<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended DECEMBER 31, 1999
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _________________
to _________________.
Commission File Number 0-16271
DVI, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 22-2722773
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 HYDE PARK
DOYLESTOWN, PENNSYLVANIA 18901
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code (215) 345-6600
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuers
classes of common stock, as of the latest practicable date:
COMMON STOCK, $.005 PAR VALUE - 14,216,808 SHARES AS OF JANUARY 31, 2000.
<PAGE> 2
DVI, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
PART I. FINANCIAL INFORMATION:
ITEM 1. FINANCIAL STATEMENTS:
Consolidated Balance Sheets -
December 31, 1999 (unaudited) and June 30, 1999............................ 3-4
Consolidated Statements of Operations (unaudited) -
Three and six months ended December 31, 1999 and 1998...................... 5
Consolidated Statements of Shareholders' Equity (unaudited) -
July 1, 1998 through December 31, 1999..................................... 6
Consolidated Statements of Cash Flows (unaudited) -
Six months ended December 31, 1999 and 1998................................ 7-8
Notes to Consolidated Financial Statements (unaudited)......................... 9-12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................................. 13-14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..................... 15-20
PART II. OTHER INFORMATION:
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................ 21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................................... 21
Signatures..................................................................... 22
</TABLE>
2
<PAGE> 3
DVI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31, June 30,
(in thousands of dollars except share data) 1999 1999
- ------------------------------------------- ------------ ------------
(Unaudited)
<S> <C> <C>
Cash and cash equivalents....................................................... $ 6,830 $ 5,695
Restricted cash and cash equivalents............................................ 63,137 36,744
Amounts due from portfolio sale................................................. - 7,827
Receivables:
Investment in direct financing leases and notes secured by equipment or
medical receivables:
Receivables in installments.............................................. 881,132 776,705
Receivables and notes - related parties.................................. 2,645 2,550
Recourse credit enhancements............................................. 44,240 62,106
Net notes collateralized by medical receivables.......................... 236,078 187,327
Residual valuation....................................................... 32,298 27,761
Unearned income.......................................................... (100,163) (84,443)
------------- -------------
Net investment in direct financing leases and notes secured
by equipment or medical receivables........................................ 1,096,230 972,006
Less: Allowance for losses on receivables.................................... (14,684) (12,279)
------------- -------------
Net receivables................................................................. 1,081,546 959,727
Equipment on operating leases
(net of accumulated depreciation of $6,755 and $6,464, respectively)......... 24,701 16,570
Furniture and fixtures
(net of accumulated depreciation of $4,652 and $3,900, respectively)......... 4,617 4,970
Investments..................................................................... 9,021 10,814
Goodwill, net................................................................... 9,785 10,359
Other assets.................................................................... 64,917 43,566
------------ ------------
Total assets.................................................................... $ 1,264,554 $ 1,096,272
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 4
DVI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31, June 30,
(in thousands of dollars except share data) 1999 1999
- ------------------------------------------- ------------- ------------
(Unaudited)
<S> <C> <C>
Accounts payable................................................................ $ 69,120 $ 63,010
Accrued expenses and other liabilities.......................................... 25,018 24,769
Borrowings under warehouse facilities........................................... 287,913 270,434
Deferred income taxes........................................................... 36,696 36,696
Long-term debt:
Discounted receivables (primarily limited recourse)........................ 396,242 276,560
97/8% Senior notes due 2004................................................ 155,000 155,000
Other debt................................................................. 69,420 56,553
Convertible subordinated notes............................................. 13,900 13,900
------------ ------------
Total long-term debt............................................................ 634,562 502,013
------------ ------------
Total liabilities............................................................... 1,053,309 896,922
Minority interest in consolidated subsidiaries.................................. 7,697 7,703
Shareholders' equity:
Preferred stock, $10.00 par value; authorized 100,000 shares; no shares
issued
Common stock, $.005 par value; authorized 25,000,000 shares;
outstanding 14,213,608 and 14,168,608 shares, respectively............. 71 71
Additional capital......................................................... 135,078 134,610
Retained earnings.......................................................... 70,429 59,055
Accumulated other comprehensive loss....................................... (2,030) (2,089)
------------- ------------
Total shareholders' equity...................................................... 203,548 191,647
------------ ------------
Total liabilities and shareholders' equity...................................... $ 1,264,554 $ 1,096,272
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 5
DVI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
---------------------- ----------------------
(in thousands of dollars except share data) 1999 1998 1999 1998
- ------------------------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Finance and other income:
Amortization of finance income ........................ $ 26,295 $ 20,851 $ 50,683 $ 38,770
Other income .......................................... 9,939 4,813 17,421 8,709
-------- -------- -------- --------
Total finance and other income ........................... 36,234 25,664 68,104 47,479
Interest expense ......................................... 19,326 14,666 37,235 27,209
-------- -------- -------- --------
Net interest and other income ............................ 16,908 10,998 30,869 20,270
Net gain on sale of financing transactions ............... 6,941 7,103 14,142 13,957
-------- -------- -------- --------
Net finance income ....................................... 23,849 18,101 45,011 34,227
Selling, general and administrative expenses ............. 9,615 8,031 18,347 14,677
Provision for losses on receivables ...................... 3,635 1,642 6,392 3,147
-------- -------- -------- --------
Earnings before minority interest, equity in net loss
of investees, and provision for income taxes .......... 10,599 8,428 20,272 16,403
Minority interest in net loss of consolidated subsidiaries 46 147 179 216
Equity in (net loss) of investees ........................ -- (26) -- (118)
Provision for income taxes ............................... 4,843 3,726 9,077 7,134
-------- -------- -------- --------
Net earnings ............................................. $ 5,802 $ 4,823 $ 11,374 $ 9,367
======== ======== ======== ========
Net earnings per share:
Basic ................................................. $ 0.41 $ 0.34 $ 0.80 $ 0.66
======== ======== ======== ========
Diluted ............................................... $ 0.38 $ 0.32 $ 0.75 $ 0.62
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE> 6
DVI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
Common Stock Accumulated
$.005 Par Value Other Total
------------------- Additional Retained Comprehensive Shareholders'
(in thousands of dollars except share data) Shares Amount Capital Earnings Loss Equity
- -------------------------------------------- ---------- ------ ----------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT JULY 1, 1998.................... 14,080,358 $ 70 $ 133,516 $ 39,387 $ (688) $ 172,285
Net earnings........................... 19,668 19,668
Currency translation adjustment........ (1,401) (1,401)
-----------
Comprehensive income............... 18,267
Issuance of common stock upon
exercise of stock options and
warrants........................... 88,250 1 1,116 1,117
Cost of issuance of common stock....... (199) (199)
Non-employee stock option grants....... 177 177
------------ ---- ---------- --------- ------- ----------
BALANCES AT JUNE 30, 1999................... 14,168,608 71 134,610 59,055 (2,089) 191,647
Net earnings........................... 11,374 11,374
Currency translation adjustment........ 59 59
----------
Comprehensive income............... 11,433
Issuance of common stock upon
exercise of stock options and
warrants........................... 45,000 468 468
------------ ---------- --------- ------- ----------
BALANCES AT DECEMBER 31, 1999............... 14,213,608 $ 71 $ 135,078 $ 70,429 $(2,030) $ 203,548
============ ==== ========== ========= ======= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE> 7
DVI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
----------------------------
(in thousands of dollars) 1999 1998
- ------------------------- ---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings................................................................ $ 11,374 $ 9,367
---------- ----------
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Equity in net loss of investees........................................... - 118
Depreciation and amortization............................................. 10,352 7,484
Provision for losses on receivables....................................... 6,392 3,147
Net gain on sale of financing transactions................................ (14,142) (13,957)
Minority interest in net loss of consolidated subsidiaries................ (179) (216)
Unrealized gain on investments............................................ (64) -
Cumulative translation adjustments........................................ 59 763
Changes in assets and liabilities:
(Increases) decreases in:
Restricted cash and cash equivalents.................................. (26,393) 13,417
Amounts due from portfolio sale....................................... 7,827 -
Receivables........................................................... 17,172 (3,450)
Other assets.......................................................... (14,333) (11,960)
Increases (decreases) in:
Accounts payable...................................................... 4,963 6,407
Accrued expenses and other liabilities................................ (12) 3,734
----------- ----------
Total adjustments......................................................... (8,358) 5,487
----------- ----------
Net cash provided by (used in) operating activities......................... 3,016 14,854
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of business..................................................... - (76,515)
Receivables originated or purchased......................................... (398,774) (376,071)
Portfolio receipts net of amounts included in income and
proceeds from sale of financing transactions.............................. 316,149 301,051
Net increase in notes collateralized by medical receivables................. (48,751) (17,104)
Investment in common and preferred stock of investees....................... (705) (1,000)
Furniture and fixtures additions............................................ (399) (3,798)
----------- -----------
Net cash used in investing activities....................................... (132,480) (168,955)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock options and warrants...................................... 468 208
Cost of issuance of common stock............................................ - (198)
Borrowings under warehouse facilities, net of repayments.................... (2,418) 88,989
Borrowings under long-term debt............................................. 231,422 136,582
Repayments on long-term debt................................................ (98,873) (72,986)
---------- ----------
Net cash provided by financing activities................................... 130,599 152,595
---------- ----------
</TABLE>
continued
7
<PAGE> 8
DVI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONCLUDED)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
----------------------------
(in thousands of dollars) 1999 1998
- ------------------------- ---------- ----------
<S> <C> <C>
Net increase (decrease) in cash and cash equivalents............................ $ 1,135 $ (1,506)
Cash and cash equivalents, beginning of period.................................. 5,695 15,192
---------- ----------
Cash and cash equivalents, end of period........................................ $ 6,830 $ 13,686
========== ==========
CASH PAID (RECEIVED) DURING THE PERIOD FOR:
Interest..................................................................... $ 32,831 $ 24,576
========== ==========
Income taxes, net of refunds................................................. $ 2,847 $ (2,038)
========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
8
<PAGE> 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
In this discussion, the terms "DVI", the "Company", "we", "us" and "our" refer
to DVI, Inc. and its subsidiaries, except where it is made clear that such terms
mean only DVI, Inc. or an individual subsidiary.
NOTE 1. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles (GAAP) for complete financial
statements. The consolidated financial statements should be read in conjunction
with the financial statements and notes thereto included in our latest annual
report on Form 10-K for the fiscal year ended June 30, 1999.
In the opinion of management, the consolidated financial statements contain all
adjustments, consisting only of normal recurring adjustments, considered
necessary for a fair statement of the consolidated balance sheets as of December
31, 1999 and June 30, 1999, the consolidated statements of operations for the
three and six month periods ended December 31, 1999 and 1998, the consolidated
statements of shareholders' equity for the period from July 1, 1998 through
December 31, 1999, and the consolidated statements of cash flows for the six
month periods ended December 31, 1999 and 1998. The results of operations for
the three and six month periods ended December 31, 1999 are not necessarily
indicative of the results of operations to be expected for the fiscal year
ending June 30, 2000.
Certain amounts as previously reported have been reclassified to conform to the
presentation for the three and six month periods ended December 31, 1999.
NOTE 2. ALLOWANCE FOR LOSSES ON RECEIVABLES
The following is an analysis of the allowance for losses on receivables:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
----------------------
(IN THOUSANDS OF DOLLARS) 1999 1998
------------------------- -------- ---------
<S> <C> <C>
Balance, beginning of period.................................... $ 12,279 $ 9,955
Provision for losses on receivables............................. 6,392 3,147
Allowance assumed in business acquisition....................... - 1,368
Net charge-offs................................................. (3,987) (3,707)
--------- ---------
Balance, end of period...................................... $ 14,684 $ 10,763
======== ========
</TABLE>
NOTE 3. SALE OF CISCO SYSTEMS STOCK
We sold 143,000 shares of Cisco Systems, Inc. (Nasdaq: CSCO) in early November
1999, generating income of $10.6 million. The shares were acquired by our Third
Coast Capital unit following its exercise of warrants issued by privately-held
Cerent Corporation. The warrants were converted into the right to receive shares
of Cisco common stock following its acquisition of Cerent Corporation. We
recognized $3.8 million of income in the quarter ended September 30, 1999 to
reflect the pre-acquisition value of the unexercised warrants. The remaining
$6.8 million was recognized in the quarter ended December 31, 1999.
9
<PAGE> 10
NOTE 4. REPOSSESSED PROPERTY AND EQUIPMENT
Repossessed assets result from taking possession of collateral, through
foreclosure or other proceedings, in satisfaction of defaulted contracts, and
are recorded at the lower of their historical cost or estimated realizable
value. Realizable value is the asset's fair market value less the costs
associated with the maintenance and eventual disposal of the equipment. Any
difference between this realizable value and the equipment's historical cost is
charged off against the allowance for losses on receivables at the time of
repossession. The assets are reviewed periodically and adjusted quarterly for
adverse changes to their realizable value. The amount of repossessed assets held
at December 31, 1999 and 1998 were $10.9 and $1.5 million, respectively, and are
included in other assets on the balance sheet.
NOTE 5. RECONCILIATION OF EARNINGS PER SHARE CALCULATION
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
---------------------- ---------------------
(IN THOUSANDS EXCEPT PER SHARE DATA) 1999 1998 1999 1998
------------------------------------ --------- --------- --------- --------
<S> <C> <C> <C> <C>
BASIC
Income available to common shareholders............................... $ 5,802 $ 4,823 $ 11,374 $ 9,367
Average common shares................................................. 14,214 14,092 14,204 14,086
Basic earnings per common share....................................... $ 0.41 $ 0.34 $ 0.80 $ 0.66
======== ======== ======== ========
DILUTED
Income available to common shareholders............................... $ 5,802 $ 4,823 $ 11,374 $ 9,367
Effect of dilutive securities:
Convertible debentures.............................................. 184 184 368 368
-------- -------- -------- --------
Diluted income available to common shareholders....................... $ 5,986 $ 5,007 $ 11,742 $ 9,735
Average common shares................................................. 14,214 14,092 14,204 14,086
Effect of dilutive securities, net:
Warrants............................................................ 8 9 9 16
Options............................................................. 141 229 193 332
Convertible debentures.............................................. 1,311 1,311 1,311 1,311
-------- -------- -------- -------
Diluted average common shares......................................... 15,674 15,641 15,717 15,745
Diluted earnings per common share..................................... $ 0.38 $ 0.32 $ 0.75 $ 0.62
======== ======== ======== ========
</TABLE>
NOTE 6. HEDGE TRANSACTIONS
At December 31, 1999, we had $125.0 million in Treasury locks, $17.4 million in
interest rate swaps and 32.5 million German deutsche marks in forward contracts.
10
<PAGE> 11
NOTE 7. SEGMENT REPORTING
In June 1999, we adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This statement establishes standards for
the reporting of operating segments in interim and annual financial statements,
as well as requiring related disclosures about products and services, geographic
areas and major customers. In accordance with this standard, we have determined
the following reportable segments based on the types of our financings:
- - Equipment financing, which includes:
- Sophisticated medical equipment financing directly to U.S. and
international end users,
- Medical equipment contracts acquired from originators that
generally do not have access to cost-effective permanent
funding and
- "Small ticket" equipment financing.
- - Medical receivables financing, which includes:
- Medical receivable lines of credit issued to a wide variety of
healthcare providers and
- Software tracking of medical receivables.
- - Corporate and all other, which includes:
- Interim real estate financing, mortgage loan placement,
subordinated debt financing for assisted living facilities
and, to a lesser extent, merger and acquisition advisory
services to our customers operating in the long-term care,
assisted care and specialized hospital markets;
- Asset-backed financing (including lease lines of credit) to
emerging growth companies and
- Miscellaneous corporate income and overhead allocations.
The following information reconciles our reportable segment information to
consolidated totals:
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31, 1999
-------------------------------------------
TOTAL FINANCE AND INTEREST NET
(IN THOUSANDS OF DOLLARS) OTHER INCOME EXPENSE EARNINGS
------------------------- ----------------- --------- ---------
<S> <C> <C> <C>
Equipment financing.......................... $ 21,016 $ 14,185 $ 2,014
Medical receivables financing................ 7,656 4,902 500
Corporate and all other...................... 7,562 239 3,288
---------- --------- ---------
Consolidated total...................... $ 36,234 $ 19,326 $ 5,802
========== ========= =========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED DECEMBER 31, 1999
------------------------------------------------------------
TOTAL FINANCE AND INTEREST NET MANAGED NET
(IN THOUSANDS OF DOLLARS) OTHER INCOME EXPENSE EARNINGS FINANCED ASSETS
------------------------- ----------------- --------- -------- ---------------
<S> <C> <C> <C> <C>
Equipment financing.......................... $ 41,475 $ 27,169 $ 5,532 $ 1,587,528
Medical receivables financing................ 14,485 9,030 951 234,656
Corporate and all other...................... 12,144 1,036 4,891 69,055
---------- --------- --------- -----------
Consolidated total...................... $ 68,104 $ 37,235 $ 11,374 $ 1,891,239
========== ========= ========= ===========
</TABLE>
11
<PAGE> 12
NOTE 7. SEGMENT REPORTING (CONCLUDED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31, 1998
------------------------------------------
TOTAL FINANCE AND INTEREST NET
(IN THOUSANDS OF DOLLARS) OTHER INCOME EXPENSE EARNINGS
------------------------- ----------------- --------- --------
<S> <C> <C> <C>
Equipment financing.......................... $ 20,487 $ 11,717 $ 4,352
Medical receivables financing................ 5,207 3,035 75
Corporate and all other...................... (30) (86) 396
----------- ---------- ---------
Consolidated total...................... $ 25,664 $ 14,666 $ 4,823
========== ========= =========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED DECEMBER 31, 1998
-------------------------------------------------------------
TOTAL FINANCE AND INTEREST NET MANAGED NET
(IN THOUSANDS OF DOLLARS) OTHER INCOME EXPENSE EARNINGS FINANCED ASSETS
------------------------- ----------------- --------- -------- ---------------
<S> <C> <C> <C> <C>
Equipment financing.......................... $ 36,827 $ 21,442 $ 9,558 $ 1,277,679
Medical receivables financing................ 10,595 5,991 649 153,418
Corporate and all other...................... 57 (224) (840) 35,470
---------- ---------- ---------- -----------
Consolidated total...................... $ 47,479 $ 27,209 $ 9,367 $ 1,466,567
========== ========= ========= ===========
</TABLE>
GEOGRAPHIC INFORMATION
We attribute finance and other income earned and managed net financed assets to
geographic areas based on the location of our subsidiaries. Finance and other
income earned and the balances of managed net financed assets for the three and
six month periods ended and as of December 31, 1999 and 1998 by geographic area
are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31, 1999 SIX MONTHS ENDED DECEMBER 31, 1999
------------------ ---------------------------------------
TOTAL FINANCE AND TOTAL FINANCE AND MANAGED NET
(IN THOUSANDS OF DOLLARS) OTHER INCOME OTHER INCOME FINANCED ASSETS
------------------------- ----------------- ----------------- ---------------
<S> <C> <C> <C>
United States........................... $ 30,407 $ 56,255 $ 1,622,249
International........................... 5,827 11,849 268,990
---------- ---------- -----------
Total.............................. $ 36,234 $ 68,104 $ 1,891,239
========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31, 1998 SIX MONTHS ENDED DECEMBER 31, 1998
------------------- ---------------------------------------
TOTAL FINANCE AND TOTAL FINANCE AND MANAGED NET
(IN THOUSANDS OF DOLLARS) OTHER INCOME OTHER INCOME FINANCED ASSETS
------------------------- ----------------- ----------------- ---------------
<S> <C> <C> <C>
United States........................... $ 21,244 $ 39,063 $ 1,273,597
International........................... 4,420 8,416 192,970
---------- ---------- -----------
Total.............................. $ 25,664 $ 47,479 $ 1,466,567
========== ========== ===========
</TABLE>
MAJOR CUSTOMER INFORMATION
We have no single customer that accounts for 10% or more of revenue for the
three and six month periods ending December 31, 1999 and 1998.
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Total equipment financing contracts originated and acquired were $194.7 and
$406.0 million for the three and six month periods ended December 31, 1999
compared with $183.4 and $398.0 million for the three and six month periods
ended December 31, 1998, representing increases of 6.2% and 2.0%. Net financed
assets totaled $1.1 billion at December 31, 1999, an increase of $132.3 million
or 13.4% over the total as of June 30, 1999. Not included in net financed assets
were the contracts sold but still serviced by us, which increased to $814.5
million as of December 31, 1999 compared to $735.3 million as of June 30, 1999,
an increase of 10.8%. Managed net financed assets, the aggregate of those
appearing on our balance sheet and those which have been sold and are still
serviced by us, totaled $1.9 billion as of December 31, 1999, representing a
13.8% increase over the total as of June 30, 1999.
During the three and six month periods ended December 31, 1999, new commitments
of credit in our medical receivables financing business were $16.2 and $40.9
million compared with $35.1 and $68.4 million for the same periods of the prior
fiscal year, representing decreases of 53.9% and 40.2%. Net medical receivables
funded at December 31, 1999 totaled $236.1 million, an increase of $48.8 million
or 26.1% over the total as of June 30, 1999.
Total finance and other income increased 41.2% and 43.4% to $36.2 and $68.1
million for the three and six month periods ended December 31, 1999 from $25.7
and $47.5 million for the three and six month period ended December 31, 1998.
Finance income was $26.3 and $50.7 million for the three and six month periods
ended December 31, 1999, or 8.9% of average net financed assets of $1.1 billion
on an annualized basis. This compares to $20.9 and $38.8 million for the three
and six month periods ended December 31, 1998, which was an annualized 9.1% of
average net financed assets of $850.7 million. This 26.1% increase in finance
income was largely due to the overall increase in the size of our loan
portfolio. Other income increased 106.5% and 100.0% to $9.9 and $17.4 million
for the three and six month periods ended December 31, 1999 as compared to $4.8
and $8.7 million in the comparable prior year periods. Other income consists
primarily of amounts received upon exercise of warrants issued by other
companies (including Cerent Corporation warrants - see note 3), servicing fees,
late charges, medical receivables fees, and contract fees and penalties.
Interest expense was $19.3 and $37.2 million for the three and six month periods
ended December 31, 1999, or 6.6% of average net financed assets on an annualized
basis. This compares to $14.7 and $27.2 million of interest expense for the
three and six month periods ended December 31, 1998, which was an annualized
6.4% of average net financed assets. The increase in interest expense is
directly attributed to higher levels of debt necessary to finance a larger
average portfolio.
The net gain on sale of financing transactions decreased 2.3% to $6.9 million
for the three month period ended December 31, 1999 compared to $7.1 million for
the three month period ended December 31, 1998, representing 7.0% and 7.3% of
the $98.1 and $97.2 million in contracts sold during those periods. The net gain
on sale of financing transactions increased 1.3% to $14.1 million for the six
month period ended December 31, 1999 compared to $14.0 million for the six month
period ended December 31, 1998, representing 7.5% and 8.2% of the $189.2 and
$169.9 million in contracts sold during those periods.
Selling, general and administrative expenses increased 19.7% and 25.0% to $9.6
and $18.3 million for the three and six month periods ended December 31, 1999
from $8.0 and $14.7 million for the same periods of the prior fiscal year. The
increase is related primarily to the development of our medical receivables and
international businesses and our 35.4% growth in average managed net financed
assets.
The allowance for losses was $14.7 million at December 31, 1999, or 0.78% of our
managed portfolio, compared to $12.3 million at June 30, 1999, or 0.74% of the
managed portfolio at that time. We made provisions for losses on receivables for
the three and six month periods ended December 31, 1999 of $3.6 and $6.4
million, compared to $1.6 and $3.1 million for the same periods ended December
31, 1998. On a quarterly basis, we evaluate the collectibility of our
receivables and record a provision for amounts deemed necessary to maintain an
adequate allowance. In the opinion of management, the provisions are adequate
based on current trends in our delinquencies and losses.
13
<PAGE> 14
Earnings before minority interest, equity in net loss of investees and provision
for income taxes increased 25.8% and 23.6% to $10.6 and $20.3 million for the
three and six month periods ended December 31, 1999 compared to $8.4 and $16.4
million for the same period ended December 31, 1998. Net earnings increased
20.3% and 21.4% to $5.8 and $11.4 million from $4.8 and $9.4 million in
comparing the three and six month periods ended December 31, 1999 to the same
periods ended December 31, 1998. Diluted earnings per share increased 18.8% and
21.0% to $0.38 and $0.75 from $0.32 and $0.62 when comparing the three and six
month periods ended December 31, 1999 to December 31, 1998. The increase in
diluted earnings per share resulted from an increase in our net earnings
combined with a decrease in diluted shares.
FINANCIAL CONDITION
Total shareholders' equity increased $11.9 million to $203.5 million at December
31, 1999 from $191.6 million at June 30, 1999. The increase was primarily due to
net earnings of $11.4 million.
At December 31, 1999, we had available an aggregate of $658.7 million in
warehouse facilities of which $287.9 million was utilized.
We believe that our present warehouse and permanent funding sources are
sufficient to fund our current needs for our equipment and medical receivables
financing businesses.
Through December 31, 1999, we have completed 25 securitizations for medical
equipment and medical receivables financings totaling approximately $2.6
billion, consisting of public debt issues totaling $0.9 billion and private
placements of debt and contract sales totaling $1.7 billion. We expect to
continue to use securitization (on both a public and private basis) or other
structured finance transactions as our principal means to permanently fund our
contracts for the foreseeable future.
14
<PAGE> 15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to two primary types of market risk: interest rate risk and
foreign currency exchange risk. We actively manage both of these risks.
INTEREST RATE RISK
The majority of our assets and liabilities are financial instruments with fixed
and variable rates. Any mismatch between the repricing or maturity
characteristics of our assets and liabilities exposes us to interest rate risk
when interest rates fluctuate. For example, our equipment loans are structured
and permanently funded on a fixed-rate basis, but we use warehouse facilities
until the permanent matched funding is obtained. Since funds borrowed through
warehouse facilities are obtained on a floating-rate basis, we are exposed to a
certain degree of risk if interest rates rise and increase our borrowing costs.
In addition, when we originate equipment loans, we base our pricing in part on
the spread we expect to achieve between the interest rate we charge our
equipment loan customers and the effective interest cost we will pay when we
permanently fund those loans. Increases in interest rates which increase our
permanent funding costs between the time the loans are originated and the time
they are permanently funded could narrow, eliminate or even reverse this spread.
In addition, changes in interest rates affect the fair market value of fixed
rate assets and liabilities. In a rising interest rate environment, fixed rate
assets lose market value whereas fixed rate liabilities gain market value and
vice versa.
In order to manage our interest rate risk, we employ a hedging strategy. We use
derivative financial instruments such as forward rate agreements, Treasury
locks, and interest rate swaps, caps and collars to manage interest sensitivity
adjustments from mismatches, the pricing of anticipated loan securitizations and
sales, and interest rate spreads. We do not use derivative financial instruments
for trading or speculative purposes. We manage the credit risk of possible
counterparty default in these derivative transactions by dealing exclusively
with counterparties with investment grade ratings.
Before entering into a derivative transaction for hedging purposes, we determine
that a high correlation exists between the change in the value of the hedged
item and the change in the value of the derivative from a movement in interest
rates. High correlation means that the change in the value of the derivative
will be substantially equal and opposite to the change in the value of the
hedged asset or liability. We monitor this correlation throughout the hedged
period. If a high degree of correlation is not maintained, the hedge becomes
ineffective, and gains or losses in the value of the derivative are recognized
in income.
There can be no assurance that our hedging strategies or techniques will be
effective, that our profitability will not be adversely affected during any
period of change in interest rates or that the costs of hedging will not exceed
the benefits.
The following table provides information about certain financial instruments
held that are sensitive to changes in interest rates. For assets and
liabilities, the table presents principal cash flows and related weighted
average interest rates by expected maturity date at December 31, 1999. For
derivative financial instruments, the table presents notional amounts and
weighted average interest rates by expected (contractual) maturity dates. These
notional amounts generally are used to calculate the contractual payments to be
exchanged under the contract. Weighted average variable rates, which are
generally LIBOR-based, represent the interest rates in effect at December 31,
1999. The information is presented in U.S. dollar equivalents, which is our
reporting currency. The actual cash flows are denominated in U.S. dollars (US),
German deutsche marks (DEM), Spanish pesetas (ESP), Singapore dollars (SGD),
Japanese yen (JPY), Australian dollars (AUD), British pounds (GBP), and Euro
(EUR), as indicated in parentheses. The table excludes investments in direct
financing leases in accordance with disclosure requirements, although our lease
contracts are exposed to interest rate risk. The information does not include
any estimates for prepayments, reinvestment, refinancing or credit losses.
15
<PAGE> 16
<TABLE>
<CAPTION>
EXPECTED MATURITY DATE - QTR ENDED DECEMBER 31,
--------------------------------------------------------------
(IN THOUSANDS OF DOLLARS) 2000 2001 2002 2003 2004
- ------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
RATE-SENSITIVE ASSETS:
Fixed rate receivables in
installments (US) .............. $ 76,974 $ 62,516 $ 41,813 $ 28,257 $ 19,720
Average interest rate ............ 9.93% 9.96% 9.93% 10.00% 9.92%
Fixed rate receivables in
installments (DEM) ............. $ 2,779 $ 3,638 $ 2,608 $ 2,293 $ 2,459
Average interest rate ............ 8.71% 9.08% 9.44% 9.39% 9.33%
Fixed rate receivables in
installments (ESP) ............. $ 416 $ 370 $ 358 -- --
Average interest rate ............ 5.80% 5.80% 5.80% -- --
Fixed rate receivables in
installments (SGD) ............. $ 915 $ 448 $ 496 $ 547 $ 592
Average interest rate ............ 10.79% 10.79% 10.79% 10.72% 10.68%
Fixed rate receivables in
installments (JPY) ............. $ 3,824 $ 1,496 $ 1,579 $ 1,668 $ 287
Average interest rate ............ 5.64% 5.64% 5.64% 5.64% 5.44%
Fixed rate receivables in
installments (AUD) ............. $ 463 $ 351 $ 62 -- --
Average interest rate ............ 9.32% 8.68% 8.71% -- --
Fixed rate receivables in
installments (GBP) ............. $ 48 $ 55 $ 62 $ 51 $ 5
Average interest rate ............ 11.00% 11.00% 10.88% 10.88% 10.88%
Floating rate receivables in
installments (US) .............. $ 52,747 $ 34,673 $ 21,641 $ 21,252 $ 5,989
Average interest rate ............ 8.57% 8.21% 7.78% 9.19% 8.40%
Floating rate notes collateralized by
medical receivables (US) ....... $ 119,099 $ 112,032 $ 2,004 -- $ 5,958
Average interest rate ............ 10.64% 10.79% 10.06% -- 9.96%
Fixed rate recourse credit
enhancements (US) .............. $ 10,719 $ 8,944 $ 9,859 $ 9,703 $ 3,785
Average interest rate ............ 6.76% 6.80% 6.75% 6.79% 7.15%
--------- --------- -------- -------- --------
Totals ......................... $ 267,984 $ 224,523 $ 80,482 $ 63,771 $ 38,795
========= ========= ======== ======== ========
Average interest rate .......... 9.77% 9.93% 8.85% 9.11% 9.36%
========= ========= ======== ======== ========
DERIVATIVES MATCHED AGAINST ASSETS:
INTEREST RATE SWAPS
Pay variable rate swaps (US)......... - - $ 5,000 - -
Weighted average pay rate......... - - 5.58% - -
Weighted average receive rate..... - - 5.83% - -
--------
Totals.......................... $ 5,000
========
</TABLE>
<TABLE>
<CAPTION>
THERE- FAIR
(IN THOUSANDS OF DOLLARS) AFTER TOTAL VALUE
- ------------------------- -------- --------- --------
<S> <C> <C> <C>
RATE-SENSITIVE ASSETS:
Fixed rate receivables in
installments (US) .............. $ 18,455 $ 247,735 $237,691
Average interest rate ............ 9.77% 9.93%
Fixed rate receivables in
installments (DEM) ............. $ 3,351 $ 17,128 $ 15,729
Average interest rate ............ 9.41% 8.71%
Fixed rate receivables in
installments (ESP) ............. -- $ 1,144 $ 1,025
Average interest rate ............ -- 5.80%
Fixed rate receivables in
installments (SGD) ............. $ 153 $ 3,151 $ 3,003
Average interest rate ............ 10.68% 10.79%
Fixed rate receivables in
installments (JPY) ............. -- $ 8,854 $ 7,922
Average interest rate ............ -- 5.64%
Fixed rate receivables in
installments (AUD) ............. -- $ 876 $ 759
Average interest rate ............ -- 9.32%
Fixed rate receivables in
installments (GBP) ............. -- $ 221 $ 218
Average interest rate ............ -- 11.00%
Floating rate receivables in
installments (US) .............. $ 716 $ 137,018 $137,018
Average interest rate ............ 7.85% 8.40%
Floating rate notes collateralized by
medical receivables (US) ....... -- $ 239,093 $239,093
Average interest rate ............ -- 10.64%
Fixed rate recourse credit
enhancements (US) .............. $ 1,230 $ 44,240 $ 41,152
Average interest rate ............ 7.24% 6.82%
-------- --------- --------
Totals ......................... $ 23,905 $ 699,460 $683,610
======== ========= ========
Average interest rate .......... 9.54% 9.59%
======== =========
DERIVATIVES MATCHED AGAINST ASSETS:
INTEREST RATE SWAPS
Pay variable rate swaps (US)......... - $ 5,000 $ (60)
Weighted average pay rate......... - 5.58%
Weighted average receive rate..... - 5.83%
--------- --------
Totals.......................... $ 5,000 $ (60)
========= ========
</TABLE>
16
<PAGE> 17
<TABLE>
<CAPTION>
EXPECTED MATURITY DATE - QTR ENDED DECEMBER 31,
----------------------------------------------------------- THERE- FAIR
(IN THOUSANDS OF DOLLARS) 2000 2001 2002 2003 2004 AFTER TOTAL VALUE
- ------------------------- --------- --------- -------- --------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
RATE-SENSITIVE LIABILITIES:
Variable rate borrowings under
warehouse facilities (US) .... $ 240,485 -- -- -- -- -- $ 240,485 $240,485
Average interest rate ..... 7.63% -- -- -- -- -- 7.63%
Variable rate borrowings under
warehouse facilities (AUD) ... $ 4,043 -- -- -- -- -- $ 4,043 $ 4,043
Average interest rate ..... 7.63% -- -- -- -- -- 7.63%
Variable rate borrowings under
warehouse facilities (DEM) ... $ 6,379 -- -- -- -- -- $ 6,379 $ 6,379
Average interest rate ..... 4.75% -- -- -- -- -- 4.75%
Variable rate borrowings under
warehouse facilities (GBP) ... -- $ 10,997 -- -- -- -- $ 10,997 $ 10,997
Average interest rate ..... -- 7.23% -- -- -- -- 7.23%
Variable rate borrowings under
warehouse facilities (JPY) ... $ 11,169 -- -- -- -- -- $ 11,169 $ 11,169
Average interest rate ..... 3.23% -- -- -- -- -- 3.23%
Variable rate borrowings under
warehouse facilities (SGD) ... $ 6,187 -- -- -- -- -- $ 6,187 $ 6,187
Average interest rate ..... 5.20% -- -- -- -- -- 5.20%
Variable rate borrowings under
warehouse facilities (EUR) ... $ 8,653 -- -- -- -- -- $ 8,653 $ 8,653
Average interest rate ..... 4.96% -- -- -- -- -- 4.96%
Fixed rate discounted
receivables (US) ............. $ 86,989 $ 60,914 $ 41,497 $ 24,934 $ 8,965 $ 2,193 $ 225,492 $224,519
Average interest rate ..... 6.58% 6.60% 6.69% 6.82% 7.09% 7.33% 6.68%
Variable rate discounted
receivables (US) ............. $ 7,750 $ 75,000 -- $ 88,000 -- -- $ 170,750 $170,750
Average interest rate ..... 7.97% 6.61% -- 6.69% -- -- 6.71%
Senior notes (US) ............ -- -- -- -- $ 155,000 -- $ 155,000 $149,800
Average interest rate ..... -- -- -- -- 9.88% -- 9.88%
Other debt (US) .............. $ 18,615 $ 9,870 $ 6,389 $ 5,250 $ 2,000 $ 25,000 $ 67,124 $ 67,068
Average interest rate ..... 8.37% 8.73% 8.89% 8.90% 8.34% 8.78% 8.67%
Other debt (GBP) ............. $ 508 $ 727 $ 640 $ 421 -- -- $ 2,296 $ 2,240
Average interest rate ..... 8.23% 8.23% 8.29% 8.91% -- -- 8.32%
Convertible subordinated
notes (US) ................... -- -- $ 13,900 -- -- -- $ 13,900 $ 19,916
Average interest rate ..... -- -- 9.13% -- -- -- 9.13%
--------- --------- -------- --------- --------- -------- --------- --------
Totals .................. $ 390,778 $ 157,508 $ 62,426 $ 118,605 $ 165,965 $ 27,193 $ 922,475 $922,206
========= ========= ======== ========= ========= ======== ========= ========
Average interest rate ... 7.17% 6.79% 7.47% 6.82% 9.71% 8.66% 7.59%
========= ========= ======== ========= ========= ======== ========
</TABLE>
17
<PAGE> 18
<TABLE>
<CAPTION>
EXPECTED MATURITY DATE - QTR ENDED DECEMBER 31,
------------------------------------------------------ THERE- FAIR
(IN THOUSANDS OF DOLLARS) 2000 2001 2002 2003 2004 AFTER TOTAL VALUE
- ------------------------- ---- ---- ---- ---- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
DERIVATIVES MATCHED AGAINST LIABILITIES:
- ----------------------------------------
INTEREST RATE SWAPS
Pay fixed rate swaps (US) .............. -- -- -- -- -- $10,000 $ 10,000 $ 228
Weighted average pay rate ........... -- -- -- -- -- 5.84% 5.84%
Weighted average receive rate ....... -- -- -- -- -- 5.96% 5.96%
Pay fixed rate swaps (AUD) ............. -- -- $1,679 -- -- -- $ 1,679 $ 14
Weighted average pay rate ........... -- -- 5.56% -- -- -- 5.56%
Weighted average receive rate ....... -- -- 5.36% -- -- -- 5.36%
TREASURY LOCKS (US) .................... $125,000 -- -- -- -- -- $125,000 $ 868
Average strike rate ................. 6.12% -- -- -- -- -- 6.12%
Average index rate .................. 6.29% -- -- -- -- -- 6.29%
-------- ------ ------- -------- ------
Totals ............................ $125,000 $1,679 $10,000 $136,679 $1,110
======== ====== ======= ======== ======
</TABLE>
FOREIGN CURRENCY EXCHANGE RATE RISK
We have international operations and foreign currency exposures due to lending
in some areas in local currencies. As a general practice, we have not hedged the
foreign exchange exposure related to either the translation of overseas earnings
into U.S. dollars or the translation of overseas equity positions back to U.S.
dollars. Our preferred method for minimizing foreign currency transaction
exposure is to fund local currency assets with local currency borrowings. For
specific local currency-denominated receivables or for a portfolio of local
currency-denominated receivables for a specific period of time, hedging with
derivative financial instruments may be necessary to manage the foreign currency
exposure derived from funding in U.S. dollars. The types of derivative
instruments used are foreign exchange forward contracts and cross-currency
interest rate swaps.
The following table provides information about certain financial instruments
held that are sensitive to changes in foreign exchange rates. For assets and
liabilities, the table presents principal cash flows and related weighted
average interest rates by expected maturity date at December 31, 1999. For
foreign currency forward exchange agreements, the table presents notional
amounts and weighted average exchange rates by expected (contractual) maturity
dates. These notional amounts generally are used to calculate the contractual
payments to be exchanged under the contract. The information is presented in
U.S. dollar equivalents, which is our reporting currency. The actual cash flows
are denominated in German deutsche marks (DEM), Spanish pesetas (ESP), Singapore
dollars (SGD), Japanese yen (JPY), Australian dollars (AUD), British pounds
(GBP), and Euro (EUR), as indicated in parentheses. The table excludes
investments in direct financing leases in accordance with disclosure
requirements, although our lease contracts are exposed to foreign currency rate
risk. The information does not include any estimates for prepayments,
reinvestment, refinancing or credit losses.
18
<PAGE> 19
<TABLE>
<CAPTION>
EXPECTED MATURITY DATE - QTR ENDED DECEMBER 31,
------------------------------------------------------ THERE- FAIR
(IN THOUSANDS OF DOLLARS) 2000 2001 2002 2003 2004 AFTER TOTAL VALUE
- ------------------------- ---- ---- ---- ---- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FOREIGN CURRENCY SENSITIVE ASSETS:
- ----------------------------------
Fixed rate receivables in
installments (DEM) ............... $ 2,779 $3,638 $2,608 $ 2,293 $ 2,459 $ 3,351 $17,128 $15,729
Average interest rate .............. 8.71% 9.08% 9.44% 9.39% 9.33% 9.41% 8.71%
Fixed rate receivables in
installments (ESP) ............... $ 416 $ 370 $ 358 -- -- -- $ 1,144 $ 1,025
Average interest rate .............. 5.80% 5.80% 5.80% -- -- -- 5.80%
Fixed rate receivables in
installments (SGD) ............... $ 915 $ 448 $ 496 $ 547 $ 592 $ 153 $ 3,151 $ 3,003
Average interest rate .............. 10.79% 10.79% 10.79% 10.72% 10.68% 10.68% 10.79%
Fixed rate receivables in
installments (JPY) ............... $ 3,824 $1,496 $1,579 $ 1,668 $ 287 -- $ 8,854 $ 7,922
Average interest rate .............. 5.64% 5.64% 5.64% 5.64% 5.44% -- 5.64%
Fixed rate receivables in
installments (AUD) ............... $ 463 $ 351 $ 62 -- -- -- $ 876 $ 759
Average interest rate .............. 9.32% 8.68% 8.71% -- -- -- 9.32%
Fixed rate receivables in
installments (GBP) ............... $ 48 $ 55 $ 62 $ 51 $ 5 -- $ 221 $ 218
Average interest rate .............. 11.00% 11.00% 10.88% 10.88% 10.88% -- 11.00%
------- ------ ------ --------- --------- --------- ------- -------
Totals ........................... $ 8,445 $6,358 $5,165 $ 4,559 $ 3,343 $ 3,504 $31,374 $28,656
======= ====== ====== ========= ========= ========= ======= =======
Average interest rate ............ 7.45% 8.19% 8.16% 8.19% 9.24% 9.47% 7.98%
======= ====== ====== ========= ========= ========= =======
DERIVATIVES MATCHED AGAINST ASSETS:
- -----------------------------------
FOREIGN EXCHANGE AGREEMENTS
Receive U.S. $ / Pay DEM .............. $16,719 -- -- -- -- -- $16,719 $ 591
Avg. contractual exchange rate ..... 1.87 -- -- -- -- -- 1.87
------- ------- -------
Totals ........................... $16,719 $16,719 $ 591
======= ======= =======
</TABLE>
19
<PAGE> 20
<TABLE>
<CAPTION>
EXPECTED MATURITY DATE - QTR ENDED DECEMBER 31,
-------------------------------------------------- THERE- FAIR
(IN THOUSANDS OF DOLLARS) 2000 2001 2002 2003 2004 AFTER TOTAL VALUE
- ------------------------- ---- ---- ---- ---- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FOREIGN CURRENCY SENSITIVE LIABILITIES:
Warehouse borrowings (AUD) ................ $ 4,043 -- -- -- -- -- $ 4,043 $ 4,043
Average interest rate .................. 7.63% -- -- -- -- -- 7.63%
Warehouse borrowings (DEM) ................ $ 6,379 -- -- -- -- -- $ 6,379 $ 6,379
Average interest rate .................. 4.75% -- -- -- -- -- 4.75%
Warehouse borrowings (GBP) ................ -- $10,997 -- -- -- -- $10,997 $10,997
Average interest rate .................. -- 7.23% -- -- -- -- 7.23%
Variable rate borrowings under
warehouse facilities (JPY) ................ $11,169 -- -- -- -- -- $11,169 $11,169
Average interest rate .................. 3.23% -- -- -- -- -- 3.23%
Variable rate borrowings under
warehouse facilities (SGD) ................ $ 6,187 -- -- -- -- -- $ 6,187 $ 6,187
Average interest rate .................. 5.20% -- -- -- -- -- 5.20%
Variable rate borrowings under
warehouse facilities (EUR) ................ $ 8,653 -- -- -- -- -- $ 8,653 $ 8,653
Average interest rate .................. 4.96% -- -- -- -- -- 4.96%
Other debt (GBP) .......................... $ 508 $ 727 $ 640 $ 421 -- -- $ 2,296 $ 2,240
Average interest rate .................. 8.23% 8.23% 8.29% 8.91% -- -- 8.32%
------- ------- ----- ----- ------- -------
Totals ............................... $36,939 $11,724 $ 640 $ 421 $49,724 $49,668
======= ======= ===== ===== ======= =======
Average interest rate ................ 4.78% 7.29% 8.29% 8.91% 5.45%
======= ======= ===== ===== =======
</TABLE>
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Any statements contained in this Form 10-Q which are not historical facts are
forward-looking statements; and, therefore, many important factors could cause
actual results to differ materially from those in the forward-looking
statements. Such factors include, but are not limited to, changes (legislative
and otherwise) in the healthcare industry, those relating to demand for our
services, pricing, market acceptance, the effect of economic conditions,
litigation, competitive products and services, the results of financing efforts,
the ability to complete transactions, and other risks identified in our
Securities and Exchange Commission filings.
20
<PAGE> 21
PART II - OTHER INFORMATION
Items 1, 2, 3 and 5 have been omitted because the related information is either
inapplicable or has been previously reported.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were voted upon at the Annual Meeting of Stockholders held
on October 29, 1999 and received the votes set forth below:
1. All of the following persons nominated were elected to serve as directors
of the Company and received the number of votes set opposite their
respective names:
<TABLE>
<CAPTION>
NAME FOR WITHHELD
---- --- --------
<S> <C> <C>
Gerald L. Cohn 8,510,984 1,136,915
John E. McHugh 8,510,984 1,136,915
Michael A. O'Hanlon 8,510,984 1,136,915
Nathan Shapiro 8,510,984 1,136,915
William S. Goldberg 8,510,984 1,136,915
Harry T. J. Roberts 8,510,984 1,136,915
</TABLE>
2. A proposal to amend the Company's 1996 Incentive Stock Option Plan to
increase the number of shares for which options may be granted thereunder
from 1,500,000 to 2,700,000 shares and approve certain option grants that
were made previously pursuant to the Plan, subject to stockholder approval,
received 5,604,770 votes FOR and 1,563,335 votes AGAINST, with 33,302
abstentions and 2,446,492 broker non-votes.
3. A proposal to ratify the appointment of Deloitte & Touche LLP as
independent public accountants for the Company for the fiscal year ending
June 30, 2000 received 9,628,475 votes FOR and 12,207 votes AGAINST, with
7,217 abstentions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1. DVI, Inc. Change-of-Control Agreement dated
December 31, 1999, entered into between the
Company and Steven R. Garfinkel, the Company's
Executive Vice President and Chief Financial
Officer, Richard E. Miller and Anthony J.
Turek, both Executive Vice Presidents of the
Company, each signed identical agreements with
the Company as of the same date.
10.2. DVI, Inc. Severance Pay Plan
27. Financial Data Schedule
(b) Form 8-K
None
21
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DVI, INC.
------------------
(Registrant)
Date: February 15, 2000 By /s/ MICHAEL A. O'HANLON
-------------------------------------
Michael A. O'Hanlon
President and Chief Executive Officer
Date: February 15, 2000 By /s/ STEVEN R. GARFINKEL
-------------------------------------
Steven R. Garfinkel
Executive Vice President and Chief
Financial Officer
22
<PAGE> 1
DVI, INC.
CHANGE-OF-CONTROL AGREEMENT
This Change-of-Control Agreement is dated December 31, 1999,
and is between Steven R. Garfinkel ("Executive") and DVI, Inc. ("DVI").
Executive and DVI, intending to be legally bound hereby and in
consideration of the provisions contained herein, agree that upon a "Change of
Control" (as defined below) followed by a "Qualifying Termination Event" (as
defined below), DVI shall make the payments described below to Executive;
provided, that Executive signs a "Release" (as described below) upon such
Qualifying Termination Event:
1. Change of Control. A Change of Control shall be deemed to
have taken place if:
(a) any person - including a group of persons acting
in concert for the purpose of acquiring, holding, voting, or disposing of voting
securities of DVI, but excluding DVI and the officers and directors of DVI (but
only to the extent acting in that capacity and not when acting in the capacity
of shareholders) - becomes the beneficial owner (as beneficial ownership is
defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended, and
any successor rule thereto) of voting securities of DVI having 51 percent or
more of the total number of votes that may be cast for the election of directors
of DVI; or
(b) there occurs (i)(w) any cash tender or exchange
offer for shares of DVI, (x) any merger or other business combination involving
DVI, (y) any sale of assets of DVI, or (z) any combination of the foregoing
transactions, and (ii) as a result of or in connection with any such event
(including, without limitation, the voluntary resignation of one or more
directors) persons who were directors of DVI before the event shall cease to
constitute a majority of the board of directors of DVI or any entity successor
thereto or to substantially all of the assets thereof; or
(c) there occurs (i) a merger or other business
combination involving DVI, and (ii) the persons who owned the issued and
outstanding voting securities of DVI immediately prior to the transaction cease
to beneficially own, as a result of the transaction, issued or outstanding
voting securities of DVI or any entity successor thereto or to substantially all
of the assets thereof which entitle the holders thereof to cast a majority of
the votes that may be cast in the election of directors.
2. Qualifying Termination Event
(a) A Qualifying Termination Event shall be deemed to
have occurred if, during the two-year period following the date of a Change of
Control, Executive ceases to be employed by DVI or its successor (referred to
jointly as "DVI") for either of the following reasons:
<PAGE> 2
(1) Except as provided in subsection (b)(3) below,
DVI terminates Executive's employment; or
(2) Executive terminates his employment for Good
Reason. "Good Reason" during the six-month period following a Change of Control
shall only be present if Executive gives DVI written notice of extraordinary
circumstances that make Executive's continuation of employment with DVI
intolerable. After such six-month period, "Good Reason" shall mean that after
Executive gives DVI written notice of one or more of the following events and
DVI fails to cure the event(s) during the 30-day period following DVI's receipt
of such notice, Executive terminates his employment with DVI:
(i) Executive's position is
materially and adversely changed from his position as of the Change of Control;
(ii) Executive is assigned duties
and responsibilities that are inconsistent in a material respect with the scope
of duties and responsibilities associated with his position as of the Change of
Control;
(iii) Executive's annual
compensation package is reduced; such package shall be measured in part by (but
without limitation to) the base salary, bonus, and stock option grants paid or
granted to him during the 12-month period immediately preceding the date of the
Change of Control; or
(iv) DVI requires Executive to be
based at an office which is at least 35 miles further from Executive's residence
than Executive's office on the day before the Change of Control.
(b) Notwithstanding subsection (a) above, Executive's
termination of employment shall not be considered a Qualifying Termination Event
for purposes of this Agreement if one or more of the following applies:
(1) Termination is due to Executive's death or
disability;
(2) Executive voluntarily terminates for any reason
not described in subsection (a)(2) above; or
(3) DVI terminates Executive's employment for Cause.
"Cause" for purposes of this Agreement shall mean one or more of the following
applies:
(i) Executive's employment is
involuntarily terminated due to Executive's intentional act or acts of
dishonesty that Executive intended to result in his personal enrichment;
(ii) prior to the occurrence of an
event described in subsection (a)(2)(i) through (iv) above, Executive's
employment is involuntarily terminated due to Executive's documented willful and
deliberate insubordination, or Executive's documented
2
<PAGE> 3
willful malfeasance or willful misconduct, in both cases in connection with his
employment after the Change in Control; or
(iii) Executive's employment is
involuntarily terminated because Executive is convicted of a felony the effect
of which, in the judgment of the Board of Directors of DVI, is likely to affect
adversely DVI or one or more of its affiliates.
3. Severance and Change-of-Control Benefits
(a) Regular Severance Benefits. If Executive's
employment terminates prior to a Change of Control (other than a termination due
to Executive's death or disability, for Cause, or due to Executive's voluntary
resignation), DVI shall pay severance benefits to Executive for the two-year
period following Executive's termination of employment (subject to Section 7 and
provided that Executive signs a release as provided in Section 6). Such
severance benefits shall be in an annual amount equal to Executive's annual
salary rate in effect on the date of termination plus the average of the last
two annual bonuses awarded to Executive prior to termination. Such severance
benefits shall be paid in substantially equal periodic payments in accordance
with the then current payroll practices of DVI.
(b) Change-of-Control Severance Benefits. If
Executive experiences a Qualifying Termination Event during the two-year period
following a Change of Control, Executive shall be entitled to receive the
following payments and benefits from DVI (subject to Section 7 and provided that
Executive signs a release as provided in Section 6):
(1) Continued salary and bonuses for the three-year
period following termination of employment (to be paid without regard to whether
Executive secures other employment during the three-year severance period) equal
to the greater of:
(i) The sum of Executive's annual
salary rate in effect on the date of termination plus the amount of the last
annual bonus paid to him before the date of termination; or
(ii) The average annual salary and
bonuses paid to Executive during the two-year period ending on the day before
the Change of Control.
Amounts payable under this
subsection (b)(1) shall be paid in accordance with DVI's then-current payroll
practices.
(2) Group medical and dental plan coverage, paid for
by DVI, equal to the coverage that Executive and his family member(s) were
entitled to as of the date of the Qualifying Termination Event, for a period of
18 months from the termination date and, to the extent the medical and dental
plan permits, thereafter until the end of the severance period provided in
subsection (b)(1) above (i.e., until the third anniversary of Executive's
termination of employment); provided, however, that if the plan does not permit
continued participation, then DVI shall reimburse Executive and his family
member(s) for the cost of reasonable coverage under personal medical and dental
policies.
3
<PAGE> 4
(c) Retention Bonus
(1) If Executive continues his employment
with DVI for the six-month period following a Change of Control, Executive shall
be entitled to receive a retention bonus in an amount equal to 1/2 of the
average of the last two annual bonuses paid to Executive prior to the Change of
Control. The retention bonus shall be paid at the same time as is paid the
customary annual bonus awarded to Executive for the year in which such six-month
period ends. The retention bonus shall be forfeited if Executive terminates his
employment other than for "Good Reason" (as defined in Section 2(a)(2)) during
such six-month period.
(2) If Executive's employment is terminated
by DVI for any reason within the six-month period following a Change of Control,
the retention bonus shall be ratably reduced by multiplying the amount of the
retention bonus by a fraction, the numerator of which shall equal the number of
Executive's days of employment with DVI following the Change of Control, and the
denominator of which shall equal 182.5. The reduced retention bonus shall be
paid as soon as practicable after Executive's termination of employment, but in
no event later than 60 days after such termination.
4. Certain Additional Payments to Executive. If all or any
portion of the payments or other benefits provided hereunder to Executive,
either alone or together with other payments and benefits which Executive
receives or is entitled to receive from DVI, constitutes an excess "parachute
payment" within the meaning of section 280G of the Internal Revenue Code of
1986, as amended, and as it may be amended on or after the date of this
Change-of Control Agreement (the "Code"), and results in the imposition on
Executive of an excise tax under section 4999 of the Code, then, in addition to
any other benefits to which Executive is entitled hereunder, DVI shall pay
Executive an amount equal to the sum of (i) the excise taxes payable by
Executive by reason of receiving excess parachute payments; and (ii) a gross-up
amount necessary to offset any and all applicable federal, state, and local
excise, income, or other taxes incurred by Executive by reason of DVI's payment
of the excise tax described in (i) above on or after the date of this
Change-of-Control Agreement.
5. Beneficiary Designation
(a) In the event Executive dies before payment of all
amounts due to him under Section 3, all unpaid amounts shall be paid to the
beneficiary(ies) designated by the Executive. Executive shall designate his
beneficiary(ies) on a beneficiary designation form substantially similar to the
form set forth in Appendix A attached hereto. The beneficiary designation shall
be effective only when filed with DVI during Executive's lifetime.
(b) Any beneficiary designation may be changed by
Executive, without the consent of any previously designated beneficiary or any
other person, by the filing of a new beneficiary designation with DVI. The
filing of a new beneficiary designation shall cancel all beneficiary
designations previously filed.
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<PAGE> 5
(c) If Executive fails to designate a beneficiary in
the manner provided above, or if the beneficiary designated by Executive
predeceases him, DVI shall direct that Executive's amounts be paid to
Executive's surviving spouse or, if him spouse does not survive him or he has no
spouse, then to his estate.
6. Release. Prior to the payments described in Section 3,
Executive, for himself, his executors, administrators, heirs, and assigns, shall
sign a separate release (the "Release") in which Executive shall:
(a) agree that no charge, complaint, claim, or
lawsuit of any kind will be filed in connection with any claim released by the
Release against DVI, its successors, parents, subsidiaries, and affiliates,
incorporated and unincorporated, past and present, and each of them, as well as
its and their directors, officers, agents, servants, and employees, past and
present, and each of them (all collectively referred to as "Releasees"); and
(b) acknowledge full and complete satisfaction of,
and release and discharge Releasees from, any and all claims, demands, and
causes of action of whatever kind or nature, whether known or unknown to, or
suspected or unsuspected by, Executive, that Executive at the time of the
Release owns or holds or has at any time owned or held against any Releasee(s)
arising out of or by reason of Executive's employment or termination of
employment due to a Change of Control.
The Release shall include, but shall not be limited to, claims under the Age
Discrimination in Employment Act of 1967, as amended. The Release shall not,
however, preclude Executive's right to pursue any claims arising (i) under this
Agreement or (ii) under any benefit programs in which Executive has accrued any
rights which arise on, or after, the Qualifying Termination Event.
7. Noncompetition and Nondisclosure Requirements
(a) Noncompetition. Executive shall not, for a
one-year period following Executive's termination of employment, (i) directly or
indirectly own, manage, operate, control, advise, participate in, become a
proprietor, partner, director, officer, or employee of, provide services to, or
become financially interested in (other than solely by virtue of the ownership
of less than five percent of any class of publicly traded securities), any
business anywhere in the world competitive with the business of DVI or any of
its affiliates (the "Companies"), or (ii) engage or participate in any effort or
act to induce any of the customers or employees of the Companies to take any
action which might be disadvantageous to the Companies.
(b) Nondisclosure. During the period of Executive's
employment or at any later time, Executive shall not (other than in the good
faith performance of Executive's services to DVI before his termination of
employment) disclose or make known to anyone other than employees of the
Companies, or use for the benefit of himself or any other person, firm,
operation, or entity unrelated to the Companies, any knowledge, information, or
materials, whether tangible or intangible, belonging to the Companies, about
their products, services,
5
<PAGE> 6
know-how, customers, business plans, or financial, marketing, pricing,
compensation, and other proprietary matters relating to the Companies. On or
before Executive's termination of employment with DVI, Executive shall promptly
deliver to DVI or to any affiliate designated by DVI any and all tangible,
confidential information in his possession.
(c) Remedies for Breach. If Executive breaches the
covenant set forth in subsection (a) above and/or the covenant set forth in
subsection (b) above, Executive's employment with DVI shall terminate at DVI's
option and/or DVI's obligation to make any of the payments described in Section
3 shall terminate. In addition, Executive expressly acknowledges that damages
alone will be an inadequate remedy for any breach or violation of subsection (a)
and/or (b) above and that DVI, in addition to all other remedies, shall be
entitled as a matter of right to equitable relief, including injunctions and
specific performance, in any court of competent jurisdiction. If any of the
provisions of subsection (a) or (b) above are held to be in any respect
unenforceable, then they shall be deemed to extend only over the maximum period
of time, geographic area, or range of activities as to which they may be
enforceable against Executive.
8. Confidentiality. The terms of this Agreement are
confidential. Executive shall not disclose in any way this Agreement or any of
its terms to any person other than his spouse, legal counsel, accountant,
financial adviser, or superior to whom he directly reports.
9. Withholding. DVI may withhold from any benefits payable
under this Agreement all federal, state, local, or other taxes as shall be
required pursuant to any law or governmental regulation or ruling.
10. Governing Law. Except as provided in Section 6, this
Agreement shall be interpreted, enforced, and governed under the laws of the
State of Delaware without reference to principles of conflict of laws.
11. Arbitration. Without in any way affecting the terms of
Section 6, any controversy or claim arising out of or relating to this Agreement
shall be settled exclusively by arbitration in Philadelphia, Pennsylvania, in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association, and judgment upon the award rendered by the arbitrator(s) may be
entered in any court having jurisdiction thereof. To the fullest extent
permitted by applicable law and by the Commercial Arbitration Rules, the
arbitration proceedings and award shall be kept confidential.
12. Entire Agreement; Amendment. This Agreement contains the
entire agreement between Executive and DVI as to the subject matter hereof. Any
amendment to this Agreement must be in writing and signed by both DVI and
Executive.
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<PAGE> 7
13. Successor Employer
(a) Assumption of Agreement. DVI shall require any
successor (whether direct or indirect, by purchase, merger, consolidation, or
otherwise) to all or substantially all of the business or assets of DVI to
assume and agree to perform this Agreement. Such assumption shall occur by means
of an agreement in form and substance satisfactory to Executive. Such successor
shall perform in the same manner and to the same extent that DVI would have been
required to perform if no such succession had taken place. If DVI fails to
obtain such assumption and agreement prior to the effective date of any such
succession (the "Succession Date"), the failure will be a breach of this
Agreement. Such breach shall entitle Executive to the payments and benefits
described in Section 3(b) (but not to the payment described in Section 3(c)) as
if a Change of Control had occurred on the day before such Succession Date and
as if the Qualifying Termination Event described in Section 2(a)(1) had occurred
on the Succession Date.
(b) Form of Payment. If DVI breaches this Agreement
under subsection (a) above, the gross amount of the payments described in
Section 3(b)(1) shall be paid in a single sum to Executive within 10 days after
the Succession Date. In addition, Executive and DVI shall in good faith agree to
a single-sum estimate of the cost of reasonable coverage for Executive and his
family member(s) under personal medical and dental policies for the entire
period described in Section 3(b)(2) and DVI shall pay such estimate to Executive
within 10 days after the Succession Date.
IN WITNESS WHEREOF, the parties named below have caused this
Agreement to be executed and delivered as of the day and year first written
above.
ATTEST: DVI, INC.
/s/ By:/s/
- --------------------------------- -----------------------------------
Title:
--------------------------------
WITNESS: EXECUTIVE
/s/ /s/ Steven R. Garfinkel
- --------------------------------- -----------------------------------
7
<PAGE> 8
APPENDIX A
BENEFICIARY DESIGNATION FORM
This Form is for Executive's use in naming a beneficiary for
the amounts payable under Section 3 of the attached Change-of-Control Agreement.
Executive should complete the Form, sign it, have it signed by DVI, and date it.
* * * * *
I understand that in the event of my death before I receive
the amounts payable to me under Section 3 of the Change-of-Control Agreement,
the amounts will be paid to the beneficiary designated by me below or, if none
or if my designated beneficiary predeceases me, to my surviving spouse or, if
none, to my estate. I further understand that the last beneficiary designation
filed by me during my lifetime cancels all prior beneficiary designations
previously filed by me for this purpose.
I hereby state that __________________________________________
[insert name], residing at _____________________________________________________
_____________________________ [insert address], whose Social Security number is
_________________________, is designated as my beneficiary.
________________________________ ______________________________________
Signature of Executive Date
ACCEPTED:
DVI, INC.
By: __________________________________
______________________________________
Date
8
<PAGE> 1
DVI, INC.
SEVERANCE PAY PLAN
(Effective January 1, 2000)
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART 1. DEFINITIONS ................................................ 1
1.1 Board ...................................................... 1
1.2 Cause ...................................................... 1
1.3 Change of Control .......................................... 1
1.4 Employee ................................................... 2
1.5 Employer ................................................... 2
1.6 Good Reason ................................................ 2
1.7 Plan ....................................................... 2
1.8 Plan Administrator ......................................... 3
1.9 Plan Year .................................................. 3
1.10 Termination Event .......................................... 3
PART 2. PARTICIPATION .............................................. 3
2.1 Commencement of Participation .............................. 3
2.2 Eligibility for Regular Severance Benefits ................. 3
2.3 Eligibility for Change-of-Control Severance Benefits ....... 3
2.4 Work-Through Date .......................................... 4
PART 3. BENEFITS; FUNDING .......................................... 4
3.1 Regular Severance Benefit .................................. 4
3.2 Change-of-Control Severance Benefits ....................... 4
3.3 Retention Bonus ............................................ 4
3.4 Plan Not Funded ............................................ 5
3.5 Limitation on Payments ..................................... 5
PART 4. FORM AND TIMING OF SEVERANCE PAYMENTS ...................... 5
4.1 Severance Payments ......................................... 5
4.2 Payments After Death ....................................... 5
PART 5. OTHER PLAN FEATURES ........................................ 5
5.1 Assignment of Benefit Prohibited ........................... 5
5.2 Claims ..................................................... 6
5.3 Amendment or Termination of Plan ........................... 7
PART 6. MISCELLANEOUS .............................................. 7
6.1 Governing Law .............................................. 7
6.2 Severability ............................................... 7
6.3 Entire Agreement ........................................... 7
6.4 Successor Employer ......................................... 7
</TABLE>
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DVI, INC.
SEVERANCE PAY PLAN
WHEREAS, DVI, Inc. ("DVI"), a Delaware corporation, desires to
establish a severance pay plan for the benefit of its eligible employees;
WHEREAS, the terms of the plan are set forth in this document and are
to supersede entirely all prior rules and policies regarding severance benefits,
if any;
WHEREAS, all payments under the plan will be made from general
corporate assets of DVI or an affiliated employer;
WHEREAS, payments under the plan are not contingent, directly or
indirectly, upon the retirement of the Employees;
WHEREAS, in adopting the plan, the Board of Directors of DVI intends
for the plan to be legally and contractually binding on DVI even though
individual contracts will not be entered into between DVI and the Employees in
the plan;
NOW, THEREFORE, in consideration of the provisions contained herein and
intending to be legally bound hereby, DVI adopts the severance pay plan under
the following terms and conditions:
PART 1. DEFINITIONS
When the following terms are used in this document with initial capital
letters, they shall have the following meanings:
1.1 Board - the Board of Directors of DVI.
1.2 Cause - means that an Employee's employment is involuntarily
terminated due to one or more of the following events:
(a) an Employee's act or acts of dishonesty that were intended to
result in such Employee's personal enrichment;
(b) an Employee's conviction of a felony; or
(c) prior to the occurrence of an event described in Section 1.6
below, an Employee's documented willful and deliberate insubordination, or
documented willful malfeasance or willful misconduct in connection with
such Employee's employment.
1.3 Change of Control - a Change of Control shall be deemed to have
taken place if:
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<PAGE> 4
(a) any person - including a group of persons acting in concert for
the purpose of acquiring, holding, voting or disposing of voting securities
of DVI, but excluding DVI and the officers and directors of DVI (but only
to the extent acting in that capacity and not when acting in the capacity
of shareholders) - becomes the beneficial owner (as beneficial ownership is
defined in Rule 13d-3 under the Securities Exchange Act of 1934, as
amended, and any successor rule thereto) of voting securities of DVI having
51 percent or more of the total number of votes that may be cast for the
election of directors of DVI; or
(b) there occurs any cash tender or exchange offer for shares of DVI,
merger or other business combination involving DVI, sale of assets of DVI,
or any combination of the foregoing transactions, and as a result of or in
connection with any such event (including, without limitation, the
voluntary resignation of one or more directors) persons who were directors
of DVI before the event shall cease to constitute a majority of the board
of directors of DVI or any entity successor thereto or to substantially all
of the assets thereof; or
(c) there occurs a merger or other business combination involving DVI,
and (ii) the persons who owned the issued and outstanding voting securities
of DVI immediately prior to the transaction cease to beneficially own, as a
result of this transaction, issued or outstanding voting securities of DVI
or any entity successor thereto or substantially all of the assets thereof
which entitle the holders thereof to cast a majority of the votes that may
be cast in the election of directors.
1.4 Employee - any individual employed full time (i.e., not less than
32 hours per week) by the Employer within the United States or (to the extent
participation is permitted by local law) outside of the United States.
1.5 Employer - DVI and its majority-owned subsidiaries and joint
ventures, including any employer organized outside of the United States (to the
extent participation is permitted by local law).
1.6 Good Reason - means that an Employee terminates his employment as a
result of either of the following events occurring after a Change of Control:
(a) the Employee's annual salary rate as in effect on the day before
the Change of Control is reduced;
(b) the Employer requires such Employee to be based at an office which
is at least 35 miles further from his residence than his office on the day
before the Change of Control (other than travel reasonably required in the
performance of such Employee's responsibilities); or
(c) the Employee's duties or position is materially and adversely
changed in a manner inconsistent with the Employee's training or
professional status.
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1.7 Plan - the DVI, Inc. Severance Pay Plan, as set forth herein and as
it may be amended from time to time.
1.8 Plan Administrator - the Compensation Committee of the Board. The
Plan Administrator shall have the responsibility, power, authority, and
discretion to supervise and control the operation of the Plan in accordance with
its terms. The Plan Administrator shall be the "named fiduciary" of the Plan
within the meaning of section 402 of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"). A majority of the members of the Compensation
Committee shall constitute a quorum for the transaction of business related to
the Plan. All resolutions or other actions taken by such Committee at any
meeting shall be by vote of the majority of the members of such Committee.
Resolutions may be adopted and other action taken by the unanimous written
consent of all members of such Committee without a meeting of such Committee.
1.9 Plan Year - the 12-consecutive month period beginning on any
January 1 and ending on the following December 31.
1.10 Termination Event - an event described in Section 2.3(a).
PART 2. PARTICIPATION
2.1 Commencement of Participation. An Employee shall become a
participant in the Plan on the later of the effective date of the Plan or the
date such Employee commenced employment with the Employer, provided such
Employee is not covered by an individual agreement with the Employer providing
payments and benefits upon a Change of Control.
2.2 Eligibility for Regular Severance Benefits. An Employee shall be
eligible to receive "Regular Severance Benefits" (as provided in Section 3.1) if
such Employee's employment terminates prior to the date of a Change of Control.
An Employee whose termination is due to the Employee's disability, death,
voluntary termination, or for Cause is not eligible for severance benefits.
2.3 Eligibility for Change-of-Control Severance Benefits. An Employee
is eligible to receive "Change-of-Control Severance Benefits" (as provided in
Section 3.2) if he experiences a Termination Event on or after the date he
becomes a participant in the Plan, subject to the Work-Through provision as
provided in Section 2.4.
(a) Termination Event. A Termination Event occurs, except as
provided in subsection (b) below, if, within one year following the date of
a Change of Control, an Employee ceases to be employed by the Employer for
either of the following reasons:
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<PAGE> 6
(1) the Employer terminates the Employee's employment other than
for Cause; or
(2) if the Employee terminates his employment for Good Reason.
(b) Terminations Not Qualifying as Termination Events. An Employee is
not eligible to receive Change-of-Control Severance Benefits under the Plan
if any of the following applies:
(1) his employment is terminated due to his disability or death;
(2) the Employer terminates his employment for Cause; or
(3) he terminates his employment without Good Reason.
2.4 Work-Through Date. At any time during the 90-day period following a
Change of Control, the Employer may condition an Employee's eligibility for
Change-of-Control Severance Benefits on such Employee's continued employment
with the Employer, upon the Employer's written request, for a period of not more
than 180 days after the date the Employer delivers the written request. After
the Employer delivers the written request, the Employer may not terminate the
Employee prior to the work-through date except for cause. The last day of the
period of required employment is the Employee's "work-through date"; provided,
however, that the work-through date requirement shall be waived in the event
such Employee terminates employment for Good Reason.
PART 3. BENEFITS; FUNDING
3.1 Regular Severance Benefit. If an Employee is terminated other than
for Cause and not in the context of a Change-of-Control, he will be entitled to
receive Regular Severance Benefits as follows:
(a) Severance Allowance. . The Employer will pay him a severance
allowance in an amount based on his years of service with the Employer and
his annual salary rate in effect on the date of termination, up to a
maximum of one times such annual salary rate. The specific amount payable
for a specific number of years of service and the payment periods is set
forth on Exhibit A attached hereto; and
(b) Medical, Dental, and Life Insurance. The Employer will provide
such Employee with group medical, dental plan, and life insurance coverage,
paid for by the Employer, that such employee was entitled to as of the date
of termination, for a period beginning with the date of termination and
continuing over the period for which he receives severance benefits under
subsection (a) above; provided, however, that if the plan does not permit
continued participation, then DVI shall reimburse the Employee and his
family member(s) for the cost of reasonable coverage under personal medical
and dental policies.
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<PAGE> 7
3.2 Change-of-Control Severance Benefits. If an Employee experiences a
Termination Event, he will be entitled to receive severance benefits as follows,
subject to Section 3.5:
(a) Severance Allowance. The Employer will pay him a severance
allowance in an amount based on his years of service with the Employer and
his annual salary rate in effect on the date of the Termination Event, up
to a maximum of one times such annual salary rate. The specific amount
payable for a specific number of years of service and the payment periods
is set forth on Exhibit A attached hereto.
(b) Medical, Dental, and Life Insurance. The Employer will provide
such Employee with group medical, dental plan, and life insurance coverage,
paid for by the Employer, that such employee was entitled to as of the date
the Termination Event occurs, for a period beginning with the date of the
Termination Event and continuing over the period for which he receives
severance benefits under subsection (a) above; provided, however, that if
the plan does not permit continued participation, then DVI shall reimburse
the Employee and his family member(s) for the cost of reasonable coverage
under personal medical and dental policies.
3.3 Retention Bonus. An Employee who remains employed with the Employer
for the 90-day period following the date of a Change of Control will be entitled
to receive a bonus in an amount equal to 1/12th of his annual salary rate in
effect on the date of the Change of Control. The bonus shall be paid in a single
sum as soon as practicable after 90 days following the Change of Control. Should
his employment terminate prior to the end of such 90-day period (other than a
termination for Cause or without Good Reason), he will receive his salary for
the remainder of the 90-day period at the salary rate in effect on the date of
termination; but, he will not receive the Retention Bonus.
3.4 Plan Not Funded. The Employer will not make any contributions to
fund this Plan. Any severance payments made pursuant to the Plan will be paid
out of the general funds of the Employer. An Employee will not have any secured
or preferred interest by way of trust, escrow, lien, or otherwise in any
specific assets. An Employee's rights shall be solely those of an unsecured
general creditor of the Employer.
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<PAGE> 8
3.5 Limitation on Payments. Amounts otherwise payable to Employees
under the Plan shall be limited to the extent required to avoid the imposition
of excise taxes on Employees under section 4999 of the Internal Revenue Code of
1986, as amended (the "Code"), or the disallowance of a deduction to the
Employer under section 280G(a) of the Code. Notwithstanding any other provision
of the Plan, severance benefits payable under Section 3.2 of the Plan, to the
extent they are parachute payments (as defined in section 280G(b)(2) of the
Code), shall be modified to the extent necessary so that the aggregate present
value (as defined in section 280G(d)(4) of the Code) of such parachute payments
payable under the Plan and any other parachute payments payable pursuant to any
other plan or agreement between each Employee and the Employer shall be at least
one dollar less than three times each Employee's "base amount" (as defined in
section 280G(b)(3) of the Code).
PART 4. FORM AND TIMING OF SEVERANCE PAYMENTS
4.1 Severance Payments. Severance payments under Section 3.1 or 3.2
will be paid in accordance with the payroll practices of the Employer in effect
at the time of termination of employment.
4.2 Payments After Death. If any portion of an Employee's severance
payments remains unpaid at his death, the remaining amount will be paid in a
single sum to the Employee's estate.
PART 5. OTHER PLAN FEATURES
5.1 Assignment of Benefit Prohibited. No severance benefits under this
Plan shall be subject in any manner to anticipation, alienation, assignment
(either at law or in equity), encumbrance, garnishment, levy, execution, or
other legal or equitable process.
5.2 Claims. If an Employee believes he may be entitled to benefits
under the Plan that he has not received, or if he disagrees with any
determination that has been made, he should follow the following procedure:
(a) Making a Claim. An Employee's claim must be written and must be
delivered to the Plan Administrator. The Plan Administrator will approve or
disapprove the claim within 30 days following the receipt of the necessary
information, unless special circumstances require more time. If more time
is required, written notice of the extension will be forwarded to the
Employee before the extension begins. In no event will the extension exceed
60 days after the Plan Administrator receives the claim. If the claim is
wholly or partially denied, the Employee will receive a written notice
specifying: (i) the reasons for denial; (ii) the Plan provisions on which
the denial is based; and (iii) any additional information needed from the
Employee in connection with the claim and the reason such information is
needed. The Employee also will receive a copy of paragraph (b) below
concerning his right to request a review.
-6-
<PAGE> 9
(b) Requesting Review of a Denied Claim. The Employee may request
that a denied claim be reviewed. The Employee's request for review must be
written and must be delivered to the Plan Administrator within 60 days
after the Employee receives the written notice that his claim was denied.
The Employee's request for review may (but is not required to) include
issues and comments the Employee wants considered in the review. The
Employee may examine pertinent Plan documents by asking the Plan
Administrator. The Plan Administrator will act upon the appeal within 30
days after receiving it, unless special circumstances require more time. If
more time is required, written notice of the extension will be forwarded to
the Employee before the extension begins. In no event will the extension
exceed 60 days after the Plan Administrator receives the appeal. The
decision will be in writing and will specify the Plan provisions on which
it is based.
(c) Arbitration. In the event any controversy or claim arising out
of or relating to the Plan or the breach, termination, or validity thereof
is not resolved pursuant to subsection (a) above or subsection (b) above,
such controversy or claim shall be settled by arbitration in accordance
with the Commercial Arbitration Rules of the American Arbitration
Association, and judgment upon the award rendered by the arbitrator(s) may
be entered by any court having jurisdiction thereof. The parties shall
share equally the costs of arbitration.
(d) In General. This Section shall be the sole method in which
controversies or claims under this Plan shall be determined. All decisions
on claims and on review of denied claims under subsections (a) and (b)
above will be made by the Plan Administrator. The Plan Administrator may,
in its discretion, hold one or more hearings. If the Employee does not
receive a decision within the specified time, the Employee may assume the
claim was denied or re-denied on the date the specified time expired. The
Plan Administrator shall have the sole discretion to carry out its duties
under the Plan, to construe and interpret the provisions of the Plan, and
to determine all questions concerning benefit entitlements, including the
power to construe and determine disputed or doubtful terms. To the maximum
extent permissible under law, the Plan Administrator's determinations on
all such matters shall be final and binding on all persons involved.
5.3 Amendment or Termination of Plan. DVI, by written action of the
Board, reserves the right to amend the Plan or to terminate the Plan at any
time, provided that no such amendment or termination shall impair an Employee's
rights under the Plan if (i) a Change of Control occurs before the date of such
amendment or termination or (ii) if such amendment or termination occurs in
contemplation of an imminent Change of Control or pursuant to the request of any
party involved with an imminent Change of Control. If the Plan is amended or
terminated, all Employees will be so notified.
PART 6. MISCELLANEOUS
-7-
<PAGE> 10
6.1 Governing Law. The law of the State of Delaware shall be the
controlling state law in all matters relating to the Plan (without reference to
principles of conflict of laws), and shall apply to the extent it is not
preempted by ERISA.
6.2 Severability. If any provision of the Plan is held invalid or
unenforceable, such invalidity or unenforceability shall not affect any other
provision, and the Plan shall be construed and enforced as if such provision had
not been included.
6.3 Entire Agreement. This Plan contains the entire agreement by the
Employer with respect to the subject matter hereof. No modification or claim of
waiver of any of the provisions hereof shall be valid unless in writing and
signed by the party against whom such modification or waiver is sought to be
enforced.
6.4 Successor Employer
(a) Assumption of Plan. DVI shall require any successor (whether
direct or indirect, by purchase, merger, consolidation, or otherwise) to
all or substantially all of the business or assets of DVI to assume and
agree to perform this Plan. Such successor shall perform in the same manner
and to the same extent that DVI would have been required to perform if no
such succession had taken place. If DVI fails to obtain such assumption and
agreement prior to the effective date of any such succession (the
"Succession Date"), the failure will be a breach of this Plan. Such breach
shall entitle each Employee to the benefits described in Section 3.2 and to
the bonus described in Section 3.3 as if a Change of Control had occurred
on the day before such Succession Date and as if a Termination Event had
occurred on the Succession Date.
(b) Form of Payment. If DVI breaches this Plan under subsection (a)
above, the gross amount of the payments described in Sections 3.2 and 3.3
shall be paid in a single sum to each Employee within 10 days after the
Succession Date. In addition, DVI shall in good faith pay a single-sum
estimate of the cost of reasonable coverage for the Employee and his family
member(s) under personal medical policies for the entire period described
in Section 3.2(b). DVI shall pay such estimate to the Employee within 10
days after the Succession Date.
IN WITNESS WHEREOF, DVI, Inc. has caused this Plan to be duly executed
this ____ day of ________________________, 2000.
Attest: DVI, INC.
_________________________ By:______________________________
Melvin C. Breaux, Michael A. O'Hanlon,
Secretary President
<PAGE> 11
DVI, INC. SEVERANCE PAY PLAN - EXHIBIT A
PLAN PURPOSE
The Severance Pay Plan is intended to assist eligible employees whose employment
ends for other than Cause and Change of Control.
PLAN EFFECTIVE DATE
The Severance Pay Plan is in effect February 1, 2000.
WHO IS ELIGIBLE
You are eligible for Severance Pay Plan benefits if you are a full-time employee
of DVI, whose employment is terminated for one of the reasons indicated below.
The Plan covers all employees of DVI and it's majority- owned subsidiaries.
HOW THE PLAN WORKS
The Plan will provide severance pay benefits and continued group medical and
life insurance benefits to all eligible employees, if employment ends for one of
the following:
- Involuntary termination other than for Cause
- Reduction in force
- Resignation for Good Reason after Change-in-Control
You will not qualify for any benefit if employment ends under circumstances,
such as:
- Termination for Cause (unsatisfactory performance, misconduct, neglect
of duties, etc.)
- Voluntary resignation without Good Reason
- Retirement
- Death
- Become eligible for Long-Term Disability Plan benefits
Your benefit will be reduced by: - All deductions required by the law.
- Sick Pay
- Disability benefits
- Income tax or other amounts withheld by law
<PAGE> 12
YOUR BENEFIT AMOUNT
The Plan benefit amount is adjusted upward for years of service in accordance
with the following table:
YOUR MONTHLY BENEFIT AMOUNT
<TABLE>
<CAPTION>
SEVERANCE ONLY(i) CHANGE OF CONTROL CHANGE OF CONTROL
PLUS SEVERANCE(ii)
- --------------------------------------------------------------------------------------------------------
EMPLOYED STAY PERIOD(iii) BONUS
<S> <C> <C> <C> <C>
< 180 days 2 3 1 6
181 - 1 year 3 3 1 7
1 - 1.5 years 4 3 1 8
1.6 - 2 years 5 3 1 9
2 - 3 years 6 3 1 10
3 - 4 years 8 3 1 12
4 - 5 years 10 3 1 14
5 - 6 years 11 3 1 15
6 - 7 years 12 3 1 16
7 - 8 years 12 3 1 16
8 + 12 3 1 16
</TABLE>
(i) SEVERANCE ONLY: Employee receives Severance Only if termination for other
than Cause and no Change of Control has occurred.
(ii) CHANGE OF CONTROL PLUS SEVERANCE: Employee receives total amount of the
Severance Only plus Change of Control amounts as they apply.
(iii) STAY PERIOD: Assumes Change of Control. Employee guaranteed 90 days from
date of Change of Control. Explanation: After 90 days, Employee is entitled to
Bonus (one months salary) paid shortly after 90th day plus Severance Pay. If
employee is terminated before 90 days, Employee is entitled to balance of 90
days salary and Severance Pay, but no Bonus Payment.
HOW PAYMENTS ARE MADE
Your payments will be made in a number of periodic installments paid through the
payroll department. The number and timing of such payments will be provided
through the existing payroll system used by the Employer.
If you die before you receive your entire benefit, DVI will pay the remainder in
a lump sum payment to your estate.
NOTE: Your employment ends on or before the date Severance Plan payments begin.
Severance Plan payments are not to be construed as an employment continuation.
WHEN BENEFITS END
You will stop receiving benefits if:
- You have received all payments to which you are entitled.
- You are reemployed by DVI or an eligible affiliate
WRITTEN RELEASE
DVI will require you to complete a written release before making any severance
payments to you.
PLAN DOCUMENT
You are entitled to receive a copy of the DVI, Inc. Severance Pay Plan upon
request to the DVI Human Resources Department Manager.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 10-Q FOR
QUARTER ENDING 12/31/99 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
10-K FOR YEAR ENDED 6/30/99.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 69,967
<SECURITIES> 0
<RECEIVABLES> 1,096,230
<ALLOWANCES> 14,684
<INVENTORY> 0
<CURRENT-ASSETS> 1,151,513
<PP&E> 9,269
<DEPRECIATION> 4,652
<TOTAL-ASSETS> 1,264,554
<CURRENT-LIABILITIES> 382,051
<BONDS> 0
0
0
<COMMON> 71
<OTHER-SE> 203,477
<TOTAL-LIABILITY-AND-EQUITY> 1,264,554
<SALES> 0
<TOTAL-REVENUES> 43,175
<CGS> 0
<TOTAL-COSTS> 19,326
<OTHER-EXPENSES> 9,569
<LOSS-PROVISION> 3,635
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 10,645
<INCOME-TAX> 4,843
<INCOME-CONTINUING> 5,802
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,802
<EPS-BASIC> 0.41
<EPS-DILUTED> 0.38
</TABLE>
