<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-Q/A-1
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
/X/ OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended: DECEMBER 31, 1994
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
/ / OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from to
-------- --------
Commission file number 0-16271
DVI, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 22-2722773
- - ------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
ONE PARK PLAZA, SUITE 800
IRVINE, CALIFORNIA 92714
------------------------ ----------
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number including area code: (714) 474-5800
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date:
Common Stock, $.005 par value - 6,684,324 shares as of January 31, 1995.
<PAGE> 2
This Amendment on Form 10-Q/A-1 is being filed for purposes of
amending Note 2 to Consolidated Financial Statements to the Registrant's
Quarterly Report on Form 10-Q for the three months ended December 31, 1994
filed with the Securities and Exchange Commission on February 13, 1995 (the
"Form 10-Q") to provide certain 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-Q contained in the
Registrant's Quarterly Report on Form 10-Q for the period ended March 31, 1995.
DVI, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION: PAGE
NUMBER
------
<S> <C>
ITEM 1. FINANCIAL STATEMENTS:
Consolidated Balance Sheets -
December 31, 1994 (unaudited) and June 30, 1994 . . . . . . . . . . . . . . . . . . . . 3 - 4
Consolidated Statements of Operations -
Three months and six months ended December 31, 1994 and 1993 (unaudited) . . . . . . . 5
Consolidated Statements of Shareholders' Equity -
From July 1, 1993 through December 31, 1994 (unaudited) . . . . . . . . . . . . . . . . 6
Consolidated Statements of Cash Flows -
Six months ended December 31, 1994 and 1993 (unaudited) . . . . . . . . . . . . . . . . 7 - 8
Notes to Consolidated Financial Statements (unaudited) . . . . . . . . . . . . . . . . . . 9 - 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION . . . . . . . . . . . . . . . . . 11 - 17
PART II. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
</TABLE>
<PAGE> 3
DVI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1994 1994
------------ ------------
<S> <C> <C>
CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . . . . . . . . . $ 357,549 $ 1,713,769
------------ ------------
RESTRICTED CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . . . . 12,048,009 13,064,814
------------ ------------
INVESTMENT IN DIRECT FINANCING LEASES AND
NOTES SECURED BY EQUIPMENT:
Receivable in installments (net of allowance
of $2,965,732 at December 31, 1994 and
$2,497,916 at June 30, 1994) . . . . . . . . . . . . . . . . . . . .
345,097,033 250,854,526
Receivable in installments - related parties . . . . . . . . . . . . . 9,027,867 16,427,684
Residual valuation . . . . . . . . . . . . . . . . . . . . . . . . . . 3,993,387 3,730,592
Unearned income . . . . . . . . . . . . . . . . . . . . . . . . . . . . (62,440,093) (47,643,772)
------------ ------------
Net investment in direct financing leases and
notes secured by equipment . . . . . . . . . . . . . . . . . . . 295,678,194 223,369,030
------------ ------------
OTHER RECEIVABLES:
From sale of leases and notes secured by equipment . . . . . . . . . . 118,143 911,585
Patient service accounts receivable . . . . . . . . . . . . . . . . . 2,282,055 3,667,123
Notes collateralized by medical receivables . . . . . . . . . . . . . . 10,564,207 6,006,600
------------ ------------
Total other receivables . . . . . . . . . . . . . . . . . . . . . . 12,964,405 10,585,308
------------ ------------
EQUIPMENT ON OPERATING LEASES
(net of accumulated depreciation of $1,701,192 at
December 31, 1994 and $1,163,591 at June 30, 1994) . . . . . . . . . . 4,919,204 2,893,683
------------ ------------
FURNITURE AND FIXTURES
(net of accumulated depreciation of $660,114 at
December 31, 1994 and $525,032 at June 30, 1994) . . . . . . . . . . . 859,378 817,135
------------ ------------
INVESTMENTS IN INVESTEES . . . . . . . . . . . . . . . . . . . . . . . . . 6,653,885 4,646,382
------------ ------------
GOODWILL, NET . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,957,586 2,024,253
------------ ------------
OTHER ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,851,359 6,834,972
------------ ------------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . $339,289,569 $265,949,346
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 4
DVI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1994 1994
------------ ------------
<S> <C> <C>
ACCOUNTS PAYABLE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,297,279 $ 23,861,905
------------ ------------
OTHER ACCRUED EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . 5,471,238 8,215,021
------------ ------------
SHORT-TERM BANK BORROWINGS . . . . . . . . . . . . . . . . . . . . . . . . 127,297,086 34,586,373
------------ ------------
DEFERRED INCOME TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . 2,738,026 2,329,205
------------ ------------
LONG-TERM DEBT:
Discounted receivables (primarily nonrecourse) . . . . . . . . . . . . 143,524,132 148,851,584
Convertible subordinated notes . . . . . . . . . . . . . . . . . . . . 13,715,321 14,112,000
------------ ------------
Total long-term debt, net . . . . . . . . . . . . . . . . . . . . . 157,239,453 162,963,584
------------ ------------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . 303,043,082 231,956,088
------------ ------------
SHAREHOLDERS' EQUITY:
Preferred Stock, $10.00 par value; authorized
100,000 shares; no shares issued
Common Stock, $.005 par value; authorized
13,000,000 shares; outstanding 6,674,324 shares at
December 31, 1994 and 6,567,295 shares at June 30, 1994 . . . . . . 33,372 32,836
Additional capital . . . . . . . . . . . . . . . . . . . . . . . . . . 29,001,888 28,155,502
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,211,227 5,804,920
------------ ------------
TOTAL SHAREHOLDERS' EQUITY . . . . . . . . . . . . . . . . . . . 36,246,487 33,993,258
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY . . . . . . . . . . . $339,289,569 $265,949,346
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 5
DVI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------ ------------------------
1994 1993 1994 1993
------------------------ ------------------------
<S> <C> <C> <C> <C>
FINANCE AND OTHER INCOME:
Amortization of finance income . . . . . . . . . . . . . . $7,906,700 $3,912,608 $14,458,816 $7,438,974
Gain on sale of financing transactions . . . . . . . . . . 625,187 111,471 625,187 245,862
Other Income . . . . . . . . . . . . . . . . . . . . . . . 163,152 542,840 808,290 1,145,295
---------- ---------- ----------- ----------
Finance and other income . . . . . . . . . . . . . . . . . 8,695,039 4,566,919 15,892,293 8,830,131
Interest expense . . . . . . . . . . . . . . . . . . . . . 4,984,791 1,891,774 9,135,943 3,509,165
---------- ---------- ----------- ----------
MARGINS EARNED 3,710,248 2,675,145 6,756,350 5,320,966
Selling, General and Administrative . . . . . . . . . . . . 2,186,086 1,669,330 4,347,200 3,680,937
---------- ---------- ----------- ----------
EARNINGS BEFORE PROVISION FOR INCOME TAXES AND
EQUITY IN NET LOSS OF INVESTEES . . . . . . . . . . . . . . 1,524,162 1,005,815 2,409,150 1,640,029
PROVISION FOR INCOME TAXES . . . . . . . . . . . . . . . . . . 631,150 422,438 1,002,843 688,809
---------- ---------- ----------- ----------
EARNINGS BEFORE EQUITY IN NET LOSS OF INVESTEES . . . . . . . . 893,012 583,377 1,406,307 951,220
EQUITY IN NET LOSS OF INVESTEES . . . . . . . . . . . . . . . (136,000) (174,150)
---------- ---------- ----------- ----------
NET EARNINGS . . . . . . . . . . . . . . . . . . . . . . . . . $ 893,012 $ 447,377 $ 1,406,307 $ 777,070
========== ========== =========== ==========
NET EARNINGS PER COMMON AND COMMON
EQUIVALENT SHARE . . . . . . . . . . . . . . . . . . . . . $ .13 $ .07 $ .21 $ .12
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING . . . . . . . . . . . 6,831,000 6,783,000 6,816,000 6,700,000
========== ========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE> 6
DVI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
FROM JULY 1, 1993 THROUGH DECEMBER 31, 1994
-----------------------------------------------------------------
COMMON STOCK
$.005 PAR TOTAL
-------------------- ADDITIONAL RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
--------- ------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE AT JULY 1, 1993 . . . . . . . . . . . 6,530,295 $32,652 $27,941,466 $6,690,296 $34,664,414
Issuance of common stock upon
exercise of stock options . . . . . . 37,000 184 214,036 214,220
Net earnings . . . . . . . . . . . . . . (885,376) (885,376)
--------- ------- ----------- ---------- -----------
BALANCE AT JUNE 30, 1994 . . . . . . . . . . 6,567,295 $32,836 $28,155,502 $5,804,920 $33,993,258
Issuance of common stock upon:
Exercise of stock options . . . . . . 59,860 300 346,622 346,922
Conversion of subordinate notes . . . 47,169 236 499,764 500,000
Net earnings . . . . . . . . . . . . . . 1,406,307 1,406,307
--------- ------- ----------- ---------- -----------
BALANCE AT DECEMBER 31, 1994 . . . . . . . . 6,674,324 $33,372 $29,001,888 $7,211,227 $36,246,487
========= ======= =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE> 7
DVI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
----------------------------
1994 1993
------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,406,307 $ 777,070
------------- ------------
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Equity in net loss of investees . . . . . . . . . . . . . . . . . 172,230
Depreciation and amortization . . . . . . . . . . . . . . . . . . 3,173,085 1,407,928
Additions to allowance accounts, net . . . . . . . . . . . . . . . 747,738 424,155
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . 408,821 631,732
Changes in assets and liabilities (net of effects
from purchase of acquired entities):
(Increases) decreases in:
Restricted cash . . . . . . . . . . . . . . . . . . . . . . 1,016,805 (22,496,733)
Accounts receivable . . . . . . . . . . . . . . . . . . . . (3,609,819) (1,306,371)
Receivables from sale of leases . . . . . . . . . . . . . . 793,442 2,537,134
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . 2,983,613 (432,779)
Increases (decreases) in:
Accounts payable . . . . . . . . . . . . . . . . . . . . . (13,564,626) 10,691,681
Other accrued expenses . . . . . . . . . . . . . . . . . . (2,743,783) 1,894,315
------------- ------------
Total adjustments . . . . . . . . . . . . . . . . . . . . . (10,794,724) (6,476,708)
------------- ------------
Net cash used in operating activities . . . . . . . . . . . . . . . (9,388,417) (5,699,638)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cost of equipment and notes acquired . . . . . . . . . . . . . . . . . (122,980,657) (69,550,341)
Receipts in excess of amounts included in income . . . . . . . . . . . 43,461,050 16,500,973
Furniture and fixtures additions . . . . . . . . . . . . . . . . . . . (177,324) (350,017)
Investments in common and preferred stock of investees . . . . . . . . 25,000
Cash received from sale of common stock of investee . . . . . . . . . 540,000
------------- ------------
Net cash used in investing activities . . . . . . . . . . . . . . . (79,696,931) (52,834,385)
------------- ------------
</TABLE>
(Continued)
7
<PAGE> 8
DVI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
----------------------------
1994 1993
------------- ------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options . . . . . . . . . . . . . . . . $ 345,865 $ 1,369
Borrowings:
Short-term . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,488,954 77,155,407
Long-term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,242,362 79,050,000
Repayments:
Short-term . . . . . . . . . . . . . . . . . . . . . . . . . . . . (107,778,241) (92,652,687)
Long-term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (25,569,812) (5,608,788)
Net cash provided by financing activities . . . . . . . . . . . . . . 87,729,128 57,945,301
------------- ------------
NET DECREASE IN CASH AND
CASH EQUIVALENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,356,220 588,722
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . . . 1,713,769 2,199,208
------------- ------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 357,549 $ 1,610,486
============= ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,219,505 $ 3,540,735
============= ============
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 637,212 $ 46,245
============= ============
SUPPLEMENT TO DISCLOSURE OF NON-CASH TRANSACTIONS:
Receipt of IPS Health Care, Inc. Series G preferred stock (Note 2) . . . . $ 2,000,000
=============
</TABLE>
As of December 31, 1994, $500,000 of subordinated notes had been converted
into common stock
The accompanying notes are an integral part of these consolidated financial
statements.
8
<PAGE> 9
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission
("Commission"). Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles ("GAAP") for
complete financial statements. The consolidated financial statements should be
read in conjunction with the financial statements and notes thereto included in
the Company's latest Annual Report on Form 10-K.
In the opinion of management, the consolidated financial statements contain all
adjustments, consisting only of normal recurring adjustments, considered
necessary for a fair statement of the consolidated balance sheet as of December
31, 1994 and June 30, 1994, the consolidated statements of operations for the
three and six month periods ended December 31, 1994 and 1993, the consolidated
statements of shareholders' equity for the period from July 1, 1993 through
December 31, 1994, and the consolidated statements of cash flows for the six
month periods ended December 31, 1994 and 1993. The results of operations for
the six month period ended December 31, 1994, are not necessarily indicative of
the results of operations to be expected for the entire fiscal year ending June
30, 1995.
Certain amounts as previously reported have been reclassified to conform to the
period ended December 31, 1994 presentation.
NOTE 2 - HEDGING TRANSACTIONS
The Company's equipment financing transactions are all structured on a fixed
interest rate basis. Although the Company permanently funds these transactions
on a fixed interest rate basis, it uses variable rate interim funding facilities
until permanent funding is obtained, generally through asset securitization.
Because funds borrowed through interim funding facilities are obtained on a
floating interest rate basis, the Company uses hedging techniques to protect its
interest rate margins during the period that interim funding facilities are
used. The Company's strategies are to hedge its portfolio by either assuming a
short position in Treasury notes of comparable maturity or entering into
Treasury lock transactions whereby DVI will either pay or receive funds based on
price movements of Treasury notes having a comparable maturity to DVI's fixed
rate portfolios. DVI believes this strategy hedges its portfolio of fixed rate
equipment financing contracts while waiting for permanent securitization funding
thus stabilizing the Company's weighted average borrowing rate. The Company has
not altered its underlying asset structure through hedging activities but does
have liabilities to cover its hedging position in the event there is an upward
movement in interest rates and a corresponding decline in the value of the
Treasury notes in which it has taken short positions or contract.
During the first quarter of fiscal 1995, the Company took hedging positions
aggregating $45 million. In the second quarter, the Company took additional
hedging positions aggregating $25 million and closed out a $23 million hedging
position when it permanently funded a portfolio of transactions. At December
31, 1994, the Company had unrealized market value gains on its hedging
transactions of $468,000. The Company's sole reason for using hedging
techniques is to offset the loss that occurs when transactions are funded on an
interim basis and interest rates rise causing the Company's interest rate
margins on the transactions to decline. Therefore, gains generated through
hedging techniques only benefit the Company to the extent they offset
corresponding losses for increasing interest rates until transactions are
permanently funded. During the quarter the Company completed a whole loan sale
which resulted in a gain of $408,000 from the discounted payment stream and a
market value gain of $217,000 related to a hedging transaction entered into to
protect the portfolio of transactions sold. The combined gain of $625,000 was
recorded under gain on sale of financing transactions. The Company's fixed-rate
portfolio was sold on a basis which varied with changes in commercial paper
rates and it purchased a two year unamortizing interest rate cap to protect its
margin, which approximates the remaining terms of the portfolio.
At June 30, 1994, DVI had no outstanding derivative financial instruments.
9
<PAGE> 10
On December 31, 1994, the Company had $47 million of financial instruments that
were matched to specific financing transactions as follows:
<TABLE>
<CAPTION>
Notional Amounts
----------------
Balance New Terminated Expired Ending Balance
June 30, 1994 Contracts Contracts Contracts December 31, 1994
------------- --------- ---------- --------- -----------------
<S> <C> <C> <C> <C> <C>
Positions:
Treasury Shorts -0- $45,000,000 -0- $23,000,000 $22,000,000
Treasury Locks -0- $25,000,000 -0- -0- $25,000,000
</TABLE>
When DVI hedging activities are matched to specific borrowings relating to
securitizations, gains or losses are reflected as either an increase or decrease
in the interest expense when securitization notes are issued. In the event of a
whole loan sale the gain on sale of whole loans is either increased or decreased
by the gain or loss of the Company's respective hedging activities.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
GENERAL
Equipment Financing. For accounting purposes, the Company classifies the
equipment financing transactions it originates as (i) notes secured by
equipment, (ii) direct financing leases and (iii) operating leases. Notes
secured by equipment and direct financing leases are those transactions in
which the obligor generally has substantially all the benefits and risks of
ownership of the equipment. Operating leases are generally those which only
provide for the use of the asset. The different classifications can result in
accounting treatments that provide substantially different income and costs
during the transaction term.
The Company reports income under the categories of "amortization of finance
income," "gain on sale of financing transactions" and "other income."
"Amortization of finance income" consists of the interest component of payments
received on notes secured by equipment (or medical receivables) and direct
financing leases, and is calculated using the interest method whereby the
income is reported over the term of the transaction. "Amortization of finance
income" includes any income derived from the sale of equipment at the end of
the transaction term under fair market value transactions. "Gain on sale of
financing transactions," consist of gains recognized when the Company
permanently funds transactions through whole loan sales. "Other income"
consists primarily of late charges, income from operating leases and income
from the billing and collecting of medical receivables. The Company stopped
billing and collecting new medical receivables late in fiscal 1994, but will
continue to receive income as the receivables outstanding are collected.
Notes secured by equipment and direct financing leases are noncancelable
transactions under which the obligor must make all scheduled payments, maintain
the equipment, insure the equipment against casualty loss and pay all equipment
related taxes. In fair market value transactions the obligor has the option to
purchase the equipment at the end of the initial financing term for its fair
market value or extend the financing term under renegotiated payments. If
neither of these options is exercised, the Company is required to sell or lease
the equipment to another user.
In accordance with GAAP, all income from transactions classified as notes
secured by equipment and direct financing leases that are permanently funded
through asset securitization or other means whereby the Company treats the
funds received as debt, is deferred and recognized using the interest method
over the term of the transactions. If an obligor under a transaction defaults,
the Company may not receive all or a portion of the unamortized income
associated with the transaction.
Medical Receivables Financing. A small portion of the Company's business is
providing loans secured by medical receivables and purchasing medical
receivables. The respective interest income and fee income from medical
receivable transactions is recognized over the term of the transactions which
is typically one to three years, and is recorded as amortization of finance
income.
Discontinued Operations. There has been no adverse change in the Company's
discontinued operations which would indicate any additional losses will be
incurred by the Company.
RESULTS OF OPERATIONS
Impact of Financing Strategies on Results of Operations. The Company's strategy
is to obtain permanent funding for most of its equipment financing transactions
through asset securitization and the remainder through whole loan sales.
Although funding transactions through asset securitization is generally more
cost effective than using whole loan sales, when management believes the
Company is exposed to excessive transaction concentration risks it uses whole
loan sales to remove certain transactions from its portfolio. The Company also
funds certain transactions through whole loan sales because it enables the
Company to permanently fund the transactions sooner than might otherwise be
possible. This is beneficial in periods of rising interest rates because once
a transaction is permanently funded the interest rate spread is fixed for the
remaining term.
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
When funding transactions through an asset securitization, the issuer can
generally structure the transaction so that the proceeds received are treated
either as borrowed funds (i.e., debt on the issuer's financial statements), or
funds it receives as a result of the sale of the transactions (i.e., from a
whole loan sale). The accounting method to report finance income differs
significantly depending on which of the two structures the issuer uses. When
the proceeds received are treated as long term debt, the issuer reports finance
income over the term of the transactions funded. When the proceeds are treated
as funds received from the sale of transactions most of the income is reported
at the time the transactions are funded. The Company uses the first alternative
when it is the issuer in an asset securitization which means the Company treats
the proceeds received as long term debt on its financial statements and reports
the finance income over the term of the transactions that are funded. When the
Company funds its transactions through whole loan sales, most of the unamortized
finance income is reported at the time the funding takes place. Since DVI funds
most of its transactions by issuing securitized notes and therefore reports the
finance income from these transactions over approximately five years, its near
term reported earnings are comparatively lower than they would be if the Company
treated all of the loans it funds as whole loan sales.
The Company entered into transactions which generated total receivables of
$160.4 million for the six months ended December 31, 1994, as compared to $102.3
million for the six months ended December 31, 1993. The Company generated an
increased dollar volume of equipment financing receivables for the six months
ended December 31, 1994, compared to the six months ended December 31, 1993,
primarily because the Company expanded its equipment financing capabilities. The
Company experienced increases in: (i) the financing transaction portfolio to
$311.2 million at December 31, 1994, from $232.3 million at June 30, 1994 and
(ii) the related liabilities to $294.8 million at December 31, 1994, from $221.4
million at June 30, 1994.
Margins Earned
Margins earned were $3.7 million for the three months ended December 31, 1994
as compared to $2.7 million for the three months ended December 31, 1993. For
the six months ended December 31, 1994, margins earned were $6.8 million as
compared to $5.3 million for the same period in the prior year. Amortization
of finance income increased to $7.9 million for the three months ended December
31, 1994 from $3.9 million for the three months ended December 31, 1993. For
the six months ended December 31, 1994, amortization of finance income
increased to $14.5 million from $7.4 million in the prior year. The increase
in the current fiscal year over the prior year for both the three and six month
periods was primarily a result of the overall increase in the size of the
Company's equipment financing portfolio.
Gains on sale of financing transactions increased to $625,000 in the three
months ended December 31, 1994 compared with a gain of $111,000 in the same
period in the prior year. In the six months ended December 31, 1994, gains on
sale of financing transactions increased to $625,000 compared with a gain of
$246,000 in the same period in the prior year. The increase for both periods
in the current fiscal year is primarily a result of the overall growth in the
Company's volume of equipment financing transactions and the need to fund
certain transactions through whole loan sales to manage transaction
concentrations. (See Results of Operations. Impact of Financing Strategies on
Results of Operations.)
Other income, which consists of late charges, operating lease income, fees from
billing and collecting medical receivables management income and other
miscellaneous items, decreased to $163,000 for the three months ended December
31, 1994 as compared to $543,000 for the three months ended December 31, 1993.
For the six months ended December 31, 1994, other income decreased to $808,000
from $1.1 million in the prior year.
Interest expense increased to $5.0 million for the three months ended December
31, 1994 from $1.9 million for the three months ended December 31, 1993. For
the six months ended December 31, 1994 interest expense increased to $9.1
million from $3.5 million during the same period in the prior year. The
increase in both the three and six month periods during the current fiscal year
is primarily a result of the growth of the Company's equipment financing
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
transaction portfolio. As a percentage of finance and other income, interest
expense was 57% in the three months ended December 31, 1994 as compared to 41%
in the same period in the prior year. As a percentage of finance and other
income, interest expense was 57% in the six months ended December 31, 1994 as
compared to 40% in the same period a year earlier. The increase in interest
expense as a percent of finance and other income in the three and six month
periods in the current fiscal year is primarily the result of (i) the Company
narrowing the interest rate spread between the cost of its funding and the
interest rate charged its customers, (ii) interest rate increases during the
year on funds borrowed on a floating rate basis under the Company's interim
funding facilities and (iii) the Company's strategy to originate financing
transactions in which the residual positions are not retained thereby reducing
the Company's rate of return and its income on the respective transactions.
Selling, General and Administrative Expense
Selling, general and administrative ("SG&A") expense increased to $2.2 million
for the three months ended December 31, 1994 from $1.7 million for the three
months ended December 31, 1993. For the six months ended December 31, 1994,
SG&A expense increased to $4.3 million from $3.7 million during the same period
in the prior year. The increase primarily reflects costs associated with the
increase in the Company's provision for doubtful accounts, additional personnel
and related costs. As a percentage of finance and other income, SG&A expense
was 25% for the three months ended December 31, 1994 versus 37% for the same
period last year. For the six months ended December 31, 1994, SG&A expense was
27% versus 42% for the same period a year ago. The percentage decrease in SG&A
for both the three and six month periods during the current fiscal year is a
result the Company's ability to increase the volume of transactions entered
into and thus the size of its transaction portfolio without a proportional
increase in SG&A expense.
Net Earnings
The Company's net earnings were $893,000, or $.13 per share, for the three
months ended December 31, 1994 as compared to $447,000, or $.07 per share, for
the three months ended December 31, 1993. For the six month ended December 31,
1994, net earnings increased to $1.4 million from $777,000 for the same period
in the prior year.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
The Company's cash and cash equivalents at December 31, 1994 and June 30, 1993
was $358,000 and $1.7 million, respectively. The following describes the
changes from June 30, 1994 to December 31, 1994 in the items which had the most
significant impact on the Company's cash flow during the six months ended
December 31, 1994.
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<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Six Months Ended
The Company's net cash used in operating activities was $9.4 million during the
six months ended December 31, 1994 compared to $5.7 million net cash used for
the six months ended December 31, 1993. The increase in cash utilization
during the six months ended December 31, 1994 almost entirely stems from a
reduction in the Company's accounts payable from June 30, 1994 by $13.6
million. The decrease in accounts payable, which consists primarily of amounts
due vendors of equipment that the Company has financed, stems from payments
made to these vendors during the six months ended December 31, 1994.
The Company's net cash used in investing activities increased to $79.7 million
during the six months ended December 31, 1994 as compared to $52.8 million for
the six months ended December 31, 1993. This increase is primarily attributed
to costs of equipment and notes acquired for the Company's financing
transactions which increased to $123.0 million during the six months ended
December 31, 1994 compared to an increase of equipment and notes acquired of
$69.6 million for the six months ended December 31, 1993.
The Company's net cash provided by financing activities was $87.7 million
during the six months ended December 31, 1994 from $57.9 million for the six
months ended December 31, 1993. This results from an increase in the Company's
short-term debt of $92.7 million for the six months ended December 31, 1994 as
compared to a $15.5 million decrease in short-term debt for the six months
ended December 31, 1993.
General
The Company's equipment financing business requires substantial amounts of
capital and borrowings. The Company's funding needs arise from financing
transaction originations, repayments of debt, payments of operating and
interest expenses, financing assets that must be funded by the Company to
credit enhance its asset securitization transactions and other fundings,
capital expenditures and repurchases of financing transactions under recourse
obligations. The Company obtains interim funding from commercial and
investment banks. The Company's interim credit borrowings are recourse
obligations, while the Company's permanent funding is obtained principally on a
limited recourse basis. In the case of limited recourse funding, the Company
retains some risk of loss because it shares in any losses incurred and/or it
may forfeit any residual interest in the underlying finance asset if a default
occurs.
A substantial portion of the Company's debt represents permanent funding of
equipment financing receivables obtained on limited recourse basis and is
structured so that the cash flow from the underlying receivables services the
debt. Most of the Company's short-term borrowings are used to temporarily fund
equipment financing transactions and are repaid with the proceeds obtained from
the permanent funding and cash flow from the underlying transactions. Because
the historical default rate on transactions originated has been low, the
Company has been able to service its long-term and short-term debt effectively.
While the Company expects this pattern to continue, a sharp increase in the
defaults on transactions originated could adversely affect the Company's
ability to meet its long-term and short-term debt obligations.
As a result of the rapid growth of the Company's equipment financing business,
the amount of interim and permanent funding it requires has significantly
increased. To meet its requirements for increased interim funding, the Company
has expanded its interim credit facilities with banks, and has obtained interim
credit facilities with investment banking firms which underwrite or place its
asset securitizations. To meet its requirement for increased permanent funding,
the Company has enhanced its ability to fund transactions on both an asset
securitization and whole loan sale basis. If suitable sources of both interim
and permanent funding are not available in the future, the Company's growth
will be constrained and it may be forced to use less attractive funding sources
in order to ensure its liquidity.
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<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Working capital financing for equipment financing customers is occasionally
provided by the Company where the loan is adequately secured by acceptable
collateral (accounts receivable) and all reasonable assurance exists that the
loan will be repaid pursuant to an established repayment program in the normal
course of business.
In June 1994, the Company completed a $15.0 million private placement of
convertible subordinated notes. The notes (i) are convertible into common
shares at $10.60 per share at the discretion of the noteholders, (ii) bear
interest at a rate of 9-1/8% payable in quarterly installments of interest only
and (iii) mature in June 2002. The proceeds generated therefrom were utilized
by the Company to repay a portion of the existing debt under its principal
interim funding credit facility and on a limited basis to fund medical
receivable financing transactions. The Company issued the notes to increase
its capital base and, therefore, increase its access to both interim and
permanent funding sources. The Note Purchase Agreement with respect to the
Notes contains, among other things, limitations on the Company's rights to pay
dividends and to make certain other kinds of payments. That Agreement also
prohibits the Company from incurring additional indebtedness unless certain
financial ratio tests are met. As of December 31, 1994, $500,000 of the notes
had been converted into common shares.
The Company believes that its present interim and permanent funding sources are
sufficient to fund the Company's current needs for its equipment financing
operations. However, the Company will have to expand both its interim and
permanent funding capacity to meet the Company's projected growth of its
equipment financing business. In addition, the growth of the Company's medical
receivables financing activity is dependent on the Company's ability to obtain
suitable funding for its medical receivables financing business. The
continuing expansion of the Company's businesses will also require additional
capital which the Company may seek to obtain from offerings of equity
securities and/or additional long-term debt financing. If the Company is
unable to continue to increase its capital base, its ability to expand its
financing business will be significantly constrained.
Interim Funding Facilities
At December 31, 1994, the Company had an aggregate of $186 million in
interim funding facilities. The Company's primary credit facility, pursuant to
a revolving credit agreement with a syndicate of banks (the "Bank Revolving
Credit Agreement"), provides the Company with $79 million in borrowing
capacity. Borrowings under the facility bear interest at the Company's option
at either a variable rate equal to 25 basis points over the prime rate
established by National Westminster Bank USA or a 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 provides that if the banks elect not to renew the facility at the end
of its stated term, the outstanding loans automatically convert to four-year
amortizing term loans at slightly higher interest rates. The Company also has
a $75 million interim funding facility with Prudential Securities Realty
Funding Corporation (the "Prudential Facility"). The Prudential Facility
provides the Company with interim financing in order to provide funding for
certain transactions to be securitized under the Company's arrangements with
that firm. Drawings under the facility bear interest at a variable rate equal
to 90 basis points over the 30 day LIBOR rate. In January, the Prudential
Facility was raised to $100 million. The Company has a $29 million facility
with a financing institution to fund equipment financing transactions on a
whole loan sale basis. The Company also has $2.6 million of additional interim
funding facilities with other financial institutions. On December 31, 1994, an
aggregate of approximately $128 million was outstanding under the Company's
interim facilities.
The Revolving Credit Agreement requires the Company to limit all of its
borrowings to specified levels determined by ratios based on the Company's
tangible net worth and, under certain circumstances, to use specified
percentages of internally generated funds to pay for equipment purchases. The
Revolving Credit Agreement also restricts the payment of dividends by DVI
Financial Services to the Company under certain circumstances. In addition,
the amount of funds available at any given time under the Revolving Credit
Agreement is constrained by the amount, type and payment status of the
Company's equipment financing receivables. If, at any time, a significant
amount of the Company's receivables were to become delinquent, the availability
of credit under the Revolving Credit Agreement would be reduced and, under the
Revolving Credit Agreement and other circumstances, the Company could be
required to prepay a portion
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<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
of the amounts outstanding under its other interim funding facilities. Since
the Revolving Credit Agreement was established, the only collateral that was
eligible for borrowing purposes was equipment financing transactions. To fund
the growth of its medical receivables financing business, the Company requested
that the banks participating in the Revolving Credit Agreement begin to allow
the Company to use the credit facility to fund medical receivable loans.
During the quarter ended December 31, 1994, the banks agreed to permit
borrowings by the Company of up to $7.0 million collateralized by medical
receivables.
The Company's use of asset securitization significantly affects its need for
interim funding facilities. When using asset securitization, the Company is
required to hold transactions in interim funding facilities until a sufficient
quantity is accumulated to meet the various requirements of the rating agencies
and others involved, and to make a securitization cost effective. Generally,
transactions totalling at least $50 million must be placed in each asset
securitization transaction.
When the Company borrows funds through interim funding facilities, it is
exposed to a certain degree of risk caused by interest rate fluctuations.
Although the Company's equipment financing transactions are structured and
permanently funded on a fixed interest rate basis, it uses interim funding
facilities until permanent funding is obtained. Because funds borrowed through
interim funding facilities are obtained on a floating interest rate basis, the
Company uses hedging techniques to protect its interest rate margins during the
period that interim funding facilities are used. During the first quarter of
fiscal 1995, the Company took hedging positions aggregating $45 million. In
the second quarter, the Company took additional hedging positions aggregating
$25 million and closed out a $23 million hedging position when it permanently
funded a portfolio of transactions. At December 31, 1994, the Company had
unrealized market value gains on its hedging transactions of $468,000. The
Company's sole reason for using hedging techniques is to offset the loss that
occurs when transactions are funded on an interim basis and interest rates rise
causing the Company's interest rate margins on the transactions to decline.
Therefore, gains generated through hedging techniques only benefit the Company
to the extent they offset corresponding reduction in margin due to rising
interest rates until the transactions are permanently funded. During the
quarter the Company completed a whole loan sale funding which resulted in a
gain of $408,000 from the discounted payment stream and a market value gain of
$217,000 related to a hedging transaction entered into to protect the portfolio
of transactions sold. The combined gain of $625,000 was recorded under gain on
sale of financing transactions. Because the portfolio of transactions sold
were structured on a fixed interest rate basis and the transactions were funded
with the cash proceeds from the issuance of commercial paper, the Company
purchased a two year unamortizing interest rate cap to protect its margins.
Permanent Funding
DVI has completed five asset securitizations totalling $238.5 million,
including a public debt issue of $75.7 million and three private placements of
debt totalling $142.1 million and one privately placed sale at $20.7 million.
In January 1994, the Company filed a $350 million registration statement with
the Commission to provide for the issuance of securitized debt in a series of
transactions pursuant to the Commission's "shelf" registration rule. The
Company expects that it will continue to structure its asset securitizations on
both a public and private basis. The $75.7 million public debt issue was the
initial funding under the $350 million shelf registration.
Generally, the Company does not have binding commitments for permanent funding,
either through asset securitizations or whole loan sales . At December 31,
1994, the Company had a commitment from a financial institution to fund
approximately $29 million on a whole loan sale basis. The Company expects that
this funding will occur during the third or fourth quarters of fiscal 1995. In
addition, the Company has non-binding agreements with investment banking
entities to fund future equipment financing transactions through asset
securitization. While the Company expects to be able to continue to obtain
the permanent funding it requires for its equipment financing business, there
can be no assurance that it will be able to do so. If, for any reason, any of
these types of funding were unavailable in the amounts and on terms deemed
reasonable by the Company, the Company's equipment financing activities would
be adversely affected.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The Company believes cash flows generated from operations and its interim
credit facilities are sufficient to meet its near term obligations.
INFLATION
The Company does not believe that inflation has had a material effect on its
operating results during the past three years. There can be no assurance that
the Company's business will not be adversely affected by inflation in the
future.
NEW ACCOUNTING STANDARDS
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 107,
"Disclosures About Fair Value of Financial Instruments," in June 1994. The
Company adopted SFAS 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. The Company is unaffected by SFAS No. 106, "Employers' Accounting
for Post-Retirement Benefits Other Than Pensions," and SFAS No. 112, "Employers
Accounting for Post Employment Benefits" because it does not offer such
benefit or compensation plans to its employees.
INCOME TAX ISSUES
Historically, the Company has deferred a substantial portion of its Federal and
state income tax liability because of its ability to obtain depreciation
deductions from transactions structured as fair market value leases. Over the
past eighteen months, the proportion of transactions originated by the Company
structured as fair market value transactions has declined significantly, and
the Company expects that trend to continue. In addition, the Company disposed
of a portion of its equipment residual portfolio in fiscal 1994 and may
continue to do so in future periods. As a result, the Company expects that in
future periods its ability to defer its income tax liability will
correspondingly decline.
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PART II - OTHER INFORMATION
Items 1 through 3 have been omitted because the related information is either
inapplicable or has been previously reported.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
(a) The Company's Annual Meeting of Stockholders was held on
December 16, 1994.
(b) Proxies for the Annual Meeting were solicited pursuant to
Regulation 14 under the Securities Exchange Act of 1934.
There were no solicitations in opposition to management
nominees as listed in the Proxy Statement and all such
nominees were elected.
(c) At the Annual Meeting, the Company's stockholders approved an
amendment to the Company's 1986 Incentive Stock Option Plan to
increase the number of shares for which options may be granted
thereunder from 950,000 to 1,250,000 common shares. Of the
shares represented at the meeting, 5,002,572 voted in favor of
the amendment, 385,375 voted against the amendment and 56,207
shares formally abstained from voting or did not vote.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) None.
(b) The Company has not filed any reports on Form 8-K during the
quarter ended September 30, 1994.
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SIGNATURES
Pursuant to the requirements 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)
/s/ DAVID L. HIGGINS
-----------------------
David L. Higgins
Chief Executive Officer
(Principal Executive Officer)
June 16, 1995
19
