<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
- - - - - - - - - - - - -
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1943
Commission File No. 0-23928
PDS Financial Corporation
-----------------------------------------------------------
(Name of Small Business Issuer in its Charter)
Minnesota 41-1605970
- ------------------------------- --------------------------------
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
6171 McLeod Drive, Las Vegas, Nevada 89120
- -------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(702) 736-0700
-------------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.01 Par Value
----------------------------
(Title of Class)
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past twelve 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
----- -----
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B and no disclosure will 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-KSB or any amendment to
this Form 10-KSB. X
-----
State issuer's revenues for its most recent fiscal year $47,613,259.
The aggregate market value of voting stock held by nonaffiliates of the Issuer
on February 28, 1998, was $16,616,325.
The number of shares outstanding of the Issuer's only class of common stock on
February 28, 1998, was 3,557,975.
THE EXHIBIT INDEX IS LOCATED AT PAGE 34.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
The following portions of the Registrant's Proxy Statement for the 1998
Annual Meeting of Shareholders (the "Proxy Statement") are incorporated by the
reference below as the Item of this Form 10-KSB indicated. The Registrant will
file with the Securities and Exchange Commission (the "Commission") the Proxy
Statement before April 29, 1998.
<TABLE>
<CAPTION>
Part of Form 10-KSB Portion of Proxy Statement
- ------------------- --------------------------
<S> <C>
1. Part III, Item 9. Directors, 1. See captions entitled "Election
Executive Officers, Promoters of Directors" and "Compliance
and Control Persons; Compliance with Section 16(a) of the
with Section 16(a) of the Securities Exchange Act of 1934".
Exchange Act.
2. Part III, Item 10. Executive 2. See caption entitled "Executive
Compensation. Compensation".
3. Part III, Item 11. Security 3. See caption entitled "Voting
Ownership of Certain Bene- Securities and Principal Holders
ficial Owners and Management. Thereof".
4. Part III, Item 12. Certain 4. See caption entitled "Certain
Relationships and Related Transactions".
Transactions.
</TABLE>
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
PDS Financial Corporation (the "Registrant" or the "Company"), formerly
known as Progressive Distribution Systems, Inc. d/b/a PDS Leasing Services, was
incorporated under the laws of the State of Minnesota in 1988.
The Company engages in the business of financing and leasing gaming
equipment and supplying reconditioned gaming machines to casino operators.
The gaming equipment financed by the Company consists mainly of slot
machines, video gaming machines and other gaming devices. In addition, the
Company finances furniture, fixtures and other gaming related equipment,
including gaming tables and chairs, restaurant and hotel furniture, vehicles,
security and surveillance equipment, computers and other office equipment.
In 1996, the Company introduced SlotLease, a specialized operating lease
program for slot machines and other electronic gaming devices. In 1997, the
Company established PDS Slot Source, a reconditioned gaming machine sales and
distribution program, to complement its leasing and financing activities.
In order to offer its SlotLease program and PDS Slot Source, the Company
must be licensed to own and distribute gaming devices in each jurisdiction in
which it conducts business. As part of the licensing process, each gaming
jurisdiction performs a thorough investigation of each applicant and certain
of its directors and officers. The Company currently is licensed in Nevada,
New Jersey, Colorado, Iowa and Minnesota. The Company also has license
applications pending in Mississippi and Indiana. The Company believes its
gaming licenses, as well as its experience in the gaming industry, provides a
significant competitive advantage, enabling the Company to offer financing
packages and services that meet the needs of this industry more effectively
than traditional financing.
The Company was founded in 1988 as a leasing company, specializing in
vehicle and general equipment leasing transactions. The Company began
providing equipment financing for new Indian gaming facilities in the Upper
Midwest in early 1991. Since 1994, all of the Company's gross originations
have resulted from transactions in the gaming industry. In 1996, the Company
established a sales office in Las Vegas, Nevada, which became the Company's
principal executive office in 1997.
The Company generally targets established medium-sized casino operators
that are opening new gaming facilities or expanding existing gaming
facilities, as well as new casino operators that have acceptable credit
quality. Most of the Company's equipment financing transactions range from
$500,000 to $2.5 million. The Company is presently primarily focusing its
efforts on the traditional gaming markets of Nevada and New Jersey.
GAMING INDUSTRY
The casino industry in the United States, and the gaming industry in
general, have experienced substantial growth in recent years. Prior to 1979,
high stakes gaming activities were limited to Nevada. In 1979, casino gaming
was legalized in New Jersey. Between 1979 and 1988, gaming activities by
various Indian tribes developed, leading to the federal enactment of the
Indian Gaming Regulatory Act of 1988. The growth of
3
<PAGE>
Indian gaming served as a catalyst for certain jurisdictions to consider
non-Indian casino gaming because of its potential as a source of government
revenue. Since 1989, various forms of casino gaming have been legalized in
Colorado, Illinois, Indiana, Iowa, Louisiana, Michigan, Mississippi, Missouri
and South Dakota. In addition, gaming facilities operate on cruise ships
sailing out of California, Florida, Georgia, Hawaii and Puerto Rico. Certain
other states have approved or are considering approval of some form of casino
gaming. No assurance can be given as to whether any additional states will
adopt legislation permitting casino gaming in the future or the nature,
timing and extent of casino development in any state.
According to data compiled from gaming commission reports, in 1996 there
were approximately 372,000 total gaming machines installed in the United
States, compared with approximately 237,000 total gaming machines installed
in the United States in 1993 and approximately 156,000 total gaming machines
installed in the United States in 1990. According to data compiled from
gaming commission reports, in 1996 there were approximately 80,000 gaming
machines shipped in the United States, compared with approximately 58,000
gaming machines shipped in the United States in 1993 and approximately 16,000
gaming machines shipped in 1990, which represents machines shipped to replace
older machines and new installations of machines.
COMPANY STRATEGY
The Company believes that the gaming industry in general has entered
into a gaming equipment replacement cycle, which provides increased
opportunities for the Company's products and services. The Company believes
its ability to offer casino operators gaming devices under operating lease
structures provides a competitive advantage over non-licensed financial
institutions. The Company's strategy is to increase both its portfolio of
assets under lease and its reconditioned gaming device sales, and thereby
increase its revenues and cash flows. Recently the Company has increased its
focus on the Nevada gaming market, and the Company intends to further expand
its presence in that market.
Because it is licensed to own and distribute gaming machines in key
jurisdictions, the Company believes it is able to offer a wider variety of
gaming equipment financing structures, such as operating leases, which are
especially important for small to medium-sized casino operators that may be
subject to financing covenants that restrict indebtedness. While gaming
equipment manufacturers and distributors may offer financing to a casino
operator, this financing may not be on the most favorable terms, and the
manufacturers and distributors generally do not offer sufficient financing
for other necessary furniture, fixtures and equipment. The Company believes
its experience in and knowledge of the industry, as well as its licenses,
allow it to offer financing packages and services that meet the needs of the
industry in a more effective manner than traditional financing and leasing
sources and equipment manufacturers and distributors.
THE SLOTLEASE PROGRAM
The Company believes SlotLease, its operating lease program, has been
well received by casino operators since its introduction in 1996 because it
offers lower monthly payments and off balance sheet financing. The Company
believes that the SlotLease program promotes its strategic objective of
increasing recurring revenues. The Company retains ownership of the gaming
equipment under operating lease, and at the end of the applicable lease
4
<PAGE>
term the Company offers the customer an option to purchase the gaming
equipment at its then determined fair market value or extend the lease term.
The Company receives rental income under a non-cancelable lease, which ranges
from 24 to 48 months and typically has a term of 36 months. The casino
operator incurs rental expense, and avoids reflecting an asset and related
liability on its balance sheet. Returned machines are inventoried for lease
or resale by the Company through the PDS Slot Source program.
PDS SLOT SOURCE
In May 1997, the Company introduced PDS Slot Source, its reconditioned
gaming machine sales and distribution program. The Company believes that the
secondary market for gaming machines is fragmented, underdeveloped and
represents a significant opportunity for growth. The Company obtains used
gaming machines either from its customers at the end of an applicable lease
term or in the market from distributors, brokers or operators. These gaming
machines are refurbished by the Company prior to resale or occasionally are
sold "as is" to a customer. The Company believes its ability to recondition
and distribute used gaming machines enhances the market value of gaming
machines at the end of an operating lease and facilitates additional
financing transactions.
STRUCTURE OF EQUIPMENT FINANCING TRANSACTIONS
In addition to offering operating leases through its SlotLease Program,
the Company also provides financing in the form of capital leases or
collateralized loans. Such financing transactions are either originated
directly by the Company with the casino operator or are structured jointly
with the gaming equipment manufacturer or distributor. In both of these
types of transactions substantially all of the benefits and risks of
ownership are borne by the lessee/borrower. Under a capital lease, the
lessee is required to pay the Company the purchase price of the gaming
equipment either throughout the term of the lease or, if the lease payments
are not sufficient to cover the purchase price of the gaming equipment, the
lessee is required to pay the Company a balloon payment at the end of the
lease term. Most of the Company's equipment financing transactions range
from $500,000 to $2.5 million. The Company generally obtains the funds
necessary for its capital lease or collateralized loans by selling all or a
portion of its interest in the payment stream to one or more institutional
investors, often simultaneously with its origination of financing
transactions. The sale price of a financing transaction is based upon the
discounted present value of the payment stream. The Company's ability to
locate investors to fund its financing transactions depends on many factors,
including the credit quality of the borrowers or lessees, the type of
underlying equipment, credit enhancements, if any and the terms under which
the transaction was both originated and sold.
COMPETITION
The finance industry is highly competitive. In the gaming equipment
financing market, the Company competes primarily with equipment manufacturers
and to a lesser extent with leasing companies, commercial banks and other
financial institutions. Certain of the Company's competitors are
significantly larger and have substantially greater resources than the
Company. The Company sometimes jointly markets its financing services with
gaming equipment manufacturers who may be competitors of the Company. The
Company believes its ability to offer
5
<PAGE>
casino operators gaming devices under operating lease structures provides a
competitive advantage over non-licensed financial institutions.
The Company competes on the basis of offering flexibility in structuring
leases and other financial transactions, commitment to prompt attention to
customer needs, creative solutions to non-traditional financing requests and
immediate reactions to changes in the financial marketplace. In addition to
financing gaming equipment, the Company finances substantially all other
types of furniture, fixture and equipment used in a casino operation.
With respect to the sales of reconditioned gaming machines, the Company
competes primarily against equipment manufacturers and smaller distributors.
It is possible that new competitors may engage in gaming equipment financing
or the distribution of reconditioned gaming machines, some of which may have
licenses to own or sell gaming equipment and have greater financial resources
than the Company.
PRINCIPAL CUSTOMERS
Historically, the Company has experienced significant nonrecurring
revenues in connection with the completion of its large gaming equipment
financing transactions. Revenues from the Company's principal customers were
37%, 18%, 11%, 2% and 7% of total revenues during 1997 and 20%, 0%, 16%, 20%
and 14% of total revenues during 1996, respectively. The Company does not
expect revenues from certain of these customers to represent a significant
percentage of its total revenues in 1998. Due to the nature of its large
gaming equipment financing transactions, the Company believes that a
significant percentage of its total revenues may be derived from one or
several of its customers in 1998.
GOVERNMENT REGULATION
Gaming is a highly regulated industry. The Company's gaming equipment
financing activities are subject to federal and state regulation and
oversight. In order to offer its SlotLease program and PDS Slot Source, the
Company must be licensed to own and distribute gaming devices in each
jurisdiction where it conducts business. As part of the licensing process,
each gaming jurisdiction performs a thorough investigation of each applicant,
its directors and certain of its officers, key employees and significant
shareholders. The Company currently is licensed as a gaming equipment
distributor under Nevada, New Jersey, Colorado, Iowa and Minnesota gaming
laws. The Company has gaming license applications pending in Mississippi and
Indiana, which were filed in 1997. Expansion of the Company's activities may
be hindered by delays in obtaining requisite state licenses or other
approvals.
No investor may become a holder of 5% or more of the Company's stock
without first agreeing to consent to a background investigation, provide a
financial statement and respond to questions from gaming regulators.
Gaming on Indian land is further regulated by tribal governments.
Changes in federal, state or tribal laws or regulations may limit or
otherwise materially affect the types of gaming that may be conducted on
Indian land. In addition, numerous lawsuits nationwide seek to limit or
expand Indian gaming activities. The outcome of such litigation cannot be
predicted.
6
<PAGE>
The following references to material statutes and regulations affecting
the Company are brief summaries thereof and do not purport to be complete,
and are qualified in their entirety by reference to such statutes and
regulations. Any change in applicable law or regulation may have a material
effect on the business of the Company.
NEVADA. The ownership, operation, sale and distribution of gaming
devices in Nevada is subject to the Nevada Gaming Control Act and the
regulations promulgated thereunder (collectively, the "Nevada Act") and
various local regulations. Generally, gaming activities (including the sale
and lease of gaming devices) may not be conducted in Nevada unless licenses
are obtained from the Nevada Gaming Commission (the "Nevada Commission") and
appropriate county and city licensing agencies. The Nevada Commission, the
Nevada State Gaming Control Board (the "Nevada Board") and the various county
and city licensing agencies are collectively referred to as the "Nevada
Gaming Authorities."
The laws, regulations, and supervisory procedures of the Nevada Gaming
Authorities are based upon declarations of public policy which are concerned
with, among other things: (i)the prevention of unsavory or unsuitable persons
from having a direct or indirect involvement with gaming at any time or in
any capacity; (ii)the establishment and maintenance of responsible accounting
practices and procedures; (iii)the maintenance of effective controls over the
financial practices of licensees, including the establishment of minimum
procedures for internal fiscal affairs and the safeguarding of assets and
revenues, providing reliable record keeping and requiring the filing of
periodic reports with the Nevada Gaming Authorities; (iv)the prevention of
cheating and fraudulent practices; and (v) to provide a source of state and
local revenues through taxation and licensing fees. Change in such laws,
regulations, and procedures could have an adverse effect on the Company's
operations.
PDS Financial Corporation-Nevada, a Nevada corporation and wholly owned
subsidiary of the Company ("PDS Nevada"), is required to be licensed as a
distributor by the Nevada Gaming Authorities. The gaming license requires
the periodic payment of fees and taxes and is not transferable. The Company
is registered by the Nevada Commission as a publicly traded corporation
("Registered Corporation") and as such, it is required periodically to submit
detailed financial and operating reports to the Nevada Commission and furnish
any other information which the Nevada Commission may require. No person may
become a stockholder of, or receive any percentage of profits from, PDS
Nevada without first obtaining licenses and approvals from the Nevada Gaming
Authorities. The Company and PDS Nevada have obtained from the Nevada Gaming
Authorities the various registrations, approvals, permits, and licenses
required in order to engage in gaming activities in Nevada.
The Nevada Gaming Authorities may investigate any individual who has a
material relationship to, or material involvement with, the Company or PDS
Nevada in order to determine whether such individual is suitable or should be
licensed as a business associate of a gaming licensee. Officers, directors
and certain key employees of PDS Nevada must file applications with the
Nevada Gaming Authorities and may be required to be licensed or found
suitable by the Nevada Gaming Authorities. Officers, directors, and key
employees of the Company who are actively and directly involved in gaming
activities of PDS Nevada may be required to be licensed or found suitable by
the Nevada Gaming Authorities. The Nevada Gaming Authorities may deny an
application for licensing for any cause which they deem reasonable. A
finding of suitability is comparable to licensing, and both require
submission of detailed personal and financial information followed by a
thorough investigation. The applicant for licensing or a finding of
suitability must pay all the costs of the investigation incurred by the
Nevada Gaming Authorities. Changes in licensed positions must be reported
7
<PAGE>
to the Nevada Gaming Authorities and in addition to their authority to deny
an application for a finding of suitability or licensure, the Nevada Gaming
Authorities have jurisdiction to disapprove a change in corporate position.
If the Nevada Gaming Authorities were to find an officer, director, or
key employee unsuitable for licensing or unsuitable to continue having a
relationship with the Company or PDS Nevada, the company involved would have
to sever all relationships with such person. In addition, the Nevada
Commission may require the Company or PDS Nevada to terminate the employment
of any person who refuses to file appropriate applications. Determinations of
suitability or of questions pertaining to licensing are not subject to
judicial review in Nevada.
The Company and PDS Nevada are required to submit detailed financial and
operating reports to the Nevada Commission. Substantially all material
loans, leases, sales of securities, and similar financial transactions by PDS
Nevada must be reported to, or approved by, the Nevada Commission.
If it were determined that the Nevada Act was violated by PDS Nevada,
the gaming licenses it holds could be limited, conditioned, suspended, or
revoked, subject to compliance with certain statutory and regulatory
procedures. In addition, PDS Nevada, the Company, and the persons involved
could be subject to substantial fines for each separate violation of the
Nevada Act at the discretion of the Nevada Commission. Limitation,
conditioning, or suspension of any gaming license could (and revocation of
any gaming license would) materially adversely affect the Company's
operations.
Any beneficial holder of the Company's voting securities, regardless of
the number of shares owned, may be required to file an application, be
investigated, and have his suitability as a beneficial holder of the
Company's voting securities determined if the Nevada Commission has reason to
believe that such ownership would otherwise be inconsistent with the declared
policies of the State of Nevada. The applicant must pay all costs of
investigation incurred by the Nevada Gaming Authorities in conducting any
such investigation.
The Nevada Act requires any person who acquires more than five percent
of the Company's voting securities to report the acquisition to the Nevada
Commission. The Nevada Act requires the beneficial owners of more than 10
percent of the Company's voting securities apply to the Nevada Commission for
a finding of suitability with 30 days after the chairman of the Nevada Board
mails the written notice requiring such filing. Under certain circumstances,
an "institutional investor," as defined in the Nevada Act, which acquires
more than 10 percent, but not more than 15 percent, of the Company's voting
securities may apply to the Nevada Commission for a waiver of such finding of
suitability if such institutional investor holds the voting securities for
investment purposes only. An institutional investor shall not be deemed to
hold voting securities for investment purposes unless the voting securities
were acquired and are held in the ordinary course of business as an
institutional investor and not for the purpose of causing, directly or
indirectly, the election of a majority of the members of the board of
directors of the Company, any change in the Company's corporate charter,
bylaws, management, policies, or operations of the Company, or any of its
gaming affiliates, or any other action which the Nevada Commission finds to
be inconsistent with holding the Company's voting securities for investment
purposes only. Activities which are not deemed to be inconsistent with
holding voting securities for investment purposes only include: (i) voting
on all matters voted on by stockholders; (ii) making financial and other
inquiries of management of the type normally made by securities analysts for
informational purposes and not to cause a change in its management, policies,
or operations; and (iii) such other activities as the Nevada Commission may
determine to be consistent with such investment intent. If the beneficial
holder of voting securities who
8
<PAGE>
must be found suitable is a corporation, partnership, or trust, it must
submit detailed business and financial information including a list of
beneficial owners. The applicant is required to pay all costs of the
investigation incurred by the Nevada Gaming Authorities.
Any person who fails or refuses to apply for a finding of suitability or
a license within 30 days after being ordered to do so by the Nevada
Commission or the Chairman of the Nevada Board, may be found unsuitable. A
record owner may also be found unsuitable if the record owner fails to
identify the beneficial owner within 30 days of a request by the Nevada
Commission or Chairman of the Nevada Board. Any stockholder found unsuitable
and who holds, directly or indirectly, any beneficial ownership of the common
stock of a Registered Corporation beyond such period of time as may be
prescribed by the Nevada Commission may be guilty of a criminal offense. The
Company is subject to disciplinary action if, after it receives notice that a
person is unsuitable to be a stockholder or to have any other relationship
with the Company or PDS Nevada, the Company (i) pays that person any dividend
or interest upon voting securities of the Company, (ii) allows that person to
exercise, directly or indirectly, any voting right conferred through
securities held by that person, (iii) pays remuneration in any form to that
person for services rendered or otherwise, or (iv) fails to pursue all lawful
efforts to require such unsuitable person to relinquish his voting securities
for cash at fair market value.
The Nevada Commission may, in its discretion, require the holder of any
debt security of a Registered Corporation to file applications, be
investigated, and be found suitable to own the debt security of a Registered
Corporation. If the Nevada Commission determines that a person is unsuitable
to own such security, then pursuant to the Nevada Act, the Registered
Corporation can be sanctioned, including the loss of its approvals, if
without the prior approval of the Nevada Commission, it: (i) pays to the
unsuitable person any dividend, interest, or any distribution whatsoever;
(ii) recognizes any voting right by such unsuitable person in connection with
such securities; (iii) pays the unsuitable person remuneration in any form;
or (iv) makes any payment to the unsuitable person by way of principal,
redemption, conversion, exchange, liquidation, or similar transaction.
The Company is required to maintain a current stock ledger in Nevada
which may be examined by the Nevada Gaming Authorities at any time. If any
securities are held in trust by an agent or by a nominee, the record holder
may be required to disclose the identity of the beneficial owner to the
Nevada Gaming Authorities. A failure to make such disclosure may be grounds
for finding the record holder unsuitable. The Company is also required to
render maximum assistance in determining the identity of the beneficial
owner. The Nevada Commission has the power to require the Company's stock
certificates to bear a legend indicating that the securities are subject to
the Nevada Act. However, to date, the Nevada Commission has not imposed such
a requirement on the Company.
The Company may not make a public offering of its securities without the
prior approval of the Nevada Commission if the securities or proceeds
therefrom are intended to be used to construct, acquire, or finance gaming
facilities in Nevada, or to retire or extend obligations incurred for such
purposes. "Gaming facilities" has been interpreted by the Nevada Gaming
Authorities to include the acquisition or financing of gaming devices in
Nevada. Furthermore, any such approval, if granted, does not constitute a
finding, recommendation, or approval by the Nevada Commission or the Nevada
Board as to the accuracy or adequacy of the prospectus or the investment
merits of the securities offered. Any representation to the contrary is
unlawful.
Changes in control of the Company through merger, consolidation, stock
or asset acquisitions, management or consulting agreements, or any act or
9
<PAGE>
conduct by a person whereby he obtains control, may not occur without the
prior approval of the Nevada Commission. Entities seeking to acquire control
of a Registered Corporation must satisfy the Nevada Board and Nevada
Commission in a variety of stringent standards prior to assuming control of
such Registered Corporation. The Nevada Commission may also require
controlling stockholders, officers, directors, and other persons having a
material relationship or involvement with the entity proposing to acquire
control, to be investigated and licensed as part of the approval process
relating to the transaction.
The Nevada legislature has declared that some corporate acquisitions
opposed by management, repurchases of voting securities and corporate defense
tactics affecting Nevada gaming licensees, and Registered Corporations that
are affiliated with those operations, may be injurious to stable and
productive corporate gaming. The Nevada Commission has established a
regulatory scheme to ameliorate the potentially adverse effects of these
business practices upon Nevada's gaming industry and to further Nevada's
policy to: (i) assure the financial stability of corporate gaming operators
and their affiliates; (ii) preserve the beneficial aspects of conducting
business in the corporate form; and (iii) promote a neutral environment for
the orderly governance of corporate affairs. Approvals are, in certain
circumstances, required from the Nevada Commission before the Company can
make exceptional repurchases of voting securities above the current market
price thereof and before a corporate acquisition opposed by management can be
consummated. The Nevada Act also requires prior approval of a plan of
recapitalization proposed by the Company's Board of Directors in response to
a tender offer made directly to the Registered Corporation's stockholders for
the purposes of acquiring control of the Registered Corporation.
License fees and taxes, computed in various ways depending on the type
of gaming or activity involved, are payable to the State of Nevada and to the
counties and cities in which the Nevada licensee's respective operations are
conducted. Depending upon the particular fee or tax involved, these fees and
taxes are payable either monthly, quarterly, or annually. Nevada licensees
that hold a license as an operator of a slot route, or a manufacturer's or
distributor's license, also pay certain fees and taxes to the State of Nevada.
Any person who is licensed, required to be licensed, registered,
required to be registered, or is under common control with such persons
(collectively, "Licensees"), and who proposes to become involved in a gaming
venture outside of Nevada is required to deposit with the Nevada Board, and
thereafter maintain, a revolving fund in the amount of $10,000 to pay the
expenses of investigation of the Nevada Board of their participation in such
foreign gaming. The revolving fund is subject to increase or decrease in the
discretion of the Nevada Commission. Thereafter, Licensees are required to
comply with certain reporting requirements imposed by the Nevada Act. A
Licensee is also subject to disciplinary action by the Nevada Commission if
it knowingly violates any laws of the foreign jurisdiction pertaining to the
foreign gaming operation, fails to conduct the foreign gaming operation in
accordance with the standards of honesty and integrity required of Nevada
gaming operations, engages in activities that are harmful to the State of
Nevada or its ability to collect gaming taxes and fees, or employs a person
in the foreign operation who has been denied a license or finding of
suitability in Nevada on the ground of personal unsuitability.
NEW JERSEY. The Company and certain of its officers and directors, are
currently required to be licensed under the New Jersey Casino Control Act
(the "New Jersey Act") as a casino service industry qualified to sell its
products to casinos in New Jersey. The sale and distribution of gaming
equipment to casinos in New Jersey is also subject to the New Jersey Act and
the regulations promulgated thereunder by the New Jersey Commission.
10
<PAGE>
The New Jersey Commission has broad discretion in promulgating and
interpreting regulations under the New Jersey Act. Amendments and
supplements to the New Jersey Act, if any, may be of a material nature, and
accordingly may adversely affect the ability of the Company or its employees
to obtain any required licenses, permits and approvals from the New Jersey
Commission, or any renewals thereof.
The current regulations govern licensing requirements, standards for
qualification, persons required to be qualified, disqualification criteria,
competition, investigation of supplementary information, duration of
licenses, record keeping, causes for suspension, standards for renewals or
revocation of licenses, equal employment opportunity requirements, fees and
exemptions. In deciding to grant a license, the New Jersey Commission may
consider, among other things, the financial stability, integrity,
responsibility, good character, reputation for honesty, business ability and
experience of the Company and its directors, officers, management and
supervisory personnel, principal employees and stockholders as well as the
adequacy of the financial resources of the Company.
New Jersey licenses are granted for a period of one or two years,
depending on the length of time a company has been licensed, and are
renewable. The New Jersey Commission may impose such conditions upon
licensing as it deems appropriate. These include the ability of the New
Jersey Commission to require the Company to report the names of all of its
stockholders as well as the ability to require any stockholders whom the New
Jersey Commission finds not qualified to dispose of the stock, not receive
dividends, not exercise any rights conferred by the shares, nor receive any
remuneration from the Company for services rendered or otherwise. Failure of
such stockholder to dispose of such stockholder's stock could result in the
loss of the Company's license. Licenses are also subject to suspension,
revocation or refusal for sufficient cause, including the violation of any
law. In addition, licensees are also subject to monetary penalties for
violations of the New Jersey Act or the regulations of the New Jersey
Commission.
OTHER JURISDICTIONS. The Company currently is licensed to operate at
various levels in Colorado, Iowa and Minnesota and has license applications
pending in Mississippi and Indiana. Although the regulations in these
jurisdictions are not identical, their material attributes are substantially
similar, as described below.
The manufacture, sale and distribution of gaming devices and the
ownership and operation of gaming facilities in each jurisdiction are subject
to various state, county and/or municipal laws, regulations and ordinances,
which are administered by the relevant regulatory agency or agencies in that
jurisdiction (the "Gaming Regulators"). These laws, regulations and
ordinances primarily concern the responsibility, financial stability and
character of gaming equipment owners, distributors, sellers and operators, as
well as persons financially interested or involved in gaming or liquor
operations.
In many jurisdictions, selling or distributing gaming equipment may not
be conducted unless proper licenses are obtained. An application for a
license may be denied for any cause which the Gaming Regulators deem
reasonable. In order to ensure the integrity of manufacturers and suppliers
of gaming supplies, most jurisdictions have the authority to conduct
background investigations of the Company, its key personnel and significant
stockholders. The Gaming Regulators may at any time revoke, suspend,
condition, limit or restrict a license for any cause deemed reasonable by the
Gaming Regulators. Fines for violation of gaming laws or regulations may be
levied against the holder of a license and persons involved. The Company and
its key personnel have obtained all licenses necessary for the conduct of the
Company's business in the jurisdictions in which it sells, distributes and
finances gaming equipment. Suspension or
11
<PAGE>
revocation of such licenses could have a material adverse effect on the
Company's operations.
EMPLOYEES
As of December 31, 1997, the Company employed 27 persons, including 6 in
direct sales and marketing, 7 in warehousing/refurbishing and 14 in general
and administrative functions. All of these persons are full-time employees.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company's corporate offices and its warehouse are located in
approximately 30,000 square feet of leased space in Las Vegas, Nevada. The
Company pays monthly rent of $20,000 pursuant to a lease expiring on December
31, 2004. The Company has additional offices located in approximately 6,000
square feet of leased space in Eden Prairie, Minnesota. The Company pays
monthly rent of $10,000 pursuant to a lease expiring on January 14, 2000.
The Company considers the facilities as adequate and suitable for the
purposes they serve.
ITEM 3. LEGAL PROCEEDINGS.
The Registrant is not a party to any material litigation and is not
aware of any threatened litigation that would have a material adverse effect
on its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the quarter ended December 31, 1997, no matter was submitted to a
vote of security holders.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
See attached caption entitled "Common Stock".
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
See attached caption entitled "Management's Discussion and Analysis".
ITEM 7. FINANCIAL STATEMENTS.
See attached captions entitled "Consolidated Balance Sheet", "Consolidated
Income Statement", "Consolidated Statement of Stockholders' Equity",
"Consolidated Statement of Cash Flows", "Notes to Consolidated Financial
Statements" and "Report of Independent Accountants".
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
No changes in accountants or disagreements between the Registrant and
its accountants regarding accounting principles or financial statement
disclosures have occurred within the twenty-four months prior to date of
Registrant's most recent financial statements.
12
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
See the Registrant's Proxy Statement for the 1998 Annual Meeting of
Shareholders, which will be filed with the Commission before April 29, 1998,
referenced on page 2 of this Form 10-KSB.
ITEM 10. EXECUTIVE COMPENSATION.
See the Registrant's Proxy Statement for the 1998 Annual Meeting of
Shareholders, which will be filed with the Commission before April 29, 1998,
referenced on page 2 of this Form 10-KSB.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
See the Registrant's Proxy Statement for the 1998 Annual Meeting of
Shareholders, which will be filed with the Commission before April 29, 1998,
referenced on page 2 of this Form 10-KSB.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
See the Registrant's Proxy Statement for the 1998 Annual Meeting of
Shareholders, which will be filed with the Commission before April 29, 1998,
referenced on page 2 of this Form 10-KSB.
13
<PAGE>
ITEM 13. EXHIBITS LIST AND REPORTS ON FORM 8-K.
(a) EXHIBITS
The following exhibits are included with this Annual Report on
Form 10-KSB (or incorporated by reference) as required by Item 601 of
Regulation S-B.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
Incorporated by Reference:
3.5* Bylaws of the Registrant
4.1* Specimen of Common Stock Certificate
4.2* Indenture of Trust between the Registrant and First Trust
National Association dated as of November 2, 1993 and First
Supplemental Indenture of Trust dated as of November 8, 1993
4.3** Form of Warrant to Purchase 25,000 Shares of Common Stock,
dated December 15, 1994, issued to Miller & Schroeder
Investments Corporation
4.4** Form of Warrant to Purchase 145,000 Shares of Common Stock,
dated May 24, 1994
10.2* 1993 Stock Option Plan
10.3* Form of Incentive Stock Option Agreement
10.4* Form of Non-Qualified Stock Option Agreement
10.5* Employment Agreement between the Registrant and Johan P.
Finley
10.6* Employment Agreement between the Registrant and David R.
Mylrea
10.7*** Employment Agreement between the Registrant and Robert M.
Mann
10.8*** Employment Agreement between the Registrant and Peter D.
Cleary
10.9* Employment Agreement between the Registrant and Lona M. B.
Finley
10.10* Form of Tax Indemnification Agreement between the
Registrant and Johan P. Finley
</TABLE>
_______________
* Incorporated by reference to the Registrant's previously
filed Form SB-2 Registration Statement No. 33-76948C
** Incorporated by reference to the Registrant's previously
filed Form SB-2 Registration Statement No. 33-88692
*** Incorporated by reference to the Registrant's previously
filed Form 10- KSB for the year ended December 31, 1995
Submitted Herewith:
<TABLE>
<CAPTION>
<S> <C>
3.1 Amended and Restated Articles of Incorporation
3.2 Articles of Amendment to Articles of Incorporation
3.3 Articles of Amendment to Articles of Incorporation
3.4 Articles of Amendment of Amended and Restated Articles of
Incorporation
10.1 Industrial Real Estate Lease dated April 29, 1997, between
the Registrant, as Tenant, and Patrick Commerce Center,
LLC, as Landlord
10.11 Revolving Credit and Security Agreement, dated April 9,
1997 between BNY Financial Corporation as Lender and as
Agent and the Registrant and PDS Financial
Corporation-Nevada as Borrowers
10.12 Loan and Security Agreement, dated June 20, 1997 between
Heller Financial, Inc., as Lender and the Registrant as
Borrower
10.13 Loan and Security Agreement, dated June 20, 1997 between
Heller Financial, Inc., as Lender and PDS Financial
Corporation-Nevada, as Borrower
10.14 Commercial Security Agreement, dated August 15, 1997
between U.S. Bank, as Lender and the Registrant as Borrower
10.15 Letter Agreement between the Registrant and David R. Mylrea
21.1 Subsidiaries of the Registrant
23.1 Consent of Independent Accountants
27.1 Financial Data Schedule for the year ended December 31, 1997
27.2 Financial Data Schedule for the nine months ended
September 30, 1997
99.1 Cautionary Statements
</TABLE>
(b) REPORTS ON FORM 8-K.
The Registrant was not required to file any reports on Form 8-K for the
quarter ended December 31, 1997.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL:
PDS Financial Corporation and its consolidated subsidiaries (the "Company" or
"PDS") engage in the business of financing and leasing gaming equipment and
supplying reconditioned gaming devices to casino operators. The gaming
equipment financed by the Company consists mainly of slot machines, video
gaming machines and other gaming devices. In addition, the Company finances
furniture, fixtures and other gaming related equipment, including gaming
tables and chairs, restaurant and hotel furniture, vehicles, security and
surveillance equipment, computers and other office equipment. In 1996, the
Company introduced SlotLease, a specialized operating lease program for slot
machines and other electronic gaming devices. The Company believes it is
currently the only independent leasing company licensed in the states of
Nevada, New Jersey, Colorado, Iowa and Minnesota to provide this financing
alternative. In 1997, the Company established PDS Slot Source, a
reconditioned gaming device sales and distribution division, to complement
its leasing and financing activities and to generate equipment sales to
casino operators.
The Company's strategy is to increase its portfolio of assets under lease and
reconditioned gaming device sales, and thereby increase revenues and cash
flows. In addition to its leasing activities, the Company also originates
note transactions, which it generally sells to institutional investors. In
some of its transactions, the Company holds the leases or notes for a period
of time after origination, or retains a partial ownership interest in the
leases or notes. The Company believes its ability to recondition and
distribute used gaming devices enhances the gaming devices' values at the end
of an operating lease and facilitates additional financing transactions.
The Company's quarterly operating results, including net income, have
historically fluctuated due to the timing of completion of large financing
transactions, as well as the timing of recognition of the resulting fee
income upon subsequent sale. These transactions can be in the negotiation and
documentation stages for several months, and recognition of the resulting fee
income by the Company may fluctuate greatly from quarter to quarter. Thus,
the results of any quarter are not necessarily indicative of the results
which may be expected for any other period. The Company believes that the
development of its lease portfolio and reconditioned gaming device division
will lead to increased recurring revenues, which will tend to lessen the
fluctuations of its operating results.
ACCOUNTING FOR COMPANY ACTIVITIES:
The accounting treatment for the Company's financing activities varies
depending upon the underlying structure of the transaction. The majority of
the Company's equipment financing transactions are structured as either notes
receivable or direct finance leases in which substantially all benefits and
risks of ownership are borne by the borrower or lessee. Direct finance
leases are afforded accounting treatment similar to that for notes
receivable. In 1996, the Company began structuring some of its gaming
equipment financings as operating leases, under which the Company retains
substantially all of the benefits and risks of ownership. In the third
quarter of 1997, the Company began structuring certain of its gaming
equipment transactions as sales-type leases. Consistent with the Company's
strategy to increase its leasing activities, the 1996 and 1997 originations
involve a greater mix of operating leases, which generate revenues throughout
the lease term, as opposed to notes or direct finance leases, which generate
revenues primarily upon sale.
The Company's revenue generating activities can be categorized as follows:
(i) equipment sales; (ii) revenue from sales-type leases; (iii) rental
revenue on operating leases; (iv) fee income, resulting principally from the
sale of lease or note receivable transactions; and (v) finance income,
resulting from financing transactions in which the direct finance lease or
note receivable is retained by the Company.
The types of income are further described below:
EQUIPMENT SALES. In mid-1997, the Company established a reconditioned gaming
device sales and distribution division, PDS Slot Source. Used gaming devices
are obtained by the Company either from its customers at the end of an
applicable lease term, or in the marketplace. The cost of this equipment is
recorded in the consolidated balance sheet as equipment held for sale or
lease. At the time of sale, the Company records revenue equal to the selling
price of the related asset. Upon selling reconditioned gaming devices, the
Company removes the underlying asset from its consolidated balance sheet and
records the cost, including reconditioning cost, as cost of revenues.
Equipment sales also includes the sale of equipment which may occur during
the term of an operating lease.
REVENUE FROM SALES-TYPE LEASES. Beginning in the third quarter of 1997, the
Company structured certain of its gaming equipment transactions as sales-type
leases. Sales-type leases, like direct finance leases, transfer substantially
all the benefits and risks of ownership of the leased asset to the lessee.
Unlike direct finance leases, sales-type leases also include dealer profit
resulting from the Company leasing equipment which was purchased at a
discount that is not available to the lessee. This dealer profit is
recognized at the inception of the lease in the consolidated income statement
as the difference between revenue from sales-type leases and sales-type lease
cost. Revenue from sales-type leases is the present value of the future
minimum lease payments. Sales-type lease cost is the Company's equipment
cost, net of any discounts. Upon selling a sales-type lease to a third party,
the Company removes the underlying asset from its consolidated balance sheet.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
RENTAL REVENUE ON OPERATING LEASES. Operating leases are defined as those
leases in which substantially all the benefits and risks of ownership of the
leased asset are retained by the Company. Revenue from operating leases
consists of monthly rentals and is reflected in the consolidated income
statement evenly over the life of the lease as rental revenue on operating
leases. The cost of the related equipment is depreciated on a straight-line
basis over the lease term to the Company's estimate of residual value. This
depreciation is recorded in the consolidated income statement as depreciation
on operating leases.
For operating leases, the cost of equipment, less accumulated depreciation,
is recorded in the consolidated balance sheet as equipment under operating
leases, net.
FEE INCOME. The Company funds much of the direct finance lease and note
transactions it originates through a sale of such transactions (i.e., the
sale of all of the Company's right, title and interest in the future payment
stream from the related leases or notes). A sale may occur simultaneously
with the origination or several months thereafter. At the time of sale, the
Company records fee income equal to the difference between the selling price
and the carrying value of the related financial asset. The calculation of fee
income reflects many factors, including the credit quality of the borrowers
or lessees, the type of underlying equipment, credit enhancements, if any and
ultimately, the terms under which the transaction was both originated and
sold. Fee income also includes commissions earned for arranging financing in
which the Company is not a party to the transaction.
Upon the sale of a lease or note, the Company removes the underlying asset
from its consolidated balance sheet.
FINANCE INCOME. For the period during which the Company holds a note
receivable or direct finance lease, finance income is recognized over the
term of the underlying lease or note in a manner which produces a constant
percentage rate of return on the asset carrying cost.
For those direct finance leases held by the Company, the present value of the
future minimum lease payments are recorded in the consolidated balance sheet
as direct finance leases.
RESULTS OF OPERATIONS:
YEARS ENDED DECEMBER 31, 1997 AND 1996
Revenues totaled $47.6 million in 1997, a significant increase from $6.4
million in 1996. The increase in revenues is primarily attributable to
equipment sales, sales-type leases of new gaming equipment as well as the
Company's expanded lease portfolio. Revenues have benefited from the Company
becoming licensed to own gaming equipment in Nevada and other jurisdictions
in 1997. Gross originations of financing transactions in 1997 totaled $84.4
million compared to $73.8 million in 1996, an increase of 14%.
Equipment sales totaled $17.5 million in 1997. The Company did not sell
equipment in 1996. The Company has obtained its gaming equipment distributor
licenses in Nevada, New Jersey, Colorado, Iowa and Minnesota and in 1997
established its reconditioned gaming device sales and distribution division,
PDS Slot Source. The 1997 equipment sales include both equipment which had
been under operating leases, and used gaming devices which the Company
purchased in the marketplace and reconditioned prior to sale. The cost of
equipment sold was $15.2 million.
Revenue from sales-type leases was $14.5 million in 1997, resulting from the
Company's first sales-type leases of new gaming equipment. Consistent with
the growth of the distribution business described above, the Company intends
to continue to offer this type of lease. The Company did not originate
sales-type leases during 1996. The related cost of these sales-type leases
was $13.7 million in 1997.
Rental revenue on operating leases increased significantly, consistent with
the Company's strategy. The Company's average operating lease portfolio grew
substantially to $27.7 million during 1997, compared to $9.1 million during
1996. Rental revenue on operating leases increased to $11.4 million during
1997 from $2.9 million during 1996. Related depreciation also increased to
$8.6 million from $2.2 million. These leases are expected to generate
revenues throughout their lease terms, which range from 24 to 48 months and
is typically 36 months.
The Company generated fee income of $2.7 million related to the sale of
transactions with a basis of $74.5 million during 1997, compared to fee
income of $2.5 million on the sale of transactions with a basis of $52.9
million during 1996.
Finance income increased to $1.6 million in 1997 from $.8 million in 1996.
The increase primarily reflects the larger portfolio of notes receivable held
by the Company in 1997.
Selling, general and administrative expenses in 1997 increased to $4.1
million from $2.3 million in 1996, primarily attributable to higher payroll
and occupancy costs associated with the expansion of the sales activities and
the formation of the reconditioned gaming device division in Las Vegas,
Nevada in 1997.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
Interest expense increased to $4.3 million from $1.4 million due to higher
levels of borrowing primarily related to the larger investment in equipment
for leasing beginning in the second half of 1996.
Other expense in 1997 primarily reflects the loss on the sale of certain
marketable securities.
Income before income taxes increased $1.0 million to $1.5 million for 1997,
compared with $.5 million for 1996. The improvement in 1997 reflects the
profit contributions from equipment sales, sales-type leases and operating
lease activities, partially offset by higher related costs and expenses, as
described above.
The Company's effective income tax rate in 1997 was approximately 38%,
compared to approximately 37% in 1996. Both effective rates are higher than
the federal statutory rate of 34%, due primarily to state income taxes.
QUARTERLY RESULTS. The following table sets forth selected historical
operating results for each quarter of 1997 and 1996. The quarterly
information is unaudited but, in management's opinion, reflects all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the information for the periods presented.
<TABLE>
<CAPTION>
1997
------------------------------------------------
Quarter ended Mar. 31 June 30 Sept. 30 Dec. 31
--------- ---------- ------------ ----------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Total revenues........... $ 3,561 $ 4,606 $17,566 $21,880
Net income............... 154 159 280 349
Net income per share:
Basic................. .05 .05 .09 .10
Diluted............... .05 .05 .08 .09
Total originations....... 35,713 18,098 18,675 11,913
</TABLE>
<TABLE>
<CAPTION>
1996
------------------------------------------------
Quarter ended Mar. 31 June 30 Sept. 30 Dec. 31
---------- ----------- ----------- ---------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Total revenues........... $ 1,236 $ 971 $ 1,636 $ 2,517
Net income............... 81 18 124 82
Net income per share:
Basic................. .03 .01 .04 .03
Diluted............... .03 .01 .04 .03
Total originations....... 5,111 19,025 37,375 12,255
</TABLE>
The summation of quarterly per share amounts may not equal the calculation
for the full year, as each quarterly calculation is performed discretely.
As previously indicated, the Company has experienced significant fluctuations
in its quarterly operating results, due primarily to the timing of completion
of large financing transactions, and the related recognition of fee income
upon subsequent sale. The increase in revenues beginning in the third quarter
of 1996 primarily reflects increased rental revenues on operating leases. The
increase in revenues in the third quarter of 1997 primarily reflects the
Company's first sales-type leases of new gaming equipment. The increase in
revenues in the fourth quarter of 1997 primarily reflects the Company's first
sales of equipment which had been under operating lease. The Company believes
that the development of its lease portfolio and reconditioned gaming device
division will lead to increased recurring revenues, which will tend to lessen
the fluctuations of the historical operating results.
LIQUIDITY AND CAPITAL RESOURCES:
The funds necessary to support the Company's activities have been provided by
cash flows generated primarily from the operating activities described above
and various forms of recourse and non-recourse borrowings. The Company's
strategy to increase its leasing activities involves a higher level of
investment in equipment under operating leases and equipment held for sale or
lease, financed through discounted lease rentals and notes payable. The
Company expects its lease portfolio to generate recurring cash flow from
operations throughout the lease term.
The Company's cash and cash equivalents totaled $1.9 million at December 31,
1997, a decrease of $.9 million from December 31, 1996. During 1997, cash
flow provided by operating activities totaled $12.8 million, an increase of
$3.4 million from 1996. The higher level of cash provided by operating
activities in 1997, when compared with 1996, primarily results from the
Company's expanded leasing activities. The cash provided by investing
activities in 1997 primarily reflects $14.7 million in proceeds from the sale
of equipment under operating leases, partially offset by $11.0 million of new
investment in equipment for leasing. The majority of the proceeds from the
sale of leased equipment were used to pay related borrowings, primarily
discounted lease rentals. The higher level of proceeds from and payments on
notes payable in 1997 reflects the utilization of the Company's new revolving
credit and working capital facilities. The greater magnitude of operating and
financing activities in 1997 reflects the higher level of originations and
larger lease portfolio, both as discussed above.
At December 31, 1997, total borrowings were $27.5 million, up from $25.6
million at December 31, 1996. The majority of the proceeds from the
borrowings were invested in equipment in the Company's leasing operations.
The Company's recourse debt to equity ratio was 2.0:1 at December 31, 1997
compared with 1.3:1 at December 31, 1996. The following summarizes the
significant borrowing activities of the Company.
DEBT FINANCING:
DISCOUNTED LEASE RENTALS. Subsequent to origination of certain leases, the
Company discounts the remaining lease payments with various financial
institutions in return for a cash payment based on the present value of such
payments. Proceeds from discounting are recorded in the Company's
consolidated balance sheet as discounted lease rentals. The discounted lease
rentals are generally non-recourse to the Company. As lessees make payments,
rental revenue on operating leases is recorded by the Company with an
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
offsetting charge to interest expense and a reduction in the discounted lease
rentals utilizing the interest method. Total discounted lease rentals decreased
to $5.9 million as of December 31, 1997 from $18.0 million as of December 31,
1996. The net decrease of $12.1 million is primarily the result of principal
payments of $18.3 million, partially offset by cash proceeds from discounting of
$4.7 million and noncash borrowings of $1.5 million.
NOTES PAYABLE. Total notes payable increased to $21.5 million as of December
31, 1997 from $5.8 million as of December 31, 1996 in part as a result of
advances under new revolving borrowing agreements, described in the
accompanying Notes to Consolidated Financial Statements. The net increase of
approximately $15.7 million is primarily the result of additional net noncash
borrowings of $19.1 million, cash proceeds of $10.5 million, partially offset
by payments of $13.9 million. The noncash borrowings are described in Note
2. of Notes to Consolidated Financial Statements.
CAPITAL RESOURCES. At December 31, 1997, the Company's revolving credit and
working capital borrowing capability is $34 million compared with $26 million
at December 31, 1996. Advances under these agreements aggregated $8.4 million
at December 31, 1997.
The Company's current financial resources, including estimated cash flows
from operations, the revolving credit and working capital facilities are
expected to be sufficient to fund the Company's anticipated working capital
needs. In addition to the borrowing activities described above, the Company
has developed a network of financial institutions to which it sells financial
transactions on a regular basis. The Company is, from time to time, dependent
upon the need to liquidate or externally finance transactions originated and
held in its investment portfolio. The Company continues to explore other
possible sources of capital, including publicly registered debt, however,
there is no assurance that additional debt financing if required, can be
obtained or will be available on terms acceptable to the Company.
Inflation has not been a significant factor in the Company's operations.
YEAR 2000 ISSUE:
The Company is currently evaluating the potential impact of the situation
referred to as the "Year 2000 Issue." The Year 2000 Issue concerns the
inability of computer software programs to properly recognize and process
date sensitive information relating to the Year 2000. The Company has begun
evaluating its major automated systems to determine if they are Year 2000
compliant and has contacted the suppliers of certain of those systems to
inquire about Year 2000 compliance. The Company believes that its major
automated systems are Year 2000 compliant.
The Company also has electronic interfaces with certain of its suppliers. The
Company has made inquiries and received assurances from such suppliers with
respect to Year 2000 issues.
The Company believes that any costs associated with, and the potential impact
of, the Year 2000 Issue will not be material. However, there can be no
guarantee that the systems of other companies on which the Company's systems
rely will be converted in a timely manner, or that a failure to convert by
another company, or a conversion that is incompatible with the Company's
systems would not have a material adverse affect on the Company.
RECENT ACCOUNTING DEVELOPMENTS:
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130, a new standard for
reporting and displaying comprehensive income. This new standard will be
adopted in the first quarter of 1998. The Company does not expect the adoption
of this new standard to have a material affect on its financial position or
results of operation.
In June 1997, the FASB issued SFAS No. 131, a new standard for reporting
segment information in financial statements. The new standard will be
effective for the Company's annual financial statements in 1998. Management
of the Company is currently evaluating this standard and has not yet
determined its impact on the Company's disclosures.
The Company capitalizes certain costs of computer software developed or
obtained for internal use. The amounts capitalized are not significant and
the Company's policy for the capitalization of these costs is consistent with
the guidelines included in the American Institute of Certified Public
Accountants' recent Statement of Position for accounting for costs of
computer software developed or obtained for internal use.
FORWARD-LOOKING STATEMENTS:
Certain statements contained herein constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Such forward-looking statements may be identified by the use of terminology
such as "believe," "may," "will," "expect," "anticipate," "intend,"
"designed," "estimate," "should" or "continue" or the negatives thereof or
other variations thereon or comparable terminology. Such forward-looking
statements involve known or unknown risks, uncertainties and other factors
which may cause the actual results, performance or achievements of the
Company, or industry results, to be materially different from any future
results, performance or achievements express or implied by such
forward-looking statements. Such factors include, among other things, the
following: strict regulation by gaming authorities; competition the Company
faces or may face in the future; uncertainty of market acceptance of the
SlotLease program and PDS Slot Source; the ability of the Company to continue
to obtain adequate financing; the ability
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
of the Company to recover its investment in gaming equipment leased under
operating leases as well as its investment in used gaming machines purchased for
refurbishment and resale to customers; the risk of default with respect to the
Company's financing transactions; the Company's dependence on key employees;
potential fluctuations in the Company's quarterly results; general economic and
business conditions; and other factors detailed from time to time in the
Company's reports filed with the Securities and Exchange Commission.
19
<PAGE>
CONSOLIDATED BALANCE SHEET
PDS FINANCIAL CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
ASSETS DECEMBER 31,
1997 1996
--------------- ------------
<S> <C> <C>
Cash and cash equivalents............................................ $ 1,865,468 $ 2,760,200
Accounts receivable, net............................................. 1,715,154 4,904,861
Notes receivable, net................................................ 3,140,964 6,392,194
Net investment in leasing operations:
Equipment under operating leases, net ............................ 18,327,490 20,560,731
Direct finance leases............................................. 5,976,368 2,121,162
Equipment held for sale or lease.................................. 6,289,900 69,216
Investment in purchased residuals................................. 1,555,178
Deferred income taxes................................................ 824,000 1,032,000
Other assets, net.................................................... 1,824,488 1,166,185
------------ ------------
Total assets............................................ $39,963,832 $40,561,727
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses................................ $ 2,094,178 $ 1,465,950
Deferred funds for pending transactions.............................. 775,159 4,975,987
Discounted lease rentals............................................. 5,919,579 17,986,776
Notes payable........................................................ 21,527,311 5,791,956
Convertible subordinated debentures.................................. 89,117 1,862,485
Other liabilities.................................................... 929,142 2,741,248
------------ ------------
Total liabilities....................................... 31,334,486 34,824,402
------------ ------------
Stockholders' equity:
Common stock, $.01 par value, 20,000,000 shares authorized,
3,523,972 and 3,119,816 shares issued and outstanding
in 1997 and 1996, respectively............................... 35,240 31,198
Additional paid-in capital........................................ 9,695,056 7,748,932
Retained earnings (accumulated deficit)........................... (1,100,950) (2,042,805)
------------ ------------
Total stockholders' equity........................................... 8,629,346 5,737,325
------------ -----------
Total liabilities and stockholders' equity........................... $39,963,832 $40,561,727
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
20
<PAGE>
CONSOLIDATED INCOME STATEMENT
PDS FINANCIAL CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
REVENUES YEAR ENDED DECEMBER 31,
1997 1996
------------ -------------
<S> <C> <C>
Equipment sales................................................... $17,481,986
Revenue from sales-type leases.................................... 14,480,372
Rental revenue on operating leases................................ 11,405,648 $ 2,938,477
Fee income........................................................ 2,669,798 2,486,366
Finance income.................................................... 1,575,455 798,324
Other............................................................. 137,327
------------ ------------
Total revenues.......................................... 47,613,259 6,360,494
------------ ------------
COSTS AND EXPENSES
Equipment sales................................................... 15,225,203
Sales-type leases................................................. 13,654,086
Depreciation on operating leases.................................. 8,588,611 2,203,476
Selling, general and administrative............................... 4,126,232 2,318,774
Interest.......................................................... 4,260,096 1,353,925
Other............................................................. 240,176
------------ ------------
Total costs and expenses................................ 46,094,404 5,876,175
------------ ------------
Income before income taxes........................................... 1,518,855 484,319
Provision for income taxes........................................... 577,000 179,000
------------ ------------
Net income........................................................... $ 941,855 $ 305,319
------------ ------------
------------ ------------
Earnings per share:
Basic............................................................. $ .30 $ .10
Diluted.......................................................... $ .28 $ .10
Weighted average shares outstanding:
Basic............................................................. 3,183,536 3,119,816
Diluted.......................................................... 3,619,837 3,126,848
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
21
<PAGE>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
PDS FINANCIAL CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
Retained
Additional Earnings
Common Stock Paid-In (Accumulated
Shares Amount Capital Deficit) Total
------------ -------------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
BALANCES, DECEMBER 31, 1995 3,119,816 $ 31,198 $7,952,161 $(2,348,124) $5,635,235
Fair market value adjustments... (203,229) (203,229)
Net income...................... 305,319 305,319
------------ -------------- ------------ ------------ -----------
BALANCES, DECEMBER 31, 1996 3,119,816 $ 31,198 $7,748,932 $(2,042,805) $5,737,325
Issuance of stock upon
conversion of
subordinated debentures...... 240,220 2,402 1,018,438 1,020,840
Issuance of stock upon
exercise of stock options,
including tax benefit
of $296,614.................. 163,936 1,640 761,948 763,588
Fair market value adjustments... 165,738 165,738
Net income...................... 941,855 941,855
------------ -------------- ------------ ------------ -----------
BALANCES, DECEMBER 31, 1997 3,523,972 $ 35,240 $9,695,056 $(1,100,950) $8,629,346
------------ -------------- ------------ ------------ -----------
------------ -------------- ------------ ------------ -----------
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
22
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
PDS FINANCIAL CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ....................................................... $ 941,855 $ 305,319
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization on operating leases............... 8,588,611 2,203,476
Provision for uncollectible receivables......................... 628,000 170,000
Deferred income taxes........................................... 447,000 179,000
Purchases of notes receivable................................... (1,133,903) (12,817,613)
Purchases of direct finance leases.............................. (36,104,562)
Proceeds from:
Sale of notes receivable.................................... 8,906,504 14,746,862
Sale of direct finance leases............................... 33,764,746 424,957
Collection on notes receivable.............................. 3,276,334 1,699,381
Collection of principal on direct finance leases............ 2,625,174 1,024,256
Gain on sale of financial assets................................ (4,214,376) (1,206,724)
Changes in operating assets and liabilities:
Accounts receivable.......................................... (1,734,423) (508,263)
Equipment held for sale or lease............................. (2,712,376)
Income taxes receivable...................................... 1,041,000
Accounts payable and accrued expenses........................ 677,864 (143,122)
Other liabilities............................................ (1,463,010) 2,664,629
Other, net...................................................... 316,923 (455,987)
------------- -------------
Net cash provided by operating activities............... 12,810,361 9,327,171
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment for leasing................................ (11,040,800) (21,123,740)
Proceeds from sale of equipment under operating leases............ 14,717,389 1,529,835
Other............................................................. (119,512) (69,245)
------------- -------------
Net cash provided by (used in) investing activities..... 3,557,077 (19,663,150)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable....................................... 10,511,260 470,000
Proceeds from discounted lease rentals............................ 4,699,634 18,085,906
Principal payments on notes payable............................... (13,866,948) (3,088,822)
Payments on discounted lease rentals.............................. (18,320,564) (2,331,371)
Principal payments on subordinated debentures..................... (752,526) (909,643)
Proceeds from exercise of stock options........................... 466,974
------------- -------------
Net cash provided by (used in) financing activities..... (17,262,170) 12,226,070
------------- -------------
Net increase (decrease) in cash and cash equivalents................. (894,732) 1,890,091
Cash and cash equivalents at beginning of year....................... 2,760,200 870,109
------------- -------------
Cash and cash equivalents at end of year............................. $ 1,865,468 $ 2,760,200
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS DESCRIPTION:
PDS Financial Corporation (the Company) engages in the leasing and financing
of gaming equipment and supplying reconditioned gaming devices to casino
operators. In 1996, the Company introduced SlotLease, a specialized operating
lease program for slot machines and other electronic gaming devices. In 1997,
the Company established PDS Slot Source, its reconditioned gaming device
sales and distribution division, to compliment its leasing and financing
activities.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of PDS Financial
Corporation and its wholly-owned subsidiaries. All significant intercompany
balances and transactions between PDS Financial Corporation and its
wholly-owned subsidiaries have been eliminated in consolidation.
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. The most significant areas
which require the use of management's estimates relate to residual values,
deferred income tax valuations and allowances for uncollectible receivables.
CASH AND CASH EQUIVALENTS:
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Cash
equivalents consist of investments in money market accounts. The Company has
cash in checking and savings accounts at various banks. The accounts are
insured by the Federal Deposit Insurance Corporation up to $100,000. At
December 31, 1997 and 1996, the Company's uninsured checking and savings
account balances totaled approximately $1.4 million and $2.6 million,
respectively.
LEASE ACCOUNTING:
Statement of Financial Accounting Standards (SFAS) No. 13, "Accounting for
Leases", requires that the Company account for its leases by the operating,
direct finance or sales-type method. Operating leases are defined as those
leases in which substantially all of the benefits and risks of ownership of
the leased asset remain with the Company. Direct finance and sales-type leases
are defined as those leases which transfer substantially all of the benefits
and risks of ownership of the asset to the lessee. Sales-type leases also
include dealer profit. After the inception of a lease, the Company may
engage in discounting or selling of lease payments to reduce or recover its
cash investment in the asset. The methods of accounting for leases and the
financial reporting effects of subsequent transactions are described below.
OPERATING LEASES. Lease revenue consists of monthly rentals and is reflected
in the Consolidated Income Statement as "Rental revenue on operating leases".
The cost of equipment is recorded as "Net investment in leasing operations -
equipment under operating leases" in the Consolidated Balance Sheet and is
depreciated on a straight-line basis over the lease term to the Company's
estimate of residual value. Revenue and depreciation are recorded evenly over
the life of the lease.
DIRECT FINANCE AND SALES-TYPE LEASES. Profit recognition under these two
accounting methods is similar, except that the sales-type classification also
gives rise to dealer profit. This results when the Company leases equipment
purchased at a discount that is not available to the lessee. Under the
sales-type method, dealer profit is recognized at lease inception as the
difference between "Revenue from sales-type leases" and "Sales-type lease"
costs. "Revenue from sales-type leases" consists of the present value of
future minimum lease payments. "Sales-type lease" costs consists of the
equipment carrying value, less the present value of its unguaranteed residual
value, if any. For direct finance leases, the present value of both the
future minimum lease payments and residual values, if any, are recorded in
the Consolidated Balance Sheet as "Net investment in leasing operations -
direct finance leases." Interest income from these leases is recognized as a
constant percentage return on asset carrying values and is reflected in the
Consolidated Income Statement as "Finance income."
EQUIPMENT HELD FOR SALE OR LEASE:
Equipment held for sale or lease, which consists primarily of gaming devices,
is valued at the lower of specific unit cost or net realizable value.
INITIAL DIRECT COSTS:
Initial direct costs related to direct finance and operating leases and notes
receivable are capitalized and recorded in the Consolidated Balance Sheet as
part of the related asset and are amortized over the term of the agreement
using the effective interest method.
RESIDUALS:
Residuals values, representing the estimated value of the asset at the
expiration of the lease, are recorded on a net present value basis in the
consolidated financial statements at the inception of each direct finance
lease originated by the Company. Investments in purchased residual interests
are recorded at cost and are separately presented in the Company's
Consolidated Balance Sheet. The Company periodically reviews residuals for
possible impairment to ensure that they are appropriately valued.
24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PROPERTY AND EQUIPMENT:
Property and equipment, which consists primarily of furniture, equipment and
leasehold improvements, is stated at cost. Depreciation and amortization are
calculated using the straight-line method over the estimated useful lives of
three to seven years. Expenditures for maintenance and repairs which do not
improve or extend the life of the respective assets are expensed as incurred.
Gains and losses on asset disposals are included in operations.
DEBT ISSUANCE COSTS:
All direct costs incurred in obtaining interest-bearing debt are capitalized
and included in the Consolidated Balance Sheet as part of "Other assets,
net", and are amortized over the term of the underlying financing agreement
using the interest method.
LICENSING COSTS:
Costs related to obtaining licenses in various states, necessary to own,
possess and distribute gaming devices and associated equipment, are
capitalized and included in "Other assets, net" in the Consolidated Balance
Sheet and are amortized over three years on a straight-line basis.
INVESTMENTS IN EQUITY SECURITIES:
Investments in equity securities are classified as available for sale and are
carried at fair value, with the unrealized gains and losses reported in
stockholders' equity until realized. These fair values are determined using
quoted market prices.
INCOME TAXES:
The Company utilizes the asset and liability method of accounting for income
taxes, under which deferred taxes are determined from the differences in the
financial reporting and tax bases of assets and liabilities using enacted tax
rates applicable to the period in which the differences are expected to
affect taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized. Income tax
expense is the tax payable for the period and the change during the period in
deferred tax assets and liabilities.
EQUIPMENT SALES:
Revenue is recognized when title to the equipment is transferred to the
customer. This occurs generally upon a customers' exercise of their purchase
option for equipment under operating leases and upon shipment of
reconditioned gaming devices to customers.
FEE INCOME:
Fee income includes gross profit from the sale to third parties of the
Company's interest in notes receivable and direct finance leases. Upon sale,
the Company records fee income equal to the difference between the sale price
and the carrying value of the related asset. Fee income also includes
commissions earned for arranging financing between unrelated parties.
STOCK-BASED COMPENSATION:
The Company utilizes the intrinsic value method for its stock option plan.
EARNINGS PER SHARE:
Effective with year-end 1997, the Company adopted SFAS No. 128, "Earnings Per
Share," and has retroactively presented basic and diluted earnings per share.
A dilutive effect on earnings results from the assumed exercise of stock
options and warrants and the full conversion of the convertible subordinated
debentures into common shares and elimination of the related interest
requirements, net of income taxes.
The Company calculated basic and diluted earnings per share as follows for the
years ended December 31.
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Net income, basic............................. $ 941,855 $ 305,319
Interest expense on convertible
subordinated debentures,
net of tax................................ 85,776
----------- ----------
Net income, diluted............................ $1,027,631 $ 305,319
----------- ----------
----------- ----------
Weighted average shares outstanding:
Basic (actual shares
outstanding).......................... 3,183,536 3,119,816
Effect of dilutive options 136,990 7,032
Effect of convertible
subordinated debentures............... 299,311
----------- ----------
Diluted.................................... 3,619,837 3,126,848
----------- ----------
----------- ----------
Per share amounts:
Basic.................................... $ .30 $ .10
Diluted.................................. $ .28 $ .10
</TABLE>
Options and warrants to purchase 337,200 and 671,364 shares of common stock at a
weighted average price of $5.60 and $4.03 for the years ended December 31, 1997
and 1996, respectively, were not included in the computation of diluted earnings
per share because the exercise price was greater than the average market price
of the common stock. These options and warrants expire at various dates through
2007. Convertible subordinated debentures (convertible into 573,898 shares of
common stock and $176,711 of related interest expense, net of tax) were not
included in the 1996 computation of diluted earnings per share because the
effect would have been antidilutive.
25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION:
BALANCE SHEET INFORMATION:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Accounts receivable, net:
Accounts receivable................. $2,030,154 $4,904,861
Allowance for
uncollectible amounts............ (315,000)
---------- ----------
$1,715,154 $4,904,861
---------- ----------
---------- ----------
Other assets, net:
Property and equipment, net......... $ 778,508 $ 153,076
Prepaid expense..................... 274,427 402,639
Debt issuance costs, net............ 265,976 43,148
Licensing costs, net................ 132,691 110,407
Investments and other............... 372,886 456,915
---------- ----------
$1,824,488 $1,166,185
---------- ----------
---------- ----------
Accounts payable and accrued expenses:
Trade payables...................... $1,107,160 $ 481,788
Accrued interest payable............ 285,572 687,490
Other accrued expenses.............. 701,446 296,672
---------- ----------
$2,094,178 $1,465,950
---------- ----------
---------- ----------
Other liabilities:
Lessee deposits..................... $ 753,870 $2,657,298
Other............................... 175,272 83,950
---------- ----------
$ 929,142 $2,741,248
---------- ----------
---------- ----------
</TABLE>
SUPPLEMENTAL CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Cash paid during the year for:
Interest............................ $ 4,393,601 $ 902,298
Income taxes, net of
refunds received................. 24,149 (1,097,819)
Noncash activities:
Transaction closed but not
funded at year-end:
Deferred funds for
pending transactions............ 775,159 4,975,987
Increase in accounts
receivable from sale of
direct finance lease............ 4,113,500
Increase in notes payable for
purchase of equipment
for leasing..................... 7,636,125 4,126,916
Increase in notes payable for
purchase of notes
receivable...................... 12,196,978
Operating leases converted to
direct finance leases upon
exercise of purchase options..... 2,675,530
Exchange of notes receivable and
purchased residuals for equipment
for leasing and the assumption
of discounted lease rentals...... 5,744,504
Exchange of notes receivable,
direct finance leases and related
discounted lease rentals for
inventory for sale or lease...... 5,332,008
Conversion of subordinated
debentures into common
stock............................ 1,020,840
Origination of direct finance lease
or notes receivable for sale
of equipment and residuals....... 3,095,523
</TABLE>
3. NOTES RECEIVABLE:
Notes receivable consists of the following:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Notes receivable, due in varying
monthly installments, stated and
effective interest at rates from
8.0% to 13.2%, through September
2002, collateralized by casino-
related equipment and furnishings
and/or lease agreements between
the borrower and a customer of
the borrower.......................... $ 4,423,964 $12,521,382
Other................................. -- 272,725
Unamortized discount.................. -- (14,421)
----------- -----------
4,423,964 12,779,686
Impairment allowance.................. (1,000,000) (6,331,000)
----------- -----------
3,423,964 6,448,686
Unamortized origination fees.......... -- 16,508
Allowance for uncollectible
amounts........................... (283,000) (73,000)
----------- -----------
$ 3,140,964 $ 6,392,194
----------- -----------
----------- -----------
</TABLE>
Included in the notes receivable balances above are certain loans, for which an
impairment allowance for the full amount of the loans has been recognized.
Changes in the allowance for uncollectible receivables, including the impairment
allowance, are as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Balance, beginning of year............ $ 6,404,000 $ 6,454,000
----------- -----------
Charge-offs........................... (5,500,000) (237,000)
Recoveries............................ 66,000 17,000
----------- -----------
Net charge-offs....................... (5,434,000) (220,000)
Provision for uncollectible
receivables........................ 313,000 170,000
----------- -----------
Balance, end of year.................. $ 1,283,000 $ 6,404,000
----------- -----------
----------- -----------
</TABLE>
The estimated fair value of notes receivable approximates their carrying
value. The fair value is estimated using discounted cash flow analysis with
interest rates currently being offered by the Company for notes with similar
terms and credit risk.
Scheduled principal maturities for notes receivable based upon the terms
noted above are as follows at December 31, 1997:
<TABLE>
<CAPTION>
<S> <C>
Year Ending December 31
1998 1,967,995
1999 1,232,457
2000 88,020
2001 18,658
2002 116,834
-----------
$3,423,964
-----------
-----------
</TABLE>
26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. NET INVESTMENT IN LEASING OPERATIONS:
Equipment under operating leases consists principally of gaming equipment the
Company leases for periods ranging from 24 to 48 months at which time the lessee
generally has the right to purchase the property at fair value. The Company may
discount the lease rentals with a financial institution. The components of net
investment in equipment under operating leases are as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Operating leased assets.............. $23,773,809 $22,382,688
Less accumulated depreciation........ (5,446,319) (1,821,957)
----------- -----------
$18,327,490 $20,560,731
----------- -----------
----------- -----------
</TABLE>
The components of net investment in direct finance leases are as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Minimum lease payments receivable:
To be received by the Company.... $ 7,432,065 $1,730,692
To be received by a financial
institution.................. 17,435 752,294
Unearned income.................. (1,458,132) (346,824)
Allowance for uncollectible
receivables.................. (15,000) (15,000)
----------- -----------
$ 5,976,368 $2,121,162
----------- -----------
----------- -----------
</TABLE>
At December 31, 1997, future minimum lease payments to be received by the
Company on nondiscounted operating and direct finance leases are as follows:
<TABLE>
<CAPTION>
Direct
Operating Finance
Year Ending December 31 Leases Leases
----------------------- ----------- -----------
<S> <C> <C>
1998 $ 3,759,570 $1,878,807
1999 4,182,898 1,972,880
2000 2,867,448 1,928,795
2001 1,217,302 1,651,583
----------- -----------
$12,027,218 $7,432,065
----------- -----------
----------- -----------
</TABLE>
See Note 5 for a summary of operating lease payments that have been discounted
with financial institutions.
5. DISCOUNTED LEASE RENTALS:
The Company utilizes certain of its lease rental receivables and underlying
assets as collateral to borrow from financial institutions at fixed rates on
a nonrecourse basis. In the event of a default by a lessee, the financial
institution has a first lien on the underlying leased asset, with no further
recourse against the Company. As lessees make payments, "Finance income" and
"Rental revenue on operating leases" are recorded along with the recognition
of interest expense on discounted lease rentals. Discounted lease rentals are
reduced by the interest method.
Future minimum lease payments and interest expense on leases that have been
discounted as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Minimum Lease Rentals to be
Received by Financial Institutions
-----------------------------------------------
Direct Discounted Future
Year Ending Finance Operating Lease Interest
December 31 Leases Leases Rentals Expense
- ----------- -------- ---------- ---------- --------
<S> <C> <C> <C> <C>
1998 $17,435 $3,606,887 $3,216,812 $407,510
1999 -- 2,606,443 2,480,269 126,174
2000 -- 226,554 222,498 4,056
------- ---------- --------- ---------
$17,435 $6,439,884 $5,919,579 $537,740
------- ---------- --------- ---------
------- ---------- --------- ---------
</TABLE>
Interest expense on discounted lease rentals was $1,975,825 and $634,847 in
1997 and 1996, respectively. At December 31, 1997, effective interest rates
on discounted lease rentals ranged from 8% to 10%.
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. BORROWINGS:
NOTES PAYABLE:
Notes payable consists of the following:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Recourse:
Notes payable to banks, due on
demand and in 1998 and 1999,
interest at the prime rate (8.5%
at December 31, 1997) plus 1%,
collateralized by certain
equipment under operating leases,
equipment held for sale or lease
and accounts receivable.................... $ 3,489,083
Notes payable to financial institutions,
due in 1998 through 2001, interest at
8.8% to 9.1%, collateralized by certain
notes receivable, equipment under operating
leases and direct finance leases........... 4,866,070 $1,698,222
Notes payable to manufacturers/distributors
due in 1998 through 2001, interest
at 8.0% to 10.0% collateralized by certain
notes receivable, equipment under operating
leases and direct finance leases........... 9,012,318 4,050,593
Other...................................... 202,284
----------- -----------
Total recourse............................. 17,569,755 5,748,815
Nonrecourse:
Notes payable to manufacturers/
distributors due in 1998 through 2001,
interest at 8.0% to 10.0%, collateralized
by certain equipment under operating
leases and direct finance leases........... 4,088,487
Other...................................... 148,904 53,245
----------- -----------
Total nonrecourse.......................... 4,237,391 53,245
Less unamortized discount.................. (279,835) (10,104)
----------- -----------
$21,527,311 $5,791,956
----------- -----------
----------- -----------
</TABLE>
The Company's established revolving credit and working capital facilities
aggregate $34 million. Advances under these agreements with banks and
financial institutions were approximately $8.4 million at December 31, 1997,
as indicated in the table above. The agreements contain covenants which
restrict the payment of dividends and require, among other things, the
Company to maintain a minimum net worth and certain debt to net worth and
cash flow ratios, as defined. Borrowings under the $1 million working capital
loan are guaranteed by the principal stockholder of the Company.
CONVERTIBLE SUBORDINATED DEBENTURES:
In 1993, the Company issued unsecured Convertible Subordinated Debentures
(the Debentures) which are subordinate to other borrowings of the Company of
which $89,117 remains outstanding at December 31, 1997. At December 31, 1997,
principal and interest at 11.5% is due in three remaining equal quarterly
installments of $31,430 through September 30, 1998. At the option of the
holders, the unpaid principal balance of the Debentures may be converted into
shares of common stock of the Company using a per share conversion price of
$4.25. During 1997, $1,020,840 of Debentures were converted into 240,220
shares of common stock.
Principal maturities of notes payable and convertible subordinated debentures
are as follows at December 31, 1997:
<TABLE>
<CAPTION>
<S> <C>
Year Ending December 31
-----------------------
1998 8,593,086
1999 7,783,081
2000 4,184,378
2001 1,051,251
2002 4,632
------------
$21,616,428
------------
------------
</TABLE>
The Company estimates that the fair value of its borrowings approximates the
carrying value.
7. INCOME TAXES:
The following summarizes the deferred income tax status as recognized in the
Company's Consolidated Balance Sheet at December 31:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Deferred tax asset........................ $ 958,500 $1,832,000
Deferred tax liability.................... (134,500) (800,000)
----------- -----------
Net deferred tax asset.................... $ 824,000 $1,032,000
----------- -----------
----------- -----------
</TABLE>
The tax effect of the major temporary differences which give rise to deferred
income taxes at December 31 is as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Net operating loss carryforward........... $ 672,000 $1,718,000
Asset valuation allowances................ 251,000 77,700
Lease transactions........................ (125,000) (787,600)
Other, net................................ 26,000 23,900
----------- -----------
Net deferred tax asset.................... $ 824,000 $1,032,000
----------- -----------
----------- -----------
</TABLE>
The net operating loss carryforward will be an available deduction from
future taxable income through 2009. Realization of the net operating loss
carryforward is dependent on generating sufficient taxable income prior to
expiration of the loss carryforward. Although realization is not assured,
management believes it is more likely than not that all of the deferred tax
asset will be realized and therefore no valuation allowance is deemed
necessary.
28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following summarizes the provision for income taxes:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Currently payable......................... $ 130,000 $ --
Deferred.................................. 447,000 179,000
---------- ----------
Provision for income taxes................ $ 577,000 $ 179,000
---------- ----------
---------- ----------
</TABLE>
The difference between the federal statutory tax rate of 34% applied to income
before income taxes and the Company's effective tax rate is:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Income taxes at
statutory rate......................... $ 516,500 $ 164,700
State income taxes, net of federal impact. 31,100 10,200
Other, net................................ 29,400 4,100
----------- -----------
Provision for income taxes................ $ 577,000 $ 179,000
----------- -----------
----------- -----------
</TABLE>
In 1994, the Company entered into a tax indemnification agreement with its
then sole stockholder whereby the Company will indemnify the stockholder for
certain tax liabilities, if any, that may arise with respect to the Company's
operations during the period in which it was an S corporation, prior to 1994.
8. STOCKHOLDERS' EQUITY:
PREFERRED STOCK:
The Company's Articles of Incorporation, as amended, authorize the issuance
of 2,000,000 shares of preferred stock. The rights, preferences and
privileges of the authorized preferred shares (none of which have been
issued) may be established by the Board of Directors without further action
by the holders of the Company's common stock. In 1996, the Board of Directors
designated the par value of the Company's preferred stock at $.01 per share.
STOCK OPTION PLAN:
The Company established the 1993 Stock Option Plan (the Plan) to encourage
stock ownership by employees, officers, directors and other individuals as
determined by the Board of Directors or a committee appointed by the Board of
Directors (the Committee). The Plan provides that options granted thereunder
may be either incentive stock options (ISOs) or nonqualified stock options.
At December 31, 1997, the maximum number of shares of common stock available
for grant under the Plan was 1,100,000. In January 1998, the Board of
Directors passed a resolution to increase the maximum number of shares to
1,350,000, subject to stockholder approval.
Newly elected nonemployee directors of the Company receive an automatic grant
of nonqualified options to purchase 10,000 shares. Options may have a maximum
term of up to ten years. The exercise price of ISOs granted under the Plan
must be at least equal to the fair value of the common stock on the date of
grant. The exercise price of nonqualified options must be at least equal to
85% of the fair value of the common stock on the date of grant. If an option
expires, terminates or is canceled, the shares not purchased thereunder become
available for additional option awards under the Plan. The Plan expires on
April 1, 2003.
Option activity is summarized as follows:
<TABLE>
<CAPTION>
Plan Options Options Outstanding
Available ----------------------------
for Grant ISOs Nonqualified
---------- --------- -------------
<S> <C> <C> <C>
Balances, Dec 31,
1995 244,628 76,282 563,819
Increase in available
shares 100,000
Granted (35,000) 15,000 20,000
Canceled 128,137 (23,409) (104,728)
---------- --------- -------------
Balances, Dec 31,
1996 437,765 67,873 479,091
---------- --------- -------------
Granted (178,500) 23,500 155,000
Exercised (10,555) (152,955)
Canceled 9,500 (9,500)
---------- --------- -------------
Balances, Dec 31,
1997 268,765 71,318 481,136
---------- --------- -------------
---------- --------- -------------
</TABLE>
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Weighted average exercise price per share:
Granted................................. $3.66 $2.23
Exercised................................ 2.86 --
Canceled................................. 3.08 2.46
December 31:
Outstanding.............................. 3.47 3.22
Exercisable.............................. 3.23 3.04
</TABLE>
Stock options outstanding at December 31, 1997 had an average remaining
contractual life of 7.5 years. At December 31, 1997, 326,454 options
outstanding had an exercise price of $1.50 to $2.88 with a weighted average
exercise price of $2.57. Of these options, 206,545 were exercisable at
December 31, 1997 with a weighted average exercise price of $2.53. The
remaining 226,000 options outstanding had an exercise price of $3.00 to $7.88
with a weighted average exercise price of $4.76. Of these options, 71,000
were exercisable at December 31, 1997 with a weighted average exercise price
of $5.30.
The exercise prices are equal to the estimated fair value of common stock on
the grant dates. These options are exercisable over vesting periods,
typically five years, through 2002. At December 31, 1997, options to purchase
277,545 shares of common stock are exercisable at prices ranging from $1.50 to
$5.75.
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Had the Company used the fair value-based method of accounting for the Plan
beginning in 1995 and charged compensation cost against income, over the vesting
period, based on the fair value of options at the date of grant, net income and
net income per share for 1997 and 1996 would have been adjusted to the following
pro forma amounts:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Net income, basic
As reported............................. $ 941,855 $ 305,319
Pro forma............................... 878,633 269,170
Net income per share, basic
As reported............................. $ .30 $ .10
Pro forma............................... .28 .09
Net income, diluted
As reported............................. $ 1,027,631 305,319
Pro forma............................... 964,409 269,170
Net income per share, diluted
As reported............................. $ .28 $ .10
Pro forma............................... .27 .09
</TABLE>
The pro forma information above only includes stock options granted after
December 31, 1994. Pro forma compensation expense under the fair value-based
method of accounting will generally increase over the next few years as
additional stock option grants are considered.
The weighted-average grant-date fair value of options granted was $2.35 and
$1.46 per option for 1997 and 1996, respectively. The weighted-average
grant-date fair value of options was determined by using the fair value of each
option grant on the date of grant, utilizing the Black-Scholes option-pricing
model and the following key assumptions:
<TABLE>
<CAPTION>
<S> <C>
Risk-free interest rate................................ 6.2%
Expected life.......................................... 5 years
Expected volatility.................................... 70%
Expected dividends..................................... 0
</TABLE>
WARRANTS:
In 1994, the Company issued warrants to purchase up to 170,000 shares of its
common stock to the underwriter in connection with the initial public
offering of its common stock and a certain lender in connection with bridge
note financing. At December 31, 1997, warrants to purchase up to 168,200
shares remain outstanding, are exercisable at an exercise price of $6.00 per
share and expire in 1999.
9. EMPLOYEE MATTERS:
BENEFIT PLAN:
The Company maintains a contributory defined contribution plan which
qualifies under Section 401(k) of the Internal Revenue Code (IRC) and covers
employees who meet certain age and service requirements subject to IRC
limits. Employee contributions are limited to 10% of their compensation.
Company contributions are at the discretion of the Board of Directors up to
5% of the individual employee earnings. The Company's contributions to the
plan in 1997 and 1996 were approximately $27,000 and $22,000, respectively.
EMPLOYMENT AGREEMENTS:
The Company has entered into employment agreements with its four officers for
periods ranging from one to five years. Three of the agreements contain
noncompete clauses which continue from one to two years following termination
of employment. The agreements, among other things, provide for initial base
salaries, benefits and payment of both discretionary bonuses and bonuses
based on the attainment of specified profit levels. The agreements are
automatically extended for additional one-year periods unless notice of
nonextension is given.
10. COMMITMENT:
The Company leases office and warehouse space under terms of various
noncancelable operating leases expiring through 2004. The agreements require
the Company to pay monthly base rent in varying amounts plus its pro rata
share of the operating expenses. A portion of the office space has been
subleased under an agreement expiring in 2000, which requires monthly
payments to the Company over the sublease term aggregating $154,000. Net rent
expense was approximately $305,000 in 1997 and $164,000 in 1996.
Net future minimum lease payments under these leases are as follows:
<TABLE>
<CAPTION>
Year Ending December 31
-----------------------
<S> <C>
1998 $ 328,000
1999 320,000
2000 208,000
2001 211,000
2002 237,000
After 2002 495,000
------------
$ 1,799,000
------------
------------
</TABLE>
30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. SIGNIFICANT CUSTOMERS:
Significant customer activity as a percent of the Company's total revenues in
1997 and 1996 is summarized as follows:
<TABLE>
<CAPTION>
Percent of Revenues
1997 1996
------- --------
<S> <C> <C>
Customer A................................. 37% 20%
Customer B................................. 18% --
Customer C................................. 11% 16%
Customer D................................. 2% 20%
Customer E................................. 7% 14%
</TABLE>
12. RELATED PARTY TRANSACTIONS:
In 1995, the Company made various loans to a casino industry change cart
manufacturing company. The Company's President, Chief Executive Officer and
principal stockholder held an ownership position in this company and also had
served on its board of directors. In early 1996, a portion of these loans
went into default. In December 1996, the Company charged off the remaining
loan balance of $237,000.
31
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of PDS Financial Corporation:
We have audited the accompanying consolidated balance sheet of PDS Financial
Corporation and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, stockholders' equity and cash
flows for the years then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated 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 consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated 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, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of PDS Financial Corporation and subsidiaries as of December 31, 1997 and
1996, and the consolidated results of their operations and their cash flows
for the years then ended, in conformity with generally accepted accounting
principles.
[SIG]
Minneapolis, Minnesota
March 20, 1998
COMMON STOCK
THE COMPANY'S COMMON STOCK HAS TRADED ON THE NASDAQ NATIONAL MARKET SYSTEM
UNDER THE SYMBOL PDSF SINCE THE INITIAL PUBLIC OFFERING IN MAY 1994. AS OF
FEBRUARY 28, 1998, THE COMPANY'S COMMON STOCK WAS HELD BY APPROXIMATELY 60
HOLDERS OF RECORD AND AN ESTIMATED 1,300 ADDITIONAL BENEFICIAL OWNERS, AND
CLOSED AT 7-1/2. THE QUOTATIONS SHOWN BELOW REPRESENT INTERDEALER PRICES,
WITHOUT MARKUP, MARKDOWN OR COMMISSION AND MAY NOT REPRESENT ACTUAL
TRANSACTIONS. THE COMPANY HAS PAID NO DIVIDENDS AND DOES NOT EXPECT TO IN THE
FORESEEABLE FUTURE.
<TABLE>
<CAPTION>
PDSF STOCK PRICE BY QUARTER
---------------------------------------------------------
1997 1996
---------------------------------------------------------
HIGH LOW HIGH LOW
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FIRST QUARTER 3-3/8 1-3/4 3 1-3/8
SECOND QUARTER 5 2-5/8 2-7/8 1-7/8
THIRD QUARTER 6-3/8 3-7/8 2-5/8 1-7/8
FOURTH QUARTER 8-1/2 6 2-1/2 1-3/4
</TABLE>
32
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PDS Financial Corporation
By: /s/ Johan P. Finley
----------------------------------
Johan P. Finley, Chief Executive
Officer
Date: March 27, 1998.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has also been signed below by the following persons on behalf of
the Registrant and in the capacities indicated on March 27, 1998.
<TABLE>
<CAPTION>
Name Title
---- ------
<S> <C>
By /s/ Johan P. Finley Chairman of the Board,
---------------------------- Chief Executive Officer,
Johan P. Finley President and Director
(Principal Executive Officer)
By /s/ Peter D. Cleary Chief Financial Officer,
---------------------------- Secretary and Director
Peter D. Cleary (Principal Financial Officer)
By /s/ Joel M. Koonce Director
----------------------------
Joel M. Koonce
By /s/ James L. Morrell Director
----------------------------
James L. Morrell
By /s/ David R. Mylrea Director
----------------------------
David R. Mylrea
By /s/ Charles R. Patterson Director
----------------------------
Charles R. Patterson
</TABLE>
33
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Page No.
- ----------- --------
<S> <C> <C>
3.1 Amended and Restated Articles of Incorporation
3.2 Articles of Amendment to Articles of Incorporation
3.3 Articles of Amendment to Articles of Incorporation
3.4 Articles of Amendment of Amended and Restated
Articles of Incorporation
10.1 Industrial Real Estate Lease dated April 29, 1997,
between the Registrant, as Tenant, and Patrick
Commerce Center, LLC, as Landlord
10.11 Revolving Credit and Security Agreement, dated
April 9, 1997 between BNY Financial Corporation
as Lender and as Agent and the Registrant and
PDS Financial Corporation-Nevada as Borrowers
10.12 Loan and Security Agreement, dated June 20, 1997
between Heller Financial, Inc., as Lender and the
Registrant as Borrower
10.13 Loan and Security Agreement, dated June 20, 1997
between Heller Financial, Inc., as Lender and
PDS Financial Corporation-Nevada, as Borrower
10.14 Commercial Security Agreement, dated August 15,
1997 between U.S. Bank, as Lender and the
Registrant as Borrower
10.15 Letter Agreement between the Registrant and
David R. Mylrea
21.1 Subsidiaries of the Registrant
23.1 Consent of Independent Accountants
27.1 Financial Data Schedule for the year ended
December 31, 1997
27.2 Financial Data Schedule for the nine months ended
September 31, 1997
99.1 Cautionary Statements
</TABLE>
34
<PAGE>
EXHIBIT 3.1
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
PROGRESSIVE DISTRIBUTION SYSTEMS, INC.
The undersigned Vice President of Progressive Distribution Systems, Inc., a
corporation formed pursuant to Minnesota Statutes, in order to amend and restate
the Articles of Incorporation of Progressive Distribution Systems, Inc. hereby
states as follows:
The following Amended and Restated Articles of Incorporation of the
corporation were adopted by the written action of the corporation's sole
shareholder taken in writing in lieu of a meeting in accordance with Minnesota
Statutes, Chapter 302A.441, effective September 13, 1993:
"ARTICLE I
The name of this corporation shall be Progressive Distribution Systems,
Inc.
ARTICLE II
The registered office of this corporation shall be located at 7652
Executive Drive, Eden Prairie, Minnesota 55344.
ARTICLE III
3.1 The authorized capital stock of this corporation shall be Ten Million
(10,000,000) which shall be Nine Million (9,000,000) shares of common stock of
the par value of one cent ($.01) per share (the "Common Stock"), and One
Million (1,000,000) shares of preferred stock.
3.2 Each of the authorized shares of this corporation now issued and
outstanding having no par value per share, without further action, shall be, and
hereby is, changed into (One (1) fully paid and nonassessable share of Common
Stock having a par value of one cent ($.01) per share. Certificates for said
shares of Common Stock shall be issued on the aforesaid basis in place and upon
surrender of certificates for shares of Common Stock of the corporation
previously issued and outstanding; provided, however, that upon these Amended
and Restated Articles of Incorporation becoming effective, the holders of said
shares of Common Stock issued and outstanding shall hereupon cease to be holders
of said shares and shall be and become holders of the herein authorized shares
of Common Stock, whether or not certificates representing the shares of Common
Stock are then issued and delivered.
<PAGE>
3.3 Subject to the provisions hereof and the limitations prescribed by
law, the Board of Directors may, from time to time establish by resolution
different classes or series of shares and may fix the rights and preferences of
said shares in any class or series; and the Board of Directors shall have the
authority to issue shares of a class or series to holders of shares of another
class or series to effectuate share dividends, splits, or conversion of its
outstanding shares.
3.4 Except as may be specifically provided in the resolution adopted by
the Board of Directors authorizing the issuance of any class or series of
Preferred Stock, as may be permitted in a shareholder control agreement adopted
pursuant to Section 302A.457 of the Minnesota Business Corporation Act, or as
otherwise required by law, the holders of the shares of Common Stock shall have
the sole voting rights of this corporation.
ARTICLE IV
No shareholder of this corporation shall be entitled to any cumulative
voting rights.
ARTICLE V
No shareholder of this corporation shall have any preferential, preemptive
or other rights to subscribe for, purchase or acquire any shares of the
corporation of any class, whether unissued or now or hereafter authorized, or
any obligations or other securities convertible into or exchangeable for any
such shares.
ARTICLE VI
An action required or permitted to be taken at a meeting of the Board of
Directors of this Corporation not needing approval by the shareholders under
Minnesota Statutes, Chapter 302A, may be taken by a written action signed by the
number of directors that would be required to take the same action at a meeting
of the Board of Directors at which all directors were present.
ARTICLE VII
The number of directors of this corporation shall be fixed in the manner
provided in the Bylaws.
ARTICLE VIII
No director of this corporation shall be personally liable to the
corporation or its shareholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i)for any breach of the director's
duty of loyalty to the
2
<PAGE>
corporation or its shareholders; (ii)for acts or omissions not in good faith
or that involve intentional misconduct or a knowing violation of law;
(iii)under Sections 302A.559 or 80A.23 of the Minnesota Statutes; (iv) for
any transaction from which the director derives any improper personal
benefit; or (v) for any act or omission accruing prior to the date when this
provision becomes effective.
The provisions of this Article VIII shall not be deemed to limit or
preclude indemnification of a director by the corporation for any liability of a
director which has not been eliminated by the provisions of this Article VIII.
If the Minnesota Statutes hereafter are amended to authorize the further
elimination or limitation of the liability of directors, then the liability of a
director of the corporation shall be eliminated or limited to the fullest extent
permitted by the amended Minnesota Statutes."
IN WITNESS WHEREOF, I hereunto set my hand this 21st day of September,
1993.
/s/ Richard J. Hegstrand
---------------------------
Richard J. Hegstrand
Vice President
3
<PAGE>
EXHIBIT 3.2
PROGRESSIVE DISTRIBUTION SYSTEMS, INC.
ARTICLES OF AMENDMENT
TO
ARTICLES OF INCORPORATION
The undersigned President of Progressive Distribution Systems, Inc., a
corporation formed pursuant to Minnesota Statutes (the "Corporation"), in order
to amend the Articles of Incorporation of the Corporation hereby states as
follows:
The following amendment to the Articles of Incorporation of the Corporation
was adopted by the Written Action of the Corporation's sole shareholder taken in
lieu of a meeting in accordance with Minnesota Statutes, Chapter 302A.441,
effective February 24, 1994:
RESOLVED, that Article I of the Articles of Incorporation of the
Corporation be amended as follows:
"ARTICLE I
The name of this corporation shall be PDS Financial Corporation."
IN WITNESS WHEREOF, I have hereunto set my hand this 24th day of
February, 1994.
/s/ Johan P. Finley
---------------------------
Johan P. Finley, President
<PAGE>
EXHIBIT 3.3
PDS FINANCIAL CORPORATION
ARTICLES OF AMENDMENT
TO
ARTICLES OF INCORPORATION
The undersigned President of PDS FINANCIAL CORPORATION, a corporation
formed pursuant to Minnesota Statutes (the "Corporation"), in order to amend the
Articles of Incorporation of the Corporation hereby states as follows:
The following amendment to the Articles of Incorporation of the Corporation
was adopted by the Written Action of the Corporation's sole shareholder taken in
lieu of a meeting in accordance with Minnesota Statutes, Chapter 302A.441,
effective March 24, 1994:
RESOLVED, that the Articles of Incorporation of the Corporation be amended
to add Article IX as follows:
"ARTICLE IX
A. No Person may become the Beneficial Owner of five percent (5%) or more
of any class or series of the corporation's issued and outstanding
capital stock unless such person agrees in writing to: (i) provide to
the Gaming Authorities information regarding such Person, including
without limitation thereto, information regarding other gaming-related
activities of such Person and financial statements, in such form, and
with such updates, as may be required by any Gaming Authority; (ii)
respond to written or oral questions that may be propounded by any
Gaming Authority; and (iii) consent to the performance of any
background investigation that may be required by any Gaming Authority,
including without limitation thereto, an investigation of any criminal
record of such Person.
B. Notwithstanding any other provisions of these Articles of
Incorporation, but subject to the provisions of any resolution of the
Board of Directors creating any series of preferred stock or any other
class of stock which has a preference over common stock with regard to
dividends or upon liquidation, outstanding shares of capital stock
held by a Disqualified Holder shall be subject to redemption at any
time by the corporation by action of the Board of Directors. The
terms and conditions of such redemption shall be as follows:
(1) the redemption price of the shares to be redeemed pursuant to
this section B of Article IX shall be equal to the Fair Market
<PAGE>
Value of such shares or such other redemption price as required
by pertinent state or federal law pursuant to which the
redemption is required;
(2) the redemption price of such shares may be paid in cash,
Redemption Securities or any combination thereof;
(3) if less than all the shares held by Disqualified Holders are to
be redeemed, the shares to be redeemed shall be selected in such
manner as shall be determined by the Board of Directors, which
may include selection first of the most recently purchased shares
thereof, selection by lot, or selection in any other manner
determined by the Board of Directors;
(4) at least thirty (30) days' written notice of the Redemption Date
shall be given to the record holders of the shares selected to be
redeemed (unless waived in writing by any such holder) provided
that the Redemption Date may be the date on which written notice
shall be given to record holders if the cash or Redemption
Securities necessary to effect the redemption shall have been
deposited in trust for the benefit of such record holders and
subject to immediate withdrawal by them upon surrender of the
stock certificates for their shares to be redeemed.
(5) from and after the Redemption Date or such earlier date as
mandated by pertinent state or federal law, any and all rights of
whatever nature, which may be held by the Beneficial Owners of
shares selected for redemption (including without limitation any
rights to vote or participate in dividends declared on stock of
the same class or series as such shares), shall cease and
terminate and they shall thereafter be entitled only to receive
the cash or Redemption Securities payable upon redemption; and
(6) such other terms and conditions as the Board of Directors shall
determine.
C. Definitions. Capitalized terms used in this Article IX shall have the
meanings provided below:
"Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 under the General Rules and
Regulations under the Securities Exchange Act of 1934, as amended (the
"Act"). The term "registrant" as used in such Rule 12b-2 shall mean
the corporation.
2
<PAGE>
"Beneficial Owner" shall mean any person who, singly or together
with any of such person's Affiliates or Associates, directly or
indirectly, has "beneficial ownership" of capital stock (as determined
pursuant to Rule 13d-3) of the Act.
"Disqualified Holder" shall mean any Beneficial Owner of shares
of capital stock of the corporation or any of its Subsidiaries, whose
holding of shares of capital stock may result or, when taken together
with the holding of shares of capital stock by any other Beneficial
Holder, may result, in the judgment of the Board of Directors, in (i)
the disapproval, modification, or non-renewal of any contract under
which the corporation or any of its Subsidiaries has sole or shared
authority to manage any gaming operations, or (ii) the loss or
non-reinstatement of any license or franchise from any governmental
agency held by the corporation or any Subsidiary to conduct any
portion of the business of the corporation or any Subsidiary, which
license or franchise is conditioned upon some or all of the holders of
capital stock meeting certain criteria.
"Fair Market Value" of a share of capital stock shall mean the
average Closing Price for such a share for each of the 45 most recent
days during which shares of stock of such class or series shall have
been traded preceding the day on which notice of redemption shall have
been given pursuant to Paragraph (4) of Section B of Article IX;
provided, however, that if shares of stock of such class or series are
not traded on any securities exchange or in the over-the-counter
market, "Fair Market Value" shall be determined by the Board of
Directors in good faith; and provided, further, however, that "Fair
Market Value" as to any stockholder who purchases any stock subject to
redemption within 120 days prior to a Redemption Date need not (unless
otherwise determined by the Board of Directors) exceed the purchase
price paid for such shares. "Closing Price" on any day means the
reported closing sales price or, in case no such sale takes place, the
average of the reported closing bid and asked price on the composite
tape for the New York Stock Exchange-listed stock, or, if stock of the
class or series in question is not quoted on such composite tape on
the New York Stock Exchange, or, if such stock is not listed on such
exchange, on the principal United States Securities Exchange
registered under the Act on which such stock is listed, or, if such
stock is not listed on any such exchange, the highest closing sales
price or bid quotation for such stock on the National Association of
Securities Dealers Automated Quotation System (including the National
Market System) or any system then in use, or, if no such prices or
quotations are available, the
3
<PAGE>
fair market value on the day in question as determined by the Board of
Directors in good faith.
"Gaming Authorities" shall mean the National Indian Gaming
Commission, or any other tribal or governmental authority regulating
any form of gaming that has jurisdiction over the corporation or its
Subsidiaries.
"Person" shall mean any natural person, corporation, firm,
partnership, association, government, governmental agency, or any
other entity, whether acting in an individual, fiduciary, or any other
capacity.
"Redemption Date" shall mean the date fixed by the Board of
Directors for the redemption of any shares of stock of the corporation
pursuant to section B of this Article IX.
"Redemption Securities" shall mean any debt or equity securities
of the corporation, any Subsidiary or any other corporation, or any
combination thereof, having such terms and conditions as shall be
approved by the Board of Directors and which, together with any cash
to be paid as part of the redemption price, in the opinion of any
nationally recognized investment banking firm selected by the Board of
Directors (which may be a firm which provides other investment
banking, brokerage or other services to the corporation), has a value,
at the time notice of redemption is given pursuant to Paragraph (4),
section B of Article IX, at least equal to the Fair Market Value of
the shares to be redeemed pursuant to section B of Article IX
(assuming, in the case of Redemption Securities to be publicly traded,
such Redemption Securities were fully distributed and subject only to
normal trading activity).
"Subsidiary" shall mean any company of which a majority of any
class of equity security is beneficially owned by the corporation."
4
<PAGE>
IN WITNESS WHEREOF, I have hereunto set my hand this 26th day of April,
1994.
/s/ Johan P. Finley
--------------------------
Johan P. Finley, President
5
<PAGE>
EXHIBIT 3.4
ARTICLES OF AMENDMENT
OF
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
PDS FINANCIAL CORPORATION
The undersigned, Johan P. Finley, President of PDS Financial Corporation,
a Minnesota Corporation (the "Company"), hereby certifies that the following
resolutions were duly adopted by the stockholders of the Company pursuant to
Chapter 302A of the Minnesota Business Corporation Act at a stockholders meeting
held May 3, 1995, and that such resolutions have not been subsequenty modified
or rescinded:
"RESOLVED, that Section 3.1 of Article III of the Company's Amended
and Restated Articles of Incorporation should be as follows:
3.1 The authorized capital stock of this corporation shall be Twenty-two
Million (22,000,000) which shall be Twenty Million (20,000,000) shares of common
stock of the par value of one cent ($.01) per share (the "Common Stock"), and
Two Million (2,000,000) shares of preferred stock.
FURTHER RESOLVED, that except for the amendment to Section 3.1 as set
forth above, the Amended and Restated Articles of Incorporation will remain
unchanged.
FURTHER RESOLVED, that the amendment to the Amended and Restated
Articles of Incorporation shall become effective when Articles of Amendment are
filed for record with the Minnesota Secretary of State, and that the officers of
the corporation are hereby authorized and directed to prepare, executed and
acknowledge articles of amendment on behalf of the corporation, embracing the
foregoing resolutions and to cause such Articles of Amendment to be filed for
record in the manner required by law."
IN WITNESS WHEREOF, the undersigned, Johan P. Finley, President of PDS
Financial Corporation, being duly authorized on behalf of PDS Financial
Corporation, has executed this document as of May 3, 1995.
/s/ Johan P. Finley
--------------------------
Johan P. Finley, President
<PAGE>
- -------------------------------------------------------------------------------
REVOLVING CREDIT
AND
SECURITY AGREEMENT
- -------------------------------------------------------------------------------
BNY FINANCIAL CORPORATION
(AS LENDER AND AS AGENT)
- -------------------------------------------------------------------------------
WITH
- -------------------------------------------------------------------------------
PDS FINANCIAL CORPORATION
AND
PDS FINANCIAL CORPORATION-NEVADA
(BORROWERS)
- -------------------------------------------------------------------------------
April 9, 1997
- -------------------------------------------------------------------------------
<PAGE>
Table of Contents
<TABLE>
<S> <C> <C>
I. DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1. ACCOUNTING TERMS . . . . . . . . . . . . . . . . . . . . . . . 1
1.2. GENERAL TERMS. . . . . . . . . . . . . . . . . . . . . . . . . 1
1.3. UNIFORM COMMERCIAL CODE TERMS. . . . . . . . . . . . . . . . . 16
1.4. CERTAIN MATTERS OF CONSTRUCTION. . . . . . . . . . . . . . . . 16
II. ADVANCES, PAYMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2.1. (a) TOTAL ADVANCES . . . . . . . . . . . . . . . . . . . . . 17
(b) INDIVIDUAL ADVANCES. . . . . . . . . . . . . . . . . . . 17
2.2. PROCEDURE FOR BORROWING. . . . . . . . . . . . . . . . . . . . 17
2.3. DISBURSEMENT OF ADVANCE PROCEEDS . . . . . . . . . . . . . . . 18
2.4. REPAYMENT OF ADVANCES. . . . . . . . . . . . . . . . . . . . . 18
2.5. REPAYMENT OF EXCESS ADVANCES . . . . . . . . . . . . . . . . . 19
2.6. STATEMENT OF ACCOUNT . . . . . . . . . . . . . . . . . . . . . 19
2.7. ADDITIONAL PAYMENTS. . . . . . . . . . . . . . . . . . . . . . 20
2.8. MANNER OF BORROWING AND PAYMENT. . . . . . . . . . . . . . . . 20
2.9. USE OF PROCEEDS. . . . . . . . . . . . . . . . . . . . . . . . 22
2.10. DEFAULTING LENDER. . . . . . . . . . . . . . . . . . . . . . . 22
III. INTEREST AND FEES. . . . . . . . . . . . . . . . . . . . . . . . . . . 23
3.1. INTEREST . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
3.2. (a) CLOSING FEE. . . . . . . . . . . . . . . . . . . . . . . 25
(b) FACILITY FEE . . . . . . . . . . . . . . . . . . . . . . 25
3.3. (a) COLLATERAL MONITORING FEE. . . . . . . . . . . . . . . . 25
(b) COLLATERAL EVALUATION FEE. . . . . . . . . . . . . . . . 25
3.4. MINIMUM ANNUAL FEES. . . . . . . . . . . . . . . . . . . . . . 25
3.5. COMPUTATION OF INTEREST AND FEES . . . . . . . . . . . . . . . 25
3.6. MAXIMUM CHARGES. . . . . . . . . . . . . . . . . . . . . . . . 25
3.7. INCREASED COSTS. . . . . . . . . . . . . . . . . . . . . . . . 26
3.8. CAPITAL ADEQUACY . . . . . . . . . . . . . . . . . . . . . . . 26
IV. COLLATERAL: GENERAL TERMS . . . . . . . . . . . . . . . . . . . . . . 27
4.1. SECURITY INTEREST IN THE COLLATERAL. . . . . . . . . . . . . . 27
4.2. PERFECTION OF SECURITY INTEREST. . . . . . . . . . . . . . . . 27
4.3. DISPOSITION OF COLLATERAL. . . . . . . . . . . . . . . . . . . 28
4.4. PRESERVATION OF COLLATERAL . . . . . . . . . . . . . . . . . . 28
4.5. OWNERSHIP OF COLLATERAL. . . . . . . . . . . . . . . . . . . . 28
4.6. DEFENSE OF AGENT'S AND LENDER'S INTERESTS. . . . . . . . . . . 29
4.7. BOOKS AND RECORDS. . . . . . . . . . . . . . . . . . . . . . . 29
4.8. FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . . . . . . . 30
4.9. COMPLIANCE WITH LAWS . . . . . . . . . . . . . . . . . . . . . 30
4.10. INSPECTION OF PREMISES . . . . . . . . . . . . . . . . . . . . 30
4.11. INSURANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . 30
-i-
<PAGE>
4.12. FAILURE TO PAY INSURANCE . . . . . . . . . . . . . . . . . . . 31
4.13. PAYMENT OF TAXES . . . . . . . . . . . . . . . . . . . . . . . 31
4.14. PAYMENT OF LEASEHOLD OBLIGATIONS . . . . . . . . . . . . . . . 32
4.15. ASSIGNED LEASES. . . . . . . . . . . . . . . . . . . . . . . . 32
(a) NATURE OF ASSIGNED LEASES. . . . . . . . . . . . . . . . 32
(b) SOLVENCY OF LESSEE . . . . . . . . . . . . . . . . . . . 32
(c) LOCATIONS OF BORROWERS . . . . . . . . . . . . . . . . . 32
(d) COLLECTION . . . . . . . . . . . . . . . . . . . . . . . 32
(e) NOTIFICATION OF ASSIGNMENT . . . . . . . . . . . . . . . 32
(f) POWER OF AGENT TO ACT ON BORROWERS' BEHALF . . . . . . . 33
(g) NO LIABILITY . . . . . . . . . . . . . . . . . . . . . . 34
(h) ESTABLISHMENT OF A LOCKBOX ACCOUNT, DOMINION ACCOUNT . . 34
4.16. INTENTIONALLY OMITTED. . . . . . . . . . . . . . . . . . . . . 35
4.17. MAINTENANCE OF LEASED EQUIPMENT. . . . . . . . . . . . . . . . 35
4.18. EXCULPATION OF LIABILITY . . . . . . . . . . . . . . . . . . . 35
4.19. ENVIRONMENTAL MATTERS. . . . . . . . . . . . . . . . . . . . . 35
4.20. FINANCING STATEMENTS . . . . . . . . . . . . . . . . . . . . . 37
V. REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . 37
5.1. AUTHORITY. . . . . . . . . . . . . . . . . . . . . . . . . . . 37
5.2. FORMATION AND QUALIFICATION. . . . . . . . . . . . . . . . . . 38
5.3. SURVIVAL OF REPRESENTATIONS AND WARRANTIES . . . . . . . . . . 38
5.4. TAX RETURNS. . . . . . . . . . . . . . . . . . . . . . . . . . 38
5.5. FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . 38
5.6. CORPORATE NAME . . . . . . . . . . . . . . . . . . . . . . . . 39
5.7. O.S.H.A. AND ENVIRONMENTAL COMPLIANCE. . . . . . . . . . . . . 39
5.8. SOLVENCY; NO LITIGATION, VIOLATION, INDEBTEDNESS OR DEFAULT. . 40
5.9. PATENTS, TRADEMARKS, COPYRIGHTS AND LICENSES . . . . . . . . . 41
5.10. LICENSES AND PERMITS . . . . . . . . . . . . . . . . . . . . . 41
5.11. DEFAULT OF INDEBTEDNESS. . . . . . . . . . . . . . . . . . . . 42
5.12. NO DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . 42
5.13. NO BURDENSOME RESTRICTIONS . . . . . . . . . . . . . . . . . . 42
5.14. NO LABOR DISPUTES. . . . . . . . . . . . . . . . . . . . . . . 42
5.15. MARGIN REGULATIONS . . . . . . . . . . . . . . . . . . . . . . 42
5.16. INVESTMENT COMPANY ACT . . . . . . . . . . . . . . . . . . . . 42
5.17. DISCLOSURE . . . . . . . . . . . . . . . . . . . . . . . . . . 42
5.18. DELIVERY OF SUBORDINATED DEBT DOCUMENTATION. . . . . . . . . . 43
5.19. SWAPS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
5.20. CONFLICTING AGREEMENTS . . . . . . . . . . . . . . . . . . . . 43
5.21. APPLICATION OF CERTAIN LAWS AND REGULATIONS. . . . . . . . . . 43
5.22. BUSINESS AND PROPERTY OF BORROWER. . . . . . . . . . . . . . . 43
VI. AFFIRMATIVE COVENANTS. . . . . . . . . . . . . . . . . . . . . . . . . 43
6.1. PAYMENT OF FEES. . . . . . . . . . . . . . . . . . . . . . . . 43
6.2. CONDUCT OF BUSINESS AND MAINTENANCE OF EXISTENCE AND ASSETS. . 44
6.3. VIOLATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 44
6.4. GOVERNMENT RECEIVABLES . . . . . . . . . . . . . . . . . . . . 44
6.5. TANGIBLE NET WORTH . . . . . . . . . . . . . . . . . . . . . . 44
-ii-
<PAGE>
6.6. FIXED CHARGE COVERAGE RATIO. . . . . . . . . . . . . . . . . . 45
6.7. LEVERAGE RATIO . . . . . . . . . . . . . . . . . . . . . . . . 45
6.8. EXECUTION OF SUPPLEMENTAL INSTRUMENTS. . . . . . . . . . . . . 45
6.9. PAYMENT OF INDEBTEDNESS. . . . . . . . . . . . . . . . . . . . 45
6.10. STANDARDS OF FINANCIAL STATEMENTS. . . . . . . . . . . . . . . 45
6.11. INTEREST RATE CAP. . . . . . . . . . . . . . . . . . . . . . . 45
6.12. APPRAISALS . . . . . . . . . . . . . . . . . . . . . . . . . . 46
6.13. GAMING LAWS. . . . . . . . . . . . . . . . . . . . . . . . . . 46
VII. NEGATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . 46
7.1. MERGER, CONSOLIDATION, ACQUISITION AND SALE OF ASSETS. . . . . 46
7.2. CREATION OF LIENS. . . . . . . . . . . . . . . . . . . . . . . 46
7.3. GUARANTEES . . . . . . . . . . . . . . . . . . . . . . . . . . 46
7.4. INVESTMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . 46
7.5. LOANS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
7.6. CAPITAL EXPENDITURES . . . . . . . . . . . . . . . . . . . . . 47
7.7. DIVIDENDS. . . . . . . . . . . . . . . . . . . . . . . . . . . 47
7.8. INDEBTEDNESS . . . . . . . . . . . . . . . . . . . . . . . . . 47
7.9. NATURE OF BUSINESS . . . . . . . . . . . . . . . . . . . . . . 47
7.10. TRANSACTIONS WITH AFFILIATES . . . . . . . . . . . . . . . . . 47
7.11. LEASES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
7.12. SUBSIDIARIES . . . . . . . . . . . . . . . . . . . . . . . . . 48
7.13. FISCAL YEAR AND ACCOUNTING CHANGES . . . . . . . . . . . . . . 48
7.14. PLEDGE OF CREDIT . . . . . . . . . . . . . . . . . . . . . . . 48
7.15. AMENDMENT OF ARTICLES OF INCORPORATION, BY-LAWS. . . . . . . . 48
7.16. COMPLIANCE WITH ERISA. . . . . . . . . . . . . . . . . . . . . 48
7.17. DEBENTURES . . . . . . . . . . . . . . . . . . . . . . . . . . 49
VIII. CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . . . . . . . . . . 49
8.1. CONDITIONS TO INITIAL ADVANCES . . . . . . . . . . . . . . . . 49
(a) NOTE . . . . . . . . . . . . . . . . . . . . . . . . . . 49
(b) FILINGS, REGISTRATIONS AND RECORDINGS. . . . . . . . . . 49
(c) CORPORATE PROCEEDINGS OF BORROWERS . . . . . . . . . . . 49
(d) INCUMBENCY CERTIFICATES OF BORROWERS . . . . . . . . . . 50
(e) CERTIFICATES . . . . . . . . . . . . . . . . . . . . . . 50
(f) GOOD STANDING CERTIFICATES . . . . . . . . . . . . . . . 50
(g) LEGAL OPINION. . . . . . . . . . . . . . . . . . . . . . 50
(h) NO LITIGATION. . . . . . . . . . . . . . . . . . . . . . 50
(i) FINANCIAL CONDITION CERTIFICATES . . . . . . . . . . . . 50
(j) COLLATERAL EXAMINATION . . . . . . . . . . . . . . . . . 50
(k) FEES . . . . . . . . . . . . . . . . . . . . . . . . . . 50
(l) FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . 51
(m) OTHER DOCUMENTS. . . . . . . . . . . . . . . . . . . . . 51
(n) INSURANCE. . . . . . . . . . . . . . . . . . . . . . . . 51
(o) PAYMENT INSTRUCTIONS . . . . . . . . . . . . . . . . . . 51
(p) CONSENTS . . . . . . . . . . . . . . . . . . . . . . . . 51
(q) NO ADVERSE MATERIAL CHANGE . . . . . . . . . . . . . . . 51
(r) SUBORDINATED DEBT DOCUMENTATION. . . . . . . . . . . . . 51
-iii-
<PAGE>
(s) NET WORTH. . . . . . . . . . . . . . . . . . . . . . . . 51
(t) CONTRACT REVIEW. . . . . . . . . . . . . . . . . . . . . 51
(u) CLOSING CERTIFICATE. . . . . . . . . . . . . . . . . . . 52
(v) BORROWING BASE . . . . . . . . . . . . . . . . . . . . . 52
(x) OTHER. . . . . . . . . . . . . . . . . . . . . . . . . . 52
8.2. CONDITIONS TO EACH ADVANCE . . . . . . . . . . . . . . . . . . 52
(a) REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . 52
(b) NO DEFAULT . . . . . . . . . . . . . . . . . . . . . . . 52
(c) MAXIMUM ADVANCES . . . . . . . . . . . . . . . . . . . . 52
(d) ORIGINAL CHATTEL PAPER . . . . . . . . . . . . . . . . . 53
IX. INFORMATION AS TO BORROWER . . . . . . . . . . . . . . . . . . . . . . 53
9.1. DISCLOSURE OF MATERIAL MATTERS . . . . . . . . . . . . . . . . 53
9.2. SCHEDULES. . . . . . . . . . . . . . . . . . . . . . . . . . . 53
9.3. ENVIRONMENTAL CERTIFICATE. . . . . . . . . . . . . . . . . . . 53
9.4. LITIGATION . . . . . . . . . . . . . . . . . . . . . . . . . . 54
9.5. MATERIAL OCCURRENCES . . . . . . . . . . . . . . . . . . . . . 54
9.6. GOVERNMENT RECEIVABLES . . . . . . . . . . . . . . . . . . . . 54
9.7. ANNUAL FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . 54
9.8. QUARTERLY FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . 55
9.9. MONTHLY FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . 55
9.10. OTHER REPORTS. . . . . . . . . . . . . . . . . . . . . . . . . 56
9.11. ADDITIONAL INFORMATION . . . . . . . . . . . . . . . . . . . . 56
9.12. PROJECTED OPERATING BUDGET . . . . . . . . . . . . . . . . . . 56
9.13. INTENTIONALLY OMITTED. . . . . . . . . . . . . . . . . . . . . 56
9.14. NOTICE OF SUITS, ADVERSE EVENTS. . . . . . . . . . . . . . . . 56
9.15. ERISA NOTICES AND REQUESTS . . . . . . . . . . . . . . . . . . 56
9.16. ADDITIONAL DOCUMENTS . . . . . . . . . . . . . . . . . . . . . 57
X. EVENTS OF DEFAULT. . . . . . . . . . . . . . . . . . . . . . . . . . . 57
XI. LENDERS' RIGHTS AND REMEDIES AFTER DEFAULT . . . . . . . . . . . . . . 60
11.1. RIGHTS AND REMEDIES. . . . . . . . . . . . . . . . . . . . . . 60
11.2. AGENT'S DISCRETION . . . . . . . . . . . . . . . . . . . . . . 61
11.3. SETOFF . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
11.4. RIGHTS AND REMEDIES NOT EXCLUSIVE. . . . . . . . . . . . . . . 61
XII. WAIVERS AND JUDICIAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . 61
12.1. WAIVER OF NOTICE . . . . . . . . . . . . . . . . . . . . . . . 61
12.2. DELAY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
12.3. JURY WAIVER. . . . . . . . . . . . . . . . . . . . . . . . . . 62
XIII. EFFECTIVE DATE AND TERMINATION . . . . . . . . . . . . . . . . . . . . 62
13.1. TERM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
13.2. TERMINATION. . . . . . . . . . . . . . . . . . . . . . . . . . 62
XIV. REGARDING AGENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
14.1. APPOINTMENT. . . . . . . . . . . . . . . . . . . . . . . . . . 63
-iv-
<PAGE>
14.2. NATURE OF DUTIES . . . . . . . . . . . . . . . . . . . . . . . 63
14.3. LACK OF RELIANCE ON AGENT AND RESIGNATION. . . . . . . . . . . 64
14.4. CERTAIN RIGHTS OF AGENT. . . . . . . . . . . . . . . . . . . . 65
14.5. RELIANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
14.6. NOTICE OF DEFAULT. . . . . . . . . . . . . . . . . . . . . . . 65
14.7. INDEMNIFICATION. . . . . . . . . . . . . . . . . . . . . . . . 65
14.8. AGENT IN ITS INDIVIDUAL CAPACITY . . . . . . . . . . . . . . . 66
14.9. DELIVERY OF DOCUMENTS. . . . . . . . . . . . . . . . . . . . . 66
14.10. BORROWERS' UNDERTAKING TO AGENT. . . . . . . . . . . . . . . . 66
XV. BORROWING AGENCY . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
15.1. BORROWING AGENCY PROVISIONS. . . . . . . . . . . . . . . . . . 66
15.2. WAIVER OF SUBROGATION. . . . . . . . . . . . . . . . . . . . . 67
XIV. MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
16.1. GOVERNING LAW. . . . . . . . . . . . . . . . . . . . . . . . . 67
16.2. ENTIRE UNDERSTANDING . . . . . . . . . . . . . . . . . . . . . 68
16.3. SUCCESSORS AND ASSIGNS; PARTICIPATIONS; NEW LENDERS. . . . . . 69
16.4. APPLICATION OF PAYMENTS. . . . . . . . . . . . . . . . . . . . 71
16.5. INDEMNITY. . . . . . . . . . . . . . . . . . . . . . . . . . . 71
16.6. NOTICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
16.7. SURVIVAL . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
16.8. SEVERABILITY . . . . . . . . . . . . . . . . . . . . . . . . . 72
16.9. EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
16.10. INJUNCTIVE RELIEF. . . . . . . . . . . . . . . . . . . . . . . 73
16.11. CONSEQUENTIAL DAMAGES. . . . . . . . . . . . . . . . . . . . . 73
16.12. CAPTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
16.14. CONSTRUCTION . . . . . . . . . . . . . . . . . . . . . . . . . 73
16.15. CONFIDENTIALITY. . . . . . . . . . . . . . . . . . . . . . . . 73
16.16. SENIOR DEBT. . . . . . . . . . . . . . . . . . . . . . . . . . 74
</TABLE>
-v-
<PAGE>
REVOLVING CREDIT
AND
SECURITY AGREEMENT
__________________
Revolving Credit and Security Agreement dated April 9, 1997 between
PDS Financial Corporation, a corporation organized under the laws of the
State of Minnesota ("PDS"), PDS Financial Corporation-Nevada, a corporation
organized under the laws of the State of Nevada ("PDS Nevada") (each a
"Borrower" and, jointly and severally, the "Borrowers"), the financial
institutions which are now or hereafter become a party hereto (collectively,
the "Lenders" and individually a "Lender") and BNY FINANCIAL CORPORATION
("BNYFC"), a corporation organized under the laws of the State of New York,
as agent for Lenders (BNYFC, in such capacity, the "Agent").
IN CONSIDERATION of the mutual covenants and undertakings herein
contained, each of Borrowers, Lender and Agent hereby agree as follows:
I. DEFINITIONS.
1.1. ACCOUNTING TERMS. As used in this Agreement, the Revolving
Credit Notes, or any certificate, report or other document made or delivered
pursuant to this Agreement, accounting terms not defined in Section 1.2 or
elsewhere in this Agreement and accounting terms partly defined in Section
1.2 to the extent not defined, shall have the respective meanings given to
them under GAAP, PROVIDED, HOWEVER, whenever such accounting terms are used
for the purposes of determining compliance with financial covenants in this
Agreement, such accounting terms shall be defined in accordance with GAAP
applied in preparation of the audited financial statements of Borrowers for
the fiscal year ended December 31, 1995.
1.2. GENERAL TERMS. For purposes of this Agreement the following
terms shall have the following meanings:
"ACCOUNTANTS" shall have the meaning set forth in Section 9.7
hereof.
"ADVANCES" shall mean advances made pursuant to Section 2.1(a)
hereof.
"ADVANCE RATES" shall have the meaning set forth in Section
2.1(a) hereof.
"AFFILIATE" of any Person shall mean (a) any Person (other than
a Subsidiary) which, directly or indirectly, is in control of, is controlled
by, or is under common control with such Person, or (b) any Person who is a
director or officer (i) of such Person, (ii) of any Subsidiary of such Person
or (iii) of any Person described in clause (a) above. For purposes of this
definition, control of a Person shall mean the power, direct or indirect, (x)
to vote 5% or more of the securities having ordinary voting power for the
election of directors of such Person, or (y) to direct or cause the direction
of the management and policies of such Person whether by contract or
otherwise.
"AGENT" shall have the meaning set forth in the preamble to
this Agreement and shall include its successors and assigns.
<PAGE>
"ALTERNATE BASE RATE" shall mean, for any day, a rate per annum
equal to the higher of (i) the Prime Rate in effect on such day and (ii) the
Federal Funds Rate in effect on such day plus 1/2 of 1%.
"APPROVED LESSEE" shall mean a Lessee of a Borrower which
satisfies each and every one of the conditions described on SCHEDULE 1.2(A),
as determined by Agent, or any such other Lessee of a Borrower specifically
approved in writing by Agent.
"ASSIGNED LEASE" shall mean each Eligible Lease and each other
Equipment Lease specifically assigned to Agent hereunder or pursuant hereto.
"AUTHORITY" shall have the meaning set forth in Section 4.19(d).
"AVERAGE MONTHLY LIBOR RATE" shall mean the rate per annum for
the one month LIBOR rate as published in THE WALL STREET JOURNAL, averaged
monthly.
"BANK" shall mean The Bank of New York.
"BLOCKED ACCOUNTS" shall have the meaning set forth in Section
4.15(h).
"BNYFC" shall have the meaning set forth in the preamble to this
Agreement and shall include its successors and assigns.
"BORROWER" or "BORROWERS" shall have the meaning set forth in
the preamble to this Agreement and shall extend to all permitted successors
and assigns of such Persons.
"BORROWERS ON A CONSOLIDATED BASIS" shall mean the
consolidation in accordance with GAAP of the accounts or other items of PDS
and its Subsidiaries.
"BORROWING AGENT" shall mean PDS and its permitted successors and
assigns.
"BUSINESS DAY" shall mean any day other than a day on which
commercial banks in New York are authorized or required by law to close.
"CASH FLOW" for any period, shall mean the sum of (i) Earnings
Before Interest and Taxes for such period plus (ii) depreciation and
amortization and all other non-cash charges, which were deducted in
determining net income for such period, minus (iii) non cash credits which
were taken into account in determining Earnings Before Interest and Taxes for
such period.
"CERCLA" shall mean the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, 42 U.S.C. Sections 9601
ET SEQ.
"CHANGE OF OWNERSHIP" shall mean:
(1) as respects PDS Nevada, the occurrence of one or more of the
following events:
(a) 50% or more of the common stock of PDS Nevada is no
longer owned or controlled by (including for the purposes of the calculation
of percentage ownership, any
-2-
<PAGE>
shares of common stock into which any capital stock of PDS Nevada held by the
PDS Nevada Original Owner is convertible or for which any such shares of the
capital stock of PDS Nevada or of any other Person may be exchanged and any
shares of common stock issuable to the PDS Nevada Original Owner upon
exercise of any warrants, options or similar rights which may at the time of
calculation be held by the PDS Nevada Original Owner) the PDS Nevada Original
Owner or an Affiliate of the PDS Nevada Original Owner; or
(b) any merger, consolidation or sale of substantially all of
the property or assets of PDS Nevada; or
(2) as respects PDS, the occurrence of one or more of the following
events:
(a) the direct or indirect sale, lease, exchange or other
transfer of all or substantially all of the assets of PDS to any Person
(other than Mr. Johan P. Finley) or entity or group of Persons or entities
acting in concert as a partnership, limited partnership, syndicate or other
group (a "Group of Persons");
(b) the consummation of any consolidation or merger of PDS
with or into another corporation with the effect that the stockholders of PDS
immediately prior to the date of the consolidation or merger hold immediately
after such merger or consolidation less than 51% of the combined voting power
of the outstanding voting securities of the surviving entity of such merger,
or the corporation resulting from such consolidation, ordinarily having the
right to vote in the election of directors immediately after such merger or
consolidation;
(c) the stockholders of PDS shall approve any plan or
proposal for the liquidation or dissolution of PDS;
(d) a Person (other than Mr. Johan P. Finley) or Group of
Persons shall, as a result of a tender or exchange offer, open market
purchases, privately negotiated purchases or otherwise, have become the
direct or indirect beneficial owner (within the meaning of Rule 13d-3 under
the Securities Exchange Act of 1934, as amended) of securities of PDS
representing more than 50% of the combined voting power of the then
outstanding securities of PDS ordinarily having the right to vote in the
election of the directors; or
(e) a Person (other than Mr. Johan P. Finley) or Group of
Persons together with any Affiliates thereof, shall succeed in having a
sufficient number of its nominees elected to the Board of Directors of PDS
such that such nominees, when added to any existing directors remaining on
the Board of Directors of PDS after such election who are Affiliates of such
Person or Group of Persons, will constitute a majority of the Board of
Directors of PDS.
"CHARGES" shall mean all taxes, charges, fees, imposts, levies
or other assessments, including, without limitation, all net income, gross
income, gross receipts, sales, use, ad valorem, value added, transfer,
franchise, profits, inventory, capital stock, license, withholding, payroll,
employment, social security, unemployment, excise, severance, stamp,
occupation and property taxes, custom duties, fees, assessments, liens,
claims and charges of any kind whatsoever, together with any interest and any
penalties, additions to tax or additional amounts, imposed by any taxing or
other authority, domestic or foreign (including, without limitation, the PBGC
or any environmental agency or superfund), upon the Collateral, any Borrower
or any of its Affiliates.
-3-
<PAGE>
"CLOSING DATE" shall mean April ___, 1997 or such other date as
may be agreed to by the parties hereto.
"CODE" shall mean the Internal Revenue Code of 1986, as amended
from time to time and the regulations promulgated thereunder.
"COLLATERAL" shall mean and include:
(a) Each Assigned Lease, all amounts payable by Lessees
thereunder and all rights and remedies of Borrower as lessor thereunder
including, but not limited to, the right to amend the lease, to grant a waiver
to Lessee and to declare a default under the lease;
(b) Leased Equipment, together with all accessions,
accessories, additions, amendments, attachments, modifications, replacements
and substitutions;
(c) Borrower's rights against guarantors, subordinators,
hypothecators, vendors of the Leased Equipment and other third parties with
respect to Assigned Leases or Leased Equipment;
(d) Any proceeds or products of any of the foregoing,
including all policies of insurance pertaining to any of the foregoing as well
as any proceeds pertaining to such policies insofar as such proceeds relate to
the foregoing; and
(e) All books and records of Borrower pertaining to any of
the foregoing.
"COMMITMENT PERCENTAGE" of any Lender shall mean the percentage
set forth below such Lender's name on the signature page hereof as same may be
adjusted upon any assignment by a Lender pursuant to Section 16.3(c) hereof.
"COMMITMENT TRANSFER SUPPLEMENT" shall mean a document in the
form of EXHIBIT 16.3 hereto, properly completed and otherwise in form and
substance satisfactory to Agent by which the Purchasing Lender purchases and
assumes a portion of the obligation of Lenders to make Advances under this
Agreement.
"CONSENTS" shall mean all filings and all licenses, permits,
consents, approvals, authorizations, qualifications and orders of governmental
authorities and other third parties, domestic or foreign, necessary to carry on
any Borrower's business, including, without limitation, any Consents required
under all applicable federal, state or other applicable law.
"CONTROLLED GROUP" shall mean all members of a controlled group
of corporations and all trades or businesses (whether or not incorporated)
under common control which, together with any Borrower, are treated as a single
employer under Section 414 of the Code.
"D & I CERTIFICATE" shall mean and include a certificate duly
executed by a Lessee acknowledging the delivery, installation and acceptance by
such Lessee of Leased Equipment.
-4-
<PAGE>
"DEBENTURES" shall mean PDS' 11.5% Convertible Subordinated
Debentures dated as of November 2, 1993.
"DEFAULT" shall mean an event which, with the giving of notice or
passage of time or both, would constitute an Event of Default.
"DEFAULT RATE" shall have the meaning set forth in Section 3.1
hereof.
"DEFAULTING LENDER" shall have the meaning set forth in Section
2.10(a) hereof.
"DEPOSITORY ACCOUNTS" shall have the meaning set forth in Section
4.15(h) hereof.
"DISCOUNTED COST" shall mean the gross invoice amount of Gaming
Device Goods less all applicable discounts, credits and allowances.
"DISCOUNT RATE" shall mean an annual rate of interest equal to
the Alternate Base Rate plus three percent (3.0%) as calculated two (2)
Business Days prior to the applicable Take Down Date.
"DOCUMENTS" shall have the meaning set forth in Section 8.1(c)
hereof.
"DOLLARS" and the sign "$" shall mean lawful money of the United
States of America.
"DOMESTIC RATE LOAN" shall mean any Advance that bears interest
based upon the Alternate Base Rate.
"EARNINGS BEFORE INTEREST AND TAXES" shall mean net income of
Borrowers on a Consolidated Basis before interest and taxes.
"EBITDA" shall mean for any period the sum of (i) Earnings Before
Interest and Taxes for such period PLUS (ii) depreciation and amortization
expenses for such period, to the extent such depreciation and amortization
expenses were deducted in calculating Earnings Before Interest and Taxes.
"ELIGIBLE LEASE" shall mean and include an Equipment Lease which
Agent, in its sole credit judgment, shall deem to be an Eligible Lease, based
on such considerations as Agent may from time to time deem appropriate. An
Equipment Lease shall not be deemed eligible unless the original chattel paper
relating to such Equipment Lease is in the possession of Agent and it is not
subject to any other Lien. In addition, no Equipment Lease shall be an
Eligible Lease if:
(a) it is cancelable by the lessee;
(b) the Lessee has not duly executed a D & I Certificate with
respect thereto;
-5-
<PAGE>
(c) its initial term is longer than 48 months;
(d) the applicable Borrower has not received all requisite
regulatory approvals, whether pertaining to such Equipment Lease's execution,
enforceability or otherwise;
(e) it is not substantially in the form of EXHIBIT 1.2(A)
hereto, except insofar as any variation enhances the rights and benefits of the
lessor and/or any assignee of such Equipment Lease;
(f) the applicable Borrower has not duly filed properly
completed and executed Uniform Commercial Code financing statements against the
Lessee covering the goods subject to such Equipment Lease;
(g) it has not been assigned to Agent by an assignment in a
form satisfactory in all respects to Agent;
(h) the Lessee has not been notified, in writing, of the
Equipment Lease assignment to Agent, with instructions to make payment
thereunder to Agent or as Agent may direct;
(i) the Lessee has not acknowledged, in writing, the Equipment
Lease assignment to Agent;
(j) the borrowing base availability created by such Equipment
Lease under SECTION 2.1(A) is less than $250,000;
(k) the Lessee thereunder is an Affiliate of any Borrower or a
Person controlled by an Affiliate of any Borrower;
(l) the monthly installment under such Equipment Lease is
unpaid more than thirty (30) days after the original due date of such
installment;
(m) the Lessee thereunder is in default in payment of any
Assigned Lease installment for more than thirty (30) days after the original
due date of such installment;
(n) any covenant, representation or warranty contained in this
Agreement with respect to such Eligible Lease has been breached;
(o) the Lessee shall (i) apply for, suffer, or consent to the
appointment of, or the taking of possession by, a receiver, custodian, trustee
or liquidator of itself or of all or a substantial part of its property or call
a meeting of its creditors, (ii) admit in writing its inability, or be
generally unable, to pay its debts as they become due or cease operations of
its present business, (iii) make a general assignment for the benefit of
creditors, (iv) commence a voluntary case under any state or federal bankruptcy
laws (as now or hereafter in effect), (v) be adjudicated a bankrupt or
insolvent, (vi) file a petition seeking to take advantage of any other law
providing for the relief of debtors, (vii) acquiesce to, or fail to have
dismissed, any petition which is filed against it in any involuntary case under
such bankruptcy laws, or (viii) take any action for the purpose of effecting
any of the foregoing;
-6-
<PAGE>
(p) the Equipment Lease is entered into with a Lessee outside
the continental United States of America, unless the lease is on letter of
credit, guaranty or acceptance terms, in each case acceptable to Agent in its
sole discretion;
(q) the original Equipment Lease is not in the possession of
Agent;
(r) Agent believes, in its sole judgment, that collection of
any amounts due under such Equipment Lease is insecure or that any such amounts
may not be paid by reason of the Lessee's financial inability to pay;
(s) the Lessee is the United States of America, any state or
any department, agency or instrumentality of any of them, unless the applicable
Borrower effectuates an assignment of its right to payment of all amounts due
under such Equipment Lease to Agent pursuant to the Assignment of Claims Act of
1940, as amended (31 U.S.C. Sub-Section 3727 ET SEQ. and 41 U.S.C. Sub-Section
15 ET SEQ.) or has otherwise complied with other applicable statutes or
ordinances;
(t) the goods relating to such Equipment Lease have not been
shipped and delivered to and accepted by the Lessee, which acceptance has been
evidenced by a duly executed D & I Certificate, or the Equipment Lease
otherwise does not represent a consummated transaction;
(u) the Lessee is not an Approved Lessee;
(v) any amount due under such Equipment Lease is subject to any
offset, deduction, defense, dispute, or counterclaim, the Lessee is also a
creditor or supplier of a Borrower or any amount due under such Equipment Lease
is contingent in any respect or for any reason;
(w) the applicable Borrower has made any agreement with a
Lessee for any deduction therefrom;
(x) the Lessee has not agreed to remit lease payments directly
to Agent;
(y) any return, rejection or repossession of the goods subject
to the Equipment Lease has occurred;
(z) any amount due under such Equipment Lease is not payable to
a Borrower;
(aa) the goods subject to such Equipment Lease are not covered
by insurance acceptable in all respects to Agent under which Agent is named as
a loss payee; or
(ab) any amount due under such Equipment Lease is not otherwise
satisfactory to Agent as determined in good faith by Agent in the exercise of
its discretion in a reasonable manner.
-7-
<PAGE>
"ELIGIBLE LEASED EQUIPMENT" shall mean, with respect to each
Borrower, Leased Equipment subject to an Eligible Lease.
"ENVIRONMENTAL COMPLAINT" shall have the meaning set forth in
Section 4.19(d) hereof.
"ENVIRONMENTAL LAWS" shall mean all federal, state and local
environmental, land use, zoning, health, chemical use, safety and sanitation
laws, statutes, ordinances and codes relating to the protection of the
environment and/or governing the use, storage, treatment, generation,
transportation, processing, handling, production or disposal of Hazardous
Substances and the rules, regulations, policies, guidelines, interpretations,
decisions, orders and directives of federal, state and local governmental
agencies and authorities with respect thereto.
"EQUIPMENT ADVANCE RATE" shall have the meaning set forth in
Section 2.1(a)(i) hereof.
"EQUIPMENT LEASE" shall mean and include each lease of Leased
Equipment by a Borrower to a Lessee.
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended from time to time and the rules and regulations promulgated
thereunder.
"EURODOLLAR RATE LOAN" shall mean an Advance at any time that
bears interest based on the Average Monthly LIBOR Rate.
"EVENT OF DEFAULT" shall mean the occurrence of any of the events
set forth in Article X hereof.
"FEDERAL FUNDS RATE" shall mean, for any day, the weighted
average of the rates on overnight Federal funds transactions with members of
the Federal Reserve System arranged by Federal funds brokers, as published for
such day (or if such day is not a Business Day, for the next preceding Business
Day) by the Federal Reserve Bank of New York, or if such rate is not so
published for any day which is a Business Day, the average of quotations for
such day on such transactions received by the Bank from three Federal funds
brokers of recognized standing selected by the Bank.
"FINANCIAL STATEMENTS" shall have the meaning set forth in
Section 5.5(b) hereof.
"FIXED CHARGE COVERAGE RATIO" shall mean and include, with
respect to any fiscal period, the ratio of (a) EBITDA during such period to (b)
the sum of each Borrower's (i) interest expense on Indebtedness for Borrowed
Money PLUS (ii) Subordinated Principal Debt Payments PLUS (iii) taxes paid,
each during such period.
"FORMULA AMOUNT" shall have the meaning set forth in Section
2.1(a).
-8-
<PAGE>
"FUNDED DEBT RATIO" shall mean and include, with respect to any
fiscal period, the ratio of (a) Indebtedness for Borrowed Money (other than the
Subordinated Indebtedness and non-recourse Indebtedness) to (b) EBITDA.
"GAAP" shall mean generally accepted accounting principles in the
United States of America in effect from time to time.
"GAMING AUTHORITIES" shall mean the governmental agencies and/or
commissions having jurisdiction over Borrowers in the various states in which
Borrowers do business.
"GAMING DEVICE GOODS" shall mean goods consisting of electronic
and mechanical gaming devices with integral attachments.
"GAMING LAWS" shall mean the statutes and regulations relating to
gaming and the operation of Gaming Device Goods promulgated by the various
states and Gaming Authorities in which Borrowers do business.
"GOVERNMENTAL BODY" shall mean any nation or government, any
state or other political subdivision thereof or any entity exercising the
legislative, judicial, regulatory or administrative functions of or pertaining
to a government.
"HAZARDOUS DISCHARGE" shall have the meaning set forth in Section
4.19(d) hereof.
"HAZARDOUS SUBSTANCE" shall mean, without limitation, any
flammable explosives, radon, radioactive materials, asbestos, urea formaldehyde
foam insulation, polychlorinated byphenyls, petroleum and petroleum products,
methane, hazardous materials, Hazardous Wastes, hazardous or toxic substances
or related materials as defined in CERCLA, the Hazardous Materials
Transportation Act, as amended (49 U.S.C. Sections 1801, ET SEQ.), RCRA,
Articles 15 and 27 of the New York State Environmental Conservation Law or any
other applicable Environmental Law and in the regulations adopted pursuant
thereto.
"HAZARDOUS WASTES" shall mean all waste materials subject to
regulation under CERCLA, RCRA or applicable state law, and any other applicable
Federal and state laws now in force or hereafter enacted relating to hazardous
waste disposal.
"INDEBTEDNESS" of a Person at a particular date shall mean all
obligations of such Person which in accordance with GAAP would be classified
upon a balance sheet as liabilities (except capital stock and surplus earned or
otherwise and except non-recourse indebtedness) and in any event, without
limitation by reason of enumeration, shall include all indebtedness, debt and
other similar monetary obligations of such Person whether direct or guaranteed,
and all premiums, if any, due at the required prepayment dates of such
indebtedness, and all indebtedness secured by a Lien on assets owned by such
Person, whether or not such indebtedness actually shall have been created,
assumed or incurred by such Person. Any indebtedness of such Person resulting
from the acquisition by such Person of any assets subject to any Lien shall be
deemed, for the purposes hereof, to be the equivalent of the creation,
assumption and incurring of the indebtedness secured thereby, whether or not
actually so created, assumed or incurred.
-9-
<PAGE>
"INDEBTEDNESS FOR BORROWED MONEY" shall mean each Borrower's
Indebtedness under this Agreement and all of each such Borrower's other
Indebtedness classified as debt in accordance with GAAP.
"INDENTURE" shall mean the Indenture of Trust between PDS (f/k/a
Progressive Distribution Systems, Inc.) and First Trust National Association,
as trustee, dated as of November 2, 1993, as supplemented by First Supplemental
Indenture of Trust dated as of November 8, 1993.
"INDIVIDUAL FORMULA AMOUNT" shall mean at the date of
determination thereof, with respect to each Borrower an amount equal to: (a)
the lesser of (A) up to the Equipment Advance Rate of the sum of the Discounted
Cost of Eligible Leased Equipment (other than Used Equipment) of such Borrower,
PLUS the lesser of (x) up to the Equipment Advance Rate of the cost of Used
Equipment of such Borrower and (y) up to the Equipment Advance Rate of the
Orderly Liquidation Value of Used Equipment of such Borrower or (B) up to the
Lease Advance Rate of the amount of the periodic payments due under the
Eligible Leases of such Borrower discounted at the Discount Rate, in each case
amortized in equal monthly amounts over 23, 35 or 47 months from each initial
Take Down Date depending on the term of the applicable Equipment Lease (it
being the intention of the parties that the amortization schedule be one month
less than the lease term, but in no event is the applicable amortization
schedule to exceed 47 months), MINUS (b) such reserves as Agent may reasonably
deem proper and necessary from time to time.
"LEASE ADVANCE RATE" shall have the meaning set forth in Section
2.1(a)(i) hereof.
"LEASED EQUIPMENT" shall mean and include Gaming Device Goods and
all other goods leased by a Borrower to a Lessee under an Assigned Lease.
"LENDER" AND "LENDERS" shall have the meaning ascribed to such
term in the preamble to this Agreement and shall include each Person which is a
transferee, successor or assign of any Lender.
"LESSEE" shall mean and include the actual or prospective
purchaser or lessee of goods with respect to any Assigned Lease.
"LIEN" shall mean any mortgage, deed of trust, pledge,
hypothecation, assignment, security interest, lien (whether statutory or
otherwise), Charge, claim or encumbrance, or preference, priority or other
security agreement or preferential arrangement held or asserted in respect of
any asset of any kind or nature whatsoever including, without limitation, any
conditional sale or other title retention agreement, any lease having
substantially the same economic effect as any of the foregoing, and the filing
of, or agreement to give, any financing statement under the Uniform Commercial
Code or comparable law of any jurisdiction.
"MATERIAL ADVERSE EFFECT" shall mean a material adverse effect
(a) the condition, operations, assets, business or prospects of the applicable
Person or Persons, (b) any Borrower's ability to pay the Obligations in
accordance with the terms thereof, (c) the value of the Collateral, the Liens
on the Collateral or the priority of any such Lien or (d) the practical
realization of the benefits of Lender's rights and remedies under this
Agreement and the Other Documents.
-10-
<PAGE>
"MAXIMUM REVOLVING ADVANCE AMOUNT" shall mean $20,000,000.
"MULTIEMPLOYER PLAN" shall mean a "multiemployer plan" as defined
in Sections 3(37) and 4001(a)(3) of ERISA.
"NET WORTH" at a particular date, shall mean all amounts which
would be included under shareholders' equity on a balance sheet of the
Borrowers on a Consolidated Basis determined in accordance with GAAP as at such
date.
"OBLIGATIONS" shall mean and include any and all of each
Borrower's Indebtedness and/or liabilities to Agent or Lenders or any
corporation that directly or indirectly controls or is controlled by or is
under common control with Agent or any Lender of every kind, nature and
description, direct or indirect, secured or unsecured, joint, several, joint
and several, absolute or contingent, due or to become due, now existing or
hereafter arising, contractual or tortious, liquidated or unliquidated,
regardless of how such indebtedness or liabilities arise or by what agreement
or instrument they may be evidenced or whether evidenced by any agreement or
instrument, including, but not limited to, any and all of any Borrower's
Indebtedness and/or liabilities under this Agreement, the Other Documents or
under any other agreement between Agent or Lenders and any Borrower and all
obligations of any Borrower to Agent or Lenders to perform acts or refrain from
taking any action.
"ORDERLY LIQUIDATION VALUE" shall mean the orderly liquidation
value of a Borrower's Used Equipment as set forth in an appraisal acceptable to
Agent and prepared by an appraiser acceptable to Agent.
"OTHER DOCUMENTS" shall mean the Revolving Credit Notes, the
Questionnaire and any and all other agreements, instruments and documents,
including, without limitation, guaranties, pledges, powers of attorney,
consents, and all other writings heretofore, now or hereafter executed by any
Borrower and/or delivered to Agent or any Lender in respect of the transactions
contemplated by this Agreement.
"PARENT" of any Person shall mean a corporation or other entity
owning, directly or indirectly, at least 50% of the shares of stock or other
ownership interests having ordinary voting power to elect a majority of the
directors of the Person, or other Persons performing similar functions for any
such Person.
"PAYMENT OFFICE" shall mean initially 1290 Avenue of the
Americas, New York, New York; thereafter, such other office of Agent, if any,
which it may designate by notice to Borrowing Agent to be the Payment Office.
"PBGC" shall mean the Pension Benefit Guaranty Corporation.
"PDS NEVADA ORIGINAL OWNER" shall mean PDS.
"PERMITTED ENCUMBRANCES" shall mean (a) Liens in favor of Agent
for the benefit of Lenders; (b) Liens for taxes, assessments or other
governmental charges not delinquent or being contested in good faith and by
appropriate proceedings and with respect to which proper
-11-
<PAGE>
reserves have been taken by Borrowers; PROVIDED, THAT, the Lien shall have no
effect on the priority of the Liens in favor of Agent or the value of the
assets in which Agent has such a Lien and a stay of enforcement of any such
Lien shall be in effect; (c) Liens disclosed in the financial statements
referred to in Section 5.5, the existence of which Agent has consented to in
writing; (d) deposits or pledges to secure obligations under worker's
compensation, social security or similar laws, or under unemployment
insurance; (e) deposits or pledges to secure bids, tenders, contracts (other
than contracts for the payment of money), leases, statutory obligations,
surety and appeal bonds and other obligations of like nature arising in the
ordinary course of any Borrower's business; (f) judgment Liens that have been
stayed or bonded and mechanics', workers', materialmen's or other like Liens
arising in the ordinary course of any Borrower's business with respect to
obligations which are not due or which are being contested in good faith by
the applicable Borrower; (g) Liens placed upon fixed assets hereafter
acquired to secure a portion of the purchase price thereof, provided that (x)
any such lien shall not encumber any other property of the Borrowers and (y)
the aggregate amount of Indebtedness secured by such Liens incurred as a
result of such purchases during any fiscal year shall not exceed the amount
provided for in Section 7.6; (h) other Liens incidental to the conduct of
Borrowers' business or the ownership of its property and assets which were
not incurred in connection with the borrowing of money or the obtaining of
advances or credit, and which do not in the aggregate materially detract from
Lender's rights in and to the Collateral or the value of Borrowers' property
or assets or which do not materially impair the use thereof in the operation
of Borrowers' business; and (i) Liens disclosed on SCHEDULE 1.2.
"PERSON" shall mean any individual, sole proprietorship,
partnership, corporation, business trust, joint stock company, trust,
unincorporated organization association, limited liability company,
institution, public benefit corporation, joint venture, entity or government
(whether Federal, state, county, city, municipal or otherwise, including any
instrumentality, division, agency, body or department thereof).
"PLAN" shall mean any employee benefit plan within the meaning of
Section 3(3) of ERISA, maintained for employees of Borrower or any member of
the Controlled Group or any such Plan to which Borrower or any member of the
Controlled Group is required to contribute on behalf of any of its employees.
"PREPAYMENT DATE" shall have the meaning set forth in Section
13.1 hereof.
"PRIME RATE" shall mean the prime commercial lending rate of the
Bank as publicly announced to be in effect from time to time, such rate to be
adjusted automatically, without notice, on the effective date of any change in
such rate. This rate of interest is determined from time to time by the Bank
as a means of pricing some loans to its customers and is neither tied to any
external rate of interest or index nor does it necessarily reflect the lowest
rate of interest actually charged by the Bank to any particular class or
category of customers of the Bank.
"PROJECTIONS" shall have the meaning set forth in Section 5.5(b)
hereof.
"PURCHASING LENDER" shall have the meaning set forth in Section
16.3 hereof.
"QUESTIONNAIRE" shall mean the Documentation Information
Questionnaire and the responses thereto provided by Borrowers and delivered to
Agent.
-12-
<PAGE>
"RCRA" shall mean the Resource Conservation and Recovery Act, 42
U.S.C. Sections 6901 ET SEQ., as same may be amended from time to time.
"REAL PROPERTY" shall mean all of Borrowers' right, title and
interest in and to their owned and leased premises.
"RELEASE" shall have the meaning set forth in Section 5.7(c)(i)
hereof.
"REPORTABLE EVENT" shall mean a reportable event described in
Section 4043(b) of ERISA or the regulations promulgated thereunder.
"REQUIRED LENDERS" shall mean Lenders holding at least sixty-six
and two-thirds percent (66-2/3%) of the Advances.
"REVOLVING CREDIT NOTES" shall mean the promissory notes referred
to in Section 2.1(a) hereof.
"REVOLVING INTEREST RATE" shall mean an interest rate per annum
equal to (a) the sum of the Alternate Base Rate plus one percent (1.0%) with
respect to Domestic Rate Loans or (b) the sum of the Eurodollar Rate plus three
and one-quarter percent (3.25%) with respect to Eurodollar Rate Loans, subject
to the provisions of Section 3.1 hereof.
"SENIOR DEBT PAYMENTS" shall mean and include all cash actually
expended by Borrower to make (a) interest payments on any Advances hereunder,
PLUS, (b) payments for all fees, commissions and charges set forth herein and
with respect to any Advances.
"SETTLEMENT DATE" shall mean the Closing Date and thereafter
Wednesday of each week unless such day is not a Business Day in which case it
shall be the next succeeding Business Day.
"SPECIFIED FINANCIAL STATEMENTS" shall have the meaning set forth
in Section 5.5(a) hereof.
"SUBORDINATED PRINCIPAL DEBT PAYMENTS" shall mean and include all
cash actually expended to make payments of principal on the Debentures.
"SUBORDINATED INDEBTEDNESS" shall mean all subordinated
indebtedness incurred by PDS under the Subordinated Debt Documentation.
"SUBORDINATION DEBT DOCUMENTATION" shall mean the Indenture and
the Debentures, as in effect on the Closing Date.
"SUBSIDIARY" shall mean a corporation or other entity in which a
Person owns, directly or indirectly, shares of stock or other ownership
interests having ordinary voting power (other than stock or other ownership
interests having such power only by reason of the happening of a contingency)
to elect a majority of the directors of such corporation or other entity, or
other Persons performing similar functions for such corporation or other
entity.
-13-
<PAGE>
"TAKE DOWN DATE" shall mean the Business Day on which an Advance
is made to a Borrower based upon an Eligible Lease.
"TANGIBLE NET WORTH" shall mean, at a particular date, (a) the
aggregate amount of all assets of Borrowers on a Consolidated Basis as may be
properly classified as such in accordance with GAAP consistently applied
excluding such other assets as are properly classified as intangible assets
under GAAP, less (b) the aggregate amount of all liabilities of the Borrowers
on a Consolidated Basis.
"TERM" shall mean the Closing Date through April __, 2000, as
same may be extended in accordance with the provisions of Section 13.1 hereof.
"TERMINATION EVENT" shall mean (i) a Reportable Event with
respect to any Plan or Multiemployer Plan; (ii) the withdrawal of any Borrower
or any member of the Controlled Group from a Plan or Multiemployer Plan during
a plan year in which such entity was a "substantial employer" as defined in
Section 4001(a)(2) of ERISA; (iii) the providing of notice of intent to
terminate a Plan in a distress termination described in Section 4041(c) of
ERISA; (iv) the institution by the PBGC of proceedings to terminate a Plan or
Multiemployer Plan; (v) any event or condition (a) which might constitute
grounds under Section 4042 of ERISA for the termination of, or the appointment
of a trustee to administer, any Plan or Multiemployer Plan, or (b) that may
result in termination of a Multiemployer Plan pursuant to Section 4041A of
ERISA; or (vi) the partial or complete withdrawal within the meaning of
Sections 4203 and 4205 of ERISA, of any Borrower or any member of the
Controlled Group from a Multiemployer Plan.
"TOXIC SUBSTANCE" shall mean and include any material present on
the Real Property which has been shown to have significant adverse effect on
human health or which is subject to regulation under the Toxic Substances
Control Act (TSCA), 15 U.S.C. Sections 2601 ET SEQ., applicable state
law, or any other applicable Federal or state laws now in force or hereafter
enacted relating to toxic substances. "Toxic Substance" includes but is not
limited to asbestos, polychlorinated biphenyls (PCBs) and lead-based paints.
"TRANSACTIONS" shall have the meaning set forth in Section 5.5
hereof.
"TRANSFEREE" shall have the meaning set forth in Section 16.3(b)
hereof.
"UNDRAWN AVAILABILITY" at a particular date shall mean an amount
equal to (a) the lesser of (i) the Formula Amount or (ii) the Maximum Revolving
Advance Amount MINUS (b) the outstanding amount of Advances.
"USED EQUIPMENT" shall mean Eligible Leased Equipment purchased
by a Borrower in a used condition.
"WEEK" shall mean the time period commencing with a Wednesday and
ending on the following Tuesday.
1.3. UNIFORM COMMERCIAL CODE TERMS. All terms used herein and defined
in the Uniform Commercial Code as adopted in the State of New York shall have
the meaning given therein unless otherwise defined herein.
-14-
<PAGE>
1.4. CERTAIN MATTERS OF CONSTRUCTION. The terms "herein", "hereof"
and "hereunder" and other words of similar import refer to this Agreement as a
whole and not to any particular section, paragraph or subdivision. Any pronoun
used shall be deemed to cover all genders. Wherever appropriate in the
context, terms used herein in the singular also include the plural and VICE
VERSA. All references to statutes and related regulations shall include any
amendments of same and any successor statutes and regulations. All references
to any instruments or agreements, including, without limitation, references to
any of the Other Documents shall include any and all modifications or
amendments thereto and any and all extensions or renewals thereof.
II. ADVANCES, PAYMENTS.
2.1. (a) TOTAL ADVANCES. Subject to the terms and conditions set
forth in this Agreement including, without limitation, Section 2.1(b), each
Lender, severally and not jointly, will make Advances to Borrowers (which
Advances may be repaid and, subject to the terms and conditions of this
Agreement, reborrowed by Borrowers) in aggregate amounts outstanding at any
time not greater than such Lender's Commitment Percentage of the lesser of (x)
the Maximum Revolving Advance Amount or (y) an amount equal to:
(i) the lesser of (A) up to 80% ("Equipment Advance Rate")
of the sum of the Discounted Cost of Eligible Leased Equipment
(other than Used Equipment) PLUS the lesser of (x) up to the
Equipment Advance Rate of the cost of Used Equipment and (y) up
to the Equipment Advance Rate of the Orderly Liquidation Value of
Used Equipment, or (B) up to 85% ("Lease Advance Rate") of the
amount of periodic payments due under the Eligible Leases
discounted at the Discount Rate, in each case amortized in equal
monthly amounts over 23, 35 or 47 months from each initial Take
Down Date depending upon the term of the applicable Equipment
Lease (it being the intention of the parties that the
amortization schedules be one month less than the lease term, but
in no event is the applicable amortization schedule to exceed 47
months) (the "Discounted Value"); PROVIDED, HOWEVER, in no event
shall the Discounted Value of Eligible Leases relating to Used
Equipment exceed twenty five percent (25%) of the Discounted
Value of total Eligible Leases (for purposes of calculations
under this Section 2.1(a)), MINUS
(ii) such reserves as Agent may reasonably deem proper and
necessary from time to time.
The amount derived from (1) the sum of Sections 2.1(a)(y)(i) MINUS (2)
Section 2.1(a)(y)(ii) at any time and from time to time shall be referred to as
the "Formula Amount". The Advances shall be evidenced by secured promissory
notes of Borrowers to each Lender ("Revolving Credit Notes") substantially in
the form attached hereto as EXHIBIT 2.1(A).
(b) INDIVIDUAL ADVANCES. Each Lender, severally and not
jointly, will make Advances to each Borrower in aggregate amounts outstanding
at any time not greater than such Lender's Commitment Percentage of such
Borrower's Individual Formula Amount.
-15-
<PAGE>
2.2. PROCEDURE FOR BORROWING; MAXIMUM AMOUNT OF EURODOLLAR RATE LOANS.
(a) Borrowing Agent on behalf of any Borrower may notify Agent
prior to 11:00 a.m. (New York time) on a Business Day of a Borrower's request
to incur, on that day, an Advance hereunder, which such notification shall
specify whether such requested Advance shall consist of a Domestic Rate Loan or
a Eurodollar Rate Loan (which Eurodollar Rate Loan shall be subject to the
notice requirement contained in Section 2.2(b) below). Should any amount
required to be paid as interest hereunder, or as fees or other charges under
this Agreement or any other agreement with Agent or Lenders, or with respect to
any other Obligation, become due, same shall be deemed a request for an Advance
for a Domestic Rate Loan as of the date such payment is due, in the amount
required to pay in full such interest, fee, charge or Obligation under this
Agreement or any other agreement with Agent or Lenders, and such request shall
be irrevocable. Notwithstanding anything contained in this Agreement to the
contrary, the aggregate amount of outstanding Eurodollar Rate Loans shall not
at any time exceed eighty percent (80%) of the aggregate amount of all
outstanding Advances.
(b) Notwithstanding the provisions of clause "(a)" above, in
the event any Borrower desires to obtain a Eurodollar Rate Loan, Borrowing
Agent, on behalf of such Borrower, shall give Agent at least three (3) Business
Days' prior written notice which notice shall specify (i) the date of the
proposed borrowing (which shall be a Business Day) and (ii) the amount to be
borrowed. No Eurodollar Rate Loan shall be made available to any Borrower
during the continuance of a Default or an Event of Default.
2.3. DISBURSEMENT OF ADVANCE PROCEEDS. All Advances shall be
disbursed from whichever office or other place Agent may designate from time to
time and, together with any and all other Obligations of Borrowers to Agent or
Lenders, shall be charged to Borrowers' account on Agent's books. During the
Term, Borrowers may use the Advances by borrowing, prepaying and reborrowing,
all in accordance with the terms and conditions of this Agreement. The
proceeds of each Advance requested by Borrowers or deemed to have been
requested by Borrowers under Section 2.2(a) hereof shall, with respect to
requested Advances to the extent Lenders make such Advances, be made available
to the applicable Borrower on the day so requested by way of credit to such
Borrower's operating account at The Bank of New York, or such other bank as
Borrowing Agent may designate following notification to Agent, in federal funds
or other immediately available funds or, with respect to Advances deemed to
have been requested by any Borrower, be disbursed to Agent to be applied to the
outstanding Obligations giving rise to such deemed request.
2.4. REPAYMENT OF ADVANCES.
(a) The Advances shall be due and payable in full on the last
day of the Term subject to earlier prepayment as herein provided.
(b) Each Borrower recognizes that the amounts evidenced by
checks, notes, drafts or any other items of payment relating to and/or proceeds
of Collateral may not be collectable by Agent on the date received. In
consideration of Agent's agreement to conditionally credit Borrowers' account
as of the Business Day on which Agent receives those items of payment, each
Borrower agrees that, in computing the charges under this Agreement, all items
of payment shall be deemed applied by Agent on account of the Obligations two
(2) Business Days after Agent's receipt thereof by wire transfer or electronic
depositary check or, to the extent applicable,
-16-
<PAGE>
two (2) Business Days after confirmation to Agent by the Blocked Account bank
or Depository Account bank, as provided for in Section 4.15(h) hereof, that
such items of payment have been collected in good funds and finally credited
to Agent's account. Agent is not, however, required to credit Borrowers'
account for the amount of any item of payment which is unsatisfactory to
Agent and Agent may charge Borrowers' account for the amount of any item of
payment which is returned to Agent unpaid. Payments received by Agent shall
be applied as follows: (i) first, to interest on Eurodollar Rate Loans; (ii)
second, to interest on Domestic Rate Loans; (iii) third, to the outstanding
principal amount of Eurodollar Rate Loans; (iv) fourth, to the outstanding
principal amount of Domestic Rate Loans and (v) last, to the remaining
Obligations in such order as Agent shall determine.
(c) All payments of principal, interest and other amounts
payable hereunder, or under any of the related agreements shall be made to
Agent at the Payment Office not later than 1:00 P.M. (New York Time) on the due
date therefor in lawful money of the United States of America in federal funds
or other funds immediately available to Agent. Agent shall have the right to
effectuate payment on any and all Obligations due and owing hereunder by
charging Borrowers' account or by making Advances as provided in Section 2.2
hereof.
(d) Borrowers shall pay principal, interest, and all other
amounts payable hereunder, or under any Other Documents, without any deduction
whatsoever, including, but not limited to, any deduction for any setoff or
counterclaim.
2.5. REPAYMENT OF EXCESS ADVANCES. The aggregate balance of Advances
outstanding at any time in excess of the maximum amount of Advances permitted
hereunder shall be immediately due and payable without the necessity of any
demand, at the Payment Office, whether or not a Default or Event of Default has
occurred.
2.6. STATEMENT OF ACCOUNT. Agent shall maintain, in accordance with
its customary procedures, a loan account in the name of Borrowers in which
shall be recorded the date and amount of each Advance made by Lenders and the
date and amount of each payment in respect thereof; PROVIDED, HOWEVER, the
failure by Agent to record the date and amount of any Advance shall not
adversely affect Agent or any Lender. Each month, Agent shall send to
Borrowing Agent a statement showing the accounting for the Advances made,
payments made or credited in respect thereof, and other transactions between
Lenders and Borrowers, during such month. The monthly statements shall be
deemed correct and binding upon Borrowers in the absence of manifest error and
shall constitute an account stated between Lenders and Borrowers unless Agent
receives a written statement of Borrowers' specific exceptions thereto within
thirty (30) days after such statement is received by Borrowing Agent. The
records of Agent with respect to the loan account shall be PRIMA FACIE evidence
of the amounts of Advances and other charges thereto and of payments applicable
thereto.
2.7. ADDITIONAL PAYMENTS. Any sums expended by Agent or any Lender
due to any Borrower's failure to perform or comply with its obligations under
this Agreement or any Other Document including, without limitation, any
Borrower's obligations under Sections 4.2, 4.4, 4.12, 4.13, 4.14 and 6.1
hereof, may be charged to Borrowers' account as a Revolving Advance and added
to the Obligations.
2.8. MANNER OF BORROWING AND PAYMENT.
-17-
<PAGE>
(a) Each borrowing of Advances shall be advanced according to
the applicable Commitment Percentages of Lenders.
(b) Each payment (including each prepayment) by Borrowers on
account of the principal of and interest on the Advances, shall be applied to
the Advances pro rata according to the applicable Commitment Percentages of
Lenders. Except as expressly provided herein, all payments (including
prepayments) to be made by Borrower on account of principal, interest and fees
shall be made without set off or counterclaim and shall be made to Agent on
behalf of the Lenders to the Payment Office, in each case on or prior to 1:00
P.M., New York time, in Dollars and in immediately available funds.
(c) (i) Notwithstanding anything to the contrary contained in
Sections 2.8(a) and (b) hereof, commencing with the first Business Day
following the Closing Date, each borrowing of Advances shall be advanced by
Agent and each payment any Borrower on account of Advances shall be applied
first to those Advances made by Agent. On or before 1:00 P.M., New York time,
on each Settlement Date commencing with the first Settlement Date following the
Closing Date, Agent and Lenders shall make certain payments as follows: (I) if
the aggregate amount of new Advances made by Agent during the preceding Week
(if any) exceeds the aggregate amount of repayments applied to outstanding
Advances during such preceding Week, then each Lender shall provide Agent with
funds in an amount equal to its applicable Commitment Percentage of the
difference between (w) such Advances and (x) such repayments and (II) if the
aggregate amount of repayments applied to outstanding Advances during such Week
exceeds the aggregate amount of new Advances made during such Week, then Agent
shall provide each Lender with funds in an amount equal to its applicable
Commitment Percentage of the difference between (y) such repayments and (z)
such Advances.
(ii) Each Lender shall be entitled to earn interest at the
applicable Revolving Interest Rate on outstanding Advances which it has funded.
(iii) Promptly following each Settlement Date, Agent shall
submit to each Lender a certificate with respect to payments received and
Advances made during the Week immediately preceding such Settlement Date. Such
certificate of Agent shall be conclusive in the absence of manifest error.
(d) If any Lender or any Transferee (a "benefitted Lender")
shall at any time receive any payment of all or part of its Advances, or
interest thereon, or receive any Collateral in respect thereof (whether
voluntarily or involuntarily or by set-off) in a greater proportion than any
such payment to and Collateral received by any other Lender, if any, in respect
of such other Lender's Advances, or interest thereon, and such greater
proportionate payment or receipt of Collateral is not expressly permitted
hereunder, such benefitted Lender shall purchase for cash from the other
Lenders such portion of each such other Lender's Advances, or shall provide
such other Lender with the benefits of any such Collateral, or the proceeds
thereof, as shall be necessary to cause such benefitted Lender to share the
excess payment or benefits of such Collateral or proceeds ratably with each of
Lenders; PROVIDED, HOWEVER, that if all or any portion of such excess payment
or benefits is thereafter recovered from such benefitted Lender, such purchase
shall be rescinded, and the purchase price and benefits returned, to the extent
of such recovery, but without interest. Each Lender so purchasing a portion of
another Lender's Advances may exercise all rights of
-18-
<PAGE>
payment (including, without limitation, rights of set off) with respect to
such portion as fully as if such Lender were the direct holder of such
portion.
(e) Unless Agent shall have been notified by telephone,
confirmed in writing, by any Lender that such Lender will not make the amount
which would constitute its applicable Commitment Percentage of the Advances
available to Agent, Agent may (but shall not be obligated to) assume that such
Lender shall make such amount available to Agent and, in reliance upon such
assumption, make available to Borrowers a corresponding amount. Agent will
promptly notify Borrowers of its receipt of any such notice from a Lender. If
such amount is made available to Agent on a date after a Settlement Date, such
Lender shall pay to Agent on demand an amount equal to the product of (i) the
daily average Federal Funds Rate (computed on the basis of a year of 360 days)
during such period as quoted by Agent, times (ii) such amount, times (iii) the
number of days from and including such Settlement Date to the date on which
such amount becomes immediately available to Agent. A certificate of Agent
submitted to any Lender with respect to any amounts owing under this paragraph
(e) shall be conclusive, in the absence of manifest error. If such amount is
not in fact made available to Agent by such Lender within three (3) Business
Days after such Settlement Date, Agent shall be entitled to recover such an
amount, with interest thereon at the rate per annum then applicable to such
Advances hereunder, on demand from Borrowers; PROVIDED, HOWEVER, that Agent's
right to such recovery shall not prejudice or otherwise adversely affect
Borrowers' rights (if any) against such Lender.
2.9. USE OF PROCEEDS. Borrowers shall apply the proceeds of Advances
to (i) pay fees and expenses relating to this transaction, and (ii) to provide
for its working capital needs and approved acquisitions of Gaming Device Goods
for simultaneous lease under an Eligible Lease.
2.10. DEFAULTING LENDER.
(a) Notwithstanding anything to the contrary contained herein,
in the event any Lender (x) has refused (which refusal constitutes a breach by
such Lender of its obligations under this Agreement) to make available its
portion of any Advance or (y) notifies either Agent or Borrowing Agent that it
does not intend to make available its portion of any Advance (if the actual
refusal would constitute a breach by such Lender of its obligations under this
Agreement) (each, a "Lender Default"), all rights and obligations hereunder of
such Lender (a "Defaulting Lender") as to which a Lender Default is in effect
and of the other parties hereto shall be modified to the extent of the express
provisions of this Section 2.16 while such Lender Default remains in effect.
(b) Advances shall be incurred pro rata from Lenders (the "Non-
Defaulting Lenders") which are not Defaulting Lenders based on their respective
Commitment Percentages, and no Commitment Percentage of any Lender or any pro
rata share of any Advances required to be advanced by any Lender shall be
increased as a result of such Lender Default. Amounts received in respect of
principal of any type of Advances shall be applied to reduce the applicable
Advances of each Lender pro rata based on the aggregate of the outstanding
Advances of that type of all Lenders at the time of such application; provided,
that, such amount shall not be applied to any Advances of a Defaulting Lender
at any time when, and to the extent that, the aggregate amount of Advances of
any Non-Defaulting Lender exceeds such Non-Defaulting Lender's Commitment
Percentage of all Advances then outstanding.
-19-
<PAGE>
(c) A Defaulting Lender shall not be entitled to give
instructions to Agent or to approve, disapprove, consent to or vote on any
matters relating to this Agreement and the Other Documents. All amendments,
waivers and other modifications of this Agreement and the Other Documents may
be made without regard to a Defaulting Lender and, for purposes of the
definition of "Required Lenders", a Defaulting Lender shall be deemed not to be
a Lender and not to have Advances outstanding.
(d) Other than as expressly set forth in this Section 2.10, the
rights and obligations of a Defaulting Lender (including the obligation to
indemnify Agent) and the other parties hereto shall remain unchanged. Nothing
in this Section 2.10 shall be deemed to release any Defaulting Lender from its
obligations under this Agreement and the Other Documents, shall alter such
obligations, shall operate as a waiver of any default by such Defaulting Lender
hereunder, or shall prejudice any rights which any Borrower, Agent or any
Lender may have against any Defaulting Lender as a result of any default by
such Defaulting Lender hereunder.
(e) In the event a Defaulting Lender retroactively cures to the
satisfaction of Agent the breach which caused a Lender to become a Defaulting
Lender, such Defaulting Lender shall no longer be a Defaulting Lender and shall
be treated as a Lender under this Agreement.
III. INTEREST AND FEES.
3.1. INTEREST. Interest on Advances shall be payable in arrears on
the last day of each month with respect to Domestic Rate Loans and Eurodollar
Rate Loans. Interest charges shall be computed on the actual principal of
Advances outstanding during the month at a rate per annum equal to the
applicable Revolving Interest Rate. Whenever, subsequent to the date of this
Agreement, the Alternate Base Rate is increased or decreased, the Revolving
Interest Rate with respect to Domestic Rate Loans shall be similarly changed
without notice or demand of any kind by an amount equal to the amount of such
change in the Alternate Base Rate during the time such change or changes remain
in effect.
So long as no Default or Event of Default shall be in existence,
the applicable Revolving Interest Rate shall be reduced by one-quarter of one
percent (.25%) thirty (30) days after each anniversary date of the Closing Date
during the period commencing on the Closing Date and ending on April ___, 1999
(the "Initial Term") in the event:
(a) the financial statements delivered to Agent in accordance
with the terms and provisions of Section 9.7 hereof with respect to the
immediately preceding fiscal year of Borrowers reflect that Borrowers on a
Consolidated Basis have achieved as at the end of such immediately preceding
fiscal year
(i) a ratio of Indebtedness for Borrowed Money (other than
Subordinated Indebtedness and non-recourse Indebtedness) to Tangible Net Worth
in an amount less than or equal to 6.5 to 1.00 as at the end of each fiscal
year.
(ii) a Funded Debt Ratio not exceeding the ratios opposite
such fiscal year end:
-20-
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year End Ratio
--------------- -----
<S> <C>
December 31, 1997 2.00 to 1.00
December 31, 1998 1.60 to 1.00
December 31, 1999 1.20 to 1.00
</TABLE>
(b) Undrawn Availability (computed as an arithmetic average of
the amount of Undrawn Availability as at the end of the months of October,
November and December of the fiscal year such computation is made) is at least
equal to or greater than the amounts set forth opposite such fiscal year end:
<TABLE>
<CAPTION>
Fiscal Year End Amount
--------------- ------
<S> <C>
December 31, 1997 $250,000
December 31, 1998 $500,000
December 31, 1999 $500,000
</TABLE>
(the tests pursuant to the preceding clauses "(a)" and "(b)" shall hereafter be
referred to as the "Interest Rate Tests"); and
(c) A certificate of Borrowers' Chief Financial Officer setting
forth the calculations of their compliance with the Interest Rate Tests is
delivered to Agent together with the applicable annual financial statements
(which certificate shall not be binding on Agent when Agent determines the
Interest Rate Tests);
PROVIDED, HOWEVER, if the Revolving Interest Rates are reduced after the first
year of the Initial Term but Borrowers do not achieve a reduction after the
second year of the Initial Term based on the Interest Rate Tests, then Agent,
in its sole discretion, may increase the Revolving Interest Rate by one-quarter
of one percent (.25%) and no further rate reductions shall be permitted
thereafter.
Notwithstanding the foregoing, in the event that (A) the amount
of outstanding Advances exceeds the lesser of (x) the Maximum Revolving Advance
Amount or (y) the Formula Amount or (B) the amount of Advances to any Borrower
exceeds such Borrower's Individual Formula Amount, then all of the Obligations
shall bear interest at the Alternate Base Rate plus one and one-half percent
(1.50%), all outstanding Eurodollar Rate Loans shall automatically be converted
to Domestic Rate Loans and no additional Eurodollar Rate Loans shall thereafter
be made available to any Borrower.
This paragraph shall not in any manner be deemed to be a consent
by Agent or any Lender for Borrowers to have Advances outstanding in excess of
what is expressly permitted hereunder (an "Overadvance"), except to the extent
Agent or any Lender voluntarily makes an Overadvance to a Borrower at Borrowing
Agent's request therefor.
Upon and after the occurrence of an Event of Default, and during the
continuation thereof, the Obligations shall bear interest at the applicable
Revolving Interest Rate plus two (2%) percent per annum (the "Default Rate").
3.2. (a) CLOSING FEE. Upon the execution of this Agreement,
Borrowers shall pay to BNYFC for its own account a closing fee of $100,000.
-21-
<PAGE>
(b) FACILITY FEE. If, for any month during the Term, the
average daily unpaid balance of the Advances for each day of such month does
not equal the Maximum Revolving Advance Amount, then Borrowers shall pay to
Agent for the ratable benefit of Lenders a fee at a rate equal to (a) from the
Closing Date to the first anniversary of the Closing Date, three-eighths of one
percent (.375%) per annum, and (b) on and after the first anniversary of the
Closing Date, one-half of one percent (.50%) per annum, on the amount by which
the Maximum Revolving Advance Amount exceeds such average daily unpaid balance.
Such fee shall be payable to Agent in arrears on the last day of each month.
3.3. (a) COLLATERAL MONITORING FEE. Borrowers shall pay Agent a
collateral monitoring fee equal to $2,500 per month commencing on the first day
of the month following the Closing Date and on the first day of each month
thereafter during the Term. The collateral monitoring fee shall be deemed
earned in full on the date when same is due and payable hereunder and shall not
be subject to rebate or proration upon termination of this Agreement for any
reason.
(b) COLLATERAL EVALUATION FEE. Borrowers shall pay to Agent on
the first day of each month following any month in which Agent performs any
collateral evaluation - namely any field examination, collateral analysis or
other business analysis, the need for which is to be determined by Agent and
which evaluation is undertaken by Agent or for Agent's benefit - a collateral
evaluation fee in an amount equal to $750.00 per day for each person employed
to perform such evaluation, plus all costs and disbursements incurred by Agent
in the performance of such examination or analysis.
3.4. MINIMUM ANNUAL FEES. In the event the total amount of interest
and fees (the "Annual Fees") paid by Borrowers to Agent for the benefit of
Lenders in any contract year is less than $300,000, Borrowers shall pay to
Agent for the benefit of Lenders a fee equal to the difference between $300,000
and the Annual Fees.
3.5. COMPUTATION OF INTEREST AND FEES. Interest and fees hereunder
shall be computed on the basis of a year of 360 days and for the actual number
of days elapsed. If any payment to be made hereunder becomes due and payable
on a day other than a Business Day, the due date thereof shall be extended to
the next succeeding Business Day and interest thereon shall be payable at the
applicable Revolving Interest Rate during such extension.
3.6. MAXIMUM CHARGES. In no event whatsoever shall interest and other
charges charged hereunder exceed the highest rate permissible under law which a
court of competent jurisdiction shall, in a final determination, deem
applicable hereto. In the event that a court determines that Agent or any
Lender has received interest and other charges hereunder in excess of the
highest rate permissible hereto, such excess amount shall be first applied to
any unpaid principal balance owed by Borrowers, and if the then remaining
excess amount is greater than the previously unpaid principal balance, Lenders
shall promptly refund such excess amount to Borrowers and the provisions hereof
shall be deemed amended to provide for such permissible rate.
3.7. INCREASED COSTS. In the event that any applicable law, treaty
or governmental regulation, or any change therein or in the interpretation or
application thereof, or compliance by any Lender (for purposes of this
Section 3.7, the term "Lender" shall include Agent or any Lender and any
corporation or bank controlling Agent or any Lender) and the office or branch
where Agent or any Lender (as so defined) makes or maintains any Eurodollar
Rate Loans with any request
-22-
<PAGE>
or directive (whether or not having the force of law) from any central bank
or other financial, monetary or other authority, shall:
(a) subject Agent or any Lender to any tax of any kind
whatsoever with respect to this Agreement or any Eurodollar Rate Loan or
change the basis of taxation of payments to Agent or any Lender of principal,
fees, interest or any other amount payable hereunder or under any Other
Documents (except for changes in the rate of tax on the overall net income of
Agent or any Lender by the jurisdiction in which it maintains its principal
office);
(b) impose, modify or hold applicable any reserve, special
deposit, assessment or similar requirement against assets held by, or
deposits in or for the account of, advances or loans by, or other credit
extended by, any office of Agent or any Lender, including (without
limitation) pursuant to Regulation D of the Board of Governors of the Federal
Reserve System; or
(c) impose on Agent or any Lender any other condition with
respect to this Agreement, any Other Documents or any other Eurodollar Rate
Loan;
and the result of any of the foregoing is to increase the cost to Agent or
Lender of making, renewing or maintaining its Advances hereunder by an amount
that Agent or such Lender deems to be material or to reduce the amount of any
payment (whether of principal, interest or otherwise) in respect of any of the
Advances by an amount that Agent or such Lender deems to be material, then, in
any case Borrowers shall promptly pay Agent or such Lender, upon its demand,
such additional amount as will compensate Agent or such Lender for such
additional cost or such reduction, as the case may be. Agent or such Lender
shall certify the amount of such additional cost or reduced amount to
Borrowers, and such certification shall be conclusive absent manifest error.
3.8. CAPITAL ADEQUACY.
(a) In the event that Agent or any Lender shall have
determined that any applicable law, rule, regulation or guideline regarding
capital adequacy, or any change therein, or any change in the interpretation
or administration thereof by any governmental authority, central bank or
comparable agency charged with the interpretation or administration thereof,
or compliance by Agent or the any Lender (for purposes of this Section 3.8,
the term "Lender" shall include Agent or any Lender and any corporation or
bank controlling Agent or any Lender) with any request or directive regarding
capital adequacy (whether or not having the force of law) of any such
authority, central bank or comparable agency, has or would have the effect of
reducing the rate of return on Agent or any Lender's capital as a consequence
of its obligations hereunder to a level below that which Agent or such Lender
could have achieved but for such adoption, change or compliance (taking into
consideration Agent's and each Lender's policies with respect to capital
adequacy) by an amount deemed by Agent or any Lender to be material, then,
from time to time, Borrowers shall pay upon demand to Agent or such Lender
such additional amount or amounts as will compensate Agent or such Lender for
such reduction. In determining such amount or amounts, Agent or such Lender
may use any reasonable averaging or attribution methods. The protection of
this Section 3.8 shall be available to Agent and each Lender regardless of
any possible contention of invalidity or inapplicability with respect to the
applicable law, regulation or condition.
-23-
<PAGE>
(b) A certificate of Agent or such Lender setting forth such
amount or amounts as shall be necessary to compensate Agent or such Lender with
respect to Section 3.8(a) hereof when delivered to Borrowers shall be
conclusive absent manifest error.
IV. COLLATERAL: GENERAL TERMS
4.1. SECURITY INTEREST IN THE COLLATERAL. To secure the prompt
payment and performance to Agent and each Lender of the Obligations, each
Borrower, subject to all mandatory provisions of law, including without
limitation the Gaming Laws, hereby assigns, pledges and grants to Agent for the
ratable benefit of each Lender a continuing security interest in and to all of
the Collateral of such Borrower, whether now owned or existing or hereafter
acquired or arising and wheresoever located. Each Borrower shall mark its
books and records as may be necessary or appropriate to evidence, protect and
perfect Agent's security interest and shall cause its financial statements to
reflect such security interest.
4.2. PERFECTION OF SECURITY INTEREST. Each Borrower shall take all
action that may be necessary or desirable, or that Agent may request, so as at
all times to maintain the validity, perfection, enforceability and priority of
Agent's security interest in the Collateral or to enable Agent to protect,
exercise or enforce its rights hereunder and in the Collateral, including, but
not limited to (i) immediately discharging all Liens other than Permitted
Encumbrances, (ii) obtaining landlords' or mortgagees' lien waivers, (iii)
delivering to Agent, endorsed or accompanied by such instruments of assignment
as Agent may specify, and stamping or marking, in such manner as Agent may
specify, any and all chattel paper, instruments, letters of credits and advices
thereof and documents evidencing or forming a part of the Collateral, (iv)
entering into warehousing, lockbox and other custodial arrangements
satisfactory to Agent, and (v) executing and delivering financing statements,
instruments of pledge, mortgages, notices and assignments, in each case in form
and substance satisfactory to Agent, relating to the creation, validity,
perfection, maintenance or continuation of Agent's security interest under the
Uniform Commercial Code or other applicable law. Agent is hereby authorized to
file financing statements signed by Agent instead of Borrower in accordance
with Section 9-402(2) of the Uniform Commercial Code as adopted in the State of
New York. All charges, expenses and fees Agent may incur in doing any of the
foregoing, and any local taxes relating thereto, shall be charged to Borrowers'
account as an Advance and added to the Obligations, or, at Agent's option,
shall be paid to Agent for the ratable benefit of Lenders immediately upon
demand.
4.3. DISPOSITION OF COLLATERAL. Each Borrower will safeguard and
protect all Collateral for Agent's general account and make no disposition
thereof whether by sale, lease or otherwise except (a) leases of Leased
Equipment under an Assigned Lease and (b) Leased Equipment sold to a Lessee
under an Assigned Lease, the proceeds of which sale shall be remitted to Agent
in accordance with the terms and provisions of Section 4.15(h).
4.4. PRESERVATION OF COLLATERAL. Following the occurrence of a
Default or Event of Default, in addition to the rights and remedies set forth
in Section 11.1 hereof, Agent subject to compliance with all mandatory
provisions of law, including without limitation the Gaming Laws: (a) may at any
time take such steps as Agent deems necessary to protect Agent's interest in
and to preserve the Collateral, including the hiring of such security guards or
the placing of other security protection measures as Agent may deem
appropriate; (b) may employ and maintain at any
-24-
<PAGE>
Borrower's premises a custodian who shall have full authority to do all acts
necessary to protect Agent's interests in the Collateral; (c) may lease
warehouse facilities to which Agent may move all or part of the Collateral;
(d) may use any Borrower's owned or leased lifts, hoists, trucks and other
facilities or equipment for handling or removing the Collateral; and (e)
shall have, and is hereby granted, a right of ingress and egress to the
places where the Collateral is located, and may proceed over and through any
Borrower's owned or leased property. Each Borrower shall cooperate fully
with all of Agent's efforts to preserve the Collateral and will take such
actions to preserve the Collateral as Agent may direct. All of Agent's
expenses of preserving the Collateral, including any expenses relating to the
bonding of a custodian, shall be charged to Borrowers' account as an Advance
and added to the Obligations.
4.5. OWNERSHIP OF COLLATERAL. With respect to the Collateral, at the
time the Collateral becomes subject to Agent's security interest and subject to
compliance with all mandatory provisions of law, including without limitation
the Gaming Laws: (a) each Borrower shall be the sole owner of and fully
authorized and able to sell, transfer, pledge and/or grant a first priority
security interest in each and every item of its respective Collateral to Agent;
and, except for Permitted Encumbrances the Collateral shall be free and clear
of all Liens and encumbrances whatsoever; (b) each document and agreement
executed by each Borrower or delivered to Agent or any Lender in connection
with this Agreement shall be true and correct in all material respects; (c) all
signatures and endorsements of each Borrower that appear on such documents and
agreements shall be genuine and each Borrower shall have full capacity to
execute same; and (d) the Collateral shall be located as set forth on
SCHEDULE 4.5 and shall not be removed from such location(s) without the prior
written consent of Agent except with respect to the lease of Leased Equipment
in accordance with the requirements of this Agreement and the disposition of
Leased Equipment to the extent permitted in Section 4.3 hereof.
4.6. DEFENSE OF AGENT'S AND LENDER'S INTERESTS. Until (a) payment and
performance in full of all of the Obligations and (b) termination of this
Agreement, Agent's interests in the Collateral shall continue in full force and
effect. During such period no Borrower shall, without Agent's prior written
consent, pledge, sell, assign, transfer, create or suffer to exist a Lien upon
or encumber or allow or suffer to be encumbered in any way except for Permitted
Encumbrances, any part of the Collateral. Each Borrower shall defend Agent's
interests in the Collateral against any and all Persons whatsoever. At any
time following demand by Agent for payment of all Obligations, Agent shall have
the right, subject to the applicable Lessee's right to possession of Leased
Equipment under the terms of the applicable Equipment Lease and subject to all
mandatory provisions of law, including without limitation the Gaming Laws, to
take possession of the indicia of the Collateral and the Collateral in whatever
physical form contained, including without limitation: labels, stationery,
documents, instruments and advertising materials. If Agent exercises this
right to take possession of the Collateral, Borrowers shall, upon demand,
assemble it in the best manner possible and make it available to Agent at a
place reasonably convenient to Agent. In addition, with respect to all
Collateral, Agent and Lenders shall be entitled to all of the rights and
remedies set forth herein and further provided by the Uniform Commercial Code
or other applicable law. Each Borrower shall, and Agent may, at its option,
instruct all suppliers, carriers, forwarders, warehouses or others receiving or
holding cash, checks, goods, documents or instruments in which Agent holds a
security interest to deliver same to Agent and/or subject to Agent's order and
if they shall come into any Borrower's possession, they, and each of them,
shall be held by such Borrower in trust as Agent's trustee, and such Borrower
will immediately deliver them to Agent in their original form together with any
necessary endorsement.
-25-
<PAGE>
4.7. BOOKS AND RECORDS. Each Borrower shall (a) keep proper books of
record and account in which full, true and correct entries will be made of all
dealings or transactions of or in relation to its business and affairs; (b) set
up on its books accruals with respect to all taxes, assessments, charges,
levies and claims; and (c) on a reasonably current basis set up on its books,
from its earnings, allowances against doubtful payments due under an Assigned
Lease, advances and investments and all other proper accruals (including
without limitation by reason of enumeration, accruals for premiums, if any, due
on required payments and accruals for depreciation, obsolescence, or
amortization of properties), which should be set aside from such earnings in
connection with its business. All determinations pursuant to this subsection
shall be made in accordance with, or as required by, GAAP consistently applied
in the opinion of the Accountants, as shall then be regularly engaged by
Borrowers.
4.8. FINANCIAL DISCLOSURE. Each Borrower hereby irrevocably
authorizes and directs all accountants and auditors employed by such Borrower
at any time during the Term to exhibit and deliver to Agent and each Lender
copies of any of the Borrower's financial statements, trial balances or other
accounting records of any sort in the accountant's or auditor's possession, and
to disclose to Agent and each Lender any information such accountants may have
concerning such Borrower's financial status and business operations. Each
Borrower hereby authorizes all federal, state and municipal authorities to
furnish to Agent and each Lender copies of reports or examinations relating to
such Borrower, whether made by such Borrower or otherwise; however, Agent and
each Lender will attempt to obtain such information or materials directly from
such Borrower prior to obtaining such information or materials from such
accountants or such authorities.
4.9. COMPLIANCE WITH LAWS. Each Borrower shall comply with all acts,
rules, regulations and orders of any legislative, administrative or judicial
body or official applicable to its respective Collateral or any part thereof or
to the operation of such Borrower's business the non-compliance with which
could have a Material Adverse Effect on such Borrower.
4.10. INSPECTION OF PREMISES. At all reasonable times Agent or any
Lender shall have full access to and the right to audit, check, inspect and
make abstracts and copies from each Borrower's books, records, audits,
correspondence and all other papers relating to the Collateral and the
operation of each Borrower's business. Agent, any Lender and their agents may
enter upon any Borrower's premises at any time during business hours and at any
other reasonable time, and from time to time, for the purpose of inspecting the
Collateral and any and all records pertaining thereto and the operation of such
Borrower's business.
4.11. INSURANCE. Each Borrower, or the applicable Lessee of Leased
Equipment constituting Collateral, shall bear the full risk of any loss of any
nature whatsoever with respect to such Leased Equipment. At each Borrower's or
the applicable Lessee's own cost and expense in amounts acceptable to Agent (a)
such Borrower shall maintain insurance covering the Leased Equipment
constituting Collateral with such carriers as are acceptable to Agent; (b) the
applicable Lessee shall maintain insurance covering Leased Equipment
constituting Collateral with such insurance carriers rated B+ or better from
BEST'S ; (c) such Borrower or the applicable Lessee shall furnish Agent with
(i) copies of all policies and evidence of the maintenance of such policies by
the renewal thereof at least thirty (30) days before any expiration date and
(ii) appropriate loss payable endorsements in form and substance satisfactory
to Agent, naming Agent as a loss payee as its
-26-
<PAGE>
interests may appear, and providing (A) that all proceeds thereunder which
relate to Leased Equipment constituting Collateral shall be payable to Agent,
(B) no such insurance shall be affected by any act or neglect of the insured
or owner of the property described in such policy, and (C) that such policy
and loss payable clauses may not be cancelled, amended or terminated unless
at least thirty (30) days' prior written notice is given to Agent. In the
event of any loss thereunder, the carriers named therein hereby are directed
by Agent and the applicable Borrower to make payment for such loss to Agent
and not to such Borrower and Agent jointly. If any insurance losses are paid
by check, draft or other instrument payable to any Borrower and Agent
jointly, Agent may endorse such Borrower's name thereon and do such other
things as Agent may deem advisable to reduce the same to cash. Agent is
hereby authorized to adjust and compromise claims under the aforementioned
insurance coverage upon prior notice to Borrowing Agent; PROVIDED, HOWEVER,
no such notice shall be required during the existence of an Event of Default.
All loss recoveries received by Agent upon any such insurance may be applied
to the Obligations, in such order as Agent in its sole discretion shall
determine. Any surplus shall be paid by Agent to Borrowers or applied as may
be otherwise required by law. Any deficiency thereon shall be paid by
Borrowers to Agent, on demand.
4.12. FAILURE TO PAY INSURANCE. If any Borrower fails to obtain or
cause the applicable Lessee to obtain insurance as hereinabove provided, or to
keep the same in force, Agent, if Agent so elects, may obtain such insurance
and pay the premium therefor for Borrowers' account, and charge Borrowers'
account therefor and such expenses so paid shall be part of the Obligations.
4.13. PAYMENT OF TAXES. Each Borrower will pay, when due, all taxes,
assessments and other Charges lawfully levied or assessed upon such Borrower or
any of the Collateral including, without limitation, real and personal property
taxes, assessments and charges and all franchise, income, employment, social
security benefits, withholding, and sales taxes. If any Charge by any
governmental authority is or may be imposed on or as a result of any
transaction between any Borrower, Agent and Lenders which Agent or any Lender
may be required to withhold or pay or if any Charges remain unpaid after the
date fixed for their payment, or if any claim shall be made which, in Agent's
or Lender's opinion, may possibly create a valid Lien on the Collateral, Agent
may without notice to Borrowers pay the Charges and each Borrower hereby
indemnifies and holds Agent and each Lender harmless in respect thereof. The
amount of any payment by Agent under this Section 4.13 shall be charged to the
Borrowers' account as an Advance and added to the Obligations and, until
Borrowers shall furnish Agent with an indemnity therefor (or supply Agent with
evidence satisfactory to Agent that due provision for the payment thereof has
been made), Agent may hold without interest any balance standing to Borrowers'
credit and Agent shall retain its security interest in any and all Collateral
held by Agent.
4.14. PAYMENT OF LEASEHOLD OBLIGATIONS. Each Borrower shall at all
times pay, when and as due, its rental obligations under all leases under which
it is a tenant, and shall otherwise comply, in all material respects, with all
other terms of such leases and keep them in full force and effect and, at
Agent's request, will provide evidence of having done so.
4.15. ASSIGNED LEASES.
(a) NATURE OF ASSIGNED LEASES. Each Assigned Lease shall be a
bona fide, enforceable and valid firm term rental obligation or account
representing a bona fide indebtedness incurred by the Lessee therein named, for
a fixed sum as set forth in the applicable
-27-
<PAGE>
Assigned Lease (provided immaterial or unintentional errors shall not be
deemed to be a breach hereof) with respect to an irrevocable lease of goods
upon stated terms of a Borrower. All amounts payable under each Assigned
Lease shall be due and owing in accordance with the applicable Borrower's
standard terms of lease without dispute, defense, setoff or counterclaim
except as may be stated on the lease schedules delivered by Borrowers to
Agent.
(b) SOLVENCY OF LESSEE. As respects each Assigned Lease, each
Lessee (i) to the best of each Borrower's knowledge, as of the date each such
Assigned Lease is entered into and assigned hereunder, is and will be solvent
and able to pay all amounts due and owing thereunder in full when due and (ii)
shall be an Approved Lessee.
(c) LOCATIONS OF BORROWERS. Each Borrower's chief executive
office is located at the addresses set forth on SCHEDULE 4.15(c) hereto. Until
written notice is given to Agent by Borrowing Agent of any other office at
which any Borrower keeps its records pertaining to Assigned Leases, all such
records shall be kept at such executive office.
(d) COLLECTION. As respects each Assigned Lease, each Lessee
shall be obligated to remit the monthly payments due and owing thereunder
directly to Agent. In the event such payments are received by any Borrower,
such Borrower shall deliver same to Agent in kind with all necessary
endorsements on the date of such Borrower's receipt thereof.
(e) NOTIFICATION OF ASSIGNMENT. As respects each Assigned
Lease, each Lessee shall acknowledge, in writing, the assignment of, and
Agent's security interest in, such Assigned Lease. Agent shall have the sole
right to collect the amounts due and owing under each Assigned Lease directly
from the applicable Lessee and take possession of the Collateral, or both.
Agent's actual collection expenses, including, but not limited to, stationery
and postage, telephone and telegraph, secretarial and clerical expenses and the
salaries of any collection personnel used for collection, may be charged to
Borrowers' account and added to the Obligations.
(f) POWER OF AGENT TO ACT ON BORROWERS' BEHALF. Subject to all
mandatory provisions of law, including without limitation the Gaming Laws,
Agent shall have the right to receive, endorse, assign and/or deliver in the
name of Agent or any Borrower any and all checks, drafts and other instruments
for the payment of money relating to Assigned Leases and other Collateral and
each Borrower hereby waives notice of presentment, protest and non-payment of
any instrument so endorsed. Each Borrower hereby constitutes Agent or Agent's
designee as such Borrower's attorney with power (i) to endorse such Borrower's
name upon any notes, acceptances, checks, drafts, money orders or other
evidences of payment or Collateral; (ii) to sign such Borrower's name on any
drafts against Lessees, assignments and verifications of Assigned Leases and
other Collateral; (iii) to send verifications of Assigned Leases and other
Collateral to any Lessee; (iv) to sign such Borrower's name on all financing
statements or any other documents or instruments deemed necessary or
appropriate by Agent to preserve, protect, or perfect Agent's interest in the
Assigned Leases and other Collateral and to file same; (v) to demand payment of
amounts due and owing under Assigned Leases and other Collateral; (vi) to
enforce amounts due and owing under Assigned Leases and other Collateral by
legal proceedings or otherwise; (vii) to exercise all of Borrowers' rights and
remedies with respect to the collection of amounts due and owing under Assigned
Leases and other Collateral; (viii) to settle, adjust, compromise, extend or
renew Assigned Leases and other Collateral; (ix) to settle, adjust or
compromise any legal proceedings brought to collect amounts due and owing under
Assigned Leases and other Collateral;
-28-
<PAGE>
(x) to prepare, file and sign such Borrower's name on a proof of claim in
bankruptcy or similar document against any Lessee as respects Assigned Leases
and other Collateral; (xi) to prepare, file and sign such Borrower's name on
any notice of Lien, assignment or satisfaction of Lien or similar document in
connection with any Assigned Lease or other Collateral; (xii) to deliver
bills of sale covering property and goods subject to Assigned Leases to
Lessees thereof who exercise purchase options with respect thereto; and
(xiii) to do all other acts and things necessary to carry out this Agreement.
All acts of said attorney or designee are hereby ratified and approved, and
said attorney or designee shall not be liable for any acts of omission or
commission nor for any error of judgment or mistake of fact or of law, unless
done maliciously or with gross (not mere) negligence; this power being
coupled with an interest is irrevocable while any of the Obligations remain
unpaid. Agent shall have the right at any time following the occurrence and
during the continuance of an Event of Default to change the address for
delivery of mail addressed to any Borrower to such address as Agent may
designate and to receive, open and dispose of all mail addressed to any
Borrower.
(g) NO LIABILITY. Neither Agent nor any Lender shall, under
any circumstances or in any event whatsoever, have any liability for any
error or omission or delay of any kind occurring in the settlement,
collection or payment of any amounts due and owing under any Assigned Lease
or other Collateral or any instrument received in payment thereof, or for any
damage resulting therefrom. Following the occurrence and during the
continuance of an Event of Default, Agent may, without notice or consent from
any Borrower, sue upon or otherwise collect, extend the time of payment of,
compromise or settle for cash, credit or upon any terms any amounts due and
owing under any Assigned Lease or other Collateral or any other securities,
instruments or insurance applicable thereto and/or release any obligor
thereof. To the extent permitted by applicable law regulating the possession
of Gaming Device Goods, Agent is authorized and empowered to accept the
return of the goods represented by any amounts due and owing under any
Assigned Lease or other Collateral without notice to or consent by any
Borrower, all without discharging or in any way affecting any Borrower's
liability hereunder.
(h) ESTABLISHMENT OF A LOCKBOX ACCOUNT, DOMINION ACCOUNT.
All proceeds of Assigned Leases and other Collateral which are received by
any Borrower shall be immediately delivered by such Borrower to Agent in kind
with all necessary endorsements or, at Agent's option, shall be deposited by
Borrowers into a lockbox account, dominion account or such other blocked
account ("Blocked Accounts") as Agent may require pursuant to an arrangement
with such bank as may be selected by Borrowers and be acceptable to Agent.
Borrowers shall issue to any such bank, an irrevocable letter of instruction
directing said bank to transfer such funds so deposited to Agent, either to
any account maintained by Agent at said bank or by wire transfer to
appropriate account(s) of Agent. All funds deposited in such Blocked Account
shall immediately become the property of Agent and Borrowers shall obtain the
agreement by such bank to waive any offset rights against the funds so
deposited. Neither Agent nor any Lender assumes any responsibility for any
Blocked Account arrangement, including, without limitation, any claim of
accord and satisfaction or release with respect to deposits accepted by any
bank thereunder. Alternatively, Agent may establish depository accounts
("Depository Accounts") in the name of Agent at a bank or banks for the
deposit of such funds and Borrowers shall deposit all proceeds of Collateral
or cause same to be deposited, in kind, in such Depository Accounts of Agent
in lieu of depositing same to the Blocked Accounts. Notwithstanding the
foregoing, as respect each Assigned Lease, Borrowers shall obtain the
agreement of each Lessee to remit payments thereunder to Agent in accordance
with the payment directions provided by Agent.
-29-
<PAGE>
(i) ADJUSTMENTS. No Borrower will, without Agent's consent,
compromise or adjust any Assigned Lease (or extend the time for payment
thereof) or amend any Assigned Lease except for those compromises,
adjustments, or amendments which have been consented to in writing by Agent,
which such consent shall not be unreasonably withheld so long as an Event of
Default is not then in existence.
4.16. INTENTIONALLY OMITTED.
4.17. MAINTENANCE OF LEASED EQUIPMENT. The Leased Equipment shall be
maintained in good operating condition and repair (reasonable wear and tear
excepted) and all necessary replacements of and repairs thereto shall be made
so that the value and operating efficiency of the Leased Equipment shall be
maintained and preserved.
4.18. EXCULPATION OF LIABILITY. Nothing herein contained shall be
construed to constitute Agent or any Lender as any Borrower's agent for any
purpose whatsoever, nor shall Agent or any Lender be responsible or liable for
any shortage, discrepancy, damage, loss or destruction (collectively, a "Loss")
of any part of the Collateral wherever the same may be located and regardless
of the cause thereof, except to the extent such Loss arises from Agent's or any
Lender's gross (not mere) negligence or wilful misconduct at a time when such
Collateral is in Agent's or such Lender's possession. Neither Agent nor any
Lender, whether by anything herein or in any assignment or otherwise, assume
any Borrower's obligations under any lease, contract or agreement assigned to
Agent or such Lender, and neither Agent nor any Lender shall be responsible in
any way for the performance by any Borrower of any of the terms and conditions
thereof.
4.19. ENVIRONMENTAL MATTERS. (a) Borrowers shall ensure that the Real
Property remains in compliance with all Environmental Laws and they shall not
place or permit to be placed any Hazardous Substances on any Real Property
except as not prohibited by applicable law or appropriate governmental
authorities.
(b) Borrowers shall dispose of any and all Hazardous Waste
generated at the Real Property only at facilities and with carriers that
maintain valid permits under RCRA and any other applicable Environmental Laws.
Borrowers shall use their best efforts to obtain certificates of disposal, such
as hazardous waste manifest receipts, from all treatment, transport, storage or
disposal facilities or operators employed by Borrowers in connection with the
transport or disposal of any Hazardous Waste generated at the Real Property.
(c) In the event any Borrower obtains, gives or receives notice
of any Release or threat of Release of a reportable quantity of any Hazardous
Substances at the Real Property (any such event being hereinafter referred to
as a "Hazardous Discharge") or receives any notice of violation, request for
information or notification that it is potentially responsible for
investigation or cleanup of environmental conditions at the Real Property,
demand letter or complaint, order, citation, or other written notice with
regard to any Hazardous Discharge or violation of Environmental Laws affecting
the Real Property or any Borrower's interest therein (any of the foregoing is
referred to herein as an "Environmental Complaint") from any Person, including
any state agency responsible in whole or in part for environmental matters in
the state in which the Real Property is located or the United States
Environmental Protection Agency (any such person or entity hereinafter the
"Authority"), then Borrowing Agent shall, within five (5) Business Days, give
-30-
<PAGE>
written notice of same to Agent detailing facts and circumstances of which
any Borrower is aware giving rise to the Hazardous Discharge or Environmental
Complaint. Such information is to be provided to allow Agent to protect its
rights to receive repayment of Advances and is not intended to create nor
shall it create any obligation upon Agent or any Lender with respect thereto.
(d) Borrowers shall promptly forward to Agent copies of any
request for information, notification of potential liability, demand letter
relating to potential responsibility with respect to the investigation or
cleanup of Hazardous Substances at any other site owned, operated or used by
any Borrower to dispose of Hazardous Substances and shall continue to forward
copies of correspondence between any Borrower and the Authority regarding such
claims to Agent until the claim is settled. Borrowers shall promptly forward
to Agent copies of all documents and reports concerning a Hazardous Discharge
at the Real Property that any Borrower is required to file under any
Environmental Laws. Such information is to be provided solely to allow Agent
to protect Agent's rights to receive repayment of Advances.
(e) Borrowers shall respond promptly to any Hazardous Discharge
or Environmental Complaint and take all necessary action in order to safeguard
the health of any Person and to avoid subjecting the Collateral to any Lien.
(f) If at any time Agent reasonably believes that the operation
or use of the Real Property violates any Environment Law or that a Hazardous
Discharge is located at, in, on, under or about the Real Property, the
occurrence or existence of which could reasonably be expected to have a
Material Adverse Effect, then upon the written request of Agent, Borrowers
shall provide Agent, at Borrowers' expense, with an environmental site
assessment or environmental audit report prepared by an environmental
engineering firm acceptable in the reasonable opinion of Agent, to assess with
a reasonable degree of certainty the existence of a Hazardous Discharge and the
potential costs in connection with abatement, cleanup and removal of any
Hazardous Substances. Any report or investigation of such Hazardous Discharge
proposed and acceptable to an appropriate Authority that is charged to oversee
the clean-up of such Hazardous Discharge shall be acceptable to Agent. If such
estimates, individually or in the aggregate, exceed $100,000, Agent shall have
the right to require Borrowers to post a bond, letter of credit or other
security reasonably satisfactory to Agent to secure payment of these costs and
expenses.
(g) Borrowers shall defend and indemnify Agent and Lenders and
hold Agent, Lenders and their respective employees, agents, directors and
officers harmless from and against all loss, liability, damage and expense,
claims, costs, fines and penalties, including attorney's fees, suffered or
incurred by Agent or Lenders under or on account of any Environmental Laws,
including, without limitation, the assertion of any Lien thereunder, with
respect to any Hazardous Discharge, the presence of any Hazardous Substances
affecting the Real Property, whether or not the same originates or emerges from
the Real Property or any contiguous real estate, including any loss of value of
the Real Property as a result of the foregoing except to the extent such loss,
liability, damage and expense is attributable to any Hazardous Discharge
resulting from actions on the part of Agent or any Lender. Borrowers'
obligations under this Section 4.19 shall arise upon the discovery of the
presence of any Hazardous Substances at the Real Property, whether or not any
federal, state, or local environmental agency has taken or threatened any
action in connection with the presence of any Hazardous Substances. Borrowers'
obligation and the indemnifications hereunder shall survive the termination of
this Agreement.
-31-
<PAGE>
(h) For purposes of Section 4.19 and 5.7, all references to
Real Property shall be deemed to include all of Borrowers' right, title and
interest in and to its owned and leased premises.
4.20. FINANCING STATEMENTS. Except as respects the financing
statements filed by Agent and the financing statements described on SCHEDULE
1.2, no financing statement covering any of the Collateral or any proceeds
thereof is on file in any public office.
V. REPRESENTATIONS AND WARRANTIES.
Each Borrower represents and warrants as follows:
5.1. AUTHORITY. Each Borrower has full power, authority and legal
right to enter into this Agreement and the Other Documents and to perform all
its respective Obligations hereunder and thereunder. The execution, delivery
and performance of this Agreement and of the Other Documents (a) are within
such Borrower's corporate powers, have been duly authorized, are not in
contravention of law or the terms of such Borrower's by-laws, certificate of
incorporation or other applicable documents relating to such Borrower's
formation or to the conduct of such Borrower's business or of any material
agreement or undertaking to which such Borrower is a party or by which such
Borrower is bound, and (b) will not conflict with nor result in any breach in
any of the provisions of or constitute a default under or result in the
creation of any Lien except Permitted Encumbrances upon any Collateral of such
Borrower under the provisions of any agreement, charter document, instrument,
by-law, or other instrument to which such Borrower or its property is a party
or by which it may be bound.
5.2. FORMATION AND QUALIFICATION. (a) Each Borrower is duly
incorporated and in good standing under the laws of the state listed on
SCHEDULE 5.2 and is qualified to do business and is in good standing in the
states listed on SCHEDULE 5.2 which constitute all states in which
qualification and good standing are necessary for such Borrower to conduct its
business and own its property and where the failure to so qualify could have a
Material Adverse Effect on such Borrower. Each Borrower has delivered to Agent
true and complete copies of its certificate of incorporation and by-laws and
will promptly notify Agent of any amendment or changes thereto.
(b) The only Subsidiaries of each Borrower are listed on
SCHEDULE 5.2.
5.3. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations
and warranties of each Borrower contained in this Agreement and the Other
Documents shall be true at the time of such Borrower's execution of this
Agreement and the Other Documents, and shall survive the execution, delivery
and acceptance thereof by the parties thereto and the closing of the
transactions described therein or related thereto. Any misrepresentation or
breach of any representation or warranty whatsoever contained in this Agreement
or the Other Documents shall be deemed material.
5.4. TAX RETURNS. Each Borrower's federal tax identification number
is set forth on SCHEDULE 5.4. Each Borrower has filed all federal, state and
local tax returns and other reports each is required by law to file and has
paid all taxes, assessments, fees and other governmental charges that are due
and payable. No Federal, state or local income tax return of any Borrower has
been
-32-
<PAGE>
examined or reported upon by any taxing authority. The provision for taxes
on the books of each Borrower are adequate for all years not closed by
applicable statutes, and for its current fiscal year, and no Borrower has
knowledge of any deficiency or additional assessment in connection therewith
not provided for on its books.
5.5. FINANCIAL STATEMENTS.
(a) The balance sheets, statements of income and stockholders'
equity and cash flows of Borrowers on a Consolidated Basis for each of
Borrowers' fiscal year ending December 31, 1996 (the "Specified Financial
Statements") furnished to Agent on the Closing Date are accurate, complete and
correct and fairly reflect the financial condition of Borrowers on a
Consolidated Basis as of the dates thereof and have been prepared in accordance
with GAAP, consistently applied. The Specified Financial Statements have been
certified as accurate, complete and correct in all material respects by the
President and Chief Financial Officer of Borrowing Agent. All fiscal year end
financial statements referred to in this subsection 5.5(a), including the
related schedules and notes thereto, have been prepared, in accordance with
GAAP, except as may be disclosed in such financial statements.
(b) The twelve-month balance sheet, statement of income and
stockholders' equity and cash flow projections of the Borrowers on a
Consolidated Basis as of the Closing Date, copies of which are annexed hereto
as EXHIBIT 5.5(b) (the "Projections") were prepared by the Chief Financial
Officer of Borrowing Agent, are based on underlying assumptions which provide a
reasonable basis for the projections contained therein and reflect Borrowers'
judgment based on present circumstances of the most likely set of conditions
and course of action for the projected period. The Projections together with
the Specified Financial Statements, are referred to as the "Financial
Statements".
(c) The Specified Financial Statements present fairly the
financial position of the Borrowers and the results of their operations as of
the dates thereof. Since January 31, 1997, there has been no change in the
condition, financial or otherwise, of Borrowers as shown on the January 31,
1997 Specified Financial Statements, except changes in the ordinary course of
business, none of which individually or in the aggregate has been materially
adverse.
5.6. CORPORATE NAME. No Borrower has been known by any other
corporate name in the past five years and does not sell or lease goods under
any other name except as set forth on SCHEDULE 5.6, nor has any Borrower been
the surviving corporation of a merger or consolidation or acquired all or
substantially all of the assets of any Person during the preceding five (5)
years.
5.7. O.S.H.A. AND ENVIRONMENTAL COMPLIANCE.
(a) Each Borrower has duly complied with, and its facilities,
business, assets, property, leaseholds and Equipment are in compliance in all
material respects with, the provisions of the Federal Occupational Safety and
Health Act, the Environmental Protection Act, RCRA and all other Environmental
Laws; there have been no outstanding citations, notices or orders of non-
compliance issued to any Borrower or relating to its business, assets,
property, leaseholds or Equipment under any such laws, rules or regulations.
-33-
<PAGE>
(b) Each Borrower has been issued all required federal, state
and local licenses, certificates or permits relating to all applicable
Environmental Laws.
(c) (i) There are no visible signs of releases, spills,
discharges, leaks or disposal (collectively referred to as "Releases") of
Hazardous Substances at, upon, under or within any Real Property or any
premises leased by any Borrower, which could reasonably be expected to have a
Material Adverse Effect; (ii) there are no underground storage tanks or
polychlorinated biphenyls on the Real Property or any premises leased by any
Borrower; (iii) neither the Real Property nor any premises leased by any
Borrower has ever been used as a treatment, storage or disposal facility of
Hazardous Waste; and (iv) no Hazardous Substances (the presence of which could
reasonably be expected to have a Material Adverse Effect) are present on the
Real Property or any premises leased by Borrower, excepting such quantities as
are handled in accordance with all applicable manufacturer's instructions and
governmental regulations and in proper storage containers and as are necessary
for the operation of the commercial business of any Borrower or of its tenants.
5.8. SOLVENCY; NO LITIGATION, VIOLATION, INDEBTEDNESS OR DEFAULT.
(a) After giving effect to the Transactions, Borrowers will be
solvent, able to pay their debts as they mature, have capital sufficient to
carry on their business and all businesses in which they is about to engage,
and (i) as of the Closing Date, the fair present saleable value of their
assets, calculated on a going concern basis, is in excess of the amount of
their liabilities and (ii) subsequent to the Closing Date, the fair saleable
value of its assets (calculated on a going concern basis) will be in excess of
the amount of its liabilities.
(b) Except as disclosed in SCHEDULE 5.8(b), no Borrower has
(i) any pending or threatened litigation, arbitration, actions or proceedings
which involve the possibility of having a Material Adverse Effect on such
Borrower, and (ii) any liabilities nor indebtedness other than the Obligations.
(c) No Borrower is in violation of any applicable statute,
regulation or ordinance in any respect which could have a Material Adverse
Effect on Borrower, nor is any Borrower in violation of any order of any court,
governmental authority or arbitration board or tribunal.
(d) No Borrower nor any member of the Controlled Group
maintains or contributes to any Plan other than those listed on SCHEDULE
5.8(d) hereto. Except as set forth in SCHEDULE 5.8(d), (i) no Plan has
incurred any "accumulated funding deficiency," as defined in Section
302(a)(2) of ERISA and Section 412(a) of the Code, whether or not waived, and
each Borrower and each member of the Controlled Group has met all applicable
minimum funding requirements under Section 302 of ERISA in respect of each
Plan, (ii) each Plan which is intended to be a qualified plan under
Section 401(a) of the Code as currently in effect has been determined by the
Internal Revenue Service to be qualified under Section 401(a) of the Code and
the trust related thereto is exempt from federal income tax under Section
501(a) of the Code, (iii) no Borrower nor any member of the Controlled Group
has incurred any liability to the PBGC other than for the payment of
premiums, and there are no premium payments which have become due which are
unpaid, (iv) no Plan has been terminated by the plan administrator thereof
nor by the PBGC, and there is no occurrence which would cause the PBGC to
institute proceedings under Title
-34-
<PAGE>
IV of ERISA to terminate any Plan, (v) at this time, the current value of the
assets of each Plan exceeds the present value of the accrued benefits and
other liabilities of such Plan and no Borrower nor any member of the
Controlled Group knows of any facts or circumstances which would materially
change the value of such assets and accrued benefits and other liabilities,
(vi) no Borrower or any member of the Controlled Group has breached any of
the responsibilities, obligations or duties imposed on it by ERISA with
respect to any Plan, (vii) no Borrower nor any member of a Controlled Group
has incurred any liability for any excise tax arising under Section 4972 or
4980B of the Code, and no fact exists which could give rise to any such
liability, (viii) no Borrower nor any member of the Controlled Group nor any
fiduciary of, nor any trustee to, any Plan, has engaged in a "prohibited
transaction" described in Section 406 of the ERISA or Section 4975 of the
Code nor taken any action which would constitute or result in a Termination
Event with respect to any such Plan which is subject to ERISA, (ix) each
Borrower and each member of the Controlled Group has made all contributions
due and payable with respect to each Plan, (x) there exists no event
described in Section 4043(b) of ERISA, for which the thirty (30) day notice
period contained in 29 CFR Section 2615.3 has not been waived, (xi) no
Borrower nor any member of the Controlled Group has any fiduciary
responsibility for investments with respect to any plan existing for the
benefit of persons other than employees or former employees of any Borrower
and any member of the Controlled Group, and (xii) no Borrower nor any member
of the Controlled Group has withdrawn, completely or partially, from any
Multiemployer Plan so as to incur liability under the Multiemployer Pension
Plan Amendments Act of 1980.
5.9. PATENTS, TRADEMARKS, COPYRIGHTS AND LICENSES. All patents,
patent applications, trademarks, trademark applications, service marks, service
mark applications, copyrights, copyright applications, design rights,
tradenames, assumed names, trade secrets and licenses owned or utilized by any
Borrower are set forth on SCHEDULE 5.9, are valid and have been duly registered
or filed with all appropriate governmental authorities and constitute all of
the intellectual property rights which are necessary for the operation of its
business; there is no objection to or pending challenge to the validity of any
such material patent, trademark, copyright, design right, tradename, trade
secret or license and no Borrower is aware of any grounds for any challenge,
except as set forth in SCHEDULE 5.9 hereto. Each patent, patent application,
patent license, trademark, trademark application, trademark license, service
mark, service mark application, service mark license, copyright, copyright
application and copyright license owned or held by any Borrower and all trade
secrets used by any Borrower consist of original material or property developed
by such Borrower or was lawfully acquired by such Borrower from the proper and
lawful owner thereof. Each of such items has been maintained so as to preserve
the value thereof from the date of creation or acquisition thereof. With
respect to all software used by any Borrower, such Borrower is in possession of
all source and object codes related to each piece of software or is the
beneficiary of a source code escrow agreement, each such source code escrow
agreement being listed on SCHEDULE 5.9 hereto.
5.10. LICENSES AND PERMITS. Except as set forth in SCHEDULE 5.10, each
Borrower (a) is in compliance with and (b) has procured and is now in
possession of, all material licenses or permits required by any applicable
federal, state, provincial or local law or regulation for the operation of its
business in each jurisdiction wherein it is now conducting or proposes to
conduct business and where the failure to procure such licenses or permits
could have a Material Adverse Effect on such Borrower.
-35-
<PAGE>
5.11. DEFAULT OF INDEBTEDNESS. No Borrower is in default in the
payment of the principal of or interest on any Indebtedness or under any
instrument or agreement under or subject to which any Indebtedness has been
issued and no event has occurred under the provisions of any such instrument
or agreement which with or without the lapse of time or the giving of notice,
or both, constitutes or would constitute an event of default thereunder.
5.12. NO DEFAULT. No Borrower is in default in the payment or
performance of any of its contractual obligations and no Default has occurred.
5.13. NO BURDENSOME RESTRICTIONS. No Borrower is party to any contract
or agreement the performance of which could have a Material Adverse Effect on
such Borrower. No Borrower has agreed or consented to cause or permit in the
future (upon the happening of a contingency or otherwise) any of the
Collateral, to be subject to a Lien which is not a Permitted Encumbrance.
5.14. NO LABOR DISPUTES. No Borrower is involved in any labor dispute;
there are no strikes or walkouts or union organization of any Borrower's
employees threatened or in existence and no labor contract is scheduled to
expire during the Term other than as set forth on SCHEDULE 5.14 hereto.
5.15. MARGIN REGULATIONS. No Borrower is engaged, nor will it engage,
principally or as one of its important activities, in the business of extending
credit for the purpose of "purchasing" or "carrying" any "margin stock" within
the respective meanings of each of the quoted terms under Regulation U or
Regulation G of the Board of Governors of the Federal Reserve System as now and
from time to time hereafter in effect. No part of the proceeds of any Advance
will be used for "purchasing" or "carrying" "margin stock" as defined in
Regulation U of such Board of Governors.
5.16. INVESTMENT COMPANY ACT. No Borrower is an "investment company"
registered or required to be registered under the Investment Company Act of
1940, as amended, nor is it controlled by such a company.
5.17. DISCLOSURE. No representation or warranty made by any Borrower
in this Agreement or in any financial statement, report, certificate or any
other document furnished in connection herewith contains any untrue statement
of fact or omits to state any fact necessary to make the statements herein or
therein not misleading. There is no fact known to any Borrower or which
reasonably should be known to any Borrower which Borrowers have not disclosed
to Agent in writing with respect to the Transactions which could have a
Material Adverse Effect on any Borrower.
5.18. DELIVERY OF SUBORDINATED DEBT DOCUMENTATION. Agent has received
complete copies of the Subordinated Debt Documentation (including all exhibits,
schedules and disclosure letters referred to therein or delivered pursuant
thereto, if any) and all amendments thereto, waivers relating thereto and other
side letters or agreements affecting the terms thereof. None of such documents
and agreements has been amended or supplemented, nor have any of the provisions
thereof been waived, except pursuant to a written agreement or instrument which
has heretofore been delivered to Agent.
-36-
<PAGE>
5.19. SWAPS. No Borrower is a party to, nor will it be a party to, any
swap agreement whereby such Borrower has agreed or will agree to swap interest
rates or currencies unless same provides that damages upon termination
following an event of default thereunder are payable on an unlimited "two-way
basis" without regard to fault on the part of either party.
5.20. CONFLICTING AGREEMENTS. No provision of any mortgage, indenture,
contract, agreement, judgment, decree or order binding on any Borrower or
affecting the Collateral conflicts with, or requires any Consent which has not
already been obtained to, or would in any way prevent the execution, delivery
or performance of, the terms of this Agreement or the Other Documents.
5.21. APPLICATION OF CERTAIN LAWS AND REGULATIONS. No Borrower nor any
Affiliate of any Borrower is subject to any statute, rule or regulation which
regulates the incurrence of any Indebtedness, including without limitation,
statutes or regulations relative to common or interstate carriers or to the
sale of electricity, gas, steam, water, telephone, telegraph or other public
utility services.
5.22. BUSINESS AND PROPERTY OF BORROWER. Upon and after the Closing
Date, Borrowers do not propose to engage in any business other than financing
(by true lease, capital lease or loans) gaming equipment and other furniture,
fixtures and equipment for casino operations and distribution and remarketing
of such used gaming equipment and activities necessary to conduct the
foregoing. On the Closing Date, each Borrower will own all the property and
possess all of the rights and Consents necessary for the conduct of the
business of such Borrower.
VI. AFFIRMATIVE COVENANTS.
Each Borrower shall, until payment in full of the Obligations and
termination of this Agreement:
6.1. PAYMENT OF FEES. Pay to Agent on demand all usual and customary
fees and expenses which Agent incurs in connection with (a) the forwarding of
Advance proceeds and (b) to the extent applicable, the establishment and
maintenance of any Blocked Accounts or Depository Accounts as provided for in
Section 4.15(h). Agent may, without making demand, charge the account of
Borrowers for all such fees and expenses.
6.2. CONDUCT OF BUSINESS AND MAINTENANCE OF EXISTENCE AND ASSETS. (a)
Conduct continuously and operate actively its business according to good
business practices and maintain all of its properties useful or necessary in
its business in good working order and condition (reasonable wear and tear
excepted and except as may be disposed of in accordance with the terms of this
Agreement), including, without limitation, all licenses, patents, copyrights,
design rights, tradenames, trade secrets and trademarks and take all actions
necessary to enforce and protect the validity of any intellectual property
right or other right included in the Collateral; (b) keep in full force and
effect its existence and comply in all material respects with the laws and
regulations governing the conduct of its business, including, without
limitation, all applicable Gaming Laws; and (c) make all such reports and pay
all such franchise and other taxes and license fees and do all such other acts
and things as may be lawfully required to maintain its rights, licenses,
leases, powers and franchises under the laws of the United States or any
political subdivision thereof.
-37-
<PAGE>
6.3. VIOLATIONS. Promptly notify Agent in writing of any violation of
any law, statute, regulation or ordinance of any Governmental Body, or of any
agency thereof, applicable to any Borrower which may have a Material Adverse
Effect on any Borrower.
6.4. GOVERNMENT RECEIVABLES. Take all steps necessary to protect
Agent's interest in the Collateral under the Federal Assignment of Claims Act
or other applicable state or local statutes or ordinances and deliver to Agent
appropriately endorsed, any instrument or chattel paper connected with any
Receivable arising out of contracts between any Borrower and the United States,
any state or any department, agency or instrumentality of any of them.
6.5. TANGIBLE NET WORTH. Maintain as at the end of each fiscal year
of Borrowers set forth below a Tangible Net Worth in an amount greater than or
equal to the amounts set forth opposite such fiscal year end:
<TABLE>
<CAPTION>
Fiscal Year End Amount
--------------- ------
<S> <C>
December 31, 1997 $6,500,000
December 31, 1998 $7,000,000
December 31, 1999 and $8,000,000
at the end of each
fiscal year thereafter
</TABLE>
6.6. FIXED CHARGE COVERAGE RATIO. Maintain as at the end of each
fiscal year of Borrowers set forth below a Fixed Charge Coverage Ratio equal to
or greater than the ratio set forth opposite such fiscal year end:
<TABLE>
<CAPTION>
Fiscal Year End Ratio
--------------- -----
<S> <C>
December 31, 1997 1.50 to 1.00
December 31, 1998 1.75 to 1.00
December 31, 1999 and 2.00 to 1.00
at the end of each
fiscal year thereafter
</TABLE>
6.7. LEVERAGE RATIO. Maintain as at the end of each fiscal year of
Borrowers a ratio of Indebtedness for Borrowed Money (other than the
Subordinated Indebtedness and deferred funds for pending transactions) to
Tangible Net Worth in an amount less than or equal to 7.0 to 1.0.
6.8. EXECUTION OF SUPPLEMENTAL INSTRUMENTS. Execute and deliver to
Agent from time to time, upon demand, such supplemental agreements, statements,
assignments and transfers, or instructions or documents relating to the
Collateral, and such other instruments as Agent may request, in order that the
full intent of this Agreement may be carried into effect.
6.9. PAYMENT OF INDEBTEDNESS. Pay, discharge or otherwise satisfy at
or before maturity (subject, where applicable, to specified grace periods and,
in the case of the trade payables, to normal payment practices) all its
obligations and liabilities of whatever nature, except when the
-38-
<PAGE>
amount or validity thereof is currently being contested in good faith by
appropriate proceedings and each Borrower shall have provided for such
reserves as Agent may reasonably deem proper and necessary, subject at all
times to any applicable subordination arrangement in favor of Lenders.
6.10. STANDARDS OF FINANCIAL STATEMENTS. Cause all financial
statements referred to in Sections 9.7, 9.8, 9.9, 9.10, 9.11, 9.12 and 9.13 as
to which GAAP is applicable to be complete and correct in all material respects
(subject, in the case of interim financial statements, to normal year-end audit
adjustments) and to be prepared in reasonable detail and in accordance with
GAAP applied consistently throughout the periods reflected therein (except as
concurred in by such reporting accountants or officer, as the case may be, and
disclosed therein).
6.11. INTEREST RATE CAP. At such time the outstanding Advances
hereunder equal or exceed $2,000,000, Borrower shall obtain not less than a ten
percent (10%) Prime Rate cap on an amount not less than fifty percent (50%) of
the Advances which are outstanding from time to time; provided, however, that
such interest rate caps shall be purchased in increments of $1,000,000.
6.12. APPRAISALS. Cause (a) a desktop appraisal of all Leased
Equipment subject to an Assigned Lease to be performed at least one (1) time
during each fiscal year of Borrowers, or more frequently at Agent's request
during the existence of an Event of Default, by an appraiser acceptable in all
respects to Agent (the "Appraisal") and (b) a copy of each such Appraisal to be
promptly delivered to Agent upon its completion.
6.13. GAMING LAWS. Borrowers shall provide notice to all applicable
Gaming Authorities, to the extent required by the applicable Gaming Law, with
appropriate notice of Agent's security interest in the Collateral and each
Assigned Lease.
VII. NEGATIVE COVENANTS.
No Borrower shall, until satisfaction in full of the Obligations and
termination of this Agreement:
7.1. MERGER, CONSOLIDATION, ACQUISITION AND SALE OF ASSETS.
(a) Other than as disclosed on SCHEDULE 7.1(a) attached hereto,
enter into any merger, consolidation or other reorganization with or into any
other Person or acquire all or a substantial portion of the assets or stock of
any Person or permit any other Person to consolidate with or merge with it.
(b) Sell, lease, transfer or otherwise dispose of any
Collateral, except as permitted by Section 4.3 hereof.
7.2. CREATION OF LIENS. Create or suffer to exist any Lien or
transfer upon or against any Collateral, except Permitted Encumbrances.
7.3. GUARANTEES. Become liable upon the obligations of any Person by
assumption, endorsement or guaranty thereof or otherwise (other than to
Lenders) except (a) as disclosed on SCHEDULE 7.3, (b) the endorsement of checks
in the ordinary course of business and (c) guarantees of
-39-
<PAGE>
a Lessee's obligations under an Equipment Lease in connection with the
assignment of such Equipment Lease for financing purposes.
7.4. INVESTMENTS. From the proceeds of an Advance, purchase or
acquire obligations or stock of, or any other interest in, any Person, except
(a) obligations issued or guaranteed by the United States of America or any
agency thereof; (b) commercial paper with maturities of not more than 180 days
and a published rating of not less than A-1 or P-1 (or the equivalent rating);
(c) certificates of time deposit and bankers' acceptances having maturities of
not more than 180 days and repurchase agreements backed by United States
government securities of a commercial bank if (i) such bank has a combined
capital and surplus of at least $500,000,000, or (ii) its debt obligations, or
those of a holding company of which it is a Subsidiary, are rated not less than
A (or the equivalent rating) by a nationally recognized investment rating
agency; and (d) U.S. money market funds that invest solely in obligations
issued or guaranteed by the United States of America or an agency thereof.
7.5. LOANS. From the proceeds of an Advance, make advances, loans or
extensions of credit (collectively, "Extensions of Credit") to any Person,
including without limitation, any Parent, Subsidiary or Affiliate, except to
the extent any Equipment Lease transaction between a Borrower and a Lessee is
deemed to constitute an Extension of Credit.
7.6. CAPITAL EXPENDITURES. Contract for, purchase or make any
expenditure or commitments for fixed or capital assets (including capitalized
leases, other than those under which any Borrower is the lessor) in any fiscal
year in an amount in excess of $500,000.
7.7. DIVIDENDS. Without Agent's prior written consent, which shall
not be unreasonably withheld, declare, pay or make any dividend or distribution
on any shares of the common stock or preferred stock of any Borrower (other
than dividends or distributions payable in its stock, or split-ups or
reclassifications of its stock) or apply any of its funds, property or assets
to the purchase, redemption or other retirement of any common or preferred
stock, or of any options to purchase or acquire any such shares of common or
preferred stock of any Borrower.
7.8. INDEBTEDNESS. Create, incur, assume or suffer to exist any
Indebtedness (exclusive of trade debt) except in respect of (i) Indebtedness to
Lenders; (ii) Indebtedness incurred for capital expenditures permitted under
Section 7.6 hereof; (iii) Indebtedness due under the Subordinated Debt
Documentation and other Indebtedness subordinated in favor of Lenders on terms
and conditions acceptable to Agent; and (iv) Indebtedness arising in connection
with the extension of credit by a Person to any Borrower secured by assets
(other than the Collateral) of such Borrower.
7.9. NATURE OF BUSINESS. Substantially change the nature of the
business as set forth in Section 5.22, nor except as specifically permitted
herein purchase or invest, directly or indirectly, in any assets or property
other than in the ordinary course of business for assets or property which are
useful in, necessary for and are to be used in its business as presently
conducted.
7.10. TRANSACTIONS WITH AFFILIATES. Directly or indirectly, purchase,
acquire or lease any property from, or sell, transfer or lease any property to,
or otherwise deal with, any Affiliate, except transactions in the ordinary
course of business, on an arm's-length basis on terms no less favorable than
terms which would have been obtainable from a Person other than an Affiliate.
-40-
<PAGE>
7.11. LEASES. (a) Enter as lessee into any lease arrangement for real
or personal property (unless capitalized and permitted under Section 7.6
hereof) if after giving effect thereto, aggregate annual rental payments for
all leased property would exceed $500,000 in any one fiscal year.
(b) Enter as lessor into any Equipment Lease with respect to
which an Advance is requested hereunder unless such Equipment Lease is an
Eligible Lease.
7.12. SUBSIDIARIES.
(a) Without Agent's prior written consent, which shall not be
unreasonably withheld, form any Subsidiary. Agent acknowledges that in the
ordinary course of its business PDS may need to form a Subsidiary in each
jurisdiction to obtain a license to lease Gaming Device Goods.
(b) Without Agent's prior written consent, which shall not be
unreasonably withheld, enter into any partnership, joint venture or similar
arrangement.
7.13. FISCAL YEAR AND ACCOUNTING CHANGES. Change its fiscal year from
December 31 or make any change (i) in accounting treatment and reporting
practices except as required by GAAP or (ii) in tax reporting treatment except
as required by law.
7.14. PLEDGE OF CREDIT. Now or hereafter pledge Agent's or any
Lender's credit on any purchases or for any purpose whatsoever or use any
portion of any Advance in or for any business other than such Borrower's
business as conducted on the date of this Agreement.
7.15. AMENDMENT OF ARTICLES OF INCORPORATION, BY-LAWS. Amend, modify
or waive any term or material provision of its Articles of Incorporation or By-
Laws, except to the extent any such amendment, modification or waiver (i) is
required by law or (ii) could not reasonably be expected to have a Material
Adverse Effect.
7.16. COMPLIANCE WITH ERISA. (i) (x) Maintain, or permit any member of
the Controlled Group to maintain, or (y) become obligated to contribute, or
permit any member of the Controlled Group to become obligated to contribute, to
any Plan, other than those Plans disclosed on Schedule 5.8(d); (ii) engage, or
permit any member of the Controlled Group to engage, in any non-exempt
"prohibited transaction", as that term is defined in section 406 of ERISA and
Section 4975 of the Code; (iii) incur, or permit any member of the Controlled
Group to incur, any "accumulated funding deficiency", as that term is defined
in Section 302 of ERISA or Section 412 of the Code; (iv) terminate, or permit
any member of the Controlled Group to terminate, any Plan where such event
could result in any liability of any Borrower or any member of the Controlled
Group or the imposition of a lien on the property of any Borrower or any member
of the Controlled Group pursuant to Section 4068 of ERISA; (v) assume, or
permit any member of the Controlled Group to assume, any obligation to
contribute to any Multiemployer Plan not disclosed on Schedule 5.8(d); (vi)
incur, or permit any member of the Controlled Group to incur, any withdrawal
liability to any Multiemployer Plan; (vii) fail promptly to notify Agent of the
occurrence of any Termination Event; (viii) fail to comply, or permit a member
of the Controlled Group to fail to comply, with the requirements of ERISA or
the Code or other applicable laws in respect of any Plan; (ix) fail to meet,
-41-
<PAGE>
or permit any member of the Controlled Group to fail to meet, all minimum
funding requirements under ERISA or the Code or postpone or delay or allow
any member of the Controlled Group to postpone or delay any funding
requirement with respect of any Plan.
7.17. DEBENTURES. At any time, directly or indirectly, pay, prepay,
repurchase, redeem, retire or otherwise acquire, or make any payment on account
of any principal of, interest on or premium payable in connection with the
repayment or redemption of any Debenture, except as expressly permitted by the
terms of such Debenture as in effect on the Closing Date.
VIII. CONDITIONS PRECEDENT.
8.1. CONDITIONS TO INITIAL ADVANCES. The agreement of Lenders to make
the initial Advances requested to be made on the Closing Date is subject to the
satisfaction, or waiver by Lenders, immediately prior to or concurrently with
the making of such Advances, of the following conditions precedent:
(a) NOTE. BNYFC shall have received its Revolving Credit Note
duly executed and delivered by an authorized officer of each Borrower;
(b) FILINGS, REGISTRATIONS AND RECORDINGS. Each document
(including, without limitation, any Uniform Commercial Code financing
statement) required by this Agreement, any Other Document or under law or
reasonably requested by the Agent to be filed, registered or recorded in order
to create, in favor of Agent, a perfected security interest in or lien upon the
Collateral shall have been properly filed, registered or recorded in each
jurisdiction in which the filing, registration or recordation thereof is so
required or requested, and Agent shall have received an acknowledgment copy, or
other evidence satisfactory to it, of each such filing, registration or
recordation and satisfactory evidence of the payment of any necessary fee, tax
or expense relating thereto;
(c) CORPORATE PROCEEDINGS OF BORROWERS. Agent shall have
received a copy of the resolutions in form and substance reasonably
satisfactory to Agent, of the Board of Directors of each Borrower authorizing
(i) the execution, delivery and performance of this Agreement, the Revolving
Credit Notes, any related agreements (collectively the "Documents") and (ii)
the granting by each Borrower of the Liens upon the Collateral in each case
certified by the Secretary or an Assistant Secretary of each Borrower as of the
Closing Date; and, such certificate shall state that the resolutions thereby
certified have not been amended, modified, revoked or rescinded as of the date
of such certificate;
(d) INCUMBENCY CERTIFICATES OF BORROWERS. Agent shall have
received a certificate of the Secretary or an Assistant Secretary of each
Borrower, dated the Closing Date, as to the incumbency and signature of the
officers of each Borrower executing this Agreement, any certificate or other
documents to be delivered by it pursuant hereto, together with evidence of the
incumbency of such Secretary or Assistant Secretary;
(e) CERTIFICATES. Agent shall have received a copy of the
Articles or Certificate of Incorporation of each Borrower, and all amendments
thereto, certified by the Secretary of State or other appropriate official of
its jurisdiction of incorporation together with
-42-
<PAGE>
copies of the By-Laws of each Borrower and all agreements of each Borrower's
shareholders certified as accurate and complete by the Secretary of each
Borrower;
(f) GOOD STANDING CERTIFICATES. Agent shall have received good
standing certificates for each Borrower dated not more than thirty (30) days
prior to the Closing Date, issued by the Secretary of State or other
appropriate official of each Borrower's jurisdiction of incorporation and each
jurisdiction where the conduct of each Borrower's business activities or the
ownership of its properties necessitates qualification;
(g) LEGAL OPINION. Agent shall have received the executed
legal opinion of Dorsey & Whitney LLP in form and substance satisfactory to
Agent which shall cover such matters incident to the transactions contemplated
by this Agreement, the Revolving Credit Notes, and related agreements as Agent
may reasonably require and each Borrower hereby authorizes and directs such
counsel to deliver such opinions to Agent and Lenders;
(h) NO LITIGATION. (i) No litigation, investigation or
proceeding before or by any arbitrator or Governmental Body shall be
continuing or threatened against any Borrower or against the officers or
directors of any Borrower (A) in connection with the Documents or any of the
Transactions and which, in the reasonable opinion of Agent, is deemed
material or (B) which if adversely determined, could, in the reasonable
opinion of Agent, have a Material Adverse Effect on any Borrower; and (ii) no
injunction, writ, restraining order or other order of any nature materially
adverse to any Borrower or the conduct of its business or inconsistent with
the due consummation of the Transactions shall have been issued by any
Governmental Body;
(i) FINANCIAL CONDITION CERTIFICATES. Agent shall have
received an executed Officers Certificate substantially in the form of Exhibit
8.1(i) hereof;
(j) COLLATERAL EXAMINATION. Agent shall have completed
Collateral examinations, the results of which shall be satisfactory in form and
substance to Agent;
(k) FEES. Agent shall have received all fees payable to Agent
and Lenders, and Hahn & Hessen LLP shall have received an "on account" payment
of outstanding legal fees and disbursements, on or prior to the Closing Date
pursuant to Article III hereof;
(l) FINANCIAL STATEMENTS. Agent shall have received a copy of
the Financial Statements which shall be satisfactory in all respects to Agent;
(m) OTHER DOCUMENTS. Agent shall have received all Other
Documents, each in form and substance satisfactory to Agent;
(n) INSURANCE. To the extent an Advance is requested on the
Closing Date, Agent shall have received, as respects all Collateral consisting
of Assigned Leases, loss payable endorsements on Agent's standard form of loss
payee endorsement naming Agent as loss payee covering such Collateral;
(o) PAYMENT INSTRUCTIONS. To the extent an Advance is
requested on the Closing Date, Agent shall have received written instructions
from Borrowers directing the application of proceeds of the initial Advances
made pursuant to this Agreement;
-43-
<PAGE>
(p) CONSENTS. Agent shall have received any and all Consents
necessary to permit the effectuation of the transactions contemplated by this
Agreement and the Other Documents; and, Agent shall have received such Consents
and waivers of such third parties as might assert claims with respect to the
Collateral, as Agent and its counsel shall deem necessary;
(q) NO ADVERSE MATERIAL CHANGE. (i) Since January 31, 1997,
there shall not have occurred (x) any material adverse change in the condition,
financial or otherwise, operations, properties or prospects of any Borrower,
(y) any material damage or destruction to any of the Collateral nor any
material depreciation in the value thereof and (z) any event, condition or
state of facts which could reasonably be expected to have a Material Adverse
Effect on any Borrower and (ii) no representations made or information supplied
to Agent shall have been proven to be inaccurate or misleading in any material
respect;
(r) SUBORDINATED DEBT DOCUMENTATION. Agent shall have received
final executed copies of the Subordinated Debt Documentation which shall
contain such terms and provisions including, without limitation, subordination
terms, satisfactory to Agent;
(s) NET WORTH. Agent shall have received the January 31, 1997
Specified Financial Statements reflecting the sum of Tangible Net Worth plus
Subordinated Indebtedness of at least $7,500,000;
(t) CONTRACT REVIEW. Agent shall have reviewed all material
contracts of Borrowers including, without limitation, leases, union contracts,
labor contracts, vendor supply contracts, license agreements and
distributorship agreements and such contracts and agreements shall be
satisfactory in all respects to Agent;
(u) CLOSING CERTIFICATE. Agent shall have received a closing
certificate signed by the Chief Financial Officer of each Borrower dated as of
the date hereof, stating that (i) all representations and warranties set forth
in this Agreement and the Other Documents are true and correct on and as of
such date, (ii) Borrowers are on such date in compliance with all the terms and
provisions set forth in this Agreement and the Other Documents and (iii) on
such date no Default or Event of Default has occurred or is continuing;
(v) BORROWING BASE. To the extent an Advance is requested on
the Closing Date, Agent shall have received evidence from Borrowers that
borrowing base availability under Section 2.1(a) is sufficient to support
Advances in the amount requested by Borrowers on the Closing Date;
(w) ORIGINAL CHATTEL PAPER. As respects all Assigned Leases,
Agent shall have received all executed originals thereof and all original
chattel paper relating thereto; and
(x) OTHER. All corporate and other proceedings, and all
documents, instruments and other legal matters in connection with the
Transactions shall be satisfactory in form and substance to Agent, Lenders and
their counsel.
-44-
<PAGE>
8.2. CONDITIONS TO EACH ADVANCE. The agreement of Lenders to make any
Advance requested to be made on any date (including, without limitation, the
initial Advance), is subject to the satisfaction of the following conditions
precedent as of the date such Advance is made:
(a) REPRESENTATIONS AND WARRANTIES. Each of the
representations and warranties made by any Borrower in or pursuant to this
Agreement and any related agreements to which it is a party, and each of the
representations and warranties contained in any certificate, document or
financial or other statement furnished at any time under or in connection with
this Agreement or any related agreement shall be true and correct in all
material respects on and as of such date as if made on and as of such date;
(b) NO DEFAULT. No Event of Default or Default shall have
occurred and be continuing on such date, or would exist after giving effect to
the Advances requested to be made, on such date PROVIDED, HOWEVER that Lenders,
in their sole discretion, may continue to make Advances notwithstanding the
existence of an Event of Default or Default and that any Advances so made shall
not be deemed a waiver of any such Event of Default or Default;
(c) MAXIMUM ADVANCES. In the case of any Advances requested to
be made, after giving effect thereto, the aggregate Advances shall not exceed
the maximum amount of Advances permitted under Section 2.1 hereof.
(d) ORIGINAL CHATTEL PAPER. As respects all Assigned Leases,
Agent shall have received all executed originals thereof and all original
chattel paper with respect thereto.
Each request for an Advance by any Borrower hereunder shall constitute a
representation and warranty by each Borrower as of the date of such Advance
that the conditions contained in this subsection shall have been satisfied.
IX. INFORMATION AS TO BORROWERS.
Each Borrower shall, until satisfaction in full of the Obligations and
the termination of this Agreement:
9.1. DISCLOSURE OF MATERIAL MATTERS. Immediately upon learning
thereof, report to Agent all matters materially affecting the value,
enforceability or collectibility of any portion of the Collateral including,
without limitation, any Borrower's reclamation or repossession of, or the
return to any Borrower of, a material amount of goods or claims or disputes
asserted by any Lessee or other obligor.
9.2. SCHEDULES. Deliver to Agent on or before the fifteenth (15th)
day of each month as and for the prior month (a) lease receivable ageings for
all Assigned Leases, and (b) Leased Equipment reports, provided, however, at
Agent's option, the Assigned Lease receivable ageings shall be reported to
Agent electronically on a daily basis. In addition, each Borrower will deliver
to Agent, in each case with respect to the Collateral, at such intervals as
Agent may require: (i) confirmatory assignment schedules, (ii) copies of
Lessee's invoices, (iii) evidence of shipment or delivery, and (iv) such
further schedules, documents and/or information regarding the Collateral as
Agent may require including, without limitation, trial balances and test
verifications. Agent shall
-45-
<PAGE>
have the right to confirm and verify all Assigned Leases and amounts owing
thereunder by any manner and through any medium it considers advisable and do
whatever it may deem reasonably necessary to protect its interests hereunder.
The items to be provided under this Section are to be in form satisfactory
to Agent and executed by each Borrower and delivered to Agent from time to
time solely for Agent's convenience in maintaining records of the Collateral,
and any Borrower's failure to deliver any of such items to Agent shall not
affect, terminate, modify or otherwise limit Agent's Lien with respect to the
Collateral.
9.3. ENVIRONMENTAL CERTIFICATE. Furnish Agent, concurrently with the
delivery of the financial statements referred to in Sections 9.7 and 9.8, with
a certificate signed by the President and/or Chief Financial Officer of each
Borrower stating, to the best of his knowledge, that each Borrower is in
compliance in all material respects with all federal, state and local laws
relating to environmental protection and control and occupational safety and
health. To the extent any Borrower is not in compliance with the foregoing
laws, the certificate shall set forth with specificity all areas of non-
compliance and the proposed action Borrower will implement in order to achieve
full compliance.
9.4. LITIGATION. Promptly notify Agent in writing of any litigation,
suit or administrative proceeding affecting any Borrower, whether or not the
claim is covered by insurance, and of any suit or administrative proceeding,
which may have a Material Adverse Effect on any Borrower.
9.5. MATERIAL OCCURRENCES. Promptly notify Agent in writing upon the
occurrence of (a) any Event of Default or Default; (b) any event of default
under the Subordinated Debt Documentation; (c) any event which with the giving
of notice or lapse of time, or both, would constitute an event of default under
the Subordinated Debt Documentation; (d) any event, development or circumstance
whereby any financial statements or other reports furnished to Agent fail in
any material respect to present fairly, in accordance with GAAP consistently
applied, the financial condition or operating results of any Borrower as of the
date of such statements; (e) any accumulated retirement plan funding deficiency
which, if such deficiency continued for two plan years and was not corrected as
provided in Section 4971 of the Code, could subject any Borrower to a tax
imposed by Section 4971 of the Code; (f) each and every default by any Borrower
which might result in the acceleration of the maturity of any Indebtedness,
including the names and addresses of the holders of such Indebtedness with
respect to which there is a default existing or with respect to which the
maturity has been or could be accelerated, and the amount of such Indebtedness;
and (g) any other development in the business or affairs of any Borrower which
might have a Material Adverse Effect; in each case describing the nature
thereof and the action Borrowers propose to take with respect thereto.
9.6. GOVERNMENT RECEIVABLES. Notify Agent immediately if any amounts
payable under any Assigned Lease arise out of contracts between any Borrower
and the United States, any state, or any department, agency or instrumentality
of any of them.
9.7. ANNUAL FINANCIAL STATEMENTS. Furnish Agent within ninety (90)
days after the end of each fiscal year of Borrowers, financial statements of
Borrowers on a Consolidated Basis including, but not limited to, statements of
income and stockholders' equity and cash flow from the beginning of the current
fiscal year to the end of such fiscal year and the balance sheet as at the end
of such fiscal year, all prepared in accordance with GAAP applied on a basis
consistent with prior
-46-
<PAGE>
practices, and in reasonable detail and reported upon without qualification
by Coopers & Lybrand or such other independent certified public accounting
firm selected by Borrowers and satisfactory to Agent (the "Accountants").
The audit report of such accounting firm shall be accompanied by a statement
of such accounting firm certifying that (i) they have caused this Agreement
to be reviewed, (ii) in making the examination upon which such report was
based either no information came to their attention which to their knowledge
constituted an Event of Default or a Default under this Agreement or any
Other Document or, if such information came to their attention, specifying
any such Default or Event of Default, its nature, when it occurred and
whether it is continuing, and such report shall contain or have appended
thereto calculations which set forth the Borrowers' compliance with the
requirements or restrictions imposed by Sections 6.5, 6.6, 6.7 and 7.6. In
addition, the reports shall be accompanied by a certificate of the President
and/or Chief Financial Officer of each Borrower which shall state that, based
on an examination sufficient to permit him to make an informed statement, no
Default or Event of Default exists, or, if such is not the case, specifying
such Default or Event of Default, its nature, when it occurred, whether it is
continuing and the steps being taken by Borrower with respect to such default
and, such certificate shall have appended thereto calculations which set
forth Borrowers' compliance with the requirements or restrictions imposed by
Sections 6.5, 6.6, 6.7 and 7.6 hereof.
9.8. QUARTERLY FINANCIAL STATEMENTS. Furnish Agent within forty-five
(45) days after the end of each fiscal quarter of Borrowers, an unaudited
balance sheet and statement of income and cash flow of Borrowers on a
Consolidated Basis and unaudited balance sheet and statement of income of each
Borrower and Subsidiary reflecting results of operations from the beginning of
the fiscal year to the end of such quarter and for such quarter, prepared on a
basis consistent with prior practices and complete and correct in all material
respects, subject to normal year end adjustments. The reports shall be
accompanied by a certificate signed by the President and/or Chief Financial
Officer of each Borrower, which shall state that, based on an examination
sufficient to permit him to make an informed statement, no Default or Event of
Default exists, or, if such is not the case, specifying such Default or Event
of Default, its nature, when it occurred, whether it is continuing and the
steps being taken by Borrowers with respect to such default.
9.9. MONTHLY FINANCIAL STATEMENTS. Furnish Agent within thirty (30)
days after the end of each month, an unaudited balance sheet and statement of
income of Borrowers on a Consolidated Basis and unaudited balance sheet and
statement of income of each Borrower and Subsidiary reflecting results of
operations from the beginning of the fiscal year to the end of such month and
for such month, prepared on a basis consistent with prior practices and
complete and correct in all material respects, subject to normal year end
adjustments. The reports shall be accompanied by a certificate signed by the
President and/or Chief Financial Officer of each Borrower, which shall state
that, based on an examination sufficient to permit him to make an informed
statement, no Default or Event of Default exists, or, if such is not the case,
specifying such Default or Event of Default, its nature, when it occurred,
whether it is continuing and the steps being taken by Borrowers with respect to
such default.
9.10. OTHER REPORTS. Furnish Agent as soon as available, but in any
event within ten (10) days after the issuance thereof, (i) with copies of such
financial statements, reports and returns as each Borrower shall send to its
stockholders and/or the Securities and Exchange Commission and (ii) copies of
all notices sent pursuant to the Subordinated Debt Documentation.
-47-
<PAGE>
9.11. ADDITIONAL INFORMATION. Furnish Agent with such additional
information as Agent shall reasonably request in order to enable Agent to
determine whether the terms, covenants, provisions and conditions of this
Agreement and the Revolving Credit Notes have been complied with by Borrowers
including, without limitation and without the necessity of any request by
Agent, (a) copies of all environmental audits and reviews, if any, (b) at least
thirty (30) days prior thereto, notice of any Borrower's opening of any new
office or place of business or any Borrower's closing of any existing office or
place of business, and (c) promptly upon any Borrower's learning thereof,
notice of any labor dispute to which any Borrower may become a party, any
strikes or walkouts relating to any of its plants or other facilities, and the
expiration of any labor contract to which any Borrower is a party or by which
any Borrower is bound.
9.12. PROJECTED OPERATING BUDGET. Furnish Agent, no later than thirty
(30) days prior to the beginning of each Borrower's fiscal years commencing
with fiscal year 1997, a month by month projected operating budget and cash
flow of Borrowers on a Consolidated Basis, (including an income statement for
each month and a balance sheet as at the end of the last month in each fiscal
quarter), such projections to be accompanied by a certificate signed by the
President or Chief Financial Officer of each Borrower to the effect that such
projections have been prepared on the basis of sound financial planning
practice consistent with past budgets and financial statements and that such
officer has no reason to question the reasonableness of any material
assumptions on which such projections were prepared.
9.13. INTENTIONALLY OMITTED.
9.14. NOTICE OF SUITS, ADVERSE EVENTS. Furnish Agent with prompt
notice of (i) any lapse or other termination of any Consent issued to any
Borrower by any Governmental Body or any other Person that is material to the
operation of any Borrower's business, (ii) any refusal by any Governmental Body
or any other Person to renew or extend any such Consent; and (iii) copies of
any periodic or special reports filed by any Borrower with any Governmental
Body or Person, if such reports indicate any material change in the business,
operations, affairs or condition of any Borrower, or if copies thereof are
requested by Lender, and (iv) copies of any material notices and other
communications from any Governmental Body or Person which specifically relate
to any Borrower.
9.15. ERISA NOTICES AND REQUESTS. Furnish Agent with immediate
written notice in the event that (i) any Borrower or any member of the
Controlled Group knows or has reason to know that a Termination Event has
occurred, together with a written statement describing such Termination Event
and the action, if any, which such Borrower or member of the Controlled Group
has taken, is taking, or proposes to take with respect thereto and, when
known, any action taken or threatened by the Internal Revenue Service,
Department of Labor or PBGC with respect thereto, (ii) any Borrower or any
member of the Controlled Group knows or has reason to know that a prohibited
transaction (as defined in Sections 406 of ERISA and 4975 of the Code) has
occurred together with a written statement describing such transaction and
the action which such Borrower or any member of the Controlled Group has
taken, is taking or proposes to take with respect thereto, (iii) a funding
waiver request has been filed with respect to any Plan together with all
communications received by any Borrower or any member of the Controlled Group
with respect to such request, (iv) any increase in the benefits of any
existing Plan or the establishment of any new Plan or the commencement of
contributions to any Plan to which any Borrower or any member of the
Controlled Group was not previously contributing shall occur, (v) any
Borrower or any member
-48-
<PAGE>
of the Controlled Group shall receive from the PBGC a notice of intention to
terminate a Plan or to have a trustee appointed to administer a Plan,
together with copies of each such notice, (vi) any Borrower or any member of
the Controlled Group shall receive any favorable or unfavorable determination
letter from the Internal Revenue Service regarding the qualification of a
Plan under Section 401(a) of the Code, together with copies of each such
letter; (vii) any Borrower or any member of the Controlled Group shall
receive a notice regarding the imposition of withdrawal liability, together
with copies of each such notice; (viii) any Borrower or any member of the
Controlled Group shall fail to make a required installment or any other
required payment under Section 412 of the Code on or before the due date for
such installment or payment; (ix) any Borrower or any member of the
Controlled Group knows that (a) a Multiemployer Plan has been terminated,
(b) the administrator or plan sponsor of a Multiemployer Plan intends to
terminate a Multiemployer Plan, or (c) the PBGC has instituted or will
institute proceedings under Section 4042 of ERISA to terminate a
Multiemployer Plan.
9.16. ADDITIONAL DOCUMENTS. Execute and deliver to Agent, upon
request, such documents and agreements as Agent may, from time to time,
reasonably request to carry out the purposes, terms or conditions of this
Agreement.
X. EVENTS OF DEFAULT.
The occurrence of any one or more of the following events shall
constitute an "Event of Default":
10.1. failure by any Borrower to pay any principal or interest on the
Obligations when due, whether at maturity or by reason of acceleration pursuant
to the terms of this Agreement or by notice of intention to prepay, or by
required prepayment or failure to pay any other liabilities or make any other
payment, fee or charge provided for herein or any Other Document when due;
10.2. any representation or warranty made or deemed made by any
Borrower in this Agreement or any related agreement or in any certificate,
document or financial or other statement furnished at any time in connection
herewith or therewith shall prove to have been misleading in any material
respect on the date when made or deemed to have been made;
10.3. failure by any Borrower to (i) furnish financial information when
due or when requested, or (ii) permit the inspection of its books or records;
10.4. issuance of a notice of Lien, levy, assessment, injunction or
attachment against any of the Collateral;
10.5. failure or neglect of any Borrower to perform, keep or observe
any term, provision, condition, covenant herein contained, or contained in any
other agreement or arrangement, now or hereafter entered into between any
Borrower and any Lender;
10.6. any judgment is rendered or judgment liens filed against any
Borrower for an amount in excess of $50,000 which within thirty (30) days of
such rendering or filing is not either satisfied, stayed or discharged of
record;
-49-
<PAGE>
10.7. any Borrower shall (i) apply for, consent to or suffer the
appointment of, or the taking of possession by, a receiver, custodian, trustee,
liquidator or similar fiduciary of itself or of all or a substantial part of
its property, (ii) make a general assignment for the benefit of creditors,
(iii) commence a voluntary case under any state or federal bankruptcy laws (as
now or hereafter in effect), (iv) be adjudicated a bankrupt or insolvent, (v)
file a petition seeking to take advantage of any other law providing for the
relief of debtors, (vi) acquiesce to, or fail to have dismissed, within thirty
(30) days, any petition filed against it in any involuntary case under such
bankruptcy laws, or (vii) take any action for the purpose of effecting any of
the foregoing;
10.8. any Borrower shall admit in writing its inability, or be
generally unable, to pay its debts as they become due or cease operations of
its present business;
10.9. any Affiliate or any Subsidiary of any Borrower, shall (i) apply
for, consent to or suffer the appointment of, or the taking of possession by, a
receiver, administrative receiver, administrator custodian, trustee, liquidator
or similar fiduciary of itself or of all or a substantial part of its property,
(ii) admit in writing its inability, or be generally unable, to pay its debts
as they become due or cease operations of its present business, (iii) make a
general assignment for the benefit of creditors, (iv) commence a voluntary case
under any state or federal bankruptcy laws (as now or hereafter in effect), (v)
be adjudicated a bankrupt or insolvent, (vi) file a petition seeking to take
advantage of any other law providing for the relief of debtors, (vii) acquiesce
to, or fail to have dismissed, within thirty (30) days, any petition filed
against it in any involuntary case under such bankruptcy laws, or (viii) take
any action for the purpose of effecting any of the foregoing;
10.10. any change in any Borrower's condition or affairs (financial or
otherwise) which in Lenders' opinion impairs the Collateral or the ability of
any Borrower to perform its Obligations under this Agreement;
10.11. any Lien created hereunder or provided for hereby or under any
related agreement for any reason ceases to be or is not a valid and perfected
Lien having a first priority interest;
10.12. an event of default has occurred and been declared under the
Subordinated Debt Documentation which default shall not have been cured or
waived within any applicable grace period and for which the holder of the
Subordinated Indebtedness is permitted to take action under the Indenture as in
effect on the Closing Date;
10.13. a default of the obligations of any Borrower under any other
agreement to which it is a party shall occur which could reasonably be expected
to have a Material Adverse Effect which default is not cured within any
applicable grace period;
10.14. termination or breach of any guaranty or similar agreement
executed and delivered to Agent in connection with the Obligations of any
Borrower, or if any guarantor attempts to terminate, challenges the validity
of, or its liability under, any such guaranty or similar agreement;
10.15. any Change of Ownership shall occur;
-50-
<PAGE>
10.16. any material provision of this Agreement shall, for any reason,
cease to be valid and binding on any Borrower, or any Borrower shall so claim
in writing to Agent;
10.17. if (i) any Governmental Body shall (A) revoke, terminate, suspend
or adversely modify any license, permit, patent, trademark or tradename of any
Borrower, or (B) commence proceedings to suspend, revoke, terminate or
adversely modify any such license, permit, trademark, tradename or patent and
such proceedings shall not be dismissed or discharged within sixty (60) days,
or (C) schedule or conduct a hearing on the renewal of any license, permit,
trademark, tradename or patent necessary for the continuation of any Borrower's
business and the staff of such Governmental Body issues a report recommending
the termination, revocation, suspension or material, adverse modification of
such license, permit, trademark, tradename or patent, and the occurrence of any
of the events referenced in this clause "(i)" could reasonably be expected to
have a Material Adverse Effect; or (ii) any agreement which is necessary or
material to the operation of any Borrower's business shall be revoked or
terminated and not replaced by a substitute acceptable to Agent within thirty
(30) days after the date of such revocation or termination, and such revocation
or termination and non-replacement could reasonably be expected to have a
Material Adverse Effect;
10.18. any portion of the Collateral shall be seized or taken by a
Governmental Body, or any Borrower or the title and rights of any Borrower or
any Original Owner which is the owner of any material portion of the Collateral
shall have become the subject matter of litigation which might, in the opinion
of Lenders, upon final determination, result in impairment or loss of the
security provided by this Agreement or the Other Documents; or
10.19. an event or condition specified in Sections 7.16 or 9.15 hereof
shall occur or exist with respect to any Plan and, as a result of such event or
condition, together with all other such events or conditions, any Borrower or
any member of the Controlled Group shall incur, or in the opinion of Lenders be
reasonably likely to incur, a liability to a Plan or the PBGC (or both) which,
in the reasonable judgment of Lenders, could have a Material Adverse Effect on
any Borrower.
XI. LENDERS' RIGHTS AND REMEDIES AFTER DEFAULT.
11.1. RIGHTS AND REMEDIES. Upon the occurrence of (i) an Event of
Default pursuant to Section 10.7 all Obligations shall be immediately due and
payable and this Agreement and the obligation of Lenders to make Advances shall
be deemed terminated; and (ii) any of the other Events of Default and at any
time thereafter (such default not having previously been cured), at the option
of Required Lenders all Obligations shall be immediately due and payable and
Lenders shall have the right to terminate this Agreement and to terminate the
obligation of Lenders to make Advances. Upon the occurrence of any Event of
Default, subject to all mandatory provisions of law, including without
limitation the Gaming Laws, Agent shall have the right to exercise any and all
other rights and remedies provided for herein, under the Uniform Commercial
Code and at law or equity generally, including, without limitation, the right
to foreclose the security interests granted herein and to realize upon any
Collateral by any available judicial procedure and/or to take possession of and
sell any or all of the Collateral with or without judicial process. Agent may
enter any Borrower's premises or other premises without legal process and
without incurring liability to any Borrower therefor, and Agent may thereupon,
or at any time thereafter, in its discretion without notice or demand, take the
Collateral and remove the same to such place as Agent may deem
-51-
<PAGE>
advisable and Agent may require Borrowers to make the Collateral available to
Lenders at a convenient place. With or without having the Collateral at the
time or place of sale, Agent may sell the Collateral, or any part thereof, at
public or private sale, at any time or place, in one or more sales, at such
price or prices, and upon such terms, either for cash, credit or future
delivery, as Agent may elect. Except as to that part of the Collateral which
is perishable or threatens to decline speedily in value or is of a type
customarily sold on a recognized market, Agent shall give Borrowers
reasonable notification of such sale or sales, it being agreed that in all
events written notice mailed to Borrowers at least five (5) days prior to
such sale or sales is reasonable notification. At any public sale Agent or
any Lender may bid for and become the purchaser, and Agent, any Lender or any
other purchaser at any such sale thereafter shall hold the Collateral sold
absolutely free from any claim or right of whatsoever kind, including any
equity of redemption and such right and equity are hereby expressly waived
and released by each Borrower. In connection with the exercise of the
foregoing remedies, Agent is granted permission, without charge, to use all
of Borrowers' trademarks, trade styles, trade names, patents, patent
applications, licenses, franchises and other proprietary rights. The
proceeds realized from the sale of any Collateral shall be applied as
follows: first, to the reasonable costs, expenses and attorneys' fees and
expenses incurred by Agent and Lenders for collection and for acquisition,
completion, protection, removal, storage, sale and delivery of the
Collateral; second, to interest due upon any of the Obligations; and, third,
to the principal of the Obligations. If any deficiency shall arise,
Borrowers shall remain liable to Agent and Lenders therefor.
11.2. AGENT'S DISCRETION. Agent shall have the right in its sole
discretion to determine which rights, Liens, security interests or remedies
Agent may at any time pursue, relinquish, subordinate, or modify or to take any
other action with respect thereto and such determination will not in any way
modify or affect any of Agent's or Lenders' rights hereunder.
11.3. SETOFF. In addition to any other rights which Agent or any
Lender may have under applicable law, upon the occurrence of an Event of
Default hereunder, Agent and such Lender shall have a right to apply any
Borrower's property held by Agent, any Lender or by the Bank to reduce the
Obligations.
11.4. RIGHTS AND REMEDIES NOT EXCLUSIVE. The enumeration of the
foregoing rights and remedies is not intended to be exhaustive and the exercise
of any right or remedy shall not preclude the exercise of any other right or
remedies provided for herein or otherwise provided by law, all of which shall
be cumulative and not alternative.
XII. WAIVERS AND JUDICIAL PROCEEDINGS.
12.1. WAIVER OF NOTICE. Each Borrower hereby waives notice of non-
payment of any amounts due and owing under any Assigned Leases or other
Collateral, demand, presentment, protest and notice thereof with respect to any
and all instruments, notice of acceptance hereof, notice of loans or advances
made, credit extended, Collateral received or delivered, or any other action
taken in reliance hereon, and all other demands and notices of any description,
except such as are expressly provided for herein.
-52-
<PAGE>
12.2. DELAY. No delay or omission on Agent's or any Lender's part in
exercising any right, remedy or option shall operate as a waiver of such or any
other right, remedy or option or of any default.
12.3. JURY WAIVER. EACH PARTY TO THIS AGREEMENT HEREBY EXPRESSLY
WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF
ACTION (A) ARISING UNDER THIS AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENT OR
AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH, OR (B) IN ANY WAY
CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO
OR ANY OF THEM WITH RESPECT TO THIS AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENT
OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH, OR THE TRANSACTIONS
RELATED HERETO OR THERETO IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER
ARISING, AND WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE AND EACH PARTY
HEREBY CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE
DECIDED BY COURT TRIAL WITHOUT A JURY, AND THAT ANY PARTY TO THIS AGREEMENT MAY
FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION WITH ANY COURT AS
WRITTEN EVIDENCE OF THE CONSENTS OF THE PARTIES HERETO TO THE WAIVER OF THEIR
RIGHT TO TRIAL BY JURY.
XIII. EFFECTIVE DATE AND TERMINATION.
13.1. TERM. This Agreement, which shall inure to the benefit of and
shall be binding upon the respective successors and permitted assigns of each
Borrower, Agent and each Lender, shall become effective on the date hereof and
shall continue in full force and effect until the last day of the Term unless
sooner terminated as herein provided. The Term shall be automatically extended
for successive periods of one (1) year each unless terminated by either party
at the end of such initial Term or any successive Term by giving the other
party ninety (90) days prior written notice. Borrowers may terminate this
Agreement at any time upon ninety (90) days' prior written notice upon payment
in full of the Obligations. In the event that the Obligations are prepaid in
full prior to the last day of the Term (the date of such prepayment hereinafter
referred to as the "Prepayment Date") Borrowers shall pay to Agent for the
benefit of Lenders an early termination fee in an amount equal to (x) $600,000
if the Prepayment Date occurs on or after the Closing Date to and including the
date immediately preceding the first anniversary of the Closing Date, (y)
$400,000 if the Prepayment Date occurs on or after the first anniversary of the
Closing Date to and including the date immediately preceding the second
anniversary of the Closing Date, and (z) $200,000 if the Prepayment Date occurs
on or after the second anniversary of the Closing Date to and including the
date immediately preceding the third anniversary of the Closing Date.
13.2. TERMINATION. The termination of the Agreement shall not affect
any Borrower's, Agent's or any Lender's rights, or any of the Obligations
having their inception prior to the effective date of such termination, and the
provisions hereof shall continue to be fully operative until all transactions
entered into, rights or interests created or Obligations have been fully
disposed of, concluded or liquidated. The Liens and rights granted to Agent
and Lenders hereunder and the financing statements filed hereunder shall
continue in full force and effect, notwithstanding the termination of this
Agreement or the fact that any Borrower's respective account may from time to
-53-
<PAGE>
time be temporarily in a zero or credit position, until all of the Obligations
of each Borrower have been paid or performed in full after the termination of
this Agreement or each Borrower has furnished Agent and Lenders with an
indemnification satisfactory to Agent and Lenders with respect thereto.
Accordingly, each Borrower waives any rights which it may have under Section 9-
404(1) of the Uniform Commercial Code to demand the filing of termination
statements with respect to the Collateral, and Agent shall not be required to
send such termination statements to each Borrower, or to file them with any
filing office, unless and until this Agreement shall have been terminated in
accordance with its terms and all Obligations paid in full in immediately
available funds. All representations, warranties, covenants, waivers and
agreements contained herein shall survive termination hereof until all
Obligations are paid or performed in full.
XIV. REGARDING AGENT.
14.1. APPOINTMENT. Each Lender hereby designates BNYFC to act as Agent
for such Lender under this Agreement and the Other Documents. Each Lender
hereby irrevocably authorizes Agent to take such action on its behalf under the
provisions of this Agreement and the Other Documents and to exercise such
powers and to perform such duties hereunder and thereunder as are specifically
delegated to or required of Agent by the terms hereof and thereof and such
other powers as are reasonably incidental thereto and Agent shall hold all
Collateral, payments of principal and interest, fees (except the fees set forth
in Sections 3.2(a) and 3.3), charges and collections (without giving effect to
any collection days) received pursuant to this Agreement, for the ratable
benefit of Lenders. Agent may perform any of its duties hereunder by or
through its agents or employees. As to any matters not expressly provided for
by this Agreement (including without limitation, collection of any Revolving
Credit Note) Agent shall not be required to exercise any discretion or take any
action, but shall be required to act or to refrain from acting (and shall be
fully protected in so acting or refraining from acting) upon the instructions
of the Required Lenders, and such instructions shall be binding; PROVIDED,
HOWEVER, that Agent shall not be required to take any action which exposes
Agent to liability or which is contrary to this Agreement or the Other
Documents or applicable law unless Agent is furnished with an indemnification
reasonably satisfactory to Agent with respect thereto.
14.2. NATURE OF DUTIES. Agent shall have no duties or responsibilities
except those expressly set forth in this Agreement and the Other Documents.
Neither Agent nor any of its officers, directors, employees or agents shall be
(i) liable for any action taken or omitted by them as such hereunder or in
connection herewith, unless caused by their willful misconduct or gross (not
mere) negligence, or (ii) responsible in any manner for any recitals,
statements, representations or warranties made by any Borrower or any officer
thereof contained in this Agreement, or in any of the Other Documents or in any
certificate, report, statement or other document referred to or provided for
in, or received by Agent under or in connection with, this Agreement or any of
the Other Documents or for the value, validity, effectiveness, genuineness,
enforceability or sufficiency of this Agreement, or any of the Other Documents
or for any failure of any Borrower to perform its obligations hereunder. Agent
shall not be under any obligation to any Lender to ascertain or to inquire as
to the observance or performance of any of the agreements contained in, or
conditions of, this Agreement or any of the Other Documents, or to inspect the
properties, books or records of any Borrower. The duties of Agent as respects
the Advances to Borrowers shall be mechanical and administrative in nature;
Agent shall not have by reason of this Agreement a fiduciary relationship in
respect of any Lender; and nothing in this Agreement, expressed or implied, is
intended to or
-54-
<PAGE>
shall be so construed as to impose upon Agent any obligations in respect of
this Agreement except as expressly set forth herein.
14.3. LACK OF RELIANCE ON AGENT AND RESIGNATION. Independently and
without reliance upon Agent or any other Lender, each Lender has made and shall
continue to make (i) its own independent investigation of the financial
condition and affairs of each Borrower in connection with the making and the
continuance of the Advances hereunder and the taking or not taking of any
action in connection herewith, and (ii) its own appraisal of the
creditworthiness of each Borrower. Agent shall have no duty or responsibility,
either initially or on a continuing basis, to provide any Lender with any
credit or other information with respect thereto, whether coming into its
possession before making of the Advances or at any time or times thereafter
except as shall be provided by any Borrower pursuant to the terms hereof.
Agent shall not be responsible to any Lender for any recitals, statements,
information, representations or warranties herein or in any agreement,
document, certificate or a statement delivered in connection with or for the
execution, effectiveness, genuineness, validity, enforceability, collectability
or sufficiency of this Agreement or any Other Document, or of the financial
condition of any Borrower, or be required to make any inquiry concerning either
the performance or observance of any of the terms, provisions or conditions of
this Agreement, the Other Documents or the financial condition of any Borrower,
or the existence of any Event of Default or any Default.
Agent may resign on sixty (60) days' written notice to each of Lenders
and Borrowing Agent and upon such resignation, the Required Lenders will
promptly designate a successor Agent reasonably satisfactory to Borrowers.
Any such successor Agent shall succeed to the rights, powers and duties
of Agent, and the term "Agent" shall mean such successor agent effective upon
its appointment, and the former Agent's rights, powers and duties as Agent
shall be terminated, without any other or further act or deed on the part of
such former Agent. After any Agent's resignation as Agent, the provisions of
this Article XIV shall inure to its benefit as to any actions taken or omitted
to be taken by it while it was Agent under this Agreement.
14.4. CERTAIN RIGHTS OF AGENT. If Agent shall request instructions
from Lenders with respect to any act or action (including failure to act) in
connection with this Agreement or any Other Document, Agent shall be entitled
to refrain from such act or taking such action unless and until Agent shall
have received instructions from the Required Lenders; and Agent shall not incur
liability to any Person by reason of so refraining. Without limiting the
foregoing, Lenders shall not have any right of action whatsoever against Agent
as a result of its acting or refraining from acting hereunder in accordance
with the instructions of the Required Lenders.
14.5. RELIANCE. Agent shall be entitled to rely, and shall be fully
protected in relying, upon any note, writing, resolution, notice, statement,
certificate, telex, teletype or telecopier message, cablegram, order or other
document or telephone message believed by it to be genuine and correct and to
have been signed, sent or made by the proper person or entity, and, with
respect to all legal matters pertaining to this Agreement and the Other
Documents and its duties hereunder, upon advice of counsel selected by it.
Agent may employ agents and attorneys-in-fact and shall not be liable for the
default or misconduct of any such agents or attorneys-in-fact selected by Agent
with reasonable care.
-55-
<PAGE>
14.6. NOTICE OF DEFAULT. Agent shall not be deemed to have knowledge
or notice of the occurrence of any Default or Event of Default hereunder or
under the Other Documents, unless Agent has received notice from a Lender or a
Borrower referring to this Agreement or the Other Documents, describing such
Default or Event of Default and stating that such notice is a "notice of
default". In the event that Agent receives such a notice, Agent shall give
notice thereof to Lenders. Agent shall take such action with respect to such
Default or Event of Default as shall be reasonably directed by the Required
Lenders; PROVIDED, THAT, unless and until Agent shall have received such
directions, Agent may (but shall not be obligated to) take such action, or
refrain from taking such action, with respect to such Default or Event of
Default as it shall deem advisable in the best interests of Lenders.
14.7. INDEMNIFICATION. To the extent Agent is not reimbursed and
indemnified by Borrowers, each Lender will reimburse and indemnify Agent in
proportion to its respective portion of the Advances (or, if no Advances are
outstanding, according to its Commitment Percentage), from and against any and
all liabilities, obligations, losses, damages, penalties, actions, judgments,
suits, costs, expenses or disbursements of any kind or nature whatsoever which
may be imposed on, incurred by or asserted against Agent in performing its
duties hereunder, or in any way relating to or arising out of this Agreement or
any Other Loan Document; PROVIDED THAT, Lenders shall not be liable for any
portion of such liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses or disbursements resulting from Agent's gross
negligence (but not mere negligence) or willful misconduct or gross (not mere)
negligence.
14.8. AGENT IN ITS INDIVIDUAL CAPACITY. With respect to the obligation
of Agent to lend under this Agreement, the Advances made by it shall have the
same rights and powers hereunder as any other Lender and as if it were not
performing the duties as Agent specified herein; and the term "Lender" or any
similar term shall, unless the context clearly otherwise indicates, include
Agent in its individual capacity as a Lender. Agent may engage in business
with any Borrower as if it were not performing the duties specified herein, and
may accept fees and other consideration from any Borrower for services in
connection with this Agreement or otherwise without having to account for the
same to Lenders.
14.9. DELIVERY OF DOCUMENTS. To the extent Agent receives documents
and information from any Borrower pursuant to the terms of this Agreement,
Agent will promptly furnish such documents and information to Lenders.
14.10. BORROWERS' UNDERTAKING TO AGENT. Without prejudice to their
respective obligations to Lenders under the other provisions of this Agreement,
each Borrower hereby undertakes with Agent to pay to Agent from time to time on
demand all amounts from time to time due and payable by it for the account of
Agent or Lenders or any of them pursuant to this Agreement to the extent not
already paid. Any payment made pursuant to any such demand shall PRO TANTO
satisfy the relevant Borrower's obligations to make payments for the account of
Lenders or the relevant one or more of them pursuant to this Agreement.
XV. BORROWING AGENCY.
15.1. BORROWING AGENCY PROVISIONS.
-56-
<PAGE>
(a) Each Borrower hereby irrevocably designates Borrowing Agent
to be its attorney and agent and in such capacity to borrow, sign and endorse
notes, and execute and deliver all instruments, documents, writings and further
assurances now or hereafter required hereunder, on behalf of such Borrower or
Borrowers, and hereby authorizes Agent to pay over or credit all loan proceeds
hereunder in accordance with the request of Borrowing Agent.
(b) The handling of this credit facility as a co-borrowing
facility with a borrowing agent in the manner set forth in this Agreement is
solely as an accommodation to Borrowers and at their request. Neither Agent
nor any Lender shall incur liability to Borrowers as a result thereof. To
induce Agent and Lenders to do so and in consideration thereof, each Borrower
hereby indemnifies Agent and each Lender and holds Agent and each Lender
harmless from and against any and all liabilities, expenses, losses, damages
and claims of damage or injury asserted against Agent or any Lender by any
Person arising from or incurred by reason of the handling of the financing
arrangements of Borrowers as provided herein, reliance by Agent or any Lender
on any request or instruction from Borrowing Agent or any other action taken by
Agent or any Lender with respect to this Section 15.1 except due to willful
misconduct or gross (not mere) negligence by the indemnified party.
(c) All Obligations shall be joint and several, and each
Borrower shall make payment upon the maturity of the Obligations by
acceleration or otherwise, and such obligation and liability on the part of
each Borrower shall in no way be affected by any extensions, renewals and
forbearance granted to Agent or any Lender to any Borrower, failure of Agent or
any Lender to give any Borrower notice of borrowing or any other notice, any
failure of Agent or any Lender to pursue or preserve its rights against any
Borrower, the release by Agent or any Lender of any Collateral now or
thereafter acquired from any Borrower, and such agreement by each Borrower to
pay upon any notice issued pursuant thereto is unconditional and unaffected by
prior recourse by Agent or any Lender to the other Borrowers or any Collateral
for such Borrower's Obligations or the lack thereof.
15.2. WAIVER OF SUBROGATION. Until payment in full of all Obligations
and irrevocable termination of this Agreement, each Borrower expressly waives
any and all rights of subrogation, reimbursement, indemnity, exoneration,
contribution of any other claim which such Borrower may now or hereafter have
against the other Borrowers or other Person directly or contingently liable for
the Obligations hereunder, or against or with respect to the other Borrowers'
property (including, without limitation, any property which is Collateral for
the Obligations), arising from the existence or performance of this Agreement.
XIV. MISCELLANEOUS.
16.1. GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of New York applied to contracts to be
performed wholly within the State of New York. Any judicial proceeding brought
by or against any Borrower with respect to any of the Obligations, this
Agreement or any related agreement may be brought in any court of competent
jurisdiction in the State of New York, United States of America, and, by
execution and delivery of this Agreement, each Borrower accepts for itself and
in connection with its properties, generally and unconditionally, the non-
exclusive jurisdiction of the aforesaid courts, and irrevocably agrees to be
bound by any judgment rendered thereby in connection with this
-57-
<PAGE>
Agreement. Each Borrower hereby waives personal service of any and all
process upon it and consents that all such service of process may be made by
registered mail (return receipt requested) directed to Borrowing Agent at its
address set forth in Section 16.6 and service so made shall be deemed
completed five (5) days after the same shall have been so deposited in the
mails of the United States of America, or, at the Agent's and/or any Lender's
option, by service upon Borrowing Agent which each Borrower irrevocably
appoints as such Borrower's Agent for the purpose of accepting service within
the State of New York. Nothing herein shall affect the right to serve process
in any manner permitted by law or shall limit the right of Agent or any
Lender to bring proceedings against any Borrower in the courts of any other
jurisdiction. Each Borrower waives any objection to jurisdiction and venue
of any action instituted hereunder and shall not assert any defense based on
lack of jurisdiction or venue or based upon FORUM NON CONVENIENS. Any
judicial proceeding by any Borrower against Agent or any Lender involving,
directly or indirectly, any matter or claim in any way arising out of,
related to or connected with this Agreement or any related agreement, shall
be brought only in a federal or state court located in the City of New York,
State of New York.
16.2. ENTIRE UNDERSTANDING. (a) This Agreement and the documents
executed concurrently herewith contain the entire understanding between each
Borrower, Agent and each Lender and supersedes all prior agreements and
understandings, if any, relating to the subject matter hereof. Any promises,
representations, warranties or guarantees not herein contained and hereinafter
made shall have no force and effect unless in writing, signed by each
Borrower's, Agent's and each Lender's respective officers. Neither this
Agreement nor any portion or provisions hereof may be changed, modified,
amended, waived, supplemented, discharged, cancelled or terminated orally or by
any course of dealing, or in any manner other than by an agreement in writing,
signed by the party to be charged. Each Borrower acknowledges that it has been
advised by counsel in connection with the execution of this Agreement and Other
Documents and is not relying upon oral representations or statements
inconsistent with the terms and provisions of this Agreement.
(b) The Required Lenders, Agent with the consent in writing of
the Required Lenders, and Borrowers may, subject to the provisions of this
Section 16.2 (b), from time to time enter into written supplemental agreements
to this Agreement or the Other Documents executed by Borrowers, for the purpose
of adding or deleting any provisions or otherwise changing, varying or waiving
in any manner the rights of Lenders, Agent or Borrowers thereunder or the
conditions, provisions or terms thereof of waiving any Event of Default
thereunder, but only to the extent specified in such written agreements;
PROVIDED, HOWEVER, that no such supplemental agreement shall, without the
consent of all Lenders:
(i) increase the Commitment Percentage of any Lender;
(ii) increase the Maximum Revolving Advance Amount;
(iii) extend the maturity of any Revolving Credit Note or
the due date for any amount payable hereunder, or decrease the rate of interest
or reduce any fee payable by Borrowers to Lenders pursuant to this Agreement;
(iv) alter the definition of the term Required Lenders or
alter, amend or modify this Section 16.2(b);
-58-
<PAGE>
(v) release any Collateral during any calendar year having
an aggregate value in excess of $250,000; or
(vi) change the rights and duties of Agent.
Any such supplemental agreement shall apply equally to each Lender and shall be
binding upon Borrowers, Lenders and Agent and all future holders of the
Obligations. In the case of any waiver, Borrowers, Agent and Lenders shall be
restored to their former positions and rights, and any Event of Default waived
shall be deemed to be cured and not continuing, but no waiver of a specific
Event of Default shall extend to any subsequent Event of Default (whether or
not the subsequent Event of Default is the same as the Event of Default which
was waived), or impair any right consequent thereon.
16.3. SUCCESSORS AND ASSIGNS; PARTICIPATIONS; NEW LENDERS.
(a) This Agreement shall be binding upon and inure to the
benefit of Borrowers, Agent, each Lender, all future holders of the Obligations
and their respective successors and assigns, except that no Borrower may assign
or transfer any of its rights or obligations under this Agreement without the
prior written consent of Agent and each Lender.
(b) Each Borrower acknowledges that in the regular course of
commercial banking business one or more Lenders may at any time and from time
to time sell participating interests in the Advances to other financial
institutions (each such transferee or purchaser of a participating interest, a
"Transferee"). Each Transferee may exercise all rights of payment (including
without limitation rights of set-off) with respect to the portion of such
Advances held by it or other Obligations payable hereunder as fully as if such
Transferee were the direct holder thereof provided that Borrowers shall not be
required to pay to any Transferee more than the amount which it would have been
required to pay to Lender which granted an interest in its Advances or other
Obligations payable hereunder to such Transferee had such Lender retained such
interest in the Advances hereunder or other Obligations payable hereunder and
in no event shall Borrowers be required to pay any such amount arising from the
same circumstances and with respect to the same Advances or other Obligations
payable hereunder to both such Lender and such Transferee. Each Borrower
hereby grants to any Transferee a continuing security interest in any deposits,
moneys or other property actually or constructively held by such Transferee as
security for the Transferee's interest in the Advances.
(c) With the prior written consent of Borrowing Agent, which
shall not be unreasonably withheld, any Lender may sell, assign or transfer all
or any part of its rights under this Agreement and the Other Documents to one
or more additional banks or financial institutions and one or more additional
banks or financial institutions may commit to make Advances hereunder (each a
"Purchasing Lender"), in minimum amounts of not less than $5,000,000, pursuant
to a Commitment Transfer Supplement, executed by a Purchasing Lender, the
transferor Lender, and Agent and delivered to Agent for recording. Upon such
execution, delivery, acceptance and recording, from and after the transfer
effective date determined pursuant to such Commitment Transfer Supplement, (i)
Purchasing Lender thereunder shall be a party hereto and, to the extent
provided in such Commitment Transfer Supplement, have the rights and
obligations of a Lender thereunder with a Commitment Percentage as set forth
therein, and (ii) the transferor Lender
-59-
<PAGE>
thereunder shall, to the extent provided in such Commitment Transfer
Supplement, be released from its obligations under this Agreement, the
Commitment Transfer Supplement creating a novation for that purpose. Such
Commitment Transfer Supplement shall be deemed to amend this Agreement to the
extent, and only to the extent, necessary to reflect the addition of such
Purchasing Lender and the resulting adjustment of the Commitment Percentages
arising from the purchase by such Purchasing Lender of all or a portion of
the rights and obligations of such transferor Lender under this Agreement and
the Other Documents. Borrowers hereby consent to the addition of such
Purchasing Lender and the resulting adjustment of the Commitment Percentages
arising from the purchase by such Purchasing Lender of all or a portion of
the rights and obligations of such transferor Lender under this Agreement and
the Other Documents. Borrowers shall execute and deliver such further
documents and do such further acts and things in order to effectuate the
foregoing.
(d) Agent shall maintain at its address a copy of each
Commitment Transfer Supplement delivered to it and a register (the "Register")
for the recordation of the names and addresses of the Advances owing to each
Lender from time to time. The entries in the Register shall be conclusive, in
the absence of manifest error, and Borrowers, Agent and Lenders may treat each
Person whose name is recorded in the Register as the owner of the Advance
recorded therein for the purposes of this Agreement. The Register shall be
available for inspection by Borrowers or any Lender at any reasonable time and
from time to time upon reasonable prior notice. Agent shall receive a fee in
the amount of $2,500 payable by the applicable Purchasing Lender upon the
effective date of each transfer or assignment to such Purchasing Lender.
(e) Borrowers authorize each Lender to disclose to any
Transferee or Purchasing Lender and any prospective Transferee or Purchasing
Lender any and all financial information in such Lender's possession concerning
Borrowers which has been delivered to such Lender by or on behalf of Borrowers
pursuant to this Agreement or in connection with such Lender's credit
evaluation of Borrowers.
16.4. APPLICATION OF PAYMENTS. Agent shall have the continuing and
exclusive right to apply or reverse and re-apply any payment and any and all
proceeds of Collateral to any portion of the Obligations. To the extent that
any Borrower makes a payment or Agent or any Lender receives any payment or
proceeds of the Collateral for any Borrower's benefit, which are subsequently
invalidated, declared to be fraudulent or preferential, set aside or required
to be repaid to a trustee, debtor in possession, receiver, custodian or any
other party under any bankruptcy law, common law or equitable cause, then, to
such extent, the Obligations or part thereof intended to be satisfied shall be
revived and continue as if such payment or proceeds had not been received by
Agent or such Lender.
16.5. INDEMNITY. Each Borrower shall indemnify Agent, each Lender and
each of their respective officers, directors, Affiliates, employees and agents
from and against any and all liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, expenses and disbursements of any
kind or nature whatsoever (including, without limitation, fees and
disbursements of counsel) which may be imposed on, incurred by, or asserted
against Agent or any Lender in any litigation, proceeding or investigation
instituted or conducted by any governmental agency or instrumentality or any
other Person with respect to any aspect of, or any transaction contemplated by,
or referred to in, or any matter related to, this Agreement or the Other
Documents,
-60-
<PAGE>
whether or not Agent or any Lender is a party thereto, except to the extent
that any of the foregoing arises out of the willful misconduct or gross (not
mere) negligence of the party being indemnified.
16.6. NOTICE. Any notice or request hereunder may be given to any
Borrower or to Agent or any Lender at their respective addresses set forth
below or at such other address as may hereafter be specified in a notice
designated as a notice of change of address under this Section. Any notice or
request hereunder shall be given by (a) hand delivery, (b) overnight courier,
(c) registered or certified mail, return receipt requested, (d) telex or
telegram, subsequently confirmed by registered or certified mail, or (e)
telecopy to the number set out below (or such other number as may hereafter be
specified in a notice designated as a notice of change of address) with
telephone communication to a duly authorized officer of the recipient
confirming its receipt as subsequently confirmed by registered or certified
mail. Any notice or other communication required or permitted pursuant to this
Agreement shall be deemed given (a) when personally delivered to any officer of
the party to whom it is addressed, (b) on the earlier of actual receipt thereof
or three (3) days following posting thereof by certified or registered mail,
postage prepaid, or (c) upon actual receipt thereof when sent by a recognized
overnight delivery service or (d) upon actual receipt thereof when sent by
telecopier to the number set forth below with telephone communication
confirming receipt and subsequently confirmed by registered, certified or
overnight mail to the address set forth below, in each case addressed to each
party at its address set forth below or at such other address as has been
furnished in writing by a party to the other by like notice:
(A) If to Agent at: BNY Financial Corporation
1290 Avenue of the Americas
New York, New York 10104
Attention: Robert V. Love
Telephone: (212) 408-4086
Telecopier: (212) 408-4317
with a copy to: Hahn & Hessen LLP
350 Fifth Avenue
New York, New York 10118-0075
Attention: Steven J. Seif, Esq.
Telephone: (212) 736-1000
Telecopier: (212) 594-7167
(B) If to a Lender other than Agent, as specified on the signature pages
hereof
(C) If to Borrowing PDS Financial Corporation
Agent or Borrowers, 6442 City West Parkway
at: Suite 300
Minneapolis, Minnesota 55344
Attention: David R. Mylrea, Esq.
Telephone: (612) 941-9500
Telecopier: (612) 941-9320
with a copy to: Dorsey & Whitney LLP
220 South Sixth Street
Minneapolis, Minnesota 55402
-61-
<PAGE>
Attention: Paula Rindels, Esq.
Telephone: (612) 343-7983
Telecopier: (612) 340-2644
16.7. SURVIVAL. The obligations of Borrowers under Sections 3.7, 3.8,
4.19(g), 14.7 and 16.5 shall survive termination of this Agreement and the
Other Documents and payment in full of the Obligations.
16.8. SEVERABILITY. If any part of this Agreement is contrary to,
prohibited by, or deemed invalid under applicable laws or regulations, such
provision shall be inapplicable and deemed omitted to the extent so contrary,
prohibited or invalid, but the remainder hereof shall not be invalidated
thereby and shall be given effect so far as possible.
16.9. EXPENSES. All costs and expenses including, without limitation,
reasonable attorneys' fees and disbursements incurred by Agent, Agent on behalf
of Lenders and Lenders (a) in all efforts made to enforce payment of any
Obligation or effect collection of any Collateral, or (b) in connection with
the entering into, modification, amendment, administration and enforcement of
this Agreement or any consents or waivers hereunder and all related agreements,
documents and instruments, or (c) in instituting, maintaining, preserving,
enforcing and foreclosing on Agent's security interest in or Lien on any of the
Collateral, whether through judicial proceedings or otherwise, or (d) in
defending or prosecuting any actions or proceedings arising out of or relating
to Agent's or any Lender's transactions with any Borrower, or (e) in connection
with any advice given to Agent or any Lender with respect to its rights and
obligations under this Agreement and all related agreements, may be charged to
Borrowers' account and shall be part of the Obligations.
16.10. INJUNCTIVE RELIEF. Each Borrower recognizes that, in the event
any Borrower fails to perform, observe or discharge any of its obligations or
liabilities under this Agreement, any remedy at law may prove to be inadequate
relief to Lenders; therefore, each Lender, if such Lender so requests, shall be
entitled to temporary and permanent injunctive relief in any such case without
the necessity of proving that actual damages are not an adequate remedy.
16.11. CONSEQUENTIAL DAMAGES. Neither Agent, any Lender nor any agent
or attorney for any of them shall be liable to any Borrower for consequential
damages arising from any breach of contract, tort or other wrong relating to
the establishment, administration or collection of the Obligations.
16.12. CAPTIONS. The captions at various places in this Agreement are
intended for convenience only and do not constitute and shall not be
interpreted as part of this Agreement.
16.13. COUNTERPARTS; TELECOPIED SIGNATURES. This Agreement may be
executed in any number of and by different parties hereto, on separate
counterparts, all of which when so executed, shall be deemed an original, but
all such counterparts shall constitute one and the same agreement. Any
signature delivered by a party by facsimile transmission shall be deemed to be
an original signature hereto.
16.14. CONSTRUCTION. The parties acknowledge that each party and its
counsel have reviewed this Agreement and that the normal rule of construction
to the effect that any ambiguities
-62-
<PAGE>
are to be resolved against the drafting party shall not be employed in
the interpretation of this Agreement or any amendments, schedules or
exhibits thereto.
16.15. CONFIDENTIALITY. Agent, each Lender and each Transferee shall
hold all non-public information obtained by Agent, such Lender or such
Transferee pursuant to the requirements of this Agreement in accordance with
its customary procedures for handling confidential information of this nature;
PROVIDED, HOWEVER, Agent, each Lender and each Transferee may disclose such
confidential information (a) to its examiners, affiliates, outside auditors,
counsel and other professional advisors, (b) to Agent, any Lender or to any
prospective Transferees and Purchasing Lenders, and (c) as required or
requested by any Governmental Body or representative thereof or pursuant to
legal process; PROVIDED, FURTHER that (i) unless specifically prohibited by
applicable law or court order, Agent, each Lender and each Transferee shall use
its best efforts prior to disclosure thereof, to notify Borrower of the
applicable request for disclosure of such non-public information (A) by a
Governmental Body or representative thereof (other than any such request in
connection with an examination of the financial condition of a Lender or a
Transferee by such Governmental Body) or (B) pursuant to legal process and (ii)
in no event shall Agent, any Lender or any Transferee be obligated to return
any materials furnished by any Borrower other than those documents and
instruments in possession of Agent or any Lender in order to perfect its Lien
on the Collateral once the Obligations have been paid in full and this
Agreement has been irrevocably terminated.
16.16. SENIOR DEBT. Each Borrower hereby acknowledges that, for
purposes of the Subordinated Debt Documentation, the Obligations shall
constitute senior debt.
-63-
<PAGE>
Each of the parties has signed this Agreement as of the day and year
first above written.
PDS FINANCIAL CORPORATION
By:
--------------------------------
[SEAL] Its:
-------------------------------
6442 City West Parkway
Suite 300
Minneapolis, Minnesota 55344
PDS FINANCIAL CORPORATION-NEVADA
By:
--------------------------------
[SEAL] Its:
-------------------------------
-----------------------------------
Address
BNY FINANCIAL CORPORATION, as Lender
and as Agent
By:
-------------------------------
Its:
------------------------------
1290 Avenue of the Americas
New York, New York 10104
Commitment Percentage: 100%
-64-
<PAGE>
STATE OF )
) ss.
COUNTY OF )
On this _____ day of ______________, 1997, before me personally came
______________________________, to me known, who, being by me duly sworn, did
depose and say that he is the __________________ of PDS Financial Corporation,
the corporation described in and which executed the foregoing instrument and
that he is authorized to execute said instrument on behalf of said corporation.
-------------------------------
NOTARY PUBLIC
STATE OF )
) ss.
COUNTY OF )
On this _____ day of ______________, 1997, before me personally came
______________________________, to me known, who, being by me duly sworn, did
depose and say that he is the __________________ of PDS Financial
Corporation--Nevada, the corporation described in and which executed the
foregoing instrument and that he is authorized to execute said instrument
on behalf of said corporation.
-------------------------------
NOTARY PUBLIC
STATE OF )
) ss.
COUNTY OF )
On this _____ day of ______________, 199_, before me personally came
______________________________, to me known, who, being by me duly sworn, did
depose and say that he is the __________________ of BNY FINANCIAL CORPORATION,
the corporation described in and which executed the foregoing instrument and
that he is authorized to execute said instrument on behalf of said corporation.
-------------------------------
NOTARY PUBLIC
-65-
<PAGE>
PDS FINANCIAL CORPORATION
Final with Signatures
<TABLE>
<S> <C>
ARTICLE I
DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
ARTICLE II
FACILITY AND PAYMENT/PREPAYMENT TERMS . . . . . . . . . . . . . . . . . . . . . . .4
2.1 The Revolving Term Facility . . . . . . . . . . . . . . . . . . . . . . . . . .4
2.2 Voluntary Termination of Facility . . . . . . . . . . . . . . . . . . . . . . .4
2.3 Interest Rate, Computation. . . . . . . . . . . . . . . . . . . . . . . . . . .4
2.4 Servicing and Payments. . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
2.5 Prepayment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
2.5.1 Voluntary Prepayment. . . . . . . . . . . . . . . . . . . . . . . . .4
2.5.2 Mandatory Prepayment. . . . . . . . . . . . . . . . . . . . . . . . .4
2.5.2.1 Termination of Contract . . . . . . . . . . . . . . . . . .4
2.5.2.2 Casualty. . . . . . . . . . . . . . . . . . . . . . . . . .4
2.5.2.3 Contract Event of Default . . . . . . . . . . . . . . . . .5
2.5.2.4 Early Termination without End-User Buyout . . . . . . . . .5
2.5.2.5 Upgrades and Additions. . . . . . . . . . . . . . . . . . .5
2.5.3 No Other Prepayments Permitted. . . . . . . . . . . . . . . . . . . .6
2.5.4 Involuntary Prepayment. . . . . . . . . . . . . . . . . . . . . . . .6
2.6 Contract Extensions or End-User Buyout Financing. . . . . . . . . . . . . . . .6
2.7 Residual Sharing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
2.8 Late Charges; Default Rate. . . . . . . . . . . . . . . . . . . . . . . . . . .6
2.9 Payment after Borrower Event of Default . . . . . . . . . . . . . . . . . . . .6
2.10 Maximum Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
2.11 Method of Payment; Good Funds . . . . . . . . . . . . . . . . . . . . . . . . .6
ARTICLE III
NOTES; SECURITY INTEREST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
3.1 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
3.2 Grant of Security Interest. . . . . . . . . . . . . . . . . . . . . . . . . . .6
3.3 Substitution of Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . .7
ARTICLE IV
CONDITIONS OF CLOSING; ADVANCES. . . . . . . . . . . . . . . . . . . . . . . . . . .7
4.1 Conditions of Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
4.1.1 Representations and Warranties. . . . . . . . . . . . . . . . . . . .7
4.1.2 Delivery. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
4.1.3 Security Interests. . . . . . . . . . . . . . . . . . . . . . . . . .7
4.1.4 Opinion of Counsel. . . . . . . . . . . . . . . . . . . . . . . . . .7
4.1.5 Performance; No Default . . . . . . . . . . . . . . . . . . . . . . .7
4.1.6 Approval of Loan Documents and Security Interests . . . . . . . . . .7
4.1.7 Material Adverse Change . . . . . . . . . . . . . . . . . . . . . . .7
4.2 Procedures for and Conditions to Advances . . . . . . . . . . . . . . . . . . .7
4.2.1 DISCRETIONARY BORROWING/LENDING . . . . . . . . . . . . . . . . . . .7
4.2.2 Procedure for Advance(s). . . . . . . . . . . . . . . . . . . . . . .8
4.2.3 Conditions of Advances. . . . . . . . . . . . . . . . . . . . . . . .8
<PAGE>
4.2.3.1 Representations and Warranties. . . . . . . . . . . . . . .8
4.2.3.2 Delivery of Documents . . . . . . . . . . . . . . . . . . .8
4.2.3.3 Security Interests . . . . . . . . . . . . . . . . . . . .8
4.2.3.5 Additional Conditions . . . . . . . . . . . . . . . . . . .8
ARTICLE V
REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . . . . . . . .8
ARTICLE VI
AFFIRMATIVE COVENANTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
ARTICLE VII
NEGATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
ARTICLE VIII
BORROWER AND CONTRACT EVENTS OF DEFAULT -- DEFINITIONS AND REMEDIES. . . . . . . . 13
8.1 Borrower Events of Default -- Definition. . . . . . . . . . . . . . . . . . . 13
8.2 Borrower Events of Default -- Remedies. . . . . . . . . . . . . . . . . . . . 13
8.3 Contract Events of Default. . . . . . . . . . . . . . . . . . . . . . . . . . 14
8.3.1 Definition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
8.3.2 Acceleration. . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
8.3.3 Contract Event of Default -- Remedies . . . . . . . . . . . . . . . 14
8.5 Power of Attorney . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
8.6 Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
8.7 Application of Funds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
ARTICLE IX
MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
9.1 Rights, Remedies and Powers . . . . . . . . . . . . . . . . . . . . . . . . . 15
9.2 Modifications, Waivers and Consents . . . . . . . . . . . . . . . . . . . . . 15
9.3 Communications. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
9.4 Severability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
9.5 Survival. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
9.6 Attorneys' Fees and Other Expenses. . . . . . . . . . . . . . . . . . . . . . 16
9.7 Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
9.8 Binding Effect. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
9.9 Assignments; Participations . . . . . . . . . . . . . . . . . . . . . . . . . 16
9.10 Further Assurances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
9.11 GOVERNING LAW, CONSENT TO JURISDICTION AND SERVICE OF PROCESS . . . . . . . . 17
9.12 WAIVER OF JURY TRIAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
</TABLE>
<PAGE>
LOAN AND SECURITY AGREEMENT
(Full Recourse)
This Loan and Security Agreement is entered into as of June 20, 1997
between PDS FINANCIAL CORPORATION ("Borrower"), a Minnesota corporation, having
its principal place of business at 6442 City West Parkway, Suite 300, Eden
Prairie, Minnesota 55344, and HELLER FINANCIAL, INC., a Delaware corporation
("Lender").
PRELIMINARY STATEMENT:
Lender understands that Borrower is engaged in the sale or lease of various
Eligible Equipment (this and all other capitalized terms are defined in Section
1.1 below), and that Borrower may from time to time offer to Lender the
opportunity to finance leases, installment sale contracts and other chattel
paper arising out of such business. This Agreement sets forth the terms and
conditions which will be applicable to any leases, installment sale contracts
and other chattel paper that Lender may, in its sole discretion, elect to
finance under an ongoing term loan facility.
ARTICLE I
DEFINITIONS
1.1 DEFINITIONS. As used in this Agreement and in the other Loan
Documents, unless otherwise expressly indicated herein or therein, the following
terms shall have the following meanings (such definitions to be applicable both
to the singular and plural terms defined):
ACQUISITION COST: all costs and expenses incurred by an End-User (in
the case of installment/conditional sales contracts) or by Borrower (in the
case of any Leases with Borrower as lessor) in connection with the
acquisition of any Eligible Equipment, including, without limitation, sales
or use taxes, freight or installation costs, and license fees, but
excluding any deposits (including security deposits) or down/advance
payments made by End-User, or manufacturer's discounts,
ADVANCE: a loan which is part of the Facility.
AFFILIATE: any Person that directly or indirectly, through one or more
intermediaries, controls or is controlled by or is under common control
with another Person. The term "control" means possession, directly or
indirectly, of the power to direct or cause the direction of the management
and policies of a Person, whether through the ownership of voting
securities, by contract or otherwise. For the purposes hereof, any Person
which owns or controls, directly or indirectly, 51% or more of the
securities of another Person shall be deemed to "control" such Person.
AGREEMENT or LOAN AND SECURITY AGREEMENT: this Loan and Security
Agreement, as amended or supplemented at any time.
AMORTIZATION SCHEDULE: a schedule approved by Lender for the repayment
of each Advance.
APPROVED CONTRACT TERM: without the prior written approval of Lender,
a period of time not less than 24 months and not more than 48 months.
ASSIGNMENT: the assignment of Contracts, and any Lien applicable
thereto in the form of EXHIBIT A executed by Borrower in favor of Lender.
BANK: First Bank National Association.
BORROWER EVENT OF DEFAULT: any of the Events of Default described in
Section 8.1.
BORROWER LIEN: a Lien on Collateral granted by an End-User to
Borrower, which Lien has been assigned by Borrower to Lender pursuant to an
Assignment.
BORROWER'S OBLIGATIONS: (i) all liabilities, obligations and covenants
imposed upon Borrower pursuant to the terms of the Loan Documents, and (ii)
all costs of litigation, collection, reasonable attorneys' fees and other
costs expended or incurred in connection with the enforcement of Lender's
rights hereunder and with respect to the Contracts and the Facility
Equipment.
BUSINESS DAY: any day other than (i) a Saturday, (ii) Sunday or (iii)
other day on which The First National Bank of Chicago, Chicago, Illinois is
closed.
CASUALTY: an event in which any item of Facility Equipment or any
portion thereof is lost, damaged (and such damage cannot reasonably be
repaired by Borrower or an End-User of such Facility Equipment within 60
days), destroyed, stolen, confiscated, requisitioned or condemned
regardless of cause.
CASUALTY PAYMENTS: all proceeds of the Collateral which arise out of
any Casualty, including, without limitation, insurance claims, tort claims,
or reimbursement payments with respect to claims for indemnity.
CERTIFICATE OF ACCEPTANCE: a certificate of delivery and acceptance
executed by an End-User pursuant to a Contract with respect to Facility
Equipment, substantially in the form included in SCHEDULE 4.1.2.
CLOSING: the execution by Borrower and Lender of the Loan Documents.
CLOSING CERTIFICATE: a certificate in the form of EXHIBIT C executed
by a Responsible Officer on behalf of Borrower.
CLOSING DATE: the date upon or as of which the Closing occurs.
COLLATERAL: the Property described in Section 3.2.
CONTRACT: (i) a lease of Eligible Equipment by and between Borrower,
as lessor, and an End-User, as lessee, or (ii) a note and security
agreement/conditional sale contract by and between Borrower, as secured
party, and an End-User, as debtor.
CONTRACT EVENT OF DEFAULT: the Event of Default described in Section
8.3.1.
CONTRACT FUNDING REQUEST: a request for an Advance in the form of
EXHIBIT E delivered by Borrower to Lender, with all attachments as
specified therein.
CONTRACT PAYMENT LETTER: a letter in the form of EXHIBIT F.
<PAGE>
CONTRACT PROCEEDS: funds received by Borrower with respect to any
Facility Contract or any Facility Equipment which is the subject of a
Facility Contract.
DEFAULT RATE: an annual rate equal to 2% plus the Facility Rate, as
applicable.
DEFAULT RATE PERIOD: a period of time commencing on the date that
Lender declares in writing to Borrower that a Borrower Event of Default has
occurred and that the Default Rate is applicable and ending on the date
that such Borrower Event of Default is cured or waived.
DISBURSEMENT DATE: any date on or after the Closing Date upon which
the proceeds of any Advance are disbursed.
ELIGIBLE CONTRACT: a Contract (i) as to which the applicable Facility
Funding Amount will not exceed the sum of $2,000,000.00 nor be less than
$250,000.00 without the prior written approval of Lender, (ii) which
conforms to Lender's credit underwriting standards, and (iii) meets all of
the requirements set forth in Section 5.9 and all subsections thereunder,
and (iv) which is in all other respects acceptable to Lender.
ELIGIBLE END-USER: an End-User (i) which is not in bankruptcy or
receivership or subject to a reorganization proceeding of any kind or
insolvent, (ii) which is not in default or breach under any of the terms of
the applicable Contract, and (iii) which, pursuant to underwriting
standards jointly agreed upon in writing between Borrower and Lender, is a
financially responsible and creditworthy commercial or institutional entity
(other than a Governmental Body).
ELIGIBLE EQUIPMENT: gaming or other equipment (i) which is new or
used, (ii) which is in good condition, repair and working order, (iii)
which is insured in the manner provided in the applicable Contract, (iv)
(A) which is owned by Borrower free and clear of all Liens except a Lender
Lien, or (B) in which the End-User thereof has granted Borrower a security
interest free and clear of all Liens except Permitted Liens, (v) which is
located within the continental United States, (vi) which is subject to an
Eligible Contract, and (vii) which is otherwise approved by Lender.
END-USER: the end-user under a Contract.
EQUIPMENT: equipment which has been approved by Lender, free and clear
of all liens and encumbrances, together with all substitutions and
replacements for such equipment, and all accessories, attachments, parts,
upgrades, features and peripheral equipment now or hereafter attached to or
used in connection therewith.
ESTIMATED RESIDUAL: as reflected on the Amortization Schedule to each
Promissory Note, Borrower's estimated value, as of the end of the related
primary Contract term, of Facility Equipment. In no event shall the
Estimated Residual exceed sixty percent (60%) of the Orderly Liquidation
Value of the Facility Equipment at Contract termination as set forth in the
latest American Appraisal Associates report referred to in Section 6.4(v)
hereof or unless otherwise agreed to in writing by Lender.
EVENT OF DEFAULT: any Borrower Event of Default or Contract Event of
Default.
EVIDENCE OF INSURANCE: either (i) an original certificate of
insurance, (ii) documentation sufficient to establish coverage under a
previously approved policy of Borrower, or (iii) if approved in writing by
Lender, evidence of self-insurance by an End-User under a Facility
Contract.
FACILITY: the Advances to be made by Lender to Borrower pursuant to
Article II and Section 4.2.
FACILITY CONTRACT: an Eligible Contract which is subject to an
Advance, along with all applicable related documentation. For the purposes
of this Agreement, all references to a schedule under a Facility Contract
shall be deemed to incorporate the terms and conditions of the related
master Lease.
FACILITY EQUIPMENT: any Eligible Equipment which is the subject of a
Facility Contract.
FACILITY FUNDING AMOUNT: with respect to each Facility Contract which
is proposed to be made the subject of an Advance, the lesser of:
(i) One Hundred percent (100%) of the Acquisition Cost for each item
of Facility Equipment, or
(ii) the sum of:
(A) the present value of all assigned periodic payments due
thereunder for the Approved Contract Term of each such
Facility Contract, AND
(B) the present value of the Estimated Residual;
using a discount rate to determine such present values equal to
the Facility Rate .
FACILITY NOTE: a full recourse promissory note in the form of EXHIBIT
G executed by Borrower in favor of Lender in conjunction with each Advance.
FACILITY RATE: with respect to each Advance, a fixed per annum
interest rate equal to the sum of (i) 3.00%; and (ii) the weekly average
U.S. Treasury Constant Maturities for a Treasury Note having approximately
an equal term as the weighted average term of the Contracts subject to the
applicable Advance, as reported by the Federal Release for the calendar
week immediately preceding a Disbursement Date.
FEDERAL RELEASE: Federal Reserve Statistical Release No. H.15(519)
under the caption "U.S. Government Securities/Treasury Constant Maturities"
or any successor publication providing information as to the yields of
Treasury Notes.
GAAP: generally accepted accounting principles as in effect from time
to time, which shall include the official interpretations thereof by the
Financial Accounting Standards Board, consistently applied.
GAMING AUTHORITIES: the governmental agencies and/or commissions
having jurisdiction over Borrower in the various states in which Borrower
does business.
2
<PAGE>
GAMING LAWS: the statutes and regulations relating to gaming and the
operation of Gaming Device Goods promulgated by the various states and
Gaming Authorities in which Borrower does business.
GAMING DEVICE GOODS: Equipment consisting of electronic and mechanical
gaming devices with integral attachments.
GOOD FUNDS: United States dollars available to Lender in Federal funds
at or before 2:00 p.m. Chicago time on a Business Day.
GOVERNMENTAL BODY: any foreign, federal, state, municipal or other
government, or any department, commission, board, bureau, agency, public
authority or instrumentality thereof or any court or arbitrator.
INCIPIENT DEFAULT: any event or condition which, with the giving of
notice or the lapse of time, or both, would become an Event of Default.
INTANGIBLE COLLATERAL: as defined in Section 3.2(b).
LEASE: any lease agreement or master lease agreement pertaining to
Eligible Equipment between Borrower, as lessor and another Person, as
lessee.
LENDER LIEN: the Lien on the Collateral granted by Borrower to Lender
pursuant to Article III of this Agreement.
LIEN: any mortgage, deed of trust, hypothecation, pledge, security
interest, encumbrance, lien or charge of any kind (including any agreement
to give any of the foregoing), any conditional sale or other title
retention agreement or any lease in the nature of any of the foregoing.
LOAN DOCUMENTS: this Agreement, the Notes, the Assignments, the
Contract Funding Requests, the Closing Certificate, UCC financing
statements, and all other documents, instruments, and certificates executed
by Borrower pursuant to this Agreement.
LOAN REPAYMENT AMOUNT: with respect to an Advance at any time, the
aggregate unpaid principal of, and accrued interest (including any interest
accrued at the Default Rate) computed in accordance with the Simple
Interest Method, on such Advance.
LOCKBOX: the arrangement with the Bank, who will act as the agent for
collection of all remittances and proceeds due to Borrower from End-Users
subject to Facility Contracts, and which shall be identified as follows:
PDS Financial Corporation
_________________________
LOCKBOX AGREEMENT: the agreement among Borrower, Lender and Bank,
substantially in the form attached hereto as EXHIBIT D, which shall set
forth the terms, conditions and provisions of the Lockbox.
NOTES: the Facility Note executed in conjunction with each Advance.
ORDINARY PREPAYMENT PREMIUM: (i) Five Percent (5%) of the amount
prepaid if prepaid prior to the first anniversary of the related
Disbursement Date, (ii) Four Percent (4%) of the amount prepaid if prepaid
after the first anniversary to the second anniversary of the related
Disbursement Date, (iii) Three Percent (3%) of the amount prepaid if
prepaid after the second anniversary to the third anniversary of the
related Disbursement Date; and (iv) Two Percent (2%) of the amount prepaid
if prepaid after the third anniversary of the related Disbursement Date.
PDS-NEVADA GUARANTY: that certain Guaranty executed by Borrower on
behalf of Lender in connection with the PDS-Nevada Loan Agreement.
PDS-NEVADA LOAN AGREEMENT: that certain Loan and Security Agreement
dated as of June 20, 1997 by and between Lender and PDS FINANCIAL CORP. -
NEVADA.
PERMITTED LIENS: any of the following Liens: (i) the Lender Lien; (ii)
the Contracts; (iii) any Borrower Lien; (iv) any Liens expressly
subordinate to (i), (ii) and/or (iii) above; and (v) Liens for taxes or
assessments and similar charges, which either are (A) not delinquent or (B)
being contested diligently and in good faith by appropriate proceedings,
and as to which Borrower has set aside adequate reserves on its books.
PERMITTED SUBSTITUTION: the substitution by Borrower of an Eligible
Contract for a Facility Contract, in accordance with the provisions of
Section 3.3.
PERSON: any individual, sole proprietorship, partnership, joint
venture, trust, unincorporated organization, association, corporation,
institution, entity, party or Governmental Body.
PROPERTY: all types of real, personal or mixed property and all types
of tangible or intangible property.
REPLACEMENT CONTRACT: a Facility Contract which is created by the
terminating of an existing Facility Contract and financing a portion of the
Eligible Equipment on a new Facility Contract.
RESIDUALS: all proceeds (net of refurbishment costs, if any) derived
from the Equipment as a result of (i) extended or renewal Contract
payments, (ii) exercised purchase options, and/or (iii) sale or lease of
the Equipment to third parties; PROVIDED, HOWEVER, that with respect to
such extended or renewal Contract payments, or third-party lease proceeds,
such proceeds (including any estimated fair market value purchase option at
end of the renewal period as reflected in the most recent American
Appraisal Associates report referred to in Section 6.4(v) hereof) shall be
discounted to present value using a discount rate equal to the Facility
Rate in effect at the time of such re-lease.
RESPONSIBLE OFFICER: any of the Chairman, President, Treasurer,
Secretary or Vice President of Borrower.
TREASURY NOTES shall mean unsecured promissory notes issued, from time
to time, as an obligation of the United States Government by the Secretary
of the Treasury in various denominations and with stated maturity dates
from the date of issue.
UCC: the Uniform Commercial Code.
U.S. TREASURIES CONSTANT MATURITIES: as defined in the Federal
Release.
3
<PAGE>
1.2 TIME PERIODS. In this Agreement and the other Loan Documents, in the
computation of periods of time from a specified date to a later specified date
(i) the word "from" means "from and including," (ii) the words "to" and "until"
each mean "to, but excluding" and (iii) the words "through," "end of" and
"expiration" each mean "through and including." All references in this Agreement
and the other Loan Documents to "month," "quarter" or "year" shall be deemed to
refer to a calendar month, quarter or year.
1.3 ACCOUNTING TERMS. Unless otherwise specified in this Agreement, all
accounting terms used herein shall be construed, all accounting determinations
hereunder shall be made, and all financial statements required to be delivered
pursuant hereto shall be prepared in accordance with GAAP.
1.4 REFERENCES. All references in this Agreement to an "Article,"
"Section," "subsection," "subparagraph," "clause," "Schedule" or "Exhibit,"
unless otherwise indicated, shall be deemed to refer to an Article, Section,
subsection, subparagraph, clause, Schedule or Exhibit, as applicable, of or to
this Agreement.
1.5 LENDER'S DISCRETION. Whenever the terms "satisfactory to," "determined
by," "acceptable to," "shall elect," "shall request," or similar terms are used
in this Agreement or any of the other Loan Documents to apply to Lender, except
as otherwise specifically provided herein or therein, such terms shall mean
satisfactory to, at the election of, determined by, acceptable to, or requested
by, Lender, in its sole, but reasonable, discretion.
1.6 STATEMENTS AS TO KNOWLEDGE. Any statements, representations or
warranties which are based upon the best knowledge of Borrower shall be deemed
to have been made after due inquiry with respect to the matter in question.
ARTICLE II
FACILITY AND PAYMENT/PREPAYMENT TERMS
2.1 THE REVOLVING TERM FACILITY: The Facility is one or more full
recourse Advances made by Lender from time to time at its sole discretion to
fund Eligible Contracts, subject to the provisions of Article II and Section
4.2. Notwithstanding anything contained herein to the contrary, the maximum
amount outstanding under both (i) the Facility and (ii) the PDS-Nevada Loan
Agreement, at any one time shall not exceed Ten Million Dollars
($10,000,000.00).
2.2 VOLUNTARY TERMINATION OF FACILITY. Upon not less than sixty (60) days'
prior notice, either party may notify the other of its intention not to
seek/provide any further financing hereunder; PROVIDED, however, that
notwithstanding the foregoing, all of Borrower's Obligations shall survive any
expiration or termination of this Agreement and/or the termination of any
Facility Contract.
2.3 INTEREST RATE, COMPUTATION. Each Advance shall be indicated by a
Facility Note, which shall bear interest at the Facility Rate noted thereon,
which shall be computed on the basis of a year consisting of 360 days and
charged for the actual number of days during the period for which interest is
being charged.
2.4 SERVICING AND PAYMENTS. Borrower, at its sole cost and expense, shall
be responsible for the billing and collecting of the payments due under any
Contract(s). All non Automated Clearing House ("ACH") billing with respect to
Facility Contracts shall be accomplished by separate invoices (i.e., not
included in invoices to the same End-User for rentals or other payments due
under any other agreement between Borrower and End-User), and shall direct the
End-Users to forward all Facility Contract remittances (including, but not
limited to rents, renewal rents and Casualty Payments) (i) to the Lockbox, which
shall be subject to the Lockbox Agreement, and at the Bank, or (ii) through the
ACH utilizing Bank's Electronic Funds Transfer ("EFT") service. The fees and
expenses of such Lockbox and ACH/EFT service shall be payable by Borrower. If
the underlying End-Users in an Advance have a single due date, Borrower shall
pay to Lender the amounts due under the related Facility Contracts within 15
days from such due date, whether or not such amounts have been remitted by the
respective End-Users. If the underlying End-Users in an Advance have a multiple
due dates, Borrower shall pay to Lender the amounts due under the related
Facility Contracts by the 10th of the following month, whether or not such
amounts have been remitted by the respective End-Users. All payments made
pursuant to this subsection 2.4 shall be applied FIRST, to any accrued and
unpaid fees and expenses then owed by Borrower to Lender; SECOND, to accrued and
unpaid interest then due Lender calculated at the Facility Rate through the last
date of such immediately preceding month, and THIRD, to principal due Lender on
the applicable Advances until paid in full. In the event (i) Borrower fails to
perform the foregoing billing and collecting duties in a manner satisfactory to
Lender in its sole discretion, or (ii) of a Contract Event of Default which
remains uncured for more than ninety (90) days, then Lender may terminate
Borrower's authorization under this subparagraph (in the event of a Contract
Event of Default, such termination shall only relate to the specific Contract in
default).
2.5 PREPAYMENT.
2.5.1 VOLUNTARY PREPAYMENT. No voluntary prepayment by Borrower of
any Advances shall be permitted; however, after the first anniversary of
the initial Disbursement Date, Borrower shall be permitted to prepay the
entire Facility (without liability for the Ordinary Prepayment Premium) in
the event the aggregate Loan Repayment Amount for all Contracts is less
than Two Hundred Fifty Thousand Dollars ($250,000.00).
2.5.2 MANDATORY PREPAYMENT.
2.5.2.1 TERMINATION OF CONTRACT. If an End-User voluntarily
terminates a Facility Contract before its scheduled expiration by
exercising an option to purchase the Facility Equipment, Borrower
shall prepay the associated Advance within ten (10) Business Days of
such termination by paying to Lender (i) the Loan Repayment Amount
with respect to such Advance, along with (ii) the greater of (A) the
applicable Ordinary Prepayment Premium, or (B) any Residuals payable
pursuant to Section 2.7. Notwithstanding the foregoing, if Borrower
elects to exercise its right of Permitted Substitution with respect to
such terminated Facility Contract, no Ordinary Prepayment Premium
shall be payable with respect thereto.
2.5.2.2 CASUALTY. If any Equipment subject to an Advance is
lost or damaged, and cannot be repaired or
4
<PAGE>
replaced with substantially similar Equipment by the first due date
occurring not less than thirty (30) days after such loss or damage,
Borrower shall prepay the associated Advance within ten (10) Business
Days thereafter by paying to Lender the Loan Repayment Amount with
respect to such Advance AND, to the extent Borrower is able to collect
sufficient proceeds from the insurance carrier and/or the End-User,
an amount to additionally reimburse Lender for costs incident to
breaking its corresponding debt, which shall not exceed three percent
(3%) of the principal amount prepaid, and which shall be evidenced by
a certificate prepared by Lender showing, in reasonable detail, the
calculation of such costs. No Ordinary Prepayment Premium shall be
payable in respect to a mandatory prepayment made pursuant to this
subsection.
2.5.2.3 CONTRACT EVENT OF DEFAULT. If Borrower prepays an
Advance pursuant to Section 8.3.3 with respect to a Contract Event of
Default, no Ordinary Prepayment Premium shall be payable by Borrower
to Lender in connection with any such prepayment, but Borrower shall
continue to be liable to Lender for any Residuals realized pursuant to
Section 2.7.
2.5.2.4 EARLY TERMINATION WITHOUT END-USER BUYOUT. If a
Facility Contract is voluntarily terminated by a End-User prior to the
scheduled expiration, without the exercise of a purchase option,
Borrower shall prepay the associated Advance within thirty (30) days
of such event by paying to Lender the (i) Loan Repayment Amount along
with (ii) the greater of (A) the applicable Ordinary Prepayment
Premium, or (B) any Residuals payable pursuant to Section 2.7.
Notwithstanding the foregoing, if Borrower elects to exercise its
right of Permitted Substitution with respect to such terminated
Facility Contract, no Ordinary Prepayment Premium shall be payable
with respect thereto.
2.5.2.5 UPGRADES AND ADDITIONS. Borrower may agree with an
End-User under a Facility Contract that the Equipment subject to such
Contract shall be upgraded or that additional Eligible Equipment
should be added, resulting in a new Facility Contract or replacement
Facility Contract.
(a) AMENDMENT OF FACILITY CONTRACT SCHEDULE TO INCORPORATE
UPGRADES/ADDITIONS. If Borrower and such End-User amend such
Facility Contract to increase the payments payable thereunder in
consideration of such upgrade or addition, Borrower may request
that Lender finance the additional Contract Proceeds arising
under such amendment (the "Contract Amendment") attributable to
such increase in payments. Not later than ten (10) Business Days
after such request, Lender shall give Borrower written advice as
to whether Lender, in its sole discretion, has elected to finance
such additional Contract Proceeds. If Lender fails to give such
advice within such ten (10) day period, Lender shall be deemed to
have declined to finance such additional Contract Proceeds and
shall so advise Borrower in writing. If Lender agrees to finance
such additional Contract Proceeds, Lender shall, subject to
satisfaction of the conditions precedent set forth in Section
4.2, make an Advance in an amount as Lender shall determine. The
Disbursement Date with respect to such Advance shall be a date
agreed upon in writing by Lender and Borrower. If Lender agrees
to make such an Advance, the Contract Amendment shall be
considered a "Facility Contract" for all purposes of this
Agreement. If Borrower finances such upgrades or additions
through a source other than Lender and does not prepay in
accordance with this Section, Borrower covenants and agrees that
any security interest granted to a source other than Lender shall
not conflict with or prime Lender's security interest.
(b) TERMINATION OF CONTRACT SCHEDULE/EXECUTION OF A
REPLACEMENT CONTRACT. If Borrower and such End-User agree that
the Equipment subject to a Facility Contract shall be upgraded,
and agree to terminate the related Facility Contract and enter
into a Replacement Contract schedule incorporating a portion of
the existing Equipment and the upgrade/additional Equipment,
Borrower may request that Lender finance the Replacement
Contract. Not later than ten (10) Business Days after such
request, Lender shall give Borrower written advice as to whether
Lender, in its sole discretion, has elected to finance such
Replacement Contract. If Lender fails to give such advice within
such ten (10) day period, Lender shall be deemed to have declined
to finance such additional Contract Proceeds and shall so advise
Borrower in writing. If Lender agrees to finance such Replacement
Contract, Borrower shall pay to Lender the Loan Repayment Amount
with respect to the existing Facility Contract, and Lender shall,
subject to satisfaction of the conditions precedent set forth in
Section 4.2, make an Advance in an amount equal to the lesser of
(i) the present value of all payments due thereunder (with the
exception of any manufacturer's discounts, deposits (including
security deposits) or down/advance payments made by End-User) for
the Approved Contract Term of each such Facility Contract, using
a discount rate to determine such present value equal to the
Facility Rate, or (ii) the sum of (A) One Hundred percent (100%)
of the Acquisition Cost for each item of Facility Equipment that
was not previously subject to the existing Facility Contract and
(B) the Loan Repayment Amount with respect to the existing
Facility Contract. The Disbursement Date with respect to such
Advance shall be a date agreed upon in writing by Lender and
Borrower. If Lender agrees to make such an Advance, the
Replacement Contract shall be considered a "Facility Contract"
for all purposes of this Agreement.
If Lender elects not to finance a Replacement Contract
pursuant to this Section, Borrower may give Lender not less than
ten (10) Business Days prior notice of its intention to prepay
the Advance made to finance the Facility Contract. Borrower
shall, prior to the next Facility Contract due date, pay the Loan
Repayment Amount with respect thereto. No Ordinary Prepayment
Premium shall be payable in respect of an optional prepayment
made pursuant to this Section.
5
<PAGE>
2.5.3 NO OTHER PREPAYMENTS PERMITTED. No Advance may be prepaid
except as otherwise expressly provided in this Agreement.
2.5.4 INVOLUNTARY PREPAYMENT. Any prepayment of the Advances
received by Lender resulting from the exercise by Lender of any remedy
available to Lender subsequent to the occurrence of a Borrower Event of
Default and the acceleration of Borrower's Obligations shall be deemed to
be a mandatory prepayment, and the applicable Ordinary Prepayment Premium
shall be payable with respect thereto.
2.6 CONTRACT EXTENSIONS OR END-USER BUYOUT FINANCING. If, at the end of
the Approved Contract Term an End-User elects to (i) extend the Contract, or
(ii) purchase the Facility Equipment subject thereto with financing provided by
Borrower, Borrower shall offer to Lender the right of first refusal to finance
such Contract extension or such end-of-term purchase option. Not later than ten
(10) Business Days after such request, Lender shall give Borrower written advice
as to whether Lender, in its sole discretion, has elected to provide such
financing. If Lender fails to give such advice within such ten (10) day period,
Lender shall be deemed to have declined such financing and shall so advise
Borrower in writing. If Lender agrees to provide such financing, Lender and
Borrower shall mutually agree regarding the terms thereof. All Contract Proceeds
received by Borrower and forwarded to Lender hereunder shall be subject to the
Residual Sharing provisions of Section 2.7 hereof.
2.7 RESIDUAL SHARING. Lender shall be entitled to receive 100% of the
Residuals attributable to any Facility Contract until Lender shall have
recovered the balloon payment/Estimated Residual amount set forth in the
applicable Amortization Schedule (which Lender shall have full recourse to
Borrower); subsequent thereto, Lender shall be entitled to thirty five percent
(35%) of such Residuals, and Borrower shall be entitled to sixty five percent
(65%) of such Residuals.
2.8 LATE CHARGES; DEFAULT RATE. If any payment of principal or interest to
be made by Borrower to Lender under the Facility becomes past due for a period
of 10 days, Borrower shall pay to Lender on demand a late charge of five percent
(5%) of the amount of such overdue payment. In addition, during a Default Rate
Period, Borrower's Obligations pertaining to the Facility shall bear interest at
the Default Rate.
2.9 PAYMENT AFTER BORROWER EVENT OF DEFAULT. Upon the occurrence and
during the continuation of a Borrower Event of Default, all Contract Proceeds
pertaining to Facility Contracts and/or Facility Equipment shall be applied by
Lender in such manner as Lender shall determine.
2.10 MAXIMUM INTEREST. Notwithstanding any provision to the contrary herein
contained, Lender shall not collect a rate of interest on any obligation or
liability due and owing by Borrower to Lender in excess of the maximum contract
rate of interest permitted by applicable law. Lender and Borrower have agreed
that the interest laws of the State of Illinois shall govern the relationship
between them, but in the event of a final adjudication to the contrary, NUNC PRO
TUNC, Borrower shall be obligated to pay to Lender only such interest as then
shall be permitted by the applicable laws of the State found to govern the
contract relationship between Lender and Borrower. All interest found in excess
of that rate of interest allowed and collected by Lender shall be applied to the
Advances in such manner as to prevent the payment and collection of interest in
excess of the rate permitted by applicable law.
2.11 METHOD OF PAYMENT; GOOD FUNDS. All payments which are to be made by
Borrower to Lender pursuant to the Loan Documents shall be made by wire transfer
to BANK OF AMERICA, 231 South LaSalle Street, Chicago, Illinois 60697; ABA
#071000039, Heller Financial, Inc., Acct. #74-21753, Phone Advice to Product
Credit Manager -- LPG and to Product Business Manager -- LPG: 630-916-1116.
Payment shall not be deemed to be received until Lender is in receipt of Good
Funds.
ARTICLE III
NOTES; SECURITY INTEREST
3.1 NOTES. Borrower's Obligations described in clause (i) of the
definition of such term shall be evidenced by the Notes.
3.2 GRANT OF SECURITY INTEREST. As security for the payment and
performance of Borrower's Obligations, whether arising hereunder or under any
other agreement between Borrower and Lender, including, but not limited to the
PDS-Nevada Guaranty, Borrower hereby grants to Lender, subject to all mandatory
provisions of law, including without limitation, the Gaming Laws, a Lien in the
following described collateral (the "Collateral"), such Lien to be superior and
prior to all other Liens other than Permitted Liens:
(a) FACILITY EQUIPMENT. All of Borrower's right, title and interest
(including any residual interest) in and to the Facility Equipment.
(b) THE CONTRACTS. All chattel paper and Contracts pertaining to any
Facility Equipment, including, without limitation, all of Borrower's right,
title and interest in, to and under each Facility Contract relating to each
item of Facility Equipment and the right to receive all payments thereunder
(collectively, the "Intangible Collateral").
(c) LOCKBOX AND LOCKBOX AGREEMENT. The Lockbox and Lockbox Agreement.
(d) BOOKS AND RECORDS. All of the books and records of Borrower
pertaining to the Property described in subparagraphs (a) - (c) above.
(e) PROCEEDS. All attachments, additions, accessions, upgrades,
accessories and replacements pertaining to the items described in
subparagraphs (a) through (d) above, as applicable, including all cash and
non-cash proceeds (including Casualty Payments and other insurance
proceeds) pertaining thereto.
Lender shall not be required to look to the Collateral for the payment of
Borrower's Obligations, but may proceed against Borrower in such manner as
Lender deems desirable. All of the Collateral assigned to Lender hereunder shall
secure the payment and performance of all of Borrower's Obligations, and whether
now
6
<PAGE>
existing or in the future; provided, however, that upon the payment and
performance in full of all of Borrower's Obligations with respect to a
Facility Contract (or the exercise of a Permitted Substitution with respect
thereto), the Loan Documents applicable to such Facility Contract and such
Facility Equipment shall automatically terminate, Lender shall execute and
deliver to Borrower such UCC termination statements and other instruments as
may be necessary to release the applicable Lender Lien(s) in the related
Collateral, and shall return all items of chattel paper to Borrower with
respect thereto.
3.3 SUBSTITUTION OF CONTRACTS. Within One Hundred Twenty (120) days after
a Contract Event of Default occurs, or immediately in the event of a prepayment
by an End-User with respect to a Facility Contract, or with the prior, written
agreement of Lender, in addition to any other remedy available hereunder to
Borrower with respect thereto, Borrower may substitute another Eligible Contract
for an existing Facility Contract ("Existing Facility Contract"), provided (i)
that the present value (determined using a discount rate which is equal to the
Facility Rate which is applicable to the Existing Facility Contract) of the
payments remaining under such Substitute Contract, is equal to or greater than
the present value (calculated as described above) of the remaining payments of
such Existing Facility Contract, including any payments which are past due under
such Existing Facility Contract; and (ii) that the number of payments remaining
under such Substitute Contract equals or exceeds the number of payments
remaining under the Existing Facility Contract. If such substitution occurs as a
result of a Contract Event of Default, such substitution shall be deemed to cure
such Contract Event of Default. As a precondition to any Permitted Substitution,
Lender shall have the right to verify the existence and terms of such Substitute
Contract with the applicable End-User.
ARTICLE IV
CONDITIONS OF CLOSING; ADVANCES
4.1 CONDITIONS OF CLOSING. The Closing shall not take place unless all of
the conditions set forth in this Section 4.1 have been satisfied in a manner,
form and substance satisfactory to Lender:
4.1.1 REPRESENTATIONS AND WARRANTIES. On the Closing Date, the
representations and warranties of Borrower set forth in the Loan Documents
shall be true and correct in all material respects.
4.1.2 DELIVERY. The following shall have been delivered to Lender,
each duly authorized and executed:
(a) the Agreement, with all Exhibits and Schedules; and the
Closing Certificate;
(b) a certificate of the Secretary or an Assistant Secretary of
Borrower in the form of EXHIBIT H, with all attachments noted therein;
(c) a certified copy of the forms of Contract used by Borrower,
to be attached to the Agreement as SCHEDULE 4.1.2;
(d) the Lockbox Agreement;
(e) a structuring fee equal to One Hundred Thousand Dollars
($100,000.00) in Good Funds; and
(f) such additional instruments, documents, certificates,
consents, financing statements, waivers and opinions as Lender
reasonably may request, including, but not limited to, a Trust
Agreement substantially in the form of EXHIBIT N hereto, in the event
that Borrower will be retaining possession of any original master
leases comprising Facility Contracts.
4.1.3 SECURITY INTERESTS. All UCC financing statements, including
UCC-1(s) naming Borrower as debtor and Lender as secured party to be filed
where applicable, using the collateral description substantially in the
form attached hereto as EXHIBIT B, shall have been filed and confirmation
thereof received by Lender.
4.1.4 OPINION OF COUNSEL. Lender shall have received from DORSEY &
WHITNEY, LLP, counsel to Borrower, an opinion dated the Closing Date,
addressed to Lender in the form of EXHIBIT I, as well as similar opinions
from outside counsel to Borrower in every state in which Borrower
originates Eligible Contracts subject to Advances hereunder.
4.1.5 PERFORMANCE; NO DEFAULT. Borrower shall have performed and
complied with all agreements and conditions contained in the Loan Documents
to be performed by or complied with prior to or at the Closing Date.
4.1.6 APPROVAL OF LOAN DOCUMENTS AND SECURITY INTERESTS. The
approval and/or consent shall have been obtained from all Governmental
Bodies and all other Persons whose approval or consent is necessary or
required to enable Borrower to (i) enter into and perform its obligations
under the Loan Documents, (ii) grant to Lender the Lender Lien and (iii)
consummate the Advances.
4.1.7 MATERIAL ADVERSE CHANGE. Since the issuance of Borrower's
most recent fiscal year-end financial statements, no event shall have
occurred which has a material adverse effect on (i) the financial
condition, Property, business, operations, ownership, structure, prospects
or profits of Borrower, (ii) the ability of Borrower to perform its
obligations under the Loan Documents, or (iii) the Collateral.
4.2 PROCEDURES FOR AND CONDITIONS TO ADVANCES
4.2.1 DISCRETIONARY BORROWING/LENDING. NOTWITHSTANDING THE OTHER
PROVISIONS OF THIS AGREEMENT, ADVANCES SHALL BE MADE ONLY WHEN BOTH (I)
BORROWER, IN ITS SOLE DISCRETION, DESIRES TO BORROW MONEY FROM LENDER, AND
(II) LENDER, IN ITS SOLE DISCRETION, DESIRES TO LOAN MONEY TO BORROWER; IT
BEING AGREED THAT THIS AGREEMENT SHALL NOT BE CONSTRUED AS IMPOSING ANY
DUTY ON BORROWER TO BORROW FROM LENDER, NOR ANY DUTY ON LENDER TO LOAN TO
BORROWER. IN CONSTRUING THE PURPOSE AND INTENT OF THIS AGREEMENT, THIS
SECTION 4.2.1
7
<PAGE>
SHALL TAKE PRECEDENCE OVER ALL OTHER PROVISIONS.
4.2.2 PROCEDURE FOR ADVANCE(S). Subject to the satisfaction of the
terms and conditions set forth in this Section 4.2, on or after the Closing
Date Borrower may request Lender to disburse the proceeds of any Advance as
set forth by Borrower in the related Contract Funding Request. The Contract
Funding Request shall specify: (A) the date such Advance is to be made,
which shall be a Business Day not less than 5 Business Days after the
delivery to Lender of such Contract Funding Request, and (B) the amount of
Advance, which shall not exceed the applicable Facility Funding Amount, and
without the written consent of Lender, be not less than $500,000.00. Lender
shall not be obligated to consider making any Advance (i) if an Incipient
Default or Event of Default exists or will occur if the requested Advance
is made, (ii) any more frequently than twice each month under the Facility,
or (iii) with respect to any Contract which Lender determines is not an
Eligible Contract or for an End-User which Lender determines is not an
Eligible End-User.
4.2.3 CONDITIONS OF ADVANCES. Lender shall not be obligated to
consider making any Advance(s) on or after the Closing Date unless all of
the conditions set forth in this Section 4.2 have been satisfied in a
manner, form and substance satisfactory to Lender, including the following:
4.2.3.1 REPRESENTATIONS AND WARRANTIES. On the date of such
Advance, the representations and warranties of Borrower set forth in
the Loan Documents shall be true and correct in all material respects.
Lender shall have the right, as a precondition to any Advance made
more than one year after June 20, 1997, to require updated evidence of
Borrower's and Borrower's officers' authority to execute Advance
documentation.
4.2.3.2 DELIVERY OF DOCUMENTS. In addition to the documents
previously delivered to Lender pursuant to Section 4.1, the following
shall have been delivered to Lender, each duly authorized and
executed:
(a) the Contract Funding Requests for the Advances to be
made, with all attachments noted therein;
(b) such additional instruments, documents, certificates,
consents, financing statements, waivers and opinions as Lender
reasonably may request, including any opinions of outside counsel
required under Section 4.1.4 not previously received by Lender.
4.2.3.3 SECURITY INTERESTS. All UCC financing statements,
including, but not limited to:
(a) in the case of Facility Contracts under which Borrower
is deemed by Lender to be the owner of the Equipment, UCC-1(s)
naming Borrower as debtor, and Lender as secured party, to be
filed where the Equipment is located and at Borrower's principal
place of business,
(b) UCC-1(s) naming End-User as debtor or lessee, and
Borrower as secured party or lessor, to be filed in the state(s)
where the Equipment is located,
(c) In the event that Lender has not been named as assignee
on the UCC-1(s) referred to in subsection 4.2.3.3(b), UCC-3(s),
as required, naming Lender as assignee to be filed in the
jurisdiction(s) where the UCC-1(s) referred to in subsection
4.2.3.3(b) are filed, and
(d) all other filings and actions necessary to perfect and
maintain the Lender Lien as a valid and perfected Lien in the
Collateral,
shall have been filed and confirmation thereof received by
Lender.
4.2.3.4 CONFIRMATION WITH END-USERS AND VENDORS. Lender or its
agents, at Lender's discretion, shall have verified with all End-Users
the existence and terms of the related Facility Contract, the delivery
of the Facility Equipment, and shall have verified that the vendors
and/or Facility Equipment suppliers have been paid.
4.2.3.5 ADDITIONAL CONDITIONS. Borrower shall have re-satisfied
the conditions set forth in Sections 4.1.5 (PERFORMANCE; NO DEFAULT),
4.1.6 (APPROVAL OF LOAN DOCUMENTS AND SECURITY INTERESTS), and 4.1.7
(MATERIAL ADVERSE CHANGE) with respect to the requested Advance(s).
ARTICLE V
REPRESENTATIONS AND WARRANTIES
Borrower hereby represents and warrants to Lender as follows:
5.1 ORGANIZATION, POWER, AUTHORITY, ETC. Borrower (i) is duly organized,
validly existing and in good standing under the laws of the State of Minnesota,
(ii) is qualified to do business in every jurisdiction in which the character of
the Property owned or leased by it or the business conducted by it makes such
qualification necessary and the failure to so qualify would permanently preclude
Borrower from enforcing its rights with respect to any Facility Contract or
Facility Equipment or would expose Borrower to any material loss or liability,
(iii) has the power and authority to carry on its business, (iv) has the power
and authority to execute and perform this Agreement and the other Loan
Documents, and (v) has duly authorized the execution, delivery and performance
of this Agreement and the other Loan Documents.
5.2 VALIDITY, ETC., OF LOAN DOCUMENTS. This Agreement and the other Loan
Documents constitute the legal, valid and binding obligations of Borrower and
are enforceable against Borrower in accordance with their respective terms,
except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting the enforcement
of creditors' rights generally and by equitable principles (whether or not any
action to enforce such document is brought at law or in equity). The execution,
delivery and performance of the Loan Documents by Borrower (i) has not violated
and will not violate any provision of law, any order of any Governmental Body,
or the Certificate of Incorporation or Bylaws
8
<PAGE>
of Borrower (or the equivalent of the foregoing if Borrower is not a
corporation), or any indenture, agreement or other instrument to which
Borrower is a party, (ii) is not in conflict with, will not result in a
breach of or, with the giving of notice, or the passage of time, or both,
will not constitute a default under any such indenture, agreement or other
instrument, and (iii) will not result in the creation or imposition of any
Lien of any nature whatsoever upon any of the Property of Borrower, except
for Permitted Liens.
5.3 OTHER AGREEMENTS. Borrower is not a party to any agreement or
instrument materially adversely affecting its present or proposed business,
properties, or assets, and Borrower is not in default in the performance,
observance or fulfillment of any material obligation, covenant or condition set
forth in any agreement or instrument to which it is a party, which default would
have a material adverse effect on the ability of Borrower to consummate any of
the transactions contemplated by the Loan Documents or to perform any of its
obligations under any of the Loan Documents.
5.4 PRINCIPAL PLACE OF BUSINESS. The principal place of business of
Borrower and its chief executive office are at 6442 City West Parkway, Suite
300, Eden Prairie, Minnesota 55344. Borrower has not done business under any
name other than PDS FINANCIAL CORPORATION or PROGRESSIVE DISTRIBUTION SYSTEMS,
INC. D/B/A PDS LEASING SERVICES.
5.5 PRIORITY. The Lender Lien is subject to no prior Liens other than
Permitted Liens, and all Borrower Liens have been or will be assigned to Lender
pursuant to an Assignment.
5.6 FINANCIAL STATEMENTS. Borrower has delivered to Lender the financial
statements described on SCHEDULE 5.6. Such financial statements present fairly
the financial condition and results of operations of Borrower as of the dates
and for the periods indicated therein. All of the foregoing financial
statements, except as otherwise indicated therein, have been prepared in
accordance with GAAP.
5.7 LITIGATION. Except as set forth in SCHEDULE 5.7, there are no actions,
suits, arbitrations, proceedings or claims (whether or not purportedly on behalf
of Borrower) pending or to the best knowledge of Borrower, threatened, against
Borrower or maintained by Borrower, at law or in equity or before any
Governmental Body which, if adversely determined, would have a material adverse
effect on the ability of Borrower to consummate any of the transactions
contemplated by the Loan Documents or perform any of its obligations under any
of the Loan Documents.
5.8 NECESSARY PROPERTY. Borrower has all necessary rights in its Property
(including all patents or trademarks) which are necessary to conduct the
business of Borrower as now conducted.
5.9 VALIDITY AND ENFORCEABILITY OF CONTRACTS. At the time a Contract is
assigned to Lender (and thereupon becomes a Facility Contract) and, unless
expressly limited to that point in time, at all future times with respect to
each of the Facility Contracts, all rights assigned as part of the Facility
Contracts, including without limitation all Facility Equipment covered thereby:
(i) Any modifications of a Contract from the form approved by Lender,
as attached to this Agreement as part of SCHEDULE 4.1.2, are identified in
the Contract by amendment or conspicuous markings, letterings or title
heading (e.g. "Additional Provisions"), and the existence of such
modifications are noted by Borrower in the related Contract Funding
Request; all Contracts have been originated by Borrower as either lessor or
secured party; all Contracts arise from a bona fide non-cancelable contract
for Eligible Equipment with an Eligible End-User for an Approved Contract
Term; and all Equipment described in the Contracts is in all respects in
accord with the requirements of the Contracts and has been delivered to and
unqualifiedly accepted by the End-User thereunder; unless specifically
agreed to by Lender in writing, none of the Equipment, after delivery and
acceptance by the End-User, is a fixture under the applicable laws of any
state where such Equipment is or may be located nor is located outside the
United States;
(ii) All Contracts and related Equipment comply with all applicable
laws and regulations, including, without limitation, interest/usury,
truth-in-lending and disclosure laws; all Contracts are genuine, valid,
binding and enforceable in accordance with their terms, accurately describe
the related Equipment and the Payments due under the Contracts, and are in
all respects what they purport to be; all Contracts, the related Equipment
and all proceeds thereof are not subject to any lien, claim or security
interest except the interest of the End-User, which shall be assigned to
Lender contemporaneously herewith, and Permitted Liens; and all Contracts,
and related rights, agreements, documents and instruments are assignable to
Lender without consent of any person, including without limitation, any
End-User or any Governmental Body or agency and no such assignment will
delegate, create or impose any duty, obligation or liability on Lender;
(iii) At the time of Borrower's assignment of the Contracts, and
subject to compliance with all mandatory provisions of law, including
without limitation, the Gaming Laws, Borrower has (A) good title to all of
the Contracts, including the right to receive the payments due thereunder,
(B) either good title to or a first, prior and perfected lien in all
related Equipment; (B) all legal power, right and authority to sell the
Contracts and grant the security interest described herein to Lender; (C)
not sold, transferred, encumbered, assigned or pledged any part of the
Contracts or related Equipment to any other Person; and (D) paid in full
all vendors of the Equipment subject to the Contracts, or will agree to
have Lender pay such vendors with the proceeds of the applicable Advance;
(iv) All counterparts of all Contracts have been clearly marked to
indicate that only one thereof is the "Original" and assignable, and such
counterpart shall be the counterpart delivered to Lender at the time of
Borrower's assignment of the Contract;
(v) Except for any master leases, Borrower has provided Lender with
an original of all material agreements entered into in connection with the
Contracts, and the Equipment related to such Contracts; the Contract
constitutes the entire agreement and there are no oral representations,
warranties or agreements
9
<PAGE>
related thereto; the Contracts employ substantially standard pricing and
documentation (including, without limitation, provisions concerning
payment terms, assignment, maintenance, termination, renewal, insurance
and stipulated loss provisions) which have been approved by Lender; the
Contracts contain no purchase option to the End-User which has not been
disclosed in writing to Lender;
(vi) Each party to each Contract has all the legal capacity, power and
right required for it to enter into such Contract and any supplemental
agreements, and to perform its obligations thereunder; all such actions
have received all corporate or governmental authorization required by any
applicable charter, by-law constitution, law, rule or regulation;
(vii) None of the following existed at the time of Borrower's
assignment to Lender of the Contracts: (i) any payment owing with respect
to any Contract is past due more than ten (10) days, (ii) any End-User is
otherwise in default under a Contract, or (iii) any End-User has canceled
or terminated or given notice of or attempted to cancel or terminate any
Contract;
(viii) There exist no setoffs, abatements, recoupments, claims,
counterclaims or defenses on the part of any End-User under the Contracts
to any claims against or obligations of any End-User thereunder, nor do the
Contracts by their terms give rise to any such right of setoff, abatement,
recoupment, claims, counterclaims or defenses against Borrower or assignee
of Borrower;
(ix) Borrower has not done anything that might impair the value of the
Contracts or any Equipment covered by the Contracts;
(x) All sales, gross receipts, property or other taxes, assessments,
fines, fees and other liabilities relating to the Contracts, the related
Equipment, or the proceeds thereof have been paid when due and all filings
in respect of any such taxes, assessments, fines, fees and other
liabilities have been timely made;
(xi) Borrower is not in default which has continued beyond any
applicable grace periods or cure rights of any of its obligations under the
Contracts, including without limitation, any obligation to repair, maintain
or replace any Equipment or to provide service as provided in the
Contracts;
(xii) The Contracts have not been altered, modified, changed or
amended except as such alterations, modifications, changes or amendments
are set forth in writing and provided to Lender prior to Borrower's
assignment of the Contracts; nor will Borrower agree to any alterations,
modifications, changes or amendments after Borrower's assignment without
Lender's prior written consent;
(xiii) At the time of Borrower's assignment of the Contracts, no
amounts have been prepaid on the Contracts except advance payments which
are required by the express written terms of the Contracts;
(xiv) Borrower has not withheld any information or material facts
in connection with any Contracts or Equipment which would make any
information furnished to Lender misleading and Borrower has no knowledge of
any Contract Event of Default or of any fact which may impair the validity,
value or enforceability of any Contract or Equipment;
(xv) To the best of Borrower's knowledge, any credit information
provided to Lender by Borrower with respect to any End-User is true and
correct in all material respects;
(xvi) All Equipment covered by the Contract (A) is in good
condition and repair and suitable for the purposes for which it is
intended; (B) is covered by comprehensive physical damage insurance for the
full insurable value thereof, unless otherwise mutually agreed to by
Borrower and Lender, and, if applicable, general public liability coverage.
Borrower, "its assigns and/or collateral assigns" have been named as "Loss
Payee" and, if applicable, as "Additional Insured" on any policies procured
by the End-User. Said insurance is in full force and effect, and has not
lapsed or been cancelled by the End-User or the respective insurers;
(xvii) The Contract will not be canceled or terminated or attempted
to be canceled or terminated prior to the full term indicated for such
Contract;
(xviii) Borrower has not breached any representation, warranty or
guarantee under the Contract or any agreement, document or instrument
related thereto;
(xix) Upon recording financing statements with respect to the
Contracts and the related Equipment, and Lender's possession of the
original chattel paper with respect thereto, Lender's security interest
therein shall be perfected and shall have priority over all other liens,
claims, rights of other persons and security interests with respect
thereto; and
(xx) Borrower has not filed any UCC-1 or other document in the public
records against any End-User or End-User Guarantor concerning any proposed
Facility Contract or Equipment EXCEPT those which have been disclosed and
either assigned or subordinated to Lender's interest in the Facility
Contracts and the related Equipment and Proceeds, and there are no other
UCC-1's or other public record filings concerning any part of any Facility
Contracts or Equipment whether executed by or in favor of Borrower.
ARTICLE VI
AFFIRMATIVE COVENANTS
Borrower covenants and agrees with Lender as follows:
6.1 PAYMENT OF BORROWER'S OBLIGATIONS. Borrower shall pay and perform all
of Borrower's Obligations as and when the same become due, payable and/or
performable, as applicable.
6.2 PRESERVATION OF EXISTENCE. Borrower shall maintain its existence and
rights in full force and effect to the extent necessary to perform its
obligations under the Loan Documents.
10
<PAGE>
6.3 LEGAL REQUIREMENTS. Borrower (i) promptly and faithfully shall comply
with, conform to and obey all applicable present and future laws, ordinances,
rules, regulations and other requirements that could materially adversely affect
the conduct of its operations, including, but not limited to, maintain its
gaming licenses in the States where it is currently operating its business, and
(ii) shall use or cause the portion of the Collateral consisting of Facility
Equipment to be used in a manner and for the use contemplated by the
manufacturer thereof, and in material compliance with all laws, rules and
regulations of every Governmental Body having jurisdiction over such Facility
Equipment.
6.4 FINANCIAL STATEMENTS AND OTHER REPORTS. Borrower shall maintain full
and complete books of account and other records reflecting the results of
Borrower's operations, all in accordance with GAAP, and shall furnish or cause
to be furnished to Lender within:
(i) 120 days after the end of each year, the consolidated
audited financial statements for such year for Borrower certified (without
qualification as to the opinion or scope of examination) by a firm of
independent certified public accountants selected by Borrower and
satisfactory to Lender;
(ii) 45 days after the end of each quarter, consolidated
quarterly financial statements of Borrower;
(iii) 30 days after the end of each quarter, (I) the completed
Lockbox Compliance Certificate for the preceding quarter, in the form
attached hereto as EXHIBIT J, and (II) computer diskettes/tapes containing
all backup data regarding Facility Contracts and Facility Equipment, in
format set forth in EXHIBIT K;
(iv) 30 days after the end of each month: (I) a delinquency report in
the form attached hereto as EXHIBIT L, (II) a true and correct copy of the
Bank, Lockbox and ACH statements for the preceding month, (III) if
applicable, a report setting forth any change in the identity or location
of Facility Equipment from that previously disclosed to Lender; (IV) a
report setting forth leasing, remarketing activities and insurance
settlements with respect to Facility Equipment, and (V) a report
identifying the Facility Contracts which terminated during the previous
thirty (30) days;
(v) every 18 months, at Borrower's expense, a new report from
American Appraisal Associates or another appraisal firm acceptable to
Lender, setting forth current Fair Market and Orderly Liquidation Values of
the principal types of Eligible Equipment subject to this Agreement, which
Lender may utilize in its sole, but reasonable, discretion in determining
an acceptable Estimated Residual therefor;
(vi) 10 days after receipt thereof by Borrower, copies of all
financial statements from any End-User(s) who comprise greater than ten
percent (10%) of the aggregate Loan Repayment Amount on all Facility
Contracts;
(vii) promptly at Lender's request, such additional information,
documents, downloads and reports as Lender shall advise Borrower from time
to time.
All of the items described in clauses (ii), (iii), (iv) and (vii)of this
Section 6.4 shall be certified by a Responsible Officer.
6.5 REMOVAL OF FACILITY EQUIPMENT. Promptly after a Responsible Officer
learns that any Facility Equipment has been moved by a End-User from one
location to another, Borrower will inform Lender or will cause such End-User to
inform Lender of such move and will execute such additional financing statements
as Lender reasonably may request.
6.6 DAMAGE TO EQUIPMENT. Promptly after a Responsible Officer learns that
any Facility Equipment is damaged, and if such Facility Equipment can be
repaired in accordance with the terms of the applicable Facility Contract so as
to restore the same to good and working order, Borrower shall cause such repairs
to be made in accordance with the terms of such Facility Contract.
6.7 BOOKS AND RECORDS; INSPECTIONS.
6.7.1 BOOKS AND RECORDS. Borrower shall keep and maintain, or
cause to be kept and maintained, complete and accurate books and records
and make all necessary entries therein to reflect the transactions
contemplated hereby and all payments, credits, adjustments and calculations
relative thereto.
6.7.2 INSPECTIONS/AUDITS. Upon reasonable prior notice, Lender
shall have full and complete access to the books and records of Borrower
pertaining to the Collateral. In addition, from time to time, but not more
often than twice each year (and upon the occurrence and during the
continuation of a Borrower Event of Default as often as Lender in its sole
discretion deems necessary in order to monitor the business activities of
Borrower), representatives of Lender shall have the right to conduct an
audit of the books and records of Borrower. Borrower shall pay to Lender on
demand the actual, reasonable, out-of-pocket travel expenses incurred by
Lender for any employee of Lender who may conduct or assist in conducting
any such audit.
6.8 MAINTENANCE. Borrower, pursuant to the applicable Facility Contract,
shall cause all Facility Equipment to be maintained and serviced so as to keep
such Facility Equipment in good operating condition, ordinary wear and tear from
normal use excepted.
6.9 NOTICE OF DEFAULTS; CHANGE IN BUSINESS AND ADVERSE EVENTS. Borrower,
immediately after any Responsible Officer becomes aware thereof, shall give
Lender written notice of the occurrence of (i) any Event of Default or any
Incipient Default, accompanied by a statement of such Responsible Officer
setting forth what action Borrower proposes to take in respect thereof, (ii) any
change in the (A) executive officers or key employees of Borrower, or (B)
location of the chief place of business of Borrower or any sale or purchase
outside the regular course of business of Borrower, (iii) any event which may
have a material adverse effect on the (A) enforceability of the Lender Lien or
(B) ability of Borrower to perform any of its obligations under any of the Loan
11
<PAGE>
Documents, (iv) any material default in payment or performance by Borrower or
any End-User under any Facility Contract or (v) any material damage to or
irreparable malfunction of any Facility Equipment.
6.10 INSURANCE/MAINTENANCE. All Facility Equipment shall be covered by
comprehensive physical damage insurance for the full insurable value thereof,
unless otherwise mutually agreed to by Borrower and Lender, and general public
liability coverage, and Borrower "and/or its assigns, including collateral
assigns," shall be named and continue to be named as "Loss Payee" and
"Additional Insured" as its interests may appear. Said insurance shall continue
to be in full force and effect, and shall not lapse or be cancelled by the
End-Users. Borrower, pursuant to the applicable Facility Contract, will cause
the End-User under each Facility Contract to maintain all Facility Equipment in
accordance with the terms of all insurance policies which are or may be in
effect with respect thereto so as not to alter or impair any of the benefits or
coverage to which Borrower or the applicable End-User is entitled under any such
insurance policies.
6.11 TAXES. Borrower shall pay or, pursuant to each Contract, shall cause
the End-User thereunder to pay promptly when due all taxes, levies, assessments
and governmental charges upon or relating to Facility Equipment for which
Borrower or the applicable End-User is or may be liable.
6.12 CONTRACTS. With respect to each of the Contracts, Borrower shall: (i)
perform all acts necessary to preserve the validity and enforceability of each
such Contract; (ii) take all actions reasonably necessary to assist Lender in
collecting when due all amounts owing to Borrower with respect to each such
Contract; (iii) at all times keep accurate and complete records of performance
by Borrower and the End-User under each such Contract; and (iv) upon request of
Lender verify with the End-User under each Facility Contract the payments due to
Borrower under such Facility Contract, except that (A) prior to the occurrence
of a Borrower Event of Default or Incipient Default, such requests shall not
occur any more frequently than once each year and (B) after the occurrence and
during the continuation of an Incipient Default or a Borrower Event of Default,
such requests may occur as often as Lender shall require.
ARTICLE VII
NEGATIVE COVENANTS
Until Borrower's Obligations are paid and performed in full, Borrower shall
not:
7.1 LIENS. Create or incur or suffer to exist any Lien on the Collateral
other than Permitted Liens.
7.2 BORROWING. Create, incur, assume or suffer to exist any indebtedness
which is secured by Liens on the Collateral other than the Advances or Permitted
Liens.
7.3 MODIFICATIONS OF FACILITY CONTRACTS. Without the prior, written
consent of Lender: amend, supplement, modify, compromise or waive any of the
terms of any Facility Contract (i) if the effect of such amendment, supplement,
modification, compromise or waiver is to (A) reduce or waive the amount of any
payment thereunder, (B) extend the term thereof (except as otherwise permitted
pursuant to Section 7.4), or (C) waive any provisions thereof with respect to
taxes, insurance or maintenance or (ii) unless such amendment, supplement,
modification, compromise or waiver is with respect to (A) the removal of any
Facility Equipment and, in connection with such removal, Borrower complies with
the provisions of Section 6.5, or (B) a Permitted Substitution and if, in
connection with such Permitted Substitution any prepayment of any portion of the
Facility shall occur, Borrower shall comply with the terms of subsection 2.5.
7.4 EXTENSIONS OF FACILITY CONTRACTS; FUTURE CONTRACTS OF FACILITY
EQUIPMENT. Without the prior written consent of Lender: (I) Extend the term of
any Facility Contract unless as of the end of the Approved Contract Term of such
Facility Contract, such Contract no longer will be a Facility Contract as a
result of any such extension or (II) re-lease any Facility Equipment unless such
re-lease is for the purpose of mitigating damages arising from a Contract Event
of Default.
7.5 MAINTENANCE OF PERFECTED LENDER LIEN. Change the location of its chief
executive office or principal place of business, except if Borrower has (I)
given Lender at least 30 days prior written notice thereof and (II) caused to be
filed all UCC financing statements which in the opinion of Lender are necessary
or advisable to maintain the perfection of the applicable Lender Lien.
7.6 MERGER AND ACQUISITION. Without the prior, written consent of Lender,
which consent will not be unreasonably withheld or delayed, consolidate with or
merge into any Person, or acquire all or substantially all of the stock or
Property of any Person.
7.7 SALE OR TRANSFER OF ASSETS. Sell, lease, assign, exchange, transfer or
otherwise dispose of any Property except (i) dispositions of Property (other
than Equipment), which is not necessary to the continued operation of the
business of Borrower, (ii) disposition of the real estate now owned or hereafter
acquired by Borrower, provided no Incipient Default or Event of Default is in
existence or will occur as a result of the consummation of any such sale, (iii)
the leasing of real property, (iv) dispositions of Property in the ordinary
course of Borrower's business, or (v) disposition of any obsolete or unusable
Property, provided that if such Property is necessary to the continued operation
of the business of Borrower, such Property promptly is replaced with Property of
like function and value to such Property when the same was not obsolete or
unusable, as applicable.
7.8 DELINQUENCY COVENANT. Allow Facility Contract Total Delinquency to be
greater than twelve percent (12%) of the Aggregate Portfolio Outstandings. All
terms in this subsection not otherwise defined shall have the meanings set forth
in EXHIBIT L (Form of Monthly Delinquency Report).
7.9 TRANSACTIONS WITH AFFILIATES. Except for (i) transactions in the
normal course of business, which transactions comply with the provisions of
clauses (y) and (z) of this Section 7.9, and (ii) purchases of Equipment from
PDS FINANCIAL CORPORATION - NEVADA, which purchases shall comply with the
provisions of clauses (y) and (z) of this Section 7.9, Borrower shall not sell,
lease, assign, transfer or otherwise dispose of any Property to any Affiliate
12
<PAGE>
or lease Property, render or receive services or purchase assets from any
Affiliate, except with the prior written consent of Lender, which consent shall
not unreasonably be withheld or delayed, and except that Borrower may enter into
any such transaction with any such Affiliate in the ordinary course of business
if (y) the monetary or business consideration arising therefrom would be
substantially as advantageous to Borrower as the monetary or business
consideration which would be obtained by Borrower in a comparable arm's-length
transaction with a Person which is not an Affiliate and (z) no other provision
of this Agreement would be violated as a result thereof.
ARTICLE VIII
BORROWER AND CONTRACT EVENTS OF DEFAULT -- DEFINITIONS AND REMEDIES
8.1 BORROWER EVENTS OF DEFAULT -- DEFINITION. The occurrence of any of the
following shall constitute a Borrower Event of Default hereunder:
(a) DEFAULT IN PAYMENT. If Borrower shall fail to remit to Lender
when due any payment that Borrower is required to make hereunder or under
any other agreement between Borrower and Lender, including, but not limited
to the PDS-Nevada Guaranty, when and as the same shall become due and
payable, and such failure shall continue for a period of 10 days after such
payment becomes due.
(b) BREACH OF REPRESENTATION OR WARRANTY. If any representation made
by Borrower to Lender in any Loan Document or in any report, certificate,
opinion, financial statement (other than those financial statements
provided by and pertaining to any End-User) or other document or statement
furnished pursuant thereto, or under any other agreement between Borrower
and Lender, including, but not limited to the PDS-Nevada Guaranty, shall be
false or misleading in any material respect when made, or any warranty
given by Borrower shall be breached by Borrower, unless (i) the fact,
circumstance or condition is made true within ten (10) Business Days after
notice thereof is given to Borrower by Lender, and (ii) in Lender's
judgment, such cure removes any adverse effect on Lender.
(c) BREACH OF COVENANT. If Borrower shall fail to duly observe or
perform any covenant, condition or agreement set forth in (i) Articles VI
or VII of the Agreement, or (ii) the PDS-Nevada Guaranty, on its part to be
performed or observed for ten (10) Business Days after a Responsible
Officer has knowledge thereof.
(d) BANKRUPTCY, RECEIVERSHIP, INSOLVENCY, ETC.
(i) If Borrower shall (A) apply for or consent to the
appointment of a receiver, trustee or liquidator for it or any of its
Property, (B) be unable to pay its debts as they mature, (C) make a
general assignment for the benefit of creditors, (D) be adjudicated a
bankrupt or insolvent or (E) file a voluntary petition in bankruptcy,
or a petition or an answer seeking reorganization or an arrangement
with creditors or to take advantage of any bankruptcy, reorganization,
insolvency, readjustment of debt, dissolution or liquidation law or
statute, or file an answer admitting the material allegations of a
petition filed against it in any proceeding under any such law, or if
action shall be taken by Borrower for the purpose of effecting any of
the foregoing, or
(ii) If any Governmental Body of competent jurisdiction shall
enter an order appointing, without consent of Borrower, a custodian,
receiver, trustee or other officer with similar powers with respect to
Borrower or with respect to any substantial part of the Property
belonging to Borrower, or if an order for relief shall be entered in
any case or proceeding for liquidation or reorganization or otherwise
to take advantage of any bankruptcy or insolvency law of any
jurisdiction, or ordering the dissolution, winding-up or liquidation
of Borrower, or if any petition for any such relief shall be filed
against Borrower, and such petition shall not be dismissed within 45
days.
(e) NON-PAYMENT OF OTHER INDEBTEDNESS. Default by Borrower (other
than in payment of Borrower's Obligations) in the (i) payment when due
(subject to any applicable grace period or cure period), whether by
acceleration or otherwise, of any indebtedness, where the amount thereof is
in excess of $500,000, or (ii) performance or observance of any obligation
or condition with respect to any indebtedness of Borrower, where the amount
of such indebtedness is in excess of $500,000 (other than in payment of
Borrower's Obligations) if the effect of such default is to accelerate the
maturity of any such indebtedness or to permit the holder thereof to cause
such indebtedness to become due and payable prior to its expressed
maturity.
(f) OTHER MATERIAL OBLIGATIONS. Default in the payment when due, or
in the performance or observance of, any material obligation of, or
condition agreed to by, Borrower with respect to any purchase or lease of
goods or services, where (i) the amount with respect to any such purchase
or lease of goods or services is in excess of $500,000 and (ii) any grace
period or cure period with respect to any such payment, performance or
observance has lapsed (except such default in payment, performance or
observance shall not be deemed to constitute a default hereunder if the
existence of any such default is being contested by Borrower in good faith
and by appropriate proceedings diligently pursued).
(g) PDS-NEVADA LOAN AGREEMENT. If an Event of Default shall have
occurred under the PDS-Nevada Loan Agreement.
In any such event, in addition to Lender's other remedies under this
Agreement, Lender, by notice to Borrower, may declare that no further Advances
shall be made.
8.2 BORROWER EVENTS OF DEFAULT -- REMEDIES. If a Borrower Event of Default
shall have occurred, and has not been cured by Borrower (or by Lender, at its
option) within an applicable cure period, or a Material Adverse Change occurs of
the type set forth in Section 4.1.7 (i) or (ii), then Lender shall have the
right to do any or all of the following:
13
<PAGE>
(a) If Lender has not already done so pursuant to Section 2.4,
complete and deliver to the End-Users the Contract Payment Letters to
commence direct billing and collection with respect to the Facility
Contracts, and deduct from such receipts and remittances a fee equal to
five percent (5%) of the aggregate monthly receipts ("Administration Fee")
from the payment on the Facility Contracts as compensation for the
additional administrative burden;
(b) (i) exercise of any of Borrower's rights under any of the
Facility Contracts, or (ii) by written notice, require Borrower to exercise
on behalf of Lender as secured party under this Agreement any and all of
the rights available to Borrower under any Facility Contract to the extent
not already exercised by Borrower, whereupon Borrower shall immediately
take all requested action;
(c) proceed against Borrower for all rights and remedies Lender may
have in law or in equity under the Loan Documents;
(d) declare the entire amount of Borrower's Obligations and
Administration Fee due and payable immediately, and exercise in respect of
the Facility Equipment all the rights and remedies of a secured party upon
default under the UCC, including, at any reasonable time, to enter
Borrower's premises and take physical possession of any master leases to
which the related Facility Contracts pertain.
Lender shall not take any action or exercise any right that would
disturb any End-User's full and quiet enjoyment of all of such End-User's rights
under that Facility Contract. Lender will give Borrower reasonable notice of the
time and place of any public sale of any Collateral or of the time after which
any public or private sale of such Collateral or any other intended disposition
thereof is to be made. Unless otherwise provided by law, the requirement of
reasonable notice shall be met if such notice is delivered at least ten (10)
days before, or mailed, postage prepaid, to Borrower, at least twenty (20) days
before the time of such sale or disposition.
Notwithstanding the foregoing, to the extent that a breach occurs
under Section 8.1(b), and such breach relates to a single Facility Contract,
Borrower shall have twenty (20) days from receipt of demand by Lender to prepay
the Facility Contract pursuant to the terms of the Mandatory Prepayment clause
set forth at Section 2.5.4. Borrower's failure to prepay such Facility Contract
within said twenty (20) day period shall then constitute a Borrower Event of
Default under Section 8.1(a). Furthermore, if the Borrower Event of Default
pertains solely to a breach of a covenant set forth in Section 7.8 (Delinquency
Covenants), Lender's sole remedy shall be to commence direct billing and
collection of Facility Contracts, subject to all mandatory provisions of law,
including without limitation, the Gaming Laws, as set forth more fully in
Section 8.2 (a) and (b).
All actual costs and expenses incurred by Lender in connection with
the enforcement and/or exercise of any of its rights or remedies (including,
without limitation, reasonable attorneys fees) hereunder shall (I) be payable by
Borrower to Lender immediately upon demand, (II) constitute a portion of
Borrower's Obligations and (III) be secured by the Lender Lien.
8.3 CONTRACT EVENTS OF DEFAULT.
8.3.1 DEFINITION: The occurrence of a default by any End-User
pursuant to the terms of a Facility Contract, which default entitles
Borrower to accelerate or terminate such Facility Contract or to repossess
the related Facility Equipment, shall constitute a Contract Event of
Default.
8.3.2 ACCELERATION. Upon the occurrence of a Contract Event of
Default, Lender, at any time (unless such Contract Event of Default shall
have been cured by Borrower), at its option, by notice to Borrower and/or
End-User, may terminate such Facility Contract and accelerate all payments
due thereunder.
8.3.3 CONTRACT EVENT OF DEFAULT -- REMEDIES. Upon the occurrence
of a Contract Event of Default, Borrower shall, if known to Borrower,
immediately deliver to Lender written notice thereof, which notice shall
identify the Facility Contract which is in default and the applicable
Advance, and describe the nature of such default and the actions Borrower
proposes to undertake with respect to such default. If any payment(s) under
a Facility Contract becomes 120 days past due, whether or not such
payment(s) have been cured by Borrower, then Borrower shall prepay in full
the unpaid portion of the Advance pertaining to such Facility Contract and
remit to Lender such Residuals as may be due pursuant to Section 2.7, or
exercise its right of substitution pursuant to Section 3.3.
Lender, with respect to the Facility Equipment subject to such
Facility Contract, shall have and may exercise against Borrower all the
rights and remedies of a secured party under the Illinois UCC and/or the
UCC applicable to the location of the related Facility Equipment, and any
other applicable laws, subject to all mandatory provisions of law,
including without limitation, the Gaming Laws. Lender will give Borrower
reasonable notice of the time and place of any public sale of any
Collateral or of the time after which any public or private sale of such
Collateral or any other intended disposition thereof is to be made. Unless
otherwise provided by law, the requirement of reasonable notice shall be
met if such notice is delivered at least ten (10) days before, or mailed,
postage prepaid, to Borrower at least twenty (20) days before the time of
such sale or disposition. Lender shall have full recourse to Borrower for
any deficiency between the Sale Proceeds thereof and the Loan Repayment
Amount for the related Advance. For the purposes hereof, Sale Proceeds
shall mean the gross proceeds received by Borrower with respect to any sale
of Facility Equipment, less any reasonable remarketing fees paid or
reasonable costs incurred by Borrower with respect to any such sale. In
addition to the foregoing, at Lender's election, Lender may complete and
deliver one or more Contract Payment Letters in order to commence direct
billing and collection with respect to one or more Contracts subject to a
Contract Event of Default, and deduct the Administration Fee with respect
thereto. Furthermore:
(i) Lender only shall be entitled to exercise the rights and
remedies set forth in this Section 8.3.3 with respect to the Facility
Contract, the End-User and the Facility
14
<PAGE>
Equipment which are the subject of such Contract Event of Default;
(ii) the expenses and other payments to which any proceeds of the
Collateral shall be applied in accordance with the provisions of
subsections 8.6 & 8.7 shall be so applied to payment of Borrower's
Obligations pertaining to the Facility Contract which is the subject
of such Contract Event of Default, and
(iii) upon payment and performance in full of all of
Borrower's Obligations pertaining to the Facility Contract which is
the subject of such Contract Event of Default, both (A) the Contract
Event of Default with respect to such Facility Contract, and (B) any
related Borrower Event of Default shall be deemed to be cured.
8.5 POWER OF ATTORNEY. In order to permit Lender to exercise the rights
and remedies set forth herein, Borrower hereby irrevocably appoints Lender as
its attorney-in-fact and agent with full power of substitution, in the name of
Lender or in the name of Borrower, to perform any of the following acts upon the
occurrence of a Borrower Event of Default, subject to all mandatory provisions
of law, including without limitation, the Gaming Laws: (i) receive, open and
examine all mail addressed to Borrower and retain any such mail relating to the
Collateral and return to Borrower only that mail which is not so related; (ii)
endorse the name of Borrower on any checks or other instruments or evidences of
payment or other documents, drafts, or instruments arising in connection with or
pertaining to the Collateral, to the extent that any such items come into the
possession of Lender; (iii) compromise, prosecute or defend any action, claim,
or proceeding concerning the Collateral; (iv) perform any and all acts which
Borrower is obligated to perform under the Loan Documents; (v) exercise such
rights as Borrower might exercise with respect to the Collateral, including,
without limitation, the leasing or other utilization thereof and the collection
of any such rents or other payments applicable thereto; (vi) give notice of the
existence of the Lender's Lien, including, without limitation, notification to
End-Users and/or other account debtors of the existence of such Lender's Lien
with respect to the rents and other payments due to Borrower relative to the
Collateral; or (vii) execute in Borrower's name and file any notices, financing
statements and other documents or instruments Lender determines are necessary or
required to carry out fully the intent and purpose of the Loan Documents or to
perfect the Lender Lien.
Borrower hereby ratifies and approves all that Lender shall do or
cause to be done by virtue of the power of attorney granted herein and agrees
that neither Lender nor any of Lender's employees, agents, officers, or its
attorneys will be liable for any acts or omissions or for any error of judgment
or mistake of fact or law made while acting in good faith pursuant to the
provisions of this subparagraph, unless such act, omission, error of judgment or
mistake of fact or law is determined by a court of competent jurisdiction in a
decision which no longer is subject to appeal to be the result of the gross
negligence or the willful or wanton misconduct of Lender or any such employees,
agents, officers or attorneys of Lender. The appointment of Lender as Borrower's
attorney-in-fact is a power coupled with an interest, and therefore shall remain
irrevocable until all of Borrower's Obligations have been paid and performed in
full.
8.6 EXPENSES. All actual costs and expenses incurred by Lender in
connection with the enforcement and/or exercise of any of its rights or remedies
(including, without limitation, reasonable attorneys fees) hereunder shall (i)
be payable by Borrower to Lender immediately upon demand, (ii) constitute a
portion of Borrower's Obligations and (iii) be secured by the Lender Lien.
8.7 APPLICATION OF FUNDS. Any funds received by Lender pursuant to the
exercise of any rights accorded to Lender pursuant to or by the operation of any
of the terms of any of the Loan Documents shall be applied by Lender in the
following order of priority:
(i) EXPENSES: First to the payment of all (A) actual fees and
expenses, including, without limitation, court costs, fees of appraisers,
title charges, costs of maintaining and preserving the Collateral, costs of
sale, reasonable attorney's fees, and all other costs incurred by Lender in
exercising any rights accorded to Lender pursuant to the Loan Documents or
by applicable law and (B) Liens superior to the Liens of Lender, except
such superior Liens subject to which any sale of the Collateral may have
been made;
(ii) BORROWER'S OBLIGATIONS. Next, to the payment of Borrower's
Obligations, in such order as Lender may determine; and
(iii) SURPLUS. Any surplus, to the Person or Persons legally
entitled thereto.
ARTICLE IX
MISCELLANEOUS
9.1 RIGHTS, REMEDIES AND POWERS. Each and every right, remedy and power
granted to Lender hereunder shall be cumulative and in addition to any other
right, remedy or power not specifically granted herein or now or hereafter
existing in equity, at law, by virtue of statute or otherwise and may be
exercised by Lender from time to time concurrently or independently as often and
in such order as Lender may deem expedient. Any failure or delay on the part of
Lender in exercising any such right, remedy or power, or abandonment or
discontinuance of steps to enforce the same, shall not operate as a waiver
thereof or affect Lender's right thereafter to exercise the same, and any single
or partial exercise of any such right, remedy or power shall not preclude any
other or further exercise thereof or the exercise of any other right, remedy or
power. Acceptance of payments in arrears shall not waive or affect any right to
accelerate Borrower's Obligations.
9.2 MODIFICATIONS, WAIVERS AND CONSENTS. Any modification or waiver of any
provision of this Agreement, or any consent to any departure by Borrower
therefrom, shall not be effective in any event unless the same is in writing and
signed by Lender, and then such modification, waiver or consent shall be
effective only in the specific instance and for the specific purpose given. Any
notice to or demand on Borrower in any event not specifically required of Lender
hereunder shall not entitle Borrower
15
<PAGE>
to any other or further notice or demand in the same, similar or other
circumstances unless specifically required hereunder.
9.3 COMMUNICATIONS. All notices, consents, approvals and other
communications under the Loan Documents shall be in writing and shall be (i)
delivered in person, (ii) sent by telephonic facsimile ("FAX") or (iii) mailed,
postage prepaid, either by (A) registered or certified mail, return receipt
requested, or (B) overnight express carrier, addressed in each case as follows:
To Lender: Heller Financial, Inc.
One TransAm Plaza Drive, Suite 222
Oakbrook Terrace, Illinois 60181
Attn: Executive Vice President, Vendor Finance
FAX No.: (630) 916-7457
Borrower: PDS Financial Corporation
Attention: Johan Finley, CEO and President
6442 City West Parkway, Suite 300
Eden Prairie, Minnesota 55344
FAX No.: (612) 941-9320
with a copy to: Dorsey & Whitney, LLP
Attention: Paula S. Rindels, Esq.
Pillsbury Center South
220 South Sixth Street
Minneapolis, MN 55402
FAX No.: (612) 340-2644
Vargas & Bartlett
Attention: Mike Alonso, Esq.
201 W. Liberty Street
P.O. Box 281
Reno, Nevada 89504
FAX No.: (702) 786-1177
or to such other address, as to either of the parties hereto, as such party
shall designate in a written notice to the other party hereto. All notices sent
pursuant to the terms of this Section 9.3 shall be deemed received (i) if sent
by FAX during regular business hours, on the day sent if a Business Day, or if
such day is not a Business Day (or a Business Day after regular business hours),
then on the next Business Day, (ii) if sent by overnight, express carrier, on
the next Business Day immediately following the day sent, or (iii) if sent by
registered or certified mail, on the fifth Business Day following the day sent.
9.4 SEVERABILITY. If any provision of this Agreement is prohibited by, or
is unlawful or unenforceable under, any applicable law of any jurisdiction, such
provision, as to such jurisdiction, shall be ineffective to the extent of such
prohibition without invalidating the remaining provisions hereof; provided,
however, that where the provisions of any such applicable law may be waived,
they hereby are waived by Borrower to the full extent permitted by law so that
this Agreement shall be deemed to be an agreement which is valid and binding in
accordance with its terms.
9.5 SURVIVAL. The warranties, representations, covenants and agreements
set forth herein shall survive the making of the Advances and the execution and
delivery of the Loan Documents and shall continue in full force and effect until
Borrower's Obligations have been paid and performed in full.
9.6 ATTORNEYS' FEES AND OTHER EXPENSES. Borrower agrees to pay to Lender
on demand any actual out-of-pocket costs or expenses, together with reasonable
attorneys' fees, incurred by Lender in connection with the enforcement or
collection against Borrower of any provision of any of the Loan Documents,
whether or not suit is instituted, including, but not limited to, such actual
costs or expenses arising from the enforcement or collection against Borrower of
any provision of any of the Loan Documents in any state or Federal bankruptcy or
reorganization proceeding. In addition, in the event that Borrower elects to
submit a Contract Funding Request containing one or more Contracts which have
deviations from the standard form approved by Lender and attached to this
Agreement as part of SCHEDULE 4.1.2, Lender reserves the right to charge a
reasonable fee, based on a rate of $125.00 per hour, as an offset against the
related Advance, for its inside counsel to review such Contract(s).
9.7 INDEMNITY. Borrower agrees to indemnify and save Lender and its
successors, assigns, agents and servants harmless of and from any claims,
actions, suits, losses, costs, liabilities, damages or expenses (including
actual expenses and reasonable attorneys' fees) incurred by Lender in connection
with the transactions contemplated by this Agreement, including without
limitation: (i) any loss, cost, liability, damage or expense (including actual
expenses and reasonable attorneys' fees) incurred in connection with the
Facility Contracts; (ii) the delivery, ownership, alteration, operation,
maintenance, return or other disposition of the Collateral; (iii) from any
documentation deficiencies or changes to the basic format of the Facility
Contract; (iv) from the existence of any party having an interest, lien or claim
in the Facility Contract(s), and/or the Facility Equipment covered thereby,
and/or the proceeds thereof, which interest, lien or claim is prior to the
interest therein assigned to Lender hereby; (v) the construction of Lender and
Borrower as having the relationship of joint venturers or partners, or (vi) the
determination that Lender or Borrower has acted as agent for the other.
Borrower's obligations with respect to the indemnity set forth in this
Section 9.7 shall survive repayment of all amounts due pursuant to the Loan
Documents, the cancellation of the Notes and the release and/or cancellation of
any and all of the Loan Documents. Lender agrees to promptly notify Borrower of
any matters in respect of which this indemnity may apply. If notified in writing
of any action or claim brought or threatened against Lender based on a claim for
which Borrower is to provide indemnity and given full authority, information,
and assistance for the defense of same by Lender, Borrower shall, without
limitation, defend those actions or claims at its expense and pay the costs and
damages and attorneys' fees awarded in any such action or arising from any such
claim, provided that Borrower shall have the right to control the defense and
settlement of all such actions and claims. Lender will take all such actions (at
the expense of Borrower) as may be reasonably requested by Borrower to assist
Borrower in connection with such defense or settlement. Nothing herein is
intended to indemnify Lender for consequences of its actions or failure to act.
9.8 BINDING EFFECT. This Agreement shall be binding upon the successors
and assigns of Borrower and shall inure to the benefit of the successors and
assigns of Lender.
16
<PAGE>
9.9 ASSIGNMENTS; PARTICIPATIONS. Lender shall be entitled to sell, assign
or transfer any portion of its interest in the Facility; provided, however,
Lender hereby agrees to deliver to Borrower notice of such proposed sale,
assignment or transfer not less than 30 days prior to the proposed date for the
consummation thereof, which notice shall include a description of the financial
institution to which such sale, assignment or transfer is proposed to be made.
In connection with any such sale, assignment or transfer, Lender may disclose
such information with respect to Borrower, its business and financial affairs
and the Facility as Lender reasonably deems necessary, unless any such
information which has been provided by Borrower to Lender is confidential in
nature, in which case such confidential information shall not be disclosed
without the prior written consent of Borrower, which consent shall not
unreasonably be withheld or delayed.
9.10 FURTHER ASSURANCES. Each of Borrower and Lender agrees that upon the
request of the other party hereto at any time and from time to time after the
execution of this Agreement it shall execute and deliver such further
instructions, documents, and certificates and take such further actions as such
party reasonably may request.
9.11 GOVERNING LAW, CONSENT TO JURISDICTION AND SERVICE OF PROCESS. EXCEPT
WITH RESPECT TO ENFORCEMENT OF SECURITY INTERESTS IN GAMING DEVICE GOODS (WHICH
SHALL BE GOVERNED BY THE STATE IN WHICH SUCH GAMING DEVICE GOODS ARE SITUATED),
THIS AGREEMENT, EACH OF THE OTHER LOAN DOCUMENTS, AND ANY ASSIGNMENT EXECUTED IN
CONNECTION THEREWITH SHALL BE A CONTRACT MADE UNDER AND GOVERNED BY THE LAWS OF
THE STATE OF ILLINOIS APPLICABLE TO CONTRACTS MADE AND PERFORMED ENTIRELY WITHIN
THE STATE OF ILLINOIS. BORROWER DOES HEREBY SUBMIT, AT LENDER'S ELECTION, TO THE
EXCLUSIVE JURISDICTION AND VENUE OF ANY COURTS (FEDERAL, STATE OR LOCAL) HAVING
A SITUS WITHIN THE COUNTY OF COOK AND THE STATE OF ILLINOIS WITH RESPECT TO ANY
DISPUTE, CLAIM, OR SUIT, WHETHER DIRECTLY OR INDIRECTLY ARISING OUT OF OR
RELATING TO THIS AGREEMENT, OR ANY RELATED NOTE OR ANY OF BORROWER'S OBLIGATIONS
OR INDEBTEDNESS HEREUNDER. BORROWER EXPRESSLY WAIVES PERSONAL SERVICE OF PROCESS
AND CONSENTS TO SERVICE BY CERTIFIED MAIL, POSTAGE PREPAID, DIRECTED TO THE LAST
KNOWN ADDRESS OF BORROWER, WHICH SERVICE SHALL BE DEEMED COMPLETED WITHIN TEN
(10) DAYS AFTER THE DATE OF MAILING THEREOF. BORROWER HEREBY IRREVOCABLY WAIVES
ANY CLAIM THAT THE COUNTY OF COOK, STATE OF ILLINOIS IS AN INCONVENIENT FORUM OR
AN IMPROPER FORUM BASED ON LACK OF VENUE AS WELL AS ANY RIGHT IT MAY NOW OR
HEREAFTER HAVE TO REMOVE ANY SUCH ACTION OR PROCEEDING, ONCE COMMENCED, TO
ANOTHER COURT ON THE GROUNDS OF FORUM NON CONVENIENS OR OTHERWISE. THE EXCLUSIVE
CHOICE OF FORUM SET FORTH HEREIN SHALL NOT BE DEEMED TO PRECLUDE THE ENFORCEMENT
BY LENDER OF ANY JUDGMENT OBTAINED IN SUCH FORUM OR THE TAKING OF ANY ACTION BY
LENDER TO ENFORCE THE SAME IN ANY OTHER APPROPRIATE JURISDICTION.
9.12 WAIVER OF JURY TRIAL. BORROWER AND LENDER HEREBY WAIVE THEIR
RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR
ARISING OUT OF THIS LOAN AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS. THIS
WAIVER IS INTENDED TO BE EFFECTIVE WITH RESPECT TO ALL DISPUTES WHICH ARISE OUT
OF ANY OF THE LOAN DOCUMENTS OR PERTAIN TO THE TRANSACTIONS CONTEMPLATED
THEREBY. THIS WAIVER IS IRREVOCABLE, AND MAY NOT BE MODIFIED EITHER ORALLY OR IN
WRITING, AND SUCH WAIVER SET FORTH HEREIN SHALL APPLY TO ANY SUBSEQUENT
AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT OR THE
OTHER LOAN DOCUMENTS.
This Agreement has been executed and delivered by each of the parties
hereto by a duly authorized officer of each such party on the date first set
forth above.
HELLER FINANCIAL, INC.
By:
--------------------------
Title: Vice President
PDS FINANCIAL CORPORATION
By: /S JOHAN FINLEY
---------------------------------------
Johan Finley
Title: CEO and President
17
<PAGE>
PDS FINANCIAL CORPORATION, NEVADA
Final with Signatures
<TABLE>
<S> <C>
ARTICLE I
DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
ARTICLE II
FACILITY AND PAYMENT/PREPAYMENT TERMS . . . . . . . . . . . . . . . . . . . . . . .4
2.1 The Revolving Term Facility . . . . . . . . . . . . . . . . . . . . . . . . . .4
2.2 Voluntary Termination of Facility . . . . . . . . . . . . . . . . . . . . . . .4
2.3 Interest Rate, Computation. . . . . . . . . . . . . . . . . . . . . . . . . . .4
2.4 Servicing and Payments. . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
2.5 Prepayment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
2.5.1 Voluntary Prepayment. . . . . . . . . . . . . . . . . . . . . . . . .4
2.5.2 Mandatory Prepayment . . . . . . . . . . . . . . . . . . . . . . . .4
2.5.2.1 Termination of Contract . . . . . . . . . . . . . . . . . .4
2.5.2.2 Casualty . . . . . . . . . . . . . . . . . . . . . . . . .5
2.5.2.3 Contract Event of Default . . . . . . . . . . . . . . . . .5
2.5.2.4 Early Termination Without End-User Buyout . . . . . . . . .5
2.5.2.5 Upgrades and Additions . . . . . . . . . . . . . . . . . .5
2.5.3 No Other Prepayments Permitted . . . . . . . . . . . . . . . . . . .6
2.5.4 Involuntary Prepayment . . . . . . . . . . . . . . . . . . . . . . .6
2.6 Contract Extensions or End-User Buyout Financing. . . . . . . . . . . . . . . .6
2.7 Residual Sharing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
2.8 Late Charges; Default Rate. . . . . . . . . . . . . . . . . . . . . . . . . . .6
2.9 Payment after Borrower Event of Default . . . . . . . . . . . . . . . . . . . .6
2.10 Maximum Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
2.11 Method of Payment; Good Funds . . . . . . . . . . . . . . . . . . . . . . . . .6
ARTICLE III
NOTES; SECURITY INTEREST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
3.1 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
3.2 Grant of Security Interest. . . . . . . . . . . . . . . . . . . . . . . . . . .6
3.3 Substitution of Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . .7
ARTICLE IV
CONDITIONS OF CLOSING; ADVANCES. . . . . . . . . . . . . . . . . . . . . . . . . . .7
4.1 Conditions of Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
4.1.1 Representations and Warranties . . . . . . . . . . . . . . . . . . .7
4.1.2 Delivery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
4.1.3 Security Interests . . . . . . . . . . . . . . . . . . . . . . . . .7
4.1.4 Opinion of Counsel . . . . . . . . . . . . . . . . . . . . . . . . .7
4.1.5 Performance; No Default . . . . . . . . . . . . . . . . . . . . . . .7
4.1.6 Approval of Loan Documents and Security Interests . . . . . . . . . .7
4.1.7 Material Adverse Change . . . . . . . . . . . . . . . . . . . . . . .7
4.2 Procedures for and Conditions to Advances . . . . . . . . . . . . . . . . . . .7
4.2.1 DISCRETIONARY BORROWING/LENDING . . . . . . . . . . . . . . . . . . .7
4.2.2 Procedure for Advance(s). . . . . . . . . . . . . . . . . . . . . . .8
4.2.3 Conditions OF Advances. . . . . . . . . . . . . . . . . . . . . . . .8
<PAGE>
4.2.3.1 Representations and Warranties. . . . . . . . . . . . . . . . . . . .8
4.2.3.2 Delivery of Documents . . . . . . . . . . . . . . . . . . . . . . . .8
4.2.3.3 Security Interests. . . . . . . . . . . . . . . . . . . . . . . . . .8
4.2.3.5 Additional Conditions . . . . . . . . . . . . . . . . . . . . . . . .8
ARTICLE V
REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . . . . . . . .8
ARTICLE VI
AFFIRMATIVE COVENANTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
ARTICLE VII
NEGATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
ARTICLE VIII
BORROWER AND CONTRACT EVENTS OF DEFAULT -- DEFINITIONS AND REMEDIES. . . . . . . . 13
8.1 Borrower Events of Default -- Definition. . . . . . . . . . . . . . . . . . . 13
8.2 Borrower Events of Default -- Remedies. . . . . . . . . . . . . . . . . . . . 13
8.3 Contract Events of Default. . . . . . . . . . . . . . . . . . . . . . . . . . 14
8.3.1 Definition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
8.3.2 Acceleration . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
8.3.3 Contract Event of Default -- Remedies . . . . . . . . . . . . . . . 14
8.5 Power of Attorney . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
8.6 Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
8.7 Application of Funds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
ARTICLE IX
MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
9.1 Rights, Remedies and Powers . . . . . . . . . . . . . . . . . . . . . . . . . 15
9.2 Modifications, Waivers and Consents . . . . . . . . . . . . . . . . . . . . . 15
9.3 Communications. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
9.4 Severability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
9.5 Survival. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
9.6 Attorneys' Fees and Other Expenses. . . . . . . . . . . . . . . . . . . . . . 16
9.7 Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
9.8 Binding Effect. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
9.9 Assignments; Participations . . . . . . . . . . . . . . . . . . . . . . . . . 16
9.10 Further Assurances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
9.11 GOVERNING LAW, CONSENT TO JURISDICTION AND SERVICE OF PROCESS . . . . . . . . 17
9.12 WAIVER OF JURY TRIAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
</TABLE>
<PAGE>
LOAN AND SECURITY AGREEMENT
(Full Recourse)
This Loan and Security Agreement is entered into as of June 20, 1997
between PDS FINANCIAL CORPORATION - NEVADA ("Borrower"), a Nevada corporation,
having its principal place of business at 1050 East Flamingo Road, Suite N-337,
Las Vegas, Nevada 89119, and HELLER FINANCIAL, INC., a Delaware corporation
("Lender").
PRELIMINARY STATEMENT:
Lender understands that Borrower is engaged in the sale or lease of various
Eligible Equipment (this and all other capitalized terms are defined in Section
1.1 below), and that Borrower may from time to time offer to Lender the
opportunity to finance leases, installment sale contracts and other chattel
paper arising out of such business. This Agreement sets forth the terms and
conditions which will be applicable to any leases, installment sale contracts
and other chattel paper that Lender may, in its sole discretion, elect to
finance under an ongoing term loan facility.
ARTICLE I
DEFINITIONS
1.1 DEFINITIONS. As used in this Agreement and in the other Loan
Documents, unless otherwise expressly indicated herein or therein, the following
terms shall have the following meanings (such definitions to be applicable both
to the singular and plural terms defined):
ACQUISITION COST: all costs and expenses incurred by an End-User (in
the case of installment/conditional sales contracts) or by Borrower (in the
case of any Leases with Borrower as lessor) in connection with the
acquisition of any Eligible Equipment, including, without limitation, sales
or use taxes, freight or installation costs, and license fees, but
excluding any deposits (including security deposits) or down/advance
payments made by End-User, or manufacturer's discounts.
ADVANCE: a loan which is part of the Facility.
AFFILIATE: any Person that directly or indirectly, through one or more
intermediaries, controls or is controlled by or is under common control
with another Person. The term "control" means possession, directly or
indirectly, of the power to direct or cause the direction of the management
and policies of a Person, whether through the ownership of voting
securities, by contract or otherwise. For the purposes hereof, any Person
which owns or controls, directly or indirectly, 51% or more of the
securities of another Person shall be deemed to "control" such Person.
AGREEMENT or LOAN AND SECURITY AGREEMENT: this Loan and Security
Agreement, as amended or supplemented at any time.
AMORTIZATION SCHEDULE: a schedule approved by Lender for the repayment
of each Advance.
APPROVED CONTRACT TERM: without the prior written approval of Lender,
a period of time not less than 24 months and not more than 48 months.
ASSIGNMENT: the assignment of Contracts, and any Lien applicable
thereto in the form of EXHIBIT A executed by Borrower in favor of Lender.
BANK: First Bank National Association.
BORROWER EVENT OF DEFAULT: any of the Events of Default described in
Section 8.1.
BORROWER LIEN: a Lien on Collateral granted by an End-User to
Borrower, which Lien has been assigned by Borrower to Lender pursuant to an
Assignment.
BORROWER'S OBLIGATIONS: (i) all liabilities, obligations and covenants
imposed upon Borrower pursuant to the terms of the Loan Documents, and (ii)
all costs of litigation, collection, reasonable attorneys' fees and other
costs expended or incurred in connection with the enforcement of Lender's
rights hereunder and with respect to the Contracts and the Facility
Equipment.
BUSINESS DAY: any day other than (i) a Saturday, (ii) Sunday or (iii)
other day on which The First National Bank of Chicago, Chicago, Illinois is
closed.
CASUALTY: an event in which any item of Facility Equipment or any
portion thereof is lost, damaged (and such damage cannot reasonably be
repaired by Borrower or an End-User of such Facility Equipment within 60
days), destroyed, stolen, confiscated, requisitioned or condemned
regardless of cause.
CASUALTY PAYMENTS: all proceeds of the Collateral which arise out of
any Casualty, including, without limitation, insurance claims, tort claims,
or reimbursement payments with respect to claims for indemnity.
CERTIFICATE OF ACCEPTANCE: a certificate of delivery and acceptance
executed by an End-User pursuant to a Contract with respect to Facility
Equipment, substantially in the form included in SCHEDULE 4.1.2.
CLOSING: the execution by Borrower and Lender of the Loan Documents.
CLOSING CERTIFICATE: a certificate in the form of EXHIBIT C executed
by a Responsible Officer on behalf of Borrower.
CLOSING DATE: the date upon or as of which the Closing occurs.
COLLATERAL: the Property described in Section 3.2.
CONTRACT: (i) a lease of Eligible Equipment by and between Borrower,
as lessor, and an End-User, as lessee, or (ii) a note and security
agreement/conditional sale contract by and between Borrower, as secured
party, and an End-User, as debtor.
CONTRACT EVENT OF DEFAULT: the Event of Default described in Section
8.3.1.
CONTRACT FUNDING REQUEST: a request for an Advance in the form of
EXHIBIT E delivered by Borrower to Lender, with all attachments as
specified therein.
CONTRACT PAYMENT LETTER: a letter in the form of EXHIBIT F.
<PAGE>
CONTRACT PROCEEDS: funds received by Borrower with respect to any
Facility Contract or any Facility Equipment which is the subject of a
Facility Contract.
DEFAULT RATE: an annual rate equal to 2% plus the Facility Rate, as
applicable.
DEFAULT RATE PERIOD: a period of time commencing on the date that
Lender declares in writing to Borrower that a Borrower Event of Default has
occurred and that the Default Rate is applicable and ending on the date
that such Borrower Event of Default is cured or waived.
DISBURSEMENT DATE: any date on or after the Closing Date upon which
the proceeds of any Advance are disbursed.
ELIGIBLE CONTRACT: a Contract (i) as to which the applicable Facility
Funding Amount will not exceed the sum of $2,000,000.00 nor be less than
$250,000.00 without the prior written approval of Lender, (ii) which
conforms to Lender's credit underwriting standards, and (iii) meets all of
the requirements set forth in Section 5.9 and all subsections thereunder,
and (iv) which is in all other respects acceptable to Lender.
ELIGIBLE END-USER: an End-User (i) which is not in bankruptcy or
receivership or subject to a reorganization proceeding of any kind or
insolvent, (ii) which is not in default or breach under any of the terms of
the applicable Contract, and (iii) which, pursuant to underwriting
standards jointly agreed upon in writing between Borrower and Lender, is a
financially responsible and creditworthy commercial or institutional entity
(other than a Governmental Body).
ELIGIBLE EQUIPMENT: gaming or other equipment (i) which is new or
used, (ii) which is in good condition, repair and working order, (iii)
which is insured in the manner provided in the applicable Contract, (iv)
(A) which is owned by Borrower free and clear of all Liens except a Lender
Lien, or (B) in which the End-User thereof has granted Borrower a security
interest free and clear of all Liens except Permitted Liens, (v) which is
located within the continental United States, (vi) which is subject to an
Eligible Contract, and (vii) which is otherwise approved by Lender.
END-USER: the end-user under a Contract.
EQUIPMENT: equipment which has been approved by Lender, free and clear
of all liens and encumbrances, together with all substitutions and
replacements for such equipment, and all accessories, attachments, parts,
upgrades, features and peripheral equipment now or hereafter attached to or
used in connection therewith.
ESTIMATED RESIDUAL: as reflected on the Amortization Schedule to each
Promissory Note, Borrower's estimated value, as of the end of the related
primary Contract term, of Facility Equipment. In no event shall the
Estimated Residual exceed sixty percent (60%) of the Orderly Liquidation
Value of the Facility Equipment at Contract termination as set forth in the
latest American Appraisal Associates report referred to in Section 6.4(v)
hereof or unless otherwise agreed to in writing by Lender.
EVENT OF DEFAULT: any Borrower Event of Default or Contract Event of
Default.
EVIDENCE OF INSURANCE: either (i) an original certificate of
insurance, (ii) documentation sufficient to establish coverage under a
previously approved policy of Borrower, or (iii) if approved in writing by
Lender, evidence of self-insurance by an End-User under a Facility
Contract.
FACILITY: the Advances to be made by Lender to Borrower pursuant to
Article II and Section 4.2.
FACILITY CONTRACT: an Eligible Contract which is subject to an
Advance, along with all applicable related documentation. For the purposes
of this Agreement, all references to a schedule under a Facility Contract
shall be deemed to incorporate the terms and conditions of the related
master Lease.
FACILITY EQUIPMENT: any Eligible Equipment which is the subject of a
Facility Contract.
FACILITY FUNDING AMOUNT: with respect to each Facility Contract which
is proposed to be made the subject of an Advance, the lesser of:
(i) One Hundred percent (100%) of the Acquisition Cost for each item
of Facility Equipment, or
(ii) the sum of:
(A) the present value of all assigned periodic payments due
thereunder for the Approved Contract Term of each such
Facility Contract, AND
(B) the present value of the Estimated Residual;
using a discount rate to determine such present values equal to
the Facility Rate.
FACILITY NOTE: a full recourse promissory note in the form of EXHIBIT
G executed by Borrower in favor of Lender in conjunction with each Advance.
FACILITY RATE: with respect to each Advance, a fixed per annum
interest rate equal to the sum of (i) 3.00%; and (ii) the weekly average
U.S. Treasury Constant Maturities for a Treasury Note having approximately
an equal term as the weighted average term of the Contracts subject to the
applicable Advance, as reported by the Federal Release for the calendar
week immediately preceding a Disbursement Date.
FEDERAL RELEASE: Federal Reserve Statistical Release No. H.15(519)
under the caption "U.S. Government Securities/Treasury Constant Maturities"
or any successor publication providing information as to the yields of
Treasury Notes.
GAAP: generally accepted accounting principles as in effect from time
to time, which shall include the official interpretations thereof by the
Financial Accounting Standards Board, consistently applied.
GAMING AUTHORITIES: the governmental agencies and/or commissions
having jurisdiction over Borrower in the various states in which Borrower
does business.
2
<PAGE>
GAMING LAWS: the statutes and regulations relating to gaming and the
operation of Gaming Device Goods promulgated by the various states and
Gaming Authorities in which Borrower does business.
GAMING DEVICE GOODS: Equipment consisting of electronic and mechanical
gaming devices with integral attachments.
GOOD FUNDS: United States dollars available to Lender in Federal funds
at or before 2:00 p.m. Chicago time on a Business Day.
GOVERNMENTAL BODY: any foreign, federal, state, municipal or other
government, or any department, commission, board, bureau, agency, public
authority or instrumentality thereof or any court or arbitrator.
GUARANTY: the continuing guaranty to be executed and delivered by PDS
FINANCIAL CORPORATION, substantially in the form of Exhibit M, as amended,
supplemented or otherwise modified from time to time.
INCIPIENT DEFAULT: any event or condition which, with the giving of
notice or the lapse of time, or both, would become an Event of Default.
INTANGIBLE COLLATERAL: as defined in Section 3.2(b).
LEASE: any lease agreement or master lease agreement pertaining to
Eligible Equipment between Borrower, as lessor and another Person, as
lessee.
LENDER LIEN: the Lien on the Collateral granted by Borrower to Lender
pursuant to Article III of this Agreement.
LIEN: any mortgage, deed of trust, hypothecation, pledge, security
interest, encumbrance, lien or charge of any kind (including any agreement
to give any of the foregoing), any conditional sale or other title
retention agreement or any lease in the nature of any of the foregoing.
LOAN DOCUMENTS: this Agreement, the Notes, the Guaranty, the
Assignments, the Contract Funding Requests, the Closing Certificate, UCC
financing statements, and all other documents, instruments, and
certificates executed by Borrower pursuant to this Agreement.
LOAN REPAYMENT AMOUNT: with respect to an Advance at any time, the
aggregate unpaid principal of, and accrued interest (including any interest
accrued at the Default Rate) computed in accordance with the Simple
Interest Method, on such Advance.
LOCKBOX: the arrangement with the Bank, who will act as the agent for
collection of all remittances and proceeds due to Borrower from End-Users
subject to Facility Contracts, and which shall be identified as follows:
PDS Financial Corporation - Nevada
_________________________
LOCKBOX AGREEMENT: the agreement among Borrower, Guarantor, Lender and
Bank, substantially in the form attached hereto as EXHIBIT D, which shall
set forth the terms, conditions and provisions of the Lockbox.
NOTES: the Facility Note executed in conjunction with each Advance.
ORDINARY PREPAYMENT PREMIUM: (i) Five Percent (5%) of the amount
prepaid if prepaid prior to the first anniversary of the related
Disbursement Date, (ii) Four Percent (4%) of the amount prepaid if prepaid
after the first anniversary to the second anniversary of the related
Disbursement Date, (iii) Three Percent (3%) of the amount prepaid if
prepaid after the second anniversary to the third anniversary of the
related Disbursement Date; and (iv) Two Percent (2%) of the amount prepaid
if prepaid after the third anniversary of the related Disbursement Date.
PDS LOAN AGREEMENT: that certain Loan and Security Agreement dated as
of June 20, 1997 by and between Lender and PDS FINANCIAL CORPORATION.
PERMITTED LIENS: any of the following Liens: (i) the Lender Lien; (ii)
the Contracts; (iii) any Borrower Lien; (iv) any Liens expressly
subordinate to (i), (ii) and/or (iii) above; and (v) Liens for taxes or
assessments and similar charges, which either are (A) not delinquent or (B)
being contested diligently and in good faith by appropriate proceedings,
and as to which Borrower has set aside adequate reserves on its books.
PERMITTED SUBSTITUTION: the substitution by Borrower of an Eligible
Contract for a Facility Contract, in accordance with the provisions of
Section 3.3.
PERSON: any individual, sole proprietorship, partnership, joint
venture, trust, unincorporated organization, association, corporation,
institution, entity, party or Governmental Body.
PROPERTY: all types of real, personal or mixed property and all types
of tangible or intangible property.
REPLACEMENT CONTRACT: a Facility Contract which is created by the
terminating of an existing Facility Contract and financing a portion of the
Eligible Equipment on a new Facility Contract.
RESIDUALS: all proceeds (net of refurbishment costs, if any) derived
from the Equipment as a result of (i) extended or renewal Contract
payments, (ii) exercised purchase options, and/or (iii) sale or lease of
the Equipment to third parties; PROVIDED, HOWEVER, that with respect to
such extended or renewal Contract payments, or third-party lease proceeds,
such proceeds (including any estimated fair market value purchase option at
end of the renewal period as reflected in the most recent American
Appraisal Associates report referred to in Section 6.4(v) hereof) shall be
discounted to present value using a discount rate equal to the Facility
Rate in effect at the time of such re-lease.
RESPONSIBLE OFFICER: any of the Chairman, President, Treasurer,
Secretary or Vice President of Borrower.
TREASURY NOTES shall mean unsecured promissory notes issued, from time
to time, as an obligation of the United States Government by the Secretary
of the Treasury in various denominations and with stated maturity dates
from the date of issue.
UCC: the Uniform Commercial Code.
U.S. TREASURIES CONSTANT MATURITIES: as defined in the Federal
Release.
3
<PAGE>
1.2 TIME PERIODS. In this Agreement and the other Loan Documents, in the
computation of periods of time from a specified date to a later specified date
(i) the word "from" means "from and including," (ii) the words "to" and "until"
each mean "to, but excluding" and (iii) the words "through," "end of" and
"expiration" each mean "through and including." All references in this Agreement
and the other Loan Documents to "month," "quarter" or "year" shall be deemed to
refer to a calendar month, quarter or year.
1.3 ACCOUNTING TERMS. Unless otherwise specified in this Agreement, all
accounting terms used herein shall be construed, all accounting determinations
hereunder shall be made, and all financial statements required to be delivered
pursuant hereto shall be prepared in accordance with GAAP.
1.4 REFERENCES. All references in this Agreement to an "Article,"
"Section," "subsection," "subparagraph," "clause," "Schedule" or "Exhibit,"
unless otherwise indicated, shall be deemed to refer to an Article, Section,
subsection, subparagraph, clause, Schedule or Exhibit, as applicable, of or to
this Agreement.
1.5 LENDER'S DISCRETION. Whenever the terms "satisfactory to," "determined
by," "acceptable to," "shall elect," "shall request," or similar terms are used
in this Agreement or any of the other Loan Documents to apply to Lender, except
as otherwise specifically provided herein or therein, such terms shall mean
satisfactory to, at the election of, determined by, acceptable to, or requested
by, Lender, in its sole, but reasonable, discretion.
1.6 STATEMENTS AS TO KNOWLEDGE. Any statements, representations or
warranties which are based upon the best knowledge of Borrower shall be deemed
to have been made after due inquiry with respect to the matter in question.
ARTICLE II
FACILITY AND PAYMENT/PREPAYMENT TERMS
2.1 THE REVOLVING TERM FACILITY: The Facility is one or more full
recourse Advances made by Lender from time to time at its sole discretion to
fund Eligible Contracts, subject to the provisions of Article II and Section
4.2. Notwithstanding anything contained herein to the contrary, the maximum
amount outstanding under both (i) the Facility and (ii) the PDS Loan Agreement,
at any one time shall not exceed Ten Million Dollars ($10,000,000.00).
2.2 VOLUNTARY TERMINATION OF FACILITY. Upon not less than sixty (60) days'
prior notice, either party may notify the other of its intention not to
seek/provide any further financing hereunder; PROVIDED, however, that
notwithstanding the foregoing, all of Borrower's Obligations shall survive any
expiration or termination of this Agreement and/or the termination of any
Facility Contract.
2.3 INTEREST RATE, COMPUTATION. Each Advance shall be indicated by a
Facility Note, which shall bear interest at the Facility Rate noted thereon,
which shall be computed on the basis of a year consisting of 360 days and
charged for the actual number of days during the period for which interest is
being charged.
2.4 SERVICING AND PAYMENTS. Borrower, at its sole cost and expense, shall
be responsible for the billing and collecting of the payments due under any
Contract(s). All non Automated Clearing House ("ACH") billing with respect to
Facility Contracts shall be accomplished by separate invoices (i.e., not
included in invoices to the same End-User for rentals or other payments due
under any other agreement between Borrower and End-User), and shall direct the
End-Users to forward all Facility Contract remittances (including, but not
limited to rents, renewal rents and Casualty Payments) (i) to the Lockbox, which
shall be subject to the Lockbox Agreement, and at the Bank, or (ii) through the
ACH utilizing Bank's Electronic Funds Transfer ("EFT") service. The fees and
expenses of such Lockbox and ACH/EFT service shall be payable by Borrower. If
the underlying End-Users in an Advance have a single due date, Borrower shall
pay to Lender the amounts due under the related Facility Contracts within 15
days from such due date, whether or not such amounts have been remitted by the
respective End-Users. If the underlying End-Users in an Advance have a multiple
due dates, Borrower shall pay to Lender the amounts due under the related
Facility Contracts by the 10th of the following month, whether or not such
amounts have been remitted by the respective End-Users. All payments made
pursuant to this subsection 2.4 shall be applied FIRST, to any accrued and
unpaid fees and expenses then owed by Borrower to Lender; SECOND, to accrued and
unpaid interest then due Lender calculated at the Facility Rate through the last
date of such immediately preceding month, and THIRD, to principal due Lender on
the applicable Advances until paid in full. With the prior, written consent of
Lender, Borrower may elect to utilize Guarantor for the servicing
responsibilities set forth in this paragraph. In the event (i) Borrower fails to
perform the foregoing billing and collecting duties in a manner satisfactory to
Lender in its sole discretion, or (ii) of a Contract Event of Default which
remains uncured for more than ninety (90) days, then Lender may terminate
Borrower's authorization under this subparagraph (in the event of a Contract
Event of Default, such termination shall only relate to the specific Contract in
default).
2.5 PREPAYMENT.
2.5.1 VOLUNTARY PREPAYMENT. No voluntary prepayment by Borrower of
any Advances shall be permitted; however, after the first anniversary of
the initial Disbursement Date, Borrower shall be permitted to prepay the
entire Facility (without liability for the Ordinary Prepayment Premium) in
the event the aggregate Loan Repayment Amount for all Contracts is less
than Two Hundred Fifty Thousand Dollars ($250,000.00).
2.5.2 MANDATORY PREPAYMENT.
2.5.2.1 TERMINATION OF CONTRACT. If an End-User voluntarily
terminates a Facility Contract before its scheduled expiration by
exercising an option to purchase the Facility Equipment, Borrower
shall prepay the associated Advance within ten (10) Business Days of
such termination by paying to Lender (i) the Loan Repayment Amount
with respect to such Advance, along with (ii) the greater of (A) the
applicable Ordinary Prepayment Premium, or (B) any Residuals payable
pursuant to Section 2.7. Notwithstanding the foregoing, if Borrower
elects to exercise its right of Permitted Substitution with respect to
such terminated Facility Contract, no Ordinary Prepayment Premium
shall be payable with respect thereto.
4
<PAGE>
2.5.2.2 CASUALTY. If any Equipment subject to an Advance is
lost or damaged, and cannot be repaired or replaced with substantially
similar Equipment by the first due date occurring not less than thirty
(30) days after such loss or damage, Borrower shall prepay the
associated Advance within ten (10) Business Days thereafter by paying
to Lender the Loan Repayment Amount with respect to such Advance AND,
to the extent Borrower is able to collect sufficient proceeds from the
insurance carrier and/or the End-User, an amount to additionally
reimburse Lender for costs incident to breaking its corresponding
debt, which shall not exceed three percent (3%) of the principal
amount prepaid, and which shall be evidenced by a certificate prepared
by Lender showing, in reasonable detail, the calculation of such
costs. No Ordinary Prepayment Premium shall be payable in respect to a
mandatory prepayment made pursuant to this subsection.
2.5.2.3 CONTRACT EVENT OF DEFAULT. If Borrower prepays an
Advance pursuant to Section 8.3.3 with respect to a Contract Event of
Default, no Ordinary Prepayment Premium shall be payable by Borrower
to Lender in connection with any such prepayment, but Borrower shall
continue to be liable to Lender for any Residuals realized pursuant to
Section 2.7.
2.5.2.4 EARLY TERMINATION WITHOUT END-USER BUYOUT. If a
Facility Contract is voluntarily terminated by a End-User prior to the
scheduled expiration, without the exercise of a purchase option,
Borrower shall prepay the associated Advance within thirty (30) days
of such event by paying to Lender the (i) Loan Repayment Amount along
with (ii) the greater of (A) the applicable Ordinary Prepayment
Premium, or (B) any Residuals payable pursuant to Section 2.7.
Notwithstanding the foregoing, if Borrower elects to exercise its
right of Permitted Substitution with respect to such terminated
Facility Contract, no Ordinary Prepayment Premium shall be payable
with respect thereto.
2.5.2.5 UPGRADES AND ADDITIONS. Borrower may agree with an
End-User under a Facility Contract that the Equipment subject to such
Contract shall be upgraded or that additional Eligible Equipment
should be added, resulting in a new Facility Contract or replacement
Facility Contract.
(a) AMENDMENT OF FACILITY CONTRACT SCHEDULE TO INCORPORATE
UPGRADES/ADDITIONS. If Borrower and such End-User amend such
Facility Contract to increase the payments payable thereunder in
consideration of such upgrade or addition, Borrower may request
that Lender finance the additional Contract Proceeds arising
under such amendment (the "Contract Amendment") attributable to
such increase in payments. Not later than ten (10) Business Days
after such request, Lender shall give Borrower written advice as
to whether Lender, in its sole discretion, has elected to finance
such additional Contract Proceeds. If Lender fails to give such
advice within such ten (10) day period, Lender shall be deemed to
have declined to finance such additional Contract Proceeds and
shall so advise Borrower in writing. If Lender agrees to finance
such additional Contract Proceeds, Lender shall, subject to
satisfaction of the conditions precedent set forth in Section
4.2, make an Advance in an amount as Lender shall determine. The
Disbursement Date with respect to such Advance shall be a date
agreed upon in writing by Lender and Borrower. If Lender agrees
to make such an Advance, the Contract Amendment shall be
considered a "Facility Contract" for all purposes of this
Agreement. If Borrower finances such upgrades or additions
through a source other than Lender and does not prepay in
accordance with this Section, Borrower covenants and agrees that
any security interest granted to a source other than Lender shall
not conflict with or prime Lender's security interest.
(b) TERMINATION OF CONTRACT SCHEDULE/EXECUTION OF A
REPLACEMENT CONTRACT. If Borrower and such End-User agree that
the Equipment subject to a Facility Contract shall be upgraded,
and agree to terminate the related Facility Contract and enter
into a Replacement Contract schedule incorporating a portion of
the existing Equipment and the upgrade/additional Equipment,
Borrower may request that Lender finance the Replacement
Contract. Not later than ten (10) Business Days after such
request, Lender shall give Borrower written advice as to whether
Lender, in its sole discretion, has elected to finance such
Replacement Contract. If Lender fails to give such advice within
such ten (10) day period, Lender shall be deemed to have declined
to finance such additional Contract Proceeds and shall so advise
Borrower in writing. If Lender agrees to finance such Replacement
Contract, Borrower shall pay to Lender the Loan Repayment Amount
with respect to the existing Facility Contract, and Lender shall,
subject to satisfaction of the conditions precedent set forth in
Section 4.2, make an Advance in an amount equal to the lesser of
(i) the present value of all payments due thereunder (with the
exception of any manufacturer's discounts, deposits (including
security deposits) or down/advance payments made by End-User) for
the Approved Contract Term of each such Facility Contract, using
a discount rate to determine such present value equal to the
Facility Rate, or (ii) the sum of (A) One Hundred percent (100%)
of the Acquisition Cost for each item of Facility Equipment that
was not previously subject to the existing Facility Contract and
(B) the Loan Repayment Amount with respect to the existing
Facility Contract. The Disbursement Date with respect to such
Advance shall be a date agreed upon in writing by Lender and
Borrower. If Lender agrees to make such an Advance, the
Replacement Contract shall be considered a "Facility Contract"
for all purposes of this Agreement.
If Lender elects not to finance a Replacement Contract
pursuant to this Section, Borrower may give Lender not less than
ten (10) Business Days prior notice of its intention to prepay
the Advance made to finance the Facility Contract. Borrower
shall, prior to the next Facility Contract due date, pay the Loan
Repayment Amount with respect thereto. No Ordinary Prepayment
5
<PAGE>
Premium shall be payable in respect of an optional prepayment
made pursuant to this Section.
2.5.3 NO OTHER PREPAYMENTS PERMITTED. No Advance may be prepaid
except as otherwise expressly provided in this Agreement.
2.5.4 INVOLUNTARY PREPAYMENT. Any prepayment of the Advances
received by Lender resulting from the exercise by Lender of any remedy
available to Lender subsequent to the occurrence of a Borrower Event of
Default and the acceleration of Borrower's Obligations shall be deemed to
be a mandatory prepayment, and the applicable Ordinary Prepayment Premium
shall be payable with respect thereto.
2.6 CONTRACT EXTENSIONS OR END-USER BUYOUT FINANCING. If, at the end of
the Approved Contract Term an End-User elects to (i) extend the Contract, or
(ii) purchase the Facility Equipment subject thereto with financing provided by
Borrower, Borrower shall offer to Lender the right of first refusal to finance
such Contract extension or such end-of-term purchase option. Not later than ten
(10) Business Days after such request, Lender shall give Borrower written advice
as to whether Lender, in its sole discretion, has elected to provide such
financing. If Lender fails to give such advice within such ten (10) day period,
Lender shall be deemed to have declined such financing and shall so advise
Borrower in writing. If Lender agrees to provide such financing, Lender and
Borrower shall mutually agree regarding the terms thereof. All Contract Proceeds
received by Borrower and forwarded to Lender hereunder shall be subject to the
Residual Sharing provisions of Section 2.7 hereof.
2.7 RESIDUAL SHARING. Lender shall be entitled to receive 100% of the
Residuals attributable to any Facility Contract until Lender shall have
recovered the balloon payment/Estimated Residual amount set forth in the
applicable Amortization Schedule (which Lender shall have full recourse to
Borrower); subsequent thereto, Lender shall be entitled to thirty five percent
(35%) of such Residuals, and Borrower shall be entitled to sixty five percent
(65%) of such Residuals.
2.8 LATE CHARGES; DEFAULT RATE. If any payment of principal or interest to
be made by Borrower to Lender under the Facility becomes past due for a period
of 10 days, Borrower shall pay to Lender on demand a late charge of five percent
(5%) of the amount of such overdue payment. In addition, during a Default Rate
Period, Borrower's Obligations pertaining to the Facility shall bear interest at
the Default Rate.
2.9 PAYMENT AFTER BORROWER EVENT OF DEFAULT. Upon the occurrence and
during the continuation of a Borrower Event of Default, all Contract Proceeds
pertaining to Facility Contracts and/or Facility Equipment shall be applied by
Lender in such manner as Lender shall determine.
2.10 MAXIMUM INTEREST. Notwithstanding any provision to the contrary herein
contained, Lender shall not collect a rate of interest on any obligation or
liability due and owing by Borrower to Lender in excess of the maximum contract
rate of interest permitted by applicable law. Lender and Borrower have agreed
that the interest laws of the State of Illinois shall govern the relationship
between them, but in the event of a final adjudication to the contrary, NUNC PRO
TUNC, Borrower shall be obligated to pay to Lender only such interest as then
shall be permitted by the applicable laws of the State found to govern the
contract relationship between Lender and Borrower. All interest found in excess
of that rate of interest allowed and collected by Lender shall be applied to the
Advances in such manner as to prevent the payment and collection of interest in
excess of the rate permitted by applicable law.
2.11 METHOD OF PAYMENT; GOOD FUNDS. All payments which are to be made by
Borrower to Lender pursuant to the Loan Documents shall be made by wire transfer
to BANK OF AMERICA, 231 South LaSalle Street, Chicago, Illinois 60697; ABA
#071000039, Heller Financial, Inc., Acct. #74-21753, Phone Advice to Product
Credit Manager -- LPG and to Product Business Manager -- LPG: 630-916-1116.
Payment shall not be deemed to be received until Lender is in receipt of Good
Funds.
ARTICLE III
NOTES; SECURITY INTEREST
3.1 NOTES. Borrower's Obligations described in clause (i) of the
definition of such term shall be evidenced by the Notes.
3.2 GRANT OF SECURITY INTEREST. As security for the payment and
performance of Borrower's Obligations, Borrower hereby grants to Lender, subject
to all mandatory provisions of law, including without limitation, the Gaming
Laws, a Lien in the following described collateral (the "Collateral"), such Lien
to be superior and prior to all other Liens other than Permitted Liens:
(a) FACILITY EQUIPMENT. All of Borrower's right, title and interest
(including any residual interest) in and to the Facility Equipment.
(b) THE CONTRACTS. All chattel paper and Contracts pertaining to any
Facility Equipment, including, without limitation, all of Borrower's right,
title and interest in, to and under each Facility Contract relating to each
item of Facility Equipment and the right to receive all payments thereunder
(collectively, the "Intangible Collateral").
(c) LOCKBOX AND LOCKBOX AGREEMENT. The Lockbox and Lockbox Agreement.
(d) BOOKS AND RECORDS. All of the books and records of Borrower
pertaining to the Property described in subparagraphs (a) - (c) above.
(e) PROCEEDS. All attachments, additions, accessions, upgrades,
accessories and replacements pertaining to the items described in
subparagraphs (a) through (d) above, as applicable, including all cash and
non-cash proceeds (including Casualty Payments and other insurance
proceeds) pertaining thereto.
Lender shall not be required to look to the Collateral for the payment of
Borrower's Obligations, but may proceed against Borrower in such manner as
Lender deems desirable. All of the Collateral assigned to Lender hereunder shall
secure the payment and performance of all of Borrower's Obligations, and whether
now
6
<PAGE>
existing or in the future; provided, however, that upon the payment and
performance in full of all of Borrower's Obligations with respect to a Facility
Contract (or the exercise of a Permitted Substitution with respect thereto), the
Loan Documents applicable to such Facility Contract and such Facility Equipment
shall automatically terminate, Lender shall execute and deliver to Borrower such
UCC termination statements and other instruments as may be necessary to release
the applicable Lender Lien(s) in the related Collateral, and shall return all
items of chattel paper to Borrower with respect thereto.
3.3 SUBSTITUTION OF CONTRACTS. Within One Hundred Twenty (120) days after
a Contract Event of Default occurs, or immediately in the event of a prepayment
by an End-User with respect to a Facility Contract, or with the prior, written
agreement of Lender, in addition to any other remedy available hereunder to
Borrower with respect thereto, Borrower may substitute another Eligible Contract
for an existing Facility Contract ("Existing Facility Contract"), provided (i)
that the present value (determined using a discount rate which is equal to the
Facility Rate which is applicable to the Existing Facility Contract) of the
payments remaining under such Substitute Contract, is equal to or greater than
the present value (calculated as described above) of the remaining payments of
such Existing Facility Contract, including any payments which are past due under
such Existing Facility Contract; and (ii) that the number of payments remaining
under such Substitute Contract equals or exceeds the number of payments
remaining under the Existing Facility Contract. If such substitution occurs as a
result of a Contract Event of Default, such substitution shall be deemed to cure
such Contract Event of Default. As a precondition to any Permitted Substitution,
Lender shall have the right to verify the existence and terms of such Substitute
Contract with the applicable End-User.
ARTICLE IV
CONDITIONS OF CLOSING; ADVANCES
4.1 CONDITIONS OF CLOSING. The Closing shall not take place unless all of
the conditions set forth in this Section 4.1 have been satisfied in a manner,
form and substance satisfactory to Lender:
4.1.1 REPRESENTATIONS AND WARRANTIES. On the Closing Date, the
representations and warranties of Borrower set forth in the Loan Documents
shall be true and correct in all material respects.
4.1.2 DELIVERY. The following shall have been delivered to Lender,
each duly authorized and executed:
(a) the Agreement, with all Exhibits and Schedules, the
Guaranty; and the Closing Certificate;
(b) a certificate of the Secretary or an Assistant Secretary of
Borrower in the form of EXHIBIT H, with all attachments noted therein;
(c) a certified copy of the forms of Contract used by Borrower,
to be attached to the Agreement as SCHEDULE 4.1.2;
(d) the Lockbox Agreement; and
(e) such additional instruments, documents, certificates,
consents, financing statements, waivers and opinions as Lender
reasonably may request, including, but not limited to, a Trust
Agreement substantially in the form of EXHIBIT N hereto, in the event
that Borrower will be retaining possession of any original master
leases comprising Facility Contracts.
4.1.3 SECURITY INTERESTS. All UCC financing statements, including
UCC-1(s) naming Borrower as debtor and Lender as secured party to be filed
where applicable, using the collateral description substantially in the
form attached hereto as EXHIBIT B, shall have been filed and confirmation
thereof received by Lender.
4.1.4 OPINION OF COUNSEL. Lender shall have received from DORSEY &
WHITNEY, LLP, counsel to Borrower, an opinion dated the Closing Date,
addressed to Lender in the form of EXHIBIT I, as well as similar opinions
from outside counsel to Borrower in every state in which Borrower
originates Eligible Contracts subject to Advances hereunder.
4.1.5 PERFORMANCE; NO DEFAULT. Borrower shall have performed and
complied with all agreements and conditions contained in the Loan Documents
to be performed by or complied with prior to or at the Closing Date.
4.1.6 APPROVAL OF LOAN DOCUMENTS AND SECURITY INTERESTS. The
approval and/or consent shall have been obtained from all Governmental
Bodies and all other Persons whose approval or consent is necessary or
required to enable Borrower to (i) enter into and perform its obligations
under the Loan Documents, (ii) grant to Lender the Lender Lien and (iii)
consummate the Advances.
4.1.7 MATERIAL ADVERSE CHANGE. Since the issuance of Borrower's
most recent fiscal year-end financial statements, no event shall have
occurred which has a material adverse effect on (i) the financial
condition, Property, business, operations, ownership, structure, prospects
or profits of Borrower, (ii) the ability of Borrower to perform its
obligations under the Loan Documents, or (iii) the Collateral.
4.2 PROCEDURES FOR AND CONDITIONS TO ADVANCES
4.2.1 DISCRETIONARY BORROWING/LENDING. NOTWITHSTANDING THE OTHER
PROVISIONS OF THIS AGREEMENT, ADVANCES SHALL BE MADE ONLY WHEN BOTH (I)
BORROWER, IN ITS SOLE DISCRETION, DESIRES TO BORROW MONEY FROM LENDER, AND
(II) LENDER, IN ITS SOLE DISCRETION, DESIRES TO LOAN MONEY TO BORROWER; IT
BEING AGREED THAT THIS AGREEMENT SHALL NOT BE CONSTRUED AS IMPOSING ANY
DUTY ON BORROWER TO BORROW FROM LENDER, NOR ANY DUTY ON LENDER TO LOAN TO
BORROWER. IN CONSTRUING THE PURPOSE AND INTENT OF THIS AGREEMENT, THIS
SECTION 4.2.1 SHALL TAKE PRECEDENCE OVER ALL OTHER PROVISIONS.
7
<PAGE>
4.2.2 PROCEDURE FOR ADVANCE(S). Subject to the satisfaction of the
terms and conditions set forth in this Section 4.2, on or after the Closing
Date Borrower may request Lender to disburse the proceeds of any Advance as
set forth by Borrower in the related Contract Funding Request. The Contract
Funding Request shall specify: (A) the date such Advance is to be made,
which shall be a Business Day not less than 5 Business Days after the
delivery to Lender of such Contract Funding Request, and (B) the amount of
Advance, which shall not exceed the applicable Facility Funding Amount, and
without the written consent of Lender, be not less than $500,000.00. Lender
shall not be obligated to consider making any Advance (i) if an Incipient
Default or Event of Default exists or will occur if the requested Advance
is made, (ii) any more frequently than twice each month under the Facility,
or (iii) with respect to any Contract which Lender determines is not an
Eligible Contract or for an End-User which Lender determines is not an
Eligible End-User.
4.2.3 CONDITIONS OF ADVANCES. Lender shall not be obligated to
consider making any Advance(s) on or after the Closing Date unless all of
the conditions set forth in this Section 4.2 have been satisfied in a
manner, form and substance satisfactory to Lender, including the following:
4.2.3.1 REPRESENTATIONS AND WARRANTIES. On the date of such
Advance, the representations and warranties of Borrower set forth in
the Loan Documents shall be true and correct in all material respects.
Lender shall have the right, as a precondition to any Advance made
more than one year after June 20, 1997, to require updated evidence of
Borrower's and Borrower's officers' authority to execute Advance
documentation, and to require ratifications of the Guaranty.
4.2.3.2 DELIVERY OF DOCUMENTS. In addition to the documents
previously delivered to Lender pursuant to Section 4.1, the following
shall have been delivered to Lender, each duly authorized and
executed:
(a) the Contract Funding Requests for the Advances to be
made, with all attachments noted therein;
(b) such additional instruments, documents, certificates,
consents, financing statements, waivers and opinions as Lender
reasonably may request, including any opinions of outside counsel
required under Section 4.1.4 not previously received by Lender.
4.2.3.3 SECURITY INTERESTS. All UCC financing statements,
including, but not limited to:
(a) in the case of Facility Contracts under which Borrower
is deemed by Lender to be the owner of the Equipment, UCC-1(s)
naming Borrower as debtor, and Lender as secured party, to be
filed where the Equipment is located and at Borrower's principal
place of business,
(b) UCC-1(s) naming End-User as debtor or lessee, and
Borrower as secured party or lessor, to be filed in the state(s)
where the Equipment is located,
(c) In the event that Lender has not been named as assignee
on the UCC-1(s) referred to in subsection 4.2.3.3(b), UCC-3(s),
as required, naming Lender as assignee to be filed in the
jurisdiction(s) where the UCC-1(s) referred to in subsection
4.2.3.3(b) are filed, and
(d) all other filings and actions necessary to perfect and
maintain the Lender Lien as a valid and perfected Lien in the
Collateral,
shall have been filed and confirmation thereof received by
Lender.
4.2.3.4 CONFIRMATION WITH END-USERS AND VENDORS. Lender or its
agents, at Lender's discretion, shall have verified with all End-Users
the existence and terms of the related Facility Contract, the delivery
of the Facility Equipment, and shall have verified that the vendors
and/or Facility Equipment suppliers have been paid.
4.2.3.5 ADDITIONAL CONDITIONS. Borrower shall have re-satisfied
the conditions set forth in Sections 4.1.5 (PERFORMANCE; NO DEFAULT),
4.1.6 (APPROVAL OF LOAN DOCUMENTS AND SECURITY INTERESTS), and 4.1.7
(MATERIAL ADVERSE CHANGE) with respect to the requested Advance(s).
ARTICLE V
REPRESENTATIONS AND WARRANTIES
Borrower hereby represents and warrants to Lender as follows:
5.1 ORGANIZATION, POWER, AUTHORITY, ETC. Borrower (i) is duly organized,
validly existing and in good standing under the laws of the State of Nevada,
(ii) is qualified to do business in every jurisdiction in which the character of
the Property owned or leased by it or the business conducted by it makes such
qualification necessary and the failure to so qualify would permanently preclude
Borrower from enforcing its rights with respect to any Facility Contract or
Facility Equipment or would expose Borrower to any material loss or liability,
(iii) has the power and authority to carry on its business, (iv) has the power
and authority to execute and perform this Agreement and the other Loan
Documents, and (v) has duly authorized the execution, delivery and performance
of this Agreement and the other Loan Documents.
5.2 VALIDITY, ETC., OF LOAN DOCUMENTS. This Agreement and the other Loan
Documents constitute the legal, valid and binding obligations of Borrower and
are enforceable against Borrower in accordance with their respective terms,
except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting the enforcement
of creditors' rights generally and by equitable principles (whether or not any
action to enforce such document is brought at law or in equity). The execution,
delivery and performance of the Loan Documents by Borrower (i) has not violated
and will not violate any provision of law, any order of any Governmental Body,
or the Certificate of Incorporation or Bylaws of Borrower (or the equivalent of
the foregoing if Borrower is not a corporation), or any indenture, agreement or
other instrument to which Borrower is a party, (ii) is not in conflict with,
will not result
8
<PAGE>
in a breach of or, with the giving of notice, or the passage of time, or
both, will not constitute a default under any such indenture, agreement or
other instrument, and (iii) will not result in the creation or imposition of
any Lien of any nature whatsoever upon any of the Property of Borrower,
except for Permitted Liens.
5.3 OTHER AGREEMENTS. Borrower is not a party to any agreement or
instrument materially adversely affecting its present or proposed business,
properties, or assets, and Borrower is not in default in the performance,
observance or fulfillment of any material obligation, covenant or condition set
forth in any agreement or instrument to which it is a party, which default would
have a material adverse effect on the ability of Borrower to consummate any of
the transactions contemplated by the Loan Documents or to perform any of its
obligations under any of the Loan Documents.
5.4 PRINCIPAL PLACE OF BUSINESS. The principal place of business of
Borrower and its chief executive office are at 1050 East Flamingo Road, Suite
N-337, Las Vegas, Nevada 89119. Borrower has not done business under any name
other than PDS FINANCIAL CORPORATION - NEVADA.
5.5 PRIORITY. The Lender Lien is subject to no prior Liens other than
Permitted Liens, and all Borrower Liens have been or will be assigned to Lender
pursuant to an Assignment.
5.6 FINANCIAL STATEMENTS. Borrower has delivered to Lender the financial
statements described on SCHEDULE 5.6. Such financial statements present fairly
the financial condition and results of operations of Borrower as of the dates
and for the periods indicated therein. All of the foregoing financial
statements, except as otherwise indicated therein, have been prepared in
accordance with GAAP.
5.7 LITIGATION. Except as set forth in SCHEDULE 5.7, there are no actions,
suits, arbitrations, proceedings or claims (whether or not purportedly on behalf
of Borrower) pending or to the best knowledge of Borrower, threatened, against
Borrower or maintained by Borrower, at law or in equity or before any
Governmental Body which, if adversely determined, would have a material adverse
effect on the ability of Borrower to consummate any of the transactions
contemplated by the Loan Documents or perform any of its obligations under any
of the Loan Documents.
5.8 NECESSARY PROPERTY. Borrower has all necessary rights in its Property
(including all patents or trademarks) which are necessary to conduct the
business of Borrower as now conducted.
5.9 VALIDITY AND ENFORCEABILITY OF CONTRACTS. At the time a Contract is
assigned to Lender (and thereupon becomes a Facility Contract) and, unless
expressly limited to that point in time, at all future times with respect to
each of the Facility Contracts, all rights assigned as part of the Facility
Contracts, including without limitation all Facility Equipment covered thereby:
(i) Any modifications of a Contract from the form approved by Lender,
as attached to this Agreement as part of SCHEDULE 4.1.2, are identified in
the Contract by amendment or conspicuous markings, letterings or title
heading (e.g. "Additional Provisions"), and the existence of such
modifications are noted by Borrower in the related Contract Funding
Request; all Contracts have been originated by Borrower as either lessor or
secured party; all Contracts arise from a bona fide non-cancelable contract
for Eligible Equipment with an Eligible End-User for an Approved Contract
Term; and all Equipment described in the Contracts is in all respects in
accord with the requirements of the Contracts and has been delivered to and
unqualifiedly accepted by the End-User thereunder; unless specifically
agreed to by Lender in writing, none of the Equipment, after delivery and
acceptance by the End-User, is a fixture under the applicable laws of any
state where such Equipment is or may be located nor is located outside the
United States;
(ii) All Contracts and related Equipment comply with all applicable
laws and regulations, including, without limitation, interest/usury,
truth-in-lending and disclosure laws; all Contracts are genuine, valid,
binding and enforceable in accordance with their terms, accurately describe
the related Equipment and the Payments due under the Contracts, and are in
all respects what they purport to be; all Contracts, the related Equipment
and all proceeds thereof are not subject to any lien, claim or security
interest except the interest of the End-User, which shall be assigned to
Lender contemporaneously herewith, and Permitted Liens; and all Contracts,
and related rights, agreements, documents and instruments are assignable to
Lender without consent of any person, including without limitation, any
End-User or any Governmental Body or agency and no such assignment will
delegate, create or impose any duty, obligation or liability on Lender;
(iii) At the time of Borrower's assignment of the Contracts,
subject to compliance with all mandatory provisions of law, including
without limitation, the Gaming Laws, Borrower has (A) good title to all of
the Contracts, including the right to receive the payments due thereunder,
(B) either good title to or a first, prior and perfected lien in all
related Equipment; (B) all legal power, right and authority to sell the
Contracts and grant the security interest described herein to Lender; (C)
not sold, transferred, encumbered, assigned or pledged any part of the
Contracts or related Equipment to any other Person; and (D) paid in full
all vendors of the Equipment subject to the Contracts, or will agree to
have Lender pay such vendors with the proceeds of the applicable Advance;
(iv) All counterparts of all Contracts have been clearly marked to
indicate that only one thereof is the "Original" and assignable, and such
counterpart shall be the counterpart delivered to Lender at the time of
Borrower's assignment of the Contract;
(v) Except for any master leases, Borrower has provided Lender with
an original of all material agreements entered into in connection with the
Contracts, and the Equipment related to such Contracts; the Contract
constitutes the entire agreement and there are no oral representations,
warranties or agreements related thereto; the Contracts employ
substantially standard pricing and documentation (including, without
limitation, provisions concerning payment terms, assignment, maintenance,
termination, renewal, insurance and stipulated loss provisions) which have
been approved by Lender; the Contracts contain no
9
<PAGE>
purchase option to the End-User which has not been disclosed in writing
to Lender;
(vi) Each party to each Contract has all the legal capacity, power and
right required for it to enter into such Contract and any supplemental
agreements, and to perform its obligations thereunder; all such actions
have received all corporate or governmental authorization required by any
applicable charter, by-law constitution, law, rule or regulation;
(vii) None of the following existed at the time of Borrower's
assignment to Lender of the Contracts: (i) any payment owing with respect
to any Contract is past due more than ten (10) days, (ii) any End-User is
otherwise in default under a Contract, or (iii) any End-User has canceled
or terminated or given notice of or attempted to cancel or terminate any
Contract;
(viii) There exist no setoffs, abatements, recoupments, claims,
counterclaims or defenses on the part of any End-User under the Contracts
to any claims against or obligations of any End-User thereunder, nor do the
Contracts by their terms give rise to any such right of setoff, abatement,
recoupment, claims, counterclaims or defenses against Borrower or assignee
of Borrower;
(ix) Borrower has not done anything that might impair the value of the
Contracts or any Equipment covered by the Contracts;
(x) All sales, gross receipts, property or other taxes, assessments,
fines, fees and other liabilities relating to the Contracts, the related
Equipment, or the proceeds thereof have been paid when due and all filings
in respect of any such taxes, assessments, fines, fees and other
liabilities have been timely made;
(xi) Borrower is not in default which has continued beyond any
applicable grace periods or cure rights of any of its obligations under the
Contracts, including without limitation, any obligation to repair, maintain
or replace any Equipment or to provide service as provided in the
Contracts;
(xii) The Contracts have not been altered, modified, changed or
amended except as such alterations, modifications, changes or amendments
are set forth in writing and provided to Lender prior to Borrower's
assignment of the Contracts; nor will Borrower agree to any alterations,
modifications, changes or amendments after Borrower's assignment without
Lender's prior written consent;
(xiii) At the time of Borrower's assignment of the Contracts, no
amounts have been prepaid on the Contracts except advance payments which
are required by the express written terms of the Contracts;
(xiv) Borrower has not withheld any information or material facts
in connection with any Contracts or Equipment which would make any
information furnished to Lender misleading and Borrower has no knowledge of
any Contract Event of Default or of any fact which may impair the validity,
value or enforceability of any Contract or Equipment;
(xv) To the best of Borrower's knowledge, any credit information
provided to Lender by Borrower with respect to any End-User is true and
correct in all material respects;
(xvi) All Equipment covered by the Contract (A) is in good
condition and repair and suitable for the purposes for which it is
intended; (B) is covered by comprehensive physical damage insurance for the
full insurable value thereof, unless otherwise mutually agreed to by
Borrower and Lender, and, if applicable, general public liability coverage.
Borrower, "its assigns and/or collateral assigns" have been named as "Loss
Payee" and, if applicable, as "Additional Insured" on any policies procured
by the End-User. Said insurance is in full force and effect, and has not
lapsed or been cancelled by the End-User or the respective insurers;
(xvii) The Contract will not be canceled or terminated or attempted
to be canceled or terminated prior to the full term indicated for such
Contract;
(xviii) Borrower has not breached any representation, warranty or
guarantee under the Contract or any agreement, document or instrument
related thereto;
(xix) Upon recording financing statements with respect to the
Contracts and the related Equipment, and Lender's possession of the
original chattel paper with respect thereto, Lender's security interest
therein shall be perfected and shall have priority over all other liens,
claims, rights of other persons and security interests with respect
thereto; and
(xx) Borrower has not filed any UCC-1 or other document in the public
records against any End-User or End-User guarantor concerning any proposed
Facility Contract or Equipment EXCEPT those which have been disclosed and
either assigned or subordinated to Lender's interest in the Facility
Contracts and the related Equipment and Proceeds, and there are no other
UCC-1's or other public record filings concerning any part of any Facility
Contracts or Equipment whether executed by or in favor of Borrower.
ARTICLE VI
AFFIRMATIVE COVENANTS
Borrower covenants and agrees with Lender as follows:
6.1 PAYMENT OF BORROWER'S OBLIGATIONS. Borrower shall pay and perform all
of Borrower's Obligations as and when the same become due, payable and/or
performable, as applicable.
6.2 PRESERVATION OF EXISTENCE. Borrower shall maintain its existence and
rights in full force and effect to the extent necessary to perform its
obligations under the Loan Documents.
6.3 LEGAL REQUIREMENTS. Borrower (i) promptly and faithfully shall comply
with, conform to and obey all applicable present and future laws, ordinances,
rules, regulations and other requirements that could materially adversely affect
the conduct of its operations, including, but not limited to, maintain its
gaming licenses in the States where it is currently operating its business, and
(ii) shall use or cause the portion of the Collateral consisting of
10
<PAGE>
Facility Equipment to be used in a manner and for the use contemplated by the
manufacturer thereof, and in material compliance with all laws, rules and
regulations of every Governmental Body having jurisdiction over such Facility
Equipment.
6.4 FINANCIAL STATEMENTS AND OTHER REPORTS. Borrower shall maintain full
and complete books of account and other records reflecting the results of
Borrower's operations, all in accordance with GAAP, and shall furnish or cause
to be furnished to Lender within:
(i) 30 days after the end of each quarter, (I) the completed Lockbox
Compliance Certificate for the preceding quarter, in the form attached
hereto as EXHIBIT J, and (II) computer diskettes/tapes containing all
backup data regarding Facility Contracts and Facility Equipment, in format
set forth in EXHIBIT K;
(ii) 30 days after the end of each month: (I) a delinquency report in
the form attached hereto as EXHIBIT L, (II) a true and correct copy of the
Bank, Lockbox and ACH statements for the preceding month, (III) if
applicable, a report setting forth any change in the identity or location
of Facility Equipment from that previously disclosed to Lender; (IV) a
report setting forth leasing, remarketing activities and insurance
settlements with respect to Facility Equipment, and (VI) a report
identifying the Facility Contracts which terminated during the previous
thirty (30) days;
(iii) every 18 months, at Borrower's expense, a new report from
American Appraisal Associates or another appraisal firm acceptable to
Lender, setting forth current Fair Market and Orderly Liquidation Values of
the principal types of Eligible Equipment subject to this Agreement, which
Lender may utilize in its sole, but reasonable, discretion in determining
an acceptable Estimated Residual therefor;
(iv) 10 days after receipt thereof by Borrower, copies of all
financial statements from any End-User(s) who comprise greater than ten
percent (10%) of the aggregate Loan Repayment Amount on all Facility
Contracts;
(v) promptly at Lender's request, such additional information,
documents, downloads and reports as Lender shall advise Borrower from time
to time.
All of the items described in clauses (i), (ii) and (v) of this Section 6.4
shall be certified by a Responsible Officer.
6.5 REMOVAL OF FACILITY EQUIPMENT. Promptly after a Responsible Officer
learns that any Facility Equipment has been moved by a End-User from one
location to another, Borrower will inform Lender or will cause such End-User to
inform Lender of such move and will execute such additional financing statements
as Lender reasonably may request.
6.6 DAMAGE TO EQUIPMENT. Promptly after a Responsible Officer learns that
any Facility Equipment is damaged, and if such Facility Equipment can be
repaired in accordance with the terms of the applicable Facility Contract so as
to restore the same to good and working order, Borrower shall cause such repairs
to be made in accordance with the terms of such Facility Contract.
6.7 BOOKS AND RECORDS; INSPECTIONS.
6.7.1 BOOKS AND RECORDS. Borrower shall keep and maintain, or
cause to be kept and maintained, complete and accurate books and records
and make all necessary entries therein to reflect the transactions
contemplated hereby and all payments, credits, adjustments and calculations
relative thereto.
6.7.2 INSPECTIONS/AUDITS. Upon reasonable prior notice, Lender
shall have full and complete access to the books and records of Borrower
pertaining to the Collateral. In addition, from time to time, but not more
often than twice each year (and upon the occurrence and during the
continuation of a Borrower Event of Default as often as Lender in its sole
discretion deems necessary in order to monitor the business activities of
Borrower), representatives of Lender shall have the right to conduct an
audit of the books and records of Borrower. Borrower shall pay to Lender on
demand the actual, reasonable, out-of-pocket travel expenses incurred by
Lender for any employee of Lender who may conduct or assist in conducting
any such audit.
6.8 MAINTENANCE. Borrower, pursuant to the applicable Facility Contract,
shall cause all Facility Equipment to be maintained and serviced so as to keep
such Facility Equipment in good operating condition, ordinary wear and tear from
normal use excepted.
6.9 NOTICE OF DEFAULTS; CHANGE IN BUSINESS AND ADVERSE EVENTS. Borrower,
immediately after any Responsible Officer becomes aware thereof, shall give
Lender written notice of the occurrence of (i) any Event of Default or any
Incipient Default, accompanied by a statement of such Responsible Officer
setting forth what action Borrower proposes to take in respect thereof, (ii) any
change in the (A) executive officers or key employees of Borrower, or (B)
location of the chief place of business of Borrower or any sale or purchase
outside the regular course of business of Borrower, (iii) any event which may
have a material adverse effect on the (A) enforceability of the Lender Lien or
(B) ability of Borrower to perform any of its obligations under any of the Loan
Documents, (iv) any material default in payment or performance by Borrower or
any End-User under any Facility Contract or (v) any material damage to or
irreparable malfunction of any Facility Equipment.
6.10 INSURANCE/MAINTENANCE. All Facility Equipment shall be covered by
comprehensive physical damage insurance for the full insurable value thereof,
unless otherwise mutually agreed to by Borrower and Lender, and general public
liability coverage, and Borrower "and/or its assigns, including collateral
assigns," shall be named and continue to be named as "Loss Payee" and
"Additional Insured" as its interests may appear. Said insurance shall continue
to be in full force and effect, and shall not lapse or be cancelled by the
End-Users. Borrower, pursuant to the applicable Facility Contract, will cause
the End-User under each Facility Contract to maintain all Facility Equipment in
accordance with the terms of all insurance policies which are or may be in
effect with respect thereto so as not to alter or impair any of the benefits or
coverage to which
11
<PAGE>
Borrower or the applicable End-User is entitled under any such insurance
policies.
6.11 TAXES. Borrower shall pay or, pursuant to each Contract, shall cause
the End-User thereunder to pay promptly when due all taxes, levies, assessments
and governmental charges upon or relating to Facility Equipment for which
Borrower or the applicable End-User is or may be liable.
6.12 CONTRACTS. With respect to each of the Contracts, Borrower shall: (i)
perform all acts necessary to preserve the validity and enforceability of each
such Contract; (ii) take all actions reasonably necessary to assist Lender in
collecting when due all amounts owing to Borrower with respect to each such
Contract; (iii) at all times keep accurate and complete records of performance
by Borrower and the End-User under each such Contract; and (iv) upon request of
Lender verify with the End-User under each Facility Contract the payments due to
Borrower under such Facility Contract, except that (A) prior to the occurrence
of a Borrower Event of Default or Incipient Default, such requests shall not
occur any more frequently than once each year and (B) after the occurrence and
during the continuation of an Incipient Default or a Borrower Event of Default,
such requests may occur as often as Lender shall require.
ARTICLE VII
NEGATIVE COVENANTS
Until Borrower's Obligations are paid and performed in full, Borrower shall
not:
7.1 LIENS. Create or incur or suffer to exist any Lien on the Collateral
other than Permitted Liens.
7.2 BORROWING. Create, incur, assume or suffer to exist any indebtedness
which is secured by Liens on the Collateral other than the Advances or Permitted
Liens.
7.3 MODIFICATIONS OF FACILITY CONTRACTS. Without the prior, written
consent of Lender: amend, supplement, modify, compromise or waive any of the
terms of any Facility Contract (i) if the effect of such amendment, supplement,
modification, compromise or waiver is to (A) reduce or waive the amount of any
payment thereunder, (B) extend the term thereof (except as otherwise permitted
pursuant to Section 7.4), or (C) waive any provisions thereof with respect to
taxes, insurance or maintenance or (ii) unless such amendment, supplement,
modification, compromise or waiver is with respect to (A) the removal of any
Facility Equipment and, in connection with such removal, Borrower complies with
the provisions of Section 6.5, or (B) a Permitted Substitution and if, in
connection with such Permitted Substitution any prepayment of any portion of the
Facility shall occur, Borrower shall comply with the terms of subsection 2.5.
7.4 EXTENSIONS OF FACILITY CONTRACTS; FUTURE CONTRACTS OF FACILITY
EQUIPMENT. Without the prior written consent of Lender: (i) Extend the term of
any Facility Contract unless as of the end of the Approved Contract Term of such
Facility Contract, such Contract no longer will be a Facility Contract as a
result of any such extension or (ii) re-lease any Facility Equipment unless such
re-lease is for the purpose of mitigating damages arising from a Contract Event
of Default.
7.5 MAINTENANCE OF PERFECTED LENDER LIEN. Change the location of its chief
executive office or principal place of business, except if Borrower has (i)
given Lender at least 30 days prior written notice thereof and (ii) caused to be
filed all UCC financing statements which in the opinion of Lender are necessary
or advisable to maintain the perfection of the applicable Lender Lien.
7.6 MERGER AND ACQUISITION. Without the prior, written consent of Lender,
which consent will not be unreasonably withheld or delayed, consolidate with or
merge into any Person, or acquire all or substantially all of the stock or
Property of any Person.
7.7 SALE OR TRANSFER OF ASSETS. Sell, lease, assign, exchange, transfer or
otherwise dispose of any Property except (i) dispositions of Property (other
than Equipment), which is not necessary to the continued operation of the
business of Borrower, (ii) disposition of the real estate now owned or hereafter
acquired by Borrower, provided no Incipient Default or Event of Default is in
existence or will occur as a result of the consummation of any such sale, (iii)
the leasing of real property, (iv) dispositions of Property in the ordinary
course of Borrower's business, or (v) disposition of any obsolete or unusable
Property, provided that if such Property is necessary to the continued operation
of the business of Borrower, such Property promptly is replaced with Property of
like function and value to such Property when the same was not obsolete or
unusable, as applicable.
7.8 DELINQUENCY COVENANT. Allow Facility Contract Total Delinquency to be
greater than twelve percent (12%) of the Aggregate Portfolio Outstandings. All
terms in this subsection not otherwise defined shall have the meanings set forth
in EXHIBIT L (Form of Monthly Delinquency Report).
7.9 TRANSACTIONS WITH AFFILIATES. Except for (i) transactions in the
normal course of business, which transactions comply with the provisions of
clauses (y) and (z) of this Section 7.9, and (ii) purchases of Equipment from
PDS FINANCIAL CORPORATION, which purchases shall comply with the provisions of
clauses (y) and (z) of this Section 7.9, Borrower shall not sell, lease, assign,
transfer or otherwise dispose of any Property to any Affiliate or lease
Property, render or receive services or purchase assets from any Affiliate,
except with the prior written consent of Lender, which consent shall not
unreasonably be withheld or delayed, and except that Borrower may enter into any
such transaction with any such Affiliate in the ordinary course of business if
(y) the monetary or business consideration arising therefrom would be
substantially as advantageous to Borrower as the monetary or business
consideration which would be obtained by Borrower in a comparable arm's-length
transaction with a Person which is not an
12
<PAGE>
Affiliate and (z) no other provision of this Agreement would be violated as a
result thereof.
ARTICLE VIII
BORROWER AND CONTRACT EVENTS OF DEFAULT -- DEFINITIONS AND REMEDIES
8.1 BORROWER EVENTS OF DEFAULT -- DEFINITION. The occurrence of any of the
following shall constitute a Borrower Event of Default hereunder:
(a) DEFAULT IN PAYMENT. If Borrower shall fail to remit to Lender
when due any payment that Borrower is required to make hereunder when and
as the same shall become due and payable, and such failure shall continue
for a period of 10 days after such payment becomes due.
(b) BREACH OF REPRESENTATION OR WARRANTY. If any representation made
by Borrower to Lender in any Loan Document or in any report, certificate,
opinion, financial statement (other than those financial statements
provided by and pertaining to any End-User) or other document or statement
furnished pursuant thereto shall be false or misleading in any material
respect when made, or any warranty given by Borrower shall be breached by
Borrower, unless (i) the fact, circumstance or condition is made true
within ten (10) Business Days after notice thereof is given to Borrower by
Lender, and (ii) in Lender's judgment, such cure removes any adverse effect
on Lender.
(c) BREACH OF COVENANT. If Borrower shall fail to duly observe or
perform any covenant, condition or agreement set forth in Articles VI or
VII of the Agreement on its part to be performed or observed for ten (10)
Business Days after a Responsible Officer has knowledge thereof.
(d) BANKRUPTCY, RECEIVERSHIP, INSOLVENCY, ETC.
(i) If Borrower or Guarantor shall (A) apply for or consent to
the appointment of a receiver, trustee or liquidator for it or any of
its Property, (B) be unable to pay its debts as they mature, (C) make
a general assignment for the benefit of creditors, (D) be adjudicated
a bankrupt or insolvent or (E) file a voluntary petition in
bankruptcy, or a petition or an answer seeking reorganization or an
arrangement with creditors or to take advantage of any bankruptcy,
reorganization, insolvency, readjustment of debt, dissolution or
liquidation law or statute, or file an answer admitting the material
allegations of a petition filed against it in any proceeding under any
such law, or if action shall be taken by Borrower or Guarantor for the
purpose of effecting any of the foregoing, or
(ii) If any Governmental Body of competent jurisdiction shall
enter an order appointing, without consent of Borrower or Guarantor, a
custodian, receiver, trustee or other officer with similar powers with
respect to Borrower or Guarantor, or with respect to any substantial
part of the Property belonging to Borrower or Guarantor, or if an
order for relief shall be entered in any case or proceeding for
liquidation or reorganization or otherwise to take advantage of any
bankruptcy or insolvency law of any jurisdiction, or ordering the
dissolution, winding-up or liquidation of Borrower or Guarantor, or if
any petition for any such relief shall be filed against Borrower or
Guarantor, and such petition shall not be dismissed within 45 days.
(e) NON-PAYMENT OF OTHER INDEBTEDNESS. Default by Borrower or
Guarantor (other than in payment of Borrower's Obligations) in the (i)
payment when due (subject to any applicable grace period or cure period),
whether by acceleration or otherwise, of any indebtedness, where the amount
thereof is in excess of $500,000, or (ii) performance or observance of any
obligation or condition with respect to any indebtedness of Borrower or
Guarantor, where the amount of such indebtedness is in excess of $500,000
(other than in payment of Borrower's Obligations) if the effect of such
default is to accelerate the maturity of any such indebtedness or to permit
the holder thereof to cause such indebtedness to become due and payable
prior to its expressed maturity.
(f) OTHER MATERIAL OBLIGATIONS. Default in the payment when due, or
in the performance or observance of, any material obligation of, or
condition agreed to by, Borrower or Guarantor with respect to any purchase
or lease of goods or services, where (i) the amount with respect to any
such purchase or lease of goods or services is in excess of $500,000 and
(ii) any grace period or cure period with respect to any such payment,
performance or observance has lapsed (except such default in payment,
performance or observance shall not be deemed to constitute a default
hereunder if the existence of any such default is being contested by
Borrower or Guarantor in good faith and by appropriate proceedings
diligently pursued).
(g) GUARANTY/GUARANTOR. If a Default or an Event of Default shall
occur under the PDS Loan Agreement or the Guaranty.
In any such event, in addition to Lender's other remedies under this
Agreement, Lender, by notice to Borrower, may declare that no further Advances
shall be made.
8.2 BORROWER EVENTS OF DEFAULT -- REMEDIES. If a Borrower Event of Default
shall have occurred, and has not been cured by Borrower (or by Lender, at its
option) within an applicable cure period, or a Material Adverse Change occurs of
the type set forth in Section 4.1.7 (i) or (ii), then Lender shall have the
right to do any or all of the following:
(a) If Lender has not already done so pursuant to Section 2.4,
complete and deliver to the End-Users the Contract Payment Letters to
commence direct billing and collection with respect to the Facility
Contracts, and deduct from such receipts and remittances a fee equal to
five percent (5%) of the aggregate monthly receipts ("Administration Fee")
from the payment on the Facility Contracts as compensation for the
additional administrative burden;
(b) (i) exercise of any of Borrower's rights under any of the
Facility Contracts, or (ii) by written notice, require Borrower to exercise
on behalf of Lender as secured party under this Agreement any and all of
the rights available to Borrower under any Facility Contract to the extent
not already exercised by
13
<PAGE>
Borrower, whereupon Borrower shall immediately take all requested action;
(c) proceed against Borrower and/or Guarantor for all rights and
remedies Lender may have in law or in equity under the Loan Documents;
(d) declare the entire amount of Borrower's Obligations and
Administration Fee due and payable immediately, and exercise in respect of
the Facility Equipment all the rights and remedies of a secured party upon
default under the UCC, including, at any reasonable time, to enter
Borrower's premises and take physical possession of any master leases to
which the related Facility Contracts pertain.
Lender shall not take any action or exercise any right that would
disturb any End-User's full and quiet enjoyment of all of such End-User's rights
under that Facility Contract. Lender will give Borrower reasonable notice of the
time and place of any public sale of any Collateral or of the time after which
any public or private sale of such Collateral or any other intended disposition
thereof is to be made. Unless otherwise provided by law, the requirement of
reasonable notice shall be met if such notice is delivered at least ten (10)
days before, or mailed, postage prepaid, to Borrower, at least twenty (20) days
before the time of such sale or disposition.
Notwithstanding the foregoing, to the extent that a breach occurs
under Section 8.1(b), and such breach relates to a single Facility Contract,
Borrower shall have twenty (20) days from receipt of demand by Lender to prepay
the Facility Contract pursuant to the terms of the Mandatory Prepayment clause
set forth at Section 2.5.4. Borrower's failure to prepay such Facility Contract
within said twenty (20) day period shall then constitute a Borrower Event of
Default under Section 8.1(a). Furthermore, if the Borrower Event of Default
pertains solely to a breach of a covenant set forth in Section 7.8 (Delinquency
Covenants), Lender's sole remedy shall be to commence direct billing and
collection of Facility Contracts, subject to all mandatory provisions of law,
including without limitation, the Gaming Laws, as set forth more fully in
Section 8.2 (a) and (b).
All actual costs and expenses incurred by Lender in connection with
the enforcement and/or exercise of any of its rights or remedies (including,
without limitation, reasonable attorneys fees) hereunder shall (i) be payable by
Borrower to Lender immediately upon demand, (ii) constitute a portion of
Borrower's Obligations and (iii) be secured by the Lender Lien.
8.3 CONTRACT EVENTS OF DEFAULT.
8.3.1 DEFINITION: The occurrence of a default by any End-User
pursuant to the terms of a Facility Contract, which default entitles
Borrower to accelerate or terminate such Facility Contract or to repossess
the related Facility Equipment, shall constitute a Contract Event of
Default.
8.3.2 ACCELERATION. Upon the occurrence of a Contract Event of
Default, Lender, at any time (unless such Contract Event of Default shall
have been cured by Borrower), at its option, by notice to Borrower and/or
End-User, may terminate such Facility Contract and accelerate all payments
due thereunder.
8.3.3 CONTRACT EVENT OF DEFAULT -- REMEDIES. Upon the occurrence
of a Contract Event of Default, Borrower shall, if known to Borrower,
immediately deliver to Lender written notice thereof, which notice shall
identify the Facility Contract which is in default and the applicable
Advance, and describe the nature of such default and the actions Borrower
proposes to undertake with respect to such default. If any payment(s) under
a Facility Contract becomes 120 days past due, whether or not such
payment(s) have been cured by Borrower, then Borrower shall prepay in full
the unpaid portion of the Advance pertaining to such Facility Contract and
remit to Lender such Residuals as may be due pursuant to Section 2.7, or
exercise its right of substitution pursuant to Section 3.3.
Lender, with respect to the Facility Equipment subject to such
Facility Contract, shall have and may exercise against Borrower all the
rights and remedies of a secured party under the Illinois UCC and/or the
UCC applicable to the location of the related Facility Equipment, and any
other applicable laws, subject to all mandatory provisions of law,
including without limitation, the Gaming Laws. Lender will give Borrower
reasonable notice of the time and place of any public sale of any
Collateral or of the time after which any public or private sale of such
Collateral or any other intended disposition thereof is to be made. Unless
otherwise provided by law, the requirement of reasonable notice shall be
met if such notice is delivered at least ten (10) days before, or mailed,
postage prepaid, to Borrower at least twenty (20) days before the time of
such sale or disposition. Lender shall have full recourse to Borrower for
any deficiency between the Sale Proceeds thereof and the Loan Repayment
Amount for the related Advance. For the purposes hereof, Sale Proceeds
shall mean the gross proceeds received by Borrower with respect to any sale
of Facility Equipment, less any reasonable remarketing fees paid or
reasonable costs incurred by Borrower with respect to any such sale. In
addition to the foregoing, at Lender's election, Lender may complete and
deliver one or more Contract Payment Letters in order to commence direct
billing and collection with respect to one or more Contracts subject to a
Contract Event of Default, and deduct the Administration Fee with respect
thereto. Furthermore:
(i) Lender only shall be entitled to exercise the rights and
remedies set forth in this Section 8.3.3 with respect to the Facility
Contract, the End-User and the Facility Equipment which are the
subject of such Contract Event of Default;
(ii) the expenses and other payments to which any proceeds of the
Collateral shall be applied in accordance with the provisions of
subsections 8.6 & 8.7 shall be so applied to payment of Borrower's
Obligations pertaining to the Facility Contract which is the subject
of such Contract Event of Default, and
(iii) upon payment and performance in full of all of
Borrower's Obligations pertaining to the Facility Contract which is
the subject of such Contract Event of Default, both
14
<PAGE>
(A) the Contract Event of Default with respect to such Facility
Contract, and (B) any related Borrower Event of Default shall be
deemed to be cured.
8.5 POWER OF ATTORNEY. In order to permit Lender to exercise the rights
and remedies set forth herein, Borrower hereby irrevocably appoints Lender as
its attorney-in-fact and agent with full power of substitution, in the name of
Lender or in the name of Borrower, to perform any of the following acts upon the
occurrence of a Borrower Event of Default, subject to all mandatory provisions
of law, including without limitation, the Gaming Laws: (i) receive, open and
examine all mail addressed to Borrower and retain any such mail relating to the
Collateral and return to Borrower only that mail which is not so related; (ii)
endorse the name of Borrower on any checks or other instruments or evidences of
payment or other documents, drafts, or instruments arising in connection with or
pertaining to the Collateral, to the extent that any such items come into the
possession of Lender; (iii) compromise, prosecute or defend any action, claim,
or proceeding concerning the Collateral; (iv) perform any and all acts which
Borrower is obligated to perform under the Loan Documents; (v) exercise such
rights as Borrower might exercise with respect to the Collateral, including,
without limitation, the leasing or other utilization thereof and the collection
of any such rents or other payments applicable thereto; (vi) give notice of the
existence of the Lender's Lien, including, without limitation, notification to
End-Users and/or other account debtors of the existence of such Lender's Lien
with respect to the rents and other payments due to Borrower relative to the
Collateral; or (vii) execute in Borrower's name and file any notices, financing
statements and other documents or instruments Lender determines are necessary or
required to carry out fully the intent and purpose of the Loan Documents or to
perfect the Lender Lien.
Borrower hereby ratifies and approves all that Lender shall do or
cause to be done by virtue of the power of attorney granted herein and agrees
that neither Lender nor any of Lender's employees, agents, officers, or its
attorneys will be liable for any acts or omissions or for any error of judgment
or mistake of fact or law made while acting in good faith pursuant to the
provisions of this subparagraph, unless such act, omission, error of judgment or
mistake of fact or law is determined by a court of competent jurisdiction in a
decision which no longer is subject to appeal to be the result of the gross
negligence or the willful or wanton misconduct of Lender or any such employees,
agents, officers or attorneys of Lender. The appointment of Lender as Borrower's
attorney-in-fact is a power coupled with an interest, and therefore shall remain
irrevocable until all of Borrower's Obligations have been paid and performed in
full.
8.6 EXPENSES. All actual costs and expenses incurred by Lender in
connection with the enforcement and/or exercise of any of its rights or remedies
(including, without limitation, reasonable attorneys fees) hereunder shall (i)
be payable by Borrower to Lender immediately upon demand, (ii) constitute a
portion of Borrower's Obligations and (iii) be secured by the Lender Lien.
8.7 APPLICATION OF FUNDS. Any funds received by Lender pursuant to the
exercise of any rights accorded to Lender pursuant to or by the operation of any
of the terms of any of the Loan Documents shall be applied by Lender in the
following order of priority:
(i) EXPENSES: First to the payment of all (A) actual fees and
expenses, including, without limitation, court costs, fees of appraisers,
title charges, costs of maintaining and preserving the Collateral, costs of
sale, reasonable attorney's fees, and all other costs incurred by Lender in
exercising any rights accorded to Lender pursuant to the Loan Documents or
by applicable law and (B) Liens superior to the Liens of Lender, except
such superior Liens subject to which any sale of the Collateral may have
been made;
(ii) BORROWER'S OBLIGATIONS. Next, to the payment of Borrower's
Obligations, in such order as Lender may determine; and
(iii) SURPLUS. Any surplus, to the Person or Persons legally
entitled thereto.
ARTICLE IX
MISCELLANEOUS
9.1 RIGHTS, REMEDIES AND POWERS. Each and every right, remedy and power
granted to Lender hereunder shall be cumulative and in addition to any other
right, remedy or power not specifically granted herein or now or hereafter
existing in equity, at law, by virtue of statute or otherwise and may be
exercised by Lender from time to time concurrently or independently as often and
in such order as Lender may deem expedient. Any failure or delay on the part of
Lender in exercising any such right, remedy or power, or abandonment or
discontinuance of steps to enforce the same, shall not operate as a waiver
thereof or affect Lender's right thereafter to exercise the same, and any single
or partial exercise of any such right, remedy or power shall not preclude any
other or further exercise thereof or the exercise of any other right, remedy or
power. Acceptance of payments in arrears shall not waive or affect any right to
accelerate Borrower's Obligations.
9.2 MODIFICATIONS, WAIVERS AND CONSENTS. Any modification or waiver of any
provision of this Agreement, or any consent to any departure by Borrower
therefrom, shall not be effective in any event unless the same is in writing and
signed by Lender, and then such modification, waiver or consent shall be
effective only in the specific instance and for the specific purpose given. Any
notice to or demand on Borrower in any event not specifically required of Lender
hereunder shall not entitle Borrower to any other or further notice or demand in
the same, similar or other circumstances unless specifically required hereunder.
9.3 COMMUNICATIONS. All notices, consents, approvals and other
communications under the Loan Documents shall be in writing and shall be (i)
delivered in person, (ii) sent by telephonic facsimile ("FAX") or (iii) mailed,
postage prepaid, either by (A) registered or certified mail, return receipt
requested, or (B) overnight express carrier, addressed in each case as follows:
15
<PAGE>
To Lender: Heller Financial, Inc.
One TransAm Plaza Drive, Suite 222
Oakbrook Terrace, Illinois 60181
Attn: Executive Vice President, Vendor Finance
FAX No.: (630) 916-7457
Borrower: PDS Financial Corporation - Nevada
Attention: Johan Finley, CEO and President
1050 East Flamingo Road, Suite N-337
Las Vegas, Nevada 89119
FAX No.: (702) 699-5649
with a copy to: Dorsey & Whitney, LLP
Attention: Paula S. Rindels, Esq.
Pillsbury Center South
220 South Sixth Street
Minneapolis, MN 55402
FAX No.: (612) 340-2644
Vargas & Bartlett
Attention: Mike Alonso, Esq.
201 W. Liberty Street
P.O. Box 281
Reno, Nevada 89504
FAX No.: (702) 786-1177
or to such other address, as to either of the parties hereto, as such party
shall designate in a written notice to the other party hereto. All notices sent
pursuant to the terms of this Section 9.3 shall be deemed received (i) if sent
by FAX during regular business hours, on the day sent if a Business Day, or if
such day is not a Business Day (or a Business Day after regular business hours),
then on the next Business Day, (ii) if sent by overnight, express carrier, on
the next Business Day immediately following the day sent, or (iii) if sent by
registered or certified mail, on the fifth Business Day following the day sent.
9.4 SEVERABILITY. If any provision of this Agreement is prohibited by, or
is unlawful or unenforceable under, any applicable law of any jurisdiction, such
provision, as to such jurisdiction, shall be ineffective to the extent of such
prohibition without invalidating the remaining provisions hereof; provided,
however, that where the provisions of any such applicable law may be waived,
they hereby are waived by Borrower to the full extent permitted by law so that
this Agreement shall be deemed to be an agreement which is valid and binding in
accordance with its terms.
9.5 SURVIVAL. The warranties, representations, covenants and agreements
set forth herein shall survive the making of the Advances and the execution and
delivery of the Loan Documents and shall continue in full force and effect until
Borrower's Obligations have been paid and performed in full.
9.6 ATTORNEYS' FEES AND OTHER EXPENSES. Borrower agrees to pay to Lender
on demand any actual out-of-pocket costs or expenses, together with reasonable
attorneys' fees, incurred by Lender in connection with the enforcement or
collection against Borrower of any provision of any of the Loan Documents,
whether or not suit is instituted, including, but not limited to, such actual
costs or expenses arising from the enforcement or collection against Borrower of
any provision of any of the Loan Documents in any state or Federal bankruptcy or
reorganization proceeding. In addition, in the event that Borrower elects to
submit a Contract Funding Request containing one or more Contracts which have
deviations from the standard form approved by Lender and attached to this
Agreement as part of SCHEDULE 4.1.2, Lender reserves the right to charge a
reasonable fee, based on a rate of $125.00 per hour, as an offset against the
related Advance, for its inside counsel to review such Contract(s).
9.7 INDEMNITY. Borrower agrees to indemnify and save Lender and its
successors, assigns, agents and servants harmless of and from any claims,
actions, suits, losses, costs, liabilities, damages or expenses (including
actual expenses and reasonable attorneys' fees) incurred by Lender in connection
with the transactions contemplated by this Agreement, including without
limitation: (i) any loss, cost, liability, damage or expense (including actual
expenses and reasonable attorneys' fees) incurred in connection with the
Facility Contracts; (ii) the delivery, ownership, alteration, operation,
maintenance, return or other disposition of the Collateral; (iii) from any
documentation deficiencies or changes to the basic format of the Facility
Contract; (iv) from the existence of any party having an interest, lien or claim
in the Facility Contract(s), and/or the Facility Equipment covered thereby,
and/or the proceeds thereof, which interest, lien or claim is prior to the
interest therein assigned to Lender hereby; (v) the construction of Lender and
Borrower as having the relationship of joint venturers or partners, or (vi) the
determination that Lender or Borrower has acted as agent for the other.
Borrower's obligations with respect to the indemnity set forth in this
Section 9.7 shall survive repayment of all amounts due pursuant to the Loan
Documents, the cancellation of the Notes and the release and/or cancellation of
any and all of the Loan Documents. Lender agrees to promptly notify Borrower of
any matters in respect of which this indemnity may apply. If notified in writing
of any action or claim brought or threatened against Lender based on a claim for
which Borrower is to provide indemnity and given full authority, information,
and assistance for the defense of same by Lender, Borrower shall, without
limitation, defend those actions or claims at its expense and pay the costs and
damages and attorneys' fees awarded in any such action or arising from any such
claim, provided that Borrower shall have the right to control the defense and
settlement of all such actions and claims. Lender will take all such actions (at
the expense of Borrower) as may be reasonably requested by Borrower to assist
Borrower in connection with such defense or settlement. Nothing herein is
intended to indemnify Lender for consequences of its actions or failure to act.
9.8 BINDING EFFECT. This Agreement shall be binding upon the successors
and assigns of Borrower and shall inure to the benefit of the successors and
assigns of Lender.
9.9 ASSIGNMENTS; PARTICIPATIONS. Lender shall be entitled to sell, assign
or transfer any portion of its interest in the Facility; provided, however,
Lender hereby agrees to deliver to Borrower notice of such proposed sale,
assignment or transfer not less than 30 days prior to the proposed date for the
consummation thereof, which notice shall include a description of the financial
institution to which such sale, assignment or transfer is proposed to be made.
In connection with any such sale, assignment or transfer, Lender may disclose
such information with respect to Borrower, its business and financial affairs
and the Facility as Lender reasonably deems necessary, unless any such
information which has been
16
<PAGE>
provided by Borrower to Lender is confidential in nature, in which case such
confidential information shall not be disclosed without the prior written
consent of Borrower, which consent shall not unreasonably be withheld or
delayed.
9.10 FURTHER ASSURANCES. Each of Borrower and Lender agrees that upon the
request of the other party hereto at any time and from time to time after the
execution of this Agreement it shall execute and deliver such further
instructions, documents, and certificates and take such further actions as such
party reasonably may request.
9.11 GOVERNING LAW, CONSENT TO JURISDICTION AND SERVICE OF PROCESS. EXCEPT
WITH RESPECT TO ENFORCEMENT OF SECURITY INTERESTS IN GAMING DEVICE GOODS (WHICH
SHALL BE GOVERNED BY THE STATE IN WHICH SUCH GAMING DEVICE GOODS ARE SITUATED),
THIS AGREEMENT, EACH OF THE OTHER LOAN DOCUMENTS, AND ANY ASSIGNMENT EXECUTED IN
CONNECTION THEREWITH SHALL BE A CONTRACT MADE UNDER AND GOVERNED BY THE LAWS OF
THE STATE OF ILLINOIS APPLICABLE TO CONTRACTS MADE AND PERFORMED ENTIRELY WITHIN
THE STATE OF ILLINOIS. BORROWER DOES HEREBY SUBMIT, AT LENDER'S ELECTION, TO THE
EXCLUSIVE JURISDICTION AND VENUE OF ANY COURTS (FEDERAL, STATE OR LOCAL) HAVING
A SITUS WITHIN THE COUNTY OF COOK AND THE STATE OF ILLINOIS WITH RESPECT TO ANY
DISPUTE, CLAIM, OR SUIT, WHETHER DIRECTLY OR INDIRECTLY ARISING OUT OF OR
RELATING TO THIS AGREEMENT, OR ANY RELATED NOTE OR ANY OF BORROWER'S OBLIGATIONS
OR INDEBTEDNESS HEREUNDER. BORROWER EXPRESSLY WAIVES PERSONAL SERVICE OF PROCESS
AND CONSENTS TO SERVICE BY CERTIFIED MAIL, POSTAGE PREPAID, DIRECTED TO THE LAST
KNOWN ADDRESS OF BORROWER, WHICH SERVICE SHALL BE DEEMED COMPLETED WITHIN TEN
(10) DAYS AFTER THE DATE OF MAILING THEREOF. BORROWER HEREBY IRREVOCABLY WAIVES
ANY CLAIM THAT THE COUNTY OF COOK, STATE OF ILLINOIS IS AN INCONVENIENT FORUM OR
AN IMPROPER FORUM BASED ON LACK OF VENUE AS WELL AS ANY RIGHT IT MAY NOW OR
HEREAFTER HAVE TO REMOVE ANY SUCH ACTION OR PROCEEDING, ONCE COMMENCED, TO
ANOTHER COURT ON THE GROUNDS OF FORUM NON CONVENIENS OR OTHERWISE. THE EXCLUSIVE
CHOICE OF FORUM SET FORTH HEREIN SHALL NOT BE DEEMED TO PRECLUDE THE ENFORCEMENT
BY LENDER OF ANY JUDGMENT OBTAINED IN SUCH FORUM OR THE TAKING OF ANY ACTION BY
LENDER TO ENFORCE THE SAME IN ANY OTHER APPROPRIATE JURISDICTION.
9.12 WAIVER OF JURY TRIAL. BORROWER AND LENDER HEREBY WAIVE THEIR
RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR
ARISING OUT OF THIS LOAN AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS. THIS
WAIVER IS INTENDED TO BE EFFECTIVE WITH RESPECT TO ALL DISPUTES WHICH ARISE OUT
OF ANY OF THE LOAN DOCUMENTS OR PERTAIN TO THE TRANSACTIONS CONTEMPLATED
THEREBY. THIS WAIVER IS IRREVOCABLE, AND MAY NOT BE MODIFIED EITHER ORALLY OR IN
WRITING, AND SUCH WAIVER SET FORTH HEREIN SHALL APPLY TO ANY SUBSEQUENT
AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT OR THE
OTHER LOAN DOCUMENTS.
This Agreement has been executed and delivered by each of the parties
hereto by a duly authorized officer of each such party on the date first set
forth above.
HELLER FINANCIAL, INC.
By:
---------------------------------
Title: Vice President
PDS FINANCIAL CORPORATION - NEVADA
By: /S/ JOHAN FINLEY
----------------------------------
Johan Finley
Title: CEO and President
17
<PAGE>
<TABLE>
<CAPTION>
LOAN AGREEMENT
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$3,000,000 08-15-97 849-26 55908 365 6608780924 40329 VB
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
</TABLE>
References in the shaded area are for Lender's use only and do not limit the
applicablity of this document to any particular loan or item.
Borrower: PDS FINANCIAL CORPORATION; ET. AL. Lender: U.S. Bank
6442 City West Parkway, Suite 300 Commercial Services Group
Minneapolis, MN 55344 2300 W. Sahara, Suite 200
Las Vegas, NV 89102
THIS LOAN AGREEMENT between PDS FINANCIAL CORPORATION and PDS FINANCIAL
CORPORATION - NEVADA (referred to in this Agreement individually and
collectively as "Borrower") and U.S. BANK (referred to in this Agreement as
"Lender") is made and executed on the following terms and conditions.
Borrower has received prior commercial loans from Lender or has applied to
Lender for a commercial loan or loans and other financial accommodations,
including those which may be described on any exhibit or schedule attached to
this Agreement. All such loans and financial accommodations, together with
all future loans and financial accommodations from Lender to Borrower, are
referred to in this Agreement individually as the "Loan" and collectively as
the "Loans." Borrower understands and agrees that: (a) in granting,
renewing, or extending any Loan, Lender is relying upon Borrower's
representations, warranties, and agreements, as set forth in this Agreement;
(b) the granting, renewing, or extending of any Loan by Lender at all times
shall be subject to Lender's sole judgment and discretion; and (c) all such
Loans shall be and shall remain subject to the following terms and conditions
of this Agreement.
TERM. This Agreement shall be effective as of August 15, 1997, and shall
continue thereafter until all indebtedness of Borrower to Lender has been
performed in full and the parties terminate this Agreement in writing.
DEFINITIONS. The following words shall have the following meanings when used
in this Agreement. Terms not otherwise defined in this Agreement shall have
the meanings attributed to such terms in the Uniform Commercial Code. All
references to dollar amounts shall mean amounts in lawful money of the United
States of America.
AGREEMENT. The word "Agreement" means this Loan Agreement, as this Loan
Agreement may be amended or modified from time to time, together with all
exhibits and schedules attached to this Loan Agreement from time to time.
ACCOUNT. The word "Account" means a trade account, account receivable, or
other right to payment for goods sold or services rendered owing to Borrower
(or to a third party grantor acceptable to Lender).
ACCOUNT DEBTOR. The words "Account Debtor" mean the person or entity
obligated upon an Account.
ADVANCE. The word "Advance" means a disbursement of Loan funds under this
Agreement.
BORROWER. The word "Borrower" means individually and collectively PDS
FINANCIAL CORPORATION and PDS FINANCIAL CORPORATION - NEVADA and all other
persons and entities signing Borrowers' Note.
BORROWING BASE. The words "Borrowing Base" mean (as determined by Lender
from time to time) the lesser of (a) $3,000,000.00; or (b) the sum of
(i) 65.000% of the aggregate amount of Eligible Accounts, plus (ii) 65.000%
of the aggregate amount of Eligible Inventory. In determining the amount of
the Borrowing
<PAGE>
Base, only Eligible Accounts and Eligible Inventory of PDS FINANCIAL
CORPORATION - NEVADA shall be included.
BUSINESS DAY. The words "Business Day" mean a day on which commercial banks
are open for business in the State of Nevada.
CERCLA. The word "CERCLA" means the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended.
CASH FLOW. The words "Cash Flow" mean net income after taxes, and exclusive
of extraordinary gains and income, plus depreciation and amortization.
COLLATERAL. The word "Collateral" means and includes without limitation all
property and assets granted as collateral security for a Loan, whether real
or personal property, whether granted directly or indirectly, whether
granted now or in the future, and whether granted in the form of a security
interest, mortgage, deed of trust, assignment, pledge, chattel mortgage,
chattel trust, factor's lien, equipment trust, conditional sale, trust
receipt, lien, charge, lien or title retention contract, lease or
consignment intended as a security device, or any other security or lien
interest whatsoever, whether created by law, contract, or otherwise. The
word "Collateral" includes without limitation all collateral described below
in the section titled "COLLATERAL."
DEBT. The word "Debt" means all of Borrower's liabilities excluding
Subordinated Debt.
ELIGIBLE ACCOUNTS. The words "Eligible Accounts" mean, at any time, all of
Borrower's Accounts which contain selling terms and conditions acceptable to
Lender. The net amount of any Eligible Account against which Borrower may
borrow shall exclude all returns, discounts, credits, and offsets of any
nature. Unless otherwise agreed to by Lender in writing, Eligible Accounts
do not include:
(a) Accounts with respect to which the Account Debtor is an officer, an
employee or agent of Borrower.
(b) Accounts with respect to which the Account Debtor is a subsidiary
of, or affiliated with or related to Borrower or its shareholders,
officers, or directors.
(c) Accounts with respect to which goods are placed on consignment,
guaranteed sale, or other terms by reason of which the payment by the
Account Debtor may be conditional.
(d) Accounts with respect to which the Account Debtor is not a resident
of the United States, except to the extent such Accounts are supported
by insurance, bonds or other assurances satisfactory to Lender.
(e) Accounts with respect to which Borrower is or may become liable to
the Account Debtor for goods sold or services rendered by the Account
Debtor to Borrower.
(f) Accounts which are subject to dispute, counterclaim, or setoff.
(g) Accounts with respect to which the goods have not been shipped or
delivered, or the services have not been rendered, to the Account
Debtor.
(h) Accounts with respect to which Lender, in its sole discretion,
deems the creditworthiness or financial condition of the Account Debtor
to be unsatisfactory.
(i) Accounts of any Account Debtor who has filed or has had filed
against it a petition in bankruptcy or an application for relief under
any provision of any state or federal bankruptcy, insolvency, or debtor-
in-relief acts; or who has had appointed a trustee, custodian, or
receiver for the assets of such
<PAGE>
Account Debtor; or who has made an assignment for the benefit of
creditors or has become insolvent or fails generally to pay its debts
(including its payrolls) as such debts become due.
(j) Accounts with respect to which the Account Debtor is the United
States government or any department or agency of the United States.
(k) Accounts which have not been paid in full within 90 DAYS from the
invoice date. The entire balance of any Account of any single Account
debtor will be ineligible whenever the portion of the Account which has
not been paid within 90 DAYS from the invoice date is in excess of
10.000% of the total amount outstanding on the Account.
(l) That portion of the Accounts of any single Account Debtor which
exceeds 10.000% of all of Borrower's Accounts.
(m) Datings; Progress Billings; Cash Sales; Service Charges.
ELIGIBLE INVENTORY. The words "Eligible Inventory" mean, at any time, all
of Borrower's Inventory as defined below except:
(a) Inventory which is not owned by Borrower free and clear of all
security interests, liens, encumbrances, and claims of third parties.
(b) Inventory which Lender, in its sole discretion, deems to be
obsolete, unsalable, damaged, defective, or unfit for further
processing.
(c) Work in progress.
(d) Raw Materials; Inventory outside Las Vegas, NV, held over 24
months.
ERISA. the word "ERISA" means the Employee Retirement Income Security Act
of 1974, as amended.
EVENT OF DEFAULT. The words "Event of Default" mean and include without
limitation any of the Events of Default set forth below in the section
titled "EVENTS OF DEFAULT."
EXPIRATION DATE. The words "Expiration Date" mean the date of termination
of Lender's commitment to lend under this Agreement.
GRANTOR. The word "Grantor" means and includes without limitation each and
all of the persons or entities granting a Security Interest in any
Collateral for the Indebtedness, including without limitation all Borrowers
granting such a Security Interest.
GUARANTOR. The word "Guarantor" means and includes without limitation each
and all of the guarantors, sureties, and accommodation parties in connection
with any Indebtedness.
INDEBTEDNESS. The word "Indebtedness" means and includes without limitation
all Loans, together with all other obligations, debts and liabilities of
Borrower to Lender, or any one or more of them, as well as all claims by
Lender against Borrower, or any one or more of them; whether now or
hereafter existing, voluntary or involuntary, due or not due, absolute or
contingent, liquidated or unliquidated; whether Borrower may be liable
individually or jointly with others; whether borrower may be obligated as a
guarantor, surety, or otherwise; whether recovery upon such Indebtedness may
be or hereafter may become barred by any statute of limitations; and whether
such Indebtedness may be or hereafter may become otherwise unenforceable.
<PAGE>
INVENTORY. The word "Inventory" means all of Borrower's raw materials, work
in process, finished goods, merchandise, parts and supplies, of every kind
and description, and goods held for sale or lease or furnished under
contracts of service in which Borrower now has or hereafter acquires any
right, whether held by Borrower or others, and all documents of title,
warehouse receipts, bills of lading, and all other documents of every type
covering all or any part of the foregoing. Inventory includes Inventory
temporarily out of Borrower's custody or possession and all returns on
Accounts.
LENDER. The word "Lender" means U.S. BANK, its successors and assigns.
LINE OF CREDIT. The words "Line of Credit" mean the credit facility
described in the Section titled "LINE OF CREDIT" below.
LIQUID ASSETS. The words "Liquid Assets" means Borrower's cash on hand plus
Borrower's readily marketable securities.
LOAN. The word "Loan" or "Loans" means and includes without limitation any
and all commercial loans and financial accommodations from Lender to
Borrower, whether now or hereafter existing, and however, evidenced,
including without limitation those loans and financial accommodations
described herein or described on any exhibit or schedule attached to this
Agreement from time to time.
NOTE. The word "Note" means and includes without limitation Borrower's
promissory note or notes, if any, evidencing Borrower's Loan obligations in
favor of Lender, as well as any substitute, replacement or refinancing note
or notes therefor.
PERMITTED LIENS. The words "Permitted Liens" mean: (a) liens and security
interests securing Indebtedness owed by Borrower to Lender; (b) liens for
taxes, assessments, or similar charges either not yet due or being contested
in good faith; (c) liens of materialmen, mechanics, warehousemen, or
carriers, or other like liens arising in the ordinary course of business and
securing obligations which are not yet delinquent; (d) purchase money liens
or purchase money security interests upon or in any property acquired or
held by Borrower in the ordinary course of business to secure Indebtedness
outstanding on the date of this Agreement or permitted to be incurred under
the paragraph of this Agreement titled "Indebtedness and Liens"; (e) liens
and security interests which, as of the date of this Agreement, have been
disclosed to and approved by the Lender in writing; and (f) those liens and
security interests which in the aggregate constitute an immaterial and
insignificant monetary amount with respect to the net value of Borrower's
assets.
RELATED DOCUMENTS. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages, deeds
of trust, and all other instruments, agreements and documents, whether now
or hereafter existing, executed in connection with the Indebtedness.
SECURITY AGREEMENT. The words "Security Agreement" mean and include without
limitation any agreements, promises, covenants, arrangements,
understandings or other agreements, whether created by law, contract or
otherwise, evidencing, governing, representing, or creating a Security
Interest.
SECURITY INTEREST. The words "Security Interest" mean and include without
limitation any type of collateral security, whether in the form of a lien,
charge, mortgage, deed of trust, assignment, pledge, chattel mortgage,
chattel trust, factor's lien, equipment trust, conditional sale, trust
receipt, lien or title retention contract, lease or consignment intended as
a security device, or any other security or lien interest whatsoever,
whether created by law, contract, or otherwise.
SARA. The word "SARA" means the Superfund Amendments and Reauthorization
Act of 1986 as now or hereafter amended.
<PAGE>
SUBORDINATED DEBT. The words "Subordinated Debt" mean Indebtedness and
liabilities of Borrower which have been subordinated by written agreement to
Indebtedness owned by Borrower to Lender in form and substance acceptable to
Lender.
TANGIBLE NET WORTH. The words "Tangible Net Worth" mean Borrower's total
assets excluding all intangible assets (i.e., goodwill, trademarks, patents,
copyrights, organizational expenses, and similar intangible items, but
including leaseholds and leasehold improvements) less total Debt.
WORKING CAPITAL. The words "Working Capital" mean Borrower's current
assets, excluding prepaid expenses, less Borrower's current liabilities.
LINE OF CREDIT. Lender agrees to make Advances to Borrower from time to time
from the date of this Agreement to the Expiration Date, provided the aggregate
amount of such Advances outstanding at any time does not exceed the Borrowing
Base. Within the foregoing limits. Borrower may borrow, partially or wholly
prepay, and reborrow under this Agreement as follows:
CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make any
Advance to or for the account of Borrower under this Agreement is subject to
the following conditions precedent, with all documents, instruments,
opinions, reports, and other items required under this Agreement to be in
form and substance satisfactory to Lender:
(a) Lender shall have received evidence that this Agreement and all
Related Documents have been duly authorized, executed, and delivered by
Borrower to Lender.
(b) Lender shall have received such opinions of counsel , supplemental
opinions, and documents as Lender may request.
(c) The security interests in the Collateral shall have been duly
authorized, created, and perfected with first lien priority and shall be
in full force and effect.
(d) All guaranties required by Lender for the Line of Credit shall have
been executed by each Guarantor, delivered to Lender, and be in full
force and effect.
(e) Lender, at its option and for its sole benefit, shall have
conducted an audit of Borrower's Accounts, Inventory, books, records,
and operations, and Lender shall be satisfied as to their condition.
(f) Borrower shall have paid to Lender all fees, costs, and expenses
specified in this Agreement and the Related Documents as are then due
and payable.
(g) There shall not exist at the time of any Advance a condition which
would constitute an Event of Default under this Agreement, and Borrower
shall have delivered to Lender the compliance certificate called for in
the paragraph below titled "Compliance Certificate."
MAKING LOAN ADVANCES. Advances under the Line of Credit may be requested
either orally or in writing by authorized persons. Lender may, but need
not, require that all oral requests be confirmed in writing. Each Advance
shall be conclusively deemed to have been made at the request of and for the
benefit of Borrower (a) when credited to any deposit account of Borrower
maintained with Lender or (b) when advanced in accordance with the
instructions of an authorized person. Lender, at its option, may set a
cutoff time, after which all requests for Advances will be treated as having
been requested on the next succeeding Business Day.
MANDATORY LOAN REPAYMENTS. If at any time the aggregate principal amount of
the outstanding Advances shall exceed the applicable Borrowing Base,
Borrower, immediately upon written or oral notice from Lender, shall pay to
Lender an amount equal to the difference between the outstanding principal
balance of
<PAGE>
the Advances and the Borrowing Base. On the Expiration Date, Borrower
shall pay to Lender in full the aggregate unpaid principal amount of all
Advances then outstanding and all accrued unpaid Interest, together with
all other applicable fees, costs and charges, if any, not yet paid.
LOAN ACCOUNT. Lender shall maintain on its books a record of account in
which Lender shall make entries for each Advance and such other debits and
credits as shall be appropriate in connection with the credit facility.
Lender shall provide Borrower with periodic statements of Borrower's
account, which statements shall be considered to be correct and conclusively
binding on Borrower unless Borrower notifies Lender to the contrary within
thirty (30) days after Borrower's receipt of any such statement which
Borrower deems to be incorrect.
COLLATERAL. To secure payment of the Line of Credit and performance of all
other Loans, obligations and duties owed by Borrower to Lender, Borrower (and
others, if required) shall grant to Lender Security Interests in such property
and assets as Lender may require (the "Collateral"), including without
limitation Borrower's present and future Accounts, general Intangibles, and
Inventory. Lender's Security Interests in the Collateral shall be continuing
liens and shall include the proceeds and products of the Collateral, including
without limitation the proceeds of any insurance. With respect to the
Collateral, Borrower agrees and represents and warrants to Lender:
PERFECTION OF SECURITY INTERESTS. Borrower agrees to execute such financing
statements and to take whatever other actions are requested by Lender to
perfect and continue Lender's Security Interests in the Collateral. Upon
request of Lender, Borrower will deliver to Lender any and all of the
documents evidencing or constituting the Collateral and Borrower will
note Lender's interest upon any and all chattel paper if not delivered to
Lender for possession by Lender. Contemporaneous with the execution of
this Agreement, Borrower will execute one or more financing statements
and any similar statements as may be required by applicable law, and
will file such financing statements and all such similar statements in
the appropriate location or locations. Borrower hereby appoints Lender as
its irrevocable attorney-in-fact for the purpose of executing any documents
necessary to perfect or to continue any Security Interest. Lender may at
any time, and without further authorization from Borrower, file a carbon,
photograph, facsimile, or other reproduction of any financing statement for
use as a financing statement. Borrower will reimburse Lender for all
expenses for the perfection, termination, and the continuation of the
perfection of Lender's security interest in the Collateral. Borrower
promptly will notify Lender of any change in Borrower's name including any
change to the assumed business names of Borrower. Borrower also promptly
will notify Lender of any change in Borrower's Social Security Number or
Employer Identification Number. Borrower further agrees to notify Lender in
writing prior to any change in address or location of Borrower's principal
governance office or should Borrower merge or consolidate with any other
entity.
COLLATERAL RECORDS. Borrower does now, and at all times hereafter shall,
keep correct and accurate records of the Collateral, all of which records
shall be available to Lender or Lender's representative upon demand for
inspection and copying at any reasonable time. With respect to the
Accounts, Borrower agrees to keep and maintain such records as Lender may
require, including without limitation information concerning Eligible
Accounts and Account balances and agings. With respect to the Inventory,
Borrower agrees to keep and maintain such records as Lender may require,
including without limitation information concerning Eligible Inventory and
records itemizing and describing the kind, type, quality, and quantity of
Inventory, Borrower's Inventory costs and selling prices, and the daily
withdrawals and additions to inventory. The following is an accurate and
complete list of all locations at which Borrower keeps or maintains business
records concerning Borrower's Accounts and Inventory: Las Vegas, NV.
COLLATERAL SCHEDULES. Concurrently with the execution and delivery of this
Agreement, Borrower shall execute and deliver to Lender schedules of
Accounts and Inventory and Eligible Accounts and Eligible Inventory, in form
and substance satisfactory to the Lender. Thereafter Borrower shall execute
and deliver to Lender such supplemental schedules of Eligible Accounts and
Eligible Inventory and such other matters and information relating to the
Accounts and Inventory as Lender may request. Supplemental schedules shall
be delivered according to the following schedule: Accounts Payable aging
and Accounts Receivable
<PAGE>
aging, within 20 days after the end of each month and formatted 90 days
from invoice date; monthly Borrower's Certificate, supported by Sales
Journal for additions to Accounts Receivable and for non-cash reductions
on Borrower's Certificate, and supported by Collection Report for
reductions to Accounts Receivable; annual complete debtor name and address
listing; monthly detailed listing of eligible Inventory, using last-cost
to calculate unit price for borrowing purposes. In addition, Borrower
agrees to undergo no less than one collateral audit annually, to be
performed by Lender's internal staff or Lender-approved external
examiners. Direct verifications will be required. Borrower agrees to pay
all Lender's expenses incurred in connection with each collateral audit.
REPRESENTATIONS AND WARRANTIES CONCERNING ACCOUNTS. With respect to the
Accounts, Borrower represents and warrants to Lender: (a) Each Account
represented by Borrower to be an Eligible Account for purposes of this
Agreement conforms to the requirements of the definition of Eligible
Account; (b) All Account Information listed on schedules delivered to
Lender will be true and correct, subject to immaterial variance; and
(c) Lender, its assigns, or agents shall have the right at any time and at
Borrower's expense to inspect, examine, and audit Borrower's records and to
confirm with Account Debtors the accuracy of such Accounts.
REPRESENTATIONS AND WARRANTIES CONCERNING INVENTORY. With respect to the
Inventory, Borrower represents and warrants to Lender: (a) All Inventory
represented by Borrower to be Eligible Inventory for purposes of this
Agreement conforms to the requirements of the definition of Eligible
Inventory; (b) All Inventory values listed on schedules delivered to Lender
will be true and correct, subject to immaterial variance; (c) The value of
the Inventory will be determined on a consistent accounting basis; (d)
Except as agreed to the contrary by Lender in writing, all Eligible
Inventory is now and at all times hereafter will be in Borrower's physical
possession and shall not be held by others on consignment, sale on approval,
or sale or return; (e) Except as reflected in the Inventory schedules
delivered to Lender, all Eligible Inventory is now and at all times
hereafter will be of good and merchantable quality, free from defects; (f)
Eligible Inventory is not now and will not at any time hereafter be stored
with a bailee, warehouseman, or similar party without Lender's prior written
consent, and, in such event, Borrower will concurrently at the time of
bailment cause any such bailee, warehouseman, or similar party to issue and
deliver to Lender, in form acceptable to Lender, warehouse receipts in
Lender's name evidencing the storage of Inventory; and (g) Lender, its
assigns, or agents shall have the right at any time and at Borrower's
expense to inspect and examine the Inventory and to check and test the same
as to quality, quantity, value, and condition.
MULTIPLE BORROWERS. This Agreement has been executed by multiple obligors who
are referred to herein individually, collectively and interchangeably as
"Borrower." Unless specifically stated to the contrary, the word "Borrower" as
used in this Agreement, including without limitation all representations,
warranties and covenants, shall include all Borrowers. Borrower understands and
agrees that, with or without notice to Borrower, Lender may with respect to any
other Borrower (a) make one or more additional secured or unsecured loans or
otherwise extend additional credit; (b) alter, compromise, renew, extend,
accelerate, or otherwise change one or more times the time for payment or other
terms any indebtedness, including increases and decreases of the rate of
interest on the indebtedness; (c) exchange, enforce, waive, subordinate, fail or
decide not to perfect, and release any security, with or without the
substitution of new collateral; (d) release, substitute, agree not to sue, or
deal with any one or more of Borrower's sureties, endorsers, or other guarantors
on any terms or in any manner Lender may choose; (e) determine how, when and
what application of payments and credits shall be made on any indebtedness;
(f) apply such security and direct the order or manner of sale thereof,
including without limitation, any nonjudicial sale permitted by the terms of the
controlling security agreement or deed of trust, as Lender in its discretion may
determine; (g) sell, transfer, assign, or grant participations in all or any
part of the indebtedness; (h) exercise or refrain from exercising any rights
against Borrower or others, or otherwise act or refrain from acting; (i) settle
or compromise any indebtedness; and (j) subordinate the payment of all or any
part of any indebtedness of Borrower to Lender to the payment of any liabilities
which may be due Lender or others .
REPRESENTATIONS AND WARRANTIES. The reference to "Borrower" in this
"REPRESENTATIONS AND WARRANTIES" section of this Agreement means PDS FINANCIAL
CORPORATION only and does not apply to any other co-borrower. Borrower
represents and warrants to Lender, as of the
<PAGE>
date of this Agreement, as of the date of each disbursement of Loan proceeds,
as of the date of any renewal, extension or modification of any Loan, and at
all times any indebtedness exists:
ORGANIZATION. Borrower is a corporation which is duly organized, validly
existing, and in good standing under the laws of the State of Minnesota and
is validly existing and in good standing in all states in which Borrower is
doing business. Borrower has the full power and authority to own its
properties and to transact the businesses in which it is presently engaged
or presently proposes to engage. Borrower also is duly qualified as a
foreign corporation and is in good standing in all states in which the
failure to so qualify would have a material adverse effect on its businesses
or financial condition.
AUTHORIZATION. The execution, delivery, and performance of this Agreement
and all Related Documents by Borrower, to the extent to be executed,
delivered or performed by Borrower, have been duly authorized by all
necessary action by Borrower; do not require the consent or approval of any
other person, regulatory authority or governmental body; and do not conflict
with, result in a violation of, or constitute a default under (a) any
provision of its articles of incorporation or organization, or bylaws, or
any agreement or other instrument binding upon Borrower or (b) any law,
governmental regulation, court decree, or order applicable to Borrower.
FINANCIAL INFORMATION. Each financial statement of Borrower supplied to
Lender truly and completely disclosed Borrower's financial condition as of
the date of the statement, and there has been no material adverse change in
Borrower's financial condition subsequent to the date of the most recent
financial statement supplied to Lender. Borrower has no material contingent
obligations except as disclosed in such financial statements.
LEGAL EFFECT. This Agreement constitutes, and any instrument or agreement
required hereunder to be given by Borrower when delivered will constitute
legal, valid and binding obligations of Borrower enforceable against
Borrower in accordance with their respective terms.
PROPERTIES. Except for Permitted Liens, Borrower owns and has good title to
all of Borrower's properties free and clear of all Security Interests, and
has not executed any security documents or financing statements relating to
such properties. All of Borrower's properties are titled in Borrower's
legal name, and Borrower has not used, or filed a financing statement under,
any other name for at least the last five (5) years.
HAZARDOUS SUBSTANCES. The terms "hazardous waste," "hazardous substance,"
"disposal," "release," and "threatened release," as used in this Agreement,
shall have the same meanings as set forth in the "CERCLA," "SARA," the
Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the
Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., or
other applicable state or Federal laws, rules, or regulations adopted
pursuant to any of the foregoing. Except as disclosed to and acknowledged
by Lender in writing, Borrower represents and warrants that: (a) During the
period of Borrower's ownership of the properties, there has been no use,
generation, manufacture, storage, treatment, disposal, release or threatened
release of any hazardous waste or substance by any person on, under, about
or from any of the properties. (b) Borrower has no knowledge of, or reason
to believe that there has been (i) any use, generation, manufacture,
storage, treatment, disposal, release, or threatened release of any
hazardous waste or substance on, under, about or from the properties by any
prior owners or occupants of any of the properties, or (ii) any actual or
threatened litigation or claims of any kind by any person relating to such
matters. (c) Neither Borrower nor any tenant, contractor, agent or other
authorized user of any of the properties shall use, generate, manufacture,
store, treat, dispose of, or release any hazardous waste or substance on,
under, about or from any of the properties; and any such activity shall be
conducted in compliance with all applicable federal, state and local laws,
regulations, and ordinances, including without limitation those laws,
regulations and ordinances described above. Borrower authorizes Lender and
its agents to enter upon the properties to make such inspections and tests
as Lender may deem appropriate to determine compliance of the properties
with this section of the Agreement. Any inspections or tests made by Lender
shall be at Borrower's expense and for Lender's purposes only and shall not
be construed to create any responsibility or liability on the part of Lender
to Borrower or to any other person.
<PAGE>
Page 9
The representations and warranties contained herein are based on
Borrower's due diligence in investigating the properties for hazardous
waste and hazardous substances. Borrower hereby (a) releases and waives
any future claims against Lender for indemnity or contribution in the
event Borrower becomes liable for cleanup or other costs under any such
laws, and (b) agrees to indemnify and hold harmless Lender against any and
all claims, losses, liabilities, damages, penalties, and expenses which
lender may directly or indirectly sustain or suffer resulting from a
breach of this section of the Agreement or as a consequence of any use,
generation, manufacture, storage, disposal, release or threatened release
occurring prior to Borrower's ownership or interest in the properties,
whether or not the same was or should have been known to Borrower. The
provisions of this section of the Agreement, including the obligation to
indemnify, shall survive the payment of the Indebtedness and the
termination or expiration of this Agreement and shall not be affected by
Lender's acquisition of any interest in any of the properties, whether by
foreclosure or otherwise.
LITIGATION AND CLAIMS. No litigation, claim, investigation, administrative
proceeding or similar action (including those for unpaid taxes) against
Borrower is pending or threatened, and no other event has occurred which may
materially adversely affect Borrower's financial condition or properties,
other than litigation, claims, or other events, if any, that have been
disclosed to and acknowledged by Lender in writing.
<PAGE>
Page 10
TAXES. To the best of Borrower's knowledge, all tax returns and reports of
Borrower that are or were required to be filed, have been filed, and all
taxes, assessments and other governmental charges have been paid in full,
except those presently being or to be contested by Borrower in good faith in
the ordinary course of business and for which adequate reserves have been
provided.
LIEN PRIORITY. Unless otherwise previously disclosed to Lender in writing,
Borrower has not entered into or granted any Security Agreements, or
permitted the filing or attachment of any Security Interests on or affecting
any of the Collateral directly or indirectly securing repayment of
Borrower's Loan and Note, that would be prior or that may in any way be
superior to Lender's Security Interests and rights in and to such
Collateral.
BINDING EFFECT. This Agreement, the Note, all Security Agreements directly
or indirectly securing repayment of Borrower's Loan and Note and all of the
Related Documents are binding upon Borrower as well as upon Borrower's
successors, representatives and assigns, and are legally enforceable in
accordance with their respective terms.
COMMERCIAL PURPOSES. Borrower intends to use the Loan proceeds solely for
business or commercial related purposes.
EMPLOYEE BENEFIT PLANS. Each employee benefit plan as to which Borrower may
have any liability complies in all material respects with all applicable
requirements of law and regulations, and (i) no Reportable Event nor
Prohibited Transaction (as defined in ERISA) has occurred with respect to
any such plan, (ii) Borrower has not withdrawn from any such plan or
initiated steps to do so, (iii) no steps have been taken to terminate any
such plan, and (iv) there are no unfunded liabilities other than those
previously disclosed to Lender in writing.
LOCATION OF BORROWER'S OFFICES AND RECORDS. Borrower's place of business,
or Borrower's Chief executive office, if Borrower has more than one place of
business, is located at 6442 City West Parkway, Suite 300, Minneapolis, MN
55344. Unless Borrower has designated otherwise in writing this location is
also the office or offices where Borrower keeps its records concerning the
Collateral.
INFORMATION. All information heretofore or contemporaneously herewith
furnished by Borrower to Lender for the purposes of or in connection with
this Agreement or any transaction contemplated hereby is, and all
information hereafter furnished by or on behalf of Borrower to Lender will
be, true and accurate in every material respect on the date as of which such
information is dated or certified; and none of such information is or will
be incomplete by omitting to state any material fact necessary to make such
information not misleading.
SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Borrower understands and agrees
that Lender, without independent investigation, is relying upon the above
representations and warranties in extending Loan Advances to Borrower.
Borrower further agrees that the foregoing representations and warranties
shall be continuing in nature and shall remain in full force and effect
until such time as Borrower's indebtedness shall be paid in full, or until
this Agreement shall be terminated in the manner provided above, whichever
is the last to occur.
AFFIRMATIVE COVENANTS. The reference to "Borrower" in this "AFFIRMATIVE
COVENANTS" section of this Agreement means PDS FINANCIAL CORPORATION only and
does not apply to any other co-borrower. Borrower covenants and agrees with
Lender that, while this Agreement is in effect, Borrower will:
LITIGATION. Promptly inform Lender in writing of (a) all material adverse
changes in Borrower's financial condition, and (b) all existing and all
threatened litigation, claims, investigations, administrative proceedings or
similar actions affecting Borrower or any Guarantor which could materially
affect the financial condition of Borrower or the financial condition of any
Guarantor.
<PAGE>
Page 11
FINANCIAL RECORDS. Maintain its books and records in accordance with
generally accepted accounting principles, applied on a consistent basis, and
permit Lender to examine and audit Borrower's books and records at all
reasonable times.
FINANCIAL STATEMENTS. Furnish Lender with, as soon as available, but in no
event later than one hundred twenty (120) days after the end of each fiscal
year, Borrower's balance sheet and income statement for the year ended,
prepared by Borrower, and, as soon as available, but in no event later than
fifty (50) days after the end of each fiscal quarter, Borrower's balance
sheet and profit and loss statement for the period ended, prepared and
certified as correct to the best knowledge and belief by Borrower's chief
financial officer or other officer or person acceptable to Lender. All
financial reports required to be provided under this Agreement shall be
prepared in accordance with generally accepted accounting principles,
applied on a consistent basis, and certified by Borrower as being true and
correct.
ADDITIONAL INFORMATION. Furnish such additional information and statements,
list of assets and liabilities, agings of receivables and payables,
inventory schedules, budgets, forecasts, tax returns, and other reports with
respect to Borrower's financial condition and business operations as Lender
may request rom time to time.
FINANCIAL COVENANTS AND RATIOS. Comply with the following covenants and
ratios:
NET WORTH RATIO. Maintain a ratio of Total Liabilities to Tangible Net
Worth of less than 7.00 to 1.00.
CASH FLOW REQUIREMENTS. Maintain Cash Flow at not less than the
following level: A RATIO OF 1.25 TO 1.00. THIS IS THE RATIO OF NET
INCOME PLUS DEPRECIATION AND AMORTIZATION PLUS INTEREST EXPENSE, DIVIDED
BY INTEREST PLUS DIVIDENDS.
The following provisions shall apply for purposes of determining compliance
with the foregoing financial covenants and ratios: DEBT WILL EXCLUDE
NONRECOURSE DEBT AND SUBORDINATED DEBT. Except as provided above, all
computations made to determine compliance with the requirements contained in
this paragraph shall be made in accordance with generally accepted
accounting principles, applied on a consistent basis, and certified by
Borrower as being true and correct.
INSURANCE. Maintain fire and other risk insurance, public liability
insurance, and such other insurance as Lender may require with respect to
Borrower's properties and operations, in form, amounts, coverages and with
insurance companies reasonably acceptable to Lender. Borrower, upon request
of Lender, will deliver to Lender from time to time the policies or
certificates of insurance in form satisfactory to Lender, including
stipulations that coverages will not be cancelled or diminished without at
least ten (10) days' prior written notice to Lender. Each insurance policy
also shall include an endorsement providing that coverage in favor of Lender
will not be impaired in any way by any act, omission or default of Borrower
or any other person. In connection with all policies covering assets in
which Lender holds or is offered a security interest for the Loans, Borrower
will provide Lender with such loss payable or other endorsements as Lender
may require.
INSURANCE REPORTS. Furnish to Lender, upon request of Lender, reports on
each existing insurance policy showing such information as Lender may
reasonably request, including without limitation the following: (a) the
name of the insurer; (b) the risks insured; (c) the amount of the policy;
(d) the properties insured; (e) the then current property values on the
basis of which insurance has been obtained, and the manner of determining
those values; and (f) the expiration date of the policy. In addition, upon
request of Lender (however not more often than annually), Borrower will have
an independent appraiser satisfactory to Lender determine, as applicable,
the actual cash value or replacement cost of any Collateral. The cost of
such appraisal shall be paid by Borrower.
<PAGE>
Page 12
OTHER AGREEMENTS. Comply with all terms and conditions of all other
agreements, whether now or hereafter existing, between Borrower and any
other party and notify Lender immediately in writing of any default in
connection with any other such agreements.
LOAN PROCEEDS. Use all Loan proceeds solely for Borrower's business
operations, unless specifically consented to the contrary by Lender in
writing.
TAXES, CHARGES AND LIENS. Pay and discharge when due all of its
indebtedness and obligations, including without limitation all assessments,
taxes, governmental charges, levies and liens, of every kind and nature,
imposed upon Borrower or its properties, income, or profits, prior to the
date on which penalties would attach, and all lawful claims that, if unpaid,
might become a lien or charge upon any of Borrowers properties, income, or
profits. Provided however, Borrower will not be required to pay and
discharge any such assessment, tax, charge, levy, lien or claim so long as
(a) the legality of the same shall be contested in good faith by appropriate
proceedings, and (b) Borrower shall have established on its books adequate
reserves with respect to such contested assessment, tax, charge, levy, lien,
or claim in accordance with generally accepted accounting practices.
Borrower, upon demand of Lender, will furnish to Lender evidence of payment
of the assessments, taxes, charges, levies, liens and claims and will
authorize the appropriate governmental official to deliver to Lender at any
time a written statement of any assessments, taxes, charges, levies, liens
and claims against Borrower's properties, income, or profits.
PERFORMANCE. Perform and comply with all terms, conditions, and provisions
set forth in this Agreement and in the Related Documents in a timely manner,
and promptly notify Lender if Borrower learns of the occurrence of any event
which constitutes an Event of Default under this Agreement or under any of
the Related Documents.
OPERATIONS. Maintain executive and management personnel with substantially
the same qualifications and experience as the present executive and
management personnel; provide written notice to Lender of any change in
executive and management personnel; conduct its business affairs in a
reasonable and prudent manner and in compliance with all applicable federal,
state and municipal laws, ordinances, rules and regulations respecting its
properties, charters, businesses and operations, including without
limitation, compliance with the Americans With Disabilities Act and with all
minimum funding standards and other requirements of ERISA and other laws
applicable to Borrower's employee benefit plans.
INSPECTION. Permit employees or agents of Lender at any reasonable time to
inspect any and all Collateral for the Loan or Loans and Borrower's other
properties and to examine or audit Borrower's books, accounts, and records
and to make copies and memoranda of Borrower's books, accounts, and records.
If Borrower now or at any time hereafter maintains any records (including
without limitation computer generated records and computer software programs
for the generation of such records) in the possession of a third party,
Borrower, upon request of Lender, shall notify such party to permit Lender
free access to such records at all reasonable times and to provide Lender
with copies of any records it may request, all at Borrower's expense.
COMPLIANCE CERTIFICATE. Unless waived in writing by Lender, provide Lender
at least annually and at the time of each disbursement of Loan proceeds with
a certificate executed by Borrower's chief financial officer, or other
officer or person acceptable to Lender, certifying that the representations
and warranties set forth in this Agreement are true and correct as of the
date of the certificate and further certifying that, as of the date of the
certificate, no Event of Default exists under this Agreement.
ENVIRONMENTAL COMPLIANCE AND REPORTS. Borrower shall comply in all respects
with all environmental protection federal, state and local laws, statutes,
regulations and ordinances; not cause or permit to exist, as a result of an
intentional or unintentional action or omission on its part or on the part
of any third party, on property owned and/or occupied by Borrower, any
environmental activity where damage may result to the environment, unless
such environmental activity is pursuant to and in compliance with the
conditions of a permit issued by the appropriate federal, state or local
governmental authorities, shall furnish to Lender promptly and in any event
within thirty (30) days after receipt thereof a copy of any notice, summons,
lien,
<PAGE>
Page 13
citation, directive, letter or other communication from any governmental
agency or instrumentality concerning any intentional or unintentional
action or omission on Borrower's part in connection with any environmental
activity whether or not there is damage to the environment and/or other
natural resources.
ADDITIONAL ASSURANCES. Make, execute and deliver to Lender such promissory
notes, mortgages, deeds of trust, security agreements, financing statements,
instruments, documents and other agreements as Lender or its attorneys may
reasonably request to evidence and secure the Loans and to perfect all
Security Interests.
RECOVERY OF ADDITIONAL COSTS. If the imposition of or any change in any law,
rule, regulation or guideline, or the interpretation or application of any
thereof by any court or administrative or governmental authority (including any
request or policy not having the force of law) shall impose, modify or make
applicable any taxes (except U.S. federal, state or local income or franchise
taxes imposed on Lender), reserve requirements, capital adequacy requirements or
other obligations which would (a) increase the cost to Lender for extending or
maintaining the credit facilities to which this Agreement relates, (b) reduce
the amounts payable to Lender under this Agreement or the Related Documents, or
(c) reduce the rate of return on Lender's capital as a consequence of Lender's
obligations with respect to the credit facilities to which this Agreement
relates, then Borrower agrees to pay Lender such additional amounts as will
compensate Lender therefor, within five (5) days after Lender's written demand
for such payment, which demand shall be accompanied by an explanation of such
imposition or charge and a calculation in reasonable detail of the additional
amounts payable by Borrower, which explanation and calculations shall be
conclusive in the absence of manifest error.
NEGATIVE COVENANTS. The reference to "Borrower" in this "NEGATIVE COVENANTS"
section of this Agreement means PDS FINANCIAL CORPORATION only and does not
apply to any other co-borrower. Borrower covenants and agrees with Lender that
while this Agreement is in effect, Borrower shall not, without the prior written
consent of Lender:
INDEBTEDNESS AND LIENS. (a) Except for trade debt incurred in the normal
course of business and indebtedness to Lender contemplated by this
Agreement, create, incur or assume indebtedness for borrowed money,
including capital leases, (b) except as allowed as a Permitted Lien, sell,
transfer, mortgage, assign, pledge, lease, grant a security interest in, or
encumber any of Borrower's assets, or (c) sell with recourse any of
Borrower's accounts, except to Lender.
CONTINUITY OF OPERATIONS. (a) Engage in any business activities
substantially different than those in which Borrower is presently engaged,
(b) cease operations, liquidate, merge, transfer, acquire or consolidate
with any other entity, change ownership, change its name, dissolve or
transfer or sell Collateral out of the ordinary course of business, (c) pay
any dividends on Borrower's stock (other than dividends payable in its
stock), provided, however that notwithstanding the foregoing, but only so
long as no Event of Default has occurred and is continuing or would result
from the payment of dividends, if Borrower is a "Subchapter S Corporation"
(as defined in the Internal Revenue Code of 1986, as amended), Borrower may
pay cash dividends on its stock to its shareholders from time to time in
amounts necessary to enable the shareholders to pay income taxes and make
estimated income tax payments to satisfy their liabilities under federal and
state law which arise solely from their status as Shareholders of a
Subchapter S Corporation because of their ownership of shares of stock of
Borrower, or (d) purchase or retire any of Borrower's outstanding shares or
alter or amend Borrower's capital structure.
LOANS, ACQUISITIONS AND GUARANTIES. (a) Loan, invest in or advance money or
assets, (b) purchase, create or acquire any interest in any other enterprise
or entity, or (c) incur any obligation as surely or guarantor other than in
the ordinary course of business.
CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to
Borrower, whether under this Agreement or under any other agreement, Lender
shall have no obligation to make Loan Advances or to disburse Loan proceeds if:
(a) Borrower or any Guarantor is in default under the terms of this Agreement or
any of the Related Documents or any other agreement that Borrower or any
Guarantor has with Lender; (b) Borrower or any Guarantor becomes insolvent,
files a petition in bankruptcy or similar proceedings, or is adjudged a
bankrupt;
<PAGE>
Page 14
(c) there occurs a material adverse change in Borrower's financial condition,
in the financial condition of any Guarantor, or in the value of any Collateral
securing any Loan; (d) any Guarantor seeks, claims or otherwise attempts to
limit, modify or revoke such Guarantor's guaranty of the Loan or any other
loan with Lender; or (e) Lender in good faith deems itself insecure, even
though no Event of Default shall have occurred.
RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security
interest in, and hereby assigns, conveys, delivers, pledges, and transfers to
Lender all Borrower's right, title and interest in and to, Borrower's accounts
with Lender (whether checking, savings, or some other account), including
without limitation all accounts held jointly with someone else and all accounts
Borrower may open in the future, excluding however all IRA and Keogh accounts,
and all trust accounts for which the grant of a security interest would be
prohibited by law. Borrower authorizes Lender, to the extent permitted by
applicable law, to charge or setoff all sums owing on the indebtedness against
any and all such accounts, and, at Lender's option, to administratively freeze
all such accounts to allow Lender to protect Lender's charge and setoff rights
provided on this paragraph.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:
DEFAULT ON INDEBTEDNESS. Failure of Borrower to make any payment when due
on the Loans.
OTHER DEFAULTS. Failure of Borrower or any Grantor to comply with or to
perform when due any other term, obligation, covenant or condition contained
in this Agreement or in any of the Related Documents, or failure of Borrower
to comply with or to perform any other term, obligation, covenant or
condition contained in any other agreement between Lender and Borrower.
DEFAULT IN FAVOR OF THIRD PARTIES. Should Borrower or any Grantor default
under any loan, extension of credit, security agreement, purchase or sales
agreement, or any other agreement, in favor of any other creditor or person
that may materially affect any of Borrower's property or Borrower's or any
Grantor's ability to repay the Loans or perform their respective obligations
under this Agreement or any of the Related Documents.
FALSE STATEMENTS. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Borrower or any Grantor under this
Agreement or the Related Documents is false or misleading in any material
respect at the time made or furnished, or becomes false or misleading at any
time thereafter.
DEFECTIVE COLLATERALIZATION. This Agreement or any of the Related Documents
ceases to be in full force and effect (including failure of any Security
Agreement to create a valid and perfected Security Interest) at any time and
for any reason.
INSOLVENCY. The dissolution or termination of Borrower's existence as a
going business, the insolvency of Borrower, the appointment of a receiver
for any part of Borrower's property, any assignment for the benefit of
creditors, any type of creditor workout, or the commencement of any
proceeding under any bankruptcy or insolvency laws by or against Borrower.
CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help,
repossession or any other method, by any creditor of Borrower, any creditor
of any Grantor against any collateral securing the Indebtedness, or by any
governmental agency. This includes a garnishment, attachment, or levy on or
of any of Borrower's deposit accounts with Lender.
EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with
respect to any Guarantor of any of the Indebtedness of any Guarantor dies or
becomes incompetent, or revokes or disputes the validity of, or liability
under, any Guaranty of the Indebtedness.
EVENTS AFFECTING CO-BORROWERS. Any of the preceding events occurs with
respect to any co-borrower of any of the Indebtedness or any co-borrower
dies or becomes incompetent, or revokes or disputes the validity of, or
liability under, any of the Indebtedness.
<PAGE>
Page 15
CHANGE IN OWNERSHIP. Any change in ownership of twenty-five percent (25%)
or more of the common stock of Borrower.
ADVERSE CHANGE. A material adverse change occurs in Borrower's financial
condition, or Lender believes the prospect of payment or performance of
the Indebtedness is impaired.
INSECURITY. Lender, in good faith, deems itself insecure.
EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except
where otherwise provided in this Agreement or the Related Documents, all
commitments and obligations of Lender under this Agreement or the Related
Documents or any other agreement immediately will terminate (including any
obligation to make Loan Advances or disbursements), and, at Lender's option, all
Indebtedness immediately will become due and payable, all without notice of any
kind to Borrower, except that in the case of an Event of Default of the type
described in the "Insolvency" subsection above, such acceleration shall be
automatic and not optional. In addition, Lender shall have all the rights and
remedies provided in the Related Documents or available at law, in equity, or
otherwise. Except as may be prohibited by applicable law, all of Lender's
rights and remedies shall be cumulative and may be exercised singularly or
concurrently. Election by Lender to pursue any remedy shall not exclude pursuit
of any other remedy, and an election to make expenditures or to take action to
perform an obligation of Borrower or of any Grantor shall not affect Lender's
right to declare a default and to exercise its rights and remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:
AMENDMENTS. This Agreement, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as to the
matters set forth in this Agreement. No alteration of or amendment to this
Agreement shall be effective unless given in writing and signed by the party
or parties sought to be charged or bound by the alteration or amendment.
APPLICABLE LAW. This Agreement has been delivered to Lender and accepted by
Lender in the State of Nevada. If there is a lawsuit, Borrower agrees upon
Lender's request to submit to the jurisdiction of the courts of Clark
County, the State of Nevada (initial here _PDC/____). Subject to the
provisions on arbitration, this Agreement shall be governed by and construed
in accordance with the laws of the State of Nevada.
ARBITRATION. LENDER AND BORROWER AGREE THAT ALL DISPUTES, CLAIMS AND
CONTROVERSIES BETWEEN THEM, WHETHER INDIVIDUAL, JOINT, OR CLASS IN NATURE,
ARISING FROM THIS AGREEMENT OR OTHERWISE, INCLUDING WITHOUT LIMITATION
CONTRACT AND TORT DISPUTES, SHALL BE ARBITRATED PURSUANT TO THE RULES OF THE
AMERICAN ARBITRATION ASSOCIATION, UPON REQUEST OF EITHER PARTY. No act to
take or dispose of any Collateral shall constitute a waiver of this
arbitration agreement or be prohibited by this arbitration agreement. This
includes, without limitation, obtaining injunctive relief or a temporary
restraining order; invoking a power of sale under any deed of trust or
mortgage; obtaining a writ of attachment or imposition of a receiver; or
exercising any rights relating to personal property, including taking or
disposing of such property with or without judicial process pursuant to
Article 9 of the Uniform Commercial Code. Any disputes, claims, or
controversies concerning the lawfulness or reasonableness of any act, or
exercise of any right, concerning any Collateral, including any claim to
rescind, reform, or otherwise modify any agreement relating to the
Collateral, shall also be arbitrated, provided however that no arbitrator
shall have the right or the power to enjoin or restrain any act of any
party. Judgment upon any award rendered by any arbitrator may be entered in
any court having jurisdiction. Nothing in this Agreement shall preclude any
party from seeking equitable relief from a court of competent jurisdiction.
The statute of limitations, estoppel, waiver, laches, and similar doctrines
which would otherwise be applicable in an action brought by a party shall be
applicable in any arbitration proceeding, and the commencement of an
arbitration proceeding shall be deemed the commencement of an action for
these purposes. The Federal Arbitration Act shall apply to the
construction, interpretation, and enforcement of this arbitration provision.
<PAGE>
Page 16
CAPTION HEADINGS. Caption headings in this Agreement are for convenience
purposes only and are not to be used to interpret or define the provisions
of this Agreement.
MULTIPLE PARTIES; CORPORATE AUTHORITY. All obligations of Borrower under
this Agreement shall be joint and several, and all references to Borrower
shall mean each and every Borrower. This means that each of the persons
signing below is responsible for ALL obligations in this Agreement.
CONSENT TO LOAN PARTICIPATION. Borrower agrees and consents to Lender's
sale or transfer, whether now or later, of one or more participation
interests in the Loans to one or more purchasers, whether related or
unrelated to Lender. Lender may provide, without any limitation whatsoever,
to any one or more purchasers, or potential purchasers, any information or
knowledge Lender may have about Borrower or about any other matter relating
to the Loan, and Borrower hereby waives any rights to privacy it may have
with respect to such matters. Borrower additionally waives any and all
notices of sale of participation interests, as well as all notices of any
repurchase of such participation interests. Borrower also agrees that the
purchasers of any such participation interests will be considered as the
absolute owners of such interests in the Loans and will have all the rights
granted under the participation agreement or agreements governing the sale
of such participation interests. Borrower further waives all rights of
offset or counterclaim that it may have now or later against Lender or
against any purchaser of such a participation interest and unconditionally
agrees that either Lender or such purchaser may enforce Borrower's
obligation under the Loans irrespective of the failure or insolvency of any
holder of any interest in the Loans. Borrower further agrees that the
purchaser of any such participation interests may enforce its interests
irrespective of any personal claims or defenses that Borrower may have
against Lender.
COSTS AND EXPENSES. Borrower agrees to pay upon demand all of Lender's
expenses, including without limitation attorneys' fees, incurred in
connection with the preparation, execution, enforcement, modification and
collection of this Agreement or in connection with the Loans made pursuant
to this Agreement. Lender may pay someone else to help collect the Loans
and to enforce this Agreement, and Borrower will pay that amount. This
includes, subject to any limits under applicable law, Lender's attorneys'
fees and Lender's legal expenses, whether or not there is a lawsuit,
including attorneys' fees for bankruptcy proceedings (including efforts to
modify or vacate any automatic stay or injunction), appeals, and any
anticipated post-judgment collection services. Borrower also will pay any
court costs, in addition to all other sums provided by law.
NOTICES. All notices required to be given under this Agreement shall be
given in writing, may be sent by telefacsimile, and shall be effective when
actually delivered or when deposited with a nationally recognized overnight
courier or deposited in the United States mail, first class, postage
prepaid, addressed to the party to whom the notice is to be given at the
address shown above. Any party may change its address for notices under
this Agreement by giving formal written notice to the other parties,
specifying that the purpose of the notice is to change the party's address.
To the extent permitted by applicable law, if there is more than one
Borrower, notice to any Borrower will constitute notice to all Borrowers.
For notice purposes, Borrower will keep Lender informed at all times of
Borrower's current address(es).
SEVERABILITY. If a court of competent jurisdiction finds any provision of
this Agreement to be invalid or unenforceable to any person or circumstance,
such finding shall not render that provision invalid or unenforceable as to
any other persons or circumstances. If feasible, any such offending
provision shall be deemed to be modified to be within the limits of
enforceability or validity; however, if the offending provision cannot be so
modified, it shall be stricken and all other provisions of this Agreement in
all other respects shall remain valid and enforceable.
SUCCESSORS AND ASSIGNS. All covenants and agreements contained by or on
behalf of Borrower shall bind its successors and assigns and shall inure to
the benefit of Lender, its successors and assigns. Borrower shall not,
however, have the right to assign its rights under this Agreement or any
interest therein, without the prior written consent of Lender.
<PAGE>
Page 17
SURVIVAL. All warranties, representations, and covenants made by Borrower
in this Agreement or in any certificate or other instrument delivered by
Borrower to Lender under this Agreement shall be considered to have been
relied upon by Lender and will survive the making of the Loan and delivery
to Lender of the Related Documents, regardless of any investigation made by
Lender or on Lender's behalf.
TIME IS OF THE ESSENCE. Time is of the essence in the performance of this
Agreement.
WAIVER. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender. No
delay or omission on the part of Lender in exercising any right shall
operate as a waiver of such right or any other right. A waiver by Lender of
a provision of this Agreement shall not prejudice or constitute a waiver of
Lender's right otherwise to demand strict compliance with that provision or
any other provision of this Agreement. No prior waiver by Lender, nor any
course of dealing between Lender and Borrower, or between Lender and any
Grantor, shall constitute a waiver of any of Lender's rights or of any
obligations of Borrower or of any Grantor as to any future transactions.
Whenever the consent of Lender is required under this Agreement, the
granting of such consent by Lender in any instance shall not constitute
continuing consent in subsequent instances where such consent is required,
and in all cases such consent may be granted or withheld in the sole
discretion of Lender.
<PAGE>
Page 18
EACH BORROWER ACKNOWLEDGES HAVING READ ALL OF THE PROVISIONS OF THIS LOAN
AGREEMENT, AND EACH BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED
AS OF AUGUST 16, 1997.
BORROWER:
PDS FINANCIAL CORPORATION
By: /s/ Johan P. Finley
----------------------------------
Johan P. Finley, President/C.E.O.
PDS FINANCIAL CORPORATION - NEVADA, Co-Borrower
By: /s/ Johan P. Finley
----------------------------------
Johan P. Finley, President/C.E.O.
LENDER:
U.S. BANK
By:
----------------------------------
Authorized Officer
<PAGE>
EXHIBIT 10.15
November 11, 1997
Johan P. Finley
President and Chief Executive Officer
PDS Financial Corporation
6442 City West Parkway
Suite 300
Minneapolis, Minnesota 55344
Re: Severance Agreement
Dear Johan:
This letter will serve to confirm the terms and conditions of our
agreement relating to the termination of my employment with PDS and our
severance arrangement. As we agreed, I have submitted my resignation and my
employment agreement, as amended from time to time, will terminate effective
November 15, 1997. Our severance agreement has several components which are
set forth below.
A cash severance benefit of $50,000.00 shall be paid to me on November
15, 1997. PDS will deduct any applicable payroll taxes. We have agreed that
I will retain my existing stock options which are fully vested. Attached is
a Resolution of the Board and Compensation Committee approving these
transactions which has been signed by Pat Patterson, Joel Koonce, Jim Morrell
and Pete.
The Company will continue my current base salary for a period not to
exceed one year from the date of this agreement. In the event I accept full
time employment elsewhere, I will advise you and the Company's obligation to
continue my salary will terminate effective on the commencement date of my
new employment. This does not affect COBRA benefits, which I will most
likely continue to use until I find other suitable health insurance benefits.
The base salary compensation shall be used as a non-refundable retainer. I
agree to represent the Company on two (2) additional "standard form"
transactions, plus general counsel services, each month during the period
which I receive the monthly base salary. It is the Company's option to
choose which transactions shall be used in the retainer. If, during this
retainer period, we can not agree on the two transactions to be completed
during any month, after good faith negotiation relating to the selection of
the transactions, the monthly retainer attributable to that month may be
withheld.
I will remain on the Board of Directors of PDS Financial Corporation
until re-election of the Board members at the annual meeting in May of 1998.
At that time, I will not run for re-election. I will resign from the
Subsidiary's boards right away so as not to create issues relating to
licensing investigations. In the interim, in my capacity as outside counsel
to the Company, I will complete appropriate Minutes of the Board of Directors
meetings and provide such other counsel and assistance to the Company as you
deem appropriate.
I agree to reaffirm all components of the non-competition and
confidentiality provisions of my employment agreement with the Company, and
<PAGE>
consistent with the Company's performance of its obligations to me under this
agreement and the engagement agreement, this letter shall serve as that
ratification and reaffirmation. I understand that the Company has received
the advice of independent legal counsel in connection with our agreements.
If this letter accurately sets forth our agreement on the matters addressed
herein, please sign this letter in the space provided below and return the
same to me. If unacceptable in any way, please call me immediately.
THE RETAINER PAID TO ME FROM TIME TO TIME UNDER THIS AGREEMENT IS AND
SHALL BE NON-REFUNDABLE AND THE COMPANY ACKNOWLEDGES THAT ANY PAYMENTS
RECEIVED BY ME WILL NEITHER BE HELD IN NOR DEPOSITED INTO A LAWYER'S TRUST
ACCOUNT AT ANY TIME.
Very truly yours,
/S/ David R. Mylrea
AGREED AND ACCEPTED THIS 11th DAY OF NOVEMBER, 1997.
PDS Financial Corporation
By: /s/ Johan P. Finley
Its: President
<PAGE>
California Chapters of the
Society of Industrial and Office Realtors-Registered Trademark-, Inc.
INDUSTRIAL REAL ESTATE LEASE
(MULTI-TENANT FACILITY)
ARTICLE ONE: BASIC TERMS
This Article One contains the Basic Terms of this Lease between the
Landlord and Tenant named below. Other Articles, Sections and Paragraphs of the
Lease referred to in this Article One explain and define the Basic Terms and are
to be read in conjunction with the Basic Terms.
Section 1.01. DATE OF LEASE: April 29, 1997
Section 1.02. LANDLORD (INCLUDE LEGAL ENTITY): Patrick Commerce Center,
LLC a Nevada limited liability company
Address of landlord: 4415 Spring Mountain Road, Suite 100, Las Vegas,
Nevada 89102
Section 1.03. TENANT (INCLUDE LEGAL ENTITY): PDS Financial Corporation -
Nevada, Inc. a Nevada corporation
Address of Tenant: 6171 McLeod Drive, Suites H through M, Las Vegas,
Nevada 89102
Section 1.04. PROPERTY: The Property is part of Landlord's
multi-tenant real property development known as Patrick Commerce Center and
described or depicted in Exhibit "A" (the "Project"). The Project includes
the land, the buildings and all other improvements located on the land, and
the common areas described in Paragraph 4.05(a). The Property is (include
street address, approximate square footage and description) An approximate
30,409 square foot (net rentable area) office/warehouse unit within the
223,890 square foot "Project." The address for the unit is 6171 McLeod
Drive, Suites H through M, Las Vegas, Nevada 89102
Section 1.05. LEASE TERM: Seven (7) years Five (5) months beginning on
August 1, 1997 or such other date as is specified in this Lease, and ending
on January 31, 2005
Section 1.06. PERMITTED USES: (see Article Five) General
office/administrative, as well as the storage and refurbishing of gaming
equipment and related lawful uses.
Section 1.07. TENANT'S GUARANTOR: (If none, so state): PDS Financial
Corporation, a MN corporation.
Section 1.08. BROKERS: (See Article Fourteen) (If none, so state)
Landlord's Broker: Michael G. DeLew, Stuart Mixer Commercial Oncor
International
Tenant's Broker: Donna Alderson, CB Commercial Real Estate Corporation,
Inc.
Section 1.09. COMMISSION PAYABLE TO LANDLORD'S BROKER: (See Article
Fourteen) $ Per separate agreement
Section 1.10. INITIAL SECURITY DEPOSIT: (See Section 3.03)
$17,322.32
Section 1.11. VEHICLE PARKING SPACES ALLOCATED TO TENANT: (See Section
4.05) Forty-two(42)
Section 1.12. RENT AND OTHER CHARGES PAYABLE TO TENANT:
(a) BASE RENT Seventeen thousand three hundred twenty two and 32/100
Dollars ($17,322.32) per month for the first Twelve (12) months, as provided
in Section 3.01, and shall be increased on the first day of the See addendum one
month(s) after the commencement Date, either (i) as provided in Section 3.02,
or (ii)
_____________________________________________________________
_____________________________________________________________________________
If (ii) is completed, then (i) and Section 3.02 are inapplicable) (See Addendum
One)
(b) OTHER PERIODIC PAYMENTS: (i) Real Property Taxes (See Section 4.02);
(ii) Utilities (See Section 4.03) (iii) Insurance Premiums (See Section 4.04);
(iv) Tenant's Initial Pro Rata Share of
<PAGE>
Common Area Expenses addendum one % (See Section 4.05); (v) Impounds for
Insurance Premiums and Property Taxes (See Section 4.08); (vi) Maintenance,
Repairs and Alterations (See Article Six).
Section 1.13. LANDLORD'S SHARE OF PROFIT ON ASSIGNMENT OR SUBLEASE: (See
Section 9.05) Fifty percent (50%) of the Profit (the "Landlord's Share").
Section 1.14. RIDERS: THE FOLLOWING RIDERS ARE ATTACHED TO AND MADE A
PART OF THIS LEASE: (If none, so state) Addendum One
Exhibits "A", "B", "C", "D", "E" & "F", & Corporate Guaranty of Lease
Duties Owed By A Nevada Real Estate Agent
ARTICLE TWO: LEASE TERM
Section 2.01. LEASE OF PROPERTY FOR LEASE TERM. Landlord leases the
Property to Tenant and Tenant leases the Property from Landlord for the Lease
Term. The Lease Term is for the period stated in Section 1.05 above and shall
begin and end on the dates specified in Section 1.05 above, unless the beginning
or end of the Lease Term is changed under any provision of this Lease. The
"Commencement Date" shall be the date specified in Section 1.05 above for the
beginning of the Lease Term, unless advanced or delayed under any provision of
this Lease.
Section 2.02. DELAY IN COMMENCEMENT. Landlord shall not be liable to
Tenant if Landlord does not deliver possession of the Property to Tenant on the
Commencement Date. Landlord's non-delivery of the Property to Tenant on that
date shall not affect this Lease or the obligations of Tenant under this Lease
except that the Commencement Date shall be delayed until Landlord delivers
possession of the Property to Tenant and the Lease Term shall be extended for a
period equal to the delay in delivery of possession of the Property to Tenant,
plus the number of days necessary to end the Lease Term on the last day of a
month. If a Landlord does not deliver possession of the Property to Tenant
within sixty (60) days after the Commencement Date, Tenant may elect to cancel
this Lease by giving written notice to Landlord within ten (10) days after the
sixty (60)-day period ends. If Tenant gives such notice, the Lease shall be
cancelled and neither Landlord nor Tenant shall have any further obligations to
the other. If Tenant does not give such notice, Tenant's right to cancel the
Lease shall expire and the Lease Term shall commence upon the delivery of
possession of the Property to Tenant. If delivery of possession of the Property
to Tenant is delayed, Landlord and Tenant shall, upon such delivery, execute an
amendment to this Lease setting forth the actual Commencement Date and
expiration date of the Lease. Failure to execute such amendment shall not
affect the actual Commencement Date and expiration date of the Lease.
Section 2.03. EARLY OCCUPANCY. If Tenant occupies the Property prior to
the Commencement Date, Tenant's occupancy of the Property shall be subject to
all of the provisions of this Lease. Early occupancy of the Property shall not
advance the expiration date of this Lease. Tenant shall pay Base Rent and all
other charges specified in this Lease for the early occupancy period.
Section 2.04. HOLDING OVER. Tenant shall vacate the Property upon the
expiration or earlier termination of this Lease. Tenant shall reimburse
Landlord for and indemnify Landlord against all damages which Landlord incurs
from Tenant's delay in vacating the Property. If Tenant does not vacate the
Property upon the expiration or earlier termination of the Lease and Landlord
thereafter accepts rent from Tenant, Tenant's occupancy of the Property shall be
a "month-to-month" tenancy, subject to all of the terms of this Lease applicable
to a month-to-month tenancy, except that the Base Rent then in effect shall be
increased by twenty-five percent (25%).
2
<PAGE>
ARTICLE THREE: BASE RENT
Section 3.01. TIME AND MANNER OF PAYMENT. Upon execution of this Lease,
Tenant shall pay Landlord the Base Rent in the amount stated in Paragraph
1.12(a) above for the first month of the Lease Term. On the first day of the
second month of the Lease Term and each month thereafter, Tenant shall pay
Landlord the Base Rent, in advance, without offset, deduction or prior demand.
The Base Rent shall be payable at Landlord's address or at such other place as
Landlord may designate in writing.
Section 3.02. COST OF LIVING INCREASES. The Base Rent shall be increased
on each date (the "Rental Adjustment Date") stated in Paragraph 1.12(a) above in
accordance with the increase in the United States Department of Labor, Bureau of
Labor Statistics, Consumer Price Index for All Urban Consumers (all items for
the geographical Statistical Area in which the Property is located on the basis
of 1982-1984 = 100) (the "Index") as follows:
(a) The Base Rent (the "Comparison Base Rent") in effect immediately
before each Rental Adjustment Date shall be increased by the percentage that the
Index has increased from the date (the "Comparison Date") on which payment of
the Comparison Base Rent began through the month in which the applicable Rental
Adjustment Date occurs. The Base Rent shall not be reduced by reason of such
computation. Landlord shall notify Tenant of each increase by a written
statement which shall include the Index for the applicable Comparison Date, the
Index for the applicable Rental Adjustment Date, the percentage increase between
those two indices, and the new Base Rent. Any increase in the Base Rent
provided for in this Section 3.02 shall be subject to any minimum or maximum
increase, if provided for in Paragraph 1.12(a).
(b) Tenant shall pay the new Base Rent from the applicable Rental
Adjustment Date until the next Rental Adjustment Date. Landlord's notice may be
given after the applicable Rental Adjustment Date of the increase, and Tenant
shall pay Landlord the accrued rental adjustment for the months elapsed between
the effective date of the increase and Landlord's notice of such increase within
ten (10) days after Landlord's notice. If the format or components of the Index
are materially changed after the Commencement Date, Landlord shall substitute an
index which is published by the Bureau of Labor Statistics or similar agency and
which is most nearly equivalent to the Index in effect on the Commencement Date.
The substitute index shall be used to calculate the increase in the Base Rent
unless Tenant objects to such index in writing within fifteen (15) days after
receipt of Landlord's notice. If Tenant objects, Landlord and Tenant shall
submit the selection of the substitute index for binding arbitration in
accordance with the rules and regulations of the American Arbitration
Association at its office closest to the Property. The costs of arbitration
shall be borne equally by Landlord and Tenant.
Said increase shall be adjusted annually to reflect no less than three
percent (3%) and not greater than four percent (4%) per annum.
Section 3.03. SECURITY DEPOSIT; INCREASES.
(a) Upon the execution of this Lease, Tenant shall deposit with Landlord a
cash Security Deposit in the amount set forth in Section 1.10 above. Landlord
may apply all or part of the Security Deposit to any unpaid rent or other
charges due from Tenant or to cure any other defaults of Tenant. If Landlord
uses any part of the Security Deposit, Tenant shall restore the Security Deposit
to its full amount within ten (10) days after Landlord's written request.
Tenant's failure to do so shall be a material default under this Lease. No
interest shall be paid on the Security Deposit. Landlord shall not be required
to keep the Security Deposit separate from its other accounts and no trust
relationship is created with respect to the Security Deposit.
3
<PAGE>
(b) Each time the Base Rent is increased, Tenant shall deposit additional
funds with Landlord sufficient to increase the Security Deposit to an amount
which bears the same relationship to the adjusted Base Rent as the initial
Security Deposit bore to the initial Base Rent.
Section 3.04. TERMINATION; ADVANCE PAYMENTS. Upon termination of this
Lease under Article Seven (Damage or Destruction), Article Eight (Condemnation)
or any other termination not resulting from Tenant's default, and after Tenant
has vacated the Property in the manner required by this Lease, Landlord shall
refund or credit to Tenant (or Tenant's successor) the unused portion of the
Security Deposit, any advance rent or other advance payments made by Tenant to
Landlord, and any amounts paid for real property taxes and other reserves which
apply to any time periods after termination of the Lease.
ARTICLE FOUR: OTHER CHARGES PAYABLE BY TENANT
Section 4.01. ADDITIONAL RENT. All charges payable by Tenant other than
Base Rent are called "Additional Rent." Unless this Lease provides otherwise,
Tenant shall pay all Additional Rent then due with the next monthly installment
of Base Rent. The term "rent" shall mean Base Rent and Additional Rent.
Section 4.02. PROPERTY TAXES. (a) Real Property Taxes. Tenant shall pay
all real property taxes on the Property (including any fees, taxes or
assessments against, or as a result of, any tenant improvements installed on the
Property by or for the benefit of Tenant) during the Lease Term. Subject to
Paragraph 4.02(c) and Section 4.08 below, such payment shall be made at least
(10) days prior to the delinquency date of the taxes. Within such ten (10)-day
period, Tenant shall furnish Landlord with satisfactory evidence that the real
property taxes have been paid. Landlord shall reimburse Tenant for any real
property taxes paid by Tenant covering any period of time prior to or after the
Lease Term. If Tenant fails to pay the real property taxes when due, Landlord
may pay the taxes and Tenant shall reimburse Landlord for the amount of such tax
payment as Additional Rent.
(b) DEFINITION OF "REAL PROPERTY TAX. "Real property tax" means: (i) any
fee, license fee, license tax, business license fee, commercial rental tax,
levy, charge, assessment, penalty or tax imposed by any taxing authority against
the Property; (ii) any tax on the Landlord's right to receive, or the receipt
of, rent or income from the Property or against Landlord's business of leasing
the Property; (iii) any tax or charge for fire protection, streets, sidewalks,
road maintenance, refuse or other services provided to the Property by any
governmental agency; (iv) any tax imposed upon this transaction or based upon a
re-assessment of the Property due to a change of ownership, as defined by
applicable law, or other transfer of all or part of Landlord's interest in the
Property; and (v) any charge or fee replacing any tax previously included within
the definition of real property tax. "Real property tax" does not, however,
include Landlord's federal or state income, franchise, inheritance or estate
taxes.
(c) JOINT ASSESSMENT. If the Property is not separately assessed,
Landlord shall reasonably determine Tenant's share of the real property tax
payable by Tenant under Paragraph 4.02(a) from the assessor's worksheets or
other reasonably available information. Tenant shall pay such share to Landlord
within fifteen (15) days after receipt of Landlord's written statement.
(d) PERSONAL PROPERTY TAXES.
(i) Tenant shall pay all taxes charged against trade fixtures,
furnishings, equipment or any other personal property belonging to Tenant.
Tenant shall try to have personal property taxed separately from the
Property.
4
<PAGE>
(ii) If any of Tenant's personal property is taxed with the Property,
Tenant shall pay Landlord the taxes for the personal property within
fifteen (15) days after Tenant receives a written statement from Landlord
for such personal property taxes.
Section 4.03. UTILITIES. Tenant shall pay, directly to the appropriate
supplier, the cost of all natural gas, heat, light, power, sewer service,
telephone, water, refuse disposal and other utilities and services supplied to
the Property. However, if any services or utilities are jointly metered with
other property, Landlord shall make a reasonable determination of Tenant's
proportionate share of the cost of such utilities and services and Tenant shall
pay such share to Landlord within fifteen (15) days after receipt of Landlord's
written statement.
Section 4.04. INSURANCE POLICIES.
(a) Liability Insurance. During the Lease Term, Tenant shall maintain a
policy of commercial general liability insurance (sometimes known as broad form
comprehensive general liability insurance) insuring Tenant against liability for
bodily injury, property damage (including loss of use of property) and personal
injury arising out of the operation, use or occupancy of the Property. Tenant
shall name Landlord as an additional insured under such policy. The initial
amount of such insurance shall be One Million Dollars ($1,000,000) per
occurrence and shall be subject to periodic increase based upon inflation.
Increased liability awards, recommendation of Landlord's professional insurance
advisers and other relevant factors. The liability insurance obtained by Tenant
under this Paragraph 4.04(a) shall (i) be primary and non-contributing; (ii)
contain cross-liability endorsements; and (iii) insure Landlord against Tenant's
performance under Section 5.05, if the matters giving rise to the indemnity
under Section 5.05 result from the negligence of Tenant. The amount and
coverage of such insurance shall not limit Tenant's liability nor relieve Tenant
of any other obligation under this Lease. Landlord may also obtain
comprehensive public liability insurance in an amount and with coverage
determined by Landlord insuring Landlord against liability arising out of
ownership, operation, use or occupancy of the Property. The policy obtained by
Landlord shall not be contributory and shall not provide primary insurance.
(b) PROPERTY AND RENTAL INCOME INSURANCE. During the Lease Term, Landlord
shall maintain policies of insurance covering loss or damage to the Property in
the full amount of its replacement value. Such policy shall contain an
Inflation Guard Endorsement and shall provide protection against all perils
included within the classification of fire, extended coverage, vandalism,
malicious mischief, special extended perils (all risk), sprinkler leakage and
any other perils which Landlord deems reasonably necessary. Landlord shall have
the right to obtain flood and earthquake insurance if required by any lender
holding a security interest in the Property. Landlord shall not obtain
insurance for Tenant's fixtures or equipment or building improvements installed
by Tenant on the Property. During the Lease Term, Landlord shall also maintain
a rental income insurance policy, with loss payable to Landlord, in an amount
equal to one year's Base Rent, plus estimated real property taxes and insurance
premiums. Tenant shall be liable for the payment of any deductible amount under
Landlord's or Tenant's insurance policies maintained pursuant to this Section
4.04, in an amount not to exceed Five Thousand Dollars ($5,000). Tenant shall
not do or permit anything to be done which invalidates any such insurance
policies.
(c) Payment of Premiums. Subject to Section 4.08, Tenant shall pay all
premiums for the insurance policies described in Paragraphs 4.04(a) and (b)
(whether obtained by Landlord or Tenant) within fifteen (15) days after Tenant's
receipt of a copy of the premium statement or other evidence of the amount due,
except Landlord shall pay all premiums for non-primary comprehensive public
liability insurance which Landlord elects to obtain as provided in Paragraph
4.04(a). For insurance policies maintained by Landlord which cover improvements
on the entire Project, Tenant shall pay Tenant's
5
<PAGE>
prorated share of the premiums, in accordance with the formula in Paragraph
4.05(e) for determining Tenant's share of Common Area costs. If insurance
policies maintained by Landlord cover improvements on real property other
than the Project, Landlord shall deliver to Tenant a statement of the premium
applicable to the Property showing in reasonable detail how Tenant's share of
the premium was computed. If the Lease Term expires before the expiration of
an insurance policy maintained by Landlord, Tenant shall be liable for
Tenant's prorated share of the insurance premiums. Before the Commencement
Date, Tenant shall deliver to Landlord a copy of any policy of insurance
which Tenant is required to maintain under this Section 4.04. At least
thirty (30) days prior to the expiration of any such policy, Tenant shall
deliver to Landlord a renewal of such policy. As an alternative to providing
a policy of insurance, Tenant shall have the right to provide Landlord a
certificate of insurance, executed by an authorized officer of the insurance
company, showing that the insurance which Tenant is required to maintain
under this Section 4.04 is in full force and effect and containing such other
information which Landlord reasonably requires.
(d) GENERAL INSURANCE PROVISIONS.
(i) Any insurance which Tenant is required to maintain under this
Lease shall include a provision which requires the insurance carrier to
give Landlord not less than thirty (30) days' written notice prior to any
cancellation or modification of such coverage.
(ii) If Tenant fails to deliver any policy, certificate or renewal to
Landlord required under this Lease within the prescribed time period or if
any such policy is cancelled or modified during the Lease Term without
Landlord's consent, Landlord may obtain such insurance, in which case
Tenant shall reimburse Landlord for the cost of such insurance within
fifteen (15) days after receipt of a statement that indicates the cost of
such insurance.
(iii) Tenant shall maintain all insurance required under this
Lease with companies holding a "General Policy Rating" of A-12 or better,
as set forth in the most current issue of "Best Key Rating Guide."
Landlord and Tenant acknowledge the insurance markets are rapidly changing
and that insurance in the form and amounts described in this Section 4.04
may not be available in the future. Tenant acknowledges that the insurance
described in this Section 4.04 is for the primary benefit of Landlord. If
at any time during the Lease Term, Tenant is unable to maintain the
insurance required under the Lease, Tenant shall nevertheless maintain
insurance coverage which is customary and commercially reasonable in the
insurance industry for Tenant's type of business, as that coverage may
change from time to time. Landlord makes no representation as to the
adequacy of such insurance to protect Landlord's or Tenant's interests.
Therefore, Tenant shall obtain any such additional property or liability
insurance which Tenant deems necessary to protect Landlord and Tenant.
(iv) Unless prohibited under any applicable insurance policies
maintained, Landlord and Tenant each hereby waive any and all rights of
recovery against the other, or against the officers, employees, agents or
representatives of the other, for loss of or damage to its property or the
property of others under its control, if such loss or damage is covered by
any insurance policy in force (whether or not described in this Lease) at
the time of such loss or damage. Upon obtaining the required policies of
insurance, Landlord and Tenant shall give notice to the insurance carriers
of this mutual waiver of subrogation.
Section 4.05. COMMON AREAS; USE, MAINTENANCE AND COSTS.
(a) COMMON AREAS. As used in this Lease, "Common Areas" shall mean all
areas within the Project which are available for the common use of tenants of
the Project and which are not leased or held for
6
<PAGE>
the exclusive use of Tenant or other tenants, including, but not limited to,
parking areas, driveways, sidewalks, loading areas, access roads, corridors,
landscaping and planted areas. Landlord, from time to time, may change the
size, location, nature and use of any of the Common Areas, convert Common
Areas into leasable areas, construct additional parking facilities (including
parking structures) in the Common Areas, and increase or decrease Common Area
land and/or facilities. Tenant acknowledges that such activities may result
in inconvenience to Tenant. Such activities and changes are permitted if they
do not materially affect Tenant's use of the Property.
(b) USE OF COMMON AREAS. Tenant shall have the nonexclusive right (in
common with other tenants and all others to whom Landlord has granted or may
grant such rights) to use the Common Areas for the purposes intended, subject to
such reasonable rules and regulations as Landlord may establish from time to
time. Tenant shall abide by such rules and regulations and shall use its best
effort to cause others who use the Common Areas with Tenant's express or implied
permission to abide by Landlord's rules and regulations. At any time, Landlord
may close any Common Areas to perform any acts in the Common Areas as, in
Landlord's judgment, are desirable to improve the Project. Tenant shall not
interfere with the rights of Landlord, other tenants or any other person
entitled to use the Common Areas.
(c) SPECIFIC PROVISION RE: VEHICLE PARKING. Tenant shall be entitled to
use the number of vehicle parking spaces in the Project allocated to Tenant in
Section 1.11 of the Lease without paying any additional rent. Tenant's parking
shall not be reserved and shall be limited to vehicles no larger than standard
size automobiles or pickup utility vehicles. Tenant shall not cause large
trucks or other large vehicles to be parked within the Project or on the
adjacent public streets. Temporary parking of large delivery vehicles in the
Project may be permitted by the rules and regulations established by Landlord.
Vehicles shall be parked only in striped parking spaces and not in driveways,
loading areas or other locations not specifically designated for parking.
Handicapped spaces shall only be used by those legally permitted to use them.
If Tenant parks more vehicles in the parking area than the number set forth in
Section 1.11 of this Lease, such conduct shall be a material breach of this
Lease. In addition to Landlord's other remedies under this Lease, Tenant shall
pay a daily charge determined by Landlord for each such additional vehicle.
(SEE ADDENDUM ONE, SECTION 23)
(d) MAINTENANCE OF COMMON AREAS. Landlord shall maintain the Common Areas
in good order, condition and repair and shall operate the Project, in Landlord's
sole discretion, as a first-class industrial/commercial real property
development. Tenant shall pay Tenant's pro rata share (as determined below) of
all costs incurred by Landlord for the operation and maintenance of the Common
Areas. Common Area costs include, but are not limited to, costs and expenses
for the following: gardening and landscaping; utilities, water and sewage
charges; maintenance of signs (other than tenants' signs); premiums for
liability, property damage, fire and other types of casualty insurance on the
Common Areas and worker's compensation insurance; all property taxes and
assessments levied on or attributable to the Common Areas and all Common Area
improvements; all personal property taxes levied on or attributable to personal
property exclusively used in connection with the Common Areas; straight-line
depreciation on personal property owned by Landlord which is exclusively
consumed in the operation or maintenance of the Common Areas; rental or lease
payments paid by Landlord for rented or leased personal property exclusively
used in the operation or maintenance of the Common Areas; fees for required
licenses and permits; repairing, resurfacing, repaving, maintaining, painting,
lighting, cleaning, refuse removal, security and similar items; reserves for
roof replacement and exterior painting and other appropriate reserves; and a
reasonable allowance to Landlord for Landlord's supervision of the Common Areas
(not to exceed five percent (5%) of the gross rents of the Project for the
calendar year). Landlord may cause any or all of such services to be provided
by third parties and the
7
<PAGE>
cost of such services shall be included in Common Area costs. Common Area
costs shall not include depreciation of real property which forms part of the
Common Areas, costs of alterations of the premises for Tenants of the
project, depreciation charges of real property, interest and principal
payments on mortgages, ground rental payments, real estate brokerage and
leasing commissions, expenses incurred in enforcing obligations of Tenants of
the project, salaries and other compensation of Landlord (other than as
provided for herein). Costs for special services provided to any one Tenant
of the project but not to Tenants of the project generally, and costs of
marketing or advertising the project.
(e) TENANT'S SHARE AND PAYMENT. Tenant shall pay Tenant's annual pro rata
share of all Common Area costs prorated for any fractional month) upon written
notice from Landlord that such costs are due and payable and in any event prior
to delinquency. Tenant's pro rata share shall be calculated by dividing the
square foot area of the Property, as set forth in Section 1.04 of the Lease, by
the aggregate square foot area of the Project which is leased or held for lease
by tenants, as of the date on which the computation is made. Tenant's initial
pro rata share is set out in Paragraph 1.13(b). Any changes in the Common Area
costs and/or the aggregate area of the Project leased or held for lease during
the Lease Term shall be effective on the first day of the month after such
change occurs. Landlord may at Landlord's election, estimate in advance and
charge to Tenant as Common Area costs, all real property taxes for which Tenant
is liable under Section 4.02 of the Lease, all insurance premiums for which
Tenant is liable under Section 4.04 of the Lease, all maintenance and repair
costs for which Tenant is liable under Section 6.04 of the Lease, and all other
Common Area costs payable by Tenant hereunder. At Landlord's election, such
statements of estimated Common Areas costs shall be delivered monthly, quarterly
or at any other periodic intervals to be designated by Landlord. Landlord may
adjust such estimates at any time based upon Landlord's experience and
reasonable anticipation of costs. Such adjustments shall be effective as of the
next rent payment date after notice to Tenant. Within sixty (60) days after the
end of each calendar year of the Lease Term, Landlord shall deliver to Tenant a
statement prepared in accordance with generally accepted accounting principles
setting forth, in reasonable detail, the Common Area costs paid or incurred by
Landlord during the preceding calendar year and Tenant's pro rata share. Upon
receipt of such statement, there shall be an adjustment between Landlord and
Tenant, with payment to or credit given by Landlord (as the case may be) so that
Landlord shall received the entire amount of Tenant's share of such costs and
expenses for such period.
Section 4.06. LATE CHARGES. Tenant's failure to pay rent promptly may
cause Landlord to incur unanticipated costs. The exact amount of such costs are
impractical or extremely difficult to ascertain. Such costs may include but are
not limited to, processing and accounting charges and late charges which may be
imposed on Landlord by any ground lease, mortgage or trust deed encumbering the
Property. Therefore, if Landlord does not receive any rent payment within ten
(10) days after it becomes due, Tenant shall pay Landlord a late charge equal to
ten percent (10%) of the overdue amount. The parties agree that such late
charge represents a fair and reasonable estimate of the costs Landlord will
incur by reason of such late payment.
Section 4.07. INTEREST ON PAST DUE OBLIGATIONS. Any amount owed by Tenant
to Landlord which is not paid when due shall bear interest at the rate of
fifteen percent (15%) per annum from the due date of such amount. However,
interest shall not be payable on late charges to be paid by Tenant under this
Lease. The payment of interest on such amounts shall not excuse or cure any
default by Tenant under this Lease. If the interest rate specified in this
Lease is higher than the rate permitted by law, the interest is hereby decreased
to the maximum legal interest rate permitted by law.
Section 4.08. IMPOUNDS FOR INSURANCE PREMIUMS AND REAL PROPERTY TAXES. If
requested by any ground lessor or lender to whom Landlord has granted a security
interest in the Property, or if Tenant is more than ten (10) days late in the
payment of rent more that once in any consecutive twelve (12) month period,
Tenant shall pay Landlord a sum equal to one-twelfth (1/12) of the annual real
property taxes
8
<PAGE>
and insurance premiums payable by Tenant under this Lease, together with each
payment of Base Rent. Landlord shall hold such payments in a non-interest
bearing impound account. If unknown, Landlord shall reasonably estimate the
amount of real property taxes and insurance premiums when due. Tenant shall
pay any deficiency of funds in the impound account to Landlord upon written
request. If Tenant defaults under this Lease, Landlord may apply any funds
in the impound account to any obligation then due under this Lease.
ARTICLE FIVE: USE OF PROPERTY
Section 5.01. PERMITTED USES. Tenant may use the Property only for the
Permitted Uses set forth in Section 1.06 above.
Section 5.02. MANNER OF USE. Tenant shall not cause or permit the
Property to be used in any way which constitutes a violation of any law,
ordinance, or governmental regulation or order, which annoys or interferes with
the rights of tenants of the Project, or which constitutes a nuisance or waste.
Tenant shall obtain and pay for all permits, including a Certificate of
Occupancy, required for Tenant's occupancy of the Property and shall promptly
take all actions necessary to comply with all applicable statutes, ordinances,
rules, regulations, orders and requirements regulating the use by Tenant of the
Property, including the Occupational Safety and Health Act.
Section 5.03. HAZARDOUS MATERIALS. As used in this Lease, the term
"Hazardous Material" means any flammable items, explosives, radioactive
materials, hazardous or toxic substances, material or waste or related
materials, including any substances defined as or included in the definition of
"hazardous substances", "Hazardous wastes", "hazardous materials" or "toxic
substances" now or subsequently regulated under any applicable federal, state or
local laws or regulations, including without limitation petroleum-based
products, paints, solvents, lead, cyanide, DDT, printing inks, acids,
pesticides, ammonia compounds and other chemical products, asbestos, PCBs and
similar compounds, and including any different products and materials which are
subsequently found to have adverse effects on the environment or the health and
safety of persons. Tenant shall not cause or permit any Hazardous Material to
be generated, produced, brought upon, used, stored, treated or disposed of in or
about the Property by Tenant, its agents, employees, contractors, sublessees or
invitees without the prior written consent of Landlord. Landlord shall be
entitled to take into account such other factors or facts as Landlord may
reasonably determine to be relevant in determining whether to grant or withhold
consent to Tenant's proposed activity with respect to Hazardous Material. In no
event, however, shall Landlord be required to consent to the installation or use
of any storage tanks on the Property.
Section 5.04. SIGNS AND AUCTIONS. Tenant shall not place any signs on the
Property without Landlord's prior written consent. Tenant shall not conduct or
permit any auctions or sheriff's sales at the Property.
Section 5.05. INDEMNITY. Tenant shall indemnify Landlord against and hold
Landlord harmless from any and all costs, claims or liability arising from: (a)
Tenant's use of the Property; (b) the conduct of Tenant's business or anything
else done or permitted by Tenant to be done in or about the Property, including
any contamination of the Property or any other property resulting from the
presence or use of Hazardous Material caused or permitted by Tenant; (c) any
breach or default in the performance of Tenant's obligations under this Lease;
(d) any misrepresentation or breach of warranty by Tenant under this Lease; or
(e) other acts or omissions of Tenant. Tenant shall defend Landlord against any
such cost, claim or liability at Tenant's expense with counsel reasonably
acceptable to Landlord or, at Landlord's election, Tenant shall reimburse
Landlord for any legal fees or costs incurred by Landlord in connection
9
<PAGE>
with any such claim. As a material part of the consideration to Landlord,
Tenant assumes all risk of damage to property or injury to persons in or
about the Property arising from any cause, and Tenant hereby waives all
claims in respect thereof against Landlord, except for any claim arising out
of Landlord's sole active negligence. As used in this Section, the term
"Tenant" shall include Tenant's employees, agents, contractors and invitees,
if applicable.
(See Addendum one)
Section 5.06. LANDLORD'S ACCESS. Landlord or its agents may enter the
Property at all reasonable times to show the Property to potential buyers,
investors or tenants or other parties, to do any other act or to inspect and
conduct tests in order to monitor Tenant's compliance with all applicable
environmental laws and all laws governing the presence and use of Hazardous
Material; or for any other purpose Landlord deems necessary. Landlord shall
give Tenant at least twenty four (24) hours prior notice of such entry, except
in the case of an emergency. Landlord may place customary "For Sale" or "For
Lease" signs on the Property.
Section 5.07. QUIET POSSESSION. If Tenant pays the rent and complies with
all other terms of this Lease, Tenant may occupy and enjoy the Property for the
full Lease Term, subject to the provisions of the Lease.
ARTICLE SIX: CONDITION OF PROPERTY; MAINTENANCE, REPAIRS AND ALTERATIONS
Section 6.01. EXISTING CONDITIONS. Tenant accepts the Property in its
condition as of the execution of the Lease, subject to all recorded matters,
laws, ordinances, and governmental regulations and orders. Except as provided
herein, Tenant acknowledges that neither Landlord nor any agent of the Landlord
has made any representation as to the condition of the Property or the
suitability of the Property for Tenant's intended use. Tenant represents and
warrants that Tenant has made its own inspection of and inquiry regarding the
condition of the Property and is not relying on any representations of Landlord
or any Broker with respect thereto. If Landlord or Landlord's Broker has
provided a Property Information Sheet or other Disclosure Statement regarding
the Property, a copy is attached as an exhibit to the Lease.
Section 6.02. EXEMPTION OF LANDLORD FROM LIABILITY. Landlord shall not be
liable for any damage or injury to the person, business (or any loss of income
therefrom), goods, wares, merchandise or other property of Tenant, Tenant's
employees, invitees, customers or any other person in or about the Property,
whether such damage or injury is caused by or results from: (a) fire, steam,
electricity, water, gas or rain; (b) the breakage, leakage, obstruction or other
defects of pipes, sprinklers, wires, appliances, plumbing, air conditioning or
lighting fixtures or any other cause; (c) conditions arising in or about the
Property or upon other portions of the Project, or from other sources or places;
or (d) any act or omission of any other tenant of the Project. Landlord shall
not be liable for any such damage or injury even though the cause of or the
means of repairing such damage or injury are not accessible to Tenant. The
provisions of this Section 6.02 shall not, however, exempt Landlord from
liability for Landlord's sole active negligence.
Section 6.03. LANDLORD'S OBLIGATIONS.
(a) Except as provided in Article Seven (Damages or Destruction) and
Article Eight (Condemnation), Landlord shall keep the following in good order,
condition and repair: the foundations, exterior walls and roof of the Property
(including painting the exterior surface of the exterior walls of the Property
not more often than once every five (5) years, if necessary) and all components
of electrical, mechanical, plumbing, heating and air conditioning systems and
facilities
10
<PAGE>
located in the Property which are concealed or used in common by tenants of
the Project. However, Landlord shall not be obligated to maintain or repair
windows, doors, plate glass or the interior surfaces of exterior walls.
Landlord shall make repairs under this Section 6.03 within a reasonable time
after receipt of written notice from Tenant of the need for such repairs.
(b) Tenant shall pay or reimburse Landlord for all costs Landlord incurs
under Paragraph 6.03(a) above as Common Area costs as provided for in Section
4.05 of the Lease. Tenant waives the benefit of any statute in effect now or in
the future which might give Tenant the right to terminate this Lease due to
Landlord's failure to keep the Property in good order, condition and repair.
Section 6.04. TENANT'S OBLIGATIONS.
(a) Except as provided in Section 6.03, Article Seven (Damage or
Destruction) and Article Eight (Condemnation). Tenant shall keep all portions
of the Property (including structural, nonstructural, interior systems and
equipment) in good order, condition and repair (including interior painting and
refinishing, as needed). If any portion of the Property or any system or
equipment in the Property which Tenant is obligated to repair cannot be fully
repaired or restored, Tenant shall promptly replace such portion of the Property
or system or equipment in the Property, regardless of whether the benefit of
such replacement extends beyond the Lease Term; but if the benefit or useful
life of such replacement extends beyond the Lease Term (as such term may be
extended by exercise of any options), the useful life of such replacement shall
be prorated over the remaining portion of the Lease Term (as extended), and
Tenant shall be liable only for that portion of the cost which is applicable to
the Lease Term (as extended). Tenant shall maintain a preventive maintenance
contract providing for the regular inspection and maintenance of the heating and
air conditioning system by a licensed heating and air conditioning contractor,
unless Landlord maintains such equipment under Section 6.03 above. If any part
of the Property or the Project is damaged by any act or omission of Tenant,
Tenant shall pay Landlord the cost of repairing or replacing such damaged
property, whether or not Landlord would otherwise be obligated to pay the cost
of maintaining or repairing such property. It is the intention of Landlord and
Tenant that at all times Tenant shall maintain the portions of the Property
which Tenant is obligated to maintain in an attractive, first-class and fully
operative condition.
(b) Tenant shall fulfill all of Tenant's obligations under this Section
6.04 at Tenant's sole expense. If Tenant fails to maintain, repair or replace
the Property as required in this Section 6.04, Landlord may, upon ten (10) days
prior notice to Tenant (except that no notice shall be required in the case of
an emergency), enter the Property and perform such maintenance or repair
(including replacement, as needed) on behalf of Tenant. In such case, Tenant
shall reimburse Landlord for all costs incurred in performing such maintenance
or repair immediately upon demand.
Section 6.05. ALTERATIONS, ADDITIONS AND IMPROVEMENTS.
(a) Tenant shall not make any alterations, additions, or improvements to
the Property without Landlord's prior written consent, which shall not be
unreasonably withheld, except for non-structural alterations which do not exceed
Ten Thousand Dollars ($10,000) in cost cumulatively over the Lease Term and
which are not visible from the outside of any building of which the Property is
part. Landlord may require Tenant to provide demolition and/or lien and
completion bonds in form and amount satisfactory to Landlord. Tenant shall
promptly remove any alterations, additions, or improvements constructed in
violation of this Paragraph 6.05(a) upon Landlord's written request. All
alterations, additions, and improvements shall be done in a good and workmanlike
manner, in conformity with all applicable laws and regulations, and by a
contractor approved by Landlord. Upon completion of any such work, Tenant shall
provide Landlord with "as built" plans, copies of all construction contracts,
and proof of payment for all labor and materials.
11
<PAGE>
(b) Tenant shall pay when due all claims for labor and material
furnished to the Property. Tenant shall give Landlord at least twenty (20)
days' prior written notice of the commencement of any work on the Property,
regardless of whether Landlord's consent to such work is required. Landlord
may elect to record and post notices of non-responsibility on the Property.
Section 6.06. CONDITION UPON TERMINATION. Upon the termination of the
Lease, Tenant shall surrender the Property to Landlord, broom clean and in the
same condition as received except for ordinary wear and tear. However, Tenant
shall not be obligated to repair any damage which Landlord is required to repair
under Article Seven (Damage or Destruction). In addition, Landlord may require
Tenant to remove any alterations, additions or improvements (whether or not made
with Landlord's consent) prior to the expiration of the Lease and to restore the
Property to its prior condition, all at Tenant's expense. All alterations,
additions and improvements which Landlord has not required Tenant to remove
shall become Landlord's property and shall be surrendered to Landlord upon the
expiration or earlier termination of the Lease, except that Tenant may remove
any of Tenant's machinery or equipment which can be removed without material
damage to the Property. Tenant shall repair, at Tenant's expense, any damage to
the Property caused by the removal of any such machinery or equipment. In no
event, however, shall Tenant remove any of the following materials or equipment
(which shall be deemed Landlord's property) without Landlord's prior written
consent: any power wiring or power panels; lighting or lighting fixtures; wall
coverings; drapes, blinds or other window coverings; carpets or other floor
coverings; heaters, air conditions or any other heating or air conditioning
equipment; fencing or security gates; or other similar building operating
equipment and decorations.
ARTICLE SEVEN: DAMAGE OR DESTRUCTION
Section 7.01. PARTIAL DAMAGE TO PROPERTY.
(a) Tenant shall notify Landlord in writing immediately upon the
occurrence of any damage to the Property. If the Property is only partially
damaged (i.e., less than fifty percent (50%) of the Property is untenantable as
a result of such damage or less than fifty percent (50%) of Tenant's operations
are materially impaired) and if the proceeds received by Landlord from the
insurance policies described in Paragraph 4.04(b) are sufficient to pay for the
necessary repairs, this Lease shall remain in effect and Landlord shall repair
the damage as soon as reasonably possible. Landlord may elect (but is not
required) to repair any damage to Tenant's fixtures, equipment, or improvements.
(b) If the insurance proceeds received by Landlord are not sufficient to
pay the entire cost of repair, or if the cause of the damage is not covered by
the insurance policies which Landlord maintains under Paragraph 4.04(b).
Landlord may elect either to (i) repair the damage as soon as reasonably
possible, in which case this Lease shall remain in full force and effect, or
(ii) terminate this Lease as of the date the damage occurred. Landlord shall
notify Tenant within thirty (30) days after receipt of notice of the occurrence
of the damage whether Landlord elects to repair the damage or terminate the
Lease. If Landlord elects to repair the damage, Tenant shall pay Landlord the
"deductible amount" (if any) under Landlord's insurance policies and, if the
damage was due to an act or omission of Tenant, or Tenant's employees, agents,
contractors or invitees, the difference between the actual cost of repair and
any insurance proceeds received by Landlord. If Landlord elects to terminate
this Lease, Tenant may elect to continue this Lease in full force and effect, in
which case Tenant shall repair any damage to the Property and any building in
which Property is located. Tenant shall pay the cost of such repairs, except
that upon satisfactory completion of such repairs, Landlord shall deliver to
Tenant any insurance proceeds received by Landlord for the damage repaired by
Tenant. Tenant shall give Landlord written notice of such election within ten
(10) days after receiving Landlord's termination notice.
12
<PAGE>
(c) If the damage to the Property occurs during the last six (6) months
of the Lease Term and such damage will require more than thirty (30) days to
repair, either Landlord or Tenant may elect to terminate this Lease as of the
date the damage occurred, regardless of the sufficiency of any insurance
proceeds. The party electing to terminate this Lease shall give written
notification to the other party of such election within thirty (30) days
after Tenant's notice to Landlord of the occurrence of the damage.
Section 7.02. SUBSTANTIAL OR TOTAL DESTRUCTION. If the Property is
substantially or totally destroyed by any cause whatsoever (i.e., the damage to
the Property is greater than partial damage as described in Section 7.01), and
regardless of whether Landlord receives any insurance proceeds, this Lease shall
terminate as of the date the destruction occurred. Notwithstanding the
preceding sentence, if the Property can be rebuilt within six (6) months after
the date of destruction, Landlord may elect to rebuild the Property at
Landlord's own expense, in which case this Lease shall remain in full force and
effect. Landlord shall notify Tenant of such election within thirty (30) days
after Tenant's notice of the occurrence of total or substantial destruction. If
Landlord so elects, Landlord shall rebuild the Property at Landlord's sole
expense, except if that destruction was caused by an act or omission of Tenant.
Tenant shall pay Landlord the difference between the actual cost of rebuilding
and any insurance proceeds received by Landlord.
Section 7.03. TEMPORARY REDUCTION OF RENT. If the Property is destroyed
or damaged and Landlord or Tenant repairs or restores the Property pursuant to
the provisions of this Article Seven, any rent payable during the period of such
damage, repair and/or restoration shall be reduced in the same proportion that
the rentable area of the portion of the Property which is unusable by Tenant in
the conduct of its business bears to the total rentable area of the Property.
However, the reduction shall not exceed the sum of one year's payment of Base
Rent, insurance premiums and real property taxes. Except for such possible
reduction in Base Rent, insurance premiums and real property taxes, Tenant shall
not be entitled to any compensation, reduction, or reimbursement from Landlord
as a result of any damage, destruction, repair, or restoration of or to the
Property.
ARTICLE EIGHT: CONDEMNATION
If all or any portion of the Property is taken under the power of eminent
domain or sold under the threat of that power (all of which are called
"Condemnation"), this Lease shall terminate as to the part taken or sold on the
date the condemning authority takes title or possession, whichever occurs first.
If more than twenty percent (20%) of the floor area of the building in which the
Property is located, or which is located on the Property, is taken, either
Landlord or Tenant may terminate this Lease as of the date the condemning
authority takes title or possession, by delivering written notice to the other
within ten (10) days after receipt of written notice of such taking (or in the
absence of such notice, within ten (10) days after the condemning authority
takes title or possession). If neither Landlord nor Tenant terminates this
Lease, this Lease shall remain in effect as to the portion of the Property not
taken, except that the Base Rent and Additional Rent shall be reduced in
proportion to the reduction in the floor area of the Property. Any Condemnation
award or payment shall be distributed in the following order: (a) first, to any
ground lessor, mortgagee or beneficiary under a deed of trust encumbering the
Property, the amount of its interest in the Property; (b) second, to Tenant,
only the amount of any award specifically designated for loss of or damage to
Tenant's trade fixtures or removable personal property; and (c) third, to
Landlord, the remainder of such award, whether as compensation for reduction in
the value of the leasehold, the taking of the fee, or otherwise. If this Lease
is not terminated, Landlord shall repair any damage to the Property caused by
the Condemnation, except that Landlord shall not be obligated to repair any
damage for which Tenant has been reimbursed by the condemning authority. If the
severance damages received by Landlord are not
13
<PAGE>
sufficient to pay for such repair, Landlord shall have the right to either
terminate this Lease or make such repair at Landlord's expense.
ARTICLE NINE: ASSIGNMENT AND SUBLETTING
Section 9.01. LANDLORD'S CONSENT REQUIRED. No portion of the Property or
of Tenant's interest in this Lease may be acquired by any other person or
entity, whether by sale, assignment, mortgage, sublease, transfer, operation of
law, or act of Tenant, without Landlord's prior written consent, except as
provided in Section 9.02 below. Landlord has the right to grant or withhold its
consent as provided in Section 9.05 below. Any attempted transfer without
consent shall be void and shall constitute a non-curable breach of this Lease.
If Tenant is a partnership, any cumulative transfer of more than twenty percent
(20%) of the partnership interests shall require Landlord's consent. If Tenant
is a corporation any change in the ownership of a controlling interest of the
voting stock of the corporation shall require Landlord's consent.
Section 9.02. TENANT AFFILIATE. Tenant may assign this Lease or sublease
the Property, without Landlord's consent, to any corporation which controls, is
controlled by or is under common control with Tenant, or to any corporation
resulting from the merger of or consolidation with Tenant ("Tenant's
Affiliate"). In such case, any Tenant's Affiliate shall assume in writing all
of Tenant's obligations under this Lease.
Section 9.03. NO RELEASE OF TENANT. No transfer permitted by this Article
Nine, whether with or without Landlord's consent, shall release Tenant or change
Tenant's primary liability to pay the rent and to perform all other obligations
of Tenant under this Lease. Landlord's acceptance of rent from any other person
is not a waiver of any provision of this Article Nine. Consent to one transfer
is not a consent to any subsequent transfer. If Tenant's transferee defaults
under this Lease, Landlord may proceed directly against Tenant without pursuing
remedies against the transferee. Landlord may consent to subsequent assignments
or modifications of this Lease by Tenant's transferee, without notifying Tenant
or obtaining its consent. Such action shall not relieve Tenant's liability
under this Lease.
Section 9.04. OFFER TO TERMINATE. If Tenant desires to assign the Lease
or sublease the Property, Tenant shall have the right to offer, in writing, to
terminate the Lease as of a date specified in the offer. If Landlord elects in
writing to accept the offer to terminate within twenty (20) days after notice of
the offer, the Lease shall terminate as of the date specified and all the terms
and provisions of the Lease governing termination shall apply. If Landlord does
not so elect, the Lease shall continue in effect until otherwise terminated and
the provisions of Section 9.05 with respect to any proposed transfer shall
continue to apply.
Section 9.05. LANDLORD'S CONSENT.
(a) Tenant's request for consent to any transfer described in Section 9.01
shall set forth in writing the details of the proposed transfer, including the
name, business and financial condition of the prospective transferee, financial
details of the proposed transfer (e.g., the term of and the rent and security
deposit payable under any proposed assignment or sublease), and any other
information Landlord deems relevant. Landlord shall have the right to withhold
consent, if reasonable, or to grant consent, based on the following factors:
(i) the business of the proposed assignee or subtenant and the proposed use of
the Property; (ii) the net worth and financial reputation of the proposed
assignee or subtenant; (iii) Tenant's compliance with all of its obligations
under the Lease; and (iv) such other factors as Landlord may reasonably deem
relevant. If Landlord objects to a proposed assignment solely because of the
net worth and/or financial reputation of the proposed assignee, Tenant may
nonetheless
14
<PAGE>
sublease (but not assign), all or a portion of the Property to the proposed
transferee, but only on the other terms of the proposed transfer.
(b) If Tenant assigns or subleases, the following shall apply:
(i) Tenant shall pay to Landlord as Additional Rent under the Lease
the Landlord's Share (stated in Section 1.13) of the Profit (defined below)
on such transaction as and when received by Tenant, unless Landlord gives
written notice to Tenant and the assignee or subtenant that Landlord's
Share shall be paid by the assignee or subtenant to Landlord directly. The
"Profit" means (A) all amounts paid to Tenant for such assignment or
sublease, including "key" money, monthly rent in excess of the monthly rent
payable under the Lease, and all fees and other consideration paid for the
assignment or sublease, including fees under any collateral agreements,
less (B) costs and expenses directly incurred by Tenant in connection with
the execution and performance of such assignment or sublease for real
estate broker's commissions and costs of renovation or construction of
tenant improvements required under such assignment or sublease. Tenant is
entitled to recover such costs and expenses before Tenant is obligated to
pay the Landlord's Share to Landlord. The Profit in the case of a sublease
of less than all the Property is the rent allocable to the subleased space
as a percentage on a square footage basis.
(ii) Tenant shall provide Landlord a written statement certifying all
amounts to be paid from any assignment or sublease of the Property within
thirty (30) days after the transaction documentation is signed, and
Landlord may inspect Tenant's books and records to verify the accuracy of
such statement. On written request, Tenant shall promptly furnish to
Landlord copies of all the transaction documentation, all of which shall be
certified by Tenant to be complete, true and correct. Landlord's receipt
of Landlord's Share shall not be a consent to any further assignment or
subletting. The breach of Tenant's obligation under this Paragraph 9.05(b)
shall be a material default of the Lease.
Section 9.06. NO MERGER. No merger shall result from Tenant's sublease of
the Property under this Article Nine. Tenant's surrender of this Lease or the
termination of this Lease in any other manner. In any such event, Landlord may
terminate any or all subtenancies or succeed to the interest of Tenant as
sublandlord under any or all subtenancies.
ARTICLE TEN: DEFAULTS; REMEDIES
Section 10.01. COVENANTS AND CONDITIONS. Tenant's performance of each of
Tenant's obligations under this Lease is a condition as well as a covenant.
Tenant's right to continue in possession of the Property is conditioned upon
such performance. Time is of the essence in the performance of all covenants
and conditions.
Section 10.02. DEFAULTS. Tenant shall be in material default under this
Lease:
(a) If Tenant abandons the Property or if Tenant's vacation of the
Property results in the cancellation of any insurance described in Section
4.04;
(b) If Tenant fails to pay rent or any other charge when due;
(c) If Tenant fails to perform any of Tenant's non-monetary
obligations under this Lease for a period of thirty (30) days after written
notice from Landlord; provided that if more than thirty (30) days are
required to complete such performance, Tenant shall not be in default if
Tenant commences such performance within the thirty (30) day period and
thereafter diligently pursues its
15
<PAGE>
completion. However, Landlord shall not be required to give such notice
if Tenant's failure to perform constitutes a non-curable breach of this
Lease. The notice required by this Paragraph is intended to satisfy any
and all notice requirements imposed by law on Landlord and is not in
addition to any such requirement.
(d) If Tenant makes a general assignment or general arrangements for
the benefit of creditors; (ii) if a petition for adjudication of bankruptcy
or for reorganization or rearrangement is filed by or against Tenant and is
not dismissed within thirty (30) days; (iii) if a trustee or receiver is
appointed to take possession of substantially all of Tenant's assets
located at the Property or of Tenant's interest in this Lease and
possession is not restored to Tenant within thirty (30) days; or (iv) if
substantially all of Tenant's assets located at the Property or of Tenant's
interest in this Lease is subjected to attachment, execution or other
judicial seizure which is not discharged within thirty (30) days. If a
court of competent jurisdiction determines that any of the acts described
in this subparagraph (d) is not a default under this Lease, and a trustee
is appointed to take possession (or if Tenant remains a debtor in
possession) and such trustee or Tenant transfers Tenant's interest
hereunder, then Landlord shall receive, as Additional Rent, the excess, if
any, of the rent (or any other consideration) paid in connection with such
assignment or sublease over the rent payable by Tenant under this Lease.
(e) If any guarantor of the Lease revokes or otherwise terminates, or
purports to revoke or otherwise terminate, any guaranty of all or any
portion of Tenant's obligations under the Lease. Unless otherwise
expressly provided, no guaranty of the Lease is revocable.
Section 10.03. REMEDIES. On the occurrence of any material default by
Tenant, Landlord may, at any time thereafter, with or without notice or demand
and without limiting Landlord in the exercise of any right or remedy which
Landlord may have:
(a) Terminate Tenant's right to possession of the Property by any lawful
means, in which case this Lease shall terminate and Tenant shall immediately
surrender possession of the Property to Landlord. In such event, Landlord shall
be entitled to recover from Tenant all damages incurred by Landlord by reason of
Tenant's default, including (i) the worth at the time of the award of the unpaid
Base Rent. Additional Rent and other charges which Landlord had earned at the
time of the termination; (ii) the worth at the time of the award of the amount
by which the unpaid Base Rent, Additional Rent and other charges which Landlord
would have earned after termination until the time of the award exceeds the
amount of such rental loss that Tenant proves Landlord could have reasonably
avoided; (iii) the worth at the time of the award of the amount by which the
unpaid Base Rent, Additional Rent and other charges which Tenant would have paid
for the balance of the Lease term after the time of award exceeds the amount of
such rental loss that Tenant proves Landlord could have reasonably avoided; and
(iv) any other amount necessary to compensate Landlord for all the detriment
proximately caused by Tenant's failure to perform its obligations under the
Lease or which in the ordinary course of things would be likely to result
therefrom, including, but not limited to, any costs or expenses Landlord incurs
in maintaining or preserving the Property after such default, the cost of
recovering possession of the Property, expenses of reletting, including
necessary renovation or alteration of the Property, Landlord's reasonable
attorneys' fees incurred in connection therewith, and any real estate commission
paid or payable. As used in subparts (i) and (ii) above, the "worth at the time
of the award" is computed by allowing interest on unpaid amounts at the rate of
fifteen percent (15%) per annum, or such lesser amount as may then be the
maximum lawful rate. As used in subpart (iii) above, the "worth at the time of
the award" is computed by discounting such amount at the discount rate of the
Federal Reserve Bank of San Francisco at the time of the award, plus one percent
(1%). If Tenant has abandoned the Property, Landlord shall have the option of
(i) retaking possession of the Property and
16
<PAGE>
recovering from Tenant the amount specified in this Paragraph 10.03(a),
or (ii) proceeding under Paragraph 10.03(b);
(b) Maintain Tenant's right to possession, in which case this Lease shall
continue in effect whether or not Tenant has abandoned the Property. In such
event, Landlord shall be entitled to enforce all of Landlord's rights and
remedies under this Lease, including the right to recover the rent as it becomes
due;
(c) Pursue any other remedy now or hereafter available to Landlord under
the laws or judicial decisions of the state in which the Property is located.
Section 10.04. REPAYMENT OF "FREE" RENT. If this Lease provides for a
postponement of any monthly rental payments, a period of "free" rent or other
rent concession, such proposed rent or "free" rent is called the "Abated Rent".
Tenant shall be credited with having paid all of the Abated Rent on the
expiration of the Lease Term only if Tenant cures any default within sixty (60)
days of such default relative to all of Tenant's obligations hereunder,
including the payment of all rent (other than the Abated Rent) and all other
monetary obligations and the surrender of the Property in the physical condition
required by this Lease. Tenant acknowledges that its right to receive credit
for the Abated Rent is absolutely conditioned upon Tenant's curing any default
within sixty (60) days of such default relative to its obligations under this
Lease. If Tenant defaults and does not cure within the sixty (60) day period,
the Abated Rent shall immediately become due and payable in full and this Lease
shall be enforced as if there were no such rent abatement or other rent
concession. In such case Abated Rent shall be calculated based on the full
initial rent payable under this Lease.
Section 10.05. AUTOMATIC TERMINATION. Notwithstanding any other term or
provision hereof to the contrary, the Lease shall terminate on the occurrence of
any act which affirms the Landlord's intention to terminate the Lease as
provided in Section 10.03 hereof, including the filing of an unlawful detainer
action against Tenant. On such termination, Landlord's damages for default
shall include all costs and fees, including reasonable attorneys' fees that
Landlord incurs in connection with the filing, commencement, pursuing and/or
defending of any action in any bankruptcy court or other court with respect to
the Lease; the obtaining of relief from any stay in bankruptcy restraining any
action to evict Tenant; or the pursuing of any action with respect to Landlord's
right to possession of the Property. All such damages suffered (apart from Base
Rent and other rent payable hereunder) shall constitute pecuniary damages which
must be reimbursed to Landlord prior to assumption of the Lease by Tenant or any
successor to Tenant in any bankruptcy or other proceeding.
Section 10.06. CUMULATIVE REMEDIES. Landlord's exercise of any right or
remedy shall not prevent it from exercising any other right or remedy.
ARTICLE ELEVEN: PROTECTION OF LENDERS
Section 11.01. SUBORDINATION. Landlord shall have the right to
subordinate this Lease to any ground lease, deed of trust or mortgage
encumbering the Property, any advances made on the security thereof and any
renewals, modifications, consolidations, replacements or extensions thereof,
whenever made or recorded. Tenant shall cooperate with Landlord and any lender
which is acquiring a security interest in the Property or the Lease. Tenant
shall execute such further documents and assurances as such lender may require,
provided that Tenant's obligations under this Lease shall not be increased in
any material way (the performance of ministerial acts shall not be deemed
material), and Tenant shall not be deprived of its rights under this Lease.
Tenant's right to quiet possession of the Property during the Lease Term shall
not be disturbed if Tenant pays the rent and performs all of Tenant's
obligations under this Lease and is not otherwise in default. If any ground
lessor, beneficiary or mortgagee elects to
17
<PAGE>
have this Lease prior to the lien of its ground lease, deed of trust or
mortgage and gives written notice thereof to Tenant, this Lease shall be
deemed prior to such ground lease, deed of trust or mortgage whether
this Lease is dated prior or subsequent to the date of said ground
lease, deed of trust or mortgage or the date of recording thereof.
Section 11.02. ATTORNMENT. If Landlord's interest in the Property is
acquired by any ground lessor, beneficiary under a deed of trust, mortgagee, or
purchaser at a foreclosure sale, Tenant shall attorn to the transferee of or
successor to Landlord's interest in the Property and recognize such transferee
or successor as Landlord under this Lease and Tenant shall not be deprived of
its rights under this Lease. Tenant waives the protection of any statute or
rule of law which gives or purports to give Tenant any right to terminate this
Lease or surrender possession of the Property upon the transfer of Landlord's
interest.
Section 11.03. SIGNING OF DOCUMENTS. Tenant shall sign and deliver any
instrument or documents reasonably necessary or appropriate to evidence any such
attornment or subordination or agreement to do so. Tenant agrees to cooperate
in good faith with Landlord to cause the execution of such documents.
Section 11.04. ESTOPPEL CERTIFICATES.
(a) Upon Landlord's written request, Tenant shall execute, acknowledge and
deliver to Landlord a written statement certifying: (i) that none of the terms
or provisions of this Lease have been changed (or if they have been changed,
stating how they have been changed); (ii) that this Lease has not been cancelled
or terminated; (iii) the last date of payment of the Base Rent and other charges
and the time period covered by such payment; (iv) that Landlord is not in
default under this Lease (or, if Landlord is claimed to be in default, stating
why); and (v) such other representations or information with respect to Tenant
or the Lease as Landlord may reasonably request or which any prospective
purchaser or encumbrancer of the Property may require. Tenant shall deliver
such statement to Landlord within ten (10) days after Landlord's request.
Landlord may give any such statement by Tenant to any prospective purchaser or
encumbrancer of the Property. Such purchaser or encumbrancer may rely
conclusively upon such statement as true and correct.
(b) If Tenant does not deliver such statement to Landlord within such ten
(10) day period, Landlord, and any prospective purchase or encumbrancer, may
conclusively presume and rely upon the following facts: (i) that the terms and
provisions of this Lease have not been changed except as otherwise represented
by Landlord; and (ii) that this Lease has not been cancelled or terminated
except as otherwise represented by Landlord; (iii) that not more than one
month's Base Rent or other charges have been paid in advance; and (iv) that
Landlord is not in default under the Lease. In such event, Tenant shall be
estopped from denying the truth of such facts.
Section 11.05. TENANT'S FINANCIAL CONDITION. Within ten (10) days after
written request from Landlord, Tenant shall deliver to Landlord such financial
statements as Landlord reasonably requires to verify the net worth of Tenant or
any assignee, subtenant, or guarantor of Tenant. In addition, Tenant shall
deliver to any lender designated by Landlord any financial statements required
by such lender to facilitate the financing or refinancing of the Property.
Tenant represents and warrants to Landlord that each such financial statement is
a true and accurate statement as of the date of such statement. All financial
statements shall be confidential and shall be used only for the purposes set
forth in this Lease.
18
<PAGE>
ARTICLE TWELVE: LEGAL COSTS
Section 12.01. LEGAL PROCEEDINGS. If Tenant or Landlord shall be in
breach or default under this Lease, such party (the "Defaulting Party") shall
reimburse the other party (the "Nondefaulting Party") upon demand for any costs
or expenses that the Nondefaulting Party incurs in connection with any breach or
default of the Defaulting Party under this Lease, whether or not suit is
commenced or judgment entered. Such costs shall include legal fees and costs
incurred for the negotiation of a settlement, enforcement of rights or
otherwise. Furthermore, if any action for breach of or to enforce the
provisions of this Lease is commenced, the court in such action shall award to
the party in whose favor a judgment is entered, a reasonable sum as attorneys'
fees and costs. The losing party in such action shall pay attorneys' fees and
costs. Tenant shall also indemnify Landlord against and hold Landlord harmless
from all costs, expenses, demands and liability Landlord may incur if Landlord
becomes or is made a party to any claim or action (a) instituted by Tenant
against any third party, or by any third party against Tenant, or by or against
any person holding any interest under or using the Property by license of or
agreement with Tenant; (b) for foreclosure of any lien for labor or material
furnished to or for Tenant or such other person; (c) otherwise arising out of or
resulting from any act or transaction of Tenant or such other person; or (d)
necessary to protect Landlord's interest under this Lease in a bankruptcy
proceeding, or other proceeding under Title 11 of the United States Code as
amended. Tenant shall defend Landlord against any such claim or action at
Tenant's expense with counsel reasonably acceptable to Landlord or, at
Landlord's election, Tenant shall reimburse Landlord for any legal fees or costs
Landlord incurs in any such claim or action.
(See Addendum One.)
Section 12.02. LANDLORD'S CONSENT. Tenant shall pay Landlord's reasonable
attorneys' fees incurred in connection with Tenant's request for Landlord's
consent under Article Nine (Assignment and Subletting) of in connection with any
other act which Tenant proposes to do and which requires Landlord's consent, not
to exceed $500.00 per request.
ARTICLE THIRTEEN: MISCELLANEOUS PROVISIONS
Section 13.01. NON-DISCRIMINATION. Tenant promises, and it is a condition
to the continuance of this Lease that there will be no discrimination against,
or segregation of, any person or group of persons on the basis of race, color,
sex, creed, national origin or ancestry in the leasing, subleasing,
transferring, occupancy, tenure or use of the Property or any portion thereof.
Section 13.02. LANDLORD'S LIABILITY; CERTAIN DUTIES.
(a) As used in this Lease, the term "Landlord" means only the current
owner or owners of the fee title to the Property or Project or the leasehold
estate under a ground lease of the Property or Project at the time in question.
Each Landlord is obligated to perform the obligations of Landlord under this
Lease only during the time which Landlord owns such interest or title. Any
Landlord who transfers its title or interest is relieved of all liability with
respect to the obligations of Landlord under this Lease to be performed on or
after the date of transfer. However, each Landlord shall deliver to its
transferee all funds that Tenant previously paid if such funds have not yet been
applied under the terms of this Lease.
(b) Tenant shall give written notice of any failure by Landlord to perform
any of its obligations under this Lease to Landlord and to any ground lessor,
mortgagee or beneficiary under any deed of trust encumbering the Property whose
name and address have been furnished to Tenant in writing. Landlord shall not
be in default under this Lease unless Landlord (or such ground lessor, mortgagee
or beneficiary)
19
<PAGE>
fails to cure such non-performance within thirty (30) days after receipt
of Tenant's notice. However, if such non-performance reasonably
requires more than thirty (30) days to cure, Landlord shall not be in
default if such cure is commenced within such thirty (30) day period and
thereafter diligently pursued to the completion. If Landlord shall
default in the performance of any of its obligations under this Lease
(after notice and opportunity to cure as provided herein), Tenant may
pursue any remedies available to it under the law and this Lease.
(c) Notwithstanding any term or provision herein to the contrary, the
liability of Landlord for the performance of its duties and obligations under
this Lease is limited to Landlord's interest in the Property and the Project and
neither the Landlord nor its partners, shareholders, officers or other
principals shall have any personal liability under this Lease.
Section 13.03. SEVERABILITY. A determination by a court of competent
jurisdiction that any provision of this Lease or any part thereof is illegal or
unenforceable shall not cancel or invalidate the remainder of such provision or
this Lease, which shall remain in full force and effect.
Section 13.04. INTERPRETATION. The captions of the Articles or Sections
of this Lease are to assist the parties in reading this Lease and are not a part
of the terms or provisions of this Lease. Whenever required by the context of
this Lease, the singular shall include the plural and the plural shall include
the singular. The masculine, feminine and neuter genders shall each include the
other. In any provision relating to the conduct, acts or omissions of Tenant,
the term "Tenant" shall include Tenant's agents, employees, contractors,
invitees, successors or others using the Property with Tenant's expressed or
implied permission.
Section 13.05. INCORPORATION OF PRIOR AGREEMENTS; MODIFICATIONS. This
Lease is the only agreement between the parties pertaining to the lease of the
Property and no other agreements are effective. All amendments to this Lease
shall be in writing and signed by all parties. Any other attempted amendment
shall be void.
Section 13.06. NOTICES. All notices required or permitted under this
Lease shall be in writing and shall be personally delivered or sent by certified
mail, return receipt requested, postage prepaid. Notices to Tenant shall be
delivered to the address specified in Section 1.03 above, except that upon
Tenant's taking possession of the Property the Property shall be Tenant's
address for notice purposes. Notices to Landlord shall be delivered to the
address specified in Section 1.02 above. All notices shall be effective upon
delivery. Either party may change its notice address upon written notice to the
other party.
Section 13.07. WAIVERS. All waivers must be in writing and signed by the
waiving party. Landlord's failure to enforce any provision of this Lease or its
acceptance of rent shall not be a waiver and shall not prevent Landlord from
enforcing that provision or any other provision of this Lease in the future. No
statement on a payment check from Tenant or in a letter accompanying a payment
check shall be binding on Landlord. Landlord may, with or without notice to
Tenant, negotiate such check without being bound to the conditions of such
statement.
Section 13.08. NO RECORDATION. Tenant shall not record this Lease without
prior written consent from Landlord. However, either Landlord or Tenant may
require that a "Short Form" memorandum of this Lease executed by both parties be
recorded. The party requiring such recording shall pay all transfer taxes and
recording fees.
Section 13.09. BINDING EFFECT; CHOICE OF LAW. This Lease binds any party
who legally acquires any rights or interest in this Lease from Landlord or
Tenant. However, Landlord shall have no obligation to
20
<PAGE>
Tenant's successor unless the rights or interests of Tenant's successor
are acquired in accordance with the terms of this Lease. The laws of
the state in which the Property is located shall govern this Lease.
Section 13.10. CORPORATE AUTHORITY; PARTNERSHIP AUTHORITY. If Tenant is a
corporation, each person signing this Lease on behalf of Tenant represents and
warrants that he has full authority to do so and that this Lease binds the
corporation. Within thirty (30) days after this Lease is signed, Tenant shall
deliver to Landlord a certified copy of a resolution of Tenant's Board of
Directors authorizing the execution of this Lease or other evidence of such
authority reasonably acceptable to Landlord. If Tenant is a partnership, each
person or entity signing this Lease for Tenant represents and warrants that he
or it is a general partner of the partnership, that he or it has full authority
to sign for the partnership and this Lease binds the partnership and all general
partners of the partnership. Tenant shall give written notice to Landlord of
any general partner's withdrawal or addition. Within thirty (30) days after
this Lease is signed, Tenant shall deliver to Landlord a copy of Tenant's
recorded statement of partnership or certificate of limited partnership.
Section 13.11. JOINT AND SEVERAL LIABILITY. All parties signing this
Lease as Tenant shall be jointly and severally liable for all obligations of
Tenant.
Section 13.12. FORCE MAJEURE. If Landlord or Tenant cannot perform any of
its obligations due to events beyond Landlord's or Tenant's control, the time
provided for performing such obligations shall be extended by a period of time
equal to the duration of such events. Events beyond Landlord's and Tenant's
control include, but are not limited to, acts of God, war, civil commotion,
labor disputes, strikes, fire, flood or other casualty, shortages of labor or
material, governmental regulation or restriction and weather conditions.
Notwithstanding the foregoing, this force majeure section shall not apply to any
monetary obligations of Tenant.
Section 13.13. EXECUTION OF LEASE. This Lease may be executed in
counterparts and, when all counterpart documents are executed, the counterparts
shall constitute a single binding instrument. Landlord's delivery of this Lease
to Tenant shall not be deemed to be an offer to lease and shall not be binding
upon either party until executed and delivered by both parties.
Section 13.14. SURVIVAL. All representations and warranties of Landlord
and Tenant shall survive the termination of this Lease.
ARTICLE FOURTEEN: BROKERS
Section 14.01. BROKER'S FEE. When this Lease is signed by and delivered
to both Landlord and Tenant, Landlord shall pay a real estate commission to
Landlord's Broker named in Section 1.08 above, if any, as provided in the
written agreement between Landlord and Landlord's Broker, or the sum stated in
Section 1.09 above for services rendered to Landlord by Landlord's Broker in
this transaction. Landlord shall pay Landlord's Broker a commission if Tenant
exercises any option to extend the Lease Term or to buy the Property, or any
similar option or right which Landlord may grant to Tenant, or if Landlord's
Broker is the procuring cause of any other lease or sale entered into between
Landlord and Tenant covering the Property. Such commission shall be the amount
set forth in Landlord's Broker's commission schedule in effect as of the
execution of this Lease. If a Tenant's Broker is named in Section 1.08 above,
Landlord's Broker shall pay an appropriate portion of its commission to Tenant's
Broker if so provided in any agreement between Landlord's Broker and Tenant's
Broker. Nothing contained in this Lease shall impose any obligation on Landlord
to pay a commission or fee to any part other than Landlord's Broker.
21
<PAGE>
Section 14.02. PROTECTION OF BROKERS. If Landlord sells the Property, or
assigns Landlord's interest in this Lease, the buyer or assignee shall, by
accepting such conveyances of the Property or assignment of the Lease, be
conclusively deemed to have agreed to make all payments to Landlord's Broker
thereafter required of Landlord under this Article Fourteen. Landlord's Broker
shall have the right to bring a legal action to enforce or declare rights under
this provision. The prevailing party in such action shall be entitled to
reasonable attorneys' fees to be paid by the losing party. Such attorneys' fees
shall be fixed by the court in such action. This Paragraph is included in this
Lease for the benefit of Landlord's Broker.
Section 14.03. BROKER'S DISCLOSURE OF AGENCY. Landlord's Broker hereby
discloses to Landlord and Tenant and Landlord and Tenant hereby consent to
Landlord's Broker acting in this transaction as the agent of (check one):
/x/ Landlord exclusively; or
/ / both Landlord and Tenant.
Section 14.04. NO OTHER BROKERS. Tenant represents and warrants to
Landlord that the brokers named in Section 1.08 above are the only agents,
brokers, finders or other parties with whom Tenant has dealt who are or may be
entitled to any commission or fee with respect to this Lease or the Property.
ADDITIONAL PROVISIONS MAY BE SET FORTH IN A RIDER OR RIDERS ATTACHED HERETO
OR IN THE BLANK SPACE BELOW. IF NO ADDITIONAL PROVISIONS ARE INSERTED, PLEASE
DRAW A LINE THROUGH THE SPACE BELOW.
Landlord and Tenant have signed this Lease at the place and on the dates
specified adjacent to their signatures below and have initialled all Riders
which are attached to or incorporated by reference in this Lease.
"LANDLORD"
Signed on May 12, 1997 Patrick Commerce Center, LLC
a Nevada limited liability company
at /s/ Michael A. Panciro
------------------------- -----------------------------
By: Michael A. Panciro
------------------------
Its: Director
------------------------
"TENANT"
Signed on May 12, 1997 PDS Financial Corporation-Nevada, Inc.
a Nevada corporation
at /s/ Johan P. Finley
------------------------- -----------------------------
By: Johan P. Finley
------------------------
Its: President
------------------------
22
<PAGE>
IN ANY REAL ESTATE TRANSACTION, IT IS RECOMMENDED THAT YOU CONSULT WITH A
PROFESSIONAL, SUCH AS A CIVIL ENGINEER, INDUSTRIAL HYGIENIST OR OTHER PERSON
WITH EXPERIENCE IN EVALUATING THE CONDITION OF THE PROPERTY, INCLUDING THE
POSSIBLE PRESENCE OF ASBESTOS, HAZARDOUS MATERIALS AND UNDERGROUND STORAGE
TANKS.
THIS PRINTED FORM LEASE HAS BEEN DRAFTED BY LEGAL COUNSEL AT THE DIRECTION
OF THE SOUTHERN CALIFORNIA CHAPTER OF THE SOCIETY OF INDUSTRIAL AND OFFICE
REALTORS-Registered Trademark-, INC. NO REPRESENTATION OR RECOMMENDATION IS
MADE BY THE SOUTHERN CALIFORNIA CHAPTER OF THE SOCIETY OF INDUSTRIAL AND OFFICE
REALTORS-Registered Trademark-, INC., ITS LEGAL COUNSEL, THE REAL ESTATE BROKERS
NAMED HEREIN, OR THEIR EMPLOYEES OR AGENTS, AS TO THE LEGAL SUFFICIENCY, LEGAL
EFFECT OR TAX CONSEQUENCES OF THIS LEASE OR OF THIS TRANSACTION. LANDLORD AND
TENANT SHOULD RETAIN LEGAL COUNSEL TO ADVISE THEM ON SUCH MATTERS AND SHOULD
RELY UPON THE ADVICE OF SUCH LEGAL COUNSEL.
23
<PAGE>
PDS FINANCIAL CORPORATION - NEVADA, INC., A
NEVADA CORPORATION
ADDENDUM ONE
------------
15. OCCUPANCY DATE AND LEASE COMMENCEMENT
Upon completion of the tenant improvements as outlined in the attached
Exhibit "B", occupancy date is estimated to be six to eight weeks after
Tenant's approval of the final working drawings (the "Working Drawings"),
lease execution, and County Building Department approvals. The
Commencement Date shall occur the earlier of (a) the date upon which Tenant
takes possession of or commences the operation of its business in the
Premises; or (b) the date upon which the agreed-upon Tenant Improvements
have been substantially completed in the Premises. The Tenant Improvements
shall be substantially completed for all purposes when Landlord's architect
issues a written certificate to Landlord and Tenant certifying that the
Tenant Improvements have been substantially completed (i.e., completed
except for 'punchlist' items listed in such architect's certificate), in
substantial compliance with the Working Drawings, and the receipt of the
final building inspection approval from the Clark County Building
Department. The estimated Occupancy Date is August 1, 1997.
16. OPTION TO EXTEND
Tenant shall have the Option to Extend the Term of the Lease for one (1)
additional period of five (5) years, on the same terms and conditions as
provided for in the Lease including, but not limited to, the Rental
adjustment provision for the Monthly Base Rent as per Section 3.02(b) of
the Lease. Tenant shall notify Landlord no later than four (4) months
prior to the ending date of a term (Primary or Option) of its intentions to
exercise an Option to Extend.
17. BASE RENTAL INCREASES
The Base Rent as per Section 1.12(a) shall be increased on the first day of
the 13th, 25th, 37th, 49th, 61st, 73rd, and 85th months after the
Commencement Date.
18. TENANT IMPROVEMENTS
Landlord shall provide to Tenant the interior finish as preliminary
depicted in Exhibit "B" attached hereto in accordance with the attached
Proposal for Design and Construction Services dated April 28, 1997 from
Burnett Haase Construction (Exhibit "B-1"). The tenant improvements will
consist of Patrick Commerce Center's "standard" building materials finishes
in the office and warehouse areas. The office area has been determined to
be approximately 5,800 square feet within the premises. The preliminary
alternate upgrades that Tenant shall have the option of including within
the Tenant Improvements at Tenant's sole cost and expense are: one
additional toilet and one additional lavatory in each restroom. Tenant
shall contribute the maximum amount of $7,354.00 for said overages towards
the design and construction of the Tenant Improvements, currently with the
execution hereof. Please note, payment for any change orders made by
Tenant shall be the sole responsibility of Tenant and shall be paid for in
advance of the subject change being made.
The term "Usable Area" shall be the entire area included within the
Premises, being the area bounded by the exterior surface of any glass walls
(or the outside surface of the permanent exterior walls where there is no
glass) of the building bounding such Premises, the inside surface of the
24
<PAGE>
exterior walls separating such Premises from any public corridors, utility
rooms, or such other public areas on such floor, and the centerline of all
walls separating such Premises from other areas leased or to be leased to
other tenants on such floor.
The term "Net Rentable Area" shall mean the computation of multiplying the
Usable Area of the Premises by the quotient of the division of the Rentable
Area of the floor (the area of the floor to the drip line of any colonnade
or outside surface of the dominant portion of the permanent outer walls,
excluding any major vertical penetrations of the floor), by the Usable Area
of the Floor.
19. CODE
The improvements initially constructed by Landlord shall comply with all
laws, statutes and ordinances applicable at the time permits are issued.
In addition, Landlord shall, as an Operating Expense of the Building,
throughout the term of the Lease, cause the Building to comply with all
applicable laws, statutes and ordinances.
20. NNN ASSESSMENTS
As per Section 1.12(b) OTHER PERIODIC PAYMENTS: (iv) Tenants initial
Pro-Rata Share of Common Area Expenses are 48.29% of the building and
13.58% of the Project. The budget for the NNN expenses (including Real
Property Taxes, Utilities not separately metered, Insurance Premiums per
section 4.04(b) and (c) of the Lease, and common area expenses) for the
calendar year 1997 are reimbursed monthly in advance and equate to $.10
per square foot per month of $3,040.90 per month. Tenant shall be
required to contract directly for trash service, janitorial service, and
all separately metered utilities.
21. BASE RENT
Notwithstanding the provisions set forth in Section 1.12(a) Base Rent, the
following months of the base lease term shall bear forgiveness of Base
Rent: 2, 13, 25, 37 and 49.
As per Section 1.12(a) and 3.02 BASE RENT: Landlord shall give to Tenant a
copy of the index used to calculate the annual Base Rent increase each year
of the Lease Term.
22. PAYMENTS UPON EXECUTION
Tenant shall pay to Landlord concurrent with the execution hereof an amount
equal to $37,685.54 which shall serve as first months prepaid base rent,
first months prepaid operating expenses, the security deposit.
Additionally, Tenant shall submit the payment for the upgrades Tenant
wishes to include within the Premises in accordance with Section 18 hereof
and the payment of first months rent for the interim storage space as per
Section 27 hereof. If the Lease is terminated pursuant to Section 2.02 of
the Lease, Landlord shall immediately refund to Tenant all amounts paid by
Tenant without offset or deduction.
23. VEHICLE STORAGE
No unauthorized vehicle storage, such as recreational vehicles, motor
homes, boats and/or trailers, is permitted. (See Exhibit "C" attached
hereto.)
25
<PAGE>
Tenant is specifically authorized to park up to three (3) transportation
type vehicles used in the ordinary course of business in the truck well
areas immediately adjacent to Tenant's unit. Provided that said vehicles
do not impair other tenants use of the common area truck staging areas.
24. STORAGE
All costs associated with the design, purchase, installation and
maintenance of signage will be Tenant's sole responsibility and expense.
Tenant will have the right to display its corporate name on the building.
Location, size and configuration shall be in accordance with Patrick
Commerce Center's signage policy and shall be approved in writing by
Landlord.
25. HAZARDOUS WASTE AND MATERIALS
(a) Landlord represents to its best knowledge that any use, storage,
treatment or transportation of hazardous substances which has occurred in
or on the Premises prior to the date hereof has been in compliance with all
applicable Federal, state and local laws, regulations and ordinances.
Landlord additionally represents to its best knowledge that no release,
leak, discharge, spill, disposal or emission of Hazardous Substances has
occurred in, on or under the Premises, and that the Premises are free of
Hazardous Substances as of the date hereof.
(b) Tenant and Landlord each agree to indemnify and hold each other
harmless from any and all claims, damages, fines, judgments, penalties,
costs, liabilities or losses (including, without limitation, any all sums
paid for settlement of claims, attorneys' fees, consultant and expert fees)
arising during or after the Lease Term from or in connection with the
presence or suspected presence of Hazardous Substances in or on the
Premises, provided the Hazardous Substances are present due to direct or
indirect actions of Tenant or Landlord, Tenant's or Landlord's agents,
employees, contractors or invitees. Without limitation of the foregoing,
this indemnification shall include any and all costs incurred due to any
investigation of the site or any clean-up, removal or restoration mandated
by a Federal, state or local agency or political subdivision. This
indemnification shall specifically include any and all costs due to
Hazardous Substances which flow, diffuse, migrate or percolate into, onto
or under the Premises after the Lease Terms commences.
(c) TENANT'S COVENANTS. Tenant shall not engage in any activity on or
about the Premises that violates any Environmental Law, and shall promptly,
at Tenant's sole cost and expense, take all investigatory and/or remedial
action required or ordered by any governmental agency or Environmental Law
for clean-up and removal or any contamination involving any Hazardous
Material created or caused directly or indirectly by Tenant.
(d) LANDLORD'S COVENANTS. Landlord shall not engage in any activity on or
about the Premises that violates any Environmental Law, and shall promptly,
at Landlord's sole cost and expense, take all investigatory and/or remedial
action required or ordered by any governmental agency or Environmental Law
for clean-up and removal or any contamination involving any Hazardous
Material created or caused directly or indirectly by Landlord.
26. HVAC MAINTENANCE
As per section 6.04 TENANT'S OBLIGATIONS, Landlord shall maintain a
preventative maintenance contract for the heating & air conditioning system
and the cost of the maintenance contract shall be included within the
project's reimbursable operating expenses.
26
<PAGE>
Landlord reserves the right to cancel it's maintenance contract at which
point the Tenant shall be directly responsible for establishing and paying
for said maintenance contract.
27. INTERIM STORAGE
Landlord grants to Tenant the use of the approximate 15,136 square feet of
storage space located at 6151 McLeod Drive, Suites A - G, Las Vegas, Nevada
(the entire building 3). Tenant shall pay Landlord the amount of $8,778.88
per month as rent for the premises for each and every month of occupancy
thereof. Tenant's occupancy shall occur upon the full execution hereof,
Landlord's receipt of the payments due upon execution, and Landlord's
receipt of an insurance binder showing proof of insurance as required under
the lease. Tenant's occupancy shall terminate within five (5) days after
delivery of the Property to Tenant. Tenant shall take possession of the
interim storage space in an "as is" condition.
28. REVIEW OF LANDLORD'S STATEMENTS
Tenant shall have the right, once each calendar year, to reasonably review
supporting data for any portion of a landlord's statement (as described in
Section 4.05(e) of the Lease) that Tenant claims is incorrect, in
accordance with the following procedure:
(A) Tenant shall, within twenty (20) business days after any such
Landlord's statement is delivered, deliver a written notice to Landlord
specifying the portions of the Landlord's statement that are claimed to be
incorrect. The right of Tenant under this Section 28 may only be exercised
once for any Landlord's statement.
(B) Tenant acknowledges that Landlord maintains its records for the
Project at Landlord's offices and Tenant agrees that any review of records
under this Section 28 shall be at the sole cost and expense of Tenant.
Tenant acknowledges and agrees that any records reviewed under this Section
28 constitute confidential information of Landlord, which shall not be
disclosed to anyone other than the accountants performing the review and
the principals of Tenant who receive the results of the review.
(C) Any errors disclosed by the review shall be promptly corrected by
Landlord, provided, however, that if Landlord disagrees with any such
claimed errors, Landlord shall have the right to cause another review to be
made. In the event of a disagreement between Landlord and Tenant, the
review that discloses the least amount of deviation from Landlord's
Statements shall be deemed to be correct. In the event the results of the
revised of records (taking into account, if applicable, the results of any
additional review caused by Landlord) reveal that Tenant has overpaid
obligations for a preceding period, the amount of such overpayment shall be
refunded to Tenant or, at Tenant's option, shall be applied to Tenant's
subsequent installment(s) to pay the estimated Common Area costs. In the
event the results of the review of records (taking into account, if
applicable, the results of any additional review caused by Landlord) reveal
that Tenant has underpaid obligations for a preceding period, the amount of
such underpayment shall be paid to Landlord by Tenant together with
Tenant's subsequent installment of the estimated Common Area costs.
29. INDEMNITY
Notwithstanding the provisions contained in Section 5.05 of the Lease,
Landlord shall indemnify Tenant against and hold Tenant harmless from any
and all costs or liability arising from: (a) Landlord's use of the
Property; (b) the conduct of Landlord's business or anything else done or
27
<PAGE>
permitted by Landlord to be done in or about the Property, including any
contamination of the Property or any other property resulting from the
presence or use of Hazardous Material caused or permitted by Landlord; (c)
any breach or default in the performance of Landlord's obligations under
this Lease; (d) any misrepresentation or breach of warranty by Landlord
under this Lease; or (e) other acts or omissions of Landlord. Landlord
shall defend Tenant against any such cost, claim or liability at Landlord's
expense with council reasonably acceptable to Tenant, or at Tenant's
election, Landlord shall reimburse Tenant for any legal fees or costs
incurred by Tenant in connection with any such claim.
30. REPAYMENT OF FREE RENT
Notwithstanding the provisions set forth in Section 10.04 of the Lease, In
the event that there is a non-material default of Tenant that Tenant is
contesting or disputing with Landlord and Tenant is working in good faith
with Landlord to resolve, then the requirement of Tenant to repay Free Rent
to Landlord shall be waived.
31. PARTIAL DAMAGE TO PROPERTY
Notwithstanding the provisions contained in Section 7.01(b) of the Lease,
Tenant shall not be obligated to pay the "deductible amount" (if any) under
Landlord's insurance policy if the damage was caused by Landlord,
Landlord's agents, invitees, or employees.
32. LEGAL PROCEEDINGS
Notwithstanding the provisions contained in Section 12.01 of the Lease,
Landlord shall indemnify Tenant against and hold Tenant harmless from all
costs, expenses, demands, and liability Tenant may incur if Tenant becomes
or is made a party to any claim or action (a) instituted by Landlord
against any third party, or by any third party against Landlord, or by or
against any person holding an interest under or using the Property by
license of or agreement with Landlord; (b) for foreclosure of any lien for
labor or material furnished to or for Landlord or such other person; (c)
otherwise arising out of or resulting from any act or transaction of
Landlord or such other person; or (d) other proceedings under Title 11. of
the United States Code, as amended. Landlord shall defend Tenant against
any such claim or action at Landlord's expense with counsel reasonably
acceptable to Tenant, or at Tenant's election, Landlord shall reimburse
Tenant for any legal fees or costs Landlord incurs in any such claim or
action.
33. NOT AN OFFER
Preparation of this Lease by Landlord or Landlord's agent and submission of
same to Tenant shall not be deemed an offer to Tenant to lease. This Lease
shall become effective and binding upon the parties hereto only upon mutual
execution by both parties.
Initials: MAP
---
JPF
---
28
<PAGE>
EXHIBIT 21.1
PDS FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
PARENT AND SUBSIDIARIES
<TABLE>
<CAPTION>
PERCENTAGE OF
VOTING SECURITIES
ORGANIZED UNDER BENEFICIALLY OWNED
NAME OF COMPANY LAWS OF BY REGISTRANT
- --------------- --------------- ------------------
<S> <C> <C>
REGISTRANT:
PDS Financial Corporation Minnesota
CONSOLIDATED SUBSIDIARIES OF THE REGISTRANT:
PDS Financial Corporation - Nevada Nevada 100
PDS Financial Corporation - Mississippi Mississippi 100
PDS Casinos International, Inc. Minnesota 100
Transcanada 2 Corporation Minnesota 100
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
PDS Financial Corporation on Form S-8 (File No. 33-85966) of our report dated
March 20, 1998, on our audits of the consolidated financial statements of PDS
Financial Corporation as of and for the years ended December 31, 1997 and
1996, which report is included in this Annual Report on Form 10-KSB.
/s/ Coopers & Lybrand L.L.P.
Minneapolis, Minnesota
March 27, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND INCOME STATEMENT AS OF AND FOR THE YEAR ENDED
DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,865,468
<SECURITIES> 0
<RECEIVABLES> 29,159,976
<ALLOWANCES> 0
<INVENTORY> 6,289,900
<CURRENT-ASSETS> 0<F1>
<PP&E> 2,648,488<F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 39,963,832
<CURRENT-LIABILITIES> 3,798,479
<BONDS> 27,536,007<F3>
0
0
<COMMON> 35,240
<OTHER-SE> 8,594,106
<TOTAL-LIABILITY-AND-EQUITY> 39,963,832
<SALES> 31,962,832
<TOTAL-REVENUES> 47,613,255
<CGS> 28,879,289
<TOTAL-COSTS> 46,094,404
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0<F4>
<INCOME-PRETAX> 1,518,855
<INCOME-TAX> 577,000
<INCOME-CONTINUING> 941,855
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 941,855
<EPS-PRIMARY> .30
<EPS-DILUTED> .28
<FN>
<F1>THE COMPANY DOES NOT PREPARE A CLASSIFIED BALANCE SHEET
<F2>INCLUDES DEFERRED INCOME TAX ASSET OF $824,000
<F3>INCLDES NONRECOURSE OBLIGATIONS OF $10,121,389
<F4>AMOUNT, $4,260,096 IS INCLUDED IN TAG 30 "TOTAL COSTS"
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND STATEMENT OF INCOME AS OF AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1997
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,027,452
<SECURITIES> 0
<RECEIVABLES> 61,128,403
<ALLOWANCES> 0
<INVENTORY> 5,818,396
<CURRENT-ASSETS> 0
<PP&E> 2,903,489
<DEPRECIATION> 0
<TOTAL-ASSETS> 70,877,740
<CURRENT-LIABILITIES> 15,042,333
<BONDS> 48,988,385
0
0
<COMMON> 32,314
<OTHER-SE> 6,814,708
<TOTAL-LIABILITY-AND-EQUITY> 70,877,740
<SALES> 13,048,913
<TOTAL-REVENUES> 25,732,711
<CGS> 12,457,651
<TOTAL-COSTS> 24,774,101
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 958,610
<INCOME-TAX> 366,000
<INCOME-CONTINUING> 592,610
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 592,610
<EPS-PRIMARY> .19
<EPS-DILUTED> .18
</TABLE>
<PAGE>
EXHIBIT 99.1
PDS FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
CAUTIONARY STATEMENTS
As provided for under the Private Securities Litigation Reform Act of 1995,
the Company wishes to caution investors that the following important risk
factors, among others, in some cases have affected and in the future could
affect the Company's actual results of operations and cause such results to
differ materially from those anticipated in the forward-looking statements
made in this document and elsewhere by or on behalf of the Company.
STRICT REGULATION BY GAMING AUTHORITIES. Financing gaming equipment and
supplying reconditioned gaming machines to casino operators in the United
States are subject to strict regulation under various state, county and
municipal laws. The Company and its required officers have received the
licenses, permits and authorizations required to own and distribute gaming
machines in Nevada, New Jersey, Colorado, Iowa and Minnesota and have license
applications pending in Mississippi and Indiana. Failure of the Company or
any of its key personnel to obtain or maintain the requisite licenses would
have a material adverse effect on the Company. Expansion of the Company's
activities may be hindered by delays in obtaining requisite state licenses.
No assurance can be given as to the term for which the Company's license will
be renewed in a particular jurisdiction or as to what license conditions, if
any, may be imposed by such jurisdiction in connection with any future
renewals. The Company cannot predict the effects that adoption of and
changes in gaming laws, rules and regulations might have on its future
operations.
COMPETITION. In recent years the Company has focused solely on
providing financing to the gaming industry and, since late 1997, supplying
reconditioned gaming machines to casino operators in the United States. In
the gaming equipment financing market, the Company competes primarily with
equipment manufacturers and to a lesser extent with leasing companies,
commercial banks and other financial institutions. Certain of the Company's
competitors are significantly larger and have substantially greater resources
than the Company. With respect to the sales of reconditioned gaming machines,
the Company competes primarily against equipment manufacturers and smaller
distributors. It is possible that new competitors may engage in gaming
equipment financing or the distribution of reconditioned gaming machines,
some of which may have licenses to own or sell gaming equipment and have
greater financial resources than the Company. Significant competition
encountered by the Company may have a material adverse effect on the Company.
There can be no assurance that the Company will be able to compete
successfully against current and future competitors.
DEMAND FOR THE COMPANY'S PRODUCTS AND SERVICES. The Company believes
that its ability to increase revenues, cash flow and profitability will
depend, in part, upon continued market acceptance of the Company's products
<PAGE>
and services, particularly SlotLease and PDS Slot Source. There can be no
assurance that the market acceptance of the Company's products and services
will continue. Changes in market conditions in the gaming industry and in
the financial condition of casino operators, such as consolidation within the
industry or other factors, could limit or diminish market acceptance of these
products and services. Historically, the Company has experienced significant
nonrecurring revenues in connection with its financings and sales of gaming
equipment to casino operators. The Company has attracted new customers to
replace these nonrecurring revenues. Insufficient market acceptance of the
Company's products and services could have a material adverse effect on the
Company's business, financial condition and results of operations.
CONTINUED AVAILABILITY OF ADEQUATE FINANCING. The amount and number of
financing transactions that can be originated by the Company are directly
dependent upon and limited by its ability to fund such transactions, either
through the sale of such transactions to institutional investors or through
the Company's working capital, lines of credit or other financing sources.
In addition, the Company desires to expand its lines of credit to allow it to
hold a greater volume of transactions, particularly leases, in its portfolio.
There is no assurance that the Company's present funding sources will be
willing to purchase future transactions, expand existing lines of credit or
continue to provide the Company with a source of funds. Further, there can
be no assurance that the Company would be able to locate new funding sources,
if needed. As a result, funding for the Company's transactions may not be
available on acceptable terms or on a timely basis if at all. The inability
of the Company to obtain suitable and timely funding for its transactions
could have a material adverse effect on the Company's operations.
ABILITY TO RECOVER INVESTMENT IN EQUIPMENT. The gaming equipment leased
under operating leases by the Company and the inventory of reconditioned
gaming machines represents a substantial portion of the Company's capital.
Under the operating leases offered through the SlotLease program, the Company
retains title to the gaming equipment and assumes the risk of not recovering
its entire investment in the gaming equipment through either re-leasing or
selling the gaming equipment. At the inception of each operating lease, the
Company estimates the residual value of the leased equipment, which is the
estimated market value of the equipment at the end of the initial lease term.
The actual residual value realized may differ from the estimated residual
value, resulting in a gain or loss when the leased equipment is sold or
re-leased at the end of the lease term. The inability to re-lease or sell
the gaming equipment on favorable terms could have a material adverse effect
on the Company.
The Company also engages in the purchase, reconditioning and resale of
used gaming machines. There can be no assurances that the Company will be
able to recover its cost for such gaming machines, and the failure to do so
could have a material adverse effect on the Company.
RISKS RELATING TO PDS SLOT SOURCE. The PDS Slot Source program, which
the Company established in 1997, has a limited operating history and is
subject to various risks, including the inability to find adequate sources of
used gaming machines, the inability to obtain or delays in obtaining parts
necessary to refurbish used gaming machines, competitors' control over the
supply of certain parts and changes in market conditions relating to
refurbished gaming machines, the occurrence of any of which could have a
material adverse effect on the Company.
<PAGE>
RISKS RELATING TO FINANCING TRANSACTIONS. The Company has funded
selected gaming equipment transactions entirely with its own working capital
or with borrowed funds rather than immediately selling the transactions to
institutional investors. In certain situations, the Company retains a
portion of the transactions it originates. This approach requires
substantial capital and places the Company at risk for its investment in the
transactions, which may subject the Company to greater loss in the event of a
default by the lessee or borrower, or an inability to sell the transactions
to institutional investors after a period of temporary investment by the
Company. In connection with its financing transactions, the Company's level
of risk depends primarily on the creditworthiness of the lessee or borrower
and the underlying collateral.
In addition, the Company has provided, and may provide in the future,
financing to Indian tribes. Indian tribes in the United States generally
enjoy sovereign immunity from lawsuits, similar to that of the United States
government. Although the Company generally obtains a waiver of sovereign
immunity, there can be no assurance that a tribe will not assert sovereign
immunity, even if such right has been waived. The law regarding sovereign
immunity is unsettled. If any Indian tribe defaults and successfully asserts
its right of sovereign immunity, the Company's ability to recover its
investment and originate and sell future Indian gaming transactions could be
materially adversely affected.
No assurance can be given that the Company will not incur significant
losses with respect to financing transactions in the future, or that such
losses will not have a material adverse effect on the Company's financial
condition.
DEPENDENCE ON CURRENT MANAGEMENT. The Company's success is largely
dependent on the efforts of Johan P. Finley, its founder, President and Chief
Executive Officer. Although the Company maintains $2 million of "key person"
life insurance and has an employment agreement with Mr. Finley, the loss of
Mr. Finley's services could have a material adverse effect on the Company's
business.
POTENTIAL FLUCTUATIONS IN RESULTS. The Company's quarterly results have
historically fluctuated due to the timing of completion of large financing
transactions, as well as the timing of recognition of the resulting fee
income upon subsequent sale of a transaction, which can occur several months
after the date such transaction was originated by the Company. These
transactions can be in the negotiation and documentation stage for several
months, and recognition of the resulting fee income by the Company is
difficult to predict and may fluctuate greatly from quarter to quarter.
Thus, the results of any quarter are not necessarily indicative of the
results that may be expected for any other interim period. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
CONTROL BY CURRENT MANAGEMENT. Johan P. Finley, the Company's founder,
President, and Chief Executive Officer, owns approximately 31% of the
Company's outstanding Common Stock. In addition, Mr. Finley's wife and child
own approximately 10% of the Company's outstanding Common Stock. Thus, Mr.
Finley effectively controls the election of all members of the Company's
Board of Directors and determines all corporate actions. Such ownership may
discourage acquisition of large blocks of the Company's securities and may
depress the price of the Common Stock and have an anti-
<PAGE>
takeover effect.
ANTI-TAKEOVER PROVISIONS; PREFERRED STOCK. The Company's Amended and
Restated Articles of Incorporation provide that no investor may become a
holder of 5% or more of the Company's stock without first agreeing to consent
to a background investigation, provide a financial statement and respond to
questions from gaming regulators. Such ownership limitations may discourage
acquisition of large blocks of the Company's equity securities, may depress
the price of the Company's Common Stock and have an anti-takeover effect.
The Company's Amended and Restated Articles of Incorporation authorize
Board of Directors to issue preferred stock and establish the rights and
preferences of such shares without stockholder approval. The voting rights
of the preferred stock may be greater than the voting rights of common stock
in certain circumstances, and thus the issuance of preferred stock may
diminish the voting power of holders of common stock and make it more
difficult for a third party to acquire the Company.
The Company's directors are subject to investigation and review by
gaming regulators in jurisdictions in which the Company is licensed or has
applied for a license. Such investigation and review of the Company's
directors may have an anti-takeover effect.
As a Minnesota corporation, the Company is subject to certain
"anti-takeover" provisions of the Minnesota Business Corporation Act. These
provisions and the power to issue additional stock and to establish separate
classes or series of stock may, in certain circumstances, deter or discourage
takeover attempts and other changes in control of the Company not approved by
the Board.
