<PAGE>
RULE 424(b)(5)
REGISTRATION NO 333-50895
PROSPECTUS SUPPLEMENT
(To Prospectus dated May 4, 1998)
- - --------------------------------------------------------------------------------
$55,000,000
LOGO DVI INC.
9 7/8% Senior Notes due 2004
- - --------------------------------------------------------------------------------
We will pay interest on the notes on February 1 and August 1 of each year,
beginning February 1, 1999. The notes will mature on February 1, 2004. We may
redeem any of the notes on or after February 1, 2002. For a more detailed
description of the terms of the notes, see "Description of the Notes."
The notes will be unsecured and will rank equally with all of our other current
and future unsubordinated debt. The notes will be effectively subordinated to
all liabilities of our subsidiaries, including warehouse debt and other current
and future debt.
INVESTING IN THE NOTES INVOLVES CERTAIN RISKS WHICH ARE DESCRIBED IN THE "RISK
FACTORS" SECTION BEGINNING ON PAGE S-8.
<TABLE>
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions DVI, Inc.
- - --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Note................................. 95.668% 2.679% 92.989%
- - --------------------------------------------------------------------------------
Total.................................... $52,617,400 $1,473,287 $51,144,113
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
</TABLE>
Price to Public and Proceeds to DVI, Inc. are subject to increase for accrued
interest, if any, from December 23, 1998.
- - --------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the notes or determined if this
Prospectus Supplement or the accompanying Prospectus is truthful or complete.
Any representation to the contrary is a criminal offense.
We expect that the notes will be ready for delivery on or about December 23,
1998. This is a firm commitment underwriting.
PRUDENTIAL SECURITIES INCORPORATED
PIPER JAFFRAY INC.
LIBRA INVESTMENTS, INC.
FLEET SECURITIES, INC.
December 16, 1998
<PAGE>
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This Prospectus Supplement and the accompanying Prospectus include forward-
looking statements. We have based these forward-looking statements on our
current expectations and projections about future events. Forward-looking
statements are generally identifiable by use of the words "may," "will,"
"should," "expect," "anticipate," "estimate," "believe," "intend" or "project"
or the negatives of such words or variations thereon or comparable terminology.
These forward-looking statements are subject to risks, uncertainties, and
assumptions about the Company, including, among other things:
. material adverse changes in economic conditions in the geographic areas
where we finance equipment;
. the possibility that difficulties may arise in integrating the
operations of acquired businesses and forming and operating joint
ventures;
. competition from others;
. changes in interest or currency exchange rates that limit our ability to
generate new receivables and decrease our net interest margins;
. increases in non-performing loans and credit losses;
. our inability to access capital and financing on terms acceptable to us;
. changes in any domestic or foreign governmental regulation affecting our
ability to declare and pay dividends or the manner in which we conduct
business;
. adverse changes, or any announcement relating to a possible or
contemplated adverse change, in the ratings obtained from any of the
independent rating agencies relating to our debt securities or other
financial instruments;
. our ability and the ability of third parties with whom we have
relationships to become year 2000 and euro compliant; and
. other risk factors set forth under "Risk Factors."
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
In light of these risks, uncertainties, and assumptions, the forward-looking
events discussed in this Prospectus Supplement and the accompanying Prospectus
might not occur.
----------------
ii
<PAGE>
PROSPECTUS SUPPLEMENT SUMMARY
This summary may not contain all the information that may be important to
you. You should read the entire Prospectus Supplement and the accompanying
Prospectus, including the financial data and related notes included herein and
the documents incorporated by reference herein, before making an investment
decision. In this Prospectus Supplement, the terms "DVI," the "Company," "we,"
"us" and "our" refer to DVI, Inc. and its subsidiaries, except where it is made
clear that such terms mean only DVI, Inc. or an individual subsidiary.
THE COMPANY
General. We are an independent specialty finance company that provides asset-
based financing to healthcare service providers. Our core businesses are
medical equipment finance and medical receivables finance. We provide these
services principally in the U.S. and, to a lesser extent, in Latin America,
Europe, the U.K., Asia and Australia. As of September 30, 1998, our managed net
financed assets and shareholders' equity were $1.4 billion and $177.6 million,
respectively.
We principally serve the financing needs of middle market healthcare service
providers, such as outpatient healthcare providers, medical imaging centers,
physician group practices, integrated healthcare delivery networks and
hospitals. Many of our customers are entrepreneurial companies that have
capitalized on trends affecting the healthcare delivery systems in the U.S. and
other countries to build their businesses. As a result of these trends, our
business has grown substantially. From June 30, 1995 to September 30, 1998, our
managed net financed receivables portfolio increased 183% to approximately $1.4
billion from approximately $494.9 million.
Medical Equipment Finance. Our medical equipment finance business operates
by:
. providing financing directly to end users of diagnostic imaging and
other sophisticated medical equipment;
. providing financing directly to end users of lower cost medical devices;
. providing domestic and international finance programs for vendors of
diagnostic and other sophisticated medical equipment; and
. to a lesser extent, purchasing medical equipment loans and leases
originated by regional leasing companies through a wholesale loan
origination program.
Our typical equipment loans for diagnostic, patient treatment and other
sophisticated medical equipment (originated both domestically and
internationally) range from $200,000 to $3.0 million, while equipment loans for
lower cost medical devices range from $5,000 to $200,000. Virtually all of our
equipment loans are structured so 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 our equipment loans are structured as notes secured by
equipment or direct financing leases with a bargain purchase option, our
exposure to residual asset value is limited; it was $24.9 million at September
30, 1998. At September 30, 1998, our managed portfolio of equipment financing
loans was $1.2 billion.
In recent years we have expanded our international business significantly.
Internationally, we finance the purchase of diagnostic imaging and other
sophisticated medical equipment by private clinics, diagnostic centers and
hospitals. Our international business is focused on providing finance programs
for equipment manufacturers doing business in Latin America, Europe, the U.K.,
Asia and Australia. We believe our presence in these regions enhances our
relationships with certain medical equipment manufacturers and permits us to
capitalize
S-1
<PAGE>
on the growing international markets for medical equipment financing. We view
continued expansion of our relationships with medical equipment vendors and
manufacturers as an integral component of our growth strategy and intend to
continue to expand our medical equipment finance activities outside the U.S. We
also believe that by helping vendors and manufacturers finance their customers'
equipment purchases outside the U.S., we will encourage those vendors and
manufacturers to increase the financing opportunities they refer to us within
the U.S. At September 30, 1998, our managed portfolio of international
equipment loans was $171.5 million.
Medical Receivables Finance. Our medical receivables finance business
operates by:
. providing lines of credit to a wide variety of healthcare providers; and
. offering an interest-only revolving line of credit to financial
intermediaries that purchase receivables from healthcare providers.
Substantially all of the lines of credit we provide are collateralized by
third party medical receivables due from Medicare, Medicaid, health maintenance
organizations, referred to as "HMOs," preferred provider organizations,
referred to as "PPOs," commercial insurance companies and, to a limited extent,
other healthcare service providers. We generally advance only 70% to 85% of our
estimate of the net collectible value of the eligible receivables from third
party payors. Clients continue to bill and collect the accounts receivable,
subject to lockbox collection and sweep arrangements established for our
benefit. We conduct extensive due diligence on our potential medical
receivables clients for all of our financing programs and follow underwriting
and credit policies in providing financing to customers. Our credit risk is
mitigated by our ownership of or security interest in all receivables, eligible
and ineligible. We also recently acquired a highly sophisticated collateral
tracking system which will allow us to improve the monitoring of medical
receivables. Our medical receivables loans are structured as floating rate
lines of credit. These lines of credit typically range in size from $500,000 to
$15.0 million; however, in certain circumstances, commitments ranging from
$20.0 million to $40.0 million are also provided to financial intermediaries
for purchasing receivables from healthcare providers. At September 30, 1998,
our portfolio of medical receivables loans was $140.0 million.
Additional Financing Services. As a result of management's belief that the
long-term care and assisted care markets and emerging growth companies have
been underserved by traditional financing sources, we established DVI Merchant
Funding and DVI Private Capital, divisions of DVI Financial Services Inc., and
recently acquired Third Coast Capital. Through DVI Merchant Funding, we provide
fee-based advisory services such as private placement, loan syndication,
interim real estate financing, mortgage loan placement and, to a lesser extent,
mergers and acquisitions advisory services to our customers operating in the
long-term care, assisted care and specialized hospital markets. Through DVI
Private Capital, we provide subordinated debt financing to our traditional
customer base and through Third Coast Capital, we provide asset-based
financing, including lease lines of credit, to emerging growth companies.
Credit Underwriting. We believe the credit underwriting process we use when
originating loans is effective in managing risk. The process follows detailed
procedures and benefits from our significant experience in evaluating the
creditworthiness of potential borrowers. We also have been successful in
resolving delinquencies. Our net charge-offs as a percentage of average managed
net financed assets were 0.28%, 0.06% and 0.15% for the years ended June 30,
1996, 1997 and 1998, respectively, and were 0.29% for the period ended
September 30, 1998 (annualized). Our delinquencies (greater than a period of 30
days) as a percentage of managed net financed assets at June 30, 1996, 1997 and
1998 were 4.3%, 3.6% and 6.9%, respectively, and were 7.2% at September 30,
1998.
S-2
<PAGE>
BUSINESS STRATEGY
Our goal is to be the leading provider of asset-based financing services to
growing segments of the healthcare industry and to be the primary source for
all of the financing needs of our customers. The principal components that we
believe will enable us to attain this goal include:
. generating additional financing opportunities with equipment
manufacturers and their customers in domestic and international markets;
. continuing to expand our medical receivables finance business;
. expanding our presence in the lower cost medical devices market;
. offering fee-based financing services to healthcare providers; and
. acquiring specialty businesses that we believe will fit within our
existing operations and long-term business strategy and will allow us to
expand into other segments of the healthcare industry.
Our executive offices are located at 500 Hyde Park, Doylestown, Pennsylvania
18901 (Telephone: (215) 345-6600).
S-3
<PAGE>
THE OFFERING
Issuer.................. DVI, Inc.
Notes Offered........... $55,000,000 aggregate principal amount of 9 7/8%
Senior Notes due 2004.
Maturity................ February 1, 2004.
Interest................ We will pay interest on the notes on February 1 and
August 1 of each year, beginning February 1, 1999.
Ranking................. The notes will rank senior in right of payment to all
existing and future subordinated debt of the Company
and equally in right of payment with existing and
future senior debt of the Company. The notes will be
structurally subordinated to all liabilities of our
subsidiaries, including warehouse debt and other
existing and future liabilities. The notes will rank
equally with our existing 9 7/8% Senior Notes due
2004.
On a pro forma basis, after giving effect to this
offering and our use of the proceeds, at September
30, 1998, we would have had $679.3 million of debt.
On the same pro forma basis, at September 30, 1998,
our subsidiaries would have had $628.5 million of
liabilities (excluding the intercompany notes).
Optional Redemption..... We may redeem any of the notes on or after February
1, 2002 at the redemption prices set forth under
"Description of the Notes--Redemption."
Change of Control....... If a Change of Control occurs, we must make an offer
to purchase all or a portion of your notes at a
purchase price equal to 101% of their principal
amount, plus accrued interest.
Certain Covenants....... The indenture governing the notes contains covenants
that, among other things, limit our ability and the
ability of our restricted subsidiaries to:
. incur debt;
. pay cash dividends, purchase our capital stock,
make certain investments or make other restricted
payments;
. sell assets;
. engage in transactions with affiliates;
. in the case of our restricted subsidiaries, agree
to dividend and other payment restrictions and
guarantee debt;
. issue or sell capital stock of restricted
subsidiaries;
. create liens; and
. merge, consolidate or sell all or substantially
all of our assets.
These covenants are subject to important exceptions
and qualifications as described in the section
captioned "Description of the Notes."
S-4
<PAGE>
Intercompany Note....... In consideration of the loan of the proceeds of the
offering, DVI Financial Services will issue a
promissory note, referred to as the "Intercompany
Note," in the amount of $55.0 million to DVI, Inc.
The Intercompany Note will:
. provide for interest payments in the same amounts
and at the same time as the notes;
. mature at the same time as the notes;
. rank equally with other senior indebtedness of DVI
Financial Services; and
. contain cross-acceleration provisions and other
events of default similar to the terms of the
notes.
Use of Proceeds......... We estimate that the net proceeds of the offering
will be approximately $50.6 million. We intend to use
these proceeds for:
. repaying borrowings under certain of our warehouse
facilities, including up to an aggregate of $5.0
million to repay an affiliate of Prudential
Securities Incorporated;
. funding our growth, including increasing the
amount of equipment and medical receivables loans
we can fund;
. developing our international operations and new
financing services;
. adding to our working capital; and
. general corporate purposes.
Risk Factors............ You should consider all of the information contained
in this Prospectus Supplement and the accompanying
Prospectus before making an investment in the notes.
In particular, you should consider the risks set
forth under the heading "Risk Factors."
S-5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED JUNE 30, SEPTEMBER 30,
-------------------------- -----------------------
1996 1997 1998 1997 1998
-------- -------- -------- -------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DA-
TA:
Total finance and other in-
come...................... $ 49,038 $ 56,334 $ 74,355 $ 16,134 $ 21,815
Net interest and other in-
come...................... 18,549 17,939 25,143 4,506 9,272
Net gain on sale of financ-
ing transactions.......... 8,032 14,039 20,977 5,024 6,854
Net finance income......... 26,581 31,978 46,120 9,530 16,126
Earnings from continuing
operations before minority
interest, equity in net
loss of investees,
provision for income
taxes, and discontinued
operations................ 14,323 15,475 22,892 4,752 7,975
Net earnings............... 8,165 8,563 12,858 2,590 4,544
<CAPTION>
AS OF
AS OF JUNE 30, SEPTEMBER 30, 1998
-------------------------- -----------------------
1996 1997 1998 ACTUAL AS ADJUSTED(1)
-------- -------- -------- -------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Gross financed receiv-
ables(2).................. $520,120 $650,376 $797,502 $920,255 $920,255
Net financed receiv-
ables(3).................. 454,398 580,637 728,135 837,921 837,921
Notes collateralized by
medical receivables....... 38,567 85,649 137,316 139,867 139,867
Total assets............... 560,939 634,528 816,920 975,262 975,262
Borrowings under warehouse
facilities................ 168,108 44,962 82,828 222,823 172,229
Long-term debt, net:
Discounted receivables
(primarily limited
recourse)(4) ........... 253,759 317,863 342,120 303,280 303,280
9 7/8% Senior Notes due
2004.................... -- 95,883 96,486 96,643 96,643
9 7/8% Senior Notes due
2004 offered
hereby.................. -- -- -- -- 50,594
Other debt............... -- 8,168 15,808 43,099 43,099
Convertible subordinated
notes................... 13,809 13,324 13,439 13,467 13,467
-------- -------- -------- -------- --------
Total long-term debt....... 267,568 435,238 467,853 456,489 507,083
Shareholders' equity....... 85,302 95,660 172,285 177,562 177,562
</TABLE>
S-6
<PAGE>
<TABLE>
<CAPTION>
AS OF OR FOR THE
THREE MONTHS ENDED
AS OF OR FOR THE YEAR ENDED JUNE 30, SEPTEMBER 30,
--------------------------------------- --------------------
1996 1997 1998 1997 1998
------------ ------------ ------------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ADDITIONAL OPERATING AND
OTHER DATA:
Managed net financed
assets(5):
Domestic equipment.... $ 601,542 $ 809,090 $ 923,765 $833,897 $1,045,202
International
equipment............ -- 29,895 162,701 58,612 171,531
Medical
receivables(6)....... 38,567 86,858 136,562 104,712 139,105
----------- ----------- ------------- -------- ----------
Total managed net
financed assets...... $ 640,109 $ 925,843 $ 1,223,028 $997,221 $1,355,838
Origination, commitments
and purchases:
Domestic equipment
origination and
purchases............ $ 316,757 $ 370,262 $ 396,276 $ 89,030 $ 191,050
International
origination and
purchases............ -- 31,461 136,600 30,219 23,523
Medical receivables
commitments and
purchases............ 40,000 101,100 183,260 20,950 33,350
----------- ----------- ------------- -------- ----------
Total originations,
commitments and
purchases............ $ 356,757 $ 502,823 $ 716,136 $140,199 $ 247,923
Net charge-offs......... $ 1,581 $ 436 $ 1,635 $ 360 $ 903
Net charge-offs
ratio(7)............... 0.28% 0.06% 0.15% 0.15% 0.29%
Allowance for possible
losses on receivables.. $ 4,026 $ 5,976 $ 9,955 $ 6,608 $ 11,894
Allowance for possible
losses on receivables
ratio(8)............... 0.63% 0.65% 0.81% 0.66% 0.88%
Total delinquencies(9).. $ 27,514 $ 33,153 $ 84,505 $ 44,006 $ 97,102
Total delinquencies
ratio(10).............. 4.30% 3.58% 6.91% 4.41% 7.16%
FINANCIAL RATIOS:
Interest coverage
ratio(11).............. 1.7x 1.7x 1.7x 1.7x 1.9x
Leverage ratio(12)...... 0.2x 1.5x 1.0x 1.5x 1.1x
Return on assets(13).... 1.7% 1.5% 1.8% 1.6% 2.1%
Return on equity(14).... 11.3% 9.5% 11.6% 10.8% 10.5%
Ratio of earnings to
fixed charges(15)...... 1.5x 1.4x 1.5x 1.4x 1.6x
</TABLE>
- - --------
(1) Adjusted to give effect to the sale of notes and the application of the net
proceeds to repay borrowings under the Company's warehouse facilities.
(2) Gross financed receivables consist of receivables in installments,
receivables in installments-related parties, recourse credit enhancements,
residual valuation, notes collateralized by medical receivables and
equipment on operating leases.
(3) Net financed receivables consist of gross financed receivables net of
unearned income.
(4) Represents debt from the permanent funding of our equipment and other loans
from securitization or other structured finance transactions where the
securitization has been accounted for as a financing (on balance sheet
transaction) as opposed to a sale (off balance sheet transaction).
(5) Managed net financed assets are (i) net financed assets appearing on our
balance sheet and (ii) portions of receivables that have been sold to third
parties and are still serviced by the Company.
(6) Amounts shown net of unearned income.
(7) Net charge-offs ratio is equal to net charge-offs divided by average
managed net financed assets. Amounts for September 30, 1998 and 1997 have
been annualized.
(8) Allowance for possible losses on receivables ratio is equal to allowance
for possible losses on receivables divided by managed net financed assets.
(9) Includes finance receivables contractually past due for a period of greater
than 30 days and defaulted finance receivables.
(10) Total delinquencies ratio is equal to total delinquencies divided by
managed net financed assets.
(11) 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.
(12) Leverage ratio is equal to full recourse debt divided by shareholders'
equity. For purposes of this ratio, full recourse debt includes
securitization debt and other obligations guaranteed by DVI, Inc., the
Convertible Subordinated Notes and the existing 9 7/8% Senior Notes due
2004, but does not include warehouse debt.
(13) Return on assets is equal to earnings from continuing operations divided
by average total assets. Amounts for September 30, 1998 and 1997 have been
annualized.
(14) Return on equity is equal to earnings from continuing operations divided
by average shareholders' equity. Amounts for September 30, 1998 and 1997
have been annualized.
(15) For purposes of computing this ratio, earnings consist of earnings from
continuing operations before provision for minority interest, equity in
net loss of investees, income taxes, fixed charges and discontinued
operations. Fixed charges are interest expense. After giving effect to the
issuance of the notes and application of the net proceeds from their sale,
the ratio of earnings to fixed charges would have been 1.5 for the year
ended June 30, 1998; and would have been 1.6 for the three months ended
September 30, 1998.
S-7
<PAGE>
RISK FACTORS
The notes we plan to sell involve a significant degree of risk. Investors
should carefully consider the risk factors described below together with all of
the information set forth or incorporated by reference in this Prospectus
Supplement and the accompanying Prospectus in determining whether or not to
purchase any of the notes.
ADVERSE EFFECT OF SUBSTANTIAL INDEBTEDNESS AND LEVERAGE
We have substantial outstanding indebtedness and are highly leveraged. As of
September 30, 1998, we (including our consolidated subsidiaries) had total debt
of $679.3 million, of which $414.5 million was full recourse debt and $264.8
million was limited recourse debt. Of the $679.3 million of total debt, $456.5
million was long-term debt and $222.8 million was short-term debt. With the
offering of the notes by this Prospectus Supplement and the existing Senior
Notes due 2004, we have substantial debt service requirements. Our ability to
repay indebtedness will depend upon future operating performance. Future
operating performance depends upon the performance of our loan portfolio, the
success of our business strategy, prevailing economic conditions, levels of
interest rates and financial, business and other factors. Many of these factors
are beyond our control. The degree to which we are leveraged may also impair
our ability to obtain additional financing on acceptable terms. In addition,
the indenture related to the notes offered by this Prospectus Supplement and
our existing Senior Notes due 2004 restricts our ability to obtain non-
warehouse or limited recourse debt which may also limit our ability to
refinance existing indebtedness.
ABILITY TO SERVICE DEBT; NEGATIVE CASH FLOWS AND CAPITAL NEED
Although we believe that cash available from operations and financing
activities will be sufficient to enable us to make required interest payments
on the notes, we can not give any assurance that we will always be able to do
so. We may encounter liquidity problems which could affect our ability to meet
our payment obligations while attempting to withstand competitive pressures or
adverse economic conditions. In those circumstances, the value of the notes
could be materially adversely affected.
We expect to continue to operate on a negative cash flow basis as the volume
of our loan purchases and originations increases and our securitization program
grows. Our primary cash requirements include the funding of:
. loan originations and purchases pending their securitization and sale;
. fees and expenses incurred in connection with the securitization of
loans;
. loan originations in connection with our new financing services, for
which permanent sources of funding are still being developed;
. credit enhancement requirements in connection with the securitization
and sale of the loans, which include cash deposits, the funding of
subordinated tranches, and/or the pledge of additional equipment or
other loans that are funded with our capital;
. ongoing administrative and other operating expenses;
. interest and principal payments under our warehouse facilities and other
indebtedness; and
. delinquent accounts, as generally required by the terms of
securitizations.
In the future, we expect our primary sources of liquidity to be existing cash
fundings under our warehouse facilities, sales of loans through securitizations
and other permanent fundings, new sources of permanent funding which are being
developed for loan originations in connection with our new financing services,
the net proceeds from the sale of the notes and further issuances of debt or
equity.
We believe these sources will be sufficient to fund our liquidity
requirements for at least the next 12 months if our future operations are
consistent with management's current growth expectations. However, because we
expect to continue to operate on a negative cash flow basis for the foreseeable
future, we will need to effect debt or equity financings regularly. The type,
timing and terms of financing selected by us will be
S-8
<PAGE>
dependent upon our cash needs, the availability of other financing sources and
the prevailing conditions in the financial markets. We can not give any
assurance that any of these sources will be available at any given time or that
they will be available on favorable terms.
HOLDING COMPANY STRUCTURE; LIMITATIONS ON ACCESS TO CASH FLOW OF SUBSIDIARIES;
STRUCTURAL SUBORDINATION OF THE NOTES TO INDEBTEDNESS OF SUBSIDIARIES
The notes will be obligations solely of DVI, Inc. DVI, Inc. is a holding
company with no business operations of its own. Our assets consist primarily of
ownership interests in our operating subsidiaries which conduct all of our
operations. Consequently, our cash flow and our ability to meet our debt
service obligations depend upon the cash flow of our subsidiaries and the
payment of funds by the subsidiaries to us in the form of loans, dividends or
otherwise. Our subsidiaries are not obligated to pay any amounts due on the
notes or to make any funds available to us for payments on the notes or to meet
our working capital needs or other liabilities, or for any other reason. In
addition, their ability to make any payments will depend on their earnings, the
terms of their indebtedness, business, tax and legal restrictions. The notes
will effectively rank junior to all liabilities of our subsidiaries. In the
event of liquidation, dissolution or reorganization of a subsidiary and
following payment of these liabilities, the subsidiary may not have sufficient
assets remaining to make payments to us as a shareholder or otherwise. As of
September 30, 1998, our subsidiaries had total debt of $559.3 million, $294.5
million of which was full recourse and $264.8 million of which was limited
recourse.
DEPENDENCE ON WAREHOUSE FINANCING AND PERMANENT FUNDING PROGRAMS
In order to sustain the growth of our financing business, we depend upon
funding from warehouse facilities until we are able to fund our equipment and
other loans permanently. The funds we obtain through warehouse facilities are
full recourse short-term borrowings secured primarily by the underlying
equipment, medical receivables and other collateral. We typically repay these
borrowings with proceeds we receive when we permanently fund our equipment and
other loans.
At September 30, 1998, we had available an aggregate of approximately $543.0
million under various warehouse facilities, of which approximately $423.0
million was available for funding equipment loans and approximately $120.0
million was available for funding medical receivables loans. We can not give
any assurance that this type of warehouse financing will continue to be
available to us on acceptable terms. If we are unable to obtain such funds on
acceptable terms, we will have to limit our equipment and other loan
originations. This would have a material adverse effect on our financial
condition and results of operations.
Our principal form of permanent funding is securitization. Securitization is
a process in which a pool of equipment loans 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 we sponsor, equipment loans funded through the
securitizations must be credit enhanced to receive an investment grade credit
rating. In the securitizations we have sponsored to date, we have effectively
been required to furnish credit enhancement equal to the difference between (i)
the aggregate principal amount of the equipment loans we originated and
transferred to our special-purpose finance subsidiary and the related costs of
consummating the securitization and (ii) the net proceeds received in such
securitizations.
Our 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 securities we may
issue or place in securitizations; and
. the overall performance of our loan portfolio.
S-9
<PAGE>
We do not have binding commitments from financial institutions or investment
banks to provide permanent funding for our equipment or medical receivables
loans. If for any reason we were unable to access the securitization markets,
and/or obtain permanent funding for our equipment or other loans, we can not
provide any assurance that our lenders would refinance or extend the terms of
our warehouse facilities for a sufficient period of time for us to obtain
permanent funding or at all. If our lenders did not refinance or extend the
terms of our warehouse facilities, we could possibly be required to repay such
facilities, the consequence of which would have a material adverse effect on
our financial condition and results of operations.
ADVERSE EFFECT OF CUSTOMER DEFAULTS AND ASSOCIATED CREDIT RISK
Many of our customers are outpatient healthcare providers. Loans to such
customers require a high degree of credit analysis. In addition, we have
entered the long-term care and assisted care submarkets and recently, have
begun to provide asset-backed financing for emerging growth companies and
subordinated debt financing to our traditional customer base, all of which
require different types of credit analysis. Although we try to reduce our risk
of default and credit losses through our underwriting practices, loan servicing
procedures and the use of various forms of non-recourse or limited recourse
financing (in which the financing sources that permanently fund our equipment
and other loans assume some or all of the risk of default by our customers), we
remain exposed to potential losses resulting from a default by a customer.
Customers' defaults could result in the following:
. require us to make certain payments under our warehouse facilities;
. in permanent equipment and other funding arrangements, require us to
make payments to the extent of our remaining credit enhancement
position;
. the loss of the cash or other collateral pledged as credit enhancement
under our permanent equipment and other funding arrangements; or
. the loss of any remaining interest we may have kept in the underlying
equipment.
During the period beginning when we initially fund an equipment or other loan
to when we fund the loan on a permanent basis, we are exposed to full recourse
liability in the event of default by the borrower. While we have typically been
able to permanently fund our equipment and other loans, we may not be able to
permanently fund many of the loans in our international portfolio. While we are
currently in the process of securing permanent funding for our international
portfolio and are exploring opportunities to permanently fund our other
financing services, with respect to such loans and services we may be subject
to credit risk for a longer period of time. In some cases, this risk will
extend for the life of the loans. In addition, the terms of securitizations and
other types of structured finance transactions generally require us to replace
or repurchase equipment and other loans in the event they fail to conform to
the representations and warranties made by us, even in transactions otherwise
designated as non-recourse or limited recourse.
Defaults by our customers could also adversely affect our ability to obtain
additional financing in the future, including our 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 us in deciding whether and on what terms to make new
loans. In addition, the credit rating agencies often involved in
securitizations consider prior credit performance in determining the rating to
be given to the securities issued in securitizations sponsored by us.
Under our wholesale loan origination program, we purchase equipment loans
from originators that generally do not have direct access to the securitization
market as a source of permanent funding for their loans. Our 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. As a result,
we must independently verify credit information supplied by the originator.
Accordingly, we face a somewhat higher degree of risk when we acquire loans
under the wholesale loan origination program. During the twelve-month period
ended
S-10
<PAGE>
June 30, 1998 and the three-month period ended September 30, 1998, loans
purchased under the wholesale program constituted 13.7% and 6.5%, respectively,
of the total domestic loans originated during such periods. We can not give any
assurance that we will be able to avoid the credit risks related to wholesale
loan origination.
ADVERSE EFFECT OF FLUCTUATING INTEREST RATES
When we borrow funds through warehouse facilities, we are exposed to certain
risks caused by interest rate fluctuations. Although our equipment loans are
structured and permanently funded on a fixed interest rate basis, we use
warehouse facilities until permanent funding is obtained. Since the funds we
borrow through warehouse facilities are on a floating interest rate basis, we
use hedging techniques to protect our interest rate margins during the period
that warehouse facilities are used prior to an anticipated securitization and
sale. To manage our interest rate risk, we use derivative financial instruments
such as forward rate agreements, forward market sales or purchases of treasury
securities, and interest rate swaps and caps. We use these derivatives to
manage certain components of interest rate risk including mismatches of the
maturity of assets and liabilities on our balance sheet, hedging anticipated
loan securitizations and sales and interest rate spread protection. However, we
can not give any assurance that:
. our hedging strategy or techniques will be effective;
. our profitability will not be adversely affected during any period of
changes in interest rates; or
. the costs of hedging will not exceed the benefits.
A substantial and sustained increase in interest rates could adversely affect
our ability to originate loans. In certain circumstances and for a variety of
reasons, we may retain for an indefinite period certain of the equipment and
other loans we originate. In such cases, our interest rate exposure may
continue for a longer period of time.
POSSIBLE ADVERSE CONSEQUENCES FROM RECENT GROWTH
In the past three years, we originated a significantly greater number of
equipment, medical receivables and other loans than we did in previous years.
As a result of this growth, our managed net financed asset portfolio grew from
$494.9 million at June 30, 1995 to $1.4 billion at September 30, 1998. In light
of this growth, the historical performance of our loan portfolio, including
rates of credit loss, may not be useful in predicting future loan portfolio
performance. Any credit or other problems associated with the large number of
equipment and other loans recently originated are not yet apparent.
Since November 1997, we have provided private placement, loan syndication,
interim real estate financing, mortgage loan placement, and, to a lesser
extent, merger and acquisition advisory services to the healthcare industry.
More recently, we have also begun to offer asset-based financing to emerging
growth companies and subordinated debt financing to our traditional customer
base. We have not provided these products and services previously. We can not
give any assurance that we will be able to market these new products and
services successfully or at all, or that if we are successful in marketing
these products and services that the returns on such products and services will
be consistent with our historical financial results.
ADVERSE EFFECT OF A HIGH CUSTOMER CONCENTRATION
At September 30, 1998, approximately 10.6% of our managed net financed
receivables were due from two of our customers and their respective affiliates,
representing 6.3% and 4.3% of managed net financed receivables, respectively.
As a result, we are subject to the risks and uncertainties of these two
businesses and their respective affiliates. Adverse conditions affecting either
of these entities could have a material adverse effect on our ability to
collect the total amount of outstanding receivables from either of these
customers. While our customer concentration has decreased as the number of our
clients has increased over time, we can not give any assurance that such
concentration will continue to decrease in the future.
S-11
<PAGE>
RISKS OF INTERNATIONAL OPERATIONS; CURRENCY FLUCTUATIONS
The portion of our medical equipment loans originated outside the U.S. was
26.0% in the fiscal year ended June 30, 1998 and 15.2% in the three month
period ended September 30, 1998. Because of our relationships with certain
manufacturers of high-cost medical equipment who are conducting business and
expanding internationally, we anticipate that equipment loans originated
outside the U.S. will become a significant portion of our loan portfolio. With
the continuing expansion of our international business, an increasing portion
of our operations may continue to be subject to certain risks, including
currency exchange risks and exchange controls and potential adverse tax
consequences. These factors could have a material adverse effect on our
financial condition and results of operations.
The growth of our international business is significantly dependent on
referrals from manufacturers of diagnostic imaging equipment and other
manufacturers of medical equipment we finance. In addition, these manufacturers
occasionally provide credit support for or assume first loss positions with
respect to equipment financing they refer to us. These manufacturers are not
contractually obligated to give these referrals or to provide credit support or
assume first loss positions in connection with their referrals and we can not
give any assurance that they will continue to do so. If for any reason we no
longer received the benefits of these referrals or related credit support and
assumptions of first loss positions, our international growth would be
materially adversely affected.
Our equipment loans are denominated in both U.S. dollars and foreign
currencies. If denominated in U.S. dollars, our operating results are subject
to fluctuation based upon changes in the exchange rates of certain currencies
in relation to the U.S. dollar. We engage in hedging activities with respect to
our foreign currency exposure and management is continuing to monitor our
exposure to currency fluctuations and our hedging policies. However, we can not
give any assurance that such hedging techniques will be successful.
We are also subject to the adverse impact devaluation would have on our
international customers' ability to make payments under equipment loans.
Although we try to account for the risk of devaluation when originating our
international equipment loans, we can not give any assurance that we will be
successful.
In Latin America, our equipment loans are subject to "transfer risks" where a
foreign government may block foreign currencies from leaving the country during
economic downturns. If a foreign government were to take any action to block
foreign currencies from leaving its country, overseas creditors such as our
Company would be unable to collect payments on their loans. Since all of our
Latin American equipment loans are denominated in U.S. dollars, any transfer
restrictions on foreign currencies would have a material adverse effect on our
financial condition and results of operations.
RISKS RELATED TO THE MEDICAL RECEIVABLE FINANCING BUSINESS
Our medical receivables financing business generally consists of providing
loans to healthcare providers that are secured by their receivables.
Receivables are paid by groups such as insurance companies, governmental
programs and other healthcare providers. These loans may also be secured by
other types of collateral. While we expect to focus on this business as a
significant part of our growth strategy, we can not give any assurance that we
will be able to expand this business successfully or avoid related liabilities
or losses.
The following describes the unique risks involved in the medical receivables
financing business:
. Overstatements by healthcare providers of the quality and
characteristics of their medical receivables, which we analyze in
determining the amount of the line of credit to be secured by such
receivables. After our determination has been made, healthcare providers
could change their billing and collection systems, accounting systems or
patient records in a way that could adversely affect our ability to
monitor the quality and/or performance of the related medical
receivables.
. Technical legal issues associated with creating and maintaining
perfected security interests in medical receivables, specifically those
generated by Medicaid and Medicare claims.
S-12
<PAGE>
. Payors may make payments directly to healthcare providers that have the
effect (intentionally or otherwise) of circumventing our rights in such
payments.
. Payors may attempt to offset their payments to us against debts owed to
the payors by the healthcare providers.
. As a lender whose position is secured by receivables, we are less likely
to collect outstanding receivables in the event of a borrower's
insolvency than a lender whose position is secured by medical equipment
that the borrower needs to operate its business.
. A borrower that defaults on obligations secured by medical receivables
may require additional loans, or modifications to the terms of existing
loans, in order to continue operations and repay outstanding loans.
. A conflict of interest may arise when we act as servicer for an
equipment-based securitization and originate medical receivables loans
to borrowers whose equipment loans have been securitized.
. The fact that the use of structured finance transactions to fund medical
receivables is a relatively new process may impair our efforts to
develop suitable sources of funding.
Although we believe we have structured our credit policies and lending
practices to take into account these and other factors (including the recent
acquisition of a highly sophisticated collateral tracking system which will
allow us to improve the monitoring of medical receivables), we can not give any
assurance that we will not sustain credit losses in connection with our medical
receivables financing business. We also can not give assurance that the medical
receivables financing business will meet our growth expectations.
FAILURE TO COMPLY WITH GOVERNMENT REGULATIONS
Our finance business is subject to numerous federal and state laws and
regulations, which, among other things, may:
.require that we obtain and maintain certain licenses and qualifications;
.limit the interest rates, fees and other charges that we are allowed to
collect;
.limit or prescribe certain other terms of our finance receivables
arrangements with clients; and
.subject us to certain claims, defenses and rights of offset.
Although we believe that we are currently in compliance with applicable
statutes and regulations, we can not give any assurance that we will be able to
maintain such compliance without incurring significant expense. The failure to
comply with such statutes and regulations could have a material adverse effect
upon us. Also, the adoption of additional statutes and regulations, changes in
the interpretation and enforcement of current statutes and regulations, or the
expansion of our business into jurisdictions that have adopted more stringent
regulatory requirements than those in which we currently conduct business could
have a material adverse effect upon us.
RISKS ASSOCIATED WITH THE MEDICAL EQUIPMENT MARKET
Many factors beyond our control affect the demand for our equipment financing
services. In addition, to general economic conditions and fluctuations in
supply and demand, the demand for medical equipment may also be negatively
affected by reductions in reimbursement amounts paid to healthcare providers
for their services from third-party payors such as insurance companies,
government programs and other healthcare providers and increased use of managed
healthcare plans that often restrict the use of certain types of high
technology medical equipment. For the quarter ended September 30, 1998,
financing for purchases of magnetic resonance imaging machines, commonly
referred to as "MRI machines," accounted for approximately 13% (by dollar
volume) of the total loans originated by us. Any substantial decrease in our
loan originations for the purchase of MRI machines could have a material
adverse effect on the Company.
COMPETITION
The business of financing medical equipment is highly competitive. We compete
with equipment manufacturers that sell and finance sales of their own
equipment, finance subsidiaries of national and regional
S-13
<PAGE>
commercial banks and equipment leasing and financing companies. Many of our
competitors have significantly greater financial and marketing resources than
we do. In addition, the competition in the new markets recently targeted by our
Company, specifically the medical device financing market and medical
receivables financing market, may be greater than the levels of competition
historically experienced by us.
We believe 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 our high level of
penetration in this market. We can not give any assurance that new competitive
providers of financing will not enter the medical equipment financing market in
the future. To meet our long-term growth objectives, we must increase our
presence in our targeted markets for lower-cost medical devices and medical
receivables financing businesses. To achieve this goal we may be required to
reduce our margins to be competitive.
NO PRIOR PUBLIC TRADING MARKET FOR THE DEBT SECURITIES
Prior to the offering of the notes, there will have been no public market for
these notes and we can not give any assurance as to the liquidity of the
trading market for the notes or that an active public market will develop or,
if developed, will continue. We do not intend to list the notes on any national
securities exchange or to seek the admission thereof for trading on the
National Association of Securities Dealers Automated Quotation System. If an
active public market does not develop or is not maintained, the market price
and liquidity of the notes may be adversely affected.
DEPENDENCE UPON KEY PERSONNEL
Our ability to successfully continue our existing financing business, to
expand into targeted markets and to develop our newer businesses depends upon
our ability to retain the services of key management personnel. The loss of any
of these individuals or an inability to attract and maintain additional
qualified personnel could adversely affect our Company. We can not give any
assurance that we will be able to retain existing management personnel or
attract additional qualified personnel.
YEAR 2000 CONCERNS
We believe, based on discussions with our current systems vendors, that our
software applications and operational programs will properly recognize calendar
dates beginning in the year 2000. We have completed an assessment of our
hardware and software systems, as well as other systems such as security
systems and elevators. Based on these assessments, the only remediation that we
have found necessary are several software packages that need to be upgraded
through "off-the-shelf" releases. The upgrades will be applied during the first
quarter of calendar 1999 and testing will be completed shortly thereafter.
Since we have no major investment in "custom" programming requiring extensive
reprogramming, we do not anticipate the need to hire year 2000 solution
providers or programmers to rewrite custom code at this time.
The software upgrades mentioned above are part of our standard maintenance,
the cost of which is already covered by our ordinary software contracts and
will not require the incurrence of any additional expense. At this time, we
anticipate that our exposure to year 2000 compliance issues will be minimal.
Our medical receivables finance business is dependent on the successful
receipt of receivables from third party payors such as Medicare and Medicaid.
Any failure of third party payors to become year 2000 compliant may result in
the inability to collect medical receivables in a timely manner or at all. This
could have a material adverse effect on our medical receivables finance
business. We are currently unaware of any other relationships with third
parties which will have a material effect on our year 2000 issues. However, we
can not provide any assurance regarding a third party's ability to become year
2000 compliant.
We have begun to identify different scenarios, including year 2000 readiness,
that would cause a business interruption. Contingency plans are being developed
to resolve the most reasonably likely scenarios. Based on current information,
we believe that the year 2000 issue will not pose significant operational
problems to us.
S-14
<PAGE>
USE OF PROCEEDS
We anticipate that the net proceeds to the Company from the sale of the notes
in this offering will be approximately $50.6 million after deducting the
underwriting discounts and commissions and estimated offering expenses.
The primary purpose of the offering of notes is to provide us with additional
capital:
. to repay borrowings under certain of our warehouse facilities as
described below;
. to fund our growth, including increasing the amount of equipment and
medical receivables loans we can fund;
. to develop our international operations and new financing services; and
. for other working capital needs and general corporate purposes.
Initially, the net proceeds from this offering will be used to repay
borrowings under certain of our warehouse facilities including up to $5.0
million to pay down a portion of our warehouse facility provided by Prudential
Securities Credit Corporation, an affiliate of Prudential Securities
Incorporated, which is one of the underwriters in this offering. Borrowings
under this facility bear interest at variable rates (a weighted average
interest rate of 7.80% at September 30, 1998). Other than such repayment of
borrowings under the Prudential warehouse facility, the net proceeds from this
offering will not be used to pay down any warehouse facilities provided by
affiliates of the underwriters in this offering. We expect to repay all of our
outstanding borrowings under the Prudential warehouse facility on or prior to
its expiration on December 31, 1998. Such repayment will not be made with any
of the net proceeds from this offering. Pending the use of net proceeds
described above, we may invest the net proceeds in short-term, investment
grade, interest bearing securities or obligations of or obligations guaranteed
by the U.S. government. We expect to re-borrow amounts under our warehouse
facilities in the future to raise additional capital.
We will advance the net proceeds of the offering of the notes to DVI
Financial Services, one of our wholly-owned subsidiaries, in the form of a
loan.
S-15
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at September
30, 1998, and as adjusted to reflect the issuance and sale of the notes, after
deducting the underwriting discounts and commissions, our estimated offering
expenses and the application of the net proceeds from the sale of the notes to
repay borrowings under our warehouse facilities. This table may not contain all
of the information you need and should be read in conjunction with our
Consolidated Financial Statements, and related notes included in or
incorporated by reference into this Prospectus Supplement or the accompanying
Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
-------------------------
ACTUAL AS ADJUSTED
----------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Borrowings under warehouse facilities(1).............. $ 222,823 $ 172,229
=========== ===========
Long-term debt, net:
Discounted receivables (primarily limited
recourse)(2)......................................... $ 303,280 $ 303,280
9 7/8% Senior Notes due 2004.......................... 96,643 96,643
9 7/8% Senior Notes due 2004 offered hereby(3)........ -- 50,594
Other debt(4)......................................... 43,099 43,099
Convertible subordinated notes........................ 13,467 13,467
----------- -----------
Total long-term debt, net......................... $ 456,489 $ 507,083
----------- -----------
Shareholders' equity:
Preferred stock, $10.00 par value; authorized
100,000 shares; no shares issued................... -- --
Common stock, $0.005 par value; authorized
25,000,000 shares; outstanding 14,080,458 ......... 70 70
Additional capital.................................. 133,318 133,318
Retained earnings................................... 43,931 43,931
Cumulative translation adjustments.................. 243 243
----------- -----------
Total shareholders' equity........................ 177,562 177,562
----------- -----------
Total capitalization............................ $ 634,051 $ 684,645
=========== ===========
</TABLE>
- - --------
(1) Principally represents interim funding of receivables pending
securitization or other permanent funding. As of September 30, 1998, we had
$543.0 million available under various warehouse facilities and we had
borrowed an aggregate of $222.8 million thereunder.
(2) Represents debt from the permanent funding of receivables from
securitization or other structured finance transactions where the
securitization has been accounted for as a financing (on balance sheet
transaction) as opposed to a sale (off-balance sheet transaction). Of this
amount, $66.7 million was guaranteed by DVI, Inc. as of September 30, 1998.
(3) Represents anticipated proceeds from the offering of notes after deducting
the underwriting discounts and commissions and estimated offering expenses.
(4) Other debt consists of $9.9 million of unsecured debt ranking equally with
the notes. In addition, there is $33.2 million in secured debt of which
$24.9 million is limited recourse. The limited recourse facility is a loan
facility to the Latin America joint venture of which we own 59%.
S-16
<PAGE>
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
at June 30, 1997 and 1998 and for each of the three years in the period ended
June 30, 1998 are derived from our audited Financial Statements included in
this Prospectus Supplement. The Statement of Operations and Balance Sheet Data
at June 30, 1994, 1995 and 1996 and for each of the two years in the period
ended June 30, 1995 are derived from our 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, 1997 and 1998 have been derived from unaudited financial
statements of the Company and in the opinion of our management, include all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of our 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, 1998 are not necessarily indicative of future results. The
following data should be read in conjunction with our Financial Statements and
related notes included in or incorporated by reference into this Prospectus
Supplement and the accompanying Prospectus. 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,
------------------------------------------ ----------------
1994 1995 1996 1997 1998 1997 1998
------- ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Finance and other
income:
Amortization of finance
income................ $18,624 $33,425 $44,509 $49,535 $63,332 $14,240 $17,919
Other income........... 1,985 2,560 4,529 6,799 11,023 1,894 3,896
------- ------- ------- ------- ------- ------- -------
Total finance and other
income................. 20,609 35,985 49,038 56,334 74,355 16,134 21,815
Interest expense........ 8,833 22,860 30,489 38,395 49,212 11,628 12,543
------- ------- ------- ------- ------- ------- -------
Net interest and other
income................. 11,776 13,125 18,549 17,939 25,143 4,506 9,272
Net gain on sale of
financing
transactions........... 302 3,042 8,032 14,039 20,977 5,024 6,854
------- ------- ------- ------- ------- ------- -------
Net finance income...... 12,078 16,167 26,581 31,978 46,120 9,530 16,126
Selling, general and
administrative
expenses............... 6,049 7,891 9,933 14,117 18,493 3,786 6,646
Provision for possible
losses on receivables.. 1,716 1,261 2,325 2,386 4,735 992 1,505
------- ------- ------- ------- ------- ------- -------
Earnings from continuing
operations before
minority interest,
equity in net loss of
investees, and
provision for income
taxes.................. 4,313 7,015 14,323 15,475 22,892 4,752 7,975
Minority interest in net
loss of consolidated
subsidiaries........... -- -- -- -- 126 -- 69
Equity in net loss of
investees.............. (242) -- (66) (281) (439) (205) (92)
Provision for income
taxes.................. 1,811 2,946 6,092 6,631 9,721 1,957 3,408
------- ------- ------- ------- ------- ------- -------
Earnings from continuing
operations............. 2,260 4,069 8,165 8,563 12,858 2,590 4,544
Loss from discontinued
operations............. 3,145 -- -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Net earnings (loss)..... $ (885) $ 4,069 $ 8,165 $ 8,563 $12,858 $ 2,590 $ 4,544
======= ======= ======= ======= ======= ======= =======
</TABLE>
S-17
<PAGE>
<TABLE>
<CAPTION>
AS OF
AS OF JUNE 30, SEPTEMBER
-------------------------------------------- 30,
1994 1995 1996 1997 1998 1998
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Gross financed
receivables(1)......... $287,734 $475,803 $520,120 $650,376 $797,502 $920,255
Net financed
receivables(2)......... 239,347 400,642 454,398 580,637 728,135 837,921
Notes collateralized by
medical receivables.... 6,007 21,247 38,567 85,649 137,316 139,867
Total assets............ 265,949 432,876 560,939 634,528 816,920 975,262
Borrowings under
warehouse facilities... 34,586 155,172 168,108 44,962 82,828 222,823
Long-term debt, net:
Securitization debt.... 148,852 205,376 253,759 317,863 342,120 303,280
9 7/8% Senior Notes due
2004.................. -- -- -- 95,883 96,486 96,643
Other debt............. -- -- -- 8,168 15,808 43,099
Convertible
subordinated notes.... 14,112 13,754 13,809 13,324 13,439 13,467
-------- -------- -------- -------- -------- --------
Total long-term debt.... $162,964 $219,130 $267,568 $435,238 $467,853 $456,489
Shareholders' equity.... $ 33,993 $ 40,250 $ 85,302 $ 95,660 $172,285 $177,562
</TABLE>
<TABLE>
<CAPTION>
AS OF OR FOR THE
AS OF OR FOR THE THREE MONTHS ENDED
YEAR ENDED JUNE 30, SEPTEMBER 30,
-------------------------------------------------- --------------------
1994 1995 1996 1997 1998 1997 1998
-------- -------- -------- -------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
ADDITIONAL OPERATING AND
OTHER DATA:
Managed net financed
assets(3):
Domestic equipment..... $233,340 $473,626 $601,542 $809,090 $ 923,765 $833,897 $1,045,202
International
equipment............. -- -- -- 29,895 162,701 58,612 171,531
Medical
receivables(4)........ 6,007 21,247 38,567 86,858 136,562 104,712 139,105
-------- -------- -------- -------- ---------- -------- ----------
Total managed net
financed assets........ $239,347 $494,873 $640,109 $925,843 $1,223,028 $997,221 $1,355,838
Origination, commitments
and purchases:
Domestic equipment
origination and
purchases............. $157,400 $314,100 $316,757 $370,262 $ 396,276 $ 89,030 $ 191,050
International
origination and
purchases............. -- -- -- 31,461 136,600 30,219 23,523
Medical receivables
commitments and
purchases............. 5,600 23,900 40,000 101,100 183,260 20,950 33,350
-------- -------- -------- -------- ---------- -------- ----------
Total origination,
commitments and
purchases.............. $163,000 $338,000 $356,757 $502,823 $ 716,136 $140,199 $ 247,923
Net charge-offs......... $ 264 $ 477 $ 1,581 $ 436 $ 1,635 $ 360 $ 903
Net charge-offs
ratio(5)............... 0.15% 0.15% 0.28% 0.06% 0.15% 0.15% 0.29%
Allowance for possible
losses on receivables.. $ 2,498 $ 3,282 $ 4,026 $ 5,976 $ 9,955 $ 6,608 $ 11,894
Allowance for possible
losses on receivables
ratio(6)............... 1.04% 0.82% 0.63% 0.65% 0.81% 0.66% 0.88%
Total delinquencies(7).. $ 8,709 $ 22,567 $ 27,514 $ 33,153 $ 84,505 $ 44,006 $ 97,102
Total delinquencies
ratio(8)............... 3.64% 4.56% 4.30% 3.58% 6.91% 4.41% 7.16%
</TABLE>
- - --------
(1) Gross financed receivables consist of receivables in installments,
receivables in installments-related parties, recourse credit enhancements,
residual valuation, notes collateralized by medical receivables and
equipment on operating leases.
(2) Net financed receivables consist of gross financed receivables net of
unearned income.
(3) Managed net financed assets are the aggregate of (i) net financed assets
appearing on the Company's balance sheet and (ii) portions of receivables
that have been sold to third parties and are still serviced by the Company.
(4) Amounts shown net of unearned income.
(5) Net charge-offs ratio is equal to net charge-offs divided by average
managed net financed assets. Amount for September 30, 1998 has been
annualized.
(6) Allowance for possible losses on receivables ratio is equal to allowance
for possible losses on receivables divided by managed net financed assets.
(7) Includes finance receivables contractually past due for a period of greater
than 30 days and defaulted finance receivables.
(8) Total delinquencies ratio is equal to total delinquencies divided by
managed net financed assets.
S-18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
We are an independent specialty finance company that provides asset-based
financing to healthcare service providers. Through our medical equipment
finance business, we finance the purchase of diagnostic imaging and other
sophisticated medical equipment and also provide vendor financing programs.
Through our medical receivables finance business, we provide lines of credit
collateralized by third party medical receivables to a wide variety of
healthcare providers and offer warehouse and securitization services to other
healthcare finance providers. We have also expanded our financing activities to
include loan syndication, private placement, interim financing, mortgage loan
placement and, to a lesser extent, merger and acquisition advisory services,
asset-based financing for emerging growth companies and subordinated debt
financing. We provide these services principally in the U.S. and, to a lesser
extent, in Latin America, Europe, the U.K., Asia and Australia. Management
believes that our healthcare industry expertise and broad range of financing
programs have positioned us to become the primary source of financing for our
customers.
CERTAIN ACCOUNTING CONSIDERATIONS
Equipment Financing
For accounting purposes, we classify the equipment loans we originate as
notes secured by equipment, direct financing leases or operating leases.
Generally, in transactions where notes are secured by equipment and direct
financing leases, the obligor has substantially all of the benefits and risks
of ownership of the equipment. Operating leases generally provide only 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 our balance sheet as "investment in direct financing leases and
notes secured by equipment." For statement of operations purposes, those
transactions result in amortization of finance income over the transaction term
in the amounts computed using the interest method.
We enter 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 us. Fair market value transactions are those
transactions in which we retain a residual interest in the equipment. This
residual interest is recorded on our 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.
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 our 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 us. If the equipment is
returned to us, we must sell or lease the equipment to another user.
In transactions classified as notes secured by equipment and direct financing
leases that we permanently fund through securitization or other structured
finance transactions, which we treat as debt, income is deferred
S-19
<PAGE>
and recognized using the interest method over the respective term of the
transactions. If an obligor under a transaction defaults, we may not receive
all or a portion of the unamortized income associated with the transaction.
Medical Receivable Financing
In addition to our equipment finance business, we provide lines of credit to
a wide variety of healthcare providers that are secured by medical receivables
and other collateral and offer an interest-only line of credit to financial
intermediaries that purchase receivables from healthcare providers. The
interest and fee income generated from these loans is recognized over the terms
of the lines of credit, which are typically one to three years, and is recorded
as amortization of finance income.
Income Classifications
We have classified income under the categories of "amortization of finance
income," "other income" and "net gain on sale of financing transactions."
Amortization of finance income consists of the interest component of scheduled
payments on notes secured by equipment, 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 contract fees and late charges, dividends on investment in
investee's preferred stock, servicing fees, placement fees, portfolio
management fees, penalty fees, gains/losses from asset disposals, and amounts
received upon exercise of warrants issued by the Company. "Net gain on sale of
financing transactions" consists of gains recognized when we permanently fund
transactions through off balance sheet securitizations or other whole loan
sales.
RESULTS OF OPERATIONS
Impact of Financing Strategies on Results of Operations
Our financing strategy is to obtain permanent funding for most of our
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 (i) long-term
debt secured by equipment loans or medical receivable loans owned by us or (ii)
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 we sponsor a securitization,
we treat the proceeds as long-term debt on our financial statements and report
the amortization of finance income on the full amount of the loans, whereas
when we sell loans, we recognize the unamortized finance income at the time the
funding takes place. However, even in a funding treated as a sale, we may
recognize servicing income and/or interest income on our subordinated interest
over the remaining term of the equipment loans sold.
Over the past three years, we have focused our strategy on increasing our
market share. We can not give any assurance that our historical growth rate or
current profitability can be sustained in the future. Additionally, our expense
levels are based in part on our expectations as to future financing volumes and
we 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. We believe that general economic conditions have not had a
material adverse effect on our recent operating results. We can not give any
assurances, however, that general economic conditions will not have a material
adverse effect on us in the future.
Three Months Ended September 30, 1998 Compared to Three Months Ended September
30, 1997
Total finance and other income increased to $21.8 million for the three month
period ended September 30, 1998 from $16.1 million for the three month period
ended September 30, 1997. Amortization of finance income increased to $17.9
million from $14.2 million for the three month period ended September 30, 1998
as
S-20
<PAGE>
compared to the same period of the prior year. The increase primarily was a
result of the overall increase in the size of our loan portfolio. Other income
increased to $3.9 million in the three month period ended September 30, 1998
from $1.9 million in the comparable prior year period. The increase was due
mainly to fees earned on the larger portfolio, and service fees earned on
serviced assets.
Interest expense increased to $12.5 million for the three months ended
September 30, 1998 from $11.6 million for the three months ended September 30,
1997. The increase is primarily a result of the growth of our loan portfolio
and growth in international markets. The weighted average interest rate on
discounted receivables, the largest component of interest expense decreased to
7.86% as of September 30, 1998, compared to 8.41% as of September 30, 1997.
Net gain on sale of financing transactions increased to $6.9 million for the
three months ended September 30, 1998 from $5.0 million for the same period of
the prior fiscal year. Loans sold during the three month period ended September
30, 1998 were $72.7 million compared to $78.4 million during the same period of
the prior fiscal year. The increase in our net gain on sale of financing
transactions was partially due to the higher yields associated with the
portfolios of acquired companies.
Selling, general and administrative expenses for the first quarter ended
September 30, 1998 increased by 75.5% to $6.6 million from $3.8 million for the
same quarter of the prior fiscal year. The increase in our selling, general and
administrative expenses was primarily related to the expansion of our new
domestic and international businesses and our 36.0% growth in managed net
financed assets.
The provision for possible losses on receivables was $1.5 million for the
three month period ended September 30, 1998 as compared to $1.0 million for the
three month period ended September 30, 1997. On a quarterly basis, we evaluate
the collectibility of our receivables and record a provision for amounts deemed
uncollectible. In the opinion of management, the provisions are adequate based
on current trends in our delinquencies and losses.
Earnings before minority interest, equity in net loss of investees, and
provision for income taxes increased 67.8% to $8.0 million for the three month
period ended September 30, 1998 compared to $4.8 million for the same period
ended September 30, 1997. Net earnings increased 75.4% to $4.5 million from
$2.6 million in comparing the three month period ended September 30, 1998 to
the same period ended September 30, 1997. Diluted earnings per share increased
36.4% to $0.30 from $0.22 when comparing the three month period ended September
30, 1998 to September 30, 1997. The increase in diluted earnings per share
resulted from an increase in our net earnings, partially offset by an increase
in diluted shares.
Total shareholders' equity increased $5.3 million to $177.6 million at
September 30, 1998 from $172.3 million at June 30, 1998. The increase primarily
was due to net earnings of $4.5 million.
At September 30, 1998, we had available an aggregate of $543.0 million in
warehouse facilities of which $222.8 million was utilized.
Through September 30, 1998, we have completed 21 securitizations or other
structured finance transactions for medical equipment and medical receivables
financings totaling approximately $1.6 billion, including two public debt
issues totaling $75.7 and $90.0 million and 19 private placements of debt and
whole loan sales totaling $1.4 billion.
Year Ended June, 30, 1998 Compared To Year Ended June 30, 1997
Total equipment financing loans originated were $524.7 million in fiscal 1998
compared with $401.7 million in fiscal 1997, an increase of 30.6%. Net financed
assets totaled $728.1 million at June 30, 1998, an increase of $147.3 million
or 25.4% over the prior year. Not included in net financed assets were the
loans sold, but still serviced by us, which increased to $546.2 million as of
June 30, 1998 compared to $389.6 million as of June 30, 1997, an increase of
40.2%. Managed net financed assets, the aggregate of those
S-21
<PAGE>
appearing on our balance sheet and those which have been sold and are still
serviced by us, totaled $1.2 billion as of June 30, 1998, representing a 32.1%
increase over the total as of June 30, 1997.
In our medical receivable financing business, new commitments of credit in
fiscal 1998 were $183.2 million compared with $101.1 million in fiscal 1997, an
increase of 81.2%. Medical receivables funded at June 30, 1998 totaled $137.3
million, an increase of $51.7 million or 60.4% over the prior year.
Total finance and other income increased 32.0% to $74.4 million for the year
ended June 30, 1998 from $56.3 million in the prior year. A component of total
finance and other income, amortization of finance income, increased 27.9% to
$63.3 million for the year ended June 30, 1998 from $49.5 million for the year
ended June 30, 1997. The increase was primarily a result of the overall
increase in the size of our portfolio. The remaining component of total finance
and other income, other income, increased 62.1% to $11.0 million in fiscal 1998
as compared to $6.8 million in fiscal 1997. The increase is due mainly to fees
earned on larger portfolios, placement fees, and servicing income.
For the year ended June 30, 1998, interest expense increased 28.2% to $49.2
million from $38.4 million in the prior year. The increase in interest expense
is primarily a result of the growth of our loan portfolio and growth in
international markets. The weighted average interest rate on discounted
receivables, the largest component of interest expense, decreased to 8.02% as
of June 30, 1998 compared to 8.60% as of June 30, 1997.
The net gain on sale of financing transactions increased 49.4% to $21.0
million for the year ended June 30, 1998 compared with a gain of $14.0 million
for the same period in the prior year. Loans sold during the year ended June
30, 1998 were $292.7 million compared to $233.0 million during the prior fiscal
year. The increase is due mainly to better and more efficient executions, and
lower transaction costs resulting from larger transactions.
Selling, general and administrative expenses increased 31.0% to $18.5 million
for the year ended June 30, 1998 from $14.1 million for the year ended June 30,
1997. The increase over the prior fiscal year is related primarily to the
development of our medical receivables, vendor finance and international
businesses and the 38.0% growth in average managed net financed assets. To
support this growth, we increased our personnel to 193 employees from 137 one
year earlier.
The provision for losses on receivables was $4.7 million for the year ended
June 30, 1998 as compared to $2.4 million for the previous year. On a quarterly
basis, we evaluate our ability to collect our receivables and record a
provision for amounts deemed uncollectible. In the opinion of management, the
provisions are adequate based on current trends in our delinquencies and
losses. Our charge-offs for the quarters ended September 30, 1997, December 31,
1997, March 31, 1998, and June 30, 1998 were $360,000, $272,000, $556,000, and
$596,000, respectively, which represents 5.45%, 3.50%, 6.39%, and 5.99%
respectively, of the quarter-end allowance for losses.
Earnings before minority interest, provision for income taxes and equity in
net losses of investees increased 47.9% to $22.9 million for the year ended
June 30, 1998 compared to $15.5 million a year earlier. Net earnings were $12.9
million or $1.03 per diluted share for the year ended June 30, 1998 as compared
to net earnings of $8.6 million or $0.74 per diluted share in the prior year.
Our cash and cash equivalents at June 30, 1998 and June 30, 1997 were $15.2
million and $9.2 million, respectively. The following describes the changes
from June 30, 1997 to June 30, 1998 in the items which had the most significant
impact on our cash flow during the year ended June 30, 1998.
Our net cash provided by operating activities was $1.9 million for the year
ended June 30, 1998 compared to $69.8 million net cash provided by operations
for the year ended June 30, 1997. The decrease in cash provided during the year
ended June 30, 1998 is attributed mainly to the fiscal year 1997 collection of
the amount due from a 1996 portfolio sale.
S-22
<PAGE>
Our Company's net cash used in investing activities increased to $122.0
million for the year ended June 30, 1998, as compared to $105.9 million for the
year ended June 30, 1997. This increase is attributed primarily to cash used to
acquire equipment of $541.7 million during the year ended June 30, 1998
compared to $429.5 million for the year ended June 30, 1997. These uses of cash
were offset by $473.0 million and $373.0 million of portfolio receipts net of
amounts included in income and proceeds from the sale of financing transactions
for the same periods.
Our net cash provided by financing activities was $126.0 million for the year
ended June 30, 1998 compared to $42.9 million for the year ended June 30, 1997.
This results from a net increase in our borrowings over repayments of $66.3
million for the year ended June 30, 1998, as compared to a $41.6 million net
increase in borrowings over repayments for the year ended June 30, 1997. In
fiscal year 1998, the equity and private offerings provided $57.9 million.
Year Ended June 30, 1997 Compared To Year Ended June 30, 1996
Total equipment financing loans originated were $401.7 million in fiscal 1997
compared with $316.8 million in fiscal 1996, an increase of 26.8%. Net financed
assets totaled $580.6 million at June 30, 1997, an increase of $126.2 million
or 27.8% over the prior year. Not included in net financed assets were the
loans sold, but still serviced by us, which increased to $389.6 million as of
June 30, 1997 compared to $218.6 million as of June 30, 1996, an increase of
78.2%. Managed net financed assets, the aggregate of those appearing on our
balance sheet and those which have been sold and are still serviced by us,
totaled $925.8 million as of June 30, 1997, representing a 44.6% increase over
the total as of June 30, 1996.
In our medical receivable financing business, new commitments of credit in
fiscal 1997 were $101.1 million compared with $40.0 million in fiscal 1996, an
increase of 152.8%. Medical receivables funded at June 30, 1997 totaled $85.6
million, an increase of $47.0 million or 149.4% over the prior year.
Total finance and other income increased 14.9% to $56.3 million for the year
ended June 30, 1997 from $49.0 million the prior year. A component of total
finance and other income, amortization of finance income, increased 11.3% to
$49.5 million for the year ended June 30, 1997 from $44.5 million for the year
ended June 30, 1996. The increase was primarily a result of the overall
increase in the size of our loan portfolio. The remaining component of total
finance and other income, other income, increased 50.1% to $6.8 million in
fiscal 1997 as compared to $4.5 million in fiscal 1996. The increase was due
mainly to fees earned on larger portfolios and servicing income.
For the year ended June 30, 1997, interest expense increased 25.9% to $38.4
million from $30.5 million in the prior year. The increase in interest expense
was primarily a result of the growth of our loan portfolio and issuance of
Senior Notes. The weighted average interest rate on discounted receivables, the
largest component of interest expense, decreased to 8.60% as of June 30, 1997
compared to 8.64% as of June 30, 1996.
The net gain on sale of financing transactions increased 74.8% to $14.0
million for the year ended June 30, 1997 compared with a gain of $8.0 million
for the prior year. Loans sold during the year ended June 30, 1997 were $233.0
million compared to $175.1 million during the prior fiscal year. The increase
is due mainly to better and more efficient executions, and lower transaction
costs resulting from larger transactions.
Selling, general and administrative expenses increased 42.1% to $14.1 million
for the year ended June 30, 1997 from $9.9 million for the year ended June 30,
1996. The increase over the prior fiscal year was related primarily to the
development of our medical receivables, vendor finance and international
businesses and the 35.1% growth in average managed net financed assets. To
support this growth, we increased our personnel to 137 employees from 129 one
year earlier.
The provision for losses on receivables was $2.4 million for the year ended
June 30, 1997 as compared to $2.3 million for the previous year. On a quarterly
basis, we evaluate our ability to collect our receivables and
S-23
<PAGE>
record a provision for amounts deemed uncollectible. In the opinion of
management, the provisions were adequate based on current trends in our
delinquencies and losses. Our charge-offs for the quarters ended September 30,
1996, December 31, 1996, March 31, 1997, and June 30, 1997 were $10,000,
$5,000, $255,000 and $166,000, respectively, which represents 0.23%, 0.10%,
5.24% and 2.78%, respectively, or the quarter-end allowance for losses.
Earnings before minority interest, provision for income taxes and equity in
net losses of investees increased 8.0% to $15.5 million for the year ended June
30, 1997 compared to $14.3 million a year earlier. Net earnings were $8.6
million or $0.74 per diluted share for the year ended June 30, 1997 as compared
to net earnings of $8.2 million or $0.77 per diluted share in the prior year.
Our net cash provided by operating activities was $69.8 million for the year
ended June 30, 1997 compared to $71.2 million net cash used in operations for
the year ended June 30, 1996. The increase in cash provided during the year
ended June 30, 1997 was attributed mainly to the amount due from the portfolio
sale at June 30, 1996 being received.
Our net cash used in investing activities increased to $105.9 million for the
year ended June 30, 1997, compared to $25.4 million for the year ended June 30,
1996. This increase was attributed primarily to cash used to acquire equipment
and to finance notes secured by medical receivables of $477.8 million during
the year ended June 30, 1997 compared to $304.3 million for the year ended June
30, 1996. These uses of cash were offset by $373.0 million and $280.5 million
of portfolio receipts, net of amounts included in income and proceeds from the
sale of financing transactions for the same periods.
Our net cash provided by financing activities was $42.9 million for the year
ended June 30, 1997 down from $97.1 million for the year ended June 30, 1996.
This resulted from a net increase in our borrowings over repayments of $41.6
million for the year ended June 30, 1997, as compared to $59.2 million net
increase in borrowings over repayments for the year ended June 30, 1996. In
fiscal 1997, we completed a public offering of $100.0 million of Senior Notes.
In 1996, the equity offering provided $29.0 million.
LIQUIDITY AND CAPITAL RESOURCES
General
Our business requires substantial amounts of capital and borrowings. We
obtain warehouse funding from commercial and investment banks. These warehouse
borrowings are full recourse obligations (meaning that upon a default, the
lender has recourse against the collateral pledged to secure our obligations
and against the Company itself), while our 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 us). In the case of limited
recourse funding, we retain some risk of loss because we share in any losses
incurred and/or we may forfeit the residual interest (if any) we have in the
underlying financed assets should defaults occur.
A substantial portion of our 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 our warehouse
borrowings are used to temporarily fund the equipment loans and medical
receivables. These borrowings 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 our domestic and international equipment
financing businesses, our medical receivables loans business and our new
financing services, the amount of warehouse and permanent funding we require
has significantly increased. To meet our requirements for increased warehouse
funding, we have expanded our warehouse facilities with banks, and have
obtained warehouse facilities with investment banking firms we use for our
securitizations. To meet our requirement for increased permanent funding, we
S-24
<PAGE>
have enhanced our ability to fund equipment loans and medical receivable 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, our growth will be limited and we may be forced to use less attractive
funding sources in order to ensure our liquidity.
In addition to the interim and permanent funding referred to above, our
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 our loans. These funds essentially provide the
credit enhancement for our leveraged investments in our loan portfolios, and
typically are obtained through sales of debt or equity securities by us.
Although we believe that cash available from operations, financing and
investing activities will be sufficient to enable us to make required interest
payments on the notes and our other debt obligations (including our existing
Senior Notes due 2004 issued in 1997 which terms are substantially the same as
those of the notes offered hereby) and other required payments, we can not give
any assurance in this regard and we may encounter liquidity problems which
could affect our ability to meet such obligations while attempting to withstand
competitive pressures or adverse economic conditions.
Warehouse Facilities
At September 30, 1998, we had available an aggregate of $423.0 million under
various warehouse facilities for equipment loan financing. Our primary credit
facility, a revolving credit agreement with a syndicate of banks, referred to
as the Agreement, provides for the borrowing of up to $137.0 million.
Borrowings under this facility bear interest based at our option of (i) prime
minus 0.25% or (ii) from 1.00% to 1.20% over the 30, 60 or 90-day LIBOR rate
based on our leverage ratio as defined in the Agreement. The Agreement is
renewable annually at the bank syndicate's discretion. The Agreement prohibits
us from paying dividends other than dividends payable solely in shares of our
stock and limits borrowings to specified levels determined by ratios based on
tangible net worth. As of September 30, 1998, we were in compliance with the
financial covenants of the Agreement.
We also have two $100.0 million interim funding facilities with investment
banking firms to fund certain equipment loans which are to be securitized.
Loans made under these facilities bear interest at a rate of 0.80% over the 30-
day LIBOR rate. Borrowings under the facility are secured by certain equipment
loans and the equipment financed thereunder. In addition, we have $66.0 million
of loan warehouse capacity which includes a $50.0 million facility for loans
originated in Brazil, a $6.0 million facility for loans originated in Australia
and a $10.0 million facility for loans originated in Germany.
We have a $5.0 million facility with a bank for the funding of equipment
loans ineligible for securitization and a $15.0 million facility with a bank
primarily for the funding of interim real estate mortgage loans for assisted
living facilities.
We have a credit facility for our medical receivables financing business. The
facility is a revolving credit facility with a syndicate of banks for
borrowings up to $95.0 million. Borrowings under this facility bear interest at
LIBOR plus 1.45% and mature in April 1999. In addition, we have a $25.0 million
facility with a bank for the funding of medical receivables loans ineligible
for securitization.
Our use of securitization significantly affects our need for warehouse
facilities. Before completing a securitization, we are required to hold loans
in warehouse facilities until a sufficient quantity is accumulated to meet the
various requirements of the credit rating agencies and others involved, and to
make a securitization cost effective. Generally, loans totaling $75.0 to $250.0
million will be placed in each securitization pool.
S-25
<PAGE>
The table below sets forth, as of September 30, 1998, the name of the primary
lender for each warehouse facility, the total amount it has committed to
provide, the total amount outstanding under the facility and the expiration
date of the facility.
<TABLE>
<CAPTION>
WAREHOUSE FACILITIES
SEPTEMBER 30, 1998
--------------------------------------
COMMITMENT OUTSTANDING EXPIRATION DATE
---------- ----------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
DOMESTIC
Equipment Finance:
Fleet Bank N.A., as Agent.............. $137,000 $ 71,986 2/28/99
Prudential Securities Credit
Corporation........................... 100,000 48,019 7/31/99
Lehman Brothers Inc.................... 100,000 22,221 9/5/98
Prime Bank............................. 5,000 2,423 1/29/99
Medical Receivables:
PNC Bank, as Agent..................... 95,000 13,235 4/29/99
Bank of America Business Credit........ 25,000 15,963 9/29/99
Other:
Fleet Bank N.A., as Agent.............. 15,000 -- 9/28/99
-------- --------
Total................................ $477,000 $173,847
======== ========
INTERNATIONAL
Prudential Securities Credit
Corporation........................... $ 50,000 $ 36,900 12/31/98
BW Capital Markets..................... 10,000 9,989 9/15/99
Rabo Australia Limited................. 5,967 2,087 5/11/99
-------- --------
Total................................ $ 65,967 $ 48,976
======== ========
Total worldwide.................... $542,967 $222,823
======== ========
</TABLE>
Permanent Funding Method
We have completed 21 securitizations for medical equipment and medical
receivables financings totaling $1.6 billion, including two public debt issues
of $75.7 million and $90.0 million and 19 private placements of debt and whole
loan sales totaling $1.4 billion. In January 1996, we completed a $25.0 million
private placement securitization of medical receivable loans and in February
1998 completed a $75.0 million private placement to fund our medical
receivables financing business. We expect to continue to use securitization, on
both a public and private basis, or other structured finance transactions as
our principal means to permanently fund our loans for the foreseeable future.
If for any reason we were to become unable to access the securitization market
to permanently fund our equipment loans, the consequences for us would be
materially adverse.
Our use of securitization significantly affects our need for warehouse
facilities and our liquidity and capital requirements due to the amount of time
required to assemble a portfolio of loans to be securitized. When using
securitization, we are required to hold loans until a sufficient quantity,
generally $75.0 to $250.0 million, is accumulated so as to attract investor
interest and allow for a cost effective placement. This increases our exposure
to changes in interest rates and temporarily reduces our warehouse facility
liquidity.
We have a $180.0 million facility with an option to sell to it certain
equipment loans and leases. As of September 30, 1998, there was $153.0 million
sold to this facility. Our obligations under this facility include servicing of
the assets and assisting the owner in the securitization of the assets if the
owner chooses to securitize.
For accounting purposes, our 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 our balance sheet as an asset for their originally contracted term as a
result of the
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<PAGE>
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 our balance sheet and results in the Company
recognizing a gain on the sale of the underlying loans upon completion of the
securitization.
We continually seek to improve the efficiency of our permanent funding
techniques by reducing up-front costs and minimizing the cash requirements. We
may consider 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.
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 our case, the limit is generally about 3%). Because of these
concentration requirements we generally must accumulate in excess of $150
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 our warehouse facilities at any point in time can be placed in
one securitization.
We do not have binding commitments for permanent funding, either through
securitization or whole loan sales. We have non-binding agreements with
investment banking entities to fund future loans through securitization. While
we expect to be able to continue to obtain the permanent funding we require for
our equipment financing and medical receivable financing business, we can not
give any assurance that we 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 us, our financing activities would be adversely affected. We
believe that our present warehouse and permanent funding sources are sufficient
to fund our current needs for our equipment and medical receivables financing
businesses.
Hedging Strategy
Although our equipment loans are structured and permanently funded on a fixed
interest rate basis, we use warehouse facilities until permanent funding is
obtained. Since funds borrowed through warehouse facilities are obtained on a
floating interest rate basis, we are exposed to a certain degree of risk caused
by interest rate fluctuations. When we originate equipment loans, we base our
pricing in part on the "spread" we expect to achieve between the interest rate
we charge our equipment loan customers and the effective interest cost we will
pay when we permanently fund 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 we
realize on our equipment loans and the interest rate that we pay under our
warehouse facilities or under a permanent funding program. In an attempt to
protect ourselves against that risk, we use a hedging strategy. We use
derivative financial instruments, such as forward rate agreements, Treasury
locks, and interest rate swaps, caps and collars, to manage our 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. We seek 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.
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<PAGE>
There can be no assurance that our hedging strategy or techniques will be
effective, that our profitability 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 our ability to originate loans. In certain
circumstances, we may, for a variety of reasons, retain for an indefinite
period certain of the equipment loan we originate. In such cases, our interest
rate exposure may continue for a longer period of time than we otherwise
consider desirable.
Foreign Exchange Forward Contracts
We have international operations and foreign currency exposures at some of
these operations due to lending in currencies other than the local currency. As
a general practice, we have not hedged the foreign exchange exposure related to
either the translation of overseas earnings into U.S. dollars, or the
translation of overseas equity positions back to U.S. dollars. A foreign
exchange forward contract is used to hedge the amount receivable to the U.S.
parent for a specific portfolio in Deutsche marks. At September 30, 1998, we
had 20.0 million Deutsche marks in forward contracts and cross currency
interest rate swaps. Foreign exchange forward contracts are accounted for as
hedges of foreign currency. The net gain/loss deferred at September 30, 1998 is
immaterial.
Income Tax Issues
Historically, we have deferred a portion of our federal and state income tax
liabilities because of our ability to obtain depreciation deductions from
transactions structured as fair market value leases. In addition, we have
structured all sales of financing transactions since the quarter ended June 30,
1997 as borrowings for tax purposes versus a sale for book (GAAP) purposes.
Future sales of financing transactions may also be structured in this manner.
Additionally, we believe our effective tax rate will increase in future periods
as a result of our inability to fully recognize for federal tax purposes, taxes
which have been paid in foreign countries.
Inflation
We do not believe that inflation has had a material effect on our operating
results during the past three years. We can not give any assurance that our
business will not be affected by inflation in the future.
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<PAGE>
BUSINESS
OVERVIEW
We are an independent specialty finance company that provides asset-based
financing to healthcare service providers. Our core businesses are medical
equipment finance and medical receivables finance. We provide these services
principally in the U.S. and are developing a significant presence in Latin
America as well as operations in Europe, the U.K., Asia, and Australia. We also
provide loan syndication, private placement, interim real estate financing,
mortgage loan placement and, to a lesser extent, merger and acquisition
advisory services, asset-backed financing for emerging growth companies and
subordinated debt financing. As of September 30, 1998, our managed net financed
assets and shareholders' equity were $1.4 billion and $177.6 million,
respectively.
We principally serve the financing needs of middle market healthcare service
providers, such as outpatient healthcare providers, medical imaging centers,
physician group practices, integrated healthcare delivery networks and
hospitals. Many of our customers are entrepreneurial, growing companies that
have capitalized on trends affecting the healthcare delivery systems in the
U.S. and other countries to build their businesses. These trends include:
. significant growth in the level of healthcare expenditures worldwide;
. dramatic efforts by governmental and market forces to reduce healthcare
delivery costs and increase efficiency;
. favorable demographic and public policy trends worldwide;
. growth, consolidation and restructuring of healthcare service providers;
and
. advances in medical technology which have increased the demand for
healthcare services and the need for sophisticated medical diagnostic
and treatment equipment.
As a result of these trends, our business has grown substantially. From June
30, 1995 to September 30, 1998, our managed net financed receivables portfolio
increased 183% to approximately $1.4 billion from $494.9 million. During this
same period of substantial portfolio growth, our net charge-offs and
delinquencies have remained low.
Medical Equipment Finance
Our medical equipment finance business operates by:
. providing financing directly to end users of diagnostic imaging and
other sophisticated medical equipment;
. providing financing directly to end users of lower cost medical devices;
. providing domestic and international finance programs for vendors of
diagnostic and other sophisticated medical equipment; and
. to a lesser extent, purchasing medical equipment loans and leases
originated by regional leasing companies through a wholesale loan
origination program.
Our typical equipment loans for diagnostic, patient treatment and other
sophisticated medical equipment (originated both domestically and
internationally), range from $200,000 to $3.0 million, while equipment loans
for lower cost medical devices range from $5,000 to $200,000. Virtually all of
our equipment loans are structured so 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 our equipment loans are structured as notes secured
by equipment or direct financing leases with a bargain purchase option, our
exposure to residual asset value is limited; it was $24.9 million at September
30, 1998. At September 30, 1998, our managed portfolio of equipment financing
loans was $1.2 billion.
We have traditionally focused our financing activities on the domestic
outpatient diagnostic and treatment services sector of the healthcare industry,
typically consisting of radiologists and other diagnostic service
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<PAGE>
providers who were among the first in the domestic healthcare industry to move
away from the hospital setting toward outpatient treatment centers. We expect
the range of services we provide in an outpatient setting to expand and intend
to focus on the equipment used and medical receivables generated as a result of
that expansion.
In recent years, we have expanded our international business significantly.
Internationally, we finance the purchase of diagnostic imaging and other
sophisticated medical equipment by private clinics, diagnostic centers and
hospitals. Our international business is focused on providing finance programs
for equipment manufacturers doing business in Latin America, Europe, the U.K.,
Asia and Australia. We believe our presence in these regions enhances our
relationships with certain medical equipment manufacturers and permits us to
capitalize on the growing international markets for medical equipment
financing. We view continued expansion of our relationships with medical
equipment vendors and manufacturers as an integral component of our growth
strategy and intend to continue to expand our medical equipment finance
activities outside the U.S. We also believe that by helping vendors and
manufacturers finance their customers' equipment purchases outside the U.S., we
will encourage those vendors and manufacturers to increase the financing
opportunities they refer to us within the U.S. At September 30, 1998, our
managed portfolio of international equipment loans was $171.5 million.
Medical Receivables Finance
Our medical receivables finance business operates by:
. providing lines of credit to a wide variety of healthcare providers; and
. offering an interest-only revolving line of credit to financial
intermediaries that purchase receivables from healthcare providers
Substantially all of the lines of credit are collateralized by third party
medical receivables due from Medicare, Medicaid, HMOs, PPOs, commercial
insurance companies, self insured corporations and, to a limited extent, other
healthcare service providers. We generally advance only 70% to 85% of our
estimate of the net collectible value of the eligible receivables from third
party payors. Clients continue to bill and collect the accounts receivable,
subject to lockbox collection and sweep arrangements established for our
benefit. We conduct extensive due diligence on our potential medical
receivables clients for all our financing programs and follow underwriting and
credit policies in providing financing to customers. Our credit risk is
mitigated by our ownership of or security interest in all receivables, eligible
and ineligible. We also recently acquired a highly sophisticated collateral
tracking system which will allow us to improve the monitoring of medical
receivables. Our medical receivables loans are structured as floating rate
lines of credit. These lines of credit typically range in size from $500,000 to
$15.0 million; however, in certain circumstances commitments ranging from $20.0
million to $40.0 million are also provided to financial intermediaries for
purchasing receivables from healthcare providers. At September 30, 1998, our
portfolio of medical receivables loans was $140.0 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 approximately $500,000, the
principal sources of financing generally are limited to specialty finance
companies or factoring companies that purchase receivables at a discount. We
believe 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. Our strategy in medical receivables financing is to
differentiate ourselves from many of our competitors by offering loans secured
by medical receivables rather than factoring those receivables at a discount.
We believe that loans secured by medical receivables are often more attractive
to borrowers that generate high-quality medical receivables because those
borrowers find our financing has a lower cost than the cost to those borrowers
of factoring their receivables.
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<PAGE>
Additional Financing Services
Management believes that the long-term care and assisted care markets and
emerging growth companies have been underserved by traditional financing
sources and that many firms have both a need for and the creditworthiness to
support working capital financing. We established DVI Merchant Funding and DVI
Private Capital, divisions of DVI Financial Services Inc., and recently
acquired Third Coast Capital, to serve these markets and companies. Through DVI
Merchant Funding we provide fee-based advisory services such as private
placement, loan syndication, interim real estate financing, mortgage loan
placement and, to a lesser extent, mergers and acquisitions advisory services
to our customers operating in the long-term care, assisted care and specialized
hospital markets. Through DVI Private Capital, we provide subordinated debt
financing to our traditional customer base and through Third Coast Capital, we
provide asset-based financing, including lease lines of credit, to emerging
growth companies.
BUSINESS STRATEGY
Our goal is to be the leading provider of asset-based financing services to
growing segments of the healthcare industry and to be the primary source for
all of the financing needs of our customers. The principal components that we
believe will enable us to attain this goal include:
. Generating additional financing opportunities with equipment
manufacturers and their customers in domestic and international
markets. We view continued expansion of our relationships with medical
equipment manufacturers as an integral component of our growth strategy
and intend, to the extent appropriate in the pursuit of that objective,
to continue to expand our medical equipment finance activities outside
the U.S. We have formed international joint ventures or established
branch offices or subsidiaries in Latin America, Europe, the U.K., Asia
and Australia which provide medical equipment financing in these regions
to strengthen our relationships with certain manufacturers of medical
equipment and to capitalize on the growing international markets for
medical equipment financing. We believe that by helping manufacturers to
finance their customers' equipment purchases outside the U.S. we will
encourage those manufacturers to increase the finance opportunities they
refer to us within the U.S.
. Continuing to expand medical receivables finance business. We intend to
further expand our medical receivables financing business by generating
financing opportunities through our existing medical equipment financing
customer base, particularly from those customers that are expanding to
provide additional healthcare services. We intend to maintain a strategy
of differentiating ourselves from many of our competitors by continuing
to offer loans secured by medical receivables rather than factoring
those receivables at a discount.
. Expanding our presence in the lower cost medical devices market. We are
seeking to use our reputation as a medical equipment financing
specialist and our 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 which includes
diagnostic and patient treatment devices. As part of this strategy, we
recently acquired substantially all the assets and retained 39 employees
of a 15-year old "small" ticket medical equipment financing business to
serve as a platform for the expansion of our vendor sales program into
this market. As of September 30, 1998, loans originated by the acquired
business were $59.7 million.
. Offering fee-based financing services to healthcare providers. Our goal
is to become the primary source for all of the financing needs of our
customers. Towards this end, we have expanded the financial services we
offer to our customers to include, among other things, real estate
financing and funding to finance healthcare related acquisitions. We
intend to continue to introduce new financing products to service the
needs of our customers and to leverage our existing expertise in the
healthcare markets to become the preferred provider of healthcare
related finance within our chosen segments of the healthcare markets.
. Acquiring specialty businesses. Growth through acquisitions of specialty
businesses that will fit within our existing operations and long-term
business strategy will allow us to expand into other
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<PAGE>
segments of the healthcare industry. During the last 18 months, we
acquired a small healthcare merchant banking operation, a small ticket
medical equipment financing business and a provider of asset-based
financing for emerging growth companies and have integrated these
activities with our financing services offered to the healthcare
industry. Through these acquisitions, we intend to significantly expand
our presence in new markets.
DVI, Inc. conducts its business principally through two operating
subsidiaries, DVI Financial Services Inc., referred to as "DVI Financial
Services" and DVI Business Credit Corporation, referred to as "DVI Business
Credit". We conduct securitizations through special purpose indirect wholly-
owned subsidiaries. We also conduct other structured financings through limited
purpose subsidiaries or through our operating subsidiaries. The borrowers under
our various warehouse credit facilities are DVI Financial Services or DVI
Business Credit.
SALES AND MARKETING
We generate most of our financing opportunities from two sources:
. medical equipment manufacturers that use third parties to finance the
sale of their products; and
. healthcare providers with whom our sales organization has relationships.
Generally, medical equipment manufacturers refer customers to us for
financing because they believe we have 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.
We have established a close working relationship, both domestically and
internationally, with major manufacturers of diagnostic imaging equipment by
meeting their needs to arrange financing for the higher cost equipment they
sell to healthcare providers. As a result of some of these relationships with
medical equipment manufacturers, especially those targeting the international
markets, we have formed joint ventures or subsidiaries to provide medical
equipment financing to the customers of the manufacturer in the international
market. We currently have joint ventures or subsidiaries in Latin America,
Europe, the U.K., Asia and Australia. We believe that these relationships
afford us a competitive advantage over other providers of medical equipment
financing.
Our target market for the medical receivables lines of credit we originate
includes "middle market" healthcare companies and providers with annual
revenues between $10.0 and $125.0 million. By definition, this sector of the
marketplace precludes both start-up healthcare companies as well as extremely
mature or rated medical organizations that can obtain traditional bank
financing. The medical receivables loan business entails significant risks and
capital requirements. This sector has been one that most traditional financing
sources have avoided due to the payor complexity and specialization required.
"Middle market" companies and providers that comprise our target market include
the following:
. Specialty Outpatient Clinics: Imaging centers, surgery centers, oncology
centers and medical laboratories.
. Hospitals: Acute care and sub-acute facilities, community and specialty
hospitals.
. Health Service Companies: Home healthcare, nursing homes, skilled
nursing, physical and occupational therapy, pharmacy, infusion, and
specialty treatment centers.
. Medical Practitioners: Medical groups, individual physicians with large
practices and management service organizations ("MSOs").
Our sales and marketing organization consists of 37 healthcare finance
specialists located in various parts of the U.S. These individuals generally
have a credit industry and/or medical equipment background. We generally locate
sales personnel in geographic areas where they have knowledge of the local
market. We
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<PAGE>
believe that sales personnel who understand local economic and political trends
are a valuable component of our credit underwriting process.
PORTFOLIO PROFILE
The following table sets forth certain information with respect to our
equipment loan origination, including loan purchases and medical receivables
commitments for the years ended June 30, 1996, 1997 and 1998 and for the three-
month period ended September 30, 1998.
EQUIPMENT LOAN ORIGINATION AND PURCHASES
AND MEDICAL RECEIVABLES COMMITMENTS AND PURCHASES
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED JUNE 30, ENDED
----------------------------------------------- SEPTEMBER 30,
1996 1997 1998 1998
--------------- --------------- --------------- ---------------
PERCENT PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
------ -------- ------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
DIAGNOSTIC/TREATMENT
EQUIPMENT(1)
Equipment Financed
Domestically:
Magnetic Resonance
Imaging (MRI).......... $152.7 42.9% $126.8 25.2% $119.5 16.7% $ 32.2 13.0%
Computerized Tomography
(CT)................... 21.2 5.9 21.5 4.3 18.6 2.6 5.2 2.1
Ultrasound.............. 4.0 1.1 10.2 2.0 7.4 1.0 1.0 0.4
Medical devices(2)...... 42.9 12.0 67.7 13.5 44.9 6.3 51.7 20.8
Imaging systems......... 18.5 5.2 24.8 4.9 13.8 1.9 3.6 1.5
X-Ray................... 1.9 0.5 6.7 1.3 1.9 0.3 0.7 0.3
Radiation therapy....... 8.4 2.4 12.5 2.5 8.4 1.2 7.6 3.1
Other................... 67.2 18.8 100.0 19.9 181.8 25.3 89.1 35.9
------ ----- ------ ----- ------ ----- ------ -----
Total Equipment Financed
Domestically........... 316.8 88.8 370.2 73.6 396.3 55.3 191.1 77.1
Equipment Financed
Internationally........ -- -- 31.5 6.4 136.6 19.1 23.5 9.5
Secured Lines of
Credit(3)
Medical receivable lines
of credit committed.... 40.0 11.2 101.1 20.0 183.2 25.6 33.3 13.4
------ ----- ------ ----- ------ ----- ------ -----
Total DVI, Inc.......... $356.8 100.0% $502.8 100.0% $716.1 100.0% $247.9 100.0%
====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
- - --------
(1) Percentages are based on the original cost of equipment financed.
(2) Defined as all equipment located in a medical facility or laboratory
including, but not limited to, hyperbaric chambers, IV pumps,
teleradiology/telecardiology systems, blood gas analyzers, endoscopy
systems, and medical beds.
(3) Percentages are based on the total dollar volume of the amounts committed
under the lines of credit.
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<PAGE>
The following table sets forth certain information with respect to the
domestic geographic distribution of our servicing portfolio's original
equipment cost as of September 30, 1998.
DOMESTIC GEOGRAPHIC DISTRIBUTION OF EQUIPMENT COST BY TOP 10 STATES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL EQUIPMENT
STATE EQUIPMENT COST LOAN PORTFOLIO
- - ----- -------------- ---------------
<S> <C> <C>
New York......................................... $232,873 14.2%
California....................................... 219,153 13.4
Texas............................................ 148,137 9.0
Florida.......................................... 134,399 8.2
New Jersey....................................... 122,214 7.4
Pennsylvania..................................... 79,670 4.9
Arizona.......................................... 52,697 3.2
Illinois......................................... 42,046 2.6
Ohio............................................. 36,851 2.2
Maryland......................................... 28,634 1.7
</TABLE>
The following table sets forth the domestic geographic distribution of our
medical receivables portfolio as of September 30, 1998.
DOMESTIC GEOGRAPHIC DISTRIBUTION OF MEDICAL RECEIVABLES PORTFOLIO BY TOP 10
STATES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
OUTSTANDINGS AS
A % OF
STATE COMMITMENT OUTSTANDINGS TOTAL PORTFOLIO
- - ----- ---------- ------------ ---------------
<S> <C> <C> <C>
California.............................. $60,800 $30,169 21.7%
Oregon.................................. 40,000 23,055 16.6
New York................................ 51,000 20,805 15.0
Florida................................. 56,150 18,938 13.6
Texas................................... 35,650 16,259 11.7
New Jersey.............................. 21,250 14,957 10.8
Georgia................................. 15,404 5,007 3.6
Oklahoma................................ 4,500 3,028 2.2
Maryland................................ 2,000 1,832 1.3
Delaware................................ 2,500 1,763 1.3
</TABLE>
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<PAGE>
The following table sets forth certain information with respect to the
international geographic distribution of our servicing portfolio's original
equipment cost as of September 30, 1998.
INTERNATIONAL GEOGRAPHIC DISTRIBUTION OF EQUIPMENT COST BY TOP 10 COUNTRIES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PERCENTAGE OF
EQUIPMENT TOTAL EQUIPMENT
COUNTRY COST LOAN PORTFOLIO
- - ------- --------- ---------------
<S> <C> <C>
Brazil................................................ $105,982 6.5%
Argentina............................................. 27,918 1.7
U. K.................................................. 12,488 0.8
Colombia.............................................. 11,467 0.7
Turkey................................................ 9,811 0.6
Germany............................................... 4,391 0.6
Australia............................................. 5,132 0.3
Yugoslavia............................................ 3,271 0.2
Hungary............................................... 2,564 0.2
Chile................................................. 1,547 0.1
</TABLE>
LOAN CHARACTERISTICS
Equipment Loans
Our typical equipment loans for diagnostic, patient treatment and other
sophisticated medical equipment (originated both domestically and
internationally), range from $200,000 to $3.0 million, while equipment loans
for lower cost medical devices range from $5,000 to $200,000. Virtually all of
our equipment loans are structured such that the full cost of the equipment and
all financing costs are repaid during the financing term which is typically
five years. In many of our equipment loans, we obtain liens on all of the
borrower's assets and guarantees from equity owners and other affiliates of the
borrowers. Where the borrower has multiple financings with us, the loans
generally contain cross default provisions. We often take a pledge of the stock
of the corporate entities that own and operate the equipment.
Our equipment loans are structured on a "net" basis, requiring the obligor to
pay for equipment maintenance and all other operating expenses, including taxes
and insurance and requiring 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 our equipment loans range from 36 to 84 months. As
of September 30, 1998 approximately 88.4% (as measured by equipment cost) of
our loan portfolio had an initial term of 72 months or less. Our policy is to
structure our equipment loans so that the obligor pays for the full cost of the
equipment and the financing during the financing term.
Medical Receivables Loans
Our medical receivables finance business consists primarily of providing
lines of credit under which we make full recourse loans to healthcare providers
that are secured by:
. specific receivables due the provider;
. the overall receivables portfolio of the healthcare provider; and
. other forms of credit enhancement such as cash collateral, letters of
credit and guarantees.
We also offer, through our medical receivables finance business, interest-
only revolving lines of credit to financial intermediaries that purchase
receivables from healthcare providers. The amounts of the credit facilities
range from $500,000 to $15.0 million; however, in certain circumstances
commitments ranging from $20.0 million to $40.0 million are also provided to
financial intermediaries for purchasing receivables from healthcare providers.
The amounts are based upon our 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
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<PAGE>
reviewed on a quarterly basis to determine collectibility. These medical
receivables generally have maturities ranging from 30 to 180 days and generally
involve payors such as insurance plans, governmental programs and other
healthcare providers. We do not lend against co-pay obligations. Substantially
all of our medical receivable lines of credit have terms from 12 to 36 months.
CREDIT UNDERWRITING
We believe the credit underwriting process used in originating loans is
effective in managing our risk. The overall credit underwriting process follows
detailed guidelines and procedures and reflects our significant experience in
evaluating the creditworthiness of potential borrowers. The guidelines are
flexible enough to recognize the variables that are most relevant among
different customer types within our targeted markets.
We have historically focused most of our efforts on the non-hospital sector
of the healthcare marketplace, which requires rigorous credit analysis and
structuring discipline. Our underwriting expertise enables us to require
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, letters of credit, guarantees, or fee subordination). The credit
analysis process is generally simpler when borrowers exhibit greater financial
strength and have audited financial statements.
In medical receivables lending, we conduct collateral and receivables
underwriting in addition to credit underwriting. Our auditors perform on-site
due diligence to confirm that billing and collections systems, accounting
systems and patient records are maintained and comply with our lending
policies. A large portion of the analysis consists of a review of receivables
quality through the appropriate testing on a sample basis of cash receipts and
cash applications. Receivables are extensively analyzed by payor types,
collection history and age. We also recently acquired a highly sophisticated
collateral tracking system which will allow us to improve the monitoring of
medical receivables.
Due to the large size of our transactions, each transaction is analyzed and
reviewed on its own merits. Pursuant to our Company policy, the Credit Manager
for DVI Financial Services has approval authority for all transactions up to
$500,000. The Vice President of Credit has approval authority for all
transactions up to $750,000. The Chief Credit Officer--USA, with the agreement
of any other member of the credit committee, has approval authority up to $1.0
million. The credit committee has approval authority for all transactions
greater than $1.0 million. If a transaction causes aggregate customer exposure
to exceed $3.0 million, it must receive credit committee approval.
We also recently acquired a 15-year old "small" ticket medical equipment
financing business, referred to as "Affiliated." As a result of the relatively
small size of the medical equipment loans generated through this business unit,
the underwriting criteria are significantly different from those typically used
by the Company. Affiliated's applications from obligors are analyzed for
approval based upon a combination of the financial condition of the applicant
as well as the credit score of the applicant (for applicants who are
individuals), which is obtained from a national credit reporting organization.
Applications are filed with the credit department and screened for repeat
customers, in which case the previous file, credit and payment history are also
analyzed. Based on such information, an individual credit analyst assigns
status to the application (approved, declined, or request for further
information or change in acceptable terms). If the application is approved and
conditions and requirements of approval are met, an account manager or sales
support representative processes the file and issues a signed purchase order.
The account is then reviewed for completion of all requirements and signed for
authorization to book the transaction. In general, Affiliated completes UCC
filings on all transactions where the cost of equipment exceeds $20,000.
Affiliated has established specific credit guidelines for hospitals, group
practices and sole-practitioners which generally require obligors to:
. be in business for a certain period of time (ranging from a minimum of
one year to over two years);
. provide financial statements, corporate resolutions and the appropriate
purchase documents;
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<PAGE>
. provide personal guarantees under certain circumstances;
. provide proof of medical license; and
. meet certain minimum TRW credit report score requirements.
Affiliated has imposed other requirements in certain circumstances and may
consider an obligors' specialty in evaluating creditworthiness.
Affiliated may allow exceptions to the foregoing requirements as warranted,
in which event, the signatures of two credit officers are required.
CREDIT EXPERIENCE
The following table sets forth certain information with respect to
delinquencies for our loans for the periods indicated.
DELINQUENCY EXPERIENCE(1)
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
AS OF
AS OF JUNE 30, SEPTEMBER 30,
---------------------------------- -----------------
1996 1997 1998 1998
---------- ---------- ------------ -----------------
$ %(2) $ %(2) $ %(2) $ %(2)
----- ---- ----- ---- ------- ---- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Managed net financed assets.. 640.1 -- 925.8 -- 1,223.0 -- 1,355.8 --
Delinquencies(1)
31 -- 60 days................ 10.4 1.6 3.8 0.4 24.6 2.0 22.6 1.7
61 -- 90 days................ 3.6 0.6 12.1 1.3 15.9 1.3 5.1 0.4
91 + days.................... 13.5 2.1 17.3 1.9 44.0 3.6 69.4 5.1
----- --- ----- --- ------- --- -------- ----
Total delinquencies......... 27.5 4.3 33.2 3.6 84.5 6.9 97.1 7.2
===== === ===== === ======= === ======== ====
</TABLE>
- - --------
(1) Under the relevant agreements, our 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 assets. Delinquencies
reflect the entire outstanding balance on delinquent contracts.
We expect all of the equipment financed ultimately to be owned by the
borrower. Our 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 we record such loans. We have also exercised our right to bring in new
management to operate centers that have defaulted on their loans.
There has been an increase in delinquencies primarily due to three loans in
the amounts of $20.0 million, $15.0 million, and $6.0 million, respectively.
The $20.0 million borrower is a long-time customer who operates cancer care and
outpatient diagnostic centers. The sale of these centers is currently being
negotiated and upon such sale we do not anticipate any loss. The $15.0 million
loan delinquency is a result of the bankruptcy filing by Allegheny Health,
Education and Research Foundation and certain of its affiliates in July 1998.
We have had extensive negotiations with Tenet Health Systems and others for the
sale of all equipment financed by us for the bankrupt Allegheny entities. To
date no sales of such equipment have been consummated. However, based on the
ongoing negotiations and other currently available information, upon
consummation of the proposed sale transactions, we anticipate recognizing a
loss. The amount of such loss is not presently determinable, but we believe
that our allowance for losses at September 30, 1998 is adequate to absorb such
loss and any such loss is not likely to have a material adverse effect on our
consolidated financial position, operating results, or cash. The $6.0 million
delinquency has been resolved as of November 30, 1998.
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<PAGE>
The following table sets forth information with respect to losses for our
loans for the periods indicated.
LOSS EXPERIENCE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED JUNE 30, ENDED
------------------------------ SEPTEMBER 30,
1996 1997 1998 1998
-------- -------- ---------- -------------
<S> <C> <C> <C> <C>
Net charge-offs............... $ 1,581 $ 436 $ 1,635 $ 903
Average net financed
assets(1).................... 455,143 530,677 679,553 790,391
Average managed net financed
assets(1).................... 571,106 771,743 1,064,663 1,259,330
Net charge-offs as a
percentage of average net
financed assets.............. 0.35% 0.08% 0.24% 0.46%(2)
Net charge-offs as a
percentage of average managed
net financed assets.......... 0.28% 0.06% 0.15% 0.29%(2)
</TABLE>
- - --------
(1) Presentation of amounts for 1996 through 1998 is based on averages of
quarterly period balances for the entire servicing portfolio.
(2) Information presented on an annualized basis.
The following table sets forth information with respect to reconciliation of
allowance for losses for our equipment loans and medical receivable loans for
the periods indicated. On a monthly basis, we compile information with respect
to the current and anticipated performance of our loan portfolio. We analyze
this information regularly and make an adjustment to the allowance at the end
of each fiscal quarter.
RECONCILIATION OF ALLOWANCE FOR LOSSES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED JUNE 30, SEPTEMBER 30,
------------------------ ---------------
1996 1997 1998 1997 1998
------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
Beginning allowance................ $ 3,282 $4,026 $ 5,976 $5,976 $ 9,955
Provision for doubtful accounts.... 2,325 2,386 4,735 992 1,505
Allowance assumed in business
acquisition....................... -- -- 879 -- 1,337
Net charge-offs.................... (1,581) (436) (1,635) (360) (903)
------- ------ ------- ------ -------
Ending allowance................... $ 4,026 $5,976 $ 9,955 $6,608 $11,894
======= ====== ======= ====== =======
Ending allowance as a percentage of
managed net financed assets....... 0.63% 0.65% 0.81% 0.66% 0.88%
======= ====== ======= ====== =======
</TABLE>
Our historical levels of allowances and delinquencies are not necessarily
predictive of future results. Various factors, including changes in the way our
customers are paid for their services, other developments in the healthcare
industry, and new technological developments affecting the resale value of
equipment we financed, could cause our future allowance and delinquency rates
to be worse than those experienced historically.
COMPETITION
The business of financing sophisticated medical equipment is highly
competitive. We compete with equipment manufacturers that sell and finance
sales of their own equipment, finance subsidiaries of national and regional
commercial banks and equipment leasing and financing companies. Many of our
competitors have significantly greater financial and marketing resources than
we do. In addition, the competition in the medical receivables financing market
may be greater than the levels of competition we have historically experienced.
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<PAGE>
We believe 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 our 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 our long-term growth objectives, we must penetrate further
the market for our medical receivables financing business and the long-term
care and assisted living sub-markets. Such penetration may require us to reduce
our margins to be competitive in the medical receivable financing businesses.
HEALTHCARE FINANCING INDUSTRY
Managed healthcare and other initiatives have had a substantial impact on the
structure of the healthcare industry in the U.S. Many healthcare services
formerly provided principally in hospitals are now delivered through outpatient
healthcare providers. We expect 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. We expect this trend to
continue. 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.
GOVERNMENT REGULATION
Our healthcare finance business is subject to federal and state regulation
and supervision and is required to be licensed or registered in various states.
In addition, we are subject to applicable usury and other similar laws in the
jurisdictions where we operate. These laws generally limit the amount of
interest and other fees and charges that a lender may contract for, charge or
receive in connection with a loan. Applicable local law typically establishes
penalties for violations of these laws. These penalties could include the
forfeiture of usurious interest contracted for, charged or received and, in
some cases, all principal and other charges that the lender has charged or
received.
Government at both the federal and state levels has continued in our efforts
to reduce, or at least limit the growth of, spending for healthcare services.
On August 5, 1997, President Clinton signed into law the Balanced
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<PAGE>
Budget Act of 1997 (the "BBA") which contains numerous Medicare and Medicaid
cost-saving measures. The BBA has been projected to save $115 billion in
Medicare spending over the next five years, and $13 billion in the Medicaid
program.
In addition to the inability of our Company to directly collect receivables
under federal and state Medicare and Medicaid programs and other government
financed programs (collectively "Government Programs" and each a "Government
Program") and the right of payors under such Government Programs to offset
against unrelated receivables, our healthcare finance business is indirectly
affected by healthcare regulation to the extent that any of our clients'
failure to comply with such regulation affects such clients' ability to collect
receivables or repay loans made by the Company. The most significant healthcare
regulations that could potentially affect the Company are: (i) certificate of
need regulation, which many states require upon the provision of new health
services, particularly for long-term care and home healthcare companies; (ii)
Medicare--Medicaid fraud and abuse statutes, which prohibit, among other
things, the offering, payment, solicitation, or receipt of remuneration,
directly or indirectly, as an inducement to refer patients to facilities owned
by physicians if such facilities receive reimbursement from Medicare or
Medicaid; and (iii) other prohibitions of physician self-referral that have
been promulgated by the states.
Certificate of Need Regulation
Many states regulate the provision of new healthcare service or acquisition
of healthcare equipment through Certificate of Need or similar programs. We
believe these requirements have had a limited effect on our business, although
there can be no assurance that future changes in those laws will not adversely
affect the Company.
Medicare--Medicaid Fraud and Abuse Statutes
These statutes prohibit the offering, payment, solicitation or receipt of
remuneration, directly or indirectly, as an inducement to refer patients for
services reimbursable in whole or in part by the Medicare--Medicaid programs.
The Department of Health and Human Resources has taken the position that
distributions of profits from corporations or partnerships to physician
investors who refer patients to the entity for a procedure which is
reimbursable under Medicare or Medicaid may be prohibited by the statute. Since
our clients often rely on prompt payment from a Government Program to satisfy
their obligations to the Company, reduced or denied payments under a Government
Program could have an adverse effect on our business.
Further Regulations of Physician Self-Referral
Additional regulatory attention has been directed toward physician-owned
healthcare facilities and other arrangements whereby physicians are
compensated, directly or indirectly, for referring patients to such healthcare
facilities. In 1988, legislation entitled the "Ethics in Patient Referrals Act"
(H.R. 5198) was introduced. As enacted, the law prohibited only Medicare
payments for patient services performed by a clinical laboratory in which the
patients' referring physician had on investment interest. The Comprehensive
Physician Ownership and Referral Act (H.R. 345), which was enacted by Congress
in 1993, is more comprehensive than H.R. 5198 and covers additional medical
services such as medical imaging radiation therapy and physical rehabilitation.
A variety of existing and pending state laws also prohibit or limit a physician
from referring patients to a facility in which that physician has a proprietary
or ownership interest. In addition, many states have laws similar to the
Medicare fraud and abuse statute which are designed to prevent the receipt or
payment of consideration in connection with the referral of a patient. Accounts
receivable resulting from a referral in violation of these laws could be denied
from payment which could have an adverse affect on our clients and the Company.
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<PAGE>
MANAGEMENT
Our directors, executive officers and other key employees are:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Michael A. O'Hanlon..... 51 Director, President and Chief Executive Officer
Steven R. Garfinkel..... 55 Executive Vice President and Chief Financial Officer
Richard E. Miller....... 47 Executive Vice President and President, DVI Financial Services Inc.
Anthony J. Turek........ 55 Executive Vice President and Chief Credit Officer
John P. Boyle........... 49 Vice President and Chief Accounting Officer
Melvin C. Breaux........ 58 Vice President, Secretary and General Counsel
Cynthia J. Cohn......... 39 Vice President and Executive Vice President, DVI Business Credit
Dominic P. Ferroni...... 51 Vice President, DVI Capital
John L. Godfrey III..... 53 President, DVI Merchant Funding
Gerald A. Hayes......... 54 Chief Credit Officer--USA
Stephen J.
Jasiukiewicz........... 43 Vice President, DVI Equipment Finance Group
Stuart Murray........... 43 Vice President and President, DVI Europe
Jozef J. Osten.......... 59 Chief Operating Officer, DVI South American Operations
Michael J. Ahearn....... 47 Managing Director and Senior Vice President, DVI Private Capital
Bert D. Kidd............ 51 President, DVI Healthcare Technology Solutions
Mark H. Idzerda......... 45 President, DVI Business Credit
Peter Myhre............. 50 Chief Operating Officer, Affiliated Capital
David Mamo.............. 48 Managing Director, Strategic Development
Miroslav Anic........... 38 Managing Director, Third Coast Capital
Gerald L. Cohn.......... 70 Director
John E. McHugh.......... 69 Director
Nathan Shapiro.......... 62 Director
William S. Goldberg..... 40 Director
Harry T.J. Roberts...... 64 Director
</TABLE>
Michael A. O'Hanlon is our President, Chief Executive Officer and Director
and has served as such since September 1994 and November 1995 respectively. Mr.
O'Hanlon was President and Chief Operating Officer from September 1994 to
November 1995. From the time Mr. O'Hanlon joined the Company in March 1993
until September 1994, he served as Executive Vice President of the Company. Mr.
O'Hanlon became a Director of the Company in November 1993. Before joining the
Company, for three years, he served as President and Chief Executive Officer of
Concord Leasing, Inc., a major source of medical, aircraft, ship and industrial
equipment financing. Previously, Mr. O'Hanlon was a senior executive with
Pitney Bowes Credit Corporation. Mr. O'Hanlon received his Master of Business
Administration degree from the University of Connecticut and his Bachelor of
Business Administration degree from the Philadelphia College of Textiles and
Science.
Steven R. Garfinkel is an Executive Vice President of the Company and our
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, treasury, accounting and financial reporting, internal control,
financial planning, and human resources. Mr. Garfinkel has extensive experience
in developing and managing corporate finance relationships, money market
funding, derivative hedging, financial and strategic planning and management
information systems. Prior to joining the Company, Mr. Garfinkel spent 29 years
with two large bank holding companies: CoreStates Financial Corp. and First
Pennsylvania Corporation. For 20 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.
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<PAGE>
Richard E. Miller is an Executive Vice President of the Company and President
of DVI Financial Services Inc. He joined the Company in April 1994. Mr. Miller
also serves on the executive committee of the Company. His primary
responsibilities are to manage operations and our sales organization of
financing specialists that interface directly with our customers. Before
joining the Company, he served for six years as Vice President of Sales for
Toshiba America Medical Systems, a major manufacturer 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. Mr. Miller has a Bachelor of Arts degree from Eastern
College.
Anthony J. Turek is an Executive Vice President and the Chief Credit Officer
of the Company. Mr. Turek has served in that capacity since joining the Company
in March 1988. Mr. Turek also serves on the executive committee of the Company.
Before joining the Company, Mr. Turek was Vice President of commercial banking
at Continental Illinois National Bank from 1968 to 1988. For the last five
years of his tenure at Continental Illinois National Bank, Mr. Turek managed
the equipment leasing and transportation divisions. His prior responsibilities
included management positions in the special industries, metropolitan and
national divisions of Bank of America. Mr. Turek received his Master of Science
degree from the University of Missouri and his Bachelor of Science degree from
Iowa State University.
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 our accounting, tax and financial reporting
functions. Mr. Boyle is a General Securities Principal and a CPA with 20 years
of experience in the financial services industry. Mr. Boyle spent five years of
his professional career with Peat Marwick Mitchell & Co. in Philadelphia.
Beyond his accounting background, he has extensive experience in credit and
corporate finance matters. Mr. Boyle received his Bachelor of Arts degree from
Temple University.
Melvin C. Breaux is General Counsel, Secretary and a Vice President of the
Company, as well as General Counsel and a Vice President of DVI Financial
Services Inc. Prior to joining the Company in July 1995, Mr. Breaux was a
partner in the Philadelphia, Pennsylvania law firm of Drinker Biddle & Reath
for 17 years and an associate of the firm for eight years. 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 his Juris Doctor
degree from the University of Pennsylvania School of Law and his Bachelor of
Arts degree from Temple University.
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. Ms.
Cohn has been employed by the Company in a sales and management capacity since
July 1986. She is responsible for the operations support and marketing
functions of DVI Business Credit Corporation, our medical receivables financing
subsidiary. 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. Ms. Cohn
received her Bachelor of Arts degree from Ithaca College.
Dominic P. Ferroni is a Vice President of DVI Capital. His primary
responsibility is to manage the unit that originates medical equipment loans on
a wholesale basis. He joined the Company in October 1994 as a member of our
sales team. Prior to joining the Company, Mr. Ferroni held a variety of senior
management positions with Pitney Bowes Financial Services for 15 years. Mr.
Ferroni's most recent positions prior to joining DVI were President and
Managing Director of Pitney Bowes Credit Australia and Regional Vice President
for Pitney Bowes Financial Services--MidAtlantic Division. Prior to his time
with Pitney Bowes Financial Services, Mr. Ferroni worked for Commercial Credit
Equipment Corporation in the Philadelphia, Pennsylvania area. Mr. Ferroni
attended the University of Pennsylvania.
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<PAGE>
John L. Godfrey III is the President of DVI Merchant Funding and has been
with the Company since November 1997. His primary responsibility is to manage
the units that provide merchant banking and FHA mortgage services to the long-
term care, assisted living and specialized hospital markets. Mr. Godfrey spent
more than 25 years as a commercial lender, banking officer and executive, as
well as an investment banker. From 1992 to 1997, Mr. Godfrey was a Senior Vice
President for J.G. Wentworth. Mr. Godfrey began his career in 1970 with
Fidelity Bank (now First Union), in healthcare and middle market lending. In
1979, he created Fidelity's healthcare lending group. Mr. Godfrey earned his
Bachelor degree in Economics from Pennsylvania Military College (now Widener
University) and received a graduate certificate in banking from the University
of Wisconsin. Mr. Godfrey was a commissioned officer in the United States Army
and served in the United States and Vietnam.
Gerald A. Hayes joined the Company in July 1997 and is the Chief Credit
Officer--USA. Before joining the Company, he served as Senior Vice
President/Senior Credit Officer/Senior Relationship Officer with CoreStates
Bank, NA from 1990 to 1996, where he provided senior credit approval, directed
the management of a $6 billion portfolio, and had the responsibility for
banking relationships in the corporate middle market. Mr. Hayes previously
served as Senior Vice President--International Banking Group with First
Pennsylvania Bank from 1982 to 1990, where he managed the bank's activities
outside the U.S., including branches in Latin America, Europe and Asia. Mr.
Hayes received his Bachelor of Arts degree from Villanova University and served
as a Captain in the Strategic Air Command of the United States Air Force.
Stephen J. Jasiukiewicz is a Vice President for DVI Equipment Finance Group
and has been with the Company since March 1993. His primary responsibility is
to manage our national retail sales organization. Mr. Jasiukiewicz has over
seventeen years experience in the finance and leasing industry. Prior to
joining the Company, Mr. Jasiukiewicz spent three years at Concord Leasing,
Inc. and three years at McDonnell Douglas Finance Corporation in various
regional and corporate sales management positions. Mr. Jasiukiewicz received
his Bachelor of Science degree from LaSalle University.
Stuart Murray is a Vice President of the Company and President of DVI Europe.
Mr. Murray joined the Company in June 1996. His primary responsibility is to
oversee the European expansion of our core businesses. He has worked with major
North American banks and financial institutions since 1974. Prior to joining
the Company, Mr. Murray was a Senior Vice President and head of European vendor
operations at AT & T Capital for three years. He also served in Europe with
Citicorp's Europe-based structured equity specialized lending group, and
Manufacturers Hanover. In addition, he founded and was President of Dana Credit
in Europe.
Jozef J. Osten joined the Company in January 1998 and is the Chief Operating
Officer of our business in Latin America. Mr. Osten has over 30 years of
financial experience gained with several international banks based in Europe.
In 1994, he accepted an assignment in South America, and most recently, Mr.
Osten served as Chief Operating Officer for Surinvest International Limited, a
bank holding company based in Montevideo, Uruguay. From 1991 to 1994, Mr. Osten
was Manager Director for Fennoscandia Bank, London a subsidiary of Skop Bank,
Helsinki, Finland. After a five year assignment in Japan with the Bank of
California, Mr. Osten returned to the Netherlands in 1978 to head the foreign
acquisition program at Nederlandsche Middenstandsbank N.V. (now ING Bank) for
ten years. Mr. Osten's formal education included Aloysius College, the Hague,
the Netherlands and the University of Washington, from which he received a
Bachelor of Arts degree in German Literature. He is fluent in Dutch, English,
German, French and Spanish.
Michael J. Ahearn is the Managing Director of DVI Private Capital, joining
the Company in April 1998. Mr. Ahearn is also a Senior Vice President of the
Company. He is primarily responsible for sourcing and evaluating business
opportunities and raising private equity funds. Prior to joining the Company,
Mr. Ahearn spent 16 years at Union Bank of Switzerland/UBS Securities. His
responsibilities included Investment Banking, Asset-Backed Securities, Real
Estate Finance, Senior Credit Officer and Credit Administration. Mr. Ahearn
also worked for Wells Fargo Bank as a Regional Manager and Chase Manhattan Bank
in Credit Audit. Mr. Ahearn
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<PAGE>
received his Bachelor Science degree from St. Francis College and his Master of
Business Administration from St. John's University.
Bert D. Kidd joined the Company in September 1998 and is the President of DVI
Healthcare Technology Solutions. Mr. Kidd has 15 years of experience in the
healthcare industry. He has consulted on hospital feasibility studies,
strategic planning documents, managed care strategies and information systems
strategic plans. For the past six years, he has been helping to integrate and
implement systems and supervise accounts receivable reduction projects for
large hospitals and nursing home chains on the east and west coasts. Mr. Kidd
is a certified public accountant and certified management accountant. Mr. Kidd
received his Bachelor of Arts degree from the University of Illinois at
Champaign and his Master of Business Administration from the University of
Chicago.
Mark H. Idzerda has been President of DVI Business Credit since September
1998. Previously, he was the Managing Director, Latin America from December
1996. Mr. Idzerda has been employed by the Company in a sales and management
capacity since January 1993. He is currently responsible for the management of
DVI Business Credit, the Company's medical receivables financing subsidiary,
focusing on its sales and marketing efforts throughout the United States. Prior
to joining the Company, Mr. Idzerda was employed by U.S. Concord, Inc., an
affiliate of the Hong Kong and Shanghai Banking Corporation, which was involved
in the financing of healthcare facilities in the United States. Mr. Idzerda was
responsible for sales and marketing activities in the western portion of the
United States from January 1986 until October 1993. Mr. Idzerda has an
extensive background in both credit and marketing and has been employed by E.F.
Hutton Credit Corporation, First Interstate Bank and Bank of Boston. Mr.
Idzerda attended Santa Monica College.
Peter Myhre is Vice President, Strategic Programs for DVI Financial Services
and COO of Affiliated Capital, which was purchased by DVI in October 1998.
Since 1996, Mr. Myhre is Vice President of the Company's strategic vendor
program. Before joining DVI, Mr. Myhre was Vice President and Treasurer of
Summit Credit Corporation from 1991 to 1996. Prior to that he was employed at
Prime Capital Corporation serving as Assistant to the President from 1987 to
1989; Vice President, Marketing and Sales Administration from 1989 to 1990; and
Vice President and Corporate Finance Director from 1990 to 1991. He also worked
for the firm of Peat, Marwick, Mitchell & Co. from 1983 to 1986. Mr. Myhre has
his Bachelor of Arts from the College of St. Thomas and his Master of
Management from the J.L. Kellogg Graduate School of Management.
David Mamo is Managing Director, Strategic Development, joining the Company
in November 1998. Previously, he served as Managing Director at Rabo Bank from
1996 to 1998. Mr. Mamo held the position of President at LINC Financial
Services from 1993 to 1996. His prior experience also included Bank Brussels
Lambert where he held the position of Manager, Corporate Finance; Vice
President of National Australia Bank; and Vice President of Continental
Illinois. Mr. Mamo has a Bachelor of Arts from the University of Pisa, a Master
of Business Administration from New York University and an M. Phil. from
Columbia University.
Miroslav Anic is Managing Director of Third Coast Capital, a division of DVI
Financial Services. Third Coast Capital is a venture capital oriented equipment
leasing firm that was acquired by DVI in June, 1998. Mr. Anic previously headed
venture leasing activities for The LINC Group from 1993 to 1996 and was a
principal partner in The Arcus Group from 1988 to 1993. He also served as Chief
Financial Officer for Liposome Technology from 1985 to 1988. Mr. Anic holds a
Bachelor of Science from Yale University and a Master of Business
Administration from the University of Chicago Graduate School of Business.
Gerald L. Cohn is a Director of the Company and has served in that capacity
since 1986. Mr. Cohn is a private investor and consultant. Mr. Cohn presently
serves as a Director of Niagara Steel Corporation and Diametrics Medical
Corporation. In addition to his responsibilities as a Director, Mr. Cohn also
is an employee of the Company and serves on our 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 the 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.
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 a current or former
Director and/or Executive Officer of several public and privately-owned
companies with which GKH Partners, L.P. is affiliated.
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 held senior
positions in international banking for 35 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>
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 27, 1997 (as supplemented, the "Indenture"), between the Company and
U.S. Bank Trust National Association (formerly known as 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 Company's existing
9 7/8% Senior Notes due 2004 were also issued under the Indenture but, for
purposes thereunder, the Notes offered hereby will be treated as a separate
series of securities. The following summaries of certain provisions of the
Indenture and the Notes do not purport to be complete, and where reference is
made to particular provisions of the Indenture and the Notes, 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 offered hereby will mature on February 1, 2004, will be initially
limited to $55.0 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 December 23, 1998 or from the most
recent interest payment date to which interest has been paid or duly provided
for, payable semiannually on February 1 and August 1 in each year, commencing
February 1, 1999, 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 January 15 or July 15 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 paid
by check mailed to the address of the person entitled thereto as such address
appears in the security register; provided that all payments with respect to
the global Notes and certificated Notes, the holders of which have given wire
transfer instructions at least five business days prior to the applicable
record date to the Company, will be made by wire transfer of immediately
available funds to the accounts of the holders thereof. 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).
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.
Subject to the covenants described below under "Certain Covenants" and
applicable laws, the Company may, from time to time, issue additional Notes
(the "Additional Notes") under the Indenture. The Notes offered hereby and any
Additional Notes subsequently issued would be treated as a single class for all
purposes under the Indenture.
As of the Closing Date, substantially 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 $55.0 million (which shall be increased upon any issuance of Additional
Notes) to DVI, Inc. The Intercompany Note will (i) provide for interest
payments in
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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. In connection with the
Company's prior issuance of its existing 9 7/8% Senior Notes due 2004, DVI
Financial Services issued a similar promissory note in the amount of $100.0
million to the Company. The $100.0 million promissory note and the Intercompany
Note are hereinafter collectively referred to as the "Intercompany 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, including the Company's existing 9 7/8% Senior
Notes due 2004. The Notes will also be structurally subordinated to all
existing and future liabilities of the Company's Subsidiaries. As of September
30, 1998, on a pro forma basis after giving effect to this offering and the use
of the net proceeds therefrom, consolidated debt (including borrowings under
warehouse facilities) of the Company would have been approximately $679.3
million (including $50.6 million of the Notes offered hereby), of which $157.1
million would have been senior unsecured debt of the Company, $13.5 million
would have been subordinated debt of the Company and $508.7 million would have
been debt of the Company's Subsidiaries (not including the obligations of DVI
Financial Services under the Intercompany Notes), and the total amount of
outstanding liabilities of the Company's Subsidiaries (not including the
obligations of DVI Financial Services under the Intercompany Notes) would have
been $628.5 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 February 1, 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 February 1 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............................................................ 102.821%
2003............................................................ 101.411%
</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.
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
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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
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,
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<PAGE>
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.
"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) 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 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.
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<PAGE>
"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 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 were in
effect on January 30, 1997.
"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, (iii) the transfer of any assets or properties from
the Company or a Restricted Subsidiary to any
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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, 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 doing business 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;
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(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.
"Permitted Joint Venture" 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
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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).
"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, 1998 would have been 1.4 to 1.0.
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 (other than any Additional Notes) and
any guarantees thereof by Restricted Subsidiaries;
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(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;
(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 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
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(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
January 30, 1997 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 which includes January 30,
1997 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), 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 January 30, 1997 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;
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(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 January 30, 1997 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 which includes January 30, 1997 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 January 30, 1997 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.
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
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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 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.
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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 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
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.
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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 doing business 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;
(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,
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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 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;
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(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;
(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
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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;
(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;
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(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 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.
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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.
REGARDING THE TRUSTEE
U.S. Bank Trust National Association is (i) the Trustee under the Indenture
which relates to the Notes and the Company's existing 9 7/8% Senior Notes due
2004 and (ii) the trustee with respect to certain other asset securitization
transactions involving the Company or its affiliates. In addition, U.S. Bank
Trust National Association is an affiliate of Piper Jaffray Inc. and a
prospective affiliate of Libra Investments, Inc. (two of the Underwriters in
the offering), as well as an affiliate of U.S. Bank National Association who is
a lender to the Company under several credit facilities. 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 Notes, it must eliminate such conflict or resign.
The Trustee may resign or be removed with respect to the Notes and a
successor Trustee may be appointed to act with respect to the Notes.
BOOK-ENTRY DELIVERY AND FORM
The certificates representing the Notes will be issued in fully registered
form without interest coupons.
Except as provided below, owners of beneficial interests in a global Note
will not be entitled to have Notes registered in their names, will not receive
or be entitled to receive physical delivery of Notes in definitive form and
will not be considered the owners or holders thereof for any purpose under the
Indenture.
If (i) the Company notifies the Trustee in writing that DTC is no longer
willing or able to act as a depositary and the Company is unable to locate a
qualified successor within 90 days or (ii) the Company, at its option, notifies
the Trustee in writing that it elects to change the issuance of the Notes in
the form of Notes in certificated form then, upon surrender by the holder of a
global Note, Notes in certificated form will be issued to each person that the
holder of a global Note and DTC identify as being the beneficial owner of the
related Notes.
DTC has advised the Company that it is a limited-purpose trust company which
was created to hold securities for its participating organization (the
"Participants") and to facilitate the clearance and settlement of securities
transactions between Participants in such securities through electronic book-
entry changes in accounts of its Participants. Participants include securities
brokers and dealers (including the Underwriters), banks and trust companies,
clearing corporations and certain other organizations. Access to DTC's system
is also available to others such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a Participant,
either directly or indirectly ("indirect participants"). Persons who are not
Participants may beneficially own securities held by DTC only through
Participants or indirect participants.
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 DTC until maturity, and secondary market trading activity for the Notes will
therefore settle in immediately available funds.
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CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of certain federal income tax consequences
associated with the acquisition, ownership, and disposition of the Notes by
initial investors who acquire the Notes at original issue for cash. The
following summary does not discuss all of the aspects of federal income
taxation that may be relevant to a prospective holder of the Notes in light of
his or her particular circumstances, or to certain types of holders (including
dealers in securities, insurance companies, tax-exempt organizations, financial
institutions, broker-dealers, regulated investment companies, persons who hold
the Notes as part of a hedge against currency risks or as a position in a
straddle, "synthetic security" or other integrated investment or persons whose
functional currency as defined in Section 985 of the Internal Revenue Code of
1986, as amended (the "Code") is not the U.S. dollar) which are subject to
special treatment under the federal income tax laws. This discussion also does
not address the tax consequences to nonresident aliens or foreign corporations
that are subject to United States federal income tax on a net basis on income
with respect to a Note because such income is effectively connected with the
conduct of a U.S. trade or business. Such holders generally are taxed in a
similar manner to U.S. Holders (as defined below); however, certain special
rules may apply. In addition, this discussion is limited to holders who hold
the Notes as capital assets within the meaning of Section 1221 of the Code.
This summary also does not describe any tax consequences under state, local, or
foreign tax laws.
This discussion is based upon the Code, its legislative history, existing and
proposed Treasury Regulations, published IRS rulings, IRS pronouncements and
judicial decisions all in effect as of the date hereof, and all of which are
subject to change at any time by legislative, judicial or administrative
action. Any such changes may be applied retroactively in a manner that could
adversely affect a holder of the Notes. The Company has not sought and will not
seek any rulings or opinions from the IRS or counsel with respect to the
matters discussed below. There can be no assurance that the IRS will not take
positions concerning the tax consequences of the purchase, ownership or
disposition of the Notes that are different from those discussed herein.
PROSPECTIVE PURCHASERS OF NOTES SHOULD CONSULT THEIR OWN TAX ADVISORS WITH
RESPECT TO THE U.S. FEDERAL INCOME TAX CONSEQUENCES THAT MAY APPLY TO THEM, AS
WELL AS THE APPLICATION OF STATE, LOCAL, FOREIGN AND OTHER TAX LAWS.
As used herein, the term "U.S. Holder" means a beneficial owner of a Note who
or which is (i) an individual citizen or resident of the United States, (ii) a
corporation created or organized in or under the laws of the United States or
of any state or political subdivision thereof (including the District of
Columbia), (iii) an estate, the income of which is subject to U.S. federal
income taxation regardless of its source, and (iv) a trust, if both (A) a court
within the United States is able to exercise primary supervision over the
administration of the trust and (B) one or more United States persons have the
authority to control all substantial decisions of the trust. As used herein,
the term "Non-U.S. Holder" means a beneficial owner of a Note that is not a
U.S. Holder. In the case of a holder of Notes that is a partnership for United
States tax purposes, each partner will take into account its allocable share of
income or loss from the Notes, and will take such income or loss into account
under the rules of taxation applicable to such partner, taking into account the
activities of the partnership and the partner.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES TO U.S. HOLDERS
Original Issue Discount
General. For United States federal income tax purposes, original issue
discount is the excess of the stated redemption price at maturity of a Note
over its issue price, if such excess equals or exceeds a de minimis amount
(generally defined as 1/4 of 1-percent of the Note's stated redemption price at
maturity multiplied by the number of complete years to its maturity). The issue
price of each Note in an issue of Notes is the first price at which a
substantial amount of such issue of Notes has been sold (ignoring sales to bond
houses, broker-dealers,
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or similar persons or organizations acting in the capacity of underwriters,
placement agents, or wholesalers). The stated redemption price at maturity of a
Note generally is the sum of all payments provided by the Note other than
"qualified stated interest" payments. The term "qualified stated interest"
generally means stated interest that is unconditionally payable in cash or
property (other than debt instruments of the issuer) at least annually at a
single fixed rate.
Payments of qualified stated interest on a Note are taxable to a U.S. Holder
as ordinary interest income at the time such payments are accrued or are
received, in accordance with the U.S. Holder's regular method of tax
accounting. In addition, since the Notes are issued with original issue
discount in excess of a de minimus amount, a U.S. Holder of a Note must include
original issue discount in income as ordinary interest for United States
federal income tax purposes as it accrues under a constant yield method in
advance of receipt of the cash payments attributable to such income, regardless
of such U.S. Holder's regular method of tax accounting. In general, the amount
of original issue discount included in income by the initial U.S. Holder of a
Note is the sum of the daily portions of original issue discount with respect
to such Note for each day during the taxable year on which such U.S. Holder
held such Note. The "daily portions" of original issue discount on any Note are
determined by allocating to each day in an accrual period a ratable portion of
the original issue discount allocable to that accrual period. An "accrual
period" may be of any length and the accrual periods may vary in length over
the term of the Note as long as (i) each accrual period is not longer than one
year, and (ii) each scheduled payment of principal or interest occurs either on
the final day of an accrual period or on the first day of an accrual period.
The amount of original issue discount allocable to each accrual period is
generally equal to the difference between (i) the product of the Note's
adjusted issue price at the beginning of such accrual period and its yield to
maturity (determined on the basis of compounding at the close of each accrual
period and appropriately adjusted to take into account the length of the
particular accrual period) and (ii) the amount of any qualified stated interest
payments allocable to such accrual period. The "adjusted issue price" of a Note
at the beginning of the first accrual period is its issue price. Thereafter,
the "adjusted issue price" of a Note is the sum of the issue price plus the
amount of original issue discount previously includible in the gross income of
the holder reduced by the amount of any payment previously made on the Note
other than a payment of qualified stated interest. Under these rules, U.S.
Holders generally will have to include in income increasingly greater amounts
of original issue discount in successive accrual periods.
Acquisition Premium. A U.S. Holder who purchases a Note for an amount that is
greater than its adjusted issue price but less than its stated redemption price
at maturity will be considered to have purchased the Note at an "acquisition
premium." Under the acquisition premium rules, the daily portions of original
issue discount which a U.S. Holder must include in its gross income with
respect to such Note will be reduced by an amount equal to the daily portion of
the original issue discount for such day multiplied by the acquisition premium
fraction. The numerator of the "acquisition premium fraction" is the excess of
the U.S. Holder's adjusted basis in the Note immediately after its purchase
over the adjusted issue price of the Note, and the denominator is the sum of
the daily portions for such Note for all days after the date of purchase and
ending on the stated maturity date (i.e., the total original issue discount
remaining on the Note).
Alternatively, rather than applying the acquisition premium fraction to
reduce the daily portion of accrued original issue discount, a U.S. Holder of a
Note may elect to compute original issue discount by treating the purchase as a
purchase at original issuance and applying the mechanics of the constant yield
method described above in "--Original Issue Discount--General." Prior to making
this election, U.S. Holders of Notes should consult their own tax advisors
concerning the potential United States federal income tax consequences to their
particular situations.
Election to Treat all Interest as Original Issue Discount. A U.S. Holder of a
Note may elect to include in gross income all interest that accrues on the Note
by using the constant yield method described in "--Original Issue Discount--
General" with certain modifications. For the purposes of this election,
interest includes stated interest, acquisition discount, original issue
discount, de minimis original issue discount, market discount, de minimis
market discount, and unstated interest, as adjusted by any amortizable bond
premium or acquisition premium.
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In applying the constant yield method to a Note with respect to which this
election has been made, (a) the issue price of the Note will equal the electing
U.S. Holder's adjusted basis on the Note immediately after acquisition, (b) the
issue date of the Note will be the date of acquisition by the electing U.S.
Holder, and (c) no payments on the Note will be treated as payments of
qualified stated interest. The election must be made for the taxable year in
which the U.S. Holder acquires the Note and will generally apply only to the
Note (or Notes) identified by the U.S. Holder in a statement attached to the
Holder's timely filed federal income tax return. The election may not be
revoked without the consent of the Internal Revenue Service (the "IRS"). If a
U.S. Holder makes the election with respect to a Note with amortizable bond
premium, then the electing U.S. Holder is deemed to have elected to apply
amortizable bond premium against interest with respect to all debt instruments
with amortizable bond premium (other than debt instruments the interest on
which is excludible from gross income) held by the electing U.S. Holder as of
the beginning of the taxable year in which the Note (with respect to which the
election is made) is acquired or thereafter acquired. The deemed election with
respect to amortizable bond premium may not be revoked without the consent of
the IRS.
If the election to apply the constant yield method to all interest on a Note
is made with respect to a "Market Discount Note" (as described below in "--
Market Discount"), the electing U.S. Holder will be deemed to have made an
election to include market discount in income currently over the life of all
debt instruments held in the year the election applies and all subsequent tax
years. The election to currently include market discount in income may not be
revoked without the consent of the IRS. Prior to making an election to treat
all income of a Note (or other debt instrument) as original issue discount,
U.S. Holders should consult with their own tax advisors as to the consequences
resulting from such an election with respect to their own particular
situations.
Market Discount. A Note will be treated as purchased at a market discount (a
"Market Discount Note") if the amount for which a U.S. Holder purchased the
Note is less than the Note's "revised issue price" and such excess is greater
than or equal to 1/4 of 1-percent of such Note's stated redemption price at
maturity multiplied by the number of complete years to the Note's maturity. If
such excess is not sufficient to cause the Note to be a Market Discount Note,
then such excess constitutes "de minimis market discount." The Code provides
that, for these purposes, the "revised issue price" of a Note generally equals
its issue price, increased by the amount of original issue discount that has
accrued over the term of the Note and reduced by amounts (other than qualified
stated interest) paid on the Note.
Any gain recognized on the maturity or disposition of a Market Discount Note
will be treated as ordinary income to the extent that such gain does not exceed
the secured market discount on such Note. Alternatively, a U.S. Holder of a
Market Discount Note may elect to include market discount in income currently
over the life of the Note. Such election shall apply to all debt instruments
with market discount acquired by the electing U.S. Holder on or after the first
day of the first year to which the election applies and may not be revoked
without the consent of the IRS.
Market discount accrues on a straight-line basis unless the U.S. Holder
elects to accrue such market discount on a constant yield basis. Such an
election shall apply only to the Note with respect to which it is made and may
not be revoked without the consent of the IRS. A U.S. Holder of a Market
Discount Note that does not elect to include market discount in income
currently generally will be required to defer deductions for interest in
borrowings allocable to such Note in an amount not exceeding the accrued market
discount on such Note until the maturity or disposition of or partial payment
of principal on such Note.
Effect of Optional Redemption and Repurchase
Under certain circumstances the Company may be entitled to redeem a portion
of the Notes. In addition, under certain circumstances, each U.S. Holder of
Notes may require the Company to repurchase all or any part of such holder's
Notes. Treasury Regulations contain special rules for determining the yield to
maturity and maturity on a debt instrument in the event the debt instrument
provides for a contingency that could result in the acceleration or deferral of
one or more payments or in additional interest. The Company does not believe
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that these rules are likely to apply to either the Company's rights to redeem
the Notes or to the holders' rights to require the Company to repurchase the
Notes or to the provision for additional interest upon such failure. Therefore,
the Company does not intend to treat such provisions of the Notes as affecting
the computation of the yield to maturity or maturity date of the Notes.
Sale or Other Taxable Disposition of the Notes
The sale, exchange, redemption, retirement or other taxable disposition of a
Note will result in the recognition of gain or loss to a U.S. Holder in an
amount equal to the difference between (a) the amount of cash and fair market
value of property received in exchange therefor (except to the extent
attributable to the payment of accrued but unpaid stated interest not
previously included in income) and (b) the holder's adjusted tax basis in such
Note. A U.S. Holder's initial tax basis in a Note purchased by such holder will
be equal to the price paid for the Note. Except as discussed above under
"Market Discount," any gain or loss on the sale, exchange, redemption,
repurchase or other taxable disposition of a Note generally will be capital
gain or loss. Net capital gains (i.e., generally, capital gain in excess of
capital loss) recognized by certain non-corporate taxpayers from the sale of a
capital asset that has been held for more than 12 months will be subject to tax
at a rate not to exceed 20%. Payments on any such disposition for accrued
interest not previously included in income will be treated as ordinary interest
income.
Backup Withholding
The backup withholding rules require a payor to deduct and withhold a tax if
(i) the payee fails to furnish a taxpayer identification number ("TIN") in the
prescribed manner, (ii) the IRS notifies the payor that the TIN furnished by
the payee is incorrect, (iii) the payee has failed to report properly the
receipt of "reportable payments" and the IRS has notified the payor that
withholding is required, or (iv) the payee fails to certify under the penalty
of perjury that such payee is not subject to backup withholding. If any one of
the events discussed above occurs with respect to a holder of Notes, the
Company, its paying agent or other withholding agent will be required to
withhold a tax equal to 31% of any "reportable payment" made in connection with
the Notes of such holder. A "reportable payment" includes among other things,
amounts paid in respect of interest on a Note. Any amounts withheld from a
payment to a holder under the backup withholding rules will be allowed as a
refund or credit against such holder's federal income tax, provided that the
required information is furnished to the IRS. Certain holders (including, among
others, corporations and certain tax-exempt organizations) are not subject to
backup withholding.
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES FOR NON-U.S. HOLDERS
This section discusses rules applicable to a Non-U.S. Holder of Notes. This
summary does not address the tax consequences to stockholders, partners or
beneficiaries in a Non-U.S. Holder.
Interest
Payments of interest including OID to a Non-U.S. Holder that do not qualify
for the portfolio interest exception discussed below will be subject to
withholding of U.S. federal income tax at a rate of 30% unless a U.S. income
tax treaty applies to reduce, or eliminate, the rate of withholding. To claim a
treaty reduced rate, the Non-U.S. Holder must generally provide a properly
executed IRS Form 1001 or applicable successor form.
Subject to the discussion below concerning backup withholding, interest that
is paid to a Non-U.S. Holder on a Note will not be subject to U.S. income or
withholding tax if the interest qualifies as "portfolio interest." Generally,
interest on the Notes that is paid by the Company will qualify as a portfolio
interest if (i) the Non-U.S. Holder does not own, actually or constructively,
10% or more of the total combined voting power of all classes of stock of the
Company entitled to vote; (ii) the Non-U.S. Holder is not a controlled foreign
corporation that is related to the Company actually or constructively through
stock ownership for U.S. federal income tax purposes; (iii) the Non-U.S. Holder
is not a bank receiving interest on a loan entered into in the ordinary course
of business; and (iv) either (x) the beneficial owner of the Notes provides the
Company or its
S-68
<PAGE>
paying agent with a properly executed certification on IRS Form W-8 (or Form W-
8BEN or a suitable substitute form), signed under penalties of perjury, that
the beneficial owner is not a "U.S. person" for U.S. federal income tax
purposes and that provides the beneficial owner's name and address, or (y) a
securities clearing organization, bank or other financial institution that
holds customers' securities in the ordinary course of its business holds the
Note and certifies to the Company or its agent under penalties of perjury that
the IRS Form W-8 (or a suitable substitute) has been received by it from the
beneficial owner of the Notes or a qualifying intermediary and furnishes the
payor a copy thereof.
With respect to Notes held by a foreign partnership, under current law, the
Form W-8 or Form W-81MY may be provided by the foreign partnership. However,
for interest and disposition proceeds paid with respect to a Note after
December 31, 1999, unless the foreign partnership has entered into a
withholding agreement with the IRS, a foreign partnership will be required, in
addition to providing an intermediary Form W-8 or Form W-8IMY, to attach an
appropriate certification by each partner. Prospective investors, including
foreign partnerships and their partners, should consult their tax advisors
regarding possible additional reporting requirements.
Treasury regulations which will become generally effective for payments made
beginning January 1, 2000 (the "New Regulations"), modify certain of the
certification requirements described above. In general, the New Regulations do
not significantly alter the substantive withholding and information reporting
requirements but rather unify current certification procedures and forms and
clarify reliance standards. In addition, the New Regulations impose different
conditions on the ability of financial intermediaries acting for a Non-U.S.
Holder to provide certifications on behalf of the Non-U.S. Holder, which may
include entering into an agreement with the IRS to audit certain documentation
with respect to such certifications. It is possible that the Company and other
withholding agents may request new withholding exemption forms from holders in
order to qualify for continued exemption from withholding under the Treasury
regulations when they become effective. Non-U.S. Holders should consult their
own tax advisors to determine the effects of the application of the New
Regulations to their particular circumstances.
Sale, Exchange or Retirement of Notes
Any gain realized by a Non-U.S. Holder on the sale, exchange or retirement of
the Notes, will generally not be subject to U.S. federal income tax or
withholding unless (i) the Non-U.S. Holder is an individual who was present in
the U.S. for 183 days or more in the taxable year of the disposition and meets
certain other requirements; or (ii) the Non-U.S. Holder is subject to tax
pursuant to certain provisions of the Code applicable to certain individuals
who renounce their U.S. citizenship or terminate long-term U.S. residency. If a
Non-U.S. Holder falls under (ii) above, the holder will be taxed on the net
gain derived from the sale under the graduated U.S. federal income tax rates
that are applicable to U.S. citizens and resident aliens, and may be subject to
withholding under certain circumstances. If a Non-U.S. Holder falls under (i)
above, the holder generally will be subject to U.S. federal income tax at a
rate of 30% (or reduced treaty rate) on the gain derived from the sale and may
be subject to withholding in certain circumstances.
U.S. Information Reporting and Backup Withholding Tax
Back-up withholding generally will not apply to payments on a Note issued in
registered form that is beneficially owned by a Non-U.S. Holder if the
certification of Non-U.S. Holder status is provided to the Company or its agent
as described above in "Certain U.S. Federal Income Tax Consequences for Non-
U.S. Holders--Interest," provided that the payor does not have actual knowledge
that the holder is a U.S. person. The Company may be required to report
annually to the IRS and to each Non-U.S. Holder the amount of interest paid to,
and the tax withheld, if any, with respect to each Non-U.S. Holder.
If payments of principal and interest are made to the beneficial owner of a
Note by or through the foreign office of a custodian, nominee or other agent of
such beneficial owner, or if the proceeds of the sale, exchange or other
disposition of a Note are paid to the beneficial owner of a Note through a
foreign office of a "broker"
S-69
<PAGE>
(as defined in the pertinent Regulations), the proceeds will not be subject to
backup withholding (absent actual knowledge that the payee is a U.S. person).
Information reporting (but not backup withholding) will apply, however, to a
payment by a foreign office of a custodian, nominee, agent or broker that is
(i) a U.S. person, (ii) a controlled foreign corporation for U.S. federal
income tax purposes, (iii) a foreign person that derives 50% or more of its
gross income from the conduct of a U.S. trade or business for a specified
three-year period or (iv) (effective for payments after December 31, 1999), a
foreign partnership with certain U.S. connections, unless the broker has in its
records documentary evidence that the holder is a Non-U.S. Holder and certain
conditions are met (including that the broker has no actual knowledge that the
holder is a U.S. person) or the holder otherwise establishes an exemption.
Payment through the U.S. office of a custodian, nominee, agent or broker is
subject to both backup withholding at a rate of 31% and information reporting,
unless the holder certifies that it is a Non-U.S. Holder under penalties of
perjury or otherwise establishes an exemption.
The New Regulations modify certain of the certification requirements for
backup withholding. It is possible that the Company and other withholding
agents may request a new withholding exemption form from holders in order to
qualify for continued exemption from backup withholding under Treasury
regulations when they become effective.
Any amount withheld under the backup withholding rules from a payment to a
Non-U.S. Holder will be allowed as a credit against, or refund of, such
holder's U.S. federal income tax liability, provided that certain information
is provided by the holder to the IRS.
S-70
<PAGE>
UNDERWRITING
Prudential Securities Incorporated ("Prudential"), Piper Jaffray Inc., Libra
Investments, Inc. and Fleet Securities, Inc. (the "Underwriters") have
severally agreed, subject to the terms and conditions contained in the
Underwriting Agreement dated December 16, 1998 with the Company, (the
"Underwriting Agreement") to purchase from us, and we have agreed to sell to
the Underwriters, the principal amount of the Notes set forth below opposite
their respective names:
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
UNDERWRITER OF THE NOTES
----------- ----------------
<S> <C>
Prudential Securities Incorporated....................... $46,750,000
Piper Jaffray Inc. ...................................... 2,750,000
Libra Investments, Inc. ................................. 2,750,000
Fleet Securities, Inc. .................................. 2,750,000
-----------
Total.................................................. $55,000,000
===========
</TABLE>
The Underwriting Agreement provides that the obligation of the Underwriters
to pay for and accept delivery of the Notes offered hereby is subject to
certain conditions, including delivery of certain legal opinions by their
counsel. Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the Notes offered hereby
if any are taken.
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 0.25% of such offering price; and that such dealers may
reallow a concession not in excess of 0.125% 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.
There is no established trading market presently in existence for the Notes
and, although the Underwriters have advised us that they currently intend to
make a market in the Notes, they are not obligated to do so and any such market
making may be discontinued at any time, without notice, in the sole discretion
of the Underwriters. In addition, such market making activity will be subject
to the limits imposed by the Securities Act and the Exchange Act. The Notes are
not listed on a national securities exchange or authorized for trading on the
National Association of Securities Dealers Automated Quotation System. No
assurance can be given as to the development of liquidity of any market that
may develop for the Notes.
The Underwriting Agreement provides that we will indemnify the Underwriters
and their respective controlling persons against certain liabilities, including
liabilities under the Securities Act, or will contribute to payments that the
Underwriters may be required to make in respect thereof.
In connection with the offering, Prudential, as managing underwriter, on
behalf of the other Underwriters may engage in overallotment, stabilizing
transactions and syndicate covering transactions and penalty bids.
Overallotment involves sales in excess of the offering size, which creates a
short position for the Underwriters. Stabilizing transactions involve bids to
purchase the Notes in the open market for the purpose of pegging, fixing and
monitoring the price of the Notes in the open market, and such transactions
will be effected in compliance with Rule 104 of Regulation M promulgated under
the Securities Act. Short covering transactions involve purchase of the Notes
in the open market after the distribution has been completed in order to cover
short positions. Penalty bids permit the Underwriters to reclaim a selling
concession from a dealer when the Notes originally sold by such dealer are
purchased in a covering transaction to cover short positions. Such stabilizing
transactions, short covering transactions and penalty bids may cause the price
of the Notes to be higher than it would otherwise be in the absence of such
transactions. Prudential is not required to engage in these activities, and may
discontinue them at any time.
Expenses associated with this offering, to be paid by us are estimated to be
$550,000.
S-71
<PAGE>
Each of the Underwriters and/or certain of their respective affiliates have,
in the past and may in the future provide commercial banking, financing and/or
financial advisory services to the Company and have received customary
compensation for the rendering of past services. Prudential has acted as
underwriter or placement agent for equipment loan securitizations and, in
connection therewith, Prudential Securities Credit Corporation, an affiliate of
Prudential, periodically provides warehouse facilities to the Company. U.S.
Bank National Association, an affiliate of Piper Jaffray Inc. and a prospective
affiliate of Libra Investments, Inc. (which has signed an agreement to be
acquired by an affiliate of U.S. Bank National Association), and certain of its
affiliates are presently lenders to the Company under several credit
facilities. Fleet Bank N.A., an affiliate of Fleet Securities, Inc., is also a
lender to the Company under several credit facilities. As described under "Use
of Proceeds", the Company will pay down borrowings under certain warehouse
facilities including a warehouse facility provided by Prudential Securities
Credit Corporation.
LEGAL MATTERS
Certain legal matters with respect to the legality of the Notes offered
hereby will be passed upon for the Company by Rogers & Wells LLP, New York, New
York. The validity of the Notes will be passed upon for the Underwriters by
Shearman & Sterling, New York, New York.
EXPERTS
The consolidated financial statements and the related consolidated financial
statement schedules included in this Prospectus Supplement and incorporated in
the accompanying Prospectus by reference from the Company's Annual Report on
Form 10-K for the year ended June 30, 1998, have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their report, which is included
and incorporated herein by reference, and have been so included and
incorporated in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
S-72
<PAGE>
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, 1998 and 1997................. F-3
Consolidated Statements of Operations for the years ended June 30, 1998,
1997 and 1996........................................................... F-4
Consolidated Statements of Shareholders' Equity for the years ended June
30, 1998, 1997 and 1996................................................. F-5
Consolidated Statements of Cash Flows for the years ended June 30, 1998,
1997 and 1996........................................................... F-6
Notes to Audited Consolidated Financial Statements....................... F-8
Consolidated Balance Sheets as of September 30, 1998 (unaudited) and June
30, 1998................................................................ F-28
Consolidated Statements of Operations (unaudited) for the three months
ended September 30, 1998 and 1997....................................... F-29
Consolidated Statements of Comprehensive Income (unaudited) for the three
months ended September 30, 1998 and 1997................................ F-30
Consolidated Statements of Shareholders' Equity (unaudited) July 1, 1997
through September 30, 1998.............................................. F-31
Consolidated Statements of Cash Flows (unaudited) for the three months
ended September 30, 1998 and 1997....................................... F-32
Notes to Unaudited Consolidated Financial Statements..................... F-33
</TABLE>
F-1
<PAGE>
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, 1998 and 1997, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended June 30, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the 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, 1998 and 1997, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended June 30, 1998
in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Parsippany, New Jersey
August 7, 1998
(September 15, 1998 as to Note 17)
F-2
<PAGE>
DVI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
-------------------
1998 1997
-------- ---------
(IN THOUSANDS
OF DOLLARS
EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
Cash and cash equivalents................................ $ 15,192 $ 9,187
Cash and cash equivalents, restricted.................... 47,582 26,461
Receivables:
Investment in direct financing leases and notes secured
by equipment or medical receivables:
Receivables in installments........................... 572,679 496,861
Receivables and notes--related parties................ 6,563 9,453
Recourse credit enhancements.......................... 51,883 46,095
Notes collateralized by medical receivables........... 137,316 85,649
Residual valuation.................................... 14,287 8,276
Unearned income....................................... (69,367) (69,739)
-------- ---------
Net investment in direct financing leases and notes
secured by equipment or medical receivables............ 713,361 576,595
Less: Allowance for losses on receivables............... (9,955) (5,976)
-------- ---------
Net receivables.......................................... 703,406 570,619
Equipment on operating leases (net of accumulated
depreciation of $3,189 and $2,301, respectively)........ 14,773 4,041
Furniture and fixtures (net of accumulated depreciation
of $2,600 and $1,710, respectively)..................... 4,225 2,405
Investments in investees................................. 7,120 6,609
Goodwill, net............................................ 3,646 3,953
Other assets............................................. 20,976 11,253
-------- ---------
Total assets............................................. $816,920 $ 634,528
======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable......................................... $ 48,030 $ 30,850
Accrued expenses and other liabilities................... 18,271 19,208
Borrowings under warehouse facilities.................... 82,828 44,962
Deferred income taxes.................................... 19,393 8,610
Long-term debt, net:
Discounted receivables (primarily limited recourse)..... 342,120 317,863
9 7/8% Senior notes due 2004............................ 96,486 95,883
Other debt.............................................. 15,808 8,168
Convertible subordinated notes.......................... 13,439 13,324
-------- ---------
Total long-term debt, net................................ 467,853 435,238
-------- ---------
Total liabilities........................................ 636,375 538,868
Commitments and contingencies (Note 12)
Minority interest in consolidated subsidiaries........... 8,260 --
Shareholders' equity:
Preferred stock, $10.00 par value; authorized 100,000
shares; no shares issued
Common stock, $.005 par value; authorized 25,000,000
shares; outstanding 14,080,358
and 10,590,859 shares, respectively.................... 70 53
Additional capital...................................... 133,516 69,194
Retained earnings....................................... 39,387 26,529
Cumulative translation adjustments...................... (688) (116)
-------- ---------
Total shareholders' equity............................... 172,285 95,660
-------- ---------
Total liabilities and shareholders' equity............... $816,920 $ 634,528
======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
DVI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------
1998 1997 1996
------- ------- -------
(IN THOUSANDS EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
Finance and other income:
Amortization of finance income................... $63,332 $49,535 $44,509
Other income..................................... 11,023 6,799 4,529
------- ------- -------
Total finance and other income..................... 74,355 56,334 49,038
Interest expense................................... 49,212 38,395 30,489
------- ------- -------
Net interest and other income...................... 25,143 17,939 18,549
Net gain on sale of financing transactions......... 20,977 14,039 8,032
------- ------- -------
Net finance income................................. 46,120 31,978 26,581
Selling, general and administrative expenses....... 18,493 14,117 9,933
Provision for losses on receivables................ 4,735 2,386 2,325
------- ------- -------
Earnings before minority interest, equity in net
loss of investees, and
provision for income taxes......................... 22,892 15,475 14,323
Minority interest in net loss of consolidated
subsidiaries...................................... 126 -- --
Equity in (net loss) of investees.................. (439) (281) (66)
Provision for income taxes......................... 9,721 6,631 6,092
------- ------- -------
Net earnings....................................... $12,858 $ 8,563 $ 8,165
======= ======= =======
Net earnings per share:
Basic............................................ $ 1.12 $ 0.78 $ 0.82
======= ======= =======
Diluted.......................................... $ 1.03 $ 0.74 $ 0.77
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
DVI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
COMMON STOCK GAIN ON
$.005 PAR VALUE AVAILABLE- TOTAL
----------------- ADDITIONAL FOR-SALE RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL INVESTMENTS EARNINGS CTA EQUITY
---------- ------ ---------- ----------- -------- ----- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS OF DOLLARS)
Balances at July 1,
1995................... 6,753,685 $34 $ 29,403 $1,061 $ 9,801 $ -- $ 40,299
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........... 8,165 8,165
---------- --- -------- ------ ------- ----- --------
Balances at June 30,
1996................... 10,451,375 $52 $ 67,284 $ -- $17,966 $ -- $ 85,302
Issuance of common
stock upon exercise of
stock options and
warrants.............. 82,881 1 1,310 1,311
Conversion of
subordinated notes.... 56,603 600 600
Currency translation
adjustment............ (116) (116)
Net earnings........... 8,563 -- 8,563
---------- --- -------- ------ ------- ----- --------
Balances at June 30,
1997................... 10,590,859 $53 $ 69,194 $ -- $26,529 $(116) $ 95,660
Issuance of common
stock upon exercise of
stock options and
warrants.............. 149,499 1,756 1,756
Net proceeds from
issuance of
common stock.......... 2,940,000 15 57,918 57,933
Issuance of common
stock for acquisition
of MEFC............... 400,000 2 4,648 4,650
Currency translation
adjustment............ (572) (572)
Net earnings........... 12,858 -- 12,858
---------- --- -------- ------ ------- ----- --------
Balances at June 30,
1998................... 14,080,358 $70 $133,516 $ -- $39,387 $(688) $172,285
========== === ======== ====== ======= ===== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
DVI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings.................................... $ 12,858 $ 8,563 $ 8,165
-------- -------- --------
Adjustments to reconcile net earnings to net
cash provided by (used in) operating
activities:
Equity in net loss of investees............... 439 281 66
Depreciation and amortization................. 12,050 10,289 7,983
Additions to allowance accounts............... 4,735 2,386 2,325
Net gain on sale of financing transactions.... (20,977) (14,039) (8,032)
Minority interest............................. (126) -- --
Cumulative translation adjustments............ (71) 37 --
Changes in assets and liabilities:
(Increases) decreases in:
Cash and cash equivalents, restricted....... (21,121) 6,090 (20,281)
Amounts due from portfolio sale............. -- 54,797 (54,797)
Receivables................................. (6,999) (14,086) (29,505)
Other assets................................ (9,697) (3,260) 3,095
Increases (decreases) in:
Accounts payable............................ 16,328 7,285 17,592
Accrued expenses and other liabilities...... 3,713 7,558 1,361
Deferred income taxes....................... 10,783 3,865 797
-------- -------- --------
Total adjustments............................... (10,943) 61,203 (79,396)
-------- -------- --------
Net cash provided by (used in) operating
activities..................................... 1,915 69,766 (71,231)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cost of equipment acquired...................... (541,715) (429,515) (292,618)
Portfolio receipts net of amounts included in
income and proceeds from sale of financing
transactions................................... 473,018 372,973 280,541
Net increase in notes collateralized by medical
receivables.................................... (49,703) (48,293) (11,667)
Furniture and fixtures additions................ (2,897) (1,017) (985)
Investments in investees........................ (1,148) (24) (2,059)
Cash received from sale of investments in
investees...................................... 549 -- 1,341
-------- -------- --------
Net cash used in investing activities........... (121,896) (105,876) (25,447)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock options and warrants.......... 1,756 1,311 8,938
Equity offering................................. 57,933 -- 28,961
Borrowings under:
Warehouse facilities.......................... 802,811 498,576 485,585
Long-term debt................................ 156,884 283,825 120,705
Repayments on:
Warehouse facilities.......................... (765,237) (621,862) (472,649)
Long-term debt................................ (128,161) (118,944) (74,434)
-------- -------- --------
Net cash provided by financing activities....... 125,986 42,906 97,106
-------- -------- --------
Net increase in cash and cash equivalents........ 6,005 6,796 428
Cash and cash equivalents, beginning of year..... 9,187 2,391 1,963
-------- -------- --------
Cash and cash equivalents, end of year........... $ 15,192 $ 9,187 $ 2,391
======== ======== ========
CASH PAID DURING THE YEAR FOR:
Interest........................................ $ 44,786 $ 31,073 $ 29,984
======== ======== ========
Income taxes.................................... $ 1,508 $ 4,777 $ 3,507
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
SUPPLEMENTAL DISCLOSURES OF NONCASH TRANSACTIONS:
In June 1998 the purchase price for MEFC of $4.7 million was reclassified
from accrued liabilities to shareholders' equity to reflect the issuance of
400,000 common shares.
In June 1998, an additional investment of $2.0 million was made to MEC of
which $852,000 is still payable.
During the year ended June 30, 1997, the Company transferred the net book
value of equipment on operating leases in the amount of $491,000 to inventory
which is classified with other assets.
At June 30, 1998 and 1997, the Company has recorded in receivables in
installments and accrued expenses amounts of $2.5 million and $1.9 million,
respectively, representing the present value of future obligations the Company
has guaranteed.
In July 1996, $600,000 of convertible subordinated notes were converted into
common stock.
During the year ended June 30, 1996, the Company converted a $541,000 note
receivable into shares of common stock of a domestic entity.
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF OPERATIONS
DVI, Inc. (the "Company" or "DVI") is primarily engaged in the business of
providing equipment and receivable financing for domestic and foreign 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, along with obligor guarantees
and vendor recourse, 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 the types of receivable-backed securities
issued or placed in securitizations sponsored by the Company and the overall
financial performance of the Company and its 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 obtain additional capital to enable the Company to expand its
operations.
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 long-term 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 outpatient facilities, physician groups and hospitals. The
Company's source of customers is subject to the effects of 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 Company established a joint venture based in
Singapore to service the medical equipment market in the Asia-Pacific region.
DVI Europe is the Company's branch established in the United Kingdom to service
the medical equipment industry in Europe.
The Company recently entered into a joint venture, MSF Holding Ltd., with the
International Finance Company (an affiliate of The World Bank), the Netherlands
Development Finance Company, and a subsidiary of First Union National
Corporation. Through MSF Holding Ltd. the Company will provide finance programs
for vendors and manufacturers of diagnostic and patient treatment devices in
Latin America, including Brazil, Argentina, Colombia and Mexico. The joint
venture commenced with a planned committed loan facility of $65 million and
paid-in capital of $20 million. In addition, the joint venture is in
discussions with a major investment banking firm to develop and implement a
permanent funding program for the equipment loans originated by the joint
venture. The Company owns 59% of the joint venture holding company which
operates through free-trade zone subsidiaries in Uruguay. The Company expects
the customer base for equipment vendors to be private clinics, diagnostic
centers, and local hospitals. The Company believes that this arrangement may
prove to be a suitable model for its other international activities.
The success and ultimate recovery of these investments is dependent upon many
factors including foreign regulation, customs, currency exchange, the
achievement of management's planned projections for these markets and the
Company's ability to manage these operations.
F-8
<PAGE>
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION POLICY--All majority-owned subsidiaries are consolidated and
all material intercompany accounts and transactions are eliminated. Investments
in 20%-50% owned entities are accounted for by the equity method of accounting,
and investments in less than 20% owned entities are accounted for by the cost
method.
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.
TRANSLATION ADJUSTMENTS--All assets and liabilities denominated in foreign
currencies are translated at the exchange rate on the balance sheet date.
Revenues, costs and expenses are translated at average rates of exchange
prevailing during the period. Translation adjustments are accumulated as a
separate component of shareholders' equity. Gains and losses resulting from
foreign currency transactions are included in the consolidated statements of
operations.
CASH EQUIVALENTS--Cash equivalents include highly-liquid securities with
original maturities of 90 days or less.
CASH AND CASH EQUIVALENTS, RESTRICTED--Cash and cash equivalents, restricted
consist of cash, certificates of deposit and mutual funds 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 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,
1998 and 1997, the Company has only available-for-sale securities with
maturities less than 90 days, which are included in restricted cash. 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 shareholders' equity, net of deferred
taxes.
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 of fixed payment contracts. The principal portion and
initial direct costs of variable rate contracts are recorded at commencement
and interest is calculated and accrued monthly on the remaining principal
balance. Included in this category are loans to officers for investment
purposes which are not directly related to the Company's operations, and for
the purpose of financing a personal residence. At June 30, 1998 and 1997,
unamortized initial direct costs amounted to $6.6 million and $7.0 million,
respectively. Initial direct costs, net of any fees collected, are deferred and
amortized over the life of the contract using the interest method which
reflects a constant effective yield.
RECOURSE CREDIT ENHANCEMENTS--The most important source of permanent funding
for the Company for equipment loan financing has been securitization and other
forms of structured finance. 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
F-9
<PAGE>
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 majority of the credit
enhancements are recorded as subordinated interests of the present value of the
discounted cash flows. The recorded assets are relieved based on the unique
structure of the credit enhancement and the proportional cash flow.
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.
RESIDUAL VALUATION--Residual values, representing the estimated value of the
equipment at the end of the lease term, are recorded in the financial
statements at the inception of each fair market value lease as amounts
estimated by management based upon its experience and judgment.
RECEIVABLES IMPAIRMENT--Impaired receivables are measured based on the
present value of the expected cash flows discounted at the receivables'
effective interest rate or the fair value of the collateral. A receivable is
considered impaired when it becomes probable the Company will be unable to
collect all amounts due according to the contract terms.
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 is recorded at cost and depreciated on a straight-line basis
over the estimated useful life of the equipment. The residual values for
operating leases are excluded from the leased equipment's net depreciable
basis. The Company evaluates residual value for potential impairment on an
ongoing basis and records any required changes in valuation. 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 approximates 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).
INVESTMENTS IN INVESTEES--The investments in investees consist of common and
nonvoting preferred equity interests in unrelated entities. The Company
accounts for its investments in the common stock of these entities using either
the cost or equity method of accounting, depending upon its ownership interests
and its ability to influence policies and operations of 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
("MEFC"). Goodwill relating to the acquisition of MEFC 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.
F-10
<PAGE>
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
OTHER ASSETS--Other assets consist of prepaid financing costs, accrued
interest, advances related to the Company's serviced portfolio, equipment held
for sale or lease, which is stated at the lower of cost or its net realizable
value, and miscellaneous accounts receivable.
ACCOUNTS PAYABLE--Accounts payable includes equipment payables for equipment
fundings of $40.8 million and $29.2 million at June 30, 1998 and 1997,
respectively.
DEBT ISSUANCE COSTS--Debt issuance costs related to the Company's warehouse
facilities, securitizations, senior notes 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 three categories: income on fixed payment transactions, income on
variable rate transactions and income on medical receivables. The interest
component of scheduled payments on notes secured by equipment and direct
financing lease fixed payment transactions is calculated using the interest
method in order to approximate a level rate of return on the net investment.
The interest component of notes secured by equipment and direct financing lease
variable rate transactions is calculated and accrued monthly on the remaining
principal balance. The interest component on medical receivables is calculated
and accrued monthly on the average balance outstanding during the period.
NET 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 funding through the whole loan sale of a transaction
to a third party.
RECOURSE OBLIGATIONS--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. Consequently, in
the event of default by the obligor, the investor would exercise its rights
under the lien with limited or no further recourse against the Company.
OTHER INCOME--Other income consists primarily of contract fees and late
charges, dividends on investments in investees' preferred stock, servicing
fees, placement fees, and gains/losses from asset disposals, and is recorded
when earned.
TAXES ON INCOME--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, gains on sales of financing transactions, and lease transactions in
which the operating lease method of accounting is used for tax purposes and the
financing lease method 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 PER SHARE--The Company adopted SFAS No. 128, Earnings per Share,
as of October 1, 1997. This statement is effective for financial statements
issued for periods ending after December 15, 1997 and has been applied
retroactively. The adoption of this statement did not have a material impact on
the Company's financial position or results of operations.
STOCK-BASED COMPENSATION--The Company accounts for stock-based compensation
using the intrinsic value method under which the Company has not recognized
compensation expense.
F-11
<PAGE>
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
HEDGING INSTRUMENTS--The Company uses various interest rate contracts such as
forward rate agreements, Treasury locks, interest rate swaps, caps and collars
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, which are accounted for as a
financing, 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 sales or securitizations,
which are accounted for as sales, gains or losses from the hedge transactions
are recognized as part of the gain or loss on the sale. Foreign exchange
forward contracts are accounted for as hedges to the extent they are
designated, and are effective as hedges of foreign currency. The net gain or
loss is recorded as a cumulative translation adjustment in shareholders'
equity.
RECENT ACCOUNTING DEVELOPMENTS--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. This statement provides an accounting and reporting standard for
transfers and servicing of financial assets, and extinguishment of liabilities.
After a transfer of financial assets, an entity recognizes the financial and
servicing assets it controls and the liabilities it has incurred, derecognizes
financial assets when control has been surrendered, and derecognizes
liabilities when extinguished. This statement provides standards for
distinguishing transfers of financial assets that are sales from transfers that
are secured borrowings. The adoption of SFAS No. 125 did not have a material
impact on the Company's financial position and the results of operations.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income
and No. 131, Disclosures about Segments of an Enterprise and Related
Information. These statements are effective for fiscal years beginning after
December 15, 1997 and early adoption is permitted. The Company intends to adopt
both standards effective July 1, 1998.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. Management has not
completed an analysis of the impact of applying this new statement.
RECLASSIFICATIONS AND RESTATEMENTS--Certain amounts as previously reported
have been reclassified to conform to the year ended June 30, 1998 presentation.
F-12
<PAGE>
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3. INVESTMENT IN DIRECT FINANCING LEASES AND NOTES SECURED BY EQUIPMENT OR
MEDICAL RECEIVABLES AND EQUIPMENT ON OPERATING LEASES
Receivables in installments are due in varying amounts and are collateralized
by the underlying equipment, along with obligor guarantees and vendor recourse.
Notes collateralized by medical receivables consist of notes receivable
resulting from working capital loans and are due at maturity. Scheduled rents
on operating leases relate to noncancelable operating leases and are due in
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 SCHEDULED
SECURED BY RENTS ON
EQUIPMENT OR OPERATING TOTAL
YEAR ENDING JUNE 30, MEDICAL RECEIVABLES LEASES RECEIVABLE
- - -------------------- ------------------- ----------- ------------
<S> <C> <C> <C>
1999............................... $284,409,000 $ 2,993,000 $287,402,000
2000............................... 225,300,000 2,315,000 227,615,000
2001............................... 135,505,000 2,250,000 137,755,000
2002............................... 75,274,000 1,940,000 77,214,000
2003............................... 33,415,000 1,415,000 34,830,000
Thereafter......................... 14,538,000 428,000 14,966,000
------------ ----------- ------------
Subtotal......................... 768,441,000 11,341,000 779,782,000
Residual valuation................. 14,287,000 -- 14,287,000
------------ ----------- ------------
Total............................ $782,728,000 $11,341,000 $794,069,000
============ =========== ============
</TABLE>
The total receivable balance of $794.1 million is comprised of direct
financing leases (28%), notes secured by equipment (54%), medical receivables
(17%), and scheduled rents on operating leases (1%). The Company is exposed to
credit risk on these receivables. At June 30, 1998, of the 3,614 debtors, the
top ten obligors represented 12.07% of the portfolio. Geographic concentration
for the top five states was New York (21.37%), California (15.37%), Florida
(10.80%), Texas (9.42%), and New Jersey (9.09%). International loans, those
outside the 50 United States, represented 16.60% of the portfolio.
Residual valuation represents the estimated amount to be received at contract
termination from the disposition of equipment financed under fair market value
leases. 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 periodically to determine if the equipment's
anticipated fair market value is below its recorded value.
During the years ended June 30, 1998 and 1997, the Company sold receivables
to third parties realizing gains of $21.0 million and $14.0 million,
respectively. In connection with certain of these transactions, the Company
retained subordinated interests in the receivables totaling $51.9 million and
$46.1 million at June 30, 1998 and 1997, respectively. 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. There can be a wide range in market assumptions
which are used by participants in the market to value such assets. Accordingly,
the Company's estimate of fair value is subjective. Under the sale agreement,
the Company is required to fund any losses on the receivables up to its
subordinated interests. Once repurchased or substituted such leases are
included within the Company's portfolio and are evaluated within the allowance
for possible losses on receivables.
F-13
<PAGE>
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At June 30, 1998, receivables amounting to $558.7 million were assigned as
collateral for long-term debt.
The following is an analysis of the allowance for losses on receivables:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1998 1997 1996
------------------- ---------- ---------- ---------- ---
<S> <C> <C> <C> <C>
Balance, beginning of year....... $5,976,000 $4,026,000 $3,282,000
Provision for losses on
receivables..................... 4,735,000 2,386,000 2,325,000
Allowance assumed in business
acquisition..................... 879,000 -- --
Write-offs, net.................. (1,635,000) (436,000) (1,581,000)
---------- ---------- ----------
Balance, end of year............. $9,955,000 $5,976,000 $4,026,000
========== ========== ==========
</TABLE>
The net investment of non-performing loans, including the managed portfolio,
on which income recognition was suspended was $22.6 million and $20.7 million
at June 30, 1998 and 1997, respectively. Cash collected on all non-accrual
loans is applied to the net investment.
NOTE 4. INVESTMENTS IN INVESTEES
At June 30, 1995, the Company held available-for-sale securities with a
market value of $3.2 million, which it accounted for at market with the
unrealized gain of $1.8 million 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.
At June 30, 1998 and 1997, the Company holds Series F and Series G preferred
stock of DIS valued at $2.5 million (2,482,000 shares) and $2.0 million
(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, under certain
conditions, 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 $0.05 per share to $0.10 per share. In addition, the majority shareholder
of DIS has the right to repurchase the Series F and G preferred stock for $4.5
million plus accrued dividends through September 2001.
During the year ended June 30, 1996, the Company converted a note receivable
totaling $541,000 into shares of outstanding stock of EQ Computer Products and
Services ("CP&S"), whose business is in the
distribution of parts and components used in the repair and maintenance of
microcomputer and associated peripherals. CP&S sells to computer maintenance
firms, independent computer service organizations and original equipment
manufacturers, throughout the United States, engaged in the maintenance and
repair of their own computer equipment and equipment manufactured by others.
During the year ended June 30, 1997, CP&S issued additional shares and had a
reverse stock split. As of June 30, 1997, the Company had 273,773 shares or
14.25% of the outstanding stock of CP&S. The Company accounts for the
investment in this entity under the cost method of accounting as it does not
exert significant influence over the entity. On June 30, 1998, the Company sold
its entire investment in CP&S for an insignificant gain.
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 Asia-Pacific diagnostic imaging marketplace. Initial
capitalization of MEC is 7,000,000 shares of common stock ($5.0 million), 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 the initial $2.0 million investment. The Company accounts for its investment
in MEC under the equity method of accounting. At June 30, 1998, 1997 and 1996,
the Company recognized losses of approximately $439,000, $231,000, and $41,000,
respectively, on this investment.
F-14
<PAGE>
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5. INTEREST BEARING DEBT
WAREHOUSE FACILITIES--The Company's primary credit facility, pursuant to a
revolving credit agreement with a syndicate of banks ("Agreement"), provides
for the borrowing of up to $112.0 million. Borrowings under this facility bear
interest at the Company's option of (i) prime minus 0.25% or (ii) from 1.00% to
1.20% over the 30, 60 or 90-day LIBOR rate based on the Company's leverage
ratio as defined in the Agreement. The Agreement is renewable annually at the
bank syndicate's discretion. 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, 1998, the Company was in
compliance with the financial covenants of the Agreement.
The Company has two $100.0 million interim funding facilities available for
certain equipment loan financing transactions which are to be securitized.
These facilities bear interest at a rate of 0.85% over the 30-day LIBOR rate.
Borrowings under the facilities are secured by certain equipment contracts and
the equipment financed thereunder. In addition, the Company has a $50.0 million
interim facility for loans originated in Brazil and a $6.2 million facility for
loans originated in Australia.
The Company has a $5.0 million facility with a bank for the funding of loans
ineligible for securitization.
The Company has two credit facilities for its medical receivables financing
business. The first facility is a revolving credit facility with a syndicate of
banks for borrowings up to $95 million. Borrowings in this facility bear
interest at LIBOR plus 1.45%. The second facility is for $30.0 million with an
interest rate of 30-day LIBOR plus 1.90% and matures in September 1998.
LONG-TERM DEBT - The discounted receivables are 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.
Future annual maturities of discounted receivables, net of capitalized
issuance costs of $7.2 million, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
--------------------
<S> <C>
1999........................................................ $ 94,115,000
2000........................................................ 75,228,000
2001........................................................ 144,183,000
2002........................................................ 20,004,000
2003........................................................ 6,915,000
Thereafter.................................................. 1,675,000
------------
Total..................................................... $342,120,000
============
</TABLE>
All of the discounted receivables have been permanently funded through ten
structured transactions which were initiated during fiscal years 1993 through
1998. Debt under these securitizations are limited recourse and bear interest
at fixed rates ranging between 5.62% to 12.85% and floating interest rates
ranging between 0.83% and 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 or residual interests and contain various recourse provisions.
Included above is $15.5 million from the Company's securitization of some of
its net retained subordinated positions in its securitizations and whole loan
sales. This transaction was completed on July 31, 1996.
F-15
<PAGE>
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company has net convertible subordinated notes outstanding of $13.4
million and $13.3 million at June 30, 1998 and 1997, respectively. The notes
are convertible into common shares at $10.60 per share at the discretion of the
noteholders, bear interest at a rate of 9 1/8% payable in quarterly
installments of interest only and mature in June 2002. There were no
conversions in fiscal year 1998. During the year ended June 30, 1997, $600,000
of these notes were converted into 56,603 shares of common stock of the
Company. Cumulatively, $1.1 million of these notes have been converted into
103,772 shares of common stock of the Company.
On January 30, 1997, the Company completed a public offering of $100.0
million principal amount of 9 7/8% Senior Notes due 2004. Interest is payable
semiannually on February 1 and August 1 of each year, commencing on August 1,
1997. The Senior Notes will be redeemable at the option of the Company in whole
or in part at any time on or after February 1, 2002 at specified redemption
prices. The proceeds from the sale are being 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.
In addition, the Company has a $4.7 million facility with a foreign bank to
fund a portfolio of equipment loans in Turkey.
The following chart summarizes interest-bearing credit facilities as of June
30, 1998 and 1997:
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998 AS OF JUNE 30, 1997
AMOUNT MATURITY ------------------- --------------------
CREDIT FACILITY AVAILABLE DATE BALANCE RATE BALANCE RATE
--------------- --------- -------- ------------------- ----------- --------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
SHORT-TERM DEBT
Warehouse facilities.... $498,208 Various $ 82,828 7.71% $ 44,962 7.10%
LONG-TERM DEBT
Discounted receivables.. $ -- Various $ 342,120 8.02% $ 317,863 8.60%
9 7/8% Senior notes..... $ -- 2004 $ 96,486 10.90% $ 95,883 10.96%
Other debt.............. $ -- Various $ 15,808 8.38% $ 8,168 7.63%
Convertible sub. debt... $ -- 2002 $ 13,439 10.30% $ 13,324 10.38%
</TABLE>
NOTE 6. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The following represents a summary of the major components of selling,
general and administrative expenses:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------
1998 1997 1996
------- -------- ------
(IN THOUSANDS OF
DOLLARS)
<S> <C> <C> <C>
Salaries and benefits.................................. $ 7,433 $ 5,276 $3,241
Professional fees...................................... 4,191 2,860 2,572
Travel and entertainment............................... 1,495 868 503
Occupancy and Equipment................................ 3,097 2,383 1,863
Other.................................................. 2,277 2,730 1,754
------- -------- ------
Total SG&A........................................... $18,493 $ 14,117 $9,933
======= ======== ======
</TABLE>
F-16
<PAGE>
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7. INCOME TAXES
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Current taxes......................... ($1,539,000) $2,766,000 $6,120,000
Foreign............................... 399,000 -- --
Deferred.............................. 10,861,000 3,865,000 (28,000)
----------- ---------- ----------
Total............................... $9,721,000 $6,631,000 $6,092,000
=========== ========== ==========
</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,
--------------------------------------------------
1998 1997 1996
---------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Provision for income taxes
at the federal statutory
rate..................... $ 7,896,000 35.0% $5,448,000 35.0% $4,993,000 35.0%
State income taxes, net of
federal tax benefit...... 1,023,000 4.5% 850,000 5.4% 1,045,000 7.3%
Foreign taxes, net of
federal tax benefit...... 259,000 1.1% -- -- -- --
Limitation on utilization
of foreign losses........ 332,000 1.5% -- -- -- --
Other..................... 211,000 0.9% 333,000 2.1% 54,000 0.4%
----------- ---- ---------- ---- ---------- ----
Total................... $ 9,721,000 43.0% $6,631,000 42.5% $6,092,000 42.7%
=========== ==== ========== ==== ========== ====
</TABLE>
Earnings before minority interest, equity in net loss of investees, and
provision for income taxes consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Domestic................................ $21,783,000 $15,040,000 $14,323,000
Foreign................................. 1,109,000 435,000 --
----------- ----------- -----------
Total................................... $22,892,000 $15,475,000 $14,323,000
=========== =========== ===========
</TABLE>
The major components of the Company's net deferred tax liabilities of $19.4
million and $8.6 million at June 30, 1998 and 1997, respectively, are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
Accumulated depreciation...................... $ 30,576,000 $ 23,511,000
Deferred recognition of lease income.......... (16,086,000) (14,740,000)
Deferred gain on financing transactions....... 8,955,000 1,977,000
Loss on hedging activities.................... 1,397,000 1,258,000
Allowances for uncollectible receivables...... (3,584,000) (2,322,000)
State income taxes............................ (1,004,000) (454,000)
Other......................................... (861,000) (620,000)
------------ ------------
Total....................................... $ 19,393,000 $ 8,610,000
============ ============
</TABLE>
F-17
<PAGE>
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8. SHAREHOLDERS' EQUITY
During fiscal 1998, the Company issued 300,000 shares of its common stock in
a private offering and 2,640,000 in a public offering for which it received net
proceeds of $4.9 million and $53.1 million, respectively. The net proceeds were
used (i) to fund the Company's growth, (ii) develop the Company's international
operations, including the origination of medical equipment loans outside the
United States, (iii) for other working capital needs, and (iv) for general
corporate purposes. The 400,000 shares for the 1995 MEFC acquisition were
issued in June 1998.
In March 1998, the Company issued options to purchase a total of 50,000
common shares at $15.3125 per share to non-employee Directors of the Company.
The options vest at various dates through August 2000 and expire in March 2008.
In November 1997, the Company acquired a healthcare-based merchant banking
group whose key services are private debt placement, loan syndication, bridge
financing, and mortgage loan arrangement for the long-term/assisted care and
specialized hospital markets. The Company issued 84,011 shares of its common
stock for the acquisition. The transaction was accounted for as a pooling of
interests and therefore, all prior financial statements presented have been
restated as if the merger took place at the beginning of such periods. The
shares were allocated to the four companies and accounted for by the pooling of
interests as follows:
<TABLE>
<S> <C> <C>
J. G. Wentworth Securities, Inc......................... 42,005 Fiscal 1995
J. G. Wentworth Mortgage Funding LP..................... 27,100 Fiscal 1997
J. G. Wentworth Partners LP............................. 10,840 Fiscal 1997
J. G. Wentworth Partners, Inc........................... 4,066 Fiscal 1997
------
Total................................................. 84,011
======
</TABLE>
In June 1997, the Company granted options to purchase 100,000 shares of the
Company's common stock at an exercise price of $13.50 per share as compensation
to a financial advisory firm. The options will vest on a pro-rata basis over a
twenty-four month period, or 4,167 shares per month. The options are
exercisable for a period of five years from the date of grant.
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 and $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 addition, in November 1990, the Company
issued warrants to purchase 35,000 common shares at $8.50 per share to an
unrelated party. Such shares were exercised during the year ended June 30,
1996.
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.
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. During each of the years ended June 30, 1998
and 1997, 10,000 shares at $8.375 and 10,000 at $7.625 were converted. The
warrants vested at various dates through November 1996 and expire at various
dates through 2003.
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. There
F-18
<PAGE>
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
were no conversions to common stock during fiscal 1998. During the year ended
June 30, 1997, $600,000 of these notes were converted into 56,603 shares of
common stock. As of June 30, 1998, cumulative conversions of these notes were
$1.1 million into 103,772 shares of common stock.
NOTE 9. STOCK OPTION PLAN AND INCENTIVE AGREEMENT
The Company had a stock option plan from August 1986 that provided 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 this 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 90 days subsequent to the termination of the employee and
are returned to the plan. This plan expired in August 1996.
The Company has a stock option plan from August 1996 that provides for the
granting of options to employees, consultants and directors to purchase up to
1,500,000 shares of the Company's common stock at the fair market value at the
date of grant. Options granted under this 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 90 days subsequent to the
termination of the employee and are returned to the plan. This plan expires
August 2006.
The following table summarizes the employee activity under the plans for the
periods indicated:
<TABLE>
<CAPTION>
EXERCISE WEIGHTED AVERAGE
OPTIONS PRICE PER EXERCISE PRICE
OUTSTANDING SHARE PER SHARE
----------- ------------- ----------------
<S> <C> <C> <C>
Outstanding at July 1, 1995......... 680,294 $ 1.44-$13.50 $ 8.16
Granted............................. 130,500 $11.63-$13.13 $12.96
Exercised........................... (152,085) $ 1.44-$13.50 $ 8.38
Canceled............................ (37,000)
---------
Outstanding at June 30, 1996........ 621,709 $ 1.75-$13.13 $ 9.14
Granted............................. 186,500 $12.75-$14.63 $14.36
Exercised........................... (40,875) $ 5.00-$10.38 $ 7.56
Canceled............................ (8,534)
---------
Outstanding at June 30, 1997........ 758,800 $ 1.75-$14.63 $10.47
Granted............................. 597,500 $14.44-$25.06 $16.83
Exercised........................... (109,499) $ 1.75-$15.31 $ 7.94
Canceled............................ (1,350)
---------
Outstanding at June 30, 1998........ 1,245,451 $ 4.06-$25.06 $13.75
=========
</TABLE>
F-19
<PAGE>
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes stock options outstanding at June 30, 1998:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OF OPTIONS REMAINING WEIGHTED AVERAGE
RANGE OF EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE
----------------------- ----------------- ---------------- ----------------
<C> <C> <S> <C>
$ 4.01-$ 6.00 52,800 3 $ 5.01
$ 6.01-$ 9.00 137,400 4 $ 8.08
$ 9.01-$14.00 300,784 6 $11.30
$14.01-$15.00 181,167 8 $14.62
$15.01-$18.00 403,300 8 $15.36
$18.01-$20.00 80,000 8 $19.16
$20.01-$25.50 90,000 8 $21.91
---------
1,245,451 7 $13.75
=========
</TABLE>
As of June 30, 1998, options to purchase 514,817 shares were exercisable.
If compensation cost for the Company's stock option plan had been determined
based on the fair value at the date of awards consistent with the fair value
method described in SFAS No. 123, the Company's net income, basic earnings per
share, and diluted earnings per share would be reduced to the proforma amounts
at June 30, 1998 of $12.0 million, $1.05 and $0.97 and at June 30, 1997 of $8.7
million, $0.78 and $0.70, respectively. Significant assumptions used to
calculate the fair value of the awards for June 30, 1998 and 1997,
respectively, are as follows: weighted average risk free rate of return of 6.0%
and 6.3%; expected option life of 60 months; expected volatility of 38% and
32%; and no expected dividends in either year.
The Company has an employee incentive agreement ("Agreement"). Under the
Agreement, the Company has agreed, subject to the discretion of its
Compensation Committee, to issue from time to time an aggregate of not more
than 200,000 shares of common stock of the Company ("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, 2001, 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 the 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 at the
date upon which the rights to receive such shares are awarded by the
Compensation Committee.
F-20
<PAGE>
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10. RECONCILIATION OF EARNINGS PER SHARE CALCULATION
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------
1998 1997 1996
------- ------- -------
(IN THOUSANDS
EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
BASIC
Income available to common shareholders................ $12,858 $ 8,563 $ 8,165
Average common shares.................................. 11,464 10,968 9,947
Basic earnings per common share........................ $ 1.12 $ 0.78 $ 0.82
======= ======= =======
DILUTED
Income available to common shareholders................ $12,858 $ 8,563 $ 8,165
Effect of dilutive securities:
Convertible debentures............................... 736 736 765
------- ------- -------
Diluted income available to common shareholders........ $13,594 $ 9,299 $ 8,930
Average common shares.................................. 11,464 10,968 9,947
Effect of dilutive securities:
Warrants............................................. 97 29 37
Options.............................................. 374 179 217
Convertible debentures............................... 1,311 1,311 1,368
------- ------- -------
Diluted average common shares.......................... 13,246 12,487 11,569
Diluted earnings per common share...................... $ 1.03 $ 0.74 $ 0.77
======= ======= =======
</TABLE>
NOTE 11. RELATED PARTY TRANSACTIONS
The Company's principal executive offices located in Doylestown, Pennsylvania
are leased from a party related to a shareholder and director of the Company.
The lease commenced in December 1994 and the Company recorded rent expense
under this lease of $322,229, $242,510, and $222,750 for the years ended June
30, 1998, 1997, and 1996, respectively.
At June 30, 1998 and 1997, receivables in installments from investees totaled
$6.6 million and $9.5 million, respectively.
As of June 30, 1998 and 1997, the Company had loans receivable from Company
officers totaling $550,000 and $505,000, respectively.
As of June 30, 1998 and 1997, the Company had investments in preferred stock
and dividends of DIS totaling $5.1 million.
As of June 30, 1998 and 1997, the Company had convertible subordinated notes
at an unamortized cost totaling $9.6 million to related parties.
F-21
<PAGE>
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 12. 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 August 2007. Rent expense for the years ended
June 30, 1998, 1997 and 1996 amounted to $883,000, $673,000 and $655,000,
respectively. Future minimum lease payments under these leases are as follows:
<TABLE>
<CAPTION>
FUTURE MINIMUM LEASE PAYMENTS
-----------------------------
YEAR ENDING JUNE 30,
--------------------
<S> <C>
1999........................................................ $1,186,000
2000........................................................ 1,316,000
2001........................................................ 1,126,000
2002........................................................ 1,125,000
2003........................................................ 1,034,000
Thereafter.................................................. 2,152,000
----------
Total..................................................... $7,939,000
==========
</TABLE>
CONTINGENCIES--Under certain limited recourse agreements, the Company may be
required to provide for losses incurred on uncollected lease and medical
receivables previously securitized. At June 30, 1998, the maximum contingent
liability under the limited recourse agreements amounted to $51.9 million. 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 a revolving $180 million interim securitization facility with
an option to sell to it certain equipment loans and leases. As of June 30,
1998, $80.1 million of equipment loans and leases were being serviced for this
facility. The Company's obligations under this facility include servicing of
the assets and assisting the owner in the securitization of the assets, if the
owner chooses to securitize.
The Company has credit lines of $7.0 million available from four foreign
banks, of which $4.4 million was used as of June 30, 1998 to provide for the
future payment of guarantees made by DVI Europe, a branch office of DVI
Financial Services. The Company records the present value of the future
obligation as an asset within receivables and corresponding liability within
other liabilities at the date the guarantee is assumed. At June 30, 1998 the
present value recorded for these guarantees was $3.0 million, while the
estimated future value was $4.3 million.
The Company has receivables from and investments in DIS aggregating $13.3
million and $13.8 million at June 30, 1998 and 1997. DIS received a qualified
going concern opinion from its auditors on its December 31, 1997, 1996 and 1995
financial statements. Management has reviewed the value of the collateral that
secures the loans to DIS and is confident that there is sufficient collateral
to cover loans outstanding.
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.
As of June 30, 1998 the Company had loan commitments of $289.5 million not
funded.
F-22
<PAGE>
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 13. BENEFIT PLANS
The Company maintains and administers an Employee Savings Plan ("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 $60,000, $60,000, and $45,000 to the Plan during the
years ended June 30, 1998, 1997 and 1996, respectively.
NOTE 14. ACQUISITIONS
On November 1, 1997, the Company acquired a healthcare-based merchant banking
group whose key services are private debt placement, loan syndication, bridge
financing, and mortgage loan arrangement for the long-term/assisted care and
specialized hospital markets. The group included J. G. Wentworth Partners,
Inc.; J. G. Wentworth Partners, LP; J. G. Wentworth Mortgage Funding, LP; and
J. G. Wentworth Securities, Inc. (collectively, "Wentworth"). The Company
issued 84,011 shares of its common stock for the acquisition at a price of
$18.45 per share. The transaction was accounted for as a pooling of interests
and therefore, all prior financial statements presented have been restated as
if the merger took place at the beginning of such periods.
Separate results of operations for the periods prior to the merger are as
follows:
<TABLE>
<CAPTION>
FOUR MONTHS YEAR ENDED YEAR ENDED
ENDED OCTOBER 31, JUNE 30, JUNE 30,
1997 1997 1996
----------------- ---------- ----------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
TOTAL FINANCE AND OTHER INCOME:
DVI, Inc......................... $ 21,385 $ 55,971 $49,013
Wentworth........................ 632 363 25
-------- -------- -------
Total.......................... $ 22,017 $ 56,334 $49,038
======== ======== =======
NET EARNINGS:
DVI, Inc......................... $ 2,389 $ 8,941 $ 8,175
Wentworth........................ 12 (378) (10)
-------- -------- -------
Total.......................... $ 2,401 $ 8,563 $ 8,165
======== ======== =======
</TABLE>
In June 1998, the Company acquired for cash a partnership interest in and
certain assets of Third Coast Capital, L.L.C. ("TCC"), for $9.3 million. TCC is
a Chicago-based venture leasing operation, founded in 1996, and provides asset-
based financing to emerging growth companies for their key operating assets
through lease lines of credit and other financial structures. The purchase
price was allocated to individual assets based on estimates of their fair
market value and resulted in no goodwill. The acquired assets are included in
the Company's balance sheet for the year ended June 30, 1998 with no effect on
operating statements. Had the purchase of TCC occurred two years prior, its
revenue and net earnings would have had an immaterial effect on the
consolidated results of the Company's operations for fiscal years 1998 and
1997.
NOTE 15. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
A summary of the estimated fair value of the Company's consolidated financial
instruments at June 30, 1998 and 1997 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.
F-23
<PAGE>
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The use of different market assumptions and/or estimation methodologies may
have a material effect on the estimated fair value amounts.
<TABLE>
<CAPTION>
CARRYING ESTIMATED
YEAR ENDED JUNE 30, 1998 AMOUNT FAIR VALUE
------------------------ ------------ ------------
<S> <C> <C>
Assets:
Receivable in installments (excluding
investment in direct financing leases)........ $227,469,390 $227,603,558
Liabilities:
Discounted receivables......................... $342,120,099 $344,187,124
<CAPTION>
CARRYING ESTIMATED
YEAR ENDED JUNE 30, 1997 AMOUNT FAIR VALUE
------------------------ ------------ ------------
<S> <C> <C>
Assets:
Receivable in installments (excluding
investment in direct financing leases)........ $236,843,000 $236,532,000
Liabilities:
Discounted receivables......................... $317,863,000 $294,729,000
</TABLE>
The carrying values of cash and cash equivalents, restricted cash and cash
equivalents, amounts due from portfolio sales, notes collateralized by medical
receivables, accounts payable, accrued expenses and other liabilities,
borrowings under warehouse facilities, senior notes, other debt and convertible
subordinated notes approximate fair values at June 30, 1998 and 1997.
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, 1998 and 1997. 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 $349.3 million and $252.9
million as of June 30, 1998 and 1997, 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, 1998 and 1997. 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, 1998; therefore, current estimates of fair value
may differ significantly from the amounts presented herein. All instruments
held by the Company are classified as other than trading.
F-24
<PAGE>
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DERIVATIVE ACTIVITY
<TABLE>
<CAPTION>
JUNE 30, 1998 JUNE 30, 1997
--------------------------------------- -------------------------------------
NOTIONAL FAIR DEFERRED NOTIONAL FAIR DEFERRED
AMOUNT VALUE GAINS/(LOSSES) AMOUNT VALUE GAINS/(LOSSES)
-------------- --------- ------------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Swaps................... $ 23.5 million $ (21,397) -- $23.4 million $115,000 --
Options................. $150.0 million $(107,938) $(443,559) $25.0 million $(49,000) --
Forwards:
Treasury locks........ -- -- -- $70.0 million $ 75,000 --
Foreign exchange
currency forward....... DM 7.5 million $ 36,650 $ (10,000) -- -- --
</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, pricing of 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
Swaps 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 5.84% and
receive either a floating rate of the H-15 composite commercial paper rate or
six-month LIBOR. The swaps mature through October 2004.
FORWARDS AND OPTIONS
Treasury lock agreements, which are forward contracts, and option collars are
used to hedge the interest rate risk associated with anticipated
securitizations and/or sales. These instruments lock in a specific rate, or a
narrow range of rates, of Treasury notes 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, 1998 are for securitizations and
sales expected to occur in the first and second quarters of fiscal 1999. In
1998, the Company deferred $1.3 million in losses associated with transactions
securitized compared with $1.6 million in deferred losses in 1997. The Company
recognized losses on loan sales of $243,000, $132,000 and $27,000 for years
ended June 30, 1998, 1997 and 1996, respectively.
FOREIGN EXCHANGE FORWARD CONTRACTS--The Company has international operations
and foreign currency exposures at some of these operations due to lending in
currencies other than the local currency. As a general practice, the Company
has not hedged the foreign exchange exposure related to either the translation
of overseas earnings into U.S. dollars or the translation of overseas equity
positions back to U.S. dollars. A foreign exchange forward contract is used to
hedge the amount receivable to the U.S. parent for a specific portfolio in
Deutsche Marks. At June 30, 1998, the Company had 7.5 million Deutsche Marks in
forward contracts. Foreign exchange forward contracts are accounted for as
hedges to the extent they are designated, and are effective as hedges of
foreign currency. The net gain/loss deferred at June 30, 1998 is immaterial.
F-25
<PAGE>
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 16. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of the quarterly results of operations for the
fiscal years ended June 30, 1998 and 1997:
<TABLE>
<CAPTION>
FISCAL 1998
-----------------------------------------
THREE MONTHS ENDED
-----------------------------------------
SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30
------------ ----------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Finance and other income............. $16,134 $18,477 $19,486 $20,258
Net finance income................... 9,530 11,477 11,566 13,547
Earnings before minority interest,
provision for income taxes and
equity in net loss of investees..... 4,752 5,338 5,488 7,314
Net earnings......................... 2,590 3,014 3,365 3,889
Net earnings per common and common
equivalent share--basic............. $ 0.23 $ 0.27 $ 0.30 $ 0.32
======= ======= ======= =======
Net earnings per common and common
equivalent share--diluted........... $ 0.22 $ 0.25 $ 0.27 $ 0.29
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1997
-----------------------------------------
THREE MONTHS ENDED
-----------------------------------------
SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30
------------ ----------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Finance and other income............. $12,616 $13,690 $15,108 $14,920
Net finance income................... 6,647 7,632 7,769 9,930
Earnings before minority interest,
provision for income taxes and
equity in net loss of investees..... 3,521 3,748 3,734 4,472
Net earnings......................... 2,001 2,199 1,986 2,377
Net earnings per common and common
equivalent share--basic............. $ 0.18 $ 0.20 $ 0.18 $ 0.22
======= ======= ======= =======
Net earnings per common and common
equivalent share--diluted........... $ 0.17 $ 0.19 $ 0.17 $ 0.21
======= ======= ======= =======
</TABLE>
NOTE 17. SUBSEQUENT EVENTS
On July 21, 1998 (the "Filing Date"), Allegheny Health Education and Research
Foundation and its affiliates ("Allegheny") filed for protection under Chapter
11 of the United States Bankruptcy Code. As of the Filing Date, the Company had
receivables from Allegheny of $14,401,000 arising from the rental by the
Company of equipment owned by the Company pursuant to fair market value leases.
As of this date, no events have occurred and no facts have been discovered by
the Company with respect to the Company's receivables from Allegheny that would
indicate that any material diminution in the value of these receivables is
likely.
On September 15, 1998, the Company announced its intention to acquire for
cash substantially all the assets and retain all the employees of Affiliated
Capital Corporation ("Affiliated") from Irwin Financial Corporation. The
purchase, as well as the assets' ultimate purchase price which will approximate
$74.0 million, is subject to the completion of due diligence, certain
governmental approvals, and the execution of a definitive purchase agreement.
The purchase price will be allocated to the assets on the basis of their
estimated fair
F-26
<PAGE>
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
market value and is expected to result in intangible assets of approximately
$6.0 million which will be amortized on a straight line basis over a 15-year
period. The purchase is expected to close near the end of DVI's first fiscal
quarter. Affiliated is a Chicago-based medical equipment leasing company,
founded 15 years ago, and employs 39 people. It operates in five regional sales
offices and generates $50.0 million of new lease transactions a year through 27
vendor relationships. Affiliated has approximately 8,700 customer contracts
involving doctors and dentists and the average cost of the new leased equipment
is $15,000. Had the purchase of Affiliate occurred at the beginning of fiscal
1998 the Company's total finance and other income would have increased by $9.1
million and net earnings would have decreased by $49,000.
F-27
<PAGE>
DVI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1998 1998
------------- --------
(UNAUDITED)
<S> <C> <C>
Cash and cash equivalents.............................. $ 46,819 $ 15,192
Cash and cash equivalents, restricted.................. 47,048 47,582
Amounts due from portfolio sale........................ 10,766 --
Receivables:
Investment in direct financing leases and notes
secured by equipment or medical receivables:
Receivables in installments......................... 660,438 572,679
Receivables and notes--related parties.............. 27,011 6,563
Recourse credit enhancements........................ 54,050 51,883
Notes collateralized by medical receivables......... 139,867 137,316
Residual valuation.................................. 24,879 14,287
Unearned income..................................... (82,334) (69,367)
-------- --------
Net investment in direct financing leases and notes
secured by equipment or medical receivables.......... 823,911 713,361
Less: Allowance for losses on receivables............. (11,894) (9,955)
-------- --------
Net receivables........................................ 812,017 703,406
Equipment on operating leases
(net of accumulated depreciation of $3,554 (September
30, 1998)
and $3,189 (June 30, 1998))........................... 14,010 14,773
Furniture and fixtures
(net of accumulated depreciation of $2,901 (September
30, 1998)
and $2,600 (June 30, 1998))........................... 4,978 4,225
Investments in investees............................... 6,977 7,120
Goodwill, net.......................................... 10,070 3,646
Other assets........................................... 22,577 20,976
-------- --------
Total assets........................................ $975,262 $816,920
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable....................................... $ 72,133 $ 48,030
Accrued expenses and other liabilities................. 18,731 18,271
Borrowings under warehouse facilities.................. 222,823 82,828
Deferred income taxes.................................. 19,393 19,393
Long-term debt, net:
Discounted receivables (primarily limited recourse)... 303,280 342,120
9 7/8% Senior notes due 2004.......................... 96,643 96,486
Other debt............................................ 43,099 15,808
Convertible subordinated notes........................ 13,467 13,439
-------- --------
Total long-term debt, net.............................. 456,489 467,853
-------- --------
Total liabilities...................................... 789,569 636,375
Minority interest in consolidated subsidiaries......... 8,131 8,260
Shareholders' equity:
Preferred stock, $10.00 par value; authorized 100,000
shares; no shares issued
Common stock, $0.005 par value; authorized 25,000,000
shares;
outstanding 14,080,458 shares (September 30, 1998)
and 14,080,358 shares (June 30, 1998)................ 70 70
Additional capital.................................... 133,318 133,516
Retained earnings..................................... 43,931 39,387
Cumulative translation adjustments.................... 243 (688)
-------- --------
Total shareholders' equity.......................... 177,562 172,285
-------- --------
Total liabilities and shareholders' equity.......... $975,262 $816,920
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-28
<PAGE>
DVI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS OF DOLLARS EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------
1998 1997
--------- ---------
<S> <C> <C>
Finance and other income:
Amortization of finance income........................... $ 17,919 $ 14,240
Other income............................................. 3,896 1,894
--------- ---------
Total finance and other income............................. 21,815 16,134
Interest expense........................................... 12,543 11,628
--------- ---------
Net interest and other income.............................. 9,272 4,506
Net gain on sale of financing transactions................. 6,854 5,024
--------- ---------
Net finance income......................................... 16,126 9,530
Selling, general and administrative expenses............... 6,646 3,786
Provision for losses on receivables........................ 1,505 992
--------- ---------
Earnings before minority interest, equity in net loss
of investees, and provision for income taxes............... 7,975 4,752
Minority interest in net loss of consolidated subsidiaries... 69 --
Equity in (net loss) of investees............................ (92) (205)
Provision for income taxes................................... 3,408 1,957
------- -------
Net earnings................................................. $ 4,544 $ 2,590
======= =======
Net earnings per share:
Basic...................................................... $ 0.32 $ 0.23
======= =======
Diluted.................................................... $ 0.30 $ 0.22
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-29
<PAGE>
DVI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS OF DOLLARS EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------
1998 1997
--------- ---------
<S> <C> <C>
Net earnings............................................... $ 4,544 $ 2,590
Other comprehensive income, net of tax:
Foreign currency translation adjustment.................. 931 (53)
--------- ---------
Comprehensive income....................................... $ 5,475 $ 2,537
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-30
<PAGE>
DVI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS OF DOLLARS EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK
-----------------
$0.005 PAR VALUE CUMULATIVE TOTAL
----------------- ADDITIONAL RETAINED TRANSLATION SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT EQUITY
---------- ------ ---------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances at July 1,
1997................... 10,590,859 $53 $ 69,194 $26,529 $(116) $ 95,660
Issuance of common stock
upon exercise of stock
options and warrants... 149,499 1,756 1,756
Net proceeds from issu-
ance of common stock... 2,940,000 15 57,918 57,933
Issuance of common stock
for acquisition of
MEFC................... 400,000 2 4,648 4,650
Currency translation
adjustment............. (572) (572)
Net earnings............ 12,858 12,858
---------- --- -------- ------- ----- --------
Balances at June 30,
1998................... 14,080,358 $70 $133,516 $39,387 $(688) $172,285
Issuance of common stock
upon exercise of stock
options and warrants... 100
Cost of issuance of
common stock........... (198) (198)
Currency translation
adjustment............. 931 931
Net earnings............ 4,544 4,544
---------- --- -------- ------- ----- --------
Balances at September
30, 1998............... 14,080,458 $70 $133,318 $43,931 $ 243 $177,562
========== === ======== ======= ===== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-31
<PAGE>
DVI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings........................................... $ 4,544 $ 2,590
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Equity in net loss of investees...................... 92 205
Depreciation and amortization........................ 3,323 2,826
Additions to allowance accounts...................... 1,505 992
Net gain on sale of financing transactions........... (6,854) (5,024)
Minority interest.................................... (129) --
Cumulative translation adjustments................... 982 (50)
Changes in assets and liabilities, net of effects
from acquisition of business:
(Increases) decreases in:
Cash and cash equivalents, restricted............. 534 (3,284)
Amounts due from portfolio sale................... (10,766) --
Receivables....................................... (1,199) (511)
Other assets...................................... (852) (439)
Increases (decreases) in:
Accounts payable.................................. 22,626 161
Accrued expenses and other liabilities............ 460 (2,721)
--------- ---------
Total adjustments...................................... 9,722 (7,845)
--------- ---------
Net cash provided by (used in) operating activities.... 14,266 (5,255)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of business................................ (74,678) --
Cost of equipment acquired............................. (167,502) (128,383)
Portfolio receipts net of amounts included in income
and proceeds from sales of financing transactions..... 135,621 125,127
Net increase in notes collateralized by medical
receivables........................................... (2,544) (17,853)
Furniture and fixtures additions....................... (870) (1,186)
--------- ---------
Net cash used in investing activities................ (109,973) (22,295)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock options and warrants................. -- 427
Cost of issuance of common stock....................... (198) --
Borrowings under:
Warehouse facilities................................. 209,230 194,815
Long-term debt....................................... 28,149 --
Repayments on:
Warehouse facilities................................. (69,415) (122,910)
Long-term debt....................................... (40,432) (30,449)
--------- ---------
Net cash provided by financing activities.............. 127,334 41,883
--------- ---------
Net increase in cash and cash equivalents............... 31,627 14,333
Cash and cash equivalents, beginning of period.......... 15,192 9,187
--------- ---------
Cash and cash equivalents, end of period................ $ 46,819 $ 23,520
========= =========
CASH PAID DURING THE PERIOD FOR:
Interest............................................... $ 13,578 $ 12,910
========= =========
Income taxes (net of refunds).......................... $ (2,088) $ 72
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-32
<PAGE>
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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. 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, 1998.
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, 1998 and June 30, 1998, the consolidated statements of operations
for the three month periods ended September 30, 1998 and 1997, the consolidated
statements of shareholders' equity for the period from July 1, 1997 through
September 30, 1998, and the consolidated statements of cash flows for the three
month periods ended September 30, 1998 and 1997. The results of operations for
the three month period ended September 30, 1998 are not necessarily indicative
of the results of operations to be expected for the entire fiscal year ending
June 30, 1999.
NOTE 2--RECONCILIATION OF EARNINGS PER SHARE CALCULATION
- - --------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------
1998 1997
--------- ---------
(IN THOUSANDS
EXCEPT PER SHARE
DATA)
<S> <C> <C>
BASIC
- - -----
Income available to common shareholders.................... $ 4,544 $ 2,590
Average common shares...................................... 14,080 11,026
Basic earnings per common share............................ $ 0.32 $ 0.23
========= =========
DILUTED
- - -------
Income available to common shareholders.................... $ 4,544 $ 2,590
Effect of dilutive securities:
Convertible debentures.................................... 184 184
--------- ---------
Diluted income available to common shareholders............ $ 4,728 $ 2,774
Average common shares...................................... 14,080 11,026
Effect of dilutive securities, net:
Warrants.................................................. 94 43
Options................................................... 364 225
Convertible debentures.................................... 1,311 1,311
--------- ---------
Diluted average common shares.............................. 15,849 12,605
Diluted earnings per common share.......................... $ 0.30 $ 0.22
========= =========
</TABLE>
NOTE 3--HEDGE TRANSACTIONS
At September 30, 1998, the Company had $70.0 million in Treasury lock
transactions and $250.0 million in collars. The Company also had $29.8 million
in interest rate swaps. At September 30, 1998, the Company had a total of 20.0
million German Deutsche Marks in forward contracts and cross-currency interest
rate swaps.
F-33
<PAGE>
PROSPECTUS
DVI, INC.
$500,000,000
COMMON STOCK, PREFERRED STOCK, DEPOSITARY SHARES,
DEBT SECURITIES AND WARRANTS
DVI, Inc. (the "Company") may from time to time offer, together or
separately, in one or more series: (i) shares of common stock, par value $.005
per share ("Common Stock"); (ii) shares of preferred stock, par value $10.00
per share ("Preferred Stock"); (iii) debt securities consisting of debentures,
notes or other evidence of indebtedness and having such prices and terms as are
determined at the time of sale ("Debt Securities"); (iv) shares of Preferred
Stock represented by depositary shares ("Depositary Shares"); and (v) warrants
or other rights to purchase Common Stock, Preferred Stock, Depositary Shares,
Debt Securities, or any combination thereof, as may be designated by the
Company at the time of the offering ("Warrants"), with an aggregate public
offering price of up to $500,000,000, in amounts, at prices and on terms to be
determined at the time of offering. The Common Stock, Preferred Stock,
Depositary Shares, Debt Securities and Warrants (collectively, the
"Securities") may be offered, separately or together, in separate series and in
amounts, at prices and on terms to be set forth in one or more supplements to
this Prospectus (each a "Prospectus Supplement").
The specific terms of the Securities in respect of which this Prospectus is
being delivered will be set forth in the applicable Prospectus Supplement and
will include, where applicable, in the case of Common Stock, the number of
shares and the terms of the offering and sale; (ii) in the case of Preferred
Stock, the number of shares, the specific title, the aggregate amount, any
dividend (including the method of calculating payment of dividends), seniority,
liquidation, redemption, voting and other rights, any terms for any conversion
or exchange into other Securities, the initial public offering price and any
other terms; (iii) in the case of Depositary Shares, the fractional share of
Preferred Stock represented by each such Depositary Share; (iv) in the case of
Debt Securities, the specific designation, aggregate principal amount, purchase
price, authorized denomination, maturity, rate or rates or interest (or method
of calculation thereof) and dates for payment thereof, dates from which
interest shall accrue, any exchangeability, conversion, redemption, prepayment
or sinking fund provisions and the currency or currencies or currency unit or
currency units in which principal, premium, if any, or interest, if any, is
payable; and (v) in the case of Warrants, the designation and number, the
exercise price and any other terms in connection with the offering, sale and
exercise of the Warrants. The Common Stock is listed on the New York Stock
Exchange, Inc. ("NYSE") under the symbol "DVI."
The applicable Prospectus Supplement will also contain information, where
applicable, about certain United States federal income tax considerations
relating to, and any listing on a national securities exchange of, the
Securities covered by such Prospectus Supplement, not contained in this
Prospectus.
The Securities may be offered directly to one or more purchasers, through
agents designated from time to time by the Company or to or through
underwriters or dealers. If any agents or underwriters are involved in the sale
of any of the Securities, their names, and any applicable purchase price, fee,
commission or discount arrangement between or among them, will be set forth, or
will be calculable from the information set forth, in an accompanying
Prospectus Supplement. The net proceeds to the Company from such sale will also
be set forth in an accompanying Prospectus Supplement. No Securities may be
sold by the Company without delivery of a Prospectus Supplement describing the
method and terms of the offering of such series of Securities. See "Plan of
Distribution."
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. FOR A DISCUSSION
OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT
IN THE SECURITIES, SEE THE SECTION CAPTIONED "RISK FACTORS" IN THE PROSPECTUS
SUPPLEMENT RELATING TO THE SECURITIES OFFERED THEREBY.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE 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 MAY 4, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
AVAILABLE INFORMATION....................................................... 2
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............................. 3
THE COMPANY................................................................. 3
RATIO OF EARNINGS TO FIXED CHARGES.......................................... 4
USE OF PROCEEDS............................................................. 4
DESCRIPTION OF CAPITAL STOCK................................................ 4
DESCRIPTION OF DEPOSITARY SHARES............................................ 5
DESCRIPTION OF DEBT SECURITIES.............................................. 8
DESCRIPTION OF WARRANTS..................................................... 18
PLAN OF DISTRIBUTION........................................................ 18
EXPERTS..................................................................... 19
LEGAL MATTERS............................................................... 20
</TABLE>
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
Judiciary Plaza, 450 Fifth Street, N.W., 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 can be obtained from the Public Reference Section of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Commission also maintains a Web site that contains reports, proxy
statements and other information regarding registrants that file electronically
with the Commission at http://www.sec.gov. Reports, proxy statements and other
information concerning the Company 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 Common Stock is traded.
This Prospectus constitutes a part of a Registration Statement on Form S-3
(together with all amendments and exhibits, the "Registration Statement") filed
by the Company with the Commission under the Securities Act of 1933, as amended
(the "Securities Act"). This Prospectus omits certain of the information
contained in the Registration Statement and the exhibits and schedules thereto,
in accordance with the rules and regulations of the Commission. For further
information concerning the Company and the Securities offered hereby, reference
is hereby made to the Registration Statement and the exhibits and schedules
filed therewith, which may be inspected without charge at the office of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and copies of
which may be obtained from the Commission at prescribed rates. Any statements
contained herein concerning the provisions of any document are not necessarily
complete, and, in each instance, reference is made to the copy of such document
filed as an exhibit to the Registration Statement or otherwise filed with the
Commission. Each such statement is qualified in its entirety by such reference.
2
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission are incorporated herein by
reference:
(a) The Company's Annual Report on Form 10-K for its fiscal year ended
June 30, 1997, as amended by Form 10-K/A-1 dated October 28, 1997 (the
"1997 10-K").
(b) The Company's Quarterly Reports on Form 10-Q for the quarterly
periods ended September 30, 1997 and December 31, 1997.
(c) The Company's Current Report on Form 8-K dated October 29, 1997.
(d) All other reports filed pursuant to Section 13(a) or 15(d) of the
Exchange Act since the end of the fiscal year covered by the 1997 10-K.
All documents filed by the Company after the date of the Prospectus pursuant
to Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act, prior to the filing
of a post-effective amendment which indicates that all securities offered
hereby have been sold or which deregisters all securities then remaining
unsold, shall be deemed to be incorporated by reference in this Prospectus and
to be a part hereof from the date of the filing of such documents. Any
statement contained in a document incorporated or deemed to be incorporated by
reference into this Prospectus will be deemed to be modified or superseded for
purposes of this Prospectus to the extent that a statement contained in this
Prospectus or any other subsequently filed document which also is or is deemed
to be incorporated by reference into this Prospectus modifies or supersedes
that statement.
THE COMPANY HEREBY UNDERTAKES TO PROVIDE, WITHOUT CHARGE, TO EACH PERSON TO
WHOM THIS PROSPECTUS IS DELIVERED, UPON WRITTEN OR ORAL REQUEST OF SUCH PERSON,
A COPY OF ANY AND ALL DOCUMENTS INCORPORATED BY REFERENCE INTO THE REGISTRATION
STATEMENT OTHER THAN EXHIBITS TO SUCH DOCUMENTS (UNLESS SUCH EXHIBITS ARE
SPECIFICALLY INCORPORATED BY REFERENCE INTO SUCH DOCUMENTS). REQUESTS FOR SUCH
COPIES SHOULD BE DIRECTED TO: DVI, INC., 500 HYDE PARK, DOYLESTOWN,
PENNSYLVANIA 18901 (TELEPHONE: 215-345-6600), ATTENTION: LEGAL DEPARTMENT.
Additional updating information with respect to the matters discussed in this
Prospectus may be provided in the future by means of appendices to this
Prospectus or other documents.
THE COMPANY
The Company is a leading provider of asset-based financing to healthcare
service providers. While its businesses are operated principally in the United
States, the Company also has a significant presence in Latin America as well as
operations in Europe and Asia. Through its medical equipment finance business,
the Company finances the purchase of diagnostic imaging and other sophisticated
medical equipment and also provides vendor financing programs on a world wide
basis. Through its medical receivables financing business, the Company provides
lines of credit collateralized by third party medical receivables to a wide
variety of healthcare providers, many of whom are the Company's equipment
finance customers. In addition to these core businesses, the Company has
recently expanded its financing activities to include loan syndication, private
placement, bridge financing, mortgage loan placement and, to a lesser extent,
merger and acquisition advisory services. Management believes that the
Company's healthcare industry expertise and its broad range of financing
programs has positioned the Company to become the primary source of financing
for its customers.
The executive offices of the Company are located at 500 Hyde Park,
Doylestown, Pennsylvania 18901 (Telephone: 215-345-6600).
3
<PAGE>
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, 1993, 1994, 1995, 1996
and 1997 and for the six months ended December 31, 1996 and 1997.
<TABLE>
<CAPTION>
SIX
MONTHS
ENDED
FISCAL YEAR ENDED JUNE DECEMBER
30, 31,
------------------------ ---------
1993 1994 1995 1996 1997 1996 1997
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio:.................................... 1.89 1.49 1.31 1.47 1.41 1.42 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 the 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 CAPITAL STOCK
The authorized capital stock of the Company consists of 25,000,000 shares of
Common Stock and 100,000 shares of Preferred Stock. As of April 30, 1998, there
were 11,020,108 shares of Common Stock issued and outstanding. No shares of
Preferred Stock are outstanding.
The description of the capital stock set forth below does not purport to be
complete and is qualified in its entirety by reference to the Company's
certificate of incorporation, as amended (the "Certificate of Incorporation"),
and bylaws, as amended (the "Bylaws"). All material terms of the Common Stock
and the Preferred Stock, except those disclosed in the applicable Prospectus
Supplement, are described in this Prospectus.
COMMON STOCK
Holders of shares of Common Stock are entitled to one vote per share on
matters to be voted upon by the stockholders of the Company. Holders of shares
of Common Stock do not have cumulative voting rights; therefore, the holders of
more than 50% of the Common Stock will have the ability to elect all of the
Company's directors. Holders of shares of Common Stock will be entitled to
receive dividends when, as and if declared by the Board of Directors and to
share ratably in the assets of the Company legally available for distribution
to its stockholders in the event of the liquidation, dissolution or winding up
of the Company, in each case subject to the rights of the holders of any
Preferred Stock issued by the Company. Holders of Common Stock have no
preemptive, subscription, redemption or conversion rights.
PREFERRED STOCK
The following description of the Preferred Stock sets forth certain general
terms and provisions of the Preferred Stock to which any Prospectus Supplement
may relate. The statements below describing the Preferred Stock are in all
respects subject to and qualified in their entirety by reference to the
applicable provisions of the
4
<PAGE>
Certificate of Incorporation and Bylaws and any applicable Certificate of
Designations designating the terms of a series of Preferred Stock (a
"Certificate of Designations").
Prior to issuance of shares of each series, the Board of Directors is
required by the Delaware General Corporation Law ("DGCL") and the Certificate
of Incorporation to fix for each series the terms, preferences, conversion or
other rights, voting powers, restrictions, limitations as to dividends or other
distributions, qualifications and terms or conditions of redemption of such
shares as may be permitted by Delaware law. Such rights, powers, restrictions
and limitations could include the right to receive specified dividend payments
and payments on liquidation prior to any such payments to holders of Common
Stock or other capital stock of the Company ranking junior to the Preferred
Stock. The shares of Preferred Stock will be, when issued, fully paid and
nonassessable.
The Board of Directors could authorize the issuance of shares of Preferred
Stock with terms and conditions that could have the effect of discouraging a
takeover or other transaction that holders of Common Stock might believe to be
in their best interests or in which holders of some, or a majority, of the
shares of Common Stock might receive a premium for their shares over the then
market price of such shares of Common Stock.
Reference is made to the Prospectus Supplement relating to the Preferred
Stock offered thereby for specific terms, including: (i) the title and stated
value of such Preferred Stock; (ii) the number of shares of such Preferred
Stock offered, the liquidation preference per share and the offering price of
such Preferred Stock; (iii) the dividend rate(s), period(s) and/or payment
date(s) or method(s) of calculation thereof applicable to such Preferred Stock;
(iv) the date from which dividends on such Preferred Stock shall accumulate, if
applicable; (v) the procedures for any auction and remarketing, if any, for
such Preferred Stock; (vi) the provision for a sinking fund, if any, for such
Preferred Stock; (vii) the provision for redemption, if applicable, of such
Preferred Stock; (viii) any listing of such Preferred Stock on any national
securities exchange; (ix) the terms and conditions, if applicable, upon which
such Preferred Stock will be convertible into Common Stock, including the
conversion price (or manner of calculation thereof); (x) any other specific
terms, preferences, rights, limitations or restrictions of such Preferred
Stock; (xi) a discussion of federal income tax considerations applicable to
such Preferred Stock; (xii) the relative ranking and preference of such
Preferred Stock as to dividend rights and rights upon liquidation, dissolution
or winding up of the affairs of the Company; and (xiii) any limitations on
issuance of any series of Preferred Stock ranking senior to or on a parity with
such series of Preferred Stock as to dividend rights and rights upon
liquidation, dissolution or winding up of the affairs of the Company.
As described under "Description of Depositary Shares," the Company may, at
its option, elect to offer Depositary Shares evidenced by depositary receipts
("Depositary Receipts"), each representing an interest (to be specified in the
Prospectus Supplement relating to the particular series of the Preferred Stock)
in a share of the particular series of Preferred Stock issued and deposited
with a Preferred Stock Depositary (as defined below).
DESCRIPTION OF DEPOSITARY SHARES
The description set forth below, and in any applicable Prospectus Supplement,
of certain provisions of the Deposit Agreement (as defined below) and of the
Depositary Shares and Depositary Receipts summarizes the material terms of the
Deposit Agreement and of the Depositary Shares and Depositary Receipts and is
qualified in its entirety by reference to the form of Deposit Agreement and
form of Depositary Receipts relating to each series of the Preferred Stock.
GENERAL
The Company may, at its option, elect to have shares of Preferred Stock be
represented by Depositary Shares. The shares of any series of the Preferred
Stock underlying the Depositary Shares will be deposited
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under a separate deposit agreement (the "Deposit Agreement") between the
Company and a bank or trust company (the "Preferred Stock Depositary") selected
by the Company. The Prospectus Supplement relating to a series of Depositary
Shares will set forth the name and address of the Preferred Stock Depositary.
Subject to the terms of the Deposit Agreement, each owner of a Depositary Share
will be entitled, proportionately, to all the rights, preferences and
privileges of the Preferred Stock represented thereby (including dividend,
voting, redemption, conversion, exchange and liquidation rights, if any).
The Depositary Shares will be evidenced by Depositary Receipts issued
pursuant to the Deposit Agreement, each of which will represent the applicable
interest in a number of shares of a particular series of the Preferred Stock
described in the applicable Prospectus Supplement.
A holder of Depositary Shares will be entitled to receive the shares of
Preferred Stock (but only in whole shares of Preferred Stock) underlying such
Depositary Shares. If the Depositary Receipts delivered by the holder evidence
a number of Depositary Shares in excess of the whole number of shares of
Preferred Stock to be withdrawn, the Depositary will deliver to such holder at
the same time a new Depositary Receipt evidencing such excess number of
Depositary Shares.
DIVIDENDS AND OTHER DISTRIBUTIONS
The Preferred Stock Depositary will distribute all cash dividends or other
cash distributions, if any, with respect to the Preferred Stock to the record
holders of Depositary Receipts in proportion, insofar as possible, to the
number of Depositary Shares owned by such holders. In the event of a
distribution other than in cash with respect to the Preferred Stock, the
Preferred Stock Depositary will distribute property received by it to the
record holders of Depositary Receipts in proportion, insofar as possible, to
the number of Depositary Shares owned by such holders, unless the Preferred
Stock Depositary determines that it is not feasible to make such distribution
in which case the Preferred Stock Depositary may, with the approval of the
Company, adopt such method as it deems equitable and practicable for the
purpose of effecting such distribution, including sale (public or private) of
such property and distribution of the net proceeds from such sale to such
holders.
The amount so distributed in any of the foregoing cases will be reduced by
any amount required to be withheld by the Company or the Preferred Stock
Depositary on account of taxes.
CONVERSION AND EXCHANGE
If any Preferred Stock underlying the Depositary Shares is subject to
provisions relating to its conversion or exchange as set forth in the
Prospectus Supplement relating thereto, each record holder of Depositary Shares
will have the right or obligation to convert or exchange such Depositary Shares
pursuant to the terms thereof.
REDEMPTION OF DEPOSITARY SHARES
If Preferred Stock underlying the Depositary Shares is subject to redemption,
the Depositary Shares will be redeemed from the proceeds received by the
Preferred Stock Depositary resulting from the redemption, in whole or in part,
of the Preferred Stock held by the Preferred Stock Depositary. The redemption
price per Depositary Share will be equal to the aggregate redemption price
payable with respect to the number of shares of Preferred Stock underlying the
Depositary Shares. Whenever the Company redeems Preferred Stock from the
Preferred Stock Depositary, the Preferred Stock Depositary will redeem as of
the same redemption date a proportionate number of Depositary Shares
representing the shares of Preferred Stock that were redeemed. If less than all
of the Depositary Shares are to be redeemed, the Depositary Shares to be
redeemed will be selected by lot or pro rata, as may be determined by the
Company.
After the date fixed for redemption, the Depositary Shares so called for
redemption will no longer be deemed to be outstanding and all rights of the
holders of the Depositary Shares will cease, except the right to receive the
redemption price upon such redemption. Any funds deposited by the Company with
the Preferred
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Stock Depositary for any Depositary Shares which the holders thereof fail to
redeem shall be returned to the Company after a period of two years from the
date such funds are so deposited.
VOTING
Upon receipt of notice of any meeting at which the holders of any shares of
Preferred Stock underlying the Depositary Shares are entitled to vote, the
Preferred Stock Depositary will mail the information contained in such notice
to the record holders of the Depositary Receipts. Each record holder of such
Depositary Receipts on the record date (which will be the same date as the
record date for the Preferred Stock) will be entitled to instruct the Preferred
Stock Depositary as to the exercise of the voting rights pertaining to the
number of shares of Preferred Stock underlying such holder's Depositary Shares.
The Preferred Stock Depositary will endeavor, insofar as practicable, to vote
the number of shares of Preferred Stock underlying such Depositary Shares in
accordance with such instructions, and the Company will agree to take all
reasonable action which may be deemed necessary by the Preferred Stock
Depositary in order to enable the Preferred Stock Depositary to do so. The
Preferred Stock Depositary will abstain from voting the Preferred Stock to the
extent it does not receive specific written instructions from holders of
Depositary Receipts representing the Preferred Stock.
RECORD DATE
Whenever (i) any cash dividend or other cash distribution shall become
payable, any distribution other than cash shall be made, or any rights,
preferences or privileges shall be offered with respect to the Preferred Stock
or (ii) the Preferred Stock Depositary shall receive notice of any meeting at
which holders of Preferred Stock are entitled to vote or of which holders of
Preferred Stock are entitled to notice, or of the mandatory conversion of or
any election on the part of the Company to call for the redemption of any
Preferred Stock, the Preferred Stock Depositary shall in each such instance fix
a record date (which shall be the same as the record date for the Preferred
Stock) for the determination of the holders of Depositary Receipts (x) who
shall be entitled to receive such dividend, distribution, rights, preferences
or privileges or the net proceeds of the sale thereof or (y) who shall be
entitled to give instructions for the exercise of voting rights at any such
meeting or to receive notice of such meeting or of such redemption or
conversion, subject to the provisions of the Deposit Agreement.
AMENDMENT AND TERMINATION OF THE DEPOSIT AGREEMENT
The form of Depositary Receipt and any provision of the Deposit Agreement may
at any time be amended by agreement between the Company and the Preferred Stock
Depositary. However, any amendment which imposes or increases any fees, taxes
or other charges payable by the holders of Depositary Receipts (other than
taxes and other governmental charges, fees and other expenses payable by such
holders as stated under "Charges of Preferred Stock Depositary"), or which
otherwise prejudices any substantial existing right of holders of Depositary
Receipts, will not take effect as to outstanding Depositary Receipts until the
expiration of 90 days after notice of such amendment has been mailed to the
record holders of outstanding Depositary Receipts.
Whenever so directed by the Company, the Preferred Stock Depositary will
terminate the Deposit Agreement by mailing notice of such termination to the
record holders of all Depositary Receipts then outstanding at least 30 days
prior to the date fixed in such notice for such termination. The Preferred
Stock Depositary may likewise terminate the Deposit Agreement if at any time 45
days shall have expired after the Preferred Stock Depositary shall have
delivered to the Company a written notice of its election to resign and a
successor depositary shall not have been appointed and accepted its
appointment. If any Depositary Receipts remain outstanding after the date of
termination, the Preferred Stock Depositary thereafter will discontinue the
transfer of Depositary Receipts, will suspend the distribution of dividends to
the holders thereof, and will not give any further notices (other than notice
of such termination) or perform any further acts under the Deposit Agreement
except as provided below and except that the Preferred Stock Depositary will
continue (i) to collect dividends on the Preferred Stock and any other
distributions with respect thereto and (ii) to deliver the
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Preferred Stock together with such dividends and distributions and the net
proceeds of any sales of rights, preferences, privileges or other property
without liability for interest thereon, in exchange for Depositary Receipts
surrendered. At any time after the expiration of two years from the date of
termination, the Preferred Stock Depositary may sell the Preferred Stock then
held by it at public or private sales, at such place or places and upon such
terms as it deems proper and may thereafter hold the net proceeds of any such
sale, together with any money and other property then held by it, without
liability for interest thereon, for the pro rata benefit of the holders of
Depositary Receipts which have not been surrendered.
CHARGES OF PREFERRED STOCK DEPOSITARY
The Company will pay all charges of the Preferred Stock Depositary including
charges in connection with the initial deposit of the Preferred Stock, the
initial issuance of the Depositary Receipts, the distribution of information to
the holders of Depositary Receipts with respect to matters on which Preferred
Stock is entitled to vote, withdrawals of the Preferred Stock by the holders of
Depositary Receipts or redemption or conversion of the Preferred Stock, except
for taxes (including transfer taxes, if any) and other governmental charges and
such other charges as are expressly provided in the Deposit Agreement to be at
the expense of holders of Depositary Receipts or persons depositing Preferred
Stock.
MISCELLANEOUS
The Preferred Stock Depositary will make available for inspection by holders
of Depositary Receipts at its corporate office and its New York office, all
reports and communications from the Company which are delivered to the
Preferred Stock Depositary as the holder of Preferred Stock.
Neither the Preferred Stock Depositary nor the Company will be liable if it
is prevented or delayed by law or any circumstance beyond its control in
performing its obligations under the Deposit Agreement. The obligations of the
Preferred Stock Depositary under the Deposit Agreement will be limited to
performing its duties thereunder without negligence or bad faith. The
obligations of the Company under the Deposit Agreement will be limited to
performing its duties thereunder in good faith. Neither the Company nor the
Preferred Stock Depositary is obligated to prosecute or defend any legal
proceeding in respect of any Depositary Shares or Preferred Stock unless
satisfactory indemnity is furnished. The Company and the Preferred Stock
Depositary are entitled to rely upon advice of or information from counsel,
accountants or other persons believed to be competent and on documents believed
to be genuine.
The Preferred Stock Depositary may resign at any time or be removed by the
Company, effective upon the acceptance by its successor of its appointment;
provided, that if the successor Preferred Stock Depositary has not been
appointed or accepted such appointment within 45 days after the Preferred Stock
Depositary has delivered a notice of election to resign to the Company, the
Preferred Stock Depositary may terminate the Deposit Agreement. See "Amendment
and Termination of Deposit Agreement" above.
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 First
Trust National Association, as trustee (the "Trustee"). The Indenture is
subject to and 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
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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 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; (5) 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
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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.
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.
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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.
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).
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"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) 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 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.
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<PAGE>
"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.
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;
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<PAGE>
(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.
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.
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<PAGE>
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 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.
15
<PAGE>
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;
(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
16
<PAGE>
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 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.
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DESCRIPTION OF WARRANTS
The Company may issue Warrants for the purchase of Debt Securities, Common
Stock, Preferred Stock or any combination thereof. Warrants may be issued
independently, together with any other Securities offered by a Prospectus
Supplement, and may be attached to or separate from such Securities. Warrants
may be issued under warrant agreements (each, a "Warrant Agreement") to be
entered into between the Company and a warrant agent specified in the
applicable Prospectus Supplement (the "Warrant Agent"). The Warrant Agent will
act solely as an agent of the Company in connection with the Warrants of a
particular series and will not assume any obligation or relationship of agency
or trust for or with any holders or beneficial owners of Warrants. The
following sets forth certain general terms and provisions of the Warrants
offered hereby. Further terms of the Warrants and the applicable Warrant
Agreement will be set forth in the applicable Prospectus Supplement.
The applicable Prospectus Supplement will describe the terms of the Warrants
in respect of which this Prospectus is being delivered, including, where
applicable, the following: (i) the title of such Warrants; (ii) the aggregate
number of such Warrants; (iii) the price or prices at which such Warrants will
be issued; (iv) the designation, number and terms of the Debt Securities,
Common Stock, Preferred Stock, Depositary Shares or combination thereof,
purchasable upon exercise of such Warrants; (v) the designation and terms of
the other Securities, if any, with which such Warrants are issued and the
number of such Warrants issued with each such Security; (vi) the date, if any,
on and after which such Warrants and the related underlying Securities will be
separately transferable; (vii) the price at which each underlying Security
purchasable upon exercise of such Warrants may be purchased; (viii) the date on
which the right to exercise such Warrants shall commence and the date on which
such right shall expire; (ix) the minimum amount of such Warrants which may be
exercised at any one time; (x) information with respect to book-entry
procedures, if any; (xi) a discussion of any applicable federal income tax
considerations; and (xii) any other terms of such Warrants, including terms,
procedures and limitations relating to the transferability, exchange and
exercise of such Warrants.
PLAN OF DISTRIBUTION
The Company may sell Securities to or through underwriters or dealers,
directly to other purchasers, or through agents. The Prospectus Supplement with
respect to any Securities will set forth the terms of the offering of the
Securities, including the name or names of any underwriters, dealers or agents,
the price of the offered 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 national securities exchanges on which such Securities may be
listed.
If underwriters are used in the sale, the 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 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 Securities will be subject to certain conditions
precedent and the underwriters will be obligated to purchase all the 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.
If a dealer is utilized in the sale of any Securities in respect of which
this Prospectus is delivered, the Company will sell such Securities to the
dealer, as principal. The dealer may then resell such 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.
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<PAGE>
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 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 Securities, underwriters or agents may
receive compensation from the Company or from purchasers of 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
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
Securities by them may be deemed to be underwriting discounts or commissions
under the Securities Act.
Unless otherwise specified in the applicable Prospectus Supplement, each
series of Securities, other than the Common Stock, will be a new issue with no
established trading market. Any shares of Common Stock sold pursuant to a
Prospectus Supplement will be listed on the NYSE subject to official notice of
issuance. The Company may elect to list any series of the Securities on an
exchange, but it is not obligated to do so. Any underwriters to whom Securities
are sold by the Company for public offering and sale may make a market in such
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 Securities.
Under agreements entered into with the Company, underwriters, dealers, and
agents may be entitled 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.
If so indicated in the applicable Prospectus Supplement, the Company will
authorize underwriters or other persons acting as the Company's agents to
solicit offers by certain institutions to purchase Securities from the Company
pursuant to contracts providing for payment and delivery on a future date.
Institutions with which such contracts may be made include commercial and
savings banks, insurance companies, pension funds, investment companies,
educational and charitable institutions and others, but in all cases such
institutions must be approved by the Company. The obligations of any purchaser
under any such contract will be subject to the condition that the purchase of
the Securities shall not at the time of delivery be prohibited under the laws
of the jurisdiction to which such purchaser is subject. The underwriters and
such other agents will not have any responsibility in respect in respect of the
validity or performance of such contracts.
In order to comply with the securities laws of certain states, if applicable,
the Securities offered hereby will be sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain states
Securities may not be sold unless they have been registered or qualification
requirement is available and is complied with.
Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of Securities offered hereby may not engage in
market making activities with respect to the Securities for a period of two
business days prior to the commencement of such distribution.
EXPERTS
The financial statements and the related financial statement schedules
included and incorporated in this Prospectus and elsewhere in the Registration
Statement by reference from the Company's Annual Report on Form 10-K for the
year ended June 30, 1997, as amended, have been audited by Deloitte & Touche
LLP,
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independent auditors, as stated in their report, which is included and
incorporated herein by reference, and have been so included and incorporated in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
LEGAL MATTERS
Certain legal matters, including the legality of the Securities covered by
this Prospectus, will be passed upon for the Company by Rogers & Wells LLP, New
York, New York.
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YOU SHOULD RELY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS SUPPLEMENT OR
THE ACCOMPANYING PROSPECTUS. NEITHER WE NOR ANY UNDERWRITER HAS AUTHORIZED
ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. NEITHER WE NOR ANY
UNDERWRITER IS MAKING AN OFFER TO SELL THESE SECURITIES IN ANY JURISDICTION
WHERE THE OFFER OR SALE IS NOT PERMITTED.
YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN THIS PROSPECTUS
SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER
THAN THE DATE ON THE FRONT COVER OF THIS PROSPECTUS SUPPLEMENT.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PROSPECTUS SUPPLEMENT
Prospectus Supplement Summary............................................ S-1
Risk Factors............................................................. S-8
Use of Proceeds.......................................................... S-15
Capitalization........................................................... S-16
Selected Financial Information and Other Data............................ S-17
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... S-19
Business................................................................. S-29
Management............................................................... S-41
Description of the Notes................................................. S-46
Certain U.S. Federal Income Tax Consequences............................. S-65
Underwriting............................................................. S-71
Legal Matters............................................................ S-72
Experts.................................................................. S-72
Index to Financial Statements............................................ F-1
</TABLE>
PROSPECTUS
<TABLE>
<S> <C>
Available Information....................................................... 2
Incorporation of Certain Documents by Reference............................. 3
The Company................................................................. 3
Ratio of Earnings to Fixed Charges.......................................... 4
Use of Proceeds............................................................. 4
Description of Capital Stock................................................ 4
Description of Depositary Shares............................................ 5
Description of Debt Securities.............................................. 8
Description of Warrants..................................................... 18
Plan of Distribution........................................................ 18
Experts..................................................................... 19
Legal Matters............................................................... 20
</TABLE>
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$55,000,000
LOGO DVI INC.
9 7/8% Senior Notes
due 2004
-----------------------
PROSPECTUS SUPPLEMENT
-----------------------
PRUDENTIAL SECURITIES INCORPORATED
PIPER JAFFRAY INC.
LIBRA INVESTMENTS, INC.
FLEET SECURITIES, INC.
December 16, 1998
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