SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
X OF THE SECURITIES EXCHANGE ACT OF 1934.
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For the quarterly period ended: December 31, 1994
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
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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 Number)
ONE PARK PLAZA, SUITE 800
IRVINE, CALIFORNIA 92714
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number including area code: (714) 474-5800
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 issuer's classes
of common stock, as of the latest practical date:
Common Stock, $.005 par value - 6,684,324 shares as of January 31, 1995.
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DVI, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION: Page Number
Item 1. Financial Statements:
Consolidated Balance Sheets -
December 31, 1994 (unaudited) and June 30, 1994 3 - 4
Consolidated Statements of Operations -
Three months and six months ended December 31, 1994
and 1993 (unaudited) 5
Consolidated Statements of Shareholders' Equity -
From July 1, 1993 through December 31, 1994 (unaudited) 6
Consolidated Statements of Cash Flows -
Six months ended December 31, 1994 and 1993 (unaudited) 7 - 8
Notes to Consolidated Financial Statements (unaudited) 9
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 10 - 15
PART II. OTHER INFORMATION 17
SIGNATURES 18
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DVI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31, June 30,
1994 1994
CASH AND CASH EQUIVALENTS $ 357,549 $ 1,713,769
RESTRICTED CASH AND CASH EQUIVALENTS 12,048,009 13,064,814
INVESTMENT IN DIRECT FINANCING LEASES AND
NOTES SECURED BY EQUIPMENT:
Receivable in installments (net of
allowance of $2,965,732 at December 31,
1994 and $2,497,916 at June 30, 1994) 345,097,033 250,854,526
Receivable in installments - related parties 9,027,867 16,427,684
Residual valuation 3,993,387 3,730,592
Unearned income (62,440,093) (47,643,772)
Net investment in direct financing
leases and notes secured by equipment 295,678,194 223,369,030
OTHER RECEIVABLES:
From sale of leases and notes secured
by equipment 118,143 911,585
Patient service accounts receivable 2,282,055 3,667,123
Notes collateralized by medical receivables 10,564,207 6,006,600
Total other receivables 12,964,405 10,585,308
EQUIPMENT ON OPERATING LEASES
(net of accumulated depreciation of
$1,701,192 at December 31, 1994 and
$1,163,591 at June 30, 1994). 4,919,204 2,893,683
FURNITURE AND FIXTURES
(net of accumulated depreciation of $660,114
at December 31, 1994 and $525,032 at
June 30, 1994) 859,378 817,135
INVESTMENTS IN INVESTEES 6,653,885 4,646,382
GOODWILL, NET 1,957,586 2,024,253
OTHER ASSETS 3,851,359 6,834,972
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TOTAL ASSETS $339,289,569 $265,949,346
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DVI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
December 31, June 30,
1994 1994
ACCOUNTS PAYABLE $ 10,297,279 $ 23,861,905
OTHER ACCRUED EXPENSES 5,471,238 8,215,021
SHORT-TERM BANK BORROWINGS 127,297,086 34,586,373
DEFERRED INCOME TAXES 2,738,026 2,329,205
LONG-TERM DEBT:
Discounted receivables (primarily nonrecourse) 143,524,132 148,851,584
Convertible subordinated notes 13,715,321 14,112,000
Total long-term debt, net 157,239,453 162,963,584
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TOTAL LIABILITIES 303,043,082 231,956,088
----------- -----------
SHAREHOLDERS' EQUITY:
Preferred Stock, $10.00 par value; authorized
100,000 shares; no shares issued
Common Stock, $.005 par value; authorized
13,000,000 shares; outstanding 6,674,324
shares at December 31, 1994 and 6,567,295
shares at June 30, 1994 33,372 32,836
Additional capital 29,001,888 28,155,502
Retained earnings 7,211,227 5,804,920
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TOTAL SHAREHOLDERS' EQUITY 36,246,487 33,993,258
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $339,289,569 $265,949,346
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DVI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ended Six Months End
December 31, December 31,
1994 1993 1994 1993
FINANCE AND OTHER INCOME:
Amortization of finance income $7,906,700 $3,912,608 $14,458,816 $7,438,974
Gain on sale of financing transactions 625,187 111,471 625,187 245,862
Other Income 163,152 542,840 808,290 1,145,295
Finance and other income 8,695,039 4,566,919 15,892,293 8,830,131
Interest expense 4,984,791 1,891,774 9,135,943 3,509,165
MARGINS EARNED 3,710,248 2,675,145 6,756,350 5,320,966
Selling, General and Administrative 2,186,086 1,669,330 4,347,200 3,680,937
EARNINGS BEFORE PROVISION FOR INCOME TAXES AND
EQUITY IN NET LOSS OF INVESTEES 1,524,162 1,005,815 2,409,150 1,640,029
PROVISION FOR INCOME TAXES 631,150 422,438 1,002,843 688,809
EARNINGS BEFORE EQUITY IN NET LOSS OF INVESTEES 893,012 583,377 1,406,307 951,220
EQUITY IN NET LOSS OF INVESTEES 136,000 174,150
NET EARNINGS $ 893,012 $ 447,377 $ 1,406,307 $ 777,070
NET EARNINGS PER COMMON AND COMMON
EQUIVALENT SHARE $ .13 $ .07 $ .21 $ .12
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING 6,831,000 6,783,000 6,816,000 6,700,000
</TABLE>
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DVI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<S> <C> <C> <C> <C> <C>
From July 1, 1993 through December 31, 1994
Common Stock Total
$.005 Par Additional Retained Shareholders'
Shares Amount Capital Earnings Equity
BALANCE AT JULY 1, 1993 6,530,295 $32,652 $27,941,466 $6,690,296 $34,664,414
Issuance of common stock upon
exercise of stock options 37,000 184 214,036 214,220
Net earnings (885,376) (885,376)
BALANCE AT JUNE 30, 1994 6,567,295 $32,836 $28,155,502 $5,804,920 $33,993,258
Issuance of common stock upon:
Exercise of stock options 59,860 300 346,622 346,922
Conversion of subordinate notes 47,169 236 499,764 500,000
Net earnings 1,406,307 1,406,307
BALANCE AT DECEMBER 31, 1994 6,674,324 $33,372 $29,001,888 $7,211,227 $36,246,487
</TABLE>
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DVI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<S> <C> <C>
Six Months Ended
December 31,
1994 1993
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 1,406,307 $ 777,070
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Equity in net loss of investees 172,230
Depreciation and amortization 3,173,085 1,407,928
Additions to allowance accounts, net 747,738 424,155
Deferred income taxes 408,821 631,732
Changes in assets and liabilities
(net of effects from purchase
of acquired entities):
(Increases) decreases in:
Restricted cash 1,016,805 (22,496,733)
Accounts receivable (3,609,819) (1,306,371)
Receivables from sale of leases 793,442 2,537,134
Other assets 2,983,613 (432,779)
Increases (decreases) in:
Accounts payable (13,564,626) 10,691,681
Other accrued expenses (2,743,783) 1,894,315
Total adjustments (10,794,724) (6,476,708)
Net cash used in operating activities (9,388,417) (5,699,638)
CASH FLOWS FROM INVESTING ACTIVITIES:
Cost of equipment and notes acquired (122,980,657) (69,550,341)
Receipts in excess of amounts included in income 43,461,050 16,500,973
Furniture and fixtures additions (177,324) (350,017)
Investments in common and preferred stock of investees 25,000
Cash received from sale of common stock of investee 540,000
Net cash used in investing activities (79,696,931) (52,834,385)
(Continued)
</TABLE>
PAGE
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DVI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<S> <C> <C>
Six Months Ended
December 31,
1994 1993
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options $ 345,865 $ 1,369
Borrowings:
Short-term 200,488,954 77,155,407
Long-term 20,242,362 79,050,000
Repayments:
Short-term (107,778,241) (92,652,687)
Long-term (25,569,812) (5,608,788)
Net cash provided by financing activities 87,729,128 57,945,301
NET DECREASE IN CASH AND
CASH EQUIVALENTS 1,356,220 588,722
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 1,713,769 2,199,208
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 357,549 $1,610,486
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 9,219,505 $ 3,540,735
Income taxes $ 637,212 $ 46,245
SUPPLEMENT TO DISCLOSURE OF NON-CASH TRANSACTIONS:
Receipt of IPS Health Care, Inc.
Series G preferred stock (Note 2) $ 2,000,000
As of December 31, 1994, $500,000 of subordinated notes
had been converted into common stock
</TABLE>
PAGE
<PAGE>
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission
("Commission"). Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles ("GAAP") for
complete financial statements. The consolidated financial statements should
be read in conjunction with the financial statements and notes thereto included
in the Company's latest Annual Report on Form 10-K.
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 sheet as of
December 31, 1994 and June 30, 1994, the consolidated statements of operations
for the three and six month periods ended December 31, 1994 and 1993, the
consolidated statements of shareholders' equity for the period from July 1,
1993 through December 31, 1994, and the consolidated statements of cash flows
for the six month periods ended December 31, 1994 and 1993. The results of
operations for the six month period ended December 31, 1994, are not
necessarily indicative of the results of operations to be expected for the
entire fiscal year ending June 30, 1995.
Certain amounts as previously reported have been reclassified to conform to
the period ended December 31, 1994 presentation.
NOTE 2 - HEDGING TRANSACTIONS
The Company's equipment financing transactions are all structured on a fixed
interest rate basis. Although the Company permanently funds these transactions
on a fixed interest rate basis, it uses interim funding facilities until
permanent funding is obtained. Because funds borrowed through interim funding
facilities are obtained on a floating interest rate basis, the Company uses
hedging techniques to protect its interest rate margins during the period
that interim funding facilities are used. During the first quarter of fiscal
1995, the Company took hedging positions aggregating $45 million. In the
second quarter, the Company took additional hedging positions aggregating $25
million and closed out a $23 million hedging position when it permanently
funded a portfolio of transactions. At December 31, 1994, the Company had
unrealized market value gains on its hedging transactions of $468,000. The
Company's sole reason for using hedging techniques is to offset the loss that
occurs when transactions are funded on an interim basis and interest rates
rise causing the Company's interest rate margins on the transactions to
decline. Therefore, gains generated through hedging techniques only benefit
the Company to the extent they offset corresponding losses for increasing
interest rates until transactions are permanently funded. During the quarter
the Company completed a whole loan sale which resulted in a gain of $408,000
from the discounted payment stream and a market value gain of $217,000 related
to a hedging transaction entered into to protect the portfolio of transactions
sold. The combined gain of $625,000 was recorded under gain on sale of
financing transactions. The Company's fixed-rate portfolio was sold on a
basis which varied with changes in commercial paper rates and it purchased a
two year unamortizing interest rate cap to protect its margin.
<PAGE>
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
General
Equipment Financing. For accounting purposes, the Company classifies the
equipment financing transactions it originates as (i) notes secured by
equipment, (ii) direct financing leases and (iii) operating leases. Notes
secured by equipment and direct financing leases are those transactions in
which the obligor generally has substantially all the benefits and risks of
ownership of the equipment. Operating leases are generally those which only
provide for the use of the asset. The different classifications can result
in accounting treatments that provide substantially different income and costs
during the transaction term.
The Company reports income under the categories of "amortization of finance
income," "gain on sale of financing transactions" and "other income."
"Amortization of finance income" consists of the interest component of payments
received on notes secured by equipment (or medical receivables) and direct
financing leases, and is calculated using the interest method whereby the
income is reported over the term of the transaction. "Amortization of finance
income" includes any income derived from the sale of equipment at the end of
the transaction term under fair market value transactions. "Gain on sale of
financing transactions," consist of gains recognized when the Company
permanently funds transactions through whole loan sales. "Other income"
consists primarily of late charges, income from operating leases and income
from the billing and collecting of medical receivables. The Company stopped
billing and collecting new medical receivables late in fiscal 1994, but will
continue to receive income as the receivables outstanding are collected.
Notes secured by equipment and direct financing leases are noncancelable
transactions under which the obligor must make all scheduled payments,
maintain the equipment, insure the equipment against casualty loss and pay
all equipment related taxes. In fair market value transactions the obligor
has the option to purchase the equipment at the end of the initial financing
term for its fair market value or extend the financing term under renegotiated
payments. If neither of these options is exercised, the Company is required
to sell or lease the equipment to another user.
In accordance with GAAP, all income from transactions classified as notes
secured by equipment and direct financing leases that are permanently funded
through asset securitization or other means whereby the Company treats the
funds received as debt, is deferred and recognized using the interest method
over the term of the transactions. If an obligor under a transaction defaults,
the Company may not receive all or a portion of the unamortized income
associated with the transaction.
Medical Receivables Financing. A small portion of the Company's business is
providing loans secured by medical receivables and purchasing medical
receivables. The respective interest income and fee income from medical
receivable transactions is recognized over the term of the transactions which
is typically one to three years, and is recorded as amortization of finance
income.
Discontinued Operations. There has been no adverse change in the Company's
discontinued operations which would indicate any additional losses will be
incurred by the Company.
Results of Operations
Impact of Financing Strategies on Results of Operations. The Company's
strategy is to obtain permanent funding for most of its equipment financing
transactions through asset securitization and the remainder through whole
loan sales. Although funding transactions through asset securitization is
generally more cost effective than using whole loan sales, when management
believes the Company is exposed to excessive transaction concentration risks
it uses whole loan sales to remove certain transactions from its portfolio.
The Company also funds certain transactions through whole loan sales because
it enables the Company to permanently fund the transactions sooner than might
otherwise be possible. This is beneficial in periods of rising interest rates
because once a transaction is permanently funded the interest rate spread is
fixed for the remaining term.
When funding transactions through an asset securitization, the issuer can
generally structure the transaction so that the proceeds received are treated
either as borrowed funds (i.e., debt on the issuer's financial statements), or
funds it receives as a result of the sale of the transactions (i.e., from a
whole loan sale). The accounting method to report finance income differs
significantly depending on which of the two structures the issuer uses.
When the proceeds received are treated as long term debt, the issuer reports
finance income over the term of the transactions funded. When the proceeds
are treated as funds received from the sale of transactions most of the
income is reported at the time the transactions are funded. The Company uses
the first alternative when it is the issuer in an asset securitization which
means the Company treats the proceeds received as long term debt on its
financial statements and reports the finance income over the term of the
transactions that are funded. When the Company funds its transactions
through whole loan sales, most of the unamortized finance income is reported
at the time the funding takes place. Since DVI funds most of its transactions
by issuing securitized notes and therefore reports the finance income from
these transactions over approximately five years, its near term reported
earnings are comparatively lower than they would be if the Company treated
all of the loans it funds as whole loan sales.
The Company entered into transactions which generated total receivables of
$160.4 million for the six months ended December 31, 1994, as compared to
$102.3 million for the six months ended December 31, 1993. The Company
generated an increased dollar volume of equipment financing receivables for
the six months ended December 31, 1994, compared to the six months ended
December 31, 1993, primarily because the Company expanded its equipment
financing capabilities. The Company experienced increases in: (i) the
financing transaction portfolio to $311.2 million at December 31, 1994, from
$232.3 million at June 30, 1994 and (ii) the related liabilities to $294.8
million at December 31, 1994, from $221.4 million at June 30, 1994.
Margins Earned
Margins earned were $3.7 million for the three months ended December 31, 1994
as compared to $2.7 million for the three months ended December 31, 1993.
For the six months ended December 31, 1994, margins earned were $6.8 million
as compared to $5.3 million for the same period in the prior year.
Amortization of finance income increased to $7.9 million for the three months
ended December 31, 1994 from $3.9 million for the three months ended December
31, 1993. For the six months ended December 31, 1994, amortization of finance
income increased to $14.5 million from $7.4 million in the prior year. The
increase in the current fiscal year over the prior year for both the three and
six month periods was primarily a result of the overall increase in the size
of the Company's equipment financing portfolio.
Gains on sale of financing transactions increased to $625,000 in the three
months ended December 31, 1994 compared with a gain of $111,000 in the same
period in the prior year. In the six months ended December 31, 1994, gains on
sale of financing transactions increased to $625,000 compared with a gain of
$246,000 in the same period in the prior year. The increase for both periods
in the current fiscal year is primarily a result of the overall growth in the
Company's volume of equipment financing transactions and the need to fund
certain transactions through whole loan sales to manage transaction
concentrations. (See Results of Operations. Impact of Financing Strategies
on Results of Operations.)
Other income, which consists of late charges, operating lease income, fees
from billing and collecting medical receivables management income and other
miscellaneous items, decreased to $163,000 for the three months ended December
31, 1994 as compared to $543,000 for the three months ended December 31, 1993.
For the six months ended December 31, 1994, other income decreased to
$808,000 from $1.1 million in the prior year.
Interest expense increased to $5.0 million for the three months ended December
31, 1994 from $1.9 million for the three months ended December 31, 1993. For
the six months ended December 31, 1994 interest expense increased to $9.1
million from $3.5 million during the same period in the prior year. The
increase in both the three and six month periods during the current fiscal
year is primarily a result of the growth of the Company's equipment financing
transaction portfolio. As a percentage of finance and other income, interest
expense was 57% in the three months ended December 31, 1994 as compared to 41%
in the same period in the prior year. As a percentage of finance and other
income, interest expense was 57% in the six months ended December 31, 1994 as
compared to 40% in the same period a year earlier. The increase in interest
expense as a percent of finance and other income in the three and six month
periods in the current fiscal year is primarily the result of (i) the Company
narrowing the interest rate spread between the cost of its funding and the
interest rate charged its customers, (ii) interest rate increases during the
year on funds borrowed on a floating rate basis under the Company's interim
funding facilities and (iii) the Company's strategy to originate financing
transactions in which the residual positions are not retained thereby reducing
the Company's rate of return and its income on the respective transactions.
Selling, General and Administrative Expense
Selling, general and administrative ("SG&A") expense increased to $2.2 million
for the three months ended December 31, 1994 from $1.7 million for the three
months ended December 31, 1993. For the six months ended December 31, 1994,
SG&A expense increased to $4.3 million from $3.7 million during the same period
in the prior year. The increase primarily reflects costs associated with the
increase in the Company's provision for doubtful accounts, additional personnel
and related costs. As a percentage of finance and other income, SG&A expense
was 25% for the three months ended December 31, 1994 versus 37% for the same
period last year. For the six months ended December 31, 1994, SG&A expense
was 27% versus 42% for the same period a year ago. The percentage decrease
in SG&A for both the three and six month periods during the current fiscal
year is a result the Company's ability to increase the volume of transactions
entered into and thus the size of its transaction portfolio without a
proportional increase in SG&A expense.
Net Earnings
The Company's net earnings were $893,000, or $.13 per share, for the three
months ended December 31, 1994 as compared to $447,000, or $.07 per share,
for the three months ended December 31, 1993. For the six month ended December
31, 1994, net earnings increased to $1.4 million from $777,000 for the same
period in the prior year.
Liquidity and Capital Resources
Cash Flows
The Company's cash and cash equivalents at December 31, 1994 and June 30, 1993
was $358,000 and $1.7 million, respectively. The following describes the
changes from June 30, 1994 to December 31, 1994 in the items which had the most
significant impact on the Company's cash flow during the six months ended
December 31, 1994.
Six Months Ended
The Company's net cash used in operating activities was $9.4 million during
the six months ended December 31, 1994 compared to $5.7 million net cash used
for the six months ended December 31, 1993. The increase in cash utilization
during the six months ended December 31, 1994 almost entirely stems from a
reduction in the Company's accounts payable from June 30, 1994 by $13.6
million. The decrease in accounts payable, which consists primarily of amounts
due vendors of equipment that the Company has financed, stems from payments
made to these vendors during the six months ended December 31, 1994.
The Company's net cash used in investing activities increased to $79.7
million during the six months ended December 31, 1994 as compared to $52.8
million for the six months ended December 31, 1993. This increase is primarily
attributed to costs of equipment and notes acquired for the Company's financing
transactions which increased to $123.0 million during the six months ended
December 31, 1994 compared to an increase of equipment and notes acquired of
$69.6 million for the six months ended December 31, 1993.
The Company's net cash provided by financing activities was $87.7 million
during the six months ended December 31, 1994 from $57.9 million for the six
months ended December 31, 1993. This results from an increase in the Company's
short-term debt of $92.7 million for the six months ended December 31, 1994 as
compared to a $15.5 million decrease in short-term debt for the six months
ended December 31, 1993.
General
The Company's equipment financing business requires substantial amounts of
capital and borrowings. The Company's funding needs arise from financing
transaction originations, repayments of debt, payments of operating and
interest expenses, financing assets that must be funded by the Company to
credit enhance its asset securitization transactions and other fundings,
capital expenditures and repurchases of financing transactions under recourse
obligations. The Company obtains interim funding from commercial and
investment banks. The Company's interim credit borrowings are recourse
obligations, while the Company's permanent funding is obtained principally on
a limited recourse basis. In the case of limited recourse funding, the Company
retains some risk of loss because it shares in any losses incurred and/or it
may forfeit any residual interest in the underlying finance asset if a default
occurs.
A substantial portion of the Company's debt represents permanent funding of
equipment financing receivables obtained on limited recourse basis and is
structured so that the cash flow from the underlying receivables services the
debt. Most of the Company's short-term borrowings are used to temporarily fund
equipment financing transactions and are repaid with the proceeds obtained from
the permanent funding and cash flow from the underlying transactions. Because
the historical default rate on transactions originated has been low, the
Company has been able to service its long-term and short-term debt effectively.
While the Company expects this pattern to continue, a sharp increase in the
defaults on transactions originated could adversely affect the Company's
ability to meet its long-term and short-term debt obligations.
As a result of the rapid growth of the Company's equipment financing business,
the amount of interim and permanent funding it requires has significantly
increased. To meet its requirements for increased interim funding, the Company
has expanded its interim credit facilities with banks, and has obtained interim
credit facilities with investment banking firms which underwrite or place its
asset securitizations. To meet its requirement for increased permanent funding,
the Company has enhanced its ability to fund transactions on both an asset
securitization and whole loan sale basis. If suitable sources of both interim
and permanent funding are not available in the future, the Company's growth
will be constrained and it may be forced to use less attractive funding sources
in order to ensure its liquidity.
Working capital financing for equipment financing customers is occasionally
provided by the Company where the loan is adequately secured by acceptable
collateral (accounts receivable) and all reasonable assurance exists that the
loan will be repaid pursuant to an established repayment program in the normal
course of business.
In June 1994, the Company completed a $15.0 million private placement of
convertible subordinated notes. The notes (i) are convertible into common
shares at $10.60 per share at the discretion of the noteholders, (ii) bear
interest at a rate of 9 1/8% payable in quarterly installments of interest
only and (iii) mature in June 2002. The proceeds generated therefrom were
utilized by the Company to repay a portion of the existing debt under its
principal interim funding credit facility and on a limited basis to fund
medical receivable financing transactions. The Company issued the notes to
increase its capital base and, therefore, increase its access to both interim
and permanent funding sources. The Note Purchase Agreement with respect to the
Notes contains, among other things, limitations on the Company's rights to pay
dividends and to make certain other kinds of payments. That Agreement also
prohibits the Company from incurring additional indebtedness unless certain
financial ratio tests are met. As of December 31, 1994, $500,000 of the notes
had been converted into common shares.
The Company believes that its present interim and permanent funding sources
are sufficient to fund the Company's current needs for its equipment financing
operations. However, the Company will have to expand both its interim and
permanent funding capacity to meet the Company's projected growth of its
equipment financing business. In addition, the growth of the Company's medical
receivables financing activity is dependent on the Company's ability to obtain
suitable funding for its medical receivables financing business. The
continuing expansion of the Company's businesses will also require additional
capital which the Company may seek to obtain from offerings of equity
securities and/or additional long-term debt financing. If the Company is
unable to continue to increase its capital base, its ability to expand its
financing business will be significantly constrained.
Interim Funding Facilities
At December 31, 1994, the Company had an aggregate of $186 million in interim
funding facilities. The Company's primary credit facility, pursuant to a
revolving credit agreement with a syndicate of banks (the "Bank Revolving
Credit Agreement"), provides the Company with $79 million in borrowing
capacity. Borrowings under the facility bear interest at the Company's option
at either a variable rate equal to 25 basis points over the prime rate
established by National Westminster Bank USA or a fixed rate equal to 200 basis
points over a 30, 60 or 90-day LIBOR rate. In January 1995, the Prudential
Facility was raised to 100 million. The Revolving Credit Agreement is
renewable annually at the bank syndicate's discretion. The credit agreement
provides that if the banks elect not to renew the facility at the end of its
stated term, the outstanding loans automatically convert to four-year
amortizing term loans at slightly higher interest rates. The Company also has
a $75 million interim funding facility with Prudential Securities Realty
Funding Corporation (the "Prudential Facility"). The Prudential Facility
provides the Company with interim financing in order to provide funding for
certain transactions to be securitized under the Company's arrangements with
that firm. Drawings under the facility bear interest at a fixed rate equal to
90 basis points over the 30 day LIBOR rate. The Company has a $29 million
facility with a financing institution to fund equipment financing transactions
on a whole loan sale basis. The Company also has $2.6 million of additional
interim funding facilities with other financial institutions. On December 31,
1994, an aggregate of approximately $128 million was outstanding under the
Company's interim facilities.
The Revolving Credit Agreement requires the Company to limit all of its
borrowings to specified levels determined by ratios based on the Company's
tangible net worth and, under certain circumstances, to use specified
percentages of internally generated funds to pay for equipment purchases.
The Revolving Credit Agreement also restricts the payment of dividends by DVI
Financial Services to the Company under certain circumstances. In addition,
the amount of funds available at any given time under the Revolving Credit
Agreement is constrained by the amount, type and payment status of the
Company's equipment financing receivables. If, at any time, a significant
amount of the Company's receivables were to become delinquent, the availability
of credit under the Revolving Credit Agreement would be reduced and, under the
Revolving Credit Agreement and other circumstances, the Company could be
required to prepay a portion of the amounts outstanding under its other
interim funding facilities. Since the Revolving Credit Agreement was
established, the only collateral that was eligible for borrowing purposes
was equipment financing transactions. To fund the growth of its medical
receivables financing business, the Company requested that the banks
participating in the Revolving Credit Agreement begin to allow the Company to
use the credit facility to fund medical receivable loans. During the quarter
ended December 31, 1994, the banks agreed to permit borrowings by the Company
of up to $7.0 million collateralized by medical receivables.
The Company's use of asset securitization significantly affects its need for
interim funding facilities. When using asset securitization, the Company is
required to hold transactions in interim funding facilities until a sufficient
quantity is accumulated to meet the various requirements of the rating agencies
and others involved, and to make a securitization cost effective. Generally,
transactions totalling at least $50 million must be placed in each asset
securitization transaction.
When the Company borrows funds through interim funding facilities, it is
exposed to a certain degree of risk caused by interest rate fluctuations.
Although the Company's equipment financing transactions are structured and
permanently funded on a fixed interest rate basis, it uses interim funding
facilities until permanent funding is obtained. Because funds borrowed through
interim funding facilities are obtained on a floating interest rate basis, the
Company uses hedging techniques to protect its interest rate margins during the
period that interim funding facilities are used. During the first quarter of
fiscal 1995, the Company took hedging positions aggregating $45 million. In
the second quarter, the Company took additional hedging positions aggregating
$25 million and closed out a $23 million hedging position when it permanently
funded a portfolio of transactions. At December 31, 1994, the Company had
unrealized market value gains on its hedging transactions of $468,000. The
Company's sole reason for using hedging techniques is to offset the loss that
occurs when transactions are funded on an interim basis and interest rates rise
causing the Company's interest rate margins on the transactions to decline.
Therefore, gains generated through hedging techniques only benefit the Company
to the extent they offset corresponding reduction in margin due to rising
interest rates until the transactions are permanently funded. During the
quarter the Company completed a whole loan sale funding which resulted in a
gain of $408,000 from the discounted payment stream and a market value gain of
$217,000 related to a hedging transaction entered into to protect the portfolio
of transactions sold. The combined gain of $625,000 was recorded under gain on
sale of financing transactions. Because the portfolio of transactions sold
were structured on a fixed interest rate basis and the transactions were funded
with the cash proceeds from the issuance of commercial paper, the Company
purchased a two year unamortizing interest rate cap to protect its margins.
Permanent Funding
DVI has completed five asset securitizations totalling $238.5 million,
including a public debt issue of $75.7 million and three private placements of
debt totalling $142.1 million and one privately placed sale at $20.7 million.
In January 1994, the Company filed a $350 million registration statement with
the Commission to provide for the issuance of securitized debt in a series of
transactions pursuant to the Commission's "shelf" registration rule. The
Company expects that it will continue to structure its asset securitizations
on both a public and private basis. The $75.7 million public debt issue was
the initial funding under the $350 million shelf registration.
Generally, the Company does not have binding commitments for permanent funding,
either through asset securitizations or whole loan sales . At December 31,
1994, the Company had a commitment from a financial institution to fund
approximately $29 million on a whole loan sale basis. The Company expects that
this funding will occur during the third or fourth quarters of fiscal 1995.
In addition, the Company has non-binding agreements with investment banking
entities to fund future equipment financing transactions through asset
securitization. While the Company expects to be able to continue to obtain
the permanent funding it requires for its equipment financing business, there
can be no assurance that it will be able to do so. If, for any reason, any of
these types of funding were unavailable in the amounts and on terms deemed
reasonable by the Company, the Company's equipment financing activities would
be adversely affected.
The Company believes cash flows generated from operations and its interim
credit facilities are sufficient to meet its near term obligations.
Inflation
The Company does not believe that inflation has had a material effect on its
operating results during the past three years. There can be no assurance that
the Company's business will not be adversely affected by inflation in the
future.
New Accounting Standards
The Company adopted Statement of Financial Accounting Standards No. 107,
"Disclosures About Fair Value of Financial Instruments," in June 1994.
The Company is unaffected by Statement of Financial Accounting Standards
No. 106, "Employers' Accounting for Post-Retirement Benefits Other Than
Pensions," and Financial Accounting Standard No. 112, "Employers Accounting for
Post Retirement Benefits" because it does not offer such benefit or
compensation plans to its employees.
Income Tax Issues
Historically, the Company has deferred a substantial portion of its Federal
and state income tax liability because of its ability to obtain depreciation
deductions from transactions structured as fair market value leases. Over the
past eighteen months, the proportion of transactions originated by the Company
structured as fair market value transactions has declined significantly, and
the Company expects that trend to continue. In addition, the Company disposed
of a portion of its equipment residual portfolio in fiscal 1994 and may
continue to do so in future periods. As a result, the Company expects that
in future periods its ability to defer its income tax liability will
correspondingly decline.
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PART II - OTHER INFORMATION
Items 1 through 3 have been omitted because the related information is either
inapplicable or has been previously reported.
Item 4. Submission of Matters to a Vote of Securities Holders
(a) The Company's Annual Meeting of Stockholders was held on
December 16, 1994.
(b) Proxies for the Annual Meeting were solicited pursuant to
Regulation 14 under the Securities Exchange Act of 1934. There
were no solicitations in opposition to management nominees as
listed in the Proxy Statement and all such nominees were elected.
(c) At the Annual Meeting, the Company's stockholders approved an
amendment to the Company's 1986 Incentive Stock Option Plan to
increase the number of shares for which options may be granted
thereunder from 950,000 to 1,250,000 common shares. Of the shares
represented at the meeting, 5,002,572 voted in favor of the
amendment, 385,375 voted against the amendment and 56,207 shares
formally abstained from voting or did not vote.
Item 6. Exhibits and Reports on Form 8-K
(a) None.
(b) The Company has not filed any reports on Form 8-K during the
quarter ended September 30, 1994.
PAGE
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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)
/s/DAVID L. HIGGINS
David L. Higgins
Chief Executive Officer
(Principal Executive Officer)
/s JAMES G. COSTELLO
James G. Costello
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
February 13, 1995
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