Financial
Consumer Financial Services
NYSE: DVI
DVI, Inc.
2500 York Road
Jamison, PA 18929
Phone: 215-488-5000
Michael A. O’Hanlon
President and
Chief Executive Officer
Interview conducted by:
Walter Banks, Co-Publisher
CEOCFOinterviews.com
October 2001
BIO OF
CEO,
Michael A. O’Hanlon is the Company’s
President and Chief Executive Officer and has served as such since November 1995. Mr.
O’Hanlon was President and Chief Operating Officer from September 1994 to November
1995. From the time Mr. O’Hanlon joined the Company in March 1993 until September
1994, he served as Executive Vice President of the Company. Mr. O’Hanlon became a
Director of the Company in November 1993. Before joining DVI, for nine years, he served as
President and Chief Executive Officer of Concord Leasing, Inc., a major source of medical,
aircraft, ship and industrial equipment financing. Previously, Mr. O’Hanlon was a
senior executive with Pitney Bowes Credit Corporation. Mr. O’Hanlon received his
Master of Business Administration degree from the University of Connecticut and his
Bachelor of Business Administration degree from the Philadelphia College of Textiles and
Science.
About DVI, Inc.
DVI is a leading independent U.S. based
financial services company devoted exclusively to financing healthcare providers
worldwide. DVI finances diagnostic and other medical equipment through offices in the
United States, Asia, Latin America, Europe and South Africa. In the United States,
DVI also offers lines of credit backed by medical accounts receivable. DVI Third Coast
Capital, a division of DVI, specializes in offering equipment financing for emerging
growth companies. This financing allows customers to better utilize, or leverage,
its venture capital base.
Large ticket financing:
DVI Equipment Finance, with offices in all major world markets, is the Company’s
largest unit. It provides lease and loan financing for “large ticket”
medical equipment, such as MRI machines, CT scanners and other equipment with a unit cost
ranging from $250,000 to $3 million. DVI Business Credit specializes in providing
working capital loans to healthcare providers, collateralized by their receivables.
These loans can be used to span cash-short periods while waiting for healthcare insurance
payments.
Medium ticket financing:
DVI Strategic Partner Group serves the “medium ticket” segment of the medical
equipment market, working closely with manufacturers and vendors whose unit cost is up to
$250,000.
DVI originates financing transactions directly and through vendor sales support
programs, and does not depend on brokers or others to originate its business. DVI operates
through the synergy created by a group of interrelated business units. Each of these
business units specializes in a particular facet of healthcare financing. All of
them cross-sell their services to clients so the Company as a whole is continually
strengthened. This strategy evolved during the period since CEO Michael O’Hanlon,
together with his sales and management team, joined the Company and set ambitious goals
for DVI. These include a more focused specialization as a financial services
operation, an aggressive loan origination and profit growth plan and global expansion into
markets where DVI can leverage its expertise.
CEOCFOinterviews - Mr. O’Hanlon, can you
give us a brief history of DVI, Inc.?
Mr. O’Hanlon:
DVI is a 13-year-old company listed on the New York Stock Exchange. Moreover, we
are a specialty finance company. Our specialty is lending to the healthcare community
throughout the world, with a primary focus on lending against high technology equipment
and medical receivables. We’d like to think of ourselves as the biggest, and perhaps
the best finance company in the field.
CEOCFOinterviews: What would you say is your
most recent and exciting news?
Mr. O’Hanlon: Well there is always good
news about DVI, but recently we completed our last quarter, our fiscal quarter ending on
June 30th, which was the most successful in the history of the company from a
volume standpoint. Up until the last quarter, our biggest quarter ever was one in which we
produced $260 million worth of volume. This past quarter we were in the $330 million
range. We also completed the biggest securitization in the company’s history. We
completed a $300 million plus securitization that was well received by the investment
community. We are producing a lot of business, we are funding a lot of business, and that
is certainly good news in today’s environment.
CEOCFOinterviews: What sets DVI apart from its
competition?
Mr. O’Hanlon: We are a focused company.
We are in the healthcare field, and the healthcare field on a global basis is a very
exciting place to be today. There is a lot of new technology coming out and many medical
advancements. The healthcare industry itself in the United States represents 14 percent of
our gross national product; it also represents a somewhat smaller amount of our GNP, but
still significant amounts in all of the countries in which we do business. We are
involved in an industry that is growing and important to any country’s economy.
Moreover, we are the leading player. What makes us so different from our competition is
that we are the only finance company out there whose exclusive specialty is
healthcare. When the people involved in the marketplace - the manufacturers and the
healthcare providers - look to raise capital or finance equipment, they want to deal with
people who know their unique situation and problems. We are the only company out there who
can really address those concerns for them. We are growing into a very successful
company that has a very bright future as the community grows and prospers.
CEOCFOinterviews: How do you reach the
healthcare community?
Mr. O’Hanlon: In our particular product
niche, which primarily involves the financing of high-end technology, there is a limited
number of manufacturers in the marketplace. They are all household names: GE,
Hitachi, Siemans, Philips, Marconi and Toshiba. Of those six major manufacturers of
equipment, somewhere in the world we act as their finance agent. Our primary introduction
to the end user is through the manufacturers, who all understand that in order for them to
market their product they have to provide financing. They find that our industry knowledge
and our expertise allows them to present to an end user a very competitive package which
involves the equipment, the service for the equipment, and the financing. That is how we
are primarily introduced to a customer. Over the years, we have built a very large
base of customers and many of our current customers come back to us directly when they are
considering additional financing. We have the best of both worlds, the
manufacturers introducing us to the clients and the clients talking among themselves and
spreading the good news about DVI. This allows us to pick up a lot of transactions just
from word of mouth from our current customers.
CEOCFOinterviews: Do you seek out the smaller
medical device companies entering the industry every year or do you primarily stick with
the big players?
Mr. O’Hanlon: That is a pretty
interesting question in that for the first ten years of our existence we focused strictly
on the big end of the business, the big players. We have since realized that the growth in
the healthcare industry over the last several years has been in the smaller medical device
business, and recognizing that, we started a company in Chicago three years ago which we
call Strategic Partner Group, a division of DVI, which focuses strictly on the smaller
medical device manufacturers. This is because we truly believe that this will be the big
growth area in the industry over the next five to ten years. This business has been very
successful for us. After some initial startup delays, we have been able to grow the
business significantly. It is our fastest growing business from a percentage
standpoint, and today, from a return standpoint, certainly one of our more profitable
businesses. We also purchased a small ticket company in Italy. We will use that
company as a base of operations in Europe in order to service those manufacturers in the
European marketplace and help them finance their medical devices business. We
recognize this is a growing business and have taken steps to provide a specialty group to
work with manufacturers to help them market their equipment.
CEOCFOinterviews: What percentage of your
business would you like the small ticket side to become over the next couple of years?
Mr. O’Hanlon: I think the big ticket side
of our business, dealing with the major manufacturers, will always be the biggest part of
our business, but from a percentage standpoint, certainly the medical device business will
be a faster growing business. We would like to think that at some point in time, the small
ticket business will represent 30 percent of our volume compared to 70 percent of our
volume on the big ticket side. That would still be significant growth for us over
the next couple of years.
CEOCFOinterviews: You have a very unique
business from an operations standpoint, can you explain it?
Mr. O’Hanlon: What we try to do from an
operational standpoint is put people who are industry experts in a group that deals
directly with counterparts from the manufacturer and end user side. This allows them to be
able to talk to one another in a very professional manner. Someone who sells
multimillion-dollar oncology equipment really wants to speak to a financing person who
understands the entire marketplace, which is why it is important for us to segment our
business. We don’t want the people who work with the manufacturers who sell the
smaller medical devices, who are used to working with a large group of people, selling
products to an even larger group of people and to be involved with some of our big ticket
people whose transactions will take up to a year to finalize. When you talk about
big-ticket equipment, from the time that you meet the customer until the time that the
equipment is installed, it could take up to a year, and that takes a lot of work, and the
process of putting the transaction together is what our big-ticket business is. Small
ticket transactions take on average about 30 days, so it is a very different workflow. We
want to make sure that we have people there in both businesses who understand the dynamics
of that particular business.
Another business that we are in and an important business for us is the financing
of medical receivables. That business was started in order to allow us to provide to the
medical providers short-term working capital that we do through the financing of their
receivables. Therefore, it is important for us when talking to a customer to understand
their needs, understand that we have to finance their equipment, but also understand that
at times they are going to have some short term working capital problems, usually stemming
from some delay in payments to them from the healthcare insurance companies or from the
government. We know that there are customers who are going to need short-term
working capital. We have instituted a program that allows them to use their most viable
asset, their receivables, to finance those shortfalls. Furthermore, being a company that
can provide capital and financing is very important to the providers and I think that is
what makes us successful. We understand the business and are able to produce programs that
satisfy the needs of customers.
CEOCFOinterviews: Is there any other parts to
your revenue model that you would like to mention?
Mr. O’Hanlon: The three main businesses
we have are the receivable business, the small ticket business and the large ticket
business. We have a group in Chicago that provides financing to venture companies. There
we are looking for startup companies who have received at least one round, but preferably
two rounds, of venture capital. We would prefer those businesses to be in the healthcare
field. This is another avenue for us to address a need in the community. These are
startup companies who obviously have a product that is attractive and need bridge
financing to get them to a public offering. We have a mechanism to allow them to do that
through our venture leasing business. I think we cover every conceivable company in
the healthcare field, from a startup to a mature company. The venture business is designed
to meet the needs of small startup companies.
CEOCFOinterviews: With regards to the
big-ticket business, what gives you a competitive edge?
Mr. O’Hanlon: The biggest competitor that
we face on a global basis is General Electric, and General Electric Capital in particular.
GE is the largest producer of medical devices in the world and they provide financing
through their capital finance company. Therefore, with almost every transaction that we
are involved in there is competition from GE Medical and GE Capital. GE is a very
formidable competitor but a very fair competitor and we respect them, but in the
healthcare marketplace, there are many opportunities for providers to find financing.
Other opportunities for financing would be through the banks and other companies.
I think what makes us unique, particularly in the big ticket side of the business is that
we know that it is going to take a year to transact a final sale. We also know that during
that year there are going to be a lot of bumps along the road as we try to help the
provider prepare his business plan in order for him to be successful once the equipment is
installed. Furthermore, understanding what is needed to allow the provider to be
successful with respect to working capital, and understanding the billing and collection
needs of a startup company, as well as being able to work with the provider to make sure
all of that is in place is what makes us so unique. I also think that is what makes us
different from our competitors, who are simply looking at cash flow and credit histories.
We appreciate the fact that those aspects have to be considered, but we provide something
more, and that’s what makes us so different and so successful.
CEOCFOinterviews: Where would you rate
yourselves in the market place, in other words what is your piece of the pie?
Mr. O’Hanlon: I think that from a large
ticket standpoint, in the United States, we would have to rate ourselves as the top
independent finance company. From an overall sales point of large ticket devices, for
cardiology, diagnostic and oncology, the marketplace is approximately $6 billion. This
year we financed $1 billion worth of product, so that gives us a pretty good share
of the market no matter how you look at it. Furthermore, we would like to see the same
type of growth in our international businesses, particularly in Europe and South America.
We see ourselves as the number one provider of financing to those industry segments in the
U.S. and South America, and probably fourth in Europe. I would like to have the European
segment of our business produce at the same levels as in the U.S. and South America.
CEOCFOinterviews: How do you plan to achieve
those growth level goals?
Mr. O’Hanlon: For us to increase our
business in the U.S. and South America, I think we have to obtain more business from the
end user environment while continuing to provide the same levels of service we do to the
manufacturers. In Europe, we really have to develop some better plans with some of the
major manufacturers. In Europe, Siemans and Philips dominate the market more than GE, and
we really have to be more successful in working with both of these manufacturers in order
for us to obtain the number one ranking in Europe, and we certainly have plans to do so. I
think that we will be able to achieve that goal over the next three years.
CEOCFOinterviews: Why are you so confident
that you will reach your goals in Europe?
Mr. O’Hanlon: One reason that makes us so
confident that we will reach our goals in Europe is that we have recently hired a very
well known and highly successful gentleman as president of DVI Europe, St. John Brown. He
joined us three months ago from Philips Medical Systems, and we have already seen an
indication of where he will take the company. I believe that when our quarter ends on
September 30, 2001, we will have, by far, our most successful quarter in our European
history. Moreover, I think the plans that he has put in place with the contacts that he
has in the industry really bode well for our future success in Europe. I think that we now
have a management team in place in Europe that will allow us to grow and prosper. I will
be very surprised if we are not extremely successful in Europe over the next two years.
CEOCFOinterviews: Why have you stayed in the
specialty finance business?
Mr. O’Hanlon: I think the reason we are a
specialty finance company, and have stayed in that niche despite other opportunities
outside the healthcare field, is that we strongly believe that our knowledge of the
industry and the fact that the manufacturers understand the need for a specialty company
to help them grow their business, makes it important for us to stay as focused as we have
been. Furthermore, I don’t think we could stay so focused if the healthcare industry
itself was not such a large industry. In the U.S. alone, there is $1 trillion of
healthcare expenditures made each year. It is an enormous marketplace and we can certainly
grow our business to any level based on the size of the healthcare marketplace. There are
many areas in the healthcare industry where we have not yet done business, and there is
tremendous growth for us in the U.S., particularly in the small ticket and the receivable
businesses.
What is important to understand is that when DVI was started 13 years ago, it
began doing business as an outpatient imaging company. We refocused the company about 10
years ago, sold off our healthcare centers and really became a specialty finance company.
What we learned during the period we were in the imaging business is what makes a
successful center and how a successful center differs from an unsuccessful center. We
learned what you have to put in with respect to working capital, the type of doctor that
you need, the community involvement that you need, and the type of referral base that you
need. Therefore, when we are dealing with a client who is looking to get into this
business, we understand what it takes. I wish we could say that we were one of the
major success stories when we were in the diagnostic imaging business, but we were
not. I certainly think the experience makes us unique from anyone else. It really
does give us some insight as to what makes a successful company and we have been able to
use that template to help other centers grow and prosper.
CEOCFOinterviews: Is the tendency for taking a
loan to term, greater in the healthcare industry than in any other industry?
Mr. O’Hanlon: I think so. Certainly
smaller ticket financing has a higher loss ratio than big ticket leasing, but from an
overall standpoint if one were to look at the entire financial industry on average, a
finance company can expect losses annually of 100 basis points. Historically, DVI
has run between 35 and 40 basis points, which is perhaps half the industry average.
I think that success goes back to the point that we have had experience in the business,
in running a center. We understand what systems need to be in place. When you look at our
business, our big-ticket business, when a center or provider has problems it is usually
for two reasons. One is that they are not marketing their product correctly; they have
done something in the community that has upset the referring doctors (referrals they
were expecting to their clinic have declined for some reason). The second
reason stems from the billing process and the collection of receivables. We
structure our loans in such a way that we try to never repossess the equipment when there
is a problem with the customer. Having the equipment come back to us and trying to resell
it is not in our best interest. What we do is structure the loan in such a way that if
there is a failure we have the ability to take over the center. Thankfully, we have not
done it very often, but when those rare cases occurred, we were able to bring in another
provider who is active in the community and who is a current customer of ours and let him
manage the center for us. In each case, with our systems and our financial support, we
have been successful in bringing that center back to profitability. The new provider then
enjoyed a very lucrative arrangement and obtained a nice business. Now we have had some
failures, obviously we have had some 30 to 40 basis point losses, which is not, to us, a
good sign. However, it certainly is a better performance on average than what the industry
does. It is our expertise and the fact that healthcare is unique. Also, the healthcare
industry tends to be a better paying industry than some other industries, therefore, we
have the best of both worlds. We have a lot of expertise, we have a good industry, and
that has kept our losses down to acceptable levels.
CEOCFOinterviews: Do you have any interest in
acquisitions?
Mr. O’Hanlon: We have always had some
interest in acquisitions, and I think what we would be looking for in an acquisition would
be a company that is active, strictly in the healthcare marketplace, probably in the
smaller device area. We would also be interested in a company that was in the medical
receivables finance area. I do not think that we would look for a company that is active
in the large ticket side of the business. I think we have enough market share there,
and I don’t think that anyone we would acquire from the large ticket side would add a
lot to our abilities in that area. Certainly if the opportunity came up for us to
obtain a company that was of interest to us in the smaller ticket business, whether it be
in or outside the United States, I think that we would be a very active pursuer of that
business.
CEOCFOinterviews: Are you comfortable with
your current financial position and do you have enough capital to grow your business?
Mr. O’Hanlon: I think that anyone in the
finance industry would probably feel more comfortable if they had more capital, but I
think as we sit here today for the short term future we certainly have enough capital to
achieve the goals that we have set for ourselves from a volume standpoint for this fiscal
year. We have over $1 billion worth of committed financing lines, which is a pretty strong
indicator of how the banking community thinks of us today. We are one of the largest
securitizers of product in the United States. We became the first finance company to
securitize receivables in Brazil, so we have been pretty active in the debt markets.
We have recently announced that we have raised an additional $150 million of financing
lines in our international businesses, so I think that from a bank line standpoint and
from a securitization standpoint, we certainly have the capacity to grow our business to
the degree that we want to. From a financial size and strength standpoint, we are a small
cap company with a couple of million dollars of net worth, over $1 billion worth of assets
on balance sheet, and probably another $1 billion off the balance sheet. Moreover, as a
company we are well regarded in the industry. I think that certainly we have shown
through our securitization programs that when we go to the market with a securitization we
have a very willing buyer group out there who have been long time buyers of our bonds who
are, I think, pretty happy with our performance. Therefore, from a financial standpoint, I
think I am comfortable that we can get to where we have to get to with what we have today.
CEOCFOinterviews: What would you like to say
to your shareholders and potential investors in closing?
Mr. O’Hanlon: This past year has been a
rather interesting year for us because we fell a little short in what we expected to earn.
We had one quarter that was affected by a new accounting treatment that we had to put in
place with respect to some of the warrants that we had on companies that had gone
public. We were forced to mark to the market price our warrant positions, which had
a negative drain on earnings. However, I think that we ended the year strong. In our
quarter ended June 30, 2001, we had, by far, our most successful volume quarter ever. What
happens in our business, because of the amount of loss reserve that we have to take on the
business volume, the profitability is certainly higher when you have more volume, but it
is not as high as you would expect because of the high degree of loss reserve that you
have to take. However, in the quarters that follow large fundings, as you amortize the
income, it starts to have a positive effect on your P&L statements. Therefore, I think
that as I look forward to this fiscal year, with the backlog of new business that we have,
the momentum from our recent third and fourth quarters, I think that our fiscal year this
year looks extremely promising. I think that the street has an estimate of $1.60 per share
for us for this year and I think that we are all confident that we will certainly attain
that figure. I think that there is a lot of upside available to us as our business
continues to flow through at record levels. We are very excited about where we are, and I
think that we have established ourselves as the main player in the marketplace and that
our investors are going to enjoy a pretty successful year this year. For that we are
extremely happy.
