<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: March 31, 1999
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 - 14,131,358 shares as of April 30, 1999.
- -------------------------------------------------------------------------
<PAGE> 2
DVI, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION:
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
Item 1. Financial Statements:
Consolidated Balance Sheets -
March 31, 1999 (unaudited) and June 30, 1998 .................. 3-4
Consolidated Statements of Operations -
Three and nine months ended March 31, 1999 and 1998 (unaudited) 5
Consolidated Statements of Comprehensive Income -
Three and nine months ended March 31, 1999 and 1998 (unaudited) 5
Consolidated Statements of Shareholders' Equity -
July 1, 1997 through March 31, 1999 (unaudited) ............... 6
Consolidated Statements of Cash Flows -
Nine months ended March 31, 1999 and 1998 (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>
March 31, June 30,
1999 1998
----------- -----------
(Unaudited)
<S> <C> <C>
Cash and cash equivalents ................................... $ 6,039 $ 15,192
Cash and cash equivalents, restricted ....................... 38,113 47,582
Amounts due from portfolio sale ............................. 4,375 --
Receivables:
Investment in direct financing leases and
notes secured by equipment or medical receivables:
Receivables in installments .............................. 736,396 572,679
Receivables and notes - related parties .............. 2,809 6,563
Recourse credit enhancements ............................. 58,091 51,883
Notes collateralized by medical receivables .............. 168,370 137,316
Residual valuation ....................................... 25,229 14,287
Unearned income .......................................... (78,812) (69,367)
----------- -----------
Net investment in direct financing leases and
notes secured by equipment or medical receivables ........ 912,083 713,361
Less: Allowance for losses on receivables ................. (11,449) (9,955)
----------- -----------
Net receivables ............................................. 900,634 703,406
Equipment on operating leases
(net of accumulated depreciation of $5,653 (March 31, 1999)
and $3,189 (June 30, 1998)) ............................... 19,187 14,773
Furniture and fixtures
(net of accumulated depreciation of $3,534 (March 31, 1999)
and $2,600 (June 30, 1998)) ............................... 5,025 4,225
Investments in investees .................................... 10,433 7,120
Goodwill, net ............................................... 10,724 3,646
Other assets ................................................ 26,543 20,976
----------- -----------
Total assets ................................................ $ 1,021,073 $ 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>
March 31, June 30,
1999 1998
----------- -----------
(Unaudited)
<S> <C> <C>
Liabilities:
Accounts payable ................................................. $ 58,589 $ 48,030
Accrued expenses and other liabilities ........................... 21,749 18,271
Borrowings under warehouse facilities ............................ 228,700 82,828
Deferred income taxes ............................................ 19,393 19,393
Long-term debt, net:
Discounted receivables (primarily limited recourse) ............ 294,754 342,120
9 7/8% Senior notes due 2004 ................................... 147,791 96,486
Other debt ..................................................... 42,560 15,808
Convertible subordinated notes ................................. 13,524 13,439
----------- -----------
Total long-term debt, net ........................................ 498,629 467,853
----------- -----------
Total liabilities ................................................ 827,060 636,375
Minority interest in consolidated subsidiaries ................... 7,822 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 14,131,358 shares (March 31, 1999) and
14,080,358 shares (June 30, 1998) ............................. 71 70
Additional capital ............................................. 133,871 133,516
Retained earnings .............................................. 53,697 39,387
Cumulative translation adjustments ............................. (1,448) (688)
----------- -----------
Total shareholders' equity ....................................... 186,191 172,285
----------- -----------
Total liabilities and shareholders' equity ....................... $ 1,021,073 $ 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 Nine Months Ended
March 31, March 31,
------------------------ ------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Finance and other income:
Amortization of finance income ........... $ 22,228 $ 16,339 $ 60,998 $ 45,839
Other income ............................. 4,383 3,147 13,092 8,258
-------- -------- -------- --------
Total finance and other income ............. 26,611 19,486 74,090 54,097
Interest expense .......................... 16,457 12,838 43,666 36,584
-------- -------- -------- --------
Net interest and other income .............. 10,154 6,648 30,424 17,513
Net gain on sale of financing transactions . 8,231 4,918 22,188 15,060
-------- -------- -------- --------
Net finance income ......................... 18,385 11,566 52,612 32,573
Selling, general and administrative expenses 8,231 4,599 22,908 13,086
Provision for losses on receivables ........ 1,473 1,479 4,620 3,909
-------- -------- -------- --------
Earnings before minority interest, equity
in net loss of investees, and provision
for income taxes ......................... 8,681 5,488 25,084 15,578
Minority interest in net loss of
consolidated subsidiaries .................. 136 -- 352 --
Equity in (net loss) of investees .......... (157) 107 (275) (293)
Provision for income taxes ................. 3,717 2,230 10,851 6,316
-------- -------- -------- --------
Net earnings ............................... $ 4,943 $ 3,365 $ 14,310 $ 8,969
======== ======== ======== ========
Net earnings per share:
Basic .................................... $ 0.35 $ 0.30 $ 1.01 $ 0.80
======== ======== ======== ========
Diluted .................................. $ 0.33 $ 0.27 $ 0.95 $ 0.74
======== ======== ======== ========
</TABLE>
DVI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands of dollars except share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------ ------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net earnings ............................ $ 4,943 $ 3,365 $ 14,310 $ 8,969
Other comprehensive income:
Foreign currency translation adjustment (1,523) (120) (760) (364)
-------- -------- -------- --------
Comprehensive income .................... $ 3,420 $ 3,245 $ 13,550 $ 8,605
======== ======== ======== ========
</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. 51,000 1 553 554
Cost of issuance of common stock....... (198) (198)
Currency translation adjustment........ (760) (760)
Net earnings........................... 14,310 14,310
---------- ---- --------- ------- ------- --------
Balances at March 31, 1999............. 14,131,358 $ 71 $ 133,871 $53,697 $(1,448) $186,191
========== ==== ========= ======= ======== ========
</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>
Nine Months Ended
March 31,
--------------------------
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net earnings ...................................... $ 14,310 $ 8,969
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Equity in net loss of investees ............... 276 293
Depreciation and amortization ................. 13,122 9,028
Additions to allowance accounts ............... 4,620 3,909
Net gain on sale of financing transactions .... (22,193) (15,060)
Minority interest ............................. (352) --
Cumulative translation adjustments ............ (831) (107)
Changes in assets and liabilities, net of
effects from
acquisition of business:
(Increases) decreases in:
Cash and cash equivalents, restricted .... 9,469 (15,012)
Amounts due from portfolio sale .......... (4,375) --
Receivables .............................. (8,987) (16,712)
Other assets ............................. (4,634) (8,710)
Increases (decreases) in:
Accounts payable ......................... 9,115 14,928
Accrued expenses and other liabilities ... 3,478 653
--------- ---------
Total adjustments ................................. (1,292) (26,790)
--------- ---------
Net cash provided by (used in) operating activities 13,018 (17,821)
--------- ---------
Cash flows from investing activities:
Acquisition of business ........................... (77,506) --
Cost of equipment acquired ........................ (557,755) (371,984)
Portfolio receipts net of amounts included in
income and proceeds
from sales of financing transactions ............ 476,752 350,807
Net increase in notes collateralized by medical
receivables...................................... (31,187) (75,694)
Investment in common and preferred stock of
investees........................................ (8,000) --
Cash received from sale of investments in investees 4,482 --
Furniture and fixtures additions .................. (1,880) (1,731)
--------- ---------
Net cash used in investing activities ........... (195,094) (98,602)
--------- ---------
</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>
Nine Months Ended
March 31,
--------------------------
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from financing activities:
Exercise of stock options and warrants ...................... 554 1,085
(Cost of) issuance of common stock .......................... (198) 4,860
Borrowings under:
Warehouse facilities ...................................... 798,555 609,821
Long-term debt ............................................ 138,562 85,000
Repayments on:
Warehouse facilities ...................................... (653,305) (472,875)
Long-term debt ............................................ (111,245) (97,734)
--------- ---------
Net cash provided by financing activities ................... 172,923 130,157
--------- ---------
Net increase (decrease) in cash and cash equivalents ........... (9,153) 13,734
Cash and cash equivalents, beginning of period ................. 15,192 9,187
--------- ---------
Cash and cash equivalents, end of period ....................... $ 6,039 $ 22,921
========= =========
Cash paid during the period for:
Interest .................................................... $ 39,234 $ 34,956
========= =========
Income taxes (net of refunds) ............................... $ (1,971) $ 514
========= =========
Supplemental disclosures of non-cash transactions:
Purchase of computer equipment under capital lease ............. $ 209
Less: Amount financed .......................................... (209)
---------
Cash paid for purchase of computer equipment under capital lease $ --
=========
</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 March
31, 1999 and June 30, 1998, the consolidated statements of operations and
comprehensive income for the three and nine month periods ended March 31,
1999 and 1998, the consolidated statements of shareholders' equity for the
period from July 1, 1997 through March 31, 1999, and the consolidated
statements of cash flows for the nine month periods ended March 31, 1999 and
1998. The results of operations for the three and nine month periods ended
March 31, 1999 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 Nine Months Ended
March 31, March 31,
-------------------------- -------------------------
(in thousands except per share data) 1999 1998 1999 1998
-------------------------------------------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Basic
Income available to common shareholders...................... $ 4,943 $ 3,365 $ 14,310 $ 8,969
Average common shares........................................ 14,118 11,376 14,097 11,217
Basic earnings per common share.............................. $ 0.35 $ 0.30 $ 1.01 $ 0.80
======== ======== ======== ========
Diluted
Income available to common shareholders...................... $ 4,943 $ 3,365 $ 14,310 $ 8,969
Effect of dilutive securities:
Convertible debentures..................................... 184 184 552 552
-------- -------- -------- --------
Diluted income available to common shareholders.............. $ 5,127 $ 3,549 $ 14,862 $ 9,521
Average common shares........................................ 14,118 11,376 14,097 11,217
Effect of dilutive securities, net:
Warrants................................................... 9 114 14 83
Options.................................................... 179 416 281 331
Convertible debentures..................................... 1,311 1,311 1,311 1,311
-------- -------- -------- -------
Diluted average common shares................................ 15,617 13,217 15,703 12,942
Diluted earnings per common share............................ $ 0.33 $ 0.27 $ 0.95 $ 0.74
======== ======== ======== ========
</TABLE>
9
<PAGE> 10
DVI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
NOTE 3. - ACQUISITIONS
In September 1998, the Company acquired for cash substantially all the assets
and retained all the employees of Affiliated Capital Corporation
("Affiliated") from Irwin Financial Corporation. Affiliated is a
Chicago-based medical equipment leasing company that was founded 15 years
ago. It employs 39 people and operates in five regional sales offices,
generating $50.0 million of new lease transactions a year through 27 vendor
relationships. The Company purchased approximately 8,700 customer contracts
with an average equipment cost of $15,000. Had the purchase of Affiliated
occurred at the beginning of fiscal 1998 the Company's total finance and
other income would have increased by $9.1 million and net earnings would have
decreased by $49,000.
NOTE 4. - RECENT PUBLIC OFFERING
On December 16, 1998, the Company completed a public offering of $55.0 million
principal amount of 9 7/8% Senior Notes due 2004 ("Senior Notes"). The
agreement with respect to the Senior 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. Interest
is payable semiannually on February 1 and August 1 of each year. The Senior
Notes will be redeemable at the Company's option in whole or in part at any time
on or after February 1, 2002 at specified redemption prices.
The Company is using the proceeds from this debt offering:
- To fund the Company's growth, including increasing the amount of
equipment and medical receivables loans the Company can fund;
- To develop the Company's expanding international operations;
- For other working capital needs; and
- For general corporate purposes.
NOTE 5 - HEDGE TRANSACTIONS
At March 31, 1999, the Company had $200.0 million in option collars and $50.0
million in Treasury locks. The Company also had $24.1 million in interest
rate swaps. At March 31, 1999, the Company had 247.1 million Spanish Pesetas
in forward contracts and a total of 14.6 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 $26.6 and $74.1 million in the
three and nine month periods ended March 31, 1999 from $19.5 and $54.1
million for the three and nine month periods ended March 31, 1998.
Amortization of finance income increased to $22.2 and $61.0 million from
$16.3 and $45.8 million for the three and nine month periods ended March 31,
1999 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 $4.4 and $13.1 million in the
three and nine month periods ended March 31, 1999 from $3.1 and $8.3 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 $16.5 and $43.7 million for the three and nine
months ended March 31, 1999 from $12.8 and $36.6 million for the three and
nine months ended March 31, 1998. 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 8.14% as of March 31, 1999
compared to 8.35% as of March 31, 1998.
Net gain on sale of financing transactions increased to $8.2 and $22.2
million for the three and nine months ended March 31, 1999 from $4.9 and
$15.1 million for the same periods of the prior fiscal year. Loans sold
during the three and nine month periods ended March 31, 1999 were $97.2 and
$267.1 million compared to $64.0 and $212.6 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 third quarter ended
March 31, 1999 increased by 79.0% to $8.2 million from $4.6 million for the
same quarter of the prior fiscal year. For the nine months ended March 31,
1999 selling, general, and administrative expenses increased by 75.1% to
$22.9 million from $13.1 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 33.5% growth in managed net financed assets.
The provision for possible losses on receivables was $1.5 and $4.6 million
for the three and nine month periods ended March 31, 1999 as compared to $1.5
and $3.9 million for the three and nine month periods ended March 31, 1998.
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 allowance is 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 58.2% and 61.0% to $8.7 and $25.1
million for the three and nine month periods ended March 31, 1999 compared to
$5.5 and $15.6 million for the same periods ended March 31, 1998. Net
earnings increased 46.9% and 59.5% to $4.9 and $14.3 million from $3.4 and
$9.0 million in comparing the three and nine month periods ended March 31,
1999 to the same periods ended March 31, 1998.
11
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Diluted earnings per share increased 22.2% and 28.4% to $0.33 and $0.95 from
$0.27 and $0.74 when comparing the three and nine month periods ended March
31, 1999 to March 31, 1998. The increase in diluted earnings per share
resulted from an increase in the Company's net earnings, partially offset by
the issuance of 0.3 million shares in October 1997 and 2.6 million shares in
May 1998.
Financial Condition
Total shareholders' equity increased $13.9 million to $186.2 million at March
31, 1999 from $172.3 million at June 30, 1998. The increase primarily was
due to net earnings of $14.3 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 March 31, 1999, the Company had available an aggregate of $521.3 million
in warehouse facilities of which $228.7 million was utilized.
Through March 31, 1999, the Company has completed 22 securitizations or other
structured finance transactions for medical equipment and medical receivables
financings totaling approximately $1.9 billion, consisting of public debt
issues totaling $0.4 billion and private placements of debt and whole loan
sales totaling $1.5 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
All non-compliant software packages have been upgraded.
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 and 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
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: May 11, 1999
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