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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
F O R M 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition period from to .
Commission file Number 0-16271
DVI, INC
(Exact name of registrant as specified in charter)
Delaware 22-2722773
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
500 Hyde Park
Doylestown, Pennsylvania 18901
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (215) 345-6600
Securities registered pursuant to Section 12(b) of the Act:
Name of each Exchange
Title of Each Class on which Registered
Common Stock
par value $.005 per share New York Stock Exchange, Inc.
9 7/8% Senior Notes due 2004 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 August 29, 1997 was
approximately $91,892,419 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
10 herein for a statement of the assumptions upon which this calculation is
based.)
As of August 29, 1997, the Registrant had 10,545,848 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.
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PART I
ITEM 1. BUSINESS
OVERVIEW
DVI, Inc. is an independent specialty finance company that conducts a
medical equipment finance business and a related medical receivables finance
business. As of June 30, 1997, the Company's total assets and shareholder's
equity were $634.1 million and $95.8 million, respectively.
Medical Equipment Finance. The Company finances the acquisition of
diagnostic imaging and other types of sophisticated medical equipment used by
outpatient healthcare providers, medical imaging centers, groups of physicians,
integrated healthcare delivery networks and hospitals. The Company's equipment
finance business operates by (i) providing financing directly to end users of
equipment; (ii) purchasing medical equipment loans and leases originated by
Originators through the Wholesale Program; and (iii) more recently, providing
finance programs for vendors of diagnostic and patient treatment devices. The
Company's typical equipment loan has an initial principal balance ranging from
$300,000 to $2.0 million. Virtually all of the Company's equipment loans are
structured on a fixed interest rate basis such that the full cost of the
equipment and all financing costs are repaid during the financing term, which
typically is five years. Because most of the Company's equipment loans are
structured as notes primarily secured by equipment or direct financing leases
with a bargain purchase option for the equipment user, the amount carried by the
Company on its balance sheet for total residual interest in equipment is quite
small ($8.3 million as of June 30, 1997). Total equipment financing loans
originated in the Company's fiscal year ended June 30, 1997 were $401.7 million.
Of this amount, approximately $303.2 million was provided by the Company
directly to end users; $85.0 million was generated through the Wholesale
Program; and $13.5 million was generated through various vendor finance
programs.
The Company has traditionally focused its financing activities on the
outpatient diagnostic and treatment services sector of the healthcare industry,
typically consisting of radiologists and other diagnostic service providers
which were among the first in the healthcare industry to move away from the
hospital setting toward outpatient treatment centers. The Company expects the
range of services provided in an outpatient setting to expand, and intends as
part of its business strategy to focus on the equipment used and medical
receivables generated as a result of that expansion.
Relatively high cost MRI and CT equipment have been the principal equipment
types acquired by the Company's customers and financed by the Company, and the
Company expects it will continue to finance substantial amounts of these types
of equipment as a result of its experience and expertise in the industry and
because that market has been relatively underserved by traditional financing
sources. More recently, the Company has targeted the growing, and substantially
more competitive, lower cost diagnostic and patient treatment device market,
where it is seeking to leverage its reputation for expertise in medical
equipment financing and its ability to provide financing to a wide range of
healthcare providers.
Medical Receivables Finance. The Company provides lines of credit to a wide
variety of healthcare providers, many of which are also equipment finance
customers. Substantially all of the lines of credit are collateralized by third
party medical receivables due from Medicare, Medicaid, HMOs, PPOs and commercial
insurance companies. The Company's medical receivables loans are structured as
floating rate revolving lines of credit secured by all medical receivables
generated by the borrowers, as well as other collateral. These lines of credit
typically range in size from $300,000 to $5.0 million. While the Company's
medical receivables finance business is newer and substantially smaller than its
medical equipment finance business, the Company expects this business unit to
grow as a result of its recent success in accessing the securitization markets
and other sources of permanent funding. New commitments of credit for the
medical receivables business for the year ended June 30, 1997 were $101.1
million, and medical receivables funded as of June 30, 1997 were $87.4 million.
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 approximately
$500,000, the principal sources of financing generally are limited to specialty
finance companies or factoring companies that purchase receivables at a
discount. The Company believes 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. The Company's strategy in medical receivables
financing is to differentiate itself from many of its competitors by offering
loans secured by medical receivables
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rather than factoring those receivables at a discount. The Company believes that
loans secured by medical receivables are often more attractive to borrowers that
generate high-quality medical receivables because those borrowers find the
Company's financing has a lower cost than the cost to those borrowers of
factoring their receivables. The Company makes loans in an amount approximately
equal to 70% to 80% of the aggregate amount of the eligible receivables pledged
by the borrower.
Credit Underwriting. The Company believes the credit underwriting process
that it uses when originating loans is effective in managing its risk. The
process follows detailed procedures, and benefits from the significant
experience of the Company in evaluating the creditworthiness of potential
borrowers. The Company also has been successful in restructuring those credits
which do become delinquent. The Company's net charge-offs, as a percentage of
average net financed assets, were 0.08%, 0.35% and 0.15%, for the years ended
June 30, 1997, 1996, and 1995, respectively, and total delinquencies, as a
percentage of managed net financed assets, for the same periods were 4.30%,
4.82% and 4.51%, respectively. The Company's historical levels of net
charge-offs and delinquencies are not necessarily predictive of future results.
Various factors, including changes in the way the Company's customers are paid
for their services, other developments in the healthcare industry, and new
technological developments affecting the resale value of equipment financed by
the Company, could cause the Company's future net charge-offs and delinquency
rates to be higher than those experienced historically.
Capital Requirements. The Company's strong growth in loan origination and
net financed receivables has required substantial amounts of external funding.
The Company, through its operating subsidiaries, finances its equipment and
medical receivables loans on an interim basis with secured credit facilities
provided by banks and other financial institutions. These interim "warehouse"
facilities are refinanced using asset securitizations, whole loan sales, and
other structured finance techniques that permanently fund most of the Company's
equipment loans and medical receivables loans. These permanent financings
require additional capital to be invested by the Company to fund reserve
accounts or to meet the overcollateralization required in the securitizations
and sales of the Company's loans.
Recent Growth. In recent years, the Company has grown substantially. Total
equipment financing loans originated by the Company grew from $46.4 million in
the year ended June 30, 1992 to $401.7 million in the year ended June 30, 1997.
The Company's managed net financed receivables grew from $92.4 million as of
June 30, 1992 to $925.8 million as of June 30, 1997. In the Company's medical
receivables financing business, which was established in 1993, new commitments
of credit in the year ended June 30, 1997 were $101.1 million compared with
$40.0 million in the year ended June 30, 1996. Medical receivables funded at
June 30, 1997 totaled $87.4 million, an increase of $48.8 million over the prior
fiscal year end.
BUSINESS STRATEGY
The Company is seeking to continue its growth by expanding its existing
share of the medical equipment financing markets (which historically have been
and continue to be its largest, most important business segment) and by
generating financing opportunities in other areas of the health care industry.
The principal components of this strategy are as follows:
- - Generate additional business through existing customers and relationships with
equipment manufacturers. The Company will continue to target the market for
high cost medical equipment, where it enjoys relationships with a large number
of users of sophisticated medical equipment. The Company also has a close
working relationship with some of the largest manufacturers of diagnostic
imaging equipment, which it maintains by meeting those manufacturers' needs to
arrange financing for the higher-cost equipment they sell to healthcare
providers. The Company believes these relationships, together with its
extensive expertise in the medical industry, can result in a continuing source
of financing opportunities.
- - Expand medical receivables financing business. The Company intends to
penetrate further the medical receivables financing market by generating
financing opportunities among its existing equipment finance customer base,
particularly those customers that are expanding to provide additional
healthcare services. The Company's strategy in medical receivables financing
is to differentiate itself from many of its competitors by offering loans
secured by medical receivables rather than factoring those receivables at a
discount.
- - Establish equipment financing relationships with manufacturers of lower cost
diagnostic and patient treatment devices. The Company is seeking to use its
reputation as a medical equipment financing specialist and its 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.
The Company intends to finance increased amounts of diagnostic and patient
treatment devices such as ultrasound, nuclear medicine and X-ray equipment.
For the year ended June 30, 1997, the Company's loan origination for that
market were $13.5 million.
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- - Originate medical equipment loans on a wholesale basis. The Company intends to
continue its wholesale program, in which it originates medical equipment loans
by purchasing them from originators. The Company uses its expertise both in
analyzing healthcare credits and utilizing securitization to service
originators that often need access to sources of permanent financing for the
equipment loans they originate. During the year ended June 30, 1997, the
Company purchased $85.0 million in medical equipment loans through the
wholesale program.
- - Capitalize on international medical equipment financing needs. During the year
ended June 30, 1997 the Company continued establishing international
operations in order to capitalize on growing overseas markets for sales of
medical equipment and devices. The Company has a joint venture based in
Singapore with a major manufacturer of medical equipment and a financial
institution to service the medical equipment market in the Asia-Pacific region
and steps have been taken to form a joint venture in Latin America. DVI Europe
is the Company's branch established in the United Kingdom to service the
medical equipment industry in Europe. While the Company believes these
international operations have significant potential, it expects that potential
will be realized, if at all, over a period of several years rather than in the
near term.
DVI, Inc. conducts its business through two operating subsidiaries, DVI
Financial Services and DVI Business Credit. The Company conducts securitizations
through special-purpose, indirect, wholly-owned subsidiaries. The Company also
conducts other structured financings through limited-purpose subsidiaries or
through its operating subsidiaries. The borrowers under the Company's various
warehouse credit facilities are DVI Financial Services or DVI Business Credit.
SALES AND MARKETING
The Company generates most of its financing opportunities from two sources:
(i) healthcare providers with whom the Company's sales organization has
relationships; and (ii) medical equipment manufacturers that use third parties
to finance the sale of their products. Generally, medical equipment
manufacturers refer customers to the Company for financing because they believe
the Company has the ability to understand and measure the creditworthiness of
the customer's business and provide the financing necessary for the completion
of the equipment sale.
The Company has established a close working relationship with major
manufacturers of diagnostic imaging and radiation care equipment by meeting
their needs to arrange financing for the higher cost equipment they sell to
healthcare providers. These manufacturers include Hitachi Medical Systems
America, Philips Medical Systems and Elekta AB among others. The Company
believes these relationships afford it a competitive advantage over other
providers of medical equipment financing.
The Company is seeking to expand its equipment finance business into the
relatively more competitive patient diagnostic and treatment device market. The
Company believes its experience and expertise in financing a wide range of
healthcare providers and meeting the equipment financing needs of major
manufacturers of diagnostic imaging and radiation care equipment will help it
build relationships with patient treatment device manufacturers. To establish
relationships with patient treatment device manufacturers, the Company expects
to train the manufacturers' sales personnel in the use of equipment financing as
a sales tool and to provide equipment financing programs that make these device
manufacturers more competitive. The Company believes the patient treatment
device market is more diverse than the diagnostic imaging market because of the
larger number of manufacturers and types of products, and the greater price
range of those products. The patient treatment device manufacturers targeted by
the Company produce products with an average cost of between $75,000 and
$300,000. For the year ended June 30, 1997, the loan origination for this
business unit was $13.5 million.
The Company also has a business unit dedicated to the wholesale program. The
Company purchases equipment loans from originators that generally do not have
access to cost effective permanent funding for their loans. The Company
initiated the wholesale program in June 1994 and during the years ended June 30,
1997 and 1996, the Company purchased an aggregate of $85.0 and $95.3 million of
equipment loans from 12 originators, respectively. The Company expects to
continue this business at approximately current levels.
In the medical receivables finance business, the lines of credit originated
by the Company are secured by pledges of (i) specific receivables due the
provider, (ii) the overall receivables portfolio of the healthcare provider, and
(iii) other forms of credit enhancement such as cash collateral, letters of
credit and guarantees. The Company's medical receivables loan marketing
specialists assist the Company's equipment loan sales force in originating
medical receivables loans. While the growth and cross selling of the medical
receivables financing business to the Company's existing client base has been
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restricted because of the lack of access to permanent funding, the Company has
established two credit facilities totaling $65.0 million for medical
receivables. The medical receivables loan business entails significant risks and
capital requirements.
The Company's sales and marketing organization consists of 26 healthcare
finance specialists located in various parts of the United States. These
individuals generally have a credit industry and/or medical equipment
background. The Company generally locates sales personnel in geographic areas
where they have knowledge of the local market. The Company believes that sales
personnel who understand local economic and political trends are a valuable
component of its credit underwriting process.
CAPITAL RESOURCES AND TRANSACTION FUNDING
The Company obtains initial funding for most of its equipment loans through
"warehouse" facilities provided by banks and other financial institutions. Loans
made under these facilities are repaid when the Company permanently funds its
equipment loans through securitization, or other limited-recourse permanent
funding programs, including loan sales. Typically, equipment loans are held for
30 to 180 days before they are permanently funded.
The Company's need for capital in addition to the funding provided under its
warehouse and permanent funding facilities is affected by two primary factors:
(i) the level of credit enhancement required under its various warehouse and
permanent funding facilities and (ii) the amount of loans held at any time by
the Company that do not qualify as eligible collateral under those facilities.
Because of the manner in which the Company accounts for its business operations
it may require substantial amounts of capital even in periods when it reports
positive earnings. This arises principally because there are timing differences
between the Company's recognition for accounting purposes of various items of
expense and income and its actual receipt of cash that cause the Company's cash
flow at times of strong growth in loan origination to be lower than its reported
earnings. The two most significant of these differences are (x) the deferral of
the Company's costs to originate each loan which are amortized for accounting
purposes over the life of the loan, even though the costs are paid in cash at
the time of the loan origination, and (y) the recognition of gain on the sale of
a loan for accounting purposes at the time the sale is deemed to have occurred,
even though in many transactions treated as sales of loans for accounting
purposes, the cash is received over the same time period as the original
amortization schedule of the loan. While these factors tend to reduce the
Company's liquidity at times of strong growth in loan origination, conversely,
if the Company's loan growth were to decline, these same factors would have the
effect of improving the Company's cash flow from operations in the short term.
Continuing Need for Capital. Each of the Company's warehouse facilities and
permanent funding vehicles require the Company to provide equity or a form of
recourse credit enhancement to the respective lenders or investors and generally
do not permit the Company to fund general corporate requirements. Therefore, the
actual liquidity, or funds available to the Company to finance its growth, are
limited to the cash generated from net financed receivables and the available
proceeds of equity or debt securities issued by DVI, Inc. At times of strong
origination growth the Company's cash flows from operations are insufficient to
fund these requirements. As a result, the Company's need to fund its high growth
rates in loan origination necessitates substantial external funding to provide
the equity or capital required as recourse credit enhancement with which to
leverage borrowings. The Company has no binding commitments for the capital it
expects it will continue to require, and its ability to obtain that capital in
the future will be dependent on a number of factors including the condition of
the capital markets and economic conditions generally.
Warehouse Facilities. As of June 30, 1997, the Company had an aggregate
maximum of $398.0 million potentially available for equipment loan financing
under various warehouse facilities of which it had borrowed an aggregate of
$44.6 million. These facilities are provided by a syndicate of banks that
participate in a revolving credit arrangement and by investment banking firms
that the Company uses for securitizations. The loans made under the bank
warehouse facility (i) bear interest at floating rates; (ii) are full recourse
obligations of the Company; and (iii) typically advance an amount equal to
approximately 95.0% of the cost of the equipment subject to the loans being made
thereunder. Loans made under the bank warehouse facility typically are repaid
with the proceeds of advances made under securitization warehouse facilities.
Those advances in turn are typically repaid with proceeds from permanent
fundings. Loans funded under securitization warehouse facilities cease to be
eligible collateral if they are not funded within a specified period of time.
The amount advanced under the securitization warehouse facilities generally is
90.0% of the discounted value of the pledged receivables. If the Company were
unable to arrange continued access to acceptable warehouse financing, the
Company would have to curtail its loan origination, which in turn would have a
material adverse effect on the Company's financial condition and operations.
Permanent Funding Program. Since 1991, the most important source of
permanent funding for the Company for equipment loan financing has been
securitization and other forms of structured finance. Securitization is a
process in which a pool of equipment loans (in the Company's case, typically 100
to 150) is transferred to a special-purpose financing vehicle
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which issues notes to investors. Principal and interest on the notes issued to
investors by the securitization subsidiary are paid from the cash flows produced
by the loan pool, and the notes are secured by a pledge of the assets in the
loan pool as well as by other collateral. In the securitizations sponsored by
the Company, equipment loans funded through the 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, securitizations sponsored by the Company are enhanced through a
combination of some or all of these methods. In the securitizations sponsored to
date by the Company, the Company effectively has been required to furnish credit
enhancement equal to the difference between (i) the aggregate principal amount
of the equipment loans originated by the Company and transferred to the
Company's special purpose finance subsidiary and the related costs of
consummating the securitization and (ii) the net proceeds received by the
Company in such securitizations. The requirement to provide this credit
enhancement reduces the Company's liquidity and requires it periodically to
obtain additional capital. There can be no assurance that the Company will be
able to obtain additional capital.
For accounting purposes, the Company's securitizations are treated as either
financings (on balance sheet transactions) or sales (off balance sheet
transactions). An on-balance sheet transaction is one in which the loans being
securitized remain on the Company's balance sheet as an asset for their
originally contracted term as a result of the consolidation of the assets and
liabilities of the special purpose vehicle with the Company's for financial
accounting purposes. An off balance sheet transaction removes the loans from the
Company's balance sheet and results in the Company recognizing a gain on the
sale of the underlying loans upon completion of the securitization.
The Company continually seeks to improve the efficiency of its permanent
funding techniques by reducing up-front costs and minimizing the cash
requirements of the Company. The Company may consider alternative structures,
including senior/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 will
depend on market conditions, costs of securitization and the availability of
credit enhancement options to the Company. The Company expects to continue to
use securitization and other forms of structured financing, on both a public and
private basis, as its principal source of permanent funding for the foreseeable
future.
To be cost efficient, a securitization must cover a relatively large and
diverse portfolio of equipment loans. One of the basic requirements of the
credit rating agencies that rate the notes issued in securitizations relates to
borrower concentration and requires that no single credit (borrower) may
constitute a significant portion of the pool of equipment loans being
securitized (in the Company's case, the limit is generally about 3%). Because of
these concentration requirements the Company generally must accumulate in excess
of $60 million in loans for each securitization. The credit rating agencies also
have other concentration guidelines such as equipment type and the geographic
location of the obligors. These requirements mean that not all of the equipment
loans held in the Company's warehouse facilities at any point in time can be
placed in one securitization.
If for any reason the Company were to become unable to access the
securitization market to permanently fund its equipment loans, the consequences
for the Company would be materially adverse. The Company's ability to complete
securitizations and other structured finance transactions depends upon a number
of factors, including general conditions in the credit markets, the size and
liquidity of the market for the types of receivable-backed securities issued or
placed in securitizations sponsored by the Company and the overall financial
performance of the Company's loan portfolio. The Company does not have binding
commitments from financial institutions or investment banks to provide permanent
funding for its equipment or medical receivables loans.
Senior Notes. On January 30, 1997, the Company 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 the Company's ability to pay dividends and to make
certain other kinds of payments. That agreement also prohibits the Company from
incurring additional indebtedness unless certain financial ratio tests are met.
Interest is payable semi-annually on February 1 and August 1 of each year,
commencing on August 1, 1997. The Notes will be redeemable at the option of the
Company in whole or in part at any time on or after February 1, 2002 at
specified redemption prices. The proceeds from the sale are being used (i) to
fund the Company's growth, including increasing the amount of equipment and
medical receivables loans the Company can fund, (ii) to develop the Company's
new international operations, including the purchase of receivables originated
outside the United States and investment in joint ventures, (iii) for other
working capital needs and (iv) for general corporate purposes.
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Hedging Strategy. The Company's equipment loans are virtually all structured
on a fixed interest rate basis. When the Company originates equipment loans, it
bases its pricing in part on the "spread" it expects to achieve between the
interest rate it charges its equipment loan customers and the effective interest
cost it will pay when it permanently funds those loans. Increases in interest
rates between the time the loans are originated and the time they are
permanently funded could narrow, eliminate or even reverse the spread between
the interest rate the Company realizes on its equipment loans and the interest
rate that the Company pays under its warehouse facilities or under a permanent
funding program. In an attempt to protect itself against that risk, the Company
uses a hedging strategy. The Company uses derivative financial instruments, such
as forward rate agreements, Treasury locks, and interest rate swaps, caps and
collars, to manage its interest rate risk. The derivatives are used to manage
three components of this interest rate risk: interest sensitivity adjustments,
pricing of anticipated loan securitizations and sales, and interest rate spread
protection. The Company seeks to manage the credit risk of possible counterparty
default in these derivative transactions by dealing exclusively with
counterparties with investment grade ratings.
Forward rate agreements are for interest sensitivity adjustments in
conjunction with cash market activities and are used to extend the repricing
period of short-term floating rate warehouse facilities. Treasury locks and
collars are used to hedge the interest rate risk on anticipated loan
securitizations and sales. Treasury lock and collar transactions lock in
specific rates and a narrow range of rates, respectively, of Treasury notes
having maturities comparable to the average life of the anticipated
securitizations and sales. Interest rate swaps and caps are used for interest
rate spread protection to protect from rising interest rates in certain loan
sale facilities where the cash flows from the loans sold are fixed rate but the
borrowing costs are variable rate.
There can be no assurance that the Company's hedging strategy or techniques
will be effective, that the profitability of the Company will not be adversely
affected during any period of changes in interest rates, or that the costs of
hedging will not exceed the benefits. A substantial and sustained increase in
interest rates could adversely affect the Company's ability to originate loans.
In certain circumstances, the Company for a variety of reasons may retain for an
indefinite period certain of the equipment loans it originates. In such cases,
the Company's interest rate exposure may continue for a longer period of time
than the Company otherwise considers desirable.
Medical Receivable Financing. The Company funds its medical receivable
financing business through various sources. The Company's principal bank
revolving credit agreement permits up to $18 million to be used to warehouse
medical receivables loans. Warehouse facilities totaling $65 million are
available through a bank and an investment bank.
While the medical receivable financing business shares certain
characteristics, including an overlapping customer base, with the Company's
medical equipment financing business, there are many differences, including
unique risks. Healthcare providers could overstate the quality and
characteristics of their medical receivables, which the Company analyzes in
determining the amount of the line of credit to be secured by such receivables.
After the Company has established or funded a line of credit, the healthcare
providers could change their billing and collection systems, accounting systems
or patient records in a way that could adversely affect the Company's ability to
monitor the quality and/or performance of the related medical receivables. In
addition, there are substantial technical legal issues associated with creating
and maintaining perfected security interests in medical receivables. Payors may
attempt to offset their payments to the Company against debts owed to the payors
by the healthcare providers. The Company may have a conflict of interest when
the Company acts as servicer for an equipment-based securitization and
originates medical receivables loans to borrowers whose previous equipment loans
have been securitized. The Company's efforts to develop suitable sources of
funding for its medical receivables financing business through securitization or
other structured finance transactions may be constrained or hindered due to the
fact that the use of structured finance transactions to fund medical receivables
is a relatively new process.
Credit Risk. Loans to outpatient healthcare providers, which constitute a
substantial portion of the Company's customers, often require a high degree of
credit analysis. Although the Company seeks to mitigate its risk of default and
credit losses through its underwriting practices and loan servicing procedures
and through the use of various forms of non-recourse or limited recourse
financing (in which the financing sources that permanently fund the Company's
equipment and other loans assume some or all of the risk of default by the
Company's customers), the Company remains exposed to potential losses resulting
from a default by an obligor. Obligors' defaults could cause the Company to make
payments to the extent the Company is obligated to do so and in the case of its
permanent equipment and other funding arrangements to the extent of the
Company's remaining credit enhancement position; could result in the loss of the
cash or other collateral pledged as credit enhancement under its permanent
equipment and other funding arrangements; or could require the Company to
forfeit any residual interest it may have retained in the underlying equipment.
During the period after the Company initially funds a loan and prior to the time
it funds the loan on a permanent basis, the Company is exposed to full
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recourse liability in the event of default by the obligor. In addition, under
the terms of securitizations and other types of structured finance transactions,
the Company generally is required to replace or repurchase equipment and other
loans in the event they fail to conform to the representations and warranties
made by the Company, even in transactions otherwise designated as nonrecourse or
limited recourse.
Defaults by the Company's customers also could adversely affect the
Company's ability to obtain additional financing in the future, including its
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 loans previously financed by the Company in deciding whether
and on what terms to make new loans. In addition, the credit rating agencies and
insurers that are often involved in securitizations consider prior credit
performance in determining the rating to be given to the securities issued in
securitizations sponsored by the Company and whether and on what terms to insure
such securities. To date, all of the Company's medical receivable loans (as
opposed to its equipment loans) have been funded on a full recourse basis
whereby the Company is fully liable for any losses that are incurred.
Under the Company's wholesale program, the Company purchases equipment loans
from originators that generally do not have direct access to the securitization
market as a source of permanent funding for their loans. The Company does not
work directly with the borrowers at the origination of these equipment loans and
therefore is not directly involved in structuring the credits, however the
Company independently verifies credit information supplied by the originator.
Accordingly, the Company faces a somewhat higher degree of risk when it acquires
loans under the wholesale program. During the years ended June 30, 1997 and
1996, loans purchased under the wholesale program constituted 21.2% and 30.1%,
respectively, of the total loans originated during the period. There can be no
assurance that the Company will be able to grow this business successfully or
avoid the credit risks related to wholesale loan origination.
COMPETITION
The financing of sophisticated medical equipment is highly competitive. The
Company competes with equipment manufacturers that sell and finance their own
products, leasing subsidiaries of national and regional commercial banks and
other leasing and financing companies. Many of the Company's competitors have
significantly greater financial and marketing resources than the Company. In
addition, the levels of competition in the lower-cost diagnostic and patient
treatment device market and medical receivable financing market are greater than
the levels of competition historically experienced by the Company in the higher
cost medical equipment market. There can be no assurance that the Company will
be able to compete successfully in any or all of its targeted markets.
GOVERNMENT REGULATION
Although most states do not regulate the equipment financing business,
certain states do require licensing of lenders and financiers, limitations on
interest rates and other charges, adequate disclosure of certain contract terms
and limitations on certain collection practices and creditor remedies. In
addition, the operation of certain types of diagnostic imaging and patient
treatment equipment is regulated by federal, state and/or local authorities. For
example, a shared service provider or healthcare provider using equipment
financed by the Company may be required to obtain and maintain approvals from
governmental authorities in order to service other healthcare providers with
whom it has entered into service agreements. Failure by the Company's customers
to comply with these requirements could adversely affect their ability to meet
their obligations to the Company. The ability of the Company's equipment
financing customers to satisfy their obligations to the Company also could be
adversely affected by changes in regulations which limit or prohibit the
referral of patients by physicians who have invested in healthcare facilities
financed by the Company.
EMPLOYEES
As of July 3, 1997, the Company had 137 full-time employees consisting of
8 executive officers, 26 sales and sales management personnel, and 107
administrative, accounting and technical personnel. None of the Company's
employees are covered by a collective bargaining agreement, and management
believes that its relationship with its employees is good.
8
<PAGE> 9
ITEM 2. PROPERTIES
The Company owns no real property and leases all of its offices. The
Company's principal executive offices are located in Doylestown, Pennsylvania.
In total, the Company leases an aggregate of approximately 40,000 square feet of
office space in various states. The Company believes that the present facilities
are adequate to meet its foreseeable needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any pending litigation or legal proceedings,
or to the best of its 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 its 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, 1997.
EXECUTIVE OFFICERS OF THE REGISTRANT
As of June 30, 1997, the executive officers of DVI, Inc. were:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Michael A. O'Hanlon 50 Director, President and Chief Executive Officer
Steven R. Garfinkel 54 Executive Vice President and Chief Financial Officer
Richard E. Miller 45 Executive Vice President
Anthony J. Turek 54 Executive Vice President and Chief Credit Officer
John P. Boyle 48 Vice President and Chief Accounting Officer
Melvin C. Breaux 56 Vice President, Secretary and General Counsel
Cynthia J. Cohn 38 Vice President
Alan J. Velotta 50 Vice President
</TABLE>
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. Previously,
Mr. O'Hanlon served as executive vice president of DVI since joining the
Company in March 1993. Mr. O'Hanlon also serves on the executive committee
of DVI. Prior to joining the Company, Mr. O'Hanlon served as president and
chief executive officer of Concord Leasing, Inc. ("Concord Leasing") for
nine years. Concord Leasing provides medical, aircraft, shipping, and
industrial equipment financing. U.S. Concord, Inc., a subsidiary, provides
equipment financing for the medical imaging industry. Previously, Mr.
O'Hanlon was a senior executive with Pitney Bowes Credit Corporation. Mr.
O'Hanlon received his Master of Science degree from the University of
Connecticut, and his Bachelor of Business Administration from the
Philadelphia College of Textiles and Science. Mr. O'Hanlon became a
director of DVI in November 1993.
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 DVI. Mr. Garfinkel joined the Company in September 1995. His
responsibilities include corporate finance, loan funding, balance sheet
management, accounting and financial reporting, internal control and
financial planning. Mr. Garfinkel has extensive experience in developing
and managing corporate finance relationships, money market funding,
derivative hedging, financial planning and management information systems.
Before joining DVI, Mr. Garfinkel spent his twenty-nine year career 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. Mr.
Miller joined the Company in April 1994. Mr. Miller is president of DVI
Financial Services Inc. and also serves on the executive committee of DVI.
His primary responsibility is to manage the Company's equipment financing
business in the United States. Before joining the Company, he served for
six years as vice president sales for Toshiba America Medical Systems, a
major
9
<PAGE> 10
distributor 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.
He also previously served in sales management with General Electric
Medical Systems. Mr. Miller has a Bachelor of Arts degree from Eastern
College.
ANTHONY J. TUREK is an executive vice president and the chief credit
officer of DVI. Mr. Turek has served in that capacity since March 1988.
Mr. Turek also serves on the executive committee of DVI. Prior to joining
the Company, Mr. Turek was vice president, Commercial Banking at
Continental Illinois National Bank ("CINB") in Chicago from 1968 to 1988.
For the five years prior to joining DVI, Mr. Turek managed the equipment
leasing and transportation divisions of CINB. Prior responsibilities
included management positions in the special industries, metropolitan and
national divisions of CINB. Before his employment with CINB, Mr. Turek was
a trust officer with Bank of America. Mr. Turek received his Bachelor of
Science degree from Iowa State University and his Master of Science degree
from the University of Missouri.
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. Before joining the Company, Mr. Boyle spent seventeen
years of his professional career in senior finance and accounting
positions with financial services organizations. He spent the initial five
years of his career with Peat Marwick Mitchell & Co. in Philadelphia. Mr.
Boyle is a General Securities Principal and a CPA with almost twenty years
of experience in the financial services industry. Beyond his accounting
background, he has extensive experience in credit and corporate finance
matters. Mr. Boyle holds a Bachelor of Arts degree from Temple University.
MELVIN C. BREAUX is general counsel, secretary and a vice president of the
Company and is general counsel and a vice president of DVI Financial
Services. Prior to joining the Company in July 1995, Mr. Breaux was a
partner in the Philadelphia, PA law firm of Drinker Biddle & Reath. 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 a Bachelor of Arts degree from Temple University and a
Juris Doctor degree from the University of Pennsylvania School of Law.
CYNTHIA J. COHN has been a vice president of DVI since October 1988 and
executive vice president of DVI Business Credit since January 1994. She is
responsible for all sales and marketing functions of DVI Business Credit.
Ms. Cohn has been employed by the Company in a sales and management
capacity since July 1986. Ms. Cohn also handles certain shareholder
relation functions for the Company. 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. She holds a Bachelor
of Arts degree from Ithaca College. Ms. Cohn is the daughter of Gerald L.
Cohn, a director of the Company.
ALAN J. VELOTTA is a vice president of the Company. He was appointed
President of DVI Business Credit in April 1997. Mr. Velotta joined the
Company in April 1994 as a group managing director of DVI Capital, the
Company's wholesale group. His primary responsibility is to apply to
Business Credit the same finance, leadership and technical skills he used
to develop DVI Capital. Prior to joining DVI, he served as vice
president-operations for Picker Financial Group, the captive leasing
company of Picker International. Previously, Mr. Velotta was vice
president/central division manager for Chrysler Capital Corporation.
-----------------------------
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, it has been 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 (Bahamas) and
by Ronald Baron. However, this should not be deemed to constitute an
admission 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 the Company's definitive proxy statement relating to its
scheduled December 1997 Annual Meeting of Shareholders to be filed with
the Securities and Exchange Commission.
10
<PAGE> 11
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Price Range of Common Stock
The following table sets forth high and low last reported sales prices per share
of Common Stock on the New York Stock Exchange, Inc. for the periods indicated:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30, 1997 HIGH LOW
- ------------------------------- ---- ---
<S> <C> <C>
First Quarter ...................... $17 3/8 $12 1/4
Second Quarter ..................... 14 7/8 12 1/2
Third Quarter ...................... 13 3/8 11
Fourth Quarter ..................... 14 5/8 11 1/4
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30, 1996 HIGH LOW
- ------------------------------- ---- ---
<S> <C> <C>
First Quarter .................................. $13 3/4 $11 1/8
Second Quarter.................................. 14 1/2 12 5/8
Third Quarter .................................. 14 3/8 12 1/4
Fourth Quarter ................................. 15 7/8 13
</TABLE>
DIVIDEND POLICY
The Company has not declared or paid any cash dividends since its inception, and
the Company anticipates that any future earnings will be retained for investment
in corporate operations. Any declaration of dividends in the future will be
determined in light of the conditions affecting the Company at that time,
including, among other things, its earnings, financial condition, capital
requirements, level of debt and the terms of any contractual limitations on
dividends. The Company's principal warehouse facility prohibits DVI Financial
Services, the Company's principal operating subsidiary, from paying cash
dividends. In addition, the agreement with respect to the Company's Senior Notes
and 9-1/8% Convertible Subordinated Notes due 2002 (the "Convertible
Subordinated Notes") places limitations on the payment of dividends by the
Company and its subsidiaries.
As of August 29, 1997, there were approximately 5,035 beneficial holders of the
Company's Common Stock.
11
<PAGE> 12
ITEM 6. SUMMARY CONSOLIDATED FINANCIAL AND OPERATING INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
---------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Finance and other income ...................................... $55,971 $49,013 $35,985 $20,609 $14,095
Interest expense .............................................. 38,395 30,489 22,860 8,833 5,005
Net interest and other income ................................. 17,576 18,524 13,125 11,776 9,090
Selling, general and administrative expenses .................. 13,382 9,898 7,891 6,049 5,487
Provision for losses on receivables ........................... 2,386 2,325 1,261 1,716 248
Earnings from continuing operations before provision for
income taxes, equity in net earnings (losses) of investees
and discontinued operations .................................. 15,847 14,333 7,015 4,313 4,459
Net earnings from continuing operations ....................... 8,941 8,175 4,069 2,260 2,580
Net primary earnings per share from continuing operations ..... $ 0.81 $ 0.81 $ 0.61 $ 0.34 $ 0.39
Weighted average number of shares outstanding ................. 11,098 10,118 6,652 6,717 6,601
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
--------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents ................. $ 8,935 $ 2,376 $ 1,963 $ 1,714 $ 2,199
Cash and cash equivalents, restricted ..... 26,425 32,522 12,241 13,065 6,825
Total assets .............................. 634,119 560,894 432,876 265,949 147,161
Borrowings under warehouse facilities ..... 44,586 168,108 155,172 34,586 45,221
Long-term debt, net ....................... 435,238 267,568 219,130 162,964 51,827
Shareholders' equity ...................... 95,755 85,263 40,250 33,993 34,664
</TABLE>
The Company has not declared or paid any cash dividends since its inception.
(See Dividend Policy.) See Item 7 for management's discussion of discontinued
operations.
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<PAGE> 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company is an independent specialty finance company that conducts a medical
equipment finance business and a related medical receivables finance business.
The Company finances diagnostic imaging and other types of sophisticated medical
equipment used by outpatient healthcare providers, medical imaging centers,
groups of physicians, integrated healthcare delivery networks and hospitals. The
Company also provides lines of credit to a wide variety of healthcare providers,
substantially all of which are collateralized by third party medical receivables
due from Medicare, Medicaid, HMO's, PPO's and commercial insurance companies.
CERTAIN ACCOUNTING CONSIDERATIONS
Equipment financing. For accounting purposes, the Company classifies
equipment contracts it originates as notes secured by equipment, direct
financing leases or operating leases. Notes secured by equipment and direct
financing leases are generally those transactions in which the obligor has
substantially all of the benefits and risks of ownership of the equipment.
Operating leases are generally those which only 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 the
Company's balance sheet as "investment in direct financing leases and notes
secured by equipment or medical receivables." For statements of operations
purposes, those transactions result in amortization of finance income over the
transaction term in the amounts computed using the interest method.
The Company enters into two types of direct financing lease transactions, which
are referred to as "conditional sales agreements" and "fair market value
transactions." Conditional sales agreements and notes secured by equipment
represent those transactions in which no residual interest in the underlying
equipment is retained by the Company. Fair market value transactions are those
transactions in which the Company retains a residual interest in the equipment.
This residual interest is recorded on the Company's books as an estimate of the
projected value of the financed equipment at the end of the transaction term. At
the inception of notes secured by equipment and direct financing lease
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.
Beginning in 1993, the Company significantly reduced its emphasis on entering
into fair market value transactions and adopted a strategy to reduce the
percentage of residual interests on its balance sheet, and accordingly, the
percentage of the Company's equipment financing transactions structured as loans
and conditional sales agreements has increased significantly. During the
Company's fiscal year ended June 30, 1997 ("fiscal 1997") the amount of residual
interest has increased, but as a percentage of net financed assets it remained
consistent with the Company's fiscal year ended June 30, 1996 ("fiscal 1996")
percentage of 1.0%. As of June 30, 1997, residual valuation increased to $8.3
million from $6.2 million at June 30, 1993, and from 5.3% of net financed
receivables as of June 30, 1993 to 1.4% at June 30, 1997. The Company believes
that loans and conditional sales agreements will constitute a high percentage of
its equipment financing transactions in the future.
Leases and contracts for the rental of equipment which do not meet the criteria
of direct financing leases are accounted for as operating leases. Equipment
under an operating lease or a rental contract is recorded on the balance sheet
at the Company's cost under the caption of "equipment on operating leases" and
depreciated on a straight-line basis over the estimated useful life of the
equipment.
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 either to purchase the
equipment for its fair market value, extend the financing term under
renegotiated payments or return the equipment to the Company. If the equipment
is returned to the Company, the Company must sell or lease the equipment to
another user.
In transactions classified as notes secured by equipment and direct financing
leases that the Company permanently funds through securitization or other
structured finance transactions which the Company treats as debt, income is
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<PAGE> 14
deferred and recognized using the interest method over the respective term of
the transactions. If an obligor under a transaction defaults, the Company may
not receive all or a portion of the unamortized income associated with the
transaction.
MEDICAL RECEIVABLES FINANCING
In addition to its core equipment finance business, the Company provides lines
of credit under which the Company makes full recourse loans to healthcare
providers that are secured by medical receivables and other collateral. 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.
DISCONTINUED OPERATIONS
In June 1993, the Company adopted a formal plan to discontinue its healthcare
services segment. At the end of fiscal 1993, the Company established a reserve
for the divestiture of the operations and recorded a loss on discontinued
operations and disposal of discontinued operations. As of June 30, 1994, the
Company had disposed of or entered into definitive agreements to sell the
outpatient facilities, had written off the investment and assets of the
remainder, and recorded an additional $3.1 million after-tax charge in excess of
the amounts of estimated losses reported as of June 30, 1993 for the disposition
of this segment of the Company's business.
RESULTS OF OPERATIONS
The Company has classified income under the categories of "amortization of
finance income," "other income" and "net gain on sale of financing
transactions." Amortization of finance income consists of the interest component
of scheduled payments on notes secured by equipment (or medical receivables) and
direct financing leases, and is calculated using the interest method whereby the
income is reported over the term of the transactions. Other income consists
primarily of fees and late charges, dividends on investment in investee's
preferred stock, servicing fees, income from asset disposals and income from
receivable purchases and billing/collecting activities which the Company has
curtailed. Net gain on sale of financing transactions consists of gains
recognized when the Company permanently funds transactions through whole loan
sales.
IMPACT OF FINANCING STRATEGIES ON RESULTS OF OPERATIONS
The Company's financing strategy is to obtain permanent funding for its
equipment and medical receivable loans through securitization and to sell the
remainder to reduce borrower concentration and to manage the Company's leverage.
When funding loans 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 loans owned by the Company, or as a sale.
The accounting method to report finance income differs significantly depending
on which of the two structures the issuer uses. When the Company sponsors a
securitization it treats the proceeds as long-term debt on its financial
statements and reports the finance income over the term of the equipment loans
that are funded. When the Company sells loans, it recognizes the unamortized
finance income at the time the funding takes place; however, even in a funding
treated as a sale, the Company may recognize servicing and/or interest income on
its subordinated interest over the remaining term of the equipment loans sold.
Over the past few years the Company has focused its strategy on increasing its
market share. There can be no assurance that the Company's historical growth
rate or current profitability can be sustained in the future. Additionally, the
Company's expense levels are based in part on its expectations as to future
financing volumes, and the Company may be unable to adjust 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. The Company believes that general economic
conditions have not had a material adverse effect on the Company's recent
operating results. There can be no assurances, however, that general economic
conditions will not have a material adverse effect on the Company in the future.
14
<PAGE> 15
YEAR ENDED JUNE 30, 1997 COMPARED TO YEAR ENDED JUNE 30, 1996
Total equipment financing loans originated were $401.7 million in fiscal 1997
compared with $316.8 million in fiscal 1996, an increase of 26.8%. Net financed
assets totaled $580.6 million at June 30, 1997, an increase of $126.2 million or
27.8% over the prior year. Not included in net financed assets were the loans
sold but still serviced by the Company, which increased to $389.6 million as of
June 30, 1997 compared to $218.6 million as of June 30,1996, an increase of
78.2%. Managed net financed assets, the aggregate of those appearing on the
Company's balance sheet and those which have been sold and are still serviced by
the Company, totaled $925.8 million as of June 30, 1997, representing a 44.6%
increase over the total as of June 30, 1996.
In the Company's medical receivable financing business, new commitments of
credit in fiscal 1997 were $101.1 million compared with $40.0 million in fiscal
1996, an increase of 152.8%. Medical receivables funded at June 30, 1997 totaled
$87.4 million, an increase of $48.8 million or 126.4% over the prior year.
Total finance and other income increased 14.2% to $56.0 million for the year
ended June 30, 1997 from $49.0 million the prior year. A component of total
finance and other income, amortization of finance income, increased 11.3% to
$49.5 million for the year ended June 30, 1997 from $44.5 million for the year
ended June 30, 1996. The increase was primarily a result of the overall increase
in the size of the Company's loan portfolio. The remaining component of total
finance and other income, other income (which consists primarily of contracts,
servicing, origination fees and dividends on investment in investee's preferred
stock) increased 42.9% to $6.4 million in fiscal 1997 as compared to $4.5
million in fiscal 1996. The increase is due mainly to fees earned on larger
portfolios and servicing income.
For the year ended June 30, 1997, interest expense increased 25.9% to $38.4
million from $30.5 million in the prior year. The increase in interest expense
is primarily a result of the growth of the Company's loan portfolio and issuance
of senior notes. As a percentage of total finance and other income, interest
expense was 68.6% in the year ended June 30, 1997 compared to 62.2% in the same
period a year earlier.
The net gain on sale of financing transactions increased 74.8% to $14.0 million
for the year ended June 30, 1997 compared with a gain of $8.0 million for the
same period in the prior year. Loans sold during the year ended June 30, 1997
were $233.0 million compared to $175.1 million during the prior fiscal year.
Selling, general and administrative expenses (SG&A) increased 35.2% to $13.4
million for the year ended June 30, 1997 from $9.9 million for the year ended
June 30, 1996. The increase over the prior fiscal year is primarily related to
the development of its medical receivables, vendor finance and international
businesses and the 44.6% growth in managed net financed assets. To support this
growth, the Company increased its personnel to 137 employees from 129 one year
earlier.
The provision for losses on receivables was $2.4 million for the year ended June
30, 1997 as compared to $2.3 million for the previous year. On a quarterly
basis, the Company evaluates the collectibility of its receivables and records a
provision for amounts deemed uncollectible. In the opinion of management, the
provisions are adequate based on current trends in the Company's delinquencies
and losses. The Company's charge-offs for the quarters ended September 30, 1996,
December 31, 1996, March 31, 1997, and June 30, 1997 were $10,000, $5,000,
$255,000 and $166,000, respectively, which represents 0.23%, 0.10%, 5.24% and
2.78% respectively, of the quarter-end allowance for losses.
Earnings before provision for income taxes and equity in net losses of investees
increased 10.6% to $15.8 million for the year ended June 30, 1997 compared to
$14.3 million a year earlier. Net earnings were $8.9 million or $0.81 per share
for the year ended June 30, 1997 as compared to net earnings of $8.2 million or
$0.81 per share in the prior year.
The Company's cash and cash equivalents at June 30, 1997 and June 30, 1996 were
$8.9 million and $2.4 million, respectively. The following describes the changes
from June 30, 1996 to June 30, 1997 in the items which had the most significant
impact on the Company's cash flow during the year ended June 30, 1997.
The Company's net cash provided by operating activities was $70.1 million for
the year ended June 30, 1997 compared to $71.2 million net cash used in
operations for the year ended June 30, 1996. The increase in cash
15
<PAGE> 16
provided during the year ended June 30, 1997 is mainly attributed to the amount
due from the portfolio sale at June 30, 1996 being received.
The Company's net cash used in investing activities increased to $105.9 million
for the year ended June 30, 1997, as compared to $25.4 million for the year
ended June 30, 1996. This increase is primarily attributed to cash used to
acquire equipment and to finance notes secured by medical receivables of $477.8
million during the year ended June 30, 1997 compared to $304.3 million for the
year ended June 30, 1996. These uses of cash were offset by $373.0 million and
$280.5 million of portfolio receipts net of amounts included in income and
proceeds from the sale of financing transactions for the same periods.
The Company's net cash provided by financing activities was $42.3 million for
the year ended June 30, 1997 down from $97.1 million for the year ended June 30,
1996. This results from a net increase in the Company's borrowings over
repayments of $41.2 million for the year ended June 30, 1997, as compared to a
$59.2 million net increase in borrowings over repayments for the year ended June
30, 1996. In fiscal 1997 the Company completed a public offering of $100.0
million of Senior Notes. In addition, in 1996 $29.0 million was provided through
the equity offering.
YEAR ENDED JUNE 30, 1996 COMPARED TO YEAR ENDED JUNE 30, 1995
Total equipment financing loans originated were $316.8 million in fiscal 1996
compared with $238.0 million in the Company's fiscal year ended June 30, 1995
("fiscal 1995"), excluding the Concord Leasing portfolio purchase ($76.1 million
purchased in fiscal 1995), an increase of 33.1%. Net financed assets for this
business totaled $454.4 million at June 30, 1996, an increase of $53.8 million
or 13.4% over the prior year. In the Company's medical receivable financing
business, new commitments of credit in fiscal 1996 were $40.0 million compared
with $23.9 million in fiscal 1995, an increase of 67.4%. Medical receivables
funded at June 30, 1996 totaled $38.6 million, an increase of $16.1 million or
71.6% over the prior year.
Amortization of finance income increased 31.2% to $44.5 million for the year
ended June 30, 1996 from $33.9 million for the year ended June 30, 1995. The
increase was primarily a result of the overall increase in the size of the
Company's net financed receivables.
Other income, which consists primarily of fees and late charges, dividends on
investment in investee's preferred stock, servicing fees, income from
receivables purchases and income from billing/collecting activities which the
Company has curtailed, increased 119.7% to $4.5 million in fiscal 1996 as
compared to $2.1 million in fiscal 1995. The increase is due to the growth in
the medical receivables business fees and the servicing of a larger loan
portfolio.
For the year ended June 30, 1996, interest expense increased 33.4% to $30.5
million from $22.9 million in the prior year. For the year ended June 30, 1996,
the Company's average indebtedness (calculated based on period beginning and
period ending balances) increased 41.6% to $405.0 million from $285.9 million in
the prior year. The increase in interest expense and average indebtedness is
primarily a result of the growth of the Company's loan portfolio. As a
percentage of total finance and other income, interest expense was 62.2% in the
year ended June 30, 1996 compared to 63.5% in the same period a year earlier.
The net gain on sale of financing transactions increased 164.0% to $8.0
million for the year ended June 30, 1996 compared with a gain of $3.0 million
for the same period in the prior year. Loans sold during the year ended June 30,
1996 were $175.1 million compared to $115.8 million during the prior fiscal
year. The increase reflects the Company's attempt to partially offset the near
term costs of its newer business units and international initiatives.
Net finance income was $26.6 million for the year ended June 30, 1996, as
compared to $16.2 million for the year ended June 30, 1995, an increase of
64.3%. The increase was primarily a result of the overall increase in the size
of the Company's loan portfolio. The Company's net interest margins on its
portfolio for the years ended June 30, 1996 and 1995 were 4.07% and 4.10%,
respectively, which reflects increased competition, more aggressive pricing for
market share growth and the sale of higher margin contracts.
Selling, general and administrative expenses (SG&A) increased 25.4% to $9.9
million for the year ended June 30, 1996 from $7.9 million for the year ended
June 30, 1995. Included in the fiscal year 1996 expense is $519,000 of
16
<PAGE> 17
non-recurring expenses incurred in the third quarter ended March 31, 1996 for
the defense and settlement of lawsuits primarily relating to employee matters.
Excluding the impact of these legal costs, total selling, general and
administrative expenses increased 18.9% over the prior fiscal year, mainly as a
result of the 36.2% growth in loan originations and the 44.0% growth in average
net financed assets. The majority of the 18.9% increase is due to
employee-related costs resulting from the increase in employees during the year.
The provision for possible losses on receivables was $2.3 million for the year
ended June 30, 1996 as compared to $1.3 million for the previous year. On a
quarterly basis, the Company evaluates the collectibility of its receivables and
records a provision for amounts deemed uncollectible. In the opinion of
management, the provisions are adequate based on current trends in the Company's
delinquencies and losses. The Company's charge-offs for the quarters ended
September 30, 1995, December 31, 1995, March 31, 1996, and June 30, 1996 were
$38,000, $528,000, $270,000 and $745,000, respectively, which represents 1.01%,
13.54%, 6.59% and 18.50% respectively, of the quarter-end allowance for losses.
The Company's net earnings were $8.2 million or $0.81 per share for the year
ended June 30, 1996 as compared to net earnings of $4.1 million or $0.61 per
share in the prior year.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
The Company's equipment financing business requires substantial amounts of
capital and borrowings. The Company obtains warehouse funding from commercial
and investment banks. The Company's warehouse borrowings are full recourse
obligations, while the Company's permanent funding is obtained principally on a
limited recourse basis. In the case of limited recourse funding, the Company
retains some risk of loss because it shares in any losses incurred and/or it may
forfeit the residual interest (if any) the Company has in the underlying
financed assets should defaults occur.
A substantial portion of the Company's debt represents permanent funding of
equipment loans obtained on a limited recourse basis and is structured so that
the cash flow from the underlying loans services the debt. Most of the Company's
warehouse borrowings are used to temporarily fund the equipment loans and are
repaid with the proceeds obtained from the permanent funding and cash flow from
the underlying transactions.
As a result of the rapid growth of the Company's equipment financing business,
the amount of warehouse and permanent funding it requires has significantly
increased. To meet its requirements for increased warehouse funding, the Company
has expanded its warehouse facilities with banks and has obtained warehouse
facilities with investment banking firms the Company uses for its
securitizations. To meet its requirements for increased permanent funding, the
Company has enhanced its ability to fund equipment loans by both securitization
and whole loan sales. If suitable sources of both warehouse and permanent
funding are not available in the future, the Company's growth will be
constrained and it may be forced to use less attractive funding sources in order
to ensure its liquidity.
In addition to the interim and permanent funding referred to above, the
Company's continued growth in loan origination and net financed assets requires
substantial amounts of external funding, primarily to fund the reserve account
or overcollateralization requirements that are applied in connection with
securitization and sales of the Company's loans. These funds essentially provide
the credit enhancement for the Company's leveraged investments in its loan
portfolios, and typically are obtained through sales of debt or equity
securities by the Company.
As a result of these external funding requirements, in June 1994, the Company
completed a $15.0 million private placement of Convertible Subordinated Notes.
The agreement with respect to the Convertible Subordinated Notes contains, among
other things, limitations on the Company's ability to pay dividends and to make
certain other kinds of payments. That agreement also prohibits the Company from
incurring additional indebtedness unless certain financial ratio tests are met.
In August 1995, the Company completed a public offering of 2,875,000 shares of
its common stock for which it received net proceeds of $29.0 million. In January
1996, holders of 615,605 of the Company's warrants and units, issued in February
1991, redeemed their warrants and units for shares of the Company's Common Stock
at $12.00 or $12.60 per share by the final exercise date of January 26, 1996. As
a result of the redemption, the Company received cash proceeds of $7.4 million.
17
<PAGE> 18
On January 30, 1997, the Company completed a public offering of $100.0 million
principal amount of 9 7/8% Senior Notes due 2004. The agreement with respect to
the Senior Notes contains, among other things, limitations on the Company's
ability to pay dividends and to make certain other kinds of payments. That
agreement also prohibits the Company from incurring additional indebtedness
unless certain financial ratio tests are met. Interest is payable semi-annually
on February 1 and August 1 of each year, commencing on August 1, 1997. The
Senior Notes will be redeemable at the option of the Company in whole or in part
at any time on or after February 1, 2002 at specified redemption prices. The
proceeds from the sale are being used (i) to fund the Company's growth,
including increasing the amount of equipment and medical receivables loans the
Company can fund, (ii) to develop the Company's new international operations,
including the purchase of receivables originated outside the United States and
investment in joint ventures, (iii) for other working capital needs and (iv) for
general corporate purposes.
Although the Company believes that cash available from operations, investing and
financing activities will be sufficient to fund the Company's current needs for
its equipment financing and its related medical receivable businesses, there can
be no assurance in this regard and the Company may encounter liquidity problems
which could effect its ability to meet such needs while attempting to withstand
competitive pressures or adverse economic conditions.
Warehouse Facilities. At June 30, 1997, the Company had available an
aggregate of $398.0 million under various warehouse facilities for equipment
loan financing. The Company's primary credit facility, pursuant to a revolving
credit agreement with a syndicate of banks ("Agreement"), provides for the
borrowing of up to $128.0 million. Borrowings under this facility bear interest
at the Company's option of (1) from prime to prime plus 0.125% or (2) from 1.20%
up to 1.65% over the 30, 60 or 90-day LIBOR rate based on the Company's leverage
ratio as defined in the Agreement. Included in the Agreement is an $18.0 million
sub-limit for borrowings secured by medical receivables loans originated by the
Company. The Agreement is renewable annually at the bank syndicate's discretion.
The Agreement prohibits the Company from paying dividends other than dividends
payable solely in shares of the Company's stock and limits borrowings to
specified levels determined by ratios based on the Company's tangible net worth.
As of June 30, 1997, the Company was in compliance with the financial covenants
of the Agreement.
The Company has two $100.0 million interim equipment loan funding facilities
with investment banks. These facilities are available to fund certain equipment
loans which are to be securitized. Loans made under this facility bear interest
at a rate of 0.85% over the 30-day LIBOR rate. Borrowings under the facility are
secured by certain equipment loans and the equipment financed thereunder.
The Company has a $5.0 million facility with a bank for the funding of loans
ineligible for securitization.
The Company has two credit facilities for its medical receivables financing
business. The first facility is for $15.0 million with an interest rate of prime
plus 2.00% and matures in June 1998. The second facility is for $50.0 million
with an interest rate of 30-day LIBOR plus 1.90% and matures in September 1997.
The Company's use of securitization significantly affects its needs for
warehouse facilities. When using securitization, the Company is required to hold
loans in warehouse facilities until a sufficient quantity is accumulated to meet
the various requirements of the credit rating agencies and others involved, and
to make a securitization cost effective. Generally, loans totaling $50 to $200
million will be placed in each securitization pool.
Permanent Funding Methods. The Company has completed sixteen securitizations
or other structured finance transactions for medical equipment financings
totaling $1.15 billion, including two public debt issues of $75.7 million and
$90.0 million and fourteen private placements of debt and whole loan sales
totaling $987.0 million. In January 1994, the Company filed a registration
statement (Registration No. 33-74446) with the Securities and Exchange
Commission (SEC) to provide for the future issuance of securitized debt in a
series of transactions pursuant to the SEC's "shelf" registration rule up to an
aggregate of $350.0 million. The registration statement was declared effective
by the SEC on June 23, 1994. The $75.7 million and $90.0 million public debt
issues were the two initial fundings under the $350.0 million shelf
registration. In January 1996, the Company completed a $25.0 million private
placement securitization of medical receivables loans with a domestic insurance
company to fund its medical receivables financing business. The Company expects
to continue to use securitization, on both a public and private basis, as its
principal means to permanently fund its loans for the foreseeable future. If for
any reason
18
<PAGE> 19
the Company were to become unable to access the securitization market to
permanently fund its equipment loans, the consequences for the Company would be
materially adverse.
The Company's use of securitization significantly affects its liquidity and
capital requirements due to the amount of time required to assemble a portfolio
of loans to be securitized. When using securitization, the Company is required
to hold loans until a sufficient quantity is accumulated so as to attract
investor interest and allow for a cost effective placement. This increases the
Company's exposure to changes in interest rates and temporarily reduces its
warehouse facility liquidity.
Generally, the Company does not have binding commitments for permanent funding,
either through securitization or whole loan sales. The Company has non-binding
agreements with investment banking entities to fund future equipment loans
through securitization. While the Company expects to be able to continue to
obtain the permanent funding it requires for its equipment financing business,
there can be no assurance that it 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 the Company, the Company's equipment financing activities would be
adversely affected. The Company believes cash flows generated from operations
and its warehouse facilities are sufficient to meet its near-term obligations.
Hedging Strategy. When the Company borrows funds through warehouse
facilities, it is exposed to a certain degree of risk caused by interest rate
fluctuations. Although the Company's equipment loans are structured and
permanently funded on a fixed interest rate basis, it uses warehouse facilities
until permanent funding is obtained. Because funds borrowed through warehouse
facilities are obtained on a floating interest rate basis, the Company uses
hedging techniques to protect its interest rate margins during the period that
warehouse facilities are used and securitization and sales are anticipated. The
Company uses derivative financial instruments, such as forward rate agreements,
Treasury locks, and interest rate swaps, caps and collars to manage its interest
rate risk. The derivatives are used to manage three components of this risk:
interest sensitivity adjustments, hedging anticipated loan securitizations and
sales, and interest rate spread protection. The Company's hedging techniques may
not necessarily protect it from interest rate risks in all interest rate
environments. See "Business - Capital Resources and Transaction Funding -
Hedging Strategy."
INCOME TAX ISSUES
Historically, the Company has deferred a portion of its federal and state income
tax liability because of its ability to obtain depreciation deductions from
transactions structured as fair market value leases. In addition, the Company
structured its sale of financing transactions in the quarter ended June 30, 1997
as a borrowing for tax purposes versus a sale for book (GAAP) purposes. Future
sales of financing transactions may also be structured in this manner. Lastly,
the Company disposed of a portion of its equipment residual portfolio in fiscal
1994 and may continue to do so in future periods.
INFLATION
The Company does not believe that inflation has had a material affect on its
operating results during the past three years. There can be no assurance that
the Company's business will not be affected by inflation in the future.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Any statements contained in this Form 10-K which are not historical facts are
forward-looking statements; and, therefore, many important factors could cause
actual results to differ materially from those in the forward-looking
statements. Such factors include, but are not limited to, changes (legislative
and otherwise) in the healthcare industry, those relating to demand for DVI's
services, pricing, market acceptance, the effect of economic conditions,
litigation, competitive products and services, the results of financing efforts,
the ability to complete transactions, and other risks identified in the
Company's Securities and Exchange Commission filings.
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.
19
<PAGE> 20
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
Independent Auditors' Report .......................................... 21
Consolidated Balance Sheets as of June 30, 1997 and 1996 .............. 22-23
Consolidated Statements of Operations for the years ended
June 30, 1997, 1996 and 1995 ....................................... 24
Consolidated Statements of Shareholders' Equity for the years ended
June 30, 1997, 1996 and 1995 ....................................... 25
Consolidated Statements of Cash Flows for the years ended
June 30, 1997, 1996 and 1995 ....................................... 26-27
Notes to Consolidated Financial Statements ............................ 28-41
</TABLE>
20
<PAGE> 21
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, 1997 and 1996, and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended June 30, 1997. 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 generally accepted auditing
standards. 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, 1997 and 1996, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended June 30, 1997
in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
July 31, 1997
21
<PAGE> 22
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June 30,
------------------------
(in thousands of dollars except share data) 1997 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents ................................................... $ 8,935 $ 2,376
Cash and cash equivalents, restricted ....................................... 26,425 32,522
Amounts due from portfolio sale ............................................. -- 54,797
Receivables:
Investment in direct financing leases and notes secured by equipment or
medical receivables:
Receivables in installments .............................................. 496,861 424,858
Receivables and notes - related parties .................................. 9,453 16,999
Recourse credit enhancements ............................................. 46,095 35,734
Notes collateralized by medical receivables .............................. 85,649 34,338
Residual valuation ....................................................... 8,276 4,347
Unearned income .......................................................... (69,739) (65,722)
--------- ---------
Net investment in direct financing leases and notes secured
by equipment or medical receivables .................................... 576,595 450,554
Less: Allowance for losses on receivables ................................ (5,976) (4,026)
--------- ---------
Net receivables ............................................................. 570,619 446,528
Equipment on operating leases
(net of accumulated depreciation of $2,301 (1997) and $2,152 (1996)) ...... 4,041 3,845
Furniture and fixtures
(net of accumulated depreciation of $1,702 (1997) and $1,052 (1996)) ...... 2,389 2,046
Investments in investees .................................................... 6,609 7,019
Goodwill, net ............................................................... 3,953 4,259
Other assets ................................................................ 11,148 7,502
--------- ---------
Total assets ................................................................ $ 634,119 $ 560,894
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
22
<PAGE> 23
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30,
----------------------
(in thousands of dollars except share data) 1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Accounts payable ............................................................. $ 30,722 $ 23,560
Accrued expenses and other liabilities ....................................... 19,208 11,650
Borrowings under warehouse facilities ........................................ 44,586 168,108
Deferred income taxes ........................................................ 8,610 4,745
Long-term debt, net:
Notes payable to financial institutions ................................... 6,168 --
Discounted receivables (primarily limited recourse) ....................... 317,863 253,759
9 7/8% Senior notes due 2004 .............................................. 95,883 --
Subordinated debt ......................................................... 2,000 --
Convertible subordinated notes ............................................ 13,324 13,809
--------- --------
Total long-term debt, net .................................................... 435,238 267,568
--------- --------
Total liabilities ............................................................ 538,364 475,631
Commitments and contingencies (Note 11)
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 10,506,848 shares (1997) and 10,409,370 shares (1996) ...... 53 52
Additional capital ........................................................ 68,828 67,162
Retained earnings ......................................................... 26,990 18,049
Cumulative translation adjustments ........................................ (116) --
--------- --------
Total shareholders' equity ................................................... 95,755 85,263
--------- --------
Total liabilities and shareholders' equity ................................... $ 634,119 $560,894
========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
23
<PAGE> 24
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------
(in thousands of dollars except per share data) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Finance and other income:
Amortization of finance income ............................... $ 49,535 $ 44,509 $ 33,935
Other income ................................................. 6,436 4,504 2,050
----------- ----------- ----------
Total finance and other income .................................. 55,971 49,013 35,985
Interest expense ................................................ 38,395 30,489 22,860
----------- ----------- ----------
Net interest and other income ................................... 17,576 18,524 13,125
Net gain on sale of financing transactions ................... 14,039 8,032 3,042
----------- ----------- ----------
Net finance income .............................................. 31,615 26,556 16,167
Selling, general and administrative expenses ................. 13,382 9,898 7,891
Provision for losses on receivables .......................... 2,386 2,325 1,261
----------- ----------- ----------
Earnings before provision for income taxes and
equity in net loss of investees .............................. 15,847 14,333 7,015
Provision for income taxes ...................................... 6,625 6,092 2,946
----------- ----------- ----------
Earnings before equity in net loss of investees ................. 9,222 8,241 4,069
Equity in net loss of investees ................................. 281 66 --
----------- ----------- ----------
Net earnings .................................................... $ 8,941 $ 8,175 $ 4,069
=========== =========== ==========
Net earnings per share:
Primary ...................................................... $ 0.81 $ 0.81 $ 0.61
=========== =========== ==========
Fully diluted ................................................ $ 0.78 $ 0.77 $ 0.60
=========== =========== ==========
Weighted average number of shares outstanding - primary ......... 11,098,000 10,118,000 6,652,000
Weighted average number of shares outstanding - fully diluted ... 12,457,000 11,564,000 8,310,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
24
<PAGE> 25
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unrealized
Common Stock Gain on
$.005 Par Value Available- Total
---------------------- Additional for-Sale Retained Shareholders'
(in thousands of dollars) Shares Amount Capital Investments Earnings CTA Equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at July 1, 1994 ................... 6,567,295 $33 $28,155 $ -- $ 5,805 $ -- $33,993
Issuance of common stock upon
exercise of stock options ............. 97,216 1 626 627
Conversion of subordinated notes ........ 47,169 500 500
Unrealized gain on available-for-sale
investments, net of deferred
taxes of $769 ......................... 1,061 1,061
Net earnings ............................ 4,069 4,069
---------- --- ------- ------- ------- ----- -------
Balances at June 30, 1995 .................. 6,711,680 34 29,281 1,061 9,874 -- 40,250
Issuance of common stock upon
exercise of stock options
and warrants .......................... 822,690 4 8,934 8,938
Net proceeds from issuance of
common stock .......................... 2,875,000 14 28,947 28,961
Sale of available-for-sale
investments, net of deferred
tax benefit of $769 ................... (1,061) (1,061)
Net earnings ............................ 8,175 8,175
---------- --- ------- ------- ------- ----- -------
Balances at June 30, 1996 .................. 10,409,370 52 67,162 -- 18,049 -- 85,263
Issuance of common stock
upon exercise of stock
options and warrants .................. 40,875 1 1,066 1,067
Conversion of subordinated notes ........ 56,603 600 600
Currency translation adjustment ......... (116) (116)
Net earnings ............................ 8,941 -- 8,941
---------- --- ------- ------- ------- ----- -------
Balances at June 30, 1997 .................. 10,506,848 $53 $68,828 $ -- $26,990 $(116) $95,755
========== === ======= ======= ======= ===== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
25
<PAGE> 26
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------
(in thousands of dollars) 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings .................................................... $ 8,941 $ 8,175 $ 4,069
--------- --------- ---------
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Equity in net loss of investees ............................... 281 66 --
Depreciation and amortization ................................. 10,283 7,982 7,237
Additions to allowance accounts ............................... 2,386 2,325 1,261
Net gain on sale of financing transactions .................... (14,039) (8,032) (3,042)
Cumulative translation adjustments ............................ 37 -- --
Changes in assets and liabilities:
(Increases) decreases in:
Cash and cash equivalents, restricted ....................... 6,097 (20,281) 824
Amounts due from portfolio sale ............................. 54,797 (54,797) --
Receivables ................................................. (14,086) (29,505) 3,285
Other assets ................................................ (3,155) 3,081 1,622
Increases (decreases) in:
Accounts payable ............................................ 7,162 17,592 (17,839)
Accrued expenses and other liabilities ...................... 7,558 1,361 (576)
Deferred income taxes ....................................... 3,865 797 1,619
--------- --------- ---------
Total adjustments ............................................. 61,186 (79,411) (5,609)
--------- --------- ---------
Net cash provided by (used in) operating activities ................ 70,127 (71,236) (1,540)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cost of equipment acquired .................................... (429,515) (292,618) (319,011)
Portfolio receipts net of amounts included in income and
proceeds from sale of financing transactions ................ 372,973 280,541 161,448
Net increase in notes collateralized by medical receivables ... (48,293) (11,667) (16,855)
Furniture and fixtures additions .............................. (996) (985) (1,026)
Investments in investees ...................................... (24) (2,059) --
Cash received from sale of investments in investees ........... -- 1,341 828
--------- --------- ---------
Net cash used in investing activities ......................... (105,855) (25,447) (174,616)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock options and warrants ........................ 1,067 8,938 626
Equity offering ............................................... -- 28,961 --
Borrowings under:
Warehouse facilities ........................................ 498,201 485,585 534,633
Long-term debt .............................................. 283,825 120,705 107,510
Repayments on:
Warehouse facilities ........................................ (621,862) (472,649) (414,046)
Long-term debt .............................................. (118,944) (74,434) (52,328)
--------- --------- ---------
Net cash provided by financing activities ..................... 42,287 97,106 176,395
--------- --------- ---------
</TABLE>
continued
The accompanying notes are an integral part of these consolidated financial
statements.
26
<PAGE> 27
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------
(in thousands of dollars) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net increase (decrease) in cash and cash equivalents ..... $ 6,559 $ 423 $ 239
Cash and cash equivalents, beginning of year ............. 2,376 1,953 1,714
------- ------- -------
Cash and cash equivalents, end of year ................... $ 8,935 $ 2,376 $ 1,953
======= ======= =======
CASH PAID DURING THE YEAR FOR:
Interest ................................................ $34,892 $29,984 $22,400
======= ======= =======
Income taxes ............................................ $ 4,777 $ 3,507 $ 1,650
======= ======= =======
</TABLE>
SUPPLEMENTAL DISCLOSURES OF NONCASH TRANSACTIONS:
During the year ended June 30, 1997, the Company transferred the net book value
of equipment on operating leases in the amount of $491,000 to inventory which is
classified with other assets.
At June 30, 1997, in accordance with Technical Bulletin 86-2, the Company has
recorded in receivables in installments and accrued expenses an amount of $1.9
million representing the present value of future obligations the Company has
guaranteed.
During the year ended June 30, 1996, the Company converted a $541,000 note
receivable into shares of common stock of a domestic entity.
During the year ended June 30, 1997 and 1995, $600,000 and $500,000,
respectively, of convertible subordinated notes were converted into common
stock.
The accompanying notes are an integral part of these consolidated financial
statements.
27
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF OPERATIONS
DVI, Inc. (the Company or DVI) is engaged in the business of providing equipment
and receivable financing for domestic and foreign users of diagnostic imaging,
radiation therapy and other medical technologies. The Company's customer base
consists principally of outpatient healthcare providers, physician groups and
hospitals. By the terms of the underlying financing contracts, the Company's
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, along 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.
ABILITY TO ACCESS THE SECURITIZATION MARKET - The Company's ability to complete
securitizations and other structured finance transactions depends upon a number
of factors, including general conditions in the credit markets, the size and
liquidity of the market for the types of receivable-backed securities issued or
placed in securitizations sponsored by the Company and the overall financial
performance of the Company and its loan portfolio. Additionally, the Company's
ability to securitize assets is dependent upon its ability to provide credit
enhancement, which reduces the Company's liquidity and periodically requires it
to obtain additional capital to enable the Company to expand its operations.
CREDIT RISK - Many of the Company's customers are outpatient healthcare
providers that have complex credit characteristics. Providing financing for
these customers involves considerable credit analysis.
CONTINUING NEED FOR CAPITAL - The Company's ability to maintain and build its
financing business is dependent on its ability to obtain substantial amounts of
warehouse and long-term debt financing.
REGULATION AND CONSOLIDATION - Additional 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. The Company's
source of customers is subject to the effects of the regulatory actions and
market consolidation.
INVESTMENTS IN FOREIGN AND INITIAL OPERATIONS - In an effort to mitigate the
impact of regulation and consolidation and to expand the Company's market, the
Company has initiated operations internationally and has made investments in
certain emerging markets. The Company established a joint venture based in
Singapore to service the medical equipment market in the Asia-Pacific region and
steps have been taken to form a joint venture in Latin America. DVI Europe is
the Company's branch established in the United Kingdom to service the medical
equipment industry in Europe. 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 the Company's ability to manage these operations.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION POLICY - The consolidated financial statements include the
accounts of DVI and its wholly-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated.
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles 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 shareholders' equity. Gains and losses resulting from
foreign currency transactions are included in the consolidated statements of
operations.
28
<PAGE> 29
CASH EQUIVALENTS - Cash equivalents include highly-liquid securities with
original maturities of 90 days or less.
CASH AND CASH EQUIVALENTS, RESTRICTED - Cash and cash equivalents, restricted
consist of cash, certificates of deposit and U.S. Treasury obligations
maintained by the Company which are pledged as collateral for certain limited
recourse borrowings related to direct financing leases, notes secured by
equipment and operating leases. The estimated fair value and the amortized cost
of U.S. Treasury obligations as of June 30, 1997 and 1996, are $12.5 million and
$14.2 million, respectively. There were no sales of U.S. Treasury obligations
during the year ended June 30, 1997 and 1996. The Company accounts for
investments in debt and equity securities in accordance with Statement of
Financial Accounting Standards (SFAS) No. 115, Accounting for Certain
Investments in Debt and Equity Securities. SFAS No. 115 requires the
classification of investments in debt and equity securities into three
categories: held to maturity, trading and available-for-sale. At June 30, 1997
and 1996, the Company has only available-for-sale securities with maturities
less than 90 days, which are included in restricted cash. Equity securities
classified as available-for-sale securities are reported at estimated fair
value, with unrealized gains and losses excluded from earnings and reported as a
separate component of shareholders' equity, net of deferred taxes.
INVESTMENT IN DIRECT FINANCING LEASES AND NOTES SECURED BY EQUIPMENT - At
contract commencement, the Company records the gross contract receivable,
initial direct costs, estimated residual value of the financed equipment, if
any, and unearned income. Included in this category are loans to officers for
investment purposes which are not directly related to the Company's operations,
and for the purpose of financing a personal residence. At June 30, 1997 and
1996, unamortized initial direct costs amounted to $7.0 million and $7.5
million, respectively. Initial direct costs are deferred and amortized over the
life of the contract using the interest method which reflects a constant
effective yield. The Company follows the accounting treatment outlined in FASB
Technical Bulletin 86-2, which requires the present value of the future
obligation be recorded as an asset and corresponding liability at the date the
guarantee is assumed.
RECOURSE CREDIT ENHANCEMENTS - The most important source of permanent funding
for the Company for equipment loan financing has been securitization and other
forms of structured finance. Securitization is a process in which a pool of
equipment loans (in the Company's case, typically 100 to 150) is transferred to
a special-purpose financing vehicle which issues notes to investors. Principal
and interest on the notes issued to investors by the securitization subsidiary
are paid from the cash flows produced by the loan pool, and the notes are
secured by a pledge of the assets in the loan pool as well as by other
collateral. In the securitizations sponsored by the Company, equipment loans
funded through the 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, securitizations
sponsored by the Company are enhanced through a combination of some or all of
these methods. In the securitizations sponsored to date by the Company, the
Company effectively has been required to furnish credit enhancement equal to the
difference between (i) the aggregate principal amount of the equipment loans
originated by the Company and transferred to the Company's special-purpose
finance subsidiary and the related costs of consummating the securitization and
(ii) the net proceeds received by the Company in such securitizations. The
requirement to provide this credit enhancement reduces the Company's liquidity
and requires it periodically to obtain additional capital. There can be no
assurance that the Company will be able to obtain additional capital.
NOTES COLLATERALIZED BY MEDICAL RECEIVABLES - Notes collateralized by medical
receivables consist of note receivables resulting from working capital and other
loans made to entities in the healthcare industry and receivables purchased from
unrelated entities. The purchased receivables are stated at the lower of the
Company's cost or the estimated collectible value.
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 as amounts estimated by
management based upon its experience and judgment. The residual values for
operating leases are included in the leased equipment's net book value. The
Company evaluates residual value on an ongoing basis and records any required
changes in valuation. In accordance with generally accepted accounting
principles, no upward revisions are recorded after the inception of the lease.
LOAN IMPAIRMENT - The Company accounts for impairment of a loan in accordance
with SFAS No.114, Accounting by Creditors for Impairment of a Loan, as amended
by SFAS No. 118, Accounting by Creditors for
29
<PAGE> 30
Impairment of a Loan - Income Recognition and Disclosures. Impaired loans are
measured based on the present value of the expected cash flows discounted at the
loan's effective interest rate or the fair value of the collateral. A loan is
considered impaired when it becomes probable the Company will be unable to
collect all amounts due according to the contract terms.
EQUIPMENT ON OPERATING LEASES - Leases which do not meet the criteria for direct
financing leases are accounted for as operating leases. Equipment on operating
leases are recorded at cost and depreciated on a straight-line basis over the
estimated useful life of the equipment. Rental income is recorded monthly on a
straight-line basis. Initial direct costs associated with operating leases are
deferred and amortized over the lease term on a straight-line basis which
reflects a constant effective yield.
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).
INVESTMENTS IN INVESTEES - The investments in investees consist of common and
nonvoting preferred equity interests in unrelated entities. The Company accounts
for its investments in the common stock of these entities using either the cost
or equity method of accounting, depending upon its ownership interests and its
ability to influence policies and operations of the investee. The investment in
the preferred stock of the investee is recorded at the lower of cost or
estimated realizable value.
GOODWILL - Goodwill represents the excess purchase price over the net tangible
assets stemming from the acquisition of Medical Equipment Finance Corporation
(MEF Corp.). Goodwill relating to the acquisition of MEF Corp. is being
amortized over a fifteen year period. The Company evaluates the recoverability
of its goodwill separately for each applicable business acquisition at each
balance sheet date. 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, an impairment for the excess is recorded at that time.
OTHER ASSETS - Other assets consist of prepaid financing costs, advances related
to the Company's serviced portfolio, equipment held for sale or lease which is
stated at the lower of cost or its net realizable value, and miscellaneous
accounts receivable.
DEBT ISSUANCE COSTS - Debt issuance costs related to the Company's warehouse
facilities, securitizations, senior notes and convertible subordinated notes are
offset against the related debt and are being amortized over the life of the
notes using the interest method.
AMORTIZATION OF FINANCE INCOME - Amortization of finance income primarily
consists of the interest component of scheduled payments on notes secured by
equipment (or medical receivables) and direct financing leases and is calculated
using the interest method so as to approximate a level rate of return on the net
investment.
NET GAIN ON SALE OF FINANCING TRANSACTIONS - Gains arising from the sale of
direct financing leases and investments in notes secured by equipment occur when
the Company obtains permanent funding through the whole loan sale of a
transaction to a third party. Subsequent to a sale, the Company has no or
limited remaining interest in the transaction or equipment and 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 the Company guarantees
reimbursement under the agreement up to a specific maximum. Consequently, in the
event of default by the obligor, the lender would exercise its rights under the
lien with limited or no further recourse against the Company, notwithstanding
any facts or circumstances that might promulgate the lender's assertion under
representations and warranties made by the Company.
OTHER INCOME - Other income consists primarily of contract fees and late
charges, dividends on investments in investee's preferred stock, servicing fees
and gains and losses from asset disposals.
TAXES ON INCOME - The Company accounts for taxes under SFAS No. 109, Accounting
for Income Taxes. 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 hedging gains and
losses and from lease transactions in which the operating lease method of
accounting is used for tax purposes and the financing lease
30
<PAGE> 31
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.
NET EARNINGS PER SHARE - Net earnings per share is calculated using the modified
treasury stock method, except when the results of this method are anti-dilutive.
DERIVATIVE INTEREST RATE CONTRACTS - The Company uses various interest rate
contracts such as forward rate agreements, treasury locks, interest rate swaps,
caps and collars to manage its interest rate risk from its floating rate
liabilities and anticipated securitization and sale transactions. No contracts
are held for trading purposes. Gains or losses from forward rate agreements 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, gains or losses from
the hedge transactions are deferred and amortized to interest expense over the
term of the securitized transaction. When hedge transactions are matched to
anticipated whole loan sales, gains or losses from the hedge transactions are
recognized as part of the gain or loss on the sale.
RECENT ACCOUNTING DEVELOPMENTS - The Company adopted SFAS No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-lived Assets to be Disposed
of, as of July 1, 1996. This Statement requires that management evaluate the
asset for recoverability based on estimated future cash flows expected to result
from the use of the asset and its eventual disposition. The adoption of SFAS No.
121 did not have a material impact on the Company's financial position and the
results of operations.
The Company has adopted SFAS No. 123, Accounting for Stock-Based Compensation,
and will continue to account for stock-based compensation using the intrinsic
value method under which the Company has not recognized compensation expense.
In June 1996, the FASB issued SFAS No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. This Statement
is effective for transfers and servicing of financial assets and extinguishments
of liabilities occurring after December 31, 1996. This Statement provides an
accounting and reporting standard for transfers and servicing of financial
assets, and extinguishment of liabilities. After a transfer of financial assets,
an entity recognizes the financial and servicing assets it controls and the
liabilities it has incurred, derecognizes financial assets when control has been
surrendered, and derecognizes liabilities when extinguished. This Statement
provides standards for distinguishing transfers of financial assets that are
sales from transfers that are secured borrowings. The adoption of SFAS No. 125
did not have a material impact on the Company's financial position and the
results of operations.
In February 1997, the FASB issued SFAS No. 128, Earnings Per Share. This
statement is effective for fiscal years beginning after December 15, 1997 and is
to be applied retroactively. Earlier application is not permitted. Management
has not completed an analysis of the impact of applying this new statement;
however, the Company intends to begin applying the standard effective July 1,
1998.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income and
No. 131, Disclosures about Segments of an Enterprise and Related Information.
These statements are effective for fiscal years beginning after December 15,
1997 and early adoption is permitted. Management has not completed an analysis
of the impact of applying the new statements; however the Company intends to
adopt both standards effective July 1, 1998.
RECLASSIFICATIONS - Certain amounts as previously reported have been
reclassified to conform to the year ended June 30, 1997 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 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. Scheduled rents on
operating leases relate to noncancelable operating leases and are due in
installments of varying amounts. Information regarding scheduled collections for
direct financing leases, notes secured by equipment or medical receivables and
operating leases are as follows:
31
<PAGE> 32
<TABLE>
<CAPTION>
Direct Financing
Leases and Notes Scheduled
Secured by Rents on
Equipment or Operating
Year Ended June 30, Medical Receivables Leases
- -------------------------------------------------------------------------------------------
<S> <C> <C>
1998 .............................................. $232,046,000 $ 926,000
1999 .............................................. 176,445,000 909,000
2000 .............................................. 119,969,000 144,000
2001 .............................................. 67,065,000 --
2002 .............................................. 32,767,000 --
Thereafter ........................................ 9,766,000 --
------------ ----------
638,058,000 1,979,000
Residual valuation................................. 8,276,000 --
------------ ----------
Total .......................................... $646,334,000 $1,979,000
============ ==========
</TABLE>
The total receivable balance of $646.3 million is comprised of direct financing
leases (30%), notes secured by equipment (56%), and medical receivables (14%).
The Company is exposed to credit risk on these receivables. At June 30, 1997, of
the 1,195 debtors, the top ten obligors represented 15.45% of the portfolio.
Geographic concentration for the top five states was New York (20.74%),
California (17.46%), Texas (8.02%), New Jersey (6.80%) and Pennsylvania (6.26%).
International loans, those outside the 50 United States, represented 5.44% of
the portfolio.
Residual valuation 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. Residual
values are reviewed on an annual basis to determine if the equipment's fair
market value is below its recorded value.
During the years ended June 30, 1997 and 1996, the Company sold receivables to
third parties realizing gains of $14.0 million and $8.0 million, respectively.
In connection with certain of these transactions, the Company retained
subordinated interests in the receivables totaling $46.1 million and $35.7
million at June 30, 1997 and 1996, respectively. In accordance with provisions
of SFAS No. 115, the Company classifies subordinated interests as trading
securities which are recorded at fair value with any unrealized gains or losses
recorded in the results of operations in the period of the change in fair value.
Valuations at origination and at each reporting period are based on discounted
cash flow analyses. There can be a wide range in market assumptions which are
used by participants in the market to value such assets. Accordingly, the
Company's estimate of fair value is subjective. Under the sale agreement, the
Company is required to fund any losses on the receivables up to its subordinated
interests. Once repurchased or substituted such leases are included within the
Company's portfolio and are evaluated within the allowance for possible losses
on receivables.
At June 30, 1997, receivables amounting to $348.4 million were assigned as
collateral for long-term debt.
The following is an analysis of the allowance for losses on receivables as of
June 30:
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year ..................... $ 4,026,000 $ 3,282,000 $ 2,498,000
Provision for possible losses on receivables ... 2,386,000 2,325,000 1,261,000
Write-offs, net ................................ (436,000) (1,581,000) (477,000)
----------- ----------- -----------
Balance, end of year ........................... $ 5,976,000 $ 4,026,000 $ 3,282,000
=========== =========== ===========
</TABLE>
32
<PAGE> 33
The net investment of non-performing loans on which income recognition was
suspended was $17.4 million and $12.9 million at June 30, 1997 and 1996,
respectively. Cash collected on all nonaccruing loans is applied to the net
investment.
NOTE 4. INVESTMENTS IN INVESTEES
At June 30, 1995, the Company held available-for-sale securities with a market
value of $3.2 million, which it accounted for at market with the unrealized gain
of $1.8 million recorded as a component of shareholders' equity. During the year
ended June 30, 1996, the Company sold its investments in common stock of
Healthcare Imaging Services, Inc. (HIS) and Diagnostic Imaging Services, Inc.
(DIS). The Company did not record a gain or loss on these transactions.
At June 30, 1997 and 1996, the Company holds Series F and Series G preferred
stock of DIS valued at $2.5 million (2,482,000 shares) and $2.0 million
(2,000,000 shares), respectively. The Series F and G preferred stock have
liquidation preferences at $1.00 per share, are redeemable at the option of DIS
at $1.00 per share plus accrued dividends, are convertible, under certain
conditions, into common stock of DIS at $2.482 per share for Series F and $2.00
per share for Series G, and are entitled to annual cumulative dividends ranging
from $0.05 per share to $0.10 per share. In addition, the majority shareholder
of DIS has the right to repurchase the Series F and G preferred stock for $4.5
million plus accrued dividends through September 2001.
In November 1995, the Company 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 is 7,000,000 shares of common stock ($5.0 million), and
ownership is based on the percentage of the initial capitalization invested by
each of the three joint venture partners. The Company's ownership is 40% based
on a $2.0 million investment. The Company accounts for its investment in MEC
under the equity method of accounting. At June 30, 1997 and 1996, the Company
recognized losses of approximately $231,000 and $41,000, respectively, on this
investment.
In the year ended June 30, 1996, the Company converted a note receivable
totaling $541,000 into shares of the outstanding stock of EQ Computer Products &
Services (CP&S), whose business is in the distribution of parts and components
used in the repair and maintenance of microcomputer and associated peripherals.
CP&S sells to computer maintenance firms, independent computer service
organizations and original equipment manufacturers, throughout the United
States, engaged in the maintenance and repair of their own computer equipment
and equipment manufactured by others. During the year ended June 30, 1997, CP&S
issued additional shares and had a reverse stock split. As of June 30, 1997, the
Company had 273,773 shares or 14.25% of the outstanding stock of CP&S. The
Company accounts for this investment in this entity under the cost method of
accounting as it does not exert significant influence over the entity.
NOTE 5. INTEREST BEARING DEBT
WAREHOUSE FACILITIES - The Company's primary credit facility, pursuant to a
revolving credit agreement with a syndicate of banks (the Agreement), provides
for the borrowing of up to $128.0 million. Borrowings under this facility bear
interest at the Company's option of (1) from prime to prime plus 0.125% or (2)
from 1.20% to 1.65% over the 30, 60 or 90-day LIBOR rate based on the Company's
leverage ratio as defined in the Agreement. Included in the Agreement is an
$18.0 million sub-limit for borrowings secured by medical receivables loans
originated by the Company. The Agreement is renewable annually at the bank
syndicate's discretion. The Agreement prohibits the Company from paying
dividends other than dividends payable solely in shares of the Company's stock
and limits borrowings to specified levels determined by ratios based on the
Company's tangible net worth. As of June 30, 1997, the Company was in compliance
with the financial covenants of the Agreement.
The Company has two $100.0 million interim funding facilities available for
certain equipment loan financing transactions which are to be securitized. These
facilities bear interest at a rate of 0.85% over the 30-day LIBOR rate.
Borrowings under the facilities are secured by certain equipment contracts and
the equipment financed thereunder.
The Company has a $5.0 million facility with a bank for the funding of loans
ineligible for securitization.
33
<PAGE> 34
The Company has two credit facilities for its medical receivables financing
business. The first facility is for $15.0 million with an interest rate of prime
plus 2.00% and matures in June 1998. The second facility is for $50.0 million
with an interest rate of 30-day LIBOR plus 1.90% and matures in September 1997.
LONG-TERM DEBT - The discounted receivables are direct financing lease
obligations, notes secured by equipment and medical receivables which were
securitized and sold to investors primarily on a limited or nonrecourse basis.
They are collateralized by the underlying equipment and medical receivables.
Future annual maturities of discounted receivables, net of capitalized issuance
costs of $7.7 million are as follows:
<TABLE>
<CAPTION>
Year Ending June 30,
- --------------------------------------------------------------------------------
<S> <C>
1998.................................................. $ 96,202,000
1999.................................................. 87,278,000
2000.................................................. 85,016,000
2001.................................................. 31,429,000
2002.................................................. 14,516,000
Thereafter............................................ 3,422,000
------------
Total ............................................. $317,863,000
============
</TABLE>
All of the discounted receivables have been permanently funded through seven
asset securitizations which were initiated during fiscal years 1993 through
1997. Debt under these securitizations are limited recourse and bear interest at
fixed rates ranging between 5.48% to 12.85% and floating interest rates of 2.25%
over 30-day LIBOR. All of the receivables are serviced by the Company and the
related securitization agreements require that the Company comply with certain
servicing requirements, require limited cash collateral or residual interests
and contain various recourse provisions.
Included above is $23.2 million from the Company's securitization of some of its
retained subordinated positions in its securitizations and whole loan sales.
This transaction was completed on July 31, 1996.
The Company has convertible subordinated notes outstanding of $13.3 million and
$13.8 million at June 30, 1997 and 1996, respectively. The notes are convertible
into common shares at $10.60 per share at the discretion of the noteholders,
bear interest at a rate of 9 1/8% payable in quarterly installments of interest
only and mature in June 2002. During the year ended June 30, 1997, $600,000 of
these notes were converted into 56,603 shares of common stock of the Company.
There were no conversions in fiscal year 1996. Cumulatively, $1.1 million of
these notes have been converted into 103,772 shares of common stock of the
Company.
On January 30, 1997, the Company completed a public offering of $100.0 million
principal amount of 9 7/8% Senior Notes due 2004. Interest is payable
semiannually on February 1 and August 1 of each year, commencing on August 1,
1997. The Notes will be redeemable at the option of the Company in whole or in
part at any time on or after February 1, 2002 at specified redemption prices.
The proceeds from the sale are being used (i) to fund the Company's growth,
including increasing the amount of equipment and medical receivables loans the
Company can fund, (ii) to develop the Company's new international operations,
including the purchase of receivables originated outside the United States and
investment in joint ventures, (iii) for other working capital needs and (iv) for
general corporate purposes.
On April 1, 1997, the Company entered into a $2.0 million Subordinated loan
agreement. Principal and all accrued interest are due five years from date of
funding.
In addition, the Company has a $6.2 million facility with a foreign bank to fund
a portfolio of equipment loans in Turkey.
The following chart summarizes interest-bearing credit facilities as of June 30,
1997 and 1996:
34
<PAGE> 35
In thousands, except percentages.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997 AS OF JUNE 30, 1996
------------------------- -------------------------
PERIOD END PERIOD END
AMOUNT MATURITY ------------------------- -------------------------
CREDIT FACILITY AVAILABLE DATE BALANCE RATE BALANCE RATE
--------------- --------- ---- ------- ---- ------- ----
<S> <C> <C> <C> <C> <C> <C>
SHORT-TERM DEBT
Warehouse Facilities $398,000 Various $ 44,586 7.10% $168,108 7.38%
LONG-TERM DEBT
N/P Financial Inst $ -- 2001 $ 6,168 8.37% $ --
Discounted Receivables $ -- Various $317,863 8.60% $253,759 8.64%
9 7/8 Senior Notes $ -- 2004 $ 95,883 10.96% $ --
Subordinated Debt $ -- 2002 $ 2,000 5.00% $ --
Convertible Sub. Debt $ -- 2002 $ 13,324 10.38% $ 13,809 10.42%
</TABLE>
NOTE 6. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The following represents a summary of the major components of selling, general
and administrative expenses for the three years ended June 30:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------ ------
<S> <C> <C> <C>
Salaries and benefits $ 5,249 $3,241 $3,300
Professional fees 2,811 2,563 1,273
Travel and Entertainment 799 503 462
Occupancy 779 655 497
Other 3,744 2,936 2,359
------- ------ ------
Total SGA $13,382 $9,898 $7,891
======= ====== ======
</TABLE>
NOTE 7. INCOME TAXES
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
Year Ended June 30, 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Current payable ........... $2,760,000 $ 6,120,000 $ 466,000
Deferred .................. 3,865,000 (28,000) 2,480,000
---------- ----------- ----------
Total ............... $6,625,000 $ 6,092,000 $2,946,000
========== =========== ==========
</TABLE>
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:
<TABLE>
<CAPTION>
Year Ended June 30, 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Provision for income taxes at the
federal statutory rate .............. $5,448,000 35.0% $4,993,000 35.0% $2,455,000 35.0%
State income taxes,
net of federal tax benefit .......... 844,000 5.4% 1,045,000 7.3% 452,000 6.4%
Other ............................... 333,000 2.1% 54,000 0.4% 39,000 0.6%
---------- ---- ---------- ---- ---------- ----
Total ......................... $6,625,000 42.5% $6,092,000 42.7% $2,946,000 42.0%
========== ==== ========== ==== ========== ====
</TABLE>
The major components of the Company's net deferred tax liabilities of $8.6
million and $4.7 million at June 30, 1997 and 1996, respectively, are as
follows:
35
<PAGE> 36
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Accumulated depreciation ..................... $ 23,511,000 $ 24,138,000
Deferred recognition of lease income ......... (14,740,000) (17,080,000)
Alternative minimum tax credits carryforwards -- (137,000)
Deferred gain on financing transactions ...... 1,977,000 --
Loss on hedging activities ................... 1,258,000 1,342,000
Allowances for uncollectible receivables ..... (2,322,000) (1,786,000)
State income taxes ........................... (454,000) (867,000)
Other ........................................ (620,000) (865,000)
------------ ------------
Total .................................. $ 8,610,000 $ 4,745,000
============ ============
</TABLE>
NOTE 8. SHAREHOLDERS' EQUITY
In August 1995, the Company completed a public offering of 2,875,000 shares of
its common stock for which it received net proceeds of $29.0 million. The net
proceeds were utilized to reduce short-term indebtedness and for general
corporate purposes.
In June 1997, the Company granted options to purchase 100,000 shares of the
Company's common stock at an exercise price of $13.50 per share. The options
will vest on a pro-rata basis over a twenty-four month period or, 4,167 shares
per month. The options are exercisable for a period of five years from the date
of grant. The options were granted to a financial advisory firm as compensation.
In January 1996, holders of 615,605 of the Company's warrants and units issued
in February 1991 redeemed their warrants and units for 50,625 and 50,625 shares
of the Company's common stock at $12.00 and $12.60, respectively, per share by
the final exercise date of January 26, 1996. As a result of the redemption, the
Company received cash proceeds of $7.4 million. In addition, the Company issued
warrants to purchase 35,000 common shares at $8.50 per share to an unrelated
party. Such shares were exercised during the year ended June 30, 1996.
Prior to June 30, 1994, the Company issued warrants to purchase a total of
80,000 common shares at prices between $7.625 and $8.375 per share to all
non-employee Directors of the Company. 10,000 shares at $7.625 and 10,000 shares
at $8.375 were exercised during the year ended June 30, 1996. The warrants
vested at various dates through November 1996 and expire at various dates
through 2003.
In fiscal 1992, the Company issued warrants to purchase up to 200,000 shares of
the Company's common stock at $18.00 per share to an underwriter as compensation
for investment banking services. No compensation expense was recognized as a
result of this transaction. The warrants expired April 27, 1997.
In June 1994, the Company issued convertible subordinated notes to related and
unrelated parties which are convertible at the option of the holder into
1,415,094 shares of common stock at $10.60 per share. During the year ended June
30, 1997, $600,000 of these notes were converted into 56,603 shares of common
stock. As of June 30, 1997, cumulative conversions of these notes were $1.1
million into 103,772 shares of common stock.
NOTE 9. STOCK OPTION PLAN AND INCENTIVE AGREEMENT
The Company has a stock option plan which currently provides for the granting of
options to employees to purchase up to 1,250,000 shares of the Company's common
stock at the fair market value at the date of grant. Options granted under the
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 subsequent to the termination of the employee and are returned to the plan.
The following table summarizes the activity under the plan for the periods
indicated:
36
<PAGE> 37
<TABLE>
<CAPTION>
Weighted Average
Options Exercise Price Exercise Price
Outstanding Per Share Per Share
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding at July 1, 1994 .... 809,862 $ 1.44 - $13.50 $ 7.86
Granted ........................ 48,500 $ 9.13 - $12.63 $11.78
Exercised ...................... (97,216) $ 2.68 - $12.88 $ 6.37
Canceled ....................... (80,852)
--------
Outstanding at June 30, 1995 ... 680,294 $ 1.44 - $13.50 $ 8.16
Granted ........................ 130,500 $11.63 - $13.13 $12.96
Exercised ...................... (152,085) $ 1.44 - $13.50 $ 8.38
Canceled ....................... (37,000)
--------
Outstanding at June 30, 1996 ... 621,709 $ 1.75 - $13.13 $ 9.14
Granted ........................ 186,500 $12.75 - $14.63 $14.36
Exercised ...................... (40,875) $ 5.00 - $10.38 $ 7.56
Canceled ....................... (8,534)
--------
Outstanding at June 30, 1997 ... 758,800 $ 1.75 - $14.63 $10.47
========
</TABLE>
The following table summarizes stock options outstanding at June 30, 1997:
<TABLE>
<CAPTION>
Number of Options Weighted Average Weighted Average
Range of Exercise Price Outstanding Remaining Contractual Life Exercise Price
- ----------------------- ----------- -------------------------- --------------
<S> <C> <C> <C>
$ 1.75 - $ 4.00 20,000 1 $ 1.75
$ 4.01 - $ 6.00 64,100 4 $ 5.09
$ 6.01 - $ 9.00 173,650 6 $ 7.99
$ 9.01 - $14.00 359,550 7 $11.48
$14.01 - $14.63 141,500 9 $14.61
-------
758,800 7 $10.47
=======
</TABLE>
As of June 30, 1997, options to purchase 430,662 shares were exercisable.
The Company accounts for compensation costs associated with stock-based
compensation using the intrinsic value method, under which the Company has
recognized no expense. Had compensation cost for the Company's stock option plan
been determined based on the fair value at the date of awards consistent with
the fair value method described in SFAS No. 123, the Company's net income,
primary earnings per share, and fully diluted earnings per share would be
reduced to the proforma amounts at June 30, 1997 of $8.7 million, $0.78 and
$0.70 and at June 30, 1996 of $8.1 million, $0.80 and $0.70, respectively.
Significant assumptions used to calculate the fair value of the awards for June
30, 1997 and 1996, respectively, are as follows: weighted average risk free rate
of return of 6.3% and 5.9%; expected option life of 60 months; expected
volatility of 32% and 24%; and no expected dividends in either year.
The Company has an employee incentive agreement (Agreement). Under the
Agreement, the Company has agreed, subject to the discretion of its Compensation
Committee, to issue from time to time an aggregate of not more than 200,000
shares of common stock of the Company (Incentive Shares) to certain of its
employees if the last sale price of the Company's common stock is $16.00 per
share or higher for 30 consecutive calendar days at any time before December 31,
2001, provided that any such employee must be employed by the Company during the
above-described 30-day period in order to receive any Incentive Shares under
this agreement. The Company has agreed that, if there is an event or series of
events that constitutes a sale of the Company at any time prior to December 31,
1998 and the consideration to be received for each share of common stock of the
Company in such sale of the Company is $13.00 or higher, the Company will issue
the Incentive Shares to the employees. If the criteria for the issuance of the
Company's common stock are met, the Company will record compensation expense
equal to the fair value of the common shares issued at the date upon which the
rights to receive such shares are awarded by the Compensation Committee.
37
<PAGE> 38
NOTE 10. RELATED PARTY TRANSACTIONS
The Company's principal executive offices located in Doylestown, Pennsylvania
are leased from a party related to a shareholder/director of the Company. The
lease commenced in December 1994 and the Company recorded rent expense under
this lease of $242,510 and $222,750 for the years ended June 30, 1997 and 1996,
respectively.
At June 30, 1997 and 1996, receivables in installments from investees totaled
$9.5 million and $17.0 million, respectively.
In June 1995, the Company and former shareholders of MEF Corp., some of whom are
also officers of the Company, entered into an agreement to set the purchase
price of MEF Corp. which was approved by the shareholders of the Company in
December 1995.
As of June 30, 1997 and 1996, the Company had loan receivables from Company
officers totaling $505,000 and $400,000, respectively.
During the year ended June 30, 1996, the Company sold its investments in common
stock of Healthcare Imaging Services, Inc. (HIS) and Diagnostic Imaging
Services, Inc. (DIS). As of June 30, 1997 and 1996, the Company had investments
in preferred stock and dividends of DIS totaling $5.1 million and $4.9 million,
respectively.
As of June 30, 1997 and 1996, the Company had convertible subordinated notes at
an unamortized cost totaling $9.6 million to related parties.
NOTE 11. COMMITMENTS AND CONTINGENCIES
FACILITY LEASES - The Company leases its facilities under noncancelable
operating leases with terms in excess of one year. The lease for the Company's
principal facility expires in August 2007. Rent expense for the years ended June
30, 1997, 1996 and 1995 amounted to $661,000, $654,000 and $498,000,
respectively. Future minimum lease payments under these leases are as follows:
<TABLE>
<CAPTION>
Future Minimum
Year Ending June 30, Lease Payments
- -----------------------------------------------------------------------------
<S> <C>
1998 ....................................................... $ 670,000
1999 ....................................................... 685,000
2000 ....................................................... 663,000
2001 ....................................................... 461,000
2002 ....................................................... 485,000
Thereafter ................................................. 2,626,000
Total ................................................... $5,590,000
</TABLE>
CONTINGENCIES - Under certain limited recourse agreements, the Company may be
required to provide for losses incurred on uncollected lease and medical
receivables previously securitized. At June 30, 1997, the maximum contingent
liability under the limited recourse agreements amounted to $46.1 million. 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.
The Company has credit lines of $3.6 million available from four foreign banks,
of which $2.7 million was used as of June 30, 1997 to provide for the future
payment of guarantees made by DVI Europe, a branch office of DVI Financial
Services. The Company follows the accounting treatment outlined in FASB
Technical Bulletin 86-2, which requires the present value of the future
obligation be recorded as an asset and corresponding liability at the date the
guarantee is assumed. At June 30, 1997 the present value recorded for these
guarantees was $1.9 million, while the future obligation was $3.1 million.
38
<PAGE> 39
The Company has receivables from and investments in DIS aggregating $13.8
million and $21.0 million at June 30, 1997 and 1996, respectively. DIS received
a qualified going concern opinion from its auditors on its December 31, 1996 and
1995 financial statements. Additionally, the Company has net receivables from
Latin American Trade Finance, Ltd. (LATF) in the amount of $886,000 and $845,000
at June 30, 1997 and 1996. LATF is a San Francisco-based investment company
which specializes in financing throughout Latin America. LATF has identified
some significant transactions, which to date, have not closed. LATF has been
unable to make scheduled payments to the Company. Management has performed an
analysis of its recoverability of such amounts and believes that based upon the
best information available, it will recover all amounts without any significant
loss.
LITIGATION - The Company is involved in litigation both as a plaintiff and
defendant in matters arising out of the Company's normal business activities.
Management does not expect the outcome of these lawsuits to have a material
adverse effect on the consolidated financial statements of the Company.
As of June 30, 1997 the Company had loan commitments of $106.9 million not
funded.
NOTE 12. BENEFIT PLANS
The Company maintains and administers an Employee Savings (Plan) pursuant to
Internal Revenue Code Section 401(k). The Plan provides for discretionary
contributions as determined by the Company's Board of Directors. The Company
contributed $60,000, $45,000 and $39,000 to the Plan during the years ending
June 30, 1997, 1996 and 1995, respectively.
NOTE 13. ACQUISITIONS
In January 1993, the Company acquired the outstanding shares of Medical
Equipment Finance Corporation (MEF Corp.). In December 1995, the Company's
shareholders approved the issuance of 400,000 shares of the Company's common
stock, as set forth in the purchase agreement as amended, valued at $4.65
million. The Company recorded goodwill of $4.65 million related to the
acquisition. As of June 30, 1997, the 400,000 common shares were unissued but
included in the earnings per share calculation.
NOTE 14. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
In accordance with Statement of Financial Accounting Standards No. 107 (SFAS
107), Disclosures About Fair Value of Financial Instruments, a summary of the
estimated fair value of the Company's consolidated financial instruments at June
30, 1997 and 1996 is presented below. The estimated fair value amounts have been
determined by the Company using available market information and appropriate
valuation methodologies. However, considerable judgment is necessary to
interpret market data to develop the estimated fair values. Accordingly, the
estimates presented herein are not necessarily indicative of the amounts the
Company 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.
<TABLE>
<CAPTION>
Carrying Estimated Fair
June 30, 1997 Amount Value
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Receivable in installments
(excluding investment in direct financing leases)....... $236,843,000 $236,532,000
Liabilities:
Discounted receivables.................................. $317,863,000 $294,729,000
</TABLE>
<TABLE>
<CAPTION>
Carrying Estimated Fair
June 30, 1996 Amount Value
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Receivable in installments
(excluding investment in direct financing leases)....... $216,473,000 $218,301,000
Liabilities:
Discounted receivables.................................. $253,759,000 $253,287,000
</TABLE>
39
<PAGE> 40
The carrying values of cash and cash equivalents, restricted cash and cash
equivalents, amounts due from portfolio sales, notes collateralized by medical
receivables, accounts payable, accrued expenses, and other liabilities
borrowings under warehouse facilities, notes payable to financial institutions,
subordinated debt and convertible subordinated notes approximate fair values at
June 30, 1997 and 1996.
The methods and assumptions used to estimate the fair values of other financial
instruments are summarized as follows:
RECEIVABLE IN INSTALLMENTS: The fair value of the financing contracts was
estimated by discounting expected cash flows using the current rates at which
loans of similar credit quality, size and remaining maturity would be made as of
June 30, 1997 and 1996. The Company believes that the risk factor embedded in
the entry-value interest rates applicable to performing loans for which there
are no known credit concerns results in a fair valuation of such loans on an
entry-value basis. In accordance with SFAS 107, the Company has excluded
receivables from lease contracts of approximately $252.9 million and $197.7
million as of June 30, 1997 and 1996, respectively, from the receivable in
installments fair value calculation.
DISCOUNTED RECEIVABLES: The fair value of discounted receivables, related to the
securitization of leases and notes, was estimated by discounting future cash
flows using rates currently available for debt with similar terms and remaining
maturities.
The fair value estimates presented herein were based on information available as
of June 30, 1997 and 1996. Although the Company is not aware of any factors that
would significantly affect the estimated fair values, such values have not been
updated since June 30, 1997; therefore, current estimates of fair value may
differ significantly from the amounts presented herein. All instruments held by
the Company are classified as other than trading.
DERIVATIVE ACTIVITY:
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1996
----------------------------------------------- ----------------------------------------------
Notional Fair Deferred Notional Fair Deferred
Amount Value Gains/(Losses) Amount Value Gains/(Losses)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Swaps ....................... $23.4 million $115,000 -- $ 99.4 million $ 236,000 --
Options ..................... $25.0 million $(49,000) -- $ 26.5 million -- --
Forwards: ...................
Treasury locks ............ $70.0 million $ 75,000 -- $ 90.0 million $(227,000) $129,000
Forward rate agreements ... -- -- -- $200.0 million $ (17,900) --
</TABLE>
The Company uses off balance sheet derivative financial instruments to hedge
interest rate risk. The Company's interest rate risk is associated with variable
rate funding of the fixed rate loans and the timing difference between temporary
funding through the warehouse and permanent funding through either
securitization or sale. The derivatives are used to manage three components of
this risk: interest sensitivity adjustments, pricing of anticipated loan
securitizations and sales, and interest rate spread protection. Credit risk
exists for these derivative instruments in the form of the failure of the
counterparty to make required payments in favor of the Company. The risk is
minimized through the use of counterparties with investment grade ratings. The
fair value of the derivative instruments is derived from dealer quotes.
SWAPS:
Swaps are used to hedge the interest rate spreads for various loan sale
facilities where cash flows from loans are fixed rate but the borrowing costs
are variable. The interest rate swaps pay fixed rates of 5.38% to 5.8% and
receive a floating rate of the H-15 composite commercial paper rate. The swaps
mature in September 2000. There were no interest rate caps outstanding on June
30, 1997.
40
<PAGE> 41
FORWARDS AND OPTIONS:
Treasury lock agreements, which are forward contracts, and option collars are
used to hedge the interest rate risk associated with anticipated securitizations
and/or sales. These instruments lock in a specific rate, or a narrow range of
rates, of Treasury notes identified to have a comparable maturity to the average
life of the anticipated transaction in order to fix the rate either over the
life of the securitization or to fix the sale price as applicable. The open
positions at June 30, 1997 are for securitizations and sales expected to occur
in the first and second quarters of fiscal 1998. In 1997, the Company deferred
$1.60 million in losses associated with transactions securitized compared with
$211,000 in deferred losses in 1996. In 1997, the Company recognized losses of
$132,000 for loan sales compared with recognized losses of $27,000 in 1996 and
no recognized gains or losses in 1995. Gains and losses for securitizations are
deferred and amortized over the life of the securitization. Gains and losses for
sales are recognized at the time of sale.
NOTE 15. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of the quarterly results of operations for the fiscal
years ended June 30, 1997 and 1996:
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------------
(in thousands, except per share data) September 30 December 31 March 31 June 30
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FISCAL 1997
Finance and other income $12,616 $13,513 $15,019 $14,823
Net finance income 6,647 7,455 7,680 9,833
Earnings before provision for income taxes
and equity in net loss of investees 3,525 3,741 3,919 4,662
Net earnings 2,005 2,192 2,171 2,573
Net earnings per common and common
equivalent share - primary $ 0.18 $ 0.20 $ 0.20 $ 0.23
======= ======= ======= =======
Net earnings per common and common
equivalent share - fully diluted $ 0.18 $ 0.19 $ 0.19 $ 0.22
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------------
(in thousands, except per share data) September 30 December 31 March 31 June 30
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FISCAL 1996
Finance and other income $11,301 $12,061 $13,152 $12,499
Net finance income 5,772 6,435 6,898 7,451
Earnings before provision for income taxes
and equity in net loss of investees 3,191 3,510 3,690 3,942
Net earnings 1,775 2,078 2,126 2,196
Net earnings per common and common
equivalent share - primary $ 0.20 $ 0.21 $ 0.20 $ 0.20
======= ======= ======= =======
Net earnings per common and common
equivalent share - fully diluted $ 0.19 $ 0.20 $ 0.19 $ 0.19
======= ======= ======= =======
</TABLE>
41
<PAGE> 42
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 28, 1997, 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 28, 1997 with the Securities sand 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 28, 1997, 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 28, 1997, 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 at Page 20.
(2) Financial Statement Schedules:
<TABLE>
<CAPTION>
SCHEDULE PAGE
NUMBER DESCRIPTION NUMBER
------ ----------- ------
<S> <C> <C>
II. Amounts Receivable from Related Parties .... 44
</TABLE>
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.
(3) Exhibits:
See Index to Exhibits of this Form 10-K on Pages 45-46.
(b) REPORTS ON FORM 8-K:
There were no reports on Form 8-K filed during the fourth quarter of the
fiscal year ended June 30, 1997.
42
<PAGE> 43
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.
DVI, INC.
------------------------------------
(Registrant)
Date: September 29, 1997 by /s/ MICHAEL A. O'HANLON
-----------------------
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.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
Principal Financial Officer:
/s/ STEVEN R. GARFINKEL
- -----------------------
Steven R. Garfinkel Executive Vice President and
Chief Financial Officer September 29, 1997
Principal Accounting Officer:
/s/ JOHN P. BOYLE
- -----------------------
John P. Boyle Vice President and
Chief Accounting Officer September 29, 1997
</TABLE>
<TABLE>
<CAPTION>
Directors Date
- --------- ----
<S> <C>
/s/ GERALD L. COHN September 29, 1997
- -----------------------
Gerald L. Cohn
/s/ WILLIAM S. GOLDBERG September 23, 1997
- -----------------------
William S. Goldberg
/s/ JOHN E. MCHUGH September 29, 1997
- -----------------------
John E. McHugh
/s/ MICHAEL A. O'HANLON September 29, 1997
- -----------------------
Michael A. O'Hanlon
/s/ HARRY T. J. ROBERTS September 29, 1997
- -----------------------
Harry T. J. Roberts
/s/ NATHANIEL SHAPIRO September 29, 1997
- -----------------------
Nathaniel Shapiro
</TABLE>
43
<PAGE> 44
DVI, INC. AND SUBSIDIARIES
SCHEDULE II - AMOUNTS RECEIVABLE FROM RELATED PARTIES
<TABLE>
<CAPTION>
BALANCE AT
BEGINNING BALANCE AT
NAME OF DEBTOR OF YEAR ADDITIONS DEDUCTIONS END OF YEAR
- -------------- ------- --------- ---------- -----------
<S> <C> <C> <C> <C>
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
======== ======== ========= ========
Year ended June 30, 1995 -
Michael A. O'Hanlon ... $ 20,000 $ 39,000 $ -- $ 59,000
======== ======== ========= ========
Year ended June 30, 1994 -
Michael A. O'Hanlon ... $ -- $ 20,000 $ -- $ 20,000
======== ======== ========= ========
</TABLE>
44
<PAGE> 45
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
1.1 Underwriting Agreement between the Underwriters and the Company
with respect to the Company's Common Stock.(1)
1.2 Underwriting Agreement dated January 27, 1997 by and between the
Underwriters and the Company with respect to the Senior Notes. (2)
3.1 Certificate of Incorporation of the Company.(3)
3.2 By-Laws of the Company and Amendment to By-Laws of the Company
dated April 17, 1996. (8)
4.1 Form of Common Stock Certificate.(3)
4.2 Form of Global Note representing the Senior Notes.(2)
4.3 Indenture dated January 27, 1997 between the Company and the
Trustee.(2)
4.4 First Supplemental Indenture dated January 30, 1997 with respect
to the Senior Notes between the Company and the Trustee.(2)
10.1 DVI Financial Services Inc. Employee Savings Plan.(4)
10.2 Amended 1986 Incentive Stock Option Plan.(4)
10.3 Purchase Agreement dated as of October 22, 1991, by and among DMR
Associates, L.P., HIS Acquisition, Inc. And DVI Financial Services
Inc.(5)
10.4 Direct Stock Option Agreements, dated as of October 16, 1990,
between the Company and each of the Company's directors other than
Mr. Higgins.(5)
10.5 Amended and Restated Letter Agreement dated December 15, 1991,
between the Company and W.I.G. Securities Limited Partnership
regarding investment banking services.(5)
10.6 Warrant dated April 27, 1992, executed by the registrant on behalf
of W.I.G. Securities Limited Partnership.(5)
10.7 Note Purchase Agreement among the Registrant and the Purchasers
listed therein, dated as of June 21, 1994.(7)
10.8 Amendment No. 1 to Note Purchase Agreement among the Registrant
and the Purchasers listed therein, dated as of November 1994.(1)
10.9 Amendment No. 1 to the MEFC Agreement dated as of June, 1995. (1)
10.10 Joint Venture Agreement dated November 10, 1995, among Philips
Medical Systems International B.V., DVI, Inc. and Philadelphia
International Equities, Inc.(8)
10.11 Interim Loan and Security Agreement, dated as of February 20,
1997, between Prudential Securities Credit Corporation and DVI
Financial Services Inc.(9)
10.12 Second Amended and Restated Loan Agreement dated February 28, 1997
by and among DVI Financial Services, Inc., the banks signatory
thereto, Fleet Bank, N.A. and Corestates Bank, N.A., as
Pre-Funding Lenders and Fleet Bank, N.A., as agent.(9)
10.13 Loan and Security Agreement, dated as of January 29, 1997, between
Prime Bank and the Company.(9)
10.14 Secured Credit Line Agreement, dated as of August 22, 1996,
between DVI Business Credit Receivables Corp. II, DVI Business
Credit Corporation and CS First Boston Mortgage Capital Corp.(10)
10.15 Loan and Security Agreement, dated as of September 6, 1996,
between DVI Financial Services Inc. and Lehman Commercial Paper
Inc.(10)
10.16 Amendment, dated as of June 30, 1997, to Interim Loan and Security
Agreement between Prudential Securities Credit Corporation and DVI
Financial Services Inc.(10)
10.17 Second Amendment, dated as of July 31, 1997, to Interim Loan and
Security Agreement between Prudential Securities Credit
Corporation and DVI Financial Services Inc.(10)
21 Subsidiaries of the Registrant.
24 Power of Attorney.(4)
</TABLE>
- -------------
(1) Filed previously as an Exhibit to the Company's Registration Statement on
Form S-1 (Registration No. 33-60547) and by this reference is incorporated
herein.
(2) 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.
45
<PAGE> 46
(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 Registration Statement on
Form S-18 (Registration No. 33-8758) and by this reference incorporated
herein.
(5) 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.
(6) Filed previously as an Exhibit to the Company's Registration Statement on
Form S-2 (Registration No. 33-46664) and by this reference is incorporated
herein.
(7) Filed previously as an Appendix to the Company's Consent Statement dated as
of December 29, 1994 and by this reference is incorporated herein.
(8) 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 is
incorporated herein.
(9) Filed previously as an Exhibit to the Company's Form 10-Q for the quarter
ended March 31, 1997 and by this reference is incorporated herein.
(10) Filed herewith.
46
<PAGE> 1
EXHIBIT 10.14
EXECUTION COPY
SECURED CREDIT LINE AGREEMENT
dated as of August 22, 1996
AMONG
DVI BUSINESS CREDIT RECEIVABLES CORP. II
as the Company
DVI BUSINESS CREDIT CORPORATION
as Servicer
and
CS FIRST BOSTON MORTGAGE CAPITAL CORP.
as Lender
<PAGE> 2
SECURED CREDIT LINE AGREEMENT
SECURED CREDIT LINE AGREEMENT, dated as of August 22, 1996, among CS FIRST
BOSTON MORTGAGE CAPITAL CORP. a Delaware corporation, having an office at 55
East 52nd Street, New York, New York 10055-0186 (the "Lender"), DVI BUSINESS
CREDIT RECEIVABLES CORP. II, a Delaware corporation having an office at 500 Hyde
Park, Doylestown, Pennsylvania 18901 (the "Company") and DVI BUSINESS CREDIT
CORPORATION, a Delaware corporation having an office at 4041 MacArthur Blvd.,
Newport Beach, California 92660 (the "Servicer").
W I T N E S S E T H:
WHEREAS, the Company is engaged in the business of purchasing revolving
credit loans backed by healthcare receivables originated by healthcare providers
in the course of rendering medical services;
WHEREAS, in connection with the transactions contemplated hereby, the
Company desires to obtain a line of credit from the Lender pursuant to which
Advances, in a maximum aggregate principal amount at any one time outstanding
not to exceed $50,000,000, may be made to the Company from time to time prior to
the Line Termination Date;
WHEREAS, the Lender is willing, on the terms and subject to the conditions
hereinafter set forth, including Section 2.11, to extend such line of credit and
to make Advances to the Company; and
WHEREAS, the proceeds of Advances will be used to pay the acquisition
price of Loans as provided in the Contribution and Servicing Agreement;
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the parties hereto hereby agree as follows:
ARTICLE II
DEFINED TERMS
SECTION II.1. Definitions. The capitalized terms used herein shall have
the meanings specified in Appendix A attached hereto.
<PAGE> 3
ARTICLE III
ADVANCES
SECTION III.1. The Advances. (a) Upon the terms and subject to the
conditions of this Agreement, including Section 2.11, the Lender shall advance
funds to the Company from time to time up to the Line Amount (such borrowing,
the "Line") in one or more advances (each, an "Advance"); provided that the
aggregate principal amount of Advances outstanding at any time shall not exceed
the Line Amount. Each Advance shall be made on the Business Day after delivery
of a Borrowing Notice, provided such Business Day is prior to the Line
Termination Date (each such date, a "Funding Date") and shall be deposited by
the Lender to such account as the Company may direct.
(b) Each Advance shall bear interest from the related Funding Date to, but
excluding, the date of repayment in full of such Advance on the outstanding
principal balance of such Advance at the Applicable Rate in effect from time to
time with respect to such Advance. Any Monthly Interest which is not paid on the
Payment Date on which it is due shall bear interest at the Applicable Rate in
effect from time to time.
(c) The Lender shall record in its records, or at its option on the
schedule attached to the Secured Note, the date and amount of each Advance made
hereunder, each repayment thereof, and the other information provided for
thereon. The aggregate unpaid principal amount so recorded shall be rebuttable
presumptive evidence of the principal amount owing and unpaid on the Secured
Note. The failure so to record any such information or any error in so recording
any such information shall not, however, limit or otherwise affect the actual
obligations of the Company hereunder or under the Secured Note to repay the
principal amount of all Advances made to it, together with all interest accruing
thereon.
(d) After the making of each Advance, the Lender shall deliver to the
Company a written confirmation of such Advance in substantially the form
attached hereto as Exhibit B (each, a "Confirmation") and the Company's
acceptance of the proceeds of the related Advance shall constitute the Company's
agreement to the terms of such Confirmation.
SECTION III.2. Advance Amount. The amount of each Advance
(a) shall not in the case of each Advance, be less than $1,000,000
in principal amount (unless otherwise consented to in writing by the
Lender); and
(b) shall equal the outstanding principal balance of all Eligible
Loans to be pledged to the Collateral Agent for the benefit of the Lender
in connection with such Advance.
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<PAGE> 4
SECTION III.3. Termination Date; Maturity of Advances. The line of credit
offered by the Lender hereunder shall terminate on the earlier of (a) March 15,
1997 (or such later date as agreed to in writing by the Lender) and (b) the
occurrence of an Event of Default which continues beyond the applicable cure
period, if any (the "Line Termination Date"). On the Line Termination Date, the
Line Amount shall be automatically reduced to $0. Each Advance shall mature on
the earliest of (a) the Line Termination Date and (b) the closing of a
Securitized Offering (the "Maturity Date").
SECTION III.4. Prepayment. Each Advance is pre-payable on any day upon at
least two Business Days' prior written notice by the Company to the Lender and
the Collateral Agent without premium or penalty, in whole or in part; provided
that the principal amount prepaid shall be at least $500,000; and provided
further that such prepayment is made solely with funds on deposit in the Loan
Accounts or representing proceeds of a Securitized Offering. Any such prepayment
shall be made by the Collateral Agent from such funds in accordance with the
written request of the Lender.
SECTION III.5. Extension Option. In the event that all outstanding
Advances are not repaid in whole on or prior to the Line Termination Date, the
Lender shall have the option on or before the Line Termination Date, in its sole
discretion, to extend the Line Termination Date on a week-to-week basis through
the last Business Day of each succeeding week at an Applicable Rate equal to
LIBOR plus 5%. If the Lender elects to extend the Line Termination Date as
aforesaid, it shall deliver notice of such election to the Company and the
Collateral Agent no later than 3:00 p.m. on the Business Day preceding the then
scheduled Line Termination Date (any such preceding date, an "Election Date").
If no such notice is delivered, all outstanding Advances shall be due and
payable without any further action by the Lender on the Line Termination Date,
and in such event the Lender may exercise all rights and remedies available to
it as the holder of a first perfected security interest under the Uniform
Commercial Code of the State of New York (the "New York UCC") and any and all
other rights hereunder and under applicable law.
SECTION III.6. Payment of Interest and Principal. Interest accruing on an
Advance and principal prepayments thereof out of Collections with respect
thereto shall be payable on each Payment Date as set forth in Section 2.9. In
addition, all accrued and unpaid Monthly Interest and the unpaid principal
amount of each Advance will be payable in full on the Maturity Date for such
Advance unless extended as set forth in Section 2.5.
SECTION III.7. Secured Note. The Line shall be evidenced by a secured
promissory note of the Company in the form attached hereto as Exhibit A (the
"Secured Note").
SECTION III.8. Form of Payment. All payments to be made to the Lender with
respect to principal and interest on the Advances and all other Secured
Obligations shall be made in immediately available funds by wire transfer to
such account as the Lender may direct the Company from time to time in writing.
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<PAGE> 5
SECTION III.9. Allocation of Collections. Based upon the information
contained in the Servicer Report, all Collections during each Collection Period
with respect to Loans financed by an Advance shall be applied on each Payment
Date in the following amounts and in the following order:
(a) So long as no Event of Default shall have occurred and then be
continuing, the Collateral Agent shall pay from the Principal Account the
Principal Collections for the Related Collection Period (net of any amounts
reborrowed pursuant to Section 2.9(d)) and any amounts withdrawn from the Cash
Collateral Account in accordance with Section 5.1(b) hereof on each Payment Date
to the Persons, in the amounts and in the priority set forth below (based solely
on the information set forth in the related Servicer Report):
(i) to the Lender, an amount equal to the Monthly Principal, if any,
payable on such Payment Date; provided that, amounts payable to the Lender
pursuant to this Section 2.9(a) may, at the prior written direction of the
Lender, be paid to the Company on account of any Advance being made by the
Lender on such Payment Date. Amounts so applied shall be deemed to have
reduced the principal balance of the Advance that matured on such Payment
Date;
(ii) to each Borrower, the applicable Deferred Payment; and
(iii) to the Company, any remaining Principal Collections on deposit
in the Principal Account with respect to the Related Collection Period;
provided, however, that no funds shall be distributed to the Company
pursuant to this clause (iii) unless, after giving effect to such
distribution, the Company shall be in compliance with the Collateral
Coverage Condition.
(b) So long as no Event of Default shall have occurred and then be
continuing, the Collateral Agent shall pay from the Finance Charge Account the
Interest Collections for the Related Collection Period (net of any amounts
reborrowed pursuant to Section 2.9(d)) and any amounts withdrawn from the Cash
Collateral Account in accordance with Section 5.1(b) and (c) hereof on each
Payment Date to the Persons, in the amounts and in the priority set forth below
(based solely on the information set forth on the related Servicer Report);
provided, however, that the failure of the Servicer to deliver a Servicer Report
shall not preclude the Collateral Agent from paying Monthly Interest, and the
Collateral Agent shall distribute such Monthly Interest on the then current
Advance Balance upon written direction from the Lender specifying the amount
thereof:
(i) to the Lender, an amount equal to the sum of (x) the Monthly
Interest and (y) any unpaid Monthly Interest from all prior Payment Dates
(with interest thereon in accordance with Section 2.1(b);
(ii) to the Collateral Agent, the Collateral Agent Fee due to
the Collateral
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<PAGE> 6
Agent on such Payment Date;
(iii) to the Servicer, if DVI Business Credit Corporation or any
Affiliate thereof is then acting as Servicer, an amount equal to the sum
of (x) one-half of the Servicing Fee due on such Payment Date, (y) any
unpaid Servicing Fee payable pursuant to this clause (iii) from all prior
Payment Dates and (z) any out-of-pocket expenses for which the Servicer is
entitled to reimbursement pursuant to Section 4.04(a) of the Contribution
and Servicing Agreement; provided, however, that if DVI Business Credit
Corporation or any Affiliate thereof is not then acting as Servicer, then
the amount to be paid to the Servicer under this Section 2.9(b)(iii) shall
be the entire Servicing Fee due on such Payment Date, any unpaid Servicing
Fee from all prior Payment Dates and any out-of-pocket expenses for which
the Servicer is entitled to reimbursement pursuant to Section 4.04(a) of
the Contribution and Servicing Agreement;
(iv) to the Collateral Agent for deposit in the Cash Collateral
Account, an amount equal to the excess, if any, of (1) the Required Cash
Collateral Account Balance for such Payment Date over (2) funds then on
deposit in the Cash Collateral Account;
(v) to the Collateral Agent, the reasonable and documented
out-of-pocket expenses incurred by the Collateral Agent in connection with
its administration of the transactions hereunder;
(vi) to the Servicer, if DVI Business Credit Corporation or any
Affiliate thereof is then acting as Servicer, an amount equal to the sum
of (x) one-half of the Servicing Fee due on such Payment Date and (y) any
unpaid Servicing Fee payable pursuant to this clause (vi) from all prior
Payment Dates;
(vii) to each Borrower, the applicable Deferred Payment; and
(viii) to the Company, any remaining Interest Collections for the
Related Collection Period; provided, however, that no funds shall be
distributed to the Company pursuant to this clause (ix) unless the Company
is in compliance with the Collateral Coverage Condition.
(c) If at any time any amount or portion thereof previously distributed
pursuant to Section 2.9(a) or (b) shall have been recovered, or shall be subject
to recovery, in any proceeding with respect to the Company or otherwise, then
for purposes of determining future distributions pursuant to Section 2.9(a) or
(b) such amount or portion thereof shall be deemed not to have been previously
so distributed.
(d) Subject to the availability of funds on deposit in the Principal
Account on any day, upon delivery of a Reborrowing Certificate in the form
attached hereto as Exhibit E by the Company to the Collateral Agent and the
Lender on a Business Day, the Collateral Agent shall
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<PAGE> 7
by 4:30 p.m. New York City time on the date of delivery of the Reborrowing
Certificate if such Reborrowing Certificate is delivered prior to 1:30 p.m. New
York City time on the date of delivery of the Reborrowing Certificate or by
12:00 noon New York City time on the Business Day next succeeding the date of
delivery of the Reborrowing Certificate if such Reborrowing Certificate is
delivered after 1:30 p.m. New York City time, from funds remaining on deposit in
the Principal Account after any distributions required to be made on such day
pursuant to Sections 2.9(a) and (b) have been made, release the Reborrowing
Amount requested in the Reborrowing Certificate; provided that no Event of
Default or Potential Event of Default shall have occurred which is continuing or
would result from the application of the Reborrowing Amount; and provided
further that the proposed use of the proceeds of the Reborrowing Amount would
not cause the requirements of Section 2.12, 2.13 or 2.14 to be violated.
(e) So long as no Event of Default shall have occurred and then be
continuing and the Company shall be in compliance with the Collateral Coverage
Condition, the Collateral Agent shall, upon receipt of an Officers' Certificate
from the Servicer which states that all Loans and other amounts owing under a
Revolving Credit Agreement have been paid in full and that the Collateral
Coverage Condition is satisfied and will continue to be satisfied after giving
effect to the requested release, release from the Loan Accounts any subsequent
Collections received in respect of such Loan and remit such amounts to such
Company.
SECTION III.10. Securitized Offering. All proceeds of any Securitized
Offering shall be paid to the Lender to the extent of (a) the accrued and
unpaid interest on Advances and (b) the outstanding Advance Balance.
SECTION III.11. Conditions to the Making of Advances. (a) The
effectiveness of this Agreement and the obligation of the Lender to make the
initial Advance shall be subject to the delivery of each of the following
documents, on or prior to such effectiveness, in form and substance satisfactory
to the Lender:
(i) Secured Note. The Secured Note duly executed by the Company
in an original principal amount equal to the Line Amount;
(ii) Certificate of Incorporation. The certificate of incorporation
of the Company and the Servicer, each duly certified by the Secretary of
State of the jurisdiction of its incorporation, together with a copy of
the by-laws of each of the Company and the Servicer, duly certified by the
Secretary or an Assistant Secretary of the Company or the Servicer, as
applicable;
(iii) Resolutions. (1) Copies of resolutions of the Board of
Directors of the Company authorizing or ratifying the execution, delivery
and performance of this Agreement, the Contribution and Servicing
Agreement, pursuant to which Loans will be purchased with the proceeds of
the initial Advance and those documents and matters
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<PAGE> 8
required of it with respect thereto, duly certified by the Secretary or
Assistant Secretary of the Company;
(2) Copies of resolutions of the Board of Directors of each of the
Servicer authorizing or ratifying the execution, delivery and performance
of this Agreement and those documents and matters required of it with
respect to this Agreement, duly certified by the Secretary or Assistant
Secretary of the Servicer;
(iv) Consents. Certified copies of all documents evidencing any
necessary corporate action, consents and governmental approvals (if
any) with respect to this Agreement;
(v) Incumbency and Signatures. A certificate of the Secretary or an
Assistant Secretary of each of the Company and the Servicer certifying the
names of the individual or individuals authorized to sign this Agreement
and the other Related Agreements to be executed by such party, together
with a sample of the true signature of each such individual (the Lender
may conclusively rely on each such certificate until formally advised by a
like certificate of any changes therein);
(vi) Opinions of Counsel. Opinions of counsel from counsel
acceptable to the Lender covering such matters as the Lender shall
request and satisfactory in form and substance to the Lender;
(vii) Good Standing Certificates. Certificates of good standing
for the Company, the Seller and the Guarantor in the jurisdiction of
its organization and the jurisdiction of its principal place of
business;
(viii) Search Reports. A written search report from a Person
satisfactory to the Lender listing all effective financing statements that
name the Company, the Servicer, the Seller, any Borrower or any Originator
as debtor or assignor and that are filed in the jurisdictions in which
filings were made pursuant to subsection (ix) below, together with copies
of such financing statements, and tax and judgment lien search reports
from a Person satisfactory to the Lender showing no evidence of any tax or
judgment liens filed against the Company, the Seller, the Servicer, any
Borrower or any Originator;
(ix) Evidence. Evidence (which may be telephonic) of the filing of
proper financing statements on Form UCC-1, (i) naming the Company as
secured party and the Seller as debtor, (ii) naming the Seller as secured
party and each Borrower as debtor, (iii) naming the applicable Originator
as debtor and the applicable Borrower as secured party, and (iv) naming
the Company as debtor and the Lender as secured party, or other similar
instruments or documents, as may be necessary or, in the reasonable
opinion of the Lender, desirable under the UCC of all applicable
jurisdictions to perfect the interest of the Collateral Agent, on behalf
of the Lender, in the Collateral;
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<PAGE> 9
(x) No Material Adverse Change. A certificate of the Chief Financial
Officer of the Company, the Seller and the Guarantor certifying that since
March 31, 1996, there has been no material adverse change in the financial
condition, business or results of operations of the Company or the Seller;
(xi) Capitalization of the Company. Evidence, in form and substance
satisfactory to the Lender, that as of the initial Funding Date, the
Company has been capitalized with equity in cash equal to or greater than
$750,000;
(xii) Establishment of Accounts. Evidence, in form and substance
satisfactory to the Lender, that the Borrower Lockbox Accounts, the
Finance Charge Account, the Principal Account and the Cash Collateral
Account have been established;
(xiii) Initial Cash Collateral Account Deposit. Evidence, in
form and substance reasonably satisfactory to the Lender that the
Required Cash Collateral Account Balance has been deposited in the Cash
Collateral Account;
(xiv) Contribution and Servicing Agreement. The Contribution and
Servicing Agreement shall have been executed and delivered by the Company
and the Seller in form and substance satisfactory to the Lender, shall be
in full force and effect with all conditions precedent to the initial sale
of Loans thereunder having been satisfied and with no defaults, and each
of the Company and the Seller shall have performed all its obligations
thereunder which, pursuant to the terms of the Contribution and Servicing
Agreement, are required to be performed prior to the making of the initial
Advance;
(xv) Revolving Credit Agreements. Each Revolving Credit Agreement
pursuant to which Loans made by DVIBC will be acquired by the Company with
the proceeds of the initial Advance shall have been executed and delivered
by DVIBC and the applicable Borrower, in form and substance satisfactory
to the Lender, shall be in full force and effect with all conditions
precedent to the making of Loans thereunder having been satisfied and with
no defaults, and each of the Seller and such Borrower shall have performed
all its obligations thereunder which, pursuant to the terms of the
applicable Revolving Credit Agreement, are required to be performed prior
to the making of Loans thereunder;
(xvi) Rating Letters. The Secured Note shall have been rated
"BBB-" by the Rating Agency;
(xvii) Guaranty. The Guaranty shall have been executed and delivered
in form and substance satisfactory to the Lender; and
(xviii) Additional Conditions. There shall have been satisfied
such other conditions as the Lender shall reasonably request.
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<PAGE> 10
(b) All Advances (including the initial Advance) shall be subject to the
further conditions precedent that (a) the Lender, the Collateral Agent and the
Rating Agency shall have received a completed and duly executed Borrowing Notice
therefor in substantially the form attached hereto as Exhibit F and a completed
and duly executed Daily Servicer Report for the date of such Borrowing Notice,
in each case, no later than 3:00 p.m. New York City time on the Business Day
preceding the Funding Date for such Advance, (b) the Company shall have
delivered to the Collateral Agent in accordance with the terms of the Collateral
Agreement the Loan Documents with respect to each Loan listed on the Loan
Schedule attached to the applicable Borrowing Notice and (c) on the Funding Date
for such Advance, the following statements shall be true (and the Company, by
accepting the amount of such Advance, shall be deemed to have represented and
warranted that): (i) the representations and warranties contained in Sections
7.1 and 7.2 are true and correct (in all material respects to the extent any
such representations and warranties do not incorporate a materiality limitation
in their terms) on and as of such Funding Date as if made on and as of such
date, (ii) no Event of Default, Potential Event of Default or Servicer Event of
Default has occurred and is continuing or would result from the making of such
Advance or from the application of the proceeds of such Advance, (iii) the Line
Termination Date shall not have occurred, (iv) such Funding Date shall be at
least 5 Business Days after the immediately preceding Funding Date if the amount
of the Advance requested in the related Borrowing Notice is less than
$1,000,000, (v) the Required Cash Collateral Account Balance shall be on deposit
in the Cash Collateral Account after giving effect to all distributions and
Advances on such Funding Date, (vi) the Lender shall have received payment of
all its fees and reimbursement for all its out-of-pocket costs incurred in
connection with entering into or enforcing this Agreement, (vii) the Rating
Agency shall not have downgraded its rating of the Secured Note or the Servicer
or placed the Servicer on "credit watch" for downgrade, (viii) the Lender,
Ascendant Capital, Inc. and the Rating Agency shall have received from the
Servicer the information specified in Schedule 1 to this Agreement with respect
to each Borrower under any Loan to be acquired with the proceeds of such Advance
and the requirements of Section 2.14 shall have been satisfied, (ix) the
Company, the Seller, each applicable Borrower and the Servicer shall have taken
all such other actions and delivered all such other instruments, documents and
agreements as are required pursuant to the terms of the Contribution and
Servicing Agreement and each applicable Revolving Credit Agreement, and (x) the
Lender shall have received such other documents and instruments, and the
Company, the Seller, each Borrower and the Servicer shall have taken all such
other actions and delivered all such other instruments, documents and agreements
as the Lender shall reasonably request.
Notwithstanding anything in this Agreement to the contrary, the Lender
shall not be obligated to make an Advance hereunder with respect to any Loans
unless and until (i) the Lender shall have satisfactorily completed a due
diligence review of the Loans proposed to be acquired, and (ii) the Seller and
the Borrower thereunder shall have entered into a Revolving Credit Agreement
with respect to such Loans on terms and conditions and in form and substance
satisfactory to the Lender, including representations and warranties for such
Loans.
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<PAGE> 11
In addition, the Lender shall have no obligation to fund an Advance if, as of
the Funding Date for such Advance: (i) any representation of the Company or the
Servicer contained herein, or of the Company or the Seller in the Contribution
and Servicing Agreement or of the Seller or the Borrower under the relevant
Revolving Credit Agreement is not true and correct in all material respects as
of such date or the Company is not in compliance in all material respects with
the terms hereof and thereof as of such date; or (ii) in the opinion of counsel
to the Lender, funding such Advance would constitute a violation of law or
conflict with any material rule, regulation or order of any state or federal
court, regulatory body, administrative agency, governmental body or arbitrator
having jurisdiction over the Lender.
SECTION III.12. Eligible Payor Concentration Tests. The Company shall not
use the proceeds of any Advance or Reborrowing Amount to acquire a Loan if and
to the extent that, after giving effect to the acquisition of such Loan, the
Loans subject to the Lien of the Collateral Agent would be secured by Eligible
Receivables that, with respect to any Borrower, exceed any of the maximum
percentages specified in Schedule 2, except to the extent that, after giving
effect to the making of such Advance and the acquisition of the Loans proposed
to be acquired with the proceeds of such Advance, (a) the sum of (i) voluntary
capital contributions of cash made by the Seller to the Company pursuant to
Section 1.02(g) of the Contribution and Servicing Agreement which are then held
in the Cash Collateral Account, (ii) the unpaid principal balance of all
Eligible Loans then subject to the Lien of the Collateral Agent under the
Collateral Agreement (other than those Eligible Loans secured by Eligible
Receivables in excess of any of the maximum percentages specified in Schedule 2,
including those Loans proposed to be acquired with the proceeds of such
Advance), and (iii) Principal Collections on deposit in the Principal Account
would equal or exceed (b) the Advance Balance. Any exception to compliance with
the foregoing will be permitted with the prior approval of the Lender if, and
only if, the Rating Agency confirms that such exception will not result in a
reduction or withdrawal of the then current rating of the Secured Note.
SECTION III.13. Borrower Concentration Tests. The Company shall not use
the proceeds of any Advance or Reborrowing Amount to acquire a Loan if and to
the extent that, after giving effect to the acquisition of such Loan, the Loans
subject to the Lien of the Collateral Agent would, with respect to any Borrower,
exceed any of the maximum percentages specified in Schedule 3, except to the
extent, that, after giving effect to the making of such Advance and the
acquisition of the Loans proposed to be acquired with the proceeds of such
Advance, (a) the sum of (i) voluntary capital contributions of cash made by the
Seller to the Company pursuant to Section 1.02(g) of the Contribution and
Servicing Agreement which are then held in the Cash Collateral Account, (ii) the
unpaid principal balance of all Eligible Loans then subject to the Lien of the
Collateral Agent under the Collateral Agreement (other than those Eligible Loans
secured by Eligible Receivables in excess of any of the maximum percentages
specified in Schedule 3, including those Loans proposed to be acquired with the
proceeds of such Advance), and (iii) Principal Collections on deposit in the
Principal Account would equal or exceed (b) the Advance Balance. Any exception
to compliance with the foregoing will be permitted with the prior approval of
the Lender if, and only if, the Rating
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<PAGE> 12
Agency confirms that such exception will not result in a reduction or withdrawal
of the then current rating of the Secured Note; provided that, without the prior
written consent of the Lender and the Rating Agency, in no event will the
aggregate outstanding balance of all Loans to any one Borrower which are subject
to the Lien of the Collateral Agent exceed (a) $4.0 million on any day as of
which the aggregate outstanding balance of all Loans subject to the Lien of the
Collateral Agent is between $10 million and $15 million, (b) $5.25 million on
any day as of which the aggregate outstanding balance of all Loans subject to
the Lien of the Collateral Agent is between $15 million and $24 million, (c)
$5.75 million on any day as of which the aggregate outstanding balance of all
Loans subject to the Lien of the Collateral Agent is between $24 million and $39
million and (d) $7 million on any day as of which the aggregate outstanding
balance of all Loans subject to the Lien of the Collateral Agent is between $39
million and $50 million.
SECTION III.14 Additional Borrowers; Borrower Defaults. (a) It shall be an
additional condition precedent to the making of each Advance and to the payment
of any Reborrowing Amount on behalf of the Company that: (i) each Borrower under
Loans to be acquired by the Company with the proceeds of such Advance or
Reborrowing Amount shall have entered into a Revolving Credit Agreement with the
Seller in substantially the form attached hereto as Exhibit C or such other form
as is acceptable to the Lender, (ii) if such Borrower is a special purpose
entity, the Lender shall have received an opinion of counsel addressed to the
Lender to the effect that the sale of Receivables to such Borrower by its parent
constitutes a true sale and addressing the issue of non-consolidation, in form
acceptable to the Lender, (iii) if the Borrower is a special-purpose
bankruptcy-remote entity, the Lender shall have received and approved certified
copies of the articles of incorporation and bylaws of such Borrower, (iv) the
Rating Agency shall have confirmed in writing that the making of Loans to such
Borrower shall not result in the reduction or withdrawal of the then current
rating of the Secured Note (provided, however, that, with respect to a new
Borrower, if the Rating Agency does not object to the Company's acquisition of
Loans made to such Borrower within 6 days after written notice thereof by the
Company, this item (iv) shall be deemed to have been satisfied), (v) the
Servicer shall have delivered to the Collateral Agent Wire Instructions for such
Borrower and (vi) the Borrower Lockbox Account for such Borrower shall have been
established and the Servicer on behalf of the Company shall have delivered the
notices with respect thereto as required under Section 5.1 of the Collateral
Agreement.
(b) No proceeds of any Advance or Reborrowing Amount shall be used by the
Company to acquire Loans made to any Borrower which is not an Eligible Borrower
or with respect to which a Borrower Default has occurred unless the Lender has
consented thereto in writing and the Rating Agency has delivered written
confirmation to the Lender, the Servicer and the Collateral Agent that the
acquisition of Loans made to such Borrower will not result in the reduction or
withdrawal of the then current rating of the Secured Note.
SECTION III.15. Certain Waivers. The Company waives presentment, demand
for payment, notice of dishonor and protest, notice of the creation of any of
the Secured
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Obligations and all other notices whatsoever to the Company with respect to the
Secured Obligations. The obligations of the Company under this Agreement and the
Secured Note shall not be affected by (i) the failure of the Lender or the
holder of the Secured Note or holders of any of the Secured Obligations to
assert any claim or demand or to exercise or enforce any right, power or remedy
against the Company or the Collateral or otherwise, (ii) any extension or
renewal for any period (whether or not longer than the original period) or
exchange of any of the Secured Obligations or the release or compromise of any
obligation of any nature of any Person with respect thereto, (iii) the
surrender, release or exchange of all or any part of any property (including the
Collateral) securing payment and performance of any of the Secured Obligations
or the compromise or extension or renewal for any period (whether or not longer
than the original period) of any obligations of any nature of any Person with
respect to any such property, and (iv) any other act, matter or thing which
would or might, in the absence of this provision, operate to release, discharge
or otherwise prejudicially affect the obligations of the Company.
SECTION III.16. Determination of LIBOR. (a) On each LIBOR Determination
Date, the Lender shall determine LIBOR for the next succeeding Interest Accrual
Period for a period equal to one month on the basis of the offered LIBOR
quotations, appearing on Telerate Page 3750 as of 11:00 a.m., London Time, on
such LIBOR Determination Date. If such rate does not appear on Telerate Page
3750, the rate for that day will be determined on the basis of the rates at
which deposits in U.S. Dollars are offered by the Reference Banks at
approximately 11:00 a.m., London Time, on the LIBOR Determination Date to prime
banks in the London interbank market for a period of one month commencing on
that day. The Lender will request the principal London office of each of the
Reference Banks to provide a quotation of its rate. If at least two such
quotations are provided, the rate for that day will be the arithmetic mean of
the quotations. If fewer than two quotations are provided as requested, the rate
for that day will be the arithmetic mean of the rates quoted by major banks in
New York City, selected by the Lender at approximately 11:00 a.m., New York City
time, on that day for loans in U.S. Dollars to leading European banks for a
period of one month commencing on that day.
(b) If necessary, on each LIBOR Determination Date, the Lender shall
designate the banks that shall act as the Reference Banks for the succeeding
Interest Accrual Period and shall notify the Collateral Agent on such LIBOR
Determination Date. The Collateral Agent may conclusively rely and shall be
fully protected in relying upon the rates provided to it by the Lender.
(c) The establishment of LIBOR, and the subsequent calculation of the
Applicable Rate for each Interest Accrual Period by the Lender, in the absence
of manifest error, shall be final and binding.
ARTICLE IV
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USE OF PROCEEDS; GRANT OF SECURITY INTEREST
SECTION IV.1. Purpose of Loan. The Company agrees that the Line shall be
used solely to acquire Eligible Loans secured by Eligible Receivables which
shall be pledged along with the other Collateral to secure the Secured
Obligations, as such Loans are identified to the Lender in writing and/or in
electronic form from time to time in a manner designated by the Lender in
writing to the Company from time to time.
SECTION IV.2. Grant of Security Interest. As security for the Advances and
all of the other Secured Obligations, the Company hereby confirms the grant to
the Collateral Agent, acting on behalf of the Lender pursuant to the Collateral
Agreement, of a security interest and Lien in all of the Company's right, title
and interest in and to each item constituting the Collateral now and hereafter,
including all future Loans and each Revolving Credit Agreement executed in
connection therewith.
SECTION IV.3. Borrower Lockbox Accounts. The Company shall direct each
Borrower (a) to make payments under the Loans to such Borrower into a Borrower
Lockbox Account established in the name of the Company, (b) to direct each
Eligible Payor (other than an Eligible Payor referred to in subsection (3) of
the definition of "Eligible Payor") to make payments in respect of the
Receivables of such Borrower into such Borrower Lockbox Account referred to in
(a) above and (c) to direct each Eligible Payor referred to in subsection (3) of
the definition of "Eligible Payor" to make payments in respect of its
Receivables of such Borrower into a Borrower Lockbox Account established in the
name of such Borrower.
ARTICLE V
FINANCING STATEMENTS
SECTION V.1. UCC Financing Statements. In connection with the pledge of
the Loans and other Collateral, the Company shall prepare and deliver to the
Lender or its agent not less than five (5) Business Days prior to the date of
any Advance or the delivery of a Reborrowing Certificate, Uniform Commercial
Code ("UCC") financing statements executed by the Company and acceptable to the
Lender, for filing in such jurisdictions as the Lender shall request. The Lender
shall be entitled to file such UCC financing statements in the applicable
jurisdictions. The Company agrees to reimburse the Lender for the amount of any
filing fees paid by the Lender in connection with the filing of such UCC
financing statements within thirty days of receipt from the Lender of an invoice
documenting such amounts.
ARTICLE VI
THE CASH COLLATERAL ACCOUNT
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SECTION VI.1. Cash Collateral Account. (a) Prior to the making of the
initial Advance, the Company shall deposit in the Cash Collateral Account an
amount equal to the Required Cash Collateral Account Balance. The Company shall
also immediately deposit into the Cash Collateral Account the amount of any
capital contribution made by DVIBC pursuant to Section 1.02(g) of the
Contribution and Servicing Agreement to the extent directed by the Seller.
(b) No later than 10:00 a.m. (New York City time) on the Business Day
prior to each Payment Date, the Collateral Agent shall, in accordance with a
direction set forth in the Servicer Report, make a draw on the Cash Collateral
Account in an amount equal to the lesser of (x) the amount then on deposit in
the Cash Collateral Account and (y) the extent by which funds then held by the
Collateral Agent are not sufficient to pay the Monthly Interest and Monthly
Principal, if any, on such Payment Date. The proceeds of any such draws will be
used by the Collateral Agent to pay the Monthly Interest and Monthly Principal,
if any, due on such Payment Date.
(c) On each Payment Date, the Collateral Agent, in accordance with a
direction set forth in the Servicer's Report, shall withdraw the excess, if any,
of (i) amounts on deposit in the Cash Collateral Account (determined after
giving effect to any draws made pursuant to Section 5(b)) over (ii) the then
current Required Cash Collateral Account Balance and deposit such amounts into
the Finance Charge Account to be applied in accordance with the priorities set
forth in Section 2.9(b) hereof.
(d) On the first Business Day after the date on which the Collateral
Agreement terminates pursuant to the terms thereof and all Secured Obligations
have been paid in full, the Collateral Agent shall, upon written certification
thereof by the Servicer, withdraw all amounts then on deposit in the Cash
Collateral Account and deliver such amounts to the Company or its designee.
ARTICLE VII
THE GUARANTY
SECTION VII.1. Claims on Guaranty. Not later than 3:00 p.m. New York City
time on the Business Day immediately preceding a Payment Date, the Collateral
Agent shall determine if the funds then held by the Collateral Agent in the Loan
Accounts, together with amounts withdrawn from the Cash Collateral Account
pursuant to Sections 5.1(b) and (c), are sufficient to pay in full the Monthly
Interest and Monthly Principal payable on such Payment Date. If there is an
insufficiency, the Collateral Agent shall submit a claim to the Guarantor in the
form of Exhibit D with respect to such insufficiency; provided that submission
of a claim in such form shall not be the exclusive or only means of drawing on
the Guaranty, and the
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provisions of this Article VI shall not be deemed to limit the Lender's rights
(or the rights of the Collateral Agent on the Lender's behalf) under the
Guaranty. The proceeds of any such draw will be used by the Collateral Agent to
pay the Monthly Interest and/or Monthly Principal payable on such Payment Date,
as applicable.
ARTICLE VIII
REPRESENTATIONS AND WARRANTIES
SECTION VIII.1. Representations and Warranties of the Company. The Company
hereby represents and warrants to the Lender as of the Closing Date and each
Funding Date (or such earlier date as shall be set forth therein):
(a) Organization and Good Standing. The Company has been duly
organized and is validly existing and in good standing under the laws of
its state of incorporation, with power and authority to own its properties
and to conduct its business as such properties shall be currently owned
and such business is presently conducted and has power, authority and
legal right to acquire, own and service the Loans, the Loan Documents and
the Receivables.
(b) Due Qualification. The Company is duly qualified to do business
as a foreign corporation in good standing, and has obtained all necessary
licenses and approvals, in all jurisdictions in which the ownership or
lease of property or the conduct of its business shall require such
qualifications (except where the failure to be so qualified or in good
standing or the failure to have such licenses and approvals could not
individually or in the aggregate have a material adverse effect on the
Collateral or the business or condition (financial or otherwise) of the
Company or impair the enforceability of any Loan or the related Loan
Documents or Receivables).
(c) Power and Authority. The Company has the power and authority to
execute and deliver this Agreement and to carry out its terms; and the
execution, delivery and performance of this Agreement have been duly
authorized by the Company by all necessary corporate action.
(d) Binding Obligation. This Agreement constitutes a legal, valid
and binding obligation of the Company enforceable against the Company in
accordance with its terms except as the enforceability thereof may be
limited by bankruptcy, insolvency, moratorium or other similar laws
affecting creditors' rights and by general principles of equity.
(e) No Violation. The consummation of the transactions contemplated
by this Agreement and the fulfillment of the terms hereof shall not
conflict with, result in any
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material breach of any of the terms and provisions of, nor constitute
(with or without notice or lapse of time) a default under, the articles of
incorporation or by-laws of the Company, or any indenture, agreement or
other instrument to which the Company is a party or by which it is bound;
nor result in the creation or imposition of any Lien upon any of its
properties pursuant to the terms of any such indenture, agreement or other
instrument (other than the Collateral Agreement); nor violate any law or,
to the best of the Company's knowledge, any order, rule or regulation
applicable to the Company of any court or of any federal or state
regulatory body, administrative agency or other governmental
instrumentality having jurisdiction over the Company or its properties.
(f) No Proceedings. There are no proceedings or investigations
pending or, to the best of the Company's knowledge, threatened, before any
court, regulatory body, administrative agency, or other governmental
instrumentality having jurisdiction over the Company or its properties:
(A) asserting the invalidity of this Agreement; (B) seeking to prevent the
consummation of any of the transactions contemplated by this Agreement; or
(C) seeking any determination or ruling that might materially and
adversely affect the performance by the Company of its obligations under,
or the validity or enforceability of, this Agreement, the Contribution and
Servicing Agreement, the Collateral Agreement or the Secured Note.
(g) Company Not Insolvent. The Company is not the subject of
any pending federal, state or other bankruptcy, insolvency or similar
proceedings.
(h) Loans and Receivables. The representations and warranties of the
Seller regarding the Loans, the Loan Documents and the Receivables
contained in Section 2 of the Contribution and Servicing Agreement are
true and correct in all material respects and the representations and
warranties of each Borrower under its Revolving Credit Agreement shall be
true and correct in all material respects as of the making of each Loan
under such Revolving Credit Agreement. The Lender and the Collateral
Agent, acting on the Lender's behalf, may rely on such representations and
warranties to the same extent as if such representations and warranties
were set forth by the Company herein.
(i) Title to Collateral. With respect to each item of Collateral,
including, without limitation, the Loans and the Receivables, the Company
either (A) owns good and marketable title thereto or (B) has a first
priority perfected security interest therein, in each case, free and clear
of all Liens, charges or claims which Lien or Liens would have a material
adverse effect on the value of the Collateral or the collectibility of the
Receivables.
(j) Taxes. The Company has filed all tax returns and reports
required by law to have been filed by it and has paid all taxes and
governmental charges thereby shown to be owing, except any such taxes or
charges which are being diligently contested in good
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faith by appropriate proceedings and for which adequate reserves in
accordance with GAAP shall have been set aside on its books.
(k) Employee Benefit Plans. The Company does not sponsor and is not
required to make any contribution to any Pension Plan. No steps have been
taken by the PBGC, DVI or any Affiliate thereof to terminate any Plan
which would result in any material liability to the Company, and no
contribution failure has occurred with respect to any Pension Plan
maintained by the Company or any member of the Controlled Group sufficient
to give rise to a Lien under section 302(f) of ERISA. No condition exists
or event or transaction has occurred with respect to any Plan which might
reasonably be expected to result in the incurrence by the Company or any
member of the Controlled Group of any material liability, fine or penalty
to or on account of a Plan pursuant to Sections 302, 409, 502(c), 502(i),
502(l), 4062, 4063, 4064, 4068 or 4071 of ERISA or Section 401(a)(29),
4971, 4975 or 4980, of the Code.
(l) Margin Regulations. The Company is not engaged in the business
of extending credit for the purpose of purchasing or carrying margin
stock, and no proceeds of any Advance will be used for a purpose which
violates, or would be inconsistent with, F.R.S. Board Regulation G, U or
X. Terms for which meanings are provided in F.R.S. Board Regulation G, U
or X or any regulations substituted therefor, as from time to time in
effect, are used in this paragraph with such meanings.
(m) Accuracy of Information. All factual information heretofore or
contemporaneously furnished by or on behalf of the Company in writing to
the Lender for purposes of or in connection with this Agreement or any
transaction contemplated hereby (including the Contribution and Servicing
Agreement, true and complete copies of which were furnished to the Lender
in connection with its execution and delivery hereof) is, and all other
such factual information hereafter furnished by or on behalf of the
Company to the Lender in writing will be, true and accurate in every
material respect on the date as of which such information is dated or
certified, as of the date of execution and delivery of this Agreement by
the Lender and as of the applicable Funding Date, and such information is
not, or shall not be, as the case may be, incomplete by omitting to state
any material fact necessary to make such information not misleading in any
material respect, in each case, in light of the circumstances under which
such information was furnished.
(n) Financial Statements. All financial statements or certificates
of DVI or any of its Subsidiaries or any of their respective officers
furnished to the Lender are true and complete and fairly present in all
material respects the financial condition, results of operations and cash
flows of DVI, or such Subsidiary, as the case may be, in each case as of
the date thereof or for the period indicated, as the case may be and,
since the date of such financial statements or certificates, or the period
indicated therein, as applicable, no event or condition has occurred and
is continuing which would have a
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material adverse effect on the ability of the Company to perform its
obligations under this Agreement, the Secured Note, the Collateral
Agreement, the Contribution and Servicing Agreement or any Related
Agreement.
(o) Enforcement of Rights and Remedies. The Company shall take all
action necessary or required by the Lender to enforce any right or remedy
the Company may have against the Seller under the Contribution and
Servicing Agreement and against a defaulting Borrower under its Revolving
Credit Agreement. The Company shall not compromise, settle or otherwise
settle a claim the Company may have against the Seller or any such
Borrower or grant any waiver or any other relief to the Seller or such
Borrower without the prior written consent of Lender.
(p) Perfected Security Interest. Upon the funding of any
Advance, the Lender shall have a perfected security interest of first
priority under applicable law in the related Collateral.
SECTION VIII.2. Representations and Warranties Regarding Loans and
Receivables. The Company hereby represents and warrants to the Lender, as of the
Closing Date, each Funding Date and each delivery of a Reborrowing Certificate,
or, with respect to any Substitute Loans, Additional Loans and the related
Receivables and Loan Documents, as of the related Substitute Date or Addition
Date:
(a) Prior to the making of each Advance or payment to the Company of
any Reborrowing Amount, the Company will (A) be the sole owner of, and
have good and marketable title to, the related Loans and Loan Documents
and (B) have a valid and perfected first priority perfected security
interest in the Receivables that have been pledged as collateral security
for such Loan.
(b) The Grant of such Loan and related Eligible Receivables to the
Collateral Agent on behalf of the Lender will not violate the terms or
provisions of any such Loan Document or Receivable or any other agreement
to which the Seller then is a party or by which it is bound.
(c) At the time each item of Loan Collateral is assigned to the
Collateral Agent, such Loan Collateral will be free and clear of all Liens
other than the Lien of the Seller pursuant to the applicable Revolving
Credit Agreement and there will be no delinquent taxes or other
outstanding charges arising by, through or under the Company affecting the
Loan Collateral that are or may be Liens prior to, equal or coordinate
with, or subordinate to, the Lien of the Collateral Agent under the
Collateral Agreement.
(d) At the time each item of Loan Collateral is assigned to the
Collateral Agent, each Loan, the related Receivables and the related Loan
Documents will be a
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legal, valid and binding full recourse obligation of the Borrower or the
Eligible Payor, as the case may be, thereunder, enforceable by the Company
(and by the Collateral Agent as assignee of the Company) against such
Borrower or the Eligible Payor, as the case may be, in accordance with the
terms thereof, except as the enforcement of Eligible Government
Receivables against the Eligible Payor may be limited by the
anti-assignment provisions of applicable Federal law relating to Medicaid,
Medicare and CHAMPUS and except as such enforcement may be limited by
bankruptcy, insolvency, reorganization or similar laws relating to or
affecting the enforcement of creditors' rights, and will be in full force
and effect, and any and all obligations of the Company and of such
Borrower or Eligible Payor, as the case may be, under any federal, state
or local law including, without limitation, usury, truth-in-lending and
equal credit opportunity laws applicable to such Loan or Receivables, as
the case may be, will have been complied with, and the Seller will have no
knowledge of any challenge or dispute by the Borrower under such Loan or
by an Eligible Payor with respect to any Receivables or of the bankruptcy
or insolvency of any such Borrower or Eligible Payor.
(e) At the time each item of Loan Collateral is assigned to the
Collateral Agent, the Company will not be in the process of terminating
any related Loan or any related Loan Document or making any plans for any
such termination. Furthermore, as of the date on which a Loan is
transferred and assigned to the Collateral Agent pursuant to the terms
hereof (i) there shall have been no default under any Loan Document which
is reasonably likely to have a material adverse effect on such Loan, the
related Receivables or such Loan Document and (ii) no event shall have
occurred and be continuing which with notice, the lapse of time or both
would constitute a default under such Loan, the related Receivables or
such Loan Document.
(f) Each Loan will have been originated by the Seller in the
ordinary course of its business in accordance with the its regular credit
approval process delivered to and approved by the Lender and does not
contravene any laws, rules or regulations applicable thereto. No Loan will
have been selected on any basis which would have any adverse effect on the
Lender.
(g) The sum of all Loans payable by any single Borrower will not
exceed any of the applicable limitations set forth in Schedule 3 hereto
(except as may otherwise be permitted under Section 2.13).
(h) With respect to any single Borrower, the sum of the Net
Collectible Values of all Eligible Receivables payable by any single
Eligible Payor to such Borrower shall not exceed any of the applicable
limitations set forth in Schedule 2 hereto (except as may otherwise be
permitted under Section 2.12).
(i) The obligation of each Borrower to repay each Loan is absolute
and unconditional, without any right of set-off by such Borrower and
without regard to any event affecting the Receivables subject to such
Loan. The obligation of each Eligible
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Payor to pay each Receivable is absolute and unconditional, without any
right of set-off by such Eligible Payor.
(j) There will be no facts or circumstances existing as of the time
each item of Loan Collateral is assigned to the Collateral Agent which
give rise to any right of rescission, offset, counterclaim or defense to
the obligations of any Borrower or any Eligible Payor, as the case may be,
to pay all amounts due with respect to any Loan or any Receivable, as the
case may be, and neither the operation of any of the terms applicable to
any Loan or any Receivable nor the exercise of any right thereunder will
render such Loan or such Receivable, as the case may be, unenforceable in
whole or in part or subject to any right of rescission, offset,
counterclaim or defense and no such right of rescission, offset,
counterclaim or defense will have been asserted with respect thereto.
(k) At the time each item of Loan Collateral is assigned to the
Collateral Agent, no Loan, Receivable or Loan Document will have been
amended, altered or modified in any way which would individually or in the
aggregate materially adversely affect the Company's rights thereunder or
prohibit payment to the Collateral Agent by the Borrower or (except in
respect of Eligible Government Receivables) any Eligible Payor, as the
case may be, and no provision of any Loan or Loan Document will have been
waived, except in writing, and copies of all such writings will be
attached to the related Loan Documents, and no Receivable securing any
such Loan will have been released, in whole or in part, from such Loan.
(l) No Loan or Receivable will have been originated in, or be
subject to the laws of, any jurisdiction whose laws would make the
assignment and transfer thereof pursuant to the terms hereof or any
transaction contemplated hereby or by the Collateral Agreement unlawful.
(m) All parties to each Loan and the related Loan Documents had
requisite authority and capacity to execute such Loan.
(n) No right of the Company with respect to a Borrower's or Eligible
Payor's failure to pay any payment due under any Loan or Receivable, as
the case may be, has been waived by the Company or by any Borrower.
(o) Each Loan Document that constitutes either "chattel paper" or an
"instrument" under the UCC as in effect in the applicable jurisdiction is
in the possession of the Collateral Agent. Each of the Loan Documents that
constitutes an "instrument" has been endorsed to the Collateral Agent or
its order. There is only one original executed copy of each Loan Document
that constitutes "chattel paper" or an "instrument" under the applicable
UCC.
(p) At the time each item of Loan Collateral is assigned to the
Collateral
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Agent, after giving effect to such assignment, the Collateral Coverage
Condition has been satisfied.
(q) The Borrower Lockbox Accounts identified on Schedule 7.2(q)
hereto have been established and are in existence on the Closing Date and
such schedule accurately sets forth the following information as to each
Borrower Lockbox Account:
(A) the name of the Borrower for whose benefit the account
was established;
(B) the name of the depository institution maintaining such
account; and
(C) the account number.
(r) Each Loan is an Eligible Loan.
(s) No consent or approval is required for the assignment and
transfer of any Loan Document pursuant to the terms of this Agreement and
the Collateral Agreement, except for such consents or approvals as have
been obtained.
SECTION VIII.3. Representations and Warranties of the Servicer. The
Servicer makes the following representations on which the Lender is deemed to
have relied in making Advances hereunder. The representations speak as of the
execution and delivery of the Agreement (or as of the date a Person becomes
Servicer in the case of a third-party successor to the Servicer which is not the
Collateral Agent):
(a) Organization and Good Standing. The Servicer has been duly
organized and is validly existing and in good standing under the laws of
its state of incorporation, with power and authority to own its properties
and to conduct its business as such properties shall be currently owned
and such business is presently conducted and has power, authority and
legal right to acquire, own and service the Loans, the Loan Documents and
the Receivables.
(b) Due Qualification. The Servicer is duly qualified to do business
as a foreign corporation in good standing, and has obtained all necessary
licenses and approvals, in all jurisdictions in which the ownership or
lease of property or the conduct of its business shall require such
qualifications (except where the failure to be so qualified or in good
standing or the failure to have such licenses and approvals could not
individually or in the aggregate have a material adverse effect on the
Collateral or the business or condition (financial or otherwise) of the
Servicer or impair the enforceability of any Loan or the related Loan
Documents or Receivables).
(c) Power and Authority. The Servicer has the power and authority to
execute and deliver this Agreement and to carry out its terms; and the
execution, delivery and
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performance of this Agreement have been duly authorized by the Servicer by
all necessary corporate action.
(d) Binding Obligation. This Agreement constitutes a legal, valid
and binding obligation of the Servicer enforceable against the Servicer in
accordance with its terms except as the enforceability thereof may be
limited by bankruptcy, insolvency, moratorium or other similar laws
affecting creditors' rights and by general principles of equity.
(e) No Violation. The consummation of the transactions contemplated
by this Agreement and the fulfillment of the terms hereof shall not
conflict with, result in any material breach of any of the terms and
provisions of, nor constitute (with or without notice or lapse of time) a
default under, the articles of incorporation or by-laws of the Servicer,
or any indenture, agreement or other material instrument to which the
Servicer is a party or by which it is bound; nor result in the creation or
imposition of any Lien upon any of its properties pursuant to the terms of
any such indenture, agreement or other material instrument (other than the
Collateral Agreement); nor violate any law or, to the best of the
Servicer's knowledge, any order, rule or regulation applicable to the
Servicer of any court or of any federal or state regulatory body,
administrative agency or other governmental instrumentality having
jurisdiction over the Servicer or its properties.
(f) No Proceedings. There are no proceedings or investigations
pending or, to the best of the Servicer's knowledge, threatened, before
any court, regulatory body, administrative agency, or other governmental
instrumentality having jurisdiction over the Servicer or its properties:
(A) asserting the invalidity of this Agreement; (B) seeking to prevent the
consummation of any of the transactions contemplated by this Agreement; or
(C) seeking any determination or ruling that might materially and
adversely affect the performance by the Servicer of its obligations under,
or the validity or enforceability of, this Agreement, the Collateral
Agreement, the Contribution and Servicing Agreement or the Secured Note.
(g) Financial Statements. All financial statements or certificates
of the Servicer or any of its officers furnished to the Lender are true
and complete in all material respects and do not omit to disclose any
material liabilities or other facts relevant to the Servicer's condition.
All such financial statements have been prepared in accordance with GAAP.
(h) No Change. There has been no change in the business, operations,
financial condition, properties or prospects of the Servicer and its
subsidiaries, taken as a whole since the date set forth in the Servicer's
most recent 10-K or 10-Q filing under the Securities Exchange Act of 1934,
as amended, which would have a material adverse effect on the ability of
the Servicer to perform its obligations under this Agreement, the
Collateral Agreement or any Related Agreement.
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SECTION VIII.4. Enforcement of Rights Against the Seller and Borrowers.
The Servicer shall take all action necessary or required by the Lender to
enforce any right or remedy the Company may have against the Seller under the
Contribution and Servicing Agreement and against a defaulting Borrower under a
Revolving Credit Agreement. The Servicer shall not compromise otherwise settle a
claim the Company may have against the Seller or any such Borrower or grant any
waiver or any other relief to the Seller or such Borrower without the prior
written consent of the Lender.
SECTION VIII.5. Purchase Upon Breach; Contribution and Servicing
Agreement. The Company, the Servicer or the Lender (or the Collateral Agent on
the Lender's behalf), as the case may be, shall inform the other parties to this
Agreement promptly, in writing, upon the discovery of a breach of any of the
Seller's representations and warranties set forth in Section 2 of the
Contribution and Servicing Agreement which materially and adversely affects the
interest of the Lender in respect of any Loan, Loan Documents or Receivables.
The Company shall cause the Seller to (a) replace such Loan and the related Loan
Documents and Receivables with a Substitute Loan in accordance with the
provisions of Section 7 of the Contribution and Servicing Agreement or (b)
purchase from the Company the Loan and the related Loan Documents and
Receivables that are affected by such breach unless, in each such instance such
breach has been cured, or waived in all respects by the Lender, within 30 days
following the Company's discovery or receipt of notice of such breach. In the
event of a repurchase of a Loan, the Company shall cause the Seller to remit to
the Collateral Agent the Repurchase Amount of such Loan on or prior to 2:00 p.m.
New York City time on the second Business Day prior to the Payment Date
immediately following the date on which the Seller has become obligated to
repurchase such Loan. The Collateral Agent shall, to the extent received,
deposit immediately that portion of the Repurchase Amount representing the
unpaid principal balance of the replaced Loans in the Principal Account, and
that portion of the Repurchase Amount representing unpaid interest and other
income payable on the replaced Loans in the Finance Charge Account, in
accordance with the written instructions of the Servicer. The sole remedy of the
Collateral Agent or the Lender against the Seller with respect to such a breach
of a representation or a warranty (absent fraud on the part of the Seller or the
applicable Borrower with respect to such breach) shall be to require the Seller
to purchase or substitute Loans pursuant to the Contribution and Servicing
Agreement and/or to enforce, as assignee of the Seller, the applicable
Borrower's obligations under the related Revolving Credit Agreement with respect
to such breach. In the event that the Seller fails to purchase or substitute for
any Loan it is required to replace or repurchase pursuant to the Contribution
and Servicing Agreement, the Collateral Agent, upon written direction of the
Lender, shall enforce the Company's rights against the Seller under and in
accordance with the terms of the Contribution and Servicing Agreements, as
assigned to the Collateral Agent, to require the purchase or replacement of the
Loan and the related Loan Documents and Receivables.
SECTION VIII.6. Release of Loans Following Substitution or Purchase. In
the event
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that (i) the Seller shall have substituted a Substitute Loan for a Predecessor
Loan in accordance with Section 7 of the Contribution and Servicing Agreement or
(ii) the Seller shall have purchased a Loan in accordance with Section 5.02 of
the Contribution and Servicing Agreement, the Predecessor Loan shall be released
from the Lien of the Collateral Agreement when the Collateral Agent shall have
received (i) an Officers' Certificate from the Servicer stating that each of the
conditions set forth in the Collateral Agreement and the Contribution and
Servicing Agreement with respect to such substitution or repurchase has been
duly satisfied, (ii) with respect to any such substitution, such documentation
required to be delivered pursuant to Section 7.01(b) of the Contribution and
Servicing Agreement and (iii) the Repurchase Amount payable pursuant to Section
5.02 of the Contribution and Servicing Agreement.
SECTION VIII.7. Release of Loans Upon Final Payment. In the event that the
Collateral Agent shall have received an Officers' Certificate from the Servicer
that no further payments on, or in respect of, any Loan or the related
Receivables are or will be due and payable, then, so long as no Event of Default
shall have occurred and then be continuing such Loan and the related Receivables
shall be released from the Lien of the Collateral Agreement.
ARTICLE VIII
COVENANTS
SECTION VIII.1. Covenants. The Company agrees with the Lender that, until
all Secured Obligations have been paid and performed in full, the Company, will
perform the obligations set forth in this Article VIII.
SECTION VIII.2. Corporate Existence, Etc. (a) The Company will do or cause
to be done all things necessary to preserve and keep in full force and effect
its corporate existence and the rights, licenses and franchises of the Company,
and will obtain and preserve its qualification to do business as a foreign
corporation in each jurisdiction in which such qualification is or shall be
necessary to protect the validity and enforceability of the Collateral
Agreement, the Secured Note, this Agreement, the Contribution and Servicing
Agreement, the Loans or any of the Receivables.
(b) The Company shall at all times observe and comply in all material
respects with (i) all laws, regulations and court orders applicable to it, (ii)
all requirements of law in the declaration and payment of dividends on its
Capital Stock, and (iii) all requisite and appropriate corporate and other
formalities (including, without limitation, annual and all other appropriate
meetings of the Company's board of directors and, if required by law, its
charter or otherwise, meetings and votes of shareholders to authorize corporate
action) in the management of its business and affairs and the conduct of the
transactions contemplated hereby and by the Contribution and Servicing
Agreement.
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(c) The Company will, at all times: (i) maintain (A) corporate and
financial books and records separate from those of any other Person and (B)
minutes of the meetings and other proceedings of its shareholders and board of
directors; (ii) continuously maintain the resolutions, agreements and other
instruments underlying the transactions contemplated hereby and by the
Contribution and Servicing Agreement as official records of the Company; (iii)
act solely in its corporate name and through its duly authorized officers or
agents to maintain an arm's-length relationship with the Seller and its
Affiliates; (iv) pay all of its operating expenses and liabilities from its own
funds; (v) maintain an office and telephone number separate from that of the
Seller on the premises currently rented by the Seller; and (vi) maintain its
assets separately from the assets of the Seller.
(d) The Company shall conduct its business solely in its own name through
its duly authorized officers or agents so as to not mislead others as to the
identity of the corporation with which those others are concerned, and
particularly will avoid the appearance of conducting business on behalf of the
Seller or any of its Affiliates or that the assets of the Company are available
to pay the creditors of the Seller or any of its Affiliates. Without limiting
the generality of the foregoing, all oral and written communications, including
without limitation, letters, invoices, purchase orders, contracts, statements
and loan applications, will be made solely in the name of the Company.
(e) The Company will be operated so as not to be substantively
consolidated for bankruptcy purposes with the Seller.
(f) At least one director of the Company shall at all times be a person
who is not a director, officer or employee of any direct or ultimate parent, or
Affiliate of the Seller.
SECTION VIII.3. Protection of Collateral; Further Assurances. The Company
will from time to time execute and deliver all such supplements and amendments
hereto and all such UCC financing statements, continuation statements,
instruments of further assurance, and other instruments, and will take such
other action as may be necessary or advisable to:
(a) Grant more effectively all or any portion of the Collateral;
(b) maintain or preserve the Lien of the Collateral Agent or
carry out more effectively the purposes of this Agreement or the
Collateral Agreement;
(c) publish notice of, or protect the validity of, any Grant made or
to be made pursuant to the Collateral Agreement and perfect the security
interest contemplated thereby in favor of the Collateral Agent in the
Loans and the related Receivables;
(d) enforce or cause the Servicer to enforce any of the Loans
and the related Receivables; or
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(e) preserve and defend title to the Collateral and preserve and
defend the rights of the Collateral Agent and the Lender in such
Collateral against the claims of all Persons.
The Company, upon the Company's failure to do so, hereby designates the Lender
its agent and attorney-in-fact to execute any UCC financing statement,
continuation statement or other document or instrument required pursuant to this
Section 8.3; provided, however, that such designation shall not be deemed
relieve the Company from its obligations to comply with the foregoing covenants.
SECTION VIII.4. Compliance Certificates. The Company will deliver to the
Collateral Agent and the Rating Agency, within 90 days after the end of each
fiscal year, a written statement signed by the Managing Director or Controller
of the Company, stating as to each signer thereof, that:
(a) a review of the activities of the Company during such year and
of its performance under this Agreement and the Collateral Agreement has
been made under his supervision;
(b) to the best of such officers' knowledge, based on such review,
the Company has fulfilled all of its obligations under this Agreement and
the Collateral Agreement throughout such year; and
(c) whether the officer knows of any Potential Events of Default or
Events of Default under this Agreement throughout such year or, if there
has been a Default in the fulfillment of any such obligation, specifying
each such Potential Event of Default or Event of Default known to him and
the nature and status thereof and the nature of the action taken with
respect thereto.
SECTION VIII.5. Performance of Obligations. (a) The Company will
punctually perform and observe all of its obligations and agreements
contained in this Agreement, the Collateral Agreement, the Secured Note and
the Contribution and Servicing Agreement.
(b) The Company will clearly mark its books and records to reflect each
assignment and transfer of the Loans and the Receivables from the Seller.
(c) If any Authorized Officer shall have knowledge of the occurrence of a
Servicer Event of Default, the Company shall promptly notify the Collateral
Agent and the Lender thereof, and shall specify in such notice the action, if
any, the Company is taking in respect of such default. Unless consented to by
the Lender, the Company may not waive any default under or amend the
Contribution and Servicing Agreement.
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SECTION VIII.6. Negative Covenants. The Company will not:
(a) sell, transfer, exchange or otherwise dispose of any portion
of the Collateral except as expressly permitted by this Agreement;
(b) claim any credit on, or make any deduction from, the principal
of, or interest on, the Secured Note by reason of the payment of any taxes
levied or assessed upon any portion of the Collateral;
(c) engage in any business or activity other than in connection
with, or relating to the ownership of, the Collateral, the issuance of the
Secured Note, the specific transactions contemplated hereby, and similar
activities with respect to ownership and financing of other pools of
loans, receivables and other financial assets;
(d) seek dissolution or liquidation in whole or in part or
reorganization of its business or affairs;
(e) (A) permit the validity or effectiveness of this Agreement or
any Grant hereunder or under the Collateral Agreement to be impaired, or
permit the Lien of the Collateral Agreement to be amended, hypothecated,
subordinated, terminated or discharged, or permit any Person to be
released from any covenants or obligations under this Agreement, except as
may be expressly permitted hereby, (B) permit any Lien, charge, security
interest, mortgage or other encumbrance to be created on or to extend to
or otherwise arise upon or burden the Collateral or any part thereof or
any interest therein or the proceeds thereof other than the Lien of the
Collateral Agent, or (C) permit the Lien of the Collateral Agreement not
to constitute a valid first priority perfected security interest in the
Collateral;
(f) conduct its business or engage in any activity in violation of
the provisions contained in its certificate of incorporation or amend
Sections 3, 5, 6, 9 or 10 of its certificate of incorporation without the
unanimous consent of all directors;
(g) at any time insist upon, plead, or in any manner whatsoever
claim or take the benefit or advantage of, any stay or extension law or
other law that would prohibit or forgive the Company from paying all or
any portion of the principal of or interest on the Secured Note as
contemplated herein or in the Secured Note, wherever enacted, now or at
any time hereafter in force, or that may affect the covenants or the
performance of this Agreement; and (to the extent that it may lawfully do
so) the Company hereby expressly waives all benefit or advantage of any
such law, and covenants that it will not hinder, delay or impede the
execution of any power granted to the Collateral Agent, but will suffer
and permit the execution of every such power as though no such law had
been enacted;
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(h) issue or register the transfer of any of its Capital Stock
to any Person other than DVIBC;
(i) merge or consolidate with any other Person. The Company
will keep all of its material assets within the United States at all
times. The Company will not make any material change in its business;
(j) take any action or permit any action to be taken by others which
would release any Person from any of such Person's covenants or
obligations under any Loan or any other instrument included in the
Collateral, or which would result in the amendment, hypothecation,
subordination, termination, or discharge of, or impair the validity or
effectiveness of, any Loan, Loan Document or such other instrument, except
as expressly provided in this Agreement or the Contribution and Servicing
Agreement;
(k) (1) commence any case, proceeding or other action under any
existing or future bankruptcy, insolvency or similar law seeking to have
an order for relief entered with respect to it, or seeking reorganization,
arrangement, adjustment, wind-up, liquidation, dissolution, composition or
other relief with respect to it or its debts, (2) seek appointment of a
receiver, trustee, custodian or other similar official for it or any part
of its assets, (3) make a general assignment for the benefit of creditors,
or (4) take any action in furtherance of, or consenting or acquiescing in,
any of the foregoing;
(l) contract for, create, incur, assume or suffer to exist any Lien
upon any of its property or assets, whether now owned or hereafter
acquired, except for the Lien created by the Collateral Agreement;
(m) contract for, create, incur, assume or suffer to exist any
Indebtedness other than (x) the Secured Note and (y) trade payables and
expense accruals incurred in the ordinary course and which are incidental
to the Company's permitted activities;
(n) make any loan or advance or credit to, or guarantee (directly or
indirectly or by an instrument having the effect of assuring another's
payment or performance on any obligation or capability of so doing, or
otherwise), endorse (except for the endorsement of checks for collection
or deposit) or otherwise become contingently liable, directly or
indirectly, in connection with the obligations, stock or dividends of, or
own, purchase, repurchase or acquire (or agree contingently to do so) any
stock, obligations or securities of, or any other interest in, or make any
capital contribution to, any other Person.
SECTION VIII.7. Information as to the Company. The Company shall file with
the Collateral Agent, the Lender and the Rating Agency:
(a) within 15 days after it files them with the Commission, copies
of the annual
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reports and of the information, documents and other reports (or copies of
such portions of any of the foregoing as the Commission may by rules and
regulations prescribe) which the Guarantor is required to file with the
Commission pursuant to Section 13 or 15(d) of the Exchange Act.
(b) immediately upon becoming aware of the existence of any
condition or event which constitutes a Potential Event of Default or an
Event of Default, a written notice describing its nature and period of
existence and what action the Company is taking or proposes to take with
respect thereto; and
(c) promptly upon the Company's becoming aware of:
(i) any proposed or pending investigation of it by any
governmental authority or agency, or
(ii) any pending or proposed court or administrative
proceeding
which involves or may involve the possibility, individually or in the
aggregate, of materially and adversely affecting the properties, business,
profits or condition (financial or otherwise) of the Company or the
validity or enforceability of the Related Agreements, a written notice
specifying the nature of such investigation or proceeding and what action
the Company is taking or proposes to take with respect thereto and
evaluating its merits.
SECTION VIII.8. Payment of Taxes and Other Claims. The Company will pay or
discharge or cause to be paid or discharged, before any penalty accrues from the
failure to so pay or discharge, (1) all taxes, assessments and governmental
charges levied or imposed upon the Company or upon the income, profits or
property (including any property that is part of the Collateral) of the Company
and (2) all lawful claims for labor, materials and supplies which, if unpaid,
might by law become a Lien upon the property of the Company; provided, however,
that the Company shall not be required to pay or discharge or cause to be paid
or discharged any such tax, assessment, charge or claim the amount,
applicability or validity of which is being contested in good faith by
appropriate proceedings and for which adequate provision has been made or where
the failure to effect such payment or discharge is not adverse in any material
respect to the Lender. The Company and DVI are members of an affiliated group
within the meaning of section 1504 of the Code which has filed, and will
continue to file, a consolidated return for federal income tax purposes, and the
Company shall be included in consolidated federal income tax returns filed by
DVI for such affiliated group.
SECTION VIII.9. Indemnification. The Company agrees to indemnify and hold
harmless the Lender, the Collateral Agent, and their respective directors,
officers, employees and agents) (each an "Indemnified Party") against any and
all liabilities, losses, damages, penalties, costs and expenses (including the
fees and expenses of counsel and the costs of
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defense and legal fees and expenses) which may be incurred or suffered by such
Indemnified Party as a result of claims, actions, suits or judgments asserted or
imposed against it and arising out of the transactions contemplated hereby or by
the Contribution and Servicing Agreement, including, without limitation, any
tort claims and any fines or penalties arising from any violation of the laws or
regulations of the United States or any state or local government or
governmental authority, except to the extent the foregoing result from the gross
negligence, bad faith or willful misconduct of such Indemnified Party.
SECTION VIII.10. Loan Documents to Collateral Agent. On or prior to each
Funding Date, Addition Date or Substitute Date, as applicable, the Company shall
deliver to the Collateral Agent the original counterpart of each Loan Document
that constitutes "chattel paper" or an "instrument", as such terms are defined
in the UCC. On the Initial Funding Date, the Company shall deliver to the
Collateral Agent a computer disk containing the information set forth in
Schedule 1 to this Agreement as of the Initial Funding Date.
SECTION VIII.11. Collection of Moneys. If at any time the Company shall
receive any payment on or in respect of any Loan or Receivables, it shall hold
such payment in trust for the benefit of the Collateral Agent and the Lender,
shall segregate such payment from the other property of the Company, and shall
deliver such payment to the Collateral Agent by wire transfer of immediately
available funds for deposit in the applicable Loan Accounts immediately upon the
Company's receipt of available funds in respect of such payment.
SECTION VIII.12. Opinion of Counsel. Within 10 Business Days after a
request by the Lender (which shall not be made more frequently than once in any
6 month period), the Company shall deliver to the Collateral Agent, the Rating
Agency and the Lender an Opinion of Counsel (which opinion may be delivered by
internal counsel to the Guarantor, DVI or the Company) as to the continued
perfection of the Collateral Agent's security interests in the Loans and the
Receivables.
SECTION VIII.13. Special Purpose Entity. The Company shall at all
times be a Special Purpose Entity.
SECTION 8.14. Daily Servicer Report. On or before 2:00 p.m. (New York City
time) on each Business Day, the Servicer shall deliver to the Collateral Agent
and the Lender a Daily Servicer Report, in substantially the form attached
hereto as Exhibit G, specifying with respect to each Borrower: (i) the name of
such Borrower, (ii) the outstanding principal balance of all Loans to such
Borrower, (iii) the Borrowing Base for such Borrower, (iv) the Commitment for
such Borrower, (v) the amount of collections received by such Borrower in
respect of Eligible Receivables subject to the Lien of the Collateral Agent
during the preceding 150 day period, (vi) the Lending Formula Amount for such
Borrower and (vii) the amount of the unused credit available to be drawn on such
day by such Borrower under its Revolving Credit Agreement, and also specifying
(1) the outstanding Advance Balance on such date, (2) the sum of items (w), (x)
and (y) in the definition of "Collateral Coverage Condition" and (3)
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whether the Collateral Coverage Condition is satisfied as of such date.
ARTICLE IX
CUSTODY OF RECEIVABLES DOCUMENTS; RELEASE OF FILES
SECTION IX.1. Company as Custodian. (a) The Company shall act as custodian
on behalf of the Lender and shall take and maintain custody of all documents and
instruments evidencing or otherwise relating to the Receivables securing the
Loans (the "Receivables Documents"), except for any Receivables Documents that
constitute "chattel paper" or "instruments" under the UCC in effect in the
jurisdiction governing the origination of such Receivable. The Company shall
review the Receivables Documents upon receipt for completeness using such
sampling or other techniques acceptable to the Lender. The Company shall store
such Receivables Documents in locked storage locations specified in writing to
the Lender. Such storage location shall be marked to indicate that a first
priority security interest in the Receivables evidenced by such Receivables
Documents has been granted to the Lender. Notwithstanding anything to the
contrary contained herein, the Company and the Lender may provide for other
custodial arrangements reasonably satisfactory to the Lender. The Company shall
release any and all Receivables Documents to the Lender upon the Lender's
request.
(b) The Company, as custodian, shall not provide access to such
Receivables Documents to any Person (other than the Servicer or designated
employees performing the custodial function set forth herein) unless the Company
has obtained the prior written consent of the Lender. The Company shall not
release any Receivables Documents to any Person, other than (i) the Lender,
unless Company has received the prior written consent of the Lender or (ii) to
another custodian acceptable to the Lender pursuant to other custodial
arrangements satisfactory to the Lender.
SECTION IX.2. Release of Files following Payment of Secured Obligations.
Upon payment in full of the Secured Obligations the Lender agrees to direct the
Collateral Agent in writing to deliver to the Company, at the Company's expense,
(a) a letter specifying that the Collateral Agent has no further interest in the
related Loan Documents and (b) such instruments necessary to release the
Collateral Agent's Lien for the benefit of the Lender thereon.
ARTICLE X
EVENTS OF DEFAULT
SECTION X.1. Events of Default. "Event of Default," wherever used herein,
means any one of the following (whatever the reason for such Event of Default
and whether it shall be
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voluntary or involuntary or be effected by operation of law or pursuant to any
judgment, decree or order of any court or any order, rule or regulation of any
administrative or governmental body):
(a) failure of the Company to make any payment of Monthly
Interest on any Payment Date, which failure continues for one day;
(b) failure of the Company to make any payment of (A) Monthly
Principal, or (B) any other amount due and owing under this Agreement or
the Secured Note when it becomes due and payable;
(c) default in the performance, or breach, of any covenant set
forth in Section 8.2, 8.5(c) or 8.6;
(d) default in the performance, or breach, of any covenant of the
Company in this Agreement, the Secured Note or the Collateral Agreement
(other than a default described in (a), (b) or (c) above), the
Contribution and Servicing Agreement or the other Related Agreements and
continuance of such default or breach for a period of 30 days after the
earliest of (A) any officer of the Company first acquiring knowledge
thereof and (B) the Collateral Agent's giving written notice thereof to
the Company;
(e) a default by the Company that continues beyond the grace period
under any other indebtedness or a failure by the Company to pay an
uncontested judgment in an amount in excess of $100,000;
(f) if any representation or warranty of the Company or the Seller
made in this Agreement or the Contribution and Servicing Agreement or any
other writing provided to the Lender in connection with the foregoing
documents shall prove to be incorrect in any material respect as of the
time when the same shall have been made; provided, however, that the
breach of any representation or warranty made by the Seller in Section
2.03 or 2.04 of the Contribution and Servicing Agreement with respect to
any of the Loans subject thereto shall not constitute an Event of Default
if the Seller substitutes one or more Substitute Loans in compliance with
the requirements set forth in Section 7.01 of the Contribution and
Servicing Agreement or repurchases such Loan and the related Receivables
in compliance with the requirements set forth in Section 5.02 of the
Contribution and Servicing Agreement; provided further that a breach of a
representation or warranty contained in Section 7.2(g) or (h) which does
not result from a violation or breach of the requirements of Section 2.12
or Section 2.13 shall not constitute an Event of Default pursuant to this
Section 10.1(f) (the foregoing shall not be deemed to affect or limit any
rights or remedies the Lender may have pursuant to other provisions of
this Agreement or any other Related Agreement);
(g) the entry by a court having jurisdiction in the premises of (A)
a decree or
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order for relief in respect of any of the Guarantor, the Seller or the
Company in an involuntary case or proceeding under any applicable federal
or state bankruptcy, insolvency, reorganization, or other similar law or
(B) a decree or order adjudging any of the Guarantor, the Seller or the
Company a bankrupt or insolvent, or approving as properly filed a petition
seeking reorganization, arrangement, adjustment, or composition of or in
respect of any such Person under any applicable federal or state law, or
appointing a custodian, receiver, liquidator, assignee, trustee,
sequestrator, or other similar official of any such Person or of any
substantial part of its property, or ordering the winding up or
liquidation of its affairs, and the continuance of any such decree or
order for relief or any such other decree or order unstayed and in effect
for a period of 60 consecutive days;
(h) the commencement by any of the Guarantor, the Seller or the
Company of a voluntary case or proceeding under any applicable federal or
state bankruptcy, insolvency, reorganization, or other similar law or of
any other case or proceeding to be adjudicated a bankrupt or insolvent, or
the consent by it to the entry of a decree or order for relief in respect
of any of the Guarantor, the Seller or the Company in an involuntary case
or proceeding under any applicable federal or state bankruptcy,
insolvency, reorganization, or other similar law or to the commencement of
any bankruptcy or insolvency case or proceeding against it, or the filing
by it of a petition or answer or consent seeking reorganization or relief
under any applicable federal or state law, or the consent by it to the
filing of such petition or to the appointment of or taking possession by a
custodian, receiver, liquidator, assignee, trustee, sequestrator, or
similar official of any such Person or of any substantial part of its
property, or the making by it of an assignment for the benefit of
creditors, or the failure of any such Person to pay its debts generally as
they become due, or the taking of corporate action by any such Person in
furtherance of any such action;
(i) any Guarantor Event of Default shall have occurred and then
be continuing;
(j) the Asset Coverage Percentage shall be less than 125% on any
day;
(k) the Servicer shall fail to deliver the Servicer Report for a
monthly reporting period to the Lender and the Rating Agency on or before
the applicable Determination Date;
(l) the Guarantor shall fail to be the owner, of record and
beneficially, of 100% of all outstanding capital stock, of all classes of
the Seller or the Seller shall fail to be the owner, of record and
beneficially, of 100% of all outstanding capital stock, of all classes of
the Company;
(m) the Company shall fail to satisfy the Collateral Coverage
Condition and such failure shall continue unremedied for a period of one
day after the earlier of (a) the
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Company becoming aware of such failure or (b) the completion and delivery
of the next succeeding Servicer Report as required under the Contribution
and Servicing Agreement;
(n) the amount of funds on deposit in the Cash Collateral Account
shall be less than the Required Cash Collateral Account Balance and such
deficiency continues unremedied for a period of one day after the earlier
of (a) the Company becoming aware of such deficiency or (b) the completion
and delivery of the next succeeding Servicer Report as required under the
Contribution and Servicing Agreement;
(o) there shall occur a Change of Control with respect to DVI;
(p) there shall occur default in the performance, or breach, of any
covenant of the Company, the Guarantor, the Seller or the Servicer
contained in any material agreement (other than a default described in any
other provision of this Section 10.1), which default or breach continues
for a period of 15 days after the earliest of (A) any officer of the
Company, the Guarantor, the Seller or the Servicer first acquiring
knowledge thereof and (B) the Collateral Agent's giving written notice
thereof to the Company, the Guarantor, the Seller or the Servicer, as
applicable and could have a material adverse effect on (1) the financial
condition, assets or operations of the Company, the Servicer, the
Guarantor, (2) the ability of the Company, the Servicer, the Guarantor to
perform its respective obligations under any Related Agreement, (3) on the
enforceability of any Related Agreement or (4) on the priority or
perfection of the Collateral Agent's Lien on the Collateral;
(q) any event shall occur or condition exist which could have a
material adverse effect on (1) the financial condition, assets or
operations of the Company, the Servicer, the Guarantor, (2) the ability of
the Company, the Servicer, the Guarantor to perform its respective
obligations under any Related Agreement, (3) on the enforceability of any
Related Agreement or (4) on the priority or perfection of the Collateral
Agent's Lien on the Collateral; or
(r) a Servicer Event of Default shall have occurred and be
continuing.
Upon the occurrence of an Event of Default pursuant to clause (a) of this
Section 10.1, the Company shall have the right, within five (5) Business Days
after receipt of written notice thereof from the Collateral Agent of the
occurrence of such Event of Default, to cure such Event of Default by making
payment to the Collateral Agent of such unpaid amount plus interest thereon at a
rate per annum equal to the Applicable Rate. If the Company makes such payment
within such timeframe, no Event of Default shall exist pursuant to clause (a) of
this Section 10.1.
SECTION X.2. Remedies Upon Default. (a) During the continuance of one or
more
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Events of Default the Lender may immediately declare the principal of the
Secured Note to be immediately due and payable, together with all interest
thereon and fees, expenses and other amounts owing under this Agreement;
provided that, upon the occurrence of the Event of Default referred to in
10.1(g) or (h), such amounts shall immediately and automatically become due and
payable without any further action by any person or entity. Upon such
declaration or such automatic acceleration, the balance then outstanding on the
Secured Note shall become immediately due and payable without presentation,
demand or further notice of any kind to the Company.
(b) During the continuance of one or more Events of Default, the Lender
shall have the right to obtain physical possession of all files of the Company
relating to the Collateral and all documents relating to the Collateral which
are then or may thereafter come in to the possession of the Company or any third
party acting for the Company. The Lender shall be entitled to specific
performance of all agreements of the Company contained in this Agreement, the
Contribution and Servicing Agreement and the Collateral Agreement.
(c) During the continuance of one or more Events of Default, the Lender
shall have the right to withdraw all funds on deposit in the Loan Accounts, the
Concentration Account and the Cash Collateral Account for application to pay
amounts due to the Lender under the Secured Note, the Secured Credit Line
Agreement, the Contribution and Servicing Agreement, the Guaranty and the
Collateral Agreement, collect and receive all further payments made on the
Collateral, and if any such payments are received by the Company, the Company
shall not commingle the amounts received with other funds of the Company and
shall promptly pay them over to the Lender. In addition, the Lender shall have
the right to dispose of the Collateral as provided herein, or as provided in the
other documents executed in connection herewith, or in any commercially
reasonable manner, or as provided by law. Such disposition may be on either a
servicing-released or a servicing-retained basis at the sole option of the
Lender. The Lender shall have all other rights of secured lenders under
applicable law. The Lender shall be entitled to place the Loans which it
recovers after an Event of Default in a pool for issuance of asset-backed
securities and to sell such securities subject to the applicable requirements of
the New York UCC. The Lender shall also be entitled to sell any or all of such
Loans individually subject to the applicable requirements of the New York UCC.
The specification in this Section of manners of disposition of collateral as
being commercially reasonable shall not preclude the use of other commercially
reasonable methods (as contemplated by the New York UCC) at the option of the
Lender.
(d) After the occurrence and during the continuance of an Event of
Default, the Lender shall have the right to appropriate and apply to the payment
of the Secured Obligations (whether or not then due) any and all balances,
credits, deposits, accounts or moneys of the Company or DVI then or thereafter
maintained with the Lender.
(e) All rights and remedies of the Lender may be exercised by the
Collateral Agent on the Lender's behalf.
-35-
<PAGE> 37
SECTION X.3. No Waiver. The failure to exercise any of the rights and
remedies set forth in this Agreement shall not constitute a waiver of the right
to exercise the same or any other option at any subsequent time in respect of
the same Event of Default or any other Event of Default. The acceptance by the
Lender of any payment hereunder which is less than payment in full of all
amounts due and payable at the time of such payment shall not constitute a
waiver of the right to exercise any of the foregoing rights and remedies at that
time or at any subsequent time or nullify any prior exercise of any such rights
and remedies without the express consent of Lender, except as and to the extent
otherwise provided by law.
SECTION X.4. Limitation. In any action or proceeding involving any state
corporate law, or any state or Federal bankruptcy, insolvency, reorganization,
fraudulent transfer or other law affecting the rights of creditors generally, if
the security interest and lien created by the Company under the Collateral
Agreement would otherwise, taking into account the provisions of this Section
10.4, be held or determined to be void, invalid or unenforceable on account of
the amount of the Collateral subject to such security interest and lien, then,
notwithstanding any other provision hereof of the contrary, the amount of such
Collateral shall, without any further action by the Company, the Lender or any
other Person, be automatically limited and reduced to the highest amount that is
valid and enforceable as determined in such action or proceeding.
ARTICLE XI
MISCELLANEOUS
SECTION XI.1. Power of Attorney. The Company hereby authorizes the Lender,
at the Company's expense, to file such financing statement or statements
relating to the Collateral without the Company's signature thereon as the Lender
at its option may deem reasonably appropriate, and appoints the Lender as the
Company's attorney-in-fact to execute any such financing statement or statements
in the Company's name and to perform all other acts which the Lender deems
appropriate to perfect and continue the security interest granted hereby, and to
protect, preserve and upon the occurrence and during the continuance of an Event
of Default realize upon the Collateral, including the right to endorse notes,
complete blanks in documents and sign assignments on behalf of the Company as
its attorney-in-fact. This Power of Attorney is coupled with an interest and is
irrevocable without the Lender's consent.
SECTION XI.2. Nature of Agreement. This Agreement shall be governed by New
York Law, and, together with the Collateral Agreement, constitute a security
agreement within the meaning of the New York UCC.
SECTION XI.3. Intent. It is understood each of the parties intends that
the Lender's rights to liquidate the Loans delivered to it hereunder or to
exercise any other remedies pursuant to Section 10.2, is a contractual right to
liquidate such Loans as described in Section
-36-
<PAGE> 38
555 and 559 of Title 11 of the United States Code, as amended, subject only to
Company's rights hereunder.
SECTION XI.4. Assignment. No assignment by the Company of this Agreement
shall be permitted without the prior written consent of Lender. The Company
acknowledges that the Lender may pledge, assign, sell, transfer, grant a
security interest in or convey by any means, including by means of a repurchase
agreement, the Secured Note and the related Collateral, by pledge or assignment
of the Secured Note and/or such Collateral, and the Company waives any and all
claims, rights, demands, causes of action and remedies relating to such action
by the Lender.
SECTION XI.5. Lender May Act Through Affiliates or Agents. The Lender may,
from time to time, designate one or more Affiliates or agents for the purpose of
performing any action hereunder.
SECTION XI.6. Notices. All demands, notices and communications relating to
this Agreement shall be in writing and shall be deemed to have been duly given
if mailed, by first-class, registered or certified mail, return receipt
requested, by overnight courier, by personal delivery or by telecopier
transmission with electronic confirmation of receipt, in each case, to the other
party or parties at the address shown below, or such other address as may
hereafter be furnished to the other party or parties by like notice. Any such
demand, notice or communication hereunder shall be deemed to have been received
on the date delivered to or received at the premises of the addressee (as
evidenced, in the case of registered or certified mail, by the date noted on the
return receipt or, in the case of telecopier transmission, by an electronic
confirmation of receipt).
If to the Company:
DVI Business Credit Receivables Corp. II
500 Hyde Park
Doylestown, Pennsylvania 18901
Attention: Stephen Garfinkel
Telephone: 215-230-2929
Fax Number: 215-230-3537
with a copy to:
DVI Business Credit Corporation
4041 MacArthur Blvd.
Newport Beach, CA 92660
Attention: Anthony Turek
Telephone: 714-474-5827
Fax Number: 714-474-6199
-37-
<PAGE> 39
If to the Lender:
CS First Boston
55 East 52nd Street
New York, NY 10055
Attention: Walter P. Fekula, Director, Credit
Telephone: 212-909-3063
Fax Number: 212-318-0533
If to the Collateral Agent:
Bankers Trust Company
Four Albany Street
New York, New York 10006
Attention: Corporate Trust and Agency Group - Structured Finance
Telephone: 212-250-6652
Fax Number: 212-250-6439/6684
SECTION XI.7. No Oral Modifications; Successors and Assigns. No provisions
of this Agreement shall be waived or modified except by a writing duly signed by
the authorized agents of the Lender and the Company. This Agreement shall be
binding upon the successors and assigns of the parties hereto; provided that,
this Agreement shall not be assignable by the Company without the prior written
consent of the Lender.
SECTION XI.8. Third Party Beneficiary. The Collateral Agent shall be a
third-party beneficiary of this Secured Credit Line Agreement with respect to,
and to the extent of, the rights and benefits granted to the Collateral Agent
herein.
-38-
<PAGE> 40
IN WITNESS WHEREOF, the parties have executed this Agreement the day and
year first above written:
DVI BUSINESS CREDIT RECEIVABLES CORP. II
By: ___________________________________
Name:
Title:
CS FIRST BOSTON MORTGAGE CAPITAL
CORP., as Lender
By: ___________________________________
Name:
Title:
DVIBC, as Servicer
By: ___________________________________
Name:
Title:
<PAGE> 41
TABLE OF CONTENTS
Section Page
ARTICLE I
DEFINED TERMS
SECTION 1.1. Definitions............................................... 1
ARTICLE II
ADVANCES
SECTION 2.1. The Advances.............................................. 2
SECTION 2.2. Advance Amount............................................ 2
SECTION 2.3. Termination Date; Maturity of Advances.................... 3
SECTION 2.4. Prepayment................................................ 3
SECTION 2.5. Extension Option.......................................... 3
SECTION 2.6. Payment of Interest and Principal......................... 3
SECTION 2.7. Secured Note.............................................. 3
SECTION 2.8. Form of Payment........................................... 3
SECTION 2.9. Allocation of Collections................................. 4
SECTION 2.10. Securitized Offering...................................... 6
SECTION 2.11. Conditions to the Making of Advances...................... 6
SECTION 2.12. Eligible Payor Concentration Tests........................ 10
SECTION 2.13. Borrower Concentration Tests.............................. 10
SECTION 2.14 Additional Borrowers; Borrower Defaults................... 11
SECTION 2.15. Certain Waivers........................................... 11
SECTION 2.16. Determination of LIBOR.................................... 12
ARTICLE III
USE OF PROCEEDS; GRANT OF SECURITY INTEREST
SECTION 3.1. Purpose of Loan........................................... 13
SECTION 3.2. Grant of Security Interest................................ 13
SECTION 3.3. Borrower Lockbox Accounts................................. 13
ARTICLE IV
FINANCING STATEMENTS
SECTION 4.1. UCC Financing Statements.................................. 13
-i-
<PAGE> 42
ARTICLE V
THE CASH COLLATERAL ACCOUNT
SECTION 5.1. Cash Collateral Account................................... 14
ARTICLE VI
THE GUARANTY
SECTION 6.1. Claims on Guaranty........................................ 14
ARTICLE VII
REPRESENTATIONS AND WARRANTIES
SECTION 7.1. Representations and Warranties of the Company............. 15
SECTION 7.2. Representations and Warranties Regarding Loans and
Receivables............................................... 18
SECTION 7.3. Representations and Warranties of the Servicer............ 21
SECTION 7.4. Enforcement of Rights Against the Seller and Borrowers.... 23
SECTION 7.5. Purchase Upon Breach; Contribution and Servicing Agreement 23
SECTION 7.6. Release of Loans Following Substitution or Purchase....... 24
SECTION 7.7. Release of Loans Upon Final Payment....................... 24
ARTICLE VIII
COVENANTS
SECTION 8.1. Covenants................................................. 24
SECTION 8.2. Corporate Existence, Etc.................................. 24
SECTION 8.3. Protection of Collateral; Further Assurances.............. 25
SECTION 8.4. Compliance Certificates................................... 26
SECTION 8.5. Performance of Obligations................................ 26
SECTION 8.6. Negative Covenants........................................ 27
SECTION 8.7. Information as to the Company............................. 28
SECTION 8.8. Payment of Taxes and Other Claims......................... 29
SECTION 8.9. Indemnification........................................... 29
SECTION 8.10. Loan Documents to Collate................................. 30
SECTION 8.11. Collection of Moneys...................................... 30
SECTION 8.12. Opinion of Counsel........................................ 30
SECTION 8.13. Special Purpose Entity.................................... 30
SECTION 8.14. Daily Servicer Report..................................... 30
-ii-
<PAGE> 43
ARTICLE IX
CUSTODY OF RECEIVABLES DOCUMENTS; RELEASE OF FILES
SECTION 9.1. Company as Custodian...................................... 31
SECTION 9.2. Release of Files following Payment of Secured Obligations. 31
ARTICLE X
EVENTS OF DEFAULT
SECTION 10.1. Events of Default......................................... 31
SECTION 10.2. Remedies Upon Default..................................... 34
SECTION 10.3. No Waiver................................................. 35
SECTION 10.4. Limitation................................................ 36
ARTICLE XI
MISCELLANEOUS
SECTION 11.1. Power of Attorney......................................... 36
SECTION 11.2. Nature of Agreement....................................... 36
SECTION 11.3. Intent.................................................... 36
SECTION 11.4. Assignment................................................ 37
SECTION 11.5. Lender May Act Through Affiliates or Agents............... 37
SECTION 11.6. Notices................................................... 37
SECTION 11.7. No Oral Modifications; Successors and Assigns............. 38
SECTION 11.8. Third Party Beneficiary................................... 38
APPENDIX A - Defined Terms
EXHIBIT A - Form of Secured Note
EXHIBIT B - Form of Confirmation
EXHIBIT C - Form of Revolving Credit Agreement
EXHIBIT D - Form of Claim on Guaranty
SCHEDULE 1 - Required Information
SCHEDULE 2 - Eligible Payor Concentration Limits
SCHEDULE 3 - Borrower Concentration Tests
SCHEDULE 7.2(q) - Provider Lockbox Accounts
EXHIBIT E - Form of Reborrowing Certificate
EXHIBIT F - Form of Borrowing Notice
EXHIBIT G - Form of Daily Servicer Report
-iii-
<PAGE> 44
EXHIBIT A
FORM OF SECURED NOTE
<PAGE> 45
EXHIBIT B
FORM OF CONFIRMATION
DVI BUSINESS CREDIT
RECEIVABLES CORP., II,
as Company
___________ __, ____
This letter hereby confirms that CS First Boston Mortgage Capital Corp.,
as Lender under the Secured Credit Line Agreement, dated August 22, 1996,
between the Company, DVI Business Credit Corporation, as Servicer, and us (the
"Secured Credit Line Agreement") made an Advance in the amount of $___________
to the Company on _______, ____.
The Company's acceptance of the proceeds of the aforementioned Advance
shall constitute your agreement to the statements made in and the terms of this
Confirmation letter.
All capitalized terms used and not otherwise defined herein shall have the
meanings ascribed to them in the Secured Credit Line Agreement.
CS FIRST BOSTON MORTGAGE CAPITAL
CORP.
By: ___________________________
Name:
Title:
<PAGE> 46
EXHIBIT C
FORM OF REVOLVING CREDIT AGREEMENT
<PAGE> 47
EXHIBIT D
FORM OF CLAIM ON GUARANTY
DVI, Inc.,
as Guarantor
_______________, ____
Re: Guaranty (the "Guaranty") dated as of August 22, 1996 given
by DVI, Inc. in connection with the Secured Credit Line
Agreement (the "Secured Credit Line Agreement") dated as of
August 22, 1996 among DVI Business Credit Receivables Corp.
II, as borrower, DVI Business Credit Corporation, as
servicer, and CS First Boston Mortgage Capital Corp. (the
"Lender"), as lender
Bankers Trust Company (the "Collateral Agent"), as Collateral Agent for
the Lender, hereby notifies you that (a) the Monthly Interest payable on the
_________, 199__ Payment Date (the "Applicable Payment Date") is $_______, (b)
the Monthly Principal payable on the Applicable Payment Date is $________ (c)
the aggregate funds on deposit in the Loan Accounts on the date hereof which,
together with amounts withdrawn from the Cash Collateral Account pursuant to the
provisions of the Secured Credit Line Agreement, are available to pay the
Monthly Interest and Monthly Principal payable on the Applicable Payment Date
are $________, and (d) the additional funds needed to pay the Monthly Interest
and Monthly Principal payable on the Applicable Payment Date are $_________ (the
"Shortfall").
Accordingly, the Collateral Agent hereby makes demand on DVI, Inc. under
the Guaranty in the amount of the Shortfall and directs DVI, Inc. to make
payment under the Guaranty and deliver to the Collateral Agent immediately, in
immediately available funds, the amount of the Shortfall.
Capitalized terms used herein but not defined herein shall have the
meaning specified in the Definitions List attached as Appendix A to the Secured
Credit Line Agreement.
BANKERS TRUST COMPANY,
as Collateral Agent
By: ______________________
Name:
Title:
<PAGE> 48
EXHIBIT E
FORM OF REBORROWING CERTIFICATE
BANKERS TRUST COMPANY,
as Collateral Agent
CS FIRST BOSTON MORTGAGE
CAPITAL CORP., as Lender
___________ __, ____
The undersigned, an Authorized Officer of DVI Business Credit Receivables
Corp. II, (the "Company"), pursuant to Section 2.9(d) of the Secured Credit Line
Agreement (the "Secured Credit Line Agreement") dated as of August 22, 1996
among the Company, as borrower, DVI Business Credit Corporation, as servicer,
and CS First Boston Mortgage Capital Corp., as lender, hereby certifies and
requests the following on behalf of the Company:
(1) The Company requests that $________ be withdrawn from the Principal
Account and distributed to each Borrower on behalf of the Company in accordance
with the table below and in accordance with the Wire Instructions for such
Borrower.
(2) The proceeds requested in (1) above will be used to acquire one or
more Loans from the Contributor. The following table details the name of the
Borrower under each Loan to be acquired, the aggregate principal balance of
Loans to be acquired with respect to each Borrower, the amount specified in the
Daily Servicer Report for the date hereof as the amount available to be drawn by
such Borrower on the date hereof under its Revolving Credit Agreement and the
amount to be distributed from the Principal Account to each Borrower:
<TABLE>
<CAPTION>
================================================================================
Available Amount to be
Principal Credit as Transferred to
Balance of Specified in Borrower from
Borrower Loans to be Daily Servicer the Principal
Acquired Report Account
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
================================================================================
</TABLE>
(3) No Event of Default or Potential Event of Default has occurred which
is
<PAGE> 49
continuing or would result from the application of the Reborrowing Amount.
(4) The proposed use of the proceeds of the Reborrowing Amount will not
cause the requirements of Section 2.12, 2.13, or 2.14 of the Secured Credit Line
Agreement to be violated, and all conditions precedent provided for in Section
2.14 have been met and fulfilled.
The Company hereby directs the Collateral Agent to wire transfer to each
Borrower specified in the table above, from the funds on deposit in the
Principal Account in accordance with the Wire Instructions for such Borrower,
the amount specified for such Borrower in the table above.
All capitalized terms used and not otherwise defined herein shall have the
meanings ascribed to them in the Secured Credit Line Agreement.
DVI BUSINESS CREDIT RECEIVABLES
CORP. II
By: ___________________________
Name:
Title:
<PAGE> 50
EXHIBIT F
FORM OF BORROWING NOTICE
BANKERS TRUST COMPANY,
as Collateral Agent
CS FIRST BOSTON MORTGAGE
CAPITAL CORP.,
as Lender
DUFF & PHELPS CREDIT
RATING CO.,
as Rating Agency
___________ __, ____
The undersigned, an Authorized Officer of DVI Business Credit Receivables
Corp. II, (the "Company"), pursuant to Section 2.11(b) of the Secured Credit
Line Agreement (the "Secured Credit Line Agreement") dated as of August 22, 1996
among the Company, as borrower, DVI Business Credit Corporation, as servicer,
and CS First Boston Mortgage Capital Corp., as lender, hereby certifies and
requests the following on behalf of the Company:
(1) The Company requests that the Lender make an Advance in the amount of
$________.
(2) The proceeds requested in (1) above will be used to acquire one or
more Loans. The following table details the name of the Borrower under each Loan
to be acquired, the aggregate principal balance of Loans to be acquired with
respect to each Borrower, the amount specified in the Daily Servicer Report for
the date hereof as the amount available to be drawn by such Borrower on the date
hereof under its Revolving Credit Agreement and the portion of such Advance
allocable to the Loans of such Borrower:
<TABLE>
<CAPTION>
================================================================================
Available Portion of
Principal Credit as Advance
Balance of Specified in Allocable to
Borrower Loans to be Daily Servicer Borrower
Acquired Report
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
================================================================================
</TABLE>
<PAGE> 51
(3) The Company hereby represents and warrants that (i) the
representations and warranties contained in Sections 7.1 and 7.2 of the Secured
Credit Line Agreement are true and correct (in all material respects to the
extent any such representations and warranties do not incorporate a materiality
limitation in their terms) on and as of the date hereof, (ii) no Event of
Default, Potential Event of Default or Servicer Event of Default has occurred
and is continuing or would result from the making of the Advance requested
hereunder and (iii) all other conditions precedent to the making of the Advance
requested hereunder pursuant to the Secured Credit Line Agreement have been
satisfied in all respects as of the date hereof.
The Company hereby directs the Lender to wire transfer to the Company the
amount specified in item (1).
All capitalized terms used and not otherwise defined herein shall have the
meanings ascribed to them in the Secured Credit Line Agreement.
DVI BUSINESS CREDIT RECEIVABLES
CORP. II
By: ___________________________
Name:
Title:
<PAGE> 52
EXHIBIT G
FORM OF DAILY SERVICER REPORT
CS FIRST BOSTON MORTGAGE
CAPITAL CORP., as Lender
BANKERS TRUST COMPANY,
as Collateral Agent
___________ __, ____
The undersigned, an Authorized Officer of DVI Business Credit Corporation, (the
"Servicer"), pursuant to Section 8.14 of the Secured Credit Line Agreement (the
"Secured Credit Line Agreement") dated as of August 22, 1996 among DVI Business
Credit Receivables Corp., II, as borrower, the Servicer, and CS First Boston
Mortgage Capital Corp., as lender, hereby certifies on behalf of the Servicer
that:
(1) The following table details the amount available to be drawn by
each Borrower under its Revolving Credit Agreement on the date hereof:
<TABLE>
<CAPTION>
======================================================================================
Borrower Aggregate Borrowing Commitment Collections Lending Amount of
Principal Base on Formula Credit
Balance of Eligible Amount Available
Loans Receivables* to Be Drawn
Outstanding
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
======================================================================================
</TABLE>
(2) The outstanding Advance Balance on the date hereof is $____________.
(3) The sum of voluntary capital contributions made by the Seller to the
Company pursuant to Section 1.02(g) of the Contribution and Servicing Agreement
which amounts shall then be held in the Cash Collateral Account, the unpaid
principal balance of all Eligible Loans then subject to the Lein of the
Collateral Agreement and Principal Collections on deposit in the Principal
Account is $___________.
__________________
* During the 150 day period preceding the date hereof.
<PAGE> 53
(4) As of the date hereof, the Collateral Coverage Condition [is] [is not]
satisfied in that the sum indicated in (3) above [equals or exceeds] [is less
than] the Advance Balance.
All capitalized terms used and not otherwise defined herein shall have the
meanings ascribed to them in the Secured Credit Line Agreement.
DVI BUSINESS CREDIT CORPORATION
By: ___________________________
Name:
Title:
<PAGE> 54
SCHEDULE 1
REQUIRED INFORMATION
- - THREE YEARS OF FINANCIAL STATEMENTS
If the provider does not have audited financial statement, include
reviewed financial statements.
Audited financial statements are mandatory for any provider receiving in
excess of $2 million of financing.
- - PROVIDER NARRATIVE (INCLUDING THE FOLLOWING SECTIONS)
1. Business overview
2. Personnel
3. Contractual Allowance procedures
4. Billing procedures
5. Payor remittances procedures
6. Collection procedures
7. Information technology capabilities
8. Litigation Review - Material Litigation involving LEXIS/NEXIS search
9. General observations and concerns with provider
- - CONTRACTUAL ALLOWANCE DERIVATION
Please include a brief summary of how DVI developed the contractual
allowance value for each provider.
- - INITIAL BORROWING BASE/PURCHASE--one page analysis netting down from
Gross Receivables to Advanced Amount
- - NEW SELLER FORM
This form should include seller specific information regarding its pool
of receivables, such as
<PAGE> 55
- Financial class stratification for purchased receivables (including
Medicare, Medicaid, commercial insurers, CHAMPUS, CHAMPVA, Blue
Cross/Blue Shield and managed care)
- Aging of receivables financed (by the following aging buckets:
0-30, 31-60, 61-90, 91-120, 121-150)
- All Commercial Payors greater than 1% of the Loan to the Provider
(list the Payors, the ratings and the exposure)
- Medicare and Medicaid Offset experience over the past 3 years,
and that value multiplied by 1.5X
-2-
<PAGE> 56
SCHEDULE 2
ELIGIBLE PAYOR CONCENTRATION LIMITS
PAYOR CLASS MAXIMUM
PERCENTAGE OF
BORROWING BASE
(ii) Eligible Receivables payable by 15%
Blue Cross and Blue Shield plans
(iii) Eligible Receivables payable by 20%(1)
any one state Medicaid program
(iv) Eligible Receivables payable by 5%
any one Blue Cross and Blue
Shield plan
(v) Eligible Receivables payable by 20%
any commercial insurer, HMO or
PPO if such payor has a
long-term rating of "AAA" from
DCR or if such payor is not
rated by DCR then has a
long-term rating of "AAA" from
Standard & Poor's Rating Agency
("S&P")
(vi) Eligible Receivables payable by 15%
any commercial insurer, HMO or
PPO if such payor has a
long-term rating of "AA-" or
better but less than "AAA" from
DCR or if such payor is not
rated by DCR then has a
long-term rating of "AA-" or
better but than "AAA" from S&P
(vii) Eligible Receivables payable by 7.5%
any commercial insurer, HMO or
PPO if such payor has a
long-term rating of "A-" or
better but less than "AA" from
DCR or if such payor is not
rated by DCR then has a
long-term rating of "A-" or
better but less than "AA-" from
S&P
(viii) Eligible Receivables payable by 5%
any commercial insurer, HMO or
PPO if such payor has a
long-term rating of
<PAGE> 57
MAXIMUM
PERCENTAGE
OF
BORROWING
PAYOR CLASS BASE
"BBB-" or better but less than
"A-" from DCR or if such payor
is not rated by DCR then has a
long-term rating of "BBB-" or
better but less than "A-" from
S&P
(ix) Eligible Receivables payable by 5%
any commercial insurer, HMO or
PPO if such payor has a
long-term rating of below "BBB-"
from DCR and for payors which
are unrated by DCR, which have
long-term ratings below "BBB-"
from S&P
(x) Eligible Receivables payable by 3%
any one institutional Payor
(1) Plus a 15% cash reserve for any excess over 20%.
<PAGE> 58
SCHEDULE 3
BORROWER CONCENTRATION TESTS
<TABLE>
<CAPTION>
TOTAL LOAN AMOUNT(1)
-----------------------------------------------------------
BORROWERS $0-$9 $10-$15 $16 - $24 $25 - $39 $40-$50
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Maximum Loan Amount $3.00 $3.00 $4.00 15% 15%
for the largest
Borrower
Maximum Loan Amount $1.50 $2.50 $3.00 10% 10%
for all other
Borrowers
Aggregate Loan $9.00 $11.50 $13.00 55% 55%
Amount for the five
largest Borrowers
Maximum Loan Amount $3.00 $4.00 $5.25 20% 20%
for the largest SPC
Borrower
Maximum Loan Amount $1.50 $2.75 $3.50 20% 20%
for all other SPC
Borrowers
</TABLE>
- ------------------
(1) In millions of dollars or as a percentage of the total Loan amount.
<PAGE> 59
SCHEDULE 7.2(q)
BORROWER LOCKBOX ACCOUNTS
NONE
<PAGE> 1
EXHIBIT 10.15
LOAN AND SECURITY AGREEMENT
-----------------------------
DATED AS OF SEPTEMBER 6, 1996
------------------------------
DVI FINANCIAL SERVICES INC.
AS BORROWER
AND
LEHMAN COMMERCIAL PAPER INC.
AS LENDER
<PAGE> 2
TABLE OF CONTENTS
Page
RECITALS.......................................................................1
SECTION 1. DEFINITIONS AND ACCOUNTING MATTERS.................................1
1.01 Certain Defined Terms...........................................1
1.02 Accounting Terms and Determinations............................10
SECTION 2. LOANS, NOTE AND PREPAYMENTS.......................................11
2.01 Loans..........................................................11
2.02 Note...........................................................11
2.03 Procedure for Borrowing........................................11
2.04 Repayment of Loans; Interest...................................13
2.05 Optional Prepayments...........................................13
2.06 Mandatory Prepayment or Pledge.................................14
2.07 Indemnity......................................................14
2.08 Purpose of Loans...............................................14
SECTION 3. PAYMENTS; COMPUTATIONS; ETC.......................................14
3.01 Payments.......................................................14
3.02 Computations...................................................15
SECTION 4. COLLATERAL SECURITY...............................................15
4.01 Collateral; Security Interest..................................15
4.02 Further Documentation..........................................16
4.03 Changes in Locations, Name, etc................................16
4.04 Lender's Appointment as Attorney-in-Fact.......................16
4.05 Performance by Lender of Borrower's Obligations................18
4.06 Proceeds.......................................................18
4.07 Remedies.......................................................18
4.08 Limitation on Duties Regarding Presentation of Collateral......19
4.09 Powers Coupled with an Interest................................19
4.10 Release of Security Interest...................................20
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TABLE OF CONTENTS (Continued)
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SECTION 5. CONDITIONS PRECEDENT..............................................20
5.01 Initial Loan...................................................20
5.02 Initial and Subsequent Loans...................................22
SECTION 6. REPRESENTATIONS AND WARRANTIES....................................23
6.01 Financial Condition............................................23
6.02 No Change......................................................24
6.03 Corporate Existence; Compliance with Law.......................24
6.04 Corporate Power; Authorization; Enforceable Obligations........24
6.05 No Legal Bar...................................................25
6.06 No Material Litigation.........................................25
6.07 No Default.....................................................25
6.08 Collateral; Collateral Security................................25
6.09 Chief Executive Office.........................................26
6.10 Location of Books and Records..................................26
6.11 No Burdensome Restrictions.....................................26
6.12 Taxes..........................................................26
6.13 Margin Regulations.............................................26
6.14 Investment Company Act; Other Regulations......................26
6.15 Subsidiaries...................................................26
6.16 Third Party Representations....................................27
6.17 Eligible Contracts.............................................27
6.18 Bulk Transfer..................................................27
6.19 Origination and Collections of Contracts.......................27
6.20 No Adverse Selection...........................................27
6.21 Contracts are Financing Leases or Security Agreements..........27
6.22 Borrower Solvent...............................................27
6.23 ERISA..........................................................27
6.24 Environmental Matters..........................................28
SECTION 7. COVENANTS OF THE BORROWER.........................................28
7.01 Financial Statements...........................................29
7.02 Existence, Etc.................................................29
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TABLE OF CONTENTS (Continued)
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7.03 Insurance......................................................30
7.04 Prohibition of Fundamental Changes.............................30
7.05 Notices........................................................30
7.06 Periodic Due Diligence Review..................................31
7.07 Limitation on Liens on Collateral..............................31
7.08 Certain Equipment Leases; Certain Equipment Loans..............31
7.09 Underwriting Guidelines........................................32
7.10 Limitation on Transactions with Affiliates.....................32
7.11 Limitation on Changes in Fiscal Year...........................32
7.12 Limitation on Lines of Business................................32
7.13 Limitations on Modifications, Waivers and Extensions
of Contracts.................................................33
7.14 Further Identification of Collateral...........................33
7.15 Limitation on Collection Account...............................33
7.16 Limitation on Sale or Other Disposition of Collateral..........33
7.17 Repayment of Loans if Contract is Found Defective..............34
7.18 Monthly Officer's Certificate..................................34
7.19 Data Pool Report...............................................34
SECTION 8. EVENTS OF DEFAULT.................................................34
SECTION 9. REMEDIES UPON DEFAULT.............................................37
SECTION 10. NO DUTY ON LENDER'S PART.........................................37
SECTION 11. MISCELLANEOUS....................................................38
11.01 Waiver........................................................38
11.02 Notices.......................................................38
11.03 Indemnification and Expenses..................................38
11.04 Amendments....................................................39
11.05 Successors and Assigns, Etc...................................39
11.06 Survival......................................................39
11.07 Captions......................................................40
11.08 Counterparts..................................................40
11.09 Loan Agreement Constitutes Security Agreement; Governing Law..40
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TABLE OF CONTENTS (Continued)
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11.10 SUBMISSION TO JURISDICTION; WAIVERS...........................40
11.11 WAIVER OF JURY TRIAL..........................................41
11.12 Acknowledgments...............................................41
11.13 Hypothecation or Pledge of Loans..............................41
11.14 Servicing.....................................................41
11.15 Set-Off.......................................................42
SCHEDULE 1 TO LOAN AGREEMENT........................................ I
Representations and Warranties re: Contracts
SCHEDULE 2 TO LOAN AGREEMENT........................................ II
Filing Jurisdictions and Offices
SCHEDULE 3 TO LOAN AGREEMENT........................................III
Subsidiaries of Borrower
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TABLE OF CONTENTS (Continued)
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EXHIBITS
EXHIBIT A Form of Promissory Note
EXHIBIT B Form of Custodial Agreement
EXHIBIT C Form of Guarantee
EXHIBIT D-1 Form of Request for Borrowing
EXHIBIT D-2 Form of Loan Supplement
EXHIBIT E Form of Opinion of Counsel to the Borrower
EXHIBIT F Form of Borrowing Base Certificate
EXHIBIT G Form of Covenant Compliance Certificate
EXHIBIT H Form of Data Pool Report
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LOAN AND SECURITY AGREEMENT
LOAN AND SECURITY AGREEMENT, dated as of September 6, 1996,
between DVI FINANCIAL SERVICES INC., a Delaware corporation (the "Borrower"),
and LEHMAN COMMERCIAL PAPER INC., a New York corporation (the "Lender").
RECITALS
The Borrower wishes to obtain financing from time to time to
provide interim funding for certain leases of, and loans in respect of,
Equipment (as defined herein), which equipment leases and loans are to be
contributed to one or more trusts or other vehicles to be sponsored by the
Borrower or an Affiliate thereof, and which equipment leases and loans and which
Equipment shall, directly or indirectly, secure the Loans (as defined herein) to
be made by the Lender hereunder.
The Lender has agreed, subject to the terms and conditions of
this Loan Agreement, to provide such funding, with a portion of the proceeds of
the sale of all equipment lease and loan asset-backed securities issued by any
such trust or other vehicle, together with other funds of the Borrower, being
used to repay any Loans made hereunder.
Accordingly, for good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the parties hereto hereby
agree as follows:
Section 1. Definitions and Accounting Matters.
1.01 Certain Defined Terms. As used herein, the following
terms shall have the following meanings (all terms defined in this Section 1.01
or in other provisions of this Loan Agreement in the singular to have the same
meanings when used in the plural and vice versa):
"Affiliate" means, with respect to any Person, any other
Person which, directly or indirectly, controls, is controlled by, or is under
common control with, such Person. For purposes of this definition, "control"
(together with the correlative meanings of "controlled by" and "under common
control with") means possession, directly or indirectly, of the power (a) to
vote 10% or more of the securities (on a fully diluted basis) having ordinary
voting power for the directors or managing general partners (or their
equivalent) of such Person, or (b) to direct or cause the direction of the
management or policies of such Person, whether through the ownership of voting
securities, by contract, or otherwise.
"Bankruptcy Code" shall mean the United States Bankruptcy Code
of 1978, as amended from time to time.
"Borrower" shall have the meaning provided in the heading
hereof.
<PAGE> 8
"Borrowing Base" shall mean 90% of the aggregate Collateral
Value of all Eligible Contracts pledged to the Lender as Collateral hereunder.
"Borrowing Base Certificate" shall have the meaning assigned
thereto in Section 7.18 hereof.
"Borrowing Base Deficiency" shall have the meaning assigned
thereto in Section 2.06 hereof.
"Business Day" shall mean any day on which (i) banks are not
authorized or required to close in New York, New York and (ii) if the applicable
Business Day relates to any computation or payment to be made with respect to
the Eurodollar Rate, any day on which dealings in dollar deposits are carried on
in the London interbank market.
"Capital Stock" shall mean any and all shares, interests,
participations or other equivalents (however designated) of capital stock of a
corporation, any and all similar ownership interests in a Person (other than a
corporation) and any and all warrants or options to purchase any of the
foregoing.
"Certificates" shall mean equipment lease and loan
asset-backed securities issued by an Affiliate of the Borrower or a trust
sponsored by the Borrower or any of its Affiliates.
"Code" shall mean the Internal Revenue Code of 1986, as
amended from time to time.
"Collateral" shall have the meaning assigned to such term in
Section 4.01(b) hereof.
"Collateral Value" shall mean as of any date in respect of an
Eligible Contract, the lesser of (a) the Discounted Present Value of such
Eligible Contract, or (b) the market value of such Eligible Contract as
determined by the Lender in its sole discretion (using commercially reasonable
methods), which market value may be determined to be zero; provided, that:
(i) the aggregate Collateral Value of all Eligible Contracts
in respect of which the same Person (or its Affiliates) is the Obligor
thereunder may not at any time exceed $3,000,000;
(ii) the aggregate Collateral Value of all Eligible Contracts
originated by any Person other than the Borrower or its Affiliates may
not at any time exceed 30% of the Maximum Credit at such time;
provided, however, that beginning upon the day which is forty-five (45)
days after the outstanding principal amount of Loans is $50,000,000 or
more, the aggregate Collateral Value of all Eligible Contracts
originated by any Person other than the Borrower or its Affiliates may
not at any time exceed 30% of
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<PAGE> 9
aggregate Collateral Value of all Eligible Contracts included in the
Borrowing Base at such time;
(iii) the aggregate Collateral Value of all Small Item
Contracts may not at any time exceed 10% of the Maximum Credit at such
time; provided, however, that beginning upon the day which is
forty-five (45) days after the outstanding principal amount of Loans is
$50,000,000 or more, the aggregate Collateral Value of all Small Item
Contracts may not at any time exceed 10% of the aggregate Collateral
Value of all Eligible Contracts included in the Borrowing Base at such
time;
(iv) the aggregate Collateral Value of all Eligible Contracts
having an original term of more than 63 months may not at any time
exceed 25% of the Maximum Credit at such time; provided, however, that
beginning upon the day which is forty-five (45) days after the
outstanding principal amount of Loans is $50,000,000 or more, the
aggregate Collateral Value of all Eligible Contracts having an original
term of more than 63 months may not at any time exceed 25% of the
aggregate Collateral Value of all Eligible Contracts included in the
Borrowing Base at such time;
(v) the aggregate Collateral Value of all Eligible Contracts
having an original term of more than 84 months and fewer than 96 months
may not at any time exceed 5% of the Maximum Credit at such time;
provided, however, that beginning upon the day which is forty-five (45)
days after the outstanding principal amount of Loans is $50,000,000 or
more, the aggregate Collateral Value of all Eligible Contracts having
an original term of more than 84 months and fewer than 96 months may
not at any time exceed 5% of the aggregate Collateral Value of all
Eligible Contracts included in the Borrowing Base at such time;
(vi) the aggregate Collateral Value of all Eligible Contracts
having an original term of more than 95 months shall be zero;
(vii) the aggregate Collateral Value of all FMV Leases may not
at any time exceed 5% of the Maximum Credit at such time; provided,
however, that beginning upon the day which is forty-five (45) days
after the outstanding principal amount of Loans is $50,000,000 or more,
the aggregate Collateral Value of all FMV Leases may not at any time
exceed 5% of the aggregate Collateral Value of all Eligible Contracts
included in the Borrowing Base at such time; and
(viii) the Collateral Value of each Eligible Contract (A) in
respect of which there is a breach of a representation and warranty
applicable thereto set forth on Schedule 1 (assuming each
representation and warranty being deemed to be made as of each date
Collateral Value is determined), (B) which remains pledged to the
Lender hereunder longer than 180 days after the date on which it is
first included in the Borrowing Base or (C) which has been released
from the possession of the Custodian under the Custodial Agreement to
the Borrower for a period in excess of five (5) days, shall in each of
the foregoing cases be zero.
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"Commonly Controlled Entity" shall mean an entity, whether or
not incorporated, which is under common control with the Borrower within the
meaning of Section 4001 of ERISA or is part of a group which includes the
Borrower and which is treated as a single employer under Section 414 of the
Code.
"Contract" shall mean an Equipment Lease or an Equipment Loan.
"Contract Documents" shall mean, with respect to a Contract,
the documents comprising the Contract File for such Contract.
"Contract File" shall have the meaning assigned thereto in the
Custodial Agreement.
"Contract Schedule" shall mean a schedule of Contracts in
computer-readable format setting forth the following information as to each
Contract pledged to the Lender hereunder: (i) the Contract identifying number;
(ii) whether the Contract is an Equipment Lease or an Equipment Loan, (iii) a
description of the Equipment; (iv) the Obligor's name and relationship, if any,
to other Obligors; (v) the street address where the Equipment is in use,
including city, state and zip code; (vi) the closing date of the Contract; (vii)
the stated maturity date of the Contract; (viii) the original months to
maturity; (ix) the last date through which the Contract was paid; (x) the
remaining months to maturity, as of the Contract paid to date; (xi) if such
Contract is an Equipment Lease, the Contract Yield, or if such Contract is an
Equipment Loan, the interest rate thereon; (xii) the due date of the first
payment on the Contract, (xiii) the original amount funded under the Contract;
(xiv) the outstanding principal balance; (xv) the Discounted Present Value;
(xvi) the purchase price of the Equipment; (xvii) the month and year that the
Equipment was purchased, (xviii) if such Contract is an Equipment Lease, the
amount of the monthly payment of the Contract (other than the purchase option
payment), or if such Contract is an Equipment Loan, the amount of the monthly
payments of principal and interest; (xix) if such Contract is an Equipment
Lease, the amount of the purchase option payment; (xx) whether the Borrower has
initially determined that the Contract is an FMV Lease.
"Contract Yield" shall mean the yield on a Contract as
determined in accordance with the Borrower's customary practices in effect as of
the date hereof.
"Contractual Obligation" shall mean as to any Person, any
provision of any security issued by such Person or of any agreement, instrument
or other undertaking to which such Person is a party or by which it or any of
its property is bound.
"Covenant Compliance Certificate" shall have the meaning
assigned thereto in Section 7.18 hereof.
"Custodial Agreement" shall mean the Custodial Agreement,
dated as of the date hereof, among the Borrower, the Custodian and the Lender,
substantially in the form of Exhibit B hereto, as the same shall be modified and
supplemented and in effect from time to time.
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<PAGE> 11
"Custodian" shall mean First Trust National Association, its
successors and permitted assigns.
"Default" shall mean an Event of Default or an event that with
notice or lapse of time or both would become an Event of Default.
"Discount Rate" shall mean a rate equal to the sum of (i) the
rate announced by Citibank, N.A. from time to time as its "prime rate", as
published in The Wall Street Journal, Eastern Edition, plus (ii) 1.00%.
"Discounted Present Value" shall mean, for any Contract as of
any date of determination, the present value of the then remaining payments
under such Contract, discounted at the Discount Rate, as determined by the
Lender in accordance with the above formula and notified to the Borrower on the
Business Day immediately preceding each Interest Payment Date (or, at the sole
discretion of the Lender following notice to the Borrower, on any Business Day).
"Dollars" and "$" shall mean lawful money of the United States
of America.
"Effective Date" shall mean the date upon which the conditions
precedent set forth in Section 5.01 shall have been satisfied.
"Eligible Contract" shall mean a Contract as to which the
applicable representations and warranties on Schedule 1 hereof are correct.
"Environmental Laws" shall mean and all Federal, state, local
or municipal laws, rules, orders, regulations, statutes, ordinances, codes,
decrees, requirements of any Governmental Authority, any and all Requirements of
Law and any and all common law requirements, rules and bases of liability
regulating, relating to or imposing liability or standards of conduct concerning
pollution or protection of human health or the environment, as now or may at any
time hereafter be in effect.
"Equipment" shall mean medical equipment and computer
equipment (including the software necessary for the operation of the medical
equipment) used in the care, treatment, hospitalization, diagnosis or testing of
patients in a medical setting, and furniture and office equipment located at
such hospital or medical setting.
"Equipment Lease" shall mean a lease originated by the
Borrower or its Affiliates or a third-party acceptable to the Lender in respect
of Equipment.
"Equipment Loan" shall mean a loan and security agreement or
an installment sale contract, with or without a promissory note, originated by
the Borrower or its Affiliates or a third-party acceptable to the Lender in
respect of Equipment.
"Equipment Schedule" shall have the meaning assigned thereto
in Section 7.08(b) hereof.
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<PAGE> 12
"ERISA" shall mean the Employee Retirement Income Security Act
of 1974, as amended from time to time.
"Eurodollar Rate" shall mean the rate at which eurodollar
deposits for one month are offered to prime banks in the interbank eurodollar
market as reported at Telerate page 3750 on such date of determination or, if
not so reported, as otherwise reasonably determined by the Lender. The
determination of the Eurodollar Rate by the Lender shall be conclusive absent
manifest error.
"Event of Default" shall have the meaning assigned thereto in
Section 8 hereof.
"Exposure" with respect to any Contract, shall mean excess of
(a) the Discounted Present Value of such Contract over (b) the value of the
collateral securing such Contract.
"FMV Lease" shall mean an Equipment Lease granting the Obligor
the option to purchase the underlying Equipment at its then fair market value or
at a purchase price other than a nominal purchase price, or which would
otherwise be deemed to create a lease and not a security interest in accordance
with Section 1-201(37) of the Uniform Commercial Code, as initially determined
by the Borrower, subject to determination by the Lender in its sole discretion.
"Funding Date" shall mean the date on which a Loan is made
hereunder.
"GAAP" shall mean generally accepted accounting principles as
in effect from time to time in the United States.
"Governmental Authority" shall mean any nation or government,
any state or other political subdivision thereof, any entity exercising
executive, legislative, judicial, regulatory or administrative functions of or
pertaining to government and any court or arbitrator having jurisdiction over
the Borrower, any of its Affiliates or any of its properties.
"Guarantee" shall mean that certain Guarantee of the
Guarantor, substantially in the form of Exhibit C hereto, as amended,
supplemented or otherwise modified from time to time.
"Guarantee Obligation": as to any Person (the "guaranteeing
person"), shall mean any obligation of (a) the guaranteeing person or (b)
another Person (including, without limitation, any bank under any letter of
credit) with respect to which the guaranteeing person has issued a
reimbursement, counterindemnity or similar obligation, in either case
guaranteeing or in effect guaranteeing any Indebtedness, leases, dividends or
other obligations (the "primary obligations") of any other third Person (the
"primary obligor") in any manner, whether directly or indirectly, including,
without limitation, any obligation of the guaranteeing person, whether or not
contingent, (i) to purchase any such primary obligation or any property
constituting direct or indirect security therefor, (ii) to advance or supply
funds (1) for the purchase or payment of any such primary obligation or (2) to
maintain working
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capital or equity capital of the primary obligor or otherwise to maintain the
net worth or solvency of the primary obligor, (iii) to purchase property,
securities or services primarily for the purpose of assuring the owner of any
such primary obligation of the ability of the primary obligor to make payment of
such primary obligation or (iv) otherwise to assure or hold harmless the owner
of any such primary obligation against loss in respect thereof; provided,
however, that the term Guarantee Obligation shall not include endorsements of
instruments for deposit or collection in the ordinary course of business. The
terms "Guarantee" and "Guaranteed" used as a verb shall have a correlative
meaning. The amount of any Guarantee Obligation of any guaranteeing person shall
be deemed to be the lower of (a) an amount equal to the stated or determinable
amount of the primary obligation in respect of which such Guarantee Obligation
is made and (b) the maximum amount for which such guaranteeing person may be
liable pursuant to the terms of the instrument embodying such Guarantee
Obligation, unless such primary obligation and the maximum amount for which such
guaranteeing person may be liable are not stated or determinable, in which case
the amount of such Guarantee Obligation shall be such guaranteeing person's
maximum reasonably anticipated liability in respect thereof as determined by the
Borrower in good faith.
"Guarantor" shall mean DVI, Inc., a Delaware corporation.
"Indemnified Parties" shall have the meaning assigned thereto
in Section 11.03 hereof.
"Interest Payment Date" shall mean the tenth (10th) day of
each calendar month, or if such day is not a Business Day, the next succeeding
Business Day.
"Interest Period" shall mean with respect to any Loan:
(a) initially, the period commencing on the Funding
Date with respect to such Loan to but excluding the first Interest
Payment Date; and
(b) thereafter, each period commencing on an
Interest Payment Date to but excluding the next succeeding Interest
Payment Date;
provided, that the foregoing provisions relating to Interest Periods are subject
to the provision that any Interest Period that would otherwise extend beyond the
Termination Date shall end on the Termination Date.
"Lender" shall have the meaning assigned thereto in the
heading hereto.
"Lien" shall mean any mortgage, lien, encumbrance, charge or
other security interest, whether arising under contract, by operation of law,
judicial process or otherwise.
"Loan" shall have the meaning assigned thereto in Section
2.01(a) hereof.
"Loan Agreement" shall mean this Loan and Security Agreement,
as may be amended, supplemented or otherwise modified from time to time.
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<PAGE> 14
"Loan Documents" shall mean, collectively, this Loan
Agreement, the Note, the Custodial Agreement, the Guarantee and the Underwriting
Letter Agreement.
"Loan Supplement" shall have the meaning assigned thereto in
Section 2.03(b) hereof.
"Master Lease" shall have the meaning assigned thereto in
Section 7.08 hereof.
"Material Adverse Effect" shall mean any event which has had
or could reasonably be expected to have a material adverse effect on (a) the
business, assets, property, condition (financial or otherwise) or prospects of
the Guarantor or Borrower and its Subsidiaries taken as a whole, or (b) the
validity or enforceability of (i) this Loan Agreement, the Note or the other
Loan Documents or (ii) the rights or remedies of the Lender hereunder or
thereunder.
"Materials of Environmental Concern" shall mean any hazardous
or toxic substances, materials or wastes, defined, listed, classified or
regulated as such in or under any Environmental Laws, including, without
limitation, asbestos, petroleum or petroleum products (including gasoline, crude
oil or any fraction thereof), polychlorinated biphenyls, and urea-formaldehyde
insulation.
"Maximum Credit" shall mean $100,000,000, as such amount may
be reduced from time to time in accordance with the terms of this Loan
Agreement.
"Multiemployer Plan" shall mean a Plan which is a
multiemployer plan as defined in Section 4001(a)(3) of ERISA.
"Note" shall mean the promissory note provided for by Section
2.02(a) hereof relating to the Loans and any promissory note delivered in
substitution or exchange therefor, in each case as the same shall be modified
and supplemented and in effect from time to time.
"Obligor" shall mean, with respect to a Contract (i) which is
an Equipment Lease, the lessee of the Equipment that is the subject of such
Contract, (ii) which is an Equipment Loan, the purchaser of the Equipment that
is the subject of such Contract, and/or in either such case any other person who
owes payments under such Contract.
"Obligor Loan Agreement" shall have the meaning assigned
thereto in Section 7.08(b) hereof.
"PBGC" shall mean the Pension Benefit Guaranty Corporation
established pursuant to Subtitle A of Title IV of ERISA.
"Person" shall mean any individual, corporation, company,
voluntary association, partnership, joint venture, limited liability company,
trust, unincorporated association or government (or any agency, instrumentality
or political subdivision thereof).
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<PAGE> 15
"Plan" shall mean at a particular time, any employee benefit
plan which is covered by ERISA and in respect of which the Borrower or a
Commonly Controlled Entity is (or, if such plan were terminated at such time,
would under Section 4069 of ERISA be deemed to be) an "employer" as defined in
Section 3(5) of ERISA.
"Post-Default Rate" shall mean, in respect of any principal of
any Loan or any other amount under this Loan Agreement, the Note or any other
Loan Document that is not paid when due to the Lender (whether at stated
maturity, by acceleration, by optional or mandatory prepayment or otherwise), a
rate per annum during the period from and including the due date to but
excluding the date on which such amount is paid in full equal to [redacted] per
annum plus the rate otherwise applicable (or, if no such rate is otherwise
applicable, the rate of interest applicable to principal of Loans).
"Properties" shall have the meaning assigned thereto in
Section 6.24 hereof.
"Reportable Event" shall mean any of the events set forth in
Section 4043(b) of ERISA, other than those events as to which the thirty day
notice period is waived under subsections .13, .14, .16, .18, .19 or .20 of PBGC
Reg. Section 2615.
"Request for Borrowing" shall have the meaning assigned
thereto in Section 2.03(a) hereof.
"Requirement of Law" shall mean as to any Person, the
Certificate of Incorporation and by-laws or other organizational or governing
documents of such Person, and any law, treaty, rule or regulation or
determination of an arbitrator or a court or other Governmental Authority, in
each case applicable to or binding upon such Person or any of its property or to
which such Person or any of its property is subject.
"Regulations G, T, U and X" shall mean Regulations G, T, U and
X of the Board of Governors of the Federal Reserve System (or any successor), as
the same may be modified and supplemented and in effect from time to time.
"Responsible Officer" shall mean, as to any Person, the chief
executive officer or, with respect to financial matters, the chief financial
officer of such Person.
"Secured Obligations" shall have the meaning assigned thereto
in Section 4.01(c) hereof.
"Servicer" shall have the meaning assigned thereto in Section
11.14(c) hereof.
"Servicing Agreement" shall have the meaning assigned thereto
in Section 11.14(c) hereof.
"Servicing Records" shall have the meaning assigned thereto in
Section 11.14(b) hereof.
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"Single Employer Plan" shall mean any Plan which is covered by
Title IV of ERISA, but which is not a Multiemployer Plan.
"Small Item Contract" shall mean an Eligible Contract which is
collateralized by Equipment in respect of which no individual item has a market
value of $100,000 or more.
"Subsidiary" shall mean, as to any Person, a corporation,
partnership or other entity of which shares of stock or other ownership
interests having ordinary voting power (other than stock or such other ownership
interests having such power only by reason of the happening of a contingency) to
elect a majority of the board of directors or other managers of such
corporation, partnership or other entity are at the time owned, or the
management of which is otherwise controlled, directly or indirectly through one
or more intermediaries, or both, by such Person. Unless otherwise qualified, all
references to a "Subsidiary" or to "Subsidiaries" in this Loan Agreement shall
refer to a Subsidiary or Subsidiaries of the Borrower.
"Supplement" shall have the meaning assigned thereto in
Section 7.08 hereof.
"Termination Date" shall mean September 5, 1997 or such
earlier date on which this Loan Agreement shall terminate in accordance with the
provisions hereof or by operation of law.
"Trust Receipt" shall have the meaning assigned to such term
in the Custodial Agreement.
"Underwriting Guidelines" shall have the meaning assigned
thereto in Section 5.01(k) hereof.
"Underwriting Letter Agreement" shall mean the Underwriting
Letter Agreement, dated as of September 6, 1996, among the Borrower, the
Guarantor and the Lender.
"Uniform Commercial Code" shall mean the Uniform Commercial
Code as in effect on the date hereof in the State of New York.
1.02 Accounting Terms and Determinations. Except as otherwise
expressly provided herein, all accounting terms used herein shall be
interpreted, and all financial statements and certificates and reports as to
financial matters required to be delivered to the Lender hereunder shall be
prepared, in accordance with GAAP.
Section 2. Loans, Note and Prepayments.
2.01 Loans.
(a) The Lender agrees to consider from time to time the
Borrower's requests that the Lender make, on the terms and conditions of this
Loan Agreement, loans (individually, a "Loan"; collectively, the "Loans") to the
Borrower in Dollars, on any Business Day from
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and including the Effective Date to but excluding the Termination Date, each in
an amount of $1,000,000 or more, and in an aggregate principal amount at any one
time outstanding up to but not exceeding the lesser of (i) the Maximum Credit,
and (ii) the Borrowing Base. This Loan Agreement does not constitute a
commitment of the Lender to make Loans but rather sets forth the procedures to
be followed in connection with requests for Loans by the Borrower and the making
of any Loans actually advanced by the Lender. The Borrower hereby acknowledges
that the Lender is under no obligation to agree to make, or to make, any Loan
pursuant to this Loan Agreement. Subject to the terms and conditions of this
Loan Agreement, the Borrower may borrow, repay and reborrow hereunder.
(b) In no event shall a Loan be made when any Default or Event
of Default has occurred and is continuing or would exist after the making of
such Loan on such Funding Date.
2.02 Note.
(a) The Loans made by the Lender shall be collectively
evidenced by a single promissory note of the Borrower substantially in the form
of Exhibit A hereto (the "Note"), dated the date hereof, payable to the Lender
in a principal amount equal to the amount of the Maximum Credit as originally in
effect and otherwise duly completed. The Lender shall have the right to have its
Note subdivided, by exchange for promissory notes of lesser denominations or
otherwise.
(b) The date, amount and interest rate of each Loan made by
the Lender to the Borrower, and each payment made on account of the principal
thereof, shall be recorded by the Lender on its books and, prior to any transfer
of the Note, endorsed by the Lender on the schedule attached to the Note or any
continuation thereof; provided, that the failure of the Lender to make any such
recordation or endorsement shall not affect the obligations of the Borrower to
make a payment when due of any amount owing hereunder or under the Note in
respect of the Loans.
2.03 Procedure for Borrowing.
(a) The Borrower may request a borrowing hereunder, on any
Business Day during the period from and including the Effective Date to and
including the Termination Date, but no more frequently than two times per week,
by delivering to the Lender, with a copy to the Custodian, an irrevocable
written request for borrowing, substantially in the form of Exhibit D-1 (a
"Request for Borrowing"), which request must be received by the Lender, with a
copy to the Custodian, no later than 11:00 a.m., New York City time, two (2)
Business Days prior to the requested Funding Date. Such Request for Borrowing
shall (i) attach a Contract Schedule in respect of the Eligible Contracts that
the Borrower proposes to pledge to the Lender and be included in the Borrowing
Base in connection with such Loan, (ii) specify the requested Funding Date,
which shall be at least two (2) Business Days after the date of such Request for
Borrowing, and (iii) attach an officer's certificate signed by a Responsible
Officer of each of the Borrower and the Guarantor as required by Section 5.02(b)
hereof.
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(b) Upon receipt of the Borrower's Request for Borrowing, the
Lender may, at its option, agree to make a Loan to the Borrower by executing and
delivering, via telecopy, a loan supplement to the Borrower substantially in the
form of Exhibit D-2 attached hereto (a "Loan Supplement") no later than 11:00
a.m. (New York City time) one (1) Business Day after its receipt of such Request
for Borrowing. Such Loan Supplement shall identify the Lender and the Borrower,
attach a schedule identifying the Eligible Contracts proposed to be pledged by
the Borrower to the Lender on such Funding Date which are acceptable to the
Lender to be pledged as Collateral hereunder and included in the Borrowing Base,
and shall set forth (i) the Funding Date and (ii) the amount of the Loan to be
made on such Funding Date, and may contain additional terms or conditions which
may or may not be inconsistent with this Loan Agreement. With respect to
Eligible Contracts which are rejected by the Lender as Collateral hereunder,
upon the request of the Borrower, the Lender shall indicate to the Borrower the
reason or reasons, if any, for the rejection of such Eligible Contracts. The
making of any Loan described in a Loan Supplement shall remain subject to the
satisfaction by the Borrower of all of the conditions precedent to any Loan
contained in this Loan Agreement. In the event there is a conflict between the
terms of this Loan Agreement and the terms of the Loan Supplement, the terms of
the Loan Supplement shall control. Each Loan Supplement, together with this Loan
Agreement, shall be conclusive evidence of the terms of the Loan(s) covered
thereby. If the Borrower has not received a Loan Supplement from the Lender
prior to such time, such Request for Borrowing shall be deemed to have been
rejected by the Lender.
(c) The Borrower shall release to the Custodian no later than
11:00 a.m., New York City time, two (2) Business Days prior to the requested
Funding Date, the Contract File pertaining to each Eligible Contract to be
pledged to the Lender and included in the Borrowing Base on such requested
Funding Date, in accordance with the terms and conditions of the Custodial
Agreement.
(d) Pursuant to the Custodial Agreement, the Custodian shall
deliver to the Lender and the Borrower, no later than 11:00 a.m. on a Funding
Date, a Trust Receipt in respect of all Contracts pledged to the Lender on such
Funding Date. Subject to Section 5 hereof, such Loan will then be made available
to the Borrower by the Lender transferring, via wire transfer, to the following
account of the Borrower: Fleet Bank, National Association, for the A/C of DVI
Financial Services Inc., ABA# 021200339, Account# 2181-01-6540, Attn: Wendy
Jordan, on such Funding Date, in the aggregate amount of such Loan in funds
immediately available to the Borrower.
(e) Notwithstanding anything to the contrary in this Loan
Agreement, (i) if the Lender is unable, after good faith effort, to obtain a
source of funds for the proposed Loan on substantially the same economic terms
as are available to the Lender as of the date of this Loan Agreement, and as a
result the cost to the Lender of making such Loan is increased by an amount
which the Lender deems material, the Lender shall not be obligated to consider
making such Loan unless the Borrower agrees to pay the Lender any additional
amounts necessary to compensate the Lender for such increased cost, as notified
by the Lender to the Borrower, and (ii) the Lender shall have no obligation to
consider making any Loan hereunder if there shall
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have occurred any material adverse change in (A) the financial condition of the
Borrower or the Guarantor, (B) the financial markets generally or (C) the
secondary market for Contracts. The Lender shall promptly notify the Borrower of
any determination by the Lender of any of the foregoing.
2.04 Repayment of Loans; Interest.
(a) Each outstanding Loan shall mature on the Termination
Date.
(b) Each Loan shall bear interest on the unpaid principal
amount thereof for the period from and including the Funding Date with respect
to such Loan to but excluding the date such Loan shall be paid in full, at a
rate per annum equal to [redacted]. Notwithstanding the foregoing, the Borrower
hereby promises to pay to the Lender interest at the applicable Post-Default
Rate on any principal of any Loan and on any other amount payable by the
Borrower hereunder or under the Note that shall not be paid in full when due
(whether at stated maturity, by acceleration or by mandatory prepayment or
otherwise), for the period from and including the due date thereof to but
excluding the date the same is paid in full (both before and after judgment).
(c) Accrued interest on each Loan shall be payable on each
Interest Payment Date (and for the last month (or portion thereof) of the Loan
Agreement on the Termination Date), except that if an Event of Default has
occurred and is continuing, interest payable at the Post-Default Rate shall be
payable from time to time on demand.
2.05 Optional Prepayments. The Loans are prepayable at any
time without premium or penalty, in whole or in part but subject to Section
2.07. Any amounts prepaid shall be applied to repay the outstanding principal
amount of any Loans (together with interest thereon) until paid in full. Amounts
prepaid may be reborrowed in accordance with the terms of this Loan Agreement.
If the Borrower intends to repay a Loan in whole or in substantial part from a
source other than the proceeds of Certificates, the Borrower shall give two (2)
Business Days' irrevocable prior written notice thereof to the Lender. If such
notice is given, the amount specified in such notice shall be due and payable on
the date specified therein, together with accrued interest to such date on the
amount prepaid. Partial prepayments shall be in an aggregate principal amount of
$1,000,000 or more.
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2.06 Mandatory Prepayment or Pledge.
(a) If at any time the aggregate outstanding principal amount
of Loans exceeds the Borrowing Base (a "Borrowing Base Deficiency"), as
determined by the Lender and notified to the Borrower on any Business Day, the
Borrower shall no later than two (2) Business Days after receipt of such notice,
at the option of the Borrower, either prepay the Loans in part or in whole or
pledge additional Collateral (which Collateral shall be in all respects
acceptable to the Lender) to the Lender, such that after giving effect to such
prepayment or pledge the aggregate outstanding principal amount of the Loans
does not exceed the Borrowing Base.
(b) The Borrower shall prepay the Loans in part or in whole to
the extent required by Section 7.17(b) hereof.
(c) The Borrower shall prepay the Loans made in respect of all
Contracts included in a securitization on the date upon which the Certificates
from such securitization are sold.
2.07 Indemnity. Upon demand by the Lender, the Borrower agrees
to indemnify the Lender and to hold the Lender harmless from any net loss or
expense (not to include any lost profit or opportunity cost) which the Lender
may sustain or incur as a consequence of default by the Borrower in making any
prepayment on the date so specified after the Borrower has given a notice in
accordance with Section 2.05 or a prepayment of a Loan on a day which is not the
Termination Date, including, without limitation, in each case, any such loss or
expense arising from the reemployment of funds obtained by it to maintain its
Loans hereunder or from fees payable to terminate the deposits from which such
funds were obtained. This Section 2.07 shall survive termination of this Loan
Agreement and payment of the Note.
2.08 Purpose of Loans. Each Loan shall be used to provide
interim financing for Eligible Contracts identified to the Lender in writing on
each Contract Schedule, as such Contract Schedule may be amended from time to
time.
Section 3. Payments; Computations; Etc.
3.01 Payments.
(a) Except to the extent otherwise provided herein, all
payments of principal, interest and other amounts to be made by the Borrower
under this Loan Agreement and the Note, shall be made in Dollars, in immediately
available funds, without deduction, set-off or counterclaim, to the Lender at
the following account maintained by the Lender: Citibank NYC, For the A/C of
Lehman Commercial Paper Inc., ABA# 021000089, Account #: 40615659, Ref: DVI
Financial Services Inc., not later than 1:00 p.m., New York City time, on the
date on which such payment shall become due (each such payment made after such
time on such due date to be deemed to have been made on the next succeeding
Business Day).
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(b) Except to the extent otherwise expressly provided herein,
if the due date of any payment under this Loan Agreement or the Note would
otherwise fall on a day that is not a Business Day, such date shall be extended
to the next succeeding Business Day, and interest shall be payable for any
principal so extended for the period of such extension.
3.02 Computations. Interest on the Loans shall be computed on
the basis of a 360-day year for the actual days elapsed (including the first day
but excluding the last day) occurring in the period for which such interest is
payable.
Section 4. Collateral Security.
4.01 Collateral; Security Interest.
(a) Pursuant to the Custodial Agreement, the Custodian shall
hold the Contract Documents as exclusive bailee and agent for the Lender
pursuant to terms of the Custodial Agreement and shall deliver to the Lender
Trust Receipts, each to the effect that it has reviewed such Contract Documents
in the manner required by the Custodial Agreement and identifying any
deficiencies in such Contract Documents as so reviewed.
(b) All of the Borrower's right, title and interest in, to and
under each of the following items of property, whether now owned or hereafter
acquired, now existing or hereafter created and wherever located, is hereinafter
referred to as the "Collateral":
(i) all Contracts and any other equipment leases, loan and
security agreements, installment sale contracts and/or promissory notes
listed on any Contract Schedule, whether or not the related Contract
File has been delivered to, or is held by, the Custodian;
(ii) all Contract Documents related thereto;
(iii) all rights, remedies, powers and privileges of the
Borrower under such Contract Documents (including, without limitation,
all rights of the Borrower in and to the Equipment and other interests
that are the subject of the Contracts);
(iv) all Servicing Records and other books and records
(including, without limitation, computer programs, tapes and other
computer storage media) relating to any of the foregoing;
(v) all recourse or support obligations, guarantees,
indemnities and security relating to any of the foregoing and all
letters of credit relating thereto;
(vi) all "general intangibles" as defined in the Uniform
Commercial Code relating to or constituting any and all of the
foregoing; and
(vii) any and all replacements, substitutions, distributions
on or proceeds of any and all of the foregoing.
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(c) The Borrower hereby assigns, pledges and grants a security
interest in the Collateral to the Lender to secure the repayment of principal of
and interest on all Loans and all other amounts owing to the Lender hereunder,
under the Note and under the other Loan Documents (collectively, the "Secured
Obligations"). The Borrower agrees to mark its computer programs and tapes to
evidence the interests granted to the Lender hereunder.
4.02 Further Documentation. At any time and from time to time,
upon the written request of the Lender, and at the sole expense of the Borrower,
the Borrower will promptly and duly execute and deliver, or will promptly cause
to be executed and delivered, such further instruments and documents and take
such further action as the Lender may reasonably request for the purpose of
obtaining or preserving the full benefits of this Loan Agreement and of the
rights and powers herein granted, including, without limitation, the filing of
any financing or continuation statements under the Uniform Commercial Code in
effect in any jurisdiction with respect to the Liens created hereby. The
Borrower also hereby authorizes the Lender to file any such financing or
continuation statement without the signature of the Borrower to the extent
permitted by applicable law. A carbon, photographic or other reproduction of
this Loan Agreement shall be sufficient as a financing statement for filing in
any jurisdiction.
4.03 Changes in Locations, Name, etc. The Borrower shall not
(i) change the location of its chief executive office/chief place of business
from that specified in Section 6 hereof or (ii) change its name, identity or
corporate structure (or the equivalent) or change the location where it
maintains its records with respect to the Collateral unless it shall have given
the Lender at least 30 days prior written notice thereof and shall have
delivered to the Lender all Uniform Commercial Code financing statements and
amendments thereto as Lender shall request and taken all other actions deemed
necessary by Lender to continue its perfected status in the Collateral with the
same or better priority.
4.04 Lender's Appointment as Attorney-in-Fact.
(a) The Borrower hereby irrevocably constitutes and appoints
the Lender and any officer or agent thereof, with full power of substitution, as
its true and lawful attorney-in-fact with full irrevocable power and authority
in the place and stead of the Borrower and in the name of the Borrower or in its
own name, from time to time in the Lender's discretion and at the Borrower's
expense, for the purpose of carrying out the terms of this Loan Agreement, to
pay insurance in respect of, and to pay or discharge taxes and Liens levied or
placed on or threatened against, the Collateral, all as fully and effectively as
the Borrower might do and, if an Event of Default shall have occurred and be
continuing, to take any and all other appropriate action and to execute any and
all documents and instruments which may be necessary or desirable to accomplish
the purposes of this Loan Agreement, and, without limiting the generality of the
foregoing, the Borrower hereby gives the Lender the power and right, on behalf
of the Borrower, without assent by, but with notice to, the Borrower, if an
Event of Default shall have occurred and be continuing, to do the following:
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(i) in the name of the Borrower or its own name, or otherwise,
to take possession of and endorse and collect any checks, drafts,
notes, acceptances or other instruments for the payment of moneys due
under any Collateral and to file any claim or to take any other action
or proceeding in any court of law or equity or otherwise deemed
appropriate by the Lender for the purpose of collecting any and all
such moneys due under any such Collateral whenever payable; and
(ii) (A) to direct any party liable for any payment under any
Collateral to make payment of any and all moneys due or to become due
thereunder directly to the Lender or as the Lender shall direct; (B) to
ask or demand for, collect, receive payment of and receipt for, any and
all moneys, claims and other amounts due or to become due at any time
in respect of or arising out of any Collateral; (C) to sign and endorse
any invoices, assignments, verifications, notices and other documents
in connection with any of the Collateral; (D) to commence and prosecute
any suits, actions or proceedings at law or in equity in any court of
competent jurisdiction to collect the Collateral and to enforce any
other right in respect of any Collateral; (E) to defend any suit,
action or proceeding brought against the Borrower with respect to any
Collateral; (F) to settle, compromise or adjust any suit, action or
proceeding described in clause (E) above and, in connection therewith,
to give such discharges or releases as the Lender may deem appropriate;
and (G) generally, to sell, transfer, pledge and make any agreement
with respect to or otherwise deal with any of the Collateral as fully
and completely as though the Lender were the absolute owner thereof for
all purposes, and to do, at the Lender's option and the Borrower's
expense, at any time, or from time to time, all acts and things which
the Lender deems reasonably necessary to protect, preserve or realize
upon the Collateral and the Lender's Liens thereon and to effect the
intent of this Loan Agreement, all as fully and effective as the
Borrower might do.
The Borrower hereby ratifies all that said attorneys shall lawfully do or cause
to be done by virtue hereof. This power of attorney is a power coupled with an
interest and shall be irrevocable.
(b) The Borrower also authorizes the Lender, at any time and
from time to time, to execute, in connection with the sale provided for in
Section 4.07 hereof, any endorsements, assignments or other instruments of
conveyance or transfer with respect to the Collateral.
(c) The powers conferred on the Lender are solely to protect
the Lender's interests in the Collateral and shall not impose any duty upon the
Lender to exercise any such powers. The Lender shall be accountable only for
amounts that it actually receives as a result of the exercise of such powers,
and neither the Lender nor any of its officers, directors, or employees shall be
responsible to the Borrower for any act or failure to act hereunder, except for
its own gross negligence or willful misconduct.
4.05 Performance by Lender of Borrower's Obligations. If the
Borrower fails to perform or comply with any of its agreements contained in the
Loan Documents and the
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Lender shall itself perform or comply, or otherwise cause performance or
compliance, with such agreement, the expenses of the Lender incurred in
connection with such performance or compliance, together with interest thereon
at a rate per annum equal to the Post-Default Rate, shall be payable by the
Borrower to the Lender on demand and shall constitute Secured Obligations.
4.6 Proceeds. If an Event of Default shall occur and be
continuing, (a) all proceeds of Collateral received by the
Borrower consisting of cash, checks and other near-cash
items shall be held by the Borrower in trust for the
Lender, segregated from other funds of the Borrower, and
shall forthwith upon receipt by the Borrower be turned
over to the Lender in the exact form received by the
Borrower (duly endorsed by the Borrower to the Lender, if
required) and (b) any and all such proceeds received by
the Lender (whether from the Borrower or otherwise) may,
in the sole discretion of the Lender, be held by the
Lender as collateral security for, and/or then or at any
time thereafter may be applied by the Lender against, the
Secured Obligations (whether matured or unmatured), such
application to be in such order as the Lender shall elect.
Any balance of such proceeds remaining after the Secured
Obligations shall have been paid in full and this Loan
Agreement shall have been terminated shall be paid over to
the Borrower or to whomsoever may be lawfully entitled to
receive the same. For purposes hereof, proceeds shall
include, but not be limited to, all principal and interest
payments, all prepayments and payoffs, insurance claims,
condemnation awards, sale proceeds, and any other income
and all other amounts received with respect to the
Collateral.
4.07 Remedies. If an Event of Default shall occur and be
continuing, the Lender may exercise, in addition to all other rights and
remedies granted to it in this Loan Agreement and in any other instrument or
agreement securing, evidencing or relating to the Secured Obligations, all
rights and remedies of a secured party under the Uniform Commercial Code.
Without limiting the generality of the foregoing, the Lender without demand of
performance or other demand, presentment, protest, advertisement or notice of
any kind (except any notice required by law referred to below) to or upon the
Borrower or any other Person (all and each of which demands, defenses,
advertisements and notices are hereby waived), may in such circumstances
forthwith collect, receive, appropriate and realize upon the Collateral, or any
part thereof, and/or may forthwith sell, lease, assign, give option or options
to purchase, or otherwise dispose of and deliver the Collateral or any part
thereof (or contract to do any of the foregoing), in one or more parcels or as
an entirety at public or private sale or sales, at any exchange, broker's board
or office of the Lender or elsewhere upon such terms and conditions as it may
deem advisable and at such prices as it may deem best, for cash or on credit or
for future delivery without assumption of any credit risk. The Lender shall have
the right upon any such public sale or sales, and, to the extent permitted by
law, upon any such private sale or sales, to purchase the whole or any part of
the Collateral so sold, free of any right or equity of redemption in the
Borrower, which right or equity is hereby waived or released. The Borrower
further agrees, at the Lender's request, to assemble the Collateral and
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make it available to the Lender at places which the Lender shall reasonably
select, whether at the Borrower's premises or elsewhere. The Lender shall apply
the net proceeds of any such collection, recovery, receipt, appropriation,
realization or sale, after deducting all reasonable costs and expenses of every
kind incurred therein or incidental to the care or safekeeping of any of the
Collateral or in any way relating to the Collateral or the rights of the Lender
hereunder, including, without limitation, reasonable attorneys' fees and
disbursements, to the payment in whole or in part of the Secured Obligations, in
such order as the Lender may elect, and only after such application and after
the payment by the Lender of any other amount required or permitted by any
provision of law, including, without limitation, Section 9-504(1)(c) of the
Uniform Commercial Code, need the Lender account for the surplus, if any, to the
Borrower. To the extent permitted by applicable law, the Borrower waives all
claims, damages and demands it may acquire against the Lender arising out of the
exercise by the Lender of any of its rights hereunder, other than those claims,
damages and demands arising from the gross negligence or willful misconduct of
the Lender. If any notice of a proposed sale or other disposition of Collateral
shall be required by law, such notice shall be deemed reasonable and proper if
given at least ten days before such sale or other disposition. The Borrower and
the Guarantor shall remain liable for any deficiency if the proceeds of any sale
or other disposition of the Collateral are insufficient to pay the Secured
Obligations and the fees and disbursements of any attorneys employed by the
Lender to collect such deficiency.
4.08 Limitation on Duties Regarding Presentation of
Collateral. The Lender's duty with respect to the custody, safekeeping and
physical preservation of the Collateral in its possession, under Section 9-207
of the Uniform Commercial Code or otherwise, shall be to deal with it in the
same manner as the Lender deals with similar property for its own account.
Neither the Lender nor any of its directors, officers or employees shall be
liable for failure to demand, collect or realize upon all or any part of the
Collateral or for any delay in doing so or shall be under any obligation to sell
or otherwise dispose of any Collateral upon the request of the Borrower or
otherwise.
4.09 Powers Coupled with an Interest. All authorizations and
agencies herein contained with respect to the Collateral are irrevocable and
powers coupled with an interest.
4.10 Release of Security Interest. Upon termination of this
Loan Agreement and repayment to the Lender of all Secured Obligations and the
performance of all obligations under the Loan Documents the Lender shall release
its security interest in any remaining Collateral.
Section 5. Conditions Precedent.
5.01 Initial Loan. The agreement of the Lender to make the
initial Loan requested to be made by it hereunder is subject to the
satisfaction, immediately prior to or concurrently with the making of
such Loan, of the following conditions precedent:
(a) Loan Documents. The Lender shall have received (i) this
Loan Agreement, executed and delivered by a duly authorized officer of
the Borrower, and
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(ii) a Note, conforming to the requirements hereof and executed by a
duly authorized officer of the Borrower.
(b) Guarantee. The Lender shall have received the Guarantee,
executed by a duly authorized officer of the Guarantor.
(c) Custodial Agreement. The Lender shall have received the
Custodial Agreement, conforming to the requirements hereof and executed
by a duly authorized officer of the Borrower and the Custodian.
(d) Underwriting Letter Agreement. The Lender shall have
received the Underwriting Letter Agreement executed by a duly
authorized officer of each of the Borrower and the Guarantor.
(e) Filings, Registrations, Recordings. Any documents
(including, without limitation, financing statements) required to be
filed, registered or recorded in order to create, in favor of the
Lender, a perfected, first-priority security interest in the
Collateral, subject to no Liens other than those created hereunder,
shall have been properly prepared for filing, registration or recording
in each office in each jurisdiction in which such filings,
registrations and recordations are required to perfect such
first-priority security interest, and with respect to each FMV Lease, a
financing statement on Form UCC-1 naming the Borrower as the debtor and
the Lender as secured party and describing the Equipment that is the
subject of such FMV Lease, and proceeds thereof, as the collateral,
shall have been properly prepared for filing, registration or recording
in each office in each jurisdiction in which such filings,
registrations and recordations are required to perfect such
first-priority security interest in such Equipment (assuming the
Borrower is the owner of such Equipment).
(f) Corporate Proceedings.
(i) The Lender shall have received a certificate of
the Secretary or Assistant Secretary of the Borrower, dated as
of the date hereof, and certifying (A) that attached thereto
is a true, complete and correct copy of resolutions duly
adopted by the Board of Directors of the Borrower authorizing
(1) the execution, delivery and performance of this Loan
Agreement, the Note and the other Loan Documents to which it
is a party, and (2) the borrowings contemplated hereunder and
that such resolutions have not been amended, modified, revoked
or rescinded, and (B) as to the incumbency and specimen
signature of each officer executing any Loan Documents on
behalf of the Borrower, and authorized to execute any Request
for Borrowing, and such certificate and the resolutions
attached thereto shall be in form and substance satisfactory
to the Lender; and
(ii) The Lender shall have received a certificate of
the Secretary or Assistant Secretary of the Guarantor, dated
as of the date hereof, and certifying (A) that attached
thereto is a true, complete and correct copy of resolutions
duly
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adopted by the Board of Directors of the Guarantor authorizing
the execution, delivery and performance of the Guarantee, and
that such resolutions have not been amended, modified, revoked
or rescinded, and (B) as to the incumbency and specimen
signature of each officer executing the Guarantee on behalf of
the Guarantor, and such certificate and the resolutions
attached thereto shall be in form and substance satisfactory
to the Lender.
(g) Corporate Documents.
(i) The Lender shall have received true and complete
copies of the certificate of incorporation and by-laws of the
Borrower, certified as such as of the date hereof by the
Secretary or an Assistant Secretary of the Borrower; and
(ii) The Lender shall have received true and complete
copies of the certificate of incorporation and by-laws of the
Guarantor, certified as such as of the date hereof by the
Secretary or an Assistant Secretary of the Guarantor.
(h) Good Standing Certificates. The Lender shall have received
copies of certificates evidencing the good standing of the Borrower and
the Guarantor, dated as of a recent date, from the Secretary of State
(or other appropriate authority) of the State of Delaware and in each
jurisdiction where the ownership, lease or operation of property, or
the conduct of business, requires the Borrower and/or the Guarantor to
qualify as a foreign corporation, except where the failure to qualify
would not have a Material Adverse Effect.
(i) Legal Opinion. The Lender shall have received the executed
legal opinions of Melvin C. Breaux, Esq., general counsel to the
Borrower and the Guarantor and Thacher Proffitt & Wood, special counsel
to the Borrower and the Guarantor, covering the matters set forth in
the form attached hereto as Exhibit E and dated the initial Funding
Date and covering such other matters incident to the transactions
contemplated by this Loan Agreement as the Lender shall reasonably
request.
(j) Fees and Expenses. The Lender shall have received all fees
and expenses required to be paid by the Borrower on or prior to the
initial Funding Date pursuant to Section 11.03(b).
(k) Financial Statements. The Lender shall have received the
financial statements referenced in Section 6.01(a) and 6.01(b).
(l) Underwriting Guidelines. The Lender and the Borrower shall
have agreed upon the Borrower's underwriting guidelines for Contracts
(the "Underwriting Guidelines").
(m) Consents, Licenses, Approvals, etc. The Lender shall have
received certified copies of all consents, licenses and approvals, if
any, required in connection
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with the execution, delivery and performance by the Borrower or the
Guarantor, as applicable, of, and the validity and enforceability of,
the Loan Documents, which consents, licenses and approvals shall be in
full force and effect.
(n) Other Documents. The Lender shall have received such other
documents as the Lender may reasonably request.
5.02 Initial and Subsequent Loans. The agreement of the Lender
to make any Loan requested to be made by it on any date (including the initial
Loan) is subject to the satisfaction of the following conditions precedent:
(a) No Default. No Default or Event of Default shall have
occurred and be continuing on such date or after giving effect to the
Loan requested to be made on such date.
(b) Representations and Warranties. Each of the
representations and warranties made by the Borrower and the Guarantor
in or pursuant to the Loan Documents shall be true and correct in all
material respects on and as of such date as if made on and as of such
date (or, if any such representation or warranty is expressly stated to
have been made as of a specific date, as of such specific date), and
the Lender shall have received an officer's certificate duly executed
by a Responsible Officer of each of the Borrower and the Guarantor to
that effect.
(c) Borrowing Base. The aggregate outstanding principal amount
of the Loans shall not exceed the Borrowing Base on such date and would
not exceed the Borrowing Base after giving effect to the Loan requested
to be made on such date.
(d) Due Diligence Review. The Lender shall have completed its
due diligence review, if any, of the Contract Files relating to the
Contracts being pledged in connection with the Loan being made on such
Funding Date, the results of which are satisfactory to the Lender.
(e) Trust Receipt. The Lender shall have received from the
Custodian a Trust Receipt in respect of Eligible Contracts to be
pledged hereunder on such Business Day, dated such Business Day and
duly completed and disclosing no material deficiencies in such Eligible
Contracts.
(f) Lien Searches. With respect to Contracts in respect of
existing Equipment previously financed or owned by the Borrower or a
third party, the Lender shall have received the results of a recent
lien search in each of the jurisdictions and offices where the related
Obligor and such Equipment are located, and such lien searches shall
reveal no Liens encumbering such Equipment or, if Liens do exist, the
Lender shall have received satisfactory evidence of release of such
Liens prior to or concurrently with the Loan being made on such Funding
Date.
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(g) Additional Matters. All corporate and other proceedings,
and all documents, instruments and other legal matters in connection
with the transactions contemplated by this Loan Agreement and the other
Loan Documents shall be reasonably satisfactory in form and substance
to the Lender, and the Lender shall have received such other documents
and legal opinions in respect of any aspect or consequence of the
transactions contemplated hereby or thereby as it shall reasonably
request.
Each Request for Borrowing by the Borrower hereunder shall constitute a
certification by the Borrower of the satisfaction of the conditions precedent
set forth in paragraphs (a)-(c), above, (both as of the date of such Request for
Borrowing and, unless the Borrower otherwise notifies the Lender prior to the
date of such borrowing, as of the date of such borrowing).
Section 6. Representations and Warranties. The Borrower
represents and warrants to the Lender on the date hereof that:
6.01 Financial Condition. (a) The audited consolidated balance
sheets of the Guarantor and its consolidated Subsidiaries as at June 30, 1994
and as at June 30, 1995, and the related consolidated statements of income and
of cash flows for the fiscal years ended on each such date, reported thereon by
Deloitte & Touche, copies of which have heretofore been furnished to the Lender,
are complete and correct and present fairly the consolidated financial condition
of the Guarantor and its consolidated Subsidiaries as at such dates, and the
consolidated results of their operations and their consolidated cash flows for
the fiscal years then ended.
(b) The unaudited consolidated balance sheet of the Guarantor
and its consolidated Subsidiaries as at June 30, 1996, and the related unaudited
consolidated statements of income and of cash flows for the twelve-month period
ended on such date, certified by a Responsible Officer, copies of which have
heretofore been furnished to the Lender, are complete and correct and present
fairly the consolidated financial condition of the Guarantor and its
consolidated Subsidiaries as at such date, and their consolidated cash flows for
the twelve-month period then ended (subject to normal year-end audit
adjustments).
(c) All such financial statements, including the related
schedules and notes thereto, have been prepared in accordance with GAAP applied
consistently throughout the periods involved (except as approved by such
accountants or Responsible Officer, as the case may be, and as disclosed
therein).
(d) Neither the Guarantor nor any of its consolidated
Subsidiaries had, at the date of the most recent balance sheet referred to
above, any material Guarantee Obligation, contingent liability or liability for
taxes, or any long-term lease or unusual forward or long-term commitment,
including, without limitation, any interest rate or foreign currency swap or
exchange transaction, or other financial derivative, which is not reflected in
the foregoing statements or in the notes thereto.
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6.02 No Change. Since June 30, 1996, there has been no
development or event nor any prospective development or event, which has had or
could reasonably be expected to have a Material Adverse Effect.
6.03 Corporate Existence; Compliance with Law. The Borrower
(a) is a corporation duly organized, validly existing and in good standing under
the laws of the jurisdiction of its organization, (b) has the corporate power
and authority, and the legal right, to own and operate its property, to lease
the property it operates as lessee and to carry on its business as now being or
as proposed to be conducted, the lack of which would be reasonably likely to
have a Material Adverse Effect, (c) is duly qualified to do business and is in
good standing under the laws of each jurisdiction in which the nature of the
business conducted by it makes such qualification necessary and where failure so
to qualify would be reasonably likely (either individually or in the aggregate)
to have a Material Adverse Effect, and (d) is in compliance in all material
respects with all Requirements of Law.
6.04 Corporate Power; Authorization; Enforceable Obligations.
(a) The Borrower has the corporate power and authority, and the legal right, to
make, deliver and perform this Loan Agreement, the Note, and each other Loan
Document to which it is a party, and to borrow and to grant Liens hereunder, and
has taken all necessary corporate action to authorize the borrowings and the
granting of Liens on the terms and conditions of this Loan Agreement, the Note,
and each other Loan Document to which it is a party, and the execution, delivery
and performance of this Loan Agreement, the Note, and each other Loan Document
to which it is a party.
(b) No consent or authorization of, approval by, notice to,
filing with or other act by or in respect of, any Governmental Authority or any
other Person is required or necessary in connection with the borrowings
hereunder or with the execution, delivery, performance, validity or
enforceability of this Loan Agreement or the Note or any other Loan Document,
except (i) for filings and recordings in respect of the Liens created pursuant
to this Loan Agreement, and (ii) as previously obtained and currently in full
force and effect.
(c) This Loan Agreement has been duly and validly executed and
delivered by the Borrower and constitutes, and the Note and each other Loan
Document when executed and delivered on behalf of the Borrower will constitute,
a legal, valid and binding obligation of the Borrower, enforceable against the
Borrower in accordance with its terms, except as enforceability may be limited
by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting the enforcement of creditors' rights generally and by general
equitable principles (whether enforcement is sought by proceedings in equity or
at law).
6.05 No Legal Bar. The execution, delivery and performance of
this Loan Agreement and the Note, the borrowings hereunder and the use of the
proceeds thereof will not violate any Requirement of Law or material Contractual
Obligation of the Borrower or of any of its Subsidiaries and will not result in,
or require, the creation or imposition of any Lien
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(other than the Liens created hereunder) on any of its or their respective
properties or revenues pursuant to any such Requirement of Law or material
Contractual Obligation.
6.06 No Material Litigation. There are no actions, suits,
arbitrations, investigations or proceedings of or before any arbitrator or
Governmental Authority pending or, to the knowledge of the Borrower, threatened
against the Borrower or any of its Subsidiaries or against any of its or their
respective properties or revenues, (i) with respect to this Loan Agreement or
the Note or any of the transactions contemplated hereby, or (ii) which could
reasonably be expected to have a Material Adverse Effect.
6.07 No Default. Neither the Borrower nor any of its
Subsidiaries is in default under or with respect to any of its Contractual
Obligations in any respect which could reasonably be expected to have a Material
Adverse Effect. No Default or Event of Default has occurred and is continuing.
6.08 Collateral; Collateral Security.
(a) The Borrower has not assigned, pledged, or otherwise
conveyed or encumbered any of the Collateral to any Person other than the
Lender, and immediately prior to the pledge of such Contract, the Borrower was
the sole owner of the Collateral and had good and marketable title thereto, free
and clear of all Liens, in each case except for Liens to be released
simultaneously with the Liens granted in favor of the Lender hereunder.
(b) The provisions of this Loan Agreement are effective to
create in favor of the Lender a valid first priority security interest in all
right, title and interest of the Borrower in, to and under the Collateral.
(c) Upon receipt by the Custodian of each Contract File, and
the filing of financing statements on Form UCC-1 naming the Lender as "Secured
Party" and the Borrower as "Debtor", and describing the Collateral, in the
jurisdictions and recording offices listed on Schedule 2 attached hereto, the
security interests granted hereunder in the Collateral will constitute fully
perfected first-priority security interests under the Uniform Commercial Code in
all right, title and interest of the Borrower in, to and under such Collateral,
which can be perfected by filing or possession under the Uniform Commercial
Code.
6.09 Chief Executive Office. The Borrower's chief executive
office on the Effective Date is located at 500 Hyde Park, Doylestown,
Pennsylvania, 18901.
6.10 Location of Books and Records. The location where the
Borrower keeps its books and records, including all computer tapes and records
relating to the Collateral is its chief executive office.
6.11 No Burdensome Restrictions. No Requirement of Law or
Contractual Obligation of the Borrower or any of its Subsidiaries has a Material
Adverse Effect.
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6.12 Taxes. Each of the Borrower and its Subsidiaries has
filed all Federal income tax returns and all other material tax returns that are
required to be filed by them and has paid all taxes due pursuant to such returns
or pursuant to any assessment received by any of them, except for any such taxes
or assessments, if any, that are being appropriately contested in good faith by
appropriate proceedings diligently conducted and with respect to which adequate
reserves in conformity with GAAP have been provided. No tax Lien has been filed,
and, to the knowledge of the Borrower, no claim is being asserted, with respect
to any such tax or assessment.
6.13 Margin Regulations. Neither the making of any Loan
hereunder, nor the use of the proceeds thereof, will violate or be inconsistent
with the provisions of Regulation G, T, U or X.
6.14 Investment Company Act; Other Regulations. The Borrower
is not an "investment company", or a company "controlled" by an "investment
company", within the meaning of the Investment Company Act of 1940, as amended.
The Borrower is not subject to regulation under any Federal or state statute or
regulation which limits its ability to incur indebtedness.
6.15 Subsidiaries. All of the Subsidiaries of the Borrower at
the date hereof are listed on Schedule 3 to this Loan Agreement.
6.16 Third Party Representations. Each of the representations
and warranties made by the Guarantor in the Guarantee is true and correct in all
material respects.
6.17 Eligible Contracts. With respect to every Contract
delivered or to be delivered to the Custodian, the representations and
warranties set forth on Schedule 1 hereto applicable thereto are true and
correct.
6.18 Bulk Transfer. The transfer, assignment and conveyance of
the Contracts and the Contract Documents by the Borrower pursuant to this Loan
Agreement are not subject to the bulk transfer or any similar statutory
provisions in effect in any applicable jurisdiction.
6.19 Origination and Collection of Contracts. The Contracts
were originated or acquired by the Borrower, and the origination and collection
practices used by the Borrower with respect to each Contract have been, in all
respects legal, proper, prudent and customary in the equipment financing and
servicing business, and in accordance with the Underwriting Guidelines. With
respect to Contracts acquired by the Borrower, all such Contracts are in
conformity with the Underwriting Guidelines.
6.20 No Adverse Selection. The Borrower used no selection
procedures that identified the Contracts as being less desirable or valuable
than other comparable equipment leases, security agreements or installment sales
contracts owned by the Borrower.
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6.21 Contracts are Financing Leases or Security Agreements.
(A) All of the Contracts other than FMV Leases are financing leases intended to
create a security interest in accordance with Section 1-201(37) of the Uniform
Commercial Code or security agreements which create a valid security interest
under the Uniform Commercial Code, (B) the Borrower does not own the Equipment
that is the subject of the Contracts other than FMV Leases and (C) the Borrower
has a perfected first priority Lien in the Equipment that is subject to
Contracts other than FMV Leases.
6.22 Borrower Solvent. As of the date hereof and immediately
after giving effect to each Loan, the fair value of the property of the Borrower
is greater than the fair value of the liabilities (including, without
limitation, contingent liabilities) of the Borrower and the Borrower is and will
be solvent, is and will be able to pay its debts as they mature and is and will
not have an unreasonably small capital to engage in the business in which it is
engaged and proposes to engage.
6.23 ERISA. Neither a Reportable Event nor an "accumulated
funding deficiency" (within the meaning of Section 412 of the Code or Section
302 of ERISA) has occurred during the five-year period prior to the date on
which this representation is made or deemed made with respect to any Plan, and
each Plan has complied in all material respects with the applicable provisions
of ERISA and the Code. No termination of a Single Employer Plan has occurred,
and no Lien in favor of the PBGC or a Plan has arisen, during such five-year
period. The present value of all accrued benefits under each Single Employer
Plan (based on those assumptions used to fund such Plans) did not, as of the
last annual valuation date prior to the date on which this representation is
made or deemed made, exceed the value of the assets of such Plan allocable to
such accrued benefits. Neither the Borrower nor any Commonly Controlled Entity
has had a complete or partial withdrawal from any Multiemployer Plan, and
neither the Borrower nor any Commonly Controlled Entity would become subject to
any liability under ERISA if the Borrower or any such Commonly Controlled Entity
were to withdraw completely from all Multiemployer Plans as of the valuation
date most closely preceding the date on which this representation is made or
deemed made. No such Multiemployer Plan is in reorganization or insolvent.
Except as set forth in the financial statements referred to in Section 6.01(a)
and (b), neither the Borrower nor any Commonly Controlled Entity has any
material liability with respect to "expected post retirement benefit
obligations" within the meaning of Statement of Financial Account Standards No.
106.
6.24 Environmental Matters.
(a) To the best knowledge of the Borrower, the facilities and
properties owned, leased or operated by the Guarantor or any of its Subsidiaries
(the "Properties") do not contain, and have not previously contained, any
Materials of Environmental Concern in amounts or concentrations which (i)
constitute or constituted a violation of, or (ii) could reasonably be expected
to give rise to liability under, any Environmental Law except in either case
insofar as such violation or liability, or any aggregation thereof, is not
reasonably likely to have a Material Adverse Effect.
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(b) To the best knowledge of the Borrower, there has been no
release or threat of release of Materials of Environmental Concern at or from
the Properties, or arising from or related to the operations of the Guarantor or
any Subsidiary in connection with the Properties or otherwise in connection with
the Business, in violation of or in amounts or in a manner that could reasonably
give rise to liability under Environmental Laws except insofar as any such
violation or liability referred to in this paragraph, or any aggregation
thereof, is not reasonably likely to have a Material Adverse Effect.
Section 7. Covenants of the Borrower. The Borrower covenants
and agrees with the Lender that, so long as any Loan is outstanding and until
payment in full of all Secured Obligations:
7.01 Financial Statements. The Borrower shall deliver to the
Lender:
(a) as soon as available and in any event within fifty (50)
days after the end of each of the first three quarterly fiscal periods
of each fiscal year of the Guarantor, the consolidated and
consolidating balance sheets of the Guarantor and its consolidated
Subsidiaries as at the end of such period and the related unaudited
consolidated and consolidating statements of income and retained
earnings and of cash flows for the Guarantor and its consolidated
Subsidiaries for such period and the portion of the fiscal year through
the end of such period, setting forth in each case in comparative form
the figures for the previous year, accompanied by a certificate of a
Responsible Officer of the Guarantor, which certificate shall state
that said consolidated financial statements fairly present the
consolidated and consolidating financial condition and results of
operations of the Guarantor and its Subsidiaries in accordance with
GAAP, consistently applied, as at the end of, and for, such period
(subject to normal year-end audit adjustments);
(b) as soon as available and in any event within ninety-five
(95) days after the end of each fiscal year of the Guarantor, the
audited consolidated and consolidating balance sheets of the Guarantor
and its consolidated Subsidiaries as at the end of such fiscal year and
the related consolidated and consolidating statements of income and
retained earnings and of cash flows for the Guarantor and its
consolidated Subsidiaries for such year, setting forth in each case in
comparative form the figures for the previous year, accompanied by an
opinion thereon of independent certified public accountants of
recognized national standing, which opinion shall not be qualified as
to scope of audit or going concern and shall state that said
consolidated and consolidating financial statements fairly present the
consolidated and consolidating financial condition and results of
operations of the Guarantor and its consolidated Subsidiaries as at the
end of, and for, such fiscal year in accordance with GAAP, and a
certificate of such accountants stating that, in making the examination
necessary for their opinion, they obtained no knowledge, except as
specifically stated, of any Default or Event of Default;
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(c) as soon as available, the annual report of the Guarantor
on Form 10-K as filed with the Securities and Exchange Commission for
each fiscal year; and
(d) from time to time such other information regarding the
financial condition, operations, or business of the Guarantor and its
Subsidiaries as the Lender may reasonably request.
7.02 Existence, Etc. The Borrower will:
(a) preserve and maintain its legal existence and all of its
material rights, privileges, licenses and franchises;
(b) comply with the requirements of all applicable laws,
rules, regulations and orders of Governmental Authorities (including,
without limitation, all environmental laws) if failure to comply with
such requirements would be reasonably likely (either individually or in
the aggregate) to have a Material Adverse Effect; and
(c) keep adequate records and books of account, in which
complete entries will be made in accordance with GAAP consistently
applied.
7.03 Insurance. The Borrower shall maintain insurance with
financially sound and reputable insurance companies, and with respect to
property and risks of a character usually maintained by entities engaged in the
same or similar business similarly situated, against loss, damage and liability
of the kinds and in the amounts customarily maintained by such entities.
7.04 Prohibition of Fundamental Changes. The Borrower shall
not enter into any transaction of merger or consolidation or amalgamation, or
liquidate, wind up or dissolve itself (or suffer any liquidation, winding up or
dissolution) or sell all or substantially all of its assets; provided, however,
that the Borrower may merge or consolidate with any other Person if (i) the
surviving entity assumes all of the obligations of the Borrower hereunder, and
(ii) immediately after giving effect to such merger or consolidation, (A) the
net worth of the surviving entity is not less than the net worth of the Borrower
immediately prior to such transaction and (B) the rating assigned to the
Guarantor by each of Standard and Poor's Ratings Group and Moody's Investors
Service, Inc. is not less than the rating assigned to the Guarantor immediately
prior to such transaction.
7.05 Notices. The Borrower shall give notice to the Lender,
promptly upon the Borrower obtaining notice thereof:
(a) of the occurrence of any Default or Event of Default;
(b) of any default related to any Collateral, any Material
Adverse Effect and any event or change in circumstances which could
reasonably be expected to have a Material Adverse Effect;
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(c) in any event within ten (10) days after service of process
on the Borrower or the Guarantor or any of its Subsidiaries, or any
agent thereof for service of process, notice of all legal or arbitrable
proceedings affecting the Borrower or the Guarantor or any of its
Subsidiaries that questions or challenges the validity or
enforceability of any of the Loan Documents;
(d) in any event within thirty (30) days of the following
events: (i) the occurrence or expected occurrence of any Reportable
Event with respect to any Plan, a failure to make any required
contribution to a Plan, the creation of any Lien in favor of the PBGC
or a Plan or any withdrawal from, or the termination, reorganization or
insolvency of, any Multiemployer Plan or (ii) the institution of
proceedings or the taking of any other action by the PBGC or the
Borrower or any Commonly Controlled Entity or any Multiemployer Plan
with respect to the withdrawal from, or the terminating, reorganization
or insolvency of, any Plan; and
(e) any of Michael O'Hanlon, Anthony Turek, Steven Garfinkel,
Dominic Gugliemi, Michael Disch, Alan Velotta, Richard Miller, Cynthia
Cohn or Ray Fear shall die, suffer an inability to work for six (6) or
more consecutive months, or shall no longer be employed by the
Guarantor, the Borrower or any of the other Subsidiaries of the
Guarantor.
Each notice pursuant to this Section shall be accompanied by a statement of a
Responsible Officer of the Borrower setting forth details of the occurrence
referred to therein and stating what action the Borrower has taken or proposes
to take with respect thereto.
7.06 Periodic Due Diligence Review. The Borrower acknowledges
that the Lender has the right to perform continuing due diligence reviews with
respect to the Contracts, for purposes of verifying compliance with the
representations, warranties and specifications made hereunder, or otherwise, and
the Borrower agrees that upon reasonable (but no less than three (3) Business
Days) prior notice to the Borrower, the Lender or its authorized representatives
will be permitted during normal business hours to examine, inspect, make copies
of, and make extracts of, the Contract Files and any and all documents, records,
agreements, instruments or information relating to such Contracts in the
possession, or under the control, of the Borrower. The Borrower further agrees
that the Borrower shall reimburse the Lender for the out-of-pocket costs and
expenses incurred by the Lender in connection with the Lender's activities
pursuant to this Section 7.06, which reimbursement shall be limited to $5,000
annually; provided, that such $5,000 annual limit shall not apply to costs and
expenses incurred by the Lender hereunder after the occurrence and during the
continuation of an Event of Default.
7.07. Limitation on Liens on Collateral. The Borrower will
not, nor will it permit or allow others to, create, incur or permit to exist any
Lien on the Collateral, other than the Lien created hereby. The Borrower will
defend the Collateral against, and will take such other action as is necessary
to remove, any Lien on the Collateral, other than the Lien created hereby, and
the Borrower will defend the right, title and interest of the Lender in and to
any.
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7.08 Certain Equipment Leases; Certain Equipment Loans
(a) With respect to each Equipment Lease pledged to the Lender
hereunder consisting of a master lease (a "Master Lease") supplemented with a
certificate of delivery and master equipment schedules (each, a "Supplement"),
the Borrower shall (i) deliver each original Supplement to the Custodian,
stamped "Secured Party's Original", together with a certified copy of the
related Master Lease (showing the stamped statement required under (iii), below,
for inclusion in the Contract File in accordance with the terms of the Custodial
Agreement), (ii) maintain exclusive possession of each original Master Lease and
not permit any third-party to take possession thereof, (iii) not stamp any
Supplement "Secured Party's Original" other than the original Supplement
delivered to the Custodian, and (iv) stamp each Master Lease with a statement to
the effect that no security interest in a Supplement may be created through the
transfer or possession of any counterpart of the original Supplement other than
that Supplement marked "Secured Party's Original" and a certified copy of the
Master Lease.
(b) With respect to each Equipment Loan pledged to the Lender
hereunder consisting of a loan and security agreement or an installment sale
contract (an "Obligor Loan Agreement") supplemented with a certificate of
delivery and master equipment schedules (each, an "Equipment Schedule"), the
Borrower shall (i) deliver each original Equipment Schedule to the Custodian,
stamped "Secured Party's Original", together with a certified copy of the
related Obligor Loan Agreement (showing the stamped statement required under
(iii), below, for inclusion in the Contract File in accordance with the terms of
the Custodial Agreement), (ii) maintain exclusive possession of each original
Obligor Loan Agreement and not permit any third-party to take possession
thereof, (iii) not stamp any Equipment Schedule "Secured Party's Original" other
than the original Equipment Schedule delivered to the Custodian, (iv) stamp each
Obligor Loan Agreement with a statement to the effect that no security interest
in a Equipment Schedule may be created through the transfer or possession of any
counterpart of the original Equipment Schedule other than that Equipment
Schedule marked "Secured Party's Original" and a certified copy of the Obligor
Loan Agreement, and (v) if any promissory note or promissory notes were executed
in connection with the origination of such Equipment Loan or otherwise, deliver
such original promissory note or promissory notes to the Custodian.
7.09 Underwriting Guidelines. Without prior written notice to
the Lender, the Borrower shall not amend or otherwise modify the Underwriting
Guidelines.
7.10 Limitation on Transactions with Affiliates. The Borrower
shall not enter into any transaction, including, without limitation, any
purchase, sale, lease or exchange of property or the rendering of any service,
with any Affiliate unless such transaction is (a) not otherwise prohibited under
this Loan Agreement, (b) in the ordinary course of the Borrower's business and
(c) upon fair and reasonable terms no less favorable to the Borrower, as the
case may be, than it would obtain in a comparable arm's length transaction with
a Person which is not an Affiliate.
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7.11 Limitation on Changes in Fiscal Year. The Borrower shall
not permit its fiscal year to end on a day other than June 30.
7.12 Limitation on Lines of Business. The Borrower shall
notify the Lender in writing no later than two (2) Business Days prior to any
Funding Date, if it shall have entered into any line of business, either
directly or through any Subsidiary, other than those lines of businesses in
which the Borrower and its Subsidiaries are engaged on the date of this Loan
Agreement or which are directly related thereto, unless the Borrower has
previously notified the Lender in writing thereof.
7.13 Limitations on Modifications, Waivers and Extensions of
Contracts. The Borrower will not, nor will it permit or allow others to, amend,
modify, terminate or waive any provision of any Contract to which the Borrower
is a party in any manner which could reasonably be expected to materially
adversely affect the value of such Contract as Collateral. The Borrower will (i)
exercise promptly and diligently each and every material right which the
Borrower may have under each Contract (other than any right of termination, but
including the enforcement of warranty, servicing and other obligations of
manufacturers and other parties) except where the failure to so act could not
materially adversely affect the value of such Contract as Collateral and (ii)
deliver to the Lender a copy of each material demand, notice or document
received by it relating in any way to any Contract other than any such demand,
notice or document relating to the delinquency of a Contract or the bankruptcy
of the obligor thereunder.
7.14 Further Identification of Collateral. The Borrower will
furnish to the Lender from time to time statements and schedules further
identifying and describing the Collateral and such other reports in connection
with the Collateral as the Lender may reasonably request, all in reasonable
detail.
7.15 Limitation on Collection Account. The Borrower will not,
nor will it permit or allow others on its behalf to, establish a collection
account for the receipt of payments pursuant to the Contracts with a financial
institution other than one acceptable to the Lender in the exercise of its
reasonable discretion and upon such terms as reasonably required by the Lender.
7.16 Limitation on Sale or Other Disposition of Collateral.
The Borrower will not sell, lease, transfer, assign or otherwise dispose of any
Collateral, except that Borrower may transfer, assign or otherwise dispose of
Collateral if (i) no Default or Event of Default has occurred and is continuing,
(ii) the Borrower provides the Lender with at least two (2) Business Days'
advance notice thereof, (iii) the Borrower has demonstrated to the Lender's
reasonable satisfaction, as expressed by the Lender in writing, that after
giving effect to such sale, lease, transfer, assignment or other disposition, no
Borrowing Base Deficiency shall exist, and (iv) such sale, lease, transfer,
assignment or other disposition satisfies such other terms and conditions as the
Lender may reasonably specify in advance of such sale, lease, transfer,
assignment or other disposition.
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7.17 Repayment of Loans if Contract is Found Defective. (a)
Upon discovery by the Borrower or the Lender of any breach of any representation
or warranty listed on Schedule 1 hereto applicable to any Contract, the party
discovering such breach shall promptly give notice of such discovery to the
other.
(b) The Lender has the right, in its unreviewable discretion,
to require the Borrower to prepay the amount of any Loan made in respect of, or
at the option of the Borrower, to substitute an Eligible Contract for, any
Contract (i) which breaches one or more of the representations and warranties
applicable thereto listed on Schedule 1 hereto or (ii) which is determined in
the reasonable judgment of the Lender to be unacceptable for inclusion in a
securitized pool relating to the Certificates, in each case no later than two
(2) Business Days after receipt by the Borrower of notice thereof from the
Lender.
7.18 Monthly Officer's Certificate. The Borrower shall deliver
to the Lender, no later than thirty (30) days after the last day of each
calendar month, a certificate of a Responsible Officer of the Borrower to the
effect that, (i) to the best of such Responsible Officer's knowledge, each of
the Borrower and the Guarantor during such calendar month has observed or
performed in all material respects all of its covenants (including, without
limitation, the financial covenants set forth in the Guarantee) and other
agreements, and satisfied every condition, contained in this Loan Agreement and
the other Loan Documents to be observed, performed or satisfied by it
(accompanied by supporting documentation and calculations showing such
compliance in a covenant compliance certificate in the form of Exhibit G hereto
(a "Covenant Compliance Certificate")), (ii) that such Responsible Officer has
obtained no knowledge of any Default or Event of Default except as specified in
such certificate (and, if any Default or Event of Default has occurred and is
continuing, describing the same in reasonable detail and describing the action
the Borrower has taken or proposes to take with respect thereto), (iii)
attaching a borrowing base certificate substantially in the form of Exhibit F
hereto (a "Borrowing Base Certificate") setting forth the Borrowing Base as at
the most recent Interest Payment Date to occur prior thereto, and (iv) attaching
an updated Contract Schedule.
7.19 Data Pool Report. The Borrower shall deliver to the
Lender, one (1) Business Day prior to each Funding Date and no later than five
(5) days after the end of each calendar quarter, (i) a complete "Data Pool"
profile report including the following categories: type of Equipment,
transaction size, end user discipline and the Borrower's percentage approval
ratio, substantially in the form of Exhibit H hereto, and (ii) a computer
readable diskette or electronic transmission containing information reasonably
requested by the Lender to enable the Lender to generate its own reports in
respect of the Contracts and other Collateral pledged hereunder.
Section 8. Events of Default. Each of the following events
shall constitute an event of default (an "Event of Default") hereunder:
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(a) the Borrower shall default in the payment of any principal
of or interest on any Loan when due (whether at stated maturity, upon
acceleration or at mandatory or optional prepayment); or
(b) the Borrower shall default in the payment of any other
amount payable by it hereunder or under any other Loan Document after
receipt by the Borrower of a written demand therefor by the Lender, and
such default shall have continued unremedied for five Business Days; or
(c) any representation, warranty or certification made or
deemed made by the Borrower herein (other than those in Schedule 1
hereto) or by the Borrower or the Guarantor in any other Loan Document
or any certificate furnished to the Lender pursuant to the provisions
thereof, shall prove to have been false or misleading in any material
respect as of the time made or furnished; or
(d) the Borrower shall fail to comply with the requirements of
Section 2.06 or Section 7 hereof (other than Sections 7.01, 7.13(ii),
7.14, 7.18 and 7.19); or the Borrower shall otherwise fail to comply
with the requirements of Sections 7.01, 7.13(ii), 7.14, 7.18 or 7.19
and such default shall continue unremedied for a period of five (5)
Business Days; or the Borrower shall fail to observe or perform any
other agreement contained in this Loan Agreement or any other Loan
Document and such failure to observe or perform shall continue
unremedied for a period of fifteen (15) Business Days; or
(e) the Guarantor shall fail to comply with the requirements
of paragraph 10 of the Guarantee; or the Guarantor shall fail to
observe or perform any other agreement contained in the Guarantee and
such failure to observe or perform shall continue unremedied for a
period of fifteen (15) Business Days; or
(f) a final judgment or judgments for the payment of money in
excess of $2,000,000 in the aggregate shall be rendered against the
Borrower or any of its Subsidiaries or the Guarantor by one or more
courts, administrative tribunals or other bodies having jurisdiction
over them and the same shall not be discharged (or provision shall not
be made for such discharge) or bonded, or a stay of execution thereof
shall not be procured, within 60 days from the date of entry thereof
and the Borrower or any such Subsidiary or the Guarantor shall not,
within said period of 60 days, or such longer period during which
execution of the same shall have been stayed or bonded, appeal
therefrom and cause the execution thereof to be stayed during such
appeal; or
(g) the Guarantor or the Borrower shall admit in writing its
inability to pay its debts as such debts become due; or
(h) the Guarantor or the Borrower or any of its Subsidiaries
shall (i) apply for or consent to the appointment of, or the taking of
possession by, a receiver, custodian, trustee, examiner or liquidator
of itself or of all or a substantial part of its property, (ii) make a
general assignment for the benefit of its creditors, (iii) commence
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a voluntary case under the Bankruptcy Code, (iv) file a petition
seeking to take advantage of any other law relating to bankruptcy,
insolvency, reorganization, liquidation, dissolution, arrangement or
winding-up, or composition or readjustment of debts, (v) fail to
controvert in a timely and appropriate manner, or acquiesce in writing
to, any petition filed against it in an involuntary case under the
Bankruptcy Code or (vi) take any corporate or other action for the
purpose of effecting any of the foregoing; or
(i) a proceeding or case shall be commenced, without the
application or consent of the Guarantor, the Borrower or any of its
Subsidiaries, in any court of competent jurisdiction, seeking (i) its
reorganization, liquidation, dissolution, arrangement or winding-up, or
the composition or readjustment of its debts, (ii) the appointment of a
receiver, custodian, trustee, examiner, liquidator or the like of the
Borrower or any such Subsidiary or of all or any substantial part of
its property, or (iii) similar relief in respect of the Borrower or any
such Subsidiary under any law relating to bankruptcy, insolvency,
reorganization, winding-up, or composition or adjustment of debts, and
such proceeding or case shall continue undismissed, or an order,
judgment or decree approving or ordering any of the foregoing shall be
entered and continue unstayed and in effect, for a period of 60 or more
days; or an order for relief against the Borrower or any such
Subsidiary shall be entered in an involuntary case under the Bankruptcy
Code; or
(j) the Custodial Agreement or the Guarantee shall for
whatever reason be terminated or cease to be in full force and effect,
or the enforceability thereof shall be contested by any party thereto;
or
(k) (i) Any Person shall engage in any "prohibited
transaction" (as defined in Section 406 of ERISA or Section 4975 of the
Code) involving any Plan, (ii) any "accumulated funding deficiency" (as
defined in Section 302 of ERISA), whether or not waived, shall exist
with respect to any Plan or any Lien in favor of the PBGC or a Plan
shall arise on the assets of the Borrower or any Commonly Controlled
Entity, (iii) a Reportable Event shall occur with respect to, or
proceedings shall commence to have a trustee appointed, or a trustee
shall be appointed, to administer or to terminate, any Single Employer
Plan, which Reportable Event or commencement of proceedings or
appointment of a trustee is, in the reasonable opinion of the Required
Lenders, likely to result in the termination of such Plan for purposes
of Title IV of ERISA, (iv) any Single Employer Plan shall terminate for
purposes of Title IV of ERISA, (v) the Borrower or any Commonly
Controlled Entity shall, or in the reasonable opinion of the Required
Lenders is likely to, incur any liability in connection with a
withdrawal from, or the insolvency or reorganization of, a
Multiemployer Plan or (vi) any other event or condition shall occur or
exist with respect to a Plan; and in each case in clauses (i) through
(vi) above, such event or condition, together with all other such
events or conditions, if any, could reasonably be expected to have a
Material Adverse Effect; or
(l) (i) the Guarantor shall at any time own, beneficially and
of record, less than 100% of all of the issued and outstanding shares
of Capital Stock of the Borrower
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having ordinary voting rights for the election of directors, or (ii)
the Pritzker family, Gerald Cohn and members of his immediate family
and David Higgins, on a combined basis, shall at any time own,
beneficially and of record, less than the greater of (x) 20% of all of
the issued and outstanding shares of Capital Stock of the Guarantor
having ordinary voting rights for the election of directors, or (y)
such greater percentage as is necessary so that such Persons constitute
the single largest block of shareholders of such issued and outstanding
shares Capital Stock of the Guarantor; or
(m) any four (4) of Michael O'Hanlon, Anthony Turek, Steven
Garfinkel, Dominic Gugliemi, Michael Disch, Alan Velotta, Richard
Miller, Cynthia Cohn or Ray Fear shall die, suffer an inability to work
for six (6) or more consecutive months, or shall no longer be employed
by the Guarantor, the Borrower or any of the other Subsidiaries of the
Guarantor; or
(n) any other event shall occur which, in the sole discretion
of the Lender, has had a Material Adverse Effect.
Section 9. Remedies Upon Default.
(a) Upon the occurrence of one or more Events of Default other
than those referred to in Section 8(h) or (i) with respect to the Borrower, the
Lender may immediately declare the principal amount of the Loans then
outstanding under the Note to be immediately due and payable, together with all
interest thereon and fees and expenses accruing under this Loan Agreement;
provided that upon the occurrence of an Event of Default referred to in Sections
8(h) or (i), such amounts shall immediately and automatically become due and
payable without any further action by any Person. Upon such declaration or such
automatic acceleration, the balance then outstanding on the Note shall become
immediately due and payable, without presentment, demand, protest or other
formalities of any kind, all of which are hereby expressly waived by the
Borrower.
(b) Upon the occurrence of one or more Events of Default, the
Lender shall, in addition to the remedies set forth in Section 4.07 hereof, have
the right to obtain physical possession of the Servicing Records and all other
files of the Borrower relating to the Collateral and all documents relating to
the Collateral which are then or may thereafter come in to the possession of the
Borrower or any third party acting for the Borrower and the Borrower shall
deliver to the Lender such assignments as the Lender shall reasonably request.
The Lender shall be entitled to specific performance of all agreements of the
Borrower contained in this Loan Agreement.
Section 10. No Duty on Lender's Part. The powers conferred on
the Lender hereunder are solely to protect the Lender's interests in the
Collateral and shall not impose any duty upon it to exercise any such powers.
The Lender shall be accountable only for amounts that it actually receives as a
result of the exercise of such powers, and neither it nor any of its officers,
directors, employees or agents shall be responsible to the Borrower for any act
or failure to act hereunder, except for its or their own gross negligence or
willful misconduct.
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Section 11. Miscellaneous.
11.01 Waiver. No failure on the part of the Lender to exercise
and no delay in exercising, and no course of dealing with respect to, any right,
power or privilege under any Loan Document shall operate as a waiver thereof,
nor shall any single or partial exercise of any right, power or privilege under
any Loan Document preclude any other or further exercise thereof or the exercise
of any other right, power or privilege. The remedies provided herein are
cumulative and not exclusive of any remedies provided by law.
11.02 Notices. Except as otherwise expressly permitted by this
Loan Agreement, all notices, requests and other communications provided for
herein and under the other Loan Documents (including, without limitation, any
modifications of, or waivers, requests or consents under, this Loan Agreement)
shall be given or made in writing (including, without limitation, by telex or
telecopy) delivered to the intended recipient at the "Address for Notices"
specified below its name on the signature pages hereof); or, as to any party, at
such other address as shall be designated by such party in a written notice to
each other party. Except as otherwise provided in this Loan Agreement and except
for notices given under Section 2 (which shall be effective only on receipt),
all such communications shall be deemed to have been duly given when transmitted
by telex or telecopier or personally delivered or, in the case of a mailed
notice, upon receipt, in each case given or addressed as aforesaid.
11.03 Indemnification and Expenses.
(a) The Borrower agrees to indemnify and hold harmless the
Lender and each of its Affiliates and their officers, directors, employees,
agents and advisors (each, an "Indemnified Party") from and against any and all
claims, damages, losses, liabilities, judgments, costs and expenses of any kind
which may be imposed on, incurred by, or asserted against any Indemnified Party,
relating to or arising out of, this Loan Agreement, the Note, any other Loan
Document or any transaction contemplated hereby or thereby, or any amendment,
supplement or modification of, or any waiver or consent under or in respect of,
this Loan Agreement, the Note, any other Loan Document or any transaction
contemplated hereby or thereby, that, in each case, results from anything other
than such Indemnified Party's gross negligence or willful misconduct. In any
suit, proceeding or action brought by any Indemnified Party in connection with
any Contract for any sum owing thereunder, or to enforce any provisions of any
Contract, the Borrower will save, indemnify and hold such Indemnified Party
harmless from and against all expense, loss or damage suffered by reason of any
defense, set-off, counterclaim, recoupment or reduction or liability whatsoever
of the account debtor or obligor thereunder, arising out of a breach by the
Borrower of any obligation thereunder or arising out of any other agreement,
indebtedness or liability at any time owing to or in favor of such account
debtor or obligor or its successors from the Borrower. The Borrower also agrees
to reimburse the Lender for all its costs and expenses incurred in connection
with the enforcement or the preservation of the Lender's rights under this Loan
Agreement, the Note, any other Loan Document or any transaction contemplated
hereby or thereby, including without limitation the reasonable fees and
disbursements of its counsel. The Borrower hereby acknowledges that,
notwithstanding the fact that the Note is secured by the
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Collateral, the obligation of the Borrower under the Secured Note is a recourse
obligation of the Borrower.
(b) The Borrower agrees to pay as and when billed by the
Lender all of the reasonable out-of-pocket costs and expenses incurred by the
Lender in connection with the development, preparation and execution of, and any
amendment, supplement or modification to, this Loan Agreement, the Note, any
other Loan Document or any other documents prepared in connection herewith or
therewith. The Borrower agrees to pay as and when billed by the Lender all of
the reasonable out-of-pocket costs and expenses incurred in connection with the
consummation and administration of the transactions contemplated hereby and
thereby including, without limitation, all the reasonable fees, disbursements
and expenses of Cadwalader, Wickersham & Taft, counsel to the Lender, and those
costs and expenses payable to the Lender pursuant to Section 7.06 hereof.
11.04 Amendments. Except as otherwise expressly provided in
this Loan Agreement, any provision of this Loan Agreement may be modified or
supplemented only by an instrument in writing signed by the Borrower and the
Lender and any provision of this Loan Agreement may be waived by the Lender.
11.05 Successors and Assigns, Etc.. This Loan Agreement shall
be binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns. The Lender may, in accordance with
applicable law, at any time sell to one or more lenders participating interests
in the Loans, the Note or any other interest of the Lender hereunder and under
the other Loan Documents, or assign and transfer all or any of its rights or
obligations under any Loan Document to one or more lenders at any time;
provided, however, that in any such transaction, the Lender shall remain as
agent for any such other lender or lenders. The Borrower may not assign any of
its rights or obligations hereunder or under any other Loan Document without the
prior written consent of the Lender.
11.06 Survival. The obligations of the Borrower under Section
2.07 and 11.03 hereof shall survive the repayment of the Loans and the
termination of this Loan Agreement. In addition, each representation and
warranty made, or deemed to be made by a request for a borrowing, herein or
pursuant hereto shall survive the making of such representation and warranty,
and the Lender shall not be deemed to have waived, by reason of making any Loan,
any Default that may arise by reason of such representation or warranty proving
to have been false or misleading, notwithstanding that the Lender may have had
notice or knowledge or reason to believe that such representation or warranty
was false or misleading at the time such Loan was made.
11.07 Captions. The table of contents and captions and section
headings appearing herein are included solely for convenience of reference and
are not intended to affect the interpretation of any provision of this Loan
Agreement.
11.08 Counterparts. This Loan Agreement may be executed in any
number of counterparts, all of which taken together shall constitute one and the
same instrument, and any of the parties hereto may execute this Loan Agreement
by signing any such counterpart.
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11.09 Loan Agreement Constitutes Security Agreement; Governing
Law. This Loan Agreement shall be governed by New York law without reference to
choice of law doctrine, and shall constitute a security agreement within the
meaning of the Uniform Commercial Code.
11.10 SUBMISSION TO JURISDICTION; WAIVERS. THE BORROWER HEREBY
IRREVOCABLY AND UNCONDITIONALLY:
(A) SUBMITS FOR ITSELF AND ITS PROPERTY IN ANY LEGAL ACTION OR
PROCEEDING RELATING TO THIS LOAN AGREEMENT, THE NOTE AND THE OTHER LOAN
DOCUMENTS, OR FOR RECOGNITION AND ENFORCEMENT OF ANY JUDGMENT IN
RESPECT THEREOF, TO THE NON-EXCLUSIVE GENERAL JURISDICTION OF THE
COURTS OF THE STATE OF NEW YORK, THE FEDERAL COURTS OF THE UNITED
STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK, AND APPELLATE
COURTS FROM ANY THEREOF;
(B) CONSENTS THAT ANY SUCH ACTION OR PROCEEDING MAY BE BROUGHT
IN SUCH COURTS AND, TO THE EXTENT PERMITTED BY LAW, WAIVES ANY
OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH
ACTION OR PROCEEDING IN ANY SUCH COURT OR THAT SUCH ACTION OR
PROCEEDING WAS BROUGHT IN AN INCONVENIENT COURT AND AGREES NOT TO PLEAD
OR CLAIM THE SAME;
(C) AGREES THAT SERVICE OF PROCESS IN ANY SUCH ACTION OR
PROCEEDING MAY BE EFFECTED BY MAILING A COPY THEREOF BY REGISTERED OR
CERTIFIED MAIL (OR ANY SUBSTANTIALLY SIMILAR FORM OF MAIL), POSTAGE
PREPAID, TO ITS ADDRESS SET FORTH UNDER ITS SIGNATURE BELOW OR AT SUCH
OTHER ADDRESS OF WHICH THE LENDER SHALL HAVE BEEN NOTIFIED IN
ACCORDANCE WITH SECTION 11.02 HEREOF; AND
(D) AGREES THAT NOTHING HEREIN SHALL AFFECT THE RIGHT TO
EFFECT SERVICE OF PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL
LIMIT THE RIGHT TO SUE IN ANY OTHER JURISDICTION.
11.11 WAIVER OF JURY TRIAL. EACH OF THE BORROWER AND THE
LENDER HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE
LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF
OR RELATING TO THIS LOAN AGREEMENT, ANY OTHER LOAN DOCUMENT OR THE TRANSACTIONS
CONTEMPLATED HEREBY OR THEREBY.
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11.12 Acknowledgments. The Borrower hereby acknowledges that:
(a) it has been advised by counsel in the negotiation,
execution and delivery of this Loan Agreement, the Note and the other
Loan Documents;
(b) the Lender has no fiduciary relationship to the Borrower,
and the relationship between the Borrower and the Lender is solely that
of debtor and creditor; and
(c) no joint venture exists between the Lender and the
Borrower.
11.13 Hypothecation or Pledge of Loans. The Lender shall have
free and unrestricted use of all Collateral and nothing in this Agreement shall
preclude the Lender from engaging in repurchase transactions with the Collateral
or otherwise pledging, repledging, transferring, hypothecating, or
rehypothecating the Collateral. Nothing contained in this Loan Agreement shall
obligate the Lender to segregate any Collateral delivered to the Lender by the
Borrower.
11.14 Servicing.
(a) The Borrower shall service and administer the Contracts in
accordance with due care and customary and prudent servicing procedures for
equipment leases, security agreements and installment sale contracts of a
similar type and, prior to the occurrence of an Event of Default, shall have
full power and authority to do any and all things not inconsistent with the
provisions of this Loan Agreement which it may deem necessary or desirable in
connection with such servicing and administration. In the event that the
preceding language is interpreted as constituting one or more servicing
contracts, each such servicing contract shall terminate automatically upon the
earliest of (i) an Event of Default, or (ii) the date on which all the Secured
Obligations have been paid in full, or (iii) the transfer of servicing approved
by the Lender.
(b) If the Contracts are serviced by the Borrower, (i) the
Borrower acknowledges that Lender has been granted a security interest in all
servicing records, including but not limited to any and all servicing
agreements, files, documents, records, data bases, computer tapes, copies of
computer tapes, proof of insurance coverage, insurance policies, appraisals,
other closing documentation, payment history records, and any other records
relating to or evidencing the servicing of Contracts (the "Servicing Records"),
and (ii) the Borrower grants the Lender a security interest in all servicing
fees and rights relating to the Contracts and all Servicing Records to secure
the obligation of the Borrower or its designee to service in conformity with
this Section and any other obligation of Borrower to the Lender. The Borrower
covenants to safeguard such Servicing Records and to deliver them promptly to
the Lender or its designee (including the Custodian) at the Lender's request.
(c) If the Contracts are serviced by a third party servicer
(such third party servicer, the "Servicer"), the Borrower (i) shall provide a
copy of the servicing agreement to the Lender (the "Servicing Agreement"); and
(ii) hereby irrevocably assigns to the Lender and
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Lender's successors and assigns all right, title, interest and the benefits of
the Servicing Agreement with respect to the Contracts.
(d) The Borrower shall provide to the Lender a letter from the
Servicer to the effect that upon the occurrence of an Event of Default, the
Lender may terminate the Servicing Agreement and transfer such servicing to its
designee, at no cost or expense to the Lender, it being agreed that the Borrower
will pay any and all fees required to terminate the Servicing Agreement and to
effectuate the transfer of servicing to the Lender.
(e) After the Funding Date, until the pledge of such Contract
is relinquished by the Custodian, the Borrower will have no right to modify or
alter the terms of the Contract and the Borrower will have no obligation or
right to repossess the Contract or substitute another Contract, except as
provided in the Custodial Agreement.
11.15 Set-Off. In addition to any rights and remedies of the
Lender provided by this Loan Agreement and by law, the Lender shall have the
right, without prior notice to the Borrower, any such notice being expressly
waived by the Borrower to the extent permitted by applicable law, upon any
amount becoming due and payable by the Borrower hereunder (whether at the stated
maturity, by acceleration or otherwise) to set-off and appropriate and apply
against such amount any and all deposits (general or special, time or demand,
provisional or final), in any currency, and any other credits, indebtedness or
claims, in any currency, in each case whether direct or indirect, absolute or
contingent, matured or unmatured, at any time held or owing by the Lender or any
Affiliate thereof to or for the credit or the account of the Borrower. The
Lender agrees promptly to notify the Borrower after any such set-off and
application made by the Lender, provided that the failure to give such notice
shall not affect the validity of such set-off and application.
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, the parties hereto have caused this Loan
Agreement to be duly executed and delivered as of the day and year first above
written.
BORROWER
DVI FINANCIAL SERVICES INC.
By___________________
Name
Title:
Address for Notices:
500 Hyde Park
Doylestown, PA 18901
Attention: Mark Shapiro
Telecopier No.: 215-230-5328
Telephone No.: 215-230-2943
LENDER
LEHMAN COMMERCIAL PAPER INC.
By___________________
Name
Title:
Address for Notices:
3 World Financial Center
200 Vesey Street
New York, NY 10285-0800
Attn: Francis X. Gilhool / Vincent Primiano
Telecopier No.: 212-528-9284
Telephone No.: 212-526-6970
<PAGE> 49
SCHEDULE 1
REPRESENTATIONS AND WARRANTIES OF THE BORROWER
IN RESPECT OF THE CONTRACTS
As to each Contract included in the Borrowing Base on a
Funding Date (and the related Equipment), the Borrower shall be deemed to make
the following representations and warranties to the Lender on and as of such
Funding Date and at all times thereafter while such Contract is pledged to the
Lender hereunder:
(i) Such Contract and all accompanying documents are complete
and authentic and all signatures thereon are genuine.
(ii) Such Contract arose from a bona fide lease or installment
sale or loan to an Eligible Obligor, complying with all applicable
state and Federal laws and regulations, to Persons having the legal
capacity to contract and is not subject to any defense, set-off or
counterclaim. "Eligible Obligor" means, at any time, an Obligor which
(1) is currently not more than 60 days delinquent in making a payment;
(2) is not an Affiliate of the Borrower; (3) is located in the United
States; and (4) is not an agency, a department, an instrumentality or a
political subdivision of the United States or of any state or local
government.
(iii) All amounts represented to be payable under such
Contract are, in fact, payable in accordance with the provisions of
such Contract, the first scheduled monthly payment then due and owing
or a down payment has been made with respect to such Contract and no
payments under such Contract are more than 60 days past due.
(iv) To the best of the Borrower's knowledge, all property
subject to any Lien given in connection with such Contract is not
subject to any encumbrance, except for Liens released simultaneously
with the grant of the Lien in favor of the Lender hereunder in such
Contract.
(v) The Borrower held good and indefeasible title to, and was
the sole owner of, the Collateral, and such Collateral is not subject
to any Lien except for Liens released simultaneously with the
Borrower's pledge of Collateral made herein.
(vi) Such Contract conforms to the description thereof as set
forth on the related Contract Schedule, and each Contract, other than
an FMV Lease, is a financing lease intended to create a security
interest in accordance with Section 1-201(37) of the Uniform Commercial
Code or a security agreement creating a valid security interest under
the Uniform Commercial Code.
(vii) Such Contract has not been declared ineligible, rejected
or refused as unacceptable for inclusion under (A) the First Amended
and Restated Loan Agreement,
<PAGE> 50
amended and restated as of March 28, 1995, between the Borrower, the banks
signatory thereto and NatWest Bank N.A., as agent, as amended from time to
time, (B) the Loan and Security Agreement, dated as of July 27, 1995,
between the Borrower and Union Bank of Switzerland, New York Branch, as
amended from time to time, (C) the Amended and Restated Interim Loan and
Security Agreement, dated as of September 13, 1994, between the Borrower
and Prudential Securities Realty Funding Corporation, as amended from time
to time, or (D) any other securitization or warehouse loan agreement
entered into by the Borrower, (other than by reason of concentration
limits); and such Contract, if purchased by the Borrower from another
lender, was not purchased because such Contract was in default to such
other lender.
(viii) All information in respect of such Contract set forth in the
Contract Schedule is true and correct.
(ix) (A) Such Contract contains provisions requiring the Obligor to
assume all risk of loss or malfunction of the related Equipment and to
maintain appropriate liability insurance with respect thereto, and making
the Obligor absolutely and unconditionally liable for all payments
required to be made thereunder, without any right of set-off for any
reason whatsoever, subject only to the Obligor's right of quiet enjoyment,
(B) such Contract may not be terminated or prepaid unless the amount
required to be paid by or on behalf of an Obligor in respect of such
prepayment is equal to or in excess of the Discounted Present Value of
such Contract plus accrued interest, (C) such Contract does not provide
for the substitution, exchange or addition of any other items of Equipment
pursuant to such Contract that would result in any reduction or extension
of payments due under such Contract, (D) the rights with respect to such
Contract are assignable by the Borrower without the consent of any Person
and (E) such Contract enables the Borrower to (subject to any applicable
grace, cure and notice periods) declare all payments thereunder to be
immediately due and payable if the Obligor is in default of such Contract.
(x) To the best of the Borrower's knowledge after due inquiry, all
requirements of applicable Federal, state and local laws, and regulations
thereunder, including, without limitation, usury laws, if any, in respect
of such Contract have been complied with in all material respects.
(xi) To the best of the Borrower's knowledge after due inquiry, such
Contract represents the legal, valid and binding obligation of the
Obligor, enforceable in accordance with its terms, subject to bankruptcy,
insolvency and other similar laws (including, but not limited to,
principles of equity) affecting the rights of creditors generally.
(xii) No instrument of release or waiver has been executed in
connection with such Contract, and no Obligor in respect of such Contract
has been released from its obligations thereunder, in whole or in part.
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<PAGE> 51
(xiii) Such Contract has not been amended after the date on which
such Contract is listed on the Contract Schedule and pledged to the Lender
hereunder except with the prior written approval of the Lender.
(xiv) Such Contract is not subject to any right of rescission,
set-off, counterclaim or defense, including the defense of usury, and, to
the best of Borrower's knowledge, no such right of rescission, set-off,
counterclaim or defense has been asserted with respect thereto.
(xv) There is no proceeding or investigation pending or, to the best
of Borrower's knowledge after due inquiry, threatened, before any court,
regulatory body, administrative agency, or other tribunal or governmental
instrumentality (A) asserting the invalidity of such Contract, (B)
asserting the bankruptcy or insolvency of an Obligor, (C) seeking to
prevent payment and performance of such Contract or (D) seeking any
determination or ruling that might materially and adversely affect the
validity or enforceability of such Contract.
(xvi) The Borrower has duly fulfilled all obligations on its part to
be fulfilled under or in connection with such Contract and has done
nothing to impair the rights of the Lender in such Contract or payments
with respect thereto.
(xvii) There is no monetary default, breach, violation or event of
acceleration existing under such Contract, and no event has occurred
which, with the passage of time or with notice, or both, would constitute
a monetary default, breach, violation or event of acceleration that has or
will cause a prepayment of Loans made in respect of such Contract pursuant
to this Loan Agreement; there is no non-monetary default, breach,
violation or event of acceleration existing under such Contract, and no
event has occurred which, with the passage of time or with notice, or
both, would constitute a non-monetary default, breach, violation or event
of acceleration; the Borrower has not waived any monetary or non-monetary
default, breach, violation or event of acceleration in respect of such
Contract; and no payment (or portion thereof) under such Contract has been
written off by the Borrower as uncollectible.
(xviii) All parties to such Contract had legal capacity to execute
such Contract and such Contract has been duly and properly executed by
such parties.
(xix) Such Contract was not selected by the Borrower on any basis
intended to adversely affect the value of the Lender's Lien therein.
(xx) Such Contract was not originated in, nor is it subject to the
laws of, any jurisdiction the laws of which would make unlawful the
pledge, transfer or assignment of such Contract under this Loan Agreement,
including any sale in accordance with this Loan Agreement.
(xxi) Immediately after the pledge, assignment and transfer to the
Lender as herein contemplated, all necessary action will have been taken
(including the filing or
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<PAGE> 52
amendment of Uniform Commercial Code financing statements in all
applicable jurisdictions) to grant a valid and enforceable first priority
perfected Lien in such Contract and all payments to become due thereunder
and all rights of the Borrower in the Equipment that is the subject of
such Contract.
(xxii) (A) Such Contract has not been sold, transferred, assigned or
pledged by the Borrower to any Person other than the Lender, except for
Liens released simultaneously with the grant of the Lien in favor of the
Lender hereunder, (B) immediately prior to the pledge and conveyance of
such Contract pursuant to Section 4 hereof, the Borrower was the sole
owner of such Contract and had good and marketable title thereto, free and
clear of all Liens, except for Liens released simultaneously with the
grant of the Lien in favor of the Lender hereunder and (C) upon execution
and delivery hereof by the Borrower, the Lender will have a first priority
perfected Lien in all of the right, title and interest of the Borrower in
and to such Contract and the payments to become due thereunder, free and
clear of all Liens, except for the interests of Obligors pursuant to the
Contract.
(xxiii) If such Contract constitutes "chattel paper" for purposes of
Sections 9-105(1)(b) and 9-308 of the Uniform Commercial Code as in effect
in any applicable jurisdiction, there is only one original executed
counterpart thereof marked "Secured Party's Original" and such original
has been delivered to the Custodian in accordance with the Loan Agreement
and the Custodial Agreement.
(xxiv) Any "instrument" for purposes of Section 9-105(1)(i) and
9-308 of the Uniform Commercial Code as in effect in any applicable
jurisdiction executed in respect of such Contract has been delivered to
the Custodian in accordance with the Custodial Agreement.
(xxv) With respect to each Equipment Lease consisting of a Master
Lease supplemented with a Supplement, (i) the original Supplement has been
delivered to the Custodian, stamped "Secured Party's Original", together
with a certified copy of the related Master Lease (showing the stamped
statement required under (iii), below) for inclusion in the Contract File
in accordance with the terms of the Custodial Agreement, (ii) the Borrower
has exclusive possession of the original Master Lease and no third-party
has taken possession thereof, (iii) the Borrower has not stamped any
Supplement "Secured Party's Original" other than the original Supplement
delivered to the Custodian, and (iv) each Master Lease has been stamped
with a statement to the effect that no security interest in a Supplement
may be created through the transfer or possession of any counterpart of
the original Supplement other than that Supplement marked "Secured Party's
Original" and a certified copy of the Master Lease.
(xxvi) With respect to each Equipment Loan pledged to the Lender
hereunder consisting of an Obligor Loan Agreement supplemented with an
Equipment Schedule, (i) the original Equipment Schedule has been delivered
to the Custodian, stamped "Secured Party's Original", together with a
certified copy of the related
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<PAGE> 53
Obligor Loan Agreement (showing the stamped statement required under
(iii), below), for inclusion in the Contract File in accordance with the
terms of the Custodial Agreement, (ii) the Borrower has exclusive
possession of the original Obligor Loan Agreement and no third-party has
taken possession thereof, (iii) the Borrower has not stamped any Equipment
Schedule "Secured Party's Original" other than the original Equipment
Schedule delivered to the Custodian, (iv) each Obligor Loan Agreement has
been stamped with a statement to the effect that no security interest in a
Equipment Schedule may be created through the transfer or possession of
any counterpart of the original Equipment Schedule other than that
Equipment Schedule marked "Secured Party's Original" and a certified copy
of the Obligor Loan Agreement, and (v) if any promissory note or
promissory notes were executed in connection with the origination of such
Equipment Loan or otherwise, such original promissory note or promissory
notes have been delivered to the Custodian.
(xxvii) The Borrower's computer records have been marked to indicate
that such Contract has been pledged, assigned and transferred to the
Lender pursuant to this Loan Agreement.
(xxviii) All insurance policies required to be maintained by such
Contract are in full force and effect and such insurance policies are of a
type customary for the Equipment covered thereby.
(xxix) The credit standing of the related Obligor of the Equipment
subject to such Contract was approved by the Borrower using its customary
practices and procedures. To the best of the Borrower's knowledge, unless
the Borrower has notified the Lender in writing, the Obligor is not and
has never been insolvent or the subject of any bankruptcy or insolvency
proceeding and the Borrower has no knowledge of any circumstance or
condition with respect to such Contract, such Equipment or the Obligor's
credit standing that could reasonably be expected to cause the Lender to
regard such Contract as an unacceptable security, cause such Contract to
become delinquent or adversely affect the value or marketability of such
Contract.
(xxx) The Equipment subject to such Contract was properly delivered
to the Obligor in good repair, without defects and in satisfactory order
and, to the best of Borrower's knowledge, is in proper working order as of
the date on which such Contract was pledged to the Lender and listed on
the Contract Schedule.
(xxxi) The Exposure does not exceed the lesser of (x) 30% of the
value of the collateral securing such Contract, or (y) $500,000.
(xxxii) The Contract was originated within twelve (12) calendar
months from the date such Contract was first included in the Borrowing
Base.
(xxxiii) The Obligor in respect of such Contract is currently
operating and carrying on its business (not preparing to operate and carry
on its business).
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<PAGE> 54
(xxxiv) If the Contract is an Equipment Loan, it bears a fixed
interest rate and is not convertible to an adjustable interest rate.
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<PAGE> 55
SCHEDULE 2
FILING JURISDICTIONS AND OFFICES
Secretary of the Commonwealth of Pennsylvania
Prothonotary of Bucks County, PA
<PAGE> 56
SCHEDULE 3
SUBSIDIARIES OF DVI, INC.(1)
DVI Financial Services Inc. (Date of Inc.: 4/30/86)
DVI Business Credit Corporation (Date of Inc.: 7/2/91)
DVI Healthcare Operations, Inc. (Date of Inc.: 7/9/91)
SUBSIDIARIES OF DVI FINANCIAL SERVICES, INC.(1)
DVI Lease Finance Corporation II (Date of Inc.: 4/13/93)
DVI Lease Receivables Corp. 1993-A (Date of Inc.: 12/14/93)
DVI Receivables Corp. (Date of Inc.: 1/21/94)
DVI Subordinated Securities Corp. (Date of Inc.: 5/29/96)
DVI Receivables Corp. II (Date of Inc.: 6/3/96)
DVI Lease Finance Corporation III (Date of Inc.: 6/26/96)
SUBSIDIARIES OF DVI BUSINESS CREDIT CORPORATION(1)
DVI Business Credit Receivables Corp. (Date of Inc.: 12/20/95)
- ----------
(1) All of the issued and outstanding common stock of each subsidiary is owned
by its respective parent.
<PAGE> 57
EXHIBIT A
[FORM OF PROMISSORY NOTE]
$100,000,000 September 6, 1996
New York, New York
FOR VALUE RECEIVED, DVI FINANCIAL SERVICES INC., a Delaware
corporation (the "Borrower"), hereby promises to pay to the order of LEHMAN
COMMERCIAL PAPER INC. (the "Lender"), at the principal office of the Lender at 3
World Financial Center, 200 Vesey Street, New York, New York 10285, in lawful
money of the United States, and in immediately available funds, the principal
sum of ONE HUNDRED MILLION DOLLARS ($100,000,000) (or such lesser amount as
shall equal the aggregate unpaid principal amount of the Loans made by the
Lender to the Borrower under the Loan Agreement), on the dates and in the
principal amounts provided in the Loan Agreement, and to pay interest on the
unpaid principal amount of each such Loan, at such office, in like money and
funds, for the period commencing on the date of such Loan until such Loan shall
be paid in full, at the rates per annum and on the dates provided in the Loan
Agreement.
The date, amount and interest rate of each Loan made by the Lender
to the Borrower, and each payment made on account of the principal thereof,
shall be recorded by the Lender on its books and, prior to any transfer of this
Note, endorsed by the Lender on the schedule attached hereto or any continuation
thereof; provided, that the failure of the Lender to make any such recordation
or endorsement shall not affect the obligations of the Borrower to make a
payment when due of any amount owing under the Loan Agreement or hereunder in
respect of the Loans made by the Lender.
This Note is the Note referred to in the Loan and Security Agreement
dated as of September 6, 1996 (as amended, supplemented or otherwise modified
and in effect from time to time, the "Loan Agreement") between the Borrower and
the Lender, and evidences Loans made by the Lender thereunder. Terms used but
not defined in this Note have the respective meanings assigned to them in the
Loan Agreement.
The Borrower agrees to pay all the Lender's costs of collection and
enforcement (including reasonable attorneys' fees and disbursements of Lender's
counsel) in respect of this Note when incurred, including, without limitation,
reasonable attorneys' fees through appellate proceedings.
Notwithstanding the pledge of the Collateral, the Borrower hereby
acknowledges, admits and agrees that the Borrower's obligations under this Note
are recourse obligations of the Borrower to which the Borrower pledges its full
faith and credit.
The Borrower, and any endorsers or guarantors hereof, (a) severally
waive diligence, presentment, protest and demand and also notice of protest,
demand, dishonor and nonpayments of this Note, (b) expressly agree that this
Note, or any payment hereunder, may
<PAGE> 58
be extended from time to time, and consent to the acceptance of further
Collateral, the release of any Collateral for this Note, the release of any
party primarily or secondarily liable hereon, and (c) expressly agree that it
will not be necessary for the Lender, in order to enforce payment of this Note,
to first institute or exhaust the Lender's remedies against the Borrower or any
other party liable hereon or against any Collateral for this Note. No extension
of time for the payment of this Note, or any installment hereof, made by
agreement by the Lender with any person now or hereafter liable for the payment
of this Note, shall affect the liability under this Note of the Borrower, even
if the Borrower is not a party to such agreement; provided, however, that the
Lender and the Borrower, by written agreement between them, may affect the
liability of the Borrower.
Any reference herein to the Lender shall be deemed to include and
apply to every subsequent holder of this Note. Reference is made to the Loan
Agreement for provisions concerning optional and mandatory prepayments,
Collateral, acceleration and other material terms affecting this Note.
THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED UNDER THE LAWS OF THE
STATE OF NEW YORK (WITHOUT REFERENCE TO CHOICE OF LAW DOCTRINE) WHOSE LAWS THE
BORROWER EXPRESSLY ELECTS TO APPLY TO THIS NOTE. THE BORROWER AGREES THAT ANY
ACTION OR PROCEEDING BROUGHT TO ENFORCE OR ARISING OUT OF THIS NOTE MAY BE
COMMENCED IN THE SUPREME COURT OF THE STATE OF NEW YORK, BOROUGH OF MANHATTAN,
OR IN THE DISTRICT COURT OF THE UNITED STATES FOR THE SOUTHERN DISTRICT OF NEW
YORK.
All notices hereunder shall be made in accordance with the terms of
the Loan Agreement.
DVI FINANCIAL SERVICES INC.
By: _______________________________
Name:
Title:
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<PAGE> 59
SCHEDULE OF LOANS
This Note evidences Loans made under the within-described Loan
Agreement to the Borrower, on the dates, in the principal amounts and bearing
interest at the rates set forth below, and subject to the payments and
prepayments of principal set forth below:
Principal Amount Paid Unpaid Principal Notation
Date Made Amount of Loan or Prepaid Amount Made by
--------- -------------- ---------- ------ -------
<PAGE> 60
EXHIBIT B
[FORM OF CUSTODIAL AGREEMENT]
[stored as a separate document]
<PAGE> 61
EXHIBIT C
[FORM OF GUARANTEE OF DVI, INC.]
GUARANTEE OF DVI, INC.
Guarantee, dated as of September 6, 1996, by DVI, INC., a Delaware
corporation (the "Guarantor") in favor of LEHMAN COMMERCIAL PAPER INC. (the
"Lender").
RECITAL
WHEREAS, pursuant to the Loan and Security Agreement, dated as of
September 6, 1996 (as amended, supplemented or otherwise modified from time to
time, the ("Loan Agreement"; capitalized terms used but not otherwise defined
herein shall have the meaning given them in the Loan Agreement) between DVI
Financial Services Inc., (the "Borrower"), and the Lender, the Lender has agreed
to consider making loans to the Borrower upon the terms and subject to the
conditions set forth therein, to be evidenced by the Note issued by the Borrower
thereunder. It is a condition precedent to the obligation of the Lender to make
its loans to the Borrower under the Loan Agreement that the Guarantor shall have
executed and delivered this Guarantee to the Lender.
NOW, THEREFORE, in consideration of the premises and to induce the
Lender to make its loans to the Borrower under the Loan Agreement, the Guarantor
hereby agrees with the Lender as follows:
1. Guarantee. To induce the Lender to enter into the Loan Agreement,
with the Borrower, the Guarantor unconditionally guarantees to the Lender, its
successors, endorsees, and permitted assigns, the prompt payment when due of all
present and future obligations and liabilities of all kinds of the Borrower to
the Lender arising out of the Loan Agreement (the "Obligations").
2. Absolute Guarantee. The Guarantor's obligations under this
Guarantee shall not be affected by the genuineness, validity, regularity, or
enforceability of the Obligations or of any instrument evidencing the
Obligations, or by the existence, validity, enforceability, perfection, or
extent of any collateral for the Obligations, or by any other circumstances
relating to the Obligations which might otherwise constitute a discharge of or
defense to this Guarantee. The Lender makes no representation or warranty to the
Guarantor regarding such matters, and has no duty or responsibility to disclose
to the Guarantor any circumstances that may now or hereafter affect such
matters. The Lender shall not be obligated to file any claim relating to the
Obligations if the Borrower becomes subject to a bankruptcy, reorganization, or
similar proceeding, and the failure of the Lender so to file shall not affect
the Guarantor's obligations hereunder. If any payment by the Borrower to the
<PAGE> 62
Lender on account of the Obligations is rescinded or must otherwise be returned
for any reason whatsoever, the Guarantor shall remain liable hereunder for such
Obligations as if such payment had not been made. The Guarantor's obligations
under this Guarantee constitute a guarantee of payment and not of collection.
3. Consents, Waivers, and Renewals. The Lender may at any time and
from time to time, either before or after the maturity thereof, without notice
to or further consent of the Guarantor, extend the time of payment of, exchange,
or surrender any collateral for, or renew, any of the Obligations, and may also
make any agreement with the Borrower or with any other individual or entity
liable on any of the Obligations, or interested therein, for the extension,
renewal, payment, compromise, discharge, or release thereof, in whole or in
part, or for any modification of the terms thereof or of any agreement between
the Lender and the Borrower or any such other individual or entity, without
impairing or affecting this Guarantee. The Lender may seek payment of any of the
Obligations from the Guarantor, whether or not the Lender shall have resorted to
any collateral for the Obligations or shall have proceeded against the Borrower
or any other obligor principally or secondarily obligated for any of the
Obligations.
4. Expenses. The Guarantor shall pay on demand all out-of-pocket
expenses (including the reasonable fees and expenses of the Lender's counsel)
incurred in the enforcement or protection of the rights of the Lender under this
Guarantee, and any collateral for the Obligations shall secure such payment;
provided, however, that the Guarantor shall not be liable for any expenses of
the Lender if no payment under this Guarantee is due.
5. No Subrogation. Notwithstanding any payment or payments made by
the Guarantor hereunder, or any setoff or application of funds of the Guarantor
by the Lender, the Guarantor shall not be entitled to be subrogated to any of
the rights of the Lender against the Borrower or against any collateral security
or guarantee or right of offset held by the Lender for the payment of the
Obligations, nor shall the Guarantor seek any reimbursement from the Borrower in
respect of payments made by the Guarantor hereunder, until all amounts owing to
the Lender by the Borrower on account of the Obligations are paid in full and
the Loan Agreement is terminated. If any amount shall be paid to the Guarantor
on account of such subrogation rights at any time when all of the Obligations
shall not have been paid in full, such amount shall be held by the Guarantor in
trust for the Lender, segregated from other funds of the Guarantor, and shall,
forthwith upon receipt by the Guarantor, be turned over to the Lender in the
exact form received by the Guarantor (duly endorsed by the Guarantor to the
Lender, if required), to be applied against the Obligations, whether matured or
unmatured, in such order as the Lender may determine.
6. Continuing Guarantee. This Guarantee is absolute, unconditional,
and irrevocable and shall remain in full force and effect and be binding upon
the Guarantor and its successors and permitted assigns until all of the
Obligations have been satisfied in full. If any present or future Obligations
are guaranteed by individuals or entities in addition to the Guarantor, the
death, release, or discharge, in whole or part of the bankruptcy, liquidation,
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<PAGE> 63
termination, or dissolution of one or more of them shall not discharge or affect
the liabilities of the Guarantor hereunder.
7. No Waiver; Cumulative Rights. No failure on the part of the
Lender to exercise, and no delay in exercising, any right, remedy, or power
under this Guarantee shall operate as a waiver thereof, nor shall any single or
partial exercise by the Lender of any right, remedy, or power hereunder preclude
any other or future exercise of any right, remedy, or power. Each and every
right, remedy, and power hereby granted to the Lender or allowed it by law or
other agreement shall be cumulative and not exclusive of any other, and may be
exercised by the Lender from time to time.
8. Waiver of Notice. Except as required otherwise herein, the
Guarantor waives notice of the acceptance of this Guarantee, presentment to or
demand of payment from anyone liable for any of the Obligations, notice of
dishonor or non-payment, protest, diligence, suit, notice of any sale of any
collateral for the Obligations, notice of the taking of any action by the Lender
against the Borrower, the Guarantor, or others, and all other notices that may
otherwise be required by law.
9. Representations and Warranties.
(a) The Guarantor (i) is a corporation duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation, (ii) has the corporate power and authority, and the legal right,
to own and operate its property, to lease the property it operates as lessee and
to carry on its business as now being or as proposed to be conducted, the lack
of which would be reasonably likely to have a Material Adverse Effect, (iii) is
duly qualified to do business and is in good standing under the laws of each
jurisdiction in which the nature of the business conducted by it makes such
qualification necessary and where failure so to qualify would be reasonably
likely (either individually or in the aggregate) to have a Material Adverse
Effect, and (iv) is in compliance in all material respects with all Requirements
of Law.
(b) The execution, delivery, and performance of this Guarantee
have been duly authorized by all necessary corporate action and do not
contravene any provision of the Guarantor's charter or by-laws, as amended to
date, or any law, regulation, rule decree, order, judgment, or contractual
restriction binding on the Guarantor or its assets.
(c) All consents, licenses, authorizations, and approvals of,
and registrations and declarations with, any governmental authority or
regulatory body necessary for the due execution, delivery, and performance of
this Guarantee have been obtained and remain in full force and effect and all
conditions thereof have been duly complied with, and no other action by, and no
notice to or filing with, any governmental authority or regulatory body is
required in connection with the execution, delivery, or performance of this
Guarantee.
(d) This Guarantee constitutes the legal, valid, and binding
obligations of the Guarantor and is enforceable against the Guarantor in
accordance with its
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<PAGE> 64
terms, subject as to enforceability to bankruptcy, insolvency, reorganization,
moratorium, conservatorship, receivership, and other laws of general
applicability relating to or affecting creditors' rights and to equitable
principles of general application.
10. Financial Covenants. The Guarantor shall maintain the following
financial covenants:
(a) Tangible Net Worth. The Guarantor shall have at the end of each
fiscal quarter Tangible Net Worth in an amount equal to or greater than the sum
of (i) $75,000,000, plus (ii) 75% of net income (with no deduction for losses)
for the period commencing with the first day of the calendar quarter ending June
30, 1996 and each subsequent calendar quarter on a cumulative basis, plus (iii)
100% of the proceeds of any new issuance of equity.
(b) Leverage Ratio. The Guarantor shall maintain at all times a
Leverage Ratio not greater than 5:1.
(c) Risk-Adjusted Leverage Ratio. The Guarantor shall maintain at
all times a Risk-Adjusted Leverage Ratio not greater than 5:1.
(d) Debt Service Coverage. The Guarantor shall maintain a ratio of
(i) the sum of Cash Receipts minus Cash Operating Expenses plus Interest
Expense, to (ii) Interest Expense plus all mandatory scheduled payments of
principal on Indebtedness, of not less than 1.05:1.
(e) Capitalized Terms in Paragraph 10. Capitalized terms used in
this paragraph 10 and not otherwise defined herein shall have the meaning given
them in that certain First Amended and Restated Loan Agreement, dated June 14,
1991 and amended and restated as of March 28, 1995 (the "Restated Loan
Agreement"), between the Borrower, certain banks, NatWest Bank N.A. as
Pre-Funding Lender and as Agent, as in effect at the time it was filed with the
Securities and Exchange Commission, without giving effect to any subsequent
amendments, supplements or other modifications thereto; provided, however, that
all references to the term "Borrower" set forth in the Restated Loan Agreement
shall be deemed to refer to the Guarantor.
11. SUBMISSION TO JURISDICTION; WAIVERS. THE GUARANTOR HEREBY
IRREVOCABLY AND UNCONDITIONALLY:
(A) SUBMITS FOR ITSELF AND ITS PROPERTY IN ANY LEGAL ACTION OR
PROCEEDING RELATING TO THIS GUARANTEE, OR FOR RECOGNITION AND ENFORCEMENT
OF ANY JUDGMENT IN RESPECT THEREOF, TO THE NON-EXCLUSIVE GENERAL
JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK, THE FEDERAL COURTS OF
THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK, AND
APPELLATE COURTS FROM ANY THEREOF;
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<PAGE> 65
(B) CONSENTS THAT ANY SUCH ACTION OR PROCEEDING MAY BE BROUGHT IN
SUCH COURTS AND, TO THE EXTENT PERMITTED BY LAW, WAIVES ANY OBJECTION THAT
IT MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING
IN ANY SUCH COURT OR THAT SUCH ACTION OR PROCEEDING WAS BROUGHT IN AN
INCONVENIENT COURT AND AGREES NOT TO PLEAD OR CLAIM THE SAME;
(C) AGREES THAT SERVICE OF PROCESS IN ANY SUCH ACTION OR PROCEEDING
MAY BE EFFECTED BY MAILING A COPY THEREOF BY REGISTERED OR CERTIFIED MAIL
(OR ANY SUBSTANTIALLY SIMILAR FORM OF MAIL), POSTAGE PREPAID, TO ITS
ADDRESS SET FORTH UNDER ITS SIGNATURE BELOW OR AT SUCH OTHER ADDRESS OF
WHICH THE LENDER SHALL HAVE BEEN NOTIFIED IN ACCORDANCE WITH PARAGRAPH 15
HEREOF; AND
(D) AGREES THAT NOTHING HEREIN SHALL AFFECT THE RIGHT TO EFFECT
SERVICE OF PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT
THE RIGHT TO SUE IN ANY OTHER JURISDICTION.
12. WAIVER OF JURY TRIAL. THE GUARANTOR HEREBY IRREVOCABLY WAIVES,
TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHT TO TRIAL BY
JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS GUARANTEE OR THE
TRANSACTIONS CONTEMPLATED HEREBY.
13. Assignment. The Guarantor may not assign its rights, interests,
or obligations under this Guarantee to any other person without the prior
written consent of the Lender.
14. Governing Law. This Guarantee shall be governed by, and
construed and enforced in accordance with, the law of the State of New York
applicable to contracts made to be performed within such State.
-5-
<PAGE> 66
15. Notices. Any notice or communication to the Guarantor in respect
of this Guarantee shall be sufficiently given if in writing and delivered in
person or sent by certified or registered mail or the equivalent (with return
receipt requested), by courier, or by facsimile addressed to the following:
DVI, Inc.
500 Hyde Park
Doylestown, PA 18901
Attention: Mark Shapiro
Telecopier No.: 215-230-5328
Telephone No.: 215-230-2943
Any such notice or communication shall specifically identify the amounts
to which this Guarantee relates, and shall be sufficiently given only upon
actual receipt by the Guarantor. Any notice or communication by the Guarantor to
the Lender in respect of this Guarantee shall
-6-
<PAGE> 67
be sufficiently given if in writing and delivered in the manner provided in the
Loan Agreement.
IN WITNESS WHEREOF, this Guarantee has been duly executed and
delivered by the Guarantor to the Lender as of the date first above written.
DVI, INC.
By:_______________________________
Name:
Title:
-7-
<PAGE> 68
EXHIBIT D-1
[FORM OF REQUEST FOR BORROWING]
REQUEST FOR BORROWING
[insert date]
Lehman Commercial Paper Inc.
3 World Financial Center
200 Vesey Street
New York, New York 10285-0800
Attention: Francis X. Gilhool / Vincent Primiano
Borrowing Request No.:_____________________
Ladies/Gentlemen:
Reference is made to the Loan and Security Agreement, dated as of
September 6, 1996 (the "Loan Agreement"; capitalized terms used but not
otherwise defined herein shall have the meaning given them in the Loan
Agreement), between Lehman Commercial Paper Inc. (the "Lender") and DVI
Financial Services Inc. (the "Borrower").
In accordance with Section 2.03(a) of the Loan Agreement, the
undersigned Borrower hereby requests that you make a Loan to us in a principal
amount of $_________________ [insert requested Loan Amount] on
____________________ [insert requested Funding Date, which must be at least two
(2) Business Days from the date of the request], in connection with which we
propose to pledge to you as Collateral the Contracts set forth on the Contract
Schedule attached hereto.
The Borrower hereby certifies, as of such Funding Date, that:
(a) no Default or Event of Default has occurred and is
continuing either before or after giving effect to such Loan;
(b) each of the representations and warranties made by the Borrower
and the Guarantor in or pursuant to the Loan Documents is true and correct
in all material respects on and as of such date as if made on and as of
such date (or, if any such representation or warranty is expressly stated
to have been made as of a specific date, as of such specific date); and
<PAGE> 69
(c) the aggregate principal amount of the Loans does not exceed the
Borrowing Base, and will not exceed the Borrowing Base after giving effect
to such Loan on the Funding Date.
Very truly yours,
DVI FINANCIAL SERVICES INC.
By:______________________________
Name:
Title:
-2-
<PAGE> 70
SCHEDULE I
TO BORROWING REQUEST
[CONTRACTS PROPOSED TO BE PLEDGED
TO LENDER ON FUNDING DATE]
[attach Contract Schedule]
-3-
<PAGE> 71
EXHIBIT D-2
[FORM OF LOAN SUPPLEMENT]
LOAN SUPPLEMENT
DVI Financial Services Inc.
500 Hyde Park
Doylestown, PA 18901
Attention: Mark Shapiro
Loan Supplement No.:_____________________
Ladies/Gentlemen:
We hereby agree to make a Loan to you with the characteristics set forth
below, subject to the terms and conditions set forth in the Loan and Security
Agreement, dated as of September 6, 1996 (the "Loan Agreement"; capitalized
terms used but not otherwise defined herein shall have the meaning given them in
the Loan Agreement), between Lehman Commercial Paper Inc. (the "Lender") and DVI
Financial Services Inc. (the "Borrower"):
Lender: Lehman Commercial Paper Inc.
Borrower: DVI Financial Services Inc.
Loan Amount: $_____________________________
Funding Date: _____________________________
Collateral to be Pledged
on Funding Date: See Schedule I attached hereto
Termination Date: _____________________________
LEHMAN COMMERCIAL PAPER INC.
By___________________________
Name:
Title:
Date:______________________________
<PAGE> 72
SCHEDULE I
TO LOAN SUPPLEMENT
COLLATERAL TO BE PLEDGED
TO LENDER ON FUNDING DATE
[attach list of Collateral]
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<PAGE> 73
EXHIBIT E
[FORM OF OPINION OF COUNSEL OF BORROWER AND GUARANTOR]
[stored as a separate document]
<PAGE> 74
EXHIBIT F
[FORM OF BORROWING BASE CERTIFICATE]
Pursuant to Section 7.18 of the Loan and Security Agreement, dated
as of September 6, 1996 (the "Loan Agreement"), between DVI Financial Services
Inc. (the "Borrower") and Lehman Commercial Paper Inc. (the "Lender"), we hereby
certify that the Borrowing Base as of the Interest Payment Date set forth below
is $_____________, calculated as follows:
A. COLLATERAL VALUE OF ELIGIBLE CONTRACTS:
1. Discounted Present Value of Eligible Contracts $______________
2. Market Value(1) of Eligible Contracts $______________
3. LESSER OF (1) AND (2) $______________
MINUS
4. Aggregate Collateral Value of Eligible Contracts
in respect of which same Person (or its Affiliates)
is Obligor, in excess of $3,000,000 $_______________
5. Aggregate Collateral Value of Eligible Contracts
having an original term of more than 95 months $_______________
6. Aggregate Collateral Value of Eligible Contracts
which breach Schedule 1 rep or warranty $_______________
7. Aggregate Collateral Value of Eligible Contracts
pledged to the Lender longer than 180 days after
first being included in the Borrowing Base $_______________
8. Aggregate Collateral Value of Eligible Contracts
which have been released by the Custodian to the
Borrower for more than five (5) days $_______________
SUBTOTAL 1 $_______________
- ----------
(1) Determined by the Lender in its sole discretion (using commercially
reasonable methods), which market value be determined to be zero.
<PAGE> 75
[UNTIL THE DAY WHICH IS 45 DAYS AFTER THE OUTSTANDING PRINCIPAL AMOUNT OF
LOANS IS $50,000,000 OR MORE, MINUS]
9. Aggregate Collateral Value of Eligible Contracts
originated by a Person other than Borrower or
its Affiliates in excess of 30% of the Maximum
Credit $_______________
10. Aggregate Collateral Value of Eligible Contracts
which are Small Item Contracts in excess of 10%
of the Maximum Credit $_______________
11. Aggregate Collateral Value of Eligible Contracts
having an original term of more than 63 months
in excess of 25% of the Maximum Credit $_______________
12. Aggregate Collateral Value of Eligible Contracts
having an original term of more than 84 months
and fewer than 96 months in excess of
5% of the Maximum Credit $_______________
13. Aggregate Collateral Value of Eligible Contracts
which are FMV Leases in excess of
5% of the Maximum Credit $_______________
SUBTOTAL 2 $_______________
[UPON AND AFTER THE DAY WHICH IS 45 DAYS AFTER THE OUTSTANDING PRINCIPAL
AMOUNT OF LOANS IS $50,000,000 OR MORE, MINUS]
9. Aggregate Collateral Value of Eligible Contracts
originated by a Person other than Borrower or
its Affiliates in excess of 30% of the aggregate
Collateral Value of all Eligible Contracts in the
Borrowing Base $_______________
10. Aggregate Collateral Value of Eligible Contracts
which are Small Item Contracts in excess of 10%
of the aggregate Collateral Value of all Eligible
Contracts in the Borrowing Base $_______________
11. Aggregate Collateral Value of Eligible Contracts
having an original term of more than 63 months
in excess of 25% of the aggregate Collateral Value
of all Eligible Contracts in the Borrowing Base $_______________
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<PAGE> 76
12. Aggregate Collateral Value of Eligible Contracts
having an original term of more than 84 months
and fewer than 96 months in excess of
5% of the aggregate Collateral Value of
all Eligible Contracts in the Borrowing Base $_______________
13. Aggregate Collateral Value of Eligible Contracts
which are FMV Leases in excess of
5% of the aggregate Collateral Value of
all Eligible Contracts in the Borrowing Base $_______________
SUBTOTAL 2 $_______________
B. BORROWING BASE
90% of Aggregate Collateral Value of
Eligible Contracts (Subtotal 2) $
===============
This Borrowing Base Certificate has been duly executed and delivered
by the Borrower to the Lender as of ____________ ___, 199__ (the "Interest
Payment Date").
DVI FINANCIAL SERVICES INC.
By: _______________________________
Name:
Title:
-6-
<PAGE> 77
EXHIBIT G
[FORM OF COVENANT COMPLIANCE CERTIFICATE]
1) Tangible Net Worth
DVI, Inc. shall have at the end of each fiscal quarter Tangible Net
Worth in an amount equal to or greater than the sum of (i) $75,000,000 plus (ii)
75% of net income (with no deduction for losses) for the period commencing with
the first day of the calendar quarter ending June 30, 1996 and each subsequent
quarter on a cumulative basis, plus (iii) 100% of any new issuance of equity.
Tangible Net Worth Calculation:
Additional Capital ______________
plus Retained Earnings ______________
plus Earned Surplus ______________
plus Capital Stock ______________
minus Intangibles ______________
minus Treasury Stock ______________
Total ______________
Intangibles Calculation:
Goodwill ______________
plus Other intangibles ______________
Total ______________
2) Leverage Ratio
DVI, Inc. shall maintain at all times a Leverage Ratio not
greater than 5:1.
Leverage Calculation:
Total Recourse Liabilities ______________
over (Tangible Net Worth ______________
plus Sub-Debt *) ______________
Total ______________
<PAGE> 78
Total Recourse Liabilities Calculation
GAAP Liabilities ______________
minus Non-Recourse Debt** ______________
minus Sub-Debt *** ______________
minus Deferred Income Tax Payable ______________
minus Accrued Expenses (and Accounts Payable) ______________
plus Contingent Liabilities ______________
minus Non-Recourse Portion of Partial Recourse Debt ______________
Total ______________
3) Risk-Adjusted Leverage Ratio
DVI, Inc. shall maintain at all times a Risk-Adjusted Leverage
Ratio not greater than 5:1.
Risk Adjusted Leverage Ratio Calculation
Total Recourse Liabilities _______________
over (Tangible Net Worth _______________
plus Sub-Debt * _______________
minus RALR Calculation) _______________
Total _______________
RALR Calculation
The greater of (a) $1,000,000 or (b) the lesser of (1) DVI, Inc.'s
unfinanced or retained interests in securitized accounts receivable (the so
called "C" piece) or (2) the product resulting from multiplying (A) DVI, Inc.'s
actual loss experience, expressed as a decimal times (B) five, times (C) DVI,
Inc.'s total securitized accounts receivable.
4) Debt Service Coverage Calculation
At the end of each fiscal quarter with respect to the 12-month
period then ended, DVI, Inc. shall have a ratio of (1) Cash Receipts minus Cash
Operating Expenses plus Interest Expense, to (2) Interest Expense plus all
mandatory scheduled payments of principal on Indebtedness of not less than
1.05:1.
-2-
<PAGE> 79
Debt Service Coverage Calculation
(Cash Receipts ______________
minus Cash Operating Expenses ______________
plus Interest Expense) ______________
over (Interest Expense ______________
plus Scheduled Payments of Principal) ______________
Total ______________
* Sub-Debt not due within the twelve-month period immediately proceeding
any date of computation.
** Excluding the non-recourse portion of Partial Recourse Debt.
*** Sub-Debt not due within the next twelve months.
-3-
<PAGE> 80
EXHIBIT H
[FORM OF DATA POOL REPORT]
[see attached]
<PAGE> 1
Exhibit 10.16
AMENDMENT TO INTERIM LOAN AND SECURITY AGREEMENT
AMENDMENT dated as of June 30, 1997 (this "Amendment"),
between (i) PRUDENTIAL SECURITIES CREDIT CORPORATION, a Delaware corporation
(the "Lender"), and (ii) DVI FINANCIAL SERVICES INC., a Delaware corporation
(the "Borrower"), to the Existing Agreement referred to below.
RECITALS
The Borrower and the Lender are parties to that certain
Interim Loan and Security Agreement dated as of February 20, 1997 (as amended
supplemented or otherwise modified prior to the date hereof, the "Existing
Agreement"; as amended by this Amendment, the "Agreement").
Under the Existing Agreement, the Lender provides interim
financing from time to time to provide interim funding for leases of equipment
for inclusion in a Trust, which leases and equipment are pledged to secure the
Advances made by the Lender thereunder, with the proceeds of the related
Certificates being used to repay such Advances.
The Borrower has requested that the Existing Agreement be
amended to extend the Termination Date as provided therein to July 31, 1997
(notwithstanding the sale prior to such date of the Certificates related to the
Contracts funded by the Advances made under the Existing Agreement), and the
Lender is willing to so amend the Existing Agreement.
Accordingly, in consideration of the premises, the Borrower
and the Lender hereby agree that the Existing Agreement is hereby amended as
follows:
SECTION 1. Terms and Conditions for All Advances.
(a) Section 2(a) of the Existing Agreement is hereby amended
by deleting the phrase "on the earlier to occur of (x) the date on which the
Certificates related to the Contracts funded by Advances made hereunder are
sold, or (y) September 30, 1997 (the "Termination Date")" occurring in the first
sentence thereof immediately prior to the proviso, and substituting in lieu
thereof the phrase "on July 31, 1997 (the "Termination Date")".
(b) Section 2(c) of the Existing Agreement is hereby amended
by deleting the first proviso of the first sentence thereof, and substituting in
lieu thereof the following new proviso:
"provided that the Maturity Date shall, for any Advance, be no
later than the Termination Date;".
1
<PAGE> 2
SECTION 2. Conditions Precedent. This Amendment shall become effective
on the date on which the Lender shall have received the following documents,
each of which shall be satisfactory to the Lender in form and substance:
(a) this Amendment, executed and delivered by a duly
authorized officer of the Borrower and the Guarantor;
(b) an opinion of counsel to the Borrower, substantially in
the form of Annex A hereto; and
(c) such other documents, certificates or opinions as the
Lender may reasonably request.
SECTION 3. Limited Effect. Except as expressly amended and
modified by this Amendment, the Existing Agreement shall continue to be, and
shall remain, in full force and effect in accordance with its terms.
SECTION 4. Definitions in Existing Agreement. Unless otherwise
defined in this Amendment, terms defined in the Existing Agreement shall have
their defined meanings when used herein.
SECTION 5. Counterparts. This Amendment may be executed by one
or more of the parties hereto on any number of separate counterparts, each of
which shall be an original and all of which taken together shall constitute one
and the same instrument.
SECTION 6. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY,
AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
[Signatures Commence on the Following Page]
2
<PAGE> 3
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be duly executed and delivered in New York, New York by their
proper and duly authorized officers as of the day and year first above written
Borrower: DVI FINANCIAL SERVICES INC.
By: /s/ Lisa Cruikshank
------------------------------
Name: Lisa J. Cruikshank
Title: Vice President
Lender: PRUDENTIAL SECURITIES CREDIT
CORPORATION
By: /s/ Jeffrey K. French
------------------------------
Name: Jeffrey K. French
Title: Vice President
CONSENTED TO:
DVI INC.
By: /s/ Steven R. Garfinkel
-------------------------------
Name: Steven R. Garfinkel
Title: Executive Vice President
Chief Financial Officer
3
<PAGE> 4
Annex A
[Letterhead of Counsel to Borrower]
[___________, 199_]
Prudential Securities Credit Corporation
199 Water Street
New York, New York 10292-0001
Re: Interim Warehouse Financing of DVI Financial Services Inc. by
Prudential Securities Credit Corporation
Ladies and Gentlemen:
I am the counsel to DVI Financial Services Inc., a Delaware
corporation (the "Borrower"), and have acted as such in connection with the
execution and delivery of the Amendment, dated as of June 30, 1997 (the
"Amendment"), between the Borrower and the Prudential Securities Credit
Corporation (the "Lender") which Amendment amends the Interim Loan and Security
Agreement dated as of February 20, 1997 as amended, supplemented or otherwise
modified prior to the date hereof (the "Agreement"), between the Lender and the
Borrower.
Capitalized terms used herein and not defined herein shall
have the meanings assigned to them in the Agreement.
I have examined executed copies of the Agreement, the Note and
the Amendment. I have also examined originals or photostatic or certified copies
of all such corporate records of the Borrower, and such certificates of public
officials, certificates of corporate officers and other documents, as I have
deemed appropriate and necessary as a basis for the opinions hereinafter
expressed. In making my examination and rendering the opinions hereinafter
expressed I have assumed (i) that the Lender, as a party to each of the
Agreement and the Amendment has the corporate power to enter into and perform
all of its obligations thereunder, (ii) the due authorization, execution and
delivery of each of the Agreement and the Amendment by the Lender and (iii) the
validity and binding effect on the Lender of each of the Agreement and the
Amendment.
The opinions expressed below with respect to enforceability
are subject to the following additional qualifications:
1
<PAGE> 5
(a) The effect of bankruptcy, insolvency, reorganization,
moratorium, receivership, or other similar laws of general
applicability relating to or affecting creditors' rights generally in
the event of bankruptcy, insolvency, reorganization, moratorium or
receivership.
(b) The application of general principles of equity,
including, but not limited to, the right of specific performance
(regardless of whether enforceability is considered in a proceeding in
equity or at law).
Based upon the foregoing, I am of the opinion that:
1. The Borrower is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware and the
Borrower is licensed or qualified to do business in each jurisdiction in which
failure to so qualify would be reasonably likely (either individually or in
aggregate) to have a material adverse effect on the business, operations or
financial condition of the Borrower, the ability of the Borrower to perform its
obligations under the Agreement and the Note, each as amended by the Amendment,
or the validity or enforceability of the Agreement, the Note, each as amended by
the Amendment, or any Contract.
2. The Borrower has the corporate power and legal right to
execute and deliver the Amendment, to borrow under the Agreement and the Note,
each as amended by the Amendment, and to grant liens under the Agreement, as
amended by the Amendment, and has taken all necessary corporate action to
authorize such borrowing and such granting of liens upon the terms and
conditions of the Agreement, as amended by the Amendment, and to authorize the
execution and delivery of the Amendment. No consent of any other person or
entity (including, without limitation, stockholders of the Borrower), and no
consent, license, permit, approval or authorization of, or registration or
declaration with, any governmental authority, bureau or agency is required in
connection with the execution and delivery of the Amendment by the Borrower or
the enforceability of each of the Agreement and the Note, each as amended by the
Amendment.
3. Assuming for purposes of the opinion expressed in this
paragraph 3 that the Agreement, the Note and the Amendment are governed by the
laws of the Commonwealth of Pennsylvania, each of the Agreement and the Note,
each as amended by the Amendment, constitutes the legal, valid and binding
obligation of the Borrower enforceable against the Borrower in accordance with
its respective terms.
4. The execution and delivery of the Amendment and the
performance of each of the Agreement and the Note, each as amended by the
Amendment, (i) will not violate any provision of any existing law or regulation
or of the charter or by-laws of the Borrower or of any mortgage, indenture,
contract or other undertaking to which, to the best of my knowledge (after due
inquiry), the Borrower is a party or which is binding upon it or its assets and
(ii) to the best of my knowledge (after due inquiry), will not result in the
creation or imposition of any lien, charge or encumbrance on any of its assets
pursuant to the provisions of any of the foregoing.
2
<PAGE> 6
5. No material litigation or administrative proceeding of or
before any government body is presently pending, or, to the best of my knowledge
(after due inquiry), threatened against the Borrower or its assets which if
decided adversely to the Borrower would be reasonably likely (either
individually or in the aggregate) to have a material adverse effect on the
business, operations or financial condition of the Borrower, or the validity or
enforceability of any Contract, the Agreement or the Note.
6. To the best of my knowledge (after due inquiry), no
consent, approval, authorization or order of, registration or filing with, or
notice to, any governmental authority or court is required under federal laws or
the laws of the Commonwealth of Pennsylvania for the execution and delivery of
the Amendment and the performance of the Agreement or the Note, each as amended
by the Amendment, by the Borrower.
7. The execution and delivery of the Amendment and the
performance by the Borrower of the Agreement and the Note, each as amended by
the Amendment, do not conflict with, result in a breach of, or constitute a
default under, any law, rule or regulation of the federal government or of the
general corporation law of the State of Delaware.
8. (a) The Agreement, as amended by the Amendment, creates a
valid security interest in favor of the Lender in all of the right, title and
interest of the Borrower in and to the Collateral.
(b) Financing statements naming the Lender as "Secured
Party" and the Borrower as "Debtor," and describing the Collateral, having been
filed in the offices of the Secretary of the Commonwealth of Pennsylvania and
the Prothonotary of Bucks County, Pennsylvania, together with possession by the
Custodian of the Contracts pursuant to the Custodial Agreement, the security
interests in the Collateral created by the Agreement constitute perfected
security interests, and no other action is necessary to preserve or perfect such
security interests.
9. Under the laws of the Commonwealth of Pennsylvania the
stipulation of New York law in the Amendment is enforceable.
10. [Except with respect to that certain license to engage in
a commercial lending business in the State of California, which license lapsed
in May, 1995,] to the best of my knowledge (after due inquiry) and with respect
to each license, permit or authorization required to be issued by, or received
from, any federal or state agency or instrumentality in connection with the
ownership or operation of the Borrower's business, each such license, permit and
authorization is currently in effect and authorizes the Borrower to conduct, or
does not prohibit the Borrower from conducting, its business as currently
conducted and no such agency or instrumentality has given notice to the Borrower
of any pending termination, review or revocation of such license, permit or
authorization.
In rendering the foregoing opinions, no opinion is expressed
(a) as to any collateral which is subject to any registration or certificate of
title statute, such as motor vehicles,
3
<PAGE> 7
automotive equipment, trailers, airplanes, rolling stock, rolling equipment or
shipping containers; or (b) as to any collateral other than chattel paper, which
cannot be perfected by the filing of a UCC-1 financing statement.
I am admitted to practice law in the Commonwealth of
Pennsylvania and the foregoing opinions are limited to the federal law of the
United States and the laws of the Commonwealth of Pennsylvania and the General
Corporation Law of the State of Delaware.
The opinion is solely for your benefit in connection with the
above-captioned transaction and may not be used, circulated, referred to, or
relied on by you for any other purpose or by any other person without my prior
written consent.
Sincerely yours,
4
<PAGE> 1
Exhibit 10.17
SECOND AMENDMENT TO
INTERIM LOAN AND SECURITY AGREEMENT
AMENDMENT dated as of July 31, 1997 (this "Amendment"), between (i)
PRUDENTIAL SECURITIES CREDIT CORPORATION, a Delaware corporation (the "Lender"),
and (ii) DVI FINANCIAL SERVICES INC., a Delaware corporation (the "Borrower"),
to the Existing Agreement referred to below.
RECITALS
The Borrower and the Lender are parties to that certain Interim Loan
and Security Agreement dated as of February 20, 1997, as amended by that certain
Amendment, dated as of June 30, 1997 (as so amended, and as further amended
supplemented or otherwise modified prior to the date hereof, the "Existing
Agreement"; as amended by this Amendment, the "Agreement").
The Borrower has requested that the Existing Agreement be amended to
extend the Termination Date as provided therein to July 30, 1998 and to make
certain other amendments to the Existing Agreement, as more specifically set
forth in this Amendment, and the Lender is willing to so amend the Existing
Agreement, but only on the terms and subject to the conditions set forth in this
Amendment.
Accordingly, in consideration of the premises, the Borrower and the
Lender hereby agree that the Existing Agreement is hereby amended as follows:
SECTION 1. Recitals. The recitals to the Existing Agreement are
hereby deleted and the following new recitals are added in lieu thereof:
"RECITALS"
WHEREAS, the Borrower wishes to obtain financing from time to time
to provide interim funding for certain leases of, and loans in respect of,
Equipment (as defined herein), which equipment leases and loans are to be
contributed to one or more trusts or other vehicles (each, a "Trust") to
be sponsored by the Borrower or an Affiliate thereof, in connection with
two securitization transactions, the first such transaction (the "First
Securitization") being anticipated to occur in December 1997 or January
1998, and the second such transaction (the "Second Securitization") being
anticipated to occur in June or July 1998, and which in either case may
have the benefit of credit enhancement issued by a credit enhancer (the
"Credit Enhancer"), and which equipment leases and loans and which
Equipment shall, directly or indirectly, secure the Loans (as defined
herein) to be made by the Lender hereunder.
WHEREAS, the Lender has agreed, subject to the terms and conditions
of this Loan Agreement, to provide such funding, with a portion of the
proceeds of the sale of all
1
<PAGE> 2
equipment lease and loan asset-backed securities (the "Certificates")
issued by any such Trust (as to which Prudential Securities Incorporated
has agreed to act as underwriter), together with other funds of the
Borrower, to be used to repay any Advances (as defined herein) made by the
Lender hereunder.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties to this
Agreement hereby agree as provided in the introductory paragraph and
recitals hereto and as follows (an index of certain capitalized, defined
terms appears in Section 22 of this Agreement)."
SECTION 1. The Loan.
(a) Section 1(i) of the Existing Agreement is hereby amended by
deleting the percentage "90%" each place it occurs and substituting therefor the
percentage "92%".
(b) Section 1 of the Existing Agreement is hereby amended by (i)
deleting the word "and" at the end of clause (i) thereof, (ii) adding the
following new clause (j) immediately following such clause (i):
"(j) after the making of such Advance, (i) the aggregate amount owed
by any Obligor under all Contracts of such Obligor pledged to the Lender
pursuant to this Agreement shall not exceed $4,500,000, (ii) the aggregate
amount owed by the Obligors under any individual Contract shall not exceed
$4,500,000, and (iii) for not more than five Contracts shall the aggregate
amount owed by the Obligors under any individual Contract exceed
$3,000,000; and";
and (iii) by re-lettering existing clause (j) thereof as clause (k).
SECTION 2. Terms and Conditions for All Advances.
(a) Section 2(a) of the Existing Agreement is hereby amended by
deleting the phrase "on July 31, 1997 (the "Termination Date")" occurring in the
first sentence thereof immediately prior to the proviso, and substituting in
lieu thereof the phrase "on the earlier to occur of (x) the date on which the
Certificates related to the Second Securitization are sold, and (y) July 30,
1998 (the "Termination Date")".
(b) Section 2(b) of the Existing Agreement is hereby amended by
deleting from clause (ii) thereof the percentage "0.85%" and substituting in
lieu thereof the percentage "0.80%."
(c) Section 2(c) of the Existing Agreement is hereby amended by
deleting the first proviso thereto and substituting in lieu thereof the
following new provisos:
"provided that the Maturity Date shall, for any Advance, be no later than
the earlier of (i) subject to the second succeeding proviso hereto, the
Termination Date, or (ii) the date
2
<PAGE> 3
upon which the Certificates related to the Contracts funded by such
Advance shall be sold; provided, further, that, notwithstanding the
foregoing proviso, there may remain outstanding Advances secured by
Contracts pledged to the Lender prior to the cut-off date for the First
Securitization and having an aggregate present value or market value
(determined in accordance with Section l(i)), as the case may be, of no
more than $7,500,000, and all of such Contracts shall be included in the
Second Securitization (if not prepaid prior to such Second
Securitization);"
(d) Section 2(j) of the Existing Agreement is hereby amended by
adding the following new sentence to the end thereof:
"The Advances shall also be repaid on the date of any whole loan sale of
Contracts in accordance with the requirements of Section 2(k)."
SECTION 3. Covenants. Section 7 of the Existing Agreement is hereby
amended by adding at the end thereof the following new clause (k):
"(k) Securitization Manager. The Borrower agrees that it shall
appoint the Lender or an Affiliate of the Lender as the lead manager with
respect to the First Securitization, and as a co-manager with respect to
the Second Securitization."
SECTION 4. Certain Definitions. Section 22 of the Existing Agreement
is hereby amended by (a) deleting the definition of "Credit Spread" therein and
substituting in lieu thereof the following new definition of "Credit Spread":
"'Credit Spread' - 179 basis points, or otherwise as notified to the
Borrower by the Lender in writing."
and (b) adding the following new definitions thereto in the appropriate
alphabetical order:
"'First Securitization' - Recitals.
'Second Securitization' - Recitals."
SECTION 5. Conditions to Effectiveness.
(a) Subject to the condition subsequent set forth in the immediately
following clause (b) of this Section 5, this Amendment shall become effective on
the date (the "Amendment Effective Date") on which the Lender shall have
received the following documents, each of which shall be satisfactory to the
Lender in form and substance:
(i) this Amendment, executed and delivered by a duly authorized
officer of the Borrower and the Guarantor; and
3
<PAGE> 4
(ii) such other documents, certificates or opinions as the Lender
may reasonably request.
(b) It shall be a condition subsequent to the effectiveness of this
Amendment that the Lender shall have received, within ten days after the
Amendment Effective Date, an opinion of counsel to the Borrower, in form and
substance satisfactory to the Lender (it being agreed that an opinion
substantially similar to the opinions delivered in connection with the first
Advance under the Existing Agreement shall be satisfactory to the Lender). If
such opinion is not received by the Lender on or prior to such time, this
Amendment shall cease to be effective as if the Amendment Effective Date shall
have never occurred.
SECTION 6. Limited Effect. Except as expressly amended and modified
by this Amendment, the Existing Agreement shall continue to be, and shall
remain, in full force and effect in accordance with its terms.
SECTION 7. Definitions in Existing Agreement. Unless otherwise
defined in this Amendment, terms defined in the Existing Agreement shall have
their defined meanings when used herein.
SECTION 8. Counterparts. This Amendment may be executed by one or
more of the parties hereto on any number of separate counterparts, each of which
shall be an original and all of which taken together shall constitute one and
the same instrument.
SECTION 9. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
[Signatures Commence on the Following Page]
4
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed and delivered in New York, New York by their proper and duly
authorized officers as of the day and year first above written
Borrower: DVI FINANCIAL SERVICES INC.
By: /s/ Lisa J. Cruikshank
-----------------------------
Name: Lisa J. Cruikshank
Title: Vice President
Lender: PRUDENTIAL SECURITIES CREDIT
CORPORATION
By: /s/ Jeffrey K. French
-----------------------------
Name: Jeffrey K. French
Title: Vice President
CONSENTED TO:
DVI INC.
By: /s/ Steven R. Garfinkel
-----------------------------
Name: Steven R. Garfinkel
Title: Executive Vice President
Chief Financial Officer
5
<PAGE> 1
DVI, INC.
SUBSIDIARIES AND SUB-SUBSIDIARIES
EXHIBIT 21
<TABLE>
<CAPTION>
PERCENTAGE OWNED BY
-------------------
NAME OF ENTITY/JURISDICTION OF ORGANIZATION REGISTRANT SUBSIDIARY
- ------------------------------------------- ---------- ----------
<S> <C> <C>
DVI Financial Services Inc. (Delaware) 100%
DVI Healthcare Operations, Inc. (Delaware) 100%
DVI Business Credit Corporation (Delaware) 100%
DVI Lease Finance Corporation II (Delaware) 100%
DVI Lease Finance Corporation III (Delaware 100%
DVI Lease Receivables Corp. 1993-A (Delaware) 100%
DVI Subordinated Securities Corporation (Delaware) 100%
DVI Receivables Corp. (Delaware) 100%
DVI Receivables Corp. II (Delaware) 100%
DVI Business Credit Receivables Corporation (Delaware) 100%
DVI Business Credit Receivables Corp. II (Delaware) 100%
Westgate Imaging Center, Inc. (Delaware) 100%
DVI Receivables Corp. III (Delaware) 100%
DVI Receivables Corp. IV (Delaware) 100%
DVI Receivables Corp. V (Delaware) 100%
DVI International (Delaware) 100%
DVI Thailand (Thailand) 100%
DVI Australia (Australia) 100%
Oferil Sociedad Anonima (Uruguay) 100%
Estolur Sociedad Anonima (Uruguay) 100%
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 35,360
<SECURITIES> 0
<RECEIVABLES> 570,619
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 4,091
<DEPRECIATION> 1,702
<TOTAL-ASSETS> 634,119
<CURRENT-LIABILITIES> 94,516
<BONDS> 0
0
0
<COMMON> 53
<OTHER-SE> 95,702
<TOTAL-LIABILITY-AND-EQUITY> 634,119
<SALES> 0
<TOTAL-REVENUES> 70,010
<CGS> 0
<TOTAL-COSTS> 38,395
<OTHER-EXPENSES> 13,663
<LOSS-PROVISION> 2,386
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 15,566
<INCOME-TAX> 6,625
<INCOME-CONTINUING> 8,941
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,941
<EPS-PRIMARY> .81
<EPS-DILUTED> .78
</TABLE>
