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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________
F O R M 10 - K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 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
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DVI, INC.
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(Exact name of registrant as specified in charter)
<TABLE>
<S> <C>
Delaware 22-2722773
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
500 Hyde Park
Doylestown, Pennsylvania 18901
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (215) 345-6600
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Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
on which Registered
------------------------
Common Stock
par value $.005 per share New York Stock Exchange, Inc.
- ------------------------- -----------------------------
(Title of Class)
Securities registered pursuant to Section 12(g) of the Act:
Units consisting of one share of Warrants to Purchase
Common Stock par value $.005 per Common Shares
Share (a "Common Share") and one -------------------
Warrant to purchase an additional (Title of Class)
Common Share
- -----------------------------------------
(Title of Class)
</TABLE>
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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Yes X No _____
---
The aggregate market value of the Common Stock held by nonaffiliates
of the Registrant was approximately $112,885,217 based upon the last reported
sale price of the Common Stock on the New York Stock Exchange on September 15,
1995.
As of September 15, 1995, the Registrant had 9,605,289 shares of
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the Registrant's
definitive Proxy Statement to be filed with the Commission within 120 days
after the close of the Registrant's fiscal year.
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PART I
ITEM 1. BUSINESS
OVERVIEW
DVI, Inc. ("DVI" or "the Company") is a specialty finance company
whose core business is financing higher cost diagnostic imaging, radiation
therapy and other types of sophisticated medical equipment by outpatient
healthcare centers, groups of physicians and hospitals. The Company has
extensive expertise in making large loans to healthcare providers in markets
underserved by most banks and finance companies. By servicing the equipment
financing needs of these healthcare providers and the corresponding need for
equipment manufacturers to arrange financing for their customers, the Company
has established a niche leadership position among independent finance companies
serving the medical industry. In addition to equipment financing, a small but
growing part of the Company's business is making working capital loans to
outpatient healthcare providers secured by their medical receivables and other
collateral.
Virtually all of the Company's equipment loans are structured on a
fixed interest rate basis such that the full cost of the equipment and all
financing costs are repaid during the financing term, which typically is five
years. The Company's risk management strategy is to minimize risks associated
with the residual value of equipment and of loan prepayments and to minimize
its exposure to interest rate fluctuations. A high percentage of the Company's
equipment loans are structured as notes secured by equipment or direct
financing leases with a bargain purchase option for the equipment user;
however, the Company structures a few of its equipment loans such that it
retains a residual interest in the equipment.
In the past two years, the Company has grown substantially. In fiscal
1995, the Company's loan origination volume increased approximately 107% to
$338.0 million from $163.0 million for fiscal 1994. Loan origination volume
increased approximately 178% to $163.0 million in fiscal 1994 as compared to
$58.6 million for fiscal 1993. The Company's net financed receivables
increased approximately 73% to $405.3 million at June 30, 1995 from $234.8
million at June 30, 1994. The Company's net financed receivables increased
approximately 100% to $234.8 million at June 30, 1994 from $117.5 million at
June 30, 1993.
The Company uses asset securitization and other structured finance
techniques to permanently fund most of its equipment loans and since 1991 has
funded $414.8 million of equipment loans in this manner. The Company's ability
to securitize loans has improved significantly in recent years which enabled it
to securitize loans in the public market in fiscal 1995. Access to the public
securitization market has lowered the Company's relative funding costs and
expanded the Company's access to funding.
GROWTH STRATEGY
The Company's growth strategy is to increase the size of its loan
portfolio by expanding its share of the diagnostic imaging and radiation
therapy equipment financing markets and by generating financing opportunities
in other areas of the healthcare industry. The principal components of this
strategy are as follows:
o Maximize the value of its relationships with equipment
manufacturers. The Company established a close working
relationship with four of the six largest manufacturers of
diagnostic imaging equipment by meeting their needs to arrange
financing for the higher cost equipment they sell to
non-hospital healthcare providers. The Company intends to
continue to fulfill those needs and place greater emphasis on
financing the lower cost patient treatment devices these
manufacturers produce such as ultrasound, nuclear medicine and
X-ray equipment, and on financing equipment for their hospital
customers.
o Originate medical equipment loans on a wholesale basis. A
growing part of the Company's equipment financing business is
purchasing loans or leases originated by regional medical
equipment finance companies and medical equipment
manufacturers (collectively, "Originators"). The Company uses
its securitization capabilities and its expertise in analyzing
healthcare credits to service Originators that often need
access to sources of permanent financing for the loans they
originate.
o Generate additional business through its existing customer
base. The Company enjoys relationships with a large number of
users of sophisticated medical equipment. The Company
believes its existing
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customers, particularly those that are expanding to provide
additional healthcare services, can be a continuing source of
equipment and medical receivable financing business. The
Company's growth strategy in medical receivables financing is
to focus on its existing customer base because it believes
this will enable it to build this area of its business with
comparatively little added expense and comparatively less
risk.
o Establish equipment financing relationships with manufacturers
of patient treatment devices. The Company intends to use its
reputation as a medical equipment financing specialist and its
ability to finance a wide range of healthcare providers to
establish its presence in the patient treatment device market.
The Company's objective is to build relationships with
manufacturers of sophisticated patient treatment devices such
as surgical lasers.
HEALTHCARE FINANCING INDUSTRY
Competitors in the healthcare financing business include equipment
manufacturers that sell and finance their products, leasing subsidiaries of
national and regional commercial banks and other leasing and financing
companies. Competition among providers of equipment financing varies based on
the type of healthcare provider being financed and the acquisition cost of the
equipment. When hospitals acquire capital equipment directly (i.e., they
accept full financial liability), competitors are numerous as lenders generally
can make credit decisions based on audited financial statements that normally
reflect a financial condition that is strong relative to the cost of the
equipment being acquired. The competition is similar when physician
specialists such as radiologists are acquiring relatively inexpensive equipment
(i.e., $200,000 or less). Many banks and finance companies are willing to make
loans of this amount to physician specialists based solely on their personal
net worth. Specialty finance companies, such as the Company, typically provide
financing for borrowers other than those described above.
Competition in medical receivable financing is similar to that in
medical equipment financing. Medical receivable financing is readily available
for most hospitals and for physicians seeking relatively small amounts of
funding. However, for outpatient healthcare providers seeking funding in
excess of approximately $500,000, the principal sources of financing generally
are limited to specialty finance companies or factoring companies that purchase
receivables at a discount. The Company's strategy in medical receivables
financing is to differentiate itself from many of its competitors by offering
loans secured by medical receivables rather than purchasing receivables.
Medical equipment financing providers often compete on the basis of
relationships with manufacturers of the equipment being financed. General
Electric Medical Systems and Siemens Medical Systems (which according to
published sources together have approximately 40 to 50% of the U.S. market for
diagnostic imaging equipment) have captive equipment financing subsidiaries.
The four remaining major manufacturers of diagnostic imaging equipment depend
largely on relationships with financing providers, such as the Company, to
finance the sale of their products.
SALES AND MARKETING
The Company generates most of its financing opportunities from two
sources: (i) medical equipment manufacturers that use third parties to finance
the sale of their products; and (ii) healthcare providers with whom the
Company's sales organization has relationships. Generally, medical equipment
manufacturers refer customers to the Company for financing because the Company
has the ability to understand and measure the creditworthiness of the
customer's business and provide the financing necessary for the completion of
the equipment sale. The Company often assists the customer in preparing a
comprehensive business and financial plan that generally includes a demographic
study of the equipment user's market, an analysis of the local competition and
the effect of managed care on the market and the specific requirements for
regulatory compliance and working capital. The Company's sales force of
financing specialists work with the equipment user, the manufacturer and the
Company's credit department to formulate this business and financial plan.
The Company established a close working relationship with four of the
six largest manufacturers of diagnostic imaging equipment by meeting their
needs to arrange financing for the higher cost equipment they sell to
non-hospital healthcare providers. These manufacturers are Hitachi Medical
Systems America, Philips Medical Systems, Picker International and Toshiba
America Medical Systems. The Company believes these relationships afford it a
competitive edge over other providers of medical equipment financing. Since
the January 1993 acquisition of MEF Corp., the Company has
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reorganized its sales force with a view to increasing the volume of business it
conducts with those companies principally by focusing on the lower cost
equipment sold by those companies.
The Company has a sales unit dedicated to its wholesale loan
origination program ("Wholesale Program"). The Company purchases equipment
loans from Originators that generally do not have access to cost effective
permanent funding for their loans. The Company initiated the Wholesale Program
in June 1994 and during the year ended June 30, 1995, the Company purchased an
aggregate of $63.3 million of equipment loans from six Originators. The
Company believes that it has an opportunity to increase the volume of loans it
buys in this manner because the number of companies that finance Originators
has declined in the past few years.
In addition to financing medical equipment, the Company also makes
working capital loans under revolving lines of credit for outpatient healthcare
providers that are secured by their receivables from payors such as insurance
companies, large self-insured companies and governmental programs such as
Medicare, and other collateral. These lines of credit are secured by (i)
specific receivables due the provider that the Company has analyzed to
determine the amount and likelihood of collection, (ii) the overall receivables
portfolio of the healthcare provider and (iii) other forms of credit
enhancement such as cash collateral, letters of credit and guarantees. The
Company's two medical receivable loan specialists assist the Company's
equipment loan sales force in originating medical receivables loans. The
medical receivable loan business entails significant risks and capital
requirements.
The Company is expanding into the patient treatment device market.
The Company believes its ability to finance a wide range of healthcare
providers and meet the equipment financing needs of major manufacturers of
diagnostic imaging equipment will help it build relationships with patient
treatment device manufacturers. To establish relationships with patient
treatment device manufacturers, the Company expects to train the manufacturer's
sales personnel in the use of equipment financing as a sales tool and to
provide equipment financing programs that make these device manufacturers more
competitive. The Company believes the patient treatment device market is more
diverse than the diagnostic imaging market because of the larger number of
manufacturers and types of products and the greater price range of those
products. The patient treatment device manufacturers targeted by the Company
produce relatively high cost treatment products such as surgical lasers.
The Company's sales and marketing organization consists of 26
healthcare finance specialists located in various parts of the U.S. These
individuals generally have a credit industry and/or medical equipment
background. The Company generally locates sales personnel in geographic areas
where they have knowledge of the local market. The Company believes that sales
personnel who understand local economic and political trends are a valuable
component of its credit underwriting process.
CAPITAL RESOURCES AND TRANSACTION FUNDING
The Company obtains initial funding for most of its equipment loans
through warehouse facilities. Funds borrowed through these facilities are
repaid when the Company permanently funds its equipment loans through
securitization or other limited recourse permanent funding programs, including
loan sales. Typically, equipment loans will be held in warehouse facilities
for 30 to 180 days before they are permanently funded. To protect its interest
rate spreads during periods in which it has borrowed funds under its warehouse
facilities, the Company sometimes employs a hedging strategy to mitigate the
impact of changes in interest rates.
Warehouse Facilities. At September 26, 1995, the Company had an
aggregate maximum of $337.7 million potentially available under various
warehouse facilities of which it had borrowed an aggregate of $169.6 million.
These facilities are provided by a syndicate of banks that participate in a
revolving credit arrangement and by two investment banking firms that the
Company uses for securitization. The funds obtained through these warehouse
facilities are borrowed on a floating interest rate and full recourse basis.
Since the Company uses securitization as its primary source of
permanent funding, the Company requires a substantial warehousing capacity. To
be cost efficient, securitization must cover a relatively large and diverse
portfolio of equipment loans. One of the basic requirements of the credit
rating agencies that rate the notes issued in securitizations relates to
borrower concentration and requires that no single credit (borrower) may
constitute a significant portion of the pool of equipment loans being
securitized (in the Company's case, the limit is generally about 3%). Because
the Company's equipment loans are often in the $2.0 million range, it must
generally accumulate in excess of $60 million in loans for each
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securitization. The credit rating agencies also have other concentration
guidelines such as equipment type and the geographic location of the obligors.
These strict requirements mean that not all of the equipment loans held in the
Company's warehouse facilities at any point in time can be placed in one
securitization.
Permanent Funding Program. Since 1991, the most important source of
permanent funding for the Company has been securitization and other forms of
structured finance. Securitization is a process in which a pool of equipment
loans (in the Company's case, typically 100 to 150) are transferred to a
special-purpose financing vehicle which issues notes to investors. In the
Company's case, the vehicle usually is an indirect wholly owned special purpose
subsidiary, with the result that the subsidiary's assets and liabilities are
consolidated with the Company's for financial accounting purposes. Principal
and interest on the notes are paid from the cash flows produced by the loan
pool, and the notes are secured by a pledge of the assets in the loan pool as
well as by other collateral for other credit enhancement. In the Company's
case, equipment loans funded through securitization must be credit enhanced to
receive an investment grade credit rating. Credit enhancement can be provided
in a number of ways, including cash collateral, letters of credit, a
subordinated "strip" of transactions or an insurance policy. Typically,
securitizations sponsored by the Company are enhanced through a combination of
some or all of these methods.
The Company continually seeks to improve the efficiency of financing
these transactions by reducing up front costs and minimizing the cash
requirements of the Company. The Company may consider alternative structures,
including senior/subordinated tranches, and alternative forms of credit
enhancement, such as letters of credit and surety bonds. The transaction
expenses of each securitization and other forms of structured financing will
depend on market conditions, costs of securitization and the availability of
credit enhancement options to the Company. The Company expects to continue to
use securitization and other forms of structured financing, on both a public
and private basis, as its principal source of permanent funding for the
foreseeable future.
The Company's financing strategy is to obtain permanent funding for
most of its equipment loans through securitization and to sell the remainder of
its equipment loans. Under current market conditions, the Company believes
funding equipment loans through securitization is more cost effective than
selling loans. However, the Company sells certain of its loans to reduce
borrower concentration and to manage the Company's leverage. When the Company
sells loans, it often is required to provide credit enhancement in a lesser
amount than required when it uses securitization.
Hedging Strategy. The Company's equipment loans are all structured on
a fixed interest rate basis. When the Company originates equipment loans, it
bases its pricing in part on the "spread" it expects to achieve between the
interest rate it charges its equipment loan customers and the effective
interest cost it will pay when it permanently funds those loans. Increases in
interest rates between the time the loans are originated and the time they are
permanently funded could narrow, eliminate or result in a negative spread
between the interest rate the Company realizes on its equipment loans and the
interest rate that the Company pays under its warehouse facilities. To protect
itself against that risk, the Company sometimes uses a hedging strategy. When
the Company hedges against this risk, it does so either by assuming a short
position in U.S. Treasury obligations of similar maturities to the specific
equipment loans being held for securitization, or by entering into Treasury
"lock" or "swap" transactions under which the Company will either pay to or
receive from a counterparty funds in amounts calculated by reference to price
movements of U.S. Treasury obligations of similar maturities to the respective
equipment loans. The Company believes this strategy can help hedge against the
interest rate risk associated with a portfolio of fixed rate equipment loans
prior to permanent funding.
Medical Receivable Financing. Until recently, the Company has funded
its medical receivable financing business using its own working capital.
During the fiscal quarter ended December 31, 1994, the Company's Revolving
Credit Agreement was with a syndicate of banks lead by NatWest Bank, N.A.
amended to permit the Company to use up to $7.0 million of the availability
under the facility to fund loans to outpatient healthcare providers that are
secured by medical receivables. The Company is seeking to develop new sources
of funding for its medical receivable financing business, including several
structured finance techniques.
Continuing Need for Capital. The Company's ability to maintain and
build its financing businesses is dependent on its continued ability to obtain
the substantial amounts of warehouse and permanent debt financing it requires.
In addition, in order to sustain continued growth, the Company will require
significant amounts of additional capital. Because of its holding company
structure, the Company can seek to satisfy its requirements for additional
long-term debt and/or equity
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capital by issuing equity or debt securities at the parent company level and
then contributing the proceeds of those financings to DVI Financial Services
Inc. or DVI Business Credit Corporation (which are the Company's principal
operating subsidiaries and the obligors under the Company's various warehouse
facilities).
OTHER BUSINESS ACTIVITIES
General. In 1991, the Company initiated a strategy to participate in
the healthcare services business by making investments in emerging healthcare
service companies and developing or acquiring healthcare facilities that it
operated on a direct basis. Subsequent to the acquisition of Medical Equipment
Finance Corporation ("MEF Corp.") in January 1993, the Company withdrew from
this area to redirect capital, management and other resources invested in the
healthcare services business to support the growth of the Company's financial
services business. In March 1995, the Company sold its equity interest in SMT
Health Services, Inc., a provider of mobile diagnostic imaging services.
Investments. In October 1991, the Company purchased an equity
interest in Healthcare Imaging Services, Inc.("HIS"), a company which provides
diagnostic imaging and lithotripsy services in the northeast U.S. HIS's common
stock is traded on the Nasdaq National Market under the symbol HISS. As of
June 30, 1995, the Company owned approximately 17% of the common shares of HIS.
The 800,000 common shares of HIS owned by the Company are carried on the
Company's consolidated balance sheet at estimated fair value. As of June 30,
1995, the Company also owned approximately 8% of the common shares of
Diagnostic Imaging Services, Inc. ("DIS"), a California corporation that owns
and operates medical imaging facilities in Southern California. DIS's common
stock is traded on the Nasdaq National Market under the symbol DIAM. The
Company acquired these shares as a result of the September 1994 merger of DIS
with and into IPS Health Care, Inc. ("IPS"). The 730,768 common shares of DIS
owned by the Company are carried at estimated fair value on the Company's
consolidated balance sheet. The Company initially made its investment in IPS,
a diagnostic imaging service company, in 1992. In addition, the Company holds
two seats on the Board of Directors of DIS.
As part of its strategy to operate exclusively as a financial services
company, the Company intends to divest its equity interests in HIS and DIS and
reduce its credit exposure to both companies. During the three-month period
ended June 30, 1994, the Company completed a series of steps which
significantly diminished its influence over HIS. Under arrangements made with
HIS, the Company agreed to allow existing equipment loans between the Company
and HIS to be refinanced through third parties and to terminate its first right
of refusal for the financing of any future equipment acquisition with HIS. In
addition, upon completion of such refinancing, the Company agreed to relinquish
its seats on the Board of Directors of HIS and to sell the common shares it
owned in HIS. During the refinancing period, the Company agreed to vote its
common shares consistent with HIS's management.
Discontinued Operations. In June 1993, the Company adopted a formal
plan to discontinue its healthcare services segment that consisted of seven
outpatient healthcare facilities which it operated or managed on a direct basis
and one facility which was in the developmental stage and not yet in operation.
At the end of fiscal 1993, the Company established a reserve for the
divestiture of the operations and recorded a loss on discontinued operations
and disposal of discontinued operations. As of June 30, 1994, the Company had
disposed of or entered into definitive agreements to sell six of these
outpatient healthcare facilities, had written off the investment and assets of
the remaining two, and recorded an additional $3.1 million after-tax charge in
excess of the amounts of estimated losses reported as of June 30, 1993 for the
disposition of this segment of the Company's business.
COMPETITION
The financing of sophisticated medical equipment is highly
competitive. The Company competes with equipment vendors which sell and
finance sales of their own equipment, finance subsidiaries of national and
regional commercial banks and equipment leasing and financing companies. Many
of the Company's competitors have significantly greater financial and marketing
resources than the Company. In addition, the competition in the new markets
recently targeted by the Company, specifically equipment financing in the
hospital market, the patient treatment device market and medical receivable
financing market, may be greater than the levels of competition historically
experienced by the Company. There can be no assurance that the Company will be
able to compete successfully in any or all of its targeted markets.
GOVERNMENT REGULATION
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General. The Company's equipment financing business, while generally
not directly subject to government regulation, is indirectly affected by
regulation in several ways. The operation of certain types of diagnostic
imaging and patient treatment equipment is regulated by federal, state and/or
local authorities. For example, a shared service provider or healthcare
provider using equipment financed by the Company may be required to obtain and
maintain approvals from governmental authorities in order to service other
healthcare providers with whom it has entered into service agreements. Failure
by the Company's customers to comply with these requirements could adversely
affect their ability to meet their obligations to the Company. The ability of
the Company's equipment financing customers to satisfy their obligations to the
Company could also be adversely affected by changes in regulations which limit
or prohibit the referral of patients by physicians who have invested in
healthcare facilities financed by the Company. Several of the regulatory
factors impacting the Company's business are discussed below.
Certificate of Need Regulation. Many states regulate the acquisition
of medical equipment or the provision of new services through Certificate of
Need or similar programs. The Company believes these requirements have had a
limited effect on its business, although there can be no assurance that future
changes in those laws will not adversely affect the Company. Additionally,
repeal of existing regulations of this type in jurisdictions where the
Company's customers have met the specific requirements could adversely affect
the Company since such customers could face increased competition. In
addition, there is no assurance that expansion of the Company's equipment
financing business within the hospital market will not be increasingly affected
by regulations of this type.
Medicare-Medicaid Fraud and Abuse Statutes. The Department of Health
and Human Services ("HHS") has increased its enforcement efforts under the
Medicare-Medicaid Fraud and Abuse Statutes in cases where physicians own an
interest in a facility to which they refer their patients for treatment or
diagnosis. These statutes prohibit the offering, payment, solicitation or
receipt of remuneration directly or indirectly as an inducement to refer
patients for services reimbursable in whole or in part by the Medicare-Medicaid
programs. HHS has taken the position that distributions of profits from
corporations or partnerships to physician investors who refer patients to the
entity for a procedure which is reimbursable under Medicare
(government-assisted medical care for the aged) or Medicaid
(government-assisted medical care for the poor) may be a form of remuneration
for referrals which is prohibited by the statute. HHS has also published safe
harbor guidelines which describe the requirements which must be met to ensure
that distributions of profits to a physician who has invested in an equity
security issued by a business to which he or she refers patients does not
violate the Medicare-Medicaid fraud and abuse statute.
Further Regulation of Physician Self-Referral. Additional regulatory
attention has been directed toward physician-owned healthcare facilities and
other arrangements whereby physicians are compensated, directly or indirectly,
for referring patients to such healthcare facilities. In 1988, legislation
entitled the "Ethics in Patient Referrals Act" (H.R. 5198) was introduced
which would have prohibited Medicare payments for all patient services
performed by an entity in which a patient's referring physician had an
investment interest. As enacted, the law prohibited only Medicare payments for
patient services performed by a clinical laboratory. The Comprehensive
Physician Ownership and Referral Act (H.R. 345), which was enacted by Congress
in 1993 as part of the Deficit Reduction Package, is more comprehensive than
H.R. 5198 and covers additional medical services including medical imaging,
radiation therapy, physical rehabilitation and others. A variety of existing
and pending state laws currently limit the extent to which a physician may
profit from referring patients to a facility in which that physician has a
proprietary or ownership interest. Many states also have laws similar to the
Medicare fraud and abuse statute which are designed to prevent the receipt or
payment of consideration in connection with the referral of a patient. The
Company believes that as a result of these legislative initiatives, demand for
new medical equipment by the outpatient healthcare facilities (which in many
cases are owned by referring physicians who are directly affected by the
legislation) has diminished.
EMPLOYEES
As of September 15, 1995, the Company had 111 full-time employees
consisting of 7 executive officers, 26 sales and sales management personnel,
and 78 administrative, accounting and technical personnel. None of the
Company's employees are covered by a collective bargaining agreement, and
management believes that its relations with its employees are good.
ITEM 2. PROPERTIES
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The Company owns no real property and leases all of its offices. The
Company's principal executive offices are located in Doylestown, Pennsylvania.
In total, the Company leases an aggregate of approximately 32,000 square feet
of office space in California, Georgia, Minnesota, New York, Ohio and
Pennsylvania. The Company believes that the present facilities are adequate to
meet its foreseeable needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any pending litigation or legal
proceedings, or to the best of its knowledge any threatened litigation or legal
proceedings, which, in the opinion of management, individually or in the
aggregate, would have a material adverse effect on its results of operations or
financial condition.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the three
months ended June 30, 1995.
EXECUTIVE OFFICERS OF THE REGISTRANT
As of June 30, 1995, the executive officers of DVI were:
<TABLE>
<CAPTION>
NAME AGE POSITION
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<S> <C> <C>
David L. Higgins 49 Chairman of the Board of Directors
and Chief Executive Officer
Michael A. O'Hanlon 48 Director, President and Chief
Operating Officer
Anthony J. Turek 52 Senior Vice President and Chief
Credit Officer
John P. Boyle 46 Vice President and Chief
Accounting Officer
Cynthia J. Cohn 36 Vice President
Dominic A. Guglielmi 44 Vice President
Richard E. Miller 43 Vice President
</TABLE>
DAVID L. HIGGINS is the Company's Chief Executive Officer and
Chairman. From the inception of the Company until September 1994, Mr.
Higgins served as the Company's President, Chief Executive Officer and
Chairman. Mr. Higgins was also the President and Chief Executive
Officer of Delta Health, Inc. ("Delta Health"), the predecessor company
to DVI which he founded in 1985, and which was acquired by the Company
in 1986. Prior to founding Delta Health, Mr. Higgins managed the North
America sales and service operations of Elscint, Inc. ("Elscint"), for
two years. Elscint is a full-line manufacturer of diagnostic imaging
equipment based in Israel. Previously, Mr. Higgins held a similar
position for one year with Xonics Medical Systems, Inc. ("Xonics"),
which was acquired by Elscint in 1982. Xonics was also a full-line
manufacturer of medical imaging equipment. Mr. Higgins presently
serves on the Board of Directors of HIS.
MICHAEL A. O'HANLON is the Company's President and Chief
Operating Officer and has served as such since September 1994.
Previously, Mr. O'Hanlon served as Executive Vice President of DVI
since joining the Company in March 1993. Mr. O'Hanlon also serves on
the Executive Committee of DVI, and is President of DVI Financial
Services, Inc. His responsibilities also include the corporate finance
functions of the Company. Prior to joining the Company, Mr. O'Hanlon
served as President and Chief Executive Officer of Concord Leasing,
Inc. ("Concord Leasing") for nine years. Concord Leasing provides
medical, aircraft, shipping and industrial equipment financing. U.S.
Concord, Inc. a subsidiary, provides equipment financing for the
medical imaging industry. Previously, Mr. O'Hanlon was a Senior
Executive with Pitney Bowes Credit Corporation. Mr. O'Hanlon received
his Master of Science degree from the University of Connecticut and his
Bachelor of Business Administration from the Philadelphia College of
Textiles and Science. Mr. O'Hanlon became a director of DVI in
November 1993.
ANTHONY J. TUREK is a Senior Vice President and the Chief
Credit Officer of DVI. Mr. Turek has served in that capacity since
March 1988. Mr. Turek also serves on the Executive Committee of DVI.
Prior to joining the Company, Mr. Turek was Vice President, Commercial
Banking at Continental Illinois National Bank ("CINB") in Chicago from
1968 to 1988. For the five years prior to joining DVI, Mr. Turek
managed the equipment leasing and transportation divisions of CINB.
Prior responsibilities included management positions in the Special
Industries, Metropolitan and National Divisions of CINB. Before his
employment with CINB, Mr. Turek was a Trust Officer with Bank of
America. Mr. Turek received his Bachelor of Science degree from Iowa
State University and his Masters of Science degree from the University
of Missouri.
JOHN P. BOYLE is a Vice President and Chief Accounting Officer
of the Company. Mr. Boyle joined the Company in January 1995. His
primary responsibility is managing the Company's accounting, tax and
financial reporting functions. Before joining the Company, Mr. Boyle
spent seventeen years of his professional career in senior finance and
accounting positions with financial services organizations. He spent
the initial five years of his career with Peat Marwick Mitchell & Co.
in Philadelphia. Mr. Boyle is a General Securities Principal and a CPA
with almost twenty years of experience in financial services industry.
Beyond his accounting
9
<PAGE> 10
EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED)
background, he has extensive experience in credit and corporate
finance matters. Mr. Boyle holds a Bachelor of Arts degree from Temple
University.
CYNTHIA J. COHN has been a Vice President of DVI since October
1988 and Executive Vice President of DVI Business Credit since January
1994. She is responsible for all sales and marketing functions of DVI
Business Credit. Ms. Cohn has been employed by the Company in a sales
and management capacity since July 1986. Ms. Cohn also handles certain
shareholder relation functions for the Company. She served as an
Assistant Vice President from July 1987 to October 1988. Prior to
joining the Company, Ms. Cohn served as Research Coordinator for
Cantor, Fitzgerald Co., Inc., a stock brokerage firm, from February
1983 to July 1986, where she was responsible for development and
coordination of that firm's research product for both institutional and
retail clientele. She holds a Bachelor of Arts degree from Ithaca
College. Ms. Cohn is the daughter of Gerald L. Cohn, a Director of the
Company.
DOMINIC A. GUGLIELMI is a Vice President of DVI and the Group
Managing Director of DVI Financial Services Inc., and has served as
such since the acquisition of MEF Corp. by DVI in January 1993. Prior
to joining the Company, Mr. Guglielmi served as the President of the
Healthcare Division of U.S. Concord, Inc. for five years where he was
responsible for sales, marketing, documentation, credit/collections,
financial budgeting and all aspects of strategic planning. Previously,
Mr. Guglielmi held management positions with General Electric Credit
Corporation and Pitney Bowes Credit Corporation. Mr. Guglielmi holds a
Bachelor of Arts degree from LaSalle University.
RICHARD E. MILLER is a Vice President of the Company who joined
the Company in April 1994. His primary responsibility is to manage the
Company's sales organization of financing specialists that interface
directly with the Company's customers. Before joining the Company, he
served for six years as Vice President Sales for Toshiba America
Medical Systems, a major distributor of medical imaging equipment.
Previously, Mr. Miller was National Sales Manager for Thomsen CGR, a
French manufacturer of medical imaging equipment, which was acquired by
General Electric Medical Systems. He also previously served in sales
management with General Electric Medical Systems. Mr. Miller has a
Bachelor of Arts degree from Eastern University.
10
<PAGE> 11
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Price Range of Common Stock
The following table sets forth high and low last reported sales prices per
share of Common Stock on the New York Stock Exchange, Inc. for the periods
indicated.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30, 1995 HIGH LOW
- ------------------------------- ---- ---
<S> <C> <C>
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . $11 1/4 $ 9 1/4
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . 11 1/2 9 7/8
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . 13 5/8 10 5/8
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . 13 1/8 11
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30, 1994 HIGH LOW
- ------------------------------- ---- ---
<S> <C> <C>
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9 1/8 $5 3/4
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . 12 1/2 8 3/8
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . 10 5/8 9 1/4
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . 10 8 1/4
</TABLE>
DIVIDEND POLICY
The Company has not declared or paid any cash dividends since its inception,
and the Company anticipates that any future earnings will be retained for
investment in corporate operations. Any declaration of dividends in the future
will be determined in light of the conditions affecting the Company at that
time, including, among other things, its earnings, financial condition, capital
requirements, level of debt and the terms of any contractual limitations on
dividends. The Company's principal warehouse facility prohibits DVI Financial
Services, the Company's principal operating subsidiary, from paying cash
dividends. In addition, the agreement with respect to the Company's 9-1/8%
Convertible Subordinated Notes due 2002 (the "Convertible Subordinated Notes")
places limitations on the payment of dividends by the Company and its
subsidiaries.
As of June 30, 1995, there were approximately 2,450 beneficial holders of the
Company's Common Stock.
11
<PAGE> 12
ITEM 6. SUMMARY CONSOLIDATED FINANCIAL AND OPERATING INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
---------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Finance and other income . . . . . . . . . . . . . $39,027 $20,911 $15,199 $14,736 $10,571
Interest expense . . . . . . . . . . . . . . . . . 22,860 8,833 5,005 5,989 4,933
Selling, general and administrative expense . . . . 9,152 7,765 5,735 3,832 2,795
Earnings from continuing operations before
provision for income taxes, equity in net
earnings (losses) of investees and
discontinued operations . . . . . . . . . . . . . 7,015 4,313 4,459 4,915 2,843
Net earnings from continuing operations . . . . . . 4,069 2,260 2,580 3,053 1,726
Net earnings from continuing operations per share . $0.61 $0.34 $0.39 $0.57 $0.37
Weighted average number of shares outstanding . . . 6,652 6,717 6,601 5,353 4,728
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
---------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents . . . . . . . . . . . . $ 1,953 $ 1,714 $ 2,199 $ 2,536 $ 2,080
Cash and short-term investments, restricted . . . . 12,241 13,065 6,825 4,004 4,531
Total assets . . . . . . . . . . . . . . . . . . . 432,931 265,949 147,161 104,714 85,084
Borrowings under warehouse facilities . . . . . . . 155,173 34,586 45,221 31,349 22,153
Long-term debt, net . . . . . . . . . . . . . . . . 219,130 162,964 51,827 24,569 36,358
Shareholders' equity . . . . . . . . . . . . . . . 40,250 33,993 34,664 34,006 16,113
</TABLE>
The Company has not declared or paid any cash dividends since its inception.
(See Dividend Policy.)
(See Notes 2, 3 and 15 to the accompanying Consolidated Financial Statements
for discussion of discontinued operations and acquisitions and the effect on
operations therefrom and earnings per share calculation.)
12
<PAGE> 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Equipment Financing. For accounting purposes, the Company classifies
equipment loans it originates as notes secured by equipment, direct financing
leases or operating leases. Notes secured by equipment and direct financing
leases are generally those transactions in which the obligor has substantially
all of 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. Direct
financing leases and notes secured by equipment are reflected on the Company's
balance sheet as "investment in direct financing leases and notes secured by
equipment." For statement of operations purposes, those transactions result in
amortization of finance income over the transaction term in the amounts
computed using the interest method.
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 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. 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.
Subsequent to the January 1993 acquisition of MEF Corp., the Company
significantly reduced its emphasis on entering into fair market value
transactions and adopted a strategy to reduce the dollar amount of residual
valuation on its balance sheet. As of June 30, 1995, residual valuation
decreased to $3.6 million from $6.2 million at June 30, 1993, and from 5.3% of
net financed receivables as of June 30, 1993 to 0.9% at June 30, 1995.
Accordingly, during this period the percentage of the Company's equipment
financing transactions structured as loans and conditional sales agreements
have increased significantly. The Company believes that loans and conditional
sales agreements will constitute a high percentage of its equipment financing
transactions in the future.
Leases and contracts for the rental of equipment which do not meet the
criteria of direct financing leases are accounted for as operating leases.
Equipment under an operating lease or a rental contract 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 has classified income under the categories of
"amortization of finance income," "receivables 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" consists of
gains recognized when the Company permanently funds transactions through whole
loan sales. "Receivables financing income" consists primarily of purchased
receivables income and income from the billing and collecting of medical
receivables. The Company withdrew from the business of billing, collecting and
purchasing medical receivables late in fiscal 1994, but will continue to record
income as the receivables outstanding as of such date are collected by the
third parties that the Company hired to service these accounts. On an ongoing
basis, the Company evaluates the collectibility of these receivables and
records a provision for amounts deemed uncollectible. In the event the
aggregate uncollected amounts with respect to receivables the Company purchased
exceeds amounts reserved for losses with respect thereto, the Company will
record a loss. "Other income" consists primarily of late charges, dividends on
investment in investee's preferred stock and income from operating leases.
Notes secured by equipment and direct financing lease transactions are
all 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, at the end of the initial financing term, the obligor has the
option either to purchase the equipment for its fair market value, extend the
financing term under renegotiated
13
<PAGE> 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
GENERAL (CONTINUED)
payments or return the equipment to the Company. If the equipment is returned
to the Company, the Company must sell or lease the equipment to another user.
In accordance with generally accepted accounting principles ("GAAP"),
in transactions classified as notes secured by equipment and direct financing
leases that the Company permanently funds through securitization or other
structured finance transactions whereby the Company treats the funds received
as debt, income is deferred and recognized using the interest method over the
respective terms 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 Receivable Financing. A small portion of the Company's
business is providing lines of credit under which the Company makes full
recourse loans to outpatient healthcare providers that are secured by medical
receivables and other collateral. The respective interest and fee income from
these loans are recognized over the terms of the lines of credit which are
typically one to three years and are recorded as amortization of finance
income.
Discontinued Operations. In June 1993, the Company announced its
decision to dispose of seven outpatient healthcare facilities which it operated
or managed on a direct basis and one facility which was in the developmental
stage and not yet in operation. At June 30, 1993, the Company established a
reserve for the divestiture of the operations and recorded a loss on
discontinued operations and disposal of discontinued operations of $1.9 million
net of tax. This estimate was based on certain assumptions as to the likely
timing of the divestitures, the estimated proceeds to be received upon the sale
of certain of the facilities and the financial results of those operations
pending divestiture. These operations have been reflected as discontinued
operations in the Company's financial statements at June 30, 1993 and 1994.
The pre-tax loss from discontinued operations of $3.3 million at June 30, 1993
was comprised of $2.6 million relating to actual and estimated losses from
operations of this segment through the date of disposition and $720,000
relating to estimated losses to be incurred upon the disposition of the
segment's net assets.
At June 30, 1994, the Company had disposed of or entered into
definitive agreements to sell six of these outpatient healthcare facilities and
had written off the investment in and assets of the remaining two. In
connection with the disposal of these facilities, the Company retained certain
assets and liabilities of these facilities, primarily accounts receivable and
accounts payable. The Company's results of operations for fiscal 1994 include
an additional $3.1 million net after tax change in estimate in the amounts
reported as of June 30, 1993 for the disposition of this segment of the
Company's operations. The change in estimate was comprised almost entirely of
a change in the estimate, in the quarter ended June 30, 1994, in the estimated
proceeds from the disposition of underlying healthcare operations assets which
included goodwill, other intangibles, equipment and other assets. The change
in estimate reflects the complete disposal or write-off of the discontinued
operations segment.
RESULTS OF OPERATIONS
Impact of Financing Strategies on Results of Operations
The Company's financing strategy is to obtain permanent funding for
most of its equipment loans through securitization and to sell the remainder to
reduce borrower concentration and to manage the Company's leverage. When
funding loans through securitization, the issuer generally can structure the
securitization 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 underlying equipment loans. 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
equipment loans that are funded. When the proceeds are treated as funds
received from the sale of equipment loans, the income is generally reported at
the time the equipment loans are funded. The Company uses the first
alternative to recognize finance income when it sponsors a securitization; this
means the Company treats the proceeds received as long-term debt on its
financial statements and reports the finance income on its subordinated
interest over the term of the equipment loans that are funded. When the
Company sells loans, it generally
14
<PAGE> 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
RESULTS OF OPERATIONS, (CONTINUED)
recognizes the unamortized finance income at the time the funding takes place;
however, it may recognize servicing and/or interest income on its subordinated
interest over the remaining term of the equipment loans sold. Since the
Company permanently funds most of its equipment loans by securitization or
other forms of structured finance and therefore reports the finance income from
these equipment loans over approximately five years, its near-term reported
earnings are comparatively lower than they would be if the Company sold all of
the loans.
Over the past two years the Company has focused its strategy on
increasing its market share. There can be no assurance that the Company's
historical growth rate or current profitability can be sustained in the future.
Additionally, the Company's expense levels are based in part on its
expectations as to future financing volumes and the Company may be unable to
adjust spending in a timely manner to compensate for a decrease in demand for
financing of medical equipment. Accordingly, operating results may be
adversely impacted. Fluctuations in operating results may also result in
volatility in the price of the Company's stock. The Company believes that
general economic conditions have not had a material adverse effect on the
Company's recent operating results. There can be no assurances, however, that
economic conditions will not have a material adverse effect on the Company in
the future.
Year Ended June 30, 1995 Compared to Year Ended June 30, 1994
The Company originated $338.0 million of loans for the year ended June
30, 1995, as compared to $163.0 million for the year ended June 30, 1994, an
increase of 107%. This increase resulted from increased funding capacity and
efficiency and improvements in sales and marketing capabilities, including the
implementation of the Wholesale Program. Of this $175.0 million increase,
$63.3 million represented loan originations under the Wholesale Program. The
Company experienced an 82% increase in its average net financed receivables to
$320.1 million for the year ended June 30, 1995, from $176.1 million for the
year ended June 30, 1994. Average net financed receivables is calculated based
on period beginning and period ending balances.
Amortization of finance income increased 87% to $34.3 million for the
year ended June 30, 1995 from $18.3 million for the year ended June 30, 1994.
The increase was primarily a result of the overall increase in the size of the
Company's net financed receivables.
Receivables financing income decreased 76% to $355,000 in fiscal 1995
from $1.5 million in fiscal 1994 due primarily to the fact that the Company
discontinued its billing and collecting of medical receivables operations late
in fiscal 1994.
The gain on sale of financing transactions, net increased 907% to $3.0
million for the year ended June 30, 1995 compared with a gain of $302,000 for
the same period in the prior year. The increase relates to the Company's need
to fund certain loans through whole loan sales to manage borrower
concentrations.
Other income, which consists primarily of late charges and other fees,
dividends on investment in investee's preferred stock and operating lease
income increased 52% to $1.3 million in fiscal 1995 as compared to $883,000 in
fiscal 1994. The increase is due primarily to the preferred stock dividend and
an increase in miscellaneous fees partially offset by a decrease in operating
lease income.
For the year ended June 30, 1995, interest expense increased 160% to
$22.9 million from $8.8 million during the same period in the prior year. For
the year ended June 30, 1995, the Company's average indebtedness (calculated
based on period beginning and period ending balances) increased 94% to $285.9
million from $147.3 million during the same period in the prior year. The
increase in interest expense and average indebtedness is primarily a result of
the growth of the Company's loan portfolio. As a percentage of total finance
and other income, interest expense was 59% in the year ended June 30, 1995
compared to 42% in the same period a year earlier. The increase in interest
expense as a percent of total finance and other income is primarily the result
of (a) increased short-term interest rates when utilizing variable interest
rate warehouse facilities including the Bank Revolving Credit Agreement for
interim funding purposes
15
<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
RESULTS OF OPERATIONS, (CONTINUED)
as well as (b) increased long-term interest rates when utilizing asset
securitization for permanent funding purposes.
Margins earned were $16.2 million for the year ended June 30, 1995, as
compared to $12.1 million for the year ended June 30, 1994, an increase of 34%.
The increase was primarily a result of the overall increase in the size of the
Company's loan portfolio.
Selling, general and administrative expense ("SG&A") increased 18% to
$9.2 million for the year ended June 30, 1995 from $7.8 million for the year
ended June 30, 1994. The increase primarily reflects additional personnel, and
other costs associated with the growth in the Company's business. As a
percentage of total finance and other income, SG&A was 23% for the year ended
June 30, 1995 versus 37% for the same period last year. The percentage
decrease in SG&A is a result of the Company's ability to increase the volume of
transactions entered into and thus the size of its loan portfolio without a
proportionate increase in SG&A.
The Company's SG&A includes the provision for doubtful accounts. That
provision was $1.3 million for the year ended June 30, 1995 as compared to $1.7
million for the same period the previous year. On a quarterly basis, the
Company evaluates the collectibility of its receivables and records a provision
for amounts deemed uncollectible. In the opinion of management, the provisions
are adequate based on current trends in the Company's delinquencies and losses.
The Company's net earnings were $4.1 million or $.61 per share for the
year ended June 30, 1995 as compared to net earnings from continuing operations
of $2.3 million or $.34 per share in the prior year.
The Company's cash and cash equivalents at June 30, 1995 and June 30,
1994 were $2.0 million and $1.7 million, respectively. The increase was
attributable to the uninvested proceeds from the Company's most recent
securitization. The following describes the changes from June 30, 1994 to June
30, 1995 in the items which had the most significant impact on the Company's
cash flow during the year ended June 30, 1995.
The Company's net cash used in operating activities was $1.9 million
during the year ended June 30, 1995 compared to $18.7 million net cash provided
by operations for the year ended June 30, 1994. The increase in cash
utilization during the year ended June 30, 1995 stems largely from a reduction
in the Company's accounts payable from June 30, 1994 by $17.8 million. The
decrease in accounts payable, which consists primarily of amounts due
manufacturers of equipment that the Company has financed, stems from payments
made to these manufacturers during the year ended June 30, 1995.
The Company's net cash used in investing activities increased to
$174.2 million during the year ended June 30, 1995 as compared to $119.6
million for the year ended June 30, 1994. This increase is attributed
primarily to cash used to acquire equipment and to finance notes secured by
equipment of $319.0 million during the year ended June 30, 1995 compared to
$149.0 million for the year ended June 30, 1994. These uses of cash were
offset by $161.4 million and $34.6 million of receipts in excess of amounts
included in income and proceeds from sales of financing transactions for the
same periods.
The Company's net cash provided by financing activities was $176.4
million during the year ended June 30, 1995 up from $100.5 million for the year
ended June 30, 1994. This results from a net increase in the Company's
borrowings under warehouse facilities of $120.6 million for the year ended June
30, 1995 as compared to a $10.6 million net decrease in borrowings under
warehouse facilities for the year ended June 30, 1994.
Year Ended June 30, 1994 Compared to Year Ended June 30, 1993
The Company originated $163.0 million of loans in fiscal 1994, as
compared to $58.6 million in fiscal 1993, an increase of 178%. The increase
from period to period was primarily because the Company expanded its equipment
financing capabilities as a result of its acquisition of MEF Corp. in January
1993. The Company's average net financed
16
<PAGE> 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
RESULTS OF OPERATIONS, (CONTINUED)
receivables increased 73% to $176.1 million for the period ended June 30, 1994,
from $101.5 million for the period ended June 30, 1993. The Company
experienced a decrease in its residual valuation to $3.7 million at June 30,
1994, from $6.2 million at June 30, 1993. The decrease stems primarily from
the Company's sale of residuals totalling $1.2 million and the Company's
strategy to reduce the number of loans in its portfolio in which residual
values are recorded.
Amortization of finance income increased 69% to $18.3 million for
fiscal 1994 from $10.8 million for fiscal 1993. Although the Company's net
financed receivables increased significantly, the amortization of finance
income did not increase on a proportionate basis due to four factors: (i) the
Company's strategy to originate equipment loans in which residual positions are
not retained reduced the Company's rate of return on the respective
transactions; (ii) the Company has narrowed the interest rate spread between
the Company's costs of funding its equipment loans and the interest rates
charged its customers; (iii) the volume of equipment loans originated in fiscal
1994 was greater in the second half of the year than in the first half; and
(iv) the interest rates under the Company's warehouse facilities increased
during the year which increased interest expense and thus reduced margins.
Receivables financing income increased to $1.5 million in fiscal 1994
from $1.3 million in fiscal 1993. Although the Company's notes collateralized
by medical receivables portfolio increased significantly, receivable financing
income did not increase on a proportionate basis primarily because the increase
in the Company's volume of medical receivables financing transactions occurred
late in fiscal 1994. Consequently, receivables financing income as a percent
of the notes collateralized by medical receivables was reduced.
Gain on sale of financing transactions, net declined 73% to $302,000
in fiscal 1994 from $1.1 million in fiscal 1993 due to the reduction in the
number and dollar amount of equipment loans funded through whole loan sales and
the increased use of securitization to obtain permanent funding for the
Company's equipment loans.
Other income, which consists of late charges, operating lease income,
management income and other miscellaneous items decreased 55% to $883,000 in
fiscal 1994 from $2.0 million for fiscal 1993. This decrease was due to a
decline in net operating lease income. Net operating lease income declined 74%
to $359,000 in fiscal 1994 from $1.4 million in fiscal 1993 as a result of the
Company's strategy to reduce its originations of operating leases and the
expiration of two substantial transactions near the end of fiscal 1993.
Interest expense increased 76% to $8.8 million in fiscal 1994 from
$5.0 million in fiscal 1993. For fiscal 1994, the Company's average
indebtedness increased 92% to $147.3 million from $76.7 million during fiscal
1993. This increase stems primarily from an increase in the average
outstanding balance of long-term debt during fiscal 1994 as compared to fiscal
1993. As a percentage of total finance and other income, interest expense was
42% for fiscal 1994 as compared to 33% in fiscal 1993. The increase in
interest expense as a percent of total finance and other income is principally
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) the
interest rates under the Company's warehouse facilities increasing during the
year; and (iii) the Company's strategy to originate equipment loans in which
residual positions are not retained reducing the Company's rate of return and
thus its income on the respective equipment loans. Consequently, as a
percentage of finance and other income, interest expense increased in fiscal
1994.
Margins earned were $12.1 million in fiscal 1994 as compared to $10.2
million in fiscal 1993, an increase of 19%. The increase in fiscal 1994 over
fiscal 1993 was primarily a result of the overall increase in the size of the
Company's loan portfolio.
SG&A increased 37% to $7.8 million in fiscal 1994 from $5.7 million in
fiscal 1993. The largest component of this increase is a $1.4 million increase
in the Company's provision for doubtful accounts which in fiscal 1994 was
attributable to the growth of the Company's loan portfolio. The increase also
reflects costs associated with additional personnel and related costs incurred
in connection with the Company's acquisition of MEF Corp. during fiscal 1993,
the acquisition of Medical Device Capital Company during fiscal 1994 and the
expansion of its medical receivable
17
<PAGE> 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
RESULTS OF OPERATIONS, (CONTINUED)
financing business in fiscal 1994.
Equity in net losses of investees increased 375% to $242,000 in fiscal
1994 from $51,000 in fiscal 1993. The increase in net losses of investees is
primarily attributable to greater losses incurred by the Company's investees in
the first half of fiscal 1994 than in fiscal 1993. See "Business -- Other
Business Activities."
The Company's net earnings from continuing operations were $2.3
million, or $.34 per share, for fiscal 1994 as compared to $2.6 million, or
$0.39 per share, for fiscal 1993 a decrease of 12%. After giving effect to its
discontinued operations, the Company's loss was $885,000, or $0.13 per share,
for fiscal 1994 versus net earnings of $658,000, or $0.10 per share, for fiscal
1993. The Company's net earnings from continuing operations did not increase
in fiscal 1994 despite the growth of its loan portfolio and the increase in
finance and other income.
LIQUIDITY AND CAPITAL RESOURCES
General
The Company's equipment financing business requires substantial
amounts of capital and borrowings. The Company obtains warehouse funding from
commercial and investment banks. The Company's warehouse 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 financed assets (if any) should defaults occur.
A substantial portion of the Company's debt represents permanent
funding of equipment loans obtained on limited recourse basis and is structured
so that the cash flow from the underlying loans services the debt. Most of the
Company's warehouse borrowings are used to temporarily fund the equipment loans
and are repaid with the proceeds obtained from the permanent funding and cash
flow from the underlying transactions.
As a result of the rapid growth of the Company's equipment financing
business, the amount of warehouse and permanent funding it requires has
significantly increased. To meet its requirements for increased warehouse
funding, the Company has expanded its warehouse facilities with banks, and has
obtained warehouse facilities with investment banking firms the Company uses
for its securitizations. To meet its requirement for increased permanent
funding, the Company has enhanced its ability to fund equipment loans by both
securitization and whole loan sales. If suitable sources of both warehouse 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 (typically accounts receivable) and the Company's other
credit criteria are satisfied.
In June 1994, the Company completed a $15.0 million private placement
of Convertible Subordinated Notes. The Convertible Subordinated Notes (i) are
convertible into shares of Common Stock 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 from the placement were utilized by the Company to repay a portion of
the existing debt under its principal warehouse facility and on a limited basis
to fund medical receivables loans. The agreement with respect to the
Convertible Subordinated Notes contains, among other things, limitations on the
Company's ability 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 June 30,
1995, $500,000 aggregate principal of the Convertible Subordinated Notes had
been converted into 47,169 shares of Common Stock.
In August 1995, the Company completed an offering of 2,875,000 shares
of its common stock for which it received
18
<PAGE> 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
LIQUIDITY AND CAPITAL RESOURCES, (CONTINUED)
net proceeds of $29.7 million.
The Company believes that its present warehouse and permanent funding
sources are sufficient to fund the Company's current needs for its equipment
financing business. However, the Company will have to expand both its
warehouse and permanent funding capacity as well as to get into commercial
paper programs and other means of unsecured debt financing vehicles to meet the
Company's projected growth of its equipment financing business. In addition,
the growth of the Company's medical receivable financing business is dependent
on the Company's ability to obtain suitable funding for that business.
Continued expansion of the Company's business and its continued use of
securitizations 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.
Warehouse Facilities
At September 26, 1995, the Company had available an aggregate of
$337.7 million under various warehouse facilities. The Company's primary
warehouse facility, a revolving credit agreement with a syndicate of banks (the
"Bank Revolving Credit Agreement"), provides the Company with $81.5 million in
borrowing capacity. Borrowings under the Bank Revolving Credit Agreement bear
interest at the Company's option at either a rate equal to 25 basis points over
the Prime rate established by NatWest Bank N.A. (NatWest) 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 Bank Revolving Credit Agreement. The Bank Revolving Credit Agreement is
renewable annually at the bank syndicate's discretion. However, the Bank
Revolving Credit Agreement provides that if the banks elect not to renew the
facility at the end of its stated term, December 31, 1995, the outstanding
loans automatically convert to four-year amortizing term loans at slightly
higher interest rates.
The Bank 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
Bank 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 Bank Revolving Credit
Agreement is constrained by the amount, type and payment status of the
Company's equipment loans. If, at any time, a significant amount of the
Company's loans were to become delinquent, the availability of credit under the
Bank Revolving Credit Agreement would be reduced and, under other
circumstances, the Company could be required to prepay a portion of the amounts
outstanding under the Bank Revolving Credit Agreement. Since the Bank
Revolving Credit Agreement was established, the only collateral that was
eligible for borrowing purposes was equipment loans. To fund the growth of its
medical receivable financing business, the Company requested that the banks
participating in the Bank 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 also has a $75.0 million interim funding facility with
Prudential Securities Realty Funding Corporation (the "Prudential Facility").
This interim funding facility is available for certain transactions which are
to be securitized under specified terms and bear interest at a rate equal to 75
basis points over the 30, 60 or 90-day LIBOR rate. The Prudential Facility
also allows the Company to borrow up to $4.3 million in special advances that
bear interest at a rate equal to 150 basis points over the 30-day LIBOR until
October 31, 1995. The $4.3 million of special advances were repaid in August
1995. Borrowings under the Prudential Facility, including the special advances,
are secured by (i) certain equipment loans and the equipment financed
thereunder, (ii) the Company's interest in certain asset-backed notes, and
(iii) the Company's rights to receive funds from certain securitized equipment
loans. All borrowings under the Prudential Facility mature on October 31,
1995. The Company has a second facility with Prudential, which provides the
Company with $5.5 million in warehouse funding to make medical receivables
loans to approved borrowers. Borrowings under the $5.5 million
19
<PAGE> 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
LIQUIDITY AND CAPITAL RESOURCES, (CONTINUED)
Prudential Facility bear interest at a rate equal to the Prime rate established
by Morgan Guaranty Trust Company of New York. The borrowings are secured by
medical receivables loans originated by the Company and the underlying
receivables. This facility matures on November 30, 1995.
The Company has a $75.0 million interim funding facility with
ContiTrade Services Corporation (the "Conti Facility") which provides the
Company with warehouse financing for certain equipment loans to be securitized
or otherwise permanently funded through the Conti Facility. Borrowings under
this facility bear interest at a rate equal to 150 basis points over the 30 or
60-day LIBOR rate which is fixed to the related funding period. This facility
matures on October 31, 1995.
In July 1995, the Company obtained a $100.0 million interim funding
facility with Union Bank of Switzerland which provides the Company with
warehouse financing for certain equipment loans to be securitized. Borrowings
under this facility are secured by certain equipment loans and the equipment
financed thereunder. Borrowings under this facility bear interest at a rate
equal to 90 basis points over a 30, 60 or 90-day LIBOR rate which is fixed to
the related funding period. This facility matures on November 27, 1995.
The Company's use of securitization significantly affects its need for
warehouse facilities. When using securitization, the Company is required to
hold loans in warehouse facilities until a sufficient quantity is accumulated
to meet the various requirements of the credit rating agencies and others
involved, and to make a securitization cost effective. Generally, loans
totalling $50 to $100 million will be placed in each securitization pool.
When the Company borrows funds through warehouse facilities, it is
exposed to a certain degree of risk caused by interest rate fluctuations.
Although the Company's equipment loans are structured and permanently funded on
a fixed interest rate basis, it uses warehouse facilities until permanent
funding is obtained. Because funds borrowed through warehouse facilities are
obtained on a floating interest rate basis, the Company uses hedging techniques
to protect its interest rate margins during the period that warehouse
facilities are used. The Company's sole reason for using hedging techniques is
to offset the loss that occurs when loans are funded on an interim basis and
interest rates rise causing the Company's interest rate margins on the loans to
decline. Therefore, gains or losses generated through hedging techniques only
benefit the Company to the extent they offset the corresponding reduction in
margin due to rising interest rates until the loans are permanently funded.
The Company's primary hedging technique is to assume short positions in U.S.
Treasury obligations of comparable maturities to the life of its loans. To the
extent hedging gains or losses resulting from U.S. Treasury contracts are
significant, the resulting cash payments or receipts may impact the Company's
liquidity.
Permanent Funding Methods
The Company has completed seven securitizations or other structured
finance transactions totalling $414.8 million, including two public debt issues
of $75.7 million and $90.0 million and five private placements of debt and
whole loan sales totalling $249.1 million. In January 1994, the Company filed
a $350 million registration statement (Registration No. 33-74446) with the
Commission to provide for the future issuance of securitized debt in a series
of transactions pursuant to the Commission's "shelf" registration rule. The
registration statement was declared effective by the Commission on June 23,
1994. The $75.7 and $90.0 million public debt issues were the two initial
fundings under the $350 million shelf registration. The Company expects to
continue to use securitization, on both a public and private basis, as its
principal means to permanently fund its loans for the foreseeable future,
except when issues of borrower concentration exist that warrant the sale of
loans.
The Company's use of securitization significantly affects its
liquidity and capital requirements due to the amount of time required to
assemble a portfolio of loans to be securitized. When using securitization,
the Company is required to hold loans 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 warehouse facility liquidity.
Generally, the Company does not have binding commitments for permanent
funding, either through securitization
20
<PAGE> 21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
LIQUIDITY AND CAPITAL RESOURCES, (CONTINUED)
or whole loan sales. The Company has non-binding agreements with investment
banking entities to fund future equipment loans through 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 warehouse
facilities are sufficient to meet its near-term obligations.
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 18 months, the proportion of transactions originated by
the Company structured as fair market value leases 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. Additionally, the Company believes its effective tax
rate will increase in future periods as a result of higher state tax rates in
certain regions in which the Company conducts its business.
INFLATION
The Company does not believe that inflation has had a material effect
on its operating results during the past three years. There can be no
assurance that the Company's business will not be affected by inflation in
the future.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of the Company and its
subsidiaries are filed on the pages listed below, as part of Part II, Item 8.
21
<PAGE> 22
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Consolidated Balance Sheets as of June 30, 1995 and 1994 . . . . . . . . . . . . . . . . . 24-25
Consolidated Statements of Operations for the years ended
June 30, 1995, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Consolidated Statements of Shareholders' Equity for the years ended
June 30, 1995, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Consolidated Statements of Cash Flows for the years ended
June 30, 1995, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28-30
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . 31-44
</TABLE>
22
<PAGE> 23
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
DVI, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of DVI, Inc. and
its Subsidiaries (the "Company") as of June 30, 1995 and 1994, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended June 30, 1995. Our audits also
included the financial statement schedule listed in the Index at Item 14(a)(2).
These consolidated financial statements and financial statement schedule are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of DVI, Inc. and its Subsidiaries as
of June 30, 1995 and 1994, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended June 30, 1995
in conformity with generally accepted accounting principles. Also, in our
opinion, such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Costa Mesa, California
September 26, 1995
23
<PAGE> 24
DVI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June 30,
---------------------------
1995 1994
------------ ------------
<S> <C> <C>
CASH AND CASH EQUIVALENTS (Note 2) . . . . . . . . . . . . . . . . . . . . $ 1,952,848 $ 1,713,769
------------ ------------
CASH AND SHORT-TERM INVESTMENTS,
RESTRICTED (Note 4) . . . . . . . . . . . . . . . . . . . . . . . . . . 12,240,604 13,064,814
------------ ------------
RECEIVABLES:
Investment in direct financing leases and notes secured by equipment
(Notes 2, 5, 6, 7, 8, 12 and 16) -
Receivable in installments . . . . . . . . . . . . . . . . . . . . . . 443,244,591 254,095,802
Receivable in installments - related parties . . . . . . . . . . . . . 8,254,953 16,427,684
Residual valuation . . . . . . . . . . . . . . . . . . . . . . . . . . 3,577,753 3,730,592
Unearned income . . . . . . . . . . . . . . . . . . . . . . . . . . . . (74,958,952) (48,387,132)
------------ ------------
Net investment in direct financing leases and
notes secured by equipment . . . . . . . . . . . . . . . . . . . 380,118,345 225,866,946
------------ ------------
Other receivables (Note 2) -
From sale of leases and notes secured by equipment . . . . . . . . . . 113,143 911,585
Patient service accounts receivable (net of contractual allowances of
$2,014,073 (1995) and $2,607,574 (1994)) . . . . . . . . . . . . . . 374,765 3,667,123
Notes collateralized by medical receivables . . . . . . . . . . . . . . 22,486,847 6,006,600
------------ ------------
Total other receivables . . . . . . . . . . . . . . . . . . . . . . 22,974,755 10,585,308
------------ ------------
Less: Allowance for possible losses on receivables . . . . . . . . . . . . (3,282,321) (2,497,916)
------------ ------------
NET RECEIVABLES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 399,810,779 233,954,338
------------ ------------
EQUIPMENT ON OPERATING LEASES (Notes 2 and 5)
(net of accumulated depreciation of $1,646,041 (1995) and
$1,163,591 (1994)) . . . . . . . . . . . . . . . . . . . . . . . . . 2,722,288 2,893,683
------------ ------------
FURNITURE AND FIXTURES (Note 2)
(net of accumulated depreciation of $725,967 (1995) and
$525,032 (1994)) . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,468,221 817,135
------------ ------------
INVESTMENTS IN INVESTEES (Notes 2 and 6) . . . . . . . . . . . . . . . . . 7,655,950 4,646,382
------------ ------------
GOODWILL, NET (Notes 2 and 15) . . . . . . . . . . . . . . . . . . . . . . 1,866,667 2,024,253
------------ ------------
OTHER ASSETS (Note 2) . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,213,411 6,834,972
------------ ------------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . $432,930,768 $265,949,346
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
24
<PAGE> 25
DVI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
JUNE 30,
--------------------------
1995 1994
------------ ------------
<S> <C> <C>
ACCOUNTS PAYABLE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,022,644 $ 23,861,905
------------ ------------
OTHER ACCRUED EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . 7,638,639 8,215,021
------------ ------------
BORROWINGS UNDER WAREHOUSE FACILITIES (Note 7) . . . . . . . . . . . . . . 155,172,591 34,586,373
------------ ------------
DEFERRED INCOME TAXES (Notes 2 and 9) . . . . . . . . . . . . . . . . . . . 4,717,059 2,329,205
------------ ------------
LONG-TERM DEBT, NET:
Discounted receivables (primarily limited recourse) (Notes 5, 8 and 16) 205,376,397 148,851,584
Convertible subordinated notes (Notes 8, 10 and 12) . . . . . . . . . . 13,753,614 14,112,000
------------ ------------
Total long-term debt, net . . . . . . . . . . . . . . . . . . . . . 219,130,011 162,963,584
------------ ------------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . 392,680,944 231,956,088
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 13 and 15)
SHAREHOLDERS' EQUITY (Notes 6, 10, 11 and 15):
Preferred Stock, $10.00 par value; authorized,
100,000 shares; no shares issued
Common Stock, $.005 par value; authorized 13,000,000 shares,
outstanding 6,711,680 shares (1995) and 6,567,295 shares (1994) . . . 33,558 32,836
Additional capital . . . . . . . . . . . . . . . . . . . . . . . . . . 29,281,063 28,155,502
Unrealized gain on available-for-sale investments, net of deferred
taxes of $768,707 . . . . . . . . . . . . . . . . . . . . . . . . . 1,061,548
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,873,655 5,804,920
------------ ------------
TOTAL SHAREHOLDERS' EQUITY . . . . . . . . . . . . . . . . . . . 40,249,824 33,993,258
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY . . . . . . . . . . . $432,930,768 $265,949,346
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
25
<PAGE> 26
DVI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Finance and Other Income (Note 2):
Amortization of finance income . . . . . . . . . . . . $34,285,584 $18,264,742 $10,826,020
Receivables financing income . . . . . . . . . . . . . 355,430 1,461,677 1,295,514
Gain on sale of financing transactions, net . . . . . 3,042,082 302,053 1,103,528
Other income . . . . . . . . . . . . . . . . . . . . . 1,343,663 882,667 1,973,490
----------- ----------- -----------
Finance and Other Income . . . . . . . . . . . . . . . 39,026,759 20,911,139 15,198,552
Interest expense . . . . . . . . . . . . . . . . . . . 22,859,535 8,832,836 5,004,744
----------- ----------- -----------
Margins Earned . . . . . . . . . . . . . . . . . . . . . . . 16,167,224 12,078,303 10,193,808
Selling, General and Administrative expense . . . . . 9,152,164 7,765,112 5,734,981
----------- ----------- -----------
Earnings from Continuing Operations Before
Provision for Income Taxes, Equity in Net Loss of
Investees and Discontinued Operations . . . . . . . . . . 7,015,060 4,313,191 4,458,827
Provision for Income Taxes (Notes 2 and 9) . . . . . . . . . 2,946,325 1,811,540 1,828,118
----------- ----------- -----------
Earnings from Continuing Operations Before Equity in Net
Loss of Investees and Discontinued Operations . . . . . . 4,068,735 2,501,651 2,630,709
Equity in Net Loss of Investees . . . . . . . . . . . . . . . (242,150) (50,547)
----------- ----------- -----------
Earnings from Continuing Operations . . . . . . . . . . . . . 4,068,735 2,259,501 2,580,162
Discontinued Operations (Note 3):
Loss from discontinued operations net of tax
of $51,000 (1994) and $1,064,529 (1993) . . . . . . . 74,000 1,497,398
Loss on disposal of discontinued operations, net of tax
of $2,212,536 (1994) and $295,200 (1993) . . . . . . . 3,070,877 424,800
----------- ----------- -----------
Loss from Discontinued Operations . . . . . . . . . . . . 3,144,877 1,922,198
----------- ----------- -----------
Net Earnings (Loss) . . . . . . . . . . . . . . . . . . . . $ 4,068,735 $ (885,376) $ 657,964
=========== =========== ===========
Net Earnings (Loss) Per Share (Note 2):
From Continuing Operations . . . . . . . . . . . . . . $ 0.61 $ 0.34 $ 0.39
From Discontinued Operations . . . . . . . . . . . . . (0.47) (0.29)
----------- ----------- -----------
Net Earnings (Loss) Per Share . . . . . . . . . . . . . . . . $ 0.61 $ (0.13) $ 0.10
=========== =========== ===========
Weighted Average Number of Shares
Outstanding (Note 2) . . . . . . . . . . . . . . . . . . 6,652,000 6,717,000 6,601,000
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
26
<PAGE> 27
DVI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
COMMON STOCK GAIN ON
$.005 PAR AVAILABLE- TOTAL
-------------------- ADDITIONAL FOR-SALE RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL INVESTMENTS EARNINGS EQUITY
-------- ------- ------------ ----------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT JULY 1, 1992 . . . . . . . . 6,530,128 $32,651 $27,940,934 $ -- $6,032,332 $34,005,917
Issuance of common stock upon
exercise of stock options . . . . 167 1 532 533
Net earnings . . . . . . . . . . . . 657,964 657,964
--------- ------- ----------- ---------- -----------
BALANCES AT JUNE 30, 1993 . . . . . . . . 6,530,295 32,652 27,941,466 6,690,296 34,664,414
Issuance of common stock upon
exercise of stock options . . . . 37,000 184 214,036 214,220
Net loss . . . . . . . . . . . . . . (885,376) (885,376)
--------- ------- ----------- ---------- -----------
BALANCES 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 . . . . 97,216 486 625,797 626,283
Conversion of subordinated notes . . 47,169 236 499,764 500,000
Unrealized gain on available-for-sale
investments, net of deferred taxes
of $768,707 (Note 2) . . . . . . . 1,061,548 1,061,548
Net earnings . . . . . . . . . . . . 4,068,735 4,068,735
--------- ------- -----------
BALANCES AT JUNE 30, 1995 . . . . . . . . 6,711,680 $33,558 $29,281,063 $1,061,548 $9,873,655 $40,249,824
========= ======= =========== ========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
27
<PAGE> 28
DVI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------------------------
1995 1994 1993
------------- ------------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) . . . . . . . . . . . . . . . . . . $ 4,068,735 $ (885,376) $ 657,964
------------- ------------- ------------
Adjustments to reconcile net earnings (loss) to net
cash provided by (used in) operating activities:
Equity in net loss of investees . . . . . . . . . 242,150 16,780
Minority interest in subsidiaries . . . . . . . . (132,404)
Depreciation and amortization . . . . . . . . . . 7,237,120 1,902,873 4,515,108
Additions to allowance accounts, net . . . . . . . 190,904 979,210 1,153,585
Gain on sale of financing transactions, net . . . (3,042,082) (302,053) (1,103,528)
Deferred income taxes . . . . . . . . . . . . . . 1,619,147 (2,152,084) 228,923
Provision for discontinued operations . . . . . . 1,865,500 720,000
Loss on disposition of assets . . . . . . . . . . 3,542,913
Changes in assets and liabilities (net of effects
from purchase of acquired entities):
(Increases) decreases in:
Cash and short-term investments, restricted . . . 824,210 (6,239,329) (2,821,330)
Other receivables . . . . . . . . . . . . . . . . 3,182,282 1,516,920 (4,016,448)
Receivables from sale of leases
and notes secured by equipment . . . . . . . . . 798,442 1,948,744 1,212,300
Other assets . . . . . . . . . . . . . . . . . . 1,621,561 (679,089) (4,207,045)
Increases (decreases) in:
Accounts payable . . . . . . . . . . . . . . . (17,839,261) 16,531,725 (475,490)
Other accrued expenses . . . . . . . . . . . . (576,382) 409,889 116,464
------------- ------------- ------------
Total adjustments . . . . . . . . . . . . . . . . (5,984,059) 19,567,369 (4,793,085)
------------- ------------- ------------
Net cash provided by (used in)
operating activities . . . . . . . . . . . . . . (1,915,324) 18,681,993 (4,135,121)
------------- ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cost of equipment acquired . . . . . . . . . . . . . . (319,010,358) (149,027,781) (62,633,598)
Receipts in excess of amounts included in income and
proceeds from sales of financing transactions . . . 161,447,928 34,565,693 29,391,908
Net increase in notes collateralized by medical
receivables . . . . . . . . . . . . . . . . . . . . . (16,480,247) (6,006,600)
Furniture and fixtures additions . . . . . . . . . . . (1,025,957) 17,606 (1,095,433)
Investments in common and preferred stock
of investees . . . . . . . . . . . . . . . . . . . . 149,998 (1,399,614)
Amounts received from minority partners . . . . . . . 116,944
Payment for purchase of acquired entities . . . . . . (1,435,720)
Cash proceeds from sale of assets . . . . . . . . . . 125,000
Cash received from sale of common and preferred
stock of investee . . . . . . . . . . . . . . . . . 827,989 540,000
------------- ------------- ------------
Net cash (used in) investing activities . . . . . . . $(174,240,645) $(119,636,084) $(37,055,513)
------------- ------------- ------------
</TABLE>
(Continued)
28
<PAGE> 29
DVI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------------------
1995 1994 1993
-------------- --------------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock options . . . . . . . . . . . . . . $ 626,283 $ 214,220 $ 533
Borrowings under:
Warehouse facilities . . . . . . . . . . . . . . 534,632,665 216,113,152 58,076,360
Long-term debt . . . . . . . . . . . . . . . . . . 107,510,263 146,855,283 44,534,864
Repayments on:
Warehouse facilities . . . . . . . . . . . . . . (414,046,447) (226,748,005) (44,204,047)
Long-term debt . . . . . . . . . . . . . . . . . (52,327,716) (35,965,998) (17,554,080)
-------------- --------------- -----------
Net cash provided by financing activities . . . . . 176,395,048 100,468,652 40,853,630
-------------- --------------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS . . . . . . . . . . . . . . . 239,079 (485,439) (337,004)
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR . . . . . . . . . . . . . . . . . 1,713,769 2,199,208 2,536,212
-------------- --------------- -----------
CASH AND CASH EQUIVALENTS,
END OF YEAR . . . . . . . . . . . . . . . . . . . . $ 1,952,848 $ 1,713,769 $ 2,199,208
============== =============== ===========
Cash paid during the year for:
Interest . . . . . . . . . . . . . . . . . . . . . . $ 22,400,387 $ 5,579,168 $ 5,137,310
============== =============== ===========
Income taxes . . . . . . . . . . . . . . . . . . . . $ 1,650,342 $ 551,848 $ 1,087,436
============== =============== ===========
SUPPLEMENTAL DISCLOSURES OF NONCASH
TRANSACTIONS:
Assets acquired and liabilities assumed in
connection with business acquisitions:
Fair value of net assets acquired . . . . . . . . . $ 2,000,000 $ 1,906,008
=============== ===========
Liabilities assumed . . . . . . . . . . . . . . . . $ 470,288
===========
</TABLE>
During the year ended June 30, 1995, $500,000 of Convertible Subordinated Notes
was converted into common stock.
Unrealized gains on available-for-sale investments including restricted
short-term investments and investments in investees total $1,061,548, net of
deferred taxes of $768,707, as of June 30, 1995.
The accompanying notes are an integral part of these
consolidated financial statements.
29
<PAGE> 30
DVI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
During the year ended June 30, 1994 the following noncash transactions occurred
in conjunction with the disposal of the Company's healthcare operations segment
(See Note 3).
<TABLE>
<S> <C>
Net assets sold or written off:
Furniture and fixtures . . . . . . . . . . . . . . . $ 733,065
Equipment on operating leases . . . . . . . . . . . 2,615,011
Receivables . . . . . . . . . . . . . . . . . . . . 1,106,664
Other assets, net . . . . . . . . . . . . . . . . . 686,842
----------
5,141,582
----------
Liabilities assumed by Company:
Accounts payable . . . . . . . . . . . . . . . . . . 544,500
Accrued liabilities . . . . . . . . . . . . . . . . 1,758,442
----------
2,302,942
----------
Less proceeds:
Cash . . . . . . . . . . . . . . . . . . . . 125,000
Notes receivable . . . . . . . . . . . . . . 3,776,611
----------
3,901,611
----------
Loss on disposal of assets $3,542,913
==========
</TABLE>
See Note 6 for discussion of additional noncash transactions.
The accompanying notes are an integral part of these
consolidated financial statements.
30
<PAGE> 31
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. GENERAL
DVI, Inc. (the "Company" or "DVI") is engaged in the business of providing
equipment financing and related services for users of diagnostic imaging,
radiation therapy and other medical technologies. The Company's customer base
consists principally of outpatient healthcare providers, physician groups and
hospitals. By the terms of the underlying financing contracts, the Company's
customers are generally considered in default if payment on a contract has not
been received. Equipment under direct financing leases and notes secured by
equipment serve as collateral for unpaid contract payments. Receivables under
medical receivables financing transactions serve as collateral for unpaid
contract payments.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation Policy - The consolidated financial statements include the
accounts of DVI and its wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated.
Cash Equivalents - Cash equivalents include highly liquid securities with
original maturities of 90 days or less.
Investment in Direct Financing Leases and Notes Secured by Equipment - At
contract commencement, the Company records the gross contract receivable,
initial direct costs, estimated residual value of the financed equipment, if
any, and unearned income. At June 30, 1995 and 1994, unamortized initial
direct costs amounted to $6,878,083 and $5,444,135, respectively. Initial
direct costs are amortized over the life of the contract on the interest method
which reflects a constant effective yield. Receivables from Sale of Leases and
Notes Secured by Equipment - The receivables from sale of leases and notes
secured by equipment primarily relate to the sale of financing transactions
which were complete as of the end of the respective period.
Receivables from Sale of Leases and Notes Secured by Equipment - The
receivables from sale of leases and notes secured by equipment primarily relate
to the sale of financing transactions which were complete as of the end of the
respective period.
Patient Service Accounts Receivable - Patient service accounts receivable
relate to billings for services performed by the Company's discontinued
healthcare segment of its business (See Note 3). The receivables have been
stated at their estimated net realizable value at June 30, 1995 and 1994.
Notes Collateralized by Medical Receivables - Notes collateralized by medical
receivables consist of notes receivable resulting from working capital and
other loans made to entities in the healthcare industry and receivables
purchased from unrelated entities. The purchased receivables are stated at the
lower of the Company's cost or the estimated collectible value.
Equipment on Operating Leases - Leases which do not meet the criteria for
direct financing leases are accounted for as operating leases. Equipment on
operating leases are recorded at cost and depreciated on a straight-line basis
over the estimated useful life of the equipment. Rental income is recorded
monthly on a straight-line basis. Initial direct costs directly associated
with operating leases are deferred and amortized over the lease term on a
straight-line basis.
Furniture and Fixtures - Furniture and fixtures are stated at cost less
accumulated depreciation and are depreciated using the straight-line method
over their estimated useful lives (generally five years).
Short-Term Investments, Restricted and Investments in Investees - The Company
has adopted Statement of Financial Accounting Standards (SFAS) No. 115,
Accounting for Certain Investments in Debt and Equity Securities. SFAS No. 115
requires the classification of investments in debt and equity securities into
three categories: held to maturity, trading and available-for-sale. Debt
securities that are purchased with the positive intent and ability to hold to
maturity are classified as held to maturity securities and reported at
amortized cost. Debt and equity securities that are reclassified from
available-for-sale or bought and held principally for the purpose of selling
them in the near-term are classified as trading securities and reported at fair
value, with unrealized gains and losses included in earnings. At June 30,
1995, the Company has only available-for-sale securities. Equity securities
classified as available-for-sale securities are reported at estimated fair
value, with unrealized gains and losses excluded from earnings and reported as
a separate component of equity, net of deferred taxes. The cumulative effect
of the adoption of the new statement was not significant.
The investments in investees consist of common and nonvoting preferred equity
interests in unconsolidated subsidiaries. Prior to fiscal 1994, the Company
accounted for its investments in the common stock of these subsidiaries using
the equity method of accounting. Subsequent to fiscal 1993, when the Company
no longer exerted significant influence over the investees, the Company began
accounting for the investees utilizing the cost method. During the year ended
June 30, 1994, the investment in the common stock of one investee was written
down to zero to reflect the Company's cumulative share of equity losses in the
investee and the investment in the preferred stock of this investee was
recorded at the lower of cost or estimated realizable value.
31
<PAGE> 32
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (CONTINUED)
As of June 30, 1995, the Company's investments in common stock are classified
as available for sale and carried at estimated fair value. (See Note 6.)
Goodwill - Goodwill at June 30, 1995 and 1994 represents the estimated excess
contingent purchase price over the net tangible assets stemming from the
acquisition of Medical Equipment Finance Corporation ("MEF Corp."). (See Note
15.) Goodwill relating to the acquisition of MEF Corp. is being amortized over
a fifteen year period. The Company evaluates the recoverability of its
goodwill separately for each applicable business acquisition at each balance
sheet date. The recoverability of goodwill is determined by comparing the
carrying value of the goodwill to the estimated operating income of the related
entity on an undiscounted cash flow basis. Should the carrying value of the
goodwill exceed the estimated operating income for the expected period of
benefit, an impairment for the excess is recorded at that time.
Other Assets - Other assets consist of prepaid financing costs and equipment
held for sale or release which is stated at the lower of cost or its net
realizable value.
Debt Issuance Costs - Debt issuance costs related to securitizations and
convertible subordinated notes are offset against the related debt and are
being amortized over the life of the notes using the interest method.
Amortization of Finance Income - Amortization of finance income primarily
consists of the interest component of payments received on notes secured by
equipment (or medical receivables) and direct financing leases and is
calculated using the interest method so as to approximate a level rate of
return on the net investment. It also includes servicing fees earned for
billing and collecting services related to the asset securitizations (See Note
8) and a gain on sale of residual interests of $799,661 during the fiscal year
ended June 30, 1994.
Receivables Financing Income - Receivables financing income is primarily
related to income generated from receivable purchases and income from
billing/collecting activities which the Company has curtailed. Income from
medical receivables purchases is recognized ratably as collections are made.
Gain on Sale of Financing Transactions - Gains arising from the sale of direct
financing leases and investments in notes secured by equipment occur when the
Company obtains permanent funding through the whole loan sale of a transaction
to a third party. Subsequent to a sale, the Company has no or limited
remaining interest in the transaction or equipment and no obligation to
indemnify the purchaser in the event of a default on the transaction by the
obligor, except when the sale agreement provides for participation in defined
excess interest spreads or limited recourse in which the Company guarantees
reimbursement under the agreement up to a specific maximum, which is of nominal
value. Upon consummation of the sale transaction, the Company records a
provision for anticipated losses under recourse provisions. Consequently, in
the event of default by the obligor, the lender would exercise its rights under
the lien with limited or no further recourse against the Company,
notwithstanding any facts or circumstances that might promulgate the lender's
assertion under representations and warranties made by the Company.
Other Income - Other income consists primarily of late charges, dividends on
investments in investee's preferred stock and income from operating leases.
Taxes on Income - The Company accounts for taxes under Statement of Financial
Accounting Standards No. 109 ("SFAS 109"), Accounting for Income Taxes.
Deferred taxes on income result from temporary differences between the
reporting of income for financial statement and tax reporting purposes. Such
differences arise principally from recording hedging gains and losses and from
lease transactions in which the operating lease method of accounting is used
for tax purposes and the financing lease method, as described above, is used
for financial statement purposes. Under the operating lease method, leased
equipment is recorded at cost and depreciated over the useful life of the
equipment and lease payments are recorded as revenue when earned.
Net Earnings (Loss) Per Share - Net earnings (loss) per share is based on the
modified treasury stock method, except when the results of this method are
anti-dilutive. In fiscal 1995, 1994 and 1993, net earnings (loss) per share is
calculated using the weighted average common shares outstanding during the year
because the results of the modified treasury stock method were antidilutive.
For the quarters ended June 30, 1995 and March 31, 1995, fully diluted net
earnings per share is calculated using the modified treasury stock method as
the exercise of stock options, warrants and the conversion of the subordinated
32
<PAGE> 33
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (CONTINUED)
notes has a dilutive effect on earnings per share.
Recent Accounting Developments - 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.
In May 1993, the Financial Accounting Standards Board (FASB) issued SFAS No.
114, Accounting by Creditors for Impairment of a Loan. SFAS No. 114 indicates
that a creditor should evaluate the collectibility of both contractual interest
and contractual principal when assessing the need for a loss accrual. The
Company must apply SFAS No. 114 in fiscal year 1996. The Company does not
believe that application of SFAS No. 114, as amended, will have a material
impact on its operations.
Reclassifications - Certain amounts as previously reported have been
reclassified to conform to the year ended June 30, 1995 presentation.
NOTE 3. DISCONTINUED OPERATIONS
On June 30, 1993, the Company formally adopted a plan to divest substantially
all of its healthcare operations.
The following table presents net revenues, losses and selected balance sheet
information relating to the healthcare operations segment as of, and for the
years ended, June 30, 1994 and 1993.
<TABLE>
<CAPTION>
1994 1993
----------- ------------
<S> <C> <C>
Net service income . . . . . . . . . . . . . . . $6,095,397 $6,455,932
Loss from discontinued operations,
net of tax of $51,000 (1994) and $1,064,529
(1993) . . . . . . . . . . . . . . . . . . . 74,000 1,497,398
Loss on disposal of discontinued operations, net
of tax of $2,212,536 (1994) and $295,200 (1993) 3,070,877 424,800
Net assets . . . . . . . . . . . . . . . . . . . 1,300,000 7,589,025
</TABLE>
In June 1993, the Company adopted a formal plan to discontinue its DVI
Healthcare Operations segment consisting of seven outpatient healthcare
facilities which it operated or managed on a direct basis and one facility
which was in the developmental stage and not yet in operation. At June 30,
1993, the Company established a reserve for the divestiture of the operations
and recorded a loss on discontinued operations and disposal of discontinued
operations of $1.9 million net of tax. This estimate was based on certain
assumptions as to the likely timing of the divestitures, the estimated proceeds
to be received upon the sale of certain of the facilities and the financial
results of those operations pending divestiture. These operations have been
reflected as discontinued operations in the Company's financial statements at
June 30, 1993 and 1994. The pre-tax loss from discontinued operations of $3.3
million at June 30, 1993 was comprised of $2.6 million relating to actual and
estimated losses from operations of this segment through the date of
disposition and approximately $700,000 relating to estimated losses to be
incurred upon the disposition of the segment's net assets.
At June 30, 1994, the Company had disposed or entered into definitive
agreements to sell five of these outpatient healthcare facilities and had
written off the investment and assets of the remaining two. In connection with
the disposal of these facilities, the Company retained certain assets and
liabilities of these facilities, primarily accounts receivable and accounts
payable. The change in estimate reflects the complete disposal or write-off of
the discontinued operations segment.
NOTE 4. CASH AND SHORT-TERM INVESTMENTS, RESTRICTED
Cash and short-term investments, restricted consist of cash, certificates of
deposit and U.S. treasury obligations - available for sale maintained by the
Company which are pledged as collateral for certain limited recourse borrowings
related to direct financing leases, notes secured by equipment and operating
leases. The estimated fair value and the amortized cost of U.S. Treasury
obligations - available for sale as of June 30, 1995 is $10,260,303. There
were no sales of U.S. Treasury
33
<PAGE> 34
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
NOTE 4. CASH AND SHORT-TERM INVESTMENTS, RESTRICTED, (CONTINUED)
obligations during the year ended June 30, 1995.
NOTE 5. INVESTMENT IN DIRECT FINANCING LEASES AND NOTES
SECURED BY EQUIPMENT AND EQUIPMENT ON OPERATING LEASES
Receivables in installments are receivable in monthly installments of varying
amounts and are collateralized by the underlying equipment. Receivables from
operating leases relate to noncancellable operating leases and are receivable
in monthly installments of varying amounts. Information regarding scheduled
collections for direct financing leases, notes secured by equipment and
operating leases are as follows:
<TABLE>
<CAPTION>
DIRECT FINANCING LEASES
AND NOTES SECURED OPERATING
BY EQUIPMENT LEASES
------------ ----------
YEAR ENDING JUNE 30,
--------------------
<S> <C> <C>
1996 . . . . . . . . . . . . . . . . . $149,894,000 $424,009
1997 . . . . . . . . . . . . . . . . . 100,618,000 316,034
1998 . . . . . . . . . . . . . . . . . 89,008,000 92,500
1999 . . . . . . . . . . . . . . . . . 66,733,000
2000 . . . . . . . . . . . . . . . . . 34,082,000
Thereafter . . . . . . . . . . . . . . 11,164,544
------------ --------
451,499,544 832,543
Residual valuation . . . . . . . . . . 3,577,753
------------ --------
Total . . . . . . . . . . . . . . . . . $455,077,297 $832,543
============ ========
</TABLE>
Residual valuation represents the estimated amount to be received at contract
termination from the disposition of equipment financed under direct financing
leases and notes secured by equipment. Amounts to be realized at contract
termination depend on the fair market value of the related equipment and may
vary from the recorded estimate. Residual values are reviewed on an annual
basis to determine if the equipment's fair market value is below its recorded
value.
During the year ended June 30, 1995, the Company sold receivables to third
parties realizing gains of approximately $3.0 million. In connection with the
sales, the Company retained subordinated interests in the receivables. Under
the purchase agreement, the Company is required to fund any losses on the
receivables up to its subordinated interests. The Company maintains an
allowance for estimated losses related to its subordinated interests.
At June 30, 1995, direct financing lease receivables amounting to $264.6
million are assigned as collateral for the long-term debt (See Note 8).
NOTE 6. INVESTMENTS IN INVESTEES
At June 30, 1995, the Company held investments in two entities, Healthcare
Imaging Services, Inc. ("HIS") and Diagnostic Imaging Services, Inc. ("DIS")
totalling approximately 17% and 8%, respectively, of the outstanding common
stock of each entity. In September 1994, IPS Health Care, Inc., the Company's
original investee, merged with DIS, an unaffiliated company, which reduced the
Company's common stock ownership from approximately 22% to 10%. At that time,
the Company began accounting for its investment in DIS on a cost basis. In
March 1995, the Company sold its stock in SMT Health Services Inc., a provider
of mobile diagnostic imaging services. The Company's investments in common
stock of these unconsolidated entities have historically been accounted for
using the equity method of accounting because the Company maintained
significant influence over the investees.
As a part of the Company's overall strategy to operate exclusively as a
financial services company, the Company initiated a process to divest of its
interests in these investees. As a part of this process, during each of the
three months ended December 31, 1993 and March 31, 1994, the Company completed
a series of steps which significantly diminished its influence over SMT and
HIS, respectively. These steps included, among other things, arrangements
with both SMT and HIS to have all existing financing transactions between DVI
and the related entity refinanced through third party lenders and
relinquishment by DVI of
34
<PAGE> 35
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
NOTE 6. INVESTMENTS IN INVESTEES, (CONTINUED)
its first right of refusal to finance all future equipment purchases made by
the entities. The Company also agreed that, upon completion of the
refinancings, it would relinquish its representation on the respective
investees' Boards of Directors and sell the common shares it owns in each
investee. Finally, during the refinancing process, DVI agreed to vote its
common shares consistent with each of the investees' management. As a result
of the Company's significant decline in influence over HIS and SMT, the
Company's investments in those entities have been accounted for on a cost basis
since January 1, 1994 for SMT and April 1, 1994 for HIS. Had the Company
continued to account for these investees on the equity method, the net loss for
the year ended June 30, 1994 would have increased by $236,000 before offsetting
any losses due to mark to market adjustments. Prior to these dates, the
Company accounted for its investments in HIS and SMT under the equity method
due to factors that existed which the Company believes yielded it significant
influence on the operating and financial policies of these investees. These
factors included the Company providing a significant portion of the investees'
equipment financing, the Company's right of first refusal to finance all the
investees' equipment purchases and the Company's representation on the
investees' Boards of Directors allowing voting power relating to mergers, major
dispositions of assets and liquidations. During the year ended June 30, 1995,
the Company sold its investment in SMT for proceeds equal to its cost of
$827,989. The Company's investment in the equity of the common stock of IPS
continued to be accounted for under the equity method until September 1994 when
the Company's ownership of IPS declined to approximately 10% and its influence
over IPS declined significantly, at which time the Company began to account for
this investment on a cost basis.
Subsequent to the Company's initial investment in IPS, the Company made
additional investments in common and preferred stock of IPS, financed various
leasing transactions for Magnetic Resonance Imaging ("MRI") and other equipment
and entered into several restructuring agreements with IPS as follows:
In August 1992, due to severe cash flow difficulties experienced by IPS, the
Company restructured certain debt of IPS. The restructuring of debt included,
among other things, the reduction of interest rates on four transactions,
extension of payment terms on certain direct finance lease receivables, the
transfer of direct patient billing and collection process to a wholly owned
subsidiary of the Company, the issuance of a working capital line of credit to
IPS, an agreement for IPS to provide consulting services to DVI, and the
appointment of two of the Officers of the Company to IPS's Board of Directors.
At the same time, the Company acquired 730,768 shares of restricted IPS common
stock from persons affiliated with the Company in exchange for $137,019 which
represented the fair value of the common stock as agreed to by the parties.
In September 1992, one of the Company's wholly owned subsidiaries acquired
700,000, 725,000 and 420,000 shares of IPS's Series B, C and D convertible
preferred stock, respectively for $1.00 per share. On November 12, 1992, an
additional 637,000 shares of Series E convertible preferred stock were acquired
from IPS for $1.00 per share. The preferred stock, with an aggregate value of
$2,482,000, was issued in exchange for cash of $1.12 million, exchange of debt
of $725,000 and imaging equipment valued at $637,000.
In September 1994, following the completion of the merger agreement between IPS
and DIS, the Company entered into an Agreement for the Exchange of Stock and
Assets. The agreement provided for the exchange of all the then outstanding
preferred stock of IPS owned by the Company for a new series of DIS preferred
stock (Series F). The agreement also provided for the exchange of certain debt
with a carrying value of $4 million, assumption by the Company of certain
assets and liabilities of IPS valued at approximately $164,000, the return of
certain equipment under leases with IPS to the Company valued at approximately
$2,164,000 and the issuance of Series G preferred stock of DIS valued at
$2,000,000. The Company did not record a gain or loss on any of the
restructuring transactions.
The Series F and G preferred stock have liquidation preferences at $1.00 per
share, are redeemable at the option of DIS at $1.00 per share plus accrued
dividends, are convertible into common stock of DIS at $2.42 per share for
Series F and $1.00 per share for Series G, and are entitled to annual
cumulative dividends ranging from $.05 per share to $.10 per share. In
addition, the majority shareholder of DIS has the right to repurchase the
Series F and G preferred stock for $4,482,000 through September 2001.
The Company's common stock investments in HIS and DIS are classified as
available-for-sale and have a total cost of
35
<PAGE> 36
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
NOTE 6. INVESTMENTS IN INVESTEES, (CONTINUED)
$1,341,377 and a total estimated fair value of $3,171,632 which resulted in an
unrealized gain of $1,830,255 as of June 30, 1995. There were no sales of HIS
or DIS investments during the year ended June 30, 1995.
NOTE 7. BORROWINGS UNDER WAREHOUSE FACILITIES
The Company's primary credit facility, pursuant to a revolving credit agreement
with a syndicate of banks (the "Bank Revolving Credit Agreement"), provides for
the borrowings of up to $81.5 million. Borrowings under this facility bear
interest at the Company's option at either 25 basis points over the Prime rate
established by NatWest Bank N.A. 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 Bank Revolving Credit
Agreement. The Bank Revolving Credit Agreement is renewable annually at the
bank syndicate's discretion. The credit agreement also provides that if the
banks elect not to renew the facility at the end of its stated term, then
outstanding loans automatically convert to four-year amortizing term loans at
slightly higher interest rates. The Bank Revolving Credit Agreement prohibits
the Company from paying dividends other than dividends payable solely in shares
of the Company's common stock and limits borrowings to specified levels
determined by ratios based on the Company's tangible net worth and, under
certain circumstances, to use specified percentages of internally generated
funds to pay for equipment purchases. As of June 30, 1995, the Company was in
compliance with the financial covenants.
The Company also has a $75.0 million interim funding facility with Prudential
Securities Realty Funding Corporation (the "Prudential Facility"). This
interim funding facility is available for certain transactions which are to be
securitized under specified terms and bear interest at a rate equal to 75 basis
points over the 30, 60 or 90-day LIBOR rate. The Prudential Facility also
allows the Company to borrow up to $4.3 million in special advances that bear
interest at a rate equal to 150 basis points over the 30-day LIBOR until
October 31, 1995. The $4.3 million in special advances was repaid in August
1995. Borrowings under the Prudential Facility, including the special
advances, are secured by (i) certain equipment loans and the equipment financed
thereunder, (ii) the Company's interest in certain asset-backed notes and (iii)
the Company's rights to receive funds from certain securitized equipment loans.
All borrowings under the Prudential Facility mature on October 31, 1995. The
Company has a second facility with Prudential, which provides the Company with
$5.5 million in warehouse funding to make loans secured by medical receivables
to approved borrowers. Borrowings under the $5.5 million Prudential Facility
bear interest at a rate equal to the Prime rate established by Morgan Guaranty
Trust Company of New York. The borrowings are secured by medical receivables
loans originated by the Company and the underlying receivables. This facility
matures on November 30, 1995.
The Company has a $75.0 million interim funding facility with ContiTrade
Services Corporation (the "Conti Facility") which provides the Company with
warehouse financing for certain equipment loans to be securitized or otherwise
permanently funded through the Conti Facility. Borrowings under this facility
bear interest at a rate equal to 150 basis points over the 30 or 60-day LIBOR
rate which is fixed to the related funding period. This facility matures on
October 31, 1995.
At June 30, 1995, the Company had available an aggregate of $268.0 million in
interim funding facilities of which $155.2 million was utilized.
In July 1995, the Company obtained a $100.0 million interim funding facility
with Union Bank of Switzerland which provides the Company with warehouse
financing for certain equipment loans to be securitized. Borrowings under this
facility are secured by certain equipment loans and the equipment financed
thereunder and bear interest at a rate equal to 90 basis points over a 30, 60
or 90-day LIBOR rate which is fixed to the related funding period.
NOTE 8. LONG-TERM DEBT
The discounted receivables are payable to financial institutions, relate to the
discounting of direct financing lease obligations and notes secured by
equipment primarily on a limited or nonrecourse basis, and are collateralized
by the underlying equipment receivables (See Note 5).
Future annual maturities of discounted receivables, net of capitalized issuance
costs of $3,976,212 are as follows:
YEAR ENDING JUNE 30,
36
<PAGE> 37
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
NOTE 7. BORROWINGS UNDER WAREHOUSE FACILITIES (CONTINUED)
<TABLE>
<S> <C>
1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 58,344,186
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,034,597
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,225,948
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,282,001
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,318,372
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . 3,171,293
------------
Total . . . . . . . . . . . . . . . . . . . . $205,376,397
============
</TABLE>
All of the discounted receivables have been permanently funded through four
asset securitizations which were initiated during fiscal years 1992 through
1995. Debt under these securitizations are limited recourse, bear interest at
rates ranging between 5.34% to 7.81% and are serviced by the Company. The
agreements require that the Company comply with certain servicing requirements
as defined in the related securitization agreements, require limited cash
collateral (See Note 4) or residual interests and contain various recourse
provisions. (See Note 13.)
In June 1994, the Company completed a $14,112,000, net of issuance costs
totalling $888,000, private placement of Convertible Subordinated Notes. The
Convertible Subordinated Notes are convertible into common shares at $10.60 per
share at the discretion of the noteholders, bear interest at a rate of 9 1/8%
payable in quarterly installments of interest only and mature in June 2002.
During the year ended June 30, 1995, $500,000 of these notes were converted
into 47,169 shares of common stock of the Company.
NOTE 9. INCOME TAXES
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Currently payable . . . . . . . . . . . . . . . . . . $ 466,558 $2,623,340 $ 608,998
Deferred . . . . . . . . . . . . . . . . . . . . . . 2,479,767 (811,800) 1,219,120
---------- ---------- ----------
Total . . . . . . . . . . . . . . . . . . . . . $2,946,325 $1,811,540 $1,828,118
========== ========== ==========
</TABLE>
A reconciliation of the provision for income taxes to the amount of income tax
expense that would result from applying the federal statutory rate (35%) to
earnings from continuing operations is as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Provision for income taxes at
the federal statutory rate . . . . . . . . . . . . $2,455,271 $1,509,617 $1,516,001
State income taxes, net of
federal tax benefit . . . . . . . . . . . . . . . 452,144 298,904 312,327
Other . . . . . . . . . . . . . . . . . . . . . . 38,910 3,019 (210)
---------- ---------- ----------
Total . . . . . . . . . . . . . . . . . . . . . $2,946,325 $1,811,540 $1,828,118
========== ========== ==========
</TABLE>
The major components of the Company's net deferred tax liabilities of
$4,717,059 and $2,329,205 at June 30, 1995 and 1994, respectively, are as
follows:
<TABLE>
<CAPTION>
1995 1994
---------- -----------
<S> <C> <C>
Accumulated depreciation . . . . . . . . . . $27,963,678 $23,214,892
Deferred recognition of lease income . . . . (21,751,039) (18,023,343)
Alternative minimum tax credits carryforwards (403,121) (699,428)
Gain or loss on investments . . . . . . . . 780,763 (496,741)
Allowances for uncollectible receivables . . (1,179,120) (953,372)
State income taxes . . . . . . . . . . . . . (401,124) (379,195)
Other . . . . . . . . . . . . . . . . . . . (292,978) (333,608)
---------- -----------
Total . . . . . . . . . . . . . . . . . . $4,717,059 $ 2,329,205
========== ===========
</TABLE>
37
<PAGE> 38
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
NOTE 9. INCOME TAXES, (CONTINUED)
NOTE 10. SHAREHOLDERS' EQUITY
Prior to June 30, 1994, the Company issued warrants to purchase a total of
80,000 common shares at prices between $7.625 and $8.375 per share to all
non-employee Directors of the Company and warrants to purchase up to 35,000
common shares at $8.50 per share to an unrelated party. Additionally, in
fiscal 1992, the Company issued warrants to purchase up to 200,000 shares of
the Company's common stock at $18.00 per share to an underwriter as
compensation for investment banking services. No compensation expense was
recognized as a result of this transaction. The warrants vest at various dates
through November 1996 and expire at various dates through 2003. At June 30,
1995, warrants for 402,000 common shares were exercisable and none of the
warrants had been exercised.
In February 1991, the Company issued 575,000 units at $10.50 per unit
(consisting of 575,000 shares of the Company's common stock and redeemable
warrants to purchase 575,000 shares of the Company's common stock at $12.00 per
share) to the public for total proceeds of $6,037,500 before net offering costs
of $999,875. As of June 30, 1995, none of these warrants had been exercised.
The warrants expire in February 1996, and are redeemable by the Company
provided certain conditions are met. In addition, the underwriter has an option
to purchase an additional 50,000 units at $12.60 per share. The underwriter's
option is exercisable during a three-year period commencing February 7, 1993.
In 1991, the Company also issued warrants to purchase 50,000 common shares at
$12.00 per share to another underwriter.
In June 1994, the Company issued convertible subordinated notes to related and
unrelated parties which are convertible at the option of the holder into
1,415,094 shares of common stock at $10.60 per share. As of June 30, 1995,
$500,000 of these notes were converted into 47,169 shares of common stock (See
Notes 8 and 12). Had the conversion occurred at July 1, 1994, the impact on
the earnings of the Company for the year ended June 30, 1995 would have been
insignificant.
NOTE 11. STOCK OPTION PLAN
The Company has a stock option plan which currently provides for the granting
of options to employees to purchase up to 1,250,000 shares of the Company's
common stock at the fair market value at the date of grant. Options granted
under the plan generally vest over three to five years from the date of grant
and expire ten years after the date of the grant. Any unexercised options are
canceled ninety days subsequent to the termination of the employee and are
returned to the plan.
38
<PAGE> 39
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
NOTE 11. STOCK OPTION PLAN, (CONTINUED)
The following table summarizes the activity under the plan for the periods
indicated:
<TABLE>
<CAPTION>
OPTIONS EXERCISE PRICE
OUTSTANDING PER SHARE
----------- --------------
<S> <C> <C>
Outstanding at July 1, 1992 . . . . . . . . . . . . . . . . . . 425,172 $1.44 - $13.50
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158,600 5.00 - 13.50
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . (167) 3.19
Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . (47,500)
------- --------------
Outstanding at June 30, 1993 . . . . . . . . . . . . . . . . . 536,105 $1.44 - $13.50
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . 399,625 7.00 - 10.38
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . (37,000) 3.00 - 8.38
Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . (88,868)
------- --------------
Outstanding at June 30, 1994 . . . . . . . . . . . . . . . . . 809,862 $1.44 - $13.50
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,000 9.13 - 10.63
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . (97,216) 2.68 - 12.88
Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . (85,936)
------- --------------
Outstanding at June 30, 1995 . . . . . . . . . . . . . . . . . 642,710 $1.44 - $13.50
======= ==============
</TABLE>
As of June 30, 1995, options to purchase 279,318 shares were exercisable.
NOTE 12. RELATED PARTY TRANSACTIONS
The Company's principal executive offices located in Doylestown, Pennsylvania
are leased from a party related to a shareholder/director of the Company. The
lease commenced in December 1994 and the Company recorded rent expense under
this lease of $33,544 for the year ended June 30, 1995.
At June 30, 1995 and 1994, receivables in installments from investees totalled
$8,254,953 and $16,427,684, respectively.
During the years ended June 30, 1995 and 1994, the Company entered into various
agreements with investees which are described in Note 6.
During the year ended June 30, 1994, the Company issued convertible
subordinated notes totalling $9,550,000 to related parties (See Notes 8 and
10).
In June 1995, the Company and former shareholders of MEF Corp., some of whom
are also officers of the Company, entered into an agreement to set the purchase
price of MEF Corp. (See Note 15.)
NOTE 13. COMMITMENTS AND CONTINGENCIES
Facility Leases - The Company leases its facilities under noncancelable
operating leases with terms in excess of one year. The lease for the Company's
principal facility expires in June 2005. Rent expense for the years ended
June 30, 1995, 1994 and 1993 amounted to $497,818, $462,731, and $715,246,
respectively. Future minimum lease payments under these leases are as follows:
<TABLE>
<CAPTION>
FUTURE MINIMUM
YEAR ENDING JUNE 30, LEASE PAYMENTS
-------------------- ----------------
<S> <C>
</TABLE>
39
<PAGE> 40
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
NOTE 13. COMMITMENTS AND CONTINGENCIES, (CONTINUED)
<TABLE>
<S> <C>
1996 . . . . . . . . . . . . . . . . . . . . . . . . $520,017
1997 . . . . . . . . . . . . . . . . . . . . . . . . 486,890
1998 . . . . . . . . . . . . . . . . . . . . . . . . 441,441
1999 . . . . . . . . . . . . . . . . . . . . . . . . 441,493
2000 . . . . . . . . . . . . . . . . . . . . . . . . 429,827
Thereafter . . . . . . . . . . . . . . . . . . . . . 1,178,250
---------
Total . . . . . . . . . . . . . . . . . . . . . . $3,497,918
==========
</TABLE>
Commitments - Under certain limited recourse agreements, the Company may be
required to provide for losses incurred on uncollected lease receivables
previously collateralized. At June 30, 1995, the maximum contingent liability
under the limited recourse agreements amounted to $35,432,155. This contingent
liability, however, could be offset by any proceeds received from the resale or
remarketing of available equipment financed under the agreements.
Litigation - The Company is involved in litigation both as a plaintiff and
defendant in matters arising out of the Company's normal business activities.
Management does not expect the outcome of these lawsuits to have a material
adverse effect on the consolidated financial statements of the Company.
NOTE 14. BENEFIT PLANS
The Company maintains and administers an Employee Savings Plan pursuant to
Internal Revenue Code Section 401(k). The Plan provides for discretionary
contributions as determined by the Company's Board of Directors. The Company
contributed $38,751, $48,673 and $21,493 to the Plan during the years ending
June 30, 1995, 1994 and 1993, respectively.
NOTE 15. ACQUISITIONS
In January 1993, the Company acquired the outstanding shares of Medical
Equipment Finance Corporation ("MEF Corp."), which had only intangible assets
at the date of acquisition. Under the terms of the original purchase
agreement, the purchase price was 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 acquired entity during the sixty-six month period following the date of
acquisition, consequently, no amounts were recorded at the date of acquisition.
At June 30, 1994, no amounts were earned under the contract, however, at that
time the Company accrued $2 million as costs in excess of net assets acquired
(goodwill) which represents the Company's estimate of the minimum amount to be
payable to former shareholders of MEF Corp. Had the acquisition occurred on
July 1, 1992, the impact on the operations of the Company would not have been
significant.
During the year ended June 30, 1994, management entered into negotiations with
the former shareholders of MEF Corp. to revise certain terms of the purchase
agreement. In June 1995, the Company and the former shareholders of MEF Corp.
agreed, subject to stockholder approval and an increase in the authorized
capital stock of the Company, to set the purchase price of MEF Corp. at 400,000
shares of the Company's common stock valued at $4.65 million. The Company will
record additional goodwill of $2.65 million at the time shareholder approval is
obtained. Had the revised purchase agreement been finalized on July 1, 1992,
net income would have decreased by $73,970, $73,970 and $112,636 and earnings
per share would have been reduced $0.011, $0.011 and $0.017 for the years
ended June 30, 1995, 1994 and 1993, respectively.
During the year ended June 30, 1994, the Company acquired additional shares of
IPS Health Care, Inc. preferred stock. (See Note 6.)
40
<PAGE> 41
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
NOTE 16. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
In accordance with Statement of Financial Accounting Standards No. 107 ("SFAS
107"), Disclosures About Fair Value of Financial Instruments, a summary of the
estimated fair value of the Company's consolidated financial instruments at
June 30, 1995 and 1994 is presented below. The estimated fair value amounts
have been determined by the Company using available market information and
appropriate valuation methodologies. However, considerable judgment is
necessary to interpret market data to develop the estimated fair values.
Accordingly, the estimates presented herein are not necessarily indicative of
the amounts the Company could realize in a current market exchange. The use of
different market assumptions and/or estimation methodologies may have a
material effect on the estimated fair value amounts.
<TABLE>
<CAPTION>
JUNE 30, 1995
-------------------------------------------
CARRYING ESTIMATED FAIR
AMOUNT VALUE
------------ --------------
<S> <C> <C>
Assets:
Receivable in installments (excluding investment
in direct financing leases) . . . . . . $177,784,930 $182,283,747
Liabilities:
Discounted receivables . . . . . . . . . . $205,376,397 $202,967,276
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1994
-------------------------------------------
CARRYING ESTIMATED FAIR
AMOUNT VALUE
------------ --------------
<S> <C> <C>
Assets:
Receivable in installments (excluding investment
in direct financing leases) . . . . . . $ 81,732,962 $ 85,022,168
Liabilities:
Discounted receivables . . . . . . . . . . $148,851,584 $146,999,444
</TABLE>
The carrying values of cash and cash equivalents, cash and short-term
investments, restricted, receivables from sale of leases and notes secured by
equipment, patient service accounts receivable, notes collateralized by medical
receivables, accounts payable, other accrued expenses, short-term bank
borrowings and convertible subordinated notes approximate fair values at June
30, 1995 and 1994.
The methods and assumptions used to estimate the fair values of other financial
instruments are summarized as follows:
Receivable in installments:
The fair value of the financing contracts was estimated by discounting expected
cash flows using the current rates at which loans of similar credit quality,
size and remaining maturity would be made as of June 30, 1995 and 1994. The
Company believes that the risk factor embedded in the entry-value interest
rates applicable to performing loans for which there are no known credit
concerns results in a fair valuation of such loans on an entry-value basis. In
accordance with SFAS 107, the Company has excluded receivables from lease
contracts of approximately $199.3 million and $141.6 million as of June 30,
1995 and 1994, respectively, from the receivable in installments fair value
calculation. Additionally, the receivable in installments - related parties
balances relates exclusively to lease receivables and has therefore been
excluded from the Company's fair value calculation.
Discounted receivables:
The fair value of discounted receivables, related to the securitization of
leases and notes, was estimated by discounting future cash flows using rates
currently available for debt with similar terms and remaining maturities.
The fair value estimates presented herein were based on information available
as of June 30, 1995 and 1994. Although the
NOTE 16. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED
41
<PAGE> 42
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
Company is not aware of any factors that would significantly affect the
estimated fair values, such values have not been updated since June 30, 1995;
therefore, current estimates of fair value may differ significantly from the
amounts presented herein.
NOTE 17. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of the quarterly results of operations for the
fiscal years ended June 30, 1995 and 1994:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30
-------------- ------------- ---------- ---------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
FISCAL 1995
- -----------
Finance and other income . . . . . . . . . . . $7,197 $8,695 $10,453 $12,682
Margins earned . . . . . . . . . . . . . . . . 3,046 3,710 4,140 5,271
Earnings from continuing operations
before provision for income taxes,
equity in net earnings (loss) of investees
and discontinued operations . . . . . . . . 885 1,524 2,169 2,437
Earnings from continuing operations . . . . . . 513 893 1,249 1,414
Loss from discontinued operations . . . . . . . -0- -0- -0- -0-
Net earnings . . . . . . . . . . . . . . . . . 513 893 1,249 1,414
Net earnings per common and
common equivalent share - primary . . . . . $.08 $.13 $.18 $.21
==== ==== ==== ====
Net earnings per common and common
equivalent share - fully diluted . . . . . $.08 $.13 $.17 $.19
==== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30
-------------- ------------- ---------- ---------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
FISCAL 1994
- -----------
Finance and other income . . . . . . . . . . . $4,262 $4,567 $5,523 $6,559
Margins earned . . . . . . . . . . . . . . . . 2,646 2,675 3,132 3,625
Earnings from continuing operations
before provision for income taxes,
equity in net earnings (loss) of investees
and discontinued operations . . . . . . . . 634 1,006 1,232 1,441
Earnings from continuing operations . . . . . . 330 447 646 837
Loss from discontinued operations . . . . . . . -0- -0- -0- (3,145)
Net earnings (loss) . . . . . . . . . . . . . . 330 447 646 (2,308)
Net earnings (loss) per common and
common equivalent share:
From continuing operations . . . . . . . . $.05 $.07 $.10 $.12
From discontinued operations . . . . . . . -0- -0- -0- (.47)
---- ---- ---- -----
Net earnings (loss) per share . . . . . . . $.05 $.07 $.10 $(.35)
==== ==== ==== =====
</TABLE>
42
<PAGE> 43
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
NOTE 18. HEDGING TRANSACTIONS
The Company's equipment financing transactions are all structured on a fixed
interest rate basis. The Company funds these transactions using variable rate
interim funding facilities until permanent funding is obtained, generally
through asset securitization. Because funds are borrowed through interim
funding facilities, 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 the Company will either pay or receive funds based on
price movements of Treasury notes having a comparable maturity to the Company's
fixed rate portfolios. The Company 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.
During the year ended June 30, 1994, the Company did not utilize derivative
financial instruments. During the year ended June 30, 1995, the Company
commenced its hedging program by entering into and closing out $193 million of
contracts. On June 30, 1995, the Company had no outstanding hedging positions.
SCHEDULE OF TREASURY SHORTS
AND TREASURY LOCKS
NOTIONAL AMOUNTS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1995
------------------------
<S> <C>
Beginning Balance $ 0
New Contracts 193,000,000
Terminated Contracts (117,000,000)
Expired Contracts (76,000,000)
------------
Ending Balance $ 0
============
</TABLE>
When the Company'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. As
of June 30, 1995, the Company had deferred hedging losses of $1.75 million
associated with transactions securitized and deferred hedging losses of $1.84
million associated with anticipated securitization transactions. 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 June
30, 1995, the Company had no unrealized hedging losses.
NOTE 19. COMPENSATION AGREEMENTS
In June 1995, the Company agreed in principle to adopt an employee incentive
plan (the "Plan"). Under the Plan the Company has agreed to issue, subject to
stockholder approval and an increase in the authorized capital stock of the
Company, 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 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 an event or series of events that
constitutes a sale 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 sale of the Company is $13.00 or higher, the Company will issue the
Incentive Shares to the employees. If the criteria for the issuance of the
Company's common stock are met, the Company will record compensation expense
equal to the fair value of the common shares issued.
NOTE 20. SUBSEQUENT EVENT
43
<PAGE> 44
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
In August 1995, the Company completed an offering of 2,875,000 shares of its
common stock for which it received net proceeds of $29.7 million.
44
<PAGE> 45
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding the Company's Directors is incorporated herein by
reference to the Company's definitive proxy statement filed not later than
October 28, 1995, with the Securities and Exchange Commission pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended.
Information regarding the Company's Executive Officers is set forth in Part I
of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 402 of Regulation S-K is incorporated herein
by reference to the Company's definitive proxy statement filed not later than
October 28, 1995 with the Securities and Exchange Commission pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 403 of Regulation S-K is incorporated herein
by reference to the Company's definitive proxy statement filed not later than
October 28, 1995, with the Securities and Exchange Commission pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 404 of Regulation S-K is incorporated herein
by reference to the Company's definitive proxy statement filed not later than
October 28, 1995, with the Securities and Exchange Commission pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(A) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT:
(1) Financial Statements:
See Index to Consolidated Financial Statements included as part of this
Form 10-K at Page 22.
(2) Financial Statement Schedules:
<TABLE>
<CAPTION>
SCHEDULE PAGE
NUMBER DESCRIPTION NUMBER
------ ----------- ------
<S> <C> <C>
II. Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . 47
</TABLE>
All other schedules are omitted because of the absence of conditions
under which they are required or because all material information
required to be reported is included in the consolidated financial
statements and notes thereto.
(3) Exhibits:
See Index to Exhibits as part of Item 8 of this Form 10-K on Pages 48.
(B) REPORTS ON FORM 8-K:
There were no reports on Form 8-K filed during the fourth quarter of the
fiscal year ended June 30, 1995.
SIGNATURES
45
<PAGE> 46
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this amendment to be signed on its
behalf by the undersigned, thereunto duly authorized.
DVI, INC.
(Registrant)
<TABLE>
<S> <C>
Date: October 4, 1995 By /s/MICHAEL A. O'HANLON
--------------------- -------------------------------
Michael A. O'Hanlon, President
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
PRINCIPAL EXECUTIVE OFFICER:
/s/DAVID L. HIGGINS
- ---------------------------------- Chief Executive Officer October 4, 1995
David L. Higgins
PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER:
/s/JOHN P. BOYLE
- ---------------------------------- Vice President and
John P. Boyle Chief Accounting Officer October 4, 1995
</TABLE>
<TABLE>
<CAPTION>
DIRECTORS DATE DATE
- --------- ---- ----
<S> <C> <C> <C>
/s/GERALD L. COHN October 4, 1995 /s/SIDNEY LUCKMAN October 4, 1995
- ------------------------ -----------------------
Gerald L. Cohn Sidney Luckman
/s/DAVID L. HIGGINS October 4, 1995 /s/JOHN E. MCHUGH October 4, 1995
- ------------------------ -----------------------
David L. Higgins John E. McHugh
/s/WILLIAM R. INGLES October 4, 1995 /s/MICHAEL A. O'HANLON October 4, 1995
- ------------------------ -----------------------
William R. Ingles Michael A. O'Hanlon
</TABLE>
46
<PAGE> 47
DVI, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO
BEGINNING COSTS AND BALANCE AT
CLASSIFICATION OF YEAR EXPENSES RECOVERIES WRITTEN OFF END OF YEAR
- -------------- --------- ---------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Year ended June 30, 1995 -
Allowance for doubtful
accounts (1) . . . . . . . $2,497,916 $1,260,502 $ -0- $476,097 $3,282,321
========== ========== ====== ======== ==========
Year ended June 30, 1994 -
Allowance for doubtful
accounts (1) . . . . . . . $1,046,465 $1,715,576 $ -0- $264,125 $2,497,916
========== ========== ====== ======== ==========
Year ended June 30, 1993 -
Allowance for doubtful
accounts (1) . . . . . . . $ 880,571 $ 248,069 $ -0- $ 82,175 $1,046,465
========== ========== ====== ======== ==========
</TABLE>
(1) Activity and balances in the allowance for doubtful accounts are net of
amounts from the Company's discontinued operations segment as the related
receivables are presented at their net realizable value (See Note 2 to the
accompanying consolidated financial statements).
47
<PAGE> 48
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- -----------
1 Form of Underwriting Agreement between the Underwriters and
Registrant.(1)
4.1 Certificate of Incorporation of the Company.(2)
4.2 By-Laws of the Company.(2)
4.3 Form of Common Stock Certificate.(2)
10.1 DVI Financial Services Inc. Employee Savings Plan.(3)
10.2 Amended 1986 Incentive Stock Option Plan.(4)
10.3 Purchase Agreement dated as of October 22, 1991, by and among
DMR Associates, L.P., HIS Acquisition, Inc. and DVI Financial
Services Inc.(5)
10.4 Direct Stock Option Agreements, dated as of October 16, 1990,
between the Company and each of the Company's directors other
than Mr. Higgins.(5)
10.5 Amended and Restated Letter Agreement dated December 15, 1991,
between the Company and W.I.G. Securities Limited Partnership
regarding investment banking services.(5)
10.6 Warrant dated April 27, 1992, executed by the registrant on
behalf of W.I.G. Securities Limited Partnership.(5)
10.7 Indemnification Agreement by and between DVI Health Services
Corporation and Anthony J. Turek, dated as of August 16,
1992.(6)
10.8 Indemnification Agreement by and between DVI Health Services
Corporation and David L. Higgins, dated as of August 16,
1992.(6)
10.9 Stock Purchase Agreement between DVI Health Services
Corporation and David L Higgins, dated August 20, 1992.(6)
10.10 Stock Purchase Agreement between DVI Health Services
Corporation and Sidney Luckman, dated August 20, 1992.(6)
10.11 Stock Purchase Agreement between DVI Health Services
Corporation and Hazelton National Bank, as trustee of certain
trusts for the benefit of Cynthia J. Cohn and Shelly Cohn
Schmidt, dated August 20, 1992.(6)
10.12 Stock Purchase Agreement between DVI Healthcare Operations,
Inc. and IPS HealthCare Inc., dated October 30, 1992.(6)
10.13 Stock Purchase Agreement between DVI Healthcare Operations,
Inc. and IPS HealthCare, Inc., dated October 30, 1992.(6)
10.14 Stock Purchase Agreement between DVI Healthcare Operations,
Inc. and IPS HealthCare, Inc. dated November 12, 1992.(6)
10.15 Stock Purchase Agreement between DVI Health Services
Corporation and MEFC Partners L.P., dated as of January 6, 1993
(the "MEFC Agreement").(6)
10.16 First Amended and Restated Loan Agreement dated as of March 28,
1995, between DVI Financial Services Inc., the Banks signatory
thereto and NatWest Bank N.A., as Agent, Prefunding Lender and
a Bank.(1)
10.17 Amended and Restated Interim Loan and Security Agreement, dated
as of September 13, 1994, between Prudential Securities Realty
Funding Corporation and DVI Financial Services Inc. (the
"Prudential Facility").(1)
10.18 Amendment to the Prudential Facility, dated as of January 9,
1995.(1)
10.19 Second Amendment to the Prudential Facility, dated as of March
10, 1995.(1)
10.20 Third Amendment to the Prudential Facility, dated as of March
31, 1995.(1)
10.29 Credit Extension Confirmation and Amendment to the Conti
Facility, dated June 30, 1995, among ContiTrade Service
Corporation, DVI Financial Services Inc., the Registrant,
ContiTrade Services L.L.C. and Bankers Trust Comapny, as
custodian.(1)
10.30 Amendment No. 1 to the MEFC Agreement dated as of June ,
1995.(1)
21 Subsidiaries and sub-subsidiaries
27 Financial Data Schedule
- ------------------
(1) Filed previously as an Exhibit to the Company's Registration Statement on
Form S-1 (Registration No. 33-60547) and by this reference incorporation
herein.
(2) Filed previously as an Exhibit to the Company's Registration Statement on
Form S-3 (Registration No. 33-84604) and by this reference incorporated
herein.
(3) Previously filed.
(4) Filed previously as an Exhibit to the Company's Registration Statement on
Form S-18 (Registration No. 33-8758) and by this reference incorporated
herein.
(5) Filed previously as an Exhibit to the Company's Form 10-K (Registration
No. 0-16271) for the year ended June 30, 1990 and by this reference
incorporated herein.
(6) Filed previously as an Exhibit to the Company's Registration Statement on
Form S-2 (Registration No. 33-46664) and by this reference is incorporated
herein.
(7) Filed previously as an Exhibit to the Company's Form 10-K (Registration
No. 0-16271) for the year ended June 30, 1993 and by this reference is
incorporated herein.
(8) Filed previously as an Appendix to the Company's Consent Statement dated
as of December 29, 1994 and by this reference is incorporated herein.
(9) Filed previously as an Exhibit to the Company's Form 10-K/A-1 (File No.
0-16271) for the year ended June 30, 1994 and by this reference is
incorporated herein.
48
<PAGE> 1
DVI, INC.
SUBSIDIARIES AND SUB-SUBSIDIARIES
EXHIBIT 21
<TABLE>
<CAPTION>
PERCENTAGE OWNED BY
-----------------------
NAME OF ENTITY/JURISDICTION OF ORGANIZATION REGISTRANT SUBSIDIARY
- ------------------------------------------- ---------- ----------
<S> <C> <C>
DVI Financial Services Inc. (Delaware) 100%
DVI Healthcare Operations, Inc. (Delaware) 100%
DVI Business Credit Corporation (Delaware) 100%
DVI Lease Finance Corporation II (Delaware) 100%
DVI Receivables Corp. 100%
DVI Lease Finance Corp. 1993-A 100%
West Los Angeles MRI, Inc. (California) 100%
West Los Angeles MRI, L.P. 100%
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-END> JUN-30-1995
<CASH> 14,193,452
<SECURITIES> 0
<RECEIVABLES> 399,810,779
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 2,194,188
<DEPRECIATION> 725,967
<TOTAL-ASSETS> 432,930,768
<CURRENT-LIABILITIES> 168,833,874
<BONDS> 219,130,011
<COMMON> 33,558
0
0
<OTHER-SE> 40,216,266
<TOTAL-LIABILITY-AND-EQUITY> 432,930,768
<SALES> 0
<TOTAL-REVENUES> 39,026,759
<CGS> 0
<TOTAL-COSTS> 22,859,535
<OTHER-EXPENSES> 9,152,164
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 7,015,060
<INCOME-TAX> 2,946,325
<INCOME-CONTINUING> 4,068,735
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,068,735
<EPS-PRIMARY> .61
<EPS-DILUTED> .61
</TABLE>
