<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITY EXCHANGE ACT OF 1934.
For the quarterly period ended: September 30, 1997
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from ____ to _____
Commission file number 0-16271
DVI, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 22-2722773
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
500 HYDE PARK
DOYLESTOWN, PENNSYLVANIA 18901
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number including area code: (215) 345-6600
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES /X/ NO / /
Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practical date:
Common stock, $.005 par value - 10,868,748 shares as of October 31, 1997.
<PAGE> 2
DVI, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION:
PAGE
NUMBER
------
ITEM 1. FINANCIAL STATEMENTS:
Consolidated Balance Sheets -
September 30, 1997 (unaudited) and June 30, 1997...................... 3-4
Consolidated Statements of Operations -
Three months ended September 30, 1997 and 1996 (unaudited) ........... 5
Consolidated Statements of Shareholders' Equity -
July 1, 1996 through September 30, 1997 (unaudited)................... 6
Consolidated Statements of Cash Flows -
Three months ended September 30, 1997 and 1996 (unaudited) ........... 7-8
Notes to Consolidated Financial Statements (unaudited)................... 9-10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS .................. 11-12
PART II. OTHER INFORMATION.............................................. 13
SIGNATURES .............................................................. 14
2
<PAGE> 3
DVI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1997 1997
------------- ---------
(Unaudited)
<S> <C> <C>
Cash and cash equivalents ....................................... $ 23,476 $ 8,935
Cash and cash equivalents, restricted ........................... 29,715 26,425
Receivables:
Investment in direct financing leases and
notes secured by equipment or medical receivables:
Receivables in installments .................................. 498,137 496,861
Receivables and notes - related parties .................. 7,851 9,453
Recourse credit enhancements ................................. 48,075 46,095
Notes collateralized by medical receivables .................. 105,119 85,649
Residual valuation ........................................... 8,857 8,276
Unearned income .............................................. (66,521) (69,739)
--------- ---------
Net investment in direct financing leases and
notes secured by equipment or medical receivables .......... 601,518 576,595
Less: Allowance for losses on receivables ..................... (6,608) (5,976)
--------- ---------
Net receivables ................................................. 594,910 570,619
Equipment on operating leases
(net of accumulated depreciation of $1,693 (September 30, 1997)
and $2,301 (June 30, 1997)) ................................... 3,955 4,041
Furniture and fixtures
(net of accumulated depreciation of $1,942 (September 30, 1997)
and $1,702 (June 30, 1997)) ................................... 3,335 2,389
Investments in investees ........................................ 6,402 6,609
Goodwill, net ................................................... 3,876 3,953
Other assets .................................................... 11,490 11,148
--------- ---------
Total assets .................................................... $ 677,159 $ 634,119
========= =========
</TABLE>
3
<PAGE> 4
DVI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS EXCEPT SHARE DATA)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1997 1997
------------- ---------
(Unaudited)
<S> <C> <C>
Accounts payable ............................................................. $ 30,589 $ 30,722
Accrued expenses and other liabilities ....................................... 16,482 19,208
Borrowings under warehouse facilities ........................................ 116,843 44,586
Deferred income taxes ........................................................ 8,610 8,610
Long-term debt, net:
Notes payable to financial institutions .................................... 5,447 6,168
Discounted receivables (primarily limited recourse) ........................ 288,972 317,863
9 7/8% senior notes due 2004 ............................................. 96,039 95,883
Subordinated debt .......................................................... 2,000 2,000
Convertible subordinated notes ............................................. 13,353 13,324
--------- ---------
Total long-term debt, net .................................................... 405,811 435,238
--------- ---------
Total liabilities ............................................................ 578,335 538,364
SHAREHOLDERS' EQUITY:
Preferred stock, $10.00 par value; authorized 100,000 shares; no shares issued
Common stock, $0.005 par value; authorized 25,000,000 shares;
outstanding 10,547,998 shares (September 30, 1997) and
10,506,848 shares (June 30, 1997) ....................................... 53 53
Additional capital ......................................................... 69,255 68,828
Retained earnings ........................................................ 29,685 26,990
Cumulative translation adjustments ......................................... (169) (116)
--------- ---------
Total shareholders' equity ................................................... 98,824 95,755
--------- ---------
Total liabilities and shareholders' equity ................................... $ 677,159 $ 634,119
========= =========
</TABLE>
4
<PAGE> 5
DVI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS OF DOLLARS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
----------------------
1997 1996
------- -------
<S> <C> <C>
Finance and other income:
Amortization of finance income ............. $14,240 $11,116
Other income ............................... 1,835 1,500
------- -------
Total finance and other income ............... 16,075 12,616
Interest expense ............................ 11,627 8,302
------- -------
Net interest and other income ................ 4,448 4,314
Net gain on sale of financing transactions ... 5,024 2,333
------- -------
Net finance income ........................... 9,472 6,647
Selling, general and administrative expenses 3,624 2,849
Provision for possible losses on receivables 992 273
------- -------
Earnings before provision for income taxes and
equity in net loss of investees ............ 4,856 3,525
Provision for income taxes ................... 1,956 1,496
Equity in net loss of investees .............. 205 24
------- -------
Net earnings ................................. $ 2,695 $ 2,005
======= =======
Net earnings per share:
Primary .................................... $ 0.24 $ 0.18
======= =======
Fully diluted .............................. $ 0.23 $ 0.18
======= =======
</TABLE>
5
<PAGE> 6
DVI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
(IN THOUSANDS OF DOLLARS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK CUMULATIVE TOTAL
$0.005 PAR VALUE ADDITIONAL RETAINED TRANSLATION SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT EQUITY
---------- ------ ------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Balances at July 1, 1996 ................. 10,409,370 $52 $67,162 $ 18,049 -- $ 85,263
Issuance of common stock upon
exercise of stock options and
warrants............................... 40,875 1 1,066 1,067
Conversion of subordinated notes ......... 56,603 600 600
Currency translation adjustment .......... (116) (116)
Net earnings ............................. 8,941 8,941
---------- --- ------- -------- ------- --------
Balances at June 30, 1997 ................ 10,506,848 53 68,828 26,990 (116) 95,755
Issuance of common stock upon
exercise of stock options and
warrants............................... 41,150 427 427
Currency translation adjustment .......... (53) (53)
Net earnings.............................. 2,695 2,695
---------- --- ------- -------- ------- --------
Balances at September 30, 1997 ........... 10,547,998 $53 $69,255 $ 29,685 $ (169) $ 98,824
========== === ======= ======== ======= ========
</TABLE>
6
<PAGE> 7
DVI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
1997 1996
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings ................................................... $ 2,695 $ 2,005
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Equity in net loss of investees ............................ 205 24
Depreciation and amortization .............................. 2,825 2,246
Additions to allowance accounts ............................ 992 273
Net gain on sale of financing transactions ................. (5,024) (2,333)
Cumulative translation adjustments ......................... (50) ---
Changes in assets and liabilities:
(Increases) decreases in:
Cash and cash equivalents, restricted .................... (3,290) 7,250
Amounts due from portfolio sale .......................... --- 54,797
Receivables .............................................. (511) 1,828
Other assets ............................................. (320) (3,987)
Increases (decreases) in:
Accounts payable ......................................... (133) (117)
Accrued expenses and other liabilities ................... (2,726) (666)
--------- --------
Total adjustments ........................................ (8,032) 59,315
--------- --------
Net cash (used in) provided by operating activities ............ (5,337) 61,320
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cost of equipment acquired ..................................... (128,383) (85,224)
Portfolio receipts net of amounts included in income and
proceeds from sales of financing transactions ................ 125,127 74,596
Net increase in notes collateralized by medical receivables .... (17,853) (12,205)
Furniture and fixtures additions ............................... (1,186) (219)
--------- --------
Net cash (used in) investing activities ...................... (22,295) (23,052)
--------- --------
</TABLE>
continued
7
<PAGE> 8
DVI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (UNAUDITED)
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
1997 1996
--------- ---------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock options and warrants ............ 427 1,444
Borrowings under:
Warehouse facilities ............................ 194,815 80,743
Long-term debt .................................. ---
19,046
Repayments on:
Warehouse facilities ............................ (122,620) (110,691)
Long-term debt .................................. (30,449) (26,544)
--------- ---------
Net cash provided by (used in)
financing activities ............................ 42,173 (36,002)
--------- ---------
Net increase in cash and
cash equivalents .................................. 14,541 2,266
Cash and cash equivalents,
beginning of period ............................... 8,935 2,376
--------- ---------
Cash and cash equivalents,
end of period ..................................... $ 23,476 $ 4,642
========= =========
CASH PAID DURING THE YEAR FOR:
Interest .......................................... $ 12,910 $ 8,261
========= =========
Income taxes ...................................... $ 72 $ 1,366
========= =========
</TABLE>
SUPPLEMENTAL DISCLOSURES OF NONCASH TRANSACTIONS:
In July 1996, $600,000 of convertible subordinated notes was converted into
common stock.
8
<PAGE> 9
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission
(Commission). Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles (GAAP) for
complete financial statements. The consolidated financial statements should be
read in conjunction with the financial statements and notes thereto included in
DVI, Inc.'s (the Company) latest annual report on Form 10-K for the fiscal year
ended June 30, 1997.
In the opinion of management, the consolidated financial statements contain all
adjustments, consisting only of normal recurring adjustments, considered
necessary for a fair statement of the consolidated balance sheets as of
September 30, 1997 and June 30, 1997, the consolidated statements of operations
for the three month periods ended September 30, 1997 and 1996, the consolidated
statements of shareholders' equity for the period from July 1, 1996 through
September 30, 1997, and the consolidated statements of cash flows for the three
month periods ended September 30, 1997 and 1996. The results of operations for
the three month period ended September 30, 1997 is not necessarily indicative of
the results of operations to be expected for the entire fiscal year ending June
30, 1998.
Certain amounts as previously reported have been reclassified to conform to the
September 30, 1997 presentation.
NOTE 2 - NET EARNINGS PER SHARE
Primary earnings per common share are based on the weighted average number of
shares of common stock and common stock equivalents outstanding during the
respective periods. The weighted average number of shares of common stock and
common stock equivalents for primary earnings per share increased to 11,210,000
in the three month period ended September 30, 1997 from 11,134,000 for the same
prior year period. Weighted average shares for fully diluted earnings per share
increased to 12,622,000 for the three month period ended September 30, 1997 from
12,446,000 for the same period of the prior year. Fully diluted earnings per
share assumes conversion of the subordinated notes as of the beginning of the
period.
9
<PAGE> 10
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED) (UNAUDITED)
NOTE 3 - HEDGE TRANSACTIONS
The Company's equipment loans are 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
even reverse the spread between the interest rate the Company realizes on its
equipment loans and the interest rate that the Company pays under its warehouse
facilities or under a permanent funding program. In an attempt to protect itself
against that risk, the Company uses a hedging strategy.
The Company uses derivative financial instruments, such as forward rate
agreements, Treasury locks, and interest rate swaps, caps and collars, to manage
its interest rate risk. The derivatives are used to manage three components of
this interest rate risk: interest sensitivity adjustments, pricing of
anticipated loan securitizations and sales, and interest rate spread protection.
Forward rate agreements in conjunction with cash market activities are for
interest sensitivity adjustments and are used to extend the repricing period of
short-term floating rate warehouse facilities. Treasury locks and collars are
used to hedge the interest rate risk on anticipated loan securitizations and
sales. Treasury lock and collar transactions lock in specific rates and a narrow
range of rates, respectively, of Treasury notes having maturities comparable to
the average life of the anticipated securitizations and sales. Interest rate
swaps and caps are used for interest rate spread protection from rising interest
rates in certain loan sale facilities where the cash flows from the loans sold
are fixed rate but the borrowing costs are variable rate.
At September 30, 1997, the Company had $50.0 million in Treasury lock
transactions and $200.0 million in collars. The Company also had $20.5 million
in interest rate swaps.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Total finance and other income increased to $16.1 million for the three month
period ended September 30, 1997 from $12.6 million for the three month period
ended September 30, 1996. Amortization of finance income increased to $14.2
million from $11.1 million for the three month period ended September 30, 1997
as compared to the same period of the prior year. The increase primarily was a
result of the overall increase in the size of the Company's loan portfolio.
Other income increased to $1.8 million in the three month period ended September
30, 1997 from $1.5 million in the comparable prior year period. The increase
mainly was due to fees earned on the larger portfolio and service fees earned on
serviced assets.
Interest expense increased to $11.6 million for the three months ended September
30, 1997 from $8.3 million for the three months ended September 30, 1996. The
increase primarily is a result of the growth of the Company's loan portfolio and
the issuance of 9 7/8% Senior Notes in January 1997. As a percentage of finance
and other income, interest expense increased to 72.3% in the three months ended
September 30, 1997 as compared to 65.8% in the same period of the prior year.
Net gain on sale of financing transactions increased to $5.0 million for the
three months ended September 30, 1997 from $2.3 million for the three months
ended for the same period of the prior fiscal year. Loans sold during the three
month period ended September 30, 1997 were $78.4 million compared to $46.8
million during the same period of the prior fiscal year.
Selling, general and administrative expenses for the first quarter ended
September 30, 1997 increased by 27.2% to $3.6 million from $2.8 million for the
same quarter of the prior fiscal year. The increase in the Company's selling,
general and administrative expenses primarily was related to the expansion of
the Company's new domestic and international businesses and the Company's 39.4%
growth in managed net financed assets.
The provision for possible losses on receivables was $992,000 for the three
month period ended September 30, 1997 as compared to $273,000 for the three
month period ended September 30, 1996. 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.
Earnings before provision for income taxes and equity in net loss of investees
increased 37.8% to $4.9 million for the three month period ended September 30,
1997 compared to $3.5 million for the same period ended September 30, 1996. Net
earnings increased 34.4% to $2.7 million from $2.0 million in comparing the
three month period ended September 30, 1997 to the same period ended September
30, 1996. Net earnings per share increased 33.3% to $0.24 for the first quarter
ended September 30, 1997 from $0.18 for the same 1996 period. The increase in
net earnings per share results from an increase in the Company's net earnings,
as the amount of weighted average number of common shares and equivalents
outstanding remained consistent between periods.
FINANCIAL CONDITION
11
<PAGE> 12
Total shareholders' equity increased $3.1 million to $98.8 million at September
30, 1997 from $95.8 million at June 30, 1997. The increase primarily was due to
net earnings of $2.7 million and exercise of stock options and warrants for
$427,000.
The Company believes that its present warehouse and permanent funding sources
are sufficient to fund the Company's current needs for its equipment and medical
receivables financing businesses.
At September 30, 1997, the Company had available an aggregate of $398.0 million
in warehouse facilities of which $116.8 million was utilized.
On January 30, 1997, the Company completed a public offering of $100.0 million
principal amount of 9 7/8% Senior Notes due 2004. Interest is payable
semiannually on February 1 and August 1 of each year, commencing on August 1,
1997. The Notes will be redeemable at the option of the Company in whole or in
part at any time on or after February 1, 2002 at specified redemption prices.
The proceeds from the sale were used (i) to fund the Company's growth, including
increasing the amount of equipment and medical receivables loans the Company can
fund, (ii) to develop the Company's new international operations, including the
purchase of receivables originated outside the United States and investment in
joint ventures, (iii) for other working capital needs and (iv) for general
corporate purposes.
Through September 30, 1997, the Company has completed sixteen securitizations or
other structured finance transactions for medical equipment financings totaling
$1.2 billion, including two public debt issues totaling $165.6 million and
fourteen private placements of debt and whole loan sales totaling $987.0
million. The Company expects for the foreseeable future to continue to use
securitization, on both a public and private basis, as its principal means to
permanently fund its loans.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Any statements contained in this Form 10-Q which are not historical facts are
forward-looking statements; and, therefore, many important factors could cause
actual results to differ materially from those in the forward-looking
statements. Such factors include, but are not limited to, changes (legislative
and otherwise) in the healthcare industry, those relating to demand for DVI's
services, pricing, market acceptance, the effect of economic conditions,
litigation, competitive products and services, the results of financing efforts,
the ability to complete transactions, and other risks identified in the
Company's Securities and Exchange Commission filings.
12
<PAGE> 13
PART II - OTHER INFORMATION
Items 1 through 5 have been omitted because the related information is either
inapplicable or has been previously reported.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None,
(b) Form 8-K
The Company filed a Current Report on Form 8-K dated October
29, 1997 with respect to the Company's private sale of an
aggregate of 300,000 shares of its common stock pursuant to
Regulation S promulgated under the Securities Act of 1933,
as amended.
13
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DVI, INC.
----------------------------
(Registrant)
By: /S/ MICHAEL A. O'HANLON
----------------------------
Michael A. O'Hanlon
President and Chief Executive
Officer
By: /S/ STEVEN R. GARFINKEL
----------------------------
Steven R. Garfinkel
Executive Vice President and
Chief Financial Officer
Date: November 14 , 1997
14
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 53,191
<SECURITIES> 0
<RECEIVABLES> 594,910
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 5,277
<DEPRECIATION> 1,942
<TOTAL-ASSETS> 677,159
<CURRENT-LIABILITIES> 163,914
<BONDS> 0
0
0
<COMMON> 53
<OTHER-SE> 98,771
<TOTAL-LIABILITY-AND-EQUITY> 677,159
<SALES> 0
<TOTAL-REVENUES> 21,099
<CGS> 0
<TOTAL-COSTS> 11,627
<OTHER-EXPENSES> 3,829
<LOSS-PROVISION> 992
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,651
<INCOME-TAX> 1,956
<INCOME-CONTINUING> 2,695
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,695
<EPS-PRIMARY> .24
<EPS-DILUTED> .23
</TABLE>
