-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HqBjXFAE4LFq457pX2Dub9Tx0zAvb8OjQ9WvNpyiEgFgwBhceSJXSjSjKqqbZVGf rq2v4aW5Ze/YlYGiyIWVRQ== 0000950123-97-008165.txt : 19970930 0000950123-97-008165.hdr.sgml : 19970930 ACCESSION NUMBER: 0000950123-97-008165 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970929 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: DVI INC CENTRAL INDEX KEY: 0000801550 STANDARD INDUSTRIAL CLASSIFICATION: FINANCE LESSORS [6172] IRS NUMBER: 222722773 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-11077 FILM NUMBER: 97687144 BUSINESS ADDRESS: STREET 1: 500 HYDE PARK CITY: DOYLESTOWN STATE: PA ZIP: 18901 BUSINESS PHONE: 2153456600 MAIL ADDRESS: STREET 1: 500 HYDE PARK CITY: DOYLESTOWN STATE: PA ZIP: 18901 FORMER COMPANY: FORMER CONFORMED NAME: DVI HEALTH SERVICES CORP DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: DVI FINANCIAL CORP DATE OF NAME CHANGE: 19911114 FORMER COMPANY: FORMER CONFORMED NAME: DIAGNOSTIC VENTURES INC DATE OF NAME CHANGE: 19880906 10-K405 1 DVI, INC 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 F O R M 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition period from to . Commission file Number 0-16271 DVI, INC (Exact name of registrant as specified in charter) Delaware 22-2722773 (State or other jurisdiction of incorporation (I.R.S. Employer or organization) Identification No.) 500 Hyde Park Doylestown, Pennsylvania 18901 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (215) 345-6600 Securities registered pursuant to Section 12(b) of the Act: Name of each Exchange Title of Each Class on which Registered Common Stock par value $.005 per share New York Stock Exchange, Inc. 9 7/8% Senior Notes due 2004 New York Stock Exchange, Inc. Securities registered pursuant to Section 12(g) of the Act: Warrants to Purchase Common Stock (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes X No --- --- The aggregate market value of the Registrant's Common Stock (its only voting stock) held by nonaffiliates of the Registrant as of August 29, 1997 was approximately $91,892,419 based upon the last reported sale price of the Common Stock on the New York Stock Exchange on that date. (Reference is made to Page 10 herein for a statement of the assumptions upon which this calculation is based.) As of August 29, 1997, the Registrant had 10,545,848 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Part III incorporates information by reference from the Registrant's definitive Proxy Statement to be filed with the Commission within 120 days after the close of the Registrant's fiscal year. 2 PART I ITEM 1. BUSINESS OVERVIEW DVI, Inc. is an independent specialty finance company that conducts a medical equipment finance business and a related medical receivables finance business. As of June 30, 1997, the Company's total assets and shareholder's equity were $634.1 million and $95.8 million, respectively. Medical Equipment Finance. The Company finances the acquisition of diagnostic imaging and other types of sophisticated medical equipment used by outpatient healthcare providers, medical imaging centers, groups of physicians, integrated healthcare delivery networks and hospitals. The Company's equipment finance business operates by (i) providing financing directly to end users of equipment; (ii) purchasing medical equipment loans and leases originated by Originators through the Wholesale Program; and (iii) more recently, providing finance programs for vendors of diagnostic and patient treatment devices. The Company's typical equipment loan has an initial principal balance ranging from $300,000 to $2.0 million. Virtually all of the Company's equipment loans are structured on a fixed interest rate basis such that the full cost of the equipment and all financing costs are repaid during the financing term, which typically is five years. Because most of the Company's equipment loans are structured as notes primarily secured by equipment or direct financing leases with a bargain purchase option for the equipment user, the amount carried by the Company on its balance sheet for total residual interest in equipment is quite small ($8.3 million as of June 30, 1997). Total equipment financing loans originated in the Company's fiscal year ended June 30, 1997 were $401.7 million. Of this amount, approximately $303.2 million was provided by the Company directly to end users; $85.0 million was generated through the Wholesale Program; and $13.5 million was generated through various vendor finance programs. The Company has traditionally focused its financing activities on the outpatient diagnostic and treatment services sector of the healthcare industry, typically consisting of radiologists and other diagnostic service providers which were among the first in the healthcare industry to move away from the hospital setting toward outpatient treatment centers. The Company expects the range of services provided in an outpatient setting to expand, and intends as part of its business strategy to focus on the equipment used and medical receivables generated as a result of that expansion. Relatively high cost MRI and CT equipment have been the principal equipment types acquired by the Company's customers and financed by the Company, and the Company expects it will continue to finance substantial amounts of these types of equipment as a result of its experience and expertise in the industry and because that market has been relatively underserved by traditional financing sources. More recently, the Company has targeted the growing, and substantially more competitive, lower cost diagnostic and patient treatment device market, where it is seeking to leverage its reputation for expertise in medical equipment financing and its ability to provide financing to a wide range of healthcare providers. Medical Receivables Finance. The Company provides lines of credit to a wide variety of healthcare providers, many of which are also equipment finance customers. Substantially all of the lines of credit are collateralized by third party medical receivables due from Medicare, Medicaid, HMOs, PPOs and commercial insurance companies. The Company's medical receivables loans are structured as floating rate revolving lines of credit secured by all medical receivables generated by the borrowers, as well as other collateral. These lines of credit typically range in size from $300,000 to $5.0 million. While the Company's medical receivables finance business is newer and substantially smaller than its medical equipment finance business, the Company expects this business unit to grow as a result of its recent success in accessing the securitization markets and other sources of permanent funding. New commitments of credit for the medical receivables business for the year ended June 30, 1997 were $101.1 million, and medical receivables funded as of June 30, 1997 were $87.4 million. Medical receivables financing is readily available for many hospitals and for physicians seeking relatively small amounts of funding. However, for outpatient healthcare providers seeking funding in excess of approximately $500,000, the principal sources of financing generally are limited to specialty finance companies or factoring companies that purchase receivables at a discount. The Company believes the principal reasons for the lack of financing in these areas historically have been the uncertainty of the value of the receivables, the lack of permanent funding vehicles and the potential for fraud due to the difficulty of verifying the performance of healthcare services. More recently, interest in providing financing for this sector has increased as a result of improved understanding of the expected reimbursement levels for healthcare services and the availability of historical performance data on which to base credit decisions. The Company's strategy in medical receivables financing is to differentiate itself from many of its competitors by offering loans secured by medical receivables 2 3 rather than factoring those receivables at a discount. The Company believes that loans secured by medical receivables are often more attractive to borrowers that generate high-quality medical receivables because those borrowers find the Company's financing has a lower cost than the cost to those borrowers of factoring their receivables. The Company makes loans in an amount approximately equal to 70% to 80% of the aggregate amount of the eligible receivables pledged by the borrower. Credit Underwriting. The Company believes the credit underwriting process that it uses when originating loans is effective in managing its risk. The process follows detailed procedures, and benefits from the significant experience of the Company in evaluating the creditworthiness of potential borrowers. The Company also has been successful in restructuring those credits which do become delinquent. The Company's net charge-offs, as a percentage of average net financed assets, were 0.08%, 0.35% and 0.15%, for the years ended June 30, 1997, 1996, and 1995, respectively, and total delinquencies, as a percentage of managed net financed assets, for the same periods were 4.30%, 4.82% and 4.51%, respectively. The Company's historical levels of net charge-offs and delinquencies are not necessarily predictive of future results. Various factors, including changes in the way the Company's customers are paid for their services, other developments in the healthcare industry, and new technological developments affecting the resale value of equipment financed by the Company, could cause the Company's future net charge-offs and delinquency rates to be higher than those experienced historically. Capital Requirements. The Company's strong growth in loan origination and net financed receivables has required substantial amounts of external funding. The Company, through its operating subsidiaries, finances its equipment and medical receivables loans on an interim basis with secured credit facilities provided by banks and other financial institutions. These interim "warehouse" facilities are refinanced using asset securitizations, whole loan sales, and other structured finance techniques that permanently fund most of the Company's equipment loans and medical receivables loans. These permanent financings require additional capital to be invested by the Company to fund reserve accounts or to meet the overcollateralization required in the securitizations and sales of the Company's loans. Recent Growth. In recent years, the Company has grown substantially. Total equipment financing loans originated by the Company grew from $46.4 million in the year ended June 30, 1992 to $401.7 million in the year ended June 30, 1997. The Company's managed net financed receivables grew from $92.4 million as of June 30, 1992 to $925.8 million as of June 30, 1997. In the Company's medical receivables financing business, which was established in 1993, new commitments of credit in the year ended June 30, 1997 were $101.1 million compared with $40.0 million in the year ended June 30, 1996. Medical receivables funded at June 30, 1997 totaled $87.4 million, an increase of $48.8 million over the prior fiscal year end. BUSINESS STRATEGY The Company is seeking to continue its growth by expanding its existing share of the medical equipment financing markets (which historically have been and continue to be its largest, most important business segment) and by generating financing opportunities in other areas of the health care industry. The principal components of this strategy are as follows: - - Generate additional business through existing customers and relationships with equipment manufacturers. The Company will continue to target the market for high cost medical equipment, where it enjoys relationships with a large number of users of sophisticated medical equipment. The Company also has a close working relationship with some of the largest manufacturers of diagnostic imaging equipment, which it maintains by meeting those manufacturers' needs to arrange financing for the higher-cost equipment they sell to healthcare providers. The Company believes these relationships, together with its extensive expertise in the medical industry, can result in a continuing source of financing opportunities. - - Expand medical receivables financing business. The Company intends to penetrate further the medical receivables financing market by generating financing opportunities among its existing equipment finance customer base, particularly those customers that are expanding to provide additional healthcare services. The Company's strategy in medical receivables financing is to differentiate itself from many of its competitors by offering loans secured by medical receivables rather than factoring those receivables at a discount. - - Establish equipment financing relationships with manufacturers of lower cost diagnostic and patient treatment devices. The Company is seeking to use its reputation as a medical equipment financing specialist and its ability to finance a wide range of healthcare providers, to establish a presence in the relatively more competitive market for financing lower-cost medical equipment. The Company intends to finance increased amounts of diagnostic and patient treatment devices such as ultrasound, nuclear medicine and X-ray equipment. For the year ended June 30, 1997, the Company's loan origination for that market were $13.5 million. 3 4 - - Originate medical equipment loans on a wholesale basis. The Company intends to continue its wholesale program, in which it originates medical equipment loans by purchasing them from originators. The Company uses its expertise both in analyzing healthcare credits and utilizing securitization to service originators that often need access to sources of permanent financing for the equipment loans they originate. During the year ended June 30, 1997, the Company purchased $85.0 million in medical equipment loans through the wholesale program. - - Capitalize on international medical equipment financing needs. During the year ended June 30, 1997 the Company continued establishing international operations in order to capitalize on growing overseas markets for sales of medical equipment and devices. The Company has a joint venture based in Singapore with a major manufacturer of medical equipment and a financial institution to service the medical equipment market in the Asia-Pacific region and steps have been taken to form a joint venture in Latin America. DVI Europe is the Company's branch established in the United Kingdom to service the medical equipment industry in Europe. While the Company believes these international operations have significant potential, it expects that potential will be realized, if at all, over a period of several years rather than in the near term. DVI, Inc. conducts its business through two operating subsidiaries, DVI Financial Services and DVI Business Credit. The Company conducts securitizations through special-purpose, indirect, wholly-owned subsidiaries. The Company also conducts other structured financings through limited-purpose subsidiaries or through its operating subsidiaries. The borrowers under the Company's various warehouse credit facilities are DVI Financial Services or DVI Business Credit. SALES AND MARKETING The Company generates most of its financing opportunities from two sources: (i) healthcare providers with whom the Company's sales organization has relationships; and (ii) medical equipment manufacturers that use third parties to finance the sale of their products. Generally, medical equipment manufacturers refer customers to the Company for financing because they believe the Company has the ability to understand and measure the creditworthiness of the customer's business and provide the financing necessary for the completion of the equipment sale. The Company has established a close working relationship with major manufacturers of diagnostic imaging and radiation care equipment by meeting their needs to arrange financing for the higher cost equipment they sell to healthcare providers. These manufacturers include Hitachi Medical Systems America, Philips Medical Systems and Elekta AB among others. The Company believes these relationships afford it a competitive advantage over other providers of medical equipment financing. The Company is seeking to expand its equipment finance business into the relatively more competitive patient diagnostic and treatment device market. The Company believes its experience and expertise in financing a wide range of healthcare providers and meeting the equipment financing needs of major manufacturers of diagnostic imaging and radiation care equipment will help it build relationships with patient treatment device manufacturers. To establish relationships with patient treatment device manufacturers, the Company expects to train the manufacturers' sales personnel in the use of equipment financing as a sales tool and to provide equipment financing programs that make these device manufacturers more competitive. The Company believes the patient treatment device market is more diverse than the diagnostic imaging market because of the larger number of manufacturers and types of products, and the greater price range of those products. The patient treatment device manufacturers targeted by the Company produce products with an average cost of between $75,000 and $300,000. For the year ended June 30, 1997, the loan origination for this business unit was $13.5 million. The Company also has a business unit dedicated to the wholesale program. The Company purchases equipment loans from originators that generally do not have access to cost effective permanent funding for their loans. The Company initiated the wholesale program in June 1994 and during the years ended June 30, 1997 and 1996, the Company purchased an aggregate of $85.0 and $95.3 million of equipment loans from 12 originators, respectively. The Company expects to continue this business at approximately current levels. In the medical receivables finance business, the lines of credit originated by the Company are secured by pledges of (i) specific receivables due the provider, (ii) the overall receivables portfolio of the healthcare provider, and (iii) other forms of credit enhancement such as cash collateral, letters of credit and guarantees. The Company's medical receivables loan marketing specialists assist the Company's equipment loan sales force in originating medical receivables loans. While the growth and cross selling of the medical receivables financing business to the Company's existing client base has been 4 5 restricted because of the lack of access to permanent funding, the Company has established two credit facilities totaling $65.0 million for medical receivables. The medical receivables loan business entails significant risks and capital requirements. The Company's sales and marketing organization consists of 26 healthcare finance specialists located in various parts of the United States. These individuals generally have a credit industry and/or medical equipment background. The Company generally locates sales personnel in geographic areas where they have knowledge of the local market. The Company believes that sales personnel who understand local economic and political trends are a valuable component of its credit underwriting process. CAPITAL RESOURCES AND TRANSACTION FUNDING The Company obtains initial funding for most of its equipment loans through "warehouse" facilities provided by banks and other financial institutions. Loans made under these facilities are repaid when the Company permanently funds its equipment loans through securitization, or other limited-recourse permanent funding programs, including loan sales. Typically, equipment loans are held for 30 to 180 days before they are permanently funded. The Company's need for capital in addition to the funding provided under its warehouse and permanent funding facilities is affected by two primary factors: (i) the level of credit enhancement required under its various warehouse and permanent funding facilities and (ii) the amount of loans held at any time by the Company that do not qualify as eligible collateral under those facilities. Because of the manner in which the Company accounts for its business operations it may require substantial amounts of capital even in periods when it reports positive earnings. This arises principally because there are timing differences between the Company's recognition for accounting purposes of various items of expense and income and its actual receipt of cash that cause the Company's cash flow at times of strong growth in loan origination to be lower than its reported earnings. The two most significant of these differences are (x) the deferral of the Company's costs to originate each loan which are amortized for accounting purposes over the life of the loan, even though the costs are paid in cash at the time of the loan origination, and (y) the recognition of gain on the sale of a loan for accounting purposes at the time the sale is deemed to have occurred, even though in many transactions treated as sales of loans for accounting purposes, the cash is received over the same time period as the original amortization schedule of the loan. While these factors tend to reduce the Company's liquidity at times of strong growth in loan origination, conversely, if the Company's loan growth were to decline, these same factors would have the effect of improving the Company's cash flow from operations in the short term. Continuing Need for Capital. Each of the Company's warehouse facilities and permanent funding vehicles require the Company to provide equity or a form of recourse credit enhancement to the respective lenders or investors and generally do not permit the Company to fund general corporate requirements. Therefore, the actual liquidity, or funds available to the Company to finance its growth, are limited to the cash generated from net financed receivables and the available proceeds of equity or debt securities issued by DVI, Inc. At times of strong origination growth the Company's cash flows from operations are insufficient to fund these requirements. As a result, the Company's need to fund its high growth rates in loan origination necessitates substantial external funding to provide the equity or capital required as recourse credit enhancement with which to leverage borrowings. The Company has no binding commitments for the capital it expects it will continue to require, and its ability to obtain that capital in the future will be dependent on a number of factors including the condition of the capital markets and economic conditions generally. Warehouse Facilities. As of June 30, 1997, the Company had an aggregate maximum of $398.0 million potentially available for equipment loan financing under various warehouse facilities of which it had borrowed an aggregate of $44.6 million. These facilities are provided by a syndicate of banks that participate in a revolving credit arrangement and by investment banking firms that the Company uses for securitizations. The loans made under the bank warehouse facility (i) bear interest at floating rates; (ii) are full recourse obligations of the Company; and (iii) typically advance an amount equal to approximately 95.0% of the cost of the equipment subject to the loans being made thereunder. Loans made under the bank warehouse facility typically are repaid with the proceeds of advances made under securitization warehouse facilities. Those advances in turn are typically repaid with proceeds from permanent fundings. Loans funded under securitization warehouse facilities cease to be eligible collateral if they are not funded within a specified period of time. The amount advanced under the securitization warehouse facilities generally is 90.0% of the discounted value of the pledged receivables. If the Company were unable to arrange continued access to acceptable warehouse financing, the Company would have to curtail its loan origination, which in turn would have a material adverse effect on the Company's financial condition and operations. Permanent Funding Program. Since 1991, the most important source of permanent funding for the Company for equipment loan financing has been securitization and other forms of structured finance. Securitization is a process in which a pool of equipment loans (in the Company's case, typically 100 to 150) is transferred to a special-purpose financing vehicle 5 6 which issues notes to investors. Principal and interest on the notes issued to investors by the securitization subsidiary are paid from the cash flows produced by the loan pool, and the notes are secured by a pledge of the assets in the loan pool as well as by other collateral. In the securitizations sponsored by the Company, equipment loans funded through the securitizations must be credit enhanced to receive an investment grade credit rating. Credit enhancement can be provided in a number of ways, including cash collateral, letters of credit, a subordinated tranche of each individual transaction or an insurance policy. Typically, securitizations sponsored by the Company are enhanced through a combination of some or all of these methods. In the securitizations sponsored to date by the Company, the Company effectively has been required to furnish credit enhancement equal to the difference between (i) the aggregate principal amount of the equipment loans originated by the Company and transferred to the Company's special purpose finance subsidiary and the related costs of consummating the securitization and (ii) the net proceeds received by the Company in such securitizations. The requirement to provide this credit enhancement reduces the Company's liquidity and requires it periodically to obtain additional capital. There can be no assurance that the Company will be able to obtain additional capital. For accounting purposes, the Company's securitizations are treated as either financings (on balance sheet transactions) or sales (off balance sheet transactions). An on-balance sheet transaction is one in which the loans being securitized remain on the Company's balance sheet as an asset for their originally contracted term as a result of the consolidation of the assets and liabilities of the special purpose vehicle with the Company's for financial accounting purposes. An off balance sheet transaction removes the loans from the Company's balance sheet and results in the Company recognizing a gain on the sale of the underlying loans upon completion of the securitization. The Company continually seeks to improve the efficiency of its permanent funding techniques by reducing up-front costs and minimizing the cash requirements of the Company. The Company may consider alternative structures, including senior/subordinated tranches, and alternative forms of credit enhancement, such as letters of credit and surety bonds. The transaction expenses of each securitization and other forms of structured financing will depend on market conditions, costs of securitization and the availability of credit enhancement options to the Company. The Company expects to continue to use securitization and other forms of structured financing, on both a public and private basis, as its principal source of permanent funding for the foreseeable future. To be cost efficient, a securitization must cover a relatively large and diverse portfolio of equipment loans. One of the basic requirements of the credit rating agencies that rate the notes issued in securitizations relates to borrower concentration and requires that no single credit (borrower) may constitute a significant portion of the pool of equipment loans being securitized (in the Company's case, the limit is generally about 3%). Because of these concentration requirements the Company generally must accumulate in excess of $60 million in loans for each securitization. The credit rating agencies also have other concentration guidelines such as equipment type and the geographic location of the obligors. These requirements mean that not all of the equipment loans held in the Company's warehouse facilities at any point in time can be placed in one securitization. If for any reason the Company were to become unable to access the securitization market to permanently fund its equipment loans, the consequences for the Company would be materially adverse. The Company's ability to complete securitizations and other structured finance transactions depends upon a number of factors, including general conditions in the credit markets, the size and liquidity of the market for the types of receivable-backed securities issued or placed in securitizations sponsored by the Company and the overall financial performance of the Company's loan portfolio. The Company does not have binding commitments from financial institutions or investment banks to provide permanent funding for its equipment or medical receivables loans. Senior Notes. On January 30, 1997, the Company completed a public offering of $100.0 million principal amount of 9 7/8% Senior Notes due 2004 ("Senior Notes"). The agreement with respect to the Senior Notes contains, among other things, limitations on the Company's ability to pay dividends and to make certain other kinds of payments. That agreement also prohibits the Company from incurring additional indebtedness unless certain financial ratio tests are met. Interest is payable semi-annually on February 1 and August 1 of each year, commencing on August 1, 1997. The Notes will be redeemable at the option of the Company in whole or in part at any time on or after February 1, 2002 at specified redemption prices. The proceeds from the sale are being used (i) to fund the Company's growth, including increasing the amount of equipment and medical receivables loans the Company can fund, (ii) to develop the Company's new international operations, including the purchase of receivables originated outside the United States and investment in joint ventures, (iii) for other working capital needs and (iv) for general corporate purposes. 6 7 Hedging Strategy. The Company's equipment loans are virtually all structured on a fixed interest rate basis. When the Company originates equipment loans, it bases its pricing in part on the "spread" it expects to achieve between the interest rate it charges its equipment loan customers and the effective interest cost it will pay when it permanently funds those loans. Increases in interest rates between the time the loans are originated and the time they are permanently funded could narrow, eliminate or even reverse the spread between the interest rate the Company realizes on its equipment loans and the interest rate that the Company pays under its warehouse facilities or under a permanent funding program. In an attempt to protect itself against that risk, the Company uses a hedging strategy. The Company uses derivative financial instruments, such as forward rate agreements, Treasury locks, and interest rate swaps, caps and collars, to manage its interest rate risk. The derivatives are used to manage three components of this interest rate risk: interest sensitivity adjustments, pricing of anticipated loan securitizations and sales, and interest rate spread protection. The Company seeks to manage the credit risk of possible counterparty default in these derivative transactions by dealing exclusively with counterparties with investment grade ratings. Forward rate agreements are for interest sensitivity adjustments in conjunction with cash market activities and are used to extend the repricing period of short-term floating rate warehouse facilities. Treasury locks and collars are used to hedge the interest rate risk on anticipated loan securitizations and sales. Treasury lock and collar transactions lock in specific rates and a narrow range of rates, respectively, of Treasury notes having maturities comparable to the average life of the anticipated securitizations and sales. Interest rate swaps and caps are used for interest rate spread protection to protect from rising interest rates in certain loan sale facilities where the cash flows from the loans sold are fixed rate but the borrowing costs are variable rate. There can be no assurance that the Company's hedging strategy or techniques will be effective, that the profitability of the Company will not be adversely affected during any period of changes in interest rates, or that the costs of hedging will not exceed the benefits. A substantial and sustained increase in interest rates could adversely affect the Company's ability to originate loans. In certain circumstances, the Company for a variety of reasons may retain for an indefinite period certain of the equipment loans it originates. In such cases, the Company's interest rate exposure may continue for a longer period of time than the Company otherwise considers desirable. Medical Receivable Financing. The Company funds its medical receivable financing business through various sources. The Company's principal bank revolving credit agreement permits up to $18 million to be used to warehouse medical receivables loans. Warehouse facilities totaling $65 million are available through a bank and an investment bank. While the medical receivable financing business shares certain characteristics, including an overlapping customer base, with the Company's medical equipment financing business, there are many differences, including unique risks. Healthcare providers could overstate the quality and characteristics of their medical receivables, which the Company analyzes in determining the amount of the line of credit to be secured by such receivables. After the Company has established or funded a line of credit, the healthcare providers could change their billing and collection systems, accounting systems or patient records in a way that could adversely affect the Company's ability to monitor the quality and/or performance of the related medical receivables. In addition, there are substantial technical legal issues associated with creating and maintaining perfected security interests in medical receivables. Payors may attempt to offset their payments to the Company against debts owed to the payors by the healthcare providers. The Company may have a conflict of interest when the Company acts as servicer for an equipment-based securitization and originates medical receivables loans to borrowers whose previous equipment loans have been securitized. The Company's efforts to develop suitable sources of funding for its medical receivables financing business through securitization or other structured finance transactions may be constrained or hindered due to the fact that the use of structured finance transactions to fund medical receivables is a relatively new process. Credit Risk. Loans to outpatient healthcare providers, which constitute a substantial portion of the Company's customers, often require a high degree of credit analysis. Although the Company seeks to mitigate its risk of default and credit losses through its underwriting practices and loan servicing procedures and through the use of various forms of non-recourse or limited recourse financing (in which the financing sources that permanently fund the Company's equipment and other loans assume some or all of the risk of default by the Company's customers), the Company remains exposed to potential losses resulting from a default by an obligor. Obligors' defaults could cause the Company to make payments to the extent the Company is obligated to do so and in the case of its permanent equipment and other funding arrangements to the extent of the Company's remaining credit enhancement position; could result in the loss of the cash or other collateral pledged as credit enhancement under its permanent equipment and other funding arrangements; or could require the Company to forfeit any residual interest it may have retained in the underlying equipment. During the period after the Company initially funds a loan and prior to the time it funds the loan on a permanent basis, the Company is exposed to full 7 8 recourse liability in the event of default by the obligor. In addition, under the terms of securitizations and other types of structured finance transactions, the Company generally is required to replace or repurchase equipment and other loans in the event they fail to conform to the representations and warranties made by the Company, even in transactions otherwise designated as nonrecourse or limited recourse. Defaults by the Company's customers also could adversely affect the Company's ability to obtain additional financing in the future, including its ability to use securitization or other forms of structured finance. The sources of such permanent funding take into account the credit performance of the equipment and other loans previously financed by the Company in deciding whether and on what terms to make new loans. In addition, the credit rating agencies and insurers that are often involved in securitizations consider prior credit performance in determining the rating to be given to the securities issued in securitizations sponsored by the Company and whether and on what terms to insure such securities. To date, all of the Company's medical receivable loans (as opposed to its equipment loans) have been funded on a full recourse basis whereby the Company is fully liable for any losses that are incurred. Under the Company's wholesale program, the Company purchases equipment loans from originators that generally do not have direct access to the securitization market as a source of permanent funding for their loans. The Company does not work directly with the borrowers at the origination of these equipment loans and therefore is not directly involved in structuring the credits, however the Company independently verifies credit information supplied by the originator. Accordingly, the Company faces a somewhat higher degree of risk when it acquires loans under the wholesale program. During the years ended June 30, 1997 and 1996, loans purchased under the wholesale program constituted 21.2% and 30.1%, respectively, of the total loans originated during the period. There can be no assurance that the Company will be able to grow this business successfully or avoid the credit risks related to wholesale loan origination. COMPETITION The financing of sophisticated medical equipment is highly competitive. The Company competes with equipment manufacturers that sell and finance their own products, leasing subsidiaries of national and regional commercial banks and other leasing and financing companies. Many of the Company's competitors have significantly greater financial and marketing resources than the Company. In addition, the levels of competition in the lower-cost diagnostic and patient treatment device market and medical receivable financing market are greater than the levels of competition historically experienced by the Company in the higher cost medical equipment market. There can be no assurance that the Company will be able to compete successfully in any or all of its targeted markets. GOVERNMENT REGULATION Although most states do not regulate the equipment financing business, certain states do require licensing of lenders and financiers, limitations on interest rates and other charges, adequate disclosure of certain contract terms and limitations on certain collection practices and creditor remedies. In addition, the operation of certain types of diagnostic imaging and patient treatment equipment is regulated by federal, state and/or local authorities. For example, a shared service provider or healthcare provider using equipment financed by the Company may be required to obtain and maintain approvals from governmental authorities in order to service other healthcare providers with whom it has entered into service agreements. Failure by the Company's customers to comply with these requirements could adversely affect their ability to meet their obligations to the Company. The ability of the Company's equipment financing customers to satisfy their obligations to the Company also could be adversely affected by changes in regulations which limit or prohibit the referral of patients by physicians who have invested in healthcare facilities financed by the Company. EMPLOYEES As of July 3, 1997, the Company had 137 full-time employees consisting of 8 executive officers, 26 sales and sales management personnel, and 107 administrative, accounting and technical personnel. None of the Company's employees are covered by a collective bargaining agreement, and management believes that its relationship with its employees is good. 8 9 ITEM 2. PROPERTIES The Company owns no real property and leases all of its offices. The Company's principal executive offices are located in Doylestown, Pennsylvania. In total, the Company leases an aggregate of approximately 40,000 square feet of office space in various states. The Company believes that the present facilities are adequate to meet its foreseeable needs. ITEM 3. LEGAL PROCEEDINGS The Company is not a party to any pending litigation or legal proceedings, or to the best of its knowledge any threatened litigation or legal proceedings, which, in the opinion of management, individually or in the aggregate, would have a material adverse effect on its results of operations or financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the three months ended June 30, 1997. EXECUTIVE OFFICERS OF THE REGISTRANT As of June 30, 1997, the executive officers of DVI, Inc. were:
NAME AGE POSITION ---- --- -------- Michael A. O'Hanlon 50 Director, President and Chief Executive Officer Steven R. Garfinkel 54 Executive Vice President and Chief Financial Officer Richard E. Miller 45 Executive Vice President Anthony J. Turek 54 Executive Vice President and Chief Credit Officer John P. Boyle 48 Vice President and Chief Accounting Officer Melvin C. Breaux 56 Vice President, Secretary and General Counsel Cynthia J. Cohn 38 Vice President Alan J. Velotta 50 Vice President
MICHAEL A. O'HANLON is the Company's president and chief executive officer and has served as such since November 1995. Mr. O'Hanlon was president and chief operating officer from September 1994 to November 1995. Previously, Mr. O'Hanlon served as executive vice president of DVI since joining the Company in March 1993. Mr. O'Hanlon also serves on the executive committee of DVI. Prior to joining the Company, Mr. O'Hanlon served as president and chief executive officer of Concord Leasing, Inc. ("Concord Leasing") for nine years. Concord Leasing provides medical, aircraft, shipping, and industrial equipment financing. U.S. Concord, Inc., a subsidiary, provides equipment financing for the medical imaging industry. Previously, Mr. O'Hanlon was a senior executive with Pitney Bowes Credit Corporation. Mr. O'Hanlon received his Master of Science degree from the University of Connecticut, and his Bachelor of Business Administration from the Philadelphia College of Textiles and Science. Mr. O'Hanlon became a director of DVI in November 1993. STEVEN R. GARFINKEL is an executive vice president of the Company and its chief financial officer. Mr. Garfinkel also serves on the executive committee of DVI. Mr. Garfinkel joined the Company in September 1995. His responsibilities include corporate finance, loan funding, balance sheet management, accounting and financial reporting, internal control and financial planning. Mr. Garfinkel has extensive experience in developing and managing corporate finance relationships, money market funding, derivative hedging, financial planning and management information systems. Before joining DVI, Mr. Garfinkel spent his twenty-nine year career with two large bank holding companies: CoreStates Financial Corp. and First Pennsylvania Corporation. For twenty years he was either controller or treasurer of those organizations. Mr. Garfinkel received his Master of Business Administration degree from Drexel University, and his Bachelor of Arts degree from Temple University. RICHARD E. MILLER is an executive vice president of the Company. Mr. Miller joined the Company in April 1994. Mr. Miller is president of DVI Financial Services Inc. and also serves on the executive committee of DVI. His primary responsibility is to manage the Company's equipment financing business in the United States. Before joining the Company, he served for six years as vice president sales for Toshiba America Medical Systems, a major 9 10 distributor of medical imaging equipment. Previously, Mr. Miller was national sales manager for Thomsen CGR, a French manufacturer of medical imaging equipment, which was acquired by General Electric Medical Systems. He also previously served in sales management with General Electric Medical Systems. Mr. Miller has a Bachelor of Arts degree from Eastern College. ANTHONY J. TUREK is an executive vice president and the chief credit officer of DVI. Mr. Turek has served in that capacity since March 1988. Mr. Turek also serves on the executive committee of DVI. Prior to joining the Company, Mr. Turek was vice president, Commercial Banking at Continental Illinois National Bank ("CINB") in Chicago from 1968 to 1988. For the five years prior to joining DVI, Mr. Turek managed the equipment leasing and transportation divisions of CINB. Prior responsibilities included management positions in the special industries, metropolitan and national divisions of CINB. Before his employment with CINB, Mr. Turek was a trust officer with Bank of America. Mr. Turek received his Bachelor of Science degree from Iowa State University and his Master of Science degree from the University of Missouri. JOHN P. BOYLE is a vice president and chief accounting officer of the Company. Mr. Boyle joined the Company in January 1995. His primary responsibility is managing the Company's accounting, tax and financial reporting functions. Before joining the Company, Mr. Boyle spent seventeen years of his professional career in senior finance and accounting positions with financial services organizations. He spent the initial five years of his career with Peat Marwick Mitchell & Co. in Philadelphia. Mr. Boyle is a General Securities Principal and a CPA with almost twenty years of experience in the financial services industry. Beyond his accounting background, he has extensive experience in credit and corporate finance matters. Mr. Boyle holds a Bachelor of Arts degree from Temple University. MELVIN C. BREAUX is general counsel, secretary and a vice president of the Company and is general counsel and a vice president of DVI Financial Services. Prior to joining the Company in July 1995, Mr. Breaux was a partner in the Philadelphia, PA law firm of Drinker Biddle & Reath. As a member of that firm's banking and finance department, he specialized in secured and unsecured commercial lending transactions, a wide variety of other financing transactions, and the general practice of business law. Mr. Breaux received a Bachelor of Arts degree from Temple University and a Juris Doctor degree from the University of Pennsylvania School of Law. CYNTHIA J. COHN has been a vice president of DVI since October 1988 and executive vice president of DVI Business Credit since January 1994. She is responsible for all sales and marketing functions of DVI Business Credit. Ms. Cohn has been employed by the Company in a sales and management capacity since July 1986. Ms. Cohn also handles certain shareholder relation functions for the Company. She served as an assistant vice president from July 1987 to October 1988. Prior to joining the Company, Ms. Cohn served as research coordinator for Cantor, Fitzgerald Co., Inc., a stock brokerage firm, from February 1983 to July 1986, where she was responsible for development and coordination of that firm's research product for both institutional and retail clientele. She holds a Bachelor of Arts degree from Ithaca College. Ms. Cohn is the daughter of Gerald L. Cohn, a director of the Company. ALAN J. VELOTTA is a vice president of the Company. He was appointed President of DVI Business Credit in April 1997. Mr. Velotta joined the Company in April 1994 as a group managing director of DVI Capital, the Company's wholesale group. His primary responsibility is to apply to Business Credit the same finance, leadership and technical skills he used to develop DVI Capital. Prior to joining DVI, he served as vice president-operations for Picker Financial Group, the captive leasing company of Picker International. Previously, Mr. Velotta was vice president/central division manager for Chrysler Capital Corporation. ----------------------------- For the purposes of calculating the aggregate market value of the shares of Common Stock of the Registrant held by nonaffiliates, as shown on the cover page of this report, it has been assumed that all the outstanding shares were held by nonaffiliates except for the shares owned by directors and executive officers of the Company, by CIBC Trust Company (Bahamas) and by Ronald Baron. However, this should not be deemed to constitute an admission that all such persons or entities are, in fact, affiliates of the Registrant, or that there are not other persons who may be deemed to be affiliates of the Registrant. Further information concerning shareholdings of officers, directors and principal shareholders is included in the Company's definitive proxy statement relating to its scheduled December 1997 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission. 10 11 PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Price Range of Common Stock The following table sets forth high and low last reported sales prices per share of Common Stock on the New York Stock Exchange, Inc. for the periods indicated:
FISCAL YEAR ENDED JUNE 30, 1997 HIGH LOW - ------------------------------- ---- --- First Quarter ...................... $17 3/8 $12 1/4 Second Quarter ..................... 14 7/8 12 1/2 Third Quarter ...................... 13 3/8 11 Fourth Quarter ..................... 14 5/8 11 1/4
FISCAL YEAR ENDED JUNE 30, 1996 HIGH LOW - ------------------------------- ---- --- First Quarter .................................. $13 3/4 $11 1/8 Second Quarter.................................. 14 1/2 12 5/8 Third Quarter .................................. 14 3/8 12 1/4 Fourth Quarter ................................. 15 7/8 13
DIVIDEND POLICY The Company has not declared or paid any cash dividends since its inception, and the Company anticipates that any future earnings will be retained for investment in corporate operations. Any declaration of dividends in the future will be determined in light of the conditions affecting the Company at that time, including, among other things, its earnings, financial condition, capital requirements, level of debt and the terms of any contractual limitations on dividends. The Company's principal warehouse facility prohibits DVI Financial Services, the Company's principal operating subsidiary, from paying cash dividends. In addition, the agreement with respect to the Company's Senior Notes and 9-1/8% Convertible Subordinated Notes due 2002 (the "Convertible Subordinated Notes") places limitations on the payment of dividends by the Company and its subsidiaries. As of August 29, 1997, there were approximately 5,035 beneficial holders of the Company's Common Stock. 11 12 ITEM 6. SUMMARY CONSOLIDATED FINANCIAL AND OPERATING INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED JUNE 30, --------------------------------------------------- 1997 1996 1995 1994 1993 ------- ------- ------- ------- ------- STATEMENT OF OPERATIONS DATA: Finance and other income ...................................... $55,971 $49,013 $35,985 $20,609 $14,095 Interest expense .............................................. 38,395 30,489 22,860 8,833 5,005 Net interest and other income ................................. 17,576 18,524 13,125 11,776 9,090 Selling, general and administrative expenses .................. 13,382 9,898 7,891 6,049 5,487 Provision for losses on receivables ........................... 2,386 2,325 1,261 1,716 248 Earnings from continuing operations before provision for income taxes, equity in net earnings (losses) of investees and discontinued operations .................................. 15,847 14,333 7,015 4,313 4,459 Net earnings from continuing operations ....................... 8,941 8,175 4,069 2,260 2,580 Net primary earnings per share from continuing operations ..... $ 0.81 $ 0.81 $ 0.61 $ 0.34 $ 0.39 Weighted average number of shares outstanding ................. 11,098 10,118 6,652 6,717 6,601
JUNE 30, -------------------------------------------------------- 1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- BALANCE SHEET DATA: Cash and cash equivalents ................. $ 8,935 $ 2,376 $ 1,963 $ 1,714 $ 2,199 Cash and cash equivalents, restricted ..... 26,425 32,522 12,241 13,065 6,825 Total assets .............................. 634,119 560,894 432,876 265,949 147,161 Borrowings under warehouse facilities ..... 44,586 168,108 155,172 34,586 45,221 Long-term debt, net ....................... 435,238 267,568 219,130 162,964 51,827 Shareholders' equity ...................... 95,755 85,263 40,250 33,993 34,664
The Company has not declared or paid any cash dividends since its inception. (See Dividend Policy.) See Item 7 for management's discussion of discontinued operations. 12 13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company is an independent specialty finance company that conducts a medical equipment finance business and a related medical receivables finance business. The Company finances diagnostic imaging and other types of sophisticated medical equipment used by outpatient healthcare providers, medical imaging centers, groups of physicians, integrated healthcare delivery networks and hospitals. The Company also provides lines of credit to a wide variety of healthcare providers, substantially all of which are collateralized by third party medical receivables due from Medicare, Medicaid, HMO's, PPO's and commercial insurance companies. CERTAIN ACCOUNTING CONSIDERATIONS Equipment financing. For accounting purposes, the Company classifies equipment contracts it originates as notes secured by equipment, direct financing leases or operating leases. Notes secured by equipment and direct financing leases are generally those transactions in which the obligor has substantially all of the benefits and risks of ownership of the equipment. Operating leases are generally those which only provide for the rental of the asset. The different classifications can result in accounting treatments that provide substantially different income and costs during the transaction term. Direct financing leases and notes secured by equipment are reflected on the Company's balance sheet as "investment in direct financing leases and notes secured by equipment or medical receivables." For statements of operations purposes, those transactions result in amortization of finance income over the transaction term in the amounts computed using the interest method. The Company enters into two types of direct financing lease transactions, which are referred to as "conditional sales agreements" and "fair market value transactions." Conditional sales agreements and notes secured by equipment represent those transactions in which no residual interest in the underlying equipment is retained by the Company. Fair market value transactions are those transactions in which the Company retains a residual interest in the equipment. This residual interest is recorded on the Company's books as an estimate of the projected value of the financed equipment at the end of the transaction term. At the inception of notes secured by equipment and direct financing lease transactions, "unearned income" represents the amount by which the gross transaction receivables and the estimated residual value (on fair market value transactions) exceed equipment cost. Beginning in 1993, the Company significantly reduced its emphasis on entering into fair market value transactions and adopted a strategy to reduce the percentage of residual interests on its balance sheet, and accordingly, the percentage of the Company's equipment financing transactions structured as loans and conditional sales agreements has increased significantly. During the Company's fiscal year ended June 30, 1997 ("fiscal 1997") the amount of residual interest has increased, but as a percentage of net financed assets it remained consistent with the Company's fiscal year ended June 30, 1996 ("fiscal 1996") percentage of 1.0%. As of June 30, 1997, residual valuation increased to $8.3 million from $6.2 million at June 30, 1993, and from 5.3% of net financed receivables as of June 30, 1993 to 1.4% at June 30, 1997. The Company believes that loans and conditional sales agreements will constitute a high percentage of its equipment financing transactions in the future. Leases and contracts for the rental of equipment which do not meet the criteria of direct financing leases are accounted for as operating leases. Equipment under an operating lease or a rental contract is recorded on the balance sheet at the Company's cost under the caption of "equipment on operating leases" and depreciated on a straight-line basis over the estimated useful life of the equipment. Notes secured by equipment and direct financing lease transactions are all "net" transactions under which the obligor must make all scheduled payments, maintain the equipment, insure the equipment against casualty loss and pay all equipment-related taxes. In fair market value transactions, at the end of the initial financing term, the obligor has the option either to purchase the equipment for its fair market value, extend the financing term under renegotiated payments or return the equipment to the Company. If the equipment is returned to the Company, the Company must sell or lease the equipment to another user. In transactions classified as notes secured by equipment and direct financing leases that the Company permanently funds through securitization or other structured finance transactions which the Company treats as debt, income is 13 14 deferred and recognized using the interest method over the respective term of the transactions. If an obligor under a transaction defaults, the Company may not receive all or a portion of the unamortized income associated with the transaction. MEDICAL RECEIVABLES FINANCING In addition to its core equipment finance business, the Company provides lines of credit under which the Company makes full recourse loans to healthcare providers that are secured by medical receivables and other collateral. The interest and fee income generated from these loans are recognized over the terms of the lines of credit, which are typically one to three years, and are recorded as amortization of finance income. DISCONTINUED OPERATIONS In June 1993, the Company adopted a formal plan to discontinue its healthcare services segment. At the end of fiscal 1993, the Company established a reserve for the divestiture of the operations and recorded a loss on discontinued operations and disposal of discontinued operations. As of June 30, 1994, the Company had disposed of or entered into definitive agreements to sell the outpatient facilities, had written off the investment and assets of the remainder, and recorded an additional $3.1 million after-tax charge in excess of the amounts of estimated losses reported as of June 30, 1993 for the disposition of this segment of the Company's business. RESULTS OF OPERATIONS The Company has classified income under the categories of "amortization of finance income," "other income" and "net gain on sale of financing transactions." Amortization of finance income consists of the interest component of scheduled payments on notes secured by equipment (or medical receivables) and direct financing leases, and is calculated using the interest method whereby the income is reported over the term of the transactions. Other income consists primarily of fees and late charges, dividends on investment in investee's preferred stock, servicing fees, income from asset disposals and income from receivable purchases and billing/collecting activities which the Company has curtailed. Net gain on sale of financing transactions consists of gains recognized when the Company permanently funds transactions through whole loan sales. IMPACT OF FINANCING STRATEGIES ON RESULTS OF OPERATIONS The Company's financing strategy is to obtain permanent funding for its equipment and medical receivable loans through securitization and to sell the remainder to reduce borrower concentration and to manage the Company's leverage. When funding loans through securitization, the issuer generally can structure the securitization so that the funding is treated for accounting purposes either as long-term debt secured by equipment loans owned by the Company, or as a sale. The accounting method to report finance income differs significantly depending on which of the two structures the issuer uses. When the Company sponsors a securitization it treats the proceeds as long-term debt on its financial statements and reports the finance income over the term of the equipment loans that are funded. When the Company sells loans, it recognizes the unamortized finance income at the time the funding takes place; however, even in a funding treated as a sale, the Company may recognize servicing and/or interest income on its subordinated interest over the remaining term of the equipment loans sold. Over the past few years the Company has focused its strategy on increasing its market share. There can be no assurance that the Company's historical growth rate or current profitability can be sustained in the future. Additionally, the Company's expense levels are based in part on its expectations as to future financing volumes, and the Company may be unable to adjust spending in a timely manner to compensate for a decrease in demand for financing of medical equipment and receivables. Accordingly, operating results may be adversely impacted by future fluctuations in such demand. The Company believes that general economic conditions have not had a material adverse effect on the Company's recent operating results. There can be no assurances, however, that general economic conditions will not have a material adverse effect on the Company in the future. 14 15 YEAR ENDED JUNE 30, 1997 COMPARED TO YEAR ENDED JUNE 30, 1996 Total equipment financing loans originated were $401.7 million in fiscal 1997 compared with $316.8 million in fiscal 1996, an increase of 26.8%. Net financed assets totaled $580.6 million at June 30, 1997, an increase of $126.2 million or 27.8% over the prior year. Not included in net financed assets were the loans sold but still serviced by the Company, which increased to $389.6 million as of June 30, 1997 compared to $218.6 million as of June 30,1996, an increase of 78.2%. Managed net financed assets, the aggregate of those appearing on the Company's balance sheet and those which have been sold and are still serviced by the Company, totaled $925.8 million as of June 30, 1997, representing a 44.6% increase over the total as of June 30, 1996. In the Company's medical receivable financing business, new commitments of credit in fiscal 1997 were $101.1 million compared with $40.0 million in fiscal 1996, an increase of 152.8%. Medical receivables funded at June 30, 1997 totaled $87.4 million, an increase of $48.8 million or 126.4% over the prior year. Total finance and other income increased 14.2% to $56.0 million for the year ended June 30, 1997 from $49.0 million the prior year. A component of total finance and other income, amortization of finance income, increased 11.3% to $49.5 million for the year ended June 30, 1997 from $44.5 million for the year ended June 30, 1996. The increase was primarily a result of the overall increase in the size of the Company's loan portfolio. The remaining component of total finance and other income, other income (which consists primarily of contracts, servicing, origination fees and dividends on investment in investee's preferred stock) increased 42.9% to $6.4 million in fiscal 1997 as compared to $4.5 million in fiscal 1996. The increase is due mainly to fees earned on larger portfolios and servicing income. For the year ended June 30, 1997, interest expense increased 25.9% to $38.4 million from $30.5 million in the prior year. The increase in interest expense is primarily a result of the growth of the Company's loan portfolio and issuance of senior notes. As a percentage of total finance and other income, interest expense was 68.6% in the year ended June 30, 1997 compared to 62.2% in the same period a year earlier. The net gain on sale of financing transactions increased 74.8% to $14.0 million for the year ended June 30, 1997 compared with a gain of $8.0 million for the same period in the prior year. Loans sold during the year ended June 30, 1997 were $233.0 million compared to $175.1 million during the prior fiscal year. Selling, general and administrative expenses (SG&A) increased 35.2% to $13.4 million for the year ended June 30, 1997 from $9.9 million for the year ended June 30, 1996. The increase over the prior fiscal year is primarily related to the development of its medical receivables, vendor finance and international businesses and the 44.6% growth in managed net financed assets. To support this growth, the Company increased its personnel to 137 employees from 129 one year earlier. The provision for losses on receivables was $2.4 million for the year ended June 30, 1997 as compared to $2.3 million for the previous year. On a quarterly basis, the Company evaluates the collectibility of its receivables and records a provision for amounts deemed uncollectible. In the opinion of management, the provisions are adequate based on current trends in the Company's delinquencies and losses. The Company's charge-offs for the quarters ended September 30, 1996, December 31, 1996, March 31, 1997, and June 30, 1997 were $10,000, $5,000, $255,000 and $166,000, respectively, which represents 0.23%, 0.10%, 5.24% and 2.78% respectively, of the quarter-end allowance for losses. Earnings before provision for income taxes and equity in net losses of investees increased 10.6% to $15.8 million for the year ended June 30, 1997 compared to $14.3 million a year earlier. Net earnings were $8.9 million or $0.81 per share for the year ended June 30, 1997 as compared to net earnings of $8.2 million or $0.81 per share in the prior year. The Company's cash and cash equivalents at June 30, 1997 and June 30, 1996 were $8.9 million and $2.4 million, respectively. The following describes the changes from June 30, 1996 to June 30, 1997 in the items which had the most significant impact on the Company's cash flow during the year ended June 30, 1997. The Company's net cash provided by operating activities was $70.1 million for the year ended June 30, 1997 compared to $71.2 million net cash used in operations for the year ended June 30, 1996. The increase in cash 15 16 provided during the year ended June 30, 1997 is mainly attributed to the amount due from the portfolio sale at June 30, 1996 being received. The Company's net cash used in investing activities increased to $105.9 million for the year ended June 30, 1997, as compared to $25.4 million for the year ended June 30, 1996. This increase is primarily attributed to cash used to acquire equipment and to finance notes secured by medical receivables of $477.8 million during the year ended June 30, 1997 compared to $304.3 million for the year ended June 30, 1996. These uses of cash were offset by $373.0 million and $280.5 million of portfolio receipts net of amounts included in income and proceeds from the sale of financing transactions for the same periods. The Company's net cash provided by financing activities was $42.3 million for the year ended June 30, 1997 down from $97.1 million for the year ended June 30, 1996. This results from a net increase in the Company's borrowings over repayments of $41.2 million for the year ended June 30, 1997, as compared to a $59.2 million net increase in borrowings over repayments for the year ended June 30, 1996. In fiscal 1997 the Company completed a public offering of $100.0 million of Senior Notes. In addition, in 1996 $29.0 million was provided through the equity offering. YEAR ENDED JUNE 30, 1996 COMPARED TO YEAR ENDED JUNE 30, 1995 Total equipment financing loans originated were $316.8 million in fiscal 1996 compared with $238.0 million in the Company's fiscal year ended June 30, 1995 ("fiscal 1995"), excluding the Concord Leasing portfolio purchase ($76.1 million purchased in fiscal 1995), an increase of 33.1%. Net financed assets for this business totaled $454.4 million at June 30, 1996, an increase of $53.8 million or 13.4% over the prior year. In the Company's medical receivable financing business, new commitments of credit in fiscal 1996 were $40.0 million compared with $23.9 million in fiscal 1995, an increase of 67.4%. Medical receivables funded at June 30, 1996 totaled $38.6 million, an increase of $16.1 million or 71.6% over the prior year. Amortization of finance income increased 31.2% to $44.5 million for the year ended June 30, 1996 from $33.9 million for the year ended June 30, 1995. The increase was primarily a result of the overall increase in the size of the Company's net financed receivables. Other income, which consists primarily of fees and late charges, dividends on investment in investee's preferred stock, servicing fees, income from receivables purchases and income from billing/collecting activities which the Company has curtailed, increased 119.7% to $4.5 million in fiscal 1996 as compared to $2.1 million in fiscal 1995. The increase is due to the growth in the medical receivables business fees and the servicing of a larger loan portfolio. For the year ended June 30, 1996, interest expense increased 33.4% to $30.5 million from $22.9 million in the prior year. For the year ended June 30, 1996, the Company's average indebtedness (calculated based on period beginning and period ending balances) increased 41.6% to $405.0 million from $285.9 million in the prior year. The increase in interest expense and average indebtedness is primarily a result of the growth of the Company's loan portfolio. As a percentage of total finance and other income, interest expense was 62.2% in the year ended June 30, 1996 compared to 63.5% in the same period a year earlier. The net gain on sale of financing transactions increased 164.0% to $8.0 million for the year ended June 30, 1996 compared with a gain of $3.0 million for the same period in the prior year. Loans sold during the year ended June 30, 1996 were $175.1 million compared to $115.8 million during the prior fiscal year. The increase reflects the Company's attempt to partially offset the near term costs of its newer business units and international initiatives. Net finance income was $26.6 million for the year ended June 30, 1996, as compared to $16.2 million for the year ended June 30, 1995, an increase of 64.3%. The increase was primarily a result of the overall increase in the size of the Company's loan portfolio. The Company's net interest margins on its portfolio for the years ended June 30, 1996 and 1995 were 4.07% and 4.10%, respectively, which reflects increased competition, more aggressive pricing for market share growth and the sale of higher margin contracts. Selling, general and administrative expenses (SG&A) increased 25.4% to $9.9 million for the year ended June 30, 1996 from $7.9 million for the year ended June 30, 1995. Included in the fiscal year 1996 expense is $519,000 of 16 17 non-recurring expenses incurred in the third quarter ended March 31, 1996 for the defense and settlement of lawsuits primarily relating to employee matters. Excluding the impact of these legal costs, total selling, general and administrative expenses increased 18.9% over the prior fiscal year, mainly as a result of the 36.2% growth in loan originations and the 44.0% growth in average net financed assets. The majority of the 18.9% increase is due to employee-related costs resulting from the increase in employees during the year. The provision for possible losses on receivables was $2.3 million for the year ended June 30, 1996 as compared to $1.3 million for the previous year. On a quarterly basis, the Company evaluates the collectibility of its receivables and records a provision for amounts deemed uncollectible. In the opinion of management, the provisions are adequate based on current trends in the Company's delinquencies and losses. The Company's charge-offs for the quarters ended September 30, 1995, December 31, 1995, March 31, 1996, and June 30, 1996 were $38,000, $528,000, $270,000 and $745,000, respectively, which represents 1.01%, 13.54%, 6.59% and 18.50% respectively, of the quarter-end allowance for losses. The Company's net earnings were $8.2 million or $0.81 per share for the year ended June 30, 1996 as compared to net earnings of $4.1 million or $0.61 per share in the prior year. LIQUIDITY AND CAPITAL RESOURCES GENERAL The Company's equipment financing business requires substantial amounts of capital and borrowings. The Company obtains warehouse funding from commercial and investment banks. The Company's warehouse borrowings are full recourse obligations, while the Company's permanent funding is obtained principally on a limited recourse basis. In the case of limited recourse funding, the Company retains some risk of loss because it shares in any losses incurred and/or it may forfeit the residual interest (if any) the Company has in the underlying financed assets should defaults occur. A substantial portion of the Company's debt represents permanent funding of equipment loans obtained on a limited recourse basis and is structured so that the cash flow from the underlying loans services the debt. Most of the Company's warehouse borrowings are used to temporarily fund the equipment loans and are repaid with the proceeds obtained from the permanent funding and cash flow from the underlying transactions. As a result of the rapid growth of the Company's equipment financing business, the amount of warehouse and permanent funding it requires has significantly increased. To meet its requirements for increased warehouse funding, the Company has expanded its warehouse facilities with banks and has obtained warehouse facilities with investment banking firms the Company uses for its securitizations. To meet its requirements for increased permanent funding, the Company has enhanced its ability to fund equipment loans by both securitization and whole loan sales. If suitable sources of both warehouse and permanent funding are not available in the future, the Company's growth will be constrained and it may be forced to use less attractive funding sources in order to ensure its liquidity. In addition to the interim and permanent funding referred to above, the Company's continued growth in loan origination and net financed assets requires substantial amounts of external funding, primarily to fund the reserve account or overcollateralization requirements that are applied in connection with securitization and sales of the Company's loans. These funds essentially provide the credit enhancement for the Company's leveraged investments in its loan portfolios, and typically are obtained through sales of debt or equity securities by the Company. As a result of these external funding requirements, in June 1994, the Company completed a $15.0 million private placement of Convertible Subordinated Notes. The agreement with respect to the Convertible Subordinated Notes contains, among other things, limitations on the Company's ability to pay dividends and to make certain other kinds of payments. That agreement also prohibits the Company from incurring additional indebtedness unless certain financial ratio tests are met. In August 1995, the Company completed a public offering of 2,875,000 shares of its common stock for which it received net proceeds of $29.0 million. In January 1996, holders of 615,605 of the Company's warrants and units, issued in February 1991, redeemed their warrants and units for shares of the Company's Common Stock at $12.00 or $12.60 per share by the final exercise date of January 26, 1996. As a result of the redemption, the Company received cash proceeds of $7.4 million. 17 18 On January 30, 1997, the Company completed a public offering of $100.0 million principal amount of 9 7/8% Senior Notes due 2004. The agreement with respect to the Senior Notes contains, among other things, limitations on the Company's ability to pay dividends and to make certain other kinds of payments. That agreement also prohibits the Company from incurring additional indebtedness unless certain financial ratio tests are met. Interest is payable semi-annually on February 1 and August 1 of each year, commencing on August 1, 1997. The Senior Notes will be redeemable at the option of the Company in whole or in part at any time on or after February 1, 2002 at specified redemption prices. The proceeds from the sale are being used (i) to fund the Company's growth, including increasing the amount of equipment and medical receivables loans the Company can fund, (ii) to develop the Company's new international operations, including the purchase of receivables originated outside the United States and investment in joint ventures, (iii) for other working capital needs and (iv) for general corporate purposes. Although the Company believes that cash available from operations, investing and financing activities will be sufficient to fund the Company's current needs for its equipment financing and its related medical receivable businesses, there can be no assurance in this regard and the Company may encounter liquidity problems which could effect its ability to meet such needs while attempting to withstand competitive pressures or adverse economic conditions. Warehouse Facilities. At June 30, 1997, the Company had available an aggregate of $398.0 million under various warehouse facilities for equipment loan financing. The Company's primary credit facility, pursuant to a revolving credit agreement with a syndicate of banks ("Agreement"), provides for the borrowing of up to $128.0 million. Borrowings under this facility bear interest at the Company's option of (1) from prime to prime plus 0.125% or (2) from 1.20% up to 1.65% over the 30, 60 or 90-day LIBOR rate based on the Company's leverage ratio as defined in the Agreement. Included in the Agreement is an $18.0 million sub-limit for borrowings secured by medical receivables loans originated by the Company. The Agreement is renewable annually at the bank syndicate's discretion. The Agreement prohibits the Company from paying dividends other than dividends payable solely in shares of the Company's stock and limits borrowings to specified levels determined by ratios based on the Company's tangible net worth. As of June 30, 1997, the Company was in compliance with the financial covenants of the Agreement. The Company has two $100.0 million interim equipment loan funding facilities with investment banks. These facilities are available to fund certain equipment loans which are to be securitized. Loans made under this facility bear interest at a rate of 0.85% over the 30-day LIBOR rate. Borrowings under the facility are secured by certain equipment loans and the equipment financed thereunder. The Company has a $5.0 million facility with a bank for the funding of loans ineligible for securitization. The Company has two credit facilities for its medical receivables financing business. The first facility is for $15.0 million with an interest rate of prime plus 2.00% and matures in June 1998. The second facility is for $50.0 million with an interest rate of 30-day LIBOR plus 1.90% and matures in September 1997. The Company's use of securitization significantly affects its needs for warehouse facilities. When using securitization, the Company is required to hold loans in warehouse facilities until a sufficient quantity is accumulated to meet the various requirements of the credit rating agencies and others involved, and to make a securitization cost effective. Generally, loans totaling $50 to $200 million will be placed in each securitization pool. Permanent Funding Methods. The Company has completed sixteen securitizations or other structured finance transactions for medical equipment financings totaling $1.15 billion, including two public debt issues of $75.7 million and $90.0 million and fourteen private placements of debt and whole loan sales totaling $987.0 million. In January 1994, the Company filed a registration statement (Registration No. 33-74446) with the Securities and Exchange Commission (SEC) to provide for the future issuance of securitized debt in a series of transactions pursuant to the SEC's "shelf" registration rule up to an aggregate of $350.0 million. The registration statement was declared effective by the SEC on June 23, 1994. The $75.7 million and $90.0 million public debt issues were the two initial fundings under the $350.0 million shelf registration. In January 1996, the Company completed a $25.0 million private placement securitization of medical receivables loans with a domestic insurance company to fund its medical receivables financing business. The Company expects to continue to use securitization, on both a public and private basis, as its principal means to permanently fund its loans for the foreseeable future. If for any reason 18 19 the Company were to become unable to access the securitization market to permanently fund its equipment loans, the consequences for the Company would be materially adverse. The Company's use of securitization significantly affects its liquidity and capital requirements due to the amount of time required to assemble a portfolio of loans to be securitized. When using securitization, the Company is required to hold loans until a sufficient quantity is accumulated so as to attract investor interest and allow for a cost effective placement. This increases the Company's exposure to changes in interest rates and temporarily reduces its warehouse facility liquidity. Generally, the Company does not have binding commitments for permanent funding, either through securitization or whole loan sales. The Company has non-binding agreements with investment banking entities to fund future equipment loans through securitization. While the Company expects to be able to continue to obtain the permanent funding it requires for its equipment financing business, there can be no assurance that it will be able to do so. If, for any reason, any of these types of funding were unavailable in the amounts and on terms deemed reasonable by the Company, the Company's equipment financing activities would be adversely affected. The Company believes cash flows generated from operations and its warehouse facilities are sufficient to meet its near-term obligations. Hedging Strategy. When the Company borrows funds through warehouse facilities, it is exposed to a certain degree of risk caused by interest rate fluctuations. Although the Company's equipment loans are structured and permanently funded on a fixed interest rate basis, it uses warehouse facilities until permanent funding is obtained. Because funds borrowed through warehouse facilities are obtained on a floating interest rate basis, the Company uses hedging techniques to protect its interest rate margins during the period that warehouse facilities are used and securitization and sales are anticipated. The Company uses derivative financial instruments, such as forward rate agreements, Treasury locks, and interest rate swaps, caps and collars to manage its interest rate risk. The derivatives are used to manage three components of this risk: interest sensitivity adjustments, hedging anticipated loan securitizations and sales, and interest rate spread protection. The Company's hedging techniques may not necessarily protect it from interest rate risks in all interest rate environments. See "Business - Capital Resources and Transaction Funding - Hedging Strategy." INCOME TAX ISSUES Historically, the Company has deferred a portion of its federal and state income tax liability because of its ability to obtain depreciation deductions from transactions structured as fair market value leases. In addition, the Company structured its sale of financing transactions in the quarter ended June 30, 1997 as a borrowing for tax purposes versus a sale for book (GAAP) purposes. Future sales of financing transactions may also be structured in this manner. Lastly, the Company disposed of a portion of its equipment residual portfolio in fiscal 1994 and may continue to do so in future periods. INFLATION The Company does not believe that inflation has had a material affect on its operating results during the past three years. There can be no assurance that the Company's business will not be affected by inflation in the future. SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Any statements contained in this Form 10-K which are not historical facts are forward-looking statements; and, therefore, many important factors could cause actual results to differ materially from those in the forward-looking statements. Such factors include, but are not limited to, changes (legislative and otherwise) in the healthcare industry, those relating to demand for DVI's services, pricing, market acceptance, the effect of economic conditions, litigation, competitive products and services, the results of financing efforts, the ability to complete transactions, and other risks identified in the Company's Securities and Exchange Commission filings. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following consolidated financial statements of the Company and its subsidiaries are filed on the pages listed below , as part of Part II, Item 8. 19 20 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page Number ------ Independent Auditors' Report .......................................... 21 Consolidated Balance Sheets as of June 30, 1997 and 1996 .............. 22-23 Consolidated Statements of Operations for the years ended June 30, 1997, 1996 and 1995 ....................................... 24 Consolidated Statements of Shareholders' Equity for the years ended June 30, 1997, 1996 and 1995 ....................................... 25 Consolidated Statements of Cash Flows for the years ended June 30, 1997, 1996 and 1995 ....................................... 26-27 Notes to Consolidated Financial Statements ............................ 28-41
20 21 INDEPENDENT AUDITORS' REPORT Board of Directors and Shareholders DVI, Inc. and Subsidiaries We have audited the accompanying consolidated balance sheets of DVI, Inc. and its subsidiaries (the "Company") as of June 30, 1997 and 1996, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended June 30, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of DVI, Inc. and its subsidiaries as of June 30, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended June 30, 1997 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Philadelphia, Pennsylvania July 31, 1997 21 22 CONSOLIDATED BALANCE SHEETS ASSETS
June 30, ------------------------ (in thousands of dollars except share data) 1997 1996 - --------------------------------------------------------------------------------------------------------- Cash and cash equivalents ................................................... $ 8,935 $ 2,376 Cash and cash equivalents, restricted ....................................... 26,425 32,522 Amounts due from portfolio sale ............................................. -- 54,797 Receivables: Investment in direct financing leases and notes secured by equipment or medical receivables: Receivables in installments .............................................. 496,861 424,858 Receivables and notes - related parties .................................. 9,453 16,999 Recourse credit enhancements ............................................. 46,095 35,734 Notes collateralized by medical receivables .............................. 85,649 34,338 Residual valuation ....................................................... 8,276 4,347 Unearned income .......................................................... (69,739) (65,722) --------- --------- Net investment in direct financing leases and notes secured by equipment or medical receivables .................................... 576,595 450,554 Less: Allowance for losses on receivables ................................ (5,976) (4,026) --------- --------- Net receivables ............................................................. 570,619 446,528 Equipment on operating leases (net of accumulated depreciation of $2,301 (1997) and $2,152 (1996)) ...... 4,041 3,845 Furniture and fixtures (net of accumulated depreciation of $1,702 (1997) and $1,052 (1996)) ...... 2,389 2,046 Investments in investees .................................................... 6,609 7,019 Goodwill, net ............................................................... 3,953 4,259 Other assets ................................................................ 11,148 7,502 --------- --------- Total assets ................................................................ $ 634,119 $ 560,894 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 22 23 LIABILITIES AND SHAREHOLDERS' EQUITY
June 30, ---------------------- (in thousands of dollars except share data) 1997 1996 - -------------------------------------------------------------------------------------------------------- Accounts payable ............................................................. $ 30,722 $ 23,560 Accrued expenses and other liabilities ....................................... 19,208 11,650 Borrowings under warehouse facilities ........................................ 44,586 168,108 Deferred income taxes ........................................................ 8,610 4,745 Long-term debt, net: Notes payable to financial institutions ................................... 6,168 -- Discounted receivables (primarily limited recourse) ....................... 317,863 253,759 9 7/8% Senior notes due 2004 .............................................. 95,883 -- Subordinated debt ......................................................... 2,000 -- Convertible subordinated notes ............................................ 13,324 13,809 --------- -------- Total long-term debt, net .................................................... 435,238 267,568 --------- -------- Total liabilities ............................................................ 538,364 475,631 Commitments and contingencies (Note 11) Shareholders' equity: Preferred stock, $10.00 par value; authorized 100,000 shares; no shares issued Common stock, $.005 par value; authorized 25,000,000 shares; outstanding 10,506,848 shares (1997) and 10,409,370 shares (1996) ...... 53 52 Additional capital ........................................................ 68,828 67,162 Retained earnings ......................................................... 26,990 18,049 Cumulative translation adjustments ........................................ (116) -- --------- -------- Total shareholders' equity ................................................... 95,755 85,263 --------- -------- Total liabilities and shareholders' equity ................................... $ 634,119 $560,894 ========= ========
The accompanying notes are an integral part of these consolidated financial statements. 23 24 CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended June 30, ---------------------------------------- (in thousands of dollars except per share data) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------- Finance and other income: Amortization of finance income ............................... $ 49,535 $ 44,509 $ 33,935 Other income ................................................. 6,436 4,504 2,050 ----------- ----------- ---------- Total finance and other income .................................. 55,971 49,013 35,985 Interest expense ................................................ 38,395 30,489 22,860 ----------- ----------- ---------- Net interest and other income ................................... 17,576 18,524 13,125 Net gain on sale of financing transactions ................... 14,039 8,032 3,042 ----------- ----------- ---------- Net finance income .............................................. 31,615 26,556 16,167 Selling, general and administrative expenses ................. 13,382 9,898 7,891 Provision for losses on receivables .......................... 2,386 2,325 1,261 ----------- ----------- ---------- Earnings before provision for income taxes and equity in net loss of investees .............................. 15,847 14,333 7,015 Provision for income taxes ...................................... 6,625 6,092 2,946 ----------- ----------- ---------- Earnings before equity in net loss of investees ................. 9,222 8,241 4,069 Equity in net loss of investees ................................. 281 66 -- ----------- ----------- ---------- Net earnings .................................................... $ 8,941 $ 8,175 $ 4,069 =========== =========== ========== Net earnings per share: Primary ...................................................... $ 0.81 $ 0.81 $ 0.61 =========== =========== ========== Fully diluted ................................................ $ 0.78 $ 0.77 $ 0.60 =========== =========== ========== Weighted average number of shares outstanding - primary ......... 11,098,000 10,118,000 6,652,000 Weighted average number of shares outstanding - fully diluted ... 12,457,000 11,564,000 8,310,000
The accompanying notes are an integral part of these consolidated financial statements. 24 25 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Unrealized Common Stock Gain on $.005 Par Value Available- Total ---------------------- Additional for-Sale Retained Shareholders' (in thousands of dollars) Shares Amount Capital Investments Earnings CTA Equity - ------------------------------------------------------------------------------------------------------------------------------------ Balances at July 1, 1994 ................... 6,567,295 $33 $28,155 $ -- $ 5,805 $ -- $33,993 Issuance of common stock upon exercise of stock options ............. 97,216 1 626 627 Conversion of subordinated notes ........ 47,169 500 500 Unrealized gain on available-for-sale investments, net of deferred taxes of $769 ......................... 1,061 1,061 Net earnings ............................ 4,069 4,069 ---------- --- ------- ------- ------- ----- ------- Balances at June 30, 1995 .................. 6,711,680 34 29,281 1,061 9,874 -- 40,250 Issuance of common stock upon exercise of stock options and warrants .......................... 822,690 4 8,934 8,938 Net proceeds from issuance of common stock .......................... 2,875,000 14 28,947 28,961 Sale of available-for-sale investments, net of deferred tax benefit of $769 ................... (1,061) (1,061) Net earnings ............................ 8,175 8,175 ---------- --- ------- ------- ------- ----- ------- Balances at June 30, 1996 .................. 10,409,370 52 67,162 -- 18,049 -- 85,263 Issuance of common stock upon exercise of stock options and warrants .................. 40,875 1 1,066 1,067 Conversion of subordinated notes ........ 56,603 600 600 Currency translation adjustment ......... (116) (116) Net earnings ............................ 8,941 -- 8,941 ---------- --- ------- ------- ------- ----- ------- Balances at June 30, 1997 .................. 10,506,848 $53 $68,828 $ -- $26,990 $(116) $95,755 ========== === ======= ======= ======= ===== =======
The accompanying notes are an integral part of these consolidated financial statements. 25 26 CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended June 30, ---------------------------------------------- (in thousands of dollars) 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings .................................................... $ 8,941 $ 8,175 $ 4,069 --------- --------- --------- Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Equity in net loss of investees ............................... 281 66 -- Depreciation and amortization ................................. 10,283 7,982 7,237 Additions to allowance accounts ............................... 2,386 2,325 1,261 Net gain on sale of financing transactions .................... (14,039) (8,032) (3,042) Cumulative translation adjustments ............................ 37 -- -- Changes in assets and liabilities: (Increases) decreases in: Cash and cash equivalents, restricted ....................... 6,097 (20,281) 824 Amounts due from portfolio sale ............................. 54,797 (54,797) -- Receivables ................................................. (14,086) (29,505) 3,285 Other assets ................................................ (3,155) 3,081 1,622 Increases (decreases) in: Accounts payable ............................................ 7,162 17,592 (17,839) Accrued expenses and other liabilities ...................... 7,558 1,361 (576) Deferred income taxes ....................................... 3,865 797 1,619 --------- --------- --------- Total adjustments ............................................. 61,186 (79,411) (5,609) --------- --------- --------- Net cash provided by (used in) operating activities ................ 70,127 (71,236) (1,540) --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Cost of equipment acquired .................................... (429,515) (292,618) (319,011) Portfolio receipts net of amounts included in income and proceeds from sale of financing transactions ................ 372,973 280,541 161,448 Net increase in notes collateralized by medical receivables ... (48,293) (11,667) (16,855) Furniture and fixtures additions .............................. (996) (985) (1,026) Investments in investees ...................................... (24) (2,059) -- Cash received from sale of investments in investees ........... -- 1,341 828 --------- --------- --------- Net cash used in investing activities ......................... (105,855) (25,447) (174,616) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Exercise of stock options and warrants ........................ 1,067 8,938 626 Equity offering ............................................... -- 28,961 -- Borrowings under: Warehouse facilities ........................................ 498,201 485,585 534,633 Long-term debt .............................................. 283,825 120,705 107,510 Repayments on: Warehouse facilities ........................................ (621,862) (472,649) (414,046) Long-term debt .............................................. (118,944) (74,434) (52,328) --------- --------- --------- Net cash provided by financing activities ..................... 42,287 97,106 176,395 --------- --------- ---------
continued The accompanying notes are an integral part of these consolidated financial statements. 26 27
Year Ended June 30, ------------------------------------- (in thousands of dollars) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents ..... $ 6,559 $ 423 $ 239 Cash and cash equivalents, beginning of year ............. 2,376 1,953 1,714 ------- ------- ------- Cash and cash equivalents, end of year ................... $ 8,935 $ 2,376 $ 1,953 ======= ======= ======= CASH PAID DURING THE YEAR FOR: Interest ................................................ $34,892 $29,984 $22,400 ======= ======= ======= Income taxes ............................................ $ 4,777 $ 3,507 $ 1,650 ======= ======= =======
SUPPLEMENTAL DISCLOSURES OF NONCASH TRANSACTIONS: During the year ended June 30, 1997, the Company transferred the net book value of equipment on operating leases in the amount of $491,000 to inventory which is classified with other assets. At June 30, 1997, in accordance with Technical Bulletin 86-2, the Company has recorded in receivables in installments and accrued expenses an amount of $1.9 million representing the present value of future obligations the Company has guaranteed. During the year ended June 30, 1996, the Company converted a $541,000 note receivable into shares of common stock of a domestic entity. During the year ended June 30, 1997 and 1995, $600,000 and $500,000, respectively, of convertible subordinated notes were converted into common stock. The accompanying notes are an integral part of these consolidated financial statements. 27 28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. NATURE OF OPERATIONS DVI, Inc. (the Company or DVI) is engaged in the business of providing equipment and receivable financing for domestic and foreign users of diagnostic imaging, radiation therapy and other medical technologies. The Company's customer base consists principally of outpatient healthcare providers, physician groups and hospitals. By the terms of the underlying financing contracts, the Company's customers are generally considered in default if payment on a contract has not been received. Equipment under direct financing leases and notes secured by equipment, along with obligor guarantees and vendor recourse, serve as collateral for unpaid contract payments. Receivables under medical receivables financing transactions serve as collateral for unpaid contract payments. ABILITY TO ACCESS THE SECURITIZATION MARKET - The Company's ability to complete securitizations and other structured finance transactions depends upon a number of factors, including general conditions in the credit markets, the size and liquidity of the market for the types of receivable-backed securities issued or placed in securitizations sponsored by the Company and the overall financial performance of the Company and its loan portfolio. Additionally, the Company's ability to securitize assets is dependent upon its ability to provide credit enhancement, which reduces the Company's liquidity and periodically requires it to obtain additional capital to enable the Company to expand its operations. CREDIT RISK - Many of the Company's customers are outpatient healthcare providers that have complex credit characteristics. Providing financing for these customers involves considerable credit analysis. CONTINUING NEED FOR CAPITAL - The Company's ability to maintain and build its financing business is dependent on its ability to obtain substantial amounts of warehouse and long-term debt financing. REGULATION AND CONSOLIDATION - Additional regulatory attention has been directed towards physician-owned healthcare facilities and other arrangements whereby physicians are compensated, directly or indirectly, for referring patients to such healthcare facilities. Furthermore, the market is subject to consolidation among outpatient facilities, physician groups and hospitals. The Company's source of customers is subject to the effects of the regulatory actions and market consolidation. INVESTMENTS IN FOREIGN AND INITIAL OPERATIONS - In an effort to mitigate the impact of regulation and consolidation and to expand the Company's market, the Company has initiated operations internationally and has made investments in certain emerging markets. The Company established a joint venture based in Singapore to service the medical equipment market in the Asia-Pacific region and steps have been taken to form a joint venture in Latin America. DVI Europe is the Company's branch established in the United Kingdom to service the medical equipment industry in Europe. The success and ultimate recovery of these investments is dependent upon many factors including foreign regulation, customs, currency exchange, the achievement of management's planned projections for these markets and the Company's ability to manage these operations. NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION POLICY - The consolidated financial statements include the accounts of DVI and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated. USE OF ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. TRANSLATION ADJUSTMENTS - All assets and liabilities denominated in foreign currencies are translated at the exchange rate on the balance sheet date. Revenues, costs and expenses are translated at average rates of exchange prevailing during the period. Translation adjustments are accumulated as a separate component of shareholders' equity. Gains and losses resulting from foreign currency transactions are included in the consolidated statements of operations. 28 29 CASH EQUIVALENTS - Cash equivalents include highly-liquid securities with original maturities of 90 days or less. CASH AND CASH EQUIVALENTS, RESTRICTED - Cash and cash equivalents, restricted consist of cash, certificates of deposit and U.S. Treasury obligations maintained by the Company which are pledged as collateral for certain limited recourse borrowings related to direct financing leases, notes secured by equipment and operating leases. The estimated fair value and the amortized cost of U.S. Treasury obligations as of June 30, 1997 and 1996, are $12.5 million and $14.2 million, respectively. There were no sales of U.S. Treasury obligations during the year ended June 30, 1997 and 1996. The Company accounts for investments in debt and equity securities in accordance with Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities. SFAS No. 115 requires the classification of investments in debt and equity securities into three categories: held to maturity, trading and available-for-sale. At June 30, 1997 and 1996, the Company has only available-for-sale securities with maturities less than 90 days, which are included in restricted cash. Equity securities classified as available-for-sale securities are reported at estimated fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of shareholders' equity, net of deferred taxes. INVESTMENT IN DIRECT FINANCING LEASES AND NOTES SECURED BY EQUIPMENT - At contract commencement, the Company records the gross contract receivable, initial direct costs, estimated residual value of the financed equipment, if any, and unearned income. Included in this category are loans to officers for investment purposes which are not directly related to the Company's operations, and for the purpose of financing a personal residence. At June 30, 1997 and 1996, unamortized initial direct costs amounted to $7.0 million and $7.5 million, respectively. Initial direct costs are deferred and amortized over the life of the contract using the interest method which reflects a constant effective yield. The Company follows the accounting treatment outlined in FASB Technical Bulletin 86-2, which requires the present value of the future obligation be recorded as an asset and corresponding liability at the date the guarantee is assumed. RECOURSE CREDIT ENHANCEMENTS - The most important source of permanent funding for the Company for equipment loan financing has been securitization and other forms of structured finance. Securitization is a process in which a pool of equipment loans (in the Company's case, typically 100 to 150) is transferred to a special-purpose financing vehicle which issues notes to investors. Principal and interest on the notes issued to investors by the securitization subsidiary are paid from the cash flows produced by the loan pool, and the notes are secured by a pledge of the assets in the loan pool as well as by other collateral. In the securitizations sponsored by the Company, equipment loans funded through the securitizations must be credit enhanced to receive an investment grade credit rating. Credit enhancement can be provided in a number of ways, including cash collateral, letters of credit, a subordinated tranche of each individual transaction or an insurance policy. Typically, securitizations sponsored by the Company are enhanced through a combination of some or all of these methods. In the securitizations sponsored to date by the Company, the Company effectively has been required to furnish credit enhancement equal to the difference between (i) the aggregate principal amount of the equipment loans originated by the Company and transferred to the Company's special-purpose finance subsidiary and the related costs of consummating the securitization and (ii) the net proceeds received by the Company in such securitizations. The requirement to provide this credit enhancement reduces the Company's liquidity and requires it periodically to obtain additional capital. There can be no assurance that the Company will be able to obtain additional capital. NOTES COLLATERALIZED BY MEDICAL RECEIVABLES - Notes collateralized by medical receivables consist of note receivables resulting from working capital and other loans made to entities in the healthcare industry and receivables purchased from unrelated entities. The purchased receivables are stated at the lower of the Company's cost or the estimated collectible value. RESIDUAL VALUATION - Residual values, representing the estimated value of the equipment at the end of the lease term, are recorded in the financial statements at the inception of each fair market value lease as amounts estimated by management based upon its experience and judgment. The residual values for operating leases are included in the leased equipment's net book value. The Company evaluates residual value on an ongoing basis and records any required changes in valuation. In accordance with generally accepted accounting principles, no upward revisions are recorded after the inception of the lease. LOAN IMPAIRMENT - The Company accounts for impairment of a loan in accordance with SFAS No.114, Accounting by Creditors for Impairment of a Loan, as amended by SFAS No. 118, Accounting by Creditors for 29 30 Impairment of a Loan - Income Recognition and Disclosures. Impaired loans are measured based on the present value of the expected cash flows discounted at the loan's effective interest rate or the fair value of the collateral. A loan is considered impaired when it becomes probable the Company will be unable to collect all amounts due according to the contract terms. EQUIPMENT ON OPERATING LEASES - Leases which do not meet the criteria for direct financing leases are accounted for as operating leases. Equipment on operating leases are recorded at cost and depreciated on a straight-line basis over the estimated useful life of the equipment. Rental income is recorded monthly on a straight-line basis. Initial direct costs associated with operating leases are deferred and amortized over the lease term on a straight-line basis which reflects a constant effective yield. FURNITURE AND FIXTURES - Furniture and fixtures are stated at cost less accumulated depreciation and are depreciated using the straight-line method over their estimated useful lives (generally five years). INVESTMENTS IN INVESTEES - The investments in investees consist of common and nonvoting preferred equity interests in unrelated entities. The Company accounts for its investments in the common stock of these entities using either the cost or equity method of accounting, depending upon its ownership interests and its ability to influence policies and operations of the investee. The investment in the preferred stock of the investee is recorded at the lower of cost or estimated realizable value. GOODWILL - Goodwill represents the excess purchase price over the net tangible assets stemming from the acquisition of Medical Equipment Finance Corporation (MEF Corp.). Goodwill relating to the acquisition of MEF Corp. is being amortized over a fifteen year period. The Company evaluates the recoverability of its goodwill separately for each applicable business acquisition at each balance sheet date. The recoverability of goodwill is determined by comparing the carrying value of the goodwill to the estimated operating income of the related entity on an undiscounted cash flow basis. Should the carrying value of the goodwill exceed the estimated operating income for the expected period of benefit, an impairment for the excess is recorded at that time. OTHER ASSETS - Other assets consist of prepaid financing costs, advances related to the Company's serviced portfolio, equipment held for sale or lease which is stated at the lower of cost or its net realizable value, and miscellaneous accounts receivable. DEBT ISSUANCE COSTS - Debt issuance costs related to the Company's warehouse facilities, securitizations, senior notes and convertible subordinated notes are offset against the related debt and are being amortized over the life of the notes using the interest method. AMORTIZATION OF FINANCE INCOME - Amortization of finance income primarily consists of the interest component of scheduled payments on notes secured by equipment (or medical receivables) and direct financing leases and is calculated using the interest method so as to approximate a level rate of return on the net investment. NET GAIN ON SALE OF FINANCING TRANSACTIONS - Gains arising from the sale of direct financing leases and investments in notes secured by equipment occur when the Company obtains permanent funding through the whole loan sale of a transaction to a third party. Subsequent to a sale, the Company has no or limited remaining interest in the transaction or equipment and no obligation to indemnify the purchaser in the event of a default on the transaction by the obligor, except when the sale agreement provides for participation in defined excess interest spreads or limited recourse in which the Company guarantees reimbursement under the agreement up to a specific maximum. Consequently, in the event of default by the obligor, the lender would exercise its rights under the lien with limited or no further recourse against the Company, notwithstanding any facts or circumstances that might promulgate the lender's assertion under representations and warranties made by the Company. OTHER INCOME - Other income consists primarily of contract fees and late charges, dividends on investments in investee's preferred stock, servicing fees and gains and losses from asset disposals. TAXES ON INCOME - The Company accounts for taxes under SFAS No. 109, Accounting for Income Taxes. Deferred taxes on income result from temporary differences between the reporting of income for financial statement and tax reporting purposes. Such differences arise principally from recording hedging gains and losses and from lease transactions in which the operating lease method of accounting is used for tax purposes and the financing lease 30 31 method is used for financial statement purposes. Under the operating lease method, leased equipment is recorded at cost and depreciated over the useful life of the equipment and lease payments are recorded as revenue when earned. NET EARNINGS PER SHARE - Net earnings per share is calculated using the modified treasury stock method, except when the results of this method are anti-dilutive. DERIVATIVE INTEREST RATE CONTRACTS - The Company uses various interest rate contracts such as forward rate agreements, treasury locks, interest rate swaps, caps and collars to manage its interest rate risk from its floating rate liabilities and anticipated securitization and sale transactions. No contracts are held for trading purposes. Gains or losses from forward rate agreements used to hedge floating rate exposure within warehouse funding facilities are deferred and amortized to interest expense over the hedged period. When hedge transactions are matched to anticipated securitizations, gains or losses from the hedge transactions are deferred and amortized to interest expense over the term of the securitized transaction. When hedge transactions are matched to anticipated whole loan sales, gains or losses from the hedge transactions are recognized as part of the gain or loss on the sale. RECENT ACCOUNTING DEVELOPMENTS - The Company adopted SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-lived Assets to be Disposed of, as of July 1, 1996. This Statement requires that management evaluate the asset for recoverability based on estimated future cash flows expected to result from the use of the asset and its eventual disposition. The adoption of SFAS No. 121 did not have a material impact on the Company's financial position and the results of operations. The Company has adopted SFAS No. 123, Accounting for Stock-Based Compensation, and will continue to account for stock-based compensation using the intrinsic value method under which the Company has not recognized compensation expense. In June 1996, the FASB issued SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. This Statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996. This Statement provides an accounting and reporting standard for transfers and servicing of financial assets, and extinguishment of liabilities. After a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. This Statement provides standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. The adoption of SFAS No. 125 did not have a material impact on the Company's financial position and the results of operations. In February 1997, the FASB issued SFAS No. 128, Earnings Per Share. This statement is effective for fiscal years beginning after December 15, 1997 and is to be applied retroactively. Earlier application is not permitted. Management has not completed an analysis of the impact of applying this new statement; however, the Company intends to begin applying the standard effective July 1, 1998. In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income and No. 131, Disclosures about Segments of an Enterprise and Related Information. These statements are effective for fiscal years beginning after December 15, 1997 and early adoption is permitted. Management has not completed an analysis of the impact of applying the new statements; however the Company intends to adopt both standards effective July 1, 1998. RECLASSIFICATIONS - Certain amounts as previously reported have been reclassified to conform to the year ended June 30, 1997 presentation. NOTE 3. INVESTMENT IN DIRECT FINANCING LEASES AND NOTES SECURED BY EQUIPMENT OR MEDICAL RECEIVABLES AND EQUIPMENT ON OPERATING LEASES Receivables in installments are due in varying amounts and are collateralized by the underlying equipment, along with obligor guarantees and vendor recourse. Notes collateralized by medical receivables consist of notes receivable resulting from working capital loans and are due at maturity. Scheduled rents on operating leases relate to noncancelable operating leases and are due in installments of varying amounts. Information regarding scheduled collections for direct financing leases, notes secured by equipment or medical receivables and operating leases are as follows: 31 32
Direct Financing Leases and Notes Scheduled Secured by Rents on Equipment or Operating Year Ended June 30, Medical Receivables Leases - ------------------------------------------------------------------------------------------- 1998 .............................................. $232,046,000 $ 926,000 1999 .............................................. 176,445,000 909,000 2000 .............................................. 119,969,000 144,000 2001 .............................................. 67,065,000 -- 2002 .............................................. 32,767,000 -- Thereafter ........................................ 9,766,000 -- ------------ ---------- 638,058,000 1,979,000 Residual valuation................................. 8,276,000 -- ------------ ---------- Total .......................................... $646,334,000 $1,979,000 ============ ==========
The total receivable balance of $646.3 million is comprised of direct financing leases (30%), notes secured by equipment (56%), and medical receivables (14%). The Company is exposed to credit risk on these receivables. At June 30, 1997, of the 1,195 debtors, the top ten obligors represented 15.45% of the portfolio. Geographic concentration for the top five states was New York (20.74%), California (17.46%), Texas (8.02%), New Jersey (6.80%) and Pennsylvania (6.26%). International loans, those outside the 50 United States, represented 5.44% of the portfolio. Residual valuation represents the estimated amount to be received at contract termination from the disposition of equipment financed under fair market value leases. Amounts to be realized at contract termination depend on the fair market value of the related equipment and may vary from the recorded estimate. Residual values are reviewed on an annual basis to determine if the equipment's fair market value is below its recorded value. During the years ended June 30, 1997 and 1996, the Company sold receivables to third parties realizing gains of $14.0 million and $8.0 million, respectively. In connection with certain of these transactions, the Company retained subordinated interests in the receivables totaling $46.1 million and $35.7 million at June 30, 1997 and 1996, respectively. In accordance with provisions of SFAS No. 115, the Company classifies subordinated interests as trading securities which are recorded at fair value with any unrealized gains or losses recorded in the results of operations in the period of the change in fair value. Valuations at origination and at each reporting period are based on discounted cash flow analyses. There can be a wide range in market assumptions which are used by participants in the market to value such assets. Accordingly, the Company's estimate of fair value is subjective. Under the sale agreement, the Company is required to fund any losses on the receivables up to its subordinated interests. Once repurchased or substituted such leases are included within the Company's portfolio and are evaluated within the allowance for possible losses on receivables. At June 30, 1997, receivables amounting to $348.4 million were assigned as collateral for long-term debt. The following is an analysis of the allowance for losses on receivables as of June 30:
1997 1996 1995 - ------------------------------------------------------------------------------------------------------------ Balance, beginning of year ..................... $ 4,026,000 $ 3,282,000 $ 2,498,000 Provision for possible losses on receivables ... 2,386,000 2,325,000 1,261,000 Write-offs, net ................................ (436,000) (1,581,000) (477,000) ----------- ----------- ----------- Balance, end of year ........................... $ 5,976,000 $ 4,026,000 $ 3,282,000 =========== =========== ===========
32 33 The net investment of non-performing loans on which income recognition was suspended was $17.4 million and $12.9 million at June 30, 1997 and 1996, respectively. Cash collected on all nonaccruing loans is applied to the net investment. NOTE 4. INVESTMENTS IN INVESTEES At June 30, 1995, the Company held available-for-sale securities with a market value of $3.2 million, which it accounted for at market with the unrealized gain of $1.8 million recorded as a component of shareholders' equity. During the year ended June 30, 1996, the Company sold its investments in common stock of Healthcare Imaging Services, Inc. (HIS) and Diagnostic Imaging Services, Inc. (DIS). The Company did not record a gain or loss on these transactions. At June 30, 1997 and 1996, the Company holds Series F and Series G preferred stock of DIS valued at $2.5 million (2,482,000 shares) and $2.0 million (2,000,000 shares), respectively. The Series F and G preferred stock have liquidation preferences at $1.00 per share, are redeemable at the option of DIS at $1.00 per share plus accrued dividends, are convertible, under certain conditions, into common stock of DIS at $2.482 per share for Series F and $2.00 per share for Series G, and are entitled to annual cumulative dividends ranging from $0.05 per share to $0.10 per share. In addition, the majority shareholder of DIS has the right to repurchase the Series F and G preferred stock for $4.5 million plus accrued dividends through September 2001. In November 1995, the Company entered into a joint venture with two other partners to establish Medical Equipment Credit Pte Ltd (MEC). MEC pursues opportunities in the Asia-Pacific diagnostic imaging marketplace. Initial capitalization of MEC is 7,000,000 shares of common stock ($5.0 million), and ownership is based on the percentage of the initial capitalization invested by each of the three joint venture partners. The Company's ownership is 40% based on a $2.0 million investment. The Company accounts for its investment in MEC under the equity method of accounting. At June 30, 1997 and 1996, the Company recognized losses of approximately $231,000 and $41,000, respectively, on this investment. In the year ended June 30, 1996, the Company converted a note receivable totaling $541,000 into shares of the outstanding stock of EQ Computer Products & Services (CP&S), whose business is in the distribution of parts and components used in the repair and maintenance of microcomputer and associated peripherals. CP&S sells to computer maintenance firms, independent computer service organizations and original equipment manufacturers, throughout the United States, engaged in the maintenance and repair of their own computer equipment and equipment manufactured by others. During the year ended June 30, 1997, CP&S issued additional shares and had a reverse stock split. As of June 30, 1997, the Company had 273,773 shares or 14.25% of the outstanding stock of CP&S. The Company accounts for this investment in this entity under the cost method of accounting as it does not exert significant influence over the entity. NOTE 5. INTEREST BEARING DEBT WAREHOUSE FACILITIES - The Company's primary credit facility, pursuant to a revolving credit agreement with a syndicate of banks (the Agreement), provides for the borrowing of up to $128.0 million. Borrowings under this facility bear interest at the Company's option of (1) from prime to prime plus 0.125% or (2) from 1.20% to 1.65% over the 30, 60 or 90-day LIBOR rate based on the Company's leverage ratio as defined in the Agreement. Included in the Agreement is an $18.0 million sub-limit for borrowings secured by medical receivables loans originated by the Company. The Agreement is renewable annually at the bank syndicate's discretion. The Agreement prohibits the Company from paying dividends other than dividends payable solely in shares of the Company's stock and limits borrowings to specified levels determined by ratios based on the Company's tangible net worth. As of June 30, 1997, the Company was in compliance with the financial covenants of the Agreement. The Company has two $100.0 million interim funding facilities available for certain equipment loan financing transactions which are to be securitized. These facilities bear interest at a rate of 0.85% over the 30-day LIBOR rate. Borrowings under the facilities are secured by certain equipment contracts and the equipment financed thereunder. The Company has a $5.0 million facility with a bank for the funding of loans ineligible for securitization. 33 34 The Company has two credit facilities for its medical receivables financing business. The first facility is for $15.0 million with an interest rate of prime plus 2.00% and matures in June 1998. The second facility is for $50.0 million with an interest rate of 30-day LIBOR plus 1.90% and matures in September 1997. LONG-TERM DEBT - The discounted receivables are direct financing lease obligations, notes secured by equipment and medical receivables which were securitized and sold to investors primarily on a limited or nonrecourse basis. They are collateralized by the underlying equipment and medical receivables. Future annual maturities of discounted receivables, net of capitalized issuance costs of $7.7 million are as follows:
Year Ending June 30, - -------------------------------------------------------------------------------- 1998.................................................. $ 96,202,000 1999.................................................. 87,278,000 2000.................................................. 85,016,000 2001.................................................. 31,429,000 2002.................................................. 14,516,000 Thereafter............................................ 3,422,000 ------------ Total ............................................. $317,863,000 ============
All of the discounted receivables have been permanently funded through seven asset securitizations which were initiated during fiscal years 1993 through 1997. Debt under these securitizations are limited recourse and bear interest at fixed rates ranging between 5.48% to 12.85% and floating interest rates of 2.25% over 30-day LIBOR. All of the receivables are serviced by the Company and the related securitization agreements require that the Company comply with certain servicing requirements, require limited cash collateral or residual interests and contain various recourse provisions. Included above is $23.2 million from the Company's securitization of some of its retained subordinated positions in its securitizations and whole loan sales. This transaction was completed on July 31, 1996. The Company has convertible subordinated notes outstanding of $13.3 million and $13.8 million at June 30, 1997 and 1996, respectively. The notes are convertible into common shares at $10.60 per share at the discretion of the noteholders, bear interest at a rate of 9 1/8% payable in quarterly installments of interest only and mature in June 2002. During the year ended June 30, 1997, $600,000 of these notes were converted into 56,603 shares of common stock of the Company. There were no conversions in fiscal year 1996. Cumulatively, $1.1 million of these notes have been converted into 103,772 shares of common stock of the Company. On January 30, 1997, the Company completed a public offering of $100.0 million principal amount of 9 7/8% Senior Notes due 2004. Interest is payable semiannually on February 1 and August 1 of each year, commencing on August 1, 1997. The Notes will be redeemable at the option of the Company in whole or in part at any time on or after February 1, 2002 at specified redemption prices. The proceeds from the sale are being used (i) to fund the Company's growth, including increasing the amount of equipment and medical receivables loans the Company can fund, (ii) to develop the Company's new international operations, including the purchase of receivables originated outside the United States and investment in joint ventures, (iii) for other working capital needs and (iv) for general corporate purposes. On April 1, 1997, the Company entered into a $2.0 million Subordinated loan agreement. Principal and all accrued interest are due five years from date of funding. In addition, the Company has a $6.2 million facility with a foreign bank to fund a portfolio of equipment loans in Turkey. The following chart summarizes interest-bearing credit facilities as of June 30, 1997 and 1996: 34 35 In thousands, except percentages.
AS OF JUNE 30, 1997 AS OF JUNE 30, 1996 ------------------------- ------------------------- PERIOD END PERIOD END AMOUNT MATURITY ------------------------- ------------------------- CREDIT FACILITY AVAILABLE DATE BALANCE RATE BALANCE RATE --------------- --------- ---- ------- ---- ------- ---- SHORT-TERM DEBT Warehouse Facilities $398,000 Various $ 44,586 7.10% $168,108 7.38% LONG-TERM DEBT N/P Financial Inst $ -- 2001 $ 6,168 8.37% $ -- Discounted Receivables $ -- Various $317,863 8.60% $253,759 8.64% 9 7/8 Senior Notes $ -- 2004 $ 95,883 10.96% $ -- Subordinated Debt $ -- 2002 $ 2,000 5.00% $ -- Convertible Sub. Debt $ -- 2002 $ 13,324 10.38% $ 13,809 10.42%
NOTE 6. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES The following represents a summary of the major components of selling, general and administrative expenses for the three years ended June 30:
1997 1996 1995 ------- ------ ------ Salaries and benefits $ 5,249 $3,241 $3,300 Professional fees 2,811 2,563 1,273 Travel and Entertainment 799 503 462 Occupancy 779 655 497 Other 3,744 2,936 2,359 ------- ------ ------ Total SGA $13,382 $9,898 $7,891 ======= ====== ======
NOTE 7. INCOME TAXES The provision for income taxes is comprised of the following:
Year Ended June 30, 1997 1996 1995 - -------------------------------------------------------------------------------- Current payable ........... $2,760,000 $ 6,120,000 $ 466,000 Deferred .................. 3,865,000 (28,000) 2,480,000 ---------- ----------- ---------- Total ............... $6,625,000 $ 6,092,000 $2,946,000 ========== =========== ==========
A reconciliation of the provision for income taxes to the amount of income tax expense that would result from applying the federal statutory rate (35%) to earnings from continuing operations is as follows:
Year Ended June 30, 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------- Provision for income taxes at the federal statutory rate .............. $5,448,000 35.0% $4,993,000 35.0% $2,455,000 35.0% State income taxes, net of federal tax benefit .......... 844,000 5.4% 1,045,000 7.3% 452,000 6.4% Other ............................... 333,000 2.1% 54,000 0.4% 39,000 0.6% ---------- ---- ---------- ---- ---------- ---- Total ......................... $6,625,000 42.5% $6,092,000 42.7% $2,946,000 42.0% ========== ==== ========== ==== ========== ====
The major components of the Company's net deferred tax liabilities of $8.6 million and $4.7 million at June 30, 1997 and 1996, respectively, are as follows: 35 36
1997 1996 - -------------------------------------------------------------------------------- Accumulated depreciation ..................... $ 23,511,000 $ 24,138,000 Deferred recognition of lease income ......... (14,740,000) (17,080,000) Alternative minimum tax credits carryforwards -- (137,000) Deferred gain on financing transactions ...... 1,977,000 -- Loss on hedging activities ................... 1,258,000 1,342,000 Allowances for uncollectible receivables ..... (2,322,000) (1,786,000) State income taxes ........................... (454,000) (867,000) Other ........................................ (620,000) (865,000) ------------ ------------ Total .................................. $ 8,610,000 $ 4,745,000 ============ ============
NOTE 8. SHAREHOLDERS' EQUITY In August 1995, the Company completed a public offering of 2,875,000 shares of its common stock for which it received net proceeds of $29.0 million. The net proceeds were utilized to reduce short-term indebtedness and for general corporate purposes. In June 1997, the Company granted options to purchase 100,000 shares of the Company's common stock at an exercise price of $13.50 per share. The options will vest on a pro-rata basis over a twenty-four month period or, 4,167 shares per month. The options are exercisable for a period of five years from the date of grant. The options were granted to a financial advisory firm as compensation. In January 1996, holders of 615,605 of the Company's warrants and units issued in February 1991 redeemed their warrants and units for 50,625 and 50,625 shares of the Company's common stock at $12.00 and $12.60, respectively, per share by the final exercise date of January 26, 1996. As a result of the redemption, the Company received cash proceeds of $7.4 million. In addition, the Company issued warrants to purchase 35,000 common shares at $8.50 per share to an unrelated party. Such shares were exercised during the year ended June 30, 1996. Prior to June 30, 1994, the Company issued warrants to purchase a total of 80,000 common shares at prices between $7.625 and $8.375 per share to all non-employee Directors of the Company. 10,000 shares at $7.625 and 10,000 shares at $8.375 were exercised during the year ended June 30, 1996. The warrants vested at various dates through November 1996 and expire at various dates through 2003. In fiscal 1992, the Company issued warrants to purchase up to 200,000 shares of the Company's common stock at $18.00 per share to an underwriter as compensation for investment banking services. No compensation expense was recognized as a result of this transaction. The warrants expired April 27, 1997. In June 1994, the Company issued convertible subordinated notes to related and unrelated parties which are convertible at the option of the holder into 1,415,094 shares of common stock at $10.60 per share. During the year ended June 30, 1997, $600,000 of these notes were converted into 56,603 shares of common stock. As of June 30, 1997, cumulative conversions of these notes were $1.1 million into 103,772 shares of common stock. NOTE 9. STOCK OPTION PLAN AND INCENTIVE AGREEMENT The Company has a stock option plan which currently provides for the granting of options to employees to purchase up to 1,250,000 shares of the Company's common stock at the fair market value at the date of grant. Options granted under the plan generally vest over three to five years from the date of grant and expire ten years after the date of the grant. Any unexercised options are canceled 90 days subsequent to the termination of the employee and are returned to the plan. The following table summarizes the activity under the plan for the periods indicated: 36 37
Weighted Average Options Exercise Price Exercise Price Outstanding Per Share Per Share - -------------------------------------------------------------------------------------------------- Outstanding at July 1, 1994 .... 809,862 $ 1.44 - $13.50 $ 7.86 Granted ........................ 48,500 $ 9.13 - $12.63 $11.78 Exercised ...................... (97,216) $ 2.68 - $12.88 $ 6.37 Canceled ....................... (80,852) -------- Outstanding at June 30, 1995 ... 680,294 $ 1.44 - $13.50 $ 8.16 Granted ........................ 130,500 $11.63 - $13.13 $12.96 Exercised ...................... (152,085) $ 1.44 - $13.50 $ 8.38 Canceled ....................... (37,000) -------- Outstanding at June 30, 1996 ... 621,709 $ 1.75 - $13.13 $ 9.14 Granted ........................ 186,500 $12.75 - $14.63 $14.36 Exercised ...................... (40,875) $ 5.00 - $10.38 $ 7.56 Canceled ....................... (8,534) -------- Outstanding at June 30, 1997 ... 758,800 $ 1.75 - $14.63 $10.47 ========
The following table summarizes stock options outstanding at June 30, 1997:
Number of Options Weighted Average Weighted Average Range of Exercise Price Outstanding Remaining Contractual Life Exercise Price - ----------------------- ----------- -------------------------- -------------- $ 1.75 - $ 4.00 20,000 1 $ 1.75 $ 4.01 - $ 6.00 64,100 4 $ 5.09 $ 6.01 - $ 9.00 173,650 6 $ 7.99 $ 9.01 - $14.00 359,550 7 $11.48 $14.01 - $14.63 141,500 9 $14.61 ------- 758,800 7 $10.47 =======
As of June 30, 1997, options to purchase 430,662 shares were exercisable. The Company accounts for compensation costs associated with stock-based compensation using the intrinsic value method, under which the Company has recognized no expense. Had compensation cost for the Company's stock option plan been determined based on the fair value at the date of awards consistent with the fair value method described in SFAS No. 123, the Company's net income, primary earnings per share, and fully diluted earnings per share would be reduced to the proforma amounts at June 30, 1997 of $8.7 million, $0.78 and $0.70 and at June 30, 1996 of $8.1 million, $0.80 and $0.70, respectively. Significant assumptions used to calculate the fair value of the awards for June 30, 1997 and 1996, respectively, are as follows: weighted average risk free rate of return of 6.3% and 5.9%; expected option life of 60 months; expected volatility of 32% and 24%; and no expected dividends in either year. The Company has an employee incentive agreement (Agreement). Under the Agreement, the Company has agreed, subject to the discretion of its Compensation Committee, to issue from time to time an aggregate of not more than 200,000 shares of common stock of the Company (Incentive Shares) to certain of its employees if the last sale price of the Company's common stock is $16.00 per share or higher for 30 consecutive calendar days at any time before December 31, 2001, provided that any such employee must be employed by the Company during the above-described 30-day period in order to receive any Incentive Shares under this agreement. The Company has agreed that, if there is an event or series of events that constitutes a sale of the Company at any time prior to December 31, 1998 and the consideration to be received for each share of common stock of the Company in such sale of the Company is $13.00 or higher, the Company will issue the Incentive Shares to the employees. If the criteria for the issuance of the Company's common stock are met, the Company will record compensation expense equal to the fair value of the common shares issued at the date upon which the rights to receive such shares are awarded by the Compensation Committee. 37 38 NOTE 10. RELATED PARTY TRANSACTIONS The Company's principal executive offices located in Doylestown, Pennsylvania are leased from a party related to a shareholder/director of the Company. The lease commenced in December 1994 and the Company recorded rent expense under this lease of $242,510 and $222,750 for the years ended June 30, 1997 and 1996, respectively. At June 30, 1997 and 1996, receivables in installments from investees totaled $9.5 million and $17.0 million, respectively. In June 1995, the Company and former shareholders of MEF Corp., some of whom are also officers of the Company, entered into an agreement to set the purchase price of MEF Corp. which was approved by the shareholders of the Company in December 1995. As of June 30, 1997 and 1996, the Company had loan receivables from Company officers totaling $505,000 and $400,000, respectively. During the year ended June 30, 1996, the Company sold its investments in common stock of Healthcare Imaging Services, Inc. (HIS) and Diagnostic Imaging Services, Inc. (DIS). As of June 30, 1997 and 1996, the Company had investments in preferred stock and dividends of DIS totaling $5.1 million and $4.9 million, respectively. As of June 30, 1997 and 1996, the Company had convertible subordinated notes at an unamortized cost totaling $9.6 million to related parties. NOTE 11. COMMITMENTS AND CONTINGENCIES FACILITY LEASES - The Company leases its facilities under noncancelable operating leases with terms in excess of one year. The lease for the Company's principal facility expires in August 2007. Rent expense for the years ended June 30, 1997, 1996 and 1995 amounted to $661,000, $654,000 and $498,000, respectively. Future minimum lease payments under these leases are as follows:
Future Minimum Year Ending June 30, Lease Payments - ----------------------------------------------------------------------------- 1998 ....................................................... $ 670,000 1999 ....................................................... 685,000 2000 ....................................................... 663,000 2001 ....................................................... 461,000 2002 ....................................................... 485,000 Thereafter ................................................. 2,626,000 Total ................................................... $5,590,000
CONTINGENCIES - Under certain limited recourse agreements, the Company may be required to provide for losses incurred on uncollected lease and medical receivables previously securitized. At June 30, 1997, the maximum contingent liability under the limited recourse agreements amounted to $46.1 million. This contingent liability, however, could be offset by any proceeds received from the resale or remarketing of available equipment financed under the agreements or outstanding medical receivables collected. The Company has credit lines of $3.6 million available from four foreign banks, of which $2.7 million was used as of June 30, 1997 to provide for the future payment of guarantees made by DVI Europe, a branch office of DVI Financial Services. The Company follows the accounting treatment outlined in FASB Technical Bulletin 86-2, which requires the present value of the future obligation be recorded as an asset and corresponding liability at the date the guarantee is assumed. At June 30, 1997 the present value recorded for these guarantees was $1.9 million, while the future obligation was $3.1 million. 38 39 The Company has receivables from and investments in DIS aggregating $13.8 million and $21.0 million at June 30, 1997 and 1996, respectively. DIS received a qualified going concern opinion from its auditors on its December 31, 1996 and 1995 financial statements. Additionally, the Company has net receivables from Latin American Trade Finance, Ltd. (LATF) in the amount of $886,000 and $845,000 at June 30, 1997 and 1996. LATF is a San Francisco-based investment company which specializes in financing throughout Latin America. LATF has identified some significant transactions, which to date, have not closed. LATF has been unable to make scheduled payments to the Company. Management has performed an analysis of its recoverability of such amounts and believes that based upon the best information available, it will recover all amounts without any significant loss. LITIGATION - The Company is involved in litigation both as a plaintiff and defendant in matters arising out of the Company's normal business activities. Management does not expect the outcome of these lawsuits to have a material adverse effect on the consolidated financial statements of the Company. As of June 30, 1997 the Company had loan commitments of $106.9 million not funded. NOTE 12. BENEFIT PLANS The Company maintains and administers an Employee Savings (Plan) pursuant to Internal Revenue Code Section 401(k). The Plan provides for discretionary contributions as determined by the Company's Board of Directors. The Company contributed $60,000, $45,000 and $39,000 to the Plan during the years ending June 30, 1997, 1996 and 1995, respectively. NOTE 13. ACQUISITIONS In January 1993, the Company acquired the outstanding shares of Medical Equipment Finance Corporation (MEF Corp.). In December 1995, the Company's shareholders approved the issuance of 400,000 shares of the Company's common stock, as set forth in the purchase agreement as amended, valued at $4.65 million. The Company recorded goodwill of $4.65 million related to the acquisition. As of June 30, 1997, the 400,000 common shares were unissued but included in the earnings per share calculation. NOTE 14. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS In accordance with Statement of Financial Accounting Standards No. 107 (SFAS 107), Disclosures About Fair Value of Financial Instruments, a summary of the estimated fair value of the Company's consolidated financial instruments at June 30, 1997 and 1996 is presented below. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is necessary to interpret market data to develop the estimated fair values. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
Carrying Estimated Fair June 30, 1997 Amount Value - ------------------------------------------------------------------------------------------ Assets: Receivable in installments (excluding investment in direct financing leases)....... $236,843,000 $236,532,000 Liabilities: Discounted receivables.................................. $317,863,000 $294,729,000
Carrying Estimated Fair June 30, 1996 Amount Value - ------------------------------------------------------------------------------------------ Assets: Receivable in installments (excluding investment in direct financing leases)....... $216,473,000 $218,301,000 Liabilities: Discounted receivables.................................. $253,759,000 $253,287,000
39 40 The carrying values of cash and cash equivalents, restricted cash and cash equivalents, amounts due from portfolio sales, notes collateralized by medical receivables, accounts payable, accrued expenses, and other liabilities borrowings under warehouse facilities, notes payable to financial institutions, subordinated debt and convertible subordinated notes approximate fair values at June 30, 1997 and 1996. The methods and assumptions used to estimate the fair values of other financial instruments are summarized as follows: RECEIVABLE IN INSTALLMENTS: The fair value of the financing contracts was estimated by discounting expected cash flows using the current rates at which loans of similar credit quality, size and remaining maturity would be made as of June 30, 1997 and 1996. The Company believes that the risk factor embedded in the entry-value interest rates applicable to performing loans for which there are no known credit concerns results in a fair valuation of such loans on an entry-value basis. In accordance with SFAS 107, the Company has excluded receivables from lease contracts of approximately $252.9 million and $197.7 million as of June 30, 1997 and 1996, respectively, from the receivable in installments fair value calculation. DISCOUNTED RECEIVABLES: The fair value of discounted receivables, related to the securitization of leases and notes, was estimated by discounting future cash flows using rates currently available for debt with similar terms and remaining maturities. The fair value estimates presented herein were based on information available as of June 30, 1997 and 1996. Although the Company is not aware of any factors that would significantly affect the estimated fair values, such values have not been updated since June 30, 1997; therefore, current estimates of fair value may differ significantly from the amounts presented herein. All instruments held by the Company are classified as other than trading. DERIVATIVE ACTIVITY:
June 30, 1997 June 30, 1996 ----------------------------------------------- ---------------------------------------------- Notional Fair Deferred Notional Fair Deferred Amount Value Gains/(Losses) Amount Value Gains/(Losses) - --------------------------------------------------------------------------------------------------------------------------------- Swaps ....................... $23.4 million $115,000 -- $ 99.4 million $ 236,000 -- Options ..................... $25.0 million $(49,000) -- $ 26.5 million -- -- Forwards: ................... Treasury locks ............ $70.0 million $ 75,000 -- $ 90.0 million $(227,000) $129,000 Forward rate agreements ... -- -- -- $200.0 million $ (17,900) --
The Company uses off balance sheet derivative financial instruments to hedge interest rate risk. The Company's interest rate risk is associated with variable rate funding of the fixed rate loans and the timing difference between temporary funding through the warehouse and permanent funding through either securitization or sale. The derivatives are used to manage three components of this risk: interest sensitivity adjustments, pricing of anticipated loan securitizations and sales, and interest rate spread protection. Credit risk exists for these derivative instruments in the form of the failure of the counterparty to make required payments in favor of the Company. The risk is minimized through the use of counterparties with investment grade ratings. The fair value of the derivative instruments is derived from dealer quotes. SWAPS: Swaps are used to hedge the interest rate spreads for various loan sale facilities where cash flows from loans are fixed rate but the borrowing costs are variable. The interest rate swaps pay fixed rates of 5.38% to 5.8% and receive a floating rate of the H-15 composite commercial paper rate. The swaps mature in September 2000. There were no interest rate caps outstanding on June 30, 1997. 40 41 FORWARDS AND OPTIONS: Treasury lock agreements, which are forward contracts, and option collars are used to hedge the interest rate risk associated with anticipated securitizations and/or sales. These instruments lock in a specific rate, or a narrow range of rates, of Treasury notes identified to have a comparable maturity to the average life of the anticipated transaction in order to fix the rate either over the life of the securitization or to fix the sale price as applicable. The open positions at June 30, 1997 are for securitizations and sales expected to occur in the first and second quarters of fiscal 1998. In 1997, the Company deferred $1.60 million in losses associated with transactions securitized compared with $211,000 in deferred losses in 1996. In 1997, the Company recognized losses of $132,000 for loan sales compared with recognized losses of $27,000 in 1996 and no recognized gains or losses in 1995. Gains and losses for securitizations are deferred and amortized over the life of the securitization. Gains and losses for sales are recognized at the time of sale. NOTE 15. QUARTERLY FINANCIAL DATA (UNAUDITED) The following is a summary of the quarterly results of operations for the fiscal years ended June 30, 1997 and 1996:
Three Months Ended ------------------------------------------------------- (in thousands, except per share data) September 30 December 31 March 31 June 30 - ------------------------------------------------------------------------------------------------------ FISCAL 1997 Finance and other income $12,616 $13,513 $15,019 $14,823 Net finance income 6,647 7,455 7,680 9,833 Earnings before provision for income taxes and equity in net loss of investees 3,525 3,741 3,919 4,662 Net earnings 2,005 2,192 2,171 2,573 Net earnings per common and common equivalent share - primary $ 0.18 $ 0.20 $ 0.20 $ 0.23 ======= ======= ======= ======= Net earnings per common and common equivalent share - fully diluted $ 0.18 $ 0.19 $ 0.19 $ 0.22 ======= ======= ======= =======
Three Months Ended ------------------------------------------------------- (in thousands, except per share data) September 30 December 31 March 31 June 30 - ------------------------------------------------------------------------------------------------------ FISCAL 1996 Finance and other income $11,301 $12,061 $13,152 $12,499 Net finance income 5,772 6,435 6,898 7,451 Earnings before provision for income taxes and equity in net loss of investees 3,191 3,510 3,690 3,942 Net earnings 1,775 2,078 2,126 2,196 Net earnings per common and common equivalent share - primary $ 0.20 $ 0.21 $ 0.20 $ 0.20 ======= ======= ======= ======= Net earnings per common and common equivalent share - fully diluted $ 0.19 $ 0.20 $ 0.19 $ 0.19 ======= ======= ======= =======
41 42 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information regarding the Company's directors is incorporated herein by reference to the Company's definitive proxy statement filed not later than October 28, 1997, with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended. Information regarding the Company's Executive Officers is set forth in Part I of this Form 10-K. ITEM 11. EXECUTIVE COMPENSATION The information required by Item 402 of Regulation S-K is incorporated herein by reference to the Company's definitive proxy statement filed not later than October 28, 1997 with the Securities sand Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 403 of Regulation S-K is incorporated herein by reference to the Company's definitive proxy statement filed not later than October 28, 1997, with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Item 404 of Regulation S-K is incorporated herein by reference to the Company's definitive proxy statement filed not later than October 28, 1997, with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT: (1) Financial Statements: See Index to Consolidated Financial Statements included as part of this Form 10-K at Page 20. (2) Financial Statement Schedules:
SCHEDULE PAGE NUMBER DESCRIPTION NUMBER ------ ----------- ------ II. Amounts Receivable from Related Parties .... 44
All other schedules are omitted because of the absence of conditions under which they are required or because all material information required to be reported is included in the consolidated financial statements and notes thereto. (3) Exhibits: See Index to Exhibits of this Form 10-K on Pages 45-46. (b) REPORTS ON FORM 8-K: There were no reports on Form 8-K filed during the fourth quarter of the fiscal year ended June 30, 1997. 42 43 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DVI, INC. ------------------------------------ (Registrant) Date: September 29, 1997 by /s/ MICHAEL A. O'HANLON ----------------------- Michael A. O'Hanlon President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.
Signature Title Date - --------- ----- ---- Principal Financial Officer: /s/ STEVEN R. GARFINKEL - ----------------------- Steven R. Garfinkel Executive Vice President and Chief Financial Officer September 29, 1997 Principal Accounting Officer: /s/ JOHN P. BOYLE - ----------------------- John P. Boyle Vice President and Chief Accounting Officer September 29, 1997
Directors Date - --------- ---- /s/ GERALD L. COHN September 29, 1997 - ----------------------- Gerald L. Cohn /s/ WILLIAM S. GOLDBERG September 23, 1997 - ----------------------- William S. Goldberg /s/ JOHN E. MCHUGH September 29, 1997 - ----------------------- John E. McHugh /s/ MICHAEL A. O'HANLON September 29, 1997 - ----------------------- Michael A. O'Hanlon /s/ HARRY T. J. ROBERTS September 29, 1997 - ----------------------- Harry T. J. Roberts /s/ NATHANIEL SHAPIRO September 29, 1997 - ----------------------- Nathaniel Shapiro
43 44 DVI, INC. AND SUBSIDIARIES SCHEDULE II - AMOUNTS RECEIVABLE FROM RELATED PARTIES
BALANCE AT BEGINNING BALANCE AT NAME OF DEBTOR OF YEAR ADDITIONS DEDUCTIONS END OF YEAR - -------------- ------- --------- ---------- ----------- Year ended June 30, 1997 - Michael A. O'Hanlon ....... $344,000 $ -- $ 59,000 $285,000 Mark H. Idzerda ........... -- 220,000 -- 220,000 -------- -------- --------- -------- Total ..................... $344,000 $220,000 $ 59,000 $505,000 ======== ======== ========= ======== Year ended June 30, 1996 - Michael A. O'Hanlon ... $ 59,000 $285,000 $ -- $344,000 ======== ======== ========= ======== Year ended June 30, 1995 - Michael A. O'Hanlon ... $ 20,000 $ 39,000 $ -- $ 59,000 ======== ======== ========= ======== Year ended June 30, 1994 - Michael A. O'Hanlon ... $ -- $ 20,000 $ -- $ 20,000 ======== ======== ========= ========
44 45 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - ----------- ----------- 1.1 Underwriting Agreement between the Underwriters and the Company with respect to the Company's Common Stock.(1) 1.2 Underwriting Agreement dated January 27, 1997 by and between the Underwriters and the Company with respect to the Senior Notes. (2) 3.1 Certificate of Incorporation of the Company.(3) 3.2 By-Laws of the Company and Amendment to By-Laws of the Company dated April 17, 1996. (8) 4.1 Form of Common Stock Certificate.(3) 4.2 Form of Global Note representing the Senior Notes.(2) 4.3 Indenture dated January 27, 1997 between the Company and the Trustee.(2) 4.4 First Supplemental Indenture dated January 30, 1997 with respect to the Senior Notes between the Company and the Trustee.(2) 10.1 DVI Financial Services Inc. Employee Savings Plan.(4) 10.2 Amended 1986 Incentive Stock Option Plan.(4) 10.3 Purchase Agreement dated as of October 22, 1991, by and among DMR Associates, L.P., HIS Acquisition, Inc. And DVI Financial Services Inc.(5) 10.4 Direct Stock Option Agreements, dated as of October 16, 1990, between the Company and each of the Company's directors other than Mr. Higgins.(5) 10.5 Amended and Restated Letter Agreement dated December 15, 1991, between the Company and W.I.G. Securities Limited Partnership regarding investment banking services.(5) 10.6 Warrant dated April 27, 1992, executed by the registrant on behalf of W.I.G. Securities Limited Partnership.(5) 10.7 Note Purchase Agreement among the Registrant and the Purchasers listed therein, dated as of June 21, 1994.(7) 10.8 Amendment No. 1 to Note Purchase Agreement among the Registrant and the Purchasers listed therein, dated as of November 1994.(1) 10.9 Amendment No. 1 to the MEFC Agreement dated as of June, 1995. (1) 10.10 Joint Venture Agreement dated November 10, 1995, among Philips Medical Systems International B.V., DVI, Inc. and Philadelphia International Equities, Inc.(8) 10.11 Interim Loan and Security Agreement, dated as of February 20, 1997, between Prudential Securities Credit Corporation and DVI Financial Services Inc.(9) 10.12 Second Amended and Restated Loan Agreement dated February 28, 1997 by and among DVI Financial Services, Inc., the banks signatory thereto, Fleet Bank, N.A. and Corestates Bank, N.A., as Pre-Funding Lenders and Fleet Bank, N.A., as agent.(9) 10.13 Loan and Security Agreement, dated as of January 29, 1997, between Prime Bank and the Company.(9) 10.14 Secured Credit Line Agreement, dated as of August 22, 1996, between DVI Business Credit Receivables Corp. II, DVI Business Credit Corporation and CS First Boston Mortgage Capital Corp.(10) 10.15 Loan and Security Agreement, dated as of September 6, 1996, between DVI Financial Services Inc. and Lehman Commercial Paper Inc.(10) 10.16 Amendment, dated as of June 30, 1997, to Interim Loan and Security Agreement between Prudential Securities Credit Corporation and DVI Financial Services Inc.(10) 10.17 Second Amendment, dated as of July 31, 1997, to Interim Loan and Security Agreement between Prudential Securities Credit Corporation and DVI Financial Services Inc.(10) 21 Subsidiaries of the Registrant. 24 Power of Attorney.(4)
- ------------- (1) Filed previously as an Exhibit to the Company's Registration Statement on Form S-1 (Registration No. 33-60547) and by this reference is incorporated herein. (2) Filed previously as an Exhibit to the Company's Current Report on Form 8-K dated January 27, 1997 and by this reference incorporated herein. 45 46 (3) Filed as an Exhibit to the Company's Registration Statement on Form S-3 (Registration No. 33-84604) and by this reference incorporated herein. (4) Filed previously as an Exhibit to the Company's Registration Statement on Form S-18 (Registration No. 33-8758) and by this reference incorporated herein. (5) Filed previously as an Exhibit to the Company's Form 10-K (File No. 0-16271) for the year ended June 30, 1990 and by this reference incorporated herein. (6) Filed previously as an Exhibit to the Company's Registration Statement on Form S-2 (Registration No. 33-46664) and by this reference is incorporated herein. (7) Filed previously as an Appendix to the Company's Consent Statement dated as of December 29, 1994 and by this reference is incorporated herein. (8) Filed previously as an Exhibit to the Company's Form 10-K (File No. 0-16271) for the year ended June 30, 1996 and by this reference is incorporated herein. (9) Filed previously as an Exhibit to the Company's Form 10-Q for the quarter ended March 31, 1997 and by this reference is incorporated herein. (10) Filed herewith. 46 EX-10.14 2 SECURED CREDIT LINE AGREEMENT 1 EXHIBIT 10.14 EXECUTION COPY SECURED CREDIT LINE AGREEMENT dated as of August 22, 1996 AMONG DVI BUSINESS CREDIT RECEIVABLES CORP. II as the Company DVI BUSINESS CREDIT CORPORATION as Servicer and CS FIRST BOSTON MORTGAGE CAPITAL CORP. as Lender 2 SECURED CREDIT LINE AGREEMENT SECURED CREDIT LINE AGREEMENT, dated as of August 22, 1996, among CS FIRST BOSTON MORTGAGE CAPITAL CORP. a Delaware corporation, having an office at 55 East 52nd Street, New York, New York 10055-0186 (the "Lender"), DVI BUSINESS CREDIT RECEIVABLES CORP. II, a Delaware corporation having an office at 500 Hyde Park, Doylestown, Pennsylvania 18901 (the "Company") and DVI BUSINESS CREDIT CORPORATION, a Delaware corporation having an office at 4041 MacArthur Blvd., Newport Beach, California 92660 (the "Servicer"). W I T N E S S E T H: WHEREAS, the Company is engaged in the business of purchasing revolving credit loans backed by healthcare receivables originated by healthcare providers in the course of rendering medical services; WHEREAS, in connection with the transactions contemplated hereby, the Company desires to obtain a line of credit from the Lender pursuant to which Advances, in a maximum aggregate principal amount at any one time outstanding not to exceed $50,000,000, may be made to the Company from time to time prior to the Line Termination Date; WHEREAS, the Lender is willing, on the terms and subject to the conditions hereinafter set forth, including Section 2.11, to extend such line of credit and to make Advances to the Company; and WHEREAS, the proceeds of Advances will be used to pay the acquisition price of Loans as provided in the Contribution and Servicing Agreement; NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the parties hereto hereby agree as follows: ARTICLE II DEFINED TERMS SECTION II.1. Definitions. The capitalized terms used herein shall have the meanings specified in Appendix A attached hereto. 3 ARTICLE III ADVANCES SECTION III.1. The Advances. (a) Upon the terms and subject to the conditions of this Agreement, including Section 2.11, the Lender shall advance funds to the Company from time to time up to the Line Amount (such borrowing, the "Line") in one or more advances (each, an "Advance"); provided that the aggregate principal amount of Advances outstanding at any time shall not exceed the Line Amount. Each Advance shall be made on the Business Day after delivery of a Borrowing Notice, provided such Business Day is prior to the Line Termination Date (each such date, a "Funding Date") and shall be deposited by the Lender to such account as the Company may direct. (b) Each Advance shall bear interest from the related Funding Date to, but excluding, the date of repayment in full of such Advance on the outstanding principal balance of such Advance at the Applicable Rate in effect from time to time with respect to such Advance. Any Monthly Interest which is not paid on the Payment Date on which it is due shall bear interest at the Applicable Rate in effect from time to time. (c) The Lender shall record in its records, or at its option on the schedule attached to the Secured Note, the date and amount of each Advance made hereunder, each repayment thereof, and the other information provided for thereon. The aggregate unpaid principal amount so recorded shall be rebuttable presumptive evidence of the principal amount owing and unpaid on the Secured Note. The failure so to record any such information or any error in so recording any such information shall not, however, limit or otherwise affect the actual obligations of the Company hereunder or under the Secured Note to repay the principal amount of all Advances made to it, together with all interest accruing thereon. (d) After the making of each Advance, the Lender shall deliver to the Company a written confirmation of such Advance in substantially the form attached hereto as Exhibit B (each, a "Confirmation") and the Company's acceptance of the proceeds of the related Advance shall constitute the Company's agreement to the terms of such Confirmation. SECTION III.2. Advance Amount. The amount of each Advance (a) shall not in the case of each Advance, be less than $1,000,000 in principal amount (unless otherwise consented to in writing by the Lender); and (b) shall equal the outstanding principal balance of all Eligible Loans to be pledged to the Collateral Agent for the benefit of the Lender in connection with such Advance. -2- 4 SECTION III.3. Termination Date; Maturity of Advances. The line of credit offered by the Lender hereunder shall terminate on the earlier of (a) March 15, 1997 (or such later date as agreed to in writing by the Lender) and (b) the occurrence of an Event of Default which continues beyond the applicable cure period, if any (the "Line Termination Date"). On the Line Termination Date, the Line Amount shall be automatically reduced to $0. Each Advance shall mature on the earliest of (a) the Line Termination Date and (b) the closing of a Securitized Offering (the "Maturity Date"). SECTION III.4. Prepayment. Each Advance is pre-payable on any day upon at least two Business Days' prior written notice by the Company to the Lender and the Collateral Agent without premium or penalty, in whole or in part; provided that the principal amount prepaid shall be at least $500,000; and provided further that such prepayment is made solely with funds on deposit in the Loan Accounts or representing proceeds of a Securitized Offering. Any such prepayment shall be made by the Collateral Agent from such funds in accordance with the written request of the Lender. SECTION III.5. Extension Option. In the event that all outstanding Advances are not repaid in whole on or prior to the Line Termination Date, the Lender shall have the option on or before the Line Termination Date, in its sole discretion, to extend the Line Termination Date on a week-to-week basis through the last Business Day of each succeeding week at an Applicable Rate equal to LIBOR plus 5%. If the Lender elects to extend the Line Termination Date as aforesaid, it shall deliver notice of such election to the Company and the Collateral Agent no later than 3:00 p.m. on the Business Day preceding the then scheduled Line Termination Date (any such preceding date, an "Election Date"). If no such notice is delivered, all outstanding Advances shall be due and payable without any further action by the Lender on the Line Termination Date, and in such event the Lender may exercise all rights and remedies available to it as the holder of a first perfected security interest under the Uniform Commercial Code of the State of New York (the "New York UCC") and any and all other rights hereunder and under applicable law. SECTION III.6. Payment of Interest and Principal. Interest accruing on an Advance and principal prepayments thereof out of Collections with respect thereto shall be payable on each Payment Date as set forth in Section 2.9. In addition, all accrued and unpaid Monthly Interest and the unpaid principal amount of each Advance will be payable in full on the Maturity Date for such Advance unless extended as set forth in Section 2.5. SECTION III.7. Secured Note. The Line shall be evidenced by a secured promissory note of the Company in the form attached hereto as Exhibit A (the "Secured Note"). SECTION III.8. Form of Payment. All payments to be made to the Lender with respect to principal and interest on the Advances and all other Secured Obligations shall be made in immediately available funds by wire transfer to such account as the Lender may direct the Company from time to time in writing. -3- 5 SECTION III.9. Allocation of Collections. Based upon the information contained in the Servicer Report, all Collections during each Collection Period with respect to Loans financed by an Advance shall be applied on each Payment Date in the following amounts and in the following order: (a) So long as no Event of Default shall have occurred and then be continuing, the Collateral Agent shall pay from the Principal Account the Principal Collections for the Related Collection Period (net of any amounts reborrowed pursuant to Section 2.9(d)) and any amounts withdrawn from the Cash Collateral Account in accordance with Section 5.1(b) hereof on each Payment Date to the Persons, in the amounts and in the priority set forth below (based solely on the information set forth in the related Servicer Report): (i) to the Lender, an amount equal to the Monthly Principal, if any, payable on such Payment Date; provided that, amounts payable to the Lender pursuant to this Section 2.9(a) may, at the prior written direction of the Lender, be paid to the Company on account of any Advance being made by the Lender on such Payment Date. Amounts so applied shall be deemed to have reduced the principal balance of the Advance that matured on such Payment Date; (ii) to each Borrower, the applicable Deferred Payment; and (iii) to the Company, any remaining Principal Collections on deposit in the Principal Account with respect to the Related Collection Period; provided, however, that no funds shall be distributed to the Company pursuant to this clause (iii) unless, after giving effect to such distribution, the Company shall be in compliance with the Collateral Coverage Condition. (b) So long as no Event of Default shall have occurred and then be continuing, the Collateral Agent shall pay from the Finance Charge Account the Interest Collections for the Related Collection Period (net of any amounts reborrowed pursuant to Section 2.9(d)) and any amounts withdrawn from the Cash Collateral Account in accordance with Section 5.1(b) and (c) hereof on each Payment Date to the Persons, in the amounts and in the priority set forth below (based solely on the information set forth on the related Servicer Report); provided, however, that the failure of the Servicer to deliver a Servicer Report shall not preclude the Collateral Agent from paying Monthly Interest, and the Collateral Agent shall distribute such Monthly Interest on the then current Advance Balance upon written direction from the Lender specifying the amount thereof: (i) to the Lender, an amount equal to the sum of (x) the Monthly Interest and (y) any unpaid Monthly Interest from all prior Payment Dates (with interest thereon in accordance with Section 2.1(b); (ii) to the Collateral Agent, the Collateral Agent Fee due to the Collateral -4- 6 Agent on such Payment Date; (iii) to the Servicer, if DVI Business Credit Corporation or any Affiliate thereof is then acting as Servicer, an amount equal to the sum of (x) one-half of the Servicing Fee due on such Payment Date, (y) any unpaid Servicing Fee payable pursuant to this clause (iii) from all prior Payment Dates and (z) any out-of-pocket expenses for which the Servicer is entitled to reimbursement pursuant to Section 4.04(a) of the Contribution and Servicing Agreement; provided, however, that if DVI Business Credit Corporation or any Affiliate thereof is not then acting as Servicer, then the amount to be paid to the Servicer under this Section 2.9(b)(iii) shall be the entire Servicing Fee due on such Payment Date, any unpaid Servicing Fee from all prior Payment Dates and any out-of-pocket expenses for which the Servicer is entitled to reimbursement pursuant to Section 4.04(a) of the Contribution and Servicing Agreement; (iv) to the Collateral Agent for deposit in the Cash Collateral Account, an amount equal to the excess, if any, of (1) the Required Cash Collateral Account Balance for such Payment Date over (2) funds then on deposit in the Cash Collateral Account; (v) to the Collateral Agent, the reasonable and documented out-of-pocket expenses incurred by the Collateral Agent in connection with its administration of the transactions hereunder; (vi) to the Servicer, if DVI Business Credit Corporation or any Affiliate thereof is then acting as Servicer, an amount equal to the sum of (x) one-half of the Servicing Fee due on such Payment Date and (y) any unpaid Servicing Fee payable pursuant to this clause (vi) from all prior Payment Dates; (vii) to each Borrower, the applicable Deferred Payment; and (viii) to the Company, any remaining Interest Collections for the Related Collection Period; provided, however, that no funds shall be distributed to the Company pursuant to this clause (ix) unless the Company is in compliance with the Collateral Coverage Condition. (c) If at any time any amount or portion thereof previously distributed pursuant to Section 2.9(a) or (b) shall have been recovered, or shall be subject to recovery, in any proceeding with respect to the Company or otherwise, then for purposes of determining future distributions pursuant to Section 2.9(a) or (b) such amount or portion thereof shall be deemed not to have been previously so distributed. (d) Subject to the availability of funds on deposit in the Principal Account on any day, upon delivery of a Reborrowing Certificate in the form attached hereto as Exhibit E by the Company to the Collateral Agent and the Lender on a Business Day, the Collateral Agent shall -5- 7 by 4:30 p.m. New York City time on the date of delivery of the Reborrowing Certificate if such Reborrowing Certificate is delivered prior to 1:30 p.m. New York City time on the date of delivery of the Reborrowing Certificate or by 12:00 noon New York City time on the Business Day next succeeding the date of delivery of the Reborrowing Certificate if such Reborrowing Certificate is delivered after 1:30 p.m. New York City time, from funds remaining on deposit in the Principal Account after any distributions required to be made on such day pursuant to Sections 2.9(a) and (b) have been made, release the Reborrowing Amount requested in the Reborrowing Certificate; provided that no Event of Default or Potential Event of Default shall have occurred which is continuing or would result from the application of the Reborrowing Amount; and provided further that the proposed use of the proceeds of the Reborrowing Amount would not cause the requirements of Section 2.12, 2.13 or 2.14 to be violated. (e) So long as no Event of Default shall have occurred and then be continuing and the Company shall be in compliance with the Collateral Coverage Condition, the Collateral Agent shall, upon receipt of an Officers' Certificate from the Servicer which states that all Loans and other amounts owing under a Revolving Credit Agreement have been paid in full and that the Collateral Coverage Condition is satisfied and will continue to be satisfied after giving effect to the requested release, release from the Loan Accounts any subsequent Collections received in respect of such Loan and remit such amounts to such Company. SECTION III.10. Securitized Offering. All proceeds of any Securitized Offering shall be paid to the Lender to the extent of (a) the accrued and unpaid interest on Advances and (b) the outstanding Advance Balance. SECTION III.11. Conditions to the Making of Advances. (a) The effectiveness of this Agreement and the obligation of the Lender to make the initial Advance shall be subject to the delivery of each of the following documents, on or prior to such effectiveness, in form and substance satisfactory to the Lender: (i) Secured Note. The Secured Note duly executed by the Company in an original principal amount equal to the Line Amount; (ii) Certificate of Incorporation. The certificate of incorporation of the Company and the Servicer, each duly certified by the Secretary of State of the jurisdiction of its incorporation, together with a copy of the by-laws of each of the Company and the Servicer, duly certified by the Secretary or an Assistant Secretary of the Company or the Servicer, as applicable; (iii) Resolutions. (1) Copies of resolutions of the Board of Directors of the Company authorizing or ratifying the execution, delivery and performance of this Agreement, the Contribution and Servicing Agreement, pursuant to which Loans will be purchased with the proceeds of the initial Advance and those documents and matters -6- 8 required of it with respect thereto, duly certified by the Secretary or Assistant Secretary of the Company; (2) Copies of resolutions of the Board of Directors of each of the Servicer authorizing or ratifying the execution, delivery and performance of this Agreement and those documents and matters required of it with respect to this Agreement, duly certified by the Secretary or Assistant Secretary of the Servicer; (iv) Consents. Certified copies of all documents evidencing any necessary corporate action, consents and governmental approvals (if any) with respect to this Agreement; (v) Incumbency and Signatures. A certificate of the Secretary or an Assistant Secretary of each of the Company and the Servicer certifying the names of the individual or individuals authorized to sign this Agreement and the other Related Agreements to be executed by such party, together with a sample of the true signature of each such individual (the Lender may conclusively rely on each such certificate until formally advised by a like certificate of any changes therein); (vi) Opinions of Counsel. Opinions of counsel from counsel acceptable to the Lender covering such matters as the Lender shall request and satisfactory in form and substance to the Lender; (vii) Good Standing Certificates. Certificates of good standing for the Company, the Seller and the Guarantor in the jurisdiction of its organization and the jurisdiction of its principal place of business; (viii) Search Reports. A written search report from a Person satisfactory to the Lender listing all effective financing statements that name the Company, the Servicer, the Seller, any Borrower or any Originator as debtor or assignor and that are filed in the jurisdictions in which filings were made pursuant to subsection (ix) below, together with copies of such financing statements, and tax and judgment lien search reports from a Person satisfactory to the Lender showing no evidence of any tax or judgment liens filed against the Company, the Seller, the Servicer, any Borrower or any Originator; (ix) Evidence. Evidence (which may be telephonic) of the filing of proper financing statements on Form UCC-1, (i) naming the Company as secured party and the Seller as debtor, (ii) naming the Seller as secured party and each Borrower as debtor, (iii) naming the applicable Originator as debtor and the applicable Borrower as secured party, and (iv) naming the Company as debtor and the Lender as secured party, or other similar instruments or documents, as may be necessary or, in the reasonable opinion of the Lender, desirable under the UCC of all applicable jurisdictions to perfect the interest of the Collateral Agent, on behalf of the Lender, in the Collateral; -7- 9 (x) No Material Adverse Change. A certificate of the Chief Financial Officer of the Company, the Seller and the Guarantor certifying that since March 31, 1996, there has been no material adverse change in the financial condition, business or results of operations of the Company or the Seller; (xi) Capitalization of the Company. Evidence, in form and substance satisfactory to the Lender, that as of the initial Funding Date, the Company has been capitalized with equity in cash equal to or greater than $750,000; (xii) Establishment of Accounts. Evidence, in form and substance satisfactory to the Lender, that the Borrower Lockbox Accounts, the Finance Charge Account, the Principal Account and the Cash Collateral Account have been established; (xiii) Initial Cash Collateral Account Deposit. Evidence, in form and substance reasonably satisfactory to the Lender that the Required Cash Collateral Account Balance has been deposited in the Cash Collateral Account; (xiv) Contribution and Servicing Agreement. The Contribution and Servicing Agreement shall have been executed and delivered by the Company and the Seller in form and substance satisfactory to the Lender, shall be in full force and effect with all conditions precedent to the initial sale of Loans thereunder having been satisfied and with no defaults, and each of the Company and the Seller shall have performed all its obligations thereunder which, pursuant to the terms of the Contribution and Servicing Agreement, are required to be performed prior to the making of the initial Advance; (xv) Revolving Credit Agreements. Each Revolving Credit Agreement pursuant to which Loans made by DVIBC will be acquired by the Company with the proceeds of the initial Advance shall have been executed and delivered by DVIBC and the applicable Borrower, in form and substance satisfactory to the Lender, shall be in full force and effect with all conditions precedent to the making of Loans thereunder having been satisfied and with no defaults, and each of the Seller and such Borrower shall have performed all its obligations thereunder which, pursuant to the terms of the applicable Revolving Credit Agreement, are required to be performed prior to the making of Loans thereunder; (xvi) Rating Letters. The Secured Note shall have been rated "BBB-" by the Rating Agency; (xvii) Guaranty. The Guaranty shall have been executed and delivered in form and substance satisfactory to the Lender; and (xviii) Additional Conditions. There shall have been satisfied such other conditions as the Lender shall reasonably request. -8- 10 (b) All Advances (including the initial Advance) shall be subject to the further conditions precedent that (a) the Lender, the Collateral Agent and the Rating Agency shall have received a completed and duly executed Borrowing Notice therefor in substantially the form attached hereto as Exhibit F and a completed and duly executed Daily Servicer Report for the date of such Borrowing Notice, in each case, no later than 3:00 p.m. New York City time on the Business Day preceding the Funding Date for such Advance, (b) the Company shall have delivered to the Collateral Agent in accordance with the terms of the Collateral Agreement the Loan Documents with respect to each Loan listed on the Loan Schedule attached to the applicable Borrowing Notice and (c) on the Funding Date for such Advance, the following statements shall be true (and the Company, by accepting the amount of such Advance, shall be deemed to have represented and warranted that): (i) the representations and warranties contained in Sections 7.1 and 7.2 are true and correct (in all material respects to the extent any such representations and warranties do not incorporate a materiality limitation in their terms) on and as of such Funding Date as if made on and as of such date, (ii) no Event of Default, Potential Event of Default or Servicer Event of Default has occurred and is continuing or would result from the making of such Advance or from the application of the proceeds of such Advance, (iii) the Line Termination Date shall not have occurred, (iv) such Funding Date shall be at least 5 Business Days after the immediately preceding Funding Date if the amount of the Advance requested in the related Borrowing Notice is less than $1,000,000, (v) the Required Cash Collateral Account Balance shall be on deposit in the Cash Collateral Account after giving effect to all distributions and Advances on such Funding Date, (vi) the Lender shall have received payment of all its fees and reimbursement for all its out-of-pocket costs incurred in connection with entering into or enforcing this Agreement, (vii) the Rating Agency shall not have downgraded its rating of the Secured Note or the Servicer or placed the Servicer on "credit watch" for downgrade, (viii) the Lender, Ascendant Capital, Inc. and the Rating Agency shall have received from the Servicer the information specified in Schedule 1 to this Agreement with respect to each Borrower under any Loan to be acquired with the proceeds of such Advance and the requirements of Section 2.14 shall have been satisfied, (ix) the Company, the Seller, each applicable Borrower and the Servicer shall have taken all such other actions and delivered all such other instruments, documents and agreements as are required pursuant to the terms of the Contribution and Servicing Agreement and each applicable Revolving Credit Agreement, and (x) the Lender shall have received such other documents and instruments, and the Company, the Seller, each Borrower and the Servicer shall have taken all such other actions and delivered all such other instruments, documents and agreements as the Lender shall reasonably request. Notwithstanding anything in this Agreement to the contrary, the Lender shall not be obligated to make an Advance hereunder with respect to any Loans unless and until (i) the Lender shall have satisfactorily completed a due diligence review of the Loans proposed to be acquired, and (ii) the Seller and the Borrower thereunder shall have entered into a Revolving Credit Agreement with respect to such Loans on terms and conditions and in form and substance satisfactory to the Lender, including representations and warranties for such Loans. -9- 11 In addition, the Lender shall have no obligation to fund an Advance if, as of the Funding Date for such Advance: (i) any representation of the Company or the Servicer contained herein, or of the Company or the Seller in the Contribution and Servicing Agreement or of the Seller or the Borrower under the relevant Revolving Credit Agreement is not true and correct in all material respects as of such date or the Company is not in compliance in all material respects with the terms hereof and thereof as of such date; or (ii) in the opinion of counsel to the Lender, funding such Advance would constitute a violation of law or conflict with any material rule, regulation or order of any state or federal court, regulatory body, administrative agency, governmental body or arbitrator having jurisdiction over the Lender. SECTION III.12. Eligible Payor Concentration Tests. The Company shall not use the proceeds of any Advance or Reborrowing Amount to acquire a Loan if and to the extent that, after giving effect to the acquisition of such Loan, the Loans subject to the Lien of the Collateral Agent would be secured by Eligible Receivables that, with respect to any Borrower, exceed any of the maximum percentages specified in Schedule 2, except to the extent that, after giving effect to the making of such Advance and the acquisition of the Loans proposed to be acquired with the proceeds of such Advance, (a) the sum of (i) voluntary capital contributions of cash made by the Seller to the Company pursuant to Section 1.02(g) of the Contribution and Servicing Agreement which are then held in the Cash Collateral Account, (ii) the unpaid principal balance of all Eligible Loans then subject to the Lien of the Collateral Agent under the Collateral Agreement (other than those Eligible Loans secured by Eligible Receivables in excess of any of the maximum percentages specified in Schedule 2, including those Loans proposed to be acquired with the proceeds of such Advance), and (iii) Principal Collections on deposit in the Principal Account would equal or exceed (b) the Advance Balance. Any exception to compliance with the foregoing will be permitted with the prior approval of the Lender if, and only if, the Rating Agency confirms that such exception will not result in a reduction or withdrawal of the then current rating of the Secured Note. SECTION III.13. Borrower Concentration Tests. The Company shall not use the proceeds of any Advance or Reborrowing Amount to acquire a Loan if and to the extent that, after giving effect to the acquisition of such Loan, the Loans subject to the Lien of the Collateral Agent would, with respect to any Borrower, exceed any of the maximum percentages specified in Schedule 3, except to the extent, that, after giving effect to the making of such Advance and the acquisition of the Loans proposed to be acquired with the proceeds of such Advance, (a) the sum of (i) voluntary capital contributions of cash made by the Seller to the Company pursuant to Section 1.02(g) of the Contribution and Servicing Agreement which are then held in the Cash Collateral Account, (ii) the unpaid principal balance of all Eligible Loans then subject to the Lien of the Collateral Agent under the Collateral Agreement (other than those Eligible Loans secured by Eligible Receivables in excess of any of the maximum percentages specified in Schedule 3, including those Loans proposed to be acquired with the proceeds of such Advance), and (iii) Principal Collections on deposit in the Principal Account would equal or exceed (b) the Advance Balance. Any exception to compliance with the foregoing will be permitted with the prior approval of the Lender if, and only if, the Rating -10- 12 Agency confirms that such exception will not result in a reduction or withdrawal of the then current rating of the Secured Note; provided that, without the prior written consent of the Lender and the Rating Agency, in no event will the aggregate outstanding balance of all Loans to any one Borrower which are subject to the Lien of the Collateral Agent exceed (a) $4.0 million on any day as of which the aggregate outstanding balance of all Loans subject to the Lien of the Collateral Agent is between $10 million and $15 million, (b) $5.25 million on any day as of which the aggregate outstanding balance of all Loans subject to the Lien of the Collateral Agent is between $15 million and $24 million, (c) $5.75 million on any day as of which the aggregate outstanding balance of all Loans subject to the Lien of the Collateral Agent is between $24 million and $39 million and (d) $7 million on any day as of which the aggregate outstanding balance of all Loans subject to the Lien of the Collateral Agent is between $39 million and $50 million. SECTION III.14 Additional Borrowers; Borrower Defaults. (a) It shall be an additional condition precedent to the making of each Advance and to the payment of any Reborrowing Amount on behalf of the Company that: (i) each Borrower under Loans to be acquired by the Company with the proceeds of such Advance or Reborrowing Amount shall have entered into a Revolving Credit Agreement with the Seller in substantially the form attached hereto as Exhibit C or such other form as is acceptable to the Lender, (ii) if such Borrower is a special purpose entity, the Lender shall have received an opinion of counsel addressed to the Lender to the effect that the sale of Receivables to such Borrower by its parent constitutes a true sale and addressing the issue of non-consolidation, in form acceptable to the Lender, (iii) if the Borrower is a special-purpose bankruptcy-remote entity, the Lender shall have received and approved certified copies of the articles of incorporation and bylaws of such Borrower, (iv) the Rating Agency shall have confirmed in writing that the making of Loans to such Borrower shall not result in the reduction or withdrawal of the then current rating of the Secured Note (provided, however, that, with respect to a new Borrower, if the Rating Agency does not object to the Company's acquisition of Loans made to such Borrower within 6 days after written notice thereof by the Company, this item (iv) shall be deemed to have been satisfied), (v) the Servicer shall have delivered to the Collateral Agent Wire Instructions for such Borrower and (vi) the Borrower Lockbox Account for such Borrower shall have been established and the Servicer on behalf of the Company shall have delivered the notices with respect thereto as required under Section 5.1 of the Collateral Agreement. (b) No proceeds of any Advance or Reborrowing Amount shall be used by the Company to acquire Loans made to any Borrower which is not an Eligible Borrower or with respect to which a Borrower Default has occurred unless the Lender has consented thereto in writing and the Rating Agency has delivered written confirmation to the Lender, the Servicer and the Collateral Agent that the acquisition of Loans made to such Borrower will not result in the reduction or withdrawal of the then current rating of the Secured Note. SECTION III.15. Certain Waivers. The Company waives presentment, demand for payment, notice of dishonor and protest, notice of the creation of any of the Secured -11- 13 Obligations and all other notices whatsoever to the Company with respect to the Secured Obligations. The obligations of the Company under this Agreement and the Secured Note shall not be affected by (i) the failure of the Lender or the holder of the Secured Note or holders of any of the Secured Obligations to assert any claim or demand or to exercise or enforce any right, power or remedy against the Company or the Collateral or otherwise, (ii) any extension or renewal for any period (whether or not longer than the original period) or exchange of any of the Secured Obligations or the release or compromise of any obligation of any nature of any Person with respect thereto, (iii) the surrender, release or exchange of all or any part of any property (including the Collateral) securing payment and performance of any of the Secured Obligations or the compromise or extension or renewal for any period (whether or not longer than the original period) of any obligations of any nature of any Person with respect to any such property, and (iv) any other act, matter or thing which would or might, in the absence of this provision, operate to release, discharge or otherwise prejudicially affect the obligations of the Company. SECTION III.16. Determination of LIBOR. (a) On each LIBOR Determination Date, the Lender shall determine LIBOR for the next succeeding Interest Accrual Period for a period equal to one month on the basis of the offered LIBOR quotations, appearing on Telerate Page 3750 as of 11:00 a.m., London Time, on such LIBOR Determination Date. If such rate does not appear on Telerate Page 3750, the rate for that day will be determined on the basis of the rates at which deposits in U.S. Dollars are offered by the Reference Banks at approximately 11:00 a.m., London Time, on the LIBOR Determination Date to prime banks in the London interbank market for a period of one month commencing on that day. The Lender will request the principal London office of each of the Reference Banks to provide a quotation of its rate. If at least two such quotations are provided, the rate for that day will be the arithmetic mean of the quotations. If fewer than two quotations are provided as requested, the rate for that day will be the arithmetic mean of the rates quoted by major banks in New York City, selected by the Lender at approximately 11:00 a.m., New York City time, on that day for loans in U.S. Dollars to leading European banks for a period of one month commencing on that day. (b) If necessary, on each LIBOR Determination Date, the Lender shall designate the banks that shall act as the Reference Banks for the succeeding Interest Accrual Period and shall notify the Collateral Agent on such LIBOR Determination Date. The Collateral Agent may conclusively rely and shall be fully protected in relying upon the rates provided to it by the Lender. (c) The establishment of LIBOR, and the subsequent calculation of the Applicable Rate for each Interest Accrual Period by the Lender, in the absence of manifest error, shall be final and binding. ARTICLE IV -12- 14 USE OF PROCEEDS; GRANT OF SECURITY INTEREST SECTION IV.1. Purpose of Loan. The Company agrees that the Line shall be used solely to acquire Eligible Loans secured by Eligible Receivables which shall be pledged along with the other Collateral to secure the Secured Obligations, as such Loans are identified to the Lender in writing and/or in electronic form from time to time in a manner designated by the Lender in writing to the Company from time to time. SECTION IV.2. Grant of Security Interest. As security for the Advances and all of the other Secured Obligations, the Company hereby confirms the grant to the Collateral Agent, acting on behalf of the Lender pursuant to the Collateral Agreement, of a security interest and Lien in all of the Company's right, title and interest in and to each item constituting the Collateral now and hereafter, including all future Loans and each Revolving Credit Agreement executed in connection therewith. SECTION IV.3. Borrower Lockbox Accounts. The Company shall direct each Borrower (a) to make payments under the Loans to such Borrower into a Borrower Lockbox Account established in the name of the Company, (b) to direct each Eligible Payor (other than an Eligible Payor referred to in subsection (3) of the definition of "Eligible Payor") to make payments in respect of the Receivables of such Borrower into such Borrower Lockbox Account referred to in (a) above and (c) to direct each Eligible Payor referred to in subsection (3) of the definition of "Eligible Payor" to make payments in respect of its Receivables of such Borrower into a Borrower Lockbox Account established in the name of such Borrower. ARTICLE V FINANCING STATEMENTS SECTION V.1. UCC Financing Statements. In connection with the pledge of the Loans and other Collateral, the Company shall prepare and deliver to the Lender or its agent not less than five (5) Business Days prior to the date of any Advance or the delivery of a Reborrowing Certificate, Uniform Commercial Code ("UCC") financing statements executed by the Company and acceptable to the Lender, for filing in such jurisdictions as the Lender shall request. The Lender shall be entitled to file such UCC financing statements in the applicable jurisdictions. The Company agrees to reimburse the Lender for the amount of any filing fees paid by the Lender in connection with the filing of such UCC financing statements within thirty days of receipt from the Lender of an invoice documenting such amounts. ARTICLE VI THE CASH COLLATERAL ACCOUNT -13- 15 SECTION VI.1. Cash Collateral Account. (a) Prior to the making of the initial Advance, the Company shall deposit in the Cash Collateral Account an amount equal to the Required Cash Collateral Account Balance. The Company shall also immediately deposit into the Cash Collateral Account the amount of any capital contribution made by DVIBC pursuant to Section 1.02(g) of the Contribution and Servicing Agreement to the extent directed by the Seller. (b) No later than 10:00 a.m. (New York City time) on the Business Day prior to each Payment Date, the Collateral Agent shall, in accordance with a direction set forth in the Servicer Report, make a draw on the Cash Collateral Account in an amount equal to the lesser of (x) the amount then on deposit in the Cash Collateral Account and (y) the extent by which funds then held by the Collateral Agent are not sufficient to pay the Monthly Interest and Monthly Principal, if any, on such Payment Date. The proceeds of any such draws will be used by the Collateral Agent to pay the Monthly Interest and Monthly Principal, if any, due on such Payment Date. (c) On each Payment Date, the Collateral Agent, in accordance with a direction set forth in the Servicer's Report, shall withdraw the excess, if any, of (i) amounts on deposit in the Cash Collateral Account (determined after giving effect to any draws made pursuant to Section 5(b)) over (ii) the then current Required Cash Collateral Account Balance and deposit such amounts into the Finance Charge Account to be applied in accordance with the priorities set forth in Section 2.9(b) hereof. (d) On the first Business Day after the date on which the Collateral Agreement terminates pursuant to the terms thereof and all Secured Obligations have been paid in full, the Collateral Agent shall, upon written certification thereof by the Servicer, withdraw all amounts then on deposit in the Cash Collateral Account and deliver such amounts to the Company or its designee. ARTICLE VII THE GUARANTY SECTION VII.1. Claims on Guaranty. Not later than 3:00 p.m. New York City time on the Business Day immediately preceding a Payment Date, the Collateral Agent shall determine if the funds then held by the Collateral Agent in the Loan Accounts, together with amounts withdrawn from the Cash Collateral Account pursuant to Sections 5.1(b) and (c), are sufficient to pay in full the Monthly Interest and Monthly Principal payable on such Payment Date. If there is an insufficiency, the Collateral Agent shall submit a claim to the Guarantor in the form of Exhibit D with respect to such insufficiency; provided that submission of a claim in such form shall not be the exclusive or only means of drawing on the Guaranty, and the -14- 16 provisions of this Article VI shall not be deemed to limit the Lender's rights (or the rights of the Collateral Agent on the Lender's behalf) under the Guaranty. The proceeds of any such draw will be used by the Collateral Agent to pay the Monthly Interest and/or Monthly Principal payable on such Payment Date, as applicable. ARTICLE VIII REPRESENTATIONS AND WARRANTIES SECTION VIII.1. Representations and Warranties of the Company. The Company hereby represents and warrants to the Lender as of the Closing Date and each Funding Date (or such earlier date as shall be set forth therein): (a) Organization and Good Standing. The Company has been duly organized and is validly existing and in good standing under the laws of its state of incorporation, with power and authority to own its properties and to conduct its business as such properties shall be currently owned and such business is presently conducted and has power, authority and legal right to acquire, own and service the Loans, the Loan Documents and the Receivables. (b) Due Qualification. The Company is duly qualified to do business as a foreign corporation in good standing, and has obtained all necessary licenses and approvals, in all jurisdictions in which the ownership or lease of property or the conduct of its business shall require such qualifications (except where the failure to be so qualified or in good standing or the failure to have such licenses and approvals could not individually or in the aggregate have a material adverse effect on the Collateral or the business or condition (financial or otherwise) of the Company or impair the enforceability of any Loan or the related Loan Documents or Receivables). (c) Power and Authority. The Company has the power and authority to execute and deliver this Agreement and to carry out its terms; and the execution, delivery and performance of this Agreement have been duly authorized by the Company by all necessary corporate action. (d) Binding Obligation. This Agreement constitutes a legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms except as the enforceability thereof may be limited by bankruptcy, insolvency, moratorium or other similar laws affecting creditors' rights and by general principles of equity. (e) No Violation. The consummation of the transactions contemplated by this Agreement and the fulfillment of the terms hereof shall not conflict with, result in any -15- 17 material breach of any of the terms and provisions of, nor constitute (with or without notice or lapse of time) a default under, the articles of incorporation or by-laws of the Company, or any indenture, agreement or other instrument to which the Company is a party or by which it is bound; nor result in the creation or imposition of any Lien upon any of its properties pursuant to the terms of any such indenture, agreement or other instrument (other than the Collateral Agreement); nor violate any law or, to the best of the Company's knowledge, any order, rule or regulation applicable to the Company of any court or of any federal or state regulatory body, administrative agency or other governmental instrumentality having jurisdiction over the Company or its properties. (f) No Proceedings. There are no proceedings or investigations pending or, to the best of the Company's knowledge, threatened, before any court, regulatory body, administrative agency, or other governmental instrumentality having jurisdiction over the Company or its properties: (A) asserting the invalidity of this Agreement; (B) seeking to prevent the consummation of any of the transactions contemplated by this Agreement; or (C) seeking any determination or ruling that might materially and adversely affect the performance by the Company of its obligations under, or the validity or enforceability of, this Agreement, the Contribution and Servicing Agreement, the Collateral Agreement or the Secured Note. (g) Company Not Insolvent. The Company is not the subject of any pending federal, state or other bankruptcy, insolvency or similar proceedings. (h) Loans and Receivables. The representations and warranties of the Seller regarding the Loans, the Loan Documents and the Receivables contained in Section 2 of the Contribution and Servicing Agreement are true and correct in all material respects and the representations and warranties of each Borrower under its Revolving Credit Agreement shall be true and correct in all material respects as of the making of each Loan under such Revolving Credit Agreement. The Lender and the Collateral Agent, acting on the Lender's behalf, may rely on such representations and warranties to the same extent as if such representations and warranties were set forth by the Company herein. (i) Title to Collateral. With respect to each item of Collateral, including, without limitation, the Loans and the Receivables, the Company either (A) owns good and marketable title thereto or (B) has a first priority perfected security interest therein, in each case, free and clear of all Liens, charges or claims which Lien or Liens would have a material adverse effect on the value of the Collateral or the collectibility of the Receivables. (j) Taxes. The Company has filed all tax returns and reports required by law to have been filed by it and has paid all taxes and governmental charges thereby shown to be owing, except any such taxes or charges which are being diligently contested in good -16- 18 faith by appropriate proceedings and for which adequate reserves in accordance with GAAP shall have been set aside on its books. (k) Employee Benefit Plans. The Company does not sponsor and is not required to make any contribution to any Pension Plan. No steps have been taken by the PBGC, DVI or any Affiliate thereof to terminate any Plan which would result in any material liability to the Company, and no contribution failure has occurred with respect to any Pension Plan maintained by the Company or any member of the Controlled Group sufficient to give rise to a Lien under section 302(f) of ERISA. No condition exists or event or transaction has occurred with respect to any Plan which might reasonably be expected to result in the incurrence by the Company or any member of the Controlled Group of any material liability, fine or penalty to or on account of a Plan pursuant to Sections 302, 409, 502(c), 502(i), 502(l), 4062, 4063, 4064, 4068 or 4071 of ERISA or Section 401(a)(29), 4971, 4975 or 4980, of the Code. (l) Margin Regulations. The Company is not engaged in the business of extending credit for the purpose of purchasing or carrying margin stock, and no proceeds of any Advance will be used for a purpose which violates, or would be inconsistent with, F.R.S. Board Regulation G, U or X. Terms for which meanings are provided in F.R.S. Board Regulation G, U or X or any regulations substituted therefor, as from time to time in effect, are used in this paragraph with such meanings. (m) Accuracy of Information. All factual information heretofore or contemporaneously furnished by or on behalf of the Company in writing to the Lender for purposes of or in connection with this Agreement or any transaction contemplated hereby (including the Contribution and Servicing Agreement, true and complete copies of which were furnished to the Lender in connection with its execution and delivery hereof) is, and all other such factual information hereafter furnished by or on behalf of the Company to the Lender in writing will be, true and accurate in every material respect on the date as of which such information is dated or certified, as of the date of execution and delivery of this Agreement by the Lender and as of the applicable Funding Date, and such information is not, or shall not be, as the case may be, incomplete by omitting to state any material fact necessary to make such information not misleading in any material respect, in each case, in light of the circumstances under which such information was furnished. (n) Financial Statements. All financial statements or certificates of DVI or any of its Subsidiaries or any of their respective officers furnished to the Lender are true and complete and fairly present in all material respects the financial condition, results of operations and cash flows of DVI, or such Subsidiary, as the case may be, in each case as of the date thereof or for the period indicated, as the case may be and, since the date of such financial statements or certificates, or the period indicated therein, as applicable, no event or condition has occurred and is continuing which would have a -17- 19 material adverse effect on the ability of the Company to perform its obligations under this Agreement, the Secured Note, the Collateral Agreement, the Contribution and Servicing Agreement or any Related Agreement. (o) Enforcement of Rights and Remedies. The Company shall take all action necessary or required by the Lender to enforce any right or remedy the Company may have against the Seller under the Contribution and Servicing Agreement and against a defaulting Borrower under its Revolving Credit Agreement. The Company shall not compromise, settle or otherwise settle a claim the Company may have against the Seller or any such Borrower or grant any waiver or any other relief to the Seller or such Borrower without the prior written consent of Lender. (p) Perfected Security Interest. Upon the funding of any Advance, the Lender shall have a perfected security interest of first priority under applicable law in the related Collateral. SECTION VIII.2. Representations and Warranties Regarding Loans and Receivables. The Company hereby represents and warrants to the Lender, as of the Closing Date, each Funding Date and each delivery of a Reborrowing Certificate, or, with respect to any Substitute Loans, Additional Loans and the related Receivables and Loan Documents, as of the related Substitute Date or Addition Date: (a) Prior to the making of each Advance or payment to the Company of any Reborrowing Amount, the Company will (A) be the sole owner of, and have good and marketable title to, the related Loans and Loan Documents and (B) have a valid and perfected first priority perfected security interest in the Receivables that have been pledged as collateral security for such Loan. (b) The Grant of such Loan and related Eligible Receivables to the Collateral Agent on behalf of the Lender will not violate the terms or provisions of any such Loan Document or Receivable or any other agreement to which the Seller then is a party or by which it is bound. (c) At the time each item of Loan Collateral is assigned to the Collateral Agent, such Loan Collateral will be free and clear of all Liens other than the Lien of the Seller pursuant to the applicable Revolving Credit Agreement and there will be no delinquent taxes or other outstanding charges arising by, through or under the Company affecting the Loan Collateral that are or may be Liens prior to, equal or coordinate with, or subordinate to, the Lien of the Collateral Agent under the Collateral Agreement. (d) At the time each item of Loan Collateral is assigned to the Collateral Agent, each Loan, the related Receivables and the related Loan Documents will be a -18- 20 legal, valid and binding full recourse obligation of the Borrower or the Eligible Payor, as the case may be, thereunder, enforceable by the Company (and by the Collateral Agent as assignee of the Company) against such Borrower or the Eligible Payor, as the case may be, in accordance with the terms thereof, except as the enforcement of Eligible Government Receivables against the Eligible Payor may be limited by the anti-assignment provisions of applicable Federal law relating to Medicaid, Medicare and CHAMPUS and except as such enforcement may be limited by bankruptcy, insolvency, reorganization or similar laws relating to or affecting the enforcement of creditors' rights, and will be in full force and effect, and any and all obligations of the Company and of such Borrower or Eligible Payor, as the case may be, under any federal, state or local law including, without limitation, usury, truth-in-lending and equal credit opportunity laws applicable to such Loan or Receivables, as the case may be, will have been complied with, and the Seller will have no knowledge of any challenge or dispute by the Borrower under such Loan or by an Eligible Payor with respect to any Receivables or of the bankruptcy or insolvency of any such Borrower or Eligible Payor. (e) At the time each item of Loan Collateral is assigned to the Collateral Agent, the Company will not be in the process of terminating any related Loan or any related Loan Document or making any plans for any such termination. Furthermore, as of the date on which a Loan is transferred and assigned to the Collateral Agent pursuant to the terms hereof (i) there shall have been no default under any Loan Document which is reasonably likely to have a material adverse effect on such Loan, the related Receivables or such Loan Document and (ii) no event shall have occurred and be continuing which with notice, the lapse of time or both would constitute a default under such Loan, the related Receivables or such Loan Document. (f) Each Loan will have been originated by the Seller in the ordinary course of its business in accordance with the its regular credit approval process delivered to and approved by the Lender and does not contravene any laws, rules or regulations applicable thereto. No Loan will have been selected on any basis which would have any adverse effect on the Lender. (g) The sum of all Loans payable by any single Borrower will not exceed any of the applicable limitations set forth in Schedule 3 hereto (except as may otherwise be permitted under Section 2.13). (h) With respect to any single Borrower, the sum of the Net Collectible Values of all Eligible Receivables payable by any single Eligible Payor to such Borrower shall not exceed any of the applicable limitations set forth in Schedule 2 hereto (except as may otherwise be permitted under Section 2.12). (i) The obligation of each Borrower to repay each Loan is absolute and unconditional, without any right of set-off by such Borrower and without regard to any event affecting the Receivables subject to such Loan. The obligation of each Eligible -19- 21 Payor to pay each Receivable is absolute and unconditional, without any right of set-off by such Eligible Payor. (j) There will be no facts or circumstances existing as of the time each item of Loan Collateral is assigned to the Collateral Agent which give rise to any right of rescission, offset, counterclaim or defense to the obligations of any Borrower or any Eligible Payor, as the case may be, to pay all amounts due with respect to any Loan or any Receivable, as the case may be, and neither the operation of any of the terms applicable to any Loan or any Receivable nor the exercise of any right thereunder will render such Loan or such Receivable, as the case may be, unenforceable in whole or in part or subject to any right of rescission, offset, counterclaim or defense and no such right of rescission, offset, counterclaim or defense will have been asserted with respect thereto. (k) At the time each item of Loan Collateral is assigned to the Collateral Agent, no Loan, Receivable or Loan Document will have been amended, altered or modified in any way which would individually or in the aggregate materially adversely affect the Company's rights thereunder or prohibit payment to the Collateral Agent by the Borrower or (except in respect of Eligible Government Receivables) any Eligible Payor, as the case may be, and no provision of any Loan or Loan Document will have been waived, except in writing, and copies of all such writings will be attached to the related Loan Documents, and no Receivable securing any such Loan will have been released, in whole or in part, from such Loan. (l) No Loan or Receivable will have been originated in, or be subject to the laws of, any jurisdiction whose laws would make the assignment and transfer thereof pursuant to the terms hereof or any transaction contemplated hereby or by the Collateral Agreement unlawful. (m) All parties to each Loan and the related Loan Documents had requisite authority and capacity to execute such Loan. (n) No right of the Company with respect to a Borrower's or Eligible Payor's failure to pay any payment due under any Loan or Receivable, as the case may be, has been waived by the Company or by any Borrower. (o) Each Loan Document that constitutes either "chattel paper" or an "instrument" under the UCC as in effect in the applicable jurisdiction is in the possession of the Collateral Agent. Each of the Loan Documents that constitutes an "instrument" has been endorsed to the Collateral Agent or its order. There is only one original executed copy of each Loan Document that constitutes "chattel paper" or an "instrument" under the applicable UCC. (p) At the time each item of Loan Collateral is assigned to the Collateral -20- 22 Agent, after giving effect to such assignment, the Collateral Coverage Condition has been satisfied. (q) The Borrower Lockbox Accounts identified on Schedule 7.2(q) hereto have been established and are in existence on the Closing Date and such schedule accurately sets forth the following information as to each Borrower Lockbox Account: (A) the name of the Borrower for whose benefit the account was established; (B) the name of the depository institution maintaining such account; and (C) the account number. (r) Each Loan is an Eligible Loan. (s) No consent or approval is required for the assignment and transfer of any Loan Document pursuant to the terms of this Agreement and the Collateral Agreement, except for such consents or approvals as have been obtained. SECTION VIII.3. Representations and Warranties of the Servicer. The Servicer makes the following representations on which the Lender is deemed to have relied in making Advances hereunder. The representations speak as of the execution and delivery of the Agreement (or as of the date a Person becomes Servicer in the case of a third-party successor to the Servicer which is not the Collateral Agent): (a) Organization and Good Standing. The Servicer has been duly organized and is validly existing and in good standing under the laws of its state of incorporation, with power and authority to own its properties and to conduct its business as such properties shall be currently owned and such business is presently conducted and has power, authority and legal right to acquire, own and service the Loans, the Loan Documents and the Receivables. (b) Due Qualification. The Servicer is duly qualified to do business as a foreign corporation in good standing, and has obtained all necessary licenses and approvals, in all jurisdictions in which the ownership or lease of property or the conduct of its business shall require such qualifications (except where the failure to be so qualified or in good standing or the failure to have such licenses and approvals could not individually or in the aggregate have a material adverse effect on the Collateral or the business or condition (financial or otherwise) of the Servicer or impair the enforceability of any Loan or the related Loan Documents or Receivables). (c) Power and Authority. The Servicer has the power and authority to execute and deliver this Agreement and to carry out its terms; and the execution, delivery and -21- 23 performance of this Agreement have been duly authorized by the Servicer by all necessary corporate action. (d) Binding Obligation. This Agreement constitutes a legal, valid and binding obligation of the Servicer enforceable against the Servicer in accordance with its terms except as the enforceability thereof may be limited by bankruptcy, insolvency, moratorium or other similar laws affecting creditors' rights and by general principles of equity. (e) No Violation. The consummation of the transactions contemplated by this Agreement and the fulfillment of the terms hereof shall not conflict with, result in any material breach of any of the terms and provisions of, nor constitute (with or without notice or lapse of time) a default under, the articles of incorporation or by-laws of the Servicer, or any indenture, agreement or other material instrument to which the Servicer is a party or by which it is bound; nor result in the creation or imposition of any Lien upon any of its properties pursuant to the terms of any such indenture, agreement or other material instrument (other than the Collateral Agreement); nor violate any law or, to the best of the Servicer's knowledge, any order, rule or regulation applicable to the Servicer of any court or of any federal or state regulatory body, administrative agency or other governmental instrumentality having jurisdiction over the Servicer or its properties. (f) No Proceedings. There are no proceedings or investigations pending or, to the best of the Servicer's knowledge, threatened, before any court, regulatory body, administrative agency, or other governmental instrumentality having jurisdiction over the Servicer or its properties: (A) asserting the invalidity of this Agreement; (B) seeking to prevent the consummation of any of the transactions contemplated by this Agreement; or (C) seeking any determination or ruling that might materially and adversely affect the performance by the Servicer of its obligations under, or the validity or enforceability of, this Agreement, the Collateral Agreement, the Contribution and Servicing Agreement or the Secured Note. (g) Financial Statements. All financial statements or certificates of the Servicer or any of its officers furnished to the Lender are true and complete in all material respects and do not omit to disclose any material liabilities or other facts relevant to the Servicer's condition. All such financial statements have been prepared in accordance with GAAP. (h) No Change. There has been no change in the business, operations, financial condition, properties or prospects of the Servicer and its subsidiaries, taken as a whole since the date set forth in the Servicer's most recent 10-K or 10-Q filing under the Securities Exchange Act of 1934, as amended, which would have a material adverse effect on the ability of the Servicer to perform its obligations under this Agreement, the Collateral Agreement or any Related Agreement. -22- 24 SECTION VIII.4. Enforcement of Rights Against the Seller and Borrowers. The Servicer shall take all action necessary or required by the Lender to enforce any right or remedy the Company may have against the Seller under the Contribution and Servicing Agreement and against a defaulting Borrower under a Revolving Credit Agreement. The Servicer shall not compromise otherwise settle a claim the Company may have against the Seller or any such Borrower or grant any waiver or any other relief to the Seller or such Borrower without the prior written consent of the Lender. SECTION VIII.5. Purchase Upon Breach; Contribution and Servicing Agreement. The Company, the Servicer or the Lender (or the Collateral Agent on the Lender's behalf), as the case may be, shall inform the other parties to this Agreement promptly, in writing, upon the discovery of a breach of any of the Seller's representations and warranties set forth in Section 2 of the Contribution and Servicing Agreement which materially and adversely affects the interest of the Lender in respect of any Loan, Loan Documents or Receivables. The Company shall cause the Seller to (a) replace such Loan and the related Loan Documents and Receivables with a Substitute Loan in accordance with the provisions of Section 7 of the Contribution and Servicing Agreement or (b) purchase from the Company the Loan and the related Loan Documents and Receivables that are affected by such breach unless, in each such instance such breach has been cured, or waived in all respects by the Lender, within 30 days following the Company's discovery or receipt of notice of such breach. In the event of a repurchase of a Loan, the Company shall cause the Seller to remit to the Collateral Agent the Repurchase Amount of such Loan on or prior to 2:00 p.m. New York City time on the second Business Day prior to the Payment Date immediately following the date on which the Seller has become obligated to repurchase such Loan. The Collateral Agent shall, to the extent received, deposit immediately that portion of the Repurchase Amount representing the unpaid principal balance of the replaced Loans in the Principal Account, and that portion of the Repurchase Amount representing unpaid interest and other income payable on the replaced Loans in the Finance Charge Account, in accordance with the written instructions of the Servicer. The sole remedy of the Collateral Agent or the Lender against the Seller with respect to such a breach of a representation or a warranty (absent fraud on the part of the Seller or the applicable Borrower with respect to such breach) shall be to require the Seller to purchase or substitute Loans pursuant to the Contribution and Servicing Agreement and/or to enforce, as assignee of the Seller, the applicable Borrower's obligations under the related Revolving Credit Agreement with respect to such breach. In the event that the Seller fails to purchase or substitute for any Loan it is required to replace or repurchase pursuant to the Contribution and Servicing Agreement, the Collateral Agent, upon written direction of the Lender, shall enforce the Company's rights against the Seller under and in accordance with the terms of the Contribution and Servicing Agreements, as assigned to the Collateral Agent, to require the purchase or replacement of the Loan and the related Loan Documents and Receivables. SECTION VIII.6. Release of Loans Following Substitution or Purchase. In the event -23- 25 that (i) the Seller shall have substituted a Substitute Loan for a Predecessor Loan in accordance with Section 7 of the Contribution and Servicing Agreement or (ii) the Seller shall have purchased a Loan in accordance with Section 5.02 of the Contribution and Servicing Agreement, the Predecessor Loan shall be released from the Lien of the Collateral Agreement when the Collateral Agent shall have received (i) an Officers' Certificate from the Servicer stating that each of the conditions set forth in the Collateral Agreement and the Contribution and Servicing Agreement with respect to such substitution or repurchase has been duly satisfied, (ii) with respect to any such substitution, such documentation required to be delivered pursuant to Section 7.01(b) of the Contribution and Servicing Agreement and (iii) the Repurchase Amount payable pursuant to Section 5.02 of the Contribution and Servicing Agreement. SECTION VIII.7. Release of Loans Upon Final Payment. In the event that the Collateral Agent shall have received an Officers' Certificate from the Servicer that no further payments on, or in respect of, any Loan or the related Receivables are or will be due and payable, then, so long as no Event of Default shall have occurred and then be continuing such Loan and the related Receivables shall be released from the Lien of the Collateral Agreement. ARTICLE VIII COVENANTS SECTION VIII.1. Covenants. The Company agrees with the Lender that, until all Secured Obligations have been paid and performed in full, the Company, will perform the obligations set forth in this Article VIII. SECTION VIII.2. Corporate Existence, Etc. (a) The Company will do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence and the rights, licenses and franchises of the Company, and will obtain and preserve its qualification to do business as a foreign corporation in each jurisdiction in which such qualification is or shall be necessary to protect the validity and enforceability of the Collateral Agreement, the Secured Note, this Agreement, the Contribution and Servicing Agreement, the Loans or any of the Receivables. (b) The Company shall at all times observe and comply in all material respects with (i) all laws, regulations and court orders applicable to it, (ii) all requirements of law in the declaration and payment of dividends on its Capital Stock, and (iii) all requisite and appropriate corporate and other formalities (including, without limitation, annual and all other appropriate meetings of the Company's board of directors and, if required by law, its charter or otherwise, meetings and votes of shareholders to authorize corporate action) in the management of its business and affairs and the conduct of the transactions contemplated hereby and by the Contribution and Servicing Agreement. -24- 26 (c) The Company will, at all times: (i) maintain (A) corporate and financial books and records separate from those of any other Person and (B) minutes of the meetings and other proceedings of its shareholders and board of directors; (ii) continuously maintain the resolutions, agreements and other instruments underlying the transactions contemplated hereby and by the Contribution and Servicing Agreement as official records of the Company; (iii) act solely in its corporate name and through its duly authorized officers or agents to maintain an arm's-length relationship with the Seller and its Affiliates; (iv) pay all of its operating expenses and liabilities from its own funds; (v) maintain an office and telephone number separate from that of the Seller on the premises currently rented by the Seller; and (vi) maintain its assets separately from the assets of the Seller. (d) The Company shall conduct its business solely in its own name through its duly authorized officers or agents so as to not mislead others as to the identity of the corporation with which those others are concerned, and particularly will avoid the appearance of conducting business on behalf of the Seller or any of its Affiliates or that the assets of the Company are available to pay the creditors of the Seller or any of its Affiliates. Without limiting the generality of the foregoing, all oral and written communications, including without limitation, letters, invoices, purchase orders, contracts, statements and loan applications, will be made solely in the name of the Company. (e) The Company will be operated so as not to be substantively consolidated for bankruptcy purposes with the Seller. (f) At least one director of the Company shall at all times be a person who is not a director, officer or employee of any direct or ultimate parent, or Affiliate of the Seller. SECTION VIII.3. Protection of Collateral; Further Assurances. The Company will from time to time execute and deliver all such supplements and amendments hereto and all such UCC financing statements, continuation statements, instruments of further assurance, and other instruments, and will take such other action as may be necessary or advisable to: (a) Grant more effectively all or any portion of the Collateral; (b) maintain or preserve the Lien of the Collateral Agent or carry out more effectively the purposes of this Agreement or the Collateral Agreement; (c) publish notice of, or protect the validity of, any Grant made or to be made pursuant to the Collateral Agreement and perfect the security interest contemplated thereby in favor of the Collateral Agent in the Loans and the related Receivables; (d) enforce or cause the Servicer to enforce any of the Loans and the related Receivables; or -25- 27 (e) preserve and defend title to the Collateral and preserve and defend the rights of the Collateral Agent and the Lender in such Collateral against the claims of all Persons. The Company, upon the Company's failure to do so, hereby designates the Lender its agent and attorney-in-fact to execute any UCC financing statement, continuation statement or other document or instrument required pursuant to this Section 8.3; provided, however, that such designation shall not be deemed relieve the Company from its obligations to comply with the foregoing covenants. SECTION VIII.4. Compliance Certificates. The Company will deliver to the Collateral Agent and the Rating Agency, within 90 days after the end of each fiscal year, a written statement signed by the Managing Director or Controller of the Company, stating as to each signer thereof, that: (a) a review of the activities of the Company during such year and of its performance under this Agreement and the Collateral Agreement has been made under his supervision; (b) to the best of such officers' knowledge, based on such review, the Company has fulfilled all of its obligations under this Agreement and the Collateral Agreement throughout such year; and (c) whether the officer knows of any Potential Events of Default or Events of Default under this Agreement throughout such year or, if there has been a Default in the fulfillment of any such obligation, specifying each such Potential Event of Default or Event of Default known to him and the nature and status thereof and the nature of the action taken with respect thereto. SECTION VIII.5. Performance of Obligations. (a) The Company will punctually perform and observe all of its obligations and agreements contained in this Agreement, the Collateral Agreement, the Secured Note and the Contribution and Servicing Agreement. (b) The Company will clearly mark its books and records to reflect each assignment and transfer of the Loans and the Receivables from the Seller. (c) If any Authorized Officer shall have knowledge of the occurrence of a Servicer Event of Default, the Company shall promptly notify the Collateral Agent and the Lender thereof, and shall specify in such notice the action, if any, the Company is taking in respect of such default. Unless consented to by the Lender, the Company may not waive any default under or amend the Contribution and Servicing Agreement. -26- 28 SECTION VIII.6. Negative Covenants. The Company will not: (a) sell, transfer, exchange or otherwise dispose of any portion of the Collateral except as expressly permitted by this Agreement; (b) claim any credit on, or make any deduction from, the principal of, or interest on, the Secured Note by reason of the payment of any taxes levied or assessed upon any portion of the Collateral; (c) engage in any business or activity other than in connection with, or relating to the ownership of, the Collateral, the issuance of the Secured Note, the specific transactions contemplated hereby, and similar activities with respect to ownership and financing of other pools of loans, receivables and other financial assets; (d) seek dissolution or liquidation in whole or in part or reorganization of its business or affairs; (e) (A) permit the validity or effectiveness of this Agreement or any Grant hereunder or under the Collateral Agreement to be impaired, or permit the Lien of the Collateral Agreement to be amended, hypothecated, subordinated, terminated or discharged, or permit any Person to be released from any covenants or obligations under this Agreement, except as may be expressly permitted hereby, (B) permit any Lien, charge, security interest, mortgage or other encumbrance to be created on or to extend to or otherwise arise upon or burden the Collateral or any part thereof or any interest therein or the proceeds thereof other than the Lien of the Collateral Agent, or (C) permit the Lien of the Collateral Agreement not to constitute a valid first priority perfected security interest in the Collateral; (f) conduct its business or engage in any activity in violation of the provisions contained in its certificate of incorporation or amend Sections 3, 5, 6, 9 or 10 of its certificate of incorporation without the unanimous consent of all directors; (g) at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law or other law that would prohibit or forgive the Company from paying all or any portion of the principal of or interest on the Secured Note as contemplated herein or in the Secured Note, wherever enacted, now or at any time hereafter in force, or that may affect the covenants or the performance of this Agreement; and (to the extent that it may lawfully do so) the Company hereby expressly waives all benefit or advantage of any such law, and covenants that it will not hinder, delay or impede the execution of any power granted to the Collateral Agent, but will suffer and permit the execution of every such power as though no such law had been enacted; -27- 29 (h) issue or register the transfer of any of its Capital Stock to any Person other than DVIBC; (i) merge or consolidate with any other Person. The Company will keep all of its material assets within the United States at all times. The Company will not make any material change in its business; (j) take any action or permit any action to be taken by others which would release any Person from any of such Person's covenants or obligations under any Loan or any other instrument included in the Collateral, or which would result in the amendment, hypothecation, subordination, termination, or discharge of, or impair the validity or effectiveness of, any Loan, Loan Document or such other instrument, except as expressly provided in this Agreement or the Contribution and Servicing Agreement; (k) (1) commence any case, proceeding or other action under any existing or future bankruptcy, insolvency or similar law seeking to have an order for relief entered with respect to it, or seeking reorganization, arrangement, adjustment, wind-up, liquidation, dissolution, composition or other relief with respect to it or its debts, (2) seek appointment of a receiver, trustee, custodian or other similar official for it or any part of its assets, (3) make a general assignment for the benefit of creditors, or (4) take any action in furtherance of, or consenting or acquiescing in, any of the foregoing; (l) contract for, create, incur, assume or suffer to exist any Lien upon any of its property or assets, whether now owned or hereafter acquired, except for the Lien created by the Collateral Agreement; (m) contract for, create, incur, assume or suffer to exist any Indebtedness other than (x) the Secured Note and (y) trade payables and expense accruals incurred in the ordinary course and which are incidental to the Company's permitted activities; (n) make any loan or advance or credit to, or guarantee (directly or indirectly or by an instrument having the effect of assuring another's payment or performance on any obligation or capability of so doing, or otherwise), endorse (except for the endorsement of checks for collection or deposit) or otherwise become contingently liable, directly or indirectly, in connection with the obligations, stock or dividends of, or own, purchase, repurchase or acquire (or agree contingently to do so) any stock, obligations or securities of, or any other interest in, or make any capital contribution to, any other Person. SECTION VIII.7. Information as to the Company. The Company shall file with the Collateral Agent, the Lender and the Rating Agency: (a) within 15 days after it files them with the Commission, copies of the annual -28- 30 reports and of the information, documents and other reports (or copies of such portions of any of the foregoing as the Commission may by rules and regulations prescribe) which the Guarantor is required to file with the Commission pursuant to Section 13 or 15(d) of the Exchange Act. (b) immediately upon becoming aware of the existence of any condition or event which constitutes a Potential Event of Default or an Event of Default, a written notice describing its nature and period of existence and what action the Company is taking or proposes to take with respect thereto; and (c) promptly upon the Company's becoming aware of: (i) any proposed or pending investigation of it by any governmental authority or agency, or (ii) any pending or proposed court or administrative proceeding which involves or may involve the possibility, individually or in the aggregate, of materially and adversely affecting the properties, business, profits or condition (financial or otherwise) of the Company or the validity or enforceability of the Related Agreements, a written notice specifying the nature of such investigation or proceeding and what action the Company is taking or proposes to take with respect thereto and evaluating its merits. SECTION VIII.8. Payment of Taxes and Other Claims. The Company will pay or discharge or cause to be paid or discharged, before any penalty accrues from the failure to so pay or discharge, (1) all taxes, assessments and governmental charges levied or imposed upon the Company or upon the income, profits or property (including any property that is part of the Collateral) of the Company and (2) all lawful claims for labor, materials and supplies which, if unpaid, might by law become a Lien upon the property of the Company; provided, however, that the Company shall not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim the amount, applicability or validity of which is being contested in good faith by appropriate proceedings and for which adequate provision has been made or where the failure to effect such payment or discharge is not adverse in any material respect to the Lender. The Company and DVI are members of an affiliated group within the meaning of section 1504 of the Code which has filed, and will continue to file, a consolidated return for federal income tax purposes, and the Company shall be included in consolidated federal income tax returns filed by DVI for such affiliated group. SECTION VIII.9. Indemnification. The Company agrees to indemnify and hold harmless the Lender, the Collateral Agent, and their respective directors, officers, employees and agents) (each an "Indemnified Party") against any and all liabilities, losses, damages, penalties, costs and expenses (including the fees and expenses of counsel and the costs of -29- 31 defense and legal fees and expenses) which may be incurred or suffered by such Indemnified Party as a result of claims, actions, suits or judgments asserted or imposed against it and arising out of the transactions contemplated hereby or by the Contribution and Servicing Agreement, including, without limitation, any tort claims and any fines or penalties arising from any violation of the laws or regulations of the United States or any state or local government or governmental authority, except to the extent the foregoing result from the gross negligence, bad faith or willful misconduct of such Indemnified Party. SECTION VIII.10. Loan Documents to Collateral Agent. On or prior to each Funding Date, Addition Date or Substitute Date, as applicable, the Company shall deliver to the Collateral Agent the original counterpart of each Loan Document that constitutes "chattel paper" or an "instrument", as such terms are defined in the UCC. On the Initial Funding Date, the Company shall deliver to the Collateral Agent a computer disk containing the information set forth in Schedule 1 to this Agreement as of the Initial Funding Date. SECTION VIII.11. Collection of Moneys. If at any time the Company shall receive any payment on or in respect of any Loan or Receivables, it shall hold such payment in trust for the benefit of the Collateral Agent and the Lender, shall segregate such payment from the other property of the Company, and shall deliver such payment to the Collateral Agent by wire transfer of immediately available funds for deposit in the applicable Loan Accounts immediately upon the Company's receipt of available funds in respect of such payment. SECTION VIII.12. Opinion of Counsel. Within 10 Business Days after a request by the Lender (which shall not be made more frequently than once in any 6 month period), the Company shall deliver to the Collateral Agent, the Rating Agency and the Lender an Opinion of Counsel (which opinion may be delivered by internal counsel to the Guarantor, DVI or the Company) as to the continued perfection of the Collateral Agent's security interests in the Loans and the Receivables. SECTION VIII.13. Special Purpose Entity. The Company shall at all times be a Special Purpose Entity. SECTION 8.14. Daily Servicer Report. On or before 2:00 p.m. (New York City time) on each Business Day, the Servicer shall deliver to the Collateral Agent and the Lender a Daily Servicer Report, in substantially the form attached hereto as Exhibit G, specifying with respect to each Borrower: (i) the name of such Borrower, (ii) the outstanding principal balance of all Loans to such Borrower, (iii) the Borrowing Base for such Borrower, (iv) the Commitment for such Borrower, (v) the amount of collections received by such Borrower in respect of Eligible Receivables subject to the Lien of the Collateral Agent during the preceding 150 day period, (vi) the Lending Formula Amount for such Borrower and (vii) the amount of the unused credit available to be drawn on such day by such Borrower under its Revolving Credit Agreement, and also specifying (1) the outstanding Advance Balance on such date, (2) the sum of items (w), (x) and (y) in the definition of "Collateral Coverage Condition" and (3) -30- 32 whether the Collateral Coverage Condition is satisfied as of such date. ARTICLE IX CUSTODY OF RECEIVABLES DOCUMENTS; RELEASE OF FILES SECTION IX.1. Company as Custodian. (a) The Company shall act as custodian on behalf of the Lender and shall take and maintain custody of all documents and instruments evidencing or otherwise relating to the Receivables securing the Loans (the "Receivables Documents"), except for any Receivables Documents that constitute "chattel paper" or "instruments" under the UCC in effect in the jurisdiction governing the origination of such Receivable. The Company shall review the Receivables Documents upon receipt for completeness using such sampling or other techniques acceptable to the Lender. The Company shall store such Receivables Documents in locked storage locations specified in writing to the Lender. Such storage location shall be marked to indicate that a first priority security interest in the Receivables evidenced by such Receivables Documents has been granted to the Lender. Notwithstanding anything to the contrary contained herein, the Company and the Lender may provide for other custodial arrangements reasonably satisfactory to the Lender. The Company shall release any and all Receivables Documents to the Lender upon the Lender's request. (b) The Company, as custodian, shall not provide access to such Receivables Documents to any Person (other than the Servicer or designated employees performing the custodial function set forth herein) unless the Company has obtained the prior written consent of the Lender. The Company shall not release any Receivables Documents to any Person, other than (i) the Lender, unless Company has received the prior written consent of the Lender or (ii) to another custodian acceptable to the Lender pursuant to other custodial arrangements satisfactory to the Lender. SECTION IX.2. Release of Files following Payment of Secured Obligations. Upon payment in full of the Secured Obligations the Lender agrees to direct the Collateral Agent in writing to deliver to the Company, at the Company's expense, (a) a letter specifying that the Collateral Agent has no further interest in the related Loan Documents and (b) such instruments necessary to release the Collateral Agent's Lien for the benefit of the Lender thereon. ARTICLE X EVENTS OF DEFAULT SECTION X.1. Events of Default. "Event of Default," wherever used herein, means any one of the following (whatever the reason for such Event of Default and whether it shall be -31- 33 voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (a) failure of the Company to make any payment of Monthly Interest on any Payment Date, which failure continues for one day; (b) failure of the Company to make any payment of (A) Monthly Principal, or (B) any other amount due and owing under this Agreement or the Secured Note when it becomes due and payable; (c) default in the performance, or breach, of any covenant set forth in Section 8.2, 8.5(c) or 8.6; (d) default in the performance, or breach, of any covenant of the Company in this Agreement, the Secured Note or the Collateral Agreement (other than a default described in (a), (b) or (c) above), the Contribution and Servicing Agreement or the other Related Agreements and continuance of such default or breach for a period of 30 days after the earliest of (A) any officer of the Company first acquiring knowledge thereof and (B) the Collateral Agent's giving written notice thereof to the Company; (e) a default by the Company that continues beyond the grace period under any other indebtedness or a failure by the Company to pay an uncontested judgment in an amount in excess of $100,000; (f) if any representation or warranty of the Company or the Seller made in this Agreement or the Contribution and Servicing Agreement or any other writing provided to the Lender in connection with the foregoing documents shall prove to be incorrect in any material respect as of the time when the same shall have been made; provided, however, that the breach of any representation or warranty made by the Seller in Section 2.03 or 2.04 of the Contribution and Servicing Agreement with respect to any of the Loans subject thereto shall not constitute an Event of Default if the Seller substitutes one or more Substitute Loans in compliance with the requirements set forth in Section 7.01 of the Contribution and Servicing Agreement or repurchases such Loan and the related Receivables in compliance with the requirements set forth in Section 5.02 of the Contribution and Servicing Agreement; provided further that a breach of a representation or warranty contained in Section 7.2(g) or (h) which does not result from a violation or breach of the requirements of Section 2.12 or Section 2.13 shall not constitute an Event of Default pursuant to this Section 10.1(f) (the foregoing shall not be deemed to affect or limit any rights or remedies the Lender may have pursuant to other provisions of this Agreement or any other Related Agreement); (g) the entry by a court having jurisdiction in the premises of (A) a decree or -32- 34 order for relief in respect of any of the Guarantor, the Seller or the Company in an involuntary case or proceeding under any applicable federal or state bankruptcy, insolvency, reorganization, or other similar law or (B) a decree or order adjudging any of the Guarantor, the Seller or the Company a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjustment, or composition of or in respect of any such Person under any applicable federal or state law, or appointing a custodian, receiver, liquidator, assignee, trustee, sequestrator, or other similar official of any such Person or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and the continuance of any such decree or order for relief or any such other decree or order unstayed and in effect for a period of 60 consecutive days; (h) the commencement by any of the Guarantor, the Seller or the Company of a voluntary case or proceeding under any applicable federal or state bankruptcy, insolvency, reorganization, or other similar law or of any other case or proceeding to be adjudicated a bankrupt or insolvent, or the consent by it to the entry of a decree or order for relief in respect of any of the Guarantor, the Seller or the Company in an involuntary case or proceeding under any applicable federal or state bankruptcy, insolvency, reorganization, or other similar law or to the commencement of any bankruptcy or insolvency case or proceeding against it, or the filing by it of a petition or answer or consent seeking reorganization or relief under any applicable federal or state law, or the consent by it to the filing of such petition or to the appointment of or taking possession by a custodian, receiver, liquidator, assignee, trustee, sequestrator, or similar official of any such Person or of any substantial part of its property, or the making by it of an assignment for the benefit of creditors, or the failure of any such Person to pay its debts generally as they become due, or the taking of corporate action by any such Person in furtherance of any such action; (i) any Guarantor Event of Default shall have occurred and then be continuing; (j) the Asset Coverage Percentage shall be less than 125% on any day; (k) the Servicer shall fail to deliver the Servicer Report for a monthly reporting period to the Lender and the Rating Agency on or before the applicable Determination Date; (l) the Guarantor shall fail to be the owner, of record and beneficially, of 100% of all outstanding capital stock, of all classes of the Seller or the Seller shall fail to be the owner, of record and beneficially, of 100% of all outstanding capital stock, of all classes of the Company; (m) the Company shall fail to satisfy the Collateral Coverage Condition and such failure shall continue unremedied for a period of one day after the earlier of (a) the -33- 35 Company becoming aware of such failure or (b) the completion and delivery of the next succeeding Servicer Report as required under the Contribution and Servicing Agreement; (n) the amount of funds on deposit in the Cash Collateral Account shall be less than the Required Cash Collateral Account Balance and such deficiency continues unremedied for a period of one day after the earlier of (a) the Company becoming aware of such deficiency or (b) the completion and delivery of the next succeeding Servicer Report as required under the Contribution and Servicing Agreement; (o) there shall occur a Change of Control with respect to DVI; (p) there shall occur default in the performance, or breach, of any covenant of the Company, the Guarantor, the Seller or the Servicer contained in any material agreement (other than a default described in any other provision of this Section 10.1), which default or breach continues for a period of 15 days after the earliest of (A) any officer of the Company, the Guarantor, the Seller or the Servicer first acquiring knowledge thereof and (B) the Collateral Agent's giving written notice thereof to the Company, the Guarantor, the Seller or the Servicer, as applicable and could have a material adverse effect on (1) the financial condition, assets or operations of the Company, the Servicer, the Guarantor, (2) the ability of the Company, the Servicer, the Guarantor to perform its respective obligations under any Related Agreement, (3) on the enforceability of any Related Agreement or (4) on the priority or perfection of the Collateral Agent's Lien on the Collateral; (q) any event shall occur or condition exist which could have a material adverse effect on (1) the financial condition, assets or operations of the Company, the Servicer, the Guarantor, (2) the ability of the Company, the Servicer, the Guarantor to perform its respective obligations under any Related Agreement, (3) on the enforceability of any Related Agreement or (4) on the priority or perfection of the Collateral Agent's Lien on the Collateral; or (r) a Servicer Event of Default shall have occurred and be continuing. Upon the occurrence of an Event of Default pursuant to clause (a) of this Section 10.1, the Company shall have the right, within five (5) Business Days after receipt of written notice thereof from the Collateral Agent of the occurrence of such Event of Default, to cure such Event of Default by making payment to the Collateral Agent of such unpaid amount plus interest thereon at a rate per annum equal to the Applicable Rate. If the Company makes such payment within such timeframe, no Event of Default shall exist pursuant to clause (a) of this Section 10.1. SECTION X.2. Remedies Upon Default. (a) During the continuance of one or more -34- 36 Events of Default the Lender may immediately declare the principal of the Secured Note to be immediately due and payable, together with all interest thereon and fees, expenses and other amounts owing under this Agreement; provided that, upon the occurrence of the Event of Default referred to in 10.1(g) or (h), such amounts shall immediately and automatically become due and payable without any further action by any person or entity. Upon such declaration or such automatic acceleration, the balance then outstanding on the Secured Note shall become immediately due and payable without presentation, demand or further notice of any kind to the Company. (b) During the continuance of one or more Events of Default, the Lender shall have the right to obtain physical possession of all files of the Company relating to the Collateral and all documents relating to the Collateral which are then or may thereafter come in to the possession of the Company or any third party acting for the Company. The Lender shall be entitled to specific performance of all agreements of the Company contained in this Agreement, the Contribution and Servicing Agreement and the Collateral Agreement. (c) During the continuance of one or more Events of Default, the Lender shall have the right to withdraw all funds on deposit in the Loan Accounts, the Concentration Account and the Cash Collateral Account for application to pay amounts due to the Lender under the Secured Note, the Secured Credit Line Agreement, the Contribution and Servicing Agreement, the Guaranty and the Collateral Agreement, collect and receive all further payments made on the Collateral, and if any such payments are received by the Company, the Company shall not commingle the amounts received with other funds of the Company and shall promptly pay them over to the Lender. In addition, the Lender shall have the right to dispose of the Collateral as provided herein, or as provided in the other documents executed in connection herewith, or in any commercially reasonable manner, or as provided by law. Such disposition may be on either a servicing-released or a servicing-retained basis at the sole option of the Lender. The Lender shall have all other rights of secured lenders under applicable law. The Lender shall be entitled to place the Loans which it recovers after an Event of Default in a pool for issuance of asset-backed securities and to sell such securities subject to the applicable requirements of the New York UCC. The Lender shall also be entitled to sell any or all of such Loans individually subject to the applicable requirements of the New York UCC. The specification in this Section of manners of disposition of collateral as being commercially reasonable shall not preclude the use of other commercially reasonable methods (as contemplated by the New York UCC) at the option of the Lender. (d) After the occurrence and during the continuance of an Event of Default, the Lender shall have the right to appropriate and apply to the payment of the Secured Obligations (whether or not then due) any and all balances, credits, deposits, accounts or moneys of the Company or DVI then or thereafter maintained with the Lender. (e) All rights and remedies of the Lender may be exercised by the Collateral Agent on the Lender's behalf. -35- 37 SECTION X.3. No Waiver. The failure to exercise any of the rights and remedies set forth in this Agreement shall not constitute a waiver of the right to exercise the same or any other option at any subsequent time in respect of the same Event of Default or any other Event of Default. The acceptance by the Lender of any payment hereunder which is less than payment in full of all amounts due and payable at the time of such payment shall not constitute a waiver of the right to exercise any of the foregoing rights and remedies at that time or at any subsequent time or nullify any prior exercise of any such rights and remedies without the express consent of Lender, except as and to the extent otherwise provided by law. SECTION X.4. Limitation. In any action or proceeding involving any state corporate law, or any state or Federal bankruptcy, insolvency, reorganization, fraudulent transfer or other law affecting the rights of creditors generally, if the security interest and lien created by the Company under the Collateral Agreement would otherwise, taking into account the provisions of this Section 10.4, be held or determined to be void, invalid or unenforceable on account of the amount of the Collateral subject to such security interest and lien, then, notwithstanding any other provision hereof of the contrary, the amount of such Collateral shall, without any further action by the Company, the Lender or any other Person, be automatically limited and reduced to the highest amount that is valid and enforceable as determined in such action or proceeding. ARTICLE XI MISCELLANEOUS SECTION XI.1. Power of Attorney. The Company hereby authorizes the Lender, at the Company's expense, to file such financing statement or statements relating to the Collateral without the Company's signature thereon as the Lender at its option may deem reasonably appropriate, and appoints the Lender as the Company's attorney-in-fact to execute any such financing statement or statements in the Company's name and to perform all other acts which the Lender deems appropriate to perfect and continue the security interest granted hereby, and to protect, preserve and upon the occurrence and during the continuance of an Event of Default realize upon the Collateral, including the right to endorse notes, complete blanks in documents and sign assignments on behalf of the Company as its attorney-in-fact. This Power of Attorney is coupled with an interest and is irrevocable without the Lender's consent. SECTION XI.2. Nature of Agreement. This Agreement shall be governed by New York Law, and, together with the Collateral Agreement, constitute a security agreement within the meaning of the New York UCC. SECTION XI.3. Intent. It is understood each of the parties intends that the Lender's rights to liquidate the Loans delivered to it hereunder or to exercise any other remedies pursuant to Section 10.2, is a contractual right to liquidate such Loans as described in Section -36- 38 555 and 559 of Title 11 of the United States Code, as amended, subject only to Company's rights hereunder. SECTION XI.4. Assignment. No assignment by the Company of this Agreement shall be permitted without the prior written consent of Lender. The Company acknowledges that the Lender may pledge, assign, sell, transfer, grant a security interest in or convey by any means, including by means of a repurchase agreement, the Secured Note and the related Collateral, by pledge or assignment of the Secured Note and/or such Collateral, and the Company waives any and all claims, rights, demands, causes of action and remedies relating to such action by the Lender. SECTION XI.5. Lender May Act Through Affiliates or Agents. The Lender may, from time to time, designate one or more Affiliates or agents for the purpose of performing any action hereunder. SECTION XI.6. Notices. All demands, notices and communications relating to this Agreement shall be in writing and shall be deemed to have been duly given if mailed, by first-class, registered or certified mail, return receipt requested, by overnight courier, by personal delivery or by telecopier transmission with electronic confirmation of receipt, in each case, to the other party or parties at the address shown below, or such other address as may hereafter be furnished to the other party or parties by like notice. Any such demand, notice or communication hereunder shall be deemed to have been received on the date delivered to or received at the premises of the addressee (as evidenced, in the case of registered or certified mail, by the date noted on the return receipt or, in the case of telecopier transmission, by an electronic confirmation of receipt). If to the Company: DVI Business Credit Receivables Corp. II 500 Hyde Park Doylestown, Pennsylvania 18901 Attention: Stephen Garfinkel Telephone: 215-230-2929 Fax Number: 215-230-3537 with a copy to: DVI Business Credit Corporation 4041 MacArthur Blvd. Newport Beach, CA 92660 Attention: Anthony Turek Telephone: 714-474-5827 Fax Number: 714-474-6199 -37- 39 If to the Lender: CS First Boston 55 East 52nd Street New York, NY 10055 Attention: Walter P. Fekula, Director, Credit Telephone: 212-909-3063 Fax Number: 212-318-0533 If to the Collateral Agent: Bankers Trust Company Four Albany Street New York, New York 10006 Attention: Corporate Trust and Agency Group - Structured Finance Telephone: 212-250-6652 Fax Number: 212-250-6439/6684 SECTION XI.7. No Oral Modifications; Successors and Assigns. No provisions of this Agreement shall be waived or modified except by a writing duly signed by the authorized agents of the Lender and the Company. This Agreement shall be binding upon the successors and assigns of the parties hereto; provided that, this Agreement shall not be assignable by the Company without the prior written consent of the Lender. SECTION XI.8. Third Party Beneficiary. The Collateral Agent shall be a third-party beneficiary of this Secured Credit Line Agreement with respect to, and to the extent of, the rights and benefits granted to the Collateral Agent herein. -38- 40 IN WITNESS WHEREOF, the parties have executed this Agreement the day and year first above written: DVI BUSINESS CREDIT RECEIVABLES CORP. II By: ___________________________________ Name: Title: CS FIRST BOSTON MORTGAGE CAPITAL CORP., as Lender By: ___________________________________ Name: Title: DVIBC, as Servicer By: ___________________________________ Name: Title: 41 TABLE OF CONTENTS Section Page ARTICLE I DEFINED TERMS SECTION 1.1. Definitions............................................... 1 ARTICLE II ADVANCES SECTION 2.1. The Advances.............................................. 2 SECTION 2.2. Advance Amount............................................ 2 SECTION 2.3. Termination Date; Maturity of Advances.................... 3 SECTION 2.4. Prepayment................................................ 3 SECTION 2.5. Extension Option.......................................... 3 SECTION 2.6. Payment of Interest and Principal......................... 3 SECTION 2.7. Secured Note.............................................. 3 SECTION 2.8. Form of Payment........................................... 3 SECTION 2.9. Allocation of Collections................................. 4 SECTION 2.10. Securitized Offering...................................... 6 SECTION 2.11. Conditions to the Making of Advances...................... 6 SECTION 2.12. Eligible Payor Concentration Tests........................ 10 SECTION 2.13. Borrower Concentration Tests.............................. 10 SECTION 2.14 Additional Borrowers; Borrower Defaults................... 11 SECTION 2.15. Certain Waivers........................................... 11 SECTION 2.16. Determination of LIBOR.................................... 12 ARTICLE III USE OF PROCEEDS; GRANT OF SECURITY INTEREST SECTION 3.1. Purpose of Loan........................................... 13 SECTION 3.2. Grant of Security Interest................................ 13 SECTION 3.3. Borrower Lockbox Accounts................................. 13 ARTICLE IV FINANCING STATEMENTS SECTION 4.1. UCC Financing Statements.................................. 13 -i- 42 ARTICLE V THE CASH COLLATERAL ACCOUNT SECTION 5.1. Cash Collateral Account................................... 14 ARTICLE VI THE GUARANTY SECTION 6.1. Claims on Guaranty........................................ 14 ARTICLE VII REPRESENTATIONS AND WARRANTIES SECTION 7.1. Representations and Warranties of the Company............. 15 SECTION 7.2. Representations and Warranties Regarding Loans and Receivables............................................... 18 SECTION 7.3. Representations and Warranties of the Servicer............ 21 SECTION 7.4. Enforcement of Rights Against the Seller and Borrowers.... 23 SECTION 7.5. Purchase Upon Breach; Contribution and Servicing Agreement 23 SECTION 7.6. Release of Loans Following Substitution or Purchase....... 24 SECTION 7.7. Release of Loans Upon Final Payment....................... 24 ARTICLE VIII COVENANTS SECTION 8.1. Covenants................................................. 24 SECTION 8.2. Corporate Existence, Etc.................................. 24 SECTION 8.3. Protection of Collateral; Further Assurances.............. 25 SECTION 8.4. Compliance Certificates................................... 26 SECTION 8.5. Performance of Obligations................................ 26 SECTION 8.6. Negative Covenants........................................ 27 SECTION 8.7. Information as to the Company............................. 28 SECTION 8.8. Payment of Taxes and Other Claims......................... 29 SECTION 8.9. Indemnification........................................... 29 SECTION 8.10. Loan Documents to Collate................................. 30 SECTION 8.11. Collection of Moneys...................................... 30 SECTION 8.12. Opinion of Counsel........................................ 30 SECTION 8.13. Special Purpose Entity.................................... 30 SECTION 8.14. Daily Servicer Report..................................... 30 -ii- 43 ARTICLE IX CUSTODY OF RECEIVABLES DOCUMENTS; RELEASE OF FILES SECTION 9.1. Company as Custodian...................................... 31 SECTION 9.2. Release of Files following Payment of Secured Obligations. 31 ARTICLE X EVENTS OF DEFAULT SECTION 10.1. Events of Default......................................... 31 SECTION 10.2. Remedies Upon Default..................................... 34 SECTION 10.3. No Waiver................................................. 35 SECTION 10.4. Limitation................................................ 36 ARTICLE XI MISCELLANEOUS SECTION 11.1. Power of Attorney......................................... 36 SECTION 11.2. Nature of Agreement....................................... 36 SECTION 11.3. Intent.................................................... 36 SECTION 11.4. Assignment................................................ 37 SECTION 11.5. Lender May Act Through Affiliates or Agents............... 37 SECTION 11.6. Notices................................................... 37 SECTION 11.7. No Oral Modifications; Successors and Assigns............. 38 SECTION 11.8. Third Party Beneficiary................................... 38 APPENDIX A - Defined Terms EXHIBIT A - Form of Secured Note EXHIBIT B - Form of Confirmation EXHIBIT C - Form of Revolving Credit Agreement EXHIBIT D - Form of Claim on Guaranty SCHEDULE 1 - Required Information SCHEDULE 2 - Eligible Payor Concentration Limits SCHEDULE 3 - Borrower Concentration Tests SCHEDULE 7.2(q) - Provider Lockbox Accounts EXHIBIT E - Form of Reborrowing Certificate EXHIBIT F - Form of Borrowing Notice EXHIBIT G - Form of Daily Servicer Report -iii- 44 EXHIBIT A FORM OF SECURED NOTE 45 EXHIBIT B FORM OF CONFIRMATION DVI BUSINESS CREDIT RECEIVABLES CORP., II, as Company ___________ __, ____ This letter hereby confirms that CS First Boston Mortgage Capital Corp., as Lender under the Secured Credit Line Agreement, dated August 22, 1996, between the Company, DVI Business Credit Corporation, as Servicer, and us (the "Secured Credit Line Agreement") made an Advance in the amount of $___________ to the Company on _______, ____. The Company's acceptance of the proceeds of the aforementioned Advance shall constitute your agreement to the statements made in and the terms of this Confirmation letter. All capitalized terms used and not otherwise defined herein shall have the meanings ascribed to them in the Secured Credit Line Agreement. CS FIRST BOSTON MORTGAGE CAPITAL CORP. By: ___________________________ Name: Title: 46 EXHIBIT C FORM OF REVOLVING CREDIT AGREEMENT 47 EXHIBIT D FORM OF CLAIM ON GUARANTY DVI, Inc., as Guarantor _______________, ____ Re: Guaranty (the "Guaranty") dated as of August 22, 1996 given by DVI, Inc. in connection with the Secured Credit Line Agreement (the "Secured Credit Line Agreement") dated as of August 22, 1996 among DVI Business Credit Receivables Corp. II, as borrower, DVI Business Credit Corporation, as servicer, and CS First Boston Mortgage Capital Corp. (the "Lender"), as lender Bankers Trust Company (the "Collateral Agent"), as Collateral Agent for the Lender, hereby notifies you that (a) the Monthly Interest payable on the _________, 199__ Payment Date (the "Applicable Payment Date") is $_______, (b) the Monthly Principal payable on the Applicable Payment Date is $________ (c) the aggregate funds on deposit in the Loan Accounts on the date hereof which, together with amounts withdrawn from the Cash Collateral Account pursuant to the provisions of the Secured Credit Line Agreement, are available to pay the Monthly Interest and Monthly Principal payable on the Applicable Payment Date are $________, and (d) the additional funds needed to pay the Monthly Interest and Monthly Principal payable on the Applicable Payment Date are $_________ (the "Shortfall"). Accordingly, the Collateral Agent hereby makes demand on DVI, Inc. under the Guaranty in the amount of the Shortfall and directs DVI, Inc. to make payment under the Guaranty and deliver to the Collateral Agent immediately, in immediately available funds, the amount of the Shortfall. Capitalized terms used herein but not defined herein shall have the meaning specified in the Definitions List attached as Appendix A to the Secured Credit Line Agreement. BANKERS TRUST COMPANY, as Collateral Agent By: ______________________ Name: Title: 48 EXHIBIT E FORM OF REBORROWING CERTIFICATE BANKERS TRUST COMPANY, as Collateral Agent CS FIRST BOSTON MORTGAGE CAPITAL CORP., as Lender ___________ __, ____ The undersigned, an Authorized Officer of DVI Business Credit Receivables Corp. II, (the "Company"), pursuant to Section 2.9(d) of the Secured Credit Line Agreement (the "Secured Credit Line Agreement") dated as of August 22, 1996 among the Company, as borrower, DVI Business Credit Corporation, as servicer, and CS First Boston Mortgage Capital Corp., as lender, hereby certifies and requests the following on behalf of the Company: (1) The Company requests that $________ be withdrawn from the Principal Account and distributed to each Borrower on behalf of the Company in accordance with the table below and in accordance with the Wire Instructions for such Borrower. (2) The proceeds requested in (1) above will be used to acquire one or more Loans from the Contributor. The following table details the name of the Borrower under each Loan to be acquired, the aggregate principal balance of Loans to be acquired with respect to each Borrower, the amount specified in the Daily Servicer Report for the date hereof as the amount available to be drawn by such Borrower on the date hereof under its Revolving Credit Agreement and the amount to be distributed from the Principal Account to each Borrower:
================================================================================ Available Amount to be Principal Credit as Transferred to Balance of Specified in Borrower from Borrower Loans to be Daily Servicer the Principal Acquired Report Account - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ================================================================================
(3) No Event of Default or Potential Event of Default has occurred which is 49 continuing or would result from the application of the Reborrowing Amount. (4) The proposed use of the proceeds of the Reborrowing Amount will not cause the requirements of Section 2.12, 2.13, or 2.14 of the Secured Credit Line Agreement to be violated, and all conditions precedent provided for in Section 2.14 have been met and fulfilled. The Company hereby directs the Collateral Agent to wire transfer to each Borrower specified in the table above, from the funds on deposit in the Principal Account in accordance with the Wire Instructions for such Borrower, the amount specified for such Borrower in the table above. All capitalized terms used and not otherwise defined herein shall have the meanings ascribed to them in the Secured Credit Line Agreement. DVI BUSINESS CREDIT RECEIVABLES CORP. II By: ___________________________ Name: Title: 50 EXHIBIT F FORM OF BORROWING NOTICE BANKERS TRUST COMPANY, as Collateral Agent CS FIRST BOSTON MORTGAGE CAPITAL CORP., as Lender DUFF & PHELPS CREDIT RATING CO., as Rating Agency ___________ __, ____ The undersigned, an Authorized Officer of DVI Business Credit Receivables Corp. II, (the "Company"), pursuant to Section 2.11(b) of the Secured Credit Line Agreement (the "Secured Credit Line Agreement") dated as of August 22, 1996 among the Company, as borrower, DVI Business Credit Corporation, as servicer, and CS First Boston Mortgage Capital Corp., as lender, hereby certifies and requests the following on behalf of the Company: (1) The Company requests that the Lender make an Advance in the amount of $________. (2) The proceeds requested in (1) above will be used to acquire one or more Loans. The following table details the name of the Borrower under each Loan to be acquired, the aggregate principal balance of Loans to be acquired with respect to each Borrower, the amount specified in the Daily Servicer Report for the date hereof as the amount available to be drawn by such Borrower on the date hereof under its Revolving Credit Agreement and the portion of such Advance allocable to the Loans of such Borrower:
================================================================================ Available Portion of Principal Credit as Advance Balance of Specified in Allocable to Borrower Loans to be Daily Servicer Borrower Acquired Report - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ================================================================================
51 (3) The Company hereby represents and warrants that (i) the representations and warranties contained in Sections 7.1 and 7.2 of the Secured Credit Line Agreement are true and correct (in all material respects to the extent any such representations and warranties do not incorporate a materiality limitation in their terms) on and as of the date hereof, (ii) no Event of Default, Potential Event of Default or Servicer Event of Default has occurred and is continuing or would result from the making of the Advance requested hereunder and (iii) all other conditions precedent to the making of the Advance requested hereunder pursuant to the Secured Credit Line Agreement have been satisfied in all respects as of the date hereof. The Company hereby directs the Lender to wire transfer to the Company the amount specified in item (1). All capitalized terms used and not otherwise defined herein shall have the meanings ascribed to them in the Secured Credit Line Agreement. DVI BUSINESS CREDIT RECEIVABLES CORP. II By: ___________________________ Name: Title: 52 EXHIBIT G FORM OF DAILY SERVICER REPORT CS FIRST BOSTON MORTGAGE CAPITAL CORP., as Lender BANKERS TRUST COMPANY, as Collateral Agent ___________ __, ____ The undersigned, an Authorized Officer of DVI Business Credit Corporation, (the "Servicer"), pursuant to Section 8.14 of the Secured Credit Line Agreement (the "Secured Credit Line Agreement") dated as of August 22, 1996 among DVI Business Credit Receivables Corp., II, as borrower, the Servicer, and CS First Boston Mortgage Capital Corp., as lender, hereby certifies on behalf of the Servicer that: (1) The following table details the amount available to be drawn by each Borrower under its Revolving Credit Agreement on the date hereof:
====================================================================================== Borrower Aggregate Borrowing Commitment Collections Lending Amount of Principal Base on Formula Credit Balance of Eligible Amount Available Loans Receivables* to Be Drawn Outstanding - -------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------- ======================================================================================
(2) The outstanding Advance Balance on the date hereof is $____________. (3) The sum of voluntary capital contributions made by the Seller to the Company pursuant to Section 1.02(g) of the Contribution and Servicing Agreement which amounts shall then be held in the Cash Collateral Account, the unpaid principal balance of all Eligible Loans then subject to the Lein of the Collateral Agreement and Principal Collections on deposit in the Principal Account is $___________. __________________ * During the 150 day period preceding the date hereof. 53 (4) As of the date hereof, the Collateral Coverage Condition [is] [is not] satisfied in that the sum indicated in (3) above [equals or exceeds] [is less than] the Advance Balance. All capitalized terms used and not otherwise defined herein shall have the meanings ascribed to them in the Secured Credit Line Agreement. DVI BUSINESS CREDIT CORPORATION By: ___________________________ Name: Title: 54 SCHEDULE 1 REQUIRED INFORMATION - - THREE YEARS OF FINANCIAL STATEMENTS If the provider does not have audited financial statement, include reviewed financial statements. Audited financial statements are mandatory for any provider receiving in excess of $2 million of financing. - - PROVIDER NARRATIVE (INCLUDING THE FOLLOWING SECTIONS) 1. Business overview 2. Personnel 3. Contractual Allowance procedures 4. Billing procedures 5. Payor remittances procedures 6. Collection procedures 7. Information technology capabilities 8. Litigation Review - Material Litigation involving LEXIS/NEXIS search 9. General observations and concerns with provider - - CONTRACTUAL ALLOWANCE DERIVATION Please include a brief summary of how DVI developed the contractual allowance value for each provider. - - INITIAL BORROWING BASE/PURCHASE--one page analysis netting down from Gross Receivables to Advanced Amount - - NEW SELLER FORM This form should include seller specific information regarding its pool of receivables, such as 55 - Financial class stratification for purchased receivables (including Medicare, Medicaid, commercial insurers, CHAMPUS, CHAMPVA, Blue Cross/Blue Shield and managed care) - Aging of receivables financed (by the following aging buckets: 0-30, 31-60, 61-90, 91-120, 121-150) - All Commercial Payors greater than 1% of the Loan to the Provider (list the Payors, the ratings and the exposure) - Medicare and Medicaid Offset experience over the past 3 years, and that value multiplied by 1.5X -2- 56 SCHEDULE 2 ELIGIBLE PAYOR CONCENTRATION LIMITS PAYOR CLASS MAXIMUM PERCENTAGE OF BORROWING BASE (ii) Eligible Receivables payable by 15% Blue Cross and Blue Shield plans (iii) Eligible Receivables payable by 20%(1) any one state Medicaid program (iv) Eligible Receivables payable by 5% any one Blue Cross and Blue Shield plan (v) Eligible Receivables payable by 20% any commercial insurer, HMO or PPO if such payor has a long-term rating of "AAA" from DCR or if such payor is not rated by DCR then has a long-term rating of "AAA" from Standard & Poor's Rating Agency ("S&P") (vi) Eligible Receivables payable by 15% any commercial insurer, HMO or PPO if such payor has a long-term rating of "AA-" or better but less than "AAA" from DCR or if such payor is not rated by DCR then has a long-term rating of "AA-" or better but than "AAA" from S&P (vii) Eligible Receivables payable by 7.5% any commercial insurer, HMO or PPO if such payor has a long-term rating of "A-" or better but less than "AA" from DCR or if such payor is not rated by DCR then has a long-term rating of "A-" or better but less than "AA-" from S&P (viii) Eligible Receivables payable by 5% any commercial insurer, HMO or PPO if such payor has a long-term rating of 57 MAXIMUM PERCENTAGE OF BORROWING PAYOR CLASS BASE "BBB-" or better but less than "A-" from DCR or if such payor is not rated by DCR then has a long-term rating of "BBB-" or better but less than "A-" from S&P (ix) Eligible Receivables payable by 5% any commercial insurer, HMO or PPO if such payor has a long-term rating of below "BBB-" from DCR and for payors which are unrated by DCR, which have long-term ratings below "BBB-" from S&P (x) Eligible Receivables payable by 3% any one institutional Payor (1) Plus a 15% cash reserve for any excess over 20%. 58 SCHEDULE 3 BORROWER CONCENTRATION TESTS
TOTAL LOAN AMOUNT(1) ----------------------------------------------------------- BORROWERS $0-$9 $10-$15 $16 - $24 $25 - $39 $40-$50 - -------------------------------------------------------------------------------- Maximum Loan Amount $3.00 $3.00 $4.00 15% 15% for the largest Borrower Maximum Loan Amount $1.50 $2.50 $3.00 10% 10% for all other Borrowers Aggregate Loan $9.00 $11.50 $13.00 55% 55% Amount for the five largest Borrowers Maximum Loan Amount $3.00 $4.00 $5.25 20% 20% for the largest SPC Borrower Maximum Loan Amount $1.50 $2.75 $3.50 20% 20% for all other SPC Borrowers
- ------------------ (1) In millions of dollars or as a percentage of the total Loan amount. 59 SCHEDULE 7.2(q) BORROWER LOCKBOX ACCOUNTS NONE EX-10.15 3 LOAN AND SECURITY AGREEMENT 1 EXHIBIT 10.15 LOAN AND SECURITY AGREEMENT ----------------------------- DATED AS OF SEPTEMBER 6, 1996 ------------------------------ DVI FINANCIAL SERVICES INC. AS BORROWER AND LEHMAN COMMERCIAL PAPER INC. AS LENDER 2 TABLE OF CONTENTS Page RECITALS.......................................................................1 SECTION 1. DEFINITIONS AND ACCOUNTING MATTERS.................................1 1.01 Certain Defined Terms...........................................1 1.02 Accounting Terms and Determinations............................10 SECTION 2. LOANS, NOTE AND PREPAYMENTS.......................................11 2.01 Loans..........................................................11 2.02 Note...........................................................11 2.03 Procedure for Borrowing........................................11 2.04 Repayment of Loans; Interest...................................13 2.05 Optional Prepayments...........................................13 2.06 Mandatory Prepayment or Pledge.................................14 2.07 Indemnity......................................................14 2.08 Purpose of Loans...............................................14 SECTION 3. PAYMENTS; COMPUTATIONS; ETC.......................................14 3.01 Payments.......................................................14 3.02 Computations...................................................15 SECTION 4. COLLATERAL SECURITY...............................................15 4.01 Collateral; Security Interest..................................15 4.02 Further Documentation..........................................16 4.03 Changes in Locations, Name, etc................................16 4.04 Lender's Appointment as Attorney-in-Fact.......................16 4.05 Performance by Lender of Borrower's Obligations................18 4.06 Proceeds.......................................................18 4.07 Remedies.......................................................18 4.08 Limitation on Duties Regarding Presentation of Collateral......19 4.09 Powers Coupled with an Interest................................19 4.10 Release of Security Interest...................................20 3 TABLE OF CONTENTS (Continued) Page ---- SECTION 5. CONDITIONS PRECEDENT..............................................20 5.01 Initial Loan...................................................20 5.02 Initial and Subsequent Loans...................................22 SECTION 6. REPRESENTATIONS AND WARRANTIES....................................23 6.01 Financial Condition............................................23 6.02 No Change......................................................24 6.03 Corporate Existence; Compliance with Law.......................24 6.04 Corporate Power; Authorization; Enforceable Obligations........24 6.05 No Legal Bar...................................................25 6.06 No Material Litigation.........................................25 6.07 No Default.....................................................25 6.08 Collateral; Collateral Security................................25 6.09 Chief Executive Office.........................................26 6.10 Location of Books and Records..................................26 6.11 No Burdensome Restrictions.....................................26 6.12 Taxes..........................................................26 6.13 Margin Regulations.............................................26 6.14 Investment Company Act; Other Regulations......................26 6.15 Subsidiaries...................................................26 6.16 Third Party Representations....................................27 6.17 Eligible Contracts.............................................27 6.18 Bulk Transfer..................................................27 6.19 Origination and Collections of Contracts.......................27 6.20 No Adverse Selection...........................................27 6.21 Contracts are Financing Leases or Security Agreements..........27 6.22 Borrower Solvent...............................................27 6.23 ERISA..........................................................27 6.24 Environmental Matters..........................................28 SECTION 7. COVENANTS OF THE BORROWER.........................................28 7.01 Financial Statements...........................................29 7.02 Existence, Etc.................................................29 -2- 4 TABLE OF CONTENTS (Continued) Page ---- 7.03 Insurance......................................................30 7.04 Prohibition of Fundamental Changes.............................30 7.05 Notices........................................................30 7.06 Periodic Due Diligence Review..................................31 7.07 Limitation on Liens on Collateral..............................31 7.08 Certain Equipment Leases; Certain Equipment Loans..............31 7.09 Underwriting Guidelines........................................32 7.10 Limitation on Transactions with Affiliates.....................32 7.11 Limitation on Changes in Fiscal Year...........................32 7.12 Limitation on Lines of Business................................32 7.13 Limitations on Modifications, Waivers and Extensions of Contracts.................................................33 7.14 Further Identification of Collateral...........................33 7.15 Limitation on Collection Account...............................33 7.16 Limitation on Sale or Other Disposition of Collateral..........33 7.17 Repayment of Loans if Contract is Found Defective..............34 7.18 Monthly Officer's Certificate..................................34 7.19 Data Pool Report...............................................34 SECTION 8. EVENTS OF DEFAULT.................................................34 SECTION 9. REMEDIES UPON DEFAULT.............................................37 SECTION 10. NO DUTY ON LENDER'S PART.........................................37 SECTION 11. MISCELLANEOUS....................................................38 11.01 Waiver........................................................38 11.02 Notices.......................................................38 11.03 Indemnification and Expenses..................................38 11.04 Amendments....................................................39 11.05 Successors and Assigns, Etc...................................39 11.06 Survival......................................................39 11.07 Captions......................................................40 11.08 Counterparts..................................................40 11.09 Loan Agreement Constitutes Security Agreement; Governing Law..40 -3- 5 TABLE OF CONTENTS (Continued) Page ---- 11.10 SUBMISSION TO JURISDICTION; WAIVERS...........................40 11.11 WAIVER OF JURY TRIAL..........................................41 11.12 Acknowledgments...............................................41 11.13 Hypothecation or Pledge of Loans..............................41 11.14 Servicing.....................................................41 11.15 Set-Off.......................................................42 SCHEDULE 1 TO LOAN AGREEMENT........................................ I Representations and Warranties re: Contracts SCHEDULE 2 TO LOAN AGREEMENT........................................ II Filing Jurisdictions and Offices SCHEDULE 3 TO LOAN AGREEMENT........................................III Subsidiaries of Borrower -4- 6 TABLE OF CONTENTS (Continued) Page ---- EXHIBITS EXHIBIT A Form of Promissory Note EXHIBIT B Form of Custodial Agreement EXHIBIT C Form of Guarantee EXHIBIT D-1 Form of Request for Borrowing EXHIBIT D-2 Form of Loan Supplement EXHIBIT E Form of Opinion of Counsel to the Borrower EXHIBIT F Form of Borrowing Base Certificate EXHIBIT G Form of Covenant Compliance Certificate EXHIBIT H Form of Data Pool Report -5- 7 LOAN AND SECURITY AGREEMENT LOAN AND SECURITY AGREEMENT, dated as of September 6, 1996, between DVI FINANCIAL SERVICES INC., a Delaware corporation (the "Borrower"), and LEHMAN COMMERCIAL PAPER INC., a New York corporation (the "Lender"). RECITALS The Borrower wishes to obtain financing from time to time to provide interim funding for certain leases of, and loans in respect of, Equipment (as defined herein), which equipment leases and loans are to be contributed to one or more trusts or other vehicles to be sponsored by the Borrower or an Affiliate thereof, and which equipment leases and loans and which Equipment shall, directly or indirectly, secure the Loans (as defined herein) to be made by the Lender hereunder. The Lender has agreed, subject to the terms and conditions of this Loan Agreement, to provide such funding, with a portion of the proceeds of the sale of all equipment lease and loan asset-backed securities issued by any such trust or other vehicle, together with other funds of the Borrower, being used to repay any Loans made hereunder. Accordingly, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: Section 1. Definitions and Accounting Matters. 1.01 Certain Defined Terms. As used herein, the following terms shall have the following meanings (all terms defined in this Section 1.01 or in other provisions of this Loan Agreement in the singular to have the same meanings when used in the plural and vice versa): "Affiliate" means, with respect to any Person, any other Person which, directly or indirectly, controls, is controlled by, or is under common control with, such Person. For purposes of this definition, "control" (together with the correlative meanings of "controlled by" and "under common control with") means possession, directly or indirectly, of the power (a) to vote 10% or more of the securities (on a fully diluted basis) having ordinary voting power for the directors or managing general partners (or their equivalent) of such Person, or (b) to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by contract, or otherwise. "Bankruptcy Code" shall mean the United States Bankruptcy Code of 1978, as amended from time to time. "Borrower" shall have the meaning provided in the heading hereof. 8 "Borrowing Base" shall mean 90% of the aggregate Collateral Value of all Eligible Contracts pledged to the Lender as Collateral hereunder. "Borrowing Base Certificate" shall have the meaning assigned thereto in Section 7.18 hereof. "Borrowing Base Deficiency" shall have the meaning assigned thereto in Section 2.06 hereof. "Business Day" shall mean any day on which (i) banks are not authorized or required to close in New York, New York and (ii) if the applicable Business Day relates to any computation or payment to be made with respect to the Eurodollar Rate, any day on which dealings in dollar deposits are carried on in the London interbank market. "Capital Stock" shall mean any and all shares, interests, participations or other equivalents (however designated) of capital stock of a corporation, any and all similar ownership interests in a Person (other than a corporation) and any and all warrants or options to purchase any of the foregoing. "Certificates" shall mean equipment lease and loan asset-backed securities issued by an Affiliate of the Borrower or a trust sponsored by the Borrower or any of its Affiliates. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. "Collateral" shall have the meaning assigned to such term in Section 4.01(b) hereof. "Collateral Value" shall mean as of any date in respect of an Eligible Contract, the lesser of (a) the Discounted Present Value of such Eligible Contract, or (b) the market value of such Eligible Contract as determined by the Lender in its sole discretion (using commercially reasonable methods), which market value may be determined to be zero; provided, that: (i) the aggregate Collateral Value of all Eligible Contracts in respect of which the same Person (or its Affiliates) is the Obligor thereunder may not at any time exceed $3,000,000; (ii) the aggregate Collateral Value of all Eligible Contracts originated by any Person other than the Borrower or its Affiliates may not at any time exceed 30% of the Maximum Credit at such time; provided, however, that beginning upon the day which is forty-five (45) days after the outstanding principal amount of Loans is $50,000,000 or more, the aggregate Collateral Value of all Eligible Contracts originated by any Person other than the Borrower or its Affiliates may not at any time exceed 30% of -2- 9 aggregate Collateral Value of all Eligible Contracts included in the Borrowing Base at such time; (iii) the aggregate Collateral Value of all Small Item Contracts may not at any time exceed 10% of the Maximum Credit at such time; provided, however, that beginning upon the day which is forty-five (45) days after the outstanding principal amount of Loans is $50,000,000 or more, the aggregate Collateral Value of all Small Item Contracts may not at any time exceed 10% of the aggregate Collateral Value of all Eligible Contracts included in the Borrowing Base at such time; (iv) the aggregate Collateral Value of all Eligible Contracts having an original term of more than 63 months may not at any time exceed 25% of the Maximum Credit at such time; provided, however, that beginning upon the day which is forty-five (45) days after the outstanding principal amount of Loans is $50,000,000 or more, the aggregate Collateral Value of all Eligible Contracts having an original term of more than 63 months may not at any time exceed 25% of the aggregate Collateral Value of all Eligible Contracts included in the Borrowing Base at such time; (v) the aggregate Collateral Value of all Eligible Contracts having an original term of more than 84 months and fewer than 96 months may not at any time exceed 5% of the Maximum Credit at such time; provided, however, that beginning upon the day which is forty-five (45) days after the outstanding principal amount of Loans is $50,000,000 or more, the aggregate Collateral Value of all Eligible Contracts having an original term of more than 84 months and fewer than 96 months may not at any time exceed 5% of the aggregate Collateral Value of all Eligible Contracts included in the Borrowing Base at such time; (vi) the aggregate Collateral Value of all Eligible Contracts having an original term of more than 95 months shall be zero; (vii) the aggregate Collateral Value of all FMV Leases may not at any time exceed 5% of the Maximum Credit at such time; provided, however, that beginning upon the day which is forty-five (45) days after the outstanding principal amount of Loans is $50,000,000 or more, the aggregate Collateral Value of all FMV Leases may not at any time exceed 5% of the aggregate Collateral Value of all Eligible Contracts included in the Borrowing Base at such time; and (viii) the Collateral Value of each Eligible Contract (A) in respect of which there is a breach of a representation and warranty applicable thereto set forth on Schedule 1 (assuming each representation and warranty being deemed to be made as of each date Collateral Value is determined), (B) which remains pledged to the Lender hereunder longer than 180 days after the date on which it is first included in the Borrowing Base or (C) which has been released from the possession of the Custodian under the Custodial Agreement to the Borrower for a period in excess of five (5) days, shall in each of the foregoing cases be zero. -3- 10 "Commonly Controlled Entity" shall mean an entity, whether or not incorporated, which is under common control with the Borrower within the meaning of Section 4001 of ERISA or is part of a group which includes the Borrower and which is treated as a single employer under Section 414 of the Code. "Contract" shall mean an Equipment Lease or an Equipment Loan. "Contract Documents" shall mean, with respect to a Contract, the documents comprising the Contract File for such Contract. "Contract File" shall have the meaning assigned thereto in the Custodial Agreement. "Contract Schedule" shall mean a schedule of Contracts in computer-readable format setting forth the following information as to each Contract pledged to the Lender hereunder: (i) the Contract identifying number; (ii) whether the Contract is an Equipment Lease or an Equipment Loan, (iii) a description of the Equipment; (iv) the Obligor's name and relationship, if any, to other Obligors; (v) the street address where the Equipment is in use, including city, state and zip code; (vi) the closing date of the Contract; (vii) the stated maturity date of the Contract; (viii) the original months to maturity; (ix) the last date through which the Contract was paid; (x) the remaining months to maturity, as of the Contract paid to date; (xi) if such Contract is an Equipment Lease, the Contract Yield, or if such Contract is an Equipment Loan, the interest rate thereon; (xii) the due date of the first payment on the Contract, (xiii) the original amount funded under the Contract; (xiv) the outstanding principal balance; (xv) the Discounted Present Value; (xvi) the purchase price of the Equipment; (xvii) the month and year that the Equipment was purchased, (xviii) if such Contract is an Equipment Lease, the amount of the monthly payment of the Contract (other than the purchase option payment), or if such Contract is an Equipment Loan, the amount of the monthly payments of principal and interest; (xix) if such Contract is an Equipment Lease, the amount of the purchase option payment; (xx) whether the Borrower has initially determined that the Contract is an FMV Lease. "Contract Yield" shall mean the yield on a Contract as determined in accordance with the Borrower's customary practices in effect as of the date hereof. "Contractual Obligation" shall mean as to any Person, any provision of any security issued by such Person or of any agreement, instrument or other undertaking to which such Person is a party or by which it or any of its property is bound. "Covenant Compliance Certificate" shall have the meaning assigned thereto in Section 7.18 hereof. "Custodial Agreement" shall mean the Custodial Agreement, dated as of the date hereof, among the Borrower, the Custodian and the Lender, substantially in the form of Exhibit B hereto, as the same shall be modified and supplemented and in effect from time to time. -4- 11 "Custodian" shall mean First Trust National Association, its successors and permitted assigns. "Default" shall mean an Event of Default or an event that with notice or lapse of time or both would become an Event of Default. "Discount Rate" shall mean a rate equal to the sum of (i) the rate announced by Citibank, N.A. from time to time as its "prime rate", as published in The Wall Street Journal, Eastern Edition, plus (ii) 1.00%. "Discounted Present Value" shall mean, for any Contract as of any date of determination, the present value of the then remaining payments under such Contract, discounted at the Discount Rate, as determined by the Lender in accordance with the above formula and notified to the Borrower on the Business Day immediately preceding each Interest Payment Date (or, at the sole discretion of the Lender following notice to the Borrower, on any Business Day). "Dollars" and "$" shall mean lawful money of the United States of America. "Effective Date" shall mean the date upon which the conditions precedent set forth in Section 5.01 shall have been satisfied. "Eligible Contract" shall mean a Contract as to which the applicable representations and warranties on Schedule 1 hereof are correct. "Environmental Laws" shall mean and all Federal, state, local or municipal laws, rules, orders, regulations, statutes, ordinances, codes, decrees, requirements of any Governmental Authority, any and all Requirements of Law and any and all common law requirements, rules and bases of liability regulating, relating to or imposing liability or standards of conduct concerning pollution or protection of human health or the environment, as now or may at any time hereafter be in effect. "Equipment" shall mean medical equipment and computer equipment (including the software necessary for the operation of the medical equipment) used in the care, treatment, hospitalization, diagnosis or testing of patients in a medical setting, and furniture and office equipment located at such hospital or medical setting. "Equipment Lease" shall mean a lease originated by the Borrower or its Affiliates or a third-party acceptable to the Lender in respect of Equipment. "Equipment Loan" shall mean a loan and security agreement or an installment sale contract, with or without a promissory note, originated by the Borrower or its Affiliates or a third-party acceptable to the Lender in respect of Equipment. "Equipment Schedule" shall have the meaning assigned thereto in Section 7.08(b) hereof. -5- 12 "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time. "Eurodollar Rate" shall mean the rate at which eurodollar deposits for one month are offered to prime banks in the interbank eurodollar market as reported at Telerate page 3750 on such date of determination or, if not so reported, as otherwise reasonably determined by the Lender. The determination of the Eurodollar Rate by the Lender shall be conclusive absent manifest error. "Event of Default" shall have the meaning assigned thereto in Section 8 hereof. "Exposure" with respect to any Contract, shall mean excess of (a) the Discounted Present Value of such Contract over (b) the value of the collateral securing such Contract. "FMV Lease" shall mean an Equipment Lease granting the Obligor the option to purchase the underlying Equipment at its then fair market value or at a purchase price other than a nominal purchase price, or which would otherwise be deemed to create a lease and not a security interest in accordance with Section 1-201(37) of the Uniform Commercial Code, as initially determined by the Borrower, subject to determination by the Lender in its sole discretion. "Funding Date" shall mean the date on which a Loan is made hereunder. "GAAP" shall mean generally accepted accounting principles as in effect from time to time in the United States. "Governmental Authority" shall mean any nation or government, any state or other political subdivision thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government and any court or arbitrator having jurisdiction over the Borrower, any of its Affiliates or any of its properties. "Guarantee" shall mean that certain Guarantee of the Guarantor, substantially in the form of Exhibit C hereto, as amended, supplemented or otherwise modified from time to time. "Guarantee Obligation": as to any Person (the "guaranteeing person"), shall mean any obligation of (a) the guaranteeing person or (b) another Person (including, without limitation, any bank under any letter of credit) with respect to which the guaranteeing person has issued a reimbursement, counterindemnity or similar obligation, in either case guaranteeing or in effect guaranteeing any Indebtedness, leases, dividends or other obligations (the "primary obligations") of any other third Person (the "primary obligor") in any manner, whether directly or indirectly, including, without limitation, any obligation of the guaranteeing person, whether or not contingent, (i) to purchase any such primary obligation or any property constituting direct or indirect security therefor, (ii) to advance or supply funds (1) for the purchase or payment of any such primary obligation or (2) to maintain working -6- 13 capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, (iii) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation or (iv) otherwise to assure or hold harmless the owner of any such primary obligation against loss in respect thereof; provided, however, that the term Guarantee Obligation shall not include endorsements of instruments for deposit or collection in the ordinary course of business. The terms "Guarantee" and "Guaranteed" used as a verb shall have a correlative meaning. The amount of any Guarantee Obligation of any guaranteeing person shall be deemed to be the lower of (a) an amount equal to the stated or determinable amount of the primary obligation in respect of which such Guarantee Obligation is made and (b) the maximum amount for which such guaranteeing person may be liable pursuant to the terms of the instrument embodying such Guarantee Obligation, unless such primary obligation and the maximum amount for which such guaranteeing person may be liable are not stated or determinable, in which case the amount of such Guarantee Obligation shall be such guaranteeing person's maximum reasonably anticipated liability in respect thereof as determined by the Borrower in good faith. "Guarantor" shall mean DVI, Inc., a Delaware corporation. "Indemnified Parties" shall have the meaning assigned thereto in Section 11.03 hereof. "Interest Payment Date" shall mean the tenth (10th) day of each calendar month, or if such day is not a Business Day, the next succeeding Business Day. "Interest Period" shall mean with respect to any Loan: (a) initially, the period commencing on the Funding Date with respect to such Loan to but excluding the first Interest Payment Date; and (b) thereafter, each period commencing on an Interest Payment Date to but excluding the next succeeding Interest Payment Date; provided, that the foregoing provisions relating to Interest Periods are subject to the provision that any Interest Period that would otherwise extend beyond the Termination Date shall end on the Termination Date. "Lender" shall have the meaning assigned thereto in the heading hereto. "Lien" shall mean any mortgage, lien, encumbrance, charge or other security interest, whether arising under contract, by operation of law, judicial process or otherwise. "Loan" shall have the meaning assigned thereto in Section 2.01(a) hereof. "Loan Agreement" shall mean this Loan and Security Agreement, as may be amended, supplemented or otherwise modified from time to time. -7- 14 "Loan Documents" shall mean, collectively, this Loan Agreement, the Note, the Custodial Agreement, the Guarantee and the Underwriting Letter Agreement. "Loan Supplement" shall have the meaning assigned thereto in Section 2.03(b) hereof. "Master Lease" shall have the meaning assigned thereto in Section 7.08 hereof. "Material Adverse Effect" shall mean any event which has had or could reasonably be expected to have a material adverse effect on (a) the business, assets, property, condition (financial or otherwise) or prospects of the Guarantor or Borrower and its Subsidiaries taken as a whole, or (b) the validity or enforceability of (i) this Loan Agreement, the Note or the other Loan Documents or (ii) the rights or remedies of the Lender hereunder or thereunder. "Materials of Environmental Concern" shall mean any hazardous or toxic substances, materials or wastes, defined, listed, classified or regulated as such in or under any Environmental Laws, including, without limitation, asbestos, petroleum or petroleum products (including gasoline, crude oil or any fraction thereof), polychlorinated biphenyls, and urea-formaldehyde insulation. "Maximum Credit" shall mean $100,000,000, as such amount may be reduced from time to time in accordance with the terms of this Loan Agreement. "Multiemployer Plan" shall mean a Plan which is a multiemployer plan as defined in Section 4001(a)(3) of ERISA. "Note" shall mean the promissory note provided for by Section 2.02(a) hereof relating to the Loans and any promissory note delivered in substitution or exchange therefor, in each case as the same shall be modified and supplemented and in effect from time to time. "Obligor" shall mean, with respect to a Contract (i) which is an Equipment Lease, the lessee of the Equipment that is the subject of such Contract, (ii) which is an Equipment Loan, the purchaser of the Equipment that is the subject of such Contract, and/or in either such case any other person who owes payments under such Contract. "Obligor Loan Agreement" shall have the meaning assigned thereto in Section 7.08(b) hereof. "PBGC" shall mean the Pension Benefit Guaranty Corporation established pursuant to Subtitle A of Title IV of ERISA. "Person" shall mean any individual, corporation, company, voluntary association, partnership, joint venture, limited liability company, trust, unincorporated association or government (or any agency, instrumentality or political subdivision thereof). -8- 15 "Plan" shall mean at a particular time, any employee benefit plan which is covered by ERISA and in respect of which the Borrower or a Commonly Controlled Entity is (or, if such plan were terminated at such time, would under Section 4069 of ERISA be deemed to be) an "employer" as defined in Section 3(5) of ERISA. "Post-Default Rate" shall mean, in respect of any principal of any Loan or any other amount under this Loan Agreement, the Note or any other Loan Document that is not paid when due to the Lender (whether at stated maturity, by acceleration, by optional or mandatory prepayment or otherwise), a rate per annum during the period from and including the due date to but excluding the date on which such amount is paid in full equal to [redacted] per annum plus the rate otherwise applicable (or, if no such rate is otherwise applicable, the rate of interest applicable to principal of Loans). "Properties" shall have the meaning assigned thereto in Section 6.24 hereof. "Reportable Event" shall mean any of the events set forth in Section 4043(b) of ERISA, other than those events as to which the thirty day notice period is waived under subsections .13, .14, .16, .18, .19 or .20 of PBGC Reg. Section 2615. "Request for Borrowing" shall have the meaning assigned thereto in Section 2.03(a) hereof. "Requirement of Law" shall mean as to any Person, the Certificate of Incorporation and by-laws or other organizational or governing documents of such Person, and any law, treaty, rule or regulation or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject. "Regulations G, T, U and X" shall mean Regulations G, T, U and X of the Board of Governors of the Federal Reserve System (or any successor), as the same may be modified and supplemented and in effect from time to time. "Responsible Officer" shall mean, as to any Person, the chief executive officer or, with respect to financial matters, the chief financial officer of such Person. "Secured Obligations" shall have the meaning assigned thereto in Section 4.01(c) hereof. "Servicer" shall have the meaning assigned thereto in Section 11.14(c) hereof. "Servicing Agreement" shall have the meaning assigned thereto in Section 11.14(c) hereof. "Servicing Records" shall have the meaning assigned thereto in Section 11.14(b) hereof. -9- 16 "Single Employer Plan" shall mean any Plan which is covered by Title IV of ERISA, but which is not a Multiemployer Plan. "Small Item Contract" shall mean an Eligible Contract which is collateralized by Equipment in respect of which no individual item has a market value of $100,000 or more. "Subsidiary" shall mean, as to any Person, a corporation, partnership or other entity of which shares of stock or other ownership interests having ordinary voting power (other than stock or such other ownership interests having such power only by reason of the happening of a contingency) to elect a majority of the board of directors or other managers of such corporation, partnership or other entity are at the time owned, or the management of which is otherwise controlled, directly or indirectly through one or more intermediaries, or both, by such Person. Unless otherwise qualified, all references to a "Subsidiary" or to "Subsidiaries" in this Loan Agreement shall refer to a Subsidiary or Subsidiaries of the Borrower. "Supplement" shall have the meaning assigned thereto in Section 7.08 hereof. "Termination Date" shall mean September 5, 1997 or such earlier date on which this Loan Agreement shall terminate in accordance with the provisions hereof or by operation of law. "Trust Receipt" shall have the meaning assigned to such term in the Custodial Agreement. "Underwriting Guidelines" shall have the meaning assigned thereto in Section 5.01(k) hereof. "Underwriting Letter Agreement" shall mean the Underwriting Letter Agreement, dated as of September 6, 1996, among the Borrower, the Guarantor and the Lender. "Uniform Commercial Code" shall mean the Uniform Commercial Code as in effect on the date hereof in the State of New York. 1.02 Accounting Terms and Determinations. Except as otherwise expressly provided herein, all accounting terms used herein shall be interpreted, and all financial statements and certificates and reports as to financial matters required to be delivered to the Lender hereunder shall be prepared, in accordance with GAAP. Section 2. Loans, Note and Prepayments. 2.01 Loans. (a) The Lender agrees to consider from time to time the Borrower's requests that the Lender make, on the terms and conditions of this Loan Agreement, loans (individually, a "Loan"; collectively, the "Loans") to the Borrower in Dollars, on any Business Day from -10- 17 and including the Effective Date to but excluding the Termination Date, each in an amount of $1,000,000 or more, and in an aggregate principal amount at any one time outstanding up to but not exceeding the lesser of (i) the Maximum Credit, and (ii) the Borrowing Base. This Loan Agreement does not constitute a commitment of the Lender to make Loans but rather sets forth the procedures to be followed in connection with requests for Loans by the Borrower and the making of any Loans actually advanced by the Lender. The Borrower hereby acknowledges that the Lender is under no obligation to agree to make, or to make, any Loan pursuant to this Loan Agreement. Subject to the terms and conditions of this Loan Agreement, the Borrower may borrow, repay and reborrow hereunder. (b) In no event shall a Loan be made when any Default or Event of Default has occurred and is continuing or would exist after the making of such Loan on such Funding Date. 2.02 Note. (a) The Loans made by the Lender shall be collectively evidenced by a single promissory note of the Borrower substantially in the form of Exhibit A hereto (the "Note"), dated the date hereof, payable to the Lender in a principal amount equal to the amount of the Maximum Credit as originally in effect and otherwise duly completed. The Lender shall have the right to have its Note subdivided, by exchange for promissory notes of lesser denominations or otherwise. (b) The date, amount and interest rate of each Loan made by the Lender to the Borrower, and each payment made on account of the principal thereof, shall be recorded by the Lender on its books and, prior to any transfer of the Note, endorsed by the Lender on the schedule attached to the Note or any continuation thereof; provided, that the failure of the Lender to make any such recordation or endorsement shall not affect the obligations of the Borrower to make a payment when due of any amount owing hereunder or under the Note in respect of the Loans. 2.03 Procedure for Borrowing. (a) The Borrower may request a borrowing hereunder, on any Business Day during the period from and including the Effective Date to and including the Termination Date, but no more frequently than two times per week, by delivering to the Lender, with a copy to the Custodian, an irrevocable written request for borrowing, substantially in the form of Exhibit D-1 (a "Request for Borrowing"), which request must be received by the Lender, with a copy to the Custodian, no later than 11:00 a.m., New York City time, two (2) Business Days prior to the requested Funding Date. Such Request for Borrowing shall (i) attach a Contract Schedule in respect of the Eligible Contracts that the Borrower proposes to pledge to the Lender and be included in the Borrowing Base in connection with such Loan, (ii) specify the requested Funding Date, which shall be at least two (2) Business Days after the date of such Request for Borrowing, and (iii) attach an officer's certificate signed by a Responsible Officer of each of the Borrower and the Guarantor as required by Section 5.02(b) hereof. -11- 18 (b) Upon receipt of the Borrower's Request for Borrowing, the Lender may, at its option, agree to make a Loan to the Borrower by executing and delivering, via telecopy, a loan supplement to the Borrower substantially in the form of Exhibit D-2 attached hereto (a "Loan Supplement") no later than 11:00 a.m. (New York City time) one (1) Business Day after its receipt of such Request for Borrowing. Such Loan Supplement shall identify the Lender and the Borrower, attach a schedule identifying the Eligible Contracts proposed to be pledged by the Borrower to the Lender on such Funding Date which are acceptable to the Lender to be pledged as Collateral hereunder and included in the Borrowing Base, and shall set forth (i) the Funding Date and (ii) the amount of the Loan to be made on such Funding Date, and may contain additional terms or conditions which may or may not be inconsistent with this Loan Agreement. With respect to Eligible Contracts which are rejected by the Lender as Collateral hereunder, upon the request of the Borrower, the Lender shall indicate to the Borrower the reason or reasons, if any, for the rejection of such Eligible Contracts. The making of any Loan described in a Loan Supplement shall remain subject to the satisfaction by the Borrower of all of the conditions precedent to any Loan contained in this Loan Agreement. In the event there is a conflict between the terms of this Loan Agreement and the terms of the Loan Supplement, the terms of the Loan Supplement shall control. Each Loan Supplement, together with this Loan Agreement, shall be conclusive evidence of the terms of the Loan(s) covered thereby. If the Borrower has not received a Loan Supplement from the Lender prior to such time, such Request for Borrowing shall be deemed to have been rejected by the Lender. (c) The Borrower shall release to the Custodian no later than 11:00 a.m., New York City time, two (2) Business Days prior to the requested Funding Date, the Contract File pertaining to each Eligible Contract to be pledged to the Lender and included in the Borrowing Base on such requested Funding Date, in accordance with the terms and conditions of the Custodial Agreement. (d) Pursuant to the Custodial Agreement, the Custodian shall deliver to the Lender and the Borrower, no later than 11:00 a.m. on a Funding Date, a Trust Receipt in respect of all Contracts pledged to the Lender on such Funding Date. Subject to Section 5 hereof, such Loan will then be made available to the Borrower by the Lender transferring, via wire transfer, to the following account of the Borrower: Fleet Bank, National Association, for the A/C of DVI Financial Services Inc., ABA# 021200339, Account# 2181-01-6540, Attn: Wendy Jordan, on such Funding Date, in the aggregate amount of such Loan in funds immediately available to the Borrower. (e) Notwithstanding anything to the contrary in this Loan Agreement, (i) if the Lender is unable, after good faith effort, to obtain a source of funds for the proposed Loan on substantially the same economic terms as are available to the Lender as of the date of this Loan Agreement, and as a result the cost to the Lender of making such Loan is increased by an amount which the Lender deems material, the Lender shall not be obligated to consider making such Loan unless the Borrower agrees to pay the Lender any additional amounts necessary to compensate the Lender for such increased cost, as notified by the Lender to the Borrower, and (ii) the Lender shall have no obligation to consider making any Loan hereunder if there shall -12- 19 have occurred any material adverse change in (A) the financial condition of the Borrower or the Guarantor, (B) the financial markets generally or (C) the secondary market for Contracts. The Lender shall promptly notify the Borrower of any determination by the Lender of any of the foregoing. 2.04 Repayment of Loans; Interest. (a) Each outstanding Loan shall mature on the Termination Date. (b) Each Loan shall bear interest on the unpaid principal amount thereof for the period from and including the Funding Date with respect to such Loan to but excluding the date such Loan shall be paid in full, at a rate per annum equal to [redacted]. Notwithstanding the foregoing, the Borrower hereby promises to pay to the Lender interest at the applicable Post-Default Rate on any principal of any Loan and on any other amount payable by the Borrower hereunder or under the Note that shall not be paid in full when due (whether at stated maturity, by acceleration or by mandatory prepayment or otherwise), for the period from and including the due date thereof to but excluding the date the same is paid in full (both before and after judgment). (c) Accrued interest on each Loan shall be payable on each Interest Payment Date (and for the last month (or portion thereof) of the Loan Agreement on the Termination Date), except that if an Event of Default has occurred and is continuing, interest payable at the Post-Default Rate shall be payable from time to time on demand. 2.05 Optional Prepayments. The Loans are prepayable at any time without premium or penalty, in whole or in part but subject to Section 2.07. Any amounts prepaid shall be applied to repay the outstanding principal amount of any Loans (together with interest thereon) until paid in full. Amounts prepaid may be reborrowed in accordance with the terms of this Loan Agreement. If the Borrower intends to repay a Loan in whole or in substantial part from a source other than the proceeds of Certificates, the Borrower shall give two (2) Business Days' irrevocable prior written notice thereof to the Lender. If such notice is given, the amount specified in such notice shall be due and payable on the date specified therein, together with accrued interest to such date on the amount prepaid. Partial prepayments shall be in an aggregate principal amount of $1,000,000 or more. -13- 20 2.06 Mandatory Prepayment or Pledge. (a) If at any time the aggregate outstanding principal amount of Loans exceeds the Borrowing Base (a "Borrowing Base Deficiency"), as determined by the Lender and notified to the Borrower on any Business Day, the Borrower shall no later than two (2) Business Days after receipt of such notice, at the option of the Borrower, either prepay the Loans in part or in whole or pledge additional Collateral (which Collateral shall be in all respects acceptable to the Lender) to the Lender, such that after giving effect to such prepayment or pledge the aggregate outstanding principal amount of the Loans does not exceed the Borrowing Base. (b) The Borrower shall prepay the Loans in part or in whole to the extent required by Section 7.17(b) hereof. (c) The Borrower shall prepay the Loans made in respect of all Contracts included in a securitization on the date upon which the Certificates from such securitization are sold. 2.07 Indemnity. Upon demand by the Lender, the Borrower agrees to indemnify the Lender and to hold the Lender harmless from any net loss or expense (not to include any lost profit or opportunity cost) which the Lender may sustain or incur as a consequence of default by the Borrower in making any prepayment on the date so specified after the Borrower has given a notice in accordance with Section 2.05 or a prepayment of a Loan on a day which is not the Termination Date, including, without limitation, in each case, any such loss or expense arising from the reemployment of funds obtained by it to maintain its Loans hereunder or from fees payable to terminate the deposits from which such funds were obtained. This Section 2.07 shall survive termination of this Loan Agreement and payment of the Note. 2.08 Purpose of Loans. Each Loan shall be used to provide interim financing for Eligible Contracts identified to the Lender in writing on each Contract Schedule, as such Contract Schedule may be amended from time to time. Section 3. Payments; Computations; Etc. 3.01 Payments. (a) Except to the extent otherwise provided herein, all payments of principal, interest and other amounts to be made by the Borrower under this Loan Agreement and the Note, shall be made in Dollars, in immediately available funds, without deduction, set-off or counterclaim, to the Lender at the following account maintained by the Lender: Citibank NYC, For the A/C of Lehman Commercial Paper Inc., ABA# 021000089, Account #: 40615659, Ref: DVI Financial Services Inc., not later than 1:00 p.m., New York City time, on the date on which such payment shall become due (each such payment made after such time on such due date to be deemed to have been made on the next succeeding Business Day). -14- 21 (b) Except to the extent otherwise expressly provided herein, if the due date of any payment under this Loan Agreement or the Note would otherwise fall on a day that is not a Business Day, such date shall be extended to the next succeeding Business Day, and interest shall be payable for any principal so extended for the period of such extension. 3.02 Computations. Interest on the Loans shall be computed on the basis of a 360-day year for the actual days elapsed (including the first day but excluding the last day) occurring in the period for which such interest is payable. Section 4. Collateral Security. 4.01 Collateral; Security Interest. (a) Pursuant to the Custodial Agreement, the Custodian shall hold the Contract Documents as exclusive bailee and agent for the Lender pursuant to terms of the Custodial Agreement and shall deliver to the Lender Trust Receipts, each to the effect that it has reviewed such Contract Documents in the manner required by the Custodial Agreement and identifying any deficiencies in such Contract Documents as so reviewed. (b) All of the Borrower's right, title and interest in, to and under each of the following items of property, whether now owned or hereafter acquired, now existing or hereafter created and wherever located, is hereinafter referred to as the "Collateral": (i) all Contracts and any other equipment leases, loan and security agreements, installment sale contracts and/or promissory notes listed on any Contract Schedule, whether or not the related Contract File has been delivered to, or is held by, the Custodian; (ii) all Contract Documents related thereto; (iii) all rights, remedies, powers and privileges of the Borrower under such Contract Documents (including, without limitation, all rights of the Borrower in and to the Equipment and other interests that are the subject of the Contracts); (iv) all Servicing Records and other books and records (including, without limitation, computer programs, tapes and other computer storage media) relating to any of the foregoing; (v) all recourse or support obligations, guarantees, indemnities and security relating to any of the foregoing and all letters of credit relating thereto; (vi) all "general intangibles" as defined in the Uniform Commercial Code relating to or constituting any and all of the foregoing; and (vii) any and all replacements, substitutions, distributions on or proceeds of any and all of the foregoing. -15- 22 (c) The Borrower hereby assigns, pledges and grants a security interest in the Collateral to the Lender to secure the repayment of principal of and interest on all Loans and all other amounts owing to the Lender hereunder, under the Note and under the other Loan Documents (collectively, the "Secured Obligations"). The Borrower agrees to mark its computer programs and tapes to evidence the interests granted to the Lender hereunder. 4.02 Further Documentation. At any time and from time to time, upon the written request of the Lender, and at the sole expense of the Borrower, the Borrower will promptly and duly execute and deliver, or will promptly cause to be executed and delivered, such further instruments and documents and take such further action as the Lender may reasonably request for the purpose of obtaining or preserving the full benefits of this Loan Agreement and of the rights and powers herein granted, including, without limitation, the filing of any financing or continuation statements under the Uniform Commercial Code in effect in any jurisdiction with respect to the Liens created hereby. The Borrower also hereby authorizes the Lender to file any such financing or continuation statement without the signature of the Borrower to the extent permitted by applicable law. A carbon, photographic or other reproduction of this Loan Agreement shall be sufficient as a financing statement for filing in any jurisdiction. 4.03 Changes in Locations, Name, etc. The Borrower shall not (i) change the location of its chief executive office/chief place of business from that specified in Section 6 hereof or (ii) change its name, identity or corporate structure (or the equivalent) or change the location where it maintains its records with respect to the Collateral unless it shall have given the Lender at least 30 days prior written notice thereof and shall have delivered to the Lender all Uniform Commercial Code financing statements and amendments thereto as Lender shall request and taken all other actions deemed necessary by Lender to continue its perfected status in the Collateral with the same or better priority. 4.04 Lender's Appointment as Attorney-in-Fact. (a) The Borrower hereby irrevocably constitutes and appoints the Lender and any officer or agent thereof, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of the Borrower and in the name of the Borrower or in its own name, from time to time in the Lender's discretion and at the Borrower's expense, for the purpose of carrying out the terms of this Loan Agreement, to pay insurance in respect of, and to pay or discharge taxes and Liens levied or placed on or threatened against, the Collateral, all as fully and effectively as the Borrower might do and, if an Event of Default shall have occurred and be continuing, to take any and all other appropriate action and to execute any and all documents and instruments which may be necessary or desirable to accomplish the purposes of this Loan Agreement, and, without limiting the generality of the foregoing, the Borrower hereby gives the Lender the power and right, on behalf of the Borrower, without assent by, but with notice to, the Borrower, if an Event of Default shall have occurred and be continuing, to do the following: -16- 23 (i) in the name of the Borrower or its own name, or otherwise, to take possession of and endorse and collect any checks, drafts, notes, acceptances or other instruments for the payment of moneys due under any Collateral and to file any claim or to take any other action or proceeding in any court of law or equity or otherwise deemed appropriate by the Lender for the purpose of collecting any and all such moneys due under any such Collateral whenever payable; and (ii) (A) to direct any party liable for any payment under any Collateral to make payment of any and all moneys due or to become due thereunder directly to the Lender or as the Lender shall direct; (B) to ask or demand for, collect, receive payment of and receipt for, any and all moneys, claims and other amounts due or to become due at any time in respect of or arising out of any Collateral; (C) to sign and endorse any invoices, assignments, verifications, notices and other documents in connection with any of the Collateral; (D) to commence and prosecute any suits, actions or proceedings at law or in equity in any court of competent jurisdiction to collect the Collateral and to enforce any other right in respect of any Collateral; (E) to defend any suit, action or proceeding brought against the Borrower with respect to any Collateral; (F) to settle, compromise or adjust any suit, action or proceeding described in clause (E) above and, in connection therewith, to give such discharges or releases as the Lender may deem appropriate; and (G) generally, to sell, transfer, pledge and make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though the Lender were the absolute owner thereof for all purposes, and to do, at the Lender's option and the Borrower's expense, at any time, or from time to time, all acts and things which the Lender deems reasonably necessary to protect, preserve or realize upon the Collateral and the Lender's Liens thereon and to effect the intent of this Loan Agreement, all as fully and effective as the Borrower might do. The Borrower hereby ratifies all that said attorneys shall lawfully do or cause to be done by virtue hereof. This power of attorney is a power coupled with an interest and shall be irrevocable. (b) The Borrower also authorizes the Lender, at any time and from time to time, to execute, in connection with the sale provided for in Section 4.07 hereof, any endorsements, assignments or other instruments of conveyance or transfer with respect to the Collateral. (c) The powers conferred on the Lender are solely to protect the Lender's interests in the Collateral and shall not impose any duty upon the Lender to exercise any such powers. The Lender shall be accountable only for amounts that it actually receives as a result of the exercise of such powers, and neither the Lender nor any of its officers, directors, or employees shall be responsible to the Borrower for any act or failure to act hereunder, except for its own gross negligence or willful misconduct. 4.05 Performance by Lender of Borrower's Obligations. If the Borrower fails to perform or comply with any of its agreements contained in the Loan Documents and the -17- 24 Lender shall itself perform or comply, or otherwise cause performance or compliance, with such agreement, the expenses of the Lender incurred in connection with such performance or compliance, together with interest thereon at a rate per annum equal to the Post-Default Rate, shall be payable by the Borrower to the Lender on demand and shall constitute Secured Obligations. 4.6 Proceeds. If an Event of Default shall occur and be continuing, (a) all proceeds of Collateral received by the Borrower consisting of cash, checks and other near-cash items shall be held by the Borrower in trust for the Lender, segregated from other funds of the Borrower, and shall forthwith upon receipt by the Borrower be turned over to the Lender in the exact form received by the Borrower (duly endorsed by the Borrower to the Lender, if required) and (b) any and all such proceeds received by the Lender (whether from the Borrower or otherwise) may, in the sole discretion of the Lender, be held by the Lender as collateral security for, and/or then or at any time thereafter may be applied by the Lender against, the Secured Obligations (whether matured or unmatured), such application to be in such order as the Lender shall elect. Any balance of such proceeds remaining after the Secured Obligations shall have been paid in full and this Loan Agreement shall have been terminated shall be paid over to the Borrower or to whomsoever may be lawfully entitled to receive the same. For purposes hereof, proceeds shall include, but not be limited to, all principal and interest payments, all prepayments and payoffs, insurance claims, condemnation awards, sale proceeds, and any other income and all other amounts received with respect to the Collateral. 4.07 Remedies. If an Event of Default shall occur and be continuing, the Lender may exercise, in addition to all other rights and remedies granted to it in this Loan Agreement and in any other instrument or agreement securing, evidencing or relating to the Secured Obligations, all rights and remedies of a secured party under the Uniform Commercial Code. Without limiting the generality of the foregoing, the Lender without demand of performance or other demand, presentment, protest, advertisement or notice of any kind (except any notice required by law referred to below) to or upon the Borrower or any other Person (all and each of which demands, defenses, advertisements and notices are hereby waived), may in such circumstances forthwith collect, receive, appropriate and realize upon the Collateral, or any part thereof, and/or may forthwith sell, lease, assign, give option or options to purchase, or otherwise dispose of and deliver the Collateral or any part thereof (or contract to do any of the foregoing), in one or more parcels or as an entirety at public or private sale or sales, at any exchange, broker's board or office of the Lender or elsewhere upon such terms and conditions as it may deem advisable and at such prices as it may deem best, for cash or on credit or for future delivery without assumption of any credit risk. The Lender shall have the right upon any such public sale or sales, and, to the extent permitted by law, upon any such private sale or sales, to purchase the whole or any part of the Collateral so sold, free of any right or equity of redemption in the Borrower, which right or equity is hereby waived or released. The Borrower further agrees, at the Lender's request, to assemble the Collateral and -18- 25 make it available to the Lender at places which the Lender shall reasonably select, whether at the Borrower's premises or elsewhere. The Lender shall apply the net proceeds of any such collection, recovery, receipt, appropriation, realization or sale, after deducting all reasonable costs and expenses of every kind incurred therein or incidental to the care or safekeeping of any of the Collateral or in any way relating to the Collateral or the rights of the Lender hereunder, including, without limitation, reasonable attorneys' fees and disbursements, to the payment in whole or in part of the Secured Obligations, in such order as the Lender may elect, and only after such application and after the payment by the Lender of any other amount required or permitted by any provision of law, including, without limitation, Section 9-504(1)(c) of the Uniform Commercial Code, need the Lender account for the surplus, if any, to the Borrower. To the extent permitted by applicable law, the Borrower waives all claims, damages and demands it may acquire against the Lender arising out of the exercise by the Lender of any of its rights hereunder, other than those claims, damages and demands arising from the gross negligence or willful misconduct of the Lender. If any notice of a proposed sale or other disposition of Collateral shall be required by law, such notice shall be deemed reasonable and proper if given at least ten days before such sale or other disposition. The Borrower and the Guarantor shall remain liable for any deficiency if the proceeds of any sale or other disposition of the Collateral are insufficient to pay the Secured Obligations and the fees and disbursements of any attorneys employed by the Lender to collect such deficiency. 4.08 Limitation on Duties Regarding Presentation of Collateral. The Lender's duty with respect to the custody, safekeeping and physical preservation of the Collateral in its possession, under Section 9-207 of the Uniform Commercial Code or otherwise, shall be to deal with it in the same manner as the Lender deals with similar property for its own account. Neither the Lender nor any of its directors, officers or employees shall be liable for failure to demand, collect or realize upon all or any part of the Collateral or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Collateral upon the request of the Borrower or otherwise. 4.09 Powers Coupled with an Interest. All authorizations and agencies herein contained with respect to the Collateral are irrevocable and powers coupled with an interest. 4.10 Release of Security Interest. Upon termination of this Loan Agreement and repayment to the Lender of all Secured Obligations and the performance of all obligations under the Loan Documents the Lender shall release its security interest in any remaining Collateral. Section 5. Conditions Precedent. 5.01 Initial Loan. The agreement of the Lender to make the initial Loan requested to be made by it hereunder is subject to the satisfaction, immediately prior to or concurrently with the making of such Loan, of the following conditions precedent: (a) Loan Documents. The Lender shall have received (i) this Loan Agreement, executed and delivered by a duly authorized officer of the Borrower, and -19- 26 (ii) a Note, conforming to the requirements hereof and executed by a duly authorized officer of the Borrower. (b) Guarantee. The Lender shall have received the Guarantee, executed by a duly authorized officer of the Guarantor. (c) Custodial Agreement. The Lender shall have received the Custodial Agreement, conforming to the requirements hereof and executed by a duly authorized officer of the Borrower and the Custodian. (d) Underwriting Letter Agreement. The Lender shall have received the Underwriting Letter Agreement executed by a duly authorized officer of each of the Borrower and the Guarantor. (e) Filings, Registrations, Recordings. Any documents (including, without limitation, financing statements) required to be filed, registered or recorded in order to create, in favor of the Lender, a perfected, first-priority security interest in the Collateral, subject to no Liens other than those created hereunder, shall have been properly prepared for filing, registration or recording in each office in each jurisdiction in which such filings, registrations and recordations are required to perfect such first-priority security interest, and with respect to each FMV Lease, a financing statement on Form UCC-1 naming the Borrower as the debtor and the Lender as secured party and describing the Equipment that is the subject of such FMV Lease, and proceeds thereof, as the collateral, shall have been properly prepared for filing, registration or recording in each office in each jurisdiction in which such filings, registrations and recordations are required to perfect such first-priority security interest in such Equipment (assuming the Borrower is the owner of such Equipment). (f) Corporate Proceedings. (i) The Lender shall have received a certificate of the Secretary or Assistant Secretary of the Borrower, dated as of the date hereof, and certifying (A) that attached thereto is a true, complete and correct copy of resolutions duly adopted by the Board of Directors of the Borrower authorizing (1) the execution, delivery and performance of this Loan Agreement, the Note and the other Loan Documents to which it is a party, and (2) the borrowings contemplated hereunder and that such resolutions have not been amended, modified, revoked or rescinded, and (B) as to the incumbency and specimen signature of each officer executing any Loan Documents on behalf of the Borrower, and authorized to execute any Request for Borrowing, and such certificate and the resolutions attached thereto shall be in form and substance satisfactory to the Lender; and (ii) The Lender shall have received a certificate of the Secretary or Assistant Secretary of the Guarantor, dated as of the date hereof, and certifying (A) that attached thereto is a true, complete and correct copy of resolutions duly -20- 27 adopted by the Board of Directors of the Guarantor authorizing the execution, delivery and performance of the Guarantee, and that such resolutions have not been amended, modified, revoked or rescinded, and (B) as to the incumbency and specimen signature of each officer executing the Guarantee on behalf of the Guarantor, and such certificate and the resolutions attached thereto shall be in form and substance satisfactory to the Lender. (g) Corporate Documents. (i) The Lender shall have received true and complete copies of the certificate of incorporation and by-laws of the Borrower, certified as such as of the date hereof by the Secretary or an Assistant Secretary of the Borrower; and (ii) The Lender shall have received true and complete copies of the certificate of incorporation and by-laws of the Guarantor, certified as such as of the date hereof by the Secretary or an Assistant Secretary of the Guarantor. (h) Good Standing Certificates. The Lender shall have received copies of certificates evidencing the good standing of the Borrower and the Guarantor, dated as of a recent date, from the Secretary of State (or other appropriate authority) of the State of Delaware and in each jurisdiction where the ownership, lease or operation of property, or the conduct of business, requires the Borrower and/or the Guarantor to qualify as a foreign corporation, except where the failure to qualify would not have a Material Adverse Effect. (i) Legal Opinion. The Lender shall have received the executed legal opinions of Melvin C. Breaux, Esq., general counsel to the Borrower and the Guarantor and Thacher Proffitt & Wood, special counsel to the Borrower and the Guarantor, covering the matters set forth in the form attached hereto as Exhibit E and dated the initial Funding Date and covering such other matters incident to the transactions contemplated by this Loan Agreement as the Lender shall reasonably request. (j) Fees and Expenses. The Lender shall have received all fees and expenses required to be paid by the Borrower on or prior to the initial Funding Date pursuant to Section 11.03(b). (k) Financial Statements. The Lender shall have received the financial statements referenced in Section 6.01(a) and 6.01(b). (l) Underwriting Guidelines. The Lender and the Borrower shall have agreed upon the Borrower's underwriting guidelines for Contracts (the "Underwriting Guidelines"). (m) Consents, Licenses, Approvals, etc. The Lender shall have received certified copies of all consents, licenses and approvals, if any, required in connection -21- 28 with the execution, delivery and performance by the Borrower or the Guarantor, as applicable, of, and the validity and enforceability of, the Loan Documents, which consents, licenses and approvals shall be in full force and effect. (n) Other Documents. The Lender shall have received such other documents as the Lender may reasonably request. 5.02 Initial and Subsequent Loans. The agreement of the Lender to make any Loan requested to be made by it on any date (including the initial Loan) is subject to the satisfaction of the following conditions precedent: (a) No Default. No Default or Event of Default shall have occurred and be continuing on such date or after giving effect to the Loan requested to be made on such date. (b) Representations and Warranties. Each of the representations and warranties made by the Borrower and the Guarantor in or pursuant to the Loan Documents shall be true and correct in all material respects on and as of such date as if made on and as of such date (or, if any such representation or warranty is expressly stated to have been made as of a specific date, as of such specific date), and the Lender shall have received an officer's certificate duly executed by a Responsible Officer of each of the Borrower and the Guarantor to that effect. (c) Borrowing Base. The aggregate outstanding principal amount of the Loans shall not exceed the Borrowing Base on such date and would not exceed the Borrowing Base after giving effect to the Loan requested to be made on such date. (d) Due Diligence Review. The Lender shall have completed its due diligence review, if any, of the Contract Files relating to the Contracts being pledged in connection with the Loan being made on such Funding Date, the results of which are satisfactory to the Lender. (e) Trust Receipt. The Lender shall have received from the Custodian a Trust Receipt in respect of Eligible Contracts to be pledged hereunder on such Business Day, dated such Business Day and duly completed and disclosing no material deficiencies in such Eligible Contracts. (f) Lien Searches. With respect to Contracts in respect of existing Equipment previously financed or owned by the Borrower or a third party, the Lender shall have received the results of a recent lien search in each of the jurisdictions and offices where the related Obligor and such Equipment are located, and such lien searches shall reveal no Liens encumbering such Equipment or, if Liens do exist, the Lender shall have received satisfactory evidence of release of such Liens prior to or concurrently with the Loan being made on such Funding Date. -22- 29 (g) Additional Matters. All corporate and other proceedings, and all documents, instruments and other legal matters in connection with the transactions contemplated by this Loan Agreement and the other Loan Documents shall be reasonably satisfactory in form and substance to the Lender, and the Lender shall have received such other documents and legal opinions in respect of any aspect or consequence of the transactions contemplated hereby or thereby as it shall reasonably request. Each Request for Borrowing by the Borrower hereunder shall constitute a certification by the Borrower of the satisfaction of the conditions precedent set forth in paragraphs (a)-(c), above, (both as of the date of such Request for Borrowing and, unless the Borrower otherwise notifies the Lender prior to the date of such borrowing, as of the date of such borrowing). Section 6. Representations and Warranties. The Borrower represents and warrants to the Lender on the date hereof that: 6.01 Financial Condition. (a) The audited consolidated balance sheets of the Guarantor and its consolidated Subsidiaries as at June 30, 1994 and as at June 30, 1995, and the related consolidated statements of income and of cash flows for the fiscal years ended on each such date, reported thereon by Deloitte & Touche, copies of which have heretofore been furnished to the Lender, are complete and correct and present fairly the consolidated financial condition of the Guarantor and its consolidated Subsidiaries as at such dates, and the consolidated results of their operations and their consolidated cash flows for the fiscal years then ended. (b) The unaudited consolidated balance sheet of the Guarantor and its consolidated Subsidiaries as at June 30, 1996, and the related unaudited consolidated statements of income and of cash flows for the twelve-month period ended on such date, certified by a Responsible Officer, copies of which have heretofore been furnished to the Lender, are complete and correct and present fairly the consolidated financial condition of the Guarantor and its consolidated Subsidiaries as at such date, and their consolidated cash flows for the twelve-month period then ended (subject to normal year-end audit adjustments). (c) All such financial statements, including the related schedules and notes thereto, have been prepared in accordance with GAAP applied consistently throughout the periods involved (except as approved by such accountants or Responsible Officer, as the case may be, and as disclosed therein). (d) Neither the Guarantor nor any of its consolidated Subsidiaries had, at the date of the most recent balance sheet referred to above, any material Guarantee Obligation, contingent liability or liability for taxes, or any long-term lease or unusual forward or long-term commitment, including, without limitation, any interest rate or foreign currency swap or exchange transaction, or other financial derivative, which is not reflected in the foregoing statements or in the notes thereto. -23- 30 6.02 No Change. Since June 30, 1996, there has been no development or event nor any prospective development or event, which has had or could reasonably be expected to have a Material Adverse Effect. 6.03 Corporate Existence; Compliance with Law. The Borrower (a) is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, (b) has the corporate power and authority, and the legal right, to own and operate its property, to lease the property it operates as lessee and to carry on its business as now being or as proposed to be conducted, the lack of which would be reasonably likely to have a Material Adverse Effect, (c) is duly qualified to do business and is in good standing under the laws of each jurisdiction in which the nature of the business conducted by it makes such qualification necessary and where failure so to qualify would be reasonably likely (either individually or in the aggregate) to have a Material Adverse Effect, and (d) is in compliance in all material respects with all Requirements of Law. 6.04 Corporate Power; Authorization; Enforceable Obligations. (a) The Borrower has the corporate power and authority, and the legal right, to make, deliver and perform this Loan Agreement, the Note, and each other Loan Document to which it is a party, and to borrow and to grant Liens hereunder, and has taken all necessary corporate action to authorize the borrowings and the granting of Liens on the terms and conditions of this Loan Agreement, the Note, and each other Loan Document to which it is a party, and the execution, delivery and performance of this Loan Agreement, the Note, and each other Loan Document to which it is a party. (b) No consent or authorization of, approval by, notice to, filing with or other act by or in respect of, any Governmental Authority or any other Person is required or necessary in connection with the borrowings hereunder or with the execution, delivery, performance, validity or enforceability of this Loan Agreement or the Note or any other Loan Document, except (i) for filings and recordings in respect of the Liens created pursuant to this Loan Agreement, and (ii) as previously obtained and currently in full force and effect. (c) This Loan Agreement has been duly and validly executed and delivered by the Borrower and constitutes, and the Note and each other Loan Document when executed and delivered on behalf of the Borrower will constitute, a legal, valid and binding obligation of the Borrower, enforceable against the Borrower in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law). 6.05 No Legal Bar. The execution, delivery and performance of this Loan Agreement and the Note, the borrowings hereunder and the use of the proceeds thereof will not violate any Requirement of Law or material Contractual Obligation of the Borrower or of any of its Subsidiaries and will not result in, or require, the creation or imposition of any Lien -24- 31 (other than the Liens created hereunder) on any of its or their respective properties or revenues pursuant to any such Requirement of Law or material Contractual Obligation. 6.06 No Material Litigation. There are no actions, suits, arbitrations, investigations or proceedings of or before any arbitrator or Governmental Authority pending or, to the knowledge of the Borrower, threatened against the Borrower or any of its Subsidiaries or against any of its or their respective properties or revenues, (i) with respect to this Loan Agreement or the Note or any of the transactions contemplated hereby, or (ii) which could reasonably be expected to have a Material Adverse Effect. 6.07 No Default. Neither the Borrower nor any of its Subsidiaries is in default under or with respect to any of its Contractual Obligations in any respect which could reasonably be expected to have a Material Adverse Effect. No Default or Event of Default has occurred and is continuing. 6.08 Collateral; Collateral Security. (a) The Borrower has not assigned, pledged, or otherwise conveyed or encumbered any of the Collateral to any Person other than the Lender, and immediately prior to the pledge of such Contract, the Borrower was the sole owner of the Collateral and had good and marketable title thereto, free and clear of all Liens, in each case except for Liens to be released simultaneously with the Liens granted in favor of the Lender hereunder. (b) The provisions of this Loan Agreement are effective to create in favor of the Lender a valid first priority security interest in all right, title and interest of the Borrower in, to and under the Collateral. (c) Upon receipt by the Custodian of each Contract File, and the filing of financing statements on Form UCC-1 naming the Lender as "Secured Party" and the Borrower as "Debtor", and describing the Collateral, in the jurisdictions and recording offices listed on Schedule 2 attached hereto, the security interests granted hereunder in the Collateral will constitute fully perfected first-priority security interests under the Uniform Commercial Code in all right, title and interest of the Borrower in, to and under such Collateral, which can be perfected by filing or possession under the Uniform Commercial Code. 6.09 Chief Executive Office. The Borrower's chief executive office on the Effective Date is located at 500 Hyde Park, Doylestown, Pennsylvania, 18901. 6.10 Location of Books and Records. The location where the Borrower keeps its books and records, including all computer tapes and records relating to the Collateral is its chief executive office. 6.11 No Burdensome Restrictions. No Requirement of Law or Contractual Obligation of the Borrower or any of its Subsidiaries has a Material Adverse Effect. -25- 32 6.12 Taxes. Each of the Borrower and its Subsidiaries has filed all Federal income tax returns and all other material tax returns that are required to be filed by them and has paid all taxes due pursuant to such returns or pursuant to any assessment received by any of them, except for any such taxes or assessments, if any, that are being appropriately contested in good faith by appropriate proceedings diligently conducted and with respect to which adequate reserves in conformity with GAAP have been provided. No tax Lien has been filed, and, to the knowledge of the Borrower, no claim is being asserted, with respect to any such tax or assessment. 6.13 Margin Regulations. Neither the making of any Loan hereunder, nor the use of the proceeds thereof, will violate or be inconsistent with the provisions of Regulation G, T, U or X. 6.14 Investment Company Act; Other Regulations. The Borrower is not an "investment company", or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended. The Borrower is not subject to regulation under any Federal or state statute or regulation which limits its ability to incur indebtedness. 6.15 Subsidiaries. All of the Subsidiaries of the Borrower at the date hereof are listed on Schedule 3 to this Loan Agreement. 6.16 Third Party Representations. Each of the representations and warranties made by the Guarantor in the Guarantee is true and correct in all material respects. 6.17 Eligible Contracts. With respect to every Contract delivered or to be delivered to the Custodian, the representations and warranties set forth on Schedule 1 hereto applicable thereto are true and correct. 6.18 Bulk Transfer. The transfer, assignment and conveyance of the Contracts and the Contract Documents by the Borrower pursuant to this Loan Agreement are not subject to the bulk transfer or any similar statutory provisions in effect in any applicable jurisdiction. 6.19 Origination and Collection of Contracts. The Contracts were originated or acquired by the Borrower, and the origination and collection practices used by the Borrower with respect to each Contract have been, in all respects legal, proper, prudent and customary in the equipment financing and servicing business, and in accordance with the Underwriting Guidelines. With respect to Contracts acquired by the Borrower, all such Contracts are in conformity with the Underwriting Guidelines. 6.20 No Adverse Selection. The Borrower used no selection procedures that identified the Contracts as being less desirable or valuable than other comparable equipment leases, security agreements or installment sales contracts owned by the Borrower. -26- 33 6.21 Contracts are Financing Leases or Security Agreements. (A) All of the Contracts other than FMV Leases are financing leases intended to create a security interest in accordance with Section 1-201(37) of the Uniform Commercial Code or security agreements which create a valid security interest under the Uniform Commercial Code, (B) the Borrower does not own the Equipment that is the subject of the Contracts other than FMV Leases and (C) the Borrower has a perfected first priority Lien in the Equipment that is subject to Contracts other than FMV Leases. 6.22 Borrower Solvent. As of the date hereof and immediately after giving effect to each Loan, the fair value of the property of the Borrower is greater than the fair value of the liabilities (including, without limitation, contingent liabilities) of the Borrower and the Borrower is and will be solvent, is and will be able to pay its debts as they mature and is and will not have an unreasonably small capital to engage in the business in which it is engaged and proposes to engage. 6.23 ERISA. Neither a Reportable Event nor an "accumulated funding deficiency" (within the meaning of Section 412 of the Code or Section 302 of ERISA) has occurred during the five-year period prior to the date on which this representation is made or deemed made with respect to any Plan, and each Plan has complied in all material respects with the applicable provisions of ERISA and the Code. No termination of a Single Employer Plan has occurred, and no Lien in favor of the PBGC or a Plan has arisen, during such five-year period. The present value of all accrued benefits under each Single Employer Plan (based on those assumptions used to fund such Plans) did not, as of the last annual valuation date prior to the date on which this representation is made or deemed made, exceed the value of the assets of such Plan allocable to such accrued benefits. Neither the Borrower nor any Commonly Controlled Entity has had a complete or partial withdrawal from any Multiemployer Plan, and neither the Borrower nor any Commonly Controlled Entity would become subject to any liability under ERISA if the Borrower or any such Commonly Controlled Entity were to withdraw completely from all Multiemployer Plans as of the valuation date most closely preceding the date on which this representation is made or deemed made. No such Multiemployer Plan is in reorganization or insolvent. Except as set forth in the financial statements referred to in Section 6.01(a) and (b), neither the Borrower nor any Commonly Controlled Entity has any material liability with respect to "expected post retirement benefit obligations" within the meaning of Statement of Financial Account Standards No. 106. 6.24 Environmental Matters. (a) To the best knowledge of the Borrower, the facilities and properties owned, leased or operated by the Guarantor or any of its Subsidiaries (the "Properties") do not contain, and have not previously contained, any Materials of Environmental Concern in amounts or concentrations which (i) constitute or constituted a violation of, or (ii) could reasonably be expected to give rise to liability under, any Environmental Law except in either case insofar as such violation or liability, or any aggregation thereof, is not reasonably likely to have a Material Adverse Effect. -27- 34 (b) To the best knowledge of the Borrower, there has been no release or threat of release of Materials of Environmental Concern at or from the Properties, or arising from or related to the operations of the Guarantor or any Subsidiary in connection with the Properties or otherwise in connection with the Business, in violation of or in amounts or in a manner that could reasonably give rise to liability under Environmental Laws except insofar as any such violation or liability referred to in this paragraph, or any aggregation thereof, is not reasonably likely to have a Material Adverse Effect. Section 7. Covenants of the Borrower. The Borrower covenants and agrees with the Lender that, so long as any Loan is outstanding and until payment in full of all Secured Obligations: 7.01 Financial Statements. The Borrower shall deliver to the Lender: (a) as soon as available and in any event within fifty (50) days after the end of each of the first three quarterly fiscal periods of each fiscal year of the Guarantor, the consolidated and consolidating balance sheets of the Guarantor and its consolidated Subsidiaries as at the end of such period and the related unaudited consolidated and consolidating statements of income and retained earnings and of cash flows for the Guarantor and its consolidated Subsidiaries for such period and the portion of the fiscal year through the end of such period, setting forth in each case in comparative form the figures for the previous year, accompanied by a certificate of a Responsible Officer of the Guarantor, which certificate shall state that said consolidated financial statements fairly present the consolidated and consolidating financial condition and results of operations of the Guarantor and its Subsidiaries in accordance with GAAP, consistently applied, as at the end of, and for, such period (subject to normal year-end audit adjustments); (b) as soon as available and in any event within ninety-five (95) days after the end of each fiscal year of the Guarantor, the audited consolidated and consolidating balance sheets of the Guarantor and its consolidated Subsidiaries as at the end of such fiscal year and the related consolidated and consolidating statements of income and retained earnings and of cash flows for the Guarantor and its consolidated Subsidiaries for such year, setting forth in each case in comparative form the figures for the previous year, accompanied by an opinion thereon of independent certified public accountants of recognized national standing, which opinion shall not be qualified as to scope of audit or going concern and shall state that said consolidated and consolidating financial statements fairly present the consolidated and consolidating financial condition and results of operations of the Guarantor and its consolidated Subsidiaries as at the end of, and for, such fiscal year in accordance with GAAP, and a certificate of such accountants stating that, in making the examination necessary for their opinion, they obtained no knowledge, except as specifically stated, of any Default or Event of Default; -28- 35 (c) as soon as available, the annual report of the Guarantor on Form 10-K as filed with the Securities and Exchange Commission for each fiscal year; and (d) from time to time such other information regarding the financial condition, operations, or business of the Guarantor and its Subsidiaries as the Lender may reasonably request. 7.02 Existence, Etc. The Borrower will: (a) preserve and maintain its legal existence and all of its material rights, privileges, licenses and franchises; (b) comply with the requirements of all applicable laws, rules, regulations and orders of Governmental Authorities (including, without limitation, all environmental laws) if failure to comply with such requirements would be reasonably likely (either individually or in the aggregate) to have a Material Adverse Effect; and (c) keep adequate records and books of account, in which complete entries will be made in accordance with GAAP consistently applied. 7.03 Insurance. The Borrower shall maintain insurance with financially sound and reputable insurance companies, and with respect to property and risks of a character usually maintained by entities engaged in the same or similar business similarly situated, against loss, damage and liability of the kinds and in the amounts customarily maintained by such entities. 7.04 Prohibition of Fundamental Changes. The Borrower shall not enter into any transaction of merger or consolidation or amalgamation, or liquidate, wind up or dissolve itself (or suffer any liquidation, winding up or dissolution) or sell all or substantially all of its assets; provided, however, that the Borrower may merge or consolidate with any other Person if (i) the surviving entity assumes all of the obligations of the Borrower hereunder, and (ii) immediately after giving effect to such merger or consolidation, (A) the net worth of the surviving entity is not less than the net worth of the Borrower immediately prior to such transaction and (B) the rating assigned to the Guarantor by each of Standard and Poor's Ratings Group and Moody's Investors Service, Inc. is not less than the rating assigned to the Guarantor immediately prior to such transaction. 7.05 Notices. The Borrower shall give notice to the Lender, promptly upon the Borrower obtaining notice thereof: (a) of the occurrence of any Default or Event of Default; (b) of any default related to any Collateral, any Material Adverse Effect and any event or change in circumstances which could reasonably be expected to have a Material Adverse Effect; -29- 36 (c) in any event within ten (10) days after service of process on the Borrower or the Guarantor or any of its Subsidiaries, or any agent thereof for service of process, notice of all legal or arbitrable proceedings affecting the Borrower or the Guarantor or any of its Subsidiaries that questions or challenges the validity or enforceability of any of the Loan Documents; (d) in any event within thirty (30) days of the following events: (i) the occurrence or expected occurrence of any Reportable Event with respect to any Plan, a failure to make any required contribution to a Plan, the creation of any Lien in favor of the PBGC or a Plan or any withdrawal from, or the termination, reorganization or insolvency of, any Multiemployer Plan or (ii) the institution of proceedings or the taking of any other action by the PBGC or the Borrower or any Commonly Controlled Entity or any Multiemployer Plan with respect to the withdrawal from, or the terminating, reorganization or insolvency of, any Plan; and (e) any of Michael O'Hanlon, Anthony Turek, Steven Garfinkel, Dominic Gugliemi, Michael Disch, Alan Velotta, Richard Miller, Cynthia Cohn or Ray Fear shall die, suffer an inability to work for six (6) or more consecutive months, or shall no longer be employed by the Guarantor, the Borrower or any of the other Subsidiaries of the Guarantor. Each notice pursuant to this Section shall be accompanied by a statement of a Responsible Officer of the Borrower setting forth details of the occurrence referred to therein and stating what action the Borrower has taken or proposes to take with respect thereto. 7.06 Periodic Due Diligence Review. The Borrower acknowledges that the Lender has the right to perform continuing due diligence reviews with respect to the Contracts, for purposes of verifying compliance with the representations, warranties and specifications made hereunder, or otherwise, and the Borrower agrees that upon reasonable (but no less than three (3) Business Days) prior notice to the Borrower, the Lender or its authorized representatives will be permitted during normal business hours to examine, inspect, make copies of, and make extracts of, the Contract Files and any and all documents, records, agreements, instruments or information relating to such Contracts in the possession, or under the control, of the Borrower. The Borrower further agrees that the Borrower shall reimburse the Lender for the out-of-pocket costs and expenses incurred by the Lender in connection with the Lender's activities pursuant to this Section 7.06, which reimbursement shall be limited to $5,000 annually; provided, that such $5,000 annual limit shall not apply to costs and expenses incurred by the Lender hereunder after the occurrence and during the continuation of an Event of Default. 7.07. Limitation on Liens on Collateral. The Borrower will not, nor will it permit or allow others to, create, incur or permit to exist any Lien on the Collateral, other than the Lien created hereby. The Borrower will defend the Collateral against, and will take such other action as is necessary to remove, any Lien on the Collateral, other than the Lien created hereby, and the Borrower will defend the right, title and interest of the Lender in and to any. -30- 37 7.08 Certain Equipment Leases; Certain Equipment Loans (a) With respect to each Equipment Lease pledged to the Lender hereunder consisting of a master lease (a "Master Lease") supplemented with a certificate of delivery and master equipment schedules (each, a "Supplement"), the Borrower shall (i) deliver each original Supplement to the Custodian, stamped "Secured Party's Original", together with a certified copy of the related Master Lease (showing the stamped statement required under (iii), below, for inclusion in the Contract File in accordance with the terms of the Custodial Agreement), (ii) maintain exclusive possession of each original Master Lease and not permit any third-party to take possession thereof, (iii) not stamp any Supplement "Secured Party's Original" other than the original Supplement delivered to the Custodian, and (iv) stamp each Master Lease with a statement to the effect that no security interest in a Supplement may be created through the transfer or possession of any counterpart of the original Supplement other than that Supplement marked "Secured Party's Original" and a certified copy of the Master Lease. (b) With respect to each Equipment Loan pledged to the Lender hereunder consisting of a loan and security agreement or an installment sale contract (an "Obligor Loan Agreement") supplemented with a certificate of delivery and master equipment schedules (each, an "Equipment Schedule"), the Borrower shall (i) deliver each original Equipment Schedule to the Custodian, stamped "Secured Party's Original", together with a certified copy of the related Obligor Loan Agreement (showing the stamped statement required under (iii), below, for inclusion in the Contract File in accordance with the terms of the Custodial Agreement), (ii) maintain exclusive possession of each original Obligor Loan Agreement and not permit any third-party to take possession thereof, (iii) not stamp any Equipment Schedule "Secured Party's Original" other than the original Equipment Schedule delivered to the Custodian, (iv) stamp each Obligor Loan Agreement with a statement to the effect that no security interest in a Equipment Schedule may be created through the transfer or possession of any counterpart of the original Equipment Schedule other than that Equipment Schedule marked "Secured Party's Original" and a certified copy of the Obligor Loan Agreement, and (v) if any promissory note or promissory notes were executed in connection with the origination of such Equipment Loan or otherwise, deliver such original promissory note or promissory notes to the Custodian. 7.09 Underwriting Guidelines. Without prior written notice to the Lender, the Borrower shall not amend or otherwise modify the Underwriting Guidelines. 7.10 Limitation on Transactions with Affiliates. The Borrower shall not enter into any transaction, including, without limitation, any purchase, sale, lease or exchange of property or the rendering of any service, with any Affiliate unless such transaction is (a) not otherwise prohibited under this Loan Agreement, (b) in the ordinary course of the Borrower's business and (c) upon fair and reasonable terms no less favorable to the Borrower, as the case may be, than it would obtain in a comparable arm's length transaction with a Person which is not an Affiliate. -31- 38 7.11 Limitation on Changes in Fiscal Year. The Borrower shall not permit its fiscal year to end on a day other than June 30. 7.12 Limitation on Lines of Business. The Borrower shall notify the Lender in writing no later than two (2) Business Days prior to any Funding Date, if it shall have entered into any line of business, either directly or through any Subsidiary, other than those lines of businesses in which the Borrower and its Subsidiaries are engaged on the date of this Loan Agreement or which are directly related thereto, unless the Borrower has previously notified the Lender in writing thereof. 7.13 Limitations on Modifications, Waivers and Extensions of Contracts. The Borrower will not, nor will it permit or allow others to, amend, modify, terminate or waive any provision of any Contract to which the Borrower is a party in any manner which could reasonably be expected to materially adversely affect the value of such Contract as Collateral. The Borrower will (i) exercise promptly and diligently each and every material right which the Borrower may have under each Contract (other than any right of termination, but including the enforcement of warranty, servicing and other obligations of manufacturers and other parties) except where the failure to so act could not materially adversely affect the value of such Contract as Collateral and (ii) deliver to the Lender a copy of each material demand, notice or document received by it relating in any way to any Contract other than any such demand, notice or document relating to the delinquency of a Contract or the bankruptcy of the obligor thereunder. 7.14 Further Identification of Collateral. The Borrower will furnish to the Lender from time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as the Lender may reasonably request, all in reasonable detail. 7.15 Limitation on Collection Account. The Borrower will not, nor will it permit or allow others on its behalf to, establish a collection account for the receipt of payments pursuant to the Contracts with a financial institution other than one acceptable to the Lender in the exercise of its reasonable discretion and upon such terms as reasonably required by the Lender. 7.16 Limitation on Sale or Other Disposition of Collateral. The Borrower will not sell, lease, transfer, assign or otherwise dispose of any Collateral, except that Borrower may transfer, assign or otherwise dispose of Collateral if (i) no Default or Event of Default has occurred and is continuing, (ii) the Borrower provides the Lender with at least two (2) Business Days' advance notice thereof, (iii) the Borrower has demonstrated to the Lender's reasonable satisfaction, as expressed by the Lender in writing, that after giving effect to such sale, lease, transfer, assignment or other disposition, no Borrowing Base Deficiency shall exist, and (iv) such sale, lease, transfer, assignment or other disposition satisfies such other terms and conditions as the Lender may reasonably specify in advance of such sale, lease, transfer, assignment or other disposition. -32- 39 7.17 Repayment of Loans if Contract is Found Defective. (a) Upon discovery by the Borrower or the Lender of any breach of any representation or warranty listed on Schedule 1 hereto applicable to any Contract, the party discovering such breach shall promptly give notice of such discovery to the other. (b) The Lender has the right, in its unreviewable discretion, to require the Borrower to prepay the amount of any Loan made in respect of, or at the option of the Borrower, to substitute an Eligible Contract for, any Contract (i) which breaches one or more of the representations and warranties applicable thereto listed on Schedule 1 hereto or (ii) which is determined in the reasonable judgment of the Lender to be unacceptable for inclusion in a securitized pool relating to the Certificates, in each case no later than two (2) Business Days after receipt by the Borrower of notice thereof from the Lender. 7.18 Monthly Officer's Certificate. The Borrower shall deliver to the Lender, no later than thirty (30) days after the last day of each calendar month, a certificate of a Responsible Officer of the Borrower to the effect that, (i) to the best of such Responsible Officer's knowledge, each of the Borrower and the Guarantor during such calendar month has observed or performed in all material respects all of its covenants (including, without limitation, the financial covenants set forth in the Guarantee) and other agreements, and satisfied every condition, contained in this Loan Agreement and the other Loan Documents to be observed, performed or satisfied by it (accompanied by supporting documentation and calculations showing such compliance in a covenant compliance certificate in the form of Exhibit G hereto (a "Covenant Compliance Certificate")), (ii) that such Responsible Officer has obtained no knowledge of any Default or Event of Default except as specified in such certificate (and, if any Default or Event of Default has occurred and is continuing, describing the same in reasonable detail and describing the action the Borrower has taken or proposes to take with respect thereto), (iii) attaching a borrowing base certificate substantially in the form of Exhibit F hereto (a "Borrowing Base Certificate") setting forth the Borrowing Base as at the most recent Interest Payment Date to occur prior thereto, and (iv) attaching an updated Contract Schedule. 7.19 Data Pool Report. The Borrower shall deliver to the Lender, one (1) Business Day prior to each Funding Date and no later than five (5) days after the end of each calendar quarter, (i) a complete "Data Pool" profile report including the following categories: type of Equipment, transaction size, end user discipline and the Borrower's percentage approval ratio, substantially in the form of Exhibit H hereto, and (ii) a computer readable diskette or electronic transmission containing information reasonably requested by the Lender to enable the Lender to generate its own reports in respect of the Contracts and other Collateral pledged hereunder. Section 8. Events of Default. Each of the following events shall constitute an event of default (an "Event of Default") hereunder: -33- 40 (a) the Borrower shall default in the payment of any principal of or interest on any Loan when due (whether at stated maturity, upon acceleration or at mandatory or optional prepayment); or (b) the Borrower shall default in the payment of any other amount payable by it hereunder or under any other Loan Document after receipt by the Borrower of a written demand therefor by the Lender, and such default shall have continued unremedied for five Business Days; or (c) any representation, warranty or certification made or deemed made by the Borrower herein (other than those in Schedule 1 hereto) or by the Borrower or the Guarantor in any other Loan Document or any certificate furnished to the Lender pursuant to the provisions thereof, shall prove to have been false or misleading in any material respect as of the time made or furnished; or (d) the Borrower shall fail to comply with the requirements of Section 2.06 or Section 7 hereof (other than Sections 7.01, 7.13(ii), 7.14, 7.18 and 7.19); or the Borrower shall otherwise fail to comply with the requirements of Sections 7.01, 7.13(ii), 7.14, 7.18 or 7.19 and such default shall continue unremedied for a period of five (5) Business Days; or the Borrower shall fail to observe or perform any other agreement contained in this Loan Agreement or any other Loan Document and such failure to observe or perform shall continue unremedied for a period of fifteen (15) Business Days; or (e) the Guarantor shall fail to comply with the requirements of paragraph 10 of the Guarantee; or the Guarantor shall fail to observe or perform any other agreement contained in the Guarantee and such failure to observe or perform shall continue unremedied for a period of fifteen (15) Business Days; or (f) a final judgment or judgments for the payment of money in excess of $2,000,000 in the aggregate shall be rendered against the Borrower or any of its Subsidiaries or the Guarantor by one or more courts, administrative tribunals or other bodies having jurisdiction over them and the same shall not be discharged (or provision shall not be made for such discharge) or bonded, or a stay of execution thereof shall not be procured, within 60 days from the date of entry thereof and the Borrower or any such Subsidiary or the Guarantor shall not, within said period of 60 days, or such longer period during which execution of the same shall have been stayed or bonded, appeal therefrom and cause the execution thereof to be stayed during such appeal; or (g) the Guarantor or the Borrower shall admit in writing its inability to pay its debts as such debts become due; or (h) the Guarantor or the Borrower or any of its Subsidiaries shall (i) apply for or consent to the appointment of, or the taking of possession by, a receiver, custodian, trustee, examiner or liquidator of itself or of all or a substantial part of its property, (ii) make a general assignment for the benefit of its creditors, (iii) commence -34- 41 a voluntary case under the Bankruptcy Code, (iv) file a petition seeking to take advantage of any other law relating to bankruptcy, insolvency, reorganization, liquidation, dissolution, arrangement or winding-up, or composition or readjustment of debts, (v) fail to controvert in a timely and appropriate manner, or acquiesce in writing to, any petition filed against it in an involuntary case under the Bankruptcy Code or (vi) take any corporate or other action for the purpose of effecting any of the foregoing; or (i) a proceeding or case shall be commenced, without the application or consent of the Guarantor, the Borrower or any of its Subsidiaries, in any court of competent jurisdiction, seeking (i) its reorganization, liquidation, dissolution, arrangement or winding-up, or the composition or readjustment of its debts, (ii) the appointment of a receiver, custodian, trustee, examiner, liquidator or the like of the Borrower or any such Subsidiary or of all or any substantial part of its property, or (iii) similar relief in respect of the Borrower or any such Subsidiary under any law relating to bankruptcy, insolvency, reorganization, winding-up, or composition or adjustment of debts, and such proceeding or case shall continue undismissed, or an order, judgment or decree approving or ordering any of the foregoing shall be entered and continue unstayed and in effect, for a period of 60 or more days; or an order for relief against the Borrower or any such Subsidiary shall be entered in an involuntary case under the Bankruptcy Code; or (j) the Custodial Agreement or the Guarantee shall for whatever reason be terminated or cease to be in full force and effect, or the enforceability thereof shall be contested by any party thereto; or (k) (i) Any Person shall engage in any "prohibited transaction" (as defined in Section 406 of ERISA or Section 4975 of the Code) involving any Plan, (ii) any "accumulated funding deficiency" (as defined in Section 302 of ERISA), whether or not waived, shall exist with respect to any Plan or any Lien in favor of the PBGC or a Plan shall arise on the assets of the Borrower or any Commonly Controlled Entity, (iii) a Reportable Event shall occur with respect to, or proceedings shall commence to have a trustee appointed, or a trustee shall be appointed, to administer or to terminate, any Single Employer Plan, which Reportable Event or commencement of proceedings or appointment of a trustee is, in the reasonable opinion of the Required Lenders, likely to result in the termination of such Plan for purposes of Title IV of ERISA, (iv) any Single Employer Plan shall terminate for purposes of Title IV of ERISA, (v) the Borrower or any Commonly Controlled Entity shall, or in the reasonable opinion of the Required Lenders is likely to, incur any liability in connection with a withdrawal from, or the insolvency or reorganization of, a Multiemployer Plan or (vi) any other event or condition shall occur or exist with respect to a Plan; and in each case in clauses (i) through (vi) above, such event or condition, together with all other such events or conditions, if any, could reasonably be expected to have a Material Adverse Effect; or (l) (i) the Guarantor shall at any time own, beneficially and of record, less than 100% of all of the issued and outstanding shares of Capital Stock of the Borrower -35- 42 having ordinary voting rights for the election of directors, or (ii) the Pritzker family, Gerald Cohn and members of his immediate family and David Higgins, on a combined basis, shall at any time own, beneficially and of record, less than the greater of (x) 20% of all of the issued and outstanding shares of Capital Stock of the Guarantor having ordinary voting rights for the election of directors, or (y) such greater percentage as is necessary so that such Persons constitute the single largest block of shareholders of such issued and outstanding shares Capital Stock of the Guarantor; or (m) any four (4) of Michael O'Hanlon, Anthony Turek, Steven Garfinkel, Dominic Gugliemi, Michael Disch, Alan Velotta, Richard Miller, Cynthia Cohn or Ray Fear shall die, suffer an inability to work for six (6) or more consecutive months, or shall no longer be employed by the Guarantor, the Borrower or any of the other Subsidiaries of the Guarantor; or (n) any other event shall occur which, in the sole discretion of the Lender, has had a Material Adverse Effect. Section 9. Remedies Upon Default. (a) Upon the occurrence of one or more Events of Default other than those referred to in Section 8(h) or (i) with respect to the Borrower, the Lender may immediately declare the principal amount of the Loans then outstanding under the Note to be immediately due and payable, together with all interest thereon and fees and expenses accruing under this Loan Agreement; provided that upon the occurrence of an Event of Default referred to in Sections 8(h) or (i), such amounts shall immediately and automatically become due and payable without any further action by any Person. Upon such declaration or such automatic acceleration, the balance then outstanding on the Note shall become immediately due and payable, without presentment, demand, protest or other formalities of any kind, all of which are hereby expressly waived by the Borrower. (b) Upon the occurrence of one or more Events of Default, the Lender shall, in addition to the remedies set forth in Section 4.07 hereof, have the right to obtain physical possession of the Servicing Records and all other files of the Borrower relating to the Collateral and all documents relating to the Collateral which are then or may thereafter come in to the possession of the Borrower or any third party acting for the Borrower and the Borrower shall deliver to the Lender such assignments as the Lender shall reasonably request. The Lender shall be entitled to specific performance of all agreements of the Borrower contained in this Loan Agreement. Section 10. No Duty on Lender's Part. The powers conferred on the Lender hereunder are solely to protect the Lender's interests in the Collateral and shall not impose any duty upon it to exercise any such powers. The Lender shall be accountable only for amounts that it actually receives as a result of the exercise of such powers, and neither it nor any of its officers, directors, employees or agents shall be responsible to the Borrower for any act or failure to act hereunder, except for its or their own gross negligence or willful misconduct. -36- 43 Section 11. Miscellaneous. 11.01 Waiver. No failure on the part of the Lender to exercise and no delay in exercising, and no course of dealing with respect to, any right, power or privilege under any Loan Document shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege under any Loan Document preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. 11.02 Notices. Except as otherwise expressly permitted by this Loan Agreement, all notices, requests and other communications provided for herein and under the other Loan Documents (including, without limitation, any modifications of, or waivers, requests or consents under, this Loan Agreement) shall be given or made in writing (including, without limitation, by telex or telecopy) delivered to the intended recipient at the "Address for Notices" specified below its name on the signature pages hereof); or, as to any party, at such other address as shall be designated by such party in a written notice to each other party. Except as otherwise provided in this Loan Agreement and except for notices given under Section 2 (which shall be effective only on receipt), all such communications shall be deemed to have been duly given when transmitted by telex or telecopier or personally delivered or, in the case of a mailed notice, upon receipt, in each case given or addressed as aforesaid. 11.03 Indemnification and Expenses. (a) The Borrower agrees to indemnify and hold harmless the Lender and each of its Affiliates and their officers, directors, employees, agents and advisors (each, an "Indemnified Party") from and against any and all claims, damages, losses, liabilities, judgments, costs and expenses of any kind which may be imposed on, incurred by, or asserted against any Indemnified Party, relating to or arising out of, this Loan Agreement, the Note, any other Loan Document or any transaction contemplated hereby or thereby, or any amendment, supplement or modification of, or any waiver or consent under or in respect of, this Loan Agreement, the Note, any other Loan Document or any transaction contemplated hereby or thereby, that, in each case, results from anything other than such Indemnified Party's gross negligence or willful misconduct. In any suit, proceeding or action brought by any Indemnified Party in connection with any Contract for any sum owing thereunder, or to enforce any provisions of any Contract, the Borrower will save, indemnify and hold such Indemnified Party harmless from and against all expense, loss or damage suffered by reason of any defense, set-off, counterclaim, recoupment or reduction or liability whatsoever of the account debtor or obligor thereunder, arising out of a breach by the Borrower of any obligation thereunder or arising out of any other agreement, indebtedness or liability at any time owing to or in favor of such account debtor or obligor or its successors from the Borrower. The Borrower also agrees to reimburse the Lender for all its costs and expenses incurred in connection with the enforcement or the preservation of the Lender's rights under this Loan Agreement, the Note, any other Loan Document or any transaction contemplated hereby or thereby, including without limitation the reasonable fees and disbursements of its counsel. The Borrower hereby acknowledges that, notwithstanding the fact that the Note is secured by the -37- 44 Collateral, the obligation of the Borrower under the Secured Note is a recourse obligation of the Borrower. (b) The Borrower agrees to pay as and when billed by the Lender all of the reasonable out-of-pocket costs and expenses incurred by the Lender in connection with the development, preparation and execution of, and any amendment, supplement or modification to, this Loan Agreement, the Note, any other Loan Document or any other documents prepared in connection herewith or therewith. The Borrower agrees to pay as and when billed by the Lender all of the reasonable out-of-pocket costs and expenses incurred in connection with the consummation and administration of the transactions contemplated hereby and thereby including, without limitation, all the reasonable fees, disbursements and expenses of Cadwalader, Wickersham & Taft, counsel to the Lender, and those costs and expenses payable to the Lender pursuant to Section 7.06 hereof. 11.04 Amendments. Except as otherwise expressly provided in this Loan Agreement, any provision of this Loan Agreement may be modified or supplemented only by an instrument in writing signed by the Borrower and the Lender and any provision of this Loan Agreement may be waived by the Lender. 11.05 Successors and Assigns, Etc.. This Loan Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. The Lender may, in accordance with applicable law, at any time sell to one or more lenders participating interests in the Loans, the Note or any other interest of the Lender hereunder and under the other Loan Documents, or assign and transfer all or any of its rights or obligations under any Loan Document to one or more lenders at any time; provided, however, that in any such transaction, the Lender shall remain as agent for any such other lender or lenders. The Borrower may not assign any of its rights or obligations hereunder or under any other Loan Document without the prior written consent of the Lender. 11.06 Survival. The obligations of the Borrower under Section 2.07 and 11.03 hereof shall survive the repayment of the Loans and the termination of this Loan Agreement. In addition, each representation and warranty made, or deemed to be made by a request for a borrowing, herein or pursuant hereto shall survive the making of such representation and warranty, and the Lender shall not be deemed to have waived, by reason of making any Loan, any Default that may arise by reason of such representation or warranty proving to have been false or misleading, notwithstanding that the Lender may have had notice or knowledge or reason to believe that such representation or warranty was false or misleading at the time such Loan was made. 11.07 Captions. The table of contents and captions and section headings appearing herein are included solely for convenience of reference and are not intended to affect the interpretation of any provision of this Loan Agreement. 11.08 Counterparts. This Loan Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument, and any of the parties hereto may execute this Loan Agreement by signing any such counterpart. -38- 45 11.09 Loan Agreement Constitutes Security Agreement; Governing Law. This Loan Agreement shall be governed by New York law without reference to choice of law doctrine, and shall constitute a security agreement within the meaning of the Uniform Commercial Code. 11.10 SUBMISSION TO JURISDICTION; WAIVERS. THE BORROWER HEREBY IRREVOCABLY AND UNCONDITIONALLY: (A) SUBMITS FOR ITSELF AND ITS PROPERTY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS LOAN AGREEMENT, THE NOTE AND THE OTHER LOAN DOCUMENTS, OR FOR RECOGNITION AND ENFORCEMENT OF ANY JUDGMENT IN RESPECT THEREOF, TO THE NON-EXCLUSIVE GENERAL JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK, THE FEDERAL COURTS OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK, AND APPELLATE COURTS FROM ANY THEREOF; (B) CONSENTS THAT ANY SUCH ACTION OR PROCEEDING MAY BE BROUGHT IN SUCH COURTS AND, TO THE EXTENT PERMITTED BY LAW, WAIVES ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING IN ANY SUCH COURT OR THAT SUCH ACTION OR PROCEEDING WAS BROUGHT IN AN INCONVENIENT COURT AND AGREES NOT TO PLEAD OR CLAIM THE SAME; (C) AGREES THAT SERVICE OF PROCESS IN ANY SUCH ACTION OR PROCEEDING MAY BE EFFECTED BY MAILING A COPY THEREOF BY REGISTERED OR CERTIFIED MAIL (OR ANY SUBSTANTIALLY SIMILAR FORM OF MAIL), POSTAGE PREPAID, TO ITS ADDRESS SET FORTH UNDER ITS SIGNATURE BELOW OR AT SUCH OTHER ADDRESS OF WHICH THE LENDER SHALL HAVE BEEN NOTIFIED IN ACCORDANCE WITH SECTION 11.02 HEREOF; AND (D) AGREES THAT NOTHING HEREIN SHALL AFFECT THE RIGHT TO EFFECT SERVICE OF PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT TO SUE IN ANY OTHER JURISDICTION. 11.11 WAIVER OF JURY TRIAL. EACH OF THE BORROWER AND THE LENDER HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS LOAN AGREEMENT, ANY OTHER LOAN DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. -39- 46 11.12 Acknowledgments. The Borrower hereby acknowledges that: (a) it has been advised by counsel in the negotiation, execution and delivery of this Loan Agreement, the Note and the other Loan Documents; (b) the Lender has no fiduciary relationship to the Borrower, and the relationship between the Borrower and the Lender is solely that of debtor and creditor; and (c) no joint venture exists between the Lender and the Borrower. 11.13 Hypothecation or Pledge of Loans. The Lender shall have free and unrestricted use of all Collateral and nothing in this Agreement shall preclude the Lender from engaging in repurchase transactions with the Collateral or otherwise pledging, repledging, transferring, hypothecating, or rehypothecating the Collateral. Nothing contained in this Loan Agreement shall obligate the Lender to segregate any Collateral delivered to the Lender by the Borrower. 11.14 Servicing. (a) The Borrower shall service and administer the Contracts in accordance with due care and customary and prudent servicing procedures for equipment leases, security agreements and installment sale contracts of a similar type and, prior to the occurrence of an Event of Default, shall have full power and authority to do any and all things not inconsistent with the provisions of this Loan Agreement which it may deem necessary or desirable in connection with such servicing and administration. In the event that the preceding language is interpreted as constituting one or more servicing contracts, each such servicing contract shall terminate automatically upon the earliest of (i) an Event of Default, or (ii) the date on which all the Secured Obligations have been paid in full, or (iii) the transfer of servicing approved by the Lender. (b) If the Contracts are serviced by the Borrower, (i) the Borrower acknowledges that Lender has been granted a security interest in all servicing records, including but not limited to any and all servicing agreements, files, documents, records, data bases, computer tapes, copies of computer tapes, proof of insurance coverage, insurance policies, appraisals, other closing documentation, payment history records, and any other records relating to or evidencing the servicing of Contracts (the "Servicing Records"), and (ii) the Borrower grants the Lender a security interest in all servicing fees and rights relating to the Contracts and all Servicing Records to secure the obligation of the Borrower or its designee to service in conformity with this Section and any other obligation of Borrower to the Lender. The Borrower covenants to safeguard such Servicing Records and to deliver them promptly to the Lender or its designee (including the Custodian) at the Lender's request. (c) If the Contracts are serviced by a third party servicer (such third party servicer, the "Servicer"), the Borrower (i) shall provide a copy of the servicing agreement to the Lender (the "Servicing Agreement"); and (ii) hereby irrevocably assigns to the Lender and -40- 47 Lender's successors and assigns all right, title, interest and the benefits of the Servicing Agreement with respect to the Contracts. (d) The Borrower shall provide to the Lender a letter from the Servicer to the effect that upon the occurrence of an Event of Default, the Lender may terminate the Servicing Agreement and transfer such servicing to its designee, at no cost or expense to the Lender, it being agreed that the Borrower will pay any and all fees required to terminate the Servicing Agreement and to effectuate the transfer of servicing to the Lender. (e) After the Funding Date, until the pledge of such Contract is relinquished by the Custodian, the Borrower will have no right to modify or alter the terms of the Contract and the Borrower will have no obligation or right to repossess the Contract or substitute another Contract, except as provided in the Custodial Agreement. 11.15 Set-Off. In addition to any rights and remedies of the Lender provided by this Loan Agreement and by law, the Lender shall have the right, without prior notice to the Borrower, any such notice being expressly waived by the Borrower to the extent permitted by applicable law, upon any amount becoming due and payable by the Borrower hereunder (whether at the stated maturity, by acceleration or otherwise) to set-off and appropriate and apply against such amount any and all deposits (general or special, time or demand, provisional or final), in any currency, and any other credits, indebtedness or claims, in any currency, in each case whether direct or indirect, absolute or contingent, matured or unmatured, at any time held or owing by the Lender or any Affiliate thereof to or for the credit or the account of the Borrower. The Lender agrees promptly to notify the Borrower after any such set-off and application made by the Lender, provided that the failure to give such notice shall not affect the validity of such set-off and application. [SIGNATURE PAGE FOLLOWS] -41- 48 IN WITNESS WHEREOF, the parties hereto have caused this Loan Agreement to be duly executed and delivered as of the day and year first above written. BORROWER DVI FINANCIAL SERVICES INC. By___________________ Name Title: Address for Notices: 500 Hyde Park Doylestown, PA 18901 Attention: Mark Shapiro Telecopier No.: 215-230-5328 Telephone No.: 215-230-2943 LENDER LEHMAN COMMERCIAL PAPER INC. By___________________ Name Title: Address for Notices: 3 World Financial Center 200 Vesey Street New York, NY 10285-0800 Attn: Francis X. Gilhool / Vincent Primiano Telecopier No.: 212-528-9284 Telephone No.: 212-526-6970 49 SCHEDULE 1 REPRESENTATIONS AND WARRANTIES OF THE BORROWER IN RESPECT OF THE CONTRACTS As to each Contract included in the Borrowing Base on a Funding Date (and the related Equipment), the Borrower shall be deemed to make the following representations and warranties to the Lender on and as of such Funding Date and at all times thereafter while such Contract is pledged to the Lender hereunder: (i) Such Contract and all accompanying documents are complete and authentic and all signatures thereon are genuine. (ii) Such Contract arose from a bona fide lease or installment sale or loan to an Eligible Obligor, complying with all applicable state and Federal laws and regulations, to Persons having the legal capacity to contract and is not subject to any defense, set-off or counterclaim. "Eligible Obligor" means, at any time, an Obligor which (1) is currently not more than 60 days delinquent in making a payment; (2) is not an Affiliate of the Borrower; (3) is located in the United States; and (4) is not an agency, a department, an instrumentality or a political subdivision of the United States or of any state or local government. (iii) All amounts represented to be payable under such Contract are, in fact, payable in accordance with the provisions of such Contract, the first scheduled monthly payment then due and owing or a down payment has been made with respect to such Contract and no payments under such Contract are more than 60 days past due. (iv) To the best of the Borrower's knowledge, all property subject to any Lien given in connection with such Contract is not subject to any encumbrance, except for Liens released simultaneously with the grant of the Lien in favor of the Lender hereunder in such Contract. (v) The Borrower held good and indefeasible title to, and was the sole owner of, the Collateral, and such Collateral is not subject to any Lien except for Liens released simultaneously with the Borrower's pledge of Collateral made herein. (vi) Such Contract conforms to the description thereof as set forth on the related Contract Schedule, and each Contract, other than an FMV Lease, is a financing lease intended to create a security interest in accordance with Section 1-201(37) of the Uniform Commercial Code or a security agreement creating a valid security interest under the Uniform Commercial Code. (vii) Such Contract has not been declared ineligible, rejected or refused as unacceptable for inclusion under (A) the First Amended and Restated Loan Agreement, 50 amended and restated as of March 28, 1995, between the Borrower, the banks signatory thereto and NatWest Bank N.A., as agent, as amended from time to time, (B) the Loan and Security Agreement, dated as of July 27, 1995, between the Borrower and Union Bank of Switzerland, New York Branch, as amended from time to time, (C) the Amended and Restated Interim Loan and Security Agreement, dated as of September 13, 1994, between the Borrower and Prudential Securities Realty Funding Corporation, as amended from time to time, or (D) any other securitization or warehouse loan agreement entered into by the Borrower, (other than by reason of concentration limits); and such Contract, if purchased by the Borrower from another lender, was not purchased because such Contract was in default to such other lender. (viii) All information in respect of such Contract set forth in the Contract Schedule is true and correct. (ix) (A) Such Contract contains provisions requiring the Obligor to assume all risk of loss or malfunction of the related Equipment and to maintain appropriate liability insurance with respect thereto, and making the Obligor absolutely and unconditionally liable for all payments required to be made thereunder, without any right of set-off for any reason whatsoever, subject only to the Obligor's right of quiet enjoyment, (B) such Contract may not be terminated or prepaid unless the amount required to be paid by or on behalf of an Obligor in respect of such prepayment is equal to or in excess of the Discounted Present Value of such Contract plus accrued interest, (C) such Contract does not provide for the substitution, exchange or addition of any other items of Equipment pursuant to such Contract that would result in any reduction or extension of payments due under such Contract, (D) the rights with respect to such Contract are assignable by the Borrower without the consent of any Person and (E) such Contract enables the Borrower to (subject to any applicable grace, cure and notice periods) declare all payments thereunder to be immediately due and payable if the Obligor is in default of such Contract. (x) To the best of the Borrower's knowledge after due inquiry, all requirements of applicable Federal, state and local laws, and regulations thereunder, including, without limitation, usury laws, if any, in respect of such Contract have been complied with in all material respects. (xi) To the best of the Borrower's knowledge after due inquiry, such Contract represents the legal, valid and binding obligation of the Obligor, enforceable in accordance with its terms, subject to bankruptcy, insolvency and other similar laws (including, but not limited to, principles of equity) affecting the rights of creditors generally. (xii) No instrument of release or waiver has been executed in connection with such Contract, and no Obligor in respect of such Contract has been released from its obligations thereunder, in whole or in part. -2- 51 (xiii) Such Contract has not been amended after the date on which such Contract is listed on the Contract Schedule and pledged to the Lender hereunder except with the prior written approval of the Lender. (xiv) Such Contract is not subject to any right of rescission, set-off, counterclaim or defense, including the defense of usury, and, to the best of Borrower's knowledge, no such right of rescission, set-off, counterclaim or defense has been asserted with respect thereto. (xv) There is no proceeding or investigation pending or, to the best of Borrower's knowledge after due inquiry, threatened, before any court, regulatory body, administrative agency, or other tribunal or governmental instrumentality (A) asserting the invalidity of such Contract, (B) asserting the bankruptcy or insolvency of an Obligor, (C) seeking to prevent payment and performance of such Contract or (D) seeking any determination or ruling that might materially and adversely affect the validity or enforceability of such Contract. (xvi) The Borrower has duly fulfilled all obligations on its part to be fulfilled under or in connection with such Contract and has done nothing to impair the rights of the Lender in such Contract or payments with respect thereto. (xvii) There is no monetary default, breach, violation or event of acceleration existing under such Contract, and no event has occurred which, with the passage of time or with notice, or both, would constitute a monetary default, breach, violation or event of acceleration that has or will cause a prepayment of Loans made in respect of such Contract pursuant to this Loan Agreement; there is no non-monetary default, breach, violation or event of acceleration existing under such Contract, and no event has occurred which, with the passage of time or with notice, or both, would constitute a non-monetary default, breach, violation or event of acceleration; the Borrower has not waived any monetary or non-monetary default, breach, violation or event of acceleration in respect of such Contract; and no payment (or portion thereof) under such Contract has been written off by the Borrower as uncollectible. (xviii) All parties to such Contract had legal capacity to execute such Contract and such Contract has been duly and properly executed by such parties. (xix) Such Contract was not selected by the Borrower on any basis intended to adversely affect the value of the Lender's Lien therein. (xx) Such Contract was not originated in, nor is it subject to the laws of, any jurisdiction the laws of which would make unlawful the pledge, transfer or assignment of such Contract under this Loan Agreement, including any sale in accordance with this Loan Agreement. (xxi) Immediately after the pledge, assignment and transfer to the Lender as herein contemplated, all necessary action will have been taken (including the filing or -3- 52 amendment of Uniform Commercial Code financing statements in all applicable jurisdictions) to grant a valid and enforceable first priority perfected Lien in such Contract and all payments to become due thereunder and all rights of the Borrower in the Equipment that is the subject of such Contract. (xxii) (A) Such Contract has not been sold, transferred, assigned or pledged by the Borrower to any Person other than the Lender, except for Liens released simultaneously with the grant of the Lien in favor of the Lender hereunder, (B) immediately prior to the pledge and conveyance of such Contract pursuant to Section 4 hereof, the Borrower was the sole owner of such Contract and had good and marketable title thereto, free and clear of all Liens, except for Liens released simultaneously with the grant of the Lien in favor of the Lender hereunder and (C) upon execution and delivery hereof by the Borrower, the Lender will have a first priority perfected Lien in all of the right, title and interest of the Borrower in and to such Contract and the payments to become due thereunder, free and clear of all Liens, except for the interests of Obligors pursuant to the Contract. (xxiii) If such Contract constitutes "chattel paper" for purposes of Sections 9-105(1)(b) and 9-308 of the Uniform Commercial Code as in effect in any applicable jurisdiction, there is only one original executed counterpart thereof marked "Secured Party's Original" and such original has been delivered to the Custodian in accordance with the Loan Agreement and the Custodial Agreement. (xxiv) Any "instrument" for purposes of Section 9-105(1)(i) and 9-308 of the Uniform Commercial Code as in effect in any applicable jurisdiction executed in respect of such Contract has been delivered to the Custodian in accordance with the Custodial Agreement. (xxv) With respect to each Equipment Lease consisting of a Master Lease supplemented with a Supplement, (i) the original Supplement has been delivered to the Custodian, stamped "Secured Party's Original", together with a certified copy of the related Master Lease (showing the stamped statement required under (iii), below) for inclusion in the Contract File in accordance with the terms of the Custodial Agreement, (ii) the Borrower has exclusive possession of the original Master Lease and no third-party has taken possession thereof, (iii) the Borrower has not stamped any Supplement "Secured Party's Original" other than the original Supplement delivered to the Custodian, and (iv) each Master Lease has been stamped with a statement to the effect that no security interest in a Supplement may be created through the transfer or possession of any counterpart of the original Supplement other than that Supplement marked "Secured Party's Original" and a certified copy of the Master Lease. (xxvi) With respect to each Equipment Loan pledged to the Lender hereunder consisting of an Obligor Loan Agreement supplemented with an Equipment Schedule, (i) the original Equipment Schedule has been delivered to the Custodian, stamped "Secured Party's Original", together with a certified copy of the related -4- 53 Obligor Loan Agreement (showing the stamped statement required under (iii), below), for inclusion in the Contract File in accordance with the terms of the Custodial Agreement, (ii) the Borrower has exclusive possession of the original Obligor Loan Agreement and no third-party has taken possession thereof, (iii) the Borrower has not stamped any Equipment Schedule "Secured Party's Original" other than the original Equipment Schedule delivered to the Custodian, (iv) each Obligor Loan Agreement has been stamped with a statement to the effect that no security interest in a Equipment Schedule may be created through the transfer or possession of any counterpart of the original Equipment Schedule other than that Equipment Schedule marked "Secured Party's Original" and a certified copy of the Obligor Loan Agreement, and (v) if any promissory note or promissory notes were executed in connection with the origination of such Equipment Loan or otherwise, such original promissory note or promissory notes have been delivered to the Custodian. (xxvii) The Borrower's computer records have been marked to indicate that such Contract has been pledged, assigned and transferred to the Lender pursuant to this Loan Agreement. (xxviii) All insurance policies required to be maintained by such Contract are in full force and effect and such insurance policies are of a type customary for the Equipment covered thereby. (xxix) The credit standing of the related Obligor of the Equipment subject to such Contract was approved by the Borrower using its customary practices and procedures. To the best of the Borrower's knowledge, unless the Borrower has notified the Lender in writing, the Obligor is not and has never been insolvent or the subject of any bankruptcy or insolvency proceeding and the Borrower has no knowledge of any circumstance or condition with respect to such Contract, such Equipment or the Obligor's credit standing that could reasonably be expected to cause the Lender to regard such Contract as an unacceptable security, cause such Contract to become delinquent or adversely affect the value or marketability of such Contract. (xxx) The Equipment subject to such Contract was properly delivered to the Obligor in good repair, without defects and in satisfactory order and, to the best of Borrower's knowledge, is in proper working order as of the date on which such Contract was pledged to the Lender and listed on the Contract Schedule. (xxxi) The Exposure does not exceed the lesser of (x) 30% of the value of the collateral securing such Contract, or (y) $500,000. (xxxii) The Contract was originated within twelve (12) calendar months from the date such Contract was first included in the Borrowing Base. (xxxiii) The Obligor in respect of such Contract is currently operating and carrying on its business (not preparing to operate and carry on its business). -5- 54 (xxxiv) If the Contract is an Equipment Loan, it bears a fixed interest rate and is not convertible to an adjustable interest rate. -6- 55 SCHEDULE 2 FILING JURISDICTIONS AND OFFICES Secretary of the Commonwealth of Pennsylvania Prothonotary of Bucks County, PA 56 SCHEDULE 3 SUBSIDIARIES OF DVI, INC.(1) DVI Financial Services Inc. (Date of Inc.: 4/30/86) DVI Business Credit Corporation (Date of Inc.: 7/2/91) DVI Healthcare Operations, Inc. (Date of Inc.: 7/9/91) SUBSIDIARIES OF DVI FINANCIAL SERVICES, INC.(1) DVI Lease Finance Corporation II (Date of Inc.: 4/13/93) DVI Lease Receivables Corp. 1993-A (Date of Inc.: 12/14/93) DVI Receivables Corp. (Date of Inc.: 1/21/94) DVI Subordinated Securities Corp. (Date of Inc.: 5/29/96) DVI Receivables Corp. II (Date of Inc.: 6/3/96) DVI Lease Finance Corporation III (Date of Inc.: 6/26/96) SUBSIDIARIES OF DVI BUSINESS CREDIT CORPORATION(1) DVI Business Credit Receivables Corp. (Date of Inc.: 12/20/95) - ---------- (1) All of the issued and outstanding common stock of each subsidiary is owned by its respective parent. 57 EXHIBIT A [FORM OF PROMISSORY NOTE] $100,000,000 September 6, 1996 New York, New York FOR VALUE RECEIVED, DVI FINANCIAL SERVICES INC., a Delaware corporation (the "Borrower"), hereby promises to pay to the order of LEHMAN COMMERCIAL PAPER INC. (the "Lender"), at the principal office of the Lender at 3 World Financial Center, 200 Vesey Street, New York, New York 10285, in lawful money of the United States, and in immediately available funds, the principal sum of ONE HUNDRED MILLION DOLLARS ($100,000,000) (or such lesser amount as shall equal the aggregate unpaid principal amount of the Loans made by the Lender to the Borrower under the Loan Agreement), on the dates and in the principal amounts provided in the Loan Agreement, and to pay interest on the unpaid principal amount of each such Loan, at such office, in like money and funds, for the period commencing on the date of such Loan until such Loan shall be paid in full, at the rates per annum and on the dates provided in the Loan Agreement. The date, amount and interest rate of each Loan made by the Lender to the Borrower, and each payment made on account of the principal thereof, shall be recorded by the Lender on its books and, prior to any transfer of this Note, endorsed by the Lender on the schedule attached hereto or any continuation thereof; provided, that the failure of the Lender to make any such recordation or endorsement shall not affect the obligations of the Borrower to make a payment when due of any amount owing under the Loan Agreement or hereunder in respect of the Loans made by the Lender. This Note is the Note referred to in the Loan and Security Agreement dated as of September 6, 1996 (as amended, supplemented or otherwise modified and in effect from time to time, the "Loan Agreement") between the Borrower and the Lender, and evidences Loans made by the Lender thereunder. Terms used but not defined in this Note have the respective meanings assigned to them in the Loan Agreement. The Borrower agrees to pay all the Lender's costs of collection and enforcement (including reasonable attorneys' fees and disbursements of Lender's counsel) in respect of this Note when incurred, including, without limitation, reasonable attorneys' fees through appellate proceedings. Notwithstanding the pledge of the Collateral, the Borrower hereby acknowledges, admits and agrees that the Borrower's obligations under this Note are recourse obligations of the Borrower to which the Borrower pledges its full faith and credit. The Borrower, and any endorsers or guarantors hereof, (a) severally waive diligence, presentment, protest and demand and also notice of protest, demand, dishonor and nonpayments of this Note, (b) expressly agree that this Note, or any payment hereunder, may 58 be extended from time to time, and consent to the acceptance of further Collateral, the release of any Collateral for this Note, the release of any party primarily or secondarily liable hereon, and (c) expressly agree that it will not be necessary for the Lender, in order to enforce payment of this Note, to first institute or exhaust the Lender's remedies against the Borrower or any other party liable hereon or against any Collateral for this Note. No extension of time for the payment of this Note, or any installment hereof, made by agreement by the Lender with any person now or hereafter liable for the payment of this Note, shall affect the liability under this Note of the Borrower, even if the Borrower is not a party to such agreement; provided, however, that the Lender and the Borrower, by written agreement between them, may affect the liability of the Borrower. Any reference herein to the Lender shall be deemed to include and apply to every subsequent holder of this Note. Reference is made to the Loan Agreement for provisions concerning optional and mandatory prepayments, Collateral, acceleration and other material terms affecting this Note. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED UNDER THE LAWS OF THE STATE OF NEW YORK (WITHOUT REFERENCE TO CHOICE OF LAW DOCTRINE) WHOSE LAWS THE BORROWER EXPRESSLY ELECTS TO APPLY TO THIS NOTE. THE BORROWER AGREES THAT ANY ACTION OR PROCEEDING BROUGHT TO ENFORCE OR ARISING OUT OF THIS NOTE MAY BE COMMENCED IN THE SUPREME COURT OF THE STATE OF NEW YORK, BOROUGH OF MANHATTAN, OR IN THE DISTRICT COURT OF THE UNITED STATES FOR THE SOUTHERN DISTRICT OF NEW YORK. All notices hereunder shall be made in accordance with the terms of the Loan Agreement. DVI FINANCIAL SERVICES INC. By: _______________________________ Name: Title: -2- 59 SCHEDULE OF LOANS This Note evidences Loans made under the within-described Loan Agreement to the Borrower, on the dates, in the principal amounts and bearing interest at the rates set forth below, and subject to the payments and prepayments of principal set forth below: Principal Amount Paid Unpaid Principal Notation Date Made Amount of Loan or Prepaid Amount Made by --------- -------------- ---------- ------ ------- 60 EXHIBIT B [FORM OF CUSTODIAL AGREEMENT] [stored as a separate document] 61 EXHIBIT C [FORM OF GUARANTEE OF DVI, INC.] GUARANTEE OF DVI, INC. Guarantee, dated as of September 6, 1996, by DVI, INC., a Delaware corporation (the "Guarantor") in favor of LEHMAN COMMERCIAL PAPER INC. (the "Lender"). RECITAL WHEREAS, pursuant to the Loan and Security Agreement, dated as of September 6, 1996 (as amended, supplemented or otherwise modified from time to time, the ("Loan Agreement"; capitalized terms used but not otherwise defined herein shall have the meaning given them in the Loan Agreement) between DVI Financial Services Inc., (the "Borrower"), and the Lender, the Lender has agreed to consider making loans to the Borrower upon the terms and subject to the conditions set forth therein, to be evidenced by the Note issued by the Borrower thereunder. It is a condition precedent to the obligation of the Lender to make its loans to the Borrower under the Loan Agreement that the Guarantor shall have executed and delivered this Guarantee to the Lender. NOW, THEREFORE, in consideration of the premises and to induce the Lender to make its loans to the Borrower under the Loan Agreement, the Guarantor hereby agrees with the Lender as follows: 1. Guarantee. To induce the Lender to enter into the Loan Agreement, with the Borrower, the Guarantor unconditionally guarantees to the Lender, its successors, endorsees, and permitted assigns, the prompt payment when due of all present and future obligations and liabilities of all kinds of the Borrower to the Lender arising out of the Loan Agreement (the "Obligations"). 2. Absolute Guarantee. The Guarantor's obligations under this Guarantee shall not be affected by the genuineness, validity, regularity, or enforceability of the Obligations or of any instrument evidencing the Obligations, or by the existence, validity, enforceability, perfection, or extent of any collateral for the Obligations, or by any other circumstances relating to the Obligations which might otherwise constitute a discharge of or defense to this Guarantee. The Lender makes no representation or warranty to the Guarantor regarding such matters, and has no duty or responsibility to disclose to the Guarantor any circumstances that may now or hereafter affect such matters. The Lender shall not be obligated to file any claim relating to the Obligations if the Borrower becomes subject to a bankruptcy, reorganization, or similar proceeding, and the failure of the Lender so to file shall not affect the Guarantor's obligations hereunder. If any payment by the Borrower to the 62 Lender on account of the Obligations is rescinded or must otherwise be returned for any reason whatsoever, the Guarantor shall remain liable hereunder for such Obligations as if such payment had not been made. The Guarantor's obligations under this Guarantee constitute a guarantee of payment and not of collection. 3. Consents, Waivers, and Renewals. The Lender may at any time and from time to time, either before or after the maturity thereof, without notice to or further consent of the Guarantor, extend the time of payment of, exchange, or surrender any collateral for, or renew, any of the Obligations, and may also make any agreement with the Borrower or with any other individual or entity liable on any of the Obligations, or interested therein, for the extension, renewal, payment, compromise, discharge, or release thereof, in whole or in part, or for any modification of the terms thereof or of any agreement between the Lender and the Borrower or any such other individual or entity, without impairing or affecting this Guarantee. The Lender may seek payment of any of the Obligations from the Guarantor, whether or not the Lender shall have resorted to any collateral for the Obligations or shall have proceeded against the Borrower or any other obligor principally or secondarily obligated for any of the Obligations. 4. Expenses. The Guarantor shall pay on demand all out-of-pocket expenses (including the reasonable fees and expenses of the Lender's counsel) incurred in the enforcement or protection of the rights of the Lender under this Guarantee, and any collateral for the Obligations shall secure such payment; provided, however, that the Guarantor shall not be liable for any expenses of the Lender if no payment under this Guarantee is due. 5. No Subrogation. Notwithstanding any payment or payments made by the Guarantor hereunder, or any setoff or application of funds of the Guarantor by the Lender, the Guarantor shall not be entitled to be subrogated to any of the rights of the Lender against the Borrower or against any collateral security or guarantee or right of offset held by the Lender for the payment of the Obligations, nor shall the Guarantor seek any reimbursement from the Borrower in respect of payments made by the Guarantor hereunder, until all amounts owing to the Lender by the Borrower on account of the Obligations are paid in full and the Loan Agreement is terminated. If any amount shall be paid to the Guarantor on account of such subrogation rights at any time when all of the Obligations shall not have been paid in full, such amount shall be held by the Guarantor in trust for the Lender, segregated from other funds of the Guarantor, and shall, forthwith upon receipt by the Guarantor, be turned over to the Lender in the exact form received by the Guarantor (duly endorsed by the Guarantor to the Lender, if required), to be applied against the Obligations, whether matured or unmatured, in such order as the Lender may determine. 6. Continuing Guarantee. This Guarantee is absolute, unconditional, and irrevocable and shall remain in full force and effect and be binding upon the Guarantor and its successors and permitted assigns until all of the Obligations have been satisfied in full. If any present or future Obligations are guaranteed by individuals or entities in addition to the Guarantor, the death, release, or discharge, in whole or part of the bankruptcy, liquidation, -2- 63 termination, or dissolution of one or more of them shall not discharge or affect the liabilities of the Guarantor hereunder. 7. No Waiver; Cumulative Rights. No failure on the part of the Lender to exercise, and no delay in exercising, any right, remedy, or power under this Guarantee shall operate as a waiver thereof, nor shall any single or partial exercise by the Lender of any right, remedy, or power hereunder preclude any other or future exercise of any right, remedy, or power. Each and every right, remedy, and power hereby granted to the Lender or allowed it by law or other agreement shall be cumulative and not exclusive of any other, and may be exercised by the Lender from time to time. 8. Waiver of Notice. Except as required otherwise herein, the Guarantor waives notice of the acceptance of this Guarantee, presentment to or demand of payment from anyone liable for any of the Obligations, notice of dishonor or non-payment, protest, diligence, suit, notice of any sale of any collateral for the Obligations, notice of the taking of any action by the Lender against the Borrower, the Guarantor, or others, and all other notices that may otherwise be required by law. 9. Representations and Warranties. (a) The Guarantor (i) is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, (ii) has the corporate power and authority, and the legal right, to own and operate its property, to lease the property it operates as lessee and to carry on its business as now being or as proposed to be conducted, the lack of which would be reasonably likely to have a Material Adverse Effect, (iii) is duly qualified to do business and is in good standing under the laws of each jurisdiction in which the nature of the business conducted by it makes such qualification necessary and where failure so to qualify would be reasonably likely (either individually or in the aggregate) to have a Material Adverse Effect, and (iv) is in compliance in all material respects with all Requirements of Law. (b) The execution, delivery, and performance of this Guarantee have been duly authorized by all necessary corporate action and do not contravene any provision of the Guarantor's charter or by-laws, as amended to date, or any law, regulation, rule decree, order, judgment, or contractual restriction binding on the Guarantor or its assets. (c) All consents, licenses, authorizations, and approvals of, and registrations and declarations with, any governmental authority or regulatory body necessary for the due execution, delivery, and performance of this Guarantee have been obtained and remain in full force and effect and all conditions thereof have been duly complied with, and no other action by, and no notice to or filing with, any governmental authority or regulatory body is required in connection with the execution, delivery, or performance of this Guarantee. (d) This Guarantee constitutes the legal, valid, and binding obligations of the Guarantor and is enforceable against the Guarantor in accordance with its -3- 64 terms, subject as to enforceability to bankruptcy, insolvency, reorganization, moratorium, conservatorship, receivership, and other laws of general applicability relating to or affecting creditors' rights and to equitable principles of general application. 10. Financial Covenants. The Guarantor shall maintain the following financial covenants: (a) Tangible Net Worth. The Guarantor shall have at the end of each fiscal quarter Tangible Net Worth in an amount equal to or greater than the sum of (i) $75,000,000, plus (ii) 75% of net income (with no deduction for losses) for the period commencing with the first day of the calendar quarter ending June 30, 1996 and each subsequent calendar quarter on a cumulative basis, plus (iii) 100% of the proceeds of any new issuance of equity. (b) Leverage Ratio. The Guarantor shall maintain at all times a Leverage Ratio not greater than 5:1. (c) Risk-Adjusted Leverage Ratio. The Guarantor shall maintain at all times a Risk-Adjusted Leverage Ratio not greater than 5:1. (d) Debt Service Coverage. The Guarantor shall maintain a ratio of (i) the sum of Cash Receipts minus Cash Operating Expenses plus Interest Expense, to (ii) Interest Expense plus all mandatory scheduled payments of principal on Indebtedness, of not less than 1.05:1. (e) Capitalized Terms in Paragraph 10. Capitalized terms used in this paragraph 10 and not otherwise defined herein shall have the meaning given them in that certain First Amended and Restated Loan Agreement, dated June 14, 1991 and amended and restated as of March 28, 1995 (the "Restated Loan Agreement"), between the Borrower, certain banks, NatWest Bank N.A. as Pre-Funding Lender and as Agent, as in effect at the time it was filed with the Securities and Exchange Commission, without giving effect to any subsequent amendments, supplements or other modifications thereto; provided, however, that all references to the term "Borrower" set forth in the Restated Loan Agreement shall be deemed to refer to the Guarantor. 11. SUBMISSION TO JURISDICTION; WAIVERS. THE GUARANTOR HEREBY IRREVOCABLY AND UNCONDITIONALLY: (A) SUBMITS FOR ITSELF AND ITS PROPERTY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS GUARANTEE, OR FOR RECOGNITION AND ENFORCEMENT OF ANY JUDGMENT IN RESPECT THEREOF, TO THE NON-EXCLUSIVE GENERAL JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK, THE FEDERAL COURTS OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK, AND APPELLATE COURTS FROM ANY THEREOF; -4- 65 (B) CONSENTS THAT ANY SUCH ACTION OR PROCEEDING MAY BE BROUGHT IN SUCH COURTS AND, TO THE EXTENT PERMITTED BY LAW, WAIVES ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING IN ANY SUCH COURT OR THAT SUCH ACTION OR PROCEEDING WAS BROUGHT IN AN INCONVENIENT COURT AND AGREES NOT TO PLEAD OR CLAIM THE SAME; (C) AGREES THAT SERVICE OF PROCESS IN ANY SUCH ACTION OR PROCEEDING MAY BE EFFECTED BY MAILING A COPY THEREOF BY REGISTERED OR CERTIFIED MAIL (OR ANY SUBSTANTIALLY SIMILAR FORM OF MAIL), POSTAGE PREPAID, TO ITS ADDRESS SET FORTH UNDER ITS SIGNATURE BELOW OR AT SUCH OTHER ADDRESS OF WHICH THE LENDER SHALL HAVE BEEN NOTIFIED IN ACCORDANCE WITH PARAGRAPH 15 HEREOF; AND (D) AGREES THAT NOTHING HEREIN SHALL AFFECT THE RIGHT TO EFFECT SERVICE OF PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT TO SUE IN ANY OTHER JURISDICTION. 12. WAIVER OF JURY TRIAL. THE GUARANTOR HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS GUARANTEE OR THE TRANSACTIONS CONTEMPLATED HEREBY. 13. Assignment. The Guarantor may not assign its rights, interests, or obligations under this Guarantee to any other person without the prior written consent of the Lender. 14. Governing Law. This Guarantee shall be governed by, and construed and enforced in accordance with, the law of the State of New York applicable to contracts made to be performed within such State. -5- 66 15. Notices. Any notice or communication to the Guarantor in respect of this Guarantee shall be sufficiently given if in writing and delivered in person or sent by certified or registered mail or the equivalent (with return receipt requested), by courier, or by facsimile addressed to the following: DVI, Inc. 500 Hyde Park Doylestown, PA 18901 Attention: Mark Shapiro Telecopier No.: 215-230-5328 Telephone No.: 215-230-2943 Any such notice or communication shall specifically identify the amounts to which this Guarantee relates, and shall be sufficiently given only upon actual receipt by the Guarantor. Any notice or communication by the Guarantor to the Lender in respect of this Guarantee shall -6- 67 be sufficiently given if in writing and delivered in the manner provided in the Loan Agreement. IN WITNESS WHEREOF, this Guarantee has been duly executed and delivered by the Guarantor to the Lender as of the date first above written. DVI, INC. By:_______________________________ Name: Title: -7- 68 EXHIBIT D-1 [FORM OF REQUEST FOR BORROWING] REQUEST FOR BORROWING [insert date] Lehman Commercial Paper Inc. 3 World Financial Center 200 Vesey Street New York, New York 10285-0800 Attention: Francis X. Gilhool / Vincent Primiano Borrowing Request No.:_____________________ Ladies/Gentlemen: Reference is made to the Loan and Security Agreement, dated as of September 6, 1996 (the "Loan Agreement"; capitalized terms used but not otherwise defined herein shall have the meaning given them in the Loan Agreement), between Lehman Commercial Paper Inc. (the "Lender") and DVI Financial Services Inc. (the "Borrower"). In accordance with Section 2.03(a) of the Loan Agreement, the undersigned Borrower hereby requests that you make a Loan to us in a principal amount of $_________________ [insert requested Loan Amount] on ____________________ [insert requested Funding Date, which must be at least two (2) Business Days from the date of the request], in connection with which we propose to pledge to you as Collateral the Contracts set forth on the Contract Schedule attached hereto. The Borrower hereby certifies, as of such Funding Date, that: (a) no Default or Event of Default has occurred and is continuing either before or after giving effect to such Loan; (b) each of the representations and warranties made by the Borrower and the Guarantor in or pursuant to the Loan Documents is true and correct in all material respects on and as of such date as if made on and as of such date (or, if any such representation or warranty is expressly stated to have been made as of a specific date, as of such specific date); and 69 (c) the aggregate principal amount of the Loans does not exceed the Borrowing Base, and will not exceed the Borrowing Base after giving effect to such Loan on the Funding Date. Very truly yours, DVI FINANCIAL SERVICES INC. By:______________________________ Name: Title: -2- 70 SCHEDULE I TO BORROWING REQUEST [CONTRACTS PROPOSED TO BE PLEDGED TO LENDER ON FUNDING DATE] [attach Contract Schedule] -3- 71 EXHIBIT D-2 [FORM OF LOAN SUPPLEMENT] LOAN SUPPLEMENT DVI Financial Services Inc. 500 Hyde Park Doylestown, PA 18901 Attention: Mark Shapiro Loan Supplement No.:_____________________ Ladies/Gentlemen: We hereby agree to make a Loan to you with the characteristics set forth below, subject to the terms and conditions set forth in the Loan and Security Agreement, dated as of September 6, 1996 (the "Loan Agreement"; capitalized terms used but not otherwise defined herein shall have the meaning given them in the Loan Agreement), between Lehman Commercial Paper Inc. (the "Lender") and DVI Financial Services Inc. (the "Borrower"): Lender: Lehman Commercial Paper Inc. Borrower: DVI Financial Services Inc. Loan Amount: $_____________________________ Funding Date: _____________________________ Collateral to be Pledged on Funding Date: See Schedule I attached hereto Termination Date: _____________________________ LEHMAN COMMERCIAL PAPER INC. By___________________________ Name: Title: Date:______________________________ 72 SCHEDULE I TO LOAN SUPPLEMENT COLLATERAL TO BE PLEDGED TO LENDER ON FUNDING DATE [attach list of Collateral] -2- 73 EXHIBIT E [FORM OF OPINION OF COUNSEL OF BORROWER AND GUARANTOR] [stored as a separate document] 74 EXHIBIT F [FORM OF BORROWING BASE CERTIFICATE] Pursuant to Section 7.18 of the Loan and Security Agreement, dated as of September 6, 1996 (the "Loan Agreement"), between DVI Financial Services Inc. (the "Borrower") and Lehman Commercial Paper Inc. (the "Lender"), we hereby certify that the Borrowing Base as of the Interest Payment Date set forth below is $_____________, calculated as follows: A. COLLATERAL VALUE OF ELIGIBLE CONTRACTS: 1. Discounted Present Value of Eligible Contracts $______________ 2. Market Value(1) of Eligible Contracts $______________ 3. LESSER OF (1) AND (2) $______________ MINUS 4. Aggregate Collateral Value of Eligible Contracts in respect of which same Person (or its Affiliates) is Obligor, in excess of $3,000,000 $_______________ 5. Aggregate Collateral Value of Eligible Contracts having an original term of more than 95 months $_______________ 6. Aggregate Collateral Value of Eligible Contracts which breach Schedule 1 rep or warranty $_______________ 7. Aggregate Collateral Value of Eligible Contracts pledged to the Lender longer than 180 days after first being included in the Borrowing Base $_______________ 8. Aggregate Collateral Value of Eligible Contracts which have been released by the Custodian to the Borrower for more than five (5) days $_______________ SUBTOTAL 1 $_______________ - ---------- (1) Determined by the Lender in its sole discretion (using commercially reasonable methods), which market value be determined to be zero. 75 [UNTIL THE DAY WHICH IS 45 DAYS AFTER THE OUTSTANDING PRINCIPAL AMOUNT OF LOANS IS $50,000,000 OR MORE, MINUS] 9. Aggregate Collateral Value of Eligible Contracts originated by a Person other than Borrower or its Affiliates in excess of 30% of the Maximum Credit $_______________ 10. Aggregate Collateral Value of Eligible Contracts which are Small Item Contracts in excess of 10% of the Maximum Credit $_______________ 11. Aggregate Collateral Value of Eligible Contracts having an original term of more than 63 months in excess of 25% of the Maximum Credit $_______________ 12. Aggregate Collateral Value of Eligible Contracts having an original term of more than 84 months and fewer than 96 months in excess of 5% of the Maximum Credit $_______________ 13. Aggregate Collateral Value of Eligible Contracts which are FMV Leases in excess of 5% of the Maximum Credit $_______________ SUBTOTAL 2 $_______________ [UPON AND AFTER THE DAY WHICH IS 45 DAYS AFTER THE OUTSTANDING PRINCIPAL AMOUNT OF LOANS IS $50,000,000 OR MORE, MINUS] 9. Aggregate Collateral Value of Eligible Contracts originated by a Person other than Borrower or its Affiliates in excess of 30% of the aggregate Collateral Value of all Eligible Contracts in the Borrowing Base $_______________ 10. Aggregate Collateral Value of Eligible Contracts which are Small Item Contracts in excess of 10% of the aggregate Collateral Value of all Eligible Contracts in the Borrowing Base $_______________ 11. Aggregate Collateral Value of Eligible Contracts having an original term of more than 63 months in excess of 25% of the aggregate Collateral Value of all Eligible Contracts in the Borrowing Base $_______________ -5- 76 12. Aggregate Collateral Value of Eligible Contracts having an original term of more than 84 months and fewer than 96 months in excess of 5% of the aggregate Collateral Value of all Eligible Contracts in the Borrowing Base $_______________ 13. Aggregate Collateral Value of Eligible Contracts which are FMV Leases in excess of 5% of the aggregate Collateral Value of all Eligible Contracts in the Borrowing Base $_______________ SUBTOTAL 2 $_______________ B. BORROWING BASE 90% of Aggregate Collateral Value of Eligible Contracts (Subtotal 2) $ =============== This Borrowing Base Certificate has been duly executed and delivered by the Borrower to the Lender as of ____________ ___, 199__ (the "Interest Payment Date"). DVI FINANCIAL SERVICES INC. By: _______________________________ Name: Title: -6- 77 EXHIBIT G [FORM OF COVENANT COMPLIANCE CERTIFICATE] 1) Tangible Net Worth DVI, Inc. shall have at the end of each fiscal quarter Tangible Net Worth in an amount equal to or greater than the sum of (i) $75,000,000 plus (ii) 75% of net income (with no deduction for losses) for the period commencing with the first day of the calendar quarter ending June 30, 1996 and each subsequent quarter on a cumulative basis, plus (iii) 100% of any new issuance of equity. Tangible Net Worth Calculation: Additional Capital ______________ plus Retained Earnings ______________ plus Earned Surplus ______________ plus Capital Stock ______________ minus Intangibles ______________ minus Treasury Stock ______________ Total ______________ Intangibles Calculation: Goodwill ______________ plus Other intangibles ______________ Total ______________ 2) Leverage Ratio DVI, Inc. shall maintain at all times a Leverage Ratio not greater than 5:1. Leverage Calculation: Total Recourse Liabilities ______________ over (Tangible Net Worth ______________ plus Sub-Debt *) ______________ Total ______________ 78 Total Recourse Liabilities Calculation GAAP Liabilities ______________ minus Non-Recourse Debt** ______________ minus Sub-Debt *** ______________ minus Deferred Income Tax Payable ______________ minus Accrued Expenses (and Accounts Payable) ______________ plus Contingent Liabilities ______________ minus Non-Recourse Portion of Partial Recourse Debt ______________ Total ______________ 3) Risk-Adjusted Leverage Ratio DVI, Inc. shall maintain at all times a Risk-Adjusted Leverage Ratio not greater than 5:1. Risk Adjusted Leverage Ratio Calculation Total Recourse Liabilities _______________ over (Tangible Net Worth _______________ plus Sub-Debt * _______________ minus RALR Calculation) _______________ Total _______________ RALR Calculation The greater of (a) $1,000,000 or (b) the lesser of (1) DVI, Inc.'s unfinanced or retained interests in securitized accounts receivable (the so called "C" piece) or (2) the product resulting from multiplying (A) DVI, Inc.'s actual loss experience, expressed as a decimal times (B) five, times (C) DVI, Inc.'s total securitized accounts receivable. 4) Debt Service Coverage Calculation At the end of each fiscal quarter with respect to the 12-month period then ended, DVI, Inc. shall have a ratio of (1) Cash Receipts minus Cash Operating Expenses plus Interest Expense, to (2) Interest Expense plus all mandatory scheduled payments of principal on Indebtedness of not less than 1.05:1. -2- 79 Debt Service Coverage Calculation (Cash Receipts ______________ minus Cash Operating Expenses ______________ plus Interest Expense) ______________ over (Interest Expense ______________ plus Scheduled Payments of Principal) ______________ Total ______________ * Sub-Debt not due within the twelve-month period immediately proceeding any date of computation. ** Excluding the non-recourse portion of Partial Recourse Debt. *** Sub-Debt not due within the next twelve months. -3- 80 EXHIBIT H [FORM OF DATA POOL REPORT] [see attached] EX-10.16 4 AMENDMENT TO INTERIM LOAN AND SECURITY AGREEMENT 1 Exhibit 10.16 AMENDMENT TO INTERIM LOAN AND SECURITY AGREEMENT AMENDMENT dated as of June 30, 1997 (this "Amendment"), between (i) PRUDENTIAL SECURITIES CREDIT CORPORATION, a Delaware corporation (the "Lender"), and (ii) DVI FINANCIAL SERVICES INC., a Delaware corporation (the "Borrower"), to the Existing Agreement referred to below. RECITALS The Borrower and the Lender are parties to that certain Interim Loan and Security Agreement dated as of February 20, 1997 (as amended supplemented or otherwise modified prior to the date hereof, the "Existing Agreement"; as amended by this Amendment, the "Agreement"). Under the Existing Agreement, the Lender provides interim financing from time to time to provide interim funding for leases of equipment for inclusion in a Trust, which leases and equipment are pledged to secure the Advances made by the Lender thereunder, with the proceeds of the related Certificates being used to repay such Advances. The Borrower has requested that the Existing Agreement be amended to extend the Termination Date as provided therein to July 31, 1997 (notwithstanding the sale prior to such date of the Certificates related to the Contracts funded by the Advances made under the Existing Agreement), and the Lender is willing to so amend the Existing Agreement. Accordingly, in consideration of the premises, the Borrower and the Lender hereby agree that the Existing Agreement is hereby amended as follows: SECTION 1. Terms and Conditions for All Advances. (a) Section 2(a) of the Existing Agreement is hereby amended by deleting the phrase "on the earlier to occur of (x) the date on which the Certificates related to the Contracts funded by Advances made hereunder are sold, or (y) September 30, 1997 (the "Termination Date")" occurring in the first sentence thereof immediately prior to the proviso, and substituting in lieu thereof the phrase "on July 31, 1997 (the "Termination Date")". (b) Section 2(c) of the Existing Agreement is hereby amended by deleting the first proviso of the first sentence thereof, and substituting in lieu thereof the following new proviso: "provided that the Maturity Date shall, for any Advance, be no later than the Termination Date;". 1 2 SECTION 2. Conditions Precedent. This Amendment shall become effective on the date on which the Lender shall have received the following documents, each of which shall be satisfactory to the Lender in form and substance: (a) this Amendment, executed and delivered by a duly authorized officer of the Borrower and the Guarantor; (b) an opinion of counsel to the Borrower, substantially in the form of Annex A hereto; and (c) such other documents, certificates or opinions as the Lender may reasonably request. SECTION 3. Limited Effect. Except as expressly amended and modified by this Amendment, the Existing Agreement shall continue to be, and shall remain, in full force and effect in accordance with its terms. SECTION 4. Definitions in Existing Agreement. Unless otherwise defined in this Amendment, terms defined in the Existing Agreement shall have their defined meanings when used herein. SECTION 5. Counterparts. This Amendment may be executed by one or more of the parties hereto on any number of separate counterparts, each of which shall be an original and all of which taken together shall constitute one and the same instrument. SECTION 6. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. [Signatures Commence on the Following Page] 2 3 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered in New York, New York by their proper and duly authorized officers as of the day and year first above written Borrower: DVI FINANCIAL SERVICES INC. By: /s/ Lisa Cruikshank ------------------------------ Name: Lisa J. Cruikshank Title: Vice President Lender: PRUDENTIAL SECURITIES CREDIT CORPORATION By: /s/ Jeffrey K. French ------------------------------ Name: Jeffrey K. French Title: Vice President CONSENTED TO: DVI INC. By: /s/ Steven R. Garfinkel ------------------------------- Name: Steven R. Garfinkel Title: Executive Vice President Chief Financial Officer 3 4 Annex A [Letterhead of Counsel to Borrower] [___________, 199_] Prudential Securities Credit Corporation 199 Water Street New York, New York 10292-0001 Re: Interim Warehouse Financing of DVI Financial Services Inc. by Prudential Securities Credit Corporation Ladies and Gentlemen: I am the counsel to DVI Financial Services Inc., a Delaware corporation (the "Borrower"), and have acted as such in connection with the execution and delivery of the Amendment, dated as of June 30, 1997 (the "Amendment"), between the Borrower and the Prudential Securities Credit Corporation (the "Lender") which Amendment amends the Interim Loan and Security Agreement dated as of February 20, 1997 as amended, supplemented or otherwise modified prior to the date hereof (the "Agreement"), between the Lender and the Borrower. Capitalized terms used herein and not defined herein shall have the meanings assigned to them in the Agreement. I have examined executed copies of the Agreement, the Note and the Amendment. I have also examined originals or photostatic or certified copies of all such corporate records of the Borrower, and such certificates of public officials, certificates of corporate officers and other documents, as I have deemed appropriate and necessary as a basis for the opinions hereinafter expressed. In making my examination and rendering the opinions hereinafter expressed I have assumed (i) that the Lender, as a party to each of the Agreement and the Amendment has the corporate power to enter into and perform all of its obligations thereunder, (ii) the due authorization, execution and delivery of each of the Agreement and the Amendment by the Lender and (iii) the validity and binding effect on the Lender of each of the Agreement and the Amendment. The opinions expressed below with respect to enforceability are subject to the following additional qualifications: 1 5 (a) The effect of bankruptcy, insolvency, reorganization, moratorium, receivership, or other similar laws of general applicability relating to or affecting creditors' rights generally in the event of bankruptcy, insolvency, reorganization, moratorium or receivership. (b) The application of general principles of equity, including, but not limited to, the right of specific performance (regardless of whether enforceability is considered in a proceeding in equity or at law). Based upon the foregoing, I am of the opinion that: 1. The Borrower is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and the Borrower is licensed or qualified to do business in each jurisdiction in which failure to so qualify would be reasonably likely (either individually or in aggregate) to have a material adverse effect on the business, operations or financial condition of the Borrower, the ability of the Borrower to perform its obligations under the Agreement and the Note, each as amended by the Amendment, or the validity or enforceability of the Agreement, the Note, each as amended by the Amendment, or any Contract. 2. The Borrower has the corporate power and legal right to execute and deliver the Amendment, to borrow under the Agreement and the Note, each as amended by the Amendment, and to grant liens under the Agreement, as amended by the Amendment, and has taken all necessary corporate action to authorize such borrowing and such granting of liens upon the terms and conditions of the Agreement, as amended by the Amendment, and to authorize the execution and delivery of the Amendment. No consent of any other person or entity (including, without limitation, stockholders of the Borrower), and no consent, license, permit, approval or authorization of, or registration or declaration with, any governmental authority, bureau or agency is required in connection with the execution and delivery of the Amendment by the Borrower or the enforceability of each of the Agreement and the Note, each as amended by the Amendment. 3. Assuming for purposes of the opinion expressed in this paragraph 3 that the Agreement, the Note and the Amendment are governed by the laws of the Commonwealth of Pennsylvania, each of the Agreement and the Note, each as amended by the Amendment, constitutes the legal, valid and binding obligation of the Borrower enforceable against the Borrower in accordance with its respective terms. 4. The execution and delivery of the Amendment and the performance of each of the Agreement and the Note, each as amended by the Amendment, (i) will not violate any provision of any existing law or regulation or of the charter or by-laws of the Borrower or of any mortgage, indenture, contract or other undertaking to which, to the best of my knowledge (after due inquiry), the Borrower is a party or which is binding upon it or its assets and (ii) to the best of my knowledge (after due inquiry), will not result in the creation or imposition of any lien, charge or encumbrance on any of its assets pursuant to the provisions of any of the foregoing. 2 6 5. No material litigation or administrative proceeding of or before any government body is presently pending, or, to the best of my knowledge (after due inquiry), threatened against the Borrower or its assets which if decided adversely to the Borrower would be reasonably likely (either individually or in the aggregate) to have a material adverse effect on the business, operations or financial condition of the Borrower, or the validity or enforceability of any Contract, the Agreement or the Note. 6. To the best of my knowledge (after due inquiry), no consent, approval, authorization or order of, registration or filing with, or notice to, any governmental authority or court is required under federal laws or the laws of the Commonwealth of Pennsylvania for the execution and delivery of the Amendment and the performance of the Agreement or the Note, each as amended by the Amendment, by the Borrower. 7. The execution and delivery of the Amendment and the performance by the Borrower of the Agreement and the Note, each as amended by the Amendment, do not conflict with, result in a breach of, or constitute a default under, any law, rule or regulation of the federal government or of the general corporation law of the State of Delaware. 8. (a) The Agreement, as amended by the Amendment, creates a valid security interest in favor of the Lender in all of the right, title and interest of the Borrower in and to the Collateral. (b) Financing statements naming the Lender as "Secured Party" and the Borrower as "Debtor," and describing the Collateral, having been filed in the offices of the Secretary of the Commonwealth of Pennsylvania and the Prothonotary of Bucks County, Pennsylvania, together with possession by the Custodian of the Contracts pursuant to the Custodial Agreement, the security interests in the Collateral created by the Agreement constitute perfected security interests, and no other action is necessary to preserve or perfect such security interests. 9. Under the laws of the Commonwealth of Pennsylvania the stipulation of New York law in the Amendment is enforceable. 10. [Except with respect to that certain license to engage in a commercial lending business in the State of California, which license lapsed in May, 1995,] to the best of my knowledge (after due inquiry) and with respect to each license, permit or authorization required to be issued by, or received from, any federal or state agency or instrumentality in connection with the ownership or operation of the Borrower's business, each such license, permit and authorization is currently in effect and authorizes the Borrower to conduct, or does not prohibit the Borrower from conducting, its business as currently conducted and no such agency or instrumentality has given notice to the Borrower of any pending termination, review or revocation of such license, permit or authorization. In rendering the foregoing opinions, no opinion is expressed (a) as to any collateral which is subject to any registration or certificate of title statute, such as motor vehicles, 3 7 automotive equipment, trailers, airplanes, rolling stock, rolling equipment or shipping containers; or (b) as to any collateral other than chattel paper, which cannot be perfected by the filing of a UCC-1 financing statement. I am admitted to practice law in the Commonwealth of Pennsylvania and the foregoing opinions are limited to the federal law of the United States and the laws of the Commonwealth of Pennsylvania and the General Corporation Law of the State of Delaware. The opinion is solely for your benefit in connection with the above-captioned transaction and may not be used, circulated, referred to, or relied on by you for any other purpose or by any other person without my prior written consent. Sincerely yours, 4 EX-10.17 5 SECOND AMENDMENT TO INTERIM LOAN/SECURITY AGRMT 1 Exhibit 10.17 SECOND AMENDMENT TO INTERIM LOAN AND SECURITY AGREEMENT AMENDMENT dated as of July 31, 1997 (this "Amendment"), between (i) PRUDENTIAL SECURITIES CREDIT CORPORATION, a Delaware corporation (the "Lender"), and (ii) DVI FINANCIAL SERVICES INC., a Delaware corporation (the "Borrower"), to the Existing Agreement referred to below. RECITALS The Borrower and the Lender are parties to that certain Interim Loan and Security Agreement dated as of February 20, 1997, as amended by that certain Amendment, dated as of June 30, 1997 (as so amended, and as further amended supplemented or otherwise modified prior to the date hereof, the "Existing Agreement"; as amended by this Amendment, the "Agreement"). The Borrower has requested that the Existing Agreement be amended to extend the Termination Date as provided therein to July 30, 1998 and to make certain other amendments to the Existing Agreement, as more specifically set forth in this Amendment, and the Lender is willing to so amend the Existing Agreement, but only on the terms and subject to the conditions set forth in this Amendment. Accordingly, in consideration of the premises, the Borrower and the Lender hereby agree that the Existing Agreement is hereby amended as follows: SECTION 1. Recitals. The recitals to the Existing Agreement are hereby deleted and the following new recitals are added in lieu thereof: "RECITALS" WHEREAS, the Borrower wishes to obtain financing from time to time to provide interim funding for certain leases of, and loans in respect of, Equipment (as defined herein), which equipment leases and loans are to be contributed to one or more trusts or other vehicles (each, a "Trust") to be sponsored by the Borrower or an Affiliate thereof, in connection with two securitization transactions, the first such transaction (the "First Securitization") being anticipated to occur in December 1997 or January 1998, and the second such transaction (the "Second Securitization") being anticipated to occur in June or July 1998, and which in either case may have the benefit of credit enhancement issued by a credit enhancer (the "Credit Enhancer"), and which equipment leases and loans and which Equipment shall, directly or indirectly, secure the Loans (as defined herein) to be made by the Lender hereunder. WHEREAS, the Lender has agreed, subject to the terms and conditions of this Loan Agreement, to provide such funding, with a portion of the proceeds of the sale of all 1 2 equipment lease and loan asset-backed securities (the "Certificates") issued by any such Trust (as to which Prudential Securities Incorporated has agreed to act as underwriter), together with other funds of the Borrower, to be used to repay any Advances (as defined herein) made by the Lender hereunder. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties to this Agreement hereby agree as provided in the introductory paragraph and recitals hereto and as follows (an index of certain capitalized, defined terms appears in Section 22 of this Agreement)." SECTION 1. The Loan. (a) Section 1(i) of the Existing Agreement is hereby amended by deleting the percentage "90%" each place it occurs and substituting therefor the percentage "92%". (b) Section 1 of the Existing Agreement is hereby amended by (i) deleting the word "and" at the end of clause (i) thereof, (ii) adding the following new clause (j) immediately following such clause (i): "(j) after the making of such Advance, (i) the aggregate amount owed by any Obligor under all Contracts of such Obligor pledged to the Lender pursuant to this Agreement shall not exceed $4,500,000, (ii) the aggregate amount owed by the Obligors under any individual Contract shall not exceed $4,500,000, and (iii) for not more than five Contracts shall the aggregate amount owed by the Obligors under any individual Contract exceed $3,000,000; and"; and (iii) by re-lettering existing clause (j) thereof as clause (k). SECTION 2. Terms and Conditions for All Advances. (a) Section 2(a) of the Existing Agreement is hereby amended by deleting the phrase "on July 31, 1997 (the "Termination Date")" occurring in the first sentence thereof immediately prior to the proviso, and substituting in lieu thereof the phrase "on the earlier to occur of (x) the date on which the Certificates related to the Second Securitization are sold, and (y) July 30, 1998 (the "Termination Date")". (b) Section 2(b) of the Existing Agreement is hereby amended by deleting from clause (ii) thereof the percentage "0.85%" and substituting in lieu thereof the percentage "0.80%." (c) Section 2(c) of the Existing Agreement is hereby amended by deleting the first proviso thereto and substituting in lieu thereof the following new provisos: "provided that the Maturity Date shall, for any Advance, be no later than the earlier of (i) subject to the second succeeding proviso hereto, the Termination Date, or (ii) the date 2 3 upon which the Certificates related to the Contracts funded by such Advance shall be sold; provided, further, that, notwithstanding the foregoing proviso, there may remain outstanding Advances secured by Contracts pledged to the Lender prior to the cut-off date for the First Securitization and having an aggregate present value or market value (determined in accordance with Section l(i)), as the case may be, of no more than $7,500,000, and all of such Contracts shall be included in the Second Securitization (if not prepaid prior to such Second Securitization);" (d) Section 2(j) of the Existing Agreement is hereby amended by adding the following new sentence to the end thereof: "The Advances shall also be repaid on the date of any whole loan sale of Contracts in accordance with the requirements of Section 2(k)." SECTION 3. Covenants. Section 7 of the Existing Agreement is hereby amended by adding at the end thereof the following new clause (k): "(k) Securitization Manager. The Borrower agrees that it shall appoint the Lender or an Affiliate of the Lender as the lead manager with respect to the First Securitization, and as a co-manager with respect to the Second Securitization." SECTION 4. Certain Definitions. Section 22 of the Existing Agreement is hereby amended by (a) deleting the definition of "Credit Spread" therein and substituting in lieu thereof the following new definition of "Credit Spread": "'Credit Spread' - 179 basis points, or otherwise as notified to the Borrower by the Lender in writing." and (b) adding the following new definitions thereto in the appropriate alphabetical order: "'First Securitization' - Recitals. 'Second Securitization' - Recitals." SECTION 5. Conditions to Effectiveness. (a) Subject to the condition subsequent set forth in the immediately following clause (b) of this Section 5, this Amendment shall become effective on the date (the "Amendment Effective Date") on which the Lender shall have received the following documents, each of which shall be satisfactory to the Lender in form and substance: (i) this Amendment, executed and delivered by a duly authorized officer of the Borrower and the Guarantor; and 3 4 (ii) such other documents, certificates or opinions as the Lender may reasonably request. (b) It shall be a condition subsequent to the effectiveness of this Amendment that the Lender shall have received, within ten days after the Amendment Effective Date, an opinion of counsel to the Borrower, in form and substance satisfactory to the Lender (it being agreed that an opinion substantially similar to the opinions delivered in connection with the first Advance under the Existing Agreement shall be satisfactory to the Lender). If such opinion is not received by the Lender on or prior to such time, this Amendment shall cease to be effective as if the Amendment Effective Date shall have never occurred. SECTION 6. Limited Effect. Except as expressly amended and modified by this Amendment, the Existing Agreement shall continue to be, and shall remain, in full force and effect in accordance with its terms. SECTION 7. Definitions in Existing Agreement. Unless otherwise defined in this Amendment, terms defined in the Existing Agreement shall have their defined meanings when used herein. SECTION 8. Counterparts. This Amendment may be executed by one or more of the parties hereto on any number of separate counterparts, each of which shall be an original and all of which taken together shall constitute one and the same instrument. SECTION 9. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. [Signatures Commence on the Following Page] 4 5 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered in New York, New York by their proper and duly authorized officers as of the day and year first above written Borrower: DVI FINANCIAL SERVICES INC. By: /s/ Lisa J. Cruikshank ----------------------------- Name: Lisa J. Cruikshank Title: Vice President Lender: PRUDENTIAL SECURITIES CREDIT CORPORATION By: /s/ Jeffrey K. French ----------------------------- Name: Jeffrey K. French Title: Vice President CONSENTED TO: DVI INC. By: /s/ Steven R. Garfinkel ----------------------------- Name: Steven R. Garfinkel Title: Executive Vice President Chief Financial Officer 5 EX-21 6 SUBSIDIARIES OF THE REGISTRANT 1 DVI, INC. SUBSIDIARIES AND SUB-SUBSIDIARIES EXHIBIT 21
PERCENTAGE OWNED BY ------------------- NAME OF ENTITY/JURISDICTION OF ORGANIZATION REGISTRANT SUBSIDIARY - ------------------------------------------- ---------- ---------- DVI Financial Services Inc. (Delaware) 100% DVI Healthcare Operations, Inc. (Delaware) 100% DVI Business Credit Corporation (Delaware) 100% DVI Lease Finance Corporation II (Delaware) 100% DVI Lease Finance Corporation III (Delaware 100% DVI Lease Receivables Corp. 1993-A (Delaware) 100% DVI Subordinated Securities Corporation (Delaware) 100% DVI Receivables Corp. (Delaware) 100% DVI Receivables Corp. II (Delaware) 100% DVI Business Credit Receivables Corporation (Delaware) 100% DVI Business Credit Receivables Corp. II (Delaware) 100% Westgate Imaging Center, Inc. (Delaware) 100% DVI Receivables Corp. III (Delaware) 100% DVI Receivables Corp. IV (Delaware) 100% DVI Receivables Corp. V (Delaware) 100% DVI International (Delaware) 100% DVI Thailand (Thailand) 100% DVI Australia (Australia) 100% Oferil Sociedad Anonima (Uruguay) 100% Estolur Sociedad Anonima (Uruguay) 100%
EX-27 7 FINANCIAL DATA SCHEDULE
5 1,000 YEAR JUN-30-1997 JUL-01-1997 JUN-30-1997 35,360 0 570,619 0 0 0 4,091 1,702 634,119 94,516 0 0 0 53 95,702 634,119 0 70,010 0 38,395 13,663 2,386 0 15,566 6,625 8,941 0 0 0 8,941 .81 .78
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