-----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, NfzDTK/BFmD21TEWpgnE3HB0XqPkToWK8QyGGChfgTeoXeV8wNdLcdNz4fHzIQjy tOS7aCpjP2EwnR++XpWzcw== 0001024739-99-000199.txt : 19990412 0001024739-99-000199.hdr.sgml : 19990412 ACCESSION NUMBER: 0001024739-99-000199 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 DATE AS OF CHANGE: 19990409 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN CAPITAL STRATEGIES LTD CENTRAL INDEX KEY: 0000817473 STANDARD INDUSTRIAL CLASSIFICATION: IRS NUMBER: 521451377 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 814-00149 FILM NUMBER: 99583819 BUSINESS ADDRESS: STREET 1: 3 BETHESDA METRO CENTER STREET 2: SUITE 860 CITY: BETHESDA STATE: MD ZIP: 20814 BUSINESS PHONE: 3019516122 MAIL ADDRESS: STREET 1: 3 BETHESDA METRO CENTER STREET 2: SUITE 860 CITY: BETHESDA STATE: MD ZIP: 20814 10-K 1 FORM 10-K As filed with the Securities and Exchange Commission on March 29, 1999 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM 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 December 31, 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 814-00149 ---------------- AMERICAN CAPITAL STRATEGIES, LTD. Delaware 52-1451377 - - ------------------------------- ---------------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) ---------------- 3 Bethesda Metro Center Suite 860 Bethesda, Maryland 20814 -------------------------------------- (Address of principal executive offices) ---------------- (301) 951-6122 -------------------------------------------------- (Registrant's telephone number, including area code) Securities to be registered pursuant to Section 12(b) of the Act: Not Applicable Securities registered pursuant to section 12(g) of the Act: Name of each exchange Title of each class on which registered ------------------- ------------------- Common Stock, $0.01 par value per share NASDAQ Stock Market Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 of 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter earlier 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. [ ] On March 16, 1999, the aggregate market value of the Registrant's common stock held by nonaffiliates of the Registrant was approximately $177,637,809 based upon a closing price of the Registrant's common stock of $17.25 per share as reported on the NASDAQ Stock Market on that date. (For this computation, the registrant has excluded the market value of all shares of its Common Stock reported as beneficially owned by executive officers and directors of the registrant and certain other stockholders; such an exclusion shall not be deemed to constitute an admission that any such person is an "affiliate" of the registrant.) On March 16, 1999, there were 11,106,105 shares of the Registrant's common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE. The Company's definitive proxy statement for the Annual Meeting of Stockholders to be held on May 6, 1999 is incorporated by reference into certain sections of Part III herein. Certain exhibits previously filed with the Securities and Exchange Commission are incorporated by reference into Part IV of this report. ================================================================================ PART I Item 1. Business of the Company Background American Capital Strategies, Ltd., a Delaware corporation (the "Company"), was incorporated in 1986 to provide financial advisory services to and invest in middle market companies. On August 29, 1997, the Company completed an initial public offering ("IPO") of 10,382,437 shares of its common stock ("Common Stock") and became a non-diversified, closed end investment company that has elected to be treated as a business development company ("BDC") under the Investment Company Act of 1940, as amended ("1940 Act"). On October 1, 1997, the Company began operations so as to qualify to be taxed as a regulated investment company ("RIC") as defined in Subtitle A, Chapter 1, under Subchapter M of the Internal Revenue Code of 1986 as amended (the "Code"). As contemplated by these transactions, the Company materially changed its business plan and format from structuring and arranging financing for buyout transactions on a fee for services basis to primarily being a lender to and investor in middle market companies. The Company continues to provide financial advisory services to businesses through ACS Capital Investments Corporation ("CIC"), a wholly-owned subsidiary. The Company had established itself as a leading firm in structuring and obtaining funding for management and employee buyouts of subsidiaries, divisions and product lines being divested by larger corporations through the use of employee stock ownership plans ("ESOPs"). From its formation in 1986 through the IPO, the Company arranged 29 financing transactions aggregating over $400 million. From the IPO through December 31, 1998, the Company has invested $150 million in debt and equity securities of middle market companies. Business The Company is a buyout and specialty finance company that is principally engaged in providing senior debt, subordinated debt and equity to middle market companies in need of capital for management buyouts including ESOP buyouts, growth, acquisitions, liquidity and restructuring. The Company invests up to $20 million in each transaction and through its subsidiary, CIC, will arrange and secure capital for larger transactions. The Company's primary business objectives are to increase its net operating income and net asset value by investing its assets in senior debt, subordinated debt with detachable warrants and equity of middle market companies with attractive current yields and potential for equity appreciation. The Company's loans typically range from $3 million to $20 million, mature in five to ten years, and require monthly or quarterly interest payments at fixed rates or variable rates based on the prime rate or LIBOR, plus a margin. The Company prices its debt and equity investments based on its analysis of each transaction. As of December 31, 1998 the weighted average effective yield on the Company's investments was 13.0%. In most cases, the Company receives the right to require the business to purchase the warrants or stock held by the Company ("Put Rights") under various circumstances including, typically, the repayment of the Company's loans or debt securities. When no public offering is available, the Company may use its Put Rights to dispose of its equity interest in a business, although the Company's ability to exercise Put Rights may be limited or nonexistent if a business is illiquid. In most cases the Company also receives the right to representation on the businesses' board of directors. At December 31, 1998, the Company had board seats on 14 out of 18 businesses and had board observation rights on 2 of the remaining businesses in which it has made investments. The Company's equity interests in middle market companies are purchased with the goal of disposing of such interests and realizing a gain within three to seven years. The opportunity to realize such gain may occur if the Company exercises its Put Rights, the business recapitalizes its equity, either through a sale to new owners or a public offering of its equity. The Company generally does not have the right to require that a business undergo an initial public offering by registering securities under the Securities Act of 1933, but the Company generally does have the right to sell its equity interests in a public offering by the business to the extent permitted by the underwriters. The Company makes available significant managerial assistance to its portfolio companies. Such assistance typically involves closely monitoring the operations of the company, participating in its board and management meetings, being available for consultation with its officers and providing organizational and financial guidance. Providing assistance to its borrowers serves as a means of influence for the Company as well as an opportunity for the Company to assist in maximizing the operations of the borrower. Prior to the IPO, the Company established itself as a leading firm in structuring and obtaining funding for management and employee buyouts of subsidiaries, divisions and product lines being divested by larger corporations through the use of an ESOP. The selling entities have included Sunbeam Corporation, the U.S. Office of Personnel Management, American Premier Underwriters, Inc. (formerly Penn Central Corporation), Campbell Soup Company, Union Carbide Corporation, National Forge Company, Inc., Air Products Company, Ampco-Pittsburgh Corporation and British Petroleum Company. In most of the ESOP transactions structured by 2 the Company, the employees agree to restructure their wages and benefits so that overall cash compensation is reduced while contributions of stock are made to an ESOP. The resulting company is structured so that the fair market value of stock contributed to the ESOP can be deducted from corporate income before paying taxes. Restructuring employee compensation together with the ESOP tax advantages has the effect of improving the cash flow of the ESOP company. The Company believes that its ESOP knowledge and experience and its ability to fund transactions positions the Company favorably in the market place. The Company provides financial advisory services and structuring of transactions through its wholly-owned subsidiary CIC. The typical advisory engagement includes a monthly retainer and a performance fee contingent upon closing of the transaction or event which is the subject of the engagement. Management believes that future growth of CIC is attainable through adding additional professionals, by gaining additional market share and by realizing the benefits of what is expected to be an increasing client base, which should expand as a result of its relationship with the Company. The Company believes that, through the structuring and advisory business, it has established an extensive referral network comprised of venture capitalists, investment bankers, attorneys, accountants, commercial bankers, unions, business and financial brokers, and prospective or existing ESOP companies. The Company has also developed an extensive internet site that generates financing requests and provides businesses an efficient tool for learning about the Company and its capabilities. The Company has a vice president of marketing dedicated to maintaining contact with members of the referral network and receiving opportunities for the Company to consider. During 1998, the vice president of marketing received in excess of 1,500 transactions for consideration. Many of those transactions did not meet the Company's criteria for initial consideration but the opportunities that met those criteria were sent to the Company's principals for further review and consideration. The vice president of marketing and CIC are continuing the relationships with the referral network and the Company utilizes the referral network and CIC's client base as its primary sources of investment opportunities. The Company also anticipates hiring an additional marketing person during 1999. Lending and Investment Decision Criteria The Company reviews certain criteria in order to make investment decisions. The criteria listed below provide a general guide for the Company's lending and investment decisions, although not all criteria are required to be favorable in order for the Company to make an investment. Operating History. The Company focuses on target companies that have stable operating histories and are profitable or near profitable at existing operating levels. The Company reviews the target companies ability to service and repay debt based on its historical results of operations. The Company considers factors such as market shares, customer concentration, recession history, competitive environment, and ability to sustain margins. The Company does not expect to lend or invest in start-up or other early stage companies. Growth. The Company considers a target company's ability to increase its cash flow. Anticipated growth is a key factor in determining the value ascribed to any warrants and equity interests acquired by the Company. Liquidation Value of Assets. Although the Company does not operate as an asset-based lender, liquidation value of the assets collateralizing the Company's loans is an important factor in each credit decision. Emphasis is placed both on tangible assets (accounts receivable, inventory, plant, property and equipment) as well as intangible assets such as customer lists, networks, databases and recurring revenue streams. Experienced Management Team. The Company requires that each borrower have a management team that is experienced and properly incentivized through a significant ownership interest in the borrower. The Company requires that a potential recipient of the Company's financing have a management team who have demonstrated the ability to execute the company's objectives and implement its business plan. Exit Strategy. Prior to making an investment, the Company analyzes the potential for the target company to experience a liquidity event that will allow the Company to realize value for its equity position. Liquidity events include, among other things, a private sale of the Company's financial interest, a sale of the company, an initial public offering, or a purchase by the company or one of its stockholders of the Company's equity position. Operations Marketing and Origination Process. The Company and CIC have twenty four professionals responsible for originating loans and investments and providing financial assistance to middle market companies and intends to hire an additional three to six professionals by December 31, 1999. To originate financing opportunities, these professionals use an extensive referral network 3 comprised of venture capitalists, investment bankers, unions, attorneys, accountants, commercial bankers, business and financial brokers and prospective or existing ESOP companies. The Company also has an extensive set of internet sites that it uses to attract financing opportunities. Approval Process. The Company's financial professionals review informational packages in search of potential financing opportunities and conduct a due diligence investigation of each applicant that passes an initial screening process. This due diligence investigation generally includes one or more on-site visits, a review of the company's historical and prospective financial information, interviews with management, employees, customers and vendors of the applicant, and background checks and research on the applicant's product, service or particular industry. The Company engages professionals such as environmental consultants, accountants, lawyers, risk managers, and management consultants to perform elements of the due diligence review as it deems appropriate. Upon completion of a due diligence investigation, one of the Company's principals creates a profile summarizing the target company's historical and projected financial statements, industry and management team and analyzing its conformity to the Company's general investment criteria. The principal then presents this profile to the Company's Investment Committee, which is comprised of Malon Wilkus, David Gladstone and Adam Blumenthal, the Chairman, Vice Chairman and Executive Vice President, respectively, of the Company. The Company's Investment Committee and the Company's Board of Directors must approve each financing. Portfolio Management. In addition to the review at the time of original underwriting, the Company attempts to preserve and enhance the earnings quality of its portfolio companies through proactive management of its relationships with its clients. This process includes attendance at portfolio company board and management meetings, management consultation, and review and management of covenant compliance. The Company's investment and finance personnel regularly review portfolio company financial statements to assess cash flow performance and trends, periodically evaluate the operations of the client, seek to identify industry or other economic issues that may adversely affect the client, and prepare periodic summaries of the aggregate portfolio quality for management review. Support Services. A commercial bank provides certain administrative services for the Company's investments and also acts as the custodian of the Company's portfolio assets pursuant to and in accordance with the 1940 Act. Loan Grading The Company has implemented a system to evaluate and classify all loans based on their current risk profile. The system requires each principal to grade a loan on a scale of one to four. Loans graded four involve the least amount of risk of loss, while loans graded one have an unacceptable level of risk and a high probability of loss. The loan grade is then reviewed and approved by the senior management of the Company and the board of directors. This system is intended to reflect the performance of the borrower's business, the collateral coverage of the loans and other factors considered relevant. For more information regarding the Company's loan grading practices, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Portfolio Credit Quality." Competition The Company's primary competitors include financial institutions, buyout and venture capital firms and other nontraditional lenders. Many of these entities have greater financial and managerial resources than the Company. Nevertheless, the Company believes that it competes effectively with these entities through, among other means, its responsiveness to the needs of its customers and its flexibility in structuring transactions. Employees As of March 1, 1999, the Company had thirty-one employees, twenty-four of whom are professionals working on financings for middle market companies. The Company believes that the relations with its employees are excellent. 4 The Company's Operations as a BDC and RIC As a BDC, the Company may not acquire any asset other than Qualifying Assets unless, at the time the acquisition is made, Qualifying Assets represent at least 70% of the value of the Company's total assets. The principal categories of Qualifying Assets relevant to the business of the Company are the following: (i) securities purchased in transactions not involving any public offering from the issuer of such securities, which issuer is an eligible portfolio company. An eligible portfolio company is defined as any issuer that (a) is organized and has its principal place of business in the United States, (b) is not an investment company other than a small business investment company wholly-owned by the BDC, and (c) does not have any class of publicly-traded securities with respect to which a broker may extend credit; (ii) securities received in exchange for or distributed with respect to securities described above, or pursuant to the exercise of options, warrants or rights relating to such securities; and (iii) cash, cash items, Government securities, or high quality debt securities maturing in one year or less from the time of investment. The Company may not change the nature of its business so as to cease to be, or withdraw its election as, a BDC unless authorized by vote of a majority, as defined in the 1940 Act, of the Company's shares. Since the Company made its BDC election, it has not made any substantial change in its structure or in the nature of its business. The Company operates so as to qualify as a RIC under the Code. Generally, in order to qualify as a RIC, the Company must distribute to shareholders in a timely manner, at least 90% of its "investment company taxable income" as defined by the Code. The Company must derive at least 90% of its gross income from dividends, interest, payments with respect to securities loans, gains from the sale of stock or other securities, or other income derived with respect to its business of investing in such stock or securities as defined by the Code. Additionally, the Company must diversify its holdings so that (i) at least 50% of the value of the Company's assets consists of cash, cash items, government securities, securities of other RICs and other securities if such other securities of any one issuer do not represent more than 5% of the Company's assets and 10% of the outstanding voting securities of the issuer and (ii) no more than 25% of the value of the Company's assets are invested in the securities of one issuer (other than U.S. government securities and securities of other RICs), or of two or more issuers that are controlled by the Company and are engaged in the same or similar or related trades or businesses. The Company must, in order to avoid federal corporate income tax, annually distribute all of its investment company taxable income and net capital gains. The Company must distribute each calendar year at least 98% of its "ordinary income" and "capital gain net income" as defined in the Code to avoid a 4% federal excise tax on distributed income. Temporary Investments Pending investment in other types of Qualifying Assets, the Company has invested its otherwise uninvested cash primarily in cash, cash items, government securities, agency paper or high quality debt securities maturing in one year or less from the time of investment in such high quality debt investments ("Temporary Investments") so that at least seventy percent (70%) of its assets are Qualifying Assets. Typically, the Company invests in U.S. Treasury bills. Additionally, the Company may invest in repurchase obligations of a "primary dealer" in government securities (as designated by the Federal Reserve Bank of New York) or of any other dealer whose credit has been established to the satisfaction of the Board of Directors. There is no percentage restriction on the proportion of the Company's assets that may be invested in such repurchase agreements. A repurchase agreement involves the purchase by an investor, such as the Company, of a specified security and the simultaneous agreement by the seller to repurchase it at an agreed upon future date and at a price which is greater than the purchase price by an amount that reflects an agreed-upon interest rate. Such interest rate is effective for the period of time during which the investor's money is invested in the arrangement and is related to current market interest rates rather than the coupon rate on the purchased security. The Company requires the continual maintenance by its custodian or the correspondent in its account with the Federal Reserve/Treasury Book Entry System of underlying securities in an amount at least equal to the repurchase price. If the seller were to default on its repurchase obligation, the Company might suffer a loss to the extent that the proceeds from the sale of the underlying securities were less than the repurchase price. A seller's bankruptcy could delay or prevent a sale of the underlying securities. Leverage For the purpose of making investments and to take advantage of favorable interest rates, the Company has issued, and intends to continue to issue, senior debt securities, up to the maximum amount permitted by the 1940 Act, which currently permits the Company, as a BDC, to issue senior debt securities and preferred stock (collectively, "Senior Securities") in amounts such that the Company's asset coverage, as defined in the 1940 Act, is at least 200% after each issuance of Senior Securities. Such indebtedness may also be incurred for the purpose of effecting share repurchases. As a result, the Company is exposed to the risks of leverage. 5 Although the Company has no current intention to do so, it has retained the right to issue preferred stock. As permitted by the 1940 Act, the Company may, in addition, borrow amounts up to five percent (5%) of its total assets for temporary or emergency purposes. Item 2. Properties Neither the Company nor any of its subsidiaries owns any real estate or other physical properties materially important to the operation of the Company or any of its subsidiaries. The Company leases an aggregate of approximately 9,000 square feet of office space in two locations for terms ranging up to six years. Item 3. Legal Proceedings Although the Company may, from time to time, be involved in litigation and claims arising out of its operations in the normal course of business, as of December 31, 1998, the Company was not presently a party to any material pending legal proceedings. Item 4. Submission of Matters to a Vote of Security Holders During the fourth quarter of the fiscal year ended December 31, 1998, there were no matters submitted to a vote of the Company's security holders through the solicitation of proxies or otherwise. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Since the IPO, the Company has distributed, and currently intends to continue to distribute in the form of dividends, a minimum of 90% of its net operating income and 98% of its net realized short-term capital gains, if any, on a quarterly basis to its stockholders. Net realized long-term capital gains may be retained to supplement the Company's equity capital and support growth in its portfolio, unless the Board of Directors determines in certain cases to make a distribution. There is no assurance that the Company will achieve investment results or maintain a tax status that will permit any specified level of cash distributions or year-to-year increases in cash distributions. The Company's Common Stock is quoted on the Nasdaq Stock Market under the symbol ACAS. As of March 16, 1999, the Company had 163 stockholders of record and approximately 4,500 beneficial owners. The following table sets forth the range of high and low sales prices of the Company's Common Stock as reported on the Nasdaq Stock Market and the dividends declared by the Company for the period from August 29, 1997, when public trading of the Common Stock commenced pursuant to the IPO, through March 16, 1999.
Bid Price Dividend High Low Declared ---- --- -------- 1997 Third Quarter (beginning August 29, 1997) $ 20.25 $ 18.50 $ 0.00 Fourth Quarter $ 20.75 $ 16.50 $ 0.21 1998 First Quarter $ 22.50 $ 17.25 $ 0.25 Second Quarter $ 24.63 $ 21.25 $ 0.29 Third Quarter $ 24.25 $ 10.13 $ 0.32 Fourth Quarter $ 18.44 $ 9.19 $ 0.48 1999 First Quarter (through March 16, 1999) $ 19.00 $ 14.00 $ 0.41
6 Item 6. Selected Financial Data AMERICAN CAPITAL STRATEGIES, LTD. Selected Financial Data The selected financial data should be read in conjunction with the Company's financial statements and notes thereto. As discussed in Notes 1 and 2, the Company completed an initial public offering of its common stock on August 29, 1997 and on October 1, 1997 began to operate so as to qualify to be taxed as a RIC. As a result of the changes, the financial results of the Company for periods prior to October 1, 1997 are not comparable to periods commencing October 1, 1997 and are not expected to be representative of the financial results of the Company in the future. (In thousands except per share data)
Three Months | | Nine Months Year Ended Ended | | Ended Year Ended Year Ended Year Ended December 31, December 31, | |September 30, December 31, December 31, December 31, 1998 1997 | | 1997 1996 1995 1994 ------------ ------------ | |------------- ------------ ------------ ------------ Total operating income $ 16,979 $ 2,797 | | $ 2,901 $2,746 $2,706 $2,498 Total operating expenses 1,709 551 | | 2,651 2,862 2,928 2,606 | | Operating income (loss) before equity in | | (loss) earnings of unconsolidated operating | | subsidiary 15,270 2,246 | | 250 (116) (222) (108) Equity in (loss) earnings of unconsolidated | | operating subsidiary (482) 24 | | -- -- -- -- | | Net operating income (loss) 14,788 2,270 | | 250 (116) (222) (108) Increase in unrealized appreciation on | | investments 2,127 167 | | 5,321 484 371 956 Realized gain (loss) on investments -- -- | | -- -- 66 (23) | | Income before income taxes 16,915 2,437 | | 5,571 368 215 825 Provision for income taxes -- -- | | 2,128 159 57 422 | | Net increase in shareholders' equity | | resulting from operations 16,915 2,437 | | 3,443 209 158 403 | | Per share data: | | Net operating income: | | Basic $ 1.34 $ 0.21 | | Diluted $ 1.29 $ 0.20 | | Net increase in shareholders' equity | | resulting from operations: | | Basic $ 1.53 $ 0.22 | | Diluted $ 1.48 $ 0.21 | | Cash dividends $ 1.34 $ 0.21 | | | | Balance Sheet Data: | | Total assets $270,019 $150,705 | | $154,322 $5,432 $ 4,382 $3,930 Total shareholders' equity 152,723 150,652 | | 150,539 3,372 2,946 2,571 | | Other Data: | | Number of portfolio companies at period | | end 15 3 | | Principal amount of loan originations $116,864 $ 16,817 | | Principal amount of loan repayments $ 1,719 $ 93 | | Return on equity (1) (2) 11.2% 6.5% | | Weighted average yield on investments | | to date 13.0% 12.2% | |
(1) Amounts are annualized for the three months ended December 31, 1997. (2) Return represents net increase in shareholders' equity resulting from operations. 7 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION (In thousands except per share data) Management's Discussion and Analysis of Financial Condition and Results of Operations All statements contained herein that are not historical facts including, but not limited to, statements regarding anticipated activity are forward looking in nature and involve a number of risks and uncertainties. Actual results may differ materially. Among the factors that could cause actual results to differ materially are the following: changes in the economic conditions in which the Company operates negatively impacting the financial resources of the Company; certain of the Company's competitors with substantially greater financial resources than the Company reducing the number of suitable investment opportunities offered to the Company or reducing the yield necessary to consummate the investment; increased costs related to compliance with laws, including environmental laws; general business and economic conditions and other risk factors described in the Company's reports filed from time to time with the Securities and Exchange Commission. The Company cautions readers not to place undue reliance on any such forward looking statements, which statements are made pursuant to the Private Securities Litigation Reform Act of 1995 and, as such, speak only as of the date made. The following analysis of the financial condition and results of operations of the Company should be read in conjunction with the Company's financial statements and the notes thereto. As discussed in Notes 1 and 2, the Company completed an initial public offering ("IPO") of its common stock on August 29, 1997 and on October 1, 1997 began to operate so as to qualify to be taxed as a regulated investment company ("RIC"). After the IPO, the Company changed its primary business plan and format from structuring and arranging financing for buyout transactions on a fee for services basis to being a lender to and investor in middle market companies. As a result of the changes, the Company's predominant source of operating income has changed from financial performance and advisory fees to interest and dividends earned from investing the Company's assets in debt and equity of businesses. Additionally, pursuant to RIC accounting requirements, effective October 1, 1997, the Company's accounting for its operating subsidiary, ACS Capital Investments Corporation (CIC), changed from a consolidated basis to the equity method. The financial results of the Company for the periods through September 30, 1997 are not comparable to periods commencing October 1, 1997 and are not expected to be representative of the financial results of the Company in the future. Accordingly, those periods are discussed separately. Portfolio Composition The Company's primary business is investing in and lending to privately-owned businesses through investments in senior debt, subordinated debt with detachable common stock warrants, preferred stock, and common stock. The total portfolio value of investments in non-publicly traded securities was $165,035 and $20,645 at December 31, 1998 and December 31, 1997, respectively. During the year ended December 31, 1998 and the three months ended December 31, 1997, the Company made investments totaling $150,249, including $7,384 in funds committed but undrawn under credit facilities, and $20,622, respectively. The weighted average effective interest rate on the investment portfolio was 13.0% and 12.2%, respectively, at December 31, 1998 and December 31, 1997. A summary of the composition of the Company's portfolio of non-publicly traded securities at December 31, 1998 and December 31, 1997 is shown in the following table: December 31, 1998 December 31, 1997 ----------------- ----------------- Senior debt 15.0% 27.7% Subordinated debt 65.5% 53.5% Convertible preferred stock 3.3% 11.2% Common stock warrants 13.5% 7.6% Common stock 2.7% -- The Company expects its portfolio composition in 1999 to be similar to its portfolio composition at December 31, 1998. The Company will continue to heavily weigh its portfolio composition toward investments in subordinated debt with detachable warrants. 8 The following table shows the portfolio composition by industry grouping: December 31, 1998 December 31, 1997 ----------------- ----------------- Manufacturing 66.1% 52.8% Media 9.1% -- Construction 10.0% -- Wholesale & Retail 7.4% 30.0% Transportation 5.4% -- Service 2.0% 17.2% Management expects that the largest percentage of its investments will continue to be in manufacturing companies, however, the Company intends to continue to diversify its portfolio and will explore new investment opportunities in a variety of industries. Results of Operations The Company's financial performance, as reflected in its Statements of Operations, is composed of four primary elements. The first element is "Net operating income (loss)," which for periods prior to October 1, 1997 ("Pre-RIC") is the difference between the Company's revenue earned from arranging financing for middle market companies and other financial advisory work and its total operating expenses including ESOP contributions, depreciation and interest expense. For periods prior to October 1, 1997, ESOP contributions represented a significant component of total operating expenses. All required contributions to the Company's ESOP have been made by the Company, and further contributions will be made at the discretion of the Company's Board of Directors. Net operating income (loss) for periods commencing October 1, 1997 ("Post-RIC") is primarily the interest and dividends earned from investing in debt and equity securities and the equity in earnings of its unconsolidated operating subsidiary less the operating expenses of the Company. The second element is "Change in unrealized appreciation of investments," which is the net change in the estimated fair value of the Company's portfolio assets at the end of the period compared with their estimated fair values at the beginning of the period or their stated costs, as appropriate. The third element is "Realized gain on investments," which reflects the difference between the proceeds from a sale or maturity of a portfolio investment and the cost at which the investment was carried on the Company's balance sheet. The fourth element is "Provision for income taxes," which reflects a statutory tax rate applied to the Company's GAAP pretax income for pre-RIC periods. Actual taxes paid have historically been lower than the provision primarily due to the temporary difference of the unrealized appreciation of investments which has resulted in a deferred tax liability on the pre-RIC balance sheet of CIC. For post-RIC periods, the Company intends to operate so as to qualify to be taxed as a RIC. As long as the Company qualifies as a RIC, it will be able to take a deduction against its otherwise taxable income for certain dividends it pays, allowing it to substantially reduce or eliminate its corporate-level tax liability. As a result, the provisions for income taxes for post-RIC periods are expected to be minimal. As discussed above, as a RIC, the Company is required to account for investments in operating subsidiaries under the equity method, regardless of ownership interest. Accordingly, the Company's investment in CIC, which prior to RIC status was consolidated, is presented on the equity method effective October 1, 1997. Therefore, commencing on October 1, 1997, and consistent with the equity method of accounting, the portfolio companies owned by CIC are not reported separately by the Company. 9 The operating results for the year ended December 31, 1998 are as follows: Year Ended December 31, 1998 ----------------- Operating income $16,979 Operating expenses 1,709 Equity in loss of unconsolidated operating subsidiary (482) ------- Net operating income 14,788 Increase in unrealized appreciation of investments 2,127 ------- Net increase in shareholders' equity resulting from operations $16,915 ======= Total operating income consisted of $2,549 in loan processing fees and $11,020 in interest and dividends on non-publicly traded securities and $3,410 in interest on government agency securities, bank deposits and repurchase agreements. The loan fees were earned as result of closing fourteen investments in private companies totaling $150 million during the year. Operating expenses for the year consisted of $843 in salaries and benefits, $809 in general and administrative expenses, and $57 in interest expense. Equity in loss of unconsolidated operating subsidiary represents CIC's results. For the year ended December 31, 1998, CIC's results included $5,227 of operating income, $6,451 of operating expenses, $481 of unrealized appreciation of investments, and $202 in other income. The increase in unrealized appreciation of investments as discussed in Note 2 to the financial statements is based on portfolio asset valuations determined by the Company's Board of Directors. The increase in unrealized appreciation of investments for the year ended December 31, 1998 is $2,127, which consists of valuation increases of $2,324 at nine portfolio companies and valuation decreases of $197 at three portfolio companies. The Post-RIC operating results for the three months ended December 31, 1997 are summarized as follows: Three Months Ended December 31, 1997 ----------------- Operating income $2,797 Operating expenses 551 Equity in earnings of unconsolidated operating subsidiary 24 ------ Net operating income 2,270 Increase in unrealized appreciation of investments 167 ------ Net increase in shareholders' equity resulting from operations $2,437 ====== Total operating income consisted of approximately $700 in loan processing fees and $200 in interest on non-publicly traded securities and $1,900 in interest on government agency securities and overnight repurchase agreements. The loan fees were earned as a result of closing three investments in private companies totaling $21 million during the period. Operating expenses for the period consisted of $243 in salaries and benefits and $308 in general and administrative expenses. Equity in earnings of unconsolidated operating subsidiary represents CIC's results including the portfolio companies. For the three months ended December 31, 1997, CIC's results included $414 of operating income, $987 of operating expenses, $605 of unrealized appreciation of investment and $8 in tax provisions. 10 The increase in unrealized appreciation of investments as discussed in Note 2 to the financial statements is determined by the Company's Board of Directors. The change in unrealized appreciation of investments for the three month period is $167 which consists of an increase of $52 in the valuation of the government agency securities and an increase of $115 in the valuation of the investments in private companies. The operating results for the nine months ended September 30, 1997 compared to nine months ended September 30, 1996. Nine Months Ended September 30, 1997 1996 ---- ---- Operating income $2,901 $1,758 Operating expenses 2,651 1,921 ------ ------ Net operating income 250 (163) Increase in unrealized appreciation of investments 5,321 441 Provision for income taxes 2,128 109 ------ ------ Net increase in shareholders' equity resulting from operations $3,443 $ 169 ====== ====== Total operating income was $2,901 for the nine months ended September 30, 1997, compared to $1,758 for the nine months ended September 30, 1996, a 65.0% increase. Financial advisory fees were $1,122 and $1,300 for the nine months ended September 30, 1997 and 1996, respectively. The decline in financial advisory fees was attributable to a relative increase in management attention to engagements producing financial performance fees, and to the IPO. Financial performance fees were $798 and $241 for the nine months ended September 30, 1997 and 1996, respectively. The increase in financial performance fees was associated with the Company's successful completion of an engagement to advise the Allied Pilots Association on the structuring of an employee option plan at American Airlines. Other operating income was $428 and $265 for the nine months ended September 30, 1997 and 1996, respectively. The increase in other operating income was attributable to a higher level of expense reimbursement for the Company. Included in total operating revenue for the nine months ended September 30, 1997 was interest income earned on investment securities and overnight repurchase agreements of $553. Total operating expenses for the nine months ended September 30, 1997 and 1996 were $2,651 and $1,921, respectively, an increase of 38.0%. Salaries and benefits for the nine months ended September 30, 1997 and 1996, were $1,221 and $935, respectively, a 30.6% increase which was predominantly associated with increased levels of staffing. General and administrative expenses for the nine months ended September 30, 1997 and 1996, were $1,514 and $772, respectively, a 96.1% increase primarily associated with the increased use of consultants by the Company. The increase in other expenses is attributable to a variety of expenses associated with potential transactions. For the nine months ended September 30, 1997 and 1996, interest expense was $60 and $21, respectively. The increase in interest expense relates to the Company's increased levels of working capital for the period in 1997 prior to the initial public offering. During the nine months ended September 30, 1997, the Company changed its evaluation of collectibility of a receivable from Martino's Bakery, Inc. due to Martino's improved financial condition, restructuring of repayment terms, and subsequent payment history. Therefore, the Company recorded a reversal in its provision for doubtful accounts totaling $177. During the nine months ended September 30, 1996, the Company had accrued $164 as a provision for doubtful accounts related to two companies, one of which was Martino's Bakery, Inc. For the nine months ended September 30, 1997 and 1996, the Company recorded net increases in unrealized appreciation of investments in its portfolio companies of $5,321 and $441, respectively. Included in unrealized appreciation of investments during the first nine months of 1997 was $4,400 associated with the acquisition of Biddeford Textile Company, formerly the blanket operation of the electric blanket manufacturing division of Sunbeam Products, Inc. Also included in unrealized appreciation of investments during the first nine months of 1997 was appreciation of $731 associated with the Company's investment in Mobile Tool International, Inc., appreciation of $356 associated with Four S Baking Company, Inc., and depreciation of $138 associated with Martino's Bakery, Inc. 11 The following table sets forth the components of the increase in unrealized appreciation of investments for the nine months ended September 30, 1997 and 1996: Nine Months Ended September 30, 1997 1996 ---- ---- Government Securities $ (27) $ -- Erie Forge and Steel, Inc -- 153 Four S Baking Company, Inc 355 (54) Indiana Steel & Wire Corporation -- 7 Martino's Bakery, Inc. (138) 143 Mobile Tool International, Inc. 731 192 Biddeford Textile Corporation 4,400 -- ------ ----- Increase in unrealized appreciation of investments $5,321 $ 441 ====== ===== The Company recorded provisions for income taxes for the nine months ended September 30, 1997 and 1996 of $2,129 and $109, respectively. Unrealized appreciation (depreciation) of investments does not affect the actual tax paid by the Company. However, under GAAP, the Company provides for income taxes based on its GAAP pretax income, which includes unrealized appreciation (depreciation) of investments. Actual income taxes paid may differ substantially from the provision for income taxes. The Company accounted for this difference by recognition of a deferred tax liability in the Pre-RIC balance sheet of CIC. Year Ended December 31, 1996 ----------------- Operating income $2,746 Operating expenses excluding ESOP contribution 2,645 ESOP contribution 216 ------ Total operating expenses 2,861 ------ Net operating loss before investment activity (115) Increase in unrealized appreciation of investments 483 Provision for income taxes 159 ------ Net increase in shareholders' equity resulting from operations $ 209 ====== Operating income consists predominantly of financial advisory fees and financial performance fees. During 1996, financial advisory fees and financial performance fees constituted 86.9% of total revenue. Total operating expenses at the Company were $2,861 in 1996. Salaries and benefits, excluding ESOP contributions, were $1,067 in 1996. General and administrative and other expenses were $1,282 in 1996. The Company's interest expense was $33 in 1996. Interest expense is primarily associated with credit facilities used by the Company to support its working capital requirements and to finance a portion of its investments in middle market companies. The Company's total borrowings under these facilities were approximately $430 at December 31, 1996. In addition, the Company had a note payable to its President in the amount of $74 at December 31, 1996. During 1996, the Company has paid interest on its debt obligations to unrelated parties at rates ranging from 1.5% above the lender's base rate of interest to 3% above such rate. The rate of interest on the Company's note payable to its President was 4% above the prime rate of interest. The Company made ESOP contributions of $216 in 1996. These contributions represent an allocation of the preferred stock held by the ESOP to the Company's employees which preferred stock was converted into common stock on a one for one basis on July 28, 1997. As a result, these contributions did not result in a cash outflow from the Company. These contributions were deductible for tax purposes and served to reduce the Company's tax obligations. At December 31, 1996, unearned ESOP shares totaled $117, and the Company's obligation to make further contributions to the ESOP was limited to that amount. 12 For the year ended December 31, 1996, the Company recorded net increases in unrealized appreciation of investments of $483 as follows: Year Ended December 31, 1996 ----------------- Erie Forge and Steel, Inc $204 Four S Baking Company, Inc (81) Indiana Steel & Wire Corporation 9 Martino's Bakery, Inc. 156 Mobile Tool International, Inc. 195 ---- Increase in unrealized appreciation of investments $483 ==== During 1996, the Company was taxed as a C Corporation. Unrealized appreciation (depreciation) of investments does not affect the actual tax paid by the Company. However, under GAAP, the Company provides for income taxes based on its GAAP pretax income, which includes unrealized appreciation (depreciation) of investments. The Company accounted for this difference by recognition of a deferred tax provision of $159 in 1996. Financial Condition, Liquidity, and Capital Resources At December 31, 1998, the Company had $6,149 in cash and cash equivalents and $89,948 in investments in Federal agency securities. In addition, the Company had outstanding debt secured by assets of the Company of $30,000 in borrowings under credit facilities and $85,948 in short-term notes payable. During 1998, the Company's primary source of funding was the proceeds received in connection with its IPO. The Company completed investing the proceeds of its IPO during 1998 and began funding its investments with proceeds from a line of credit and short term borrowings. As of March 31, 1999, the Company closed a maximum $100,000 debt funding facility. In connection with the closing, the Company established ACS Funding Trust I (the "Trust"), an affiliated business trust, and contributed or sold to the Trust approximately $157,000 in loans. Subject to certain conditions precedent, the Company will be required to contribute related equity warrants to the Trust in the future. The Company will remain the servicer of the loans. Simultaneously with the initial contribution, the Trust entered into a loan agreement with First Union Capital Markets Corp., as deal agent, and certain other parties providing for loans in an amount up to 50% of the eligible loan balance subject to certain concentration limits. The loans to the Trust are expected to be funded primarily through a commercial paper conduit. The Company used initial proceeds under this facility to repay existing debt and expects to use future proceeds to continue making investments in the debt and equity securities of middle market companies. In order to manage interest rate risk associated with the floating rate borrowings, the Trust will enter into hedging agreements. The Trust intends to use derivative instruments for non-trading and non-speculative purposes only. As a RIC, the Company is required to distribute annually 90% or more of its net operating income and net realized short-term capital gains to shareholders. While the Company provides shareholders with the option of reinvesting their distributions in the Company, the Company anticipates having to issue debt or equity securities in addition to the above borrowings to expand its investments in middle market companies. The terms of the future debt and equity issuances can not be determined and there can be no assurances that the debt or equity markets will be available to the Company on terms it deems favorable. Portfolio Credit Quality At December 31, 1998 and December 31, 1997, the Company's outstanding loans had estimated fair values of $132,878 and $16,763, respectively. All of the Company's outstanding loans are performing and paying as agreed. The Company has implemented a system under which it grades all loans on a scale of 1 to 4. This system is intended to reflect the performance of the borrower's business, the collateral coverage of the loans and other factors considered relevant. Under this system, management believes that loans with a grade of 4 involve the least amount of risk in the Company's portfolio. The borrower is performing above expectations and the trends and risk factors are generally favorable. Management believes that loans graded 3 involve an acceptable level of risk that is similar to the risk at the time of origination. The borrower is performing as expected and the risk factors are neutral to favorable. All new loans are initially graded 3. 13 Loans graded 2 involve a borrower performing below expectations and the loan risk has increased since origination. The borrower may be out of compliance with debt covenants, however, loan payments are not more than 120 days past due. For loans graded 2, the Company's management will increase procedures to monitor the borrower and will write down the fair value of the loan if it is deemed to be impaired. A loan grade of 1 indicates that the borrower is performing materially below expectations and the loan risk has substantially increased since origination. Some or all of the debt covenants are out of compliance and payments are delinquent. Loans graded 1 are not anticipated to be repaid in full and the Company will reduce the fair market value of the loan to the amount it anticipates will be recovered. To monitor and manage the investment portfolio risk, management tracks the weighted average portfolio grade. The weighted average portfolio grade was 3.2 and 3.0 at December 31, 1998 and December 31, 1997, respectively. In addition, at December 31, 1998 and December 31, 1997, all of the Company's loans were graded 3 or higher. Impact of the Year 2000 The "Year 2000 Issue" is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs or hardware that have date-sensitive software or embedded chips may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruption of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. The Company created a Year 2000 Compliance Committee to address the Year 2000 compliance of the Company's information technology and non-information technology systems, the systems of third parties, and the systems of the portfolio companies. The Company has also engaged outside technology consultants to assist with its Year 2000 project. All of the software used by the Company in its information technology systems is provided by outside vendors. The Company has taken an inventory of all of its information technology systems and is in the process of obtaining Year 2000 compliance designation from the vendors and internally conducting compliance testing. Based on its assessment of its information technology systems, management has identified the general ledger software package as the significant system that is Year 2000 non-compliant. As such, the Company will replace its accounting software with a new, Year 2000 compliant software package. The new accounting software and all necessary modifications to other information technology systems will be completed by August, 1999. The Company is also evaluating the Year 2000 compliance of its non-information technology systems, consisting of office equipment other than computers and communications equipment. The Company has contacted the office equipment vendors to obtain Year 2000 compliance designation. The Company believes it will complete the remediation, testing and implementation of these non-information technology systems by July, 1999. The Company has contacted third parties that do not share information systems with the Company ("external agents"). These third parties include the Company's banks, landlords, utility companies, telecommunication providers and other vendors. To date, the Company is not aware of any external agent Year 2000 issue that would materially impact the Company's results of operations, liquidity, or capital resources. However, the Company has no means of ensuring that external agents will be Year 2000 ready. The inability of external agents to complete their Year 2000 resolution process in a timely fashion could materially impact the Company. The effect of non-compliance by external agents is not determinable. The Company is also evaluating the Year 2000 readiness of its portfolio companies. Beginning in the summer of 1998, the Company has required that each portfolio company expressly warrant in its loan agreement that it is or will be Year 2000 compliant prior to December 31, 1999. The Company has also submitted questionnaires to all of its portfolio companies to determine their exposure to the Year 2000 problem and the adequacy of their plans to address the issues. Over 90% of the portfolio companies have responded to the questionnaire. Based on the correspondence received from the portfolio companies, management believes that over two-thirds of its portfolio companies have either no material exposure to the Year 2000 issue or are adequately carrying out their plans to address their exposure. The Company has either not received complete questionnaires from the remaining one third of the portfolio companies or has requested that the portfolio companies improve the scope and detail of their responses. The Company intends to follow up with the portfolio companies to ensure that they have executed their compliance plan by June 30, 1999. Throughout 1999, the Company will continue to address any issues of Year 2000 non-compliance and further develop its contingency plan to ensure business operations in the event of systems failure in the Year 2000. The Company is utilizing both internal and external resources to reprogram or replace, test, and implement the software and other systems for Year 2000 modifications. The Company estimates that the cost of its Year 2000 project will be less than $125. This amount includes the cost of additional software, reviewing the portfolio companies' readiness, and outside systems professionals working on the Company's Year 2000 compliance. 14 The Company's plans to complete the Year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events including the continued availability of certain resources, estimates on the status of completion and the total expected costs. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those plans. Specific issues that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes, and similar uncertainties. Significant systems failures at the Company, a third party, or the portfolio companies could have a materially adverse effect on the Company's business. While the Company believes that its portfolio companies are adequately addressing the Year 2000 issue, no assurance can be given that some of its portfolio companies will not suffer material adverse effects from Year 2000 issues. Management believes that the most likely worst case Year 2000 scenario is a material decrease in interest income and an impairment in the valuation of the Companies investment portfolio. The magnitude of these material adverse effects on the portfolio companies and the operating results and financial of the Company cannot be determined at this time. Impact of Inflation Management believes that inflation can influence the value of the Company's investments through the impact it may have on the capital markets, the valuations of business enterprises and the relationship of the valuations to underlying earnings. 15 Item 8. Financial Statements and Supplementary Data Report of Independent Auditors Board of Directors American Capital Strategies, Ltd. We have audited the accompanying balance sheets of American Capital Strategies, Ltd., including the schedules of investments, as of December 31, 1998 and 1997, the related statements of operations, shareholders' equity and cash flows for the year ended December 31, 1998, the three months ended December 31, 1997, the nine months ended September 30, 1997, and the year ended December 31, 1996, and the financial highlights for the year ended December 31, 1998 and the three months ended December 31, 1997. These financial statements and the financial highlights 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 audits 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, the financial statements referred to above present fairly, in all material aspects, the financial position of American Capital Strategies, Ltd. at December 31, 1998 and 1997, and the results of its operations and its cash flows for the year ended December 31, 1998, the three months ended December 31, 1997, the nine months ended September 30, 1997, and the year ended December 31, 1996, and the financial highlights for the year ended December 31, 1998 and the three months ended December 31, 1997 in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Washington, D.C. February 2, 1999 16 AMERICAN CAPITAL STRATEGIES, LTD. BALANCE SHEETS (In thousands except per share data)
December 31, December 31, 1998 1997 ---- ---- Assets Investments at fair value (cost of $252,718 and $133,274, respectively) $254,983 $133,415 Cash and cash equivalents 6,149 8,862 Investment in unconsolidated operating subsidiary 6,386 6,869 Due from unconsolidated operating subsidiary 778 861 Interest receivable 1,561 644 Other 162 54 -------- -------- Total assets $270,019 $150,705 ======== ======== Liabilities and Shareholders' Equity Accounts payable and accrued liabilities $ 126 $ 53 Accrued dividends payable 1,222 -- Notes payable 85,948 -- Revolving credit facility 30,000 -- -------- -------- Total liabilities 117,296 53 Shareholders' equity: Undesignated preferred stock, $0.01 par value, 5,000 shares authorized, 0 issued and outstanding -- -- Common stock, $.01 par value, 20,000 shares authorized, and 11,081 and 11,069 issued and outstanding, respectively 111 111 Capital in excess of par value 145,245 144,940 Note receivable from sale of common stock (300) -- Distributions in excess of net realized earnings (116) (55) Unrealized appreciation of investments 7,783 5,656 -------- -------- Total shareholders' equity 152,723 150,652 -------- -------- Total liabilities and shareholders' equity $270,019 $150,705 ======== ========
See accompanying notes. 17 AMERICAN CAPITAL STRATEGIES, LTD. SCHEDULE OF INVESTMENTS DECEMBER 31, 1998 (In thousands except per share data)
Industry Cost Fair Value -------- ---- ---------- Senior Debt--9.47% - - ------------------ Four S Baking Company Baking $ 1,266 $ 1,266 BIW Connector Systems, LLC Manufacturing 3,404 3,404 Chance Coach, Inc. Bus Manufacturer 1,286 1,286 JAG Industries, Inc. Manufacturing 1,200 1,200 Wilderness Systems, Inc. Canoes & Kayaks 9,675 9,675 Cycle Gear, Inc. Motor Cycle Accessories 750 750 Eurocaribe, Inc. Meat Processing 7,181 7,181 -------- -------- Subtotal 24,762 24,762 Subordinated Debt--41.37% - - ------------------------- Four S Baking Company Baking 1,588 1,588 BIW Connector Systems, LLC. Manufacturing 6,710 6,710 Westwinds Group Holdings, Inc. Restaurant 2,932 2,932 JAG Industries, Inc. Manufacturing 2,335 2,335 Specialty Transportation Services, Inc. Waste Hauler 7,368 7,368 Chance Coach, Inc. Bus Manufacturer 7,060 7,060 The L.A. Studios, Inc. Audio Production 2,393 2,393 Decorative Surfaces International, Inc. Decorative Paper & 10,490 10,490 Vinyl Mfg. New Piper Aircraft, Inc. Aircraft Manufacturing 17,858 17,858 Electrolux, LLC Vacuum Cleaner 7,264 7,264 Cycle Gear, Inc. Motor Cycle Accessories 633 633 Wilderness System, Inc. Canoes & Kayaks 4,701 4,701 Eurocaribe, Inc. Meat Processing 8,905 8,905 ConStar International, Inc. Electrical 12,839 12,839 Centennial Broadcasting, Inc. Radio Stations 15,040 15,040 -------- -------- Subtotal 108,116 108,116 Convertible Preferred Stock--2.10% - - ------------------------------------ Four S Baking Company 15% dividend convertible into 51,390 shares of common stock or 10.89% of Co. Baking 2,756 2,756 Chance Coach, Inc. 12% dividend convertible into 20% of Co. Bus Manufacturer 2,000 2,079 Decorative Surfaces International, Inc. prime rate plus 4% dividend convertible into 2.9% of Co. Decorative Paper & Vinyl Mfg. 646 646 Subtotal -------- -------- 5,402 5,481 Common Stock Warrants(1)--8.52% - - ---------------------------------- Four S Baking Company 3.26% of Co. Baking 462 600 BIW Connector Systems, LLC 8% of LLC Manufacturing 652 540 Westwinds Group Holdings, Inc. 5% of Co. Restaurant 350 421 JAG Industries, Inc. 75% of Co. Manufacturing 505 465 Specialty Transportation Services, Inc. 9.1% of Co. Waste Hauler 694 784 Chance Coach, Inc. 43.7% of Co. Bus Manufacturer 4,041 4,543 The L.A. Studios, Inc. 17% of Co. Audio Production 902 857 Decorative Surfaces International, Inc. 42.3% of Co. Decorative Paper & Vinyl Mfg. 4,571 5,596 New Piper Aircraft, Inc. 4% of Co. Aircraft Manufacturing 2,231 2,231 Electrolux, LLC 2.5% of Co. Vacuum Cleaner 246 246 Cycle Gear, Inc. 16.5% of Co. Motor Cycle Accessories 374 374 Wilderness System, Inc. 18% of Co. Canoes & Kayaks 1,319 1,319 Eurocaribe, Inc. 37% of Co. Meat Processing 1,110 1,110 ConStar International, Inc. 17.5% of Co. Electrical 3,171 3,171 -------- -------- Subtotal 20,628 22,257 Common Stock (1) - 1.69% - - ------------------------ Four-S Baking Company 5.5% of Co. Baking 966 1,004 Specialty Transportation Services, Inc. 9.1% of Co. Waste Hauler 500 784 Chance Coach, Inc. 18.3% of Co. Bus Manufacturer 1,896 2,131 ConStar International, Inc. 2.8% Electrical 500 500 -------- -------- Subtotal 3,862 4,419 -------- -------- Subtotal--non-publicly traded securities--63.15% 162,770 165,035 Government Securities--34.41% - - ----------------------------- FHLB Discount Note due 1/4/98 89,948 89,948 -------- -------- Total Investments 252,718 254,983 Investment in Unconsolidated Operating Subsidiary--2.44% - - -------------------------------------------------------- ACS Capital Investments Corporation(1)(2)--100% of Co. Investment Banking 403 6,386 -------- -------- Totals $253,121 $261,369 ======== ========
(1) Non-income producing (2) Affiliate See accompanying notes. 18 AMERICAN CAPITAL STRATEGIES, LTD. SCHEDULE OF INVESTMENTS DECEMBER 31, 1997 (In thousands except per share data)
Industry Cost Fair Value -------- ---- ---------- Senior Debt--4.07% - - ------------------ Four S Baking Company Baking $ 1,825 $ 1,825 BIW Connector Systems, LLC. Manufacturing 3,890 3,890 -------- -------- Subtotal 5,715 5,715 Subordinated Debt--7.88% - - ------------------------ Four S Baking Company Baking 1,492 1,492 BIW Connector Systems, LLC. Manufacturing 6,350 6,350 Westwinds Group Holdings, Inc. Restaurant 3,206 3,206 -------- -------- Subtotal 11,048 11,048 Convertible Preferred Stock--1.64% - - ------------------------------------- Four S Baking Company 15% dividend convertible into 51,390 shares of common stock or 10.89% of Co. Baking 2,303 2,303 Common Stock Warrants(1)--1.13% - - ---------------------------------- Four S Baking Company 3.26% of Co. Baking 461 577 BIW Connector Systems, LLC 8% of LLC Manufacturing 652 652 Westwinds Group Holdings, Inc. 5% of Co. Restaurant 350 350 -------- -------- Subtotal 1,463 1,579 -------- -------- Subtotal--non-publicly traded securities--14.72% 20,529 20,645 Government Securities--80.38% - - ----------------------------- FHLB Discount Note due 2/4/98 20,969 20,981 FHLB Discount Note due 3/6/98 10,893 10,898 FHLB Discount Note due 4/1/98 9,865 9,868 FNMA Discount Note due 4/24/98 6,877 6,883 FFCB 5.90% due 6/2/98 20,017 20,016 FHLB Discount Note due 6/8/98 14,646 14,644 FHLB Discount Note due 8/20/98 14,483 14,480 FNMA 5.71% due 9/9/98 14,995 15,000 -------- -------- Subtotal 112,745 112,770 -------- -------- Total Investments 133,274 133,415 Investment in Unconsolidated Operating Subsidiary--4.90% ACS Capital Investments Corporation(1)(2)--100% of Co Investment Banking 403 6,869 -------- -------- Totals $133,677 $140,284 ======== ========
(1) Non-income producing (2) Affiliate See accompanying notes. 19 AMERICAN CAPITAL STRATEGIES, LTD. STATEMENTS OF OPERATIONS (In thousands except per share data)
Three Months Year Ended Ended Nine Months Ended Year Ended December 31, 1998 December 31, 1997 September 30, 1997 December 31, 1996 ----------------- ----------------- ------------------ ----------------- Operating income: Financial advisory fees $ -- $ -- $ 1,122 $ 1,738 Financial performance fees -- -- 798 649 Interest and dividend income 14,430 2,123 553 -- Loan processing fees 2,549 654 -- -- Other -- 20 428 359 -------- ------- -------- -------- Total operating income 16,979 2,797 2,901 2,746 Operating expenses: Salaries and benefits 843 243 1,221 1,283 General, administrative and other 809 308 1,514 1,282 Provision for (reversal of) doubtful accounts -- -- (177) 224 Interest 57 -- 60 33 Depreciation and amortization -- -- 33 39 -------- ------- -------- ------ Total operating expenses 1,709 551 2,651 2,861 Operating income (loss) before equity in earnings of unconsolidated operating subsidiary 15,270 2,246 250 (115) Equity in (loss) earnings of unconsolidated operating subsidiary (482) 24 -- -- -------- ------- -------- ------ Net operating income (loss) 14,788 2,270 250 (115) Increase in unrealized appreciation of investments 2,127 167 5,321 483 -------- ------- -------- ------ Income before income taxes 16,915 2,437 5,571 368 Provision for income taxes -- -- 2,128 159 -------- ------- -------- ------ Net increase in shareholders' equity resulting from operations $ 16,915 $ 2,437 $ 3,443 $ 209 ======== ======= ======== =======
Net operating income per share Basic $ 1.34 $ 0.21 Diluted $ 1.29 $ 0.20 Net increase in shareholders' equity Basic $ 1.53 $ 0.22 resulting from operations per share Diluted $ 1.48 $ 0.21 Weighted average shares of Basic 11,068 11,069 common stock outstanding Diluted 11,424 11,405 See accompanying notes. 20 AMERICAN CAPITAL STRATEGIES, INC. STATEMENTS OF SHAREHOLDERS' EQUITY (In thousands except per share data)
Unearned Capital in Preferred ESOP Common Stock Excess of Retained Stock Shares Shares Amount Par Value Earnings ----- ------ ------ ------ --------- -------- Balance at December 31, 1995 $ 1,419 $ (333) 480 $ 5 $ 10 $ 1,845 Net increase in shareholders' equity resulting from operations -- -- -- -- -- 209 Options exercised -- -- 1 -- 1 -- ESOP shares earned -- 216 -- -- -- -- -------- ------- ----- ----- ------- -------- Balance at December 31, 1996 $ 1,419 $ (117) 481 $ 5 $ 11 $ 2,054 Net increase in shareholders' equity resulting from operations -- -- -- -- -- 3,443 Contribution of common stock to ESOP -- -- 1 -- 8 (8) Conversion of preferred stock to common stock (1,419) -- 205 2 1,417 -- Issuance of common stock -- -- 10,382 104 143,504 -- ESOP shares earned -- 117 -- -- -- -- ------- -------- ------- ----- -------- ------- Balance at September 30, 1997 $ -- $ -- $11,069 $ 111 $144,940 $ 5,489 ======= ======== ======= ===== ======== ======= - - --------------------------------------------------------------------------------------------------------------------- - - --------------------------------------------------------------------------------------------------------------------- Effect of reorganization as a RIC -- -- -- -- -- (5,489) Net increase in shareholders' equity resulting from operations -- -- -- -- -- -- Distributions -- -- -- -- -- -- -------- -------- ------- ----- -------- ------ Balance at December 31, 1997 $ -- $ -- 11,069 $ 111 $144,940 $ -- ======== ======== ======= ===== ======== ====== Issuance of common stock under the 1997 Stock Option Plan -- -- 28 -- 396 -- Issue of common stock under the Dividend Reinvestment Plan -- -- 7 -- 128 -- Repurchase of outstanding shares -- -- (23) -- (219) -- Issuance of note receivable from sale of common stock -- -- -- -- -- -- Net increase in shareholders' equity resulting from operations -- -- -- -- -- -- Distributions -- -- -- -- -- -- ------- ------- ------ ----- ------- ------ Balance at December 31, 1998 $ -- $ -- 11,081 $ 111 $145,245 $ -- ======= ======= ======= ===== ======== ======
AMERICAN CAPITAL STRATEGIES, INC. STATEMENTS OF SHAREHOLDERS' EQUITY (In thousands except per share data)
Notes Receivable Unearned Unrealized Total From Sale of Net Realized Appreciation Shareholders' Common Stock Earnings of Investments Equity ------------ -------- -------------- ------ Balance at December 31, 1995 -- -- -- $ 2,946 Net increase in shareholders' equity resulting from operations -- -- -- 209 Options exercised -- -- -- 1 ESOP shares earned -- -- -- 216 ------- -------- ------ -------- Balance at December 31, 1996 -- -- -- $ 3,372 ------- -------- ------ -------- Net increase in shareholders' equity resulting from operations -- -- -- 3,443 Contribution of common stock to ESOP -- -- -- -- Conversion of preferred stock to common stock -- -- -- -- Issuance of common stock -- -- -- 143,608 ESOP shares earned -- -- 117 ------- -------- ------- -------- Balance at September 30, 1997 $ -- $ -- $ -- $150,540 ======= ======== ======= ======== - - ----------------------------------------------------------------------------------------------- - - ----------------------------------------------------------------------------------------------- Effect of reorganization as a RIC -- -- 5,489 -- Net increase in shareholders' equity resulting from operations -- 2,269 167 2,436 Distributions -- (2,324) -- (2,324) ------- -------- ------- -------- Balance at December 31, 1997 $ -- $ (55) $ 5,656 $150,652 ======= ======== ======= ======== Issuance of common stock under the 1997 Stock Option Plan -- -- -- 396 Issue of common stock under the Dividend Reinvestment Plan -- -- -- 128 Repurchase of outstanding shares -- -- -- (219) Issuance of note receivable from sale of common stock (300) -- -- (300) Net increase in shareholders' equity resulting from operations -- 14,788 2,127 16,915 Distributions -- (14,849) -- (14,849) ------- -------- -------- -------- Balance at December 31, 1998 $ (300) $ (116) $ 7,783 $152,723 ======= ======== ======= ======== See accompanying notes.
21 AMERICAN CAPITAL STRATEGIES, LTD. STATEMENTS OF CASH FLOWS (In thousands except per share data)
Three Months Nine Months Year Ended Ended Ended Year Ended December 31, December 31, September 30, December 31, 1998 1997 1997 1996 ----------- ----------- ------------ ------------ Operating activities Net increase in shareholders' equity resulting from operations $ 16,915 $ 2,437 $ 3,443 $ 209 Adjustments to reconcile net increase in shareholders' equity resulting from operations to net cash provided by (used in) operating activities: Depreciation and amortization -- -- 33 38 Uunrealized appreciation of investments (2,127) (167) (5,321) (483) Net amortization of securities (1,336) (1,234) (337) -- Amortization of loan discounts (913) -- -- -- Amortization of deferred finance costs -- -- 3 11 Provision for deferred income taxes -- -- 2,102 121 Contribution of stock to ESOP -- -- 117 216 Increase in interest receivable (917) (207) (122) -- Provision for doubtful accounts -- -- (177) 224 Increase in accrued payment-in-kind dividend and interest (478) -- -- -- Decrease (increase) in due from unconsolidated subsidiary 83 (526) -- -- Decrease (increase) in accounts receivable -- -- 486 (865) Decrease in income taxes receivable -- -- 24 101 (Increase) decrease in other assets (71) 62 (113) 6 Increase (decrease) in accounts payable and accrued liabilities 73 (328) 128 228 Loss (earnings) of unconsolidated operating subsidiary 482 (24) -- -- ----------- --------- --------- --------- Net cash provided by (used in) operating activities 11,711 13 266 (194) Investing activities Proceeds from sale or maturity of investments 231,580 35,000 60 -- Principal repayments 1,719 93 -- -- Purchase of investments (142,865) (20,622) (483) (75) Purchase of securities (207,146) (16,593) (129,896) -- Purchases of property and equipment, net of disposals -- -- (29) (39) ----------- --------- --------- --------- Net cash used in investing activities (116,712) (2,122) (130,348) (114) Financing activities Proceeds from short term notes payable, net 85,948 -- (430) 269 Drawings on revolving credit facilities, net 30,000 -- -- -- Increase in deferred financing costs (37) -- -- (4) (Decrease) increase in due to related parties, net -- -- (78) 6 Repurchase of common stock (219) -- -- -- Issuance of common stock 224 -- 143,608 -- Options exercised -- -- -- 1 Distributions paid (13,628) (2,325) -- -- ----------- --------- --------- --------- Net cash provided by (used in) financing activities 102,288 (2,325) 143,100 272 ----------- --------- --------- --------- Net (decrease) increase in cash and cash equivalents (2,713) (4,434) 13,018 (36) Cash and cash equivalents at beginning of period 8,862 13,296 323 359 ----------- --------- -------- --------- Cash and cash equivalents at end of period $ 6,149 $ 8,862 $ 13,341 $ 323 =========== ========= ========= ========= Non-cash financing activities: - - ----------------------------- Note receivable issued in sale of common stock $ 300 $ -- $ -- $ --
See accompanying notes. 22 AMERICAN CAPITAL STRATEGIES, LTD. FINANCIAL HIGHLIGHTS (In thousands except per share data)
Year Ended Three Months Ended December 31, 1998 December 31, 1997 ------------------- ------------------- Per Share Data(1) Net asset value at beginning of the period $ 13.61 $ 13.60 Net operating income 1.34 0.21 Increase in unrealized appreciation on investments 0.19 0.01 ---------------- ------------------- Net increase in shareholders' equity from operations $ 1.53 $ 0.22 Distribution of net investment income 1.34 0.21 ---------------- ------------------- Net asset value at end of period $ 13.80 $ 13.61 Per share market value at end of period $ 17.25 $ 18.125 Total return (3) 2.57% 22.23% Shares outstanding at end of period 11,081 11,069 Ratio/Supplemental Data Net assets at end of period $ 152,723 $ 150,652 Ratio of operating expenses to average net assets(2) 1.13% 1.46% Ratio of net operating income to average net assets(2) 9.75% 6.03%
- - ------------------ (1) Basic per share data. (2) Amounts were annualized for the results of the three month period ended December 31, 1997. (3) Amounts were not annualized for the results of the three month period ended December 31, 1997. See accompanying notes. 23 AMERICAN CAPITAL STRATEGIES, LTD. NOTES TO FINANCIAL STATEMENTS (In thousands except per share data) Note 1. Organization American Capital Strategies, Ltd., a Delaware corporation (the "Company"), was incorporated in 1986 to provide financial advisory services to and invest in middle market companies. On August 29, 1997, the Company completed an initial public offering ("IPO") of 10,382,437 shares of common stock ("Common Stock"), and became a non-diversified close end investment company that has elected to be treated as a business development company ("BDC") under the Investment Company Act of 1940, as amended ("1940 Act"). On October 1, 1997, the Company began operations so as to qualify to be taxed as a regulated investment company ("RIC") as defined in Subtitle A, Chapter 1, under Subchapter M of the Internal Revenue Code of 1986 as amended (the "Code"). As contemplated by these transactions, the Company materially changed its business plan and format from structuring and arranging financing for buyout transactions on a fee for services basis to primarily being a lender to and investor in middle market companies. As a result of the changes, the Company is operating as a holding company whose predominant source of operating income has changed from financial performance and advisory fees to interest and dividends earned from investing the Company's assets in debt and equity of businesses. The Company's investment objectives are to achieve current income from the collection of interest and dividends, as well as long-term growth in its shareholders' equity through appreciation in value of the Company's equity interests. The Company continues to provide financial advisory services to businesses through ACS Capital Investments Corporation ("CIC"), a wholly-owned subsidiary. The Company is headquartered in Bethesda, Maryland, and has offices in New York, Boston, Pittsburgh, San Francisco, Chicago, and Dallas. Note 2. Summary of Significant Accounting Policies Basis of Presentation The accompanying financial statements have been prepared in accordance with generally accepted accounting principles and for periods commencing with the Company's election to be treated as a RIC, in accordance with Article 6 of Regulation S-X of the Code of Federal Regulations. For the nine months ended September 30, 1997 and the year ended December 31, 1996 the financial statements are prepared on a consolidated basis with the accounts of CIC, the Company's wholly owned subsidiary. All intercompany transactions and balances were eliminated. Effective October 1, 1997, pursuant to RIC accounting requirements, CIC was deconsolidated, and, as a result, for the year ended December 31, 1998 and the three months ended December 31, 1997 the Company accounted for its investment in CIC under the equity method. In connection with this change, the Company contributed the following assets and liabilities to CIC: Investment in Erie Forge and Steel $2,736 Other assets 791 Other liabilities 69 Deferred tax liability 3,333 As a result of these changes, the Company's financial statements for periods through September 30, 1997 ("pre-RIC") are not comparable with the financial statements for periods commencing after October 1, 1997 ("post-RIC"). Valuation of Investments Investments are carried at fair value, as determined by the Board of Directors. Securities which are publicly traded are valued at the closing bid price on the valuation date. Debt and equity securities which are not publicly traded are valued at fair value as determined in good faith by the Board of Directors. In making such determination, the Board of Directors will value non-convertible debt securities at cost plus amortized original issue discount, if any, unless adverse factors lead to a determination of a lesser valuation. In valuing convertible debt, equity or other securities, the Board of Directors determines the fair value based on the collateral, the issuer's ability to make payments, the earnings of the issuer, sales to third parties of similar securities, the comparison to publicly traded securities and other pertinent factors. Due to the uncertainty inherent in the valuation process, such estimates of fair value may differ significantly from the values that would have been used had a ready market for the securities existed, and the differences could be material. 24 AMERICAN CAPITAL STRATEGIES, LTD. NOTES TO FINANCIAL STATEMENTS (In thousands except per share data) Cash and Cash Equivalents Cash and cash equivalents consist of demand, deposits and highly liquid investments with original maturities of three months or less. Cash and cash equivalents are carried at cost which approximates fair value. Interest and Dividend Income Recognition Interest income is recorded on the accrual basis to the extent that such amounts are expected to be collected. Original issue discount is amortized into interest income using the effective interest method. Dividend income is recognized on the ex-dividend date. Financial Advisory and Performance Fee Recognition Financial advisory fees represent amounts received for providing advice and analysis to middle market companies and are recognized as earned based on hours incurred. Financial performance fees represent amounts received for structuring, financing, and executing transactions and are generally payable only if the transaction closes and are recognized as earned when the transaction is completed. Financial advisory and performance fees are for services provided by CIC. Loan Fee and Loan Processing Fee Recognition The Company records loan fees as income on the closing date of the related loan. Loan processing fees are recorded by the Company's wholly owned subsidiary, CIC, as income on the closing date of the related loan. Realized Gain or Loss and Unrealized Appreciation or Depreciation on Investments Realized gain or loss is recorded at the disposition of an investment and is the difference between the net proceeds from the sale and the cost basis of the investment using the specific identification method. Unrealized appreciation or depreciation reflects the difference between the Board of Directors' valuation of the investments and the cost basis of the investments. Distributions to Shareholders Distributions to shareholders are recorded on the ex-dividend date. Federal Income Taxes The Company operates so as to qualify to be taxed as a RIC under the Internal Revenue Code. Generally, a RIC is entitled to deduct dividends it pays to its shareholders from its income to determine "taxable income." The Company has distributed and currently intends to distribute sufficient dividends to eliminate taxable income. Therefore, the statement of operations contains no provision for income taxes for the year ended December 31, 1998 and the three months ended December 31, 1997. During the pre-RIC periods, the Company operated under Subchapter C of the Internal Revenue Code and calculated its tax provision pursuant to Statement of Financial Accounting Standards No. 109. Deferred income taxes were determined based on the differences between financial reporting and tax basis of assets and liabilities. Use of Estimates in Preparation of Financial Statements 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, liabilities, revenues and expenses and disclosure of contingent assets and liabilities. Actual results could differ from those estimates. Property and Equipment Property and equipment are carried at cost and are depreciated using the straight-line method over the estimated useful lives of the related assets ranging from five to seven years. 25 AMERICAN CAPITAL STRATEGIES, LTD. NOTES TO FINANCIAL STATEMENTS (In thousands except per share data) Management Fees The Company is self-managed and therefore does not incur management fees payable to third parties. Reclassifications Certain previously reported amounts have been reclassified to conform with the current financial statement presentation. Recent Accounting Pronouncements As of January 1, 1998, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 established new rules for the reporting and display of comprehensive income and its components; however, the adoption of this statement had no impact on the Company's net increase in shareholders' equity resulting from operations or shareholders' equity. As of January 1, 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 established standards for determining an entity's operating segments and the type and level of financial information to be disclosed in both annual and interim financial statements. It also established standards for related disclosures about products and services, geographic areas and major customers. Accordingly, the Company's reportable segments are its investing operations as a business development company and the financial advisory operations of its wholly-owned subsidiary, CIC (see Note 4). As of January 1, 1998, the Company adopted SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits - an amendment of FASB Statements No. 87, 88, and 106" ("SFAS 132"). SFAS 132 revises employers' disclosures about pension and other postretirement benefit plans. Adoption of SFAS 132 does not have a material impact on the financial statements of the Company. In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and reporting standards for derivative instruments. The statement requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. This statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Adoption of SFAS 133 is not expected to have a material impact on the Company's financial statements or disclosures. Note 3. Investments Investments consists of securities issued by various agencies of the Federal government valued at $89,948 with maturities of less than one year from the date of purchase and securities issued by privately-held companies valued at $165,035. The securities issued by privately-held companies consist of senior debt, subordinated debt with equity warrants, convertible preferred stock and common stock. The debt securities have effective interest rates ranging from 8.8% to 22.4% and are payable in installments with final maturities from 5 to 10 years and are generally collateralized by assets of the borrower. The Company's investments in equity warrants and common stock are non-income producing. The net unrealized appreciation in investments for Federal income tax purposes is the same as for book purposes and none of the Company's investments are on non-accrual status. Note 4. Investment in Unconsolidated Operating Subsidiary As discussed in Note 2, CIC is an operating subsidiary of the Company and is accounted for under the equity method effective October 1, 1997. The investment in CIC is carried at fair value as determined by the Board of Directors. 26 AMERICAN CAPITAL STRATEGIES, LTD. NOTES TO FINANCIAL STATEMENTS (In thousands except per share data) Condensed financial information for CIC is as follows:
December 31, 1998 December 31, 1997 ----------------- ----------------- Assets Investments in portfolio companies, at fair value $ 10,837 $ 10,361 Other assets, net 1,359 991 ------------- ------------ Total assets $ 12,196 $ 11,352 ============= ============ Liabilities and Shareholder's Equity Deferred income taxes $ 2,921 $ 3,323 Due to parent 778 861 Other liabilities 2,111 299 Shareholder's equity 6,386 6,869 ------------- ------------ Total liabilities and shareholder's equity $ 12,196 $ 11,352 ============= ============
Year Ended Three Months Ended December 31, 1998 December 31, 1997 ----------------- ----------------- Operating income $ 5,227 $ 532 Operating expense 6,451 1,084 ------------- ------------ Net operating loss (1,224) (552) Increase in unrealized appreciation of investments 481 605 Other 261 (29) ------------- ------------ Net (loss) income $ (482) $ 24 ============= ============
Note 5. Stock Option Plan The Company applies APB No. 25, "Accounting for Stock Issued to Employees" (APB 25), and related interpretations in accounting for its stock-based compensation plan. In accordance with SFAS 123, "Accounting for Stock-Based Compensation" (SFAS 123), the Company elected to continue to apply the provisions of APB 25 and provide pro forma disclosure of the Company's net operating income and net increase in shareholders' equity resulting from operations calculated as if compensation costs were computed in accordance with SFAS 123. The Company is providing this information for the post-RIC period as discussed in Notes 1 and 2 and from the time the 1997 Stock Option Plan (the 1997 Plan) was established by the Company. The 1997 Plan provides for the granting of options to purchase up to 1,328 shares of common stock at a price of not less than the fair market value of the common stock on the date of grant to employees of the Company. On May 14, 1998, the Company authorized 500 additional shares to be granted under the 1997 Plan. As of December 31, 1998, there are 195 shares available to be granted under the 1997 Plan. Options granted under the 1997 Plan may be either incentive stock options within the meaning of Section 422 of the Code or nonstatutory stock options. Only employees of the Company and its subsidiaries are eligible to receive incentive stock options under the 1997 Plan; such options generally vest over a three year period. Incentive stock options must have a per share exercise price of no less than the fair market value on the date of the grant. Nonstatutory stock options granted under the 1997 Plan must have a per share exercise price of no less than the fair market value on the date of the grant. Options granted under the 1997 Plan may be exercised for a period of no more than ten years from the date of grant.
Year Ended Three months ended December 31, 1998 December 31, 1997 ----------------- ----------------- Net operating income as reported $ 14,788 $ 2,270 pro forma $ 13,609 $ 2,030 Net increase in shareholders' equity resulting from operations as reported $ 16,915 $ 2,437 pro forma $ 15,737 $ 2,197
27 AMERICAN CAPITAL STRATEGIES, LTD. NOTES TO FINANCIAL STATEMENTS (In thousands except per share data) The effects of applying SFAS 123 for providing pro forma disclosures are not likely to be representative of the effects on reported net operating income and net increase in shareholders' equity resulting from operations for future years. For options granted during the year ended December 31, 1998, the Company estimated a fair value per option on the date of grant of $4.72 using a Black-Scholes option pricing model and the following assumptions: dividend yield 7.9%, risk free interest rate 5.1%, expected volatility factor .51, and expected lives of the options of 7 years. For options granted during the three months ended December 31, 1997, the Company estimated a fair value per option on the date of grant of $2.44 using a Black-Scholes option pricing model and the following assumptions; dividend yield 6.5%, risk free interest rate 6.5%, expected volatility factor .25, and expected lives of the options of 7 years. A summary of the status of the Company's stock option plans as of and for the year ended December 31, 1998 and as of and for the three months ended December 31, 1997 is as follows:
Year Ended Three Months Ended December 31, 1998 December 31, 1997 ----------------------------- ----------------------------- Weighted-Average Weighted-Average Exercise Exercise Shares Price Shares Price ------ ----- ------ ----- Options outstanding, beginning of period 1,297 $ 15.00 -- -- Granted 692 $ 18.42 1,303 $ 15.00 Exercised (28) $ 15.00 -- -- Canceled (328) $ 22.38 (6) $ 15.00 ------ --------- ----- ---------- Options outstanding, end of year 1,633 $ 14.96 1,297 $ 15.00 ===== ========= ===== ========== Options exercisable at year end 1,633 1,297
The following table summarizes information about stock options outstanding at December 31, 1998:
Options Outstanding Options Exercisable ------------------- ------------------- Weighted- Number Average Weighted Number Weighted Outstanding at Remaining Average Exercisable at Average Range of Exercise Prices December 31, 1998 Contractual Life Exercise Price December 31, 1998 Exercisable Price ------------------------ ---------------- ---------------- -------------- ----------------- ----------------- Less than $14.01 62 9.7 years $ 14.00 62 $ 14.00 $14.01 to $15.00 1,571 8.9 years $ 15.00 1,571 $ 15.00 ----- --------- --------- ----- ----------- $14.00 to $15.00 1,633 8.9 years $ 14.96 1,633 $ 14.96 ===== ========= ========= ===== ===========
In 1998, the Company issued 20 shares of common stock to an officer of the Company in exchange for a note receivable in the amount of $300. The transaction was executed pursuant to the 1997 Stock Option Plan, which allows the Company to lend to its employees funds to pay for the exercise of stock options. All loans made under this arrangement are fully secured by the value of the common stock purchased. Interest is charged and paid on such loans at the Applicable Federal Rate as defined in the Internal Revenue Code. On November 6, 1997, the Board of Directors authorized the establishment of a stock option plan for the non-employee directors. The plan was approved by shareholders at the annual meeting held on May 14, 1998. The Company is awaiting approval of the plan by the Securities and Exchange Commission (SEC). Pending SEC approval, the Board of Directors has authorized the Company to issue 15 options to each of the six non-employee directors. 28 AMERICAN CAPITAL STRATEGIES, LTD. NOTES TO FINANCIAL STATEMENTS (In thousands except per share data) Note 6. Related Parties Prior to the Company's IPO, ACS Partners I, L.P., a Delaware Partnership, was formed in 1997 with a wholly owned subsidiary of the Company as sole general partner and several principals of the Company as limited partners to allow the principals the opportunity to co-invest in a transaction with the Company. Pursuant to the terms of the partnership agreement of ACS Partners I, L.P. the Company through its wholly owned subsidiary, as sole general partner, has all discretion over the purchase, sale, restructuring and disposition of the assets of ACS Partners I, L.P. Upon completion of its IPO, the Company became subject to the 1940 Act. Pursuant to the rules and regulations of the 1940 Act, the Company is prohibited from allowing employees to co-invest with the Company. While no investments in ACS Partners I, L.P. were made subsequent to the IPO, as of December 31, 1998 and December 31, 1997, principals of the Company had invested $260 in ACS Partners I, L.P. for investment commitments issued prior to the Company's IPO. The Company and CIC have entered into an expense sharing agreement whereby CIC reimburses the Company for expenses paid by the Company on CIC's behalf. Note 7. Notes Payable During December, 1998, the Company borrowed $80,948 secured by government agency securities with a fair value of $89,948. The interest rate on the Note was 4.25% and the note was fully repaid on January 4, 1999. During November, 1998, the Company entered into a credit agreement with two banks under which the Company has the ability to borrow up to $30 million. Interest on borrowings is accrued and paid monthly at the prime rate (7.75% at December 31, 1998). At December 31, 1998, the outstanding balance was $30 million, which is due in October, 2000. The credit facility is secured by the certain investments of the Company. During December, 1998, the Company borrowed $5 million from a corporation. Interest is accrued and paid monthly at 7.75% and the principal of the note is due on March 31, 1999. During the year ended December 31, 1998, the nine months ended September 30, 1997 and the year ended December 31, 1996, the cash paid for interest was approximately $56, $88, and $43, respectively. The weighted average interest rates, including amortization of deferred finance costs, for the year ended December 31, 1998, the nine months ended September 30, 1997 and the year ended December 31, 1996 and 1995 were 5.9%, 16.9%, and 17.3%, respectively. Due to the short term of the borrowings, the fair value of the notes payable approximates cost. Note 8. Income Taxes The Company operates so as to qualify to be taxed as a RIC under the Internal Revenue Code. Generally, a RIC is entitled to deduct dividends it pays to its shareholders from its income to determine taxable income." The Company has distributed and currently intends to distribute sufficient dividends to eliminate taxable income. Therefore, the statement of operations contains no provision for income taxes for the year ended December 31, 1998 and the three months ended December 31, 1997. During the pre-RIC periods, the Company operated under Subchapter C of the Internal Revenue Code and calculated its tax provision pursuant to Statement of Financial Accounting Standards No. 109. Deferred income taxes were determined based on the differences between financial reporting and tax basis of assets and liabilities. The components of the income tax provision were as follows:
Nine Months Ended Year Ended September 30, 1997 December 31, 1996 ------------------ ----------------- Current provision $ 2 $ 39 Deferred provision 2,126 120 ---------- ----------- $ 2,128 $ 159 ---------- -----------
29 AMERICAN CAPITAL STRATEGIES, LTD. NOTES TO FINANCIAL STATEMENTS (In thousands except per share data) The differences between taxes at the Federal statutory tax rate and the effective tax rate were as follows:
Nine Months Ended Year Ended September 30, 1997 December 31, 1996 ------------------ ----------------- Statutory rate $ 1,803 $ 125 State taxes 342 15 Change in valuation Allowance -- (26) Other (17) 45 ---------- --------- Effective rate $ 2,128 $ 159 ========== ==========
During the nine months ended September 30, 1997 and the year ended December 31, 1996, cash paid for income taxes was approximately $2 and $1, respectively. The aggregate gross and net unrealized appreciation over the cost for Federal income tax purposes was $2,265, $7,414, and $3,399 as of December 31, 1998, December 31, 1997 and 1996, respectively. The aggregate cost of securities for Federal income tax purposes was $252,718, $132,870 and $581, as of December 31, 1998, December 31, 1997 and 1996, respectively. As discussed in Note 1, the Company had been taxed under subchapter C prior to October 1, 1997, when the Company converted to a subchapter M corporation for Federal income tax purposes. As a subchapter M corporation, the Company is entitled to deduct dividends it pays to shareholders from its income to determine taxable income. The Company has distributed and intends to distribute sufficient dividends to eliminate taxable income. As a result, the Company does not have a provision for income taxes for the year ended December 31, 1998 and the three months ended December 31, 1997. The Company requested a ruling in June 1997 from the IRS seeking to clarify the tax consequences of the conversion from taxation under subchapter C to subchapter M. The Company was seeking to avoid having to incur a tax liability associated with the unrealized appreciation of assets whose fair market value exceeded their basis upon the ruling from the IRS in regards to the treatment of the unrecognized gain. Provided the Company meets all the requirements to be taxed as a RIC, it will be permitted to elect to be subject to rules similar to the rules of Section 1374 of the Internal Revenue Code with respect to any unrealized gain inherent in its assets, upon its conversion to RIC status ("built-in gain"). Generally, this treatment allows the deferring of recognition of the built-in gain. If the Company were to divest itself of any assets in which it had built-in gains prior to the end of a ten year recognition period, the Company would then be subject to the extent of its built-in gain. Note 9. Commitments and Contingencies The Company has non-cancelable operating leases for office space and office equipment. The leases expire over the next seven years and contain provisions for certain annual rental escalations. Rent expense for operating leases for the year ended December 31, 1998, the three months ended December 31, 1997, the nine months ended September 30, 1997 and the year ended December 31, 1996 was approximately $60, $73, $97, and $101, respectively. Future minimum lease payments under non-cancelable operating leases at December 31, 1998 were as follows: 1999 $ 240 2000 241 2001 248 2002 236 2003 and thereafter 374 -------- Total $ 1,339 ======== In addition, at December 31, 1998, the Company had commitments $7.4 million to three portfolio companies. These commitments are composed of two working capital credit facilities and one acquisition credit facility. The commitments are subject to 30 AMERICAN CAPITAL STRATEGIES, LTD. NOTES TO FINANCIAL STATEMENTS (In thousands except per share data) the borrowers meeting certain criteria. The terms of the borrowings subject to commitment are comparable to the terms of other debt securities in the Company's portfolio. Note 10. Employee Stock Ownership Plan The Company maintains an ESOP, which includes all employees and is fully funded on a pro rata basis by the Company and its wholly owned subsidiary, CIC. Contributions are made at the Company's discretion up to the lesser of $30 or 25% of annual compensation expense for each employee. Employees are not fully vested until completing five years of service. For the year ended December 31, 1998, the Company and CIC contributed $97 to the ESOP, or 3% of total eligible employee compensation. The Company sponsors an employee stock ownership trust to act as the depository of employer contributions to the ESOP as well as to administer and manage the actual trust assets which are deposited into the ESOP. Note 11. Capital Stock In July, 1997, all unearned ESOP shares became earned and were allocated to the ESOP accounts of the Company's employees. Pursuant to the Company's Class A preferred stock declaration, the Class A preferred stock held by the ESOP was converted into common stock on a one share to one share basis. The Company also contributed an additional 529 shares of common stock to the ESOP. In August 1997, the Company increased its authorized shares of unallocated preferred stock to 5,000,000 and increased its authorized shares of common stock to 20,000,000. On August 27, 1997, the Company declared a stock split effective August 29, 1997, effected in the form of a stock dividend pursuant to which each outstanding share of common stock was effectively converted into 29.859 shares. Outstanding shares and per share amounts for all periods presented have been restated to reflect this stock split. On August 29, 1997, the Company completed its IPO and sold 10,382 shares of its common stock at a price of $15.00 per share. Pursuant to the terms of the Company's agreement with the underwriter of the offering, the Company issued 442,751 common stock warrants ("Warrants") to the underwriter. The Warrants have a term of five years from the date of issuance and may be exercised at a price of $15.00 per share. The Company declared dividends of $14,849, or $1.34 per share for the year ended December 31, 1998; at year end, $1,222 remained accrued and undistributed to shareholders. For the three months ended December 31, 1997, the Company distributed $2,324, or $0.21 per share, to its shareholders. For Federal income tax purposes, the distributions were 100% from ordinary income. In addition, in accordance with regulations governing RIC's, the Company notified shareholders of its intention to periodically repurchase its outstanding common stock. Following release of this notification, the Company repurchased 23 shares of it common stock at a weighted average price of $10.12 per share. Note 12. Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share for the year ended December 31, 1998 and the three months ended December 31, 1997. For all other periods, earnings per share is not presented since it is not considered meaningful due to the IPO and reorganization of the Company as a RIC.
Year Ended Three Months Ended December 31, 1998 December 31, 1997 ----------------- ----------------- Numerator for basic and diluted net increase in shareholders' equity resulting from operations $ 16,915 $ 2,437 Denominator for basic-weighted average shares 11,068 11,069 Employee stock options 269 251 Warrants 87 85 ----------- ------------ Dilutive potential shares 356 334 Denominator for diluted 11,424 11,405 ----------- ------------ Basic earnings per share $ 1.53 $ 0.22 Diluted earnings per share $ 1.48 $ 0.21
Note 13. Subsequent Events During February 1999, the Company obtained a commitment for a $100,000 credit facility. The credit facility is funded by a commercial paper conduit and requires the Company to create ACAS Funding, a bankruptcy remote wholly-owned subsidiary. The Company is required to make a capital contribution of $115,000 consisting of loans and any related equity warrants to ACAS Funding. ACAS Funding will then acquire loans and related equity warrants originated by the Company and may borrow up to 50% of the eligible loan balance subject to certain concentration limits. The term of the facility is two years and interest on borrowings will be charged at LIBOR plus 2.50%. The full amount of principal is due at the end of the term and interest is payable monthly. 31 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE NONE PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information in response to this Item is incorporated herein by reference to the information provided in the Company's Proxy Statement for its Annual Meeting of Shareholders to be held May 6, 1999 (the "1999 Proxy Statement") under the headings "ELECTIONS OF DIRECTORS" and "SECTION (16) (a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE". ITEM 11. EXECUTIVE COMPENSATION Information in response to this Item is incorporated herein by reference to the information provided in the 1999 Proxy Statement under the heading "COMPENSATION OF EXECUTIVE OFFICERS" and "DIRECTOR COMPENSATION". ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information in response to this Item is incorporated herein by reference to the information provided in the 1999 Proxy Statement under the heading "Security Ownership of Management and Certain Beneficial Owners." ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information in response to this Item is incorporated herein by reference to the information provided in the 1999 Proxy Statement under the heading "Certain Transactions." PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) (1) The following financial statements are filed herewith: AMERICAN CAPITAL STRATEGIES, LTD. Report of Independent Public Accountant Balance Sheets as of December 31, 1998 and 1997 Schedule of Investments as of December 31, 1998 and 1997 Statement of Operations for the Year Ended December 31, 1998, the Three Months Ended December 31, 1997, the Nine Months September 30, 1997, and the Year Ended December 31, 1996. Statement of Shareholders' Equity as of December 31, 1998, December 31, 1997, September 30, 1997, and December 31, 1996. Statement of Cash Flows for the Year Ended December 31, 1998, the Three Months Ended December 31, 1997, the Nine Months Ended September 30, 1997 and the Year Ended December 31, 1996. Financial Highlights for the Year Ended December 31, 1998 and the Three Months Ended December 31, 1997 Notes to Financial Statements 32 (2) No financial statement schedules of the Company are filed herewith because (i) such schedules are not required or (ii) the information required has been presented in the aforementioned financial statement (3) The following exhibits are filed herewith or incorporated herein by reference Exhibit Description ------ ----------- 3.1 American Capital Strategies, Ltd. Second Amended and Restated Certificate of Incorporation. Incorporated herein by reference to Exhibit a of the Pre-Effective Amendment Number 1 to the Registration Statement on Form N-2 (File No. 333-29943) filed on August 12, 1997. 3.2 American Capital Strategies, Ltd. Second Amended and Restated Bylaws. Incorporated herein by reference to Exhibit b of the Pre-Effective Amendment Number 1 to the Registration Statement on Form N-2 (File No. 333-29943) filed on August 12, 1997. 10.1 Credit Agreement dated October 30, 1998, among the Company, certain financial institutions named therein and LaSalle National Bank, filed herewith. 10.2 Promissory Note dated October 30, 1998, made by the Company in favor of LaSalle National Bank, filed herewith. 10.3 Security and Pledge Agreement dated October 30, 1998, among the Company, certain other persons or entities named therein and LaSalle National Bank, filed herewith. 10.4 Custody Control Agreement dated October 30, 1998, between the Company and LaSalle National Bank, filed herewith. 10.5 Account Control Agreement dated October 30, 1998, between the Company and LaSalle National Bank, filed herewith. 10.6 First Amendment to the Credit Agreement dated December 30, 1998, among the Company, certain financial institutions named therein and LaSalle National Bank, filed herewith. 10.7 Promissory Note dated December 30, 1998, made by the Company in favor of First Tennessee Bank National Association, filed herewith. 10.8 Promissory Note dated December 30, 1998, made by the Company in favor of US Investigations Services, Inc., filed herewith. 13 1998 Annual Report to Stockholders, incorporated herein by reference. 21 Subsidiaries of the Company and jurisdiction of incorporation: ACS Capital Investments Corporation, a Delaware corporation. 27 Financial Data Schedule. - - ---------- * Management Contract or Compensatory Plan or Arrangement (b) Reports on Form 8-K NONE (c) Exhibits. See the exhibits filed herewith (d) Additional financial statement schedules NONE 33 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. AMERICAN CAPITAL STRATEGIES, LTD. By: /s/ John R. Erickson ---------------------------- John R. Erickson Vice President and Chief Financial Officer Date: March 31, 1998 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 registrant and in the capacities and on the dates indicated.
Name Title Date - - ---- ----- ---- /s/ Malon Wilkus President, Chief Executive Officer, Chairman and Director March 31, 1999 - - ------------------- Malon Wilkus /s/ David J. Gladstone Vice Chairman and Director March 31, 1999 - - ------------------- David J. Gladstone /s/ Adam Blumenthal Executive Vice President March 31, 1999 - - ------------------- and Director Adam Blumenthal /s/ John R. Erickson Vice President and Chief March 31, 1999 - - ------------------- Financial Officer John R. Erickson (Principal Financial and Accounting Officer) /s/ Stephen L. Hester Vice President and General Counsel March 31, 1999 - - ------------------- Director Stephen L. Hester /s/ Robert L. Allbritton Director March 31, 1999 - - ------------------- Robert L. Allbritton /s/ Alvin N. Puryear Director March 31, 1999 - - ------------------- Alvin N. Puryear /s/ Neil M. Hahl Director March 31, 1999 - - ------------------- Neil M. Hahl /s/ Philip R. Harper Director March 31, 1999 - - ------------------- Philip R. Harper /s/ Stan Lundine Director March 31, 1999 - - ------------------- Stan Lundine /s/ Steven P. Walko Director March 31, 1999 - - ------------------- Steven P. Walko
34 EX-10.1 2 CREDIT AGREEMENT DATED OCTOBER 30, 1998 Exhibit 10.1 - - -------------------------------------------------------------------------------- CREDIT AGREEMENT dated as of October 30, 1998 among AMERICAN CAPITAL STRATEGIES, LTD. VARIOUS FINANCIAL INSTITUTIONS and LASALLE NATIONAL BANK, as Agent - - -------------------------------------------------------------------------------- TABLE OF CONTENTS SECTION 1 DEFINITIONS.................................................1 1.1 Definitions.................................................1 ----------- 1.2 Other Interpretive Provisions..............................12 ----------------------------- SECTION 2 COMMITMENTS OF THE BANKS; BORROWING AND CONVERSION PROCEDURES......................................12 2.1 Revolving Loan Commitment..................................12 ------------------------- 2.2 Loan Procedures............................................13 --------------- 2.2.1 Various Types of Loans............................13 ---------------------- 2.2.2 Borrowing Procedures..............................13 -------------------- (b) Failure to Make Available.........................13 ------------------------- 2.2.3 Conversion and Continuation Procedures............14 -------------------------------------- 2.3 Commitments Several........................................15 ------------------- 2.4 Certain Conditions.........................................15 ------------------ SECTION 3 NOTES EVIDENCING LOANS.....................................15 3.1 Notes......................................................15 ----- 3.2 Recordkeeping..............................................15 ------------- SECTION 4 INTEREST...................................................15 4.1 Interest Rates.............................................16 -------------- 4.2 Interest Payment Dates.....................................16 ---------------------- 4.3 Setting and Notice of Eurodollar Rates.....................16 -------------------------------------- 4.4 Computation of Interest....................................16 ----------------------- SECTION 5 FEES.......................................................16 5.1 Non-Use Fee................................................16 ----------- 5.2 Upfront Fees...............................................17 ------------ 5.3 Agent's Fees...............................................17 ------------ SECTION 6 REDUCTION OR TERMINATION OF THE REVOLVING COMMITMENT AMOUNT.....................................................17 6.1 Reduction or Termination of the Revolving Commitment ---------------------------------------------------- Amount.....................................................17 ------ 6.1.1 Voluntary Reduction or Termination of the Revolving Commitment Amount.................................17 6.1.2 Mandatory Reductions of Revolving Commitment Amount............................................17 6.1.3 All Reductions of the Revolving Commitment Amount............................................17 6.2 Prepayments................................................17 ----------- 6.2.1 Voluntary Prepayments.............................17 --------------------- 6.3 All Prepayments............................................18 --------------- SECTION 7 MAKING AND PRORATION OF PAYMENTS; SETOFF; TAXES............18 -i- 7.1 Making of Payments.........................................18 ------------------ 7.2 Application of Certain Payments............................18 ------------------------------- 7.3 Due Date Extension.........................................18 ------------------ 7.4 Setoff.....................................................18 ------ 7.5 Proration of Payments......................................18 --------------------- 7.6 Taxes......................................................19 ----- SECTION 8 INCREASED COSTS; SPECIAL PROVISIONS FOR EURODOLLAR LOANS 20 8.1 Increased Costs............................................20 --------------- 8.2 Basis for Determining Interest Rate Inadequate or Unfair...21 -------------------------------------------------------- 8.3 Changes in Law Rendering Eurodollar Loans Unlawful.........21 -------------------------------------------------- 8.4 Funding Losses.............................................22 -------------- 8.5 Right of Banks to Fund through Other Offices...............22 -------------------------------------------- 8.6 Discretion of Banks as to Manner of Funding................22 ------------------------------------------- 8.7 Mitigation of Circumstances; Replacement of Banks..........22 ------------------------------------------------- 8.8 Conclusiveness of Statements; Survival of Provisions.......23 ---------------------------------------------------- SECTION 9 WARRANTIES.................................................23 9.1 Organization...............................................23 ------------ 9.2 Authorization; No Conflict.................................24 -------------------------- 9.3 Validity and Binding Nature................................24 --------------------------- 9.4 Financial Condition........................................24 ------------------- 9.5 No Material Adverse Change.................................24 -------------------------- 9.6 Litigation and Contingent Liabilities......................24 ------------------------------------- 9.7 Ownership of Properties; Liens.............................24 ------------------------------ 9.8 Subsidiaries...............................................25 ------------ 9.9 Pension Plans..............................................25 ------------- 9.10 Investment Company Act.....................................25 ---------------------- 9.11 Public Utility Holding Company Act.........................25 ---------------------------------- 9.12 Regulation U...............................................26 ------------ 9.13 Taxes......................................................26 ----- 9.14 Solvency, etc..............................................26 ------------- 9.15 Environmental Matters......................................26 --------------------- 9.16 Year 2000 Problem..........................................27 ----------------- 9.17 Insurance..................................................27 --------- 9.18 Real Property..............................................27 ------------- 9.19 Information................................................27 ----------- 9.20 Intellectual Property......................................28 --------------------- 9.21 Burdensome Obligations.....................................28 ---------------------- 9.22 Labor Matters..............................................28 ------------- 9.23 No Default.................................................28 ---------- SECTION 10 COVENANTS..................................................28 10.1 Reports, Certificates and Other Information................28 ------------------------------------------- -ii- 10.1.1 Annual Report.....................................28 ------------- 10.1.2 Interim Reports...................................29 --------------- 10.1.3 Compliance Certificates...........................29 ----------------------- 10.1.4 Reports to the SEC, 1940 Act Reports and Reports to --------------------------------------------------- Stockholders......................................29 ------------ 10.1.5 Notice of Default, Litigation and ERISA Matters...30 ----------------------------------------------- 10.1.6 Borrowing Base Certificates.......................30 --------------------------- 10.1.7 Management Reports................................31 ------------------ 10.1.8 Projections.......................................31 ----------- 10.1.9 Subordinated Debt Notices.........................31 ------------------------- 10.1.10 Year 2000 Problem.................................31 ----------------- 10.1.11 Valuations........................................31 ---------- 10.1.12 Other Information.................................31 ----------------- 10.2 Books, Records and Inspections.............................31 ------------------------------ 10.3 Maintenance of Property; Insurance.........................32 ---------------------------------- 10.4 Compliance with Laws; Payment of Taxes and Liabilities.....32 ------------------------------------------------------ 10.5 Maintenance of Existence, etc..............................33 ------------------------------ 10.6 Financial Covenants........................................33 ------------------- 10.6.1 Consolidated Tangible Net Worth...................33 ------------------------------- 10.6.2 Leverage Ratio....................................33 -------------- 10.6.3 Consolidated Pre-Tax Income.......................33 --------------------------- 10.6.4 Asset Coverage Ratio..............................33 -------------------- 10.7 Limitations on Debt........................................33 ------------------- 10.8 Liens......................................................34 ----- 10.9 Operating Leases...........................................35 ---------------- 10.10 Restricted Payments........................................35 ------------------- 10.11 Mergers, Consolidations, Sales.............................35 ------------------------------ 10.12 Modification of Organizational Documents...................35 ---------------------------------------- 10.13 Use of Proceeds............................................36 --------------- 10.14 Further Assurances.........................................36 ------------------ 10.15 Transactions with Affiliates...............................36 ---------------------------- 10.16 Employee Benefit Plans.....................................36 ---------------------- 10.17 Environmental Matters......................................36 --------------------- 10.18 Unconditional Purchase Obligations.........................36 ---------------------------------- 10.19 Inconsistent Agreements....................................37 ----------------------- 10.20 Business Activities........................................37 ------------------- 10.21 Investments................................................37 ----------- 10.22 Fiscal Year................................................37 ----------- 10.23 Limitations on Equity......................................37 --------------------- SECTION 11 EFFECTIVENESS; CONDITIONS OF LENDING, ETC..................38 11.1 Initial Credit Extension...................................38 ------------------------ 11.1.1 Notes.............................................38 11.1.2 Resolutions.......................................38 11.1.3 Consents; Certificates, etc.......................38 -iii- 11.1.4 Incumbency and Signature Certificates.............38 11.1.5 Guaranty..........................................38 11.1.6 Security and Pledge Agreement.....................39 11.1.7 Custody Control Agreement.........................39 11.1.8 Opinions of Counsel...............................39 11.1.9 Insurance.........................................39 11.1.10 Copies of Portfolio Investments; Certain Documents.39 11.1.11 Payment of Fees....................................39 11.1.12 Search Results; Lien Terminations..................39 11.1.13 Filings, Registrations and Recordings..............39 11.1.14 Closing Certificate................................40 11.1.15 Borrowing Base Certificate.........................40 11.1.16 Other..............................................40 11.2 Conditions.................................................40 ---------- 11.2.1 Compliance with Warranties, No Default, etc.......40 -------------------------------------------- 11.2.2 Confirmatory Certificate..........................40 ------------------------ SECTION 12 EVENTS OF DEFAULT AND THEIR EFFECT.........................40 12.1 Events of Default..........................................40 ----------------- 12.1.1 Non-Payment of the Loans, etc.....................40 12.1.2 Non-Payment of Other Debt.........................41 12.1.3 Other Material Obligations........................41 12.1.4 Bankruptcy, Insolvency, etc.......................41 12.1.5 Non-Compliance with Loan Documents................41 12.1.6 Warranties........................................41 12.1.8 Judgments.........................................42 12.1.9 Invalidity of Guaranty, etc.......................42 12.1.10 Invalidity of Collateral Documents, etc............42 12.1.11 Invalidity of Subordination Provisions, etc........42 12.1.12 Change of Control..................................42 12.1.13 Investment Company Act.............................43 12.1.14 Material Adverse Effect............................43 12.2 Effect of Event of Default.....................................43 SECTION 13 THE AGENT..................................................43 13.1 Appointment and Authorization..............................43 ----------------------------- 13.2 Delegation of Duties.......................................44 -------------------- 13.3 Liability of Agent.........................................44 ------------------ 13.4 Reliance by Agent..........................................44 ----------------- 13.5 Notice of Default..........................................44 ----------------- 13.6 Credit Decision............................................45 --------------- 13.7 Indemnification............................................45 --------------- 13.8 Agent in Individual Capacity...............................46 ---------------------------- 13.9 Successor Agent............................................46 --------------- -iv- 13.10 Collateral Matters.........................................46 ------------------ SECTION 14 GENERAL....................................................47 14.1 Waiver; Amendments.........................................47 ------------------ 14.2 Confirmations..............................................47 ------------- 14.3 Notices....................................................47 ------- 14.4 Computations...............................................47 ------------ 14.5 Regulation U...............................................48 ------------ 14.6 Costs, Expenses and Taxes..................................48 ------------------------- 14.7 Subsidiary References......................................48 --------------------- 14.8 Captions...................................................48 -------- 14.9 Assignments; Participations................................48 --------------------------- 14.9.1 Assignments.......................................48 14.9.2 Participations....................................50 14.10 Governing Law..............................................50 ------------- 14.11 Counterparts...............................................51 ------------ 14.12 Successors and Assigns.....................................51 ---------------------- 14.13 Indemnification by the Company.............................51 ------------------------------ 14.14 Nonliability of Lenders....................................51 ----------------------- 14.15 Forum Selection and Consent to Jurisdiction................52 ------------------------------------------- 14.16 Waiver of Jury Trial.......................................52 -------------------- -v- -vi- -vii- -viii- -ix- SCHEDULES Pricing Schedule SCHEDULE 2.1 Banks and Pro Rata Shares SCHEDULE 9.2 Conflicts SCHEDULE 9.6 Litigation and Contingent Liabilities SCHEDULE 9.8 Subsidiaries SCHEDULE 9.15 Environmental Matters SCHEDULE 9.17 Insurance SCHEDULE 9.18 Real Property SCHEDULE 9.22 Labor Matters SCHEDULE 10.8 Existing Liens SCHEDULE 10.21 Investments SCHEDULE 11.1 Debt to be Repaid SCHEDULE 12.1.12 Key Executives SCHEDULE 14.3 Addresses for Notices EXHIBITS EXHIBIT A Form of Note (Section 3.1) EXHIBIT B Form of Compliance Certificate (Section 10.1.3) EXHIBIT C Form of Guaranty (Section 1.1) EXHIBIT D Form of Security and Pledge Agreement (Section 1.1) EXHIBIT E Form of Borrowing Base Certificate (Section 1.1) EXHIBIT F Form of Assignment Agreement (Section 14.9.1) EXHIBIT G Form of Opinion (Section 11.1.8) -x- CREDIT AGREEMENT THIS CREDIT AGREEMENT dated as of October 30, 1998 (this "Agreement") is entered into among AMERICAN CAPITAL STRATEGIES, LTD., a Delaware corporation (the "Company"), the financial institutions that are or may from time to time become parties hereto (together with their respective successors and assigns, the "Banks") and LASALLE NATIONAL BANK (in its individual capacity, "LaSalle"), as agent for the Banks. WHEREAS, the Banks have agreed to make available to the Company a revolving credit facility upon the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the mutual agreements herein contained, the parties hereto agree as follows: SECTION 1 DEFINITIONS. 1.1 Definitions. When used herein the following terms shall have the following meanings: ACSLR - see Section 10.5. Affected Loan - see Section 8.3. Affiliate of any Person means (a) any other Person which, directly or indirectly, controls or is controlled by or is under common control with such Person and (b) any officer or director of such Person. A Person shall be deemed to be "controlled by" any other Person if such Person possesses, directly or indirectly, power to vote 5% or more of the securities (on a fully diluted basis) having ordinary voting power for the election of directors or managers or power to direct or cause the direction of the management and policies of such Person whether by contract or otherwise. Agent means LaSalle in its capacity as agent for the Banks hereunder and any successor thereto in such capacity. Agreement - see the Preamble. Asset Coverage Ratio means on a consolidated basis for the Company and its Consolidated Subsidiaries the ratio which the value of total assets, less all liabilities and Debt not represented by senior securities (all as determined pursuant to the 1940 Act and any orders of the SEC issued to the Company thereunder), bears to the aggregate amount of senior securities representing Debt of the Company and its Consolidated Subsidiaries. Assignment Agreement - see Section 14.9.1. Attorney Costs means, with respect to any Person, all reasonable fees and charges of any counsel to such Person, the reasonable allocable cost of internal legal services of such Person, all reasonable disbursements of such internal counsel and all court costs and similar legal expenses. Bank - see the Preamble. References to the "Banks" shall include the Issuing Bank; for purposes of clarification only, to the extent that LaSalle (or any successor Issuing Bank) may have any rights or obligations in addition to those of the other Banks due to its status as Issuing Bank, its status as such will be specifically referenced. Base Rate means at any time the greater of (a) the Federal Funds Rate plus 0.5% and (b) the Prime Rate. Base Rate Loan means any Loan which bears interest at or by reference to the Base Rate. Borrowing Base means an amount equal to 50% of the Value of Eligible Investment Assets from time to time and shall be net of such reserves and allowances as the Agent deems necessary in its reasonable discretion; provided, that the Borrowing Base shall be automatically reduced by any amount necessary for the Company to maintain the Asset Coverage Ratio required hereunder and under the 1940 Act. Borrowing Base Certificate means a certificate substantially in the form of Exhibit E. Business Day means any day on which LaSalle is open for commercial banking business in Chicago, Illinois and, in the case of a Business Day which relates to a Eurodollar Loan, on which dealings are carried on in the London interbank eurodollar market. Capital Lease means, with respect to any Person, any lease of (or other agreement conveying the right to use) any real or personal property by such Person that, in conformity with GAAP, is accounted for as a capital lease on the balance sheet of such Person. Cash Equivalent Investment means, at any time, (a) any evidence of Debt, maturing not more than one year after such time, issued or guaranteed by the United States Government or any agency thereof, (b) commercial paper, maturing not more than one year from the date of issue, or corporate demand notes, in each case (unless issued by a Bank or its holding company) rated at least A-l by Standard & Poor's Ratings Group or P-l by Moody's Investors Service, Inc., (c) any certificate of deposit (or time deposits represented by such certificates of deposit) or banker's acceptance, maturing not more than one year after such time, or overnight Federal Funds transactions that are issued or sold by any Bank or its holding company or by a commercial banking institution that is a member of the Federal Reserve System and has a combined capital and surplus and undivided profits of not less than $350,000,000 and (d) any repurchase agreement entered into with any Bank (or other commercial banking institution of the stature referred to in clause (c)) which (i) is secured by a fully perfected security interest in any obligation of the type described in any of clauses (a) through (c) and (ii) has a market value at the time such repurchase agreement is entered into of not less than 2 100% of the repurchase obligation of such Bank (or other commercial banking institution) thereunder. CERCLA - see Section 9.15. Closing Date - see Section 11.1. Code means the Internal Revenue Code of 1986, as amended. Collateral Documents means the Security and Pledge Agreement, the Custody Control Agreement and any other agreement or instrument pursuant to which the Company, any Subsidiary or any other Person grants collateral to the Agent for the benefit of the Banks. Commitment means, as to any Bank, such Bank's commitment to make Loans under this Agreement. The initial amount of each Bank's Pro Rata Share of the Revolving Commitment Amount is set forth on Schedule 2.1. Company - see the Preamble. Computation Period means each period of four consecutive Fiscal Quarters ending on the last day of a Fiscal Quarter. Consolidated Pre-Tax Income means, with respect to the Company and its Consolidated Subsidiaries for any period, the net income (or loss) of the Company and its Consolidated Subsidiaries for such period before payment or distribution of federal, state and local income taxes, excluding any gains from sales of Portfolio Investments, any extraordinary gains and any gains from discontinued operations. Consolidated Stockholders' Equity means for the Company and its Consolidated Subsidiaries (without duplication) the sum of the capital stock, capital in excess of par and stated value of shares of its capital stock, retained earnings and any other account, including any special account for common stock subject to redemption, which, in accordance with GAAP, constitutes stockholders' equity (or such other appropriate account designation), as determined in accordance with GAAP. Consolidated Subsidiaries means any Subsidiary which is required to be consolidated on financial statements of the Company prepared in accordance with GAAP. Consolidated Tangible Net Worth means, as of any particular date, (a) Consolidated Stockholders' Equity, minus (b) the value of the Company's unamortized debt discount and expense, prepaid expenses, deposits, unamortized deferred charges, goodwill, organization costs, non-competition agreements, patents, copyrights, trademarks and other intangible items and amounts due from officers, employees, stockholders and Affiliates, plus (c) the outstanding principal balance of Subordinated Debt, all determined in accordance with GAAP. 3 Controlled Group means all members of a controlled group of corporations and all members of a controlled group of trades or businesses (whether or not incorporated) under common control which, together with the Company, are treated as a single employer under Section 414 of the Code or Section 4001 of ERISA. Custodian means LaSalle in its capacity as custodian under the Custody Control Agreement, or any other custodian approved in writing by the Required Banks and permitted under the Custody Control Agreement. Custody Control Agreement means the Custody Control Agreement between the Custodian (which initially shall be LaSalle), the Agent and the Company pursuant to which the Agent acts as custodian and the perfection and control agent for the purpose of perfecting the Agent's security interest in Portfolio Investments. Debt of any Person means, without duplication, (a) all indebtedness of such Person for borrowed money, whether or not evidenced by bonds, debentures, notes or similar instruments, (b) all obligations of such Person as lessee under Capital Leases which have been or should be recorded as liabilities on a balance sheet of such Person in accordance with GAAP, (c) all obligations of such Person to pay the deferred purchase price of property or services (excluding trade accounts payable in the ordinary course of business), (d) all indebtedness secured by a Lien on the property of such Person, whether or not such indebtedness shall have been assumed by such Person, (e) all obligations, contingent or otherwise, with respect to the face amount of all letters of credit (whether or not drawn) and banker's acceptances issued for the account of such Person, (f) all Hedging Obligations of such Person, (g) all Suretyship Liabilities of such Person and (h) all Debt of any partnership of which such Person is a general partner. Debt to be Repaid means Debt listed on Schedule 11.1. Disposal - see the definition of "Release". Dollar and the sign "$" mean lawful money of the United States of America. Eligible Investment Assets means any Portfolio Investment or Cash Equivalent Investment which meets each of the following requirements: (1) the Company is the legal and beneficial owner of such Portfolio Investment or Cash Equivalent Investment free and clear of any Liens or adverse claims; (2) such Portfolio Investment consists of senior or subordinated loans; (3) the Portfolio Company under such Portfolio Investments is not more than thirty days past due in the payment of principal or interest under such Portfolio Investment; 4 (4) such Portfolio Investment does not include promissory notes or instruments (i) representing capitalized interest or payment-in-kind interest or payment obligations relating to exercise of "put" rights or (ii) owing from a single Portfolio Company representing more than 10% of the total amount of Portfolio Investments held by the Company; provided, that such Portfolio Investment shall only be ineligible to the extent of such instruments or any portion thereof related to payment-in-kind interest or any portion thereof in excess of such 10% limit; (5) all documents evidencing and governing such Portfolio Investments or Cash Equivalent Investments have been delivered to Agent pursuant to the Custody Control Agreement, together with endorsements, stock powers and other assignments or perfection instruments required by the Agent; (6) the Agent has a legal, valid and binding perfected, first-priority security interest in such Portfolio Investment or Cash Equivalent Investment and such Portfolio Investment or Cash Equivalent Investment is freely transferable to the Agent or its assignee upon the occurrence of an Event of Default; (7) the Portfolio Company of such Portfolio Investment is not subject to any bankruptcy, insolvency, liquidation or similar proceeding; (8) such Portfolio Investment or Cash Equivalent Investment satisfies all applicable requirements of the Investment Policy; and (9) such Portfolio Investment or Cash Equivalent Investment complies with all applicable regulatory guidelines (including the 1940 Act and Regulation U). Any Eligible Investment Asset which ceases to meet all of the criteria set forth above shall automatically at such time cease to be an Eligible Investment Asset until such time as such Eligible Investment Asset shall satisfy such criteria. If the loan documents relating to any Eligible Investment Asset are amended, modified, extended or restructured, or payments thereunder are waived, extended or reduced (any such action, a "Modification"), such Eligible Investment Asset shall upon the consummation of such Modification be excluded from the Borrowing Base (and the Company shall provide the Agent with a revised Borrowing Base Certificate reflecting such exclusion and a copy of all material documents relating to such Modification promptly after consummation of such Modification) and not constitute an Eligible Investment Asset unless and until either (x) the Required Banks have approved such Modification in writing, or (y) such Eligible Investment Asset has been valued (in accordance with the standards set forth herein for determining the Value of Eligible Investment Assets) taking into account such Modification and a revised Borrowing Base Certificate reflecting such valuation has been provided to the Agent. Environmental Claims means all claims, however asserted, by any governmental, regulatory or judicial authority or other Person alleging potential liability or responsibility for violation of any Environmental Law, or for release or injury to the environment. 5 Environmental Laws means all present or future federal, state or local laws, statutes, common law duties, rules, regulations, ordinances and codes, together with all administrative orders, directed duties, requests, licenses, authorizations and permits of, and agreements with, any governmental authority, in each case relating to Environmental Matters. Environmental Matters means any matter arising out of or relating to health and safety, or pollution or protection of the environment or workplace, including any of the foregoing relating to the presence, use, production, generation, handling, transport, treatment, storage, disposal, distribution, discharge, release, control or cleanup of any Hazardous Substance. ERISA means the Employee Retirement Income Security Act of 1974. Eurocurrency Reserve Percentage means, with respect to any Eurodollar Loan for any Interest Period, a percentage (expressed as a decimal) equal to the daily average during such Interest Period of the percentage in effect on each day of such Interest Period, as prescribed by the FRB, for determining the aggregate maximum reserve requirements applicable to "Eurocurrency Liabilities" pursuant to Regulation D or any other then applicable regulation of the FRB which prescribes reserve requirements applicable to "Eurocurrency Liabilities" as presently defined in Regulation D. Eurodollar Loan means any Loan which bears interest at a rate determined by reference to the Eurodollar Rate (Reserve Adjusted). Eurodollar Margin means 2.50% per annum. Eurodollar Office means with respect to any Bank the office or offices of such Bank which shall be making or maintaining the Eurodollar Loans of such Bank hereunder. A Eurodollar Office of any Bank may be, at the option of such Bank, either a domestic or foreign office. Eurodollar Rate means, with respect to any Eurodollar Loan for any Interest Period, a rate per annum equal to the offered rate for deposits in Dollars for amounts approximately equal to such Eurodollar Loan and for a period equal or comparable to such Interest Period which appears on Telerate page 3750 as of 11:00 A.M. (London time) two Business Days prior to the first day of such Interest Period. ATelerate Page 3750 A means the display designated as APage 3750" on the Telerate Service (or such other page as may replace page 3750 on that service or such other service as may be nominated by the British Bankers' Association as the information vendor for the purpose of displaying British Bankers' Association Interest Settlement Rates for Dollar deposits). Eurodollar Rate (Reserve Adjusted) means, with respect to any Eurodollar Loan for any Interest Period, a rate per annum (rounded upwards, if necessary, to the nearest 1/16th of 1%) determined pursuant to the following formula: Eurodollar Rate........... Eurodollar Rate (Reserve Adjusted)......... 1-Eurocurrency 6 Reserve Percentage. Event of Default means any of the events described in Section 12.1. Federal Funds Rate means, for any day, the rate set forth in the weekly statistical release designated as H.15(519), or any successor publication, published by the Federal Reserve Bank of New York (including any such successor publication, "H.15(519)") on the preceding Business Day opposite the caption "Federal Funds (Effective)"; or, if for any relevant day such rate is not so published on any such preceding Business Day, the rate for such day will be the arithmetic mean as determined by the Agent of the rates for the last transaction in overnight Federal funds arranged prior to 9:00 A.M. (New York City time) on that day by each of three leading brokers of Federal funds transactions in New York City selected by the Agent. Fiscal Quarter means a fiscal quarter of a Fiscal Year. Fiscal Year means the fiscal year of the Company and its Subsidiaries, which period shall be the 12-month period ending on December 31 of each year. References to a Fiscal Year with a number corresponding to any calendar year (e.g., AFiscal Year 1998") refer to the Fiscal Year ending on December 31 of such calendar year. FRB means the Board of Governors of the Federal Reserve System or any successor thereto. GAAP means generally accepted accounting principles set forth from time to time in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board (or agencies with similar functions of comparable stature and authority within the U.S. accounting profession), which are applicable to the circumstances as of the date of determination. Group - see Section 2.2.1. Guaranty means a guaranty substantially in the form of Exhibit C. Hazardous Substances - see Section 9.15. Hedging Agreement means any interest rate, currency or commodity swap agreement, cap agreement or collar agreement, and any other agreement or arrangement designed to protect a Person against fluctuations in interest rates, currency exchange rates or commodity prices. Hedging Obligation means, with respect to any Person, any liability of such Person under any Hedging Agreement. Interest Period means, as to any Eurodollar Loan, the period commencing on the date such Loan is borrowed or continued as, or converted into, a Eurodollar Loan and ending on the date one, two 7 or three months thereafter as selected by the Company pursuant to Section 2.2.2 or 2.2.3, as the case may be; provided that: (i) if any Interest Period would otherwise end on a day that is not a Business Day, such Interest Period shall be extended to the following Business Day unless the result of such extension would be to carry such Interest Period into another calendar month, in which event such Interest Period shall end on the preceding Business Day; (ii) any Interest Period that begins on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period shall end on the last Business Day of the calendar month at the end of such Interest Period; and (iii) the Company may not select any Interest Period which would extend beyond the scheduled Termination Date. Investment Policy means the investment policy of the Company as recited in its registration statement filed with the SEC under Securities Act of 1933, as amended. Investment means, relative to any Person, any investment in another Person, whether by acquisition of any debt or equity security, by making any loan or advance or by becoming obligated with respect to a Suretyship Liability in respect of obligations of such other Person (other than travel and similar advances to employees in the ordinary course of business), including any Portfolio Investment. LaSalle - see the Preamble. Leverage Ratio means, as of the last day of any Fiscal Quarter, the ratio of (i) Total Liabilities as of such day to (ii) Consolidated Tangible Net Worth as of such day. Lien means, with respect to any Person, any interest granted by such Person in any real or personal property, asset or other right owned or being purchased or acquired by such Person which secures payment or performance of any obligation and shall include any mortgage, lien, encumbrance, charge or other security interest of any kind, whether arising by contract, as a matter of law, by judicial process or otherwise. Loan Documents means this Agreement, the Notes, the Guaranty and the Collateral Documents. Loan Party means the Company and each Subsidiary. Loans means Revolving Loans. 8 Margin Stock means any "margin stock" as defined in Regulation U. Material Adverse Effect means (a) a material adverse change in, or a material adverse effect upon, the financial condition, operations, assets, business, properties or prospects of the Company and its Subsidiaries taken as a whole, (b) a material impairment of the ability of the Company or any Subsidiary to perform any of its obligations under any Loan Document or (c) a material adverse effect upon any substantial portion of the collateral under the Collateral Documents or upon the legality, validity, binding effect or enforceability against the Company or any Subsidiary of any Loan Document. Multiemployer Pension Plan means a multiemployer plan, as defined in Section 4001(a)(3) of ERISA, to which the Company or any member of the Controlled Group may have any liability. Non-Use Fee Rate means .25% per annum. Note - see Section 3.1. PBGC means the Pension Benefit Guaranty Corporation and any entity succeeding to any or all of its functions under ERISA. Pension Plan means a "pension plan", as such term is defined in Section 3(2) of ERISA, which is subject to Title IV of ERISA (other than a Multiemployer Pension Plan), and to which the Company or any member of the Controlled Group may have any liability, including any liability by reason of having been a substantial employer within the meaning of Section 4063 of ERISA at any time during the preceding five years, or by reason of being deemed to be a contributing sponsor under Section 4069 of ERISA. Person means any natural person, corporation, partnership, trust, limited liability company, association, governmental authority or unit, or any other entity, whether acting in an individual, fiduciary or other capacity. Portfolio Company means any corporation, partnership or limited liability company issuing securities to the Company constituting Portfolio Investments. Portfolio Investments means each investment by the Company in a Portfolio Company by acquisition of any debt or equity securities in accordance with the Investment Policy. Pro Rata Share means, with respect to any Bank, the percentage specified opposite such Bank's name on Schedule 2.1 hereto, as adjusted from time to time in accordance with the terms hereof. Prime Rate means, for any day, the rate of interest in effect for such day as publicly announced from time to time by LaSalle as its prime rate (whether or not such rate is actually 9 charged by LaSalle). Any change in the Prime Rate announced by LaSalle shall take effect at the opening of business on the day specified in the public announcement of such change. RCRA - see Section 9.15. Regulation D means Regulation D of the FRB. Regulation U means Regulation U of the FRB. Release has the meaning specified in CERCLA and the term "Disposal" (or "Disposed") has the meaning specified in RCRA; provided that in the event either CERCLA or RCRA is amended so as to broaden the meaning of any term defined thereby, such broader meaning shall apply as of the effective date of such amendment; and provided, further, that to the extent that the laws of a state wherein any affected property lies establish a meaning for "Release" or "Disposal" which is broader than is specified in either CERCLA or RCRA, such broader meaning shall apply. Required Banks means Banks having Pro Rata Shares aggregating 66 2/3% or more. Revolving Commitment Amount means $25,000,000 as reduced from time to time pursuant to Section 6.1. Revolving Loan - see Section 2.1.1. Revolving Outstandings means, at any time, the aggregate principal amount of all outstanding Revolving Loans. SEC means the Securities and Exchange Commission or any other governmental authority succeeding to any of the principal functions thereof. Security and Pledge Agreement means a security agreement substantially in the form of Exhibit D. Senior Debt means all Debt of the Company and its Subsidiaries other than Subordinated Debt. Subordinated Debt means any unsecured Debt of the Company which has subordination terms, covenants, pricing, amount, holder and other terms which have been approved in writing by the Required Banks. Subsidiary means, with respect to any Person, a corporation, partnership, limited liability company or other entity of which such Person and/or its other Subsidiaries own, directly or indirectly, such number of outstanding shares or other ownership interests as have more than 50% of the ordinary voting power for the election of directors or other managers of such corporation, partnership, limited liability company or other entity; provided, that no Portfolio Company shall constitute 10 a Subsidiary of the Company. Unless the context otherwise requires, each reference to Subsidiaries herein shall be a reference to Subsidiaries of the Company. Suretyship Liability means any agreement, undertaking or arrangement by which any Person guarantees, endorses or otherwise becomes or is contingently liable upon (by direct or indirect agreement, contingent or otherwise, to provide funds for payment, to supply funds to or otherwise to invest in a debtor, or otherwise to assure a creditor against loss) any indebtedness, obligation or other liability of any other Person (other than by endorsements of instruments in the course of collection), or guarantees the payment of dividends or other distributions upon the shares of any other Person. The amount of any Person's obligation in respect of any Suretyship Liability shall (subject to any limitation set forth therein) be deemed to be the principal amount of the debt, obligation or other liability supported thereby. Termination Date means the earlier to occur of (a) October 30, 2000, or (b) such other date on which the Commitments terminate pursuant to Section 6 or 12. Total Liabilities means all liabilities of the Company and its Consolidated Subsidiaries, determined in accordance with GAAP, including all Debt of the Company and its Consolidated Subsidiaries. Unmatured Event of Default means any event that, if it continues uncured, will, with lapse of time or notice or both, constitute an Event of Default. Value of Eligible Investment Assets means, with respect to each Eligible Investment Asset, the lesser of (a) the original principal amount of such Eligible Investment Asset and (b) if such Eligible Investment Asset has been reduced in value below the original principal amount thereof (other than as a result of allocation of a portion of the original principal amount to warrants) the fair market value of such Eligible Investment Asset, as determined in accordance with the 1940 Act and any orders of the SEC issued to the Company thereunder. Wholly-Owned Subsidiary means, as to any Person, another Person all of the shares of capital stock or other ownership interests of which (except directors' qualifying shares) are at the time directly or indirectly owned by such Person and/or another Wholly-Owned Subsidiary of such Person. Year 2000 Problem means the risk that computer applications and embedded microchips in non-computing devices may be unable to recognize and perform properly date-sensitive functions involving certain dates prior to and any date after December 31, 1999. 1940 Act - see Section 9.10. 1.2 Other Interpretive Provisions. (a) The meanings of defined terms are equally applicable to the singular and plural forms of the defined terms. 11 (b) Section, Schedule and Exhibit references are to this Agreement unless otherwise specified. (c) The term "including" is not limiting and means "including without limitation." (d) In the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including"; the words "to" and "until" each mean "to but excluding", and the word "through" means "to and including." (e) Unless otherwise expressly provided herein, (i) references to agreements (including this Agreement) and other contractual instruments shall be deemed to include all subsequent amendments and other modifications thereto, but only to the extent such amendments and other modifications are not prohibited by the terms of any Loan Document, and (ii) references to any statute or regulation shall be construed as including all statutory and regulatory provisions amending, replacing, supplementing or interpreting such statute or regulation. (f) This Agreement and the other Loan Documents may use several different limitations, tests or measurements to regulate the same or similar matters. All such limitations, tests and measurements are cumulative and each shall be performed in accordance with its terms. (g) This Agreement and the other Loan Documents are the result of negotiations among and have been reviewed by counsel to the Agent, the Company, the Banks and the other parties thereto and are the products of all parties. Accordingly, they shall not be construed against the Agent or the Banks merely because of the Agent's or Banks' involvement in their preparation. SECTION 2 COMMITMENTS OF THE BANKS; BORROWING AND CONVERSION PROCEDURES. 2.1 Revolving Loan Commitment. On and subject to the terms of this Agreement, each Bank, severally and for itself alone, agrees to make loans on a revolving basis ("Revolving Loans") from time to time until the Termination Date in such Bank's Pro Rata Share of such aggregate amounts as the Company may request from all Banks; provided that the Revolving Outstandings will not at any time exceed the lesser of (x) the Revolving Commitment Amount and (y) the Borrowing Base. 2.2 Loan Procedures. 2.2.1 Various Types of Loans. Each Revolving Loan shall be divided into tranches which are, either a Base Rate Loan or a Eurodollar Loan (each a "type" of Loan), as the Company shall specify in the related notice of borrowing or conversion pursuant to Section 2.2.2 or 2.2.3. Eurodollar Loans having the same Interest Period are sometimes called a "Group" or collectively "Groups". Base Rate Loans and Eurodollar Loans may be outstanding at the same time, provided that not more than five different Groups of Eurodollar Loans shall be outstanding at any one time. 12 All borrowings, conversions and repayments of Revolving Loans shall be effected so that each Bank will have a pro rata share (according to its Pro Rata Share) of all types and Groups of Loans. 2.2.2 Borrowing Procedures. (a) The Company shall give written notice or telephonic notice (followed immediately by written confirmation thereof) to the Agent of each proposed borrowing not later than (i) in the case of a Base Rate borrowing, 11:00 A.M., Chicago time, on the proposed date of such borrowing, and (ii) in the case of a Eurodollar Rate borrowing, 11:00 A.M., Chicago time, at least three Business Days prior to the proposed date of such borrowing. Each such notice shall be effective upon receipt by the Agent, shall be irrevocable, and shall specify the date, amount and type of borrowing and, in the case of a Eurodollar Rate borrowing, the initial Interest Period therefor. Promptly upon receipt of such notice, the Agent shall advise each Bank thereof. Not later than 1:00 P.M., Chicago time, on the date of a proposed borrowing, each Bank shall provide the Agent at the office specified by the Agent with immediately available funds covering such Bank's Pro Rata Share of such borrowing and, so long as the Agent has not received written notice that the conditions precedent set forth in Section 11 with respect to such borrowing have not been satisfied, the Agent shall pay over the funds received by the Agent to the Company on the requested borrowing date. Each borrowing shall be on a Business Day. Each Base Rate borrowing shall be in an aggregate amount of at least $100,000 and an integral multiple of $100,000 and each Eurodollar Rate borrowing shall be in an aggregate amount of at least $500,000 and an integral multiple of at least $100,000. (b) Failure to Make Available. Unless the Agent shall have been notified by any Bank prior to the date of any proposed borrowing that such Bank does not intend to make available to the Agent such Loan on such date, the Agent may assume that such Bank has made such amount available to the Agent on such date and the Agent in its sole discretion may, but shall not be obligated to, make available to the Company a corresponding amount on such date. If such corresponding amount is not in fact made available to the Agent by such Bank by 1:00 P.M., Chicago time, on the Business Day of such proposed borrowing (it being understood that any such notice received after noon, Chicago time, or any Business Day shall be deemed to have been received the next following Business Day), such Bank agrees to pay and the Company agrees to repay to the Agent within two Business Days of demand such corresponding amount together with interest thereon, for each day from the date such amount is made available to the Company until the date such amount is paid or repaid to the Agent, at the interest rate applicable to such borrowing. If such Bank shall pay to the Agent such amount, such amount so paid shall constitute such Bank's Pro Rata Share of such borrowing, and if both such Bank and the Company shall have paid and repaid, respectively, such corresponding amount, the Agent shall promptly pay over to such Borrower such corresponding amount in same day funds, but the Company shall remain obligated for all interest thereon to the extent not already paid by the Company pursuant to the preceding sentence. Nothing in this Section 2.2.2 shall be deemed to relieve any Bank of its obligation hereunder to make its Pro Rata Share of any borrowing on any date specified in any borrowing notice. 2.2.3 Conversion and Continuation Procedures. (a) Subject to Section 2.2.1, the Company may, upon irrevocable written notice to the Agent in accordance with clause (b) below: 13 (i) elect, as of any Business Day, to convert any Loans (or any part thereof in an aggregate amount not less than $500,000 a higher integral multiple of $100,000) into Loans of the other type; or (ii) elect, as of the last day of the applicable Interest Period, to continue any Eurodollar Loans having Interest Periods expiring on such day (or any part thereof in an aggregate amount not less than $500,000 or a higher integral multiple of $100,000) for a new Interest Period; provided that after giving effect to any prepayment, conversion or continuation, the aggregate principal amount of each Group of Eurodollar Loans shall be at least $500,000 and an integral multiple of $100,000. (b) The Company shall give written or telephonic (followed immediately by written confirmation thereof) notice to the Agent of each proposed conversion or continuation not later than (i) in the case of conversion into Base Rate Loans, 11:00 A.M., Chicago time, on the proposed date of such conversion and (ii) in the case of conversion into or continuation of Eurodollar Loans, 11:00 A.M., Chicago time, at least three Business Days prior to the proposed date of such conversion or continuation, specifying in each case: (i) the proposed date of conversion or continuation; (ii) the aggregate amount of Loans to be converted or continued; (iii) the type of Loans resulting from the proposed conversion or continuation; and (iv) in the case of conversion into, or continuation of, Eurodollar Loans, the duration of the requested Interest Period therefor. (c) If upon the expiration of any Interest Period applicable to Eurodollar Loans, the Company has failed to select timely a new Interest Period to be applicable to such Eurodollar Loans, the Company shall be deemed to have elected to convert such Eurodollar Loans into Base Rate Loans effective on the last day of such Interest Period. (d) The Agent will promptly notify each Bank of its receipt of a notice of conversion or continuation pursuant to this Section 2.2.3 or, if no timely notice is provided by the Company, of the details of any automatic conversion. (e) Any conversion of a Eurodollar Loan on a day other than the last day of an Interest Period therefor shall be subject to Section 8.4. 2.3 Commitments Several. The failure of any Bank to make a requested Loan on any date shall not relieve any other Bank of its obligation (if any) to make a Loan on such date, but no 14 Bank shall be responsible for the failure of any other Bank to make any Loan to be made by such other Bank. 2.4 Certain Conditions. Notwithstanding any other provision of this Agreement, no Bank shall have an obligation to make any Loan, or to permit the continuation of or any conversion into any Eurodollar Loan, if an Event of Default or Unmatured Event of Default exists. SECTION 3 NOTES EVIDENCING LOANS. 3.1 Notes. The Loans of each Bank shall be evidenced by a promissory note (each a "Note") substantially in the form set forth in Exhibit A, with appropriate insertions, payable to the order of such Bank in a face principal amount equal to such Bank's Pro Rata Share of the Revolving Commitment Amount. The Commitment shall terminate and all Revolving Loans shall be due and payable on the Termination Date. 3.2 Recordkeeping. Each Bank shall record in its records, or at its option on the schedule attached to its Note, the date and amount of each Loan made by such Bank, each repayment or conversion thereof and, in the case of each Eurodollar Loan, the dates on which each Interest Period for such Loan shall begin and end. The aggregate unpaid principal amount so recorded shall be rebuttable presumptive evidence of the principal amount owing and unpaid on such Note. The failure to so record any such amount or any error in so recording any such amount shall not, however, limit or otherwise affect the obligations of the Company hereunder or under any Note to repay the principal amount of the Loans evidenced by such Note together with all interest accruing thereon. SECTION 4 INTEREST. 4.1 Interest Rates. The Company promises to pay interest on the unpaid principal amount of each Loan for the period commencing on the date of such Loan until such Loan is paid in full as follows: (a) at all times while such Loan is a Base Rate Loan, at a rate per annum equal to the Base Rate from time to time in effect; and (b) at all times while such Loan is a Eurodollar Loan, at a rate per annum equal to the sum of the Eurodollar Rate (Reserve Adjusted) applicable to each Interest Period for such Loan plus the Eurodollar Margin from time to time in effect; provided that at any time an Event of Default exists, if requested by the Required Banks, the interest rate applicable to each Loan shall be increased by 2%. 4.2 Interest Payment Dates. Accrued interest on each Base Rate Loan shall be payable in arrears on the last day of each calendar month and at maturity. Accrued interest on each Eurodollar Loan shall be payable on the last day of each Interest Period relating to such Loan (and, 15 in the case of a Eurodollar Loan with an Interest Period in excess of three months, on the three-month anniversary of the first day of such Interest Period) and at maturity. After maturity, accrued interest on all Loans shall be payable on demand. 4.3 Setting and Notice of Eurodollar Rates. The applicable Eurodollar Rate for each Interest Period shall be determined by the Agent, and notice thereof shall be given by the Agent promptly to the Company and each Bank. Each determination of the applicable Eurodollar Rate by the Agent shall be conclusive and binding upon the parties hereto, in the absence of demonstrable error. The Agent shall, upon written request of the Company or any Bank, deliver to the Company or such Bank a statement showing the computations used by the Agent in determining any applicable Eurodollar Rate hereunder. 4.4 Computation of Interest. Interest shall be computed for the actual number of days elapsed on the basis of a year of 365 days. The applicable interest rate for each Base Rate Loan shall change simultaneously with each change in the Base Rate. SECTION 5 FEES. 5.1 Non-Use Fee. The Company agrees to pay to the Agent for the account of each Bank a non-use fee, for the period from the Closing Date to the Termination Date, at the Non-Use Fee Rate in effect from time to time of such Bank's Pro Rata Share (as adjusted from time to time) of the unused amount of the Revolving Commitment Amount. For purposes of calculating usage under this Section, the Revolving Commitment Amount shall be deemed used to the extent of the aggregate principal amount of all outstanding Revolving Loans. Such non-use fee shall be payable in arrears on the last day of each calendar quarter and on the Termination Date for any period then ending for which such non-use fee shall not have previously been paid. The non-use fee shall be computed for the actual number of days elapsed on the basis of a year of 365 days. 5.2 Upfront Fees. The Company agrees to pay to the Agent for the account of each Bank on the Closing Date an upfront fee in the amount previously agreed to between the Company and the Agent (and the Agent agrees to promptly forward to each Bank a portion of such upfront fee in the amount previously agreed to between the Agent and such Bank). 5.3 Agent's Fees. The Company agrees to pay to the Agent such agent's fees as are mutually agreed to from time to time by the Company and the Agent. SECTION 6 REDUCTION OR TERMINATION OF THE REVOLVING COMMITMENT AMOUNT 6.1 Reduction or Termination of the Revolving Commitment Amount. 6.1.1 Voluntary Reduction or Termination of the Revolving Commitment Amount. The Company may from time to time on at least five Business Days' prior written notice received by the 16 Agent (which shall promptly advise each Bank thereof) permanently reduce the Revolving Commitment Amount to an amount not less than the Revolving Outstandings. Any such reduction shall be in an amount not less than $100,000 or a higher integral multiple of $100,000. Concurrently with any reduction of the Revolving Commitment Amount to zero, the Company shall pay all interest on the Revolving Loans and all non-use fees, determined pursuant to Section 5.1 hereof. 6.1.2 Mandatory Reductions of Revolving Commitment Amount. If on any day the Revolving Outstandings exceed the Borrowing Base, the Company shall immediately prepay the Loans in an amount sufficient to eliminate such excess. 6.1.3 All Reductions of the Revolving Commitment Amount. All reductions of the Revolving Commitment Amount shall reduce the Commitments pro rata among the Banks according to their respective Pro Rata Shares. 6.2 Prepayments. 6.2.1 Voluntary Prepayments. The Borrowers may from time to time prepay the Loans in whole or in part; provided that the Borrowers shall give the Agent (which shall promptly advise each Bank) notice thereof not later than 11:00 A.M., Chicago time, one Business Day prior to such prepayment (in the case of Base Rate Loans) and three Business Days prior to such prepayment (in the case of Eurodollar Rate Loans) (which shall be a Business Day), specifying the Loans to be prepaid and the date and amount of prepayment. Any such partial prepayment shall be in an amount equal to $100,000 or a higher integral multiple of $100,000. 6.3 All Prepayments. Each voluntary partial prepayment shall be in a principal amount of $100,000 or a higher integral multiple of $100,000. Any partial prepayment of a Group of Eurodollar Loans shall be subject to the proviso to Section 2.2.3(a). Any prepayment of a Eurodollar Loan on a day other than the last day of an Interest Period therefor shall include interest on the principal amount being repaid and shall be subject to Section 8.4. SECTION 7 MAKING AND PRORATION OF PAYMENTS; SETOFF; TAXES. 7.1 Making of Payments. All payments of principal of or interest on the Notes, and of all fees, shall be made by the Company to the Agent in immediately available funds at the office specified by the Agent not later than noon, Chicago time, on the date due; and funds received after that hour shall be deemed to have been received by the Agent on the following Business Day. The Agent shall promptly remit to each Bank its share of all such payments received in collected funds by the Agent for the account of such Bank. All payments under Section 8.1 shall be made by the Company directly to the Bank entitled thereto. 7.2 Application of Certain Payments. Each payment of principal shall be applied to such Loans as the Company shall direct by notice to be received by the Agent on or before the date of such payment or, in the absence of such notice, as the Agent shall determine in its discretion. Concurrently with each remittance to any Bank of its share of any such payment, the Agent shall advise such Bank as to the application of such payment. 17 7.3 Due Date Extension. If any payment of principal or interest with respect to any of the Loans, or of any fees, falls due on a day which is not a Business Day, then such due date shall be extended to the immediately following Business Day (unless, in the case of a Eurodollar Loan, such immediately following Business Day is the first Business Day of a calendar month, in which case such due date shall be the immediately preceding Business Day) and, in the case of principal, additional interest shall accrue and be payable for the period of any such extension. 7.4 Setoff. The Company agrees that the Agent and each Bank have all rights of set-off and bankers' lien provided by applicable law, and in addition thereto, the Company agrees that at any time any Event of Default exists, the Agent and each Bank may apply to the payment of any obligations of the Company hereunder, whether or not then due, any and all balances, credits, deposits, accounts or moneys of the Company then or thereafter with the Agent or such Bank. 7.5 Proration of Payments. If any Bank shall obtain any payment or other recovery (whether voluntary, involuntary, by application of offset or otherwise, but excluding any payment pursuant to Section 8.7 or 14.9 and payments of interest on any Affected Loan) on account of principal of or interest on any Loan in excess of its pro rata share of payments and other recoveries obtained by all Banks on account of principal of and interest on the Loans then held by them, such Bank shall purchase from the other Banks such participations in the Loans held by them as shall be necessary to cause such purchasing Bank to share the excess payment or other recovery ratably with each of them; provided that if all or any portion of the excess payment or other recovery is thereafter recovered from such purchasing Bank, the purchase shall be rescinded and the purchase price restored to the extent of such recovery. 7.6 Taxes. All payments of principal of, and interest on, the Loans and all other amounts payable hereunder shall be made free and clear of and without deduction for any present or future income, excise, stamp or franchise taxes and other taxes, fees, duties, withholdings or other charges of any nature whatsoever imposed by any taxing authority, excluding franchise taxes and taxes imposed on or measured by any Bank's net income or receipts (all non-excluded items being called "Taxes"). If any withholding or deduction from any payment to be made by the Company hereunder is required in respect of any Taxes pursuant to any applicable law, rule or regulation, then the Company will: (a) pay directly to the relevant authority the full amount required to be so withheld or deducted; (b) promptly forward to the Agent an official receipt or other documentation satisfactory to the Agent evidencing such payment to such authority; and (c) pay to the Agent for the account of the Banks such additional amount or amounts as is necessary to ensure that the net amount actually received by each Bank will equal the full amount such Bank would have received had no such withholding or deduction been required. 18 Moreover, if any Taxes are directly asserted against the Agent or any Bank with respect to any payment received by the Agent or such Bank hereunder, the Agent or such Bank may pay such Taxes and the Company will promptly pay such additional amounts (including any penalty, interest or expense) as is necessary in order that the net amount received by such Person after the payment of such Taxes (including any Taxes on such additional amount) shall equal the amount such Person would have received had such Taxes not been asserted. If the Company fails to pay any Taxes when due to the appropriate taxing authority or fails to remit to the Agent, for the account of the respective Banks, the required receipts or other required documentary evidence, the Company shall indemnify the Banks for any incremental Taxes, interest or penalties that may become payable by any Bank as a result of any such failure. For purposes of this Section 7.6, a distribution hereunder by the Agent or any Bank to or for the account of any Bank shall be deemed a payment by the Company. Each Bank that (a) is organized under the laws of a jurisdiction other than the United States of America and (b)(i) is a party hereto on the Closing Date or (ii) becomes an assignee of an interest under this Agreement under Section 14.9.1 after the Closing Date (unless such Bank was already a Bank hereunder immediately prior to such assignment) shall execute and deliver to the Company and the Agent one or more (as the Company or the Agent may reasonably request) United States Internal Revenue Service Forms 4224 or Forms 1001 or such other forms or documents, appropriately completed, as may be applicable to establish that such Bank is exempt from withholding or deduction of Taxes. The Company shall not be required to pay additional amounts to any Bank pursuant to this Section 7.6 to the extent that the obligation to pay such additional amounts would not have arisen but for the failure of such Bank to comply with this paragraph. SECTION 8 INCREASED COSTS; SPECIAL PROVISIONS FOR EURODOLLAR LOANS. 8.1 Increased Costs. (a) If, after the date hereof, the adoption of, or any change in, any applicable law, rule or regulation, or any change in the interpretation or administration of any applicable law, rule or regulation by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank (or any Eurodollar Office of such Bank) with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency (i) shall subject any Bank (or any Eurodollar Office of such Bank) to any tax, duty or other charge with respect to its Eurodollar Loans, its Note or its obligation to make Eurodollar Loans, or shall change the basis of taxation of payments to any Bank of the principal of or interest on its Eurodollar Loans or any other amounts due under this Agreement in respect of its Eurodollar Loans or its obligation to make Eurodollar Loans (except for changes in the rate of tax on the overall net income of such Bank or its Eurodollar Office imposed by the jurisdiction in which such Bank's principal executive office or Eurodollar Office is located); 19 (ii) shall impose, modify or deem applicable any reserve (including any reserve imposed by the FRB, but excluding any reserve included in the determination of interest rates pursuant to Section 4), special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by any Bank (or any Eurodollar Office of such Bank); or (iii) shall impose on any Bank (or its Eurodollar Office) any other condition affecting its Eurodollar Loans, its Note or its obligation to make Eurodollar Loans; and the result of any of the foregoing is to increase the cost to (or to impose a cost on) such Bank (or any Eurodollar Office of such Bank) of making or maintaining any Eurodollar Loan, or to reduce the amount of any sum received or receivable by such Bank (or its Eurodollar Office) under this Agreement or under its Note with respect thereto, then upon demand by such Bank (which demand shall be accompanied by a statement setting forth the basis for such demand and a calculation of the amount thereof in reasonable detail, a copy of which shall be furnished to the Agent), the Company shall pay directly to such Bank such additional amount as will compensate such Bank for such increased cost or such reduction. (b) If any Bank shall reasonably determine that any change in, the adoption or phase-in of, any applicable law, rule or regulation regarding capital adequacy, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank or any Person controlling such Bank with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on such Bank's or such controlling Person as a consequence of such Bank's obligations hereunder to a level below that which such Bank or such controlling Person could have achieved but for such change, adoption, phase-in or compliance (taking into consideration such Bank's or such controlling Person's policies with respect to capital adequacy) by an amount deemed by such Bank or such controlling Person to be material, then from time to time, upon demand by such Bank (which demand shall be accompanied by a statement setting forth the basis for such demand and a calculation of the amount thereof in reasonable detail, a copy of which shall be furnished to the Agent), the Company shall pay to such Bank such additional amount as will compensate such Bank or such controlling Person for such reduction. 8.2 Basis for Determining Interest Rate Inadequate or Unfair. If with respect to any Interest Period: (a) deposits in Dollars (in the applicable amounts) are not being offered to the Agent in the interbank eurodollar market for such Interest Period, or the Agent otherwise reasonably determines (which determination shall be binding and conclusive on the Company) that by reason of circumstances affecting the interbank eurodollar market adequate and reasonable means do not exist for ascertaining the applicable Eurodollar Rate; or 20 (b) the Required Banks advise the Agent that the Eurodollar Rate (Reserve Adjusted) as determined by the Agent will not adequately and fairly reflect the cost to such Banks of maintaining or funding Eurodollar Loans for such Interest Period (taking into account any amount to which such Banks may be entitled under Section 8.1) or that the making or funding of Eurodollar Loans has become impracticable as a result of an event occurring after the date of this Agreement which in the opinion of such Banks materially affects such Loans; then the Agent shall promptly notify the other parties thereof and, so long as such circumstances shall continue, (i) no Bank shall be under any obligation to make or convert into Eurodollar Loans and (ii) on the last day of the current Interest Period for each Eurodollar Loan, such Loan shall, unless then repaid in full, automatically convert to a Base Rate Loan. 8.3 Changes in Law Rendering Eurodollar Loans Unlawful. If any change in, or the adoption of any new, law or regulation, or any change in the interpretation of any applicable law or regulation by any governmental or other regulatory body charged with the administration thereof, should make it (or in the good faith judgment of any Bank cause a substantial question as to whether it is) unlawful for any Bank to make, maintain or fund Eurodollar Loans, then such Bank shall promptly notify each of the other parties hereto and, so long as such circumstances shall continue, (a) such Bank shall have no obligation to make or convert into Eurodollar Loans (but shall make Base Rate Loans concurrently with the making of or conversion into Eurodollar Loans by the Banks which are not so affected, in each case in an amount equal to the amount of Eurodollar Loans which would be made or converted into by such Bank at such time in the absence of such circumstances) and (b) on the last day of the current Interest Period for each Eurodollar Loan of such Bank (or, in any event, on such earlier date as may be required by the relevant law, regulation or interpretation), such Eurodollar Loan shall, unless then repaid in full, automatically convert to a Base Rate Loan. Each Base Rate Loan made by a Bank which, but for the circumstances described in the foregoing sentence, would be a Eurodollar Loan (an "Affected Loan") shall remain outstanding for the same period as the Group of Eurodollar Loans of which such Affected Loan would be a part absent such circumstances. 8.4 Funding Losses. The Company hereby agrees that upon demand by any Bank (which demand shall be accompanied by a statement setting forth the basis for the amount being claimed, a copy of which shall be furnished to the Agent), the Company will indemnify such Bank against any actual loss or expense which such Bank may sustain or incur (including any actual loss or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such Bank to fund or maintain any Eurodollar Loan), as reasonably determined by such Bank, as a result of (a) any payment, prepayment or conversion of any Eurodollar Loan of such Bank on a date other than the last day of an Interest Period for such Loan (including any conversion pursuant to Section 8.3) or (b) any failure of the Company to borrow, convert or continue any Loan on a date specified therefor in a notice of borrowing, conversion or continuation pursuant to this Agreement. For this purpose, all notices to the Agent pursuant to this Agreement shall be deemed to be irrevocable. 21 8.5 Right of Banks to Fund through Other Offices. Each Bank may, if it so elects, fulfill its commitment as to any Eurodollar Loan by causing a foreign branch or Affiliate of such Bank to make such Loan; provided that in such event for the purposes of this Agreement such Loan shall be deemed to have been made by such Bank and the obligation of the Company to repay such Loan shall nevertheless be to such Bank and shall be deemed held by it, to the extent of such Loan, for the account of such branch or Affiliate. 8.6 Discretion of Banks as to Manner of Funding. Notwithstanding any provision of this Agreement to the contrary, each Bank shall be entitled to fund and maintain its funding of all or any part of its Loans in any manner it sees fit, it being understood, however, that for the purposes of this Agreement all determinations hereunder shall be made as if such Bank had actually funded and maintained each Eurodollar Loan during each Interest Period for such Loan through the purchase of deposits having a maturity corresponding to such Interest Period and bearing an interest rate equal to the Eurodollar Rate for such Interest Period. 8.7 Mitigation of Circumstances; Replacement of Banks. (a) Each Bank shall promptly notify the Company and the Agent of any event of which it has knowledge which will result in, and will use reasonable commercial efforts available to it (and not, in such Bank's sole judgment, otherwise disadvantageous to such Bank) to mitigate or avoid, (i) any obligation by the Company to pay any amount pursuant to Section 7.6 or 8.1 or (ii) the occurrence of any circumstances described in Section 8.2 or 8.3 (and, if any Bank has given notice of any such event described in clause (i) or (ii) above and thereafter such event ceases to exist, such Bank shall promptly so notify the Company and the Agent). Without limiting the foregoing, each Bank will designate a different funding office if such designation will avoid (or reduce the cost to the Company of) any event described in clause (i) or (ii) of the preceding sentence and such designation will not, in such Bank's sole judgment, be otherwise disadvantageous to such Bank. (b) If the Company becomes obligated to pay additional amounts to any Bank pursuant to Section 7.6 or 8.1, or any Bank gives notice of the occurrence of any circumstances described in Section 8.2 or 8.3, the Company may designate another bank which is acceptable to the Agent and the Issuing Bank in their reasonable discretion (such other bank being called a "Replacement Bank") to purchase the Loans of such Bank and such Bank's rights hereunder, without recourse to or warranty by, or expense to, such Bank, for a purchase price equal to the outstanding principal amount of the Loans payable to such Bank plus any accrued but unpaid interest on such Loans and all accrued but unpaid fees owed to such Bank and any other amounts payable to such Bank under this Agreement, and to assume all the obligations of such Bank hereunder, and, upon such purchase and assumption (pursuant to an Assignment Agreement), such Bank shall no longer be a party hereto or have any rights hereunder (other than rights with respect to indemnities and similar rights applicable to such Bank prior to the date of such purchase and assumption) and shall be relieved from all obligations to the Company hereunder, and the Replacement Bank shall succeed to the rights and obligations of such Bank hereunder. 22 8.8 Conclusiveness of Statements; Survival of Provisions. Determinations and statements of any Bank pursuant to Section 8.1, 8.2, 8.3 or 8.4 shall be conclusive absent demonstrable error. Banks may use reasonable averaging and attribution methods in determining compensation under Sections 8.1 and 8.4, and the provisions of such Sections shall survive repayment of the Loans, cancellation of the Notes and termination of this Agreement. SECTION 9 WARRANTIES. To induce the Agent and the Banks to enter into this Agreement and to induce the Banks to make Loans, the Company warrants to the Agent and the Banks that: 9.1 Organization. The Company is a corporation validly existing and in good standing under the laws of the State of Delaware; each Subsidiary is validly existing and in good standing under the laws of the jurisdiction of its organization; and each of the Company and each Subsidiary is duly qualified to do business in each jurisdiction where, because of the nature of its activities or properties, such qualification is required, except for such jurisdictions where the failure to so qualify would not have a Material Adverse Effect. 9.2 Authorization; No Conflict. Each Loan Party is duly authorized to execute and deliver each Loan Document to which it is a party, the Company is duly authorized to borrow monies hereunder and each Loan Party is duly authorized to perform its obligations under each Loan Document to which it is a party. Except as set forth on Schedule 9.2, the execution, delivery and performance by the Company of this Agreement and by each Loan Party of each Loan Document to which it is a party, and the borrowings by the Company hereunder, do not and will not (a) require any consent or approval of any governmental agency or authority (other than any consent or approval which has been obtained and is in full force and effect), (b) conflict with (i) any provision of law (including the 1940 Act), (ii) the charter, by-laws or other organizational documents of the Company or any other Loan Party or (iii) any agreement, indenture, instrument or other document, or any judgment, order or decree, which is binding upon the Company or any other Loan Party or any of their respective properties or (c) require, or result in, the creation or imposition of any Lien on any asset of the Company, any Subsidiary or any other Loan Party (other than Liens in favor of the Agent created pursuant to the Collateral Documents). 9.3 Validity and Binding Nature. Each of this Agreement and each other Loan Document to which the Company or any other Loan Party is a party is the legal, valid and binding obligation of such Person, enforceable against such Person in accordance with its terms, subject to bankruptcy, insolvency and similar laws affecting the enforceability of creditors' rights generally and to general principles of equity. 9.4 Financial Condition. The audited financial statements of the Company and its Consolidated Subsidiaries as at December 31, 1997 and the unaudited financial statements of the Company and its Consolidated Subsidiaries as at June 30, 1998, copies of each of which have been delivered to each Bank, were prepared in accordance with GAAP (subject, in the case of such unaudited statements, to the absence of footnotes and to normal year-end adjustments) and present fairly the consolidated financial condition of the Company and its Consolidated Subsidiaries as at such dates and the results of their operations for the periods then ended. 23 9.5 No Material Adverse Change. Since December 31, 1997, there has been no material adverse change in the financial condition, operations, assets, business, properties or prospects of the Company and its Subsidiaries taken as a whole. 9.6 Litigation and Contingent Liabilities. No litigation (including derivative actions), arbitration proceeding or governmental investigation or proceeding is pending or, to the Company's knowledge, threatened against any Loan Party which might reasonably be expected to have a Material Adverse Effect, except as set forth in Schedule 9.6. Other than any liability incident to such litigation or proceedings, no Loan Party has any material contingent liabilities not listed on Schedule 9.6 or permitted by Section 10.7. 9.7 Ownership of Properties; Liens. Each Loan Party owns good title to all of its properties and assets, real and personal, tangible and intangible (including each Portfolio Investment), of any nature whatsoever free and clear of all Liens, charges and claims, except as permitted under Section 10.8. 9.8 Subsidiaries. As of the Closing Date, the Company has no Subsidiaries other than those listed on Schedule 9.8. ACSLR has no material assets or liabilities. 9.9 Pension Plans. (a) During the twelve-consecutive-month period prior to the date of the execution and delivery of this Agreement or the making of any Loan, (i) no steps have been taken to terminate any Pension Plan and (ii) no contribution failure has occurred with respect to any Pension Plan sufficient to give rise to a Lien under Section 302(f) of ERISA. No condition exists or event or transaction has occurred with respect to any Pension Plan which could result in the incurrence by any Loan Party of any material liability, fine or penalty. (b) All contributions (if any) have been made to any Multiemployer Pension Plan that are required to be made by the Company or any other member of the Controlled Group under the terms of the plan or of any collective bargaining agreement or by applicable law; neither the Company nor any member of the Controlled Group has withdrawn or partially withdrawn from any Multiemployer Pension Plan, incurred any withdrawal liability with respect to any such plan or received notice of any claim or demand for withdrawal liability or partial withdrawal liability from any such plan, and no condition has occurred which, if continued, might result in a withdrawal or partial withdrawal from any such plan; and neither the Company nor any member of the Controlled Group has received any notice that any Multiemployer Pension Plan is in reorganization, that increased contributions may be required to avoid a reduction in plan benefits or the imposition of any excise tax, that any such plan is or has been funded at a rate less than that required under Section 412 of the Code, that any such plan is or may be terminated, or that any such plan is or may become insolvent. 24 9.10 Investment Company Act. The Company is a closed end investment company that has elected to be regulated as a business development company under Section 54 of the Investment Company Act of 1940 (together with all amendments thereto and any successor or substitute therefore and all regulations, orders and opinions issued thereunder, the "1940 Act". The Company and its Subsidiaries are in compliance with the requirements of the 1940 Act. No order, notice or application has been received by the Company (and the Company has no knowledge of any threatened or pending order, notice or application, or any basis for any such order, notice or application) to revoke or suspend the status of the Company under the 1940 Act as a business development company. The Loans constitute a senior security permitted by the 1940 Act. Neither the Company nor its Subsidiaries nor any of their Affiliates, after diligent inquiry, is related to the Agent or any Bank or any of its or their Affiliates in the manner described in Section 57(b) of the 1940 Act or an Affiliated Person or Affiliated Company of the Agent or any Bank, under the 1940 Act. The transactions contemplated by this Agreement and the Loans do not constitute transactions that are unlawful or prohibited by Section 57 of the 1940 Act. 9.11 Public Utility Holding Company Act. No Loan Party is a "holding company", or a "subsidiary company" of a "holding company", or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company", within the meaning of the Public Utility Holding Company Act of 1935. 9.12 Regulation U. No Loan Party is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying Margin Stock. None of the Portfolio Investments includes Margin Stock. 9.13 Taxes. Each Loan Party has filed all tax returns and reports required by law to have been filed by it, unless the failure to file such tax returns and reports would not have a Material Adverse Effect, and has paid all taxes and governmental charges thereby shown to be owing, except any such taxes or charges which are being diligently contested in good faith by appropriate proceedings and for which adequate reserves in accordance with GAAP shall have been set aside on its books. The Company is qualified and treated as a regulated investment company under the Code. 9.14 Solvency, etc. On the Closing Date, and immediately prior to and after giving effect to each borrowing hereunder and the use of the proceeds thereof, (a) the Company's assets will exceed its liabilities and (b) the Company will be solvent, will be able to pay its debts as they mature, will own property with fair saleable value greater than the amount required to pay its debts and will have capital sufficient to carry on its business as then constituted. 9.15 Environmental Matters. (a) No Violations. Except as set forth on Schedule 9.15, no Loan Party, nor any operator of any Loan Party's real properties, is in violation, or alleged violation, of any judgment, decree, order, law, permit, license, rule or regulation pertaining to environmental matters, including those arising under the Resource Conservation and Recovery Act ("RCRA"), the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), the Superfund Amendments and Reauthorization Act of 1986 or any other Environmental Law which (i) in any single case, requires expenditures in any three-year period of $100,000 or more by any Loan Party in penalties and/or for investigative, removal or remedial actions or (ii) individually or in the aggregate otherwise might reasonably be expected to have a Material Adverse Effect. 25 (b) Notices. Except as set forth on Schedule 9.15 and for matters arising after the Closing Date, in each case none of which could singly or in the aggregate be expected to have a Material Adverse Effect, no Loan Party has received notice from any third party, including any Federal, state or local governmental authority: (a) that any one of them has been identified by the U.S. Environmental Protection Agency as a potentially responsible party under CERCLA with respect to a site listed on the National Priorities List, 40 C.F.R. Part 300 Appendix B; (b) that any hazardous waste, as defined by 42 U.S.C. ss. 6903(5), any hazardous substance as defined by 42 U.S.C. ss. 9601(14), any pollutant or contaminant as defined by 42 U.S.C. ss. 9601(33) or any toxic substance, oil or hazardous material or other chemical or substance regulated by any Environmental Law (all of the foregoing, "Hazardous Substances") which any one of them has generated, transported or disposed of has been found at any site at which a Federal, state or local agency or other third party has conducted a remedial investigation, removal or other response action pursuant to any Environmental Law; (c) that it must conduct a remedial investigation, removal, response action or other activity pursuant to any Environmental Law; or (d) of any Environmental Claim. (c) Handling of Hazardous Substances. Except as set forth on Schedule 9.15, (i) no portion of the real property of any Loan Party has been used for the handling, processing, storage or disposal of Hazardous Substances except in accordance in all material respects with applicable Environmental Laws; and no underground tank or other underground storage receptacle for Hazardous Substances is located on such properties; (ii) in the course of any activities conducted by each Loan Party or the operators of any real property of any Loan Party, no Hazardous Substances have been generated or are being used on such properties except in accordance in all material respects with applicable Environmental Laws; (iii) there have been no Releases or threatened Releases of Hazardous Substances on, upon, into or from any real property of any Loan Party, which Releases singly or in the aggregate might reasonably be expected to have a material adverse effect on the value of such real property or assets; (iv) there have been no Releases on, upon, from or into any real property in the vicinity of the real property of any Loan Party which, through soil or groundwater contamination, may have come to be located on, and which might reasonably be expected to have a material adverse effect on the value of, the real property or other assets of any Loan Party; and (v) any Hazardous Substances generated by any Loan Party have been transported offsite only by properly licensed carriers and delivered only to treatment or disposal facilities maintaining valid permits as required under applicable Environmental Laws, which transporters and facilities have been and are operating in compliance in all material respects with such permits and applicable Environmental Laws. 9.16 Year 2000 Problem. Each Loan Party has reviewed the areas within its business and operations which could be adversely affected by, and has developed or are developing a program to address on a timely basis, the Year 2000 Problem. Based on such review, program and inquiries, the Company reasonably believes that the "Year 2000 Problem" will not have a Material Adverse Effect. 26 9.17 Insurance. Set forth on Schedule 9.17 is a complete and accurate summary of the property and casualty insurance program of each Loan Party as of the Closing Date (including the names of all insurers, policy numbers, expiration dates, amounts and types of coverage, annual premiums, exclusions, deductibles, self-insured retention, and a description in reasonable detail of any self-insurance program, retrospective rating plan, fronting arrangement or other risk assumption arrangement involving each Loan Party). 9.18 Real Property. Set forth on Schedule 9.18 is a complete and accurate list, as of the Closing Date, of the address of all real property owned or leased by each Loan Party, together with, in the case of leased property, the name and mailing address of the lessor of such property. 9.19 Information. All information heretofore or contemporaneously herewith furnished in writing by any Loan Party to the Agent or any Bank for purposes of or in connection with this Agreement and the transactions contemplated hereby is, and all written information hereafter furnished by or on behalf of any Loan Party to the Agent or any Bank pursuant hereto or in connection herewith will be, true and accurate in every material respect on the date as of which such information is dated or certified, and none of such information is or will be incomplete by omitting to state any material fact necessary to make such information not misleading in light of the circumstances under which made (it being recognized by the Agent and the Banks that any projections and forecasts provided by any Loan Party is based on good faith estimates and assumptions believed by the Company to be reasonable as of the date of the applicable projections or assumptions and that actual results during the period or periods covered by any such projections and forecasts may differ from projected or forecasted results). 9.20 Intellectual Property. Each Loan Party owns and possesses or has a license or other right to use all patents, patent rights, trademarks, trademark rights, trade names, trade name rights, service marks, service mark rights and copyrights as are necessary for the conduct of the business of each Loan Party, without any infringement upon rights of others which could reasonably be expected to have a Material Adverse Effect. 9.21 Burdensome Obligations. No Loan Party is a party to any agreement or contract or subject to any corporate or partnership restriction which might reasonably be expected to have a Material Adverse Effect. 9.22 Labor Matters. Except as set forth on Schedule 9.22, no Loan Party is subject to any labor or collective bargaining agreement. There are no existing or threatened strikes, lockouts or other labor disputes involving any Loan Party that singly or in the aggregate could reasonably be expected to have a Material Adverse Effect. Hours worked by and payment made to employees of each Loan Party are not in violation of the Fair Labor Standards Act or any other applicable law, rule or regulation dealing with such matters. 9.23 No Default. No Event of Default or Unmatured Event of Default exists or would result from the incurring by the Company of any Debt hereunder or under any other Loan Document. 27 SECTION 10 COVENANTS. Until the expiration or termination of the Commitments and thereafter until all obligations of the Company hereunder and under the other Loan Documents are paid in full, the Company agrees that, unless at any time the Required Banks shall otherwise expressly consent in writing, it will: 10.1 Reports, Certificates and Other Information. Furnish to the Agent and each Bank: 10.1.1 Annual Report. Promptly when available and in any event within 90 days after the close of each Fiscal Year: (a) a copy of the annual audit report of the Company and its Consolidated Subsidiaries for such Fiscal Year (and with respect to any Subsidiary that is not a Consolidated Subsidiary, its unaudited financial statements), including therein balance sheets and statements of earnings and cash flows of the Company and its Consolidated Subsidiaries (or other Subsidiary) as at the end of such Fiscal Year, certified without qualification by Ernst & Young LLP or other independent auditors of recognized standing selected by the Company and reasonably acceptable to the Required Banks, together with (i) a written statement from such accountants to the effect that in making the examination necessary for the signing of such annual audit report by such accountants, nothing came to their attention that caused them to believe that the Company was not in compliance with any provision of Section 10.6, 10.7, 10.9 or 10.10 of this Agreement insofar as such provision relates to accounting matters or, if something has come to their attention that caused them to believe that the Company was not in compliance with any such provision, describing such non-compliance in reasonable detail and (ii) a comparison with the budget for such Fiscal Year and a comparison with the previous Fiscal Year; and (b) consolidating balance sheets of the Company and its Consolidated Subsidiaries (and with respect to any Subsidiary that is not a Consolidated Subsidiary, its balance sheet) as of the end of such Fiscal Year and a consolidating statement of earnings for the Company and its Consolidated Subsidiaries (or other Subsidiary) for such Fiscal Year, certified by the Chief Financial Officer or the Treasurer of the Company. 10.1.2 Interim Reports. Promptly when available and in any event within 45 days after the end of each Fiscal Quarter (except the last Fiscal Quarter of each Fiscal Year), consolidated and consolidating balance sheets of the Company and its Consolidated Subsidiaries as of the end of such Fiscal Quarter (and with respect to any Subsidiary that is not a Consolidated Subsidiary, its balance sheet), together with consolidated and consolidating statements of earnings and cash flows for such Fiscal Quarter and for the period beginning with the first day of such Fiscal Year and ending on the last day of such Fiscal Quarter, together with a comparison with the corresponding period of the previous Fiscal Year and a comparison with the budget for such period of the current Fiscal Year, certified by the Chief Financial Officer or the Treasurer of the Company. 10.1.3 Compliance Certificates. Contemporaneously with the furnishing of a copy of each annual audit report pursuant to Section 10.1.1 and each set of quarterly statements pursuant to Section 10.1.2, a duly completed compliance certificate in the form of Exhibit B, with appropriate insertions, dated the date of such annual report or such quarterly statements and signed by the Chief Financial Officer or the Treasurer of the Company, containing a computation of each of the financial ratios and restrictions set forth in Section 10.6 and to the effect that such officer has not become aware of any Event of Default or Unmatured Event of Default that has occurred and is continuing or, if there is any such event, describing it and the steps, if any, being taken to cure it. 28 10.1.4 Reports to the SEC, 1940 Act Reports and Reports to Stockholders. Promptly upon the filing or sending thereof, copies of all regular, periodic or special reports of the Company or any Subsidiary filed with the SEC (including Forms 12b-25, 10-K, 10-Q and 8-K); copies of all registration statements of the Company or any Subsidiary filed with the SEC (other than on Form S-8); and copies of all proxy statements or other communications made to security holders generally; copies of all filings, reports and notices made under or pursuant to the 1940 Act (including Section 6(c) of the 1940 Act and any no action letters submitted to the SEC staff on behalf of or relating to the Company). 10.1.5 Notice of Default, Litigation and ERISA Matters. Promptly upon becoming aware of any of the following, written notice describing the same and the steps being taken by the Company or the Subsidiary affected thereby with respect thereto: (a) the occurrence of an Event of Default or an Unmatured Event of Default; (b) any litigation, arbitration or governmental investigation or proceeding not previously disclosed by the Company to the Banks which has been instituted or, to the knowledge of the Company, is threatened against the Company or any Subsidiary or to which any of the properties of any thereof is subject which might reasonably be expected to have a Material Adverse Effect; (c) the institution of any steps by any member of the Controlled Group or any other Person to terminate any Pension Plan, or the failure of any member of the Controlled Group to make a required contribution to any Pension Plan (if such failure is sufficient to give rise to a Lien under Section 302(f) of ERISA) or to any Multiemployer Pension Plan, or the taking of any action with respect to a Pension Plan which could result in the requirement that the Company furnish a bond or other security to the PBGC or such Pension Plan, or the occurrence of any event with respect to any Pension Plan or Multiemployer Pension Plan which could result in the incurrence by any member of the Controlled Group of any material liability, fine or penalty (including any claim or demand for withdrawal liability or partial withdrawal from any Multiemployer Pension Plan), or any material increase in the contingent liability of the Company with respect to any post-retirement welfare plan benefit, or any notice that any Multiemployer Pension Plan is in reorganization, that increased contributions may be required to avoid a reduction in plan benefits or the imposition of an excise tax, that any such plan is or has been funded at a rate less than that required under Section 412 of the Code, that any such plan is or may be terminated, or that any such plan is or may become insolvent; (d) any cancellation or material change in any insurance maintained by any Loan Party; 29 (e) any other event (including (i) any violation of any Environmental Law or the assertion of any Environmental Claim or (ii) the enactment or effectiveness of any law, rule or regulation) which might reasonably be expected to have a Material Adverse Effect; or (f) any event which would cause any Eligible Investment Asset to cease to be an Eligible Investment Asset (including any Modification and all details and copies of all documents relating thereto). 10.1.6 Borrowing Base Certificates. Within 30 days of the end of each month (or 45 days in the case of a month that is also the end of a Fiscal Quarter), a Borrowing Base Certificate dated as of the end of such month and executed by the Chief Financial Officer or the Treasurer of the Company on behalf of the Company (provided that (i) the Company may deliver a Borrowing Base Certificate more frequently if it chooses and (ii) at any time an Event of Default exists, the Agent may require the Company to deliver Borrowing Base Certificates more frequently). Each quarterly Borrowing Base Certificate shall contain a valuation analysis of Portfolio Investments taking into account the criteria for Eligible Investment Assets and include all calculations thereunder. 10.1.7 Management Reports. Promptly upon the request of the Agent or any Bank, copies of all detailed financial and management reports submitted to the Company by independent auditors in connection with each annual or interim audit made by such auditors of the books of the Company. 10.1.8 Projections. As soon as practicable, and in any event within 60 days prior to the commencement of each Fiscal Year, financial projections for the Company and its Subsidiaries for such Fiscal Year (including an operating budget and a cash flow budget) prepared in a manner consistent with the projections delivered by the Company to the Banks prior to the Closing Date or otherwise in a manner reasonably satisfactory to the Agent, accompanied by a certificate of the Chief Financial Officer or the Treasurer of the Company on behalf of the Company to the effect that (i) such projections were prepared by the Company in good faith, (ii) the Company has a reasonable basis for the assumptions contained in such projections and (iii) such projections have been prepared in accordance with such assumptions. 10.1.9 Subordinated Debt Notices. Promptly from time to time, copies of any notices (including notices of default or acceleration) received from any holder or trustee of, under or with respect to any Subordinated Debt. 10.1.10 Year 2000 Problem. Promptly upon the request of the Agent or any Bank, such updated information or documentation as may be requested from time to time regarding the efforts of any Loan Party to address the Year 2000 Problem. 10.1.11 Valuations. Within 45 days of the end of each Fiscal Quarter, a consolidated statement of Portfolio Investments (with detail as to cost versus value by Portfolio Company and indicating each investment component (senior debt, subordinated debt, warrants, preferred or common stock, government securities, etc.) for each Portfolio Investment) accompanied by a servicing and delinquency status report and detail as to unrealized gains and losses for Portfolio Investments. Promptly upon receipt, copies of all other valuation reports or appraisals or information or reports modifying previous valuations relating to Portfolio Investments received from any Person, including any Portfolio Company or any advisor to a Portfolio Company or the Company's auditors. 30 10.1.12 Other Information. Promptly from time to time, such other information concerning any Loan Party as any Bank or the Agent may reasonably request. 10.2 Books, Records and Inspections. Keep, and cause each Loan Party to keep, its books and records in accordance with sound business practices sufficient to allow the preparation of financial statements in accordance with GAAP; permit, and cause each Loan Party to permit, any Bank or the Agent or any representative thereof to inspect the properties (including all documents, relating to Portfolio Investments) and operations of each Loan Party at any reasonable time and with reasonable notice (or at any time without notice if an Event of Default exists); and permit, and cause each Loan Party to permit, at any reasonable time and with reasonable notice (or at any time without notice if an Event of Default exists), any Bank or the Agent or any representative thereof to visit any or all of its offices, to discuss its financial matters with its officers and its independent auditors (and the Company hereby authorizes such independent auditors to discuss such financial matters with any Bank or the Agent or any representative thereof), and to examine (and, at the expense of the Company or the applicable Loan Party, photocopy extracts from) any of its books or other records; and permit, and cause each Loan Party to permit, the Agent and its representatives to inspect the tangible assets of the Company or such Loan Party, to perform appraisals of the equipment of the Company or such Loan Party, and to inspect, audit, check and make copies of and extracts from the books, records, computer data, computer programs, journals, orders, receipts, correspondence and other data relating to any collateral. All such inspections or audits by the Agent shall be at the Company's expense. 10.3 Maintenance of Property; Insurance. (a) Keep, and cause each Loan Party to keep, all property useful and necessary in the business of the Company or such Loan Party in good working order and condition, ordinary wear and tear excepted. (b) Maintain, and cause each Loan Party to maintain, with responsible insurance companies, such insurance as may be required by any law or governmental regulation or court decree or order applicable to it and such other insurance, to such extent and against such hazards and liabilities, as is customarily maintained by companies similarly situated; and, upon request of the Agent or any Bank, furnish to the Agent or such Bank a certificate setting forth in reasonable detail the nature and extent of all insurance maintained by the Company and each Loan Party. The Company shall cause each issuer of an insurance policy to provide the Agent with an endorsement (i) showing loss payable to the Agent with respect to each policy of property or casualty insurance and naming the Agent and each Bank as an additional insured with respect to each policy of insurance for liability for personal injury or property damage, (ii) providing that 30 days' notice will be given to the Agent prior to any cancellation of, material reduction or change in coverage provided by or other material modification to such policy and (iii) reasonably acceptable in all other respects to the Agent. 10.4 Compliance with Laws; Payment of Taxes and Liabilities. (a) Comply, and cause each Loan Party to comply, in all material respects with all applicable laws, rules, regulations, decrees, orders, judgments, licenses and permits, except where failure to comply could not reasonably be expected to have a Material Adverse Effect; and (b) pay, and cause each Loan Party to pay, prior to delinquency, all taxes and other governmental charges against it or any of its property, as well as claims of any kind which, if unpaid, might become a Lien on any of its property; provided that the foregoing shall not require the Company or any Loan Party to pay any such tax or charge so long as it shall contest the validity thereof in good faith by appropriate proceedings and shall set aside on its books adequate reserves with respect thereto in accordance with GAAP. 31 10.5 Maintenance of Existence, etc. Maintain and preserve, and (subject to Section 10.11) cause each Loan Party to maintain and preserve, (a) its existence and good standing in the jurisdiction of its organization and (b) its qualification to do business and good standing in each jurisdiction where the nature of its business makes such qualification necessary (except in those instances in which the failure to be qualified or in good standing does not have a Material Adverse Effect). The Company shall maintain its status as a closed-end business development company under the 1940 Act and as Person qualifying for treatment as a regulated investment company under the Code. The Company shall not withdraw the registration of its common stock under Section 12 of the Securities Exchange Act of 1934. Notwithstanding the foregoing, the Company shall be permitted to cease operations of and dissolve or liquidate American Capital Strategies Labor Research, Inc., a Delaware corporation ("ACSLR") and the Agent shall be permitted to release ACSLR from any of its obligations under the Loan Documents (which dissolution and release is hereby approved by the Required Banks); provided, that such dissolution or liquidation occurs within 180 days of the date hereof. 10.6 Financial Covenants. 10.6.1 Consolidated Tangible Net Worth. Not permit Consolidated Tangible Net Worth to be less than $140,000,000 at any time. 10.6.2 Leverage Ratio. Not permit the Leverage Ratio at the end of any Fiscal Quarter to exceed 1 to 1 for the Computation Period ending on such Fiscal Quarter. 10.6.3 Consolidated Pre-Tax Income. Not permit Consolidated Pre-Tax Income at the end of any Fiscal Quarter to be less than $10,000,000 for the Computation Period ending on such Fiscal Quarter. 10.6.4 Asset Coverage Ratio. Not permit the Asset Coverage Ratio to be less than 2 to 1 at any time. 10.7 Limitations on Debt. Not, and not permit any Loan Party to, create, incur, assume or suffer to exist any Debt, except: (a) obligations under this Agreement and the other Loan Documents; 32 (b) Debt secured by Liens permitted by Section 10.8(d), and extensions, renewals and refinancings thereof; provided that the aggregate amount of all such Debt at any time outstanding shall not exceed $1,000,000; (c) Subordinated Debt; (d) Hedging Obligations incurred for bona fide hedging purposes and not for speculation; (e) the Debt to be Repaid (so long as such Debt is repaid on the Closing Date with the proceeds of the initial Loans hereunder). (f) short term borrowings incurred to purchase Cash Equivalent Investments to the extent necessary to maintain its status as a regulated investment company; and (g) guaranty obligations of Portfolio Companies of up to $10,000,000 in the aggregate at any time. 10.8 Liens. Not, and not permit any Loan Party to, create or permit to exist any Lien on any of its real or personal properties, assets or rights of whatsoever nature (whether now owned or hereafter acquired), except: (a) Liens for taxes or other governmental charges not at the time delinquent or thereafter payable without penalty or being contested in good faith by appropriate proceedings and, in each case, for which it maintains adequate reserves; (b) Liens arising in the ordinary course of business (such as (i) Liens of carriers, warehousemen, mechanics and materialmen and other similar Liens imposed by law and (ii) Liens incurred in connection with worker's compensation, unemployment compensation and other types of social security (excluding Liens arising under ERISA) or in connection with surety bonds, bids, performance bonds and similar obligations) for sums not overdue or being contested in good faith by appropriate proceedings and not involving any deposits or advances or borrowed money or the deferred purchase price of property or services and, in each case, for which it maintains adequate reserves; (c) Liens described on Schedule 10.8; (d) subject to the limitation set forth in Section 10.7(b), (i) Liens arising in connection with Capital Leases (and attaching only to the property being leased), (ii) Liens existing on property (other than Portfolio Investments) at the time of the acquisition thereof by the Company or any Loan Party (and not created in contemplation of such acquisition) and (iii) Liens that constitute purchase money security interests on any property (other than Portfolio Investments) securing debt incurred for the purpose of financing all or any part of the cost of acquiring such property, provided that any such Lien attaches to such property within 60 days of the acquisition thereof and attaches solely to the property so acquired; 33 (e) attachments, appeal bonds, judgments and other similar Liens, for sums not exceeding $100,000 arising in connection with court proceedings, provided the execution or other enforcement of such Liens is effectively stayed and the claims secured thereby are being actively contested in good faith and by appropriate proceedings; (f) easements, rights of way, restrictions, minor defects or irregularities in title and other similar Liens not interfering in any material respect with the ordinary conduct of the business of the Company or any Loan Party; (g) Liens arising under the Loan Documents; and (h) Liens on Cash Equivalent Investments not included in Eligible Investment Assets purchased with Debt permitted by Section 10.7(f). 10.9 Operating Leases. Not permit the aggregate amount of all rental payments under Operating Leases made (or scheduled to be made) by the Company and its Subsidiaries (on a consolidated basis) to exceed $1,000,000 in any Fiscal Year. 10.10 Restricted Payments. Not, and not permit any Loan Party to, (a) make any distribution to any of its stockholders, (b) purchase or redeem any of its capital stock or other equity interests or any warrants, options or other rights in respect thereof, (c) pay any management fees or similar fees to any of its shareholders or any Affiliate thereof, (d) make any redemption, prepayment, defeasance or repurchase of any Subordinated Debt or (e) set aside funds for any of the foregoing. Notwithstanding the foregoing, (i) any Subsidiary may pay dividends or make other distributions to the Company or to a Wholly-Owned Subsidiary; and (ii) so long as no Event of Default or Unmatured Event of Default exists or would result therefrom, the Company may (A) pay dividends in the ordinary course of business, (B) purchase in the open market shares of its capital stock or other equity interests, warrants, options or other rights in respect thereof, and (C) purchase shares of its capital stock issued pursuant to the Company's 1997 Stock Option Plan, in accordance with the call provisions thereof. 10.11 Mergers, Consolidations, Sales. Not, and not permit any Loan Party to, be a party to any merger or consolidation, or purchase or otherwise acquire all or substantially all of the assets or any stock of any class of, or any partnership or joint venture interest in, any other Person, or, except in the ordinary course of its business, sell, transfer, convey or lease all or any substantial part of its assets, or sell or assign with or without recourse any receivables, except for (a) any such merger, consolidation, sale, transfer, conveyance, lease or assignment of or by ACSLR or any Wholly-Owned Subsidiary into the Company or into, with or to any other Wholly-Owned Subsidiary; (b) any such purchase or other acquisition by the Company or any Wholly-Owned Subsidiary of the assets or stock of any Wholly-Owned Subsidiary; and (c) so long as no Event of Default or Unmatured Event of Default exists or would result therefrom, sales and dispositions of Portfolio Investments in the ordinary course of business for not less than the value of such Portfolio Investments included in the most current Borrowing Base Certificate. 34 10.12 Modification of Organizational Documents. Not permit the Certificate or Articles of Incorporation, By-Laws or other organizational documents of the Company or any Loan Party to be amended or modified in any way which might reasonably be expected to materially adversely affect the interests of the Banks. 10.13 Use of Proceeds. Use the proceeds of the Loans solely for general corporate purposes; and not use or permit any proceeds of any Loan to be used, either directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of "purchasing or carrying" any Margin Stock. 10.14 Further Assurances. Take, and cause each Loan Party to take, such actions as are necessary or as the Agent or the Required Banks may reasonably request from time to time (including the execution and delivery of guaranties, security agreements, pledge agreements, mortgages, deeds of trust, financing statements and other documents, the filing or recording of any of the foregoing, and the delivery of stock certificates and other collateral with respect to which perfection is obtained by possession) to ensure that (a) the obligations of the Company hereunder and under the other Loan Documents (i) are secured by substantially all of the assets of the Company and (ii) guaranteed by all of its Subsidiaries (including, promptly upon the acquisition or creation thereof, any Subsidiary acquired or created after the date hereof) by execution of a counterpart of the Guaranty and (b) the obligations of each Subsidiary under the Guaranty are secured by substantially all of the assets of such Subsidiary. 10.15 Transactions with Affiliates. Not, and not permit any Loan Party to, enter into, or cause, suffer or permit to exist any transaction, arrangement or contract with any of its other Affiliates (other than the Company and its Subsidiaries) which is on terms which are less favorable than are obtainable from any Person which is not one of its Affiliates. Without limitation on the foregoing, not, and not permit any Loan Party to enter into, or cause, suffer or permit to exist any transaction, arrangement or contract prohibited by or unlawful under the 1940 Act. 10.16 Employee Benefit Plans. Maintain, and cause each Loan Party to maintain, each Pension Plan in substantial compliance with all applicable requirements of law and regulations. 10.17 Environmental Matters. (a) If any Release or Disposal of Hazardous Substances shall occur or shall have occurred on any real property of any Loan Party, the Company shall, or shall cause the applicable Loan Party to, cause the prompt containment and removal of such Hazardous Substances and the remediation of such real property or other assets as necessary to comply with all Environmental Laws and to preserve the value of such real property or other assets. Without limiting the generality of the foregoing, the Company shall, and shall cause each Loan Party to, comply with any valid Federal or state judicial or administrative order requiring the performance at any real property of any Loan Party of activities in response to the Release or threatened Release of a Hazardous Substance. 35 (b) To the extent that the transportation of "hazardous waste" as defined by RCRA is permitted by this Agreement, the Company shall, and shall cause each Loan Party to, dispose of such hazardous waste only at licensed disposal facilities operating in compliance with Environmental Laws. 10.18 Unconditional Purchase Obligations. Not, and not permit any Loan Party to, enter into or be a party to any contract for the purchase of materials, supplies or other property or services if such contract requires that payment be made by it regardless of whether delivery is ever made of such materials, supplies or other property or services. 10.19 Inconsistent Agreements. Not, and not permit any Loan Party to, enter into any agreement containing any provision which would (a) be violated or breached by any borrowing by the Company hereunder or by the performance by the Company or any Loan Party of any of its obligations hereunder or under any other Loan Document, (b) prohibit the Company or any Loan Party from granting to the Agent, for the benefit of the Banks, a Lien on any of its assets or (c) create or permit to exist or become effective any encumbrance or restriction on the ability of any Subsidiary to (i) pay dividends or make other distributions to the Company or any other applicable Subsidiary, or pay any Debt owed to the Company or any other Subsidiary, (ii) make loans or advances to the Company or (iii) transfer any of its assets or properties to the Company. 10.20 Business Activities. Not, and not permit any Loan Party to, engage in any line of business other than the businesses engaged in on the date hereof and businesses reasonably related thereto in accordance with the Investment Policy. 10.21 Investments. Not, and not permit any Loan Party to, make or permit to exist any Investment in any other Person, except (without duplication) the following: (a) Cash Equivalent Investments held with the Agent as collateral pursuant to the Collateral Documents for the Company's obligations hereunder; (b) Portfolio Investments; and (c) Investments listed on Schedule 10.21; provided that (x) any Investment which when made complies with the requirements of the definition of the term "Cash Equivalent Investment" may continue to be held notwithstanding that such Investment if made thereafter would not comply with such requirements; (y) no Investment otherwise permitted by (c) shall be permitted to be made if, immediately before or after giving effect thereto, any Event of Default or Unmatured Event of Default exists. 10.22 Fiscal Year. Not change its Fiscal Year. 10.23 Limitations on Equity. Without the prior written consent of the Required Banks, not, and not permit any Loan Party to, issue any capital stock or other equity interest or any options or warrants to purchase, or securities convertible into, capital stock or equity interests, except (a) pursuant to the Company's 1997 Stock Option Plan (or any similar option plans adopted by the Company's board of directors), (b) issuances of capital stock to the Company's Employee Stock Ownership Plan in accordance with the terms hereof, and (c) pursuant to exercise of 442,751 warrants issued to Friedman, Billings, Ramsey & Co., Inc., in connection with the Company's initial public offering. Notwithstanding the foregoing, the Company shall be permitted to issue capital stock or other equity interests so long as no Event of Default or Unmatured Event of Default exists or would result therefrom, if concurrently with the receipt of cash proceeds (net of direct costs of issuance, including sales and underwriter's commissions) from any such issuance the Company makes a prepayment of the Revolving Loans (but not a permanent reduction in the Commitment) equal to 50% of the amount of such proceeds. 36 SECTION 11 EFFECTIVENESS; CONDITIONS OF LENDING, ETC. The obligation of each Bank to make its Loans is subject to the following conditions precedent: 11.1 Initial Credit Extension. The obligation of the Banks to make the initial Loans is, in addition to the conditions precedent specified in Section 11.2, subject to the conditions precedent that (1) all Debt to be Repaid has been (or concurrently with the initial borrowing will be) paid in full, and that all agreements and instruments governing the Debt to be Repaid and that all Liens securing such Debt to be Repaid have been (or concurrently with the initial borrowing will be) terminated and (2) the Agent shall have received all of the following, each duly executed and dated the Closing Date (or such earlier date as shall be satisfactory to the Agent), in form and substance satisfactory to the Agent (and the date on which all such conditions precedent have been satisfied or waived in writing by the Agent and the Required Banks (which date shall not be later than November 30, 1998 or the Commitment shall terminate) is called the "Closing Date"): 11.1.1 Notes. The Notes. 11.1.2 Resolutions. Certified copies of resolutions of the Board of Directors of the Company authorizing the execution, delivery and performance by the Company of this Agreement, the Notes and the other Loan Documents to which the Company is a party; and certified copies of resolutions of the Board of Directors of each other Loan Party authorizing the execution, delivery and performance by such Loan Party of each Loan Document to which such entity is a party. 11.1.3 Consents; Certificates, etc. Certified copies of all documents evidencing any necessary corporate or partnership action, consents and governmental approvals (if any) required for the execution, delivery and performance by the Company and each other Loan Party of the documents referred to in this Section 11, including certificates/articles of incorporation, by-laws, and good standing certificates for the Company and each other Loan Party. 11.1.4 Incumbency and Signature Certificates. A certificate of the Secretary or an Assistant Secretary (or other appropriate representative) of each Loan Party certifying the names of the officer or officers of such entity authorized to sign the Loan Documents to which such entity is a party, together with a sample of the true signature of each such officer (it being understood that the Agent and each Bank may conclusively rely on each such certificate until formally advised by a like certificate of any changes therein). 37 11.1.5 Guaranty. A counterpart of the Guaranty executed by each Subsidiary. 11.1.6 Security and Pledge Agreement. A counterpart of the Security and Pledge Agreement executed by the Company and each Subsidiary. 11.1.7 Custody Control Agreement. A Custody Control Agreement executed by the Company and the Agent. 11.1.8 Opinions of Counsel. The opinion of Arnold & Porter substantially in the form of Exhibit G. 11.1.9 Insurance. Evidence satisfactory to the Agent of the existence of insurance required to be maintained pursuant to Section 10.3(b), together with evidence that the Agent has been named as a lender's loss payee and an additional insured on all related insurance policies. 11.1.10 Copies of Portfolio Investments; Certain Documents. Copies, certified by the Secretary of the Company, of all documents relating to each Portfolio Investment (including copies of all notes and certificates issued thereunder) and copies of any financial advisory or management agreement to which the Company or any Subsidiary is a party. Originals of all documents relating to each Portfolio Investment shall have been delivered to the Custodian. 11.1.11 Payment of Fees. Evidence of payment by the Company of all accrued and unpaid fees, costs and expenses to the extent then due and payable on the Closing Date, together with all Attorney Costs of the Agent to the extent invoiced prior to the Closing Date, plus such additional amounts of Attorney Costs as shall constitute the Agent's reasonable estimate of Attorney Costs incurred or to be incurred by the Agent through the closing proceedings (provided that such estimate shall not thereafter preclude final settling of accounts between the Company and the Agent). 11.1.12 Search Results; Lien Terminations. Certified copies of Uniform Commercial Code Requests for Information or Copies (Form UCC-11), or a similar search report certified by a party acceptable to the Agent, dated a date reasonably near to the Closing Date, listing all effective financing statements which name the Company and each Subsidiary (under their present names and any previous names) as debtors and which are filed in the jurisdictions in which filings are to be made pursuant to the Collateral Documents, together with (i) copies of such financing statements, (ii) executed copies of proper Uniform Commercial Code Form UCC-3 termination statements, if any, necessary to release all Liens and other rights of any Person in any collateral described in the Collateral Documents previously granted by any Person (other than Liens permitted by Section 10.8) and (iii) such other Uniform Commercial Code Form UCC-3 termination statements as the Agent may reasonably request. 11.1.13 Filings, Registrations and Recordings. The Agent shall have received each document (including Uniform Commercial Code financing statements) required by the Collateral Documents or under law or reasonably requested by the Agent to be filed, registered or recorded in order to create in favor of the Agent, for the benefit of the Banks, a perfected Lien on the collateral described therein, prior and superior to any other Person, in proper form for filing, registration or recording. The Agent shall have received such stock powers, assignments in blank, note powers, endorsements in blank, notices of assignment, assignments and other documents and instruments as it may require in order to perfect in favor of the Agent, for the benefit of the Banks, a security interest in each Portfolio Investment. 38 11.1.14 Closing Certificate. A certificate signed by an authorized officer of the Company dated as of the Closing Date, affirming the matters set forth in Section 11.2.1 as of the Closing Date. 11.1.15 Borrowing Base Certificate. A Borrowing Base Certificate dated as of the Closing Date. 11.1.16 Other. Such other documents as the Agent or any Bank may reasonably request. 11.2 Conditions. The obligation of each Bank to make each Loan is subject to the following further conditions precedent that: 11.2.1 Compliance with Warranties, No Default, etc. Both before and after giving effect to any borrowing the following statements shall be true and correct: (a) the representations and warranties of the Company and each Loan Party set forth in this Agreement and the other Loan Documents shall be true and correct in all material respects with the same effect as if then made (except to the extent stated to relate to a specific earlier date, in which case such representations and warranties shall be true and correct as of such earlier date); and (b) no Event of Default or Unmatured Event of Default shall have then occurred and be continuing. 11.2.2 Confirmatory Certificate. If requested by the Agent or any Bank, the Agent shall have received (in sufficient counterparts to provide one to each Bank) a certificate dated the date of such requested Loan and signed by a duly authorized representative of the Company as to the matters set out in Section 11.2.1 (it being understood that each request by the Company for the making of a Loan be deemed to constitute a warranty by the Company that the conditions precedent set forth in Section 11.2.1 will be satisfied at the time of the making of such Loan), together with such other documents as the Agent or any Bank may reasonably request in support thereof. SECTION 12 EVENTS OF DEFAULT AND THEIR EFFECT. 12.1 Events of Default. Each of the following shall constitute an Event of Default under this Agreement: 39 12.1.1 Non-Payment of the Loans, etc. Default in the payment when due of the principal of any Loan; or default, and continuance thereof for five days, in the payment when due of any interest, fee or other amount payable by the Company hereunder or under any other Loan Document. 12.1.2 Non-Payment of Other Debt. Any default shall occur under the terms applicable to any Debt of the Company or any Subsidiary in an aggregate amount (for all such Debt so affected) exceeding $250,000 and such default shall (a) consist of the failure to pay such Debt when due (after the lapse of any applicable grace period), whether by acceleration or otherwise, or (b) accelerate the maturity of such Debt or permit the holder or holders thereof, or any trustee or agent for such holder or holders, to cause such Debt to become due and payable (after the lapse of any applicable grace period) (or require the Company or any Subsidiary to purchase or redeem such Debt) prior to its expressed maturity. 12.1.3 Other Material Obligations. Default in the payment when due (after the lapse of any applicable grace period), or in the performance or observance of, any material obligation of, or condition agreed to by, the Company or any Subsidiary with respect to any material purchase or lease of goods or services where such default, singly or in the aggregate with all other such defaults, might reasonably be expected to have a Material Adverse Effect. 12.1.4 Bankruptcy, Insolvency, etc. The Company or any Subsidiary becomes insolvent or generally fails to pay, or admits in writing its inability or refusal to pay, debts as they become due; or the Company or any Subsidiary applies for, consents to, or acquiesces in the appointment of a trustee, receiver or other custodian for the Company or such Subsidiary or any property thereof, or makes a general assignment for the benefit of creditors; or, in the absence of such application, consent or acquiescence, a trustee, receiver or other custodian is appointed for the Company or any Subsidiary or for a substantial part of the property of any thereof and is not discharged within 60 days; or any bankruptcy, reorganization, debt arrangement, or other case or proceeding under any bankruptcy or insolvency law, or any dissolution or liquidation proceeding, is commenced in respect of the Company or any Subsidiary, and if such case or proceeding is not commenced by the Company or such Subsidiary, it is consented to or acquiesced in by the Company or such Subsidiary, or remains for 60 days undismissed; or the Company or any Subsidiary takes any action to authorize, or in furtherance of, any of the foregoing. 12.1.5 Non-Compliance with Loan Documents. (a) Failure by the Company to comply with or to perform any covenant set forth in Sections 10.5 through 10.15, and 10.20 through 10.22, or failure by the Company to permit access and inspections in accordance with Section 10.2; or (b) failure by the Company to comply with or to perform any other provision of this Agreement or any other Loan Document (and not constituting an Event of Default under any other provision of this Section 12) and continuance of such failure described in this clause (b) for 30 days. 12.1.6 Warranties. Any warranty made by the Company or any Subsidiary herein or any other Loan Document is breached or is false or misleading in any material respect, or any schedule, certificate, financial statement, report, notice or other writing furnished by the Company or any Subsidiary to the Agent or any Bank in connection herewith is false or misleading in any material respect on the date as of which the facts therein set forth are stated or certified. 40 12.1.7 Pension Plans. (i) Institution of any steps by the Company or any other Person to terminate a Pension Plan if as a result of such termination the Company could be required to make a contribution to such Pension Plan, or could incur a liability or obligation to such Pension Plan, in excess of $250,000; (ii) a contribution failure occurs with respect to any Pension Plan sufficient to give rise to a Lien under Section 302(f) of ERISA; or (iii) there shall occur any withdrawal or partial withdrawal from a Multiemployer Pension Plan and the withdrawal liability (without unaccrued interest) to Multiemployer Pension Plans as a result of such withdrawal (including any outstanding withdrawal liability that the Company and the Controlled Group have incurred on the date of such withdrawal) exceeds $250,000. 12.1.8 Judgments. Final judgments which exceed an aggregate of $250,000 shall be rendered against the Company or any Subsidiary and shall not have been paid, discharged or vacated or had execution thereof stayed pending appeal within 30 days after entry or filing of such judgments. 12.1.9 Invalidity of Guaranty, etc. The Guaranty shall cease to be in full force and effect with respect to any Subsidiary; or any Subsidiary (or any Person by, through or on behalf of such Subsidiary) shall contest in any manner the validity, binding nature or enforceability of the Guaranty with respect to such Subsidiary. 12.1.10 Invalidity of Collateral Documents, etc. Any Collateral Document shall cease to be in full force and effect; or the Company or any Subsidiary (or any Person by, through or on behalf of the Company or any Subsidiary) shall contest in any manner the validity, binding nature or enforceability of any Collateral Document. 12.1.11 Invalidity of Subordination Provisions, etc. Any subordination provision in any document or instrument governing Subordinated Debt, or any subordination provision in any guaranty by any Subsidiary of any Subordinated Debt, shall cease to be in full force and effect, or the Company shall contest in any manner the validity, binding nature or enforceability of any such provision. 12.1.12 Change of Control. (a) Any Person or group of Persons (within the meaning of Section 13 or 14 of the Securities Exchange Act of 1934 shall acquire beneficial ownership (within the meaning of Rule 13d-3 promulgated under such Act) of more than 51% of the outstanding securities (on a fully diluted basis and taking into account any securities or contract rights exercisable, exchangeable or convertible into equity securities) of the Company having voting rights in the election of directors under normal circumstances; or (b) a majority of the members of the Board of Directors of the Company shall cease to be Continuing Members; or (c) a period of 30 consecutive days shall have elapsed during which any two of the individuals named in Schedule 12.1.12 shall have ceased to hold executive offices with the Company at least equal in seniority and responsibility to such individuals' present offices, as set out in such Schedule 12.1.12, excluding any such individual who has been replaced by another individual or individuals reasonably satisfactory to the Required Banks (it being understood that any such replacement individual shall be deemed added to Schedule 12.1.12 on the date of approval thereof by the Required Banks). For purposes of the foregoing, "Continuing Member" means a member of the Board of Directors of the Company who either (i) was a member of the Company's Board of Directors on the day before the Closing Date and has been such continuously thereafter or (ii) became a member of such Board of Directors after the day before the Closing Date and whose election or nomination for election was approved by a vote of the majority of the Continuing Members then members of the Company's Board of Directors. 41 12.1.13 Investment Company Act. (a) Any election by the holders of voting securities to change the Investment Policy; (b) any election by the holders of voting securities to become an open end investment company under the 1940 Act; (c) any withdrawal by the Company of election to be a business development company under the 1940 Act; (d) any action taken by the SEC to suspend or revoke the status of the Company as a business development company under the 1940 Act; or (e) the Company violates the 1940 Act in a manner which could have a Material Adverse Effect. 12.1.14 Material Adverse Effect. The occurrence of any event having a Material Adverse Effect. 12.2 Effect of Event of Default. If any Event of Default described in Section 12.1.4 shall occur, the Commitments (if they have not theretofore terminated) shall immediately terminate and the Loans and all other obligations hereunder shall become immediately due and payable, all without presentment, demand, protest or notice of any kind; and, if any other Event of Default shall occur and be continuing, the Agent (upon written request of the Required Banks) shall declare the Commitments (if they have not theretofore terminated) to be terminated and/or declare all Loans and all other obligations hereunder to be due and payable, whereupon the Commitments (if they have not theretofore terminated) shall immediately terminate and/or all Loans and all other obligations hereunder shall become immediately due and payable, all without presentment, demand, protest or notice of any kind. The Agent shall promptly advise the Company of any such declaration, but failure to do so shall not impair the effect of such declaration. Notwithstanding the foregoing, the effect as an Event of Default of any event described in Section 12.1.1 or Section 12.1.4 may be waived by the written concurrence of all of the Banks, and the effect as an Event of Default of any other event described in this Section 12 may be waived by the written concurrence of the Required Banks. SECTION 13 THE AGENT. 13.1 Appointment and Authorization. Each Bank hereby irrevocably (subject to Section 13.9) appoints, designates and authorizes the Agent to take such action on its behalf under the provisions of this Agreement and each other Loan Document and to exercise such powers and perform such duties as are expressly delegated to it by the terms of this Agreement or any other Loan Document, together with such powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary contained elsewhere in this Agreement or in any other Loan Document, the Agent shall not have any duty or responsibility except those expressly set forth herein, nor shall the Agent have or be deemed to have any fiduciary relationship with any Bank, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Loan Document or otherwise exist against the Agent. 42 13.2 Delegation of Duties. The Agent may execute any of its duties under this Agreement or any other Loan Document by or through agents, employees or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Agent shall not be responsible for the negligence or misconduct of any agent or attorney-in-fact that it selects with reasonable care. 13.3 Liability of Agent. None of the Agent nor any of its directors, officers, employees or agents shall (i) be liable for any action taken or omitted to be taken by any of them under or in connection with this Agreement or any other Loan Document or the transactions contemplated hereby (except for its own gross negligence or willful misconduct), or (ii) be responsible in any manner to any of the Banks for any recital, statement, representation or warranty made by the Company or any Subsidiary or Affiliate of the Company, or any officer thereof, contained in this Agreement or in any other Loan Document, or in any certificate, report, statement or other document referred to or provided for in, or received by the Agent under or in connection with, this Agreement or any other Loan Document, or the validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Loan Document or any security interest created thereunder or for the priority or perfection thereof, or for any failure of the Company or any other party to any Loan Document to perform its obligations hereunder or thereunder. The Agent shall not be under any obligation to any Bank to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or any other Loan Document, or to inspect the properties, books or records of the Company or any of the Company's Subsidiaries or Affiliates. Without limitation on the foregoing, the Agent shall have no duty or responsibility for the validity, legality, enforceability, recordability, genuineness, authorization, collectability, insurability, effectiveness or suitability of any Portfolio Investment or for determining the accuracy or validity of any Borrowing Base Certificate or any valuation or certifications made therein. 13.4 Reliance by Agent. The Agent shall be entitled to rely, and shall be fully protected in relying, upon any writing, resolution, notice, consent, certificate, affidavit, letter, telegram, facsimile, telex or telephone message, statement or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons, and upon advice and statements of legal counsel (including counsel to the Company), independent accountants and other experts selected by the Agent. The Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Loan Document unless it shall first receive such advice or concurrence of the Required Banks as it deems appropriate and, if it so requests, confirmation from the Banks of their obligation to indemnify the Agent against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. The Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement or any other Loan Document in accordance with a request or consent of the Required Banks and such request and any action taken or failure to act pursuant thereto shall be binding upon all of the Banks. 13.5 Notice of Default. The Agent shall not be deemed to have knowledge or notice of the occurrence of any Event of Default or Unmatured Event of Default except with respect to defaults in the payment of principal, interest and fees required to be paid to the Agent for the account of the Banks, unless the Agent shall have received written notice from a Bank or the Company referring to this Agreement, describing such Event of Default or Unmatured Event of Default and stating that such notice is a "notice of default". The Agent will notify the Banks of its receipt of any such notice. The Agent shall take such action with respect to such Event of Default or Unmatured Event of Default as may be requested by the Required Banks in accordance with Section 12; provided that unless and until the Agent has received any such request, the Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Event of Default or Unmatured Event of Default as it shall deem advisable or in the best interest of the Banks. 43 13.6 Credit Decision. Each Bank acknowledges that the Agent has not made any representation or warranty to it, and that no act by the Agent hereafter taken, including any review of the affairs of the Company and its Subsidiaries, shall be deemed to constitute any representation or warranty by the Agent to any Bank. Each Bank represents to the Agent that it has, independently and without reliance upon the Agent and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, prospects, operations, property, financial and other condition and creditworthiness of the Company and its Subsidiaries, and made its own decision to enter into this Agreement and to extend credit to the Company hereunder. Each Bank also represents that it will, independently and without reliance upon the Agent and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Loan Documents, and to make such investigations as it deems necessary to inform itself as to the business, prospects, operations, property, financial and other condition and creditworthiness of the Company. Except for notices, reports and other documents expressly herein required to be furnished to the Banks by the Agent, the Agent shall not have any duty or responsibility to provide any Bank with any credit or other information concerning the business, prospects, operations, property, financial or other condition or creditworthiness of the Company which may come into the possession of the Agent. 13.7 Indemnification. Whether or not the transactions contemplated hereby are consummated, the Banks shall indemnify upon demand the Agent and its directors, officers, employees and agents (to the extent not reimbursed by or on behalf of the Company and without limiting the obligation of the Company to do so), pro rata, from and against any and all Indemnified Liabilities; provided that no Bank shall be liable for any payment to any such Person of any portion of the Indemnified Liabilities resulting from such Person's gross negligence or willful misconduct. Without limitation of the foregoing, each Bank shall reimburse the Agent upon demand for its ratable share of any costs or out-of-pocket expenses (including Attorney Costs) incurred by the Agent in connection with the preparation, execution, delivery, administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement, any other Loan Document, or any document contemplated by or referred to herein, to the extent that the Agent is not reimbursed for such expenses by or on behalf of the Company. The undertaking in this Section shall survive repayment of the Loans, cancellation of the Notes, expiration or termination of the Letters of Credit, any foreclosure under, or modification, release or discharge of, any or all of the Collateral Documents, termination of this Agreement and the resignation or replacement of the Agent. 44 13.8 Agent in Individual Capacity. LaSalle and its Affiliates may make loans to, issue letters of credit for the account of, accept deposits from, acquire equity interests in and generally engage in any kind of banking, trust, financial advisory, underwriting or other business with the Company, and its Subsidiaries and Affiliates and any Portfolio Company, as though LaSalle were not the Agent or the Issuing Bank hereunder and without notice to or consent of the Banks. The Banks acknowledge that, pursuant to such activities, LaSalle or its Affiliates may receive information regarding the Company or its Affiliates (including information that may be subject to confidentiality obligations in favor of the Company or such Affiliate) and acknowledge that the Agent shall be under no obligation to provide such information to them. With respect to their Loans (if any), LaSalle and its Affiliates shall have the same rights and powers under this Agreement as any other Bank and may exercise the same as though LaSalle were not the Agent and the Issuing Bank, and the terms "Bank" and "Banks" include LaSalle and its Affiliates, to the extent applicable, in their individual capacities. 13.9 Successor Agent. The Agent may resign as Agent upon 30 days' notice to the Banks. If the Agent resigns under this Agreement, the Required Banks shall, with (so long as no Event of Default exists) the consent of the Company (which shall not be unreasonably withheld or delayed), appoint from among the Banks a successor agent for the Banks. If no successor agent is appointed prior to the effective date of the resignation of the Agent, the Agent may appoint, after consulting with the Banks and the Company, a successor agent from among the Banks. Upon the acceptance of its appointment as successor agent hereunder, such successor agent shall succeed to all the rights, powers and duties of the retiring Agent and the term "Agent" shall mean such successor agent, and the retiring Agent's appointment, powers and duties as Agent shall be terminated. After any retiring Agent's resignation hereunder as Agent, the provisions of this Section 13 and Sections 14.6 and 14.13 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement. If no successor agent has accepted appointment as Agent by the date which is 30 days following a retiring Agent's notice of resignation, the retiring Agent's resignation shall nevertheless thereupon become effective and the Banks shall perform all of the duties of the Agent hereunder until such time, if any, as the Required Banks appoint a successor agent as provided for above. 13.10 Collateral Matters. The Banks irrevocably authorize the Agent, at its option and in its discretion, (a) to release any Lien granted to or held by the Agent under any Collateral Document (i) upon termination of the Commitments and payment in full of all Loans and all other obligations of the Company hereunder; (ii) constituting property sold or to be sold or disposed of as part of or in connection with any disposition permitted hereunder; or (iii) subject to Section 14.1, if approved, authorized or ratified in writing by the Required Banks; or (b) to subordinate its interest in any collateral to any holder of a Lien on such collateral which is permitted by clause (d)(i) or (d)(iii) of Section 10.8 (it being understood that the Agent may conclusively rely on a certificate from the Company in determining whether the Debt secured by any such Lien is permitted by Section 10.7(b)). Upon request by the Agent at any time, the Banks will confirm in writing the Agent's authority to release, or subordinate its interest in, particular types or items of collateral pursuant to this Section 13.10. SECTION 14 GENERAL. 45 14.1 Waiver; Amendments. No delay on the part of the Agent or any Bank in the exercise of any right, power or remedy shall operate as a waiver thereof, nor shall any single or partial exercise by any of them of any right, power or remedy preclude other or further exercise thereof, or the exercise of any other right, power or remedy. No amendment, modification or waiver of, or consent with respect to, any provision of this Agreement or the Notes shall in any event be effective unless the same shall be in writing and signed and delivered by Banks having an aggregate Pro Rata Share of not less than the aggregate Pro Rata Share expressly designated herein with respect thereto or, in the absence of such designation as to any provision of this Agreement or the Notes, by the Required Banks, and then any such amendment, modification, waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. No amendment, modification, waiver or consent shall change the Pro Rata Share of any Bank without the consent of such Bank. No amendment, modification, waiver or consent shall (i) increase the Revolving Commitment Amount, (ii) extend the date for payment of any principal of or interest on the Loans or any fees payable hereunder, (iii) reduce the principal amount of any Loan, the rate of interest thereon or any fees payable hereunder, (iv) release the Guaranty or all or any substantial part of the collateral granted under the Collateral Documents or (v) reduce the aggregate Pro Rata Share required to effect an amendment, modification, waiver or consent without, in each case, the consent of all Banks. No provision of Section 13 or other provision of this Agreement affecting the Agent in its capacity as such shall be amended, modified or waived without the consent of the Agent. 14.2 Confirmations. The Company and each holder of a Note agree from time to time, upon written request received by it from the other, to confirm to the other in writing (with a copy of each such confirmation to the Agent) the aggregate unpaid principal amount of the Loans then outstanding under such Note. 14.3 Notices. Except as otherwise provided in Sections 2.2.2 and 2.2.3, all notices hereunder shall be in writing (including facsimile transmission) and shall be sent to the applicable party at its address shown on Schedule 14.3 or at such other address as such party may, by written notice received by the other parties, have designated as its address for such purpose. Notices sent by facsimile transmission shall be deemed to have been given when sent; notices sent by mail shall be deemed to have been given three Business Days after the date when sent by registered or certified mail, postage prepaid; and notices sent by hand delivery or overnight courier service shall be deemed to have been given when received. For purposes of Sections 2.2.2 and 2.2.3, the Agent shall be entitled to rely on telephonic instructions from any person that the Agent in good faith believes is an authorized officer or employee of the Company, and the Company shall hold the Agent and each other Bank harmless from any loss, cost or expense resulting from any such reliance. 14.4 Computations. Where the character or amount of any asset or liability or item of income or expense is required to be determined, or any consolidation or other accounting computation is required to be made, for the purpose of this Agreement, such determination or calculation shall, to the extent applicable and except as otherwise specified in this Agreement, be made in accordance with GAAP, consistently applied; provided that if the Company notifies the Agent that the Company wishes to amend any covenant in Section 10 to eliminate or to take into account the effect of any change in GAAP on the operation of such covenant (or if the Agent notifies the Company that the Required Banks wish to amend Section 10 for such purpose), then the Company's compliance with such covenant shall be determined on the basis of GAAP in effect immediately before the relevant change in GAAP became effective, until either such notice is withdrawn or such covenant is amended in a manner satisfactory to the Company and the Required Banks. 46 14.5 Regulation U. Each Bank represents that it in good faith is not relying, either directly or indirectly, upon any Margin Stock as collateral security for the extension or maintenance by it of any credit provided for in this Agreement. 14.6 Costs, Expenses and Taxes. The Company agrees to pay on demand all reasonable out-of-pocket costs and expenses of the Agent (including Attorney Costs) in connection with the preparation, execution, syndication, delivery and administration of this Agreement, the other Loan Documents and all other documents provided for herein or delivered or to be delivered hereunder or in connection herewith (including any amendment, supplement or waiver to any Loan Document), and all reasonable out-of-pocket costs and expenses (including Attorney Costs) incurred by the Agent and each Bank after an Event of Default in connection with the enforcement of this Agreement, the other Loan Documents or any such other documents. In addition, the Company agrees to pay, and to save the Agent and the Banks harmless from all liability for, (a) any stamp or other taxes (excluding income taxes and franchise taxes based on net income) which may be payable in connection with the execution and delivery of this Agreement, the borrowings hereunder, the issuance of the Notes or the execution and delivery of any other Loan Document or any other document provided for herein or delivered or to be delivered hereunder or in connection herewith and (b) any fees of the Company's auditors in connection with any reasonable exercise by the Agent and the Banks of their rights pursuant to Section 10.2. All obligations provided for in this Section 14.6 shall survive repayment of the Loans, cancellation of the Notes, expiration or termination of the Letters of Credit and termination of this Agreement. 14.7 Subsidiary References. The provisions of this Agreement relating to Subsidiaries shall apply only during such times as the Company has one or more Subsidiaries. 14.8 Captions. Section captions used in this Agreement are for convenience only and shall not affect the construction of this Agreement. 14.9 Assignments; Participations. 14.9.1 Assignments. Any Bank may, with the prior written consents of the Agent and (so long as no Event of Default exists) the Company (which consents shall not be unreasonably delayed or withheld and, in any event, shall not be required for an assignment by a Bank to one of its Affiliates), at any time assign and delegate to one or more commercial banks or other Persons (any Person to whom such an assignment and delegation is to be made being herein called an "Assignee") all or any fraction of such Bank's Loans and Commitment (which assignment and delegation shall be of a constant, and not a varying, percentage of all the assigning Bank's Loans and Commitment) in a minimum aggregate amount equal to the lesser of (i) the amount of the assigning Bank's Pro Rata Share of the Revolving Commitment Amount and (ii) $5,000,000; provided that (a) no assignment and delegation may be made to any Person if, at the time of such assignment and delegation, the Company would be obligated to pay any greater amount under Section 7.6 or Section 8 to the Assignee than the Company is then obligated to pay to the assigning Bank under such Sections (and if any assignment is made in violation of the foregoing, the Company will not be required to pay the incremental amounts) and (b) the Company and the Agent shall be entitled to continue to deal solely and directly with such Bank in connection with the interests so assigned and delegated to an Assignee until the date when all of the following conditions shall have been met: 47 (x) five Business Days (or such lesser period of time as the Agent and the assigning Bank shall agree) shall have passed after written notice of such assignment and delegation, together with payment instructions, addresses and related information with respect to such Assignee, shall have been given to the Company and the Agent by such assigning Bank and the Assignee, (y) the assigning Bank and the Assignee shall have executed and delivered to the Company and the Agent an assignment agreement substantially in the form of Exhibit F (an "Assignment Agreement"), together with any documents required to be delivered thereunder, which Assignment Agreement shall have been accepted by the Agent, and (z) except in the case of an assignment by a Bank to one of its Affiliates, the assigning Bank or the Assignee shall have paid the Agent a processing fee of $3,500. From and after the date on which the conditions described above have been met, (x) such Assignee shall be deemed automatically to have become a party hereto and, to the extent that rights and obligations hereunder have been assigned and delegated to such Assignee pursuant to such Assignment Agreement, shall have the rights and obligations of a Bank hereunder and (y) the assigning Bank, to the extent that rights and obligations hereunder have been assigned and delegated by it pursuant to such Assignment Agreement, shall be released from its obligations hereunder. Within five Business Days after effectiveness of any assignment and delegation, the Company shall execute and deliver to the Agent (for delivery to the Assignee and the Assignor, as applicable) a new Note in the principal amount of the Assignee's Pro Rata Share of the Revolving Commitment Amount and, if the assigning Bank has retained a Commitment hereunder, a replacement Note in the principal amount of the Pro Rata Share of the Revolving Commitment Amount retained by the assigning Bank (such Note to be in exchange for, but not in payment of, the predecessor Note held by such assigning Bank). Each such Note shall be dated the effective date of such assignment. The assigning Bank shall mark the predecessor Note "exchanged" and deliver it to the Company. Accrued interest on that part of the predecessor Note being assigned shall be paid as provided in the Assignment Agreement. Accrued interest and fees on that part of the predecessor Note not being assigned shall be paid to the assigning Bank. Accrued interest and accrued fees shall be paid at the same time or times provided in the predecessor Note and in this Agreement. Any attempted assignment and delegation not made in accordance with this Section 14.9.1 shall be null and void. 48 Notwithstanding the foregoing provisions of this Section 14.9.1 or any other provision of this Agreement, any Bank may at any time assign all or any portion of its Loans and its Note to a Federal Reserve Bank (but no such assignment shall release any Bank from any of its obligations hereunder). 14.9.2 Participations. Any Bank may at any time sell to one or more commercial banks or other Persons participating interests in any Loan owing to such Bank, the Note held by such Bank, the Commitment of such Bank, or any other interest of such Bank hereunder (any Person purchasing any such participating interest being herein called a "Participant"). In the event of a sale by a Bank of a participating interest to a Participant, (x) such Bank shall remain the holder of its Note for all purposes of this Agreement, (y) the Company and the Agent shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations hereunder and (z) all amounts payable by the Company shall be determined as if such Bank had not sold such participation and shall be paid directly to such Bank. No Participant shall have any direct or indirect voting rights hereunder except with respect to any of the events described in the fourth sentence of Section 14.1. Each Bank agrees to incorporate the requirements of the preceding sentence into each participation agreement which such Bank enters into with any Participant. The Company agrees that if amounts outstanding under this Agreement and the Notes are due and payable (as a result of acceleration or otherwise), each Participant shall be deemed to have the right of setoff in respect of its participating interest in amounts owing under this Agreement and any Note to the same extent as if the amount of its participating interest were owing directly to it as a Bank under this Agreement or such Note; provided that such right of setoff shall be subject to the obligation of each Participant to share with the Banks, and the Banks agree to share with each Participant, as provided in Section 7.5. The Company also agrees that each Participant shall be entitled to the benefits of Section 7.6 and Section 8 as if it were a Bank (provided that no Participant shall receive any greater compensation pursuant to Section 7.6 or Section 8 than would have been paid to the participating Bank if no participation had been sold). Notwithstanding anything to the contrary set forth in this Section 14.9, no Assignee or Participant may be an Affiliate (as such term is defined herein but giving effect to any broader definition under the 1940 Act) of the Company or any of its Affiliates under the 1940 Act and each Assignee and Participant hereby warrants (upon becoming an Assignee or Participant) that it is not such an Affiliate. 14.10 Governing Law. This Agreement and each Note shall be a contract made under and governed by the internal laws of the State of Illinois applicable to contracts made and to be performed entirely within such State. Whenever possible each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. All obligations of the Company and rights of the Agent and the Banks expressed herein or in any other Loan Document shall be in addition to and not in limitation of those provided by applicable law. 14.11 Counterparts. This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts and each such counterpart shall be deemed to be an original, but all such counterparts shall together constitute but one and the same Agreement. 49 14.12 Successors and Assigns. This Agreement shall be binding upon the Company, the Banks and the Agent and their respective successors and assigns, and shall inure to the benefit of the Company, the Banks and the Agent and the successors and assigns of the Banks and the Agent. 14.13 Indemnification by the Company. In consideration of the execution and delivery of this Agreement by the Agent and the Banks and the agreement to extend the Commitments provided hereunder, the Company hereby agrees to indemnify, exonerate and hold the Agent, each Bank and each of the officers, directors, employees, Affiliates and agents of the Agent and each Bank (each a "Bank Party") free and harmless from and against any and all actions, causes of action, suits, losses, liabilities, damages and expenses, including Attorney Costs (collectively, the "Indemnified Liabilities"), incurred by the Bank Parties or any of them as a result of, or arising out of, or relating to (i) any tender offer, merger, purchase of stock, purchase of assets or other similar transaction financed or proposed to be financed in whole or in part, directly or indirectly, with the proceeds of any of the Loans, (ii) the use, handling, release, emission, discharge, transportation, storage, treatment or disposal of any hazardous substance at any property owned or leased by the Company or any Subsidiary, (iii) any violation of any Environmental Laws with respect to conditions at any property owned or leased by the Company or any Subsidiary or the operations conducted thereon, (iv) the investigation, cleanup or remediation of offsite locations at which the Company or any Subsidiary or their respective predecessors are alleged to have directly or indirectly disposed of hazardous substances or (v) the execution, delivery, performance or enforcement of this Agreement or any other Loan Document by any of the Bank Parties, except for any such Indemnified Liabilities arising on account of the applicable Bank Party's gross negligence or willful misconduct. If and to the extent that the foregoing undertaking may be unenforceable for any reason, the Company hereby agrees to make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities which is permissible under applicable law. All obligations provided for in this Section 14.13 shall survive repayment of the Loans, cancellation of the Notes, any foreclosure under, or any modification, release or discharge of, any or all of the Collateral Documents and termination of this Agreement. 14.14 Nonliability of Lenders. The relationship between the Company on the one hand and the Banks and the Agent on the other hand shall be solely that of borrower and lender. Neither the Agent nor any Bank shall have any fiduciary responsibility to the Company. Neither the Agent nor any Bank undertakes any responsibility to the Company to review or inform the Company or any matter in connection with any phase of the Company's business or operations. The Company agrees that neither the Agent nor any Bank shall have liability to the Company (whether sounding in tort, contract or otherwise) for losses suffered by the Company in connection with, arising out of, or in any way related to the transactions contemplated and the relationship established by the Loan Documents, or any act, omission or event occurring in connection therewith, unless it is determined in a final non-appealable judgment by a court of competent jurisdiction that such losses resulted from the gross negligence or willful misconduct of the party from which recovery is sought. Neither the Agent nor any Bank shall have any liability with respect to, and the Company hereby waives, releases and agrees not to sue for, any special, indirect or consequential damages suffered by the Company in connection with, arising out of, or in any way related to the Loan Documents or the transactions contemplated thereby. 50 14.15 Forum Selection and Consent to Jurisdiction. ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, SHALL BE BROUGHT AND MAINTAINED EXCLUSIVELY IN THE COURTS OF THE STATE OF ILLINOIS OR IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS; PROVIDED THAT ANY SUIT SEEKING ENFORCEMENT AGAINST ANY COLLATERAL OR OTHER PROPERTY MAY BE BROUGHT, AT THE AGENT'S OPTION, IN THE COURTS OF ANY JURISDICTION WHERE SUCH COLLATERAL OR OTHER PROPERTY MAY BE FOUND. THE COMPANY HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE COURTS OF THE STATE OF ILLINOIS AND OF THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS FOR THE PURPOSE OF ANY SUCH LITIGATION AS SET FORTH ABOVE. THE COMPANY FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS BY REGISTERED MAIL, POSTAGE PREPAID, OR BY PERSONAL SERVICE WITHIN OR WITHOUT THE STATE OF ILLINOIS. THE COMPANY HEREBY EXPRESSLY AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN ANY SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. 14.16 Waiver of Jury Trial. EACH OF THE COMPANY, THE AGENT AND EACH BANK HEREBY WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER THIS AGREEMENT, ANY NOTE, ANY OTHER LOAN DOCUMENT AND ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR THEREWITH OR ARISING FROM ANY BANKING RELATIONSHIP EXISTING IN CONNECTION WITH ANY OF THE FOREGOING, AND AGREES THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY. 51 Delivered at Chicago, Illinois, as of the day and year first above written. AMERICAN CAPITAL STRATEGIES, LTD. By ------------------------------- Title ------------------------- LASALLE NATIONAL BANK, as Agent By ------------------------------- Title ------------------------- LASALLE NATIONAL BANK, as a Bank By ------------------------------- Title ------------------------- 52 SCHEDULE 2.1 BANKS AND PRO RATA SHARES - - ---------------------------------------------------------------------------- Pro Rata Share of Revolving Bank Commitment Amount Pro Rata Share - - --------------------------------------------------------------------------- LaSalle National Bank $25,000,000 100% TOTALS $25,000,000 100% - - ------------------------------------------------------------------------- 53 SCHEDULE 9.2 CONFLICTS 54 SCHEDULE 9.6 LITIGATION AND CONTINGENT LIABILITIES 55 SCHEDULE 9.8 SUBSIDIARIES 56 SCHEDULE 9.15 ENVIRONMENTAL MATTERS 57 SCHEDULE 9.17 INSURANCE 58 SCHEDULE 9.18 REAL PROPERTY 59 SCHEDULE 9.22 LABOR MATTERS 60 SCHEDULE 10.8 EXISTING LIENS 61 SCHEDULE 10.21 INVESTMENTS 62 SCHEDULE 11.1 DEBT TO BE REPAID 63 SCHEDULE 12.1.12 KEY EXECUTIVES David Gladstone ------------------- Malon Wilkus ------------------- Adam Blumenthal ------------------- John Erickson ------------------- 64 SCHEDULE 14.3 ADDRESSES FOR NOTICES AMERICAN CAPITAL STRATEGIES, LTD. 3 Bethesda Metro Center Bethesda, Maryland 20814 Attention: John Erickson Telephone: (301) 951-6122; x34 Facsimile: (301) 654-6714 LASALLE NATIONAL BANK, as Agent, Issuing Bank and a Bank Notices of Borrowing , Conversion and Continuation 135 South LaSalle Street Chicago, Illinois 60603 Attention: _________________ Telephone: (312)____________ Facsimile: (312) ___________ All Other Notices 135 South LaSalle Street Chicago, Illinois 60603 Attention: Michael J. Burton Adam S. Gelfeld Telephone: (312) 904-2677 (312) 904-6534 Facsimile: (312) 904-6457 [OTHER BANKS] 65 EXHIBIT A FORM OF NOTE -------,------- $__________________ Chicago, Illinois The undersigned, for value received, promises to pay to the order of ______________ (the "Bank") at the principal office of LaSalle National Bank (the "Agent") in Chicago, Illinois, the aggregate unpaid amount of all Loans made to the undersigned by the Bank pursuant to the Credit Agreement referred to below (as shown on the schedule attached hereto (and any continuation thereof) or in the records of the Bank), such principal amount to be payable on the dates set forth in the Credit Agreement. The undersigned further promises to pay interest on the unpaid principal amount of each Loan from the date of such Loan until such Loan is paid in full, payable at the rate(s) and at the time(s) set forth in the Credit Agreement. Payments of both principal and interest are to be made in lawful money of the United States of America. This Note evidences indebtedness incurred under, and is subject to the terms and provisions of, the Credit Agreement, dated as of [Date of Agreement] (as amended or otherwise modified from time to time, the "Credit Agreement"; terms not otherwise defined herein are used herein as defined in the Credit Agreement), among the undersigned, certain financial institutions (including the Bank) and the Agent, to which Credit Agreement reference is hereby made for a statement of the terms and provisions under which this Note may or must be paid prior to its due date or its due date accelerated. This Note is made under and governed by the laws of the State of Illinois applicable to contracts made and to be performed entirely within such State. AMERICAN CAPITAL STRATEGIES, LTD. By: ------------------------------- Title: ------------------------- A-1 - - -------------------------------------------------------------------------------- SCHEDULE ATTACHED TO NOTE DATED ___________, _____ OF AMERICAN CAPITAL STRATEGIES, LTD.. PAYABLE TO THE ORDER OF ----------- - - -------------------------------------------------------------------------------- - - ------------------------- ----------------------- ---------------------- -------
Date and Date and Amount of Amount of Loan or of Repayment or of Conversion Conversion Interest from another into another type of Period/Unpaid type of Loan Notation Loan Maturity Date Principal Balance Made by - - ------------------------- ----------------------- ---------------------- ----------------------- ---------------------- - - ----------------------------------------------------------------------------------------------------------------------- 1. BASE RATE LOANS - - ----------------------------------------------------------------------------------------------------------------------- - - ------------------------- ----------------------- ---------------------- ----------------------- ---------------------- - - ------------------------- ----------------------- ---------------------- ----------------------- ---------------------- - - ------------------------- ----------------------- ---------------------- ----------------------- ---------------------- - - ------------------------- ----------------------- ---------------------- ----------------------- ---------------------- - - ----------------------------------------------------------------------------------------------------------------------- 2. EURODOLLAR LOANS - - ----------------------------------------------------------------------------------------------------------------------- - - ------------------------- ----------------------- ---------------------- ----------------------- ---------------------- - - ------------------------- ----------------------- ---------------------- ----------------------- ---------------------- - - ------------------------- ----------------------- ---------------------- ----------------------- ---------------------- - - ------------------------- ----------------------- ---------------------- ----------------------- ----------------------
A-2 EXHIBIT B FORM OF COMPLIANCE CERTIFICATE To: LaSalle National Bank, as Agent Please refer to the Credit Agreement dated as of October 30, 1998 (as amended or otherwise modified from time to time, the "Credit Agreement") among American Capital Strategies, Ltd. (the "Company"), various financial institutions and LaSalle National Bank, as agent. Terms used but not otherwise defined herein are used herein as defined in the Credit Agreement. I. Reports. Enclosed herewith is a copy of the [annual audited/quarterly/monthly] report of the Company as at _____________, ____ (the "Computation Date"), which report fairly presents in all material respects the financial condition and results of operations [(subject to the absence of footnotes and to normal year-end adjustments)] of the Company as of the Computation Date and has been prepared in accordance with GAAP consistently applied. II. Financial Tests. The Company hereby certifies and warrants to you that the following is a true and correct computation as at the Computation Date of the following ratios and/or financial restrictions contained in the Credit Agreement: A. Section 10.6.1 - Minimum Consolidated Tangible Net Worth 1. Consolidated Stockholders' Equity $___________ 2. (Intangibles) $___________ 3. Subordinated Debt $___________ 4. Consolidated Tangible Net Worth $140,000,000 5 Compliance yes/no B. Section 10.6.2 - Maximum Leverage Ratio 1. Total Liabilities $___________ 2. Consolidated Tangible Net Worth $___________ 3. Ratio of (1) to (2) ____ to 1 4. Maximum allowed 1 to 1 5. Compliance yes/no B-1 C. Section 10.6.3-Minimum Consolidated Pre-Tax Income 1. Consolidated Pre-Tax Income $____________ 2. Minimum required $10,000,000 3. Compliance yes/no D. Section 10.1.4 Asset Coverage Ratio 1. Value of total assets $___________ less all liabilities and Debt not represented by senior securities ($__________) 2. Amount of Senior Securities $____________ 3. Ratio (1): to (2): __________ 4. Requirement: 2:1 5. Compliance: yes/no The Company further certifies to you that no Event of Default or Unmatured Event of Default has occurred and is continuing. IN WITNESS WHEREOF, the Company has caused this Certificate to be executed and delivered by its duly authorized officer on _________, ____. AMERICAN CAPITAL STRATEGIES, LTD. By -------------------------------- Title --------------------------- B-2 EXHIBIT E FORM OF BORROWING BASE CERTIFICATE To: LaSalle National Bank, as Agent 135 S. LaSalle St. Chicago, Illinois 60603 Ladies and Gentlemen: Please refer to the Credit Agreement dated as of October 30, 1998 (as amended or otherwise modified from time to time, the "Credit Agreement") among American Capital Strategies, Ltd. (the "Company"), various financial institutions and LaSalle National Bank, as agent. This certificate (this "Certificate"), together with supporting calculations attached hereto, is delivered to you pursuant to the terms of the Credit Agreement. Capitalized terms used but not otherwise defined herein shall have the same meanings herein as in the Credit Agreement. The Company hereby certifies and warrants to the Agent and the Banks that at the close of business on ______________, ____ (the "Calculation Date"), the Borrowing Base was $_____________, computed as set forth on the schedule attached hereto. IN WITNESS WHEREOF, the Company has caused this Certificate to be executed and delivered by its officer thereunto duly authorized on ___________, - - ------. AMERICAN CAPITAL STRATEGIES, LTD. By -------------------------------- Title --------------------------- E-1 Borrowing Base (Date: ______________) I. Eligible Investment Assets:
- - ----------------------------------------------------------------------------------------------------------------------- A. Total Value of Portfolio Investments (from Schedule 1): $____________ - - ----------------------------------------------------------------------------------------------------------------------- Exclude Portfolio (1) the Company is the legal and beneficial owner of such ------------------ Portfolio Investment or Cash Equivalent Investment Investments not [indicate excluded Portfolio Investment, if any] (____________) ---------------- satisfying each ---------------- of the following ---------------- (without (2) such Portfolio Investment consists of senior or --------- subordinated loans duplication): [indicate excluded Portfolio Investment, if any] (____________) ------------ - - ---------------------------- -------------------------------------------------------------------- --------------------- (3) the Portfolio Company under such Portfolio Investments is not more than thirty days past due in the payment of principal or interest [indicate excluded Portfolio Investment, if any] (____________) - - ---------------------------- -------------------------------------------------------------------- --------------------- (4) such Portfolio Investment does not include promissory notes or instruments (i) representing capitalized interest or payment-in-kind interest or payment obligations relating to exercise of "put" rights or (ii) owing from a single Portfolio Company representing more than 10% of the total amount of Portfolio Investments held by the Company; provided, that such Portfolio Investment shall only be ineligible to the extent of such instruments or portions thereof related to payment-in-kind interest or portions thereof in excess of such 10% limit [indicate excluded Portfolio Investment, if any] (____________) - - - - - ---------------------------- -------------------------------------------------------------------- --------------------- (5) all documents evidencing and governing such Portfolio Investments or Cash Equivalent Investments have been delivered to Agent pursuant to the Custody Control Agreement, together with endorsements, stock powers and other assignments or perfection instruments required by the Agent [indicate excluded Portfolio Investment, if any] (____________) - - ---------------------------- -------------------------------------------------------------------- --------------------- (6) the Agent has a legal, valid and binding perfected, first-priority security interest in such Portfolio Investment or Cash Equivalent Investment and such Portfolio Investment or Cash Equivalent Investment is freely transferable to the Agent or its assignee upon the occurrence of an Event of Default [indicate excluded Portfolio Investment, if any] (____________) - - ---------------------------- -------------------------------------------------------------------- --------------------- (7) the Portfolio Company of such Portfolio Investment is not subject to any bankruptcy, insolvency, liquidation or similar proceeding [indicate excluded Portfolio Investment, if any] (____________) - - ---------------------------- -------------------------------------------------------------------- --------------------- (8) such Portfolio Investment or Cash Equivalent Investment satisfies all applicable requirements of the Investment Policy [indicate excluded Portfolio Investment, if any] (____________) - - ---------------------------- -------------------------------------------------------------------- --------------------- (9) such Portfolio Investment or Cash Equivalent Investment complies with all applicable regulatory guidelines (including the 1940 Act and Regulation U) [indicate excluded Portfolio Investment, if any] (____________) - - ---------------------------- -------------------------------------------------------------------- --------------------- (10) exclude an Portfolio Investment subject to a Modification: (____________) - - ----------------------------------------------------------------------------------------------------------------------- B. Total Eligible Investment Assets (Borrowing Base) ____________ - - ------------------------------------------------------------------------------------------------- --------------------- C. Revolving Outstandings (____________) - - ------------------------------------------------------------------------------------------------- --------------------- D. Total Availability $____________ - - ------------------------------------------------------------------------------------------------- ---------------------
E-2 Schedule 1
- - --------------- --------------------- ------------------ ------------------- ----------------------- ----------------------- Portfolio Current Valuation Investment Debt (attach most recent Change from Portfolio (Describe Acquired Cost valuation analysis) Previous Valuation Company Investment) - - --------------- --------------------- ------------------ ------------------- ----------------------- ----------------------- - - --------------- --------------------- ------------------ ------------------- ----------------------- ----------------------- - - --------------- --------------------- ------------------ ------------------- ----------------------- ----------------------- - - --------------- --------------------- ------------------ ------------------- ----------------------- ----------------------- - - --------------- --------------------- ------------------ ------------------- ----------------------- ----------------------- - - ---------------------------------------------------------------------------------------------------------------------------- TOTAL: $___________________ - - ----------------------------------------------------------------------------------------------------------------------------
E-3 EXHIBIT F FORM OF ASSIGNMENT AGREEMENT Date:____________________ To: American Capital Strategies, Ltd. and LaSalle National Bank, as Agent Re: Assignment under the Credit Agreement referred to below Gentlemen and Ladies: Please refer to Section 14.9.1 of the Credit Agreement dated as of October 30, 1998 (as amended or otherwise modified from time to time, the "Credit Agreement") among American Capital Strategies, Ltd. (the "Company"), various financial institutions and LaSalle National Bank, as agent (in such capacity, the "Agent"). Unless otherwise defined herein or the context otherwise requires, terms used herein have the meanings provided in the Credit Agreement. _______________ (the "Assignor") hereby sells and assigns to ___________ (the "Assignee"), and the Assignee hereby purchases and assumes from the Assignor, that interest in and to the Assignor's rights and obligations under the Credit Agreement as of the date hereof equal to ____% of all of the Loans, of the participation interests in the Letters of Credit and of the Commitments, such sale, purchase, assignment and assumption to be effective as of __________, ____, or such later date on which the Company and the Agent shall have consented hereto (the "Effective Date"). After giving effect to such sale, purchase, assignment and assumption, the Assignee's and the Assignor's respective Percentages for purposes of the Credit Agreement will be as set forth opposite their names on the signature pages hereof. The Assignor hereby instructs the Agent to make all payments from and after the Effective Date in respect of the interest assigned hereby directly to the Assignee. The Assignor and the Assignee agree that all interest and fees accrued up to, but not including, the Effective Date are the property of the Assignor, and not the Assignee. The Assignee agrees that, upon receipt of any such interest or fees, the Assignee will promptly remit the same to the Assignor. F-1 The Assignee hereby confirms that it has received a copy of the Credit Agreement and the exhibits thereto, together with copies of the documents which were required to be delivered under the Credit Agreement as a condition to the making of the initial Loans thereunder. The Assignee acknowledges and agrees that it (i) has made and will continue to make such inquiries and has taken and will take such care on its own behalf as would have been the case had its Commitment been granted and its Loans been made directly to, the Company without the intervention of the Agent, the Assignor or any other Bank and (ii) has made and will continue to make, independently and without reliance upon the Agent, the Assignor or any other Bank and based on such documents and information as it has deemed appropriate, its own credit analysis and decisions relating to the Credit Agreement. The Assignee further acknowledges and agrees that neither the Agent nor the Assignor has made any representation or warranty about the creditworthiness of the Company or any other party to the Credit Agreement or with respect to the legality, validity, sufficiency or enforceability of the Credit Agreement or any other Loan Document or the value of any security therefor. This assignment shall be made without recourse to the Assignor. The Assignor represents and warrants that it is the legal and beneficial owner of the interest being assigned by it hereunder and that such interest is free and clear of any adverse claim. The Assignee represents and warrants to the Company and the Agent that, as of the date hereof, the Company will not be obligated to pay any greater amount under Section 7.6 or 8 of the Credit Agreement than the Company is obligated to pay to the Assignor under such Section. Except as otherwise provided in the Credit Agreement, effective as of the Effective Date: (a) the Assignee (i) shall be deemed automatically to have become a Party to the Credit Agreement and to have all the rights and obligations of a "Bank" under the Credit Agreement as if it were an original signatory thereto to the extent specified in the second paragraph hereof, and (ii) agrees to be bound by the terms and conditions set forth in the Credit Agreement as if it were an original signatory thereto; and (b) the Assignor shall be released from its obligations under the Credit Agreement to the extent specified in the second paragraph hereof. The Assignee hereby advises each of you of the following administrative details with respect to the assigned Loans and Commitment: (A) Institution Name: Address: Attention: Telephone: Facsimile: (B) Payment Instructions: F-2 Please evidence your receipt hereof and your consent to the sale, assignment, purchase and assumption set forth herein by signing and returning counterparts hereof to the Assignor and the Assignee. Percentage = ____% [ASSIGNEE] By: --------------------------- Title: ------------------------ Adjusted Percentage = ____% [ASSIGNOR] By: --------------------------- Title: ------------------------ ACKNOWLEDGED AND CONSENTED TO this _____ day of ________, ____ LASALLE NATIONAL BANK, as Agent By: --------------------------- Title: ------------------------ ACKNOWLEDGED AND CONSENTED TO this ___ day of ________, ____ AMERICAN CAPITAL STRATEGIES, LTD. By: --------------------------- Title: ------------------------ F-3 EX-10.2 3 PROMISSORY NOTE DATED OCTOBER 30, 1998 Exhibit 10.2 NOTE October 30, 1998 $25,000,000 Chicago, Illinois The undersigned, for value received, promises to pay to the order of LaSalle National Bank (the "Bank") at the principal office of LaSalle National Bank (the "Agent") in Chicago, Illinois, the aggregate unpaid amount of all Loans made to the undersigned by the Bank pursuant to the Credit Agreement referred to below (as shown on the schedule attached hereto (and any continuation thereof) or in the records of the Bank), such principal amount to be payable on the dates set forth in the Credit Agreement. The undersigned further promises to pay interest on the unpaid principal amount of each Loan from the date of such Loan until such Loan is paid in full, payable at the rate(s) and at the time(s) set forth in the Credit Agreement. Payments of both principal and interest are to be made in lawful money of the United States of America. This Note evidences indebtedness incurred under, and is subject to the terms and provisions of, the Credit Agreement, dated as of October 30, 1998 (as amended or otherwise modified from time to time, the "Credit Agreement"; terms not otherwise defined herein are used herein as defined in the Credit Agreement), among the undersigned, certain financial institutions (including the Bank) and the Agent, to which Credit Agreement reference is hereby made for a statement of the terms and provisions under which this Note may or must be paid prior to its due date or its due date accelerated. This Note is made under and governed by the laws of the State of Illinois applicable to contracts made and to be performed entirely within such State. AMERICAN CAPITAL STRATEGIES, LTD. By: _____________________________ Title: _____________________________ - - ------------------------------------------------------------------------------- SCHEDULE ATTACHED TO NOTE DATED OCTOBER __, 1998 OF AMERICAN CAPITAL STRATEGIES, LTD.. PAYABLE TO THE ORDER OF LASALLE NATIONAL BANK - - ------------------------------------------------------------------------------- - - ------------------------- ----------------------- ---------------------- ------
Date and Date and Amount of Amount of Loan or of Repayment or of Conversion Conversion Interest from another into another type of Period/Unpaid type of Loan Notation Loan Maturity Date Principal Balance Made by - - ----------------------------------------------------------------------------------------------------------------------- 1. BASE RATE LOANS - - ----------------------------------------------------------------------------------------------------------------------- - - ------------------------- ----------------------- ---------------------- ----------------------- ---------------------- - - ------------------------- ----------------------- ---------------------- ----------------------- ---------------------- - - ------------------------- ----------------------- ---------------------- ----------------------- ---------------------- - - ------------------------- ----------------------- ---------------------- ----------------------- ---------------------- - - ----------------------------------------------------------------------------------------------------------------------- 2. EURODOLLAR LOANS - - ----------------------------------------------------------------------------------------------------------------------- - - ------------------------- ----------------------- ---------------------- ----------------------- ---------------------- - - ------------------------- ----------------------- ---------------------- ----------------------- ---------------------- - - ------------------------- ----------------------- ---------------------- ----------------------- ---------------------- - - ------------------------- ----------------------- ---------------------- ----------------------- ----------------------
EX-10.3 4 SECURITY AND PLEDGE AGREEMENT Exhibit 10.3 SECURITY AND PLEDGE AGREEMENT THIS SECURITY AND PLEDGE AGREEMENT (this "Agreement") dated as of October 30, 1998, is among AMERICAN CAPITAL STRATEGIES, LTD. (the "Company"); the other persons or entities which are listed on the signature pages hereof as debtors or which from time to time become parties hereto as debtors (collectively, including the Company, the "Debtors" and individually each a "Debtor"); and LASALLE NATIONAL BANK in its capacity as agent for the Lender Parties referred to below (in such capacity, the "Agent"). W I T N E S S E T H: WHEREAS, the Company has entered into a Credit Agreement dated as of October 30, 1998 (as amended, amended and restated, supplemented, extended or otherwise modified from time to time, the "Credit Agreement") with various financial institutions and the Agent, pursuant to which such financial institutions have agreed to make loans to the Company; WHEREAS, each of the other Debtors has executed and delivered a guaranty (as amended or otherwise modified from time to time, the "Guaranty") of certain obligations of the Company, including all obligations of the Company under the Credit Agreement; and WHEREAS, the obligations of the Company under the Credit Agreement and the obligations of each other Debtor under the Guaranty are to be secured pursuant to this Agreement; NOW, THEREFORE, for and in consideration of any loan, advance or other financial accommodation heretofore or hereafter made to the Company under or in connection with the Credit Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Definitions. When used herein, (a) the terms Certificated Security, Chattel Paper, Deposit Account, Document, Equipment, Financial Asset, Fixture, Goods, Inventory, Instrument, Investment Property, Security, Security Entitlement, Uncertificated Security and Securities Intermediary have the respective meanings assigned thereto in the UCC (as defined below); (b) capitalized terms which are not otherwise defined have the respective meanings assigned thereto in the Credit Agreement; and (c) the following terms have the following meanings (such definitions to be applicable to both the singular and plural forms of such terms): Account Control Agreement means any Account Control Agreement from time to time executed and delivered among a Securities Intermediary, the Agent and the Company pursuant to which the Agent has and retains control (as defined in the UCC) over the relevant Investment Property of a Debtor held by such Securities Intermediary. Account Debtor means the party who is obligated on or under any Account Receivable, Contract Right or General Intangible. Account Receivable means, with respect to any Debtor, any right of such Debtor to payment for goods sold or leased or for services rendered. Assignee Deposit Account - see Section 6. Collateral means, with respect to any Debtor, all property and rights of such Debtor in which a security interest is granted hereunder. Computer Hardware and Software means, with respect to any Debtor, all of such Debtor's rights (including rights as licensee and lessee) with respect to (i) computer and other electronic data processing hardware, including all integrated computer systems, central processing units, memory units, display terminals, printers, computer elements, card readers, tape drives, hard and soft disk drives, cables, electrical supply hardware, generators, power equalizers, accessories, peripheral devices and other related computer hardware; (ii) all software programs designed for use on the computers and electronic data processing hardware described in clause (i) above, including all operating system software, utilities and application programs in whatsoever form (source code and object code in magnetic tape, disk or hard copy format or any other listings whatsoever); (iii) any firmware associated with any of the foregoing; and (iv) any documentation for hardware, software and firmware described in clauses (i), (ii) and (iii) above, including flow charts, logic diagrams, manuals, specifications, training materials, charts and pseudo codes. Contract Right means, with respect to any Debtor, any right of such Debtor to payment under a contract for the sale or lease of goods or the rendering of services, which right is at the time not yet earned by performance. Custodian means, with respect to the Company, LaSalle in its capacity as custodian, or any other custodian approved in writing by the Required Banks and, with respect to any other Debtor, a custodian who is in possession of any Collateral pursuant to a custodial arrangement with such Debtor. Custody Control Agreement means any Custody Control Agreement among the Custodian, the Agent and the Company pursuant to which the Custodian acts as the perfection and control agent and bailee for the Agent for the purpose of perfecting the Agent's security interest in any Pledged Debt and Pledged Securities held by the Custodian, as such agreement may be amended, amended and restated, supplemented or modified from time to time. Default means the occurrence of: (i) any Unmatured Event of Default under Section 12.1.1 or 12.1.4 of the Credit Agreement; or (ii) any Event of Default. 2 General Intangibles means, with respect to any Debtor, all of such Debtor's "general intangibles" as defined in the UCC and, in any event, includes (without limitation) all of such Debtor's trademarks, trade names, patents, copyrights, trade secrets, customer lists, inventions, designs, software programs, mask works, goodwill, registrations, licenses, franchises, tax refund claims, insurance policies and proceeds, title insurance policies and proceeds, guarantee claims, security interests and rights to indemnification. Intellectual Property means all past, present and future: trade secrets and other proprietary information; trademarks, service marks, business names, designs, logos, indicia and other source and/or business identifiers, and the goodwill of the business relating thereto and all registrations or applications for registrations which have heretofore been or may hereafter be issued thereon throughout the world; copyrights (including copyrights for computer programs) and copyright registrations or applications for registrations which have heretofore been or may hereafter be issued throughout the world and all tangible property embodying the copyrights; unpatented inventions (whether or not patentable); patent applications and patents; industrial designs, industrial design applications and registered industrial designs; license agreements related to any of the foregoing and income therefrom; books, records, writings, computer tapes or disks, flow diagrams, specification sheets, source codes, object codes and other physical manifestations, embodiments or incorporations of any of the foregoing; the right to sue for all past, present and future infringements of any of the foregoing; and all common law and other rights throughout the world in and to all of the foregoing. Lender Party means each Bank under and as defined in the Credit Agreement and any Affiliate of such a Bank which is a party to a Hedging Agreement with the Company. Liabilities means, as to each Debtor, all obligations (monetary or otherwise) of such Debtor under the Credit Agreement, any Note, the Guaranty, any other Loan Document or any other document or instrument executed in connection therewith and, in the case of the Company, all Hedging Obligations owed to any Lender Party, in each case howsoever created, arising or evidenced, whether direct or indirect, absolute or contingent, now or hereafter existing, or due or to become due. Non-Tangible Collateral means, with respect to any Debtor, collectively, such Debtor's Accounts Receivable, Contract Rights and General Intangibles. Perfection Documents means, collectively, any Custodian Agreement, any Account Control Agreement, any endorsements, endorsements in blank, assignments, blank stock or bond powers executed pursuant hereto and any filings made pursuant hereto, in each case as amended, amended and restated, modified or supplemented from time to time. Pledged Debt means the indebtedness described on Schedule I hereto (including all Instruments, Securities, Investment Property and other property relating thereto), as Schedule I may from time to time be supplemented, together with all principal, interest, cash, instruments or other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such indebtedness; and any and all future or additional indebtedness from time to time owed to any Debtor (including all Instruments, Securities, Investment Property and other property relating thereto), together with all principal, interest, cash, instruments and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such future or additional indebtedness. 3 Pledged Securities means the Subsidiary Stock and all shares of capital stock, warrants and other equity interest listed on Schedule I hereto (including all Securities and Investment Property and other property relating thereto), as Schedule I may from time to time be supplemented, together with any and all stock certificates, warrants, options or rights of any nature whatsoever that may be issued or granted to any Debtor in connection therewith; and any and all future or additional shares of capital stock, warrants and other equity interests from time to time issued to any Debtor (including all Securities and Investment Property and other property relating thereto). Subsidiary Stock means, any Instrument, Security or other Investment Property owned by the Company directly or indirectly and issued by a Subsidiary. UCC means the Uniform Commercial Code as in effect in the State of Illinois on the date of this Agreement; provided that, as used in Section 8 hereof, "UCC" shall mean the Uniform Commercial Code as in effect from time to time in any applicable jurisdiction. 2. Pledge and Grant of Security Interest. As security for the payment of all Liabilities, each Debtor hereby pledges and assigns to the Agent for the benefit of the Lender Parties, and grants to the Agent for the benefit of the Lender Parties a continuing security interest in, the following, whether now or hereafter existing or acquired: All of such Debtor's: (i) Accounts Receivable; (ii) Certificated Securities; (iii) Chattel Paper; (iv) Computer Hardware and Software and all rights with respect thereto, including, any and all licenses, options, warranties, service contracts, program services, test rights, maintenance rights, support rights, improvement rights, renewal rights and indemnifications, and any substitutions, replacements, additions or model conversions of any of the foregoing; (v) Contract Rights; (vi) Deposit Accounts; (vii) Documents; (viii) Financial Assets; (ix) General Intangibles; 4 (x) Goods (including all of its Equipment, Fixtures and Inventory), and all accessions, additions, attachments, improvements, substitutions and replacements thereto and therefor; (xi) Instruments; (xii) Intellectual Property; (xiii) Investment Property; (xiv) money (of every jurisdiction whatsoever); (xv) Security Entitlements; (xvi) Uncertificated Securities; (xvii) Pledged Debt; (xviii) Pledged Securities; and (xix) to the extent not included in the foregoing, other personal property of any kind or description; together with all books, records, writings, data bases, information and other property relating to, used or useful in connection with, or evidencing, embodying, incorporating or referring to any of the foregoing, and all proceeds, products, offspring, rents, issues, profits and returns of and from any of the foregoing; provided that to the extent that the provisions of any lease or license of Computer Hardware and Software or Intellectual Property expressly prohibit (which prohibition is enforceable under applicable law) the assignment thereof, and the grant of a security interest therein, such Debtor's rights in such lease or license shall be excluded from the foregoing assignment and grant for so long as such prohibition continues, it being understood that upon request of the Agent, such Debtor will in good faith use reasonable efforts to obtain consent for the creation of a security interest in favor of the Agent in such Debtor's rights under such lease or license. Such Debtor agrees to deliver to the Agent, promptly upon receipt and in due form for transfer (i.e., endorsed in blank or accompanied by undated stock powers executed in blank), any Collateral (other than dividends which the Company is entitled to receive and retain pursuant to Section 5 hereof) which may at any time or from time to time come into the possession or control of such Debtor; and prior to the delivery thereof to the Agent, such Collateral shall be held by such Debtor separate and apart from its other property and in express trust for the Agent. Each Debtor acknowledges and agrees that the Pledged Debt and Pledged Securities may be held by the Custodian, which in addition to its custodial duties shall hold such Collateral as bailee for the Agent for the purpose of perfection of the pledge and security interest granted hereunder. 5 3. Warranties. Each Debtor warrants that: (i) no financing statement (other than any which may have been filed on behalf of the Agent or in connection with liens expressly permitted by the Credit Agreement ("Permitted Liens")) covering any of the Collateral is on file in any public office; (ii) such Debtor is and will be the lawful owner of all Collateral, free of all liens and claims whatsoever, other than the security interest hereunder and Permitted Liens, with full power and authority to execute this Agreement and perform such Debtor's obligations hereunder, and to subject the Collateral to the security interest hereunder; (iii) all information with respect to Collateral and Account Debtors set forth in any schedule, certificate or other writing at any time heretofore or hereafter furnished by such Debtor to the Agent or any Lender Party is and will be true and correct in all material respects as of the date furnished, including Schedule I hereto which sets forth a complete and accurate list of all Pledged Debt and Pledged Securities and other Instruments, Securities and Investment Property owned by each of the Debtors; (iv) such Debtor's chief executive office and principal place of business are as set forth on Schedule II hereto (and such Debtor has not maintained its chief executive office and principal place of business at any other location at any time after December 31, 1997); (v) each other location where such Debtor maintains a place of business and the location of any Custodian or Securities Intermediary of such Debtor is set forth on Schedule III hereto; (vi) except as set forth on Schedule IV hereto, such Debtor is not now known and during the five years preceding the date hereof has not previously been known by any trade name; (vii) except as set forth on Schedule IV hereto, during the five years preceding the date hereof such Debtor has not been known by any legal name different from the one set forth on the signature pages of this Agreement nor has such Debtor been the subject of any merger or other corporate reorganization; (viii) Schedule V hereto contains a complete listing of all of such Debtor's Intellectual Property which is subject to registration statutes; (ix) such Debtor is a corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation; 6 (x) the execution and delivery of this Agreement and the Perfection Documents and the performance by such Debtor of its obligations hereunder and thereunder are within such Debtor's corporate powers, have been duly authorized by all necessary corporate action, have received all necessary governmental approval (if any shall be required), and do not and will not contravene or conflict with any provision of law or of the charter or by-laws of such Debtor or of any material agreement, indenture, instrument or other document, or any material judgment, order or decree, which is binding upon such Debtor; (xi) this Agreement and each of the Perfection Documents is a legal, valid and binding obligation of such Debtor, enforceable in accordance with its terms, except that the enforceability of this Agreement may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to creditors' rights generally and by general principles of equity (regardless of whether enforcement is sought in a proceeding in equity or at law); (xii) such Debtor is in compliance with the requirements of all applicable laws (including the provisions of the Fair Labor Standards Act), rules, regulations and orders of every governmental authority, the non-compliance with which would reasonably be expected to result in a Material Adverse Effect; (xiii) the pledge and delivery of the Pledged Debt and Pledged Securities hereto pursuant to this Agreement (or pursuant to the Custody Control Agreement) will create a valid perfected first-priority security interest in the Collateral in favor of the Agent; (xiv) all Pledged Securities which are shares of stock in a corporation or ownership interests in a partnership or limited liability company have been (to the extent such concepts are relevant with respect to such Instrument, Security or other type of Investment Property) duly and validly issued, are fully paid and non-assessable; (xv) to the Company's knowledge, all Pledged Debt has been duly authorized, authenticated, issued and delivered and is the legal, valid and binding obligation of the obligors thereof, and is not in default; (xvi) the Pledged Debt constitutes all of the outstanding indebtedness owed to any Debtor and is outstanding in the principal amount indicated on Schedule I; no Debtor has agreed, and no holder of any Pledged Debt shall be obligated, to remit any payments made under the Pledged Debt for the account of any other Person; to the Company's knowledge, none of the Pledged Debt is subject to any defense or setoff; (xvii) with respect to any certificates delivered to the Agent, the Custodian, or any Securities Intermediary representing an ownership interest in a partnership or limited liability company, either such certificates are Securities under Article 8 of the UCC of the applicable jurisdiction as a result of actions by the issuer or otherwise, or, if such certificates are not Securities, such Debtor has so informed the Agent so that the Agent may take steps to perfect its security interest therein as a General Intangible; 7 (xviii) as to each issuer of Pledged Securities whose name appears in Schedule I hereto, such Pledged Securities represent on the date hereof not less than the applicable percentage (as shown in Schedule I hereto) of the total shares of capital stock issued and outstanding of such issuer; and (xiv) no Debtor has knowledge of any facts or circumstances that would preclude, upon delivery of the Pledged Securities, with the transfer power executed in blank, and the Pledged Debt, endorsed in blank, to the Agent or the Custodian, the Agent from being a "bona fide purchaser" of the Pledge Securities under Article 8 of the UCC or a "holder in due course" of the Pledged Debt under Article 3 of the UCC. 4. Holding in Name of Agent, etc. With respect to the Collateral listed on Schedule I hereto, the Agent may from time to time after the occurrence and during the continuance of a Default, without notice to the Debtors, take all or any of the following actions: (a) transfer all or any part of such Collateral into the name of the Agent or any nominee or sub-agent for the Agent, with or without disclosing that such Collateral is subject to the lien and security interest hereunder, (b) appoint one or more sub-agents or nominees for the purpose of retaining physical possession of such Collateral, (c) notify the parties obligated on any of such Collateral to make payment to the Agent of any amounts due or to become due thereunder, (d) endorse any checks, drafts or other writings in the name of the appropriate Debtor to allow collection of such Collateral, (e) enforce collection of any of such Collateral by suit or otherwise, and surrender, release or exchange all or any part thereof, or compromise or renew for any period (whether or not longer than the original period) any obligations of any nature of any party with respect thereto, (f) take control of any proceeds of such Collateral, (g) exercise any and all rights of conversion, exchange, subscription and any other rights, privileges or options pertaining to such Collateral as if it were the absolute owner thereof (including the right to exchange at its discretion any and all of such Collateral upon the merger, consolidation, reorganization, recapitalization or other fundamental change in the corporate structure of any Portfolio Company, or upon the exercise by any Debtor or the Agent of any right, privilege or option pertaining to such Collateral, and in connection therewith, the right to deposit and deliver any and all of the Pledged Securities with any committee, depositary, transfer agent, registrar or other designated agency upon such terms and conditions it may determine), all without liability except to account for property actually received by it, but the Agent shall have no duty to any Debtor to exercise any such right, privilege or option and shall not be responsible for any failure to do so or delay in so doing, and (h) the Agent shall have the right to (i) take possession of any or all of such Collateral from the Custodian and (ii) to notify the Custodian to remit directly to the Agent, as received, all payments, however characterized, received by the Custodian with respect to such Collateral. 5. Voting Rights, Dividends, etc. (a) Notwithstanding certain provisions of Section 4 hereof, so long as the Agent has not given the notice referred to in paragraph (b) below: 8 (i) Each Debtor shall be entitled to exercise any and all voting or consensual rights and powers and stock purchase or subscription rights (but any such exercise by a Debtor of stock purchase or subscription rights may be made only from funds of such Debtor not comprising part of the Collateral) relating or pertaining to the Pledged Debt or Pledged Securities or any part thereof for any purpose; provided that such Debtor agrees that it will not exercise any such right or power in any manner prohibited by the Credit Agreement or which would have a material adverse effect on the value of the Collateral or any part thereof. (ii) The Debtors shall be entitled to receive and retain any and all lawful dividends and payments payable in respect of the Pledged Debt or Pledged Securities which are paid in cash by any issuer if such dividends are permitted by the Credit Agreement, but all dividends, payments and distributions in respect of the Pledged Debt and Pledged Securities or any part thereof made in shares of stock or other property or representing any return of capital, whether resulting from a subdivision, combination or reclassification of the Pledged Debt or Pledged Securities or any part thereof or received in exchange for the Pledged Debt or Pledged Securities or any part thereof or as a result of any merger, consolidation, acquisition or other exchange of assets to which any issuer may be a party or otherwise or as a result of any exercise of any stock purchase or subscription right, shall be and become part of the Collateral hereunder and, if received by any Debtor, shall be forthwith delivered to the Agent or the Custodian in due form for transfer (i.e., endorsed in blank or accompanied by stock or bond powers executed in blank) to be held for the purposes of this Agreement. (iii) The Agent shall execute and deliver, or cause to be executed and delivered, to the appropriate Debtor all such proxies, powers of attorney, dividend orders and other instruments as any Debtor may request for the purpose of enabling such Debtor to exercise the rights and powers which it is entitled to exercise pursuant to clause (i) above and to receive the dividends which it is authorized to retain pursuant to clause (ii) above. (b) Upon notice from the Agent during the existence of a Default, and so long as the same shall be continuing, all rights and powers which any Debtor is entitled to exercise pursuant to Section 5(a)(i) hereof, and all rights of any Debtor to receive and retain dividends and other payments pursuant to Section 5(a)(ii) hereof, shall forthwith cease, and all such rights and powers shall thereupon become vested in the Agent which shall have, during the continuance of such Default, the sole and exclusive authority to exercise such rights and powers and to receive such dividends and other payments. Any and all money and other property paid over to or received by the Agent pursuant to this paragraph (b) shall be retained by the Agent as additional Collateral hereunder and applied in accordance with the provisions hereof. 9 (c) Without limitation on Section 5(a) above, if any Debtor shall, as a result of its ownership of any Collateral, become entitled to receive or shall receive any note, stock certificate (including, without limitation, any certificate representing a stock dividend or a distribution in connection with any reclassification, increase or reduction of capital or any certificate issued in connection with any reorganization), warrant, option or rights, whether in addition to, in substitution of, as a conversion of, or in exchange for any of the Collateral, or otherwise in respect thereof, such Debtor shall accept the same as the agent of the Agent, hold the same in trust for the Agent and deliver the same forthwith to the Agent or the Custodian (with copies to the Agent) in the form received, duly indorsed by such Debtor to the Agent, if required, together with an undated transfer power and irrevocable proxy covering such certificate or other instrument duly executed in blank by such Debtor and with, if the Agent so requests, signature guaranteed, to be held by the Custodian, for the benefit of the Agent and the Banks, subject to the terms hereof and the Custody Control Agreement, as additional collateral security for the Liabilities. In addition, any sums paid upon or in respect of any Collateral upon the liquidation or dissolution of any Portfolio Company shall be paid over to the Agent or the Custodian, for the benefit of the Agent and the Banks, to be held by it hereunder and under the Custody Control Agreement as additional collateral security for the Liabilities, and in case any distribution of capital shall be made on or in respect of any Collateral or any property shall be distributed upon or with respect to any Collateral pursuant to the recapitalization or reclassification of the capital of any Portfolio Company or pursuant to the reorganization thereof, the property so distributed shall be delivered to the Agent or the Custodian, for the benefit of the Agent and the Banks, to be held by it hereunder and under the Custody Control Agreement as additional collateral security for the Liabilities. If any sums of money or property so paid or distributed in respect of any Collateral shall be received by any Debtor, such Debtor shall, until such money or property is paid or delivered to the Agent or the Custodian, hold such money or property in trust for the Agent, segregate from other funds of any Debtor, as additional collateral security for the Liabilities. 6. Collections, etc. Until such time during the existence of a Default as the Agent shall notify such Debtor of the revocation of such power and authority, each Debtor (a) may, in the ordinary course of its business, at its own expense, sell, lease or furnish under contracts of service any of the Inventory normally held by such Debtor for such purpose, use and consume, in the ordinary course of its business, any raw materials, work in process or materials normally held by such Debtor for such purpose, and use, in the ordinary course of its business (but subject to the terms of the Credit Agreement), the cash proceeds of Collateral and other money which constitutes Collateral, (b) will, at its own expense, endeavor to collect, as and when due, all amounts due under any of the Non-Tangible Collateral and Pledged Debt, including the taking of such action with respect to such collection as the Agent may reasonably request or, in the absence of such request, as such Debtor may deem advisable, and (c) may grant, in the ordinary course of business, to any party obligated on any of the Non-Tangible Collateral, any rebate, refund or allowance to which such party may be lawfully entitled, and may accept, in connection therewith, the return of Goods, the sale or lease of which shall have given rise to such Non-Tangible Collateral. The Agent, however, may, at any time that a Default exists, whether before or after any revocation of such power and authority or the maturity of any of the Liabilities, notify any parties obligated on any of the Non-Tangible Collateral to make payment to the Agent of any amounts due or to become due thereunder and enforce collection of any of the Non-Tangible Collateral by suit or otherwise and surrender, release or exchange all or any part thereof, or compromise or extend or renew for any period (whether or not longer than the original period) any indebtedness thereunder or evidenced thereby. Upon the request of the Agent during the existence of a Default, each Debtor will, at its own expense, notify any or all parties obligated on any of the Non-Tangible Collateral to make payment to the Agent of any amounts due or to become due thereunder. 10 Upon request by the Agent during the existence of a Default, each Debtor will forthwith, upon receipt, transmit and deliver to the Agent, in the form received, all cash, checks, drafts and other instruments or writings for the payment of money (properly endorsed, where required, so that such items may be collected by the Agent) which may be received by such Debtor at any time in full or partial payment or otherwise as proceeds of any of the Collateral. Except as the Agent may otherwise consent in writing, any such items which may be so received by any Debtor will not be commingled with any other of its funds or property, but will be held separate and apart from its own funds or property and upon express trust for the Agent until delivery is made to the Agent. Each Debtor will comply with the terms and conditions of any consent given by the Agent pursuant to the foregoing sentence. During the existence of a Default, all items or amounts which are delivered by any Debtor to the Agent on account of partial or full payment or otherwise as proceeds of any of the Collateral shall be deposited to the credit of a deposit account (each an "Assignee Deposit Account") of such Debtor with LaSalle (or another financial institution selected by the Agent) over which the Agent has sole dominion and control, as security for payment of the Liabilities. No Debtor shall have any right to withdraw any funds deposited in the applicable Assignee Deposit Account. The Agent may, from time to time, in its discretion, and shall upon request of the applicable Debtor made not more than once in any week, apply all or any of the then balance, representing collected funds, in the Assignee Deposit Account toward payment of the Liabilities, whether or not then due, in such order of application as the Agent may determine, and the Agent may, from time to time, in its discretion, release all or any of such balance to the applicable Debtor. The Agent (or any designee of the Agent) is authorized to endorse, in the name of the applicable Debtor, any item, howsoever received by the Agent, representing any payment on or other proceeds of any of the Collateral. 7. Certificates, Schedules and Reports. Each Debtor will from time to time, as the Agent may request, deliver to the Agent such schedules, certificates and reports respecting all or any of the Collateral at the time subject to the security interest hereunder, and the items or amounts received by such Debtor in full or partial payment of any of the Collateral, as the Agent may reasonably request. Any such schedule, certificate or report shall be executed by a duly authorized officer of such Debtor and shall be in such form and detail as the Agent may specify. Each Debtor shall immediately notify the Agent of the occurrence of any event causing any loss or depreciation in the value of its Inventory or other Goods which is material to the Company and its Subsidiaries taken as a whole, and such notice shall specify the amount of such loss or depreciation. 8. Agreements of the Debtors. Each Debtor will: 11 (i) upon request of the Agent, execute such financing statements and other documents (and pay the cost of filing or recording the same in all public offices reasonably deemed appropriate by the Agent) and do such other acts and things (including, delivery to the Agent, Custodian, or Securities Intermediary, as appropriate, of any Instruments, Securities or other Investment Property which constitute Collateral), all as the Agent may from time to time reasonably request, to establish and maintain a valid security interest in the Collateral (free of all other liens, claims and rights of third parties whatsoever, other than Permitted Liens) to secure the payment of the Liabilities; (ii) so long as any of the Liabilities shall be outstanding or any commitment shall exist on the part of the Agent or any Lender Party with respect to the creation of any Liabilities, not, without the express prior written consent of the Agent, sell, assign, exchange, pledge or otherwise transfer, encumber, or grant any option, warrant or other right to purchase such Collateral which is pledged hereunder, or otherwise diminish or impair any of its rights in, to or under any such Collateral, except to the extent permitted by the Credit Agreement; (iii) execute and deliver to the Agent such stock powers, endorsements and similar documents relating to the Collateral (including, but not limited to, any custody agreement or account control agreement), satisfactory in form and substance to the Agent, as the Agent may reasonably request; (iv) not, without the express written consent of the Agent, amend, restate, modify or terminate the Custodian Control Agreement or any other agreement relating to the administration of the Collateral; (v) keep all its Inventory at, and will not maintain any place of business at any location other than, its address(es) shown on Schedules II and III hereto or at such other addresses of which such Debtor shall have given the Agent not less than ten (10) days' prior written notice; (vi) keep its records concerning the Non-Tangible Collateral in such a manner as will enable the Agent or its designees to determine at any time the status of the Non-Tangible Collateral; (vii) furnish the Agent such information concerning such Debtor, the Collateral, the Account Debtors, the Custodian and the Securities Intermediary as the Agent may from time to time reasonably request; (viii) permit the Agent and its designees, from time to time, on reasonable notice and at reasonable times and intervals during normal business hours (or at any time without notice during the existence of a Default) to inspect such Debtor's Inventory and other Goods, and to inspect, audit and make copies of and extracts from all records and other papers in the possession of such Debtor pertaining to the Collateral and the Account Debtors, and will, upon request of the Agent during the existence of a Default, deliver to the Agent all of such records and papers; (ix) upon request of the Agent, stamp on its records concerning the Collateral, and add on all Chattel Paper constituting a portion of the Collateral, a notation, in form satisfactory to the Agent, of the security interest of the Agent hereunder; 12 (x) not, except for the sale or lease of Inventory in the ordinary course of its business and sales of Equipment which is no longer useful in its business or which is being replaced by similar Equipment, sell, lease, assign or create or permit to exist any Lien on any Collateral other than Permitted Liens; (xi) without limiting the provisions of Section 10.3 of the Credit Agreement, at all times keep all of its Inventory and other Goods insured under policies maintained with reputable, financially sound insurance companies against loss, damage, theft and other risks to such extent as is customarily maintained by companies similarly situated, and cause all such policies to provide that loss thereunder shall be payable to the Agent as its interest may appear (it being understood that (a) so long as no Default shall be existing, the Agent shall deliver any proceeds of such insurance which may be received by it to such Debtor and (b) whenever a Default shall be existing, the Agent may apply any proceeds of such insurance which may be received by it toward payment of the Liabilities, whether or not due, in such order of application as the Agent may determine), and such policies or certificates thereof shall, if the Agent so requests, be deposited with or furnished to the Agent; (xii) take such actions as are reasonably necessary to keep its Inventory in good repair and condition; (xiii) take such actions as are reasonably necessary to keep its Equipment in good repair and condition and in good working order, ordinary wear and tear excepted; (xiv) promptly pay when due all license fees, registration fees, taxes, assessments and other charges which may be levied upon or assessed against the ownership, operation, possession, maintenance or use of its Equipment and other Goods; (xv) upon request of the Agent, (a) cause to be noted on the applicable certificate, in the event any of its Equipment is covered by a certificate of title, the security interest of the Agent in the Equipment covered thereby, and (b) deliver all such certificates to the Agent or its designees; (xvi) take all steps reasonably necessary to protect, preserve and maintain all of its rights in the Collateral; (xvii) except as listed on Schedule VI, keep all of the tangible Collateral in the United States; (xviii) upon the consummation of each Portfolio Investment provide the Agent with an updated Schedule I reflecting such Portfolio Investment and take all such further action as the Agent may reasonably request to perfect its security interest in such Portfolio Investment; and 13 (xix) reimburse the Agent for all expenses, including reasonable attorney's fees and charges (including time charges of attorneys who are employees of the Agent), incurred by the Agent in seeking to collect or enforce any rights in respect of such Debtor's Collateral. Any expenses incurred in protecting, preserving or maintaining any Collateral shall be borne by the applicable Debtor. Whenever a Default shall be existing, the Agent shall have the right to bring suit to enforce any or all of the Intellectual Property or licenses thereunder, in which event the applicable Debtor shall at the request of the Agent do any and all lawful acts and execute any and all proper documents required by the Agent in aid of such enforcement and such Debtor shall promptly, upon demand, reimburse and indemnify the Agent for all costs and expenses incurred by the Agent in the exercise of its rights under this Section 8. Notwithstanding the foregoing, the Agent shall have no obligation or liability regarding the Collateral or any part thereof by reason of, or arising out of, this Agreement. 9. Default and Remedies. Whenever a Default shall exist, the Agent may exercise from time to time any rights and remedies available to it under the UCC. Without limiting the foregoing, whenever a Default shall exist the Agent (a) may, to the fullest extent permitted by applicable law, without notice, advertisement, hearing or process of law of any kind, (i) sell any or all of the Collateral, free of all rights and claims of any Debtor therein and thereto, at any public or private sale or brokers' board and (ii) bid for and purchase any or all of the Collateral at any such public sale and (b) shall have the right, for and in the name, place and stead of any Debtor, to execute endorsements, assignments, stock powers and other instruments of conveyance or transfer with respect to all or any of the Collateral. Each Debtor hereby expressly waives, to the fullest extent permitted by applicable law, any and all notices, advertisements, hearings or process of law in connection with the exercise by the Agent of any of its rights and remedies during the continuance of a Default. Any notification of intended disposition of any of the Collateral shall be deemed reasonably and properly given if given at least ten days before such disposition. The Agent or any Bank shall have the right upon any such public sale or sales, and, to the extent permitted by law, upon any such private sale or sales, to purchase the whole or any part of the Collateral so sold, free of any right or equity of redemption in any Debtor, which right or equity is hereby waived or released. The Agent shall apply any proceeds from time to time held by it and the net proceeds of any such collection, recovery, receipt, appropriation, realization or sale, after deducting all reasonable costs and expenses of every kind incurred in respect thereof or incidental to the care of safekeeping of any of the Collateral or in any way relating to the Collateral or the rights of the Agent and the Banks hereunder, including, without limitation, reasonable attorneys' fees and disbursements of counsel thereto, to the payment in whole or in part of the Liabilities. The Debtors shall remain liable for any deficiency if the proceeds of any sale or other disposition of Collateral are insufficient to pay the Liabilities and the fees and disbursements of any attorneys employed by the Agent or any Bank to collect any such deficiency. 14 Each Debtor recognizes that the Agent may be unable to effect a public sale of any or all the Pledged Securities and/or Pledged Debt, by reason of certain prohibitions contained in the federal and state securities laws or otherwise, and may be compelled to resort to one or more private sales thereof to a restricted group of purchasers which will be obliged to agree, among other things, to acquire such Pledged Securities and/or Pledged Debt for their own account for investment and not with a view to the distribution or resale thereof. Each Debtor acknowledges and agrees that any such private sale may result in prices and other terms less favorable than if such sale were a public sale shall be deemed to have been made in a commercially reasonable manner. The Agent shall be under no obligation to delay a sale of any of the Pledged Securities and/or Pledged Debt for the period of time necessary to permit the issuer thereof to register such securities for public sale under federal or state securities laws, even if such issuer would agree to do so. The Agent is hereby authorized to comply with any limitation or restriction in connection with any sale of Collateral as it may be advised by counsel is necessary in order to (a) avoid any violation of applicable law (including, without limitation, compliance with such procedures as may restrict the number of prospective bidders or purchasers and/or further restrict such prospective bidders or purchasers to persons or entities who will represent and agree that they are purchasing for their own account for investment and not with a view to the distribution or resale of such Collateral) or (b) obtain any required approval of the sale or of the purchase by any governmental regulatory authority or official, and each Debtor agrees that such compliance shall not result in such sale being considered or deemed not to have been made in a commercially reasonable manner and that the Agent shall not be liable or accountable to any Debtor for any discount allowed by reason of the fact that such Collateral is sold in compliance with any such limitation or restriction. Without limitation on the foregoing, the Agent may exercise from time to time any other right or remedy available to it under applicable law. Each Debtor agrees, in case of Default, (i) to assemble, at its expense, all its Inventory and other Goods (other than Fixtures) at a convenient place or places acceptable to the Agent, and (ii) at the Agent's request, to execute all such documents and do all such other things which may be necessary or desirable in order to enable the Agent or its nominee to be registered as owner of the Intellectual Property with any competent registration authority. Any proceeds of any disposition by the Agent of any of the Collateral may be applied by the Agent to payment of expenses in connection with the Collateral, including reasonable attorney's fees and charges (including time charges of attorneys who are employees of the Agent), and any balance of such proceeds may be applied by the Agent toward the payment of such of the Liabilities, and in such order of application, as the Agent may from time to time elect. 10. Irrevocable Authorization and Instruction to Portfolio Companies. Each Debtor hereby authorizes and instructs each issuer and obligor under any Pledged Debt to comply with any instruction received by it from the Agent in writing that (a) states that Default has occurred and (b) is otherwise in accordance with the terms of this Agreement, without any other or further instructions from any Debtor, and each Debtor agrees that each issuer and obligor under any Pledged Debt shall be fully protected in so complying. 15 11. General. The Agent shall be deemed to have exercised reasonable care in the custody and preservation of any of the Collateral in its possession if it takes such action for that purpose as any applicable Debtor requests in writing, but failure of the Agent to comply with any such request shall not of itself be deemed a failure to exercise reasonable care, and no failure of the Agent to preserve or protect any right with respect to such Collateral against prior parties, or to do any act with respect to the preservation of such Collateral not so requested by any Debtor, shall be deemed of itself a failure to exercise reasonable care in the custody or preservation of such Collateral. The Agent's sole duty with respect to the custody, safekeeping and physical preservation of the Collateral in its possession, under Section 9-207 of the UCC or otherwise, shall be to deal with it in the same manner as the Agent deals with similar securities and property for its own account. Neither the Agent, any Bank nor any of their respective directors, officers, employees or agents shall be liable for failure to demand, collect or realize upon any of the Collateral or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Collateral upon the request of any Debtor or otherwise. Any notice from the Agent to any Debtor, if mailed, shall be deemed given five days after the date mailed, postage prepaid, addressed to such Debtor either at such Debtor's address shown on Schedule II hereto or at such other address as such Debtor shall have specified in writing to the Agent as its address for notices hereunder. Each of the Debtors agrees to pay all expenses, including reasonable attorney's fees and charges (including time charges of attorneys who are employees of the Agent or any Lender Party) paid or incurred by the Agent or any Lender Party in endeavoring to collect the Liabilities of such Debtor, or any part thereof, and in enforcing this Agreement against such Debtor, and such obligations will themselves be Liabilities. No delay on the part of the Agent in the exercise of any right or remedy shall operate as a waiver thereof, and no single or partial exercise by the Agent of any right or remedy shall preclude other or further exercise thereof or the exercise of any other right or remedy. This Agreement shall remain in full force and effect until all Liabilities have been paid in full and all Commitments have terminated. If at any time all or any part of any payment theretofore applied by the Agent or any Lender Party to any of the Liabilities is or must be rescinded or returned by the Agent or such Lender Party for any reason whatsoever (including the insolvency, bankruptcy or reorganization of any Debtor), such Liabilities shall, for the purposes of this Agreement, to the extent that such payment is or must be rescinded or returned, be deemed to have continued in existence, notwithstanding such application by the Agent or such Lender Party, and this Agreement shall continue to be effective or be reinstated, as the case may be, as to such Liabilities, all as though such application by the Agent or such Lender Party had not been made. This Agreement shall be construed in accordance with and governed by the laws of the State of Illinois applicable to contracts made and to be performed entirely within such State, subject, however, to the applicability of the UCC of any jurisdiction in which any Goods of any Debtor may be located at any given time. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. The rights and privileges of the Agent hereunder shall inure to the benefit of its successors and assigns. 16 This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts, and each such counterpart shall be deemed to be an original, but all such counterparts shall together constitute one and the same Agreement. At any time after the date of this Agreement, one or more additional Persons may become parties hereto by executing and delivering to the Agent a counterpart of this Agreement together with supplements to the Schedules hereto setting forth all relevant information with respect to such party as of the date of such delivery. Immediately upon such execution and delivery (and without any further action), each such additional Person will become a party to, and will be bound by all the terms of, this Agreement. ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, SHALL BE BROUGHT AND MAINTAINED EXCLUSIVELY IN THE COURTS OF THE STATE OF ILLINOIS OR IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS; PROVIDED THAT ANY SUIT SEEKING ENFORCEMENT AGAINST ANY COLLATERAL OR OTHER PROPERTY MAY BE BROUGHT, AT THE AGENT'S OPTION, IN THE COURTS OF ANY JURISDICTION WHERE SUCH COLLATERAL OR OTHER PROPERTY MAY BE FOUND. EACH DEBTOR HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE COURTS OF THE STATE OF ILLINOIS AND OF THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS FOR THE PURPOSE OF ANY SUCH LITIGATION AS SET FORTH ABOVE. EACH DEBTOR FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS BY REGISTERED MAIL, POSTAGE PREPAID, TO THE ADDRESS SET FORTH ON SCHEDULE II HERETO (OR SUCH OTHER ADDRESS AS IT SHALL HAVE SPECIFIED IN WRITING TO THE AGENT AS ITS ADDRESS FOR NOTICES HEREUNDER) OR BY PERSONAL SERVICE WITHIN OR WITHOUT THE STATE OF ILLINOIS. EACH DEBTOR HEREBY EXPRESSLY AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN ANY SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. EACH DEBTOR, THE AGENT AND (BY ACCEPTING THE BENEFITS HEREOF) EACH LENDER PARTY HEREBY WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER THIS AGREEMENT, ANY NOTE, ANY OTHER LOAN DOCUMENT AND ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR THEREWITH OR ARISING FROM ANY FINANCING RELATIONSHIP EXISTING IN CONNECTION WITH ANY OF THE FOREGOING, AND AGREES THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY. [signature page to follow] 17 IN WITNESS WHEREOF, this Agreement has been duly executed as of the day and year first above written. DEBTORS: AMERICAN CAPITAL STRATEGIES, LTD. By: ------------------------------- Title: ---------------------------- ACS CAPITAL INVESTMENTS CORPORATION By: ------------------------------- Title: ---------------------------- AMERICAN CAPITAL STRATEGIES LABOR RESEARCH, INC. By: ------------------------------- Title: ---------------------------- ACS GENPAR, INC. By: ------------------------------- Title: ---------------------------- AGENT: LASALLE NATIONAL BANK, as Agent By: ------------------------------- Title: ---------------------------- 18 Signature page for the Security and Pledge Agreement dated as of October __, 1998 among American Capital Strategies, Ltd., various other parties and LaSalle National Bank as Agent for the Lender Parties referred to herein. The undersigned is executing a counterpart hereof for purposes of becoming a party hereto (and attached to this signature page are supplements to the Schedules to the Security and Pledge Agreement setting forth all relevant information with respect to the undersigned): [ADDITIONAL DEBTOR] By: ------------------------------- Title: ---------------------------- 19 SCHEDULE I TO SECURITY AGREEMENT I. Pledged Securities - - -------------------------- ------------------------------------ ------------------------- ---------------- ------------- Portfolio Company Owner (holder) of Record Description No. Shares Cert. No. (Issuer) of Security - - -------------------------- ------------------------------------ ------------------------- ---------------- ------------- Four-S Baking Company American Capital Strategies, Ltd. Common Stock 25,748 53 - - -------------------------- ------------------------------------ ------------------------- ---------------- ------------- Four-S Baking Company American Capital Strategies, Ltd. Warrant 15,389 W-1 - - -------------------------- ------------------------------------ ------------------------- ---------------- ------------- Four-S Baking Company American Capital Strategies, Ltd. Class A Convertible 25,681 PA-1 Preferred Stock - - -------------------------- ------------------------------------ ------------------------- ---------------- ------------- The Westwind Group American Capital Strategies, Ltd. Warrant Holdings, Inc. - - -------------------------- ------------------------------------ ------------------------- ---------------- ------------- BIW Connector Systems, American Capital Strategies, Ltd. Primary Warrant 633.33 PW-1 L.L.C. - - -------------------------- ------------------------------------ ------------------------- ---------------- ------------- BIW Connector Systems, American Capital Strategies, Ltd. Primary Warrant 6.56 PW-2 L.L.C. - - -------------------------- ------------------------------------ ------------------------- ---------------- ------------- BIW Connector Systems, American Capital Strategies, Ltd. Conditional Warrant CW-1 L.L.C. - - -------------------------- ------------------------------------ ------------------------- ---------------- ------------- Chance Coach, Inc. American Capital Strategies, Ltd. Class A Convertible 200,500 PA1 Preferred Stock - - -------------------------- ------------------------------------ ------------------------- ---------------- ------------- Chance Coach, Inc. American Capital Strategies, Ltd. Series B Common Stock 204,643 CB1 - - -------------------------- ------------------------------------ ------------------------- ---------------- ------------- Chance Coach, Inc. American Capital Strategies, Ltd. Warrant 431,500 W-2 - - -------------------------- ------------------------------------ ------------------------- ---------------- ------------- Specialty Transportation American Capital Strategies, Ltd. Primary Warrant 500,000 PW-1 Services, Inc. - - -------------------------- ------------------------------------ ------------------------- ---------------- ------------- Specialty Transportation American Capital Strategies, Ltd. Conditional Warrant CW-1 Services, Inc. - - -------------------------- ------------------------------------ ------------------------- ---------------- ------------- Specialty Transportation American Capital Strategies, Ltd. Common Stock 500,000 3 Services, Inc. - - -------------------------- ------------------------------------ ------------------------- ---------------- ------------- Specialty Transportation PNC Bank Common Stock 4,500,000 4 Services, Inc. - - -------------------------- ------------------------------------ ------------------------- ---------------- ------------- Specialty Transportation Aasch Transportation Services, Inc. Voting Trust Certificate 4,500,000 VT-1 Services, Inc. - - -------------------------- ------------------------------------ ------------------------- ---------------- ------------- 20 - - -------------------------- ------------------------------------ ------------------------- ---------------- ------------- Portfolio Company Owner (holder) of Record Description No. Shares Cert. No. (Issuer) of Security - - -------------------------- ------------------------------------ ------------------------- ---------------- ------------- The New Piper Aircraft, American Capital Strategies, Ltd. Warrant 34,000 W-1 Inc. - - -------------------------- ------------------------------------ ------------------------- ---------------- ------------- The L.A. Studios, Inc. American Capital Strategies, Ltd. Warrant 34,821 W-1 - - -------------------------- ------------------------------------ ------------------------- ---------------- ------------- Cycle Gear, Inc. American Capital Strategies, Ltd. Primary Warrant 11,081 W-1 - - -------------------------- ------------------------------------ ------------------------- ---------------- ------------- Cycle Gear, Inc. American Capital Strategies, Ltd. Disbursement Warrant 20,315.3 DW-1 - - -------------------------- ------------------------------------ ------------------------- ---------------- ------------- Confluence Holdings, American Capital Strategies, Ltd. Primary Warrant 11,089 PW-1 Corp. - - -------------------------- ------------------------------------ ------------------------- ---------------- ------------- Confluence Holdings, American Capital Strategies, Ltd. Conditional Warrant CW-1 Corp. - - -------------------------- ------------------------------------ ------------------------- ---------------- ------------- JAG Acquisitions, Inc. American Capital Strategies, Ltd. Warrant 3,000 W-1 - - -------------------------- ------------------------------------ ------------------------- ---------------- ------------- JAG Acquisitions, Inc. Eugene F. Stalter Common Stock 1,000 C-1 - - -------------------------- ------------------------------------ ------------------------- ---------------- ------------- Biddeford Textile ACS Capital Investments Corporation Class B Common Stock 28,000 B-10 Corporation - - -------------------------- ------------------------------------ ------------------------- ---------------- ------------- Biddeford Textile ACS Capital Investments Corporation Class B Common Stock 90,000 B-1 Corporation - - -------------------------- ------------------------------------ ------------------------- ---------------- ------------- Indiana Steel & Wire ACS Capital Investments Corporation Common Stock 6,785.7075 18 Corporation - - -------------------------- ------------------------------------ ------------------------- ---------------- ------------- Indiana Steel & Wire ACS Capital Investments Corporation Common Stock 761.572 19 Corporation - - -------------------------- ------------------------------------ ------------------------- ---------------- ------------- Employee Acquisition ACS Capital Investments Corporation Common Stock 270 8 Corporation-14 - - -------------------------- ------------------------------------ ------------------------- ---------------- ------------- Employee Acquisition ACS Capital Investments Corporation Common Stock 26,730 21 Corporation-14 - - -------------------------- ------------------------------------ ------------------------- ---------------- ------------- Good Stuff Food Company ACS Capital Investments Corporation Common Stock 6,335 43 - - -------------------------- ------------------------------------ ------------------------- ---------------- ------------- Martino's Bakery, Inc. ACS Capital Investments Corporation Common Stock 50,000 22 - - -------------------------- ------------------------------------ ------------------------- ---------------- ------------- Mobile Tool ACS Capital Investments Corporation Class B Common Stock 5,000 B004 International, Inc. - - -------------------------- ------------------------------------ ------------------------- ---------------- ------------- Mobile Tool ACS Capital Investments Corporation Class B Common Stock 1,000 B034 International, Inc. - - -------------------------- ------------------------------------ ------------------------- ---------------- ------------- Mobile Tool ACS Capital Investments Corporation Class B Common Stock 1,133 B035 International, Inc. - - -------------------------- ------------------------------------ ------------------------- ---------------- ------------- Mobile Tool ACS Capital Investments Corporation Class B Common Stock 500 B037 International, Inc. - - -------------------------- ------------------------------------ ------------------------- ---------------- -------------
21 II. Pledged Debt - - -------------------------- ------------------ ---------------------- -------------- --------------- -------------------- Portfolio Company Owner (holder) Description of Debt Date of Issue Maturity Date Original Principal (Issuer) of Record Amount ($) - - -------------------------- ------------------ ---------------------- -------------- --------------- -------------------- - - -------------------------- ------------------ ---------------------- -------------- --------------- -------------------- Four-S Baking Company American Capital Senior Subordinated 10/14/97 10/14/02 1,918,750 Strategies, Ltd. Note - - -------------------------- ------------------ ---------------------- -------------- --------------- -------------------- The Westwind Group, Inc. American Capital Restated and Amended 12/17/97 09/30/04 3,553,375.50 Strategies, Ltd. Senior Subordinated Note-I - - -------------------------- ------------------ ---------------------- -------------- --------------- -------------------- BIW Connector Systems, American Capital Senior Subordinated 06/09/98 12/31/03 250,000 L.L.C. Strategies, Ltd. Note - - -------------------------- ------------------ ---------------------- -------------- --------------- -------------------- BIW Connector Systems, American Capital Senior Note 12/22/97 12/31/03 3,890,000 L.L.C. Strategies, Ltd. - - -------------------------- ------------------ ---------------------- -------------- --------------- -------------------- BIW Connector Systems, American Capital Senior Subordinated 12/22/97 12/31/03 7,000,000 L.L.C. Strategies, Ltd. Note - - -------------------------- ------------------ ---------------------- -------------- --------------- -------------------- Chance Coach, Inc. American Capital Senior Term Note 05/15/97 04/01/06 1,500,000 Strategies, Ltd. - - -------------------------- ------------------ ---------------------- -------------- --------------- -------------------- Chance Coach, Inc. American Capital Senior Subordinated 05/15/97 04/01/07 12,000,000 Strategies, Ltd. Note - - -------------------------- ------------------ ---------------------- -------------- --------------- -------------------- Specialty Transportation American Capital Senior Subordinated 01/30/98 02/01/06 5,500,000 Services, Inc. Strategies, Ltd. Note - - -------------------------- ------------------ ---------------------- -------------- --------------- -------------------- Speciality American Capital Junior Subordinated 01/30/98 02/01/06 2,500,000 Transportation Services, Strategies, Ltd. Note Inc. - - -------------------------- ------------------ ---------------------- -------------- --------------- -------------------- The New Piper Aircraft, American Capital Subordinated Note 05/27/98 03/31/08 20,000,000 Inc. Strategies, Ltd. No. 1 - - -------------------------- ------------------ ---------------------- -------------- --------------- -------------------- The L.A. Studios, Inc. American Capital Secured Note 04/03/98 05/01/05 3,250,000 Strategies, Ltd. - - -------------------------- ------------------ ---------------------- -------------- --------------- -------------------- ELX Holdings, L.L.C. American Capital 14% Senior 07/31/98 12/31/06 7,500,000 Strategies, Ltd. Subordinated Note - - -------------------------- ------------------ ---------------------- -------------- --------------- -------------------- Cycle Gear, Inc. American Capital Senior Secured Note 09/28/98 09/30/05 750,000 Strategies, Ltd. - - -------------------------- ------------------ ---------------------- -------------- --------------- -------------------- Cycle Gear, Inc. American Capital Junior Secured Note 09/28/98 09/30/06 5,250,000 Strategies, Ltd. - - -------------------------- ------------------ ---------------------- -------------- --------------- -------------------- 22 - - -------------------------- ------------------ ---------------------- -------------- --------------- -------------------- Portfolio Company Owner (holder) Description of Debt Date of Issue Maturity Date Original Principal (Issuer) of Record Amount ($) - - -------------------------- ------------------ ---------------------- -------------- --------------- -------------------- - - -------------------------- ------------------ ---------------------- -------------- --------------- -------------------- Confluence Holdings, American Capital Revolving Note No. 09/30/98 10/01/99 6,000,000 Corp. Strategies, Ltd. RN-2 - - -------------------------- ------------------ ---------------------- -------------- --------------- -------------------- Confluence Holdings, American Capital Senior Secured Note 09/30/98 04/01/05 6,000,000 Corp. Strategies, Ltd. SSN-2 - - -------------------------- ------------------ ---------------------- -------------- --------------- -------------------- Confluence Holdings, American Capital Junior Secured Note 09/30/98 10/01/05 6,000,000 Corp. Strategies, Ltd. No. JSN-2 - - -------------------------- ------------------ ---------------------- -------------- --------------- -------------------- JAG Acquisition, Inc. American Capital Working Capital Note 01/12/98 07/11/98 500,000 Strategies, Ltd. No. WCN-1 - - -------------------------- ------------------ ---------------------- -------------- --------------- -------------------- JAG Acquisition, Inc. American Capital Senior Term Note No. 01/12/98 01/01/06 700,000 Strategies, Ltd. STN-1 - - -------------------------- ------------------ ---------------------- -------------- --------------- -------------------- JAG Acquisition, Inc. American Capital Senior Subordinated 01/12/98 01/01/07 2,800,000 Strategies, Ltd. Note No. SSN-1 - - -------------------------- ------------------ ---------------------- -------------- --------------- --------------------
23 III. Subsidiary Stock - - -------------------------- ------------------- ------------------ --------------- ----------------- ---------------- Subsidiary Owner of Record No. Shares % of All Class of Shares Certificate Shares Number - - -------------------------- ------------------- ------------------ --------------- ----------------- ---------------- - - -------------------------- ------------------- ------------------ --------------- ----------------- ---------------- ACS Capital Investments American Capital 100 100 Common 1 Corporation Strategies, Ltd. - - -------------------------- ------------------- ------------------ --------------- ----------------- ---------------- - - -------------------------- ------------------- ------------------ --------------- ----------------- ---------------- American Capital American Capital 85 100 Common 1 Strategies Labor Strategies, Ltd. Research, Inc. - - -------------------------- ------------------- ------------------ --------------- ----------------- ---------------- - - -------------------------- ------------------- ------------------ --------------- ----------------- ---------------- ACS Genpar, Inc. ACS Capital 1,000 1,000 Common 1 Investments Corporation - - -------------------------- ------------------- ------------------ --------------- ----------------- ----------------
24 SCHEDULE II TO SECURITY AGREEMENT CHIEF EXECUTIVE OFFICES 1. 2. 3. 4. SCHEDULE III TO SECURITY AGREEMENT ADDRESSES SCHEDULE IV TO SECURITY AGREEMENT TRADE NAMES, PRIOR LEGAL NAMES, ETC. SCHEDULE V TO SECURITY AGREEMENT - - ------------------------------------------------------------------------------- PATENTS - - ------------------------------------------------------------------------------- - - ----------------- ----------------------- ---------------- -- ----------------- PATENT PATENT/SERIAL NO. COUNTRY CO. NAME HELD IN ISSUE DATE - - ----------------- ------------------ ---------- -------------------- ---------- - - ----------------- ------------------ ---------- -------------------- ---------- - - ----------------- ------------------ ---------- -------------------- ---------- - - ------------------------------------------------------------------------------- TRADEMARKS - - -------------------------------------------------------------------------------- - - ---------------------------------------------- --- ---------------- -------- --- TRADEMARK NAME REGISTRATION/SERIAL NO. COUNTRY CO. NAME HELD IN ISSUE DATE - - ----------------- ------------------ ---------- -------------------- ---------- - - ----------------- ------------------ ---------- -------------------- ---------- - - ----------------- ------------------ ---------- -------------------- ---------- - - ------------------------------------------------------------------------------- COPYRIGHTS - - ------------------------------------------------------------------------------- - - --------------------------- --------------- ------------------------- --------- COPYRIGHT NAME COUNTRY CO. NAME HELD IN ISSUE DATE - - --------------------------- --------------- ------------------------- --------- - - -------------------------------------------------------------------------------- SCHEDULE VI TO SECURITY AGREEMENT COLLATERAL NOT LOCATED IN THE UNITED STATES EX-10.4 5 CUSTODY CONTROL AGREEMENT Exhibit 10.4 CUSTODY CONTROL AGREEMENT THIS CUSTODY CONTROL AGREEMENT (the "Agreement") dated as of October 30, 1998, is entered into by and between AMERICAN CAPITAL STRATEGIES, LTD., a Delaware corporation (the "Company") and LASALLE NATIONAL BANK, a national banking association ("Agent"), as custodian, but subject to its rights as agent for certain Banks pursuant to the Credit Agreement and the Security Agreement (defined below). PRELIMINARY STATEMENT WHEREAS, the Company has requested that the Agent act as custodian for the purpose of receiving and holding certain property from time to time as custodian and as agent for the benefit of the Banks pursuant to the Credit Agreement and the Security Agreement; WHEREAS, the Company, the Agent and certain lenders ("Banks") have entered into a certain Credit Agreement dated as of October 30, 1998 (as amended, amended and restated, supplemented, extended or otherwise modified from time to time, the "Credit Agreement"); and WHEREAS, subject to the terms and conditions of the Credit Agreement, the Banks thereunder have agreed to make a credit facility available to the Company on the condition that, among other things, the Company enter into a certain Security and Pledge Agreement dated as of October 30, 1998 (as amended, amended and restated, supplemented, extended or otherwise modified from time to time, the "Security Agreement") and grant the Agent for the benefit of the Banks a perfected, first-priority interest in all of its property (including all Property hereunder). NOW, THEREFORE, the parties agree as follows: ARTICLE 1 DEFINITIONS SECTION 1.1 Definitions. As used herein, the following terms shall have the meanings assigned thereto below: "Authorized Employee" means any employee of the Company listed on Schedule I hereto and any other Company employee hereafter authorized in writing by an existing Authorized Employee to act as an Authorized Employee of Company hereunder; provided, that any Authorized Employee may send the Agent a notice informing them of any other Authorized Employee who ceases to be an Authorized Employee. "Property" means securities, notes, loan documents, loan files and other property reasonably acceptable to Agent. "Termination Date" means the date upon which this Agreement is terminated pursuant to Sections 3.04 or 3.05 hereto. Capitalized terms not defined herein shall have the meaning given to them in the Credit Agreement. ARTICLE 2 CUSTODIAN SECTION 2.1 Designation and Appointment of Agent as Custodian. The Agent is hereby designated as, and hereby agrees to perform the duties and obligations of, custodian under and as set forth in this Agreement, but subject to its duties as perfection agent and bailee, as agent for the benefit of the Banks under the Credit Agreement and the Security Agreement. The Agent acknowledges and agrees that it is acting and will act with respect to the Property for the benefit of the Banks and is not, and shall not at any time in the future be, subject with respect to the Property, in any manner or to any extent, to the direction or control of the Company, except as expressly permitted by this Agreement. The Agent agrees to act in accordance with this Agreement, subject to its rights and duties under the Credit Agreement and the Security Agreement. The Agent shall serve as custodian from the date hereof until the Termination Date. SECTION 2.2 Duties of Custodian. At all times that the Agent shall be the custodian, it shall duly discharge its duties of receiving and holding the Property in accordance with this Agreement. As to any matters not expressly provided for by this Agreement, the Agent shall be required to act or to refrain from acting (and shall be fully protected in so acting or refraining from acting) upon the written instructions of the Company (executed by an Authorized Employee); provided, that the Agent shall not be required to take any action which is contrary to this Agreement, the Credit Agreement or applicable law, or which is not reasonably incidental to its duties and responsibilities under this Agreement or the Credit Agreement or is of a type unrelated to its business. 2 SECTION 2.3 Property. (a) From time to time the Company may deliver Property to the Agent. Each delivery of Property shall be contained in a redwell file folder labeled by transaction and tabbed by individual document and accompanied by a list in the form of Schedule II hereto itemizing each document (and the corresponding tab number) included in such Property and indicating whether it is an original or copy. All supplemental deliveries of Property relating to transactions for which Property was previously delivered (each, an "Existing Transaction") shall be delivered with an addendum in the same format referring to the Schedule II delivered for such Existing Transaction. Each delivery of Property shall include a note power executed in blank (if such Property includes senior or subordinated debt), a stock power executed in blank (if such Property includes capital stock) and assignments of security documents (if such transaction is secured, and in recordable form if such security documents include a mortgage or deed of trust) and such notices and consents as may be required by the Agent, all consistent with the forms delivered on the Closing Date. Promptly after receipt of each delivery of Property, the Agent shall confirm receipt of such Property in the manner set forth on Schedule II. The acknowledgment by the Agent of Property delivered hereunder shall be based solely on a confirmation of receipt of the documents listed on Schedule II. The Agent shall have no obligation to conduct a review of the adequacy or sufficiency of any Property and makes no representation or warranty as to the existence, validity, legality, enforceability, recordability, genuineness, authorization, collectability, insurability, effectiveness or suitability of any Property for any purpose. All Property shall be delivered to the Agent at the address set forth in Section 3.03. At all times, the Company shall remain the owner of the Property, provided, that at all times until the Credit Agreement is terminated and all obligations thereunder have been paid in full, all property shall be held by the Agent hereunder pursuant to the security interest in favor of the Agent for the benefit of the Banks. All such Property shall be held by the Agent pursuant to the terms of this Agreement, the Credit Agreement and the Security Agreement. Such Property shall be placed by the Agent for safekeeping in a fire resistant facility located on the Agent's premises and shall be held in a manner which allows such Property to be released within two business days following the Agent's receipt of notice pursuant to the terms set forth in Section 2.04 below. (b) Property held by the Agent shall at all times be individually segregated from the securities and other property of all persons other than the Company and marked in an appropriate manner (including by attaching tags or labels to the Property or by placing the Property in labeled containers that contain only the Company's Property) to identify clearly the Company's ownership, both upon physical inspection thereof and upon examination of the books and records of the Agent. SECTION 2.4 Removal of Property. (a) Subject to clause (c) below, the Company shall have the right, upon reasonable advance written notice (by facsimile or otherwise) signed by an Authorized Employee, to remove all or any portion of the Property from the Agent; provided that the Company executes and delivers to the Agent a Release Request in the form of Schedule III hereto. (b) Subject to clause (c) below, other than as described in the this Section 2.04 and as otherwise required by law, the Agent shall have no authority to release any Property to any other Person. (c) Notwithstanding anything to the contrary in clauses (a) or (b) above or elsewhere in this Agreement, (i) removal of Property shall be permitted only if permitted by the terms of the Credit Agreement (and if after giving effect to such release no Unmatured Event of Default or Event of Default would exist or result therefrom) and (ii) upon the occurrence and during the continuance of an Unmatured Event of Default or Event of Default, the Agent shall have all rights and remedies under the Credit Agreement and the Security Agreement, including, but not limited to, the right to deny release of and access to the Property. 3 SECTION 2.5 Liens or Encumbrances. The Company hereby acknowledges and agrees that the Agent and the Banks have been granted a perfected first-priority security interest in and to the Property under the Security Agreement and that the rights of the Agent to the Property in connection therewith overrides any custodial duties hereunder. Except pursuant to the Credit Agreement and the Liens granted to the Agent for the benefit of the Banks under the Security Agreement, the Property will not be subject to any Lien in favor of the Agent and the Agent shall not assign, hypothecate, pledge or otherwise dispose of the Property, except in accordance with this Agreement, the Credit Agreement and the Security Agreement. The Agent shall have no liability to the Company or any other Person for action or failure to act hereunder (including the refusal to release or make available Property) if it is acting in accordance with the Credit Agreement and the Security Agreement. SECTION 2.6 Maintenance of Records. The Agent shall implement and maintain administrative and operating procedures pursuant to which it shall keep and maintain all records and information necessary to permit the regular identification of all Property held or released by it. SECTION 2.7 Visitation Rights and Other Information. From time to time prior to the occurrence and continuance of an Event of Default, upon reasonable prior notification, during normal business hours, any Authorized Employee shall have the right (i) to visit the Agent's office where the Property is maintained, (ii) to examine the facilities for the storage and safekeeping of the Property, (iii) to review the procedures with which such Property is stored and catalogued, (iv) to examine and make copies of and abstracts from any documents relating to the Property, and (v) to discuss matters relating to the Property and the Agent's performance hereunder with any officer of the Agent having knowledge of such matters. The Agent shall provide to the Company such other information concerning the Property as it may from time to time reasonably request. The Agent acknowledges and agrees that the Securities and Exchange Commission shall, at all times upon reasonable prior notice, have the right to inspect the Property through its employees and agents. The Agent shall also have the right to make all Property available to any Bank for inspection. SECTION 2.8 Agent's Liability. The Agent shall have no liability whatsoever by reason of any error of judgment for any act done or step taken or omitted by it, or for any mistake of fact or law for anything which it may do or refrain from doing in connection herewith, unless caused by or arising out of its own negligence or willful misconduct. Without limitation on the foregoing, the Agent shall have no duties whatsoever to any Person (including any stockholder, officer, director or Affiliate of the Company) other than as expressly set forth herein and the rights of the Agent as the collateral agent for the Banks shall override any custodial duties hereunder. The Company hereby indemnifies and agrees to hold the Agent, each Bank and each of the officers, directors, employees, Affiliates and agents thereof (each an "Indemnified Party") harmless from and against any and all actions, causes of action, suits, losses, liabilities, damages and expenses, including Attorney Costs (collectively, "Indemnified Liabilities") incurred by the Indemnified Parties or any of them as a result of, or arising out of, or relating to, the execution, delivery, performance or enforcement of this Agreement, except for any such Indemnified Liabilities arising out of the applicable Indemnified Party's gross negligence or willful misconduct. 4 ARTICLE 3 MISCELLANEOUS SECTION 3.1 Fees and Expenses of the Custodian. The Company agrees to pay the Agent the fees and expenses set forth on Schedule IV hereto in accordance with the terms thereof for the services rendered hereunder. Such fees and expenses shall be subject to adjustment from time to time in accordance with the Agent's customary practice. The Company shall also reimburse the Agent on demand for all out of pocket expenses (including Attorney Costs) incurred in connection with its duties as custodian hereunder. SECTION 3.2 Amendments, Etc. No amendment or waiver of any provision of this Agreement nor consent to any departure therefrom, shall in any event be effective unless the same shall be in writing and signed by each party hereto, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. SECTION 3.3 Notices. All demands, notices and communications hereunder shall be in writing and shall be deemed to have been duly given when delivered if personally delivered, mailed by certified or registered mail, postage-prepaid, return receipt requested, or sent by overnight courier or telecopied to the following address. All Property shall be delivered to the Agent at the address listed below. (i) if to the Company: American Capital Strategies, Ltd. 3 Bethesda Metro Center Bethesda, Maryland 20814 Attention: John Erickson Telecopy No.: (301) 654-6714 (ii) if to the Agent: LaSalle National Bank 135 South LaSalle Street, Suite 1626 Chicago, Illinois 60674-4107 Attention: Mark Henrikson Telecopy No.: (312) 904-2084 with a copy of Schedule II with each delivery of Property to: LaSalle National Bank 135 South LaSalle Street, Suite 215 Chicago, Illinois 60603 Attention: Michael J. Burton and Adam S. Gelfeld Telecopy No.: (312) 904-6457 5 or such other address as may hereafter be furnished to the other parties by like notice. SECTION 3.4 Binding Effect; Assignability; Term. This Agreement shall be binding upon and inure to the benefit of the Company and the Agent and their respective successors and permitted assigns. The Company may not assign at any time its rights and obligations hereunder and interests herein without the prior written consent of the Agent. The Agent may not assign any of its rights, duties and obligations hereunder or any interest herein without the Company's prior written consent unless a Default or Event of Default has occurred and is continuing under the Credit Agreement in which case no such consent shall be necessary. This Agreement shall create and constitute the continuing obligations of the parties hereto in accordance with its terms, and shall remain in full force and effect until the Termination Date, provided that the provisions of Section 2.08 shall be continuing and shall survive the termination of this Agreement. SECTION 3.5 Resignation and Removal. The Agent may resign at any time by giving written notice thereof to the Company not less than 60 days prior to the effective date of such resignation (unless such resignation is tendered in connection with the termination of the Credit Agreement, in which case such resignation may be effective concurrently with such termination and repayment of all obligations under the Credit Agreement). The Agent may be removed by the Company at any time, with or without cause, by giving written notice thereof to the Agent not less than thirty (30) days prior to the effective date of such removal; provided, that no such removal shall be permitted at any time when the Credit Agreement is in effect without (a) the prior written consent of the Agent and (b) the execution and delivery of a custody agreement with a custodian satisfactory to the Agent that has agreed to act as bailee and perfection agent for the Agent and the Banks on terms satisfactory to the Agent. Upon any such resignation or removal, the Company shall have the right to appoint a successor Agent. Any such successor shall, upon its acceptance thereof, succeed to and become vested with all the rights, powers, privileges and duties of the retiring custodian, and the retiring custodian shall be discharged from its duties and obligations as custodian under this Agreement. SECTION 3.6 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS AND DECISIONS OF THE STATE OF ILLINOIS APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE. SECTION 3.7 Execution in Counterparts; Severability. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same agreement. In case any provision in or obligation under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. 6 SECTION 3.8 General. The Agent shall be deemed to have exercised reasonable care in the custody and preservation of any of the Property if it takes such action for that purpose as any Company requests in writing, but failure of the Agent to comply with any such request shall not of itself be deemed a failure to exercise reasonable care, and no failure of the Agent to preserve or protect any right with respect to such Property against prior parties, or to do any act with respect to the preservation of such Property not so requested by the Company, shall be deemed of itself a failure to exercise reasonable care in the custody or preservation of such Property. ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT SHALL BE BROUGHT AND MAINTAINED EXCLUSIVELY IN THE COURTS OF THE STATE OF ILLINOIS OR IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS; PROVIDED THAT ANY SUIT SEEKING ENFORCEMENT AGAINST ANY COLLATERAL OR OTHER PROPERTY MAY BE BROUGHT, AT THE AGENT'S OPTION, IN THE COURTS OF ANY JURISDICTION WHERE SUCH COLLATERAL OR OTHER PROPERTY MAY BE FOUND. THE COMPANY HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE COURTS OF THE STATE OF ILLINOIS AND OF THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS FOR THE PURPOSE OF ANY SUCH LITIGATION AS SET FORTH ABOVE. THE COMPANY FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS BY REGISTERED MAIL, POSTAGE PREPAID, TO THE ADDRESS SET FORTH ON THE SIGNATURE PAGES HERETO (OR SUCH OTHER ADDRESS AS IT SHALL HAVE SPECIFIED IN WRITING TO THE AGENT AS ITS ADDRESS FOR NOTICES HEREUNDER) OR BY PERSONAL SERVICE WITHIN OR WITHOUT THE STATE OF ILLINOIS. THE COMPANY HEREBY EXPRESSLY AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN ANY SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. THE COMPANY AND THE AGENT (BY ACCEPTING THE BENEFITS HEREOF) HEREBY WAIVE ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER THIS AGREEMENT, OR ANY INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR THEREWITH OR ARISING FROM ANY FINANCING RELATIONSHIP EXISTING IN CONNECTION WITH ANY OF THE FOREGOING, AND AGREES THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY. [signature page to follow] 7 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their respective officers thereunto duly authorized as of the date first above written. AMERICAN CAPITAL STRATEGIES, LTD. By: ------------------------------- Name: ----------------------------- Title: ---------------------------- LASALLE NATIONAL BANK By: ------------------------------- Name: ----------------------------- Title: ---------------------------- 8 AMERICAN CAPITAL STRATEGIES SCHEDULE I - - ----------------------------------------------------------- -------------------- AUTHORIZED EMPLOYEES SPECIMEN SIGNATURE - - ----------------------------------------------------------- -------------------- - - ----------------------------------------------------------- -------------------- Malon Wilkus - - ----------------------------------------------------------- -------------------- Adam Blumenthal - - ----------------------------------------------------------- -------------------- Stephen L. Hester - - ----------------------------------------------------------- -------------------- Samantha Blizzard - - ----------------------------------------------------------- -------------------- John Erickson - - ----------------------------------------------------------- -------------------- Marge Schwalm - - ----------------------------------------------------------- -------------------- SCHEDULE II PORTFOLIO COMPANY [COMPANY NAME] Transaction Date: ___________________
- - ---------------- ------------------------------------------------------------------ --------------- ---------------- Tab Document Delivered (Title, Parties and Date) Original Copy - - ---------------- ------------------------------------------------------------------ --------------- ---------------- [Documents Delivered] - - ---------------- ------------------------------------------------------------------ --------------- ---------------- - - ---------------- ------------------------------------------------------------------ --------------- ---------------- - - ---------------- ------------------------------------------------------------------ --------------- ---------------- - - ---------------- ------------------------------------------------------------------ --------------- ---------------- - - ---------------- ------------------------------------------------------------------ --------------- ---------------- - - ---------------- ------------------------------------------------------------------ --------------- ---------------- - - ---------------- ------------------------------------------------------------------ --------------- ---------------- - - ---------------- ------------------------------------------------------------------ --------------- ---------------- - - ---------------- ------------------------------------------------------------------ --------------- ---------------- - - ---------------- ------------------------------------------------------------------ --------------- ---------------- - - ---------------- ------------------------------------------------------------------ --------------- ---------------- - - ---------------- ------------------------------------------------------------------ --------------- ---------------- - - ---------------- ------------------------------------------------------------------ --------------- ---------------- - - ---------------- ------------------------------------------------------------------ --------------- ---------------- - - ---------------- ------------------------------------------------------------------ --------------- ---------------- - - ---------------- ------------------------------------------------------------------ --------------- ---------------- - - ---------------- ------------------------------------------------------------------ --------------- ---------------- - - ---------------- ------------------------------------------------------------------ --------------- ----------------
American Capital Strategies, Ltd. certifies that the above listed documents are all of the documents relating to the transaction described above. AMERICAN CAPITAL STRATEGIES, LTD. By: ------------------------------ Its: ----------------------------- Received documents listed above this LASALLE NATIONAL BANK, as custodian By: ------------------------------ Its: ----------------------------- SCHEDULE III RELEASE REQUEST LaSalle National Bank 135 South LaSalle Street, Suite 1626 Chicago, Illinois 60674-4107 Attention: Mark Henrikson Re: Custody Control Agreement between American Capital Strategies, Ltd. (the "Company") and LaSalle National Bank dated as of October 30, 1998 ("Agreement") American Capital Strategies, Ltd. hereby requests release of the following items of property relating to the following transactions ("Released Property") [Describe Document(s)] [Describe Transaction(s)] The Released Property should be delivered as follows [Specify Delivery Instructions] American Capital Strategies, Ltd. By: ------------------------------- Name: ----------------------------- Title: ---------------------------- Consent of Agent By: _________________________ [ATTENTION CUSTODIAN: RELEASE REQUIRES WRITTEN CONSENT OF MICHAEL BURTON, ADAM GELFELD OR ANOTHER AUTHORIZED REPRESENTATIVE OF AGENT UNDER THE CREDIT AGREEMENT REFERRED TO IN THE AGREEMENT] SCHEDULE IV LASALLE NATIONAL BANK LOAN CUSTODY FEE SCHEDULE A. Review and certification of files $35.00 per document set B. Storage and warehouse of files $ 1.30 per document set/month D. Delivery, legal, other out-of pocket At cost miscellaneous expenses F. Release/Reinstatement Fees Releases: $ 7.50 per document set Reinstatements: $15.00 per document set Fees due to LaSalle National Bank will be billed monthly and fees will be due and owing when incurred. The undersigned agrees with the terms of this schedule and will pay fees directly to LaSalle National Bank. American Capital Strategies, Ltd. Accepted: ---------------------- Name of Officer: ---------------- Title: -------------------------- Date: --------------------------- Billing Address: 3 Bethesda Metro Center Bethesda, Maryland 20814 Attn: John Erickson Phone:(301) 951-6122 x34 Fax:(301) 654-6714 Email: john_erickson@esops.com EX-10.5 6 ACCOUNT CONTROL AGREEMENT DATED OCTOBER 30, 1998 Exhibit 10.5 ACCOUNT CONTROL AGREEMENT October 30, 1998 LaSalle National Bank, with an office at 135 South LaSalle Street, Chicago, Illinois 60603, Telecopy No. 312/904-6457, as agent for Lenders ("Agent"); American Capital Strategies, Ltd., a Delaware corporation, with an office at 3 Bethesda Metro Center, Suite 860, Bethesda, Maryland 20814, Telecopy No. 301/654-6714 ("Company"); and LaSalle National Bank, with an office at 135 South LaSalle Street, Room 1825, Chicago, Illinois 60603, Telecopy No. 312/904-1871, as securities intermediary ("Securities Intermediary") hereby agree as follows: PREAMBLE: 1. Securities Intermediary and Company shall enter into a corporate custodian account agreement, dated as of November 9, 1998, a copy of which is attached hereto as Exhibit A (the "Customer Agreement"), pursuant to which Securities Intermediary shall establish its trust account number 03-8032900 in the name of Company (the "Account"). 2. Company, the other Persons designated therein as Grantors and Agent have entered into a Security and Pledge Agreement of even date herewith (as from time to time amended, restated, supplemented or otherwise modified, the "Security Agreement"), in which, Company has granted to Agent on behalf of the Lender Parties a security interest in the Account, all financial assets to be held in the Account, any free credit balance carried therein and other items of "Collateral", as such term is defined in the Security Agreement (collectively, the "Collateral"). 3. Agent, Company and Securities Intermediary are entering into this Account Control Agreement (this "Agreement") to provide for the control of the Account and to perfect the security interest of Agent in the Account and the financial assets and any free credit balance carried therein as more fully described in the Security Agreement. 4 Company, various financial institutions and the Agent have entered into a Credit Agreement of even date herewith (as from time to time amended, restated, supplemented or otherwise modified, the "Credit Agreement"), pursuant to which the execution and delivery of this Agreement by Agent, Company and Securities Intermediary is a condition precedent to the effectiveness of the Credit Agreement. TERMS: Section 1. The Account. Securities Intermediary hereby represents and warrants to Agent and Company that (a) the Account has been established in the name of Company as recited above, (b) Exhibit B attached hereto is a complete and accurate statement of items of Collateral deposited in the Account as of the date hereof, (c) Exhibit B does not reflect any financial assets which are registered in the name of Company, payable to its order, or specially endorsed to it which have not been endorsed to Securities Intermediary or in blank, (d) the Customer Agreement, the security entitlements arising out of the financial assets carried in the account and such free credit balances are valid and legally binding obligations of Securities Intermediary, and (e) except for the claims and interests of Agent, Company and, to the extent set forth in Section 3 hereof, Securities Intermediary in the Account, Securities Intermediary does not know of any claim to or interest in the Account or in any financial asset carried therein. Securities Intermediary will treat all property held by it in the Account as financial assets under Article 8 of the Uniform Commercial Code of Illinois (the "Code"). Section 2. Control. Securities Intermediary will comply with entitlement orders originated by Agent concerning the Account without further consent by Company. Securities Intermediary shall neither accept nor comply with any entitlement order from Company withdrawing any item of Collateral from the Account nor deliver any such Collateral to Company nor pay any free credit balance or other amount owing from Securities Intermediary to Company with respect to the Account or any other item of Collateral following receipt of a written notice from Agent which states that Agent is exercising exclusive control over the Collateral (a "Notice of Exclusive Control"); provided, that prior to its receipt of a Notice of Exclusive Control, (a) all interest and dividend payments received in respect of the Collateral will be paid by Securities Intermediary to or otherwise at the direction of Company and (b) Company may direct Securities Intermediary to transfer other items of Collateral in the Account. After Securities Intermediary receives a Notice of Exclusive Control, it will immediately (x) cease complying with instructions or entitlement orders concerning the Account or any other item of Collateral originated by Company or its representatives and (y) cause all cash, securities and other property which may be or become payable or attributable to Company on account of any Collateral, including cash or noncash proceeds thereof, to be paid or delivered to Agent as specified by Agent on such notice or otherwise at the direction of Agent. Section 3. Priority of Lien. Securities Intermediary hereby consents to and acknowledges the existence of the security interest granted pursuant to the Security Agreement with respect to the Collateral. Securities Intermediary shall not hypothecate any item of Collateral. Securities Intermediary hereby waives and releases all liens, encumbrances, claims and rights of setoff Securities Intermediary may have against the Account or any other item of Collateral (other than rights of setoff in respect of any fees due and owing under the Customer Agreement) and agrees that it will not assert any lien, encumbrance, claim or right or the priority thereof against the Account or any other item of Collateral (in each case in its capacity as Securities Intermediary but without limitation on its rights as Agent under the Security Agreement and Credit Agreement). Securities Intermediary will not agree with any third party that Securities Intermediary will comply with entitlement orders concerning the Account or any other item of Collateral originated by such third party without the prior written consent of Agent and Company. 2 Section 4. Statements, Confirmations and Notices of Adverse Claims. Securities Intermediary will send copies of all statements regarding the Account and confirmations and other correspondence concerning the Collateral simultaneously to each of Company and Agent at the addresses set forth in the heading of this Agreement. If Securities Intermediary learns that any person has asserted any lien, encumbrance or adverse claim against the Account or any other item of Collateral, Securities Intermediary will promptly notify Agent and Company thereof. Section 5. Responsibility of Securities Intermediary. Securities Intermediary shall have no responsibility or liability to Agent for (a) making trades of Collateral at the instruction of Company, or its authorized representatives, or (b) complying with entitlement orders concerning the Collateral from Company, or its authorized representatives, which are received by Securities Intermediary, in any such case, before Securities Intermediary receives a Notice of Exclusive Control. Securities Intermediary shall have no responsibility or liability to Company for complying with a Notice of Exclusive Control or complying with entitlement orders concerning the Collateral originated by Agent. Securities Intermediary shall have no duty to investigate or make any determination as to whether (a) the information contained in any certificate delivered by Company pursuant to the Security Agreement is correct or (b) the conditions for the issuance of a Notice of Exclusive Control or entitlement order contained in any agreement between Company and Agent have occurred. Neither this Agreement nor the Security Agreement imposes or creates any obligation or duty of Securities Intermediary other than those expressly set forth herein. Section 6. Standard of Care. Securities Intermediary shall exercise reasonable care and diligence in performing all of its obligations hereunder; provided, however, that: (a) Securities Intermediary shall be entitled to rely upon the authenticity of, and the truth of any statement in, any certificate, opinion of counsel, evidence of indebtedness, notice, consent, instruction or other document reasonably believed by Securities Intermediary to be genuine and to be signed by the proper party or parties; (b) Securities Intermediary shall not be liable with respect to any action taken or omitted to be taken by it in good faith in reliance upon the advice of its legal counsel; (c) Securities Intermediary shall not be liable with respect to any action taken or omitted to be taken by it in good faith at the instruction of Agent; and (d) Securities Intermediary shall be entitled to request the written consent or instructions of Agent to Securities Intermediary's taking any action hereunder requiring the exercise of its discretion and to refrain from taking such action until it shall have received written consent or instructions. Section 7. Indemnity. Company agrees to indemnify and hold Securities Intermediary harmless from and against any losses, liabilities and damages incurred by Securities Intermediary as a consequence of any action taken or omitted to be taken by it in the performance of its obligations hereunder, with the exception of any losses, liabilities and damages arising from any breach by Securities Intermediary of any provision of Section 6 hereof. 3 Section 8. Tax Reporting. No items of income, gain, expense or loss recognized in the Account shall be reported to the Internal Revenue Service or any state or local taxing authority under the name and taxpayer identification number of Agent. Section 9. Customer Agreement. This Agreement supplements the Customer Agreement between Securities Intermediary and Company. In the event of a conflict between this Agreement and the Customer Agreement, the terms of this Agreement will prevail. Regardless of any provision in the Customer Agreement, Illinois shall be deemed to be Securities Intermediary's location for the purposes of this Agreement and the perfection and priority of Agent's security interest in the Collateral. The Securities Intermediary and Company may not change the law governing the Customer Agreement without Agent's express written consent. Section 10. Termination. The rights and powers granted herein to Agent have been granted in order to perfect its security interest in the Collateral, are powers coupled with an interest and will neither be affected by the bankruptcy of Company nor by the lapse of time. The obligations of Securities Intermediary under Sections 2, 3 and 4 above shall continue in effect until the earlier to occur of (a) the termination of the security interest of Agent in the Collateral pursuant to the terms of the Security Agreement and the notification by Agent to Securities Intermediary of such termination in writing and (b) the termination of the Customer Agreement in accordance with its terms so long as Securities Intermediary has given Agent at least thirty (30) days prior written notice of such termination. Upon the occurrence of either such event, the obligations of Securities Intermediary under Sections 2, 3 and 4 above with respect to the operation and maintenance of the Account after the receipt of such notice shall terminate and Agent shall have no further right to originate entitlement orders concerning the Collateral. Upon the occurrence of an event under clause (a), Securities Intermediary may take such steps as Company may request to vest full ownership and control of the Collateral in Company, including, but not limited to, transferring all of the Collateral to another securities account in the name of Company or its designee. Upon the occurrence of an event under clause (b), Securities Intermediary shall comply with Agent's directions regarding transfer of the Collateral. Section 11. This Agreement. This Agreement, the schedules and exhibits hereto and the agreements and instruments required to be executed and delivered hereunder set forth the entire agreement of the parties hereto with respect to the subject matter hereof and supersede and discharge all prior agreements (written or oral) and negotiations and all contemporaneous oral agreements concerning such subject matter and negotiations. There are no oral conditions precedent to the effectiveness of this Agreement. Section 12. Amendments. No amendment, modification or termination of this Agreement or waiver of any right hereunder shall be binding on any party hereto unless it is in writing and is signed by the party to be charged. Section 13. Severability. If any term or provision set forth in this Agreement shall be invalid or unenforceable, the remainder of this Agreement, or the application of such terms or provisions to persons or circumstances, other than those to which it is held invalid or unenforceable, shall be construed in all respects as if such invalid or unenforceable term or provision were omitted. 4 Section 14. Successors. The terms of this Agreement shall be binding upon, and shall inure to the benefit of, the parties hereto and their respective corporate successors or assigns. Section 15. Rules of Construction. The captions and section numbers appearing in this Agreement are inserted only as a matter of convenience. They do not define, limit or describe the scope or intent of the provisions of this Agreement. Except as otherwise defined herein all terms herein shall have the meanings ascribed thereto in the Code. Section 16. Notices. Any notice, request or other communication required or permitted to be given under this Agreement shall be in writing and deemed to have been properly given when delivered in person, or when sent by telecopy or other electronic means and electronic confirmation of error free receipt is received or three days after being sent by certified or registered mail, return receipt requested, postage prepaid, addressed to the party at the address set forth next to such parties' name at the heading of this Agreement. Any party may change its address for notices in the manner set forth above. Section 17. Counterparts. This Agreement may be executed in any number of counterparts, all of which shall constitute one and the same instrument, and any party hereto may execute this Agreement by signing and delivering one or more counterparts. Section 18. Choice of Law. The parties hereto agree that certain material events, occurrences and transactions relating to this Agreement bear a reasonable relationship to Illinois. The validity, terms, performance and enforcement of this Agreement shall be governed by the laws of Illinois which are applicable to agreements which are executed, delivered and performed therein without regard to conflicts of law provisions thereof. [signature page follows] 5 SIGNATURES: LASALLE NATIONAL BANK, as agent By: _____________________________ Title: Vice President AMERICAN CAPITAL STRATEGIES, LTD. By: _____________________________ Title: _________________________ LASALLE NATIONAL BANK, as securities intermediary By: ______________________________ Title: __________________________ Exhibit A Customer Agreement [See Attached] Exhibit B Collateral - - - To be provided at time of deposit. EX-10.6 7 FIRST AMENDMENT TO CREDIT AGREEMENT DATED 12/30/98 Exhibit 10.6 FIRST AMENDMENT TO CREDIT AGREEMENT THIS FIRST AMENDMENT TO CREDIT AGREEMENT ("Amendment") is made as of December 30, 1998 by and among AMERICAN CAPITAL STRATEGIES, LTD., a Delaware corporation (the "Borrower"), LASALLE NATIONAL BANK, a national banking association (individually, "LaSalle"), as agent ("Agent") and the Banks described in the Credit Agreement (as hereinafter defined). RECITALS A. The Agent, the Banks and the Borrower entered into a Credit Agreement dated as of October 30, 1998 ("Credit Agreement"). B. The parties to the Credit Agreement desire to enter into this Amendment for the purpose of (1) increasing the Revolving Commitment Amount by $5,000,000 (such increase, the "Additional Credit") from $25,000,000 to $30,000,000, and (2) adding First Tennessee Bank National Association ("FTBNA") as a Bank under the Credit Agreement with a Commitment equal to the Additional Credit. AGREEMENT In consideration of the matters set forth in the recitals and the covenants and provisions herein set forth, and other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. Definitions. Capitalized terms used but not defined herein are used as defined in the Credit Agreement. 2. Revolving Commitment Amount The amount "$25,000,000" contained in the definition of Revolving Commitment Amount is hereby deleted and replaced with the amount "$30,000,000." 3. Schedule 2.1. Schedule 2.1 of the Credit Agreement is hereby deleted and replaced by Schedule 2.1 hereto. 4. Addition of Bank. FTBNA by execution and delivery of this Amendment shall become a Bank party to the Credit Agreement. This Amendment shall not constitute an assignment under Section 14.9 but rather an amendment to increase the Revolving Commitment Amount and allocate the Additional Credit to FTBNA a new Bank under the Credit Agreement. From and after the date hereof, FTBNA shall be a Bank for all purposes (and shall have all of the rights and obligations of a Bank under the Credit Agreement) and have a Commitment and Pro Rata Share equal to the Additional Credit as set forth on Schedule 2.1 hereto. The new Pro Rata Share of LaSalle (as proportionately reduced by the Additional Credit) is set forth on Schedule 2.1. 5 416753.3 5. Waiver; Amendments. Section 14.1 of the Credit Agreement is amended to add the following new clause (vi) to the fourth sentence of Section 14.1 before the words "without, in each case, the consent of all Banks." "(vi) amend the definitions of "Borrowing Base" or "Eligible Investment Assets" The Agent, LaSalle and the Borrower further agree that until such time as LaSalle as a Bank owns less than 66 2/3% (the level necessary for "Required Banks"), any amendments, modifications or waivers to the financial covenants set forth in Section 10 or the default provisions set forth in Section 12, shall require the consent to all Banks. At such time that LaSalle (or any of its affiliates) owns less than 66 2/3% the preceding sentence shall automatically become null and void. 6. Consent. Notwithstanding anything to the contrary set forth in Section 10.7 or 10.10 to the Credit Agreement, the Banks hereby consent to the Borrower borrowing up to $5,000,000 of unsecured senior debt from US Investigations Services, Inc. for a period of 90 days from the date hereof; provided, that after giving effect to such loan the Borrower is in compliance with all financial and other covenants contained in the Credit Agreement and no Event of Default or Unmatured Event of Default otherwise exists. The Borrowing Base shall be deemed reduced by the aggregate principal amount of such loan and the commitment thereunder. The Borrower shall not be permitted to repay such loan if after giving effect thereto the Borrower would not be in compliance with the financial and other covenants in the Credit Agreement or an Event of Default or Unmatured Event of Default would otherwise exist under the Credit Agreement. 7. Repayment of FTBNA. Notwithstanding anything to the contrary set forth in the Credit Agreement, the Borrower agrees to repay any amounts borrowed from FTBNA on or before May 1, 1999 (the "FTBNA Repayment"), and upon receipt of the FTBNA Repayment the Revolving Commitment Amount shall be reduced by the amount of the Additional Credit and FTBNA shall cease to be a Bank under the Credit Agreement; provided that the Borrower shall not be permitted to make the FTBNA Repayment if after giving effect thereto the Borrower would not be in compliance with the financial and other covenants in the Credit Agreement or an Event of Default or Unmatured Event of Default would otherwise exist under the Credit Agreement. If the Borrower is unable to make the FTBNA Repayment on or before May 1, 1999 in compliance with this Section 7, such failure shall constitute an Event of Default under the Credit Agreement. The Agent and LaSalle agree that the FTBNA Repayment shall be permitted as a one-time non pro-rata permanent reduction of the Revolving Commitment amount on the conditions set forth above. 8. Representations and Warranties of Borrower. To induce the Agent and the Banks to execute this Amendment, the Borrower represents and warrants to the Agent and the Banks as follows: (a) The Borrower is in good standing in its jurisdiction of organization and in each jurisdiction where it conducts its business and has all requisite power and authority to execute, deliver and perform this Amendment. 2 (b) The execution, delivery and performance of this Amendment (i) has been duly authorized by all requisite action of the Borrower and (ii) will not (A) violate (1) any provision of law, statute, rule or regulation or the articles/certificate of incorporation or other constitutive documents, partnership agreements or the by-laws or regulations of the Borrower, (2) any order of any court, or any rule, regulation or order of any other agency of government binding upon the Borrower, or (3) any provisions of any material indenture, agreement or other instrument to which the Borrower is a party, or by which the Borrower or any of its properties or assets is or may be bound, (B) be in conflict with, result in a breach of or constitute (alone or with notice or lapse of time or both) a default under any indenture, agreement or other instrument referred to in clause (ii)(a)(3) above. (c) This Amendment constitutes the legal, valid and binding obligations of the Borrower enforceable in accordance with its terms, subject to bankruptcy, insolvency or similar laws affecting the enforceability of creditors' rights generally and to general principles of equity). (d) The representations and warranties in the Loan Documents (including but not limited to Section 9 of the Credit Agreement) are true and correct in all material respects with the same effect as though made on and as of the date of this Amendment. 9. Affirmation. Except as expressly amended hereby, the Credit Agreement and the other Loan Documents are and shall continue in full force and effect and the Borrower hereby fully ratifies and affirms each Loan Document to which it is a party. Reference in any of this Amendment, the Credit Agreement or any other Loan Document to the Credit Agreement shall be a reference to the Credit Agreement as amended hereby and as further amended, modified, restated, supplemented or extended from time to time. This Amendment shall constitute a Loan Document for purposes of the Credit Agreement and the other Loan Documents. Each Guarantor joins in this Amendment solely for the purpose of consenting to the terms hereof, and each Guarantor hereby unconditionally consents to the term of this Amendment and fully ratifies and affirms the Guaranty, taking into account this Amendment (including the increase in the Commitment hereunder, which shall be included in the Liabilities under the Guaranty). 10. Acknowledgment of FTBNA. FTBNA hereby confirms that it has received a copy of the Credit Agreement and the exhibits and schedules thereto, together with copies of the documents which were required to be delivered under the Credit Agreement as a condition to the making of the initial Loans thereunder. The Assignee acknowledges and agrees that it (i) has made and will continue to make such inquiries and has taken and will take such care on its own behalf as would have been an original party to the Credit Agreement and (ii) has made and will continue to make, independently and without reliance upon the Agent, LaSalle or any other Bank and based on such documents and information as it has deemed appropriate, its own credit analysis and decisions relating to the Credit Agreement. FTBNA further acknowledges and agrees that neither the Agent nor the Assignor has made any representation or warranty about the creditworthiness of the Company or any other party to the Credit Agreement or with respect to the legality, validity, sufficiency or enforceability of the Credit Agreement or any other Loan Document or the value of any security therefor. This assignment shall be made without recourse to the Assignor. 3 11. Counterparts. This Amendment may be executed in two or more counterparts, each of which shall constitute an original, but all of which when taken together shall constitute one instrument. 12. Headings. The headings and captions of this Amendment are for the purposes of reference only and shall not affect the construction of, or be taken into consideration in interpreting, this Amendment. 13. Conditions to Amendment. This Amendment is subject to satisfaction in full of all of the following conditions in full of all of the following conditions precedent, each of which shall be satisfactory to the Agent and the Lenders. (a) Amendment. The Borrower shall have executed and delivered to the Agent this Amendment. (b) Authorization. The Borrower shall have delivered to the Agent such documents and instruments (including incumbency certificate and directors resolutions for each Borrower) as the Agent may require to demonstrate authorization by the Borrower to execute and deliver this Amendment. (c) Note. The Borrower shall have executed and delivered to FTBNA a Note reflecting the allocations set forth on Schedule 2.1. 14. Further Assurances. The Borrower agrees to execute and deliver in form and substance satisfactory to the Lenders such further documents, instruments, amendments, financing statements and to take such further action, as may be necessary from time to time to perfect and maintain the liens and security interests created by the Loan Documents, as amended hereby. 15. APPLICABLE LAW. THIS AMENDMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF ILLINOIS WITHOUT GIVING EFFECT TO ILLINOIS CHOICE OF LAW DOCTRINE. 4 SCHEDULE 2.1 BANKS AND PRO RATA SHARES ------------------------------------------------------------------------------- Pro Rata Share of Revolving Bank Commitment Amount Pro Rata Share ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- LaSalle National Bank $25,000,000 83.333333334% First Tennessee Bank National Association $5,000,000 16.666666666% TOTALS $30,000,000 100% 5 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their duly authorized officers, all as of the day and year first above written. BORROWER: AMERICAN CAPITAL STRATEGIES, LTD. By:____________________________________ Its:___________________________________ LASALLE NATIONAL BANK, Individually and as Agent. By:____________________________________ Its:___________________________________ FIRST TENNESSEE BANK NATIONAL ASSOCIATION By:____________________________________ Its:___________________________________ FIRST TENNESSEE BANK NATIONAL ASSOCIATION 165 Madison Avenue First Floor Memphis, TN 38103 Attention: Sam Jenkins Telephone: (901) 523-4263 Fax: (901) 523-4235 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their duly authorized officers, all as of the day and year first above written. CONSENT OF GUARANTORS: ACS CAPITAL INVESTMENTS CORPORATION By: ---------------------------------- Title: ------------------------------- AMERICAN CAPITAL STRATEGIES LABOR RESEARCH, INC. By: ---------------------------------- Title: ------------------------------- ACS GENPAR, INC. By: ---------------------------------- Title: ------------------------------- EX-10.7 8 PROMISSORY NOTE DATED DECEMBER 30, 1998 Exhibit 10.7 NOTE December 30, 1998 $5,000,000 Chicago, Illinois The undersigned, for value received, promises to pay to the order of First Tennessee Bank National Association (the "Bank") at the principal office of LaSalle National Bank (the "Agent") in Chicago, Illinois, the aggregate unpaid amount of all Loans made to the undersigned by the Bank pursuant to the Credit Agreement referred to below (as shown on the schedule attached hereto (and any continuation thereof) or in the records of the Bank), such principal amount to be payable on the dates set forth in the Credit Agreement. The undersigned further promises to pay interest on the unpaid principal amount of each Loan from the date of such Loan until such Loan is paid in full, payable at the rate(s) and at the time(s) set forth in the Credit Agreement. Payments of both principal and interest are to be made in lawful money of the United States of America. This Note evidences indebtedness incurred under, and is subject to the terms and provisions of, the Credit Agreement, dated as of October 30, 1998 (as amended or otherwise modified from time to time, the "Credit Agreement;" terms not otherwise defined herein are used herein as defined in the Credit Agreement), among the undersigned, certain financial institutions (including the Bank) and the Agent, to which Credit Agreement reference is hereby made for a statement of the terms and provisions under which this Note may or must be paid prior to its due date or its due date accelerated. This Note is made under and governed by the laws of the State of Illinois applicable to contracts made and to be performed entirely within such State. AMERICAN CAPITAL STRATEGIES, LTD. By: ---------------------------------- Title: ------------------------------- - - -------------------------------------------------------------------------------- SCHEDULE ATTACHED TO NOTE DATED DECEMBER 30, 1998 OF AMERICAN CAPITAL STRATEGIES, LTD.. PAYABLE TO THE ORDER OF FIRST TENNESSEE BANK NATIONAL ASSOCIATION - - --------------------------------------------------------------------------------
Date and Date and Amount of Amount of Loan or of Repayment or of Conversion Conversion Interest from another into another type of Period/Unpaid type of Loan Notation Loan Maturity Date Principal Balance Made by - - ----------------------------------------------------------------------------------------------------------------------- 1. BASE RATE LOANS - - ----------------------------------------------------------------------------------------------------------------------- - - ------------------------- ----------------------- ---------------------- ----------------------- ---------------------- - - ------------------------- ----------------------- ---------------------- ----------------------- ---------------------- - - ------------------------- ----------------------- ---------------------- ----------------------- ---------------------- - - ------------------------- ----------------------- ---------------------- ----------------------- ---------------------- - - ----------------------------------------------------------------------------------------------------------------------- 2. EURODOLLAR LOANS - - ----------------------------------------------------------------------------------------------------------------------- - - ------------------------- ----------------------- ---------------------- ----------------------- ---------------------- - - ------------------------- ----------------------- ---------------------- ----------------------- ---------------------- - - ------------------------- ----------------------- ---------------------- ----------------------- ---------------------- - - ------------------------- ----------------------- ---------------------- ----------------------- ----------------------
EX-10.8 9 PROMISORY NOTE DATED DECEMBER 30, 1998 Exhibit 10.8 AMERICAN CAPITAL STRATEGIES, LTD. SENIOR PROMISSORY NOTE $5,000,000 December 30, 1998 FOR VALUE RECEIVED, the undersigned, AMERICAN CAPITAL STRATEGIES, LTD., a Delaware corporation (the "Company"), hereby promises to pay to US INTEGRATION SERVICES, INC., a Delaware corporation or its registered assigns (the "Holder"), the principal sum of FIVE MILLION DOLLARS ($5,000,000), with interest thereon on the principal amount outstanding at a rate equal to Seven and 75/100 percent (7.75%) per annum (the "Interest Rate"). This Senior Promissory Note (the "Note") is made upon and is subject to the following terms and conditions: All accrued interest under this Note shall be due and payable monthly in arrears commencing on January 31, 1999, followed by payments on February 28, 1999 and March 31, 1999. Interest payments shall be calculated on the basis of a 360 day year of twelve 30-day months, and the actual days elapsed. The outstanding principal, all accrued but unpaid interest and all other charges payable under this Note shall be due and payable in full on March 31, 1999 (the "Maturity Date"), or on such earlier date on which this Note may fall due as a result of acceleration. Payments of principal of, interest on and any premium with respect to this Note are to be made in lawful money of the United States of America by check mailed and addressed to the registered Holder at 300 Delaware Ave. Suite 900 Wilmington, DE 19801 or, at the option of the Holder, in such manner and at such other place in the United States of America as the Holder hereof shall have designated to the Company in writing. If any payment hereunder becomes due and payable on a day other than a Business Day, the time for payment shall be extended to the next succeeding Business Day. Holder may, at his option, prepay this Note, in whole or in part, at any time without premium or penalty. Notwithstanding any provision to the contrary in this Note or any other agreement between the Holder and the Company, the Company shall not be required to pay, and the Holder shall not be permitted to contract for, take, reserve, charge or receive, any compensation which constitutes interest under applicable law in excess of the maximum amount of interest permitted by law. Upon the occurrence of an "Event of Default," Company shall be in default under the terms of this Note. The following events shall constitute Events of Default: -1- (a) The Company shall fail to pay any principal of or interest on this Note, or any other amount payable hereunder, when due in accordance with the terms hereof (provided that the Company shall have five days to cure any non-payment of interest); or (b) There is commenced by or against the Company any bankruptcy, reorganization or insolvency proceeding or other voluntary or involuntary proceeding for the adjustment of debtor-creditor relationships ("Insolvency Proceeding") unless, in the case of any involuntary Insolvency Proceeding, the same is dismissed within thirty (30) days of the commencement thereof, and prior to the entry of any order for relief therein. In addition to any other rights and remedies Holder may have as provided by law or pursuant to this Note and all other documents and instruments from time to time evidencing or securing the indebtedness evidenced hereby, if any Event of Default shall have occurred and be continuing, Holder may declare the unpaid principal amount hereof (together with accrued interest thereon) and all other amounts payable hereunder to be due and payable forthwith, whereupon the same immediately shall become due and payable. This Note and the rights and obligations of the parties hereto shall be deemed to be contracts under the laws of the Commonwealth of Pennsylvania and for all purposes shall be governed by and construed and enforced in accordance with the laws of said State, except for its rules relating to the conflict of laws. All notices, demands and requests made pursuant to this Note shall be in writing and either (b) personally delivered, (c) sent by overnight courier with guaranteed delivery, or (d) mailed by first-class registered or certified mail, return receipt requested, to the party to which the notice, demand or request is being made to the following addresses and shall be deemed to have been given when actually received or refused, by the addressee or any other person at such address: If to Holder: US Integration Services, Inc. 300 Delaware Ave. Suite 900 Wilmington, DE 19801 ATTENTION: Mr. Francis Jacobs If to Company: American Capital Strategies, Ltd. 3 Bethesda Metro Center Suite 860 Bethesda, MD 20814 ATTENTION: President -2- Either party may change its address for notices by notice given to the other party as provided herein. THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE SECURITIES LAW OF ANY JURISDICTION. AMERICAN CAPITAL STRATEGIES, LTD. By: _____________________________ Name: John R. Erickson Title: CFO -3- EX-27 10 FINANCIAL DATA SCHEDULE
6 0000817473 American Capital Strategies, Ltd. 1,000 U.S. Dollars 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 1.00 253,121 261,369 2,339 162 6,149 270,019 0 115,948 1,348 117,296 0 145,356 11,081 11,069 0 116 0 0 7,783 152,723 0 14,430 2,067 1,709 14,430 0 2,127 16,915 0 14,849 0 0 28 23 7 2,071 0 0 55 0 0 57 1,709 210,362 13.61 1.34 0.19 0 1.34 0 13.80 0.011 57,974 5.23
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