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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________________
F O R M 10 - K/A-1
(Mark One)
/x/ AMENDMENT NO.1 TO ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1994
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
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DVI, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
DELAWARE 22-2722773
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(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER
OR ORGANIZATION) IDENTIFICATION NO.)
ONE PARK PLAZA, SUITE 800
IRVINE, CALIFORNIA 92714
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (714) 474-5800
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
ON WHICH REGISTERED
-------------------------
COMMON STOCK
PAR VALUE $.005 PER SHARE NEW YORK STOCK EXCHANGE, INC.
- - ------------------------- -----------------------------
TITLE OF CLASS
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
UNITS CONSISTING OF ONE SHARE OF WARRANTS TO PURCHASE
COMMON STOCK PAR VALUE $.005 PER COMMON SHARES
----------------------
SHARE (A "COMMON SHARE") AND ONE (TITLE OF CLASS)
WARRANT TO PURCHASE AN ADDITIONAL
COMMON SHARE
- - ---------------------------------
(TITLE OF CLASS)
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
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Yes X No
----- -----
The aggregate market value of the Common Stock held by nonaffiliates
of the Registrant was approximately $42,938,790 based upon the last reported
sale price of the Common Stock on the New York Stock Exchange on September
30,1994.
As of December 31, 1994, the Registrant had 6,674,324 shares of Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the Registrant's
definitive Proxy Statement to be filed with the Commission within 120 days
after the close of the Registrant's fiscal year.
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This Amendment on Form 10-K/A-1 is being filed for the purpose of amending Part
I, Items 1 and 7, Consolidated Statements of Operations, Notes 2, 3, 6, 9, 15
and 17 to Consolidated Financial Statements, Part III, Item 10 and Financial
Statement Schedules II and IX to the Registrant's Annual Report on Form 10-K
for the year ended June 30, 1994 filed with the Securities and Exchange
Commission on October 13, 1994 (the "Form 10-K") to provide certain additional
information at June 16, 1995. Since this Amendment is being filed in June
1995, this Amendment should be read in conjunction with the information
subsequent to the Form 10-K contained in the Registrant's Quarterly Report on
Form 10-Q filed for the period ended September 30, 1994, Quarterly Report on
Form 10-Q/A-1 for the period ended December 31, 1994 and the Quarterly Report
on Form 10-Q for the period ended March 31, 1995.
PART I
ITEM 1. BUSINESS
GENERAL
DVI, Inc. (the "Company" or "DVI") is engaged in the business of providing
equipment financing and related services for users of diagnostic imaging,
radiation therapy and other medical technologies. The Company's customer base
consists principally of outpatient healthcare providers, physician groups and
hospitals. The Company believes that it is one of the leading independent
sources of financing of diagnostic imaging and radiation therapy equipment for
those categories of customers.
The Company's business has grown since its acquisition in January 1993 of
Medical Equipment Finance Corporation ("MEF Corp."). The Company acquired MEF
Corp. because MEF Corp. had (i) numerous long standing relationships with
equipment users in the Company's targeted markets; (ii) well established
relationships with a number of medical equipment vendors including a majority
of the largest manufacturers of diagnostic imaging equipment and (iii) valuable
relationships with funding sources, credit rating agencies and others in the
financial market. The Company believes the assets received in this acquisition
have and will provide the Company growth opportunities. This growth is
illustrated by the fact that for the fiscal years ended June 30, 1992, 1993 and
1994, the volume of financing transactions originated by DVI (measured by
dollar amount financed) was $46.4 million, $58.6 million and $163.3 million,
respectively. The equipment financed typically ranges in cost from $100,000 to
$2.0 million.
Essentially all of DVI's equipment financing transactions have a term of 60
months and are full payout transactions that enable the Company to recover its
profit plus all the costs of acquiring and financing the equipment during the
initial non-cancelable financing term. Prior to fiscal 1994, the Company often
retained the residual value rights to the equipment it financed even though it
made no "residual investment" in the equipment. Residual investment represents
the amount that would normally be invested in a lease that, when combined with
the present value of the noncancelable rental stream, equals the equipment
acquisition cost. Subsequent to the acquisition of MEF Corp., the Company
changed its strategy whereby it would, with minor exception, not retain the
residual value rights to the equipment it financed. The Company believes its
residual value exposure is limited. As of June 30, 1994, the residual
valuation on the Company's balance sheet represents only 1.3% of its $282.4
million gross financed assets.
The Company focuses its sales and marketing efforts on five overlapping areas
of the healthcare finance market: (i) financing higher-cost medical equipment
such as computed tomography ("CT"), magnetic resonance imaging ("MRI") and
radiation therapy systems (this has historically been the primary market for
DVI); (ii) financing other generally less expensive types of diagnostic imaging
equipment (such as nuclear medicine, ultrasound and X-ray systems); (iii)
providing customized equipment financing programs for moderately sized
manufacturers of medical devices used in patient treatment; (iv) financing
equipment in general for hospitals; and (v) providing loans collateralized by
medical receivables. The Company's strategy to compete successfully in these
areas include(s): (i) capitalizing on the strength of the established
relationships its sales personnel enjoys with numerous medical equipment users,
(ii) capitalizing on its strong relationships with a majority of the largest
manufacturers of diagnostic imaging equipment, (iii) expanding its presence in
the medical marketplace beyond diagnostic imaging equipment, and (iv)
continuing to refine its loan funding programs in an attempt to further reduce
its borrowing cost and thus improve its competitiveness.
The Company requires substantial amounts of interim and permanent funding for
its equipment financing transactions. The Company's interim funding needs are
addressed through lending facilities provided by banks and other financial
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ITEM 1. BUSINESS (CONTINUED)
GENERAL (CONTINUED)
institutions. At September 30, 1994, the Company had interim credit facilities
totalling $162.5 million. The Company's funding programs have been
continuously refined and upgraded since its inception. Beginning in fiscal
1991, the Company began moving away from whole loan sales as its principal
source of permanent funding in favor of asset securitization. In fiscal 1994,
92.6% of the permanent funding obtained by the Company was through asset
securitization. The Company believes asset securitization represents a
lower-cost and more readily accessible means of obtaining permanent funding
than the methods it previously used. To date, DVI has completed four asset
securitizations representing funding of $217.8 million.
Medical equipment financing has been DVI's core business since its formation in
1985. In 1991, the Company entered the business of operating and managing
outpatient healthcare facilities, and in June 1993 elected to discontinue this
segment of its business. This decision was based principally on DVI's decision
to focus its management and other resources on the Company's financial services
business, particularly in light of the growth which followed the acquisition of
MEF Corp. The Company also provides loans collateralized by medical
receivables.
INDUSTRY BACKGROUND
A significant portion of DVI's sales and marketing efforts have historically
been directed toward servicing the needs of equipment manufacturers and their
customers in the outpatient medical industry. The Company believes that over
the past decade the outpatient medical industry has been impacted by various
developments which are relevant to its business, the most significant of which
are as follows.
In the mid 1980's, non-hospital healthcare providers became major users of
high-cost medical equipment for the first time. The federal government 's
introduction of a fixed fee reimbursement system for Medicare in place of
"cost-plus" reimbursement began forcing hospitals to generate sufficient
utilization of equipment to justify its acquisition. Following the federal
government's lead, most insurance companies and other payors adopted a similar
reimbursement posture also limiting the amount they would pay for medical
services. Subsequently, many hospitals curtailed purchases of equipment while
groups of physicians and other non-hospital medical providers began acquiring
equipment to provide services such as MRI and lithotripsy. The impact of
these changes on equipment manufacturers was substantial as non-hospital
equipment users generally lack the resources to obtain financing from
traditional sources. Also, banks and other lenders that often provided
equipment financing in the "cost-plus" reimbursement era generally did not
transition themselves to compete in the non-hospital market. These changes
created an opportunity for finance companies such as DVI that were specialists
in the medical industry. Although numerous commercial finance companies and
general equipment lessors were attracted to the outpatient equipment financing
market in the mid to late 1980's, most no longer competed in the market by the
early 1990's.
Another development relates to the various healthcare cost containment
initiatives that have been introduced in the public and private sectors of the
healthcare market since the mid 1980's. Under its Medicare program, the
federal government has generally reduced reimbursement to medical providers for
many medical services, including diagnostic imaging. Also, under its Resource
Based Relative Value Scale, Medicare decreased payments to most physician
specialists for their services. In late 1991, Medicare again changed the way
it reimbursed hospitals for capital equipment acquisitions. In the private
sector, the movement toward managed healthcare plans such as health maintenance
organizations and preferred provider organizations has accelerated. Under
these plans, payors negotiate discounted fee schedules from healthcare
providers in exchange for an agreement to channel more patient care to selected
providers. Additionally, the Clinton Administration and other Federal and
state government officials introduced healthcare reform proposals which seek to
reduce costs through government mandated changes to the healthcare system.
These initiatives vary widely, but in general, encourage reduced reimbursement
for medical services. The Company believes this overall pressure on
reimbursement for medical services including advanced services such as
diagnostic imaging will continue.
It is the Company's belief that the demand for new technologies and equipment
will remain strong because these technologies are an important tool in the
diagnosis of disease which reduces healthcare expenditures. Several additional
factors will positively impact the demand for new medical equipment and
services, including: (i) clinical and technological advances which continue to
produce valuable new medical procedures that reduce costs, simplify patient
care and increase patient safety; (ii) increasing awareness among the medical
community and public about the existence and value of such procedures; (iii)
the likelihood of increased access to healthcare benefits for numerous
uninsured Americans under any governmental healthcare reform program; (iv) the
aging of the American population which will
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ITEM 1. BUSINESS (CONTINUED)
GENERAL (CONTINUED)
increase the need for medical care; and (v) functional and/or technical
obsolescence which will mean the replacement of much of the medical equipment
currently in use today.
The equipment purchasing patterns of many healthcare providers have been
changed by the phaseout of cost-plus reimbursement and the accompanying
increase in the number of managed-care programs. The Company believes that
prior to these changes, hospitals generally acquired equipment at the higher
end of the product spectrum because the cost-plus reimbursement system created
little economic incentive to acquire less expensive equipment. However, with
declining reimbursement and broad based healthcare reform, the Company
believes that healthcare providers are increasingly looking to acquire
lower-cost equipment that has a superior "price/value" characteristic.
SALES AND MARKETING
The Company's sales and marketing strategy consists principally of the
following:
MAINTAIN DVI'S TRADITIONAL BUSINESS OF FINANCING RELATIVELY HIGH-COST
DIAGNOSTIC IMAGING/THERAPY EQUIPMENT. The primary types of equipment in this
category financed by DVI include CT, MRI and radiation therapy systems.
Equipment cost and financing for these transactions typically range from
$700,000 to $2.0 million. Historically, DVI's most active market for this
equipment has been non-hospital medical providers.
FINANCE MORE OF THE GENERALLY LESS EXPENSIVE DIAGNOSTIC IMAGING
EQUIPMENT SOLD BY MANUFACTURERS WITH WHOM DVI HAS AN ESTABLISHED RELATIONSHIP.
During fiscal 1994, the Company reorganized its sales organization to
capitalize on the opportunity it believes it has to finance substantially more
of the less expensive diagnostic imaging equipment these manufacturers produce
such as ultrasound, nuclear medicine and X-ray equipment. Equipment cost and
financing for these transactions typically ranges from $100,000 to $400,000.
EXPAND DVI'S EQUIPMENT FINANCING BUSINESS AMONG MANUFACTURERS OF
MEDICAL DEVICES USED FOR PATIENT TREATMENT. The Company has targeted this
market because it believes there are a large number of medical equipment
manufacturers that do not have the resources necessary to support an internally
funded financing program, but would be best served if they could provide
financing for their customers in order to enhance their competitiveness. To
service these manufacturers, many of which have annual sales of less than $50
million, DVI functions essentially as a "captive finance company," providing
credit analysis, logistical support, funding and servicing. In certain
instances, these financing services are marketed under the name of the
equipment manufacturer. This service allows the manufacturer to present an
integrated sales-with-financing package to its customer. The medical devices
sold by these manufacturers, such as surgical lasers, are relatively low in
cost typically ranging from $100,000 to $300,000.
USE DVI'S ESTABLISHED RELATIONSHIPS WITH EQUIPMENT SUPPLIERS AND A
SALES FORCE DEDICATED EXCLUSIVELY TO THE HOSPITAL MARKETPLACE TO INCREASE
BUSINESS WITH HOSPITALS. Historically, DVI was limited in its ability to
service the hospital market because its funding costs were not competitive.
During fiscal 1994, the Company reduced its funding costs and increased the
sales and marketing resources it dedicates to this market. This increased
focus is in part a response to what the Company believes to be a renewed demand
for new and replacement equipment by many hospitals as a result of regulatory
changes and broad based healthcare reform.
PROVIDE MEDICAL RECEIVABLES FINANCING IN HEALTHCARE MARKETS
UNDERSERVED BY CONVENTIONAL LENDERS. The Company believes that it has an
opportunity to provide medical receivables financing for non-hospital medical
providers and others, because of its focus on the healthcare market and the
presence of its well established sales force. The Company also believes that
this market niche is underserved due to the uncertainty brought about by
healthcare reform. The typical medical receivables loan provided by the
Company ranges from $500,000 to $1.0 million and is collateralized by medical
receivables that are generally collected within a thirty to ninety day period.
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Overall, the Company generates equipment financing opportunities through
referrals from major equipment manufacturers that utilize the Company for
equipment financing and through relationships of its sales organization with
end users. In the Company's traditional non-hospital market, and to some
degree in the medium-sized hospital market, an equipment manufacturer's success
in consummating a sale of higher cost medical equipment is often dependent on
the availability of properly structured financing for the end user of the
equipment. The Company believes it is an important source of equipment
financing, particularly in the non-hospital marketplace, for products sold by a
majority of the largest manufacturers of diagnostic imaging equipment as well
as other vendors. These manufacturers include Hitachi Medical Systems
America, Philips Medical Systems, Picker International and Toshiba America
Medical Systems.
When DVI provides "captive equipment financing" programs for manufacturers that
sell lower-cost medical devices, it generates opportunities principally through
the manufacturer's sales force. To establish the relationships with such
manufacturers, the Company offers sales training and formulates marketing
programs that enable a manufacturer's sales force to effectively use financing
as a sales tool.
DVI's equipment financing transactions most often involve diagnostic imaging
equipment and then, to a lesser extent, treatment equipment and other medical
devices. The Company believes that the types of equipment it finances
generally have an estimated useful life between approximately seven and ten
years. Significant suppliers of the equipment have historically included ADAC
Laboratories, ATL Medical, General Electric Medical Systems, Hitachi Medical
Systems America, Mitsubishi International, Picker International, Shimadzu
Medical Systems, Siemens Medical Systems, Toshiba America Medical Systems and
Varian Associates. DVI believes that with the acquisition of MEF Corp. in
January 1993, it significantly enhanced its relationships with Philips Medical
Systems, Picker International and Toshiba America Medical Systems.
DVI's sales and sales management organization consists of approximately 26
healthcare finance specialists. Sales personnel are located at the Company's
corporate offices in Irvine and fifteen other cities throughout the country.
The Company's sales organization is primarily comprised of individuals with a
credit or finance background. The Company believes, that at present, its sales
personnel have an average of approximately ten years of experience in the
medical and/or equipment financing industries.
COMPETITION
The Company competes with equipment vendors which sell and finance their
products to customers, leasing subsidiaries of national and regional commercial
banks and other leasing and financing companies. Many of the Company's
competitors have significantly greater financial and marketing resources than
the Company. The competition in the new markets recently targeted by the
Company -- particularly the medium-sized hospital market -- is greater than in
the non-hospital healthcare market historically emphasized by the Company.
There can be no assurance that the Company will be able to compete successfully
in any or all of its targeted markets.
TRANSACTION OVERVIEW
DVI's equipment financing transactions are structured exclusively on a "net"
basis, requiring the customer to be responsible for all operating expenses,
including taxes and insurance premiums. The financing documentation specifies
that the customer is responsible for compliance with all applicable laws and
regulations with respect to the operation of the equipment. With very few
exceptions, DVI's equipment financing transactions are noncancelable. The
terms of the financing transactions originated range from 36 to 84 months with
the majority having a term of approximately sixty months. Virtually all
equipment financing transactions entered into by the Company since its
inception have been structured on full payout basis, such that the Company made
no residual investment in the equipment financed. In certain instances,
however, the Company was historically able to retain the residual value rights
to the equipment financed.
As of June 30, 1994, the Company's gross financed assets were in aggregate,
$282.4 million. Of this amount, $118.4 million or 41.9% were conditional sales
agreements (leases with a bargain purchase option), $97.4 million or 34.5%
were notes secured by equipment, and $49.1 million or 17.4% were fair market
value transactions (direct finance leases) $6.0 million or 2.1% were medical
receivables loans, and $11.5 million or 4.1% were operating leases and other
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ITEM 1. BUSINESS (CONTINUED)
receivables. Under fair market value transactions and operating leases, the
Company retains the residual rights to the underlying equipment. Subsequent to
the acquisition of MEF Corp., the percentage of the Company's equipment
financing transactions structured as conditional sales agreements and loans has
increased substantially. The Company believes that these types of transactions
will continue to make up a high percentage of its equipment financing
transaction originations in the future.
TRANSACTION FUNDING
DVI has a continuing need for capital to fund its financing activities. The
Company funds substantially all the equipment financing transactions it
originates through borrowings under credit facilities collateralized by a
security interest in the financial assets. Those borrowings in turn are repaid
with the proceeds received when transactions are permanently funded. In the
past, DVI's principal permanent funding technique was through the use of whole
loan sales. Beginning in 1991, the Company began moving away from whole loan
sales as its principal source of permanent funding in favor of asset
securitization. In both whole loan sales and asset securitizations, the
Company is able to obtain funding at a fixed rate of interest for periods which
match the length of the equipment financing transactions funded. All of the
Company's equipment financing transactions are written at a fixed interest rate
over a fixed term whereas the medical receivables financing provided by the
Company is written on a floating interest rate basis.
To date, notes issued by the Company pursuant to asset securitizations have
been classified as debt; consequently, the interest income from each
transaction is recognized over the life of the transaction. Conversely, the
proceeds from whole loan sales in excess of the remaining unamortized costs are
recognized as income at the time of sale. Because of the lower costs
incurred, the Company believes that the income realized over the life of each
transaction funded through asset securitization should be greater than if the
same transaction were funded through a whole loan sale. The Company intends to
continue to fund certain transactions as whole loan sales when it believes
doing so is warranted.
When using asset securitization, the Company contributes a pool of transactions
to a wholly-owned special-purpose subsidiary formed solely for the purpose of
the particular asset securitization. The special-purpose subsidiary issues one
or more classes of notes bearing fixed rates of interest to investors. The
Company then acts as servicer for the transactions underlying the particular
asset securitization. The purchasers of notes issued pursuant to the asset
securitization generally receive a credit-enhanced security. The credit
enhancement typically is achieved through some or a combination of (i) a cash
collateral account, (ii) cash flows from transactions pledged as additional
collateral, (iii) a bond insurance policy, (iv) guarantees and/or a letter of
credit, and (v) a pledge of the Company's interest to the residual values of
equipment included in the related asset securitization.
DVI has completed four asset securitizations totalling $217.8 million,
including a public debt issue of $75.7 million and three private placements of
debt totalling $142.1 million. In January 1994, the Company filed a $350
million registration statement (File No. 33-74446) with the Securities and
Exchange Commission (the "Commission") to provide for the future issuance of
securitized debt in a series of transactions pursuant to the Commission's
"shelf" registration rule. The Registration Statement was declared effective by
the Commission on June 23, 1994. The $75.7 million public debt issue was the
initial funding under the $350 million shelf registration. The Company expects
that it will continue to structure its asset securitizations on both a public
offering and private placement basis.
Under certain of its asset securitization arrangements, the Company has the
opportunity to "pre-fund" equipment financing transactions it expects to
originate in the near future. The pre-funding arrangement locks interest rates
on these transactions funded subsequent to the close of a securitization which
is beneficial in periods of rising interest rates. Under a pre-funding
arrangement, a portion of the total proceeds from the securitization are held
by the trustee against the future delivery of a pool of transactions to be
funded. The additional financing transactions to be delivered must meet
specified criteria and be originated within the prescribed period after the
initial closing of the securitization. This feature helps the Company to
manage its interest rate exposure by completing an asset securitization earlier
than otherwise would be feasible.
OTHER BUSINESS ACTIVITIES
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ITEM 1. BUSINESS (CONTINUED)
OTHER BUSINESS ACTIVITIES (CONTINUED)
Medical Receivables Financing
In fiscal 1992, the Company initiated medical receivable financing services.
The Company's principal medical receivable financing activity is making loans
secured by medical receivables. In certain instances the Company's arrangement
with its customers involves a purchase of the customers medical receivables as
opposed to a loan. The amount funded is based upon an evaluation of the
estimated collectible amount of the receivables from insurance companies and
other payors.
The medical receivables funded by the Company generally have short maturities
ranging from 30 to 120 days before payment is received. To date, the Company
has primarily funded its medical receivable loans through the use of its own
capital. Recently, the Company was able to fund medical receivables, on a
limited basis, through its major equipment financing bank credit facility. As
the volume of new medical receivables exceeds its limits on bank credit
facilities, the Company will attempt to either securitize its portfolio of
medical receivables or enter into whole loan sales of the medical receivables
portfolio.
OTHER INVESTMENTS
In October 1991, the Company purchased an equity interest in Healthcare Imaging
Services, Inc. ("HIS"). HIS provides diagnostic imaging and lithotripsy
services to outpatient healthcare providers in the northeast. In February
1992, the Company purchased an equity interest in SMT Health Services, Inc.
("SMT"). SMT provides diagnostic imaging services and radiation therapy
services in the mid-Atlantic area and the state of Washington. In September
1992, the Company purchased an equity interest in IPS Health Care, Inc.
("IPS"). IPS provides diagnostic imaging services in Southern California. In
addition, the Company made additional investments in IPS in the form of
preferred stock. As of June 30, 1994, DVI owned approximately 18%, 15% and 22%
of the common shares of HIS, SMT, and IPS, respectively. In September 1994,
IPS merged with Diagnostic Imaging Services, which reduced the Company's common
stock ownership from approximately 22% to approximately 10%.
As part of its overall corporate strategy to operate exclusively as a financial
services company, the Company initiated a process during the second quarter of
fiscal 1994 to divest its interests in these investees. The Company completed
a series of steps which significantly diminished its influence over both SMT
and HIS, during the three month periods ended December 31, 1993 and June 30,
1994, respectively. Under arrangements made with HIS and SMT, the Company
agreed to allow existing financing transactions between DVI and each entity to
be refinanced through third parties and terminate its first right of refusal
for financing any future transactions. In addition, upon completion of said
refinancing, the Company agreed to relinquish its seats on the Boards of
Directors of HIS and SMT and sell the common shares owned by DVI in each
entity. Finally, during the refinancing period, DVI agreed to vote its common
shares consistent with each company's management. (See Managements Discussions
and Analysis for further details.)
Discontinued Operations.
In June 1993, the Company announced its decision to dispose of seven outpatient
healthcare facilities which it operated or managed on a direct basis and one
facility which was in the developmental stage and not yet in operation. At
June 30, 1993 the Company established a reserve for the divestiture of the
operations and recorded a loss on discontinued operations and disposal of
discontinued operations of $1.9 million net of tax. This estimate was based on
based on certain assumptions as to the likely timing of the divestitures, the
estimated proceeds to be received upon the sale of certain of the facilities
and the financial results of those operations pending divestiture. These
operations have been reflected as discontinued operations in the Company's
financial statements at June 30, 1992, 1993 and 1994. The pre-tax loss from
discontinued operations of $3.3 million at June 30, 1993 was comprised of $2.6
million relating to actual and estimated losses from operations of this segment
through the date of disposition and $700,000 relating to estimated losses to be
incurred upon the disposition of the segment's net assets.
At June 30, 1994, the Company had disposed or entered into definitive
agreements to sell five of these outpatient healthcare facilities and had
written off the investment and assets of the remaining two. In connection with
the disposal
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ITEM 1. BUSINESS (CONTINUED)
of these facilities, the Company retained certain assets and liabilities of
these facilities, primarily accounts receivable and accounts payable. The
Company's results of operations for the fiscal year ended June 30, 1994 include
an additional $3.1 million net after tax change in estimate in the amounts
reported as of June 30, 1993 for the disposition of this segment of the
Company's operations. The change in estimate was comprised almost entirely of
a change in the estimate, in the quarter ended June 30, 1994, in the estimated
proceeds from the disposition of underlying healthcare operations assets which
included goodwill, other tangibles, equipment and other assets. The change in
estimate reflects the complete disposal or write-off of the discontinued
operations segment.
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ITEM 1. BUSINESS (CONTINUED)
GOVERNMENT REGULATIONS
General
The Company's equipment financing business, while generally not directly
subject to government regulation, is indirectly affected by regulation in
several ways. The use, maintenance and operation of certain types of
diagnostic imaging and patient treatment equipment is regulated by Federal,
state and/or local authorities. For example, a shared service provider or
healthcare provider using equipment financed by the Company may be required to
obtain and maintain approvals from governmental authorities in order to service
other healthcare providers with whom it has entered into service agreements.
Failure by the Company's customers to comply with these requirements could
adversely affect their ability to meet their obligations to the Company. The
ability of the Company's equipment financing customers to satisfy their
obligations to the Company could also be adversely affected by changes in
regulations which limit or prohibit the referral of patients by physicians who
have invested in healthcare facilities financed by the Company. Among the
regulatory factors impacting the Company's business are the following:
Certificate of Need Regulation
A number of states regulate the acquisition of medical equipment or the
provision of new services through Certificate of Need ("CON") or similar
program. The Company believes these requirements have had a limited effect on
its business, although there can be no assurance that future changes in those
laws will not adversely affect DVI. Additionally, repeal of existing
regulations of this type in jurisdictions where the Company's customers have
met the specific requirements could adversely affect the Company since such
customers could face increased competition. In addition, there is no assurance
that expansion of the Company's equipment financing business within the
hospital market will not be increasingly effected by regulations of this type.
Medicare-Medicaid Fraud and Abuse Statutes
The Department of Health and Human Services ("HHS") has increased its
enforcement efforts under the Medicare-Medicaid Fraud and Abuse Statutes in
cases where physicians own an interest in a facility to which they refer their
patients for treatment or diagnosis. These statutes prohibit the offering,
payment, solicitation or receipt of remuneration directly or indirectly as an
inducement to refer patients for services reimbursable in whole or in part by
the Medicare-Medicaid programs. HHS has taken the position that distributions
of profits from corporations or partnerships to physician investors who refer
patients to the entity for a procedure which is reimbursable under Medicare
(government-assisted medical care for the aged) or Medicaid
(government-assisted medical care for the poor) may be a form of remuneration
for referrals which is prohibited by the statute. HHS has also published safe
harbor guidelines which describe the requirements which must be met to ensure
that distributions of profits to a physician who has invested in an equity
security issued by a business to which he or she refers patients does not
violate the Medicare-Medicaid fraud and abuse statute.
Further Regulation of Physician Self-Referral
Additional regulatory attention has been directed toward physician-owned
healthcare facilities and other arrangements whereby physicians are
compensated, directly or indirectly, for referring patients to such healthcare
facilities. In 1988, legislation entitled the "Ethics in Patient Referrals
Act" (H.R. 5198) was introduced which would have prohibited Medicare payments
for all patient services performed by an entity in which a patient's referring
physician had an investment interest. As enacted, the law prohibited only
Medicare payments for patient services performed by a clinical laboratory. The
Comprehensive Physician Ownership and Referral Act (H.R. 345), which was
enacted by Congress in 1993 as part of the Deficit Reduction Package, is more
comprehensive than H.R. 5198 and covers additional medical services including
medical imaging, radiation therapy, physical rehabilitation and others. A
variety of existing and pending state laws currently limit the extent to which
a physician may profit from referring patients to a facility in which that
physician has a proprietary or ownership interest. Many states also have laws
similar to the Medicare fraud and
9
<PAGE> 10
ITEM 1. BUSINESS (CONTINUED)
GOVERNMENT REGULATION (CONTINUED)
abuse statute which are designed to prevent the receipt or payment of
consideration in connection with the referral of a patient. The Company
believes that as a result of these legislative initiatives, demand for new
medical equipment by the outpatient healthcare facilities (which in many cases
are owned by referring physicians who are directly affected by the legislation)
has diminished.
Government Cost Containment Initiatives
The U.S. Government and a number of states have proposed or enacted laws and
regulations designed to control healthcare costs. Certain agencies and
authorities have proposed or enacted mandated reductions in some fees for
medical services employing high technology medical equipment. These controls
and fee reductions may reduce the ability of a medical provider to derive
sufficient revenue from usage of the equipment to meet its obligations to the
Company. The Company may also experience a decrease in its volume of the
business as a result of such controls and fee reductions. In September 1993,
the Clinton Administration presented to Congress the American Health Security
Act of 1993, a comprehensive plan to restructure the U.S. healthcare system.
The key elements of the proposal are universal access to healthcare and cost
containment. Under the proposal, employers would have been required to
provide all employees with an established minimum level of health insurance
coverage. The proposal also provides for the creation of regional and
corporate health alliances and the establishment of a National Health Board
that will set national health standards and oversee the establishment and
administration of the new healthcare system. Numerous alternative reform
proposals have been presented in Congress which vary substantially in the
degree to which they would reform the healthcare system. The Company believes
the uncertainties associated with the prospect of healthcare reform have
negatively impacted the medical equipment imaging industry in the U.S.
Currently, it is not possible to predict the ultimate substance and scope of
any proposed federally mandated reform program and, therefore, its impact on
the Company.
EMPLOYEES
As of September 30, 1994, DVI had 90 full-time employees consisting of 7
executive officers, 26 sales and sales management employees, and 57
administrative, accounting and technical personnel. None of the Company's
employees is covered by a collective bargaining agreement and management
believes that its relations with its employees are good.
ITEM 2. PROPERTIES
The Company owns no real property and leases all of its offices. The Company's
executive offices are located in Irvine, California. In total, the Company
leases an aggregate of approximately 24,900 square feet of office space in
Arizona, California, Connecticut, Georgia, New York, Ohio and Pennsylvania and
has an option to lease additional space at its California location. None of
the Company's facility leases exceed a term of 60 months. The Company believes
that the present facilities are adequate to meet its foreseeable needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any pending litigation or legal proceedings, or
to the best of its knowledge any threatened litigation or legal proceedings,
which, in the opinion of management, individually or in the aggregate, would
have a material adverse effect on its results of operations or financial
condition.
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITIES HOLDERS
There were no matters submitted to a vote of security holders during the three
months ended June 30, 1994.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of DVI are:
<TABLE>
<CAPTION>
NAME AGE POSITION
- - ---- --- --------
<S> <C> <C>
</TABLE>
10
<PAGE> 11
<TABLE>
<S> <C> <C>
David L. Higgins 48 Chairman of the Board of Directors and Chief Executive Officer
Michael A. O'Hanlon 47 Director, President and Chief Operating Officer
James G. Costello 59 Senior Vice President and Chief Financial Officer
Anthony J. Turek 51 Senior Vice President and Chief Credit Officer
Cynthia J. Cohn 35 Vice President
Dominic A. Guglielmi 43 Vice President
Lisa A. Olsen 39 Secretary
</TABLE>
DAVID L. HIGGINS is the Company's Chief Executive Officer and Chairman. From
the inception of the Company until September 1994, Mr. Higgins served as the
Company's President, Chief Executive Officer and Chairman. Mr. Higgins was
also the President and Chief Executive Officer of Delta Health, Inc. ("Delta
Health"), the predecessor company to DVI which he founded in 1985, and which
was acquired by the Company in 1986. Prior to founding Delta Health, Mr.
Higgins managed the North America sales and service operations of Elscint, Inc.
("Elscint"), for two years. Elscint is a full-line manufacturer of diagnostic
imaging equipment based in Israel. Previously, Mr. Higgins held a similar
position for one year with Xonics Medical Systems, Inc. ("Xonics"), which was
acquired by Elscint in 1982. Xonics was also a full-line manufacturer of
medical imaging equipment. Mr. Higgins presently serves on the Board of
Directors of HIS and SMT.
MICHAEL A. O'HANLON is the Company's President and Chief Operating Officer and
has served as such since September 1994. Previously, Mr. O'Hanlon served as
Executive Vice President of DVI since joining the Company in March 1993. Mr.
O'Hanlon also serves on the Executive Committee of DVI, and is President of DVI
Financial Services, Inc. His responsibilities also include the corporate
finance functions of the Company. Prior to joining the Company, Mr. O'Hanlon
served as President and Chief Executive Officer of Concord Leasing, Inc.
("Concord Leasing") for nine years. Concord Leasing provides medical,
aircraft, shipping and industrial equipment financing. U.S. Concord, Inc. a
subsidiary, provides equipment financing for the medical imaging industry.
Previously, Mr. O'Hanlon was a Senior Executive with Pitney Bowes Credit
Corporation. Mr. O'Hanlon received his Master of Science degree from the
University of Connecticut and his Bachelor of Business Administration from the
Philadelphia College of Textiles and Science. Mr. O'Hanlon became a director
of DVI in November 1993.
JAMES G. COSTELLO is Senior Vice President and Chief Financial Officer of DVI.
Mr. Costello has served as Senior Vice President of DVI since October 1993 and
as Chief Financial Officer of DVI since August 1994. His responsibilities
include management of all back office operations related to credit
documentation and funding, transaction servicing, accounting and
administration. In addition, he is integral to the Company's asset
securitization and other financing programs. Mr. Costello was Executive Vice
President of Concord Leasing, Inc. for six years where he was responsible for
Concord Leasing's capital market/funding activities, including term loans,
commercial paper and sale of securitized assets. He also served as President
of Concord Commercial Corporation. Previously, Mr. Costello was President of
Unisys Finance Corporation, and Vice President and Chief Financial Officer of
Pitney Bowes Credit Corporation. Mr. Costello received a Bachelor of Business
Administration from Pace University, a Certificate of Public Accountancy in New
York State and a Master of Business Administration from New York University
Graduate School of Business.
ANTHONY J. TUREK is a Senior Vice President and the Chief Credit Officer of
DVI. Mr. Turek has served in that capacity since March 1988. Mr. Turek also
serves on the Executive Committee of DVI. Prior to joining the Company, Mr.
Turek was Vice President, Commercial Banking at Continental Illinois National
Bank ("CINB") in Chicago from 1968 to 1988. For the five years prior to
joining DVI, Mr. Turek managed the equipment leasing and transportation
divisions of CINB. Prior responsibilities included management positions in the
Special Industries, Metropolitan and National Divisions of CINB. Before his
employment with CINB, Mr. Turek was a Trust Officer with Bank of America. Mr.
Turek received his Bachelor of Science degree from Iowa State University and
his Masters of Science degree from the University of Missouri.
CYNTHIA J. COHN has been a Vice President of DVI since October 1988 and
Executive Vice President of DVI Business Credit since January 1994. She is
responsible for all sales and marketing functions of DVI Business Credit. Ms.
Cohn has been employed by the Company in a sales and management capacity since
July 1986. Ms. Cohn also handles certain shareholder relation functions for
the Company. She served as an Assistant Vice President from July 1987 to
October 1988. Prior to joining the Company, Ms. Cohn served as Research
Coordinator for Cantor,
11
<PAGE> 12
ITEM 3. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (CONTINUED)
EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED)
Fitzgerald Co., Inc., a stock brokerage firm, from February 1983 to July 1986,
where she was responsible for development and coordination of that firm's
research product for both institutional and retail clientele. She holds a
Bachelor of Arts degree from Ithaca College. Ms. Cohn is the daughter of
Gerald L. Cohn, a Director of the Company.
DOMINIC A. GUGLIELMI is a Vice President of DVI and the Group Managing Director
of DVI Financial Services Inc., and has served as such since the acquisition of
MEF Corp. by DVI in January 1993. Prior to joining the Company, Mr. Guglielmi
served as the President of the Healthcare Division of U.S. Concord, Inc. for
five years where he was responsible for sales, marketing, documentation,
credit/collections, financial budgeting and all aspects of strategic planning.
Previously, Mr. Guglielmi held management positions with General Electric
Credit Corporation and Pitney Bowes Credit Corporation. Mr. Guglielmi holds a
Bachelor of Arts degree from LaSalle University.
LISA A. OLSEN is Vice President, Secretary and General Counsel of DVI Financial
Services and Secretary of DVI and has served as such since December 1993. Her
primary responsibilities include advising and representing DVI on legal issues.
Prior to joining the Company, Ms. Olsen served as Senior Counsel for Phoenix
Leasing Incorporated, an equipment leasing company, from October 1990 to
December 1993. From January 1989 to October 1990, Ms. Olsen was Assistant Vice
President, Compliance for Wells Fargo-Nikko Investment Advisors, an
institutional investment manager. Ms. Olsen earned her Juris Doctorate at the
University of Southern California School of Law and her Bachelor of Arts degree
at the University of California, Irvine.
12
<PAGE> 13
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
PRICE RANGE OF COMMON STOCK
The following table sets forth for the Common Stock, the range of reported high
and low sales prices on the New York Stock Exchange, Inc. for the periods
indicated.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30, 1994 HIGH LOW
- - ------------------------------- ---- ---
<S> <C> <C>
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9 1/8 $5 3/4
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 1/2 8 3/8
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 5/8 9 1/4
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 8 1/4
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30, 1993 HIGH LOW
- - ------------------------------- ---- ---
<S> <C> <C>
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10 $7 1/4
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 6 5/8
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 1/2 4 7/8
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 3/8 4 1/2
</TABLE>
DIVIDEND POLICY
The Company has not declared or paid any cash dividends since its inception,
and the Company anticipates that all of its earnings in the near future will be
retained for investment in corporate operations. Any declaration of dividends
in the future will be determined in light of the conditions affecting the
Company at that time, including, among other things, its earnings, financial
condition, capital requirements, level of debt and the terms of any contractual
limitations on dividends. In various credit agreements under which the
Company's principal operating subsidiary, DVI Financial Services, Inc., is a
borrower and the Company is a guarantor, cash dividends are prohibited. In
addition, the agreement with respect to the Company's Convertible Subordinated
Notes places limitations on the payment of dividends by the Company and its
subsidiaries.
The Company estimates that at September 20, 1994 there were approximately 2,400
beneficial holders of its Common Stock.
13
<PAGE> 14
ITEM 6. SUMMARY CONSOLIDATED FINANCIAL AND OPERATING INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
---------------------------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Finance and other income . . . . . . . . . . . . . . . . $20,911 $15,199 $14,736 $10,571 $6,972
Interest expense . . . . . . . . . . . . . . . . . . . . 8,833 5,005 5,989 4,933 3,711
Selling, general and administrative expense . . . . . . . 7,765 5,735 3,832 2,795 1,817
Earnings from continuing operations before provision for
income taxes, equity in net earnings (losses) of investees
and discontinued operations . . . . . . . . . . . . . . 4,313 4,459 4,915 2,843 1,444
Net earnings from continuing operations . . . . . . . . . 2,260 2,580 3,053 1,726 873
Net earnings from continuing operations per common and
common equivalent share . . . . . . . . . . . . . . . . $ 0.34 $ 0.39 $ 0.57 $ 0.37 $ 0.28
Weighted average number of common and common equivalent
shares outstanding . . . . . . . . . . . . . . . . . . 6,717 6,601 5,353 4,728 3,173
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
---------------------------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents . . . . . . . . . . . . . . . . $ 1,714 $ 2,199 $ 2,536 $ 2,080 $ 2,575
Restricted cash . . . . . . . . . . . . . . . . . . . . . 13,065 6,825 4,004 4,531 701
Total assets . . . . . . . . . . . . . . . . . . . . . . 265,949 147,161 104,714 85,084 55,479
Short-term bank borrowings . . . . . . . . . . . . . . . 34,586 45,221 31,349 22,153 18,187
Long-term debt (primarily non-recourse) . . . . . . . . . 162,964 51,827 24,569 36,358 22,177
Shareholders' equity . . . . . . . . . . . . . . . . . . 33,993 34,664 34,006 16,113 6,194
</TABLE>
(See Dividends.)
The Company has not declared or paid any cash dividends since its inception.
See Dividend Policy. (See Notes 3 and 15 to the accompanying Consolidated
Financial Statement for discussion of discontinued operations and acquisitions
and the effect on operations therefrom.)
14
<PAGE> 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Equipment Financing. For accounting purposes, the Company classifies the
financing transactions it originates as (i) notes secured by equipment, (ii)
direct financing leases and (iii) operating leases. Notes receivable secured
by equipment and direct financing leases are generally those transactions which
the obligor has substantially all the benefits and risks of ownership of the
equipment. Operating leases are generally those which only provide for the
rental of the asset. The different classifications can result in accounting
treatments that provide substantially different income revenues and costs
during the transaction term.
Notes secured by equipment and direct financing leases are recorded on the
balance sheet under the caption of "investment in direct financing leases and
notes secured by equipment." The Company enters into two types of direct
financing lease transactions, which are referred to as "conditional sales
agreements" and "fair market value transactions." Conditional sales
agreements and notes secured by equipment represent those transactions in which
no residual interest in the underlying equipment is retained by the Company.
Fair market value transactions are those transactions in which the Company
retains a nominal residual interest in the equipment. This residual interest
is recorded on the Company's books as an estimate of the projected value of the
financed equipment at the end of the transaction term. The few lease contracts
which do not meet the criteria of direct financing leases are accounted for
as operating leases. Equipment under an operating lease is recorded on the
balance sheet at the Company's cost under the caption of "equipment on
operating leases" and depreciated on a straight-line basis over the estimated
useful life of the equipment. At the inception of the transaction, unearned
income represents the amount by which the gross receivables, initial direct
costs and the nominal estimated residual value (on fair market value
transactions) exceeds equipment cost.
The Company reports income under the categories of "amortization of finance
income," "receivables financing income," "net operating lease income," "gain
on sale of financing transactions" and "other income," (which consist
primarily of late and other fees). Amortization of finance income consists of
the interest component of payments on direct financing leases and notes
receivable secured by equipment calculated using the interest method and the
gain on sale of residuals. "Gain on sale of financing transactions" are gains
recognized when the Company permanently funds transactions through whole loan
sales such that the Company does not retain any interest in the transactions.
Net operating lease income consist of rental income recognized on operating
leases on a straight-line basis over the life of the transaction, net of
depreciation expense.
All of the Company's notes secured by equipment and direct financing lease
transactions are noncancelable "net" transactions which contain provisions
under which the obligor must, under any conditions, make all scheduled payments
and which require the obligor to maintain and service the equipment, insure the
equipment against casualty loss and pay all equipment related taxes. Upon
termination of a fair market value transaction, the customer generally has the
option to either purchase the equipment for its fair market value or extend the
term under renegotiated payments. If neither of these options is exercised and
the Company is unable to place and finance the equipment with a new user, the
Company generally sells the equipment.
In accordance with generally accepted accounting principles ("GAAP"), all the
income from transactions classified as notes secured by equipment and direct
financing leases that are permanently funded through asset securitizations or
other forms of borrowing in which the Company retains some right, obligations
or other interest are deferred and recognized using the interest method over
the term of the related transactions.
If an obligor under a particular transaction defaults, the Company may not
receive all or a portion of the future income associated with that transaction.
Therefore, there can be no assurance that the Company will recognize the income
described above.
Other Business. Receivables financing income is earned by the Company for
services related to financing (including receivable purchases), billing and
collecting medical receivables. Income from billing and collecting services
15
<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
GENERAL (CONTINUED)
generally is recognized as the services are performed and income from
receivable purchases as the purchased receivables are collected. In late
fiscal 1994, the Company changed its strategy in the medical receivables
business due to changing market conditions and its inability to obtain suitable
credit facilities for the purchase of the types of medical receivables it had
targeted. As part of this change in strategy, the Company stopped providing
billing/collecting services. In addition, the Company has shifted its
marketing emphasis such that it essentially stopped purchasing receivables and
began providing loans collateralized by medical receivables to a broad range of
healthcare providers. Under notes collateralized by medical receivables, the
respective interest income and fee income is recognized over the term of the
loans, which is typically one year.
Discontinued Operations. In June 1993, the Company adopted a formal plan to
discontinue its DVI Healthcare Operations segment consisting of seven
outpatient healthcare facilities which it operated or managed on a direct basis
and one facility which was in the developmental stage and not yet in operation.
At June 30, 1993 the Company established a reserve for the divestiture of the
operations and recorded a loss on discontinued operations and disposal of
discontinued operations of $1.9 million net of tax. This estimate was based on
certain assumptions as to the likely timing of the divestitures, the estimated
proceeds to be received upon the sale of certain of the facilities and the
financial results of those operations pending divestiture. These operations
have been reflected as discontinued operations in the Company's financial
statements at June 30, 1992, 1993 and 1994. The pre-tax loss from discontinued
operations of $3.3 million at June 30, 1993 was comprised of $2.6 million
relating to actual and estimated losses from operations of this segment through
the date of disposition and approximately $700,000 relating to estimated losses
to be incurred upon the disposition of the segment's net assets.
At June 30, 1994, the Company had disposed or entered into definitive
agreements to sell five of these outpatient healthcare facilities and had
written off the investment and assets of the remaining two. In connection with
the disposal of these facilities, the Company retained certain assets and
liabilities of these facilities, primarily accounts receivable and accounts
payable. Late in fiscal 1994, revenues from one of the facilities began to
significantly decline. Additionally, the prospective value of the facility
being developed by the Company was adversely effected by significant changes
beyond the Company's control. As a result of the decline in value of the
assets underlying these facilities in the fourth quarter of fiscal 1994, the
Company recorded an additional $3.1 million after tax change in estimate in the
amounts reported as of June 30, 1993 for the disposition of this segment of the
Company's operations. The before tax change in estimate totalling $5.4 million
was comprised almost entirely of a change in the amount, in the quarter ended
June 30, 1994, of the estimated proceeds from the disposition of underlying
healthcare operations assets which included goodwill, other tangibles,
equipment and other assets. The change in estimate reflects the complete
disposal or write-off of the discontinued operations segment.
16
<PAGE> 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
GENERAL (CONTINUED)
RESULTS OF OPERATIONS
Impact of Financing Strategies on Results of Operations. Beginning in 1991,
various factors, including changing conditions in the capital markets in which
the Company accesses permanent funding caused the Company to begin utilizing
asset securitization as its principal method of obtaining permanent funding.
As the Company does not sell the underlying financing transactions when it uses
asset securitization, the income derived from such transactions is recognized
over the term of the transactions rather than at the time the transactions are
permanently funded. The Company expects to continue to use asset
securitization as its principal means of permanent funding for the foreseeable
future except when it believes the sale of transactions is warranted. The
principal reasons for the Company's change in the permanent funding strategy
are: (i) the number of "whole loan buyers" who purchase transactions of the
type originated by the Company has declined; (ii) the interest or "discount"
rates charged by financial institutions that purchase whole loans are
relatively high compared to the rates that can generally be obtained through
asset securitization; and (iii) the cost of funds obtained by the Company
through asset securitization has declined due to improvements in the Company's
execution of such transactions. As the Company has increased its use of asset
securitization and correspondingly reduced its use of whole loan sales, the
amortization of finance income has increased while income from the sale of
transactions has declined. This shift toward asset securitization away from
whole loan sales has resulted in a reduction of near-term reported earnings.
Asset securitization generally results in a lower permanent funding cost to the
Company. Therefore, transactions funded through asset securitization generally
produce greater income to the Company than if the transactions were sold.
After DVI sells a transaction, it generally has only limited future risk as to
that transaction. Typically, DVI's risk in such cases is limited to (i)
contingent liability on warranties given by DVI as to the validity of the
documents underlying the transaction and (ii) a contractual limited recourse
liability on the transaction, such as a "first loss" position assumed by DVI in
the event of a credit default on the transaction, normally in the amount of the
between 5% and 10% of the loss for that transaction. Generally, the Company
does not retain servicing rights or obligations for transactions which it
sells. In asset securitizations, DVI has contingent exposure attributable to
the structural credit enhancement techniques used in those financings. This
structural credit enhancement takes the form of excess collateral (i.e.,
contract), cash or a combination thereof. The amount of DVI's contingent
exposure under these arrangements typically is up to 15% of the face amount of
the debt securities issued in the securitization. DVI typically acts as
servicer for securitized portfolios and accordingly is responsible for billing
and collecting the payments due on the underlying contracts.
Year Ended June 30, 1994 Compared to Year Ended June 30, 1993
The Company entered into transactions which generated total receivables of
$210.6 million for the year ended June 30, 1994 ("fiscal 1994"), as compared to
$74.5 million for the year ended June 30, 1993 ("fiscal 1993"). The Company
generated an increased dollar volume of equipment financing receivables in
fiscal 1994 compared to fiscal 1993, primarily because the Company expanded its
equipment financing capabilities as a result of its acquisition of MEF Corp. in
January 1993. The Company experienced increases in: (i) its net financed
assets to $232.3 million at June 30, 1994, from $116.3 million at June 30, 1993
and (ii) the related liabilities to $221.4 million at June 30, 1994, from
$103.8 million at June 30, 1993. The Company experienced a decrease in its
residual valuation to $3.7 million at June 30, 1994, from $6.2 million at June
30, 1993. The decrease stems primarily from the Company's sale of residuals
totalling $1.2 million and the Company's strategy to reduce the number of
financing transactions in its portfolio in which residual values are recorded.
17
<PAGE> 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Margins Earned
Margins earned were $12.1 million in fiscal 1994 as compared to $10.2 million
in fiscal 1993. Amortization of finance income increased to $18.3 million from
$10.8 million for the fiscal year 1994 and 1993, respectively, primarily as a
result of the overall increase in the size of the Company's equipment financing
portfolio. Although the Company's portfolio increased significantly, the
amortization of finance income did not increase on a proportionate basis due to
four factors: (i) the Company's strategy to originate financing transactions
in which residual positions are not retained reduced the Company's rate of
return on the respective transactions; (ii) the Company has narrowed the
interest rate spread between the Company's costs of funding its transactions
and the interest rates charged its customers; (iii) the volume of financing
transactions originated in fiscal 1994 was greater in the second half of the
year than in the first half and (iv) the interest rates under the Company's
interim funding facilities increased during the year which increased interest
expense and thus reduced margins. Consequently, amortization of finance income
as a percent of the equipment financing portfolio was reduced.
Net operating lease income declined to $359,000 in fiscal 1994 from $1.4
million in fiscal 1993 as a result of the Company's strategy to reduce its
originations of operating leases and the expiration of two substantial
transactions near the end of fiscal 1993.
Receivable financing income increased to $1.5 million in fiscal 1994 from $1.3
million in fiscal 1993. Although the Company's notes collateralized by medical
receivables portfolio increased significantly, receivable financing income did
not increase on a proportionate basis primarily because the increase in the
Company's volume of medical receivables financing transactions occurred late in
fiscal 1994. Consequently, receivable financing income as a percent of the
notes collateralized by medical receivables was reduced.
Gain on sale of financing transactions declined to $302,000 in fiscal 1994 from
$1.1 million in fiscal 1993 due to the reduction in the number and dollar amount
of transactions funded through whole loan sales and the increased use of asset
securitization to obtain permanent funding for the Company's equipment
financing transactions.
Other income, which consists of several items, none of which is individually
significant, remained relatively stable from fiscal 1993 to fiscal 1994.
Interest expense increased to $8.8 million in fiscal 1994 from $5.0 million in
fiscal 1993. This increase stems primarily from an increase in the average
outstanding balance of long term debt during fiscal 1994 as compared to fiscal
1993. As a percentage of finance and other income, interest expense was 42%
for fiscal 1994 as compared to 33% in fiscal 1993. The increase in interest
expense as a percent of financing income is principally the result of (i) the
Company narrowed the interest rate spread between the cost of its funding and
the interest rate charged its customers, (ii) the interest rates under the
Company's interim funding increased during the year and (iii) the Company's
strategy to originate financing transactions in which residual positions are
not retained reduced the Company's rate of return thus its income on the
respective transactions. Consequently, as a percentage of finance and other
income, interest expense increased in fiscal 1994.
Selling, General and Administrative Expense
Selling, general and administrative ("SG&A") expense increased to $7.8 million
in fiscal 1994 from $5.7 million in fiscal 1993. The largest component of this
increase is a $1.4 million increase in the Company's provision for doubtful
accounts which in the current fiscal year is attributable to the growth of the
Company's financing portfolio. The increase also reflects costs associated
with additional personnel and related costs incurred in connection with the
Company's acquisition of MEF Corp. during fiscal 1993, the acquisition of MDCC
during fiscal 1994 and the expansion of its receivables financing business in
the current fiscal year. The Company believes that its provision for the
doubtful accounts component of total SG&A expenses will continue to increase in
proportion to the growth
18
<PAGE> 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
of its financing portfolio, but that while other SG&A expense will continue to
rise overall, the rate of increase for these expenses should be slower than the
growth rate of the Company's financing portfolio.
Equity in Net Losses of Investees
Equity in net losses of investees increased to $242,000 in fiscal 1994 from
$51,000 in fiscal 1993. The increase in net losses of investees is primarily
attributable to greater losses incurred by the Company's investees in the first
half of fiscal 1994 than in fiscal 1993. (See BUSINESS. Other Investments.)
Net Earnings
The Company's net earnings from continuing operations were $2.3 million, or
$.34 per share, for fiscal 1994 as compared to $2.6 million, or $0.39 per
share, for fiscal 1993. After giving effect to its discontinued operations,
the Company's loss was $885,000, or $0.13 per share, for fiscal 1994 versus net
earnings of $658,000, or $.10 per share, for fiscal 1993.
The Company's net earnings from continuing operations did not increase in
fiscal 1994 despite the growth of its financing portfolio and the increase in
finance and other income. The Company believes its net earnings should
increase over previous periods due primarily to increases in finance and other
income attributable to the growth of DVI's financing business and lower
operating costs relative to the size of the Company's financing portfolio.
Year Ended June 30, 1993 Compared to Year Ended June 30, 1992
The Company entered into transactions which generated total receivables of
$74.5 million for fiscal 1993, as compared to $65.3 million for the year ended
June 30, 1992 ("fiscal 1992"). The Company generated an increased dollar
volume of equipment financing receivables in fiscal 1993, compared to fiscal
1992, primarily because the Company expanded its equipment financing
capabilities and market presence as a result of its acquisition of MEF Corp. in
January 1993. The Company experienced increases in: (i) the financing
transaction portfolio to $116.3 million at June 30, 1993 from $85.4 million at
June 30, 1992; (ii) the residual valuation balance to $6.2 million at June 30,
1993, from $6.0 million at June 30, 1992; and (iii) the related liabilities to
$103.8 million at June 30, 1993, from $63.0 million at June 30, 1992.
Margins Earned
Margins earned were $10.2 million in fiscal 1993 as compared to $8.7 million in
fiscal 1992. Amortization of finance income increased to $10.8 million from
$10.1 million for the fiscal year 1993 and 1992, respectively, primarily as a
result of the overall increase in the size of the Company's equipment financing
portfolio. Although the Company's portfolio increased significantly, the
amortization of finance income did not increase on a proportionate basis due to
the volume of originations of financing transactions in fiscal 1993 was greater
in the second half of the year than in the first half. Consequently,
amortization of finance income as a percent of the equipment financing
portfolio was reduced.
Net operating lease income increased to $1.4 million in fiscal 1993 from $1.1
million in fiscal 1992 as a result of an overall increase in the Company's
operating lease portfolio in fiscal 1993 as compared to 1992.
Receivable financing income increased to $1.3 million in fiscal 1993 from
$553,000 in fiscal 1992. The increase is primarily attributable to an
expansion in size and scope of the billing and collecting services and
purchased/financed receivables business in fiscal 1993 from 1992 levels. As a
result, receivables associated with purchased and financed management business
increased to $2.6 million at June 30, 1993 from $536,000 at June 30, 1992.
19
<PAGE> 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Gain on sales of financing transactions decreased to $1.1 million in fiscal
1993 from $2.2 million in fiscal 1992 due to the reduction in the number and
dollar amount of whole loan sales of financing transactions in fiscal 1993 from
fiscal 1992 levels. The use of asset securitization to obtain permanent
financing for the Company's financed transactions significantly reduced the
Company's need to sell financed transactions on a whole loan sale basis.
Other income decreased to $526,000 in fiscal 1993 from $710,000 in fiscal 1992.
The decrease of $184,000 consists of several items, none of which is
individually significant.
Interest expense decreased to $5.0 million in fiscal 1993 from $6.0 million in
fiscal 1992. This decrease stems from a decrease in the cost of funds obtained
by the Company in fiscal 1993 through the use of asset securitization and the
general decline in prevailing interest rates in fiscal 1993 compared to fiscal
1992.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased from $3.8 million in
fiscal 1992 to $5.7 million in fiscal 1993. The increase reflects costs
associated with additional personnel and related costs incurred in connection
with the Company's acquisition of MEF Corp. during fiscal 1993, the expansion
of its receivables financing business in both fiscal 1993 and fiscal 1992, and
the increased emphasis on financing rather than managing medical receivables
for third party healthcare providers. Selling, general and administrative
expenses relative to the Company's receivables management business increased to
$1.5 million for fiscal 1993, from $775,000 for fiscal 1992, its initial year
of operation. Additions to the Company's allowance for losses declined to
$167,000 in fiscal 1993 from $422,000 in fiscal 1992.
Equity in Net Loss/Earnings of Investees
Equity in the net loss/earnings of investees decreased to a net loss of $51,000
in fiscal 1993 from net earnings of $153,000 in fiscal 1992. The decline to a
net loss during fiscal 1993 from a position of net earnings in the prior year
is primarily attributable to more significant losses incurred by one of the
Company's investees in fiscal 1993.
Net Earnings
The Company's net earnings from continuing operations were $2.6 million, or
$0.39 per share, for fiscal 1993 as compared to $3.1 million, or $0.57 per
share, for fiscal 1992. After giving effect to its discontinued operations,
the Company's net earnings were $658,000, or $0.10 per share, for fiscal 1993
and $2.7 million, or $0.51 per share, for fiscal 1992.
Cash Flows
The Company's cash and cash equivalents at June 30, 1994 and 1993 was $1.7
million and $2.2 million, respectively. The following describes the changes
from fiscal 1993 to fiscal 1994 in the items which had the most significant
impact on the Company's cash flow during fiscal 1994.
The Company's net cash provided by operating activities increased $16.0 million
to $13.0 million in fiscal 1994 from ($3.0) million in fiscal 1993. The
increase almost entirely stems from an increase in the Company's accounts
payable from June 30, 1993 to June 30, 1994 of $17.0 million. The increase in
accounts payable, which consists primarily of amounts due vendors of equipment
that the Company has financed, stems from the increased volume of the Company's
financing transactions near the end of fiscal 1994.
The Company's net cash used in investing activities increased $75.8 million to
$113.9 million in fiscal 1994 from $38.2 million in fiscal 1993. This increase
is primarily attributed to costs of equipment acquired for the Company's
20
<PAGE> 21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
financing transactions which increased $86.4 million to $149.0 million in
fiscal 1994 from $62.6 million in fiscal 1993.
The Company's net cash provided by financing activities increased $59.6 million
to $100.5 million in fiscal 1994 from $40.9 million in fiscal 1993. This
increase primarily results from an increase in the Company's long term debt
related to securitizations from June 30, 1993 to June 30, 1994 and the issuance
of convertible subordinated debt in which the Company realized net proceeds of
approximately $14.1 million in fiscal 1994.
LIQUIDITY AND CAPITAL RESOURCES
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, deposits to restricted cash collateral accounts (i.e.,
accounts required to be established by the Company in 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
typically limited recourse and to a lesser degree non-recourse.
In the case of limited recourse or nonrecourse financings the Company retains
some risk of loss because it shares in any losses incurred (in the case of
limited recourse financing) and/or, in the case of both limited recourse and
nonrecourse financing, may forfeit any residual interest in the underlying
equipment if a default occurs. A substantial portion of the Company's
long-term debt represents permanent funding of equipment financing receivables
and is structured so that the cash flow from the underlying receivables
services the debt.
Historically, most of the Company's short-term borrowings have been used to
temporarily fund transactions and have been repaid with the proceeds obtained
from the permanent fundings and cash flows 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 Company's acquisition of MEF Corp. in January 1993,
the volume of transactions originated and the need for interim and permanent
funding have significantly increased. To meet its requirements for increased
interim funding, the Company has available interim credit facilities with banks
and investment banking firms, and intends to obtain additional interim funding
lines-of-credit from the banks and investment banking firms which underwrite or
place its asset securitizations. If these sources of funding are not
available, growth will be constrained and the Company may be forced to use
relatively less attractive permanent funding sources in order to ensure its
liquidity.
Working capital financing for equipment financing customers is occasionally
provided by the Company through its medical receivables financing subsidiary,
DVI Business Credit, provided that 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. On September 30, 1994, the Company filed a
Registration Statement on Form S-3 (File No. 33-84604) with the Commission with
21
<PAGE> 22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
respect to 1,450,079 shares of Common Stock, which may be offered from time to
time by certain selling stockholders. Such selling stockholders include all
the purchasers of the convertible subordinated debt described above, and the
registration statement covers, among other shares of the Company's common
stock, all the shares issuable upon conversion of such convertible subordinated
debt. At the date of this Amendment on Form 10-K/A-1, the registration
statement has not been declared effective by the Commission. The Company will
receive no portion of the proceeds of the sale by the selling stockholders of
the shares issuable upon conversion of such convertible debt.
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 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 Credit Facilities
The Company presently has available an aggregate of $162.5 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 $79.0 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 at a variable rate equal to 200
basis points over a 30-, 60- or 90-day LIBOR rate. The interest rates on the
Company's borrowings under the credit agreement generally are re-set at the end
of each applicable LIBOR period (i.e., every 30, 60, or 90 days). 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 $75.0 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 Prudential facility bear
interest at a variable rate equal to 90 basis points over the 30-day LIBOR.
The interest rate on the Company's borrowings under the Prudential facility
are re-set every 30 days based on changes in the underlying LIBOR index. The
Company also has $8.5 million of additional interim funding facilities with
other financial institutions. On September 15, 1994, an aggregate of
approximately $77.2 million was outstanding under the Company's interim credit
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
22
<PAGE> 23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
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 credit facilities.
Permanent Funding Methods
DVI has completed four asset securitizations totalling $217.8 million,
including a public debt issue of $75.7 million and three private placements of
debt totalling $142.1 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.
The Company's use of asset securitization significantly affects its liquidity
and capital requirements due to the amount of time required to assemble a
portfolio of transactions to be securitized. When using asset securitization,
the Company is required to hold transactions until a sufficient quantity is
accumulated so as to attract investor interest and allow for a cost effective
placement. This increases the Company's exposure to changes in interest rates
and temporarily reduces its interim funding liquidity.
The Company does not have any binding commitments for permanent funding, either
for asset securitizations or whole loan sales . However, the Company has
non-binding agreements with investment banking entities for the asset
securitization of future equipment financing transactions. While the Company
expects to be able to continue to obtain 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 affected by inflation in the future.
NEW ACCOUNTING STANDARDS
The Company adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," in July 1992. The effect of the adoption of
this change in accounting principle was not significant to the consolidated
financial statements. The Company adopted Statement of Financial Accounting
Standards No. 107, "Disclosures About Fair Value at 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.
23
<PAGE> 24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
As a result, the Company expects that in future periods its ability to defer
its income tax liability will correspondingly decline.
The Company does not believe Federal income tax changes contained in the
Omnibus Budget Reconciliation Act of 1993 signed into law on August 10, 1993,
will have a material impact on the Company's consolidated financial statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of the Company and its
subsidiaries are filed on the pages listed below, as part of Part II, Item 8.
24
<PAGE> 25
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Consolidated Balance Sheets at June 30, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . 27-28
Consolidated Statements of Operations for the years ended
June 30, 1994, 1993 and 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Consolidated Statements of Shareholders' Equity for the years ended
June 30, 1994, 1993 and 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Consolidated Statements of Cash Flows for the years ended
June 30, 1994, 1993 and 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31, 32, 33
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . 34-47
</TABLE>
25
<PAGE> 26
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
DVI, Inc. and Subsidiaries
Irvine, California
We have audited the accompanying consolidated balance sheets of DVI, Inc. and
its Subsidiaries (the "Company") as of June 30, 1994 and 1993, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended June 30, 1994. Our audits also
included the financial statement schedules listed in the Index at Item
14(a)(2). These consolidated financial statements and financial statement
schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of DVI, Inc. and its Subsidiaries as
of June 30, 1994 and 1993, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended June 30, 1994
in conformity with generally accepted accounting principles. Also, in our
opinion, such financial statement schedules, when considered in relation to the
basic consolidated financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Costa Mesa, California
October 3, 1994
26
<PAGE> 27
DVI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30,
------------------------------
1994 1993
------------ ------------
<S> <C> <C>
CASH AND CASH EQUIVALENTS (Note 2) . . . . . . . . . . . . . . . . . . . . $ 1,713,769 $ 2,199,208
------------ ------------
RESTRICTED CASH AND CASH EQUIVALENTS (Note 4) . . . . . . . . . . . . . . . 13,064,814 6,825,485
------------ ------------
INVESTMENT IN DIRECT FINANCING LEASES AND
NOTES SECURED BY EQUIPMENT (Notes 2, 5, 6, 12 and 16):
Receivable in installments (net of allowance of $2,497,916 (1994)
and $1,210,125 (1993)) . . . . . . . . . . . . . . . . . . . . . . . 250,854,526 106,046,337
Receivable in installments - related parties . . . . . . . . . . . . . 16,427,684 19,285,865
Residual valuation . . . . . . . . . . . . . . . . . . . . . . . . . . 3,730,592 6,205,621
Unearned income . . . . . . . . . . . . . . . . . . . . . . . . . . . . (47,643,772) (24,562,613)
------------ ------------
Net investment in direct financing leases and
notes secured by equipment . . . . . . . . . . . . . . . . . . . 223,369,030 106,975,210
------------ ------------
OTHER RECEIVABLES (Note 2):
From sale of leases and notes secured by equipment . . . . . . . . . . 911,585 2,860,329
Patient service accounts receivable . . . . . . . . . . . . . . . . . . 3,667,123 3,258,270
Notes collateralized by medical receivables . . . . . . . . . . . . . . 6,006,600 2,565,451
------------ ------------
Total other receivables . . . . . . . . . . . . . . . . . . . . . . 10,585,308 8,684,050
------------ ------------
EQUIPMENT ON OPERATING LEASES (Notes 2 and 5)
(net of accumulated depreciation of $1,163,591 (1994) and
$1,515,344 (1993)) . . . . . . . . . . . . . . . . . . . . . . . . . 2,893,683 6,759,629
------------ ------------
FURNITURE AND FIXTURES (Note 2)
(net of accumulated depreciation of $525,032 (1994) and
$513,600 (1993)) . . . . . . . . . . . . . . . . . . . . . . . . . . . 817,135 1,579,241
------------ ------------
INVESTMENTS IN AND ADVANCES TO
INVESTEES (Notes 2 and 6) . . . . . . . . . . . . . . . . . . . . . . . 4,646,382 5,578,500
------------ ------------
GOODWILL, NET (Notes 2 and 15) . . . . . . . . . . . . . . . . . . . . . . 2,024,253 1,956,239
------------ ------------
OTHER ASSETS (Note 2) . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,834,972 6,603,606
------------ ------------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . $265,949,346 $147,161,168
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
27
<PAGE> 28
DVI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
JUNE 30,
---------------------------
1994 1993
------------ ------------
<S> <C> <C>
ACCOUNTS PAYABLE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 23,861,905 $ 6,785,683
------------ ------------
OTHER ACCRUED EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . 8,215,021 4,181,190
------------ ------------
SHORT-TERM BANK BORROWINGS (Notes 7 and 12) . . . . . . . . . . . . . . . . 34,586,373 45,221,225
------------ ------------
DEFERRED INCOME TAXES (Notes 2 and 9) . . . . . . . . . . . . . . . . . . . 2,329,205 4,481,289
------------ ------------
LONG-TERM DEBT:
Notes payable to bank . . . . . . . . . . . . . . . . . . . . . . . . . 136,070
Discounted receivables (primarily nonrecourse) (Notes 5, 8 and 16) . . 148,851,584 51,691,297
Convertible subordinated notes (Notes 8, 10 and 12) . . . . . . . . . . 14,112,000
------------ ------------
Total long-term debt, net . . . . . . . . . . . . . . . . . . . . . 162,963,584 51,827,367
------------ ------------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . 231,956,088 112,496,754
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 13 and 15)
SHAREHOLDERS' EQUITY (Notes 10, 11 and 15):
Preferred Stock, $10.00 par value; authorized,
100,000 shares; no shares issued
Common Stock, $.005 par value; authorized 13,000,000 shares,
outstanding 6,567,295 shares (1994) and 6,530,295 shares (1993) . . . 32,836 32,652
Additional capital . . . . . . . . . . . . . . . . . . . . . . . . . . 28,155,502 27,941,466
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,804,920 6,690,296
------------ ------------
TOTAL SHAREHOLDERS' EQUITY . . . . . . . . . . . . . . . . . . . 33,993,258 34,664,414
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY . . . . . . . . . . . $265,949,346 $147,161,168
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
28
<PAGE> 29
DVI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------------------
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
Finance and Other Income (Note 2)
Amortization of finance income . . . . . . . . . . . . . $18,264,742 $10,826,020 $10,130,255
Receivables financing income . . . . . . . . . . . . . . 1,461,677 1,295,514 552,873
Net operating lease income . . . . . . . . . . . . . . . 359,353 1,447,264 1,146,471
Gain on sale of financing transactions, net . . . . . . . 302,053 1,103,528 2,196,547
Other income . . . . . . . . . . . . . . . . . . . . . . 523,314 526,226 709,590
----------- ----------- -----------
Finance and Other Income . . . . . . . . . . . . . . . . 20,911,139 15,198,552 14,735,736
Interest expense . . . . . . . . . . . . . . . . . . . . 8,832,836 5,004,744 5,988,802
----------- ----------- -----------
Margins Earned . . . . . . . . . . . . . . . . . . . . . . . 12,078,303 10,193,808 8,746,934
Selling, General and Administrative expense . . . . . . . 7,765,112 5,734,981 3,832,384
----------- ----------- -----------
Earnings from Continuing Operations Before
Provision for Income Taxes, Equity in Net Earnings (Loss)
of Investees and Discontinued Operations . . . . . . . . . 4,313,191 4,458,827 4,914,550
Provision for Income Taxes (Notes 2 and 9) . . . . . . . 1,811,540 1,828,118 2,014,965
----------- ----------- -----------
Earnings from Continuing Operations Before Equity in Net
Earnings (Loss) of Investees and Discontinued Operations . 2,501,651 2,630,709 2,899,585
Equity in Net Earnings (Loss) of Investees . . . . . . . . . (242,150) (50,547) 153,314
----------- ----------- -----------
Earnings from Continuing Operations . . . . . . . . . . . . . 2,259,501 2,580,162 3,052,899
Discontinued Operations (Note 3):
Loss From discontinued operations net of tax
of $51,000 (1994), $1,064,529 (1993) and $301,760 (1992) 74,000 1,497,398 345,743
Loss on disposal of discontinued operations, net of tax
of $2,212,536 (1994) and $295,200 (1993) . . . . . . . . 3,070,877 424,800
----------- ----------- -----------
Loss from Discontinued Operations . . . . . . . . . . . . . 3,144,877 1,922,198 345,743
----------- ----------- -----------
Net Earnings (Loss) . . . . . . . . . . . . . . . . . . . . . (885,376) $ 657,964 $ 2,707,156
=========== =========== ===========
Net Earnings (Loss) Per Common and Common
Equivalent Share (Note 2):
From Continuing Operations . . . . . . . . . . . . . . . $ 0.34 $ 0.39 $ 0.57
From Discontinued Operations . . . . . . . . . . . . . . (0.47) (0.29) (0.06)
----------- ----------- -----------
Net Earnings (Loss) Per Share . . . . . . . . . . . . . . . . $ (0.13) $ 0.10 $ 0.51
=========== =========== ===========
Weighted Average Number of Common and Common
Equivalent Shares Outstanding (Note 2) . . . . . . . . . . 6,717,000 6,601,000 5,353,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
29
<PAGE> 30
DVI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
$.005 PAR TOTAL
-------------------- ADDITIONAL RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
-------- ------ ------------ --------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE AT JULY 1, 1991 . . . . . . . . . . . 4,986,423 $24,932 $12,762,695 $3,325,176 $16,112,803
Issuance of common stock upon
exercise of stock options . . . . . . 18,705 94 57,554 57,648
Increase as a result of subsidiary's sale
of stock, net of income taxes . . . . 1,210,958 1,210,958
Income tax benefit arising from
the exercise of nonstatutory stock
options and disposition of common
stock acquired by option . . . . . . . 144,998 144,998
Issuance of common stock . . . . . . . . 1,525,000 7,625 13,764,729 13,772,354
Net earnings . . . . . . . . . . . . . . 2,707,156 2,707,156
--------- ------- ----------- ---------- -----------
BALANCE AT JUNE 30, 1992 . . . . . . . . . . 6,530,128 32,651 27,940,934 6,032,332 34,005,917
Issuance of common stock upon
exercise of stock options . . . . . . 167 1 532 533
Net earnings . . . . . . . . . . . . . . 657,964 657,964
--------- ------- ----------- ---------- -----------
BALANCE AT JUNE 30, 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 loss . . . . . . . . . . . . . . . .
(885,376) (885,376)
--------- ------- ----------- ---------- -----------
BALANCE AT JUNE 30, 1994 . . . . . . . . . . 6,567,295 $32,836 $28,155,502 $5,804,920 $33,993,258
========= ======= =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
30
<PAGE> 31
DVI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------------------
1994 1993 1992
------------ ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) . . . . . . . . . . . . . . . . . . $ (885,376) $ 657,964 $ 2,707,156
------------ ----------- -----------
Adjustments to reconcile net earnings (loss) to net
cash provided by (used in) operating activities:
Equity in net loss (earnings) of investees . . . 242,150 16,780 (244,053)
Gain on sale of common stock of investee . . . . (135,942)
Minority interest in subsidiaries . . . . . . . (132,404) (61,827)
Depreciation and amortization . . . . . . . . . 1,902,873 4,515,108 3,600,621
Additions to allowance accounts, net . . . . . . 979,210 1,153,585 897,085
Deferred income taxes . . . . . . . . . . . . . (2,152,084) 228,923 1,359,726
Provision for discontinued operations . . . . . 1,865,500 720,000
Loss on disposition of assets . . . . . . . . . . 3,542,913
Changes in assets and liabilities (net of effects
from purchase of acquired entities):
(Increases) decreases in:
Restricted cash . . . . . . . . . . . . . . . . (6,239,329) (2,821,330) 526,568
Accounts receivable . . . . . . . . . . . . . . (4,489,680) (4,016,448) (2,584,661)
Receivables from sale of leases
and notes secured by equipment . . . . . . . 1,948,744 1,212,300 1,220,731
Other assets . . . . . . . . . . . . . . . . . (679,089) (4,207,045) 2,155,368
Increases (decreases) in:
Accounts payable . . . . . . . . . . . . . . . 16,531,725 (475,490) 178,729
Other accrued expenses . . . . . . . . . . . .
409,889 116,464 1,513,983
------------ ----------- -----------
Total adjustments . . . . . . . . . . . . . . . . 13,862,822 (3,689,557) 8,426,328
------------ ----------- -----------
Net cash provided by (used in)
operating activities . . . . . . . . . . . . . . 12,977,446 (3,031,593) 11,133,484
------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cost of equipment acquired . . . . . . . . . . . . . . (149,027,781) (62,633,598) (41,396,620)
Receipts in excess of amounts included in income . . . 34,263,640 28,288,380 22,829,899
Furniture and fixtures additions . . . . . . . . . . . 17,606 (1,095,433) (329,317)
Investments in common and preferred stock
of investees . . . . . . . . . . . . . . . . . . . . 149,998 (1,399,614) (1,230,000)
Amounts received from minority partners . . . . . . . 116,944 140,000
Payment for purchase of acquired entities . . . . . . (1,435,720) (2,017,055)
Cash proceeds from sale of assets . . . . . . . . . . 125,000
Cash received from sale of common and preferred
stock of investee . . . . . . . . . . . . . . . . .
540,000 675,942
------------ ----------- -----------
Net cash used in investing activities . . . . . . . . (113,931,537) (38,159,041) (21,327,151)
------------ ----------- -----------
</TABLE>
(Continued)
31
<PAGE> 32
DVI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------------------
1994 1993 1992
------------ ------------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock . . . . . . . . . . . . .
$ $ $13,772,354
Exercise of stock rights, options, warrants
and sale of units . . . . . . . . . . . . . . . 214,220
533 57,648
Borrowings:
Short-term . . . . . . . . . . . . . . . . . . . 216,113,152 58,076,360 31,141,333
Long-term, net of capitalized costs . . . . . . 146,855,283 44,534,864 (283,517)
Repayments:
Short-term . . . . . . . . . . . . . . . . . . . (226,748,005) (44,204,047) (21,945,410)
Long-term . . . . . . . . . . . . . . . . . . . (35,965,998) (17,554,080) (12,092,871)
------------ ----------- -----------
Net cash provided by financing activities . . . . . 100,468,652 40,853,630 10,649,537
------------ ----------- -----------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS . . . . . . . . . . . . . . . (485,439) (337,004) 455,870
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR . . . . . . . . . . . . . . . . . 2,199,208 2,536,212 2,080,342
------------ ----------- -----------
CASH AND CASH EQUIVALENTS,
END OF YEAR . . . . . . . . . . . . . . . . . . . . $ 1,713,769 $ 2,199,208 $ 2,536,212
============ =========== ===========
Cash paid during the year for:
Interest . . . . . . . . . . . . . . . . . . . . . . . $ 5,579,168 $ 5,137,310 $ 5,872,146
============ =========== ===========
Income taxes . . . . . . . . . . . . . . . . . . . . . $ 551,848 $ 1,087,436 $ 34,229
============ =========== ===========
SUPPLEMENTAL DISCLOSURES OF NONCASH TRANSACTIONS:
Assets acquired and liabilities assumed in
connection with business acquisitions:
Fair value of net assets acquired . . . . . . . . . . . $ 2,000,000 $ 1,906,008 $ 2,278,056
============ =========== ===========
Liabilities assumed . . . . . . . . . . . . . . . . . . $ 470,288 $ 261,001
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
32
<PAGE> 33
During the year ended June 30, 1994 the following non-cash transactions
occurred in conjunction with the disposal of the Company's healthcare
operations segment (See Note 3).
<TABLE>
<S> <C>
Net assets sold or written off:
Furniture and fixtures . . . . . . . . . . . . . . . . $ 733,065
Equipment on operating leases . . . . . . . . . . . . . 2,615,011
Receivables . . . . . . . . . . . . . . . . . . . . . . 1,106,664
Other assets, net . . . . . . . . . . . . . . . . . . . 686,842
----------
$5,141,582
----------
Liabilities assumed by Company:
Accounts payable . . . . . . . . . . . . . . . . . . 544,500
Accrued liabilities . . . . . . . . . . . . . . . . 1,758,442
----------
2,302,942
----------
Less proceeds:
Cash . . . . . . . . . . . . . . . . . . . . . . . . 125,000
Notes receivable . . . . . . . . . . . . . . . . . . 3,776,611
----------
3,901,611
----------
Loss on disposal of assets $3,542,913
==========
</TABLE>
See Note 6 for discussion of additional noncash transactions.
The accompanying notes are an integral part of these consolidated financial
statements.
33
<PAGE> 34
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. GENERAL
DVI, Inc. (the "Company" or "DVI") is engaged in the business of providing
equipment financing and related services for users of diagnostic imaging,
radiation therapy and other medical technologies. The Company's customer base
consists principally of outpatient healthcare providers, physician groups and
hospitals. By the terms of the underlying financing contracts, the Company's
customers are generally considered in default if payment on a contract has not
been received. Equipment under direct financing leases and notes secured by
equipment serve as collateral for unpaid contract payments. Receivables under
medical receivables financing transaction serve as collateral for unpaid
contract payments.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation Policy - The consolidated financial statements include the
accounts of DVI and its majority and wholly-owned subsidiaries. All
significant intercompany balances and transactions have been eliminated.
Cash Equivalents - Cash equivalents include highly liquid securities with
original maturities of 90 days or less.
Investment in Direct Financing Leases and Notes Secured by Equipment - At
contract commencement, the Company records the gross contract receivable,
initial direct costs, estimated residual value of the financed equipment, if
any, and unearned income. At June 30, 1994 and 1993, unamortized initial
direct costs amounted to $5,444,135 and $3,548,361, respectively. Initial
direct costs are amortized over the life of the contract on the interest method
which reflects a constant effective yield.
Receivables from Sale of Leases and Notes Secured by Equipment - The
receivables from sale of leases and notes secured by equipment primarily relate
to the sale of financing transactions which were complete as of the end of the
respective period.
Patient service accounts receivable - Patient service accounts receivable
relate to billings for services performed by the Company's discontinued
healthcare segment of its business (See Note 3). The receivables have been
stated at their estimated net realizable value at June 30, 1994 and 1993.
Notes collateralized by medical receivables - Notes collateralized by medical
receivables consist of receivables purchased from unrelated entities (1993) and
notes receivable resulting from working capital and other loans made to
entities in the healthcare industry (1994). The purchased receivables are
stated at the lower of the Company's cost or the estimated collectible value.
The notes receivable are stated at the original issuance amount net of reserves
for uncollectible amounts.
Equipment on Operating Leases - Leases which do not meet the criteria for
direct financing leases are accounted for as operating leases. Equipment on
operating lease are recorded at cost and depreciated on a straight-line basis
over the estimated useful life of the equipment. Rental income is recorded
monthly on a straight-line basis. Initial direct costs directly associated
with operating leases are deferred and amortized over the lease term on a
straight-line basis.
Furniture and Fixtures - Furniture and fixtures are stated at cost less
accumulated depreciation and are depreciated using the straight-line method
over their estimated useful lives (generally five years).
Investments in and Advances to Investees - The investments in and advances to
investees consist of common and nonvoting preferred equity interests in
unconsolidated subsidiaries. Prior to fiscal 1994, the Company accounted for
its investments in the common stock of these subsidiaries using the equity
method of accounting. Subsequent to fiscal 1993, when the Company no longer
exerted significant influence over two of the investees, the Company began
accounting for these two investees utilizing the cost method. The Company's
common stock investment in the remaining investee is accounted for under the
equity method. The investment in the investees accounted for under the cost
method are classified as held for sale and are stated at fair value. The
investment in the common and preferred stock of the remaining entity has been
classified as held for investment because the Company does not intend to
dispose of its interest in the near term. The investment in the common stock
of the remaining investee has been written down to zero to reflect the
Company's cumulative share of equity losses in the investee. The investment in
the preferred stock has been recorded at the lower of cost or estimated market
value (See Note 6).
34
<PAGE> 35
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Goodwill - Goodwill at June 30, 1994 represents the estimated excess contingent
purchase price over the net tangible assets stemming from the acquisition of
Medical Equipment Finance Corporation ("MEF Corp."). (See Note 15.) Goodwill
at June 30, 1993 represents the excess of the purchase price over the fair
value of the net assets acquired in conjunction with the Company's healthcare
segment. Goodwill relating to the acquisition of MEF Corp. is being amortized
over a fifteen year period. Goodwill relating to the healthcare segment was
written off during fiscal 1994 in conjunction with the change in estimate of
the loss on discontinued operations (See Note 3). The Company evaluates the
recoverability of its goodwill separately for each applicable business
acquisition at each balance sheet date. The recoverability of goodwill is
determined by comparing the carrying value of the goodwill to the estimated
operating income of the related entity on an undiscounted cash flow basis.
Should the carrying value of the goodwill exceed the estimated operating income
for the expected period of benefit, an impairment for the excess is recorded at
that time.
Other assets - Other assets consists primarily of equipment held for sale or
release and is stated at the lower of cost or its estimated market value.
Debt Issuance Costs - Debt issuance costs related to securitizations and
convertible subordinated notes are offset against the related debt and are
being amortized over the life of the notes using the interest method.
Amortization of finance income - Amortization of finance income primarily
consists of the amortization of unearned income which is recognized over the
term of the contract on the interest method so as to approximate a level rate
of return of the net investment. It also includes servicing fees earned for
billing and collecting services related to the assets securitizations (See Note
8) and a gain on sale of residual interests of $799,661 during the fiscal year
ended June 30, 1994.
Receivables Financing Income - Receivables financing income is primarily
related to interest earned and fee income on notes collateralized by medical
receivables; income generated from receivable purchases; and income from
billing/collecting activities which the Company has curtailed. Interest income
on loans is recognized as earned. Income from medical receivable purchases is
recognized ratably as collections are made. Income from billing/collecting
activities is recognized as services are performed.
Gain on Sale of Financing Transactions - Gains arising from the sale of direct
financing leases and investments in notes secured by equipment occur when the
Company obtains permanent funding through the whole loan sale of a transaction
to a third party. Subsequent to a sale, the Company has no remaining interest
in the transaction or equipment and no obligation to indemnify the purchaser in
the event of a default on the transaction by the obligor, except when the sale
agreement provides for limited recourse in which the Company guarantees
reimbursement under the agreement up to specific maximum, which maximum is of
nominal value. Consequently, in the event of default by the obligor, the
lender would exercise its rights under the lien with no further recourse
against the Company, notwithstanding any facts or circumstances that might
promulgate the lender's assertion under representations and warranties made by
the Company.
Taxes on Income - The Company adopted Statement of Financial Accounting
Standards No. 109 ("SFAS 109"), Accounting for Income Taxes, in July 1992. The
effect of the adoption of this change in accounting principle was not
significant to the accompanying consolidated financial statements (See Note 9).
Deferred taxes on income result from temporary differences between the
reporting of income for financial statement and tax reporting purposes. Such
differences arise principally in lease transactions in which the operating
lease method of accounting is used for tax purposes and the financing lease
method, as described above, is used for financial statement purposes. Under
the operating lease method, leased equipment is recorded at cost and
depreciated over the useful life of the equipment and lease payments are
recorded as revenue when earned.
Net Earnings (Loss) Per Common and Common Equivalent Share - The net earnings
(loss) per common and common equivalent share are calculated using the weighted
average number of common and common equivalent shares outstanding, except where
antidilutive. For earnings from continuing operations in 1994 and net earnings
in 1993 and 1992, common equivalent shares include shares issuable upon the
exercise of stock options, rights and warrants less
35
<PAGE> 36
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the number of shares assumed purchased with the proceeds available from the
assumed exercise of the options, rights and warrants. Common equivalent shares
have been excluded from the computation of net loss per common share in 1994,
because their effect would be antidilutive. The proforma net earnings per
share for the year ended June 30, 1992, assuming that the net proceeds of
$13,772,354 from the Company's offering of its common stock were used to repay
existing short-term debt under the Company's principal revolving credit
facilities at the beginning of that year, is $.50 per share.
Recent Accounting Development - The Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of", as of July 1, 1994. The
impact of the adoption did not have a material impact on the Company's
operations.
Reclassifications - Certain amounts as previously reported have been
reclassified to conform to the year ended June 30, 1994 presentation.
NOTE 3. DISCONTINUED OPERATIONS
On June 30, 1993, the Company formally adopted a plan to divest substantially
all of its healthcare operations.
The following table presents net revenues, losses and selected balance sheet
information relating to the healthcare operations segment as of, and for the
years ended, June 30, 1994, 1993 and 1992.
<TABLE>
<CAPTION>
1994 1993 1992
------------ ----------- ------------
<S> <C> <C> <C>
Net service income . . . . . . . . . . . . . . . $6,095,397 $6,455,932 $3,007,849
Loss from discontinued operations,
net of tax of $51,000 (1994), $1,064,529
(1993) and $301,760 (1992) . . . . . . . . . . 74,000 1,497,398 345,743
Loss on disposal of discontinued operations, net
of tax $2,212,536 (1994) and $295,200 (1993) 3,070,877 424,800
Net assets . . . . . . . . . . . . . . . . . . . 1,300,000 7,589,025 2,943,897
</TABLE>
In June 1993, the Company adopted a formal plan to discontinue its DVI
Healthcare Operations segment consisting of seven outpatient healthcare
facilities which it operated or managed on a direct basis and one facility
which was in the developmental stage and not yet in operation. At June 30,
1993 the Company established a reserve for the divestiture of the operations
and recorded a loss on discontinued operations and disposal of discontinued
operations of $1.9 million net of tax. This estimate was based on certain
assumptions as to the likely timing of the divestitures, the estimated proceeds
to be received upon the sale of certain of the facilities and the financial
results of those operations pending divestiture. These operations have been
reflected as discontinued operations in the Company's financial statements at
June 30, 1992, 1993 and 1994. The pre-tax loss from discontinued operations of
$3.3 million at June 30, 1993 was comprised of $2.6 million relating to actual
and estimated losses from operations of this segment through the date of
disposition and approximately $700,000 relating to estimated losses to be
incurred upon the disposition of the segment's net assets.
At June 30, 1994, the Company had disposed or entered into definitive
agreements to sell five of these outpatient healthcare facilities and had
written off the investment and assets of the remaining two. In connection with
the disposal of these facilities, the Company retained certain assets and
liabilities of these facilities, primarily accounts receivable and accounts
payable. The change in estimate reflects the complete disposal or write-off of
the discontinued operations segment.
NOTE 4. RESTRICTED CASH AND CASH EQUIVALENTS
Restricted cash and cash equivalents consist of cash and certificates of
deposit maintained by the Company which are pledged as collateral for certain
limited recourse borrowings related to direct financing leases, notes secured
by equipment and operating leases.
36
<PAGE> 37
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
NOTE 5. INVESTMENT IN DIRECT FINANCING LEASES AND NOTES
SECURED BY EQUIPMENT AND EQUIPMENT ON OPERATING LEASES
Receivables in installments are receivable in monthly installments of varying
amounts and are collateralized by the underlying equipment. Receivables from
operating leases relate to noncancellable operating leases and are receivable
in monthly installments of varying amounts. Information regarding scheduled
collections for direct financing leases, notes secured by equipment and
operating leases are as follows:
<TABLE>
<CAPTION>
DIRECT FINANCING LEASES
AND NOTES SECURED OPERATING
BY EQUIPMENT LEASES
------------ ----------
YEAR ENDING JUNE 30,
--------------------
<S> <C> <C>
1995 . . . . . . . . . . . . . . . . . $ 75,248,978 $ 462,004
1996 . . . . . . . . . . . . . . . . . 62,880,283 412,009
1997 . . . . . . . . . . . . . . . . . 54,643,515 304,034
1998 . . . . . . . . . . . . . . . . . 44,002,771 82,500
1999 . . . . . . . . . . . . . . . . . 27,108,828
Thereafter . . . . . . . . . . . . . . 5,895,751
------------ ----------
269,780,126 1,260,547
Residual valuation . . . . . . . . . . 3,730,592
------------ ----------
Total . . . . . . . . . . . . . . . . . $273,510,718 1,260,547
============ ==========
</TABLE>
Residual valuation represents the estimated amount to be received at contract
termination from the disposition of equipment financed under direct financing
leases and notes secured by equipment. Amounts to be realized at contract
termination depend on the fair market value of the related equipment and may
vary from the recorded estimate. Residual values are reviewed on an annual
basis to determine if the equipment's fair market value is below its recorded
value.
At June 30, 1994, direct financing lease receivables amounting to $192,382,867
are assigned as collateral for the long-term debt (See Note 8).
37
<PAGE> 38
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
NOTE 6. INVESTMENTS IN AND ADVANCES TO INVESTEES
At June 30, 1994, the Company held investments in three entities, SMT Health
Services, Inc. ("SMT"), Healthcare Imaging Services, Inc. ("HIS") and IPS
Health Care, Inc. ("IPS") totalling approximately 15%, 18% and 22%,
respectively, of the outstanding common stock of each entity. In September
1994, IPS merged with Diagnostic Imaging Services, which reduced the Company's
common stock ownership from approximately 22% to 10%. At that time, the
Company began accounting for its investment in IPS on a cost basis.
The investments in these entities originally consisted of investments in
nonvoting, convertible preferred stock and voting common stock. Subsequent to
the Company's investment in SMT and HIS, those entities issued and sold shares
of their common stock in public offerings to the public. As a result of these
public offerings, the Company increased the basis of its investment in these
entities to reflect the public offering price (See Note 2). During fiscal
1991, the Company converted its preferred stock of HIS to common stock and
then sold the common stock on the open market for a gain of $135,942. During
fiscal 1994, the Company sold its preferred stock in SMT for $540,000 at no
gain or loss. After giving effect to the above transactions and the equity in
the earnings (losses) of the investees recorded by the Company, the Company's
remaining interest in SMT and HIS represents investments in common stock
totalling $2.2 million. The Company's investments in common stock of all of
these unconsolidated entities have historically been accounted for using the
equity method of accounting because the Company maintained significant
influence over the investees.
As a part of the Company's overall strategy to operate exclusively as a
financial services company, the Company initiated a process to divest of its
interests in these investees. As a part of this process, during each of the
three months ended December 31, 1993 and March 31, 1994, the Company completed
a series of steps which significantly diminished its influence over SMT and
HIS, respectively. These steps included, among other things, arrangements
with both SMT and HIS to have all existing financing transactions between DVI
and the related entity refinanced through third party lenders and
relinquishment by DVI of its first right of refusal to finance all future
equipment purchases made by the entities. The Company also agreed that, upon
completion of the refinancings, it would relinquish its representation on the
respective investees' Boards of Directors and sell the common shares it owns
in each investee. Finally, during the refinancing process, DVI agreed to vote
its common shares consistent with each of the investees' management. As a
result of the Company's significant decline in influence over HIS and SMT, the
Company's investments in those entities have been accounted for on a cost basis
since January 1, 1994 for SMT and April 1, 1994 for HIS. Had the Company
continued to account for these investees on the equity method, the net loss for
the year ended June 30, 1994 would have increased by $236,000, before
offsetting any losses due to a mark to market adjustment. Prior to these
dates, the Company accounted for its investments in HIS and SMT under the
equity method due to factors that existed which the Company believes yielded
it significant influence on the operating and financial policies of these
investees. These factors included the Company providing a significant portion
of the investees' equipment financing, the Company's right of first refusal to
finance all the investees' equipment purchases and the Company's representation
on the investees' Boards of Directors allowing voting power relating to
mergers, major dispositions of assets and liquidations. The Company's
investment in the equity of the common stock of IPS continued to be accounted
for under the equity method until September 1994 when the Company's ownership
of IPS declined to approximately 10% and its influence over IPS declined
significantly. Subsequent to the merger of IPS and DIS, the Company will use
the cost method to account for its investment in DIS. Any impairment in the
value of these investments is recorded at the time of reduction.
Subsequent to the Company's initial investment in IPS, the Company made
additional investments in common and preferred stock of IPS, financed various
leasing transactions for MRI and other equipment and entered into several
restructuring agreements with IPS as follows:
In August 1992, due to severe cash flow difficulties experienced by IPS, the
Company restructured certain debt of IPS. The restructuring of debt included,
among other things, the reduction of interest rates on four transactions,
extension of payment terms on certain direct finance lease receivables, the
transfer of direct patient billing and collection process to a wholly owned
subsidiary of the Company, the issuance of a working capital line of credit to
IPS, an agreement for IPS to provide consulting services to DVI, and the
appointment of two of the Officers of the Company to IPS's
38
<PAGE> 39
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
NOTE 6. INVESTMENTS IN AND ADVANCES TO INVESTEES (CONTINUED)
Board of Directors. At the same time, the Company acquired 730,768 shares of
restricted IPS common stock from persons affiliated with the Company in
exchange for $137,019 which represented the fair value of the common stock as
agreed to by the parties.
In September 1992, one of the Company's wholly owned subsidiaries acquired
700,000, 725,000 and 420,000 shares of IPS's Series B, C and D convertible
preferred stock, respectively for $1.00 per share. On November 12, 1992, an
additional 637,000 shares of Series E convertible preferred stock were acquired
from IPS for $1.00 per share. The preferred stock, with an aggregate value of
$2,482,000, was issued in exchange for cash of $1.12 million, exchange of debt
of $725,000 and imaging equipment valued at $637,000.
In September 1994, following the completion of a merger agreement between IPS
and Diagnostic Imaging Services, Inc., an unaffiliated entity, the Company
entered into an Agreement for the Exchange of Stock and Assets. The agreement
provided for the exchange of all the then outstanding preferred stock of IPS
owned by DVI for a new series of preferred stock (Series F). The agreement
also provided for the exchange of certain debt with a carrying value of $4
million, assumption by DVI of certain assets and liabilities of IPS valued at
approximately $164,000, the return of certain equipment under leases with IPS
to DVI valued at approximately $2,164,000 and the issuance of Series G
preferred stock of IPS valued at $2,000,000. The Company did not record a gain
or loss on any of the restructuring transactions.
The Series F and G preferred stock have liquidation preferences at $1.00 per
share, are redeemable at the option of IPS at $1.00 per share plus accrued
dividends, are convertible into common stock of IPS at $2.42 per share for
Series F and $1.00 per share for Series G, and are entitled to annual
cumulative dividends ranging from $.05 per share to $.10 per share. In
addition, the majority shareholder of IPS has the right to repurchase the
Series F and G preferred stock at $4,482,000 through September 2001.
39
<PAGE> 40
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
NOTE 7. SHORT-TERM BANK BORROWINGS
At October 3, 1994, the Company had available to it an aggregate of $162.5
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 for the borrowings of up to $79.0
million. Borrowings under this 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 variable rate equal to 200
basis points over a 30, 60 or 90-day LIBOR rate. The Revolving Credit
Agreement is renewable annually at the bank syndicate's discretion. The credit
agreement also provides that if the banks elect not to renew the facility at
the end of its stated term, then outstanding loans automatically convert to
four-year amortizing term loans at slightly higher interest rates. The Company
also has a $75.0 million interim funding facility with Prudential Securities
Realty Funding Corporation (the "Prudential Facility"). This interim funding
facility is available for certain transactions which are to be securitized
under specified terms and bear interest at a variable rate equal to 90 basis
points over the 30 day LIBOR rate. The Company also has $8.5 million of
additional interim funding facilities with other financial institutions. The
Bank Revolving Credit Agreement prohibits the Company from paying dividends
other than dividends payable solely in shares of the Company's common stock.
Additionally, the Bank Revolving Credit Agreement limits 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. At June 30, 1994, an
aggregate of approximately $34.6 million was outstanding under the Company's
interim credit facilities and $97.9 million was available.
40
<PAGE> 41
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. LONG-TERM DEBT
The discounted receivables are payable to financial institutions, relate to the
discounting of direct financing lease obligations and notes secured by
equipment primarily on a limited or nonrecourse basis, and are collateralized
by the underlying equipment receivables (See Note 5).
Future annual maturities of discounted receivables, net of capitalized issuance
costs of $2,586,379 are as follows.
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
--------------------
<S> <C>
1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 35,215,830
1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,206,157
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,641,743
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,478,346
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,324,414
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,985,094
------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . $148,851,584
============
</TABLE>
Of the total discounted receivables, $148.4 million has been permanently funded
through three asset securitization which were initiated during fiscal years
1992 through 1994. Debt under these securitizations are limited recourse, bear
interest at rates ranging between 5.34% to 7.67% and are serviced by the
Company. The agreements require that the Company comply with certain servicing
requirements as defined in the related securitization agreement, require
limited collateral in the form of cash (See Note 4) or residual interests.
Total collateral required under these arrangements amounted to $7.4 million at
June 30, 1994.
Under the Company's most recent asset securtization, permanent funding was
secured for $75.7 million of financing transactions. Approximately $55.5 was
utilized for financing transactions completed as of June 30, 1994. The
remaining $20.2 million was received subsequent to June 30, 1994, as the
underlying financing agreements were originated.
In June 1994, the Company completed a $14,112,000, net of issuance costs
totalling $888,000, private placement of convertible subordinated notes. The
Convertible Subordinated Notes are convertible into common shares at $10.60 per
share at the discretion of the noteholders, bear interest at a rate of 9 1/8%
payable in quarterly installments of interest only and mature in June 2002.
NOTE 9. INCOME TAXES
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
JUNE 30,
---------------------------------------------
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
Currently payable . . . . . . . . . . . . . . . . . . $2,623,340 $ 608,998 $ 353,479
Deferred . . . . . . . . . . . . . . . . . . . . . . (811,800) 1,219,120 1,661,486
---------- ---------- ----------
Total . . . . . . . . . . . . . . . . . . . . . $1,811,540 $1,828,118 $2,014,965
========== ========== ==========
</TABLE>
41
<PAGE> 42
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. INCOME TAXES (CONTINUED)
A reconciliation of the provision for income taxes to the amount of income tax
expense that would result from applying the federal statutory rate (35%) to
earnings from continuing operations is as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------------------
1994 1993 1992
---------- ------------ -----------
<S> <C> <C> <C>
Provision for income taxes at
the federal statutory rate . . . . . . . . . . . . $1,509,617 $1,516,001 $1,670,947
State income taxes, net of
federal tax benefit . . . . . . . . . . . . . . . 298,904 312,327 271,267
Other . . . . . . . . . . . . . . . . . . . . . . 3,019 (210) 72,751
---------- ---------- ----------
Total . . . . . . . . . . . . . . . . . . . . . $1,811,540 $1,828,118 $2,014,965
========== ========== ==========
</TABLE>
The major components of the Company's net deferred taxes of $2,329,205 and
$4,481,289 at June 30, 1994 and 1993, respectively, are as follows:
<TABLE>
<CAPTION>
1994 1993
-------- ----------
<S> <C> <C>
Accumulated depreciation . . . . . . . . . . $23,214,892 $20,343,031
Deferred recognition of lease income . . . . (18,023,343) (13,521,028)
Net operating loss carryforwards and
alternative minimum tax credits . . . . . (699,428) (1,773,334)
Gain on investment . . . . . . . . . . . . . 696,679 841,514
Allowances for uncollectible receivables . . (953,372) (544,412)
State income taxes . . . . . . . . . . . . . (379,195) (356,658)
Reserve for discontinued operations and
loss on disposal . . . . . . . . . . . . . $ 1,193,420 (302,400)
Other . . . . . . . . . . . . . . . . . . . (333,608) (205,424)
----------- -----------
Total . . . . . . . . . . . . . . . . . . $ 2,329,205 $ 4,481,289
=========== ===========
</TABLE>
Including in the tax benefit for discontinued operations in fiscal 1994 of
$2,263,536 are net deferred assets of approximately $1,340,000 which are
expected to reverse during fiscal 1995.
At June 30, 1994, the Company has federal alternative minimum tax credit
carryforwards of $699,428 available to offset future taxable income.
42
<PAGE> 43
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10. SHAREHOLDERS' EQUITY
Prior to June 30, 1994, the Company issued warrants to purchase a total of
80,000 common shares at prices between $7.625 and $8.375 per share to all
non-employee Directors of the Company and warrants to an unrelated party to
purchase up to 35,000 common shares at $8.50 per share. Additionally, in
fiscal 1992, the Company issued warrants to purchase up to 200,000 shares of
the Company's common stock at $18.00 per share to an underwriter as
compensation for investment banking services. No compensation expense was
recognized as a result of this transaction. The warrants vest at various dates
through November 1996 and expire at various dates through 2003. At June 30,
1994, warrants for 280,000 common shares were exercisable and none of the
warrants had been exercised.
In February 1991, the Company issued 575,000 units at $10.50 per unit
(consisting of 575,000 shares of the Company's common stock and redeemable
warrants to purchase 575,000 shares of the Company's common stock at $12.00 per
share) to the public for total proceeds of $6,037,500 before net offering costs
of $999,875. As of June 30, 1994, none of these warrants had been exercised.
The warrants expire in February 1996, and are redeemable by the Company
provided certain conditions are met. In addition, the underwriter has an option
to purchase an additional 50,000 units at $12.60 per share. The underwriter's
option is exercisable during a three-year period commencing February 7, 1993.
In June 1994, the Company issued convertible subordinated notes to related and
unrelated parties which are convertible at the option of the holder into
1,415,094 shares of common stock at $10.60 per share (See Note 8 and 12).
NOTE 11. STOCK OPTION PLAN
The Company has a stock option plan which currently provides for the granting
of options to employees to purchase up to 950,000 shares of the Company's
common stock at the fair market value at the date of grant. Options granted
under the plan generally vest over three to five years from the date of grant
and expire ten years after the date of the grant. Any unexercised options are
canceled ninety days subsequent to the termination of the employee and are
returned to the plan.
The following table summarizes the activity under the plan for the periods
indicated:
<TABLE>
<CAPTION>
OPTIONS EXERCISE PRICE
OUTSTANDING PER SHARE
----------- --------------
<S> <C> <C>
Outstanding at July 1, 1991 . . . . . . . . . . . . . . . . . . 314,170 $1.44 - $13.38
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . 171,000 8.25 - 13.50
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . (18,705) 1.82 - 9.63
Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . (41,293)
------- --------------
Outstanding at June 30, 1992 . . . . . . . . . . . . . . . . . 425,172 1.44 - 13.50
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . 158,600 5.00 - 13.50
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . (167) 3.19
Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . (47,500)
------- --------------
Outstanding at June 30, 1993 . . . . . . . . . . . . . . . . . 536,105 1.44 - 13.50
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . 399,625 7.00 - 10.38
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . (37,000) 3.00 - 8.38
Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . (88,868)
------- --------------
Outstanding at June 30, 1994 . . . . . . . . . . . . . . . . . 809,862 $1.44 - $13.50
======= ==============
</TABLE>
As of June 30, 1994, options to purchase 285,682 shares were exercisable.
43
<PAGE> 44
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12. RELATED PARTY TRANSACTIONS
Until March 31, 1994, a shareholder/director of the Company was also a director
of a bank which provides the Company with short-term bank borrowings. The
Company had short-term borrowings from the bank amounting to $2,907,696 and
$2,181,099 at June 30, 1994 and 1993, respectively (See Note 7).
At June 30, 1994 and 1993, receivables in installments from investees totalled
$16,427,684 and $19,285,865, respectively (See Note 3).
During the year ended June 30, 1994, the Company entered into various
agreements with an investee which are described in Note 6.
During the year ended June 30, 1994, the Company issued convertible
subordinated notes totalling $9,550,000 to related parties (See Notes 8 and
10).
NOTE 13. COMMITMENTS AND CONTINGENCIES
Facility Leases - The Company leases its facilities under noncancelable
operating leases with terms in excess of one year. The lease for the Company's
principal facility expires in May 1995 and provides for fixed increased
periodic rentals which are being recognized on a straight-line basis over the
lease term. Rent expense for the years ended June 30, 1994, 1993 and 1992
amounted to $462,731, $715,246 and $272,895, respectively. Future minimum
lease payments under these leases are as follows:
<TABLE>
<CAPTION>
FUTURE MINIMUM
YEAR ENDING JUNE 30, LEASE PAYMENTS
-------------------- ----------------
<S> <C>
1995 . . . . . . . . . . . . . . . . . . . . . . . . $ 662,959
1996 . . . . . . . . . . . . . . . . . . . . . . . . 393,324
1997 . . . . . . . . . . . . . . . . . . . . . . . . 270,419
1998 . . . . . . . . . . . . . . . . . . . . . . . . 130,985
1999 . . . . . . . . . . . . . . . . . . . . . . . . 108,800
Thereafter . . . . . . . . . . . . . . . . . . . . . 329,905
----------
Total . . . . . . . . . . . . . . . . . . . . . . $1,896,392
==========
</TABLE>
Commitments - Under certain limited recourse agreements, the Company may be
required to provide for losses incurred on uncollected lease receivables
previously collateralized. At June 30, 1994, the maximum contingent liability
under the limited recourse agreements amounted to $28,002,976. This contingent
liability, however, could be offset by any proceeds received from the resale or
remarketing of available equipment financed under the agreements.
Litigation - The Company is involved in litigation both as a plaintiff and
defendant in matters arising out of the Company's normal business activities.
Management does not expect the outcome of these lawsuits to have a material
adverse effect on the consolidated financial statements of the Company.
NOTE 14. BENEFIT PLANS
The Company maintains and administers an Employee Savings Plan pursuant to
Internal Revenue Code Section 401(k). The Plan provides for discretionary
contributions as determined by the Company's Board of Directors. The Company
contributed $48,673, $21,493 and $9,245 to the Plan during the years ending
June 30, 1994, 1993 and 1992, respectively.
44
<PAGE> 45
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15. ACQUISITIONS
In February 1992 the Company purchased from IPS Health Care, Inc. an interest
in a joint venture for $967,778 in cash and the assumption of $131,512 in
liabilities. The Company's interest in this joint venture was included in the
Company's healthcare operations segment which was discontinued as of June 30,
1993 (See Note 3).
In January 1993, the Company acquired the outstanding shares of Medical
Equipment Finance Corporation ("MEF Corp."), which had only intangible assets
at the date of acquisition. Under the terms of the purchase agreement, the
purchase price is payable before October 15, 1998 in cash or common stock of
DVI, as elected by the Company. The purchase price is contingent and is to be
determined as a percentage of the after-tax earnings of the acquired entity
during the sixty-six month period following the date of acquisition,
consequently, no amounts were recorded at the date of acquisition. At June 30,
1994, no amounts were earned under the contract, however, at that time the
Company accrued $2 million as costs in excess of net assets acquired (goodwill)
which represents the Company's estimate of the minimum amount to be payable to
former shareholders of MEF Corp. Had the acquisition occurred on July 1, 1992,
the impact on the operations of the Company would not have been significant.
During the year ended June 30, 1994, management entered into negotiations with
the former shareholders of MEF Corp. to revise certain terms of the purchase
agreement. At June 30, 1994, these negotiations had not been finalized,
however, the parties have agreed that in the event of a change in control of
the Company (as defined), the former shareholders of MEF Corp. will receive
400,000 shares of the Company's common stock.
In February 1994, the Company acquired the outstanding shares of Medical Device
Capital Company ("MDCC") . Under the terms of the purchase agreement, the
purchase price is payable before October 15, 1999 in cash or common stock of
DVI, as elected by the Company. The purchase price, is contingent, and is to
be determined by a percentage of the after-tax earnings of the acquired entity
during the sixty-four month period following the date of acquisition. Had this
acquisition occurred on July 1, 1993, the impact on the operations of the
Company would not have been significant. At June 30, 1994, no amounts were
earned under the contract and due to the uncertainty of any future contingent
payments no amounts have been accrued under such agreement.
During the year ended June 30, 1994, the Company acquired additional shares of
IPS Health Care, Inc. preferred stock. (See Note 6.)
NOTE 16. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
In accordance with Statement of Financial Accounting Standards No. 107 ("SFAS
107"), Disclosures About Fair Value of Financial Instruments, a summary of the
estimated fair value of the Company's consolidated financial instruments at
June 30, 1994 is presented below. The estimated fair value amounts have been
determined by the Company using available market information and appropriate
valuation methodologies. However, considerable judgment is necessary to
interpret market data to develop the estimated fair values. Accordingly, the
estimates presented herein are not necessarily indicative of the amounts the
Company could realize in a current market exchange. The use of different
market assumptions and/or estimation methodologies may have a material effect
on the estimated fair value amounts.
45
<PAGE> 46
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
<TABLE>
<CAPTION>
June 30, 1994
--------------------------------------------
Carrying Estimated Fair
Amount Value
<S> <C> <C>
Assets:
Receivable in installments (excluding investment
in direct financing leases) . . . . . . $ 81,732,962 $ 85,022,168
Liabilities:
Discounted receivables . . . . . . . . . . $148,851,584 $146,999,444
</TABLE>
The carrying values of cash and cash equivalents, restricted cash and cash
equivalents, receivables from sale of leases and notes secured by equipment,
patient service accounts receivable, notes collateralized by medical
receivables, investment in subordinated notes, accounts payable, other accrued
expenses, short-term bank borrowings, convertible subordinated notes and
deferred income taxes approximate fair values at June 30, 1994.
The methods and assumptions used to estimate the fair values of other financial
instruments are summarized as follows:
Receivable in installments:
The fair value of the financing contracts was estimated by discounting expected
cash flows using the current rates at which loans of similar credit quality,
size and remaining maturity would be made as of June 30, 1994. The Company
believes that the risk factor embedded in the entry-value interest rates
applicable to performing loans for which there are no known credit concerns
results in a fair valuation of such loans on an entry-value basis. In
accordance with SFAS 107, the Company has excluded receivables from lease
contracts of approximately $141.6 million from the receivable in installments
fair value calculation. Additionally, the receivable in installments - related
parties balances relates exclusively to lease receivables and has therefore
been excluded from the Company's fair value calculation.
Discounted receivables:
The fair value of discounted receivables, related to the securitization of
leases and notes, was estimated by discounting future cash flows using rates
currently available for debt with similar terms and remaining maturities.
The fair value estimates presented herein were based on information available
as of June 30, 1994. Although the Company is not aware of any factors that
would significantly affect the estimated fair values, such values have not been
updated since June 30, 1994; therefore, current estimates of fair value may
differ significantly from the amounts presented herein.
46
<PAGE> 47
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of the quarterly results of operations for the
fiscal years ended June 30, 1994 and 1993:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30
-------------- ------------- ---------- ---------
(In thousands, except per share data)
FISCAL 1994
- - -----------
<S> <C> <C> <C> <C>
Finance and other income . . . . . . . . . . $4,262 $4,567 $5,523 $6,559
Margins earned . . . . . . . . . . . . . . . 2,646 2,675 3,132 3,625
Earnings from continuing operations
before provision for income taxes,
equity in net earnings (loss) of investees
and discontinued operations . . . . . . . 634 1,006 1,232 1,441
Earnings from continuing operations . . . . . 330 447 646 837
Loss from discontinued operations . . . . . . -0- -0- -0- (3,145)
Net earnings (loss) . . . . . . . . . . . . . 330 447 646 (2,308)
Net earnings (loss) per common and
common equivalent share:
From continuing operations . . . . . . . .05 .07 .10 .12
From discontinued operations . . . . . . -0- -0- -0- (.47)
------ ------ ------ ------
Net earnings (loss) per share . . . . . . $ .05 $ .07 $ .10 $ (.35)
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30
-------------- ------------- ---------- ---------
(In thousands, except per share data)
FISCAL 1993
- - -----------
<S> <C> <C> <C> <C>
Finance and other income . . . . . . . . . . $4,321 $3,341 $3,654 $3,883
Margins earned . . . . . . . . . . . . . . . 3,108 2,167 2,516 2,403
Earnings from continuing operations
before provision for income taxes,
equity in net earnings (loss) of
investees and discontinued
operations . . . . . . . . . . . . . . 1,896 903 1,038 622
Earnings from continuing operations . . . . . 1,172 498 562 348
Loss from discontinued operations . . . . . . (275) (261) (520) (866)
Net earnings (loss) . . . . . . . . . . . . . 897 237 42 (518)
Net earnings (loss) per common and
common equivalent share:
From continuing operations $.18 $.08 $ .08 $ .05
From discontinued operations $ (.04) $ (.04) $ (.08) $ (.13)
------ ------ ------ ------
Net earnings per share $ .14 $ .04 $ .00 ($.08)
====== ====== ====== ======
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not Applicable.
47
<PAGE> 48
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding the Company's Directors is incorporated herein by
reference to the Company's definitive proxy statement filed on October 28,
1994, with the Securities and Exchange Commission pursuant to Regulation 14A
under the Securities Exchange Act of 1934, as amended. Information regarding
the Company's Executive Officers is set forth in Part I of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 402 of Regulation S-K is incorporated herein
by reference to the Company's definitive proxy statement filed on October 28,
1994 with the Securities and Exchange Commission pursuant to Regulation 14A
under the Securities Exchange Act of 1934, as amended.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 403 of Regulation S-K is incorporated herein
by reference to the Company's definitive proxy statement filed on October 28,
1994, with the Securities and Exchange Commission pursuant to Regulation 14A
under the Securities Exchange Act of 1934, as amended.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 404 of Regulation S-K is incorporated herein
by reference to the Company's definitive proxy statement filed on October 28,
1994, with the Securities and Exchange Commission pursuant to Regulation 14A
under the Securities Exchange Act of 1934, as amended.
48
<PAGE> 49
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT:
(1) Financial Statements:
See Index to Consolidated Financial Statements included as part of this
Form 10-K at Page 25.
(2) Financial Statement Schedules:
<TABLE>
<CAPTION>
SCHEDULE PAGE
NUMBER DESCRIPTION NUMBER
------ ----------- ------
<S> <C> <C>
II. Amounts Receivable From Related Parties and Underwriters,
Promoters and Employees Other Than Related Parties . . . . . . . . 51
IV. Indebtedness of and to Related Parties - Not Current . . . . . . . 53
VIII. Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . 54
IX. Short-Term Borrowings . . . . . . . . . . . . . . . . . . . . . . . 55
X. Supplementary Income Statement Information . . . . . . . . . . . . 56
</TABLE>
All other schedules are omitted because of the absence of conditions
under which they are required or because all material information
required to be reported is included in the consolidated financial
statements and notes thereto.
(3) Exhibits:
See Index to Exhibits as part of Item 8 of this Form 10-K on Pages
57-59.
(B) REPORTS ON FORM 8-K:
There were no reports on Form 8-K filed during the fourth quarter of the
fiscal year ended June 30, 1994.
49
<PAGE> 50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this amendment to be signed on its
behalf by the undersigned, thereunto duly authorized.
DVI, INC.
(Registrant)
Date: June 16, 1995 By: /s/DAVID L. HIGGINS
-----------------------------------------
David L. Higgins, Chief Executive Officer
50
<PAGE> 51
DVI, INC.
SCHEDULE II - AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS,
PROMOTERS AND EMPLOYEES OTHER THAN RELATED PARTIES
<TABLE>
<CAPTION>
DEDUCTIONS
BALANCE AT ---------------------------- (1)
BEGINNING AMOUNTS AMOUNTS BALANCE AT
NAME OF DEBTOR OF YEAR ADDITIONS COLLECTED WRITTEN OFF END OF YEAR
- - -------------- -------- --------- --------- ------------- -----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED JUNE 30, 1992:
SMT Health Services, Inc. $ 2,583,355 $ 8,927,669 $ 3,618,991 $ $ 7,892,033
=========== =========== =========== ========== ===========
YEAR ENDED JUNE 30, 1993:
SMT Health Services, Inc. $ 7,892,033 $ 9,727,103 $ 7,581,451 $ -0- $10,037,685
IPS Health Care, Inc. 3,755,049 756,654 2,998,395
Healthcare Imaging Services, Inc. 3,519,830 5,883,958 3,154,003 6,249,785
----------- ----------- ----------- ---------- -----------
$15,166,912 $15,611,061 $11,492,108 $ $19,285,865
=========== =========== =========== ========== ===========
YEAR ENDED JUNE 30, 1994:
SMT Health Services, Inc. $10,037,685 $ 5,790,377 $ 7,043,333 $ -0- $ 8,784,729
IPS Health Care, Inc. 2,998,395 130,438 864,759 2,264,074
Healthcare Imaging Services, Inc. 6,249,785 2,031,852 2,902,756 5,378,881
----------- ----------- ----------- ---------- -----------
$19,285,865 $ 7,952,667 $10,810,848 $ $16,427,684
=========== =========== =========== ========== ===========
</TABLE>
51
<PAGE> 52
DVI, INC.
SCHEDULE II - AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS,
PROMOTERS AND EMPLOYEES OTHER THAN RELATED PARTIES
52
<PAGE> 53
DVI, INC. AND SUBSIDIARIES
SCHEDULE IV - INDEBTEDNESS OF AND TO RELATED PARTIES - NOT CURRENT
<TABLE>
<CAPTION>
BALANCE
NAME AT BEGINNING BALANCE AT
OF CREDITOR OF YEAR ADDITIONS DEDUCTIONS END OF YEAR
- - ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
YEAR ENDED JUNE 30, 1994
Hannah S. and Samuel A.
Cohn Memorial Foundation(1) $ $ 200,000 $ $ 200,00
Canadian Imperial Bank of
Commerce Trust Company
as Trustee of Settlement T-
1740 Trusts #14, #27, #28, #29,
#30, #31, #32, #33, #34, #35
and #36(2) 7,600,000 7,600,000
Luckman Family Ventures(3) 100,000 100,000
Gerald L. Cohn Revocable Trust(4) 800,000 800,000
Brenda McHugh(5) 250,000 250,000
Richard Weiss and Gail Weiss,
Jtwros(6) 100,000 100,000
Robert Luckman(7) 100,000 100,000
Sidney Luckman Individual
Retirement Account(8) 400,000 400,000
---------- ---------- ---------- ----------
$ $9,550,000 $ $9,550,000
========== ========== ========== ==========
</TABLE>
(1) The Hannah S. and Samuel A. Cohn Memorial Foundation (the "Foundation")
is a charitable enterprise of which Gerald L. Cohn, a Director of the
Company, is the President and a board member. Mr. Cohn has no financial
interest in the Foundation, but may be deemed for securities law purposes
to be the beneficial owner of the securities owned by the Foundation by
reason of his positions with the Foundation.
(2) Canadian Imperial Bank of Commerce Trust Company (Bahamas) Limited, as
trustee of trusts for the benefit of various descendants of A.N. Pritzker,
deceased, is the record holder of 1,483,739 shares of common stock.
(3) Luckman Family Ventures is a limited partnership in which Robert Luckman
and certain of the grandchildren of Sidney Luckman, a Director of the
Company, are general partners. Robert Luckman is the son of Sidney
Luckman.
(4) The Gerald L. Cohn Revocable Trust is a trust of which Mr. Cohn is a
co-trustee and the sole beneficiary. For securities law purposes, Mr.
Cohn is deemed to be the beneficial owner of the securities owned by the
Cohn Trust.
(5) Brenda McHugh is the wife of John E. McHugh, a Director of the Company.
(6) Mr. and Mrs. Weiss are the son-in-law and daughter, respectively, of
Sidney Luckman, a Director of the Company.
(7) Robert Luckman is the son of Sidney Luckman, a Director of the Company.
(8) Sidney Luckman is a Director of the Company.
Note: At June 30, 1994 and 1993, the Company had no indebtedness of related
parties.
53
<PAGE> 54
DVI, INC. AND SUBSIDIARIES
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO
BEGINNING COSTS AND BALANCE AT
CLASSIFICATION OF YEAR EXPENSES RECOVERIES WRITTEN OFF END OF YEAR
- - -------------- --------- ---------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Year ended June 30, 1994 -
Allowance for doubtful
accounts (1) . . . . . . . $1,332,374 $1,715,576 $ -0- $264,125 $2,783,825
========== ========== ====== ======== ==========
Year ended June 30, 1993 -
Allowance for doubtful
accounts (1) . . . . . . . $1,166,480 $ 248,069 $ -0- $ 82,175 $1,332,374
========== ========== ====== ======== ==========
Year ended June 30, 1992 -
Allowance for doubtful
accounts (1) . . . . . . . $ 696,499 $ 506,503 $ -0- $ 36,522 $1,166,480
========== ========== ====== ======== ==========
</TABLE>
(1) Activity and balances in the allowance for doubtful accounts are net of
amounts from the Company's discontinued operations segment as the related
receivables are presented at their net realizable value (See Note 2 to the
accompanying consolidated financial statements).
54
<PAGE> 55
DVI, INC. AND SUBSIDIARIES
SCHEDULE IX - SHORT-TERM BORROWINGS
<TABLE>
<CAPTION>
MAXIMUM AVERAGE WEIGHTED
AMOUNT AMOUNT AVERAGE
WEIGHTED OUTSTANDING OUTSTANDING INTEREST
CATEGORY OF AGGREGATE BALANCE AT AVERAGE DURING DURING RATE DURING
SHORT-TERM BORROWINGS END OF YEAR INTEREST RATE THE YEAR THE YEAR THE YEAR
- - --------------------- ------------- ------------- ------------- ------------ -------------
(A) (B) (C)
<S> <C> <C> <C> <C> <C>
Year ended June 30, 1994 -
Lines of Credit . . . . . . . . $34,586,373 7.06% $88,965,943 $56,986,775 6.85%
Year ended June 30, 1993 -
Lines of Credit . . . . . . . . $45,221,225 5.65% $49,294,232 $36,621,322 6.02%
Year ended June 30, 1992 -
Lines of Credit . . . . . . . . $31,348,911 7.00% $38,793,640 $30,447,584 8.30%
</TABLE>
(A) Represent borrowings under the Company's equipment lease lines of credit.
(B) The average amount outstanding during the year was computed by dividing the
total of month-end outstanding principal balances by 12.
(C) The weighted average interest rate during the year was computed by dividing
the actual interest expense by the average short-term borrowing amount
outstanding.
55
<PAGE> 56
DVI, INC. AND SUBSIDIARIES
SCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------------------------
1994 1993 1992
--------------- --------------- ----------------
<S> <C> <C> <C>
Maintenance and repairs . . . . . . . . . $233,934 $564,566 $531,131
</TABLE>
Taxes other than payroll and income taxes, royalties, depreciation and
amortization of intangible assets and pre-operating costs and advertising costs
are not presented inasmuch as each item does not exceed 1% of revenues as shown
in the consolidated statements of operations or is disclosed elsewhere in the
consolidated financial statements.
56
<PAGE> 57
DVI, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- - ------ ----------------------
<S> <C>
3(a) Certificate of Incorporation, as amended, of Registrant(D)
3(b) By-laws of Registrant(B)
4(a) Article X of the By-laws of Registrant(B)
4(b) Form of Unit Purchase Option(E)
4(c) Form of Warrant Agreement among Stratton Oakmont, Inc., as Underwriter, American Stock Transfer & Trust
Company, as Warrant Agent and the Registrant(E)
10(a) Employment Agreement dated as of July 1, 1986, among the registrant, DVI Medical Corporation and David
L. Higgins(C)
10(b) Form of Executive Compensation Agreement(C)
10(c) DVI Financial Services Inc. Employee Savings Plan(B)
10(d) Revolving Loan Agreement dated October 18, 1988, between National Westminster Bank USA and DVI Financial
Services Inc.(B)
10(e) Lease Financing Credit Agreement dated September 30, 1988, between California Federal Savings and Loan
Association and DVI Financial Services Inc.(B)
10(f) Loan Agreement dated March 31, 1989, between the Hazleton National Bank and DVI Financial Services
Inc.(B)
10(g) Revolving Loan Agreement dated May 1, 1989, between PRIVATbanken A/S and DVI Financial Services Inc.(B)
10(h) Master Purchase, Remarketing, and Deficiency Agreement between DVI Financial Services Inc. and
Toshiba America Medical Systems, Inc. and Toshiba America MCI, Inc.(D)
10(i) Amendment Number One to $5,000,000 Revolving Loan Agreement dated October 18, 1988, between DVI
Financial Services Inc. and National Westminster Bank USA(D)
10(j) Amendment and Supplement Number Two to Revolving Loan Agreement dated as of December 31, 1989, between
DVI Financial Services Inc., registrant and National Westminster Bank USA(D)
10(k) Second Amendment to Lease Financing Credit Agreement dated as of February 2, 1990, between California
Federal Bank and DVI Financial Services Inc.(D)
10(l) Revolving Loan Agreement dated July 27, 1989, between Lincoln Savings Bank, FSB and DVI Financial
Services Inc.(A)
10(m) Revolving Credit Agreement dated as of March 21, 1990, between First Union National Bank of North
Carolina and DVI Financial Services Inc.(A)
10(n) Amendment to Revolving Loan Agreement dated May 14, 1990, between PRIVATbanken A/S and DVI Financial
Services Inc.(A)
10(o) Amended 1986 Incentive Stock Option Plan(A)
10(p) Amendment to Revolving Loan Agreement dated July 26, 1990, between Unibank A/S (formerly PRIVATbanken
A/S) and DVI Financial Services Inc.(E)
10(q) Fifth Amendment to Lease Financing Credit Agreement, dated October 31, 1990, between DVI Financial
Services Inc. and California Federal Bank(E)
10(r) Loan Agreement by and among DVI Financial Services Inc., the Banks Signatory Thereto and National
Westminster Bank USA, as Agent and as a Bank, dated June 14, 1991(F)
10(s) Amendment No. 1 to Loan Agreement by and among DVI Financial Services Inc., the Banks Signatory Thereto
and National Westminster Bank USA, as Agent and as a Bank, dated as of September 25, 1991, but effective
June 14, 1991(F)
10(t) Stock Purchase Agreement by and among New Shared Medical Technologies, Inc., Shared Medical
Technologies, Inc. and DVI Financial Services Inc.(F)
</TABLE>
57
<PAGE> 58
DVI, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS (CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- - ------ ----------------------
<S> <C>
10(u) Amended and Restated Stock Purchase Agreement dated as of November 27, 1991, by and among SMT Health
Services Inc., Shared Medical Technologies, Inc. and DVI Financial Services Inc.+
10(v) Amendment No. 2 to Loan Agreement by and among DVI Financial Services Inc., the Banks Signatory Thereto
and National Westminster Bank USA, as Agent and as a Bank, dated as of December 5, 1991 but effective June
14, 1991+
10(w) Amendment No. 3 to Loan Agreement by and among DVI Financial Services Inc., the Banks Signatory Thereto
and National Westminster Bank USA, as Agent and as a Bank, dated as of February 28, 1992+
10(x) $5,000,000 Revolving Credit Loan Agreement between DVI Financial Services Inc. and UJB Leasing
Corporation+
10(y) Purchase Agreement dated as of October 22, 1991, by and among DMR Associates, L.P., HIS Acquisition,
Inc. and DVI Financial Services Inc.+
10(z) Direct Stock Option Agreements, dated as of October 16, 1990, between the Company and each of the
Company's directors other than Mr. Higgins+
10(aa) Amended and Restated Letter Agreement dated December 15, 1991, between the Company and W.I.G.
Securities Limited Partnership regarding investment banking Services+
10(bb) Warrant dated April 27, 1992, executed by the registrant on behalf of W.I.G. Securities Limited
Partnership+
10(cc) Amendment No. 4 to Loan Agreement by and among DVI Financial Services Inc., the Banks Signatory Thereto
and National Westminster Bank U.S.A., as Agent and as a Bank, dated as of March 31, 1992+
10(dd) Agreement and Plan of Merger, dated January 17, 1992, among DVI Sub, Inc., registrant and Northwest
Georgia Neurovascular Associates, Inc.+
10(ee) Agreement dated March 12, 1992, by and among DVI Health Services Corporation, DVI Sub, Inc., Northwest
Georgia Neurovascular Associates, Inc., John S. Kirkland, M.D., E. Leon Rhodes, M.D., and D. Michael
Rogers, M.D.+
10(ff) Agreement dated March 27, 1992, by and among DVI Health Services Corporation, DVI Sub, Inc., Northwest
Georgia Neurovascular Associates, Inc., John S. Kirkland, M.D., E. Leon Rhodes, M.D., and D. Michael
Rogers, M.D.+
10(gg) Agreement dated April 3, 1992, by and among DVI Health Services Corporation, DVI Sub, Inc., Northwest
Georgia Neurovascular Associates, Inc., John S. Kirkland, M.D., E. Leon Rhodes, M.D., and D. Michael
Rogers, M.D.+
10(hh) Agreement dated April 8, 1992, by and among DVI Health Services Corporation, DVI Sub, Inc., Northwest
Georgia Neurovascular Associates, Inc., John S. Kirkland, M.D., E. Leon Rhodes, M.D., and D. Michael
Rogers, M.D.+
10(ii) Agreement, Consent and Waiver dated as of February 28, 1992, by and between IPS Healthcare, Inc., MAG-
RES Group, Inc., registrant, and DVI Sub, Inc.+
10(jj) Letter Agreement between IPS Healthcare, Inc. and DVI Financial Services Inc. dated February 28, 1992+
10(kk) Letter Agreement between IPS Healthcare, Inc., Towers Financial Corporation and registrant dated
April 3, 1992+
10(ll) Security Agreement dated as of April 7, 1992, between DVI Financial Services Inc. and IPS Healthcare,
Inc.+
</TABLE>
58
<PAGE> 59
DVI, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS (CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- - ------ ----------------------
<S> <C>
10(mm) Amendments No. 5 through 8 to Loan Agreement by and among DVI Financial Services Inc., the Banks
Signatory thereto and National Westminster Bank USA, as Agent and as a Bank, dated as of June 12, 1992,
June 29, 1992, July 14, 1992, July 24, 1992, respectively(G)
10(nn) Common Stock Redemption Agreement by and among DVI Health Services Corporation, Northwest Georgia
Neurovascular Associates, Inc., John S. Kirkland, M.D., Leeon Rhodes, M.D., D. Michael Rogers, M.D. dated
as of August 19, 1992(G)
10(oo) Underwriting Agreement by and among DVI Health Services Corporation, The Chicago Corporation and W.I.G.
Securities as the Underwriters dated May 14, 1992(G)
10(pp) Amendments No. 9 and 10 to Loan Agreement by and among DVI Financial Services Inc., the Banks signatory
thereto and National Westminster Bank USA, as Agent and as Bank, dated as of December 31, 1992 and January
22, 1993, respectively(H)
10(qq) Loan Agreement by and among Hazleton National Bank and DVI Financial Services Inc., dated July, 1993 (H)
10(rr) Indemnification Agreement by and between DVI Health Services Corporation and Anthony J. Turek,
dated as of August 16, 1992(H)
10(ss) Indemnification Agreement by and between DVI Health Services Corporation and David L. Higgins, dated as
of August 16, 1992(H)
10(tt) Stock Purchase Agreement between DVI Health Services Corporation and David L. Higgins, dated August 20,
1992(H)
10(uu) Stock Purchase Agreement between DVI Health Services Corporation and Sidney Luckman, dated August
20, 1992(H)
10(vv) Stock Purchase Agreement between DVI Health Services Corporation and Hazleton National Bank, as
trustee of certain trusts for the benefit of Cynthia J. Cohn and Shelley Cohn Schmidt, dated August
20, 1992(H)
10(ww) Stock Purchase Agreement between DVI Healthcare Operations, Inc. and IPS Health Care, Inc., dated
October 30, 1992(H)
10(xx) Stock Purchase Agreement between DVI Healthcare Operations, Inc. and IPS Health Care, Inc., dated
October 30, 1992(H)
10(yy) Stock Purchase Agreement between DVI Healthcare Operations, Inc. and IPS Health Care, Inc., dated
November 12, 1992(H)
10(zz) First Amendment to Revolving Credit Loan Agreement between DVI Financial Services Inc. and UJB Leasing
Corporation, dated as of July 31, 1992(H)
10(aaa) Stock Purchase Agreement between DVI Health Services Corporation and MEFC Partners L.P., dated as
of January 6, 1993H)
10(bbb) Amendments No. 11, 12, 13, and 14 to Loan Agreement by and among DVI Financial Services Inc., the Banks
signatory thereto and National Westminster Bank USA, as Agent and as Bank, dated as of September 28, 1993,
March 31, 1994 and April 29, 1994, respectively.(I)
10(ccc) Interim Loan and Security Agreement between Prudential Securities Realty Funding Corporation and DVI
Financial Services Inc. dated as of March 16, 1994.(I)
10(ddd) Stock Purchase Agreement by and between DVI Financial Services Inc., Buyer, and MDCC Partners, L.P.,
Seller.(I)
21 Subsidiaries of the Registrant(J)
23 Consent of Deloitte and Touche(J)
+ Filed previously as an Exhibit to the Company's Registration Statement on Form S-2 (Registration No.
33-46664), as amended, and by this reference is incorporated herein.
(A) Filed previously as an Exhibit to the Company's Form 10-K for the year ended June 30, 1990 and by this
reference is incorporated herein.
(B) Filed previously as an Exhibit to the Company's Registration Statement on Form S-18, as amended, and by
this reference is incorporated herein.
(C) Filed previously as an Exhibit to the Company's Form 10-K for the year ended June 30, 1989 and by this
reference is incorporated herein.
</TABLE>
59
<PAGE> 60
DVI, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS (CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- - ------ ----------------------
<S> <C>
(D) Filed previously as an Exhibit to the Company's Registration Statement on Form S-3, as amended, and by
this reference is incorporated herein.
(E) Filed previously as an Exhibit to the Company's Registration Statement on Form S-2 (Registration No.
33-37964), as amended, and by this reference is incorporated herein.
(F) Filed previously as an Exhibit to the Company's Form 10-K for the year ended June 30, 1991 and by this
reference is incorporated herein.
(G) Filed previously as an Exhibit to the Company's Form 10-K for the year ended June 30, 1992 and by this
reference is incorporated herein.
(H) Filed previously as an Exhibit to the Company's Form 10-K for the year ended June 30, 1993 and by this
reference is incorporated herein.
(I) Filed previously as an Exhibit to the Company's Form 10-Q for the quarter ended March 31, 1994 and by this
reference is incorporated herein.
(J) Filed herewith.
</TABLE>
60
<PAGE> 1
DVI, INC.
SUBSIDIARIES AND SUB-SUBSIDIARIES
EXHIBIT 21
<TABLE>
<CAPTION>
PERCENTAGE OWNED BY
-----------------------
NAME OF ENTITY/JURISDICTION OF ORGANIZATION REGISTRANT SUBSIDIARY
- - ------------------------------------------- ---------- ----------
<S> <C> <C>
DVI Financial Services Inc. (Delaware) 100%
DVI Healthcare Operations, Inc. (Delaware) 100%
DVI Business Credit Corporation (Delaware) 100%
DVI Lease Finance Corporation II (Delaware) 100%
DVI Receivables Corp. 100%
DVI Lease Finance Corp. 1993-A 100%
West Los Angeles MRI, Inc. (California) 100%
A/R Advantage, Inc. (California) 100%
Northwest Georgia Neurovascular Associates, Inc.
(Georgia) 100%
DVI Tempe, Inc. (Delaware) 100%
DVI of Houston, Inc. (Delaware) 100%
Wausau MRI, Inc. (Delaware) 100%
Westgate Imaging Center, Inc. (Delaware) 100%
West Los Angeles MRI, L.P. 100%
Beverly Hills Imaging, L.P. 100%
Vascular Centers of America, L.P. 60%
DVI-TMC Imaging Limited Partnership 60%
Texas MRI, JV 59.52%
</TABLE>
<PAGE> 1
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to our report dated October 3, 1994 on the financial statements and
financial statement schedules of DVI, Inc., filed as part of the Annual Report
on Form 10-K for the year ended June 30, 1994, being considered as including
the amendments to such financial statements and schedules included in Amendment
No. 1 to such Annual Report.
/s/ Deloitte & Touche LLP
- - ---------------------------------
Costa Mesa, California
June 15, 1995
