<PAGE> 1
Filed Pursuant to Rule 424(b)(5)
File No. 333-17097
INFORMATION CONTAINED IN THIS PRELIMINARY PROSPECTUS SUPPLEMENT IS SUBJECT
TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THE
OFFERED SECURITIES HAS BEEN DECLARED EFFECTIVE BY THE SECURITIES AND
EXCHANGE COMMISSION. THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN
OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE
IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO
REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION -- DATED DECEMBER 23, 1996
PROSPECTUS SUPPLEMENT
(To Prospectus dated December 19, 1996)
- --------------------------------------------------------------------------------
$100,000,000
DIV, INC. LOGO
% Senior Notes due 2004
- --------------------------------------------------------------------------------
The % Senior Notes due 2004 (the "Notes") are being offered by DVI, Inc. (the
"Company"). The Notes will mature on , 2004, and will bear interest
at the rate of % per annum, payable semiannually on and
of each year, commencing on , 1997. The Notes will be
redeemable at the option of the Company in whole or in part at any time on or
after , 2002 at the redemption prices set forth herein, plus
interest accrued and unpaid thereon to the redemption date. Upon a Change of
Control (as defined herein), the Company will be required to offer to purchase
all outstanding Notes at 101% of the principal amount thereof, plus interest
accrued and unpaid thereon to the purchase date. The Notes will not have the
benefit of any sinking fund obligations. See "Description of the Notes." The
Notes have been approved for listing on the New York Stock Exchange (the "NYSE")
under the symbol "DVI 04," subject to official notice of issuance.
The Company is a holding company with no material assets other than the stock of
its subsidiaries and the Intercompany Note (as defined herein). The Notes will
be obligations of the Company; none of the Company's subsidiaries will have any
obligation to pay any amounts due in respect of the Notes or, other than
payments under the Intercompany Note, to make any funds available therefor. The
Notes will be structurally subordinated to all liabilities of the Company's
subsidiaries, including Warehouse Debt (as defined herein) and other
indebtedness that may be incurred under current or future credit facilities.
After giving pro forma effect to the sale of the Notes and the application of
the estimated net proceeds therefrom as described under "Use of Proceeds," the
Notes would have been structurally subordinated to the total outstanding
liabilities of the Company's subsidiaries which would have been approximately
$330.6 million at September 30, 1996, without giving effect to the Intercompany
Note. See "Description of the Notes -- Ranking" herein and "Risk
Factors -- Holding Company Structure; Limitations on Access to Cash Flow of
Operating Companies; Effective Subordination" in the accompanying Prospectus.
SEE "RISK FACTORS" ON PAGES 4 TO 9 IN THE ACCOMPANYING PROSPECTUS FOR A
DISCUSSION OF CERTAIN MATERIAL FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION
WITH AN INVESTMENT IN THE NOTES OFFERED HEREBY.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public(1) Commissions(2) Company(1)(3)
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------
Per Note............................... % % %
- ------------------------------------------------------------------------------------------------------
Total.................................. $ $ $
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
</TABLE>
(1) Plus accrued interest, if any, from January , 1997.
(2) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(3) Before deducting expenses payable by the Company estimated to be $650,000.
- --------------------------------------------------------------------------------
The Notes are offered by the Underwriters subject to delivery by the Company and
acceptance by the Underwriters, to prior sale and to withdrawal, cancellation or
modification of the offer without notice. Delivery of the Notes to the
Underwriters is expected to be made at the office of Prudential Securities
Incorporated, One New York Plaza, New York, New York on or about January ,
1997.
PRUDENTIAL SECURITIES INCORPORATED
CIBC WOOD GUNDY SECURITIES CORP.
January , 1997
<PAGE> 2
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES OFFERED
HEREBY AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
S-2
<PAGE> 3
PROSPECTUS SUPPLEMENT SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus
Supplement and the accompanying Prospectus. Unless the context indicates
otherwise, (i) references in this Prospectus Supplement and the accompanying
Prospectus to the "Company" are to DVI, Inc. and its wholly-owned subsidiaries
and (ii) "Offering" refers to the offering of the Notes made hereby. For a
description of certain terms used in this Prospectus Supplement and the
accompanying Prospectus, see "Glossary."
THE COMPANY
DVI, Inc. (the "Company") is an independent specialty finance company that
conducts a medical equipment finance business and a related medical receivables
finance business. As of September 30, 1996, the Company's total assets and
shareholders' equity were $526.1 million and $88.7 million, respectively.
Medical Equipment Finance. The Company finances the acquisition of
diagnostic imaging and other types of sophisticated medical equipment used by
outpatient healthcare providers, medical imaging centers, groups of physicians,
integrated healthcare delivery networks and hospitals. The Company's equipment
finance business operates by (i) providing financing directly to end users of
equipment; (ii) purchasing medical equipment loans and leases originated by
regional finance companies ("Originators") through a wholesale loan origination
program (the "Wholesale Program"); and (iii) more recently, providing finance
programs for vendors of diagnostic and patient treatment devices. The Company's
typical equipment loan has an initial principal balance ranging from $300,000 to
$2.0 million. Virtually all of the Company's equipment loans are structured on a
fixed interest rate basis such that the full cost of the equipment and all
financing costs are repaid during the financing term, which typically is five
years. Because most of the Company's equipment loans are structured as notes
secured by equipment or direct financing leases with a bargain purchase option
for the equipment user, the amount carried by the Company on its balance sheet
for total residual interest in equipment is quite small ($5.3 million as of
September 30, 1996). Total equipment financing loans originated in the Company's
fiscal year ended June 30, 1996 were $316.8 million. Of this amount,
approximately $218.5 million was provided by the Company directly to end users;
$95.3 million was generated through the Wholesale Program; and $3.0 million was
generated through various vendor finance programs.
Medical Receivables Finance. The Company provides lines of credit to a
wide variety of healthcare providers, many of which are also equipment finance
customers. Substantially all of the lines of credit are collateralized by third
party medical receivables due from Medicare, Medicaid, health maintenance
organizations ("HMOs"), preferred provider organizations ("PPOs") and commercial
insurance companies. The Company's medical receivables loans are structured as
floating rate revolving lines of credit secured by all medical receivables
generated by the borrowers, as well as other collateral. These lines of credit
typically range in size from $300,000 to $5.0 million. While the Company's
medical receivables finance business is newer and substantially smaller than its
medical equipment finance business, the Company expects this business unit to
grow as a result of its recent success in accessing the securitization markets
and other sources of permanent funding. New commitments of credit for the
medical receivables business for the year ended June 30, 1996 were $40.0
million, and medical receivables funded as of June 30, 1996 were $38.6 million.
Credit Underwriting. The Company believes the credit underwriting process
that it uses when originating loans is effective in managing its risk. The
process follows detailed procedures and benefits from the significant experience
of the Company in evaluating the creditworthiness of potential borrowers. The
Company also has been successful in restructuring those credits which become
delinquent. The Company's net charge-offs as a percentage of average net
financed receivables were 0.15%, 0.15% and 0.34%, for the years ended June 30,
1994, 1995 and 1996, respectively, and total delinquencies as a percentage of
managed net financed receivables for the same periods were 3.64%, 4.51% and
4.28%, respectively. See "Business -- Credit Experience."
S-3
<PAGE> 4
Capital Requirements. The Company's strong growth in loan originations and
net financed receivables has required substantial amounts of external funding.
The Company, through its operating subsidiaries, finances its equipment and
medical receivables loans on an interim basis with secured credit facilities
provided by banks and other financial institutions. These interim "warehouse"
facilities are refinanced using asset securitizations, whole loan sales, and
other structured finance techniques that permanently fund most of the Company's
equipment loans and medical receivables loans. These permanent financings
require additional capital to be invested by the Company to fund reserve
accounts or to meet the overcollateralization required in the securitizations
and sales of the Company's loans. The Company expects that most of the net
proceeds from this Offering ultimately will be used to provide this additional
capital required by the securitization process, thereby facilitating the
Company's continued growth.
Recent Growth. In recent years, the Company has grown substantially. Total
equipment financing loans originated by the Company grew from $46.4 million in
the year ended June 30, 1992 to $316.8 million in the year ended June 30, 1996.
The Company's managed net financed receivables grew from $92.4 million as of
June 30, 1992 to $642.3 million as of June 30, 1996. In the Company's medical
receivables financing business, which was established in 1993, new commitments
of credit in the year ended June 30, 1996 were $40.0 million compared with $23.9
million in the year ended June 30, 1995. Medical receivables funded at June 30,
1996 totaled $38.6 million, an increase of $16.1 million over the prior fiscal
year-end.
BUSINESS STRATEGY
The Company is seeking to continue its growth by expanding its existing
share of the medical equipment financing markets (which historically have been
and continue to be its largest, most important business segment) and by
generating financing opportunities in other areas of the healthcare industry.
The principal components of this strategy are as follows:
- Generate additional business through existing customers and
relationships with equipment manufacturers. The Company will continue
to target the market for high cost medical equipment, where it enjoys
relationships with a large number of users of sophisticated medical
equipment. The Company also has a close working relationship with some
of the largest manufacturers of diagnostic imaging equipment which it
maintains by meeting those manufacturers' needs to arrange financing
for the higher-cost equipment they sell to healthcare providers. The
Company believes these relationships, together with its extensive
expertise in the medical industry, can result in a continuing source
of financing opportunities.
- Expand medical receivables financing business. The Company intends to
penetrate further the medical receivables financing market by
generating financing opportunities among its existing equipment
finance customer base, particularly those customers that are expanding
to provide additional healthcare services. The Company's strategy in
medical receivables financing is to differentiate itself from many of
its competitors by offering loans secured by medical receivables
rather than factoring those receivables at a discount.
- Establish equipment financing relationships with manufacturers of
lower cost diagnostic and patient treatment devices. The Company is
seeking to use its reputation as a medical equipment financing
specialist and its ability to finance a wide range of healthcare
providers to establish a presence in the relatively more competitive
market for financing lower-cost medical equipment. The Company intends
to finance increased amounts of diagnostic and patient treatment
devices such as ultrasound, nuclear medicine and X-ray equipment. As
of September 30, 1996, the Company had established relationships with
twelve manufacturers of these types of medical devices. For the year
ended June 30, 1996, the Company's loan originations for this market
were $3.0 million.
S-4
<PAGE> 5
- Originate medical equipment loans on a wholesale basis. The Company
intends to continue its Wholesale Program, in which it originates
medical equipment loans by purchasing them from Originators. The
Company uses its expertise both in analyzing healthcare credits and
utilizing securitization to service Originators that often need access
to sources of permanent financing for the equipment loans they
originate. During the year ended June 30, 1996, the Company purchased
$95.3 million in medical equipment loans through the Wholesale
Program.
- Capitalize on international medical equipment financing needs. During
the year ended June 30, 1996 the Company began establishing
international operations in order to capitalize on growing overseas
markets for sales of medical equipment and devices. The Company
established a joint venture based in Singapore with a major
manufacturer of medical equipment and a financial institution to
service the medical equipment market in the Asia-Pacific region. The
Company also has taken steps to establish overseas operations in Latin
America and elsewhere. While the Company believes these international
operations have significant potential, it expects that potential will
be realized, if at all, over a period of several years rather than in
the near term.
DVI, Inc. conducts its business through two operating subsidiaries, DVI
Financial Services Inc. ("DVI Financial Services") and DVI Business Credit
Corporation ("DVI Business Credit"). The Company conducts securitizations
through special purpose indirect wholly-owned subsidiaries. The Company also
conducts other structured financings through limited purpose subsidiaries or
through its operating subsidiaries. The borrowers under the Company's various
warehouse credit facilities are DVI Financial Services or DVI Business Credit.
THE OFFERING
Securities Offered......... $100,000,000 aggregate principal amount of %
Senior Notes due 2004.
Maturity Date.............. , 2004.
Interest Payment Dates..... and , commencing ,
1997.
Optional Redemption........ The Notes will be redeemable at the option of the
Company in whole or in part at any time on or after
, 2002, at a redemption price
initially equal to % of the principal amount
thereof, declining ratably to 100% of such
principal amount at maturity, plus interest accrued
and unpaid thereon to the redemption date. See
"Description of the Notes -- Redemption."
Ranking.................... The Notes will rank senior in right of payment to
all existing and future subordinated debt of the
Company and pari passu in right of payment with all
existing and future senior debt of the Company. The
Notes will be structurally subordinated to all
liabilities of the Company's subsidiaries,
including Warehouse Debt and other indebtedness
that may be incurred under current or future credit
facilities. See "Description of the
Notes -- Ranking."
Change of Control.......... Upon a Change of Control (as defined herein), the
Company will be required to offer to purchase all
outstanding Notes at 101% of the principal amount
thereof, plus interest accrued and unpaid thereon
to the purchase date. See "Description of the
Notes -- Certain Covenants -- Purchase of Notes
upon a Change of Control."
S-5
<PAGE> 6
Certain Covenants.......... The Indenture governing the Notes will contain
certain covenants, including, but not limited to,
covenants imposing limitations on the following:
(i) the incurrence of additional debt; (ii)
restricted payments; (iii) dividend and other
payment restrictions affecting certain
subsidiaries; (iv) asset dispositions; (v)
transactions with related persons; (vi) issuances
and sale of stock of certain subsidiaries; (vii)
guarantees by certain subsidiaries; (viii) liens;
and (ix) consolidations, mergers or sales of
assets. See "Description of the Notes -- Certain
Covenants."
Use of Proceeds............ The net proceeds to the Company from the sale of
the Notes are estimated to be approximately $96.4
million. The Company will lend those net proceeds
to DVI Financial Services, one of the Company's
operating subsidiaries. Those funds will be used
(i) to fund the Company's growth, including
increasing the amount of equipment and medical
receivables loans the Company can fund, (ii) to
develop the Company's new international operations,
including the purchase of receivables originated
outside the United States and investment in joint
ventures, (iii) for other working capital needs and
(iv) for general corporate purposes. Pending
application of the net proceeds as described above,
the Company intends to use the net proceeds to
repay borrowings under the Company's warehouse
facilities.
Intercompany Note.......... In consideration of the loan of the proceeds of the
Offering, DVI Financial Services will issue a
promissory note (the "Intercompany Note") in the
amount of $100.0 million to DVI, Inc. The
Intercompany Note will (i) provide for interest
payments in the same amounts and at the same time
as the Notes, (ii) mature at the same time as the
Notes, (iii) rank pari passu with other senior
indebtedness of DVI Financial Services and (iv)
contain cross-acceleration provisions and other
events of default similar to the terms of the
Notes.
NYSE Symbol................ "DVI 04"
Risk Factors............... Prospective purchasers of the Notes should consider
all of the information contained in this Prospectus
Supplement and the accompanying Prospectus before
making an investment in the Notes. In particular,
prospective purchasers should consider the factors
set forth in the accompanying Prospectus under
"Risk Factors."
S-6
<PAGE> 7
SUMMARY CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED JUNE 30, SEPTEMBER 30,
---------------------------------------------------- -------------------
1992 1993 1994 1995 1996 1995 1996
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(1):
Total finance and other income..... $ 12,539 $ 14,095 $ 20,609 $ 35,985 $ 49,013 $ 11,300 $ 12,616
Net interest and other income...... 6,550 9,090 11,776 13,125 18,524 4,311 4,314
Net finance income................. 8,747 10,194 12,078 16,167 26,205 5,714 6,517
Earnings from continuing operations
before provision for income
taxes,
equity in net earnings (loss) of
investees and discontinued
operations....................... 4,915 4,459 4,313 7,015 14,333 3,191 3,525
Earnings from continuing operations
................................. 3,053 2,580 2,260 4,069 8,175 1,775 2,005
Net earnings (loss)................ 2,707 658 (885) 4,069 8,175 1,775 2,005
</TABLE>
<TABLE>
<CAPTION>
AS OF
AS OF JUNE 30, SEPTEMBER 30, 1996
---------------------------------------------------- -------------------------
1992 1993 1994 1995 1996 ACTUAL AS ADJUSTED(2)
-------- -------- -------- -------- -------- -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA(1):
Gross financed receivables... $113,579 $148,191 $287,734 $480,774 $522,500 $545,809 $545,809
Net financed receivables..... 92,373 123,628 239,347 405,815 456,778 478,520 478,520
Notes collateralized by
medical receivables........ 536 2,565 6,007 22,862 34,529 42,556 42,556
Total assets................. 104,714 147,161 265,949 432,931 560,325 526,113 529,763
Borrowings under warehouse
facilities(3).............. 31,349 45,221 34,586 155,172 168,108 138,160 41,810
Long-term debt, net:
Securitization debt(4)..... 24,497 51,691 148,852 205,376 253,759 247,400 247,400
% Senior Notes due
2004................... -- -- -- -- -- -- 100,000
Other...................... 72 136 -- -- -- -- --
Convertible subordinated
notes.................... -- -- 14,112 13,754 13,809 13,238 13,238
Total long-term debt......... 24,569 51,827 162,964 219,130 267,568 260,638 360,638
Shareholders' equity......... 34,006 34,664 33,993 40,250 85,263 88,712 88,712
</TABLE>
<TABLE>
<CAPTION>
AS OF OR FOR THE
THREE MONTHS ENDED
AS OF OR FOR THE YEAR ENDED JUNE 30, SEPTEMBER 30,
--------------------------------------------------- -------------------
1992 1993 1994 1995 1996 1995 1996
------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
ADDITIONAL OPERATING AND OTHER
DATA(1):
Average net financed
receivables(5).................... $78,489 $ 94,233 $176,410 $319,831 $460,550 $423,816 $478,785
Average managed net financed
receivables(5).................... 78,489 94,233 176,410 359,515 573,959 512,977 665,893
Managed net financed receivables.... 92,373 123,628 239,347 500,602 642,298 544,049 703,800
Equipment loans originated.......... 46,400 58,600 157,400 314,100 316,800 74,300 82,557
Medical receivables lines of credit
originated(6)..................... -- -- 5,600 23,900 40,000 5,650 18,825
Net charge-offs..................... 37 82 264 477 1,581 38 10
Net charge-offs as a percentage of
average net financed
receivables....................... 0.05% 0.09% 0.15% 0.15% 0.34% 0.04% 0.01%
Allowance for possible losses on
receivables....................... $ 1,082 $ 1,046 $ 2,498 $ 3,282 $ 3,675 $ 3,694 $ 3,808
Allowance for possible losses on
receivables as a percentage of net
financed receivables.............. 1.17% 0.85% 1.04% 0.81% 0.80% 0.86% 0.80%
Total delinquencies................. $ 3,972 $ 10,101 $ 8,709 $ 22,567 $ 27,514 $ 21,957 $ 28,086
Total delinquencies as a percentage
of managed net financed
receivables....................... 4.30% 8.17% 3.64% 4.51% 4.28% 4.04% 3.99%
</TABLE>
S-7
<PAGE> 8
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED JUNE 30, SEPTEMBER 30,
---------------------------------------- ---------------
1992 1993 1994 1995 1996 1995 1996
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL RATIOS(1):
Interest coverage ratio(7).................... 2.4 x 2.8 x 1.7 x 1.6 x 1.7 x 1.8 x 1.7 x
Leverage ratio(8)............................. -- -- 0.4 x 0.3 x 0.6 x 0.2 x 0.7 x
Return on assets(9)........................... 3.3% 2.2 % 1.1 % 1.1 % 1.7 % 1.6 % 1.5 %
</TABLE>
- ---------------
(1) Certain amounts as previously reported have been reclassified to conform to
the year ended June 30, 1996 presentation.
(2) As adjusted to reflect the issuance and sale of the Notes in the Offering
after deducting the underwriting discounts and commissions and the estimated
offering expenses payable by the Company and the application of the
estimated net proceeds therefrom.
(3) Principally represents interim funding of receivables and equipment loans
pending securitization or other permanent funding. As of November 30, 1996,
the Company had an aggregate maximum of $276.5 million potentially available
under various warehouse facilities of which it had borrowed an aggregate of
$132.1 million.
(4) Primarily limited recourse. Of this amount, $53.6 million and $35.0 million,
respectively, was guaranteed by DVI, Inc. at September 30, 1996 and June 30,
1996.
(5) Approximates the arithmetic mean of quarter-end balances.
(6) Includes both funded and unfunded amounts under medical receivables lines of
credit.
(7) Interest coverage ratio is equal to the total of earnings from continuing
operations before provision for income taxes, equity in net earnings (loss)
of investees and discontinued operations, plus depreciation and
amortization, and interest expense divided by interest expense. This ratio
includes the effect of on-balance sheet securitizations including, as a
component of interest expense, the interest associated with those
securitizations.
(8) Leverage ratio is equal to recourse debt, which includes securitization debt
guaranteed by DVI, Inc. and the Convertible Subordinated Notes divided by
shareholders' equity.
(9) Return on assets is equal to earnings from continuing operations divided by
average total assets.
S-8
<PAGE> 9
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Notes in the Offering
are estimated to be approximately $96.4 million, after deducting underwriting
discounts and commissions and estimated offering expenses.
The primary purpose of the Offering is to provide the Company with
additional capital (i) to fund its growth, including increasing the amount of
equipment and medical receivables loans the Company can fund, (ii) to develop
the Company's new international operations, including the purchase of
receivables originated outside the United States and investment in joint
ventures, (iii) for other working capital needs and (iv) for general corporate
purposes.
The net proceeds of the Offering will be advanced by DVI, Inc. to DVI
Financial Services, a wholly-owned subsidiary, in the form of a loan. Pending
application of the net proceeds as described above, the Company intends to use
the net proceeds to repay borrowings under the Company's principal revolving
credit agreement with a syndicate of banks, which is one of the Company's
warehouse facilities. Borrowings under this facility bear interest at variable
rates (a weighted average rate of 7.2% at September 30, 1996). Following such
repayment, the Company will be able to reborrow such amounts under the revolving
credit agreement. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital
Resources -- Warehouse Facilities."
S-9
<PAGE> 10
CAPITALIZATION
The following table sets forth the capitalization of the Company at
September 30, 1996, and as adjusted to reflect the issuance and sale of the
Notes in the Offering after deducting the underwriting discounts and commissions
and the estimated offering expenses payable by the Company and the application
of the estimated net proceeds therefrom. This table should be read in
conjunction with the Company's audited Financial Statements and related notes
thereto included elsewhere in or incorporated by reference into this Prospectus
Supplement or the accompanying Prospectus.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1996
------------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Borrowings under warehouse facilities(1).............................. $138,160 $ 41,810
======== ========
Long-term debt, net:
Securitization debt(2).............................................. $247,400 $ 247,400
% Senior Notes due 2004........................................... -- 100,000
Convertible subordinated notes...................................... 13,238 13,238
-------- --------
Total long-term debt........................................ $260,638 $ 360,638
-------- --------
Shareholders' equity:
Preferred stock, $10.00 par value; authorized 100,000 shares;
no shares issued................................................. -- --
Common stock, $0.005 par value; authorized 75,000,000 shares;
outstanding 10,497,723 shares.................................... 52 52
Additional capital.................................................. 68,606 68,606
Retained earnings................................................... 20,054 20,054
-------- --------
Total shareholders' equity.................................. 88,712 88,712
-------- --------
Total capitalization................................... $349,350 $ 449,350
======== ========
</TABLE>
- ---------------
(1) Principally represents interim funding of receivables and equipment loans
pending securitization or other permanent funding. As of November 30, 1996,
the Company had an aggregate maximum of $276.5 million potentially available
under various warehouse facilities of which it had borrowed an aggregate of
$132.1 million.
(2) Primarily limited recourse. Of this amount, $53.6 million was guaranteed by
DVI, Inc. as of September 30, 1996.
S-10
<PAGE> 11
SELECTED FINANCIAL INFORMATION AND OTHER DATA
The following tables contain selected financial information for the Company
for the periods presented. The Statement of Operations and Balance Sheet Data as
of June 30, 1995 and 1996 and for each of the three years in the period ended
June 30, 1996 are derived from the Company's audited Financial Statements
included elsewhere in this Prospectus Supplement. The Statement of Operations
and Balance Sheet Data as of June 30, 1992, 1993 and 1994 and for each of the
two years in the period ended June 30, 1993 are derived from the Company's
audited Financial Statements for those years, which are not included or
incorporated by reference in this Prospectus Supplement. The selected financial
data as of and for the three months ended September 30, 1995 and 1996 have been
derived from unaudited financial statements of the Company and in the opinion of
the Company's management, include all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the Company's
financial condition and results of operations at the end of and for such
periods. The results of operations for the three months ended September 30, 1996
are not necessarily indicative of future results. The following data should be
read in conjunction with the Company's financial statements and related notes
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus Supplement. Certain amounts as
previously reported have been reclassified to conform to the year ended June 30,
1996 presentation. Summations and differences of the numbers set forth below may
not reconcile due to rounding.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED JUNE 30, SEPTEMBER 30,
------------------------------------------------------- -------------------
1992 1993 1994 1995 1996 1995 1996
------- ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Finance and other income:
Amortization of finance
income.................... $11,276 $12,273 $18,624 $33,425 $44,625 $10,506 $11,116
Other income................ 1,263 1,822 1,985 2,560 4,388 794 1,500
------- ------- ------- ------- ------- ------- -------
Total finance and other
income...................... 12,539 14,095 20,609 35,985 49,013 11,300 12,616
Interest expense.............. 5,989 5,005 8,833 22,860 30,489 6,989 8,302
------- ------- ------- ------- ------- ------- -------
Net interest and other
income...................... 6,550 9,090 11,776 13,125 18,524 4,311 4,314
Net gain on sale of financing
transactions................ 2,197 1,104 302 3,042 7,681 1,403 2,203
------- ------- ------- ------- ------- ------- -------
Net finance income............ 8,747 10,194 12,078 16,167 26,205 5,714 6,517
Selling, general and
administrative expenses..... 3,410 5,568 6,049 7,891 9,898 2,073 2,849
Provision for possible losses
on receivables.............. 422 167 1,716 1,261 1,974 450 143
------- ------- ------- ------- ------- ------- -------
Earnings from continuing
operations before provision
for income taxes, equity in
net earnings (loss) of
investees and discontinued
operations.................. 4,915 4,459 4,313 7,015 14,333 3,191 3,525
Provision for income taxes.... 2,015 1,828 1,811 2,946 6,092 1,416 1,496
------- ------- ------- ------- ------- ------- -------
Earnings from continuing
operations before equity in
net earnings (loss) of
investees and discontinued
operations.................. 2,900 2,631 2,502 4,069 8,241 1,775 2,029
Equity in net earnings (loss)
of investees................ 153 (51) (242) -- (66) -- (24)
------- ------- ------- ------- ------- ------- -------
Earnings from continuing
operations.................. 3,053 2,580 2,260 4,069 8,175 1,775 2,005
Loss from discontinued
operations.................. 346 1,922 3,145 -- -- -- --
------- ------- ------- ------- ------- ------- -------
Net earnings (loss)........... $ 2,707 $ 658 $ (885) $ 4,069 $ 8,175 $ 1,775 $ 2,005
======= ======= ======= ======= ======= ======= =======
</TABLE>
S-11
<PAGE> 12
<TABLE>
<CAPTION>
AS OF JUNE 30, AS OF
------------------------------------------------------------ SEPTEMBER 30,
1992 1993 1994 1995 1996 1996
-------- -------- -------- -------- -------- -------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Gross financed
receivables............... $113,579 $148,191 $287,734 $480,774 $522,500 $ 545,809
Net financed receivables.... 92,373 123,628 239,347 405,815 456,778 478,520
Notes collateralized by
medical receivables....... 536 2,565 6,007 22,862 34,529 42,556
Total assets................ 104,714 147,161 265,949 432,931 560,325 526,113
Borrowings under warehouse
facilities(1)............. 31,349 45,221 34,586 155,172 168,108 138,160
Long-term debt, net:
Securitization debt(2).... 24,497 51,691 148,852 205,376 253,759 247,400
Other..................... 72 136 -- -- -- --
Convertible subordinated
notes................... -- -- 14,112 13,754 13,809 13,238
Total long-term debt........ 24,569 51,827 162,964 219,130 267,568 260,638
Shareholders' equity........ 34,006 34,664 33,993 40,250 85,263 88,712
</TABLE>
<TABLE>
<CAPTION>
AS OF OR FOR THE
THREE MONTHS ENDED
AS OF OR FOR THE YEAR ENDED JUNE 30, SEPTEMBER 30,
----------------------------------------------------------- ---------------------
1992 1993 1994 1995 1996 1995 1996
------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
ADDITIONAL OPERATING AND
OTHER DATA:
Average net financed
receivables(3)........ $78,489 $ 94,233 $176,410 $319,831 $460,550 $423,816 $478,785
Average managed net
financed
receivables(3)........ 78,489 94,233 176,410 359,515 573,959 512,977 665,893
Managed net financed
receivables........... 92,373 123,628 239,347 500,602 642,298 544,049 703,800
Equipment loans
originated............ 46,400 58,600 157,400 314,100 316,800 74,300 82,557
Medical receivables
lines of credit
originated(4)......... -- -- 5,600 23,900 40,000 5,650 18,825
Net charge-offs......... 37 82 264 477 1,581 38 10
Net charge-offs as a
percentage of average
net financed
receivables........... 0.05% 0.09% 0.15% 0.15% 0.34% 0.04% 0.01%
Allowance for possible
losses on
receivables........... $ 1,082 $ 1,046 $ 2,498 $ 3,282 $ 3,675 $ 3,694 $ 3,808
Allowance for possible
losses on receivables
as a percentage of net
financed
receivables........... 1.17% 0.85% 1.04% 0.81% 0.80% 0.86% 0.80%
Total delinquencies..... $ 3,972 $ 10,101 $ 8,709 $ 22,567 $ 27,514 $ 21,957 $ 28,086
Total delinquencies as a
percentage of managed
net financed
receivables........... 4.30% 8.17% 3.64% 4.51% 4.28% 4.04% 3.99%
</TABLE>
- ---------------
(1) Principally represents interim funding of receivables and equipment loans
pending securitization or other permanent funding.
(2) Primarily limited recourse. Of this amount $53.6 and $35.0 million,
respectively, was guaranteed by DVI, Inc. at September 30, 1996 and June 30,
1996.
(3) Approximates the arithmetic mean of quarter-end balances.
(4) Includes both funded and unfunded amounts under medical receivables lines of
credit.
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<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company is an independent specialty finance company that conducts a
medical equipment finance business and a related medical receivables finance
business. The Company finances diagnostic imaging and other types of
sophisticated medical equipment used by outpatient healthcare providers, medical
imaging centers, groups of physicians, integrated healthcare delivery networks
and hospitals. The Company also provides lines of credit to a wide variety of
healthcare providers, substantially all of which are collateralized by third
party medical receivables due from Medicare, Medicaid, HMOs, PPOs and commercial
insurance companies.
CERTAIN ACCOUNTING CONSIDERATIONS
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 or medical receivables." 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 estimated residual value
(on fair market value transactions) exceed equipment cost.
Beginning in 1993, the Company adopted a strategy to reduce the dollar
amount of residual interests on its balance sheet and, accordingly, the
percentage of the Company's equipment financing transactions structured as loans
and conditional sales agreements have increased significantly. As of June 30,
1996, residual valuation had decreased to $4.3 million from $6.2 million as of
June 30, 1993, and from 5.0% of net financed receivables as of June 30, 1993 to
1.0% as of June 30, 1996. 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.
Notes secured by equipment and direct financing lease transactions are all
"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 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 transactions classified as notes secured by equipment and direct
financing leases that the Company permanently funds through securitization or
other structured finance transactions which the Company treats
S-13
<PAGE> 14
as debt, income is deferred and recognized using the interest method over the
respective term 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. In addition to its core equipment finance
business, the Company provides lines of credit under which the Company makes
full recourse loans to healthcare providers that are secured by medical
receivables and other collateral. The interest and fee income generated 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.
RESULTS OF OPERATIONS
The Company has classified income under the categories of "amortization of
finance income," "other income" and "gain on sale of financing transactions."
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. "Other income" consists primarily
of contracts, servicing and origination fees, late charges and dividends on
investment in investee's preferred stock. "Gain on sales of financing
transactions" consists of gains recognized when the Company permanently funds
transactions through off balance sheet securitizations or other whole loan
sales.
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 whole loan sales. When funding
loans through securitization, the issuer generally can structure the
securitization so that the funding is treated for accounting purposes either as
long-term debt secured by equipment loans owned by the Company, or as a sale.
The manner in which income arising in those transactions is recognized for
financial reporting purposes differs significantly depending on which of the two
structures the issuer uses. When the Company sponsors a securitization it treats
the proceeds as long-term debt on its financial statements and reports the
finance income on the full amount of the loans, whereas when the Company sells
loans, it recognizes the unamortized finance income at the time the funding
takes place; however, even in a funding treated as a sale, the Company may
recognize servicing and/or interest income on its subordinated interest over the
remaining term of the equipment loans sold.
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
and receivables. Accordingly, operating results may be adversely impacted by
future fluctuations in such demand. 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 general economic
conditions will not have a material adverse effect on the Company in the future.
Three Months Ended September 30, 1996 Compared to Three Months Ended
September 30, 1995
Total equipment financing loans originated in the three months ended
September 30, 1996 were $82.6 million compared with $74.3 million in the three
months ended September 30, 1995, an increase of 11.2%. Net financed receivables
totaled $478.5 million at September 30, 1996, an increase of $50.5 million or
11.8% over the amount at September 30, 1995. Not included in net financed
receivables were the loans sold but still serviced by the Company, which
increased to $260.4 million as of September 30, 1996 compared to $218.6 million
as of June 30, 1996, an increase of 19.1%. Managed net financed receivables, the
aggregate of those appearing on the Company's balance sheet and those which have
been sold and are still serviced by the Company, totaled $703.8 million as of
September 30, 1996, representing a 9.6% increase over the total as of June 30,
1996.
S-14
<PAGE> 15
In the Company's medical receivable financing business, new commitments of
credit in the three months ended September 30, 1996 were $18.8 million compared
with $5.7 million in the three months ended September 30, 1995. Medical
receivables funded at September 30, 1996 totaled $46.7 million, an increase of
$23.9 million or 104.8% over the amount at September 30, 1995.
Total finance and other income increased 11.6% to $12.6 million in the
three months ended September 30, 1996 from $11.3 million for the three months
ended September 30, 1995. Amortization of finance income increased 5.8% to $11.1
million from $10.5 million for the three months ended September 30, 1996 as
compared to the same period of the prior year. The increase was primarily a
result of the overall increase in the size of the Company's loan portfolio.
Other income, which consists primarily of contracts, servicing and origination
fees, late charges and dividends on investment in investee's preferred stock
increased 88.9% to $1.5 million in the three months ended September 30, 1996
from $794,000 in the comparable prior year quarter. The increase was mainly due
to fees earned on larger portfolios, and service fees of $352,000 earned on
portfolios sold.
Interest expense increased 18.8% to $8.3 million for the three months ended
September 30, 1996 from $7.0 million for the three months ended September 30,
1995. The increase is primarily a result of the growth of the Company's loan
portfolio. As a percentage of finance and other income, interest expense
increased to 65.8% in the three months ended September 30, 1996 as compared to
61.9% in the same period in the prior year.
The net gain on sale of financing transactions for the three months ended
September 30, 1996 increased 57.0% to $2.2 million from $1.4 million for the
same period of the prior fiscal year. Loans sold during the first quarter were
$47.0 million compared to $32.4 million during the same period of the prior
fiscal year, an increase of 45.1%.
Selling, general and administrative expenses ("SG&A") for the three months
ended September 30, 1996 increased by 37.4% to $2.8 million from $2.1 million
for the same quarter of the prior fiscal year. The increase in the Company's
SG&A was primarily related to the development of its medical receivables, vendor
finance and international businesses and the Company's 29.4% growth in managed
net financed receivables. To support this growth the Company increased its
personnel to 132 employees from 112 one year earlier.
The provision for possible losses on receivables was $143,000 for the three
months ended September 30, 1996 as compared to $450,000 for the three month
period ended September 30, 1995. On a quarterly basis, the Company evaluates the
collectibility of its receivables and records a provision for amounts deemed
uncollectible. The Company's chargeoffs for the quarter ended September 30, 1996
were $10,000 which represents less than 1.0% of the quarter-ended allowance for
losses.
Earnings before provision for income taxes and equity in net loss of
investees increased 10.5% to $3.5 million for the three months ended September
30, 1996 compared to $3.2 million for the three months ended September 30, 1995.
Net earnings increased 13.0% to $2.0 million from $1.8 million in comparing the
three months ended September 30, 1996 to the three months ended September 30,
1995. Net earnings per share decreased 10.0% to $0.18 from $0.20 when comparing
the three months ended September 30, 1996 to the three months ended September
30, 1995. The decrease in net earnings per share results from the weighted
average number of shares increasing 25.9% to 11.1 million in the three months
ended September 30, 1996 from 8.8 million in the three months ended September
30, 1995.
Year Ended June 30, 1996 Compared to Year Ended June 30, 1995
Total equipment financing loans originated, excluding an extraordinary
portfolio purchase of $76.1 million in the year ended June 30, 1995, were $316.8
million in the year ended June 30, 1996 compared with $238.0 million in the year
ended June 30, 1995, an increase of 33.1%. Net financed receivables totaled
$456.8 million at June 30, 1996, an increase of $50.9 million or 12.5% over the
prior fiscal year-end. In the Company's medical receivable financing business,
new commitments of credit in the year ended June 30, 1996 were $40.0 million
compared with $23.9 million in the year ended June 30, 1995, an increase of
67.4%. Medical
S-15
<PAGE> 16
receivables funded at June 30, 1996 totaled $38.6 million, an increase of $16.1
million or 71.6% over the prior year.
Amortization of finance income increased 32.0% to $45.3 million for the
year ended June 30, 1996 from $34.3 million for the year ended June 30, 1995.
The increase was primarily a result of the overall increase in the size of the
Company's net financed receivables.
Other income increased 120.6% to $3.7 million in the year ended June 30,
1996 as compared to $1.7 million in the year ended June 30, 1995. The increase
was due to the growth in the medical receivables business fees and the servicing
of a larger loan portfolio.
For the year ended June 30, 1996, interest expense increased 33.4% to $30.5
million from $22.9 million in the prior year. For the year ended June 30, 1996,
the Company's average indebtedness (calculated based on period beginning and
period ending balances) increased 41.7% to $405.0 million from $285.9 million in
the prior year. The increase in interest expense and average indebtedness was
primarily a result of the growth of the Company's loan portfolio. As a
percentage of total finance and other income, interest expense was 62.2% in the
year ended June 30, 1996 compared to 63.5% in the same period a year earlier.
The net gain on sale of financing transactions increased 152.5% to $7.7
million for the year ended June 30, 1996 compared with a gain of $3.0 million
for the same period in the prior year. Loans sold during the year ended June 30,
1996 were $179.4 million compared to $115.8 million during the prior fiscal
year. The increase reflects the Company's attempt to partially offset the near
term costs of its newer business units and international initiatives.
Net finance income was $26.2 million for the year ended June 30, 1996, as
compared to $16.2 million for the year ended June 30, 1995, an increase of
62.1%. The increase was primarily a result of the overall increase in the size
of the Company's loan portfolio. The Company's net interest margins on its
portfolio for the years ended June 30, 1996 and 1995 were 4.02% and 4.10%,
respectively, which reflects increased competition, more aggressive pricing for
market share growth and the increased sales of higher margin contracts.
SG&A increased 25.4% to $9.9 million for the year ended June 30, 1996 from
$7.9 million for the year ended June 30, 1995. Included in SG&A for the year
ended June 30, 1996 was $519,000 of non-recurring expenses incurred in the third
quarter ended March 31, 1996 for the defense and settlement of lawsuits
primarily relating to employee matters. Excluding the impact of these legal
costs, total selling, general and administrative expenses increased 18.9% over
the prior fiscal year, mainly as a result of the 36.2% growth in loan
originations and the 44.0% growth in average net financed assets. The majority
of the 18.9% increase is due to employee-related costs resulting from the
increase in employees during the year.
The provision for possible losses on receivables was $2.0 million for the
year ended June 30, 1996 as compared to $1.3 million for the previous year. On a
quarterly basis, the Company evaluates the collectibility of its receivables and
records a provision for amounts deemed uncollectible. The Company's chargeoffs
for the quarters ended September 30, 1995, December 31, 1995, March 31, 1996,
and June 30, 1996 were $38,000, $528,000, $270,000, and $745,000, respectively,
which represents 1.0%, 13.9%, 6.9%, and 20.3%, respectively, of the quarter-end
allowance for losses.
The Company's net earnings were $8.2 million or $0.81 per share for the
year ended June 30, 1996 as compared to net earnings of $4.1 million or $0.61
per share in the prior year.
The Company's cash and cash equivalents at June 30, 1996 and June 30, 1995
were $2.4 million and $2.0 million, respectively. The following describes the
changes from June 30, 1995 to June 30, 1996 in the items which had the most
significant impact on the Company's cash flow during the year ended June 30,
1996.
The Company's net cash used in operating activities was $74.0 million
during the year ended June 30, 1996 compared to $1.5 million net cash used in
operations for the year ended June 30, 1995. The increase in cash utilization
during the year ended June 30, 1996 stems largely from an increase in
receivables and amounts due from portfolio sale.
S-16
<PAGE> 17
The Company's net cash used in investing activities decreased to $22.7
million during the year ended June 30, 1996 as compared to $174.6 million for
the year ended June 30, 1995. This decrease was primarily attributed to cash
used to acquire equipment and to finance notes secured by equipment of $292.6
million during the year ended June 30, 1996 compared to $319.0 million for the
year ended June 30, 1995. These uses of cash were offset by $283.3 million and
$161.4 million of portfolio receipts net 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 $97.1 million
during the year ended June 30, 1996 down from $176.4 million for the year ended
June 30, 1995. This results from a net increase in the Company's borrowings
under warehouse facilities of $12.9 million for the year ended June 30, 1996 as
compared to a $120.6 million net increase in borrowings under warehouse
facilities for the year ended June 30, 1995.
Year Ended June 30, 1995 compared to Year Ended June 30, 1994
Total equipment financing loans originated, excluding a portfolio purchase
of $76.1 million in the year ended June 30, 1995, were $238.0 million in the
year ended June 30, 1995 compared with $157.4 million in the year ended June 30,
1994, an increase of 51.2%. In the Company's medical receivable financing
business, new commitments of credit in the year ended June 30, 1995 were $23.9
million compared with $5.6 million in the year ended June 30, 1994.
Amortization of finance income increased 87.7% 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.
Other income decreased 27.5% to $1.7 million in the year ended June 30,
1995 as compared to $2.3 million in the year ended June 30, 1994. The decrease
was primarily due to a decrease in receivables financing income partially offset
by increases in preferred stock dividends from investees and miscellaneous fees.
For the year ended June 30, 1995, interest expense increased 158.8% 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 94.1% 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 63.5% in the year ended June 30, 1995
compared to 42.9% 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 (i) increases in short-term interest rates under the variable interest rate
warehouse facilities used by the Company for interim funding purposes as well as
(ii) increases in long-term interest rates under the asset securitizations used
by the Company for permanent funding purposes.
The gain on sale of financing transactions, net, increased to $3.0 million
for the year ended June 30, 1995 from $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.
Net finance income was $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
33.9%. The increase was primarily a result of the overall increase in the size
of the Company's loan portfolio.
SG&A increased 30.5% to $7.9 million for the year ended June 30, 1995 from
$6.0 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
21.9% for the year ended June 30, 1995, and 29.4% for the same period in the
prior 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.
S-17
<PAGE> 18
The provision for possible losses on receivables 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.
The Company's net earnings were $4.1 million or $0.61 per share for the
year ended June 30, 1995 as compared to net earnings from continuing operations
of $2.3 million or $0.34 per share in the prior year.
LIQUIDITY AND CAPITAL RESOURCES
General
The Company's 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 full recourse
obligations (meaning that upon a default, the lender has recourse against the
collateral pledged to secure the Company's obligations and against the Company
itself), while the Company's permanent funding is obtained principally on a
limited recourse basis (meaning that upon a default, the lender's primary
recourse is against the pledged collateral and the lender has only a limited
ability to recover directly from the Company). 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 (if any) the Company has in
the underlying financed assets should defaults occur.
A substantial portion of the Company's debt represents permanent funding of
equipment loans obtained on a 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 utilizing both
securitization techniques 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.
In addition to the interim and permanent funding referred to above, the
Company's continued growth in loan originations and net financed receivables
requires substantial amounts of external funding, primarily to fund the reserve
account or overcollateralization requirements that are applied in connection
with securitizations and sales of the Company's loans. These funds essentially
provide the credit enhancement for the Company's leveraged investments in its
loan portfolios, and typically are obtained through sales of debt or equity
securities by the Company.
As a result of these external funding requirements, in June 1994, the
Company completed a $15.0 million private placement of Convertible Subordinated
Notes. 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. In August 1995, the Company completed a public
offering of 2,875,000 shares of its common stock for which it received net
proceeds of $29.0 million. In January 1996, holders of 615,605 of the Company's
warrants and units, issued in February 1991, redeemed their warrants and units
for shares of the Company's Common Stock at $12.00 or $12.60 per share by the
final exercise date of January 26, 1996. As a result of the redemption, the
Company received cash proceeds of $7.4 million.
Although the Company believes that cash available from operations and
financing activities will be sufficient to enable it to make required interest
payments on the Notes and its other debt obligations and other required
payments, there can be no assurance in this regard and the Company may encounter
liquidity problems which could affect its ability to meet such obligations while
attempting to withstand competitive
S-18
<PAGE> 19
pressures or adverse economic conditions. In such circumstances, the value of
the Notes could be materially adversely affected.
The Company's existing net financed receivables generate positive cash
flows, however, as a result of the Company's continued strong growth in loan
originations and net financed receivables and its securitization program, the
Company's cash flow from operations is expected to continue to be negative. The
Company's primary cash requirements include the funding of: (i) loan
originations and purchases pending their securitization and sale; (ii) fees and
expenses incurred in connection with the securitization of loans; (iii) reserve
account or overcollateralization requirements in connection with the
securitization and sale of the loans; (iv) ongoing administrative and other
operating expenses; and (v) interest and principal payments under the Company's
warehouse facilities and other indebtedness.
The Company's primary sources of liquidity in the future are expected to be
cash generated from net financed receivables, existing cash, fundings under its
warehouse facilities, sales of loans through securitizations and other permanent
fundings, the net proceeds from sales of the Notes and further issuances of debt
or equity. The Company expects these sources to be sufficient to fund the
Company's liquidity requirements for at least the next twelve months if the
Company's future operations are consistent with management's current growth
expectations. However, because the Company expects to continue to operate on a
negative cash flow basis for the foreseeable future, it anticipates that it will
need to complete debt or equity financings on a regular basis. The type, timing
and terms of financing selected by the Company will be dependent upon the
Company's cash needs, the availability of other financing sources and the
prevailing conditions in the financial markets. There can be no assurance that
any such sources will be available to the Company at any given time or as to the
favorableness of the terms on which such sources may be available.
Warehouse Facilities
At November 30, 1996, the Company had available an aggregate of $276.5
million under various warehouse facilities of which it had borrowed an aggregate
of $132.1 million. The Company's primary credit facility, pursuant to a
revolving credit agreement with a syndicate of banks (the "Agreement"), provides
for the borrowing of up to $116.5 million. Borrowings under this facility bear
interest based on the Company's leverage ratio as defined in the Agreement at
the Company's option of (i) from prime to prime plus 0.125% or (ii) from 1.50%
up to 1.65% over the 30, 60 or 90-day LIBOR rate. Included in the Agreement is
an $18.0 million sub-limit for borrowings secured by medical receivables loans
originated by the Company. The Agreement is renewable annually at the bank
syndicate's discretion. The Agreement also provides that if the banks elect not
to renew the facility at the end of its stated term, loans then outstanding
automatically convert to four-year amortizing term loans at slightly higher
interest rates. The Agreement prohibits the Company from paying dividends other
than dividends payable solely in shares of the Company's stock and limits
borrowings to specified levels determined by ratios based on the Company's
tangible net worth. As of September 30, 1996, the Company was in compliance with
the financial covenants of the Agreement.
In addition to the credit facility described above, the Company has a
$100.0 million interim funding facility with an investment banking firm which
was obtained in September 1996 to fund certain equipment loans which are to be
securitized by the lender thereunder. Borrowings under this facility bear
interest at a rate of 0.85% over the 30-day LIBOR rate.
The Company also has three credit facilities for its medical receivables
financing business. The first facility is a $50.0 million warehouse facility
with an investment banking firm which was obtained in September 1996. The second
facility is for $3.0 million with an interest rate of prime plus 2.00% and
matures in March 1997. The third facility is for $7.0 million with an interest
rate, at the Company's option, of either prime plus 1.00% or the 30-day LIBOR
rate plus 2.25% and matures in December 1996.
Permanent Funding Methods
The Company has completed thirteen securitizations or other structured
finance transactions for medical equipment financings totaling $825.6 million,
including two public debt issues of $75.7 million and $90.0 million and eleven
private placements of debt and whole loan sales totaling $660.0 million. In
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<PAGE> 20
January 1994, the Company filed a 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 up to an aggregate of $350 million. 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. In January 1996, the Company completed a $25.0 million
private placement securitization of medical receivable loans with a domestic
insurance company to fund its medical receivables financing business. 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. If for any reason the Company were to become unable to access the
securitization market to permanently fund its equipment loans, the consequences
for the Company would be materially adverse.
The Company's use of securitization significantly affects its need for
warehouse facilities and 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, generally $50 to $100 million, 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 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.
Hedging Strategy
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 prior
to an anticipated securitization or sale. The Company uses derivative financial
instruments, such as forward rate agreements, Treasury locks, and interest rate
swaps, caps and collars, to manage its interest rate risk. The derivatives are
used to manage three components of this risk: interest sensitivity adjustments,
hedging anticipated loan securitizations and sales, and interest rate spread
protection. The Company's hedging techniques may not protect it from interest
rate-related risks in all interest rate environments. See "Business -- Capital
Resources and Transaction Funding -- Hedging Strategy."
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, and the Company expects
that trend will continue. In addition, the Company disposed of a portion of its
equipment residual portfolio in the year ended June 30, 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 it 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.
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<PAGE> 21
RECENT ACCOUNTING DEVELOPMENT
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities" ("SFAS 125") which
addresses the accounting for transfers of financial assets in which the
transferor has some continuing involvement either with the assets transferred or
with the transferee. A transfer of financial assets in which the transferor
surrenders control over those assets is accounted for as a sale to the extent
that consideration other than beneficial interest in the transferred assets is
received in exchange. SFAS 125 requires that liabilities and derivatives
incurred or obtained by the transferor as part of a transfer of financial assets
be initially measured at fair value, if practicable. In addition, SFAS 125
requires that servicing assets and liabilities be subsequently measured by the
amortization over their estimated life and assessment of asset impairment be
based on such assets' fair value. SFAS 125 is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring after
December 31, 1996, and is applied prospectively. The Company is currently
evaluating the impact of SFAS 125 on its financial position and results of
operations.
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<PAGE> 22
BUSINESS
OVERVIEW
DVI, Inc. is an independent specialty finance company that conducts a
medical equipment finance business and a related medical receivables finance
business. As of September 30, 1996, the Company's total assets and shareholder's
equity were $526.1 million and $88.7 million, respectively.
Medical Equipment Finance. The Company finances the acquisition of
diagnostic imaging and other types of sophisticated medical equipment used by
outpatient healthcare providers, medical imaging centers, groups of physicians,
integrated healthcare delivery networks and hospitals. The Company's equipment
finance business operates by (i) providing financing directly to end users of
equipment; (ii) purchasing medical equipment loans and leases originated by
Originators through the Wholesale Program; and (iii) more recently, providing
finance programs for vendors of diagnostic and patient treatment devices. The
Company's typical equipment loan has an initial principal balance ranging from
$300,000 to $2.0 million. Virtually all of the Company's equipment loans are
structured on a fixed interest rate basis such that the full cost of the
equipment and all financing costs are repaid during the financing term, which
typically is five years. Because most of the Company's equipment loans are
structured as notes secured by equipment or direct financing leases with a
bargain purchase option for the equipment user, the amount carried by the
Company on its balance sheet for total residual interest in equipment is quite
small ($5.3 million as of September 30, 1996). Total equipment financing loans
originated in the Company's fiscal year ended June 30, 1996 were $316.8 million.
Of this amount, approximately $218.5 million was provided by the Company
directly to end users; $95.3 million was generated through the Wholesale
Program; and $3.0 million was generated through various vendor finance programs.
The Company has traditionally focused its financing activities on the
outpatient diagnostic and treatment services sector of the healthcare industry,
typically consisting of radiologists and other diagnostic service providers
which were among the first in the healthcare industry to move away from the
hospital setting toward outpatient treatment centers. The Company expects the
range of services provided in an outpatient setting to expand and intends as
part of its business strategy to focus on the equipment used and medical
receivables generated as a result of that expansion.
Relatively high cost MRI and CT equipment have been the principal equipment
types acquired by the Company's customers and financed by the Company, and the
Company expects it will continue to finance substantial amounts of these types
of equipment as a result of its experience and expertise in the industry and
because that market has been relatively underserved by traditional financing
sources. More recently, the Company has targeted the growing and substantially
more competitive lower cost diagnostic and patient treatment device market,
where it is seeking to leverage its reputation for expertise in medical
equipment financing and its ability to provide financing to a wide range of
healthcare providers. To capitalize on the anticipated growth in this market, in
its fiscal year ended June 30, 1995 the Company formed a sales and business unit
dedicated to the financing of lower cost diagnostic and patient treatment
devices.
Medical Receivables Finance. The Company provides lines of credit to a
wide variety of healthcare providers, many of which are also equipment finance
customers. Substantially all of the lines of credit are collateralized by third
party medical receivables due from Medicare, Medicaid, HMOs, PPOs and commercial
insurance companies. The Company's medical receivables loans are structured as
floating rate revolving lines of credit secured by all medical receivables
generated by the borrowers, as well as other collateral. These lines of credit
typically range in size from $300,000 to $5.0 million. While the Company's
medical receivables finance business is newer and substantially smaller than its
medical equipment finance business, the Company expects this business unit to
grow as a result of its recent success in accessing the securitization markets
and other sources of permanent funding. New commitments of credit for the
medical receivables business for the year ended June 30, 1996 were $40.0
million, and medical receivables funded as of June 30, 1996 were $38.6 million.
Medical receivables financing is readily available for many hospitals and
for physicians seeking relatively small amounts of funding. However, for
outpatient healthcare providers seeking funding in excess of
S-22
<PAGE> 23
approximately $500,000, the principal sources of financing generally are limited
to specialty finance companies or factoring companies that purchase receivables
at a discount. The Company believes the principal reasons for the lack of
financing in these areas historically have been the uncertainty of the value of
the receivables, the lack of permanent funding vehicles and the potential for
fraud due to the difficulty of verifying the performance of healthcare services.
More recently, interest in providing financing for this sector has increased as
a result of improved understanding of the expected reimbursement levels for
healthcare services and the availability of historical performance data on which
to base credit decisions. The Company's strategy in medical receivables
financing is to differentiate itself from many of its competitors by offering
loans secured by medical receivables rather than factoring those receivables at
a discount. The Company believes that loans secured by medical receivables are
often more attractive to borrowers that generate high-quality medical
receivables because those borrowers find the Company's financing has a lower
cost than the cost to those borrowers of factoring their receivables. The
Company makes loans in an amount approximately equal to 70% to 80% of the
aggregate amount of the eligible receivables pledged by the borrower.
Credit Underwriting. The Company believes the credit underwriting process
that it uses when originating loans is effective in managing its risk. The
process follows detailed procedures and benefits from the significant experience
of the Company in evaluating the creditworthiness of potential borrowers. The
Company also has been successful in restructuring those credits which do become
delinquent. The Company's net charge-offs as a percentage of average net
financed receivables were 0.15%, 0.15% and 0.34%, for the years ended June 30,
1994, 1995 and 1996, respectively, and total delinquencies as a percentage of
managed net financed receivables for the same periods were 3.64%, 4.51% and
4.28%, respectively. The Company's historical levels of net charge-offs and
delinquencies are not necessarily predictive of future results. Various factors,
including changes in the way the Company's customers are paid for their
services, other developments in the healthcare industry, and new technological
developments affecting the resale value of equipment financed by the Company,
could cause the Company's future net charge-offs and delinquency rates to be
higher than those experienced historically.
Capital Requirements. The Company's strong growth in loan originations and
net financed receivables has required substantial amounts of external funding.
The Company, through its operating subsidiaries, finances its equipment and
medical receivables loans on an interim basis with secured credit facilities
provided by banks and other financial institutions. These interim "warehouse"
facilities are refinanced using asset securitizations, whole loan sales, and
other structured finance techniques that permanently fund most of the Company's
equipment loans and medical receivables loans. These permanent financings
require additional capital to be invested by the Company to fund reserve
accounts or to meet the overcollateralization required in the securitizations
and sales of the Company's loans. The Company expects that most of the net
proceeds from this Offering ultimately will be used to provide this additional
capital required by the securitization process, thereby facilitating the
Company's continued growth.
Recent Growth. In recent years, the Company has grown substantially. Total
equipment financing loans originated by the Company grew from $46.4 million in
the year ended June 30, 1992 to $316.8 million in the year ended June 30, 1996.
The Company's managed net financed receivables grew from $92.4 million as of
June 30, 1992 to $642.3 million as of June 30, 1996. In the Company's medical
receivables financing business, which was established in 1993, new commitments
of credit in the year ended June 30, 1996 were $40.0 million compared with $23.9
million in the year ended June 30, 1995. Medical receivables funded at June 30,
1996 totaled $38.6 million, an increase of $16.1 million over the prior fiscal
year-end.
S-23
<PAGE> 24
BUSINESS STRATEGY
The Company is seeking to continue its growth by expanding its existing
share of the medical equipment financing markets (which historically have been
and continue to be its largest, most important business segment) and by
generating financing opportunities in other areas of the healthcare industry.
The principal components of this strategy are as follows:
- Generate additional business through existing customers and
relationships with equipment manufacturers. The Company will continue
to target the market for high cost medical equipment, where it enjoys
relationships with a large number of users of sophisticated medical
equipment. The Company also has a close working relationship with some
of the largest manufacturers of diagnostic imaging equipment which it
maintains by meeting those manufacturers' needs to arrange financing
for the higher-cost equipment they sell to healthcare providers. The
Company believes these relationships, together with its extensive
expertise in the medical industry, can result in a continuing source
of financing opportunities.
- Expand medical receivables financing business. The Company intends to
penetrate further the medical receivables financing market by
generating financing opportunities among its existing equipment
finance customer base, particularly those customers that are expanding
to provide additional healthcare services. The Company's strategy in
medical receivables financing is to differentiate itself from many of
its competitors by offering loans secured by medical receivables
rather than factoring those receivables at a discount.
- Establish equipment financing relationships with manufacturers of
lower cost diagnostic and patient treatment devices. The Company is
seeking to use its reputation as a medical equipment financing
specialist and its ability to finance a wide range of healthcare
providers to establish a presence in the relatively more competitive
market for financing lower-cost medical equipment. The Company intends
to finance increased amounts of diagnostic and patient treatment
devices such as ultrasound, nuclear medicine and X-ray equipment. As
of September 30, 1996, the Company had established relationships with
twelve manufacturers of these types of medical devices. For the year
ended June 30, 1996, the Company's loan originations for that market
were $3.0 million.
- Originate medical equipment loans on a wholesale basis. The Company
intends to continue its Wholesale Program, in which it originates
medical equipment loans by purchasing them from Originators. The
Company uses its expertise both in analyzing healthcare credits and
utilizing securitization to service Originators that often need access
to sources of permanent financing for the equipment loans they
originate. During the year ended June 30, 1996, the Company purchased
$95.3 million in medical equipment loans through the Wholesale
Program.
- Capitalize on international medical equipment financing needs. During
the year ended June 30, 1996 the Company began establishing
international operations in order to capitalize on growing overseas
markets for sales of medical equipment and devices. The Company
established a joint venture based in Singapore with a major
manufacturer of medical equipment and a financial institution to
service the medical equipment market in the Asia-Pacific region. The
Company also has taken steps to establish overseas operations in Latin
America and elsewhere. While the Company believes these international
operations have significant potential, it expects that potential will
be realized, if at all, over a period of several years rather than in
the near term.
DVI, Inc. conducts its business through two operating subsidiaries, DVI
Financial Services and DVI Business Credit. The Company conducts securitizations
through special purpose indirect wholly-owned subsidiaries. The Company also
conducts other structured financings through limited purpose subsidiaries or
through its operating subsidiaries. The borrowers under the Company's various
warehouse credit facilities are DVI Financial Services or DVI Business Credit.
S-24
<PAGE> 25
HEALTHCARE FINANCING INDUSTRY
General. Managed healthcare and other initiatives have had a substantial
impact on the structure of the healthcare industry in the United States. Many
healthcare services formerly provided principally in hospitals are now delivered
through outpatient healthcare providers. The Company expects that the movement
away from hospital care will continue as long as outpatient healthcare providers
can provide healthcare services at costs lower than hospitals. There is also an
increasing trend toward the use of diagnostic, preventative and non-invasive
procedures, many of which can be provided by outpatient healthcare providers.
Payors such as Medicaid, Medicare and commercial insurance companies have placed
an emphasis on these procedures in an attempt to achieve the cost savings often
obtained in subsequent healthcare services following early detection.
The healthcare industry also has been affected by recent changes in
reimbursement procedures. In an attempt to control healthcare costs, many payors
have moved away from fee for service based reimbursement, where a pre-determined
fee was paid for each diagnostic or treatment procedure performed, toward
capitation or population based reimbursement, where a pre-determined amount per
patient is provided by the payor on an annual basis regardless of the amount or
the types of services performed. These trends in the healthcare industry have
generally placed pressure on the operating margins of all healthcare providers.
In addition, the complex relationships that are evolving as a result of the
reimbursement structure have made it increasingly difficult for traditional
lenders to analyze the credit of healthcare providers, thereby limiting the
funding sources available to the industry.
Developments in computer based technology also have had a significant
impact on the healthcare industry by advancing the capability of sophisticated
medical equipment while at the same time lowering its cost. The increasing
emphasis on diagnostic and early stage preventative treatment, coupled with
these technological advances, have increased the usefulness of, and therefore
the demand for, diagnostic equipment of many kinds, including MRI and CT
equipment. At the same time, cost containment pressure appears to have increased
the demand for relatively less expensive models of diagnostic and other
equipment.
Changes in the healthcare industry have led to consolidation among
healthcare providers, including outpatient healthcare providers. The Company
expects this trend to continue, however, the effect of this consolidation on the
healthcare financing industry is uncertain. One result has been that many
outpatient healthcare providers have diversified the services they provide by
acquiring new equipment to better service their market and to facilitate their
ability to negotiate with third party payors.
SALES AND MARKETING
The Company generates most of its financing opportunities from two sources:
(i) healthcare providers with whom the Company's sales organization has
relationships; and (ii) medical equipment manufacturers that use third parties
to finance the sale of their products. Generally, medical equipment
manufacturers refer customers to the Company for financing because they believe
the Company has the ability to understand and measure the creditworthiness of
the customer's business and provide the financing necessary for the completion
of the equipment sale.
The Company has established a close working relationship with major
manufacturers of diagnostic imaging equipment by meeting their needs to arrange
financing for the higher cost equipment they sell to healthcare providers. These
manufacturers include Hitachi Medical Systems America, Philips Medical Systems
and Toshiba America Medical Systems among others. The Company believes these
relationships afford it a competitive advantage over other providers of medical
equipment financing.
The Company is seeking to expand its equipment finance business into the
relatively more competitive patient diagnostic and treatment device market. The
Company believes its experience and expertise in financing a wide range of
healthcare providers and meeting the equipment financing needs of major
manufacturers of diagnostic imaging equipment will help it build relationships
with patient treatment device manufacturers. To establish relationships with
patient treatment device manufacturers, the Company expects to train the
manufacturers' sales personnel in the use of equipment financing as a sales tool
and to provide equipment financing programs that make these device manufacturers
more competitive. The Company
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<PAGE> 26
believes the patient treatment device market is more diverse than the diagnostic
imaging market because of the larger number of manufacturers and types of
products and the greater price range of those products. The patient treatment
device manufacturers targeted by the Company produce products with an average
cost of between $75,000 and $300,000. For the year ended June 30, 1996, the loan
originations for this business unit were $3.0 million.
The Company also has a business unit dedicated to the Wholesale Program.
The Company purchases equipment loans from Originators that generally do not
have access to cost effective permanent funding for their loans. The Company
initiated the Wholesale Program in June 1994 and during the years ended June 30,
1996 and 1995, the Company purchased an aggregate of $95.3 million of equipment
loans from twelve Originators and $59.3 million from six Originators,
respectively. The Company expects to continue this business at approximately
current levels.
In the medical receivables finance business, the lines of credit originated
by the Company are secured by pledges of (i) specific receivables due the
provider, (ii) the overall receivables portfolio of the healthcare provider, and
(iii) other forms of credit enhancement such as cash collateral, letters of
credit and guarantees. The Company's medical receivable loan marketing
specialists assist the Company's equipment loan sales force in originating
medical receivables loans. While the growth and cross selling of the medical
receivables financing business to the Company's existing client base has been
restricted because of the lack of access to permanent funding, the Company has
recently completed a $25 million securitization of medical receivables and has
established a $50 million warehouse facility for medical receivables. The
medical receivables loan business entails significant risks and capital
requirements.
The Company's sales and marketing organization consists of 25 healthcare
finance specialists located in various parts of the United States. These
individuals generally have a credit industry and/or medical equipment
background. The Company generally locates sales personnel in geographic areas
where they have knowledge of the local market. The Company believes that sales
personnel who understand local economic and political trends are a valuable
component of its credit underwriting process.
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<PAGE> 27
PROFILE OF EQUIPMENT FINANCED
The following table sets forth certain information with respect to loan
originations, including loan purchases by the Company for the years ended June
30, 1994, 1995 and 1996. Summations and differences of the numbers set forth
below may not reconcile due to rounding.
LOANS ORIGINATED BY THE COMPANY(1)
(IN THOUSANDS, EXCEPT PERCENTAGES)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JUNE 30,
------------------------------------------------------------
1994 1995 1996
------------------ ------------------ ------------------
PERCENT PERCENT PERCENT
AMOUNT OF AMOUNT OF AMOUNT OF
ORIGINATED TOTAL ORIGINATED TOTAL ORIGINATED TOTAL
---------- ----- ---------- ----- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
DIAGNOSTIC/TREATMENT EQUIPMENT(2)
Magnetic Resonance Imaging (MRI)............. $ 95.8 58.8% $155.9 46.1% $152.7 42.8%
Computerized Tomography (CT)................. 11.6 7.1 20.7 6.1 21.2 5.9
Ultrasound................................... 2.7 1.7 9.7 2.9 4.0 1.1
Medical Devices.............................. 2.4 1.5 15.3 4.5 42.9 12.0
Imaging Systems.............................. 4.6 2.8 12.2 3.6 18.5 5.2
X-Ray........................................ 1.7 1.0 2.3 0.7 1.9 0.5
Radiation Therapy............................ 9.9 6.1 12.0 3.6 8.4 2.4
Other........................................ 28.7 17.6 86.1 25.5 67.2 18.8
------ ---- ------ ---- ------ ----
157.4 314.1 316.8
SECURED LINES OF CREDIT(3)
- --------------------------
Lines of credit originated................... 5.6 3.4 23.9 7.1 40.0 11.2
------ ------ ------ ------ ------ ------
Total...................................... $163.0 100.0% $338.0 100.0% $356.8 100.0%
====== ====== ======= ====== ====== ======
</TABLE>
- ---------------
(1) In addition to medical equipment, when the Company provides financing for
outpatient healthcare centers, it often finances other general types of
equipment necessary to operate the center, including computers and
telecommunication systems. Therefore, the categories in the table may
include amounts provided to finance such equipment.
(2) Percentages are based on the original cost of equipment financed.
(3) Percentages are based on the total dollar volume of the amounts committed
under the lines of credit which includes both funded and unfunded amounts.
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<PAGE> 28
The following table sets forth certain information with respect to the
geographic distribution of the Company's leases and notes outstanding as of
September 30, 1996 based on the original equipment cost.
GEOGRAPHIC DISTRIBUTION OF EQUIPMENT LOAN PORTFOLIO TOP 10 STATES
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL EQUIPMENT
STATE EQUIPMENT COST LOAN PORTFOLIO
----- -------------- ---------------
<S> <C> <C>
California............................................... $148,754 18.3%
New York................................................. 139,531 17.2
Florida.................................................. 79,388 9.8
Texas.................................................... 62,501 7.7
New Jersey............................................... 52,169 6.4
Pennsylvania............................................. 33,391 4.1
Maryland................................................. 30,238 3.7
Illinois................................................. 23,694 2.9
Arizona.................................................. 20,694 2.6
Georgia.................................................. 18,249 2.3
</TABLE>
The following table sets forth management's estimate of the approximate
cost of new equipment financed by the Company.
COST ESTIMATE OF NEW EQUIPMENT FINANCED
<TABLE>
<CAPTION>
EQUIPMENT TYPE PRICE RANGE
-------------- -------------------------
<S> <C> <C> <C>
MRI........................................................... $800,000 -- $1,800,000
Radiation Therapy............................................. 600,000 -- 1,300,000
CT............................................................ 250,000 -- 800,000
Medical Devices............................................... 10,000 -- 500,000
Imaging Systems............................................... 100,000 -- 300,000
Ultrasound.................................................... 70,000 -- 200,000
X-Ray......................................................... 70,000 -- 200,000
</TABLE>
LOAN CHARACTERISTICS AND UNDERWRITING
Equipment loans. The Company's typical equipment loan is secured by
medical equipment and other collateral, is a five-year contract that is not
prepayable and has an initial principal balance ranging from $300,000 to $2.0
million. In many of its equipment loans, the Company obtains liens on all of the
borrower's assets and guarantees from equity owners and other affiliates of the
borrowers. In a small number of instances the Company will obtain recourse to
the manufacturers of the equipment. Where the borrower has multiple financings
with the Company, the loans generally contain cross default provisions. The
Company also takes a pledge of the stock of the corporate entities that own and
operate the equipment.
The Company's equipment loans are structured (i) on a "net" basis,
requiring the obligor to pay for equipment maintenance and all other operating
expenses, including taxes and insurance and (ii) to require the obligor to be
responsible for compliance with all applicable laws and regulations with respect
to the use and operation of the equipment. The terms of the Company's equipment
loans range from 36 to 84 months. As of September 30, 1996 approximately 90% (as
measured by equipment cost) of the Company's loan portfolio had an initial term
of 72 months or less. The Company's policy is to structure its equipment loans
so that the obligor pays for the full cost of the equipment and the financing
during the financing term.
Due to the relatively large size of the Company's typical equipment loan
originations (which in the year ended June 30, 1996 averaged approximately
$400,000), each loan is analyzed individually. The Company applies specific
credit guidelines to each of its various customers, depending on their credit
strength. Loans equal to or in excess of $750,000 generally require the approval
of the Company's senior credit committee (the "Senior Credit Committee"), which
consists of two members of the Credit Committee (defined below) and a
S-28
<PAGE> 29
designated member of the Company's Board of Directors. All loans equal to or in
excess of $500,000 but less than $750,000 must be approved by the Company's
credit committee (the "Credit Committee"), which consists of three designated
senior credit officers. The Vice President of Credit of DVI Financial Services,
together with the credit manager of the applicable subsidiary has the authority
to approve all transactions in excess of $250,000 but less than $500,000. All
other loans must be approved by the credit manager of the applicable subsidiary.
To service the needs of its customers, equipment manufacturers and sales
organizations, the Credit Committee and Senior Credit Committee generally meet
at least weekly to review and make credit decisions on new loans.
The credit underwriting process the Company uses to evaluate out-patient
healthcare providers and other non-hospital borrowers enables it to prescribe
specific working capital and net worth requirements and specify the amount and
form of any credit enhancement and/or financial support (such as cash
collateral, letter of credit, guarantees, fee subordinations or equipment
manufacturer guarantees). When analyzing hospital credits, the credit analysis
process is generally simpler and less time consuming than the process for
analyzing outpatient and physician credits due to the financial strength of the
borrower and the availability of audited financial statements.
Wholesale Program. Under the Wholesale Program, the Company purchases
loans that satisfy the same credit guidelines that it employs to originate
equipment loans on a direct basis. The Company is not required to purchase all
or any of such loans. The Company believes that following its credit guidelines
helps minimize the Company's financial risk in connection with purchasing loans
from Originators and helps ensure that the loans conform to the requirements of
the Company's securitization programs. The Company selects Originators based on
the type and cost of the medical equipment they finance, the business and credit
history of Originators and the historical performance of the loans they have
originated. The Company requires Originators to use loan documentation supplied
by or acceptable to the Company and to furnish it the same general credit
information the Company requires when it originates loans on a direct basis.
The purchase price for wholesale loans is based on the present value of the
remaining payments discounted at an agreed upon interest rate that is higher
than the borrowing costs the Company expects to incur when it securitizes or
otherwise permanently funds the purchased loans. Pending securitization or sale,
the Company borrows under its warehouse facilities, which bear interest at
variable rates, in order to purchase loans from Originators. Accordingly, the
Company may be exposed to interest rate risk on purchases under the Wholesale
Program to the extent interest rates increase between the time the purchases are
initially funded and the time they are permanently funded. In addition, the
Company services the loans it purchases under the Wholesale Program for the
remaining terms of the contracts.
Medical Receivables Loans. The Company's medical receivables financing
business consists primarily of providing revolving lines of credit under which
the Company makes full recourse loans to healthcare providers, many of which are
equipment finance customers, that are secured by medical receivables and other
collateral. The amounts of the credit facilities range from $300,000 to $5.0
million and are based upon the Company's evaluation of the net collectible
amount of the healthcare providers' eligible receivables. After determining the
amount of the credit facility, the providers' eligible receivables are reviewed
on a quarterly basis to determine collectibility. These medical receivables
generally have maturities ranging from 30 to 150 days and generally involve
payors such as insurance plans, self insured companies and governmental
programs. The Company does not lend against co-pay obligations, worker's
compensation claims or receivables that are more than 90 days past due.
Substantially all of the Company's medical receivable lines of credit have terms
from 12 to 36 months. The medical receivable financing business entails
significant risks and capital requirements. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
S-29
<PAGE> 30
CREDIT EXPERIENCE
The following table sets forth certain information with respect to the
delinquencies for the Company's equipment loans for the periods indicated.
DELINQUENCY EXPERIENCE(1)
<TABLE>
<CAPTION>
AS OF
AS OF JUNE 30, SEPTEMBER
-------------------------------------------------------------- 30,
1992 1993 1994 1995 1996 1996
---------- ----------- ----------- ----------- ----------- ------------
$ %(2) $ %(2) $ %(2) $ %(2) $ %(2) $ %(2)
----- ---- ------ ---- ------ ---- ------ ---- ------ ---- ------ ----
(IN MILLIONS, EXCEPT FOR PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Managed net financed
receivables.................. 92.4 -- 123.6 -- 239.3 -- 500.6 -- 642.3 -- 703.8 --
Delinquencies
31 - 60 days................. 1.1 1.2 4.1 3.3 4.0 1.6 12.6 2.5 10.4 1.6 9.7 1.4
61 - 90 days................. 2.6 2.8 2.1 1.7 0.2 0.1 3.1 0.6 3.6 0.6 5.2 0.7
91 + days.................... 0.3 0.3 3.9 3.2 4.5 1.9 6.9 1.4 13.5 2.1 13.2 1.9
---- --- ----- --- ----- --- ----- --- ----- --- ----- ---
Total delinquencies....... 4.0 4.3 10.1 8.2 8.7 3.6 22.6 4.5 27.5 4.3 28.1 4.0
==== === ===== === ===== === ===== === ===== === ===== ===
</TABLE>
- ---------------
(1) Under the relevant agreements, the Company's obligors generally are
considered in default if payment on a contract has not been received when
due. Information presented does not include obligations that are overdue by
less than 30 days.
(2) Delinquencies as a percentage of managed net financed receivables.
Delinquencies reflect the entire outstanding balance on delinquent
contracts.
The Company expects all of the equipment it finances ultimately to be owned
by the borrower. The Company's experience has been that in instances of
delinquency, the market value of the equipment generally has been sufficient to
allow for the restructuring of loans without any significant adjustments to the
manner in which the Company records such loans. The Company has also exercised
its right to bring in new management to operate centers that have defaulted on
their loans.
The following table sets forth information with respect to losses for the
Company's equipment loans for the periods indicated.
LOSS EXPERIENCE
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED JUNE 30, ENDED
---------------------------------------------------------- SEPTEMBER 30,
1992 1993 1994 1995 1996 1996
------- ------- -------- -------- -------- -------------
(IN THOUSANDS, EXCEPT FOR PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
Net charge-offs......... $ 37 $ 82 $ 264 $ 477 $ 1,581 $ 10
Average net financed
receivables(1)........ 78,489 94,233 176,410 319,831 460,550 478,785
Net charge-offs as
percentage of average
net financed
receivables........... 0.05% 0.09% 0.15% 0.15% 0.34% 0.01%
Average managed net
financed
receivables(1)........ $78,489 $94,233 $176,410 $359,515 $573,959 $ 665,893
Net charge-offs as a
percentage of average
managed net financed
receivables(2)........ 0.05% 0.09% 0.15% 0.13% 0.28% 0.01%
</TABLE>
- ---------------
(1) Approximates the arithmetic mean of quarter-end balances.
(2) Information presented on an annualized basis.
S-30
<PAGE> 31
The following table sets forth information with respect to reconciliation
of allowance for losses for the Company's equipment loans for the periods
indicated. On a monthly basis, the Company compiles information with respect to
the current and anticipated performance of its loan portfolio. The Company
analyzes this information regularly and makes an adjustment to the allowance at
the end of each fiscal quarter.
RECONCILIATION OF ALLOWANCE FOR LOSSES
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED JUNE 30, ENDED
--------------------------------------------------- SEPTEMBER 30,
1992 1993 1994 1995 1996 1996
------- -------- -------- -------- -------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Beginning allowance.............. $ 612 $ 1,082 $ 1,046 $ 2,498 $ 3,282 $ 3,675
Provision for doubtful
accounts....................... 507 248 1,716 1,261 1,974 143
Net charge-offs.................. (37) (82) (264) (477) (1,581) (10)
Other(1)......................... -- (202) -- -- -- --
------- -------- -------- -------- -------- --------
Ending allowance................. $ 1,082 $ 1,046 $ 2,498 $ 3,282 $ 3,675 $ 3,808
======= ======== ======== ======== ======== ========
Net financed receivables......... $92,373 $123,628 $239,347 $405,815 $456,778 $ 478,520
Ending allowance as a percentage
of net financed receivables.... 1.17% 0.85% 1.04% 0.81% 0.80% 0.80%
======= ======== ======== ======== ======== ========
</TABLE>
- ---------------
(1) Adjustments related primarily to discontinued operations.
The Company's historical levels of allowances and delinquencies are not
necessarily predictive of future results. Various factors, including changes in
the way the Company's customers are paid for their services, other developments
in the healthcare industry, and new technological developments affecting the
resale value of equipment financed by the Company, could cause the Company's
future allowance and delinquency rates to be worse than those experienced
historically.
CAPITAL RESOURCES AND TRANSACTION FUNDING
The Company obtains initial funding for most of its equipment loans through
"warehouse" facilities provided by banks and other financial institutions. Loans
made under these facilities are repaid when the Company permanently funds its
equipment loans through securitization or other limited recourse permanent
funding programs, including loan sales. Typically, equipment loans are held for
30 to 180 days before they are permanently funded.
The Company's need for capital in addition to the funding provided under
its warehouse and permanent funding facilities is affected by two primary
factors: (i) the level of credit enhancement required under its various
warehouse and permanent funding facilities and (ii) the amount of loans held at
any time by the Company that do not qualify as eligible collateral under those
facilities. Because of the manner in which the Company accounts for its business
operations it may require substantial amounts of capital even in periods when it
reports positive earnings. This arises principally because there are timing
differences between the Company's recognition for accounting purposes of various
items of expense and income and its actual receipt of cash that cause the
Company's cash flow at times of strong growth in loan originations to be lower
than its reported earnings. The two most significant of these differences are
(x) the deferral of the Company's costs to originate each loan which are
amortized for accounting purposes over the life of the loan, even though the
costs are paid in cash at the time of the loan origination, and (y) the
recognition of gain on the sale of a loan for accounting purposes at the time
the sale is deemed to have occurred, even though in many transactions treated as
sales of loans for accounting purposes, the cash is received over the same time
period as the original amortization schedule of the loan. While these factors
tend to reduce the Company's liquidity at times of strong growth in loan
originations, conversely, if the Company's loan growth were to decline, these
same factors would have the effect of improving the Company's cash flow from
operations in the short term.
S-31
<PAGE> 32
Continuing Need for Capital. Each of the Company's warehouse facilities
and permanent funding vehicles require the Company to provide equity or a form
of recourse credit enhancement to the respective lenders or investors and
generally do not permit the Company to fund general corporate requirements.
Therefore, the actual liquidity or funds available to the Company to finance its
growth are limited to the cash generated from net financed receivables and the
available proceeds of equity or debt securities issued by DVI, Inc. At times of
strong origination growth the Company's cash flows from operations are
insufficient to fund these requirements. As a result, the Company's need to fund
its high growth rates in loan originations necessitates substantial external
funding to provide the equity or capital required as recourse credit enhancement
with which to leverage borrowings. The Company has no binding commitments for
the capital it expects it will continue to require, and its ability to obtain
that capital in the future will be dependent on a number of factors including
the condition of the capital markets and economic conditions generally.
Warehouse Facilities. As of November 30, 1996, the Company had an
aggregate maximum of $276.5 million potentially available under various
warehouse facilities of which it had borrowed an aggregate of $132.1 million.
These facilities are provided by a syndicate of banks that participate in a
revolving credit arrangement and by investment banking firms that the Company
uses for securitizations. The loans made under the bank warehouse facility (i)
bear interest at floating rates; (ii) are full recourse obligations of the
Company; and (iii) typically require the Company to advance an amount equal to
approximately 95.0% of the cost of the equipment subject to the loans being made
thereunder. Loans made under the bank warehouse facility typically are repaid
with the proceeds of advances made under securitization warehouse facilities.
Those advances in turn are typically repaid with proceeds from permanent
fundings. Loans funded under securitization warehouse facilities cease to be
eligible collateral if they are not funded within a specified period of time.
The amount advanced under the securitization warehouse facilities generally is
90.0% of the discounted value of the pledged receivables. If the Company were
unable to arrange continued access to acceptable warehouse financing, the
Company would have to curtail its loan originations, which in turn would have a
material adverse effect on the Company's financial condition and operations.
Permanent Funding Program. Since 1991, the most important source of
permanent funding for the Company has been securitization and other forms of
structured finance. Securitization is a process in which a pool of equipment
loans (in the Company's case, typically 100 to 150) is transferred to a
special-purpose financing vehicle which issues notes to investors. Principal and
interest on the notes issued to investors by the securitization subsidiary are
paid from the cash flows produced by the loan pool, and the notes are secured by
a pledge of the assets in the loan pool as well as by other collateral. In the
securitizations sponsored by the Company, equipment loans funded through the
securitizations must be credit enhanced to receive an investment grade credit
rating. Credit enhancement can be provided in a number of ways, including cash
collateral, letters of credit, a subordinated "tranche" of each individual
transaction or an insurance policy. Typically, securitizations sponsored by the
Company are enhanced through a combination of some or all of these methods. In
the securitizations sponsored to date by the Company, the Company effectively
has been required to furnish credit enhancement equal to the difference between
(i) the aggregate principal amount of the equipment loans originated by the
Company and transferred to the Company's special purpose finance subsidiary and
the related costs of consummating the securitization and (ii) the net proceeds
received by the Company in such securitizations. The requirement to provide this
credit enhancement reduces the Company's liquidity and requires it periodically
to obtain additional capital. There can be no assurance that the Company will be
able to obtain additional capital.
For accounting purposes, the Company's securitizations are treated as
either financings (on balance sheet transactions) or sales (off balance sheet
transactions). An on balance sheet transaction is one in which the loans being
securitized remain on the Company's balance sheet as an asset for their
originally contracted term as a result of the consolidation of the assets and
liabilities of the special purpose vehicle with the Company's for financial
accounting purposes. An off balance sheet transaction removes the loans from the
Company's balance sheet and results in the Company recognizing a gain on the
sale of the underlying loans upon completion of the securitization.
The Company continually seeks to improve the efficiency of its permanent
funding techniques by reducing up-front costs and minimizing the cash
requirements of the Company. The Company may consider
S-32
<PAGE> 33
alternative structures, including senior/subordinated tranches, and alternative
forms of credit enhancement, such as letters of credit and surety bonds. The
transaction expenses of each securitization and other forms of structured
financing will depend on market conditions, costs of securitization and the
availability of credit enhancement options to the Company. The Company expects
to continue to use securitization and other forms of structured financing, on
both a public and private basis, as its principal source of permanent funding
for the foreseeable future.
To be cost efficient, a securitization must cover a relatively large and
diverse portfolio of equipment loans. One of the basic requirements of the
credit rating agencies that rate the notes issued in securitizations relates to
borrower concentration and requires that no single credit (borrower) may
constitute a significant portion of the pool of equipment loans being
securitized (in the Company's case, the limit is generally about 3%). Because of
these concentration requirements the Company generally must accumulate in excess
of $60 million in loans for each securitization. The credit rating agencies also
have other concentration guidelines such as equipment type and the geographic
location of the obligors. These requirements mean that not all of the equipment
loans held in the Company's warehouse facilities at any point in time can be
placed in one securitization.
If for any reason the Company were to become unable to access the
securitization market to permanently fund its equipment loans, the consequences
for the Company would be materially adverse. The Company's ability to complete
securitizations and other structured finance transactions depends upon a number
of factors, including general conditions in the credit markets, the size and
liquidity of the market for the types of receivable-backed securities issued or
placed in securitizations sponsored by the Company and the overall financial
performance of the Company's loan portfolio. The Company does not have binding
commitments from financial institutions or investment banks to provide permanent
funding for its equipment or medical receivables loans.
Hedging Strategy. The Company's equipment loans are virtually all
structured on a fixed interest rate basis. When the Company originates equipment
loans, it bases its pricing in part on the "spread" it expects to achieve
between the interest rate it charges its equipment loan customers and the
effective interest cost it will pay when it permanently funds those loans.
Increases in interest rates between the time the loans are originated and the
time they are permanently funded could narrow, eliminate or even reverse the
spread between the interest rate the Company realizes on its equipment loans and
the interest rate that the Company pays under its warehouse facilities or under
a permanent funding program. In an attempt to protect itself against that risk,
the Company uses a hedging strategy. The Company uses derivative financial
instruments, such as forward rate agreements, Treasury locks, and interest rate
swaps, caps and collars, to manage its interest rate risk. The derivatives are
used to manage three components of this interest rate risk: interest sensitivity
adjustments, pricing of anticipated loan securitizations and sales, and interest
rate spread protection. The Company seeks to manage the credit risk of possible
counterparty default in these derivative transactions by dealing exclusively
with counterparties with investment grade ratings.
Forward rate agreements are for interest sensitivity adjustments in
conjunction with cash market activities and are used to extend the repricing
period of short-term floating rate warehouse facilities. Treasury locks and
collars are used to hedge the interest rate risk on anticipated loan
securitizations and sales. Treasury lock and collar transactions lock in
specific rates and a narrow range of rates, respectively, of Treasury notes
having maturities comparable to the average life of the anticipated
securitizations and sales. Interest rate swaps and caps are used for interest
rate spread protection to protect from rising interest rates in certain loan
sale facilities where the cash flows from the loans sold are fixed rate but the
borrowing costs are variable rate.
There can be no assurance that the Company's hedging strategy or techniques
will be effective, that the profitability of the Company will not be adversely
affected during any period of changes in interest rates or that the costs of
hedging will not exceed the benefits. A substantial and sustained increase in
interest rates could adversely affect the Company's ability to originate loans.
In certain circumstances, the Company for a variety of reasons may retain for an
indefinite period certain of the equipment loans it originates. In such cases,
the Company's interest rate exposure may continue for a longer period of time
than the Company otherwise considers desirable.
S-33
<PAGE> 34
Medical Receivable Financing. The Company funds its medical receivable
financing business through various sources. The Company's principal bank
revolving credit agreement permits up to $18 million to be used to warehouse
medical receivables loans. Warehouse facilities totaling $10 million are
available from two other banks. In addition, in September 1996 the Company
obtained a $50 million warehouse facility from an investment banking firm. In
January 1996 the Company completed a $25 million private placement
securitization of loans. This was placed with a domestic insurance company and
matures in four years.
While the medical receivable financing business shares certain
characteristics, including an overlapping customer base, with the Company's
medical equipment financing business, there are many differences, including
unique risks. Healthcare providers could overstate the quality and
characteristics of their medical receivables, which the Company analyzes in
determining the amount of the line of credit to be secured by such receivables.
After the Company has established or funded a line of credit, the healthcare
providers could change their billing and collection systems, accounting systems
or patient records in a way that could adversely affect the Company's ability to
monitor the quality and/or performance of the related medical receivables. In
addition, there are substantial technical legal issues associated with creating
and maintaining perfected security interests in medical receivables. Payors may
attempt to offset their payments to the Company against debts owed to the payors
by the healthcare providers. The Company may have a conflict of interest when
the Company acts as servicer for an equipment-based securitization and
originates medical receivables loans to borrowers whose previous equipment loans
have been securitized. The Company's efforts to develop suitable sources of
funding for its medical receivable financing business through securitization or
other structured finance transactions may be constrained or hindered due to the
fact that the use of structured finance transactions to fund medical receivables
is a relatively new process.
Credit Risk. Loans to outpatient healthcare providers, which constitute a
substantial portion of the Company's customers, often require a high degree of
credit analysis. Although the Company seeks to mitigate its risk of default and
credit losses through its underwriting practices and loan servicing procedures
and through the use of various forms of non-recourse or limited recourse
financing (in which the financing sources that permanently fund the Company's
equipment and other loans assume some or all of the risk of default by the
Company's customers), the Company remains exposed to potential losses resulting
from a default by an obligor. Obligors' defaults could cause the Company to make
payments to the extent the Company is obligated to do so and in the case of its
permanent equipment and other funding arrangements to the extent of the
Company's remaining credit enhancement position; could result in the loss of the
cash or other collateral pledged as credit enhancement under its permanent
equipment and other funding arrangements; or could require the Company to
forfeit any residual interest it may have retained in the underlying equipment.
During the period after the Company initially funds an equipment or other loan
and prior to the time it funds the loan on a permanent basis, the Company is
exposed to full recourse liability in the event of default by the obligor. In
addition, under the terms of securitizations and other types of structured
finance transactions, the Company generally is required to replace or repurchase
equipment and other loans in the event they fail to conform to the
representations and warranties made by the Company, even in transactions
otherwise designated as non-recourse or limited recourse.
Defaults by the Company's customers also could adversely affect the
Company's ability to obtain additional financing in the future, including its
ability to use securitization or other forms of structured finance. The sources
of such permanent funding take into account the credit performance of the
equipment and other loans previously financed by the Company in deciding whether
and on what terms to make new loans. In addition, the credit rating agencies and
insurers that are often involved in securitizations consider prior credit
performance in determining the rating to be given to the securities issued in
securitizations sponsored by the Company and whether and on what terms to insure
such securities. To date, all of the Company's medical receivable loans (as
opposed to its equipment loans) have been funded on a full recourse basis
whereby the Company is fully liable for any losses that are incurred.
Under the Company's Wholesale Program, the Company purchases equipment
loans from Originators that generally do not have direct access to the
securitization market as a source of permanent funding for their loans. The
Company does not work directly with the borrowers at the origination of these
equipment loans and therefore is not directly involved in structuring the
credits, however the Company independently verifies credit
S-34
<PAGE> 35
information supplied by the Originator. Accordingly, the Company faces a
somewhat higher degree of risk when it acquires loans under the Wholesale
Program. During the year ended June 30, 1996 and the three month period ended
September 30, 1996, loans purchased under the Wholesale Program constituted
29.5% and 34.0%, respectively, of the total loans originated during the period.
There can be no assurance that the Company will be able to grow this business
successfully or avoid the credit risks related to wholesale loan origination.
COMPETITION
The financing of sophisticated medical equipment is highly competitive. The
Company competes with equipment manufacturers that sell and finance their own
products, leasing subsidiaries of national and regional commercial banks and
other leasing and financing companies. Many of the Company's competitors have
significantly greater financial and marketing resources than the Company. In
addition, the levels of competition in the lower-cost diagnostic and patient
treatment device market and medical receivable financing market, are greater
than the levels of competition historically experienced by the Company in the
higher cost medical equipment market. There can be no assurance that the Company
will be able to compete successfully in any or all of its targeted markets.
GOVERNMENT REGULATION
Although most states do not regulate the equipment financing business,
certain states do require licensing of lenders and financiers, limitations on
interest rates and other charges, adequate disclosure of certain contract terms
and limitations on certain collection practices and creditor remedies. In
addition, the operation of certain types of diagnostic imaging and patient
treatment equipment is regulated by federal, state and/or local authorities. For
example, a shared service provider or healthcare provider using equipment
financed by the Company may be required to obtain and maintain approvals from
governmental authorities in order to service other healthcare providers with
whom it has entered into service agreements. Failure by the Company's customers
to comply with these requirements could adversely affect their ability to meet
their obligations to the Company. The ability of the Company's equipment
financing customers to satisfy their obligations to the Company could also be
adversely affected by changes in regulations which limit or prohibit the
referral of patients by physicians who have invested in healthcare facilities
financed by the Company.
S-35
<PAGE> 36
MANAGEMENT
The Directors and executive officers of the Company are:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Michael A. O'Hanlon................ 50 Director, President and Chief Executive Officer
Steven R. Garfinkel................ 53 Executive Vice President and Chief Financial
Officer
Richard E. Miller.................. 45 Executive Vice President
Anthony J. Turek................... 53 Executive Vice President and Chief Credit Officer
John P. Boyle...................... 47 Vice President and Chief Accounting Officer
Melvin C. Breaux................... 56 Vice President, Secretary and General Counsel
Cynthia J. Cohn.................... 37 Vice President
Dominic A. Guglielmi............... 45 Vice President
Alan J. Velotta.................... 49 Vice President
Gerald L. Cohn..................... 68 Director
John E. McHugh..................... 67 Director
Nathan Shapiro..................... 60 Director
William S. Goldberg................ 38 Director
Harry T.J. Roberts................. 62 Director
</TABLE>
Michael A. O'Hanlon is the Company's president and chief executive officer
and has served as such since November 1995. Mr. O'Hanlon was president and chief
operating officer from September 1994 to November 1995. Previously, Mr. O'Hanlon
served as executive vice president of the Company since joining the Company in
March 1993. Mr. O'Hanlon also serves on the executive committee of the Company.
Prior to joining the Company, Mr. O'Hanlon served as president and chief
executive officer of Concord Leasing, Inc. ("Concord Leasing") for nine years.
Concord Leasing provides medical, aircraft, shipping, and industrial equipment
financing. U.S. Concord, Inc., a subsidiary, provides equipment financing for
the medical imaging industry. Previously, Mr. O'Hanlon was a senior executive
with Pitney Bowes Credit Corporation. Mr. O'Hanlon received his Master of
Science degree from the University of Connecticut, and his Bachelor of Business
Administration from the Philadelphia College of Textiles and Science. Mr.
O'Hanlon became a director of the Company in November 1993.
Steven R. Garfinkel is an executive vice president of the Company and its
chief financial officer. Mr. Garfinkel also serves on the executive committee of
the Company. Mr. Garfinkel joined the Company in September 1995. His
responsibilities include corporate finance, loan funding, balance sheet
management, accounting and financial reporting, internal control and financial
planning. Mr. Garfinkel has extensive experience in developing and managing
corporate finance relationships, money market funding, derivative hedging,
financial planning and management information systems. Before joining the
Company, Mr. Garfinkel spent his twenty-nine year career with two large bank
holding companies: CoreStates Financial Corp and First Pennsylvania Corporation.
For twenty years he was either controller or treasurer of those organizations.
Mr. Garfinkel received his Master of Business Administration degree from Drexel
University, and his Bachelor of Arts degree from Temple University.
Richard E. Miller is an executive vice president of the Company who joined
the Company in April 1994. Mr. Miller is president of DVI Financial Services
Inc. Mr. Miller also serves on the executive committee of the Company. His
primary responsibility is to manage the Company's sales organization of
financing specialists that interface directly with the Company's customers.
Before joining the Company, he served for six years as vice president sales for
Toshiba America Medical Systems, a major distributor of medical imaging
equipment. Previously, Mr. Miller was national sales manager for Thomsen CGR, a
French manufacturer of medical imaging equipment, which was acquired by General
Electric Medical Systems. He also previously served in sales management with
General Electric Medical Systems. Mr. Miller has a Bachelor of Arts degree from
Eastern University.
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Anthony J. Turek is an executive vice president and the chief credit
officer of the Company. Mr. Turek has served in that capacity since March 1988.
Mr. Turek also serves on the executive committee of the Company. Prior to
joining the Company, Mr. Turek was vice president, Commercial Banking at
Continental Illinois National Bank ("CINB") in Chicago from 1968 to 1988. For
the five years prior to joining the Company, Mr. Turek managed the equipment
leasing and transportation divisions of CINB. Prior responsibilities included
management positions in the special industries, metropolitan and national
divisions of CINB. Before his employment with CINB, Mr. Turek was a trust
officer with Bank of America. Mr. Turek received his Bachelor of Science degree
from Iowa State University and his Master of Science degree from the University
of Missouri.
John P. Boyle is a vice president and chief accounting officer of the
Company. Mr. Boyle joined the Company in January 1995. His primary
responsibility is managing the Company's accounting, tax and financial reporting
functions. Before joining the Company, Mr. Boyle spent seventeen years of his
professional career in senior finance and accounting positions with financial
services organizations. He spent the initial five years of his career with Peat
Marwick Mitchell & Co. in Philadelphia. Mr. Boyle is a General Securities
Principal and a CPA with almost twenty years of experience in the financial
services industry. Beyond his accounting background, he has extensive experience
in credit and corporate finance matters. Mr. Boyle holds a Bachelor of Arts
degree from Temple University.
Melvin C. Breaux is general counsel, secretary and a vice president of the
Company and is general counsel and a vice president of DVI Financial Services.
Prior to joining the Company in July 1995, Mr. Breaux was a partner in the
Philadelphia, PA law firm of Drinker Biddle & Reath. As a member of that firm's
banking and finance department, he specialized in secured and unsecured
commercial lending transactions, a wide variety of other financing transactions,
and the general practice of business law. Mr. Breaux received a Bachelor of Arts
degree from Temple University and a Juris Doctor degree from the University of
Pennsylvania School of Law.
Cynthia J. Cohn has been a vice president of the Company since October 1988
and executive vice president of DVI Business Credit since January 1994. She is
responsible for all sales and marketing functions of DVI Business Credit. Ms.
Cohn has been employed by the Company in a sales and management capacity since
July 1986. Ms. Cohn also handles certain shareholder relation functions for the
Company. She served as an assistant vice president from July 1987 to October
1988. Prior to joining the Company, Ms. Cohn served as research coordinator for
Cantor, Fitzgerald Co., Inc., a stock brokerage firm, from February 1983 to July
1986, where she was responsible for development and coordination of that firm's
research product for both institutional and retail clientele. She holds a
Bachelor of Arts degree from Ithaca College. Ms. Cohn is the daughter of Gerald
L. Cohn, a director of the Company.
Dominic A. Guglielmi is a vice president of the Company and the group
managing director of DVI Financial Services Inc., and has served as such since
the acquisition of Medical Equipment Finance Corp. by the Company in January
1993. Prior to joining the Company, Mr. Guglielmi served as the president of the
Healthcare Division of U.S. Concord, Inc. for five years where he was
responsible for sales, marketing, documentation, credit/collections, financial
budgeting and all aspects of strategic planning. Previously, Mr. Guglielmi held
management positions with General Electric Credit Corporation and Pitney Bowes
Credit Corporation. Mr. Guglielmi holds a Bachelor of Arts degree from LaSalle
University.
Alan J. Velotta is a group managing director of DVI Capital. Mr. Velotta
joined the Company in April 1994. His primary responsibility is to manage the
unit that originates medical equipment loans on a wholesale basis. Prior to
joining the Company, he served as vice president -- operations for Picker
Financial Group, the captive leasing company of Picker International.
Previously, Mr. Velotta was vice president/central division manager for Chrysler
Capital Corporation.
Gerald L. 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 Niagara Steel Corporation, Diametrics Medical Corporation and SMT
Healthcare Company. 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.
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John E. 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, James McHugh Construction Company,
a firm he has been associated with since 1954.
Nathan Shapiro is a Director of the Company and has served in that capacity
since 1995. 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.
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.
William S. Goldberg is a Director of the Company and has served in that
capacity since 1995. 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 current or former
director and/or executive officer of several public and privately owned
companies controlled by GKH Partners, L.P.
Harry T.J. Roberts is a Director of the Company and has served in that
capacity since 1996. In addition to his responsibilities as a Director, Mr.
Roberts also acts as a consultant to the Company. Mr. Roberts is President of
Nakebro, Boston, a privately owned property group and since 1995 has been a
director of Calmar Inc., Los Angeles, the largest manufacturer of non-aerosol
plastic dispensing systems in the world. Prior to these posts, Mr. Roberts held
senior positions in international banking for thirty-five years. Since 1978 he
has worked in the United States as General Manager of Midland International
Bank, London and Svenska Handelsbanken, Stockholm. Mr. Roberts is a Fellow of
the Chartered Institute of Bankers.
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<PAGE> 39
DESCRIPTION OF THE NOTES
The following description of the particular terms of the Notes supplements
and, to the extent inconsistent therewith, supersedes the description of the
general terms of the Debt Securities set forth under the heading "Description of
Debt Securities" in the accompanying Prospectus, to which description reference
is made.
The Notes will be issued under an Indenture dated as of January , 1997
(the "Indenture"), between the Company and First Trust National Association,
trustee (the "Trustee"). The Indenture is subject to and is governed by the
Trust Indenture Act of 1939, as amended. The following summaries of certain
provisions of the Indenture do not purport to be complete, and where reference
is made to particular provisions of the Indenture, such provisions, including
the definitions of certain terms, are incorporated by reference as part of such
summaries or terms, which are qualified in their entirety by such reference. The
definitions of certain capitalized terms used in the Indenture and in the
following summary are set forth below under "-- Certain Definitions" and under
"Description of Debt Securities -- Certain Definitions" in the accompanying
Prospectus.
GENERAL
The Notes will mature on January , 2004, will be limited to $100 million
aggregate principal amount and will be senior unsecured obligations of the
Company. Each Note will bear interest at the rate set forth on the cover page
hereof from January , 1997 or from the most recent interest payment date to
which interest has been paid or duly provided for, payable semiannually on July
and January in each year, commencing July , 1997, until the principal thereof
is paid or duly provided for, to the person in whose name the Note (or any
predecessor Note) is registered at the close of business on the July , or
January , next preceding such interest payment date. Interest will be
computed on the basis of a 360-day year comprised of twelve 30-day months.
The principal of and premium, if any, and interest on the Notes will be
payable, and the Notes will be exchangeable and transferable, at the office or
agency of the Company in The City of New York maintained for such purposes
(which initially will be the office of the Trustee located at 100 Wall Street,
New York, New York); provided, however, that, at the option of the Company,
interest may be paid by check mailed to the address of the person entitled
thereto as such address appears in the security register. The Notes will be
issued only in registered form without coupons and only in denominations of
$1,000 and any integral multiple thereof. No service charge will be made for any
registration of transfer or redemption of Notes, but the Company may require
payment in certain circumstances of a sum sufficient to cover any tax or other
governmental charge that may be imposed in connection therewith.
As of the Closing Date, all of the Company's Subsidiaries will be
Restricted Subsidiaries. However, under certain circumstances, the Company will
be able to designate current or future Subsidiaries, other than DVI Business
Credit and DVI Financial Services, as Unrestricted Subsidiaries. Unrestricted
Subsidiaries will not be subject to many of the restrictive covenants set forth
in the Indenture.
The Notes will not be entitled to the benefits of a sinking fund.
INTERCOMPANY NOTE
In consideration of the loan of the proceeds of the Offering, DVI Financial
Services will issue a promissory note (the "Intercompany Note") in the amount of
$100.0 million to DVI, Inc. The Intercompany Note will (i) provide for interest
payments in the same amounts and at the same time as the Notes, (ii) mature at
the same time as the Notes (iii) rank pari passu with other senior indebtedness
of DVI Financial Services and (iv) contain cross-acceleration provisions and
other events of default similar to the terms of the Notes.
RANKING
The Notes will be senior unsecured obligations of the Company and will rank
pari passu in right of payment with all other existing and future senior
obligations of the Company. The Notes will also be structurally subordinated to
all existing and future liabilities of the Company's Subsidiaries. As of
September 30, 1996, on a pro forma basis after giving effect to this offering
and the use of the net proceeds therefrom,
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consolidated debt (including borrowings under warehouse facilities) of the
Company would have been approximately $402.4 million (including $100.0 million
of the Notes offered hereby), of which $100.0 million would have been senior
unsecured debt of the Company, $13.2 million would have been subordinated debt
of the Company and $289.2 million would have been debt of the Company's
Subsidiaries (not including the obligation of DVI Financial Services under the
Intercompany Note), and the total amount of outstanding liabilities of the
Company's Subsidiaries (not including the obligations of DVI Financial Services
under the Intercompany Note) would have been $330.6 million. Substantially all
of the debt of the Company's Subsidiaries is secured debt. Subject to certain
limitations, the Company and its Restricted Subsidiaries may incur additional
Debt in the future.
REDEMPTION
The Notes will be redeemable at the election of the Company, as a whole or
from time to time in part, at any time on or after January , 2002, on not less
than 30 nor more than 60 days' prior notice at the redemption prices (expressed
as percentages of principal amount) set forth below, together with accrued
interest, if any, to the redemption date, if redeemed during the 12-month period
beginning on January of the years indicated below (subject to the right of
holders of record on the relevant record date to receive interest due on an
interest payment date):
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2002.............................................. %
2003..............................................
</TABLE>
and thereafter at 100% of the principal amount, together with accrued interest,
if any, to the redemption date.
If less than all the Notes are to be redeemed, the particular Notes to be
redeemed will be selected not more than 60 days prior to the redemption date by
the Trustee by such method as the Trustee deems fair and appropriate.
SAME-DAY SETTLEMENT AND PAYMENT
Settlement for the Notes will be made in immediately available funds. All
payments of principal and interest will be made by the Company in immediately
available funds. The Notes will trade in the Same-Day Funds Settlement System of
The Depository Trust Company ("DTC") until maturity, and secondary market
trading activity for the Notes will therefore settle in immediately available
funds.
CERTAIN DEFINITIONS
"Acquired Debt" means Debt of a person (a) existing at the time such person
is merged with or into the Company or becomes a Subsidiary or (b) assumed in
connection with the acquisition of assets from such person.
"Affiliate" means, with respect to any specified person, any other person
directly or indirectly controlling or controlled by or under direct or indirect
common control with such specified person. For the purposes of this definition,
"control," when used with respect to any specified person, means the power to
direct the management and policies of such person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing.
"Asset Sale" means any sale, issuance, conveyance, transfer, lease or other
disposition (including, without limitation, by way of merger or consolidation)
(collectively, a "transfer") by the Company or a Restricted Subsidiary, directly
or indirectly, in one or a series of related transactions, to any person other
than the Company or a Restricted Subsidiary of (a) any Capital Stock of any
Restricted Subsidiary, (b) all or substantially all of the properties and assets
of the Company and its Restricted Subsidiaries representing a division or line
of business, (c) any other properties or assets of the Company or any Restricted
Subsidiary, other than transactions in the ordinary course of business or (d)
any Excess Spread Receivables. For the
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purposes of this definition, the term "Asset Sale" does not include any transfer
of properties or assets (i) that is governed by the provisions of the Indenture
described under "Consolidation, Merger and Sale of Assets", (ii) between or
among the Company and its Restricted Subsidiaries pursuant to transactions that
do not violate any other provision of the Indenture, (iii) to an Unrestricted
Subsidiary, if permitted under the "Limitation on Restricted Payments" covenant,
or (iv) the gross proceeds of which do not exceed $1 million for any particular
item. For purposes of this definition, the term "ordinary course of business"
shall include, without limitation, (x) dispositions of collateral acquired by
the Company through foreclosure or otherwise and (y) dispositions of Receivables
through securitization, whole loan sale or other similar transactions.
"Average Life" means, as of the date of determination with respect to any
Debt or Disqualified Stock, the quotient obtained by dividing (a) the sum of the
products of (i) the number of years from the date of determination to the date
or dates of each successive scheduled principal or liquidation value payment of
such Debt or Disqualified Stock, respectively, multiplied by (ii) the amount of
each such principal or liquidation value payment by (b) the sum of all such
principal or liquidation value payments.
"Capital Stock" of any person means any and all shares, interests,
partnership interests, participations, rights in or other equivalents (however
designated) of such person's equity interest (however designated).
"Capitalized Lease Obligation" means, with respect to any person, an
obligation incurred or assumed under or in connection with any capital lease of
real or personal property that, in accordance with GAAP, has been recorded as a
capitalized lease.
"Change of Control" means the occurrence of any of the following events:
(a) any person or "group" (as such term is used in Sections 13(d) and
14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined
in Rules 13d-3 and 13d-5 under the Exchange Act, except that a person will
be deemed to have "beneficial ownership" of all securities that such person
has the right to acquire, whether such right is exercisable immediately or
only after the passage of time), directly or indirectly, of more than 50%
of the Voting Stock of the Company;
(b) during any consecutive two-year period, individuals who at the
beginning of such period constituted the Board of Directors of the Company
(together with any new directors whose election to such Board of Directors,
or whose nomination for election by the stockholders of the Company, was
approved by a vote of 66 2/3% of the directors then still in office who
were either directors at the beginning of such period or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of the Board of Directors of the Company then in
office; or
(c) the Company is liquidated or dissolved or adopts a plan of
liquidation or dissolution.
"Closing Date" means the date on which the Notes are originally issued
under the Indenture.
"Consolidated Adjusted Net Income" means, for any period, the net income
(or net loss) of the Company and its Restricted Subsidiaries for such period as
determined on a consolidated basis in accordance with GAAP, adjusted to the
extent included in calculating such net income or loss by excluding (a) any net
after-tax extraordinary gains or losses (less all fees and expenses relating
thereto), (b) any net after-tax gains or losses (less all fees and expenses
relating thereto) attributable to Asset Sales, (c) the portion of net income (or
loss) of any person (other than the Company or a Restricted Subsidiary),
including Unrestricted Subsidiaries, in which the Company or any Restricted
Subsidiary has an ownership interest, except to the extent of the amount of
dividends or other distributions actually paid to the Company or any Restricted
Subsidiary in cash during such period, (d) the net income (or loss) of any
person combined with the Company or any Restricted Subsidiary on a "pooling of
interests" basis attributable to any period prior to the date of combination and
(e) the net income (but not the net loss) of any Restricted Subsidiary to the
extent that the declaration or payment of dividends or similar distributions by
such Restricted Subsidiary is at the date of determination restricted, directly
or indirectly, except to the extent that such net income could be paid to the
Company or a Restricted Subsidiary thereof by loans, advances, intercompany
transfers, principal repayments or otherwise.
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<PAGE> 42
"Consolidated Leverage Ratio" means, at any date of determination, the
ratio of (i) the aggregate amount of all Debt of the Company and its Restricted
Subsidiaries at such date on a consolidated basis, excluding (A) Permitted
Warehouse Debt and (B) Hedging Obligations permitted to be incurred pursuant to
clause (v) of the covenant described under "-- Limitation on Debt" to (ii) the
Consolidated Net Worth of the Company at such date.
"Consolidated Net Worth" means, at any date of determination, stockholders'
equity of the Company and its Restricted Subsidiaries as set forth on the most
recently available quarterly or annual consolidated balance sheet of the Company
and its Restricted Subsidiaries, less any amounts attributable to Disqualified
Stock, the cost of treasury stock and the principal amount of any promissory
notes receivable from the sale of the Capital Stock of the Company or any of its
Restricted Subsidiaries, and less, to the extent included in calculating such
stockholder's equity of the Company and its Restricted Subsidiaries, the
stockholders' equity attributable to Unrestricted Subsidiaries, each item to be
determined in conformity with GAAP (excluding the effects of foreign currency
adjustments under Financial Accounting Standards Board Statement of Financial
Accounting Standards No. 52).
"Debt" means (without duplication), with respect to any person, whether
recourse is to all or a portion of the assets of such person and whether or not
contingent, (a) every obligation of such person for money borrowed, (b) every
obligation of such person evidenced by bonds, debentures, notes or other similar
instruments, (c) every reimbursement obligation of such person with respect to
letters of credit, bankers' acceptances or similar facilities issued for the
account of such person, (d) every obligation of such person issued or assumed as
the deferred purchase price of property or services, (e) Capital Lease
Obligations, (f) all Disqualified Stock of such person valued at its maximum
fixed repurchase price, plus accrued and unpaid dividends, (g) all obligations
of such person under or in respect of Hedging Obligations, and (h) every
obligation (to the extent guaranteed by such person) of the type referred to in
clauses (a) through (g) of another person and all dividends of another person
the payment of which, in either case, such person has guaranteed. For purposes
of this definition, the "maximum fixed repurchase price" of any Disqualified
Stock that does not have a fixed repurchase price will be calculated in
accordance with the terms of such Disqualified Stock as if such Disqualified
Stock were repurchased on any date on which Debt is required to be determined
pursuant to the Indenture, and if such price is based upon, or measured by, the
fair market value of such Disqualified Stock, such fair market value will be
determined in good faith by the board of directors of the issuer of such
Disqualified Stock. Notwithstanding the foregoing, trade accounts payable and
accrued liabilities arising in the ordinary course of business and any liability
for federal, state or local taxes or other taxes owed by such person shall not
be treated as Debt for purposes of this definition. Furthermore, any securities
issued in a securitization by a special purpose owner trust or other entity
formed by or on behalf of a person and to which Receivables have been sold or
otherwise transferred by or on behalf of such person or its Subsidiaries shall
not be treated as Debt of such person or its Subsidiaries for purposes of this
definition, regardless of whether such securities are treated as indebtedness
for tax or accounting purposes; provided, however, that any guarantee by the
Company or a Restricted Subsidiary (other than such special purpose owner trust
or other entity) of indebtedness arising in connection with such securitization
shall be treated as Debt for purposes of this definition.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Disinterested Director" means, with respect to any transaction or series
of transactions in respect of which the Board of Directors is required to
deliver a resolution of the Board of Directors under the Indenture, a member of
the Board of Directors who does not have any material direct or indirect
financial interest in or with respect to such transaction or series of
transactions (other than by ownership of securities issued by the Company).
"Disqualified Stock" means any class or series of Capital Stock that,
either by its terms, by the terms of any security into which it is convertible
or exchangeable or by contract or otherwise (i) is or upon the happening of an
event or passage of time would be, required to be redeemed prior to the final
Stated Maturity of the Notes, (ii) is redeemable at the option of the holder
thereof at any time prior to such final Stated
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Maturity or (iii) at the option of the holder thereof, is convertible into or
exchangeable for debt securities at any time prior to such final Stated
Maturity.
"Excess Spread" means, over the life of a "pool" of Receivables that have
been sold by the Company or a Restricted Subsidiary to a trust or other person
in a securitization or sale, the rights retained by the Company or its
Restricted Subsidiaries at or subsequent to the closing of such securitization
or sale with respect to such "pool", including any rights to receive cash flows
attributable to such pool and any servicing rights retained.
"Excess Spread Receivables" of the Company or a Restricted Subsidiary means
the right to Excess Spread capitalized on the Company's consolidated balance
sheet (the amount of which will be the present value of the Excess Spread,
calculated in accordance with GAAP).
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Generally Accepted Accounting Principles" or "GAAP" means generally
accepted accounting principles in the United States, consistently applied, that
are in effect on the Closing Date.
"guarantee" means, as applied to any obligation, (a) a guarantee (other
than by endorsement of negotiable instruments for collection in the ordinary
course of business), direct or indirect, in any manner, of any part or all of
such obligation and (b) an agreement, direct or indirect, contingent or
otherwise, the practical effect of which is to assure in any way the payment or
performance (or payment of damages in the event of non-performance) of all or
any part of such obligation, including, without limitation, the payment of
amounts drawn down under letters of credit. For purposes of this definition, the
following actions, taken by any person in connection with a disposition or
permanent funding of Receivables through a securitization, whole loan sale or
other similar transaction, will not constitute a guarantee by that person: (i)
the furnishing of collateral or credit enhancement, whether in the form of cash,
marketable securities, Excess Spread Receivables or otherwise; (ii) the
acquisition and ownership of a subordinated or junior class of equity or debt
securities issued in a securitization; or (iii) the provision of customary
representations and warranties regarding the documentation of and credit
underwriting practices followed with respect to, the Receivables being disposed
of or funded.
"Hedging Obligations" means the obligations of any person under (i)
interest rate swap agreements, interest rate cap agreements and interest rate
collar agreements and (ii) other agreements or arrangements designed to protect
such person against fluctuations in interest rates or the value of foreign
currencies.
"Investment" means, (i) directly or indirectly, any advance, loan or other
extension of credit (including, without limitation, by way of guarantee or
similar arrangement) or capital contribution to, the purchase of any stock,
bonds, notes, debentures or other securities of, or the acquisition, by purchase
or otherwise, of all or substantially all of the business or assets or stock or
other evidence of beneficial ownership of, any person or making of any
investment in any person, (ii) the designation of any Restricted Subsidiary as
an Unrestricted Subsidiary and (iii) the transfer of any assets or properties
from the Company or a Restricted Subsidiary to any Unrestricted Subsidiary,
other than the transfer of assets or properties made in the ordinary course of
business. Investments exclude extensions of trade credit on commercially
reasonable terms in accordance with normal trade practices.
"Lien" means any mortgage, charge, pledge, lien (statutory or otherwise),
privilege, security interest, hypothecation, assignment for security, claim, or
preference or priority or other encumbrance upon or with respect to any property
of any kind, real or personal, movable or immovable, now owned or hereafter
acquired. A person will be deemed to own subject to a Lien any property that
such person has acquired or holds subject to the interest of a vendor or lessor
under any conditional sale agreement, capital lease or other title retention
agreement.
"Maturity" means, with respect to any Note, the date on which any principal
of such Note becomes due and payable as therein or in the Indenture provided,
whether at the Stated Maturity with respect to such principal or by declaration
of acceleration, call for redemption, purchase or otherwise.
"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds
thereof in the form of cash or cash equivalents, including payments in respect
of deferred payment obligations when received in the form of,
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or stock or other assets when disposed for, cash or cash equivalents (except to
the extent that such obligations are financed or sold with recourse to the
Company or any Restricted Subsidiary), net of (a) brokerage commissions and
other fees and expenses (including fees and expenses of legal counsel and
investment banks) related to such Asset Sale, (b) provisions for all taxes
payable as a result of such Asset Sale, (c) payments made to retire Debt where
payment of such Debt is secured by the assets that are the subject of such Asset
Sale, (d) amounts required to be paid to any person (other than the Company or
any Restricted Subsidiary) owning a beneficial interest in the assets that are
subject to the Asset Sale and (e) appropriate amounts to be provided by the
Company or any Restricted Subsidiary, as the case may be, as a reserve required
in accordance with GAAP against any liabilities associated with such Asset Sale
and retained by the seller after such Asset Sale, including pension and other
post-employment benefit liabilities, liabilities related to environmental
matters and liabilities under any indemnification obligations associated with
such Asset Sale.
"Permitted Investments" means any of the following:
(a) Investments in (i) securities with a maturity of 180 days or less
issued or directly and fully guaranteed or insured by the United States or
any agency or instrumentality thereof (provided that the full faith and
credit of the United States is pledged in support thereof); (ii)
certificates of deposit, acceptances or other obligations with a maturity
of 180 days or less of any financial institution that is a member of the
Federal Reserve System having combined capital and surplus of not less than
$500 million; and (iii) commercial paper with a maturity of 180 days or
less issued by a corporation that is not an Affiliate of the Company and is
organized under the laws of any state of the United States or the District
of Columbia and having the highest rating obtainable from Moody's Investors
Service, Inc. or Standard & Poor's Ratings Services;
(b) the application, directly or indirectly of up to $5 million of the
net proceeds from the sale of the Notes to an Investment in a Permitted
Joint Venture which is primarily engaged in the business of originating,
purchasing, brokering and marketing, pooling, selling, securitizing and
servicing medical equipment loan receivables or medical receivables in
Latin America;
(c) Investments by the Company or any Restricted Subsidiary in another
person, if as a result of such Investment (i) such other person becomes a
Restricted Subsidiary or (ii) such other person is merged or consolidated
with or into, or transfers or conveys all or substantially all of its
assets to, the Company or a Restricted Subsidiary;
(d) Investments by the Company or any of the Restricted Subsidiaries
in any of the other of them;
(e) Investments in Receivables or assets owned or used in the ordinary
course of business;
(f) Investments in existence on the Closing Date and any renewals,
extensions, substitutions, refinancing or replacements or any such
Investment to the extent they do not require an increase in the amount of
such Investment;
(g) promissory notes received as a result of Asset Sales permitted
under the "Limitations on Certain Asset Sales" covenant;
(h) Excess Spread Receivables arising from the securitization or sale
of Receivables by the Company or any of its Restricted Subsidiaries;
(i) Investments comprised of promissory notes, stock, obligations or
securities received in the ordinary course of business in settlement of
debts owing to the Company or any of its Restricted Subsidiaries, or on
sales of assets acquired through foreclosure or similar transactions;
(j) other Investments in Permitted Joint Ventures that do not exceed
$20 million at any time outstanding; and
(k) Loans or other extensions of credit from the Company or a
Restricted Subsidiary to a Permitted Joint Venture for the purpose of
providing liquidity to such Permitted Joint Venture to allow it to
originate or acquire Receivables in the ordinary course; provided that the
Company or the Restricted Subsidiary has effective operational control of
such Permitted Joint Venture.
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"Permitted Joint Ventures" means any joint venture between the Company or
one of its Restricted Subsidiaries and any other person which is primarily
engaged in the business of originating, purchasing, brokering and marketing,
pooling, selling, securitizing or servicing medical equipment loan receivables
or medical receivables.
"Permitted Warehouse Debt" means all Warehouse Debt outstanding from time
to time; provided, however, that (i) the Warehouse Debt will be deemed to be
Permitted Warehouse Debt only to the extent that the assets to which such
Warehouse Debt relates are expected by the Company to be permanently funded
through a securitization or sale transaction and (ii) such Warehouse Debt will
be deemed to be Permitted Warehouse Debt only to the extent of the realizable
value of the Receivables to which such Warehouse Debt relates and that were not
originated or acquired by the Company more than 364 days prior to the date of
determination (such realizable value to be determined in good faith by the Board
of Directors of the Company) if that value is less than the amount of the
Warehouse Debt.
"Preferred Stock" means, with respect to any person, any and all shares,
interests, participations or other equivalents (however designated) of such
person's preferred or preference stock, whether now outstanding or issued after
the initial issuance of the Notes, and including, without limitation, all
classes and series of preferred or preference stock of such person.
"Qualified Equity Interest" means any Qualified Stock and all warrants,
options or other rights to acquire Qualified Stock (but excluding any debt
security that is convertible into or exchangeable for Capital Stock).
"Qualified Stock" of any person means any and all Capital Stock of such
person, other than Disqualified Stock.
"Receivables" means consumer and commercial loans, leases and receivables
purchased or originated by the Company or any Restricted Subsidiary in the
ordinary course of business; provided, however, that, for purposes of
determining the amount of a Receivable at any time, such amount shall be
determined in accordance with GAAP, consistently applied, as of the most recent
practicable date.
"Restricted Subsidiary" means any Subsidiary other than an Unrestricted
Subsidiary.
"Significant Subsidiary" means any Restricted Subsidiary of the Company
that together with its Subsidiaries, (a) for the most recent fiscal year of the
Company, accounted for more than 10% of the consolidated net sales of the
Company and its Restricted Subsidiaries or (b) as of the end of such fiscal
year, was the owner of more than 10% of the total finance and other income of
the Company and its Restricted Subsidiaries, in the case of either (a) or (b),
as set forth on the most recently available consolidated financial statements of
the Company for such fiscal year or (c) was organized or acquired since the end
of such fiscal year and would have been a Significant Subsidiary if it had been
owned during such fiscal year.
"Stated Maturity" means, when used with respect to any Note or any
installment of interest thereon, the date specified in such Note as the fixed
date on which the principal of such Note or such installment of interest is due
and payable and, when used with respect to any other Debt, means the date
specified in the instrument governing such Debt as the fixed date on which the
principal of such Debt or any installment of interest thereon is due and
payable.
"Subordinated Debt" means Debt of the Company that is subordinated in right
of payment to the Notes.
"Subsidiary" means any person a majority of the equity ownership or Voting
Stock of which is at the time owned, directly or indirectly, by the Company
and/or one or more other Subsidiaries of the Company.
"Unrestricted Subsidiary" means (a) any Subsidiary that is designated by
the Board of Directors as an Unrestricted Subsidiary in accordance with the
"Unrestricted Subsidiaries" covenant and (b) any Subsidiary of an Unrestricted
Subsidiary.
"Voting Stock" means any class or classes of Capital Stock pursuant to
which the holders thereof have the general voting power under ordinary
circumstances to elect at least a majority of the board of directors, managers
or trustees of any person (irrespective of whether or not, at the time, stock of
any other class or classes has, or might have, voting power by reason of the
happening of any contingency).
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"Warehouse Debt" means Debt incurred by the Company or a Restricted
Subsidiary under a Warehouse Facility. Warehouse Debt under any Warehouse
Facility shall be deemed to equal the principal amount of such Debt or, if less,
the book value of the Receivables pledged under such Warehouse Facility to
secure such Warehouse Debt.
"Warehouse Facility" means any funding arrangement with a financial
institution or other lender or purchaser a principal purpose of which is to
finance the purchase or origination of Receivables by the Company or one or more
of its Restricted Subsidiaries for the purpose of pooling such Receivables prior
to securitization or sale in the ordinary course of business, including purchase
and sale facilities pursuant to which the Company or a Restricted Subsidiary
sells Receivables to a financial institution and retains a right of first
refusal upon the subsequent resale of such Receivables by such financial
institution.
CERTAIN COVENANTS
Limitation on Debt. The Company will not, and will not permit any
Restricted Subsidiary to, create, issue, assume, guarantee or in any manner
become directly or indirectly liable for the payment of, or otherwise incur
(collectively, "incur"), any Debt (including Acquired Debt and the issuance of
Disqualified Stock), except that the Company may incur Debt or issue
Disqualified Stock if, on the date of such incurrence or issuance and after
giving effect thereto, the Consolidated Leverage Ratio does not exceed 2.0 to
1.0.
On a pro-forma basis after giving effect to this offering and the use of
the net proceeds therefrom, the Company's Consolidated Leverage Ratio at
September 30, 1996 would have been 1.9: 1.
Notwithstanding the foregoing, the Company may, and may permit its
Restricted Subsidiaries to, incur the following Debt ("Permitted Debt"):
(i) Permitted Warehouse Debt of the Company or any Restricted
Subsidiary;
(ii) Debt of the Company or any Restricted Subsidiary outstanding on
the Closing Date;
(iii) Debt owed by the Company to any Restricted Subsidiary or owed by
any Restricted Subsidiary to the Company or any other Restricted Subsidiary
(provided that such Debt is held by the Company or such Restricted
Subsidiary);
(iv) Debt represented by the Notes and any guarantees thereof by
Restricted Subsidiaries;
(v) Debt of the Company or any Restricted Subsidiary in respect of
Hedging Obligations incurred in the ordinary course of business;
(vi) either (A) Capitalized Lease Obligations of the Company or any
Restricted Subsidiary or (B) Debt under purchase money mortgages or secured
by purchase money security interests so long as (x) such Debt is not
secured by any property or assets of the Company or any Restricted
Subsidiary other than the property and assets so acquired and (y) such Debt
is created within 60 days of the acquisition of the related property;
provided that the aggregate amount of Debt under clauses (A) and (B) does
not exceed in the aggregate $5 million at any one time outstanding;
(vii) Debt of the Company or any Restricted Subsidiary consisting of
guarantees, indemnities or obligations in respect of purchase price
adjustments in connection with the acquisition or disposition of assets,
including, without limitation, shares of Capital Stock;
(viii) Acquired Debt of a person, other than Debt incurred in
connection with, or in contemplation of, such person becoming a Restricted
Subsidiary or the acquisition of assets from such person, as the case may
be, provided that the Company on a pro forma basis could incur $1.00 of
additional Debt (other than Permitted Debt) pursuant to the first paragraph
of the "Limitation on Debt" covenant;
(ix) Debt of the Company, not permitted by any other clause of this
definition, in an aggregate principal amount not to exceed $20 million at
any one time outstanding;
(x) Debt incurred under one or more working capital facilities in an
aggregate principal amount not to exceed $10 million at any one time
outstanding;
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(xi) Debt of the Company or any Restricted Subsidiary, which Debt is
in the form of a guarantee and is incurred in connection with a
securitization or sale of Receivables; provided, that the Company has
concluded (as determined in good faith by the Board of Directors of the
Company) that the incurrence of such Debt is necessary to obtain an
investment grade rating for other Debt issued in connection with such
securitization or sale of Receivables; and
(xii) any renewals, extensions, substitutions, refinancings or
replacements (each, for purposes of this clause, a "refinancing") of any
outstanding Debt, other than Debt incurred pursuant to clause (i), (vi),
(ix), (x) or (xi) of this definition, including any successive refinancings
thereof, so long as (A) any such new Debt is in a principal amount that
does not exceed the principal amount so refinanced, plus the amount of any
premium required to be paid in connection with such refinancing pursuant to
the terms of the Debt refinanced or the amount of any premium reasonably
determined by the Company as necessary to accomplish such refinancing, plus
the amount of the expenses of the Company incurred in connection with such
refinancing, (B) in the case of any refinancing of Subordinated Debt, such
new Debt is made subordinate to the Notes at least to the same extent as
the Debt being refinanced and (C) such refinancing Debt does not have an
Average Life less than the Average Life of the Debt being refinanced and
does not have a final scheduled maturity earlier than the final scheduled
maturity, or permit redemption at the option of the holder earlier than the
earliest date of redemption at the option of the holder, of the Debt being
refinanced.
Limitation on Restricted Payments. The Company will not, and will not
permit any Restricted Subsidiary to, directly or indirectly, take any of the
following actions:
(a) declare or pay any dividend on, or make any distribution to
holders of, any shares of the Capital Stock of the Company or any
Restricted Subsidiary (other than dividends or distributions payable solely
in Qualified Equity Interests and other than dividends or distributions by
a Restricted Subsidiary payable to the Company or another Restricted
Subsidiary);
(b) purchase, redeem or otherwise acquire or retire for value,
directly or indirectly, any shares of Capital Stock of the Company or any
Restricted Subsidiary, or any options, warrants or other rights to acquire
such shares of Capital Stock (other than any such Capital Stock owned by
the Company or any of its Restricted Subsidiaries);
(c) make any principal payment on, or repurchase, redeem, defease or
otherwise acquire or retire for value, prior to any scheduled principal
payment, sinking fund payment or maturity, any Subordinated Debt; and
(d) make any Investment (other than a Permitted Investment) in any
person
(such payments or other actions described in (but not excluded from)
clauses (a) through (d) being referred to as "Restricted Payments"), unless
at the time of, and immediately after giving effect to, the proposed
Restricted Payment:
(i) no Default or Event of Default has occurred and is continuing,
(ii) the Company could incur at least $1.00 of additional Debt
(other than Permitted Debt) pursuant to the first paragraph of the
"Limitation on Debt" covenant and
(iii) the aggregate amount of all Restricted Payments made after
the Closing Date does not exceed the sum of:
(A) 25% of the aggregate Consolidated Adjusted Net Income of the
Company during the period (taken as one accounting period) from the
first day of the Company's fiscal quarter during which the Closing
Date occurred to the last day of the Company's most recently ended
fiscal quarter for which internal financial statements are available
at the time of such proposed Restricted Payment (or, if such
aggregate cumulative Consolidated Adjusted Net Income is a loss,
minus 100% of such amount), plus
(B) the aggregate net proceeds including the fair market value
of property other than cash (as determined by the Board of Directors,
whose good faith determination will be conclusive),
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received by the Company after the initial issuance of the Notes from
the issuance or sale (other than to a Subsidiary) of Qualified Equity
Interests of the Company; plus
(C) the aggregate net proceeds including the fair market value
of property other than cash (as determined by the Board of Directors,
whose good faith determination will be conclusive), received by the
Company after the initial issuance of the Notes from the issuance or
sale (other than to a Restricted Subsidiary) of debt securities or
Disqualified Stock that have been converted into or exchanged for
Qualified Stock of the Company, together with the aggregate net cash
proceeds received by the Company at the time of such conversion or
exchange.
Notwithstanding the foregoing, the Company and its Restricted Subsidiaries
may take the following actions, so long as (with respect to clauses (e), (f) and
(g) below) no Default or Event of Default has occurred and is continuing or
would occur:
(a) the payment of any dividend within 60 days after the date of
declaration thereof, if at the declaration date such payment would not have
been prohibited by the foregoing provision;
(b) the repurchase, redemption or other acquisition or retirement for
value of any shares of Capital Stock of the Company in exchange for, or out
of the net cash proceeds of a substantially concurrent issuance and sale
(other than to a Subsidiary) of Qualified Equity Interests of the Company;
(c) the purchase, redemption, defeasance or other acquisition or
retirement for value of any Subordinated Debt in exchange for, or out of
the net cash proceeds of a substantially concurrent issuance and sale
(other than to a Subsidiary) of Qualified Equity Interests of the Company;
(d) the purchase, redemption, defeasance or other acquisition or
retirement for value of Subordinated Debt in exchange for, or out of the
net cash proceeds of a substantially concurrent issuance or sale (other
than to a Subsidiary) of, Subordinated Debt, so long as the Company or a
Restricted Subsidiary would be permitted to refinance such original
Subordinated Debt with such new Subordinated Debt pursuant to clause (xii)
of the definition of Permitted Debt;
(e) the repurchase of any Subordinated Debt at a purchase price not
greater than 101% of the principal amount of such Subordinated Debt in the
event of a change of control in accordance with provisions similar to the
"Purchase of Notes upon a Change of Control" covenant; provided that, prior
to or simultaneously with such repurchase, the Company has made the Change
of Control Offer as provided in such covenant with respect to the Notes and
has repurchased all Notes validly tendered for payment in connection with
such Change of Control Offer;
(f) loans or advances to officers, directors and employees of the
Company or any of its Restricted Subsidiaries made in the ordinary course
of business after the Closing Date in an amount not to exceed $1 million in
the aggregate at any one time outstanding;
(g) Investments by the Company or a Restricted Subsidiary in another
person made with, or out of the net cash proceeds of, a substantially
concurrent issuance and sale (other than to a Subsidiary) of Qualified
Stock of the Company; and
(h) the making of an Investment in a Permitted Joint Venture so long
as the aggregate amount of all such Investments pursuant to this clause (h)
made after the Closing Date does not exceed the difference between (A) 25%
of the aggregate Consolidated Adjusted Net Income (without giving effect to
clause (e) of the definition thereof) of the Company during the period
(taken as one accounting period) from the first day of the Company's fiscal
quarter during which the Closing Date occurred to the last day of the
Company's most recently ended fiscal quarter for which internal financial
statements are available at the time of such proposed Investment, minus (B)
the aggregate amount of all Restricted Payments made after the Closing Date
in reliance on the foregoing clause (iii)(A); provided, that, at the time
of, and immediately after giving effect to, the proposed Investment in a
Permitted Joint Venture pursuant to this clause (h), the Company could
incur at least $1.00 of additional Debt (other than Permitted Debt)
pursuant to the first paragraph of the "Limitation on Debt" covenant.
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The actions described in clauses (b), (c), (e), (f), (g) and (h) of this
paragraph will be Restricted Payments that will be permitted to be taken in
accordance with this paragraph but will reduce the amount that would otherwise
be available for Restricted Payments under clause (iii) of the first paragraph
under "-- Limitation on Restricted Payments" and the actions described in
clauses (a) and (d) of this paragraph will be Restricted Payments that will be
permitted to be taken in accordance with this paragraph and will not reduce the
amount that would otherwise be available for Restricted Payments under clause
(iii) of that first paragraph.
For the purpose of making any calculations under the Indenture (i) if a
Restricted Subsidiary is designated an Unrestricted Subsidiary, the Company will
be deemed to have made an Investment in an amount equal to the fair market value
of the net assets of such Restricted Subsidiary at the time of such designation
as determined by the Board of Directors of the Company, whose good faith
determination will be conclusive, (ii) any property transferred to or from an
Unrestricted Subsidiary will be valued at fair market value at the time of such
transfer, as determined by the Board of Directors of the Company, whose good
faith determination will be conclusive and (iii) subject to the foregoing, the
amount of any Restricted Payment, if other than cash, will be determined by the
Board of Directors of the Company, whose good faith determination will be
conclusive.
If the aggregate amount of all Restricted Payments calculated under the
foregoing provision includes an Investment in an Unrestricted Subsidiary or
other person that thereafter becomes a Restricted Subsidiary, the aggregate
amount of all Restricted Payments calculated under the foregoing provision will
be reduced by the lesser of (x) the net asset value of such Subsidiary at the
time it becomes a Restricted Subsidiary and (y) the initial amount of such
Investment.
If an Investment resulted in the making of a Restricted Payment, the
aggregate amount of all Restricted Payments calculated under the foregoing
provision will be reduced by the amount of any net reduction in such Investment
(resulting from the payment of interest or dividends, loan repayment, transfer
of assets or otherwise), to the extent such net reduction is not included in the
Company's Consolidated Adjusted Net Income; provided that the total amount by
which the aggregate amount of all Restricted Payments may be reduced may not
exceed the lesser of (x) the cash proceeds received by the Company and its
Restricted Subsidiaries in connection with such net reduction and (y) the
initial amount of such Investment.
In computing Consolidated Adjusted Net Income of the Company under the
foregoing clause (iii)(A), (i) the Company may use audited financial statements
for the portions of the relevant period for which audited financial statements
are available on the date of determination and unaudited financial statements
and other current financial data based on the books and records of the Company
for the remaining portion of such period and (ii) the Company will be permitted
to rely in good faith on the financial statements and other financial data
derived from the books and records of the Company that are available on the date
of determination. If the Company makes a Restricted Payment that, at the time of
the making of such Restricted Payment, would in the good faith determination of
the Company be permitted under the requirements of the Indenture, such
Restricted Payment will be deemed to have been made in compliance with the
Indenture notwithstanding any subsequent adjustments made in good faith to the
Company's financial statements affecting Consolidated Adjusted Net Income of the
Company for any period.
Purchase of Notes upon a Change of Control. If a Change of Control occurs
at any time, then each holder of Notes will have the right to require that the
Company purchase such holder's Notes, in whole or in part in integral multiples
of $1,000, at a purchase price in cash equal to 101% of the principal amount of
such Notes, plus accrued and unpaid interest, if any, to the date of purchase,
pursuant to the offer described below (the "Change of Control Offer") and the
other procedures set forth in the Indenture.
Within 30 days following any Change of Control, the Company will notify the
Trustee thereof and give written notice of such Change of Control to each holder
of Notes by first-class mail, postage prepaid, at its address appearing in the
security register, stating, among other things, (i) the purchase price and the
purchase date, which will be a Business Day no earlier than 30 days nor later
than 60 days from the date such notice is mailed or such later date as is
necessary to comply with requirements under the Exchange Act; (ii) that any Note
not tendered will continue to accrue interest; (iii) that, unless the Company
defaults in the payment of the purchase price, any Notes accepted for payment
pursuant to the Change of Control Offer will cease to
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accrue interest after the Change of Control purchase date; and (iv) certain
other procedures that a holder of Notes must follow to accept a Change of
Control Offer or to withdraw such acceptance.
If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the purchase price for all
of the Notes that might be tendered by holders of the Notes seeking to accept
the Change of Control Offer. In addition, it may be necessary to receive the
consent of certain creditors of the Company or certain of its Subsidiaries
before the Company can make a Change of Control Offer. There can be no assurance
that such consents will be given. The failure of the Company to make or
consummate the Change of Control Offer or pay the applicable Change of Control
purchase price when due would result in an Event of Default and would give the
Trustee and the holders of the Notes the rights described under "Events of
Default".
One of the events that constitutes a Change of Control under the Indenture
is the disposition of "all or substantially all" of the Company's assets. This
term has not been interpreted under New York law (which is the governing law of
the Indenture) to represent a specific quantitative test. As a consequence, in
the event holders of the Notes elect to require the Company to purchase the
Notes and the Company elects to contest such election, there can be no assurance
as to how a court interpreting New York law would interpret the phrase in many
circumstances.
The existence of a holder's right to require the Company to purchase such
holder's Notes upon a Change of Control may deter a third party from acquiring
the Company in a transaction that constitutes a Change of Control.
The definition of "Change of Control" in the Indenture is limited in scope.
The provisions of the Indenture may not afford holders of Notes the right to
require the Company to repurchase such Notes in the event of a highly leveraged
transaction or certain transactions with the Company's management or its
affiliates, including a reorganization, restructuring, merger or similar
transaction involving the Company (including, in certain circumstances, an
acquisition of the Company by management or its affiliates) that may adversely
affect holders of the Notes, if such transaction is not a transaction defined as
a Change of Control. See "Certain Definitions" above for the definition of
"Change of Control". A transaction involving the Company's management or its
affiliates, or a transaction involving a recapitalization of the Company, would
result in a Change of Control if it is the type of transaction specified in such
definition.
The Company will comply with the applicable tender offer rules including
Rule 14e-l under the Exchange Act, and any other applicable securities laws and
regulations in connection with a Change of Control Offer.
The Company will not, and will not permit any Restricted Subsidiary to,
create any restriction (other than restrictions existing under Debt as in effect
on the Closing Date or in refinancings of such Debt) that would materially
impair the ability of the Company to make a Change of Control Offer to purchase
the Notes or, if such Change of Control Offer is made, to pay for the Notes
tendered for purchase.
Limitation on Certain Asset Sales. (a) The Company will not, and will not
permit any Restricted Subsidiary to, engage in any Asset Sale unless (i) the
consideration received by the Company or such Restricted Subsidiary for such
Asset Sale is not less than the fair market value of the assets sold (as
determined by the Board of Directors of the Company, whose good faith
determination will be conclusive) and (ii) the consideration received by the
Company or the relevant Restricted Subsidiary in respect of such Asset Sale
consists of at least 85% cash or cash equivalents.
(b) If the Company or any Restricted Subsidiary engages in an Asset Sale,
the Company may, at its option, within 12 months after such Asset Sale, (i)
apply all or a portion of such Net Cash Proceeds to the repayment of senior Debt
of the Company or a Restricted Subsidiary or (ii) invest (or enter into a
legally binding agreement to invest) all or a portion of such Net Cash Proceeds
in properties and assets to replace the properties and assets that were the
subject of the Asset Sale or in properties and assets that will be used in
businesses of the Company or its Restricted Subsidiaries, as the case may be,
existing on the Closing Date, or in Permitted Joint Ventures. If any such
legally binding agreement to invest such Net Cash Proceeds is terminated, the
Company may, within 90 days of such termination or within 12 months of such
Asset Sale, whichever is later, invest such Net Cash Proceeds as provided in
clause (i) or (ii) (without regard to the
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parenthetical contained in such clause (ii)) above. The amount of such Net Cash
Proceeds not so used as set forth above in this paragraph (b) constitutes
"Excess Proceeds".
(c) When the aggregate amount of Excess Proceeds exceeds $5 million the
Company will, within 30 days thereafter, make an offer to purchase from all
holders of Notes, on a pro rata basis, in accordance with the procedures set
forth in the Indenture, the maximum principal amount (expressed as a multiple of
$1,000) of Notes that may be purchased with the Excess Proceeds, at a purchase
price in cash equal to 100% of the principal amount thereof, plus accrued
interest, if any, to the date such offer to purchase is consummated. To the
extent that the aggregate principal amount of Notes tendered pursuant to such
offer to purchase is less than the Excess Proceeds, the Company may use such
deficiency for general corporate purposes. If the aggregate principal amount of
Notes validly tendered and not withdrawn by holders thereof exceeds the Excess
Proceeds, the Notes to be purchased will be selected on a pro rata basis. Upon
completion of such offer to purchase, the amount of Excess Proceeds will be
reset to zero.
Limitation on Transactions with Affiliates. The Company will not, and will
not permit any Restricted Subsidiary to, directly or indirectly, enter into or
suffer to exist any transaction with, or for the benefit of, any Affiliate of
the Company or any beneficial owner of 5% or more of any class of the Capital
Stock of the Company at any time outstanding ("Interested Persons"), unless (a)
such transaction is on terms that are no less favorable to the Company or such
Restricted Subsidiary, as the case may be, than those that could have been
obtained in an arm's length transaction with third parties who are not
Interested Persons and (b) either (i) with respect to any transaction or series
of transactions involving aggregate payments in excess of $1 million, but less
than $5 million, the Company delivers an officers' certificate to the Trustee
certifying that such transaction or transactions comply with clause (a) above or
(ii) with respect to a transaction or series of transactions involving aggregate
payments equal or greater than $5 million, such transaction or transactions have
been approved by the Board of Directors (including a majority of the
Disinterested Directors) of the Company or the Company has obtained a written
opinion from a nationally recognized investment banking firm to the effect that
such transaction or transactions are fair to the Company or such Restricted
Subsidiary from a financial point of view.
The foregoing covenant will not restrict
(A) transactions among the Company and/or its Restricted Subsidiaries;
(B) the Company from paying reasonable and customary regular
compensation and fees to directors of the Company or any Restricted
Subsidiary who are not employees of the Company or any Restricted
Subsidiary; and
(C) the application, directly or indirectly, of up to $5 million of
the net proceeds from the sale of the Notes to fund the Company's
Investment in a Permitted Joint Venture which is primarily engaged in the
business of originating, purchasing, brokering and marketing, pooling,
selling, securitizing and servicing medical equipment loan receivables or
medical receivables in Latin America.
Limitation on Dividends and Other Payment Restrictions Affecting Restricted
Subsidiaries. The Company will not, and will not permit any Restricted
Subsidiary to, directly or indirectly, create or otherwise cause or suffer to
exist or become effective any consensual encumbrance or restriction of any kind
on the ability of any Restricted Subsidiary to (a) pay dividends, in cash or
otherwise, or make any other distributions on or in respect of its Capital
Stock, (b) pay any Debt owed to the Company or any other Restricted Subsidiary,
(c) make loans or advances to the Company or any other Restricted Subsidiary,
(d) transfer any of its properties or assets to the Company or any other
Restricted Subsidiary or (e) guarantee any Debt of the Company or any other
Restricted Subsidiary, except for such encumbrances or restrictions existing
under or by reason of:
(i) any agreement in effect on the Closing Date;
(ii) customary non-assignment provisions of any lease governing a
leasehold interest of the Company or any Restricted Subsidiary;
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(iii) the refinancing or successive refinancings of Debt incurred
under the agreements in effect on the Closing Date, so long as such
encumbrances or restrictions are no less favorable to the Company or any
Restricted Subsidiary than those contained in such original agreement;
(iv) Warehouse Facilities and other credit facilities, provided,
however, that the terms and conditions of any such encumbrances or
restrictions are not materially more restrictive in the aggregate than
those contained in the revolving credit agreement with a syndicate of banks
and Fleet Bank, National Association, as agent, dated March 28, 1995, in
effect on the Closing Date in the judgment of the Board of Directors of the
Company as evidenced by a resolution of the Board of Directors of the
Company and filed with the Trustee; or
(v) any agreement or other instrument of a person acquired by the
Company or any Restricted Subsidiary in existence at the time of such
acquisition (but not created in contemplation thereof), which encumbrance
or restriction is not applicable to any person, or the properties or assets
of any person, other than the person, or the property or assets of the
person, so acquired.
Limitation on Issuances and Sales of Capital Stock of Restricted
Subsidiaries. The Company (a) will not permit any Restricted Subsidiary to
issue any Capital Stock (other than to the Company or a Restricted Subsidiary)
and (b) will not permit any person (other than the Company or a Restricted
Subsidiary) to own any Capital Stock of any Restricted Subsidiary; provided,
however, that this covenant will not prohibit (i) the sale or other disposition
of all, but not less than all, of the issued and outstanding Capital Stock of a
Restricted Subsidiary owned by the Company and its Restricted Subsidiaries in
compliance with the other provisions of the Indenture or (ii) the ownership by
directors of director's qualifying shares or the ownership by foreign nationals
of Capital Stock of any Restricted Subsidiary, to the extent mandated by
applicable law.
Limitation on Guarantees of Debt by Restricted Subsidiaries. The Company
will not permit any Restricted Subsidiary, directly or indirectly, to guarantee,
assume or in any other manner become liable for the payment of any Debt of the
Company or any Debt of any other Restricted Subsidiary, unless (a) such
Restricted Subsidiary simultaneously executes and delivers a supplemental
indenture providing for a guarantee of payment of the Notes by such Restricted
Subsidiary and (b) with respect to any guarantee of Subordinated Debt by a
Restricted Subsidiary, any such guarantee is subordinated to such Restricted
Subsidiary's guarantee with respect to the Notes at least to the same extent as
such Subordinated Debt is subordinated to the Notes, provided that the foregoing
provision will not be applicable to any guarantee by any Restricted Subsidiary
that existed at the time such person became a Restricted Subsidiary and was not
incurred in connection with, or in contemplation of, such person becoming a
Restricted Subsidiary.
Any guarantee by a Restricted Subsidiary of the Notes pursuant to the
preceding paragraph will provide by its terms that it will be automatically and
unconditionally released and discharged upon (i) any sale, exchange or transfer
to any person not an Affiliate of the Company of all of the Company's and the
Restricted Subsidiaries' Capital Stock in, or all or substantially all the
assets of, such Restricted Subsidiary (which sale, exchange or transfer is not
prohibited by the Indenture) or (ii) the release or discharge of the guarantee
that resulted in the creation of such guarantee of the Notes, except a discharge
or release by or as a result of payment under such guarantee.
Unrestricted Subsidiaries. (a) The Board of Directors of the Company may
designate any Subsidiary (including any newly acquired or newly formed
Subsidiary) to be an Unrestricted Subsidiary so long as (i) neither the Company
nor any Restricted Subsidiary is directly or indirectly liable for any Debt of
such Subsidiary, (ii) no default with respect to any Debt of such Subsidiary
would permit (upon notice, lapse of time or otherwise) any holder of any other
Debt of the Company or any Restricted Subsidiary to declare a default on such
other Debt or cause the payment thereof to be accelerated or payable prior to
its stated maturity, (iii) any Investment in such Subsidiary made as a result of
designating such Subsidiary an Unrestricted Subsidiary will not violate the
provisions of the "Limitation on Restricted Payments" covenant, (iv) neither the
Company nor any Restricted Subsidiary has a contract, agreement, arrangement,
understanding or obligation of any kind, whether written or oral, with such
Subsidiary other than those that might be obtained at the time from persons who
are not Affiliates of the Company and (v) neither the Company nor any Restricted
Subsidiary has any obligation to subscribe for additional shares of Capital
Stock or other equity
S-52
<PAGE> 53
interest in such Subsidiary, or to maintain or preserve such Subsidiary's
financial condition or to cause such Subsidiary to achieve certain levels of
operating results. Notwithstanding the foregoing, the Company may not designate
DVI Business Credit or DVI Financial Services as an Unrestricted Subsidiary and
may not sell, transfer or otherwise dispose of any properties or assets of DVI
Business Credit or DVI Financial Services to an Unrestricted Subsidiary, other
than in the ordinary course of business.
(b) The Board of Directors of the Company may designate any Unrestricted
Subsidiary as a Restricted Subsidiary; provided that such designation will be
deemed to be an incurrence of Debt by a Restricted Subsidiary of any outstanding
Debt of such Unrestricted Subsidiary and such designation will only be permitted
if (i) such Debt is permitted under the "Limitation on Debt" covenant and (ii)
no Default or Event of Default will have occurred and be continuing following
such designation.
Limitation on Liens. The Company will not, and will not permit any
Restricted Subsidiary to, directly or indirectly, create, incur, assume or
suffer to exist any Lien of any kind on or with respect to any of its property
or assets, including any shares of stock or indebtedness of any Restricted
Subsidiary, whether owned at the Closing Date or thereafter acquired, or any
income, profits or proceeds therefrom, or assign or otherwise convey any right
to receive income thereon, unless (a) in the case of any Lien securing
Subordinated Debt, the Notes are secured by a Lien on such property, assets or
proceeds that is senior in priority to such Lien and (b) in the case of any
other Lien, the Notes are equally and ratably secured with the obligation or
liability secured by such Lien.
Notwithstanding the foregoing, the Company may, and may permit any
Restricted Subsidiary to, incur the following Liens ("Permitted Liens"):
(i) Liens on property or assets securing Permitted Warehouse Debt of
the Company or any Restricted Subsidiary, other than Liens on Excess Spread
Receivables related to such Permitted Warehouse Debt not created in favor
of the lenders under the related Warehouse Facility;
(ii) Liens incurred in connection with a securitization or sale of
Receivables, other than Liens on Excess Spread Receivables related to such
securitization or sale transaction that were not created at the time of
such securitization or sale transaction;
(iii) Liens existing as of the Closing Date;
(iv) Liens on any property or assets of a Restricted Subsidiary
granted in favor of the Company or any Restricted Subsidiary;
(v) Liens securing the Notes;
(vi) Liens representing the interest or title of lessors under
Capitalized Lease Obligations or Liens securing purchase money mortgages or
purchase money security interests, so long as the aggregate amount secured
by such Liens does not exceed the amount permitted by clause (vi) of the
definition of "Permitted Debt";
(vii) Liens securing Acquired Debt created prior to (and not in
connection with or in contemplation of) the incurrence of such Debt by the
Company or any Restricted Subsidiary; provided that such Lien does not
extend to any property or assets of the Company or any Restricted
Subsidiary other than the property and assets acquired in connection with
the incurrence of such Acquired Debt;
(viii) Liens (other than on any Excess Spread Receivables) securing
obligations under Hedging Obligations permitted to be incurred pursuant to
clause (v) of the definition of "Permitted Debt";
(ix) statutory Liens or landlords', carriers', warehouseman's,
mechanics', suppliers', materialmen's, repairmen's or other like Liens
arising in the ordinary course of business and with respect to (A) amounts
not yet delinquent or (B) amounts being contested in good faith by
appropriate proceedings or (C) an aggregate amount at any one time not in
excess of $1 million;
(x) Liens for taxes, assessments, government charges or claims that
are being contested in good faith by appropriate proceedings promptly
instituted and diligently conducted;
S-53
<PAGE> 54
(xi) Liens incurred or deposits made to secure the performance of
tenders, bids, leases, statutory obligations, surety and appeal bonds,
government contracts, performance bonds and other obligations of a like
nature incurred in the ordinary course of business (other than contracts
for the payment of money);
(xii) easements, rights-of-way, restrictions and other similar charges
or encumbrances not interfering in any material respect with the business
of the Company or any Restricted Subsidiary incurred in the ordinary course
of business;
(xiii) Liens arising by reason of any judgment, decree or order of any
court, so long as such Lien is adequately bonded and any appropriate legal
proceedings that may have been duly initiated for the review of such
judgment, decree or order have not been finally terminated or the period
within which such proceedings may be initiated has not expired;
(xiv) Liens securing reimbursement obligations with respect to letters
of credit that encumber documents and other property relating to such
letters of credit and the products and proceeds thereof;
(xv) Liens in favor of customs and revenue authorities arising as a
matter of law to secure payment of customs duties in connection with the
importation of goods; and
(xvi) any extension, renewal or replacement, in whole or in part, of
any Lien described in the foregoing clauses (i) through (xv); provided that
any such extension, renewal or replacement is no more restrictive in any
material respect than the Lien so extended, renewed or replaced and does
not extend to any additional property or assets.
Limitation on Investment Company Status. The Company shall not take any
action, or otherwise permit to exist any circumstance, that would require the
Company or any of its Subsidiaries to register as an "investment company" under
the Investment Company Act of 1940, as amended.
Reports. The Company will be required to file on a timely basis with the
Commission, to the extent such filings are accepted by the Commission and
whether or not the Company has a class of securities registered under the
Exchange Act, the annual reports, quarterly reports and other documents that the
Company would be required to file if it were subject to Section 13 or 15(d) of
the Exchange Act. The Company will also be required (a) to file with the
Trustee, and provide to each holder of Notes, without cost to such holder,
copies of such reports and documents within 15 days after the date on which the
Company files such reports and documents with the Commission or the date on
which the Company would be required to file such reports and documents if the
Company were so required and (b) if filing such reports and documents with the
Commission is not accepted by the Commission or is prohibited under the Exchange
Act, to supply at the Company's cost copies of such reports and documents to any
prospective holder of Notes promptly upon written request.
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Company may not consolidate with or merge with or into any other person
or, directly or indirectly, convey, sell, assign, transfer, lease or otherwise
dispose of its properties and assets substantially as an entirety to any other
person (in one transaction or a series of related transactions), unless:
(a) either (i) the Company is the surviving corporation or (ii) the
person (if other than the Company) formed by such consolidation or into
which the Company is merged or the person that acquires by sale,
assignment, transfer, lease or other disposition the properties and assets
of the Company substantially as an entirety (the "Surviving Entity") (A) is
a corporation, partnership or trust organized and validly existing under
the laws of the United States, any state thereof or the District of
Columbia and (B) expressly assumes, by a supplemental indenture in form
satisfactory to the Trustee, all of the Company's obligations under the
Indenture and the Notes;
(b) immediately after giving effect to such transaction and treating
any obligation of the Company or a Restricted Subsidiary in connection with
or as a result of such transaction as having been incurred as of the time
of such transaction, no Default or Event of Default has occurred and is
continuing;
S-54
<PAGE> 55
(c) immediately after giving effect to such transaction on a pro forma
basis, the Consolidated Net Worth of the Company (or of the Surviving
Entity if the Company is not the continuing obligor under the Indenture) is
equal to or greater than the Consolidated Net Worth of the Company
immediately prior to such transaction;
(d) immediately after giving effect to such transaction on a pro forma
basis (on the assumption that the transaction occurred at the beginning of
the most recently ended four full fiscal quarter period for which internal
financial statements are available, the Company (or the Surviving Entity if
the Company is not the continuing obligor under the Indenture) could incur
at least $1.00 of additional Debt (other than Permitted Debt) pursuant to
the first paragraph of the "Limitation on Debt" covenant;
(e) if any of the property or assets of the Company or any of its
Restricted Subsidiaries would thereupon become subject to any Lien, the
provisions of the "Limitation on Liens" covenant are complied with; and
(f) the Company delivers, or causes to be delivered, to the Trustee,
in form and substance reasonably satisfactory to the Trustee, an officers'
certificate and an opinion of counsel, each stating that such transaction
complies with the requirements of the Indenture.
In the event of any transaction described in and complying with the
conditions listed in the first paragraph of this covenant in which the Company
is not the continuing obligor under the Indenture, the Surviving Entity will
succeed to, and be substituted for, and may exercise every right and power of,
the Company under the Indenture, and thereafter the Company will be discharged
from all its obligations and covenants under the Indenture and Notes.
EVENTS OF DEFAULT
The following will be "Events of Default" under the Indenture:
(a) default in the payment of any interest on any Note when it becomes
due and payable, and continuance of such default for a period of 30 days;
(b) default in the payment of the principal of (or premium, if any,
on) any Note when due;
(c) failure to perform or comply with the Indenture provisions
described under "Consolidation, Merger and Sale of Assets";
(d) default in the performance, or breach, of any covenant or
agreement of the Company contained in the Indenture (other than a default
in the performance, or breach, of a covenant or agreement that is
specifically dealt with elsewhere herein), and continuance of such default
or breach for a period of 60 days after written notice has been given to
the Company by the Trustee or to the Company and the Trustee by the holders
of at least 25% in aggregate principal amount of the Notes then
outstanding;
(e) (i) an event of default has occurred under any mortgage, bond,
indenture, loan agreement or other document evidencing an issue of Debt of
the Company or any Significant Subsidiary, which issue has an aggregate
outstanding principal amount of not less than $5 million, and such default
has resulted in such Debt becoming, whether by declaration or otherwise,
due and payable prior to the date on which it would otherwise become due
and payable or (ii) a default in any payment when due at final maturity of
any such Debt;
(f) failure by the Company or any of its Restricted Subsidiaries to
pay one or more final judgments the uninsured portion of which exceeds in
the aggregate $5 million, which judgment or judgments are not paid,
discharged or stayed for a period of 60 days; or
(g) the occurrence of certain events of bankruptcy, insolvency or
reorganization with respect to the Company or any Significant Subsidiary.
If an Event of Default (other than as specified in clause (g) above) occurs
and is continuing, the Trustee or the holders of not less than 25% in aggregate
principal amount of the Notes then outstanding may declare
S-55
<PAGE> 56
the principal of all of the outstanding Notes immediately due and payable and,
upon any such declaration, such principal will become due and payable
immediately.
If an Event of Default specified in clause (g) above occurs and is
continuing, then the principal of all of the outstanding Notes will ipso facto
become and be immediately due and payable without any declaration or other act
on the part of the Trustee or any holder of Notes.
At any time after a declaration of acceleration under the Indenture, but
before a judgment or decree for payment of the money due has been obtained by
the Trustee, the holders of a majority in aggregate principal amount of the
outstanding Notes, by written notice to the Company and the Trustee, may rescind
such declaration and its consequences if (i) the Company has paid or deposited
with the Trustee a sum sufficient to pay (A) all overdue interest on all Notes,
(B) all unpaid principal of (and premium, if any, on) any outstanding Notes that
has become due otherwise than by such declaration of acceleration and interest
thereon at the rate borne by the Notes, (C) to the extent that payment of such
interest is lawful, interest upon overdue interest and overdue principal at the
rate borne by the Notes and, (D) all sums paid or advanced by the Trustee under
the Indenture and the reasonable compensation, expenses, disbursements and
advances of the Trustee, its agents and counsel; and (ii) all Events of Default,
other than the non-payment of amounts of principal of (or premium, if any, on)
or interest on the Notes that have become due solely by such declaration of
acceleration, have been cured or waived. No such rescission will affect any
subsequent default or impair any right consequent thereon.
The holders of not less than a majority in aggregate principal amount of
the outstanding Notes may, on behalf of the holders of all of the Notes, waive
any past defaults under the Indenture, except a default in the payment of the
principal of (and premium, if any) or interest on any Note, or in respect of a
covenant or provision that under the Indenture cannot be modified or amended
without the consent of the holder of each Note outstanding.
If a Default or an Event of Default occurs and is continuing and is known
to the Trustee, the Trustee will mail to each holder of the Notes notice of the
Default or Event of Default within 90 days after the occurrence thereof. Except
in the case of a Default or an Event of Default in payment of principal of (and
premium, if any, on) or interest on any Notes, the Trustee may withhold the
notice to the holders of the Notes if a committee of its trust officers in good
faith determines that withholding such notice is in the interests of the holders
of the Notes.
The Company is required to furnish to the Trustee annual statements as to
the performance by the Company and the Subsidiary Guarantors of their respective
obligations under the Indenture and as to any default in such performance. The
Company is also required to notify the Trustee within five days of any Default.
SATISFACTION AND DISCHARGE
Upon the request of the Company, the Indenture will cease to be of further
effect (except as to surviving rights of registration of transfer of the Notes,
as expressly provided for in the Indenture) and the Trustee, at the expense of
the Company, will execute proper instruments acknowledging satisfaction and
discharge of the Indenture when (a) either (i) all the Notes theretofore
authenticated and delivered (other than destroyed, lost or stolen Notes that
have been replaced or paid and Notes that have been subject to defeasance under
"Defeasance or Covenant Defeasance of Indenture") have been delivered to the
Trustee for cancellation or (ii) all Notes not theretofore delivered to the
Trustee for cancellation (A) have become due and payable, (B) will become due
and payable at maturity within one year or (C) are to be called for redemption
within one year under arrangements satisfactory to the Trustee for the giving of
notice of redemption by the Trustee in the name, and at the expense, of the
Company, and the Company has irrevocably deposited or caused to be deposited
with the Trustee funds in trust for the purpose and in an amount sufficient to
pay and discharge the entire Debt on such Notes not theretofore delivered to the
Trustee for cancellation, for principal (and premium, if any, on) and interest
on the Notes to the date of such deposit (in the case of Notes that have become
due and payable) or to the Stated Maturity or Redemption Date, as the case may
be; (b) the Company has paid or caused to be paid all sums payable under the
Indenture by the Company; and (c) the
S-56
<PAGE> 57
Company has delivered to the Trustee an officers' certificate and an opinion of
counsel, each stating that all conditions precedent provided in the Indenture
relating to the satisfaction and discharge of the Indenture have been complied
with.
AMENDMENTS AND WAIVERS
Modifications and amendments of the Indenture may be made by the Company
and the Trustee with the consent of the holders of a majority in aggregate
outstanding principal amount of the Notes; provided, however, that no such
modification or amendment may, without the consent of the holder of each
outstanding Note affected thereby,
(a) change the Stated Maturity of the principal of, or any installment
of interest on, any Note, or reduce the principal amount thereof or the
rate of interest thereon or any premium payable upon the redemption
thereof, or change the coin or currency in which any Note or any premium or
the interest thereon is payable, or impair the right to institute suit for
the enforcement of any such payment after the Stated Maturity thereof (or,
in the case of redemption, on or after the Redemption Date);
(b) reduce the percentage in principal amount of outstanding Notes,
the consent of whose holders is required for any waiver of compliance with
certain provisions of, or certain defaults and their consequences provided
for under, the Indenture; or
(c) modify any provisions relating to "Amendments and Waivers" except
to increase the percentage of outstanding Notes required for such actions
or to provide that certain other provisions of the Indenture cannot be
modified or waived without the consent of the holder of each outstanding
Note affected thereby.
The holders of a majority in aggregate principal amount of the Notes
outstanding may waive compliance with certain restrictive covenants and
provisions of the Indenture.
REGARDING THE TRUSTEE
First Trust National Association ("First Trust") is the Trustee under the
Indenture, which relates to the Notes. First Trust is a party to certain
indentures and pooling and servicing agreements with the Company and its
subsidiaries. First Trust may also maintain other banking arrangements with the
Company in the ordinary course of business.
S-57
<PAGE> 58
UNDERWRITING
Subject to the terms and conditions as set forth in the Underwriting
Agreement, the Company has agreed to sell to Prudential Securities Incorporated
("Prudential Securities") and CIBC Wood Gundy Securities Corp. (collectively,
the "Underwriters"), and the Underwriters have severally agreed to purchase from
the Company, the principal amount of the Notes set forth opposite their
respective names:
<TABLE>
<CAPTION>
PRINCIPAL
UNDERWRITER AMOUNT
--------------------------------------------------------------- ------------
<S> <C>
Prudential Securities Incorporated............................. $
CIBC Wood Gundy Securities Corp................................
------------
Total................................................ $100,000,000
============
</TABLE>
The Company is obligated to sell, and the Underwriters are obligated to
purchase, subject to the terms and conditions of the Underwriting Agreement, all
of the Notes offered hereby if any are purchased.
The Underwriters have advised the Company that they propose to offer the
Notes initially at the initial public offering price set forth on the cover page
of this Prospectus Supplement; that the Underwriters may allow to selected
dealers a concession of % of such offering price; and that such dealers may
reallow a concession not in excess of % of such offering price to certain
other dealers. After the initial public offering, the offering price and the
concessions may be changed by the Underwriters.
No action has been or will be taken in any jurisdiction by the Company or
the Underwriters that would permit a public offering for the Notes offered
hereby or possession or distribution of this Prospectus Supplement in any
jurisdiction where action for that purpose is required, other than the United
States. No offer or sale of the Notes may be made in any jurisdiction except
under circumstances that will result in compliance with the applicable laws
thereof. Persons into whose possession this Prospectus Supplement comes are
required by the Company and the Underwriters to inform themselves about and to
observe any restrictions as to the offering of the Notes hereby and the
distribution of this Prospectus Supplement.
The Company has agreed to indemnify the Underwriters or contribute to
losses arising out of certain liabilities that may be incurred in connection
with this Offering, including liabilities under the Securities Act of 1933, as
amended.
The Notes are a new issue of securities with no established trading market.
The Company has been advised by the Underwriters that each of them intends to
make a market in the Notes but the Underwriters are not obligated to do so and
may discontinue market making at any time without notice. No assurance can be
given as to the liquidity of the trading market for the Notes. The Notes have
been approved for listing on the NYSE, subject to official notice of issuance.
Prudential Securities and certain of its affiliates have, in the past
provided and may in the future provide financial advisory and financing services
to the Company and have received customary compensation for the rendering of
such services. These services have included acting as underwriter or placement
agent for equipment loan securitizations and, in connection therewith, an
affiliate of Prudential Securities periodically provides warehouse facilities to
the Company.
S-58
<PAGE> 59
DVI, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Independent Auditors' Report.......................................................... F-2
Consolidated Balance Sheets as of June 30, 1996 and 1995.............................. F-3
Consolidated Statements of Operations for each of the three years in the period ended
June 30, 1996....................................................................... F-5
Consolidated Statements of Shareholders' Equity for each of the three years in the
period ended June 30, 1996.......................................................... F-6
Consolidated Statements of Cash Flows for each of the three years in the period ended
June 30, 1996....................................................................... F-7
Notes to Audited Consolidated Financial Statements.................................... F-9
Consolidated Balance Sheets as of September 30, 1996 (Unaudited) and June 30, 1996.... F-23
Consolidated Statements of Operations (Unaudited) for the three months ended September
30, 1996 and 1995................................................................... F-25
Consolidated Statements of Shareholders' Equity (Unaudited) July 1, 1995 through
September 30, 1996.................................................................. F-26
Consolidated Statements of Cash Flows (Unaudited) for the three months ended September
30, 1996 and 1995................................................................... F-27
Notes to Unaudited Consolidated Financial Statements.................................. F-28
</TABLE>
F-1
<PAGE> 60
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
DVI, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of DVI, Inc.
and its Subsidiaries (the "Company") as of June 30, 1996 and 1995, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended June 30, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of DVI, Inc. and its Subsidiaries
as of June 30, 1996 and 1995, and the consolidated results of their operations
and their cash flows for each of the three years in the period ended June 30,
1996 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
August 30, 1996
F-2
<PAGE> 61
DVI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
JUNE 30,
---------------------
1996 1995
-------- --------
<S> <C> <C>
Cash and cash equivalents.............................................. $ 2,376 $ 1,953
-------- --------
Cash and cash equivalents, restricted (Note 4)......................... 32,522 12,241
-------- --------
Amounts due from portfolio sale........................................ 54,797 --
-------- --------
Receivables:
Investment in direct financing leases and notes secured by equipment or
medical receivables (Notes 5, 6, 7, 8, 12 and 16)
Receivable in installments........................................... 462,780 427,784
Receivable in installments -- related parties........................ 16,999 23,828
Notes collateralized by medical receivables.......................... 34,529 22,862
Residual valuation................................................... 4,347 3,578
Unearned income...................................................... (65,722) (74,959)
-------- --------
Net investment in direct financing leases and notes secured by
equipment or medical receivables.................................. 452,933 403,093
-------- --------
Less: Allowance for possible losses on receivables..................... (3,675) (3,282)
-------- --------
Net receivables........................................................ 449,258 399,811
-------- --------
Equipment on operating leases (Note 5) (net of accumulated depreciation
of $2,152 (1996) and $1,646 (1995)).................................. 3,845 2,722
-------- --------
Furniture and fixtures (net of accumulated depreciation of $926 (1996)
and $726 (1995))..................................................... 1,959 1,468
-------- --------
Investments in investees (Note 6)...................................... 7,019 7,656
-------- --------
Goodwill, net (Note 15)................................................ 4,259 1,867
-------- --------
Other assets, including loans to shareholders of $344 (1996) and $59
(1995) (Note 12)..................................................... 4,290 5,213
-------- --------
Total assets................................................. $560,325 $432,931
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 62
DVI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS EXCEPT SHARE DATA)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
JUNE 30,
---------------------
1996 1995
-------- --------
<S> <C> <C>
Accounts payable....................................................... $ 23,029 $ 6,023
Other accrued expenses................................................. 11,612 7,639
Borrowings under warehouse facilities (Note 7)......................... 168,108 155,172
Deferred income taxes (Note 9)......................................... 4,745 4,717
Long-term debt, net:
Discounted receivables (primarily limited recourse) (Notes 5, 8 and
16)............................................................... 253,759 205,376
Convertible subordinated notes (Notes 8, 10 and 12).................. 13,809 13,754
-------- --------
Total long-term debt, net.................................... 267,568 219,130
-------- --------
Total liabilities............................................ 475,062 392,681
-------- --------
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, $0.005 par value; authorized
75,000,000 shares, outstanding 10,409,370 shares (1996) and
6,711,680 shares (1995)........................................... 52 34
Additional capital................................................... 67,162 29,281
Unrealized gain on available-for-sale investments, net of deferred
taxes of $769 (1995).............................................. -- 1,061
Retained earnings.................................................... 18,049 9,874
-------- --------
Total shareholders' equity................................... 85,263 40,250
-------- --------
Total liabilities and shareholders' equity................... $560,325 $432,931
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 63
DVI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS OF DOLLARS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Finance and other income:
Amortization of finance income.................... $ 45,265 $ 34,286 $ 18,265
Other income...................................... 3,748 1,699 2,344
------- ------- -------
Total finance and other income............ 49,013 35,985 20,609
Interest expense.................................. 30,489 22,860 8,833
------- ------- -------
Net interest income................................. 18,524 13,125 11,776
Gain on sale of financing transactions, net (Note
16)............................................ 7,681 3,042 302
------- ------- -------
Net finance income.................................. 26,205 16,167 12,078
Selling, general and administrative expenses...... 9,898 7,891 6,049
Provision for possible losses on receivables (Note
5)............................................. 1,974 1,261 1,716
------- ------- -------
Earnings from continuing operations before provision
for income taxes, equity in net loss of investees
and discontinued operations....................... 14,333 7,015 4,313
Provision for income taxes (Note 9)................. 6,092 2,946 1,811
------- ------- -------
Earnings from continuing operations before equity in
net loss of investees and discontinued
operations........................................ 8,241 4,069 2,502
Equity in net loss of investees..................... 66 -- 242
------- ------- -------
Earnings from continuing operations................. 8,175 4,069 2,260
Discontinued operations (Note 3):
Loss from discontinued operations, net of tax of
$51............................................ -- -- 74
Loss on disposal of discontinued operations, net
of tax of $2,213............................... -- -- 3,071
------- ------- -------
Loss from discontinued operations................. -- -- 3,145
------- ------- -------
Net earnings (loss)................................. $ 8,175 $ 4,069 $ (885)
======= ======= =======
Net earnings (loss) per share:
Primary:
From continuing operations..................... $ 0.81 $ 0.61 $ 0.34
From discontinued operations................... -- -- (0.47)
------- ------- -------
Net earnings (loss) per share.................. $ 0.81 $ 0.61 $ (0.13)
======= ======= =======
Fully diluted:
From continuing operations..................... $ 0.77 $ 0.60 $ 0.34
From discontinued operations................... -- -- (0.47)
------- ------- -------
Net earnings (loss) per share.................. $ 0.77 $ 0.60 $ (0.13)
======= ======= =======
Weighted average number of shares
outstanding -- primary............................ 10,118,000 6,652,000 6,717,000
Weighted average number of shares
outstanding -- fully diluted...................... 11,564,000 8,310,000 6,744,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 64
DVI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
UNREALIZED
COMMON STOCK GAIN ON
$0.005 PAR VALUE AVAILABLE- TOTAL
------------------- ADDITIONAL FOR-SALE RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL INVESTMENTS EARNINGS EQUITY
---------- ------ ---------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances at July 1, 1993.......... 6,530,295 $ 33 $ 27,941 $ -- $ 6,690 $34,664
Issuance of common stock upon
exercise of stock options.... 37,000 214 214
Net loss........................ (885) (885)
---------- --- ------- ------- ------- -------
Balances at June 30, 1994......... 6,567,295 33 28,155 5,805 33,993
Issuance of common stock upon
exercise of stock options.... 97,216 1 626 627
Conversion of subordinated
notes........................ 47,169 500 500
Unrealized gain on
available-for-sale
investments, net of deferred
taxes of $769................ 1,061 1,061
Net earnings.................... 4,069 4,069
---------- --- ------- ------- ------- -------
Balances at June 30, 1995......... 6,711,680 34 29,281 1,061 9,874 40,250
Issuance of common stock upon
exercise of stock options and
warrants..................... 822,690 4 8,934 8,938
Net proceeds from issuance of
common stock................. 2,875,000 14 28,947 28,961
Sale of available-for-sale
investments, net of deferred
tax benefit of $769.......... (1,061) (1,061)
Net earnings.................... 8,175 8,175
---------- --- ------- ------- ------- -------
Balances at June 30, 1996......... 10,409,370 $ 52 $ 67,162 $ -- $ 18,049 $85,263
========== === ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 65
DVI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss)....................................... $ 8,175 $ 4,069 $ (885)
--------- --------- ---------
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Equity in net loss of investees........................ 66 242
Depreciation and amortization.......................... 7,982 7,237 1,903
Additions to allowance accounts........................ 1,974 1,261 1,716
Gain on sale of financing transactions, net............ (7,681) (3,042) (302)
Deferred income taxes.................................. 797 1,619 (2,152)
Losses related to discontinued operations.............. 5,408
Changes in assets and liabilities:
(Increases) decreases in:
Cash and cash equivalents, restricted................ (20,281) 824 (6,239)
Amounts due from portfolio sale...................... (54,797)
Receivables.......................................... (29,505) 3,285 2,729
Other assets......................................... 923 1,622 (679)
Increases (decreases) in:
Accounts payable..................................... 17,006 (17,839) 16,531
Other accrued expenses............................... 1,323 (576) 410
--------- --------- ---------
Total adjustments...................................... (82,193) (5,609) 19,567
--------- --------- ---------
Net cash provided by (used in) operating activities....... (74,018) (1,540) 18,682
--------- --------- ---------
Cash flows from investing activities:
Cost of equipment acquired................................ (292,618) (319,011) (149,028)
Portfolio receipts net of amounts included in income and
proceeds from sales of financing transactions.......... 283,323 161,448 34,566
Net increase in notes collateralized by medical
receivables............................................ (11,667) (16,855) (6,007)
Furniture and fixtures additions.......................... (985) (1,026) 18
Investments in common and preferred stock of investees.... (2,059) 150
Cash proceeds from sale of assets......................... 125
Cash received from sale of common and preferred stock
of investee............................................ 1,341 828 540
--------- --------- ---------
Net cash (used in) investing activities................... (22,665) (174,616) (119,636)
Cash flows from financing activities:
Exercise of stock options and warrants.................... 8,938 626 214
Equity offering........................................... 28,961
Borrowings under:
Warehouse facilities................................... 485,585 534,633 216,113
Long-term debt......................................... 120,705 107,510 146,856
Repayments on:
Warehouse facilities................................... (472,649) (414,046) (226,748)
Long-term debt......................................... (74,434) (52,328) (35,966)
--------- --------- ---------
Net cash provided by financing activities................. 97,106 176,395 100,469
--------- --------- ---------
</TABLE>
F-7
<PAGE> 66
DVI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Net increase (decrease) in cash and cash equivalents........ 423 239 (485)
Cash and cash equivalents, beginning of year................ 1,953 1,714 2,199
--------- --------- ---------
Cash and cash equivalents, end of year...................... $ 2,376 $ 1,953 $ 1,714
========= ========= =========
Cash paid during the year for:
Interest.................................................. $ 29,984 $ 22,400 $ 5,579
========= ========= =========
Income taxes.............................................. $ 3,507 $ 1,650 $ 552
========= ========= =========
Supplemental disclosures of noncash transactions:
Assets acquired and liabilities assumed in connection with
business acquisitions:
Fair value of net assets acquired (in thousands of
dollars)............................................... $ 2,000
=========
</TABLE>
During the year ended June 30, 1996, the Company converted a $541,000 note
receivable into 435,335 shares of common stock of a domestic entity.
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, totalled $1,061,548, net of
deferred taxes of $768,707, as of June 30, 1995.
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). All figures are in thousands of dollars.
<TABLE>
<S> <C>
Net assets sold or written off:
Furniture and fixtures............................................................ $ 733
Equipment on operating leases..................................................... 2,615
Receivables....................................................................... 1,107
Other assets, net................................................................. 687
------
5,142
------
Liabilities assumed by Company:
Accounts payable.................................................................. 545
Accrued liabilities............................................................... 1,758
------
2,303
------
Less proceeds:
Cash.............................................................................. 125
Notes receivable.................................................................. 3,777
------
3,902
------
Loss on disposal of assets.......................................................... $3,543
======
</TABLE>
See Note 6 for discussion of additional noncash transactions.
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE> 67
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996, 1995 AND 1994
NOTE 1. NATURE OF OPERATIONS
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.
Ability to access the securitization market. The Company's ability to
complete securitizations and other structured finance transactions depends upon
a number of factors, including general conditions in the credit markets, the
size and liquidity of the market for types of receivable-backed securities
issued or placed in securitizations sponsored by the Company and the overall
financial performance of the Company's loan portfolio. Additionally, the
Company's ability to securitize assets is dependent upon its ability to provide
credit enhancement, which reduces the Company's liquidity and periodically
requires it to seek and obtain additional capital.
Credit risk. Many of the Company's customers are outpatient healthcare
providers that have complex credit characteristics. Providing financing for
these customers involves considerable credit analysis.
Continuing need for capital. The Company's ability to maintain and build
its financing business is dependent on its ability to obtain substantial amounts
of warehouse and permanent debt financing.
Regulation and consolidation. Additional regulatory attention has been
directed towards physician-owned healthcare facilities and other arrangements
whereby physicians are compensated, directly or indirectly, for referring
patients to such healthcare facilities. Furthermore, the market is subject to
consolidation among out-patient and physician groups and with hospitals. The
Company's source of customers is subject to the effects of the regulatory
actions and market consolidation.
Investments in foreign and initial operations. In an effort to mitigate
the impact of regulation and consolidation and to expand the Company's market,
the Company has initiated operations internationally and has made investments in
certain emerging markets. The success and ultimate recovery of these investments
is dependent upon many factors including foreign regulation, customs, currency
exchange and the achievement of management's planned projections for these
markets.
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.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
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, 1996 and 1995, unamortized initial direct
costs
F-9
<PAGE> 68
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1996, 1995 AND 1994
amounted to $7,450,000 and $6,878,000, respectively. Initial direct costs are
amortized over the life of the contract on the interest method which reflects a
constant effective yield.
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 associated with operating
leases are deferred and amortized over the lease term on a straight-line basis
which reflects a constant effective yield.
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).
Cash and Cash Equivalents, Restricted and Investments in Investees. The
Company accounts for investments in debt and equity securities in accordance
with 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. At June 30, 1996,
the Company has only available-for-sale securities which are included in
restricted cash, as their maturities are less than 90 days. 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 investments in investees consist of common and nonvoting preferred
equity interests in unconsolidated subsidiaries. The Company accounts for its
investments in the common stock of these subsidiaries using either the cost or
equity method of accounting, depending upon its ownership interests and its
ability to influence the investee. The investment in the preferred stock of the
investee is recorded at the lower of cost or estimated realizable value.
Goodwill. Goodwill represents the excess 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, equipment
held for sale or release which is stated at the lower of cost or its net
realizable value, and loans to shareholders primarily for financing a personal
residence.
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.
F-10
<PAGE> 69
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1996, 1995 AND 1994
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 or asset
securitization 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. 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,
income from receivables purchases and income from billing/collecting activities
which the Company has curtailed.
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 and 1994, 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
fiscal 1996 and the quarters ended June 30, 1996, March 31, 1996, December 31,
1995, September 30, 1995, 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 notes
has a dilutive effect on earnings per share.
Derivative Interest Rate Contracts. The Company uses various interest rate
contracts such as forward rate agreements, Treasury locks, interest rate swaps
and caps to manage its interest rate risk from its floating rate liabilities and
anticipated securitization and sale transactions. No contracts are held for
trading purposes. Gains or losses from forward rate agreements used to hedge
floating rate exposure within warehouse funding facilities are deferred and
amortized to interest expense over the hedged period. When hedge transactions
are matched to anticipated securitizations, gains or losses from the hedge
transactions are deferred and amortized to interest expense over the term of the
securitized transaction. When hedge transactions are matched to anticipated
whole loan sales, gains or losses from the hedge transactions are recognized as
part of the gain or loss on the sale.
Recent Accounting Developments. The Company adopted SFAS No. 114,
Accounting by Creditors for Impairment of a Loan, as amended by SFAS No. 118,
Accounting by Creditors for Impairment of a Loan -- Income Recognition and
Disclosures, as of July 1, 1995. These statements require that impaired loans be
measured based on the present value of the expected cash flows discounted at the
loan's effective interest rate or the fair value of the collateral, if the loan
is collateral dependent. Under SFAS No. 114, a loan is considered impaired when,
based on current information and events, it is probable that a creditor will be
unable to collect all amounts due according to the contractual terms of the loan
agreement. The adoption of SFAS No. 114 and No. 118 did not have a material
impact on the Company's operations. (See Note 5.)
F-11
<PAGE> 70
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1996, 1995 AND 1994
In October 1995, The Financial Accounting Standards Board (FASB) issued
SFAS No. 123, Accounting for Stock-Based Compensation. The Company has
determined that it will not change to the fair value method and will continue to
use Accounting Principle Board Opinion No. 25 for measurement and recognition of
employee stock-based transactions.
In June 1996, the FASB issued SFAS No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. This statement
is effective for transfers and servicing of financial assets and extinguishments
of liabilities occurring after December 31, 1996, and is to be applied
prospectively. Earlier or retroactive application is not permitted. Management
has not completed an analysis of the impact of applying this new statement;
however, the Company intends to begin applying this new standard, effective
January 1, 1997.
Reclassifications. Certain amounts as previously reported have been
reclassified to conform to the year ended June 30, 1996 presentation.
NOTE 3. DISCONTINUED OPERATIONS
In June 1993, the Company adopted a formal plan to discontinue its
healthcare services segment that consisted 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 the end of fiscal
1993, the Company established a reserve for the divestiture of the operations
and recorded a loss on discontinued operations and disposal of discontinued
operations. As of June 30, 1994, the Company had disposed of or entered into
definitive agreements to sell six of these outpatient healthcare facilities, had
written off the investment and assets of the remaining two, and recorded an
additional $3.1 million after-tax charge in excess of the amounts of estimated
losses reported as of June 30, 1993 for the disposition of this segment of the
Company's business.
NOTE 4. CASH AND CASH EQUIVALENTS, RESTRICTED
Cash and cash equivalents, restricted consist of cash, certificates of
deposit and U.S. Treasury obligations 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 as of June 30,
1996 is $14,208,516. There were no sales of U.S. Treasury obligations during the
year ended June 30, 1996.
F-12
<PAGE> 71
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1996, 1995 AND 1994
NOTE 5. INVESTMENT IN DIRECT FINANCING LEASES AND NOTES SECURED BY EQUIPMENT OR
MEDICAL RECEIVABLES AND EQUIPMENT ON OPERATING LEASES
Receivables in installments are receivable in monthly installments of
varying amounts and are collateralized by the underlying equipment. Notes
collateralized by medical receivables consist of notes receivable resulting from
working capital loans and are due at maturity. Receivables from operating leases
relate to noncancellable operating leases and are due in monthly installments of
varying amounts. Information regarding scheduled collections for direct
financing leases, notes secured by equipment or medical receivables and
operating leases are as follows:
<TABLE>
<CAPTION>
DIRECT FINANCING LEASES
AND NOTES SECURED
BY EQUIPMENT OR OPERATING
YEAR ENDING JUNE 30, MEDICAL RECEIVABLES LEASES
---------------------------------------------------- ----------------------- ----------
<S> <C> <C>
1997................................................ $ 168,767,000 $ 640,000
1998................................................ 140,050,000 567,000
1999................................................ 106,907,000 557,000
2000................................................ 61,319,000
2001................................................ 27,263,000
Thereafter.......................................... 10,002,000
------------ ----------
514,308,000 1,764,000
Residual valuation.................................. 4,347,000
------------ ----------
Total............................................... $ 518,655,000 $1,764,000
============ ==========
</TABLE>
The total receivable balance of $518,655,000 is comprised of direct
financing leases (38.9%), notes secured by equipment (53.6%), and medical
receivables (7.5%). The Company is exposed to credit risk on these receivables.
At June 30, 1996, of the 380 debtors, the largest concentration of credit
exposure was 2.9%.
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 years ended June 30, 1996 and 1995, the Company sold receivables
to third parties realizing gains of approximately $7.7 million and $3.0 million,
respectively. In connection with certain of these transactions, the Company
retained subordinated interests in the receivables totaling $35,734,000 and
$13,431,000 at June 30, 1996 and 1995, respectively, which are included in
Receivables in installments. In accordance with provisions of SFAS No. 115, the
Company classifies subordinated interests as trading securities which are
recorded at fair value with any unrealized gains or losses recorded in the
results of operations in the period of the change in fair value. Valuations at
origination and at each reporting period are based on discounted cash flow
analyses. The range of values attributable to the factors used in determining
fair value is broad, accordingly, the Company's estimate of fair value is
subjective. 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 which is included in the allowance for possible losses on receivables.
At June 30, 1996, receivables amounting to $300.5 million are assigned as
collateral for long-term debt (See Note 8).
F-13
<PAGE> 72
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1996, 1995 AND 1994
The following is an analysis of the allowance for possible losses on
receivables as of June 30:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Balance, beginning of year..................... $3,282,000 $2,498,000 $1,046,000
Provision for possible losses on receivables... 1,974,000 1,261,000 1,716,000
Recoveries..................................... -- -- --
Write-offs..................................... 1,581,000 477,000 264,000
---------- ---------- ----------
Balance, end of year........................... $3,675,000 $3,282,000 $2,498,000
========== ========== ==========
</TABLE>
The total carrying amount of loans on which income was suspended was
$3,799,000 at June 30, 1996. The average carrying amount of such loans was
$2,501,000 for the year ended June 30, 1996. Cash collected on all nonaccruing
loans is applied to the carrying amount.
NOTE 6. INVESTMENTS IN INVESTEES
At June 30, 1995, the Company held available-for-sale securities with a
market value of $3,172,000, which it accounted for at market with the unrealized
gain of $1,830,000 recorded as a component of shareholders' equity. During the
year ended June 30, 1996, the Company sold its investments in common stock of
Healthcare Imaging Services, Inc. ("HIS") and Diagnostic Imaging Services, Inc.
("DIS"). The Company did not record a gain or loss on these transactions. In
March 1995, the Company sold its investment in common stock of SMT Health
Services, Inc. for proceeds equal to its cost of $827,989.
At June 30, 1996 and 1995, the Company holds Series F and Series G
preferred stock of DIS valued at $2,482,000 (2,482,000 shares) and $2,000,000
(2,000,000 shares), respectively. 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 $2.482 per share for Series F and $2.00 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 plus accrued dividends through
September 2001.
In November 1995, the Company entered into a joint venture with two other
partners to establish Medical Equipment Credit Pte. Ltd. ("MEC"). MEC pursues
opportunities in the Asian-Pacific diagnostic imaging marketplace. Initial
capitalization of MEC is 7,000,000 shares of common stock ($5,000,000) and
ownership is based on the percentage of the initial capitalization invested by
each of the three joint venture partners. The Company's ownership is 40% based
on a $2,000,000 investment. The Company accounts for its investment in MEC under
the equity method of accounting.
In the year ended June 30, 1996, the Company converted a note receivable
totaling $541,000 into 435,335 shares or 19.8% of the outstanding stock of a
domestic entity. The Company accounts for this investment in this entity under
the cost method of accounting as it does not exert significant influence over
the entity.
NOTE 7. BORROWINGS UNDER WAREHOUSE FACILITIES
The Company's primary credit facility, pursuant to a revolving credit
agreement with a syndicate of banks (the "Agreement"), provides for the
borrowing of up to $116.5 million. Borrowings under this facility bear interest
based on the Company's leverage ratio as defined in the Agreement at the
Company's option of (1) from prime to prime plus .125% or (2) from 1.50% to
1.65% over the 30, 60 or 90-day LIBOR rate. Included in the Agreement is an
$18.0 million sub-limit for borrowings secured by medical receivables loans
originated by the Company. The Agreement is renewable annually at the bank
syndicate's discretion. The Agreement also provides that if the banks elect not
to renew the facility at the end of its stated term, the then outstanding loans
automatically convert to four-year amortizing term loans at slightly higher
interest rates.
F-14
<PAGE> 73
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1996, 1995 AND 1994
The Agreement prohibits the Company from paying dividends other than dividends
payable solely in shares of the Company's stock and limits borrowings to
specified levels determined by ratios based on the Company's tangible net worth.
As of June 30, 1996, the Company was in compliance with the financial covenants
of the Agreement.
The Company has a $100.0 million interim funding facility with Union Bank
of Switzerland. This facility is available for certain transactions which are to
be securitized. This facility bears interest at a rate of .90% over the 30-day
LIBOR rate. Borrowings under the facility are secured by certain equipment loans
and the equipment financed thereunder. The facility was closed to further
financings on August 31, 1996 in preparation for a securitization.
The Company has two credit facilities for its medical receivables financing
business. The first facility is for $3.0 million with an interest rate of prime
plus 2.00% and matures in March 1997. The second facility is for $7.0 million
with an interest rate, at the Company's option, of either prime plus 1.00% or
30-day LIBOR plus 2.25% and matures in December 1996. In addition, in September
1996 the Company obtained a $50.0 million warehouse facility with an investment
banking firm.
At June 30, 1996, the Company had available an aggregate of $226.5 million
in interim funding facilities of which $168.1 million was utilized.
NOTE 8. LONG-TERM DEBT
The discounted receivables are discounted direct financing lease
obligations, notes secured by equipment, and medical receivables which were
securitized and sold to investors primarily on a limited or nonrecourse basis.
They are collateralized by the underlying equipment and medical receivables (See
Note 5).
Future annual maturities of discounted receivables, net of capitalized
issuance costs of $6,512,000, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
---------------------------------------------------------------
<S> <C>
1997...................................................... $ 76,715,000
1998...................................................... 57,641,000
1999...................................................... 48,812,000
2000...................................................... 55,324,000
2001...................................................... 11,052,000
Thereafter................................................ 4,215,000
------------
Total........................................... $253,759,000
============
</TABLE>
All of the discounted receivables have been permanently funded through six
asset securitizations which were initiated during fiscal years 1993 through
1996. Debt under these securitizations are limited recourse and bear interest at
fixed rates ranging between 5.34% to 7.81% and floating interest rates of 2.25%
over 30-day LIBOR. All of the receivables are serviced by the Company and the
related securitization agreements require that the Company comply with certain
servicing requirements, require limited cash collateral (See Note 4) or residual
interests and contain various recourse provisions. (See Note 13.)
Included above is a $10.0 million facility with Warehouse Line LLC. This
was an advance related to the Company's securitization of its retained
subordinated positions in its securitizations and whole loan sales. The
securitization transaction was completed on July 31, 1996.
In June 1994, the Company completed a $14,112,000, net of issuance costs
totaling $888,000, private placement of convertible subordinated notes. The
notes are convertible into common shares at $10.60 per
F-15
<PAGE> 74
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1996, 1995 AND 1994
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. There were no conversions in
fiscal year 1996.
NOTE 9. INCOME TAXES
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Current payable................................ $6,120,000 $ 466,000 $2,623,000
Deferred....................................... (28,000) 2,480,000 (812,000)
---------- ---------- ----------
Total................................ $6,092,000 $2,946,000 $1,811,000
========== ========== ==========
</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,
-------------------------------------------------------------
1996 1995 1994
------------------ ------------------ -----------------
<S> <C> <C> <C> <C> <C> <C>
Provision for income taxes at the
federal statutory rate............. $4,993,000 35.0% $2,455,000 35.0% $1,509,000 35.0%
State income taxes, net of federal
tax benefit........................ 1,045,000 7.3 452,000 6.4 299,000 7.0
Other................................ 54,000 0.4 39,000 0.6 3,000 --
---------- ---- ---------- ---- ---------- ----
Total...................... $6,092,000 42.7% $2,946,000 42.0% $1,811,000 42.0%
========== ==== ========== ==== ========== ====
</TABLE>
The major components of the Company's net deferred tax liabilities of
$4,745,000 and $4,717,000 at June 30, 1996 and 1995, respectively, are as
follows:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Accumulated depreciation................................ $ 31,820,000 $ 27,963,000
Deferred recognition of lease income.................... (24,762,000) (21,751,000)
Alternative minimum tax credits carryforwards........... (137,000) (403,000)
Gain or loss on hedging activities...................... 1,342,000 1,444,000
Allowances for uncollectible receivables................ (1,786,000) (1,179,000)
State income taxes...................................... (867,000) (401,000)
Other................................................... (865,000) (956,000)
------------ ------------
Total......................................... $ 4,745,000 $ 4,717,000
============ ============
</TABLE>
NOTE 10. SHAREHOLDERS' EQUITY
In August 1995, the Company completed a public offering of 2,875,000 shares
of its Common Stock for which it received net proceeds of $29.0 million. The net
proceeds were utilized to reduce short-term indebtedness and for general
corporate purposes.
In January 1996, holders of 615,605 of the Company's warrants and units
issued in February 1991 redeemed their warrants and units for shares of the
Company's Common Stock at $12.00 or $12.60 per share by the final exercise date
of January 26, 1996. As a result of the redemption, the Company received cash
proceeds of $7.4 million.
F-16
<PAGE> 75
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1996, 1995 AND 1994
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, 1996, warrants for 250,000
common shares were exercisable and 55,000 warrants had been exercised.
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. Subsequent to June 30,
1996, $600,000 of these notes were converted into 56,603 shares of common stock.
As of July 15, 1996, cumulative conversions of these notes were $1,100,000 into
103,772 shares of common stock (see Notes 8 and 12).
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.
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, 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................................................. 48,500 9.13 -- 12.63
Exercised............................................... (97,216) 2.68 -- 12.88
Canceled................................................ (80,852)
-------- ---------------
Outstanding at June 30, 1995............................ 680,294 $1.44 -- $13.50
Granted................................................. 130,500 11.63 -- 13.13
Exercised............................................... (152,085) 1.44 -- 13.50
Canceled................................................ (37,000)
-------- ---------------
Outstanding at June 30, 1996............................ 621,709 $1.75 -- $13.13
======== ===============
</TABLE>
As of June 30, 1996, options to purchase 290,989 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 $222,750 and $33,544 for the years ended June 30,
1996 and 1995, respectively.
F-17
<PAGE> 76
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1996, 1995 AND 1994
At June 30, 1996 and 1995, receivables in installments from investees
totaled $16,999,000 and $23,828,000, respectively.
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. which was approved by the stockholders of the
Company in December 1995. (See Note 15.)
As of June 30, 1996 and 1995, the Company had loans receivable from Company
officers totaling $400,000 and $113,000, respectively.
During the year ended June 30, 1996, the Company sold its investments in
common stock of Healthcare Imaging Services, Inc. ("HIS") and Diagnostic Imaging
Services, Inc. ("DIS"). As of June 30, 1996 and 1995, the Company had
investments in preferred stock and dividends of DIS totaling $4,891,000 and
$4,667,000, respectively. (See Note 6.)
During the year ended June 30, 1994, the Company issued convertible
subordinated notes totaling $9,550,000 to related parties.
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, 1996, 1995 and 1994 amounted to $654,000, $498,000 and $463,000,
respectively. Future minimum lease payments under these leases are as follows:
<TABLE>
<CAPTION>
FUTURE
MINIMUM
LEASE
YEAR ENDING JUNE 30, PAYMENTS
----------------------------------------------------------------- ----------
<S> <C>
1997............................................................. $ 517,000
1998............................................................. 441,000
1999............................................................. 441,000
2000............................................................. 430,000
2001............................................................. 236,000
Thereafter....................................................... 943,000
----------
Total.................................................. $3,008,000
==========
</TABLE>
Contingencies. Under certain limited recourse agreements, the Company may
be required to provide for losses incurred on uncollected lease and medical
receivables previously collateralized. At June 30, 1996, the maximum contingent
liability under the limited recourse agreements amounted to $60,791,000. This
contingent liability, however, could be offset by any proceeds received from the
resale or remarketing of available equipment financed under the agreements or
outstanding medical receivables collected.
The Company has receivables from and investments with DIS aggregating
$21,005,000 and $24,448,000 at June 30, 1996 and 1995, respectively. DIS
received a qualified opinion for a going concern on its December 31, 1995
financial statements. Additionally, the Company has net receivables from Latin
American Trade Finance, Ltd. (LATF) in the amount of $845,000 at June 30, 1996.
LATF is a San Francisco based investment company which specializes in financing
throughout Latin America. LATF has identified some significant deals. To date,
those deals have not closed and LATF has been unable to make scheduled payments
to the Company. Management has performed an analysis of its recoverability of
such amounts and believes that based upon the best information available, it
will recover all amounts, without any loss. (See Note 12.)
F-18
<PAGE> 77
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1996, 1995 AND 1994
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 $45,000, $39,000 and $49,000 to the Plan during the years ending
June 30, 1996, 1995 and 1994, respectively.
NOTE 15. ACQUISITIONS
In January 1993, the Company acquired the outstanding shares of Medical
Equipment Finance Corporation ("MEF Corp."). In December 1995, the Company's
shareholders approved the issuance of 400,000 shares of the Company's common
stock, as set in the purchase agreement as amended, valued at $4.65 million. The
Company recorded goodwill of $4.65 million related to the acquisition. As of
June 30, 1996, the 400,000 common shares were unissued but included in the
earnings per share calculation.
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, 1996 and 1995 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, 1996
-------------------------------
CARRYING ESTIMATED FAIR
AMOUNT VALUE
------------ --------------
<S> <C> <C>
Assets:
Receivable in installments (excluding investment in
direct financing leases)........................... $216,473,000 $ 218,301,000
Liabilities:
Discounted receivables................................ $253,759,000 $ 253,287,000
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1995
-------------------------------
CARRYING ESTIMATED FAIR
AMOUNT VALUE
------------ --------------
<S> <C> <C>
Assets:
Receivable in installments (excluding investment in
direct financing leases)........................... $177,785,000 $ 182,284,000
Liabilities:
Discounted receivables................................ $205,376,000 $ 202,967,000
</TABLE>
The carrying values of cash and cash equivalents, cash and short-term
investments, restricted, notes collateralized by medical receivables, accounts
payable, other accrued expenses, short-term bank borrowings and convertible
subordinated notes approximate fair values at June 30, 1996 and 1995.
F-19
<PAGE> 78
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1996, 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, 1996 and 1995.
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 $197.7 million and $199.3 million as of June 30, 1996
and 1995, respectively, from the receivable in installments 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, 1996 and 1995. Although the Company is not aware of any
factors that would significantly affect the estimated fair values, such values
have not been updated since June 30, 1996; therefore, current estimates of fair
value may differ significantly from the amounts presented herein.
Derivative activity:
<TABLE>
<CAPTION>
JUNE 30, 1996 JUNE 30, 1995
------------------------------------ ---------------------------------
DEFERRED DEFERRED
NOTIONAL FAIR GAINS/ NOTIONAL FAIR GAINS/
AMOUNT VALUE (LOSSES) AMOUNT VALUE (LOSSES)
------------- --------- -------- -------- ----- --------------
<S> <C> <C> <C> <C> <C> <C>
Swaps.......................... $99.4 million $ 236,000 -- -- -- --
Options........................ $26.5 million -- -- -- -- --
Forwards:
Treasury Locks............... $ 90 million $(227,000) $129,000 -- -- $(1.84 million)
Forward Rate Agreements...... $ 200 million $ (17,900) -- -- -- --
</TABLE>
The Company uses off balance sheet derivative financial instruments to
hedge interest rate risk. The Company's interest rate risk is associated with
variable rate funding of the fixed rate loans and the timing difference between
temporary funding through the warehouse and permanent funding through either
securitization or sale. The derivatives are used to manage three components of
this risk: interest sensitivity adjustments, hedging anticipated loan
securitizations and sales, and interest rate spread protection. Credit risk
exists for these derivative instruments in the form of the failure of the
counterparty to make required payments in favor of the Company. The risk is
minimized through the use of counterparties with investment grade ratings. The
fair value of the derivative instruments is derived from dealer quotes.
Swaps and Options:
Swaps and options, primarily interest rate caps, are used to hedge the
interest rate spreads for various loan sale facilities where cash flows from
loans are fixed rate but the borrowing costs are variable. The interest rate
swaps pay fixed rates of 5.38% to 6.74% and receive a floating rate of the H-15
composite commercial paper
F-20
<PAGE> 79
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1996, 1995 AND 1994
rate. The swaps mature in September 2000 and December 2000. The interest rate
caps are fixed at 9.00% and mature in December 1996 and March 1997.
Forwards:
Treasury lock agreements, forward contracts, are used to hedge the interest
rate risk associated with anticipated securitizations and/or sales. These
instruments lock a specific Treasury rate identified to have a comparable
maturity to the average life of the anticipated transaction in order to fix the
rate either over the life of the securitization or to fix the sale price as
applicable. The open positions at June 30, 1996 were for securitizations and
sales expected to occur in the first and second quarters of fiscal 1997. In
1996, the Company deferred $211,000 in losses associated with transactions
securitized compared with $1.75 million in deferred losses in 1995. In 1996, the
Company recognized losses of $27,000 for loan sales compared with no recognized
gains or losses in 1995. Gains and losses for securitizations are deferred and
amortized over the life of the securitization. Gains and losses on sales are
recognized as part of the gain or loss on the sale.
Forward rate agreements, forward contracts, are used to hedge interest
sensitivity adjustments in conjunction with cash market activities by extending
the repricing period of the short term floating rate warehouse facilities. Gains
and losses are deferred and amortized to interest expense over the extension
period. The Company pays a fixed rate of 5.77% and receives a floating rate of
one month LIBOR. These agreements mature in September 1996.
NOTE 17. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of the quarterly results of operations for the
fiscal years ended June 30, 1996 and 1995:
<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 1996
Finance and other income................... $11,301 $ 12,061 $13,152 $ 12,499
Net finance income......................... 5,714 6,394 6,832 7,265
Earnings before provision for income taxes
and equity in net earnings (loss) of
investees................................ 3,191 3,510 3,690 3,942
Net earnings............................... 1,775 2,078 2,126 2,196
Net earnings per common and common
equivalent share -- primary.............. $ .20 $ .21 $ .20 $ .20
======= ======= ======= =======
Net earnings per common and common
equivalent share -- fully diluted........ $ .19 $ .20 $ .19 $ .19
======= ======= ======= =======
</TABLE>
F-21
<PAGE> 80
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1996, 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 $8,070 $ 9,648 $ 11,070
Net finance income......................... 3,046 3,710 4,140 5,271
Earnings before provision for income taxes
and equity in net earnings (loss) of
investees................................ 885 1,524 2,169 2,437
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>
NOTE 18. 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.
F-22
<PAGE> 81
DVI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1996 1996
------------- --------
(UNAUDITED)
<S> <C> <C>
CASH AND CASH EQUIVALENTS........................................... $ 4,642 $ 2,376
CASH AND CASH EQUIVALENTS, RESTRICTED............................... 25,272 32,522
AMOUNTS DUE FROM PORTFOLIO SALE..................................... -- 54,797
RECEIVABLES:
Investment in Direct Financing Leases and Notes Secured by Equipment
or Medical Receivables:
Receivable in installments........................................ 477,842 462,780
Receivable in installments -- related parties..................... 15,869 16,999
Notes collateralized by medical receivables....................... 42,556 34,529
Residual valuation................................................ 5,323 4,347
Unearned income................................................... (67,289) (65,722)
-------- --------
Net investment in direct financing leases and notes secured by
equipment or medical receivables............................... 474,301 452,933
Less: Allowance for possible losses on receivables................ (3,808) (3,675)
-------- --------
NET RECEIVABLES..................................................... 470,493 449,258
EQUIPMENT ON OPERATING LEASES
(net of accumulated depreciation of $2,581 at September 30, 1996
and $2,152 at June 30, 1996)...................................... 4,219 3,845
FURNITURE AND FIXTURES
(net of accumulated depreciation of $1,197 at September 30, 1996
and $926 at June 30, 1996)........................................ 2,032 1,959
INVESTMENTS IN INVESTEES............................................ 6,996 7,019
GOODWILL, NET....................................................... 4,182 4,259
OTHER ASSETS (including loans to shareholders of $344 at September
30, 1996 and June 30, 1996)....................................... 8,277 4,290
-------- --------
TOTAL ASSETS........................................................ $ 526,113 $560,325
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-23
<PAGE> 82
DVI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS EXCEPT SHARE DATA)
LIABILITIES AND SHAREHOLDERS EQUITY
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1996 1996
------------- --------
(UNAUDITED)
<S> <C> <C>
ACCOUNTS PAYABLE.................................................... $ 22,912 $ 23,029
OTHER ACCRUED EXPENSES.............................................. 10,946 11,612
BORROWINGS UNDER WAREHOUSE FACILITIES............................... 138,160 168,108
DEFERRED INCOME TAXES............................................... 4,745 4,745
LONG-TERM DEBT, NET:
Discounted receivables (primarily limited recourse)............... 247,400 253,759
Convertible subordinated notes.................................... 13,238 13,809
-------- --------
TOTAL LONG-TERM DEBT, NET........................................... 260,638 267,568
-------- --------
TOTAL LIABILITIES................................................... 437,401 475,062
-------- --------
SHAREHOLDERS' EQUITY:
Preferred stock, $10.00 par value; authorized 100,000 shares; no
shares issued.................................................. -- --
Common stock, $0.005 par value; authorized 75,000,000 shares;
outstanding 10,497,723 shares at September 30, 1996 and
10,409,370 shares at June 30, 1996............................. 52 52
Additional capital................................................ 68,606 67,162
Retained earnings................................................. 20,054 18,049
-------- --------
TOTAL SHAREHOLDERS' EQUITY.......................................... 88,712 85,263
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.......................... $ 526,113 $560,325
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-24
<PAGE> 83
DVI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS OF DOLLARS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------
1996 1995
------- -------
<S> <C> <C>
FINANCE AND OTHER INCOME:
Amortization of finance income......................................... $11,116 $10,506
Other income........................................................... 1,500 794
------- -------
Total finance and other income........................................... 12,616 11,300
Interest expense......................................................... 8,302 6,989
------- -------
NET INTEREST INCOME...................................................... 4,314 4,311
Net gain on sale of financing transactions............................. 2,203 1,403
------- -------
NET FINANCE INCOME....................................................... 6,517 5,714
Selling, general and administrative expenses........................... 2,849 2,073
Provision for possible losses on receivables........................... 143 450
------- -------
EARNINGS BEFORE PROVISION FOR INCOME TAXES AND EQUITY IN NET LOSS OF
INVESTEES.............................................................. 3,525 3,191
PROVISION FOR INCOME TAXES............................................... 1,496 1,416
EQUITY IN NET LOSS OF INVESTEES.......................................... 24 --
------- -------
NET EARNINGS............................................................. $ 2,005 $ 1,775
======= =======
NET EARNINGS PER SHARE:
Primary................................................................ $ .18 $ .20
======= =======
Fully diluted.......................................................... $ .18 $ .19
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-25
<PAGE> 84
DVI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
COMMON STOCK UNREALIZED
------------------- GAIN (LOSS) ON
$0.005 PAR VALUE AVAILABLE- TOTAL
------------------- ADDITIONAL FOR-SALE RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL INVESTMENTS EARNINGS EQUITY
---------- ------ ---------- -------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT JULY 1, 1995....... 6,711,680 $ 34 $ 29,281 $1,061 $ 9,874 $40,250
Issuance of common stock upon
exercise of stock options
and warrants.............. 822,690 4 8,934 8,938
Net proceeds from issuance of
common stock.............. 2,875,000 14 28,947 28,961
Sale of available-for-sale
investments, net of
deferred tax benefit of
$769...................... (1,061) (1,061)
Net earnings................. 8,175 8,175
---------- --- ------- ------ ------- -------
BALANCES AT JUNE 30, 1996...... 10,409,370 52 67,162 -- 18,049 85,263
Issuance of common stock upon
exercise of stock options
and warrants.............. 31,750 -- 844 844
Conversion of subordinated
notes..................... 56,603 -- 600 600
Net earnings................. 2,005 2,005
---------- --- ------- ------ ------- -------
BALANCES AT SEPT. 30, 1996..... 10,497,723 $ 52 $ 68,606 $ -- $ 20,054 $88,712
========== === ======= ====== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-26
<PAGE> 85
DVI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------
1996 1995
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings......................................................... $ 2,005 $ 1,775
-------- --------
Adjustments to reconcile net earnings to net cash provided by (used
in) operating activities:
Equity in net loss of investees................................... 24 --
Depreciation and amortization..................................... 2,246 2,219
Additions to allowance accounts................................... 143 450
Net gain on sale of financing transactions........................ (2,203) (1,403)
Deferred income taxes............................................. -- 1
Changes in assets and liabilities:
(Increases) decreases in:
Cash and cash equivalents, restricted........................... 7,250 756
Amounts due from portfolio sale................................. 54,797 --
Receivables..................................................... 1,828 (2,047)
Other assets.................................................... (3,987) (192)
Increases (decreases) in:
Accounts payable................................................ (117) 14,960
Other accrued expenses.......................................... (666) (528)
-------- --------
Total adjustments............................................... 59,315 14,216
-------- --------
Net cash provided by operating activities............................ 61,320 15,991
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cost of equipment acquired........................................... (85,224) (75,805)
Portfolio receipts net of amounts included in income and proceeds
from sales of financing transactions.............................. 74,596 55,598
Net increase in notes collateralized by medical receivables.......... (12,205) (323)
Furniture and fixtures additions..................................... (219) (314)
-------- --------
Net cash (used in) investing activities........................... $(23,052) $(20,844)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock options and warrants............................... $ 1,444 $ 296
Equity offering...................................................... -- 29,062
Borrowings under:
Warehouse facilities.............................................. 80,743 119,826
Long-term debt.................................................... 19,046 --
Repayments on:
Warehouse facilities.............................................. (110,691) (120,425)
Long-term debt.................................................... (26,544) (22,224)
-------- --------
Net cash (used in) provided by financing activities.................. (36,002) 6,535
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS.............................. 2,266 1,682
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD......................... 2,376 1,953
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD............................... $ 4,642 $ 3,635
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
Interest............................................................. $ 9,073 $ 6,714
======== ========
Income taxes......................................................... $ 1,366 $ 235
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-27
<PAGE> 86
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1996 AND JUNE 30, 1996
AND FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
(Commission). Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles (GAAP) for
complete financial statements. The consolidated financial statements should be
read in conjunction with the financial statements and notes thereto included in
DVI, Inc.'s (the Company) latest annual report on Form 10-K for the fiscal year
ended June 30, 1996.
In the opinion of management, the consolidated financial statements contain
all adjustments consisting only of normal recurring adjustments, considered
necessary for a fair statement of the consolidated balance sheets as of
September 30, 1996 and June 30, 1996, the consolidated statements of operations
for the three month periods ended September 30, 1996 and 1995, the consolidated
statements of shareholders' equity for the period from July 1, 1995 through
September 30, 1996, and the consolidated statements of cash flows for the three
month periods ended September 30, 1996 and 1995. The results of operations for
the three month period ended September 30, 1996 are not necessarily indicative
of the results of operations to be expected for the entire fiscal year ending
June 30, 1997.
Certain amounts as previously reported have been reclassified to conform to
the September 30, 1996 presentation.
NOTE 2. NET EARNINGS PER SHARE
Primary earnings per common share are based on the weighted average number
of shares of common stock and common stock equivalents outstanding during the
respective periods. The weighted average number of shares of common stock and
common equivalents was 11,134,000 and 8,843,000 for primary earnings per share
for the three month periods ended September 30, 1996 and 1995, respectively, and
12,446,000 and 10,356,000 for fully diluted earnings per share for the same
periods. Fully diluted earnings per share assumes conversion of the subordinated
notes as of the beginning of the period.
NOTE 3. HEDGE TRANSACTIONS
The Company's equipment financing transactions are structured on a fixed
interest rate basis. These transactions are funded using variable rate interim
funding facilities until permanent fixed rate funding is obtained, generally
through asset securitizations. Interest rate risk for the Company occurs during
the interim funding period when the borrowing costs are floating at a variable
rate. To minimize this interest rate risk, the Company uses hedging techniques
to fix its future long-term borrowing costs. Hedging vehicles used include
interest rate swaps which permanently lock in costs and treasury locks. Treasury
lock transactions lock in specific rates of treasury notes having maturities
comparable to the average life of the hedged securitization or loan sale. This
strategy stabilizes the weighted average borrowing rate until permanent fixed
rate funding occurs.
At September 30, 1996, there were $100.0 million in notional amounts of
treasury lock transactions. The Company also had notional amounts of $96.1
million in interest rate swaps where the Company pays a fixed rate and receives
a floating rate and $26.5 million in interest rate caps. These transactions are
to hedge the effect of interest rate changes on the cash flows repriced monthly
in an off-balance sheet loan sale.
When the hedge positions are matched to specific borrowings relating to
securitizations, gains or losses from the hedge positions are capitalized and
amortized to interest expense over the term of the securitized
F-28
<PAGE> 87
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AS OF SEPTEMBER 30, 1996 AND JUNE 30, 1996
AND FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
transaction. When transactions are funded through whole loan sales, gains or
losses from hedge positions are recorded as an increase or decrease in the gain
on sale proceeds.
NOTE 4. EQUITY OFFERING
In August 1995, the Company completed a public offering of 2,875,000 shares
of its common stock for which it received net proceeds of $29.0 million. The net
proceeds were utilized to reduce borrowings under warehouse facilities and for
general corporate purposes.
NOTE 5. REDEMPTION OF WARRANTS AND UNITS AND CONVERTIBLE SUBORDINATED NOTES
In January 1996, holders of 614,355 of the Company's warrants and units
issued in February 1991 redeemed their warrants and units for shares of the
Company's common stock at $12.00 or $12.60 per share by the final exercise date
of January 26, 1996. As a result of the redemption, the Company received cash
proceeds of $7.4 million.
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. In July 1996, $600,000 of
these notes were converted into 56,603 shares of common stock. As of September
30, 1996, cumulative conversions of these notes were $1,100,000 into 103,772
shares of common stock.
F-29
<PAGE> 88
GLOSSARY
Conditional sales
agreements................. Equipment leases in which the Company retains no
residual interest in the underlying equipment
being leased.
Credit enhancement......... Cash collateral, letters of credit, subordinated
tranches of transactions or an insurance policy
required to be furnished by the Company in
connection with its securitizations to receive an
investment grade credit rating.
Equipment loans............ Loans and leases provided by the Company to a wide
variety of healthcare providers, secured by or
otherwise covering medical equipment and other
collateral, including conditional sales agreements
and fair market value transactions.
Excess spread.............. In a securitization, generally, the excess of (x)
the weighted average interest rate on each pool of
equipment loans or medical receivables loans sold
over (y) the sum of (i) the investor interest rate
plus (ii) the related costs of consummating the
securitization and (iii) an estimate of annual
future credit losses expected to be incurred with
respect to the loans in the pool, over the lives
of those loans.
Fair market value
transactions............... Equipment leases in which the Company retains a
residual interest in the equipment being leased of
no more than 10%. The 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 end of the
initial term, the obligor has the option either to
purchase the equipment for its fair market value,
extend the financing term under renegotiated
payments or return the equipment to the Company.
Gross financed
receivables................ Consist of receivables in installments,
receivables in installments-related parties,
residual valuation, notes collateralized by
medical receivables and equipment on operating
leases.
Healthcare providers....... Includes outpatient healthcare providers, medical
imaging centers, groups of physicians, integrated
healthcare delivery networks, hospitals and
ambulatory diagnostic and therapeutic clinics.
HMOs....................... Health maintenance organizations.
Loan originations.......... Equipment leases or loans or medical receivables
loans, as the context requires, originated by the
Company and equipment leases or loans purchased by
the Company through the Wholesale Program.
Loan portfolio............. The Company's net financed receivables.
Managed net financed
receivables................ The aggregate of (i) net financed receivables
appearing on the Company's balance sheet and (ii)
net financed receivables that have been sold to
third parties and are still serviced by the
Company.
Medical receivables
loans......................
Loans made pursuant to lines of credit provided by
the Company to healthcare providers and
collateralized by third party medical receivables
due from Medicare, Medicaid, HMOs, PPOs and
commercial insurance companies.
Net financed receivables... Gross financed receivables net of unearned income.
G-1
<PAGE> 89
Originators................ Regional finance companies that originate medical
equipment loans and leases.
Overcollateralization...... In a securitization, the amount by which the
outstanding principal balance of assets (loans and
equipment leases) which are the subject of the
securitization exceeds the outstanding principal
balance of the notes issued by the related special
purpose subsidiary. The required amount of
overcollateralization for each securitization is
specified in the applicable documents.
PPOs....................... Preferred provider organizations.
Securitization............. The transfer by the Company of a "pool" of
equipment loans or medical receivables loans it
has originated or purchased through the Wholesale
Program to a separate entity, usually an indirect
wholly-owned special purpose subsidiary, and the
concurrent issuance by the subsidiary of notes to
investors in a private placement or public
offering. Principal and interest on the notes
issued to investors by the subsidiary are paid
from the cash flows produced by the loan pool, and
the notes are secured by a pledge of the assets in
the loan pool as well as by other collateral. In
the securitizations sponsored by the Company,
loans funded through the securitizations typically
are credit enhanced to receive an investment grade
credit rating.
Unearned income............ With respect to equipment loans originated by the
Company, the amount by which (x) the sum of (i)
the Company's gross transaction receivables from
those equipment loans, plus (ii) the initial
direct costs of originating the equipment loans
plus (iii) the estimated residual value (on fair
market value transactions) of the underlying
equipment exceed (y) the Company's cost to acquire
the underlying equipment.
Warehouse facilities....... Secured loan facilities or purchase commitments
provided to the Company to facilitate the
accumulation of securitizable equipment loans or
medical receivables loans prior to securitization,
including the Company's principal revolving credit
agreement. Commitments are typically for one year
or less and are designed to fund only
securitizable assets.
Whole loan sales........... Equipment loans or medical receivables loans sold
by the Company in bulk to third party purchasers.
Wholesale program.......... The wholesale loan origination program pursuant to
which the Company purchases medical equipment
loans and leases from Originators.
G-2
<PAGE> 90
PROSPECTUS
- --------------------------------------------------------------------------------
$100,000,000
DVI, INC.
Debt Securities
- --------------------------------------------------------------------------------
DVI, Inc. (the "Company") may offer from time to time, together or separately,
notes, debentures or other evidences of indebtedness ("Debt Securities") in one
or more series at an aggregate offering price not to exceed $100,000,000. Debt
Securities may be issuable in registered form without coupons. The Company will
offer Debt Securities to the public on terms determined by market conditions.
The accompanying Prospectus Supplement will set forth the specific terms of the
Debt Securities, including the ranking as unsubordinated Debt Securities, the
specific designation, aggregate principal amount, purchase price, maturity,
redemption terms, interest rate (or manner of calculation thereof), time of
payment of interest (if any), terms for any conversion (including the terms
relating to the adjustment thereof), listing (if any) on a securities exchange
and any other specific terms of the Debt Securities.
The Debt Securities may be sold directly, through agents, underwriters or
dealers as designated from time to time, or through a combination of such
methods. See "Plan of Distribution." If agents of the Company or any dealers or
underwriters are involved in the sale of the Debt Securities in respect of which
this Prospectus is being delivered, the names of such agents, dealers or
underwriters and any applicable commissions or discounts will be set forth in or
may be calculated from the Prospectus Supplement with respect to such Debt
Securities. The net proceeds to the Company from such sale also will be set
forth in the applicable Prospectus Supplement.
- --------------------------------------------------------------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 4 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CAREFULLY CONSIDERED BY PROSPECTIVE INVESTORS.
- --------------------------------------------------------------------------------
This Prospectus may not be used to consummate sales of securities unless
accompanied by a Prospectus Supplement.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is December 19, 1996
<PAGE> 91
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, ANY
ACCOMPANYING PROSPECTUS SUPPLEMENT OR THE DOCUMENTS INCORPORATED OR DEEMED
INCORPORATED BY REFERENCE HEREIN, AND ANY INFORMATION OR REPRESENTATIONS NOT
CONTAINED HEREIN OR THEREIN MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY
THE COMPANY OR BY ANY AGENT, DEALER OR UNDERWRITER. THIS PROSPECTUS AND ANY
ACCOMPANYING PROSPECTUS SUPPLEMENT DO NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY THE SECURITIES IN ANY CIRCUMSTANCES IN WHICH
SUCH OFFER OR SOLICITATION IS UNLAWFUL. THE DELIVERY OF THIS PROSPECTUS OR ANY
PROSPECTUS SUPPLEMENT AT ANY TIME DOES NOT IMPLY THAT THE INFORMATION HEREIN OR
THEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF SUCH INFORMATION.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company can be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549; and at its regional
offices at 7 World Trade Center, 13th Floor, New York, New York 10048 and at 500
West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such
material may be obtained from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549, at prescribed
rates. The Commission maintains a site on the world-wide web at
http://www.sec.gov that contains reports, proxy statements and other information
regarding the Company. Such reports, proxy statements and other information can
also be inspected at the office of the New York Stock Exchange, 20 Broad Street,
New York, New York 10005 on which exchange the Company's common stock is traded.
The Company has filed with the Commission a Registration Statement on Form
S-3 (the "Registration Statement") under the Securities Act of 1933, as amended
(the "Securities Act"), with respect to the Debt Securities offered hereby. This
Prospectus and any accompanying Prospectus Supplement do not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules filed as a part thereof, as permitted by the rules and regulations of
the Commission. For further information with respect to the Company and the Debt
Securities, reference is hereby made to such Registration Statement, including
the exhibits and schedules filed as a part thereof. Statements contained in this
Prospectus and any Prospectus Supplement as to the contents of any contract or
other document referred to herein are not necessarily complete and where such
contract or other document is an exhibit to the Registration Statement, each
such statement is qualified in all respects by the provisions of such exhibit,
to which reference is hereby made for a full statement of the provisions
thereof. The Registration Statement, including the exhibits and schedules filed
as a part thereof, may be inspected without charge at the public reference
facilities maintained by the Commission as set forth in the preceding paragraph.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents heretofore filed with the Commission (Registration
No. 0-16271) are hereby incorporated by reference in this Prospectus:
1. The Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1996; and
2. The Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996.
All documents filed by the Company with the Commission pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this
Prospectus and prior to the filing of a post-effective amendment which indicates
the termination of the offering of the Debt Securities made by this Prospectus
shall be deemed to be incorporated by reference in this Prospectus and to be a
part of this Prospectus from the
2
<PAGE> 92
date of filing of such documents. Any statement contained herein or in a
document incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein or in any subsequently filed document
which also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
The Company hereby undertakes to provide without charge to each person to
whom a copy of this Prospectus has been delivered, on the written or oral
request of any such person, a copy of any or all of the documents referred to
above other than exhibits to such documents. Written or oral requests for such
copies should be directed to: DVI, Inc., 500 Hyde Park, Doylestown, Pennsylvania
18901 (Telephone: 215-345-6600), Attention: Legal Department.
THE COMPANY
DVI, Inc. (the "Company") is a specialty finance company whose core
business is financing diagnostic imaging, radiation therapy and other types of
sophisticated medical equipment used by outpatient healthcare providers, medical
imaging centers, groups of physicians, integrated healthcare delivery networks
and hospitals. In addition to originating equipment loans, the Company purchases
medical equipment loans and leases originated by regional finance companies
("Originators") through its wholesale loan purchase program (the "Wholesale
Program") and provides innovative finance programs for manufacturers and vendors
of a broad range of lower cost patient treatment devices. The Company also
provides lines of credit to a wide variety of healthcare providers substantially
all of which are collateralized by third party medical receivables due from
Medicare, Medicaid, Health Maintenance Organizations ("HMOs"), Preferred
Provider Organizations ("PPOs") and commercial insurance companies. By
effectively and efficiently servicing the equipment financing needs of
healthcare providers and at the same time building productive relationships with
medical equipment manufacturers and vendors seeking to arrange financing for
their customers, the Company has established a niche leadership position among
independent finance companies serving the medical industry.
The Company is a Delaware corporation and conducts its business through
operating subsidiaries. The principal operating subsidiaries are DVI Financial
Services Inc. ("DVI Financial Services") and DVI Business Credit Corporation
("DVI Business Credit"). The Company conducts securitizations through indirect
wholly-owned subsidiaries. The Company also conducts other structured financings
through its operating subsidiaries. The borrowers under the Company's various
warehouse credit facilities are DVI Financial Services or DVI Business Credit.
Except as the context otherwise requires, the term "Company" refers to DVI, Inc.
and its wholly owned subsidiaries.
The executive offices of the Company are located at 500 Hyde Park,
Doylestown, Pennsylvania 18901 (Telephone: 215-345-6600).
3
<PAGE> 93
RISK FACTORS
An investment in the Debt Securities offered hereby involves a high degree
of risk. Prospective purchasers of Debt Securities should carefully consider the
following risk factors in addition to the other information set forth in this
Prospectus and any Prospectus Supplement.
Substantial Indebtedness and Leverage. The Company currently has
substantial outstanding indebtedness and, subsequent to the offering of Debt
Securities, the Company will be highly leveraged. As of September 30, 1996, the
Company and its consolidated subsidiaries had total debt of $398.8 million, of
which $180.0 million was full recourse debt and $218.8 million was limited
recourse debt. Of the $398.8 million of total debt, $260.6 million was long-term
debt and $138.2 million was short-term debt. After completion of the Offering,
the Company will have substantial debt service requirements. The ability of the
Company to repay its indebtedness, including the Debt Securities, will depend
upon future operating performance, which is subject to the performance of the
Company's loan portfolio, the success of the Company's business strategy,
prevailing economic conditions, levels of interest rates and financial, business
and other factors, many of which are beyond the Company's control. The degree to
which the Company is leveraged also may impair its ability to obtain additional
financing on acceptable terms.
Ability to Service Debt; Negative Cash Flows and Capital Needs. Although
the Company believes that cash available from operations and financing
activities will be sufficient to enable it to make required interest payments on
the Debt Securities and its other debt obligations and other required payments,
there can be no assurance in this regard and the Company may encounter liquidity
problems which could affect its ability to meet such obligations while
attempting to withstand competitive pressures or adverse economic conditions. In
such circumstances, the value of the Debt Securities could be materially
adversely affected.
In a securitization, the Company recognizes a gain on sale of the loans
securitized upon the closing of the securitization, but does not receive the
cash representing such gain until it receives the excess servicing, which in
general is payable over the actual life of the loans securitized. The Company
incurs significant expense in connection with a securitization and incurs both
current and deferred tax liabilities as a result of the gain on sale. Therefore,
the Company requires continued access to short- and long-term external sources
of cash to fund its operations.
The Company expects to continue to operate on a negative cash flow basis as
the volume of the Company's loan purchases and originations increases and its
securitization program grows. The Company's primary cash requirements include
the funding of: (i) loan originations and purchases pending their securitization
and sale; (ii) fees and expenses incurred in connection with the securitization
of loans; (iii) reserve account or overcollateralization requirements in
connection with the securitization and sale of the loans; (iv) ongoing
administrative and other operating expenses; and (v) interest and principal
payments under the Company's warehouse facilities and other indebtedness.
The Company's primary sources of liquidity in the future are expected to be
existing cash fundings under its warehouse facilities, sales of loans through
securitizations and other permanent fundings, the net proceeds from sales of
Debt Securities and further issuances of debt or equity.
The Company's primary sources of liquidity as described in the paragraph
above are expected to be sufficient to fund the Company's liquidity requirements
for at least the next 12 months if the Company's future operations are
consistent with management's current growth expectations. However, because the
Company expects to continue to operate on a negative cash flow basis for the
foreseeable future, it anticipates that it will need to effect debt or equity
financings regularly. The type, timing and terms of financing selected by the
Company will be dependent upon the Company's cash needs, the availability of
other financing sources and the prevailing conditions in the financial markets.
There can be no assurance that any such sources will be available to the Company
at any given time or as to the favorableness of the terms on which such sources
may be available.
Holding Company Structure; Limitations on Access to Cash Flow of Operating
Companies; Effective Subordination. The Debt Securities will be obligations
solely of the Company, which is a holding company with no business operations of
its own. The Company's assets consist primarily of its ownership interests in
its
4
<PAGE> 94
operating subsidiaries and all of the operations of the Company are conducted
through its subsidiaries, which are separate and distinct legal entities and,
unless otherwise provided in any Prospectus Supplement, have no obligations,
contingent or otherwise, to pay any amounts due pursuant to the Debt Securities
or to make any funds available to the Company to enable it to make payments on
the Debt Securities or meet working capital needs or other liabilities of the
Company, or for any other reason. In addition, to the extent that any of the
operating subsidiaries generates positive cash flow, the Company may be unable
to access such cash flow because certain of such entities are currently or may
become parties to credit or other borrowing agreements that restrict or prohibit
the payment of dividends or interest and principal on the Debt Securities, and
such entities are likely to continue to be subject to such restrictions and
prohibitions for the foreseeable future. The Debt Securities also will be
effectively subordinated to all existing and future indebtedness and other
liabilities of the Company's subsidiaries because the Company's right to receive
the assets of any such entities upon their liquidation, dissolution or
reorganization will be effectively subordinated to the claims of such entities'
creditors arising from the first priority perfected liens on those assets
granted under warehouse facilities and other loans. To the extent that the
Company is itself recognized as a creditor of any such subsidiary, the claims of
the Company would still be subordinated to the claims of such entities' trade
creditors as well as any indebtedness of such entity that is senior in right of
payment to the Company's claim or that is secured by the assets of any such
entity. As of September 30, 1996, the Company's subsidiaries had total debt of
$385.6 million, $166.8 million of which was full recourse and $218.8 million of
which was limited recourse.
Dependence on Warehouse Financing. The Company's ability to sustain the
growth of its financing business is dependent upon funding obtained through
warehouse facilities until its equipment and other loans are permanently funded.
The funds the Company obtains through warehouse facilities are full recourse
short-term borrowings secured primarily by the underlying equipment, the medical
receivables and other collateral. These borrowings are in turn typically repaid
with the proceeds received by the Company when its equipment and other loans are
securitized or sold. At September 30, 1996 the Company had available an
aggregate of approximately $376.5 million under various warehouse facilities,
approximately $298.5 million of which is available for funding equipment loans
and approximately $78.0 million of which is available for funding medical
receivables loans. There can be no assurance that this type of warehouse
financing will continue to be available to the Company on acceptable terms. If
the Company were unable to arrange continued access to acceptable warehouse
financing, the Company would have to curtail its equipment and other loan
originations, which in turn would have a material adverse effect on the
Company's financial condition and results of operations.
Dependence on Permanent Funding Programs. The Company's use of
securitization as its principal form of permanent funding is an important part
of the Company's business strategy. If for any reason the Company were to become
unable to access the securitization market to fund permanently its equipment and
other loans, the consequences for the Company would be materially adverse. The
Company's ability to complete securitizations and other structured finance
transactions depends upon a number of factors, including general conditions in
the credit markets, the size and liquidity of the market for the types of
receivable-backed securities issued or placed in securitizations sponsored by
the Company and the overall performance of the Company's loan portfolio. The
Company does not have binding commitments from financial institutions or
investment banks to provide permanent funding for its equipment or medical
receivables loans.
Impact of Credit Enhancement Requirements. In connection with its
securitizations and other structured financings, the Company is required to
provide credit enhancement for the debt obligations issued and sold to third
parties. Typically, the credit enhancement consists of cash deposits, the
funding of subordinated tranches and/or the pledge of additional equipment or
other loans that are funded with the Company's capital. The requirement to
provide this credit enhancement reduces the Company's liquidity and requires it
to obtain additional capital. If the Company is unable to obtain and maintain
sufficient capital, it may be required to halt or curtail its securitization or
other structured financing programs, which in turn would have a material adverse
effect on the Company's financial condition and operations.
Credit Risk. Many of the Company's customers are outpatient healthcare
providers, the loans to whom often require a high degree of credit analysis.
Although the Company seeks to mitigate its risk of default and credit losses
through its underwriting practices and loan servicing procedures and through the
use of various
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forms of non-recourse or limited recourse financing (in which the financing
sources that permanently fund the Company's equipment and other loans assume
some or all of the risk of default by the Company's customers), the Company
remains exposed to potential losses resulting from a default by an obligor.
Obligors' defaults could cause the Company to make payments to the extent the
Company is obligated to do so and in the case of its permanent equipment and
other funding arrangements to the extent of the Company's remaining credit
enhancement position; could result in the loss of the cash or other collateral
pledged as credit enhancement under its permanent equipment and other funding
arrangements; or could require the Company to forfeit any residual interest it
may have retained in the underlying equipment. During the period after the
Company initially funds an equipment or other loan and prior to the time it
funds the loan on a permanent basis, the Company is exposed to full recourse
liability in the event of default by the obligor. In addition, under the terms
of securitizations and other types of structured finance transactions, the
Company generally is required to replace or repurchase equipment and other loans
in the event they fail to conform to the representations and warranties made by
the Company, even in transactions otherwise designated as non-recourse or
limited recourse.
Defaults by the Company's customers also could adversely affect the
Company's ability to obtain additional financing in the future, including its
ability to use securitization or other forms of structured finance. The sources
of such permanent funding take into account the credit performance of the
equipment and other loans previously financed by the Company in deciding whether
and on what terms to make new loans. In addition, the credit rating agencies and
insurers that are often involved in securitizations consider prior credit
performance in determining the rating to be given to the securities issued in
securitizations sponsored by the Company and whether and on what terms to insure
such securities. To date, all of the Company's medical receivable loans (as
opposed to its equipment loans) have been funded on a full recourse basis
whereby the Company is fully liable for any losses that are incurred.
Under the Company's Wholesale Program, the Company purchases equipment
loans from Originators that generally do not have direct access to the
securitization market as a source of permanent funding for their loans. The
Company does not work directly with the borrowers at the origination of these
equipment loans and therefore is not directly involved in structuring the
credits, however the Company independently verifies credit information supplied
by the Originator. Accordingly, the Company faces a somewhat higher degree of
risk when it acquires loans under the Wholesale Program on a wholesale basis.
During the twelve-month period ended June 30, 1996 and the three month period
ended September 30, 1996, loans purchased under the Wholesale Program
constituted 29.5% and 34.0%, respectively, of the total loans originated during
the period. There can be no assurance that the Company will be able to grow this
business successfully or avoid the credit risks related to wholesale loan
origination.
Interest Rate Risk. When the Company borrows funds through warehouse
facilities, it is exposed to certain risks 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 prior to an anticipated securitization and sale. The Company uses
derivative financial instruments, such as forward rate agreements, forward
market sales or purchases of treasury securities, and interest rate swaps and
caps, to manage its interest rate risk. The derivatives are used to manage three
components of this risk; mismatches of the maturity of assets and liabilities on
the Company's balance sheet, hedging anticipated loan securitizations and sales,
and interest rate spread protection. There can be no assurance, however, that
the Company's hedging strategy or techniques will be effective, that the
profitability of the Company will not be adversely affected during any period of
changes in interest rates or that the costs of hedging will not exceed the
benefits. A substantial and sustained increase in interest rates could adversely
affect the Company's ability to originate loans. In certain circumstances, the
Company for a variety of reasons may retain for an indefinite period certain of
the equipment and other loans it originates. In such cases, the Company's
interest rate exposure may continue for a longer period of time.
Possible Adverse Consequences from Recent Growth. In the past three years,
the Company originated a significantly greater number of equipment and other
loans than it did in previous years. As a result of this rapid
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growth, the Company's loan portfolio grew from $234.0 million at June 30, 1994
to $474.3 million at September 30, 1996. In light of this growth, the historical
performance of the Company's loan portfolio, including rates of credit loss, may
be of limited relevance in predicting future loan portfolio performance. Any
credit or other problems associated with the large number of equipment and other
loans originated in the recent past will not become apparent until sometime in
the future. Further, while the Company's loan originations have grown
substantially in the past three years, its net interest margins have declined
during that same period due to a general decline in interest rates, the
Company's pricing strategy, the sale of higher-yielding loans to finance the
cost of its developing domestic and international business units and the
increase in the amount of lower-yielding credit enhancements due to the
increased number of securitizations. Periodic permanent financing which shifts
portions of the Company's borrowings from short term facilities to more costly
long term facilities increases the cost of funds. As a result, the Company's
historical results of operations may be of limited relevance to an investor
seeking to predict the Company's future performance.
Ability to Sustain Growth. To sustain the rates of growth it has achieved
in the last three years, the Company will be required to penetrate further the
markets for lower cost diagnostic imaging equipment and for other types of
medical equipment or devices such as lasers used in patient treatment. The
Company faces significant barriers to entry in the patient treatment device
market, which is more diverse than the diagnostic imaging market because of the
larger number of manufacturers and types of products and the greater price range
of those products. The Company has limited experience in the patient treatment
device market. In an effort to obtain access to new markets, the Company has
initiated operations internationally and has made investments in certain
emerging markets. The success and ultimate recovery of these investments is
dependent upon many factors including foreign regulation and business practices,
currency exchange regulations and currency fluctuations and the achievement of
management's planned objectives for these markets. There can be no assurance
that the Company will be able to penetrate and compete effectively in the
markets described above.
Risks Related to the Medical Receivable Financing Business. In July 1993,
the Company entered the medical receivable financing business and expects to
focus on this business as a part of the Company's growth strategy. The Company's
medical receivable financing business generally consists of providing loans to
healthcare providers that are secured by their receivables from payors such as
insurance companies, large self-insured companies and governmental programs and
by other collateral. While the Company expects to focus on this business as a
significant part of its growth strategy, there can be no assurance that the
Company will be able to expand this business successfully or avoid related
liabilities or losses. The Company has funded its medical receivable financing
business to date through the use of the Company's capital; a $25 million
securitization; a recently established $50.0 million medical receivables
warehouse/securitization facility; and, on a limited basis, through the
Company's revolving credit facility which the Company generally uses for its
equipment financing business. The growth of the Company's medical receivable
financing business is dependent upon the Company's ability to obtain additional
funding facilities to finance medical receivables loans.
While the medical receivable financing business shares certain
characteristics, including an overlapping customer base, with the Company's core
equipment financing business, there are many differences, including unique
risks. Healthcare providers could overstate the quality and characteristics of
their medical receivables, which the Company analyzes in determining the amount
of the line of credit to be secured by such receivables. After the Company has
established or funded a line of credit, the healthcare providers could change
their billing and collection systems, accounting systems or patient records in a
way that could adversely affect the Company's ability to monitor the quality
and/or performance of the related medical receivables. There are technical legal
issues associated with creating and maintaining perfected security interests in
medical receivables, specifically those generated by Medicaid and Medicare
claims. Payors may make payments directly to healthcare providers that have the
effect (intentionally or otherwise) of circumventing the Company's rights in and
access to such payments. Payors may attempt to offset their payments to the
Company against debts owed to the payors by the healthcare providers. In
addition, as a lender whose position is secured by receivables, the Company is
likely to have less leverage in collecting outstanding receivables in the event
of a borrower's insolvency than a lender whose position is secured by medical
equipment that the
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borrower needs to run its business. A borrower that receives medical receivables
loans from the Company and defaults on obligations secured by such receivables
may require additional loans, or modifications to the terms of existing loans,
in order to continue operations and repay outstanding loans. The Company may
have a conflict of interest when it acts as servicer for an equipment-based
securitization and originates medical receivables loans to borrowers whose
equipment loans have been securitized. The Company's efforts to develop suitable
sources of funding for its medical receivable financing business through
securitization or other structured finance transactions may be constrained or
hindered due to the fact that the use of structured finance transactions to fund
medical receivables is a relatively new process. While the Company believes it
has structured its credit policies and lending practices to take into account
these and other factors, there can be no assurance the Company will not sustain
credit losses in connection with its medical receivable financing business or
that the medical receivable financing business will meet the Company's growth
expectations.
Medical Equipment Market. The demand for the Company's equipment financing
services is affected by numerous factors beyond the control of the Company.
These factors include general economic conditions, including the effects of
recession or inflation, and fluctuations in supply and demand for various types
of sophisticated medical equipment resulting from, among other things,
technological and economic obsolescence and government regulation. In addition,
the demand for sophisticated medical equipment also may be negatively affected
by reductions in the amount of reimbursement to healthcare providers for their
services from third-party payors such as insurance companies, large self-insured
companies and government programs, and the increased use of managed healthcare
plans that often restrict the use of certain types of high technology medical
equipment. At September 30, 1996, financing for purchases of magnetic resonance
imaging ("MRI") machines accounted for approximately 44.7% (by dollar volume) of
the total loans originated by the Company. Any substantial decrease in the
Company's loan originations for the purchase of MRI machines could have a
material adverse effect on the Company.
Healthcare Reform. During the past half decade, large U.S. corporations
and U.S. consumers of healthcare services have substantially increased their use
of managed healthcare plans such as HMOs and PPOs. This development has
increased the purchasing power of those plans, which in turn have used that
power to lower the amounts they pay for healthcare services. Since 1993,
numerous proposals have been presented to Congress to restructure the U.S.
healthcare system. The principal features of these proposals are to provide
universal access to healthcare services and to achieve overall cost containment.
To date, none of the proposals initiated at the federal government level have
been enacted. In the private sector, however, cost containment initiatives have
continued. Certain aspects of these actual and proposed cost containment
initiatives, particularly plans to eliminate payment for duplicative procedures,
may reduce the overall demand for the types of medical equipment financed by the
Company. Declining reimbursement for medical services also could cause
hospitals, physician groups and other healthcare providers, which form a
significant portion of the Company's customer base, to experience cash flow
problems. This in turn could negatively impact their ability to meet their
financial obligations to the Company and/or reduce their future equipment
acquisitions which could adversely affect the Company. The Company believes that
the general movement toward a managed healthcare system in the U.S. will
materially reduce the demand for medical equipment and for related financing.
Dependence on Referrals and Support from Equipment Manufacturers. The
Company obtains a significant amount of its equipment financing business through
referrals from manufacturers of diagnostic imaging equipment and other
manufacturers of medical equipment it finances. In addition, these manufacturers
occasionally provide credit support for or assume first loss positions with
respect to equipment financing they refer to the Company. These manufacturers
are not contractually obligated to refer their customers to the Company for
equipment financing or to provide credit support or assume first loss positions
in connection with their referrals. There is no assurance that these
manufacturers will continue to refer equipment financing opportunities to the
Company or to provide credit support or assume first loss positions. If for any
reason the Company were no longer to benefit from these referrals or related
credit support and assumptions of first loss positions, its equipment financing
business would be materially adversely affected.
Competition. The business of financing sophisticated medical equipment is
highly competitive. The Company competes with equipment manufacturers that sell
and finance sales of their own equipment and
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finance subsidiaries of national and regional commercial banks and equipment
leasing and financing companies. Many of the Company's competitors have
significantly greater financial and marketing resources than the Company. In
addition, the competition in the new markets recently targeted by the Company,
specifically the patient treatment device financing market and medical
receivable financing market, may be greater than the levels of competition
historically experienced by the Company.
The Company believes that increased equipment loan originations during the
past three years resulted, in part, from a decrease in the number of competitors
in the higher cost medical equipment financing market and the Company's high
level of penetration in this market. There can be no assurance that new
competitive providers of financing will not enter the medical equipment
financing market in the future. To meet its long-term growth objectives, the
Company must penetrate further its targeted markets for lower cost medical
equipment and medical receivable financing businesses. Such penetration may
require the Company to reduce its margins to be competitive in the lower cost
medical equipment and medical receivable financing businesses. In addition,
there can be no assurance that the Company will sustain the same level of
equipment loan originations in future periods as during the past three years or
that it will be able to meet its long-term growth objectives.
No Prior Pubic Trading Market for the Debt Securities. Prior to the
Offering of any series of Debt Securities, there will have been no public market
for such series of Debt Securities and there can be no assurance as to the
liquidity of the trading market for such series of Debt Securities or that an
active public market will develop or, if developed, will continue. If an active
public market does not develop or is not maintained, the market price and
liquidity of such series of Debt Securities may be adversely affected.
Investee Company. The Company has receivables from and investments in
Diagnostic Imaging Services, Inc. ("DIS"), a company that operates diagnostic
imaging equipment and accordingly is subject to the risks of that business. At
September 30, 1996, the total amount of outstanding receivables due to the
Company from DIS was $20.8 million. DIS received a qualified going concern
opinion from its auditors on its December 31, 1995 financial statements. In
addition, the Company owns approximately 4.5 million shares of convertible
preferred stock (Series F and Series G) of DIS. The DIS preferred stock has an
aggregate liquidation preference of approximately $4.5 million, is redeemable at
the option of DIS for approximately $4.5 million plus accrued dividends, and is
convertible into common stock of DIS at $2.482 per share for the Series F
convertible preferred stock and $2.00 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.
Dependence Upon Key Personnel. The ability of the Company to successfully
continue its existing financing business, to expand into its targeted markets
and to develop its newer businesses depends upon the ability of the Company to
retain the services of its key management personnel, including Michael A.
O'Hanlon, the Company's President and Chief Executive Officer. The loss of any
of these individuals or an inability to attract and maintain additional
qualified personnel could adversely affect the Company. There can be no
assurance that the Company will be able to retain its existing management
personnel or to attract additional qualified personnel.
Forward-Looking Information. This Prospectus contains and any Prospectus
Supplement may contain various forward-looking statements based on assumptions
made by and information currently available to management. When used in this
Prospectus and any Prospectus Supplement, the words "expect," "believe,"
"estimate," "project" and similar expressions are intended to identify forward
looking statements. The Company wishes to ensure that such statements are
accompanied by meaningful cautionary statements pursuant to the safe harbor
established in the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks, uncertainties and assumptions including
those identified in this section. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those expected, believed, estimated or
projected. Additionally, new risk factors may emerge from time to time and
management cannot predict such risk factors, nor can it assess the impact, if
any, of such risk factors on the Company's business or the extent to which any
factor, or
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combination of factors, may cause actual results to differ materially from those
projected in any forward-looking statements.
RATIO OF EARNINGS TO FIXED CHARGES
The following are the ratios of consolidated earnings to fixed charges for
the Company for each of the fiscal years ended June 30, 1992, 1993, 1994, 1995
and 1996 and for the three months ended September 30, 1995 and 1996.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
FISCAL YEAR ENDED JUNE 30, SEPTEMBER 30,
---------------------------------------- -------------
1992 1993 1994 1995 1996 1995 1996
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
RATIO:
Earnings/Fixed Charges................. 1.82 1.89 1.49 1.31 1.47 1.46 1.42
---- ---- ---- ---- ---- ---- ----
</TABLE>
For purposes of computing this ratio, earnings consist of earnings from
continuing operations before provision for income taxes, equity in net loss of
investees and discontinued operations. Fixed charges are interest expense.
USE OF PROCEEDS
Except as may otherwise be set forth in the applicable Prospectus
Supplement, the Company intends to use the net proceeds from the sale of Debt
Securities offered hereby for general corporate purposes, which may include the
continued expansion and diversification of its financing activities, both by
internal growth and by acquisition; repayment of any outstanding indebtedness of
the Company or its subsidiaries; or for such other uses as may be set forth in a
Prospectus Supplement. Pending any of the foregoing applications, the net
proceeds may be invested temporarily in short-term, interest bearing securities.
DESCRIPTION OF DEBT SECURITIES
The Debt Securities may be issued from time to time in one or more series.
The particular terms of each series of Debt Securities offered by any Prospectus
Supplement will be described therein. The Debt Securities will be issued under
the Indenture (the "Indenture"), between the Company and the trustee named in
the applicable Prospectus Supplement (the "Trustee") prior to the issuance of
the Debt Securities. The Indenture is subject to and is governed by the Trust
Indenture Act of 1939, as amended.
The statements herein relating to the Debt Securities and the Indenture are
summaries and are subject to the detailed provisions of the Indenture. The
following summaries of certain provisions of the Indenture do not purport to be
complete and, where reference is made to particular provisions of the Indenture,
such provisions, including the definitions of certain terms, are incorporated by
reference as a part of such summaries or terms, which are qualified in their
entirety by such reference and with respect to any particular Debt Securities,
to the description thereof in the Prospectus Supplement related thereto. The
definitions of certain capitalized terms used in the following summary are set
forth below under "Certain Definitions."
GENERAL
The Indenture does not limit the aggregate amount of Debt Securities which
may be issued thereunder, and Debt Securities may be issued thereunder from time
to time in separate series up to the aggregate amount from time to time
authorized by the Company for each series. The Debt Securities when issued will
be direct, unsecured obligations of the Company and will rank equally with all
other unsecured and unsubordinated indebtedness of the Company.
The applicable Prospectus Supplement will describe the following terms of
the series of Debt Securities in respect of which this Prospectus is being
delivered: (1) the title of such Debt Securities; (2) any limit on
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the aggregate principal amount of such Debt Securities; (3) the person to whom
any interest on any Debt Security of the series shall be payable if other than
the person in whose name the Debt Security is registered on the regular record
date; (4) the date or dates on which such Debt Securities will mature; (5) the
rate or rates of interest, if any, or the method of calculation thereof, which
such Debt Securities will bear, the date or dates from which any such interest
will accrue, the interest payment dates on which any such interest on such Debt
Securities will be payable and the regular record date for any interest payable
on any interest payment date; (6) the place or places where the principal of and
any premium and interest on such Debt Securities will be payable; (7) the period
or periods within which, the events upon the occurrence of which, and the price
or prices at which, such Debt Securities may, pursuant to any optional or
mandatory provisions, be redeemed or purchased, in whole or in part, by the
Company and any terms and conditions relevant thereto; (8) the obligations of
the Company, if any, to redeem or repurchase such Debt Securities at the option
of the Holders; (9) the denominations in which any such Debt Securities will be
issuable, if other than denominations of $1,000 and any integral multiple
thereof; (10) any index or formula used to determine the amount of payments of
principal of and any premium and interest on such Debt Securities; (11) the
currency, currencies or currency unit or units of payment of principal of and
any premium and interest on such Debt Securities if other than U.S. dollars;
(12) if the principal of, or premium, if any, or interest on such Debt
Securities is to be payable, at the election of the Company or a holder thereof,
in one or more currencies or currency units other than that or those in which
such Debt Securities are stated to be payable, the currency, currencies or
currency units in which payment of the principal of and any premium and interest
on Debt Securities of such series as to which such election is made shall be
payable, and the periods within which and the terms and conditions upon which
such election is to be made; (13) if other than the principal amount thereof,
the portion of the principal amount of such Debt Securities which will be
payable upon acceleration of the maturity thereof; (14) if the principal amount
of any Debt Securities which will be payable at the maturity thereof will not be
determinable as of any date prior to such maturity, the amount which will be
deemed to be the outstanding principal amount of such Debt Securities; (15) the
applicability of any provisions described under "-- Defeasance or Covenant
Defeasance of Indenture"; (16) whether any of such Debt Securities are to be
issuable in permanent global form ("Global Security") and, if so, the terms and
conditions, if any, upon which interests in such Debt Securities in global form
may be exchanged, in whole or in part, for the individual Debt Securities
represented thereby; (17) the applicability of, and modifications to, any
provisions described under "Events of Default" and any additional Event of
Default applicable thereto; (18) any covenants applicable to such Debt
Securities in addition to, or in lieu of, the covenants described under
"-- Certain Covenants of the Company"; (19) whether such Debt Securities are
secured; and (20) any other terms of such Debt Securities not inconsistent with
the provisions of the Indenture.
Debt Securities may be issued at a discount from their principal amount.
United States Federal income tax considerations and other special considerations
applicable to any such original issue discount Debt Securities will be described
in the applicable Prospectus Supplement.
If the purchase price of any of the Debt Securities is denominated in a
foreign currency or currencies or a foreign currency unit or units or if the
principal of and any premium and interest on any series of Debt Securities is
payable in a foreign currency or currencies or a foreign currency unit or units,
the restrictions, elections, general tax considerations, specific terms and
other information with respect to such issue of Debt Securities will be set
forth in the applicable Prospectus Supplement.
FORM, REGISTRATION, TRANSFER AND PAYMENT
Unless otherwise indicated in the applicable Prospectus Supplement, the
Debt Securities will be issued only in fully registered form in denominations of
$1,000 or integral multiples thereof. Unless otherwise indicated in the
applicable Prospectus Supplement, payment of principal, premium, if any, and
interest on the Debt Securities will be payable, and the transfer of Debt
Securities will be registerable, at the office or agency of the Company
maintained for such purposes and at any other office or agency maintained for
such purpose. No service charge will be made for any registration of transfer of
the Debt Securities, but the Company may require payment of a sum sufficient to
cover any tax or other governmental charge imposed in connection therewith.
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All monies paid by the Company to a Paying Agent (as defined in the
Indenture) for the payment of principal of and any premium or interest on any
Debt Security which remain unclaimed for two years after such principal, premium
or interest has become due and payable may be repaid to the Company and
thereafter the Holder (as defined in the Indenture) of such Debt Security may
look only to the Company for payment thereof.
BOOK-ENTRY DEBT SECURITIES
The Debt Securities of a series may be issued in whole or in part in the
form of one or more Global Securities that will be deposited with, or on behalf
of, a Depositary ("Depositary") or its nominee identified in the applicable
Prospectus Supplement. In such a case, one or more Global Securities will be
issued in a denomination or aggregate denomination equal to the portion of the
aggregate principal amount of outstanding Debt Securities of the series to be
represented by such Global Security or Global Securities. Unless and until it is
exchanged in whole or in part for Debt Securities in registered form, a Global
Security may not be registered for transfer or exchange except as a whole by the
Depositary for such Global Security to a nominee of such Depositary or by a
nominee of such Depositary to such Depositary or another nominee of such
Depositary or by such Depositary or any nominee to a successor Depositary or a
nominee of such successor Depositary and except in the circumstances described
in the applicable Prospectus Supplement.
The specific terms of the depositary arrangement with respect to any
portion of a series of Debt Securities to be represented by a Global Security
will be described in the applicable Prospectus Supplement. The Company expects
that the following provisions will apply to depositary arrangements.
Unless otherwise specified in the applicable Prospectus Supplement, Debt
Securities which are to be represented by a Global Security to be deposited with
or on behalf of a Depositary will be represented by a Global Security registered
in the name of such Depositary or its nominee. Upon the issuance of such Global
Security, and the deposit of such Global Security with or on behalf of the
Depositary for such Global Security, the Depositary will credit, on its
book-entry registration and transfer system, the respective principal amounts of
the Debt Securities represented by such Global Security to the accounts of
institutions that have accounts with such Depositary or its nominee
("participants"). The accounts to be credited will be designated by the
underwriters of, or agents for, such Debt Securities or by the Company, if such
Debt Securities are offered and sold directly by the Company. Ownership of
beneficial interests in such Global Security will be limited to participants or
persons that may hold interests through participants. Ownership of beneficial
interests by participants in such Global Security will be shown on, and the
transfer of that ownership interest will be effected only through, records
maintained by the Depositary or its nominee for such Global Security. Ownership
of beneficial interests in such Global Security by persons that hold through
participants will be shown on, and the transfer of such ownership interests will
be effected only through, records maintained by such participant. The laws of
some jurisdictions require that certain purchasers of securities take physical
delivery of such securities in certificated form. The foregoing limitations and
such laws may impair the ability to transfer beneficial interests in such Global
Securities.
Debt Securities will be issued in fully registered, certificated form
("Definitive Securities") to holders or their nominees, rather than to the
Depositary or its nominee, only if (i) the Depositary advises the applicable
Trustee in writing that the Depositary is no longer willing or able to discharge
properly its responsibilities as depositary with respect to such Debt Securities
and it is unable to locate a qualified successor, (ii) the Company, at its
option, elects to terminate the book-entry system or (iii) after the occurrence
of an Event of Default with respect to such Debt Securities, a Holder of Debt
Securities advises the applicable Trustee in writing that it wishes to receive a
Definitive Security.
Upon the occurrence of any event described in the immediately preceding
paragraph, the applicable Trustee will be required to notify all applicable
holders through the Depositary and its participants of the availability of
Definitive Securities. Upon surrender by the Depositary of the definitive
certificates representing the corresponding Debt Securities and receipt of
instructions for re-registration, the applicable Trustee will reissue such Debt
Securities as Definitive Securities to such holders.
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So long as the Depositary for a Global Security, or its nominee, is the
registered owner of such Global Security, such Depositary or nominee will be
considered the sole owner or holder of the Securities represented by such Global
Security for all purposes under the Indenture. Unless otherwise specified in the
applicable Prospectus Supplement, owners of beneficial interests in such Global
Security will not be entitled to have Debt Securities of the series represented
by such Global Security registered in their names, will not receive or be
entitled to receive physical delivery of Debt Securities of such series in
certificated form and will not be considered the holders thereof for any
purposes under the Indenture. Accordingly, each person owning a beneficial
interest in such Global Security must rely on the procedures of the Depositary
and, if such person is not a participant, on the procedures of the participant
through which such person owns its interest, to exercise any rights of a holder
under the Indenture. The Company understands that under existing industry
practices, if the Company requests any action of holders or an owner of a
beneficial interest in such Global Security desires to give any notice or take
any action a holder is entitled to give or take under the Indenture, the
Depositary would authorize the participants to give such notice or take such
action, and participants would authorize beneficial owners owning through such
participants to give such notice or take such action or would otherwise act upon
the instructions of beneficial owners owning through them.
Principal of and any premium and interest on a Global Security will be
payable in the manner described in the applicable Prospectus Supplement.
CERTAIN DEFINITIONS
"Capital Stock" of any person means any and all shares, interests,
partnership interests, participations, rights in or other equivalents (however
designated) of such person's equity interest (however designated).
"Capitalized Lease Obligation" means, with respect to any person, an
obligation incurred or assumed under or in connection with any capital lease of
real or personal property that, an obligation incurred or assumed under or in
connection with any capital lease of real or personal property that, in
accordance with GAAP, has been recorded as a capitalized lease.
"Closing Date" means, with respect to any Debt Securities, the date on
which such Debt Securities are originally issued under the Indenture.
"Consolidated Net Worth" means, at any date of determination, stockholders'
equity of the Company and its Restricted Subsidiaries as set forth on the most
recently available quarterly or annual consolidated balance sheet of the Company
and its Restricted Subsidiaries, less any amounts attributable to Disqualified
Stock or any equity security convertible into or exchangeable for Debt, the cost
of treasury stock and the principal amount of any promissory notes receivable
from the sale of the Capital Stock of the Company or any of its Restricted
Subsidiaries, each item to be determined in conformity with GAAP (excluding the
effects of foreign currency adjustments under Financial Accounting Standards
Board Statement of Financial Accounting Standards No. 52).
"Debt" means (without duplication), with respect to any person, whether
recourse is to all or a portion of the assets of such person and whether or not
contingent (a) every obligation of such person for money borrowed, (b) every
obligation of such person evidenced by bonds, debentures, notes or other similar
instruments, (c) every reimbursement obligation of such person with respect to
letters of credit, bankers' acceptances or similar facilities issued for the
account of such person, (d) every obligation of such person issued or assumed as
the deferred purchase price of property or services, (e) Capitalized Lease
Obligations, (f) all Disqualified Stock of such person valued at its maximum
fixed repurchase price, plus accrued and unpaid dividends, (g) all obligations
of such person under or in respect of Hedging Agreements, and (h) every
obligation of the type referred to in clauses (a) through (g) f another person
and all dividends of another person the payment of which, in either case, such
person has guaranteed. For purposes of this definition, the "maximum fixed
repurchase price" of any Disqualified Stock that does not have a fixed
repurchase price will be calculated in accordance with the terms of such
Disqualified stock as if such Disqualified Stock were repurchased on any date on
which Debt is required to be determined pursuant to the Indenture, and if such
price is based upon, or measured by, the fair market value of such Disqualified
Stock, such fair market value will be determined in good faith by the board of
directors of the issuer of such Disqualified Stock.
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Notwithstanding the foregoing, trade accounts payable and accrued liabilities
arising in the ordinary course of business and any liability for federal, state
or local taxes or other taxes owed by such person will not be considered Debt
for purposes of this definition.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Disqualified Stock" means any class or series of Capital Stock that,
either by its terms, by the terms of any security into which it is convertible
or exchangeable or by contract or otherwise (i) is or upon the happening of any
event or passage of time would be, required to be redeemed prior to the final
Stated Maturity of the Notes, (ii) is redeemable at the option of the holder
thereof at any time prior to such final Stated Maturity or (iii) at the option
of the holder thereof, is convertible into or exchangeable for debt securities
at any time prior to such final Stated Maturity.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Generally Accepted Accounting Principles" or "GAAP" means generally
accepted accounting principles in the United States, consistently applied, that
are in effect on the Closing Date.
"Hedging Obligations" means the obligations of any person under (i)
interest rate swap agreements, interest rate cap agreements and interest rate
collar agreements and (ii) other agreements or arrangements designed to protect
such person against fluctuations in interest rates or the value of foreign
currencies.
"Lien" means any mortgage, charge, pledge, lien (statutory or otherwise),
privilege, security interest, hypothecation, assignment for security, claim, or
preference or priority or other encumbrance upon or with respect to any property
of any kind, real or personal, movable or immovable, now owned or hereafter
acquired. A person will be deemed to own subject to a Lien any property that
such person has acquired or holds subject to the interest of a vendor or lessor
under any conditional sale agreement, capital lease or other title retention
agreement.
"Restricted Subsidiary" means any Subsidiary other than an Unrestricted
Subsidiary.
"Significant Subsidiary" means any Restricted Subsidiary of the Company
that together with its Subsidiaries, (a) for the most recent fiscal year of the
Company, accounted for more than 10% of the consolidated net sales of the
Company and its Restricted Subsidiaries or (b) as to the end of such fiscal
year, was the owner of more than 10% of the consolidated assets of the Company
and its Restricted Subsidiaries, in the case of either (a) or (b), as set forth
on the most recently available consolidated financial statements of the Company
for such fiscal year or (c) was organized or acquired since the end of such
fiscal year and would have been a Significant Subsidiary if it had been owned
during such fiscal year.
"Stated Maturity" means, when used with respect to any Note or any
installment of interest thereon, the date specified in such Note as the fixed
date on which the principal of such Note or installment of interest is due and
payable and, when used with respect to any other Debt, means the date specified
in the instrument governing such Debt as the fixed date on which the principal
of such Debt or any installment of interest thereon is due and payable.
"Subsidiary" means any person a majority of the equity ownership or Voting
Stock of which is at the time owned, directly or indirectly, by the Company
and/or one or more other Subsidiaries of the Company.
"Unrestricted Subsidiary" means (a) any Subsidiary that is designated by
the Board of Directors as an Unrestricted Subsidiary in accordance with the
"Unrestricted Subsidiaries" covenant and (b) any Subsidiary of an Unrestricted
Subsidiary.
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CERTAIN COVENANTS OF THE COMPANY
Unless otherwise specified in the applicable Prospectus Supplement, the
following covenants contained in the Indenture shall be applicable with respect
to each series of Debt Securities:
Limitation on Investment Company Status. The Company shall not take any
action, or otherwise permit to exist any circumstance, that would require the
Company or any of its subsidiaries to register as an "investment company" under
the Investment Company Act of 1940, as amended.
Reports. The Company will be required to file on a timely basis with the
Commission, to the extent such filings are accepted by the Commission and
whether or not the Company has a class of securities registered under the
Exchange Act, the annual reports, quarterly reports and other documents that the
Company would be required to file if it were subject to Section 13 or 15(d) of
the Exchange Act. The Company will also be required (a) to file with the
applicable Trustee, and provide to each holder of Debt Securities, without cost
to such holder, copies of such reports and documents within 15 days after the
date on which the Company files such reports and documents with the Commission
or the date on which the Company would be required to file such reports and
documents if the Company were so required and (b) if filing such reports and
documents with the Commission is not accepted by the Commission or is prohibited
under the Exchange Act, to supply at the Company's cost copies of such reports
and documents to any prospective holder of Debt Securities promptly upon written
request.
EVENTS OF DEFAULT
Unless otherwise specified in the applicable Prospectus Supplement, the
following will constitute "Events of Default" under the Indenture with respect
to Debt Securities of any series (unless they are inapplicable to such series of
Debt Securities or they are specifically deleted in the supplemental indenture
or the Board Resolution under which such series of Debt Securities is issued or
has been modified):
(a) default in the payment of any interest on any Debt Security of
such series when it becomes due and payable, and continuance of such
default for a period of 30 days;
(b) default in the payment of the principal of (or premium, if any,
on) any Debt Security of such series when due;
(c) failure to perform or comply with the Indenture provisions
described under "Consolidation, Merger and Sale of Assets";
(d) default in the performance, or breach, of any covenant or
agreement of the Company contained in the Indenture (other than a default
in the performance, or breach, of a covenant or agreement that is
specifically dealt with elsewhere therein), and continuance of such default
or breach for a period of 60 days after written notice has been given to
the Company by the Trustee or to the Company and the Trustee by the holders
of at least 25% in aggregate principal amount of the Debt Securities of
such series then outstanding as provided in the Indenture;
(e)(i) an event of default has occurred under any mortgage, bond,
indenture, loan agreement or other document evidencing an issue of Debt of
the Company or any Significant Subsidiary, which issue has an aggregate
outstanding principal amount of not less than $5.0 million, and such
default has resulted in such Debt becoming, whether by declaration or
otherwise, due and payable prior to the date on which it would otherwise
become due and payable or (ii) a default in any payment when due at final
maturity of any such Debt;
(f) failure by the Company or any of its Restricted Subsidiaries to
pay one or more final judgments the uninsured portion of which exceeds in
the aggregate $5.0 million, which judgment or judgments are not paid,
discharged or stayed for a period of 60 days;
(g) the occurrence of certain events of bankruptcy, insolvency or
reorganization with respect to the Company or any Significant Subsidiary;
or
(h) any other Event of Default specified for such series.
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If an Event of Default (other than as specified in clause (g) above) occurs
and is continuing under the Indenture applicable to any series of Debt
Securities, the Trustee or the holders of not less than 25% in aggregate
principal amount of the Debt Securities of such series then outstanding may
declare the principal of all of the outstanding Debt Securities of such series
immediately due and payable and, upon any such declaration, such principal will
become due and payable immediately.
If an Event of Default specified in clause (g) above occurs and is
continuing, then the principal of all of the outstanding Debt Securities of any
series will ipso facto become and be immediately due and payable without any
declaration or other act on the part of the Trustee or any holder of Debt
Securities of such series.
At any time after a declaration of acceleration under the Indenture, but
before a judgment or decree for payment of the money due has been obtained by
the Trustee, the holders of a majority in aggregate principal amount of the
outstanding Debt Securities of any series, by written notice to the Company and
the Trustee, may rescind such declaration and its consequences if (i) the
Company has paid or deposited with the Trustee a sum sufficient to pay (A) all
overdue interest on all Debt Securities of such series, (B) all unpaid principal
of (and premium, if any, on) any outstanding Debt Securities of such series that
has become due otherwise than by such declaration of acceleration and interest
thereon at the rate borne by the Debt Securities of such series, (C) to the
extent that payment of such interest is lawful, interest upon overdue interest
and overdue principal at the rate borne by the Debt Securities of such series
and, (D) all sums paid or advanced by the Trustee under the Indenture and the
reasonable compensation, expenses, disbursements and advances of the Trustee,
its agents and counsel; and (ii) all Events of Default, other than the
non-payment of amounts of principal of (or premium, if any, on) or interest on
the Debt Securities of such series that have become due solely by such
declaration of acceleration, have been cured or waived. No such rescission will
affect any subsequent default or impair any right consequent thereto.
The holders of not less than a majority in aggregate principal amount of
the outstanding Debt Securities of any series may, on behalf of the holders of
all of the Debt Securities of such series, waive any past defaults under the
Indenture, except a default in the payment of the principal of (and premium, if
any on) or interest on any Debt Securities of such series, or in respect of a
covenant or provision that under the Indenture cannot be modified or amended
without the consent of the holder of each such Debt Security outstanding.
If a Default or an Event of Default occurs with respect to a series of Debt
Securities and is continuing and is known to the Trustee, the Trustee will mail
to each holder of the Debt Securities of such series notice of the Default or
Event of Default within 90 days after the occurrence thereof. Except in the case
of a Default or an Event of Default in payment of principal of (and premium, if
any, on) or interest on any Debt Securities of any series, the Trustee may
withhold the notice to the holders of the Debt Securities of such series if a
committee of its trust officers in good faith determines that withholding such
notice is in the interests of the holders of the Debt Securities of such series.
The Company is required to furnish to the Trustee annual statements as to
the performance by the Company and any Subsidiary Guarantors (as defined in the
Indenture) of their respective obligations under the Indenture and as to any
default in such performance. The Company is also required to notify the Trustee
within five days of any Default.
SATISFACTION AND DISCHARGE OF THE INDENTURE AND THE DEBT SECURITIES
Upon the request of the Company, the Indenture will cease to be of further
effect (except as to surviving rights of registration of transfer of the Debt
Securities of any series outstanding under the Indenture, as expressly provided
for in the Indenture) and the Trustee, at the expense of the Company, will
execute proper instruments acknowledging satisfaction and discharge of the
Indenture when (a) either (i) all the Debt Securities of any series theretofore
authenticated and delivered (other than destroyed, lost or stolen Debt
Securities of any series that have been replaced or paid and Debt Securities of
any series that have been subject to defeasance under "Defeasance or Covenant
Defeasance of Indenture") have been delivered to the Trustee for cancellation or
(ii) all Debt Securities of any series not theretofore delivered to the Trustee
for cancellation (A) have become due and payable, (B) will become due and
payable at maturity within one year or (C) are to be called for redemption
within one year under arrangements satisfactory to the Trustee for the
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giving of notice of redemption by the Trustee in the name, and at the expense,
of the Company, and the Company has irrevocably deposited or caused to be
deposited with the Trustee funds in trust for the purpose and in an amount
sufficient to pay and discharge the entire Debt on such Debt Securities of any
series not theretofore delivered to the Trustee for cancellation, for principal
(and premium, if any, on) and interest on the Debt Securities of any series to
the date of such deposit (in the case of Debt Securities of any series that have
become due and payable) or to the Stated Maturity or Redemption Date (as defined
in the Indenture), as the case may be; (b) the Company has paid or caused to be
paid all sums payable under the Indenture by the Company; and (c) the Company
has delivered to the Trustee an officers' certificate and an opinion of counsel,
each stating that all conditions precedent provided in the Indenture relating to
the satisfaction and discharge of the Indenture have been complied with.
MODIFICATION AND WAIVER
Modifications and amendments of the Indenture may be made by the Company
and the Trustee with the consent of the holders of a majority in aggregate
outstanding principal amount of the Debt Securities of any series to be offered
under the Indenture; provided, however, that no such modification or amendment
may, without the consent of the holder of each outstanding Debt Security of such
series affected thereby,
(a) change the Stated Maturity of the principal of, or any installment
of interest on, any Debt Securities of such series, or reduce the principal
amount thereof or the rate of interest thereon or any premium payable upon
the redemption thereof, or change the coin or currency in which any Debt
Securities of such series or any premium or the interest thereon is
payable, or impair the right to institute suit for the enforcement of any
such payment after the Stated Maturity thereof (or, in the case of
redemption, on or after the Redemption Date);
(b) reduce the percentage in principal amount of outstanding Debt
Securities of such series, the consent of whose holders is required for any
waiver of compliance with certain provisions of, or certain defaults and
their consequences provided for under, the Indenture; or
(c) modify any provisions relating to "-- Modification and Waiver"
except to increase the percentage of outstanding Debt Securities of such
series required for such actions or to provide that certain other
provisions of the Indenture cannot be modified or waived without the
consent of the holder of each outstanding Debt Security of such series
affected thereby.
The holders of a majority in aggregate principal amount of the Debt
Securities of any series outstanding may waive compliance with certain
restrictive covenants and provisions of the Indenture with respect to such
series.
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Company may not consolidate with or merge with or into any other person
or, directly or indirectly, convey, sell, assign, transfer, lease or otherwise
dispose of its properties and assets substantially as an entirety to any other
person (in one transaction or a series of related transactions), unless:
(a) either (i) the Company is the surviving corporation or (ii) the
person (if other than the Company) formed by such consolidation or into
which the Company is merged or the person that acquires by sale,
assignment, transfer, lease or other disposition of the properties and
assets of the Company substantially as an entirety (the "Surviving Entity")
(A) is a corporation, partnership or trust organized and validly existing
under the laws of the United States, any state thereof or the District of
Columbia and (B) expressly assumes, by a supplemental indenture in form
satisfactory to the Trustee, all of the Company's obligations under the
Indenture and the Debt Securities;
(b) immediately after giving effect to such transaction and treating
any obligation of the Company or a Restricted Subsidiary in connection with
or as a result of such transaction as having been incurred as of the time
of such transaction, no Default or Event of Default has occurred and is
continuing;
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(c) immediately after giving effect to such transaction on a pro forma
basis, the Consolidated Net Worth of the Company (or of the Surviving
Entity if the Company is not the continuing obligor under the Indenture) is
equal to or greater than the Consolidated Net Worth of the Company
immediately prior to such transaction;
(d) immediately after giving effect to such transaction on a pro forma
basis (on the assumption that the transaction occurred at the beginning of
the most recently ended four full fiscal quarter period for which internal
financial statements are available, the Company (or the Surviving Entity if
the Company is not the continuing obligor under the Indenture) could incur
at least $1.00 of additional Debt (other than Permitted Debt (as defined in
the Indenture)) pursuant to the first paragraph of any "Limitation on Debt"
covenant applicable to any series of Debt Securities;
(e) if any of the property or assets of the Company or any of its
Restricted Subsidiaries would thereupon become subject to any Lien, the
provisions of any "Limitation on Liens" covenant applicable to any series
of Debt Securities are complied with; and
(f) the Company delivers, or causes to be delivered, to the Trustee,
in form and substance reasonably satisfactory to the Trustee, an officers'
certificate and an opinion of counsel, each stating that such transaction
complies with the requirements of the Indenture.
In the event of any transaction described in and complying with the
conditions listed in the first paragraph of this covenant in which the Company
is not the continuing obligor under the Indenture, the Surviving Entity will
succeed to, and be substituted for, and may exercise every right and power of,
the Company under the Indenture, and thereafter the Company will be discharged
from all its obligations and covenants under the Indenture and the Debt
Securities.
DEFEASANCE OR COVENANT DEFEASANCE OF INDENTURE
If the Prospectus Supplement relating to the offered Debt Securities so
provides, the Company may, at its option and at any time, terminate the
obligations of the Company and any Subsidiary Guarantors with respect to the
outstanding Debt Securities of any series ("defeasance"). Such defeasance means
that the Company will be deemed to have paid and discharged the entire Debt
represented by the outstanding Debt Securities of such series, except for (i)
the rights of holders of outstanding Debt Securities of such series to receive
payments in respect of the principal of (and premium, if any, on) and interest
on such Debt Securities when such payments are due, (ii) the Company's
obligations to issue temporary Debt Securities of such series, register the
transfer or exchange of any Debt Securities of such series, replace mutilated,
destroyed, lost or stolen Debt Securities of such series, maintain an office or
agency for payments in respect of the Debt Securities of any series and
segregate and hold such payments in trust, (iii) the rights, powers, trusts,
duties and immunities of the Trustee and (iv) the defeasance provisions of the
Indenture. In addition, the Company may, at its option and at any time, elect to
terminate the obligations of the Company and any Subsidiary Guarantor with
respect to certain covenants set forth in the Indenture, and any failure to
comply with such obligations would not constitute a Default or an Event of
Default with respect to the Debt Securities of such series ("covenant
defeasance").
In order to exercise either defeasance or covenant defeasance, (a) the
Company must irrevocably deposit or cause to be deposited with the Trustee, as
trust funds in trust, specifically pledged as security for, and dedicated solely
to, the benefit of the holders of the Debt Securities of a series, money in an
amount, or U.S. Government Obligations (as defined in the Indenture) that
through the scheduled payment of principal and interest thereon will provide
money in an amount, or a combination thereof, sufficient, in the opinion of a
nationally recognized firm of independent public accountants, to pay and
discharge the principal of (and premium, if any, on) and interest on the
outstanding Debt Securities of such series at maturity (or upon redemption, if
applicable) of such principal or installment of interest; (b) no Default or
Event of Default has occurred and is continuing on the date of such deposit or,
insofar as an event of bankruptcy under clause (g) of "Events of Default" above
is concerned, at any time during the period ending on the 91st day after the
date of such deposit; (c) such defeasance or covenant defeasance may not result
in a breach or violation of, or constitute a default under, the Indenture or any
material agreement or instrument to which the Company or
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any Subsidiary Guarantor is a party or by which it is bound; (d) in the case of
defeasance, the Company must deliver to the Trustee an opinion of counsel
stating that the Company has received from, or there has been published by, the
U.S. Internal Revenue Service a ruling, or there has been a change in applicable
federal income tax law, to the effect, and based thereon such opinion must
confirm that, the holders of the outstanding Debt Securities of such series will
not recognize income, gain or loss for federal income tax purposes as a result
of such defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case if
such defeasance had not occurred; (e) in the case of covenant defeasance, the
Company must have delivered to the Trustee an opinion of counsel to the effect
that the Holders of the outstanding Debt Securities of such series will not
recognize income, gain or loss for federal income tax purposes as a result of
such covenant defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case if
such covenant defeasance had not occurred; and (f) the Company must have
delivered to the Trustee an officers' certificate and an opinion of counsel,
each stating that all conditions precedent provided for relating to either the
defeasance or the covenant defeasance, as the case may be, have been complied
with.
GOVERNING LAW
The Indenture and the Debt Securities will be governed by, and construed in
accordance with, the laws of the State of New York.
REGARDING THE TRUSTEE
The Indenture contains certain limitations on the right of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize for its own account on certain property received in
respect of any such claim as security or otherwise. The Trustee will be
permitted to engage in certain other transactions; however, if it acquires any
conflicting interest and there is a default under the Debt Securities, it must
eliminate such conflict or resign.
The Trustee may resign or be removed with respect to one or more series of
Debt Securities and a successor Trustee may be appointed to act with respect to
such series. In the event that two or more persons are acting as Trustee with
respect to different series of Debt Securities, each such Trustee shall be a
Trustee of a trust under the Indenture separate and apart from the trust
administered by any other such Trustee, and any action described herein to be
taken by the "Trustee" may then be taken by each such Trustee with respect to,
and only with respect to, the one or more series of Debt Securities for which it
is Trustee.
PLAN OF DISTRIBUTION
The Company may sell Debt Securities to or through underwriters or dealers,
directly to other purchasers, or through agents. The Prospectus Supplement with
respect to any Debt Securities will set forth the terms of the offering of the
Debt Securities, including the name or names of any underwriters, dealers or
agents, the price of the offered Debt Securities and the net proceeds to the
Company from such sale, any underwriting discounts or other items constituting
underwriters' compensation, any discounts or concessions allowed or reallowed or
paid to dealers and any securities exchanges on which such Debt Securities may
be listed.
If underwriters are used in the sale, the Debt Securities will be acquired
by the underwriters for their own account and may be resold from time to time in
one or more transactions, including negotiated transactions, at a fixed public
price or at varying prices determined at the time of sale. The underwriter or
underwriters with respect to a particular underwritten offering of Debt
Securities will be named in the Prospectus Supplement relating to such offering,
and if an underwriting syndicate is used, the managing underwriter or
underwriters will be set forth on the cover of such Prospectus Supplement.
Unless otherwise set forth in the Prospectus Supplement, the obligations of the
underwriters or agents to purchase the Debt Securities will be subject to
certain conditions precedent and the underwriters will be obligated to purchase
all the Debt Securities if any are purchased. Any initial public offering price
and any discounts or concessions allowed or reallowed or paid to dealers may be
changed from time to time.
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If a dealer is utilized in the sale of any Debt Securities in respect of
which this Prospectus is delivered, the Company will sell such Debt Securities
to the dealer, as principal. The dealer may then resell such Debt Securities to
the public at varying prices to be determined by such dealer at the time of
resale. The name of the dealer and the terms of the transaction will be set
forth in the Prospectus Supplement relating thereto.
Debt Securities may be sold directly by the Company to one or more
institutional purchasers, or through agents designated by the Company from time
to time, at a fixed price, or prices, which may be changed, or at varying prices
determined at the time of sale. Any agent involved in the offer or sale of the
Debt Securities will be named, and any commissions payable by the Company to
such agent will be set forth, in the Prospectus Supplement relating thereto.
Unless otherwise indicated in the Prospectus Supplement, any such agent will be
acting on a best efforts basis for the period of its appointment.
In connection with the sale of the Debt Securities, underwriters or agents
may receive compensation from the Company or from purchasers of Debt Securities
for whom they may act as agents in the form of discounts, concessions, or
commissions. Underwriters, agents, and dealers participating in the distribution
of the Debt Securities may be deemed to be underwriters, and any discounts or
commissions received by them from the Company and any profit on the resale of
the Debt Securities by them may be deemed to be underwriting discounts or
commissions under the Securities Act.
Each series of Debt Securities will be a new issue with no established
trading market. Any underwriters to whom Debt Securities are sold by the Company
for public offering and sale may make a market in such Debt Securities, but such
underwriters will not be obligated to do so and may discontinue any market
making at any time without notice. No assurance can be given as to the liquidity
of the trading market for any Debt Securities.
Underwriters, dealers, and agents may be entitled under agreements entered
into with the Company to indemnification by the Company against certain civil
liabilities, including liabilities under the Securities Act, or to contribution
with respect to payments that such agents, dealers, or underwriters may be
required to make with respect thereto. Underwriters, dealers, or agents and
their associates may be customers of, engage in transactions with and perform
services for, the Company in the ordinary course of business.
LEGAL MATTERS
The validity of the Debt Securities offered hereby will be passed upon for
the Company by Rogers & Wells, New York, New York and for any underwriters,
dealers or agents by Shearman & Sterling, New York, New York.
EXPERTS
The consolidated financial statements and the related financial statement
schedules incorporated in this Prospectus by reference from the Company's Annual
Report on Form 10-K for the year ended June 30, 1996 have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report, which is
incorporated herein by reference, and have been so incorporated in reliance upon
the report of such firm given upon their authority as experts in accounting and
auditing.
20
<PAGE> 110
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NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS, IN CONNECTION WITH THE
OFFER MADE BY THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS, AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR EITHER OF THE UNDERWRITERS. THIS
PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS DO NOT CONSTITUTE AN OFFER
TO SELL, OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE
NOTES OFFERED BY THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS, NOR
DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY NOTES
BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT OR THE
ACCOMPANYING PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT
Prospectus Supplement Summary.................. S-3
Use of Proceeds................................ S-9
Capitalization................................. S-10
Selected Financial Information and Other
Data......................................... S-11
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... S-13
Business....................................... S-22
Management..................................... S-36
Description of the Notes....................... S-39
Underwriting................................... S-58
Financial Statements........................... F-1
Glossary....................................... G-1
PROSPECTUS
Available Information.......................... 2
Incorporation of Certain Documents by
Reference.................................... 2
The Company.................................... 3
Risk Factors................................... 4
Ratio of Earnings to Fixed Charges............. 10
Use of Proceeds................................ 10
Description of Debt Securities................. 10
Plan of Distribution........................... 19
Legal Matters.................................. 20
Experts........................................ 20
</TABLE>
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$100,000,000
LOGO
% SENIOR NOTES
DUE 2004
--------------------------------------------
PROSPECTUS SUPPLEMENT
--------------------------------------------
PRUDENTIAL SECURITIES INCORPORATED
CIBC WOOD GUNDY SECURITIES CORP.
January , 1997
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