-----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, KglOYD8LlUOFcJCnGieotTdMjhDmaZsZmKvc8Eg/MXZLdrv0u9wBoDP2Us/da2VG uOF8aX8z6gLpXo60fD1vHg== 0000950123-98-008529.txt : 19980928 0000950123-98-008529.hdr.sgml : 19980928 ACCESSION NUMBER: 0000950123-98-008529 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980925 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: 98715131 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, 1998 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 18, 1998 was approximately $201,812,373 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 12 herein for a statement of the assumptions upon which this calculation is based.) As of August 18, 1998, the Registrant had 14,080,358 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. (the "Company" or "DVI") is an independent specialty finance company that provides financing to healthcare providers, principally through its medical equipment finance business and its related medical receivables finance business. As of June 30, 1998, the Company's total assets and shareholder's equity were $816.9 million and $172.3 million, respectively. 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. 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 providing financing directly to end users of equipment and, more recently, by providing finance programs for vendors of diagnostic and patient treatment devices. The Company also purchases equipment loans from originators that generally do not have access to cost-effective permanent funding ("Wholesale Program"). The Company's typical equipment loan has an initial principal balance ranging from $50,000 to $2.0 million. The majority 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 small ($14.3 million as of June 30, 1998). Total equipment financing loans originated in the Company's fiscal year ended June 30, 1998 were $524.7 million. Of this amount, approximately $320.6 million was provided by the Company directly to end users; $53.2 million was generated through the Wholesale Program; $14.3 million was generated through various vendor finance programs and $136.6 million was international business. The Company has traditionally focused its financing activities on the outpatient diagnostic and treatment services sector of the healthcare industry. This sector typically consists of radiologists and other diagnostic service providers who were among the first in the 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. 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 generally range from $1.0 million to $15.0 million; however, commitments are also provided for multiple obligor structures ranging from $16.0 million to $40.0 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 2 3 receivables business for the year ended June 30, 1998 were $183.2 million, and medical receivables funded as of June 30, 1998 were $137.3 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 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 85% of the aggregate amount of the net collectible value of eligible receivables pledged by the borrower. OTHER FINANCING PRODUCTS Consistent with its strategy of seeking to provide its healthcare provider clients with comprehensive solutions to their financing needs, the Company continually explores and from time to time provides additional financing products beyond those described above. These have included unsecured lines of credit and secured financing for clients' acquisitions of assisted living facilities. In November 1997, the Company acquired a healthcare-based merchant banking group whose key product offerings are private debt placement, loan syndication, bridge financing and mortgage loan arrangement for clients operating in the long term/assisted care and specialized hospital markets. 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 0.24%, 0.08% and 0.35% for the years ended June 30, 1998, 1997, and 1996, respectively, and average delinquencies, as a percentage of average managed net financed assets, for the same periods were 5.33%, 4.44% and 4.57%, 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. Permanently funded equipment and medical receivables loans are funded through the life of the respective assets. 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 $524.7 million in the year ended June 30, 1998. The Company's managed net financed receivables grew from $92.4 million as of June 30, 1992 to $1.2 billion as of June 30, 1998. In the Company's medical receivables financing business, which was established in 1993, new commitments of credit in the year ended June 30, 1998 were $183.2 million compared with $101.1 million in the year ended June 30, 1997. Medical receivables funded at June 30, 1998 totaled $137.3 million, an increase of $51.7 million over the prior fiscal year end. 3 4 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 has penetrated the medical receivables financing market by generating financing opportunities amongst its existing equipment finance customer base, particularly those customers that are expanding to provide additional healthcare services, as well as clients who are in segments of the healthcare market not serviced by DVI Financial Services. The Company is also exploring financial products to augment those it currently offers. - - 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, 1998, the Company's loan originations for that market were $14.3 million. - - Originate medical equipment loans on a wholesale basis. The Company intends to continue its Wholesale Program, in which it obtains 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, 1998, the Company purchased $53.2 million in medical equipment loans through the Wholesale Program. - - Leverage existing expertise by offering additional financing products focused on the healthcare industry. The Company seeks to the extent appropriate to build and develop relationships with existing and potential future clients by offering financing products in addition to its core medical equipment and medical receivables financing products. - - Grow through acquisitions. The Company periodically seeks to enhance its internal growth rate through the acquisition of specialty businesses that it believes will fit within its existing operations and long-term business strategy. During its most recent fiscal year, the Company acquired a small healthcare merchant banking operation and a venture leasing business and plans to gradually integrate these activities with other DVI financing services offered to the healthcare industry. In September 1998, the Company announced its intention to acquire substantially all the assets and retain all the employees of a 15-year old "small ticket" medical equipment financing business to serve as a platform for it to expand its vendor sales program and offer customers an efficient method to finance lower cost medical equipment. - - Capitalize on international medical equipment financing needs. During the year ended June 30, 1998 the Company continued establishing international operations in order to capitalize on growing overseas markets for sales of medical equipment and devices. The Company recently entered into a joint venture, MSF Holding Ltd., with the International Finance Corporation (an affiliate of The World Bank), the Netherlands Development Finance Company, and a subsidiary of First Union National Corporation. Through MSF Holding Ltd., the Company will provide finance programs for vendors and manufacturers of diagnostic and patient treatment equipment and devices in Latin America, including Brazil, Argentina, Columbia and Mexico. The joint venture commenced with a planned committed loan facility of $65 million and paid-in capital of $20 million. In addition, the joint venture is in discussions with a major investment banking firm to develop and implement a permanent funding program for the equipment loans originated by the joint venture. The Company owns 59% of the joint venture holding company which operates through free-trade zone subsidiaries in Uruguay. The Company expects the customer base for equipment vendors to be private clinics, diagnostic centers and local hospitals. The Company believes that this arrangement may prove to be a suitable model for its other international activities. 4 5 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. 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 the potential will be realized over the long term. 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 the customers 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 that 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 lower price range of products in the patient diagnostic and treatment device market. The patient treatment device manufacturers targeted by the Company produce products with an average cost of between $50,000 and $300,000. For the year ended June 30, 1998, the loan origination for this business unit was $14.3 million. The Company also has a domestic business unit dedicated to the Wholesale Program which the Company started in June 1994. The Company purchases equipment loans from originators that generally do not have access to cost effective permanent funding for their loans. During the years ended June 30, 1998 and June 30, 1997, the Company purchased an aggregate of $53.2 and $85.0 million of equipment loans from 17 and 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. The growth and cross selling of the medical receivables financing business to the Company's existing client base should not be restricted because of the lack of access to permanent funding. The Company has closed two medical receivable term securitizations for $100 million and has also established two credit facilities totaling $125.0 million for medical receivables. The Company's sales and marketing organization consists of 36 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 usually places 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 more 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 5 6 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 that 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 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 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, they may have the effect of improving the Company's cash flow from operations in the short term if the Company's loan growth were to decline. 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, 1998, the Company had an aggregate maximum of $373.2 million potentially available for equipment loan financing under various warehouse facilities of which it had borrowed an aggregate of $65.5 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 facilities. Those advances in turn are typically repaid with proceeds from permanent fundings. Loans funded under securitization facilities cease to be eligible collateral if they are not funded within a specified period of time. The amount advanced under the securitization facilities is 92% 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 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 6 7 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 $75 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. 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. COMMON STOCK OFFERING On May 28, 1998, the Company issued 2,300,000 shares of common stock through an underwritten public offering. The aggregate price to the public of such shares was $49.3 million and the aggregate net proceeds to the Company were $46.6 7 8 million. Also on May 28, 1998, the Company issued 340,000 shares of common stock to certain stockholders of the Company. The price to such stockholders and the aggregate net proceeds to the Company for such shares was $6.9 million. These net proceeds received do not reflect issuance costs totaling $0.4 million. The proceeds from the May 28th stock issuances 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 expanding international operations, (iii) for other working capital needs and (iv) for general corporate purposes. On June 30, 1998, approximately $445.9 million of common stock, preferred stock, depositary shares, debt securities and warrants remained registered and unissued under the Securities Act. 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. The Company believes that, in the event of a 10% movement in interest rates, any changes in the fair value of its derivative instruments would be proportionately offset by the changes in the fair values of the underlying hedged asset or liability. 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. Warehouse facilities totaling $125 million are available through a bank and an investment bank. The Company has established a revolving credit agreement with a syndicate of banks to be used to warehouse medical receivables loans up to $95 million. An additional warehouse facility of $30 million is available through an investment bank. The Company had $17.3 million outstanding under these facilities at June 30, 1998. 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 providers against debts 8 9 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 that 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 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 could also 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, 1998 and 1997, loans purchased under the Wholesale Program constituted 13.7% and 23.0%, respectively, of the total domestic 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 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. YEAR 2000 The Company believes, based on discussions with current systems vendors, that its software applications and operational programs will properly recognize calendar dates beginning in the Year 2000. In addition, the Company is discussing with its customers and suppliers the possibility of any interface difficulties relating to the Year 2000 which may affect the Company. To date, no significant concerns have been identified; however, there can be no assurance that there will not be any Year 9 10 2000-related operating problems or expenses that will arise with the Company's computer systems and software of its vendors, customers and suppliers. 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, 1998, the Company had 193 full-time employees consisting of 8 executive officers, 36 sales and sales management personnel, and 149 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. 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 62,400 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, 1998. EXECUTIVE OFFICERS OF THE REGISTRANT As of June 30, 1998, the executive officers of DVI, Inc. were:
NAME AGE POSITION ---- --- -------- Michael A. O'Hanlon 51 Director, President and Chief Executive Officer Steven R. Garfinkel 55 Executive Vice President and Chief Financial Officer Richard E. Miller 46 Executive Vice President and President, DVI Financial Services, Inc. Anthony J. Turek 55 Executive Vice President and Chief Credit Officer John P. Boyle 48 Vice President and Chief Accounting Officer Melvin C. Breaux 57 Vice President, Secretary and General Counsel Cynthia J. Cohn 39 Vice President and Executive Vice President, DVI Business Credit Corporation Alan J. Velotta 50 Vice President and President, DVI Business Credit Corporation
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. From the time Mr. O'Hanlon joined the Company in March 1993 until September 1994, he served as executive vice president of the Company. Mr. O'Hanlon became a director of the Company in November 1993. 10 11 Before joining the Company, for nine years, he served as president and chief executive officer of Concord Leasing, Inc., a major source of medical, aircraft, ship, and industrial equipment financing. Previously, Mr. O'Hanlon was a senior executive with Pitney Bowes Credit Corporation. Mr. O'Hanlon received his MBA from the University of Connecticut, and his Bachelor of Business Administration Degree from the Philadelphia College of Textiles and Science. STEVEN R. GARFINKEL is an executive vice president of the Company and its chief financial officer. Mr. Garfinkel also serves on the executive committee of the Company. Mr. Garfinkel joined the Company in 1995. His responsibilities include corporate finance, loan funding, balance sheet management, treasury, accounting and financial reporting, internal control, financial and strategic planning, and human resources. Mr. Garfinkel has extensive experience in developing and managing corporate finance relationships, money market funding, derivative hedging, financial planning and management information systems. Prior to joining the Company, Mr. Garfinkel spent twenty-nine years with two large bank holding companies: CoreStates Financial Corp. and First Pennsylvania Corporation. For twenty years he was either controller or treasurer of those organizations. Mr. Garfinkel received his Master of Business Administration degree from Drexel University, and his Bachelor of Arts degree from Temple University. RICHARD E. MILLER is an executive vice president of the Company and president of DVI Financial Services Inc. He joined the Company in April 1994. Mr. Miller also serves on the executive committee of the Company. His primary responsibility is to manage operations and the Company's sales organization of financing specialists that interface directly with the Company's customers. Before joining the Company, he served for six years as vice president of sales for Toshiba America Medical Systems, a major manufacturer of medical imaging equipment. Previously, Mr. Miller was national sales manager for Thomsen CGR, a French manufacturer of medical imaging equipment, which was acquired by General Electric Medical Systems. Mr. Miller has a Bachelor of Arts degree from Eastern College. ANTHONY J. TUREK is an executive vice president and the chief credit officer of the Company. Mr. Turek has served in that capacity since joining the Company in March 1988. Mr. Turek also serves on the executive committee of the Company. Before joining the Company, Mr. Turek was vice president of commercial banking at Continental Illinois National Bank from 1968 to 1988. For the last five years of his tenure at Continental Illinois National Bank, Mr. Turek managed the equipment leasing and transportation divisions. His prior responsibilities included management positions in the special industries, metropolitan and national divisions of the Bank of America. Mr. Turek received his Master of Science degree from the University of Missouri and his Bachelor of Science degree from Iowa State University. JOHN P. BOYLE is a vice president and chief accounting officer of the Company. Mr. Boyle joined the Company in January 1995. His primary responsibility is managing the Company's accounting, tax and financial reporting functions. Mr. Boyle is a General Securities Principal and a CPA with twenty years of experience in the financial services industry. Mr. Boyle spent five years of his professional career with Peat Marwick Mitchell & Co. in Philadelphia. Beyond his accounting background, he has extensive experience in credit and corporate finance matters. Mr. Boyle received his Bachelor of Arts degree from Temple University. MELVIN C. BREAUX is general counsel, secretary and a vice president of the Company, as well as general counsel and a vice president of DVI Financial Services Inc. Prior to joining the Company in July 1995, Mr. Breaux was a partner in the Philadelphia, Pennsylvania law firm of Drinker, Biddle, & Reath for 17 years and an associate of the firm for 8 years. As a member of that firm's banking and finance department, he specialized in secured and unsecured commercial lending transactions, a wide variety of other financing transactions, and the general practice of business law. Mr. Breaux received his Juris Doctor degree from the University of Pennsylvania School of Law and his Bachelor of Arts degree from Temple University. CYNTHIA J. COHN has been a vice president of the Company since October 1988 and executive vice president of DVI Business Credit Corporation since January 1994. Ms. Cohn has been employed by the Company in a sales and management capacity since July 1986. She is responsible for the operations support and marketing functions of DVI Business Credit Corporation, the Company's medical receivables financing subsidiary. She served as an assistant vice president from July 1987 to October 1988. Prior to joining the Company, Ms. Cohn served as research coordinator for Cantor, Fitzgerald Co., Inc., a stock brokerage firm, from February 1983 to July 1986, where she was responsible for development and coordination of that firm's research product for both institutional 11 12 and retail clientele. Ms. Cohn received her Bachelor of Arts degree from Ithaca College. ALAN J. VELOTTA is the president of DVI Business Credit Corporation and has served in this capacity since April 1997. Mr. Velotta is also a vice president of the Company. His primary responsibilities are to manage the unit that originates the Company's medical receivable-backed loans. When Mr. Velotta joined the Company in April 1994, he served as the group managing director of DVI Capital, the Company's wholesale equipment financing operation. Prior to joining the Company, for four years, Mr. Velotta served as vice president of 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 eleven years. Mr. Velotta received a Bachelor of Science degree in Marketing from Cleveland State University. -------------------------------------------- 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 and by the Ronald Baron group. 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 1998 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission. 12 13 PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS PRICE RANGE OF COMMON STOCK The common stock of DVI, Inc. is listed on the New York Stock Exchange. The following table sets forth high and low sales prices per share of common stock as reported on the Composite Tape for the periods indicated:
FISCAL YEAR ENDED JUNE 30, 1998 HIGH LOW - ------------------------------- ---- --- First Quarter ......................................................... $16 3/4 $14 1/8 Second Quarter ........................................................ 21 16 3/8 Third Quarter ......................................................... 27 1/4 18 3/8 Fourth Quarter ........................................................ 25 1/2 19 3/4
FISCAL YEAR ENDED JUNE 30, 1997 HIGH LOW - ------------------------------- ---- --- First Quarter ......................................................... $17 7/8 $11 3/8 Second Quarter ........................................................ 15 12 3/8 Third Quarter ......................................................... 13 1/2 10 7/8 Fourth Quarter ........................................................ 14 7/8 11 1/8
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 places limitations on the payment of dividends by the Company and its subsidiaries. As of August 18, 1998, there were approximately 4,398 beneficial holders of the Company's common stock. 13 14 ITEM 6. SUMMARY CONSOLIDATED FINANCIAL AND OPERATING INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED JUNE 30, ----------------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- STATEMENT OF OPERATIONS DATA: Finance and other income ................................ $74,355 $56,334 $49,038 $35,985 $20,609 Interest expense ........................................ 49,212 38,395 30,489 22,860 8,833 Net interest and other income ........................... 25,143 17,939 18,549 13,125 11,776 Selling, general and administrative expenses ............ 18,493 14,117 9,933 7,891 6,049 Provision for losses on receivables ..................... 4,735 2,386 2,325 1,261 1,716 Earnings from continuing operations before minority interest, equity in net loss of investees, provision for income taxes, and discontinued operations ............................................ 22,892 15,475 14,323 7,015 4,313 Net earnings from continuing operations ................. 12,858 8,563 8,165 4,069 2,260 Net diluted earnings per share from continuing operations $ 1.03 $ 0.74 $ 0.77 $ 0.60* $ 0.34* Weighted average number of dilutive shares outstanding .. 13,246 12,487 11,569 8,352* 6,786*
JUNE 30, ---------------------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- BALANCE SHEET DATA: Cash and cash equivalents ........... $ 15,192 $ 9,187 $ 2,391 $ 1,963 $ 1,714 Cash and cash equivalents, restricted 47,582 26,461 32,550 12,241 13,065 Total assets ........................ 816,920 634,528 560,939 432,876 265,949 Borrowings under warehouse facilities 82,828 44,962 168,108 155,172 34,586 Long-term debt, net ................. 467,853 435,238 267,568 219,130 162,964 Shareholders' equity ................ 172,285 95,660 85,302 40,299 33,993
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. * Calculated on a fully diluted basis. 14 15 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, HMOs, PPOs 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." These 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 fair market value of the financed equipment at the end of the transaction term. At the inception of notes secured by equipment and direct financing lease fixed payment transactions, "unearned income" represents the amount by which the gross transaction receivables and the estimated residual value (on fair market value transactions) exceed equipment cost. At the inception of notes secured by equipment and direct financing lease variable rate transactions, the beginning receivable balance is equal to the equipment cost only. Variable rate contracts have scheduled principal payments and variable interest payments that are calculated and accrued monthly on the remaining principal balance. 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 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 deferred and recognized using the interest method over the respective term of the transactions. If an obligor defaults, the Company may not receive all of the unamortized income associated with the transaction. 15 16 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. INCOME CLASSIFICATIONS 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 contract fees and late charges, dividends on investments in investees' preferred stock, servicing fees, placement fees, and gains/losses from asset disposals. Net gain on sale of financing transactions consists of gains recognized when the Company funds transactions through whole loan sales. 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 IMPACT OF FINANCING STRATEGIES 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 for 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. YEAR ENDED JUNE 30, 1998 COMPARED TO YEAR ENDED JUNE 30, 1997 Total equipment financing loans originated were $524.7 million in fiscal 1998 compared with $401.7 million in fiscal 1997, an increase of 30.6%. Net financed assets totaled $728.1 million at June 30, 1998, an increase of $147.3 million or 25.4% over the prior year. Not included in net financed assets were the loans sold, but still serviced by the Company, which increased to $546.2 million as of June 30, 1998 compared to $389.6 million as of 16 17 June 30, 1997, an increase of 40.2%. 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 $1.2 billion as of June 30, 1998, representing a 32.1% increase over the total as of June 30, 1997. In the Company's medical receivable financing business, new commitments of credit in fiscal 1998 were $183.2 million compared with $101.1 million in fiscal 1997, an increase of 81.2%. Medical receivables funded at June 30, 1998 totaled $137.3 million, an increase of $51.7 million or 60.4% over the prior year. Total finance and other income increased 32.0% to $74.4 million for the year ended June 30, 1998 from $56.3 million the prior year. A component of total finance and other income, amortization of finance income, increased 27.9% to $63.3 million for the year ended June 30, 1998 from $49.5 million for the year ended June 30, 1997. 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, increased 62.1% to $11.0 million in fiscal 1998 as compared to $6.8 million in fiscal 1997. The increase is due mainly to fees earned on larger portfolios, placement fees, and servicing income. For the year ended June 30, 1998, interest expense increased 28.2% to $49.2 million from $38.4 million in the prior year. The increase in interest expense is primarily a result of the growth of the Company's loan portfolio and growth in international markets. The weighted average interest rate on discounted receivables, the largest component of interest expense, decreased to 8.02% as of June 30, 1998 compared to 8.60% as of June 30, 1997. The net gain on sale of financing transactions increased 49.4% to $21.0 million for the year ended June 30, 1998 compared with a gain of $14.0 million for the same period in the prior year. Loans sold during the year ended June 30, 1998 were $292.7 million compared to $233.0 million during the prior fiscal year. The increase is due mainly to better and more efficient executions, and lower transaction costs resulting from larger transactions. Selling, general and administrative expenses ("SG&A") increased 31.0% to $18.5 million for the year ended June 30, 1998 from $14.1 million for the year ended June 30, 1997. The increase over the prior fiscal year is related primarily to the development of its medical receivables, vendor finance and international businesses and the 38.0% growth in average managed net financed assets. To support this growth, the Company increased its personnel to 193 employees from 137 one year earlier. The provision for losses on receivables was $4.7 million for the year ended June 30, 1998 as compared to $2.4 million for the previous year. On a quarterly basis, the Company evaluates its ability to collect 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, 1997, December 31, 1997, March 31, 1998, and June 30, 1998 were $360,000, $272,000, $556,000, and $596,000, respectively, which represents 5.45%, 3.50%, 6.39%, and 5.99%, respectively, of the quarter-end allowance for losses. Earnings before minority interest, provision for income taxes and equity in net losses of investees increased 47.9% to $22.9 million for the year ended June 30, 1998 compared to $15.5 million a year earlier. Net earnings were $12.9 million or $1.03 per diluted share for the year ended June 30, 1998 as compared to net earnings of $8.6 million or $0.74 per diluted share in the prior year. The Company's cash and cash equivalents at June 30, 1998 and June 30, 1997 were $15.2 million and $9.2 million, respectively. The following describes the changes from June 30, 1997 to June 30, 1998 in the items which had the most significant impact on the Company's cash flow during the year ended June 30, 1998. The Company's net cash provided by operating activities was $1.9 million for the year ended June 30, 1998 compared to $69.8 million net cash provided by operations for the year ended June 30, 1997. The decrease in cash provided during the year ended June 30, 1998 is attributed mainly to the fiscal year 1997 collection of the amount due from a 1996 portfolio sale. The Company's net cash used in investing activities increased to $122.0 million for the year ended June 30, 1998, as compared to $105.9 million for the year ended June 30, 1997. This increase is attributed primarily to cash used to acquire equipment of $541.7 million during the year ended June 30, 1998 compared to $429.5 million for the year 17 18 ended June 30, 1997. These uses of cash were offset by $473.0 million and $373.0 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 $126.0 million for the year ended June 30, 1998 compared to $42.9 million for the year ended June 30, 1997. This results from a net increase in the Company's borrowings over repayments of $66.3 million for the year ended June 30, 1998, as compared to a $41.6 million net increase in borrowings over repayments for the year ended June 30, 1997. In fiscal year 1998, the equity and private offerings provided $57.9 million. 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 $85.6 million, an increase of $47.0 million or 149.4% over the prior year. Total finance and other income increased 14.9% to $56.3 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, increased 50.1% to $6.8 million in fiscal 1997 as compared to $4.5 million in fiscal 1996. The increase was 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 was primarily a result of the growth of the Company's loan portfolio and issuance of Senior Notes. The weighted average interest rate on discounted receivables, the largest component of interest expense, decreased to 8.60% as of June 30, 1997 compared to 8.64% as of June 30, 1996. 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 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. The increase is due mainly to better and more efficient executions, and lower transaction costs resulting from larger transactions. Selling, general and administrative expenses ("SG&A") increased 42.1% to $14.1 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 was related primarily to the development of its medical receivables, vendor finance and international businesses and the 35.1% growth in average 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 its ability to collect its receivables and records a provision for amounts deemed uncollectible. In the opinion of management, the provisions were 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. 18 19 Earnings before minority interest, provision for income taxes and equity in net losses of investees increased 8.0% to $15.5 million for the year ended June 30, 1997 compared to $14.3 million a year earlier. Net earnings were $8.6 million or $0.74 per diluted share for the year ended June 30, 1997 as compared to net earnings of $8.2 million or $0.77 per diluted share in the prior year. The Company's net cash provided by operating activities was $69.8 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 provided during the year ended June 30, 1997 was attributed mainly 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, compared to $25.4 million for the year ended June 30, 1996. This increase was attributed primarily 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 $42.9 million for the year ended June 30, 1997 down from $97.1 million for the year ended June 30, 1996. This resulted from a net increase in the Company's borrowings over repayments of $41.6 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 1996, the equity offering provided $29.0 million. 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 sold or permanently funded assets if 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 medical receivables. These borrowings 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 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 19 20 contains, among other things, limitations on the Company's ability to pay dividends and to make certain other kinds of payments. This 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. 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. This 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. On October 30, 1997, the Company completed a private placement of 300,000 shares of DVI common stock with a group of European financial institutions for net proceeds of $4.9 million. On April 24, 1998, the Company registered under the Securities Act of 1933, as amended ("Securities Act"), $500.0 million of common stock, preferred stock, depositary shares, debt securities, and warrants with the Securities and Exchange Commission ("SEC"). The SEC declared the registration statement (Registration No. 333-50895) effective on May 4, 1998. On May 28, 1998, the Company issued 2,300,000 shares of common stock through an underwritten public offering. The aggregate price to the public of such shares was $49.3 million and the aggregate net proceeds to the Company were $46.6 million. Also on May 28, 1998, the Company issued 340,000 shares of common stock to certain stockholders of the Company. The price to such stockholders and the aggregate net proceeds to the Company for such shares was $6.9 million. These net proceeds received do not reflect issuance costs totaling $0.4 million. The proceeds from the May 28th stock issuances 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 expanding international operations, (iii) for other working capital needs and (iv) for general corporate purposes. On June 30, 1998, approximately $445.9 million of common stock, preferred stock, depositary shares, debt securities and warrants remained registered and unissued under the Securities Act. Although the Company believes that cash available from operating, 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 affect its ability to meet such needs while attempting to withstand competitive pressures or adverse economic conditions. WAREHOUSE FACILITIES At June 30, 1998, the Company had available an aggregate of $373.2 million under various warehouse facilities for equipment loan financing. The Company's primary credit facility, a revolving credit agreement with a syndicate of banks ("Agreement"), provides for the borrowing of up to $112.0 million. Borrowings under this facility bear interest at the Company's option of (i) prime minus 0.25% or (ii) from 1.00% to 1.20% over the 30, 60 or 90-day LIBOR rate based on the Company's leverage ratio as defined in the Agreement. 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, 1998, the Company was in compliance with the financial covenants of the Agreement. 20 21 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. In addition, the Company has $66.2 million of loan warehouse capacity which includes a $50.0 million facility for loans originated in Brazil and a $6.2 million facility for loans originated in Australia. 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 a revolving credit facility with a syndicate of banks for borrowings up to $95 million. Borrowings in this facility bear interest at LIBOR plus 1.45% and mature in April 1999. The second facility is for $30.0 million with an interest rate of 30-day LIBOR plus 1.90% and matures in September 1998. The Company's use of securitization significantly affects its needs for warehouse facilities. When using a 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 $75 to $250 million will be placed in each securitization pool. PERMANENT FUNDING METHODS The Company has completed 21 securitizations or other structured finance transactions for medical equipment financings and medical receivables financings totaling $1.57 billion, including two public debt issues of $75.7 million and $90.0 million and 19 private placements of debt and whole loan sales totaling $1.4 billion. 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. In February 1998, the Company closed a $75 million private term securitization of medical receivables loans. 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 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 a securitization, the Company is required to hold loans in warehouse facilities until a sufficient quantity is accumulated in order 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. The Company has a $180 million facility with an option to sell to it certain equipment loans and leases. As of June 30, 1998, there was $80.1 million sold to this facility. The Company's obligations under this facility include servicing of the assets and assisting the owner in the securitization of the assets if the owner chooses to securitize. 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, 21 22 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. FOREIGN EXCHANGE FORWARD CONTRACTS The Company has international operations and has foreign currency exposures at some of these operations due to lending in currencies other than the local currency. As a general practice, the Company has not hedged the foreign exchange exposure related to either the translation of overseas earnings into U.S. dollars, or the translation of overseas equity positions back to U.S. dollars. A foreign exchange forward contract is used to hedge the amount receivable to the U.S. parent for a specific portfolio in Deutsche Marks. At June 30, 1998, the Company had 7.5 million Deutsche Marks in forward contracts. Foreign exchange forward contracts are accounted for as hedges to the extent they are designated, and are effective as hedges of foreign currency. The net gain/loss deferred at June 30, 1998 is immaterial. 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 has structured all sales of financing transactions since the quarter ended June 30, 1997 as borrowings for tax purposes versus a sale for book (GAAP) purposes. Future sales of financing transactions may also be structured in this manner. INFLATION The Company does not believe that inflation has had a material effect 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. 22 23 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page Number ------ Independent Auditors' Report ...................................... 24 Consolidated Balance Sheets as of June 30, 1998 and 1997 .......... 25-26 Consolidated Statements of Operations for the years ended June 30, 1998, 1997 and 1996 ................................. 27 Consolidated Statements of Shareholders' Equity for the years ended June 30, 1998, 1997 and 1996 ................................. 28 Consolidated Statements of Cash Flows for the years ended June 30, 1998, 1997 and 1996 ................................. 29-30 Notes to Consolidated Financial Statements ........................ 31-45
23 24 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, 1998 and 1997, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended June 30, 1998. 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, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended June 30, 1998 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Parsippany, New Jersey August 7, 1998 (September 15, 1998 as to Note 17) 24 25 CONSOLIDATED BALANCE SHEETS ASSETS
June 30, ----------------------------- (in thousands of dollars except share data) 1998 1997 - -------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents ............................................................... $ 15,192 $ 9,187 Cash and cash equivalents, restricted ................................................... 47,582 26,461 Receivables: Investment in direct financing leases and notes secured by equipment or medical receivables: Receivables in installments ...................................................... 572,679 496,861 Receivables and notes - related parties .......................................... 6,563 9,453 Recourse credit enhancements ..................................................... 51,883 46,095 Notes collateralized by medical receivables ...................................... 137,316 85,649 Residual valuation ............................................................... 14,287 8,276 Unearned income .................................................................. (69,367) (69,739) --------- --------- Net investment in direct financing leases and notes secured by equipment or medical receivables ................................................ 713,361 576,595 Less: Allowance for losses on receivables ............................................ (9,955) (5,976) --------- --------- Net receivables ......................................................................... 703,406 570,619 Equipment on operating leases (net of accumulated depreciation of $3,189 and $2,301, respectively) ................... 14,773 4,041 Furniture and fixtures (net of accumulated depreciation of $2,600 and $1,710, respectively) ................. 4,225 2,405 Investments in investees ................................................................ 7,120 6,609 Goodwill, net ........................................................................... 3,646 3,953 Other assets ............................................................................ 20,976 11,253 --------- --------- Total assets ............................................................................ $ 816,920 $ 634,528 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 25 26 LIABILITIES AND SHAREHOLDERS' EQUITY
June 30, ---------------------------------- (in thousands except share data) 1998 1997 - ------------------------------------------------------------------------------------------------------------------------ Accounts payable ........................................................... $ 48,030 $ 30,850 Accrued expenses and other liabilities ..................................... 18,271 19,208 Borrowings under warehouse facilities ...................................... 82,828 44,962 Deferred income taxes ...................................................... 19,393 8,610 Long-term debt, net: Discounted receivables (primarily limited recourse) ................... 342,120 317,863 9 7/8% Senior notes due 2004 .......................................... 96,486 95,883 Other debt ............................................................ 15,808 8,168 Convertible subordinated notes ........................................ 13,439 13,324 --------- --------- Total long-term debt, net .................................................. 467,853 435,238 --------- --------- Total liabilities .......................................................... 636,375 538,868 Commitments and contingencies (Note 12) Minority interest in consolidated subsidiaries ............................. 8,260 -- Shareholders' equity: Preferred stock, $10.00 par value; authorized 100,000 shares; no shares issued Common stock, $.005 par value; authorized 25,000,000 shares; outstanding 14,080,358 and 10,590,859 shares, respectively ......... 70 53 Additional capital .................................................... 133,516 69,194 Retained earnings ..................................................... 39,387 26,529 Cumulative translation adjustments .................................... (688) (116) --------- --------- Total shareholders' equity ................................................. 172,285 95,660 --------- --------- Total liabilities and shareholders' equity ................................. $ 816,920 $ 634,528 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 26 27 CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended June 30, ---------------------------------------- (in thousands except per share data) 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------------- Finance and other income: Amortization of finance income ..................................... $ 63,332 $ 49,535 $ 44,509 Other income ....................................................... 11,023 6,799 4,529 -------- -------- -------- Total finance and other income ........................................ 74,355 56,334 49,038 Interest expense ...................................................... 49,212 38,395 30,489 -------- -------- -------- Net interest and other income ......................................... 25,143 17,939 18,549 Net gain on sale of financing transactions ............................ 20,977 14,039 8,032 -------- -------- -------- Net finance income .................................................... 46,120 31,978 26,581 Selling, general and administrative expenses .......................... 18,493 14,117 9,933 Provision for losses on receivables ................................... 4,735 2,386 2,325 -------- -------- -------- Earnings before minority interest, equity in net loss of investees, and provision for income taxes ......................................... 22,892 15,475 14,323 Minority interest in net loss of consolidated subsidiaries ............ 126 -- -- Equity in (net loss) of investees ..................................... (439) (281) (66) Provision for income taxes ............................................ 9,721 6,631 6,092 -------- -------- -------- Net earnings .......................................................... $ 12,858 $ 8,563 $ 8,165 ======== ======== ======== Net earnings per share: Basic .............................................................. $ 1.12 $ 0.78 $ 0.82 ======== ======== ======== Diluted ............................................................ $ 1.03 $ 0.74 $ 0.77 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 27 28 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, 1995 ............ 6,753,685 $34 $ 29,403 $ 1,061 $ 9,801 $ -- $ 40,299 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 ..................... 8,165 8,165 ---------- --- -------- ------- ------- ------- --------- Balances at June 30, 1996 ........... 10,451,375 $52 $ 67,284 $ -- $17,966 $ -- $ 85,302 Issuance of common stock upon exercise of stock options and warrants ............ 82,881 1 1,310 1,311 Conversion of subordinated notes . 56,603 600 600 Currency translation adjustment .. (116) (116) Net earnings ..................... 8,563 -- 8,563 ---------- --- -------- ------- ------- ------- --------- Balances at June 30, 1997 ........... 10,590,859 $53 $ 69,194 $ -- $26,529 $ (116) $ 95,660 Issuance of common stock upon exercise of stock options and warrants ............ 149,499 1,756 1,756 Net proceeds from issuance of common stock .................... 2,940,000 15 57,918 57,933 Issuance of common stock for acquisition of MEFC ............. 400,000 2 4,648 4,650 Currency translation adjustment .. (572) (572) Net earnings ..................... 12,858 -- 12,858 ---------- --- -------- ------- ------- ------- --------- Balances at June 30, 1998 ........... 14,080,358 $70 $133,516 $ -- $39,387 $ (688) $ 172,285 ========== === ======== ======= ======= ======= =========
The accompanying notes are an integral part of these consolidated financial statements. 28 29 CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended June 30, --------------------------------------------- (in thousands of dollars) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings .............................................. $ 12,858 $ 8,563 $ 8,165 --------- --------- --------- Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Equity in net loss of investees .......................... 439 281 66 Depreciation and amortization ............................ 12,050 10,289 7,983 Additions to allowance accounts .......................... 4,735 2,386 2,325 Net gain on sale of financing transactions ............... (20,977) (14,039) (8,032) Minority interest ........................................ (126) -- -- Cumulative translation adjustments ....................... (71) 37 -- Changes in assets and liabilities: (Increases) decreases in: Cash and cash equivalents, restricted ................. (21,121) 6,090 (20,281) Amounts due from portfolio sale ....................... -- 54,797 (54,797) Receivables ........................................... (6,999) (14,086) (29,505) Other assets .......................................... (9,697) (3,260) 3,095 Increases (decreases) in: Accounts payable ...................................... 16,328 7,285 17,592 Accrued expenses and other liabilities ................ 3,713 7,558 1,361 Deferred income taxes ................................. 10,783 3,865 797 --------- --------- --------- Total adjustments ........................................ (10,943) 61,203 (79,396) --------- --------- --------- Net cash provided by (used in) operating activities ....... 1,915 69,766 (71,231) --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Cost of equipment acquired ................................ (541,715) (429,515) (292,618) Portfolio receipts net of amounts included in income and proceeds from sale of financing transactions ............. 473,018 372,973 280,541 Net increase in notes collateralized by medical receivables (49,703) (48,293) (11,667) Furniture and fixtures additions .......................... (2,897) (1,017) (985) Investments in investees .................................. (1,148) (24) (2,059) Cash received from sale of investments in investees ....... 549 -- 1,341 --------- --------- --------- Net cash used in investing activities ..................... (121,896) (105,876) (25,447) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Exercise of stock options and warrants .................... 1,756 1,311 8,938 Equity offering ........................................... 57,933 -- 28,961 Borrowings under: Warehouse facilities ..................................... 802,811 498,576 485,585 Long-term debt ........................................... 156,884 283,825 120,705 Repayments on: Warehouse facilities ..................................... (765,237) (621,862) (472,649) Long-term debt ........................................... (128,161) (118,944) (74,434) --------- --------- --------- Net cash provided by financing activities ................. 125,986 42,906 97,106 --------- --------- ---------
continued 29 30 CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Year Ended June 30, --------------------------------------------- (in thousands of dollars) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------- Net increase in cash and cash equivalents .................... $ 6,005 $ 6,796 $ 428 Cash and cash equivalents, beginning of year ................. 9,187 2,391 1,963 --------- --------- --------- Cash and cash equivalents, end of year ....................... $ 15,192 $ 9,187 $ 2,391 ========= ========= ========= CASH PAID DURING THE YEAR FOR: Interest................................................... $ 44,786 $ 31,073 $ 29,984 ========= ========= ========= Income taxes .............................................. $ 1,508 $ 4,777 $ 3,507 ========= ========= =========
SUPPLEMENTAL DISCLOSURES OF NONCASH TRANSACTIONS: In June 1998 the purchase price for MEFC of $4.7 million was reclassified from accrued liabilities to shareholders' equity to reflect the issuance of 400,000 common shares. In June 1998, an additional investment of $2.0 million was made to MEC of which $852,000 is still payable. 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, 1998 and 1997, the Company has recorded in receivables in installments and accrued expenses amounts of $2.5 million and $1.9 million, respectively, representing the present value of future obligations the Company has guaranteed. In July 1996, $600,000 of convertible subordinated notes were converted into common stock. During the year ended June 30, 1996, the Company converted a $541,000 note receivable into shares of common stock of a domestic entity. The accompanying notes are an integral part of these consolidated financial statements. 30 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. NATURE OF OPERATIONS DVI, Inc. (the "Company" or "DVI") is primarily engaged in the business of providing equipment and receivable financing for domestic and foreign users of diagnostic imaging, radiation therapy and other medical technologies. 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 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. DVI Europe is the Company's branch established in the United Kingdom to service the medical equipment industry in Europe. The Company recently entered into a joint venture, MSF Holding Ltd., with the International Finance Company (an affiliate of The World Bank), the Netherlands Development Finance Company, and a subsidiary of First Union National Corporation. Through MSF Holding Ltd. the Company will provide finance programs for vendors and manufacturers of diagnostic and patient treatment devices in Latin America, including Brazil, Argentina, Colombia and Mexico. The joint venture commenced with a planned committed loan facility of $65 million and paid-in capital of $20 million. In addition, the joint venture is in discussions with a major investment banking firm to develop and implement a permanent funding program for the equipment loans originated by the joint venture. The Company owns 59% of the joint venture holding company which operates through free-trade zone subsidiaries in Uruguay. The Company expects the customer base for equipment vendors to be private clinics, diagnostic centers, and local hospitals. The Company believes that this arrangement may prove to be a suitable model for its other international activities. The success and ultimate recovery of these investments is dependent upon many factors including foreign regulation, customs, currency exchange, the achievement of management's planned projections for these markets and the Company's ability to manage these operations. NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION POLICY - All majority-owned subsidiaries are consolidated and all material intercompany accounts and transactions are eliminated. Investments in 20%-50% owned entities are accounted for by the equity method of accounting, and investments in less than 20% owned entities are accounted for by the cost method. 31 32 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. 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 mutual funds 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 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, 1998 and 1997, 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 of fixed payment contracts. The principal portion and initial direct costs of variable rate contracts are recorded at commencement and interest is calculated and accrued monthly on the remaining principal balance. 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, 1998 and 1997, unamortized initial direct costs amounted to $6.6 million and $7.0 million, respectively. Initial direct costs, net of any fees collected, are deferred and amortized over the life of the contract using the interest method which reflects a constant effective yield. 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. 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 majority of the credit enhancements are recorded as subordinated interests of the present value of the discounted cash flows. The recorded assets are relieved based on the unique structure of the credit enhancement and the proportional cash flow. NOTES COLLATERALIZED BY MEDICAL RECEIVABLES - Notes collateralized by medical receivables consist of notes receivable 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. RECEIVABLES IMPAIRMENT - Impaired receivables are measured based on the present value of the expected cash flows discounted at the receivables' effective interest rate or the fair value of the collateral. A receivable is considered impaired when it becomes probable 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 is recorded at cost and depreciated on a straight-line basis over the estimated useful life of the 32 33 equipment. The residual values for operating leases are excluded from the leased equipment's net depreciable basis. The Company evaluates residual value for potential impairment on an ongoing basis and records any required changes in valuation. Rental income is recorded monthly on a straight-line basis. Initial direct costs associated with operating leases are deferred and amortized over the lease term on a straight-line basis which approximates 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 ("MEFC"). Goodwill relating to the acquisition of MEFC 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, accrued interest, 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. ACCOUNTS PAYABLE - Accounts payable includes equipment payables for equipment fundings of $40.8 million and $29.2 million at June 30, 1998 and 1997, respectively. 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 three categories: income on fixed payment transactions, income on variable rate transactions and income on medical receivables. The interest component of scheduled payments on notes secured by equipment and direct financing lease fixed payment transactions is calculated using the interest method in order to approximate a level rate of return on the net investment. The interest component of notes secured by equipment and direct financing lease variable rate transactions is calculated and accrued monthly on the remaining principal balance. The interest component on medical receivables is calculated and accrued monthly on the average balance outstanding during the period. 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 funding through the whole loan sale of a transaction to a third party. RECOURSE OBLIGATIONS - 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 investor would exercise its rights under the lien with limited or no further recourse against the Company. OTHER INCOME - Other income consists primarily of contract fees and late charges, dividends on investments in investees' preferred stock, servicing fees, placement fees, and gains/losses from asset disposals, and is recorded when earned. TAXES ON INCOME - Deferred taxes on income result from temporary differences between the reporting of income for financial statement and tax reporting purposes. Such differences arise principally from recording hedging gains and losses, gains on sales of financing transactions, and lease transactions in which the operating lease method of accounting is used for tax purposes and the financing lease method is used for financial statement purposes. Under the operating lease method, leased equipment is recorded at cost and depreciated over the useful life of the equipment and lease payments are recorded as revenue when earned. NET EARNINGS PER SHARE - The Company adopted SFAS No. 128, Earnings per Share, as of October 1, 1997. This statement is effective for financial statements issued for periods ending after December 15, 1997 and has been applied retroactively. The adoption of this statement did not have a material impact on the Company's financial position or results of operations. 33 34 STOCK-BASED COMPENSATION - The Company accounts for stock-based compensation using the intrinsic value method under which the Company has not recognized compensation expense. HEDGING INSTRUMENTS - 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, which are accounted for as a financing, 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 sales or securitizations, which are accounted for as sales, gains or losses from the hedge transactions are recognized as part of the gain or loss on the sale. Foreign exchange forward contracts are accounted for as hedges to the extent they are designated, and are effective as hedges of foreign currency. The net gain or loss is recorded as a cumulative translation adjustment in shareholders' equity. RECENT ACCOUNTING DEVELOPMENTS - 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 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. The Company intends to adopt both standards effective July 1, 1998. In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Management has not completed an analysis of the impact of applying this new statement. RECLASSIFICATIONS AND RESTATEMENTS - Certain amounts as previously reported have been reclassified to conform to the year ended June 30, 1998 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:
Direct Financing Leases and Notes Scheduled Secured by Rents on Equipment or Operating Total Year Ending June 30, Medical Receivables Leases Receivable - -------------------- ------------------- ------ ---------- 1999 ............. $284,409,000 $ 2,993,000 $287,402,000 2000 ............. 225,300,000 2,315,000 227,615,000 2001 ............. 135,505,000 2,250,000 137,755,000 2002 ............. 75,274,000 1,940,000 77,214,000 2003 ............. 33,415,000 1,415,000 34,830,000 Thereafter ....... 14,538,000 428,000 14,966,000 ------------ ----------- ------------ Subtotal ...... 768,441,000 11,341,000 779,782,000 Residual valuation 14,287,000 -- 14,287,000 ------------ ----------- ------------ Total ......... $782,728,000 $11,341,000 $794,069,000 ============ =========== ============
34 35 The total receivable balance of $794.1 million is comprised of direct financing leases (28%), notes secured by equipment (54%), medical receivables (17%), and scheduled rents on operating leases (1%). The Company is exposed to credit risk on these receivables. At June 30, 1998, of the 3,614 debtors, the top ten obligors represented 12.07% of the portfolio. Geographic concentration for the top five states was New York (21.37%), California (15.37%), Florida (10.80%), Texas (9.42%), and New Jersey (9.09%). International loans, those outside the 50 United States, represented 16.60% 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 periodically to determine if the equipment's anticipated fair market value is below its recorded value. During the years ended June 30, 1998 and 1997, the Company sold receivables to third parties realizing gains of $21.0 million and $14.0 million, respectively. In connection with certain of these transactions, the Company retained subordinated interests in the receivables totaling $51.9 million and $46.1 million at June 30, 1998 and 1997, 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, 1998, receivables amounting to $558.7 million were assigned as collateral for long-term debt. The following is an analysis of the allowance for losses on receivables:
Year Ended June 30, 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------ Balance, beginning of year ................ $ 5,976,000 $ 4,026,000 $ 3,282,000 Provision for losses on receivables ....... 4,735,000 2,386,000 2,325,000 Allowance assumed in business acquisition . 879,000 -- -- Write-offs, net ........................... (1,635,000) (436,000) (1,581,000) ----------- ----------- ----------- Balance, end of year ...................... $ 9,955,000 $ 5,976,000 $ 4,026,000 =========== =========== ===========
The net investment of non-performing loans, including the managed portfolio, on which income recognition was suspended was $22.6 million and $20.7 million at June 30, 1998 and 1997, respectively. Cash collected on all non-accrual 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, 1998 and 1997, 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. 35 36 During the year ended June 30, 1996, the Company converted a note receivable totaling $541,000 into shares of outstanding stock of EQ Computer Products and 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 the investment in this entity under the cost method of accounting as it does not exert significant influence over the entity. On June 30, 1998, the Company sold its entire investment in CP&S for an insignificant gain. 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 the initial $2.0 million investment. The Company accounts for its investment in MEC under the equity method of accounting. At June 30, 1998, 1997 and 1996, the Company recognized losses of approximately $439,000, $231,000, and $41,000, respectively, on this investment. NOTE 5. INTEREST BEARING DEBT WAREHOUSE FACILITIES - 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 $112.0 million. Borrowings under this facility bear interest at the Company's option of (i) prime minus 0.25% or (ii) from 1.00% to 1.20% over the 30, 60 or 90-day LIBOR rate based on the Company's leverage ratio as defined in the Agreement. 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, 1998, 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. In addition, the Company has a $50.0 million interim facility for loans originated in Brazil and a $6.2 million facility for loans originated in Australia. 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 a revolving credit facility with a syndicate of banks for borrowings up to $95 million. Borrowings in this facility bear interest at LIBOR plus 1.45%. The second facility is for $30.0 million with an interest rate of 30-day LIBOR plus 1.90% and matures in September 1998. 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 $7.2 million, are as follows:
Year Ending June 30, - -------------------------------------------------- 1999 ......................... $ 94,115,000 2000 ......................... 75,228,000 2001 ......................... 144,183,000 2002 ......................... 20,004,000 2003 ......................... 6,915,000 Thereafter ................... 1,675,000 ------------ Total ..................... $342,120,000 ============
All of the discounted receivables have been permanently funded through ten structured transactions which were initiated during fiscal years 1993 through 1998. Debt under these securitizations are limited recourse and bear interest at fixed rates ranging between 5.62% to 12.85% and floating interest rates ranging between 0.83% and 2.25% over 30-day LIBOR. All of the receivables are serviced by the 36 37 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 $15.5 million from the Company's securitization of some of its net retained subordinated positions in its securitizations and whole loan sales. This transaction was completed on July 31, 1996. The Company has net convertible subordinated notes outstanding of $13.4 million and $13.3 million at June 30, 1998 and 1997, 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. There were no conversions in fiscal year 1998. During the year ended June 30, 1997, $600,000 of these notes were converted into 56,603 shares of common stock of the Company. 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 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. In addition, the Company has a $4.7 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, 1998 and 1997: (in thousands of dollars)
As of June 30, 1998 As of June 30, 1997 Amount Maturity --------------------- ---------------------- Credit Facility Available Date Balance Rate Balance Rate --------------- --------- ---- ------- ---- ------- ---- SHORT-TERM DEBT Warehouse facilities . $498,208 Various $ 82,828 7.71% $ 44,962 7.10% LONG-TERM DEBT Discounted receivables $ -- Various $342,120 8.02% $317,863 8.60% 9 7/8 Senior notes ... $ -- 2004 $ 96,486 10.90% $ 95,883 10.96% Other debt ........... $ -- Various $ 15,808 8.38% $ 8,168 7.63% Convertible sub. debt $ -- 2002 $ 13,439 10.30% $ 13,324 10.38%
NOTE 6. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES The following represents a summary of the major components of selling, general and administrative expenses: (in thousands of dollars)
Year Ended June 30, 1998 1997 1996 - -------------------------------------------------------------------- Salaries and benefits .. $ 7,433 $ 5,276 $3,241 Professional fees ...... 4,191 2,860 2,572 Travel and entertainment 1,495 868 503 Occupancy and Equipment 3,097 2,383 1,863 Other .................. 2,277 2,730 1,754 ------- ------- ------ Total SG&A ............. $18,493 $14,117 $9,933 ======= ======= ======
37 38 NOTE 7. INCOME TAXES The provision for income taxes is comprised of the following:
Year Ended June 30, 1998 1997 1996 - ----------------------------------------------------------------------------- Current taxes ..... ($ 1,539,000) $2,766,000 $ 6,120,000 Foreign ........... 399,000 -- -- Deferred .......... 10,861,000 3,865,000 (28,000) ------------ ---------- ----------- Total ....... $ 9,721,000 $6,631,000 $ 6,092,000 ============ ========== ===========
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, 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------------- Provision for income taxes at the federal statutory rate .................. $7,896,000 35.0% $5,448,000 35.0% $4,993,000 35.0% State income taxes, net of federal tax benefit .............. 1,023,000 4.5% 850,000 5.4% 1,045,000 7.3% Foreign taxes, net of federal tax benefit .............. 259,000 1.1% -- -- -- -- Limitation on utilization of foreign losses 332,000 1.5% -- -- -- -- Other ...................................... 211,000 0.9% 333,000 2.1% 54,000 0.4% ---------- ---- ---------- ---- ---------- ---- Total ................................ $9,721,000 43.0% $6,631,000 42.5% $6,092,000 42.7% ========== ==== ========== ==== ========== ====
Earnings before minority interest, equity in net loss of investees, and provision for income taxes consist of the following:
Year Ended June 30, 1998 1997 1996 - ---------------------------------------------------------------------------- Domestic .......... $21,783,000 $15,040,000 $14,323,000 Foreign ........... 1,109,000 435,000 -- ----------- ----------- ----------- Total ............. $22,892,000 $15,475,000 $14,323,000 =========== =========== ===========
The major components of the Company's net deferred tax liabilities of $19.4 million and $8.6 million at June 30, 1998 and 1997, respectively, are as follows:
Year Ended June 30, 1998 1997 - ---------------------------------------------------------------------------------- Accumulated depreciation ............... $ 30,576,000 $ 23,511,000 Deferred recognition of lease income ... (16,086,000) (14,740,000) Deferred gain on financing transactions 8,955,000 1,977,000 Loss on hedging activities ............. 1,397,000 1,258,000 Allowances for uncollectible receivables (3,584,000) (2,322,000) State income taxes ..................... (1,004,000) (454,000) Other .................................. (861,000) (620,000) ------------ ------------ Total ............................ $ 19,393,000 $ 8,610,000 ============ ============
NOTE 8. SHAREHOLDERS' EQUITY During fiscal 1998, the Company issued 300,000 shares of its common stock in a private offering and 2,640,000 in a public offering for which it received net proceeds of $4.9 million and $53.1 million, respectively. The net proceeds were used (i) to fund the Company's growth, (ii) develop the Company's international operations, including the origination of medical equipment loans outside the United States, (iii) for other working capital needs, and (iv) for general corporate purposes. The 400,000 shares for the 1995 MEFC acquisition were issued in June 1998. 38 39 In March 1998, the Company issued options to purchase a total of 50,000 common shares at $15.3125 per share to non-employee Directors of the Company. The options vest at various dates through August 2000 and expire in March 2008. In November 1997, the Company acquired a healthcare-based merchant banking group whose key services are private debt placement, loan syndication, bridge financing, and mortgage loan arrangement for the long-term/assisted care and specialized hospital markets. The Company issued 84,011 shares of its common stock for the acquisition. The transaction was accounted for as a pooling of interests and therefore, all prior financial statements presented have been restated as if the merger took place at the beginning of such periods. The shares were allocated to the four companies and accounted for by the pooling of interests as follows: J. G. Wentworth Securities, Inc. .. 42,005 Fiscal 1995 J. G. Wentworth Mortgage Funding LP 27,100 Fiscal 1997 J. G. Wentworth Partners LP ....... 10,840 Fiscal 1997 J. G. Wentworth Partners, Inc. .... 4,066 Fiscal 1997 ------ Total ............................. 84,011 ======
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 as compensation to a financial advisory firm. 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. 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 and $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. In addition, in November 1990, 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. 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. 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. During each of the years ended June 30, 1998 and 1997, 10,000 shares at $8.375 and 10,000 at $7.625 were converted. The warrants vested at various dates through November 1996 and expire at various dates through 2003. 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. There were no conversions to common stock during fiscal 1998. 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, 1998, 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 had a stock option plan from August 1986 that provided for the granting of options to employees to purchase up to 1,250,000 shares of the Company's common stock at the fair market value at the date of grant. Options granted under this plan generally vest over three to five years from the date of grant and expire ten years after the date of the grant. Any unexercised options are canceled 90 days subsequent to the termination of the employee and are returned to the plan. This plan expired in August 1996. The Company has a stock option plan from August 1996 that provides for the granting of options to employees, consultants and directors to purchase up to 1,500,000 shares of the Company's common stock at the fair market value at the date of grant. Options granted under this plan generally vest over three to five years from the date of grant and expire ten years after the date of the grant. Any unexercised options are canceled 90 days subsequent to the termination of the employee and are returned to the plan. This plan expires August 2006. 39 40 The following table summarizes the employee activity under the plans for the periods indicated:
Weighted Average Options Exercise Price Exercise Price Outstanding Per Share Per Share - -------------------------------------------------------------------------------------------- Outstanding at July 1, 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 Granted .................... 597,500 $14.44 - $25.06 $ 16.83 Exercised .................. (109,499) $ 1.75 - $15.31 $ 7.94 Canceled ................... (1,350) --------- Outstanding at June 30, 1998 1,245,451 $ 4.06 - $25.06 $ 13.75 =========
The following table summarizes stock options outstanding at June 30, 1998:
Number of Options Weighted Average Weighted Average Range of Exercise Price Outstanding Remaining Contractual Life Exercise Price - ----------------------- ----------- -------------------------- -------------- $ 4.01 - $ 6.00 52,800 3 $ 5.01 $ 6.01 - $ 9.00 137,400 4 $ 8.08 $ 9.01 - $14.00 300,784 6 $11.30 $14.01 - $15.00 181,167 8 $14.62 $15.01 - $18.00 403,300 8 $15.36 $18.01 - $20.00 80,000 8 $19.16 $20.01 - $25.50 90,000 8 $21.91 --------- 1,245,451 7 $13.75 =========
As of June 30, 1998, options to purchase 514,817 shares were exercisable. If compensation cost for the Company's stock option plan had been determined based on the fair value at the date of awards consistent with the fair value method described in SFAS No. 123, the Company's net income, basic earnings per share, and diluted earnings per share would be reduced to the proforma amounts at June 30, 1998 of $12.0 million, $1.05 and $0.97 and at June 30, 1997 of $8.7 million, $0.78 and $0.70, respectively. Significant assumptions used to calculate the fair value of the awards for June 30, 1998 and 1997, respectively, are as follows: weighted average risk free rate of return of 6.0% and 6.3%; expected option life of 60 months; expected volatility of 38% and 32%; 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 the 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. 40 41 NOTE 10. RECONCILIATION OF EARNINGS PER SHARE CALCULATION
Year Ended June 30, -------------------------------------- (in thousands except per share data) 1998 1997 1996 - ---------------------------------------------------------------------------------------------- BASIC Income available to common shareholders ........ $12,858 $ 8,563 $ 8,165 Average common shares .......................... 11,464 10,968 9,947 Basic earnings per common share ................ $ 1.12 $ 0.78 $ 0.82 ======= ======= ======= DILUTED Income available to common shareholders ........ $12,858 $ 8,563 $ 8,165 Effect of dilutive securities: Convertible debentures ....................... 736 736 765 ------- ------- ------- Diluted income available to common shareholders $13,594 $ 9,299 $ 8,930 Average common shares .......................... 11,464 10,968 9,947 Effect of dilutive securities: Warrants ..................................... 97 29 37 Options ...................................... 374 179 217 Convertible debentures ....................... 1,311 1,311 1,368 ------- ------- ------- Diluted average common shares .................. 13,246 12,487 11,569 Diluted earnings per common share .............. $ 1.03 $ 0.74 $ 0.77 ======= ======= =======
NOTE 11. RELATED PARTY TRANSACTIONS The Company's principal executive offices located in Doylestown, Pennsylvania are leased from a party related to a shareholder and director of the Company. The lease commenced in December 1994 and the Company recorded rent expense under this lease of $322,229, $242,510, and $222,750 for the years ended June 30, 1998, 1997, and 1996, respectively. At June 30, 1998 and 1997, receivables in installments from investees totaled $6.6 million and $9.5 million, respectively. As of June 30, 1998 and 1997, the Company had loans receivable from Company officers totaling $550,000 and $505,000, respectively. As of June 30, 1998 and 1997, the Company had investments in preferred stock and dividends of DIS totaling $5.1 million. As of June 30, 1998 and 1997, the Company had convertible subordinated notes at an unamortized cost totaling $9.6 million to related parties. NOTE 12. 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, 1998, 1997 and 1996 amounted to $883,000, $673,000 and $655,000, respectively. Future minimum lease payments under these leases are as follows: 41 42
Future Minimum Year Ending June 30, Lease Payments 1999 ............................................ $1,186,000 2000 ............................................ 1,316,000 2001 ............................................ 1,126,000 2002 ............................................ 1,125,000 2003 ............................................ 1,034,000 Thereafter ...................................... 2,152,000 ---------- Total ........................................ $7,939,000 ==========
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, 1998, the maximum contingent liability under the limited recourse agreements amounted to $51.9 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 a revolving $180 million interim securitization facility with an option to sell to it certain equipment loans and leases. As of June 30, 1998, $80.1 million of equipment loans and leases were being serviced for this facility. The Company's obligations under this facility include servicing of the assets and assisting the owner in the securitization of the assets, if the owner chooses to securitize. The Company has credit lines of $7.0 million available from four foreign banks, of which $4.4 million was used as of June 30, 1998 to provide for the future payment of guarantees made by DVI Europe, a branch office of DVI Financial Services. The Company records the present value of the future obligation as an asset within receivables and corresponding liability within other liabilities at the date the guarantee is assumed. At June 30, 1998 the present value recorded for these guarantees was $3.0 million, while the estimated future value was $4.3 million. The Company has receivables from and investments in DIS aggregating $13.3 million and $13.8 million at June 30, 1998 and 1997. DIS received a qualified going concern opinion from its auditors on its December 31, 1997, 1996 and 1995 financial statements. Management has reviewed the value of the collateral that secures the loans to DIS and is confident that there is sufficient collateral to cover loans outstanding. 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, 1998 the Company had loan commitments of $289.5 million not funded. NOTE 13. BENEFIT PLANS The Company maintains and administers an Employee Savings Plan ("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, $60,000, and $45,000 to the Plan during the years ended June 30, 1998, 1997 and 1996, respectively. NOTE 14. ACQUISITIONS On November 1, 1997, the Company acquired a healthcare-based merchant banking group whose key services are private debt placement, loan syndication, bridge financing, and mortgage loan arrangement for the long-term/assisted care and specialized hospital markets. The group included J. G. Wentworth Partners, Inc.; J. G. Wentworth Partners, LP; J. G. Wentworth Mortgage Funding, LP; and J. G. Wentworth Securities, Inc. (collectively, "Wentworth"). The Company issued 84,011 shares of its common stock for the acquisition at a price of $18.45 per share. The transaction was accounted for as a pooling of interests and therefore, all prior financial statements presented have been restated as if the merger took place at the beginning of such periods. 42 43 Separate results of operations for the periods prior to the merger are as follows:
Four months ended Year ended Year ended (In thousands of dollars) October 31, 1997 June 30, 1997 June 30, 1996 - --------------------------------------------------------------------------------------------- TOTAL FINANCE AND OTHER INCOME: DVI, Inc. $21,385 $ 55,971 $ 49,013 Wentworth 632 363 25 ------- -------- -------- Total $22,017 $ 56,334 $ 49,038 ======= ======== ======== NET EARNINGS: DVI, Inc. $ 2,389 $ 8,941 $ 8,175 Wentworth 12 (378) (10) ------- -------- -------- Total $ 2,401 $ 8,563 $ 8,165 ======= ======== ========
In June 1998, the Company acquired for cash a partnership interest in and certain assets of Third Coast Capital, L.L.C. ("TCC"), for $9.3 million. TCC is a Chicago-based venture leasing operation, founded in 1996, and provides asset-based financing to emerging growth companies for their key operating assets through lease lines of credit and other financial structures. The purchase price was allocated to individual assets based on estimates of their fair market value and resulted in no goodwill. The acquired assets are included in the Company's balance sheet for the year ended June 30, 1998 with no effect on operating statements. Had the purchase of TCC occurred two years prior, its revenue and net earnings would have had an immaterial effect on the consolidated results of the Company's operations for fiscal years 1998 and 1997. NOTE 15. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS A summary of the estimated fair value of the Company's consolidated financial instruments at June 30, 1998 and 1997 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 Year Ended June 30, 1998 Amount Value - ------------------------------------------------------------------------------------------- Assets: Receivable in installments (excluding investment in direct financing leases)... $227,469,390 $227,603,558 Liabilities: Discounted receivables.............................. $342,120,099 $344,187,124
Carrying Estimated Fair Year Ended 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
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, senior notes, other debt and convertible subordinated notes approximate fair values at June 30, 1998 and 1997. The methods and assumptions used to estimate the fair values of other financial instruments are summarized as follows: 43 44 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, 1998 and 1997. 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 $349.3 million and $252.9 million as of June 30, 1998 and 1997, 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, 1998 and 1997. 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, 1998; 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, 1998 June 30, 1997 ----------------------------------------------- --------------------------------------------------- Notional Fair Deferred Notional Fair Deferred Amount Value Gains/(Losses) Amount Value Gains/(Losses) - ---------------------------------------------------------------------------------------------------------------------------------- Swaps................. $ 23.5 million $ (21,397) - $ 23.4 million $ 115,000 - Options............... $150.0 million $(107,938) $(443,559) $ 25.0 million $ (49,000) - Forwards: Treasury locks...... - - - $ 70.0 million $ 75,000 - Foreign exchange currency forward............. DM 7.5 million $ 36,650 $ (10,000) - - -
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 5.84% and receive either a floating rate of the H-15 composite commercial paper rate or six-month LIBOR. The swaps mature through October 2004. 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, 1998 are for securitizations and sales expected to occur in the first and second quarters of fiscal 1999. In 1998, the Company deferred $1.3 million in losses associated with transactions securitized compared with $1.6 million in deferred losses in 1997. The Company recognized losses on loan sales of $243,000, $132,000 and $27,000 for years ended June 30, 1998, 1997 and 1996, respectively. FOREIGN EXCHANGE FORWARD CONTRACTS - The Company has international operations and foreign currency exposures at some of these operations due to lending in currencies other than the local currency. As a general practice, the Company has not hedged the foreign exchange exposure related to either the translation of overseas earnings into U.S. dollars or the translation of overseas equity positions 44 45 back to U.S. dollars. A foreign exchange forward contract is used to hedge the amount receivable to the U.S. parent for a specific portfolio in Deutsche Marks. At June 30, 1998, the Company had 7.5 million Deutsche Marks in forward contracts. Foreign exchange forward contracts are accounted for as hedges to the extent they are designated, and are effective as hedges of foreign currency. The net gain/loss deferred at June 30, 1998 is immaterial. NOTE 16. QUARTERLY FINANCIAL DATA (UNAUDITED) The following is a summary of the quarterly results of operations for the fiscal years ended June 30, 1998 and 1997:
Fiscal 1998 Three Months Ended (in thousands, except per share data) September 30 December 31 March 31 June 30 - ----------------------------------------------------------------------------------------------------------------------- Finance and other income $16,134 $18,477 $19,486 $20,258 Net finance income 9,530 11,477 11,566 13,547 Earnings before minority interest, provision for income taxes and equity in net loss of investees 4,752 5,338 5,488 7,314 Net earnings 2,590 3,014 3,365 3,889 Net earnings per common and common equivalent share - basic $ 0.23 $ 0.27 $ 0.30 $ 0.32 ======== ======== ======== ======== Net earnings per common and common equivalent share - diluted $ 0.22 $ 0.25 $ 0.27 $ 0.29 ======== ======== ======== ========
Fiscal 1997 Three Months Ended (in thousands, except per share data) September 30 December 31 March 31 June 30 - ----------------------------------------------------------------------------------------------------------------------- Finance and other income $12,616 $13,690 $15,108 $14,920 Net finance income 6,647 7,632 7,769 9,930 Earnings before minority interest, provision for income taxes and equity in net loss of investees 3,521 3,748 3,734 4,472 Net earnings 2,001 2,199 1,986 2,377 Net earnings per common and common equivalent share - basic $ 0.18 $ 0.20 $ 0.18 $ 0.22 ======== ======== ======== ======== Net earnings per common and common equivalent share - diluted $ 0.17 $ 0.19 $ 0.17 $ 0.21 ======== ======== ======== ========
NOTE 17. SUBSEQUENT EVENTS On July 21, 1998 (the "Filing Date"), Allegheny Health Education and Research Foundation and its affiliates ("Allegheny") filed for protection under Chapter 11 of the United States Bankruptcy Code. As of the Filing Date, the Company had receivables from Allegheny of $14,401,000 arising from the rental by the Company of equipment owned by the Company pursuant to fair market value leases. As of this date, no events have occurred and no facts have been discovered by the Company with respect to the Company's receivables from Allegheny that would indicate that any material diminution in the value of these receivables is likely. On September 15, 1998, the Company announced its intention to acquire for cash substantially all the assets and retain all the employees of Affiliated Capital Corporation ("Affiliated") from Irwin Financial Corporation. The purchase, as well as the assets' ultimate purchase price which will approximate $74.0 million, is subject to the completion of due diligence, certain governmental approvals, and the execution of a definitive purchase agreement. The purchase price will be allocated to the assets on the basis of their estimated fair market value and is expected to result in intangible assets of approximately $6.0 million which will be amortized on a straight line basis over a 15-year period. The purchase is expected to close near the end of DVI's first fiscal quarter. Affiliated is a Chicago-based medical equipment leasing company, founded 15 years ago, and employs 39 people. It operates in five regional sales offices and generates $50.0 million of new lease transactions a year through 27 vendor relationships. Affiliated has approximately 8,700 customer contracts involving doctors and dentists and the average cost of the new leased equipment is $15,000. Had the purchase of Affiliate occurred at the beginning of fiscal 1998 the Company's total finance and other income would have increased by $9.1 million and net earnings would have decreased by $49,000. 45 46 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, 1998, 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, 1998 with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 403 of Regulation S-K is incorporated herein by reference to the Company's definitive proxy statement filed not later than October 28, 1998, 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, 1998, with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT: (1) Financial Statements: See Index to Consolidated Financial Statements included as part of this Form 10-K on Page 23. (2) Financial Statement Schedules:
SCHEDULE PAGE NUMBER DESCRIPTION NUMBER ------ ----------- ------ II. Amounts Receivable from Related Parties ....... 48
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 49-50. (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, 1998. 46 47 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 25, 1998 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 25, 1998 Principal Accounting Officer: /S/ JOHN P. BOYLE - ----------------------------- John P. Boyle Vice President and Chief Accounting Officer September 25, 1998
Directors Date Date - --------- ---- ---- /S/ GERALD L. COHN September 25, 1998 /S/ MICHAEL A. O'HANLON September 25, 1998 - ----------------------------- ----------------------------- Gerald L. Cohn Michael A. O'Hanlon /S/ WILLIAM S. GOLDBERG September 25, 1998 /S/ HARRY T. J. ROBERTS September 25, 1998 - ----------------------------- ----------------------------- William S. Goldberg Harry T. J. Roberts /S/ JOHN E. MCHUGH September 25, 1998 /S/ NATHANIEL SHAPIRO September 25, 1998 - ----------------------------- ----------------------------- John E. McHugh Nathaniel Shapiro
47 48 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, 1998- Michael A. O'Hanlon ..... $285,000 $ 10,000 $ -- $295,000 Mark H. Idzerda ......... 220,000 -- -- 220,000 Anthony J. Turek ........ -- 35,000 -- 35,000 -------- -------- -------- -------- Total ................... $505,000 $ 45,000 $ -- $550,000 ======== ======== ======== ======== Year ended June 30, 1997- Michael A. O'Hanlon ..... $344,000 $ -- $ 59,000 $285,000 Mark H. Idzerda ......... -- 220,000 -- 220,000 -------- -------- -------- -------- Total ................... $344,000 $220,000 $ 59,000 $505,000 ======== ======== ======== ======== Year ended June 30, 1996- Michael A. O'Hanlon . $ 59,000 $285,000 $ -- $344,000 ======== ======== ======== ======== 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 ======== ======== ======== ========
48 49 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) 10.18 Shareholders' Agreement dated as of April 27, 1998 by and among DVI International, Inc. (the Company's wholly-owned subsidiary), International Finance Corporation, Nederlandse Financierings-Maatschappijvoor Ontwikkelinglanden N. V., Philadelphia International Equities Inc., and MSF Holding Ltd. (11) 10.19 Share Retention, Non-Competition and Put Option Agreement dated April 27, 1998 among DVI, Inc., International Finance Corporation, MSF Holding Ltd., Cadilur S. A., Estolur S. A., and Natuler S. A. (11)
49 50
10.20 Share Retention, Non-Competition and Put Option Agreement dated April 27, 1998 among DVI, Inc., Nederlandse Financierings-Maatschappij voor Ontwikkelinglanden N. V, MSF Holding Ltd., Cadilur S. A., Estolur S. A., and Natuler S. A. (11) 10.21 Guaranty Agreement dated as of April 27, 1998 by DVI, Inc. in favor of Cadilur S. A. and Natuler S. A. (11) 10.22 Limited Partnership Interest Purchase Agreement dated as of June 30, 1998 by and among Cargill Leasing Corporation, Third Coast SPC-I, L.L.C., Third Coast GP-I, and DVI Financial Services Inc. (11) 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. (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 previously as an Exhibit to the Company's Form 10-K (File No. 1-11077) for the year ended June 30, 1997 and by this reference is incorporated herein. (11) Filed herewith. 50 EX-10.18 2 SHAREHOLDERS AGREEMENT 1 EXHIBIT 10.18 SHAREHOLDERS' AGREEMENT Dated as of April 27, 1998 by and among (1) DVI International, Inc.; (2) International Finance Corporation; (3) Nederlandse Financierings-Maatschappij voor Ontwikkelinglanden N.V.; (4) Philadelphia International Equities Inc. (5) MSF Holding Ltd. 2 TABLE OF CONTENTS Article Page - ------- ---- 1. Definitions and Interpretation.........................................5 2. Business of the Company and Obligations of Shareholders................6 3. Directors..............................................................7 4. Proceedings of Directors...............................................8 5. Director's Approval....................................................9 6. Meetings of Shareholders..............................................10 7. Actions Requiring Consent of Shareholders.............................11 8. Management of the Company.............................................12 9. Restrictions on Transfers of Shares...................................12 10. Information Rights....................................................14 11. Relationship Between the Shareholders.................................15 12. Confidentiality.......................................................15 13. Representations and Warranties of the Shareholders....................16 14. Assignment............................................................17 15. Waiver, Release, and Remedies.........................................17 16. Severance and Amendments..............................................18 17. Notices...............................................................18 18. Dissolution...........................................................19 19 Governing Law and Jurisdiction........................................20 2 3 20. Dispute Resolution....................................................20 21. Counterparts..........................................................22 3 4 THIS SHAREHOLDERS' AGREEMENT is made as of this 27th day of April, 1998, among: (1) DVI INTERNATIONAL, INC., a corporation organized and existing under the laws of the State of Delaware and having a place of business at 500 Hyde Park, Doylestown, Pennsylvania, 18901, United States of America ("DVI"); and (2) INTERNATIONAL FINANCE CORPORATION, an international organization established by Articles of Agreement among its member countries and having a place of business at 2121 Pennsylvania Avenue, NW, Washington, DC 20433, United States of America ("IFC"); and (3) NEDERLANDSE FINANCIERINGS-MAATSCHAPPIJ VOOR ONTWIKKELINGLANDEN N.V., a limited liability company established under the laws of The Netherlands, whose registered office is at Koningskade 40, 2596 AA The Hague, the Netherlands ("FMO"); and (4) PHILADELPHIA INTERNATIONAL EQUITIES INC., a company incorporated in Delaware and having its registered office at 200 Baynard Building, 3411 Silverside Road, Wilmington, Delaware, 19810, United States of America ("PIE"). (5) MSF HOLDING LTD., a corporation organized and existing under the laws of the Commonwealth of the Bahamas and having its registered office at First Floor, Euro Canadian Centre, Marlborough Street, Nassau, Bahamas ("The Company"). 4 5 ARTICLE 1. DEFINITIONS AND INTERPRETATION 1.1 In this Agreement, unless the context or subject matter otherwise requires, the following terms shall have the following meanings: "Affiliate" means any person or entity controlling, controlled by, or under common control with a Shareholder. In this definition, "control" means majority ownership of any class of voting stock; "Articles of Association" means the memorandum and Articles of Association of the Company as the same may be amended, modified or supplemented from time to time; "Board" means the board of directors of the Company; "Business" means the leasing/financing of medical and related equipment in the Countries of Operation; "Cadilur" means Cadilur, S.A., a corporation organized and existing under the laws of Uruguay, and a subsidiary of the Company; "CEO" means Chief Executive officer; "Company" means MSF Holding Ltd.; "Countries of Operation" means countries in Latin America and the Caribbean area which are members of the IFC; "Estolur" means Estolur S.A., a corporation organized and existing under the laws of Uruguay, and a subsidiary of the Company; "FMO Investment Agreement" means the investment agreement of even date herewith entered into between FMO and the Co-Borrowers specified therein; "Financial Year" means any period of 12 months commencing on July 1 and ending on June 30 in any year (except for the first financial year which will commence on the date of the incorporation of the Company and end on June 30, 1998); "IFC Investment Agreement" means the investment agreement of even date herewith entered into between IFC and the Co-Borrowers specified therein; 5 6 "Natuler" means Natuler, S.A., a corporation organized and existing under the laws of Uruguay, and a subsidiary of the Company; "Shares" means authorized and issued shares of any class of the Company, and a "Share" means any of the Shares; "Shareholders" means the parties to this Agreement other than the Company, or any person or persons to whom they may properly transfer their Shares pursuant to the provisions of this Agreement and the Articles of Association, or any other person or persons made a Shareholder pursuant to the provisions of this Agreement, and "Shareholder" means any of them. "Voting Shareholders" means Shareholders owning shares of stock designated as Class A Voting shares of the Company. 1.2 In this Agreement, unless the context or subject matter otherwise requires: (a) words importing one gender include the other genders and words importing persons include corporations and unincorporated bodies of persons, and vice versa; (b) references to Recitals, Articles, Appendices and Schedules are references to recitals and articles of and the appendices and schedules to this Agreement; (c) the table of contents and headings to the Articles are for convenience of reference only and do not form part of this Agreement or affect the interpretation thereof; (d) any reference to "audited financial statements of the Company" shall mean the audited consolidated financial statements of the Company and its subsidiaries; ARTICLE 2. BUSINESS OF THE COMPANY AND OBLIGATIONS OF SHAREHOLDERS 2.1 The Shareholders shall each cooperate and use reasonable efforts so as to ensure that the primary objects of the Company shall be to carry out the Business; and the Business shall be conducted in the best interests of the Company on sound commercial profit-making principles so as to generate the maximum achievable profits. 6 7 2.2 This Agreement shall become effective only on the later to occur of (a) its execution by all of the parties hereto or (b) the purchase and full payment by all of the Shareholders of the full amount of their respective number of Shares as required by the FMO Investment Agreement and the IFC Investment Agreement. ARTICLE 3. DIRECTORS 3.1 The total number of Directors of the Company holding office at any time shall not exceed seven, and initially there shall be five Directors, unless otherwise agreed in writing by all the Shareholders. 3.2 At the first meeting of Shareholders, each Voting Shareholder (other than DVI) shall be entitled to nominate one Director and DVI shall be entitled to nominate two Directors and the Voting Shareholders shall elect such nominees; and at any time a Voting Shareholder may require the removal or substitution of any Director elected pursuant to that Voting Shareholder's nomination. The Director nominated by DVI shall serve as the Chairman of the Board of Directors. DVI shall be entitled to nominate the person who the Board of Directors shall appoint the CEO of the Company, and the CEO may also be a Director. The appointment, removal or substitution of any Director shall be in writing addressed to the Company and shall be effective from the date of the written notice or any date in the written notice specified as the effective date. Every Voting Shareholder shall vote its shares to effect the foregoing appointments, removals and substitutions. 3.3 If any Director dies, resigns, or by law or otherwise ceases to hold office as a Director, the Shareholder nominating such Director shall be entitled to nominate another person to fill the vacancy. 3.4 A Director shall be entitled at any time from time to time by a written instrument to appoint any person to act as his alternate and to terminate the appointment of such person. Such alternate Director shall be entitled while holding such office to receive notices of all Board meetings and to attend and vote as a Director at any such meetings at which the Director appointing him is not present and generally to exercise all the powers, rights, duties and authorities and to perform all functions of the Director appointing him. Further, if such alternate Director represents more than one Director he shall be entitled to one vote for each Director he represents. 3.5 Each Voting Shareholder shall cause the Director(s) nominated by it and the Company to give effect to the provisions of this Agreement. 7 8 3.6 The Board shall establish a credit committee ("Credit Committee") which will review and approve credit proposals in connection with financing for Cadilur's and Natuler's customers, within the guidelines set forth by the Board. The Credit Committee shall be comprised of the CEO and one representative each of DVI and PIE. ARTICLE 4. PROCEEDINGS OF DIRECTORS 4.1 No business shall be transacted at any Board meeting unless a quorum of any four Directors (or their alternates) including at least one of those Directors appointed by DVI, PIE, IFC and FMO respectively, are present or have waived in writing their right to be present as set forth in Article 4.2 below. 4.2 A Director shall be given not less than ten (10) days prior written notice of a meeting of Directors (and with or prior to such notice a copy of all material documents related to such meeting provided, however, that this requirement can be waived at the meeting by unanimous vote of the Directors in attendance at the meeting), but a meeting of Directors held without ten (10) days notice having been given to all Directors shall be valid if all the Directors entitled to vote at the meeting, but who did not attend, either prior to or subsequent to such meeting, waive in writing their right to receive notice of the meeting. 4.3 A Director shall be deemed to be present at a meeting of directors if he participates by telephone or other electronic means and all Directors participating in the meeting are able to hear each other and recognize each other's voice. 4.4 If within one hour from the time appointed for the meeting a quorum is not present, the Board meeting shall stand adjourned to such other day and at such other time and place as the Chairman of the meeting may determine and the Directors shall be notified in writing accordingly. If at such adjourned meeting, there is no quorum as prescribed, any three Directors present shall constitute a quorum. 4.5 Any matter (other than the matters set out in Article 5.1) which is to be resolved by the Board shall require a resolution approved by a majority of the Directors present in person and each Director shall have one vote in relation to any matter requiring the approval of the Board. In the event of any tie, the Chairman shall have a second vote. 4.6 Any action required or permitted to be taken at any meeting of the Board of Directors may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing setting forth the action so taken shall be signed 8 9 by all of the Directors and delivered to the Secretary of the Company to be recorded with the records of actions and proceedings of the Board of Directors. For the purpose of this paragraph, "in writing" and "signed" include approval by telex, telefax, electronic mail or cable provided that in the case of such approval, the original resolution in the same terms containing the signature(s) of the relevant Director or Directors shall be forwarded to the Company contemporaneously and to any other Director requesting the same. ARTICLE 5. DIRECTOR'S APPROVAL 5.1 Notwithstanding anything to the contrary expressed or implied elsewhere in this Agreement, but without prejudice to Article 7, no action specified below shall be taken in respect of the Company and/or its subsidiaries without the affirmative vote of at least four of the Directors except that actions specified in Articles 5.1(b), (d) and (h) shall require the affirmative vote of all of the Directors: (a) the conclusion, modification or amendment of any matter, agreement or contract between the Company and any of the Directors or Shareholders or the Company and any third party in which a Director or Shareholder has a material pecuniary or beneficial interest whether directly or indirectly; (b) any diversification into unrelated activities or any major changes in the method of carrying out the Business by the Company or its subsidiaries; (c) any material change in the financial and credit policies of the Company including policies relating to minimizing cross-border risks; (d) any material change in the funding and financing policy of the Company by way of equity or debt financing; (e) execution of any agreement or undertaking of any commitment which is outside the ordinary course of business; (f) the giving by the Company of any guarantee or indemnity or other undertaking to a third party other than in the ordinary course of business; (g) a change in the external accountants used by the Company; and (h) the issuance of any debt, or other securities, 9 10 convertible into Shares of the Company's and/or its subsidiaries's stock. 5.2 The CEO shall obtain the prior approval of the Board of Directors for the following matters: (a) the approval of annual budgets and accounts, Directors' reports and the agenda for and the date, time and place of annual and special meetings of the Shareholders; (b) the approval of any capital expenditure exceeding US$50,000 for a single item in any Financial Year of the Company unless otherwise approved by the Board as part of the Company's capital budget; and (c) the approval of operational and investment budgets as well as major tax and accounting policies and practices of the Company. ARTICLE 6. MEETINGS OF SHAREHOLDERS 6.1 Notwithstanding anything in the Articles of Association to the contrary: (a) a Shareholder shall be given not less than ten (10) days prior written notice of a meeting of Shareholders (and with or prior to such notice, a copy of all material documents related to such meeting provided, however that this requirement can be waived at the meeting by unanimous vote of the Voting Shareholders in attendance at the meeting), but a meeting of Shareholders held without ten (10) days notice having been given to all Shareholders shall be valid if all the Voting Shareholders entitled to vote at the meeting who do not attend, waive in writing notice of the meeting. (b) subject to Article 6(c), no business shall be transacted at any meeting of the Company's Shareholders unless a quorum of Voting Shareholders is present in person or by proxy, at the time when the meeting proceeds to business, and the quorum for a valid meeting of Shareholders shall be Voting Shareholders holding at least 76% of the issued and outstanding Class A Voting Shares of the Company; (c) if within one hour from the time appointed for the holding of the Shareholders' meeting a quorum is not present, the meeting shall stand adjourned to such other day and at such other time and place as the Chairman of the meeting may determine. If at such adjourned meeting a quorum is not present within one 10 11 hour from the time appointed for the holding of the adjourned meeting, the Voting Shareholders present in person or by proxy who are entitled to vote shall, except as otherwise required by law, be a quorum, provided at least two Voting Shareholders are present; (d) each Voting Shareholder shall be entitled to one vote for each Class A Voting Share held by it, and (except for the matters set out in Article 7) matters arising at any Shareholders' meeting of the Company shall be decided by a majority of votes thereat; and (e) Any action required or permitted to be taken at any meeting of the Shareholders may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing setting forth the action so taken shall be signed by all of the Voting Shareholders and delivered to the Secretary of the Company to be recorded with the records of actions and proceedings of the Shareholders. For the purpose of this paragraph, "in writing" and "signed" include approval by telex, telefax, electronic mail or cable provided that in the case of such approval, the original resolution in the same terms containing the signature(s) of the relevant Voting Shareholder or Voting Shareholders shall be forwarded to the Company contemporaneously. ARTICLE 7. ACTIONS REQUIRING CONSENT OF SHAREHOLDERS 7.1 The Shareholders agree that the Company and its subsidiaries shall not without the prior written consent of Voting Shareholders holding 100% of the Company's issued and outstanding shares of capital stock: (a) change the capital structure of the Company and/or its subsidiaries including (without limitation) approving all subscriptions, transfers and repurchases in respect of shares, approving transferees or assignees of Shares, varying the authorized or issued share capital, issuing or granting any option over unissued shares, or creating any new shares including securities convertible into Shares of the Company's and/or its subsidiaries's stock; (b) alter or amend the memorandum or Articles of Association of the Company and/or its subsidiaries; (c) amend, modify or waive any provision of this Agreement; (d) appoint or remove or determine or vary the terms and conditions of employment of the CEO of the Company; and 11 12 (e) vary the maximum or minimum number of Directors on the Board. ARTICLE 8. MANAGEMENT OF THE COMPANY 8.1 The Shareholders agree that the business and corporate affairs of the Company shall be managed in accordance with the best business practices and corporate management standards from time to time applied in accordance with the provisions of this Agreement. 8.2 Except as otherwise provided herein, the management of the Company shall be the responsibility of and be vested in the Board with full powers to delegate the day to day management and administration of the Company in such manner and to such person(s) as the Board may determine. ARTICLE 9. RESTRICTIONS ON TRANSFERS OF SHARES 9.1 The transfer of Shares by any of the Shareholders shall be regulated in accordance with the provisions of the Articles of Association, the provisions of this Article 9, and the Share Retention, Non-Competition and Put Option Agreements (the "Put Option Agreements") of even date herewith among DVI, the Company and IFC on the one hand, and among DVI, the Company and FMO, on the other. Any sale, transfer or disposal of Shares by any of the Shareholders in contravention of this Article 9 and of the Put Option Agreements shall be null and void and of no effect whatever. 9.2 Any Shareholder may transfer all but not less than all of the Shares owned by it to its Affiliate provided that such Affiliate executes in such form as may be reasonably required by and agreed between the existing Shareholders of the Company a deed of ratification and accession under which the Affiliate shall agree to be bound by and shall be entitled to the benefits of this Agreement as if an original party hereto in place of the Shareholder. 9.3 Other than as provided in Articles 9.2 and 9.4 and the Put Option Agreements, no Shareholder may at any time assign, convey, mortgage, pledge, sell, transfer, or otherwise dispose of any or all of its Shares without the prior consent of the other Shareholders. Any such purported sale shall be null and void and the Company shall not recognize or register any such purported transfer. 9.4 At any time, a Shareholder may dispose of some or all of its Shares 12 13 (hereinafter referred to as a "Selling Shareholder") pursuant to a bona fide written offer (the "Offer") from an unaffiliated third party (the "Third Party"), subject to the right of first refusal of the other Shareholders described in Article 9.4(a) below. (a) The Selling Shareholder shall provide notice of the Offer in writing to the other Shareholders (the "Offeree Shareholders") and the Company specifying the price, terms and identity of the Third Party. The Offeree Shareholders shall have the right to acquire, on a pro rata basis, all (but not less than all) of the Shares subject to the Offer, at the price and on the terms of the Offer for a period of 45 days after receipt of the notice (the "Shareholder Notice Period"). As to any sale to the Offeree Shareholders pursuant to this Article 9.4(a), the closing thereof shall be held and the purchase price shall be paid to the Selling Shareholder within seven days of the expiration of the Shareholder Notice Period. (b) If the Shares being offered are not purchased pursuant to the provisions of this Article 9.4, then the Selling Shareholder shall have the right, for a period of 90 days after the expiration of the Shareholder Notice Period, to sell to the Third Party all, but not less than all, of the Shares subject to the Offer on the terms and at the price of the Offer, and the Third Party shall be deemed to have been approved by the Shareholders as a Transferee (as defined below) in accordance with Article 7 hereof. If the Shares are not sold to the Third Party on or prior to the end of such 90-day period, then the Selling Shareholder may not dispose of all or part of its Shares to any third party without once again complying with the provisions of this Article 9.4. 9.5 For purposes of this Article 9, "pro rata basis" shall mean, with respect to any non-withdrawing Shareholder, in the same proportion that such non-withdrawing Shareholder's Shares bears to the aggregate of all outstanding Shares (other than those held by the withdrawing Shareholder). In the event that any non-withdrawing Shareholder elects not to exercise its right to purchase the withdrawing Shareholder's Shares, the portion of the Shares of the withdrawing Shareholder which would have been allocated on a pro rata basis for purchase by such non-withdrawing Shareholder shall be reallocated among the remaining non-withdrawing Shareholders in proportion to their respective Share ownership. 9.6 It shall be a condition precedent to the right of any Shareholder (in this sub-article referred to as "the Transferor") to transfer Shares in the Company, in accordance with the Articles of Association, that the transferee of the relevant Shares (in this sub-article referred to as "the Transferee") shall, if not already bound by the provisions of this Agreement, execute in such form as may be reasonably required by and agreed between the existing shareholders of the Company a deed of ratification and accession under which the Transferee shall agree to be bound by and shall be entitled to the benefit of this Agreement as if an original party hereto in place of the Transferor. 13 14 9.7 Notwithstanding anything in this Article 9 to the contrary, DVI may not sell any of its Shares except strictly in accordance with the Put Option Agreements. ARTICLE 10. INFORMATION RIGHTS 10.1 The Company shall provide to each Shareholder (i) financial and management reports on a periodic basis within 30 days from the end of the period to which such reports relate, which shall include such information as may be determined by the Board from time to time, and (ii) any other information about the Company and its operations that any Shareholder may reasonably request. The Company also shall allow any Shareholder to carry out at its own expense an audit of the Company. Without limiting the generality of the foregoing, the Company (a) shall provide its consolidated financial statements in U.S. Dollars under United States generally accepted accounting principles, (b) shall cause Cadilur, Natuler and Estolur to prepare and provide their financial statements in U.S. Dollars and under both United States and Uruguayan generally accepted accounting principles, and shall provide any external auditors's management letters regarding the Company and/or its subsidiaries; and (c) shall provide the following information from time to time on a timely basis as relevant: (a) Sponsors and Shareholdings. Information on significant changes in share ownership of the Company and/or its subsidiaries, the reasons for such changes, and the identity of major new shareholders. (b) Management and Technology. Information on significant changes in (i) the Company's senior management or organizational structure, and (ii) technology used by the Company and/or its subsidiaries, including technical assistance arrangements. (c) Corporate Strategy. Description of any changes to the Company's and/or its subsidiaries' corporate or operational strategy, including changes in products, degree of integration, and business emphasis. (d) Markets. Brief analysis of changes in the Company's and/or its subsidiaries' market conditions (both domestic and export), with emphasis on changes in market share and degree of competition. (e) Operating Performance. Discussion of major factors affecting the year's financial results (sales by value and volume, operating and financial costs, profit margins, capacity utilization, capital expenditure, etc.). 14 15 (f) Financial Condition. Key financial ratios for previous year, compared with ratios covenanted in the Investment Agreement. (g) Asset and Liability Management Reports. ARTICLE 11. RELATIONSHIP BETWEEN THE SHAREHOLDERS 11.1 The relationship of the Shareholders under and in relation to this Agreement shall be limited to the matters herein contained and/or provided for by law in the Commonwealth of the Bahamas as to the liability of a shareholder to a company, and nothing herein provided shall be considered or interpreted as constituting the relationship of the Shareholders or any of them as a partnership, association or other relationship in which any one of the Shareholders may be liable for the acts or omissions of any other Shareholder, nor shall anything herein contained be considered or interpreted as constituting any Shareholder as the general agent of the other Shareholders. ARTICLE 12. CONFIDENTIALITY 12.1 All communications related to the Company between the Shareholders and between the Shareholders and the Company and all information and other material supplied to or received by any of them from the others which is either marked "confidential" or is by its nature intended to be exclusively for the knowledge of the recipient alone and any information concerning the business transactions or the financial arrangements of the Shareholders and/or the Company or of any person with whom any of them is in a confidential relationship with regard to the matter in question coming to the knowledge of the recipient shall be kept confidential by the recipient unless: (i) it is in the public domain (save where it is the result of any act or breach by such recipient); (ii) such information was known by the recipient prior to such disclosure (save where it is the result of any act or breach by such recipient); (iii) where the disclosure of such information is required by auditors, government regulators, court orders or applicable law, rule or regulation; or (iv) the prior written consent of the 15 16 effected party is obtained. 12.2 The Shareholders shall procure the observance of the above-mentioned restrictions by their respective directors, officers, employees and agents and by the Company and shall take all reasonable steps to minimize the risk of disclosure of confidential information, by ensuring that only their directors, officers, employees and agents and those of the Company whose duties will require them to possess any of such information shall have access thereto, and that they shall be instructed to treat the same as confidential. 12.3 The obligations contained in this Article 12 shall endure, even after the release of any Shareholder or termination of this Agreement in accordance with and as permitted by the provisions of this Agreement and the Articles of Association, for a period of three years after the earlier to occur of such release (but only as to the Shareholder(s) so released) or such termination of this Agreement except and until any confidential information enters the public domain as set out above. 12.4 The Shareholders shall not and shall cause the Company not to make any announcements regarding this Agreement or the Company whether before or after the execution of this Agreement without the prior written approval of the other Shareholders (such approval not to be unreasonably withheld) unless such announcement is required by law or the rules of any relevant stock exchange, in which case any such announcements may be made after first notifying the other Shareholders if such notification is practicable. ARTICLE 13. REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS 13.1 Each Shareholder hereby represents and warrants to the other Shareholders as follows: (a) Other than IFC, it is a corporation or a limited liability company duly organized, validly existing and in good standing under the laws of its jurisdiction of origin and has all necessary corporate power and authority to carry on its business as presently conducted. IFC is an international organization, established by Articles of Agreement among its member countries, is validly existing and in good standing and has all necessary power and authority to carry on its business as presently conducted. (b) It has full legal right, power and authority to enter into and perform its obligations under this Agreement and under the other agreements and documents contemplated hereby. The execution, delivery and performance by the 16 17 Shareholder of this Agreement have been duly authorized by all necessary corporate action. This Agreement has been duly and validly executed and delivered by the Shareholder and constitutes the legal, valid and binding obligation of the Shareholder enforceable against it in accordance with its terms. When executed and delivered as contemplated herein, this Agreement shall constitute the legal, valid and binding obligation of the Shareholder enforceable against it in accordance with its terms. ARTICLE 14. ASSIGNMENT 14.1 This Agreement shall enure to the benefit of and be binding upon the Shareholders and their respective successors and permitted assignees and permitted transferees of their Shares. ARTICLE 15. WAIVER, RELEASE, AND REMEDIES 15.1 Except as otherwise provided in this Agreement (including Article 9.2), a Shareholder shall be released from all its obligations hereunder (other than Articles 12) upon it ceasing to be a legal and beneficial owner of the Shares in accordance with and as permitted by the provisions of this Agreement and the Articles of Association. 15.2 This Agreement shall remain in full force and effect vis-a-vis the Shareholders continuing to legally and/or beneficially hold any Shares unless and until the earliest of: (i) an initial public offering of at least 30% of the Company's Shares, (ii) the initial Shareholders cease to own at least 51% in the aggregate of the issued and outstanding Shares of the Company, (iii) the liquidation or termination of the Company, or (iv) the Company shall otherwise cease to operate as a separate legal entity in accordance with and as permitted by the provisions of this Agreement and the Articles of Association. 15.3 Notwithstanding the provisions of Articles 15.1 and 15.2, the release of any Shareholder or the termination of this Agreement shall not release such Shareholder from any liability or obligation which, at the time of release or termination, has arisen or fallen due for performance. 15.4 No remedy conferred by any of the provisions of this Agreement is intended to be exclusive of any other remedy which is otherwise available at law, in equity, by statute or otherwise, and each and every other remedy shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing at 17 18 law, in equity, by statute or otherwise. The election of any one or more of such remedies by any of the Shareholders shall not constitute a waiver by such Shareholder of the right to pursue any other available remedies. ARTICLE 16. SEVERANCE AND AMENDMENTS 16.1 If any provision of this Agreement or part thereof is rendered void, illegal or unenforceable by any legislation or any court or authority of competent jurisdiction to which it is subject, it shall be rendered void, illegal or unenforceable to that extent and no further. 16.2 This Agreement shall not be altered, changed, supplemented or amended except by written instruments signed by the Shareholders or the duly authorized representatives of the Shareholders. ARTICLE 17. NOTICES 17.1 Subject as otherwise provided in this Agreement, all notices, demands or other communications required or permitted to be given or made hereunder shall be in writing and delivered personally or sent by prepaid registered post or by facsimile message addressed to the intended recipient thereof at its address and facsimile number set forth below (or to such other address or facsimile number as a Shareholder may from time to time notify the other Shareholders in accordance with the provisions of this Article 17). The sender of every facsimile message shall confirm its dispatch by telephone on the same day. Any such notice, demand or communication shall be deemed to have been duly served (if given or made by facsimile and confirmed by telephone) immediately or (if given or made by letter) two days after posting by certified or registered mail, return receipt requested. The initial addresses and facsimile numbers of the Shareholders for the purposes of this Agreement are: DVI, Inc. 500 Hyde Park Doylestown, PA 18901 United States of America Attention: Michael A. O'Hanlon Facsimile No: (215) 230-3537 Telephone No: (215) 345-6600 18 19 International Finance Corporation: 2121 Pennsylvania Avenue, NW Washington, DC 20433 United States of America Attention: Director, Latin American and Caribean Facsimile No: (202) 458-7038 Telephone No: (202) 974-4390 Nederlandse Financierings-Maatschappij voor Ontwikkelinglanden N.V. Koningskade 40 P.O. Box 93060 2509 AB The Hague, The Netherlands Facsimile No: 31 70 324 6187 Telephone No: 31 70 314 9616 Philadelphia International Equities Inc. 200 Baynard Building 3411 Silverside Road Wilmington, DE 19810 United States of America Attention: James Pope Managing Director Facsimile No: (302) 478-3667 Telephone No: (302) 477-1813 with a copy to: Philadelphia International Investment Corporation Suite 2314 1345 Chestnut Street Philadelphia, PA 19107 Attention: James L. Pope Managing Director Facsimile No: (215) 786-6091 Telephone No: (215) 973-3820 MSF Holding Ltd. Euro Canadian Centre Marlborough Street PO Box N-8327 Nassau, Bahamas 19 20 Facsimile No: 242-326-6177 Telephone No: 242-322-7461 ARTICLE 18. DISSOLUTION 18.1 Upon the dissolution and winding up of the Company, unless the Shareholders then remaining otherwise agree, any assets remaining after payment or provision for the Company's debts and other obligations shall be liquidated and the proceeds thereof distributed to the then remaining Shareholders pro rata in accordance with their percentage ownership of the Shares then outstanding. ARTICLE 19. GOVERNING LAW AND JURISDICTION 19.1 This Agreement shall be governed by and construed in accordance with the laws of the State of New York, USA. ARTICLE 20. DISPUTE RESOLUTION 20.1 Informal Discussions. The Parties hereto agree to settle any dispute, controversy or difference which may arise between or among them in connection with this Agreement or any Schedule or Exhibit attached hereto (except as otherwise expressly contemplated by this Agreement or any such Schedule or Exhibit) by good faith discussions between or among representatives ("Representatives") designated by the Parties to the dispute (the "Disputing Parties"). 20.2 Arbitration. (a) In the event that such dispute, controversy or difference is not resolved within 60 days after the commencement of discussions between or among the Representatives or the conclusion in good faith of the Representatives that amicable resolution of the dispute, controversy or difference does not appear likely, whichever is earlier, then the dispute, controversy or difference shall be finally settled by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association. (b) The arbitration shall be held in Washington, D.C. or such other location as to which the Disputing Parties shall mutually agree. The 20 21 arbitration shall be heard by a panel of three arbitrators, each of whom shall be experienced in the resolution of disputes, controversies and differences relating to the issue or issues which give rise to the arbitration hereunder. If there are two Disputing Parties, one such arbitrator shall be selected by one Disputing Party, one such arbitrator shall be selected by the other Disputing Party and the third arbitrator shall be selected by the arbitrators selected by each of the Disputing Parties. If there are more than two Disputing Parties, the three arbitrators shall be selected by the President of the American Arbitration Association. Resolution of the dispute, controversy or difference shall be determined by a majority vote of the arbitration panel. (c) The Disputing Parties shall bear equally all fees, costs and expenses of the arbitration, and each Disputing Party shall bear its own legal expenses and costs of all experts and witnesses relating thereto; provided, however, that if the claim of any Disputing Party is upheld by the arbitration panel in all material respects, then the arbitration panel may apportion between or among the Disputing Parties as such arbitration panel may deem equitable the costs incurred by the prevailing Disputing Party. (d) Any award rendered by the arbitration panel shall be final and conclusive upon the Disputing Parties and any judgment thereon may be enforced in any court of competent jurisdiction, unless: (i) the award was procured by corruption, fraud or other manifest undue means; (ii) the arbitrators exceeded their powers (it being acknowledged that the arbitrators are entitled to hear any dispute, controversy or difference relating in any way to this Agreement or any Schedule or Exhibit attached hereto); or (iii) the arbitrators have been guilty of misconduct. The parties waive their right to any form of appeal or recourse or means for setting aside in respect of the arbitral proceedings or any decisions, awards or determinations made by the arbitrators, before a court of law, in any other instance, or before any other judicial or administrative authority. The parties accept and agree that the present submission to arbitration by IFC does not constitute a waiver, relinquishment or reduction, either before the intervening arbitrators or any authority or institution or court of law, including, without limitation, any such authority, or institution or court of law supervising arbitral proceedings or involved in the recognition, effectiveness or enforcement of the award or of any decision or determination by the arbitrators, of any privilege or immunity of IFC under applicable law or international law or any of the following immunities or privileges of IFC further set out and described in Article VI, Sections 3, 4, 5 and 6 of IFC's Articles of Agreement: (i) immunity from all forms of seizure, attachment or execution before the delivery of a final judgment against IFC; (ii) immunity from search, requisition, confiscation, expropriation or any other form of seizure by executive or legislative action; 21 22 (iii) immunity of IFC's archives; and (iv) freedom of assets from restrictions. (e) The fact that arbitration has commenced in accordance with this Article 20 shall not impair the ability of any Party to exercise any termination rights in accordance with Article 9 hereof. ARTICLE 21. COUNTERPARTS This Agreement may be executed in any number of counterparts and by the different parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all the counterparts shall together constitute but one and the same instrument. IN WITNESS WHEREOF this Agreement has been entered into by the parties hereto on the day and year first above written. DVI INTERNATIONAL, INC. - --------------------------------- By: Its: INTERNATIONAL FINANCE CORPORATION - --------------------------------- By: Its: NEDERLANDSE FINANCIERINGS-MAATSCHAPPIJ VOOR ONTWIKKELINGLANDEN N.V. - --------------------------------- By: Its: 22 23 PHILADELPHIA INTERNATIONAL EQUITIES INC. - --------------------------------- By: Its: MSF HOLDING LTD. - --------------------------------- By: Its: 23 EX-10.19 3 SHARE RETENTION, NON-COMPETITION, AND PUT OPTION 1 EXHIBIT 10.19 CONFORMED COPY INVESTMENT NUMBER 8354 SHARE RETENTION, NON-COMPETITION AND PUT OPTION AGREEMENT AMONG DVI, INC. AND MSF HOLDING LTD. AND CADILUR S.A. AND ESTOLUR S.A. AND NATULER S.A. AND INTERNATIONAL FINANCE CORPORATION DATED APRIL 27, 1998 2 TABLE OF CONTENTS Article or Section Item Page No. ------- ---- -------- ARTICLE I......................................................................2 DEFINITIONS....................................................................2 Section 1.01. Definitions................................................2 Section 1.02. Other Terms................................................2 Section 1.03. Interpretation.............................................6 ARTICLE II.....................................................................7 REPRESENTATIONS AND WARRANTIES.................................................7 Section 2.01. General Representations....................................7 Section 2.02. Further Representations....................................8 Section 2.03. IFC Reliance...............................................8 Section 2.04. Non-Estoppel...............................................8 ARTICLE III....................................................................9 RETENTION OF SHARES............................................................9 Section 3.01. DVI's Undertakings........................................9 Section 3.02. MSF Holding's Undertakings.................................9 Section 3.03. Additional Obligations....................................10 Section 3.04. Request for Transfer......................................10 Section 3.05. Further Assurances........................................11 Section 3.06. Tag-Along Rights..........................................11 ARTICLE IV....................................................................11 NON-COMPETITION PROVISIONS....................................................11 Section 4.01. Competing Activities......................................12 Section 4.02. Acknowledgments of DVI....................................12 ARTICLE V.....................................................................13 PUT OPTION....................................................................13 Section 5.01. Put Option................................................13 Section 5.02. Notice of Exercise........................................13 3 - 2 - Article or Section Item Page No. ------- ---- -------- Section 5.03. Commitment of DVI.........................................13 Section 5.04. Settlement................................................13 Section 5.05. Share Certificates........................................14 Section 5.06. Right of Transfer.........................................14 Section 5.07. Obligations Irrevocable, Absolute and Unconditional.......14 Section 5.08. Term of the Put Option....................................15 Section 5.09. Cancellation of the Put Option............................16 Section 5.10. Required Documentation....................................17 ARTICLE VI....................................................................17 MISCELLANEOUS.................................................................17 Section 6.01. Waivers..................................................17 Section 6.02. MSF Holding as Agent for Communication....................19 Section 6.03. Notices...................................................19 Section 6.04. English Language..........................................21 Section 6.05. Fees and Expenses.........................................21 Section 6.06. Financial Calculations....................................22 Section 6.07. Termination of Agreement..................................22 Section 6.08. Severability..............................................22 Section 6.09. Applicable Law and Jurisdiction...........................22 Section 6.10. Successors and Assigns....................................25 Section 6.11. Amendment.................................................25 Section 6.12. Counterparts..............................................25 Section 6.13. Remedies and Waivers......................................25 4 SHARE RETENTION, NON-COMPETITION AND PUT OPTION AGREEMENT AGREEMENT, dated April 27, 1998 among DVI, Inc. ("DVI"), a corporation organized and existing under the laws of the State of Delaware, USA, MSF HOLDING LTD., a company organized and existing under the laws of the Commonwealth of the Bahamas ("MSF Holding"), CADILUR S.A. ("MSF"), ESTOLUR S.A. ("Estolur"), and NATULER S.A. ("HSF" and together with MSF Holding, MSF and Estolur, the "Co-Borrowers" and each individually a "Co-Borrower"), each of MSF, Estolur and HSF are companies organized and existing under the laws of Uruguay, and INTERNATIONAL FINANCE CORPORATION, an international organization established by Articles of Agreement among its member countries (hereinafter called "IFC"). WHEREAS: (A) By an investment agreement of even date herewith among IFC and the Co-Borrowers (the "Investment Agreement"), IFC has agreed to (i) extend a loan to the Co-Borrowers in the aggregate principal amount of up to forty million Dollars ($40,000,000) (the "Loan"), in the form of an A Loan of up to fifteen million Dollars ($15,000,000), and a B loan of up to twenty-five million Dollars ($25,000,000) and (ii) make the IFC Subscription, upon the terms and conditions set forth in the Investment Agreement. (B) In consideration of IFC entering into the Investment Agreement and as an inducement to IFC to make the first Disbursement of the Loan and the first Disbursement and Subscription under the IFC Subscription, each of DVI and the Co-Borrowers has agreed to undertake the obligations assumed by it in this Agreement. (C) IFC's obligation to make the Loan and the IFC Subscription is conditioned upon the agreement by DVI not to engage in certain forms of competition with the Co-Borrowers, as more particularly set forth herein. (D) Each of DVI and the Co-Borrowers has been provided with, and hereby acknowledges receipt of, a copy of the Investment Agreement and all the other Transaction Documents. NOW, THEREFORE, the parties agree as follows: 5 - 2 - ARTICLE I DEFINITIONS Section 1.01. Definitions. Wherever used in this Agreement, unless the context otherwise requires, or unless otherwise defined in the preamble or Recitals hereto, capitalized terms defined in the Investment Agreement shall have the same meanings herein. Section 1.02. Other Terms. Wherever used in this Agreement, unless the context otherwise requires, the following terms shall have the following meanings: "Average Consolidated Pre-Tax Income" means, as at the date of the relevant Notice of Exercise, the amount resulting from calculating the average of the audited consolidated pre-tax profit recorded by MSF Holding for the previous Fiscal Year, as determined from the consolidated audited financial statements for such Fiscal Year and the audited consolidated profit recorded by MSF Holding for the current year (annualized), as determined from the consolidated audited financial statements for the most recently completed fiscal quarter before which the relevant Notice of Exercise is given, audited in accordance with Section 5.10 (iii) hereof if so requested by IFC; "Exercise Period" means, the period (A) beginning on the earlier of (i) the fourth anniversary of the date of this Agreement, and (ii) the date on which a Triggering Event occurs; and (B) expiring as provided in Section 5.08(a); "Exercise Price" means, the higher of (A) a multiple of one point two five (1.25) times the Net Worth of MSF Holding or (B) a multiple of eight (8) times the Average Consolidated Pre-Tax Income of MSF Holding; "Net Worth" means, the capital, reserves and retained earnings of MSF Holding based on the consolidated audited financial 6 - 3 - statements for the Fiscal Year immediately preceding the date of the relevant Notice of Exercise, or, if available, the consolidated financial statements for the most recently completed fiscal quarter of the Fiscal Year in which the relevant Notice of Exercise is given, provided any such quarterly statements have been audited in accordance with Section 5.10(iii) hereof; "Notice of Exercise" means any written notice given at any time or from time to time during the Exercise Period by IFC to DVI pursuant to Article V, which shall set forth: (i) only in the case that the Notice of Exercise is given before the fourth anniversary of the date of this Agreement, the occurrence and description of a Triggering Event and the basis of its determination, which determination by IFC shall be final, conclusive and binding upon DVI (absent gross negligence or clerical error); (ii) whether IFC is exercising the Put Option with respect to all or part of the Option Shares and, if less than all the Option Shares are to be put to DVI, the number of Option Shares with respect to which IFC is exercising the Put Option; (iii) the Settlement Date; (iv) the Settlement Place; (v) the Exercise Price and the basis for its determination, which determination by IFC shall be final, conclusive and binding upon DVI (absent gross negligence or clerical error); and (vi) the account to which payment of the Exercise Price is to be made. "Option Shares" means: (i) the IFC Shares; 7 - 4 - (ii) any other Shares subscribed or acquired by, or delivered to, IFC pursuant to the exercise of preemptive rights, options or warrants accruing to IFC in relation to the Option Shares; (iii) any Shares received by IFC as a result of stock dividends, stock splits or otherwise on the Option Shares; and (iv) any Shares received by IFC in exchange, replacement or substitution for the Option Shares; "Put Option" means the right of IFC to require DVI and the obligation of DVI to purchase in accordance with the terms and conditions of this Agreement some or all of the Option Shares; "Region" means the countries of Uruguay, Argentina, Brazil, Colombia and any other Latin American Country where any Co-Borrower or any of its Subsidiaries operates; "Settlement Date" means a date specified in the relevant Notice of Exercise for making payment for and delivery of the Option Shares specified in the Notice of Exercise, which shall not be less than ninety (90) days nor more than one hundred twenty (120) days after the relevant Notice of Exercise shall have been given; "Settlement Place" means the place in New York, New York, United States to be specified by IFC in the relevant Notice of Exercise where payment for and delivery of the relevant Option Shares are to be made; "Stock Exchange" means an internationally recognized stock exchange acceptable to IFC including, but not limited to, the London Stock Exchange and NASDAQ; "Termination Date" means the date which is the eighth anniversary date of this Agreement; and "Triggering Event" means: 8 - 5 - (i) the failure or incapability of MSF Holding to maintain, on a consolidated basis, a diversified vendor lease portfolio, with no single vendor providing more than: (A) fifty percent (50%) of the equipment financed pursuant to Eligible Leases/Loans in the MSF Portfolio from December 31, 2000 through December 31, 2001; and (B) forty percent (40%) of the equipment financed pursuant to Eligible Leases/Loans in the MSF Portfolio thereafter; (ii) the failure or incapability of MSF Holding to maintain, on a consolidated basis, a Lease/Loan Loss Reserve of at least: (A) one percent (1%) of Net Financed Assets during Fiscal Years 1997 and 1998; (B) one and one-half percent (1.5%) of Net Financed Assets during Fiscal Year 1999; and (C) two percent (2%) of Net Financed Assets in Fiscal Year 2000 and thereafter; (iii) any material default or non-compliance by any party thereto (other than IFC) with any of its respective obligations, or any material misrepresentation or breach of warranty by any party thereto (other than IFC), under any of the Transaction Documents, in each case, to the extent any of such events are not attributable to IFC, and so long as any such default or non-compliance, or any such misrepresentation or breach of warranty, has not been cured, to the satisfaction of IFC, by any party thereto, as the case may be, within a period of thirty (30) Business Days commencing on the earlier of (i) the date in which IFC has given written notice to the Co-Borrowers and DVI that any of such events has occurred and is continuing and (ii) the date on which any of the Co- 9 - 6 - Borrowers and DVI shall have become aware of any of such events, whether or not: (A) such circumstance was beyond the control of such party; (B) IFC has exercised, or has omitted to exercise, any other right, power or remedy accruing to IFC upon such circumstance under any of such Transaction Documents; and (C) such obligation is permitted, in whole or in part, under any applicable laws; or (iv) any substantial change to DVI's shareholder structure which would materially adversely affect MSF Holding's or any of its Subsidiaries policies or operations; Section 1.03. Interpretation. In this Agreement, unless the context otherwise requires: (a) headings and underlinings are for convenience only and do not affect the interpretation of this Agreement; (b) words importing the singular include the plural and vice versa; (c) words importing a gender or neuter include any gender or neuter; (d) an expression importing a natural person includes any company, partnership, joint venture, association, corporation or other body corporate and any governmental or quasi-governmental authority or agency; (e) a reference to any thing includes a part of that thing; (f) a reference to a Section, paragraph, party, Annex, Exhibit or Schedule is a reference to a Section and paragraph of, and a party, Annex, Exhibit and Schedule to, this Agreement; (g) a reference to a document includes an amendment or supplement to, or replacement or novation of, that document disregarding any amendment, 10 - 7 - supplement, replacement or novation made in breach of the Investment Agreement; and (h) a reference to a party to any document includes that party's successors and permitted assigns. ARTICLE II REPRESENTATIONS AND WARRANTIES Section 2.01. General Representations. Each of DVI and the Co-Borrowers represents, warrants and covenants that: (a) (i) in the case of DVI, it is a company duly incorporated and validly existing under the laws of the State of Delaware, USA, (ii) in the case of MSF Holding, it is a company duly incorporated and validly existing under the laws of the Commonwealth of the Bahamas, and (iii) in the case of each of MSF, Estolur and HSF, it is a company duly incorporated and validly existing under the laws of Uruguay; (b) it has the corporate power to conduct its business as presently conducted; (c) it has the corporate power and all necessary corporate and other action has been taken to authorize it to execute this Agreement and to perform fully and completely all its obligations and liabilities hereunder; (d) the execution and delivery of this Agreement and the performance of its respective obligations hereunder will not violate or exceed its powers or contravene: (i) any provision of any applicable law, regulation, decree or order to which it is subject; (ii) any provision of the Estatutos or Certificate of Incorporation or Memorandum and Articles of Association or other relevant constitutive documents; 11 - 8 - (iii) any provision of any mortgage, deed, contract, agreement or undertaking to which it is a party or which is binding upon all or any of its respective property or assets; (e) this Agreement constitutes its valid obligations, legally binding upon it and enforceable in accordance with its terms; (f) it has been provided with, and hereby acknowledges receipt of, a copy of each of the Transaction Documents; and (g) all governmental, corporate, shareholders', optionholders', creditors' and other necessary authorizations, consents, approvals, licenses and waivers required for its execution and delivery of this Agreement and its performance of its obligations under this Agreement, have been duly obtained or granted and are in full force and effect. Section 2.02. Further Representations. (a) DVI represents and warrants that it presently holds, directly or through its wholly-owned Subsidiaries, at least forty percent (40%) of the voting shares of MSF Holding unencumbered by any Lien; (b) MSF Holding represents and warrants that it presently holds one hundred percent (100%) of the voting shares of each of MSF, HSF and Estolur unencumbered by any Lien. Section 2.03. IFC Reliance. Each of DVI and the Co-Borrowers hereby acknowledges that it has made the representations in Sections 2.01 and 2.02 above with the intention of persuading IFC to enter into the Transaction Documents and that IFC has entered into certain of the Transaction Documents on the basis of, and in full reliance on, each of such representations. Each of DVI and the Co-Borrowers warrants to IFC that each such representation is true and correct in all material respects as of the date of this Agreement and that none of them omits any matter the omission of which makes any of such representations misleading. Section 2.04. Non-Estoppel. The rights and remedies of IFC in relation to any misrepresentations or breach of warranty on the part of DVI and the Co-Borrowers shall not be prejudiced by any investigation by or on behalf of IFC into the affairs of DVI and the Co-Borrowers, by the execution of this Agreement or by any act or thing which may be done by or on behalf of IFC in connection with 12 - 9 - this Agreement and which might, apart from this Section, prejudice such rights or remedies. ARTICLE III RETENTION OF SHARES Section 3.01. DVI's Undertakings. Unless IFC otherwise agrees in writing, so long as any amounts are due and payable to IFC under any of the Transaction Documents, and so long as IFC holds shares in the voting capital of MSF Holding: (a) DVI agrees not to, and cause its Subsidiaries or Affiliates not to sell, transfer, assign, redeem, pledge, or otherwise in any manner dispose of or encumber, or permit any encumbrances or Liens to exist over, any of the voting shares of MSF Holding which it now owns or which it may acquire in the future, directly or indirectly through any of its Subsidiaries or Affiliates, if as a result thereof, it would own directly or indirectly through its wholly-owned Subsidiaries less than forty percent (40%) of the voting share capital of MSF Holding, unencumbered by any pledge, Lien or security; and (b) DVI also agrees that it will from time to time take such action as shall be required on its part, directly or indirectly, including the exercise (to the extent permitted by law) of its or its Subsidiaries' or Affiliates' preemptive rights under the Memorandum and Articles of Association or other relevant constitutive documents of MSF Holding to maintain its or its Subsidiaries' or Affiliates' shareholding in MSF Holding at the minimum level specified above. Section 3.02. MSF Holding's Undertakings. Unless IFC otherwise agrees in writing, so long as any amounts are due and payable to IFC under any of the Transaction Documents and so long as IFC holds shares in the voting capital of MSF Holding: (a) MSF Holding agrees not to sell, transfer, assign, redeem, pledge or otherwise in any manner dispose of or encumber, or permit any encumbrances or Liens to exist over, any of the voting shares of MSF, Estolur or HSF which it now owns or which it may acquire in the future if, as a result thereof, it would own less 13 - 10 - than one hundred percent (100%) of the voting share capital of each of MSF, Estolur and HSF unencumbered by any pledge, Lien or security; and (b) MSF Holding also agrees that it will from time to time take such action as shall be required on its part, including the exercise (to the extent permitted by law) of its preemptive rights under the respective Memorandum and Articles of Association, Estatutos or other relevant constitutive documents of each of MSF, Estolur and HSF to maintain its respective shareholdings in each such company at the minimum levels specified above. Section 3.03. Additional Obligations. Each of DVI and MSF Holding agrees that, for so long as any monies are payable to IFC under any of the Transaction Documents and so long as IFC holds shares in the voting capital of MSF Holding, unless IFC otherwise agrees in writing: (a) it will exercise its voting rights at any meeting of, or in respect of any other vote taken by, the shareholders of DVI, any of its Subsidiaries or Affiliates or any of the Co-Borrowers in such manner and otherwise take or cause to be taken all actions as to achieve a prompt and effective implementation of all the provisions of, and performance of all obligations of DVI, any of its Subsidiaries or Affiliates and the Co-Borrowers under, the Transaction Documents; and (b) it will not, under the relevant provisions of the Memorandum and Articles of Association, Estatutos or other relevant constitutive documents of DVI, any or its Subsidiaries or Affiliates or any of the Co-Borrowers, as the case may be, approve or vote in favor of the approval of any transfer of shares proposed to be made in violation of the provisions of this Agreement. Section 3.04. Request for Transfer. (a) MSF Holding shall promptly give written notice to IFC of any request received by it to record a transfer, pledge or other form of disposition by DVI or any of its Subsidiaries or Affiliates of the shares held by DVI and any of its Subsidiaries or Affiliates in MSF Holding, and shall, to the extent permitted by law, refuse to make any such registration which is in violation of the provisions of this Agreement. (b) Each of MSF, Estolur and HSF shall promptly give written notice to IFC of any request received by it to record a transfer, pledge or other form of disposition by MSF Holding of the shares held by MSF Holding in any of MSF, Estolur or HSF, and shall, to the extent permitted by law, refuse to make any such registration which is in violation of the provisions of this Agreement. 14 - 11 - Section 3.05. Further Assurances. (i) MSF Holding undertakes to take all necessary actions to ensure that this Agreement is expressly mentioned in its respective registry of shareholders and/or any other registry whenever so required under the laws of the Bahamas, as the case may be, in order for this Agreement to become fully effective, valid and enforceable against the parties hereto and third parties; and (ii) each of MSF Holding, MSF, Estolur and HSF undertakes to take all necessary actions to ensure the prompt and effective implementation of all of the provisions of this Agreement. Section 3.06. Tag-Along Rights. Subject to the provisions of Section 3.01 above, if at any time DVI decides, directly or indirectly through any of its Subsidiaries or Affiliates, to sell all or a percentage of the shares of MSF Holding held by DVI or its Subsidiaries or Affiliates (the "DVI Shares"), unless IFC has notified DVI that the sale shall not include any Option Shares, DVI, directly or indirectly through any of its Subsidiaries or Affiliates, shall only sell (or permit the sale of) any of the DVI Shares if the sale also includes all or the same percentage of the Option Shares as the percentage of all DVI Shares to be sold. If necessary, DVI, directly or indirectly through any of its Subsidiaries or Affiliates, shall reduce the number of DVI Shares to be sold in order to sell the required number of Option Shares. DVI shall notify IFC of the terms and conditions on which it has decided to sell DVI Shares, and IFC shall have sixty (60) days to decide whether to sell any or all of its Option Shares as herein provided, and DVI, directly or indirectly through any of its Subsidiaries or Affiliates, shall not sell any (or permit the sale of) DVI Shares prior to the expiration of such sixty (60) day period. The provisions of the preceding sentence shall apply to any DVI Shares that are not sold on the terms and conditions set forth in any notice to IFC relating to the proposed sale of such DVI Shares within thirty (30) days after the expiration of the sixty (60) day period applicable to such DVI Shares. ARTICLE IV NON-COMPETITION PROVISIONS Section 4.01. Competing Activities. So long as any amounts are due and payable to IFC under any of the Transaction Documents, and so long as IFC holds shares in the voting capital of MSF Holding, DVI agrees that it shall not directly or indirectly, alone or in conjunction with others, through Subsidiaries or Affiliates (other than the Co-Borrowers), joint ventures or other business arrangements: 15 - 12 - (a) develop, own, manage, operate, join, control, finance or participate in the ownership, management, operation, control or financing of, or be connected as an officer, director, employee, consultant or otherwise with, any business or enterprise engaged in any business which is competitive with the business of the Co-Borrowers within the Region provided, however, that DVI may continue to participate in the management, operation and control of Oferil; (b) engage in any other manner, within the Region, in any business which is competitive with the business of the Co-Borrowers provided, however, that DVI may engage in the business of the Co-Borrowers through Oferil (i) if and when such business has first been offered to the Co-Borrowers and the Co-Borrowers have declined participation in such business; or (ii) in connection with Oferil's existing portfolio which has not been transferred to MSF or HSF pursuant to the Assignment Agreements; or (c) induce or attempt to induce any customers, suppliers, distributors, officers or employees of the Co-Borrowers to terminate their relationships with or to take any action that would be disadvantageous to the business of the Co-Borrowers. For the purposes of this Section, the "business of the Co-Borrowers" shall be defined as the financing, through leases, loans or otherwise, of medical equipment. Section 4.02. Acknowledgments of DVI. DVI acknowledges that the period of restrictions and the restraints imposed by Section 4.01 are reasonably required for the protection of IFC and the Co-Borrowers. In the event that any of the provisions contained in this Agreement relating to the period of restriction or the scope of such restrictions, as set forth in Section 4.01, shall be deemed by a court of competent jurisdiction to exceed the maximum periods of time which such court would deem enforceable, or to exceed the enforceable scope of such provisions, the period or scope of such restriction, as the case may be, shall, for purposes of this Agreement, be deemed to be the maximum time period or maximum scope which such court would deem valid and enforceable. DVI further acknowledges that any violation of the covenants contained in Section 4.01 is likely to cause irreparable damage to IFC and the Co-Borrowers and, if proven to the satisfaction of a court of competent jurisdiction, it may be restrained in an action instituted by IFC or the Co-Borrowers by process issued out of such court, in addition to any other legal or equitable remedies provided by law. ARTICLE V 16 - 13 - PUT OPTION Section 5.01. Put Option IFC, in its discretion, shall have the right at any time, at one or more times and from time to time during the Exercise Period to sell to DVI, and to require DVI to purchase (and DVI shall be obligated to purchase), all or a portion of the Option Shares at the Exercise Price, in accordance with the provisions of this Article. Section 5.02. Notice of Exercise The Put Option may be exercised by IFC in respect of all or some of the Option Shares at any time, at one or more times and from time to time during the Exercise Period by delivery of a Notice of Exercise, executed by IFC and duly delivered to DVI. Section 5.03. Commitment of DVI Subject to the terms and conditions set forth herein, DVI hereby unconditionally, absolutely and irrevocably agrees to purchase from IFC, on the Settlement Date, at the Settlement Place and at the Exercise Price, all of the Option Shares in respect of which an Exercise Notice shall have been duly issued by IFC and delivered to DVI. Section 5.04. Settlement Upon receipt of a Notice of Exercise, DVI shall, on the Settlement Date and at the Settlement Place, purchase all of the Option Shares in respect to which such Notice of Exercise was issued and shall make all necessary arrangements to pay, and shall pay, the Exercise Price in full, in Dollars in immediately available funds by wire transfer to the account so designated by IFC in the Notice of Exercise, it being understood that such payment shall be made to IFC without any set-off, counterclaim or condition and without any deduction whatsoever for fees, taxes, duties, expenses, costs or other charges howsoever called, all of which shall be borne by DVI. Section 5.05. Share Certificates IFC shall, on the Settlement Date, but only after receipt of the Exercise Price, transfer to DVI or its assigns the Option Shares sold on such Settlement Date, free and clear of Liens, charges and encumbrances and deliver to DVI or its assigns, certificates representing such Option Shares, duly endorsed in property (en propriedad) by IFC in the name of DVI and together with such instruments of transfer, if any, as shall be required by the laws of the Commonwealth of the Bahamas or the State of Delaware, USA to effect the transfer. Section 5.06. Right of Transfer. Without prejudice to any remedies available to IFC under this Agreement or otherwise, and notwithstanding any other provision of this Agreement to the contrary, in the event that DVI shall fail 17 - 14 - to pay to IFC in full in Dollars the Exercise Price on or before the Settlement Date at the Settlement Place, IFC, at its sole discretion and with prior written notice to DVI, shall be free to: (i) sell, transfer or otherwise dispose of any or all of such Option Shares, provided, however, that in the event of any such sale, transfer or other disposition of such Option Shares, the provisions of this Agreement (including, without limitation, the obligation of DVI to purchase the Option Shares) with respect to the portion of the Option Shares so sold, transferred or otherwise disposed of, shall have no further force or effect; provided, further, that DVI shall remain obligated to pay to IFC the Exercise Price, but reduced by an amount equal to the net proceeds, if any, received by IFC from such sale, transfer or disposition of such Option Shares; and/or (ii) cancel, in whole or in part, the relevant Notice of Exercise and the sale of all or part of the Option Shares to be made pursuant thereto, without penalty of any kind to IFC and without prejudice to any other right, remedies, powers and remedies of IFC hereunder or elsewhere. Section 5.07. Obligations Irrevocable, Absolute and Unconditional. (a) The obligations of DVI under this Article V are firm, unconditional, absolute and irrevocable and shall not be terminated, suspended or affected in any manner by the deterioration of DVI's or the Co-Borrowers' financial situation, the interruption of DVI's or the Co-Borrowers' operations, the insolvency of any of the Co-Borrowers or, to the extent permitted by law, DVI, the filing of any bankruptcy procedure or any similar procedure against any of the Co-Borrowers or, to the extent permitted by law, DVI, or any other circumstances whatsoever. (b) DVI's obligations hereunder can be discharged only by performance and then only to the extent of such performance. (c) The Put Option shall continue to be effective or be reinstated, as the case may be, if at any time any payment of any of the Exercise Price is rescinded or must otherwise be returned by IFC or any other person upon the insolvency, bankruptcy or reorganization of any person or otherwise, all as though such payment had not been made. Section 5.08. Term of the Put Option. (a) The provisions of this Article V shall be effective from the date hereof and shall continue to be in full force and 18 - 15 - effect until the first to occur of (A) the first date on which MSF Holding shall be deemed to have become a public company as provided in subsection (b) below, (B) the date on which the payment of any of the Exercise Price shall no longer be subject to recision or return pursuant to Section 5.07(c) hereof, (C) the date on which the right of MSF Holding to the IFC Subscription under the Investment Agreement shall have been canceled and (D) the date which is the eighth anniversary date of this Agreement. (b) MSF Holding shall be deemed to have become a public company when all the requirements set out below have been fully satisfied: (i) MSF Holding shall have delivered to IFC a notice, in form and substance satisfactory to IFC, signed by an authorized representative of MSF Holding certifying that (A) all legal, governmental, corporate, creditors', and other necessary licenses, approvals or consents required to be obtained or fulfilled under the laws, rules, procedures and regulations of the applicable Stock Exchange, any other applicable laws and MSF Holding's Memorandum and Articles of Association or other relevant constitutive documents; to become a public company, have been duly fulfilled, granted and obtained by MSF Holding and all such licenses, approvals or consents have become irrevocable and unconditional under their relevant terms; and (B) no Event of Default or suspension or cancellation of the IFC Subscription, and no Triggering Event, shall have occurred or be continuing; (ii) IFC shall have received a certificate from the Stock Exchange or other documentation satisfactory to IFC confirming that (A) Shares representing at least thirty percent (30%) of the outstanding share capital of MSF Holding were placed within a period not to exceed forty-five (45) consecutive calendar days counting from the day on which such shares were originally made available for subscription by the public; provided, that for purposes of the calculation referred to in this Section 5.08(b)(ii)(A), any Shares offered in an initial public offering and subscribed by, or any Shares traded by or on behalf of, any of the Co-Borrowers or DVI or any Subsidiary or Affiliate of the Co-Borrowers or DVI shall be excluded; and (B) IFC has 19 - 16 - received documentation establishing that the Shares are actively traded in a manner satisfactory to IFC; (iii) IFC shall have received a legal opinion or opinions, in form and substance acceptable to IFC of counsel acceptable to it in (A) the Commonwealth of the Bahamas, and (B) such other jurisdiction as IFC shall deem appropriate, and concurred in by counsel for MSF Holding, with respect to the matters referred to in paragraph (i) above and such other matters incident to the public offering of the capital of MSF Holding and the trading of the Shares in such Stock Exchange as IFC shall reasonably request; and (iv) IFC shall have delivered to MSF Holding a notice stating that the notice from MSF Holding, the confirmation by such Stock Exchange, the other documentation and the legal opinions referred to in paragraphs (i), (ii) and (iii) above are acceptable to IFC, and such notice shall not be unreasonably withheld by IFC. Section 5.09. Cancellation of the Put Option. Notwithstanding anything to the contrary provided in this Article V, IFC may, at its own discretion, at any time prior to the relevant Settlement Date, by notice to DVI, cancel the relevant Notice of Exercise and the sale of Option Shares to be made pursuant thereto. In such event, IFC agrees to reimburse DVI for any reasonable expenses incurred theretofore by it as a result of or in connection with the relevant Notice of Exercise that has been canceled by IFC. Section 5.10. Required Documentation. For the purposes of calculating the Exercise Price, DVI agrees to cause MSF Holding to, and MSF Holding agrees to, furnish to IFC: (i) within ninety (90) days after the commencement of a Fiscal Year, the audited financial statements of each of the Co-Borrowers for the immediately preceding Fiscal Year; (ii) within sixty (60) days after the commencement of a fiscal quarter of a Fiscal Year, the unaudited financial statements of each of the Co-Borrowers for the immediately preceding fiscal quarter of such Fiscal Year; and 20 - 17 - (iii) only if so requested by IFC for purposes of calculating the Exercise Price, special audited financial statements of the Co-Borrowers for the immediately preceding fiscal quarter of such Fiscal Year (such audit to be at the cost of the Co-Borrowers, and such special audited quarterly financial statements shall be delivered to IFC within forty-five (45) days after the date of the notice of request sent by IFC to DVI in this respect). ARTICLE VI MISCELLANEOUS Section 6.01. Waivers. (a) DVI and each of the Co-Borrowers hereby irrevocably waives, to the extent permitted by applicable laws, any defenses, rights, claims, counterclaims, remedies and powers that it may now or hereafter have in any way relating to any or all of the following: (i) any lack of validity or enforceability of the Investment Agreement, the other Transaction Documents or any agreement or instrument relating thereto; (ii) any change in the time, manner or place of payment of, or in any other term of or relating to, all or any obligations of any person under the Investment Agreement or any other Transaction Document, or any other amendment or waiver of or any consent to departure from the Investment Agreement or any other Transaction Document; (iii) any change, restructuring, reorganization, merger, consolidation, liquidation or termination of the corporate structure or existence of any of the Co-Borrowers or DVI, or any of their respective Subsidiaries, or any change in the ownership of any shares of the capital stock of any of such entities; (iv) any failure of IFC to disclose to the Co-Borrowers or DVI any information relating to the financial condition, operations, properties or prospects of any other person now or in the future known to IFC; 21 - 18 - (v) the occurrence and/or continuance of any bankruptcy, reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency, liquidation or similar proceedings with respect to DVI, any of the Co-Borrowers or any other person; (vi) the existence of any claim, setoff, defense or other right which DVI or the Co-Borrowers may have against DVI, any of the Co-Borrowers, IFC or any other person; (vii) all requirements as to promptness, diligence, presentment, demand, protest or notice of any kind with respect to any obligations of any party (other than IFC) under either this Agreement, the Investment Agreement or any other Transaction Document; (viii) any right to require IFC to proceed against DVI, any of the Co-Borrowers or any other person, or to pursue any other remedy, action or power whatsoever within the power of IFC; (ix) any right arising out of the absence of request for payment (judicial or otherwise) by IFC to DVI or any of the Co-Borrowers; (x) any right to revoke or terminate this Agreement, except as established in Sections 5.09. and 6.08 hereof; (xi) any assertion of, or failure to assert, or delay in asserting, any right, power or remedy against any party in respect of any Triggering Event; (xii) any failure of any of the Transaction Documents to comply with any requirement of any applicable laws; (xiii) any purported or actual assignment or transfer of any of the Option Shares by IFC to any other party; (xiv) any Transaction Document being in whole or in part illegal, void, voidable, voided, unenforceable or otherwise of limited force and effect; or 22 - 19 - (xv) any other circumstance (including, without limitation, any statute of limitations) or any existence of or reliance on any representation by IFC that might otherwise constitute a defense available to, or a discharge of, DVI. (b) DVI and each of the Co-Borrowers acknowledges that it will receive substantial direct and indirect benefits from the IFC Subscription contemplated by the Transaction Documents and that the waivers set forth in subsection (e) above are knowingly made in contemplation of such benefits. Section 6.02. MSF Holding as Agent for Communication. So long as any amounts are due and payable to IFC under any of the Transaction Documents, and so long as IFC holds shares in the voting capital of MSF Holding, any notice, request or other communication to be given by IFC to MSF, Estolur and HSF under the term of this Agreement and each Transaction Document may, at the option of IFC and without prejudice to its right to communicate directly with MSF, Estolur and HSF, be addressed to MSF Holding, as agent, which is hereby irrevocably authorized and directed by MSF, Estolur and HSF to act as agent for it in such matter, and MSF Holding hereby accepts such appointment. (b) Each of MSF, Estolur and HSF hereby irrevocably appoints MSF Holding to act as its agent to give any notice, request or other communication to be given by MSF, Estolur and HSF under the terms of this Agreement and each Transaction Document, and MSF Holding accepts such appointment. Section 6.03. Notices. Any notice given under this Agreement shall be in writing and shall be deemed to have been duly given when delivered by hand, airmail or facsimile or established courier service to the party's address specified below or at such other address as such party notifies to the other party from time to time and will be effective upon receipt or, in the case of delivery by hand or by established courier service, upon refusal to accept delivery. For DVI: DVI, Inc. 500 Hyde Park Doylestown, PA 18901 USA Attn: Mr. Michael A. O'Hanlon Facsimile: (215) 230-3537 23 - 20 - For the Co-Borrowers: MSF Holding Euro Canadian Centre Marlborough Street P.O. Box N-8327 Facsimile: (242) 326-6177 For IFC: International Finance Corporation 2121 Pennsylvania Avenue, N.W. Washington, D.C. 20433 United States of America Attention: Director, Latin America and Caribbean Department Facsimile: (202) 974-4390 With a copy (in the case of notices relating to payments) sent to the attention of the Manager, Accounting Division, at: Facsimile: 202-676-1830 Cable: CORINTFIN Washington, D.C. Section 6.04. English Language. All documents to be furnished or communications to be given or made under this Agreement shall be in the English language or, if in another language, shall, if IFC so requests, be accompanied by a translation into English satisfactory to IFC certified by a representative of DVI or the Co-Borrowers, as the case may be, which translation shall be the governing version among DVI, the Co-Borrowers and IFC. Section 6.05. Fees and Expenses. DVI and the Co-Borrowers shall pay to IFC or as IFC may direct all taxes, including stamp taxes, duties, fees or other charges payable in connection with the execution, delivery, registration or notarization of this Agreement and shall pay: 24 - 21 - (a) the fees and expenses of IFC's counsel in the Bahamas, Uruguay, New York, Delaware and any jurisdiction in which any of the Co-Borrowers conducts Sbusiness, incurred in connection with: (i) the preparation and/or review, execution and, if appropriate, registration of this Agreement and any other documents related to this Agreement; (ii) the giving of any legal opinions required by IFC under this Agreement; and (iii) any amendment, supplement or modification to, or waiver under this Agreement or any of the Transaction Documents; (b) the costs and expenses incurred by IFC in relation to the enforcement or protection or attempted enforcement or protection of its rights under this Agreement, including legal and other professional consultants' fees; and (c) any costs or expenses incurred by IFC or losses suffered as a result of DVI's failure to pay to IFC in full in Dollars the Exercise Price on or before the Settlement Date at the Settlement Place. Section 6.06. Financial Calculations. (a) All financial calculations to be made under, or for the purposes of, this Agreement shall be determined in accordance with U.S. generally accepted accounting principles and applied on a consistent basis and, except as otherwise required to conform to the definitions and other provisions contained in this Agreement, shall be calculated from the then most recently issued financial statements which each of the Co-Borrowers is obligated to furnish to IFC under Sections 7.01 (d) and (e) of the Investment Agreement. (b) If any material adverse change in the financial condition of any of the Co-Borrowers after the end of the period covered by the relevant financial statements has occurred, such material adverse change shall also be taken into account in calculating the relevant figures. Section 6.07. Termination of Agreement. Except as otherwise provided herein, this Agreement shall continue in force for as long as any amounts are due and payable to IFC under any of the Transaction Documents. Notwithstanding the above, the provisions of Article IV and, subject to the provisions of Section 5.09 hereof, Article V shall survive the termination or cancellation of the Investment 25 - 22 - Agreement or any other Transaction Document if IFC continues to hold any IFC Shares notwithstanding such termination or cancellation. Section 6.08. Severability. (a) The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement which shall remain in full force and effect. Section 6.09 Applicable Law and Jurisdiction. (a) This Agreement is governed by, and shall be construed in accordance with, the laws of the State of New York, United States of America. (b) Each of DVI and the Co-Borrowers irrevocably agrees that any legal action, suit or proceeding arising out of or relating to this Agreement or any other Transaction Document to which DVI or any of the Co-Borrowers is a party may be brought by IFC in the courts of the State of New York or of the United States of America located in the Southern District of New York. Final judgment against DVI or any of the Co-Borrowers in any such action, suit or proceeding shall be conclusive and may be enforced in any other jurisdiction, including the Bahamas or Uruguay, by suit on the judgment, a certified or exemplified copy of which shall be conclusive evidence of the judgment, or in any other manner provided by law. (c) By the execution and delivery of this Agreement, each of DVI and the Co-Borrowers irrevocably submits to the non-exclusive jurisdiction of any such court in any such action, suit or proceeding and each of DVI and the Co-Borrowers designates, appoints and empowers CT Corporation System, New York, New York as its authorized agent to receive for and on its behalf service of any summons, complaint or other legal process in any such action, suit or proceeding in the State of New York. (d) Nothing in this Agreement shall affect the right of IFC to commence legal proceedings or otherwise sue DVI or any of the Co-Borrowers in the Bahamas or Uruguay or any other appropriate jurisdiction, or concurrently in more than one jurisdiction, or to serve process, pleadings and other legal papers upon DVI or any of the Co-Borrowers in any manner authorized by the laws of any such jurisdiction. (e) As long as this Agreement remains in force, each of DVI and the Co-Borrowers shall maintain a duly appointed agent for the service of summons, complaint and other legal process in New York, New York, United States of America, for purposes of any legal action, suit or proceeding IFC may bring in 26 - 23 - respect of this Agreement or any other Transaction Document to which any of DIV and the Co-Borrowers is a party. Each of DVI and the Co-Borrowers shall keep IFC advised of the identity and location of such agent. (f) Each of DVI and the Co-Borrowers also irrevocably consents, if for any reason any of DVI's or the Co-Borrower's authorized agent for service of process of summons, complaint and other legal process in any such action, suit or proceeding is not present in New York, New York, to service of such papers being made out of those courts by mailing copies of the papers by registered United States air mail, postage prepaid, to any of DVI and the Co-Borrowers, as the case may be, at its address specified in Section 6.03. In such a case, IFC shall also send by telex or facsimile, or have sent by telex or facsimile, a copy of the papers to DVI or such Co-Borrower, as the case may be. (g) Service in the manner provided in subsection (f) above in any such action, suit or proceeding will be deemed personal service, will be accepted by DVI and the Co-Borrowers, as the case may be, as such and will be valid and binding upon the Co-Borrowers, as the case may be, for all purposes of any such action, suit or proceeding. (h) Each of DVI and the Co-Borrowers irrevocably waives to the fullest extent permitted by applicable law: (i) any objection which it may have now or in the future to the laying of the venue of any such action, suit or proceeding in any court referred to in this Section; (ii) any claim that any such action, suit or proceeding has been brought in an inconvenient forum; and (iii) its right of removal of any matter commenced by IFC in the courts of the State of New York to any court of the United States of America. (i) To the extent that DVI or any of the Co-Borrowers may be entitled in any jurisdiction to claim for itself or its assets immunity in respect of its obligations under this Agreement or any other Transaction Document to which DVI or such Co-Borrower is a party from any suit, execution, attachment (whether provisional or final, in aid of execution, before judgment or otherwise) or other legal process or to the extent that in any jurisdiction such immunity 27 - 24 - (whether or not claimed) may be attributed to it or its assets, each of DVI and the Co-Borrowers irrevocably agrees not to claim and irrevocably waives such immunity to the fullest extent permitted by the laws of such jurisdiction. (j) Each of DVI and the Co-Borrowers hereby acknowledges that IFC shall be entitled under applicable law, including the provisions of the International Organizations Immunities Act, to immunity from a trial by jury in any action, suit or proceeding arising out of or relating to this Agreement or the transactions contemplated hereby or any other Transaction Document to which any of DVI or the Co-Borrowers is a party, brought against IFC in any court of the United States of America. Each of DVI and the Co-Borrowers hereby waives any and all rights to demand a trial by jury in any action, suit or proceeding arising out of or relating to this Agreement or any other Transaction Document to which any of DVI or the Co-Borrowers is a party or the transactions contemplated by this Agreement or such Transaction Documents that is (i) brought against DVI or any of the Co-Borrowers or (ii) brought against IFC in any forum in which IFC is not entitled to immunity from a trial by jury. (k) To the extent that DVI or any of the Co-Borrowers may, in any suit, action or proceeding brought in any of the courts referred to in paragraph (b) above or a court of the Bahamas, Uruguay or elsewhere arising out of or in connection with this Agreement or any other Transaction Document to which DVI or any of the Co-Borrowers is a party, be entitled to the benefit of any provision of law requiring IFC in such suit, action or proceeding to post security for the costs of DVI or any of the Co-Borrowers (cautio judicatum solvi), or to post a bond or to take similar action, each of DVI and the Co-Borrowers hereby irrevocably waives such benefit, in each case to the fullest extent now or in the future permitted under the laws of the Bahamas, Uruguay or, as the case may be, the jurisdiction in which such court is located. Section 6.10 Successors and Assigns. This Agreement binds and benefits the respective successors and assigns of its parties. However, DVI and the Co-Borrowers may not assign or delegate any of their respective rights or obligations under this Agreement without IFC's consent. Section 6.11 Amendment. Any amendment of any provision of this Agreement shall be in writing and signed by the parties. Section 6.12 Counterparts. This Agreement may be executed in several counterparts, each of which is an original, but all of which together constitute one and the same agreement. 28 - 25 - Section 6.13 Remedies and Waivers. No failure or delay by IFC in exercising any power, remedy, discretion, authority or other rights under this Agreement shall waive or impair that or any other right of IFC. No single or partial exercise of such a right shall preclude its additional or future exercise. No such waiver shall waive any other right under this Agreement. All waivers or consents given under this Agreement shall be in writing. IN WITNESS WHEREOF, the parties have caused this Agreement to be signed in their respective names as of the date first above written. DVI, INC. By: /s/ Steven R. Garfinkel STEVEN R. GARFINKEL Authorized Representative MSF HOLDING LTD. By: /s/ Steven R. Garfinkel STEVEN R. GARFINKEL Authorized Representative CADILUR, S.A. By: /s/ Steven R. Garfinkel STEVEN R. GARFINKEL Authorized Representative ESTOLUR S.A. By: /s/ Steven R. Garfinkel STEVEN R. GARFINKEL Authorized Representative NATULER S.A. By: /s/ Steven R. Garfinkel STEVEN R. GARFINKEL 29 - 26 - Authorized Representative INTERNATIONAL FINANCE CORPORATION By: /s/ Haydee Celaya HAYDEE CELAYA Authorized Representative EX-10.20 4 SHARE RETENTION, NON-COMPETITION, AND PUT OPTION 1 EXHIBIT 10.20 SHARE RETENTION, NON-COMPETITION AND PUT OPTION AGREEMENT AMONG DVI, INC. AND MSF HOLDING LTD. AND CADILUR S.A. AND ESTOLUR S.A. AND NATULER S.A. AND NEDERLANDSE FINANCIERINGS-MAATSCHAPPIJ VOOR ONTWIKKELINGSLANDEN N.V. DATED AS OF APRIL 27 , 1998 2 2 TABLE OF CONTENTS ARTICLE OR SECTION ITEM PAGE NO. - ------- ---- -------- ARTICLE I......................................................................2 DEFINITIONS....................................................................2 Section 1.01. Definitions.................................................2 Section 1.02. Other Terms.................................................2 Section 1.03. Interpretation..............................................7 ARTICLE II.....................................................................8 REPRESENTATIONS AND WARRANTIES.................................................8 Section 2.01. General Representations.....................................8 Section 2.02. Further Representations.....................................9 Section 2.03. FMO Reliance................................................9 Section 2.04. Non-Estoppel................................................9 ARTICLE III....................................................................9 RETENTION OF SHARES............................................................9 Section 3.01. DVI's Undertakings........................................10 Section 3.02. MSF Holding's Undertakings.................................10 Section 3.03. Additional Obligations.....................................10 Section 3.04. Request for Transfer.......................................11 Section 3.05. Further Assurances.........................................11 Section 3.06. Tag-Along Rights...........................................11 ARTICLE IV....................................................................12 NON-COMPETITION PROVISIONS....................................................12 Section 4.01. Competing Activities.......................................12 Section 4.02. Acknowledgments of DVI.....................................12 ARTICLE V.....................................................................13 PUT OPTION....................................................................13 Section 5.01. Put Option................................................13 Section 5.02. Notice of Exercise........................................13 Section 5.03. Commitment of DVI.........................................13 Section 5.04. Settlement................................................13 Section 5.05. Share Certificates........................................13 Section 5.06. Right of Transfer.........................................14 3 3 Section 5.07. Obligations Irrevocable, Absolute and Unconditional.......14 Section 5.08. Term of the Put Option....................................15 Section 5.09. Cancellation of the Put Option............................16 Section 5.10. Required Documentation....................................16 ARTICLE VI....................................................................17 MISCELLANEOUS.................................................................17 Section 6.01. Waivers...................................................17 Section 6.02. MSF Holding as Agent for Communication....................19 Section 6.03. Notices...................................................19 Section 6.04. English Language..........................................20 Section 6.05. Fees and Expenses.........................................21 Section 6.06. Financial Calculations....................................21 Section 6.07. Termination of Agreement..................................22 Section 6.08. Severability..............................................22 Section 6.09 Applicable Law and Jurisdiction...........................22 Section 6.10 Successors and Assigns....................................25 Section 6.11 Amendment.................................................25 Section 6.12 Counterparts..............................................25 Section 6.13 Remedies and Waivers......................................25 4 SHARE RETENTION, NON-COMPETITION AND PUT OPTION AGREEMENT AGREEMENT, dated as of April 27, 1998 among DVI, Inc. ("DVI"), a corporation organized and existing under the laws of the State of Delaware, USA, MSF HOLDING LTD., a company organized and existing under the laws of the Commonwealth of the Bahamas ("MSF Holding"), CADILUR S.A., a sociedad anonima, organized and existing under the laws of Uruguay ("MSF"), ESTOLUR S.A., a sociedad anonima, organized and existing under the laws of Uruguay ("Estolur"), and NATULER S.A., a sociedad anonima, organized and existing under the laws of Uruguay ("HSF" and together with MSF Holding, MSF and Estolur, the "Co-Borrowers" and each individually a "Co-Borrower"), each of MSF, Estolur and HSF are companies organized and existing under the laws of Uruguay and NEDERLANDSE FINANCIERINGS-MAATSCHAPPIJ VOOR ONTWIKKELINGSLANDEN N.V., a company organized and existing under the laws of The Netherlands (hereinafter called "FMO"). WHEREAS: (A) By an investment agreement of even date herewith among FMO and the Co-Borrowers (the "Investment Agreement"), FMO has agreed to (i) extend a loan to the Co-Borrowers in the aggregate principal amount of up to twenty-five million Dollars ($25,000,000) (the "Loan"), in the form of an A Loan of up to ten million Dollars ($10,000,000), and a B loan of up to fifteen million Dollars ($15,000,000) and (ii) make the FMO Subscription, upon the terms and conditions set forth in the Investment Agreement. (B) In consideration of FMO entering into the Investment Agreement and as an inducement to FMO to make the first Disbursement of the Loan and the first Disbursement and Subscription under the FMO Subscription, each of DVI and the Co-Borrowers has agreed to undertake the obligations assumed by it in this Agreement. (C) FMO's obligation to make the Loan and the FMO Subscription is conditioned upon the agreement by DVI not to engage in certain forms of competition with the Co-Borrowers, as more particularly set forth herein. (D) Each of DVI and the Co-Borrowers has been provided with, and hereby acknowledges receipt of, a copy of the Investment Agreement and all the other Transaction Documents. 5 - 2 - NOW, THEREFORE, the parties agree as follows: ARTICLE I DEFINITIONS Section 1.01. Definitions. Wherever used in this Agreement, unless the context otherwise requires, or unless otherwise defined in the preamble or Recitals hereto, capitalized terms defined in the Investment Agreement shall have the same meanings herein. Section 1.02. Other Terms. Wherever used in this Agreement, unless the context otherwise requires, the following terms shall have the following meanings: "Average Consolidated Pre-Tax Income" means, as at the date of the relevant Notice of Exercise, the amount resulting from calculating the average of the audited consolidated pre-tax profit recorded by MSF Holding for the previous Fiscal Year, as determined from the consolidated audited financial statements for such Fiscal year and the audited consolidated profit recorded by MSF Holding for the current year (annualized), as determined from the consolidated audited financial statements for the most recently completed fiscal quarter of the Fiscal Year in which the relevant Notice of Exercise is given, audited in accordance with Section 5.10 (iii) hereof if so requested by FMO; "Exercise Period" means, as at the date of the relevant Notice of Exercise, the period (A) beginning on the earlier of (i) the fourth anniversary of the date of this Agreement, and (ii) the date on which a Triggering Event occurs; and (B) expiring as provided in Section 5.08(a); "Exercise Price" means, as at the date of the relevant Notice of Exercise, the higher of (A) a multiple of one point two five (1.25) times the Net Worth of MSF Holding or (B) a multiple of eight (8) times the Average Consolidated Pre-Tax Income of MSF Holding; 6 - 3 - "Net Worth" means, as of the relevant date of the relevant Notice of Exercise, the capital, reserves and retained earnings of MSF Holding based on the consolidated audited financial statements for the Fiscal Year immediately preceding the date of the relevant Notice of Exercise, or, if available, the consolidated financial statements for the most recently completed fiscal quarter of the Fiscal Year, in which the relevant Notice of Exercise is given, provided any such quarterly statements have been audited in accordance with Section 5.10(iii) hereof; "Notice of Exercise" means any written notice given at any time or from time to time during the Exercise Period by FMO to DVI pursuant to Article V, which shall set forth: (i) only in the case that the Notice of Exercise is given before the fourth anniversary of the date of this Agreement, the occurrence and description of a Triggering Event and the basis of its determination, which determination by FMO shall be final, conclusive and binding upon DVI (absent gross negligence or clerical error); (ii) whether FMO is exercising the Put Option with respect to all or part of the Option Shares and, if less than all the Option Shares are to be put to DVI, the number of Option Shares with respect to which FMO is exercising the Put Option; (iii) the Settlement Date; (iv) the Settlement Place; and (v) the Exercise Price and the basis for its determination, which determination by FMO shall be final, conclusive and binding upon DVI (absent gross negligence or clerical error); "Option Shares" means: (i) the FMO Shares; (ii) any other Shares subscribed or acquired by, or delivered to, FMO pursuant to the exercise of 7 - 4 - preemptive rights, options or warrants accruing to FMO in relation to the Option Shares; (iii) any Shares received by FMO as a result of stock dividends, stock splits or otherwise on the Option Shares; and (iv) any Shares received by FMO in exchange, replacement or substitution for the Option Shares; "Put Option" means the right of FMO to require DVI and the obligation of DVI to purchase in accordance with the terms and conditions of this Agreement some or all of the Option Shares; "Region" means the countries of Uruguay, Argentina, Brazil, Colombia and any other Latin American Country where any Co-Borrower or any of its Subsidiaries operates; "Settlement Date" means a date specified in the relevant Notice of Exercise for making payment for and delivery of the Option Shares specified in the Notice of Exercise, which shall not be less than ninety (90) days nor more than one hundred twenty (120) days after the relevant Notice of Exercise shall have been given; "Settlement Place" means the place in New York, New York, United States to be specified by FMO in the relevant Notice of Exercise where payment for and delivery of the relevant Option Shares are to be made; "Stock Exchange" means an internationally recognized stock exchange, acceptable to FMO including, but not limited to, the London Stock Exchange and NASDAQ; "Termination Date" means the date which is the eighth anniversary date of this Agreement; and "Triggering Event" means: (i) the failure or incapability of MSF Holding to maintain, on a consolidated basis, a diversified vendor lease portfolio, with no single vendor providing more than: 8 - 5 - (A) fifty percent (50%) of the equipment financed pursuant to Eligible Leases/Loans in the MSF Portfolio from December 31, 2000 through December 31, 2001; and (B) forty percent (40%) of the equipment financed pursuant to Eligible Leases/Loans in the MSF Portfolio thereafter; (ii) the failure or incapability of MSF Holding to maintain, on a consolidated basis, a Lease/Loan Loss Reserve of at least: (A) one percent (1%) of Net Financed Assets during Fiscal Years 1997 and 1998; (B) one and one-half percent (1.5%) of Net Financed Assets during Fiscal Year 1999; and (C) two percent (2%) of Net Financed assets in Fiscal Year 2000 and thereafter; or (iii) any material default or non-compliance by any party thereto (other than FMO) with any of its respective obligations, or any material misrepresentation or breach of warranty by any party thereto (other than FMO), under any of the Transaction Documents, in each case, to the extent any of such events are not attributable to FMO, and so long as any such default or non-compliance, or any such misrepresentation or breach of warranty, has not been cured, to the satisfaction of FMO, by any party thereto, as the case may be, within a period of thirty (30) Business Days commencing on the earlier of (i) the date in which FMO has given written notice to the Co-Borrowers and DVI that any of such events has occurred and is continuing and (ii) the date on which any of the Co-Borrowers and DVI shall have become aware of any of such events, whether or not: (A) such circumstance was beyond the control of such party; 9 6 (B) FMO has exercised, or has omitted to exercise, any other right, power or remedy accruing to FMO upon such circumstance under any of such Transaction Documents; and (C) such obligation is permitted, in whole or in part, under any applicable laws. (iv) any substantial change to DVI's shareholder structure which would materially adversely affect MSF Holding's or any of its Subsidiaries policies or operations; Section 1.03. Interpretation. In this Agreement, unless the context otherwise requires: (a) headings and underlinings are for convenience only and do not affect the interpretation of this Agreement; (b) words importing the singular include the plural and vice versa; (c) words importing a gender or neuter include any gender or neuter; (d) an expression importing a natural person includes any company, partnership, joint venture, association, corporation or other body corporate and any governmental or quasi-governmental authority or agency; (e) a reference to any thing includes a part of that thing; (f) a reference to a Section, paragraph, party, Annex, Exhibit or Schedule is a reference to a Section and paragraph of, and a party, Annex, Exhibit and Schedule to, this Agreement; (g) a reference to a document includes an amendment or supplement to, or replacement or novation of, that document disregarding any amendment, supplement, replacement or novation made in breach of the Investment Agreement; and (h) a reference to a party to any document includes that party's successors and permitted assigns. 10 7 ARTICLE II REPRESENTATIONS AND WARRANTIES Section 2.01. General Representations. Each of DVI and the Co-Borrowers represents, warrants and covenants that: (a) (i) in the case of DVI, it is a company duly incorporated and validly existing under the laws of the State of Delaware, USA, (ii) in the case of MSF Holding, it is a company duly incorporated and validly existing under the laws of the Commonwealth of the Bahamas, and (iii) in the case of each of MSF, Estolur and HSF, it is a company duly incorporated and validly existing under the laws of Uruguay; (b) it has the corporate power to conduct its business as presently conducted; (c) it has the corporate power and all necessary corporate and other action has been taken to authorize it to execute this Agreement and to perform fully and completely all its obligations and liabilities hereunder; (d) the execution and delivery of this Agreement and the performance of its respective obligations hereunder will not violate or exceed its powers or contravene: (i) any provision of any applicable law, regulation, decree or order to which it is subject; (ii) any provision of the Estatutos or Certificate of Incorporation or Memorandum and Articles of Association or other relevant constitutive documents; (iii) any provision of any mortgage, deed, contract, agreement or undertaking to which it is a party or which is binding upon all or any of its respective property or assets; (e) this Agreement constitutes its valid obligations, legally binding upon it and enforceable in accordance with its terms; (f) it has been provided with, and hereby acknowledges receipt of, a copy of each of the Transaction Documents; and 11 8 (g) all governmental, corporate, shareholders', optionholders', creditors' and other necessary authorizations, consents, approvals, licenses and waivers required for its execution and delivery of this Agreement and its performance of its obligations under this Agreement, have been duly obtained or granted and are in full force and effect. Section 2.02. Further Representations. (a) DVI represents and warrants that it presently holds directly or through its wholly-owned Subsidiaries at least forty per cent (40%) of the voting shares of MSF Holding unencumbered by any Lien; (b) MSF Holding represents and warrants that it presently holds ninety-nine per cent (99%) of the voting shares of each of MSF, HSF and Estolur unencumbered by any Lien. Section 2.03. FMO Reliance. Each of DVI and the Co-Borrowers hereby acknowledges that it has made the representations in Sections 2.01 and 2.02 above with the intention of persuading FMO to enter into certain of the Transaction Documents and that FMO has entered into certain of the Transaction Documents on the basis of, and in full reliance on, each of such representations. Each of DVI and the Co-Borrowers warrants to FMO that each such representation is true and correct in all material respects as of the date of this Agreement and that none of them omits any matter the omission of which makes any of such representations misleading. Section 2.04. Non-Estoppel. The rights and remedies of FMO in relation to any misrepresentations or breach of warranty on the part of DVI and the Co-Borrowers shall not be prejudiced by any investigation by or on behalf of FMO into the affairs of DVI and the Co-Borrowers, by the execution of this Agreement or by any act or thing which may be done by or on behalf of FMO in connection with this Agreement and which might, apart from this Section, prejudice such rights or remedies. ARTICLE III RETENTION OF SHARES Unless FMO otherwise agrees in writing, so long as any amounts are due and payable to FMO under any of the Transaction Documents, and so long as FMO holds shares in the voting capital of 12 9 MSF Holding: (a) DVI agrees directly and indirectly through any of its Subsidiaries or Affiliates, not to sell, transfer, assign, redeem, pledge, or otherwise in any manner dispose of or encumber, or permit any encumbrances or Liens to exist over, any of the voting shares of MSF Holding which it now owns or which it may acquire in the future, directly or indirectly through any of its Subsidiaries or Affiliates, if as a result thereof, it would own directly or indirectly less than forty percent (40%) of the voting share capital of MSF Holding, unencumbered by any pledge, Lien or security; and (b) DVI also agrees that it will from time to time take such action as shall be required on its part, directly or indirectly, including the exercise (to the extent permitted by law) of its preemptive rights under the Memorandum and Articles of Association or other relevant constitutive documents of MSF Holding to maintain its shareholding in MSF Holding at the minimum level specified above. Section 3.02. MSF Holding's Undertakings. Unless FMO otherwise agrees in writing, so long as any amounts are due and payable to FMO under any of the Transaction Documents and so long as FMO holds shares in the voting capital of MSF Holding: (a) MSF Holding agrees not to sell, transfer, assign, redeem, pledge or otherwise in any manner dispose of or encumber, or permit any encumbrances or Liens to exist over, any of the voting shares of MSF, Estolur or HSF which it now owns or which it may acquire in the future if, as a result thereof, it would own less than one hundred per cent (100%) of the voting share capital of each of MSF, Estolur and HSF unencumbered by any pledge, Lien or security; and (b) MSF Holding also agrees that it will from time to time take such action as shall be required on its part, including the exercise (to the extent permitted by law) of its preemptive rights under the respective Memorandum and Articles of Association, Estatutos or other relevant constitutive documents of each of MSF, Estolur and HSF to maintain its respective shareholdings in each such company at the minimum levels specified above. Section 3.03. Additional Obligations. Each of DVI and MSF Holding agrees that, for so long as any monies are payable to FMO under any of the Transaction Documents and so long as FMO holds shares in the voting capital of MSF Holding, unless FMO otherwise agrees in writing: (a) it will exercise its voting rights at any meeting of, or in respect of any other vote taken by, the shareholders of DVI, any of its Subsidiaries or Affiliates or any of the Co-Borrowers in such manner and otherwise take or cause to be taken all actions as to achieve a prompt and effective implementation of all the provisions of, and performance of all obligations of DVI, any of its 13 10 Subsidiaries or Affiliates and the Co-Borrowers under, the Transaction Documents; and (b) it will not, under the relevant provisions of the Memorandum and Articles of Association, Estatutos or other relevant constitutive documents of DVI, any or its Subsidiaries or Affiliates or any of the Co-Borrowers, as the case may be, approve or vote in favor of the approval of any transfer of shares proposed to be made in violation of the provisions of this Agreement. Section 3.04. Request for Transfer. (a) MSF Holding shall promptly give written notice to FMO of any request received by it to record a transfer, pledge or other form of disposition by DVI or any of its Subsidiaries or Affiliates of the shares held by DVI and any of its Subsidiaries or Affiliates in MSF Holding, and shall, to the extent permitted by law, refuse to make any such registration which is in violation of the provisions of this Agreement. (b) Each of MSF, Estolur and HSF shall promptly give written notice to FMO of any request received by it to record a transfer, pledge or other form of disposition by MSF Holding of the shares held by MSF Holding in any of MSF, Estolur or HSF, and shall, to the extent permitted by law, refuse to make any such registration which is in violation of the provisions of this Agreement. Section 3.05. Further Assurances. Each of MSF Holding, MSF, Estolur and HSF undertakes to take all necessary actions (i) to ensure that this Agreement is expressly mentioned in its respective registry of shareholders and/or any other registry whenever so required under the laws of the Bahamas or Uruguay, as the case may be, in order for this Agreement to become fully effective, valid and enforceable against the parties hereto and third parties; and (ii) to ensure the prompt and effective implementation of all of the provisions of this Agreement. Section 3.06. Tag-Along Rights. Subject to the provisions of Section 3.01 above, if at any time DVI decides, directly or indirectly through any of its Subsidiaries or Affiliates, to sell all or a percentage of the shares of MSF Holding held by DVI (the "DVI Shares"), unless FMO has notified DVI that the sale shall not include any Option Shares, DVI, directly or indirectly through any of its Subsidiaries or Affiliates, shall only sell any of the DVI Shares if the sale also includes all or the same percentage of the Option Shares as the percentage of all the DVI Shares sold. If necessary, DVI, directly or indirectly through any of its Subsidiaries or Affiliates, shall reduce the number of DVI Shares to be sold in order to sell the required number of Option Shares. DVI shall notify FMO of the terms and conditions on which it has decided to sell DVI Shares, and FMO shall have sixty (60) days to decide whether to sell any or all of its Option Shares as herein provided, and DVI, directly or indirectly through any of its Subsidiaries or Affiliates, shall not sell any DVI Shares prior to the expiration of such sixty (60) 14 11 day period. The provisions of the preceding sentence shall apply to any DVI Shares that are not sold on the terms and conditions set forth in any notice to FMO relating to the proposed sale of such DVI Shares within thirty (30) days after the expiration of the sixty (60) day period applicable to such DVI Shares ARTICLE IV NON-COMPETITION PROVISIONS Section 4.01. Competing Activities. So long as any amounts are due and payable to FMO under any of the Transaction Documents, and so long as FMO holds shares in the voting capital of MSF Holding, DVI agrees that it shall not directly or indirectly, alone or in conjunction with others, through Subsidiaries, Affiliates (other than MSF Holding), joint ventures or other business arrangements: (a) develop, own, manage operate, join, control, finance or participate in the ownership, management, operation, control or financing of, or be connected as an officer, director, employee, consultant or otherwise with, any business or enterprise engaged in any business which is competitive with the business of the Co-Borrowers within the Region provided however that DVI may continue to participate in the management, operation and control of Oferil; (b) engage in any other manner, within the Region, in any business which is competitive with the business of the Co-Borrowers provided, however, that DVI may engage in the business of the Co-Borrowers through Oferil (i) if and when such business has first be offered to the Co-Borrowers and the Co-Borrowers have declined participation in such business; (ii) in connection with Oferil's existing portfolio which has not be transferred to MSF or HSF pursuant to the Assignment Agreements; or (c) induce or attempt to induce any customers, suppliers, distributors, officers or employees of the Co-Borrowers to terminate their relationships with or to take any action that would be disadvantageous to the business of the Co-Borrowers. For the purposes of this Section, the "business of the Co-Borrowers" shall be defined as the financing, through leases, loans or otherwise, of medical equipment. Section 4.02. Acknowledgments of DVI. DVI acknowledges that the period of restrictions and the restraints imposed by Section 4.01 are reasonably 15 12 required for the protection of FMO and the Co-Borrowers. In the event that any of the provisions contained in this Agreement relating to the period of restriction or the scope of such restrictions, as set forth in Section 4.01, shall be deemed by a court of competent jurisdiction to exceed the maximum periods of time which such court would deem enforceable, or to exceed the enforceable scope of such provisions, the period or scope of such restriction, as the case may be, shall, for purposes of this Agreement, be deemed to be the maximum time period or maximum scope which such court would deem valid and enforceable. DVI further acknowledges that any violation of the covenants contained in Section 4.01 is likely to cause irreparable damage to FMO and the Co-Borrowers and, if proven to the satisfaction of a court of competent jurisdiction, it may be restrained in an action instituted by FMO or the Co- Borrowers by process issued out of such court, in addition to any other legal or equitable remedies provided by law. 16 13 ARTICLE V PUT OPTION Section 5.01. Put Option FMO, in its discretion, shall have the right at any time, at one or more times and from time to time during the Exercise Period to sell to DVI, and to require DVI to purchase (and DVI shall be obligated to purchase), all or a portion of the Option Shares at the Exercise Price, in accordance with the provisions of this Article. Section 5.02. Notice of Exercise The Put Option may be exercised by FMO in respect of all or some of the Option Shares at any time, in one or more times and from time to time during the Exercise Period by delivery of a Notice of Exercise, executed by FMO and duly delivered to DVI. Section 5.03. Commitment of DVI Subject to the terms and conditions set forth herein, DVI hereby unconditionally, absolutely and irrevocably agrees to purchase from FMO, on the Settlement Date, at the Settlement Place and at the Exercise Price, all of the Option Shares in respect to which an Exercise Notice shall have been duly issued by FMO and delivered to DVI. Section 5.04. Settlement Upon receipt of a Notice of Exercise, DVI shall, on the Settlement Date and at the Settlement Place, purchase all of the Option Shares in respect to which such Exercise Notice was issued and shall make all necessary arrangements to pay, and shall pay, the Exercise Price in full, in Dollars in immediately available funds by wire transfer to the account so designated by FMO in the Notice of Exercise, it being understood that such payment shall be made to FMO without any set-off, counterclaim and condition and without any deduction whatsoever for fees, taxes, duties, expenses, costs or other charges howsoever called, all of which shall be borne by DVI. Section 5.05. Share Certificates FMO shall, on the Settlement Date, but only after receipt of the Exercise Price, transfer to DVI or its assigns the respective certificates representing the Option Shares so sold, free and clear of Liens, charges and encumbrances, duly endorsed in property (en propriedad) by FMO in the name of DVI and together with such instruments of transfer, if any, as shall be required by the laws of the Commonwealth of the Bahamas or the State of Delaware, USA to effect the transfer. Section 5.06. Right of Transfer. Without prejudice to any remedies available to FMO under this Agreement or otherwise, and notwithstanding any other provision of this Agreement to the contrary, in the event that DVI shall fail to pay to FMO in full in Dollars the Exercise Price on or before the Settlement 17 14 Date at the Settlement Place, FMO, at its sole discretion and by prior written notice to DVI, shall be free to: (i) sell, transfer or otherwise dispose of any or all of such Option Shares, provided, however, that in the event of any such sale, transfer or other disposition of such Option Shares, the provisions of this Agreement (including, without limitation, the obligation of DVI to purchase the Option Shares) with respect to the portion of the Option Shares so sold, transferred or otherwise disposed of, shall have no further force or effect; provided, further, that DVI shall remain obligated to pay to FMO the Exercise Price, but reduced by an amount equal to the net proceeds, if any, received by FMO from such sale, transfer or disposition of such Option Shares; and/or (ii) cancel, in whole or in part, the relevant Notice of Exercise and the sale of all or part of the Option Shares to be made pursuant thereto, without penalty of any kind to FMO and without prejudice to any other right, remedies, powers and remedies of FMO hereunder or elsewhere. Section 5.07. Obligations Irrevocable, Absolute and Unconditional. (a) The obligations of DVI under this Article V are firm, unconditional, absolute and irrevocable and shall not be terminated, suspended or affected in any manner by the deterioration of DVI's or the Co-Borrowers' financial situation, the interruption of DVI's or the Co-Borrowers' operations, the insolvency of any of the Co-Borrowers, the filing of any bankruptcy procedure or any similar procedure against any of the Co-Borrowers or any other circumstances whatsoever. (b) DVI's obligations hereunder can be discharged only by performance and then only to the extent of such performance. (c) The Put Option shall continue to be effective or be reinstated, as the case may be, if at any time any payment of any of the Exercise Price is rescinded or must otherwise be returned by FMO or any other person upon the insolvency, bankruptcy or reorganization of any person or otherwise, all as though such payment had not been made. Section 5.08. Term of the Put Option. (a) The provisions of this Article V shall be effective from the date hereof and shall continue to be in full force and effect until the last to occur of (A) the first date on which MSF Holding shall be deemed to have become a public company as provided in subsection (b) below, (B) the date on which the Exercise Price shall no longer be subject to recession or 18 15 return pursuant to Section 5.08(c) hereof, (C) the date on which the right of MSF Holding to the FMO Subscription under the Investment Agreement shall have been canceled and (D) the date which is the eighth anniversary date of this Agreement. (b) MSF Holding shall be deemed to have become a public company when all the requirements set out below have been fully satisfied: (i) MSF Holding shall have delivered to FMO a notice, in form and substance satisfactory to FMO, signed by an authorized representative of MSF Holding certifying that (A) all legal, governmental, corporate, creditors', and other necessary licenses, approvals or consents required to be obtained or fulfilled under the laws, rules, procedures and regulations of the applicable Stock Exchange, any other applicable laws and MSF Holding's Memorandum and Articles of Association or other relevant constitutive documents; to become a public company, have been duly fulfilled, granted and obtained by MSF Holding and all such licenses, approvals or consents have become irrevocable and unconditional under their relevant terms; and (B) no Event of Default or suspension and cancellation of the FMO Subscription and no Triggering Event shall have occurred or be continuing; (ii) FMO shall have received a certificate from the Stock Exchange or other documentation satisfactory to FMO establishing that (A) Shares representing at least thirty percent (30%) of the outstanding share capital of MSF Holding were placed within a period not to exceed forty-five (45) consecutive calendar days counting from the day on which such shares were originally made available for subscription by the public; provided, that for purposes of the calculation referred to in Section 5.08(b)(ii)(A), any Shares offered in an initial public offering and subscribed by, or any Shares traded by or on behalf of, any of the Co-Borrowers or DVI or any Subsidiary or Affiliate shall be excluded and FMO has received documentation satisfactory to FMO establishing that the Shares are actively traded; (iii) FMO shall have received a legal opinion or opinions, in form and substance acceptable to FMO of counsel acceptable to it in (A) the Commonwealth of the Bahamas, and (B) such other jurisdiction as FMO shall deem appropriate, and concurred in by counsel for MSF Holding, 19 16 with respect to the matters referred to in paragraph (i) above and such other matters incident to the opening of the capital of MSF Holding and the trading of the Shares in such Stock Exchange as FMO shall reasonably request; and (iv) FMO shall have delivered to MSF Holding a notice stating that the notice from MSF Holding, the confirmation by such Stock Exchange and the legal opinions referred to in paragraphs (i), (ii) and (iii) above are acceptable to FMO, and such notice shall not be unreasonably withheld by FMO. Section 5.09. Cancellation of the Put Option. Notwithstanding anything to the contrary provided in this Article V, FMO may, at its own discretion, at any time prior to the relevant Settlement Date, by notice to DVI, cancel the relevant Notice of Exercise and the sale of Option Shares to be made pursuant thereto. In such event, FMO agrees to reimburse DVI for any reasonable expenses incurred theretofore by them as a result of or in connection with the relevant Notice of Exercise that has been canceled by FMO. Section 5.10. Required Documentation. For the purposes of calculating the Exercise Price, DVI agrees to cause MSF Holding to, and MSF Holding agrees to, furnish to FMO: (i) within ninety (90) days after the commencement of a Fiscal Year, the audited financial statements of each of the Co-Borrowers for the immediately preceding Fiscal Year; (ii) within sixty (60) days after the commencement of a fiscal quarter of a Fiscal Year, the unaudited financial statements of each of the Co-Borrowers for the immediately preceding fiscal quarter of such Fiscal Year; and (iii) only if so requested by FMO for purposes of calculating the Exercise Price, special audited financial statements of the Co-Borrowers for the immediately preceding fiscal quarter of such Fiscal Year (such audit to be at the cost of the Co-Borrowers, which special audited quarterly financial statements shall be delivered to FMO within forty-five (45) days after the date of the notice of request sent by FMO to DVI in this respect). 20 17 ARTICLE VI MISCELLANEOUS Section 6.01. Waivers. (a) DVI and each of the Co-Borrowers hereby irrevocably waives, to the extent permitted by applicable laws, any defenses, rights, claims, counterclaims, remedies and powers that it may now or hereafter have in any way relating to any or all of the following: (i) any lack of validity or enforceability of the Investment Agreement, the other Transaction Documents or any agreement or instrument relating thereto; (ii) any change in the time, manner or place of payment of, or in any other term of or relating to, all or any obligations of any person under the Investment Agreement or any other Transaction Document, or any other amendment or waiver of or any consent to departure from the Investment Agreement or any other Transaction Document; (iii) any change, restructuring, reorganization, merger, consolidation, liquidation or termination of the corporate structure or existence of any of the Co-Borrowers or DVI, or any of their respective Subsidiaries, or any change in the ownership of any shares of the capital stock of any of such entities; (iv) any failure of FMO to disclose to the Co-Borrowers or DVI any information relating to the financial condition, operations, properties or prospects of any other person now or in the future known to FMO; (v) the occurrence and/or continuance of any bankruptcy, reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency, liquidation or similar proceedings with respect to DVI, any of the Co-Borrowers or any other person; (vi) the existence of any claim, setoff, defense or other right which DVI or the Co-Borrowers may have against DVI or any of the Co-Borrowers, FMO or any other person; 21 18 (vii) all requirements as to promptness, diligence, presentment, demand, protest or notice of any kind with respect to any obligations of any party (other than FMO) under either this Agreement, the Investment Agreement or any other Transaction Document; (viii) any right to require FMO to proceed against DVI, any of the Co-Borrowers or any other person, or to pursue any other remedy, action or power whatsoever within the power of FMO; (ix) any right arising out of the absence of request of payment (judicial or otherwise) by FMO to DVI or any of the Co-Borrowers; (x) any right to revoke or terminate this Agreement, except as established in Sections 5.09. and 6.08 hereof; (xi) any assertion of, or failure to assert, or delay in asserting, any right, power or remedy against any party in respect of any Triggering Event; (xii) any failure of any of the Transaction Documents to comply with any requirement of any applicable laws; (xiii) any purported or actual assignment or transfer of any of the Option Shares by FMO to any other party; (xiv) any Transaction Document being in whole or in part illegal, void, voidable, voided, unenforceable or otherwise of limited force and effect; or (xv) any other circumstance (including, without limitation, any statute of limitations) or any existence of or reliance on any representation by FMO that might otherwise constitute a defense available to, or a discharge of, DVI. (b) DVI and each of the Co-Borrowers acknowledges that it will receive substantial direct and indirect benefits from the FMO Subscription contemplated by the Transaction Documents and that the waivers set forth in subsection (e) above are knowingly made in contemplation of such benefits. Section 6.02. MSF Holding as Agent for Communication. So long as any amounts are due and payable to FMO under any of the Transaction Documents, 22 19 and so long as FMO holds shares in the voting capital of MSF Holding, any notice, request or other communication to be given by FMO to MSF, Estolur and HSF under the term of this Agreement and each Transaction Document may, at the option of FMO and without prejudice to its right to communicate directly with MSF, Estolur and HSF, be addressed to MSF Holding, as agent, which is hereby irrevocably authorized and directed by MSF, Estolur and HSF to act as agent for it in such matter, and MSF Holding hereby accepts such appointment. (b) Each of MSF, Estolur and HSF hereby irrevocably appoints MSF Holding to act as its agent to give any notice, request or other communication to be given by MSF, Estolur and HSF under the terms of this Agreement and each Transaction Document, and MSF Holding accepts such appointment. Section 6.03. Notices. Any notice given under this Agreement shall be in writing and shall be deemed to have been duly given when delivered by hand, airmail or facsimile, established courier service or telex to the party's address specified below or at such other address as such party notifies to the other party from time to time and will be effective upon receipt or, in the case of delivery by hand or by established courier service, upon refusal to accept delivery. 23 20 For DVI: 500 Hyde Park Doylestown, PA 18901 USA Attn.: Mr. Michael A. O'Hanlon Facsimile: 215-230 8108 Telex: ___________ For the Co-Borrowers: MSF Holding EuroCanadian Centre Marlborough Street P.O. Nassau Bahamas N-8327 Bahamas Facsimile: 242-3266177 For FMO: Nederlandse Financierings-Maatschappij voor Ontwikkelingslanden N.V. P.O. Box 93060 2509 AB The Hague The Netherlands Facsimile: 31 70 32 461 87 Section 6.04. English Language. All documents to be furnished or communications to be given or made under this Agreement shall be in the English language or, if in another language, shall, if FMO so requests, be accompanied by a translation into English satisfactory to FMO certified by a representative of DVI or the Co-Borrowers, as the case may be, which translation shall be the governing version among DVI, the Co-Borrowers and FMO. 24 21 Section 6.05. Fees and Expenses. DVI and the Co-Borrowers shall pay to FMO or as FMO may direct all taxes, including stamp taxes, duties, fees or other charges payable in connection with the execution, delivery, registration or notarization of this Agreement and shall pay: (a) the fees and expenses of FMO's counsel in the Bahamas, Uruguay, New York, Delaware and any jurisdiction in which any of the Co-Borrowers conducts business, incurred in connection with: (i) the preparation and/or review, execution and, if appropriate, registration of this Agreement and any other documents related to this Agreement; (ii) the giving of any legal opinions required by FMO under this Agreement; and (iii) any amendment, supplement or modification to, or waiver under this Agreement or any of the Transaction Documents; (b) the costs and expenses incurred by FMO in relation to the enforcement or protection or attempted enforcement or protection of its rights under this Agreement, including legal and other professional consultants' fees; and (c) any costs or expenses incurred by FMO or losses suffered as a result of DVI's failure to pay to FMO in full in Dollars the Exercise Price on or before the Settlement Date at the Settlement Place. Section 6.06. Financial Calculations. (a) All financial calculations to be made under, or for the purposes of, this Agreement shall be determined in accordance with U.S. generally accepted accounting principles applied on a consistent basis and, except as otherwise required to conform to the definitions contained in the Investment Agreement, shall be calculated from the then most recently issued quarterly financial statements which each of the Co-Borrowers is obligated to furnish to FMO under Sections 7.01(c) and (d) of the Investment Agreement. (b) If the relevant quarterly financial statements are in respect of the last quarter of a Fiscal Year then, at FMO's option, such calculations may instead be made from the audited financial statements for the relevant Fiscal Year. (c) If any material adverse change in the financial condition of any of the Co-Borrowers after the end of the period covered by the relevant financial 25 22 statements has occurred, such material adverse change shall also be taken into account in calculating the relevant figures. Section 6.07. Termination of Agreement. Except as otherwise provided herein, this Agreement shall continue in force for as long as any amounts are due and payable to FMO under any of the Transaction Documents. Notwithstanding the above, the provisions of Article IV and, subject to the provisions of Section 5.09 hereof, Article V shall survive the termination or cancellation of the Investment Agreement or any other Transaction Document if FMO continues to hold any FMO Shares notwithstanding such termination or cancellation. Section 6.08. Severability. (a) The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement which shall remain in full force and effect. Section 6.09 Applicable Law and Jurisdiction. (a) This Agreement is governed by, and shall be construed in accordance with, the laws of the State of New York, United States of America. (b) Each of DVI and the Co-Borrowers irrevocably agrees that any legal action, suit or proceeding arising out of or relating to this Agreement or any other Transaction Document to which DVI or any of the Co-Borrowers is a party may be brought by FMO in the courts of the State of New York or of the United States of America located in the Southern District of New York. Final judgment against DVI or any of the Co-Borrowers in any such action, suit or proceeding shall be conclusive and may be enforced in any other jurisdiction, including the Bahamas or Uruguay, by suit on the judgment, a certified or exemplified copy of which shall be conclusive evidence of the judgment, or in any other manner provided by law. (c) By the execution and delivery of this Agreement, each of DVI and the Co-Borrowers irrevocably submits to the non-exclusive jurisdiction of any such court in any such action, suit or proceeding and each of the Co-Borrowers designates, appoints and empowers CT Corporation System, 1633 Broadway New York NY 10019, New York as its authorized agent to receive for and on its behalf service of any summons, complaint or other legal process in any such action, suit or proceeding in the State of New York. (d) Nothing in this Agreement shall affect the right of FMO to commence legal proceedings or otherwise sue DVI or any of the Co-Borrowers in the Bahamas or Uruguay or any other appropriate jurisdiction, or concurrently in more than one jurisdiction, or to serve process, pleadings and other legal papers 26 23 upon DVI or any of the Co-Borrowers in any manner authorized by the laws of any such jurisdiction. (e) As long as this Agreement remains in force, each of the Co-Borrowers shall maintain a duly appointed agent for the service of summons, complaint and other legal process in New York, New York, United States of America, for purposes of any legal action, suit or proceeding FMO may bring in respect of this Agreement or any other Transaction Document to which any of the Co-Borrowers is a party. Each of the Co-Borrowers shall keep FMO advised of the identity and location of such agent. (f) Each of the Co-Borrowers also irrevocably consents, if for any reason any of the Co-Borrower's authorized agent for service of process of summons, complaint and other legal process in any such action, suit or proceeding is not present in New York, New York, to service of such papers being made out of those courts by mailing copies of the papers by registered United States air mail, postage prepaid, to any of the Co-Borrowers, as the case may be, at its address specified in Section 6.03. In such a case, FMO shall also send by telex or facsimile, or have sent by telex or facsimile, a copy of the papers to such Co-Borrower, as the case may be. (g) Service in the manner provided in subsection (f) above in any such action, suit or proceeding will be deemed personal service, will be accepted by the Co-Borrowers, as the case may be, as such and will be valid and binding upon the Co-Borrowers, as the case may be, for all purposes of any such action, suit or proceeding. (h) Each of DVI and the Co-Borrowers irrevocably waives to the fullest extent permitted by applicable law: (i) any objection which it may have now or in the future to the laying of the venue of any such action, suit or proceeding in any court referred to in this Section; (ii) any claim that any such action, suit or proceeding has been brought in an inconvenient forum; and (iii) its right of removal of any matter commenced by FMO in the courts of the State of New York to any court of the United States of America. (i) To the extent that DVI or any of the Co-Borrowers may be entitled in any jurisdiction to claim for itself or its assets immunity in respect of its obligations under this Agreement or any other Transaction Document to which 27 24 such Co-Borrower is a party from any suit, execution, attachment (whether provisional or final, in aid of execution, before judgment or otherwise) or other legal process or to the extent that in any jurisdiction such immunity (whether or not claimed) may be attributed to it or its assets, each of DVI and the Co-Borrowers irrevocably agrees not to claim and irrevocably waives such immunity to the fullest extent permitted by the laws of such jurisdiction. (j) Each of DVI and the Co-Borrowers hereby acknowledges that FMO shall be entitled under applicable law, including the provisions of the International Organizations Immunities Act, to immunity from a trial by jury in any action, suit or proceeding arising out of or relating to this Agreement or the transactions contemplated hereby or any other Transaction Document to which any of DVI or the Co-Borrowers is a party, brought against FMO in any court of the United States of America. Each of DVI and the Co-Borrowers hereby waives any and all rights to demand a trial by jury in any action, suit or proceeding arising out of or relating to this Agreement or any other Transaction Document to which any of DVI or the Co-Borrowers is a party or the transactions contemplated by this Agreement or such Transaction Documents, brought against FMO in any forum in which FMO is not entitled to immunity from a trial by jury. (k) To the extent that DVI or any of the Co-Borrowers may, in any suit, action or proceeding brought in any of the courts referred to in paragraph (b) above or a court of the Bahamas, Uruguay or elsewhere arising out of or in connection with this Agreement or any other Transaction Document to which DVI or any of the Co-Borrowers is a party, be entitled to the benefit of any provision of law requiring FMO in such suit, action or proceeding to post security for the costs of DVI or any of the Co-Borrowers (cautio judicatum solvi), or to post a bond or to take similar action, each of DVI and the Co-Borrowers hereby irrevocably waives such benefit, in each case to the fullest extent now or in the future permitted under the laws of the Bahamas, Uruguay or, as the case may be, the jurisdiction in which such court is located. Section 6.10 Successors and Assigns. This Agreement binds and benefits the respective successors and assigns of its parties. However the Co-Borrowers may not assign or delegate any of their respective rights or obligations under this Agreement without FMO's consent. Section 6.11 Amendment. Any amendment of any provision of this Agreement shall be in writing and signed by the parties. Section 6.12 Counterparts. This Agreement may be executed in several counterparts, each of which is an original, but all of which together constitute one and the same agreement. 28 25 Section 6.13 Remedies and Waivers. No failure or delay by FMO in exercising any power, remedy, discretion, authority or other rights under this Agreement shall waive or impair that or any other right of FMO. No single or partial exercise of such a right shall preclude its additional or future exercise. No such waiver shall waive any other right under this Agreement. All waivers or consents given under this Agreement shall be in writing. 29 26 IN WITNESS WHEREOF, the parties have caused this Agreement to be signed in their respective names as of the date first above written. DVI, Inc By ___________________________ Authorized Representative MSF HOLDING LTD. By ___________________________ Authorized Representative CADILUR S.A. By ___________________________ Authorized Representative ESTOLUR S.A. By ___________________________ Authorized Representative NATULER S.A. By ___________________________ Authorized Representative NEDERLANDSE FINANCIERINGS-MAATSCHAPPIJ 30 27 VOOR ONTWIKKELINGSLANDEN N.V. By ___________________________ Authorized Representative EX-10.21 5 GUARANTY AGREEMENT 1 EXHIBIT 10.21 GUARANTY AGREEMENT THIS GUARANTY (this "GUARANTY") dated as of April 27, 1998, is made by DVI, Inc., a Delaware corporation (the "GUARANTOR") in favor of Cadilur S.A. ("CADILUR") and Natuler S.A. ("NATULER"), each a corporation organized and existing under the laws of Uruguay. RECITALS WHEREAS, each of Cadilur and Natuler (herein individually referred to as a "COMPANY" and collectively referred to as "THE COMPANIES") is a commercial finance company organized and existing under the laws of Uruguay, and is in the business of financing and leasing medical equipment; and WHEREAS, Oferil, S. A. ("OFERIL") intends to enter into various assignment agreements with each of the Companies and pursuant to each such agreement, Oferil will sell and transfer to each of the Companies from time to time certain lease and loan receivables; and WHEREAS, Guarantor is the indirect owner of all of the issued and outstanding capital stock of Oferil, and as such will benefit from the sale of the lease and loan receivables to the Companies; and WHEREAS, Guarantor's indirect wholly-owned subsidiary, DVI International, Inc., owns approximately 48.12 per cent of the issued and outstanding voting stock of MSF Holding Ltd. ("MSF HOLDING"), which in turn owns 100% of the issued and outstanding stock of the Companies, and as such, the Guarantor will obtain substantial direct and indirect benefit from the Companies' purchase of the receivables; and WHEREAS, it is a condition to the Companies' purchase of the receivables that this Guaranty Agreement be executed and delivered by Guarantor in favor of the Companies and be in continuous full force and effect. NOW, THEREFORE, in consideration of the foregoing Recitals and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound, Guarantor hereby covenants and agrees with the Companies as follows: Section 1. Definitions. For the purpose of this Guaranty, the following terms shall have the following meanings: 1 2 (a) "DEFAULT" shall mean the failure of an Obligor (as hereinafter defined) to make on the due date a regularly scheduled payment under the lease or loan agreement which is the basis for such Obligor's Obligation (as hereinafter defined) and such failure to pay continues for a period of sixty (60) days after the due date therefor. (b) "INVESTMENT BALANCE," with respect to an Obligation shall mean an amount equal to the Purchase Price of such Obligation paid by a Company to Oferil as set forth on the applicable Schedule to this Guaranty, minus any principal payments received by the Company in respect of such Obligation. (c) "LOSS AMOUNT" shall have the meaning given that term in Section 3(c) below. (d) "LOSS RECOGNITION" shall have the meaning given that term in Section 3(b) below. (e) "NET LOSSES" shall mean the aggregate Loss Amounts paid by the Guarantor under Section 3(c), less any such Loss Amounts which relate to Obligations that were subsequently purchased by Guarantor under Section 4(a) below. (f) "OBLIGATION" shall mean the payment and performance obligations of a lessee or borrower, as applicable, under a lease or loan agreement, including any guaranties or collateral security agreements given in connection with such agreements. (g) "OBLIGOR" shall mean a lessee or borrower under or with respect to an Obligation. (h) "PORTFOLIO PRICE" in effect from time to time, shall mean the aggregate of all of the Purchase Prices paid by the Companies to Oferil for the acquisition of all of the Obligations which are then subject to this Guaranty, excluding any Obligations which have been previously purchased by Guarantor pursuant to Section 4(a). (i) "PURCHASE PRICE" of an Obligation shall mean the amount paid by a Company to Oferil for the acquisition of such Obligation as set forth on the applicable Schedule (as hereinafter defined) to this Guaranty. (j) "RECOVERIES" shall mean any payments received by Guarantor under its subrogation rights in Section 5 below in reimbursement for any Loss Amount paid by Guarantor under this Guaranty. (k) "SCHEDULE" shall mean a schedule to this Guaranty, in the form of EXHIBIT A hereto and incorporated herein by reference, executed from time to time by Guarantor and the applicable Company, and setting forth the Obligations subject to this Guaranty and the Purchase Price related to such Obligations. 2 3 Section 2. Guaranty. (a) Subject to the limitations set forth in subsections (b) through (d) below, the Guarantor hereby unconditionally, absolutely and irrevocably guarantees the full payment to the Companies of each Obligation set forth on a Schedule to this Guaranty, in accordance with the terms and conditions set forth in this Guaranty. Guarantor agrees to execute a new Schedule to this Guaranty from time to time upon the transfer of additional loan and lease receivables from Oferil to the Companies pursuant to the assignment agreements, in order to evidence the addition of such Obligations under this Guaranty. (b) Notwithstanding anything to the contrary contained in this Guaranty, Guarantor's aggregate liability as of any date with respect to Defaults under all Obligations shall be limited to a maximum amount equal to twenty percent (20%) of the Portfolio Price then in effect (the "MAXIMUM LIABILITY"). (c) Upon the purchase by the Guarantor of any Obligation in Default pursuant to Section 4(a) below, the Maximum Liability shall be recalculated by reducing the Portfolio Price by the original Purchase Price of such Obligation and multiplying the result by twenty per cent (20%). (d) Guarantor's liability with respect to any individual Obligation in Default shall not exceed the Maximum Liability then in effect, less the aggregate Net Losses previously paid by Guarantor under Section 3(c) below. In making such calculations, Net Losses shall be decreased by the amount of any Recoveries received by the Guarantor under the subrogation provisions of this Guaranty. Section 3. Claim Procedure. (a) Within fifteen (15) days after the date on which any Obligation goes into Default, the applicable Company shall notify Guarantor in writing of such Default. (b) Such Company shall make a good faith effort to notify the Guarantor at least ten (10) days prior to the expected recognition by the Company of a write down of the loan value (determined in accordance with the Company's customary accounting practices under generally accepted accounting principles) in connection with such Obligation in Default (a "LOSS RECOGNITION"). Such notice shall include a statement of the Investment Balance of such Obligation remaining unpaid. (c) The Company shall notify the Guarantor when a Loss Recognition has actually occurred and Guarantor shall, within ten (10) days after receipt of such notice, pay to the Company the sum of (i) the amount of the write down of the loan value, (ii) interest income lost as a result of the non-accrual status of such Obligation, and (iii) reasonable out of pocket costs and expenses incurred by the Company in collecting and enforcing the Obligation (such sum 3 4 being hereinafter referred to as the "LOSS AMOUNT"), provided however, that Guarantor shall not be required to pay any Loss Amounts which would cause the Net Losses paid by Guarantor under this Section 3(c), less any Recoveries received by Guarantor, to exceed the Maximum Liability then in effect. Section 4. Purchase Option (a) At any time after receipt of the Default notice required under 3(a) above but prior to any cure of such Default by the Obligor, the Guarantor may, at its option and in its sole discretion, and without any obligation to do so, purchase the Obligation from the Company for a purchase price equal to one hundred per cent (100%) of the Investment Balance of such Obligation as of the date of such payment. (b) As soon as reasonably practicable after payment by the Guarantor of the Investment Balance required under Section 4(a) above for the purchase by Guarantor of an Obligation, the Company shall convey to the Guarantor in form reasonably satisfactory to the Guarantor, free and clear of any liens, claims or encumbrances created by or through the Company, all of the Company's right, title and interest in and to such Obligation and all instruments, documents, guaranties, proceeds and collateral security related to such Obligation. (c) Upon purchase of an Obligation by the Guarantor, the parties acknowledge that such Obligation will be removed from the servicing agreement between the applicable Company and Estolur, S.A., an affiliate of the Companies ("ESTOLUR"), and will be transferred to the servicing agreement in place between Estolur and Oferil, at the standard rates provided for in such servicing agreement, except that Guarantor shall be responsible for any out of pocket costs and expenses of collection and enforcement undertaken by Estolur at the Guarantor's request in connection with such delinquent Obligation. Section 5. Subrogation. (a) Guarantor shall be subrogated to the rights of the Companies against the Obligor and against any collateral security or guaranty held by the Companies for the payment of the Obligations in respect of payments made by the Guarantor hereunder. (b) In the event that Guarantor makes any payments to the Company under subsection 3(c) above, Guarantor shall succeed to the Company's rights with respect to such payment as more fully set forth below: (i) the Company shall pursue collection and enforcement of the Obligation in Default in accordance with the Company's normal and customary business practices; (ii) In the event that the Loss Amount equals or exceeds the remaining Investment 4 5 Balance, with respect to such defaulted Obligation, the Company shall convey to Guarantor in form reasonably satisfactory to the Guarantor, free and clear of any liens, claims or encumbrances created by or through the Company, all of the Company's right, title and interest in the defaulted Obligation and shall deliver to Guarantor all instruments, documents, guaranties and collateral security related to such Obligation; (iii) In the event that the Company receives or collects any payment from or on behalf of an Obligor for a defaulted Obligation for which the Company has already received payment of the Loss Amount from Guarantor under subsection 3(c) above or payment of the Investment Balance under subsection 4(a) above, the Company shall pay such sums over to the Guarantor. Section 6. Continuing Guaranty. (a) This Guaranty 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 such Obligations are guaranteed by individuals or entities in addition to the Guarantor, the death, release, or discharge, in whole or part or the bankruptcy, liquidation, termination, or dissolution of one or more of them shall not discharge or affect the liabilities of the Guarantor hereunder. (b) The Guarantor's obligations under this Guaranty shall not be affected by (i) the genuineness, validity, or enforceability of the Obligations or of any instrument evidencing the Obligations, (ii) the existence, validity, enforceability, perfection, or extent of any collateral for the Obligations, (iii) the consolidation or merger of either of the Companies with or into any other corporation or corporations or any sale, lease or other disposition of either of the Companies' properties as an entirety or substantially as an entirety to any other corporation, (iv) any modifications, waivers or amendments to any of the Obligations, or (v) any other circumstance relating to the Obligations which might otherwise constitute a discharge of or defense, it being the purpose and intent of the parties hereto that the obligations of the Guarantor hereunder shall be absolute and unconditional under any and all circumstances, and shall not be discharged except by payment as herein provided, and then only to the extent of such payment or payments. Section 7. No Waiver; Cumulative Rights. No failure on the part of the Companies to exercise, and no delay in exercising, any right, remedy, or power under this Guaranty shall operate as a waiver thereof, nor shall any single or partial exercise by the Companies 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 Companies or allowed them by law or other agreement shall be cumulative and not exclusive of any other. 5 6 Section 8. Waiver of Notice. Except as required otherwise herein, the Guarantor waives notice of the acceptance of this Guaranty, presentment or demand, notice of dishonor or non-payment, protest, diligence, suit, and all notices that may otherwise be required by law, except for such notices as are expressly required by the terms of this Guaranty. Section 9. Representations and Warranties. The Guarantor makes each of these representations and warranties as of the date hereof: (a) The Guarantor is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has full corporate power and authority to execute, deliver, and perform this Guaranty. (b) The execution, delivery, and performance of this Guaranty have been duly authorized by all necessary corporate action and do not contravene any provision of the Guarantor's charter or by-laws, or any material law, regulation, rule, decree, order, judgment, or contractual restriction binding on the Guarantor or its assets. (c) All consents, licenses, authorizations, registrations and approvals of any governmental authority or regulatory body necessary for the due execution, delivery, and performance of this Guaranty 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 Guaranty. (d) This Guaranty constitutes the legal, valid, and binding obligation of the Guarantor and is enforceable against the Guarantor in accordance with its terms, subject as to enforceability to bankruptcy, insolvency, reorganization, moratorium, receivership, and other laws of general applicability relating to or affecting creditors' rights generally and to equitable principles of general application. (e) The execution and delivery by the Guarantor of this Guaranty and the performance by it hereunder will not violate any provision of law and will not conflict with or result in a breach of any order, writ, injunction, ordinance, resolution, decree or other similar document or instrument of any court or governmental authority, bureau or agency, domestic or foreign, or create a default under or breach of any material agreement, bond, note or indenture to which the Guarantor is a party, or by which it is bound or any of its properties or assets is affected. Section 10. Assignment. The Guarantor may not assign its rights, interests, or obligations under this Guaranty to any other person without the prior written consent of the Companies and any purported assignment in the absence of such consent shall be void. 6 7 Section 11. Governing Law. This Guaranty shall be governed by, and construed in accordance with, the internal laws of the State of New York, United States of America. Section 12. Notices; Payments. (a) Any notice or communication in respect of this Guaranty 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: If to the Guarantor: DVI, Inc. 500 Hyde Park Doylestown, Pennsylvania 18901 Attention: President Telephone: (215) 230-2903 Telecopy: (215) 345-4428 If to the Companies: Cadilur S.A. Plaza Independencia 811, P.B. (11000) Montevideo Republica Oriental del Uruguay Attention: Mr. Jozef Osten Telephone: (561) 417-7040 Fax: (561) 417-7050 Natuler S.A. Plaza Independencia 811, P.B. (11000) Montevideo Republica Oriental del Uruguay Attention: Mr. Jozef Osten Telephone: (561) 417-7040 Fax: (561) 417-7050 Any such notice or communication shall be sufficiently given only upon actual receipt. (b) All payments made by the Guarantor under or by virtue of this Guaranty shall be paid to the Companies at such place as shall be specified from time to time by notice given pursuant to this Section. 7 8 Section 13. Successors and Assigns. This Guaranty shall be binding upon the Guarantor and its permitted successors and assigns, and shall inure to the benefit of the Companies and their respective successors and assigns. This Guaranty embodies the entire agreement and understanding between the Companies and the Guarantor relating to the subject matter hereof and supersedes all prior agreements and understandings relating to the subject matter hereof. IN WITNESS WHEREOF, this Guaranty has been duly executed and delivered by the parties hereto as of the date first above written. DVI, INC. CADILUR S.A. By: __________________________ By: __________________________ Title: Title: Vice Chairman Name: Steven R. Garfinkel Name: Steven R. Garfinkel NATULER S.A. By: ________________________ Title: Vice Chairman Name: Steven R. Garfinkel 8 9 EXHIBIT A FORM OF SCHEDULE TO GUARANTY SCHEDULE NUMBER ____ TO GUARANTY DATED APRIL 27, 1998 This Schedule No. ___ dated as of _____________, 1998, is issued pursuant to that certain Guaranty Agreement dated April 27, 1998 (the "GUARANTY") by DVI, Inc., a Delaware corporation (the "GUARANTOR") in favor of Cadilur S.A. ("CADILUR") and Natuler S.A. ("NATULER"). All capitalized terms used herein, unless otherwise defined herein, have the same meaning given them in the Guaranty. Pursuant to the terms and conditions of the Guaranty, the parties hereto hereby agree that the Obligations set forth below shall be Obligations subject to the Guaranty from and after the date hereof: OBLIGOR LEASE/LOAN PURCHASE PRICE IN WITNESS WHEREOF, the parties have executed this Schedule No. __ as of the year first above written. DVI, INC. CADILUR S.A. By: __________________________ By: __________________________ Title: Title: Name: Name: NATULER S.A. By: __________________________ Title: Name: 9 EX-10.22 6 LIMITED PARTNERSHIP INTEREST PURCHASE AGREEMENT 1 EXHIBIT 10.22 LIMITED PARTNERSHIP INTEREST PURCHASE AGREEMENT THIS LIMITED PARTNERSHIP INTEREST PURCHASE AGREEMENT (this "AGREEMENT") is made as of the 30th day of June, 1998 by and among Cargill Leasing Corporation, a Delaware corporation ("Cargill") and Third Coast SPC-I, L.L.C., a Delaware limited liability company ("SPC", and together with Cargill, "SELLERS"), Third Coast GP-I, L.L.C., an Illinois limited liability company ("GENERAL PARTNER") and DVI Financial Services Inc., a Delaware corporation ("BUYER"). RECITALS A. Cargill and SPC own all of the limited partnership interests (the "INTERESTS") in Third Coast Venture Lease Partners I, L.P. (the "PARTNERSHIP"). B. Buyer desires to purchase, and Sellers desire to sell the Interests, subject to the terms and conditions of this Agreement. NOW, THEREFORE, for and in consideration of the foregoing recitals and the mutual covenants, agreements, representations and warranties contained in this Agreement, the parties agree as follows: ARTICLE 1 DEFINITIONS 1.1 Certain Definitions. The following terms used in this Agreement have the indicated meanings: "ADVERSE CLAIMS" means all pledges, liens, security interests, charges, mortgages, claims and other encumbrances and third party interests and material defects of title of any nature whatsoever. "AFFILIATE" means with respect to any person or entity, any other person or entity controlling, controlled by or under common control with such person or entity and any officer or director of any such entity. "CLOSING DATE" means June 30, 1998 or such other date as the parties may agree. "CODE" means the Internal Revenue Code of 1986, as amended. "CONTRACTS" means all contracts, agreements, commitments and arrangements, oral or written entered into by the Partnership. "PERMITTED ENCUMBRANCES" means those Adverse Claims listed on Schedule 3.7 hereto. 1 2 1.2 Construction. (a) Unless the context of this Agreement clearly requires otherwise, the plural includes the singular, the singular includes the plural, the part includes the whole, "including" is not limiting, and "or" has the inclusive meaning of the phrase "and/or." The words "hereof," "herein," "hereby," "hereunder," and other similar terms in this Agreement refer to this Agreement as a whole and not exclusively to any particular provision of this Agreement. (b) Neither this Agreement nor any uncertainty or ambiguity herein may be construed or resolved against any party hereto, whether under any rule of construction or otherwise. On the contrary, this Agreement has been reviewed by each of the parties and their respective counsel and is entitled to be construed and interpreted according to the ordinary meaning of the words used so as to accomplish the purposes and intentions of all parties hereto fairly. ARTICLE 2 PURCHASE AND SALE OF INTERESTS; PURCHASE PRICE AND ADJUSTMENTS 2.1 Sale and Transfer of Interests. Subject to and in accordance with the terms and conditions of this Agreement, on the Closing Date, Cargill shall convey, transfer, deliver and assign to Buyer, and Buyer shall accept from Cargill, all of Cargill's Interests. 2.2 Purchase Price. The aggregate purchase price to be paid by Buyer for the Interests and General Partner's consent to the sale thereof is Seven Million Six Hundred Six Thousand Four Hundred Ninety-Four Dollars ($7,606,494.00) (the "PURCHASE PRICE"). Buyer shall pay the Purchase Price to Cargill and the Partnership by wire transfer on the Closing Date as follows: (a) in an amount equal to 99% of the Purchase Price, paid by Buyer to Cargill; and (b) in an amount equal to 1% of the Purchase Price, paid by Buyer to the Partnership for distribution to the General Partner. 2.3 Excise and Property Taxes. Buyer shall pay any and all sales, use, excise, transfer, recordation, documentary and conveyance taxes or fees, except income tax of Sellers, payable or assessable in connection with or as a result of the transfer of the Interests under the terms of this Agreement and the transactions contemplated hereby. Buyer shall not be responsible for any business, occupation, withholding, franchise, income, possessory interest or similar tax or assessment or any other tax or fee of any kind relating to any period on or prior to the Closing Date with respect to Sellers, the Interests or the Partnership, nor for any escape or supplemental assessment or increase in any such tax, assessment or fee relating to such period, all of which are the responsibility of Sellers or the Partnership, as applicable. 2 3 2.4 Partnership Expenses. Other than for GAAP and income tax purposes, income and expenses associated with the Interests through May 31, 1998 is for the account of Cargill and after May 31, 1998 for the account of Buyer. All advance payments to, or monies of, third parties on deposit with the Partnership including advance payments and deposits, will be retained by the Partnership. ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF GENERAL PARTNER As a material inducement to Buyer to enter into this Agreement, General Partner represents and warrants the following for the benefit of Buyer as of the date hereof: 3.1 Organization and Qualification. The Partnership is a limited partnership validly existing and in good standing under the laws of the state of Delaware; and is qualified and licensed to do business and is in good standing in any state in which the conduct of its business or its ownership of property requires that it be so qualified or licensed, and has the power and authority (corporate and otherwise) to execute and carry out the terms of any contracts to which it is a party, to own its assets and to carry on its business as currently conducted. 3.2 Capitalization. The Partnership's authorized capitalization consists solely of general partnership interests all of which are held by General Partner and limited partnership interests, all the economic benefits of which are held by Cargill and a nominal interest being held by SPC (such issued and outstanding limited partnership interests have been previously defined as the "INTERESTS"). All of the Interests have been duly authorized and validly issued, are fully paid and nonassessable, were not issued in violation of any agreement or other understanding, and were issued in compliance with the certificate of limited partnership and the Partnership Agreement of the Partnership and all applicable federal and state securities laws and regulations. The Partnership has no other equity securities or other evidence of ownership of the Partnership outstanding other than the Interests possessed by Sellers and the general partnership interest held by General Partner. There are no outstanding subscriptions, options, warrants, convertible securities, calls, commitments, rights or other contracts to purchase or otherwise acquire, issue, sell or otherwise dispose of any securities of the Partnership. 3.3 Authority. General Partner has the right, power, legal capacity and authority to enter into and perform its obligations under this Agreement and the documents, instruments and certificates to be executed and delivered by it pursuant to this Agreement. The execution, delivery and performance of this Agreement by General Partner and all documents, instruments and certificates made or delivered by it pursuant to this Agreement, and the transactions contemplated thereby, have been duly authorized by all necessary action on the part of General Partner. 3.4 Enforceability. The terms and provisions of this Agreement and all documents, instruments and certificates made or delivered from time to time by General Partner hereunder 3 4 and thereunder constitute valid and legally binding obligations of General Partner, enforceable as against such General Partner in accordance with the terms hereof and thereof. 3.5 Approvals. The execution, delivery and performance of this Agreement by General Partner, do not and will not require any registration with, consent or approval of, notice to, or any action by any person or governmental authority. 3.6 Compliance with Other Instruments. (a) The execution and delivery of this Agreement and the consummation of the transactions contemplated hereunder (i) are not and will not result in a breach or violation of any agreement or instrument by which the Partnership or any of its assets are bound; (ii) will not result in the creation of a lien or Adverse Claim on any assets of the Partnership, and (iii) will not result in a breach or violation of any term or provision of the charter documents of General Partner or any contract, agreement, franchise, license, lease, indenture, mortgage, loan agreement, note, order, permit or judgment as to which General Partner is a party, in each case the effect of which would materially impair, restrict or condition the ability of General Partner to perform its obligations under this Agreement. (b) The Partnership has complied with in all material respects all provisions of, and is not in breach or default under any material franchise, license, lease, indenture, mortgage, loan agreement, note, contract, agreement, commitment, arrangement, order, permit, judgment, instrument or other authorization, right, restriction or obligation to which it is a party or by which it or any of its Assets may be bound or affected. 3.7 Title and Encumbrances. The Partnership has title to its assets, free and clear of Adverse Claims of any nature, whether accrued, absolute, contingent or otherwise, other than Permitted Encumbrances. 3.8 Taxes. All material assessments and taxes, whether real, personal or otherwise, due or payable by or imposed, levied or assessed against the Partnership, or its property have been paid in full before delinquency or before the expiration of any extension period; and the Partnership has made due and timely payment or deposit of all federal, state, and local taxes, assessments, or contributions required of it by law, except only for items that the Partnership is currently contesting diligently and in good faith and that have been fully disclosed in writing to Buyer. 3.9 No Interest in Other Entities. Except as set forth on Exhibit 3.9, the Partnership does not have any investment in or owns any securities of any corporation, association, partnership, joint venture or other organization, public or private, except for certificates of deposit, commercial paper, money market funds and similar money equivalents. 3.10 Certificate of Formation, Partnership Agreement, Minute Books and Interest Books. Copies of the certificate of limited partnership and of the Partnership Agreement of the Partnership have been delivered to Buyer, and they are true, correct and complete copies thereof. 4 5 The Partnership has no minute book. There are no minutes of meetings or consents in lieu of meeting of the General Partner and the limited partners of the Partnership. If any interests are certificated, no duplicate certificate has been issued at any time heretofore; no transfer has been made without surrender of the proper certificate duly endorsed; and all certificates so surrendered have been duly canceled and are attached to the proper stubs with all necessary assignments (or similar documentation) attached thereto. Any stamp taxes on all issues and transfers of interests have been paid. 3.11 Business. The Partnership has all franchises and authorizations legally required to conduct its business, all of which are in full force and effect and are not in known conflict with the rights of others. 3.12 Employees. The Partnership has no and has never had any employees. 3.13 Litigation. (a) There is no claim or controversy, or legal, administrative or other proceeding or governmental investigation, hearing, complaint, appeal, show cause or special relief proceeding pending or, to the knowledge of General Partner after due investigation, threatened against General Partner or affecting any of the Interests or the Partnership and its current and future operations, or which would impair the ability or capacity of General Partner to perform its obligations under this Agreement. Neither the Interests nor the Partnership are subject to any order, writ, injunction, judgment or decree of any federal, state or local court, department, agency or instrumentality, nor has the Partnership received, any written inquiry from any federal, state or local governmental agency concerning the operation of the Partnership which remains unresolved on the date of this Agreement. (b) There are no proceedings, including investigations or inspections, pending against the Partnership or, to the knowledge of General Partner after due investigation, threatened against the Partnership nor are there any pending negotiations or demands involving General Partner or the Partnership, by any federal, state or local governmental agency, or any other person or entity to currently or hereafter terminate, suspend, modify, restrict or materially and adversely change any of the terms, provisions or conditions of the rights of General Partner or the Partnership, or which would result in any material obligation with regard to the Interests, the Partnership or Buyer. 3.14 Compliance with Laws. The Partnership is in compliance in all material respects with all applicable laws, rules or regulations of the United States of America or of any state, county, municipality or other political subdivision or any agency of any of the foregoing having jurisdiction over the Partnership. 3.15 Equipment. The Partnership is the sole owner of, and has good and marketable title to the equipment listed on Exhibit 3.16, free and clear of all Adverse Claims other than Permitted encumbrances. Exhibit 3.16 is a true and complete list of all equipment and other property which the Partnership owns. To the knowledge of General Partner the equipment 5 6 owned, operated or leased by the Partnership is in good condition and repair (except for such ordinary wear and tear), free of any structural or engineering defect, is suitable for the conduct of the business of the Partnership as presently conducted and as presently proposed to be conducted, do not require any maintenance or repairs by the Partnership and all such equipment conforms in all material respects with all applicable laws and other requirements currently relating thereto. 3.16 Contracts. Exhibit 3.17 is a true and complete list of all material Contracts as of May 31, 1998 ("MATERIAL CONTRACTS") to which the Partnership is a party and with respect to the Material Contracts all (i) customer names, lease numbers, quantities of equipment, terms of the contracts, rentals payable by the customer in connection therewith, purchase option amounts and customer rights, if applicable, and billing cycles and plans, and (ii) in the case of finance leases or installment sales, the interest rate factors, the remaining minimum lease payments including residual value, the current gross finance receivable amount and lease installment amount, and such other details regarding such transactions as shall have been or be reasonably requested by Buyer. The Partnership has not collected in advance more than an amount equal to one month's payment under any Contract, assuming such Contract has been fully funded by the Partnership. There is no material default under any Material Contract by the Partnership and to the knowledge of General Partner by any other party. Each Material Contract was originated by the Partnership in the ordinary course of its business in accordance with its regular credit approval process and does not contravene any laws, rules or regulations applicable thereto. No Material Contract has been originated in, or be subject to the laws of, any jurisdiction whose laws would make the terms hereof or any transaction contemplated hereby unlawful. At the time each Material Contract was entered into, the Partnership took, and since has taken, all necessary action to create, perfect and maintain its security interest in each piece of equipment subject to each such Material Contract and in other property intended to collateralize the obligations of any obligor to it under each such Material Contract. 3.17 Real Properties. The Partnership does not own or lease nor has it at any time owned or leased any real property. 3.18 Financial Condition. All financial statements relating to the Partnership or its assets that have been delivered to Buyer fairly present in all material respects the financial condition and results of operation of the Partnership as of the date thereof and have been prepared in accordance with GAAP, except for interim statements. The Partnership has no material obligations or liabilities of any kind not disclosed in that financial information other than the Contracts and, since the date of the financial statements, incurred in the ordinary course of business, and there has been no material adverse change in the financial condition of the Partnership since the date of the most recent financial statements submitted to Buyer. 3.19 Books and Records. The books of account and other financial and company records of the Partnership are in all material respects accurate and complete (subject to normal year-end audit adjustments, which in the aggregate are not material), are maintained in all material respects in accordance with GAAP and customary industry practices and all laws applicable to the Partnership. 6 7 3.20 Representations. These representations and warranties contained in this Agreement are exclusive and Buyer has relied no others, except as otherwise set forth herein. ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF CARGILL As a material inducement to Buyer to enter into this Agreement, Cargill represents and warrants the following for the benefit of Buyer as of the date hereof: 4.1 Organization and Qualification. To its actual knowledge without any investigation, inquiry or review of its records or of the General Partner, the Partnership is a limited partnership validly existing and in good standing under the laws of the state of Delaware; and is qualified and licensed to do business and is in good standing in any state in which the conduct of its business or its ownership of property requires that it be so qualified or licensed, and has the power and authority (corporate and otherwise) to execute and carry out the terms of any contracts to which it is a party, to own its assets and to carry on its business as currently conducted. 4.2 Capitalization. To its actual knowledge without any investigation, inquiry or review of its records or of the General Partner, (i) the Partnership has no other equity securities or other evidence of ownership of the Partnership outstanding other than the Interests possessed by Sellers and the general partnership interest held by General Partner; (ii) there are, and have been, no preemptive rights applicable to the issuance of the Interests; (iii) there are no outstanding subscriptions, options, warrants, convertible securities, calls, commitments, rights or other contracts to purchase or otherwise acquire, issue, sell or otherwise dispose of any securities of the Partnership. 4.3 Interest Ownership. Cargill is the lawful owner of record and beneficially of the issued and outstanding Interests as indicated in Section 3.2 (the "CARGILL INTERESTS"), free and clear of all Adverse Claims, including any agreements, proxies, subscriptions, options, warrants, calls, commitments or rights of any character granting to any person any interest in or right to acquire at any time, or upon the happening of any stated event, any of the Cargill Interests. 4.4 Authority. Cargill has the right, power, legal capacity and authority to enter into and perform its obligations under this Agreement and the documents, instruments and certificates to be executed and delivered by it pursuant to this Agreement. The execution, delivery and performance of this Agreement by Cargill and all documents, instruments and certificates made or delivered by it pursuant to this Agreement, and the transactions contemplated thereby, have been duly authorized by all necessary action on the part of such Cargill. 4.5 Enforceability. The terms and provisions of this Agreement and all documents, instruments and certificates made or delivered from time to time by Cargill hereunder and thereunder constitute valid and legally binding obligations of Cargill, enforceable as against it in accordance with the terms hereof and thereof. 7 8 4.6 Approvals. The execution, delivery and performance of this Agreement by Cargill do not and will not require any registration with, consent or approval of, notice to, or any action by any person or governmental authority. 4.7 Compliance with Other Instruments. (a) The execution and delivery of this Agreement and the consummation of the transactions contemplated hereunder (i) to its actual knowledge without any investigation, inquiry or review of its records or of the General Partner, are not and will not result in a breach or violation of any agreement or instrument by which the Partnership or any of its assets are bound; (ii) to its actual knowledge without any investigation, inquiry or review of its records or of the General Partner, will not result in the creation of a lien or Adverse Claim on any assets of the Partnership, and (iii) will not result in a breach or violation of any term or provision of the charter documents of Cargill or any contract, agreement, franchise, license, lease, indenture, mortgage, loan agreement, note, order, permit or judgment as to which Cargill is a party, in each case the effect of which would materially impair, restrict or condition the ability of Cargill to perform its obligations under this Agreement. (b) To its actual knowledge without any investigation, inquiry or review of its records or of the General Partner, the Partnership has complied within in all material respects all provisions of, and is not in breach or default under any material franchise, license, lease, indenture, mortgage, loan agreement, note, contract, agreement, commitment, arrangement, order, permit, judgment, instrument or other authorization, right, restriction or obligation to which it is a party or by which it or any of its Assets may be bound or affected. 4.8 Title and Encumbrances. To its actual knowledge without any investigation, inquiry or review of its records or of the General Partner, the Partnership has title to its assets, free and clear of Adverse Claims of any nature, whether accrued, absolute, contingent or otherwise, other than Permitted Encumbrances. 4.9 Taxes. To its actual knowledge without any investigation, inquiry or review of its records or of the General Partner, all material assessments and taxes, whether real, personal or otherwise, due or payable by or imposed, levied or assessed against the Partnership, or its property have been paid in full before delinquency or before the expiration of any extension period; and the Partnership has made due and timely payment or deposit of all federal, state, and local taxes, assessments, or contributions required of it by law, except only for items that the Partnership is currently contesting diligently and in good faith and that have been fully disclosed in writing to Buyer. 4.10 No Interest in Other Entities. To its actual knowledge without any investigation, inquiry or review of its records or of the General Partner, except as set forth on Exhibit 3.09, the Partnership does not have any investment in or owns any securities of any corporation, association, partnership, joint venture or other organization, public or private, except for certificates of deposit, commercial paper, money market funds and similar money equivalents. 8 9 4.11 Business. To its actual knowledge without any investigation, inquiry or review of its records or of the General Partner, the Partnership has all franchises and authorizations, legally required to conduct its business, all of which are all in full force and effect and are not in known conflict with the rights of others. 4.12 Employees. To its actual knowledge without any investigation, inquiry or review of its records or of the General Partner, the Partnership has no and has never had any employees. 4.13 Litigation. (a) There is no claim or controversy, or legal, administrative or other proceeding or governmental investigation, hearing, complaint, appeal, show cause or special relief proceeding pending or, to the best of Cargill's knowledge after due investigation, threatened against Cargill or affecting any of the Cargill Interests, or which would impair the ability or capacity of Cargill to perform its obligations under this Agreement. The Cargill Interests are not subject to any order, writ, injunction, judgment or decree of any federal, state or local court, department, agency or instrumentality. (b) To its actual knowledge without any investigation, inquiry or review of its records or of the General Partner, there is no claim or controversy, or legal, administrative or other proceeding or governmental investigation, hearing, complaint, appeal, show cause or special relief proceeding pending or threatened against the Partnership and its current and future operations. To its actual knowledge without any investigation, inquiry or review of its records or of the General Partner, the Partnership is not subject to any order, writ, injunction, judgment or decree of any federal, state or local court, department, agency or instrumentality nor has the Partnership received any written inquiry from any federal, state or local government agency concerning the operation of the Partnership which remains unresolved on the date of this Agreement. (c) There are no proceedings, including investigations or inspections, pending against Cargill or, to the knowledge of Cargill after due investigation, threatened against Cargill nor are there any pending negotiations or demands involving Cargill by any federal, state or local governmental agency, or any other person or entity to currently or hereafter terminate, suspend, modify, restrict or materially and adversely change any of the terms, provisions or conditions of the rights of Cargill or which would result in any material obligation with regard to the Cargill Interests. (d) To its actual knowledge without any investigation, inquiry or review of its records or of the General Partner, there are no proceedings, including investigations or inspections, pending against the Partnership or threatened against the Partnership nor are there any pending negotiations or demands involving the Partnership by any federal, state or local governmental agency, or any other person or entity to currently or hereafter terminate, suspend, modify, restrict or materially and adversely change any of the terms, provisions or conditions of the rights of the 9 10 Partnership or which would result in any material obligation with regard to the Partnership or Buyer. 4.14 Compliance with Laws. To its actual knowledge without any investigation, inquiry or review of its records or of the General Partner, the Partnership is in compliance in all material respects with all applicable laws, rules or regulations of the United States of America or of any state, county, municipality or other political subdivision or any agency of any of the foregoing having jurisdiction over the Partnership. 4.15 Real Properties. To its actual knowledge without any investigation, inquiry or review of its records or of the General Partner, the Partnership does not own or lease nor has it at any time owned or leased any real property. 4.16 Commissions. Cargill has not entered into any agreement, commitment or obligation with regard to any brokerage commission or finder's fee arising out of the execution, delivery or performance of this Agreement or the transactions contemplated hereby. ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF SPC As a material inducement to Buyer to enter into this Agreement, SPC represents and warrants the following for the benefit of Buyer as of the date hereof: 5.1 Interest Ownership. SPC is the lawful owner of record and beneficially of the issued and outstanding Interests as indicated in Section 3.2 (the "SPC INTERESTS"), free and clear of all Adverse Claims, including any agreements, proxies, subscriptions, options, warrants, calls, commitments or rights of any character granting to any person any interest in or right to acquire at any time, or upon the happening of any stated event, any of the SPC Interests. 5.2 Authority. SPC has the right, power, legal capacity and authority to enter into and perform its obligations under this Agreement and the documents, instruments and certificates to be executed and delivered by it pursuant to this Agreement. The execution, delivery and performance of this Agreement by SPC and all documents, instruments and certificates made or delivered by it pursuant to this Agreement, and the transactions contemplated thereby, have been duly authorized by all necessary action on the part of such SPC. 5.3 Enforceability. The terms and provisions of this Agreement and all documents, instruments and certificates made or delivered from time to time by each SPC hereunder and thereunder constitute valid and legally binding obligations of SPC, enforceable as against it in accordance with the terms hereof and thereof. 5.4 Approvals. The execution, delivery and performance of this Agreement by SPC do not and will not require any registration with, consent or approval of, notice to, or any action by any person or governmental authority. 10 11 5.5 Compliance with Other Instruments. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereunder will not result in a breach or violation of any term or provision of the charter documents SPC or any contract, agreement, franchise, license, lease, indenture, mortgage, loan agreement, note, order, permit or judgment as to which SPC is a party, the effect of which would materially impair, restrict or condition the ability of SPC to perform its obligations under this Agreement. 5.6 Litigation. (a) There is no claim or controversy, or legal, administrative or other proceeding or governmental investigation, hearing, complaint, appeal, show cause or special relief proceeding pending or, to the best of SPC's knowledge after due investigation, threatened against SPC or affecting any of the SPC Interests nor which would impair the ability or capacity of SPC to perform its obligations under this Agreement. The SPC Interests are subject to any order, writ, injunction, judgment or decree of any federal, state or local court, department, agency or instrumentality. (b) There are no proceedings, including investigations or inspections, pending against SPC or, to the best knowledge of SPC after due investigation, threatened against SPC nor are there any pending negotiations or demands involving SPC, by any federal, state or local governmental agency, or any other person or entity to currently or hereafter terminate, suspend, modify, restrict or materially and adversely change any of the terms, provisions or conditions of the rights of SPC, or which would result in any material obligation with regard to the SPC Interests. ARTICLE 6 REPRESENTATIONS AND WARRANTIES OF BUYER As a material inducement to Sellers to enter into this Agreement, Buyer represents and warrants to Sellers the following for the benefit of Sellers as of the date hereof: 6.1 Organization and Qualification. Buyer is duly organized, validly existing and in good standing under the laws of the State of Delaware. Buyer has all necessary power and authority to own and utilize its properties and assets and to engage in the business or businesses in which it is presently engaged as and in the places where such property and assets are now owned or utilized or such businesses are now conducted. 6.2 Authority. Buyer has the right, power, legal capacity and authority to enter into and perform its obligations under this Agreement and the documents, instruments and certificates to be executed and delivered by Buyer pursuant to this Agreement. The execution, delivery and performance of this Agreement by Buyer and all documents, instruments and certificates made or delivered by Buyer pursuant to this Agreement, and the transactions contemplated hereby, have been duly authorized by all necessary organizational action on the part of Buyer. 11 12 6.3 Enforceability. The terms and provisions of this Agreement and all documents, instruments and certificates made or delivered from time to time by Buyer hereunder and thereunder constitute valid and legally binding obligations of Buyer enforceable as against Buyer in accordance with the terms hereof and each thereof. 6.4 Approvals. The execution, delivery and performance of this Agreement by Buyer do not and will not require any registration with, consent or approval of, notice to, or any action by any person or governmental authority. 6.5 Compliance with Other Instruments. (a) The execution and delivery of this Agreement and the consummation of the transactions contemplated hereunder are not and will not result in a breach or violation of any term or provision of Buyer's articles of incorporation or bylaws, or any material contract, agreement, franchise, license, lease, indenture, mortgage, loan agreement, note, order, permit or judgment as to which Buyer is a party. (b) Buyer has complied with all material provisions of, and is not in material breach or default the effect of which would impair the ability of Buyer to perform its obligations under this Agreement with respect to, its articles of incorporation or bylaws, any franchise, license, lease, indenture, mortgage, loan agreement, note, contract, agreement, commitment, arrangement, order, permit, judgment, instrument or other authorization, right, restriction or obligation to which Buyer is a party or by which Buyer or any of its assets may be bound or affected. 6.6 Commissions. Buyer has not entered into any agreement, commitment or obligation with regard to any brokerage commission or finder's fee arising out of the execution, delivery or performance of this Agreement or the transactions contemplated thereby. ARTICLE 7 GENERAL PARTNER COVENANTS 7.1 Use of Cargill Name. Within ten (10) days from the Closing Date, General Partner shall, and shall cause the Partnership and any other Affiliates of General Partner to, cease using and remove the name "Cargill" from any and all documents and media (electronic, print or otherwise) used by the Partnership, the General Partner and any Affiliates (including without limitation brochures, sales material, Internet web sites and advertisements), and thereafter shall have no right to use the name "Cargill" in any manner in any advertising, printed material, electronic medium or other medium. 7.2 Matters Relating to SPC. Within thirty (30) days from the Closing Date, General Partner shall cause its affiliates to take such actions as is necessary to wind down the affairs of 12 13 SPC and liquidate its assets according to its constituent documents. Cargill, as member, agrees to provide reasonable cooperation in such effort. 7.3 Tax Matters. General Partner agrees to prepare and deliver to Cargill all tax returns and records and take such other actions as required by the Partnership Agreement for all tax periods up to and including the Closing Date. 7.4 Permitted Encumbrances. Promptly after the Closing Date, General Partner shall cause the Partnership to obtain, and file if necessary, any and all documents necessary to remove those Permitted Encumbrances designated as subject to this Section 7.4. ARTICLE 8 CONDITIONS PRECEDENT TO BUYER'S PERFORMANCE 8.1 Conditions Precedent; Waiver. Buyer may waive any or all conditions precedent contained in this Agreement in whole or in part, provided that no such waiver of a condition shall constitute a waiver by Buyer of any of its other rights or remedies under this Agreement or otherwise at law or in equity if Sellers should be in default of any of their covenants, agreements, representations or warranties under this Agreement. ARTICLE 9 CONDITIONS PRECEDENT TO SELLERS' PERFORMANCE 9.1 Conditions Precedent; Waiver. The obligations of Sellers to consummate the transactions contemplated under this Agreement are subject to the satisfaction, on or before the Closing Date, of all the conditions set forth in this Article 7. Sellers may waive any or all of such conditions in whole or in part, provided that no such waiver of a condition shall constitute a waiver by Sellers of any of their other rights or remedies under this Agreement or otherwise at law or in equity if Buyer should be in default of any of the covenants, agreements, representations or warranties made by Buyer under this Agreement. 9.2 Partnership Distributions. The Partnership must have distributed to Cargill a cash distribution in the aggregate amount of $2,174,387.92 (representing: (a) $456,978.58 as a special limited partner distribution, (b) $1,658,009.34 as reimbursement for certain progress payments, and (c) $59,400 as reimbursement for management fees). 13 14 ARTICLE 10 THE CLOSING 10.1 Time and Place. The closing of the transactions contemplated by this Agreement will take place on the Closing Date at the offices of Buyer, or such other location as the parties hereto may mutually agree. At the closing, certificates, documents and other consideration required by this Agreement may be executed and exchanged. 10.2 Seller's Obligations at Closing. On the Closing Date, Sellers shall deliver or cause to be delivered to Buyer the following: (a) executed Assignment of Limited Partnership Interests in the form set forth as Exhibit 10.2(a) hereto; (b) an opinion of counsel to each of General Partner and Cargill dated as of the Closing Date in form and substance satisfactory to Buyer and its counsel; and (c) such other documents, instruments and certificates as Buyer or its counsel may reasonably request to effect the transfers contemplated by this Agreement. 10.3 Buyer's Obligations at Closing. On the Closing Date, Buyer shall deliver or cause to be delivered to Sellers and General Partner the following: (a) such documents, instruments and certificates as Seller or its counsel may reasonably request to consummate the transactions contemplated by this Agreement; (b) wire transfer of immediately available funds to such account as each Seller directs in writing in the amount equal to the Purchase Price. ARTICLE 11 POST-CLOSING OBLIGATIONS 11.1 Mutual Indemnity. (a) Each of the Sellers, General Partner and Buyer, each for themselves and their successors and assigns (referred to in this Section 9.1 individually as an "INDEMNITOR" and collectively as "INDEMNITORS"), shall defend, indemnify and hold harmless the others, their Affiliates, and their respective officers, directors and employees, and the successors and assigns of each (referred to in this Section 9.1 individually as an "INDEMNITEE" and collectively as "INDEMNITEES") from and against any and all liabilities and obligations asserted or other claims, actions, judgments, assessments, taxes (including without limitation federal, state and local income taxes and property taxes), charges, fines, penalties, debts, damages, costs or expenses of any kind (including legal fees and costs) suffered, incurred or accrued by any of the Indemnitees (individually, an "OBLIGATION") by reason of or arising from the following: 14 15 (1) the breach of any representation or warranty as of the date made by the Indemnitor under this Agreement; (2) breach or default by the Indemnitor in the observance or performance of any of the Indemnitor's other obligations under this Agreement; (3) only as to a Seller as Indemnitor and Buyer as Indemnitee, the ownership of its Interests, as applicable on or prior to May 31, 1998, including the occurrence of any event after May 31, 1998 attributable to the acts or omissions of such Seller or their predecessors in interest on or prior to May 31, 1998 and including any liability for federal, state or local income and property (real and personal) taxes, including penalties and interest, with respect to its Interests during the period through May 31, 1998 (not including taxes resulting from the sale of the Interests from Seller to Buyer); or (4) only as to Buyer as Indemnitor and Sellers as Indemnitee, the ownership of the Interests after the Closing Date. (b) Every expense of any attempt to settle or defend a claim of an Obligation, including expenses for proceedings, negotiations, investigations, settlements or suits, shall be borne solely by the Indemnitors. (c) Indemnitees shall inform Indemnitors of all Obligations in a timely fashion. Indemnitors may assume the defense of any Obligation at its own expense with counsel of its claims, subject to the reasonable consent of Indemnitees as to such counsel. ARTICLE 12 MISCELLANEOUS 12.1 Further Assurances. From time to time following the Closing Date, each party and its Affiliates shall, if requested by another party, make, execute and deliver to the requesting party any such additional instruments, documents and agreements as may be necessary or appropriate to consummate the transactions herein contemplated. 12.2 Survival. All covenants, agreements, representations and warranties made by General Partner, Sellers and Buyer under this Agreement, any Exhibit or in any document, instrument or certificate contemplated hereby are deemed and construed to be continuing covenants, agreements, representations and warranties which survive the Closing Date for a period of three years from the Closing Date; provided, however, that (i) the representations and warranties of Cargill set forth in Sections 4.1, 4.2, 4.8, 4.9, 4.10, 4.11, 4.12, 4.13(b), 4.13(d), 4.14 and 4.15 survive for a period of one year following the Closing Date and (ii) the covenants contained in Section 12.16 survive for a period of two years from the Closing Date. 15 16 12.3 Notice. Except as otherwise provided in this Agreement, any notice, approval, consent, waiver or other communication required or permitted to be given or to be served upon any person in connection with this Agreement must be in writing given or served by a party or its counsel. Such notice may be personally served, sent by facsimile or overnight messenger, or sent prepaid by registered or certified mail with return receipt requested and are deemed given, (i) if personally served when delivered to the person to whom such notice is addressed, (ii) if given by facsimile, when sent, or (iii) if given by mail, five (5) business days following deposit in the United States mail. Any notice given by facsimile must be confirmed in writing within forty-eight (48) hours after sent. Such notices must be addressed to the party to whom such notice is to be given at the party's address set forth below or as such party otherwise directs. To Cargill: Cargill Leasing Corporation c/o Cargill Financial Services Corporation 6000 Clearwater Drive Minnetonka, Minnesota 55343 Facsimile: 612.984.3900 Attention: Investment Group Manager With a copy to: Cargill, Incorporated c/o Cargill Financial Services Corporation 6000 Clearwater Drive Minnetonka, Minnesota 55343 Facsimile: 612.984.3898 Attention: Law Department To SPC and General Partner: Third Coast Capital 900 N. Franklin Street, #700 Chicago, Illinois 60610 Facsimile: 312.337.2567 Attention: Mr. Miroslav Anic Ms. Kathleen Wilkerson With a copy to: Kirkland & Ellis 200 East Randolph Drive Chicago, Illinois 60601 Facsimile: 312.861.2200 Attention: Edward T. Swan, Esq. 16 17 To Buyer: DVI Financial Services, Inc. 4041 MacArthur Boulevard, Suite 401 Newport Beach, California 92660 Facsimile: 714.474.5899 Attention: Mr. Anthony J. Turek With a copy to: Cooper, White & Cooper 201 California Street, 17th Floor San Francisco, California 94111 Facsimile: 415.433.5530 Attention: Jeffrey J. Wong, Esq. 12.4 Waiver. No waiver by a party of any default or breach by another party of any covenant, condition, representation or warranty contained in this Agreement, any Exhibit or any document, instrument or certificate contemplated hereby may be deemed to be a waiver of any subsequent default or breach by such party of the same or any other covenant, condition, representation or warranty. No act, delay, omission or course of dealing on the part of a party in exercising any right, power or remedy under this Agreement or at law or in equity operates as a waiver thereof or otherwise prejudice any of such party's rights, powers and remedies. All remedies, whether at law or in equity, shall be cumulative and the election of any one or more do not constitute a waiver of the right to pursue other available remedies. 12.5 Successors and Assigns. Buyer may assign its rights under this Agreement in whole or in part to any Affiliate of Buyer, but may not delegate or be relieved of any of its obligations under this Agreement. The obligations of Buyer and the rights and obligations of Seller hereunder are assignable only with the written consent of the other party, which may not be unreasonably withheld. Subject to the foregoing, this Agreement inures to the benefit of, and be binding upon, the parties hereto and their respective successors and assigns. 12.6 Applicable Law. This Agreement is governed in all respects by the laws of the State of California applicable to agreements negotiated, executed and performed there. 12.7 Waiver of Trial by Jury. Buyer, General Partner and Sellers hereby waive the right to trial by jury of any matters arising out of this Agreement or any of the other loan documents or the relationship between Buyer, General Partner and Sellers. 12.8 Submission to Jurisdiction. (a) Buyer, Sellers and General Partner hereby irrevocably submit to the nonexclusive jurisdiction of any California or Federal court sitting in Orange County, California, over any action or proceeding arising out of or relating to this Agreement. Service of copies of summons and complaints and any other process which may be 17 18 served on Sellers in any action or proceeding arising hereunder may be made by mailing or delivering a copy of such process by registered or certified mail, postage prepaid, to borrower at its address set forth in this Agreement. (b) Nothing in this paragraph 12.8 affects the right to serve legal process in any other manner permitted by law or affect the right to bring any action or proceeding in the courts of other jurisdictions to the extent otherwise permitted by law. (c) To the extent that Sellers has or hereafter may acquire (i) any immunity from jurisdiction of any court of California or any Federal court sitting in Orange County, California or from any legal process out of any such court (whether through service or notice, attachment prior to judgment, attachment in aid of execution, execution or otherwise) with respect to itself or its property, or (ii) any objection to the laying of the venue or of an inconvenient forum of any suit, action or proceeding, if brought in California or Federal court sitting in Orange County, California under process served in accordance with subparagraph (a) above, Sellers hereby irrevocably waive such immunity or objection in respect of any suit, action or proceeding arising out of or relating to this Agreement. 12.9 Attorneys' Fees. If any proceeding is brought between any of the parties arising out of or relating to this Agreement or its breach, the successful or prevailing party in any judgment or award is entitled to the full amount of its reasonable expenses, including all court costs and attorneys' fees paid or incurred in good faith, in addition to such other relief as such party shall be entitled. 12.10 Severability. If any provision of this Agreement or the application thereof to any party or circumstance is, to any extent, invalid or unenforceable, the remaining provisions of this Agreement, or the application of such provision to the parties or circumstances other than those to which it is held invalid or unenforceable, shall not be affected thereby. 12.11 Sections and Captions. The captions or headings of articles, sections, paragraphs and exhibits of this Agreement are provided for convenience only, and are not of any force or effect in construing any provision of this Agreement. 12.12 Amendment. Neither this Agreement nor any provision hereof may be waived, modified, amended, discharged, or terminated except by an instrument in writing signed by the party against which the enforcement of such writing is sought, and then only to the extent set forth in such writing. 12.13 Entire Agreement. This Agreement, including the Exhibits hereto which are incorporated in this Agreement by reference, constitute the entire understanding between the parties with respect to the matters set forth herein and or therein and supersede all prior or contemporaneous understandings or agreements between the parties with respect to the subject matter hereof, whether oral or written. 18 19 12.14 Expenses. Except as otherwise provided in this Agreement, each party shall bear its own costs and expenses in connection with the negotiation and performance of the terms, conditions and provisions of this Agreement, including without limitation, attorneys' fees, brokerage fees, commissions or finders' fees. 12.15 Publicity. No public announcement or disclosure, whether oral or written, concerning the execution and delivery of this Agreement or with respect to the transactions contemplated by this Agreement may be made by either party without the prior written consent of the other, except as may be required by any governmental authority having jurisdiction over Seller or Buyer, provided that the amount of cash transferred to Seller may not be disclosed if not required by such governmental authority. Each party shall furnish to the other for review and approval copies of any announcement or release which it proposes to make public in advance of the delivery thereof to any third party. 12.16 Confidentiality. Buyer, General Partner and Sellers shall keep confidential all information contained in the financial statements or other information and materials delivered to them by other party under this Agreement, provided that the provisions of this Section 12.16 do not apply with respect to such information as is or was (i) disclosed by Buyer, General Partner or Sellers to their employees, representatives and agents in connection with the transactions contemplated by this Agreement provided that Buyer, General Partner and Sellers shall advise all such employees, representatives and agents of the confidential nature of the information and the requirement of this Section 12.16, (ii) known to the party to which such information was provided before the date of this Agreement, (iii) independently developed by the party to which such information was provided, (iv) publicly known or available other than through disclosure by the party to which such information was provided, (v) rightfully received by the party to which such information was provided from a third person or (vi) required to be disclosed to any lender or governmental authority. 19 20 IN WITNESS WHEREOF, the parties have caused their duly authorized representatives to execute this Agreement as of the date first written. THIRD COAST SPC-I, L.L.C., an Illinois limited liability company By: ___________________________________ CARGILL LEASING CORPORATION, a Delaware corporation By: ___________________________________ DVI FINANCIAL SERVICES, INC., a Delaware corporation By: ___________________________________ THIRD COAST GP-I, L.L.C., an Illinois limited liability company By: ___________________________________ 20 21 EXHIBIT 3.7 Permitted Encumbrances 1. The Contracts listed on 3.16 other than the Credit Agreement described below. 2. The Credit Agreement by and among the Partnership, General Partner, Third Coast GP-I, L.L.C. and Silicon Valley Bank and any related Contracts entered into in connection with the Credit Agreement, which must be removed as an Adverse Claim pursuant to Section 7.4. 22 EXHIBIT 3.9 Interests in Other Entities Bell Geospace [PENCIL ART] Warrant Captura [PENCIL ART] Warrant Series B Ecrix [PENCIL ART] Warrant Series B Harmonic Systems, Inc. [PENCIL ART] Preferred Stock Purchase Warrant Q-Club, Inc. [PENCIL ART] Stock Purchase Warrant Redcape Software, Inc. [PENCIL ART] Warrant Sandbox Entertainment [PENCIL ART] Warrant for 12,500 shares [PENCIL ART] Warrant for 25,000 shares [PENCIL ART] Warrant for 62,500 shares Tava Technologies [PENCIL ART] Warrant Teldata, Inc. [PENCIL ART] Series C Warrant (2) 23 EXHIBIT 3.15 Equipment EXHIBIT 3.16 Contracts 1. Lease Documentation Bell Geospace Loan and Security Agreement Warrant Funding Agreement Intercreditor Agreement Schedule No. 1 UCC filings Captura Master Lease Agreement 101-05001-001 Addendum No. 01 Warrant Purchase Agreement Warrant Series B Schedule No. 01 UCC filings Ecrix Master Lease Agreement 101-05001-001 Addendum No. 01 Warrant Purchase Agreement Warrant Series B Amendment No. 1 to Stockholder's Agreement Schedule No. 01 Schedule No. 02 Schedule No. 03 Schedule No. 04 UCC filings Harmonic Systems, Inc. Master Lease Agreement 101-08001-001 Addendum No. 01 Addendum No. 02 Warrant Purchase Agreement Preferred Stock Purchase Warrant Amendment No 1 to Stock Purchase Agreement Amendment No 2 to the Co-Shareholders First Offer Agreement Waiver Agreement (3) Statement of Designation Schedule No. 01 24 Schedule No. 02 Schedule No. 03 UCC filings Jamba Juice Company Master Lease Agreement 101-10001-001 Addendum No. 01 Addendum No. 02 Schedule No. 01 Schedule No. 02 Schedule No. 03 Schedule No. 04 Bill of Sale to Schedule No. 5 Schedule No. 05 Schedule No. 06 Schedule No. 07 Schedule No. 08 UCC filings Prolinx Master Lease Agreement 101-17001-001 Addendum No. 01 Q-Club, Inc. Master Lease Agreement 101-17001-001 Addendum No. 01 Warrant Purchase Agreement Registration Agreement Stock Purchase Warrant Schedule No. 01-11 UCC filings Redcape Software, Inc. Master Lease Agreement 101-18001-001 Addendum No. 01 Warrant Purchase Agreement (2) Warrant Schedule No. 01 Schedule No. 02 UCC filings Sandbox Entertainment Master Lease Agreement 101-19001-001 Addendum No. 01 Addendum No. 02 25 Addendum No. 03 Warrant Purchase Agreement for 12,500 shares Warrant for 12,500 shares Warrant Purchase Agreement for 25,000 shares Warrant Purchase Agreement for 62,500 shares Warrant for 25,000 shares Warrant for 62,500 shares Schedule No. 01 Schedule No. 02 Schedule No. 03 Landlord's Waiver UCC filings Tava Technologies Master Lease Agreement 101-20002-001 Addendum No. 01 Warrant Purchase Agreement Warrant Schedule No. 01 UCC filings Teldata, Inc. Master Lease Agreement 108-20002-001 Addendum No. 01 Addendum No. 02 Warrant Purchase Agreement (2) Series C Warrant (2) Schedule No. 01 Schedule No. 02 Schedule No. 03 Bill of Sale dated 12/15/97 Bill of Sale dated 01/26/98 UCC filings 2. Silicon Valley Bank Credit Agreement dated December 18, 1996 Loan Modification Agreement dated December 18, 1997 Loan Modification Agreement dated March 18, 1998 3. Partnership Agreement Agreement of Limited Partnership of Third Coast Venture Lease Partners I, L.P. EX-21 7 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 Business Credit Corporation (Delaware) 100% Westgate Imaging Center, Inc. (Delaware) 100% DVI Lease Receivables Corp. 1993-A (Delaware) 100% DVI Lease Finance Corporation II (Delaware) 100% DVI Lease Finance Corporation III (Delaware) 100% DVI Subordinated Securities Corporation (Delaware) 100% DVI Receivables Corp. (Delaware) 100% DVI Receivables Corp. II (Delaware) 100% DVI Receivables Corp. III (Delaware) 100% DVI Receivables Corp. IV (Delaware) 100% DVI Receivables Corp. V (Delaware) 100% DVI Receivables Corp. V, LLC (Delaware) 100% DVI Receivables Corp. VI (Delaware) 100% DVI Receivables Corp. VI, LLC (Delaware) 100% DVI Receivables Corp. VII (Delaware) 100% DVI Business Credit Receivables Corporation (Delaware) 100% DVI Business Credit Receivables Corp. II (Delaware) 100% DVI Business Credit Receivables Corp. III (Delaware) 100% DVI Securities, Inc. (Delaware) 100% DVI Mortgaging Funding (Delaware) 100% DVI Healthcare Financial Advisors (Delaware) 100% DVI Ohio, Inc. (Delaware) 100% DVI International (Delaware) 100% DVI Thailand Ltd. (Thailand) 100% DVI Financial Services (Australia) Ltd. (Australia) 100% Oferil Sociedas Anonima (Uruguay) 100% DVI Malaysia, Inc. (Malaysia) 100% DVI International (Deutschland) GmbH (Germany) 100% MSF Holding Ltd. (Bahamas) 59%
51 EX-27 8 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from 10-K @ year ended June 30, 1998. 1,000 YEAR JUN-30-1998 JUL-01-1997 JUN-30-1998 62,774 0 713,361 9,955 0 0 6,825 2,600 816,920 149,129 0 0 0 70 172,215 816,920 0 95,332 0 49,212 18,806 4,735 0 22,579 9,721 12,858 0 0 0 12,858 1.12 1.03 EPS Primary shown above is actually EPS Basic as required.
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