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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
Commission File No. 0-23928
PDS FINANCIAL CORPORATION
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(Name of Small Business Issuer in its Charter)
Minnesota 41-1605970
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(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
6171 McLeod Drive, Las Vegas, Nevada 89120
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(Address of Principal Executive Offices)
(702) 736-0700
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(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
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Common Stock Purchase Warrants
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(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
--- ---
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K or any amendment to this Form 10-K. X
---
The approximate market value of stock held by non-affiliates was $3,147,000
based upon 2,398,000 shares held by such persons and the closing price on March
21, 2000 of $1.3125. The number of shares outstanding of the Registrant's $0.01
par value common stock at March 21, 2000 was 3,711,710.
Documents Incorporated by Reference: Portions of the Registrant's Proxy
Statement for its 2000 Annual Meeting of Shareholders (the "Proxy Statement"),
are incorporated by reference in Part III.
Page 1 of 19 Pages Exhibit Index Begins on Page 17
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
PDS Financial Corporation and subsidiaries (the "Registrant", the
"Company" or "PDS"), 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 division, 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, officers, key employees and significant shareholders.
The Company currently is licensed in Nevada, New Jersey, Colorado, Illinois,
Iowa, Minnesota, Mississippi, Indiana and New Mexico. The Company also has a
license application pending in Washington and a route operator's license
application pending in Nevada. The Company believes its gaming licenses, as well
as its experience in the gaming industry, provide 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 casinos that the Company believes have acceptable credit quality.
The Company also provides financing directly to gaming equipment manufacturers.
The Company is currently focusing its efforts on the traditional gaming market
of Nevada and the other jurisdictions in which it is licensed.
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 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. Several 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 and gaming
industry analysts, in 1998 there were approximately 400,000 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 and gaming industry analysts, in
1997 there were approximately 74,000 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, all of
which represent machines shipped to replace older machines and new installations
of machines.
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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 its recurring revenues
and cash flows by increasing its portfolio of assets under lease and its
reconditioned gaming device sales by expanding the types of games it offers
and by expanding into the direct operations of casinos. In 1999, the Company
completed its move to Las Vegas, Nevada. The Company intends to further
expand its presence in Nevada and the other jurisdictions in which it is
licensed.
Because it is licensed to own and distribute gaming machines in key
states, 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 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 6 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 PDS
Slot Source.
PDS SLOT SOURCE
In May 1997, the Company introduced PDS Slot Source, its reconditioned
gaming machine sales and distribution division. The Company believes that the
secondary market for gaming machines is fragmented and underdeveloped and Slot
Source is now one of the leading providers of reconditioned gaming devices. The
Company obtains used gaming machines in the market from distributors, brokers or
operators, or from its customers at the end of an applicable lease term. These
gaming machines are reconditioned by the Company prior to resale or occasionally
are sold "as is" to customers. 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.
During 1999, the Company expanded its focus beyond providing
reconditioned slot and video gaming devices to include new types of games
through the acquisition of intellectual property associated with "Digital 21",
an automated computerized version of the traditional casino table game of
"Blackjack". See discussion of the DigiDeal Technology Agreement below. The
Company intends to continue to expand its gaming equipment offerings in the
future through on-going development or acquisition of additional types of casino
games.
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DIGIDEAL
In June 1999, the Company acquired the intellectual property rights
for gaming devices using the Digital Card System ("DCS") from DigiDeal
Corporation as part of an agreement covering patent and technology rights
including technology transfer, manufacture, distribution and affecting
patents trademarks and copyrights (the Technology Agreement). Products built
on the DCS platform use virtual playing cards, which are displayed with high
quality graphics on screens for each player and the dealer. The first product
introduced on the DCS platform is Digital 21-TM-, which is undergoing its
first live trial in New Mexico and is presently being reviewed by the State
of Nevada Gaming Control Board. There can be no assurance that the State of
Nevada Gaming Control Board will approve Digital 21-TM- on a timely basis or
at all. The Company's strategy is to place games utilizing the DCS with its
casino customers in order to generate recurring monthly revenues and cash
flows.
GAMING OPERATIONS
The Company intends to expand its business strategy to include
owning and operating gaming facilities. In this regard, the Company on March
6, 2000, signed a nonbinding letter of intent with Elsinore Corporation to
acquire the capital stock of Four Queens, Inc., a Nevada corporation doing
business as the Four Queens Hotel & Casino for a purchase price of $30
million, subject to adjustment. Consummation of the acquisition is subject to
a number of conditions, including negotiation and execution of a definitive
purchase agreement, receipt of required regulatory approvals, including
approval of the Nevada Gaming Commission, other gaming approvals, and, if
necessary, approval under the Hart-Scott-Rodino Antitrust Act, and receipt by
PDS of satisfactory purchase financing. There can be no assurance that a
definitive agreement can be reached, the other conditions to the acquisition
will be satisfied or that the acquisition will be consummated.
The Four Queens Hotel & Casino consists of a 690-room hotel and
32,000 square foot casino, located in the Fremont Street Experience in
downtown Las Vegas, Nevada. The casino has approximately 1,075 slot machines
and 26 table games. No material changes in the operations of the hotel and
casino or personnel are anticipated.
STRUCTURE OF EQUIPMENT FINANCING TRANSACTIONS
In addition to offering operating leases through its SlotLease program,
the Company also provides financing to its customers 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. Under 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 leases 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.
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 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.
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PRINCIPAL CUSTOMERS
Historically, the Company has experienced significant nonrecurring
revenues in connection with the completion of large gaming equipment
financing transactions. During 1999, no customer accounted for more than 10%
of total revenue. Revenues from the Company's five largest customers, as a
percentage of 1998 revenues were 20%, 19%, 16%, 9% and 8%, and of 1997
revenues, were 0%, 11%, 0%, 0% and 0%, respectively. Due to the non-recurring
nature of its large gaming equipment financing transactions, the Company
cannot estimate the potential significance of total revenues that may be
derived from one or several customers in 2000.
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, Illinois, Iowa, Mississippi, Minnesota, Indiana and New Mexico
gaming laws. The Company has license applications pending in Washington and a
slot route operator's license application pending in Nevada. Expansion of the
Company's activities may be hindered by delays in obtaining requisite state
licenses or other approvals. No assurance can be given as to the term for which
the Company's license will be renewed in a particular jurisdiction or to what
license conditions, if any, may be imposed by such jurisdiction in connection
with any future renewals. The Company cannot predict the effect that such
adoption of and changes in gaming laws, rules and regulations might have on its
future operations.
Any person who acquires a controlling interest in the Company would
have to meet the requirements of all applicable governmental bodies that
regulate the Company's operations. A change in the make-up of the Company's
board of directors and management would require the various gaming authorities
to examine the qualifications of the new board members and management.
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.
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 manufacture, 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 manufacture, 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
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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 the distribution
of gaming devices and to act as a manufacturer of gaming devises in Nevada. The
Company also has an application pending with the Nevada Gaming Authorities for a
slot route operator's license.
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 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 within 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
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determine to be consistent with such investment intent. If the beneficial holder
of voting securities who 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
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
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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 submit a notification statement to the
Nevada Board which provides detailed information regarding the foreign gaming
operation and 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. 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. In addition to Nevada and New Jersey, the
Company currently is licensed to operate at various levels in Colorado,
Illinois, Indiana, Iowa, Minnesota, Mississippi and New Mexico and has
license applications pending in Washington. Although the regulations in these
jurisdictions are not identical to the states of Nevada or New Jersey, their
material attributes are substantially similar, as summarized 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,
8
<PAGE>
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 revocation of such licenses could have a material adverse effect
on the Company's operations.
EMPLOYEES
As of December 31, 1999, the Company employed 52 persons, including 7
in direct sales and marketing, 28 in Slot Source and 17 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 reconditioning facilities are
located in approximately 58,000 square feet of leased space in Las Vegas,
Nevada. The Company pays monthly rent of approximately $40,000 pursuant to a
lease expiring on December 31, 2004. The Company considers the facilities as
adequate and suitable for the purposes they serve.
ITEM 3. LEGAL PROCEEDINGS
The Company 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, 1999, no matter was submitted to
a vote of security holders.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Common Stock is traded on the NASDAQ SmallCap Market under the
symbol: PDSF. The following table sets forth the high and low sales price for
the Common Stock as reported by NASDAQ for the periods indicated. These prices
reflect inter-dealer prices, without retail mark-up or markdown or commissions,
and do not necessarily represent actual transactions.
<TABLE>
<CAPTION>
Price Range of Common Stock
---------------------------
High Low
---- ---
<S> <C> <C>
2000
- - ----
First quarter (through March 21, 2000) $2.19 $1.00
1999
- - ----
First quarter $3.38 $2.13
Second quarter 4.94 1.81
Third quarter 4.94 2.06
Fourth quarter 2.31 1.25
1998
- - ----
First quarter $7.94 $5.44
Second quarter 10.50 7.38
Third quarter 9.50 4.75
Fourth quarter 5.88 2.00
</TABLE>
9
<PAGE>
On March 21, 2000, the most recent available trading date, the
closing sales price of the Company's common stock was $1.3125. As of March
21, 2000, the Company's common stock was held by approximately 42 holders of
record and an estimated 700 additional beneficial owners.
No dividends were paid during the periods indicated. The Company does
not anticipate that it will pay cash dividends on its common stock in the
foreseeable future. Certain of the Company's financing agreements restrict the
payment of dividends.
In December, 1999 NASDAQ informed the Company that it was not in
compliance with the $5 million market value of public float requirement for
continued listing of its Common Stock on the NASDAQ National Market.
Subsequently, the Company applied for listing on the NASDAQ SmallCap Market.
By letter dated March 8, 2000, NASDAQ informed the Company that its
application for listing on the NASDAQ SmallCap Market had been approved.
ITEM 6. SELECTED FINANCIAL DATA
The table below sets forth-selected consolidated financial data for the
periods indicated derived from the Company's consolidated financial statements.
The data should be read in conjunction with Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operations, and the Company's
consolidated financial statements and notes to the financial statements
appearing elsewhere.
<TABLE>
<CAPTION>
INCOME STATEMENT DATA
(IN THOUSANDS, EXCEPT PER SHARE AND NUMBER OF SHARES DATA)
Years Ended December 31,
---------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------- ---------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Revenues:
Equipment sales $ 6,146 $20,522 $17,482
Revenue from sales-type leases 7,699 3,964 14,480
Rental revenue on operating leases 12,426 6,750 11,406 $2,938 $1,640
Finance income 5,511 3,033 1,575 936 1,837
Fee income 3,697 1,746 2,670 2,486 1,212
------------ ------------- ---------------- -------------- --------------
35,479 36,015 47,613 6,360 4,689
------------ ------------- ---------------- -------------- --------------
Cost and expenses:
Equipment sales 6,740 17,257 15,123
Sales-type leases 6,622 3,386 13,654
Depreciation on leased equipment 8,773 4,931 8,589 2,203 1,208
Interest 8,133 5,062 4,260 1,354 1,253
Selling, general and administrative 4,810 4,681 3,840 2,149 2,524
Provision for losses 1,395 123 628 170 6,908
------------ ------------- ---------------- -------------- --------------
36,473 35,440 46,094 5,876 11,893
------------ ------------- ---------------- -------------- --------------
Income (loss) before income taxes (994) 575 1,519 484 (7,204)
Income tax expense (benefit) (260) 219 577 179 (2,590)
------------ ------------- ---------------- -------------- --------------
Net income (loss) $(734) $356 $942 $305 $(4,614)
============ ============= ================ ============== ==============
Earnings per common share:
Basic $(.20) $.10 $.30 $.10 $(1.49)
Diluted (.20) .09 .28 .10 (1.49)
Weighted average number of common
shares outstanding:
Basic 3,684,000 3,611,000 3,184,000 3,126,848 3,092,876
Diluted 3,684,000 3,784,000 3,620,000 3,126,848 3,092,876
BALANCE SHEET DATA
(in thousands)
Total assets $108,033 $79,629 $39,964 $40,562 $16,389
Notes payable and subordinated debt 79,872 50,670 27,536 25,641 9,243
</TABLE>
10
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OVERVIEW:
The Company is engaged 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 primarily 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, Illinois, Iowa, Indiana, Mississippi, Minnesota and New
Mexico 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 for fee
income. 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. In the last
three years, the Company has significantly increased the amount of leases and
collateralized equipment loans ("financing transactions") held in its own
portfolio (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Financing transactions originated and
sold to third parties for fee income $22,400 $8,900 $74,500
Financing transactions originated
for the Company's portfolio 58,400 51,400 9,900
------- -------- -------
$80,800 $60,300 $84,400
======= ======= =======
</TABLE>
RESULTS OF OPERATIONS:
During 1999, 1998, and 1997 the Company reported net (loss) income of
($734,000), $356,000 and $942,000, respectively.
The results of operations for 1999 and 1998 reflect:
- - - Costs associated with growing the business activities of the PDS Slot
Source division, which was established in 1997. During 1999, the
Company incurred a loss of $669,000, as a result of liquidating certain
used gaming devices held in inventory by Slot Source.
- - - The costs associated with growing the portfolio of financing
transactions retained on its balance sheet. Such costs include:
- Higher interest expense associated with the debt
incurred to finance the portfolio, and
- The opportunity cost resulting from foregone fee
income which could have been realized had the
financing transactions been sold to third parties,
compared to the leasing or finance margin actually
realized from holding the financing transactions in
the Company's portfolio. While the aggregate leasing
and finance margin is expected to be greater over the
life of the transaction, it is significantly less
than fee income would have been in the year of
origination.
Results for 1997 reflect sales-type lease profit arising from the
Company's ability to buy new gaming devices from the manufacturer at a discount.
After 1997, no such transactions were completed.
The Company's operating results are subject to quarterly fluctuations
resulting from a variety of factors, including variations in the mix of
financing transactions between operating leases, direct finance leases, and
notes receivable, changes in the gaming industry which effect the demand for
reconditioned gaming devices sold by the Company's Slot Source division,
11
<PAGE>
economic conditions, in which a detrimental change can cause customers to delay
new investments and increase the Company's bad debt experience, and the level of
fee income obtained through the sale of leases or financing transactions.
The Company's quarterly operating results, including net income
(loss), 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 growth of its portfolio of notes and lease receivables and equipment
under operating lease will lead to increased recurring revenues, which will
tend to lessen the fluctuations of its operating results.
Presented below are schedules showing condensed income statement
categories and analysis of changes in those condensed categories derived from
the Consolidated Statements of Income appearing on page F-3 of this report on
Form 10-K, prepared solely to facilitate the discussion of results of operations
that follows (in thousands):
<TABLE>
<CAPTION>
Condensed Condensed
Consolidated Consolidated
Statement of Income Statement of Income
for the Years the Effect On for the Years the Effect On
Ended December 31, Net Income Ended December 31, Net Income
------------------ of Changes ------------------ of Changes
1999 1998 Between Years 1998 1997 Between Years
---- ---- ------------- ---- ---- -------------
<S> <C> <C> <C> <C> <C> <C>
Equipment sales and
sales-type lease margin $483 $3,843 $(3,360) $3,843 $3,185 $658
Leasing & finance margin 9,164 4,852 4,312 4,852 4,392 460
Fee income 3,697 1,746 1,951 1,746 2,670 (924)
Selling, general, &
administrative expense (4,810) (4,681) (129) (4,681) (3,840) (841)
Interest expense (8,133) (5,062) (3,071) (5,062) (4,260) (802)
Provision for losses (1,395) (123) (1,272) (123) (628) 505
------- ------- ------- ------- ------- -------
Income before income taxes $(994) $575 $(1,569) $575 $1,519 $(944)
====== ==== ======== ==== ====== ======
</TABLE>
EQUIPMENT SALES AND SALES-TYPE LEASE MARGIN
Equipment sales and sales-type margin consist of the following (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Slot Source division:
Equipment sales revenue $ 6,146 $ 13,114 $ 2,160
Cost of equipment sales (6,071) (10,709) (1,825)
------- -------- -------
75 2,405 335
Loss on liquidation of obsolete equipment (669)
------- -------- --------
Slot Source sales margin $ (594) $ 2,405 $ 335
------- -------- --------
Sales-type lease revenue 7,699 3,964
Cost of sales-type leases (6,622) (3,386)
------- -------- --------
Sales-type lease margin 1,077 578
------- -------- --------
Slot Source margin 483 2,983 335
------- -------- --------
Finance division:
Sale of leases at termination 7,408 15,322
Cost of sale of leases at termination (6,548) (13,298)
------- -------- --------
Finance division sales margin 860 2,024
------- -------- --------
Equipment sales and sales-type
lease margin $ 483 $ 3,843 $ 2,359
======= ======== ========
</TABLE>
12
<PAGE>
Slot Source Division
Slot Source revenues represent the sale, or financing under a
sales-type lease to an end-user, of reconditioned gaming equipment. During 1998,
the Company significantly expanded its efforts in this area resulting in
significantly increased sales compared to 1997, primarily related to sales of
reconditioned gaming devices with a feature known as a "bill acceptor" (a device
which enables a machine to accept paper currency in addition to coins) for which
there was strong market demand. The market demand for such gaming devices was
significantly satisfied during 1998. Additionally, demand for "reel-type" slot
machines declined in 1999. Consequently, revenues and sales margin declined in
1999. In response to these trends, the Company has significantly narrowed its
product line and managed Slot Source inventory levels downward (from $10 million
to $6.6 million at December 31, 1998 and 1999, respectively) by liquidating at a
loss of $669,000 gaming devices for which market demand had declined, and by
establishing more stringent guidelines for acquiring used gaming devices for
inventory.
Finance Division
The Company realizes gains upon lease termination in two ways:
- The Company's operating lease agreements generally provide the
lessee with the option to purchase the leased equipment upon
lease expiration at its then fair market value. The Company
realizes a gain where the lessee acquires the equipment for
fair market value in excess of the Company's residual carrying
value, or
- An existing lessee chooses to terminate a lease prior to its
scheduled expiration. The lessee is generally required to pay
the Company an amount in excess of its carrying value in such
situations. Sales revenue in 1998 primarily reflects early
termination transactions. There were no such transactions
during 1999.
The Company believes that, due to increasing lease maturities in the
future, it will realize gains on termination of leases in calendar year 2000.
Sales-type lease revenue from third party gaming devices and
associated equipment was $14.5 million and cost of sales-type leases was
$13.7 million in 1997. The Company completed no such transactions in 1999 and
1998. Such amounts were excluded from the Equipment Sales and Sales-type
Lease Margin table above due to their non-recurring nature.
LEASING AND FINANCE MARGIN
Leasing and finance margin consists of the following (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31
-----------------------
1999 1998 1997
----- ---- ----
<S> <C> <C> <C>
Finance income $5,511 $3,033 $1,575
Rental revenue on
operating leases 12,426 6,750 11,406
Depreciation on
leased equipment (8,773) (4,931) (8,589)
------- ------- -------
$9,164 $4,852 $4,392
====== ====== ======
</TABLE>
Leasing and finance margin and it's components have increased in 1999
and in 1998, and are expected to increase in the future due to increases in the
Company's portfolio of operating leases, direct finance leases, and
collateralized equipment loans as summarized below (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Notes receivable, net $22,614 $21,878 $3,141
Investment in direct financing leases 17,172 9,668 5,976
Leveraged lease, net 3,528
Equipment under operating leases, net 41,287 27,751 18,328
------- ------- -------
$84,601 $59,297 $27,445
======= ======= =======
</TABLE>
13
<PAGE>
Leasing and finance margin has not increased as quickly as the lease
and finance portfolio because of:
- Changes in the mix of leases and financing transactions
originated during 1999 and 1998. An increase in the mix of
operating leases compared to direct financing leases and
collateralized loans moderated the growth in the related
margin. Operating lease margin (rental revenue less
depreciation) is recognized on a constant basis over the life
of a lease. Finance income is recognized as a fixed percentage
of the underlying balance of the note receivable or direct
finance lease. Consequently, the margin inherent in an
operating lease tends to be recognized later in the life of
the lease when compared to a note receivable or a direct
finance lease. Therefore, as the portfolio has grown to
include a greater percentage of operating leases, leasing
margin has not grown to the same extent or as quickly.
- The timing of the completion of significant lease and finance
originations and terminations. A significant customer
terminated their leases in late 1997. Thus, the Company
recognized lease margin throughout most of 1997, but the asset
was sold at year end. The gain on termination of leases was
reflected in equipment sales and sales-type lease margin in
1997.
FEE INCOME
Fee income includes gross profit form 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. Fee
income has historically fluctuated due to the timing of completion of large
financing transactions, as well as the timing of the subsequent sale of notes
receivable and direct finance leases. Fee income decreased $924,000 in 1998
compared to 1997, primarily due to the Company's strategy of holding more
transactions for its own account and consequently fewer transactions were
sold for fee income. The strategy of holding more transactions continued in
1999, however, fee income increased due to transactions with one customer
which resulted in approximately 45% of the year's fee income.
INTEREST EXPENSE
Consistent with the Company's plan to grow its lease portfolio, it has
incurred higher levels of borrowing, and consequently incurred an increase in
interest expense, to finance the investment in leases and notes receivable.
SELLING, GENERAL & ADMINISTRATIVE, EXPENSES
The increases in selling, general & administrative expenses in 1999 and
1998 primarily reflect higher payroll and occupancy costs associated with the
growth in the Slot Source reconditioned gaming device division, and legal fees
associated with obtaining licensing in the states of Mississippi and Illinois in
1999, and Colorado in 1998, and legal fees in connection with the work out of
three accounts which defaulted in 1999.
PROVISION FOR LOSSES
The provision for losses represents the Company's estimate of the
amount expected to be lost related to specific accounts, including estimated
losses on future non-cancelable lease rentals and notes receivable. The 1999
provision for loss reflects three customers that defaulted under their financing
agreements.
INCOME TAXES
The Company's effective tax rate was approximately 26% for 1999, and
lower than the federal statutory rate of 34% due to the non-deductible
amortization of costs related to the acquisition of the DigiDeal Technology
Agreement and the reversal of temporary differences at other than the
originally expected effective rate.
The Company's effective income tax rate was approximately 38% in both
1997 and 1998. Effective rates for 1998 and 1997 are higher than the federal
statutory rate of 34%, due primarily to state income taxes.
LIQUIDITY AND CAPITAL RESOURCES:
The Company's unrestricted cash and cash equivalents totaled $2.9
million at December 31, 1999, compared to $1.3 million at December 31, 1998. Net
cash provided by operations activities amounted to $2.3 million in 1999,
compared to net cash used in operating activities of $16.8 million in 1998. The
increase in cash provided by operating activities in 1999 resulted primarily the
cash flow arising from the increase in the Company's portfolio of leases and
notes receivable.
14
<PAGE>
The Company's strategy to increase its financing activities involve a
higher level of investment in notes receivable and equipment under operating
leases. 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 from
banks, financial institutions, and financial intermediaries. Payments under the
Company's borrowings and the maturities of its borrowings are typically
structured to match the payments under the leases and notes collateralizing the
borrowings.
See Note 4 to Notes to Financial statements for a description of the
Company's debt financing.
The Company's current financial resources, including estimated cash
flows from operations, the revolving credit and working capital and other
facilities which total $71 million (of which $31 million is available as of
December 31, 1999) 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 manages its portfolio to optimize concentration among customers or
geographic markets. To achieve this goal, it will from time to time, sell or
externally finance transactions originated including those held in its
investment portfolio. The Company continues to explore other possible sources
of capital, however, there is no assurance that additional capital, if
required, can be obtained or will be available on terms acceptable to the
Company.
The Company has entered into a letter of intent to acquire the
capital stock of Four Queens, Inc., which is contingent upon the Company
obtaining satisfactory purchase financing. There can be no assurance that the
Company will be able to obtain such financing on terms acceptable to the
Company.
Inflation has not had a significant impact on the Company's operations.
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
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Substantially all of the Company's borrowings are under fixed
interest rates, and maturities are matched with the cash flows of leased
assets and notes receivables. In addition, a changing interest rate
environment will not impact the Company's margins since the effects of higher
or lower borrowing costs would be reflected in the rates for newly originated
leases or collateralized loans. Therefore, consistent with the Company's
strategy and intention to hold most of its originations to maturity the
Company does not have a significant exposure to interest rate changes.
ITEM 8. FINANCIAL STATEMENTS.
The company's Consolidated Financial statements, including notes
thereto, are listed in Part IV, Item 14, of this report and are included after
the signature page beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
On October 23, 1999 the Company determined to solicit proposals from
qualified firms to act as the Company's independent auditors for the 1999
calendar year. On November 8, 1999, PricewaterhouseCoopers resigned as the
independent accountants of the Company. There were no disagreements with
PricewaterhouseCoopers on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements if not resolved to the satisfaction of PricewaterhouseCoopers,
would have caused them to make a reference to their report on financial
statements for such years.
15
<PAGE>
On January 5, 2000, the Company engaged new independent accountants,
Piercy, Bowler, Tayler & Kern Certified Public Accountants & Business Advisors A
Professional Corporation ("Piercy Bowler") to audit the Company's financial
statements as of, and for the year ended, December 31, 1999. The decision to
appoint Piercy Bowler was approved by the Audit Committee of the Board of
Directors.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The information required by this Item is incorporated by reference to
the Company's definitive proxy statement to be filed within 120 days after the
Company's fiscal year end.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated by reference to
the Company's definitive proxy statement to be filed within 120 days after the
company's fiscal year end.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is incorporated by reference to
the Company's definitive proxy statement to be filed within 120 days after the
company's fiscal year end.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated by reference to
the Company's definitive proxy statement to be filed within 120 days after the
company's fiscal year end.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) Financial Statements
The financial statements listed on the accompanying Index of
Financial Statements (page F-1) are filed as part of this annual report.
(b) Reports on Form 8-K
During the quarter ended December 31, 1999, the Company filed a Form
8-K regarding the resignation of PricewaterhouseCoopers LLP as the Company's
accountants, as discussed under ITEM 9 above.
(c) Exhibits
Included as Exhibits are the items listed in The Exhibit Index. The
Company will furnish to its shareholders of record as of the record date for
its 1999 Annual Meeting of Stockholders, a copy of any of the exhibits listed
below upon payment of $.25 per page.
16
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- - -------- -----------
<S> <C>
3.1 Amended and Restated Articles of Incorporation(4)
3.2 Articles of Amendment to Articles of Incorporation(4)
3.3 Articles of Amendment to Articles of Incorporation(4)
3.4 Articles of Amendment of Amended and Restated Articles of
Incorporation (4)
3.5 Bylaws of the Registrant (1)
4.1 Specimen of Common Stock Certificate (1)
4.3 Form of Warrant to Purchase 25,000 Shares of Common Stock,
dated December 15, 1994, issued to Miller & Schroeder
Investments Corporation(2)
4.4 Form of Warrant to Purchase 145,000 Shares of Common Stock,
dated May 24, 1994 (2)
10.1 Industrial Real Estate Lease dated April 29, 1997, between the
Registrant, as Tenant, and Patrick Commerce Center, LLC, as
Landlord (4)
10.2 1993 Stock Option Plan, as amended (1)
10.3 Form of Incentive Stock Option Agreement (1)
10.4 Form of Non-Qualified Stock Option Agreement (1)
10.5 Employment Agreement between the Registrant and Johan P.
Finley (1)
10.7 Employment Agreement between the Registrant and Peter D.
Cleary (3)
10.8 Employment Agreement between the Registrant and Lona M. B.
Finley (1)
10.9 Employment Agreement between the Registrant and Steven M. Des
Champs (6)
10.10 Form of Tax Indemnification Agreement between the Registrant
and Johan P. Finley (1)
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 (4)
10.12 Loan and Security Agreement, dated October 29, 1998 between
Heller Financial, Inc., as Lender and the Registrant as
Borrower (5)
10.13 Loan and Security Agreement, dated October 29, 1998 between
Heller Financial, Inc., as Lender and PDS Financial
Corporation-Nevada, as Borrower (5)
10.14 Master Loan Agreement by and among the Registrant, PDS
Financial Corporation - Nevada and Miller & Schroeder
Investments Corporation, date May 26, 1998 (5)
10.15 Master Loan Agreement by and among the Registrant, PDS
Financial Corporation - Nevada and Miller & Schroeder
Investments Corporation, date December 15, 1998 (6)
10.16 Loan Agreement, dated October 11, 1999 between U.S. Bank, as
Lender and the Registrant as Borrower
10.17 Loan and Security Agreement, dated April 28, 1999 between
SunWest Bank as Lender and PDS Financial Corporation -
Nevada as Borrower
10.18 Master Revolving Line of Credit-Promissory Note by and
among the Registrant, PDS Financial Corporation - Nevada and
Nevada State Bank, dated April 22, 1999
17
<PAGE>
10.19 Master Loan Agreement by and among the Registrant, PDS
Financial Corporation - Nevada, PDS Financial
Corporation - Mississippi and Miller & Schroeder Investments
Corporation, dated October 28, 1999
10.20 Master Loan Agreement by and among the Registrant, PDS
Financial Corporation - Nevada and Miller & Schroeder
Investments Corporation, dated October 28, 1999
10.21 Agreement for Technology Transfer, Manufacture,
Distribution and Affecting Patent, Trademark and Copyrights
by and among the Registrant and Digideal Corporation dated
June 16, 1999 (7)
10.22 Agreement For Technology Transfer, Manufacture,
Distribution and Affecting Patent, Trademark and Copyrights
(Sovereign Nations) dated June 16, 1999 (7)
10.23 First Modification of Agreement For Technology Transfer,
Manufacture, Distribution and Affecting Patent, Trademark
and Copyrights dated June 16, 1999 (7)
10.24 Warrant to Purchase Common Stock of PDS Financial
Corporation issued to Digideal Corporation in connection
with the Agreement for Technology, Transfer, Manufacture,
Distribution and Affecting Patent, Trademark and Copyrights,
dated June 16, 1999
10.25 Warrant to Purchase Common Stock of PDS Financial
Corporation issued to Digideal Corporation in connection
with the Agreement for Technology, Transfer, Manufacture,
Distribution and Affecting Patent, Trademark and Copyrights,
dated June 16, 1999
21.1 Subsidiaries of the Registrant
23.1 Consent of Independent Accountants
23.2 Consent of Independent Accountants
27.1 Financial Data Schedule for the year ended December 31, 1999
99.1 Cautionary Statements
</TABLE>
---------------
(1) Incorporated by reference to the Registrant's previously
filed Form SB-2 Registration Statement No. 33-76948C
(2) Incorporated by reference to the Registrant's previously
filed Form SB-2 Registration Statement No. 33-88692
(3) Incorporated by reference to the Registrant's previously
filed Form 10-KSB for the year ended December 31, 1995
(4) Incorporated by reference to the Registrant's previously filed
Form 10-KSB for the year ended December 31, 1997
(5) Incorporated by reference to the Registrant's previously filed
Form 10-QSB for the quarter ended June 30, 1998
(6) Incorporated by reference to the Registrant's previously filed
post effective amendment on Form S-3 to Form SB-2
Registration Statement No. 333-49199
(7) Incorporated by reference to the Registrant's previously
filed Form 10-Q for the quarter ended September 30, 1999
18
<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 Date: March 29, 2000
-------------------------------------
Johan P. Finley, Chief Executive
Officer
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 29, 2000.
Name Title
---- -----
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 Director,
-------------------------- President,
Peter D. Cleary Chief Operating Officer
Interim Chief Financial Officer
By /s/ Joel M. Koonce Director
--------------------------
Joel M. Koonce
By /s/ James L. Morrell Director
--------------------------
James L. Morrell
By /s/ Lona M. Finley Director
--------------------------
Lona M.Finley
19
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) Documents filed as part of this report: Page
----
<S> <C>
1. Consolidated Financial Statements:
Reports of Independent Accountants F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998 F-3
Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)
for the Years Ended December 31, 1999, 1998 and 1997 F-4
Consolidated Statement of Stockholders' Equity for the Years Ended
December 31, 1999, 1998 and 1997 F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, F-6
1998 and 1997
Notes to Consolidated Financial Statements F-7 - F-16
</TABLE>
F-1
<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, 1999 and related
consolidated statements of income (loss) and comprehensive income (loss), and
stockholders' equity and cash flows for the year 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 audit.
We conducted our audit 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 audit 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, 1999, and the
consolidated results of their operations and their cash flows for the year then
ended, in conformity with generally accepted accounting principles.
PIERCY BOWLER TAYLOR & KERN
Certified Public Accountants and Business Advisors,
A Professional Corporation
Las Vegas, Nevada
March 8, 2000
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of PDS Financial Corporation:
In our opinion, the accompanying balance sheet as of December 31,
1998 and the related consolidated statements of income and comprehensive
income, stockholders' equity and cash flows for each of the two years in the
period ended December 31, 1998 present fairly, in all material respects, the
financial position, results of operations and cash flows of PDS Financial
Corporation and subsidiaries (the "Company") at December 31, 1998 and for
each of the two years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally
accepted auditing standards, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above. We have not audited the consolidated financial statements of PDS
Financial Corporation and subsidiaries for any period subsequent to December
31, 1998.
PricewaterhouseCoopers LLP
Las Vegas, Nevada
February 23, 1999
F-2
<PAGE>
PDS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
ASSETS 1999 1998
-------------- -------------
<S> <C> <C>
Cash and cash equivalents, $ 2,860,000 $ 1,269,000
Restricted cash 2,831,000 3,166,000
Notes, accounts, and leases receivable, net 48,616,000 32,881,000
Equipment under operating leases, net 41,287,000 27,751,000
Equipment held for sale or lease 6,616,000 10,002,000
Refundable income tax deposits 403,000 522,000
Deferred income taxes 976,000 583,000
Other assets, net 4,444,000 3,455,000
-------------- -------------
$ 108,033,000 $ 79,629,000
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable:
Equipment vendors $ 6,363,000 $ 13,427,000
Other 717,000 1,117,000
Customer deposits 7,141,000 1,357,000
Notes payable 66,549,000 37,505,000
Subordinated debt 13,323,000 13,165,000
Accrued expenses and other 3,836,000 2,524,000
-------------- -------------
97,929,000 69,095,000
-------------- -------------
Stockholders' equity:
Common stock, $.01 par value, 20,000,000 shares authorized, 3,683,753 and
3,648,211 shares issued and outstanding
at December 31, 1999 and 1998 37,000 36,000
Additional paid-in capital 11,546,000 11,268,000
Accumulated other comprehensive loss (25,000)
Deficit (1,479,000) (745,000)
-------------- -------------
10,104,000 10,534,000
-------------- -------------
$ 108,033,000 $ 79,629,000
============== =============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
PDS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
AND COMPREHENSIVE INCOME (LOSS)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------ -------------
<S> <C> <C> <C>
REVENUES:
Equipment sales $ 6,146,000 $20,522,000 $17,482,000
Revenue from sales-type leases 7,699,000 3,964,000 14,480,000
Operating lease rentals 12,426,000 6,750,000 11,406,000
Finance income 5,511,000 3,033,000 1,575,000
Fee income 3,697,000 1,746,000 2,670,000
------------- ------------ ------------
35,479,000 36,015,000 47,613,000
------------- ------------ ------------
COSTS AND EXPENSES:
Equipment sales 6,740,000 17,257,000 15,123,000
Sales-type leases 6,622,000 3,386,000 13,654,000
Depreciation on leased equipment 8,773,000 4,931,000 8,589,000
Interest 8,133,000 5,062,000 4,260,000
Selling, general and administrative 4,810,000 4,681,000 3,840,000
Collection and asset impairment provisions 1,395,000 123,000 628,000
------------- ------------ ------------
36,473,000 35,440,000 46,094,000
------------- ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (BENEFIT) (994,000) 575,000 1,519,000
INCOME TAXES (BENEFIT) (260,000) 219,000 577,000
-------------- ------------ ------------
NET INCOME (LOSS) (734,000) 356,000 942,000
OTHER COMPREHENSIVE INCOME, NET OF TAX 25,000 12,000 45,000
------------- ------------ ------------
COMPREHENSIVE INCOME (LOSS) $ (709,000) $ 368,000 $ 987,000
============== ============ ============
NET INCOME (LOSS) PER SHARE:
Basic ($0.20) $0.10 $0.30
Diluted ($0.20) $0.09 $0.28
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 3,684,000 3,611,000 3,184,000
Diluted 3,684,000 3,784,000 3,620,000
</TABLE>
See notes to the consolidated financial statements.
F-4
<PAGE>
PDS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
--------------------------- PAID-IN COMPREHENSIVE
SHARES PAR VALUE CAPITAL INCOME (LOSS) DEFICIT TOTAL
---------- --------- ----------- ------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, JANUARY 1, 1997 3,119,816 $31,000 $7,952,000 $(203,000) $(2,043,000) $5,737,000
Conversion of subordinated debentures 240,220 2,400 1,018,000 1,020,400
Exercise of stock options, including tax
benefit of $296,600 163,936 1,600 762,000 763,600
Unrealized holding gains on securities
net of income taxes 45,000 45,000
Reclassification from net income 121,000 121,000
Net income 942,000 942,000
---------- --------- ----------- ---------- ----------- ----------
BALANCES, DECEMBER 31, 1997 3,523,972 35,000 9,732,000 (37,000) (1,101,000) 8,629,000
Conversion of subordinated debentures 11,810 50,000 50,000
Exercise of warrants 45,747 400 14,600 15,000
Exercise of stock options, including tax
benefit of $61,000 66,682 600 368,000 368,600
Issuance of stock purchase warrants 1,103,400 1,103,400
Unrealized holding gains on securities
net of income taxes 12,000 12,000
Net income 356,000 356,000
---------- -------- ------------ --------- ------------ -----------
BALANCES, DECEMBER 31, 1998 3,648,211 36,000 11,268,000 (25,000) (745,000) 10,534,000
Exercise of stock options, including tax
benefit of $28,000 34,896 700 175,000 175,700
Issued pursuant to Employee
Stock Purchase Plan 646 300 3,000 3,300
Issuance of stock purchase warrants 100,000 100,000
Unrealized holding gains on securities
net of income taxes 25,000 25,000
Net loss (734,000) (734,000)
---------- -------- ------------ ------- ----------- ------------
BALANCES, DECEMBER 31, 1999 3,683,753 $37,000 $11,546,000 $(1,479,000) $10,104,000
========= ======= =========== ========= ============ ===========
</TABLE>
See notes to the consolidated financial statements.
F-5
<PAGE>
PDS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
-------------- ------------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net cash provided by (used in) operating activities $2,321,000 $(16,789,000) $12,810,000
------------- ------------- -------------
INVESTING ACTIVITIES
Purchases of equipment for leasing (129,000) (7,226,000) (11,041,000)
Proceeds from sale of equipment under operating leases 3,701,000 14,717,000
Other (922,000) (260,000) (119,000)
-------------- ------------- -------------
Net cash provided by (used in) investing activities (1,051,000) (3,785,000) 3,557,000
-------------- ------------- ------------
FINANCING ACTIVITIES
Proceeds from discounting operating lease rentals 692,000 4,700,000
Proceeds from borrowings 26,541,000 42,253,000 10,511,000
Payment of debt issue costs (1,560,000)
Repayment of borrowings (26,499,000) (21,700,000) (32,940,000)
Proceeds from exercise of stock options and warrants 279,000 293,000 467,000
------------- ------------ ------------
Net cash provided by (used in) financing activities 321,000 19,978,000 (17,262,000)
-------------- ------------ ------------
CHANGE IN CASH AND CASH EQUIVALENTS
Net increase (decrease) during the year 1,591,000 (596,000) (895,000)
Balance, beginning of year 1,269,000 1,865,000 2,760,000
------------- ----------- ------------
Balance, end of year $ 2,860,000 $ 1,269,000 $ 1,865,000
============= ============ ============
</TABLE>
See notes to the consolidated financial statements.
F-6
<PAGE>
PDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS DESCRIPTION. PDS Financial Corporation and subsidiaries (the "Company")
engages principally in the leasing and financing of gaming equipment. Beginning
in 1997, the Company began reconditioning for disposition gaming equipment that
it acquired at the end of the lease or through open market purchases. This
reconditioning process and related sales and distribution effort (known as PDS
Slot Source, an operating division) is viewed by management as an integral part
of the Company's leasing and financing activities. The Company's specialized
operating lease program for slot machines and other electronic gaming devices
has been known as SlotLease since 1996. The Company conducts its leasing and
financing and sales activities in substantially all domestic United States
gaming jurisdictions and, to a lesser extent, certain other countries and could
be affected by adverse changes in economic conditions in those areas.
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 financial
statements and the reported amounts of revenue and expenses during the reporting
period. For the Company, these are principally the estimates of residual values,
collectibility of notes, accounts, and leases receivable and valuation of
equipment held for sale or lease. Actual results could differ from these
estimates.
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 have been eliminated in
consolidation.
REVENUE AND COST RECOGNITION. The Company's leasing activities include
operating, direct finance, sales-type, and leveraged leases. For all types of
leases, the determination of profit considers the estimated value of equipment
at lease termination, referred to as the residual value. For operating leases,
revenue and depreciation on the leased equipment are recorded on the
straight-line method over the term of the lease. Direct finance and sales-type
leases are similar in that substantially all of the benefits and risks of
ownership of the leased equipment are transferred to the lessee, and interest
income is recognized at a constant percentage return on the asset carrying
value. The carrying value consists of the present value of the future lease
payments plus any unguaranteed residual, sometimes referred to herein as the
lease receivable. A dealer's profit or loss on the subject equipment is
recognized at the inception of a sales-type lease. Investment in leveraged
leases consists of rentals receivable (net of principal and interest on
nonrecourse debt), plus the estimated residual values of the equipment, and
minus unearned income which is recognized at a constant percentage return on the
investment over the lease term. After the inception of a lease, the Company may
discount or sell notes and future lease payments to reduce or recover its
investment in the asset.
Initial direct costs related to leases and notes receivable are capitalized as
part of the related asset and amortized over the term of the agreement using the
interest method, except for operating leases, for which the straight line method
is used.
Equipment, consisting primarily of gaming devices, held for lease or sale is
valued at the lower of average unit cost or net realizable value. Revenue is
recognized when title transfers to the customer upon shipment of reconditioned
gaming devices or upon the exercise of a purchase option under an operating
lease.
FEE INCOME. The difference between the sale price and the carrying value of the
notes and lease receivables sold is included in fee income. Fee income also
includes commissions earned for arranging financing between unrelated parties.
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. Excluded from cash equivalents at December 31, 1999 and 1998 is
restricted cash consisting of proceeds from borrowings legally restricted for
certain transactions and expected to be completed within three months or less
of such dates.
OTHER ASSETS, NET. Property and equipment is included in this classification and
consists primarily of furniture, equipment and leasehold improvements stated at
cost less depreciation and amortization calculated using the straight-line
method over the estimated useful lives. Also included are direct costs incurred
in obtaining debt that are being amortized over the term of the underlying
financing agreement using the interest method and costs to obtain licenses to
own and distribute gaming devices and associated equipment that are amortized
over three years on a straight-line basis.
ALLOWANCE FOR LOSSES. An allowance for losses is maintained at levels determined
by management to adequately provide for any other-than-temporary declines in
asset values. In determining losses, economic conditions, the activity in used
equipment markets, the effect of actions by equipment manufacturers, the
financial condition of customers, the expected courses of
F-7
<PAGE>
PDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
action by lessees with regard to leased equipment at termination of the initial
lease term, changes in technology and other factors which management believes
are relevant, are considered. Recoverability of an asset value is measured by a
comparison of the carrying amount of the asset to future net cash flows expected
to be generated by the asset. If a loss is indicated, the loss to be recognized
is measured by the amount by which the carrying amount of the asset exceeds the
fair valued of the asset. Asset charge-offs are recorded upon the disposition of
the underlying assets. Assets are reviewed quarterly to determine the adequacy
of the allowance for losses.
NET INCOME (LOSS) PER SHARE. The Company calculated basic and diluted net income
(loss) per share as follows for the years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
-------- ------------- -------------
<S> <C> <C> <C>
Net income (loss), basic ($734,000) $356,000 $942,000
Interest expense on
subordinated debt, net of tax 86,000
----------- ---------- ----------
Net income (loss), diluted ($ 734,000) $ 356,000 $1,028,000
=========== ========== ==========
Per share amounts:
Basic ($0.20) $0.10 $0.30
Diluted ($0.20) $0.09 $0.28
Weighted average shares outstanding:
Basic (weighted average shares outstanding) 3,684,000 3,611,000 3,184,000
Effect of dilutive options 155,000 137,000
Effect of dilutive warrants 18,000
Effect of subordinated debt 299,000
----------- ---------- ----------
Diluted 3,684,000 3,784,000 3,620,000
=========== ========== ==========
</TABLE>
Options to purchase 802,000 shares of common stock, and warrants to purchase
1,290,000 shares of common stock were not included in the computation of diluted
earnings per share for 1999 because the effect would be anti-dilutive. In
addition, the exercise price was greater than the average market price of the
common stock for the year. The weighted average exercise price for these options
and warrants was $4.71 and $9.44 as of December 31, 1999. These options and
warrants expire at various dates through 2009. Weighted-average exercise prices
($11.28 in 1998 and $5.60 in 1997) in excess of average market prices caused
options and warrants to purchase common shares (984,500 in 1998 and 337,200 in
1997) to be excluded from the computation of diluted earnings in those years.
STOCK COMPENSATION. The Company accounts for stock based employee compensation
(Note 7) using the intrinsic value method in Accounting Principles Board Opinion
No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES.
RECLASSIFICATIONS. Certain items in the consolidated financial statements have
been reclassified to conform to the current year presentation.
2. NOTES, ACCOUNTS, AND LEASES RECEIVABLE:
Notes, accounts, and leases receivable consist of the following as of December
31:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Notes receivable bearing interest at 8.5% to 15.3% $ 23,449,000 $ 23,535,000
Minimum direct finance lease payments 20,679,000 11,497,000
Leveraged leases, net 7,121,000
Unsecured revolving line bearing interest at 13% 1,734,000
------------ ------------
52,983,000 35,032,000
Unearned lease income, direct finance leases (3,407,000) (1,814,000)
Unearned income, leveraged leases (3,593,000)
Unamortized discounts (331,000) (312,000)
------------ ------------
45,652,000 32,906,000
Accounts and other 5,302,000 1,335,000
Allowance for uncollectible accounts (2,338,000) (1,360,000)
------------ ------------
$ 48,616,000 $ 32,881,000
============ ============
</TABLE>
F-8
<PAGE>
PDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. NOTES, ACCOUNTS, AND LEASES RECEIVABLE (CONTINUED):
Notes and direct finance lease receivables are due in monthly installments,
generally collateralized by casino-related equipment and furnishings. The
Company is also committed to fund up to $5,000,000 under an unsecured revolving
line of credit receivable in monthly installments of principal and interest of
approximately $86,000. Leveraged leases net includes estimated residuals of
$6,557,000 and deferred tax liabilities associated with these leases are not
material.
At December 31, 1999, future minimum payments receivable on notes and leases
(both direct finance leases and the leveraged leases) are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, NOTES LEASES TOTAL
- - ------------------------ ------------ ------------ ------------
<S> <C> <C> <C>
2000 $ 11,196,000 $ 7,312,000 $ 18,508,000
2001 6,201,000 6,303,000 12,504,000
2002 7,731,000 9,822,000 17,553,000
2003 55,000 3,116,000 3,171,000
2004 688,000 688,000
Other 559,000 559,000
------------ ------------ ------------
$ 25,183,000 $ 27,800,000 $ 52,983,000
============ ============ ============
</TABLE>
Included in the preceding table are notes and leases receivable from two
customers totaling $4,053,000 (all in 2000) upon which no payments are currently
being received. At December 31, 1999, specific allowances for doubtful
collection provided for these and receivables from two other customers totaled
$2,337,000. The maximum losses that the Company would incur if these customers
failed to completely perform and the collateral were unavailable or of no value
would be $1,716,000 after allowances provided. At December 31, 1998, specific
allowances relating to one of these customers totaled $1,200,000. Interest
income earned (and received) on impaired notes receivable for 1999, 1998 and
1997 was not material.
Changes in the allowance for uncollectible receivables are as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Balance, beginning of year $1,360,000 $1,283,000
---------- ----------
Charge-offs
Recoveries 17,000 46,000
---------- ----------
Net recoveries (charge-offs) 17,000 46,000
Collection provision 995,000 123,000
---------- ----------
Balance, end of year $2,338,000 $1,360,000
========== ==========
</TABLE>
The estimated fair value of notes and direct finance leases receivable
approximates their carrying value. The fair value is estimated using discounted
cash flow analysis and interest rates currently offered by the Company for
obligations with similar terms and credit risk.
3. EQUIPMENT UNDER OPERATING LEASES AND DISCOUNTED LEASE OBLIGATIONS:
Equipment under operating leases consists of gaming equipment and casino hotel
related equipment leased for periods ranging from 6 to 48 months as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Gaming and related $55,653,000 $34,482,000
Impairment allowance (400,000)
Less accumulated depreciation (13,966,000) (6,731,000)
----------- -----------
$41,287,000 $27,751,000
=========== ===========
</TABLE>
Lessees generally have the future right to purchase the equipment for fair value
at the termination of the lease.
At December 31, 1999, future minimum lease payments to be received by the
Company on non-discounted operating leases for the years ending December 31,
2000 through 2003 are approximately $14,086,000, $11,817,000, $8,361,000, and
$2,712,000 respectively.
On occasion, the Company collateralizes borrowings from financial
institutions with operating lease rentals and the related equipment. The
borrowings at December 31, 1999 and 1998 are not material and are classified
as notes payable in the accompanying consolidated balance sheet.
F-9
<PAGE>
PDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. EQUIPMENT UNDER OPERATING LEASES AND DISCOUNTED LEASE OBLIGATIONS
(CONTINUED):
Interest expense on discounted lease obligations totaled $43,000, $274,000, and
$1,976,000 in 1999, 1998 and 1997, respectively. At December 31, 1999, the
effective interest rates on discounted lease rentals ranged from 8.7% to 10.5%.
4. NOTES PAYABLE AND SUBORDINATED NOTES:
Recourse and non-recourse obligations consist of the following:
<TABLE>
<CAPTION>
1999 1998
------------ -------------
<S> <C> <C>
Lines of credit with a maximum aggregate balance of $46,000,000
bearing interest at rates from 7.3% to 10.3%, secured by related
investment in leases and equipment held for sale or lease $26,351,000 $14,908,000
Equipment notes bearing interest at rates from 8.0%
to 15%, secured by related investment in leases:
Recourse 18,472,000 17,234,000
Non-recourse 23,244,000 6,737,000
------------ ------------
68,067,000 38,879,000
Unamortized loan discounts (1,518,000) (1,374,000)
------------ ------------
$66,549,000 $37,505,000
============ ============
</TABLE>
Principal and interest payments on the recourse and nonrecourse notes payable
are generally due monthly in amounts that are approximately equal to the total
payments due from the lessee under the leases that collateralize the notes
payable. Under recourse financing, in the event of a default by a lessee, the
lender has recourse against the lessee, the equipment serving as collateral, and
the borrower. Under nonrecourse financing, in the event of a default by a
lessee, the lender generally only has recourse against the lessee, and the
equipment serving as collateral, but not against the borrower.
Certain of the Company's lines of credit restrict the payment of dividends. The
also contain certain covenants regarding minimum consolidated tangible net
worth, maximum recourse debt to worth ratio, cash flow coverage, and minimum
interest expense coverage ratio.
Recourse equipment notes include borrowings of $2.8 million at December 31,
1999, which have been funded by the lending source into escrow. The funding
amounts are classified as restricted cash. Such amounts will be released from
escrow and utilized to pay for equipment under lease as lease schedules are
originated.
In May 1998, the Company issued $13,800,000 of 10% senior subordinated notes due
on July 1, 2004 that included 690,000 detachable stock purchase warrants with an
exercise price of $12.25 valued at $690,000 ($477,000 unamortized as of December
31, 1999). Interest is payable quarterly. Pursuant to the terms of the
indenture, beginning July 1, 2000, a total of $2.1 million of the subordinated
notes will be randomly selected each year for mandatory redemption. In addition
to mandatory redemptions, the Company may also redeem the subordinated notes, in
part or in full, at any time at par plus accrued interest and any premium, if
applicable. The entire unpaid principal balance and unpaid interest thereon, is
due and payable on July 1, 2004.
In 1993, the Company issued unsecured subordinated debentures convertible into
shares of common stock of the Company using a per share conversion price of
$4.25. During 1998 and 1997, approximately $50,000 and $1,020,400 of debentures
were converted into 11,810 and 240,220 shares of common stock.
F-10
<PAGE>
PDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Recourse and nonrecourse notes payable and subordinated notes as of December 31,
1999, mature as follows:
<TABLE>
<CAPTION>
Recourse Notes Nonrecourse Subordinated
Payable Notes Payable Notes
-------------- ------------- -------------
<S> <C> <C> <C>
Year ending December 31, 2000 $17,958,000 $8,629,000 $2,070,000
2001 16,340,000 8,988,000 2,070,000
2002 6,875,000 4,168,000 2,070,000
2003 3,650,000 1,459,000 2,070,000
2004 and thereafter 5,520,000
-------------- ------------- -------------
$44,823,000 $23,244,000 $13,800,000
============== ============= =============
</TABLE>
The Company estimates that the fair value of its borrowings approximates the
carrying value based on terms currently available.
5. INCOME TAXES
The following summarizes the components of deferred income taxes included in
the Company's consolidated balance sheets at December 31:
<TABLE>
<CAPTION>
1999 1998
----------- -------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carry forward $2,185,000 $1,502,000
Asset valuation allowances 723,000 279,000
Customer deposits and prepaid rent 1,130,000
Other 266,000 119,000
----------- -------------
Total deferred tax assets 4,304,000 1,900,000
----------- -------------
Deferred tax liabilities:
Lease transactions (2,956,000) (1,197,000)
Initial direct costs (372,000) (120,000)
------------ --------------
Total deferred tax liabilities (3,328,000) (1,317,000)
------------ --------------
Net deferred tax assets $ 976,000 $ 583,000
=========== ==============
</TABLE>
Net operating loss carryforwards of approximately $6,100,000 will be an
available deduction from future taxable income, expiring approximately 45% in
2010 and prior, and approximately 55% in 2018 and after. Realization of the
net operating loss carryforwards is dependent on generating sufficient
taxable income prior to expiration of the loss carryforward. Although
realization is not assured, the Company 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.
The provision (benefit) for income taxes is comprised as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------- --------- --------
<S> <C> <C> <C>
Current ($22,000) $130,000
Deferred ($260,000) 241,000 447,000
---------- --------- --------
($260,000) $219,000 $577,000
========== ========= ========
</TABLE>
The difference between the normal federal statutory tax rate of 34% applied to
income before income taxes and the Company's effective tax rate is:
<TABLE>
<CAPTION>
1999 1998 1997
---------- --------- --------
<S> <C> <C> <C>
Income taxes at federal statutory rate ($338,000) $196,000 $517,000
State income taxes, net of federal effect (10,000) 12,000 31,000
Non-deductible amortization of asset acquisition costs 57,000
Reversal of temporary differences at other than
expected effective rate 34,000
Other, net (3,000) 11,000 29,000
---------- --------- --------
($260,000) $219,000 $577,000
========== ========= ========
</TABLE>
F-11
<PAGE>
PDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY
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, 1999, the maximum number of shares of common stock
available for grant under the Plan was 1,350,000.
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. Newly elected non-employee directors of the
Company receive an initial grant of non-qualified options to purchase 5,000
shares of common stock upon election to the Board.
Option activity is summarized as follows:
<TABLE>
<CAPTION>
OPTIONS WEIGHTED
AVAILABLE FOR OPTIONS EXERCISE PRICE
GRANT OUTSTANDING PER SHARE
----- ----------- ---------
<S> <C> <C> <C>
Balances, December 31, 1996 438,000 547,000 $3.22
------- ------- -----
Granted (178,500) 178,500 3.66
Exercised (163,500) 2.86
Cancelled 9,500 (9,500) 3.08
------- ------- -----
Balances, December 31, 1997 269,000 552,500 3.47
Increase in number of shares available 250,000
Granted (341,000) 341,000 7.65
Exercised (71,500) 3.96
Cancelled 53,000 (53,000) 5.20
------- ------- -----
Balances, December 31, 1998 231,000 769,000 5.16
Granted (258,000) 258,000 3.26
Exercised (56,000) 2.60
Cancelled 169,000 (169,000) 5.28
------- ------- -----
Balances, December 31, 1999 142,000 802,000 $4.80
======= ======= =====
Options exercisable at December 31, 1999 284,000 $3.86
======= =====
</TABLE>
The following table summarizes stock options outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -----------------------------
Number of Weighted Average Number of Weighted Average
Options Remaining Options Remaining
Range of Exercise Prices Outstanding Contractual Life Outstanding Contractual Life
------------------------ ----------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C>
$1.50 - $2.50 148,000 7.5 65,000 5.8
$2.51 - $5.00 418,000 7.4 171,000 4.1
$5.01 - $7.50 75,000 8.3 15,000 8.0
$7.50 - $10.05 161,000 8.4 33,000 8.3
------- --------
802,000 284,000
======= ========
</TABLE>
F-12
<PAGE>
PDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
At December 31, 1999, the range of exercise prices and weighted average
remaining contractual life of outstanding options was $1.50 - $10.05, and 7.0
years, respectively. Had the Company used the fair value-based method of
accounting and recognized compensation expense over the vesting period as
provided for in Financial Accounting Standards Board Statement No. 123, STOCK
BASED COMPENSATION, net income and net income per share for 1999, 1998 and 1997
would have been as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Pro forma net income (loss):
Basic $(1,137,000) $4,000 $879,000
Diluted (1,137,000) 4,000 964,000
Pro forma net income (loss) per share:
Basic $(0.31) $0.00 $0.28
Diluted $(0.31) 0.00 0.27
</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 $0.86, $2.57,
and $2.35 per option for 1999, 1998 and 1997, 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>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Risk-free interest rate 6.3% 5.2% 6.2%
Expected life 5 years 5 years 5 years
Expected volatility 60% 60% 70%
Expected dividends 0 0 0
</TABLE>
PREFERRED STOCK. The Company's Articles of Incorporation, as amended, authorize
the issuance of 2,000,000 shares of preferred stock, par value $0.01 per share.
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.
WARRANTS. In June 1999, the Company issued a warrant to purchase
approximately 5% of the Company's common stock, or 184,000 shares of common
stock to DigiDeal Corporation ("DigiDeal") as part of its purchase of certain
intellectual property rights from DigiDeal covered by an agreement for
technology transfer, manufacture, distribution and affecting patent trademark
and copyrights (the Technology Agreement). These warrants have an exercise
price of $3.75 per share, expire in 2004 and are exercisable only upon the
achievement of certain levels of revenues from Designated Products, as
defined. An additional warrant was granted to DigiDeal Corporation for the
right to purchase an additional 184,000 shares of common stock of the Company
once revenues from Designated Products reach certain levels (2.5% upon
achievement of each of two goals). The Company valued these warrants at a
total of $500,000, which was treated as an asset, with a corresponding entry
to additional paid in capital, and will be amortized over the life of the
Technology Agreement. The Company has reciprocal rights to purchase up to 10%
of the common shares of DigiDeal at $1.35 per share.
In 1998, the Company issued 690,000 detachable stock purchase warrants as
part of the Subordinated Notes offering. These warrants have an exercise
price of $12.25 per share and expire in 2003, are exercisable beginning on
May 4,1999. The Company also issued a warrant to purchase 50,000 shares of
common stock to the underwriter for the Subordinated Notes offering, and such
warrants have the same terms as the warrants described in the preceding
sentence, except that such warrants are exercisable beginning on May 4, 2000.
The Company valued these warrants at a total of $740,000, of which $690,000
was treated as a debt discount, and $50,000 as deferred debt issue costs,
with a corresponding entry to additional paid in capital. Also in 1998, the
Company issued warrants to purchase 181,700 shares of common stock to a
financial institution in partial consideration for the approval of a $25
million revolving line of credit. These warrants have an exercise price of
$4.66 per share, expire in 2003 and were exercisable as of October 1998.
F-13
<PAGE>
PDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
The Company valued these warrants at a total of $363,400, which was treated as
deferred debt issue costs, with a corresponding entry to additional paid in
capital.
In 1994, the Company issued warrants (the "IPO 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. The warrants are exercisable into common stock at
$6.00 per share had a cash-less exercise provision and expired in 1999. During
1998, a total of 121,500 warrants were surrendered to the Company resulting in
proceeds to the Company of $15,000 and issuance of approximately 45,700 shares
of common stock. There were no warrants surrendered in 1999.
7. EMPLOYEE MATTERS
BENEFIT PLANS. The Company maintains a contributory defined contribution plan
that qualifies under Section 401(k) of the Internal Revenue Code (IRC) and
covers eligible employees. 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 1999, 1998 and 1997 were not material.
EMPLOYMENT AGREEMENTS. The Company has entered into employment agreements with
its three officers for periods ranging from one to five years. Each 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 performance and
discretionary bonuses. The agreements are automatically extended for additional
one-year periods unless notice of nonextension is given.
8. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT
During 1999, no customer accounted for more than 10% of revenues. During 1998,
three customers accounted for 20%, 19%, and 16% of revenue, respectively, and in
1997, one of these customers and two others accounted for 37%, 18%, and 11% of
revenues, respectively.
During 1999, one customer accounted for 54% of fee income. During 1998 and 1997,
no customer accounted for more than 10% of fee income.
As of December 31, 1999, the Company's five largest customers represented 11%,
8%, 6%, 6%, and 4% of the total note and lease portfolio of $84,601,000. No
other customer represented more than 2% of the note and lease portfolio.
Based on the carrying value of the underlying notes and leases, 97% of the
Company's portfolio is located in the United States, with 60%, 14%, and 13% in
the states of Nevada, Colorado, and Mississippi.
9. COMMITMENTS AND CONTINGENCIES:
The Company leases office and space for its reconditioning activities under
terms of various noncancelable operating leases expiring through 2004. The lease
agreements require the Company to pay monthly base rent in varying amounts plus
its pro rata share of the operating expenses. Rent expense was approximately
$494,000, $470,000 and $305,000 in 1999, 1998, and 1997.
Future minimum lease payments under these leases are as follows:
<TABLE>
<CAPTION>
Year Ending December 31,
- - ------------------------
<S> <C>
2000 $476,000
2001 488,000
2002 525,000
2003 540,000
2004 554,000
-----------
$2,583,000
</TABLE>
F-14
<PAGE>
PDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. SEGMENT INFORMATION:
The Company conducts business with external customers through the operations of
its PDS Slot Source ("Slot Source") and PDS Finance ("Finance") segments. In
addition, employees of the Company provide certain legal, accounting and
compliance, personnel and other administrative support services on behalf of
Slot Source and Finance. The costs associated with these activities (SG & A) are
not separately allocated to each business unit. Prior to 1999, the activities
of Slot Source and Finance were conducted as one reporting segment.
The accounting policies of each business unit are the same as those described in
Note 1 of Notes to Consolidated Financial Statements. The Company evaluates the
performance of its operating segments based on earnings before income taxes.
Financial performance measurements for Slot Source, Finance, and SG & A are set
forth below for the year ended December 31, 1999.
<TABLE>
<CAPTION>
Slot Source Finance SG & A Total
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues $13,845,000 $21,634,000 $35,479,000
Income (loss) before income taxes 483,000 3,333,000 ($4,810,000) (994,000)
Identifiable assets 7,789,000 95,569,000 4,675,000 108,033,000
</TABLE>
11. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial instruments
was made in accordance with Statements of Financial Standards No. 107 ("SFAS No.
107"), Disclosures about Fair Value of Financial Instruments. SFAS No. 107
specifically excludes certain items from its disclosure requirements such as the
company's investment in equipment under operating lease, net, and equipment held
for sale or lease. Accordingly, the aggregate fair value amounts presented are
not intended to represent the underlying value of the net assets of the Company
The carrying amounts at December 31, 1999 for cash and cash equivalents, notes,
accounts, and leases receivable, net equipment purchases payable, accounts
payable notes payable and subordinated debt approximate their fair values due to
the short maturity of these instruments, or because the related interest rates
approximate current market rates.
12. SUPPLEMENTAL CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -----------
<S> <C> <C> <C>
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY
(USED IN) OPERATING ACTIVITIES:
Net income (loss) ($734,000) $356,000 $942,000
Depreciation and amortization 8,773,000 4,931,000 8,589,000
Provision for uncollectible receivables 1,395,000 123,000 628,000
Deferred income taxes (260,000) (241,000) 447,000
Originations of notes and direct finance leases receivables (36,388,000) (28,325,000) (37,239,000)
Proceeds from:
Sale or discounting of notes and leases receivables 17,245,000 5,886,000 42,671,000
Collections on notes and direct finance leases receivables 12,301,000 5,093,000 5,901,000
Gain on sale of financial assets (1,550,000) (2,283,000) (4,214,000)
Changes in operating assets and liabilities:
Accounts receivable (4,018,000) 295,000 (1,735,000)
Equipment held for sale or lease (319,000) (5,098,000) (2,712,000)
Income taxes receivable 119,000 (503,000) (19,000)
Accounts payable 912,000 22,000 678,000
Customer Deposit 5,784,000 1,952,000 (1,463,000)
Other, net (939,000) 1,003,000 336,000
------------- ------------- -----------
Net cash provided by (used in) operating activities $ 2,321,000 $(16,789,000) $12,810,000
============= ============= ===========
CASH PAID DURING THE YEAR FOR:
Interest $6,228,000 $4,260,000 $4,394,000
Income taxes, net of refunds received 446,000 24,000
</TABLE>
F-15
<PAGE>
PDS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. SUPPLEMENTAL CASH FLOW INFORMATION (CONTINUED):
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -----------
<S> <C> <C> <C>
SIGNIFICANT NON-CASH FINANCING AND INVESTING ACTIVITIES:
Increase (decrease) in equipment purchases payable (7,064,000) 13,427,000 775,000
Increase in notes payable for purchase of
equipment for leasing 29,337,000 207,000 7,636,000
Increase (decrease) in notes payable for cash deposited
into (withdrawn from) escrow (335,000) 3,166,000
Leases of equipment previously held for sale or lease
equipment under operating or direct finance
leases 3,705,000 1,568,000
Increase in notes payable for purchase of
notes receivable 103,000 12,197,000
Operating leases converted to direct finance
leases upon exercise of purchase options 2,011,000 456,000 2,676,000
Exchange of notes receivable and purchased
residuals for equipment for leasing and
the assumption of discounted lease rentals 5,745,000
Exchange of notes receivable, direct finance
leases and related discounted lease rentals
for inventory for sale or lease 5,332,000
Conversion of subordinated debentures into
common stock 50,000 1,020,000
Origination of notes receivable for sale of equipment
and direct finance receivables 5,056,000
</TABLE>
13. SUBSEQUENT EVENT
On March 6, 2000, the Company signed a non-binding letter of intent with
Elsinore Corporation to acquire the capital stock of Four Queens, Inc., a Nevada
corporation doing business as the Four Queens Hotel & Casino for a purchase
price of $30 million, subject to adjustment. Consummation of the acquisition is
subject to a number of conditions, including negotiation and approvals,
including approval of the Nevada Gaming Commission, other gaming approvals, and,
if necessary, approval under the Hart-Scott-Rodino Antitrust Act, and receipt by
the Company of satisfactory purchase financing. There can be no assurance that a
definitive agreement can be reached, the other conditions to the acquisition
will be satisfied or that the acquisition will be consummated.
14. QUARTERLY RESULTS (UNAUDITED)
The following table sets forth selected historical operating results for each
quarter of 1999 and 1998. 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>
1999 Quarter Ended
---------------------------------------------------------------
March 31 June 30 September 30 December. 31
-------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Total revenues $6,856,000 $10,512,000 $9,766,000 $8,345,000
Income taxes (benefit) 82,000 (105,000) (255,000) 18,000
Net income (loss) 134,000 (171,000) (414,000) (283,000)
Net income (loss) per share:
Basic .04 (.05) (.11) (.08)
Diluted .04 (.05) (.11) (.08)
Total originations 8,600,000 55,300,000 3,500,000 13,400,000
</TABLE>
<TABLE>
<CAPTION>
1998 Quarter Ended
--------------------------------------------------------------
March 31 June 30 September 30 December 31
---------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Total revenues $9,450,000 $14,278,000 $6,755,000 $5,532,000
Income taxes (benefit) 275,000 178,000 27,000 (261,000)
Net income (loss) 449,000 291,000 42,000 (426,000)
Net income (loss) per share:
Basic .13 .08 .01 (.12)
Diluted .12 .08 .01 (.12)
Total originations 11,600,000 20,600,000 11,500,000 16,600,000
</TABLE>
The summation of quarterly per share amounts may not equal the
calculation for the full year, as each quarterly calculation is performed
discretely.
F-16
<PAGE>
[LOGO] EX 10.16
LOAN AGREEMENT
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL LOAN DATE MATURITY LOAN NO. CALL COLLATERAL ACCOUNT OFFICER INITIALS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$5,000,000.00 10-11-1999 10-14-2000 140 5606780824 KMM36
- - ------------------------------------------------------------------------------------------------------------------------------
REFERENCES IN THE SHADED AREA ARE FOR LENDER'S USE ONLY AND DO NOT LIMIT THE APPLICABILITY OF THIS DOCUMENT TO ANY PARTICULAR
LOAN OR ITEM.
- - ------------------------------------------------------------------------------------------------------------------------------
BORROWER: PDS FINANCIAL CORPORATION; ET.AL. LENDER: U.S. BANK NATIONAL ASSOCIATION
6171 MCLEOD DRIVE COMMERCIAL SERVICES GROUP
LAS VEGAS, NV 09120 2300 W. SAHARA, SUITE 200
LAS VEGAS, NV 09102
==============================================================================================================================
</TABLE>
THIS LOAN AGREEMENT BETWEEN PDS FINANCIAL CORPORATION AND PDS FINANCIAL
NEVADA (REFERRED TO IN THIS AGREEMENT INDIVIDUALLY AND COLLECTIVELY AS
"BORROWER") AND U.S. BANK NATIONAL ASSOCIATION (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 October 9, 1999, 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.
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 NEVADA and all other persons and
entities signing Borrower's Note.
BORROWING BASE. The words "Borrowing Base" mean, as determined by
Lender from time to time, the lesser of (a) $6,000,000.00; or (b)
65.000% of the aggregate amount of Eligible Inventory. In determining
the amount of the Borrowing Base, all Eligible inventory of all
Borrowers 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 little 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 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 interacts, liens, encumbrances, and claims of third parties.
(b) Inventory which Lender, in its sole discretion, deems to be
obsolete, unsalable, damaged, defective, or until further processing.
(c) Eligible Inventory will be reduced by the greater of inventory
(defined as slot machines) which has been in inventory for more than
twenty four (24) months or PDS's inventory reserve. Exclude work in
progress from eligible inventory except for operational inventory.
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
billed "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 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 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.
INVENTORY. The word "Inventory" means all of the 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 or 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 NATIONAL ASSOCIATION, 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" mean Borrower's each 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 properly 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, guarantees, security agreements,
mortgages, deeds of trust, and all other instruments, agreements and
documents, whether now or hereafter existing, executed in connection
with indebtedness.
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10-11-1999 LOAN AGREEMENT PAGE 2
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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 1988 as now or hereafter amended.
SUBORDINATED DEBT. The words "Subordinated Debt" mean indebtedness and
liabilities of Borrower which have been subordinated by written
agreement to indebtedness owed 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 resolved 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 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 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 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 UCC
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 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.
COLLATERAL SCHEDULES. Concurrently with the execution and delivery of
this Agreement, Borrower shall execute and deliver to Lender a schedule
of Inventory and Eligible Inventory, in form and substance satisfactory
to the Lender. Thereafter Borrower shall execute and deliver to Lender
such supplemental schedules of Eligible Inventory specifying the value
thereof, and such other matters and information relating to Borrower's
inventory as Lender may request. Supplemental schedules shall be
delivered according to the following schedule: Borrower agrees to submit
to Lender monthly Accounts Receivable Agings, Accounts Payable Listing,
Inventory Certificate and Borrower's Certificate supported by a detailed
inventory listing within twenty (20) days after the end of each month.
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
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10-11-1999 LOAN AGREEMENT PAGE 3
LOAN NO. (CONTINUED)
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increases and decreases of the rate of interest on the indebtedness; (c)
exchange, enforce, waive, subordinate, fall 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. Borrower represents and warrants to Lender,
as of the 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
Nevada 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 quality 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 or
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 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 Lendor
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 Borrowers'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.
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 indemnity 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 of a hazardous waste or substance on the
properties. The provisions of this section of the Agreement, including
the obligation to indemnity, 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.
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 PROPERTY. 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 6171 MCLEOD DRIVE, LAS
VEGAS, NV 89120. 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 purpose 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 warrants 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 affect 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. 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.
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, audited by a certified public accountant satisfactory
to Lender, 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.
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10-11-1999 LOAN AGREEMENT PAGE 4
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ADDITIONAL INFORMATION. Furnish such additional information and
statements, lists 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 from 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: RATIO OF 1.50 TO 1.00 DEFINED AS: EARNINGS BEFORE
INTEREST, TAXES, DEPRECIATION AND AMORTIZATION DIVIDED BY INTEREST
PLUS DIVIDENDS.
The following provisions shall apply for purposes of determining
compliance with the foregoing financial covenants and ratios:
Quarterly. The financial covenants and ratios set forth in this
paragraph shall be determined and calculated for all Borrowers on a
consolidated basis and reference in this paragraph to "Borrower" shall
mean all "Borrowers." 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.
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 FEES AND CHARGES. In addition to all other agreed upon fees and
charges, pay the following: BORROWER AGREES TO PAY LENDER, PRIOR TO OR
CONTEMPORANEOUSLY WITH THE INITIAL ADVANCE OF LOAN PROCEEDS, A
NONREFUNDABLE LOAN FEE IN THE AMOUNT OF $18,750.00
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 Borrower's 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 of 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, 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. 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 1988, 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.
<PAGE>
10-11-1999 LOAN AGREEMENT PAGE 5
LOAN NO (CONTINUED)
- - -------------------------------------------------------------------------------
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 surety 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; (c) there occurs a material adverse change in
Borrowers 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.
ACCESS LAWS. Without limiting the generality of any provision of this
agreement requiring Borrower to comply with applicable laws, rules, and
regulations, Borrower agrees that it will at all times comply with the
applicable laws relating to disabled access including, but not limited to,
all applicable titles of the Americans with Disabilities Act of 1990.
YEAR 2000. Year 2000. Borrower has reviewed and accessed its business
operations and computer systems and applications to address the "year 2000
problem" (that is, that computer applications and equipment used by Borrower,
directly or indirectly through third parties, may be unable to properly
perform date-sensitive functions before, during and after January 1, 2000).
Borrower reasonably believes that the year 2000 problem will not result in a
material adverse change in Borrower's business condition (financial or
otherwise), operations, properties or prospects or ability to repay Lender.
Borrower agrees that this representation will be true and correct on and
shall be deemed made by Borrower on each date Borrower requests any advance
under this Agreement or Note or delivers any information to Lender, Borrower
will promptly deliver to Lender such information relating to this
representation as Lender requests from time to time.
PRIOR LOAN AGREEMENT. This Loan Agreement shall supercede and replace the
prior Loan Agreement dated August 5, 1998.
RIGHT OF SETOFF. Borrower grants to Lender a contractual 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 the 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.
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 or any Guarantor
dies or becomes incompetent, or revokes or disputes the validity of, or
liability 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.
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
______________.). 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 any 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.
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,
<PAGE>
10-11-1999 LOAN AGREEMENT PAGE 6
LOAN NO (CONTINUED)
- - --------------------------------------------------------------------------------
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 (unless otherwise
required by law), 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 as 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.
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 rolled 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.
EACH BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS LOAN
AGREEMENT, AND EACH BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS
OF OCTOBER 11, 1999.
BORROWER:
PDS FINANCIAL CORPORATION
/X/ /s/ [ILLEGIBLE]
------------------------------------
Authorized Officer
PDS FINANCIAL NEVADA, CO-BORROWER
By: /s/ [ILLEGIBLE]
----------------------------------------
Authorized Officer
LENDER:
U.S. BANK NATIONAL ASSOCIATION
By: /s/ [ILLEGIBLE]
----------------------------------------
Authorized Officer
<PAGE>
[LOGO]
PROMISSORY NOTE
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL LOAN DATE MATURITY LOAN NO. CALL COLLATERAL ACCOUNT OFFICER INITIALS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$5,000,000,00 10-11-1999 10-14-2000 140 5608780924 KMM36
- - ------------------------------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular
loan or item.
- - ------------------------------------------------------------------------------------------------------------------------------
BORROWER: PDS FINANCIAL CORPORATION; ET. AL. LENDER: U.S. BANK NATIONAL ASSOCIATION
6171 MCLEOD DRIVE COMMERCIAL SERVICES GROUP
LAS VEGAS, NV 89120 2300 W. SAHARA, SUITE 200
LAS VEGAS, NV 89102
==============================================================================================================================
</TABLE>
PRINCIPAL AMOUNT: $5,000,000.00 DATE OF NOTE: OCTOBER 11, 1999
PROMISE TO PAY. PDS FINANCIAL CORPORATION and PDS FINANCIAL NEVADA (referred
to in this Note individually and collectively as "Borrower") jointly and
severally promise to pay to U.S. BANK NATIONAL ASSOCIATION ("Lender"), or
order, in lawful money of the United States of America, the principal amount
of Five Million & 00/100 Dollars ($5,000,000.00) or so much as may be
outstanding, together with interest on the unpaid outstanding principal
balance of each advance. Interest shall be calculated from the date of each
advance until repayment of each advance.
PAYMENT. Borrower will pay this loan on demand, or if no demand is made, in
one payment of all outstanding principal plus all accrued unpaid interest on
October 14, 2000. In addition, Borrower will pay regular monthly payments of
accrued unpaid interest beginning October 15, 1999, and all subsequent
interest payments are due on the same day of each month after that. The
annual interest rate for this Note is computed on a 365/360 basis; that is,
by applying the ratio of the annual interest rate over a year of 360 days,
multiplied by the outstanding principal balance, multiplied by the actual
number of days the principal balance is outstanding. Borrower will pay Lender
at Lender's address shown above or at such other place as Lender may
designate in writing.
VARIABLE INTEREST RATE. The interest rate on this Note is subject to change
from time to time based on changes in an index which is the LENDER'S PRIME
RATE. THIS IS THE RATE OF INTEREST WHICH LENDER FROM TIME TO TIME ESTABLISHES
AS ITS PRIME RATE AND IS NOT, FOR EXAMPLE, THE LOWEST RATE OF INTEREST WHICH
LENDER COLLECTS FROM ANY BORROWER OR CLASS OF BORROWERS (the "Index"). THE
INTEREST RATE SHALL BE ADJUSTED WITHOUT NOTICE EFFECTIVE ON THE DAY LENDER'S
PRIME RATE CHANGES. Lender will tell Borrower the current index rate upon
Borrower's request. Borrower understands that Lender may make loans based on
other rates as well. The interest rate change will not occur more often than
each DAY. The interest rate to be applied to the unpaid principal balance of
this Note will be at a rate of 0.750 percentage points over the Index. NOTICE:
Under no circumstances will the interest rate on this Note be more than the
maximum rate allowed by applicable law.
PREPAYMENT. Borrower agrees that all loan fees and other prepaid finance
charges are earned fully as of the date of the loan and will not be subject
to refund upon early payment (whether voluntary or as a result of default),
except as otherwise required by law.
Except for the foregoing, Borrower may pay without penalty all or a portion
of the amount owed earlier than it is due. Early payments will not, unless
agreed to by Lender in writing, relieve Borrower of Borrower's obligation to
continue to make payments of accrued unpaid interest. Rather, they will
reduce the principal balance due.
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to comply with or to perform
when due any other term, obligation, covenant, or condition contained in this
Note or any agreement related to this Note, or in any other agreement or loan
Borrower has with Lender. (c) Borrower defaults 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 ability to repay this Note or
perform Borrower's obligations under this Note or any of the Related
Documents. (d) Any representation or statement made or furnished to Lender by
Borrower or on Borrower's behalf is false or misleading in any material
respect either now or at the time made or furnished. (e) Borrower becomes
insolvent, a receiver is appointed for any part of Borrower's property,
Borrower makes an assignment for the benefit of creditors, or any proceeding
is commenced either by Borrower or against Borrower under any bankruptcy or
insolvency laws. (f) Borrower is in default under any other note, security
agreement, lease agreement or lease schedule, loan agreement or other
agreement, whether now existing or hereafter made, between Borrower and U.S.
Bancorp or any direct or indirect subsidiary of U.S. Bancorp. (g) Any
creditor tries to take any of Borrower's property on or in which Lender has a
lien or security interest. This includes a garnishment of any of Borrower's
accounts with Lender. (h) Any guarantor dies or any of the other events
described in this default section occurs with respect to any guarantor of
this Note. (i) A material adverse change occurs in Borrower's financial
condition, or Lender believes the prospect of payment or performance of the
indebtedness is impaired. (j) Lender in good faith deems itself insecure.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid
principal balance on this Note and all accrued unpaid interest immediately
due, without notice, and then Borrower will pay that amount. Upon default,
including failure to pay upon final maturity, Lender, at its option, may
also, if permitted under applicable law, increase the variable interest rate
on this Note to 5.750 percentage points over the Index. The interest rate
will not exceed the maximum rate permitted by applicable law. Lender may hire
or pay someone else to help collect this Note if Borrower does not pay.
Borrower also will pay Lender 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 and
legal expenses for bankruptcy proceedings (including efforts to modify or
vacate any automatic stay or injunction), appeals, and any anticipated
post-judgment collection services. If not prohibited by applicable law,
Borrower also will pay any court costs, in addition to all other sums
provided by law. This Note 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 __[ILLEGIBLE]___). Subject to the
provisions on arbitration, this Note shall be governed by and construed in
accordance with the laws of the State of Nevada.
RIGHT OF SETOFF. Borrower grants to Lender a contractual 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 this Note
against any and all such accounts.
LINE OF CREDIT. This Note evidences a revolving line of credit. Advances under
this Note may be requested either orally or in writing by Borrower or by an
authorized person. Lender may, but need not, require that all oral requests be
confirmed in writing. All communications, instructions, or directions by
telephone or otherwise to Lender are to be directed to Lender's office shown
above. Borrower agrees to be liable for all sums either: (a) advanced in
accordance with the instructions of an authorized person or (b) credited to
any of Borrower's accounts with Lender. The unpaid principal balance owing on
this Note at any time may be evidenced by endorsements on this Note or by
Lender's internal records, including daily computer print-outs. Lender will
have no obligation to advance funds under this Note if: (a) Borrower or any
guarantor is in default under the terms of this Note or any agreement that
Borrower or any guarantor has with Lender, including any agreement made in
connection with the signing of this Note; (b) Borrower or any guarantor
ceases doing business or is insolvent; (c) any guarantor seeks, claims or
otherwise attempts to limit, modify or revoke such guarantor's guarantee of
this Note or any other loan with Lender; (d) Borrower has applied funds
provided pursuant to this Note for purposes other than those authorized by
Lender; or (e) Lender in good faith deems itself insecure under this Note or
any other agreement between Lender and Borrower.
ARBITRATION. Lender and Borrower agree that all disputes, claims and
controversies between them, whether individual, joint, or class in nature,
arising from this Note 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 securing this Note 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 securing this Note,
including any claim to rescind, reform, or otherwise modify any agreement
relating to the collateral securing this Note, 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 Note 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.
LATE CHARGE. If a payment is 15 days or more past due, Borrower will be
charged a late charge of 5% of the delinquent payment.
YEAR 2000. Year 2000. Borrower has reviewed and assessed its business
operations and computer systems and applications to address the "year 2000
problem" (that is, that computer applications and equipment used by
Borrower, directly or indirectly through third parties, may be unable to
properly perform date-sensitive functions before, during and after January 1,
2000). Borrower reasonably believes that the year 2000 problem will not
<PAGE>
10-11-1999 PROMISSORY NOTE PAGE 2
LOAN NO. (CONTINUED)
- - -------------------------------------------------------------------------------
result in a material adverse change in Borrower's business condition
(financial or otherwise), operations, properties or prospects or ability to
repay Lender. Borrower agrees that this representation will be true and
correct on and shall be deemed made by Borrower on each date Borrower
requests any advance under this Agreement or Note or delivers any information
to Lender. Borrower will promptly deliver to Lender such information
relating to this representation as Lender requests from time to time.
PRIOR NOTE. Promissory note from Borrower to Lender dated August 5, 1998 in
the principal amount of $4,000,000.00.
GENERAL PROVISIONS. This Note is payable on demand. The inclusion of specific
default provisions or rights of Lender shall not preclude Lender's right to
declare payment of this Note on its demand. Lender may delay or forgo
enforcing any of its rights or remedies under this Note without losing them.
Each 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 of 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)
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 agreements, as Lender in its discretion may determine;
(e) 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; and (f) determine how, when and what application of
payments and credits shall be made on any other indebtedness owing by such
other borrower. Borrower and any other person who signs, guarantees or
endorses this Note, to the extent allowed by law, waive presentment, demand
for payment, protest and notice of dishonor. Upon any change in the terms of
this Note, and unless otherwise expressly stated in writing, no party who
signs this Note, whether as maker, guarantor, accommodation maker or
endorser, shall be released from liability. All such parties agree that
Lender may renew or extend (repeatedly and for any length of time) this loan,
or release any party or guarantor or collateral; or impair, fail to realize
upon or perfect Lender's security interest in the collateral; and take any
other action deemed necessary by Lender without the consent of or notice to
anyone. All such parties also agree that Lender may modify this loan without
the consent of or notice to anyone other than the party with whom the
modification is made. The obligations under this Note are joint and several.
PRIOR TO SIGNING THIS NOTE, EACH BORROWER READ AND UNDERSTOOD ALL THE
PROVISIONS OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS.
EACH BORROWER AGREES TO THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A
COMPLETED COPY OF THE NOTE.
BORROWER:
PDS FINANCIAL CORPORATION
/s/ [ILLEGIBLE]
- - ----------------------------
Authorized Officer
PDS FINANCIAL NEVADA, Co-Borrower
By: /s/ [ILLEGIBLE]
----------------------------
Authorized Officer
LENDER:
U.S. BANK NATIONAL ASSOCIATION
By: /s/ [ILLEGIBLE]
----------------------------
Authorized Officer
<PAGE>
LOAN AND SECURITY AGREEMENT
(FULL RECOURSE)
This Loan and Security Agreement ("Agreement") is entered into as of
___________, 1999 between PDS Financial Corporation - Nevada a Nevada
corporation ("Borrower"), having its principal place of business at 6171 McLeod
Drive, Las Vegas, Nevada 89120, and Sun West Bank, a Nevada corporation
("Lender") having its principal place of business at 5830 W. Flamingo Road, Las
Vegas, NV 89103.
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 compacts and
other chattel paper that Lender may 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 6 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.
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.
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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 Lender 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 1.
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 D delivered by Borrower to Lender, with all attachments as specified
therein.
Contract Payment Letter: a letter in the form of Exhibit E.
Contract Proceeds: funds received by Borrower with respect to any
Facility or any Facility Equipment which is the subject of a Facility Contract.
Default Rate: an annual rate equal to 5.00% plus the Facility Rate, as
applicable.
Default Rate Period: a period of time commencing on the date that the
default first exists as identified by Lender in writing to Borrower, and ending
on the date that the 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 $250,000.00 nor be less than
$25,000.00 without the prior written approval of Lender, and (ii) meets all of
the requirements set forth in Section 5.9 and all subsections thereunder.
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, Borrower has reasonably determined, 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
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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 not subject to a software licensing agreement for its
re-marketing.
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.
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.
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) 100% of the Acquisition Cost for each item of Facility
Equipment, or
(ii) the present value of the remaining payments, including
the Estimated Residual, calculated using the implicit
rate of the Eligible Contract.
Facility Note: a full recourse promissory note in the form of Exhibit F
executed by Borrower in favor of Lender in conjunction with each Advance.
Facility Rate: with respect to each Advance interest shall accrue at a
floating rate equal to Lender's announced Base Rate plus 1.00% (Lender's Base
Rate as of the date of this Agreement is 7.75%); provided, however, that the
Facility Rate shall never be less than 8.50% per annum.
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.
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. Las Vegas 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.
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Guaranty: the continuing guaranty to be executed and delivered by PDS
Financial Corporation, substantially in the form of Exhibit J, 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.
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. "Simple Interest Method" as used herein is defined as
the annual interest rate for an Advance computed on a 365/360 basis; that is, by
applying the ratio of the annual interest rate over a year of 360 days,
multiplied by the outstanding principal balance, multiplied by the actual number
of days the principal balance is outstanding.
Notes: the Facility Note executed in conjunction with each Advance.
Permitted Liens: any of the following Liens: (i) the Lender Lien; (ii)
any Borrower Lien; (iii) any Liens expressly subordinate to (i) and/or (ii)
above; and (iv) 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.
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.
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.
Responsible Officer: any of the Chairman, President, Treasurer,
Secretary or Vice President of Borrower.
UCC: the Nevada Uniform Commercial Code, NRS 104.1101 et seq.
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. 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.
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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 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 at any one time shall not
exceed One Million Dollars ($1,000,000.00). Notwithstanding anything contained
herein to the contrary, the Facility, and Lender's obligation to make additional
or future Advances shall terminate on a date one (1) year from the date of this
Agreement, unless previously terminated in accordance with Paragraph 2.2 below.
2.2 Voluntary Termination of Facility. Upon not less than thirty (30) days'
prior written notice, either party may notify the other of its intention, for
any reason or no reason, 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). 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 accrued and
unpaid interest then due Lender calculated at the Facility Rate through the
last date of such immediately preceding month; SECOND, to principal due
Lender on the applicable Advances until paid in full;, and THIRD, to any
accrued and unpaid fees and expenses then owed by Borrower to Lender. . In
the event Borrower fails to perform the foregoing billing and collecting
duties in a manner satisfactory to Lender in its sole discretion, Lender may
terminate Borrower's authorization under this subparagraph.
2.5 Loan, Documentation and Attorney Fees. Upon the execution of this
Agreement, Borrower shall pay to Lender a Loan fee of $5,000.00, a
documentation fee of $250.00, and all fees and expenses incurred by Lender's
legal counsel in connection with this transaction. In addition, Borrower
shall pay to Lender a documentation, processing and UCC Filing/Release fee of
$135.00 for each Advance, which fee is due and payable at the time of funding
such Advance.
2.6 Prepayment.
2.6.1 Voluntary Prepayment. Voluntary prepayment by Borrower of any
Advances shall be permitted without penalty upon ten (10) days prior written
notice to Lender.
2.6.2 Mandatory Prepayment.
2.6.2.1 Termination of Contract. If an End-User voluntarily
terminates or fails to perform under a Facility Contract before its scheduled
expiration, Borrower shall prepay the associated Advance within ten (10)
Business Days of such termination or failure.
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2.6.2.2 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 sixty (60) days after
such loss or damage, Borrower shall prepay the associated Advance within ten
(10) Business Days thereafter.
2.6.2.3 Early Termination without End-User Buyout. If a
Facility Contract is voluntarily terminated by an 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.
2.6.2.4 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. If
Borrower and such End-User amend such Facility Contract to increase the payments
payable thereunder in consideration of such upgrade or addition, Borrower shall
prepay the obligations relating to the Facility Contract. Borrower may request
that Lender finance the amended Contract as a new Facility Contract , subject to
the terms outlined herein.
2.7 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.
2.8 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.
2.9 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 all laws including the interest rate laws of the State of Nevada shall
govern the relationship between them, but in the event of a final adjudication
to the contrary, Borrower shall be obligated to pay to Lender such interest as
then shall be permitted by the applicable laws of the State of Nevada. 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 Nevada
law.
2.10 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 Sun West Bank, ABA #122402010, and reference the applicable note number as
designated by Lender. 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,
whatever its condition, insured status, lien status, location, or
relationship to an Eligible Contract.
(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.
(c) Books and Records. All of the books and records of Borrower
pertaining to the Property described in subparagraphs (a) and (b) above.
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(d) Proceeds. All attachments, additions, accessions, upgrades,
accessories and replacements pertaining to the items described in subparagraphs
(a) through (c) 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 existing or in the future, and wherever located; provided, however, that
upon the payment and performance in full of all of Borrower's Obligations with
respect to a Facility Contract, 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.
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 G, 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 1;
(d) such additional instruments, documents, certificates,
consents, financing statements, waivers and opinions
as Lender reasonably may request.
4.1.3 Security Interests. All UCC financing statements, including
UCC-l(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 a legal
counsel satisfactory to both Borrower and Lender, an opinion dated the Closing
Date, addressed to Lender in the form of Exhibit H.
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.
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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.
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. 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 or (ii) with respect to
any Contact 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.
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 the owner of the Equipment, UCC-l(s) naming Borrower as debtor,
and Lender as secured party, to be filed with the Secretary of State's office
where the Equipment is located and with the Secretary of State in which
Borrower maintains its principal place of business.
(b) UCC-l(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-l(s) referred to in subsection 4.2.3.3(b), UCC- 2(s),
as required, naming Lender as assignee shall 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 flied and confirmation thereof received by Lender.
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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 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, 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 6171 McLeod Drive, Las Vegas,
Nevada 89120. 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 2. 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 3, 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:
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(i) Any material modifications of a Contract from the form
approved by Lender, as attached to this Agreement as part of Schedule 1, are
identified 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
"Original" shall be delivered to Lender at the time of Borrower's assignment of
the Contract;
(v) Except for any master leases, copies of which have been
provided to Lender, Borrower has provided Lender with an original of all
material agreements entered into in connection with the Contracts, and the
Equipment related to the 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); the Contracts contain no purchase option to or for 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;
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(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, all 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, specifically including Lender, 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.
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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 Covenants, Statements and Other Reports.
6.4.1 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 the
following:
(a) within 30 days after the end of each month: (i) a
delinquency report in the form attached hereto as Exhibit
I, (ii) a report setting forth leasing, remarketing
activities and insurance settlements with respect to
Facility Equipment, and (iii) a report identifying the
Facility Contracts which terminated during the previous
thirty (30) days. All reports shall be certified by a
Responsible Officer.
(b) Within 90 days after Borrower's fiscal year end, an audited
financial statement;
(c) Within 30 days of each quarter, Borrower's updated
financial statement.
6.4.2 Financial Covenants. Borrower shall maintain the same
measures of financial performance and condition as detailed for other lenders
with whom Borrower has a committed lending arrangement in an aggregate amount
in excess of $1,000,000 (the "Financial Performance and Conditions").
Borrower acknowledges and agrees that any default in the covenants set forth
in any agreement executed by Borrower in connection with a committed lending
arrangement with any other lender shall constitute a Borrower Event of
Default hereunder, entitling Lender to avail itself of any and all remedies
set forth in this Agreement, and any other documents or instruments executed
in connection herewith.
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 Contracts
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.
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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 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, 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 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 or (C) waive any
provisions thereof with respect to taxes, insurance or maintenance.
7.4 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.
7.5 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.
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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 Borrowers 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, i.e.
at the end of any calendar month, the total outstanding balances to Borrower of
all Facility Contracts that have outstanding payments 30 days or more past due,
divided by the total outstanding balances on all Facility Contracts.
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 could 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. (i) 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; and (ii) if at any
time during the term of a Facility Note the scheduled payment amount due from
the End-User under the respective Contract is less than the payment amount
due from the Borrower under the Facility Note.
(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
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<PAGE>
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 Guaranty.
In any such event in addition to Lender's other remedies under this
Agreement, Lender may , by notice to Borrower, Immediately cease making further
Advances.
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 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.
Provided the End User is not in default under a Facility Contract,
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
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<PAGE>
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.
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, Borrower, at any time (unless such Contract Event of Default shall
have been cured), at its option, by notice to 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 calendar 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.
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 Nevada 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. 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, unless a Borrower Event of Default
also exists with respect to said Facility Contract.
(ii) 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.
8.4 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 Lenders
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
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<PAGE>
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.
8.5 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.
8.6 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 attorneys' fees, and all other costs incurred by Lender in exercising
any rights accorded to Lender pursuant to the Loan Documents or by applicable
law;
(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 open
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:
To Lender: Sun West Bank
Attention: Carla Jewell, Vice President
5830 West Flamingo
P.O. Box 81710
Las Vegas, NV 89180-1710
FAX No.: (702) 949-2299
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To Borrower: PDS Financial Corporation - Nevada
Attention: Johan Finley, CEO and President
6171 McLeod Drive
Las Vegas, Nevada 89120
FAX No.: (702) 736-0700
with a copy to: Jones-Vargas
Attention: Mike Alonso, Esq.
201 W. Liberty Street
P.O. Box 281
Reno, Nevada 89504
FAX No.: (775) 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.
9.7 Indemnity. Borrower agrees to indemnity 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.
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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 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 NEVADA APPLICABLE TO CONTRACTS MADE
AND PERFORMED ENTIRELY WITHIN THE STATE OF NEVADA. 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 CLARK
AND THE STATE OF NEVADA 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 CLARK, STATE OF NEVADA 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.
19
<PAGE>
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.
SUN WEST BANK PDS FINANCIAL CORPORATION - NEVADA
By: By:
--------------------------- ---------------------------------
Its: Its:
--------------------------- ---------------------------------
20
<PAGE>
<TABLE>
EXHIBITS
<S> <C>
Exhibit A Assignment
Exhibit B Collateral Description
Exhibit C Closing Certificate
Exhibit D Contract Funding Request
Exhibit E Contract Payment Letter
Exhibit F Facility Note
Exhibit G Secretary's Certificate
Exhibit H Opinion of Counsel
Exhibit I Delinquency Report
Exhibit J Guaranty
<CAPTION>
SCHEDULES
<S> <C>
Schedule 1 Form of Contracts
Schedule 2 Financial Statements (Assignments greater than $100,000 or as requested by Lender)
Schedule 3 Litigation
</TABLE>
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<PAGE>
Schedule 1
Form of Contracts
1) Master Lease Agreement
2) Guaranty
3) Lease Schedule to Master Lease
4) Secretary's Certificate
5) Confidential Sales and Security Agreement
6) Exhibit A
7) Promissory Note
8) Security Agreement
22
<PAGE>
NEVADA STATE
BANK
$5,000,000
REVOLVING LINE AND
NOTE
<PAGE>
MASTER REVOLVING LINE OF CREDIT
PROMISSORY NOTE
("This Note")
Las Vegas, Nevada
LINE OF CREDIT: $5,000,000.00 April 22, 1999
FOR VALUE RECEIVED, the undersigned PDS FINANCIAL CORPORATION, a
Minnesota corporation, and PDS FINANCIAL CORPORATION-NEVADA, a Nevada
corporation (hereinafter collectively "Borrower"), hereby promises to pay to
the order of NEVADA STATE BANK (hereinafter "Lender"), the aggregate
principal amount of all outstanding notes made by Borrower in favor of Lender
evidencing advances made hereunder ("Advance Note"), not to exceed at any one
time outstanding the aggregate principal amount of FIVE MILLION AND NO/100THS
DOLLARS ($5,000,000.00), in lawful money of the United States with interest
accruing on each Advance Note at a fixed rate of interest equal to 300 basis
points over the 3-year LIBOR Interest Rate on the date of execution of the
Advance Note. The LIBOR Interest Rate is an index which is determined and
announced by Lender to determine the interest rate charged. It is not the
lowest rate charged by Lender. The index is related to the London Interbank
Offered Rate but does not equal the London Interbank Offered Rate. The LIBOR
Interest Rate is not intended to serve any purpose or have any meaning other
than to provide an index to determine the interest rate to be paid by
Borrower.
This Note shall mature one (1) year from the date first above written
(unless extended by Lender), at which time no further advances under the line
of credit will be allowed. Each Advance Note made hereunder shall mature in
accordance with its own terms.
The term of each Advance Note shall not exceed the lesser of the term
of the Eligible Contract(s) (as that term is defined in the Security
Agreement of even date) which is (are) funded under and Advance Note, or 42
months. Principal and interest shall be payable monthly under each Advance
Note in accordance with its own terms.
This Note shall be a revolving line credit under which Borrower may
repeatedly draw (by way of Advance Notes) and repay funds, so long as no
default has occurred hereunder or under the Security Agreement or other
agreement providing collateral for this indebtedness; provided that the
aggregate principal balances of all Advance Notes outstanding at any one time
shall not exceed FIVE MILLION AND NO/100THS DOLLARS ($5,000,000.00). If at
any time prior to the maturity of this Note, this Note shall have a zero
balance owing, this Note shall not be deemed satisfied or terminated but
shall remain in full force and effect for future draws unless terminated upon
other grounds.
This Note is executed and delivered pursuant to a SECURITY AGREEMENT of
even date herewith between Lender and Borrower (the "Security
Agreement"), and repayment of this Note shall be secured by the Collateral
described in the Security Agreement.
EXHIBIT "A"
<PAGE>
All references herein to certain defined terms shall refer to those
defined terms contained in the Security Agreement, which are incorporated into
this instrument by reference.
As additional security for this Note, Lender has a lien on, a continuing
security interest in, and a right of setoff at any time without notice,
against all property and deposit accounts under the control of Lender which
belong to Borrower or any other party to this Note.
In the event that (i) any amount due under this Advance Note is reduced
to judgment, (ii) Borrower is ten (10) days late in making any payment
provided in an Advance Note, or (iii) an Event of Default as defined in the
Security Agreement, occurs, Borrower shall be considered in default if any of
the above are not cured within ten (10) days after the date of written notice
sent by Lender to Borrower at the address set forth herein notifying Borrower
of the default, after which time the total of the unpaid balance of principal
and the accrued unpaid interest (past due interest being compounded) shall
then begin accruing interest at the rate stated above, plus three percent
(3.00%) per annum (the "Default Rate"), until such time as all past due
payments and accrued interest are paid. At that time, the interest rate will
revert to the rate stated above. Borrower acknowledges that the effect of
this Default Rate provision could operate to compound some of the interest
obligations due, and Borrower hereby expressly assents to such compounding
should it occur.
Should the indebtedness represented by this Note, or any part hereof, be
collected at law, in equity, or in any bankruptcy, receivership or other
court proceeding, or this Note be placed in the hands of any attorney for
collection after default, Borrower agrees to pay, in addition to the
principal and interest due hereon, all reasonable attorney fees, plus all
other costs and expenses of collection and enforcement, including any fees
incurred in connection with such proceedings or collection of this Note
and/or enforcement of the Lender's rights with respect to the administration,
supervision, preservation or protection of, or realization upon, and property
security payment hereof.
The failure of Lender to act or to exercise any right or remedy shall
not in any way affect or impair the obligation of Borrower to Lender, or
constitute a waiver by Lender of, or otherwise affect any of, Lender's rights
under this Note, under any endorsement or guaranty of this Note or under any
document or instrument evidencing any security for payment of this Note.
The invalidity or unenforceability of any one or more provisions of this
Note shall in no way affect the other provisions.
Borrower waives presentment, demand, protest and notice of nonpayment.
All titles used in this Note are intended solely for convenience and
reference; said titles shall not affect any terms, provisions, or meanings of
this Note.
The laws of the State of Nevada shall govern the validity, construction,
performance and effect of this Note.
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ARBITRATION DISCLOSURES:
1. ARBITRATION IS FINAL AND BINDING ON THE PARTIES AND SUBJECT TO ONLY
VERY LIMITED REVIEW BY A COURT.
2. IN ARBITRATION THE PARTIES ARE WAIVING THEIR RIGHT TO LITIGATE IN COURT,
INCLUDING THEIR RIGHT TO A JURY TRIAL.
3. DISCOVERY IN ARBITRATION IS MORE LIMITED THAN DISCOVERY IN COURT.
4. ARBITRATORS ARE NOT REQUIRED TO INCLUDE FACTUAL FINDINGS OR LEGAL
REASONING IN THEIR AWARDS. THE RIGHT TO APPEAL OR TO SEEK MODIFICATION
OF ARBITRATORS' RULINGS IS VERY LIMITED.
5. A PANEL OF ARBITRATORS MIGHT INCLUDE AN ARBITRATOR WHO IS OR WAS
AFFILIATED WITH THE BANKING INDUSTRY.
6. IF YOU HAVE QUESTIONS ABOUT ARBITRATION, CONSULT YOUR ATTORNEY OR THE
AMERICAN ARBITRATION ASSOCIATION.
a. Any claim or controversy ("Dispute") between or among the parties
and their assigns, including but not limited to Disputes arising out of
or relating to this agreement, this arbitration provision ("arbitration
clause"), or any related agreements or instruments relating hereto or
delivered in connection herewith ("Related Documents"), and including
but not limited to a Dispute based on or arising from an alleged tort,
shall at the request of any party be resolved by binding arbitration in
accordance with the applicable arbitration rules of the American
Arbitration Association (the "Administrator"). The provisions of this
arbitration clause shall survive any termination, amendment, or
expiration of this agreement or related Documents. The provisions of
this arbitration clause shall supersede any prior arbitration agreement
between or among the parties. If any provision of this arbitration
clause should be determined to be unenforceable, all other provisions of
this arbitration clause shall remain in full force and effect.
b. The arbitration proceedings shall be conducted in Las Vegas, Nevada,
at a place to be determined by the Administrator. The Administrator and
the arbitrator(s) shall have the authority to the extent practicable to
take any action to require the arbitration proceeding to be completed
and the arbitrator(s)' award issued within one hundred fifty (150) days
of the filing of the Dispute with the Administrator. The arbitrator(s)
shall have the authority to impose sanctions on any party that fails to
comply with time periods imposed by the Administrator or the
arbitrator(s), including the sanction of summarily dismissing any
Dispute or defense with prejudice. The arbitrator(s) shall have the
authority to resolve any Dispute regarding
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the terms of this agreement, this arbitration clause or Related Documents,
including any claim or controversy regarding the arbitrability of any
Dispute. All limitations periods applicable to any Dispute or defense,
whether by statute or agreement, shall apply to any arbitration
proceeding hereunder and the arbitrator(s) shall have the authority to
decide whether any Dispute or defense is barred by a limitations period
and, if so, to summarily enter an award dismissing any Dispute or
defense on that basis. The doctrines of compulsory counterclaim, res
judicata, and collateral estoppel shall apply to any arbitration
proceeding hereunder so that a party must state as a counterclaim in the
arbitration proceeding any claim or controversy which arises out of the
transaction or occurrence that is the subject matter of the Dispute. The
arbitrator(s) may in the arbitrator(s)' discretion and at the request of
any party: (1) consolidate in a single arbitration proceeding any other
claim or controversy involving another party that is substantially
related to the Dispute where that other party is bound by an arbitration
clause with the Lender, such as borrowers, guarantors, sureties, and
owners of collateral; (2) consolidate in a single arbitration proceeding
any other claim or controversy that is substantially similar to the
Dispute; and (3) administer multiple arbitration claims or controversies
as class actions in accordance with the provisions of Rule 23 of the
Nevada Rules of Civil Procedure or Rule 23 of the Federal Rules of Civil
Procedure.
c. The arbitrator(s) shall be selected in accordance with the rules of
the Administrator from panels maintained by the Administrator. A single
arbitrator shall have expertise in the subject matter of the Dispute.
Where three arbitrators conduct an arbitration proceeding, the Dispute
shall be decided by a majority vote of the three arbitrators, at least
one of whom must have expertise in the subject matter of the Dispute and
at least one of whom must be a practicing attorney. The arbitrator(s)
shall award to the prevailing party recovery of all costs and fees
(including attorneys' fees and costs, arbitration administration fees and
costs, and arbitrator(s)' fees). The arbitrator(s), either during the
pendency of the arbitration proceeding or as part of the arbitration
award, also may grant provisional or ancillary remedies, including but
not limited to an award of injunctive relief, foreclosure,
sequestration, attachment, replevin, garnishment, or the appointment of
a receiver.
d. Judgment upon an arbitration award may be entered in any court
having jurisdiction, subject to the following limitation: the
arbitration award is binding upon the parties only if the amount does
not exceed Four Million Dollars ($4,000,000.00); if the award exceeds
that limit, either party may demand the right to a court trial. Such a
demand must be filed with the Administrator within thirty (30) days
following the date of the arbitration award; if such a demand is not
made within that time period, the amount of the arbitration award shall
be binding. The computation of the total amount of an arbitration award
shall include amounts awarded for attorneys' fees and costs, arbitration
administration fees and costs, and arbitrator(s)' fees.
e. No provision of this arbitration clause, nor the exercise of any
rights hereunder,
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shall limit the right of any party to: (1) judicially or non-judicially
foreclose against any real or personal property collateral or other
security; (2) exercise self-help remedies, including but not limited to
repossession and setoff rights; or (3) obtain from a court having
jurisdiction there over any provisional or ancillary remedies,
including but not limited to injunctive relief, foreclosure,
sequestration, attachment, replevin, garnishment, or the appointment of
a receiver. Such rights can be exercised at any time, before or during
initiation of an arbitration proceeding, except to the extent such
action is contrary to the arbitration award. The exercise of such rights
shall not constitute a waiver of the right to submit any Dispute to
arbitration, and any claim or controversy related to the exercise of
such rights shall be a Dispute to be resolved under the provisions of
this arbitration clause. Any party may initiate arbitration with the
Administrator; however, if any party initiates litigation and another
party disputes any allegation in that litigation, the disputing party -
upon the request of the initiating party - must file a demand for
arbitration with the Administrator and pay the Administrator's filing
fee. The parties may serve by mail a notice of an initial motion for an
order of arbitration.
f. Notwithstanding the applicability of any other law to this
agreement, the arbitration clause, or Related Documents between or among
the parties, the Federal Arbitration Act, 9 U.S.C. Section 1 ET SEQ.,
shall apply to the construction and interpretation of this arbitration
clause.
If there is a lawsuit, Borrower agrees upon Lender's request to submit
to the jurisdiction of the courts of Clark County, State of Nevada (INITIAL
HERE /s/ S). Lender and Borrower hereby waive the right to any jury
trial in any action, proceeding, or counterclaim brought by either Lender or
Borrower against the other.
IN WITNESS WHEREOF, this Note has been executed effective this date and
place above written.
"Borrower"
PDS FINANCIAL CORPORATION, PDS FINANCIAL CORPORATION-NEVADA,
a Minnesota corporation a Nevada corporation
By: /s/ Steven M. Des Champs By: /s/ Steven M. Des Champs
------------------------------- ------------------------------
Its: Chief Financial Officer Its: Chief Financial Officer
------------------------------ -----------------------------
Borrowers' Address:
6171 McLeod Drive
Las Vegas, Nevada 89120
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SECURITY AGREEMENT
THIS SECURITY AGREEMENT is made and entered into this 22 day of April,
1999, by and between PDS FINANCIAL CORPORATION, a Minnesota corporation, and
PDS FINANCIAL CORPORATION-NEVADA, a Nevada corporation (collectively
"Grantor"), and NEVADA STATE BANK, a Nevada corporation ("Lender").
RECITALS
WHEREAS, Grantor has applied to Lender for a revolving line of credit
loan (the "Loan") in the principal amount of FIVE MILLION AND NO/100THS
DOLLARS ($5,000,000.00) as provided for in the Master Revolving Line of
Credit Promissory Note, a copy of which is attached hereto and incorporated
herein as Exhibit "A"; and
WHEREAS, Lender has determined to make the Loan upon the terms and
conditions set forth below;
NOW THEREFORE, in accordance with the above recitals and for other good
and valuable consideration, receipt of which is hereby acknowledged, Grantor
hereby grants to Lender a security interest in the Collateral (as described
below) to secure the Indebtedness (as defined below), and agrees that Lender
shall have the rights stated in this Agreement with respect to the
Collateral, in addition to all other rights which Lender may have by law.
1. DEFINITIONS. The following words shall have the following meanings when
used in this Agreement. Terms not otherwise defined in this Agreement shall
have the meaning attributed to such terms in the Nevada Uniform Commercial
Code. All references to dollar amounts shall mean amounts in lawful money of
the United States of America.
1.01 ACCEPTED ELIGIBLE CONTRACT. The words "Accepted Eligible
Contract" mean an Eligible Contract presented by Grantor to Lender,
which meets the Lender's review criteria (as required by Exhibit B), and
is approved and accepted by Lender for funding.
1.02 AGREEMENT. The word "Agreement" means this Security Agreement,
as may be modified in writing from time to time, evidencing, governing,
representing, or creating a Security Interest.
1.03 BORROWER. The word "Borrower" means, collectively, PDS FINANCIAL
CORPORATION, a Minnesota corporation and PDS FINANCIAL
CORPORATION-NEVADA, a Nevada corporation, and their successors, assigns,
and transferees.
1.04 COLLATERAL. The word "Collateral" means all the following
described property of Grantor and the proceeds therefrom whether now
owned or hereafter acquired, and wherever located:
<PAGE>
a. CHATTEL PAPER. "Chattel paper" means all writings which
evidence both a monetary obligation and a security interest in or
a lease of specific goods related to an Accepted Eligible
Contract. When a transaction is evidenced by both a security
agreement or a lease and by an instrument or a series of
instruments, the group of writings taken together constitutes
chattel paper.
b. CONTRACT RIGHTS. "Contract rights" means all of the Grantor's
rights to payment under an Accepted Eligible Contract, whether
not yet earned by performance, and not evidenced by an instrument
or chattel paper.
c. DEPOSIT ACCOUNTS. "Deposit account" means all of Grantor's
demand, time, savings, passbook or like account maintained with
the Lender, if any.
d. EQUIPMENT. "Equipment" means that equipment, or equipment
in which Grantor has rights, wherever located, including, without
limitation, gaming devices, tables, and all other machinery,
furniture, furnishings, leasehold improvements, fixtures, motor
vehicles, forklifts, stock, dyes and tools related solely to an
Accepted Eligible Contract.
e. FIXTURES. "Fixtures" means all of Grantor's good which have
been so annexed to land that it is regarded as part of the land
related solely to an Accepted Eligible Contract.
f. FURNITURE. "Furniture" means all of Grantor's property that
furnishes or is supplied to a room, office, place of business, or
public building or the like, to make it habitable, convenient or
agreeable related solely to an Accepted Eligible Contract.
g. GENERAL INTANGIBLES. "General Intangibles" means all general
intangibles of Grantor, including, but not limited to, all
copyrights, royalties, trademarks, trade names, service marks,
patent and proprietary marks, customer lists, goodwill,
blueprints, drawings, designs, trade secrets, plans, diagrams,
schematics, assembly and display materials relating thereto,
contract rights, income tax refunds, chooses in action, and any
other personal property other than goods, accounts, chattel
paper, documents, instruments, and money related solely to an
Accepted Eligible Contract.
h. GOODS. "Goods" means all of Grantor's tangible personal
property that is movable at the time the security interest
attaches or that is a fixture, whether now owned or hereafter
acquired, but does not include money, documents, instruments,
accounts, chattel paper, general intangibles, or minerals or the
like related solely to an Accepted Eligible Contract.
i. INSTRUMENT. "Instrument" means all of Grantor's negotiable
instruments or
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certified securities or any other writings which evidence a right
to payment of money and is not itself a security agreement or
lease and is of a type which is in the ordinary course of
business transferred by delivery with any necessary endorsement
or assignment related solely to an Accepted Eligible Contract.
j. PROCEEDS. The word "Proceeds" includes all the following,
whether now owned by Grantor or hereafter acquired, whether now
existing or hereafter arising, and wherever located related to an
Accepted Eligible Contract:
(1) All attachments, accessions, tools, parts, supplies,
increases and additions to and all replacements of and
substitutions for any property described in this section 1.04.
(2) All products and produce of any of the property described
in this section 1.04.
(3) All accounts, contract rights, general intangibles,
instruments, monies payments and all other rights, arising
out of a sale, lease or other disposition of any of the
property described in this section 1.04.
(4) All proceeds (including insurance proceeds) from the sale,
destruction, loss, or other disposition of any of the
property described in this section 1.04.
(5) All records and data relating to any of the property
described in this Collateral section, whether in the form
of a writing, photograph, microfilm, microfiche, or
electronic media, together with all of Grantor's right,
title and interest in and to all computer software required
to utilize, create, and process any such records or data on
electronic media.
1.05 ELIGIBLE CONTRACT. The words "Eligible Contract" shall mean a
contract evidencing debt or lease payment obligations by Grantor's
obligor in favor of Grantor and pledged as collateral which meets the
criteria described in Exhibit "B", attached hereto and incorporated
herein, and shall include any substitute, replacement or refinancing
contract or contracts thereof.
1.06 EVENT OF DEFAULT. The term "Event of Default" means and includes
any of the Events of Default set forth below in section 9 of this
Agreement entitled "Event of Default."
1.07 GRANTOR. The word "Grantor" collectively means PDS FINANCIAL
CORPORATION, a Minnesota corporation, and PDS FINANCIAL
CORPORATION-NEVADA, a Nevada corporation, their successors, assigns and
transferees.
1.08 INDEBTEDNESS. The word "Indebtedness" is used in its most
comprehensive sense and means and includes all indebtedness, liabilities
and obligations of Borrower to Lender,
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including, without limiting the generality of the foregoing, any
indebtedness, liability or obligation of Borrower to Lender under any
loan made to Borrower by Lender prior to the date hereof and any and all
extensions or renewals thereof in whole or in part; any indebtedness,
liability or obligation of Borrower by Lender prior to the date hereof
and any and all extensions or renewals thereof in whole or in part; any
indebtedness, liability or obligation of Borrower to Lender arising
hereunder or as a result hereof, whether evidenced by the Promissory
Note, or any other promissory note given by Borrower to Lender, or
otherwise, and any and all extensions or renewals thereof in whole or in
part; any indebtedness, liability or obligation of Borrower to Lender
under any later or future advances or loans made by Lender to Borrower,
and any and all extensions or renewals thereof in whole or in part; any
and all present and future indebtedness of Borrower to other creditors
which is purchased by Lender from such other creditors; and any and all
future or additional indebtedness, liabilities or obligations of
Borrower to Lender whatsoever and in any event, whether existing as of
the date hereof or hereafter arising, whether arising under a loan,
lease, credit card arrangement, line of credit, letter of credit or
other type of financing, whether direct, indirect, absolute or
contingent, voluntary or involuntary, liquidated or unliquidated,
determined or undetermined, as maker, endorser, guarantor, surety or
otherwise, and whether evidenced by, arising out of or relating to, a
promissory note, bill of exchange, check, draft, bond, letter of credit,
guaranty agreement, bankers's acceptance, foreign exchange contract,
commitment fee, service charge or otherwise; whether recovery of the
indebtedness may be or may become barred or unenforceable against
Borrower for any reason whatsoever; and whether the indebtedness arises
from transactions which may be voidable on account of infancy, insanity,
ultra vires, or otherwise.
1.09 LENDER. The word "Lender" means Nevada State Bank, a Nevada
corporation its successors and assigns.
1.10 PROMISSORY NOTE. The words "Promissory Note" mean the Master
Revolving Line of Credit Promissory Note of even date herewith in the
principal amount of $5,000,000.00 given by Grantor to Lender.
1.11 PERMITTED LIENS. The words "Permitted Liens" mean: (a) liens and
security interests securing indebtedness owed by Grantor 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.
1.12 RELATED DOCUMENTS. The words "Related Documents" mean and include
without limitation the Promissory Note, all other promissory notes,
including Advance Notes as defined under the Promissory Note, credit
agreements, loan agreements, guaranties, security agreements, mortgages,
deeds of trust, assignments, pledges and all other instruments and
documents, whether now or hereafter existing, executed in connection
with Grantor's Indebtedness to Lender.
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<PAGE>
1.13 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 liens, 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.
2. RIGHT OF SETOFF. Grantor hereby grants Lender a contractual possessory
Security Interest in and hereby assigns, conveys, delivers, pledges, and
transfers all of Grantor's right, title and interest in and to Grantor's
deposit accounts with Lender (whether checking, savings, or some other
account), including all accounts held jointly with someone else and all
accounts Grantor may open in the future, excluding however all IRA, Keogh,
and trust accounts. Grantor authorizes Lender, to the extent permitted by
applicable law, to charge or setoff all Indebtedness against any and all such
accounts.
3. OBLIGATIONS, REPRESENTATIONS, WARRANTIES AND WAIVERS OF GRANTOR. Grantor
covenants, represents, warrants and makes the following waivers to Lender as
follows:
3.01 ORGANIZATION. Grantors are both corporations authorized to do
business in the State of Nevada.
3.02 AUTHORIZATION. The execution, delivery, and performance of this
Agreement by Grantor is duly authorized by all necessary action by
Grantor and do not conflict with, result in a violation of, or
constitute a default under: (a) any provision of any organizational
document from Grantor or any other agreement or other instrument binding
upon Grantor; or (b) any law, governmental regulation, court decree, or
order applicable to Grantor.
3.03 PERFECTION OF SECURITY INTEREST. Grantor acknowledges that Lender
has a valid and perfected Security Interest in the Collateral, and
further agrees to execute such additional financing statement and
continuations of financing statements and to take whatever other actions
are required by Lender to perfect and continue perfection of Lender's
Security Interest in the Collateral. Upon request of Lender, Grantor
will deliver to Lender any and all of the documents evidencing or
constituting the Collateral, and Grantor will note Lender's interest
upon any and all titles for titled property and chattel paper if not
delivered to Lender for possession by Lender. Grantor hereby appoints
Lender as its irrevocable attorney-in-fact for the purpose of executing
any documents necessary to perfect or to continue the Security Interest
granted in this Agreement. Lender may at any time, and without further
authorization from Grantor, file a carbon, photographic or other
reproduction of any financing statement or of this Agreement for use as
a financing statement. Grantor will reimburse Lender for all expenses
for the perfection and the continuation of the perfection of Lender's
Security Interest in the Collateral. Grantor promptly will notify
Lender of any change in Grantor's name or address, and any change to the
assumed business
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<PAGE>
name or names of Grantor.
3.04 ENFORCEABILITY OF COLLATERAL. To the extent the Collateral
consists of contract rights, chattel paper, or general intangibles,
Grantor represents that the Collateral is enforceable in accordance with
its terms, is genuine, and complies with applicable laws concerning
form, content and manner of preparation and execution, and all persons
appearing to be obligated on the Collateral have authority and capacity
to contract and are in fact obligated as they appear to be on the
Collateral.
3.05 LOCATION OF GRANTOR'S OFFICES AND RECORDS. Grantor's place of
business, or Grantor's chief executive office, if Grantor has more than
one place of business, is located at 6171 McLeod Drive, Las Vegas,
Nevada 89120. Unless Grantor has designated otherwise in writing this
location is also the office or offices where Grantor keeps its records
concerning the Collateral.
3.06 REMOVAL OF COLLATERAL. Grantor shall keep the Collateral (or to
the extent the Collateral consists of intangible property such as
contract rights or general intangibles, the records concerning the
Collateral) at Grantor's address shown above, or at such other locations
as are disclosed to and acceptable to Lender. The acceptance of an
Eligible Contract shall constitute disclosure and acceptance by Lender.
Except in the ordinary course of its business, Grantor shall not remove
the Collateral or records from its existing locations without the prior
written consent of Lender.
3.07 TRANSACTIONS INVOLVING COLLATERAL. Grantor shall not sell, offer
to sell, or otherwise transfer or dispose of the Collateral. Grantor
shall not pledge, mortgage, encumber or otherwise permit the Collateral
to be subject to any lien, security interest, encumbrance, or charge,
other than the Security Interest provided for in this Agreement, without
the prior written consent of Lender. This includes security interests
even if junior in right to the Security Interests granted under this
Agreement. Unless waived by Lender, all proceeds from any disposition
of the Collateral (for whatever reason) shall be held in trust for
Lender and shall not be commingled with any other funds; provided,
however, this requirement shall not constitute consent by Lender to any
sale or other disposition. Upon receipt, Grantor shall immediately
deliver any such proceeds to Lender.
3.08 TITLE. Grantor represents and warrants to Lender that it holds
good and marketable title to the Collateral. No financing statement
covering any of the Collateral is on file in any public office other
than those which reflect the security interest created by this
Agreement. Grantor acknowledges that Lender has a first priority
perfected Security Interest in the Collateral, and Grantor shall defend
Lender's rights in the Collateral against the claims and demands of all
other persons or entities.
3.09 COLLATERAL SCHEDULES AND LOCATIONS. Insofar as the Collateral
consists of equipment, Grantor shall deliver to Lender at least
annually, or more often as Lender shall otherwise require, such lists,
descriptions, and designations of such Collateral as Lender may require
to identify the nature, extent, and location of such Collateral. Such
information shall be submitted for Grantor and each of its subsidiaries
or related companies.
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<PAGE>
3.10 INSPECTION OF RECORDS; MAINTENANCE AND INSPECTION OF COLLATERAL.
Grantor shall use its best efforts to ensure that all tangible Collateral
remains in good condition and repair. Grantor will not commit or permit
damage to or destruction of the Collateral or any part of the Collateral.
Lender and its designated representatives and agents shall have the
right at all reasonable times to examine, inspect, audit, Grantor's
books, accounts, records, and Collateral subject to the terms and
conditions of the documents between Grantor and its obligor, and, if
Lender deems it necessary, repair and maintain the Collateral wherever
located. Grantor shall immediately notify Lender of all cases involving
the return, rejection, repossession, loss or damage of or to any
Collateral; of any request for credit or adjustment or of any other
dispute arising with respect to the Collateral; and generally of all
happenings and events affecting the Collateral or the value or the
amount of the Collateral. Borrower shall reimburse Lender upon demand
for any sums expended by Lender to repair or maintain the Collateral.
All information received by Lender under this Section shall be held
confidential.
3.11 TAXES, ASSESSMENTS AND LIENS. Grantor shall pay when due all of
its local, state and federal taxes, and any other taxes, assessments and
liens upon the Collateral, its use or operation, upon this Agreement,
upon any promissory note or notes evidencing the Indebtedness, or upon
any of the other Related Documents. Grantor may withhold any such
payment or may elect to contest any lien if Grantor is in good faith
conducting an appropriate proceeding to contest the obligation to pay
and so long as Lender's interest in the Collateral is not jeopardized in
Lender's sole opinion. If the Collateral is subjected to a lien which is
not discharged within fifteen (15) days, Grantor shall deposit with
Lender cash, a sufficient corporate surety bond or other security
satisfactory to Lender in an amount adequate to provide for the
discharge of the lien plus any interests, costs, attorneys' fees or
other charges that could accrue. In any contest Grantor shall defend
itself and Lender and shall satisfy any final adverse judgment before
enforcement against the Collateral. Grantor shall name Lender as an
additional obligee under any surety bond furnished in the contest
proceedings.
3.12 COMPLIANCE WITH GOVERNMENTAL REQUIREMENTS. Grantor shall comply
promptly with all laws, ordinances and regulations of all governmental
authorities applicable to the production, disposition, or use of the
Collateral. Grantor may contest in good faith any such law, ordinance or
regulation and withhold compliance during any proceeding, including
appropriate appeals, so long as Lender's interest in the Collateral, in
Lender's opinion, is not jeopardized.
3.13 HAZARDOUS SUBSTANCES. Grantor represents and warrants that the
Collateral never has been, and never will be so long as this Agreement
remains a lien on the Collateral, used for the generation, manufacture,
storage, treatment, disposal, release or threatened release of any
hazardous waste or substance, as those terms are defined in the
Comprehensive Environmental Response, Compensation, and Liability Act of
1980, as amended, 42 U.S.C. Section 9601, et seq. ("CERCLA"), the
Superfund Amendments and Reauthorization Act of 1986, Publ. L. No.
99-499 ("SARA"), the Hazardous Materials Transportation Act, 49 U.S.C.
Section 1801, et seq., the Resource Conservation and Recovery Act, 49
U.S.C.
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Section 6901, et seq., the Underground Storage Tanks Act, 42 U.S.C.
Section 6991, et seq., or other applicable state or Federal laws, rules,
or regulations adopted pursuant to any of the foregoing. The
representations and warranties contained herein are based on Grantor's
due diligence in investigating the Collateral for hazardous waste.
Grantor hereby (a) releases and waives any future claims against Lender
for indemnity or contribution in the event Grantor 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 and losses resulting
from a breach of this provision of this Agreement. This obligation to
indemnify shall survive the payment of the Indebtedness and the
satisfaction of this Agreement.
3.14 MAINTENANCE OF CASUALTY INSURANCE. Grantor shall use its best
efforts to ensure that all risks insurance is procured and maintained,
including without limitation fire, theft and liability coverage together
with such other insurance as Lender may require with respect to the
Collateral, in form, amounts, coverages and basis reasonably acceptable
to Lender and issued by a company or companies reasonably acceptable to
Lender. Grantor will use its best efforts to deliver to Lender the
policies or certificates of insurance in form satisfactory to Lender,
including stipulations that coverages will not be canceled or diminished
without at least ten (10) days' prior written notice to Lender. In
connection with all policies covering the Collateral and other assets in
which Lender holds or is offered a security interest for the
Indebtedness, Grantor will provide Lender with such loss payable, or
additional insured status, or other endorsements as Lender may require.
If Grantor at any time fails to obtain or maintain any insurance as
required under this Agreement, Lender may (but shall not be obligated
to) obtain such insurance as Lender deems appropriate, including if it
so chooses "single interest insurance," which will cover only Lender's
interest in the Collateral. Grantor shall pay Lender for the costs of
such insurance as provided in section 5 of this Agreement.
3.15 APPLICATION OF INSURANCE PROCEEDS. Grantor shall promptly notify
Lender of any loss or damage to the Collateral. Lender may make proof of
loss if Grantor fails to do so within fifteen (15) days of the casualty.
All proceeds of any insurance on the Collateral, including accrued
proceeds thereon, shall be held by Lender as part of the Collateral. If
Lender consents to repair or replacement of the damaged or destroyed
Collateral, Lender shall, upon satisfactory proof of expenditure, pay or
reimburse Grantor from the proceeds for the reasonable cost of repair or
restoration. If Lender does not consent to repair or replacement of the
Collateral, Lender shall retain a sufficient amount of the proceeds to
pay all of the Indebtedness, and shall pay the balance to Grantor. Any
proceeds which have not been disbursed within six (6) months after their
receipt and which Grantor has not committed to the repair or restoration
of the Collateral shall be used to prepay the Indebtedness.
3.16 JUDGMENT LIENS. No judgment liens have been filed against Grantor.
3.17 TAX LIENS. No tax liens have been filed against Grantor.
3.18 INSOLVENCY. After giving effect to the execution and delivery of
this Agreement and/or any Related Documents, Grantor will not be
"insolvent" as such term is defined in
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the Bankruptcy Code, 11 U.S.C. 101 et seq., any successor provision, or
any state or local law.
Grantor will not be left with unreasonably small capital and Grantor
will not be unable to pay its debts generally as such debts become due.
3.19 CHANGE OF PRINCIPAL PLACE OF BUSINESS, NAME, IDENTITY OR STRUCTURE.
Grantor will not move its executive office or change its name, identity
or its structure without first notifying Lender in writing at least
thirty (30) days prior thereto. Grantor will, if requested to do so by
Lender, execute any and all documents to make this Agreement and any
and all Related Documents binding upon Grantor when operating under the
new name, identity or structure.
3.20 FINANCIAL INFORMATION. Grantor shall provide Lender with such tax
returns, financial statements, and financial reports as may be
reasonably requested by Lender. Such financial reports shall include,
but not necessarily be limited to the annual 10K, quarterly 10Q's,
monthly borrowing base certificates and supporting schedules, and
evidence of insurance by the obligor's or the lessees on the underlying
equipment under the Eligible Contract.
3.21 FINANCIAL PRIVACY. Grantor waives any privacy rights he may have
to Lender's files on Grantor. Grantor authorizes Lender to disclose any
documents contained in its files on Grantor at Lender's sole discretion.
All information received by Lender under this Section shall be held
confidential, unless Lender is compelled by law to disclose any of the
information from Lender's files on Grantor.
3.22 USE OF PROCEEDS. Grantor covenants and agrees to use the proceeds
of each advance under the Loan, as evidenced by a separate Advance Note,
solely for financing contracts with certain casino operators for the
purchase or lease of Collateral as defined herein.
3.23 PAYMENT OF TAXES; CONDUCT OF BUSINESS. Grantor shall pay all
taxes when due and conduct and maintain business in accordance with all
applicable federal and state laws and regulations, including all
licenses and filing of reports required under the Nevada Gaming
Commission.
3.24 SENIOR DEBT. The nature of the Loan shall be considered "senior
debt", which is defined to mean a secured borrowing from a financial
institution and shall be considered pari passu with other senior debt.
3.25 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 securing
repayment of Borrower's Loan and Promissory 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.
3.26 FINANCIAL COVENANTS. The following financial covenants shall
apply to Grantor
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during the term of the Loan:
3.26.1 MINIMUM TANGIBLE NET WORTH (TOTAL STOCKHOLDER'S EQUITY LESS
INTANGIBLE ASSETS PER GAAP): $8,000,000.00 as of December 31,
1999, and thereafter.
3.26.2 FIXED CHARGES COVERAGE RATIO: 2.00 as of December 31, 1999,
and thereafter. Calculated Earnings Before Interest, Taxes,
Depreciation and Amortization divided by Fixed Charges.
(Fixed Charges to include interest expense; subordinated debt
principal payments and taxes paid).
3.26.3 LEVERAGE RATIO NOT TO EXCEED 7:1. LEVERAGE RATIO IS DEFINED
AS: Total Debt (Total Liabilities less subordinated debt;
non-recourse debt; deferred funds) Divided By Tangible Net
Worth (Total Stockholders Equity less Intangible Assets per
GAAP) as of December 31, 1999 and thereafter.
3.27 YEAR 2000 COMPLIANCE. "Year 2000 compliant" means, with regard to
any entity, that all material software utilized by such entity is able
to fully function without causing any error to such entity's
date-sensitive data. "Providers" means the key suppliers, vendors, and
customers of Grantor whose business failure would, with reasonable
probability, result in a material adverse change in the financial
condition or prospects of Grantor.
Grantor has or will soon have (i) undertaken a detailed assessment
of all areas within its business and operations that could be adversely
affected by the failure of Grantor to be Year 2000 compliant, (ii)
developed and implemented a detailed plan for becoming Year 2000
compliant on a timely basis, and (iii) made written inquiry of each of
its Providers as to whether the Providers will be Year 2000 compliant
in all material respects. Grantor reasonably anticipates that it and
the Providers will be Year 2000 compliant on a timely basis. Grantor
will promptly advise Lender in writing upon the occurrence of any of
the following: (i) Grantor determines or Grantor is advised by its
accountants, financial adviser, consultants, or auditors or any Provider
that it or any Provider will not be Year 2000 compliant on a timely
basis or (ii) Grantor or any Provider experiences data or data processing
problems due to failure to be Year 2000 compliant.
3.28 GRANTOR'S UNDERSTANDING WITH RESPECT TO OBLIGATIONS,
REPRESENTATIONS, WARRANTIES AND WAIVERS. Grantor hereby acknowledges
that it made the above obligations, representations, warranties and
waivers to Lender in order to induce Lender to loan money to Borrower.
Grantor further acknowledges that Lender has relied upon those
obligations, representations, warranties and waivers and acknowledges
that Lender would not have loaned any sum of money to Borrower in the
absence of those obligations, representations, warranties and waivers.
4. LOAN ADVANCES. Loan Advances under the Loan shall be made in the
following manner:
4.01 ADVANCE NOTES. Each Loan Advance shall be evidenced by a separate
non-revolving
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note ("Advance Note") drawn under the Master Revolving Promissory Note.
The principal amount of each Advance Note shall be determined by taking
ninety percent (90%) of the value of the equipment securing the Eligible
Contracts. There shall be a minimum of $250,000.00 for each Advance
Note. No more than five (5) Eligible Contracts with a minimum balance of
$50,000.00 each shall be aggregated under any one (1) Advance Note. No
more than ten percent (10%) of the collateral securing the Eligible
Contracts which are aggregated for funding under one (1) Advance Note,
shall consist of non-gaming devices at the time of funding. The term of
each Advance Note shall not exceed the terms of the Eligible Contracts
being funded under the Advance Note, or 42 months, which ever is less.
Payments under each Advance Note shall be made by monthly principal and
interest payments, fully amortized over the term of the Advance Note,
based upon a fixed interest rate equal to the 3-year LIBOR rate at the
time of execution of the Advance Note, plus 300 basis points.
4.02 CESSATION OF ADVANCES. If Lender has made any commitment to make
any Loan to Grantor, 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) Grantor is in default under the terms of
this Agreement or any of the Related Documents or any other agreement
that Grantor has with Lender; (b) Grantor becomes insolvent, files a
petition in bankruptcy or similar proceedings, or is adjudged a
bankrupt; or (c) there occurs a material adverse change in Grantor's
financial condition, or in the value of any Collateral securing the Loan.
5. BORROWING AND REPAYMENT. Grantor may, from time to time during the term
of the Promissory Note, borrow or partially or wholly repay its outstanding
borrowing in the amount of FIVE MILLION AND NO/100THS DOLLARS
($5,000,000.00), or integral multiples thereof, and re-borrow, subject to all
of the limitations, terms and conditions contained herein, provided that the
total outstanding borrowing hereunder at any one time, as represented by the
aggregate principal amount of all Advance Notes outstanding, shall at no time
exceed FIVE MILLION AND NO/100THS DOLLARS ($5,000,000.00).
6. NEGATIVE COVENANTS. Grantor covenants and agrees with Lender that while
this Agreement is in effect, Grantor shall not, without the prior written
consent of Lender:
(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
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because of their ownership of shares of stock of Borrower; (d) purchase
or retire any of Borrower's outstanding shares or alter or amend
Borrower's capital structure; (e) encumber any of the Collateral under
the Loan, except for Lender's encumbrance; or (f) allow any Event of
Default to continue past any cure period provided for herein.
7. GRANTOR'S RIGHT TO POSSESSION. Until default, Grantor may have possession
of the tangible personal property and beneficial use of all the Collateral
and may use it in any lawful manner not inconsistent with this Agreement or
the Related Documents, provided that Grantor's right to possession and
beneficial use shall not apply to any Collateral where possession of the
Collateral by Lender is required by law to perfect Lender's security interest
in such Collateral. If Lender at any time has possession of any Collateral,
whether before or after an Event of Default, Lender shall be deemed to have
exercised reasonable care in the custody and preservation of the Collateral
if Lender takes such action for that purpose as Grantor shall request or as
Lender, in Lender's sole discretion, shall deem appropriate under the
circumstances, but failure to honor any request by Grantor shall not of
itself be deemed to be a failure to exercise reasonable care. Grantor shall
hold Lender harmless for any depreciation in the Collateral caused by
fluctuations in the market for that Collateral. Lender shall not be required
to take any steps necessary to preserve any rights in the Collateral against
prior parties, nor to protect, preserve or maintain any Security Interest
given to secure the Collateral.
8. EXPENDITURES BY LENDER. If not discharged or paid when due, Lender may
but shall not be obligated to) discharge or pay any amounts required to be
discharged or paid by Grantor under this Agreement, including without
limitation, all insurance premiums, taxes, liens, security interests,
encumbrances, and other claims, at any time levied or placed on the
Collateral. Lender also may (but shall not be obligated to) pay all costs for
insuring, maintaining and preserving the Collateral. All such expenditures
incurred or paid by Lender for such purposes will then bear interest at the
highest rate charged under the Related Documents evidencing the Indebtedness
from the date incurred or paid by Lender to the date of repayment by Grantor.
All such expenses shall become a part of the Indebtedness and, at Lender's
option, will:
a. be payable on demand; or
b. be added to the balance of the Indebtedness and be payable with any
installment payments due under the Indebtedness to become due during the
term of any applicable insurance policy; or
c. be treated as a balloon payment which will be due and payable at the
maturity of the applicable Related Document for the Indebtedness.
This Agreement also will secure payment of these amounts. Such right
shall be in addition to all other rights and remedies to which Lender may be
entitled upon the occurrence of an Event of Default.
9. EVENT OF DEFAULT. Occurrence of any of the following events shall be an
"Event of Default" under this Agreement:
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9.01 DEFAULT ON INDEBTEDNESS. Failure of Grantor to make any payment
when due on the Indebtedness.
9.02 OTHER DEFAULTS. Failure of Grantor to comply with or to perform
any term, obligation, covenant or condition contained in this Agreement
or in any of the Related Documents.
9.03 FALSE STATEMENTS. Any warranty, representation or statement made
or furnished to Lender by or on behalf of Grantor under this Agreement
is false or misleading in any material respect, either now or at the
time made or furnished.
9.04. DEFECTIVE COLLATERALIZATION. This Agreement or any of the
Related Documents ceases to be in full force and effect (including
failure of any collateral documents to create a valid and perfected
Security Interest or lien) at any time and for any reason.
9.05. INSOLVENCY. The dissolution or termination of Grantor's
existence as a going business, the insolvency of Grantor, the
appointment of a receiver for any part of Grantor's property, any
assignment for the benefit of creditors of Grantor, or the commencement
of any case or proceeding under any bankruptcy or insolvency laws by or
against Grantor.
9.06. CREDITOR PROCEEDINGS. Commencement of foreclosure, whether by
judicial proceeding, self-help repossession or any other method, by any
creditor of Grantor against the Collateral or any other collateral
securing the Indebtedness. This includes a garnishment of any of
Grantor's deposit accounts with Lender. However, except for garnishment
of accounts, this Event of Default shall not apply if there is a good
faith dispute by Grantor as to the validity or reasonableness of the
claim which is the basis of the creditor proceeding and if Grantor
gives Lender written notice of the creditor proceeding and deposits with
Lender monies or a security bond for the creditor proceeding, in an
amount determined by Lender, in its sole discretion, as being an
adequate reserve or bond for the dispute.
9.07. LOSS, REVOCATION OR SUSPENSION OF LICENSE. The loss, lapse,
revocation, condition, suspension or any other adverse or negative
action taken against Grantor or against any gaming, liquor, business or
other license issued by any governmental body or entity to Grantor.
9.08. ADVERSE CHANGE. A material adverse change occurs in Borrower's
financial condition, or Lender reasonably believes the prospect of
payment or performance of the indebtedness is impaired.
9.09. TITLE TO COLLATERAL. The acquisition at any time of title to
the whole, or any part of, the Collateral which is Security for the
Promissory Note, by any person, partnership, limited liability company,
or corporation other than Borrower.
10. RIGHTS AND REMEDIES ON DEFAULT. If an Event of Default occurs under
this Agreement, at any time thereafter, Lender shall have all the rights of a
secured party under the
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Nevada Uniform Commercial Code or any successor law. In addition and without
limitation, Lender may exercise any one or more of the following rights and
remedies:
10.01. ACCELERATE INDEBTEDNESS. Lender may declare the entire
Indebtedness immediately due and payable, without notice.
10.02. ASSEMBLE COLLATERAL. Lender may require Grantor to deliver to
Lender all or any portion of the Collateral and any and all certificates
of title and other documents relating to the Collateral. Lender may
require Grantor to assemble the Collateral and make it available to
Lender at a place to be designated by Lender. Lender also shall have
full power to enter upon the property of Grantor to take possession of
and remove the Collateral. If the collateral contains other goods not
covered by this Agreement at the time of repossession, Grantor agrees
Lender may take such other goods, provided that Lender makes reasonable
efforts to return them to Grantor after repossession.
10.03. SELL THE COLLATERAL. Lender shall have full power to sell,
lease, transfer, or otherwise deal with the Collateral or proceeds
thereof in its own name or that of Grantor. Lender may sell the
Collateral at public auction or private sale. Unless the Collateral
threatens to decline speedily in value or is of a type customarily sold
on a recognized market, Lender will give Grantor reasonable notice of
the time after which any private sale or any other intended disposition
of the Collateral is to be made. The requirements of reasonable notice
shall be met if such notice is given at least ten (10) days before the
time of the sale of disposition. All expenses relating to the
disposition of the Collateral, including without limitation the expenses
of retaking, holding, insuring, preparing for sale and selling the
Collateral, shall become a part of the Indebtedness secured by this
Agreement and shall be payable on demand, with interest at the agreed
upon rate in the applicable Related Document from date of expenditures
until repaid.
10.04. APPOINT RECEIVER. To the extent permitted by applicable law,
Lender shall have the following rights and remedies regarding the
appointment of a receiver: (a) Lender may have a receiver appointed as a
matter of right; (b) the receiver may be an employee of Lender and may
serve without bond; (c) all fees of the receiver and his or her attorney
shall become part of the Indebtedness secured by this Agreement.
10.05. COLLECT REVENUES, APPLY ACCOUNTS. Lender, either itself or
through a receiver, may collect the payments, rents, income, and
revenues from the Collateral. Lender may at any time in its discretion
transfer any Collateral into its own name or that of its nominee and
receive the payments, rents, income and revenues therefrom and hold the
same as security for the Indebtedness or apply it to payment of the
Indebtedness in such order of preference as Lender may determine.
Insofar as the Collateral consists of accounts, general intangibles,
contract rights, insurance policies, instruments, chattel paper, chooses
in action, or similar property, Lender may demand, collect, receipt for,
settle, compromise, adjust, sue for, foreclose, or realize on the
Collateral as Lender may determine. For these purposes, Lender may, on
behalf of and in the name of Grantor, receive, open and dispose of mail
addressed to Grantor and endorse notes, checks, drafts, money orders,
documents of title, instruments
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and items pertaining to payment, shipment, or storage of any Collateral.
To facilitate collection, Lender may notify account debtors and
obligors on any Collateral to make payments directly to Lender.
10.06 OBTAIN DEFICIENCY. If Lender chooses to sell any or all of the
Collateral, Lender may obtain a judgment against Grantor for any
deficiency remaining on the Indebtedness due to Lender after application
of all amounts received from the exercise of the rights provided in this
Agreement. Grantor shall be liable for a deficiency even if the
transaction described in this subsection is a sale of accounts or
chattel paper.
10.07. OTHER RIGHTS AND REMEDIES. Lender shall have all the rights and
remedies of a secured creditor under the provisions of the Nevada
Uniform Commercial Code and any successor law, as they may be amended
from time to time. In addition, Lender shall have and may exercise any
or all other rights and remedies it may have available at law, in equity,
or otherwise.
10.08. CUMULATIVE REMEDIES. All of Lender's rights and remedies,
whether evidenced by this Agreement or the Related Documents or by any
other writing, 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 Grantor under this Agreement,
after Grantor's failure to perform, shall not affect Lender's right to
declare a default and to exercise its remedies.
11. MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a
part of this Agreement:
11.01. 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.
11.02. APPLICABLE LAW; VENUE; JURY WAIVER. This Agreement has been
delivered to Lender and accepted by Lender in the State of Nevada.
Subject to the provision on arbitration, this Agreement shall be
governed by and construed in accordance with the laws of the State of
Nevada. If there is a lawsuit, Grantor agrees upon Lender's request to
submit to the jurisdiction of the courts of Clark County, State of
Nevada (INITIAL HERE_____). Grantor and Lender hereby waive the right
to any jury trial in any action, proceeding or counterclaim brought by
either Lender or Grantor against the other.
11.03 ARBITRATION. Arbitration Disclosures:
(1) ARBITRATION IS FINAL AND BINDING ON THE PARTIES AND SUBJECT
TO ONLY VERY LIMITED REVIEW BY A COURT.
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(2) IN ARBITRATION THE PARTIES ARE WAIVING THEIR RIGHT TO LITIGATE IN
COURT, INCLUDING THEIR RIGHT TO A JURY TRIAL.
(3) DISCOVERY IN ARBITRATION IS MORE LIMITED THAN DISCOVERY IN COURT.
(4) ARBITRATORS ARE NOT REQUIRED TO INCLUDE FACTUAL FINDINGS OR LEGAL
REASONING IN THEIR AWARDS. THE RIGHT TO APPEAL OR TO SEEK
MODIFICATION OF ARBITRATORS' RULINGS IS VERY LIMITED.
(5) A PANEL OF ARBITRATORS MIGHT INCLUDE AN ARBITRATOR WHO IS OR WAS
AFFILIATED WITH THE BANKING INDUSTRY.
(6) IF YOU HAVE QUESTIONS ABOUT ARBITRATION, CONSULT YOUR ATTORNEY OR
THE AMERICAN ARBITRATION ASSOCIATION.
a. Any claim or controversy ("Dispute") between or among the parties and
their assigns, including but not limited to Disputes arising out of or
relating to this agreement, this arbitration provision ("arbitration
clause"), or any related agreements or instruments relating hereto or
delivered in connection herewith ("Related Documents"), and including but
not limited to a Dispute based on or arising from an alleged tort, shall
at the request of any party be resolved by binding arbitration in
accordance with the applicable arbitration rules of the American
Arbitration Association (the "Administrator"). The provisions of this
arbitration clause shall survive any termination, amendment, or
expiration of this agreement or related Documents. The provisions of
this arbitration clause shall supersede any prior arbitration agreement
between or among the parties. If any provision of this arbitration
clause should be determined to be unenforceable, all other provisions of
this arbitration clause shall remain in full force and effect.
b. The arbitration proceedings shall be conducted in Las Vegas, Nevada,
at a place to be determined by the Administrator. The Administrator and
the arbitrator(s) shall have the authority to the extent practicable to
take any action to require the arbitration proceeding to be completed
and the arbitrator(s)' award issued within one hundred fifty (150) days
of the filing of the Dispute with the Administrator. The arbitrator(s)
shall have the authority to impose sanctions on any party that fails to
comply with time periods imposed by the Administrator or the
arbitrator(s), including the sanction of summarily dismissing any
Dispute or defense with prejudice. The arbitrator(s) shall have the
authority to resolve any Dispute regarding the terms of this agreement,
this arbitration clause or Related Documents, including any claim or
controversy regarding the arbitrability of any Dispute. All limitations
periods applicable to any Dispute or defense, whether by statute or
agreement, shall apply to any arbitration proceeding hereunder and the
arbitrator(s) shall have the
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authority to decide whether any Dispute or defense is barred by a
limitations period and, if so, to summarily enter an award dismissing
any Dispute or defense on that basis. The doctrines of compulsory
counterclaim, res judicata, and collateral estoppel shall apply to any
arbitration proceeding hereunder so that a party must state as a
counterclaim in the arbitration proceeding any claim or controversy
which arises out of the transaction or occurrence that is the subject
matter of the Dispute. The arbitrator(s) may in the arbitrator(s)'
discretion and at the request of any party: (1) consolidate in a single
arbitration proceeding any other claim or controversy involving another
party that is substantially related to the Dispute where that other
party is bound by an arbitration clause with the Lender, such as
borrowers, guarantors, sureties, and owners of collateral; (2)
consolidate in a single arbitration proceeding any other claim or
controversy that is substantially similar to the Dispute; and (3)
administer multiple arbitration claims or controversies as class actions
in accordance with the provisions of Rule 23 of the Nevada Rules of
Civil Procedure or Rule 23 of the Federal Rules of Civil Procedure.
c. The arbitrator(s) shall be selected in accordance with the rules of
the Administrator from panels maintained by the Administrator. A single
arbitrator shall have expertise in the subject matter of the Dispute.
Where three arbitrators conduct an arbitration proceeding, the Dispute
shall be decided by a majority vote of the three arbitrators, at least
one of whom must have expertise in the subject matter of the Dispute and
at least one of whom must be a practicing attorney. The arbitrator(s)
shall award to the prevailing party recovery of all costs and fees
(including attorneys' fees and costs, arbitration administration fees
and costs, and arbitrator(s)' fees). The arbitrator(s), either during the
pendency of the arbitration proceeding or as part of the arbitration
award, also may grant provisional or ancillary remedies, including but
not limited to an award of injunctive relief, foreclosure,
sequestration, attachment, replevin, garnishment, or the appointment of
a receiver.
d. Judgment upon an arbitration award may be entered in any court
having jurisdiction, subject to the following limitation: the
arbitration award is binding upon the parties only if the amount does
not exceed Four Million Dollars ($4,000,000.00); if the award exceeds
that limit, either party may demand the right to a court trial. Such a
demand must be filed with the Administrator within thirty (30) days
following the date of the arbitration award; if such a demand is not
made within that time period, the amount of the arbitration award shall
be binding. The computation of the total amount of an arbitration award
shall include amounts awarded for attorneys' fees and costs, arbitration
administration fees and costs, and arbitrator(s)' fees.
e. No provision of this arbitration clause, nor the exercise of any
rights hereunder, shall limit the right of any party to: (1) judicially
or non-judicially foreclose against any real or personal property
collateral or other security; (2) exercise self-help remedies,
including but not limited to repossession and setoff rights; or (3)
obtain from a court having jurisdiction thereover any provisional or
ancillary remedies,
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including but not limited to injunctive relief, foreclosure,
sequestration, attachment, replevin, garnishment, or the appointment of
a receiver. Such rights can be exercised at any time, before or during
initiation of an arbitration proceeding, except to the extent such
action is contrary to the arbitration award. The exercise of such rights
shall not constitute a waiver of the right to submit any Dispute to
arbitration, and any claim or controversy related to the exercise of
such rights shall be a Dispute to be resolved under the provisions of
this arbitration clause. Any party may initiate arbitration with the
Administrator; however, if any party initiates litigation and another
party disputes any allegation in that litigation, the disputing party -
upon the request of the initiating party - must file a demand for
arbitration with the Administrator and pay the Administrator's filing
fee. The parties may serve by mail a notice of an initial motion for an
order of arbitration.
f. Notwithstanding the applicability of any other law to this agreement,
the arbitration clause, or Related Documents between or among the
parties, the Federal Arbitration Act, 9 U.S.C. Section 1 ET SEQ.,
shall apply to the construction and interpretation of this arbitration
clause.
11.04 ATTORNEYS' FEES; EXPENSES. Grantor agrees to pay upon demand all of
Lender's costs and expenses, including attorneys' fees and legal costs,
accountants' fees, appraisers' fees and other professional fees and costs
incurred in connection with the enforcement of this Agreement. Lender may
pay someone else to help enforce this Agreement and Grantor shall pay the
costs and expenses of such enforcement. Costs and expenses include Lender's
attorneys' fees and legal expenses whether or not there is a lawsuit,
including attorneys' fees and legal expenses for bankruptcy proceedings,
appeals, any anticipated post-judgment collection services, and any travel
expenses and lodging expenses incurred by Lender and any professional or other
agent it may employ. Grantor also shall pay all court costs and such
additional fees as may be directed by the court.
11.05 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.
11.06 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which when fully executed shall be an original, and all
of said counterparts taken together shall be deemed to constitute one and
the same agreement. For the purpose of this section only, a telefax copy or a
facsimile copy of a counterpart is an original counterpart.
11.07 NOTICES. All notices required to be given under this Agreement shall
be given in writing and shall be effective when actually delivered or when
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 below.
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 to the other parties, specifying that the purpose of the notice is
to change the party's address.
Grantor: PDS Financial Corporation and PDS Financial Corporation-Nevada
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6171 McLeod Drive
Las Vegas, NV 89120
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Lender: Nevada State Bank
P.O. Box 990
Las Vegas, NV 89125-0990
Attention: Corporate Banking Group
11.08 POWER OF ATTORNEY. Upon the occurrence of an Event of Default as
defined herein, Grantor hereby appoints Lender as its true and lawful
attorney-in-fact, irrevocably, with full power of substitution to do the
following:
a. to demand, collect, receive, receipt for, sue and recover all sums of
money or other property which may now or hereafter become due, owing or
payable from the Collateral;
b. to execute, sign and endorse any and all claims, instruments, receipts,
checks, drafts or warrants issued in payment for the Collateral;
c. to settle or compromise any and all claims arising under the Collateral,
and, in the place and instead of Grantor, to execute and deliver its
release and settlement for the claim; and
d. to file any claim or claims or to take any action or institute or take
part in any proceedings, either in its own name or in the name of
Grantor, or otherwise, which in the discretion of Lender may seem to be
necessary or advisable. This power is given as security for the
Indebtedness, and the authority hereby conferred is and shall be
irrevocable and shall remain in full force and effect until renounced by
Lender or this Security Agreement is terminated.
11.09 SEVERABILITY. If a court of competent jurisdiction finds any
provision of this Agreement to be invalid or unenforceable as to any person
or circumstances, 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.
11.10 SUCCESSOR INTERESTS. Subject to the limitations set forth above on
transfer of the Collateral, this Agreement shall be binding upon and inure to
the benefit of the parties, their successors, assigns, estates, heirs and
transferees.
11.11 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
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<PAGE>
provision or any other provision of this Agreement. No prior waiver by
Lender, nor any course of dealing between Lender and Grantor, shall
constitute a waiver of any of Lender's rights or of any of Grantor's
obligations 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 to subsequent instances
where such consent is required and in all cases such consent may be granted
or withheld in the sole discretion of Lender. This provision cannot be
waived by the conduct, acts or agreement of Lender and Grantor.
11.12 ADVICE OF COUNSEL. In entering into this Agreement, the Grantor
acknowledges that it has been fully advised and represented by its own legal
counsel and is fully familiar with all of the terms, conditions, restrictions
and covenants entered into herein. In executing this Agreement, Grantor does
so relying wholly upon its own judgment and on the advice of its counsel of
its own independent selection, and has been in no way influenced whatsoever
in entering into this Agreement by any representation or statement of Lender
regarding the matters set forth herein.
GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS SECURITY
AGREEMENT, AND GRANTOR AGREES TO ITS TERMS. THIS SECURITY AGREEMENT IS
EFFECTIVE ON THE DATE FIRST ABOVE WRITTEN.
GRANTOR: LENDER:
PDS FINANCIAL CORPORATION, NEVADA STATE BANK,
a Minnesota corporation a Nevada corporation
By: /s/ Steven M. Des Champs By: /s/ [ILLEGIBLE]
------------------------------- ------------------------------
Its: Chief Financial Officer Its: Vice President
------------------------------- ------------------------------
PDS FINANCIAL CORPORATION-NEVADA,
a Nevada corporation
By: /s/ Steven M. Des Champs
-------------------------------
Its: Chief Financial Officer
-------------------------------
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<PAGE>
EXHIBIT "B"
ELIGIBLE CONTRACT
An Eligible Contract ("Contract") shall have these terms and conditions:
Evidence: Each Contract shall be one of these: (a) a full recourse
installment sales contract; (b) a full recourse finance or an operating lease.
Contract Parties: Contracts with foreign entities or Contracts that are
subject to the Indian Gaming Regulatory Act shall not be permitted; and
contracts placed on maritime vessels shall not, at any time, exceed 20% of
the outstanding balance, in aggregate, of all the Advance Notes outstanding
under the Loan at the time of funding of any maritime contract.
Advance Values:
A) Installment Sales Contract(s): The Advance Note funding such Contract(s)
shall not have an initial or subsequent outstanding balance or more than 90%
of the equipment value under the Contract(s) at all times. Equipment value
shall be the equipment sales price excluding any sales or use tax, delivery
charges and installation charges.
B) Finance Lease(s): The Advance Note funding such Contract(s) shall not
have an initial or subsequent outstanding balance of more than 90% of the
equipment value under the Contract(s) at all times. Equipment value shall be
the capitalized cost to the lessee excluding any sales or use tax, delivery
charges and installation charges.
C) Operating Lease(s): The Advance Note funding such Contract(s) shall not
have an initial or subsequent outstanding balance of more than 90% of the
equipment value under the Contract(s) at all times. (It is understood that
the corresponding depreciation schedule for the equipment under Contract(s)
is on a "straight-line" basis on Grantor's accounting records; and as such
may indicate a note balance in comparison to the equipment value of more than
90% during the first twelve months after initial funding). The equipment
value shall be the capitalized cost to the lessee excluding any sales or use
tax, delivery charges, installation charges on any security deposits, after
depreciation.
Reporting: The equipment values for each Contract shall be presented to
Lender in the form of a Borrowing Base Certificate at the initial point of
funding under the corresponding Advance Note as well as at the end of each
month thereafter as long as there is an outstanding balance under the Advance
Note. In essence, there shall be a separate Borrowing Base Certificate for
each Advance Note vis-a-vis each Contract. The 90% loan-to-value ratio shall
be maintained at all times with pay downs occurring as a result of early
expiration of the Contract, sale of equipment, return of equipment,
repurchase of the Contract or any delinquency exceeding 60 days on the stream
of payments to Grantor from the obligor or lessee. The situation of a 60-day
delinquency on any part of the outstanding balance under any funded Contract
shall require a payoff the outstanding balance
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<PAGE>
of the delinquent balance directly by Grantor within 15 days after the 60 day
delinquency has occurred. Failure of Grantor to pay off the outstanding
balance within the 15 days shall constitute an Event of Default.
Contract Review: Prior to funding of each Advance Note Grantor shall submit
each Contract and all supporting documentation to Lender for review of
eligibility as per the following review criteria:
Review Criteria:
A) For Contracts with balances under $250,000.00: There shall be no review
required as long as: (i) contract party is not in bankruptcy; and (ii)
Grantor has no knowledge of any pending or existing default by the contract
party nor any pending bankruptcy.
B) For Contracts with balances over $250,000.00: (i) Grantor shall provide
Lender with a summary of the transaction; (ii) Lender shall advise Grantor
within five (5) business days if the Contract is acceptable; and (iii)
Lender's approval acceptance of the Contract and willingness to fund shall be
valid for a 60-day period.
Contract Confirmation: Each funded Contract shall be subject to a "delivery
and acceptance" acknowledgment to Lender directly by the obligor.
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<PAGE>
CORPORATE RESOLUTION TO BORROW
I, THE UNDERSIGNED SECRETARY OF PDS FINANCIAL CORPORATION, AND PDS FINANCIAL
CORPORATION-NEVADA, (COLLECTIVELY, THE "CORPORATIONS"), HEREBY CERTIFY THAT
the Corporations are organized and existing under and by virtue of the laws
of the State of Minnesota, and Nevada, respectively as corporations for
profit, with their principal office at 6171 McLeod Drive, Las Vegas, Nevada
89120, and are duly authorized to transact business in the State of Nevada.
I FURTHER CERTIFY that at a meeting of the Directors of the Corporations,
duly called and held on April 21, 1999, at which a quorum was present and
voting, or by other duly authorized corporate action in lieu of a meeting,
the following resolutions were adopted:
BE IT RESOLVED, that ANY ONE (1) of the following named officers, employees,
or agents of the Corporations, whose actual signatures are shown below:
<TABLE>
<CAPTION>
NAME POSITION ACTUAL SIGNATURE
---- -------- ----------------
<S> <C> <C>
Johan P. Finley President /s/ Johan P. Finley
-------------------------
Steven M. Des Champs Chief Financial Officer /s/ Steven M. Des Champs
-------------------------
Joe S. Rolston IV Vice President /s/ Joe S. Rolston IV
-------------------------
Lona M.B. Finley Secretary /s/ Lona M.B. Finley
-------------------------
</TABLE>
acting for and on behalf of the Corporations and as its act and deed be, and he
or she hereby is, authorized and empowered:
BORROW MONEY. To borrow from time to time from NEVADA STATE BANK
("Lender"), on such terms as may be agreed upon between the Corporations
and Lender, such sum or sums of money as in his or her judgment should
be borrowed, without limitation.
EXECUTE NOTES. To execute and deliver to Lender the promissory note or
notes, or other evidence of credit accommodations of the Corporations,
on Lender's forms, at such rates of interest and on such terms as may be
agree upon, evidencing the sums of money so borrowed or any indebtedness
of the Corporations to Lender, and also to execute and deliver to Lender
one or more renewals, extensions modifications, refinancings,
consolidations, or substitutions for one or more of the notes, any
portion of the notes, or any other evidence of credit accommodations.
GRANT SECURITY. To mortgage, pledge, transfer, endorse, hypothecate, or
otherwise encumber and deliver to Lender, as security for the payment of
any loans or credit
-1-
<PAGE>
accommodations so obtained, any promissory notes so executed (including
any amendments to or modifications, renewals, and extensions of such
promissory notes), or any other further indebtedness of the Corporations
to Lender at any time owing, however the same may be evidenced, any
property now or hereafter belonging to the Corporations or in which the
Corporations now or hereafter may have an interest, including without
limitation all real property and all personal property (tangible or
intangible) of the Corporations. Such property may be mortgaged, pledged,
transferred, endorsed, hypothecated, or encumbered at the time such loans
are obtained or such indebtedness is incurred, or at any other time or
times, and may be either in addition to or in lieu of any property
theretofore mortgaged, pledged, transferred, endorsed, hypothecated, or
encumbered.
EXECUTE SECURITY DOCUMENTS. To execute and deliver to Lender the forms
of mortgage, deed of trust, pledge agreement, hypothecation agreement,
and other security agreements and financing statements which may be
submitted by Lender, and which shall evidence the terms and conditions
under and pursuant to which such liens and encumbrances, or any of them,
are given; and also to execute and deliver to Lender any other written
instruments, any chattel paper, or any other Collateral, of any kind or
nature, which he or she may in his or her discretion deem reasonably
necessary or proper in connection with or pertaining to the giving of the
liens and encumbrances.
NEGOTIATE ITEMS. To draw, endorse, and discount with Lender all drafts,
trade acceptances, promissory notes, or other evidences of indebtedness
payable to or belonging to the Corporations in which the Corporations
may have an interest, and either to receive cash for the same or to
cause such proceeds to be credited to the account of the Corporations
with Lender, or to cause such other disposition of the proceeds derived
therefrom as they may deem advisable.
FURTHER ACTS. In the case of lines of credit, to designate additional
or alternate individuals as being authorized to request advances
thereunder, and in all cases, to do and perform such other acts and
things, to pay any and all fees and costs, and to execute and deliver
such other documents and agreements, INCLUDING AGREEMENTS REQUIRING
DISPUTES WITH LENDER TO BE SUBMITTED TO BINDING ARBITRATION FOR FINAL
RESOLUTION AND WAIVING THE RIGHT TO TRIAL BY JURY, as he or she may in
his or her discretion deem reasonably necessary or proper in order to
carry into effect the provisions of these Resolutions. The following
person or persons currently are authorized, except as provided below, to
request advances and authorize payments under the line of credit until
Lender receives written notice of revocation of their authority: Johan
P. Finley, President, Steven M. Des Champs, Chief Financial Officer, Joe
Rolston, Vice President, and Lona M.B. Finely, Secretary. All
covenants regarding Eligible Contracts must be reviewed and approved by
Lender before any advance request will be completed.
BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to these
Resolutions and performed prior to the passage of these Resolutions are
hereby ratified and approved, that these
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<PAGE>
Resolutions shall remain in full force and effect and Lender may rely on
these Resolutions until written notice of his or her revocation shall have
been delivered to and received by Lender. Any such notice shall not affect
any of the Corporations' agreements or commitments in effect at the time
notice is given.
BE IT FURTHER RESOLVED, that the Corporations will notify Lender in writing
at Lender's address shown above (or such other addresses as Lender may
designate from time to time) prior to any (a) change in the name of the
Corporations, (b) change in the assumed business name(s) of the Corporations,
(c) change in the management of the Corporations, (d) change in the
authorized signer(s), (e) conversion of the Corporations to a new or
different type of business entity, or (f) change in any other aspect of the
Corporations that directly or indirectly relates to any agreements between
the Corporations and Lender. No change in the name of the Corporations will
take effect until after Lender has been notified.
I FURTHER CERTIFY that the officers, employees, or agents named above are
duly elected, appointed, or employed by or for the Corporations, as the case
may be, and occupy the positions set opposite their names; that the foregoing
Resolutions now stand of record on the books of the Corporations; and that
the Resolutions are in full force and effect and have not been modified or
revoked in any manner whatsoever. The Corporations have no corporate seal,
and therefore, no seal is affixed to this certificate.
IN TESTIMONY WHEREOF, I HAVE HEREUNTO SET MY HAND ON THIS 21ST DAY OF APRIL,
1999 AND ATTEST THAT THE SIGNATURES SET OPPOSITE THE NAMES LISTED ABOVE ARE
THEIR GENUINE SIGNATURES.
CERTIFIED TO AND ATTESTED BY:
By: /s/ Lona Finley
----------------------------------
Its: Secretary
---------------------------------
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<PAGE>
ADVANCE NOTE
Principal Amount: $_________ Interest Rate: __________ Date of Note: _________
FOR VALUE RECEIVED, PDS FINANCIAL CORPORATION, a Minnesota corporation,
or, PDS FINANCIAL CORPORATION-NEVADA, a Nevada corporation 6171 McLeod Drive,
Las Vegas, Nevada 89120 (hereinafter "Borrower"), promises to pay NEVADA
STATE BANK, a Nevada corporation, 201 South Fourth Street, Las Vegas, Nevada
89101 (hereinafter "Lender") or order, in lawful money of the United States
of America, the principal amount of ___________________________
($___________), together with interest thereon at a fixed rate of interest
equal to ______ percent (______%), per annum, which interest rate is equal to
300 basis points over the 3-year LIBOR Interest Rate on the date of this
Advance Note, until paid in full. The LIBOR Interest Rate is an index which
is determined and announced by Lender to determine the interest rate charged.
It is not the lowest rate charged by Lender. The index is related to the
London Interbank Offered Rate but does not equal the London Interbank offered
rate. The LIBOR Interest Rate is not intended to serve any purpose or have
any meaning other than to provide an index to determine the interest rate to
be paid by Borrower.
Borrower will pay this loan in _________ equal monthly principal and
interest payments of $__________ each. Borrower's first monthly payment is
due on ____________, and all subsequently monthly payments are due on the
same day of each month thereafter, with Borrower's final payment being due on
__________, which shall be in an amount of all outstanding principal and
interest due. The annual interest rate for this Note is computed on a 365/360
basis; that is, by applying the ratio of the annual interest rate over a year
of 360 days, multiplied by the outstanding principal balance, multiplied by
the actual number of days the principal balance is outstanding. Borrower will
pay Lender at Lender's address shown above or at such other place as Lender
may designate in writing. Unless otherwise agreed or required by applicable
law, payments will be applied first to any unpaid collection costs and any
late charges, then to any unpaid interest, and any remaining amount to
principal.
This Advance Note is executed and delivered pursuant to a Master
Revolving Line of Credit Promissory Note and a Security Agreement ("Security
Agreement") each dated ____________, executed between Lender and Borrower,
and repayment of this Advance Note shall be secured by the Collateral
described in the Security Agreement.
All references herein to certain defined terms shall refer to those
defined terms contained in the Security Agreement, which are incorporated
into this instrument by reference.
As additional security for this Advance Note, Lender has a lien on, a
continuing security interest in and a right of setoff at any time without
notice, against all property and deposit accounts under the control of Lender
which belong to Borrower or any other party to this Advance Note.
In the event that (i) any amount due under this Advance Note is reduced
to judgment, (ii) Borrower is ten (10) days late in making any payment
provided in this Advance Note, or (iii) an Event of Default as defined in the
Security Agreement, occurs, Borrower shall be considered in
<PAGE>
default if any of the above are not cured within ten (10) days after the date
of written notice sent by Lender to Borrower at the address set forth herein
notifying Borrower of the default, the total of the unpaid balance of
principal and the accrued unpaid interest (past due interest being
compounded) shall then begin accruing interest at the rate stated above, plus
three percent (3.00%) per annum (the "Default Rate"), until such time as all
past due payments and accrued interest are paid. At that time, the interest
rate will revert to the rate stated above. Borrower acknowledges that the
effect of this Default Rate provision could operate to compound some of the
interest obligations due, and Borrower hereby expressly assents to such
compounding should it occur.
Should the indebtedness represented by this Advance Note, or any part
hereof, be collected at law, in equity, or in any bankruptcy, receivership or
other court proceeding, or this Advance Note be placed in the hands of any
attorney for collection after default, Borrower agrees to pay, in addition to
the principal and interest due hereon, all reasonable attorney fees, plus all
other costs and expenses of collection and enforcement, including any fees
incurred in connection with such proceedings or collection of this Advance
Note and/or enforcement of the Lender's rights with respect to the
administration, supervision, preservation or protection of, or realization
upon, any property securing payment hereof.
The failure of Lender to act or to exercise any right or remedy shall
not in any way affect or impair the obligation of Borrower to Lender, or
constitute a waiver by Lender of, or otherwise affect any of, Lender's rights
under this Advance Note, under any endorsement or guaranty of this Advance
Note or under any document or instrument evidencing any security for payment
of this Advance Note.
The invalidity or unforceability of any one or more provisions of this
Advance Note shall in no way affect the other provisions.
Borrower waives presentment, demand, protest and notice of nonpayment.
All titles used in this Advance Note are intended solely for convenience
and reference; said titles shall not affect any terms, provisions, or
meanings of this Advance Note.
The laws of the State of Nevada shall govern the validity, construction,
performance and effect of this Advance Note.
ARBITRATION DISCLOSURES:
1. ARBITRATION IS FINAL AND BINDING ON THE PARTIES AND SUBJECT TO ONLY
VERY LIMITED REVIEW BY A COURT.
2. IN ARBITRATION THE PARTIES ARE WAIVING THEIR RIGHT TO LITIGATE IN
COURT, INCLUDING THEIR RIGHT TO A JURY TRIAL.
-2-
<PAGE>
3. DISCOVERY IN ARBITRATION IS MORE LIMITED THAN DISCOVERY IN COURT.
4. ARBITRATORS ARE NOT REQUIRED TO INCLUDE FACTUAL FINDINGS OR LEGAL
REASONING IN THEIR AWARDS. THE RIGHT TO APPEAL OR TO SEEK
MODIFICATION OF ARBITRATORS' RULINGS IS VERY LIMITED.
5. A PANEL OF ARBITRATORS MIGHT INCLUDE AN ARBITRATOR WHO IS OR WAS
AFFILIATED WITH THE BANKING INDUSTRY.
6. IF YOU HAVE QUESTIONS ABOUT ARBITRATION, CONSULT YOUR ATTORNEY OR THE
AMERICAN ARBITRATION ASSOCIATION.
a. Any claim or controversy ("Dispute") between or among the parties
and their assigns, including but not limited to Disputes arising out
of or relating to this agreement, this arbitration provision
("arbitration clause"), or any related agreements or instruments
relating hereto or delivered in connection herewith ("Related
Documents"), and including but not limited to a Dispute based on or
arising from an alleged tort, shall at the request of any party be
resolved by binding arbitration in accordance with the applicable
arbitration rules of the American Arbitration Association (the
"Administrator"). The provisions of this arbitration clause shall
survive any termination, amendment, or expiration of this agreement
or related Documents. The provisions of this arbitration clause
shall supersede any prior arbitration agreement between or among the
parties. If any provision of this arbitration clause should be
determined to be unenforceable, all other provisions of this
arbitration clause shall remain in full force and effect.
b. The arbitration proceedings shall be conducted in Las Vegas,
Nevada, at a place to be determined by the Administrator. The
Administrator and the arbitrator(s) shall have the authority to the
extent practicable to take any action to require the arbitration
proceeding to be completed and the arbitrator(s)' award issued
within one hundred fifty (150) days of the filing of the Dispute
with the Administrator. The arbitrator(s) shall have the authority
to impose sanctions on any party that fails to comply with time
periods imposed by the Administrator or the arbitrator(s), including
the sanction of summarily dismissing any Dispute or defense with
prejudice. The arbitrator(s) shall have the authority to resolve any
Dispute regarding the terms of this agreement, this arbitration
clause or Related Documents, including any claim or controversy
regarding the arbitrability of any Dispute. All limitations periods
applicable to any Dispute or defense, whether by statute or
agreement, shall apply to any arbitration proceeding hereunder and
the arbitrator(s) shall have the authority to decide whether any
Dispute or defense is barred by a limitations period and, if so, to
summarily enter an award dismissing any Dispute or defense on that
basis. The doctrines of compulsory counterclaim, res judicata, and
collateral
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<PAGE>
estoppel shall apply to any arbitration proceeding hereunder so that
a party must state as a counterclaim in the arbitration proceeding
any claim or controversy which arises out of the transaction or
occurrence that is the subject matter of the Dispute. The
arbitrator(s) may in the arbitrator(s)' discretion and at the
request of any party: (1) consolidate in a single arbitration
proceeding any other claim or controversy involving another party
that is substantially related to the Dispute where that other party
is bound by an arbitration clause with the Lender, such as
borrowers, guarantors, sureties, and owners of collateral; (2)
consolidate in a single arbitration proceeding any other claim or
controversy that is substantially similar to the Dispute; and (3)
administer multiple arbitration claims or controversies as class
actions in accordance with the provisions of Rule 23 of the Nevada
Rules of Civil Procedure or Rule 23 of the Federal Rules of Civil
Procedure.
c. The arbitrator(s) shall be selected in accordance with the rules
of the Administrator from panels maintained by the Administrator. A
single arbitrator shall have expertise in the subject matter of the
Dispute. Where three arbitrators conduct an arbitration proceeding,
the Dispute shall be decided by a majority vote of the three
arbitrators, at least one of whom must have expertise in the
subject matter of the Dispute and at least one of whom must be a
practicing attorney. The arbitrator(s) shall award to the prevailing
party recovery of all costs and fees (including attorneys' fees and
costs, arbitration administration fees and costs, and arbitrator(s)'
fees). The arbitrator(s), either during the pendency of the
arbitration proceeding or as part of the arbitration award, also
may grant provisional or ancillary remedies, including but not
limited to an award of injunctive relief, foreclosure,
sequestration, attachment, replevin, garnishment, or the appointment
of a receiver.
d. Judgment upon an arbitration award may be entered in any court
having jurisdiction, subject to the the following limitation: the
arbitration award is binding upon the parties only if the amount
does not exceed Four Million dollars ($4,000,000.00); if the award
exceeds that limit, either party may demand the right to a court
trial. Such a demand must be filed with the Administrator within
thirty (30) days following the date of the arbitration award; if
such a demand is not made within that time period, the amount of
the arbitration award shall be binding. The computation of the total
amount of an arbitration award shall include amounts awarded for
attorneys' fees and costs, arbitration administration fees and
costs, and arbitrator(s)' fees.
e. No provision of this arbitration clause, nor the exercise of any
rights hereunder, shall limit the right of any party to: (1)
judicially or non-judicially foreclose against any real or personal
property collateral or other security; (2) exercise self-help
remedies, including but not limited to repossession and setoff
rights; or (3) obtain from a court having jurisdiction thereover any
provisional or ancillary remedies, including but not limited to
injunctive relief, foreclosure, sequestration, attachment, replevin,
garnishment, or the appointment of a receiver. Such rights can be
exercised
-4-
<PAGE>
at any time, before or during initiation of an arbitration
proceeding, except to the extent such action is contrary to the
arbitration award. The exercise of such rights shall not constitute
a waiver of the right to submit any Dispute to arbitration, and any
claim or controversy related to the exercise of such rights shall be
a Dispute to be resolved under the provisions of this arbitration
clause. Any party may initiate arbitration with the Administrator;
however, if any party initiates litigation and another party
disputes any allegation in that litigation, the disputing party -
upon the request of the initiating party - must file a demand for
arbitration with the Administrator and pay the Administrator's
filing fee. The parties may serve by mail a notice of an initial
motion for an order of arbitration.
f. Notwithstanding the applicability of any other law to this
agreement, the arbitration clause, or Related Documents between or
among the parties, the Federal Arbitration Act, 9 U.S.C. Section 1
ET SEQ., shall apply to the construction and interpretation of this
arbitration clause.
If there is a lawsuit, Borrower agrees upon Lender's request to submit
to the jurisdiction of the courts of Clark County, State of Nevada (INITIAL
HERE ________). Lender and Borrower hereby waive the right to any jury trial
in any action, proceeding, or counterclaim brought by either Lender or
Borrower against the other.
IN WITNESS WHEREOF, this Advance Note has been executed effective the date
and place above written.
"Borrower"
PDS FINANCIAL CORPORATION, "OR" PDS FINANCIAL CORPORATION-NEVADA,
a Minnesota corporation a Nevada corporation
By: By:
--------------------------- --------------------------------
Its: Its:
--------------------------- -------------------------------
Borrowers' Address:
6171 McLeod Drive
Las Vegas, Nevada 89120
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<PAGE>
- - --------------------------------------------------------------------------------
MASTER LOAN AGREEMENT
BY AND AMONG
PDS FINANCIAL CORPORATION
PDS FINANCIAL CORPORATION-NEVADA
PDS FINANCIAL CORPORATION-MISSISSIPPI
AND
MILLER & SCHROEDER INVESTMENTS CORPORATION
- - --------------------------------------------------------------------------------
Drafted by:
Fredrikson & Byron, P.A.
1100 International Centre
900 Second Avenue South
Minneapolis, Minnesota 55402-3397
<PAGE>
MASTER LOAN AGREEMENT
THIS AGREEMENT is made as of October __, 1999, by and among PDS FINANCIAL
CORPORATION, a Minnesota corporation ("PDS"), PDS FINANCIAL CORPORATION-NEVADA,
a Nevada corporation ("PDS-Nevada") and PDS FINANCIAL CORPORATION-MISSISSIPPI, a
Mississippi corporation ("PDS-Mississippi") (PDS, PDS-Nevada and PDS-Mississippi
are jointly and severally, the "Borrower") and MILLER & SCHROEDER INVESTMENTS
CORPORATION, a Minnesota corporation ("M&S"), and certain other participating
institutions identified in the Participation Agreements among M&S and the
participants (M&S and the participants being collectively, the "Lender").
RECITALS
A. The Borrower has requested that the Lender make available to the
Borrower a multiple advance credit facility in an aggregate principal amount of
Two Million Dollars ($2,000,000) (the "Credit Facility") evidenced by a
Promissory Note dated the date hereof from the Borrower in favor of the Lender
(the "Note") and secured by a Master Security Agreement dated the date hereof
between the Borrower and the Lender (as such Master Security Agreement may be
amended from time to time, the "Security Agreement").
B. The Lender is willing to make advances under the Credit Facility (each
a "Loan") to the Borrower upon the terms and subject to the conditions set forth
herein.
C. The Lender has entered or will enter into one or more participation
agreements (the "Participation Agreements") pursuant to which the participants
named therein agree to participate in the Credit Facility.
NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. DEFINITIONS.
"Addendum and Assignment" is defined in Section 1 of the Security
Agreement.
"Capitalized Cost to Lessee" means the fair market value of the Equipment
as of the date of the Contract as reasonably determined by Borrower in
accordance with FASB 13, excluding any charges for insurance, maintenance,
delivery and sales or use taxes.
"Closing Date" means the date hereof.
"Collateral" is defined in Section 2 of the Security Agreement.
"Contract" means any Contract which is identified in an Addendum and
Assignment, and which meets the eligibility criteria set forth in EXHIBIT A
attached hereto.
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"Delinquent Contract" means any Contract where payment in full of all
installments then due have not been made within 30 days of the due date or where
any other material default has occurred and such default has continued for a
period of at least 30 days.
"Equipment" is defined in Section 1 of the Security Agreement.
"Equipment Value" means, (i) with respect to any Contract which is an
installment sales contract or installment note, the sales price of the Equipment
subject to such Contract, EXCLUDING sales or use tax, delivery charges,
installation charges and any security deposit that is or will be applied as a
credit against the first or last installment payment in whatever form collected;
(ii) with respect to any Contract which is a finance lease, the Capitalized Cost
to Lessee, EXCLUDING sales or use tax, delivery charges, installation charges
and any security deposit that is or will be applied as a credit against the
first or last rent payment; and (iii) with respect to any Contract which is an
operating lease, the Capitalized Cost to Lessee, EXCLUDING sales or use tax,
delivery charges, installation charges and any security deposit that is or will
be applied as a credit against the first or last rent payment.
"GAAP" means 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.
"Loan Documents" means this Agreement, the Note, the Security Agreement,
the Addendum and Agreement, the Repossession Agreement, the UCC-1 and UCC-3
Financing Statements, and all other documents, instruments or agreements
(excluding the Contracts) necessary to give effect to this Agreement and the
transaction contemplated hereby.
"Maturity Date" means November 1, 2003.
"Obligor" means, with respect to any Contract, the person identified on a
Contract as the lessee or purchaser.
"Repossession Agreement" means that certain Repossession Agreement among
the Borrower and the Lender, dated the date hereof, as it may be amended from
time to time.
"Required Payment Amount" means as of any Installment Payment Date (as
defined in the Note), that amount equal to the monthly amount necessary to fully
amortize the then outstanding principal balance and accrued interest under the
Note in equal monthly installments by the Maturity Date, together with payment
of the Servicing Fee described in the Note.
2. THE CREDIT FACILITY. Subject to and upon the terms and conditions
hereof, and in reliance upon the representations and warranties of the Borrower
herein, the Lender will make Loans to the Borrower under the Credit Facility
from time to time from the date hereof until November 1, 2003, at such time and
in such amount as to each Loan as the Borrower may request up to but not
exceeding an aggregate principal amount of $2,000,000 for the purpose of funding
Contracts to certain casino operators, and to pay all related transaction costs.
The Credit
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Facility will be advanced based on multiple Advance Requests (as hereafter
defined) but will not be a revolving credit facility and the Borrower may not
borrow, repay and reborrow amounts advanced. The Advance amount of any Loan
shall not exceed ninety percent (90%) of the Equipment Value of any Contract(s)
being financed therewith and no more than $1,750,000 will be advanced on an
individual Contract, and in no event shall the aggregate principal amount of
Loans, the proceeds of which are used to finance Contracts where the Equipment
subject to such Contracts is located on ships or is subject to maritime laws,
exceed twenty-five percent (25%) of the aggregate principal amount of all Loans.
The Loans under the Credit Facility shall be evidenced by a single Note which
will be made payable to the order of the Lender. The Credit Facility shall bear
interest at the rate of nine and three quarters percent (9.75%) per annum. The
Credit Facility shall be payable over a forty-eight (48)-month term. Commencing
December 1, 1999 and continuing on each Installment Payment Date (as defined in
the Note) thereafter, the Borrower shall pay installments of principal and
interest equal to the Required Payment Amount; provided that the unpaid
principal balance of the Note, interest accrued thereon and all charges payable
pursuant to the terms of the Note shall become due and payable in full on the
earlier to occur of the following: (i) the Maturity Date, (ii) the occurrence of
an Event of Default and (iii) the Installment Payment Date (as defined in the
Note) next following the Installment Payment Date on which the unpaid principal
balance of the Note declines below $100,000. Any prepayments made on any
Contract shall be used to prepay the Credit Facility to the extent required by
Section 3(t) of the Security Agreement. The Note may be prepaid in whole or in
part at any time, provided that any prepayment shall be made on fifteen (15)
days' advance written notice to the Lender and shall be made only on a regularly
scheduled Installment Payment Date and shall be made in denominations of no less
than $100,000 or provide for payment in full of the outstanding balance of the
Note. After a prepayment, the then outstanding principal balance and accrued
interest will be reamortized over the period remaining between the date of
prepayment and the Maturity Date. All amounts paid in respect of the Note shall
be applied in accordance with Section 5(b) of the Security Agreement. All
payments and prepayments of the principal of and interest on the Loan shall be
made by the Borrower to the Lender pursuant to the terms of the Note and other
Loan Documents, and shall be made by wire transfer in accordance with Lender's
instructions.
3. BORROWING PROCEDURE AND DISBURSEMENT OF LOAN PROCEEDS. On the date
hereof, the Lender has disbursed to the Borrower $____________ for payment of
closing costs for the Credit Facility. The balance of the Credit Facility in
the amount of $_____________ will be advanced under the Note and deposited in an
interest bearing account with the Lender (the "Escrow). Each time the Borrower
desires to obtain a disbursement from the Escrow, the Borrower shall submit to
the Lender a written advance request, duly signed by the Borrower, substantially
in the form of EXHIBIT B attached hereto (each an "Advance Request"). Each
Advance Request shall be submitted by the Borrower to the Lender at least five
(5) business days prior to the date of the requested advance. Each Advance
Request shall specify (i) the advance date (which shall be a business day), (ii)
the Equipment being acquired or financed therewith and the Equipment Value
thereof, (iii) the terms of the Contract(s) to which such Equipment will be sold
or leased, and (iv) the amount of the requested Loan, and shall set forth the
information requested therein. Unless the Lender reasonably determines any
applicable condition specified in this Agreement has not been satisfied, the
Lender will make the amount of the requested Loan available to the Borrower at
the Lender's principal office in Minneapolis, Minnesota not later
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than 5:00 p.m., Minneapolis time, on the date requested. The Borrower shall be
obligated to repay all Loans notwithstanding the fact that the person requesting
the same was not in fact authorized to do so. The proceeds of each Loan will be
disbursed to the Borrower upon delivery to the Lender of the following documents
or other items:
a. ITEMS NECESSARY AT TIME THIS AGREEMENT IS EXECUTED:
(1) this Agreement, the Note, the Security Agreement, and the
Repossession Agreement, each executed by the Borrower in favor of the Lender;
(2) resolutions of the executive committees of the boards of
directors of each of the Borrowers, certified by an officer of each of the
Borrowers, authorizing the execution, delivery and performance of the Loan
Documents and related documents and the transactions contemplated thereby;
(3) evidence in form and substance acceptable to the Lender that
the Borrower has all licenses necessary to carry on its business and to enable
it to perform its obligations under the Repossession Agreement, including
without limitation all licenses required under Nevada and Mississippi gaming law
for the operation of the Borrower's business;
(4) Articles of Incorporation of PDS, certified by the Minnesota
Secretary of State, a copy of the Bylaws of PDS, certified by an officer of PDS,
and an unqualified certificate of good standing for PDS issued by the Minnesota
Secretary of State;
(5) Articles of Incorporation of PDS-Nevada, certified by the
Nevada Secretary of State, a copy of the Bylaws of PDS-Nevada, certified by an
officer of PDS-Nevada, and an unqualified certificate of good standing for PDS-
Nevada issued by the Nevada Secretary of State;
(6) Articles of Incorporation of PDS-Mississippi, certified by
the Mississippi Secretary of State, a copy of the Bylaws of PDS-Mississippi,
certified by an officer of PDS-Mississippi, and an unqualified certificate of
good standing for PDS-Mississippi issued by the Mississippi Secretary of State;
(7) UCC searches with respect to each Borrower;
(8) an opinion of counsel to PDS as to the due organization and
good standing of PDS, the due authorization, execution and delivery by PDS of
the Loan Documents, the validity and enforceability of the Loan Documents, and
as to such other matters regarding PDS and the transactions and documents
contemplated hereby as the parties may agree;
(9) an opinion of counsel to PDS-Nevada as to the due
organization and good standing of PDS-Nevada, the due authorization, execution
and delivery by PDS-Nevada of the Loan Documents, the validity and
enforceability of the Loan Documents, the availability of and basic elements of
the procedure to perfect a purchase money security interest
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under Nevada state law, and as to Nevada gaming law matters and such other
matters regarding PDS-Nevada and the transactions and documents contemplated
hereby as the parties may agree;
(10) an opinion of counsel to PDS-Mississippi as to the due
organization and good standing of PDS-Mississippi, the due authorization,
execution and delivery by PDS-Mississippi of the Loan Documents, the validity
and enforceability of the Loan Documents, the availability of and basic elements
of the procedure to perfect a purchase money security interest under Mississippi
state law, and as to Mississippi gaming law matters and such other matters
regarding PDS-Mississippi and the transactions and documents contemplated hereby
as the parties may agree;
(11) a certificate of an officer of each Borrower to the effect
that the representations, warranties and covenants of such Borrower contained
herein and in the other Loan Documents are true and correct as of the date of
such documents and as of the date of delivery of the certificate;
(12) certificates of insurance and insurance endorsements
required hereby;
(14) a certificate by each Borrower regarding Year 2000 computer
compliance.
b. BORROWER ITEMS NECESSARY BEFORE ANY LOAN:
(1) an Addendum and Assignment and UCC-1 and UCC-3 Financing
Statements, each executed by the Borrower in favor of the Lender with respect to
the Contract(s) being financed with the Loan, and an assignment of the
Borrower's interest as secured party in the UCC-1 Financing Statement as to the
related Equipment;
(2) with respect to each of the Contracts in which Borrower is
granting a security interest to the Lender pursuant to the Addendum and
Assignment, the executed original of each such Contract, with all collateral
schedules, and copies of such additional instruments, opinions, documents,
certificates, searches and reports as the Borrower has obtained in connection
with such Contract;
(3) a Notice, Consent and Acknowledgment of Assignment with
respect to the Contract(s) being financed with the Loan, duly executed by the
Borrower;
(4) updated UCC searches with respect to each Borrower who is
requesting a loan on a Contract owned by that Borrower;
(5) Except as to financing statements in favor of the Lender,
UCC-3 financing statements terminating security interests filed with respect to
the Contracts and the Equipment, including without limitation a release executed
by U.S. Bank (or any other creditor holding a blanket lien) with respect to the
Contracts and the Equipment;
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(6) the first time a Loan is requested regarding a Contract
(other than an operating lease) where the Equipment is located in a jurisdiction
(other than Nevada), an opinion of counsel to PDS as to the availability of and
basic elements of the procedure to perfect a purchase money security interest
under the law of that jurisdiction;
(7) certificates of insurance and insurance endorsements
required hereby;
(8) all other items as may be required pursuant to the
eligibility criteria set forth in EXHIBIT A attached hereto.
c. OBLIGOR ITEMS NECESSARY BEFORE ANY LOAN:
(1) a Notice, Consent and Acknowledgment of Assignment duly
executed by the Obligor under each Contract being financed with the Loan;
(2) UCC-1 Financing Statements, executed by the Obligor in favor
of the Borrower and assigned to the Lender (or with respect to an installment
note, assigned to Lender and the other holder(s) of note(s) evidencing the same
loan on a joint and several basis) with respect to the Contract(s) being
financed with the Loan, and the related Equipment and releases, terminations or
other appropriate filings, if any;
(3) certificates of insurance and insurance endorsements
required hereby;
(4) all other items as may be required pursuant to the
eligibility criteria set forth in EXHIBIT A attached hereto.
4. REPRESENTATIONS AND WARRANTIES OF THE BORROWER. In order to induce
the Lender to advance the proceeds of each Loan, the Borrower hereby represents
and warrants to the Lender as follows:
a. PDS is a corporation duly organized and validly existing under
the laws of the State of Minnesota, PDS-Nevada is a corporation duly organized
and validly existing under the laws of the State of Nevada and PDS-Mississippi
is a corporation duly organized and validly existing under the laws of the State
of Mississippi. The Borrower is duly qualified to do business and is in good
standing in every other jurisdiction wherein the nature of its business or the
character of its properties makes such qualification necessary and where failure
to be so qualified and in good standing, in the aggregate, would not have a
material adverse effect on the business, properties, operations, assets,
liabilities or condition (financial or otherwise) of the Borrower. The Borrower
has all requisite power and authority to carry on its business as now conducted
and as presently proposed to be conducted.
b. The Borrower has full power and authority to execute and deliver
the Loan Documents and to incur and perform its obligations hereunder and
thereunder. The execution, delivery and performance by the Borrower of the Loan
Documents and any and all other
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documents and transactions contemplated hereby or thereby, have been duly
authorized by all necessary corporate action, will not violate any provision of
law or of the Articles of Incorporation or the Bylaws of the Borrower or result
in the breach of, constitute a default under, or create or give rise to any lien
under, any indenture or other agreement or instrument to which the Borrower is a
party or by which the Borrower or its property may be bound or affected. The
Loan Documents have been executed and delivered to the Lender by an appropriate
officer of the Borrower who is authorized by and specified in the Borrower's
Bylaws to execute and so deliver such agreements. The Borrower is not in
violation of or subject to any contingent liability on account of any statute,
law, rule, ordinance, order, writ, injunction or decree to the extent that such
violation or contingent liability would result in a material adverse effect on
the condition (financial or otherwise), business, properties, or assets of
Borrower. As used herein, material adverse effect means a violation or
contingent liability that would result in a cost or loss to Borrower of $500,000
or more.
c. The Loan Documents constitute the legal, valid and binding
obligations of the Borrower, enforceable in accordance with their respective
terms.
d. Except as set forth in EXHIBIT C hereto, there is no action, suit
or proceeding pending or, to the knowledge of the Borrower, threatened against
or affecting the Borrower, or any basis therefor, which, if adversely
determined, would have a material adverse effect on the condition (financial or
otherwise), business, properties or assets of the Borrower or which would
question the validity of the Loan Documents or any instrument, document or other
agreement related hereto or required hereby, or impair the ability of the
Borrower to perform its obligations under the foregoing agreements.
e. The Borrower possesses adequate licenses, permits, franchises,
patents, copyrights, trademarks and trade names, or rights thereto (collectively
"Licenses"), to conduct its business substantially as now conducted and as
presently proposed to be conducted. Without limiting the foregoing, PDS-Nevada
possesses all licenses required under Nevada gaming law for the operation of
PDS-Nevada's business. Without limiting the foregoing, PDS-Mississippi
possesses all licenses required under Mississippi gaming law for the operation
of PDS-Mississippi's business. Each License is validly issued and in full force
and effect. Borrower has fulfilled and performed all of its obligations with
respect thereto. No event has occurred which: (1) results in, or after notice
or lapse of time or both would result in, suspension, surrender, failure to
renew, revocation or termination of any material License; or (2) materially and
adversely affects or in the future may (so far as Borrower can now reasonably
foresee) materially adversely affect any of the rights of Borrower thereunder.
Borrower is not a party to and the Borrower does not have any knowledge of any
notice of violation, order or complaint issued by or before any court or
regulatory body or of any other proceedings which could in any manner result in
suspension, surrender, failure to renew, revocation or termination of any
material License or otherwise threaten or adversely affect the validity or
continued effectiveness of the Licenses of Borrower. Borrower has no reason to
believe that any Licenses will not be renewed in the ordinary course. Borrower
has fully cooperated with every regulatory body having jurisdiction over any of
the Licenses or the activities of Borrower with respect thereto, and Borrower
has filed all material reports, applications, documents, instruments, and
information
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required to be filed by it pursuant to applicable laws, rules and regulations.
Borrower has posted all required bonds required under its Licenses.
f. The Borrower owns the Contracts constituting part of the
Collateral, subject to no prior security interests, assignments, liens or
encumbrances. The Lender has a valid first perfected security interest in the
Collateral subject to no prior security interests or encumbrances. The security
interest of the Lender has been recorded with the appropriate recording offices,
and the Lender's security interest in the Equipment is a first perfected
security interest, subject only to the rights of the Obligors and the Borrowers
under the Collateral.
g. No director, shareholder, officer, employee of or consultant to
the Borrower is prohibited by law, regulation, contract or the terms of any
license, franchise, permit, certificate, approval or consent from participating
in the business of the Borrower as director, shareholder, officer, employee of
or as consultant to the Borrower.
h. Except with respect to reporting and compliance requirements of
the regulatory gaming authorities in the jurisdictions in which either of the
Borrowers or the Obligors conducts business, no consent, approval, order or
authorization of, or registration, declaration or filing with, or notice to, any
governmental authority or any third party is required in connection with the
execution and delivery of the Loan Documents or any of the agreements or
instruments contemplated thereby to which the Borrower is a party, or in
connection with the carrying out or performance of any of the transactions
required or contemplated hereby or thereby or, if required, such consent,
approval, order or authorization has been obtained or such registration,
declaration or filing has been accomplished or such notice has been given prior
to the date hereof.
i. The Borrower has filed all local, state, federal and other tax
returns required to be filed by it and either paid all taxes shown thereon to be
due, including interest and penalties, which are not being contested in good
faith and by appropriate proceedings, or provided adequate reserves for payment
thereof. The Borrower has no information or knowledge of any objections to or
claims for additional taxes in respect of local, state and federal or other
income or excess profits tax returns of the Borrower for prior years.
j. The Borrower does not intend to, or believe that it will, incur
debts beyond its ability to pay such debts as they mature.
k. All financial and other information provided to the Lender by or
on behalf of the Borrower in connection with the Borrower's request for the Loan
fairly presented the financial condition of the Borrower as of the dates thereof
and disclosed fully all liabilities of the Borrower. Since the date of such
financial and other information, there has been no material adverse change in
the financial condition of the Borrower.
l. Each qualified retirement plan of the Borrower, if any, presently
conforms to and is administered in a manner consistent with the Employee
Retirement Income Security Act of 1974.
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m. As of the date hereof, no Contract is a Delinquent Contract.
n. The Borrower is not engaged in the business of extending credit
for the purpose of purchasing or carrying margin stock (within the meaning of
Regulation U issued by the Board of Governors of the Federal Reserve System),
and no proceeds of the Loan will be used to purchase or carry any margin stock
or to extend credit to others for the purpose of purchasing or carrying any
margin stock.
o. No proceeds of the Loan will be used to acquire any security in
any transaction which is subject to Sections 13 and 14 of the Securities
Exchange Act of 1934.
p. The transaction evidenced by this Agreement does not violate any
law pertaining to usury or the payment of interest on loans.
q. The Borrower will use the proceeds of the Loan solely for lawful
and proper corporate purposes of the Borrower.
5. AFFIRMATIVE COVENANTS. The Borrower covenants and agrees as follows:
a. The Borrower will use the proceeds of each Loan solely for the
financing of Contracts to certain casino operators.
b. The Borrower will pay all of its taxes (including payroll and
withholding taxes), levies, assessments and governmental charges prior to the
time when any penalties or interest accrue, unless contested in good faith with
an adequate reserve for payment.
c. The Borrower will continue the conduct of its business, maintain
its corporate existence, maintain all rights, licenses and franchises necessary
or desirable in the normal conduct of its business, comply with all rules,
regulations and orders of any governmental or other authority or agency and all
applicable federal and state laws and regulations. Without in any way limiting
the generality of the foregoing, the Borrower will maintain all licenses
required under Nevada gaming law for the operation of Borrower's business, and
will timely file all reports as the Nevada Gaming Commission may from time to
time require or request. Without in any way limiting the generality of the
foregoing, the Borrower will maintain all licenses required under Mississippi
gaming law for the operation of Borrower's business, and will timely file all
reports as the Mississippi Gaming Commission may from time to time require or
request.
d. The Borrower shall use best efforts to cause the Obligors to
maintain and service the Equipment so as to keep such Equipment in good
operating condition, ordinary wear and tear from normal use excepted.
e. The Borrower will deliver to the Lender:
(1) Within one hundred twenty (120) days after the end of each
fiscal year, the consolidated audited financial statements of the Borrower for
such fiscal year, certified
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(without qualification as to the opinion or scope of examination) by a firm of
independent certified public accountants selected by the Borrower and acceptable
to the Lender.
(2) Within forty-five (45) days after the end of each fiscal
quarter, consolidated quarterly financial statements of the Borrower.
(3) Upon the reasonable request of the Lender, all backup data
regarding the Contracts and the Equipment.
(4) Within thirty (30) days after the end of each calendar
quarter, a Contract Status report setting forth the information set forth on
EXHIBIT D hereto.
(5) As soon as practicable, but in any event within thirty (30)
days after the end of each calendar month, a certificate of the Chief Financial
Officer (or Chief Accounting Officer or other officer of Borrower serving in
such capacity) of the Borrower substantially in the form of EXHIBIT E hereto
stating (i) whether or not such officer has knowledge of the occurrence of any
Event of Default under any of the Loan Documents or any event which with the
giving of notice or the passage of time would constitute an Event of Default
under any of the Loan Documents, other than Events of Default previously
reported and remedied and, if so, stating in reasonable detail the facts with
respect to such Event of Default, and (ii) that the Borrower is in compliance
with each of the covenants set forth in Sections 5 and 6 of this Agreement.
Without limiting the foregoing, the certificate shall specifically state (A) the
aggregate number and aggregate unpaid payments of Delinquent Contracts, and (B)
the aggregate amount of prepayments on the Contracts in such month.
(6) Copies of any and all reports, filings, financial statements
or other information as and when filed with the United States Securities and
Exchange Commission and with the Nevada Gaming Commission, and the Mississipi
Gaming Commission (only in connection with the Loan, the Contracts, the
Equipment, the Lender or its participants), and copies of all information and
notices as and when delivered to the Borrower's shareholders.
(7) Promptly upon becoming aware thereof, notice of any default
with respect to any other indebtedness, whether owed to the Lender or any other
creditor.
f. Upon reasonable notice of not less than 48 hours, the Borrower
will permit any officer, employee, attorney or accountant for the Lender to
review, make extracts from, or copy any and all corporate and financial books
and records of the Borrower relating to the Contracts at all times during
ordinary business hours, to send and discuss with Obligors requests for
verification of amounts owed to the Borrower if Lender has a reasonable basis
for believing such a verification is necessary, and to discuss the affairs of
the Borrower with any of its officers. After the occurrence of an Event of
Default, the rights to review and copy books and records shall not be limited to
those relating to the Contracts but will be all of the Borrower's books and
records.
g. The Borrower will provide the Lender with an insurance
certificate, issued by Obligor's insurer, in form and content and from an
insurer acceptable to the Lender,
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providing for ten (10) days' written notice to the Lender of cancellation or
non-renewal (without qualification), and evidencing the following categories and
amounts of coverage:
(1) Comprehensive public liability coverage for the Obligor.
(2) Comprehensive physical damage insurance for the full
insurable value of the Equipment, naming the Lender as loss payee, as their
interests may appear.
(3) If circumstances warrant, warehouse and transportation
insurance on the Equipment which is being stored or transported, as the case may
be, for the full insurable value of the Equipment naming the Lender as loss
payee, as their interests may appear.
(4) With respect to any Equipment which is located on any ship
or which is otherwise subject to any maritime laws, shipwreck, piracy,
abandonment and hull insurance in such amounts as the Lender may request, with a
lender's loss payable endorsement provided to the Lender.
h. The Borrower will notify the Lender promptly of (i) any material
disputes or claims by any Obligor; (ii) any Equipment returned to or recovered
by the Borrower or damaged, destroyed or stolen from the Borrower or an Obligor;
(iii) any change in the persons constituting the directors or officers of the
Borrower; (iv) the occurrence of any breach, default or event of default by or
attributable to the Borrower under this Agreement or any of the Loan Documents;
(v) the occurrence of any breach, default or event of default by or attributable
to any Obligor under the Obligor's Contract; and (vi) any event which may have
any effect on the enforceability of any lien in favor of the Lender, or on the
ability of the Borrower or the Obligor to perform its obligations under the Loan
Documents or any Contract, as the case may be.
i. The Borrower will notify the Lender in writing promptly after the
commencement of any lawsuit, legal proceeding or proceedings before any
governmental or regulatory agency against the Borrower which would have a
material adverse effect on the Loan, the Contracts, the Equipment, the Lender or
its participants or the business of Borrower. As used herein, material adverse
effect means a lawsuit or proceeding involving a potential cost or loss to
Borrower of $500,000 or more.
j. PDS will maintain the following financial covenants:
(i) At all times, a Tangible Net Worth in an amount not less
than $8,000,000 plus 15% of positive Net Income earned after January 1, 1999.
As used herein, "Tangible Net Worth" means, at a particular date, (a) the
aggregate amount of assets of PDS as may be properly classified as such in
accordance with GAAP excluding such other assets as are properly classified as
intangible assets under GAAP, less (b) the aggregate amount of all liabilities
of PDS. As used herein, "Net Income" means, with respect to any period, the
aggregate of the net income of PDS for such period determined in accordance with
GAAP.
(ii) A Cash Flow Ratio not less than 1.5 to 1.0 as of the end of
each calendar month measured on a trailing twelve (12) month basis. As used
herein, "Cash Flow
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Ratio" means the ratio of (a) Net Income PLUS Interest Expense, income taxes,
depreciation and amortization TO (b) Interest Expense PLUS Dividends.
As used herein, "Dividends" means any payment for the purchase,
redemption or acquisition for value of any shares of PDS's stock, or the
payment of any dividends thereon or any distribution on, or payment on account
of the purchase, redemption, defeasance or other acquisition or retirement for
value of any shares of PDS's stock or set aside of funds for any such purpose.
As used herein, "Interest Expense" means the total scheduled
interest expense (including any default rate of interest if then applicable)
whether paid or accrued, on Indebtedness.
As used here, in "Indebtedness" means without duplication, all
obligations, contingent or otherwise, which in accordance with GAAP should be
classified upon the PDS's balance sheet as liabilities, but in any event
including the following (whether or not they should be classified as
liabilities upon such balance sheet): (a) obligations secured by any mortgage,
pledge, security interest, lien, charge or other encumbrance existing on
property owned or acquired subject thereto, whether or not the obligation
secured thereby shall have been assumed and whether or not the obligation
secured is the obligation of the owner or another party; (b) any obligation on
account of deposits or advances; (c) any obligation for the deferred purchase
price of any property or services, except trade accounts payable, (d) any
obligation as lessee under any capitalized lease; (e) all guaranties,
endorsements and other contingent obligations respecting Indebtedness of others;
and (f) undertakings or agreements to reimburse or indemnify issuers of letters
of credit.
k. With respect to any Delinquent Contract, the Borrower shall
comply with Section 7 hereof.
l. The Borrower will keep full and complete books of record and
accounts for itself and other records reflecting the results of the Borrower's
operations, all in accordance with GAAP.
m. At any time upon request from the Lender after the occurrence of
an Event of Default, the Borrower will cause the Obligors under the Contracts
which constitute a part of the Collateral to be notified to make payment
directly to the Lender, and the Lender shall be entitled to take control of any
proceeds thereof.
n. After the occurrence of an Event of Default, all proceeds of
Collateral not released from the lien of the Security Agreement pursuant to
Section 3 of the Security Agreement, including without limitation, proceeds from
the sale or re-leasing of the Equipment, proceeds of insurance and all other
unscheduled recoveries, shall be paid by the Borrower into a collateral account
administered by the Lender in the manner described in Section 5 of the Security
Agreement.
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o. In the event any Equipment has been repossessed, the Borrower
shall pay promptly to the Lender the proceeds of the sale or other disposition
of the Equipment, together with a cash payment equal to the amount necessary to
fully pay the unamortized amount of the loan proceeds advanced with respect to
Contract(s) relating to such Equipment.
p. In the event any Equipment is damaged, destroyed, lost or stolen,
the Borrower shall pay promptly to the Lender the proceeds of any insurance on
the Equipment, together with a cash payment equal to the amount necessary to
fully pay the unamortized amount of the loan proceeds advanced with respect to
Contract(s) relating to such Equipment.
q. The Borrower shall service the Contracts which form a part of the
Collateral in accordance with the industry standards applicable to servicers of
such contracts, and the Borrower shall have ultimate responsibility for such
servicing. If the Borrower shall fail in any material respect in the
performance of its duties hereunder, and such failure shall continue for thirty
(30) days, the Lender shall appoint a servicer, chosen at the discretion of the
Lender, to perform such duties, and the Borrower shall promptly make available
to such servicer all books and records in any and all formats with respect to
the Collateral, and shall also make available to the servicer without fee any
and all computer software necessary to service the Collateral. Fees of the
servicer shall be paid in the manner described in the Security Agreement.
r. The Borrower will provide notice to all applicable gaming
authorities, to the extent required by the applicable gaming law, of the
Lender's security interest in the Contracts and the Equipment.
s. After the occurrence of an Event of Default and not later than
two (2) days prior to a date on which a payment is due under the Note, the
Borrower shall provide the Lender with a detailed report with respect to all
monies, if any, deposited in the collateral account pursuant to Section 5 of the
Security Agreement, including amounts paid in respect of Payments on all
Contracts (as due and as a prepayment) and amounts paid in respect of interest.
The report shall be prepared in such manner as may be required by the Lender for
purposes of properly applying funds in accordance with Section 5(b) of the
Security Agreement, if applicable.
t. With respect to each of the Contracts, the 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 Obligor under each such Contract; and (iv) upon request of
Lender verify with the Obligor under each Contract the payments due to Borrower
under such Contract, except that (A) prior to the occurrence of an Event of
Default or an event which with the passage of time or the giving of notice, or
both, would be an Event of Default, such requests shall not occur any more
frequently than once each year and (B) after the occurrence and during the
continuance of an Event of Default or an event which with the passage of time or
the giving of notice, or both, would be an Event of Default such requests may
occur as often as Lender shall require.
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u. The Borrower will store the Equipment (which is not in the
possession of an Obligor) only in the Borrower's warehouses or in bonded
warehouses.
6. NEGATIVE COVENANTS. The Borrower covenants and agrees that, except
with the prior written approval of the Lender:
a. The Borrower will not create, incur or cause to exist any
mortgage, security interest, encumbrance, lien or other charge of any kind upon
any of the Collateral, whether now owned or hereafter acquired, except for the
security interests created by the Loan Documents. Except as permitted by the
Security Agreement, the Borrower will not sell, dispose of, lease, mortgage,
assign, sublet or transfer all or any part of the Borrower's right, title or
interest in or to all or any portion of the Collateral.
b. The Borrower will not substantially alter the nature of the
business in which it is engaged, or engage in any line of business substantially
different from its current business.
c. Following the occurrence of and during the continuance of an
Event of Default, the Borrower will not declare or pay any distributions or
purchase or redeem any of its capital stock, or otherwise distribute any
property on account of its capital stock, or enter into any agreement therefor.
d. The Borrower will not permit any material breach, default or
event of default to occur under any note, loan agreement, indenture, lease,
mortgage, contract for deed, security agreement or other contractual obligation
binding upon the Borrower which is not cured within the applicable cure
provisions thereof.
e. The Borrower will not materially amend, supplement, modify,
compromise or waive any of the terms of any Contract, without the prior written
consent of the Lender, provided that Borrower will have the right to substitute
Equipment subject to any Contract with other Equipment that is like-kind in
value as long as Borrower files an amended or updated UCC financing statement
signed by Lender as to the substituted Equipment within the time period required
by the law of the applicable jurisdiction to perfect a purchase money security
interest and delivers such filed financing statements to the Lender with its
quarterly Contract Status Report.
f. If any of the following transactions would result in the
surviving entity not complying with the Tangible Net Worth test and the Cash
Flow Ratio test set forth in Section 5(j) hereof or otherwise cause an Event of
Default hereunder, the Borrower will not consolidate with or merge into any
person or entity, or permit any other person or entity to merge into it, or
acquire (in a transaction analogous in purpose or effect to a consolidation or
merger) all or substantially all of the assets of any other person or entity, or
enter into any partnership or joint venture.
g. The Borrower will not make any payments on any of the Borrower's
indebtedness to any of the Borrower's affiliated entities, or to any of the
Borrower's
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shareholders, officers, directors or employees, following the occurrence of and
during the continuance of an Event of Default or a failure to comply with a
covenant contained in Section 5 or this Section 6.
h. After delivery of the Equipment to Obligor, the Borrower will not
cause or allow any movement of the Equipment, except as permitted under Section
6(e) hereof or in connection with any repossession by the Borrower of such
Equipment.
7. DELINQUENT CONTRACTS. So long as no Event of Default or event which
with the giving of notice or the passage of time would constitute an Event of
Default has occurred under this Agreement, Delinquent Contracts that are in
monetary default only may remain part of the Collateral provided that (i) the
Borrower gives written notice to the Lender within thirty (30) days of each
monthly monetary default; (ii) the defaults by the Obligor do not exceed three
(3) consecutive monthly payments or a total of four (4) nonconsecutive monthly
payments. With respect to Delinquent Contracts that are in non-monetary
default, including without limitation, the involvement of the Obligor in any
bankruptcy or insolvency proceedings, or Delinquent Contracts that are in
monetary default beyond the limitations of the foregoing sentence, the Borrower
shall within fifteen (15) days, either (i) pay to the Lender an amount equal to
the outstanding balance of the loan proceeds advanced with respect to such
Contract, and such payment shall be applied to the unpaid principal balance of
the Note, or (ii) execute and deliver to the Lender an Addendum and Assignment
(and appropriate UCC financing statements) respecting one or more other
Contracts with an aggregate Equipment Value multiplied by 90% that is equal to
or greater than the outstanding balance of the loan proceeds advanced with
respect to such Delinquent Contract, and Obligor Acknowledgment(s) relating to
such Contract(s) duly executed by each Obligor under such Contract, and all such
other documents, instruments and agreements as required under Section 3(b) and
3(c) or as the Lender may request.
8. REPLACEMENT RIGHTS. The Borrower may, from time to time, upon ten
(10) days prior written notice to the Lender, obtain a release of a particular
Contract from the Collateral (the "Released Contract") and substitute one or
more other Contracts (the "Replacement Contract"), provided that (i) neither the
Released Contract or the Replacement Contracts are Delinquent Contracts; (ii)
the Borrower execute and deliver to the Lender an Addendum and Assignment (and
appropriate UCC financing statements) respecting the Replacement Contracts(s)
with an aggregate Equipment Value multiplied by 90% that is equal to or greater
than the outstanding balance of the loan proceeds advanced with respect to the
Released Contract (the "Unamortized Advance"), and Obligor Acknowledgment(s)
relating to the Replacement Contract(s) duly executed by each Obligor under such
Contract(s), and all such other documents, instruments and agreements as
required under Section 3(b) and 3(c) or as the Lender may request; (iii) the
Borrower pay to the Lender a Replacement Fee equal to one percent (1%) of the
Unamortized Advance; and (iv) the Borrower pay $750 for lender's legal fees in
connection with the replacement.
9. RETURNED EQUIPMENT. Certain Contracts that may be funded pursuant to
the Credit Facility will contain a provision giving the Obligor the right, under
certain circumstances, to return and replace some portion of the Equipment that
is subject to a particular Contract. In that
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event, the Borrower has agreed with the Obligor to amend the Contract to reduce
the obligations of the Obligor thereunder and create a new Contract for
replacement Equipment. The Borrower agrees that, in such event, in exchange for
the Lender's release of its security interest in the returned Equipment (the
"Returned Equipment"), the Borrower will make a prepayment on the Note equal to
the outstanding balance of the amount advanced by the Lender with respect to the
Returned Equipment under the applicable Contract. The Borrower agrees to
provide the Lender with a written certification (i) identifying the Returned
Equipment, (ii) the aggregate Equipment Value of the Returned Equipment, (iii)
90% of such aggregate Equipment Value that was advanced by the Lender and
(iv) the outstanding balance of the amount advanced. The Borrower also agrees
to provide UCC-3 Releases to be executed by the Lender to release such
Equipment.
10. EVENT OF DEFAULT. Each of the following occurrences shall constitute
an Event of Default under this Agreement and under the Loan Documents (herein
called an "Event of Default"):
a. The Borrower shall fail to pay any or all of the indebtedness
arising out of this Agreement or Loan Documents (the "Obligations") when due or,
if payable on demand, on demand and such failure shall continue for a period of
five (5) days after such payment becomes due; or
b. The Borrower shall fail to observe or perform any covenant or
agreement binding on the Borrower under this Agreement or under any other
assignment, conveyance, instrument or agreement now in effect or hereafter made
between the Borrower and the Lender, or under the Loan Documents for a period of
thirty (30) days for any default which can be reasonably cured within thirty
(30) days and a reasonable period of time for a default not reasonably capable
of cure within thirty (30) days, provided the Borrower diligently commences and
continues a course of action acceptable to the Lender to so cure; or
c. The Borrower shall make any representations or warranties in this
Agreement or in any such other assignment, conveyance, instrument, agreement,
financial statements, reports or certificates heretofore or at any time
hereafter submitted by or on behalf of the Borrower to the Lender, and such
representations or warranties, shall prove to have been false or materially
misleading when made; or
d. As a result of a default or failure by Borrower, payment of any
substantial indebtedness of the Borrower (other than the Obligations and other
than indebtedness of the Borrower to the extent the indebtedness is non-recourse
to the Borrower) shall be demanded, or the maturity of any substantial
indebtedness shall be accelerated, or any precondition or circumstance
permitting any creditor of the Borrower (acting individually or with the consent
of other creditors) to accelerate the maturity of any substantial indebtedness
shall have occurred; for this purpose indebtedness shall be deemed substantial
if it exceeds $500,000; or
e. The Borrower shall become insolvent or shall commit an act of
bankruptcy under the United States Bankruptcy Act, or shall file or have filed
against it, voluntarily or involuntarily, a petition in bankruptcy or for
reorganization or for the adoption of an arrangement or plan under the United
States Bankruptcy Act or shall procure or suffer the
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appointment of a receiver for any substantial portion of its properties, or
shall initiate or have initiated against it, voluntarily or involuntarily, any
act, process or proceeding under any insolvency law or other statute or law
providing for the modification or adjustment of the rights of creditors and such
petition, receiver, act, process or proceeding shall not be dismissed or
discharged within ninety (90) days; or
f. A garnishment summons or writ of attachment for an amount in
excess of $500,000 shall have been issued against or served upon the Lender for
the attachment of any property of the Borrower in the Lender's possession or any
indebtedness owing the Borrower; or
g. The Borrower shall have been dissolved, whether voluntarily or by
operation of law; or
h. Any of Borrower's licenses required under the gaming laws of
Nevada, Mississippi or any other jurisdiction in which any of the Collateral is
located is revoked or rescinded, lapses, or is otherwise no longer maintained by
or available to the Borrower.
11. RIGHTS AND REMEDIES UPON DEFAULT. Upon the occurrence of an Event of
Default and at any time thereafter, subject to the gaming laws of any
jurisdiction in which any of the Collateral is located, the Lender may exercise
one or more of the following rights and remedies:
a. The Lender may declare all unmatured Obligations to be
immediately due and payable, and the same shall thereupon be immediately due and
payable, without presentment or other notice or demand;
b. Subject to the rights of the Obligors, the Lender may exercise
and enforce any and all rights and remedies available upon default to a secured
party under the Uniform Commercial Code including, without limitation, the right
to take possession of the Collateral, or any evidence thereof, proceeding
without judicial process or by judicial process (without a prior hearing or
notice thereof, which the Borrower hereby expressly waives) and the right to
sell, lease or otherwise dispose of any or all of the Collateral, and the
Borrower agrees to make the Collateral available to the Lender at a place to be
designated by the Lender which is reasonably convenient to both parties. If
notice to the Borrower of any intended disposition of the Collateral or any
other intended action is required by law in a particular instance, such notice
shall be deemed commercially reasonable if given at least ten (10) calendar days
prior to the date of intended disposition or other action;
c. The Lender may request the Borrower to, and upon such request the
Borrower will, assist the Lender in repossessing and selling the Equipment in
compliance with all applicable laws and in accordance with the Repossession
Agreement (this provision in no way limits the Lender's ability to use any other
person or entity to repossess and sell the Equipment);
d. Without notice or demand, the Lender may offset any indebtedness
the Lender or any of its participants, successors or assigns then owes to the
Borrower whether or not then due, against any Obligation then owed to the Lender
or any of its participants, successors or assigns by Borrower, whether or not
then due;
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e. The Lender may exercise the recourse rights of the Borrower
against the Obligor on any Contracts; and
f. The Lender may exercise or enforce any and all other rights or
remedies available by law or agreement against the Collateral, against the
Borrower or against any other person or property.
12. MISCELLANEOUS. The Borrower agrees that:
a. The performance or observance of any promise or condition set
forth in this Agreement may be waived in writing by the Lender, but not
otherwise. No delay in the exercise of any power, right or remedy of the
Lender, shall operate as a waiver thereof, nor shall any single or partial
exercise thereof or the exercise of any other power, right or remedy operate as
a waiver thereof.
b. This Agreement shall be binding upon the Borrower and its
successors and assigns and shall inure to the benefit of the Lender and its
participants and the successors and assigns of any of them, provided that the
Borrower may not transfer or assign its rights hereunder without the prior
written consent of the Lender. This Agreement shall be effective the date
written above. All rights and powers specifically conferred upon the Lender may
be transferred or delegated by the Lender to any of its successors or assigns.
Except to the extent otherwise required by law, this Agreement and the
transactions evidenced hereby shall be governed by the substantive laws of the
State of Minnesota without regard to principles of conflicts of laws. If any
provision or application of this Agreement is held unlawful or unenforceable in
any respect, such illegality or unenforceability shall not affect other
provisions or applications which can be given effect, and this Agreement shall
be construed as if the unlawful or unenforceable provision or application had
never been contained herein or prescribed hereby. All representations and
warranties contained in this Agreement or in any other agreement between the
Borrower and the Lender shall survive the execution, delivery and performance of
this Agreement and the creation and payment of any indebtedness to the Lender.
This Agreement may be executed in any number of counterparts, each of which is
to be deemed to be an original and all of which constitute one agreement.
13. NOTICES. All notices, consents, requests, demands and other
communications hereunder shall be given to or made upon the respective parties
hereto at their respective addresses specified below or, as to any party, at
such other address as may be designated by it in a written notice to the other
party. All notices, requests, consents and demands hereunder shall be effective
when personally delivered or five (5) days after depositing in the United States
mail, certified or registered, postage prepaid, or when sent by confirmed
facsimile, or when delivered by overnight courier.
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If to Borrower: PDS Financial Corporation
6171 McLeod Drive
Las Vegas, NV 89120
Attn: Johan Finley
Telephone: 702-736-0700
Fax: 702-740-8692
If to M&S: Miller & Schroeder Investments Corporation
220 South Sixth Street, Suite 300
Minneapolis, Minnesota 55402
Attn: Gaming Department
Telephone: 612/376-1500
Fax: 612/376-1410
14. JURISDICTION. THE BORROWER HEREBY SUBMITS ITSELF TO THE JURISDICTION
OF THE STATE OF MINNESOTA AND THE FEDERAL COURTS OF THE UNITED STATES LOCATED IN
SUCH STATE IN RESPECT OF ALL ACTIONS ARISING OUT OF OR IN CONNECTION WITH THE
INTERPRETATION OR ENFORCEMENT OF THIS AGREEMENT AND THE DOCUMENTS RELATED
THERETO.
15. DUTIES OF LENDER WITH RESPECT TO COLLATERAL. Except with respect to
the exercise of remedies under this Agreement or the Security Agreement, the
Lender shall have no duty, responsibility or obligation of any nature whatsoever
to service, collect, administer, enforce or account for the Contracts. The
Borrower shall service, account for, administer, collect all payments and
enforce all rights with respect to such Contracts. Upon the occurrence of an
Event of Default, the Borrower shall deposit such payments promptly upon receipt
and in the form received in the collateral account established by the Lender
pursuant to Section 5 of the Security Agreement.
16. INDEMNIFICATION. Except for losses, claims, damages or liability
arising out of the gross negligence or willful misconduct of the Lender, the
Borrower agrees to indemnify and hold harmless the Lender, its officers, agents
(including outside legal counsel) and employees, against any and all losses,
claims, damages or liability to which the Lender, its officers, agents and
employees, may become subject under any law in connection with the carrying out
of the transactions contemplated by this Agreement or any other Loan Document,
or the conduct of any activity related to the Equipment and to reimburse the
Lender, its officers, agents and employees, for any out-of-pocket legal and
other expenses (including reasonable attorneys' fees, whether incurred at trial,
on appeal, in bankruptcy proceedings, or otherwise) incurred by the Lender, its
officers, agents and employees, in connection with investigating any such
losses, claims, damages or liabilities or in connection with defending any
actions relating thereto. The Lender agrees, at the request and reasonable
expense of the Borrower, to cooperate in the making of any investigation in
defense of any such claim and promptly to assert any or all of the rights and
privileges and defenses which may be available to the Lender. The Borrower
further releases and agrees to hold harmless the Lender, its officers, agents
and employees, from and against all losses, damages, penalties, liabilities, or
expenses (including reasonable legal fees, whether incurred at trial, on appeal,
in bankruptcy proceedings, or otherwise) due to or arising out of any
misrepresentation of information furnished to Lender by Borrower or out of a
breach of any
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covenant, representation or undertaking of the Borrower contained in this
Agreement or any other Loan Document. The Borrower's liability hereunder shall
not be limited to the extent of such insurance or subject to any exclusions from
coverage in any insurance policy. The provisions of this Section shall survive
the payment of the Note and the Loan.
17. PLACEMENT FEE/PARTICIPATION SERVICING FEE. The Borrower shall pay to
the Lender the following amounts: (i) a placement fee that will be deducted
from the proceeds of the Note on the Closing Date, and (ii) a participation
servicing fee on the unpaid principal balance of the Note from time to time
outstanding (computed on the basis of a year consisting of twelve (12) thirty
(30) day months) accruing at a rate equal to one-fourth of one percent (0.25%),
payable monthly on each payment date under the Note.
18. ATTORNEYS FEES AND TAXES. The Borrower shall reimburse the Lender,
upon demand, for all reasonable costs and expenses actually incurred, including
without limitation reasonable attorney's fees paid or incurred by the Lender in
connection with:
a. The preparation or review of the Loan Documents (provided,
however, that the Borrower's obligation to pay legal fees to the Lender for
legal services rendered by counsel for the Lender in connection with the initial
preparation and review of the Loan Documents shall be limited to $2,000), the
perfection, protection, enforcement or foreclosure of the security interests
created by the Loan Documents, the protection or enforcement of the interests
and collateral security of the Lender in any litigation or bankruptcy or
insolvency proceeding or the prosecution or defense of any action or proceeding
relating in any way to the transactions contemplated by this Agreement, travel
to and from the offices and place of business of the Borrower, the negotiation
and preparation of the Loan Documents and all other documents necessary or
desirable in connection with the original execution and delivery of Loan
Documents;
b. For each Advance Request made pursuant to this Agreement, legal
fees associated with review of the documentation submitted by Borrower, and the
perfection of the security interests in the Collateral (provided, however, that
the legal fees for each Advance Request shall be limited to $750.00 and shall be
paid out of the Advance Request).
c. Subsequent to the initial Closing, the negotiation of any
amendments or modifications to any of the Loan Documents requested by or
consented to by Borrower or, if an Event of Default has occurred and is
continuing, requested by Lender, and any related documents, instruments or
agreements and the preparation of any and all documents necessary or desirable
to effect such amendments or modifications; and
d. The enforcement by the Lender during the term hereof or
thereafter of the rights or remedies of the Lender hereunder or under any of the
foregoing documents, instruments or agreements, including without limitation
reasonable costs and expenses of collection in the Event of Default, whether or
not suit is filed with respect thereto and whether such costs are paid or
incurred, or to be paid or incurred, prior to or after entry of judgment.
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The Borrower agrees to pay all stamp, document, transfer, recording or filing
taxes or fees and similar impositions now or hereafter reasonably determined by
the Lender to be payable in connection with the Loan Documents, or any other
documents, instruments or transactions pursuant to or in connection herewith or
therewith, and the Borrower agrees to save the Lender harmless from and against
any and all present or future claims, liabilities or losses with respect to or
resulting from any omission to pay or delay in paying any such taxes, fees or
impositions, unless such omission or delay is due to gross negligence or willful
misconduct on the part of Lender. All such expenses, taxes or attorney's fees
shall be payable to the Lender on demand. The obligations of Borrower under
this Section 18 shall survive the repayment of the Note and Loan.
19. RELATIONSHIP AMONG BORROWERS.
a. JOINT AND SEVERAL LIABILITY. BY SIGNING THIS AGREEMENT, EACH OF
THE BORROWERS AGREES THAT IT IS LIABLE, JOINTLY AND SEVERALLY WITH THE OTHER
BORROWER, FOR THE PAYMENT OF THE NOTE AND ALL OTHER OBLIGATIONS OF THE BORROWERS
UNDER THIS AGREEMENT, AND THAT LENDER CAN ENFORCE SUCH OBLIGATIONS AGAINST
EITHER BORROWER, IN LENDER'S SOLE AND UNLIMITED DISCRETION.
b. LENDER RIGHTS TO ADMINISTER THE LOAN. Lender may at any time and
from time to time, without the consent of, or notice to, either Borrower,
without incurring responsibility to either Borrower, and without affecting,
impairing or releasing any of the obligations of either Borrower hereunder:
(1) alter, change, modify, extend, release, renew, cancel,
supplement or amend in any manner the Loan Documents provided at least one
Borrower has consented thereto, and the Borrowers' joint and several liability
shall continue to apply after giving effect to any such alteration, change,
modification, extension, release, renewal, cancellation, supplement or
amendment;
(2) sell, exchange, surrender, realize upon, release (with or
without consideration) or otherwise deal with in any manner and in any order any
property of any person or entity mortgaged to Lender or otherwise securing the
Borrowers' joint and several liability, or otherwise providing recourse to
Lender with respect thereto;
(3) exercise or refrain from exercising any rights against
either Borrower or others with respect to the Borrowers' joint and several
liability, or otherwise act or refrain from acting;
(4) settle or compromise any of the Borrowers' joint and several
liability, any security therefor or other recourse with respect thereto, or
subordinate the payment or performance of all or any part thereof to the payment
of any liability (whether due or not) of either Borrower to any creditor of
either Borrower, including without limitation, Lender and either Borrower;
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(5) apply any sum received by Lender from any source in respect
of any liabilities of either Borrower to Lender to any of such liabilities,
regardless of whether the Note remains unpaid;
(6) fail to set off and/or release, in whole or in part, any
balance of any account or any credit on its books in favor of either Borrower,
or of any other person, and extend credit in any manner whatsoever to either
Borrower, and generally deal with either Borrower and any security for the
Borrowers' joint and several liability or any recourse with respect thereto as
Lender may see fit; and/or
(7) consent to or waive any breach of, or any act, omission or
default under, this Agreement or any other Loan Document, including, without
limitation, any agreement providing collateral security for the payment of the
Borrowers' joint and several liability or any other indebtedness of either
Borrower or Lender.
c. PRIMARY OBLIGATION. No invalidity, irregularity or
unenforceability of all or any part of either Borrower's joint and several
liability or of any security therefor or other recourse with respect thereto
shall affect, impair or be a defense to the other Borrower's joint and several
liability, and all obligations under the Note and this Agreement are primary
obligations of each Borrower.
d. PAYMENTS RECOVERED FROM LENDER. If any payment received by the
Lender and applied to any obligations is subsequently set aside, recovered,
rescinded or required to be returned for any reason (including, without
limitation, the bankruptcy, insolvency or reorganization of a Borrower or any
other obligor), the obligations to which such payment was applied shall be
deemed to have continued in existence, notwithstanding such application, and
each Borrower shall be jointly and severally liable for such obligations as
fully as if such application had never been made. References in this Agreement
to amounts "irrevocably paid" or to "irrevocable payment" refer to payments that
cannot be set aside, recovered, rescinded or required to be returned for any
reason.
e. NO RELEASE. Until the Note and all other obligations under this
Agreement have been paid in full and each and every one of the covenants and
agreements of this Agreement are fully performed, the obligations of either
Borrower hereunder shall not be released, in whole or in part, by any action or
thing (other than irrevocable payment in full) which might, but for this
provision of this Agreement, be deemed a legal or equitable discharge of a
surety or guarantor, or by reason of any waiver, extension, modification,
forbearance or delay or other act or omission of Lender or its failure to
proceed promptly or otherwise, or by reason of any action taken or omitted by
Lender whether or not such action or failure to act varies or increases the risk
of, or affects the rights or remedies of, either Borrower, nor shall any
modification of any of the Note or this Agreement or release of any security
therefor by operation of law or by the action of any third party affect in any
way the obligations of either Borrower hereunder, and each Borrower hereby
expressly waives and surrenders any defense to its liability hereunder based
upon any of the foregoing acts, omissions, things, agreements, or waivers of any
of them. Neither Borrower shall be exonerated with respect to its liabilities
under this Agreement by any act or thing except irrevocable payment and
performance of the
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obligations, it being the purpose and intent of this Agreement that the
obligations constitute the direct and primary obligations of each Borrower and
that the covenants, agreements and all obligations of each Borrower hereunder be
absolute, unconditional and irrevocable.
f. ACTIONS NOT REQUIRED. Each Borrower hereby waives any and all
right to cause a marshalling of the other Borrower's assets or any other action
by any court or other governmental body with respect thereto insofar as the
rights of Lender hereunder are concerned or to cause Lender to proceed against
any security for the Borrowers' joint and several liability or any other
recourse which Lender may have with respect thereto, and further waives any and
all requirements that Lender institute any action or proceeding at law or in
equity against the other Borrower or anyone else, or with respect to this
Agreement, the Loan Documents, or any collateral security for the Borrowers'
joint and several liability, as a condition precedent to making demand on, or
bringing an action or obtaining and/or enforcing a judgment against, either
Borrower. Each Borrower further waives any requirement that Lender seek
performance by the other Borrower or any other person, of any obligation under
this Agreement, the Loan Documents or any collateral security for the Borrowers'
joint and several liability as a condition precedent to making a demand on, or
bringing an action or obtaining and/or enforcing a judgment against, either
Borrower. No Borrower shall have any right of setoff against Lender with
respect to any of its obligations hereunder. Any remedy or right hereby granted
which shall be found to be unenforceable as to any person or under any
circumstance, for any reason, shall in no way limit or prevent the enforcement
of such remedy or right as to any other person or circumstance, nor shall such
unenforceability limit or prevent enforcement of any other remedy or right
hereby granted.
g. DEFICIENCIES. Each Borrower specifically agrees that in the
event of a foreclosure under the Security Agreement, any other security
agreement or other similar agreement held by Lender which secures any part or
all of the Borrowers' joint and several liability and in the event of a
deficiency resulting therefrom, each Borrower shall be, and hereby is expressly
made, liable to Lender for the full amount of such deficiency notwithstanding
any other provision of this Agreement or provision of such agreement, any
document or documents evidencing the indebtedness secured by such agreement or
any other document or any provision of applicable laws which might otherwise
prevent Lender from enforcing and/or collecting such deficiency. Each Borrower
hereby waives any right to notice of a foreclosure under any security agreement
or other similar agreement given to Lender by any other Borrower which secures
any part or all of the Borrowers' joint and several liability.
h. BORROWERS BANKRUPTCY. Each Borrower expressly agrees that its
liability and obligations under the Note and this Agreement shall not in any way
be affected by the institution by or against the other Borrower or any other
person or entity of any bankruptcy, reorganization, arrangement, insolvency or
liquidation proceedings, or any other similar proceedings for relief under any
bankruptcy law or similar law for the relief of debtors, or any action taken or
not taken by Lender in connection therewith, and that any discharge of either
Borrower's joint and several liability pursuant to any such bankruptcy or
similar law or other laws shall not discharge or otherwise affect in any way the
obligations of the other Borrower under the Note and this Agreement, and that
upon or at any time after the institution of any of the above actions, at
Lender's sole discretion, the Borrowers' joint and several obligations shall be
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enforceable against either Borrower that is not itself the subject of such
proceedings. Each Borrower expressly waives any right to argue that Lender's
enforcement of any remedies against that Borrower is stayed by reason of the
pendency of any such proceedings against the other Borrower.
i. NO SUBROGATION. Notwithstanding any payment or payments made by
either Borrower hereunder or any setoff or application of funds of either
Borrower by the Lender, such Borrower shall not be entitled to be subrogated to
any of the rights of the Lender against the other Borrower or any other
guarantor or any collateral security or guaranty or right of offset held by the
Lender for the payment of the obligations, nor shall such Borrower seek or be
entitled to seek any contribution or reimbursement from the other Borrower or
any other guarantor in respect of payments made by such Borrower hereunder,
until all amounts owing to the Lender by the Borrowers on account of the
obligations are irrevocably paid in full. If any amount shall be paid to a
Borrower on account of such subrogation rights at any time when all of the
obligations shall not have been irrevocably paid in full, such amount shall be
held by that Borrower, and shall, forthwith upon receipt by the Borrower, be
turned over to the Lender in the exact form received by the Borrower (duly
endorsed by the Borrower to the Lender, if required), to be applied against the
obligations, whether matured or unmatured, in such order as the Lender may
determine.
j. BORROWERS' FINANCIAL CONDITION. Each Borrower is familiar with
the financial condition of the other Borrower, and each Borrower has executed
and delivered this Agreement and the Note based on that Borrower's own judgment
and not in reliance upon any statement or representation of the Lender. The
Lender shall have no obligation to provide either Borrower with any advice
whatsoever or to inform either Borrower at any time of the Lender's actions,
evaluations or conclusions on the financial condition or any other matter
concerning the Borrowers.
k. RELATIONSHIP OF BORROWERS. Each Borrower represents that it
expects to derive benefits from the extension of credit accommodations to the
Borrowers by the Lender and finds it advantageous, desirable and in its best
interests to execute and deliver this Agreement and the Note to the Lender.
20. PARTICIPATION DISCLOSURE. The Borrower hereby acknowledges that and
consents to the Lender selling participation interests in the Loan, and hereby
authorizes the Lender to disclose to any potential participant the Loan
Documents and any and all financial and other information relating to the
Borrower and delivered to the Lender in connection with this transaction,
provided that Lender shall comply with all laws, including but not limited to
federal and state securities laws, in connection with the offer or sale of such
participation interests. The Lender and anyone claiming by or through the
Lender shall not hold Borrower responsible for any false representations Lender
may have made to its participants.
21. AMENDMENTS. No amendment, modification or waiver of any provision of
the Loan Documents and no consent to any departure by the Borrower therefrom
shall in any event be effective unless the same shall be in writing and signed
by the Lender, and then such amendment, modification, waiver or consent shall be
effective only in the specific instance and
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<PAGE>
for the purpose for which given. Neither this Agreement nor any provision
hereof may be changed, waived, discharged or terminated orally, but only by an
instrument in writing signed by the party against whom enforcement of the
change, waiver, discharge or termination is sought.
22. MARSHALLING; PAYMENTS SET ASIDE. The Lender shall be under no
obligation to marshall any assets in favor of the Borrower or any other Person
or against or in payment of the Loan and other Indebtedness of the Borrower to
the Lender. To the extent that the Borrower makes a payment or payments to the
Lender or the Lender exercises its rights of setoff, and such payment or
payments or the proceeds of such setoff or any part thereof are subsequently
invalidated, declared to be fraudulent or preferential, set aside and/or
required to be repaid to a trustee, receiver or any other party under any
bankruptcy law, state or federal law, common law or equitable cause, then to the
extent of such recovery, the obligation or part thereof originally intended to
be satisfied shall be revived and continued in full force and effect as if such
payment had not been made or such enforcement or setoff had not occurred.
23. INVALID PROVISIONS. If fulfillment of any provision hereof, or any
transaction related thereto at the time performance of any such provision shall
be due, shall involve transcending the limit of validity prescribed by law,
then, ipso facto, the obligation to be fulfilled shall be reduced to the limit
of such validity; and such clause or provision shall be deemed invalid as though
not herein contained, and the remainder of this Agreement shall remain operative
in full force and effect.
24. NOT JOINT VENTURES. The Lender is not, and shall not by reason of any
provision of any of the Loan Documents be deemed to be, a joint venturer with or
partner or agent of the Borrower.
25. ESTOPPEL CERTIFICATE. At any time and from time to time, within
fifteen (15) Business Days after receipt from the other party hereto of a
written request therefor, Borrower or Lender, as the case may be, shall prepare,
execute and deliver to the such party, and/or any other party which Borrower or
Lender, as the case may be, may designate, an estoppel certificate stating: (a)
the amount of the unpaid principal balance and accrued interest on the date
thereof; (b) the date upon which the last payment was made and the date the next
payment is due; and (c) that Borrower has no defenses, claims or offsets against
full enforcement hereof according to the terms hereof, or listing and describing
any such amendments, changes, defaults, events of default, defenses, claims or
offsets which do exist.
26. NOTICE OF CHANGE OF LOCATION. Borrower shall promptly notify Lender
of any change in location of Borrower's principal places of business or the
offices where it keeps its records concerning accounts and contract rights.
27. TAX IDENTIFICATION NUMBER. The federal tax identification number for
PDS Financial Corporation is 41-1605970. The federal tax identification number
for PDS Financial Corporation-Nevada is 88-0357859. The federal tax
identification number for PDS Financial Corporation-Mississippi is 41-1605970.
28. SETOFFS. If the unpaid principal amount of the Loan, interest accrued
thereon or any other amount owing by the Borrower under the Loan Documents shall
have become due and
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payable (by demand, acceleration or otherwise), the Lender shall have the right,
in addition to all other rights and remedies available to it, without notice to
the Borrower, to set off against, and to appropriate and apply to such due and
payable amounts any debt owing to, and any other funds held in any manner by the
Lender for the account of, the Borrower. Such right shall exist whether or not
the Lender shall have made any demand hereunder or under any other Loan
Document, whether or not such debt owing to or funds held for the account of the
Borrower is or are matured or unmatured, and regardless of the existence or
adequacy of any collateral, guaranty or any other security, right or remedy
available to the Lender.
29. REMEDIES CUMULATIVE. The rights and remedies herein specified of the
parties hereto are cumulative and not exclusive of any rights or remedies which
the parties hereto would otherwise have at law or in equity or by statute.
30. INTEGRATION; CONFLICTING TERMS. This Agreement together with the
other Loan Documents comprises the entire agreement of the parties on the
subject matter hereof and supersedes and replaces all prior agreements, oral and
written, on such subject matter. If any term of any of the other Loan Documents
expressly conflicts with the provisions of this Agreement, the provisions of
this Agreement shall control; provided, however, that the inclusion of
supplemental rights and remedies of Lender in any of the other Loan Documents
shall not be deemed a conflict with this Agreement.
31. GOVERNING LAW; CONSTRUCTION. The Loan Documents shall be governed by,
and construed in accordance with, Minnesota law. Whenever possible, each,
provision of the Loan Documents and any other statement, instrument or
transaction contemplated hereby or thereby or relating hereto or thereto shall
be interpreted in such manner as to be effective and valid under such applicable
law, but, if any provision of the Loan Documents or any other statement,
instrument or transaction contemplated hereby or thereby or relating hereto or
thereto shall be held to be prohibited or invalid under such applicable law,
such provision shall be ineffective only to the extent of such prohibition or
invalidity, without invalidating the remainder of such provision or the
remaining provisions of the Loan Documents or any other statement, instrument or
transaction contemplated hereby or thereby or relating hereto or thereto. The
parties shall endeavor in good-faith negotiations to replace any invalid,
illegal or unenforceable provisions with a valid provision the economic effect
of which comes as close as possible to that of the invalid, illegal or
unenforceable provision. The provisions of this Section are irrevocable and may
not be rescinded, revoked or amended without the prior written consent of
Lender. Borrower acknowledges Lender has relied upon them in entering into the
Loan Documents.
32. WAIVER OF JURY TRIAL. Borrower hereby irrevocably waives any and all
right to trial by jury in any legal proceeding arising out of or relating to
this Agreement, the Note or any of the documents executed in connection
therewith or the transactions contemplated hereby or thereby.
IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by
the proper officers thereunto duly authorized on the day and year first above
written.
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<PAGE>
MILLER & SCHROEDER PDS FINANCIAL CORPORATION
INVESTMENTS CORPORATION
By: By:
--------------------------- --------------------------------
Its: Its:
------------------------ -----------------------------
PDS FINANCIAL CORPORATION-
NEVADA
By:
--------------------------------
Its:
-----------------------------
PDS FINANCIAL CORPORATION-
MISSISSIPPI
By:
--------------------------------
Its:
-----------------------------
LIST OF EXHIBITS
A. Contract Eligibility Criteria
B. Form of Advance Request
C. Pending Litigation
D. Contract Status Report Format
E. Compliance Certificate
27
<PAGE>
- - --------------------------------------------------------------------------------
MASTER LOAN AGREEMENT
BY AND AMONG
PDS FINANCIAL CORPORATION
PDS FINANCIAL CORPORATION-NEVADA
AND
MILLER & SCHROEDER INVESTMENTS CORPORATION
- - --------------------------------------------------------------------------------
Drafted by:
Fredrikson & Byron, P.A.
1100 International Centre
900 Second Avenue South
Minneapolis, Minnesota 55402-3397
<PAGE>
MASTER LOAN AGREEMENT
THIS AGREEMENT is made as of October 28, 1999, by and among PDS FINANCIAL
CORPORATION, a Minnesota corporation ("PDS") and PDS FINANCIAL CORPORATION-
NEVADA, a Nevada corporation ("PDS-Nevada") (PDS and PDS-Nevada are jointly and
severally, the "Borrower") and MILLER & SCHROEDER INVESTMENTS CORPORATION, a
Minnesota corporation ("M&S"), and certain other participating institutions
identified in the Participation Agreements among M&S and the participants (M&S
and the participants being collectively, the "Lender").
RECITALS
A. The Borrower has requested that the Lender make available to the
Borrower a multiple advance credit facility in an aggregate principal amount of
Three Million Dollars ($3,000,000) (the "Credit Facility") evidenced by a
Promissory Note dated the date hereof from the Borrower in favor of the Lender
(the "Note") and secured by a Master Security Agreement dated the date hereof
between the Borrower and the Lender (as such Master Security Agreement may be
amended from time to time, the "Security Agreement").
B. The Lender is willing to make advances under the Credit Facility (each
a "Loan") to the Borrower upon the terms and subject to the conditions set forth
herein.
C. The Lender has entered or will enter into one or more participation
agreements (the "Participation Agreements") pursuant to which the participants
named therein agree to participate in the Credit Facility.
NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. DEFINITIONS.
"Addendum and Assignment" is defined in Section 1 of the Security
Agreement.
"Capitalized Cost to Lessee" means the fair market value of the Equipment
as of the date of the Contract as reasonably determined by Borrower in
accordance with FASB 13, excluding any charges for insurance, maintenance,
delivery and sales or use taxes.
"Closing Date" means the date hereof.
"Collateral" is defined in Section 2 of the Security Agreement.
"Contract" means any Contract which is identified in an Addendum and
Assignment, and which meets the eligibility criteria set forth in EXHIBIT A
attached hereto.
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"Delinquent Contract" means any Contract where payment in full of all
installments then due have not been made within 30 days of the due date or where
any other material default has occurred and such default has continued for a
period of at least 30 days.
"Equipment" is defined in Section 1 of the Security Agreement.
"Equipment Value" means, (i) with respect to any Contract which is an
installment sales contract or installment note, the sales price of the Equipment
subject to such Contract, EXCLUDING sales or use tax, delivery charges,
installation charges and any security deposit that is or will be applied as a
credit against the first or last installment payment in whatever form collected;
(ii) with respect to any Contract which is a finance lease, the Capitalized Cost
to Lessee, EXCLUDING sales or use tax, delivery charges, installation charges
and any security deposit that is or will be applied as a credit against the
first or last rent payment; and (iii) with respect to any Contract which is an
operating lease, the Capitalized Cost to Lessee, EXCLUDING sales or use tax,
delivery charges, installation charges and any security deposit that is or will
be applied as a credit against the first or last rent payment.
"GAAP" means 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.
"Loan Documents" means this Agreement, the Note, the Security Agreement,
the Addendum and Agreement, the Repossession Agreement, the UCC-1 and UCC-3
Financing Statements, and all other documents, instruments or agreements
(excluding the Contracts) necessary to give effect to this Agreement and the
transaction contemplated hereby.
"Maturity Date" means November 1, 2003.
"Obligor" means, with respect to any Contract, the person identified on a
Contract as the lessee or purchaser.
"Repossession Agreement" means that certain Repossession Agreement among
the Borrower and the Lender, dated the date hereof, as it may be amended from
time to time.
"Required Payment Amount" means as of any Installment Payment Date (as
defined in the Note), that amount equal to the monthly amount necessary to fully
amortize the then outstanding principal balance and accrued interest under the
Note in equal monthly installments by the Maturity Date, together with payment
of the Servicing Fee described in the Note.
2. THE CREDIT FACILITY. Subject to and upon the terms and conditions
hereof, and in reliance upon the representations and warranties of the Borrower
herein, the Lender will make Loans to the Borrower under the Credit Facility
from time to time from the date hereof until November 1, 2003, at such time and
in such amount as to each Loan as the Borrower may request up to but not
exceeding an aggregate principal amount of $3,000,000 for the purpose of funding
Contracts to certain casino operators, and to pay all related transaction costs.
The Credit Facility will be advanced based on multiple Advance Requests (as
hereafter defined) but will not
2
<PAGE>
be a revolving credit facility and the Borrower may not borrow, repay and
reborrow amounts advanced. The Advance amount of any Loan shall not exceed
ninety percent (90%) of the Equipment Value of any Contract(s) being financed
therewith and no more than $1,750,000 will be advanced on an individual
Contract, and in no event shall the aggregate principal amount of Loans, the
proceeds of which are used to finance Contracts where the Equipment subject to
such Contracts is located on ships or is subject to maritime laws, exceed
twenty-five percent (25%) of the aggregate principal amount of all Loans. The
Loans under the Credit Facility shall be evidenced by a single Note which will
be made payable to the order of the Lender. The Credit Facility shall bear
interest at the rate of nine and three quarters percent (9-3/4%) per annum. The
Credit Facility shall be payable over a forty-eight (48)-month term. Commencing
December 1, 1999 and continuing on each Installment Payment Date (as defined in
the Note) thereafter, the Borrower shall pay installments of principal and
interest equal to the Required Payment Amount; provided that the unpaid
principal balance of the Note, interest accrued thereon and all charges payable
pursuant to the terms of the Note shall become due and payable in full on the
earlier to occur of the following: (i) the Maturity Date, (ii) the occurrence of
an Event of Default and (iii) the Installment Payment Date (as defined in the
Note) next following the Installment Payment Date on which the unpaid principal
balance of the Note declines below $100,000. Any prepayments made on any
Contract shall be used to prepay the Credit Facility to the extent required by
Section 3(t) of the Security Agreement. The Note may be prepaid in whole or in
part at any time, provided that any prepayment shall be made on fifteen (15)
days' advance written notice to the Lender and shall be made only on a regularly
scheduled Installment Payment Date and shall be made in denominations of no less
than $100,000 or provide for payment in full of the outstanding balance of the
Note. After a prepayment, the then outstanding principal balance and accrued
interest will be reamortized over the period remaining between the date of
prepayment and the Maturity Date. All amounts paid in respect of the Note shall
be applied in accordance with Section 5(b) of the Security Agreement. All
payments and prepayments of the principal of and interest on the Loan shall be
made by the Borrower to the Lender pursuant to the terms of the Note and other
Loan Documents, and shall be made by wire transfer in accordance with Lender's
instructions.
3. BORROWING PROCEDURE AND DISBURSEMENT OF LOAN PROCEEDS. On the date
hereof, the Lender has disbursed to the Borrower $____________ for payment of
closing costs for the Credit Facility. The balance of the Credit Facility in
the amount of $_____________ will be advanced under the Note and deposited in an
interest bearing account with the Lender (the "Escrow). Each time the Borrower
desires to obtain a disbursement from the Escrow, the Borrower shall submit to
the Lender a written advance request, duly signed by the Borrower, substantially
in the form of EXHIBIT B attached hereto (each an "Advance Request"). Each
Advance Request shall be submitted by the Borrower to the Lender at least five
(5) business days prior to the date of the requested advance. Each Advance
Request shall specify (i) the advance date (which shall be a business day), (ii)
the Equipment being acquired or financed therewith and the Equipment Value
thereof, (iii) the terms of the Contract(s) to which such Equipment will be sold
or leased, and (iv) the amount of the requested Loan, and shall set forth the
information requested therein. Unless the Lender reasonably determines any
applicable condition specified in this Agreement has not been satisfied, the
Lender will make the amount of the requested Loan available to the Borrower at
the Lender's principal office in Minneapolis, Minnesota not later than 5:00
p.m., Minneapolis time, on the date requested. The Borrower shall be obligated
to
3
<PAGE>
repay all Loans notwithstanding the fact that the person requesting the same was
not in fact authorized to do so. The proceeds of each Loan will be disbursed to
the Borrower upon delivery to the Lender of the following documents or other
items:
a. ITEMS NECESSARY AT TIME THIS AGREEMENT IS EXECUTED:
(1) this Agreement, the Note, the Security Agreement, and the
Repossession Agreement, each executed by the Borrower in favor of the Lender;
(2) resolutions of the executive committees of the boards of
directors of each of the Borrowers, certified by an officer of each of the
Borrowers, authorizing the execution, delivery and performance of the Loan
Documents and related documents and the transactions contemplated thereby;
(3) evidence in form and substance acceptable to the Lender that
the Borrower has all licenses necessary to carry on its business and to enable
it to perform its obligations under the Repossession Agreement, including
without limitation all licenses required under Nevada gaming law for the
operation of the Borrower's business;
(4) Articles of Incorporation of PDS, certified by the Minnesota
Secretary of State, a copy of the Bylaws of PDS, certified by an officer of PDS,
and an unqualified certificate of good standing for PDS issued by the Minnesota
Secretary of State;
(5) Articles of Incorporation of PDS-Nevada, certified by the
Nevada Secretary of State, a copy of the Bylaws of PDS-Nevada, certified by an
officer of PDS-Nevada, and an unqualified certificate of good standing for PDS-
Nevada issued by the Nevada Secretary of State;
(6) UCC searches with respect to each Borrower;
(7) an opinion of counsel to PDS as to the due organization and
good standing of PDS, the due authorization, execution and delivery by PDS of
the Loan Documents, the validity and enforceability of the Loan Documents, and
as to such other matters regarding PDS and the transactions and documents
contemplated hereby as the parties may agree;
(8) an opinion of counsel to PDS-Nevada as to the due
organization and good standing of PDS-Nevada, the due authorization, execution
and delivery by PDS-Nevada of the Loan Documents, the validity and
enforceability of the Loan Documents, the availability of and basic elements of
the procedure to perfect a purchase money security interest under Nevada state
law, and as to Nevada gaming law matters and such other matters regarding PDS-
Nevada and the transactions and documents contemplated hereby as the parties may
agree;
(9) a certificate of an officer of each Borrower to the effect
that the representations, warranties and covenants of such Borrower contained
herein and in the other Loan Documents are true and correct as of the date of
such documents and as of the date of delivery of the certificate;
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<PAGE>
(10) certificates of insurance and insurance endorsements
required hereby;
(11) a certificate by each Borrower regarding Year 2000 computer
compliance.
b. BORROWER ITEMS NECESSARY BEFORE ANY LOAN:
(1) an Addendum and Assignment and UCC-1 and UCC-3 Financing
Statements, each executed by the Borrower in favor of the Lender with respect to
the Contract(s) being financed with the Loan, and an assignment of the
Borrower's interest as secured party in the UCC-1 Financing Statement as to the
related Equipment;
(2) with respect to each of the Contracts in which Borrower is
granting a security interest to the Lender pursuant to the Addendum and
Assignment, the executed original of each such Contract, with all collateral
schedules, and copies of such additional instruments, opinions, documents,
certificates, searches and reports as the Borrower has obtained in connection
with such Contract;
(3) a Notice, Consent and Acknowledgment of Assignment with
respect to the Contract(s) being financed with the Loan, duly executed by the
Borrower;
(4) updated UCC searches with respect to each Borrower who is
requesting a loan on a Contract owned by that Borrower;
(5) Except as to financing statements in favor of the Lender,
UCC-3 financing statements terminating security interests filed with respect to
the Contracts and the Equipment, including without limitation a release executed
by U.S. Bank (or any other creditor holding a blanket lien) with respect to the
Contracts and the Equipment;
(6) the first time a Loan is requested regarding a Contract
(other than an operating lease) where the Equipment is located in a jurisdiction
(other than Nevada), an opinion of counsel to PDS as to the availability of and
basic elements of the procedure to perfect a purchase money security interest
under the law of that jurisdiction;
(7) certificates of insurance and insurance endorsements
required hereby;
(8) all other items as may be required pursuant to the
eligibility criteria set forth in EXHIBIT A attached hereto.
c. OBLIGOR ITEMS NECESSARY BEFORE ANY LOAN:
(1) a Notice, Consent and Acknowledgment of Assignment duly
executed by the Obligor under each Contract being financed with the Loan;
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<PAGE>
(2) UCC-1 Financing Statements, executed by the Obligor in favor
of the Borrower and assigned to the Lender (or with respect to an installment
note, assigned to Lender and the other holder(s) of note(s) evidencing the same
loan on a joint and several basis) with respect to the Contract(s) being
financed with the Loan, and the related Equipment and releases, terminations or
other appropriate filings, if any;
(3) certificates of insurance and insurance endorsements
required hereby;
(4) all other items as may be required pursuant to the
eligibility criteria set forth in EXHIBIT A attached hereto.
4. REPRESENTATIONS AND WARRANTIES OF THE BORROWER. In order to induce
the Lender to advance the proceeds of each Loan, the Borrower hereby represents
and warrants to the Lender as follows:
a. PDS is a corporation duly organized and validly existing under
the laws of the State of Minnesota and PDS-Nevada is a corporation duly
organized and validly existing under the laws of the State of Nevada. The
Borrower is duly qualified to do business and is in good standing in every other
jurisdiction wherein the nature of its business or the character of its
properties makes such qualification necessary and where failure to be so
qualified and in good standing, in the aggregate, would not have a material
adverse effect on the business, properties, operations, assets, liabilities or
condition (financial or otherwise) of the Borrower. The Borrower has all
requisite power and authority to carry on its business as now conducted and as
presently proposed to be conducted.
b. The Borrower has full power and authority to execute and deliver
the Loan Documents and to incur and perform its obligations hereunder and
thereunder. The execution, delivery and performance by the Borrower of the Loan
Documents and any and all other documents and transactions contemplated hereby
or thereby, have been duly authorized by all necessary corporate action, will
not violate any provision of law or of the Articles of Incorporation or the
Bylaws of the Borrower or result in the breach of, constitute a default under,
or create or give rise to any lien under, any indenture or other agreement or
instrument to which the Borrower is a party or by which the Borrower or its
property may be bound or affected. The Loan Documents have been executed and
delivered to the Lender by an appropriate officer of the Borrower who is
authorized by and specified in the Borrower's Bylaws to execute and so deliver
such agreements. The Borrower is not in violation of or subject to any
contingent liability on account of any statute, law, rule, ordinance, order,
writ, injunction or decree to the extent that such violation or contingent
liability would result in a material adverse effect on the condition (financial
or otherwise), business, properties, or assets of Borrower. As used herein,
material adverse effect means a violation or contingent liability that would
result in a cost or loss to Borrower of $500,000 or more.
c. The Loan Documents constitute the legal, valid and binding
obligations of the Borrower, enforceable in accordance with their respective
terms.
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<PAGE>
d. Except as set forth in EXHIBIT C hereto, there is no action, suit
or proceeding pending or, to the knowledge of the Borrower, threatened against
or affecting the Borrower, or any basis therefor, which, if adversely
determined, would have a material adverse effect on the condition (financial or
otherwise), business, properties or assets of the Borrower or which would
question the validity of the Loan Documents or any instrument, document or other
agreement related hereto or required hereby, or impair the ability of the
Borrower to perform its obligations under the foregoing agreements.
e. The Borrower possesses adequate licenses, permits, franchises,
patents, copyrights, trademarks and trade names, or rights thereto (collectively
"Licenses"), to conduct its business substantially as now conducted and as
presently proposed to be conducted. Without limiting the foregoing, PDS-Nevada
possesses all licenses required under Nevada gaming law for the operation of
PDS-Nevada's business. Each License is validly issued and in full force and
effect. Borrower has fulfilled and performed all of its obligations with
respect thereto. No event has occurred which: (1) results in, or after notice
or lapse of time or both would result in, suspension, surrender, failure to
renew, revocation or termination of any material License; or (2) materially and
adversely affects or in the future may (so far as Borrower can now reasonably
foresee) materially adversely affect any of the rights of Borrower thereunder.
Borrower is not a party to and the Borrower does not have any knowledge of any
notice of violation, order or complaint issued by or before any court or
regulatory body or of any other proceedings which could in any manner result in
suspension, surrender, failure to renew, revocation or termination of any
material License or otherwise threaten or adversely affect the validity or
continued effectiveness of the Licenses of Borrower. Borrower has no reason to
believe that any Licenses will not be renewed in the ordinary course. Borrower
has fully cooperated with every regulatory body having jurisdiction over any of
the Licenses or the activities of Borrower with respect thereto, and Borrower
has filed all material reports, applications, documents, instruments, and
information required to be filed by it pursuant to applicable laws, rules and
regulations. Borrower has posted all required bonds required under its
Licenses.
f. The Borrower owns the Contracts constituting part of the
Collateral, subject to no prior security interests, assignments, liens or
encumbrances. The Lender has a valid first perfected security interest in the
Collateral subject to no prior security interests or encumbrances. The security
interest of the Lender has been recorded with the appropriate recording offices,
and the Lender's security interest in the Equipment is a first perfected
security interest, subject only to the rights of the Obligors and the Borrowers
under the Collateral.
g. No director, shareholder, officer, employee of or consultant to
the Borrower is prohibited by law, regulation, contract or the terms of any
license, franchise, permit, certificate, approval or consent from participating
in the business of the Borrower as director, shareholder, officer, employee of
or as consultant to the Borrower.
h. Except with respect to reporting and compliance requirements of
the regulatory gaming authorities in the jurisdictions in which either of the
Borrowers or the Obligors conducts business, no consent, approval, order or
authorization of, or registration, declaration or filing with, or notice to, any
governmental authority or any third party is required
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in connection with the execution and delivery of the Loan Documents or any of
the agreements or instruments contemplated thereby to which the Borrower is a
party, or in connection with the carrying out or performance of any of the
transactions required or contemplated hereby or thereby or, if required, such
consent, approval, order or authorization has been obtained or such
registration, declaration or filing has been accomplished or such notice has
been given prior to the date hereof.
i. The Borrower has filed all local, state, federal and other tax
returns required to be filed by it and either paid all taxes shown thereon to be
due, including interest and penalties, which are not being contested in good
faith and by appropriate proceedings, or provided adequate reserves for payment
thereof. The Borrower has no information or knowledge of any objections to or
claims for additional taxes in respect of local, state and federal or other
income or excess profits tax returns of the Borrower for prior years.
j. The Borrower does not intend to, or believe that it will, incur
debts beyond its ability to pay such debts as they mature.
k. All financial and other information provided to the Lender by or
on behalf of the Borrower in connection with the Borrower's request for the Loan
fairly presented the financial condition of the Borrower as of the dates thereof
and disclosed fully all liabilities of the Borrower. Since the date of such
financial and other information, there has been no material adverse change in
the financial condition of the Borrower.
l. Each qualified retirement plan of the Borrower, if any, presently
conforms to and is administered in a manner consistent with the Employee
Retirement Income Security Act of 1974.
m. As of the date hereof, no Contract is a Delinquent Contract.
n. The Borrower is not engaged in the business of extending credit
for the purpose of purchasing or carrying margin stock (within the meaning of
Regulation U issued by the Board of Governors of the Federal Reserve System),
and no proceeds of the Loan will be used to purchase or carry any margin stock
or to extend credit to others for the purpose of purchasing or carrying any
margin stock.
o. No proceeds of the Loan will be used to acquire any security in
any transaction which is subject to Sections 13 and 14 of the Securities
Exchange Act of 1934.
p. The transaction evidenced by this Agreement does not violate any
law pertaining to usury or the payment of interest on loans.
q. The Borrower will use the proceeds of the Loan solely for lawful
and proper corporate purposes of the Borrower.
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5. AFFIRMATIVE COVENANTS. The Borrower covenants and agrees as follows:
a. The Borrower will use the proceeds of each Loan solely for the
financing of Contracts to certain casino operators.
b. The Borrower will pay all of its taxes (including payroll and
withholding taxes), levies, assessments and governmental charges prior to the
time when any penalties or interest accrue, unless contested in good faith with
an adequate reserve for payment.
c. The Borrower will continue the conduct of its business, maintain
its corporate existence, maintain all rights, licenses and franchises necessary
or desirable in the normal conduct of its business, comply with all rules,
regulations and orders of any governmental or other authority or agency and all
applicable federal and state laws and regulations. Without in any way limiting
the generality of the foregoing, the Borrower will maintain all licenses
required under Nevada gaming law for the operation of Borrower's business, and
will timely file all reports as the Nevada Gaming Commission may from time to
time require or request.
d. The Borrower shall use best efforts to cause the Obligors to
maintain and service the Equipment so as to keep such Equipment in good
operating condition, ordinary wear and tear from normal use excepted.
e. The Borrower will deliver to the Lender:
(1) Within one hundred twenty (120) days after the end of each
fiscal year, the consolidated audited financial statements of the Borrower for
such fiscal year, certified (without qualification as to the opinion or scope of
examination) by a firm of independent certified public accountants selected by
the Borrower and acceptable to the Lender.
(2) Within forty-five (45) days after the end of each fiscal
quarter, consolidated quarterly financial statements of the Borrower.
(3) Upon the reasonable request of the Lender, all backup data
regarding the Contracts and the Equipment.
(4) Within thirty (30) days after the end of each calendar
quarter, a Contract Status report setting forth the information set forth on
EXHIBIT D hereto.
(5) As soon as practicable, but in any event within thirty (30)
days after the end of each calendar month, a certificate of the Chief Financial
Officer (or Chief Accounting Officer or other officer of Borrower serving in
such capacity) of the Borrower substantially in the form of EXHIBIT E hereto
stating (i) whether or not such officer has knowledge of the occurrence of any
Event of Default under any of the Loan Documents or any event which with the
giving of notice or the passage of time would constitute an Event of Default
under any of the Loan Documents, other than Events of Default previously
reported and remedied and, if so, stating in reasonable detail the facts with
respect to such Event of Default,
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<PAGE>
and (ii) that the Borrower is in compliance with each of the covenants set forth
in Sections 5 and 6 of this Agreement. Without limiting the foregoing, the
certificate shall specifically state (A) the aggregate number and aggregate
unpaid payments of Delinquent Contracts, and (B) the aggregate amount of
prepayments on the Contracts in such month.
(6) Copies of any and all reports, filings, financial statements
or other information as and when filed with the United States Securities and
Exchange Commission and with the Nevada Gaming Commission (only in connection
with the Loan, the Contracts, the Equipment, the Lender or its participants),
and copies of all information and notices as and when delivered to the
Borrower's shareholders.
(7) Promptly upon becoming aware thereof, notice of any default
with respect to any other indebtedness, whether owed to the Lender or any other
creditor.
f. Upon reasonable notice of not less than 48 hours, the Borrower
will permit any officer, employee, attorney or accountant for the Lender to
review, make extracts from, or copy any and all corporate and financial books
and records of the Borrower relating to the Contracts at all times during
ordinary business hours, to send and discuss with Obligors requests for
verification of amounts owed to the Borrower if Lender has a reasonable basis
for believing such a verification is necessary, and to discuss the affairs of
the Borrower with any of its officers. After the occurrence of an Event of
Default, the rights to review and copy books and records shall not be limited to
those relating to the Contracts but will be all of the Borrower's books and
records.
g. The Borrower will provide the Lender with an insurance
certificate, issued by Obligor's insurer, in form and content and from an
insurer acceptable to the Lender, providing for ten (10) days' written notice to
the Lender of cancellation or non-renewal (without qualification), and
evidencing the following categories and amounts of coverage:
(1) Comprehensive public liability coverage for the Obligor.
(2) Comprehensive physical damage insurance for the full
insurable value of the Equipment, naming the Lender as loss payee, as their
interests may appear.
(3) If circumstances warrant, warehouse and transportation
insurance on the Equipment which is being stored or transported, as the case may
be, for the full insurable value of the Equipment naming the Lender as loss
payee, as their interests may appear.
(4) With respect to any Equipment which is located on any ship
or which is otherwise subject to any maritime laws, shipwreck, piracy,
abandonment and hull insurance in such amounts as the Lender may request, with a
lender's loss payable endorsement provided to the Lender.
h. The Borrower will notify the Lender promptly of (i) any material
disputes or claims by any Obligor; (ii) any Equipment returned to or recovered
by the Borrower or damaged, destroyed or stolen from the Borrower or an Obligor;
(iii) any change in the persons
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constituting the directors or officers of the Borrower; (iv) the occurrence of
any breach, default or event of default by or attributable to the Borrower under
this Agreement or any of the Loan Documents; (v) the occurrence of any breach,
default or event of default by or attributable to any Obligor under the
Obligor's Contract; and (vi) any event which may have any effect on the
enforceability of any lien in favor of the Lender, or on the ability of the
Borrower or the Obligor to perform its obligations under the Loan Documents or
any Contract, as the case may be.
i. The Borrower will notify the Lender in writing promptly after the
commencement of any lawsuit, legal proceeding or proceedings before any
governmental or regulatory agency against the Borrower which would have a
material adverse effect on the Loan, the Contracts, the Equipment, the Lender or
its participants or the business of Borrower. As used herein, material adverse
effect means a lawsuit or proceeding involving a potential cost or loss to
Borrower of $500,000 or more.
j. PDS will maintain the following financial covenants:
(i) At all times, a Tangible Net Worth in an amount not less
than $8,000,000 plus 15% of positive Net Income earned after January 1, 1999.
As used herein, "Tangible Net Worth" means, at a particular date, (a) the
aggregate amount of assets of PDS as may be properly classified as such in
accordance with GAAP excluding such other assets as are properly classified as
intangible assets under GAAP, less (b) the aggregate amount of all liabilities
of PDS. As used herein, "Net Income" means, with respect to any period, the
aggregate of the net income of PDS for such period determined in accordance with
GAAP.
(ii) A Cash Flow Ratio not less than 1.5 to 1.0 as of the end of
each calendar month measured on a trailing twelve (12) month basis. As used
herein, "Cash Flow Ratio" means the ratio of (a) Net Income PLUS Interest
Expense, income taxes, depreciation and amortization TO (b) Interest Expense
PLUS Dividends.
As used herein, "Dividends" means any payment for the purchase,
redemption or acquisition for value of any shares of PDS's stock, or the payment
of any dividends thereon or any distribution on, or payment on account of the
purchase, redemption, defeasance or other acquisition or retirement for value of
any shares of PDS's stock or set aside of funds for any such purpose.
As used herein, "Interest Expense" means the total scheduled
interest expense (including any default rate of interest if then applicable)
whether paid or accrued, on Indebtedness.
As used here, in "Indebtedness" means without duplication, all
obligations, contingent or otherwise, which in accordance with GAAP should be
classified upon the PDS's balance sheet as liabilities, but in any event
including the following (whether or not they should be classified as
liabilities upon such balance sheet): (a) obligations secured by any mortgage,
pledge, security interest, lien, charge or other encumbrance existing on
property owned or acquired subject thereto, whether or not the obligation
secured thereby shall have been assumed and whether or not the obligation
secured is the obligation of the owner or another
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<PAGE>
party; (b) any obligation on account of deposits or advances; (c) any obligation
for the deferred purchase price of any property or services, except trade
accounts payable, (d) any obligation as lessee under any capitalized lease; (e)
all guaranties, endorsements and other contingent obligations respecting
Indebtedness of others; and (f) undertakings or agreements to reimburse or
indemnify issuers of letters of credit.
k. With respect to any Delinquent Contract, the Borrower shall
comply with Section 7 hereof.
l. The Borrower will keep full and complete books of record and
accounts for itself and other records reflecting the results of the Borrower's
operations, all in accordance with GAAP.
m. At any time upon request from the Lender after the occurrence of
an Event of Default, the Borrower will cause the Obligors under the Contracts
which constitute a part of the Collateral to be notified to make payment
directly to the Lender, and the Lender shall be entitled to take control of any
proceeds thereof.
n. After the occurrence of an Event of Default, all proceeds of
Collateral not released from the lien of the Security Agreement pursuant to
Section 3 of the Security Agreement, including without limitation, proceeds from
the sale or re-leasing of the Equipment, proceeds of insurance and all other
unscheduled recoveries, shall be paid by the Borrower into a collateral account
administered by the Lender in the manner described in Section 5 of the Security
Agreement.
o. In the event any Equipment has been repossessed, the Borrower
shall pay promptly to the Lender the proceeds of the sale or other disposition
of the Equipment, together with a cash payment equal to the amount necessary to
fully pay the unamortized amount of the loan proceeds advanced with respect to
Contract(s) relating to such Equipment.
p. In the event any Equipment is damaged, destroyed, lost or stolen,
the Borrower shall pay promptly to the Lender the proceeds of any insurance on
the Equipment, together with a cash payment equal to the amount necessary to
fully pay the unamortized amount of the loan proceeds advanced with respect to
Contract(s) relating to such Equipment.
q. The Borrower shall service the Contracts which form a part of the
Collateral in accordance with the industry standards applicable to servicers of
such contracts, and the Borrower shall have ultimate responsibility for such
servicing. If the Borrower shall fail in any material respect in the
performance of its duties hereunder, and such failure shall continue for thirty
(30) days, the Lender shall appoint a servicer, chosen at the discretion of the
Lender, to perform such duties, and the Borrower shall promptly make available
to such servicer all books and records in any and all formats with respect to
the Collateral, and shall also make available to the servicer without fee any
and all computer software necessary to service the Collateral. Fees of the
servicer shall be paid in the manner described in the Security Agreement.
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<PAGE>
r. The Borrower will provide notice to all applicable gaming
authorities, to the extent required by the applicable gaming law, of the
Lender's security interest in the Contracts and the Equipment.
s. After the occurrence of an Event of Default and not later than
two (2) days prior to a date on which a payment is due under the Note, the
Borrower shall provide the Lender with a detailed report with respect to all
monies, if any, deposited in the collateral account pursuant to Section 5 of the
Security Agreement, including amounts paid in respect of Payments on all
Contracts (as due and as a prepayment) and amounts paid in respect of interest.
The report shall be prepared in such manner as may be required by the Lender for
purposes of properly applying funds in accordance with Section 5(b) of the
Security Agreement, if applicable.
t. With respect to each of the Contracts, the 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 Obligor under each such Contract; and (iv) upon request of
Lender verify with the Obligor under each Contract the payments due to Borrower
under such Contract, except that (A) prior to the occurrence of an Event of
Default or an event which with the passage of time or the giving of notice, or
both, would be an Event of Default, such requests shall not occur any more
frequently than once each year and (B) after the occurrence and during the
continuance of an Event of Default or an event which with the passage of time or
the giving of notice, or both, would be an Event of Default such requests may
occur as often as Lender shall require.
u. The Borrower will store the Equipment (which is not in the
possession of an Obligor) only in the Borrower's warehouses or in bonded
warehouses.
6. NEGATIVE COVENANTS. The Borrower covenants and agrees that, except
with the prior written approval of the Lender:
a. The Borrower will not create, incur or cause to exist any
mortgage, security interest, encumbrance, lien or other charge of any kind upon
any of the Collateral, whether now owned or hereafter acquired, except for the
security interests created by the Loan Documents. Except as permitted by the
Security Agreement, the Borrower will not sell, dispose of, lease, mortgage,
assign, sublet or transfer all or any part of the Borrower's right, title or
interest in or to all or any portion of the Collateral.
b. The Borrower will not substantially alter the nature of the
business in which it is engaged, or engage in any line of business substantially
different from its current business.
c. Following the occurrence of and during the continuance of an
Event of Default, the Borrower will not declare or pay any distributions or
purchase or redeem any of its capital stock, or otherwise distribute any
property on account of its capital stock, or enter into any agreement therefor.
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<PAGE>
d. The Borrower will not permit any material breach, default or
event of default to occur under any note, loan agreement, indenture, lease,
mortgage, contract for deed, security agreement or other contractual obligation
binding upon the Borrower which is not cured within the applicable cure
provisions thereof.
e. The Borrower will not materially amend, supplement, modify,
compromise or waive any of the terms of any Contract, without the prior written
consent of the Lender, provided that Borrower will have the right to substitute
Equipment subject to any Contract with other Equipment that is like-kind in
value as long as Borrower files an amended or updated UCC financing statement
signed by Lender as to the substituted Equipment within the time period required
by the law of the applicable jurisdiction to perfect a purchase money security
interest and delivers such filed financing statements to the Lender with its
quarterly Contract Status Report.
f. If any of the following transactions would result in the
surviving entity not complying with the Tangible Net Worth test and the Cash
Flow Ratio test set forth in Section 5(j) hereof or otherwise cause an Event of
Default hereunder, the Borrower will not consolidate with or merge into any
person or entity, or permit any other person or entity to merge into it, or
acquire (in a transaction analogous in purpose or effect to a consolidation or
merger) all or substantially all of the assets of any other person or entity, or
enter into any partnership or joint venture.
g. The Borrower will not make any payments on any of the Borrower's
indebtedness to any of the Borrower's affiliated entities, or to any of the
Borrower's shareholders, officers, directors or employees, following the
occurrence of and during the continuance of an Event of Default or a failure to
comply with a covenant contained in Section 5 or this Section 6.
h. After delivery of the Equipment to Obligor, the Borrower will not
cause or allow any movement of the Equipment, except as permitted under Section
6(e) hereof or in connection with any repossession by the Borrower of such
Equipment.
7. DELINQUENT CONTRACTS. So long as no Event of Default or event which
with the giving of notice or the passage of time would constitute an Event of
Default has occurred under this Agreement, Delinquent Contracts that are in
monetary default only may remain part of the Collateral provided that (i) the
Borrower gives written notice to the Lender within thirty (30) days of each
monthly monetary default; (ii) the defaults by the Obligor do not exceed three
(3) consecutive monthly payments or a total of four (4) nonconsecutive monthly
payments. With respect to Delinquent Contracts that are in non-monetary
default, including without limitation, the involvement of the Obligor in any
bankruptcy or insolvency proceedings, or Delinquent Contracts that are in
monetary default beyond the limitations of the foregoing sentence, the Borrower
shall within fifteen (15) days, either (i) pay to the Lender an amount equal to
the outstanding balance of the loan proceeds advanced with respect to such
Contract, and such payment shall be applied to the unpaid principal balance of
the Note, or (ii) execute and deliver to the Lender an Addendum and Assignment
(and appropriate UCC financing statements)
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<PAGE>
respecting one or more other Contracts with an aggregate Equipment Value
multiplied by 90% that is equal to or greater than the outstanding balance of
the loan proceeds advanced with respect to such Delinquent Contract, and Obligor
Acknowledgment(s) relating to such Contract(s) duly executed by each Obligor
under such Contract, and all such other documents, instruments and agreements as
required under Section 3(b) and 3(c) or as the Lender may request.
8. REPLACEMENT RIGHTS. The Borrower may, from time to time, upon ten
(10) days prior written notice to the Lender, obtain a release of a particular
Contract from the Collateral (the "Released Contract") and substitute one or
more other Contracts (the "Replacement Contract"), provided that (i) neither the
Released Contract or the Replacement Contracts are Delinquent Contracts; (ii)
the Borrower execute and deliver to the Lender an Addendum and Assignment (and
appropriate UCC financing statements) respecting the Replacement Contracts(s)
with an aggregate Equipment Value multiplied by 90% that is equal to or greater
than the outstanding balance of the loan proceeds advanced with respect to the
Released Contract (the "Unamortized Advance"), and Obligor Acknowledgment(s)
relating to the Replacement Contract(s) duly executed by each Obligor under such
Contract(s), and all such other documents, instruments and agreements as
required under Section 3(b) and 3(c) or as the Lender may request; (iii) the
Borrower pay to the Lender a Replacement Fee equal to one percent (1%) of the
Unamortized Advance; and (iv) the Borrower pay $750 for lender's legal fees in
connection with the replacement.
9. RETURNED EQUIPMENT. Certain Contracts that may be funded pursuant to
the Credit Facility will contain a provision giving the Obligor the right, under
certain circumstances, to return and replace some portion of the Equipment that
is subject to a particular Contract. In that event, the Borrower has agreed
with the Obligor to amend the Contract to reduce the obligations of the Obligor
thereunder and create a new Contract for replacement Equipment. The Borrower
agrees that, in such event, in exchange for the Lender's release of its security
interest in the returned Equipment (the "Returned Equipment"), the Borrower will
make a prepayment on the Note equal to the outstanding balance of the amount
advanced by the Lender with respect to the Returned Equipment under the
applicable Contract. The Borrower agrees to provide the Lender with a written
certification (i) identifying the Returned Equipment, (ii) the aggregate
Equipment Value of the Returned Equipment, (iii) 90% of such aggregate Equipment
Value that was advanced by the Lender and (iv) the outstanding balance of the
amount advanced. The Borrower also agrees to provide UCC-3 Releases to be
executed by the Lender to release such Equipment.
10. EVENT OF DEFAULT. Each of the following occurrences shall constitute
an Event of Default under this Agreement and under the Loan Documents (herein
called an "Event of Default"):
a. The Borrower shall fail to pay any or all of the indebtedness
arising out of this Agreement or Loan Documents (the "Obligations") when due or,
if payable on demand, on demand and such failure shall continue for a period of
five (5) days after such payment becomes due; or
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<PAGE>
b. The Borrower shall fail to observe or perform any covenant or
agreement binding on the Borrower under this Agreement or under any other
assignment, conveyance, instrument or agreement now in effect or hereafter made
between the Borrower and the Lender, or under the Loan Documents for a period of
thirty (30) days for any default which can be reasonably cured within thirty
(30) days and a reasonable period of time for a default not reasonably capable
of cure within thirty (30) days, provided the Borrower diligently commences and
continues a course of action acceptable to the Lender to so cure; or
c. The Borrower shall make any representations or warranties in this
Agreement or in any such other assignment, conveyance, instrument, agreement,
financial statements, reports or certificates heretofore or at any time
hereafter submitted by or on behalf of the Borrower to the Lender, and such
representations or warranties, shall prove to have been false or materially
misleading when made; or
d. As a result of a default or failure by Borrower, payment of any
substantial indebtedness of the Borrower (other than the Obligations and other
than indebtedness of the Borrower to the extent the indebtedness is non-recourse
to the Borrower) shall be demanded, or the maturity of any substantial
indebtedness shall be accelerated, or any precondition or circumstance
permitting any creditor of the Borrower (acting individually or with the consent
of other creditors) to accelerate the maturity of any substantial indebtedness
shall have occurred; for this purpose indebtedness shall be deemed substantial
if it exceeds $500,000; or
e. The Borrower shall become insolvent or shall commit an act of
bankruptcy under the United States Bankruptcy Act, or shall file or have filed
against it, voluntarily or involuntarily, a petition in bankruptcy or for
reorganization or for the adoption of an arrangement or plan under the United
States Bankruptcy Act or shall procure or suffer the appointment of a receiver
for any substantial portion of its properties, or shall initiate or have
initiated against it, voluntarily or involuntarily, any act, process or
proceeding under any insolvency law or other statute or law providing for the
modification or adjustment of the rights of creditors and such petition,
receiver, act, process or proceeding shall not be dismissed or discharged within
ninety (90) days; or
f. A garnishment summons or writ of attachment for an amount in
excess of $500,000 shall have been issued against or served upon the Lender for
the attachment of any property of the Borrower in the Lender's possession or any
indebtedness owing the Borrower; or
g. The Borrower shall have been dissolved, whether voluntarily or by
operation of law; or
h. Any of Borrower's licenses required under the gaming laws of
Nevada, or any other jurisdiction in which any of the Collateral is located is
revoked or rescinded, lapses, or is otherwise no longer maintained by or
available to the Borrower.
11. RIGHTS AND REMEDIES UPON DEFAULT. Upon the occurrence of an Event of
Default and at any time thereafter, subject to the gaming laws of any
jurisdiction in which any of the Collateral is located, the Lender may exercise
one or more of the following rights and remedies:
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<PAGE>
a. The Lender may declare all unmatured Obligations to be
immediately due and payable, and the same shall thereupon be immediately due and
payable, without presentment or other notice or demand;
b. Subject to the rights of the Obligors, the Lender may exercise
and enforce any and all rights and remedies available upon default to a secured
party under the Uniform Commercial Code including, without limitation, the right
to take possession of the Collateral, or any evidence thereof, proceeding
without judicial process or by judicial process (without a prior hearing or
notice thereof, which the Borrower hereby expressly waives) and the right to
sell, lease or otherwise dispose of any or all of the Collateral, and the
Borrower agrees to make the Collateral available to the Lender at a place to be
designated by the Lender which is reasonably convenient to both parties. If
notice to the Borrower of any intended disposition of the Collateral or any
other intended action is required by law in a particular instance, such notice
shall be deemed commercially reasonable if given at least ten (10) calendar days
prior to the date of intended disposition or other action;
c. The Lender may request the Borrower to, and upon such request the
Borrower will, assist the Lender in repossessing and selling the Equipment in
compliance with all applicable laws and in accordance with the Repossession
Agreement (this provision in no way limits the Lender's ability to use any other
person or entity to repossess and sell the Equipment);
d. Without notice or demand, the Lender may offset any indebtedness
the Lender or any of its participants, successors or assigns then owes to the
Borrower whether or not then due, against any Obligation then owed to the Lender
or any of its participants, successors or assigns by Borrower, whether or not
then due;
e. The Lender may exercise the recourse rights of the Borrower
against the Obligor on any Contracts; and
f. The Lender may exercise or enforce any and all other rights or
remedies available by law or agreement against the Collateral, against the
Borrower or against any other person or property.
12. MISCELLANEOUS. The Borrower agrees that:
a. The performance or observance of any promise or condition set
forth in this Agreement may be waived in writing by the Lender, but not
otherwise. No delay in the exercise of any power, right or remedy of the
Lender, shall operate as a waiver thereof, nor shall any single or partial
exercise thereof or the exercise of any other power, right or remedy operate as
a waiver thereof.
b. This Agreement shall be binding upon the Borrower and its
successors and assigns and shall inure to the benefit of the Lender and its
participants and the successors and assigns of any of them, provided that the
Borrower may not transfer or assign its rights hereunder without the prior
written consent of the Lender. This Agreement shall be effective the date
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<PAGE>
written above. All rights and powers specifically conferred upon the Lender may
be transferred or delegated by the Lender to any of its successors or assigns.
Except to the extent otherwise required by law, this Agreement and the
transactions evidenced hereby shall be governed by the substantive laws of the
State of Minnesota without regard to principles of conflicts of laws. If any
provision or application of this Agreement is held unlawful or unenforceable in
any respect, such illegality or unenforceability shall not affect other
provisions or applications which can be given effect, and this Agreement shall
be construed as if the unlawful or unenforceable provision or application had
never been contained herein or prescribed hereby. All representations and
warranties contained in this Agreement or in any other agreement between the
Borrower and the Lender shall survive the execution, delivery and performance of
this Agreement and the creation and payment of any indebtedness to the Lender.
This Agreement may be executed in any number of counterparts, each of which is
to be deemed to be an original and all of which constitute one agreement.
13. NOTICES. All notices, consents, requests, demands and other
communications hereunder shall be given to or made upon the respective parties
hereto at their respective addresses specified below or, as to any party, at
such other address as may be designated by it in a written notice to the other
party. All notices, requests, consents and demands hereunder shall be effective
when personally delivered or five (5) days after depositing in the United States
mail, certified or registered, postage prepaid, or when sent by confirmed
facsimile, or when delivered by overnight courier.
If to Borrower: PDS Financial Corporation
6171 McLeod Drive
Las Vegas, NV 89120
Attn: Johan Finley
Telephone: 702-736-0700
Fax: 702-740-8692
If to M&S: Miller & Schroeder Investments Corporation
220 South Sixth Street, Suite 300
Minneapolis, Minnesota 55402
Attn: Gaming Department
Telephone: 612/376-1500
Fax: 612/376-1410
14. JURISDICTION. THE BORROWER HEREBY SUBMITS ITSELF TO THE JURISDICTION
OF THE STATE OF MINNESOTA AND THE FEDERAL COURTS OF THE UNITED STATES LOCATED IN
SUCH STATE IN RESPECT OF ALL ACTIONS ARISING OUT OF OR IN CONNECTION WITH THE
INTERPRETATION OR ENFORCEMENT OF THIS AGREEMENT AND THE DOCUMENTS RELATED
THERETO.
15. DUTIES OF LENDER WITH RESPECT TO COLLATERAL. Except with respect to
the exercise of remedies under this Agreement or the Security Agreement, the
Lender shall have no duty, responsibility or obligation of any nature whatsoever
to service, collect, administer, enforce or account for the Contracts. The
Borrower shall service, account for, administer, collect all payments and
enforce all rights with respect to such Contracts. Upon the occurrence of an
Event
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<PAGE>
of Default, the Borrower shall deposit such payments promptly upon receipt and
in the form received in the collateral account established by the Lender
pursuant to Section 5 of the Security Agreement.
16. INDEMNIFICATION. Except for losses, claims, damages or liability
arising out of the gross negligence or willful misconduct of the Lender, the
Borrower agrees to indemnify and hold harmless the Lender, its officers, agents
(including outside legal counsel) and employees, against any and all losses,
claims, damages or liability to which the Lender, its officers, agents and
employees, may become subject under any law in connection with the carrying out
of the transactions contemplated by this Agreement or any other Loan Document,
or the conduct of any activity related to the Equipment and to reimburse the
Lender, its officers, agents and employees, for any out-of-pocket legal and
other expenses (including reasonable attorneys' fees, whether incurred at trial,
on appeal, in bankruptcy proceedings, or otherwise) incurred by the Lender, its
officers, agents and employees, in connection with investigating any such
losses, claims, damages or liabilities or in connection with defending any
actions relating thereto. The Lender agrees, at the request and reasonable
expense of the Borrower, to cooperate in the making of any investigation in
defense of any such claim and promptly to assert any or all of the rights and
privileges and defenses which may be available to the Lender. The Borrower
further releases and agrees to hold harmless the Lender, its officers, agents
and employees, from and against all losses, damages, penalties, liabilities, or
expenses (including reasonable legal fees, whether incurred at trial, on appeal,
in bankruptcy proceedings, or otherwise) due to or arising out of any
misrepresentation of information furnished to Lender by Borrower or out of a
breach of any covenant, representation or undertaking of the Borrower contained
in this Agreement or any other Loan Document. The Borrower's liability
hereunder shall not be limited to the extent of such insurance or subject to any
exclusions from coverage in any insurance policy. The provisions of this
Section shall survive the payment of the Note and the Loan.
17. PLACEMENT FEE/PARTICIPATION SERVICING FEE. The Borrower shall pay to
the Lender the following amounts: (i) a placement fee that will be deducted
from the proceeds of the Note on the Closing Date, and (ii) a participation
servicing fee on the unpaid principal balance of the Note from time to time
outstanding (computed on the basis of a year consisting of twelve (12) thirty
(30) day months) accruing at a rate equal to one-fourth of one percent (0.25%),
payable monthly on each payment date under the Note.
18. ATTORNEYS FEES AND TAXES. The Borrower shall reimburse the Lender,
upon demand, for all reasonable costs and expenses actually incurred, including
without limitation reasonable attorney's fees paid or incurred by the Lender in
connection with:
a. The preparation or review of the Loan Documents (provided,
however, that the Borrower's obligation to pay legal fees to the Lender for
legal services rendered by counsel for the Lender in connection with the initial
preparation and review of the Loan Documents shall be limited to $10,000), the
perfection, protection, enforcement or foreclosure of the security interests
created by the Loan Documents, the protection or enforcement of the interests
and collateral security of the Lender in any litigation or bankruptcy or
insolvency proceeding or the prosecution or defense of any action or proceeding
relating in any way to the transactions contemplated by this Agreement, travel
to and from the offices and place of business
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<PAGE>
of the Borrower, the negotiation and preparation of the Loan Documents and all
other documents necessary or desirable in connection with the original execution
and delivery of Loan Documents;
b. For each Advance Request made pursuant to this Agreement, legal
fees associated with review of the documentation submitted by Borrower, and the
perfection of the security interests in the Collateral (provided, however, that
the legal fees for each Advance Request shall be limited to $750.00 and shall be
paid out of the Advance Request).
c. Subsequent to the initial Closing, the negotiation of any
amendments or modifications to any of the Loan Documents requested by or
consented to by Borrower or, if an Event of Default has occurred and is
continuing, requested by Lender, and any related documents, instruments or
agreements and the preparation of any and all documents necessary or desirable
to effect such amendments or modifications; and
d. The enforcement by the Lender during the term hereof or
thereafter of the rights or remedies of the Lender hereunder or under any of the
foregoing documents, instruments or agreements, including without limitation
reasonable costs and expenses of collection in the Event of Default, whether or
not suit is filed with respect thereto and whether such costs are paid or
incurred, or to be paid or incurred, prior to or after entry of judgment.
The Borrower agrees to pay all stamp, document, transfer, recording or filing
taxes or fees and similar impositions now or hereafter reasonably determined by
the Lender to be payable in connection with the Loan Documents, or any other
documents, instruments or transactions pursuant to or in connection herewith or
therewith, and the Borrower agrees to save the Lender harmless from and against
any and all present or future claims, liabilities or losses with respect to or
resulting from any omission to pay or delay in paying any such taxes, fees or
impositions, unless such omission or delay is due to gross negligence or willful
misconduct on the part of Lender. All such expenses, taxes or attorney's fees
shall be payable to the Lender on demand. The obligations of Borrower under
this Section 18 shall survive the repayment of the Note and Loan.
19. RELATIONSHIP AMONG BORROWERS.
a. JOINT AND SEVERAL LIABILITY. BY SIGNING THIS AGREEMENT, EACH OF
THE BORROWERS AGREES THAT IT IS LIABLE, JOINTLY AND SEVERALLY WITH THE OTHER
BORROWER, FOR THE PAYMENT OF THE NOTE AND ALL OTHER OBLIGATIONS OF THE BORROWERS
UNDER THIS AGREEMENT, AND THAT LENDER CAN ENFORCE SUCH OBLIGATIONS AGAINST
EITHER BORROWER, IN LENDER'S SOLE AND UNLIMITED DISCRETION.
b. LENDER RIGHTS TO ADMINISTER THE LOAN. Lender may at any time and
from time to time, without the consent of, or notice to, either Borrower,
without incurring responsibility to either Borrower, and without affecting,
impairing or releasing any of the obligations of either Borrower hereunder:
20
<PAGE>
(1) alter, change, modify, extend, release, renew, cancel,
supplement or amend in any manner the Loan Documents provided at least one
Borrower has consented thereto, and the Borrowers' joint and several liability
shall continue to apply after giving effect to any such alteration, change,
modification, extension, release, renewal, cancellation, supplement or
amendment;
(2) sell, exchange, surrender, realize upon, release (with or
without consideration) or otherwise deal with in any manner and in any order any
property of any person or entity mortgaged to Lender or otherwise securing the
Borrowers' joint and several liability, or otherwise providing recourse to
Lender with respect thereto;
(3) exercise or refrain from exercising any rights against
either Borrower or others with respect to the Borrowers' joint and several
liability, or otherwise act or refrain from acting;
(4) settle or compromise any of the Borrowers' joint and
several liability, any security therefor or other recourse with respect thereto,
or subordinate the payment or performance of all or any part thereof to the
payment of any liability (whether due or not) of either Borrower to any creditor
of either Borrower, including without limitation, Lender and either Borrower;
(5) apply any sum received by Lender from any source in respect
of any liabilities of either Borrower to Lender to any of such liabilities,
regardless of whether the Note remains unpaid;
(6) fail to set off and/or release, in whole or in part, any
balance of any account or any credit on its books in favor of either Borrower,
or of any other person, and extend credit in any manner whatsoever to either
Borrower, and generally deal with either Borrower and any security for the
Borrowers' joint and several liability or any recourse with respect thereto as
Lender may see fit; and/or
(7) consent to or waive any breach of, or any act, omission or
default under, this Agreement or any other Loan Document, including, without
limitation, any agreement providing collateral security for the payment of the
Borrowers' joint and several liability or any other indebtedness of either
Borrower or Lender.
c. PRIMARY OBLIGATION. No invalidity, irregularity or
unenforceability of all or any part of either Borrower's joint and several
liability or of any security therefor or other recourse with respect thereto
shall affect, impair or be a defense to the other Borrower's joint and several
liability, and all obligations under the Note and this Agreement are primary
obligations of each Borrower.
d. PAYMENTS RECOVERED FROM LENDER. If any payment received by the
Lender and applied to any obligations is subsequently set aside, recovered,
rescinded or required to be returned for any reason (including, without
limitation, the bankruptcy, insolvency or reorganization of a Borrower or any
other obligor), the obligations to which such payment was
21
<PAGE>
applied shall be deemed to have continued in existence, notwithstanding such
application, and each Borrower shall be jointly and severally liable for such
obligations as fully as if such application had never been made. References in
this Agreement to amounts "irrevocably paid" or to "irrevocable payment" refer
to payments that cannot be set aside, recovered, rescinded or required to be
returned for any reason.
e. NO RELEASE. Until the Note and all other obligations under this
Agreement have been paid in full and each and every one of the covenants and
agreements of this Agreement are fully performed, the obligations of either
Borrower hereunder shall not be released, in whole or in part, by any action or
thing (other than irrevocable payment in full) which might, but for this
provision of this Agreement, be deemed a legal or equitable discharge of a
surety or guarantor, or by reason of any waiver, extension, modification,
forbearance or delay or other act or omission of Lender or its failure to
proceed promptly or otherwise, or by reason of any action taken or omitted by
Lender whether or not such action or failure to act varies or increases the risk
of, or affects the rights or remedies of, either Borrower, nor shall any
modification of any of the Note or this Agreement or release of any security
therefor by operation of law or by the action of any third party affect in any
way the obligations of either Borrower hereunder, and each Borrower hereby
expressly waives and surrenders any defense to its liability hereunder based
upon any of the foregoing acts, omissions, things, agreements, or waivers of any
of them. Neither Borrower shall be exonerated with respect to its liabilities
under this Agreement by any act or thing except irrevocable payment and
performance of the obligations, it being the purpose and intent of this
Agreement that the obligations constitute the direct and primary obligations of
each Borrower and that the covenants, agreements and all obligations of each
Borrower hereunder be absolute, unconditional and irrevocable.
f. ACTIONS NOT REQUIRED. Each Borrower hereby waives any and all
right to cause a marshalling of the other Borrower's assets or any other action
by any court or other governmental body with respect thereto insofar as the
rights of Lender hereunder are concerned or to cause Lender to proceed against
any security for the Borrowers' joint and several liability or any other
recourse which Lender may have with respect thereto, and further waives any and
all requirements that Lender institute any action or proceeding at law or in
equity against the other Borrower or anyone else, or with respect to this
Agreement, the Loan Documents, or any collateral security for the Borrowers'
joint and several liability, as a condition precedent to making demand on, or
bringing an action or obtaining and/or enforcing a judgment against, either
Borrower. Each Borrower further waives any requirement that Lender seek
performance by the other Borrower or any other person, of any obligation under
this Agreement, the Loan Documents or any collateral security for the Borrowers'
joint and several liability as a condition precedent to making a demand on, or
bringing an action or obtaining and/or enforcing a judgment against, either
Borrower. No Borrower shall have any right of setoff against Lender with
respect to any of its obligations hereunder. Any remedy or right hereby granted
which shall be found to be unenforceable as to any person or under any
circumstance, for any reason, shall in no way limit or prevent the enforcement
of such remedy or right as to any other person or circumstance, nor shall such
unenforceability limit or prevent enforcement of any other remedy or right
hereby granted.
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<PAGE>
g. DEFICIENCIES. Each Borrower specifically agrees that in the
event of a foreclosure under the Security Agreement, any other security
agreement or other similar agreement held by Lender which secures any part or
all of the Borrowers' joint and several liability and in the event of a
deficiency resulting therefrom, each Borrower shall be, and hereby is expressly
made, liable to Lender for the full amount of such deficiency notwithstanding
any other provision of this Agreement or provision of such agreement, any
document or documents evidencing the indebtedness secured by such agreement or
any other document or any provision of applicable laws which might otherwise
prevent Lender from enforcing and/or collecting such deficiency. Each Borrower
hereby waives any right to notice of a foreclosure under any security agreement
or other similar agreement given to Lender by any other Borrower which secures
any part or all of the Borrowers' joint and several liability.
h. BORROWERS BANKRUPTCY. Each Borrower expressly agrees that its
liability and obligations under the Note and this Agreement shall not in any way
be affected by the institution by or against the other Borrower or any other
person or entity of any bankruptcy, reorganization, arrangement, insolvency or
liquidation proceedings, or any other similar proceedings for relief under any
bankruptcy law or similar law for the relief of debtors, or any action taken or
not taken by Lender in connection therewith, and that any discharge of either
Borrower's joint and several liability pursuant to any such bankruptcy or
similar law or other laws shall not discharge or otherwise affect in any way the
obligations of the other Borrower under the Note and this Agreement, and that
upon or at any time after the institution of any of the above actions, at
Lender's sole discretion, the Borrowers' joint and several obligations shall be
enforceable against either Borrower that is not itself the subject of such
proceedings. Each Borrower expressly waives any right to argue that Lender's
enforcement of any remedies against that Borrower is stayed by reason of the
pendency of any such proceedings against the other Borrower.
i. NO SUBROGATION. Notwithstanding any payment or payments made by
either Borrower hereunder or any setoff or application of funds of either
Borrower by the Lender, such Borrower shall not be entitled to be subrogated to
any of the rights of the Lender against the other Borrower or any other
guarantor or any collateral security or guaranty or right of offset held by the
Lender for the payment of the obligations, nor shall such Borrower seek or be
entitled to seek any contribution or reimbursement from the other Borrower or
any other guarantor in respect of payments made by such Borrower hereunder,
until all amounts owing to the Lender by the Borrowers on account of the
obligations are irrevocably paid in full. If any amount shall be paid to a
Borrower on account of such subrogation rights at any time when all of the
obligations shall not have been irrevocably paid in full, such amount shall be
held by that Borrower, and shall, forthwith upon receipt by the Borrower, be
turned over to the Lender in the exact form received by the Borrower (duly
endorsed by the Borrower to the Lender, if required), to be applied against the
obligations, whether matured or unmatured, in such order as the Lender may
determine.
j. BORROWERS' FINANCIAL CONDITION. Each Borrower is familiar with
the financial condition of the other Borrower, and each Borrower has executed
and delivered this Agreement and the Note based on that Borrower's own judgment
and not in reliance upon any statement or representation of the Lender. The
Lender shall have no obligation to provide either
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<PAGE>
Borrower with any advice whatsoever or to inform either Borrower at any time of
the Lender's actions, evaluations or conclusions on the financial condition or
any other matter concerning the Borrowers.
k. RELATIONSHIP OF BORROWERS. Each Borrower represents that it
expects to derive benefits from the extension of credit accommodations to the
Borrowers by the Lender and finds it advantageous, desirable and in its best
interests to execute and deliver this Agreement and the Note to the Lender.
20. PARTICIPATION DISCLOSURE. The Borrower hereby acknowledges that and
consents to the Lender selling participation interests in the Loan, and hereby
authorizes the Lender to disclose to any potential participant the Loan
Documents and any and all financial and other information relating to the
Borrower and delivered to the Lender in connection with this transaction,
provided that Lender shall comply with all laws, including but not limited to
federal and state securities laws, in connection with the offer or sale of such
participation interests. The Lender and anyone claiming by or through the
Lender shall not hold Borrower responsible for any false representations Lender
may have made to its participants.
21. AMENDMENTS. No amendment, modification or waiver of any provision of
the Loan Documents and no consent to any departure by the Borrower therefrom
shall in any event be effective unless the same shall be in writing and signed
by the Lender, and then such amendment, modification, waiver or consent shall be
effective only in the specific instance and for the purpose for which given.
Neither this Agreement nor any provision hereof may be changed, waived,
discharged or terminated orally, but only by an instrument in writing signed by
the party against whom enforcement of the change, waiver, discharge or
termination is sought.
22. MARSHALLING; PAYMENTS SET ASIDE. The Lender shall be under no
obligation to marshall any assets in favor of the Borrower or any other Person
or against or in payment of the Loan and other Indebtedness of the Borrower to
the Lender. To the extent that the Borrower makes a payment or payments to the
Lender or the Lender exercises its rights of setoff, and such payment or
payments or the proceeds of such setoff or any part thereof are subsequently
invalidated, declared to be fraudulent or preferential, set aside and/or
required to be repaid to a trustee, receiver or any other party under any
bankruptcy law, state or federal law, common law or equitable cause, then to the
extent of such recovery, the obligation or part thereof originally intended to
be satisfied shall be revived and continued in full force and effect as if such
payment had not been made or such enforcement or setoff had not occurred.
23. INVALID PROVISIONS. If fulfillment of any provision hereof, or any
transaction related thereto at the time performance of any such provision shall
be due, shall involve transcending the limit of validity prescribed by law,
then, ipso facto, the obligation to be fulfilled shall be reduced to the limit
of such validity; and such clause or provision shall be deemed invalid as though
not herein contained, and the remainder of this Agreement shall remain operative
in full force and effect.
24. NOT JOINT VENTURES. The Lender is not, and shall not by reason of any
provision of any of the Loan Documents be deemed to be, a joint venturer with or
partner or agent of the
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Borrower.
25. ESTOPPEL CERTIFICATE. At any time and from time to time, within
fifteen (15) Business Days after receipt from the other party hereto of a
written request therefor, Borrower or Lender, as the case may be, shall prepare,
execute and deliver to the such party, and/or any other party which Borrower or
Lender, as the case may be, may designate, an estoppel certificate stating: (a)
the amount of the unpaid principal balance and accrued interest on the date
thereof; (b) the date upon which the last payment was made and the date the next
payment is due; and (c) that Borrower has no defenses, claims or offsets against
full enforcement hereof according to the terms hereof, or listing and describing
any such amendments, changes, defaults, events of default, defenses, claims or
offsets which do exist.
26. NOTICE OF CHANGE OF LOCATION. Borrower shall promptly notify Lender
of any change in location of Borrower's principal places of business or the
offices where it keeps its records concerning accounts and contract rights.
27. TAX IDENTIFICATION NUMBER. The federal tax identification number for
PDS Financial Corporation is 41-1605970. The federal tax identification number
for PDS Financial Corporation-Nevada is 88-0357859.
28. SETOFFS. If the unpaid principal amount of the Loan, interest accrued
thereon or any other amount owing by the Borrower under the Loan Documents shall
have become due and payable (by demand, acceleration or otherwise), the Lender
shall have the right, in addition to all other rights and remedies available to
it, without notice to the Borrower, to set off against, and to appropriate and
apply to such due and payable amounts any debt owing to, and any other funds
held in any manner by the Lender for the account of, the Borrower. Such right
shall exist whether or not the Lender shall have made any demand hereunder or
under any other Loan Document, whether or not such debt owing to or funds held
for the account of the Borrower is or are matured or unmatured, and regardless
of the existence or adequacy of any collateral, guaranty or any other security,
right or remedy available to the Lender.
29. REMEDIES CUMULATIVE. The rights and remedies herein specified of the
parties hereto are cumulative and not exclusive of any rights or remedies which
the parties hereto would otherwise have at law or in equity or by statute.
30. INTEGRATION; CONFLICTING TERMS. This Agreement together with the
other Loan Documents comprises the entire agreement of the parties on the
subject matter hereof and supersedes and replaces all prior agreements, oral and
written, on such subject matter. If any term of any of the other Loan Documents
expressly conflicts with the provisions of this Agreement, the provisions of
this Agreement shall control; provided, however, that the inclusion of
supplemental rights and remedies of Lender in any of the other Loan Documents
shall not be deemed a conflict with this Agreement.
31. GOVERNING LAW; CONSTRUCTION. The Loan Documents shall be governed by,
and construed in accordance with, Minnesota law. Whenever possible, each,
provision of the Loan Documents and any other statement, instrument or
transaction contemplated hereby or thereby or relating hereto or thereto shall
be interpreted in such manner as to be effective and valid under
25
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such applicable law, but, if any provision of the Loan Documents or any other
statement, instrument or transaction contemplated hereby or thereby or relating
hereto or thereto shall be held to be prohibited or invalid under such
applicable law, such provision shall be ineffective only to the extent of such
prohibition or invalidity, without invalidating the remainder of such provision
or the remaining provisions of the Loan Documents or any other statement,
instrument or transaction contemplated hereby or thereby or relating hereto or
thereto. The parties shall endeavor in good-faith negotiations to replace any
invalid, illegal or unenforceable provisions with a valid provision the economic
effect of which comes as close as possible to that of the invalid, illegal or
unenforceable provision. The provisions of this Section are irrevocable and may
not be rescinded, revoked or amended without the prior written consent of
Lender. Borrower acknowledges Lender has relied upon them in entering into the
Loan Documents.
32. WAIVER OF JURY TRIAL. Borrower hereby irrevocably waives any and all
right to trial by jury in any legal proceeding arising out of or relating to
this Agreement, the Note or any of the documents executed in connection
therewith or the transactions contemplated hereby or thereby.
IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by
the proper officers thereunto duly authorized on the day and year first above
written.
MILLER & SCHROEDER PDS FINANCIAL CORPORATION
INVESTMENTS CORPORATION
By: By:
---------------------------- --------------------------------
Its: Its:
------------------------- -----------------------------
PDS FINANCIAL CORPORATION-
NEVADA
By:
--------------------------------
Its:
-----------------------------
LIST OF EXHIBITS
A. Contract Eligibility Criteria
B. Form of Advance Request
C. Pending Litigation
D. Contract Status Report Format
E. Compliance Certificate
26
<PAGE>
THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT
BEEN REGISTERED UNDER EITHER THE SECURITIES ACT OF 1933 OR APPLICABLE STATE
SECURITIES LAWS AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, OFFERED,
PLEDGED OR OTHERWISE DISTRIBUTED FOR VALUE UNLESS THERE IS AN EFFECTIVE
REGISTRATION STATEMENT UNDER SUCH ACT AND SUCH LAWS COVERING SUCH
SECURITIES, OR THE COMPANY RECEIVES AN OPINION OF COUNSEL ACCEPTABLE TO THE
COMPANY STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT, OFFER, PLEDGE OR OTHER
DISTRIBUTION FOR VALUE IS EXEMPT FROM THE REGISTRATION AND
PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT AND SUCH LAWS.
WARRANT
TO PURCHASE SHARES OF
COMMON STOCK OF
PDS FINANCIAL CORPORATION
This certifies that for good and valuable consideration, Digideal
Corporation (the "Holder") is entitled to subscribe for and purchase from PDS
Financial Corporation, a Minnesota corporation (the "Company"), at any time or
from time to time after June 16, 1999 and before June 16, 2004, in the amounts
and subject to the conditions set forth in Section 1 hereof, 184,479 fully paid
and nonassessable shares of common stock ("Common Stock") of the Company at a
price per share equal to $3.75 (the "Warrant Exercise Price"), subject to the
antidilution provisions of this Warrant. The shares which may be acquired upon
exercise of this Warrant are referred to herein as the "Warrant Shares."
1) EXERCISE OF WARRANT; RESTRICTIONS ON TRANSFERABILITY.
a) The rights represented by this Warrant may be exercised by
the Holder in the following increments and only if prior to the
expiration of this Warrant on June 16, 2004 (i) the Company has
obtained $50,000,000 of aggregated revenue from the sale or lease of
Designated Product (as defined in the Agreement for Technology
Transfer, Manufacture, Distribution and Affecting Patent, Trademark and
Copyrights [the "Technology Agreement"] between the Company and the
Holder) and (ii) the following conditions (each such condition is
referred to as a "Vesting Condition") are met:
NO. OF SHARES BECOMING
VESTED AND EXERCISABLE VESTING CONDITION
92,240 Sales, rentals and other revenue from the
Designated Product (as defined in the
Technology Agreement) exceed 25% of the
Company's total revenue
-1-
<PAGE>
NO. OF SHARES BECOMING
VESTED AND EXERCISABLE VESTING CONDITION
92,239 Sales, rentals and other revenue from the
Designated Product (as defined in the
Technology Agreement) exceed 50% of the
Company's total revenue
b) For purposes of this Section 1, sales, rentals and other
revenue from Designated Products will be determined (and will be
compared with revenue from other products of the Company) on a
quarterly basis in accordance with the methodology the Company uses to
determine revenue in the preparation of its financial statements which
are made available to the public.
c) Once a portion of this Warrant becomes exercisable, such
portion may be exercised at any time thereafter up to and including
June 16, 2004 (the "Expiration Date"), after which date this Warrant
shall expire. Any portion of this Warrant which has not become
exercisable on or prior to the Expiration Date or which has become
exercisable on or prior to the Expiration Date, but has not been
exercised as of 5:00 p.m. on the Expiration Date shall be canceled and
forfeited and shall no longer represent the right to purchase shares of
Common Stock of the Company. To exercise this Warrant, the Holders
shall deliver a written notice of exercise (in the form attached
hereto) delivered to the Company at the principal office of the Company
and accompanied or preceded by the surrender of this Warrant along with
a check in payment of the Warrant Exercise Price for such shares. Upon
any exercise of less than all the Warrant Shares, there shall be issued
to the holder a new Warrant in respect of the Warrant Shares as to
which this Warrant was not exercised.
d) Each certificate representing Warrant Shares issued to the
Holder shall bear the following legend; PROVIDED, HOWEVER, that such
legend shall not be required if the Company receives an opinion of
counsel reasonably acceptable to the Company to the effect that neither
such legend nor the restrictions on transfer are required in order to
ensure compliance with the Securities Act of 1933, as amended:
The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended, or
any state securities law, and may not be transferred, sold or
otherwise disposed of in the absence of such registration or
an exemption therefrom. Such shares may be transferred only in
compliance with the conditions specified in the Warrant dated
June 16, 1999, between the issuer and the Holder, a complete
and correct copy of which is available for inspection at the
principal office of the issuer and will be furnished to the
holder hereof upon written request and without charge.
2) NO VOTING RIGHTS. This Warrant shall not entitle the Holder to any
voting rights or other rights as a shareholder of the Company.
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<PAGE>
3) REPRESENTATION BY HOLDER. The Holder, by acceptance hereof,
represents and warrants that (a) it is acquiring this Warrant for its own
account for investment purposes only and not with a view to its resale or
distribution and (b) it has no present intention to resell or otherwise dispose
of all or any part of this Warrant or any of the Warrant Shares. The Holder, by
acceptance hereof, covenants that it will make any filings pursuant to state or
federal securities laws, including without limitation Schedule 13-D or Schedule
13-G, required to be made by it by virtue of holding this Warrant or upon
exercise of this Warrant.
4) NEGOTIABILITY AND TRANSFER. This Warrant is issued upon the
following terms, to which the Holder and any permitted successors and assigns
of the Holder, each consents and agrees:
a) Other than pursuant to registration under federal
securities laws and qualification under applicable state securities
laws or an exemption from such registration or qualification, the
availability of which the Company shall determine in its sole
discretion, neither this Warrant nor any of the Warrant Shares may be
sold, pledged, assigned, or otherwise disposed of (whether voluntarily
or involuntarily). The Company may condition such sale, pledge,
assignment, or other disposition on the receipt from the proposed
transferee to whom such Warrant Shares are to be issued or so
transferred of any reasonable representations and agreements requested
by the Company in order to permit such issuance or transfer to be made
pursuant to exemptions from registration or qualification under federal
and applicable state securities laws. The Holder shall give written
notice to the Company before transferring this Warrant or any of the
Warrant Shares of the Holder's intention to do so, describing briefly
the manner of any proposed transfer and the identity and background of
the proposed transferee. Within thirty (30) days after receiving such
written notice, the Company shall notify the Holder as to whether such
transfer may be effected and of the conditions to any such transfer.
b) Until this Warrant is duly transferred on the books of the
Company, the Company may treat the registered holder of this Warrant as
absolute owner hereof for all purposes without being affected by any
notice to the contrary.
c) Each successive holder of this Warrant, or of any portion
of the rights represented thereby, shall be bound by the terms and
conditions set forth herein.
5) ANTIDILUTION ADJUSTMENTS.
a) If the Company shall at any time hereafter subdivide or
combine its outstanding shares of Common Stock, or declare a dividend
payable in Common Stock, the exercise price in effect immediately prior
to the subdivision, combination, or record date for such dividend
payable in Common Stock shall forthwith be proportionately increased,
in the case of combination, or proportionately decreased, in the case
of subdivision or declaration of a dividend payable in Common Stock,
and the number of Warrant Shares purchasable upon exercise of this
Warrant immediately preceding such event, shall be changed to the
number determined by dividing the then current exercise price by the
exercise price as adjusted after such subdivision, combination, or
dividend payable in Common Stock and multiplying the result of such
division against the number
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<PAGE>
of Warrant Shares purchasable upon the exercise of this Warrant
immediately preceding such event, so as to achieve an exercise price
and number of Warrant Shares purchasable after such event
proportional to such exercise price and number of Warrant Shares
purchasable immediately preceding such event. All calculations
hereunder shall be made to the nearest cent or to the nearest
one-hundredth of a share, as the case may be. No fractional Warrant
Shares are to be issued upon the exercise of this Warrant, but
the Company shall pay a cash adjustment in respect of any fraction of a
share which would otherwise be issuable in an amount equal to the same
fraction of the market price per share of Common Stock on the day of
exercise as determined in good faith by the Company.
b) In case of any capital reorganization or any
reclassification of the shares of Common Stock of the Company, or in
the case of any consolidation with or merger of the Company into or
with another corporation, or the sale of all or substantially all of
its assets to another corporation, which is effected in such a manner
that the holders of Common Stock shall be entitled to receive stock,
securities, or assets with respect to or in exchange for Common Stock,
then, as a part of such reorganization, reclassification,
consolidation, merger, or sale, as the case may be, lawful provision
shall be made so that the holder of the Warrant shall have the right
thereafter to receive, upon the exercise hereof, the kind and amount of
shares of stock or other securities or property which the holder would
have been entitled to receive if, immediately prior to such
reorganization, reclassification, consolidation, merger, or sale, the
holder had held the number of Warrant Shares which were then
purchasable upon the exercise of the Warrant. In any such case,
appropriate adjustment (as determined in good faith by the Board of
Directors of the Company) shall be made in the application of the
provisions set forth herein with respect to the rights and interest
thereafter of the holder of the Warrant, to the end that the provisions
set forth herein (including provisions with respect to adjustments of
the exercise price) shall thereafter be applicable, as nearly as
reasonably may be, in relation to any shares of stock or other property
thereafter deliverable upon the exercise of the Warrant.
c) When any adjustment is required to be made in the exercise
price, initial or adjusted, the Company shall forthwith determine the
new exercise price and (a) prepare and retain on file a statement
describing in reasonable detail the method used in arriving at the new
exercise price and (b) cause a copy of such statement to be mailed to
the holder of the Warrant as of a date within ten (10) days after the
date when the circumstances giving rise to the adjustment occurred.
6) RIGHT TO CONVERT.
a) The holder of this Warrant shall have the right to require
the Company to convert this Warrant (the "Conversion Right"), at any
time after it becomes exercisable and prior to its expiration, into
shares of Common Stock as provided for in this Section 6. Upon exercise
of the Conversion Right, the Company shall deliver to the holder
(without payment by the holder of any exercise price) that number of
shares of Common Stock equal to the number of shares of Common Stock
resulting from multiplying the number of Warrant Shares requested to be
converted hereunder times the quotient obtained by
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<PAGE>
dividing (x) the value of the Warrant at the time the Conversion Right
is exercised (determined by subtracting the aggregate exercise price
for the Warrant Shares in effect immediately prior to the exercise of
the Conversion Right from the aggregate Fair Market Value (as
determined below) for the Warrant Shares immediately prior to the
exercise of the Conversion Right) by (y) the aggregate Fair Market
Value for the Warrant Shares immediately prior to the exercise of the
Conversion Right.
b) The Conversion Right may be exercised by the holder, at any
time or from time to time, prior to its expiration, on any business
day, by delivering a written notice (the "Conversion Notice") to the
Company at the offices of the Company exercising the Conversion Right
and specifying (i) the total number of Warrant Shares the Warrantholder
will purchase pursuant to such conversion and (ii) a place, and a date
not less than five (5) nor more than twenty (20) business days from the
date of the Conversion Notice, for the closing of such purchase.
c) At any closing under Section 6(b) hereof, (i) the holder
will surrender the Warrant, (ii) the Company will deliver to the holder
a certificate or certificates for the number of shares of Common Stock
issuable upon such conversion, together with cash, in lieu of any
fraction of a share, and (iii) the Company will deliver to the holder a
new Warrant representing the number of Warrant Shares, if any, with
respect to which the Warrant shall not have been converted.
d) "Fair Market Value" of a share of Common Stock as of a
particular date (the "Determination Date") shall mean:
i) If the Company's Common Stock is traded on an
exchange or is quoted on the Nasdaq Stock Market or Small-Cap
Market, then the average closing or last sale prices,
respectively, reported for the ten (10) business days
immediately preceding the Determination Date;
ii) if the Company's Common Stock is not traded on an
exchange or on the Nasdaq Stock Market or Small-Cap Market,
but is traded on the Nasdaq Bulletin Board or another
over-the-counter market, then the average of the closing bid
and asked prices reported for the ten (10) business days
immediately preceding the Determination Date;
iii) If the Company's Common Stock is not publicly
traded, then, at the option of the Company, "Fair Market
Value" shall mean either (1) the sales price for the most
recent bona fide sale for cash on an arm's-length basis prior
to the Determination Date of such Common Stock by the Company
privately to one or more investors unaffiliated with the
Company or (2) the appraised fair market value of such stock,
its determined by mutual agreement of the Company and the
holder of the Warrant. If Company elects (2) above and the
parties cannot agree to such valuation, then each of the
Company and the holder shall select an arbitrator and such
arbitrators shall select a third, and such three arbitrators
shall determine (in accordance with the Commercial Arbitration
Rules of the American Arbitration Association, such expenses
to be borne equally by the parties) the fair
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<PAGE>
market value (without any discount for lack of marketability
or minority interest) of a share of Common Stock of the
Company.
7) NOTICE OF CERTAIN EVENTS. The Company shall mail to the
registered holder of the Warrant, at its known post office address appearing
on the books of the Company, not less than fifteen (15) days prior to the
date on which (a) a record will be taken for the purpose of determining the
holders of shares of Common Stock entitled to dividends (other than cash
dividends) or subscription rights or (b) a record will be taken (or in lieu
thereof, the transfer books will be closed) for the purpose of determining
the holders of common stock entitled to notice of and to vote at a meeting of
shareholders at which any capital reorganization, reclassification of common
stock, consolidation, merger, dissolution, liquidation, winding up, or sale
of substantially all of the Company's assets shall be considered and acted
upon.
8) RESERVATION OF COMMON STOCK. During the period in which this
Warrant may be exercised, the Company will reserve sufficient authorized but
unissued securities to enable it to satisfy its obligations on exercise of
this Warrant. If at any time the Company's authorized securities shall not be
sufficient to allow the exercise of this Warrant, the Company shall take such
corporate action as may be necessary to increase its authorized but unissued
securities to be sufficient for such purpose.
9) GOVERNING LAW. This Warrant shall be interpreted under the
laws of the State of Washington, exclusive of its conflicts of laws rules.
10) NOTICES. All notices under this Warrant shall be in writing
and shall be delivered by personal service or telecopy or certified mail
return receipt requested, postage prepaid, to such address as may be
designated from time to time by the relevant party, and which shall initially
be:
a) IF TO THE HOLDER:
Digideal Corporation
East 5207 Third Avenue
Spokane, Washington 99212
Attention: Mike Kahn
Telecopy: 509-747-5125
b) IF TO THE COMPANY:
PDS Financial Corporation
6171 McLeod Drive
Las Vegas, Nevada 89120
Attention: Johan P. Finley
Telecopy: (702) 740-8692
Any notice sent by certified mail shall be deemed to have been given
three days after the date on which it is mailed. All other notices shall be
deemed given when received. No objection may be made to the manner of delivery
of any notice actually received in writing by an authorized agent or party.
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<PAGE>
11) NO THIRD-PARTY BENEFICIARIES. None of the provisions of this
Warrant shall be for the benefit of, or enforceable by, any third-party
beneficiary.
12) SEVERABILITY. The validity, legality or enforceability of
the remainder of this Warrant shall not be affected even if one or more of
its provisions shall be held to be invalid, illegal or unenforceable in any
respect.
IN WITNESS WHEREOF, the undersigned has caused this Warrant to be
signed by its duly authorized officer as of the 16th day of June, 1999.
PDS FINANCIAL CORPORATION
By /s/ Peter Cleary
Title: Executive Vice President_____________
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<PAGE>
WARRANT EXERCISE FORM
To be signed only upon exercise of Warrant.
The undersigned, the holder of the within Warrant, hereby irrevocably
elects to exercise the purchase right represented by such Warrant for, and to
purchase thereunder, ____________ of the Warrant Shares of PDS Financial
Corporation to which such Warrant relates and herewith makes payment of
$____________ therefore in cash or by certified check, and requests that such
Warrant Shares be issued and be delivered to the address for which is set forth
below the signature of the undersigned.
Dated: _______________________
----------------------------------
(Taxpayer's I.D. Number)
----------------------------------
(Signature)
----------------------------------
----------------------------------
(Address)
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<PAGE>
ASSIGNMENT FORM
To be signed only upon authorized transfer of Warrant.
FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and
transfers unto __________________ the right to purchase Warrant Shares of PDS
Financial Corporation to which the within Warrant relates and appoints
__________________, attorney, to transfer said right on the books of such
corporation with full power of substitution in the premises.
Dated: ____________________
-----------------------------------
(Signature)
-----------------------------------
-----------------------------------
(Address)
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<PAGE>
THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT
BEEN REGISTERED UNDER EITHER THE SECURITIES ACT OF 1933 OR APPLICABLE STATE
SECURITIES LAWS AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, OFFERED, PLEDGED OR
OTHERWISE DISTRIBUTED FOR VALUE UNLESS THERE IS AN EFFECTIVE REGISTRATION
STATEMENT UNDER SUCH ACT AND SUCH LAWS COVERING SUCH SECURITIES, OR THE COMPANY
RECEIVES AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY STATING THAT SUCH SALE,
TRANSFER, ASSIGNMENT, OFFER, PLEDGE OR OTHER DISTRIBUTION FOR VALUE IS EXEMPT
FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT AND SUCH
LAWS.
WARRANT
TO PURCHASE SHARES OF
COMMON STOCK OF
PDS FINANCIAL CORPORATION
This certifies that for good and valuable consideration, Digideal
Corporation (the "Holder") is entitled to subscribe for and purchase from PDS
Financial Corporation, a Minnesota corporation (the "Company"), at any time or
from time to time after June 16, 1999 and before June 16, 2004, in the amounts
and subject to the conditions set forth in Section 1 hereof, up to 184,480 fully
paid and nonassessable shares of common stock ("Common Stock") of the Company at
a price per share equal to $3.75 (the "Warrant Exercise Price"), subject to the
antidilution provisions of this Warrant. The shares which may be acquired upon
exercise of this Warrant are referred to herein as the "Warrant Shares."
1) EXERCISE OF WARRANT; RESTRICTIONS ON TRANSFERABILITY.
a) The rights represented by this Warrant may be exercised by
the Holder in the following increments and only if the following
conditions (each such condition is referred to as a "Vesting
Condition") are met:
NO. OF SHARES BECOMING
VESTED AND EXERCISABLE VESTING CONDITION
36,896 $10,000,000 of aggregated revenue from the sale
or lease of Designated Product (as defined in
Agreement for Technology Transfer, Manufacture,
Distribution and Affecting Patent, Trademark
and Copyrights (the "Technology Agreement")
between the Company and the Holder, dated June
16, 1999)
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<PAGE>
NO. OF SHARES BECOMING
VESTED AND EXERCISABLE VESTING CONDITION
36,896 $20,000,000 of aggregated revenue from the sale
or lease of Designated Product (as defined in
the Technology Agreement)
36,896 $30,000,000 of aggregated revenue from the sale
or lease of Designated Product (as defined in
the Technology Agreement)
36,896 $40,000,000 of aggregated revenue from the sale
or lease of Designated Product (as defined in
the Technology Agreement)
36,896 $50,000,000 of aggregated revenue from the sale
or lease of Designated Product (as defined in
the Technology Agreement)
b) For purposes of this Section 1, revenue from Designated
Products will be determined on a quarterly basis in accordance with the
methodology the Company uses to determine revenue in the preparation of
its financial statements, which are made available to the public.
c) Once a portion of this Warrant becomes exercisable, such
portion may be exercised at any time thereafter up to and including
June 16, 2004 (the "Expiration Date"), after which date this Warrant
shall expire. Any portion of this Warrant which has not become
exercisable on or prior to the Expiration Date or which has become
exercisable on or prior to the Expiration Date, but has not been
exercised as of 5:00 p.m. on the Expiration Date shall be canceled and
forfeited and shall no longer represent the right to purchase shares of
Common Stock of the Company. To exercise this Warrant, the Holders
shall deliver a written notice of exercise (in the form attached
hereto) delivered to the Company at the principal office of the Company
and accompanied or preceded by the surrender of this Warrant along with
a check in payment of the Warrant Exercise Price for such shares. Upon
any exercise of less than all the Warrant Shares, there shall be issued
to the holder a new Warrant in respect of the Warrant Shares as to
which this Warrant was not exercised.
d) Each certificate representing Warrant Shares issued to
the Holder shall bear the following legend; PROVIDED, HOWEVER, that
such legend shall not be required if the Company receives an opinion of
counsel reasonably acceptable to the Company to the effect that neither
such legend nor the restrictions on transfer are required in order to
ensure compliance with the Securities Act of 1933, as amended:
The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended, or
any state
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<PAGE>
securities law, and may not be transferred, sold or otherwise
disposed of in the absence of such registration or an
exemption therefrom. Such shares may be transferred only in
compliance with the conditions specified in the Warrant dated
June 16, 1999, between the issuer and the Holder, a complete
and correct copy of which is available for inspection at the
principal office of the issuer and will be furnished to the
holder hereof upon written request and without charge.
2) NO VOTING RIGHTS. This Warrant shall not entitle the Holder
to any voting rights or other rights as a shareholder of the Company.
3) REPRESENTATION BY HOLDER. The Holder, by acceptance hereof,
represents and warrants that (a) it is acquiring this Warrant for its own
account for investment purposes only and not with a view to its resale or
distribution and (b) it has no present intention to resell or otherwise
dispose of all or any part of this Warrant or any of the Warrant Shares. The
Holder, by acceptance hereof, covenants that it will make any filings
pursuant to state or federal securities laws, including without limitation
Schedule 13-D or Schedule 13-G, required to be made by it by virtue of
holding this Warrant or upon exercise of this Warrant.
4) NEGOTIABILITY AND TRANSFER. This Warrant is issued upon the
following terms, to which the Holder and any permitted successors and assigns
of the Holder, each consents and agrees:
a) Other than pursuant to registration under federal
securities laws and qualification under applicable state securities
laws or an exemption from such registration or qualification, the
availability of which the Company shall determine in its sole
discretion, neither this Warrant nor any of the Warrant Shares may be
sold, pledged, assigned, or otherwise disposed of (whether voluntarily
or involuntarily). The Company may condition such sale, pledge,
assignment, or other disposition on the receipt from the proposed
transferee to whom such Warrant Shares are to be issued or so
transferred of any reasonable representations and agreements requested
by the Company in order to permit such issuance or transfer to be made
pursuant to exemptions from registration or qualification under federal
and applicable state securities laws. The Holder shall give written
notice to the Company before transferring this Warrant or any of the
Warrant Shares of the Holder's intention to do so, describing briefly
the manner of any proposed transfer and the identity and background of
the proposed transferee. Within thirty (30) days after receiving such
written notice, the Company shall notify the Holder as to whether such
transfer may be effected and of the conditions to any such transfer.
b) Until this Warrant is duly transferred on the books of the
Company, the Company may treat the registered holder of this Warrant as
absolute owner hereof for all purposes without being affected by any
notice to the contrary.
c) Each successive holder of this Warrant, or of any portion
of the rights represented thereby, shall be bound by the terms and
conditions set forth herein.
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<PAGE>
5) ANTIDILUTION ADJUSTMENTS.
a) If the Company shall at any time hereafter subdivide or
combine its outstanding shares of Common Stock, or declare a dividend
payable in Common Stock, the exercise price in effect immediately prior
to the subdivision, combination, or record date for such dividend
payable in Common Stock shall forthwith be proportionately increased,
in the case of combination, or proportionately decreased, in the case
of subdivision or declaration of a dividend payable in Common Stock,
and the number of Warrant Shares purchasable upon exercise of this
Warrant immediately preceding such event, shall be changed to the
number determined by dividing the then current exercise price by the
exercise price as adjusted after such subdivision, combination, or
dividend payable in Common Stock and multiplying the result of such
division against the number of Warrant Shares purchasable upon the
exercise of this Warrant immediately preceding such event, so as to
achieve an exercise price and number of Warrant Shares purchasable
after such event proportional to such exercise price and number of
Warrant Shares purchasable immediately preceding such event. All
calculations hereunder shall be made to the nearest cent or to the
nearest one-hundredth of a share, as the case may be. No fractional
Warrant Shares are to be issued upon the exercise of this Warrant, but
the Company shall pay a cash adjustment in respect of any fraction of a
share which would otherwise be issuable in an amount equal to the same
fraction of the market price per share of Common Stock on the day of
exercise as determined in good faith by the Company.
b) In case of any capital reorganization or any
reclassification of the shares of Common Stock of the Company, or in
the case of any consolidation with or merger of the Company into or
with another corporation, or the sale of all or substantially all of
its assets to another corporation, which is effected in such a manner
that the holders of Common Stock shall be entitled to receive stock,
securities, or assets with respect to or in exchange for Common Stock,
then, as a part of such reorganization, reclassification,
consolidation, merger, or sale, as the case may be, lawful provision
shall be made so that the holder of the Warrant shall have the right
thereafter to receive, upon the exercise hereof, the kind and amount of
shares of stock or other securities or property which the holder would
have been entitled to receive if, immediately prior to such
reorganization, reclassification, consolidation, merger, or sale, the
holder had held the number of Warrant Shares which were then
purchasable upon the exercise of the Warrant. In any such case,
appropriate adjustment (as determined in good faith by the Board of
Directors of the Company) shall be made in the application of the
provisions set forth herein with respect to the rights and interest
thereafter of the holder of the Warrant, to the end that the provisions
set forth herein (including provisions with respect to adjustments of
the exercise price) shall thereafter be applicable, as nearly as
reasonably may be, in relation to any shares of stock or other property
thereafter deliverable upon the exercise of the Warrant.
c) When any adjustment is required to be made in the exercise
price, initial or adjusted, the Company shall forthwith determine the
new exercise price and (a) prepare and retain on file a statement
describing in reasonable detail the method used in arriving at the new
exercise price and (b) cause a copy of such statement to be mailed
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<PAGE>
to the holder of the Warrant as of a date within ten (10) days after
the date when the circumstances giving rise to the adjustment occurred.
6) RIGHT TO CONVERT.
a) The holder of this Warrant shall have the right to require
the Company to convert this Warrant (the "Conversion Right"), at any
time after it becomes exercisable and prior to its expiration, into
shares of Common Stock as provided for in this Section 6. Upon exercise
of the Conversion Right, the Company shall deliver to the holder
(without payment by the holder of any exercise price) that number of
shares of Common Stock equal to the number of shares of Common Stock
resulting from multiplying the number of Warrant Shares requested to be
converted hereunder times the quotient obtained by dividing (x) the
value of the Warrant at the time the Conversion Right is exercised
(determined by subtracting the aggregate exercise price for the Warrant
Shares in effect immediately prior to the exercise of the Conversion
Right from the aggregate Fair Market Value (as determined below) for
the Warrant Shares immediately prior to the exercise of the Conversion
Right) by (y) the aggregate Fair Market Value for the Warrant Shares
immediately prior to the exercise of the Conversion Right.
b) The Conversion Right may be exercised by the holder, at any
time or from time to time, prior to its expiration, on any business
day, by delivering a written notice (the "Conversion Notice") to the
Company at the offices of the Company exercising the Conversion Right
and specifying (i) the total number of Warrant Shares the Warrantholder
will purchase pursuant to such conversion and (ii) a place, and a date
not less than five (5) nor more than twenty (20) business days from the
date of the Conversion Notice, for the closing of such purchase.
c) At any closing under Section 6(b) hereof, (i) the holder
will surrender the Warrant, (ii) the Company will deliver to the holder
a certificate or certificates for the number of shares of Common Stock
issuable upon such conversion, together with cash, in lieu of any
fraction of a share, and (iii) the Company will deliver to the holder a
new Warrant representing the number of Warrant Shares, if any, with
respect to which the Warrant shall not have been converted.
d) "Fair Market Value" of a share of Common Stock as of a
particular date (the "Determination Date") shall mean:
i) If the Company's Common Stock is traded on an
exchange or is quoted on the Nasdaq Stock Market or Small-Cap
Market, then the average closing or last sale prices,
respectively, reported for the ten (10) business days
immediately preceding the Determination Date;
ii) if the Company's Common Stock is not traded on an
exchange or on the Nasdaq Stock Market or Small-Cap Market,
but is traded on the Nasdaq Bulletin Board or another
over-the-counter market, then the average of the closing bid
and asked prices reported for the ten (10) business days
immediately preceding the Determination Date;
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<PAGE>
iii) If the Company's Common Stock is not publicly
traded, then, at the option of the Company, "Fair Market
Value" shall mean either (1) the sales price for the most
recent bona fide sale for cash on an arm's-length basis prior
to the Determination Date of such Common Stock by the Company
privately to one or more investors unaffiliated with the
Company or (2) the appraised fair market value of such stock,
its determined by mutual agreement of the Company and the
holder of the Warrant. If Company elects (2) above and the
parties cannot agree to such valuation, then each of the
Company and the holder shall select an arbitrator and such
arbitrators shall select a third, and such three arbitrators
shall determine (in accordance with the Commercial Arbitration
Rules of the American Arbitration Association, such expenses
to be borne equally by the parties) the fair market value
(without any discount for lack of marketability or minority
interest) of a share of Common Stock of the Company.
7) NOTICE OF CERTAIN EVENTS. The Company shall mail to the
registered holder of the Warrant, at its known post office address appearing
on the books of the Company, not less than fifteen (15) days prior to the
date on which (a) a record will be taken for the purpose of determining the
holders of shares of Common Stock entitled to dividends (other than cash
dividends) or subscription rights or (b) a record will be taken (or in lieu
thereof, the transfer books will be closed) for the purpose of determining
the holders of common stock entitled to notice of and to vote at a meeting of
shareholders at which any capital reorganization, reclassification of common
stock, consolidation, merger, dissolution, liquidation, winding up, or sale
of substantially all of the Company's assets shall be considered and acted
upon.
8) RESERVATION OF COMMON STOCK. During the period in which
this Warrant may be exercised, the Company will reserve sufficient authorized
but unissued securities to enable it to satisfy its obligations on exercise
of this Warrant. If at any time the Company's authorized securities shall not
be sufficient to allow the exercise of this Warrant, the Company shall take
such corporate action as may be necessary to increase its authorized but
unissued securities to be sufficient for such purpose.
9) GOVERNING LAW. This Warrant shall be interpreted under the
laws of the State of Washington, exclusive of its conflicts of laws rules.
10) NOTICES. All notices under this Warrant shall be in writing
and shall be delivered by personal service or telecopy or certified mail
return receipt requested, postage prepaid, to such address as may be
designated from time to time by the relevant party, and which shall initially
be:
a) IF TO THE HOLDER:
Digideal Corporation
East 5207 Third Avenue
Spokane, Washington 99212
Attention: Mike Kahn
Telecopy: 509-747-5125
-6-
<PAGE>
b) IF TO THE COMPANY:
PDS Financial Corporation
6171 McLeod Drive
Las Vegas, Nevada 89120
Attention: Johan P. Finley
Telecopy: (702) 740-8692
Any notice sent by certified mail shall be deemed to have been given
three days after the date on which it is mailed. All other notices shall be
deemed given when received. No objection may be made to the manner of delivery
of any notice actually received in writing by an authorized agent or party.
11) NO THIRD-PARTY BENEFICIARIES. None of the provisions of this
Warrant shall be for the benefit of, or enforceable by, any third-party
beneficiary.
12) SEVERABILITY. The validity, legality or enforceability of the
remainder of this Warrant shall not be affected even if one or more of its
provisions shall be held to be invalid, illegal or unenforceable in any respect.
IN WITNESS WHEREOF, the undersigned has caused this Warrant to be
signed by its duly authorized officer as of the 16th day of June, 1999.
PDS FINANCIAL CORPORATION
By /s/ Peter Cleary
Title: Executive Vice President _______________
-7-
<PAGE>
WARRANT EXERCISE FORM
To be signed only upon exercise of Warrant.
The undersigned, the holder of the within Warrant, hereby irrevocably
elects to exercise the purchase right represented by such Warrant for, and to
purchase thereunder, ____________ of the Warrant Shares of PDS Financial
Corporation to which such Warrant relates and herewith makes payment of
$____________ therefore in cash or by certified check, and requests that such
Warrant Shares be issued and be delivered to the address for which is set forth
below the signature of the undersigned.
Dated: _______________________
-----------------------------------
(Taxpayer's I.D. Number)
-----------------------------------
(Signature)
-----------------------------------
-----------------------------------
(Address)
-8-
<PAGE>
ASSIGNMENT FORM
To be signed only upon authorized transfer of Warrant.
FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and
transfers unto __________________ the right to purchase Warrant Shares of PDS
Financial Corporation to which the within Warrant relates and appoints
__________________, attorney, to transfer said right on the books of such
corporation with full power of substitution in the premises.
Dated: ____________________
------------------------------------
(Signature)
------------------------------------
------------------------------------
(Address)
-9-
<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
PDS Financial Corporation - Colorado Colorado 100
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements
of PDS Financial Corporation on Form S-8 (File No. 33-85966 and 333-79523)
and Form S-3 (File No. 333-49199) of our report dated February 23, 1999, on
our audits of the consolidated financial statements of PDS Financial
Corporation and subsidiaries as of December 31, 1998 and for the years ended
December 31, 1998 and 1997, which report is included in this Annual Report on
Form 10-K.
/s/ PricewaterhouseCoopers LLP
Las Vegas, Nevada
March 28, 2000
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements
of PDS Financial Corporation on Form S-8 (File No. 33-85966 and 333-79523)
and Form S-3 (File No. 333-49199) of our report dated March 8, 2000, on our
audit of the consolidated financial statements of PDS Financial Corporation
as of and for the year ended December 31, 1999, which report is included in
this Annual Report on Form 10-K.
/s/ Piercy Bowler Taylor & Kern
Las Vegas, Nevada
March 8, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF INCOME (LOSS) AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 5,691
<SECURITIES> 0
<RECEIVABLES> 92,641
<ALLOWANCES> 2,738
<INVENTORY> 6,616
<CURRENT-ASSETS> 0<F1>
<PP&E> 5,823<F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 108,033
<CURRENT-LIABILITIES> 18,057
<BONDS> 79,872<F4>
0
0
<COMMON> 37
<OTHER-SE> 10,067
<TOTAL-LIABILITY-AND-EQUITY> 108,033
<SALES> 13,845
<TOTAL-REVENUES> 35,479
<CGS> 13,362
<TOTAL-COSTS> 26,945
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,395
<INTEREST-EXPENSE> 8,133
<INCOME-PRETAX> (994)
<INCOME-TAX> (260)
<INCOME-CONTINUING> (734)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (734)
<EPS-BASIC> (0.20)
<EPS-DILUTED> (0.20)
<FN>
<F1>THE COMPANY DOES NOT PREPARE A CLASSIFIED BALANCE SHEET
<F2>INCLUDES PREPAID EXPENSES OF $1,982, INCOME TAX ASSETS $1,379 AND PP&E OF $875
<F4>INCLUDES NONRECOURSE DEBT OF $23,244
</FN>
</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 and certain shareholders have received the
necessary licenses, permits and authorizations required to own and distribute
gaming machines in Nevada, New Jersey, Mississippi, Colorado, Iowa, Indiana,
Illinois, New Mexico and Minnesota and have license applications pending in
Washington and a route operator's licenses pending in Nevada.. Failure of the
Company or any of its key personnel to obtain or maintain the requisite
licenses, permits and authorizations 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 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
and services, particularly SlotLease and PDS Slot Source, and its new product
Digital 21. 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 financing 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 Company has
entered into a letter of intent to acquire the stock of Four Queens, Inc.,
which is contingent upon the Company securing financing in amounts and on
terms acceptable to finance the purchase price. In addition, 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 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 finance the
Four Queens, Inc. acquisition, 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 Four Queens,
Inc. acquisition or 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 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
<PAGE>
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.
Through its PDS Slot Source division, 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 division,
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 gaming
machines, the occurrence of any of which could have a material adverse effect
on the Company.
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 the completion of brokered transactions. 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 29% of the Company's
outstanding Common Stock. In addition, Mr. Finley's wife and children 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-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
<PAGE>
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.
