Filed Pursuant to
Rule 424(b)(3)
PROSPECTUS SUPPLEMENT
Supplement to Prospectus Dated May 11, 1998
83,212 Shares of
DVI, INC.
Common Stock
Shares of the Company's common stock are traded on the New York Stock
Exchange under the symbol "DVI."
The Common Stock offered hereby involves a high degree of risk. See "Risk
Factors" beginning on page 2.
Stockholders of the Company are selling these shares of Common Stock. The
Company will not receive any part of the proceeds from the sale by the
stockholders.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed on the
adequacy or accuracy of this Prospectus Supplement. Any representation to the
contrary is a criminal offense.
You should rely only on the information contained in, or incorporated by
reference into, this Prospectus Supplement. The Company has not authorized any
other person to provide you with different information. The Company is not
making an offer of these shares in any location where the offer is not
permitted.
The date of this Prospectus Supplement is July 22, 1999
<PAGE>
TABLE OF CONTENTS
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS.................S-1
RISK FACTORS...............................................................S-2
THE COMPANY...............................................................S-10
USE OF PROCEEDS...........................................................S-12
SELLING STOCKHOLDERS......................................................S-12
PLAN OF DISTRIBUTION......................................................S-12
EXPERTS...................................................................S-13
LEGAL MATTERS.............................................................S-13
ADDITIONAL INFORMATION....................................................S-13
S-i
<PAGE>
CAUTIONARY STATEMENT CONCERNING
FORWARD-LOOKING STATEMENTS
This prospectus supplement includes forward-looking statements. We have
based these forward-looking statements on our current expectations and
projections about future events. Forward-looking statements are generally
identifiable by use of the words "may," "will," "should," "expect,"
"anticipate," "estimate," "believe," "intend" or "project" or the negatives of
such words or variations thereon or comparable terminology. These
forward-looking statements are subject to risks, uncertainties, and assumptions
about the Company, including, among other things:
o material adverse changes in economic conditions in the geographic
areas where we finance equipment;
o the possibility that difficulties may arise in integrating the
operations of acquired businesses and forming and operating joint
ventures;
o competition from others;
o changes in interest or currency exchange rates that limit our
ability to generate new receivables and decrease our net interest
margins;
o increases in non-performing loans and credit losses;
o our inability to access capital and financing on terms acceptable to
us;
o changes in any domestic or foreign governmental regulation affecting
our ability to declare and pay dividends or the manner in which we
conduct business;
o adverse changes, or any announcement relating to a possible or
contemplated adverse change, in the ratings obtained from any of the
independent rating agencies relating to our debt securities or other
financial instruments;
o our ability and the ability of third parties with whom we have
relationships to become year 2000 and euro compliant; and
o other risk factors set forth under "Risk Factors."
We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. In light of these risks, uncertainties, and assumptions,
the forward-looking events discussed in this prospectus supplement might not
occur.
S-1
<PAGE>
RISK FACTORS
The common stock involves a significant degree of risk. Investors should
carefully consider the risk factors described below together with all of the
information set forth or incorporated by reference in this prospectus supplement
in determining whether or not to purchase any of the Common Stock.
To fund our business we depend on warehouse financing to meet our short-term
need for funds and our securitization program to meet our long-term need for
funds. These financing options may not be available to us in the future.
In order to sustain the growth of our financing business, we depend upon
funding from warehouse facilities until we are able to fund our equipment and
other loans permanently. The funds we obtain through warehouse facilities are
full recourse short-term borrowings secured primarily by the underlying
equipment, medical receivables and other collateral. We typically repay these
borrowings with proceeds we receive when we permanently fund our equipment and
other loans.
At March 31, 1999, we had available an aggregate of approximately $521.3
million under various warehouse facilities, of which approximately $401.3
million was available for funding equipment loans and approximately $120.0
million was available for funding medical receivables loans. We can not give any
assurance that this type of warehouse financing will continue to be available to
us on acceptable terms. If we are unable to obtain such funds on acceptable
terms, we will have to limit our equipment and other loan originations. This
would have a material adverse effect on our financial condition and results of
operations.
Our principal form of permanent funding is securitization. Securitization
is a process in which a pool of equipment loans is transferred to a
special-purpose financing vehicle which issues notes to investors. Principal and
interest on the notes issued to investors by the securitization subsidiary are
paid from the cash flows produced by the loan pool, and the notes are secured by
a pledge of the assets in the loan pool as well as by other collateral. In the
securitizations we sponsor, equipment loans funded through the securitizations
must be credit enhanced to receive an investment grade credit rating. In the
securitizations we have sponsored to date, we have effectively been required to
furnish credit enhancement equal to the difference between (i) the aggregate
principal amount of the equipment loans we originated and transferred to our
special-purpose finance subsidiary and the related costs of consummating the
securitization and (ii) the net proceeds received in such securitizations.
Our ability to complete securitizations and other structured finance
transactions depends upon a number of factors, including:
o general conditions in the credit markets;
o the size and liquidity of the market for the types of securities we
may issue or place in securitizations; and
o the overall performance of our loan portfolio.
We do not have binding commitments from financial institutions or
investment banks to provide permanent funding for our equipment or medical
receivables loans. If for any reason we were unable to access the securitization
markets, and/or obtain permanent funding for our equipment or other loans, we
can not provide any assurance that our lenders would refinance or extend the
terms of our warehouse facilities for a sufficient period of time for us to
obtain permanent funding or at all. If our lenders did not refinance or extend
the terms of our warehouse facilities, we could possibly be required to repay
such facilities, the consequence of which would have a material adverse effect
on our financial condition and results of operations.
S-2
<PAGE>
Our results depend upon the rate at which our customers make the scheduled
payments on their equipment leases and do not default. A higher rate of default
than we predict could hurt our business in a variety of ways.
Many of our customers are outpatient healthcare providers. Loans to such
customers require a high degree of credit analysis. In addition, we have entered
the long-term care and assisted care submarkets and recently, have begun to
provide asset-backed financing for emerging growth companies and subordinated
debt financing to our traditional customer base, all of which require different
types of credit analysis. Although we try to reduce our risk of default and
credit losses through our underwriting practices, loan servicing procedures and
the use of various forms of non-recourse or limited recourse financing (in which
the financing sources that permanently fund our equipment and other loans assume
some or all of the risk of default by our customers), we remain exposed to
potential losses resulting from a default by a customer. Customers' defaults
could result in the following:
o require us to make certain payments under our warehouse facilities;
o in permanent equipment and other funding arrangements, require us to
make payments to the extent of our remaining credit enhancement
position;
o the loss of the cash or other collateral pledged as credit
enhancement under our permanent equipment and other funding
arrangements; or
o the loss of any remaining interest we may have kept in the
underlying equipment.
During the period beginning when we initially fund an equipment or other
loan to when we fund the loan on a permanent basis, we are exposed to full
recourse liability in the event of default by the borrower. While we have
typically been able to permanently fund our equipment and other loans, we may
not be able to permanently fund many of the loans in our international
portfolio. While we are currently in the process of securing permanent funding
for our international portfolio and are exploring opportunities to permanently
fund our other financing services, with respect to such loans and services we
may be subject to credit risk for a longer period of time. In some cases, this
risk will extend for the life of the loans. In addition, the terms of
securitizations and other types of structured finance transactions generally
require us to replace or repurchase equipment and other loans in the event they
fail to conform to the representations and warranties made by us, even in
transactions otherwise designated as non-recourse or limited recourse.
Defaults by our customers could also adversely affect our ability to
obtain additional financing in the future, including our ability to use
securitization or other forms of structured finance. The sources of such
permanent funding take into account the credit performance of the equipment and
other loans previously financed by us in deciding whether and on what terms to
make new loans. In addition, the credit rating agencies often involved in
securitizations consider prior credit performance in determining the rating to
be given to the securities issued in securitizations sponsored by us.
Under our wholesale loan origination program, we purchase equipment loans
from originators that generally do not have direct access to the securitization
market as a source of permanent funding for their loans. Our Company does not
work directly with the borrowers at the origination of these equipment loans and
therefore is not directly involved in structuring the credits. As a result, we
must independently verify credit information supplied by the originator.
Accordingly, we face a somewhat higher degree of risk when we acquire loans
under the wholesale loan origination program. During the twelve-month period
ended June 30, 1998 and the nine-month period ended March 31, 1999, loans
purchased under the wholesale program constituted 13.7% and 9.8%, respectively,
of the total domestic loans originated during such periods. We can not give any
assurance that we will be able to avoid the credit risks related to wholesale
loan origination.
S-3
<PAGE>
As a business that borrows and loans money, fluctuating interest rates can
increase the cost of our borrowings, cause us to incur costs to limit our
interest rate exposure and make our loans less attractive to our customers.
When we borrow funds through warehouse facilities, we are exposed to
certain risks caused by interest rate fluctuations. Although our equipment loans
are structured and permanently funded on a fixed interest rate basis, we use
warehouse facilities until permanent funding is obtained. Since the funds we
borrow through warehouse facilities are on a floating interest rate basis, we
use hedging techniques to protect our interest rate margins during the period
that warehouse facilities are used prior to an anticipated securitization and
sale. To manage our interest rate risk, we use derivative financial instruments
such as forward rate agreements, forward market sales or purchases of treasury
securities, and interest rate swaps and caps. We use these derivatives to manage
certain components of interest rate risk including mismatches of the maturity of
assets and liabilities on our balance sheet, hedging anticipated loan
securitizations and sales and interest rate spread protection. However, we can
not give any assurance that:
o our hedging strategy or techniques will be effective;
o our profitability will not be adversely affected during any period
of changes in interest rates; or
o the costs of hedging will not exceed the benefits.
A substantial and sustained increase in interest rates could adversely
affect our ability to originate loans. In certain circumstances and for a
variety of reasons, we may retain for an indefinite period certain of the
equipment and other loans we originate. In such cases, our interest rate
exposure may continue for a longer period of time.
We have expanded our operations recently and we cannot be sure we can manage the
expansion profitably.
In the past three years, we originated a significantly greater number of
equipment, medical receivables and other loans than we did in previous years. As
a result of this growth, our managed net financed asset portfolio grew from
$494.9 million at June 30, 1995 to $1.5 billion at March 31, 1999. In light of
this growth, the historical performance of our loan portfolio, including rates
of credit loss, may not be useful in predicting future loan portfolio
performance. Any credit or other problems associated with the large number of
equipment and other loans recently originated are not yet apparent.
Since November 1997, we have provided private placement, loan syndication,
interim real estate financing, mortgage loan placement, and, to a lesser extent,
merger and acquisition advisory services to the healthcare industry. More
recently, we have also begun to offer asset-based financing to emerging growth
companies and subordinated debt financing to our traditional customer base. We
have not provided these products and services previously. We can not give any
assurance that we will be able to market these new products and services
successfully or at all, or that if we are successful in marketing these products
and services that the returns on such products and services will be consistent
with our historical financial results.
Three of our customers account for over 10% of our business. The loss of these
customers would hurt our results.
At March 31, 1999, approximately 12.4% of our managed net financed
receivables were due from three of our customers and their respective
affiliates, representing 5.8%, 3.7% and 2.9% of managed net financed
receivables, respectively. As a result, we are subject to the risks and
uncertainties of these three businesses and their respective affiliates. Adverse
conditions affecting any of these entities could have a material adverse effect
on our ability to collect the total amount of outstanding receivables from any
of these customers. While our customer concentration has decreased as the number
of our clients has
S-4
<PAGE>
increased over time, we can not give any assurance that such concentration will
continue to decrease in the future.
A substantial part of our loans are originated outside the United States
subjecting our revenue to the risks associated with transactions involving
foreign currencies.
The portion of our medical equipment loans originated outside the U.S. was
26.0% in the fiscal year ended June 30, 1998 and 13.9% in the nine month period
ended March 31, 1999. Because of our relationships with certain manufacturers of
high-cost medical equipment who are conducting business and expanding
internationally, we anticipate that equipment loans originated outside the U.S.
will become a significant portion of our loan portfolio. With the continuing
expansion of our international business, an increasing portion of our operations
may continue to be subject to certain risks, including currency exchange risks
and exchange controls and potential adverse tax consequences. These factors
could have a material adverse effect on our financial condition and results of
operations.
The growth of our international business is significantly dependent on
referrals from manufacturers of diagnostic imaging equipment and other
manufacturers of medical equipment we finance. In addition, these manufacturers
occasionally provide credit support for or assume first loss positions with
respect to equipment financing they refer to us. These manufacturers are not
contractually obligated to give these referrals or to provide credit support or
assume first loss positions in connection with their referrals and we can not
give any assurance that they will continue to do so. If for any reason we no
longer received the benefits of these referrals or related credit support and
assumptions of first loss positions, our international growth would be
materially adversely affected.
Our equipment loans are denominated in both U.S. dollars and foreign
currencies. If denominated in U.S. dollars, our operating results are subject to
fluctuation based upon changes in the exchange rates of certain currencies in
relation to the U.S. dollar. We engage in hedging activities with respect to our
foreign currency exposure and management is continuing to monitor our exposure
to currency fluctuations and our hedging policies. However, we can not give any
assurance that such hedging techniques will be successful.
We are also subject to the adverse impact devaluation would have on our
international customers' ability to make payments under equipment loans.
Although we try to account for the risk of devaluation when originating our
international equipment loans, we can not give any assurance that we will be
successful.
In Latin America, our equipment loans are subject to "transfer risks"
where a foreign government may block foreign currencies from leaving the country
during economic downturns. If a foreign government were to take any action to
block foreign currencies from leaving its country, overseas creditors such as
our Company would be unable to collect payments on their loans. Since all of our
Latin American equipment loans are denominated in U.S. dollars, any transfer
restrictions on foreign currencies would have a material adverse effect on our
financial condition and results of operations.
There are certain risks related to the business of financing medical
receivables, such as evaluating the quality of receivables and securing our
rights to and collecting payment of our receivables.
Our medical receivables financing business generally consists of providing
loans to healthcare providers that are secured by their receivables. Receivables
are paid by groups such as insurance companies, governmental programs and other
healthcare providers. These loans may also be secured by other types of
collateral. While we expect to focus on this business as a significant part of
our growth strategy, we can not give any assurance that we will be able to
expand this business successfully or avoid related liabilities or losses.
S-5
<PAGE>
The following describes the unique risks involved in the medical
receivables financing business:
o Overstatements by healthcare providers of the quality and
characteristics of their medical receivables, which we analyze in
determining the amount of the line of credit to be secured by such
receivables. After our determination has been made, healthcare
providers could change their billing and collection systems,
accounting systems or patient records in a way that could adversely
affect our ability to monitor the quality and/or performance of the
related medical receivables.
o Technical legal issues associated with creating and maintaining
perfected security interests in medical receivables, specifically
those generated by Medicaid and Medicare claims.
o Payors may make payments directly to healthcare providers that have
the effect (intentionally or otherwise) of circumventing our rights
in such payments.
o Payors may attempt to offset their payments to us against debts owed
to the payors by the healthcare providers.
o As a lender whose position is secured by receivables, we are less
likely to collect outstanding receivables in the event of a
borrower's insolvency than a lender whose position is secured by
medical equipment that the borrower needs to operate its business.
o A borrower that defaults on obligations secured by medical
receivables may require additional loans, or modifications to the
terms of existing loans, in order to continue operations and repay
outstanding loans.
o A conflict of interest may arise when we act as servicer for an
equipment-based securitization and originate medical receivables
loans to borrowers whose equipment loans have been securitized.
o The fact that the use of structured finance transactions to fund
medical receivables is a relatively new process may impair our
efforts to develop suitable sources of funding.
Although we believe we have structured our credit policies and lending
practices to take into account these and other factors (including the recent
acquisition of a highly sophisticated collateral tracking system which will
allow us to improve the monitoring of medical receivables), we can not give any
assurance that we will not sustain credit losses in connection with our medical
receivables financing business. We also can not give assurance that the medical
receivables financing business will meet our growth expectations.
We are subject to complicated government regulations with which we could fail to
successfully comply.
Our finance business is subject to numerous federal and state laws and
regulations, which, among other things, may:
o require that we obtain and maintain certain licenses and
qualifications;
o limit the interest rates, fees and other charges that we are allowed
to collect;
o limit or prescribe certain other terms of our finance receivables
arrangements with clients; and
o subject us to certain claims, defenses and rights of offset.
Although we believe that we are currently in compliance with applicable
statutes and regulations, we can not give any assurance that we will be able to
maintain such compliance without incurring significant expense. The failure to
comply with such statutes and regulations could have a material
S-6
<PAGE>
adverse effect upon us. Also, the adoption of additional statutes and
regulations, changes in the interpretation and enforcement of current statutes
and regulations, or the expansion of our business into jurisdictions that have
adopted more stringent regulatory requirements than those in which we currently
conduct business could have a material adverse effect upon us.
Our results depend on the demand for medical equipment.
Many factors beyond our control affect the demand for our equipment
financing services. In addition, to general economic conditions and fluctuations
in supply and demand, the demand for medical equipment may also be negatively
affected by reductions in reimbursement amounts paid to healthcare providers for
their services from third-party payors such as insurance companies, government
programs and other healthcare providers and increased use of managed healthcare
plans that often restrict the use of certain types of high technology medical
equipment. For the quarter ended March 31, 1999, financing for purchases of
magnetic resonance imaging machines, commonly referred to as "MRI machines,"
accounted for approximately 18.7% (by dollar volume) of the total loans
originated by us. Any substantial decrease in our loan originations for the
purchase of MRI machines could have a material adverse effect on the Company.
We compete with equipment manufacturers and a variety of other financing sources
for our customers.
The business of financing medical equipment is highly competitive. We
compete with equipment manufacturers that sell and finance sales of their own
equipment, finance subsidiaries of national and regional commercial banks and
equipment leasing and financing companies. Many of our competitors have
significantly greater financial and marketing resources than we do. In addition,
the competition in the new markets recently targeted by our Company,
specifically the medical device financing market and medical receivables
financing market, may be greater than the levels of competition historically
experienced by us.
We believe that increased equipment loan originations during the past
three years resulted, in part, from a decrease in the number of competitors in
the higher cost medical equipment financing market and our high level of
penetration in this market. We can not give any assurance that new competitive
providers of financing will not enter the medical equipment financing market in
the future. To meet our long-term growth objectives, we must increase our
presence in our targeted markets for lower-cost medical devices and medical
receivables financing businesses. To achieve this goal we may be required to
reduce our margins to be competitive.
We depend on our key personnel.
Our ability to successfully continue our existing financing business, to
expand into targeted markets and to develop our newer businesses depends upon
our ability to retain the services of key management personnel. The loss of any
of these individuals or an inability to attract and maintain additional
qualified personnel could adversely affect our Company. We can not give any
assurance that we will be able to retain existing management personnel or
attract additional qualified personnel.
We have a substantial amount of indebtedness that may limit our ability to
borrow more funds to operate our business.
We have substantial outstanding indebtedness and are highly leveraged. As
of March 31, 1999, we (including our consolidated subsidiaries) had total debt
of $727.3 million, of which $467.7 million was full recourse debt and $259.6
million was limited recourse debt. Of the $727.3 million of total debt, $498.6
million was long-term debt and $228.7 million was short-term debt. We have
substantial debt service requirements. Our ability to repay indebtedness will
depend upon future operating performance. Future operating performance depends
upon the performance of our loan portfolio, the success of our
S-7
<PAGE>
business strategy, prevailing economic conditions, levels of interest rates and
financial, business and other factors. Many of these factors are beyond our
control. The degree to which we are leveraged may also impair our ability to
obtain additional financing on acceptable terms. In addition, the indenture
related to our Senior Notes due 2004 restricts our ability to obtain
non-warehouse or limited recourse debt which may also limit our ability to
refinance existing indebtedness.
Our indebtedness requires sizeable interest payments. We operate on a negative
cash flow basis. As a result, we have a continuing substantial need for
additional capital.
Although we believe that cash available from operations and financing
activities will be sufficient to enable us to make required interest payments on
our debt, we can not give any assurance that we will always be able to do so. We
may encounter liquidity problems which could affect our ability to meet our
payment obligations while attempting to withstand competitive pressures or
adverse economic conditions.
We expect to continue to operate on a negative cash flow basis as the
volume of our loan purchases and originations increases and our securitization
program grows. Our primary cash requirements include the funding of:
o loan originations and purchases pending their securitization and
sale;
o fees and expenses incurred in connection with the securitization of
loans;
o loan originations in connection with our new financing services, for
which permanent sources of funding are still being developed;
o credit enhancement requirements in connection with the
securitization and sale of the loans, which include cash deposits,
the funding of subordinated tranches, and/or the pledge of
additional equipment or other loans that are funded with our
capital;
o ongoing administrative and other operating expenses;
o interest and principal payments under our warehouse facilities and
other indebtedness; and
o delinquent accounts, as generally required by the terms of
securitizations.
In the future, we expect our primary sources of liquidity to be existing
cash fundings under our warehouse facilities, sales of loans through
securitizations and other permanent fundings, new sources of permanent funding
which are being developed for loan originations in connection with our new
financing services, the net proceeds from the sale of further issuances of debt
or equity.
We believe these sources will be sufficient to fund our liquidity
requirements for at least the next 12 months if our future operations are
consistent with management's current growth expectations. However, because we
expect to continue to operate on a negative cash flow basis for the foreseeable
future, we will need to effect debt or equity financings regularly. The type,
timing and terms of financing selected by us will be dependent upon our cash
needs, the availability of other financing sources and the prevailing conditions
in the financial markets. We can not give any assurance that any of these
sources will be available at any given time or that they will be available on
favorable terms.
There is a risk that the Year 2000 problem will affect the computer
systems upon which we rely.
We believe, based on discussions with our current systems vendors, that
our software applications and operational programs will properly recognize
calendar dates beginning in the year 2000. We have completed an assessment of
our hardware and software systems, as well as other systems such as security
systems and elevators. Based on these assessments, the only remediation that we
have found necessary are several software packages that need to be upgraded
through "off-the-shelf" releases. The upgrades
S-8
<PAGE>
have been applied during the first quarter of calendar 1999 and testing has been
completed during the second quarter of calendar 1999. Since we have no major
investment in "custom" programming requiring extensive reprogramming, we do not
anticipate the need to hire year 2000 solution providers or programmers to
rewrite custom code at this time.
The software upgrades mentioned above are part of our standard
maintenance, the cost of which is already covered by our ordinary software
contracts and will not require the incurrence of any additional expense. At this
time, we project the cost to become year 2000 compliant to be less than $5,000.
Our medical receivables finance business is dependent on the successful
receipt of receivables from third party payors such as Medicare and Medicaid.
Any failure of third party payors to become year 2000 compliant may result in
the inability to collect medical receivables in a timely manner or at all. This
could have a material adverse effect on our medical receivables finance
business. We are currently unaware of any other relationships with third parties
which will have a material effect on our year 2000 issues. However, we can not
provide any assurance regarding a third party's ability to become year 2000
compliant.
We have identified different scenarios, including year 2000 readiness,
that would cause a business interruption. Contingency plans have been developed
to resolve the most reasonably likely scenarios. Based on current information,
we believe that the year 2000 issue will not pose significant operational
problems to us.
S-9
<PAGE>
THE COMPANY
General. We are an independent specialty finance company that provides
asset-based financing to healthcare service providers. Our core businesses are
medical equipment finance and medical receivables finance. We provide these
services principally in the U.S. and, to a lesser extent, in Latin America,
Europe, the U.K., Asia and Australia. As of March 31, 1999, our managed net
financed assets and shareholders' equity were $1.5 billion and $186.2 million,
respectively.
We principally serve the financing needs of middle market healthcare
service providers, such as outpatient healthcare providers, medical imaging
centers, physician group practices, integrated healthcare delivery networks and
hospitals. Many of our customers are entrepreneurial companies that have
capitalized on trends affecting the healthcare delivery systems in the U.S. and
other countries to build their businesses. As a result of these trends, our
business has grown substantially. From June 30, 1995 to March 31, 1999, our
managed net financed receivables portfolio increased 212.7% to approximately
$1.5 billion from approximately $494.9 million.
Medical Equipment Finance. Our medical equipment finance business operates
by:
o providing financing directly to end users of diagnostic imaging and
other sophisticated medical equipment;
o providing financing directly to end users of lower cost medical
devices;
o providing domestic and international finance programs for vendors of
diagnostic and other sophisticated medical equipment; and
o to a lesser extent, purchasing medical equipment loans and leases
originated by regional leasing companies through a wholesale loan
origination program.
Our typical equipment loans for diagnostic, patient treatment and other
sophisticated medical equipment (originated both domestically and
internationally) range from $200,000 to $3.0 million, while equipment loans for
lower cost medical devices range from $5,000 to $200,000. Virtually all of our
equipment loans are structured so that the full cost of the equipment and all
financing costs are repaid during the financing term, which typically is five
years. Because most of our equipment loans are structured as notes secured by
equipment or direct financing leases with a bargain purchase option, our
exposure to residual asset value is limited; it was $25.2 million at March 31,
1999. At March 31, 1999, our managed portfolio of domestic equipment financing
loans was $1.2 billion.
In recent years we have expanded our international business significantly.
Internationally, we finance the purchase of diagnostic imaging and other
sophisticated medical equipment by private clinics, diagnostic centers and
hospitals. Our international business is focused on providing finance programs
for equipment manufacturers doing business in Latin America, Europe, the U.K.,
Asia and Australia. We believe our presence in these regions enhances our
relationships with certain medical equipment manufacturers and permits us to
capitalize on the growing international markets for medical equipment financing.
We view continued expansion of our relationships with medical equipment vendors
and manufacturers as an integral component of our growth strategy and intend to
continue to expand our medical equipment finance activities outside the U.S. We
also believe that by helping vendors and manufacturers finance their customers'
equipment purchases outside the U.S., we will encourage those vendors and
manufacturers to increase the financing opportunities they refer to us within
the U.S. At March 31, 1999, our managed portfolio of international equipment
loans was $205.7 million.
S-10
<PAGE>
Medical Receivables Finance. Our medical receivables finance business
operates by:
o providing lines of credit to a wide variety of healthcare providers;
and
o offering an interest-only revolving line of credit to financial
intermediaries that purchase receivables from healthcare providers.
Substantially all of the lines of credit we provide are collateralized by
third party medical receivables due from Medicare, Medicaid, health maintenance
organizations, referred to as "HMOs," preferred provider organizations, referred
to as "PPOs," commercial insurance companies and, to a limited extent, other
healthcare service providers. We generally advance only 70% to 85% of our
estimate of the net collectible value of the eligible receivables from third
party payors. Clients continue to bill and collect the accounts receivable,
subject to lockbox collection and sweep arrangements established for our
benefit. We conduct extensive due diligence on our potential medical receivables
clients for all of our financing programs and follow underwriting and credit
policies in providing financing to customers. Our credit risk is mitigated by
our ownership of or security interest in all receivables, eligible and
ineligible. We also recently acquired a highly sophisticated collateral tracking
system which will allow us to improve the monitoring of medical receivables. Our
medical receivables loans are structured as floating rate lines of credit. These
lines of credit typically range in size from $1.0 million to $15.0 million;
however, in certain circumstances, commitments ranging from $20.0 million to
$40.0 million are also provided to financial intermediaries for purchasing
receivables from healthcare providers. At March 31, 1999, our portfolio of
medical receivables loans was $167.6 million.
Additional Financing Services. As a result of management's belief that the
long-term care and assisted care markets and emerging growth companies have been
underserved by traditional financing sources, we established DVI Merchant
Funding and DVI Private Capital, divisions of DVI Financial Services Inc., and
recently acquired Third Coast Capital. Through DVI Merchant Funding, we provide
fee-based advisory services such as private placement, loan syndication, interim
real estate financing, mortgage loan placement and, to a lesser extent, mergers
and acquisitions advisory services to our customers operating in the long-term
care, assisted care and specialized hospital markets. Through DVI Private
Capital, we provide subordinated debt financing to our traditional customer base
and through Third Coast Capital, we provide asset-based financing, including
lease lines of credit, to emerging growth companies.
Credit Underwriting. We believe the credit underwriting process we use
when originating loans is effective in managing risk. The process follows
detailed procedures and benefits from our significant experience in evaluating
the creditworthiness of potential borrowers. We also have been successful in
resolving delinquencies. Our net charge-offs as a percentage of average managed
net financed assets were 0.28%, 0.06% and 0.15% for the years ended June 30,
1996, 1997 and 1998, respectively, and were 0.43% for the period ended March 31,
1999 (annualized). Our delinquencies (greater than a period of 30 days) as a
percentage of managed net financed assets at June 30, 1996, 1997 and 1998 were
4.3%, 3.6% and 6.9%, respectively, and were 5.1% at March 31, 1999.
Where You Can Find More Information. We file annual, quarterly and special
reports, proxy statements and other information with the Securities and Exchange
Commission. The Securities and Exchange Commission is referred to in this
offering memorandum as the "Commission." You may read and copy any document that
we file at the Commission's public reference rooms located at 450 First Street,
N.W., Judiciary Plaza, Room 1024, Washington, D.C. 20549. You may contact the
Commission at 1-800-SEC-0330. Our filings with the Commission are also available
to the public at the Commission's web site at http://www.sec.gov. You may also
read and copy these documents at the offices of the New York Stock Exchange, 20
Broad Street, New York, New York 10005.
S-11
<PAGE>
USE OF PROCEEDS
The Company will receive no portion of the proceeds of the sale of the
shares of Common Stock offered by this prospectus.
SELLING STOCKHOLDERSS
The Selling Stockholders acquired the Shares in connection with the Company's
acquisition of the Wentworth Entities in November 1997. Under the terms of a
Registration Rights Agreement dated as of November 14, 1997 by and among the
Company and the Selling Stockholders, the Company agreed to register the Shares
which may be sold by the Selling Stockholders from time to time. The table below
sets forth: (i) each Selling Stockholder's affiliation with the Company, (ii)
the aggregate number of shares of Common Stock owned by each Selling Stockholder
prior to the offering made by this Prospectus; (iii) the maximum number of
shares that each Selling Stockholder may offer and sell pursuant to this
Prospectus; and (iv) the number of shares (and percentage of the outstanding
shares) of Common Stock owned by each Selling Stockholder after the offering
made by this Prospectus.
<TABLE>
<CAPTION>
NAME Material Relationship with Number of Shares of Common Maximum Number of Number of Shares (and
Company During Previous Stock Beneficially Owned Shares That May Be Percentage of Outstanding
Three Years Before Offrering (1) Offered Hereby Shares) of Common Stock
To Be Beneficially Owned
-------------------------- -------------------------- ------------------ -------------------------
<S> <C> <C> <C> <C>
Gary Veloric None 37,805 37,805 --0--
James Delaney None 37,005 37,005 --0--
John L. Godfrey III (2) 8,402 8,402 --0--
</TABLE>
- ----------
(1) Acquired on November 14, 1997 in connection with the Company's acquisition
of the Wentworth Entities.
(2) Mr. Godfrey is the President of each of DVI Healthcare Financial Advisors,
Inc. and DVI Mortgage Funding, Inc., each of which are indirectly
wholly-owned subsidiaries of the Company.
PLAN OF DISTRIBUTION
It is anticipated that each Selling Stockholder will offer his or her
shares for sale at the prices prevailing on the New York Stock Exchange (or
other principal market on which their shares are then traded) on the date of
sale. Each Selling Stockholder also may sell his or her shares privately, either
directly to the purchaser or through a broker or brokers. There are no
arrangements or agreements with any brokers or dealers to act as underwriters of
the Shares as of the date hereof. All costs, expenses and fees incurred in
connection with the registration of these shares, including, but not limited to,
all registration and filing fees, printing expenses and fees (if any) and
disbursements of the Company's counsel and accountants, are being paid by the
Company, but all selling and other expenses incurred by each Selling Stockholder
will be paid by him or her.
Each Selling Stockholder, and the brokers through whom the sales of his or
her shares are made, may be deemed to be "underwriters" within the meaning of
Section 2(11) of the Securities Act. In addition, any profits realized by a
Selling Stockholder or such brokers on the sale of their shares may be deemed to
be underwriting commissions. The Company has agreed to indemnify the Selling
Stockholders and any brokers through whom sales of shares are made against
certain liabilities, including liabilities under the Securities Act.
S-12
<PAGE>
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, 1998, 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
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Rogers & Wells LLP, 200 Park Avenue, New York, New York
10166.
ADDITIONAL INFORMATION
The Commission allows us to "incorporate by reference" the information we
file with them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
considered to be part of this registration statement, and later information that
we file with the Commission will automatically update and supersede this
information. We incorporate by reference the documents listed below and any
future filings made with the Commission under Sections 13(a), 13(c), 14, or
15(d) of the Securities Exchange Act of 1934, as amended, until such time as all
of the shares of Common Stock have been sold.
(i) Our Annual Report on Form 10-K for our fiscal year ended June 30,
1998;
(ii) Our Quarterly Reports on Form 10-Q for the quarters ended September
30, 1998; December 31, 1999 and March 31, 1999, and
(iii) The description of the Common Stock contained in our registration
statement on Form 8-A (which we filed with the Commission on March
27, 1992) and the information in our prospectus contained in our
registration statement on Form S-2 (dated May 14, 1992), together
with any other documents filed with the Commission for the purpose
of updating or otherwise amending that description after the date of
this registration statement.
You may request a copy of these filings, at no cost, by writing or
telephoning us at our principal business address:
DVI, Inc.
500 Hyde Park
Doylestown, Pennsylvania 18901
Attn: Legal Department
(215) 345-6600
S-13
<PAGE>
PROSPECTUS DATED MAY 11, 1998
DVI, INC.
84,012 SHARES OF COMMON STOCK
PAR VALUE $.005 PER SHARE
This Prospectus relates to 84,012 shares (the "Shares") of Common Stock,
$.005 par value per share (the "Common Stock"), of DVI, Inc., a Delaware
corporation ("DVI" or the "Company"), which may be offered from time to time by
the persons named in this Prospectus under "Selling Stockholders." The Selling
Stockholders received the Shares in connection with the Company's acquisition of
J.G. Wentworth Partners, Inc., a Pennsylvania corporation ("JGWP"), J.G.
Wentworth Securities, Inc., a Pennsylvania corporation ("JGWS"), J.G. Wentworth
Partners, L.P., a Pennsylvania limited partnership ("Partners"), and J.G.
Wentworth Mortgage Funding, L.P., a Pennsylvania limited partnership ("JGWM"
and, together with JGWP, JGWS and Partners, the "Wentworth Entities") in
November 1997. The Company will receive no portion of the proceeds from the sale
of the Shares offered hereby.
It is anticipated that the Selling Stockholders will offer the Shares for
sale at the prices prevailing on the New York Stock Exchange ("NYSE") (or other
principal market on which the Shares are then traded) on the date of sale. The
Selling Stockholders also may sell the Shares privately, either directly to the
purchaser or through a broker or brokers. All costs, expenses and fees incurred
in connection with the registration of the Shares are being borne by the
Company, but all selling and other expenses incurred by the Selling Stockholders
will be borne by the Selling Stockholders. See "Plan of Distribution."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE
"RISK FACTORS" BEGINNING ON PAGE 4.
The Selling Stockholders, and the brokers through whom sales of the Shares
are made, may be deemed to be "underwriters" within the meaning of Section 2(11)
of the Securities Act of 1933, as amended (the "Securities Act"). In addition,
any profits realized by the Selling Stockholders or such brokers on the sale of
the Shares may be deemed to be underwriting commissions. The Company has agreed
to indemnify the Selling Stockholders and any brokers through whom sales of
Shares are made against certain liabilities, including liabilities under the
Securities Act. Shares of the Company's Common Stock are traded on the NYSE
under the symbol "DVI." On May 5, 1998, the last sale price per share for the
Common Stock, as reported on the NYSE, was $23.125. Prospective purchasers of
Common Stock are urged to obtain a current price quotation.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
This Prospectus does not constitute an offer to sell or a solicitation of
an offer to buy the Shares offered hereby in any jurisdiction in which such
offer or solicitation may be unlawful. No person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus and, if given or made, such information or representations must not
be relied upon as having been authorized. Except where otherwise indicated,
neither the delivery of this Prospectus nor any sale made hereunder shall, under
any circumstances, create any implication that there has been no change in the
affairs of the Company since the date hereof or that the information contained
herein is correct as of any time subsequent to its date.
The date of this Prospectus is May 11, 1998.
<PAGE>
TABLE OF CONTENTS
AVAILABLE INFORMATION ..................................................... 1
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE ........................... 1
THE COMPANY ............................................................... 2
RISK FACTORS .............................................................. 2
USE OF PROCEEDS ........................................................... 9
SELLING STOCKHOLDERS ...................................................... 9
PLAN OF DISTRIBUTION ...................................................... 10
EXPERTS ................................................................... 10
LEGAL MATTERS ............................................................. 10
i
<PAGE>
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. This
Prospectus constitutes a part of a Registration Statement on Form S-3 (the
"Registration Statement") filed by the Company with the Commission under 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 Common Stock 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 Station 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/A1 dated October 28, 1997 (the "1997
10-K").
(b) The Company's Quarterly Report on Form 10-Q for the quarters ended
September 30, 1997 and December 31, 1997.
(c) The Company's Current Report on Form 8-K dated October 29, 1997.
(d) All other reports filed pursuant to Section 13(a) or 15(d) of the
Exchange Act since the end of the fiscal year covered by the 1997 10-K.
(e) The description of the Common Stock, $.005 par value, of the Company
contained in the Company's Registration Statement on Form 8-A filed March 27,
1992, and incorporating by reference the information contained in the Company's
Prospectus dated May 14, 1992, contained in the Company's Registration Statement
on Form S-2 (File No. 33-46664), together with all reports and other documents
filed with the Commission for the purpose of updating or otherwise amending that
description after the date of this Prospectus.
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
1
<PAGE>
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 WILL 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
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 executive offices of the Company are located at 500 Hyde Park,
Doylestown, Pennsylvania 18901 (Telephone 215-345-6600).
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
2
<PAGE>
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 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
3
<PAGE>
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; 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 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,
4
<PAGE>
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
successof 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 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.
5
<PAGE>
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 loan 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
6
<PAGE>
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 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.
7
<PAGE>
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 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 approximately 13,570,108 shares of Common Stock
outstanding. 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 3,526,791 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
8
<PAGE>
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."
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.
USE OF PROCEEDS
The Company will receive no portion of the proceeds of the sale of the
Shares offered hereby.
SELLING STOCKHOLDERS
The Selling Stockholders acquired the Shares in connection with the
Company's acquisition of the Wentworth Entities in November 1997. Under the
terms of a Registration Rights Agreement dated as of November 14, 1997 by and
among the Company and the Selling Stockholders, the Company agreed to register
the Shares which may be sold by the Selling Stockholders from time to time. The
table below sets forth: (i) each Selling Stockholder's affiliation with the
Company, (ii) the aggregate number of shares of Common Stock owned by each
Selling Stockholder prior to the offering made by this Prospectus; (iii) the
maximum number of shares that each Selling Stockholder may offer and sell
pursuant to this Prospectus; and (iv) the number of shares (and percentage of
the outstanding shares) of Common Stock owned by each Selling Stockholder after
the offering made by this Prospectus.
9
<PAGE>
<TABLE>
<CAPTION>
NAME Material Relationship with Number of Shares of Common Maximum Number of Number of Shares (and
Company During Previous Stock Beneficially Owned Shares That May Be Percentage of Outstanding
Three Years Before Offrering (1) Offered Hereby Shares) of Common Stock
To Be Beneficially Owned
-------------------------- -------------------------- ------------------ -------------------------
<S> <C> <C> <C> <C>
Gary Veloric None 37,805 37,805 --0--
James Delaney None 37,005 37,005 --0--
John L. Godfrey III (2) 8,402 8,402 --0--
</TABLE>
- ----------
(1) Acquired on November 14, 1997 in connection with the Company's acquisition
of the Wentworth Entities.
(2) Mr. Godfrey is the President of each of DVI Healthcare Financial Advisors,
Inc. and DVI Mortgage Funding, Inc., each of which are indirectly
wholly-owned subsidiaries of the Company.
PLAN OF DISTRIBUTION
It is anticipated that the Selling Stockholders will offer the Shares for
sale at the prices prevailing on the NYSE (or other principal market on which
the Shares are then traded) on the date of sale. The Selling Stockholders also
may sell the Shares privately, either directly to the purchaser or through a
broker or brokers. There are no arrangements or agreements with any brokers or
dealers to act as underwriters of the Common Stock as of the date hereof. All
costs, expenses and fees incurred in connection with the registration of the
Shares, including, but not limited to, all registration and filing fees,
printing expenses and fees (if any) and disbursements of the Company's counsel
and accountants, are being borne by the Company, but all selling and other
expenses incurred by the Selling Stockholders will be borne by the Selling
Stockholders. The Selling Stockholders, and the brokers through whom the sales
of the Shares are made, may be deemed to be "underwriters" within the meaning of
Section 2(11) of the Securities Act. In addition, any profits realized by the
Selling Stockholders or such brokers on the sale of the Shares may be deemed to
be underwriting commissions. The Company has agreed to indemnify the Selling
Stockholders and any brokers through whom sales of Shares are made against
certain liabilities, including liabilities under the Securities Act.
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
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Rogers & Wells LLP, 200 Park Avenue, New York, New York
10166.
10
