPTION>
06/29/90 06/28/91 06/30/92 06/30/93 06/30/94 06/30/95
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
- - DVI, INC. 100.0 166.6 179.8 107.8 182.2 225.4
* S&P 500 COMPOSITE INDEX 100.0 107.4 121.7 138.3 139.9 176.7
X - LEASE CO. INDEX 100.0 111.9 118.8 171.8 191.0 273.5
</TABLE>
DATE
DATA PERIOD: JUNE 30, 1990 THROUGH JUNE 30, 1995
CERTAIN TRANSACTIONS
DIAGNOSTIC IMAGING SERVICES, INC. Subsequent to the Company's initial
investment in IPS Health Care, Inc. ("IPS") in November 1992, the Company made
additional investments in common and preferred stock of IPS, financed various
leasing transactions for magnetic resonance imaging and other equipment, and
entered into several restructuring agreements with IPS. In those restructuring
agreements, IPS issued several series of convertible preferred stock to the
Company in exchange for cash, equipment and an exchange of debt obligations of
IPS previously held by the Company. Through these restructurings, the Company
also obtained the right to appoint representatives to IPS's Board of Directors.
In 1994, the businesses of IPS and Diagnostic Imaging Services, Inc.
("DIS") were combined through a merger (the "IPS Merger"). In the IPS Merger,
each outstanding share of common stock of DIS was converted into approximately
4.69 shares of common stock of IPS ("IPS Common Stock"). In addition, each
stockholder of DIS received on a pro rata basis (based on each such
stockholder's percentage ownership of DIS Common Stock immediately prior to the
IPS Merger), options and warrants to purchase additional shares of IPS Common
Stock that are substantially identical in number and terms to the options and
warrants issued by IPS and outstanding immediately prior to the IPS Merger. As a
result of the IPS Merger, Norman Hames, who formerly was the beneficial owner of
approximately 95% of the outstanding capital stock of DIS, and the other four
stockholders of DIS acquired 50% of the IPS Common Stock.
In September 1994, following the completion of the IPS Merger, the
Company exchanged all the preferred stock of IPS owned by the Company for two
new series of convertible redeemable preferred stock (Series F and Series G) of
IPS. The exchange agreement also provided for the exchange of certain assets and
liabilities of IPS valued at approximately $164,000, the return to IPS of IPS
debt obligations valued at approximately $4.0 million, assumption by the Company
of certain assets and liabilities of IPS, and the return of certain equipment
previously used by the Company to IPS. The Company did not record a gain or loss
on any of the restructuring transactions.
11
<PAGE> 15
Subsequent to the IPS Merger and the exchange and the other transactions
described above, IPS changed its name to DIS.
The approximately 4.5 million shares of DIS convertible preferred stock
now held by the Company have an aggregate liquidation preference of
approximately $4.5 million, are redeemable at the option of DIS for
approximately $4.5 million plus accrued dividends, and are convertible into
common stock of DIS at $2.42 per share for the Series F convertible preferred
stock and $1.00 per share for the Series G convertible preferred stock. In
addition, the majority shareholder of DIS has the right to repurchase the DIS
convertible preferred stock for approximately $4.5 million, plus accrued
dividends, through September 2001. The Company also owns approximately 9% of
DIS's issued and outstanding common stock. Following the completion of the IPS
Merger, the Company's representatives (Mr. Higgins and Mr. Turek) resigned from
the Board of Director of IPS. Upon completion of the IPS Merger, new
representatives of the Company (Mr. Cohn and Mr. O'Hanlon) became members of the
board of directors of DIS.
MEDICAL EQUIPMENT FINANCE CORP. In January 1993, the Company acquired all
of the outstanding shares of common stock of Medical Equipment Finance Corp.
("MEF Corp.") from MEFC Partners L.P., a Delaware limited partnership ("MEFC
Partners"). Under the terms of the original purchase agreement, the purchase
price was payable before October 15, 1998 in cash or Common Stock of the
Company, as elected by the Company. As initially structured, the purchase price
was to be determined as a percentage of the after-tax earnings of the MEF Corp.
division of the Company during the sixty-six month period following the date of
acquisition. During the year ended June 30, 1995, management entered into
negotiations with the former shareholders of MEF Corp. to revise certain terms
of the purchase agreement. The Company and the former shareholders of MEF Corp.
agreed in June 1995 to set the purchase price of MEF Corp. at 400,000 shares of
Common Stock (the "MEFC Shares"). Issuance of the MEFC Shares is subject to
stockholder approval. See Proposal 3. Michael A. O'Hanlon (President, Chief
Operating Officer and a Director of the Company), Dominic A. Guglielmi (Vice
President of the Company) and Mark H. Idzerda (an employee of DVI Financial
Services) are general partners of MEFC Partners and pursuant to the terms of
Amendment No. 1 are entitled to receive 132,000, 88,000 and 80,000 of the MEFC
Shares, respectively, if stockholder approval is obtained. In addition, the MEFC
Partners have been granted certain registration rights with respect to the MEFC
Shares.
PRINCIPAL HOLDERS OF VOTING SECURITIES
The following table sets forth information regarding beneficial ownership
of shares of Common Stock as of September 30, 1995 by each stockholder known to
the Company to be the beneficial owner of more than 5% of the outstanding shares
of Common Stock, each director, each nominee for election as director and all
current officers and directors as a group. Persons named in the following table
have sole voting and investment powers with respect to all shares shown as
beneficially owned by them, subject to community property laws where applicable
and other information contained in the footnotes to the table. Information with
respect to beneficial ownership is based upon the Company's Common Stock records
and data supplied to the Company by its stockholders.
12
<PAGE> 16
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
NAME AND ADDRESS OF BENEFICIAL PERCENT
BENEFICIAL OWNER OWNERSHIP OF CLASS
------------------- ---------- --------
<S> <C> <C>
David L. Higgins** 356,630(1)(2) 3.7%
Gerald L. Cohn*** 431,004(3)(4)(5) 4.4%
William R. Ingles** 21,666(4) *
Sidney Luckman*** 66,701(4)(6) *
John E. McHugh*** 50,399(4)(7) *
Nathaniel Shapiro*** 4,100(8) *
William S. Goldberg*** -- --
Michael A. O'Hanlon*** 41,573(9)(10)(11) *
Canadian Imperial Bank of
Commerce Trust Company (Bahamas)
Limited**** 2,200,720(12)(13) 21.3%
Granite Capital, L.P.***** 608,779(14) 6.2%
All directors & officers as a
group (12 persons) 1,158,280(11)(15)(16) 11.5%(11)(15)(16)
</TABLE>
* Less than 1%
** 4041 MacArthur Boulevard, Suite 401, Newport Beach, California
92660
*** 500 Hyde Park, Doylestown, Pennsylvania 18901
**** P.O. Box N-3933, Nassau, Bahamas
***** 375 Park Avenue, 18th Floor, New York, New York 10152
(1) Includes 100,000 shares of Common Stock which may be purchased on
the exercise of stock options granted under the Plan.
(2) Includes 2,380 shares of Common Stock held through the Company's
Employee Savings Plan.
(3) Does not include (i) 46,500 shares of Common Stock held of record
by Cynthia J. Cohn, who is a Vice President of the Company and one
of Mr. Cohn's daughters, in her capacity as trustee of the Cynthia
J. Cohn Revocable Trust, (ii) 15,000 shares of Common Stock held
of record by a trust established for the benefit of Shelley Cohn
Schmidt, another of Mr. Cohn's daughters, (iii) 9,750 shares
of Common Stock held of record by a trust established for the
benefit of Clayton Schmidt, Mr. Cohn's grandchild, and (iv) 1,000
shares of Common Stock held of record by Blake Schmidt, Mr.
Cohn's grandchild, as to all of which Mr. Cohn disclaims any
beneficial interest.
(4) Includes 16,666 shares of Common Stock which may be purchased on
the exercise of stock options granted under the Plan.
(5) Includes an aggregate of 94,338 shares of Common Stock issuable
upon conversion of the Company's 9-1/8% Convertible Subordinated
Notes Due 2002 (the "Notes") that are held by (i) The Hanna S. and
Samuel A. Cohn Memorial Foundation (the "Foundation"), which is a
charitable enterprise of which Mr. Cohn is the President and a
Board member, and (ii) The Gerald L. Cohn Revocable Trust, which
is a trust of which Mr. Cohn is a co-trustee and the sole
beneficiary. Mr. Cohn has no financial interest in the Foundation,
but may be deemed for securities laws purposes to be the
beneficial owner of the securities owned by the Foundation by
reason of his positions with the Foundation.
(6) Includes an aggregate of 37,735 shares of Common Stock issuable
upon the conversion of Notes held by Guarantee and Trust Company
FBO Sidney Luckman Individual Retirement Account. Does not include
(i) 80,000 shares of Common Stock held of record by various trusts
established for the benefit of certain members of Mr. Luckman's
family, of which either Robert Luckman (Mr. Luckman's son) or
another individual is the trustee, or (ii) an aggregate of 28,299
shares of Common Stock issuable upon the conversion of Notes that
are held by (A) Luckman Family Ventures, a limited partnership in
which Robert Luckman is the general partner and certain of the
grandchildren of Sidney Luckman are limited partners, (B) Richard
Weiss and Gail Weiss, Jtwros, who are the son-in-law and daughter,
respectively, of Sidney Luckman or (C) Robert Luckman, as to all
of which Sidney Luckman disclaims any beneficial ownership.
(7) Does not include an aggregate of 23,584 shares of Common Stock
issuable upon conversion of Notes that are held by Brenda McHugh,
the wife of Mr. McHugh.
(8) Includes (i) 3,000 shares of Common Stock held of record by Mr.
Shapiro and (ii) 1,100 shares of Common Stock held of record by SF
Investments, Inc., a privately held registered broker-dealer, 90%
of the common stock of which is owned by Mr. Shapiro. Does not
include 25,000 shares of Common Stock that are held of record by
Baldwin & Lyons, Inc., a publicly traded insurance company, in
which Mr. Shapiro is a director, as to all of which Mr. Shapiro
disclaims any beneficial interest.
13
<PAGE> 17
(9) Includes 24,750 shares of Common Stock which may be purchased on
the exercise of stock options granted under the Plan.
(10) Includes 1,573 shares of Common Stock held through the Employee
Savings Plan.
(11) Does not include 132,000 shares of Common Stock which Mr.
O'Hanlon, a former shareholder of MEF Corp., may become entitled
to receive in connection with the Company's acquisition of MEF
Corp. See Proposal No. 3.
(12) Held by Canadian Imperial Bank of Commerce Trust Company (Bahamas)
Limited ("CIBC"), as trustee of trusts for the benefit of the
grandchildren of A.N. Pritzker, deceased. Does not include 56,339
shares of Common Stock owned by a partnership comprised of trusts
for the benefit of members of the Pritzker Family. CIBC is not the
trustee of such trusts. As used herein, the term "Pritzker Family"
refers to the lineal descendants of Nicholas J. Pritzker,
deceased.
(13) Includes an aggregate of 716,981 shares of Common Stock issuable
upon conversion of Notes that are held by CIBC.
(14) Includes an aggregate of 188,679 shares of Common Stock issuable
upon conversion of Notes that are held by Granite Capital, L.P.
(15) Includes 127,000 shares which may be purchased on the exercise of
stock options granted under the Plan, in addition to those shares
that may be purchased on the exercise of options set forth in
footnotes (1), (4) and (9).
(16) Does not include 88,000 shares of Common Stock which Dominic A.
Guglielmi, a vice president of the Company and a former
shareholder of MEF Corp., may be entitled to receive in connection
with the Company's acquisition of MEF Corp. See Proposal No. 3.
VOTE REQUIRED; BOARD RECOMMENDATION
The affirmative vote of a majority of the shares of Common Stock present
and voting in person or by proxy at the Annual Meeting is required for the
election of each nominee specified in this proposal. The Board of Directors
unanimously recommends that you vote FOR the election of each nominee specified
in this proposal. Proxies solicited by the Board of Directors will be voted for
the nominees specified in this proposal unless authority to vote for one or more
of such nominees is specifically withheld in the proxy.
14
<PAGE> 18
PROPOSAL 2
PROPOSAL TO AMEND THE COMPANY'S CERTIFICATE OF INCORPORATION
DESCRIPTION OF PROPOSED AMENDMENT
At the Annual Meeting, there will be presented to the stockholders a
proposal to amend the Company's Certificate of Incorporation to increase the
number of shares of Common Stock that the Company is authorized to issue from
13,000,000 to 75,000,000. The Board of Directors has determined that an increase
in the Company's authorized Common Stock is in the best interests of the Company
and its stockholders. The Company's ability to grow in the future will depend on
its access to new sources of financing. These sources may include the issuance
and sale of additional shares of Common Stock in one or more public and/or
private transactions. At October 16, 1995, 9,620,898 shares were issued and
outstanding and an additional 3,347,685 shares were reserved for issuance on
exercise of various outstanding options and warrants. As a result, only 31,417
shares remained authorized and available for issuance at the date of this Proxy
Statement. If a sufficient number of authorized shares of Common Stock were not
available and the authorization of the increase in the authorized number of such
shares were to be postponed until a specific need arose, the delay and expense
incident to obtaining the approval of the Company's stockholders at that time
might significantly impair the Company's ability to meet its objectives.
Furthermore, additional shares of Common Stock are necessary for issuance in
connection with (i) the acquisition of MEF Corp. (See Proposal 3) and (ii) the
establishment of the DVI, Inc. 1995 Stock Bonus Plan (See Proposal 4). The Board
of Directors frequently reviews acquisition opportunities, some of which might
involve the issuance of Common Stock. At the date of this Proxy Statement, the
Company has not entered into any definitive arrangement for any such
acquisitions.
If the proposal is approved, the additional shares of Common Stock will
be available for issuance from time to time for such purposes and for such
consideration as the Board of Directors may approve without the need to obtain
the approval of the Company's stockholders, other than as required by the rules
of the New York Stock Exchange. At the date of this Proxy Statement, the Company
has no definitive plans to issue additional shares of Common Stock.
If this proposal is approved, the first paragraph of Article FOURTH of
the Company's Certificate of Incorporation will be amended and restated in its
entirety as follows:
"FOURTH: The Corporation is authorized to issue 75,100,000 shares
of capital stock, of which 75,000,000 shares shall be Common Stock, par
value $.005 per share, and 100,000 shares shall be Preferred Stock, par
value $10.00 per share."
VOTE REQUIRED; BOARD RECOMMENDATION
The affirmative vote of a majority of the outstanding shares of Common
Stock on the Record Date is required for the proposed amendment to the
Certificate of Incorporation. The Board of Directors unanimously recommends that
you vote FOR this proposal. Proxies solicited by the Board of Directors will be
voted FOR this proposal unless a vote against the proposal or abstention is
specifically indicated.
15
<PAGE> 19
PROPOSAL 3
PROPOSAL TO RATIFY AND APPROVE AMENDMENT NO. 1 TO STOCK PURCHASE AGREEMENT
DESCRIPTION OF AMENDMENT NO. 1
At the Annual Meeting, there will be presented to the stockholders a
proposal to (i) ratify and approve Amendment No. 1 to Stock Purchase Agreement,
dated as of June 14, 1995 ("Amendment No. 1"), between the Company and MEFC
Partners; and (ii) authorize and approve the issuance of an aggregate of 400,000
shares of Common Stock pursuant to the terms of Amendment No. 1.
In January 1993, the Company acquired all the outstanding shares of
common stock of MEF Corp. from MEFC Partners pursuant to a Stock Purchase
Agreement dated as of January 6, 1993 (the "Agreement"), between the Company and
the MEFC Partners. Under the terms of the Agreement, the purchase price was
payable before October 15, 1998 in cash or Common Stock of the Company, as
elected by the Company. As initially structured, the purchase price was to be
determined as a percentage of the after-tax earnings of the MEF Corp. division
of the Company during the sixty-six month period following the date of the
acquisition. During the year ended June 30, 1995, the Company entered into
negotiations with the former shareholders of MEF Corp. to revise certain terms
of the Agreement. The reason for the amendment was that due to the integration
of the former MEF Corp. personnel and business relationships into the Company's
business, the concept of segregating the earnings of the "MEF Corp. division" as
contemplated by the Agreement was becoming increasingly impractical and was
likely to result in substantial uncertainties. Due to this fact and because of
changes in the Company's business, it was not possible for the Company to
compute the number of shares to which MEFC Partners would have been entitled
under the original provisions of the Agreement. Based on negotiations between
the Company and MEFC Partners, the Company and the former shareholders of MEF
Corp. agreed in June 1995 to set the purchase price of MEF Corp. at 400,000
shares of Common Stock (the "MEFC Shares") pursuant to the terms of Amendment
No. 1.
Under the rules of the NYSE (on which the Common Stock is listed),
issuance of the MEFC Shares requires the approval of the Company's stockholders
because certain of the Company's officers have an interest in the transaction.
Michael A. O'Hanlon (President, Chief Operating Officer and a Director of the
Company), Dominic A. Guglielmi (Vice President of the Company) and Mark H.
Idzerda (an employee of DVI Financial Services) are general partners of MEFC
Partners and pursuant to the terms of Amendment No. 1 will be entitled to
receive 132,000, 88,000 and 80,000 of the MEFC Shares, respectively, if
stockholder approval is obtained. In addition, the MEFC Partners have been
granted certain registration rights with respect to the MEFC Shares. See
"Certain Transactions - Medical Equipment Finance Corp."
On June 8, 1995 the Board of Directors approved and recommended for
submission to the Company's stockholders for their approval the terms of
Amendment No. 1 and the issuance of the MEFC Shares thereunder. Amendment No. 1
is conditioned on, among other things, the approval of stockholders of the
issuance of the MEFC Shares. The Board of Directors has determined, based on the
considerations described above, that the issuance of the MEFC Shares to the MEFC
Partners pursuant to the terms of Amendment No. 1 is in the best interests of
the stockholders and the Company and believes that the acquisition of MEF Corp.
was an important part of the Company's strategy of continued future growth.
A copy of the Amendment is attached as Annex 1 to this Proxy Statement.
16
<PAGE> 20
VOTE REQUIRED; BOARD RECOMMENDATION
Under the rules of the NYSE, the affirmative vote of a majority of the
outstanding shares of Common Stock present and voting in person or by proxy at
the Annual Meeting is required for ratification and approval of Amendment No. 1
and authorization and approval of the issuance of the MEFC Shares in accordance
with the terms of Amendment No. 1, provided that the total vote cast represents
over 50% in interest of all shares of Common Stock entitled to vote on this
proposal. The Board of Directors unanimously recommends that you vote FOR this
proposal. Proxies solicited by the Board of Directors will be voted FOR this
proposal unless a vote against the proposal or abstention is specifically
indicated.
PROPOSAL 4
PROPOSAL TO RATIFY AND APPROVE THE DVI, INC. 1995 STOCK BONUS PLAN
DESCRIPTION OF 1995 STOCK BONUS PLAN
On June 8, 1995 the Board of Directors adopted and recommended for
submission to stockholders for their approval the DVI, Inc. 1995 Stock Bonus
Plan (the "Stock Bonus Plan"). The Stock Bonus Plan will permit the Company to
issue up to 200,000 shares of Common Stock in the aggregate (the "Stock Bonus
Plan Shares") to certain key employees. These employees will include Michael A.
O'Hanlon, the Company's President and Chief Operating Officer, and Dominic A.
Guglielmi, a Vice President of the Company. See "Certain Transactions -- Medical
Equipment Finance Corp." Except with respect to certain changes in the Company's
capital structure, the aggregate number of shares of Common Stock that may be
awarded under the Stock Bonus Plan to any participant may not exceed 100,000
shares.
The Stock Bonus Plan Shares may be issued by the Company on the earlier
to occur of (i) such time on or prior to December 31, 1998 as the last sales
price (as reported in the consolidated reporting system of the New York Stock
Exchange, Inc. (the "NYSE")) of the Common Stock is $16.00 per share or higher
for 30 consecutive calendar days, provided that any such employee entitled to
Stock Bonus Plan Shares under the Stock Bonus Plan must be employed by the
Company during the above described 30-day period in order to receive Stock Bonus
Plan Shares or (ii) a Sale of the Company (as defined below) in which the
consideration to be received for each share of Common Stock is $13.00 or higher.
The determination of the Stock Bonus Plan Committee (as defined below) as to the
occurrence of either condition shall be final and conclusive. "Sale of the
Company" is defined in the Stock Bonus Plan as the earliest to occur of the
following events, whether in one transaction or a series of related
transactions: (a) any sale, lease, exchange or transfer of all or substantially
all of the assets of the Company and/or its subsidiaries to any party other than
an affiliate of the Company; or (b) any "person" (as such term is used in
Sections 13(d) and 14(d)(2) of the Exchange Act) shall become the "beneficial
owner" (as defined in Rule 13d-3 and 13d-5 under the Exchange Act except where a
person is deemed to have acquired beneficial ownership by virtue of Rule
13-3(d)(1)(i) under the Exchange Act), directly or indirectly, of 75% or more of
the total voting power of all classes of capital stock then outstanding of the
Company normally entitled to vote in the election of Directors.
The Plan will be administered by a committee (the "Stock Bonus Plan
Committee") comprised of members of the Board of Directors who are not employees
of the Company and have not received Stock Bonus Plan Shares or any other equity
securities of the Company under any plans maintained by the Company at any time
within one year prior to, or at any time during, such member's term of service
on the Stock Bonus Plan Committee. The Stock Bonus Plan Committee shall have the
exclusive authority to, among other things, (i) construe and interpret the Stock
Bonus Plan, (ii) subject to the provisions of the Stock Bonus Plan, to determine
the participants who will receive awards of the right
17
<PAGE> 21
to receive Stock Bonus Plan Shares, (iii) award the right to receive Stock Bonus
Plan Shares under the Stock Bonus Plan, (iv) contest any ruling or decision
relating to the Stock Bonus Plan, and (v) determine whether income tax
withholding will be required under the Stock Bonus Plan. The determinations by
the Stock Bonus Plan Committee will be final and conclusive. Each award of the
right to receive Stock Bonus Plan Shares shall be subject to payment by the
participant of the par value for the Stock Bonus Plan Shares awarded, the
conditions specified above and such other conditions, not inconsistent with the
Stock Bonus Plan, as the Stock Bonus Plan Committee shall deem appropriate. In
the event the conditions described above fail to occur, the Stock Bonus Plan
will terminate on December 31, 1998.
The Board of Directors believes that the Stock Bonus Plan is instrumental
in securing and retaining the services of key employees of the Company by
allowing them to participate in the ownership and growth of the Company through
the issuance of Stock Bonus Plan Shares. The Stock Bonus Plan provides key
employees an additional inducement to remain in the service of the Company and
provides them with an increased incentive to work towards the Company's success.
A copy of the Stock Bonus Plan is attached on Annex 2 to this Proxy
Statement.
VOTE REQUIRED; BOARD RECOMMENDATION
Section 16(b) of the Exchange Act, and the rules promulgated thereunder
("Rule 16b-3") and the Rules of the NYSE require the affirmative vote of the
holders of a majority of the shares of Common Stock present in person or by
proxy at the Annual Meeting for approval of the Stock Bonus Plan, provided that
the total vote cast represents over 50% in interest of all shares of Common
Stock entitled to vote on this proposal. The Board of Directors unanimously
recommends that you vote for this proposal. Proxies solicited by the Board of
Directors will be voted for this proposal unless a vote against the proposal or
abstention is specifically indicated.
18
<PAGE> 22
PROPOSAL 5
PROPOSAL TO RATIFY APPOINTMENT OF ACCOUNTANTS
The Company proposes to select Deloitte & Touche LLP as the Company's
independent accountants for the fiscal year ending June 30, 1996. Deloitte &
Touche LLP has been the independent accountants for the Company since May 1987.
Representatives of Deloitte & Touche LLP are expected to be present at the
Annual Meeting and will be available to respond to appropriate questions and to
make such statements as they may desire.
VOTE REQUIRED; BOARD RECOMMENDATION
The affirmative vote of a majority of the outstanding shares of Common
Stock present and voting in person or by proxy at the Annual Meeting is required
to ratify the appointment of Deloitte & Touche LLP as the Company's independent
certified public accountants. The Board of Directors unanimously recommends that
you vote FOR the ratification of Deloitte & Touche LLP as the Company's
independent certified public accountants. Proxies solicited by the Board of
Directors will be voted for the proposal unless a vote against the proposal or
an abstention is specifically indicated.
ANNUAL REPORT TO STOCKHOLDERS
The Company's Annual Report to Stockholders for the fiscal year ended
June 30, 1995 (the "Annual Report"), which is being mailed concurrently with the
mailing of this Proxy Statement, contains the consolidated financial statements
of the Company. Such consolidated financial statements, including the notes
thereto and management's discussion and analysis of financial condition and
results of operations (collectively, the "Financial Statements"), are
incorporated by reference herein and are considered a part of the proxy
soliciting material. Except for the Financial Statements, the Annual Report is
not incorporated in this Proxy Statement and is not considered a part of the
proxy soliciting material.
STOCKHOLDER PROPOSALS FOR NEXT ANNUAL MEETING
The Company has received no stockholder proposals to be voted on at this
meeting. Appropriate stockholder proposals which are intended to be presented at
the 1996 Annual Stockholder's Meeting must be received by the Company no later
than June 30, 1996, in order to be included in the 1996 proxy materials.
19
<PAGE> 23
OTHER MATTERS
All expenses in connection with the solicitation of proxies will be paid
by the Company. The Company may pay brokers, nominees, fiduciaries or other
custodians for their reasonable expenses in sending proxy materials to, and
obtaining instructions from persons for whom they hold stock of the Company. The
Company expects to solicit proxies primarily by mail, but directors, officers
and other employees of the Company may also solicit proxies in person or by
telephone, telex or telegraph.
As of the date of this Proxy Statement, the management has no knowledge
of any matters to be presented at the meeting other than those referred to
above. If any other matters properly come before the meeting, the persons named
in the accompanying form of proxy intend to vote such proxy in accordance with
their best judgment.
By Order of the Board of Directors
/s/ Melvin C. Breaux
Melvin C. Breaux
Secretary
October 28, 1995
STOCKHOLDERS MAY OBTAIN WITHOUT CHARGE, A COPY OF THE COMPANY'S 1995 ANNUAL
REPORT ON FORM 10-K BY SENDING A WRITTEN REQUEST TO CORPORATE COMMUNICATIONS,
DVI, INC., 4041 MacARTHUR BOULEVARD, SUITE 401, NEWPORT BEACH, CALIFORNIA
92660.
20
<PAGE> 24
ANNEX 1
EXECUTION COPY
AMENDMENT NO. 1 TO STOCK PURCHASE AGREEMENT
AMENDMENT NO. 1 TO STOCK PURCHASE AGREEMENT ("Amendment") dated as of
June 14, 1995 between DVI, INC. (formerly known as DVI HEALTH SERVICES
CORPORATION), a Delaware corporation ("Buyer"), and MEFC PARTNERS L.P., a
Delaware limited partnership ("Seller").
WHEREAS, Buyer and Seller (i) have entered into a Stock Purchase
Agreement dated as of January 6, 1993 (the "Agreement") relating to the purchase
by Buyer and the sale by Seller of all of the common stock, par value $.01 per
share, of Medical Equipment Finance Corporation (all capitalized terms not
otherwise defined in this Amendment are used herein as defined in the Agreement)
and (ii) desire to amend the Agreement pursuant to Section 9.6 thereof upon the
terms hereinafter set forth.
NOW THEREFORE, in consideration of the premises, the mutual covenants,
representations, warranties and agreements set forth in this Agreement, and of
other good and valuable consideration, the receipt, sufficiency and adequacy of
which is hereby acknowledged, the parties hereto, intending legally to be bound,
hereby covenant and agree as follows:
1. Amendments to Agreement. Subject to the conditions of Section 2
hereof, Section 1.2 of the Agreement is hereby amended in its entirety as
follows:
"1.2 Consideration. In consideration of the sale of the Shares, Buyer
shall deliver to Seller, as the purchase price for the Shares, an
aggregate of 400,000 shares of the common stock, par value $.01 per
share, of the Buyer (the "DVI Common Stock") at such time as the
conditions set forth in Section 2 are satisfied. Each of Buyer and Seller
shall account for and report the issuance of the shares of DVI Common
Stock as purchase price for the Shares."
2. Conditions to Effectiveness. This Amendment is subject to the
satisfaction in full of the following conditions precedent:
(a) Each of Buyer and Seller shall have received fully executed
counterparts of this Amendment;
(b) Buyer shall have filed an amended Listing Application with the
New York Stock Exchange (the "NYSE") and received the approval of the
NYSE with respect thereto (subject to official notice of issuance);
<PAGE> 25
(c) Buyer shall have made such filings and received such approvals as
may be required under federal and state securities laws for the issuance
of the shares of DVI Common Stock pursuant to Section 1 hereof;
(d) The issuance of the DVI Common Stock shall have been approved by
the stockholders of Buyer; and
(e) Seller shall have received one or more certificates evidencing
the shares of DVI Common Stock to be acquired by it hereunder.
3. Representations and Warranties.
(a) Buyer represents and warrants to Seller that:
(i) This Amendment has been duly authorized, executed and
delivered by Buyer and constitutes a valid and legally binding obligation
of Buyer, enforceable in accordance with its terms;
(ii) No consent, approval, authorization, order, registration or
qualification of or with any governmental authority or other entity or
person is required for the consummation by Buyer of the transactions
contemplated by this Amendment;
(iii) The shares of DVI Common Stock to be issued to Seller have
been duly authorized and, when issued and delivered against payment
therefor as provided herein, will be duly and validly issued and fully
paid and nonassessable; good and valid title to each of the shares of DVI
Common Stock will be transferred by Buyer to Seller, free and clear of
any mortgage or deed of trust, pledge, hypothecation, assignment, deposit
arrangement, security interest, lien, charge, encumbrance, preference,
priority or other security agreement or preferential arrangement of any
kind or nature whatsoever (other than restrictions on transfer imposed by
the Securities Act (as hereinafter defined) or the applicable securities
laws of any State); and
(iv) The representations and warranties of Buyer contained in
the Agreement are true and correct on and as of the date hereof as if
such representations and warranties had been made on and as of the date
hereof (except to the extent such representation and warranties relate to
an earlier date).
(b) Seller represents and warrants to Buyer that:
(i) This Amendment has been duly authorized, executed and
delivered by Seller and constitutes a valid and legally binding
obligation of Seller, enforceable in accordance with its terms;
2
<PAGE> 26
(ii) No consent, approval, authorization, order, registration
or qualification of or with any governmental authority or other entity or
person is required for the consummation by Seller of the transactions
contemplated by this Amendment;
(iii) (A) Seller is acquiring the shares of DVI Common Stock
hereunder for its own account and with no intention of distributing or
selling such shares except for distribution thereof to its partners.
Seller understands that the shares of DVI Common Stock being acquired by
it hereunder have not been (and are not being) registered under the
Securities Act by reason of their contemplated issuance in transaction(s)
exempt from the registration and prospectus delivery requirements of the
Securities Act pursuant to Section 4(2) thereof, and that the reliance of
Buyer on such exemption from registration is predicated in part on the
representations and warranties of Seller hereunder.
(B) Seller agrees that it will not sell or otherwise
dispose of any share(s) of DVI Common Stock acquired by it hereunder
unless such sale or other disposition has been registered or is exempt
from registration under the Securities Act and has been registered or
qualified or is exempt from registration or qualification under
applicable securities laws of any State.
(C) Seller understands that a restrictive legend consistent
with the foregoing has been or will be placed on the certificates
evidencing the shares of DVI Common Stock to be issued to it hereunder,
and related stop transfer instructions will be noted in the transfer
records of Buyer and/or its transfer agent for such shares of capital
stock; and
(iv) the representations and warranties of Seller contained in
the Agreement are true and correct on and as of the date hereof as if
such representations and warranties had been made on and as of the date
hereof (except to the extent such representation and warranties relate to
an earlier date).
4. Miscellaneous.
(a) Full Force and Effect. Except as expressly set forth herein, this
Amendment does not constitute a waiver or modification of any provision of the
Agreement. Except expressly amended hereby, the Agreement shall continue in full
force and effect in accordance with the provisions thereof on the date hereof.
As used in the Agreement, the terms "the Agreement," "herein," "hereof,"
"hereinafter," "hereto" and words of similar import, shall, unless the context
otherwise requires, mean the Agreement as amended by the Amendment. References
to the terms "Agreement" appearing in the Exhibits or Schedules to the
Agreement, shall, unless the context otherwise requires, mean the Agreement as
amended by this Amendment.
(b) Headings and terms. The headings in this Amendment are for
purposes of reference only and shall not be considered in construing this
Agreement. Terms defined in the singular shall have a comparable meaning when
used in the plural, and vice versa.
3
<PAGE> 27
(c) Counterparts. This Amendment may be executed in any number of
counterparts, each of which when so executed and delivered shall constitute an
original and all together shall constitute one agreement.
(d) Law Governing. This Agreement shall be construed and enforced in
accordance with and shall be governed by the laws of the State of New York,
without giving effect to its conflict of laws provisions.
(e) Public Announcements. Buyer and Seller each hereby agrees it will
not issue any press release or otherwise make any public statement or respond to
any press inquiry with respect to this Amendment, the transactions contemplated
hereby or agreements or transactions referred to herein without the prior
approval of the other party except as may be required by applicable law.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the date first above written.
BUYER:
DVI, INC. (FORMERLY KNOWN AS DVI HEALTH
SERVICES CORPORATION), a Delaware corporation
By: /s/ David L. Higgins
-----------------------------------------
Name: David L. Higgins
Title: Chief Executive Officer
SELLER:
MEFC PARTNERS L.P., a Delaware limited
partnership
By: /s/ Dominick Guglielmi
-----------------------------------------
Name: Dominick Guglielmi
Title: General Partner
By: /s/ Mark Irzerda
-----------------------------------------
Name: Mark Irzerda
Title: General Partner
4
<PAGE> 28
ANNEX 2
DVI, INC.
1995 STOCK BONUS PLAN
1. Preamble.
DVI, Inc., a Delaware corporation (the "Company"), has established this
DVI, Inc. 1995 Stock Bonus Plan, (as set forth herein and as amended from time
to time the "Plan") as a means whereby the Company may provide key employees who
have substantial responsibilities for the direction and management of the
Company and its Subsidiaries (as hereinafter defined) with additional incentive
to promote the success of the businesses operated by the Company and its
Subsidiaries.
2. Definitions.
2.01 "Affiliate" means, with respect to any person or entity, any person
or entity who or which, directly or indirectly, through one or more
intermediaries, controls or is controlled by or is under common control with
such person or entity.
2.02 "Award Date" means the date upon which rights to receive shares of
Bonus Stock are awarded to a Participant under the Plan.
2.03 "Board" or "Board of Directors" means the board of directors of the
Company.
2.04 "Bonus Stock" means Common Stock awarded to a Participant pursuant
to this Plan and subject to the restrictions contained in Section 6.
2.05 "Bonus Stock Agreement" means an agreement, substantially in the
form of Exhibit A hereto, or such other agreement as the Committee shall from
time to time approve to memorialize an award pursuant to hereto.
2.06 "Committee" shall initially mean the Compensation Committee of the
Board of Directors (so long as it meets the requirements of this Section), or,
in the event the Compensation Committee fails to meet such requirements, such
other committee selected by the Board which is comprised exclusively of
Directors, provided that each member of the Committee (a) shall not, at any time
within one year prior to, or at any time during such member's term of service on
the Committee, have received any award of Bonus Stock under the Plan or any
other equity security under any other plan maintained by the Company or any of
its affiliates, except as permitted pursuant to the provisions of Rule
16b-3(c)(2)(i) of the Exchange Act or any successor rule thereto; and (b) shall
be an outside Director as determined under Proposed Regulation 26 CFR Section
1.162-27(e)(3) or any final or successor regulation thereto.
<PAGE> 29
2.07 "Common Stock" means the common stock of the Company, $.005 par
value.
2.08 "Director" means a member of the Board.
2.09 "Exchange Act" shall mean the Securities Exchange Act of 1934, as it
exists now or from time to time may hereafter be amended.
2.10 "Fair Market Value" means for the relevant day:
(a) If shares of Common Stock are listed or admitted to unlisted
trading privileges on any national or regional securities exchange, the
last reported sale price, regular way, on the composite tape of that
exchange on the day Fair Market Value is to be determined;
(b) If the Common Stock is not listed or admitted to unlisted
trading privileges as provided in paragraph (a), and if sales prices for
shares of Common Stock are reported by the National Association of
Securities Dealers, Inc. Automated Quotations, Inc. National Market
System ("NASDAQ System"), then the last sale price for Common Stock
reported as of the close of business on the day Fair Market Value is to
be determined, or if no such sale takes place on that day, the average of
the high bid and low asked prices so reported; if Common Stock is not
traded on that day, the next preceding day on which such stock was
traded; or
(c) If trading of the Common Stock is not reported by the NASDAQ
System or on a stock exchange, Fair Market Value will be determined by
the Committee based upon the best available data, which determination
shall be conclusive for all purposes.
2.11 "Participant" means an employee of the Company to whom rights to
receive Bonus Stock have been awarded under the Plan.
2.12 "Sale of the Company" means the earliest to occur of the following
events, whether in one transaction or a series of related transactions:
(a) any sale, lease, exchange or transfer of all or substantially
all of the assets of the Company and/or its Subsidiaries to any party
other than an Affiliate of the Company; or
(b) any "person" (as such term is used in Sections 13(d) and
14(d)(2) of the Exchange Act) shall become the "beneficial owner" (as
defined in Rule 13d-3 and 13d-5 under the Exchange Act except where a
person is deemed to have acquired beneficial ownership by virtue of Rule
13-3(d)(1)(i) under the Exchange Act), directly or indirectly, of 75% or
more of the total voting power of all classes of capital stock then
outstanding of the Company normally entitled to vote in the election of
Directors.
2
<PAGE> 30
2.13 "Securities Act" means the Securities Act of 1933, as it exists now
or from time to time may hereafter be amended.
2.14 "Subsidiary" means any corporation or other entity of which the
majority voting power or equity interest is owned directly or indirectly by the
Company.
3. Stock Subject to the Plan.
Except as otherwise provided in Section 8, the aggregate number of shares
of Common Stock that may be awarded as Bonus Stock under this Plan may not
exceed 200,000 shares. Shares of Common Stock reserved for issuance pursuant to
this Plan may be either authorized but unissued shares or treasury shares, in
the Board's discretion. If any award of rights to receive Bonus Stock hereunder
shall terminate or expire, as to any number of shares, new rights to receive
Bonus Stock may thereafter be awarded with respect to such shares. Except as
otherwise provided in Section 8, the aggregate number of shares of Common Stock
that may be awarded as Bonus Stock to any Participant may not exceed 100,000.
4. Administration.
The Plan shall be administered by the Committee. In addition to any other
powers set forth in this Plan, the Committee has the exclusive authority:
(a) to construe and interpret the Plan, and to remedy any
ambiguities or inconsistencies therein;
(b) to establish, amend and rescind appropriate rules and
regulations relating to the Plan;
(c) subject to the express provisions of the Plan, to determine the
Participants who will receive awards of rights to receive Bonus Stock,
the times when Participants will receive such awards, the number of
shares to be subject to each award and the payment terms, payment method,
and expiration date applicable to each award;
(d) to contest on behalf of the Company or Participants, at the
expense of the Company, any ruling or decision on any matter relating to
the Plan or to any awards of Bonus Stock (or rights to receive the same);
(e) generally, to administer the Plan, and to take all such steps
and make all such determinations in connection with the Plan and the
awards of rights to receive Bonus Stock granted thereunder as it may deem
necessary or advisable; and
(f) to determine whether income tax withholding under Section 9 of
this Plan will be required.
3
<PAGE> 31
5. Eligible Employees.
Subject to the provisions of the Plan, the Committee shall determine from
time to time those key employees of the Company or a Subsidiary who shall be
designated as Participants and the number of shares of Bonus Stock to which each
such Participant shall be granted rights or receive upon the terms and subject
to the conditions of this Agreement.
6. Terms and Conditions of Awards.
The Committee, in its discretion, may award the right to receive shares
of Bonus Stock to any Participant under the Plan. Each award of the right to
receive shares of Bonus Stock shall be evidenced by a Bonus Stock Agreement
between the Company and the Participant. Each award of the right to receive
shares of Bonus Stock under the Plan shall be subject to the following express
terms and conditions and to such other terms and conditions, not inconsistent
with the Plan, as the Committee shall deem appropriate:
(a) Issuance of Shares. No shares of Bonus Stock will be issued
until (i) payment therefor is made in accordance with Section 7 hereof
and (ii) the earlier to occur of (x) such time on or prior to December
31, 1998 as the Fair Market Value per share of Common Stock is greater
than or equal to $16 for a period of 30 consecutive calendar days; and
(y) immediately prior to the occurrence of a Sale of the Company at any
time on or prior to December 31, 1998 so long as the value of the
consideration to be paid to all stockholders of the Company in connection
with such Sale of the Company is greater than or equal to $13 per share
of Common Stock. The determination of the Committee as to the occurrence
of either condition to issuance shall be final and binding on the Company
and all Participants in the Plan. In the event neither condition to
issuance shall occur on or prior to December 31, 1998, no shares of Bonus
Stock will be issued pursuant hereto and this Plan shall terminate.
Subject to the provisions of subparagraphs (b) and (c) below and
any other restrictions imposed by law, certificates evidencing shares of
Bonus Stock shall be delivered to Participants as soon as practicable
after they are issued.
(b) Forfeitures. A Participant shall forfeit all rights to receive
shares of Bonus Stock awarded to such Participant hereunder on the date
that such participant's employment by the Company is terminated for any
reason. A transfer of a Participant's employment from the Company to a
Subsidiary or affiliate, or vice versa shall not be a termination of
employment for purposes of this Plan. This Section 6(b) shall not apply
to any shares of Bonus Stock which shall have been issued prior to the
date upon which such Participant's employment by the Company is
terminated.
(c) Legends. Each certificate representing shares of Bonus Stock
issued to any Participant who may (in the Company's discretion) be deemed
to be an "affiliate" of the
4
<PAGE> 32
Company for purposes of the Securities Act shall bear the following (or a
similar) legend:
"The shares of Common Stock represented hereby have not been
registered under the Securities Act of 1933, as amended (the
Securities Act"), or any state securities laws. These securities
may not be transferred or resold except as permitted under the
Securities Act and the applicable state securities laws, pursuant
to either registration thereunder or exemption therefrom."
7. Payment for Shares of Bonus Stock.
In connection with the issuance of shares of Bonus Stock pursuant hereto,
the Participant shall pay or the Company shall cause to be paid an amount equal
to the product of (a) the par value per share of the Common Stock, multiplied by
(b) the number of shares of Bonus Stock to be issued.
8. Adjustments to Reflect Changes in Capital Structure.
If there is any change in the corporate structure or shares of the
Company, the Board of Directors may make any adjustments necessary to prevent
accretion, or to protect against dilution, in the number and kind of shares
authorized by the Plan and, with respect to outstanding rights to receive Bonus
Stock in the number and kind of shares covered thereby. For the purpose of this
Section 8, a change in the corporate structure or shares of the Company
includes, without limitation, any change resulting from a recapitalization,
stock split, stock dividend, consolidation, rights offering, spin-off,
reorganization, or liquidation and any transaction in which shares of Common
Stock are changed into or exchanged for a different number or kind of shares of
stock or other securities of the Company or another corporation.
9. Withholding Tax.
The Company shall have the right to withhold, from any compensation
payable to Participants, any income taxes required by law to be withheld as a
result of the issuance of Bonus Stock or the grant to the Participant of rights
to receive the same.
10. No Right To Employment.
Participation in the Plan will not give any Participant a right to be
retained as an employee of the Company or any Subsidiary, or any right or claim
to any benefit under the Plan, unless the right or claim has specifically
accrued under the Plan.
5
<PAGE> 33
11. Amendment of the Plan.
The Committee may from time to time amend or revise the terms of this
Plan in whole or in part and may, without limitation, adopt any amendment deemed
necessary; provided, however, that (a) no change in any award previously granted
to a Participant may be made that would impair the rights of the Participant
without the Participant's consent and (b) the Committee may not, without
approval by the holders of a majority of the shares of the Company's Common
Stock present at a duly held stockholders' meeting or otherwise represented and
entitled to vote thereon, (i) change the aggregate number of shares of Common
Stock that may be awarded pursuant to the Plan (except in accordance with the
provisions of Section 8), (ii) change the class of eligible individuals who may
receive awards under the Plan, or (iii) materially increase benefits accruing to
Participants under the Plan.
12. Conditions Upon Issuance of Shares.
Rights to receive Bonus Stock shall not be awarded and shares of Bonus
Stock shall not be issued unless any such transaction shall comply with all
relevant provisions of law, including, without limitation, the Securities Act,
the Exchange Act, the rules and regulations promulgated thereunder, and the
requirements of any stock exchange upon which the shares of Common Stock may
then be listed, and shall be further subject to the approval of counsel for the
Company with respect to such compliance.
13. Effective Date and Termination of Plan.
13.1 Effective Date. This Plan is effective as of the later of the date
of its adoption by the Committee, or the date it is approved by the stockholders
of the Company, in accordance with Rule 16b-3(b) under the Exchange Act.
13.2 Termination of the Plan. The Plan will terminate on January 1, 1999,
or at such other time as the Committee, in its sole discretion, may determine.
The Committee may terminate the Plan at any time with respect to any shares of
Common Stock authorized for awards under Section 3 for which rights to receive
the same have not been awarded under this Plan. Termination of the Plan will not
affect the rights and obligations of any Participant with respect to awards to
receive Bonus Stock which have been granted prior to termination and shares of
Bonus Stock which have been issued prior to termination to Bonus Stock awarded
before termination.
14. Rules of Construction.
14.1 Governing Law. The construction and operation of this Plan are
governed by the laws of the State of Delaware.
14.2 Undefined Terms. Unless the context requires another meaning, any
term not specifically defined in this Plan has the meaning given to it by the
Code.
6
<PAGE> 34
14.3 Headings. All headings in this Plan are for reference only and are
not to be utilized in construing the Plan.
14.4 Gender. Unless clearly appropriate, all nouns of whatever gender
refer indifferently to persons of any gender.
14.5 Singular and Plural. Unless clearly inappropriate, singular terms
refer also to the plural and vice versa.
14.6 Severability. If any provision of this Plan is determined to be
illegal or invalid for any reason, the remaining provisions shall continue in
full force and effect and shall be construed and enforced as if the illegal or
invalid provision did not exist, unless the continuance of the Plan in such
circumstances is not consistent with its purposes.
7
<PAGE> 35
EXHIBIT A
DVI, INC.
STOCK BONUS AGREEMENT
STOCK BONUS AGREEMENT (this "Agreement") dated as of ____ day of
_________________________, 1995 between DVI, Inc. a Delaware corporation (the
"Company"), and ______________________ (the "Participant").
1. The Company, in order to provide additional incentive to the
Participant to promote the success of the businesses operated by the Company and
its subsidiaries, hereby awards to the Participant the right to receive a total
of ____ shares of Common Stock of the Company ("Bonus Stock"), pursuant to the
DVI, Inc. 1995 Stock Bonus Plan (the "Plan"), subject to the conditions and
restrictions set forth below and in the Plan.
2. The Participant hereby acknowledges that the Bonus Stock will
not be issued until the Committee determines that the conditions to issuance set
forth in the Plan have been satisfied.
3. In the event the Company deems the Participant to be an
"affiliate" (as such term is defined under the Securities Act of 1933, as
amended) of the Company at the time the Bonus Stock is issued, the certificate
evidencing the Bonus Stock shall bear a legend as set forth in paragraph 6(c) of
the Plan.
4. In the event that the Participant's employment by the Company is
terminated for any reason prior to the date the Bonus Stock is issued, the
Participant shall forfeit all rights to receive the Bonus Stock.
5. This award of Bonus Stock is subject to all of the terms and
conditions of the Plan (a copy of which is attached and made a part hereof) and
to the determinations of the Committee, which administers the Plan. Capitalized
terms used and not otherwise defined herein shall be deemed to have the same
meaning ascribed thereto as in the Plan.
6. The Participant agrees that the Company may withhold, from any
compensation payable to the Participant, any income taxes required by law to be
withheld as a result of the issuance of the Bonus Stock or the grant to
Participant of rights to receive the same.
/REMAINDER OF PAGE INTENTIONALLY LEFT BLANK/
8
<PAGE> 36
To accept this award, the Participant must sign and date the enclosed
copies of this Agreement and return them to the Secretary of the Company.
DVI, INC., a Delaware corporation
By:
--------------------------------
Name:
---------------------------
Title:
--------------------------
Accepted and Agreed to:
- --------------------------------
Participant
Dated:
--------------------------
9
<PAGE> 37
PROXY
DVI, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON DECEMBER 15, 1995
The undersigned hereby constitutes and appoints David L. Higgins and
Melvin C. Breaux, or either of them, attorneys and proxies of the undersigned
with full power of substitution to vote all shares of Common Stock of DVI, Inc.
(the "Company") owned or held by the undersigned at the Annual Meeting of
Stockholders of the Company to be held at the Cock 'N Bull Restaurant, Lahaska,
Pennsylvania, on Friday, December 15, 1995, at 10:30 a.m. and at any adjournment
thereof.
The Board of Directors recommends a vote "FOR ALL NOMINEES" in Item 1 and
"FOR" Items 2, 3, 4 and 5.
ITEM 1. Election of Directors.
/ / For all nominees listed below (except as marked to the contrary below)
/ / WITHHOLD AUTHORITY to vote for all nominees
INSTRUCTION: To withhold authority to vote for any individual nominee
strike a line through the nominee's name in the list below.
G. Cohn, D. Higgins, J. McHugh, M. O'Hanlon, N. Shapiro, W. Goldberg
ITEM 2. To amend Article Fourth of the Company's Certificate of
Incorporation to increase the number of shares of Common Stock the Company is
authorized to issue from 13,000,000 shares to 75,000,000 shares.
/ / For / / Against
/ / Abstain
ITEM 3. To ratify and approve Amendment No. 1 to the Stock Purchase
Agreement dated as of June 14, 1995 ("Amendment No. 1"), between the Company and
MEFC Partners, L.P., and to authorize and approve the issuance of an aggregate
of 400,000 shares of Common Stock pursuant to Amendment No. 1.
/ / For / / Against
/ / Abstain
ITEM 4. To approve the DVI, Inc. 1995 Stock Bonus Plan.
/ / For / / Against
/ / Abstain
ITEM 5. To ratify the appointment of Deloitte & Touche LLP as independent
public accountants for the Company for the fiscal year ending June 30, 1996.
/ / For / / Against
/ / Abstain
ITEM 6. To transact such other business as may properly come before the
Annual Meeting or any adjournment thereof.
THIS PROXY IS CONTINUED ON THE REVERSE SIDE.
PLEASE MARK, DATE AND SIGN ON THE REVERSE SIDE AND RETURN PROMPTLY.
<PAGE> 38
PAGE 2
THE PROXY HOLDERS ARE DIRECTED TO VOTE AS SET FORTH ABOVE. THE SHARES
REPRESENTED BY THIS PROXY WILL BE VOTED AS DIRECTED BY THE STOCKHOLDER. IF NO
DIRECTION IS GIVEN WHEN THE DULY EXECUTED AND DATED PROXY IS RETURNED, SUCH
SHARES WILL BE VOTED "FOR ALL NOMINEES" IN ITEM 1, "FOR" ITEMS 2, 3, 4 AND 5 AND
IN ACCORDANCE WITH THE JUDGMENT OF SUCH PROXIES ON SUCH OTHER MATTERS AS MAY
PROPERLY COME BEFORE THE ANNUAL MEETING. IF ANY OF THE NOMINEES FOR DIRECTOR IS
UNABLE TO SERVE OR FOR GOOD CAUSE WILL NOT SERVE, THE PROXY HOLDERS WILL VOTE
FOR SUCH OTHER PERSON OR PERSONS AS THE BOARD OF DIRECTORS MAY RECOMMEND.
The undersigned hereby acknowledges receipt of the Company's Annual
Report to Stockholders and of the Notice of Annual Meeting of Stockholders and
Proxy Statement relating to the Annual Meeting
Dated: , 1995
--------------------------------------------
Signature(s):
Please mark, date and sign as your name appears above and return in
the enclosed envelope. When signing as an agent, attorney, or
fiduciary, or for a corporation or partnership, indicate the
capacity in which you are signing. Shares registered in joint names
should be signed by each joint tenant or trustee.
<PAGE> 39
Information Incorporated by Reference
From DVI, INC.'s 1995 Annual Report to Stockholders
- - Management's Discussion and Analysis of Financial Condition and Results of
Operations
- - Consolidated Financial Statements
- - Notes to Consolidated Financial Statements
- - Independent Auditors' Report
<PAGE> 40
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-10
Consolidated Balance Sheets as of June 30, 1995 and 1994 . . . . . . . . . . . . . . . . . 11-12
Consolidated Statements of Operations for the years ended
June 30, 1995, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Consolidated Statements of Shareholders' Equity for the years ended
June 30, 1995, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Consolidated Statements of Cash Flows for the years ended
June 30, 1995, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15-17
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . 18-31
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
</TABLE>
1
<PAGE> 41
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Equipment Financing. For accounting purposes, the Company classifies
equipment loans it originates as notes secured by equipment, direct financing
leases or operating leases. Notes secured by equipment and direct financing
leases are generally those transactions in which the obligor has substantially
all of the benefits and risks of ownership of the equipment. Operating leases
are generally those which only provide for the rental of the asset. The
different classifications can result in accounting treatments that provide
substantially different income and costs during the transaction term. Direct
financing leases and notes secured by equipment are reflected on the Company's
balance sheet as "investment in direct financing leases and notes secured by
equipment." For statement of operations purposes, those transactions result in
amortization of finance income over the transaction term in the amounts
computed using the interest method.
The Company enters into two types of direct financing lease
transactions, which are referred to as "conditional sales agreements" and "fair
market value transactions." Conditional sales agreements and notes secured by
equipment represent those transactions in which no residual interest in the
underlying equipment is retained by the Company. Fair market value
transactions are those transactions in which the Company retains a residual
interest in the equipment. This residual interest is recorded on the Company's
books as an estimate of the projected value of the financed equipment at the
end of the transaction term. At the inception of notes secured by equipment
and direct financing lease transactions, "unearned income" represents the
amount by which the gross transaction receivables, initial direct costs and the
nominal estimated residual value (on fair market value transactions) exceed
equipment cost.
Subsequent to the January 1993 acquisition of MEF Corp., the Company
significantly reduced its emphasis on entering into fair market value
transactions and adopted a strategy to reduce the dollar amount of residual
valuation on its balance sheet. As of June 30, 1995, residual valuation
decreased to $3.6 million from $6.2 million at June 30, 1993, and from 5.3% of
net financed receivables as of June 30, 1993 to 0.9% at June 30, 1995.
Accordingly, during this period the percentage of the Company's equipment
financing transactions structured as loans and conditional sales agreements
have increased significantly. The Company believes that loans and conditional
sales agreements will constitute a high percentage of its equipment financing
transactions in the future.
Leases and contracts for the rental of equipment which do not meet the
criteria of direct financing leases are accounted for as operating leases.
Equipment under an operating lease or a rental contract is recorded on the
balance sheet at the Company's cost under the caption of "equipment on
operating leases" and depreciated on a straight-line basis over the estimated
useful life of the equipment.
The Company has classified income under the categories of
"amortization of finance income," "receivables finance income," "gain on sale
of financing transactions" and "other income." Amortization of finance income
consists of the interest component of payments received on notes secured by
equipment (or medical receivables) and direct financing leases, and is
calculated using the interest method whereby the income is reported over the
term of the transactions. "Gain on sale of financing transactions" consists of
gains recognized when the Company permanently funds transactions through whole
loan sales. "Receivables financing income" consists primarily of purchased
receivables income and income from the billing and collecting of medical
receivables. The Company withdrew from the business of billing, collecting and
purchasing medical receivables late in fiscal 1994, but will continue to record
income as the receivables outstanding as of such date are collected by the
third parties that the Company hired to service these accounts. On an ongoing
basis, the Company evaluates the collectibility of these receivables and
records a provision for amounts deemed uncollectible. In the event the
aggregate uncollected amounts with respect to receivables the Company purchased
exceeds amounts reserved for losses with respect thereto, the Company will
record a loss. "Other income" consists primarily of late charges, dividends on
investment in investee's preferred stock and income from operating leases.
Notes secured by equipment and direct financing lease transactions are
all noncancelable "net" transactions under which the obligor must make all
scheduled payments, maintain the equipment, insure the equipment against
casualty loss and pay all equipment related taxes. In fair market value
transactions, at the end of the initial financing term, the obligor has the
option either to purchase the equipment for its fair market value, extend the
financing term under renegotiated
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
GENERAL (CONTINUED)
payments or return the equipment to the Company. If the equipment is returned
to the Company, the Company must sell or lease the equipment to another user.
In accordance with generally accepted accounting principles ("GAAP"),
in transactions classified as notes secured by equipment and direct financing
leases that the Company permanently funds through securitization or other
structured finance transactions whereby the Company treats the funds received
as debt, income is deferred and recognized using the interest method over the
respective terms of the transactions. If an obligor under a transaction
defaults, the Company may not receive all or a portion of the unamortized
income associated with the transaction.
Medical Receivable Financing. A small portion of the Company's
business is providing lines of credit under which the Company makes full
recourse loans to outpatient healthcare providers that are secured by medical
receivables and other collateral. The respective interest and fee income from
these loans are recognized over the terms of the lines of credit which are
typically one to three years and are recorded as amortization of finance
income.
Discontinued Operations. In June 1993, the Company announced its
decision to dispose of seven outpatient healthcare facilities which it operated
or managed on a direct basis and one facility which was in the developmental
stage and not yet in operation. At June 30, 1993, the Company established a
reserve for the divestiture of the operations and recorded a loss on
discontinued operations and disposal of discontinued operations of $1.9 million
net of tax. This estimate was based on certain assumptions as to the likely
timing of the divestitures, the estimated proceeds to be received upon the sale
of certain of the facilities and the financial results of those operations
pending divestiture. These operations have been reflected as discontinued
operations in the Company's financial statements at June 30, 1993 and 1994.
The pre-tax loss from discontinued operations of $3.3 million at June 30, 1993
was comprised of $2.6 million relating to actual and estimated losses from
operations of this segment through the date of disposition and $720,000
relating to estimated losses to be incurred upon the disposition of the
segment's net assets.
At June 30, 1994, the Company had disposed of or entered into
definitive agreements to sell six of these outpatient healthcare facilities and
had written off the investment in and assets of the remaining two. In
connection with the disposal of these facilities, the Company retained certain
assets and liabilities of these facilities, primarily accounts receivable and
accounts payable. The Company's results of operations for fiscal 1994 include
an additional $3.1 million net after tax change in estimate in the amounts
reported as of June 30, 1993 for the disposition of this segment of the
Company's operations. The change in estimate was comprised almost entirely of
a change in the estimate, in the quarter ended June 30, 1994, in the estimated
proceeds from the disposition of underlying healthcare operations assets which
included goodwill, other intangibles, equipment and other assets. The change
in estimate reflects the complete disposal or write-off of the discontinued
operations segment.
RESULTS OF OPERATIONS
Impact of Financing Strategies on Results of Operations
The Company's financing strategy is to obtain permanent funding for
most of its equipment loans through securitization and to sell the remainder to
reduce borrower concentration and to manage the Company's leverage. When
funding loans through securitization, the issuer generally can structure the
securitization so that the proceeds received are treated either as borrowed
funds (i.e., debt on the issuer's financial statements) or funds it receives as
a result of the sale of the underlying equipment loans. The accounting method
to report finance income differs significantly depending on which of the two
structures the issuer uses. When the proceeds received are treated as
long-term debt, the issuer reports finance income over the term of the
equipment loans that are funded. When the proceeds are treated as funds
received from the sale of equipment loans, the income is generally reported at
the time the equipment loans are funded. The Company uses the first
alternative to recognize finance income when it sponsors a securitization; this
means the Company treats the proceeds received as long-term debt on its
financial statements and reports the finance income on its subordinated
interest over the term of the equipment loans that are funded. When the
Company sells loans, it generally
3
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
RESULTS OF OPERATIONS, (CONTINUED)
recognizes the unamortized finance income at the time the funding takes place;
however, it may recognize servicing and/or interest income on its subordinated
interest over the remaining term of the equipment loans sold. Since the
Company permanently funds most of its equipment loans by securitization or
other forms of structured finance and therefore reports the finance income from
these equipment loans over approximately five years, its near-term reported
earnings are comparatively lower than they would be if the Company sold all of
the loans.
Over the past two years the Company has focused its strategy on
increasing its market share. There can be no assurance that the Company's
historical growth rate or current profitability can be sustained in the future.
Additionally, the Company's expense levels are based in part on its
expectations as to future financing volumes and the Company may be unable to
adjust spending in a timely manner to compensate for a decrease in demand for
financing of medical equipment. Accordingly, operating results may be
adversely impacted. Fluctuations in operating results may also result in
volatility in the price of the Company's stock. The Company believes that
general economic conditions have not had a material adverse effect on the
Company's recent operating results. There can be no assurances, however, that
economic conditions will not have a material adverse effect on the Company in
the future.
Year Ended June 30, 1995 Compared to Year Ended June 30, 1994
The Company originated $338.0 million of loans for the year ended June
30, 1995, as compared to $163.0 million for the year ended June 30, 1994, an
increase of 107%. This increase resulted from increased funding capacity and
efficiency and improvements in sales and marketing capabilities, including the
implementation of the Wholesale Program. Of this $175.0 million increase,
$63.3 million represented loan originations under the Wholesale Program. The
Company experienced an 82% increase in its average net financed receivables to
$320.1 million for the year ended June 30, 1995, from $176.1 million for the
year ended June 30, 1994. Average net financed receivables is calculated based
on period beginning and period ending balances.
Amortization of finance income increased 87% to $34.3 million for the
year ended June 30, 1995 from $18.3 million for the year ended June 30, 1994.
The increase was primarily a result of the overall increase in the size of the
Company's net financed receivables.
Receivables financing income decreased 76% to $355,000 in fiscal 1995
from $1.5 million in fiscal 1994 due primarily to the fact that the Company
discontinued its billing and collecting of medical receivables operations late
in fiscal 1994.
The gain on sale of financing transactions, net increased 907% to $3.0
million for the year ended June 30, 1995 compared with a gain of $302,000 for
the same period in the prior year. The increase relates to the Company's need
to fund certain loans through whole loan sales to manage borrower
concentrations.
Other income, which consists primarily of late charges and other fees,
dividends on investment in investee's preferred stock and operating lease
income increased 52% to $1.3 million in fiscal 1995 as compared to $883,000 in
fiscal 1994. The increase is due primarily to the preferred stock dividend and
an increase in miscellaneous fees partially offset by a decrease in operating
lease income.
For the year ended June 30, 1995, interest expense increased 160% to
$22.9 million from $8.8 million during the same period in the prior year. For
the year ended June 30, 1995, the Company's average indebtedness (calculated
based on period beginning and period ending balances) increased 94% to $285.9
million from $147.3 million during the same period in the prior year. The
increase in interest expense and average indebtedness is primarily a result of
the growth of the Company's loan portfolio. As a percentage of total finance
and other income, interest expense was 59% in the year ended June 30, 1995
compared to 42% in the same period a year earlier. The increase in interest
expense as a percent of total finance and other income is primarily the result
of (a) increased short-term interest rates when utilizing variable interest
rate warehouse facilities including the Bank Revolving Credit Agreement for
interim funding purposes
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
RESULTS OF OPERATIONS, (CONTINUED)
as well as (b) increased long-term interest rates when utilizing asset
securitization for permanent funding purposes.
Margins earned were $16.2 million for the year ended June 30, 1995, as
compared to $12.1 million for the year ended June 30, 1994, an increase of 34%.
The increase was primarily a result of the overall increase in the size of the
Company's loan portfolio.
Selling, general and administrative expense ("SG&A") increased 18% to
$9.2 million for the year ended June 30, 1995 from $7.8 million for the year
ended June 30, 1994. The increase primarily reflects additional personnel, and
other costs associated with the growth in the Company's business. As a
percentage of total finance and other income, SG&A was 23% for the year ended
June 30, 1995 versus 37% for the same period last year. The percentage
decrease in SG&A is a result of the Company's ability to increase the volume of
transactions entered into and thus the size of its loan portfolio without a
proportionate increase in SG&A.
The Company's SG&A includes the provision for doubtful accounts. That
provision was $1.3 million for the year ended June 30, 1995 as compared to $1.7
million for the same period the previous year. On a quarterly basis, the
Company evaluates the collectibility of its receivables and records a provision
for amounts deemed uncollectible. In the opinion of management, the provisions
are adequate based on current trends in the Company's delinquencies and losses.
The Company's net earnings were $4.1 million or $.61 per share for the
year ended June 30, 1995 as compared to net earnings from continuing operations
of $2.3 million or $.34 per share in the prior year.
The Company's cash and cash equivalents at June 30, 1995 and June 30,
1994 were $2.0 million and $1.7 million, respectively. The increase was
attributable to the uninvested proceeds from the Company's most recent
securitization. The following describes the changes from June 30, 1994 to June
30, 1995 in the items which had the most significant impact on the Company's
cash flow during the year ended June 30, 1995.
The Company's net cash used in operating activities was $1.9 million
during the year ended June 30, 1995 compared to $18.7 million net cash provided
by operations for the year ended June 30, 1994. The increase in cash
utilization during the year ended June 30, 1995 stems largely from a reduction
in the Company's accounts payable from June 30, 1994 by $17.8 million. The
decrease in accounts payable, which consists primarily of amounts due
manufacturers of equipment that the Company has financed, stems from payments
made to these manufacturers during the year ended June 30, 1995.
The Company's net cash used in investing activities increased to
$174.2 million during the year ended June 30, 1995 as compared to $119.6
million for the year ended June 30, 1994. This increase is attributed
primarily to cash used to acquire equipment and to finance notes secured by
equipment of $319.0 million during the year ended June 30, 1995 compared to
$149.0 million for the year ended June 30, 1994. These uses of cash were
offset by $161.4 million and $34.6 million of receipts in excess of amounts
included in income and proceeds from sales of financing transactions for the
same periods.
The Company's net cash provided by financing activities was $176.4
million during the year ended June 30, 1995 up from $100.5 million for the year
ended June 30, 1994. This results from a net increase in the Company's
borrowings under warehouse facilities of $120.6 million for the year ended June
30, 1995 as compared to a $10.6 million net decrease in borrowings under
warehouse facilities for the year ended June 30, 1994.
Year Ended June 30, 1994 Compared to Year Ended June 30, 1993
The Company originated $163.0 million of loans in fiscal 1994, as
compared to $58.6 million in fiscal 1993, an increase of 178%. The increase
from period to period was primarily because the Company expanded its equipment
financing capabilities as a result of its acquisition of MEF Corp. in January
1993. The Company's average net financed
5
<PAGE> 45
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
RESULTS OF OPERATIONS, (CONTINUED)
receivables increased 73% to $176.1 million for the period ended June 30, 1994,
from $101.5 million for the period ended June 30, 1993. The Company
experienced a decrease in its residual valuation to $3.7 million at June 30,
1994, from $6.2 million at June 30, 1993. The decrease stems primarily from
the Company's sale of residuals totalling $1.2 million and the Company's
strategy to reduce the number of loans in its portfolio in which residual
values are recorded.
Amortization of finance income increased 69% to $18.3 million for
fiscal 1994 from $10.8 million for fiscal 1993. Although the Company's net
financed receivables increased significantly, the amortization of finance
income did not increase on a proportionate basis due to four factors: (i) the
Company's strategy to originate equipment loans in which residual positions are
not retained reduced the Company's rate of return on the respective
transactions; (ii) the Company has narrowed the interest rate spread between
the Company's costs of funding its equipment loans and the interest rates
charged its customers; (iii) the volume of equipment loans originated in fiscal
1994 was greater in the second half of the year than in the first half; and
(iv) the interest rates under the Company's warehouse facilities increased
during the year which increased interest expense and thus reduced margins.
Receivables financing income increased to $1.5 million in fiscal 1994
from $1.3 million in fiscal 1993. Although the Company's notes collateralized
by medical receivables portfolio increased significantly, receivable financing
income did not increase on a proportionate basis primarily because the increase
in the Company's volume of medical receivables financing transactions occurred
late in fiscal 1994. Consequently, receivables financing income as a percent
of the notes collateralized by medical receivables was reduced.
Gain on sale of financing transactions, net declined 73% to $302,000
in fiscal 1994 from $1.1 million in fiscal 1993 due to the reduction in the
number and dollar amount of equipment loans funded through whole loan sales and
the increased use of securitization to obtain permanent funding for the
Company's equipment loans.
Other income, which consists of late charges, operating lease income,
management income and other miscellaneous items decreased 55% to $883,000 in
fiscal 1994 from $2.0 million for fiscal 1993. This decrease was due to a
decline in net operating lease income. Net operating lease income declined 74%
to $359,000 in fiscal 1994 from $1.4 million in fiscal 1993 as a result of the
Company's strategy to reduce its originations of operating leases and the
expiration of two substantial transactions near the end of fiscal 1993.
Interest expense increased 76% to $8.8 million in fiscal 1994 from
$5.0 million in fiscal 1993. For fiscal 1994, the Company's average
indebtedness increased 92% to $147.3 million from $76.7 million during fiscal
1993. This increase stems primarily from an increase in the average
outstanding balance of long-term debt during fiscal 1994 as compared to fiscal
1993. As a percentage of total finance and other income, interest expense was
42% for fiscal 1994 as compared to 33% in fiscal 1993. The increase in
interest expense as a percent of total finance and other income is principally
the result of: (i) the Company narrowing the interest rate spread between the
cost of its funding and the interest rate charged its customers; (ii) the
interest rates under the Company's warehouse facilities increasing during the
year; and (iii) the Company's strategy to originate equipment loans in which
residual positions are not retained reducing the Company's rate of return and
thus its income on the respective equipment loans. Consequently, as a
percentage of finance and other income, interest expense increased in fiscal
1994.
Margins earned were $12.1 million in fiscal 1994 as compared to $10.2
million in fiscal 1993, an increase of 19%. The increase in fiscal 1994 over
fiscal 1993 was primarily a result of the overall increase in the size of the
Company's loan portfolio.
SG&A increased 37% to $7.8 million in fiscal 1994 from $5.7 million in
fiscal 1993. The largest component of this increase is a $1.4 million increase
in the Company's provision for doubtful accounts which in fiscal 1994 was
attributable to the growth of the Company's loan portfolio. The increase also
reflects costs associated with additional personnel and related costs incurred
in connection with the Company's acquisition of MEF Corp. during fiscal 1993,
the acquisition of Medical Device Capital Company during fiscal 1994 and the
expansion of its medical receivable
6
<PAGE> 46
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
RESULTS OF OPERATIONS, (CONTINUED)
financing business in fiscal 1994.
Equity in net losses of investees increased 375% to $242,000 in fiscal
1994 from $51,000 in fiscal 1993. The increase in net losses of investees is
primarily attributable to greater losses incurred by the Company's investees in
the first half of fiscal 1994 than in fiscal 1993. See "Business -- Other
Business Activities."
The Company's net earnings from continuing operations were $2.3
million, or $.34 per share, for fiscal 1994 as compared to $2.6 million, or
$0.39 per share, for fiscal 1993 a decrease of 12%. After giving effect to its
discontinued operations, the Company's loss was $885,000, or $0.13 per share,
for fiscal 1994 versus net earnings of $658,000, or $0.10 per share, for fiscal
1993. The Company's net earnings from continuing operations did not increase
in fiscal 1994 despite the growth of its loan portfolio and the increase in
finance and other income.
LIQUIDITY AND CAPITAL RESOURCES
General
The Company's equipment financing business requires substantial
amounts of capital and borrowings. The Company obtains warehouse funding from
commercial and investment banks. The Company's warehouse borrowings are
recourse obligations, while the Company's permanent funding is obtained
principally on a limited recourse basis. In the case of limited recourse
funding, the Company retains some risk of loss because it shares in any losses
incurred and/or it may forfeit the residual interest the Company has in the
underlying financed assets (if any) should defaults occur.
A substantial portion of the Company's debt represents permanent
funding of equipment loans obtained on limited recourse basis and is structured
so that the cash flow from the underlying loans services the debt. Most of the
Company's warehouse borrowings are used to temporarily fund the equipment loans
and are repaid with the proceeds obtained from the permanent funding and cash
flow from the underlying transactions.
As a result of the rapid growth of the Company's equipment financing
business, the amount of warehouse and permanent funding it requires has
significantly increased. To meet its requirements for increased warehouse
funding, the Company has expanded its warehouse facilities with banks, and has
obtained warehouse facilities with investment banking firms the Company uses
for its securitizations. To meet its requirement for increased permanent
funding, the Company has enhanced its ability to fund equipment loans by both
securitization and whole loan sales. If suitable sources of both warehouse and
permanent funding are not available in the future, the Company's growth will be
constrained and it may be forced to use less attractive funding sources in
order to ensure its liquidity.
Working capital financing for equipment financing customers is
occasionally provided by the Company where the loan is adequately secured by
acceptable collateral (typically accounts receivable) and the Company's other
credit criteria are satisfied.
In June 1994, the Company completed a $15.0 million private placement
of Convertible Subordinated Notes. The Convertible Subordinated Notes (i) are
convertible into shares of Common Stock at $10.60 per share at the discretion
of the noteholders; (ii) bear interest at a rate of 9 1/8% payable in quarterly
installments of interest only; and (iii) mature in June 2002. The proceeds
generated from the placement were utilized by the Company to repay a portion of
the existing debt under its principal warehouse facility and on a limited basis
to fund medical receivables loans. The agreement with respect to the
Convertible Subordinated Notes contains, among other things, limitations on the
Company's ability to pay dividends and to make certain other kinds of payments.
That agreement also prohibits the Company from incurring additional
indebtedness unless certain financial ratio tests are met. As of June 30,
1995, $500,000 aggregate principal of the Convertible Subordinated Notes had
been converted into 47,169 shares of Common Stock.
In August 1995, the Company completed an offering of 2,875,000 shares
of its common stock for which it received
7
<PAGE> 47
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
LIQUIDITY AND CAPITAL RESOURCES, (CONTINUED)
net proceeds of $29.7 million.
The Company believes that its present warehouse and permanent funding
sources are sufficient to fund the Company's current needs for its equipment
financing business. However, the Company will have to expand both its
warehouse and permanent funding capacity as well as to get into commercial
paper programs and other means of unsecured debt financing vehicles to meet the
Company's projected growth of its equipment financing business. In addition,
the growth of the Company's medical receivable financing business is dependent
on the Company's ability to obtain suitable funding for that business.
Continued expansion of the Company's business and its continued use of
securitizations will also require additional capital that the Company may seek
to obtain from public offerings and/or private placements of equity securities
and/or additional long-term debt financing. If the Company is unable to
continue to increase its capital base, its ability to expand its financing
business will be significantly constrained.
Warehouse Facilities
At September 26, 1995, the Company had available an aggregate of
$337.7 million under various warehouse facilities. The Company's primary
warehouse facility, a revolving credit agreement with a syndicate of banks (the
"Bank Revolving Credit Agreement"), provides the Company with $81.5 million in
borrowing capacity. Borrowings under the Bank Revolving Credit Agreement bear
interest at the Company's option at either a rate equal to 25 basis points over
the Prime rate established by NatWest Bank N.A. (NatWest) or a rate of
interest that varies from 150 to 180 basis points over the 30, 60 or 90-day
LIBOR rate based on the Company's leverage ratio from time to time as defined
in the Bank Revolving Credit Agreement. The Bank Revolving Credit Agreement is
renewable annually at the bank syndicate's discretion. However, the Bank
Revolving Credit Agreement provides that if the banks elect not to renew the
facility at the end of its stated term, December 31, 1995, the outstanding
loans automatically convert to four-year amortizing term loans at slightly
higher interest rates.
The Bank Revolving Credit Agreement requires the Company to limit all
of its borrowings to specified levels determined by ratios based on the
Company's tangible net worth and, under certain circumstances, to use specified
percentages of internally generated funds to pay for equipment purchases. The
Bank Revolving Credit Agreement also restricts the payment of dividends by DVI
Financial Services to the Company under certain circumstances. In addition,
the amount of funds available at any given time under the Bank Revolving Credit
Agreement is constrained by the amount, type and payment status of the
Company's equipment loans. If, at any time, a significant amount of the
Company's loans were to become delinquent, the availability of credit under the
Bank Revolving Credit Agreement would be reduced and, under other
circumstances, the Company could be required to prepay a portion of the amounts
outstanding under the Bank Revolving Credit Agreement. Since the Bank
Revolving Credit Agreement was established, the only collateral that was
eligible for borrowing purposes was equipment loans. To fund the growth of its
medical receivable financing business, the Company requested that the banks
participating in the Bank Revolving Credit Agreement begin to allow the Company
to use the credit facility to fund medical receivable loans. During the
quarter ended December 31, 1994, the banks agreed to permit borrowings by the
Company of up to $7.0 million collateralized by medical receivables.
The Company also has a $75.0 million interim funding facility with
Prudential Securities Realty Funding Corporation (the "Prudential Facility").
This interim funding facility is available for certain transactions which are
to be securitized under specified terms and bear interest at a rate equal to 75
basis points over the 30, 60 or 90-day LIBOR rate. The Prudential Facility
also allows the Company to borrow up to $4.3 million in special advances that
bear interest at a rate equal to 150 basis points over the 30-day LIBOR until
October 31, 1995. The $4.3 million of special advances were repaid in August
1995. Borrowings under the Prudential Facility, including the special advances,
are secured by (i) certain equipment loans and the equipment financed
thereunder, (ii) the Company's interest in certain asset-backed notes, and
(iii) the Company's rights to receive funds from certain securitized equipment
loans. All borrowings under the Prudential Facility mature on October 31,
1995. The Company has a second facility with Prudential, which provides the
Company with $5.5 million in warehouse funding to make medical receivables
loans to approved borrowers. Borrowings under the $5.5 million
8
<PAGE> 48
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
LIQUIDITY AND CAPITAL RESOURCES, (CONTINUED)
Prudential Facility bear interest at a rate equal to the Prime rate established
by Morgan Guaranty Trust Company of New York. The borrowings are secured by
medical receivables loans originated by the Company and the underlying
receivables. This facility matures on November 30, 1995.
The Company has a $75.0 million interim funding facility with
ContiTrade Services Corporation (the "Conti Facility") which provides the
Company with warehouse financing for certain equipment loans to be securitized
or otherwise permanently funded through the Conti Facility. Borrowings under
this facility bear interest at a rate equal to 150 basis points over the 30 or
60-day LIBOR rate which is fixed to the related funding period. This facility
matures on October 31, 1995.
In July 1995, the Company obtained a $100.0 million interim funding
facility with Union Bank of Switzerland which provides the Company with
warehouse financing for certain equipment loans to be securitized. Borrowings
under this facility are secured by certain equipment loans and the equipment
financed thereunder. Borrowings under this facility bear interest at a rate
equal to 90 basis points over a 30, 60 or 90-day LIBOR rate which is fixed to
the related funding period. This facility matures on November 27, 1995.
The Company's use of securitization significantly affects its need for
warehouse facilities. When using securitization, the Company is required to
hold loans in warehouse facilities until a sufficient quantity is accumulated
to meet the various requirements of the credit rating agencies and others
involved, and to make a securitization cost effective. Generally, loans
totalling $50 to $100 million will be placed in each securitization pool.
When the Company borrows funds through warehouse facilities, it is
exposed to a certain degree of risk caused by interest rate fluctuations.
Although the Company's equipment loans are structured and permanently funded on
a fixed interest rate basis, it uses warehouse facilities until permanent
funding is obtained. Because funds borrowed through warehouse facilities are
obtained on a floating interest rate basis, the Company uses hedging techniques
to protect its interest rate margins during the period that warehouse
facilities are used. The Company's sole reason for using hedging techniques is
to offset the loss that occurs when loans are funded on an interim basis and
interest rates rise causing the Company's interest rate margins on the loans to
decline. Therefore, gains or losses generated through hedging techniques only
benefit the Company to the extent they offset the corresponding reduction in
margin due to rising interest rates until the loans are permanently funded.
The Company's primary hedging technique is to assume short positions in U.S.
Treasury obligations of comparable maturities to the life of its loans. To the
extent hedging gains or losses resulting from U.S. Treasury contracts are
significant, the resulting cash payments or receipts may impact the Company's
liquidity.
Permanent Funding Methods
The Company has completed seven securitizations or other structured
finance transactions totalling $414.8 million, including two public debt issues
of $75.7 million and $90.0 million and five private placements of debt and
whole loan sales totalling $249.1 million. In January 1994, the Company filed
a $350 million registration statement (Registration No. 33-74446) with the
Commission to provide for the future issuance of securitized debt in a series
of transactions pursuant to the Commission's "shelf" registration rule. The
registration statement was declared effective by the Commission on June 23,
1994. The $75.7 and $90.0 million public debt issues were the two initial
fundings under the $350 million shelf registration. The Company expects to
continue to use securitization, on both a public and private basis, as its
principal means to permanently fund its loans for the foreseeable future,
except when issues of borrower concentration exist that warrant the sale of
loans.
The Company's use of securitization significantly affects its
liquidity and capital requirements due to the amount of time required to
assemble a portfolio of loans to be securitized. When using securitization,
the Company is required to hold loans until a sufficient quantity is
accumulated so as to attract investor interest and allow for a cost effective
placement. This increases the Company's exposure to changes in interest rates
and temporarily reduces its warehouse facility liquidity.
Generally, the Company does not have binding commitments for permanent
funding, either through securitization
9
<PAGE> 49
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
LIQUIDITY AND CAPITAL RESOURCES, (CONTINUED)
or whole loan sales. The Company has non-binding agreements with investment
banking entities to fund future equipment loans through securitization. While
the Company expects to be able to continue to obtain the permanent funding it
requires for its equipment financing business, there can be no assurance that
it will be able to do so. If, for any reason, any of these types of funding
were unavailable in the amounts and on terms deemed reasonable by the Company,
the Company's equipment financing activities would be adversely affected. The
Company believes cash flows generated from operations and its warehouse
facilities are sufficient to meet its near-term obligations.
INCOME TAX ISSUES
Historically, the Company has deferred a substantial portion of its
federal and state income tax liability because of its ability to obtain
depreciation deductions from transactions structured as fair market value
leases. Over the past 18 months, the proportion of transactions originated by
the Company structured as fair market value leases has declined significantly,
and the Company expects that trend to continue. In addition, the Company
disposed of a portion of its equipment residual portfolio in fiscal 1994 and
may continue to do so in future periods. As a result, the Company expects that
in future periods its ability to defer its income tax liability will
correspondingly decline. Additionally, the Company believes its effective tax
rate will increase in future periods as a result of higher state tax rates in
certain regions in which the Company conducts its business.
INFLATION
The Company does not believe that inflation has had a material effect
on its operating results during the past three years. There can be no
assurance that the Company's business will not be affected by inflation in
the future.
10
<PAGE> 50
CONSOLIDATED FINANCIAL STATEMENTS
DVI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June 30,
---------------------------
1995 1994
------------ ------------
<S> <C> <C>
CASH AND CASH EQUIVALENTS (Note 2) . . . . . . . . . . . . . . . . . . . . $ 1,952,848 $ 1,713,769
------------ ------------
CASH AND SHORT-TERM INVESTMENTS,
RESTRICTED (Note 4) . . . . . . . . . . . . . . . . . . . . . . . . . . 12,240,604 13,064,814
------------ ------------
RECEIVABLES:
Investment in direct financing leases and notes secured by equipment
(Notes 2, 5, 6, 7, 8, 12 and 16) -
Receivable in installments . . . . . . . . . . . . . . . . . . . . . . 443,244,591 254,095,802
Receivable in installments - related parties . . . . . . . . . . . . . 8,254,953 16,427,684
Residual valuation . . . . . . . . . . . . . . . . . . . . . . . . . . 3,577,753 3,730,592
Unearned income . . . . . . . . . . . . . . . . . . . . . . . . . . . . (74,958,952) (48,387,132)
------------ ------------
Net investment in direct financing leases and
notes secured by equipment . . . . . . . . . . . . . . . . . . . 380,118,345 225,866,946
------------ ------------
Other receivables (Note 2) -
From sale of leases and notes secured by equipment . . . . . . . . . . 113,143 911,585
Patient service accounts receivable (net of contractual allowances of
$2,014,073 (1995) and $2,607,574 (1994)) . . . . . . . . . . . . . . 374,765 3,667,123
Notes collateralized by medical receivables . . . . . . . . . . . . . . 22,486,847 6,006,600
------------ ------------
Total other receivables . . . . . . . . . . . . . . . . . . . . . . 22,974,755 10,585,308
------------ ------------
Less: Allowance for possible losses on receivables . . . . . . . . . . . . (3,282,321) (2,497,916)
------------ ------------
NET RECEIVABLES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 399,810,779 233,954,338
------------ ------------
EQUIPMENT ON OPERATING LEASES (Notes 2 and 5)
(net of accumulated depreciation of $1,646,041 (1995) and
$1,163,591 (1994)) . . . . . . . . . . . . . . . . . . . . . . . . . 2,722,288 2,893,683
------------ ------------
FURNITURE AND FIXTURES (Note 2)
(net of accumulated depreciation of $725,967 (1995) and
$525,032 (1994)) . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,468,221 817,135
------------ ------------
INVESTMENTS IN INVESTEES (Notes 2 and 6) . . . . . . . . . . . . . . . . . 7,655,950 4,646,382
------------ ------------
GOODWILL, NET (Notes 2 and 15) . . . . . . . . . . . . . . . . . . . . . . 1,866,667 2,024,253
------------ ------------
OTHER ASSETS (Note 2) . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,213,411 6,834,972
------------ ------------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . $432,930,768 $265,949,346
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
11
<PAGE> 51
DVI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
JUNE 30,
--------------------------
1995 1994
------------ ------------
<S> <C> <C>
ACCOUNTS PAYABLE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,022,644 $ 23,861,905
------------ ------------
OTHER ACCRUED EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . 7,638,639 8,215,021
------------ ------------
BORROWINGS UNDER WAREHOUSE FACILITIES (Note 7) . . . . . . . . . . . . . . 155,172,591 34,586,373
------------ ------------
DEFERRED INCOME TAXES (Notes 2 and 9) . . . . . . . . . . . . . . . . . . . 4,717,059 2,329,205
------------ ------------
LONG-TERM DEBT, NET:
Discounted receivables (primarily limited recourse) (Notes 5, 8 and 16) 205,376,397 148,851,584
Convertible subordinated notes (Notes 8, 10 and 12) . . . . . . . . . . 13,753,614 14,112,000
------------ ------------
Total long-term debt, net . . . . . . . . . . . . . . . . . . . . . 219,130,011 162,963,584
------------ ------------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . 392,680,944 231,956,088
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 13 and 15)
SHAREHOLDERS' EQUITY (Notes 6, 10, 11 and 15):
Preferred Stock, $10.00 par value; authorized,
100,000 shares; no shares issued
Common Stock, $.005 par value; authorized 13,000,000 shares,
outstanding 6,711,680 shares (1995) and 6,567,295 shares (1994) . . . 33,558 32,836
Additional capital . . . . . . . . . . . . . . . . . . . . . . . . . . 29,281,063 28,155,502
Unrealized gain on available-for-sale investments, net of deferred
taxes of $768,707 . . . . . . . . . . . . . . . . . . . . . . . . . 1,061,548
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,873,655 5,804,920
------------ ------------
TOTAL SHAREHOLDERS' EQUITY . . . . . . . . . . . . . . . . . . . 40,249,824 33,993,258
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY . . . . . . . . . . . $432,930,768 $265,949,346
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
12
<PAGE> 52
DVI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Finance and Other Income (Note 2):
Amortization of finance income . . . . . . . . . . . . $34,285,584 $18,264,742 $10,826,020
Receivables financing income . . . . . . . . . . . . . 355,430 1,461,677 1,295,514
Gain on sale of financing transactions, net . . . . . 3,042,082 302,053 1,103,528
Other income . . . . . . . . . . . . . . . . . . . . . 1,343,663 882,667 1,973,490
----------- ----------- -----------
Finance and Other Income . . . . . . . . . . . . . . . 39,026,759 20,911,139 15,198,552
Interest expense . . . . . . . . . . . . . . . . . . . 22,859,535 8,832,836 5,004,744
----------- ----------- -----------
Margins Earned . . . . . . . . . . . . . . . . . . . . . . . 16,167,224 12,078,303 10,193,808
Selling, General and Administrative expense . . . . . 9,152,164 7,765,112 5,734,981
----------- ----------- -----------
Earnings from Continuing Operations Before
Provision for Income Taxes, Equity in Net Loss of
Investees and Discontinued Operations . . . . . . . . . . 7,015,060 4,313,191 4,458,827
Provision for Income Taxes (Notes 2 and 9) . . . . . . . . . 2,946,325 1,811,540 1,828,118
----------- ----------- -----------
Earnings from Continuing Operations Before Equity in Net
Loss of Investees and Discontinued Operations . . . . . . 4,068,735 2,501,651 2,630,709
Equity in Net Loss of Investees . . . . . . . . . . . . . . . (242,150) (50,547)
----------- ----------- -----------
Earnings from Continuing Operations . . . . . . . . . . . . . 4,068,735 2,259,501 2,580,162
Discontinued Operations (Note 3):
Loss from discontinued operations net of tax
of $51,000 (1994) and $1,064,529 (1993) . . . . . . . 74,000 1,497,398
Loss on disposal of discontinued operations, net of tax
of $2,212,536 (1994) and $295,200 (1993) . . . . . . . 3,070,877 424,800
----------- ----------- -----------
Loss from Discontinued Operations . . . . . . . . . . . . 3,144,877 1,922,198
----------- ----------- -----------
Net Earnings (Loss) . . . . . . . . . . . . . . . . . . . . $ 4,068,735 $ (885,376) $ 657,964
=========== =========== ===========
Net Earnings (Loss) Per Share (Note 2):
From Continuing Operations . . . . . . . . . . . . . . $ 0.61 $ 0.34 $ 0.39
From Discontinued Operations . . . . . . . . . . . . . (0.47) (0.29)
----------- ----------- -----------
Net Earnings (Loss) Per Share . . . . . . . . . . . . . . . . $ 0.61 $ (0.13) $ 0.10
=========== =========== ===========
Weighted Average Number of Shares
Outstanding (Note 2) . . . . . . . . . . . . . . . . . . 6,652,000 6,717,000 6,601,000
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
13
<PAGE> 53
DVI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
COMMON STOCK GAIN ON
$.005 PAR AVAILABLE- TOTAL
-------------------- ADDITIONAL FOR-SALE RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL INVESTMENTS EARNINGS EQUITY
-------- ------- ------------ ----------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT JULY 1, 1992 . . . . . . . . 6,530,128 $32,651 $27,940,934 $ -- $6,032,332 $34,005,917
Issuance of common stock upon
exercise of stock options . . . . 167 1 532 533
Net earnings . . . . . . . . . . . . 657,964 657,964
--------- ------- ----------- ---------- -----------
BALANCES AT JUNE 30, 1993 . . . . . . . . 6,530,295 32,652 27,941,466 6,690,296 34,664,414
Issuance of common stock upon
exercise of stock options . . . . 37,000 184 214,036 214,220
Net loss . . . . . . . . . . . . . . (885,376) (885,376)
--------- ------- ----------- ---------- -----------
BALANCES AT JUNE 30, 1994 . . . . . . . . 6,567,295 32,836 28,155,502 5,804,920 33,993,258
Issuance of common stock upon
exercise of stock options . . . . 97,216 486 625,797 626,283
Conversion of subordinated notes . . 47,169 236 499,764 500,000
Unrealized gain on available-for-sale
investments, net of deferred taxes
of $768,707 (Note 2) . . . . . . . 1,061,548 1,061,548
Net earnings . . . . . . . . . . . . 4,068,735 4,068,735
--------- ------- -----------
BALANCES AT JUNE 30, 1995 . . . . . . . . 6,711,680 $33,558 $29,281,063 $1,061,548 $9,873,655 $40,249,824
========= ======= =========== ========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
14
<PAGE> 54
DVI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------------------------
1995 1994 1993
------------- ------------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) . . . . . . . . . . . . . . . . . . $ 4,068,735 $ (885,376) $ 657,964
------------- ------------- ------------
Adjustments to reconcile net earnings (loss) to net
cash provided by (used in) operating activities:
Equity in net loss of investees . . . . . . . . . 242,150 16,780
Minority interest in subsidiaries . . . . . . . . (132,404)
Depreciation and amortization . . . . . . . . . . 7,237,120 1,902,873 4,515,108
Additions to allowance accounts, net . . . . . . . 190,904 979,210 1,153,585
Gain on sale of financing transactions, net . . . (3,042,082) (302,053) (1,103,528)
Deferred income taxes . . . . . . . . . . . . . . 1,619,147 (2,152,084) 228,923
Provision for discontinued operations . . . . . . 1,865,500 720,000
Loss on disposition of assets . . . . . . . . . . 3,542,913
Changes in assets and liabilities (net of effects
from purchase of acquired entities):
(Increases) decreases in:
Cash and short-term investments, restricted . . . 824,210 (6,239,329) (2,821,330)
Other receivables . . . . . . . . . . . . . . . . 3,182,282 1,516,920 (4,016,448)
Receivables from sale of leases
and notes secured by equipment . . . . . . . . . 798,442 1,948,744 1,212,300
Other assets . . . . . . . . . . . . . . . . . . 1,621,561 (679,089) (4,207,045)
Increases (decreases) in:
Accounts payable . . . . . . . . . . . . . . . (17,839,261) 16,531,725 (475,490)
Other accrued expenses . . . . . . . . . . . . (576,382) 409,889 116,464
------------- ------------- ------------
Total adjustments . . . . . . . . . . . . . . . . (5,984,059) 19,567,369 (4,793,085)
------------- ------------- ------------
Net cash provided by (used in)
operating activities . . . . . . . . . . . . . . (1,915,324) 18,681,993 (4,135,121)
------------- ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cost of equipment acquired . . . . . . . . . . . . . . (319,010,358) (149,027,781) (62,633,598)
Receipts in excess of amounts included in income and
proceeds from sales of financing transactions . . . 161,447,928 34,565,693 29,391,908
Net increase in notes collateralized by medical
receivables . . . . . . . . . . . . . . . . . . . . . (16,480,247) (6,006,600)
Furniture and fixtures additions . . . . . . . . . . . (1,025,957) 17,606 (1,095,433)
Investments in common and preferred stock
of investees . . . . . . . . . . . . . . . . . . . . 149,998 (1,399,614)
Amounts received from minority partners . . . . . . . 116,944
Payment for purchase of acquired entities . . . . . . (1,435,720)
Cash proceeds from sale of assets . . . . . . . . . . 125,000
Cash received from sale of common and preferred
stock of investee . . . . . . . . . . . . . . . . . 827,989 540,000
------------- ------------- ------------
Net cash (used in) investing activities . . . . . . . $(174,240,645) $(119,636,084) $(37,055,513)
------------- ------------- ------------
</TABLE>
(Continued)
15
<PAGE> 55
DVI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------------------
1995 1994 1993
-------------- --------------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock options . . . . . . . . . . . . . . $ 626,283 $ 214,220 $ 533
Borrowings under:
Warehouse facilities . . . . . . . . . . . . . . 534,632,665 216,113,152 58,076,360
Long-term debt . . . . . . . . . . . . . . . . . . 107,510,263 146,855,283 44,534,864
Repayments on:
Warehouse facilities . . . . . . . . . . . . . . (414,046,447) (226,748,005) (44,204,047)
Long-term debt . . . . . . . . . . . . . . . . . (52,327,716) (35,965,998) (17,554,080)
-------------- --------------- -----------
Net cash provided by financing activities . . . . . 176,395,048 100,468,652 40,853,630
-------------- --------------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS . . . . . . . . . . . . . . . 239,079 (485,439) (337,004)
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR . . . . . . . . . . . . . . . . . 1,713,769 2,199,208 2,536,212
-------------- --------------- -----------
CASH AND CASH EQUIVALENTS,
END OF YEAR . . . . . . . . . . . . . . . . . . . . $ 1,952,848 $ 1,713,769 $ 2,199,208
============== =============== ===========
Cash paid during the year for:
Interest . . . . . . . . . . . . . . . . . . . . . . $ 22,400,387 $ 5,579,168 $ 5,137,310
============== =============== ===========
Income taxes . . . . . . . . . . . . . . . . . . . . $ 1,650,342 $ 551,848 $ 1,087,436
============== =============== ===========
SUPPLEMENTAL DISCLOSURES OF NONCASH
TRANSACTIONS:
Assets acquired and liabilities assumed in
connection with business acquisitions:
Fair value of net assets acquired . . . . . . . . . $ 2,000,000 $ 1,906,008
=============== ===========
Liabilities assumed . . . . . . . . . . . . . . . . $ 470,288
===========
</TABLE>
During the year ended June 30, 1995, $500,000 of Convertible Subordinated Notes
was converted into common stock.
Unrealized gains on available-for-sale investments including restricted
short-term investments and investments in investees total $1,061,548, net of
deferred taxes of $768,707, as of June 30, 1995.
The accompanying notes are an integral part of these
consolidated financial statements.
16
<PAGE> 56
DVI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
During the year ended June 30, 1994 the following noncash transactions occurred
in conjunction with the disposal of the Company's healthcare operations segment
(See Note 3).
<TABLE>
<S> <C>
Net assets sold or written off:
Furniture and fixtures . . . . . . . . . . . . . . . $ 733,065
Equipment on operating leases . . . . . . . . . . . 2,615,011
Receivables . . . . . . . . . . . . . . . . . . . . 1,106,664
Other assets, net . . . . . . . . . . . . . . . . . 686,842
----------
5,141,582
----------
Liabilities assumed by Company:
Accounts payable . . . . . . . . . . . . . . . . . . 544,500
Accrued liabilities . . . . . . . . . . . . . . . . 1,758,442
----------
2,302,942
----------
Less proceeds:
Cash . . . . . . . . . . . . . . . . . . . . 125,000
Notes receivable . . . . . . . . . . . . . . 3,776,611
----------
3,901,611
----------
Loss on disposal of assets $3,542,913
==========
</TABLE>
See Note 6 for discussion of additional noncash transactions.
The accompanying notes are an integral part of these
consolidated financial statements.
17
<PAGE> 57
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. GENERAL
DVI, Inc. (the "Company" or "DVI") is engaged in the business of providing
equipment financing and related services for users of diagnostic imaging,
radiation therapy and other medical technologies. The Company's customer base
consists principally of outpatient healthcare providers, physician groups and
hospitals. By the terms of the underlying financing contracts, the Company's
customers are generally considered in default if payment on a contract has not
been received. Equipment under direct financing leases and notes secured by
equipment serve as collateral for unpaid contract payments. Receivables under
medical receivables financing transactions serve as collateral for unpaid
contract payments.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation Policy - The consolidated financial statements include the
accounts of DVI and its wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated.
Cash Equivalents - Cash equivalents include highly liquid securities with
original maturities of 90 days or less.
Investment in Direct Financing Leases and Notes Secured by Equipment - At
contract commencement, the Company records the gross contract receivable,
initial direct costs, estimated residual value of the financed equipment, if
any, and unearned income. At June 30, 1995 and 1994, unamortized initial
direct costs amounted to $6,878,083 and $5,444,135, respectively. Initial
direct costs are amortized over the life of the contract on the interest method
which reflects a constant effective yield.
Receivables from Sale of Leases and Notes Secured by Equipment - The
receivables from sale of leases and notes secured by equipment primarily relate
to the sale of financing transactions which were complete as of the end of the
respective period.
Patient Service Accounts Receivable - Patient service accounts receivable
relate to billings for services performed by the Company's discontinued
healthcare segment of its business (See Note 3). The receivables have been
stated at their estimated net realizable value at June 30, 1995 and 1994.
Notes Collateralized by Medical Receivables - Notes collateralized by medical
receivables consist of notes receivable resulting from working capital and
other loans made to entities in the healthcare industry and receivables
purchased from unrelated entities. The purchased receivables are stated at the
lower of the Company's cost or the estimated collectible value.
Equipment on Operating Leases - Leases which do not meet the criteria for
direct financing leases are accounted for as operating leases. Equipment on
operating leases are recorded at cost and depreciated on a straight-line basis
over the estimated useful life of the equipment. Rental income is recorded
monthly on a straight-line basis. Initial direct costs directly associated
with operating leases are deferred and amortized over the lease term on a
straight-line basis.
Furniture and Fixtures - Furniture and fixtures are stated at cost less
accumulated depreciation and are depreciated using the straight-line method
over their estimated useful lives (generally five years).
Short-Term Investments, Restricted and Investments in Investees - The Company
has adopted Statement of Financial Accounting Standards (SFAS) No. 115,
Accounting for Certain Investments in Debt and Equity Securities. SFAS No. 115
requires the classification of investments in debt and equity securities into
three categories: held to maturity, trading and available-for-sale. Debt
securities that are purchased with the positive intent and ability to hold to
maturity are classified as held to maturity securities and reported at
amortized cost. Debt and equity securities that are reclassified from
available-for-sale or bought and held principally for the purpose of selling
them in the near-term are classified as trading securities and reported at fair
value, with unrealized gains and losses included in earnings. At June 30,
1995, the Company has only available-for-sale securities. Equity securities
classified as available-for-sale securities are reported at estimated fair
value, with unrealized gains and losses excluded from earnings and reported as
a separate component of equity, net of deferred taxes. The cumulative effect
of the adoption of the new statement was not significant.
The investments in investees consist of common and nonvoting preferred equity
interests in unconsolidated subsidiaries. Prior to fiscal 1994, the Company
accounted for its investments in the common stock of these subsidiaries using
the equity method of accounting. Subsequent to fiscal 1993, when the Company
no longer exerted significant influence over the investees, the Company began
accounting for the investees utilizing the cost method. During the year ended
June 30, 1994, the investment in the common stock of one investee was written
down to zero to reflect the Company's cumulative share of equity losses in the
investee and the investment in the preferred stock of this investee was
recorded at the lower of cost or estimated realizable value.
18
<PAGE> 58
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (CONTINUED)
As of June 30, 1995, the Company's investments in common stock are classified
as available for sale and carried at estimated fair value. (See Note 6.)
Goodwill - Goodwill at June 30, 1995 and 1994 represents the estimated excess
contingent purchase price over the net tangible assets stemming from the
acquisition of Medical Equipment Finance Corporation ("MEF Corp."). (See Note
15.) Goodwill relating to the acquisition of MEF Corp. is being amortized over
a fifteen year period. The Company evaluates the recoverability of its
goodwill separately for each applicable business acquisition at each balance
sheet date. The recoverability of goodwill is determined by comparing the
carrying value of the goodwill to the estimated operating income of the related
entity on an undiscounted cash flow basis. Should the carrying value of the
goodwill exceed the estimated operating income for the expected period of
benefit, an impairment for the excess is recorded at that time.
Other Assets - Other assets consist of prepaid financing costs and equipment
held for sale or release which is stated at the lower of cost or its net
realizable value.
Debt Issuance Costs - Debt issuance costs related to securitizations and
convertible subordinated notes are offset against the related debt and are
being amortized over the life of the notes using the interest method.
Amortization of Finance Income - Amortization of finance income primarily
consists of the interest component of payments received on notes secured by
equipment (or medical receivables) and direct financing leases and is
calculated using the interest method so as to approximate a level rate of
return on the net investment. It also includes servicing fees earned for
billing and collecting services related to the asset securitizations (See Note
8) and a gain on sale of residual interests of $799,661 during the fiscal year
ended June 30, 1994.
Receivables Financing Income - Receivables financing income is primarily
related to income generated from receivable purchases and income from
billing/collecting activities which the Company has curtailed. Income from
medical receivables purchases is recognized ratably as collections are made.
Gain on Sale of Financing Transactions - Gains arising from the sale of direct
financing leases and investments in notes secured by equipment occur when the
Company obtains permanent funding through the whole loan sale of a transaction
to a third party. Subsequent to a sale, the Company has no or limited
remaining interest in the transaction or equipment and no obligation to
indemnify the purchaser in the event of a default on the transaction by the
obligor, except when the sale agreement provides for participation in defined
excess interest spreads or limited recourse in which the Company guarantees
reimbursement under the agreement up to a specific maximum, which is of nominal
value. Upon consummation of the sale transaction, the Company records a
provision for anticipated losses under recourse provisions. Consequently, in
the event of default by the obligor, the lender would exercise its rights under
the lien with limited or no further recourse against the Company,
notwithstanding any facts or circumstances that might promulgate the lender's
assertion under representations and warranties made by the Company.
Other Income - Other income consists primarily of late charges, dividends on
investments in investee's preferred stock and income from operating leases.
Taxes on Income - The Company accounts for taxes under Statement of Financial
Accounting Standards No. 109 ("SFAS 109"), Accounting for Income Taxes.
Deferred taxes on income result from temporary differences between the
reporting of income for financial statement and tax reporting purposes. Such
differences arise principally from recording hedging gains and losses and from
lease transactions in which the operating lease method of accounting is used
for tax purposes and the financing lease method, as described above, is used
for financial statement purposes. Under the operating lease method, leased
equipment is recorded at cost and depreciated over the useful life of the
equipment and lease payments are recorded as revenue when earned.
Net Earnings (Loss) Per Share - Net earnings (loss) per share is based on the
modified treasury stock method, except when the results of this method are
anti-dilutive. In fiscal 1995, 1994 and 1993, net earnings (loss) per share is
calculated using the weighted average common shares outstanding during the year
because the results of the modified treasury stock method were antidilutive.
For the quarters ended June 30, 1995 and March 31, 1995, fully diluted net
earnings per share is calculated using the modified treasury stock method as
the exercise of stock options, warrants and the conversion of the subordinated
19
<PAGE> 59
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (CONTINUED)
notes has a dilutive effect on earnings per share.
Recent Accounting Developments - The Company adopted SFAS No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of, as of July 1, 1994. The impact of the adoption did not have a
material impact on the Company's operations.
In May 1993, the Financial Accounting Standards Board (FASB) issued SFAS No.
114, Accounting by Creditors for Impairment of a Loan. SFAS No. 114 indicates
that a creditor should evaluate the collectibility of both contractual interest
and contractual principal when assessing the need for a loss accrual. The
Company must apply SFAS No. 114 in fiscal year 1996. The Company does not
believe that application of SFAS No. 114, as amended, will have a material
impact on its operations.
Reclassifications - Certain amounts as previously reported have been
reclassified to conform to the year ended June 30, 1995 presentation.
NOTE 3. DISCONTINUED OPERATIONS
On June 30, 1993, the Company formally adopted a plan to divest substantially
all of its healthcare operations.
The following table presents net revenues, losses and selected balance sheet
information relating to the healthcare operations segment as of, and for the
years ended, June 30, 1994 and 1993.
<TABLE>
<CAPTION>
1994 1993
----------- ------------
<S> <C> <C>
Net service income . . . . . . . . . . . . . . . $6,095,397 $6,455,932
Loss from discontinued operations,
net of tax of $51,000 (1994) and $1,064,529
(1993) . . . . . . . . . . . . . . . . . . . 74,000 1,497,398
Loss on disposal of discontinued operations, net
of tax of $2,212,536 (1994) and $295,200 (1993) 3,070,877 424,800
Net assets . . . . . . . . . . . . . . . . . . . 1,300,000 7,589,025
</TABLE>
In June 1993, the Company adopted a formal plan to discontinue its DVI
Healthcare Operations segment consisting of seven outpatient healthcare
facilities which it operated or managed on a direct basis and one facility
which was in the developmental stage and not yet in operation. At June 30,
1993, the Company established a reserve for the divestiture of the operations
and recorded a loss on discontinued operations and disposal of discontinued
operations of $1.9 million net of tax. This estimate was based on certain
assumptions as to the likely timing of the divestitures, the estimated proceeds
to be received upon the sale of certain of the facilities and the financial
results of those operations pending divestiture. These operations have been
reflected as discontinued operations in the Company's financial statements at
June 30, 1993 and 1994. The pre-tax loss from discontinued operations of $3.3
million at June 30, 1993 was comprised of $2.6 million relating to actual and
estimated losses from operations of this segment through the date of
disposition and approximately $700,000 relating to estimated losses to be
incurred upon the disposition of the segment's net assets.
At June 30, 1994, the Company had disposed or entered into definitive
agreements to sell five of these outpatient healthcare facilities and had
written off the investment and assets of the remaining two. In connection with
the disposal of these facilities, the Company retained certain assets and
liabilities of these facilities, primarily accounts receivable and accounts
payable. The change in estimate reflects the complete disposal or write-off of
the discontinued operations segment.
NOTE 4. CASH AND SHORT-TERM INVESTMENTS, RESTRICTED
Cash and short-term investments, restricted consist of cash, certificates of
deposit and U.S. treasury obligations - available for sale maintained by the
Company which are pledged as collateral for certain limited recourse borrowings
related to direct financing leases, notes secured by equipment and operating
leases. The estimated fair value and the amortized cost of U.S. Treasury
obligations - available for sale as of June 30, 1995 is $10,260,303. There
were no sales of U.S. Treasury
20
<PAGE> 60
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
NOTE 4. CASH AND SHORT-TERM INVESTMENTS, RESTRICTED, (CONTINUED)
obligations during the year ended June 30, 1995.
NOTE 5. INVESTMENT IN DIRECT FINANCING LEASES AND NOTES
SECURED BY EQUIPMENT AND EQUIPMENT ON OPERATING LEASES
Receivables in installments are receivable in monthly installments of varying
amounts and are collateralized by the underlying equipment. Receivables from
operating leases relate to noncancellable operating leases and are receivable
in monthly installments of varying amounts. Information regarding scheduled
collections for direct financing leases, notes secured by equipment and
operating leases are as follows:
<TABLE>
<CAPTION>
DIRECT FINANCING LEASES
AND NOTES SECURED OPERATING
BY EQUIPMENT LEASES
------------ ----------
YEAR ENDING JUNE 30,
--------------------
<S> <C> <C>
1996 . . . . . . . . . . . . . . . . . $149,894,000 $424,009
1997 . . . . . . . . . . . . . . . . . 100,618,000 316,034
1998 . . . . . . . . . . . . . . . . . 89,008,000 92,500
1999 . . . . . . . . . . . . . . . . . 66,733,000
2000 . . . . . . . . . . . . . . . . . 34,082,000
Thereafter . . . . . . . . . . . . . . 11,164,544
------------ --------
451,499,544 832,543
Residual valuation . . . . . . . . . . 3,577,753
------------ --------
Total . . . . . . . . . . . . . . . . . $455,077,297 $832,543
============ ========
</TABLE>
Residual valuation represents the estimated amount to be received at contract
termination from the disposition of equipment financed under direct financing
leases and notes secured by equipment. Amounts to be realized at contract
termination depend on the fair market value of the related equipment and may
vary from the recorded estimate. Residual values are reviewed on an annual
basis to determine if the equipment's fair market value is below its recorded
value.
During the year ended June 30, 1995, the Company sold receivables to third
parties realizing gains of approximately $3.0 million. In connection with the
sales, the Company retained subordinated interests in the receivables. Under
the purchase agreement, the Company is required to fund any losses on the
receivables up to its subordinated interests. The Company maintains an
allowance for estimated losses related to its subordinated interests.
At June 30, 1995, direct financing lease receivables amounting to $264.6
million are assigned as collateral for the long-term debt (See Note 8).
NOTE 6. INVESTMENTS IN INVESTEES
At June 30, 1995, the Company held investments in two entities, Healthcare
Imaging Services, Inc. ("HIS") and Diagnostic Imaging Services, Inc. ("DIS")
totalling approximately 17% and 8%, respectively, of the outstanding common
stock of each entity. In September 1994, IPS Health Care, Inc., the Company's
original investee, merged with DIS, an unaffiliated company, which reduced the
Company's common stock ownership from approximately 22% to 10%. At that time,
the Company began accounting for its investment in DIS on a cost basis. In
March 1995, the Company sold its stock in SMT Health Services Inc., a provider
of mobile diagnostic imaging services. The Company's investments in common
stock of these unconsolidated entities have historically been accounted for
using the equity method of accounting because the Company maintained
significant influence over the investees.
As a part of the Company's overall strategy to operate exclusively as a
financial services company, the Company initiated a process to divest of its
interests in these investees. As a part of this process, during each of the
three months ended December 31, 1993 and March 31, 1994, the Company completed
a series of steps which significantly diminished its influence over SMT and
HIS, respectively. These steps included, among other things, arrangements
with both SMT and HIS to have all existing financing transactions between DVI
and the related entity refinanced through third party lenders and
relinquishment by DVI of
21
<PAGE> 61
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
NOTE 6. INVESTMENTS IN INVESTEES, (CONTINUED)
its first right of refusal to finance all future equipment purchases made by
the entities. The Company also agreed that, upon completion of the
refinancings, it would relinquish its representation on the respective
investees' Boards of Directors and sell the common shares it owns in each
investee. Finally, during the refinancing process, DVI agreed to vote its
common shares consistent with each of the investees' management. As a result
of the Company's significant decline in influence over HIS and SMT, the
Company's investments in those entities have been accounted for on a cost basis
since January 1, 1994 for SMT and April 1, 1994 for HIS. Had the Company
continued to account for these investees on the equity method, the net loss for
the year ended June 30, 1994 would have increased by $236,000 before offsetting
any losses due to mark to market adjustments. Prior to these dates, the
Company accounted for its investments in HIS and SMT under the equity method
due to factors that existed which the Company believes yielded it significant
influence on the operating and financial policies of these investees. These
factors included the Company providing a significant portion of the investees'
equipment financing, the Company's right of first refusal to finance all the
investees' equipment purchases and the Company's representation on the
investees' Boards of Directors allowing voting power relating to mergers, major
dispositions of assets and liquidations. During the year ended June 30, 1995,
the Company sold its investment in SMT for proceeds equal to its cost of
$827,989. The Company's investment in the equity of the common stock of IPS
continued to be accounted for under the equity method until September 1994 when
the Company's ownership of IPS declined to approximately 10% and its influence
over IPS declined significantly, at which time the Company began to account for
this investment on a cost basis.
Subsequent to the Company's initial investment in IPS, the Company made
additional investments in common and preferred stock of IPS, financed various
leasing transactions for Magnetic Resonance Imaging ("MRI") and other equipment
and entered into several restructuring agreements with IPS as follows:
In August 1992, due to severe cash flow difficulties experienced by IPS, the
Company restructured certain debt of IPS. The restructuring of debt included,
among other things, the reduction of interest rates on four transactions,
extension of payment terms on certain direct finance lease receivables, the
transfer of direct patient billing and collection process to a wholly owned
subsidiary of the Company, the issuance of a working capital line of credit to
IPS, an agreement for IPS to provide consulting services to DVI, and the
appointment of two of the Officers of the Company to IPS's Board of Directors.
At the same time, the Company acquired 730,768 shares of restricted IPS common
stock from persons affiliated with the Company in exchange for $137,019 which
represented the fair value of the common stock as agreed to by the parties.
In September 1992, one of the Company's wholly owned subsidiaries acquired
700,000, 725,000 and 420,000 shares of IPS's Series B, C and D convertible
preferred stock, respectively for $1.00 per share. On November 12, 1992, an
additional 637,000 shares of Series E convertible preferred stock were acquired
from IPS for $1.00 per share. The preferred stock, with an aggregate value of
$2,482,000, was issued in exchange for cash of $1.12 million, exchange of debt
of $725,000 and imaging equipment valued at $637,000.
In September 1994, following the completion of the merger agreement between IPS
and DIS, the Company entered into an Agreement for the Exchange of Stock and
Assets. The agreement provided for the exchange of all the then outstanding
preferred stock of IPS owned by the Company for a new series of DIS preferred
stock (Series F). The agreement also provided for the exchange of certain debt
with a carrying value of $4 million, assumption by the Company of certain
assets and liabilities of IPS valued at approximately $164,000, the return of
certain equipment under leases with IPS to the Company valued at approximately
$2,164,000 and the issuance of Series G preferred stock of DIS valued at
$2,000,000. The Company did not record a gain or loss on any of the
restructuring transactions.
The Series F and G preferred stock have liquidation preferences at $1.00 per
share, are redeemable at the option of DIS at $1.00 per share plus accrued
dividends, are convertible into common stock of DIS at $2.42 per share for
Series F and $1.00 per share for Series G, and are entitled to annual
cumulative dividends ranging from $.05 per share to $.10 per share. In
addition, the majority shareholder of DIS has the right to repurchase the
Series F and G preferred stock for $4,482,000 through September 2001.
The Company's common stock investments in HIS and DIS are classified as
available-for-sale and have a total cost of
22
<PAGE> 62
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
NOTE 6. INVESTMENTS IN INVESTEES, (CONTINUED)
$1,341,377 and a total estimated fair value of $3,171,632 which resulted in an
unrealized gain of $1,830,255 as of June 30, 1995. There were no sales of HIS
or DIS investments during the year ended June 30, 1995.
NOTE 7. BORROWINGS UNDER WAREHOUSE FACILITIES
The Company's primary credit facility, pursuant to a revolving credit agreement
with a syndicate of banks (the "Bank Revolving Credit Agreement"), provides for
the borrowings of up to $81.5 million. Borrowings under this facility bear
interest at the Company's option at either 25 basis points over the Prime rate
established by NatWest Bank N.A. or a rate of interest that varies from 150 to
180 basis points over the 30, 60 or 90-day LIBOR rate based on the Company's
leverage ratio from time to time as defined in the Bank Revolving Credit
Agreement. The Bank Revolving Credit Agreement is renewable annually at the
bank syndicate's discretion. The credit agreement also provides that if the
banks elect not to renew the facility at the end of its stated term, then
outstanding loans automatically convert to four-year amortizing term loans at
slightly higher interest rates. The Bank Revolving Credit Agreement prohibits
the Company from paying dividends other than dividends payable solely in shares
of the Company's common stock and limits borrowings to specified levels
determined by ratios based on the Company's tangible net worth and, under
certain circumstances, to use specified percentages of internally generated
funds to pay for equipment purchases. As of June 30, 1995, the Company was in
compliance with the financial covenants.
The Company also has a $75.0 million interim funding facility with Prudential
Securities Realty Funding Corporation (the "Prudential Facility"). This
interim funding facility is available for certain transactions which are to be
securitized under specified terms and bear interest at a rate equal to 75 basis
points over the 30, 60 or 90-day LIBOR rate. The Prudential Facility also
allows the Company to borrow up to $4.3 million in special advances that bear
interest at a rate equal to 150 basis points over the 30-day LIBOR until
October 31, 1995. The $4.3 million in special advances was repaid in August
1995. Borrowings under the Prudential Facility, including the special
advances, are secured by (i) certain equipment loans and the equipment financed
thereunder, (ii) the Company's interest in certain asset-backed notes and (iii)
the Company's rights to receive funds from certain securitized equipment loans.
All borrowings under the Prudential Facility mature on October 31, 1995. The
Company has a second facility with Prudential, which provides the Company with
$5.5 million in warehouse funding to make loans secured by medical receivables
to approved borrowers. Borrowings under the $5.5 million Prudential Facility
bear interest at a rate equal to the Prime rate established by Morgan Guaranty
Trust Company of New York. The borrowings are secured by medical receivables
loans originated by the Company and the underlying receivables. This facility
matures on November 30, 1995.
The Company has a $75.0 million interim funding facility with ContiTrade
Services Corporation (the "Conti Facility") which provides the Company with
warehouse financing for certain equipment loans to be securitized or otherwise
permanently funded through the Conti Facility. Borrowings under this facility
bear interest at a rate equal to 150 basis points over the 30 or 60-day LIBOR
rate which is fixed to the related funding period. This facility matures on
October 31, 1995.
At June 30, 1995, the Company had available an aggregate of $268.0 million in
interim funding facilities of which $155.2 million was utilized.
In July 1995, the Company obtained a $100.0 million interim funding facility
with Union Bank of Switzerland which provides the Company with warehouse
financing for certain equipment loans to be securitized. Borrowings under this
facility are secured by certain equipment loans and the equipment financed
thereunder and bear interest at a rate equal to 90 basis points over a 30, 60
or 90-day LIBOR rate which is fixed to the related funding period.
NOTE 8. LONG-TERM DEBT
The discounted receivables are payable to financial institutions, relate to the
discounting of direct financing lease obligations and notes secured by
equipment primarily on a limited or nonrecourse basis, and are collateralized
by the underlying equipment receivables (See Note 5).
Future annual maturities of discounted receivables, net of capitalized issuance
costs of $3,976,212 are as follows:
YEAR ENDING JUNE 30,
23
<PAGE> 63
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
NOTE 7. BORROWINGS UNDER WAREHOUSE FACILITIES (CONTINUED)
<TABLE>
<S> <C>
1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 58,344,186
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,034,597
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,225,948
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,282,001
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,318,372
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . 3,171,293
------------
Total . . . . . . . . . . . . . . . . . . . . $205,376,397
============
</TABLE>
All of the discounted receivables have been permanently funded through four
asset securitizations which were initiated during fiscal years 1992 through
1995. Debt under these securitizations are limited recourse, bear interest at
rates ranging between 5.34% to 7.81% and are serviced by the Company. The
agreements require that the Company comply with certain servicing requirements
as defined in the related securitization agreements, require limited cash
collateral (See Note 4) or residual interests and contain various recourse
provisions. (See Note 13.)
In June 1994, the Company completed a $14,112,000, net of issuance costs
totalling $888,000, private placement of Convertible Subordinated Notes. The
Convertible Subordinated Notes are convertible into common shares at $10.60 per
share at the discretion of the noteholders, bear interest at a rate of 9 1/8%
payable in quarterly installments of interest only and mature in June 2002.
During the year ended June 30, 1995, $500,000 of these notes were converted
into 47,169 shares of common stock of the Company.
NOTE 9. INCOME TAXES
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Currently payable . . . . . . . . . . . . . . . . . . $ 466,558 $2,623,340 $ 608,998
Deferred . . . . . . . . . . . . . . . . . . . . . . 2,479,767 (811,800) 1,219,120
---------- ---------- ----------
Total . . . . . . . . . . . . . . . . . . . . . $2,946,325 $1,811,540 $1,828,118
========== ========== ==========
</TABLE>
A reconciliation of the provision for income taxes to the amount of income tax
expense that would result from applying the federal statutory rate (35%) to
earnings from continuing operations is as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Provision for income taxes at
the federal statutory rate . . . . . . . . . . . . $2,455,271 $1,509,617 $1,516,001
State income taxes, net of
federal tax benefit . . . . . . . . . . . . . . . 452,144 298,904 312,327
Other . . . . . . . . . . . . . . . . . . . . . . 38,910 3,019 (210)
---------- ---------- ----------
Total . . . . . . . . . . . . . . . . . . . . . $2,946,325 $1,811,540 $1,828,118
========== ========== ==========
</TABLE>
The major components of the Company's net deferred tax liabilities of
$4,717,059 and $2,329,205 at June 30, 1995 and 1994, respectively, are as
follows:
<TABLE>
<CAPTION>
1995 1994
---------- -----------
<S> <C> <C>
Accumulated depreciation . . . . . . . . . . $27,963,678 $23,214,892
Deferred recognition of lease income . . . . (21,751,039) (18,023,343)
Alternative minimum tax credits carryforwards (403,121) (699,428)
Gain or loss on investments . . . . . . . . 780,763 (496,741)
Allowances for uncollectible receivables . . (1,179,120) (953,372)
State income taxes . . . . . . . . . . . . . (401,124) (379,195)
Other . . . . . . . . . . . . . . . . . . . (292,978) (333,608)
---------- -----------
Total . . . . . . . . . . . . . . . . . . $4,717,059 $ 2,329,205
========== ===========
</TABLE>
24
<PAGE> 64
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
NOTE 9. INCOME TAXES, (CONTINUED)
NOTE 10. SHAREHOLDERS' EQUITY
Prior to June 30, 1994, the Company issued warrants to purchase a total of
80,000 common shares at prices between $7.625 and $8.375 per share to all
non-employee Directors of the Company and warrants to purchase up to 35,000
common shares at $8.50 per share to an unrelated party. Additionally, in
fiscal 1992, the Company issued warrants to purchase up to 200,000 shares of
the Company's common stock at $18.00 per share to an underwriter as
compensation for investment banking services. No compensation expense was
recognized as a result of this transaction. The warrants vest at various dates
through November 1996 and expire at various dates through 2003. At June 30,
1995, warrants for 402,000 common shares were exercisable and none of the
warrants had been exercised.
In February 1991, the Company issued 575,000 units at $10.50 per unit
(consisting of 575,000 shares of the Company's common stock and redeemable
warrants to purchase 575,000 shares of the Company's common stock at $12.00 per
share) to the public for total proceeds of $6,037,500 before net offering costs
of $999,875. As of June 30, 1995, none of these warrants had been exercised.
The warrants expire in February 1996, and are redeemable by the Company
provided certain conditions are met. In addition, the underwriter has an option
to purchase an additional 50,000 units at $12.60 per share. The underwriter's
option is exercisable during a three-year period commencing February 7, 1993.
In 1991, the Company also issued warrants to purchase 50,000 common shares at
$12.00 per share to another underwriter.
In June 1994, the Company issued convertible subordinated notes to related and
unrelated parties which are convertible at the option of the holder into
1,415,094 shares of common stock at $10.60 per share. As of June 30, 1995,
$500,000 of these notes were converted into 47,169 shares of common stock (See
Notes 8 and 12). Had the conversion occurred at July 1, 1994, the impact on
the earnings of the Company for the year ended June 30, 1995 would have been
insignificant.
NOTE 11. STOCK OPTION PLAN
The Company has a stock option plan which currently provides for the granting
of options to employees to purchase up to 1,250,000 shares of the Company's
common stock at the fair market value at the date of grant. Options granted
under the plan generally vest over three to five years from the date of grant
and expire ten years after the date of the grant. Any unexercised options are
canceled ninety days subsequent to the termination of the employee and are
returned to the plan.
25
<PAGE> 65
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
NOTE 11. STOCK OPTION PLAN, (CONTINUED)
The following table summarizes the activity under the plan for the periods
indicated:
<TABLE>
<CAPTION>
OPTIONS EXERCISE PRICE
OUTSTANDING PER SHARE
----------- --------------
<S> <C> <C>
Outstanding at July 1, 1992 . . . . . . . . . . . . . . . . . . 425,172 $1.44 - $13.50
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158,600 5.00 - 13.50
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . (167) 3.19
Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . (47,500)
------- --------------
Outstanding at June 30, 1993 . . . . . . . . . . . . . . . . . 536,105 $1.44 - $13.50
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . 399,625 7.00 - 10.38
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . (37,000) 3.00 - 8.38
Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . (88,868)
------- --------------
Outstanding at June 30, 1994 . . . . . . . . . . . . . . . . . 809,862 $1.44 - $13.50
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,000 9.13 - 10.63
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . (97,216) 2.68 - 12.88
Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . (85,936)
------- --------------
Outstanding at June 30, 1995 . . . . . . . . . . . . . . . . . 642,710 $1.44 - $13.50
======= ==============
</TABLE>
As of June 30, 1995, options to purchase 279,318 shares were exercisable.
NOTE 12. RELATED PARTY TRANSACTIONS
The Company's principal executive offices located in Doylestown, Pennsylvania
are leased from a party related to a shareholder/director of the Company. The
lease commenced in December 1994 and the Company recorded rent expense under
this lease of $33,544 for the year ended June 30, 1995.
At June 30, 1995 and 1994, receivables in installments from investees totalled
$8,254,953 and $16,427,684, respectively.
During the years ended June 30, 1995 and 1994, the Company entered into various
agreements with investees which are described in Note 6.
During the year ended June 30, 1994, the Company issued convertible
subordinated notes totalling $9,550,000 to related parties (See Notes 8 and
10).
In June 1995, the Company and former shareholders of MEF Corp., some of whom
are also officers of the Company, entered into an agreement to set the purchase
price of MEF Corp. (See Note 15.)
NOTE 13. COMMITMENTS AND CONTINGENCIES
Facility Leases - The Company leases its facilities under noncancelable
operating leases with terms in excess of one year. The lease for the Company's
principal facility expires in June 2005. Rent expense for the years ended
June 30, 1995, 1994 and 1993 amounted to $497,818, $462,731, and $715,246,
respectively. Future minimum lease payments under these leases are as follows:
<TABLE>
<CAPTION>
FUTURE MINIMUM
YEAR ENDING JUNE 30, LEASE PAYMENTS
-------------------- ----------------
<S> <C>
</TABLE>
24
<PAGE> 66
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
NOTE 13. COMMITMENTS AND CONTINGENCIES, (CONTINUED)
<TABLE>
<S> <C>
1996 . . . . . . . . . . . . . . . . . . . . . . . . $520,017
1997 . . . . . . . . . . . . . . . . . . . . . . . . 486,890
1998 . . . . . . . . . . . . . . . . . . . . . . . . 441,441
1999 . . . . . . . . . . . . . . . . . . . . . . . . 441,493
2000 . . . . . . . . . . . . . . . . . . . . . . . . 429,827
Thereafter . . . . . . . . . . . . . . . . . . . . . 1,178,250
---------
Total . . . . . . . . . . . . . . . . . . . . . . $3,497,918
==========
</TABLE>
Commitments - Under certain limited recourse agreements, the Company may be
required to provide for losses incurred on uncollected lease receivables
previously collateralized. At June 30, 1995, the maximum contingent liability
under the limited recourse agreements amounted to $35,432,155. This contingent
liability, however, could be offset by any proceeds received from the resale or
remarketing of available equipment financed under the agreements.
Litigation - The Company is involved in litigation both as a plaintiff and
defendant in matters arising out of the Company's normal business activities.
Management does not expect the outcome of these lawsuits to have a material
adverse effect on the consolidated financial statements of the Company.
NOTE 14. BENEFIT PLANS
The Company maintains and administers an Employee Savings Plan pursuant to
Internal Revenue Code Section 401(k). The Plan provides for discretionary
contributions as determined by the Company's Board of Directors. The Company
contributed $38,751, $48,673 and $21,493 to the Plan during the years ending
June 30, 1995, 1994 and 1993, respectively.
NOTE 15. ACQUISITIONS
In January 1993, the Company acquired the outstanding shares of Medical
Equipment Finance Corporation ("MEF Corp."), which had only intangible assets
at the date of acquisition. Under the terms of the original purchase
agreement, the purchase price was payable before October 15, 1998 in cash or
common stock of DVI, as elected by the Company. As initially structured, the
purchase price was to be determined as a percentage of the after-tax earnings
of the acquired entity during the sixty-six month period following the date of
acquisition, consequently, no amounts were recorded at the date of acquisition.
At June 30, 1994, no amounts were earned under the contract, however, at that
time the Company accrued $2 million as costs in excess of net assets acquired
(goodwill) which represents the Company's estimate of the minimum amount to be
payable to former shareholders of MEF Corp. Had the acquisition occurred on
July 1, 1992, the impact on the operations of the Company would not have been
significant.
During the year ended June 30, 1994, management entered into negotiations with
the former shareholders of MEF Corp. to revise certain terms of the purchase
agreement. In June 1995, the Company and the former shareholders of MEF Corp.
agreed, subject to stockholder approval and an increase in the authorized
capital stock of the Company, to set the purchase price of MEF Corp. at 400,000
shares of the Company's common stock valued at $4.65 million. The Company will
record additional goodwill of $2.65 million at the time shareholder approval is
obtained. Had the revised purchase agreement been finalized on July 1, 1992,
net income would have decreased by $73,970, $73,970 and $112,636 and earnings
per share would have been reduced $0.011, $0.011 and $0.017 for the years
ended June 30, 1995, 1994 and 1993, respectively.
During the year ended June 30, 1994, the Company acquired additional shares of
IPS Health Care, Inc. preferred stock. (See Note 6.)
27
<PAGE> 67
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
NOTE 16. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
In accordance with Statement of Financial Accounting Standards No. 107 ("SFAS
107"), Disclosures About Fair Value of Financial Instruments, a summary of the
estimated fair value of the Company's consolidated financial instruments at
June 30, 1995 and 1994 is presented below. The estimated fair value amounts
have been determined by the Company using available market information and
appropriate valuation methodologies. However, considerable judgment is
necessary to interpret market data to develop the estimated fair values.
Accordingly, the estimates presented herein are not necessarily indicative of
the amounts the Company could realize in a current market exchange. The use of
different market assumptions and/or estimation methodologies may have a
material effect on the estimated fair value amounts.
<TABLE>
<CAPTION>
JUNE 30, 1995
-------------------------------------------
CARRYING ESTIMATED FAIR
AMOUNT VALUE
------------ --------------
<S> <C> <C>
Assets:
Receivable in installments (excluding investment
in direct financing leases) . . . . . . $177,784,930 $182,283,747
Liabilities:
Discounted receivables . . . . . . . . . . $205,376,397 $202,967,276
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1994
-------------------------------------------
CARRYING ESTIMATED FAIR
AMOUNT VALUE
------------ --------------
<S> <C> <C>
Assets:
Receivable in installments (excluding investment
in direct financing leases) . . . . . . $ 81,732,962 $ 85,022,168
Liabilities:
Discounted receivables . . . . . . . . . . $148,851,584 $146,999,444
</TABLE>
The carrying values of cash and cash equivalents, cash and short-term
investments, restricted, receivables from sale of leases and notes secured by
equipment, patient service accounts receivable, notes collateralized by medical
receivables, accounts payable, other accrued expenses, short-term bank
borrowings and convertible subordinated notes approximate fair values at June
30, 1995 and 1994.
The methods and assumptions used to estimate the fair values of other financial
instruments are summarized as follows:
Receivable in installments:
The fair value of the financing contracts was estimated by discounting expected
cash flows using the current rates at which loans of similar credit quality,
size and remaining maturity would be made as of June 30, 1995 and 1994. The
Company believes that the risk factor embedded in the entry-value interest
rates applicable to performing loans for which there are no known credit
concerns results in a fair valuation of such loans on an entry-value basis. In
accordance with SFAS 107, the Company has excluded receivables from lease
contracts of approximately $199.3 million and $141.6 million as of June 30,
1995 and 1994, respectively, from the receivable in installments fair value
calculation. Additionally, the receivable in installments - related parties
balances relates exclusively to lease receivables and has therefore been
excluded from the Company's fair value calculation.
Discounted receivables:
The fair value of discounted receivables, related to the securitization of
leases and notes, was estimated by discounting future cash flows using rates
currently available for debt with similar terms and remaining maturities.
The fair value estimates presented herein were based on information available
as of June 30, 1995 and 1994. Although the
NOTE 16. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED
28
<PAGE> 68
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
Company is not aware of any factors that would significantly affect the
estimated fair values, such values have not been updated since June 30, 1995;
therefore, current estimates of fair value may differ significantly from the
amounts presented herein.
NOTE 17. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of the quarterly results of operations for the
fiscal years ended June 30, 1995 and 1994:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30
-------------- ------------- ---------- ---------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
FISCAL 1995
- -----------
Finance and other income . . . . . . . . . . . $7,197 $8,695 $10,453 $12,682
Margins earned . . . . . . . . . . . . . . . . 3,046 3,710 4,140 5,271
Earnings from continuing operations
before provision for income taxes,
equity in net earnings (loss) of investees
and discontinued operations . . . . . . . . 885 1,524 2,169 2,437
Earnings from continuing operations . . . . . . 513 893 1,249 1,414
Loss from discontinued operations . . . . . . . -0- -0- -0- -0-
Net earnings . . . . . . . . . . . . . . . . . 513 893 1,249 1,414
Net earnings per common and
common equivalent share - primary . . . . . $.08 $.13 $.18 $.21
==== ==== ==== ====
Net earnings per common and common
equivalent share - fully diluted . . . . . $.08 $.13 $.17 $.19
==== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30
-------------- ------------- ---------- ---------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
FISCAL 1994
- -----------
Finance and other income . . . . . . . . . . . $4,262 $4,567 $5,523 $6,559
Margins earned . . . . . . . . . . . . . . . . 2,646 2,675 3,132 3,625
Earnings from continuing operations
before provision for income taxes,
equity in net earnings (loss) of investees
and discontinued operations . . . . . . . . 634 1,006 1,232 1,441
Earnings from continuing operations . . . . . . 330 447 646 837
Loss from discontinued operations . . . . . . . -0- -0- -0- (3,145)
Net earnings (loss) . . . . . . . . . . . . . . 330 447 646 (2,308)
Net earnings (loss) per common and
common equivalent share:
From continuing operations . . . . . . . . $.05 $.07 $.10 $.12
From discontinued operations . . . . . . . -0- -0- -0- (.47)
---- ---- ---- -----
Net earnings (loss) per share . . . . . . . $.05 $.07 $.10 $(.35)
==== ==== ==== =====
</TABLE>
29
<PAGE> 69
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
NOTE 18. HEDGING TRANSACTIONS
The Company's equipment financing transactions are all structured on a fixed
interest rate basis. The Company funds these transactions using variable rate
interim funding facilities until permanent funding is obtained, generally
through asset securitization. Because funds are borrowed through interim
funding facilities, the Company uses hedging techniques to protect its interest
rate margins during the period that interim funding facilities are used. The
Company's strategies are to hedge its portfolio by either assuming a short
position in Treasury notes of comparable maturity or entering into Treasury
lock transactions whereby the Company will either pay or receive funds based on
price movements of Treasury notes having a comparable maturity to the Company's
fixed rate portfolios. The Company believes this strategy hedges its portfolio
of fixed rate equipment financing contracts while waiting for permanent
securitization funding thus stabilizing the Company's weighted average
borrowing rate. The Company has not altered its underlying asset structure
through hedging activities but does have liabilities to cover its hedging
position in the event there is an upward movement in interest rates and a
corresponding decline in the value of the Treasury notes in which it has taken
short positions or contracts.
During the year ended June 30, 1994, the Company did not utilize derivative
financial instruments. During the year ended June 30, 1995, the Company
commenced its hedging program by entering into and closing out $193 million of
contracts. On June 30, 1995, the Company had no outstanding hedging positions.
SCHEDULE OF TREASURY SHORTS
AND TREASURY LOCKS
NOTIONAL AMOUNTS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1995
------------------------
<S> <C>
Beginning Balance $ 0
New Contracts 193,000,000
Terminated Contracts (117,000,000)
Expired Contracts (76,000,000)
------------
Ending Balance $ 0
============
</TABLE>
When the Company's hedging activities are matched to specific borrowings
relating to securitizations, gains or losses from hedging positions are
reflected as a decrease or increase in the interest expense and thus the gain
or loss is spread over the remaining term of the transactions securitized. As
of June 30, 1995, the Company had deferred hedging losses of $1.75 million
associated with transactions securitized and deferred hedging losses of $1.84
million associated with anticipated securitization transactions. Gains and
losses from hedging are reflected as an increase or decrease in the gain on
sale proceeds when transactions are funded through whole loan sales. At June
30, 1995, the Company had no unrealized hedging losses.
NOTE 19. COMPENSATION AGREEMENTS
In June 1995, the Company agreed in principle to adopt an employee incentive
plan (the "Plan"). Under the Plan the Company has agreed to issue, subject to
stockholder approval and an increase in the authorized capital stock of the
Company, an aggregate of 200,000 shares of common stock of the Company (the
"Incentive Shares") to certain of its employees if the last sale price of the
Company's common stock is $16.00 per share or higher for 30 consecutive
calendar days at any time before December 31, 1998, provided that any such
employee must be employed by the Company during the above-described 30-day
period in order to receive any Incentive Shares under this agreement. The
Company has agreed that, if there is an event or series of events that
constitutes a sale of the Company at any time prior to December 31, 1998 and
the consideration to be received for each share of common stock of the Company
in such sale of the Company is $13.00 or higher, the Company will issue the
Incentive Shares to the employees. If the criteria for the issuance of the
Company's common stock are met, the Company will record compensation expense
equal to the fair value of the common shares issued.
NOTE 20. SUBSEQUENT EVENT
30
<PAGE> 70
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
In August 1995, the Company completed an offering of 2,875,000 shares of its
common stock for which it received net proceeds of $29.7 million.
31
