SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended: MARCH 31, 1995
______________
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)
500 HYDE PARK
DOYLESTOWN, PENNSYLVANIA 18901
________________________ __________________________
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number including area code: (215) 345-6600
______________
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
YES X NO
___ ___
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date:
Common Stock, $.005 par value - 6,711,180 shares as of March 31,
___________________________________________________________________
1995.
_____
DVI, INC. AND SUBSIDIARIES
__________________________
<PAGE>
INDEX
PART I. FINANCIAL INFORMATION: Page
------------------------------ Number
------
Item 1. FINANCIAL STATEMENTS:
Consolidated Balance Sheets -
March 31, 1995 (unaudited) and June 30, 1994 . . . 3-4
Consolidated Statements of Operations -
Three months and nine months ended March 31, 1995
and 1994 (unaudited) . . . . . . . . . . . . . . . 5
Consolidated Statements of Shareholders' Equity -
From July 1, 1993 through March 31, 1995 (unaudited) 6
Consolidated Statements of Cash Flows -
Nine months ended March 31, 1995 and 1994 (unaudited) 7-8
Notes to Consolidated Financial Statements (unaudited) 9-11
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 11-22
PART II. OTHER INFORMATION . . . . . . . . . . . . . . 22
--------------------------
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . 23
2
<PAGE>
<TABLE>
<CAPTION>
DVI, INC. AND SUBSIDIARIES
__________________________
CONSOLIDATED BALANCE SHEETS
___________________________
ASSETS
March 31, June 30,
1995 1994
______________________________
(unaudited)
<S> <C> <C>
CASH AND CASH EQUIVALENTS . . $ 4,566,595 $ 1,713,769
___________ ______________
RESTRICTED CASH AND CASH EQUIVALENTS . 49,818,082 13,064,814
____________ ______________
INVESTMENT IN DIRECT FINANCING LEASES
AND NOTES SECURED BY EQUIPMENT:
Receivable in installments (net of
allowance of $3,067,032 at March 31,
1995 and $2,497,916 at June 30, 1994) 413,319,616 250,854,526
Receivable in installments -
related parties 4,340,188 16,427,684
Residual valuation . . . . . . . . 3,868,260 3,730,592
Unearned income . . . . . . . . . ( 71,681,240) (47,643,772)
______________ _______________
Net investment in direct financing
leases and notes secured by
equipment . . . . . . . . . . . 349,846,824 223,369,030
_____________ _____________
OTHER RECEIVABLES:
From sale of leases and notes
secured by equipment . . . . . . 113,143 911,585
Patient service accounts . . . .
receivable . . . . . . . . . . 1,588,366 3,667,123
Notes collateralized by medical
receivables 14,036,369 6,006,600
_____________ _____________
Total other receivables . . . . 15,737,878 10,585,308
_____________ _____________
EQUIPMENT ON OPERATING LEASES
(net of accumulated depreciation
of $1,407,741 at March 31, 1995
and $1,163,591 at June 30, 1994). . 3,636,905 2,893,683
_____________ _____________
FURNITURE AND FIXTURES
(net of accumulated depreciation
of $646,250 at March 31, 1995
and $525,032 at June 30, 1994) . . 755,823 817,135
_____________ _____________
INVESTMENTS IN INVESTEES . . . . . . 5,825,695 4,646,382
_____________ _____________
GOODWILL, NET . . . . . . . . . . . 1,900,000 2,024,253
_____________ _____________
OTHER ASSETS . . . . . . . . . . . . 2,759,222 6,834,972
_____________ _____________
TOTAL ASSETS . . . . . . . . . . . $434,847,024 $265,949,346
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
DVI, INC. AND SUBSIDIARIES
--------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
MARCH 31, JUNE 30,
1995 1994
---------------------------------------------
(Unaudited)
<S> <C> <C>
ACCOUNTS PAYABLE $5,783,720 $ 23,861,905
---------- -------------
OTHER ACCRUED EXPENSES 7,268,806 8,215,021
---------- -------------
SHORT-TERM BANK BORROWINGS 147,969,332 34,586,373
---------- -------------
DEFERRED INCOME TAXES 3,435,267 2,329,205
---------- -------------
LONG-TERM DEBT:
Discounted receivables
(primarily nonrecourse) 218,877,882 148,851,584
Convertible subordinated notes 13,741,981 14,112,000
---------- -------------
Total long-term debt, net 232,619,863 162,963,584
---------- -------------
TOTAL LIABILITIES 397,076,988 231,956,088
---------- -------------
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 6,711,180 shares
at March 31, 1995 and 6,567,295
shares at June 30, 1994 33,556 32,836
Additional capital 29,276,502 28,155,502
Retained earnings 8,459,978 5,804,920
---------- -------------
TOTAL SHAREHOLDERS' EQUITY 37,770,036 33,993,258
---------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $434,847,024 $265,949,346
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
DVI, INC. AND SUBSIDIARIES
--------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
-------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------------------- ----------------------------
1995 1994 1995 1994
----------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
FINANCE AND OTHER INCOME:
Amortization of finance income $9,555,958 $4,988,693 $24,014,774 $12,849,348
Gain on sale of financing transactions 804,896 1,430,083 245,862
Other income 92,205 533,809 900,495 1,268,022
---------- ---------- ----------- -----------
Finance and other income 10,453,059 5,522,502 26,345,352 14,363,232
Interest expense 6,313,570 2,390,940 15,449,513 5,900,105
---------- ---------- ----------- -----------
MARGINS EARNED 4,139,489 3,131,562 10,895,839 8,463,127
Selling, general and administrative 1,970,953 1,899,691 6,318,154 5,591,226
---------- ---------- ----------- -----------
EARNINGS BEFORE PROVISION FOR INCOME TAXES AND
EQUITY IN NET LOSS OF INVESTEES 2,168,536 1,231,871 4,577,685 2,871,901
PROVISION FOR INCOME TAXES 919,786 517,407 1,922,627 1,206,221
---------- ---------- ----------- -----------
EARNINGS BEFORE EQUITY IN NET LOSS OF INVESTEES 1,248,750 714,464 2,655,058 1,665,680
EQUITY IN NET LOSS OF INVESTEES 68,000 242,150
---------- ---------- ----------- -----------
NET EARNINGS $1,248,750 $ 646,464 $2,655,058 $1,423,530
========== ========== =========== ===========
NET EARNINGS PER COMMON AND COMMON
EQUIVALENT SHARE $ .18 $ .10 $ .39 $ .21
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING 6,978,420 6,746,170 6,869,901 6,715,580
========== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
5
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
DVI, INC. AND SUBSIDIARIES
---------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
-----------------------------------------------
From July 1, 1993 through March 31, 1995
---------------------------------------------------------------
Common Stock Total
$.005 Par 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 loss (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 96,716 484 621,236 621,720
Conversion of subordinate notes 47,169 236 499,764 500,000
Net earnings 2,655,058 2,655,058
---------- ------- ----------- ----------- ------------
BALANCE AT MARCH 31, 1995 (unaudited) 6,711,180 $33,556 $29,276,502 $8,459,978 $37,770,036
=========== ======= =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
6
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
DVI, INC. AND SUBSIDIARIES
--------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
-------------------------------------
NINE MONTHS ENDED
MARCH 31,
--------------------------------
1995 1994
----------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $2,655,058 $ 1,423,530
----------- ------------
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Equity in net loss of investees 242,729
Depreciation and amortization 4,506,319 2,347,894
Additions to allowance accounts, net 592,027 290,303
Deferred income taxes 1,106,062 581,490
Changes in assets and liabilities:
(Increases) decreases in:
Restricted cash (36,753,268) (4,707,798)
Accounts receivable (5,815,581) (1,313,554)
Receivables from sale of leases 798,442 2,860,327
Other assets 4,075,750 (6,567,691)
Increases (decreases) in:
Accounts payable (18,078,185) 26,607,419
Other accrued expenses (946,215) (107,584)
----------- ------------
Total adjustments (50,514,649) 20,233,535
----------- ------------
Net cash (used in) provided by operating activities (47,859,591) 21,657,065
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cost of equipment and notes acquired (234,302,578) (115,531,546)
Receipts in excess of amounts included in income 101,217,862 24,084,574
Furniture and fixtures additions (233,842) (611,673)
Cash received from sale of common stock of investee 540,000
----------- ------------
Net cash used in investing activities (133,318,558) (91,518,645)
----------- ------------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
7
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
DVI, INC. AND SUBSIDIARIES
--------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (UNAUDITED)
-------------------------------------
NINE MONTHS ENDED
MARCH 31,
------------------------------------
1995 1994
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options $ 621,720 $ 45,807
Borrowings:
Short-term 398,353,650 119,858,228
Long-term 110,242,362 79,222,143
Repayments:
Short-term (284,970,695) (109,177,697)
Long-term (40,216,062) (20,963,729)
----------- ------------
Net cash provided by financing activities 184,030,975 68,984,752
----------- ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 2,852,826 (876,828)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 1,713,769 2,199,208
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 4,566,595 $ 1,322,380
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 14,532,341 $ 5,586,445
============ ============
Income taxes $ 1,129,755 $ 551,848
============ ============
SUPPLEMENT TO DISCLOSURE OF NON-CASH TRANSACTIONS:
Receipt of IPS Health Care, Inc. Series G
preferred stock $ 2,000,000
============
As of March 31, 1995, $500,000 of subordinated notes
had been converted into common stock
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
8
<PAGE>
DVI, INC. AND SUBSIDIARIES
__________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________________________________________
(UNAUDITED)
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\A-1.
In the opinion of management, the consolidated financial statements
contain all adjustments, consisting only of normal recurring
adjustments, considered necessary for a fair statement of the
consolidated balance sheets as of March 31, 1995 and June 30, 1994,
the consolidated statements of operations for the three and nine
month periods ended March 31, 1995 and 1994, the consolidated
statements of shareholders' equity for the period from July 1, 1993
through March 31, 1995, and the consolidated statements of cash
flows for the nine month periods ended March 31, 1995 and 1994.
The results of operations for the nine month period ended March 31,
1995, 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 March 31, 1995 presentation.
9
<PAGE>
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 contracts.
On June 30, 1994, DVI had no outstanding derivative financial
instruments. During the nine months since June 30, 1994, the
Company commenced its hedging program by entering into $193
million of contracts and closing out $135 million. On March 31,
1995, the Company had $58 million of outstanding financial
instruments that were matched either to specific financing
transactions or DVI's existing portfolio:
<TABLE>
<CAPTION>
SCHEDULE OF TREASURY SHORTS
AND TREASURY LOCKS
Notional Amounts
________________
Three Months Nine Months
Ended March 31, 1995 Ended March 31, 1995
-------------------- -----------------------
<S> <C> <C>
Beginning Balance $47,000,000 $ 0
New Contracts 123,000,000 193,000,000
Terminated Contracts (87,000,000) (87,000,000)
Expired Contracts (25,000,000) (48,000,000)
___________ ___________
Ending Balance $58,000,000 $ 58,000,000
=========== ============
</TABLE>
10
<PAGE>
When DVI's hedging activities are matched to specific borrowings
relating to securitizations, gains or losses from hedging positions
are reflected as a decrease or increase in the interest expense and
thus the gain or loss is spread over the remaining term of the
transactions securitized. Gains and losses from hedging are
reflected as an increase or decrease in the gain on sale proceeds
when transactions are funded through whole loan sales. At March
31, 1995 the Company had unrealized hedging losses of $1.2 million
offset by margin gains.
NOTE 3. EMPLOYMENT MATTERS
As part of an employee incentive plan, the Company has
agreed to issue an aggregate of 200,000 shares of common
stock of the Company (the "Incentive Shares") to certain
of its employees if the last sale price (as reported in
the consolidated reporting system of the New York Stock
Exchange) of the Company's common stock is $16.00 per
share or higher for 30 consecutive calendar days at
any time before December 31, 1998, provided that any such
employee must be employed by the Company during the above-
described 30-day period in order to receive any Incentive
Shares under this agreement. The Company has agreed that,
if there is a change in control of the Company at any time
prior to December 31, 1998 and the consideration to be
received for each share of common stock of the Company
in such change in control is $13.00 or higher, the Company
will issue the Incentive Shares to the employees described above.
NOTE 4. ACQUISITIONS
In January 1993, the Company acquired the outstanding shares of
Medical Equipment Finance Corporation ("MEF Corp."). 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. As initially structured, the purchase price was to
be determined as a percentage of the after-tax earnings of the MEF
Corp. division of the Company during the sixty-six month period
following the date of acquisition. 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. The Company and the former shareholders
of MEF Corp. recently agreed to set the purchase price of
MEF Corp. at 400,000 shares of the Company's common stock.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
_____________________________________________
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)
11
<PAGE>
operating leases. Notes receivable secured by equipment and direct
financing leases are generally those transactions in 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 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. Most of the direct
financing lease transactions entered into by the Company are
conditional sales agreements. At the inception of notes secured by
equipment and direct financing lease transactions, "unearned
income" represents the amount by which the gross transaction
receivables, initial direct costs and the nominal estimated
residual value (on fair market value transactions) exceed equipment
cost. The few lease contracts the Company has 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.
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 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 medical receivables late in fiscal 1994, but
will continue to receive income as the receivables outstanding are
collected.
12
<PAGE>
Notes secured by equipment and direct financing lease transactions
are almost exclusively noncancelable "net" 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 either purchase the equipment for its
fair market value or extend the financing term under renegotiated
payments. If neither of these options is exercised, the Company
must sell or lease the equipment to another user.
In accordance with GAAP, in transactions classified as notes
secured by equipment and direct financing leases that the Company
permanently funds through asset securitizations or other means
whereby the Company treats the funds received as debt, income 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 comparatively small portion of
the Company's business is making loans secured by medical
receivables and purchasing medical receivables. The respective
interest 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.
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 to fund 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 the risk of excessive
transaction concentration it uses whole loan sales to remove
certain transactions from its portfolio. The Company also funds
transactions through whole loan sales because such funding 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.
13
<PAGE>
When funding transactions through 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 that are funded.
When the proceeds are treated as funds received from the sale of
transactions, a majority of the income is generally reported at the
time the transactions are funded. The Company uses the first
alternative to recognize finance income when it is the issuer in an
asset securitization; this 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 transactions through whole loan
sales, it generally recognizes a majority of the unamortized
finance income at the time the funding takes place, however it may
recognize servicing and/or interest income over the remaining term
of the transactions sold. Since the Company 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 funded all of the loans as whole loan
sales.
General
_______
The Company entered into transactions which generated total
receivables of $139.4 million for the three months ended March 31,
1995, as compared to $57.5 million for the three months ended March
31, 1994. The increase from period to period was primarily because
the Company improved its overall equipment financing capabilities.
The Company entered into transactions which generated total
receivables of $299.8 million for the nine months ended March 31,
1995, as compared to $160.4 million for the nine months ended March
31, 1994. The increase from period to period was primarily because
the Company improved its overall equipment financing capabilities.
The Company experienced increases in: (i) the financing transaction
portfolio to $370.6 million at March 31, 1995, from $234.8 million
at June 30, 1994 and (ii) the related liabilities to $386.4 million
at March 31, 1995, from $221.4 million at June 30, 1994.
Margins Earned
______________
Margins earned were $4.1 million for the three months ended March
31, 1995 as compared to $3.1 million for the three months ended
March 31, 1994. For the nine months ended March 31, 1995, margins
earned were $10.9 million as compared to $8.5 million for the same
period in the prior year. Amortization of finance income increased
to $9.6 million for the three months ended March 31, 1995 from $5.0
million for the three months ended March 31, 1994. For the nine
months ended March 31, 1995, amortization of finance income
increased to $24.0 million from $12.8 million in the prior year.
The increase in the current fiscal year over the prior year for
both the three and nine month periods was primarily a result of the
overall increase in the size of the Company's equipment financing
portfolio.
14
<PAGE>
Gain on sale of financing transactions increased to $805,000 for
the three months ended March 31, 1995 compared with no sales for
the same period in the prior year. For the nine months ended March
31, 1995, gain on sale of financing transactions increased to $1.4
million 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 "-Impact of Financing Strategies on Results
of Operations" and "General.")
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
$92,000 for the three months ended March 31, 1995 as compared to
$534,000 for the three months ended March 31, 1994. For the nine
months ended March 31, 1995, other income decreased to $900,000
from $1.3 million in the prior year.
Interest expense increased to $6.3 million for the three months
ended March 31, 1995 from $2.4 million for the three months ended
March 31, 1994. For the nine months ended March 31, 1995, interest
expense increased to $15.4 million from $5.9 million during the
same period in the prior year. The increase in both the three and
nine month periods during the current fiscal year is primarily a
result of the growth of the Company's equipment financing
transaction portfolio. As a percentage of finance and other
income, interest expense was 60% in the three months ended March
31, 1995 as compared to 43% in the same period in the prior year.
As a percentage of finance and other income, interest expense was
59% in the nine months ended March 31, 1995 as compared to 41% in
the same period a year earlier. The increase in interest expense
as a percent of finance and other income in the three and nine
month periods in the current fiscal year is primarily the result of
(i) the Company's strategy to narrow the interest rate spread
between the cost of its funding and the interest rate charged its
customers to increase its market share, (ii) an overall increase in
interest rates on transactions funded during the year on a floating
rate basis that were not protected by hedging positions 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.
15
<PAGE>
Selling, General and Administrative Expense
___________________________________________
Selling, general and administrative ("SG&A") expense increased to
$2.0 million for the three months ended March 31, 1995 from $1.9
million for the three months ended March 31, 1994. For the nine
months ended March 31, 1995, SG&A expense increased to $6.3 million
from $5.6 million during the same period in the prior year. The
increase for nine months primarily reflects additional personnel,
and other cost associated with the growth in the Company's
business. As a percentage of finance and other income, SG&A
expense was 19% for the three months ended March 31,1995 versus 34%
for the same period last year. For the nine months ended March 31,
1995, SG&A expense was 24% versus 39% for the same period a year
ago. The percentage decrease in SG&A for both the three and nine
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
proportionate increase in SG&A expense.
The Company's SG&A includes the provision for doubtful accounts.
That provision was $826,000 for the nine months ended March 31, 1995
as compared to $848,000 for the same period the previous year. The
amounts are not significantly different despite the growth in the
Company's equipment transaction portfolio, and this reflects
management's judgment that the overall quality of the portfolio
has improved.
Net Earnings
____________
The Company's net earnings were $1.2 million , or $.18 per share,
for the three months ended March 31, 1995 as compared to $646,000,
or $.10 per share, for the three months ended March 31, 1994. For
the nine months ended March 31, 1995, net earnings increased to
$2.7 million or $.39 per share as compared to $1.4 million or $.21
per share for the same period the prior year.
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, financing assets that
must be funded by the Company to credit enhance its asset
securitization transactions and other fundings, capital
16
<PAGE>
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 the residual interest the Company has in the underlying
finance assets (if any) should defaults occur.
A substantial portion of the Company's debt represents permanent
funding of equipment financing receivables obtained on limited
recourse basis and is structured so that the cash flow from the
underlying receivables services the debt. Most of the Company's
short-term borrowings are used to temporarily fund equipment
financing transactions and are repaid with the proceeds obtained
from the permanent funding and cash flow from the underlying
transactions. Because the historical default rate on transactions
originated has been low, the Company has been able to service its
long-term and short-term debt effectively. While the Company
expects this pattern to continue, a sharp increase in the defaults
on transactions originated could adversely affect the Company's
ability to meet its long-term and short-term debt obligations.
As a result of the rapid growth of the Company's equipment
financing business, the amount of interim and permanent funding it
requires has significantly increased. To meet its requirements for
increased interim funding, the Company has expanded its interim
credit facilities with banks, and has obtained interim credit
facilities with investment banking firms which underwrite or place
its asset securitizations. To meet its requirement for increased
permanent funding, the Company has enhanced its ability to fund
transactions on both an asset securitization and whole loan sale
basis. If suitable sources of both interim and permanent funding
are not available in the future, the Company's growth will be
constrained and it may be forced to use less attractive funding
sources in order to ensure its liquidity.
Working capital financing for equipment financing customers is
occasionally provided by the Company where the loan is adequately
secured by acceptable collateral (accounts receivable) and all
reasonable assurance exists that the loan will be repaid pursuant
to an established repayment program in the normal course of
business.
17
<PAGE>
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 March 31, 1995, $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
continued expansion of the Company's business will also require
additional capital that the Company may seek to obtain from public
offerings and/or private placements 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.
Nine Months Ended March 31, 1995
________________________________
Cash Flows. The Company's cash and cash equivalents at March 31,
1995 and June 30, 1994 were $54.4 million and $14.8 million,
respectively. The increase in the current year was attributed to
the uninvested proceeds from the Company's most recent asset
securitization. The following describes the changes from June 30,
1994 to March 31, 1995 in the items which had the most significant
impact on the Company's cash flow during the nine months ended
March 31, 1995.
Net Cash. The Company's net cash used in operating activities was
$47.9 million during the nine months ended March 31, 1995 compared
to $21.7 million net cash provided by operations for the nine
months ended March 31, 1994. The increase in cash utilization
during the nine months ended March 31, 1995 stems largely from a
reduction in the Company's accounts payable from June 30, 1994 by
$18.1 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 nine
months ended March 31, 1995.
18
<PAGE>
The Company's net cash used in investing activities increased to
$133.3 million during the nine months ended March 31, 1995 as
compared to $91.5 million for the nine months ended March 31, 1994.
This increase is primarily attributed to costs of equipment and
notes acquired for the Company's financing transactions which
increased $234.3 million during the nine months ended March 31,
1995 compared to an increase of equipment and notes acquired of
$115.5 million for the nine months ended March 31, 1994.
The Company's net cash provided by financing activities was $184.0
million during the nine months ended March 31, 1995 from $69.0
million for the nine months ended March 31, 1994. This results
from an increase in the Company's short-term debt of $113.4 million
for the nine months ended March 31, 1995 as compared to a $10.7
million increase in short-term debt for the nine months ended March
31, 1994.
Interim Funding Facilities.
__________________________
At March 31, 1995, the Company had an aggregate of $256.5 million
in interim funding facilities of which approximately $141.7
million was outstanding. The Company's primary credit
facility, pursuant to a revolving credit agreement with a
syndicate of banks (the "Revolving Credit Agreement"),
provides the Company with $81.5 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 rate of
interest that varies from 150 to 180 basis points over the 30, 60
or 90-day LIBOR rate based on the Company's leverage ratio from
time to time as defined in the loan agreement. The Revolving
Credit Agreement is renewable annually at the bank syndicate's
discretion. The Revolving 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 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 other circumstances, the Company could be
required to prepay a portion of the amounts outstanding under its
other interim funding facilities. Since the Revolving Credit
Agreement was established, the only collateral that was eligible
for borrowing purposes was equipment financing transactions. To
fund the growth of its medical receivables financing business, the
Company requested that the banks participating in the Revolving
Credit Agreement begin to allow the Company to use the credit
facility to fund medical receivable loans. During the quarter
ended December 31, 1994, the banks agreed to permit borrowings by
the Company of up to $7.0 million collateralized by medical
receivables.
19
<PAGE>
The Company also has a $100.0 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 facility bear interest at a
fixed rate equal to 90 basis points over the 30 day LIBOR rate.
The Company also has a $75.0 million interim funding facility with
ContiTrade Services Corporation (the "Conti Facility"). The Conti
Facility provides the Company with interim financing in order to
provide funding for certain transactions to be securitized under
the Company's arrangements with that firm. Drawings under the
facility bear interest at a fixed rate equal to 150 basis points
over the 30 day LIBOR rate.
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. 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 or losses 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.
Permanent Funding
_________________
DVI has completed seven asset securitizations or other structured
finance transactions totalling $414.8 million, including two
20
<PAGE>
public debt issues of $75.7 million and $90.0 million, five private
placements of debt totalling $249.1 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 and $90.0 million public debt issues were the two
initial fundings 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.
Generally, the Company does not have binding commitments for
permanent funding, either through asset securitizations or whole
loan sales. The Company has non-binding agreements with
investment banking entities to fund future equipment financing
transactions through asset securitization. While the Company
expects to be able to continue to obtain the permanent funding it
requires for its equipment financing business, there can be no
assurance that it will be able to do so. If, for any reason, any
of these types of funding were unavailable in the amounts and on
terms deemed reasonable by the Company, the Company's equipment
financing activities would be adversely affected. The Company
believes cash flows generated from operations and its interim
credit facilities are sufficient to meet its near term
obligations.
INFLATION
The Company does not believe that inflation has had a material
effect on its operating results during the past two years. There
can be no assurance that the Company's business will not be
affected by inflation in the future
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.
21
<PAGE>
PART II - OTHER INFORMATION
___________________________
Items 1 through 5 have been omitted because the related information
is either inapplicable or has been previously reported.
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 March 31, 1995.
22
<PAGE>
SIGNATURES
__________
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
DVI, INC.
_________________________________
(Registrant)
/s/DAVID L. HIGGINS
______________________________
David L. Higgins
Chief Executive Officer
(Principal Executive Officer)
/s/ JAMES G. COSTELLO
_________________________________
James G. Costello
Senior Vice President and
Principal Financial and
Accounting Officer
May 22, 1995
23
<PAGE>
May 22, 1995
VIA EDGAR
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: DVI, Inc.
Dear Sirs:
On behalf of DVI, Inc. (the "Company"), enclosed please
find the Company's Quarterly Report on Form 10-Q for the three
months ended March 31, 1995.
Please contact me at (212) 878-8535 if you have any
questions.
Very truly yours,
/s/ Joseph A. Adams
Joseph A. Adams
cc: David L. Higgins
John A. Healy
<PAGE>
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<CASH> 54,385,000
<SECURITIES> 0
<RECEIVABLES> 363,883,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,402,000
<DEPRECIATION> (646,000)
<TOTAL-ASSETS> 434,847,000
<CURRENT-LIABILITIES> 161,022,000
<BONDS> 323,620,000
<COMMON> 34,000
0
0
<OTHER-SE> 37,736,000
<TOTAL-LIABILITY-AND-EQUITY> 434,847,000
<SALES> 0
<TOTAL-REVENUES> 26,345,000
<CGS> 15,449,000
<TOTAL-COSTS> 6,318,000
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<INCOME-PRETAX> 4,578,000
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<PAGE>
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