<PAGE> 1
As Filed Pursuant to Rule 424(b)(2)
Registration No. 333-50895
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED MAY 4, 1998)
- --------------------------------------------------------------------------------
2,200,000 Shares
[DVI logo]
Common Stock
- --------------------------------------------------------------------------------
All of the 2,200,000 shares of common stock, par value $.005 per share (the
"Common Stock"), of DVI, Inc., a Delaware corporation (the "Company"), offered
hereby (the "Offering") are being offered by the Company. In addition to the
2,200,000 shares of Common Stock offered by the Underwriters, the Company is
selling 340,000 shares of Common Stock directly to certain stockholders of the
Company (the "Direct Offering") at the public offering price less the
Underwriting Discounts and Commissions.
The Company's Common Stock is listed on the New York Stock Exchange ("NYSE")
under the symbol "DVI." On May 21, 1998, the last reported sales price for the
Common Stock on the NYSE was $21.4375 per share. See "Price Range of Common
Stock and Dividend Policy."
SEE "RISK FACTORS"ON PAGES S-7 TO S-13 FOR A DISCUSSION OF THE MATERIAL FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK
OFFERED HEREBY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
===============================================================================================================
Underwriting
Price to Discounts and Proceeds to
Public(1) Commissions(2) Company(1)(3)(4)
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<S> <C> <C> <C>
Per Share........................ $21.4375 $1.18 $20.2575
- ---------------------------------------------------------------------------------------------------------------
Total............................ $47,162,500 $2,596,000 $44,566,500
===============================================================================================================
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting."
(2) Before deducting expenses payable by the Company estimated to be $624,110.
(3) The Company has granted the Underwriters a 30-day over-allotment option to
purchase up to 330,000 additional shares of Common Stock on the same terms
and conditions as set forth above. If all such additional shares are
purchased by the Underwriters, the total Price to Public will be
$54,236,875, the total Underwriting Discounts and Commissions will be
$2,985,400 and the total Proceeds to Company will be $51,251,475. See
"Underwriting."
(4) The Proceeds to Company will be $51,454,050 giving effect to the Direct
Offering.
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The shares of Common Stock are offered by the several Underwriters, subject to
delivery by the Company and acceptance by the Underwriters, to prior sale and to
withdrawal, cancellation or modification of the offer without notice. Delivery
of the shares to the Underwriters is expected to be made through the facilities
of the Depository Trust Company, New York, New York on or about May 28, 1998.
PRUDENTIAL SECURITIES INCORPORATED
PIPER JAFFRAY INC.
FOX-PITT, KELTON INC.
May 21, 1998
<PAGE> 2
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF THE COMMON STOCK
INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE, PURCHASES
OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE COMMON STOCK
AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
ii
<PAGE> 3
PROSPECTUS SUPPLEMENT SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information and selected financial data appearing elsewhere in this
Prospectus Supplement. Unless the context indicates otherwise, (i) references in
this Prospectus Supplement and the accompanying Prospectus to the "Company" are
to DVI, Inc. and its wholly-owned subsidiaries and (ii) all information assumes
that the Underwriters' over-allotment option will not be exercised.
THE COMPANY
DVI, Inc. is a leading provider of asset-based financing to healthcare
service providers. 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. Through its medical
receivables finance business, the Company provides lines of credit
collateralized by third party medical receivables to a wide variety of
healthcare providers and offers warehouse and securitization services to other
healthcare finance providers. 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. The Company operates
principally in the United States and is developing a significant presence in
Latin America as well as operations in Europe and Asia. 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 Company principally serves 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. In addition, the Company has recently expanded its
customer base to include the long term and assisted care markets. Many of the
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: (i) significant growth in the
level of healthcare expenditures worldwide; (ii) dramatic efforts by
governmental and market forces to reduce healthcare delivery costs and increase
efficiency; (iii) favorable demographic and public policy trends worldwide; (iv)
growth, consolidation and restructuring of healthcare service providers; and (v)
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 factors, the Company's business has grown
substantially. From June 30, 1995 to March 31, 1998, the Company's managed net
finance receivables portfolio increased 134% to approximately $1.2 billion from
$494.9 million. During this same period of substantial portfolio growth, the
Company's net charge-offs and delinquencies have remained low. The Company's net
charge-offs as a percentage of average net financed receivables were 0.15%,
0.35%, 0.08% and 0.24% for the three years ended June 30, 1995, 1996 and 1997
and the nine months ended March 31, 1998, annualized, respectively, and total
delinquencies as a percentage of managed net financed receivables for the same
periods were 4.56%, 4.30%, 3.58% and 5.71%, respectively. See
"Business -- Credit Experience."
The continued growth in the Company's business has required substantial
amounts of external funding. The Company finances its originations on an interim
basis with secured credit facilities provided by banks and other financial
institutions. These interim "warehouse" facilities are generally repaid with the
proceeds from asset securitizations, whole loan sales, and other structured
finance techniques to permanently fund most of the Company's portfolio. These
permanent financings require capital to be invested by the Company to fund
reserve accounts or to meet the overcollateralization required in the
securitizations and sales of the Company's loans. The Company continues to seek
new ways to fund its growth, including developing asset securitization and other
structured finance techniques to permanently fund its international medical
equipment loans.
Medical Equipment Finance. The Company's equipment finance business
operates by: (i) providing financing directly to end users of diagnostic imaging
and other sophisticated medical equipment; (ii) providing captive finance
programs for vendors of diagnostic and patient treatment devices worldwide; and
(iii) to a
S-1
<PAGE> 4
lesser extent, by purchasing medical equipment loans and leases originated by
regional finance companies through a wholesale loan origination program. The
Company's typical equipment loan has an initial principal balance ranging from
$300,000 to $2.0 million. Virtually all of the Company's equipment loans are
structured such that the full cost of the equipment and all financing costs are
repaid during the financing term, which typically is five years. The Company's
exposure to residual asset value is limited to $11.2 million at March 31, 1998
because most of the Company's equipment loans are structured as notes secured by
equipment or direct financing leases with a bargain purchase option. At March
31, 1998, the Company's managed portfolio of equipment financing loans was
$996.8 million.
To enhance its relationships with certain medical equipment manufacturers,
and to capitalize on the growing international markets for medical equipment
financing, the Company has formed international joint ventures or established
subsidiaries in Latin America, Europe, Asia and Australia which provide captive
finance programs for manufacturers in these regions. The Company views continued
expansion of its relationships with medical equipment vendors and manufacturers
as an integral component of its growth strategy and intends, to the extent
appropriate in the pursuit of that objective, to continue to expand its medical
equipment finance activities outside the U.S. The Company believes that by
helping vendors and manufacturers to finance their customers' equipment
purchases outside the U.S. it will encourage those vendors and manufacturers to
increase the financing opportunities they refer to the Company within the U.S.
At March 31, 1998 the Company's portfolio of international equipment loans was
$118.1 million. In addition, at March 31, 1998, Medical Equipment Credit Pte, a
joint venture in which the Company has a minority interest had a portfolio of
international equipment loans of $13.0 million.
Medical Receivables Finance. The Company provides lines of credit to a
wide variety of healthcare providers and offers warehouse and securitization
services to other healthcare finance providers who do not have access to such
financing sources. Substantially all of the lines of credit are collateralized
by third party medical receivables due from Medicare, Medicaid, health
maintenance organizations ("HMOs"), preferred provider organizations ("PPOs"),
commercial insurance companies, self insured corporations and, to a limited
extent, other healthcare service providers. The Company generally advances only
70% to 85% of the Company's 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 the benefit of the Company. The Company conducts
extensive due diligence on its potential medical receivables clients for all its
financing programs and follows underwriting and credit policies in providing
financing to customers. The Company's credit risk is mitigated by the Company's
ownership of or security interest in all receivables, eligible and ineligible.
The Company's 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. At March 31, 1998, the Company's portfolio of medical receivables loans
was $162.6 million.
Additional Financing Services. Management believes that the long-term care
and assisted care markets have been underserved by traditional financing sources
and that many firms in these markets have both a need for and the
creditworthiness to support working capital financing. To serve these markets
the Company established DVI Merchant Funding, a division of DVI Financial
Services Inc. in November 1997. Through DVI Merchant Funding the Company
provides fee based advisory services such as private placement, loan
syndication, bridge financing, mortgage loan placement and to a lesser extent
mergers and acquisitions advisory services to its customers.
S-2
<PAGE> 5
BUSINESS STRATEGY
The Company's business strategy 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 its customers.
The principal components of the Company's strategy include: (i) strengthening
its relationships with equipment manufacturers to generate additional financing
opportunities in the U.S. and international markets; (ii) continuing to expand
its medical receivables finance business; (iii) offering a broader range of
financing services to healthcare providers; and (iv) expanding its presence in
new segments of the healthcare industry, such as long-term care and assisted
care.
RECENT DEVELOPMENTS
Latin America Joint Venture. The Company recently entered into a joint
venture, MSF Holding Ltd., with the International Finance Corporation, 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 in Brazil,
Argentina, Colombia and Mexico. The joint venture will commence 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 will operate 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.
Third Quarter Results. The Company recently announced its unaudited
financial results for the three month period ended March 31, 1998. The Company's
net income increased 70% to $3.4 million from $2.0 million in the corresponding
three month period in 1997. The Company's diluted earnings per share for the
period was $0.27 compared to diluted earnings per share for the corresponding
period in 1997 of $0.17. Total equipment financing loans originated by the
Company grew to $382.5 million in the nine months ended March 31, 1998 from
$303.9 million in the nine months ended March 31, 1997, an increase of 25.8%.
The Company's managed net financed receivables grew to approximately $1.2
billion at March 31, 1998 from $857.0 million at March 31, 1997, an increase of
35.3%. In the Company's medical receivables financing business, new commitments
of credit in the nine months ended March 31, 1998 were $110.5 million compared
with $68.6 million in the corresponding period of 1997, an increase of 61.1%.
Medical receivables funded at March 31, 1998 totaled $162.6 million, an increase
of $90.9 million or 126.8% from March 31, 1997.
S-3
<PAGE> 6
THE OFFERING
Common Stock Offered in the Offering........ 2,200,000 shares
Common Stock Offered in the Direct
Offering.................................... 340,000 shares
Common Stock to be Outstanding after the
Offering and the Direct Offering............ 13,560,108 shares(1)
Direct Offering............................. Certain of the Company's
principal stockholders will
purchase an aggregate of 340,000
shares of Common Stock directly
from the Company immediately
preceding the consummation of
the Offering (the "Direct
Offering"). The price per share
to be paid by those stockholders
will be the same price to be
paid by the Underwriters in the
Offering. After giving effect to
the Offering and the Direct
Offering, such stockholders will
continue to own approximately
19.5% of the outstanding shares
of Common Stock. See
"Underwriting."
Use of Proceeds.................................................................
The net proceeds of the Offering
and the Direct Offering are
approximately $44.6 million
(approximately $51.3 million if
the Underwriters' over-allotment
option is exercised in full) and
$6.9 million, respectively. The
primary purpose of the Offering
and the Direct Offering is to
provide the Company with
additional capital (i) to fund
its growth, including increasing
the amount of equipment and
medical receivables loans the
Company can fund, (ii) to
develop the Company's expanding
international operations, (iii)
for other working capital needs
and (iv) for general corporate
purposes. See "Use of Proceeds."
NYSE Symbol................................. DVI
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(1) Does not include options to purchase 1,190,901 shares of Common Stock at a
weighted average exercise price of $13.29 per share.
RISK FACTORS
Investors should consider the material risk factors involved in connection
with an investment in the Common Stock and the possible impact on investors of
various events that could adversely affect the Company's business. See "Risk
Factors."
S-4
<PAGE> 7
SUMMARY CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED JUNE 30, MARCH 31,
----------------------------------------------- -----------------
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total finance and other income............ $14,095 $20,609 $35,985 $49,038 $56,334 $41,414 $54,097
Net interest income....................... 9,090 11,776 13,125 18,549 17,939 13,768 17,513
Net gain on sale of financing
transactions............................ 1,104 302 3,042 8,032 14,039 8,280 15,060
Net finance income........................ 10,194 12,078 16,167 26,581 31,978 22,048 32,573
Earnings from continuing operations before
provision for income taxes, equity in
net earnings (loss) of investees and
discontinued operations................. 4,459 4,313 7,015 14,323 15,475 11,003 15,578
Earnings from continuing operations....... 2,580 2,260 4,069 8,165 8,563 6,186 8,969
Net earnings (loss)....................... 658 (885) 4,069 8,165 8,563 6,186 8,969
Net earnings per share:
Basic................................... $ 0.56 $ 0.80
Diluted................................. $ 0.54 $ 0.74
</TABLE>
<TABLE>
<CAPTION>
AS OF
AS OF JUNE 30, MARCH 31, 1998
---------------------------------------------------- -------------------------
1993 1994 1995 1996 1997 ACTUAL AS ADJUSTED(1)
-------- -------- -------- -------- -------- -------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Gross financed receivables... $148,191 $287,734 $475,803 $520,120 $650,376 $770,060 $770,060
Net financed receivables..... 123,628 239,347 400,642 454,398 580,637 703,270 703,270
Notes collateralized by
medical receivables........ 2,565 6,007 21,247 38,567 86,858 162,553 162,553
Total assets................. 147,161 265,949 432,876 560,939 634,528 729,059 779,889
Borrowings under warehouse
facilities................. 45,221 34,586 155,172 168,108 44,961 182,152 182,152
Long-term debt, net:
Securitization debt........ 51,691 148,852 205,376 253,759 317,863 298,945 298,945
9 7/8% Senior Notes due
2004..................... -- -- -- -- 95,883 96,329 96,329
Other debt................. 136 -- -- -- 8,168 16,764 16,764
Convertible subordinated
notes.................... -- 14,112 13,754 13,809 13,324 13,410 13,410
-------- -------- -------- -------- -------- -------- --------
Total long-term debt......... 51,827 162,964 219,130 267,568 435,238 425,448 425,448
Shareholders' equity......... 34,664 33,993 40,250 85,302 95,660 110,210 161,040
</TABLE>
S-5
<PAGE> 8
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,
---------------------------------------------------- ---------------------
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- -------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
ADDITIONAL OPERATING AND OTHER
DATA:
Origination and commitments:
Domestic equipment
origination................... $ 58,600 $157,400 $314,100 $316,757 $370,262 $272,767 $ 277,242
International origination and
commitments................... -- -- -- -- 31,461 31,192 105,263
Medical receivables
commitments................... -- 5,600 23,900 40,000 101,100 68,550 110,510
-------- -------- -------- -------- -------- -------- ----------
Total originations and
commitments................... $ 58,600 $163,000 $338,000 $356,757 $502,823 $372,509 $ 493,015
======== ======== ======== ======== ======== ======== ==========
Managed portfolio:
Domestic equipment.............. $121,063 $233,340 $473,626 $601,542 $809,090 $753,331 $ 878,643
International equipment......... -- -- -- -- 29,895 31,959 118,130
Medical receivables............. 2,565 6,007 21,247 38,567 86,858 71,678 162,553
-------- -------- -------- -------- -------- -------- ----------
Total managed portfolio......... $123,628 $239,347 $494,873 $640,109 $925,843 $856,968 $1,159,326
======== ======== ======== ======== ======== ======== ==========
Net charge-offs................... $ 82 $ 264 $ 477 $ 1,581 $ 436 $ 270 $ 1,188
Net charge-offs as a percentage of
average net financed assets..... 0.09% 0.15% 0.15% 0.35% 0.08% 0.07% 0.24%
Allowance for possible losses on
receivables..................... $ 1,046 $ 2,498 $ 3,282 $ 4,026 $ 5,976 $ 4,867 $ 8,697
Allowance for possible losses on
receivables as a percentage of
net financed assets............. 0.85% 1.04% 0.82% 0.89% 1.03% 0.88% 1.24%
Total delinquencies(2)............ $ 10,101 $ 8,709 $ 22,567 $ 27,514 $ 33,153 $ 34,669 $ 66,176
Total delinquencies as a
percentage of managed net
financed assets................. 8.17% 3.64% 4.56% 4.30% 3.58% 4.05% 5.71%
FINANCIAL RATIOS:
Return on average assets.......... 2.0% 1.1% 1.2% 1.7% 1.5% 1.5% 1.7%
Return on average equity.......... 7.5% 6.6% 11.0% 11.3% 9.5% 9.3% 11.7%
</TABLE>
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(1) Adjusted to give effect to the sale of an aggregate of 2,540,000 shares of
Common Stock in the Offering and the Direct Offering and the application of
the net proceeds therefrom.
(2) Includes finance receivables contractually past due for a period of greater
than 30 days and defaulted finance receivables.
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<PAGE> 9
RISK FACTORS
An investment in the Common Stock offered hereby involves a high degree of
risk. Prospective purchasers of Common Stock should carefully consider the
following risk factors in addition to the other information set forth in this
Prospectus Supplement, the accompanying Prospectus and the documents
incorporated by reference herein.
This Prospectus Supplement, the accompanying Prospectus and the documents
incorporated by reference herein contain certain statements that are
"forward-looking statements" within the meaning of Section 27A of the Securities
Act and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). Those statements include, among other things, the discussions
of the Company's business strategy and expectations concerning the Company's
market position, future operations, margins, profitability, funding sources,
liquidity and capital resources. Investors in the Common Stock offered hereby
are cautioned that reliance on any forward-looking statement involves risks and
uncertainties, and that although the Company believes that the assumptions on
which the forward-looking statements contained herein are reasonable, any of the
assumptions could prove to be inaccurate, and as a result, the forward-looking
statements based on the assumptions also could be incorrect. The uncertainties
in this regard include, but are not limited to, those identified in the risk
factors discussed below. In light of these and other uncertainties, the
inclusion of a forward-looking statement herein should not be regarded as a
representation by the Company that the Company's plans and objectives will be
achieved.
DEPENDENCE ON WAREHOUSE FINANCING. The Company's ability to sustain the
growth of its financing business is dependent upon funding obtained through
warehouse facilities until its equipment and other loans are permanently funded.
The funds the Company obtains through warehouse facilities are full recourse
short-term borrowings secured primarily by the underlying equipment, the medical
receivables and other collateral. These borrowings are in turn typically repaid
with the proceeds received by the Company when its equipment and other loans are
securitized or sold. At March 31, 1998 the Company had available an aggregate of
approximately $398.0 million under various warehouse facilities, approximately
$212.4 million of which is available for funding equipment loans and
approximately $3.4 million of which is available for funding medical receivables
loans. The Company's warehouse facilities are short-term borrowings with
maturities of less than 12 months. In the Company's experience, these facilities
are typically renewed upon their expiration. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources -- Warehouse Facilities." There can be no assurance that this
type of warehouse financing will continue to be available to the Company on
acceptable terms. If the Company were unable to arrange continued access to
acceptable warehouse financing, the Company would have to curtail its equipment
and other loan originations, which in turn would have a material adverse effect
on the Company's financial condition and results of operations.
DEPENDENCE ON PERMANENT FUNDING PROGRAMS. The Company's use of
securitization as its principal form of permanent funding is an important part
of the Company's business strategy. If for any reason the Company were to become
unable to access the securitization markets to fund permanently its equipment
and other loans, the consequences for the Company would be materially adverse.
The Company's ability to complete securitizations and other structured finance
transactions depends upon a number of factors, including general conditions in
the credit markets, the size and liquidity of the market for the types of
receivable-backed securities issued or placed in securitizations sponsored by
the Company and the overall performance of the Company's loan portfolio. The
Company does not have binding commitments from financial institutions or
investment banks to provide permanent funding for its equipment or medical
receivables loans.
IMPACT OF CREDIT ENHANCEMENT REQUIREMENTS. In connection with its
securitizations and other structured financings, the Company is required to
provide credit enhancement for the debt obligations issued and sold to third
parties. Typically, the credit enhancement consists of cash deposits, the
funding of subordinated tranches and/or the pledge of additional equipment or
other loans that are funded with the Company's capital. The requirement to
provide this credit enhancement reduces the Company's liquidity and requires it
to obtain additional capital. If the Company is unable to obtain and maintain
sufficient capital, it
S-7
<PAGE> 10
may be required to halt or curtail its securitization or other structured
financing programs, which in turn would have a material adverse effect on the
Company's financial condition and results of operations.
CREDIT RISK. Many of the Company's customers are outpatient healthcare
providers, the loans to whom often require a high degree of credit analysis. In
addition, the Company has recently entered the long-term care and assisted care
sub-markets which may, to a significant extent, require a different type of
credit analysis. Although the Company seeks to mitigate its risk of default and
credit losses through its underwriting practices and loan servicing procedures
and through the use of various forms of non-recourse or limited recourse
financing (in which the financing sources that permanently fund the Company's
equipment and other loans assume some or all of the risk of default by the
Company's customers), the Company remains exposed to potential losses resulting
from a default by a customer. Customers' defaults could cause the Company to
make payments to the extent the Company is obligated to do so and in the case of
its permanent equipment and other funding arrangements to the extent of the
Company's remaining credit enhancement position; could result in the loss of the
cash or other collateral pledged as credit enhancement under its permanent
equipment and other funding arrangements; or could require the Company to
forfeit any residual interest it may have retained in the underlying equipment.
During the period after the Company initially funds an equipment or other loan
and prior to the time it funds the loan on a permanent basis, the Company is
exposed to full recourse liability in the event of default by the customer.
While the Company has typically been able to permanently fund its equipment and
other loans, many of the loans in its international portfolio may not be able to
be permanently funded or the Company is in the process of securing permanent
funding and therefore may be subject to credit risk for a longer period of time
and in some cases over the life of the loan. In addition, under the terms of
securitizations and other types of structured finance transactions, the Company
generally is required to replace or repurchase equipment and other loans in the
event they fail to conform to the representations and warranties made by the
Company, even in transactions otherwise designated as non-recourse or limited
recourse.
Defaults by the Company's customers also could adversely affect the
Company's ability to obtain additional financing in the future, including its
ability to use securitization or other forms of structured finance. The sources
of such permanent funding take into account the credit performance of the
equipment and other loans previously financed by the Company in deciding whether
and on what terms to make new loans. In addition, the credit rating agencies
that are often involved in securitizations consider prior credit performance in
determining the rating and level of credit enhancement to be given to the
securities issued in securitizations sponsored by the Company.
RISKS RELATED TO THE MEDICAL RECEIVABLES FINANCE BUSINESS. The Company
entered the medical receivables finance business in July 1993 and has focused on
this business as a part of the Company's growth strategy. The Company's medical
receivables finance business generally consists of providing loans to healthcare
providers that are secured by their receivables from payors such as insurance
companies, large self-insured companies and governmental programs and by other
collateral. While the Company expects to continue to focus on this business as a
significant part of its growth strategy, there can be no assurance that the
Company will be able to continue to expand this business successfully or avoid
related liabilities or losses. The Company has funded its medical receivables
finance business to date through the use of the Company's capital, $100.0
million in securitizations and a rated warehouse facility of $30.0 million. In
addition, the Company recently obtained a committed $95.0 million revolving
credit facility for its medical receivables finance business. The growth of the
Company's medical receivables finance business is dependent upon the Company's
ability to obtain additional funding facilities to finance medical receivables
loans.
While the medical receivables finance business shares certain
characteristics, including an overlapping customer base, with the Company's
equipment financing business, there are many differences, including unique
risks. Healthcare providers could overstate the quality and characteristics of
their medical receivables, which the Company analyzes in determining the amount
of the line of credit to be secured by such receivables. After the Company has
established or funded a line of credit, the healthcare providers could change
their billing and collection systems, accounting systems or patient records in a
way that could adversely affect the Company's ability to monitor the quality
and/or performance of the related medical receivables. There are technical legal
issues associated with creating and maintaining perfected security interests in
medical
S-8
<PAGE> 11
receivables, specifically those generated by Medicaid and Medicare claims.
Payors may make payments directly to healthcare providers that have the effect
(intentionally or otherwise) of circumventing the Company's rights in and access
to such payments. Payors may attempt to offset their payments to the Company
against debts owed to the payors by the healthcare providers. In addition, as a
lender whose position is secured by receivables, the Company is likely to have
less leverage in collecting outstanding receivables in the event of a borrower's
insolvency than a lender whose position is secured by medical equipment that the
borrower needs to run its business. A borrower that receives medical receivables
loans from the Company and defaults on obligations secured by such receivables
may require additional loans, or modifications to the terms of existing loans,
in order to continue operations and repay outstanding loans. The Company may
have a conflict of interest when it acts as servicer for an equipment-based
securitization and originates medical receivables loans to borrowers whose
equipment loans have been securitized. While the Company believes it has
structured its credit policies and lending practices to take into account these
and other factors, there can be no assurance the Company will not sustain credit
losses in connection with its medical receivable financing business or that the
medical receivable financing business will meet the Company's growth
expectations.
INTEREST RATE RISK. When the Company borrows funds through warehouse
facilities, it is exposed to certain risks caused by interest rate fluctuations.
Although the Company's equipment loans are structured and permanently funded on
a fixed interest rate basis, it uses warehouse facilities until permanent
funding is obtained. The Company uses hedging techniques to protect its interest
rate margins during the period that warehouse facilities are used prior to an
anticipated securitization and sale because funds borrowed through warehouse
facilities are obtained on a floating interest rate basis. The Company uses
derivative financial instruments, such as forward rate agreements, interest rate
swaps, caps and collars, to manage its interest rate risk. The derivatives are
used to manage three components of this risk: mismatches of the maturity of
assets and liabilities on the Company's balance sheet, hedging anticipated loan
securitizations and sales, and interest rate spread protection. There can be no
assurance, however, that the Company's hedging strategy or techniques will be
effective, that the profitability of the Company will not be adversely affected
during any period of changes in interest rates or that the costs of hedging will
not exceed the benefits. A substantial and sustained increase in interest rates
could adversely affect the Company's ability to originate loans. In certain
circumstances, the Company for a variety of reasons may retain for an indefinite
period certain of the equipment and other loans it originates. In such cases,
the Company's interest rate exposure may continue for a longer period of time.
SUBSTANTIAL LEVERAGE; CONTINUING NEED FOR CAPITAL. The Company has
substantial outstanding indebtedness and is highly leveraged. As of March 31,
1998, the Company and its consolidated subsidiaries had total debt of $607.6
million, of which $350.4 million was full recourse debt and $257.2 million was
limited recourse debt. Of the $607.6 million of total debt, $425.4 million was
long-term debt and $182.2 million was short-term debt. The ability of the
Company to repay its indebtedness will depend upon future operating performance,
which is subject to the performance of the Company's loan portfolio, the success
of the Company's business strategy, prevailing economic conditions, levels of
interest rates and financial, business and other factors, many of which are
beyond the Company's control. The degree to which the Company is leveraged also
may impair its ability to obtain additional financing on acceptable terms. In
addition, the indenture related to the Company's Senior Notes due 2004 restricts
the Company's ability to obtain non-warehouse or non-limited recourse
indebtedness which may also constrain the Company's ability to refinance its
existing indebtedness.
Each of the Company's warehouse facilities and permanent funding vehicles
requires the Company to provide equity or a form of recourse credit enhancement
to the respective lenders or investors and generally does not permit the Company
to fund general corporate requirements. Therefore, the actual liquidity, or
funds available to the Company to finance its growth, are limited to the cash
generated from net financed receivables and the available proceeds of equity or
debt securities issued by the Company. At times of strong origination growth,
the Company's cash flows from operations are insufficient to fund these
requirements. As a result, the Company's need to fund its high growth rates in
loan origination necessitates substantial external funding to provide the equity
or capital required as recourse credit enhancement with which to leverage
borrowings. The Company has no binding commitments for the capital it expects it
will continue to require, and its ability to
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<PAGE> 12
obtain that capital in the future will be dependent on a number of factors
including the condition of the capital markets and economic conditions
generally.
POSSIBLE ADVERSE CONSEQUENCES FROM RECENT GROWTH. In the past three years,
the Company originated a significantly greater number of equipment, medical
receivables and other loans than it did in previous years. As a result of this
growth, the Company's net financed asset portfolio grew from $400.6 million at
June 30, 1995 to $703.3 million at March 31, 1998. In light of this growth, the
historical performance of the Company's loan portfolio, including rates of
credit loss, may be of limited relevance in predicting future loan portfolio
performance. Any credit or other problems associated with the large number of
equipment and other loans originated in the recent past will not become apparent
until sometime in the future. Further, while the Company's loan originations
have grown substantially in the past three years, its net interest margins have
declined during that same period due to a general decline in interest rates, the
Company's pricing strategy, the sale of higher-yielding loans to finance the
cost of its developing domestic and international business units and the
increase in the amount of lower-yielding credit enhancements due to the
increased number of securitizations. As a result, the Company's historical
results of operations may be of limited relevance to an investor seeking to
predict the Company's future performance.
ABILITY TO SUSTAIN GROWTH. To sustain the rates of growth it has achieved
in the last three years, the Company will be required to: (i) penetrate further
the markets for medical receivables finance and medical equipment loans,
including through the development of its vendor finance programs; and (ii)
establish a presence in the long-term care and assisted care markets. The
Company faces significant barriers to entry in the long-term care and assisted
care markets, which are more diverse than the general markets for medical
equipment loans and medical receivables finance because of the larger number of
providers and types of financial products and the greater price range of those
financing alternatives. While the employees of the entities comprising DVI
Merchant Funding have experience in the long-term care and assisted care market,
the Company has not previously provided financing services to these markets. In
addition, in an effort to strengthen its relationships with medical equipment
manufacturers and the vendor finance market and to obtain access to new markets,
the Company has initiated operations internationally (including Europe and Asia)
and has made investments in certain emerging markets (such as Latin America).
The success of these investments is dependent upon many factors including
foreign regulation and business practices, currency exchange regulations and
currency fluctuations and the achievement of management's planned objectives for
these markets. There can be no assurance that the Company will be able to
penetrate and compete effectively in the markets described above.
CUSTOMER CONCENTRATION. At March 31, 1998, approximately 14.6% of managed
net financed receivables were due from two of the Company's customers and their
respective affiliates, representing 9.1% and 5.5% of managed net financed
receivables, respectively. As a result of this concentration the Company is
subject to the risks and uncertainties of these two businesses and their
respective affiliates and adverse conditions affecting either of these entities
could have a material adverse effect on the Company's ability to collect the
total amount of outstanding receivables from either of these customers. The
Company's customer concentration has decreased as the number of its clients has
increased over time; however, there can be no assurance that such concentration
will continue to decrease in the future.
INTEGRATION OF GLOBAL LOCATIONS. The Company's U.S. headquarters are
located in Doylestown, Pennsylvania. It also conducts operations
internationally, including in Asia, Europe, Australia and Latin America through
subsidiaries and joint ventures. As a result, the Company has employees and
clients operating in diverse geographic locations imposing a number of risks and
burdens on the Company, including the need to transact business with employees
and customers from diverse cultural backgrounds, who speak different languages
and operate in a number of time zones. Although the Company seeks to mitigate
the difficulties associated with operating in diverse geographic locations
through the extensive use of electronic mail, there can be no assurance that it
will not encounter unforeseen difficulties or logistical barriers in operating
in diverse locations. Furthermore, operations in widespread geographic locations
require the Company to implement and operate complex information systems that
are capable of providing timely information which can readily be consolidated.
Although the Company believes that its information systems are adequate, the
Company may in the future have to implement new information systems.
Implementation of
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<PAGE> 13
such new information systems may be costly and may require training of
personnel. Any failure or delay in implementing these systems, procedures and
controls on a timely basis, if necessary, or in expanding these areas in an
efficient manner at a pace consistent with the Company's business could have a
material adverse effect on the Company's business and operating results.
MEDICAL EQUIPMENT MARKET. The demand for the Company's equipment financing
services is affected by numerous factors beyond the control of the Company.
These factors include general economic conditions, including the effects of
recession or inflation, and fluctuations in supply and demand for various types
of sophisticated medical equipment resulting from, among other things,
technological and economic obsolescence and government regulation. In addition,
the demand for sophisticated medical equipment also may be negatively affected
by reductions in the amount of reimbursement to healthcare providers for their
services from third-party payors such as insurance companies, large self-insured
companies and government programs, and the increased use of managed healthcare
plans that often restrict the use of certain types of high technology medical
equipment.
DEPENDENCE ON REFERRALS AND SUPPORT FROM EQUIPMENT MANUFACTURERS. The
Company obtains a significant amount of its equipment financing business through
referrals from manufacturers of diagnostic imaging equipment and other medical
equipment it finances. In addition, these manufacturers occasionally provide
credit support for or assume first loss positions with respect to equipment
financing they refer to the Company. These manufacturers are not contractually
obligated to refer their customers to the Company for equipment financing or to
provide credit support or assume first loss positions in connection with their
referrals. There is no assurance that these manufacturers will continue to refer
equipment financing opportunities to the Company or to provide credit support or
assume first loss positions. If for any reason the Company were no longer to
benefit from these referrals or related credit support and assumptions of first
loss positions, its equipment financing business would be materially adversely
affected.
RISKS OF INTERNATIONAL OPERATIONS; CURRENCY FLUCTUATIONS. Approximately
6.3% and 21.4% of the Company's medical equipment loans in 1997 and the nine
month period ended March 31, 1998, respectively, were originated outside the
United States. Because certain of the manufacturers of high-cost medical
equipment with whom the Company has relationships are conducting business and
expanding internationally, the Company anticipates that equipment loans
originated outside the United States will become a significant portion of its
loan portfolio. As a result, an increasing portion of the Company's 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 the Company's business and operating
results.
Although most of the Company's equipment loans are denominated in U.S.
dollars, as a result of the Company's international operations, the Company's
operating results are subject to fluctuations based upon changes in the exchange
rates of certain currencies in relation to the U.S. dollar. The Company engages
in hedging activities with respect to its foreign currency exposure and
management is continuing to monitor the Company's exposure to currency
fluctuations and the Company's hedging policies. However, there can be no
assurance that such hedging techniques will be successful. In the future, the
Company could be required to denominate its equipment loans in other currencies,
which would make the management of currency fluctuations more difficult and
expose the Company to greater risks in this regard.
NEW PRODUCT OFFERINGS. Since November 1997, the Company has provided
private placement, loan syndication, bridge financing, mortgage loan placement,
and business, merger and acquisition consulting services to the healthcare
industry. The Company has not provided these products and services previously
and there is no assurance that the Company will be able to market these new
products and services successfully or that the return on these products and
services will be consistent with the Company's historical financial results.
FAILURE TO COMPLY WITH GOVERNMENT REGULATIONS. The Company's finance
business is subject to numerous federal and state laws and regulations, which,
among other things, may (i) require the Company to obtain and maintain certain
licenses and qualifications, (ii) limit the interest rates, fees and other
charges that the Company is allowed to collect, (iii) limit or prescribe certain
other terms of its finance receivables
S-11
<PAGE> 14
arrangements with clients, and (iv) subject the Company to certain claims,
defenses and rights of offset. Although the Company believes that it is
currently in compliance with statutes and regulations applicable to its
business, there can be no assurance that the Company 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 the
Company. Furthermore, the adoption of additional statutes and regulations,
changes in the interpretation and enforcement of current statutes and
regulations, or the expansion of the Company's business into jurisdictions that
have adopted more stringent regulatory requirements than those in which the
Company currently conducts business could have a material adverse effect upon
the Company.
HEALTHCARE REFORM. During the past half decade, large U.S. corporations
and U.S. consumers of healthcare services have substantially increased their use
of managed healthcare plans such as HMOs and PPOs. This development has
increased the purchasing power of those plans, which in turn have used that
power to lower the amounts they pay for healthcare services. Since 1993,
numerous proposals have been presented to Congress to restructure the U.S.
healthcare system. The principal features of these proposals are to provide
universal access to healthcare services and to achieve overall cost containment.
To date, none of the proposals initiated at the federal government level have
been enacted. In the private sector, however, cost containment initiatives have
continued. Certain aspects of these actual and proposed cost containment
initiatives, particularly plans to eliminate payment for duplicative procedures,
may reduce the overall demand for the types of medical equipment financed by the
Company. Declining reimbursement for medical services also could cause
hospitals, physician groups and other healthcare providers, which form a
significant portion of the Company's customer base, to experience cash flow
problems. This in turn could negatively impact their ability to meet their
financial obligations to the Company and/or reduce their future equipment
acquisitions which could adversely affect the Company.
SHARES ELIGIBLE FOR FUTURE SALE. Following the Offering and the Direct
Offering, the Company will have outstanding approximately 13,560,108 shares of
Common Stock (approximately 13,890,108 if the underwriter's over-allotment
option is exercised in full). Of these shares of Common Stock approximately
11,745,197 shares, which include the 2,200,000 shares offered hereby, are freely
tradeable without restriction under the Securities Act, except for any shares
purchased by existing affiliates of the Company, which shares are subject to the
resale limitations of Rule 144 as promulgated under the Securities Act ("Rule
144"). All of the remaining shares of outstanding Common Stock are "restricted
securities" as that term is defined in Rule 144. Subject to the 90-day lock-up
agreement described below, these restricted securities will be eligible for sale
pursuant to Rule 144 in the public market following the consummation of the
Offering. Additional shares of Common Stock, including shares issuable upon
exercise of employee stock options and upon conversion of the Company's
Convertible Notes, will also become eligible for sale in the public market from
time to time. However, the Company, certain of its executive officers and
directors, certain stockholders and certain holders of Convertible Subordinated
Notes, who in the aggregate will own approximately 3,516,791 shares of Common
Stock after the Offering and the Direct Offering, have agreed that, for a period
of 90 days after the date of this Prospectus Supplement, they will not, without
the prior written consent of Prudential Securities Incorporated, directly or
indirectly, offer, sell, offer to sell, contract to sell, pledge, grant any
option to purchase or otherwise sell or dispose (or announce any offer, sale,
offer of sale, contract of sale, pledge, grant of any option to purchase or
other sale or disposition) of any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock or other
capital stock of the Company, or any right to purchase or acquire Common Stock
or other capital stock of the Company, subject to certain exceptions, including
the ability of the Company to grant options and issue shares of Common Stock
under the Company's existing option plans and to issue Common Stock in
acquisition transactions not involving a public offering, provided that the
recipient will be bound by that lock-up agreement. Prudential Securities
Incorporated may, in its sole discretion, at any time and without notice,
release all or any portion of the shares subject to such lock-up agreements.
Following this Offering and the Direct Offering and upon the expiration of the
lock-up agreements, sales of substantial amounts of the Company's Common Stock
in the public market pursuant to Rule 144 or otherwise, or the availability of
such shares for sale, could adversely affect the prevailing market price of the
Common Stock and impair the Company's ability to raise additional capital
through the sale of equity securities. See "Shares Eligible for Future Sale."
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<PAGE> 15
DEPENDENCE UPON KEY PERSONNEL. The ability of the Company to successfully
continue its existing financing business, to expand into its targeted markets
and to develop its newer businesses depends upon the ability of the Company to
retain the services of its key executive officers and senior management
personnel, including Michael A. O'Hanlon, the Company's President and Chief
Executive Officer. The loss of any of these individuals or an inability to
attract and maintain additional qualified personnel could adversely affect the
Company. There can be no assurance that the Company will be able to retain its
existing management personnel or to attract additional qualified personnel.
YEAR 2000 CONCERNS. The Company believes, based on discussions with its
current systems vendors, that its software applications and operational programs
will properly recognize calendar dates beginning in the Year 2000. In addition,
the Company is discussing with its customers and suppliers the possibility of
any interface difficulties relating to the Year 2000 which may affect the
Company. To date, no significant concerns have been identified, however, there
can be no assurance that there will not be any Year 2000-related operating
problems or expenses that will arise with the Company's computer systems and
software or in connection with the Company's interface with the computer systems
and software of its vendors and customers and suppliers.
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<PAGE> 16
USE OF PROCEEDS
The aggregate net proceeds to the Company from the sale of the 2,540,000
shares of Common Stock in the Offering and the Direct Offering are $50.8
million, consisting of $43.9 million from the sale of 2,200,000 shares of Common
Stock in the Offering ($50.6 million if the Underwriters' over-allotment option
is exercised in full) after deducting underwriting discounts and commissions and
estimated Offering expenses and $6.9 million from the sale of the 340,000 shares
of Common Stock in the Direct Offering.
The primary purpose of the Offering and the Direct Offering is to provide
the Company with additional capital (i) to fund its growth, including increasing
the amount of equipment and medical receivables loans the Company can fund, (ii)
to develop the Company's 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. Pending such uses the
Company may temporarily (a) pay down certain of its warehouse facilities which
may include facilities provided by Prudential Securities Credit Corporation, an
entity affiliated with Prudential Securities Incorporated, one of the
Underwriters of this Offering or (b) invest the net proceeds in short-term,
investment grade, interest bearing securities or guaranteed obligations of the
U.S. government.
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<PAGE> 17
PRICE RANGE OF COMMON STOCK
The Common Stock has been listed on the NYSE since May 14, 1992. Prior to
that time, it was included in The Nasdaq Stock Market's National Market since
August 7, 1990. The following table sets forth the high and low last reported
sales prices per share of Common Stock on the NYSE Composite Tape for the
periods indicated:
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C> <C> <C>
FISCAL YEAR ENDED JUNE 30, 1996
First Quarter............................................. $13 3/4 $11 1/8
Second Quarter............................................ 14 1/2 12 5/8
Third Quarter............................................. 14 3/8 12 1/4
Fourth Quarter............................................ 15 7/8 12 5/8
FISCAL YEAR ENDED JUNE 30, 1997
First Quarter............................................. $17 3/8 $12 1/4
Second Quarter............................................ 14 7/8 12 1/2
Third Quarter............................................. 13 3/8 11
Fourth Quarter............................................ 14 5/8 11 1/4
FISCAL YEAR ENDED JUNE 30, 1998
First Quarter............................................. $16 3/4 $14 5/16
Second Quarter............................................ 20 5/16 16 1/2
Third Quarter............................................. 25 1/4 18 3/8
Fourth Quarter (through May 21, 1998)..................... 25 21 7/16
</TABLE>
On May 21, 1998, the last reported sales price of the Common Stock on the
NYSE Composite Tape was $21.4375 per share and there were approximately 5,300
holders of record.
DIVIDEND POLICY
The Company has not declared or paid any cash dividends since its
inception, and the Company anticipates that any future earnings will be retained
for investment in corporate operations. Any declaration of dividends in the
future will be determined in light of the conditions affecting the Company at
that time, including, among other things, its earnings, financial condition,
capital requirements, level of debt and the terms of any contractual limitations
on dividends. The Company's principal warehouse facility prohibits DVI Financial
Services, the Company's principal operating subsidiary, from paying cash
dividends to the Company. In addition, the agreement with respect to the
Company's 9 1/8% Convertible Subordinated Notes due 2002 (the "Convertible
Subordinated Notes") and the indenture governing the Company's 9 7/8% Senior
Notes due 2004 (the "Senior Notes") both place limitations on the payment of
dividends by the Company and its subsidiaries. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
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<PAGE> 18
CAPITALIZATION
The following table sets forth the capitalization of the Company at March
31, 1998, and as adjusted to reflect the sale of (i) 2,200,000 shares of Common
Stock in the Offering, after deducting the underwriting discounts and
commissions and the estimated Offering expenses payable by the Company and the
application of the net proceeds therefrom and (ii) 340,000 shares of Common
Stock in the Direct Offering and the application of the proceeds therefrom. This
table should be read in conjunction with the Company's Consolidated Financial
Statements, and related notes incorporated by reference into this Prospectus
Supplement and the accompanying Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1998
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Borrowings under warehouse facilities....................... $182,152 $182,152
-------- --------
Long-term debt, net:
Securitization debt....................................... $298,945 $298,945
9 7/8% Senior Notes due 2004.............................. 96,329 96,329
Other debt................................................ 16,764 16,764
Convertible subordinated notes............................ 13,410 13,410
-------- --------
Total long-term debt.............................. $425,448 $425,448
-------- --------
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 11,018,008 at March 31, 1998 and
13,558,008, as adjusted................................ 55 68
Additional capital........................................ 75,137 125,954
Retained earnings......................................... 35,498 35,498
-------- --------
Cumulative translation adjustments........................ (480) (480)
-------- --------
Total shareholders' equity........................ 110,210 161,040
-------- --------
Total capitalization.............................. $535,658 $586,488
======== ========
</TABLE>
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<PAGE> 19
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, 1996 and 1997 and for each of the three years in the period ended June
30, 1997 are derived from the Company's audited Financial Statements
incorporated by reference into this Prospectus Supplement and the accompanying
Prospectus. The Statement of Operations and Balance Sheet Data at June 30, 1993,
1994 and 1995 and for each of the two years in the period ended June 30, 1994
are derived from the Company's audited Financial Statements for those years,
which are not included or incorporated by reference in this Prospectus
Supplement and the accompanying Prospectus. The selected financial data as of
and for the nine months ended March 31, 1997 and 1998 have been derived from
unaudited financial statements of the Company and in the opinion of the
Company's management, include all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the Company's
financial condition and results of operations at the end of and for such
periods. The results of operations for the nine months ended March 31, 1998 are
not necessarily indicative of future results. The following data should be read
in conjunction with the Company's financial statements and related notes
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>
NINE MONTHS
ENDED
YEAR ENDED JUNE 30, MARCH 31,
----------------------------------------------- -----------------
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Finance and other income:
Amortization of finance income.......... $12,273 $18,624 $33,425 $44,509 49,535 $36,058 $45,839
Other income............................ 1,822 1,985 2,560 4,529 6,799 5,356 8,258
------- ------- ------- ------- ------- ------- -------
Total finance and other income............ 14,095 20,609 35,985 49,038 56,334 41,414 54,097
Interest expense.......................... 5,005 8,833 22,860 30,489 38,395 27,646 36,584
------- ------- ------- ------- ------- ------- -------
Net interest and other income............. 9,090 11,776 13,125 18,549 17,939 13,768 17,513
Net gain on sale of financing
transactions............................ 1,104 302 3,042 8,032 14,039 8,280 15,060
------- ------- ------- ------- ------- ------- -------
Net finance income........................ 10,194 12,078 16,167 26,581 31,978 22,048 32,573
Selling, general and administrative
expenses................................ 5,568 6,049 7,891 9,933 14,117 9,934 13,086
Provision for possible losses on
receivables............................. 167 1,716 1,261 2,325 2,386 1,111 3,909
------- ------- ------- ------- ------- ------- -------
Earnings from continuing operations before
provision for income taxes, equity in
net earnings (loss) of investees and
discontinued operations................. 4,459 4,313 7,015 14,323 15,475 11,003 15,578
Equity in net earnings (loss) of
investees............................... (51) (242) -- (66) (281) (173) (293)
Provision for income taxes................ 1,828 1,811 2,946 6,092 6,631 4,644 6,316
------- ------- ------- ------- ------- ------- -------
Earnings from continuing operations....... 2,580 2,260 4,069 8,165 8,563 6,186 8,969
Loss from discontinued operations......... 1,922 3,145 -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Net earnings (loss)....................... $ 658 $ (885) $ 4,069 $ 8,165 $ 8,563 $ 6,186 $ 8,969
======= ======= ======= ======= ======= ======= =======
Net earnings per share:
Basic................................... $ 0.56 $ 0.80
Diluted................................. $ 0.54 $ 0.74
</TABLE>
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<PAGE> 20
<TABLE>
<CAPTION>
AS OF
AS OF JUNE 30, MARCH 31,
---------------------------------------------------- ------------
1993 1994 1995 1996 1997 1998
-------- -------- -------- -------- -------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Gross financed receivables................ $148,191 $287,734 $475,803 $520,120 $650,376 $770,060
Net financed receivables.................. 123,628 239,347 400,642 454,398 580,637 703,270
Notes collateralized by medical
receivables............................. 2,565 6,007 21,247 38,567 86,858 162,553
Total assets.............................. 147,161 265,949 432,876 560,939 634,528 729,059
Borrowings under warehouse facilities..... 45,221 34,586 155,172 168,108 44,961 182,152
Long-term debt, net:
Securitization debt..................... 51,691 148,852 205,376 253,759 317,863 298,945
9 7/8% Senior Notes due 2004............ -- -- -- -- 95,883 96,329
Other debt.............................. 136 -- -- -- 8,168 16,764
Convertible subordinated notes.......... -- 14,112 13,754 13,809 13,324 13,410
-------- -------- -------- -------- -------- --------
Total long-term debt...................... $ 51,827 $162,964 $219,130 $267,568 $435,238 $425,448
======== ======== ======== ======== ======== ========
Shareholders' equity...................... $ 34,664 $ 33,993 $ 40,250 $ 85,302 $ 95,660 $110,210
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,
---------------------------------------------------- ---------------------
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- -------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
ADDITIONAL OPERATING AND OTHER
DATA:
Origination and commitments:
Domestic equipment
origination.................. $ 58,600 $157,400 $314,100 $316,757 $370,262 $272,767 $ 277,242
International origination and
commitments.................. -- -- -- -- 31,461 31,192 105,263
Medical receivables
commitments.................. -- 5,600 23,900 40,000 101,100 68,550 110,510
-------- -------- -------- -------- -------- -------- ----------
Total origination and
commitments...................... $ 58,600 $163,000 $338,000 $356,757 $502,823 $372,509 $ 493,015
======== ======== ======== ======== ======== ======== ==========
Managed portfolio:
Domestic equipment............. $121,063 $233,340 $473,626 $601,542 $809,090 $753,331 $ 878,643
International equipment........ -- -- -- -- 29,895 31,959 118,130
Medical receivables............ 2,565 6,007 21,247 38,567 86,858 71,678 162,553
-------- -------- -------- -------- -------- -------- ----------
Total managed portfolio............ $123,628 $239,347 $494,873 $640,109 $925,843 $856,968 $1,159,326
======== ======== ======== ======== ======== ======== ==========
Net charge-offs.................... $ 82 $ 264 $ 477 $ 1,581 $ 436 $ 270 $ 1,188
Net charge offs as a percentage of
average net financed assets...... 0.09% 0.15% 0.15% 0.35% 0.08% 0.07% 0.24%
Allowance for possible losses on
receivables...................... $ 1,046 $ 2,498 $ 3,282 $ 4,026 $ 5,976 $ 4,867 $ 8,697
Allowance for possible losses on
receivables as a percentage of
net financed assets.............. 0.85% 1.04% 0.82% 0.89% 1.03% 0.88% 1.24%
Total delinquencies................ $ 10,101 $ 8,709 $ 22,567 $ 27,514 $ 33,153 $ 34,669 $ 66,176
Total delinquencies as a percentage
of managed net financed assets... 8.17% 3.64% 4.56% 4.30% 3.58% 4.05% 5.71%
</TABLE>
S-18
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company is a leading provider of asset-based financing to healthcare
service providers. 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. Through its medical
receivables finance business, the Company provides lines of credit
collateralized by third party medical receivables to a wide variety of
healthcare providers and offers warehouse and securitization services to other
healthcare finance providers. 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. The Company operates
principally in the United States and is developing a significant presence in
Latin America as well as operations in Europe and Asia. 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.
CERTAIN ACCOUNTING CONSIDERATIONS
Equipment Financing. For accounting purposes, the Company classifies
equipment loans it originates as notes secured by equipment, direct financing
leases or operating leases. Notes secured by equipment and direct financing
leases are generally those transactions in which the obligor has substantially
all of the benefits and risks of ownership of the equipment. Operating leases
are generally those which only provide for the rental of the asset. The
different classifications can result in accounting treatments that provide
substantially different income and costs during the transaction term. Direct
financing leases and notes secured by equipment are reflected on the Company's
balance sheet as "investment in direct financing leases and notes secured by
equipment." For statement of operations purposes, those transactions result in
amortization of finance income over the transaction term in the amounts computed
using the interest method.
The Company enters into two types of direct financing lease transactions,
which are referred to as "conditional sales agreements" and "fair market value
transactions." Conditional sales agreements and notes secured by equipment
represent those transactions in which no residual interest in the underlying
equipment is retained by the Company. Fair market value transactions are those
transactions in which the Company retains a residual interest in the equipment.
This residual interest is recorded on the Company's books as an estimate of the
projected value of the financed equipment at the end of the transaction term. At
the inception of notes secured by equipment and direct financing lease
transactions, "unearned income" represents the amount by which the gross
transaction receivables, initial direct costs and the estimated residual value
(on fair market value transactions) exceed equipment cost.
Beginning in 1993, the Company significantly reduced its emphasis on
entering into fair market value transactions and adopted a strategy to reduce
the dollar amount of residual interests on its balance sheet. Pursuant to this
policy, the percentage of the Company's equipment financing transactions
structured as loans and conditional sales agreements have increased
significantly. While the Company has recently entered into fair market value
transactions in connection with its international operations, and as of March
31, 1998, residual valuation had increased to $11.2 million from $6.2 million at
June 30, 1993, as a percentage of net financed receivables residual valuation
decreased from 5.0% as of June 30, 1993 to 1.6% at March 31, 1998. The Company
believes that loans and conditional sales agreements will constitute a high
percentage of its equipment financing transactions in the future.
Leases and contracts for the rental of equipment which do not meet the
criteria of direct financing leases are accounted for as operating leases.
Equipment under an operating lease or a rental contract is recorded on the
balance sheet at the Company's cost under the caption of "equipment on operating
leases" and depreciated on a straight-line basis over the estimated useful life
of the equipment.
S-19
<PAGE> 22
Notes secured by equipment and direct financing lease transactions are all
"net" transactions under which the obligor must make all scheduled payments,
maintain the equipment, insure the equipment against casualty loss and pay all
equipment related taxes. In fair market value transactions, at the end of the
initial financing term, the obligor has the option either to purchase the
equipment for its fair market value, extend the financing term under
renegotiated payments or return the equipment to the Company. If the equipment
is returned to the Company, the Company must sell or lease the equipment to
another user.
In transactions classified as notes secured by equipment and direct
financing leases that the Company permanently funds through securitization or
other structured finance transactions which the Company treats as debt, income
is deferred and recognized using the interest method over the respective term of
the transactions. If an obligor under a transaction defaults, the Company may
not receive all or a portion of the unamortized income associated with the
transaction.
Medical Receivable Financing. In addition to its equipment finance
business, the Company provides lines of credit to a wide variety of healthcare
providers that are secured by medical receivables and other collateral and
offers warehouse and securitization services to other healthcare finance
providers who do not have access to such financing sources. The interest and fee
income generated from these loans are recognized over the terms of the lines of
credit, which are typically one to three years, and are recorded as amortization
of finance income.
RESULTS OF OPERATIONS
The Company has classified income under the categories of "amortization of
finance income," "other income" and "gain on sale of financing transactions."
Amortization of finance income consists of the interest component of payments
received on notes secured by equipment, 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
late charges, dividends on investment in investee's preferred stock, income from
operating leases, service fees earned on serviced assets, fees associated with
the repayment of contracts and income from billing/collecting activities. "Gain
on sale of financing transactions" consists of gains recognized when the Company
permanently funds transactions through off balance sheet securitizations or
other whole loan sales.
Impact of Financing Strategies on Results of Operations
The Company's financing strategy is to obtain permanent funding for most of
its equipment loans through securitization and whole loan sales. When funding
loans through securitization, the issuer generally can structure the
securitization so that the funding is treated for accounting purposes either as
long-term debt secured by equipment loans or medical receivable loans owned by
the Company, or as a sale. The manner in which income arising in those
transactions is recognized for financial reporting purposes differs
significantly depending on which of the two structures the issuer uses. When the
Company sponsors a securitization it treats the proceeds as long-term debt on
its financial statements and reports the amortization of finance income on the
full amount of the loans, whereas when the Company sells loans, it recognizes
the unamortized finance income at the time the funding takes place; however,
even in a funding treated as a sale, the Company may recognize servicing income
and/or interest income on its subordinated interest over the remaining term of
the equipment loans sold.
Over the past three years the Company has focused its strategy on
increasing its market share. There can be no assurance that the Company's
historical growth rate or current profitability can be sustained in the future.
Additionally, the Company's expense levels are based in part on its expectations
as to future financing volumes and the Company may be unable to adjust spending
in a timely manner to compensate for a decrease in demand for financing of
medical equipment and receivables. Accordingly, operating results may be
adversely impacted by future fluctuations in such demand. The Company believes
that general economic conditions have not had a material adverse effect on the
Company's recent operating results. There can be no assurances, however, that
general economic conditions will not have a material adverse effect on the
Company in the future.
S-20
<PAGE> 23
Nine Months Ended March 31, 1998 Compared to Nine Months Ended March 31, 1997
Total finance and other income increased to $54.1 million in the nine month
period ended March 31, 1998 from $41.4 million for the nine month period ended
March 31, 1997. Amortization of finance income increased to $45.8 million from
$36.1 million for the nine month period ended March 31, 1998 as compared to the
same period of the prior year. The increase primarily was a result of the
overall increase in the size of the Company's loan portfolio. Other income
increased to $8.3 million in the nine month period ended March 31, 1998 from
$5.4 million in the comparable prior year period. The increase was due mainly to
fees earned on the larger portfolio, service fees earned on serviced assets and
fees associated with the repayment of contracts and a legal settlement.
Interest expense increased to $36.6 million for the nine months ended March
31, 1998 from $27.6 million for the nine months ended March 31, 1997. The
increase is primarily a result of the growth of the Company's loan portfolio. As
a percentage of finance and other income, interest expense increased to 67.6%
for the nine months ended March 31, 1998 as compared to 66.8% for the nine month
period ended March 31, 1997.
Net gain on sale of financing transactions increased to $15.1 million for
the nine months ended March 31, 1998 from $8.3 million for the same period of
the prior fiscal year. Loans sold during the nine month period ended March 31,
1998 were $212.6 million compared to $169.8 million during the same period of
the prior fiscal year. Higher relative gains are attributable to better
structuring, timing and execution of securitizations.
For the nine months ended March 31, 1998 selling, general and
administrative expenses increased by 31.7% to $13.1 million from $9.9 million
for the same prior year period. The increase in the Company's selling, general
and administrative expenses was primarily related to the expansion of the
Company's new domestic and international businesses and the Company's 35.3%
growth in managed net financed assets.
The provision for possible losses on receivables was $3.9 million for the
nine month period ended March 31, 1998 as compared to $1.1 million for the nine
months ended March 31, 1997. On a quarterly basis, the Company evaluates the
collectibility of its receivables and records a provision for amounts deemed
uncollectible. In the opinion of management, the provisions are adequate based
on current trends in the Company's delinquencies and losses.
Earnings before provision for income taxes and equity in net loss of
investees increased 41.6% to $15.6 million for the nine month period ended March
31, 1998 compared to $11.0 million for the same period ended March 31, 1997. Net
earnings increased 45.0% to $9.0 million from $6.2 million in comparing the nine
month period ended March 31, 1998 to the same period ended March 31, 1997.
Diluted earnings per share increased 37.0% to $0.74 from $0.54 when comparing
the nine month period ended March 31, 1998 and March 31, 1997. The increase in
diluted earnings per share results from an increase in the Company's net
earnings, partially offset by an increase in average diluted shares.
Total shareholders' equity increased to $110.2 million at March 31, 1998
from $95.7 million at June 30, 1997. The increase primarily was due to net
earnings of $9.0 million, issuance of 300,000 shares for $4.9 million, and
exercise of stock options and warrants for $1.1 million.
The Company believes that its present warehouse and permanent funding
sources are sufficient to fund the Company's current needs for its equipment and
medical receivables financing businesses.
At March 31, 1998, the Company had available an aggregate of $398.0 million
in warehouse facilities of which $182.2 million was utilized.
Through March 31, 1998, the Company has completed 20 securitizations or
other structured finance transactions for medical equipment and medical
receivables financings totaling approximately $1.4 billion, including two public
debt issues totaling $165.6 million and 18 private placements of debt and whole
loan sales totaling approximately $1.2 billion. The Company expects for the
foreseeable future to continue to use securitization, on both a public and
private basis, as its principal means to permanently fund its loans.
S-21
<PAGE> 24
LIQUIDITY AND CAPITAL RESOURCES
General
The Company's financing business requires substantial amounts of capital
and borrowings. The Company obtains warehouse funding from commercial and
investment banks. The Company's warehouse borrowings are full recourse
obligations (meaning that upon a default, the lender has recourse against the
collateral pledged to secure the Company's obligations and against the Company
itself), while the Company's permanent funding is obtained principally on a
limited recourse basis (meaning that upon a default, the lender's primary
recourse is against the pledged collateral and the lender has only a limited
ability to recover directly from the Company). In the case of limited recourse
funding, the Company retains some risk of loss because it shares in any losses
incurred and/or it may forfeit the residual interest (if any) the Company has in
the underlying financed assets should defaults occur.
A substantial portion of the Company's debt represents permanent funding of
equipment loans obtained on a limited recourse basis and is structured so that
the cash flow from the underlying loans services the debt. Most of the Company's
warehouse borrowings are used to temporarily fund the equipment loans and are
repaid with the proceeds obtained from the permanent funding and cash flow from
the underlying transactions.
As a result of the growth of the Company's equipment financing and medical
receivable loans business, the amount of warehouse and permanent funding it
requires has significantly increased. To meet its requirements for increased
warehouse funding, the Company has expanded its warehouse facilities with banks,
and has obtained warehouse facilities with investment banking firms the Company
uses for its securitizations. To meet its requirement for increased permanent
funding, the Company has enhanced its ability to fund equipment loans 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, the Company's growth will be constrained and it may be
forced to use less attractive funding sources in order to ensure its liquidity.
In addition to the interim and permanent funding referred to above, the
Company's continued growth in loan originations and net financed receivables
requires substantial amounts of external funding, primarily to fund the reserve
account or overcollateralization requirements that are applied in connection
with securitizations and sales of the Company's loans. These funds essentially
provide the credit enhancement for the Company's leveraged investments in its
loan portfolios, and typically are obtained through sales of debt or equity
securities by the Company.
Although the Company believes that cash available from operations and
financing activities will be sufficient to enable it to make required interest
payments on the Convertible Subordinated Notes and the Senior Notes and its
other debt obligations and other required payments, there can be no assurance in
this regard and the Company may encounter liquidity problems which could affect
its ability to meet such obligations while attempting to withstand competitive
pressures or adverse economic conditions.
The Company's existing net financed receivables generate positive cash
flows, however, as a result of the Company's continued strong growth in loan
originations and net financed receivables and its securitization program, the
Company expects to continue to generate negative cash flow from operations. The
Company's primary cash requirements include the funding of: (i) loan
originations and purchases pending their securitization and sale; (ii) fees and
expenses incurred in connection with the securitization of loans; (iii) reserve
account or overcollateralization requirements in connection with the
securitization and sale of the loans; (iv) ongoing administrative and other
operating expenses; and (v) interest and principal payments under the Company's
warehouse facilities and other indebtedness.
The Company's primary sources of liquidity in the future are expected to be
available cash flow from operations, existing cash fundings under its warehouse
facilities, sales of loans through securitizations and other permanent fundings,
the net proceeds from this Offering and further issuances of debt or equity. The
Company expects these sources to be sufficient to fund the Company's liquidity
requirements for at least the next twelve months if the Company's future
operations are consistent with management's current growth expectations.
However, because the Company expects to continue to operate on a negative cash
flow basis for
S-22
<PAGE> 25
the foreseeable future, it anticipates that it will need to affect debt or
equity financings regularly. The type, timing and terms of financing selected by
the Company will be dependent upon the Company's cash needs, the availability of
other financing sources and the prevailing conditions in the financial markets.
There can be no assurance that any such sources will be available to the Company
at any given time or as to the favorableness of the terms on which such sources
may be available.
Warehouse Facilities
At March 31, 1998, the Company had an aggregate maximum of $368.0 million
potentially available under various warehouse facilities for equipment financing
of which it had borrowed an aggregate of $155.6 million. The Company's primary
credit facility, pursuant to a revolving credit agreement with a syndicate of
banks (the "Agreement"), provides for the borrowing of up to $128.0 million.
Borrowings under this facility bear interest based on DVI Financial Services'
leverage ratio as defined in the Agreement at DVI Financial Services' option of
(i) from prime to prime plus 0.125% or (ii) from 1.35% up to 1.65% over the 30,
60 or 90-day LIBOR rate. Included in the Agreement is a $35.0 million sub-limit
for borrowings secured by medical receivables loans originated by DVI Financial
Services. The Agreement is renewable annually at the bank syndicate's
discretion. The Agreement prohibits DVI Financial Services from paying dividends
other than dividends payable solely in shares of DVI Financial Services' stock
and limits borrowings to specified levels determined by ratios based on the
Company's tangible net worth. As of March 31, 1998, the Company was in
compliance with the financial covenants of the Agreement.
In addition to the credit facility described above, the Company has two
$100.0 million interim funding facilities with investment banking firms to fund
certain equipment loans which are to be securitized by the lenders thereunder.
Borrowings under these facilities bear interest at a rate of 0.80% over the
30-day LIBOR rate. The Company also has a $30.0 million warehouse credit
facility for its medical receivables financing business.
The table below sets forth, as of March 31, 1998, the name of the primary
leader 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
(IN THOUSANDS)
MARCH 31, 1998
------------------------------------------
COMMITMENT OUTSTANDING EXPIRATION DATE
---------- ----------- ---------------
<S> <C> <C> <C>
DOMESTIC
Fleet Bank, as Agent..................................... $128.0 $ 49.3 12/31/98
Prudential Securities.................................... 100.0 38.3 7/30/98
Lehman Brothers.......................................... 100.0 28.0 9/5/98
Credit Suisse First Boston............................... 30.0 26.6 9/30/98
Prime Bank............................................... 5.0 5.0 1/29/99
Fleet Bank............................................... 5.0 5.0 6/29/98
------ ------
Total.......................................... $368.0 $152.2
====== ======
INTERNATIONAL
Prudential Securities.................................... $ 30.0 $ 30.0 6/30/98
------ ------
Total.......................................... $ 30.0 $ 30.0
====== ======
</TABLE>
Permanent Funding Methods
The Company has completed 20 securitizations or other structured finance
transactions for medical equipment and medical receivables financings totaling
approximately $1.4 billion, of which $1.3 billion represents medical equipment
financings. In January 1996, the Company 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 its medical receivables
financing business. The Company expects to continue to use
S-23
<PAGE> 26
securitization, on both a public and private basis, as its principal means to
permanently fund its loans for the foreseeable future. If for any reason the
Company were to become unable to access the securitization market to permanently
fund its equipment loans, the consequences for the Company would be materially
adverse.
The Company's use of securitization significantly affects its need for
warehouse facilities and its liquidity and capital requirements due to the
amount of time required to assemble a portfolio of loans to be securitized. When
using securitization, the Company is required to hold loans until a sufficient
quantity, generally $150.0 to $250.0 million, is accumulated so as to attract
investor interest and allow for a cost effective placement. This increases the
Company's exposure to changes in interest rates and temporarily reduces its
warehouse facility liquidity.
The Company does not have binding commitments for permanent funding, either
through securitization or whole loan sales. The Company has non-binding
agreements with investment banking entities to fund future loans through
securitization. While the Company expects to be able to continue to obtain the
permanent funding it requires for its equipment financing and medical
receivables financing business, there can be no assurance that it will be able
to do so. If, for any reason, any of these types of funding were unavailable in
the amounts and on terms deemed reasonable by the Company, the Company's
financing activities would be adversely affected. The Company believes its
existing warehouse facilities are sufficient to meet its near-term obligations.
Hedging Strategy
When the Company borrows funds through warehouse facilities, it is exposed
to a certain degree of risk caused by interest rate fluctuations. Although the
Company's equipment loans are structured and permanently funded on a fixed
interest rate basis, it uses warehouse facilities until permanent funding is
obtained. Because funds borrowed through warehouse facilities are obtained on a
floating interest rate basis, the Company uses hedging techniques to protect its
interest rate margins during the period that warehouse facilities are used prior
to an anticipated securitization or sale. The Company uses derivative financial
instruments, such as forward rate agreements, Treasury locks, and interest rate
swaps, caps and collars, to manage its interest rate risk. The derivatives are
used to manage three components of this risk: interest sensitivity adjustments,
hedging anticipated loan securitizations and sales, and interest rate spread
protection. The Company's hedging techniques may not necessarily protect it from
interest rate-related risks in all interest rate environments. See
"Business -- Capital Resources and Transaction Funding -- Hedging Strategy."
Income Tax Issues
Historically, the Company has deferred a substantial portion of its federal
and state income tax liability because of its ability to obtain depreciation
deductions from transactions structured as fair market value leases. Over the
past 18 months, the proportion of transactions originated by the Company
structured as fair market value leases has declined, and the Company expects
that trend will continue. As a result, the Company expects that in future
periods its ability to defer its income tax liability will correspondingly
decline. Additionally, the Company believes its effective tax rate will increase
in future periods as a result of higher state tax rates in certain regions in
which the Company conducts its business.
Inflation
The Company does not believe that inflation has had a material effect on
its operating results during the past three years. There can be no assurance
that the Company's business will not be affected by inflation in the future.
S-24
<PAGE> 27
BUSINESS
OVERVIEW
DVI, Inc. is a leading provider of asset-based financing to healthcare
service providers. 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. Through its medical
receivables finance business, the Company provides lines of credit
collateralized by third party medical receivables to a wide variety of
healthcare providers and offers warehouse and securitization services to other
healthcare finance providers. 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. The Company operates
principally in the United States and is developing a significant presence in
Latin America as well as operations in Europe and Asia. 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 Company principally serves 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. In addition, the Company has recently expanded its
customer base to include the long term and assisted care markets. Many of the
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: (i) significant growth in the
level of healthcare expenditures worldwide; (ii) dramatic efforts by
governmental and market forces to reduce healthcare delivery costs and increase
efficiency; (iii) favorable demographic and public policy trends worldwide; (iv)
growth, consolidation and restructuring of healthcare service providers; and (v)
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 factors, the Company's business has grown
substantially. From June 30, 1995 to March 31, 1998, the Company's managed net
finance receivables portfolio increased 134% to approximately $1.2 billion from
$494.9 million. During this same period of substantial portfolio growth, the
Company's net charge-offs and delinquencies have remained low. The Company's net
charge-offs as a percentage of average net financed receivables were 0.15%,
0.35%, 0.08% and 0.24% for the three years ended June 30, 1995, 1996 and 1997
and the nine months ended March 31, 1998, annualized, respectively, and total
delinquencies as a percentage of managed net financed receivables for the same
periods were 4.56%, 4.30%, 3.58% and 5.71%, respectively. See "-- Credit
Experience."
The continued growth in the Company's business has required substantial
amounts of external funding. The Company finances its originations on an interim
basis with secured credit facilities provided by banks and other financial
institutions. These interim "warehouse" facilities are generally repaid with the
proceeds from asset securitizations, whole loan sales, and other structured
finance techniques to permanently fund most of the Company's portfolio. These
permanent financings require capital to be invested by the Company to fund
reserve accounts or to meet the overcollateralization required in the
securitizations and sales of the Company's loans. The Company continues to seek
new ways to fund its growth, including developing asset securitization and other
structured finance techniques to permanently fund its international medical
equipment loans.
Medical Equipment Finance. The Company's equipment finance business
operates by: (i) providing financing directly to end users of diagnostic imaging
and other sophisticated medical equipment; (ii) providing captive finance
programs for vendors of diagnostic and patient treatment devices worldwide; and
(iii) to a lesser extent, by purchasing medical equipment loans and leases
originated by regional finance companies through a wholesale loan origination
program. The Company's typical equipment loan has an initial principal balance
ranging from $300,000 to $2.0 million. Virtually all of the Company's equipment
loans are structured such that the full cost of the equipment and all financing
costs are repaid during the financing term, which typically is five years. The
Company's exposure to residual asset value is limited because most of the
Company's equipment loans are structured as notes secured by equipment or direct
financing leases with a
S-25
<PAGE> 28
bargain purchase option. At March 31, 1998, the Company's portfolio of equipment
financing loans was $996.8 million.
The Company has traditionally focused its financing activities on the
domestic outpatient diagnostic and treatment services sector of the healthcare
industry, typically consisting of radiologists and other diagnostic service
providers who were among the first in the domestic healthcare industry to move
away from the hospital setting toward outpatient treatment centers. The Company
expects the range of services provided in an outpatient setting to expand and
intends as part of its business strategy to focus on the equipment used and
medical receivables generated as a result of that expansion. In addition, to
enhance its relationships with certain medical equipment manufacturers, and to
capitalize on the growing international markets for medical equipment financing,
the Company has formed international joint ventures or established subsidiaries
in Latin America, Europe, Asia and Australia which provide finance programs for
manufacturers in these regions. The Company views continued expansion of its
relationships with medical equipment vendors and manufacturers as an integral
component of its growth strategy and intends, to the extent appropriate in the
pursuit of that objective, to continue to expand its medical equipment finance
activities outside the U.S. The Company believes that by helping vendors and
manufacturers to finance their customers' equipment purchases outside the U.S.
it will encourage those vendors and manufacturers to increase the financing
opportunities they refer to the Company within the U.S. At March 31, 1998, the
Company's portfolio of international equipment loans was $118.1 million. In
addition, at March 31, 1998, Medical Equipment Credit Pte, a joint venture in
which the Company has a minority interest, had a portfolio of international
equipment loans of $13.0 million.
Medical Receivables Finance. The Company provides lines of credit to a
wide variety of healthcare providers and offers warehouse and securitization
services to other healthcare finance providers who do not have access to such
financing sources. Substantially all of the lines of credit are collateralized
by third party medical receivables due from Medicare, Medicaid, health
maintenance organizations ("HMOs"), preferred provider organizations ("PPOs"),
commercial insurance companies, self insured corporations and, to a limited
extent, other healthcare service providers. The Company generally advances only
70% to 85% of the Company's 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 the benefit of the Company. The Company conducts
extensive due diligence on its potential medical receivables clients for all its
financing programs and follows underwriting and credit policies in providing
financing to customers. The Company's credit risk is mitigated by the Company's
ownership of or security interest in all receivables, eligible and ineligible.
The Company's 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. At March 31, 1998, the Company's portfolio of medical receivables loans
was $162.6 million.
Medical receivables financing is readily available for many hospitals and
for physicians seeking relatively small amounts of funding. However, for
outpatient healthcare providers seeking funding in excess of approximately
$500,000, the principal sources of financing generally are limited to specialty
finance companies or factoring companies that purchase receivables at a
discount. The Company believes the principal reasons for the lack of financing
in these areas historically have been the uncertainty of the value of the
receivables, the lack of permanent funding vehicles and the potential for fraud
due to the difficulty of verifying the performance of healthcare services. More
recently, interest in providing financing for this sector has increased as a
result of improved understanding of the expected reimbursement levels for
healthcare services and the availability of historical performance data on which
to base credit decisions. The Company's strategy in medical receivables
financing is to differentiate itself from many of its competitors by offering
loans secured by medical receivables rather than factoring those receivables at
a discount. The Company believes that loans secured by medical receivables are
often more attractive to borrowers that generate high-quality medical
receivables because those borrowers find the Company's financing has a lower
cost than the cost to those borrowers of factoring their receivables.
Additional Financing Services. Management believes that the long-term care
and assisted care markets have been underserved by traditional financing sources
and that many firms in these markets have both a need for and the
creditworthiness to support working capital financing. To serve these markets
the Company established DVI Merchant Funding in November 1997. Through DVI
Merchant Funding the Company
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<PAGE> 29
provides fee based advisory services such as private placement, loan
syndication, bridge financing, mortgage loan placement and to a lesser extent
mergers and acquisitions advisory services to its customers.
BUSINESS STRATEGY
The Company's business strategy 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 its customers.
The principal components of the Company's strategy include:
- Strengthening its relationships with equipment manufacturers to generate
additional financing opportunities in the U.S. and international
markets. The Company views continued expansion of its relationships with
medical equipment manufacturers as an integral component of its growth
strategy and intends, to the extent appropriate in the pursuit of that
objective, to continue to expand its medical equipment finance activities
outside the U.S. To strengthen its relationships with certain
manufacturers of medical equipment and to capitalize on the growing
international markets for medical equipment financing, the Company has
formed international joint ventures or established subsidiaries in Latin
America, Europe, Asia and Australia which provide medical equipment
financing in these regions. The Company believes that by helping
manufacturers to finance their customers' equipment purchases outside the
U.S. it will encourage those manufacturers to increase the finance
opportunities they refer to the Company within the U.S.
- Continuing to expand medical receivables finance business. The Company
intends to further expand its share of the medical receivables financing
market by generating financing opportunities through its existing medical
equipment financing customer base, particularly those customers that are
expanding to provide additional healthcare services. The Company intends
to maintain a strategy of differentiating itself from many of its
competitors by continuing to offer loans secured by medical receivables
rather than factoring those receivables at a discount.
- Offering a broader range of financing services to healthcare
providers. The Company's goal is to become the primary source for all of
the financing needs of its customers. Towards this end, the Company has
expanded the credit services that it offers to its customers to include,
among other things, real estate financing and funding to finance
health-care related acquisitions. The Company intends to continue to
introduce new financing products to service the needs of its customers
and to leverage its existing expertise in the healthcare markets to
become the preferred provider of healthcare related finance within its
chosen segments of the healthcare markets.
- Expanding its presence in new segments of the healthcare industry. The
Company intends to significantly expand its presence in new segments of
the healthcare industry, including the long-term care and assisted care
markets. The Company views these markets as being traditionally
underserved by financing providers and as having favorable
characteristics for working capital financing, especially as healthcare
providers in these markets grow, consolidate and restructure. The Company
believes that in these markets it can achieve attractive returns while
controlling its overall credit risk. The Company intends to look
opportunistically for other healthcare markets with similar
characteristics.
DVI, Inc. conducts its business principally through two operating
subsidiaries, DVI Financial Services Inc. ("DVI Financial Services") and DVI
Business Credit Corporation ("DVI Business Credit"). The Company conducts
securitizations through special purpose indirect wholly-owned subsidiaries. The
Company also conducts other structured financings through limited purpose
subsidiaries or through its operating subsidiaries. The borrowers under the
Company's various warehouse credit facilities are DVI Financial Services or DVI
Business Credit.
HEALTHCARE FINANCING INDUSTRY
General. Managed healthcare and other initiatives have had a substantial
impact on the structure of the healthcare industry in the United States. Many
healthcare services formerly provided principally in hospitals are now delivered
through outpatient healthcare providers. The Company expects that the movement
away
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<PAGE> 30
from hospital care will continue as long as outpatient healthcare providers can
provide healthcare services at costs lower than hospitals. There is also an
increasing trend toward the use of diagnostic, preventative and non-invasive
procedures, many of which can be provided by outpatient healthcare providers.
Payors such as Medicaid, Medicare and commercial insurance companies have placed
an emphasis on these procedures in an attempt to achieve the cost savings often
obtained in subsequent healthcare services following early detection.
The healthcare industry also has been affected by recent changes in
reimbursement procedures. In an attempt to control healthcare costs, many payors
have moved away from fee for service based reimbursement, where a pre-determined
fee was paid for each diagnostic or treatment procedure performed, toward
capitation or population based reimbursement, where a pre-determined amount per
patient is provided by the payor on an annual basis regardless of the amount or
the types of services performed. These trends in the healthcare industry have
generally placed pressure on the operating margins of all healthcare providers.
In addition, the complex relationships that are evolving as a result of the
reimbursement structure have made it increasingly difficult for traditional
lenders to analyze the credit of healthcare providers, thereby limiting the
funding sources available to the industry.
Developments in computer based technology also have had a significant
impact on the healthcare industry by advancing the capability of sophisticated
medical equipment while at the same time lowering its cost. The increasing
emphasis on diagnostic and early stage preventative treatment, coupled with
these technological advances, have increased the usefulness of, and therefore
the demand for, diagnostic equipment of many kinds, including MRI and CT
equipment. At the same time, cost containment pressure appears to have increased
the demand for relatively less expensive models of diagnostic and other
equipment.
Changes in the healthcare industry have led to consolidation among
healthcare providers, including outpatient healthcare providers. The Company
expects this trend to continue, however, the effect of this consolidation on the
healthcare financing industry is uncertain. One result has been that many
outpatient healthcare providers have diversified the services they provide by
acquiring new equipment to better service their market and to facilitate their
ability to negotiate with third party payors.
SALES AND MARKETING
The Company generates most of its financing opportunities from two sources:
(i) medical equipment manufacturers that use third parties to finance the sale
of their products; and (ii) healthcare providers with whom the Company's sales
organization has relationships. Generally, medical equipment manufacturers refer
customers to the Company for financing because they believe the Company has the
ability to understand and measure the creditworthiness of the customer's
business and provide the financing necessary for the completion of the equipment
sale.
The Company has established a close working relationship, 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,
the Company has formed joint ventures or subsidiaries to provide medical
equipment financing to the customers of the manufacturer in the international
market. The Company currently has joint ventures or subsidiaries in Latin
America, Europe, Asia and Australia. The Company believes that these
relationships afford it a competitive advantage over other providers of medical
equipment financing.
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<PAGE> 31
In the medical receivables finance business, the lines of credit originated
by the Company are secured by pledges of: (i) specific receivables due the
provider, (ii) the overall receivables portfolio of the healthcare provider, and
(iii) other forms of credit enhancement such as cash collateral, letters of
credit and guarantees. The Company's target market for the lines of credit it
originates includes "middle market" healthcare companies and providers with
annual revenues between $5 and $125 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 the Company's target
market include the following:
1. Specialty Outpatient Clinics: Imaging centers, surgery centers,
oncology centers and medical laboratories.
2. Hospitals: Acute care and sub-acute facilities, community and
specialty hospitals.
3. Health Service Companies: Home healthcare, nursing homes, skilled
nursing, physical and occupational therapy, pharmacy, infusion, and
specialty treatment centers.
4. Medical Practitioners: Medical groups, individual physicians with
large practices and management service organizations ("MSOs").
The Company's sales and marketing organization consists of 25 healthcare
finance specialists located in various parts of the United States. These
individuals generally have a credit industry and/or medical equipment
background. The Company generally locates sales personnel in geographic areas
where they have knowledge of the local market. The Company believes that sales
personnel who understand local economic and political trends are a valuable
component of its credit underwriting process.
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<PAGE> 32
PROFILE OF RECEIVABLES FINANCED
The following table sets forth certain information with respect to
equipment loan origination, including loan purchases and medical receivables
commitments by the Company for the years ended June 30, 1995, 1996, 1997 and for
the nine-month period ended March 31, 1998.
LOAN ORIGINATION AND COMMITMENTS BY THE COMPANY
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------------------------------------- NINE MONTHS ENDED
1995 1996 1997 MARCH 31, 1998
--------------------- --------------------- --------------------- ---------------------
PERCENT PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
---------- -------- ---------- -------- ---------- -------- ---------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
DIAGNOSTIC/TREATMENT
EQUIPMENT(1)
Equipment Financed
Domestically
Magnetic Resonance Imaging
(MRI).................... $155.9 46.1% $152.7 42.9% $126.8 25.2% $ 86.4 17.5%
Computerized Tomography
(CT)..................... 20.7 6.1 21.2 5.9 21.5 4.3 12.4 2.5
Ultrasound................. 9.7 2.9 4.0 1.1 10.2 2.0 3.5 0.7
Medical devices(2)......... 15.3 4.5 42.9 12.0 67.7 13.5 37.7 7.6
Imaging systems............ 12.2 3.6 18.5 5.2 24.8 4.9 10.9 2.2
X-Ray...................... 2.3 0.7 1.9 0.5 6.7 1.3 1.6 0.4
Radiation therapy.......... 12.0 3.6 8.4 2.4 12.5 2.5 4.6 1.0
Other...................... 86.0 25.4 67.2 18.8 100.0 19.9 120.2 24.4
------ ---- ------ ---- ------ ----- ------ ----
Total Equipment Financed
Domestically............... 314.1 92.9 316.8 88.8 370.2 73.6 277.3 56.3
Equipment Financed
Internationally............ 31.5 6.4 105.2 21.3
SECURED LINES OF CREDIT(3)
- -----------------------------
Medical receivables lines of
credit committed........... 23.9 7.1 40.0 11.2 101.1 20.0 110.5 22.4
------ ---- ------ ---- ------ ----- ------ ----
Total DVI, Inc. ............. $338.0 100% $356.8 100% $502.8 100% $493.0 100%
====== ==== ====== ==== ====== ===== ====== ====
</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> 33
The following tables set forth certain information with respect to the
geographic distribution of the Company's servicing portfolio as of March 31,
1998 based on the original equipment cost.
GEOGRAPHIC DISTRIBUTION OF EQUIPMENT LOAN PORTFOLIO TOP 10 STATES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL EQUIPMENT
STATE EQUIPMENT COST LOAN PORTFOLIO
- ----- -------------- ---------------
<S> <C> <C>
New York.................................................... $208,146 15.7%
California.................................................. 178,812 13.5
Texas....................................................... 113,660 8.6
Florida..................................................... 112,719 8.5
New Jersey.................................................. 98,031 7.4
Pennsylvania................................................ 67,590 5.1
Maryland.................................................... 51,886 3.9
Ohio........................................................ 32,845 2.5
Illinois.................................................... 31,519 2.4
Maryland.................................................... 28,332 2.1
</TABLE>
GEOGRAPHIC DISTRIBUTION OF EQUIPMENT LOAN PORTFOLIO BY TOP 10 COUNTRIES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL EQUIPMENT
COUNTRY EQUIPMENT COST LOAN PORTFOLIO
- ------- -------------- ---------------
<S> <C> <C>
Brazil...................................................... $71,281 5.4%
Argentina................................................... 18,562 1.4
Colombia.................................................... 10,668 0.8
United Kingdom.............................................. 7,208 0.5
Turkey...................................................... 7,068 0.5
Yugoslavia.................................................. 2,971 0.2
Hungary..................................................... 2,090 0.2
Chile....................................................... 1,547 0.1
Jamaica..................................................... 1,009 0.1
Uruguay..................................................... 897 0.1
</TABLE>
LOAN CHARACTERISTICS
Equipment loans. The Company's typical equipment loan is secured by
medical equipment and other collateral, is a five-year contract that is not
prepayable and has an initial principal balance ranging from $300,000 to $2.0
million. In many of its equipment loans, the Company obtains liens on all of the
borrower's assets and guarantees from equity owners and other affiliates of the
borrowers. In a small number of instances the Company will obtain recourse to
the manufacturers of the equipment. Where the borrower has multiple financings
with the Company, the loans generally contain cross default provisions. The
Company also takes a pledge of the stock of the corporate entities that own and
operate the equipment.
The Company's equipment loans are structured (i) on a "net" basis,
requiring the obligor to pay for equipment maintenance and all other operating
expenses, including taxes and insurance and (ii) to require the obligor to be
responsible for compliance with all applicable laws and regulations with respect
to the use and operation of the equipment. The terms of the Company's equipment
loans range from 36 to 84 months. As of March 31, 1998 approximately 87.7% (as
measured by equipment cost) of the Company's loan portfolio had an initial term
of 72 months or less. The Company's policy is to structure its equipment loans
so that the obligor pays for the full cost of the equipment and the financing
during the financing term.
Medical Receivables Loans. The Company's medical receivables finance
business consists primarily of providing lines of credit under which the Company
makes full recourse loans to healthcare providers that are
S-31
<PAGE> 34
secured by medical receivables and other collateral and offers warehouse and
securitization services to other healthcare finance providers who do not have
access to such financing sources. The amounts of the credit facilities range
from $500,000 to $15.0 million and are based upon the Company's evaluation of
the net collectible amount of the healthcare providers' eligible receivables.
After determining the amount of the credit facility, the providers' eligible
receivables are reviewed on a quarterly basis to determine collectibility. These
medical receivables generally have maturities ranging from 30 to 180 days and
generally involve payors such as insurance plans, self insured companies and
governmental programs. The Company does not lend against co-pay obligations.
Substantially all of the Company's medical receivable lines of credit have terms
from 12 to 36 months. The medical receivable financing business entails
significant risks and capital requirements. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
The following table sets forth the geographic distribution of the Company's
medical receivables at of March 31, 1998.
GEOGRAPHIC DISTRIBUTION OF MEDICAL RECEIVABLES PORTFOLIO BY TOP 10 STATES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
OUTSTANDING AS A
PERCENTAGE OF
STATE COMMITMENT OUTSTANDING TOTAL PORTFOLIO
- ----- ---------- ----------- ----------------
<S> <C> <C> <C>
Florida.................................................. $70,130 $50,969 30.3%
Tennessee................................................ 28,510 22,460 13.4
California............................................... 30,550 20,732 12.3
Oregon................................................... 30,000 17,554 10.4
Nevada................................................... 11,500 11,015 6.6
New York................................................. 14,500 10,832 6.4
New Jersey............................................... 15,250 9,484 5.6
Texas.................................................... 18,900 7,868 4.7
Georgia.................................................. 15,500 4,335 2.6
Oklahoma................................................. 4,500 3,701 2.2
</TABLE>
CREDIT UNDERWRITING
The Company believes the credit underwriting process that it uses when
originating loans is effective in managing its risk. The overall credit
underwriting process follows detailed guidelines and procedures and reflects the
significant experience of the Company 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 the
Company's targeted markets.
The Company has historically focused most of its efforts on the
non-hospital sector of the healthcare marketplace, which requires rigorous
credit analysis and structuring discipline. The Company's underwriting expertise
enables it 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, letter of credits, 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, the Company conducts collateral and
receivables underwriting in addition to credit underwriting. On-site due
diligence is performed by the Company's auditors to confirm that billing and
collections systems, accounting systems and patient records are maintained and
comply with the Company's 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.
Due to the large size of the Company's transactions, each transaction is
analyzed and reviewed on its own merits. Pursuant to Company policy, the Credit
Manager for DVI Financial Services has approval authority
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<PAGE> 35
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.
CREDIT EXPERIENCE
The following table sets forth certain information with respect to
delinquencies for the periods indicated.
DELINQUENCY EXPERIENCE(1)
<TABLE>
<CAPTION>
AS OF JUNE 30,
------------------------------------------------------------------------ AS OF MARCH 31,
1993 1994 1995 1996 1997 1998
------------ ------------ ------------ ------------ ------------ ---------------
$ %(2) $ %(2) $ %(2) $ %(2) $ %(2) $ %(2)
----- ---- ----- ---- ----- ---- ----- ---- ----- ---- ------- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Managed net financed
receivables.............. 123.6 -- 239.3 -- 494.9 -- 640.1 -- 925.8 -- 1,159.3 --
Delinquencies(1)
31 -- 60 days............ 4.1 3.3 4.0 1.7 12.6 2.5 10.4 1.6 3.7 0.4 25.5 2.2
61 -- 90 days............ 2.1 1.7 0.2 0.1 3.1 0.6 3.6 0.6 12.1 1.3 13.6 1.2
91 + days................ 3.9 3.2 4.5 1.9 6.9 1.4 13.5 2.1 17.3 1.9 27.1 2.3
----- --- ----- --- ----- --- ----- --- ----- --- ------- ---
Total
delinquencies... 10.1 8.2 8.7 3.7 22.6 4.5 27.5 4.3 33.1 3.6 66.2 5.7
===== === ===== === ===== === ===== === ===== === ======= ===
</TABLE>
- ---------------
(1) Under the relevant agreements, the Company's obligors generally are
considered in default if payment on a contract has not been received when
due. Information presented does not include obligations that are overdue by
less than 30 days.
(2) Delinquencies as a percentage of managed net financed receivables.
Delinquencies reflect the entire outstanding balance on delinquent
contracts.
The Company expects all of the equipment it finances ultimately to be owned
by the borrower. The Company's experience has been that in instances of
delinquency, the market value of the equipment generally has been sufficient to
allow for the restructuring of loans without any significant adjustments to the
manner in which the Company records such loans. The Company has also exercised
its right to bring in new management to operate centers that have defaulted on
their loans.
The following table sets forth information with respect to losses for the
Company's loans for the periods indicated.
LOSS EXPERIENCE
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, NINE MONTHS
--------------------------------------------------- ENDED MARCH 31,
1993 1994 1995 1996 1997 1998
------- -------- -------- -------- -------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net charge-offs........... $ 82 $ 264 $ 477 $ 1,581 $ 436 $ 1,188
Average net financed
receivables(1).......... 94,233 176,410 321,514 455,143 530,677 663,738
Average managed net
financed
receivables(1).......... 97,808 192,203 355,620 571,106 771,743 1,031,132
Net charge-offs as a
percentage of average
net financed
receivables............. 0.09% 0.15% 0.15% 0.35% 0.08% 0.24%(2)
Net charge-offs as a
percentage of average
net managed financed
receivables............. 0.08 0.14 0.13 0.28 0.06 0.15(2)
</TABLE>
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<PAGE> 36
- ---------------
(1) Presentation of amounts for 1993 through 1994 is based on averages of
quarterly period end balances. Presentation of amounts for 1995 through 1998
is based on averages of quarterly period average balances. Amounts for 1995
through 1998 are based on servicing records for entire servicing portfolio.
Amounts for 1993 through 1994 are based on financial statements and may
include additional assets.
(2) Information presented on an annualized basis.
The following table sets forth information with respect to reconciliation
of allowance for losses for the Company's equipment loans and medical receivable
loans for the periods indicated. On a monthly basis, the Company compiles
information with respect to the current and anticipated performance of its loan
portfolio. The Company analyzes this information regularly and makes an
adjustment to the allowance at the end of each fiscal quarter.
RECONCILIATION OF ALLOWANCE FOR LOSSES
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED JUNE 30, ENDED
------------------------------------------- MARCH 31,
1993 1994 1995 1996 1997 1998
------ ------ ------ ------- ------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Beginning allowance....................... $1,082 $1,046 $2,498 $ 3,282 $4,026 $ 5,976
Provision for doubtful accounts........... 248 1,716 1,261 2,325 2,386 3,909
Net charge-offs........................... (82) (264) (477) (1,581) (436) (1,188)
Other..................................... (202) -- -- -- -- --
------ ------ ------ ------- ------ -------
Ending allowance.......................... $1,046 $2,498 $3,282 $ 4,026 $5,976 $ 8,697
====== ====== ====== ======= ====== =======
Ending allowance as a percentage of net
financed receivables.................... 0.85% 1.04% 0.82% 0.89% 1.03% 1.24%
====== ====== ====== ======= ====== =======
</TABLE>
The Company's historical levels of allowances and delinquencies are not
necessarily predictive of future results. Various factors, including changes in
the way the Company's customers are paid for their services, other developments
in the healthcare industry, and new technological developments affecting the
resale value of equipment financed by the Company, could cause the Company's
future allowance and delinquency rates to be worse than those experienced
historically.
CAPITAL RESOURCES AND TRANSACTION FUNDING
The Company obtains initial funding for most of its equipment loans through
"warehouse" facilities provided by banks and other financial institutions. Loans
made under these facilities are repaid when the Company permanently funds its
equipment loans through securitization or other limited recourse permanent
funding programs, including loan sales. Typically, equipment loans are held for
30 to 180 days before they are permanently funded.
The Company's need for capital in addition to the funding provided under
its warehouse and permanent funding facilities is affected by two primary
factors: (i) the level of credit enhancement required under its various
warehouse and permanent funding facilities and (ii) the amount of loans held at
any time by the Company that do not qualify as eligible collateral under those
facilities. Because of the manner in which the Company accounts for its business
operations it may require substantial amounts of capital even in periods when it
reports positive earnings. This arises principally because there are timing
differences between the Company's recognition for accounting purposes of various
items of expense and income and its actual receipt of cash that cause the
Company's cash flow at times of strong growth in loan originations to be lower
than its reported earnings. The two most significant of these differences are
(x) the deferral of the Company's costs to originate each loan which are
amortized for accounting purposes over the life of the loan, even though the
costs are paid in cash at the time of the loan origination, and (y) the
recognition of gain on the sale of a loan for accounting purposes at the time
the sale is deemed to have occurred, even though in many transactions treated as
sales of loans for accounting purposes, the cash is received over the same time
period as the original
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<PAGE> 37
amortization schedule of the loan. While these factors tend to reduce the
Company's liquidity at times of strong growth in loan originations, conversely,
if the Company's loan growth were to decline, these same factors would have the
effect of improving the Company's cash flow from operations in the short term.
Continuing Need for Capital. Each of the Company's warehouse facilities
and permanent funding vehicles require the Company to provide equity or a form
of recourse credit enhancement to the respective lenders or investors and
generally do not permit the Company to fund general corporate requirements.
Therefore, the actual liquidity or funds available to the Company to finance its
growth are limited to the cash generated from net financed receivables and the
available proceeds of equity or debt securities issued by DVI, Inc. At times of
strong origination growth the Company's cash flows from operations are
insufficient to fund these requirements. As a result, the Company's need to fund
its high growth rates in loan originations necessitates substantial external
funding to provide the equity or capital required as recourse credit enhancement
from which to leverage borrowings. The Company has no binding commitments for
the capital it expects it will continue to require, and its ability to obtain
that capital in the future will be dependent on a number of factors including
the condition of the capital markets and economic conditions generally.
Warehouse Facilities. As of March 31, 1998, the Company had an aggregate
maximum of $368.0 million potentially available under various warehouse
facilities for equipment financing of which it had borrowed an aggregate of
$155.6 million. These facilities are provided by a syndicate of banks that
participate in a revolving credit arrangement and by investment banking firms
that the Company uses for securitizations. The loans made under the bank
warehouse facility (i) bear interest at floating rates; (ii) are full recourse
obligations of the Company; and (iii) typically advance an amount equal to
approximately 95.0% of the cost of the equipment subject to the loans being made
thereunder. Loans made under the bank warehouse facility typically are repaid
with the proceeds of advances made under securitization warehouse facilities.
Those advances in turn are typically repaid with proceeds from permanent
fundings. Loans funded under securitization warehouse facilities cease to be
eligible collateral if they are not funded within a specified period of time.
The amount advanced under the securitization warehouse facilities generally is
92.0% of the discounted value of the pledged receivables. If the Company were
unable to arrange continued access to acceptable warehouse financing, the
Company would have to curtail its loan originations, which in turn would have a
material adverse effect on the Company's financial condition and operations.
Permanent Funding Program. Since 1991, the most important source of
permanent funding for the Company has been securitization and other forms of
structured finance. Securitization is a process in which a pool of equipment
loans is transferred to a special-purpose financing vehicle which issues notes
to investors. Principal and interest on the notes issued to investors by the
securitization subsidiary are paid from the cash flows produced by the loan
pool, and the notes are secured by a pledge of the assets in the loan pool as
well as by other collateral. In the securitizations sponsored by the Company,
equipment loans funded through the securitizations must be credit enhanced to
receive an investment grade credit rating. Credit enhancement can be provided in
a number of ways, including cash collateral, letters of credit, a subordinated
"tranche" of each individual transaction or an insurance policy. Typically,
securitizations sponsored by the Company are enhanced through a combination of
some or all of these methods. In the securitizations sponsored to date by the
Company, the Company effectively has been required to furnish credit enhancement
equal to the difference between (i) the aggregate principal amount of the
equipment loans originated by the Company and transferred to the Company's
special purpose finance subsidiary and the related costs of consummating the
securitization and (ii) the net proceeds received by the Company in such
securitizations. The requirement to provide this credit enhancement reduces the
Company's liquidity and requires it periodically to obtain additional capital.
There can be no assurance that the Company will be able to obtain additional
capital.
For accounting purposes, the Company's securitizations are treated as
either financings (on balance sheet transactions) or sales (off balance sheet
transactions). An on balance sheet transaction is one in which the loans being
securitized remain on the Company's balance sheet as an asset for their
originally contracted term as a result of the consolidation of the assets and
liabilities of the special purpose vehicle with the Company's for financial
accounting purposes. An off balance sheet transaction removes the loans from the
Company's balance sheet and results in the Company recognizing a gain on the
sale of the underlying loans upon completion of the securitization.
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The Company continually seeks to improve the efficiency of its permanent
funding techniques by reducing up-front costs and minimizing the cash
requirements of the Company. The Company may consider alternative structures,
including senior/subordinated tranches, and alternative forms of credit
enhancement, such as letters of credit and surety bonds. The transaction
expenses of each securitization and other forms of structured financing will
depend on market conditions, costs of securitization and the availability of
credit enhancement options to the Company. The Company expects to continue to
use securitization and other forms of structured financing, on both a public and
private basis, as its principal source of permanent funding for the foreseeable
future.
To be cost efficient, a securitization must cover a relatively large and
diverse portfolio of equipment loans. One of the basic requirements of the
credit rating agencies that rate the notes issued in securitizations relates to
borrower concentration and requires that no single credit (borrower) may
constitute a significant portion of the pool of equipment loans being
securitized (in the Company's case, the limit is generally about 3%). Because of
these concentration requirements the Company generally must accumulate in excess
of $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 the Company's warehouse facilities at any point in time
can be placed in one securitization.
If for any reason the Company were to become unable to access the
securitization market to permanently fund its equipment loans, the consequences
for the Company would be materially adverse. The Company's ability to complete
securitizations and other structured finance transactions depends upon a number
of factors, including general conditions in the credit markets, the size and
liquidity of the market for the types of receivable-backed securities issued or
placed in securitizations sponsored by the Company and the overall financial
performance of the Company's loan portfolio. The Company does not have binding
commitments from financial institutions or investment banks to provide permanent
funding for its equipment or medical receivables loans.
Hedging Strategy. The Company's equipment loans are virtually all
structured on a fixed interest rate basis. When the Company originates equipment
loans, it bases its pricing in part on the "spread" it expects to achieve
between the interest rate it charges its equipment loan customers and the
effective interest cost it will pay when it permanently funds those loans.
Increases in interest rates between the time the loans are originated and the
time they are permanently funded could narrow, eliminate or even reverse the
spread between the interest rate the Company realizes on its equipment loans and
the interest rate that the Company pays under its warehouse facilities or under
a permanent funding program. In an attempt to protect itself against that risk,
the Company uses a hedging strategy. The Company uses derivative financial
instruments, such as forward rate agreements, Treasury locks, and interest rate
swaps, caps and collars, to manage its interest rate risk. The derivatives are
used to manage three components of this interest rate risk: interest sensitivity
adjustments, pricing of anticipated loan securitizations and sales, and interest
rate spread protection. The Company seeks to manage the credit risk of possible
counterparty default in these derivative transactions by dealing exclusively
with counterparties with investment grade ratings.
Forward rate agreements are for interest sensitivity adjustments in
conjunction with cash market activities and are used to extend the repricing
period of short-term floating rate warehouse facilities. Treasury locks and
collars are used to hedge the interest rate risk on anticipated loan
securitizations and sales. Treasury lock and collar transactions lock in
specific rates and a narrow range of rates, respectively, of Treasury notes
having maturities comparable to the average life of the anticipated
securitizations and sales. Interest rate swaps and caps are used for interest
rate spread protection to protect from rising interest rates in certain loan
sale facilities where the cash flows from the loans sold are fixed rate but the
borrowing costs are variable rate.
There can be no assurance that the Company's hedging strategy or techniques
will be effective, that the profitability of the Company will not be adversely
affected during any period of changes in interest rates or that the costs of
hedging will not exceed the benefits. A substantial and sustained increase in
interest rates could adversely affect the Company's ability to originate loans.
In certain circumstances, the Company for a variety of reasons may retain for an
indefinite period certain of the equipment loans it originates. In such cases,
the
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Company's interest rate exposure may continue for a longer period of time than
the Company otherwise considers desirable.
Medical Receivables Finance. The Company funds its medical receivables
finance business through various sources. The Company's principal bank revolving
credit agreement permits up to $35 million to be used to warehouse medical
receivables loans. A warehouse facility totaling $30 million is available from
an investment banking firm. At March 31, 1998, the Company had $42.4 million
outstanding under the facilities. For permanent funding, in January 1996 the
Company completed a $25 million private placement securitization of loans and in
February 1998 completed a $75 million private placement.
While the medical receivables finance business shares certain
characteristics, including an overlapping customer base, with the Company's
medical equipment finance business, there are many differences, including unique
risks. Healthcare providers could overstate the quality and characteristics of
their medical receivables, which the Company analyzes in determining the amount
of the line of credit to be secured by such receivables. After the Company has
established or funded a line of credit, the healthcare providers could change
their billing and collection systems, accounting systems or patient records in a
way that could adversely affect the Company's ability to monitor the quality
and/or performance of the related medical receivables. In addition, there are
substantial technical legal issues associated with creating and maintaining
perfected security interests in medical receivables. Payors may attempt to
offset their payments to the Company against debts owed to the payors by the
healthcare providers. The Company may have a conflict of interest when the
Company acts as servicer for an equipment-based securitization and originates
medical receivables loans to borrowers whose previous equipment loans have been
securitized. The Company's efforts to develop suitable sources of funding for
its medical receivables finance business through securitization or other
structured finance transactions may be constrained or hindered due to the fact
that the use of structured finance transactions to fund medical receivables is a
relatively new process.
Credit Risk. Loans to outpatient healthcare providers, which constitute a
substantial portion of the Company's customers, often require a high degree of
credit analysis. Although the Company seeks to mitigate its risk of default and
credit losses through its underwriting practices and loan servicing procedures
and through the use of various forms of non-recourse or limited recourse
financing (in which the financing sources that permanently fund the Company's
equipment and other loans assume some or all of the risk of default by the
Company's customers), the Company remains exposed to potential losses resulting
from a default by a customer. Customers' defaults could cause the Company to
make payments to the extent the Company is obligated to do so and in the case of
its permanent equipment and other funding arrangements to the extent of the
Company's remaining credit enhancement position; could result in the loss of the
cash or other collateral pledged as credit enhancement under its permanent
equipment and other funding arrangements; or could require the Company to
forfeit any residual interest it may have retained in the underlying equipment.
During the period after the Company initially funds an equipment or other loan
and prior to the time it funds the loan on a permanent basis, the Company is
exposed to full recourse liability in the event of default by the obligor. In
addition, under the terms of securitizations and other types of structured
finance transactions, the Company generally is required to replace or repurchase
equipment and other loans in the event they fail to conform to the
representations and warranties made by the Company, even in transactions
otherwise designated as non-recourse or limited recourse.
Defaults by the Company's customers also could adversely affect the
Company's ability to obtain additional financing in the future, including its
ability to use securitization or other forms of structured finance. The sources
of such permanent funding take into account the credit performance of the
equipment and other loans previously financed by the Company in deciding whether
and on what terms to make new loans. In addition, the credit rating agencies
that are often involved in securitizations consider prior credit performance in
determining the rating to be given to the securities issued in securitizations
sponsored by the Company.
COMPETITION
The business of financing sophisticated medical equipment is highly
competitive. The Company competes with equipment manufacturers that sell and
finance sales of their own equipment and finance
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subsidiaries of national and regional commercial banks and equipment leasing and
financing companies. Many of the Company's competitors have significantly
greater financial and marketing resources than the Company. In addition, the
competition in the medical receivable financing market may be greater than the
levels of competition historically experienced by the Company.
The Company believes that increased equipment loan originations during the
past three years resulted, in part, from a decrease in the number of competitors
in the higher cost medical equipment financing market and the Company's high
level of penetration in this market. There can be no assurance that new
competitive providers of financing will not enter the medical equipment
financing market in the future. To meet its long-term growth objectives, the
Company must penetrate further the market for its medical receivable financing
business and the long-term care and assisted living sub-markets. Such
penetration may require the Company to reduce its margins to be competitive in
the medical receivable financing businesses. In addition, there can be no
assurance that the Company will sustain the same level of equipment loan
originations in future periods as during the past three years or that it will be
able to meet its long-term growth objectives.
GOVERNMENT REGULATION
The Company's 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, the Company is subject to applicable usury and
other similar laws in the jurisdictions where the Company operates. These laws
generally limit the amount of interest and other fees and charges that a lender
may contract for, charge or receive in connection with a loan. Applicable local
law typically establishes penalties for violations of these laws. 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 its
efforts to reduce, or at least limit the growth of, spending for healthcare
services. On August 5, 1997, President Clinton signed into law the Balanced
Budget Act of 1997 (the "BBA") which contains numerous Medicare and Medicaid
cost-saving measures. The 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 the 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 programs to offset against
unrelated receivables, the Company's healthcare finance business is indirectly
affected by healthcare regulation to the extent that any of its clients' failure
to comply with such regulation affects such clients' ability to collect
receivables or repay loans made by the Company. The most significant healthcare
regulations that could potentially affect the Company are: (i) certificate of
need regulation, which many states require upon the provision of new health
services, particularly for long-term care and home healthcare companies; (ii)
Medicare -- Medicaid fraud and abuse 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. The Company believes these requirements have had a
limited effect on its business, although there can be no assurance that future
changes in those laws will not adversely affect the Company.
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 the Company's clients often rely on prompt
payment from a
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Government Program to satisfy their obligations to the Company, reduced or
denied payments under a Government Program could have an adverse effect on the
Company's 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 the Company's clients and the Company.
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MANAGEMENT
The Directors, executive officers and other key employees of the Company
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.................................. 46 Executive Vice President and President, DVI
Financial Services Inc.
Anthony J. Turek................................... 54 Executive Vice President and Chief Credit
Officer
John P. Boyle...................................... 48 Vice President and Chief Accounting Officer
Melvin C. Breaux................................... 57 Vice President, Secretary and General
Counsel
Cynthia J. Cohn.................................... 38 Vice President and Executive Vice President,
DVI Business Credit
Dominic P. Ferroni................................. 50 President, DVI Capital
John L. Godfrey III................................ 52 President, DVI Merchant Funding
Donna M. Hamel..................................... 51 Managing Director, DVI Vendor Finance Group
Gerald A. Hayes.................................... 53 Chief Credit Officer -- USA
Stephen J. Jasiukiewicz............................ 42 Managing Director, DVI Equipment Finance
Group
Stuart Murray...................................... 42 Vice President and President, DVI Europe
Jozef J. Osten..................................... 59 Chief Operating Officer, DVI South American
Operations
Alan J. Velotta.................................... 50 Vice President and President, DVI Business
Credit Corporation
Gerald L. Cohn..................................... 69 Director
John E. McHugh..................................... 68 Director
Nathan Shapiro..................................... 61 Director
William S. Goldberg................................ 39 Director
Harry T.J. Roberts................................. 64 Director
</TABLE>
Michael A. O'Hanlon is the Company's president and chief executive officer
and has served as such since November 1995. Mr. O'Hanlon was president and chief
operating officer from September 1994 to November 1995. 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 nine 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 Science 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 its
chief financial officer. Mr. Garfinkel also serves on the executive committee of
the Company. Mr. Garfinkel joined the Company in September 1995. His
responsibilities include corporate finance, loan funding, balance sheet
management, accounting and financial reporting, internal control, financial
planning, and human resources. Mr. Garfinkel had extensive experience in
developing and managing corporate finance relationships, money market funding,
derivative hedging, financial planning and management information systems. Prior
to joining the Company, Mr. Garfinkel spent his twenty-nine year career with two
large bank holding companies: CoreStates Financial Corp. and First Pennsylvania
Corporation. For twenty years he was either controller or treasurer of those
organizations. Mr. Garfinkel received his Master of Business Administration
degree from Drexel University and his Bachelor of Arts degree form Temple
University.
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
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Company. His primary responsibility is to manage operations and the Company's
sales organization of financing specialists that interface directly with the
Company's customers. Before joining the Company, he served for six years as vice
president 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. He also previously served in sales
management with General Electric Medical Systems. Mr. Miller has a Bachelor of
Arts degree from Eastern University.
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 the bank. Prior to his employment with
Continental Illinois National Bank, Mr. Turek was a trust officer with 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 the Company's accounting, tax and financial reporting
functions. Before joining the Company, Mr. Boyle spent seventeen years of his
professional career in senior finance and accounting positions with financial
services organizations. He spent the initial five years of his career with Peat
Marwick Mitchell & Co. in Philadelphia. Mr. Boyle is a General Securities
Principal and a CPA with twenty years of experience in the financial services
industry. Beyond his accounting background, he has extensive experience in
credit and corporate finance matters. Mr. Boyle received his Bachelor of Arts
degree from Temple University.
Melvin C. Breaux is general counsel, secretary and a vice president of the
Company and is general counsel and a vice president of DVI Financial Services
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 8 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 sales management capacity since
July 1986. She is responsible for the operations support and marketing functions
of DVI Business Credit, the Company's 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 the president of DVI Capital. His primary
responsibilities are to manage the unit that originates medical equipment loans
on a wholesale basis. He joined the Company in October 1994 as a member of the
Company's 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.
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 services to the long-term care, assisted
care and specialized hospital markets. Mr. Godfrey spent more than 25 years as a
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commercial lender and 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.
Donna M. Hamel is the managing director of DVI Vendor Finance Group. Ms.
Hamel joined the Company in January 1997 and is primarily responsible for
developing global captive vendor alliances with major equipment manufacturers.
Ms. Hamel has over 20 years experience in the finance/leasing industry
specializing in captive creation and acquisitions on a global basis. Most
recently, Ms. Hamel served as group manager -- business development for GE
Capital, Vendor Financial Services. She was responsible for identifying and
developing global captive programs in diversified industries to strategically
expand GE Capital's industry focus and business base. Additionally, Ms. Hamel
has held key executive positions at U.S. Concord, Inc., DPF Limited, Citicorp
Equipment Finance, Pitney Bowes Credit Corporation and Key Bank. Ms. Hamel
received her Bachelor of Arts degree from Boston University.
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 1992 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 1989 to 1992, 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 managing director for DVI Equipment Finance
Group and has been with the Company since March 1993. His primary responsibility
is to manage the Company's 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 nine 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 the Company's 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 the Company's business in South 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 managing 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.
Alan J. Velotta is the president of DVI Business Credit Corporation and has
served in this capacity since April 1997. Mr. Velotta is also a vice president
of the Company. His primary responsibilities are to manage the
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unit that originates the Company's medical receivable-backed loans. When Mr.
Velotta joined the Company in April 1994, he served as the group managing
director of DVI Capital, the Company's wholesale equipment financing operations.
Prior to joining the Company, for four years, Mr. Velotta served as vice
president of operations for Picker Financial Group, the captive leasing company
of Picker International. Previously, Mr. Velotta was vice president/central
division manager for Chrysler Capital Corporation for eleven years. Mr. Velotta
received a Bachelor of Science degree in Marketing from Cleveland State
University.
Mr. 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 acts as a
consultant to the Company and serves on the Company's senior credit committee.
Mr. Cohn is the father of Cynthia J. Cohn, a Company Vice President.
John E. McHugh is a Director of the Company and has served in that capacity
since 1990. Mr. McHugh was formerly the President of, and now serves in a
marketing and public relations capacity with, James McHugh Construction Company,
a firm he has been associated with since 1954.
Nathan Shapiro is a Director of the Company and has served in that capacity
since 1995. Mr. Shapiro is a founder and President of SF Investments, Inc., a
registered broker/dealer in business since 1972. Since 1979 he has been a
director of Baldwin & Lyons, Inc., a publicly traded property and casualty
insurance company. Mr. Shapiro is also the Chairman of the Investment Committee.
He is a trustee for CT&T Funds, a family of mutual funds sponsored by Chicago
Title and Trust Company. Mr. Shapiro is also a director of Amli Realty Co.
William S. Goldberg is a Director of the Company and has served in that
capacity since 1995. Mr. Goldberg is currently Managing Director of GKH
Partners, L.P., a private equity investment and venture capital partnership with
which he has been involved since 1988. Mr. Goldberg is a current and/or former
executive officer of several public and privately owned companies controlled by
GKH Partners, L.P.
Harry T.J. Roberts is a Director of the Company and has served in that
capacity since 1996. In addition to his responsibilities as a Director, Mr.
Roberts also acts as a consultant to the Company. Mr. Roberts is President of
Nakebro, Boston, a privately owned property group and since 1995 has been a
director of Calmar Inc., Los Angeles, the largest manufacturer of non-aerosol
plastic dispensing systems in the world. Prior to these posts, Mr. Roberts held
senior positions in international banking for thirty-five years. Since 1978 he
has worked in the United States as General Manager of Midland International
Bank, London and Svenska Handelsbanken, Stockholm. Mr. Roberts is a Fellow of
the Chartered Institute of Bankers.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering and the Direct Offering, the Company will
have outstanding approximately 13,560,108 shares of Common Stock (13,890,108 if
the Underwriters' over-allotment option is exercised in full). Of these shares
of Common Stock approximately 11,745,197 shares, which include the 2,200,000
shares offered hereby, will be freely tradeable without restriction or further
registration under the Securities Act. Of the remaining 1,814,911 shares of
Common Stock outstanding upon completion of the Offering and the Direct Offering
approximately 1,514,911 shares of Common Stock are restricted securities as such
term is defined in Rule 144. All of the restricted securities and any other
shares of Common Stock acquired by an affiliate of the Company are eligible for
resale pursuant to the provisions of Rule 144 or at any time pursuant to an
effective registration statement covering such shares of Common Stock. All of
these restricted securities are subject to lock-up provisions as described
below. See "Description of Capital Stock."
The Company has reserved or made available for issuance 2,420,000 shares of
Common Stock pursuant to various options and warrants granted under the
Company's various employee benefit and stock incentive plans (the "Plans") to
purchase Common Stock and 1,311,322 shares of Common Stock issuable upon
conversion of the Convertible Subordinated Notes. All of these reserved shares
are covered by currently effective registration statements under the Securities
Act and are therefore freely tradable upon issuance. The Company has also
reserved 400,000 shares of Common Stock for issuance to the former shareholders
of Medical Equipment Finance Corp.
In general, under Rule 144 as currently in effect, any affiliate of the
Company or any person (or persons whose shares are aggregated in accordance with
Rule 144) who has beneficially owned "restricted securities" for at least one
year would be entitled to sell within any three-month period a number of shares
that does not exceed the greater of 1.0% of the outstanding shares of Common
Stock or the reported average weekly trading volume of the Common Stock for the
four calendar weeks preceding the sale. Sales under Rule 144 are also subject to
certain manner of sale restrictions and notice requirements and to the
availability of current public information concerning the Company. Persons who
have not been affiliates of the Company for at least three months and who have
beneficially held their shares of Common Stock for more than two years are
entitled to sell "restricted securities" without regard to the volume, manner of
sale, notice and public information requirements of Rule 144.
The Company, its executive officers and directors, certain stockholders,
certain holders of outstanding options and warrants to purchase Common Stock and
certain holders of Convertible Subordinated Notes owning or holding options or
warrants or conversion rights for an aggregate of approximately 3,516,791 shares
of Common Stock, have agreed that they will not, directly or indirectly, offer,
sell, offer to sell, contract to sell, pledge, grant any option to purchase or
otherwise sell or dispose (or announce any offer, sale, offer of sale, contract
of sale, pledge, grant of any option to purchase or other sale or disposition),
of any shares of Common Stock or any securities convertible into, or exercisable
or exchangeable for Common Stock or other capital stock of the Company, or any
right to purchase or acquire Common Stock or other capital stock of the Company,
for a period of 90 days after the date of this Prospectus Supplement, without
the prior written consent of Prudential Securities Incorporated, on behalf of
the Underwriters. Prudential Securities Incorporated may, in its sole
discretion, at any time and without notice, release all or any portion of the
shares subject to such lock-up agreements. See "Underwriting."
No prediction can be made as to the effect, if any, that sales of the
Common Stock or the availability of such shares for sale in the public market
will have on the market price for the Common Stock prevailing from time to time.
Nevertheless, sales of substantial amounts of Common Stock in the public market
after the restrictions described above lapse could adversely affect prevailing
market prices for the Common Stock and impair the ability of the Company to
raise capital through the sale of equity securities in the future.
S-44
<PAGE> 47
UNDERWRITING
The underwriters named below, Prudential Securities Incorporated, Piper
Jaffray Inc. and Fox-Pitt Kelton, Inc. (the "Underwriters"), have severally
agreed, subject to the terms and conditions contained in the underwriting
agreement (the "Underwriting Agreement"), to purchase from the Company the
number of shares of Common Stock set forth below opposite their respective
names:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ----------- ---------
<S> <C>
Prudential Securities Incorporated.......................... 1,320,000
Piper Jaffray Inc. ......................................... 660,000
Fox-Pitt, Kelton Inc. ...................................... 220,000
---------
Total....................................................... 2,200,000
=========
</TABLE>
The Company is obligated to sell, and the Underwriters are obligated to
purchase, all of the shares of Common Stock offered hereby, if any are
purchased.
The Underwriters have advised the Company that they propose to offer the
shares of Common Stock at the public offering price set forth on the cover page
of this Prospectus Supplement; that the Underwriters may allow to selected
dealers a concession of $0.69 per share; and that such dealers may reallow a
concession of $0.10 per share to certain other dealers. After the Offering, the
public offering price and the concession may be changed by the Underwriters.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus Supplement, to purchase up to 330,000
additional shares of Common Stock at the public offering price less underwriting
discounts and commissions as set forth on the cover page of this Prospectus
Supplement. The Underwriters may exercise such option solely for the purpose of
covering over-allotments incurred in the sale of the shares of Common Stock
offered hereby. To the extent such option to purchase is exercised, each
Underwriter will become obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares as the number of
shares set forth next to such Underwriter's name in the preceding table bears to
2,200,000.
The Company, its executive officers and directors and the stockholders
receiving the shares of Common Stock in the direct offering have agreed that
they will not directly or indirectly, offer, sell, offer to sell, contract to
sell, pledge, grant any option to purchase or otherwise sell or dispose (or
announce any offer, sale, offer of sale, contract of sale, pledge, grant of any
option to purchase or other sale or disposition) of any shares of Common Stock
or other capital stock of the Company, or any securities convertible into, or
exchangeable or exercisable for any shares of Common Stock or other capital
stock of the Company for a period of 90 days from the date of this Prospectus
Supplement, without the prior written consent of Prudential Securities
Incorporated on behalf of the Underwriters, subject to certain exceptions
(including the grant of options and award of shares of Common Stock under the
Company's stock option plans). Prudential Securities Incorporated may, in its
sole discretion, at any time and without notice, release all or any portion of
the shares subject to such lock-up agreements.
In addition to the 2,200,000 shares of Common Stock offered by the
Underwriters, the Company is selling 340,000 shares of Common Stock in the
Direct Offering to certain stockholders of the Company. The Underwriters will
not participate in, or receive any discount or commission on, the sale of these
shares in the Direct Offering.
The Company has agreed to indemnify the several Underwriters and contribute
to any losses arising out of certain liabilities, including liability under the
Securities Act.
From time to time in the ordinary course of their respective businesses,
certain of the Underwriters or their affiliates have provided, and may provide
in the future, various investment banking, general financing and banking and
other services to the Company, for which they have received and may receive
customary fees and commissions. In addition, in connection with the extension of
a third warehouse credit facility of $30,000,000 to the Company by Prudential
Securities Credit Corporation in March 1998, Prudential Securities Incorpo-
S-45
<PAGE> 48
rated received a right of first refusal to act as lead manager or lead placement
agent for all public and private issuances of debt and equity by the Company.
This right of first refusal extends through December 31, 1998.
It is anticipated that more than 10% of the proceeds of the sale of the
Common Stock offered hereby, not including underwriting discounts and
commissions, may be applied to reduce the amount outstanding under a warehouse
facility provided by Prudential Securities Credit Corporation, an affiliate of
Prudential Securities Incorporated. Prudential Securities Incorporated is a
member of the National Association of Securities Dealers, Inc. (the "NASD") and
is acting as an Underwriter of the Offering. Therefore, the Offering is being
made pursuant to the provisions of Section 2710(c)(8) of the Conduct Rules of
the NASD.
In connection with the Offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M, pursuant to which such persons may bid for or
purchase Common Stock for the purpose of stabilizing its market price. The
Underwriters also may create a short position for this account by selling more
Common Stock in connection with the Offering than they are committed to purchase
from the Company, and in such case may purchase Common Stock in the open market
following completion of the Offering to cover all or a portion of such short
position. The Underwriters may also cover all or a portion of such short
position, up to 330,000 shares of Common Stock, by exercising the Underwriters'
over-allotment option. In addition, Prudential Securities Incorporated, on
behalf of the Underwriters, may impose "penalty bids" under contractual
arrangements with the Underwriters whereby it may reclaim from an Underwriter or
any selling group member participating in the Offering for the account of the
other Underwriters, the selling concession with respect to Common Stock that is
distributed in the Offering but subsequently purchased for the account of the
Underwriters in the open market. Any of the transactions described in this
paragraph may result in the maintenance of the price of the Common Stock at a
level above that which might otherwise prevail in the open market. None of the
transactions described in this paragraph are required and, if undertaken, may be
discontinued at any time.
LEGAL MATTERS
Certain legal matters with respect to the legality of the issuance of the
shares of Common Stock offered hereby will be passed upon for the Company by
Rogers & Wells LLP, New York, New York. Certain legal matters in connection with
this Offering will be passed upon for the Underwriters by Gibson Dunn & Crutcher
LLP, New York, New York.
S-46
<PAGE> 49
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> 50
TABLE OF CONTENTS
<TABLE>
<S> <C>
AVAILABLE INFORMATION....................................... 2
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............. 2
THE COMPANY................................................. 3
RATIO OF EARNINGS TO FIXED CHARGES.......................... 3
USE OF PROCEEDS............................................. 4
DESCRIPTION OF CAPITAL STOCK................................ 4
DESCRIPTION OF DEPOSITARY SHARES............................ 5
DESCRIPTION OF DEBT SECURITIES.............................. 8
DESCRIPTION OF WARRANTS..................................... 17
PLAN OF DISTRIBUTION........................................ 18
EXPERTS..................................................... 19
LEGAL MATTERS............................................... 19
</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.
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.
2
<PAGE> 51
(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).
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 30, DECEMBER 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.
3
<PAGE> 52
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 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.
4
<PAGE> 53
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 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.
5
<PAGE> 54
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 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.
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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 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.
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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 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
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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 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.
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BOOK-ENTRY DEBT SECURITIES
The Debt Securities of a series may be issued in whole or in part in the
form of one or more Global Securities that will be deposited with, or on behalf
of, a Depositary ("Depositary") or its nominee identified in the applicable
Prospectus Supplement. In such a case, one or more Global Securities will be
issued in a denomination or aggregate denomination equal to the portion of the
aggregate principal amount of outstanding Debt Securities of the series to be
represented by such Global Security or Global Securities. Unless and until it is
exchanged in whole or in part for Debt Securities in registered form, a Global
Security may not be registered for transfer or exchange except as a whole by the
Depositary for such Global Security to a nominee of such Depositary or by a
nominee of such Depositary to such Depositary or another nominee of such
Depositary or by such Depositary or any nominee to a successor Depositary or a
nominee of such successor Depositary and except in the circumstances described
in the applicable Prospectus Supplement.
The specific terms of the depositary arrangement with respect to any
portion of a series of Debt Securities to be represented by a Global Security
will be described in the applicable Prospectus Supplement. The Company expects
that the following provisions will apply to depositary arrangements.
Unless otherwise specified in the applicable Prospectus Supplement, Debt
Securities which are to be represented by a Global Security to be deposited with
or on behalf of a Depositary will be represented by a Global Security registered
in the name of such Depositary or its nominee. Upon the issuance of such Global
Security, and the deposit of such Global Security with or on behalf of the
Depositary for such Global Security, the Depositary will credit, on its
book-entry registration and transfer system, the respective principal amounts of
the Debt Securities represented by such Global Security to the accounts of
institutions that have accounts with such Depositary or its nominee
("participants"). The accounts to be credited will be designated by the
underwriters of, or agents for, such Debt Securities or by the Company, if such
Debt Securities are offered and sold directly by the Company. Ownership of
beneficial interests in such Global Security will be limited to participants or
persons that may hold interests through participants. Ownership of beneficial
interests by participants in such Global Security will be shown on, and the
transfer of that ownership interest will be effected only through, records
maintained by the Depositary or its nominee for such Global Security. Ownership
of beneficial interests in such Global Security by persons that hold through
participants will be shown on, and the transfer of such ownership interests will
be effected only through, records maintained by such participant. The laws of
some jurisdictions require that certain purchasers of securities take physical
delivery of such securities in certificated form. The foregoing limitations and
such laws may impair the ability to transfer beneficial interests in such Global
Securities.
Debt Securities will be issued in fully registered, certificated form
("Definitive Securities") to holders or their nominees, rather than to the
Depositary or its nominee, only if (i) the Depositary advises the applicable
Trustee in writing that the Depositary is no longer willing or able to discharge
properly its responsibilities as depositary with respect to such Debt Securities
and it is unable to locate a qualified successor, (ii) the Company, at its
option, elects to terminate the book-entry system or (iii) after the occurrence
of an Event of Default with respect to such Debt Securities, a Holder of Debt
Securities advises the applicable Trustee in writing that it wishes to receive a
Definitive Security.
Upon the occurrence of any event described in the immediately preceding
paragraph, the applicable Trustee will be required to notify all applicable
holders through the Depositary and its participants of the availability of
Definitive Securities. Upon surrender by the Depositary of the definitive
certificates representing the corresponding Debt Securities and receipt of
instructions for re-registration, the applicable Trustee will reissue such Debt
Securities as Definitive Securities to such holders.
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
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beneficial interest in such Global Security must rely on the procedures of the
Depositary and, if such person is not a participant, on the procedures of the
participant through which such person owns its interest, to exercise any rights
of a holder under the Indenture. The Company understands that under existing
industry practices, if the Company requests any action of holders or an owner of
a beneficial interest in such Global Security desires to give any notice or take
any action a holder is entitled to give or take under the Indenture, the
Depositary would authorize the participants to give such notice or take such
action, and participants would authorize beneficial owners owning through such
participants to give such notice or take such action or would otherwise act upon
the instructions of beneficial owners owning through them.
Principal of and any premium and interest on a Global Security will be
payable in the manner described in the applicable Prospectus Supplement.
CERTAIN DEFINITIONS
"Capital Stock" of any person means any and all shares, interests,
partnership interests, participations, rights in or other equivalents (however
designated) of such person's equity interest (however designated).
"Capitalized Lease Obligation" means, with respect to any person, an
obligation incurred or assumed under or in connection with any capital lease of
real or personal property that, an obligation incurred or assumed under or in
connection with any capital lease of real or personal property that, in
accordance with GAAP, has been recorded as a capitalized lease.
"Closing Date" means, with respect to any Debt Securities, the date on
which such Debt Securities are originally issued under the Indenture.
"Consolidated Net Worth" means, at any date of determination, stockholders'
equity of the Company and its Restricted Subsidiaries as set forth on the most
recently available quarterly or annual consolidated balance sheet of the Company
and its Restricted Subsidiaries, less any amounts attributable to Disqualified
Stock or any equity security convertible into or exchangeable for Debt, the cost
of treasury stock and the principal amount of any promissory notes receivable
from the sale of the Capital Stock of the Company or any of its Restricted
Subsidiaries, each item to be determined in conformity with GAAP (excluding the
effects of foreign currency adjustments under Financial Accounting Standards
Board Statement of Financial Accounting Standards No. 52).
"Debt" means (without duplication), with respect to any person, whether
recourse is to all or a portion of the assets of such person and whether or not
contingent (a) every obligation of such person for money borrowed, (b) every
obligation of such person evidenced by bonds, debentures, notes or other similar
instruments, (c) every reimbursement obligation of such person with respect to
letters of credit, bankers' acceptances or similar facilities issued for the
account of such person, (d) every obligation of such person issued or assumed as
the deferred purchase price of property or services, (e) Capitalized Lease
Obligations, (f) all Disqualified Stock of such person valued at its maximum
fixed repurchase price, plus accrued and unpaid dividends, (g) all obligations
of such person under or in respect of Hedging Agreements, and (h) every
obligation of the type referred to in clauses (a) through (g) 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.
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"Disqualified Stock" means any class or series of Capital Stock that,
either by its terms, by the terms of any security into which it is convertible
or exchangeable or by contract or otherwise (i) is or upon the happening of any
event or passage of time would be, required to be redeemed prior to the final
Stated Maturity of the Notes, (ii) is redeemable at the option of the holder
thereof at any time prior to such final Stated Maturity or (iii) at the option
of the holder thereof, is convertible into or exchangeable for debt securities
at any time prior to such final Stated Maturity.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Generally Accepted Accounting Principles" or "GAAP" means generally
accepted accounting principles in the United States, consistently applied, that
are in effect on the Closing Date.
"Hedging Obligations" means the obligations of any person under (i)
interest rate swap agreements, interest rate cap agreements and interest rate
collar agreements and (ii) other agreements or arrangements designed to protect
such person against fluctuations in interest rates or the value of foreign
currencies.
"Lien" means any mortgage, charge, pledge, lien (statutory or otherwise),
privilege, security interest, hypothecation, assignment for security, claim, or
preference or priority or other encumbrance upon or with respect to any property
of any kind, real or personal, movable or immovable, now owned or hereafter
acquired. A person will be deemed to own subject to a Lien any property that
such person has acquired or holds subject to the interest of a vendor or lessor
under any conditional sale agreement, capital lease or other title retention
agreement.
"Restricted Subsidiary" means any Subsidiary other than an Unrestricted
Subsidiary.
"Significant Subsidiary" means any Restricted Subsidiary of the Company
that together with its Subsidiaries, (a) for the most recent fiscal year of the
Company, accounted for more than 10% of the consolidated net sales of the
Company and its Restricted Subsidiaries or (b) as to the end of such fiscal
year, was the owner of more than 10% of the consolidated assets of the Company
and its Restricted Subsidiaries, in the case of either (a) or (b), as set forth
on the most recently available consolidated financial statements of the Company
for such fiscal year or (c) was organized or acquired since the end of such
fiscal year and would have been a Significant Subsidiary if it had been owned
during such fiscal year.
"Stated Maturity" means, when used with respect to any Note or any
installment of interest thereon, the date specified in such Note as the fixed
date on which the principal of such Note or installment of interest is due and
payable and, when used with respect to any other Debt, means the date specified
in the instrument governing such Debt as the fixed date on which the principal
of such Debt or any installment of interest thereon is due and payable.
"Subsidiary" means any person a majority of the equity ownership or Voting
Stock of which is at the time owned, directly or indirectly, by the Company
and/or one or more other Subsidiaries of the Company.
"Unrestricted Subsidiary" means (a) any Subsidiary that is designated by
the Board of Directors as an Unrestricted Subsidiary in accordance with the
"Unrestricted Subsidiaries" covenant and (b) any Subsidiary of an Unrestricted
Subsidiary.
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
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required (a) to file with the applicable Trustee, and provide to each holder of
Debt Securities, without cost to such holder, copies of such reports and
documents within 15 days after the date on which the Company files such reports
and documents with the Commission or the date on which the Company would be
required to file such reports and documents if the Company were so required and
(b) if filing such reports and documents with the Commission is not accepted by
the Commission or is prohibited under the Exchange Act, to supply at the
Company's cost copies of such reports and documents to any prospective holder of
Debt Securities promptly upon written request.
EVENTS OF DEFAULT
Unless otherwise specified in the applicable Prospectus Supplement, the
following will constitute "Events of Default" under the Indenture with respect
to Debt Securities of any series (unless they are inapplicable to such series of
Debt Securities or they are specifically deleted in the supplemental indenture
or the Board Resolution under which such series of Debt Securities is issued or
has been modified):
(a) default in the payment of any interest on any Debt Security of
such series when it becomes due and payable, and continuance of such
default for a period of 30 days;
(b) default in the payment of the principal of (or premium, if any,
on) any Debt Security of such series when due;
(c) failure to perform or comply with the Indenture provisions
described under "Consolidation, Merger and Sale of Assets";
(d) default in the performance, or breach, of any covenant or
agreement of the Company contained in the Indenture (other than a default
in the performance, or breach, of a covenant or agreement that is
specifically dealt with elsewhere therein), and continuance of such default
or breach for a period of 60 days after written notice has been given to
the Company by the Trustee or to the Company and the Trustee by the holders
of at least 25% in aggregate principal amount of the Debt Securities of
such series then outstanding as provided in the Indenture;
(e) (i) an event of default has occurred under any mortgage, bond,
indenture, loan agreement or other document evidencing an issue of Debt of
the Company or any Significant Subsidiary, which issue has an aggregate
outstanding principal amount of not less than $5.0 million, and such
default has resulted in such Debt becoming, whether by declaration or
otherwise, due and payable prior to the date on which it would otherwise
become due and payable or (ii) a default in any payment when due at final
maturity of any such Debt;
(f) failure by the Company or any of its Restricted Subsidiaries to
pay one or more final judgments the uninsured portion of which exceeds in
the aggregate $5.0 million, which judgment or judgments are not paid,
discharged or stayed for a period of 60 days;
(g) the occurrence of certain events of bankruptcy, insolvency or
reorganization with respect to the Company or any Significant Subsidiary;
or
(h) any other Event of Default specified for such series.
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
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amount of the outstanding Debt Securities of any series, by written notice to
the Company and the Trustee, may rescind such declaration and its consequences
if (i) the Company has paid or deposited with the Trustee a sum sufficient to
pay (A) all overdue interest on all Debt Securities of such series, (B) all
unpaid principal of (and premium, if any, on) any outstanding Debt Securities of
such series that has become due otherwise than by such declaration of
acceleration and interest thereon at the rate borne by the Debt Securities of
such series, (C) to the extent that payment of such interest is lawful, interest
upon overdue interest and overdue principal at the rate borne by the Debt
Securities of such series and, (D) all sums paid or advanced by the Trustee
under the Indenture and the reasonable compensation, expenses, disbursements and
advances of the Trustee, its agents and counsel; and (ii) all Events of Default,
other than the non-payment of amounts of principal of (or premium, if any, on)
or interest on the Debt Securities of such series that have become due solely by
such declaration of acceleration, have been cured or waived. No such rescission
will affect any subsequent default or impair any right consequent thereto.
The holders of not less than a majority in aggregate principal amount of
the outstanding Debt Securities of any series may, on behalf of the holders of
all of the Debt Securities of such series, waive any past defaults under the
Indenture, except a default in the payment of the principal of (and premium, if
any on) or interest on any Debt Securities of such series, or in respect of a
covenant or provision that under the Indenture cannot be modified or amended
without the consent of the holder of each such Debt Security outstanding.
If a Default or an Event of Default occurs with respect to a series of Debt
Securities and is continuing and is known to the Trustee, the Trustee will mail
to each holder of the Debt Securities of such series notice of the Default or
Event of Default within 90 days after the occurrence thereof. Except in the case
of a Default or an Event of Default in payment of principal of (and premium, if
any, on) or interest on any Debt Securities of any series, the Trustee may
withhold the notice to the holders of the Debt Securities of such series if a
committee of its trust officers in good faith determines that withholding such
notice is in the interests of the holders of the Debt Securities of such series.
The Company is required to furnish to the Trustee annual statements as to
the performance by the Company and any Subsidiary Guarantors (as defined in the
Indenture) of their respective obligations under the Indenture and as to any
default in such performance. The Company is also required to notify the Trustee
within five days of any Default.
SATISFACTION AND DISCHARGE OF THE INDENTURE AND THE DEBT SECURITIES
Upon the request of the Company, the Indenture will cease to be of further
effect (except as to surviving rights of registration of transfer of the Debt
Securities of any series outstanding under the Indenture, as expressly provided
for in the Indenture) and the Trustee, at the expense of the Company, will
execute proper instruments acknowledging satisfaction and discharge of the
Indenture when (a) either (i) all the Debt Securities of any series theretofore
authenticated and delivered (other than destroyed, lost or stolen Debt
Securities of any series that have been replaced or paid and Debt Securities of
any series that have been subject to defeasance under "Defeasance or Covenant
Defeasance of Indenture") have been delivered to the Trustee for cancellation or
(ii) all Debt Securities of any series not theretofore delivered to the Trustee
for cancellation (A) have become due and payable, (B) will become due and
payable at maturity within one year or (C) are to be called for redemption
within one year under arrangements satisfactory to the Trustee for the 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.
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MODIFICATION AND WAIVER
Modifications and amendments of the Indenture may be made by the Company
and the Trustee with the consent of the holders of a majority in aggregate
outstanding principal amount of the Debt Securities of any series to be offered
under the Indenture; provided, however, that no such modification or amendment
may, without the consent of the holder of each outstanding Debt Security of such
series affected thereby,
(a) change the Stated Maturity of the principal of, or any installment
of interest on, any Debt Securities of such series, or reduce the principal
amount thereof or the rate of interest thereon or any premium payable upon
the redemption thereof, or change the coin or currency in which any Debt
Securities of such series or any premium or the interest thereon is
payable, or impair the right to institute suit for the enforcement of any
such payment after the Stated Maturity thereof (or, in the case of
redemption, on or after the Redemption Date);
(b) reduce the percentage in principal amount of outstanding Debt
Securities of such series, the consent of whose holders is required for any
waiver of compliance with certain provisions of, or certain defaults and
their consequences provided for under, the Indenture; or
(c) modify any provisions relating to "-- Modification and Waiver"
except to increase the percentage of outstanding Debt Securities of such
series required for such actions or to provide that certain other
provisions of the Indenture cannot be modified or waived without the
consent of the holder of each outstanding Debt Security of such series
affected thereby.
The holders of a majority in aggregate principal amount of the Debt
Securities of any series outstanding may waive compliance with certain
restrictive covenants and provisions of the Indenture with respect to such
series.
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Company may not consolidate with or merge with or into any other person
or, directly or indirectly, convey, sell, assign, transfer, lease or otherwise
dispose of its properties and assets substantially as an entirety to any other
person (in one transaction or a series of related transactions), unless:
(a) either (i) the Company is the surviving corporation or (ii) the
person (if other than the Company) formed by such consolidation or into
which the Company is merged or the person that acquires by sale,
assignment, transfer, lease or other disposition of the properties and
assets of the Company substantially as an entirety (the "Surviving Entity")
(A) is a corporation, partnership or trust organized and validly existing
under the laws of the United States, any state thereof or the District of
Columbia and (B) expressly assumes, by a supplemental indenture in form
satisfactory to the Trustee, all of the Company's obligations under the
Indenture and the Debt Securities;
(b) immediately after giving effect to such transaction and treating
any obligation of the Company or a Restricted Subsidiary in connection with
or as a result of such transaction as having been incurred as of the time
of such transaction, no Default or Event of Default has occurred and is
continuing;
(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;
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(e) if any of the property or assets of the Company or any of its
Restricted Subsidiaries would thereupon become subject to any Lien, the
provisions of any "Limitation on Liens" covenant applicable to any series
of Debt Securities are complied with; and
(f) the Company delivers, or causes to be delivered, to the Trustee,
in form and substance reasonably satisfactory to the Trustee, an officers'
certificate and an opinion of counsel, each stating that such transaction
complies with the requirements of the Indenture.
In the event of any transaction described in and complying with the
conditions listed in the first paragraph of this covenant in which the Company
is not the continuing obligor under the Indenture, the Surviving Entity will
succeed to, and be substituted for, and may exercise every right and power of,
the Company under the Indenture, and thereafter the Company will be discharged
from all its obligations and covenants under the Indenture and the Debt
Securities.
DEFEASANCE OR COVENANT DEFEASANCE OF INDENTURE
If the Prospectus Supplement relating to the offered Debt Securities so
provides, the Company may, at its option and at any time, terminate the
obligations of the Company and any Subsidiary Guarantors with respect to the
outstanding Debt Securities of any series ("defeasance"). Such defeasance means
that the Company will be deemed to have paid and discharged the entire Debt
represented by the outstanding Debt Securities of such series, except for (i)
the rights of holders of outstanding Debt Securities of such series to receive
payments in respect of the principal of (and premium, if any, on) and interest
on such Debt Securities when such payments are due, (ii) the Company's
obligations to issue temporary Debt Securities of such series, register the
transfer or exchange of any Debt Securities of such series, replace mutilated,
destroyed, lost or stolen Debt Securities of such series, maintain an office or
agency for payments in respect of the Debt Securities of any series and
segregate and hold such payments in trust, (iii) the rights, powers, trusts,
duties and immunities of the Trustee and (iv) the defeasance provisions of the
Indenture. In addition, the Company may, at its option and at any time, elect to
terminate the obligations of the Company and any Subsidiary Guarantor with
respect to certain covenants set forth in the Indenture, and any failure to
comply with such obligations would not constitute a Default or an Event of
Default with respect to the Debt Securities of such series ("covenant
defeasance").
In order to exercise either defeasance or covenant defeasance, (a) the
Company must irrevocably deposit or cause to be deposited with the Trustee, as
trust funds in trust, specifically pledged as security for, and dedicated solely
to, the benefit of the holders of the Debt Securities of a series, money in an
amount, or U.S. Government Obligations (as defined in the Indenture) that
through the scheduled payment of principal and interest thereon will provide
money in an amount, or a combination thereof, sufficient, in the opinion of a
nationally recognized firm of independent public accountants, to pay and
discharge the principal of (and premium, if any, on) and interest on the
outstanding Debt Securities of such series at maturity (or upon redemption, if
applicable) of such principal or installment of interest; (b) no Default or
Event of Default has occurred and is continuing on the date of such deposit or,
insofar as an event of bankruptcy under clause (g) of "Events of Default" above
is concerned, at any time during the period ending on the 91st day after the
date of such deposit; (c) such defeasance or covenant defeasance may not result
in a breach or violation of, or constitute a default under, the Indenture or any
material agreement or instrument to which the Company or 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
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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.
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.
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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.
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
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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, 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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============================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS, IN CONNECTION WITH THE
OFFER MADE BY THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS, AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL, OR THE SOLICITATION OF ANY OFFER TO BUY ANY SECURITIES OTHER THAN
THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS SUPPLEMENT OR THE
ACCOMPANYING PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY THE SHARES OF COMMON STOCK BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Supplement
Prospectus Supplement Summary............. S-1
Risk Factors.............................. S-7
Use of Proceeds........................... S-14
Price Range of Common Stock............... S-15
Dividend Policy........................... 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-25
Management................................ S-40
Shares Eligible for Future Sale........... S-44
Underwriting.............................. S-45
Legal Matters............................. S-46
Prospectus
Available Information..................... 2
Incorporation of Certain Documents by
Reference............................... 2
The Company............................... 3
Ratio of Earnings to Fixed Charges........ 3
Use of Proceeds........................... 4
Description of Capital Stock.............. 4
Description of Depositary Shares.......... 5
Description of Debt Securities............ 8
Description of Warrants................... 17
Plan of Distribution...................... 18
Experts................................... 19
Legal Matters............................. 19
</TABLE>
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2,200,000 Shares
LOGO
Common Stock
---------------------------------------------
PROSPECTUS SUPPLEMENT
---------------------------------------------
PRUDENTIAL SECURITIES INCORPORATED
PIPER JAFFRAY INC.
FOX-PITT, KELTON INC.
May 21, 1998
============================================================
