SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended June 30, 2000
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from to
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Commission File Number: 0-16271
DVI, INC.
(Exact name of registrant as specified in its charter)
| Delaware |
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22-2722773 |
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(State or other jurisdiction
of incorporation or organization)
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(I.R.S. Employer
Identification No.) |
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2500 York Road
Jamison, Pennsylvania |
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18929 |
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| (Address of principal executive offices) |
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(Zip Code) |
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Registrant’s telephone number, including area code (215) 488-5000
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of each Exchange
on which Registered
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| Common Stock, par value $.005 per share |
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New York Stock Exchange, Inc. |
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| 9 7/8% Senior Notes due 2004 |
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New York Stock Exchange, Inc. |
Securities registered pursuant to Section 12(g) of the Act:
Warrants to Purchase Common Stock
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes x No ¨
The aggregate market value of the registrant’s Common Stock (its only voting stock) held by nonaffiliates of the
registrant as of July 31, 2000 was approximately $152,917,983 based upon the last reported sale price of the Common Stock on the New York Stock Exchange on that date. (Reference is made to Page 16 herein for a statement of the assumptions upon which this
calculation is based.)
As of July 31, 2000, the registrant had 14,222,974 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the registrant’s definitive Proxy Statement to be filed with the Commission within 120
days after the close of the registrant’s fiscal year.
PART I
Introduction
In this discussion, the terms “DVI”, the “Company”, “we”, “us” and “our” refer to DVI, Inc. and its subsidiaries, except
where it is made clear that such terms mean only DVI, Inc. or an individual subsidiary.
DVI conducts its business principally through two operating subsidiaries, DVI Financial Services Inc., referred to as “DVI Financial Services” and DVI Business
Credit Corporation, referred to as “DVI Business Credit”. We conduct securitizations through special-purpose subsidiaries. We also conduct other structured financings through limited-purpose subsidiaries or through our operating subsidiaries.
Overview
We are an independent specialty finance company that provides asset-backed financing to healthcare service providers. Our core businesses are medical equipment finance and
medical receivables finance. We provide these services principally in the U.S., Latin America, Europe, the United Kingdom, South Africa, Asia and Australia. We also provide interim real estate financing, mortgage loan placement, subordinated debt
financing for assisted living facilities and, to a lesser extent, merger and acquisition advisory services and asset-backed financing for emerging growth companies. As of June 30, 2000, our total assets and shareholders’ equity were $1.3 billion and
$215.4 million, respectively.
We principally serve the financing needs of middle-market healthcare service providers, such as outpatient healthcare providers, medical imaging centers, physician group
practices, integrated healthcare delivery networks and hospitals. Many of our customers are growing entrepreneurial companies that have capitalized on trends affecting the healthcare delivery systems in the US and other countries to build their
businesses. These trends include:
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Significant growth in the level of healthcare expenditures worldwide;
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Dramatic efforts by governmental and market forces to reduce healthcare delivery costs and increase efficiency;
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Favorable demographic and public policy trends worldwide;
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Growth, consolidation and restructuring of healthcare service providers and
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Advances in medical technologies that have increased the demand for healthcare services and the need for sophisticated medical
diagnostic and treatment equipment.
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As a result of these trends, our business has grown substantially. From June 30, 1995 to June 30, 2000, our managed net financed assets portfolio increased 303% to
approximately $2.0 billion from $494.9 million.
Medical Equipment Finance
Our medical equipment finance business, which had managed net financed assets of $1.7 billion and total revenues of $89.8 million as of June 30, 2000, operates by:
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Providing financing directly to end users of diagnostic imaging and other sophisticated medical equipment;
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Providing financing directly to end users of lower-cost medical devices and
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Providing domestic and international finance programs for vendors of diagnostic and other sophisticated medical equipment.
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Our typical equipment contracts for diagnostic, patient treatment and other sophisticated medical equipment (originated both domestically and internationally) range from
$200,000 to $3.0 million while equipment contracts for lower cost medical devices range from $5,000 to $200,000. Most of our equipment contracts are structured so that the full cost of the equipment and all financing costs are repaid during the financing
term, which is typically five years. Because most of our equipment
contracts are structured as notes secured by equipment or direct financing leases with a bargain purchase option, our exposure to residual asset value is limited. Our
residual asset value was $40.3 million at June 30, 2000.
For accounting purposes, we classify the equipment contracts we originate as:
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Notes secured by equipment,
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Direct financing leases or
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Generally, in transactions where notes are secured by equipment and in direct financing leases, the obligor has substantially all of the benefits and risks of ownership of
the equipment. Operating leases provide for the rental of the asset. The different classifications can result in accounting treatments that provide substantially different income and costs during the transaction term. Direct financing leases and notes
secured by equipment are reflected on our balance sheet as “investment in direct financing leases and notes secured by equipment or medical receivables”. For statement of operations purposes, those transactions result in amortization of finance
income over the transaction term in the amounts computed using the interest method.
We enter into two types of direct financing lease transactions, which are referred to as “conditional sales agreements” and “fair market value t
ransactions”. Conditional sales agreements and notes secured by equipment represent those transactions in which we retain no residual interest in the underlying equipment. Fair market value transactions are those transactions in which we do retain a
residual interest in the equipment. We record this residual interest on our books as an estimate of the financed equipment’s projected fair market value at the end of the transaction term. At the inception of notes secured by equipment and direct
financing lease fixed payment transactions, “unearned income” represents the amount by which the gross transaction receivables and the estimated residual value (on fair market value transactions) exceed equipment cost. At the inception of notes
secured by equipment and direct financing lease variable rate transactions, the beginning receivable balance is equal to the equipment cost only. Variable rate contracts have scheduled principal payments and variable interest payments that are calculated
and accrued monthly on the remaining principal balance. The accrued interest receivable on variable rate contracts is reflected on the balance sheet under Accounts receivable.
Leases and contracts for the rental of equipment that do not meet the criteria of direct financing leases are accounted for as operating leases. We record equipment under an
operating lease or a rental contract on the balance sheet at our cost under the caption of “Equipment on operating leases” and depreciate this equipment on a straight-line basis over its estimated useful life. Income is also recognized on a
straight-line basis over the life of the contract.
Notes secured by equipment and direct financing lease transactions are all “net” transactions under which the obligor must make all scheduled payments, maintain the
equipment, insure the equipment against casualty loss and pay all equipment-related taxes. In fair market value transactions, at the end of the initial financing term, the obligor has the option to purchase the equipment for its fair market value, extend
the financing term under renegotiated payments or return the equipment to us. If the equipment is returned to us, we must sell or lease the equipment to another user.
In transactions that we permanently fund through securitization or other structured finance transactions which we treat as debt, income is deferred and recognized using the
interest method over the respective term of the transactions. If an obligor under a transaction defaults, we may not receive all or a portion of the unamortized income associated with the transaction.
For those securitizations that are treated as sales, we retain the obligation to service the individual contracts although they are removed from our balance sheet at the time
of sale. We are compensated for these services under contractual terms, which include our receipt of a servicing fee, late charges, and ancillary revenue that we believe would more than adequately compensate a substitute servicer. Generally accepted
accounting principles (“GAAP”) requires us to recognize as a servicing asset the excess of that compensation received over amounts that would otherwise be paid to an independent third party to perform this specific type of servicing. We began
recording these servicing assets for securitizations consummated after June 30, 1999. The amount of unamortized servicing assets recorded at June 30, 2000 was $6.3 million and is included in Other assets on the balance sheet.
We have traditionally focused our financing activities on the domestic outpatient diagnostic and treatment services sector of the healthcare industry. This sector typically
consists of radiologists and other diagnostic service providers who were among the first in the domestic healthcare industry to move away from the hospital setting toward outpatient treatment centers. We expect the range of outpatient services we finance
to expand, and we intend to focus on the equipment used and medical receivables generated as a result of that expansion.
In recent years, we have significantly expanded our international business in which we finance the purchase of diagnostic imaging and other sophisticated medical equipment by
private clinics, diagnostic centers and hospitals. Our international business is focused on providing finance programs for equipment manufacturers doing business in Latin America, Europe, the United Kingdom, South Africa, Asia and Australia. We believe
our presence in these regions enhances our relationships with certain medical equipment manufacturers and permits us to capitalize on the growing international markets for medical equipment financing. We view continued expansion of our relationships with
medical equipment vendors and manufacturers as an integral component of our growth strategy, and we intend to continue our expansion of international medical equipment finance activities. At June 30, 2000, our managed portfolio of international equipment
contracts was $291.1 million.
Medical Receivables Finance
Our medical receivables financing business, which had managed net financed assets of $251.0 million and total revenues of $31.7 million as of June 30, 2000, generally
consists of providing loans to healthcare providers that are secured by their receivables. Substantially all of these lines of credit are collateralized by third party medical receivables due from Medicare, Medicaid, HMOs, PPOs, commercial insurance
companies, self-insured corporations, and, to a limited extent, other healthcare service providers. At times, we may use additional types of collateral to secure these loans. We generally advance 70% to 85% of our estimate of the net collectible value of
the eligible receivables from third party payors. Clients continue to bill and collect the accounts receivable, subject to lockbox collection and sweep arrangements established to our benefit. The interest and fee income generated from these loans are
recognized over the terms of the lines of credit, which are typically one to three years, and are recorded as amortization of finance income and other income. We conduct due diligence on our potential medical receivables clients for all financings and
follow underwriting and credit policies in providing financing to customers. Our credit risk is mitigated by our security interest in the customer’s eligible and ineligible receivables and by the customer’s additional collateral, where
applicable. We also acquired a highly sophisticated collateral tracking system that will allow us to improve the monitoring of medical receivables. Our medical receivables loans are structured as floating rate lines of credit. These lines of credit
typically range in size from $500,000 to $15.0 million; however, in certain circumstances commitments ranging from $20.0 million to $40.0 million are also provided.
Medical receivables financing is readily available for many hospitals and for physicians seeking relatively small amounts of funding. However, for outpatient healthcare
providers seeking funding in excess of $500,000, the principal sources of financing generally are limited to specialty finance companies or factoring companies that purchase receivables at a discount. We believe the principal reasons for the lack of
financing in these areas historically have been the uncertainty of the value of the receivables, the lack of permanent funding vehicles and the potential for fraud due to the difficulty of verifying the performance of healthcare services. More recently,
interest in providing financing for this sector has increased as a result of improved understanding of the expected reimbursement levels for healthcare services and the availability of historical performance data on which to base credit decisions. Our
strategy in medical receivables financing is to differentiate ourselves from many of our competitors by offering loans secured by medical receivables rather than factoring those receivables at a discount. We believe that loans secured by medical
receivables are often more attractive to borrowers that generate high-quality medical receivables because those borrowers find that our financing costs less than receivables factoring.
The following describes the unique risks involved in the medical receivables financing business:
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Healthcare providers may overstate the quality and characteristics of the medical receivables that we analyze in determining the
amount of the line of credit to be secured by such receivables. After our determination has been made, healthcare providers could change their billing and collection systems, accounting systems, or patient records in a way that could adversely affect our
ability to monitor the quality and/or performance of the related medical receivables.
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There are technical legal issues associated with creating and maintaining perfected security interests in medical receivables,
specifically those generated by Medicaid and Medicare claims.
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Payors may make payments directly to healthcare providers that have the effect (intentionally or otherwise) of circumventing our
rights in such payments.
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Payors may attempt to offset their payments against debts owed to the payors by the healthcare providers.
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As a lender whose position is secured by medical receivables, we are less likely to collect outstanding receivables in the event of
a borrower’s insolvency than a lender whose position is secured by medical equipment that the borrower needs to operate its business.
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A borrower that defaults on obligations secured by medical receivables may require additional loans (or modifications to the terms
of existing loans) to continue operations and repay outstanding loans.
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A conflict of interest may arise when we act as servicer for an equipment-based securitization and originate medical receivables
loans to borrowers whose equipment contracts have been securitized.
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The fact that the use of structured finance transactions to fund medical receivables is a relatively new process may impair our
efforts to develop suitable sources of funding.
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Additional Financing Services
Management believes that the long-term and assisted care markets and emerging growth companies have been underserved by traditional financing sources and that many firms have
both a need for and the creditworthiness to support working capital financing. In November 1997, we established DVI Merchant Funding (a division of DVI Financial Services) and acquired Third Coast Capital in June 1998 to serve these markets and companies.
Through DVI Merchant Funding we provide interim real estate financing, mortgage loan placement, subordinated debt financing for assisted living facilities and, to a lesser extent, merger and acquisition advisory services to our customers operating in the
long-term care, assisted care and specialized hospital markets. Through Third Coast Capital, we provide asset-backed financing, including lease lines of credit, to emerging growth companies. The services that are provided by these newly acquired companies
have not yet achieved their full potential. For segment reporting purposes, they are included under “corporate and all other” (see Item 8, Note 19 for more information on segment reporting).
Income Classifications
Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements”, outlines the accounting for revenue recognition and includes both broad conceptual
discussions as well as certain industry-specific guidance. Based on these guidelines, it states that revenue should not be recognized until it is realized or realizable and earned. We have implemented SAB 101 in the current financial statements and it has
not had a material impact on the results of operations.
We classify income under the categories of:
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“Amortization of finance income”, which consists primarily of the interest component of scheduled payments on notes
secured by equipment, medical receivables and direct financing leases;
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“Other income”, which consists primarily of income realized from customer warrants not related to current lending
activities, medical receivables fees, consulting and advisory fees, late fees, net service fee income, and contract fees and penalties (see Item 8, Note 7 for a summary of other income) and
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“Net gain on sale of financing transactions”, in which gains are recognized when we permanently fund transactions through
off-balance sheet securitizations or other contract sales.
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Amortization of finance income is calculated using the interest method whereby the income is reported at a level rate of return on the net investments over the contract term.
Included is the amortization of deferred loan fees and any related consideration obtained in connection with lending activities. This income is treated as an adjustment of yield in accordance with GAAP.
Revenue from medical receivables fees, late fees, net service fee income, and contract fees and penalties is recorded in Other income when earned according to signed
contractual terms. Revenue from investment advisory services is recorded in Other income when the services are rendered, when the fair value of our interest can be reasonably established and when collection is estimated to be short-term (within 90 days).
Business Strategy
Our goal is to be the leading provider of asset-backed financing services to growing segments of the healthcare industry and to be the primary source for all of the financing
needs of our customers. The principal components that we believe will enable us to attain this goal include:
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Generating additional financing opportunities with equipment manufacturers and their customers in domestic and international
markets. We view continued expansion of our relationships with medical equipment manufacturers as an integral component of our growth strategy. We intend, to the extent appropriate in pursuit of that objective, to continue to expand our
medical equipment finance activities outside the U.S. We have formed international joint ventures or established branch offices or subsidiaries in Latin America, Europe, the United Kingdom, South Africa, Asia and Australia that provide medical equipment
financing in these regions to strengthen our relationships with certain manufacturers of medical equipment and to capitalize on the growing international markets for medical equipment financing. We believe that by helping manufacturers finance their
customers’ equipment purchases outside the U.S., we will encourage those manufacturers to increase the financing opportunities they refer to us within the U.S.
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Continuing to expand our medical receivables financing business. We intend to further expand our
medical receivables financing business by generating financing opportunities through our existing medical equipment financing customer base, particularly from those customers who are expanding to provide additional healthcare services as well as through
providers who do not finance significant amounts of medical equipment. We intend to maintain a strategy of differentiating ourselves from many of our competitors by continuing to offer contracts secured by medical receivables rather than factoring those
receivables at a discount.
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Expanding our presence in the lower-cost medical devices market. We seek to use our reputation as a
medical equipment financing specialist and our ability to finance a wide range of healthcare providers to establish a presence in the relatively more competitive market for financing lower-cost medical equipment. This market includes diagnostic and
patient treatment devices. As part of this strategy, in September 1998, we acquired substantially all the assets and retained 39 employees of a 15-year old “small ticket” medical equipment financing business, referred to as DVI Strategic Partner
Group (“DVI SPG”), formerly known as Affiliated Capital. This business is serving as a platform for the expansion of our vendor sales program into this market. During the nine months ended June 30, 1999 and year ended June 30, 2000, contracts
originated by this acquired business were $37.4 million and $56.4 million, respectively.
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Offering fee-based financing services to healthcare providers. Our goal is to become the primary
source for all of the financing needs of our customers. To this end, we have expanded the financial services we offer to our customers to include, among other things, real estate financing and funding to finance healthcare-related acquisitions. We intend
to continue to introduce new financing products to service the needs of our customers and to leverage our existing expertise in the healthcare markets to become the preferred provider of healthcare-related finance within our chosen segments of the
healthcare markets.
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Acquiring specialty businesses. Growth through acquisitions of specialty businesses that fit within
our existing operations and long-term business strategy will allow us to expand into other segments of the healthcare industry. During the last three years, we acquired a small healthcare merchant funding operation, a provider of asset-backed financing
for emerging growth companies, a “small ticket” medical equipment financing business and a custom software design firm that provides software and services to the healthcare industry. We have integrated these activities with our financing
services offered to the healthcare industry. Through these acquisitions, we intend to significantly expand our presence in new markets.
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Sales and Marketing
We generate most of our financing opportunities from two sources:
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Medical equipment manufacturers that use third parties to finance the sale of their products and
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Healthcare providers with whom our sales organization has relationships.
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Generally, medical equipment manufacturers refer customers to us for financing because they believe we have the ability to understand and measure the creditworthiness of the
customer’s business and to provide the financing necessary for the completion of the equipment sale.
We have established a close working relationship, both domestically and internationally, with major manufacturers of diagnostic imaging equipment by meeting their needs to
arrange financing for the higher-cost equipment they sell to healthcare providers. Because of some of these relationships with medical equipment manufacturers, especially those targeting the international markets, we have formed joint ventures or
subsidiaries to provide medical equipment financing to the customers of the manufacturers in the international market. We currently have joint ventures, branch offices or subsidiaries in Latin America, Europe, the United Kingdom, South Africa, Asia and
Australia. We believe that these relationships give us a competitive advantage over other providers of medical equipment financing.
Our target market for the medical receivables lines of credit we originate includes “middle market” healthcare companies and providers with annual revenues between
$10.0 and $125.0 million. By definition, this sector of the marketplace precludes both start-up healthcare companies as well as extremely mature or rated medical organizations that can obtain traditional bank financing. This sector has been one that most
traditional financing sources have avoided due to the payor complexity and specialization required. “Middle market” companies and providers that comprise our target market include the following:
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Specialty outpatient clinics, including imaging centers, surgery centers, oncology centers, and medical laboratories;
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Hospitals, including acute care and sub-acute facilities, and community and specialty hospitals;
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Health service companies, including home healthcare, nursing homes, skilled nursing, physical and occupational therapy, pharmacy,
infusion, and specialty treatment centers and
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Medical practitioners, including medical groups, individual physicians with large practices and management service organizations.
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Our sales and sales management staff consists of 56 healthcare finance specialists located in various parts of the world. These individuals generally have a finance industry
and/or medical equipment background. We typically locate sales personnel in geographic areas where they have knowledge of the local market. We believe that sales personnel who understand local economic and political trends are a valuable component of our
credit underwriting process.
Credit Underwriting
We believe that the credit underwriting process used in originating contracts is effective in managing our risk. The overall credit underwriting process follows detailed
guidelines and procedures and reflects our significant experience in evaluating the creditworthiness of potential borrowers. The guidelines use those attributes that are most relevant among different customer types within our targeted markets.
We have historically focused most of our efforts on the non-hospital sector of the healthcare marketplace, which requires rigorous credit analysis and structuring discipline.
Our underwriting expertise enables us to require specific working capital and net worth requirements and specify the amount and form of any credit enhancement and/or financial support (such as cash collateral, letters of credit, guarantees, or fee
subordination).
In medical receivables lending, we conduct collateral and receivables underwriting in addition to credit underwriting. Our due diligence staff performs on-site testing to
confirm that billing and collections systems, accounting systems and patient records are adequately maintained and comply with our lending policies. A large portion of the analysis consists of a review
of receivables quality through the appropriate testing of cash receipts and cash applications on a sample basis. Payor types, collection history and age of receivables are
analyzed.
Due to the large size of our transactions, each one is analyzed and reviewed on its own merits. Pursuant to our Company policy, the Director of Credit for DVI Financial
Services has approval authority for all transactions up to $500,000. The Vice President of Credit for DVI Financial Services has approval authority for all transactions up to $750,000. The Chief Credit Officer—USA and the Chief Credit Officer of DVI,
with the agreement of any other member of the credit committee, has approval authority up to $1.0 million. The credit committee has approval authority for all transactions greater than $1.0 million. Credit committee approval must also be given each time a
customer’s aggregate exposure exceeds an increment of $3.0 million.
Because of the relatively small size of the medical equipment contracts generated through DVI SPG, the underwriting criteria are significantly different from those we
typically use. DVI SPG’s applications from obligors are analyzed for approval based upon a combination of the applicant’s financial condition and credit score (for applicants who are individuals), which is obtained from a national credit
reporting organization. Applications are filed with the credit department and screened for repeat customers, in which case the previous file, credit and payment history are also analyzed. Based on such information, an individual credit analyst assigns a
status to the application (approved, declined, request for further information or change in acceptable terms). If the application is approved and the conditions and requirements of approval are met, an account manager or sales support representative
processes the file and issues a signed purchase order. The account is then reviewed for completion of all requirements and signed for authorization to book the transaction. In general, DVI SPG completes UCC filings on all transactions where the cost of
the equipment exceeds $25,000.
DVI SPG has established specific credit guidelines for hospitals, group practices and sole practitioners that generally require obligors to:
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Be in business for a certain period of time, usually for a minimum of one to two years;
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Provide financial statements, corporate resolutions and the appropriate purchase documents;
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Provide personal guarantees under certain circumstances;
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Provide proof of medical license and
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Meet the credit report score requirements of independent scoring services.
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DVI SPG has imposed other requirements in certain circumstances and may consider an obligor’s medical specialty in evaluating creditworthiness. DVI SPG may allow
exceptions to the foregoing requirements as warranted, in which case the approval of two credit officers is required.
Credit Experience
The following table sets forth certain information with respect to delinquencies for our contracts for the periods indicated:
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As of June 30,
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(in millions of dollars)
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2000
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1999
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1998
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$
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%(2)
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$
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%(2)
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$
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%(2)
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| Managed net financed assets |
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1,992.0 |
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– |
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1,661.8 |
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– |
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1,223.0 |
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– |
| Delinquencies (1) |
| 31—60 days |
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13.6 |
|
0.7 |
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14.9 |
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0.9 |
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24.6 |
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2.0 |
| 61—90 days |
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14.7 |
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0.7 |
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8.8 |
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0.5 |
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15.9 |
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1.3 |
| 91+ days |
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87.3 |
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4.4 |
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59.1 |
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3.6 |
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44.0 |
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3.6 |
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| Total delinquencies |
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115.6 |
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5.8 |
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82.8 |
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5.0 |
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84.5 |
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6.9 |
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(1)
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Under the relevant agreements, our obligors generally are considered in default if payment on a contract has not been received when
due. Information presented does not include obligations that are overdue by less than 30 days.
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(2)
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Delinquencies as a percentage of managed net financed assets. Delinquencies reflect the remaining outstanding balance on delinquent
contracts.
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The 39.6% increase in delinquencies to $115.6 million is the result of the 19.9% growth in managed net financed assets, a $3.6 million bankruptcy of a borrower of Third
Coast Capital (which was cleared on June 26, 2000 by the bankruptcy court at 100% of its value), a $6.5 million loan to an assisted living facility that is being restructured, a $4.9 million loan to a psychiatric hospital in California that is secured by
all assets including real estate and $3.7 million of additional delinquencies at DVI Capital, which was discontinued in March 2000 (see Item 8, Note 16). All of these loans and leases are properly collateralized or reserved for and no significant losses
are anticipated.
Ultimately, we expect the borrowers to own all of the equipment financed. Our experience has been that, in instances of delinquency, the market value of the equipment
generally has been sufficient to allow for the restructuring of contracts without any significant adjustments to the original yield or the manner in which we record such contracts. We have also exercised our right to bring in new management to operate
centers that have defaulted on their contracts.
The following table sets forth information with respect to losses for our contracts for the periods indicated:
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Year Ended June 30,
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(in thousands of dollars)
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2000
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1999
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1998
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| Net charge-offs |
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$ 7,449 |
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$ 5,345 |
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$ 1,635 |
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| Average net financed assets |
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1,157,560 |
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|
916,528 |
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679,553 |
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| Average managed net financed assets |
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1,868,630 |
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1,437,597 |
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1,064,663 |
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| Net charge-offs as a percentage of average net financed assets |
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0.64 |
% |
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0.58 |
% |
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0.24 |
% |
Net charge-offs as a percentage of average managed net financed
assets |
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0.40 |
% |
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0.37 |
% |
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0.15 |
% |
Net charge-offs during fiscal 2000 increased $2.1 million over the prior year. This increase in charge-offs is due to the 30.0% growth in our average managed net financed
assets. Specific areas of increased charge-offs over the prior year include $1.0 million for repossessed assets, $0.8 million for international operations and $0.4 million for small ticket medical equipment financing.
The increase in net charge-offs during fiscal 1999 was the result of a bankruptcy filing by Allegheny Health Education and Research Foundation in the amount of $2.0 million.
Small-ticket medical equipment financing charge-offs totaled $1.1 million.
The allowance for losses on receivables (the “allowance”) is available to absorb our current estimates of credit losses in our managed portfolio. Each month we
compile information on the performance of our portfolio to assess the adequacy of the allowance. Our assessment includes a review of delinquencies, historical loss experience, collateral and the strength of guarantors, and legal options to enforce
management changes or sustain legal positions. The assessment includes estimates that may be significantly affected by changes in general economic and political conditions. We perform detailed analyses for specific obligors to evaluate discrete factors
adversely affecting their ability to comply with the terms of their agreements with us. Based on the conclusions of those analyses, we make provisions for losses at the end of each fiscal quarter in amounts deemed necessary to maintain an adequate
allowance. As these assessments are often influenced by factors outside our control, there is uncertainty inherent in them, making it possible that they could change in the near term. We believe the allowance is adequate to provide for estimated losses.
See Item 8, Note 3 for a reconciliation of the allowance for each of the past three years.
Our historical levels of allowances and delinquencies are not necessarily predictive of future results. Various factors, including changes in the way our customers are paid
for their services, other developments in the healthcare industry, increasing international activity, general economic conditions, and new technological developments affecting the resale value of equipment we finance, could cause our future allowance and
delinquency rates to be different than those experienced historically.
Capital Resources and Funding
We obtain initial funding for most of our equipment contracts through warehouse facilities provided by banks and other financial institutions. Contracts made under these
facilities are repaid when we permanently fund our equipment contracts through securitization or other limited-recourse permanent funding programs, including sales. Typically, equipment contracts are held for 30 to 180 days before they are permanently
funded.
In addition to the funding provided under our warehouse and permanent funding facilities, our need for capital is affected by four primary factors:
Ÿ
|
The level of credit enhancement required under our various warehouse and permanent funding facilities,
|
Ÿ
|
The amount of contracts we hold that do not qualify as eligible collateral under those facilities,
|
Ÿ
|
Growth in overseas markets for which funding resources have not been fully developed and
|
Ÿ
|
Growth in new businesses for which funding resources have not been fully developed.
|
While these factors tend to reduce our liquidity at times of strong growth in contract origination, they may have the effect of improving our cash flow from operations in the
short term if our contract growth were to decline.
The Company’s strong growth in contract origination and net financed assets has required substantial amounts of external funding. Through our operating subsidiaries, we
finance our equipment and medical receivables on an interim basis with secured credit facilities provided by banks and other financial institutions. These interim “warehouse” facilities are refinanced using asset securitizations, contract sales,
and other structured finance techniques that permanently fund most of our equipment and medical receivables contracts. Permanently funded equipment and medical receivables are funded through the life of the respective assets. These permanent financings
require us to invest additional capital to fund reserve accounts or to meet the overcollateralization required in the securitizations and sales of our contracts.
Each of our warehouse facilities and permanent funding vehicles requires us to provide equity or a form of recourse credit enhancement to the respective lenders or investors
and generally does not permit us to fund general corporate requirements. Therefore, the actual liquidity, or funds available to us to finance our growth, is limited to the cash generated from operations and the available proceeds of equity or debt
securities we issue. At times of strong origination growth, our cash flows from operations are insufficient to fund these requirements. As a result, our need to fund during periods of high growth in contract origination necessitates external funding to
provide the equity or capital required as recourse credit enhancement to leverage borrowings.
Warehouse Facilities
At June 30, 2000, we had an aggregate of $574.2 million available for both domestic and international equipment contract financing under various warehouse facilities of which
we had borrowed an aggregate of $256.7 million. These facilities are provided by a syndicate of banks that participate in a revolving credit arrangement, by several banks lending directly to our international business and by investment banking firms that
we use for securitizations. The contracts made under these bank warehouse facilities bear interest at floating rates and are full recourse obligations of the Company. Borrowings made under the domestic facilities typically are repaid with the proceeds of
advances made under securitization facilities. Those advances in turn are typically repaid with proceeds from permanent fundings. Contracts funded under securitization facilities cease to be eligible collateral if they are not securitized within a
specified period. The amount advanced under the securitization facilities is 92% of the discounted value of the pledged receivables. If we were unable to arrange continued access to acceptable warehouse financing, we would have to curtail our contract
origination, which in turn would have a material adverse effect on our financial condition and operations. See Item 8, Note 6 for a summary of our warehouse availability at June 30, 2000.
Medical Receivables Financing
We fund our medical receivables financing business through various sources. We have established a revolving credit agreement with a syndicate of banks that is used to
warehouse medical receivables contracts up to $100.0 million. We also have an additional warehouse facility of $3.0 million available through another bank. We had $49.9 million outstanding under these facilities at June 30, 2000. See Item 8, Note 6 for a
summary of our warehouse availability at June 30, 2000.
Permanent Funding Program
The most important sources of permanent funding for our contracts have been securitization and other forms of structured finance. Securitization is a process in which a pool
of contracts is transferred to a special–purpose financing entity that issues notes to investors. The notes are secured by a pledge of the assets or other collateral in the contract pool. Principal
and interest on these notes are paid from the cash flows produced by the contract pool. In the securitizations we sponsor, equipment contracts funded through securitizations must be credit enhanced to receive an investment grade credit rating.
Credit enhancement can be provided in a number of ways, including cash collateral, letters of credit, a subordinated tranche of each individual transaction or an insurance
policy. Typically, our securitizations are enhanced through subordinated tranches and cash collateral. In the equipment securitizations we have sponsored to date, we have been effectively required to furnish credit enhancement equal to the difference
between the total discounted cash flows of the securitization pool and the net proceeds we receive in such a securitization. In the medical receivables securitizations we have sponsored to date, we have furnished credit enhancement through subordinated
tranches, corporate guarantees and cash collateral. The majority of the credit enhancements is recorded as subordinated interests of the present value of the discounted cash flows and is repaid from their share of those future cash flows.
The requirement to provide this credit enhancement reduces our liquidity and requires us to obtain additional capital periodically. There can be no assurance that we will be
able to obtain additional capital in the future.
For accounting purposes, our securitizations are treated as either financings (on–balance sheet transactions) or sales (off–balance sheet transactions). The decision on which accounting treatment to use depends
on the level of control we wish to retain over the assets. In an on–balance sheet transaction, the contracts being securitized remain on our balance sheet as an asset for their originally contracted term and the proceeds raised are accounted for as
discounted receivables in which no gain or loss is recognized. In an off–balance sheet transaction, we remove the contracts from our balance sheet and recognize a gain or loss on the sale of these contracts. The previously recorded amounts are
allocated between the assets sold and the recourse credit enhancement based on the relative fair values on the date of transfer. The net proceeds received are adjusted on our balance sheet by recording the fair value of recourse credit enhancements and
servicing assets. Unamortized securitization assets are reviewed quarterly for impairment.
We continually seek to improve the efficiency of our permanent funding techniques by reducing up–front costs and minimizing our cash requirements. We may consider alternative structures, including senior and subordinated tranches, and alternative forms of credit enhancement, such as letters of credit and surety bonds. The transaction expenses of
each securitization and other forms of structured financing depend on market conditions, costs of securitization and the availability of credit enhancement options. We expect to continue to use securitization and other forms of structured financing, on
both a public and private basis, as our principal source of permanent funding for the foreseeable future.
To be cost efficient, a securitization must cover a relatively large and diverse portfolio of contracts. One of the basic requirements of the credit rating agencies (entities
that rate the quality of the notes issued in our securitizations) relates to borrower concentration. This requirement specifies that no single credit (borrower) may constitute a significant portion of the pool of contracts being securitized. Because of
this concentration requirement, we generally must accumulate in excess of $75.0 million in contracts for each securitization. The credit rating agencies also have other concentration guidelines such as equipment type, geographic location of the obligors
and medical receivables payor concentrations. Our portfolio management software allows us to continually monitor borrower concentrations, as well as other concentrations dealt with in the agency guidelines. These requirements mean that not all of the
contracts held in our warehouse facilities at any point in time can be placed in one securitization.
The securitization of our equipment contracts are often structured as sales and resulted in gains totaling $25.7 million, $29.8 million and $21.0 million for years ended June
30, 2000, 1999 and 1998, respectively. We find distinct advantages to this structure over the on–balance sheet structure that does not result in a gain and, subject to the continuing availability of the
sale structure, intend to use it in future years. The principal advantage of this structure is that it accelerates the recognition of revenue that would otherwise be recognized over the term of the underlying contracts. This acceleration of revenue, in
turn, increases our capital base, which increases the amount of funds that we can borrow. The greater borrowing capacity can be used to acquire greater amounts of earning assets, which promotes our growth and profitability.
If, for any reason, we were to become unable to access the securitization market to permanently fund our equipment and medical receivables contracts, the consequences would
be materially adverse. Our ability to complete securitizations and other structured finance transactions depends upon a number of factors, including:
Ÿ
|
The general conditions in the credit markets,
|
Ÿ
|
The size and liquidity of the market for the types of receivable-backed securities we issue or place in securitizations and
|
Ÿ
|
The overall financial performance of our contract portfolio.
|
We do not have binding commitments for permanent funding, through either securitization or contract sales. We have non-binding agreements with investment banking entities to
fund future contracts through securitization. While we expect to be able to continue to obtain the permanent funding we require for our equipment and medical receivables financing businesses, we cannot give any assurance that we will be able to do so. If,
for any reason, any of these types of funding were unavailable in the amounts and on terms deemed reasonable by us, our equipment and medical receivables financing activities would be adversely affected. We believe that our present warehouse and permanent
funding sources are sufficient to fund our current needs for our equipment and medical receivables financing businesses.
Credit Risk
Many of our customers are outpatient healthcare providers. Contracts to such customers require a high degree of credit analysis. In addition, we have entered the long-term
care and assisted care submarkets, and we are now providing asset-backed financing for emerging growth companies and subordinated debt financing to our traditional client base, all of which require different types of credit analysis. Although we try to
reduce our risk of default and credit losses through our underwriting practices, contract servicing procedures and the use of various forms of non-recourse or limited-recourse financing (in which the financing sources that permanently fund our equipment
and other contracts assume all or some of the risk of default by our customers), we remain exposed to potential losses resulting from a default by a customer. Customer defaults could result in:
Ÿ
|
Requiring us to make certain payments under our warehouse facilities,
|
Ÿ
|
Requiring us to make payments to the extent of our remaining credit enhancement position under our permanent equipment and other
funding arrangements,
|
Ÿ
|
The loss of the cash or other collateral pledged as credit enhancement or
|
Ÿ
|
The loss of any remaining interest we may have kept in the underlying equipment.
|
During the period of time that occurs between the initial funding of a contract to the funding of the contract on a permanent basis, we are exposed to full recourse liability
in case of default by the borrower. While we have typically been able to permanently fund our equipment and other contracts, we may not be able to permanently fund many of the contracts in our international portfolio. We are currently in the process of
securing permanent funding for our international portfolio and we are exploring opportunities to permanently fund our other financing services. Consequently, we may be subject to credit risk for a longer period. In some cases, this risk will extend over
the life of the contracts. In addition, the terms of securitizations and other types of structured finance transactions generally require us to replace or repurchase equipment and other contracts in the event they fail to conform to the representations
and warranties made by us, even in transactions otherwise designated as non-recourse or limited recourse.
Defaults by our customers could also adversely affect our ability to obtain additional financing in the future, including our ability to use securitization or other forms of
structured finance. The sources of such permanent funding take into account the credit performance of the equipment and other contracts we previously financed in deciding whether and on what terms to make new contracts. In addition, the credit rating
agencies often involved in securitizations consider prior credit performance in determining the rating to be given to the securities issued in the securitizations that we sponsor.
In June and December 1999, we purchased a total of $150.0 million of transfer and convertibility risk insurance from the Multilateral Investment Guarantee Agency (“
MIGA”), a division of the World Bank. This program will be used by MSF Holding Ltd., our 59%-owned joint venture business in Latin America, to cover the risks associated with transferring payments out of Brazil. The MIGA guarantee program will
eliminate certain capital allocations for lenders and assist DVI in obtaining favorable agency credit ratings needed for bank funding and sales of assets to investors through securitization.
In the past few years, we originated a significantly greater number of equipment, medical receivables and other contracts than we did previously. Because of this growth, our
managed net financed asset portfolio grew from $494.9 million at June 30, 1995 to $2.0 billion at June 30, 2000. In light of this growth, the historical performance of our contract portfolio, including rates of credit loss, may not be useful in predicting
future contract portfolio performance.
Since November 1997, we have provided interim real estate financing, mortgage loan placement, subordinated debt financing for assisted living facilities and, to a lesser
extent, merger and acquisition advisory services to the healthcare industry. More recently, we have also begun to offer asset-backed financing to emerging growth companies. We had not provided these products and services previously. We can not give any
assurance that we will be able to market these new products and services successfully or at all, or that if we are successful in marketing these products and services that their returns will be consistent with our historical financial results.
Competition
The business of financing medical equipment is highly competitive. We compete with equipment manufacturers that finance sales of their own equipment, finance subsidiaries of
national and regional commercial banks, and equipment leasing and financing companies. Many of our competitors have significantly greater financial and marketing resources than we do. In addition, the competition in the new markets we have recently
targeted, specifically the medical device financing market and the medical receivables financing market, may be greater than the levels of competition we have historically experienced.
We believe that a decrease in the number of competitors in the higher cost medical equipment financing market, combined with our high level of focus and experience in this
market, resulted in increased equipment contract origination during the past few years. We cannot give any assurance that new competitive providers of financing will not enter the medical equipment financing market in the future. To meet our long-term
growth objectives, we must increase our presence in our targeted markets for lower-cost medical device financing and medical receivables financing. To achieve this goal we may be required to reduce our margins to remain competitive.
Government Regulation
Although most states do not regulate the equipment financing business, certain states do require the licensing of lenders and financiers by requiring adequate disclosure of
certain contract terms and limitations on certain collection practices and creditor remedies. Some states impose limitations on interest rates and other charges. In addition, federal, state, local and international authorities regulate the operation of
certain types of diagnostic imaging and patient treatment equipment. For example, a shared service provider or healthcare provider using the equipment that we finance may be required to obtain and maintain approvals from governmental authorities to
service other healthcare providers with whom we have entered into service agreements. Failure by our customers to comply with these requirements could adversely affect their ability to meet their obligations to us. Our customers could be adversely
affected by changes in regulations that limit or prohibit the referral of patients by physicians who have invested in healthcare facilities that we finance.
Employees
As of June 30, 2000, the Company had 345 full-time employees consisting of:
Ÿ
|
56 sales and sales management personnel,
|
Ÿ
|
103 documentation and credit personnel,
|
Ÿ
|
66 accounting and treasury personnel and
|
Ÿ
|
112 other administrative and technical personnel.
|
None of our employees are covered by a collective bargaining agreement, and management believes that its relationship with its employees is good.
The Company leases all of its office buildings. Our principal executive offices are located in Jamison, Pennsylvania. We lease an aggregate of approximately 95,603 square
feet of office space worldwide. In addition, we own a 1,553 square-foot residential property located in Jamison, PA for use by those visiting our principal office on company business. We also own a 450 square-foot apartment unit in New York City for use
by Company officers while conducting business there.
| ITEM 3. |
|
LEGAL PROCEEDINGS |
We are not a party to any pending litigation or legal proceedings, or, to the best of our knowledge, any threatened litigation or legal proceedings, which, in the opinion of
management, individually or in the aggregate, would have a material adverse effect on our results of operations or financial condition.
| ITEM 4. |
|
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
There were no matters submitted to a vote of security holders during the three months ended June 30, 2000.
Executive Officers of the Registrant
As of June 30, 2000, the executive officers of DVI, Inc. were:
Name
|
|
Age
|
|
Position
|
| Michael A. O’Hanlon |
|
53 |
|
Director, President and Chief Executive Officer |
| Steven R. Garfinkel |
|
57 |
|
Executive Vice President and Chief Financial Officer |
| Richard E. Miller |
|
48 |
|
Executive Vice President and President, DVI Financial Services Inc. |
| Jozef J.M. Osten |
|
61 |
|
Executive Vice President and President, DVI Europe |
| Anthony J. Turek |
|
57 |
|
Executive Vice President and Chief Credit Officer |
| John P. Boyle |
|
50 |
|
Vice President and Chief Accounting Officer |
| Melvin C. Breaux |
|
59 |
|
Vice President, Secretary and General Counsel |
| Cynthia J. Cohn |
|
41 |
|
Vice President and Executive Vice President, DVI Business Credit Corp. |
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. Mr. O’Hanlon joined the Company in March 1993 and until September 1994 served as executive vice president. Mr. O’Hanlon became a director of the Company in November 1993. Before
joining the Company, Mr. O’Hanlon served for nine years 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 MBA
from the University of Connecticut and his Bachelor of Business Administration Degree from the Philadelphia College of Textiles and Science.
Steven R. Garfinkel is an executive vice president of the Company and its chief financial officer. Mr. Garfinkel also serves on the executive committee of the
Company. Mr. Garfinkel joined the Company in 1995. His responsibilities include corporate finance, loan funding, balance sheet management, treasury, accounting and financial reporting, internal control, financial and strategic planning, and human
resources. Mr. Garfinkel has extensive experience in developing and managing corporate finance relationships, money market funding, derivative hedging, financial planning and management information systems. Prior to joining the Company, Mr. Garfinkel
spent twenty-nine years with two large bank holding companies: CoreStates Financial Corp. and First Pennsylvania Corporation. For twenty years, he was either controller or treasurer of those organizations. Mr. Garfinkel received his Master of Business
Administration degree from Drexel University, and his Bachelor of Arts degree from Temple University.
Richard E. Miller is an executive vice president of the Company and president of DVI Financial Services Inc. He joined the Company in April 1994. Mr. Miller
also serves on the executive committee of the Company. His primary responsibility is to manage operations and the Company’s sales organization of financing specialists that interface directly with the Company’s customers. Before joining the
Company, he served for six years as vice president of sales for Toshiba America Medical Systems, a major manufacturer of medical imaging equipment. Previously, Mr. Miller was national sales manager for Thomsen CGR, a French manufacturer of medical imaging
equipment, which was acquired by General Electric Medical Systems. Mr. Miller received his Bachelor of Arts degree from Eastern College.
Jozef J.M. Osten is an executive vice president of the Company and President of DVI’s European operations. Mr. Osten joined the Company in January 1998.
Mr. Osten has over 30 years of financial experience gained with several international banks based in Europe and the U.S. In 1994, he accepted an assignment in Latin America, and most recently, Mr. Osten served as Chief Operating Officer for Surinvest
International Limited, a bank holding company based in Montevideo, Uruguay. From 1991 to 1994, Mr. Osten was managing director for Fennoscandia Bank, London, a subsidiary of Skop Bank, Helsinki, Finland. After a five-year assignment in Japan with the Bank
of California, Mr. Osten returned to the Netherlands in 1978 to head the foreign acquisition program at Netherlandsche Middenstandbank N.V. (now ING Bank) for ten years. Mr. Osten’s formal education included Aloysius College, The Hague, The
Netherlands and the University of Washington, from which he received a Bachelor of Arts degree in German literature. He is fluent in Dutch, English, German, French and Spanish.
Anthony J. Turek is an executive vice president and the chief credit officer of the Company. Mr. Turek has served in that capacity since joining the Company in
March 1988. Mr. Turek also serves on the executive committee of the Company. Before joining the Company, Mr. Turek was vice president of commercial banking at Continental Illinois National Bank (now a unit of Bank of America) from 1968 to 1988. For the
last five years of his tenure at Continental Illinois National Bank, Mr. Turek managed the equipment leasing and transportation divisions. His prior responsibilities included management positions in the special industries, metropolitan and national
divisions of Continental Illinois National Bank. Mr. Turek received his Master of Science degree from the University of Missouri and his Bachelor of Science degree from Iowa State University.
John P. Boyle is a vice president and chief accounting officer of the Company. Mr. Boyle joined the Company in January 1995. His primary responsibility is
managing the Company’s accounting, tax and financial reporting functions. Mr. Boyle is a General Securities Principal and a CPA with twenty years of experience in the financial services industry. Mr. Boyle spent five years of his professional career
with Peat Marwick Mitchell & Co. in Philadelphia. Beyond his accounting background, he has extensive experience in credit and corporate finance matters. Mr. Boyle received his Bachelor of Arts degree from Temple University.
Melvin C. Breaux is general counsel, secretary and a vice president of the Company, as well as general counsel and a vice president of DVI Financial Services
Inc. Before joining the Company in July 1995, Mr. Breaux was a partner in the Philadelphia, Pennsylvania law firm of Drinker, Biddle, & Reath for 17 years and an associate of the firm for 8 years. As a member of that firm’s banking and finance
department, he specialized in secured and unsecured commercial lending transactions, a wide variety of other financing transactions, and the general practice of business law. Mr. Breaux received his Juris Doctorate degree from the University of
Pennsylvania School of Law and his Bachelor of Arts degree from Temple
University.
Cynthia J. Cohn has been a vice president of the Company since October 1988 and executive vice president of DVI Business Credit Corporation since January 1994.
The Company has employed Ms. Cohn in a sales and management capacity since July 1986. She is responsible for the operating functions of DVI Business Credit Corporation, the Company’s medical receivables financing subsidiary. She served as an
assistant vice president from July 1987 to October 1988. Prior to joining the Company, Ms. Cohn served as research coordinator for Cantor, Fitzgerald Co., Inc., a stock brokerage firm, from February 1983 to July 1986, where she was responsible for
development and coordination of that firm’s research product for both institutional and retail clientele. Ms. Cohn received her Bachelor of Arts degree from Ithaca College. Ms. Cohn is the daughter of Gerald L. Cohn, a director of the Company.
For the purposes of calculating the aggregate market value of the shares of Common Stock of the Registrant held by nonaffiliates, as shown on the cover page of this report,
we assumed that all the outstanding shares were held by nonaffiliates except for the shares owned by directors and executive officers of the Company, by CIBC Trust Company and by the Ronald Baron group. However, we cannot be sure that all such persons or
entities are, in fact, affiliates of the Registrant, or that there are not other persons who may be deemed to be affiliates of the Registrant. Further information concerning shareholdings of officers, directors and principal shareholders is included in
our definitive proxy statement relating to our scheduled November 29, 2000 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission.
PART II
| ITEM 5. |
|
MARKET FOR THE COMPANY’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS |
Price Range of Common Stock
The common stock of DVI, Inc. is listed on the New York Stock Exchange. The following table sets forth high and low sales prices per share of common stock as reported on the
Composite Tape for the periods indicated:
| |
|
Year Ended June 30,
|
| |
|
2000
|
|
1999
|
| |
|
High
|
|
Low
|
|
High
|
|
Low
|
| First Quarter |
|
$17 1
/2
|
|
|
$15 |
1
/8
|
|
$25 1
/4
|
|
$13 7
/16 |
| Second Quarter |
|
16 1
/16
|
|
|
11 |
1
/4
|
|
19 5
/8
|
|
9 1
/2 |
| Third Quarter |
|
18 1
/16
|
|
|
13 |
3
/8
|
|
18 7
/8
|
|
12 5
/8 |
| Fourth Quarter |
|
17
|
|
|
12 |
9
/16
|
|
17 5
/8
|
|
12 1
/4 |
Dividend Policy
We have not declared or paid any cash dividends since our inception, and we anticipate that any future earnings will be retained for investment in our corporate operations.
Any declaration of dividends in the future will be determined in light of a number of factors affecting us at that time, including our earnings, financial condition, capital requirements, level of debt and the terms of any contractual limitations on
dividends. Our principal warehouse facility prohibits DVI Financial Services, our principal operating subsidiary, from paying cash dividends. In addition, the agreement with respect to our Senior Notes and Convertible Subordinated Notes places limitations
on the payment of dividends by the Company and its subsidiaries.
As of July 31, 2000, there were approximately 3,409 beneficial holders of the Company’s common stock.
| ITEM 6. |
|
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING INFORMATION |
(in thousands of dollars except share data)
| |
|
Year Ended June 30,
|
Statement of Operations Data
|
|
2000
|
|
1999
|
|
1998
|
|
1997
|
|
1996
|
|
|
| Finance and other income |
|
$ 143,372 |
|
$ 103,798 |
|
$ 74,355 |
|
$ 56,334 |
|
$ 49,038 |
| Interest expense |
|
78,943 |
|
60,850 |
|
49,212 |
|
38,395 |
|
30,489 |
| Net interest and other income |
|
64,429 |
|
42,948 |
|
25,143 |
|
17,939 |
|
18,549 |
| Net gain on sale of financing transactions |
|
25,728 |
|
29,813 |
|
20,977 |
|
14,039 |
|
8,032 |
Selling, general and administrative
expenses |
|
38,702 |
|
31,529 |
|
18,493 |
|
14,117 |
|
9,933 |
| Provision for losses on receivables |
|
9,477 |
|
6,301 |
|
4,735 |
|
2,386 |
|
2,325 |
Earnings before minority interest, equity
in net loss of investees, and provision
for income taxes |
|
41,978 |
|
34,931 |
|
22,892 |
|
15,475 |
|
14,323 |
| Net earnings |
|
23,442 |
|
19,668 |
|
12,858 |
|
8,563 |
|
8,165 |
| Basic earnings per share |
|
$ 1.65 |
|
$ 1.39 |
|
$ 1.12 |
|
$ 0.78 |
|
$ 0.82 |
| Diluted earnings per share |
|
$ 1.54 |
|
$ 1.30 |
|
$ 1.03 |
|
$ 0.74 |
|
$ 0.77 |
Weighted average number of dilutive
shares outstanding |
|
15,714 |
|
15,686 |
|
13,246 |
|
12,487 |
|
11,569 |
|
|
| |
|
June 30,
|
Balance Sheet Data
|
|
2000
|
|
1999
|
|
1998
|
|
1997
|
|
1996
|
| Cash and cash equivalents |
|
$ 6,353 |
|
$ 5,695 |
|
$ 15,192 |
|
$ 3,141 |
|
$ 2,391 |
| Restricted cash and cash equivalents |
|
73,691 |
|
36,744 |
|
47,582 |
|
32,515 |
|
32,550 |
| Net financed assets |
|
1,157,530 |
|
988,576 |
|
728,135 |
|
580,637 |
|
454,398 |
| Total assets |
|
1,333,784 |
|
1,096,272 |
|
828,490 |
|
647,191 |
|
568,142 |
| Borrowings under warehouse facilities |
|
306,610 |
|
270,434 |
|
83,064 |
|
45,203 |
|
168,108 |
| Long-term debt |
|
664,827 |
|
502,013 |
|
479,187 |
|
447,646 |
|
274,771 |
| Shareholders’ equity |
|
215,363 |
|
191,647 |
|
172,285 |
|
95,660 |
|
85,302 |
The Company has not declared or paid any cash dividends since its inception (see Dividend Policy).
| ITEM 7. |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Results of Operations
Impact of Financing Strategies on Results of Operations
Our financing strategy is to obtain permanent funding for most of our equipment and medical receivables contracts through securitization and contract sales. When funding
contracts through securitization, the issuer generally can structure the securitization so that the funding is treated for accounting purposes either as long-term debt secured by equipment or medical receivables contracts owned by us, or as a sale. The
manner in which income arising in those transactions is recognized for financial reporting purposes differs significantly depending on which of the two structures the issuer uses. When we sponsor a securitization structured as debt, we treat the proceeds
as long-term debt on our financial statements and report the amortization of finance income on those contracts. When we sell contracts, we recognize the discounted unamortized finance income at the time the funding takes place. However, even in a funding
treated as a sale, we may recognize servicing income and interest income on our subordinated interest in the securitization over the remaining term of the equipment contracts sold.
Over the past few years, we have focused our strategy on increasing our market share. We cannot give any assurance that our historical growth rate or current profitability
can be sustained in the future. Additionally, our expense levels are based in part on our expectations of future financing volumes. We may be unable to adjust our spending in a timely manner to compensate for a decrease in demand for financing of medical
equipment and receivables. Accordingly, operating results may be adversely impacted by future fluctuations in such demand. We believe that general economic conditions have not had a material adverse effect on our recent operating results. However, we
cannot give any assurance that general economic conditions will not have a material adverse effect on us in the future.
Year Ended June 30, 2000 Compared to Year Ended June 30, 1999
Total equipment financing contracts originated were $749.6 million in fiscal 2000 compared with $784.6 million in fiscal 1999, a decrease of 4.5%. Included in these amounts
were corporate acquisitions of $22.5 million and $59.7 million for fiscal 2000 and 1999, respectively. In addition, new business from DVI Capital, our wholesale leasing business division, decreased to $47.3 million in fiscal 2000 compared with $75.4
million in fiscal 1999. In March 2000, we closed the operations of this division (see Item 8, Note 16).
Net financed assets totaled $1.2 billion at June 30, 2000, an increase of $168.9 million or 17.1% over the prior year. Not included in net financed assets were the contracts
sold but still serviced by us, which increased to $877.7 million as of June 30, 2000 compared to $735.3 million as of June 30, 1999, an increase of 19.4%. Managed net financed assets, the aggregate of those appearing on our balance sheet and those which
have been sold and are still serviced by us, totaled $2.0 billion as of June 30, 2000, representing a 19.9% increase over the total as of June 30, 1999.
During fiscal 2000, new line of credit commitments in our medical receivables financing business were $99.9 million compared with $144.9 million in fiscal 1999, a decrease of
31.1%. This decrease is due to discontinued marketing efforts in certain lines of business during fiscal 2000. Net medical receivables funded at June 30, 2000 totaled $253.0 million, an increase of $65.6 million or 35.0% over the prior year.
Total finance and other income increased 38.1% to $143.4 million for the year ended June 30, 2000 from $103.8 million in the prior year. Finance income was $112.9 million for
the year ended June 30, 2000, or 9.8% of average net financed assets of $1.2 billion. This compares to $83.8 million for the 1999 fiscal year, which was 9.1% of that year’s average net financed assets of $916.5 million. This 34.8% increase in finance
income was largely due to the overall increase in the size of our loan portfolio and $5.8 million in loan fees recognized in fiscal 2000 that were related to the Corvis transaction (See Item 8, Note 20). Other income increased 52.2% to $30.5 million in
fiscal 2000 as compared to $20.0 million in fiscal 1999. Most of this increase was due to income realized from customer warrants not related to current lending activities of $11.8 million for the year ended June 30, 2000, compared to $1.7 million for the
year ended June 30, 1998. See Item 8, Note 7 for a summary of other income.
Interest expense was $78.9 million for the year ended June 30, 2000, or 6.8% of average net financed assets. This compares to $60.9 million of interest expense for fiscal
1999, which was 6.6% of average net financed assets during that year. The $18.0 million increase in interest expense can be directly attributed to higher levels of debt necessary to finance a larger average portfolio in 2000. The weighted average interest
rate on discounted receivables remained the same at 7.8% for fiscal years 2000 and 1999.
The net gain on sale of financing transactions decreased 13.7% to $25.7 million for the year ended June 30, 2000, representing 7.1% of the $364.4 million in contracts sold
that year. This compares to $29.8 million recognized in fiscal 1999, or 7.9% of the $376.6 million in contracts sold. The decrease in gains during this fiscal year is due to rising interest rates, volatility in the bond markets and widening spreads on
asset-backed paper.
Selling, general and administrative expenses (“SG&A”) increased 22.8% to $38.7 million for the year ended June 30, 2000 from $31.5 million for the year ended
June 30, 1999. The increase over the prior fiscal year is related primarily to our acquisitions, the development of our medical receivables and international businesses and our 30.0% growth in average managed net financed assets. To support this growth,
we increased our personnel to 345 employees from 283 one year earlier. See Item 8, Note 8 for a summary of the major components of SG&A expenses.
The allowance for losses was $14.3 million at June 30, 2000, or 0.72% of our managed portfolio, compared to $12.3 million at the end of the prior year, which represented
0.74% of the managed portfolio at that time. We made provisions for losses on receivables during fiscal 2000 of $9.5 million, compared to $6.3 million in the prior year. The increase in the provision during fiscal 2000 was the result of our 30.0% growth
in our average managed net financed assets. Our net charge-offs for the quarters ended September 30, 1999, December 31, 1999, March 31, 2000, and June 30, 2000 were $1.5 million, $2.5 million, $1.7 million, and $1.7 million, respectively, which represent
11.2%, 16.8%, 12.2%, and 12.2%, respectively, of the quarter-end allowance for losses. Recoveries on receivables previously charged off were insignificant for the year ended June 30, 2000.
Earnings before minority interest, equity in net loss of investees and provision for income taxes increased 20.2% to $42.0 million for the year ended June 30, 2000 compared
to $34.9 million a year earlier. Net earnings were $23.4 million or $1.54 per diluted share for the year ended June 30, 2000 as compared to net earnings of $19.7 million or $1.30 per diluted share in the prior year.
Year Ended June 30, 1999 Compared to Year Ended June 30, 1998
Total equipment financing contracts originated were $784.6 million in fiscal 1999 compared with $532.9 million in fiscal 1998, an increase of 47.2%. Net financed assets
totaled $988.6 million at June 30, 1999, an increase of $260.5 million or 35.8% over the prior year. Not included in net financed assets were the contracts sold but still serviced by us, which increased to $735.3 million as of June 30, 1999 compared to
$546.2 million as of June 30, 1998, an increase of 34.6%. Managed net financed assets, the aggregate of those appearing on our balance sheet and those which have been sold and are still serviced by us, totaled $1.7 billion as of June 30, 1999,
representing a 35.9% increase over the total as of June 30, 1998.
During fiscal 1999, new line of credit commitments in our medical receivables financing business were $144.9 million compared with $183.2 million in fiscal 1998, a decrease
of 20.9%. Net medical receivables funded at June 30, 1999 totaled $187.3 million, an increase of $50.0 million or 36.4% over the prior year.
Total finance and other income increased 39.6% to $103.8 million for the year ended June 30, 1999 from $74.4 million in the prior year. Finance income was $83.8 million for
the year ended June 30, 1999, or 9.1% of average net financed assets of $916.5 million. This compares to $63.3 million for the 1998 fiscal year, which was 9.3% of that year’s average net financed assets of $679.6 million. This 32.3% increase in
finance income was largely due to the overall increase in the size of our loan portfolio. Other income increased 81.5% to $20.0 million in fiscal 1999 as compared to $11.0 million in fiscal 1998. Other income in fiscal 1999 consisted primarily of medical
receivables fees, consulting and advisory fees, servicing fees, late charges, amounts received upon exercise of warrants issued by other companies, and contract fees and penalties. See Item 8, Note 7 for a summary of other income.
Interest expense was $60.9 million for the year ended June 30, 1999, or 6.6% of average net financed assets. This compares to $49.2 million of interest expense for fiscal
1998, which was 7.2% of average net financed assets during that year. Since $69.0 million of average net financed assets in fiscal 1999 were financed by an increase in average shareholders’ equity of that amount, the $11.7 million increase in
interest expense can be directly attributed to higher levels of debt necessary to finance a larger average portfolio in 1999. The weighted average interest rate on discounted receivables decreased to 7.8% for fiscal 1999 compared to 8.1% for fiscal 1998.
The net gain on sale of financing transactions increased 42.1% to $29.8 million for the year ended June 30, 1999, representing 7.9% of the $376.6 million in contracts sold
that year. This compares to $21.0 million recognized in fiscal 1998, or 7.2% of the $292.7 million in contracts sold. The increase in gain is principally due to the increased number of contracts sold in fiscal year 1999 and, to a lesser extent, better and
more efficient executions and lower transaction costs resulting from larger transactions.
Selling, general and administrative expenses (“SG&A”) increased 70.5% to $31.5 million for the year ended June 30, 1999 from $18.5 million for the year ended
June 30, 1998. The increase over the prior fiscal year is related primarily to our acquisitions, the development of our medical receivables and international businesses and our 35.0% growth in average managed net financed assets. To support this growth,
we increased our personnel to 283 employees from 193 one year earlier. See Item 8, Note 8 for a summary of the major components of SG&A expenses.
The allowance for losses was $12.3 million at June 30, 1999, or 0.74% of our managed portfolio, compared to $10.0 million at the end of the prior year, which represented
0.81% of the managed portfolio at that time. We made provisions for losses on receivables during fiscal 1999 of $6.3 million, compared to $4.7 million in the prior year. The increase in the provision was the result of the recognition of a higher loss than
previously anticipated resulting from the bankruptcy filing by Allegheny Health Education and Research Foundation (“Allegheny”). Our net charge-offs for the quarters ended September 30, 1998, December 31, 1998, March 31, 1999, and June 30, 1999
were $0.9 million, $2.8 million, $0.8 million, and $0.8 million, respectively, which represent 7.6%, 26.1%, 6.9%, and 6.9%, respectively, of the quarter-end allowance for losses. The increase in net charge-offs during the second quarter of fiscal 1999 is
the result of Allegheny’s bankruptcy filing. Recoveries on receivables previously charged off were insignificant for the year ended June 30, 1999.
Earnings before minority interest, equity in net loss of investees and provision for income taxes increased 52.6% to $34.9 million for the year ended June 30, 1999 compared
to $22.9 million a year earlier. Net earnings were $19.7 million or $1.30 per diluted share for the year ended June 30, 1999 as compared to net earnings of $12.9 million or $1.03 per diluted share in the prior year.
Liquidity and Capital Resources
General
As a result of the rapid growth of our domestic and international equipment financing businesses, our medical receivables financing business and our new financing services,
the amount of warehouse and permanent funding we require has significantly increased. We obtain warehouse funding from commercial and investment banks. These warehouse borrowings are full recourse obligations in which the lender has recourse against the
collateral pledged to secure our obligations and against the Company itself upon default. Our permanent funding is obtained principally on a limited recourse basis in which the lender’s primary recourse is against the pledged collateral and the
lender has only a limited ability to recover directly from us upon default. In the case of limited recourse funding, we retain some risk of loss because we share in any losses incurred, and/or we may forfeit any residual interest in the underlying sold or
permanently funded assets if defaults occur.
A substantial portion of our debt represents permanent funding of equipment contracts obtained on a limited recourse basis and is structured so that the cash flows from the
underlying contracts service the debt. Most of our warehouse borrowings are used to fund temporarily the equipment and medical receivables contracts. These borrowings are repaid with the proceeds obtained from the permanent funding and cash flows from the
underlying transactions.
To meet our requirements for increased warehouse funding, we have expanded our warehouse facilities with banks and have obtained warehouse facilities with investment banking
firms we use for our securitizations. To meet our requirement for increased permanent funding, we have enhanced our ability to fund equipment and medical receivables contracts. If suitable sources of both warehouse and permanent funding are not available
in the future, our growth will be limited and we may be forced to use less attractive funding sources in order to ensure liquidity.
In addition to the interim and permanent funding referred to above, our continued growth in contract origination and net financed receivables requires substantial amounts of
external funding, primarily to fund the reserve account or overcollateralization required by the securitizations and sales of our contracts. These funds essentially provide the credit enhancement for our leveraged investments in our contract portfolios,
and typically are obtained through sales of debt or equity securities.
Summary of Cash Flows
Our cash and cash equivalents at June 30, 2000 and June 30, 1999 were $6.4 million and $5.7 million, respectively. The following describes the changes from June 30, 1999 to
June 30, 2000 in the items that had the most significant impact on our cash flow during the year ended June 30, 2000.
Our net cash used in operating activities for the year ended June 30, 2000 was $4.5 million. The net cash provided by operating activities for the year ended June 30, 1999
was $4.9 million. Restricted cash increased $36.9 million in fiscal 2000 compared to a decrease of $10.8 million in fiscal 1999, a difference of $47.7 million. This increase can be attributed in part to the higher levels of cash escrow and collateral
coverage required by our November 1999 DVI Business Credit securitization agreement, as well as increased cash from additional borrowings at year-end. Accounts receivable increased $7.0 million in fiscal 2000 compared to an increase of $16.0 million in
fiscal 1999.
Our net cash used in investing activities for the year ended June 30, 2000 was $174.7 million compared to $225.5 million in the prior year. The decrease from the prior year
is attributed mainly to the fiscal 1999 acquisition of DVI SPG for approximately $77.5 million. Also in fiscal 1999, we made an investment in U.S. Cancer Care for $7.5 million and we sold our preferred shares in Diagnostic Imaging Services for $4.5
million. Notes collateralized by medical receivables increased $65.6 million.
Our net cash provided by financing activities for the year ended June 30, 2000 was $179.8 million compared to $211.1 million in the prior year. Proceeds from warehouse
borrowings, net of repayments, were $16.3 million for the year ended June 30, 2000, compared to $187.4 million in the prior year. Proceeds from long-term debt borrowings, net of repayments, were $162.8 million for the year ended June 30, 2000, compared to
$22.8 million in the prior year.
Warehouse Facilities
At June 30, 2000 we had available an aggregate of $677.2 million under various warehouse facilities for medical equipment and medical receivables financing, consisting of
$429.8 million available for domestic equipment contracts, $144.4 million for international contracts, and $103.0 million for medical receivables contracts. See Item 8, Note 6 for more detail on our warehouse lines of credit.
Permanent Funding Methods
We have completed 25 securitizations for medical equipment and medical receivables financings totaling approximately $2.9 billion, consisting of public debt issues totaling
$1.2 billion and private placements of debt and contract sales totaling $1.7 billion. We expect to continue to use securitization (on both a public and private basis) or other structured finance transactions as our principal means to permanently fund our
contracts for the foreseeable future. If for any reason we were to become unable to access the securitization market to permanently fund our contracts, the consequences for us would be materially adverse.
Our use of securitization significantly affects our need for warehouse facilities and our liquidity and capital requirements due to the amount of time required to assemble a
portfolio of contracts to be securitized. When using securitization, we are
required to hold contracts in warehouse facilities until a sufficient quantity, generally in excess of $75.0 million, is accumulated in order to attract investor interest
and to allow for a cost-effective placement. This increases our exposure to changes in interest rates and temporarily reduces our warehouse facility liquidity. See Item 7A and Item 8, Notes 2 and 17 for discussions about our efforts to manage this
exposure through hedging.
We have $230.0 million available under a facility with the option to sell to it certain equipment contracts. As of June 30, 2000, $75.9 million was sold to this facility. Our
obligations under this facility include servicing of the assets and assisting the owners in the securitization of the assets if the owners choose to do so.
In addition, we have investment agreements with two shareholders, the International Finance Corporation (an affiliate of the World Bank) (“IFC”) and the Netherlands
Development Finance Company (“FMO”), which provide for the borrowing of $15.0 million and $10.0 million respectively. Borrowings under this loan bear interest at 2.75% over the six-month LIBOR rate, payable semiannually in arrears. Full
principal loan repayment is due May 15, 2005. This loan is secured by granting perfected and registered first priority security interest of all lease/loan receivables assigned to IFC and FMO.
The agreements also provide for syndicated borrowings from IFC and FMO, for which we had $23.0 million outstanding at June 30, 2000. Borrowings under this loan bear interest
at 3.25% over the six-month LIBOR rate, payable semiannually in arrears. Principal loan repayment commences on November 15, 2000 and is to be paid in full on November 15, 2003. This loan is secured by granting perfected and registered first priority
security interest of all lease/loan receivables assigned to IFC and FMO.
As of June 30, 2000, management believes that the Company was in compliance with the financial covenants of these agreements.
Debt and Equity Offerings
On January 30, 1997, we completed a public offering of $100.0 million principal amount of 97
/8% Senior Notes due 2004 (“Senior Notes”). The agreement with respect to the Senior Notes contains, among other things, limitations on our ability to pay dividends and to make certain other kinds of payments. That agreement also
prohibits us from incurring additional indebtedness unless certain financial ratio tests are met. Currently, we have met these financial ratio tests and we are not prohibited from incurring additional debt. Interest on the notes is payable semi-annually
on February 1 and August 1 of each year. The Senior Notes will be redeemable at our option in whole or in part at any time on or after February 1, 2002 at specified redemption prices.
On October 30, 1997, we completed a private placement of 300,000 shares of DVI common stock with a group of European financial institutions for which we received net proceeds
of $4.9 million.
On April 24, 1998, we registered under the Securities Act of 1933, as amended (“Securities Act”), $500.0 million of common stock, preferred stock, depositary
shares, debt securities, and warrants with the Securities and Exchange Commission (“SEC”). The SEC declared the registration statement (Registration No. 333-50895) effective on May 4, 1998.
On May 28, 1998, we issued 2,300,000 shares of common stock through an underwritten public offering. The aggregate price to the public of such shares was $49.3 million and
the net proceeds we received were $46.6 million. In addition, on May 28, 1998, we issued 340,000 shares of common stock to certain DVI stockholders. The price to these stockholders and the net proceeds we received for these shares was $6.5 million.
On December 16, 1998, we completed a public offering of $55.0 million principal amount of 97
/8% Senior Notes due 2004. The agreement with respect to these Senior Notes contains substantially the same terms and limitations as those in the agreement for the $100.0 million Senior Notes issuance of January 30, 1997 discussed above.
On March 22, 1999, we registered under the Securities Act $600.0 million of Asset-Backed Securities issuable in series with the SEC. The SEC declared the registration
statement (Registration No. 333-74901) effective on July 12, 1999.
On January 12, 2000, we registered under the Securities Act $1.125 billion of Asset-Backed Securities issuable in series with the SEC. The SEC declared the registration
statement (Registration No. 333-94523) effective on January 24, 2000.
At June 30, 2000, approximately $388.8 million of common stock, preferred stock, depositary shares, debt securities and warrants remained registered and unissued under the
Securities Act.
We are using the proceeds from the debt and stock offerings of January 1997, May 1998 and December 1998:
Ÿ
|
To fund our growth, including increasing the amount of equipment and medical receivables contracts we can fund;
|
Ÿ
|
To develop our expanding international operations; and
|
Ÿ
|
For other working capital needs and general corporate purposes.
|
We believe that the cash available from our operating, investing and financing activities will be sufficient to fund our current needs for our equipment financing and medical
receivables businesses. However, we cannot give any assurance in this regard, and we may encounter liquidity problems that could affect our ability to meet such needs while attempting to withstand competitive pressures or adverse economic conditions.
Net Financed Assets
The following represents a summary of the components of net financed assets:
| |
|
Year Ended June 30,
|
(in thousands of dollars)
|
|
2000
|
|
1999
|
| Receivables in installments |
|
$ 898,063 |
|
|
$776,705 |
|
| Receivables and notes—related parties |
|
5,782 |
|
|
2,550 |
|
| Recourse credit enhancements |
|
43,222 |
|
|
62,106 |
|
| Net notes collateralized by medical receivables |
|
252,974 |
|
|
187,327 |
|
| Residual valuation |
|
40,271 |
|
|
27,761 |
|
| Unearned income |
|
(112,167 |
) |
|
(84,443 |
) |
| Equipment on operating leases |
|
29,385 |
|
|
16,570 |
|
| |
|
|
|
|
|
|
| Net financed assets |
|
$1,157,530 |
|
|
$988,576 |
|
| |
|
|
|
|
|
|
Income Tax Issues
Historically, we have deferred a portion of our federal and state income tax liabilities because of our ability to obtain depreciation deductions from transactions structured
as fair market value leases. In addition, we have structured all sales of financing transactions since the quarter ended June 30, 1997 as borrowings for tax purposes versus sales for book (GAAP) purposes. Future sales of financing transactions may also be
structured in this manner. Additionally, we believe our effective tax rate will increase moderately in future periods as a result of our inability to fully recognize taxes that have been paid in foreign countries for federal tax purposes, as well as our
inability to currently recognize tax benefits related to losses incurred by certain start-up foreign operations.
Inflation
We do not believe that inflation has had a material effect on our operating results during the past three years. We cannot give any assurance that our business will not be
affected by inflation in the future.
| ITEM 7A. |
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We are exposed to two primary types of market risk: interest rate risk and foreign currency exchange risk. We actively manage both of these risks.
Interest Rate Risk
The majority of our assets and liabilities are financial contracts with fixed and variable rates. Any mismatch between the repricing and maturity characteristics of our
assets and liabilities exposes us to interest rate risk when interest rates fluctuate. For example, our equipment loans are structured and permanently funded on a fixed-rate basis, but we use warehouse facilities until the permanent matched funding is
obtained. Since funds borrowed through warehouse facilities are obtained on a floating-rate basis, we are exposed to a certain degree of risk if interest rates rise and increase our borrowing costs. In addition, when we originate equipment loans, we base
our pricing in part on the spread we expect to achieve between the interest rate we charge our equipment loan customers and the effective interest cost we will pay when we permanently fund those loans. Increases in interest rates that increase our
permanent funding costs between the time the loans are originated and the time they are permanently funded could narrow, eliminate or even reverse this spread. In addition, changes in interest rates affect the fair market value of fixed rate assets and
liabilities. In a rising interest rate environment, fixed rate assets lose market value whereas fixed rate liabilities gain market value and vice versa.
To manage our interest rate risk, we employ a hedging strategy. We use derivative financial instruments such as forward rate agreements, Treasury locks, forward start swaps
and interest rate swaps, caps and collars to manage interest sensitivity adjustments from mismatches, the pricing of anticipated loan securitizations and sales, and interest rate spreads. We do not use derivative financial instruments for trading or
speculative purposes. We manage the credit risk of possible counterparty default in these derivative transactions by dealing exclusively with counterparties with investment grade ratings.
Before entering into a derivative transaction for hedging purposes, we determine that a high correlation exists between the change in the value of the hedged item and the
change in the value of the derivative from a movement in interest rates. High correlation means that the change in the value of the derivative will be substantially equal and opposite to the change in the value of the hedged asset or liability. We monitor
this correlation throughout the hedged period. If a high degree of correlation is not maintained, the hedge becomes ineffective, and gains or losses in the value of the derivative are recognized in income.
There can be no assurance that our hedging strategies or techniques will be effective, that our profitability will not be adversely affected during any period of change in
interest rates or that the costs of hedging will not exceed the benefits.
The following table provides information about certain financial instruments held that are sensitive to changes in interest rates. For assets and liabilities, the table
presents principal cash flows and related weighted average interest rates by expected maturity date at June 30, 2000. For derivative financial instruments, the table presents notional amounts and weighted average interest rates by expected (contractual)
maturity dates. These notional amounts generally are used to calculate the contractual payments to be exchanged under the contract. Weighted average variable rates, which are generally LIBOR-based, represent the interest rates in effect at June 30, 2000.
The information is presented in U.S. dollar equivalents, which is our reporting currency. The actual cash flows are denominated in U.S. dollars (US), Singapore dollars (SGD), Japanese yen (JPY), Australian dollars (AUD), British pounds (GBP) and Euro
(EUR), as indicated in parentheses. The table excludes investments in direct financing leases totaling $324.5 million in accordance with disclosure requirements, although our lease contracts are exposed to interest rate risk. The information does not
include any estimates for prepayments, reinvestment, refinancing or credit losses. See Item 8, Note 17 for a description of the methods used to determine fair value.
| |
|
Expected Maturity Date—Year Ended June 30,
|
|
There-
after
|
|
Total
|
|
Fair Value
|
(in thousands of dollars)
|
|
2001
|
|
2002
|
|
2003
|
|
2004
|
|
2005
|
| Rate-Sensitive Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate receivables in
installments (US) |
|
$ 83,113 |
|
|
$ 59,273 |
|
|
$36,726 |
|
|
$26,684 |
|
|
$16,804 |
|
|
$17,841 |
|
|
$240,441 |
|
|
$230,642 |
|
| Average interest rate |
|
9.74 |
% |
|
9.69 |
% |
|
9.68 |
% |
|
9.60 |
% |
|
9.64 |
% |
|
9.47 |
% |
|
9.74 |
% |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate receivables in
installments (SGD) |
|
$ 1,404 |
|
|
$ 442 |
|
|
$ 491 |
|
|
$ 547 |
|
|
$ 445 |
|
|
- |
|
|
$ 3,329 |
|
|
$ 3,059 |
|
| Average interest rate |
|
10.20 |
% |
|
10.68 |
% |
|
10.68 |
% |
|
10.68 |
% |
|
10.68 |
% |
|
- |
|
|
10.20 |
% |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate receivables in
installments (JPY) |
|
$ 3,755 |
|
|
$ 1,482 |
|
|
$ 1,564 |
|
|
$ 1,091 |
|
|
- |
|
|
- |
|
|
$ 7,892 |
|
|
$ 7,076 |
|
| Average interest rate |
|
5.66 |
% |
|
5.44 |
% |
|
5.44 |
% |
|
5.44 |
% |
|
- |
|
|
- |
|
|
5.66 |
% |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate receivables in
installments (AUD) |
|
$ 478 |
|
|
$ 215 |
|
|
$ 2 |
|
|
- |
|
|
- |
|
|
- |
|
|
$ 695 |
|
|
$ 610 |
|
| Average interest rate |
|
9.17 |
% |
|
8.71 |
% |
|
9.31 |
% |
|
- |
|
|
- |
|
|
- |
|
|
9.17 |
% |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate receivables in
installments (GBP) |
|
$ 44 |
|
|
$ 55 |
|
|
$ 61 |
|
|
$ 21 |
|
|
- |
|
|
- |
|
|
$ 181 |
|
|
$ 178 |
|
| Average interest rate |
|
11.00 |
% |
|
11.00 |
% |
|
11.00 |
% |
|
10.88 |
% |
|
- |
|
|
- |
|
|
11.00 |
% |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate receivables in
installments (EUR) |
|
$ 5,826 |
|
|
$ 5,805 |
|
|
$ 4,758 |
|
|
$ 4,827 |
|
|
$ 4,089 |
|
|
$ 3,608 |
|
|
$ 28,913 |
|
|
$ 26,219 |
|
| Average interest rate |
|
7.91 |
% |
|
8.23 |
% |
|
8.39 |
% |
|
8.42 |
% |
|
8.64 |
% |
|
9.41 |
% |
|
7.91 |
% |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating rate receivables in
installments (US) |
|
$ 52,882 |
|
|
$ 29,673 |
|
|
$19,352 |
|
|
$16,313 |
|
|
$ 6,585 |
|
|
$ 1,348 |
|
|
$126,153 |
|
|
$126,153 |
|
| Average interest rate |
|
9.07 |
% |
|
8.67 |
% |
|
8.76 |
% |
|
9.60 |
% |
|
9.65 |
% |
|
9.19 |
% |
|
9.07 |
% |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating rate notes
collateralized by medical
receivables (US) |
|
$170,613 |
|
|
$ 78,503 |
|
|
$ 4,613 |
|
|
$ 141 |
|
|
$ 3,614 |
|
|
- |
|
|
$257,484 |
|
|
$257,484 |
|
| Average interest rate |
|
11.46 |
% |
|
11.35 |
% |
|
10.93 |
% |
|
10.94 |
% |
|
11.00 |
% |
|
- |
|
|
11.46 |
% |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate recourse credit
enhancements (US) |
|
$ 10,626 |
|
|
$ 9,266 |
|
|
$12,148 |
|
|
$ 7,331 |
|
|
$ 3,154 |
|
|
$ 697 |
|
|
$ 43,222 |
|
|
$ 40,610 |
|
| Average interest rate |
|
6.90 |
% |
|
6.94 |
% |
|
6.84 |
% |
|
7.10 |
% |
|
7.40 |
% |
|
7.35 |
% |
|
6.90 |
% |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Totals |
| |
|
$328,741
|
|
|
$184,714
|
|
|
$79,715
|
|
|
$56,955
|
|
|
$34,691
|
|
|
$23,494
|
|
|
$708,310
|
|
|
$692,031
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average interest
rate |
|
10.36 |
% |
|
10.02 |
% |
|
8.94 |
% |
|
9.11 |
% |
|
9.48 |
% |
|
9.38 |
% |
|
9.97 |
% |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Derivatives Matched Against Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Interest Rate Swaps |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Pay variable rate swaps (US) |
|
- |
|
|
$ 5,000 |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
$ 5,000 |
|
|
$ (63 |
) |
Weighted average pay
rate |
|
- |
|
|
6.13 |
% |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
6.13 |
% |
|
|
|
Weighted average
receive rate |
|
- |
|
|
5.83 |
% |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
5.83 |
% |
|
|
|
| |
|
Expected Maturity Date — Year Ended June 30,
|
|
There–
after
|
|
Total
|
|
Fair
Value
|
(in thousands of dollars)
|
|
2001
|
|
2002
|
|
2003
|
|
2004
|
|
2005
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Rate–Sensitive Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable rate borrowings under warehouse
facilities (US) |
|
$235,867 |
|
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
$235,867 |
|
|
$235,867 |
| Average interest rate |
|
8.28 |
% |
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
8.28 |
% |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable rate borrowings under warehouse
facilities (AUD) |
|
$ 2,612 |
|
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
$ 2,612 |
|
|
$ 2,612 |
| Average interest rate |
|
7.00 |
% |
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
7.00 |
% |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable rate borrowings under warehouse
facilities (GBP) |
|
$ 12,068 |
|
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
|
|
|
$ 12,068 |
|
|
$12,068 |
| Average interest rate |
|
7.63 |
% |
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
7.63 |
% |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable rate borrowings under warehouse
facilities (JPY) |
|
$ 20,491 |
|
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
$ 20,491 |
|
|
$ 20,491 |
| Average interest rate |
|
2.63 |
% |
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
2.63 |
% |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable rate borrowings under warehouse
facilities (SGD) |
|
$ 8,186 |
|
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
$ 8,186 |
|
|
$ 8,186 |
| Average interest rate |
|
4.99 |
% |
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
4.99 |
% |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable rate borrowings under warehouse
facilities (EUR) |
|
$ 27,386 |
|
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
$ 27,386 |
|
|
$ 27,386 |
| Average interest rate |
|
5.61 |
% |
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
5.61 |
% |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fixed rate discounted receivables (US) |
|
$ 92,754 |
|
|
$67,776 |
|
|
$ 49,774 |
|
|
$ 30,648 |
|
|
$13,292 |
|
|
$ 2,765 |
|
|
$257,009 |
|
|
$255,330 |
| Average interest rate |
|
6.98 |
% |
|
7.08 |
% |
|
7.16 |
% |
|
7.41 |
% |
|
7.66 |
% |
|
7.74 |
% |
|
6.98 |
% |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Variable rate discounted receivables (US) |
|
$ 79,750 |
|
|
– |
|
|
$ 88,000 |
|
|
– |
|
|
– |
|
|
– |
|
|
$167,750 |
|
|
$167,750 |
| Average interest rate |
|
7.52 |
% |
|
– |
|
|
7.58 |
% |
|
– |
|
|
– |
|
|
– |
|
|
7.55 |
% |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Senior notes (US) |
|
– |
|
|
– |
|
|
– |
|
|
$155,000 |
|
|
– |
|
|
– |
|
|
$155,000 |
|
|
$140,500 |
| Average interest rate |
|
– |
|
|
– |
|
|
– |
|
|
9.88 |
% |
|
– |
|
|
– |
|
|
9.88 |
% |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other debt (US) |
|
$ 15,394 |
|
|
$11,291 |
|
|
$ 10,954 |
|
|
$ 2,000 |
|
|
$27,000 |
|
|
– |
|
|
$ 66,639 |
|
|
$ 66,489 |
| Average interest rate |
|
9.29 |
% |
|
9.66 |
% |
|
9.60 |
% |
|
8.34 |
% |
|
9.58 |
% |
|
– |
|
|
9.49 |
% |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other debt (GBP) |
|
$ 1,013 |
|
|
$ 1,120 |
|
|
$ 870 |
|
|
$ 308 |
|
|
$ 172 |
|
|
$ 1,046 |
|
|
$ 4,529 |
|
|
$ 4,070 |
| Average interest rate |
|
8.35 |
% |
|
8.33 |
% |
|
8.30 |
% |
|
7.72 |
% |
|
7.80 |
% |
|
7.80 |
% |
|
8.15 |
% |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Convertible sub notes (US) |
|
– |
|
|
$13,900 |
|
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
$ 13,900 |
|
|
$ 20,981 |
| Average interest rate |
|
– |
|
|
9.13 |
% |
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
9.13 |
% |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Totals |
|
$495,521 |
|
|
$94,087 |
|
|
$149,598 |
|
|
$187,956 |
|
|
$40,464 |
|
|
$ 3,811 |
|
|
$971,437 |
|
|
$961,730 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Average interest rate |
|
7.49 |
% |
|
7.71 |
% |
|
7.59 |
% |
|
9.46 |
% |
|
8.94 |
% |
|
7.76 |
% |
|
7.96 |
% |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Expected Maturity Date–Year Ended June 30,
|
|
There-
after
|
(in thousands of dollars)
|
|
2001
|
|
2002
|
|
2003
|
|
2004
|
|
2005
|
|
|
Total
|
|
Value
Fair
|
| Derivatives Matched Against Liabilities: |
| Interest Rate Swaps |
|
|
|
|
|
| Pay fixed rate swaps (US) |
|
$ 78,937 |
|
|
– |
|
|
– |
|
– |
|
$10,000 |
|
|
– |
|
$ 88,937 |
|
|
$ 103 |
|
| Weighted average pay rate |
|
7.48 |
% |
|
– |
|
|
– |
|
– |
|
5.84 |
% |
|
– |
|
7.30 |
% |
| Weighted average receive rate |
|
7.31 |
% |
|
– |
|
|
– |
|
– |
|
6.53 |
% |
|
– |
|
7.22 |
% |
|
|
| Pay fixed rate swaps (AUD) |
|
– |
|
|
$1,214 |
|
|
– |
|
– |
|
– |
|
|
– |
|
$ 1,214 |
|
|
$ 7 |
|
| Weighted average pay rate |
|
– |
|
|
5.56 |
% |
|
– |
|
– |
|
– |
|
|
– |
|
5.56 |
% |
| Weighted average receive rate |
|
– |
|
|
6.28 |
% |
|
– |
|
– |
|
– |
|
|
– |
|
6.28 |
% |
|
|
| Pay fixed rate swaps (EUR) |
|
$ 9,525 |
|
|
– |
|
|
– |
|
– |
|
$ 3,935 |
|
|
– |
|
$ 13,460 |
|
|
$ 87 |
|
| Weighted average pay rate |
|
4.35 |
% |
|
– |
|
|
– |
|
– |
|
4.97 |
% |
|
– |
|
4.53 |
% |
| Weighted average receive rate |
|
4.42 |
% |
|
– |
|
|
– |
|
– |
|
4.48 |
% |
|
– |
|
4.44 |
% |
|
|
| Treasury Locks (US) |
|
$ 50,000 |
|
|
– |
|
|
– |
|
– |
|
– |
|
|
– |
|
$ 50,000 |
|
|
$(486 |
) |
| Average strike rate |
|
6.87 |
% |
|
– |
|
|
– |
|
– |
|
– |
|
|
– |
|
6.87 |
% |
| Average index rate |
|
6.39 |
% |
|
– |
|
|
– |
|
– |
|
– |
|
|
– |
|
6.39 |
% |
|
|
| Interest Rate Caps (US) |
|
$ 40,000 |
|
|
– |
|
|
– |
|
– |
|
– |
|
|
– |
|
$ 40,000 |
|
|
$ 180 |
|
| Average strike rate |
|
6.38 |
% |
|
– |
|
|
– |
|
– |
|
– |
|
|
– |
|
6.38 |
% |
| Average index rate |
|
6.65 |
% |
|
– |
|
|
– |
|
– |
|
– |
|
|
– |
|
6.65 |
% |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Totals |
|
$178,462 |
|
|
$1,214 |
|
|
|
|
|
|
$13,935 |
|
|
|
|
$193,611 |
|
|
$(109 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison to Prior Year
The following table provides information about certain financial instruments held that are sensitive to changes in interest rates. For assets and liabilities, the table
presents principal cash flows and related weighted average interest rates by expected maturity date at June 30, 1999. For derivative financial instruments, the table presents notional amounts and weighted average interest rates by expected (contractual)
maturity dates. These notional amounts generally are used to calculate the contractual payments to be exchanged under the contract. Weighted average variable rates, which are generally LIBOR-based, represent the interest rates in effect at June 30, 1999.
The information is presented in U.S. dollar equivalents, which is our reporting currency. The actual cash flows are denominated in US dollars (US), Euro (EUR) and Australian dollars (AUD), as indicated in parentheses. The table excludes investments in
direct financing leases in accordance with disclosure requirements, although our lease contracts are exposed to interest rate risk. The information does not include any estimates for prepayments, reinvestment, refinancing or credit losses. See Item 8,
Note 17 for a description of the methods used to determine fair value.
| |
|
Expected Maturity Date – Year Ended June 30,
|
|
There-
after
|
|
Total
|
|
Fair Value
|
(in thousands of dollars)
|
|
2000
|
|
2001
|
|
2002
|
|
2003
|
|
2004
|
| Rate-Sensitive Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate receivables in
installments (US) |
|
$ 92,041 |
|
|
$ 59,360 |
|
|
$ 46,714 |
|
|
$ 27,515 |
|
|
$ 16,290 |
|
|
$ 13,226 |
|
|
$ 255,146 |
|
|
$ 246,264 |
|
| Average interest rate |
|
9.80 |
% |
|
9.72 |
% |
|
9.80 |
% |
|
9.85 |
% |
|
9.69 |
% |
|
9.81 |
% |
|
9.80 |
% |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate receivables in
installments (EUR) |
|
$ 3,512 |
|
|
$ 2,910 |
|
|
$ 2,613 |
|
|
$ 1,278 |
|
|
$ 1,008 |
|
|
$ 774 |
|
|
$ 12,095 |
|
|
$ 11,440 |
|
| Average interest rate |
|
8.99 |
% |
|
9.14 |
% |
|
9.18 |
% |
|
9.64 |
% |
|
9.45 |
% |
|
9.09 |
% |
|
8.99 |
% |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating rate receivables in
installments (US) |
|
$ 48,263 |
|
|
$ 28,173 |
|
|
$ 20,968 |
|
|
$ 13,872 |
|
|
$ 10,559 |
|
|
$ 727 |
|
|
$ 122,562 |
|
|
$ 122,562 |
|
| Average interest rate |
|
8.24 |
% |
|
7.16 |
% |
|
6.77 |
% |
|
7.27 |
% |
|
8.78 |
% |
|
6.32 |
% |
|
8.24 |
% |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating rate notes
collateralized by medical
receivables (US) |
|
$ 108,275 |
|
|
$ 66,357 |
|
|
$ 17,154 |
|
|
– |
|
|
– |
|
|
– |
|
|
$ 191,786 |
|
|
$ 191,786 |
|
| Average interest rate |
|
10.01 |
% |
|
10.10 |
% |
|
9.38 |
% |
|
– |
|
|
– |
|
|
– |
|
|
10.01 |
% |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate recourse credit
enhancements (US) |
|
$ 14,687 |
|
|
$ 12,430 |
|
|
$ 10,938 |
|
|
$ 13,363 |
|
|
$ 8,194 |
|
|
$ 2,494 |
|
|
$ 62,106 |
|
|
$ 57,974 |
|
| Average interest rate |
|
6.41 |
% |
|
6.31 |
% |
|
6.22 |
% |
|
6.31 |
% |
|
6.26 |
% |
|
6.19 |
% |
|
6.41 |
% |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Totals |
|
$ 266,778 |
|
|
$169,230 |
|
|
$ 98,387 |
|
|
$ 56,028 |
|
|
$ 36,051 |
|
|
$ 17,221 |
|
|
$ 643,695 |
|
|
$ 630,026 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Average interest rate |
|
9.41 |
% |
|
9.18 |
% |
|
8.67 |
% |
|
8.37 |
% |
|
8.64 |
% |
|
9.11 |
% |
|
9.22 |
% |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Derivatives Matched Against Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Interest Rate Swaps |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Pay fixed rate swaps (EUR) |
|
$ 7,229 |
|
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
$ 7,229 |
|
|
$ – |
|
| Weighted average pay rate |
|
3.70 |
% |
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
3.70 |
% |
|
|
|
| Weighted average receive rate |
|
5.37 |
% |
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
5.37 |
% |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Pay variable rate swaps (US) |
|
– |
|
|
– |
|
|
$ 5,000 |
|
|
– |
|
|
– |
|
|
– |
|
|
$ 5,000 |
|
|
$ (20 |
) |
| Weighted average pay rate |
|
– |
|
|
– |
|
|
5.08 |
% |
|
– |
|
|
– |
|
|
– |
|
|
5.08 |
% |
|
|
|
| Weighted average receive rate |
|
– |
|
|
– |
|
|
5.83 |
% |
|
– |
|
|
– |
|
|
– |
|
|
5.83 |
% |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Totals |
|
$ 7,229 |
|
|
|
|
|
$ 5,000 |
|
|
|
|
|
|
|
|
|
|
|
$ 12,229 |
|
|
$ (20 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Expected Maturity Date – Year Ended June 30,
|
|
There-
after
|
|
Total
|
|
Fair
Value
|
(in thousands of dollars)
|
|
2000
|
|
2001
|
|
2002
|
|
2003
|
|
2004
|
| Rate-Sensitive Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable rate borrowings
under warehouse facilities (US) |
|
$ 244,344 |
|
|
$ 10,000 |
|
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
$ 254,344 |
|
|
$ 254,344 |
| Average interest rate |
|
6.68 |
% |
|
6.34 |
% |
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
6.67 |
% |
|
|
|
|
Variable rate borrowings
under warehouse facilities (AUD) |
|
$ 1,939 |
|
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
$ 1,939 |
|
|
$ 1,939 |
| Average interest rate |
|
6.11 |
% |
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
6.11 |
% |
|
|
|
|
Variable rate borrowings
under warehouse facilities (EUR) |
|
$ 9,263 |
|
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
$ 9,263 |
|
|
$ 9,263 |
| Average interest rate |
|
4.49 |
% |
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
4.49 |
% |
|
|
|
|
Variable rate borrowings
under warehouse facilities (GBP) |
|
– |
|
|
$ 4,887 |
|
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
$ 4,887 |
|
|
$ 4,887 |
| Average interest rate |
|
– |
|
|
6.73 |
% |
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
6.73 |
% |
|
|
|
|
Fixed rate discounted
receivables (US) |
|
$ 81,435 |
|
|
$ 52,262 |
|
|
$ 27,007 |
|
|
$ 12,715 |
|
|
$ 2,497 |
|
|
$ 644 |
|
|
$ 176,560 |
|
|
$ 177,279 |
| Average interest rate |
|
6.90 |
% |
|
6.45 |
% |
|
6.25 |
% |
|
6.16 |
% |
|
6.14 |
% |
|
6.14 |
% |
|
6.90 |
% |
|
|
|
|
Variable rate discounted
receivables (US) |
|
$ 25,000 |
|
|
$ 75,000 |
|
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
$ 100,000 |
|
|
$ 100,000 |
| Average interest rate |
|
7.17 |
% |
|
5.75 |
% |
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
6.11 |
% |
|
|
|
|
| Senior notes (US) |
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
$155,000 |
|
|
– |
|
|
$ 155,000 |
|
|
$ 150,350 |
| Average interest rate |
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
9.88 |
% |
|
– |
|
|
9.88 |
% |
|
|
|
|
| Other debt (US) |
|
$ 8,573 |
|
|
$ 8,525 |
|
|
$ 6,571 |
|
|
$ 5,884 |
|
|
$ 2,000 |
|
|
$25,000 |
|
|
$ 56,553 |
|
|
$ 56,385 |
| Average interest rate |
|
8.40 |
% |
|
8.38 |
% |
|
8.36 |
% |
|
8.38 |
% |
|
8.34 |
% |
|
7.85 |
% |
|
8.15 |
% |
|
|
|
|
| Convertible sub notes (US) |
|
– |
|
|
– |
|
|
$ 13,900 |
|
|
– |
|
|
– |
|
|
– |
|
|
$ 13,900 |
|
|
$ 22,456 |
| Average interest rate |
|
– |
|
|
– |
|
|
9.13 |
% |
|
– |
|
|
– |
|
|
– |
|
|
9.13 |
% |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Totals |
|
$ 370,554 |
|
|
$ 150,674 |
|
|
$ 47,478 |
|
|
$ 18,599 |
|
|
$159,497 |
|
|
$25,644 |
|
|
$ 772,446 |
|
|
$ 776,903 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Average interest rate |
|
6.74 |
% |
|
6.21 |
% |
|
7.39 |
% |
|
6.86 |
% |
|
9.80 |
% |
|
7.81 |
% |
|
7.35 |
% |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Expected Maturity Date–Year Ended June 30,
|
|
There-
after
|
|
Total
|
|
Fair
Value
|
(in thousands of dollars)
|
|
2000
|
|
2001
|
|
2002
|
|
2003
|
|
2004
|
| Derivatives Matched Against Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Interest Rate Swaps |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Pay fixed rate swaps (US) |
|
– |
|
|
– |
|
– |
|
|
– |
|
– |
|
$10,000 |
|
|
$ 10,000 |
|
|
$ 48 |
|
| Weighted average pay rate |
|
– |
|
|
– |
|
– |
|
|
– |
|
– |
|
5.84 |
% |
|
5.84 |
% |
|
|
|
| Weighted average receive rate |
|
– |
|
|
– |
|
– |
|
|
– |
|
– |
|
5.65 |
% |
|
5.65 |
% |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Pay fixed rate swaps (AUD) |
|
– |
|
|
– |
|
$2,422 |
|
|
– |
|
– |
|
– |
|
|
$ 2,422 |
|
|
$ – |
|
| Weighted average pay rate |
|
– |
|
|
– |
|
5.56 |
% |
|
– |
|
– |
|
– |
|
|
5.56 |
% |
|
|
|
| Weighted average receive rate |
|
– |
|
|
– |
|
4.84 |
% |
|
– |
|
– |
|
– |
|
|
4.84 |
% |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Interest Rate Caps (US) |
|
$ 50,000 |
|
|
– |
|
– |
|
|
– |
|
– |
|
– |
|
|
$ 50,000 |
|
|
$ – |
|
| Average strike rate |
|
5.80 |
% |
|
– |
|
– |
|
|
– |
|
– |
|
– |
|
|
5.80 |
% |
|
|
|
| Average index rate |
|
5.24 |
% |
|
– |
|
– |
|
|
– |
|
– |
|
– |
|
|
5.24 |
% |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Interest Rate Floors (US) |
|
$ 50,000 |
|
|
– |
|
– |
|
|
– |
|
– |
|
– |
|
|
$ 50,000 |
|
|
$ (24 |
) |
| Average strike rate |
|
5.50 |
% |
|
– |
|
– |
|
|
– |
|
– |
|
– |
|
|
5.50 |
% |
|
|
|
| Average index rate |
|
5.24 |
% |
|
– |
|
– |
|
|
– |
|
– |
|
– |
|
|
5.24 |
% |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Treasury Locks (US) |
|
$400,000 |
|
|
– |
|
– |
|
|
– |
|
– |
|
– |
|
|
$400,000 |
|
|
$ 609 |
|
| Average strike rate |
|
5.54 |
% |
|
– |
|
– |
|
|
– |
|
– |
|
– |
|
|
5.54 |
% |
|
|
|
| Average index rate |
|
5.56 |
% |
|
– |
|
– |
|
|
– |
|
– |
|
– |
|
|
5.56 |
% |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Totals |
|
$500,000 |
|
|
|
|
$2,422 |
|
|
|
|
|
|
$10,000 |
|
|
$512,422 |
|
|
$ 633 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total rate-sensitive assets increased $64.6 million from the prior year. This increase was due to an increase in loans collateralized by medical receivables of $65.6 million
and additional fixed rate loans of $19.1 million from the full consolidation of MEC, our Asian joint venture (see Item 8, Note 4). These increases were offset by a decrease in our recourse credit enhancements of $18.9 million. The reduction in our
recourse credit enhancements was due to the full amortization of older securitizations with higher levels of credit enhancement than current securitizations.
Total rate-sensitive liabilities increased $199.0 million from the prior year. This increase was due to an additional $34.8 million in warehouse borrowings resulting from the
full consolidation of MEC, several new international borrowing facilities and the completion of a medical receivables securitization and two medical equipment securitizations.
Current and prior year derivative positions represent the hedging of anticipated equipment securitizations and interest rate swaps and caps to convert floating rate
borrowings to fixed rates in order to minimize the interest rate mismatch to fixed rate assets. Changes in the overall derivative positions held at June 30, 2000 and 1999 reflect the changes in the Company’s exposures in its financial contracts.
Foreign Currency Exchange Rate Risk
We have international operations and foreign currency exposures due to lending in some areas in local currencies. As a general practice, we have not hedged the foreign
exchange exposure related to either the translation of overseas earnings into U.S. dollars or the translation of overseas equity positions back to U.S. dollars. Our preferred method for minimizing foreign currency transaction exposure is to fund local
currency assets with local currency borrowings. For specific local currency-denominated receivables or for a portfolio of local currency-denominated receivables for a specific period of time, hedging with derivative financial instruments may be necessary
to manage the foreign currency exposure derived from funding in U.S. dollars. The types of derivative instruments used are foreign exchange forward contracts and cross-currency interest rate swaps.
The following table provides information about certain financial instruments held that are sensitive to changes in foreign exchange rates. For assets and liabilities, the
table presents principal cash flows and related weighted average interest rates by expected maturity date at June 30, 2000. For foreign currency forward exchange agreements, the table presents notional amounts and weighted average exchange rates by
contractual maturity dates. These notional amounts generally are used to calculate the contractual payments to be exchanged under the contract. The information is presented in U.S. dollar equivalents, which is our reporting currency. The actual cash flows
are denominated in Singapore dollars (SGD), Japanese yen (JPY), Australian dollars (AUD), British pounds (GBP) and Euro (EUR), as indicated in parentheses. The table excludes investments in direct financing leases totaling $35.1 million in accordance with
disclosure requirements, although our lease contracts are exposed to foreign currency rate risk. The information does not include any estimates for prepayments, reinvestment, refinancing or credit losses. See Item 8, Note 17 for a description of the
methods used to determine fair value.
| |
|
Expected Maturity Date—Year Ended June 30,
|
|
There-
after
|
|
Total
|
|
Fair
Value
|
(in thousands of dollars)
|
|
2001
|
|
2002
|
|
2003
|
|
2004
|
|
2005
|
| Foreign Currency Sensitive Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate receivables in
installments (SGD) |
|
$ 1,404 |
|
|
$ 442 |
|
|
$ 491 |
|
|
$ 547 |
|
|
$ 445 |
|
|
– |
|
|
$ 3,329 |
|
|
$ 3,059 |
|
| Average interest rate |
|
10.20 |
% |
|
10.68 |
% |
|
10.68 |
% |
|
10.68 |
% |
|
10.68 |
% |
|
– |
|
|
10.20 |
% |
|
|
|
|
|
Fixed rate receivables in
installments (JPY) |
|
$ 3,755 |
|
|
$ 1,482 |
|
|
$ 1,564 |
|
|
$ 1,091 |
|
|
– |
|
|
– |
|
|
$ 7,892 |
|
|
$ 7,076 |
|
| Average interest rate |
|
5.66 |
% |
|
5.44 |
% |
|
5.44 |
% |
|
5.44 |
% |
|
– |
|
|
– |
|
|
5.66 |
% |
|
|
|
|
|
Fixed rate receivables in
installments (AUD) |
|
$ 478 |
|
|
$ 215 |
|
|
$ 2 |
|
|
– |
|
|
– |
|
|
– |
|
|
$ 695 |
|
|
$ 610 |
|
| Average interest rate |
|
9.17 |
% |
|
8.71 |
% |
|
9.31 |
% |
|
– |
|
|
– |
|
|
– |
|
|
9.17 |
% |
|
|
|
|
|
Fixed rate receivables in
installments (GBP) |
|
$ 44 |
|
|
$ 55 |
|
|
$ 61 |
|
|
$ 21 |
|
|
– |
|
|
– |
|
|
$ 181 |
|
|
$ 178 |
|
| Average interest rate |
|
11.00 |
% |
|
11.00 |
% |
|
11.00 |
% |
|
10.88 |
% |
|
– |
|
|
– |
|
|
11.00 |
% |
|
|
|
|
|
Fixed rate receivables in
installments (EUR) |
|
$ 5,826 |
|
|
$ 5,805 |
|
|
$ 4,758 |
|
|
$ 4,827 |
|
|
$ 4,089 |
|
|
$ 3,608 |
|
|
$ 28,913 |
|
|
$ 26,219 |
|
| Average interest rate |
|
7.91 |
% |
|
8.23 |
% |
|
8.39 |
% |
|
8.42 |
% |
|
8.64 |
% |
|
9.41 |
% |
|
7.91 |
% |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Totals |
|
$ 11,507 |
|
|
$ 7,999 |
|
|
$ 6,876 |
|
|
$ 6,486 |
|
|
$ 4,534 |
|
|
$ 3,608 |
|
|
$ 41,010 |
|
|
$ 37,142 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Average interest rate |
|
7.52 |
% |
|
7.88 |
% |
|
7.90 |
% |
|
8.12 |
% |
|
8.84 |
% |
|
9.41 |
% |
|
7.70 |
% |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Derivatives Matched Against Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Foreign Exchange Agreements |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Receive US$ / Pay EUR |
|
$ 12,252 |
|
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
$ 12,252 |
|
|
$ (88 |
) |
Avg. contractual exchange
rate |
|
0.95 |
|
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
0.95 |
|
|
|
|
| |
|
Expected Maturity Date—Year Ended June 30,
|
|
There-
after
|
|
Total
|
|
Fair
Value
|
(in thousands of dollars)
|
|
2001
|
|
2002
|
|
2003
|
|
2004
|
|
2005
|
| Foreign Currency Sensitive Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable rate borrowings under
warehouse facilities (AUD) |
|
$ 2,612 |
|
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
$ 2,612 |
|
|
$ 2,612 |
| Average interest rate |
|
7.00 |
% |
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
7.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable rate borrowings under
warehouse facilities (GBP) |
|
$ 12,068 |
|
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
$ 12,068
|
|
|
$ 12,068 |
| Average interest rate |
|
7.63 |
% |
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
7.63 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable rate borrowings under
warehouse facilities (JPY) |
|
$ 20,491 |
|
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
$ 20,491 |
|
|
$ 20,491 |
| Average interest rate |
|
2.63 |
% |
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
2.63 |
% |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable rate borrowings under
warehouse facilities (SGD) |
|
$ 8,186 |
|
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
$ 8,186 |
|
|
$ 8,186 |
| Average interest rate |
|
4.99 |
% |
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
4.99 |
% |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable rate borrowings under
warehouse facilities (EUR) |
|
$ 27,386 |
|
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
$ 27,386 |
|
|
$ 27,386 |
| Average interest rate |
|
5.61 |
% |
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
5.61 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other debt (GBP) |
|
$ 1,013 |
|
|
$ 1,120 |
|
|
$ 870 |
|
|
$ 308 |
|
|
$ 172 |
|
|
$ 1,046 |
|
|
$ 4,529 |
|
|
$ 4,070 |
| Average interest rate |
|
8.35 |
% |
|
8.33 |
% |
|
8.30 |
% |
|
7.72 |
% |
|
7.80 |
% |
|
7.80 |
% |
|
8.15 |
% |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Totals |
|
$ 71,756 |
|
|
$ 1,120 |
|
|
$ 870 |
|
|
$ 308 |
|
|
$ 172 |
|
|
$ 1,046 |
|
|
$ 75,272
|
|
|
$ 74,813 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Average interest rate |
|
5.12 |
% |
|
8.33 |
% |
|
8.30 |
% |
|
7.72 |
% |
|
7.80 |
% |
|
7.80 |
% |
|
5.26 |
% |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides information about certain financial instruments held that are sensitive to changes in foreign exchange rates. For assets and liabilities, the
table presents principal cash flows and related weighted average interest rates by expected maturity date at June 30, 1999. For foreign currency forward exchange agreements, the table presents notional amounts and weighted average exchange rates by
contractual maturity dates. These notional amounts generally are used to calculate the contractual payments to be exchanged under the contract. The information is presented in U.S. dollar equivalents, which is our reporting currency. The actual cash flows
are denominated in Euros (EUR), Australian dollars (AUD) and British pounds (GBP), as indicated in parentheses. The table excludes investments in direct financing leases in accordance with disclosure requirements, although our lease contracts are exposed
to foreign currency rate risk. The information does not include any estimates for prepayments, reinvestment, refinancing or credit losses. See Item 8, Note 17 for a description of the methods used to determine fair value.
| |
|
Expected Maturity Date – Year Ended June 30,
|
|
There-
after
|
|
Total
|
|
Fair
Value
|
| (in thousands of dollars)
|
|
2000
|
|
2001
|
|
2002
|
|
2003
|
|
2004
|
|
|
| Foreign Currency Sensitive Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate receivables in
installments (EUR) |
|
$ 3,512 |
|
|
$ 2,910 |
|
|
$2,613 |
|
|
$1,278 |
|
|
$ 1,008 |
|
|
$ 774 |
|
|
$ 12,095 |
|
|
$ 11,440 |
| Average interest rate |
|
8.99 |
% |
|
9.14 |
% |
|
9.18 |
% |
|
9.65 |
% |
|
9.45 |
% |
|
9.09 |
% |
|
8.99 |
% |
|
|
|
|
| Derivatives Matched Against Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Foreign Exchange Agreements |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Receive US$ / Pay EUR |
|
$13,938 |
|
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
$ 13,938 |
|
|
$ 780 |
| Avg. contractual exchange rate |
|
1.09 |
|
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
1.09 |
|
|
|
|
|
| Foreign Currency Sensitive Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Warehouse borrowings (EUR) |
|
$ 9,263 |
|
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
$ 9,263 |
|
|
$ 9,263 |
| Average interest rate |
|
4.49 |
% |
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
4.49 |
% |
|
|
|
|
| Warehouse borrowings (AUD) |
|
$ 1,939 |
|
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
$ 1,939 |
|
|
$ 1,939 |
| Average interest rate |
|
6.11 |
% |
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
6.11 |
% |
|
|
|
|
| Warehouse borrowings (GBP) |
|
– |
|
|
$ 4,887 |
|
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
$ 4,887 |
|
|
$ 4,887 |
| Average interest rate |
|
– |
|
|
6.73 |
% |
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
6.73 |
% |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Totals |
|
$11,202 |
|
|
$ 4,887 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$16,089 |
|
|
$ 16,089 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Average interest rate |
|
4.77 |
% |
|
6.73 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
5.37 |
% |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total foreign currency sensitive assets increased $28.9 million from the prior year. $19.1 million of this increase was due to the full consolidation of MEC, and the
remainder was due to the growth in our international portfolio.
Total foreign currency sensitive liabilities increased $59.2 million from the prior year. $34.8 million of this increase was due to additional warehouse borrowings from the
full consolidation of MEC and the remainder from new international borrowing facilities.
The current and prior year derivative positions are forward sales of currencies to hedge foreign currency denominated assets funded on a short-term basis with U.S. dollars.
Recent Accounting Developments
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements", outlines the accounting for revenue recognition and includes both broad conceptual discussions as well as certain industry–specific
guidance. Based on these guidelines, it states that revenue should not be recognized until it is realized or realizable and earned. We have implemented SAB 101 in the current financial statements and it has not had a material impact on the results of
operations.
On July 1, 2000, we adopted SFAS 133. The recognition of the fair value of all freestanding derivative instruments resulted in recording liabilities in the amount of
$260,000. The transition adjustment for derivatives in cash flow hedges was to record a liability of $380,000 and was recognized as a cumulative-effect-type adjustment in accumulated other comprehensive income. The transition adjustment for derivatives in
fair value hedges was to record an asset of $56,000 and was recognized as a cumulative-effect-type adjustment to net income. This adjustment was offset by the adjustment of the carrying value of the hedged assets. The transition adjustment for derivatives
in hedges of net investments in foreign operations was to record a liability of $88,000 and was recognized as a cumulative-effect-type adjustment in cumulative translation adjustment.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
Any statements contained in this Form 10-K that 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 our 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 our Securities and Exchange Commission filings.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of the Company and its subsidiaries are filed on the pages listed below, as part of Part II, Item 8.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
INDEPENDENT AUDITORS’ REPORT
Board of Directors and Shareholders
DVI, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of DVI, Inc. and its subsidiaries (the “Company”) as of June 30, 2000 and 1999, and the related
consolidated statements of operations, shareholders’ equity and cash flows for each of the three years in the period ended June 30, 2000. These financial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of DVI, Inc. and its subsidiaries as of June 30, 2000
and 1999, and the consolidated results of their operations and their cash flows for each of the three years in the period ended June 30, 2000 in conformity with accounting principles generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
Parsippany, New Jersey
August 18, 2000
DVI, Inc. and Subsidiaries
Consolidated Balance Sheets
| Assets |
|
|
|
|
(in thousands of dollars except share data)
|
|
June 30,
2000
|
|
June 30,
1999
|
| Cash and cash equivalents |
|
$ 6,353 |
|
|
$ 5,695 |
|
| Restricted cash and cash equivalents |
|
73,691 |
|
|
36,744 |
|
| Accounts receivable |
|
36,818 |
|
|
29,867 |
|
| Investments |
|
10,116 |
|
|
10,814 |
|
| Contract receivables: |
|
|
|
|
|
|
Investment in direct financing leases and notes secured by equipment or medical
receivables: |
|
|
|
|
|
|
| Receivables in installments |
|
898,063 |
|
|
776,705 |
|
| Receivables and notes—related parties |
|
5,782 |
|
|
2,550 |
|
| Recourse credit enhancements |
|
43,222 |
|
|
62,106 |
|
| Net notes collateralized by medical receivables |
|
252,974 |
|
|
187,327 |
|
| Residual valuation |
|
40,271 |
|
|
27,761 |
|
| Unearned income |
|
(112,167 |
) |
|
(84,443 |
) |
| |
|
|
|
|
|
|
Net investment in direct financing leases and notes secured by equipment or
medical receivables |
|
1,128,145 |
|
|
972,006 |
|
| Less: Allowance for losses on receivables |
|
(14,307 |
) |
|
(12,279 |
) |
| |
|
|
|
|
|
|
| Net contract receivables |
|
1,113,838 |
|
|
959,727 |
|
Equipment on operating leases (net of accumulated depreciation of $9,155 and
$6,464, respectively) |
|
29,385 |
|
|
16,570 |
|
| Repossessed assets |
|
18,624 |
|
|
1,680 |
|
Furniture and fixtures (net of accumulated depreciation of $5,261 and $3,900,
respectively) |
|
4,670 |
|
|
4,970 |
|
| Goodwill, net |
|
9,649 |
|
|
10,359 |
|
| Other assets |
|
30,640 |
|
|
19,846 |
|
| |
|
|
|
|
|
|
| Total assets |
|
$1,333,784 |
|
|
$1,096,272 |
|
| |
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
DVI, Inc. and Subsidiaries
Consolidated Balance Sheets, continued
Liabilities and Shareholders’ Equity
(in thousands of dollars except share data)
|
|
June 30,
2000
|
|
June 30,
1999
|
| Accounts payable |
|
$ 64,036 |
|
|
$ 63,010 |
|
| Accrued expenses and other liabilities |
|
24,749 |
|
|
24,769 |
|
| Borrowings under warehouse facilities |
|
306,610 |
|
|
270,434 |
|
| Long-term debt: |
|
|
|
|
|
|
| Discounted receivables (primarily limited recourse) |
|
424,759 |
|
|
276,560 |
|
| 9 7
/8% Senior notes due 2004 |
|
155,000 |
|
|
155,000 |
|
| Other debt |
|
71,168 |
|
|
56,553 |
|
| Convertible subordinated notes |
|
13,900 |
|
|
13,900 |
|
| |
|
|
|
|
|
|
| Total long-term debt |
|
664,827 |
|
|
502,013 |
|
| |
|
|
|
|
|
|
| Deferred income taxes |
|
50,414 |
|
|
36,696 |
|
| Total liabilities |
|
1,110,636 |
|
|
896,922 |
|
| Commitments and contingencies (Note 14) |
| Minority interest in consolidated subsidiaries |
|
7,785 |
|
|
7,703 |
|
| Shareholders’ equity: |
|
|
|
|
|
|
| Preferred stock, $10.00 par value; authorized 100,000 shares; no shares issued
|
|
|
|
|
|
|
Common stock, $.005 par value; authorized 25,000,000 shares; outstanding
14,222,974 and 14,168,608 shares, respectively |
|
71 |
|
|
71 |
|
| Additional capital |
|
135,346 |
|
|
134,610 |
|
| Retained earnings |
|
82,497 |
|
|
59,055 |
|
| Accumulated other comprehensive loss |
|
(2,551 |
) |
|
(2,089 |
) |
| |
|
|
|
|
|
|
| Total shareholders’ equity |
|
215,363 |
|
|
191,647 |
|
| |
|
|
|
|
|
|
| Total liabilities and shareholders’ equity |
|
$1,333,784 |
|
|
$1,096,272 |
|
| |
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
DVI, Inc. and Subsidiaries
Consolidated Statements of Operations
| |
|
Year Ended June 30,
|
(in thousands of dollars except share data)
|
|
2000
|
|
1999
|
|
1998
|
| Finance and other income: |
|
|
|
|
|
|
|
|
| Amortization of finance income |
|
$ 112,916 |
|
$ 83,791 |
|
|
$ 63,332 |
|
| Other income |
|
30,456 |
|
20,007 |
|
|
11,023 |
|
| |
|
|
|
|
|
|
|
|
| Total finance and other income |
|
143,372 |
|
103,798 |
|
|
74,355 |
|
| Interest expense |
|
78,943 |
|
60,850 |
|
|
49,212 |
|
| |
|
|
|
|
|
|
|
|
| Net interest and other income |
|
64,429 |
|
42,948 |
|
|
25,143 |
|
| Net gain on sale of financing transactions |
|
25,728 |
|
29,813 |
|
|
20,977 |
|
| |
|
|
|
|
|
|
|
|
| Net operating income |
|
90,157 |
|
72,761 |
|
|
46,120 |
|
| Selling, general and administrative expenses |
|
38,702 |
|
31,529 |
|
|
18,493 |
|
| Provision for losses on receivables |
|
9,477 |
|
6,301 |
|
|
4,735 |
|
| |
|
|
|
|
|
|
|
|
Earnings before minority interest, equity in net loss of investees, and provision
for income taxes |
|
41,978 |
|
34,931 |
|
|
22,892 |
|
| Minority interest in net loss of consolidated subsidiaries |
|
67 |
|
471 |
|
|
126 |
|
| Equity in net loss of investees |
|
- |
|
(353 |
) |
|
(439 |
) |
| Provision for income taxes |
|
18,603 |
|
15,381 |
|
|
9,721 |
|
| |
|
|
|
|
|
|
|
|
| Net earnings |
|
$ 23,442 |
|
$ 19,668 |
|
|
$ 12,858 |
|
| |
|
|
|
|
|
|
|
|
| Net earnings per share: |
|
|
|
|
|
|
|
|
| Basic |
|
$ 1.65 |
|
$ 1.39 |
|
|
$ 1.12 |
|
| |
|
|
|
|
|
|
|
|
| Diluted |
|
$ 1.54 |
|
$ 1.30 |
|
|
$ 1.03 |
|
| |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
DVI, Inc. and Subsidiaries
Consolidated Statements of Shareholders’ Equity
| |
|
Common Stock $.005
Par Value
|
| |
|
|
Additional
Capital
|
|
Retained
Earnings
|
|
Accumulated
Other
Comprehensive
Loss
|
|
Total
Shareholders’
Equity
|
(in thousands of dollars except share data)
|
|
Shares
|
|
Amount
|
| Balances at June 30, 1997 |
|
10,590,859 |
|
$53 |
|
$ 69,194 |
|
$ 26,529 |
|
$ (116 |
) |
$ 95,660 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net earnings |
|
|
|
|
|
|
|
12,858 |
|
|
|
12,858 |
|
|
| Currency translation adjustment |
|
|
|
|
|
|
|
|
|
(572 |
)
|
(572 |
) |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
12,286 |
|
|
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 |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Balances at June 30, 1998 |
|
14,080,358 |
|
70 |
|
133,516 |
|
39,387 |
|
(688 |
)
|
172,285 |
|
|
| Net earnings |
|
|
|
|
|
|
|
19,668 |
|
|
|
19,668 |
|
|
| Currency translation adjustment |
|
|
|
|
|
|
|
|
|
(1,401 |
)
|
(1,401 |
) |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
18,267 |
|
|
Issuance of common stock upon
exercise of stock options and
warrants |
|
88,250 |
|
1 |
|
1,116 |
|
|
|
|
|
1,117 |
|
|
| Cost of issuance of common stock |
|
|
|
|
|
(199 |
) |
|
|
|
|
(199 |
) |
|
| Non-employee stock option grants |
|
|
|
|
|
177 |
|
|
|
|
|
177 |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balances at June 30, 1999 |
|
14,168,608 |
|
71 |
|
134,610 |
|
59,055 |
|
(2,089 |
)
|
191,647 |
|
|
| Net earnings |
|
|
|
|
|
|
|
23,442 |
|
|
|
23,442 |
|
|
Unrealized loss on available-for-sale
securities (net of deferred taxes
of $70) |
|
|
|
|
|
|
|
|
|
(105 |
)
|
(105 |
) |
|
| Currency translation adjustment |
|
|
|
|
|
|
|
|
|
(357 |
)
|
(357 |
) |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Comprehensive
income |
|
|
|
|
|
|
|
|
|
|
|
22,980 |
|
|
Issuance of common stock upon
exercise of stock options and
warrants |
|
54,366 |
|
|
|
690 |
|
|
|
|
|
690 |
|
|
| Non-employee stock option grants |
|
|
|
|
|
46 |
|
|
|
|
|
46 |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Balances at June 30, 2000 |
|
14,222,974 |
|
$71 |
|
$135,346 |
|
$ 82,497 |
|
$ (2,551 |
)
|
$215,363 |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
DVI, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
| |
|
Year Ended June 30,
|
(in thousands of dollars)
|
|
2000
|
|
1999
|
|
1998
|
| Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
| Net earnings |
|
$ 23,442 |
|
|
$ 19,668 |
|
|
$ 12,858 |
|
| |
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net earnings to net cash provided by (used in)
operating activities: |
|
|
|
|
|
|
|
|
|
| Equity in net loss of investees |
|
– |
|
|
353 |
|
|
439 |
|
| Depreciation and amortization |
|
20,878 |
|
|
18,285 |
|
|
12,050 |
|
| Provision for losses on receivables |
|
9,477 |
|
|
6,301 |
|
|
4,735 |
|
| Net gain on sale of financing transactions |
|
(25,728 |
) |
|
(29,813 |
) |
|
(20,977 |
) |
| Loss on disposition of furniture and fixtures |
|
164 |
|
|
– |
|
|
– |
|
| Minority interest in net loss of consolidated subsidiaries |
|
(67 |
) |
|
(471 |
) |
|
(126 |
) |
| Unrealized gain on investments |
|
(211 |
) |
|
– |
|
|
– |
|
| Cumulative translation adjustments |
|
(357 |
) |
|
(1,401 |
) |
|
(572 |
) |
| Deferred income taxes |
|
13,788 |
|
|
17,303 |
|
|
10,783 |
|
| Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
| (Increases) decreases in: |
|
|
|
|
|
|
|
|
|
| Restricted cash and cash equivalents |
|
(36,947 |
) |
|
10,838 |
|
|
(15,067 |
) |
| Accounts receivable |
|
(6,950 |
) |
|
(16,006 |
) |
|
(6,456 |
) |
| Other assets |
|
(6,214 |
) |
|
(21,012 |
) |
|
(10,874 |
) |
| Increases (decreases) in: |
| Accounts payable |
|
4,720 |
|
|
(5,641 |
) |
|
4,635 |
|
| Accrued expenses and other liabilities |
|
(446 |
) |
|
6,498 |
|
|
3,729 |
|
| |
|
|
|
|
|
|
|
|
|
| Total adjustments |
|
(27,893 |
) |
|
(14,766 |
) |
|
(17,701 |
) |
| |
|
|
|
|
|
|
|
|
|
| Net cash (used in) provided by operating activities |
|
(4,451 |
) |
|
4,902 |
|
|
(4,843 |
) |
| |
|
|
|
|
|
|
|
|
|
| Cash flows from investing activities: |
| Acquisition of businesses (net of cash received) |
|
(3,280 |
) |
|
(77,506 |
) |
|
– |
|
| Receivables originated or purchased |
|
(740,946 |
) |
|
(749,862 |
) |
|
(530,052 |
) |
Portfolio receipts net of amounts included in income and
proceeds from
sale of financing transactions |
|
637,216 |
|
|
658,055 |
|
|
473,018 |
|
| Net increase in notes collateralized by medical receivables |
|
(65,647 |
) |
|
(50,011 |
) |
|
(51,667 |
) |
| Furniture and fixtures additions |
|
(1,312 |
) |
|
(2,192 |
) |
|
(2,897 |
) |
| Investment in common and preferred stock of investees |
|
(705 |
) |
|
(8,479 |
) |
|
(1,148 |
) |
| Cash received from sale of investments in investees |
|
– |
|
|
4,482 |
|
|
549 |
|
| |
|
|
|
|
|
|
|
|
|
| Net cash used in investing activities |
|
(174,674 |
) |
|
(225,513 |
) |
|
(112,197 |
) |
| |
|
|
|
|
|
|
|
|
|
| Cash flows from financing activities: |
| Exercise of stock options and warrants |
|
690 |
|
|
1,117 |
|
|
1,756 |
|
| Issuance of common stock, net of issuance costs |
|
– |
|
|
(199 |
) |
|
57,933 |
|
| Borrowings under warehouse facilities, net of repayments |
|
16,279 |
|
|
187,370 |
|
|
37,861 |
|
| Borrowings under long-term debt |
|
338,873 |
|
|
151,562 |
|
|
156,884 |
|
| Repayments on long-term debt |
|
(176,059 |
) |
|
(128,736 |
) |
|
(125,343 |
) |
| |
|
|
|
|
|
|
|
|
|
| Net cash provided by financing activities |
|
179,783 |
|
|
211,114 |
|
|
129,091 |
|
| |
|
|
|
|
|
|
|
|
|
continued
DVI, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (concluded)
| |
|
Year Ended June 30,
|
(in thousands of dollars)
|
|
2000
|
|
1999
|
|
1998
|
| Net increase (decrease) in cash and cash equivalents |
|
$ 658 |
|
$ (9,497 |
) |
|
$12,051 |
| Cash and cash equivalents, beginning of year |
|
5,695 |
|
15,192 |
|
|
3,141 |
| |
|
|
|
|
|
|
|
| Cash and cash equivalents, end of year |
|
$ 6,353 |
|
$ 5,695 |
|
|
$15,192 |
| |
|
|
|
|
|
|
|
| Cash paid (received) during the year for: |
| Interest |
|
$70,717 |
|
$51,063 |
|
|
$44,786 |
| |
|
|
|
|
|
|
|
| Income taxes, net of refunds |
|
$ 1,565 |
|
$ (1,869 |
) |
|
$ 1,508 |
| |
|
|
|
|
|
|
|
Supplemental disclosures of noncash transactions:
For the year ended June 30, 2000, $14.1 million was reclassified from contract receivables to repossessed assets.
In June 1998 the purchase price for Medical Equipment Finance Corporation (“MEFC”) of $4.7 million was reclassified from accrued liabilities to shareholders’
equity to reflect the issuance of 400,000 common shares.
At June 30, 2000, 1999 and 1998, we had receivables in installments and accrued expenses of $3.6 million, $3.6 million and $3.0 million, respectively, representing the
present value of future obligations we have guaranteed.
The accompanying notes are an integral part of these consolidated financial statements.
Notes to Consolidated Financial Statements
Note 1. Nature of Operations
In this discussion, the terms “DVI”, the “Company”, “we”, “us” and “our” refer to DVI, Inc. and its subsidiaries, except
where it is made clear that such terms mean only DVI, Inc. or an individual subsidiary.
We are primarily engaged in the business of providing equipment and receivable financing for domestic and foreign users of diagnostic imaging, radiation therapy and other
medical technologies. Our customer base consists principally of outpatient healthcare providers, physician groups and hospitals.
Ability to Access the Securitization Market—Our ability to complete securitizations and other structured finance transactions depends upon a number of factors,
including:
Ÿ
|
The general conditions in the credit markets,
|
Ÿ
|
The size and liquidity of the market for the types of receivable-backed securities that we issue or place in securitizations and
|
Ÿ
|
Our overall financial performance and contract portfolio.
|
Additionally, our ability to securitize assets is dependent upon our ability to provide credit enhancement, which reduces our liquidity and periodically requires us to obtain
additional capital to enable us to expand our operations.
Credit Risk—A customer’s failure to pay back amounts borrowed is a risk faced by all finance companies. Many of our customers are outpatient healthcare
providers that have complex credit characteristics, and to provide financing for these customers involves sophisticated credit analysis. By the terms of the underlying financing contracts, our customers are generally considered in default if payment on a
contract has not been received. Equipment under direct financing leases and notes secured by equipment, combined with obligor guarantees and vendor recourse, serve as collateral for unpaid contract payments. Receivables under medical receivables financing
transactions serve as collateral for unpaid contract payments.
Continuing Need for Capital—Our ability to maintain and build our financing business is dependent on our ability to obtain warehouse and long-term debt financing.
Regulation and Consolidation—Considerable regulatory attention has been directed towards physician-owned healthcare facilities and other arrangements whereby
physicians are compensated, directly or indirectly, for referring patients to such healthcare facilities. Furthermore, the market is subject to consolidation among outpatient facilities, physician groups and hospitals. Our source of customers is subject
to the effects of regulatory actions and market consolidation.
Investments in Foreign and Initial Operations—In an effort to mitigate the impact of regulation and consolidation within the United States, and to expand our
market, we have initiated operations internationally and have made investments in certain emerging markets. We have operations in Latin America, the United Kingdom, Spain, Germany, Italy, The Netherlands, Turkey and South Africa. We also have a joint
venture based in Singapore to service the medical equipment market in the Asia-Pacific region.
In May 1998, we entered into a joint venture, MSF Holding Ltd., with the International Finance Corporation (an affiliate of the World Bank) (“IFC”), the Netherlands Development
Finance Company (“FMO”) and Philadelphia International Equities, Inc., a subsidiary of First Union National Corporation. Through MSF Holding Ltd., we provide financing programs for vendors and manufacturers of diagnostic and patient treatment
equipment and devices in Latin America, including Brazil, Argentina, Colombia, Venezuela and Mexico. We own 59% of this joint venture holding company that operates through free-trade zone subsidiaries in Uruguay and the Cayman Islands. We consolidate
these operations within our financial statements. Our customer base for equipment vendors within this region is private clinics, diagnostic centers and local hospitals. Upon commencement of the joint venture, its owners contributed capital of $20.1
million (DVI’s portion was $11.8 million). As of June 30, 2000, a syndicate of banks headed by IFC and FMO has loaned the venture $48.0 million and
are pursuing other bank participants for additional funds. We believe that this arrangement may prove to be a suitable model for our other international activities.
The success and ultimate recovery of these investments is dependent upon many factors including foreign regulation, customs, currency exchange, the achievement of
management’s planned projections for these markets, and our ability to manage these operations.
Note 2. Summary of Significant Accounting Policies
Consolidation Policy—The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. The equity method of
accounting is used for 20%- to 50%-owned entities or for investments in less than 20%-owned entities in which we have the ability to exercise significant influence over the operating and financial policies of the investee. Investments in less than
20%-owned entities in which we do not have the ability to exercise significant influence over the investee are accounted for using the cost method of accounting. Intercompany accounts and transactions have been eliminated.
Use of Estimates—The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Translation Adjustments—All assets and liabilities denominated in foreign currencies are translated at the exchange rate on the balance sheet date. Revenues,
costs and expenses are translated at average rates of exchange prevailing during the period. Translation adjustments are accumulated as a separate component of other comprehensive income within shareholders’ equity. Gains and losses resulting from
foreign currency transactions are included in the consolidated statements of operations.
Cash and Cash Equivalents—Cash and cash equivalents include highly liquid securities with original maturities of 90 days or less.
Restricted Cash and Cash Equivalents—Restricted cash and cash equivalents consist of cash, certificates of deposit and money market mutual funds which are pledged
as collateral for certain limited recourse borrowings related to direct financing leases, notes secured by equipment and operating leases. At June 30, 2000 and 1999, restricted cash consisted of only securities with maturities less than 90 days.
Accounts Receivable—Accounts receivable includes advances to our serviced portfolio, amounts due from portfolio sale, fees receivable for advisory services and
floating lease accrued interest receivable.
Investments—We account for investments in other companies using either the cost or the equity method of accounting. Equity securities classified as trading
securities are reported at their estimated fair market value, with unrealized gains and losses included in earnings. Equity securities classified as available-for-sale securities are reported at their estimated fair market value, with unrealized gains and
losses excluded from earnings and reported as a separate component of comprehensive income (under shareholders’ equity), net of deferred taxes. All debt securities are classified as held-to-maturity and are stated at cost. The fair market value of
our investments is determined by using market quotes from nationally traded exchanges. For investments in equity securities that are not publicly traded, and therefore have no readily determinable fair value, carrying amount is used to approximate fair
value. The carrying value of our investments is periodically reviewed for impairment and recoverability, with writedowns recognized in the period that impairment is determined.
Investment in Direct Financing Leases and Notes Secured by Equipment—At contract commencement, we record the gross contract receivable, initial direct costs,
estimated residual value of the financed equipment, if any, and unearned income of fixed payment contracts. The principal portion and initial direct costs of variable rate contracts are recorded at commencement, and interest is calculated and accrued
monthly on the remaining principal balance. At June 30, 2000 and 1999, unamortized initial direct costs amounted to $11.4 million and $9.7 million, respectively. Initial direct costs, net of
any fees or consideration received, are deferred and amortized over the life of the contract using the interest method, which reflects a constant effective yield.
Securitization, Recourse Credit Enhancements and Net Gain on Sale of Financing Transactions—The most important sources of permanent funding for our contracts have
been securitization and other forms of structured finance. Securitization is a process in which a pool of contracts is transferred to a special-purpose financing entity that issues notes to investors. The notes are secured by a pledge of the assets or
other collateral in the contract pool. Principal and interest on these notes are paid from the cash flows produced by the contract pool. In the securitizations we sponsor, equipment contracts funded through securitizations must be credit enhanced to
receive an investment grade credit rating.
Credit enhancement can be provided in a number of ways, including cash collateral, letters of credit, a subordinated tranche of each individual transaction or an insurance
policy. Typically, our securitizations are enhanced through subordinated tranches and cash collateral. In the equipment securitizations we have sponsored to date, we have been effectively required to furnish credit enhancement equal to the difference
between the total discounted cash flows of the securitization pool and the net proceeds we receive in such a securitization. In the medical receivables securitizations we have sponsored to date, we have furnished credit enhancement through subordinated
tranches, corporate guarantees and cash collateral. The majority of the credit enhancements is recorded as subordinated interests of the present value of the discounted cash flows and is repaid from their share of those future cash flows.
For accounting purposes, our securitizations are treated as either financings (on–balance sheet transactions) or sales (off–balance sheet transactions). The
decision on which accounting treatment to use depends on the level of control we wish to retain over the assets. In an on–balance sheet transaction, the contracts being securitized remain on our balance sheet as an asset for their originally
contracted term and the proceeds raised are accounted for as discounted receivables in which no gain or loss is recognized. In an off–balance sheet transaction, we remove the contracts from our balance sheet and recognize a gain or loss on the sale
of these contracts. The previously recorded amounts are allocated between the assets sold and the recourse credit enhancement based on the relative fair values on the date of transfer. The net proceeds received are adjusted on our balance sheet by
recording the fair value of recourse credit enhancements and servicing assets. Unamortized securitization assets are reviewed quarterly for impairment.
Net Notes Collateralized by Medical Receivables—Notes collateralized by medical receivables consist of notes receivable resulting from working capital loans and other
contracts made to entities in the healthcare industry.
Residual Valuation—Residual values, representing the estimated value of the equipment at the end of the lease term, are recorded in the financial statements at
the inception of each fair market value lease. These amounts are estimated by management based upon its experience and judgment. In addition, we purchase the residual value of equipment leased to local municipalities in the UK. This residual is recorded
as either the amount paid to the lessor at the inception of the contract or the present value of the amount that will be paid at the end of the contract’s term.
Receivables Impairment—Impaired receivables are measured based on the present value of the expected cash flows discounted at the receivables’ effective
interest rate or the fair value of the collateral. A receivable is considered impaired when it becomes probable that we will be unable to collect all amounts due according to the contract terms.
Allowance for Losses on Receivables—The allowance for losses on receivables is available to absorb credit losses in our managed portfolio. Each month we evaluate
the adequacy of the allowance to absorb our current estimates of credit losses that have occurred in our managed portfolio. Our evaluation is based on a continuing assessment of the delinquencies, historical loss experience, asset valuations, assessment
of collateral and strength of guarantors, and legal options to enforce management changes or sustain legal positions. That evaluation includes estimates that may be significantly affected by changes in economic conditions or discrete events adversely
affecting specific obligors. We believe that the allowance is adequate to provide for credit losses.
We generally place receivables contracts on non-accrual status (in which we halt the recognition of income) when they become seriously delinquent. At that time, we consider
the range of remedies available to mitigate a potential loss. Remedies include the pursuit of underlying collateral and guarantors (including recourse to dealers and manufacturers), draws on letters of credit, and protecting our investment by taking
control of a medical facility’s operations and replacing its existing management. Receivables contracts are charged-off when a loss is considered probable and all reasonable remedies have been pursued. The small delinquent contracts arising from our
vendor programs are generally charged-off when they become greater than 120 days delinquent. Cash received while a contract is in non-accrual status is applied only to the principal balance due with no impact to income.
Equipment on Operating Leases—Leases that do not meet the criteria for direct financing leases are accounted for as operating leases. Equipment on operating
leases is recorded at cost and depreciated straight-line over its estimated useful life. The residual values for operating leases are excluded from the leased equipment’s net depreciable basis. We evaluate the residual’s carrying value for
potential impairment each quarter and record any required changes in valuation. Rental income is recorded monthly on a straight-line basis. Initial direct costs associated with operating leases are deferred and amortized straight-line over the lease term,
which approximates a constant effective yield. There were no writedowns in residual valuation during the years ended June 30, 2000, 1999 and 1998.
Repossessed Assets—Repossessed assets result from taking possession of collateral, through foreclosure or other proceedings, in satisfaction of defaulted
contracts, and are recorded at the lower of their historical cost or estimated realizable value. Realizable value is the asset’s fair market value less the costs associated with the maintenance and eventual disposal of the equipment. Any difference
between this realizable value and the equipment’s historical cost is charged off against the allowance for losses on receivables at the time of repossession. The assets are reviewed periodically and adjusted quarterly for adverse changes to their
realizable value. The increase in repossessed assets during fiscal year 2000 is the result of the reclassification of equipment inventory from other assets, and two property foreclosures consisting of assisted living facilities and various types of
medical centers.
Furniture and Fixtures—Furniture and fixtures are stated at cost less accumulated depreciation and are depreciated using the straight-line method over their
estimated useful lives (generally five years).
Goodwill—Goodwill represents the excess purchase price over the fair value of net assets stemming from business acquisitions and is being amortized over periods
not exceeding 15 years. We evaluate the recoverability of our goodwill separately for each applicable business acquisition quarterly. The recoverability of goodwill is determined by comparing the carrying value of the goodwill to the estimated operating
income of the related entity on an undiscounted cash flow basis. Should the carrying value of the goodwill exceed the estimated operating income for the expected period of benefit, impairment for the excess is recorded at that time. No impairments to
goodwill were recorded for the years presented.
Debt Issuance Costs—Debt issuance costs related to our warehouse facilities, securitizations, senior notes, convertible subordinated notes and other debt are
included in other assets. These costs are being amortized over the lives of the notes using the interest and straight-line methods, as applicable.
Servicing Assets—For those securitizations that are treated as sales, we retain the responsibility to service the individual contracts although they are removed
from our balance sheet at the time of sale. We are compensated for these services under contractual terms, which include our receipt of a servicing fee, late charges, and ancillary revenue that we believe would more than adequately compensate a substitute
servicer. We recognize as a servicing asset the excess of that compensation received over amounts that would otherwise be paid to an independent third party to perform this specific type of servicing. We began recording these servicing assets for
securitizations consummated after July 1, 1999. The amount of unamortized servicing assets recorded at June 30, 2000 was $6.3 million and is included in other assets on the balance sheet. Servicing assets are amortized in proportion to, and over the
period of, estimated net servicing income. Servicing assets are assessed quarterly for impairment based on estimated fair value.
Other Assets—Other assets consists primarily of unamortized debt issuance costs, servicing assets and prepaid expenses. Also included in this category are loans
to officers and employees. See Note 5 for a summary of Other assets.
Accounts Payable—Accounts payable includes equipment payables for equipment fundings of $55.2 million and $60.0 million at June 30, 2000 and 1999, respectively.
Recourse Obligations—Subsequent to a sale, we retain either a limited remaining interest in the transaction or underlying equipment, or none at all. Accordingly,
we carry no obligation to indemnify the purchaser in the event of a default on the transaction by the obligor, except when the sale agreement provides for participation in defined excess interest spreads or limited recourse in which we guarantee
reimbursement under the agreement up to a specific maximum. Consequently, in
case of default by the obligor, the investor would exercise its rights under the lien with limited or no further recourse against us.
Amortization of Finance Income—Amortization of finance income primarily consists of three categories:
Ÿ
|
Income on fixed payment transactions,
|
Ÿ
|
Income on variable rate transactions and
|
Ÿ
|
Income on notes collateralized by medical receivables.
|
The interest component of scheduled payments on notes secured by equipment and direct financing lease fixed-payment transactions is calculated using the interest method in
order to approximate a level rate of return on the net investment. The interest component of notes secured by equipment and direct financing lease variable rate transactions is calculated and accrued monthly on the remaining current principal balance. The
interest component on medical receivables is calculated and accrued monthly on the average balance outstanding during the period.
Other Income—Other income is accrued when earned and consists primarily of income realized from customer warrants not related to current lending activities,
medical receivables fees, consulting and advisory fees, late fees, net service fee income, and contract fees and penalties. Revenue from medical receivables fees, late fees, net service fee income, and contract fees and penalties are recorded when earned
according to signed contractual terms. Revenue from investment advisory services is recorded when the services are rendered, when the fair value of our interest can be reasonably established and when collection is estimated to be short-term (within 90
days). See Note 7 for a summary of other income.
Taxes on Income—Deferred taxes on income result from temporary differences between the reporting of income for financial statement and tax reporting purposes.
Such differences arise principally from recording gains on sales of financing transactions, and lease transactions in which the operating lease method of accounting is used for tax purposes and the financing lease method is used for financial statement
purposes. Under the operating lease method, leased equipment is recorded at cost and depreciated over the useful life of the equipment, and lease payments are recorded as revenue when earned.
Stock Options—We apply Accounting Principles Board Opinion No. 25 and related interpretations for accounting for our stock option plans. Accordingly, we record no
compensation expense for the granting of stock options to our employees and directors. The fair market value of stock options granted to consultants, however, is recorded as an expense over the service or vesting period.
Hedging Instruments—We use various interest rate contracts such as forward rate agreements, Treasury locks, interest rate swaps, caps and collars to manage our
interest rate risk from our floating rate liabilities and anticipated securitization and sale transactions. No contracts are held for trading purposes. The gains or losses from forward rate agreements that are used to hedge floating rate exposure within
warehouse funding facilities are deferred and amortized to interest expense over the hedged period. When hedge transactions are matched to anticipated securitizations that are accounted for as financings, gains or losses from the hedge transactions are
deferred and amortized to interest expense over the term of the securitized transactions. When hedge transactions are matched to anticipated sales or securitizations that are accounted for as sales, gains or losses from the hedge transactions are
recognized as part of the gain or loss on the sale. Foreign exchange forward contracts are accounted for as hedges of foreign currency. The net gain or loss is recorded as a cumulative translation adjustment in comprehensive income.
Before entering into a derivative transaction for hedging purposes, we determine that a high correlation exists between the change in the value of the hedged item and the
change in the value of the derivative from a movement in interest rates. High correlation means that the change in the value of the derivative will be substantially equal and opposite to the change in the value of the hedged asset or liability. We monitor
this correlation throughout the hedged period. If a high degree of correlation is not maintained, the hedge becomes ineffective, and gains and losses in the value of the derivative are recognized in income. We manage the credit risk of possible
counterparty default in these derivative transactions by dealing exclusively with counterparties with investment grade ratings.
Recent Accounting Developments—In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (“SFAS”) No.
133, Accounting for Derivative Instruments and Hedging Activities. This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging
activities. SFAS No. 133, as amended, is effective for all quarters of fiscal years beginning after June 15, 2000 and does not permit retroactive restatement of prior period financial statements. This statement requires the recognition of all derivative
instruments as either assets or liabilities in the statement of financial position measured at fair value. Generally, increases or decreases in the fair value of derivative instruments will be recognized as gains or losses in earnings in the period of
change. If certain conditions are met, where the derivative instrument has been designated as a fair value hedge, the hedged item will also be marked to market through earnings thus creating an offset. If the derivative is designated and qualifies as a
cash flow hedge, the changes in fair value of the derivative instrument will be recorded in comprehensive income. If the derivative is designated as a hedge of a net investment in foreign operations, changes in fair value of the derivative will be
recorded as cumulative translation adjustments.
We use off-balance sheet derivative financial instruments to hedge interest rate risk. Our interest rate risk is associated with variable rate financing of the fixed rate
contracts and the timing difference between temporary financing through the warehouse and permanent funding through either securitization or sale. We use derivatives to manage three components of this interest rate risk:
Ÿ
|
Interest sensitivity adjustments,
|
Ÿ
|
Pricing of anticipated contract securitizations and sales and
|
Ÿ
|
Interest rate spread protection.
|
In addition, we have foreign currency exposures in our international operations due to lending in some areas in local currencies. As a general practice, we have not hedged
the foreign exchange exposure related to either the translation of overseas earnings into U.S. dollars or the translation of overseas equity positions back to U.S. dollars. Our preferred method for minimizing foreign currency transaction exposure is to
fund local currency assets with local currency borrowings. For specific local currency-denominated receivables or for a portfolio of local currency-denominated receivables for a specific period of time, hedging with derivative financial instruments may be
necessary to manage the foreign currency exposure derived from funding in U.S. dollars.
We have analyzed and will continue to manage interest rate and foreign currency exchange rate risk exposure under the new terms of the SFAS 133 standard. Accordingly,
existing derivative instrument transactions have been re-designated as follows:
(in millions of dollars)
|
|
Notional
Amount
|
| Cash Flow Hedges: |
| Treasury locks |
|
$ 50.0 |
| Interest rate swaps |
|
103.5 |
| Options |
|
40.0 |
|
|
| Fair Value Hedges: |
| Interest rate swaps |
|
$ 5.1 |
|
|
| Net Investment in Foreign Operations Hedges: |
| Foreign currency denominated forward |
|
| rate agreements |
|
$ 12.3 |
On July 1, 2000, we adopted SFAS 133. The recognition of the fair value of all freestanding derivative instruments resulted in recording liabilities in the amount of
$260,000. The transition adjustment for derivatives in cash flow hedges was to record a liability of $380,000 and was recognized as a cumulative-effect-type adjustment in accumulated other comprehensive income. The transition adjustment for derivatives in
fair value hedges was to record an asset of $56,000 and
was recognized as a cumulative-effect-type adjustment to net income. This adjustment was offset by the adjustment of the carrying value of the hedged assets. The transition
adjustment for derivatives in hedges of net investments in foreign operations was to record a liability of $88,000 and was recognized as a cumulative-effect-type adjustment in cumulative translation adjustment.
Reclassifications and Restatements—Certain amounts as previously reported have been reclassified to conform to the year ended June 30, 2000 presentation.
Note 3. Investment in Direct Financing Leases and Notes Secured by Equipment or Medical Receivables and Equipment on Operating Leases
Receivables in installments are due in varying amounts and are collateralized primarily by the underlying equipment, along with obligor guarantees and vendor recourse. Notes
collateralized by medical receivables consist of notes receivable resulting from working capital loans and are due at maturity. Medical receivable lines of credit outstanding have no scheduled maturity dates and are expected to be recovered within a year
due to their revolving nature. Scheduled rents on operating leases relate to noncancelable operating leases and are due in contractual installments of varying amounts.
Information regarding scheduled collections for direct financing leases, notes secured by equipment or medical receivables and operating leases is as follows:
(in thousands of dollars)
Year Ended June 30,
|
|
Direct Financing
Leases and Notes
Secured by
Equipment or
Medical Receivables
|
|
Scheduled
Rents on
Operating
Leases
|
|
Total
Receivables
|
| 2001 |
|
$ 622,087 |
|
$ 7,611 |
|
$ 629,698 |
| 2002 |
|
212,497 |
|
7,028 |
|
219,525 |
| 2003 |
|
154,120 |
|
6,277 |
|
160,397 |
| 2004 |
|
111,622 |
|
3,944 |
|
115,566 |
| 2005 |
|
60,682 |
|
1,505 |
|
62,187 |
| Thereafter |
|
39,033 |
|
895 |
|
39,928 |
| |
|
|
|
|
|
|
| Subtotal |
|
1,200,041 |
|
27,260 |
|
1,227,301 |
| Equipment residual value |
|
40,271 |
|
– |
|
40,271 |
| |
|
|
|
|
|
|
| Total |
|
$ 1,240,312 |
|
$ 27,260 |
|
$ 1,267,572 |
| |
|
|
|
|
|
|
The total receivables balance is comprised of notes primarily secured by equipment (45.3%), direct financing leases (32.6%), medical receivables (20.0%) and scheduled rents
on operating leases (2.1%). We are exposed to credit risk on these receivables. At June 30, 2000, of the 13,466 debtors, the top ten obligors represented 10.96% of the portfolio. Geographic concentration for the top five states was California (9.1%), New
York (8.3%), Texas (7.7%), Florida (6.9%) and New Jersey (5.8%). International contracts (those outside the 50 United States) represented 22.8% of the portfolio.
Our contracts in Brazil require that our customers’ payments be made in U.S. dollars. The devaluation of the Brazilian real during the first quarter of calendar year
1999 created a burden on our customers’ ability to service their debt. Many of them sought concessions in their payment schedules, consisting of either a deferral of the next payment or a lengthening of their schedule by one or two payments. In most
cases, we granted these concessions since they were minor and the customers’ requests were due to broad economic issues facing Brazil rather than specific customer performance. We granted these concessions in exchange for additional consideration
from our customers that preserve our original contract yields. As of June 30, 1999, concessions were made for 43 contracts with total outstanding balances of $27.2 million.
Equipment residual value represents the estimated amount to be received at contract termination from the disposition of equipment financed under fair market value leases.
Amounts to be realized at contract termination depend on the fair market value of the related equipment and may vary from the recorded estimate. Carrying values are reviewed periodically to determine if the equipment’s anticipated fair market value
is below its recorded value.
During the years ended June 30, 2000 and 1999, we sold receivables to third parties realizing gains of $25.7 million and $29.8 million, respectively. In connection with our
sales, we have retained subordinated interests in the receivables totaling $43.2 million, $62.1 million and $51.9 million at June 30, 2000, 1999 and 1998, respectively. Valuations of retained subordinated interest at the date of sale and at each reporting
period are based on discounted cash flow analyses using our best estimates of market assumptions. There can be a wide range in market assumptions that are used by participants in the market to value such assets, including discount rate, prepayment, loss
frequency and loss severity assumptions. Accordingly, our estimate of fair value is subjective. Under the sale agreements, we are at risk for losses on the receivables up to our subordinated interests. Once repurchased or substituted such leases are
included within our portfolio and all managed net financed assets are evaluated within the allowance for losses on receivables.
The following represents a summary of the major components of recourse credit enhancements:
| |
|
Year Ended June 30,
|
(in thousands of dollars)
|
|
2000
|
|
1999
|
| Beginning balance |
|
$ 62,106
|
|
|
$ 51,883
|
|
| Principal payments |
|
(14,715
|
)
|
|
(20,828
|
)
|
| Additions |
|
35,354
|
|
|
40,130
|
|
| Reduction in required credit enhancement |
|
(39,523
|
)
|
|
(9,079
|
)
|
| |
|
|
|
|
|
|
| Ending balance |
|
$ 43,222 |
|
|
$ 62,106 |
|
| |
|
|
|
|
|
|
At June 30, 2000, receivables amounting to $589.9 million were assigned as collateral for long-term debt.
The following is an analysis of the allowance for losses on receivables:
| |
|
Year Ended June 30,
|
(in thousands of dollars)
|
|
2000
|
|
1999
|
|
1998
|
| Balance, beginning of year |
|
$12,279 |
|
|
$ 9,955 |
|
|
$ 5,976 |
|
| Provision for losses on receivables |
|
9,477 |
|
|
6,301 |
|
|
4,735 |
|
| Allowance assumed in business acquisition |
|
– |
|
|
1,368 |
|
|
879 |
|
| Net charge-offs |
|
(7,449 |
) |
|
(5,345 |
) |
|
(1,635 |
) |
| |
|
|
|
|
|
|
|
|
|
| Balance, end of year |
|
$14,307 |
|
|
$12,279 |
|
|
$ 9,955 |
|
| |
|
|
|
|
|
|
|
|
|
The increase in the provision during fiscal 2000 was the result of our 30.0% growth in our average managed net financed assets. Recoveries on receivables previously charged
off were insignificant for each of the years ended June 30, 2000, 1999 and 1998.
The net investment of non-performing contracts, including the managed portfolio, on which income recognition was suspended, was $67.1 million and $39.7 million at June 30,
2000 and 1999, respectively. Cash collected on all non-accrual contracts is applied to the net investment.
Note 4. Investments
The following represents a summary of investments and associated receivables held as of June 30, 2000 and 1999:
| (in thousands of dollars) |
|
|
|
|
|
|
| |
|
|
|
|
|
Year Ended June 30, 2000
|
Description of Investee
|
|
Classification
|
|
Date
Acquired
|
|
Total
Investment
|
|
Total
Receivables
|
| Operator of radiation therapy centers |
|
Cost |
|
Mar 1999 |
|
$ 7,500 |
|
$2,107 |
| Internet/hardware solutions provider |
|
Trading |
|
Nov 1999 |
|
912 |
|
– |
| Operator of MRI center |
|
Cost |
|
Sep 1999 |
|
890 |
|
– |
| Online healthcare transaction processor |
|
Avail-for-sale |
|
Oct 1998 |
|
325 |
|
– |
| Other |
|
Various |
|
Various |
|
489 |
|
3,675 |
| |
|
|
|
|
|
|
|
|
| Total |
|
|
|
|
|
$10,116 |
|
$5,782 |
| |
|
|
|
|
|
|
|
|
| (in thousands of dollars) |
|
|
|
|
|
|
| |
|
|
|
|
|
Year Ended June 30, 1999
|
Description of Investee
|
|
Classification
|
|
Date
Acquired
|
|
Total
Investment
|
|
Total
Receivables
|
| Operator of radiation therapy centers |
|
Cost |
|
Mar 1999 |
|
$ 7,500 |
|
$1,808 |
| 40%-owned Singapore joint venture |
|
Equity |
|
Nov 1995 |
|
2,333 |
|
– |
| Online healthcare transaction processor |
|
Avail-for-sale |
|
Oct 1998 |
|
500 |
|
– |
| Other |
|
Various |
|
Various |
|
481 |
|
742 |
| |
|
|
|
|
|
|
|
|
| Total |
|
|
|
|
|
$10,814 |
|
$2,550 |
| |
|
|
|
|
|
|
|
|
We had receivables from and investments in U.S. Cancer Care ("USCC") of $9.6 million included on our balance sheet at June 30, 2000. We serviced receivables from USCC of $15.9 million that were not included in our balance
sheet. Management has reviewed the value of the collateral that secures the contracts to USCC and is confident that there is sufficient collateral to cover contracts outstanding.
We sold 143,000 shares of Cisco Systems, Inc. (Nasdaq: CSCO) in early November 1999, generating income of $10.8 million. The shares were acquired by our Third Coast Capital unit following
its exercise of warrants issued by privately-held Cerent Corporation. The warrants were converted into the right to receive shares of Cisco common stock following its acquisition of Cerent Corporation. We recognized $3.8 million of income in the quarter
ended September 30, 1999 to reflect the pre-acquisition value of the unexercised warrants. The remaining $7.0 million was recognized in the quarter ended December 31, 1999. Changes in market value were recorded in the quarters ended March 31, 2000 and
June 30, 2000. The balance at June 30, 2000 reflects the market value of 14,354 Cisco shares held.
In September 1999, we entered into a joint venture agreement with a company to take over an MRI center in Singapore from a former delinquent account. We have a 40% ownership
interest in the joint venture and our ownership is limited to eight years. The amount we recorded as an investment is equal to the outstanding funds we had previously advanced to the center net of amounts provided in a new Hire Purchase agreement with the
center. We expect to fully recover our investment through future income from the center.
In November 1995, we entered into a joint venture with two other partners to establish Medical Equipment Credit Pte Ltd. (“MEC”). MEC pursues opportunities in the
Asia-Pacific diagnostic imaging marketplace. Initial capitalization of MEC was 7,000,000 shares of common stock ($5.0 million), and ownership was based on the percentage of the initial capitalization invested by each of the three joint venture partners.
At June 30, 1999, our ownership was 40% based on an initial $2.0 million investment. We accounted for our investment in MEC through June 30, 1999 under the equity method of accounting. At June 30, 1999 and 1998, we recognized losses of approximately
$353,000 and $439,000, respectively, on this investment.
On July 1, 1999, we increased our ownership in MEC from 40% to 80% with the purchase of an additional 2.8 million shares of common stock of MEC from Philips Medical Systems
International B.V., a shareholder of MEC, for $475,000. This change in ownership allows us to finance equipment in addition to that manufactured by Philips, thereby improving our ability to service our customers. Effective July 1, 1999 MEC’s balance
sheet and results of operations are fully consolidated within DVI. Had this increase in ownership occurred at the beginning of fiscal 1998, our net earnings would have been $19.4 million and $12.3 million for the years ended June 30, 1999 and 1998,
respectively.
Note 5. Other Assets
The following represents a summary of the major components of other assets:
| |
|
Year Ended June 30,
|
(in thousands of dollars)
|
|
2000
|
|
1999
|
| Unamortized debt issuance costs |
|
$ 12,613 |
|
$ 15,451 |
| Servicing assets |
|
6,262 |
|
— |
| Prepaid expenses |
|
6,096 |
|
1,569 |
| Miscellaneous |
|
5,669 |
|
2,826 |
| |
|
|
|
|
| Total other assets |
|
$ 30,640 |
|
$ 19,846 |
| |
|
|
|
|
Note 6. Interest Bearing Debt
Warehouse Facilities—The following summarizes our warehouse lines of credit at June 30, 2000:
(in millions of dollars)
|
|
|
|
|
| Type of
Facility
|
|
Country
|
|
Line of
Credit
|
|
Rate at
June 30, 2000 (1)
|
|
Maturity
Date
|
| Equipment
|
|
U.S.
|
|
$250.0 |
|
LIBOR + 0.80 |
% |
|
4/30/2001 |
|
| Equipment
|
|
U.S.
|
|
152.5 |
|
LIBOR + 1.375 |
% |
|
2/28/2002 |
|
| Equipment
|
|
U.S.
|
|
5.0 |
|
Prime
|
|
|
12/31/2000 |
|
| Assisted Living
|
|
U.S.
|
|
8.8 |
|
LIBOR + 3.00 |
% |
|
12/31/2000 |
|
| Assisted Living
|
|
U.S.
|
|
8.5 |
|
LIBOR + 2.10 |
% |
|
3/6/2001 |
|
| Assisted Living
|
|
U.S.
|
|
5.0 |
|
LIBOR + 1.85 |
% |
|
7/31/2000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
429.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
| Equipment
|
|
Asia
|
|
40.0 |
|
Various
|
|
|
12/18/2000 |
|
| Equipment
|
|
Europe
|
|
30.3 |
|
LIBOR + 1.00 |
% |
|
1/22/2001 |
|
| Equipment
|
|
Europe
|
|
22.0 |
|
Euribor + 1.50 |
% |
|
12/4/2000 |
|
| Equipment
|
|
Italy
|
|
18.5 |
|
Various
|
|
|
Various |
|
|
|
|
Germany /
|
|
|
|
|
|
|
|
|
| Equipment
|
|
Eastern Europe
|
|
12.2 |
|
Euribor + 1.0%, 2.0 |
% |
|
7/31/2000 |
(2) |
| Equipment
|
|
Australia
|
|
11.4 |
|
BBSY + 1.25 |
% |
|
8/28/2000 |
|
| Equipment
|
|
Europe
|
|
10.0 |
|
LIBOR + 2.00 |
% |
|
9/15/2000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
144.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
| Medical Receivables
|
|
U.S.
|
|
100.0 |
|
LIBOR + 1.75 |
% |
|
8/31/2000 |
|
| Medical Receivables
|
|
U.S.
|
|
3.0 |
|
LIBOR + 4.50 |
% |
|
9/30/2000 |
|
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
103.0 |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Total lines of credit |
|
|
|
$677.2 |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The LIBOR (or country equivalent) rates charged under our lines of credit ranged from 4.42% to 7.00% at June 30, 2000. The Prime
rate was 9.50% at June 30, 2000.
|
|
(2)
|
Renewed for an additional three months and expected to be renewed further through 7/31/2001.
|
Long-term Debt—The discounted receivables are direct financing lease obligations, notes secured by equipment and medical receivables that were securitized and
offered to investors primarily on a limited or nonrecourse basis. They are primarily collateralized by the underlying equipment and medical receivables.
Future annual maturities of discounted receivables are as follows:
| (in thousands of dollars) |
|
|
| |
Year Ended June 30,
|
| 2001 |
|
$172,504 |
| 2002 |
|
67,776 |
| 2003 |
|
137,774 |
| 2004 |
|
30,648 |
| 2005 |
|
13,292 |
| Thereafter |
|
2,765 |
| |
|
|
| Total |
|
$424,759 |
| |
|
|
All of the discounted receivables have been permanently funded through 12 structured transactions that were initiated during fiscal years 1995 through 2000. Debt under these
securitizations is limited recourse and bears interest at fixed rates ranging between 5.24% to 12.85% and floating interest rates ranging between 0.35% and 2.95% over 30-day LIBOR. We service all of these receivables. The related securitization agreements
contain various recourse provisions and require that we comply with certain servicing requirements and maintain limited cash collateral or residual interests.
We have convertible subordinated notes outstanding of $13.9 million at June 30, 2000 and 1999. The notes are convertible into common shares at $10.60 per share at the
discretion of the noteholders, bear interest at a rate of 91/8% payable in quarterly installments of interest only and mature in June 2002. There were no conversions in each of the three years ended June 30, 2000, 1999 and 1998. During the year ended June
30, 1997, $600,000 of these notes was converted into 56,603 shares of DVI common stock. Cumulatively, $1.1 million of these notes have been converted into 103,772 shares of DVI common stock.
On January 30, 1997, we completed a public offering of $100.0 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 our ability to pay dividends and to make certain other kinds of payments. That agreement also prohibits us from incurring additional indebtedness unless certain financial ratio tests are
met. Interest on the notes is payable semiannually on February 1 and August 1 of each year. The Senior Notes will be redeemable at our option in whole or in part at any time on or after February 1, 2002 at specified redemption prices. On December 16,
1998, we completed another public offering of $55.0 million principal amount of 9 7/8% Senior Notes due 2004 under substantially the same terms.
We have facilities totaling $4.7 million outstanding with a foreign bank to fund a portfolio of equipment contracts in Turkey and another $10.0 million outstanding from an
unsecured facility for general corporate purposes.
In addition, we have investment agreements with two shareholders, IFC and FMO, which provide for the borrowing of $15.0 million and $10.0 million respectively. Borrowings
under this loan bear interest at 2.75% over the six-month LIBOR rate, payable semiannually in arrears. Full principal loan repayment is due May 15, 2005. This loan is secured by granting perfected and registered first priority security interest of all
lease/loan receivables assigned to IFC and FMO.
The agreements also provide for syndicated borrowings from IFC and FMO, for which we had $23.0 million outstanding at June 30, 2000. Borrowings under this loan bear interest
at 3.25% over the six-month LIBOR rate, payable semiannually in arrears. Principal loan repayment commences on November 15, 2000 and is to be paid in full on November 15, 2003. This loan is secured by granting perfected and registered first priority
security interest of all lease/loan receivables assigned to IFC and FMO.
As of June 30, 2000, management believes that the Company was in compliance with the financial covenants of these agreements.
The following chart summarizes interest-bearing credit facilities as of June 30, 2000 and 1999:
| |
|
|
|
As of June 30, 2000
|
|
As of June 30, 1999
|
| (in thousands of dollars) |
|
Maturity
|
|
Balance
|
|
Rate
|
|
Balance
|
|
Rate
|
| Short-term Debt: |
|
|
|
|
|
|
|
|
|
|
|
|
| Warehouse facilities (1) |
|
2000-2002 |
|
$306,610 |
|
7.68 |
% |
|
$270,434 |
|
7.22 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Long-term Debt: |
| Discounted receivables |
|
2001-2008 |
|
$424,759 |
|
7.82 |
% |
|
$276,560 |
|
7.82 |
% |
| 9 7
/8% Senior notes
|
|
2004 |
|
155,000 |
|
10.85 |
% |
|
155,000 |
|
10.70 |
% |
| Other debt |
|
2000-2005 |
|
71,168 |
|
9.56 |
% |
|
56,553 |
|
8.83 |
% |
| Convertible sub notes |
|
2002 |
|
13,900 |
|
9.96 |
% |
|
13,900 |
|
9.96 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Total long-term debt
|
|
|
|
$664,827 |
|
|
|
|
$502,013 |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
(1)
|
$699,211 and $521,993 were available at June 30, 2000 and 1999, respectively.
|
Note 7. Other Income
The following represents a summary of the major components of other income:
| |
|
Year Ended June 30,
|
(in thousands of dollars)
|
|
2000
|
|
1999
|
|
1998
|
| Income realized from customer warrants (1) |
|
$11,830 |
|
$ 1,740 |
|
$ 696 |
| Medical receivables fees |
|
5,388 |
|
4,661 |
|
3,752 |
| Consulting and advisory fees |
|
4,188 |
|
3,774 |
|
172 |
| Late fees |
|
3,296 |
|
1,917 |
|
1,561 |
| Net service fee income |
|
2,102 |
|
3,135 |
|
2,317 |
| Contract fees and penalties |
|
1,118 |
|
1,234 |
|
434 |
| Preferred stock dividends received on investments |
|
725 |
|
134 |
|
225 |
| Commitment and referral fees |
|
595 |
|
524 |
|
105 |
| Gains from asset disposals |
|
584 |
|
201 |
|
350 |
| Contract placement fees |
|
350 |
|
174 |
|
352 |
| Miscellaneous |
|
280 |
|
2,513 |
|
1,059 |
| |
|
|
|
|
|
|
| Total other income |
|
$30,456 |
|
$20,007 |
|
$11,023 |
| |
|
|
|
|
|
|
|
(1)
|
Not related to current lending activities.
|
Note 8. Selling, General and Administrative Expenses
The following represents a summary of the major components of selling, general and administrative expenses (“SG&A”):
| |
|
Year Ended June 30,
|
(in thousands of dollars)
|
|
2000
|
|
1999
|
|
1998
|
| Salaries and benefits |
|
$17,774 |
|
$14,308 |
|
$ 7,433 |
| Outside services |
|
7,551 |
|
6,018 |
|
4,191 |
| Equipment |
|
2,897 |
|
2,860 |
|
2,063 |
| Building costs |
|
2,690 |
|
2,139 |
|
1,034 |
| Travel and entertainment |
|
2,432 |
|
2,070 |
|
1,495 |
| Other |
|
5,358 |
|
4,134 |
|
2,277 |
| |
|
|
|
|
|
|
| Total SG&A |
|
$38,702 |
|
$31,529 |
|
$18,493 |
| |
|
|
|
|
|
|
Note 9. Income Taxes
The provision for income taxes is comprised of the following:
| |
|
Year Ended June 30,
|
(in thousands of dollars)
|
|
2000
|
|
1999
|
|
1998
|
| Current taxes (refundable) |
|
$ 2,602 |
|
$(3,083 |
) |
|
$(1,539 |
) |
| Foreign |
|
2,213 |
|
1,161 |
|
|
399 |
|
| Deferred |
|
13,788 |
|
17,303 |
|
|
10,861 |
|
|
|
|
|
|
|
|
|
|
| Total |
|
$18,603 |
|
$15,381 |
|
|
$ 9,721 |
|
| |
|
|
|
|
|
|
|
|
A reconciliation of the provision for income taxes to the amount of income tax expense that would result from applying the federal statutory rate (35%) to earnings from
continuing operations is as follows:
| |
|
Year Ended June 30,
|
| |
|
2000
|
|
1999
|
|
1998
|
(in thousands of dollars)
|
|
$
|
|
%
|
|
$
|
|
%
|
|
$
|
|
%
|
| Provision for income taxes at the federal statutory rate |
|
14,715 |
|
35.0 |
|
12,267 |
|
35.0 |
|
7,896 |
|
35.0 |
| State income taxes, net of federal tax benefit |
|
2,005 |
|
4.8 |
|
1,676 |
|
4.8 |
|
1,023 |
|
4.5 |
| Foreign taxes, net of federal tax benefit |
|
1,438 |
|
3.4 |
|
755 |
|
2.2 |
|
259 |
|
1.1 |
| Limitation on utilization of foreign losses |
|
371 |
|
0.9 |
|
503 |
|
1.4 |
|
332 |
|
1.5 |
| Other |
|
74 |
|
0.2 |
|
180 |
|
0.5 |
|
211 |
|
0.9 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
18,603 |
|
44.3 |
|
15,381 |
|
43.9 |
|
9,721 |
|
43.0 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before minority interest, equity in net loss of investees, and provision for income taxes consist of the following:
| |
|
Year Ended June 30,
|
(in thousands of dollars)
|
|
2000
|
|
1999
|
|
1998
|
| Domestic |
|
$42,071 |
|
|
$34,261 |
|
$21,783 |
| Foreign |
|
(93 |
) |
|
670 |
|
1,109 |
| |
|
|
|
|
|
|
|
| Total |
|
$41,978 |
|
|
$34,931 |
|
$22,892 |
| |
|
|
|
|
|
|
|
The major components of our net deferred tax liabilities of $50.4 million and $36.7 million at June 30, 2000 and 1999, respectively, are as follows:
| |
|
Year Ended June 30,
|
(in thousands of dollars)
|
|
2000
|
|
1999
|
| Accumulated depreciation |
|
$51,523 |
|
$34,913 |
| Deferred gain on financing transactions |
|
21,822 |
|
17,871 |
| Net unrealized gains on security transactions |
|
3,800 |
|
– |
| Loss on hedging activities |
|
– |
|
1,376 |
| Other |
|
1,242 |
|
834 |
| |
|
|
|
|
| Total deferred tax liability |
|
78,387 |
|
54,994 |
| |
|
|
|
|
| Deferred recognition of lease income |
|
13,130 |
|
11,106 |
| Allowance for losses on receivables |
|
4,221 |
|
3,792 |
| Net operating loss carryforward (will expire in 2020) |
|
4,192 |
|
– |
| Net unrealized losses on available-for-sale securities |
|
70 |
|
– |
| State income taxes |
|
3,048 |
|
1,447 |
| Other |
|
3,312 |
|
1,953 |
| |
|
|
|
|
| Total deferred tax asset |
|
27,973 |
|
18,298 |
|
|
|
|
|
| Total net deferred tax liability |
|
$50,414 |
|
$36,696 |
| |
|
|
|
|
Note 10. Shareholders’ Equity
During fiscal year 1998, we issued 300,000 shares of our common stock in a private offering and 2,640,000 shares in a public offering for which we received net proceeds of
$4.9 million and $53.1 million, respectively. The net proceeds were used:
Ÿ
|
To fund our growth, including increasing the amount of equipment and medical receivables contracts we can fund;
|
Ÿ
|
To develop our expanding international operations and
|
Ÿ
|
For other working capital needs and general corporate purposes.
|
The 400,000 shares for the 1995 MEFC acquisition were issued in June 1998 and registered in January 1999.
In October 1999, we granted options to purchase 10,000 shares of DVI common stock at an exercise price of $13.50 per share as an incentive to a marketing and public relations
firm. The options will be fully vested on October 29, 2002 and will expire on October 29, 2009.
In October 1998 and August 1997, we issued options to purchase a total of 75,000 and 50,000 common shares at $15.00 and $15.3125 per share, respectively, to directors of the
Company. We record no compensation expense on these transactions. The options vested at various dates through October 2000 and will expire through October 2008.
In June 1997, we granted options to purchase 100,000 shares of DVI common stock at an exercise price of $13.50 per share as compensation to a financial advisory firm. The
options are fully vested and are exercisable for a period of five years from the date of grant.
Prior to June 30, 1998, we issued warrants to purchase a total of 80,000 common shares at prices between $7.625 and $8.375 per share to all directors. During fiscal 2000,
none of these warrants were exercised. During fiscal 1999, 20,000 shares at $7.625 were exercised. The 20,000 warrants still outstanding at June 30, 2000 are fully vested and will expire on October 16, 2000.
In June 1994, we issued convertible subordinated notes to related and unrelated parties that are convertible at the option of the holder into 1,415,094 shares of common stock
at $10.60 per share. There were no conversions to common stock during each of the fiscal years ended June 30 2000, 1999 and 1998. As of June 30, 2000, cumulative conversions of these notes were $1.1 million into 103,772 shares of common stock.
Note 11. Stock Option Plan and Incentive Agreement
We had a stock option plan from August 1986 that provided for the granting of options to employees to purchase up to 1,250,000 shares of our common stock at the fair market
value at the date of grant. Options granted under this plan generally vest over three to five years from the date of grant and expire ten years after the date of the grant. Any unexercised options are canceled 90 days after the termination of the employee
and are returned to the plan. This plan expired in August 1996.
Our current stock option plan, effective August 1996, provides for the granting of options to employees, consultants and directors to purchase up to 2,700,000 shares of our
common stock at the fair market value at the date of grant. Options granted under this plan generally vest over three to five years from the date of grant and expire ten years after the date of the grant. This plan will expire in August 2006.
The following table summarizes the activity under the plans for the periods indicated:
|
|
Options
Outstanding
|
|
Exercise Price
Per Share
|
|
Weighted Average
Exercise Price
Per Share
|
| Outstanding at July 1, 1997 |
|
869,300 |
|
|
$ 1.75 - $ 14.63 |
|
$10.85 |
| Granted |
|
653,000 |
|
|
14.44 - 25.06 |
|
16.71 |
| Exercised |
|
(109,499 |
) |
|
1.75 - 15.31 |
|
7.94 |
| Canceled |
|
(1,350 |
) |
|
|
|
|
| |
|
|
|
|
|
| Outstanding at June 30, 1998 |
|
1,411,451 |
|
|
$ 4.06 - $ 25.06 |
|
$13.79 |
| Granted |
|
795,800 |
|
|
13.94 - 22.50 |
|
15.94 |
| Exercised |
|
(68,250 |
) |
|
5.00 - 18.06 |
|
12.79 |
| Canceled |
|
(81,368 |
) |
|
15.19 - 22.00 |
|
20.37 |
| |
|
|
|
|
|
|
|
|
|
| Outstanding at June 30, 1999 |
|
2,057,633 |
|
|
$ 4.06 - $ 25.06 |
|
$14.41 |
| Granted |
|
876,000 |
|
|
13.50 - 17.19 |
|
16.76 |
| Exercised |
|
(54,366 |
) |
|
4.06 - 15.50 |
|
10.31 |
| Canceled |
|
(101,202 |
) |
|
14.63 - 22.50 |
|
17.72 |
| |
|
|
|
|
|
|
|
|
|
| Outstanding at June 30, 2000 |
|
2,778,065 |
|
|
$ 5.00 - $ 25.06 |
|
$15.11 |
| |
|
|
|
|
|
|
|
The following table summarizes stock options outstanding at June 30, 2000:
Range of
Exercise Price
|
|
Number of
Options
Outstanding
|
|
Outstanding
Weighted Average
Exercise Price
|
|
Number of
Options
Exercisable
|
|
Exercisable
Weighted Average
Exercise Price
|
|
Weighted Avg.
Remaining
Contractual Life
|
| $ 5.00 - $11.63 |
|
284,334 |
|
$ 8.62 |
|
284,334 |
|
$ 8.62 |
|
3 |
| 12.25 - 13.88 |
|
290,000 |
|
13.21 |
|
267,000 |
|
13.17 |
|
4 |
| 13.94 - 15.19 |
|
184,667 |
|
14.61 |
|
141,164 |
|
14.58 |
|
7 |
| 15.31 - 15.31 |
|
415,233 |
|
15.31 |
|
276,841 |
|
15.31 |
|
7 |
| 15.50 - 15.88 |
|
643,299 |
|
15.50 |
|
215,198 |
|
15.50 |
|
8 |
| 16.06 - 17.00 |
|
811,866 |
|
16.91 |
|
13,529 |
|
16.71 |
|
9 |
| 17.19 - 19.00 |
|
35,000 |
|
18.16 |
|
16,665 |
|
18.55 |
|
8 |
| 19.31 - 25.06 |
|
113,666 |
|
20.33 |
|
66,329 |
|
20.30 |
|
8 |
| |
|
|
|
|
|
|
|
|
|
|
| |
|
2,778,065 |
|
$15.11 |
|
1,281,060 |
|
$13.65 |
|
7 |
| |
|
|
|
|
|
|
|
|
|
|
If compensation cost for our stock option plan had been determined based on the fair value at the date of awards consistent with the fair value method described in SFAS No.
123, our net income, basic earnings per share, and diluted earnings per share would be reduced to the following proforma amounts at June 30, 2000, 1999 and 1998:
| |
|
Year Ended June 30,
|
(in thousands of dollars, except share data)
|
|
2000
|
|
1999
|
|
1998
|
| Net earnings |
|
$19,061 |
|
$17,000 |
|
$12,000 |
| |
|
|
|
|
|
|
| Basic earnings per share |
|
$ 1.34 |
|
$ 1.21 |
|
$ 1.05 |
| |
|
|
|
|
|
|
| Diluted earnings per share |
|
$ 1.27 |
|
$ 1.13 |
|
$ 0.97 |
| |
|
|
|
|
|
|
Significant assumptions used to calculate the fair value of awards for June 30, 2000, 1999 and 1998 are as follows:
| |
|
Year Ended
June 30, 2000
|
| |
|
2000
|
|
1999
|
|
1998
|
| Weighted average risk-free rate of return |
|
5.8 |
% |
|
5.4 |
% |
|
6.0 |
% |
| Expected option life (in months) |
|
60 |
|
|
60 |
|
|
60 |
|
| Expected volatility |
|
45 |
% |
|
63 |
% |
|
38 |
% |
| Expected dividends |
|
– |
|
|
– |
|
|
– |
|
We have an employee incentive agreement (“Agreement”). Under this Agreement, and subject to the discretion of our Compensation Committee, we will issue from time to
time an aggregate of not more than 200,000 shares of DVI common stock (“Incentive Shares”) to certain of our employees. Eligible employees must be employed by us during the above-described 30-day period in order to receive any Incentive Shares.
When issuing shares under these conditions, we will record compensation expense equal to the fair value of the common shares issued at the date the Compensation Committee awards the shares.
Note 12. Reconciliation of Earnings per Share Calculation
| |
|
Year Ended June 30,
|
(in thousands of dollars except per share data)
|
|
2000
|
|
1999
|
|
1998
|
| Basic |
|
|
|
|
| Income available to common shareholders |
|
$23,442 |
|
$19,668 |
|
$12,858 |
| Average common shares |
|
14,210 |
|
14,108 |
|
11,464 |
| Basic earnings per common share |
|
$ 1.65 |
|
$ 1.39 |
|
$ 1.12 |
| |
|
|
|
|
|
|
| Diluted |
|
|
|
|
| Income available to common shareholders |
|
$23,442 |
|
$19,668 |
|
$12,858 |
| Effect of dilutive securities: |
|
|
| Convertible debentures |
|
736 |
|
736 |
|
736 |
| |
|
|
|
|
|
|
| Diluted income available to common shareholders |
|
$24,178 |
|
$20,404 |
|
$13,594 |
|
|
| Average common shares |
|
14,210 |
|
14,108 |
|
11,464 |
| Effect of dilutive securities: |
| Warrants |
|
9 |
|
12 |
|
97 |
| Options |
|
184 |
|
255 |
|
374 |
| Convertible debentures |
|
1,311 |
|
1,311 |
|
1,311 |
| |
|
|
|
|
|
|
| Diluted average common shares |
|
15,714 |
|
15,686 |
|
13,246 |
|
|
| Diluted earnings per common share |
|
$ 1.54 |
|
$ 1.30 |
|
$ 1.03 |
| |
|
|
|
|
|
|
Note 13. Related Party Transactions
Our principal executive offices located in Jamison, Pennsylvania are leased from a party related to a shareholder and director of the Company. The lease commenced in July
2000. Previously, our executive offices located in Doylestown, Pennsylvania were leased from the same related party, and we recorded rent expense under that lease of $434,802, $447,074, and $322,229 for the years ended June 30, 2000, 1999, and 1998,
respectively.
At June 30, 2000 and 1999, receivables in installments from entities in which we have an investment interest totaled $5.8 million and $2.6 million, respectively.
As of June 30, 2000 and 1999, we had loans receivable from Company officers and employees totaling $1.6 million and $1.3 million, respectively.
In March 1999, we acquired preferred stock of U.S. Cancer Care for $7.5 million. We had receivables from and investments in this company of $9.6 million included on our balance sheet at June 30, 2000. We serviced receivables from USCC of
$15.9 million that were not included in our balance sheet.
As of June 30, 2000 and 1999, we had convertible subordinated notes totaling $9.6 million due to related parties.
Note 14. Commitments and Contingencies
Facility Leases—We lease our facilities under noncancelable operating leases with terms in excess of one year. The lease for our principal facility expires in
July 2010. Rent expense for all of our domestic and international office space for the years ended June 30, 2000, 1999 and 1998 amounted to approximately $2.3 million, $1.8 million and $0.9 million, respectively. Future minimum lease payments under these
leases are as follows:
| (in thousands of dollars) |
|
|
Year Ended June 30,
|
|
Future Minimum
Lease Payments
|
| 2001 |
|
$ 2,545 |
| 2002 |
|
2,182 |
| 2003 |
|
1,913 |
| 2004 |
|
1,722 |
| 2005 |
|
1,212 |
| Thereafter |
|
5,872 |
| |
|
|
| Total |
|
$15,446 |
|
|
|
Contingencies—Under certain limited recourse agreements, we may be required to provide for losses incurred on uncollected lease and medical receivables previously
securitized. This contingent liability, however, could be offset by any proceeds received from the resale or remarketing of available equipment financed under the agreements or outstanding medical receivables collected. Currently, we assess and include
this exposure within our evaluation of allowance for loss on our recorded finance receivables.
We have $230.0 million available under a facility with the option to sell to it certain equipment contracts. As of June 30, 2000, $75.9 million was sold to this facility. Our
obligations under this facility include servicing of the assets and assisting the owners in the securitization of the assets if the owners choose to do so.
We have credit lines of $4.8 million available from four foreign banks, of which $4.8 million was used as of June 30, 2000 to provide for the future payment of guarantees
made by DVI Europe, a branch office of DVI Financial Services. We record the present value of the future obligation as an asset within receivables and the corresponding liability within other liabilities at the date the guarantee is assumed. At June 30,
2000, the present value recorded for these guarantees was $3.4 million.
As of June 30, 2000 we had unfunded contract commitments of $173.7 million.
Litigation—We are involved in litigation both as a plaintiff and as defendant in matters arising out of our normal business activities. Management does not expect
the outcome of these lawsuits to have a material adverse effect on our consolidated financial statements.
Note 15. Benefit Plans
We maintain and administer an Employee Savings Plan (“Plan”) pursuant to Internal Revenue Code Section 401(k). The Plan provides for discretionary contributions as
determined by our Board of Directors. Substantially all full-time employees are eligible to participate. Each eligible employee can contribute up to 17% of his/her base salary up to the maximum allowable amount as determined by the Internal Revenue Code.
The Plan also provides for Company matching of employee
contributions. Prior to January 1, 1999, this Company matching was 40% up to $500 per employee per year. Effective January 1, 1999, the Company matches 25% up to $2,500 per employee per year. Company contributions to the Plan totaled $293,000, $196,000
and $60,000 during the years ended June 30, 2000, 1999 and 1998, respectively.
Note 16. Acquisitions and Disposition
In June 1998, we acquired for cash a 99% partnership interest in and certain assets of Third Coast Venture Lease Partners I, L.P. (“TCC”), for $9.3 million for
which no goodwill was recorded. TCC is a Chicago-based venture leasing operation, founded in 1996, which provides asset-backed financing to emerging growth companies for their key operating assets through lease lines of credit and other financial
structures. The purchase price was allocated to individual assets based on estimates of their fair market value. In February 1999, we purchased the remaining partnership interest in TCC resulting in goodwill of $0.9 million.
In September 1998, we acquired for cash substantially all the assets and retained all of the employees of a “small ticket” medical equipment financing business,
referred to as DVI Strategic Partner Group (“DVI SPG”), formerly known as Affiliated Capital, from Irwin Financial Corporation. We paid $77.5 million for this acquisition. DVI SPG is a Chicago-based medical equipment leasing company that was
founded 16 years ago.
In September 1998, we purchased Healthcare Technology Solutions (“HTS”), a custom software design firm that has been providing software and services to the
healthcare industry for approximately 20 years. HTS specializes in accounts receivable analysis software designed for financial services companies and accounts receivable collection software designed for healthcare providers.
In June 1999, we opened DVI Italia, S.r.l., Milan, Italy to expand our international medical equipment financings. Initial capitalization for this company was approximately
$558,000. Under this new company, in October 1999, we acquired for cash certain assets and retained several key employees of Leasing Medica Europa SpA, a company based in Italy that specialized in financing healthcare providers. This acquisition added
in-country financing experience, numerous healthcare contracts and extensive medical vendor agreements to our Italy business. We paid $3.0 million for this acquisition, which includes $0.6 million in goodwill. The acquired assets and the first eight
months of operating results were included in our balance sheet and operating statement as of June 30, 2000.
In March 2000, we opened DVI Finance SA (Pty) Ltd, our new business in South Africa. Headquartered in the suburbs of Johannesburg, this new business adds eighteen new
employees to the DVI worldwide staff. It offers small- and large-ticket medical equipment financing and other financial services to healthcare providers such as clinics, medical centers and physicians groups.
In March 2000, we closed operations of DVI Capital, our wholesale leasing business division. This closing resulted from narrowing spreads and the indirect nature of the
business relationships found in the wholesale lease business.
In June 2000, we purchased a joint venture interest in Medi Lease B.V. from the Medi Lease Group of companies and the Van den Hout family based in Helvoirt, The Netherlands.
We agreed to acquire a 50% interest in Medi Lease B.V. and 100% of Medi Lease en Financiering B.V. We paid $0.2 million for this acquisition. Medi Lease B.V. offers specialized financing to its Netherlands clients, which include hospitals and other
healthcare organizations.
Note 17. Estimated Fair Value of Financial Instruments
Following is a summary of the estimated fair value of our consolidated financial instruments at June 30, 2000 and 1999. We determined these estimated fair value amounts using
available market information and appropriate valuation methodologies such as market quotations and discounting expected cash flows using current market rates. For short-term and floating rate instruments, the carrying values approximate fair value.
Considerable judgment is necessary to interpret market data to develop the estimated fair values. Accordingly, the estimates presented herein may not necessarily be indicative of the amounts we could realize in a current market exchange. The use of
different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. The fair value estimates presented herein were based on information available as of June 30, 2000 and 1999. Although we are not
aware of any factors that would
significantly affect the estimated fair values, such values have not been updated since June 30, 2000; therefore, current estimates of fair value may differ significantly from the amounts presented herein. All instruments we hold are classified as other
than trading, except for certain investments. All amounts are reported in U.S. dollars, which is our reporting currency.
(in millions of dollars)
|
|
|
|
|
Year Ended June 30, 2000
|
|
Carrying
Amount
|
|
Estimated
Fair Value
|
| Assets: |
|
|
| |
Cash and cash equivalents |
|
$ 6.4 |
|
$ 6.4 |
| |
Restricted cash and cash equivalents |
|
73.7 |
|
73.7 |
| |
Accounts receivable |
|
36.8 |
|
36.8 |
| |
Investments |
|
10.1 |
|
10.1 |
| |
Receivables in installments (excluding investment in direct financing leases) |
|
407.6 |
|
393.9 |
| |
Notes collateralized by medical receivables |
|
257.5 |
|
257.5 |
| |
Recourse credit enhancements |
|
43.2 |
|
40.6 |
| Liabilities: |
| |
Borrowings under warehouse facilities |
|
$306.6 |
|
$306.6 |
| |
Discounted receivables |
|
424.8 |
|
423.1 |
| |
Senior notes |
|
155.0 |
|
140.5 |
| |
Other debt |
|
71.2 |
|
70.6 |
| |
Convertible subordinated notes |
|
13.9 |
|
21.0 |
Year Ended June 30, 1999
|
|
Carrying
Amount
|
|
Estimated
Fair Value
|
| Assets: |
|
|
| |
Cash and cash equivalents |
|
$ 5.7 |
|
$ 5.7 |
| |
Restricted cash and cash equivalents |
|
36.7 |
|
36.7 |
| |
Accounts receivable |
|
29.9 |
|
29.9 |
| |
Investments |
|
10.8 |
|
10.8 |
| |
Receivables in installments (excluding investment in direct financing leases) |
|
389.8 |
|
380.3 |
| |
Notes collateralized by medical receivables |
|
191.8 |
|
191.8 |
| |
Recourse credit enhancements |
|
62.1 |
|
58.0 |
| Liabilities: |
| |
Borrowings under warehouse facilities |
|
$270.4 |
|
$270.4 |
| |
Discounted receivables |
|
276.6 |
|
277.3 |
| |
Senior notes |
|
155.0 |
|
150.4 |
| |
Other debt |
|
56.6 |
|
56.4 |
| |
Convertible subordinated notes |
|
13.9 |
|
22.5 |
The methods and assumptions used to estimate the fair values of other financial instruments are summarized as follows:
Cash and Cash Equivalents, Restricted Cash and Cash Equivalents and Accounts Receivable—Due to their short-term and liquid nature, the carrying values of cash, its
equivalents and accounts receivable approximates fair value.
Investments—The fair value of our investments is determined by using market quotes from nationally traded exchanges. For investments in equity securities that are
not publicly traded, and therefore have no readily determinable fair value, carrying amount is used to approximate fair value.
Receivable in Installments—The fair value of the financing contracts was estimated by discounting expected cash flows using the current rates at which contracts of similar
fixed-rate credit quality, size and remaining maturity would be made as
of June 30, 2000 and 1999. We believe that the risk factor embedded in the entry-value interest rates applicable to performing contracts for which there are no known credit concerns results in a fair valuation of such contracts on an entry-value basis.
The fair value of the floating rate contracts was estimated at carrying value. In accordance with GAAP, we excluded receivables from lease contracts of approximately $324.5 million and $328.3 million as of June 30, 2000 and 1999, respectively, from the
receivable in installments fair value calculation.
Recourse Credit Enhancements—The fair value of the recourse credit enhancements was determined by discounting the expected future cash flows using current rates
for similar credit quality and remaining maturity.
Notes Collateralized by Medical Receivables—Due to their floating rate nature and frequent repricing, the carrying value of notes collateralized by medical
receivables approximates fair value.
Borrowings under Warehouse Facilities—The carrying values of the warehouse borrowings approximate fair value due to their short-term nature, frequent repricing
and floating rates.
Discounted Receivables—The fair value of discounted receivables, related to the securitization of contracts, was estimated by discounting future cash flows using
rates currently available for debt with similar terms and remaining maturities, except for floating rate securitizations in which the carrying value approximates fair value.
Other Debt, Senior Notes and Convertible Subordinated Notes—The fair value of other debt was estimated at the incremental current market borrowing rate. The fair
values of the senior notes and convertible subordinated notes were determined based on their quoted market prices.
Derivative Financial Instruments—
The following represents a summary of derivative financial instruments held at June 30, 2000 and 1999:
| |
|
June 30, 2000
|
|
|
Notional
Amount
|
|
Fair Value
(in thousands)
|
|
Deferred
Gains/(Losses)
(in thousands) (1)
|
| Treasury locks |
|
$ 50.0 million |
|
$(485.7 |
) |
|
$– |
| Swaps |
|
108.6 million |
|
133.8 |
|
|
– |
| Options |
|
40.0 million |
|
179.9 |
|
|
– |
| Foreign exchange forward rate agreements |
|
12.3 million |
|
(87.9 |
) |
|
– |
| |
|
June 30, 1999
|
|
|
Notional
Amount
|
|
Fair Value
(in thousands)
|
|
Deferred
Gains/(Losses)
(in thousands) (1)
|
| Treasury locks |
|
$400.0 million |
|
$609.3 |
|
|
$773.4 |
| Swaps |
|
15.0 million |
|
27.4 |
|
|
– |
| Options |
|
100.0 million |
|
(24.3 |
) |
|
– |
| Foreign exchange cross currency interest rate swap |
|
7.2 million |
|
596.0 |
|
|
– |
| Foreign exchange forward rate agreements |
|
6.7 million |
|
183.4 |
|
|
– |
| Foreign exchange interest rate swap |
|
2.4 million |
|
– |
|
|
– |
(1)
|
Represents derivative positions closed but not yet recognized in earnings either fully or through amortization. These positions
primarily relate to derivatives closed prior to completion of an anticipatory transaction.
|
Credit risk exists for these derivative instruments since a counterparty for any of these instruments may fail to make required payments in our favor. We seek to manage the
credit risk of possible counterparty default in these derivative transactions by
dealing exclusively with counterparties with investment grade ratings. The fair value of the derivative positions was determined by market dealers using valuation methodologies consistent with their valuing of all like instruments.
Swaps - Interest rate swaps are used to reduce the impact of rising interest rates in certain contract sale facilities where the cash flows from the
contracts sold are at fixed rates but the borrowing costs are at variable rates. Our swaps pay fixed rates of 4.35% to 10.13% and receive the Prime rate or LIBOR (or a country’s equivalent) rates ranging from one to six months. The swaps mature
through October 2004.
Forwards and Options - Treasury locks, collars and forward start swaps are used to hedge the interest rate risk on anticipated contract securitizations and
sales. Treasury lock and collar transactions lock in specific rates and a narrow range of rates, respectively, of Treasury notes having maturities comparable to the average life of the anticipated securitizations and sales. Forward start swaps lock in
specific rates of the LIBOR swap curve for the duration of the anticipated securitizations’ average life. The open positions at June 30, 2000 are for securitizations and sales expected to occur in the first and second quarters of fiscal 2001. We
deferred $0.3 million in gains and $1.3 million in losses associated with securitized transactions in fiscal years 2000 and 1999, respectively. These are reported as debt issuance costs and are amortized to earnings over the life of the respective
securitized pool. We recognized net gains or losses on securitized transactions of $3.2 million, ($2.6) million, and ($0.2) million for the years ended June 30, 2000, 1999 and 1998, respectively. These are reported in the gain on sale of financing
transactions.
Foreign Exchange Forward Contracts - We have international operations and foreign currency exposures at some of these operations due to lending in local
currencies. As a general practice, we have not hedged the foreign exchange exposure related to either the translation of overseas earnings into U.S. dollars or the translation of overseas equity positions back to U.S. dollars. Foreign exchange forward
contracts are used to hedge the amount receivable to the U.S. parent for specific portfolios in Euros. At June 30, 2000, we had $12.3 million in forward contracts for Euros. In fiscal year 2000, we recognized $2.5 million in gains in cumulative
translation adjustments on our foreign exchange contracts. These foreign exchange forward contracts are accounted for as hedges of foreign currency.
Note 18. Quarterly Financial Data (Unaudited)
The following is a summary of the quarterly results of operations for the fiscal years ended June 30, 2000 and 1999:
| |
|
Fiscal Year 2000
|
| |
|
Three Months Ended
|
(in thousands of dollars except per share data)
|
|
September 30
|
|
December 31
|
|
March 31
|
|
June 30
|
| Finance and other income |
|
$31,870 |
|
$36,234 |
|
$36,602 |
|
$38,666 |
| Net operating income |
|
21,162 |
|
23,849 |
|
22,696 |
|
22,450 |
Earnings before minority interest, equity in net loss of
investees, and provision for income taxes |
|
9,673 |
|
10,599 |
|
10,911 |
|
10,795 |
| Net earnings |
|
5,572 |
|
5,802 |
|
6,007 |
|
6,061 |
Net earnings per common and common equivalent share—
basic |
|
$ 0.39 |
|
$ 0.41 |
|
$ 0.42 |
|
$ 0.43 |
| |
|
|
|
|
|
|
|
|
Net earnings per common and common equivalent share—
diluted |
|
$ 0.37 |
|
$ 0.38 |
|
$ 0.39 |
|
$ 0.40 |
| |
|
|
|
|
|
|
|
|
| |
|
Fiscal Year 1999
|
| |
|
Three Months Ended
|
(in thousands of dollars except per share data)
|
|
September 30
|
|
December 31
|
|
March 31
|
|
June 30
|
| Finance and other income |
|
$21,815 |
|
$25,664 |
|
$26,611 |
|
$29,708 |
| Net operating income |
|
16,126 |
|
18,101 |
|
18,385 |
|
20,149 |
Earnings before minority interest, equity in
net loss of investees, and provision for
income taxes |
|
7,975 |
|
8,428 |
|
8,681 |
|
9,847 |
| Net earnings |
|
4,544 |
|
4,823 |
|
4,943 |
|
5,358 |
Net earnings per common and common
equivalent share—basic |
|
$ 0.32 |
|
$ 0.34 |
|
$ 0.35 |
|
$ 0.38 |
| |
|
|
|
|
|
|
|
|
Net earnings per common and common
equivalent share—diluted |
|
$ 0.30 |
|
$ 0.32 |
|
$ 0.33 |
|
$ 0.35 |
| |
|
|
|
|
|
|
|
|
Note 19. Segment Reporting
In June 1999, we adopted SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information”. This statement establishes standards for the reporting
of operating segments in interim and annual financial statements, as well as requiring related disclosures about products and services, geographic areas and major customers. In accordance with this standard, we have determined the following reportable
segments based on the types of our financings:
·
|
Equipment financing, which includes:
|
|
·
|
Sophisticated medical equipment financing directly to U.S. and international end users,
|
|
·
|
Medical equipment contracts acquired from originators that generally do not have access to cost-effective permanent funding and
|
|
·
|
“Small ticket” equipment financing.
|
·
|
Medical receivables financing, which includes:
|
|
·
|
Medical receivable lines of credit issued to a wide variety of healthcare providers and
|
|
·
|
Software tracking of medical receivables.
|
·
|
Corporate and all other, which includes:
|
|
·
|
Interim real estate financing, mortgage loan placement, subordinated debt financing for assisted living facilities and, to a lesser
extent, merger and acquisition advisory services to our customers operating in the long-term care, assisted care and specialized hospital markets;
|
|
·
|
Asset-backed financing (including lease lines of credit) to emerging growth companies and
|
|
·
|
Miscellaneous financial advisory services, corporate income and overhead allocations.
|
The following information reconciles our reportable segment information to consolidated totals:
| |
|
Year Ended June 30, 2000
|
(in thousands of dollars)
|
|
Total Finance
and Other
Income
|
|
Interest
Expense
|
|
Net
Earnings(1)
|
|
Net
Financed
Assets
|
| Equipment financing |
|
$ 89,784 |
|
$56,309 |
|
$12,548 |
|
|
$ 845,446 |
| Medical receivables financing |
|
31,734 |
|
19,759 |
|
2,328 |
|
|
250,971 |
| Corporate and all other |
|
21,854 |
|
2,875 |
|
8,566 |
|
|
61,113 |
| |
|
|
|
|
|
|
|
|
|
| Consolidated total |
|
$143,372 |
|
$78,943 |
|
$23,442 |
|
|
$1,157,530 |
| |
|
|
|
|
|
|
|
|
|
(1) The decrease in Equipment Financing's fiscal year 2000 net earnings is principally due to the impact of both domestic and international start-up operations as well as lower levels of other income. The increase in Corporate and all
other fiscal year 2000 net earnings is related to higher levels of other income.
| |
|
Year Ended June 30, 1999
|
(in thousands of dollars)
|
|
Total Finance
and Other
Income
|
|
Interest
Expense
|
|
Net
Earnings
|
|
Net
Financed
Assets
|
| Equipment financing |
|
$ 80,099 |
|
$47,424 |
|
$20,815 |
|
|
$751,567 |
| Medical receivables financing |
|
23,000 |
|
12,632 |
|
2,052 |
|
|
186,419 |
| Corporate and all other |
|
699 |
|
794 |
|
(3,199 |
) |
|
50,590 |
| |
|
|
|
|
|
|
|
|
|
| Consolidated total |
|
$103,798 |
|
$60,850 |
|
$19,668 |
|
|
$988,576 |
| |
|
|
|
|
|
|
|
|
|
| |
|
Year Ended June 30, 1998
|
(in thousands of dollars)
|
|
Total Finance
and Other
Income
|
|
Interest
Expense
|
|
Net
Earnings
|
|
Net
Financed
Assets
|
| Equipment financing |
|
$57,368 |
|
|
$38,958 |
|
|
$17,159 |
|
|
$574,084 |
| Medical receivables financing |
|
19,178 |
|
|
10,424 |
|
|
2,310 |
|
|
136,562 |
| Corporate and all other |
|
(2,191 |
) |
|
(170 |
) |
|
(6,611 |
) |
|
17,489 |
| |
|
|
|
|
|
|
|
|
|
|
|
| Consolidated total |
|
$74,355 |
|
|
$49,212 |
|
|
$12,858 |
|
|
$728,135 |
| |
|
|
|
|
|
|
|
|
|
|
|
Monthly interest expense for warehouses and securitization debt are expensed to the divisions based upon the underlying collateral and advance rates. The interest expense for
unsecured debt is charged according to the amount allocated on the balance sheet using the quarterly yield of unsecured debt. The balance sheet is allocated unsecured debt according to the percent of unsecured debt to the sum of the unsecured debt and
shareholders’ equity at the consolidated level. Income taxes are allocated to each division using the best estimate of tax rates for that division.
Geographic Information
We attribute finance and other income earned and net financed assets to geographic areas based on the location of our subsidiaries. Finance and other income earned and the
balances of net financed assets for years ended and as of June 30, 2000 and 1999 by geographic area are as follows:
| |
|
Year ended June 30, 2000
|
(in thousands of dollars)
|
|
Total Finance
and Other
Income
|
|
Net
Financed
Assets
|
| United States |
|
$115,429 |
|
$ 871,371 |
| International |
|
27,943 |
|
286,159 |
| |
|
|
|
|
| Total |
|
$143,372 |
|
$1,157,530 |
| |
|
|
|
|
| |
|
Year ended June 30, 1999
|
(in thousands of dollars)
|
|
Total Finance and
Other Income
|
|
Net Financed
Assets
|
| United States |
|
$ 84,753 |
|
$784,247 |
| International |
|
19,045 |
|
204,329 |
| |
|
|
|
|
| Total |
|
$103,798 |
|
$988,576 |
| |
|
|
|
|
| |
|
Year ended June 30, 1998
|
(in thousands of dollars)
|
|
Total Finance and
Other Income
|
|
Net Financed
Assets
|
| United States |
|
$65,276 |
|
$589,563 |
| International |
|
9,079 |
|
138,572 |
|
|
|
|
|
| Total |
|
$74,355 |
|
$728,135 |
|
|
|
|
|
Major Customer Information
We have no single customer that accounts for 10% or more of revenue for years ended June 30, 2000 and 1999.
Note 20. Subsequent Events
Beginning in July 1999, we made certain loans to Corvis Corporation (Nasdaq: CORV) for which we received warrants that, upon exercise, will allow us to acquire an aggregate
of 737,900 shares of Corvis common stock at a price of $0.76 per share. There is a 180-day lock-up on the exercise of these warrants and/or common shares with a partial release after 90 days if certain terms and conditions are met. Based on an independent
professional appraisal, the value of these warrants recorded was $15.0 million. We will recognize income on a level yield basis over the term of the underlying loans that expire in 2003. Accordingly, income of $5.8 million was recognized as of June 30,
2000 as amortization of deferred loan fees. On July 28, 2000, Corvis Corporation completed its initial public offering of common stock. As of August 18, 2000, Corvis shares were trading at $94 20
/32
***
| ITEM 9. |
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding the Company’s directors is incorporated herein by reference to the Company’s definitive proxy statement filed not later than October 30,
2000, with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended. Information regarding the Company’s Executive Officers is set forth in Part I of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 402 of Regulation S-K is incorporated herein by reference to the Company’s definitive proxy statement filed not later than October 30,
2000 with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 403 of Regulation S-K is incorporated herein by reference to the Company’s definitive proxy statement filed not later than October 30,
2000, with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 404 of Regulation S-K is incorporated herein by reference to the Company’s definitive proxy statement filed not later than October 30,
2000, with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) List of Documents filed as part of this Report:
|
(1)
|
Financial Statements:
|
|
See Index to Consolidated Financial Statements included as part of this Form 10-K on Page 34.
|
|
(2)
|
Financial Statement Schedules:
|
Schedule Number
|
|
Description
|
|
Page
Number
|
| II. |
|
Amounts Receivable from Related Parties |
|
68 |
|
|
All other schedules are omitted because of the absence of conditions under which they are required or because all material information required to be reported
is included in the consolidated financial statements and notes thereto.
|
|
See Index to Exhibits of this Form 10-K on Pages 69-71.
|
|
There were no reports on Form 8-K filed during the fourth quarter of the fiscal year ended June 30, 2000.
|
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: September 25, 2000
|
By /s/ MICHAEL
A. O’HANLON
|
|
President and Chief Executive Officer
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities
and on the dates indicated.
| Signature
|
|
Title
|
|
Date
|
| Principal Financial Officer: |
|
|
|
|
| /s/ STEVEN
R. GARFINKEL
Steven R. Garfinkel
|
|
Executive Vice President and
Chief Financial Officer |
|
September 25, 2000
|
|
|
| Principal Accounting Officer: |
|
|
|
|
| /s/ JOHN
P. BOYLE
John P. Boyle
|
|
Vice President and Chief
Accounting Officer |
|
September 25, 2000
|
| Directors
|
|
Date
|
|
|
|
Date
|
|
|
/s/ GERALD
L. COHN
Gerald L. Cohn |
|
September 25, 2000 |
|
/s/ MICHAEL
A. O’HANLON
Michael A. O’Hanlon
|
|
September 25, 2000 |
| |
| /s/ WILLIAM
S. GOLDBERG
William S. Goldberg
|
|
September 25, 2000 |
|
/s/ HARRY
T. J. ROBERTS
Harry T. J. Roberts
|
|
September 25, 2000 |
| |
|
|
|
|
|
|
/s/ JOHN
E. MC
HUGH
John E. McHugh |
|
September 25, 2000 |
|
/s/ NATHAN
SHAPIRO
Nathan Shapiro
|
|
September 25, 2000 |
| |
|
|
|
|
|
|
DVI, INC. AND SUBSIDIARIES
SCHEDULE II—AMOUNTS RECEIVABLE FROM CERTAIN RELATED PARTIES
Name of Debtor
|
|
Balance at
Beginning
of Year
|
|
Additions
|
|
Deductions
|
|
Balance at
End of Year
|
| Year ended June 30, 2000: |
|
|
|
|
| Michael A. O’Hanlon |
|
$516,000 |
|
$ 37,650 |
|
$ 29,100 |
|
$524,550 |
| Anthony J. Turek |
|
165,982 |
|
96,452 |
|
11,827 |
|
250,607 |
| Richard Miller |
|
152,250 |
|
9,000 |
|
6,750 |
|
154,500 |
| Stuart Murray |
|
78,155 |
|
– |
|
78,155 |
|
– |
| |
|
|
|
|
|
|
|
|
| Total |
|
$912,387 |
|
$143,102 |
|
$125,832 |
|
$929,657 |
| |
|
|
|
|
|
|
|
|
| Year ended June 30, 1999: |
|
|
| Michael A. O’Hanlon |
|
$295,000 |
|
$221,000 |
|
$ – |
|
$516,000 |
| Mark H. Idzerda |
|
220,000 |
|
– |
|
220,000 |
|
– |
| Anthony J. Turek |
|
35,000 |
|
130,982 |
|
– |
|
165,982 |
| Richard Miller |
|
– |
|
152,250 |
|
– |
|
152,250 |
| Stuart Murray |
|
– |
|
78,155 |
|
– |
|
78,155 |
| |
|
|
|
|
|
|
|
|
| Total |
|
$550,000 |
|
$582,387 |
|
$220,000 |
|
$912,387 |
| |
|
|
|
|
|
|
|
|
| Year ended June 30, 1998: |
|
|
|
|
| Michael A. O’Hanlon |
|
$285,000 |
|
$ 10,000 |
|
$ – |
|
$295,000 |
| Mark H. Idzerda |
|
220,000 |
|
– |
|
– |
|
220,000 |
| Anthony J. Turek |
|
– |
|
35,000 |
|
– |
|
35,000 |
| |
|
|
|
|
|
|
|
|
| Total |
|
$505,000 |
|
$ 45,000 |
|
$ – |
|
$550,000 |
| |
|
|
|
|
|
|
|
|
| Year ended June 30, 1997: |
|
|
| Michael A. O’Hanlon |
|
$344,000 |
|
$ – |
|
$ 59,000 |
|
$285,000 |
| Mark H. Idzerda |
|
– |
|
220,000 |
|
– |
|
220,000 |
| |
|
|
|
|
|
|
|
|
| Total |
|
$344,000 |
|
$220,000 |
|
$ 59,000 |
|
$505,000 |
| |
|
|
|
|
|
|
|
|
| Year ended June 30, 1996: |
|
|
| Michael A. O’Hanlon |
|
$ 59,000 |
|
$285,000 |
|
$ – |
|
$344,000 |
| |
|
|
|
|
|
|
|
|
EXHIBIT INDEX
Exhibit
Number
|
|
Description
|
| 3.1 |
|
Restated Certificate of Incorporation of the Company (12) |
|
|
| 3.2 |
|
By-laws of the Company and Amendment to By-Laws of the Company dated April 17, 1996. (2) |
|
|
| 4.1 |
|
Form of Common Stock Certificate. (3) |
|
|
| 4.2 |
|
Form of Global Note representing Senior Notes due 2004. (4) |
|
|
| 4.3 |
|
Indenture dated January 27, 1997 between the Company and the Trustee. (4) |
|
|
| 4.4 |
|
First Supplemental Indenture dated January 30, 1997 with respect to the Senior Notes between the
Company and the Trustee. (4) |
|
|
| 4.5 |
|
Form of Global Note representing Senior Notes due 2004. (5) |
|
|
| 4.6 |
|
Supplemental Indenture dated December 23, 1998 with respect to the Senior Notes between the
Company and the Trustee. (5) |
|
|
| 10.1 |
|
DVI Financial Services Inc. Employee Savings Plan. (6) |
|
|
| 10.2 |
|
Purchase Agreement dated as of October 22, 1991, by and among DMR Associates, L.P., HIS
Acquisition, Inc. and DVI Financial Services Inc. (7) |
|
|
| 10.3 |
|
Direct Stock Option Agreements, dated as of October 16, 1990, between the Company and certain of
the Company’s directors. (7) |
|
|
| 10.4 |
|
Amended and Restated Letter Agreement dated December 15, 1991, between the Company and
W.I.G. Securities Limited partnership regarding investment banking services. (7) |
|
|
| 10.5 |
|
Warrant dated April 27, 1992, executed by the Company on behalf of W.I.G. Securities Limited
Partnership. (7) |
|
|
| 10.6 |
|
Note Purchase Agreement among the Company and the Purchasers listed therein, dated as of June 21,
1994. (8) |
|
|
| 10.7 |
|
Amendment No. 1 to Note Purchase Agreement among the Company and the Purchasers listed
therein, dated as of November 1994. (9) |
|
|
| 10.8 |
|
Amendment No. 1 to the MEFC Agreement dated as of June 1995. (9) |
|
|
| 10.9 |
|
Joint Venture Agreement dated November 10, 1995 among Philips Medical Systems International
B.V., the Company and Philadelphia International Equities, Inc. (10) |
|
|
| 10.10 |
|
Interim Loan and Security Agreement, dated as of February 20, 1997, between Prudential Securities
Credit Corporation and DVI Financial Services Inc. (2) |
|
|
| 10.11 |
|
Shareholders’ Agreement dated as of April 27, 1998 by and among DVI International, Inc. (the
Company’s wholly owned subsidiary), International Finance Corporation, Nederlandse Financierings-
Maatschappij voor Ontwikkelinglarden N.V., Philadelphia International Equities Inc. and MSF
Holding Ltd. (11) |
|
|
| 10.12 |
|
Share Retention, Non-Competition and Put Option Agreement dated April 27, 1998 among DVI, Inc.,
International Finance Corporation, MSF Holding Ltd., Cadilur S.A., Estolur S.A. and Natuler S.A.
(11) |
|
|
| 10.13 |
|
Share Retention, Non-Competition and Put Option Agreement dated April 27, 1998 among DVI, Inc.,
Nederlandse Financierings-Maatschappij voor Ontwikkelinglarden N.V., MSF Holding Ltd., Cadilur
S.A., Estolur S.A., and Natuler S.A. (11) |
|
|
| 10.14 |
|
First Amendment, dated September 30, 1998, to Share Retention, Non-Competition and Put Option
Agreement dated April 27, 1998 among DVI, Inc., International Finance Corporation, MSF Holding
Ltd., Medical Systems Finance S.A., Estolur S.A., Healthcare Systems Finance S.A., and Sistemas
Financieros S.A. (15) |
EXHIBIT INDEX (CONTINUED)
Exhibit
Number
|
|
Description
|
| 10.15 |
|
First Amendment, dated September 30, 1998, to Share Retention, Non-Competition and Put Option
Agreement dated April 27, 1998 among DVI, Inc., Nederlandse Financierings-Maatschappij voor
Ontwikkelinglarden N.V., MSF Holding Ltd., Medical Systems Finance S.A., Estolur S.A., Healthcare
Systems Finance S.A. and Sistemas Financieros S.A. (13) |
|
|
| 10.16 |
|
Amended and Restated Investment Agreement dated April 27, 1998 (amended and restated September
30, 1998) among DVI, Inc., Nederlandse Financierings-Maatschappij voor Ontwikkelinglarden N.V.,
MSF Holding Ltd., Medical Systems Finance S.A., Estolur S.A., Healthcare Systems Finance S.A.,
and Sistemas Financieros S.A. (14) |
|
|
| 10.17 |
|
Amended and Restated Investment Agreement dated April 27, 1998 (amended and restated September
30, 1998) among International Finance Corporation, MSF Holding Ltd., Medical Systems Finance
S.A., Estolur S.A., Healthcare Systems Finance S.A. and Sistemas Financieros S.A. (15) |
|
|
| 10.18 |
|
Guaranty Agreement dated as of April 27, 1998 by DVI, Inc. in favor of Cadilur S.A. and Natuler
S.A. (11) |
|
|
| 10.19 |
|
Limited Partnership Interest Purchase Agreement dated as of June 30, 1998 by and among Cargill
Leasing Corporation, Third Coast SPC-I, L.L.C., Third Coast GP-I and DVI Financial Services Inc.
(11) |
|
|
| 10.20 |
|
1996 Incentive Stock Option Plan. (15) |
|
|
| 10.21 |
|
DVI, Inc. Change-of-Control Agreement, dated December 31, 1999, entered into between the
Company and Steven R. Garfinkel, the Company’s Executive Vice President and Chief Financial
Officer. Richard E. Miller and Anthony J. Turek, both Executive Vice Presidents of the Company,
each signed identical agreements with the Company as of the same date. (16) |
|
|
| 10.22 |
|
DVI, Inc. Severance Pay Plan (16) |
|
|
| 10.23 |
|
Independent Auditors' Consent |
|
|
| 21 |
|
Subsidiaries of the Registrant. (1) |
|
|
| 24 |
|
Power of Attorney. (4) |
|
|
|
|
| 1. |
|
Filed herewith. |
|
|
| 2. |
|
Filed previously as an Exhibit to the Company’s Form 10-Q for the quarter ended March 31, 1997
and by this reference incorporated herein. |
|
|
| 3. |
|
Filed as an Exhibit to the Company’s Registration Statement on Form S-3 (Registration No. 33-
84604) and by this reference incorporated herein. |
|
|
| 4. |
|
Filed previously as an Exhibit to the Company’s Current Report on Form 8-K dated January 27, 1997
and by this reference incorporated herein. |
|
|
| 5. |
|
Filed previously as an Exhibit to the Company’s Current Report on Form 8-K dated December 23,
1998 and by this reference incorporated herein. |
|
|
| 6. |
|
Filed previously as an Exhibit to the Company’s Registration Statement on Form S-18 (Registration
No. 33-8758) and by this reference incorporated herein. |
|
|
| 7. |
|
Filed previously as an Exhibit to the Company’s Form 10-K (File No. 0-16271) for the year ended
June 30, 1990 and by this reference incorporated herein. |
|
|
| 8. |
|
Filed previously as an Appendix to the Company’s Consent Statement dated as of December 29, 1994
and by this reference incorporated herein. |
EXHIBIT INDEX (CONCLUDED)
9.
|
Filed previously as an Exhibit to the Company’s Registration Statement on Form S-1 (Registration No. 33-60547) and by this
reference incorporated herein.
|
10.
|
Filed previously as an Exhibit to the Company’s Form 10-K (File No. 0-16271) for the year ended June 30, 1996 and by this
reference incorporated herein.
|
11.
|
Filed previously as an Exhibit to the Company’s Form 10-K (File No. 0-16271) for the year ended June 30, 1998 and by this
reference incorporated herein.
|
12.
|
Filed previously as an Exhibit to the Company’s Form 10-Q for the quarter ended December 31, 1998 and by this reference
incorporated herein.
|
13.
|
This Exhibit is not being filed herewith because it is substantially identical to Exhibit 10.14 in all material respects except as
to the parties thereto.
|
14.
|
This Exhibit is not being filed herewith because it is substantially identical to Exhibit 10.17 in all material respects except as
to the parties thereto.
|
15.
|
Filed previously as an Exhibit to the Company’s Form 10-K (File No. 0-16271) for the year ended June 30, 1999 and by this
reference incorporated herein.
|
16.
|
Filed previously as an Exhibit to the Company’s Form 10-Q for the quarter ended December 31, 1999 and by this reference
incorporated herein.
|
