<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: December 31, 1998
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 - 14,116,358 shares as of January 31, 1999.
<PAGE> 2
DVI, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION: PAGE
NUMBER
ITEM 1. FINANCIAL STATEMENTS:
<S> <C>
Consolidated Balance Sheets -
December 31, 1998 (unaudited) and June 30, 1998.................................... 3-4
Consolidated Statements of Operations -
Three and six months ended December 31, 1998 and 1997 (unaudited).................. 5
Consolidated Statements of Comprehensive Income -
Three and six months ended December 31, 1998 and 1997 (unaudited).................. 5
Consolidated Statements of Shareholders' Equity -
July 1, 1997 through December 31, 1998 (unaudited)................................. 6
Consolidated Statements of Cash Flows -
Six months ended December 31, 1998 and 1997 (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............................. 11-15
PART II. OTHER INFORMATION............................................................. 16
Signatures.............................................................................. 17
</TABLE>
2
<PAGE> 3
DVI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1998
------------- -------------
(Unaudited)
<S> <C> <C>
Cash and cash equivalents.............................................. $ 13,686 $ 15,192
Cash and cash equivalents, restricted.................................. 34,165 47,582
Receivables:
Investment in direct financing leases and notes secured by equipment or
medical receivables:
Receivables in installments....................................... 709,515 572,679
Receivables and notes - related parties........................... 24,520 6,563
Recourse credit enhancements...................................... 54,376 51,883
Notes collateralized by medical receivables....................... 154,420 137,316
Residual valuation................................................ 25,332 14,287
Unearned income................................................... (86,437) (69,367)
------------- -------------
Net investment in direct financing leases and
notes secured by equipment or medical receivables.................. 881,726 713,361
Less: Allowance for losses on receivables........................... (10,763) (9,955)
------------- -------------
Net receivables........................................................ 870,963 703,406
Equipment on operating leases
(net of accumulated depreciation of $4,499 (December 31, 1998)
and $3,189 (June 30, 1998))......................................... 19,632 14,773
Furniture and fixtures
(net of accumulated depreciation of $3,309 (December 31, 1998)
and $2,600 (June 30, 1998))......................................... 7,417 4,225
Investments in investees............................................... 3,506 7,120
Goodwill, net.......................................................... 10,050 3,646
Other assets........................................................... 25,642 20,976
------------ ------------
Total assets........................................................... $ 985,061 $ 816,920
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 4
DVI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS OF DOLLARS EXCEPT SHARE DATA)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1998
------------ ------------
(Unaudited)
Liabilities:
<S> <C> <C>
Accounts payable....................................................... $ 55,881 $ 48,030
Accrued expenses and other liabilities................................. 22,005 18,271
Borrowings under warehouse facilities.................................. 171,808 82,828
Deferred income taxes.................................................. 19,393 19,393
Long-term debt, net:
Discounted receivables (primarily limited recourse)................. 322,970 342,120
9 7/8% Senior notes due 2004........................................ 147,641 96,486
Other debt.......................................................... 41,458 15,808
Convertible subordinated notes...................................... 13,496 13,439
------------ ------------
Total long-term debt, net.............................................. 525,565 467,853
------------ ------------
Total liabilities...................................................... 794,652 636,375
Minority interest in consolidated subsidiaries......................... 7,984 8,260
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
14,105,458 shares (December 31, 1998) and
14,080,358 shares (June 30, 1998)................................. 71 70
Additional capital.................................................. 133,525 133,516
Retained earnings................................................... 48,754 39,387
Cumulative translation adjustments.................................. 75 (688)
------------ -------------
Total shareholders' equity............................................. 182,425 172,285
------------ ------------
Total liabilities and shareholders' equity............................. $ 985,061 $ 816,920
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 5
DVI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS OF DOLLARS EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------- -------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Finance and other income:
Amortization of finance income........................... $ 20,851 $ 15,260 $ 38,770 $ 29,500
Other income............................................. 4,813 3,217 8,709 5,111
--------- --------- --------- ---------
Total finance and other income.............................. 25,664 18,477 47,479 34,611
Interest expense............................................ 14,666 12,118 27,209 23,746
--------- --------- --------- ---------
Net interest and other income............................... 10,998 6,359 20,270 10,865
Net gain on sale of financing transactions.................. 7,103 5,118 13,957 10,142
--------- --------- --------- ---------
Net finance income.......................................... 18,101 11,477 34,227 21,007
Selling, general and administrative expenses................ 8,031 4,701 14,677 8,487
Provision for losses on receivables......................... 1,642 1,438 3,147 2,430
--------- --------- --------- ---------
Earnings before minority interest, equity in net loss of
investees, and provision for income taxes................ 8,428 5,338 16,403 10,090
Minority interest in net loss of consolidated subsidiaries.. 147 - 216 -
Equity in (net loss) of investees........................... (26) (195) (118) (400)
Provision for income taxes.................................. 3,726 2,129 7,134 4,086
--------- --------- --------- ---------
Net earnings................................................ $ 4,823 $ 3,014 $ 9,367 $ 5,604
======== ======== ======== =========
Net earnings per share:
Basic.................................................... $ 0.34 $ 0.27 $ 0.66 $ 0.50
======== ======== ========= ==========
Diluted.................................................. $ 0.32 $ 0.25 $ 0.62 $ 0.47
======== ======== ========= ==========
</TABLE>
DVI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS OF DOLLARS EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------------- --------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net earnings................................................ $ 4,823 $ 3,014 $ 9,367 $ 5,604
Other comprehensive income:
Foreign currency translation adjustment.................. (168) (191) 763 (244)
---------- ---------- --------- ---------
Comprehensive income........................................ $ 4,655 $ 2,823 $ 10,130 $ 5,360
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE> 6
\ DVI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS OF DOLLARS EXCEPT SHARE DATA)
(UNAUDITED)
<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, 1997.................. 10,590,859 $ 53 $ 69,194 $26,529 $(116) $ 95,660
Issuance of common stock upon
exercise of stock options and warrants.. 149,499 1,756 1,756
Net proceeds from issuance of
common stock............................ 2,940,000 15 57,918 57,933
Issuance of common stock for acquisition
of MEFC................................. 400,000 2 4,648 4,650
Currency translation adjustment........... (572) (572)
Net earnings.............................. 12,858 12,858
----------- ---- --------- ------- ------ --------
Balances at June 30, 1998................. 14,080,358 $ 70 $ 133,516 $39,387 $(688) $172,285
Issuance of common stock upon
exercise of stock options and warrants.. 25,100 1 $ 207 208
Cost of issuance of common stock......... (198) (198)
Currency translation adjustment.......... 763 763
Net earnings............................. 9,367 9,367
----------- ---- --------- ------- ------ --------
Balances at December 31, 1998........... 14,105,458 $ 71 $ 133,525 $48,754 $ 75 $182,425
=========== ==== ========= ======= ===== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE> 7
DVI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
---------------------------
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings .............................................................. $ 9,367 $ 5,604
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Equity in net loss of investees ..................................... 118 400
Depreciation and amortization ....................................... 7,484 5,980
Additions to allowance accounts ..................................... 3,147 2,430
Net gain on sale of financing transactions .......................... (13,957) (10,142)
Minority interest ................................................... (276) -
Cumulative translation adjustments .................................. 777 (244)
Changes in assets and liabilities, net of effects from acquisition of
business:
(Increases) decreases in:
Cash and cash equivalents, restricted ........................ 13,417 (3,772)
Receivables .................................................. (3,600) (2,687)
Other assets ................................................. (3,791) (5,061)
Increases (decreases) in:
Accounts payable ............................................. 6,407 2,790
Accrued expenses and other liabilities ....................... 3,734 1,365
--------- ---------
Total adjustments ......................................................... 13,460 (8,941)
--------- ---------
Net cash provided by (used in) operating activities ....................... 22,827 (3,337)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of business ................................................... (76,515) -
Cost of equipment acquired ................................................ (376,071) (264,776)
Portfolio receipts net of amounts included in income and proceeds
from sales of financing transactions ................................... 301,051 249,087
Net increase in notes collateralized by medical receivables ............... (16,968) (57,005)
Investment in common and preferred stock of investees ..................... (1,000) -
Cash received from sale of investments in investees ....................... 4,482 -
Furniture and fixtures additions .......................................... (3,798) (1,464)
--------- ---------
Net cash used in investing activities .................................. (168,819) (74,158)
--------- -----------
</TABLE>
continued
The accompanying notes are an integral part of these consolidated financial
statements.
7
<PAGE> 8
DVI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
---------------------------
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock options and warrants ............ 208 447
(Cost of) issuance of common stock ................ (198) 4,860
Borrowings under:
Warehouse facilities ........................... 477,347 413,535
Long-term debt ................................. 136,582 -
Repayments on:
Warehouse facilities ........................... (388,751) (272,964)
Long-term debt ................................. (80,702) (65,698)
--------- ---------
Net cash provided by financing activities ......... 144,486 80,180
--------- ---------
Net increase (decrease) in cash and cash equivalents... (1,506) 2,685
Cash and cash equivalents, beginning of period ........ 15,192 9,187
--------- ---------
Cash and cash equivalents, end of period .............. $ 13,686 $ 11,872
========= =========
CASH PAID DURING THE PERIOD FOR:
Interest .......................................... $ 24,576 $ 21,758
========= =========
Income taxes (net of refunds) ..................... $ (2,038) $ 546
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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.
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,
1998.
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 December
31, 1998 and June 30, 1998, the consolidated statements of operations for the
three and six month periods ended December 31, 1998 and 1997, the consolidated
statements of shareholders' equity for the period from July 1, 1997 through
December 31, 1998, and the consolidated statements of cash flows for the six
month periods ended December 31, 1998 and 1997. The results of operations for
the three and six month periods ended December 31, 1998 are not necessarily
indicative of the results of operations to be expected for the entire fiscal
year ending June 30, 1999.
NOTE 2 - RECONCILIATION OF EARNINGS PER SHARE CALCULATION
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------ -----------------------
(IN THOUSANDS EXCEPT PER SHARE DATA) 1998 1997 1998 1997
----------------------------------------------------------------- -------- -------- -------- --------
BASIC
<S> <C> <C> <C> <C>
Income available to common shareholders......................... $ 4,823 $ 3,014 $ 9,367 $ 5,604
Average common shares........................................... 14,092 11,251 14,086 11,139
Basic earnings per common share................................. $ 0.34 $ 0.27 $ 0.66 $ 0.50
======== ======== ======== ========
DILUTED
Income available to common shareholders......................... $ 4,823 $ 3,014 $ 9,367 $ 5,604
Effect of dilutive securities:
Convertible debentures........................................ 184 184 368 368
-------- -------- -------- --------
Diluted income available to common shareholders................. $ 5,007 $ 3,198 $ 9,735 $ 5,972
Average common shares........................................... 14,092 11,251 14,086 11,139
Effect of dilutive securities, net:
Warrants...................................................... 9 90 16 66
Options....................................................... 229 354 332 290
Convertible debentures........................................ 1,311 1,311 1,311 1,311
-------- -------- -------- -------
Diluted average common shares................................... 15,641 13,006 15,745 12,806
Diluted earnings per common share............................... $ 0.32 $ 0.25 $ 0.62 $ 0.47
======== ======== ======== ========
</TABLE>
9
<PAGE> 10
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 3 - HEDGE TRANSACTIONS
At December 31, 1998, the Company had $150.0 million in option collars. The
Company also had $26.2 million in interest rate swaps. At December 31, 1998, the
Company had a total of 22.1 million German Deutsche Marks in forward contracts
and cross-currency 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 $25.7 and $47.5 million in the three
and six month periods ended December 31, 1998 from $18.5 and $34.6 million for
the three and six month periods ended December 31, 1997. Amortization of finance
income increased to $20.9 and $38.8 million from $15.3 and $29.5 million for the
three and six month periods ended December 31, 1998 as compared to the same
periods 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
$4.8 and $8.7 million in the three and six month periods ended December 31, 1998
from $3.2 and $5.1 million in the comparable prior year period. The increase was
due mainly to a single advisory fee for $1.9 million earned in December 1998,
and larger fees earned by the Company because of increases in both its own
portfolio and in the size of the portfolios serviced for other parties.
Interest expense increased to $14.7 and $27.2 million for the three and six
months ended December 31, 1998 from $12.1 and $23.7 million for the three and
six months ended December 31, 1997. The increase is primarily a result of the
growth of the Company's loan portfolio and growth in international markets. The
weighted average interest rate on discounted receivables, the largest component
of interest expense, decreased to 7.72% as of December 31, 1998 compared to
8.45% as of December 31, 1997.
Net gain on sale of financing transactions increased to $7.1 and $14.0 million
for the three and six months ended December 31, 1998 from $5.1 and $10.1 million
for the same periods of the prior fiscal year. Loans sold during the three and
six month periods ended December 31, 1998 were $97.2 and $169.9 million compared
to $70.2 and $148.6 million during the same periods of the prior fiscal year.
The increase in the Company's net gain on sale of financing transactions was
partially due to better and more efficient executions, lower transaction costs,
and higher yields associated with the portfolios of acquired companies, offset
during the quarter ended December 31, 1998 by $1.2 million of costs associated
with the Company's hedging activity.
Selling, general and administrative expenses for the second quarter ended
December 31, 1998 increased by 70.8% to $8.0 million from $4.7 million for the
same quarter of the prior fiscal year. For the six months ended December 31,
1998 selling, general, and administrative expenses increased by 72.9% to $14.7
million from $8.5 million for the same prior year period. The increase in the
Company's selling, general and administrative expenses was primarily related to
the acquisition of Affiliated Capital, the expansion of the Company's other new
domestic and international businesses, and the Company's 34.9% growth in managed
net financed assets.
The provision for possible losses on receivables was $1.6 and $3.1 million for
the three and six month periods ended December 31, 1998 as compared to $1.4 and
$2.4 million for the three and six month periods ended December 31, 1997. 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 minority interest, equity in net loss of investees, and
provision for income taxes increased 57.9% and 62.6% to $8.4 and $16.4 million
for the three and six month periods ended December 31, 1998 compared to $5.3 and
$10.1 million for the same periods ended December 31, 1997. Net earnings
increased 60.0% and 67.1% to $4.8 and $9.4 million from $3.0 and $5.6 million in
comparing the three and six month periods ended December 31, 1998 to the same
periods ended December 31, 1997.
11
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Diluted earnings per share increased 28.0% and 31.9% to $0.32 and $0.62 from
$0.25 and $0.47 when comparing the three and six month periods ended December
31, 1998 to December 31, 1997. The increase in diluted earnings per share
resulted from an increase in the Company's net earnings, partially offset by
the issue of 0.3 million shares in October 1997 and 2.6 million shares in May
1998.
FINANCIAL CONDITION
Total shareholders' equity increased $10.1 million to $182.4 million at December
31, 1998 from $172.3 million at June 30, 1998. The increase primarily was due to
net earnings of $9.4 million.
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 December 31, 1998, the Company had available an aggregate of $503.1 million
in warehouse facilities of which $171.8 million was utilized.
Through December 31, 1998, the Company has completed 22 securitizations or other
structured finance transactions for medical equipment and medical receivables
financings totaling approximately $1.8 billion, including public debt issues
totaling $0.4 billion and private placements of debt and whole loan sales
totaling $1.4 billion. 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.
YEAR 2000 CONCERNS
The Year 2000 issue concerns itself with electronic systems that were designed
with a two-digit representation of the year. When calendar dates do not include
the first two digits of the year, systems have "understood" that prefix to be
"19". Some computer systems that project calculations into the future have
already begun to malfunction, generating errors based upon next year being
regarded as 1900 by the system, instead of 2000. These problems will affect even
more systems, including hardware, when the current date becomes 2000.
If the systems and products used by DVI are not properly equipped to identify
and recognize the Year 2000, the Company's systems could fail or create
erroneous results. This could cause the Company to experience a temporary
inability to process transactions, originate loans or leases, service the loans
of third parties, and engage in other normal business activities. Under these
circumstances, the Year 2000 problem could have a material adverse effect on the
Company's products, services, operations, and financial results.
The Company's medical receivables finance business is dependent on the
successful repayment of receivables from third party payors such as Medicare and
Medicaid. Any failure of third party payors to become Year 2000 compliant may
result in the inability to collect medical receivables in a timely manner or at
all. This could have a material adverse effect on the medical receivables
finance business. DVI cannot provide any assurance regarding a third party's
ability to become Year 2000 compliant.
12
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
DVI Advantages
Like many financial companies, DVI's computer systems have already been working
with calculations that project three to five years into the future. While this
has given DVI some measure of comfort that the Company is successfully testing
systems in a "live" environment, it is still necessary to perform a full Year
2000 evaluation.
DVI has several other advantages that have simplified the Year 2000 project:
1. As a relatively young company, DVI does not have an investment in
non-compliant hardware that will need to be replaced or upgraded.
2. All of DVI's critical systems use "off-the-shelf" software. No consultants
or staff programmers will be needed to reprogram the Company's systems.
3. DVI has strong internal controls and standards for technology purchases.
Critical systems worldwide are centralized in its United States
headquarters, which has allowed DVI to focus its assessment and remediation
efforts on relatively few hardware and software platforms. Adequate
internal resources are available to devote to this project.
The Company began a formal Year 2000 project in December 1997 with the formation
of the Year 2000 Committee, chaired by its senior information technology
manager. The Committee has members from various business units and departments
within the organization, and provides status reports periodically to senior
management and directors. The first task for the Committee was to formulate a
plan for addressing the Year 2000 problem. The Committee selected a five-phase
approach, which is outlined below.
Phase 1 - Inventory
DVI began by performing a worldwide assessment of any devices that may be
affected by the Year 2000 problem. The Company investigated computer hardware,
operating systems, applications software, networking systems, telephone systems,
building security systems, FAX machines, elevators, and other electronic office
equipment. This phase was completed in May 1998.
Phase 2 - Assessment
Once the Committee had identified the current inventory of systems, they
performed an assessment of how critical each system was to the operation of the
business, and the potential impact of failure, in order to establish priorities
for repair or replacement. To ensure that the Inventory and Assessment phases
were thorough, DVI enlisted outside professionals to help with the assessment.
Vendors for each component provided written certification about their Year 2000
compliance status. When this assessment was completed in June 1998, DVI had
identified three off-the-shelf software packages that would need to be upgraded
through maintenance releases. This was the only remediation deemed necessary for
all critical and non-critical systems within the Company's worldwide offices.
Phase 3 - Remediation
Two of the non-compliant software packages were upgraded in the last quarter of
calendar 1998. The final software program to be upgraded will be installed in
the first quarter of calendar 1999.
13
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Phase 4 - Testing
Although DVI's systems vendors have certified their products as Year 2000
compliant, the next phase requires that the Company thoroughly test these
certifications in their own environment. DVI recognizes that their vendors test
and certify products in an isolated, laboratory environment, which does not
account for the unique mix of hardware and software in customer locations.
In-house testing is the only way to verify that DVI's current systems will be
compliant next year. Testing methodologies will be complete in the first quarter
of calendar 1999. Internal testing of critical systems will be completed by the
second quarter of calendar 1999.
Phase 5 - Contingency Planning
DVI is planning to develop contingency plans for all systems deemed critical
during the assessment phase. These contingency plans will be designed to protect
the Company from business interruptions related to the Year 2000 problem. Many
of the critical systems in use by the Company may be substituted for a short
period of time with manual procedures. Whenever possible, alternate suppliers
and vendors will be identified in the event that our current vendors are
affected by the Year 2000 problem. In addition to the Year 2000 contingency
planning, DVI maintains and deploys standard plans that address various types of
business interruptions. These plans may address the interruption of support
provided by third parties resulting from their failure to be Year 2000
compliant. DVI will begin contingency planning in the second quarter of calendar
1999, and expects to complete the plan in the third quarter of calendar 1999.
Costs
DVI does not have any investment in "custom" programming that will require
extensive reprogramming. Virtually all of the software systems are
"off-the-shelf" products which have been developed by outside vendors. For this
reason, DVI does not anticipate the need to hire Year 2000 solution providers or
programmers at this time. The costs of the software upgrades discussed in the
remediation phase were included in standard maintenance agreements, and have not
required any additional expenses. At this time, DVI projects the cost to become
Year 2000 compliant to be less than $5,000.
Other Concerns
The Company has identified significant relationships that may affect the
operation of its business, including vendors, customers, and asset management
and funding counterparties. Failure by these entities to become Year 2000
compliant could have a material adverse effect on the Company. There can be no
assurances that any of the Company's contingency plans will be sufficient to
anticipate all of the problems or issues that may arise.
Conclusion
The Company believes that the Year 2000 issue will not pose significant
operational problems for it, and will not have a material adverse effect on its
future financial condition, liquidity or results of operations during 1999 and
in future periods. This section discussing Year 2000 issues contains
forward-looking statements.
14
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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.
15
<PAGE> 16
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
3.1 Restated Certificate of Incorporation
27 Financial Data Schedule
(b) Form 8-K
The Company filed a Current Report on Form 8-K dated December
16, 1998 with respect to the Company's underwritten public
offering under its existing shelf registration statement (File
No. 333-50895) of $55,000,000 aggregate principal amount of
9 7/8% Senior Notes due 2004.
16
<PAGE> 17
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: February 12, 1999
17
<PAGE> 1
State of Delaware
Office of the Secretary of State PAGE 1
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY
CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE RESTATED CERTIFICATE OF
"DVI, INC.", FILED IN THIS OFFICE ON THE SIXTH DAY OF JANUARY, A.D. 1999, AT 9
O'CLOCK A.M.
A FILED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW CASTLE COUNTY
RECORDER OF DEEDS.
[SECRETARY OF STATE SEAL] /s/ Edward J. Freel
_________________________________________
Edward J. Freel, Secretary of State
2089780 8100 AUTHENTICATION: 9507267
991005620 DATE: 01-06-99
<PAGE> 2
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 09:00 AM 01/06/1999
991005620 - 2089780
RESTATED
CERTIFICATE OF INCORPORATION
OF
DVI, INC
DVI, Inc., a corporation originally incorporated under the name Medical
Ventures, Inc. on April 30, 1986 and organized and existing under and by virtue
of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY:
1. That the Board of Directors of the corporation adopted this Restated
Certificate of Incorporation in accordance with the provisions of Section 245
of the General Corporation Law of the State of Delaware.
2. That this Restated Certificate of Incorporation only restates and
integrates and does not further amend the provisions of the corporation's
Certificate of Incorporation as heretofore amended or supplemented and there is
no discrepancy between the provisions contained therein and the provisions of
this Restated Certificate of Incorporation.
3. That the Certificate of Incorporation of the corporation as heretofore
amended and supplemented reads in its entirety as follows:
FIRST: The name of the corporation is DVI, INC.
SECOND: The address of its registered office in the State of Delaware is
Corporation Trust Center, 1209 Orange Street in the City of Wilmington,
County of New Castle. The name of its registered agent at such address is The
Corporation Trust Company.
THIRD: The nature of the business or purposes to be conducted or
promoted is to engage in any lawful act or activity for which corporations may
be organized under the General Corporation Law of the State of Delaware.
FOURTH: The corporation is authorized to issue 25,100,000 shares of
capital stock, of which 25,000,000 shares shall be Common Stock, par value
$.005 per share, and 100,000 shares shall be Preferred Stock, par value $10.00
per share.
The designations and the powers, preferences and rights, and the
qualifications, limitations or restrictions thereof of the Preferred Shares of
the Corporation are as follows:
A. The Preferred Shares as a Class
1. General. Preferred Shares may be issued from time to time in one
or more series, as provided for herein or as provided for by the Board of
Directors as permitted hereby. The Board of Directors shall establish the par
value, preferences, limitations and relative rights of such series as between
each of them and with respect to the Common Shares. All Preferred Shares shall
be of equal rank and shall be identical, except in respect of the terms fixed
<PAGE> 3
herein for the series provided for herein or fixed by the Board of Directors
for series provided for by the Board of Directors as permitted hereby. All
shares of any one series of Preferred Shares shall be identical in all
respects with all the other shares of such series, except the shares of any
one series issued at different times may differ as to the dates from which
dividends thereon may be cumulative.
2. Status of Reacquired Shares. Preferred Shares of any series which have
been redeemed, purchased or otherwise acquired by the Corporation, or which are
no longer deemed to be outstanding by virtue of funds or securities necessary
for redemption or payment having been set aside or deposited in trust or
otherwise, or which, if convertible, have been converted into shares of stock
of the Corporation of any other class or series, shall, upon appropriate filing
and recording to the extent required by law, have the status of authorized and
unissued Preferred Shares and may be reissued as a part of any series of
Preferred Shares provided for herein or by the Board of Directors as permitted
hereby.
B. A Series of 50,000 Preferred Shares; Designated Series A Preferred Shares:
Stated Value $10.00 per Share
There is hereby created a series of Preferred Shares within the class of
the Preferred Shares with a stated value of $10.00 per share, the designation,
the number of shares and the terms and provisions of which (except as
heretofore set forth) are as follows:
1. Designation of Series and Number of Shares. The series of the Preferred
Shares created hereby shall be designated "Series A Preferred Shares"
(hereinafter called the "Series A Preferred Shares"), shall consist of 50,000
shares and shall have a stated value of $10.00 per share. The Board of Directors
is hereby authorized to decrease (but not below the number of shares thereof
then outstanding) the number of Series A Preferred Shares. The number of shares
by which the Series A Preferred Shares may be so decreased from time to time
shall, upon appropriate filing and recording to the extent required by law, have
the status of authorized and unissued Preferred Shares and may be reissued as a
part of any series of Preferred Shares provided for herein or by the Board of
Directors as permitted hereby.
2. Dividend.
(a) General. The holders of Series A Preferred Shares shall be
entitled to receive, when and as declared by the Board of Directors, and to the
extent permitted by applicable law, cumulative dividends at the rate of $1.00
per share per annum, and the holders of Series A Preferred Shares shall be
entitled to no other or further dividends except as herein provided. Such
dividends shall be distributable semiannually on the first day of May and
November in each year to holders of Series A Preferred Shares of record on
respective dates not exceeding 60 days preceding such annual dividend payment
dates, fixed by the Board of Directors of the Corporation for the purpose of
determining holders of the Series A Preferred Shares entitled to receive such
dividends. The first semiannual dividend shall be payable on November 1, 1986
and, shall be computed on the basis of a 360-day year consisting of twelve
30-day months and the actual number of days elapsed in the period from the date
of issuance of the first Series A Preferred Shares as evidenced by the date
indicated on the Certificate representing such Share to November 1, 1986.
<PAGE> 4
Each Series A Preferred Shares, whether issued initially when no other Series A
Preferred Shares are outstanding or subsequently when other shares of Series A
Preferred Shares are outstanding, shall on each semiannual dividend payment
date be entitled to the same semiannual dividend as each other Series A
Preferred Shares.
(b) Relation to Common Shares. The Series A Preferred Shares shall be
preferred as to the payment of dividends over the Common Shares and any other
class or classes of shares of the Corporation ranking junior in rights and
preferences to the Series A Preferred Shares. Dividends on the Series A
Preferred Shares shall be declared and paid or set apart for payment before any
dividends (other than dividends payable in Common Shares) on any such junior
shares shall be declared and paid or set apart for payment. All dividends
payable on the Series A Preferred Shares shall be cumulative, and no dividends,
other than dividends payable only in Common Shares or such junior shares if all
dividends in respect of Series A Preferred Shares shall not have been declared,
or if dividends that have been declared on any Series A Preferred Shares shall
not have been fully paid or set apart for payment.
3. Redemption.
(a) Right to Redeem and Redemption Price. The Corporation may elect
from time to time to redeem the whole or any part of the series of Series A
Preferred Shares at a redemption price (the "Redemption Price") of $10.00 per
share, together with a sum of money equivalent to dividends at the rate of $1.00
per share per annum from the date which the dividends become cumulative to the
date fixed for such redemption, less the amount of dividends theretofore paid
thereon. Upon redemption and payment of the Redemption Price in full, all rights
of the holders of the shares redeemed shall terminate, including but not limited
to all rights with respect to declared or undeclared dividends. If fewer than
all outstanding Series A Preferred Shares are to be redeemed, the shares to be
redeemed shall be chosen by lot or in such other manner as the Corporation may
determine.
(b) Manner of Payment. The Corporation shall pay the Redemption Price
in cash or by good check.
(c) Notice of Redemption. Notice of every redemption shall be mailed
to the holders of record of the Series A Preferred Shares to be redeemed at
their respective addresses as the same shall appear in the records of the
Corporation not less than 5 nor more than 60 days in advance of the redemption
date.
4. Liquidation or Dissolution.
The amount payable on each share of the Series A Preferred Shares in
the event of the liquidation, dissolution or winding-up of the affairs of the
Corporation shall be an amount equal to the Redemption Price, as if each such
share were being redeemed. Neither the merger nor consolidation of the
Corporation, nor the sale, lease or exchange of all or any part of its assets,
shall be deemed to be voluntary or involuntary dissolution, liquidation or
winding up of its affairs for purposes of this Section 4.
<PAGE> 5
5. Sinking Fund.
Series A Preferred Shares shall not be entitled to the benefit of any
sinking fund or purchase fund to be applied to the redemption or purchase of
the Series A Preferred Shares.
6. Voting Rights.
Holders of Series A Preferred Shares shall not be entitled to vote on
any matters submitted to shareholders generally, except as otherwise required by
Delaware law.
C. Additional Series of Preferred Shares
The Board of Directors is hereby authorized, by resolution or resolutions,
to establish additional series of Preferred Shares out of the 100,000 authorized
Preferred Shares which are not issued or allocated to any series of Preferred
Shares. Before any shares of any such additional series are issued, the Board of
Directors shall fix and determine and is hereby expressly empowered to fix and
determine, by resolution or resolutions, the distinguishing characteristics and
the relative rights, preferences, privileges and immunities of the shares
thereof, so far as not inconsistent with the provisions of this Article Fourth.
Without limiting the generality of the foregoing, the Board of Directors may fix
and determine:
1. The designation of such series, the number of shares which shall
constitute such series and the par value, if any, of such shares;
2. The rate of dividend, if any, payable on shares of such series;
3. Whether the shares of such series shall be cumulative, non-cumulative
or partially cumulative as to dividends, and the dates from which any cumulative
dividends are to accumulate;
4. Whether the shares of such series may be redeemed, and if so, the
price or prices at which and the terms and conditions on which shares of such
series may be redeemed;
5. The amount payable upon shares of such series in the event of the
voluntary or involuntary dissolution, liquidation or winding up of the affairs
of the Corporation;
6. The sinking fund provisions, if any, for the redemption of shares of
such series;
7. The voting rights, if any, of the shares of such series;
8. The terms and conditions, if any, on which shares of such series may
be converted into shares of capital stock of the Corporation of any other class
or series;
9. Whether the shares of such series are to be preferred over shares of
capital stock of the Corporation of any other class or series as to dividends,
or upon the voluntary or involuntary dissolution, liquidation, or winding up
<PAGE> 6
of the affairs of the Corporation, or otherwise; and
10. Any other characteristics, preferences, limitations, rights,
privileges, immunities or terms not inconsistent with the provision of this
Article Fourth.
FIFTH: The Board of Directors is authorized to make, alter or repeal the
by-laws of the corporation. Election of directors need not be by ballot.
SIXTH: No director of the Corporation shall be personally liable to the
Corporation or to its stockholders for monetary damages for any breach of his
fiduciary duty as a director of the Corporation. This provision does not
eliminate or limit the liability of a director (i) for any breach of the
director's duty of loyalty to the Corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the General Corporation Law
of the State of Delaware or (iv) for any transaction from which the director
derived an improper personal benefit. This provision shall not eliminate or
limit the liability of a director for any act or omission occurring prior to the
date this provision becomes effective in accordance with Section 103(d) of the
General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, DVI, INC. has caused this Restated Certificate of
Incorporation to be signed by its Executive Vice President and attested by its
Secretary this 5th day of January, 1999.
DVI, INC.
By: /s/ Steven R. Garfinkel
------------------------------------
Steven R. Garfinkel
Executive Vice President
ATTEST:
/s/ Melvin C. Breaux
- -----------------------------
Melvin C. Breaux
Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 10Q AT
QUARTER END 12/31/98 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 10K
AT YEAR END 6/30/98.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 47,851
<SECURITIES> 0
<RECEIVABLES> 881,726
<ALLOWANCES> 10,763
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 10,726
<DEPRECIATION> 3,309
<TOTAL-ASSETS> 985,061
<CURRENT-LIABILITIES> 249,694
<BONDS> 0
0
0
<COMMON> 71
<OTHER-SE> 182,354
<TOTAL-LIABILITY-AND-EQUITY> 985,061
<SALES> 0
<TOTAL-REVENUES> 32,767
<CGS> 0
<TOTAL-COSTS> 14,666
<OTHER-EXPENSES> 7,910
<LOSS-PROVISION> 1,642
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 8,549
<INCOME-TAX> 3,726
<INCOME-CONTINUING> 4,823
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,823
<EPS-PRIMARY> 0.34<F1>
<EPS-DILUTED> 0.32
<FN>
<F1>EPS PRIMARY SHOWN ABOVE IS ACTUALLY EPS-BASIC AS REQUIRED.
</FN>
</TABLE>
