AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 12, 1997
SECURITIES ACT FILE NO. 333-29943
INVESTMENT COMPANY ACT FILE NO. 811-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 1
TO
FORM N-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |X|
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 | |
(CHECK APPROPRIATE BOX OR BOXES)
---------------------
AMERICAN CAPITAL STRATEGIES, LTD.
-------------------------------------------------
(Exact name of Registrant as specified in charter)
3 Bethesda Metro Center
Suite 860
Bethesda, MD 20814
---------------------------------------
(Address of principal executive offices)
Registrant's Telephone Number, including Area Code: (301) 951-6122
---------------------
Malon Wilkus
3 Bethesda Metro Center
Suite 860
Bethesda, MD 20814
---------------------------------------
(Name and address of agent for service)
---------------------
COPIES TO:
Samuel A. Flax Howard B. Adler
Arnold & Porter Gibson, Dunn & Crutcher LLP
555 Twelfth Street, N.W. 1050 Connecticut Avenue, N.W.
Washington, DC 20004-1206 Washington, DC 20036-5306
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after the
Registration Statement becomes effective.
-----------
If any securities being registered on this form will be
offered on a delayed or continuous basis in reliance on Rule 415 under the
Securities Act of 1933, other than securities offered in connection with a
devidend reinvestment plan, check the following box. /x/
It is proposed that this filing will become effective (check
appropriate box)
[ X ] when declared effective pursuant to Section 8(c)
<PAGE>
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
- --------------------------------------------------------------------------------
Proposed Proposed
Maximum Maximum Amount of
Title of Securities Amount Being Offering Price Aggregate Registration
Being Registered Registered Per Unit Offering Price Fee
- --------------------------------------------------------------------------------
Common Stock, $0.01
per value per share.. 8,050,000(1) $15.00 $120,750,000 $ 0
716,846(2) 13.95 10,000,002 122
378,127(3) 15.00 5,671,905 53
----------- ------ ------------ -------
Total................ 9,144,973 $136,421,907 $ 175(4)
- --------------------------------------------------------------------------------
(1) Common Stock to be offered by the Underwriters pursuant to the attached
Prospectus, including Common Stock to be offered under the Underwriters'
Over-Allotment Option described therein.
(2) Common Stock to be offered in the Direct Offering described in the attached
Prospectus.
(3) Common Stock to be issued pursuant to exercise of Underwriters' Warrants
described in the attached Prospectus.
(4) The total filing fee for this Registration Statement filing is $41,341. The
amount of $41,166 was deposited with the initial filing. The amount of $175
represents the increase in the filing fee attributable to an increase in the
number of shares being registered.
================================================================================
<PAGE>
<TABLE>
<CAPTION>
AMERICAN CAPITAL STRATEGIES, LTD.
Cross Reference Sheet Showing Location in Prospectus of Information
Required by Parts A and B of Form N-2 Registration Statement
Item Number Registration Statement Item and Heading Caption or Location in Prospectus
----------- --------------------------------------- ----------------------------------
<S> <C> <C>
1 Outside Front Cover............................... Outside Front Cover Page
2 Inside Front and Outside Back Cover Page.......... Inside Front and Outside Back Cover Page
3 Fee Table and Synopsis............................ Fees and Expenses
4 Financial Highlights.............................. Selected Consolidated Financial and Other Data;
Management's Discussion and Analysis of Financial
Condition and Results of Operations
5 Plan of Distribution.............................. Outside Front Cover; Underwriting; Direct Offering
6 Selling Shareholders.............................. Not Applicable
7 Use of Proceeds................................... Use of Proceeds; Certain Transactions
8 General Description of Registrant................. Outside Front Cover;
Prospectus Summary; Risk Factors;
Business; Investment Policies; Portfolio Companies
9 Management........................................ Management; Custodian, Transfer and Dividend
Paying Agent and Registrar; Principal Stockholders
10 Capital Stock, Long-Term Debt and Other
Securities........................................ Description of Capital Stock;
Reinvestment Plan; Investment
Policies; Tax Status; Regulation; Principal Stockholders
11 Defaults and Arrears on Senior Securities......... Not Applicable
12 Legal Proceedings................................. Not Applicable
13 Table of Contents of the Statement of
Additional Information............................ Inside Front Cover Page; Outside Back Cover Page
<CAPTION>
<S> <C> <C>
14 Cover Page........................................ Not Applicable
15 Table of Contents................................. Not Applicable
16 General Information and History................... The Company; Business
17 Investment Objectives and Policies................ Investment Policies
18 Management........................................ Management
19 Control Persons and Principal Holders of
Securities........................................ Principal Stockholders
20 Investment Advisory and Other Services............ Custodian, Transfer and Dividend Paying Agent and Registrar
21 Brokerage Allocation and Other Practices.......... Not Applicable
22 Tax Status........................................ Tax Status
23 Financial Statements.............................. Consolidated Financial Statements
</TABLE>
* Pursuant to General Instruction on Form N-2, all information required to be
set forth in Part B: Statement of Additional Information has been included in
Part A: The Prospectus. All items required to be set forth in Part C are set
forth in Part C.
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may neither be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy and there shall not be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
such State.
SUBJECT TO COMPLETION, DATED AUGUST 12, 1997
[LOGO]
7,000,000 SHARES COMMON STOCK
------------------------
All of the shares of common stock (the 'Common Stock') being offered hereby
(the 'Offering') are being issued and sold by American Capital Strategies, Ltd.
('American Capital' or the 'Company'). It is currently estimated that the
initial public offering price per share will be $15.00. See 'Underwriting' for
the factors to be considered in determining the initial public offering price.
Prior to the Offering, there has been no public market for the Common Stock. The
Common Stock has been approved for listing on the Nasdaq National Market under
the symbol ACAS.
American Capital is a specialty finance company that, following the
Offering, will primarily be engaged in making loans to and investing in small
and medium sized businesses. The Company's investment objectives are to achieve
a high level of current income from the collection of interest and advisory
fees, as well as long-term growth in its stockholders' equity through the
appreciation in value of the Company's equity interests in the companies in
which it invests. The Company intends to make loans at favorable interest rates
to small and medium sized businesses that are underserved by traditional
lenders. See 'Business.' In seeking to achieve these objectives, the Company
will make senior and subordinated loans to small and medium sized businesses in
need of capital for growth, restructuring or a change of control, and the
Company will generally invest in, or obtain warrants to acquire a minority
equity interest in, such businesses. No assurance can be given that the Company
will achieve its objectives. Following the Offering, the Company will be a
non-diversified, closed-end investment company that has elected to be treated as
a business development company under the Investment Company Act of 1940, as
amended (the '1940 Act').
In addition to the 7,000,000 shares offered by the Underwriters, the Company
is offering by means of this Prospectus up to 716,846 shares of Common Stock
directly to directors, officers and employees of the Company and certain
associated persons and entities at the Price to Public net of Underwriting
Discounts and Commissions (the 'Direct Offering'). See 'Direct Offering.'
SHARES OF CLOSED-END INVESTMENT COMPANIES HAVE IN THE PAST FREQUENTLY TRADED
AT DISCOUNTS FROM THEIR NET ASSET VALUES AND INITIAL OFFERING PRICES. THE RISK
OF LOSS ASSOCIATED WITH THIS CHARACTERISTIC OF CLOSED-END INVESTMENT COMPANIES
MAY BE GREATER FOR INVESTORS EXPECTING TO SELL SHARES OF COMMON STOCK PURCHASED
IN THIS OFFERING SOON AFTER THE COMPLETION OF THIS OFFERING.
This Prospectus sets forth concisely the information about American Capital
that a prospective investor ought to know before investing. It should be
retained for future reference. Additional information about the Company has been
filed with the Securities and Exchange Commission (the 'Commission') and is
available upon written or oral request without charge. See 'Additional
Information.'
------------------------
SEE 'RISK FACTORS' BEGINNING ON PAGE 8 FOR CERTAIN INFORMATION, INCLUDING
RISKS RELATING TO LEVERAGE, THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS
OF THE COMMON STOCK OFFERED HEREBY. THERE ARE CERTAIN SPECIAL RISKS ASSOCIATED
WITH INVESTING IN A BUSINESS DEVELOPMENT COMPANY INCLUDING RISKS RESULTING FROM
A PORTFOLIO HEAVILY INVESTED IN SECURITIES OF SMALL AND DEVELOPING BUSINESSES.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE COMMISSION OR ANY
STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS
PRICE TO DISCOUNTS AND TO THE
PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
Per Share......................................... $ $ $
Total(3).......................................... $ $ $ (4)
</TABLE>
(1) Does not include warrants to purchase up to 336,127 shares of Common Stock
(378,127 shares of Common Stock if the Over-Allotment Option, as described
below, is exercised in full) issued to the representative of the
Underwriters in connection with the Offering (the 'Underwriters' Warrants')
and an accountable expense allowance of up to $200,000 payable to the
Underwriters. The Company has agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933,
as amended (the 'Securities Act'). See 'Underwriting.'
(2) Before deduction of expenses of the Offering payable by the Company
estimated at $ .
(3) The Company has granted to the Underwriters an option, exercisable within 30
days of the date of this Prospectus, to purchase up to an aggregate of
1,050,000 additional shares of Common Stock on the same terms as set forth
above, solely to cover over-allotments, if any (the 'Over-Allotment
Option'). If this option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions, and Proceeds to Company would be
$ , $ and $ , respectively. See 'Underwriting.'
(4) Excludes $ expected to be received by the Company from the Direct Offering
if the Direct Offering is sold in full.
------------------------
The shares of Common Stock offered by this Prospectus, other than through
the Direct Offering, are being offered by the Underwriters, subject to prior
sale, when, as and if accepted by the Underwriters and subject to the
Underwriters' right to reject orders, in whole or in part, and to certain other
conditions. It is expected that delivery of the shares to the Underwriters will
be made at the office of the Underwriters on or about , 1997 against
payment therefor in immediately available funds.
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
SEPTEMBER , 1997
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
N-2 (the 'Registration Statement') under the Securities Act, with respect to the
shares of Common Stock offered by this Prospectus. The Prospectus, which is a
part of the Registration Statement, does not contain all of the information set
forth in the Registration Statement or the exhibits and schedules thereto. For
further information with respect to the Company and the Common Stock, reference
is made to the Registration Statement, including the exhibits and schedules
thereto.
The Company will also file reports, proxy statements and other information
with the Commission under the Securities Exchange Act of 1934, as amended. Such
reports, proxy statements and other information, as well as the Registration
Statement and the exhibits and schedules thereto, can be inspected at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's Regional Offices,
located at Seven World Trade Center, New York, New York 10048, and 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. The Commission maintains a
web site that contains reports, proxy statements and other information regarding
registrants, including the Company, that file such information electronically
with the Commission. The address of the Commission's web site is
http://www.sec.gov. Copies of such material may also be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates.
The Company will also furnish to its stockholders annual and quarterly
reports, which will include annual financial information that has been examined
and reported on, with an opinion expressed, by independent public accountants,
and quarterly unaudited financial information. See 'Experts.'
The Company's principal office is located at 3 Bethesda Metro Center,
Bethesda, Maryland 20814 and its telephone number is (301) 951-6122.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the detailed
information and the consolidated financial statements and notes thereto
appearing elsewhere in this Prospectus. Except as otherwise indicated, the
information contained in this Prospectus assumes that neither the Over-Allotment
Option nor the Underwriters' Warrants are exercised and reflects a stock
dividend, effective immediately prior to the effective date of the Registration
Statement of which this Prospectus is a part (the 'Registration Statement'),
pursuant to which each outstanding share of Common Stock will be effectively
converted into 29.859 shares of Common Stock. As used herein, the 'Estimated
Offering Price' equals $15.00, which represents the estimated price per share
for the Common Stock set forth on the front cover page of this Prospectus.
Information contained or incorporated by reference in this Prospectus may
contain 'forward-looking statements' within the meaning of the Private
Securities Litigation Reform Act of 1995, which can be identified by the use of
forward-looking terminology such as 'may,' 'will,' 'expect,' 'intend,' 'plans,'
'anticipate,' 'estimate' or 'continue' or the negative thereof or other
variations thereon or comparable terminology. The matters described in 'Risk
Factors' and certain other factors noted throughout this Prospectus and in any
exhibits to the Registration Statement of which this Prospectus is a part,
constitute cautionary statements identifying important factors with respect to
any such forward-looking statements, including certain risks and uncertainties,
that could cause actual results to differ materially from those in such
forward-looking statements.
THE COMPANY
OVERVIEW
American Capital is a specialty finance company that has been principally
engaged in arranging commercial loans for small and medium sized businesses
throughout the United States and has made equity investments in certain of these
businesses. While the Company has historically not made loans because it lacked
the financial resources to do so, after the Offering, the Company plans to make
senior and subordinated commercial loans to small and medium sized businesses at
relatively high interest rates, accompanied by warrants or stock ownership. The
Company's investment objectives are to achieve a high level of current income
from the collection of interest and advisory fees, as well as long-term growth
in its stockholders' equity through the appreciation in the value of the
Company's equity interests in the companies in which it invests. The Company
intends to make loans at favorable interest rates to small and medium sized
businesses that are underserved by traditional lenders. The Company plans to use
its established network of loan referral sources, the relationships of its
Chairman David Gladstone, referral arrangements with Riggs Bank, N.A. ('Riggs
Bank') and NCB Development Corporation ('NCBDC'), an affiliate of the National
Cooperative Bank, that will be entered into prior to the closing of the
Offering, and other similar sources to generate financing opportunities. The
Company's business strategy contemplates that (i) the net capital gains from the
sale of the warrants or stock it receives in connection with its lending
activities will exceed any losses it may experience from loan defaults, (ii) the
fee income it derives from its lending will provide the Company with a source of
revenue in excess of its general and administrative expenses (excluding interest
expense) and (iii) the Company will derive additional income from its financial
advisory services. No assurance can be given that the Company will achieve its
investment objectives or that its business strategy will be successful.
The Company has significant expertise in arranging financing from banks and
finance companies for small and medium sized businesses. Since its formation in
1986, the Company has arranged 29 financings aggregating over $400 million. In
addition, David Gladstone, the Company's Chairman, has over 22 years experience
in making loans and investing at Allied Capital, an affiliated group of public
and private companies which had under management in excess of $750 million in
assets at December 31, 1996, and invests in small and medium sized businesses
('Allied Capital'). While either Chairman or President of Allied Capital, Mr.
Gladstone oversaw, during the years 1992 through 1997 in excess of $850 million
of financing for many small and medium sized businesses and raised, during the
years 1985 throught 1997, seven funds totaling over $430 million of equity.
The Company currently has twelve professionals who are involved in
structuring and arranging financing for small and medium sized businesses, and
upon completion of the Offering, the Company plans to hire an additional four
professionals with business lending experience. The Company believes that this
expertise will help it to be successful in lending to small and medium sized
businesses.
3
<PAGE>
STRATEGY
The Company will target small and medium sized businesses that meet certain
criteria, including the potential for growth, adequate assets for loan
collateral, an experienced management team with a significant ownership interest
in the business, profitable or near profitable operations and potential
opportunities for the Company to realize appreciation and gain liquidity in its
equity position. The Company's loans to these businesses typically will range
from $1 million to $10 million, mature in five to seven years, and require
monthly interest payments at an annualized rate that exceeds the prime rate.
Amortization of principal may generally be deferred for several years. Liquidity
can be achieved through a sale of the business, a public offering by the
business, a private sale of the Company's loan or equity interests or exercising
the Company's rights to require the business to buy back the Company's warrants
or stock.
To develop new financing opportunities, the Company plans to use its
established network of referral sources, the relationships of its Chairman David
Gladstone and referral arrangements with Riggs Bank and NCBDC whereby they
would, in certain instances, refer certain small and medium sized business
financing opportunities to the Company. The Company intends to enter into
similar referral arrangements with other financial institutions, but no
assurance can be given that it will be able to do so.
The Company believes that many opportunities exist to provide lending to
small and medium sized businesses. According to the Small Business
Administration, small businesses employed 53% of the private work force,
contributed 47% of all sales in the United States, and were responsible for 50%
of the private gross domestic product in 1995. Small businesses produced an
estimated 75% of the 2.5 million new jobs created during 1995 and had income of
$449.2 billion in 1995. The number of small businesses has increased 49% from
1982 to 1995. As of 1994, there were approximately 22.1 million non-farm
businesses in the United States, of which 99% were small businesses.
The Company believes that the market for commercial loans to these small
and medium sized businesses is underserved for a number of reasons. First,
traditional lenders, such as commercial banks and savings and loans, generally
are burdened with an overhead and administrative structure and operate in a
regulatory environment that hinders them from lending effectively to these
businesses. Second, consolidation in the banking industry during the past decade
decreased the number of banks willing to lend to small and medium sized
businesses, as the larger acquiring banks sought to limit both the credit
exposure and monitoring costs associated with loans to these businesses. Third,
the banking industry has experienced structural and regulatory changes that have
greatly affected the ability of traditional financial institutions to make funds
available for loans to small and medium sized businesses.
The Company believes that it is well positioned to provide financing to
small and medium sized businesses. The Company is not burdened with the capital
and other regulatory requirements of the banking and savings and loan industries
and has relatively low overhead and administrative expenses. Moreover, the
Company's strategy of making equity investments in its borrowers is intended to
closely align the interests of the Company and its borrowers, thereby reducing
transaction costs, conveying the Company's commitment to its borrowers and
enhancing the Company's attractiveness as a financing source. The Company
believes that it has the experience and expertise to serve as a financing source
for small and medium sized businesses. In particular, the Company intends to
utilize its expertise in corporate spinoffs and employee stock ownership plan
('ESOP') transactions as well as Mr. Gladstone's twenty-two years of experience
in financing small to medium sized businesses to realize a competitive
advantage.
BACKGROUND
The Company has 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 & Chemicals, Inc., General Cable Corporation, PPG
Industries, Inc., GenCorp, Inc., American Maize-Products Company,
Ampco-Pittsburgh Corporation, and British Petroleum Company. In most of the ESOP
transactions structured by the Company, the employees agree to restructure their
wages and benefits so that overall cash compensation is reduced in favor of
contribution of stock to an ESOP. The Company structures the resulting company
so that the fair market value of stock contributed to the employees' 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
4
<PAGE>
cash flow of the ESOP company. Principals of the Company have served on the
boards of directors of eighteen ESOP companies.
The Company has also provided financial advisory services to the following
entities or parties involved in transactions with such entities: AMR Corporation
(parent of American Airlines, Inc.), Massachusetts Financial Services Company,
Wings Holdings, Inc. (then parent of Northwest Airlines, Inc.), Northwestern
Steel and Wire Company, Goldendale Aluminum Company, Inc., Columbia Aluminum
Corporation, Flair Corporation, Bidermann Industries Corporation, Simmons
Company, John Morrell & Company, Inc., The Circle K Corporation, and H.P. Hood,
Inc.
The Company believes that, through its current business, it has established
an extensive referral network comprised of venture capitalists, investment
bankers, attorneys, commercial bankers and business and financial brokers. While
the Company plans to continue its present business of structuring ESOP
transactions, it also intends to utilize its existing referral network to expand
the Company's operations by making loans to ESOP companies and by financing
small and medium sized businesses without ESOPs.
From 1990 through June 30, 1997, the Company made equity investments in
eight of the businesses that it assisted. The Company's Board of Directors has
determined the value of its six current equity investments based on valuations
by independent firms that were conducted as of dates between December 31, 1996
and June 30, 1997. Based on those six valuations and the net realized gains from
the Company's other two investments, the return on the Company's equity
investments from August 20, 1990 to June 30, 1997 was 47.0% per annum. As of
June 30, 1997, the Company retained six of its equity investments with an
aggregate value of $9.7 million. See 'Portfolio Companies.'
The Company is headquartered in Bethesda, Maryland, a suburb of Washington,
D.C., and has professionals based in or near New York, Pittsburgh, San
Francisco, Savannah and Boston. The Company believes that it offers investors a
unique opportunity to invest in a portfolio of loans to, and equity interests
in, small and medium sized businesses that is not otherwise available to the
general public. Following the Offering, the Company will be a non-diversified,
closed-end investment company that will operate as a business development
company under the 1940 Act. To facilitate compliance with certain regulatory
requirements relating to investment companies, the Company plans to contribute
its assets and operations relating to its existing business to a wholly owned
subsidiary. Proceeds from the Offering will remain with the Company.
TAXATION AS A REGULATED INVESTMENT COMPANY
Since its formation in 1986, the Company has been subject to tax as an
ordinary corporation under Subchapter C of the Internal Revenue Code of 1986, as
amended (the 'Code'). After the Offering, the Company intends to qualify for and
elect to be treated as a regulated investment company ('RIC') under Subchapter M
of the Code. If 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.
The tax consequences of converting an existing corporation from taxation
under Subchapter C of the Code to taxation as a RIC under Subchapter M of the
Code are uncertain. The Company has requested a ruling from the Internal Revenue
Service ('IRS') that would clarify the consequences of the conversion. Although
the Company expects a favorable ruling, there can be no assurance that the IRS
will issue a favorable ruling or that such a ruling would be issued on a timely
basis.
If the Company does not receive a favorable ruling on a timely basis it
will treat the conversion as triggering a deemed sale of all the Company's
assets. The deemed sale would cause the Company to pay approximately $3.1
million of additional tax (based on the Company's June 30, 1997 financial
results), which potential liability is included on the Company's financial
statements as a deferred tax liability. The Company would also pay a taxable
dividend to holders of Common Stock before the end of its first tax year during
which it wishes to be treated as a RIC equal to the gain recognized on the
deemed sale, reduced by the tax payment referred to above. The dividend would be
approximately $5.9 million (based on the Company's June 30, 1997 financial
results). See 'Tax Status--Conversion to RIC Status.'
CERTAIN INVESTMENT CONSIDERATIONS
Investment in the Common Stock carries certain risks. There can be no
assurance that the market price for the Common Stock will not decrease below the
offering price or that the Company will pay regular dividends. Only investors
who can bear the risk of such decreases in the stock price and who do not depend
on the payment of regular dividends should consider purchasing the Common Stock.
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company................ 7,000,000 shares
Common Stock to be outstanding after
the Offering..................................... 8,403,176 shares(1)
Nasdaq National Market Symbol...................... ACAS
Use of proceeds.................................... Origination of loans and investments and repayment of
indebtedness. See 'Use of Proceeds.'
Distributions...................................... The Company intends to distribute quarterly 90% or more of
its net investment income and net realized short-term
capital gains, if any. The first distribution is expected to
be declared approximately 60 days after the date of this
Prospectus. See 'Distributions.'
Risk Factors....................................... Investment in shares of Common Stock involves certain risks
relating to the structure and investment objectives of the
Company that should be considered by purchasers of Common
Stock. See 'Risk Factors.'
Reinvestment Plan.................................. All cash distributions to stockholders will be reinvested
automatically under the Company's Reinvestment Plan in
additional whole and fractional shares of Common Stock
unless a stockholder or its representative elects to receive
cash. See 'Reinvestment Plan' and 'Tax Status.'
</TABLE>
- ------------------
(1) Assumes that all of the 716,846 shares offered through the Direct Offering
are sold in full, but does not include Common Stock reserved for issuance
upon exercise of the Underwriters' Warrants, the Over-Allotment Option or
options to be issued under the Company's 1997 Stock Option Plan. See
'Management--Stock Option Plan,' 'Shares Eligible for Future Sale' and
'Underwriting.'
6
<PAGE>
FEES AND EXPENSES
The purpose of the following table is to assist a prospective investor in
understanding the various costs and expenses that an investor in the Company
will bear directly or indirectly.
<TABLE>
<S> <C> <C>
STOCKHOLDER TRANSACTION EXPENSES
Sales Load (as a percentage of offering price).......................................... 7.00%(1)
Dividend Reinvestment Plan Fees......................................................... None(2)
ANNUAL EXPENSES (as a percentage of net assets attributable to common shares)
Management Fees......................................................................... None
Interest Payments on Borrowed Funds..................................................... 0.03%(3)
Other Expenses.......................................................................... 2.49%(3)
-----
Total Annual Expenses (estimated)............................................. 2.52%
-----
-----
</TABLE>
- ------------------
(1) The underwriting discounts and commissions with respect to the Common Stock
sold by the Company in the Offering, which are onetime fees paid by the
Company to the Underwriters in connection with the Offering, are the only
sales load paid in connection with the Offering.
(2) The expenses of the Reinvestment Plan are included in stock record expenses,
a component of Total Operating Expenses. The Company has no cash purchase
plan.
(3) Estimates of Interest Payments on Borrowed Funds and Total Operating
Expenses have been based on the Company's existing Operating Expenses
(including interests costs) and including expenses associated with its
financial advisory services divided by the Company's assets subsequent to
the Offering. The percentage in the table assumes that the Company has not
issued any securities that are senior to its equity securities. In fact, the
Company does not expect the Offering proceeds to be fully invested for the
first year and possibly one and a half years. See 'Use of Proceeds.' Once
the Offering proceeds are substantially fully invested, the Company intends
to issue senior debt securities ('Senior Debt Securities') up to an amount
so that the asset coverage, as defined in the 1940 Act, is at least 200%
immediately after each issuance of Senior Debt Securities. See
'Business--Leverage.'
EXAMPLE
The following example demonstrates the projected dollar amount of total
cumulative expenses that would be incurred over various periods with respect to
a hypothetical investment in the Company. These amounts are based upon payment
by an investor of a 7% sales load (the underwriting discounts and commissions
paid by the Company with respect to the Common Stock sold by the Company in this
Offering) and payment by the Company of operating expenses at the levels set
forth in the table above which, as indicated above, does not include leverage or
related expenses.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming a 5%
annual return............................................................ $ 95 $ 149 $ 209 $386
</TABLE>
This example should not be considered a representation of the future
expenses of the Company, and actual expenses may be greater or less than those
shown. Moreover, while the example assumes (as required by the Commission) a 5%
annual return, the Company's performance will vary and may result in a return
greater or less than 5%. In addition, while the example assumes reinvestment of
all dividends and distributions at net asset value, participants in the
Reinvestment Plan may receive shares purchased by the Plan Administrator at the
market price in effect at the time, which may be at, above or below net asset
value. See 'Reinvestment Plan.'
7
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------------------------------- ----------
1993(1) 1994 1995 1996
---------- ---------- ---------- ---------- 1996
----------
1992(1)(2) (UNAUDITED)
-----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
REVENUE
Financial advisory fees...................... $ 891,340 $1,195,821 $1,433,891 $1,148,752 $1,738,295 $ 838,625
Financial performance fees................... -- 210,000 708,377 1,288,797 649,030 240,980
Other........................................ 156,380 476,337 355,963 268,083 359,097 212,435
----------- ---------- ---------- ---------- ---------- ----------
Total revenue................................ 1,047,720 1,882,158 2,498,231 2,705,632 2,746,422 1,292,040
OPERATING EXPENSES
Salaries and benefits........................ 462,910 751,755 1,350,909 1,484,833 1,067,315 514,807
General and administrative................... 252,634 386,816 523,233 573,102 926,502 374,500
Other operating expenses..................... 159,870 292,842 345,056 278,212 355,693 184,464
Provision for doubtful accounts.............. -- -- -- 302,283 224,329 100,250
Interest..................................... 15,948 38,960 36,001 37,037 32,959 11,223
Depreciation and amortization................ 9,516 22,526 33,198 35,415 39,016 18,350
ESOP contribution............................ 100,917 166,273 317,361 216,827 215,883 103,328
----------- ---------- ---------- ---------- ---------- ----------
Total operating expenses..................... 1,001,795 1,659,172 2,605,758 2,927,709 2,861,697 1,306,922
----------- ---------- ---------- ---------- ---------- ----------
Net operating income (loss) before investment
activity................................... 45,925 222,986 (107,527) (222,077) (115,275) (14,882)
Unrealized appreciation (depreciation) of
investments................................ 619,760 (61,660) 956,294 370,696 483,665 398,498
Realized gain (loss) on investments.......... -- -- (22,784) 66,148 -- --
----------- ---------- ---------- ---------- ---------- ----------
Income before income taxes and
extraordinary item......................... 665,685 161,326 825,983 214,767 368,390 383,616
Provision for (benefit from) income taxes.... 212,346 (2,458) 421,664 57,381 159,251 149,454
----------- ---------- ---------- ---------- ---------- ----------
Income before extraordinary item............. 453,339 163,784 404,319 157,386 209,139 234,162
Extraordinary item........................... 60,228 -- -- -- -- --
----------- ---------- ---------- ---------- ---------- ----------
Net income................................... $ 513,567 $ 163,784 $ 404,319 $ 157,386 $ 209,139 $ 234,162
----------- ---------- ---------- ---------- ---------- ----------
----------- ---------- ---------- ---------- ---------- ----------
SUPPLEMENTAL PER SHARE DATA:(3)
Net operating income (loss) before investment
activity................................... $ (0.17)
Income before extraordinary item............. 0.30
Net income................................... 0.30
Weighted average shares outstanding.......... 686,330
BALANCE SHEET DATA AT PERIOD END:
Investments.................................. $2,173,202 $2,111,542 $3,045,052 $3,422,422 $3,980,421 $3,820,920
Cash and cash equivalents.................... 206,204 229,674 203,234 359,029 322,664 312,001
Total assets................................. 2,713,821 2,821,611 3,930,365 4,382,994 5,432,265 4,890,574
Total liabilities............................ 1,244,751 971,102 1,358,919 1,437,335 2,060,614 1,606,455
Total stockholders' equity................... 1,469,070 1,850,509 2,571,446 2,945,659 3,371,651 3,284,119
OPERATING STATISTICS (DOLLARS IN THOUSANDS):
(UNAUDITED)
Number of financings arranged during the
period..................................... 1 6 2 4 4 2
Amount of financings arranged................ $ 35,153 $ 42,862 $ 16,470 $ 131,039 $ 49,931 $ 8,080
Number of portfolio companies as of end of
period..................................... 2 4 5 5 5 5
<CAPTION>
1997
----------
<S> <C>
STATEMENT OF INCOME DATA:
REVENUE
Financial advisory fees...................... $ 860,431
Financial performance fees................... 743,600
Other........................................ 337,658
----------
Total revenue................................ 1,941,689
OPERATING EXPENSES
Salaries and benefits........................ 619,851
General and administrative................... 700,006
Other operating expenses..................... 425,316
Provision for doubtful accounts.............. (177,198)
Interest..................................... 41,709
Depreciation and amortization................ 21,832
ESOP contribution............................ 7,296
----------
Total operating expenses..................... 1,638,812
----------
Net operating income (loss) before investment
activity................................... 302,877
Unrealized appreciation (depreciation) of
investments................................ 5,332,369
Realized gain (loss) on investments.......... --
----------
Income before income taxes and
extraordinary item......................... 5,635,246
Provision for (benefit from) income taxes.... 2,150,893
----------
Income before extraordinary item............. 3,484,353
Extraordinary item........................... --
----------
Net income................................... $3,484,353
----------
----------
SUPPLEMENTAL PER SHARE DATA:(3)
Net operating income (loss) before investment
activity................................... $ 0.44
Income before extraordinary item............. 5.08
Net income................................... 5.08
Weighted average shares outstanding.......... 686,330
BALANCE SHEET DATA AT PERIOD END:
Investments.................................. $9,685,679
Cash and cash equivalents.................... 726,086
Total assets................................. 11,369,683
Total liabilities............................ 4,506,383
Total stockholders' equity................... 6,893,300
OPERATING STATISTICS (DOLLARS IN THOUSANDS):
(UNAUDITED)
Number of financings arranged during the
period..................................... 2
Amount of financings arranged................ $ 39,539
Number of portfolio companies as of end of
period..................................... 6
</TABLE>
- ------------------
(1) Beginning January 1, 1994, the Company prospectively adopted the provisions
of AICPA Statement of Position 93-6, 'Employers' Accounting for Employee
Stock Ownership Plans' (SOP 93-6). Through December 31, 1993, the Company
accounted for ESOP shares in accordance with AICPA Statement of Position
76-3.
(2) Effective January 1, 1993, the Company changed its method of accounting for
income taxes from the deferred method to the liability method required by
FASB Statement No. 109, 'Accounting for Income Taxes.' As permitted under
the new rules, financial statements as of and for the year ended December
31, 1992 have not been restated for the effect of this change. The
cumulative effect of adopting Statement 109 as of January 1, 1993 was
immaterial for financial statement presentation.
(3) Per share data for periods not shown is not meaningful, in part, because of
the July 28, 1997 conversion of the Company ESOP's Preferred Stock into
Common Stock. See 'Capitalization.'
8
<PAGE>
RISK FACTORS
The purchase of the shares offered by this Prospectus involves a number of
significant risk and other factors relating to the structure and investment
objectives of the Company. As a result, there can be no assurance that the
Company will achieve its investment objectives. In addition to the other
information contained in this Prospectus, prospective investors should consider
carefully the following information before making an investment in the Common
Stock.
RISKS ASSOCIATED WITH LOANS TO AND INVESTMENTS IN SMALL AND MEDIUM SIZED
PRIVATELY-OWNED BUSINESSES
The Company's portfolio primarily will consist of loans to and securities
issued by small and medium sized, privately-owned businesses. There is generally
no publicly available information about such companies and the Company must rely
on the diligence of its employees and agents to obtain information in connection
with the Company's investment decisions. Typically, small and medium sized
businesses depend for their success on the management talents and efforts of one
or two persons or a small group of persons, and the death, disability or
resignation of one or more of these persons could have a material adverse impact
on the related company. In addition, small and medium sized businesses
frequently have smaller product lines and market shares than their competition.
Small and medium sized companies may be more vulnerable to economic downturns
and often need substantial additional capital to expand or compete. Such
businesses may also experience substantial variations in operating results.
Accordingly, investment in small and medium sized businesses should be
considered speculative. The Company's operating history is relatively limited,
and it has not previously operated as a lender to small and medium sized
businesses. The Company will seek to make senior secured loans and subordinated
loans, the latter of which have a higher degree of collection risk. The Company
will also make unsecured loans and will invest in equity, both of which
activities may involve a higher degree of risk.
RISK OF PAYMENT DEFAULT
The Company after this Offering intends generally to make five to seven
year term loans, deferring amortization of principal for several years. The
loans will have relatively high interest rates floating with the prime lending
rate or a comparable index. These loans will be made to small and medium sized
companies that may have limited financial resources and may be unable to obtain
financing from traditional sources. These loans generally will be secured by the
assets of the borrower. A borrower's ability to repay its loan may be adversely
affected by numerous factors, including the failure to meet its business plan, a
downturn in its industry or negative economic conditions. A deterioration in a
borrower's financial condition and prospects usually will be accompanied by a
deterioration in the value of any collateral for the loan and a reduction in the
likelihood of realizing on any guarantees obtained from the borrower's
management. Although the Company often will seek to be the senior, secured
lender to a borrower, the Company will not always be the senior lender, and the
Company's interest in any collateral for a loan may be subordinate to another
lender's security interest.
LONG-TERM CHARACTER OF INVESTMENTS
The Company expects that it will take at least one and possibly
one-and-a-half years for the net proceeds from the Offering to be substantially
fully invested or loaned. See 'Use of Proceeds.' Since the Company generally
intends to make five to seven year term loans and to hold its loans and related
equity investments until the loans mature, an investor in the Company should not
expect realization events, if any, to occur for a long time. In addition, the
Company expects that its equity investments may require several years to
appreciate in value and no assurance can be given that such appreciation will
occur.
ILLIQUIDITY
Liquidity relates to the ability of the Company to sell either a debt or
equity security in a timely manner at a price that reflects the value of that
security. Most of the investments of the Company will consist of securities
acquired directly from their issuers in private transactions. The securities
will usually be subject to restrictions on resale or otherwise illiquid because
there will usually be no established trading market for such securities. The
illiquidity of most of the Company's portfolio securities will adversely affect
the ability of the Company to dispose of such securities in a timely manner and
at a fair price at times when it might be necessary or advantageous for the
Company to liquidate portfolio securities. To the extent that there exists any
market, the market for illiquid securities tends to be more volatile than the
market for more liquid securities and market
9
<PAGE>
values of relatively illiquid securities may be more susceptible to change as a
result of adverse publicity and investor perceptions than are the market values
of relatively liquid securities. In the absence of readily ascertainable market
value, the valuation of securities in the Company's portfolio is determined in
good faith by the Company's Board of Directors. The estimated values 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.
LEVERAGE RISKS
The Company expects that it will take at least one and possibly
one-and-a-half years for the net proceeds from the Offering to be substantially
fully invested or loaned. At such time as the Company believes that the
remaining proceeds will be insufficient to fund new loans or investments
anticipated to be made within the next twelve month period (other than temporary
investments), it intends to leverage its assets by borrowing or issuing Senior
Debt Securities up to the maximum amount permitted under the 1940 Act, which is
currently an amount such that the asset coverage, as defined in the 1940 Act, is
at least 200% immediately after each issuance of Senior Debt Securities. The use
of leverage magnifies the potential for gain or loss on monies invested and,
therefore, increases the risks associated with an investment in the Company's
securities. See 'Business-- Leverage,' 'Regulation,' and 'Tax Status.'
POSSIBLE FAILURE TO OBTAIN PASS-THROUGH TAX TREATMENT; TAXATION OF BUILT-IN GAIN
The Company was formed in 1986, and since that time has been subject to tax
as an ordinary corporation under Subchapter C of the Code. After the Offering,
the Company intends to qualify for and elect to be treated as a RIC under
Subchapter M of the Code. If 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. Failure to qualify for RIC status will result in the imposition of
corporate-level taxes that will substantially reduce the returns available to
purchasers of Common Stock. Such a failure would have a material adverse effect
on the Company and its shares.
The tax consequences of converting an existing corporation from taxation
under Subchapter C of the Code to taxation as a RIC under Subchapter M of the
Code are uncertain. The Company has requested a ruling from the IRS that would
clarify the consequences of the conversion. Although the Company expects a
favorable ruling, there can be no assurance that the IRS will issue a favorable
ruling or that such a ruling would be issued on a timely basis.
If the Company does not receive a favorable ruling on a timely basis it
will treat the conversion as triggering a deemed sale of all the Company's
assets. The deemed sale would cause the Company to pay approximately $3.1
million of additional tax (based on the Company's June 30, 1997 financial
results), which potential liability is included on the Company's financial
statements as a deferred tax liability. The Company would also pay a taxable
dividend to holders of Common Stock before the end of its first tax year during
which it wishes to be treated as a RIC equal to the gain recognized on the
deemed sale, reduced by the tax payment referred to above. The dividend would be
approximately $5.9 million (based on the Company's June 30, 1997 financial
results).
If the Company receives a timely favorable ruling, it will not pay
additional tax or a special dividend in connection with its conversion to RIC
status. The Company's basis in the assets it owned before the Offering will be
less than their fair market value by approximately $9.0 (the 'Code') million
('built-in gain'). If the Company disposes of any asset held on the date of the
Offering within ten years of the Offering, and it recognizes any built-in gain
from the disposition of the asset, it generally will be liable for
corporate-level tax on the gain. If all of the built-in gain assets were sold,
the built-in gain tax would be approximately $3.1 million at current corporate
tax rates. Such taxes will reduce the funds otherwise available for the
Company's operations or for distribution to stockholders. See 'Tax
Status--Conversion to RIC Status.'
POTENTIAL PURCHASERS OF COMMON STOCK SHOULD CONSULT THEIR OWN TAX ADVISORS
WITH RESPECT TO THE TAX CONSEQUENCES OF THE COMPANY'S CONVERSION TO RIC STATUS,
AND THE TAX TREATMENT OF THE COMPANY'S BUILT-IN GAIN.
RISK OF LOSS OF PASS-THROUGH TAX TREATMENT
To maintain its qualification as a RIC, the Company must meet income source
and distribution rules and asset diversification requirements. If the Company
qualifies as a RIC, the Company will not be subject to federal income tax in any
given tax year to the extent it distributes its income to its stockholders. The
income distribution
10
<PAGE>
requirement is satisfied if the Company distributes at least 90% of its net
investment income to stockholders. Because the Company intends to use leverage,
it is subject to certain asset coverage ratio requirements under the 1940 Act
and could, under certain circumstances, be restricted from making distributions
necessary to qualify as a RIC. The asset diversification requirements must be
met at the end of each calendar quarter. Failure to meet these tests may result
in the Company having to quickly dispose of certain investments in order to
prevent the loss of pass-through treatment. Since most of the Company's
investments will be illiquid, such dispositions, if possible, may not be made at
prices advantageous to the Company and, in fact, may result in substantial
losses. If the Company fails to qualify for pass-through tax treatment for any
reason and becomes fully subject to corporate income tax, the resulting
corporate taxes could substantially reduce the Company's net assets, the amount
of income available for distribution, and the actual amount distributed. Such a
failure would have a material adverse effect on the Company and its shares. See
'Business--Leverage,' 'Tax Status,' and 'Regulation.'
ABSENCE OF A PUBLIC MARKET; DETERMINATION OF OFFERING PRICE; MARKET PRICE
DISPARITIES
Prior to this Offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price will be determined
through negotiations between the Company and the representative of the
Underwriters. See 'Underwriting' for a discussion of factors to be considered in
determining the initial public offering price. There can be no assurance that a
regular trading market for the Common Stock will develop after this Offering or,
if developed, that a public trading market can be sustained. The initial public
offering price will not necessarily reflect, and may be higher than, the market
price of the Common Stock after the Offering.
Shares of closed-end investment companies frequently trade at a discount
from net asset value, but shares of some have historically traded at a premium
to net asset value. This characteristic of shares of closed-end investment
companies is separate and distinct from the risk that a company's net asset
value per share will decline. It is not possible to predict whether the shares
offered hereby will trade at, above, or below net asset value.
INTEREST RATE RISK AND HEDGING
The Company's income will, in part, depend upon the 'spread' between the
rate at which it borrows funds and the rate at which it loans these funds. The
Company anticipates eventually using a combination of long-term and short-term
borrowings to finance its lending activities and engaging in interest rate risk
management techniques, including various interest rate hedging activities such
as interest rate swaps and purchased interest rate caps and floors. There can be
no assurance, however, that a significant change in market interest rates will
not have a material adverse effect on the Company's profitability. Additionally,
interest rate hedging activities are a type of off-balance sheet financial
derivative and, as such, involve, to varying degrees, interest rate and credit
risk in excess of the amount recognized in the Company's balance sheet. Interest
rate swaps are agreements to exchange fixed and floating interest rate payments
calculated on a notional principal amount. The floating rate is based on a money
market index, primarily short-term LIBOR indices. Purchased interest rate caps
and floors are agreements where, for a fee, the counterparty agrees to pay the
amount, if any, by which a specified market interest rate exceeds or is less
than a defined rate applied to a notional amount, respectively. For interest
rate swaps, caps and floors, only periodic cash payments and, with respect to
caps and floors, premiums are exchanged. Therefore, cash requirements and
exposure to credit risk are significantly less than the notional value, although
greater than the amount recognized in the Company's balance sheet.
RISK OF UNAVAILABILITY OF FUNDS
Once the Offering proceeds are substantially invested, the Company will
have a continuing need for capital to finance its loans and investments. In
order to maintain RIC status, the Company will distribute to its stockholders
90% of its investment company taxable income. Accordingly, such earnings will
not be available to fund the Company's loans and investments. The unavailability
of funds from commercial banks or other sources on terms favorable to the
Company could have a material adverse effect on the Company. See 'Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Financial Condition, Liquidity and Capital Resources' and
'Distributions.'
COMPETITIVE MARKET FOR INVESTMENT OPPORTUNITIES
A large number of entities and individuals compete to make the types of
investments made by the Company, many of whom have greater financial resources
than the Company. As a result of this competition, the Company may from time to
time be precluded from entering into attractive transactions. There can be no
assurance that the
11
<PAGE>
Company will be able to identify and make investments which satisfy the
Company's investment objectives or that it will be able to invest fully its
available capital.
DEPENDENCE ON MANAGEMENT
The Company will be dependent for the final selection, structuring, closing
and monitoring of its investments on the diligence and skill of David Gladstone,
Malon Wilkus, Adam Blumenthal and other management members. Although each of the
aforementioned individuals has an employment contract with the Company, the loss
of the services of any of such individuals could have a material adverse effect
on the Company. The Company does not plan to maintain key man life insurance
with respect to any of its executives. See 'Management.'
LACK OF PREVIOUS LENDING OPERATIONS
Although the Company has significant expertise in arranging financing for,
and investing in, small and medium sized businesses and has assisted in
arranging financings aggregating over $400 million, the Company has not
previously made any commercial loans. Consequently, the Company has no prior
experience in loan administration. The Company has, however, entered into an
agreement with Riggs Bank pursuant to which the bank will provide certain loan
accounting administrative services for the Company's loans. Because the Company
has not previously made loans, it has no experience in workouts of troubled
loans as a lender. However, the Company has extensive experience as a financial
adviser to troubled companies. In addition, Mr. Gladstone has more than 22 years
of experience in making and working out loans to, and investing in, small and
medium sized businesses, and, after the Offering, the Company plans to hire an
additional four professionals with substantial lending experience. The success
of the Company will be dependent upon its ability to attract and retain
financial professionals.
CERTAIN ANTI-TAKEOVER PROVISIONS
The Company's Second Amended and Restated Certificate of Incorporation and
Second Amended and Restated By-laws contain certain provisions that may have the
effect of discouraging a third party from making an acquisition proposal for the
Company and thereby inhibit a change in control of the Company in circumstances
that could give the holders of Common Stock the opportunity to realize a premium
over the then prevailing market price for the Common Stock. See 'Description of
Capital Stock--Certain Provisions of the Second Amended and Restated Certificate
of Incorporation and the Second Amended and Restated By-Laws.'
SHARES ELIGIBLE FOR RESALE
Upon consummation of the Offering and the entire amount of the Direct
Offering, the Company will have 8,403,176 shares of Common Stock outstanding.
Following the Offering, sales of substantial amounts of the Common Stock in the
public market pursuant to Rule 144 or otherwise, or the availability of such
shares for sale, could adversely affect the prevailing market prices for the
Common Stock and impair the Company's ability to raise additional capital
through the sale of equity securities should it desire to do so. See 'Shares
Eligible for Future Sale.'
USE OF PROCEEDS
The net proceeds of the Offering and the Direct Offering, assuming that the
Direct Offering is sold in full, are estimated to be approximately $106,900,000
($121,547,500 if the Over-Allotment Option is exercised in full) after deducting
the underwriting discounts and commissions and estimated Offering expenses
payable by the Company. The Company will use approximately $636,000 of the net
proceeds of the Offering to repay the outstanding debt on its term loan and its
acquisition credit facility with NCBDC, which bear interest at rates ranging
from 1.5% to 3% per annum over such lender's base rate and which mature or
terminate on November 30, 2001 and May 7, 2004, respectively. The remainder of
the net proceeds will be invested in accordance with the Company's investment
objectives and policies. See 'Business--Strategy--Selection of Loan
Opportunities' and 'Investment Objectives and Policies.' The Company estimates
that it will take at least one and possibly up to one and one half years for the
net proceeds of the Offering to be substantially fully loaned or invested,
depending on the availability of appropriate opportunities and other market
conditions. Pending such investment, the proceeds will be invested in Temporary
Investments. See 'Business--Temporary Investments.'
12
<PAGE>
DISTRIBUTIONS
The Company intends to distribute quarterly 90% or more of its net
investment income and net realized short-term capital gains, if any. The first
distribution is expected to be declared approximately 60 days after the date of
this Prospectus. Net realized long-term capital gains, if any, may be
distributed annually, as a special distribution, or retained. There can be no
assurance that the Company will achieve results that will permit the payment of
any cash distributions. For a discussion of the consequences for stockholders of
net realized long-term capital gains that are retained by the Company, see 'Tax
Status.' All cash distributions will be reinvested automatically under the
Company's Reinvestment Plan in additional whole and fractional shares unless a
stockholder elects to receive cash. A stockholder whose shares are held in the
name of a broker or other nominee should contact the broker or nominee regarding
participation in the Reinvestment Plan on the stockholder's behalf. See 'Risk
factors--Risk of Loss of Pass-Through Tax Treatment' and 'Reinvestment Plan.'
CAPITALIZATION
The following table sets forth (i) the actual capitalization of the Company
as of June 30, 1997, which reflects a stock dividend pursuant to which each
outstanding share of Common Stock will effectively convert into 29.859 shares,
to become effective immediately prior to the Effective Date of the Registration
Statement, and (ii) the capitalization of the Company as of June 30, 1997, as
adjusted to reflect the effects of (A) the sale of the Common Stock offered
hereby by the Company including the assumed sale of 716,846 shares in the Direct
Offering, (B) the repayment in full of the loan by the Company ESOP to the
Company which occurred as of July 28, 1997 and, pursuant to the Company's Second
Amended and Restated Certificate of Incorporation, the simultaneous conversion
of Preferred Stock held by the Company ESOP into Common Stock on a one share to
one share basis, (C) the effectiveness of the Company's Second Amended and
Restated Certificate of Incorporation increasing the amount of authorized
Preferred Stock and Common Stock, (D) a contribution of 529 shares of Common
Stock made to the Company ESOP as of July 28, 1997, and (E) the application of
the net proceeds as set forth under 'Use of Proceeds.' This table does not
reflect any exercise of the Over-Allotment Option, the Underwriters' Warrants or
any options to be issued under the Company's 1997 Stock Option Plan.
<TABLE>
<CAPTION>
JUNE 30, 1997
---------------------------
AS
ACTUAL ADJUSTED(1)
---------- ------------
<S> <C> <C>
Due to related parties...................................................... $ 39,612 $ --
Notes payable............................................................... 1,019,309 --
---------- ------------
1,058,921 --
Stockholders' equity:
Preferred stock, $.01 par value, 100,000 shares authorized (5,000,000
shares as adjusted) and 6,857 issued and outstanding (0 issued and
outstanding as adjusted)............................................... 1,419,399 --
Unearned ESOP shares...................................................... (27,956) --
Common stock, $.01 par value, 100,000 shares authorized (20,000,000 shares
as adjusted) and 481,058 issued and outstanding (8,403,176 issued and
outstanding as adjusted)............................................... 4,811 84,032
Capital in excess of par value............................................ 10,407 108,258,520
Retained earnings......................................................... 5,456,639 5,420,748
---------- ------------
Total stockholders' equity.................................................. 6,863,300 113,763,300
---------- ------------
Total capitalization........................................................ $7,922,221 $113,763,300
---------- ------------
---------- ------------
</TABLE>
- ------------------
(1) Assumes an Estimated Offering Price of $15.00 for the Offering, an estimated
offering price of $13.95 for the Direct Offering and estimated expenses of
$750,000.
13
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following table sets forth selected consolidated financial data and
other operating information of the Company. The selected consolidated statement
of income and consolidated balance sheet data as of and for the four years ended
December 31, 1996 are derived from the Company's audited consolidated financial
statements. The selected consolidated statement of income and consolidated
balance sheet data as of and for the year ended December 31, 1992 and as of and
for the six months ended June 30, 1997 and 1996 are derived from unaudited
consolidated financial statements. The unaudited consolidated financial
statements include all adjustments, consisting of normal recurring accruals,
which the Company considers necessary for a fair presentation of the financial
position and the results of operations for these periods. Operating results for
the six months ended June 30, 1997 are not necessarily indicative of the results
that may be expected for the entire year ending December 31, 1997. The data
should be read in conjunction with the consolidated financial statements,
related notes, and other financial information included herein.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------------- ----------------------
1993(1) 1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ---------- ----------
1992(1)(2)
-----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
REVENUE
Financial advisory fees.......... $ 891,340 $1,195,821 $1,433,891 $1,148,752 $1,738,295 $ 838,625 $ 860,431
Financial performance fees....... -- 210,000 708,377 1,288,797 649,030 240,980 743,600
Other............................ 156,380 476,337 355,963 268,083 359,097 212,435 337,658
----------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenue.................... 1,047,720 1,882,158 2,498,231 2,705,632 2,746,422 1,292,040 1,941,689
OPERATING EXPENSES
Salaries and benefits............ 462,910 751,755 1,350,909 1,484,833 1,067,315 514,807 619,851
General and administrative....... 252,634 386,816 523,233 573,102 926,502 374,500 700,006
Other operating expenses......... 159,870 292,842 345,056 278,212 355,693 184,464 425,316
Provision for doubtful accounts.. -- -- -- 302,283 224,329 100,250 (177,198)
Interest......................... 15,948 38,960 36,001 37,037 32,959 11,223 41,709
Depreciation and amortization.... 9,516 22,526 33,198 35,415 39,016 18,350 21,832
ESOP contribution................ 100,917 166,273 317,361 216,827 215,883 103,328 7,296
----------- ---------- ---------- ---------- ---------- ---------- ----------
Total operating expenses......... 1,001,795 1,659,172 2,605,758 2,927,709 2,861,697 1,306,922 1,638,812
----------- ---------- ---------- ---------- ---------- ---------- ----------
Net operating income (loss)
before investment activity..... 45,925 222,986 (107,527) (222,077) (115,275) (14,882) 302,877
Unrealized appreciation
(depreciation) of investments.. 619,760 (61,660) 956,294 370,696 483,665 398,498 5,332,369
Realized gain (loss) on
investments.................... -- -- (22,784) 66,148 -- -- --
----------- ---------- ---------- ---------- ---------- ---------- ----------
Income before income taxes and
extraordinary item............. 665,685 161,326 825,983 214,767 368,390 383,616 5,635,246
Provision for (benefit from)
income taxes................... 212,346 (2,458) 421,664 57,381 159,251 149,454 2,150,893
----------- ---------- ---------- ---------- ---------- ---------- ----------
Income before extraordinary
item........................... 453,339 163,784 404,319 157,386 209,139 234,162 3,484,353
Extraordinary item............... 60,228 -- -- -- -- -- --
----------- ---------- ---------- ---------- ---------- ---------- ----------
Net income....................... $ 513,567 $ 163,784 $ 404,319 $ 157,386 $ 209,139 $ 234,162 $3,484,353
----------- ---------- ---------- ---------- ---------- ---------- ----------
----------- ---------- ---------- ---------- ---------- ---------- ----------
SUPPLEMENTAL PER SHARE DATA:(3)
Net operating income (loss)
before investment activity..... $ (0.17) $ 0.44
Income before extraordinary
item........................... 0.30 5.08
Net income....................... 0.30 5.08
Weighted average shares
outstanding.................... 686,330 686,330
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
----------------------------------------------------------- ----------------------
1992(1)(2) 1993(1) 1994 1995 1996 1996 1997
----------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
BALANCE SHEET DATA AT PERIOD END:
Investments...................... $ 2,173,202 $2,111,542 $3,045,052 $3,422,422 $3,980,421 $3,820,920 $9,685,679
Cash and cash equivalents........ 206,204 229,674 203,234 359,029 322,664 312,001 726,086
Total assets..................... 2,713,821 2,821,611 3,930,365 4,382,994 5,432,265 4,890,574 11,369,683
Total liabilities................ 1,244,751 971,102 1,358,919 1,437,335 2,060,614 1,606,455 4,506,383
Total stockholders' equity....... 1,469,070 1,850,509 2,571,446 2,945,659 3,371,651 3,284,119 6,863,300
OPERATING STATISTICS
(DOLLARS IN THOUSANDS):
(UNAUDITED)
Number of financings arranged
during the period.............. 1 6 2 4 4 2 2
Amount of financings arranged.... $ 35,153 $ 42,862 $ 16,470 $ 131,039 $ 49,931 $ 8,080 $ 39,539
Number of portfolio companies as
of end of period............... 2 4 5 5 5 5 6
</TABLE>
- ------------------
(1) Beginning January 1, 1994, the Company prospectively adopted the provisions
of AICPA Statement of Position 93-6, 'Employers' Accounting for Employee
Stock Ownership Plans' (SOP 93-6). Through December 31, 1993, the Company
accounted for ESOP shares in accordance with AICPA Statement of Position
76-3.
(2) Effective January 1, 1993, the Company changed its method of accounting for
income taxes from the deferred method to the liability method required by
FASB Statement No. 109, 'Accounting for Income Taxes.' As permitted under
the new rules, financial statements as of and for the year ended December
31, 1992 have not been restated for the effect of this change. The
cumulative effect of adopting Statement 109 as of January 1, 1993 was
immaterial for financial statement presentation.
(3) Per share data for periods not shown is not meaningful, in part, because of
the July 28, 1997 conversion of the Company ESOP's Preferred Stock into
Common Stock. See 'Capitalization.'
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following analysis of the financial condition and results of operations
of the Company should be read in conjunction with the Selected Consolidated
Financial and Other Data, the Company's consolidated financial statements and
the notes thereto and the other financial data included elsewhere in this
Prospectus.
GENERAL
The Offering will significantly increase the Company's capital resources.
Prior to the Offering, the Company operated as a specialty finance company
principally engaged in arranging commercial loans for small and medium sized
businesses and making equity investments in certain of these businesses. The
Company has not historically made loans itself because it has lacked the
financial resources to do so. The amount of capital available for direct
investments by the Company has been small. Subsequent to the Offering, the
Company will operate as a finance company and as a closed-end investment company
that has elected to be treated as a business development company, the primary
business of which will be lending to and investing funds in small and medium
sized businesses. As a result of this change, the Company's operating results
subsequent to the Offering are anticipated to be significantly different from
its operating results prior to the Offering. In addition, the Company plans to
contribute the assets and operations relating to its existing business to a
wholly-owned subsidiary. Thereafter, the financial results of the Company's
subsidiaries will be reported by the Company using the equity method of
accounting.
The Company's financial results as reported under GAAP reflect significant
adjustments from actual cash income. In particular, the Company has historically
reported significant ESOP contributions, which reduce GAAP income and taxes
without an outflow of cash.
The Company's financial performance as reflected in its Consolidated
Statements of Income is composed of four primary elements. The first element is
'Net Operating Income (Loss) Before Investment Activity,' which is the
difference between the Company's income earned from arranging commercial loans
for small and medium sized businesses and other financial advisory work and its
total operating expenses including ESOP contributions, depreciation and interest
expense. ESOP contributions, which reflect non-cash contributions to the
Company's ESOP, historically have 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. The second element is 'Unrealized Appreciation
(Depreciation) of Investments,' which is the net change in the fair value of the
Company's portfolio assets at the end of the period compared with their fair
values at the beginning of the period or their stated costs, as appropriate. The
third element is 'Realized Gain (Loss) on Investments,' which reflects the
difference between the proceeds from a portfolio investment at the time the gain
or loss is realized, and the value at which the investment was carried on the
Company's balance sheet. The fourth element is Provision for (Benefit from)
Income Taxes, which reflects a statutory tax rate applied to the Company's GAAP
pretax income. Actual taxes paid have historically been lower than the Provision
for (Benefit from) Income Taxes, which has resulted in a Deferred Tax Liability
on the Company's balance sheet.
FISCAL YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Total Revenue...................................................... $2,498,231 $2,705,632 $2,746,422
Operating Expense Excluding ESOP Contribution...................... 2,288,397 2,710,882 2,645,814
ESOP Contribution.................................................. 317,361 216,827 215,883
---------- ---------- ----------
Net Operating Income (Loss) Before Investment Activity............. (107,527) (222,077) (115,275)
Unrealized Appreciation of Investments............................. 956,294 370,696 483,665
Realized Gain (Loss) on Investments................................ (22,784) 66,148 --
Provision for Income Taxes......................................... 421,664 57,381 159,251
---------- ---------- ----------
Net Income......................................................... $ 404,319 $ 157,386 $ 209,139
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
Net Operating Income (Loss)
Net Operating Income (Loss) is the difference between the Company's Total
Revenue earned from arranging commercial loans for small and medium sized
businesses and other financial advisory work and its Total Operating Expenses
including ESOP contributions, depreciation and interest expense.
16
<PAGE>
Total Revenue
Total Revenue consists predominantly of Financial Advisory Fees, which are
hourly or periodic fees earned by the Company for providing advice and analysis
to small and medium sized businesses, and Financial Performance Fees, which are
fees earned on a contingent basis for structuring, financing, or executing
transactions. During 1996, Financial Advisory Fees and Financial Performance
Fees constituted 86.9% of Total Revenue; during 1995, Financial Advisory Fees
and Financial Performance Fees constituted 90.1% of Total Revenue; and during
1994, Financial Advisory Fees and Financial Performance Fees constituted 85.8%
of Total Revenue. During each of the fiscal years ended December 31, 1996 and
1995, the Company earned Total Revenue of $2.7 million. Total Revenue for 1995
reflected an 8.3% increase over 1994 Total Revenue of $2.5 million. Other
components of Total Revenue consisted primarily of expense reimbursements.
Operating Expenses
Total Operating Expenses at the Company were $2.9 million in 1996, a 2.3%
decrease from 1995. Total Operating Expenses for 1995 reflected a 12.4% increase
over 1994's level of $2.6 million. This increase in Total Operating Expenses
from 1994 primarily reflected an increase in Provision for Doubtful Accounts
from $0 in 1994 to $302,000 in 1995 and to $224,000 in 1996. This Provision for
Doubtful Accounts reflected an allowance for uncollectible fees related to two
companies. One of these companies is expected to be liquidated, and no fees are
expected to be recovered. The second company has, in the second quarter of 1997,
begun making payments to reduce the amount owed to the Company. Salaries and
benefits were $1.4 million in 1994 and $1.5 million in 1995, a 9.9% increase.
Salaries and Benefits declined 28.1% to $1.1 million in 1996. This reduction in
Salaries and Benefits is the result of an increased use of outside consultants
in the Company's financial advisory work and the nonpayment of bonuses in 1996.
General and Administrative expenses increased 9.5% from $523,000 in 1994 to
$573,000 in 1995, and 61.7% to $927,000 in 1996. The increased use of
consultants was the primary reason for the increase in General and
Administrative expenses from 1995 to 1996.
Interest Expense
The Company's Interest Expense was $33,000 in 1996, $37,000 in 1995, and
$36,000 in 1994. Interest Expense is primarily associated with credit facilities
used by the Company to support its working capital requirements and, beginning
in 1996, to finance a portion of its investments in small and medium sized
businesses. The Company's total borrowings under these facilities were
approximately $430,000 at December 31, 1996, $161,000 at December 31, 1995, and
$238,000 at December 31, 1994. In addition, the Company had a note payable to
its President in the amount of $74,000 at December 31, 1996, $66,000 at December
31, 1995, and $58,000 at December 31, 1994. During the past three years, 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 is 4%
above the prime rate of interest. The Company intends to repay and cancel all of
this indebtedness out of the proceeds of the Offering. See 'Use of Proceeds.'
ESOP Contribution
The Company made ESOP contributions of $216,000 in 1996, $217,000 in 1995,
and $317,000 in 1994. 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.
See 'Capitalization.' 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 $117,000, and the Company's obligation to make
further contributions to the ESOP was limited to that amount. All of the ESOP
shares have now been earned and distributed and, therefore, the Company has no
further obligation to make contributions to the ESOP. Management believes that a
more complete understanding of the Company's results can be gained by viewing
them on a pro forma, 'fully distributed' basis. This approach considers all ESOP
shares which were distributed to employees to have been immediately outstanding
and thus fully distributed. Consistent with this method, the ESOP compensation
expense is excluded from fully distributed net operating income, and no portion
of ESOP
17
<PAGE>
convertible preferred stock dividends are included in compensation expense. A
comparison of results reported on a fully distributed basis to results reported
under GAAP is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------
1994 1995 1996
------------------------- ------------------------- -------------------------
EXCL. ESOP EXCL. ESOP EXCL. ESOP
GAAP CONTRIBUTION GAAP CONTRIBUTION GAAP CONTRIBUTION
---------- ------------ ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Total Operating Expenses........... $2,605,758 $ 2,288,397 $2,927,709 $ 2,710,882 $2,861,697 $ 2,645,814
Net Operating Income (Loss) Before
Investment Activity.............. (107,527) 209,834 (222,077) (5,250) (115,275) 100,608
</TABLE>
Realized Gain (Loss) on Investments
When an investment is sold, disposed of, or liquidated at a value different
from the cumulative unrealized gain or loss associated with that investment, the
difference between the ultimate value realized on the investment and its
carrying value is shown as a realized gain or loss on the investment. The
Company realized a gain of $66,000 in 1995 on the sale of an investment in a
portfolio company and a loss of $23,000 on its investment in a portfolio company
in 1994 due to the winding up of that company.
Unrealized Appreciation of Investments
For the years ended December 31, 1996, 1995, and 1994, the Company recorded
net increases in unrealized appreciation of investments of $484,000, $371,000,
and $956,000, respectively. Unrealized Appreciation represents the periodic
increases and decreases in the fair market value of the investments in the
Company's portfolio. Fair market value is determined by the Board of Directors
of the Company, taking into account recent independent third party valuations of
these investments. The following chart sets forth the components of Unrealized
Appreciation of Investments for the years ended December 31, 1996, 1995, and
1994:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1994 1995 1996
-------- --------- --------
<S> <C> <C> <C>
Erie Forge and Steel, Inc.................................................... $708,938 $(208,937) $203,808
Good Stuff Food Company, Inc................................................. 67,750 499,250 (81,000)
Indiana Steel & Wire Corporation............................................. 12,608 (5,719) 9,057
Martino's Bakery, Inc........................................................ 120,750 (18,250) 156,500
Mobile Tool International, Inc............................................... -- 170,500 195,300
The C.M. Kemp Manufacturing Company(1)....................................... 46,248 (66,148) --
-------- --------- --------
Total Unrealized Appreciation of Investments................................. $956,294 $ 370,696 $483,665
-------- --------- --------
-------- --------- --------
</TABLE>
- ------------------
(1) The Company's investment in the C.M. Kemp Manufacturing Company ('Kemp') was
sold in 1995 for a gain over the original cost of the investment. The
Company had recorded Unrealized Appreciation in the amount of this gain
prior to the Sale and, thus, at the time of sale, Kemp was sold off for the
value at which it was then reflected on the Company's balance sheet. The
Company then recorded depreciation of $66,000 in 1995 to reverse the
Unrealized Appreciation and recognize the Realized Appreciation associated
with the sale of Kemp.
Provision for Income Taxes
During 1996, 1995, and 1994, the Company was taxed as a C corporation under
the Code. Unrealized appreciation (depreciation) 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). The result of this is that the Company reflects a deferred tax
liability on its balance sheet. The Company recorded provisions for income taxes
of $159,000 in 1996, $57,000 in 1995, and $422,000 in 1994.
18
<PAGE>
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1996 1997
---------- ----------
<S> <C> <C>
Total Revenue...................................................................... $1,292,040 $1,941,689
Operating Expense Excluding ESOP Contribution...................................... 1,203,594 1,631,516
ESOP Contribution.................................................................. 103,328 7,296
---------- ----------
Net Operating Income (Loss) Before Investment Activity............................. (14,882) 302,877
Unrealized Appreciation of Investments............................................. 398,498 5,332,369
Provision for Income Taxes......................................................... 149,454 2,150,893
---------- ----------
Net Income......................................................................... $ 234,162 $3,484,353
---------- ----------
---------- ----------
</TABLE>
Total Revenue
Total Revenue was $1.9 million in the first half of 1997 compared to $1.3
million in the first half of 1996, a 50.3% increase. Financial Advisory Fees
increased to $860,000 in the first half of 1997 from $839,000 in the first half
of 1996, and Financial Performance Fees in the first half of 1997 increased to
$744,000 from $241,000 in the first half of 1996. This increase in financial
performance fees, and resulting increase in Total Revenue, 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.
Operating Expenses
Total operating expenses increased to $1.6 million in the first half of
1997 from $1.3 million in the first half of 1996, a 25.4% increase. Salaries and
benefits increased to $620,000 from $515,000, a 20.4% increase which was
predominantly associated with increased levels of staffing. General and
Administrative expenses increased to $700,000 from $375,000, an 86.9% increase
primarily associated with the increased use of consultants by the Company. Other
operating expenses increased 130.6% to $425,000 from $184,000, reflecting a
variety of expenses associated with potential transactions. Interest expense
increased to $42,000 in the first half of 1997 from $11,000 in the first half of
1996, 271.6% increase associated primarily with increased levels of working
capital financing on the Company's term loan facility from NCBDC, on which the
Company pays interest at the rate of 1.5% above the finance company's base rate
of interest.
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
$177,000 for the six months ended June 30, 1997.
ESOP Contribution
The Company made contributions to its ESOP of $7,000 in the first half of
1997 and $103,000 in the first half of 1996. As stated above, these
contributions did not result in a cash outflow from the Company. At June 30,
1997, the unearned ESOP shares totaled $28,000, and the Company's obligation to
make further contributions to the ESOP was limited to that amount. Management
anticipates that all of the ESOP shares will be earned and distributed prior to
the Offering. The Company will have no further obligation to make contributions
to the ESOP. As stated above, management believes that a more complete
understanding of the Company's results can be gained by viewing them on a
proforma, 'fully distributed' basis. A comparison of results reported on a fully
distributed basis to results reported under GAAP is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-----------------------------------------------------------
1996 1997
--------------------------- ---------------------------
EXCL. ESOP EXCL. ESOP
GAAP CONTRIBUTION GAAP CONTRIBUTION
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Total Operating Expenses........................... $1,306,922 $ 1,203,594 $1,638,812 $ 1,631,516
Net Operating Income (Loss) Before Investment
Activity......................................... (14,882) 88,446 302,887 310,173
</TABLE>
Unrealized Appreciation of Investments
For the six months ended June 30, 1997 and 1996, the Company recorded net
increases in Unrealized Appreciation of Investments of $5,332,000 and $398,000
respectively. Included in Unrealized Appreciation of Investments during the
first six months of 1997 was $4.4 million associated with the acquisition of
Biddeford Textile Company, formerly the blanket operation of the electric
blanket manufacturing division of Sunbeam Corporation. The
19
<PAGE>
Company structured a buyout transaction in which the Company, a local investor
group, management, and Biddeford employees each received an ownership position
at Biddeford in the second quarter of 1997. The appreciation of the Biddeford
investment was determined by an independent valuation as of June 30, 1997. The
Biddeford investment further diversified the Company's portfolio, which
previously included investments in food products, steel products, and lift truck
manufacturing, into consumer textile products. The following table sets forth
the components of Unrealized Appreciation of Investments for the six months
ended June 30,1997 and 1996:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------
1996
----------------------------
<S> <C>
Erie Forge and Steel, Inc.................................................. $ 102,053
Good Stuff Food Company, Inc............................................... (27,000)
Indiana Steel & Wire Corporation........................................... 4,528
Martino's Bakery, Inc...................................................... 130,417
Mobile Tool International, Inc............................................. 188,500
Biddeford Textile Corporation --
----------------------------
Total Unrealized Appreciation of Investments............................... $ 398,498
----------------------------
----------------------------
<CAPTION>
1997
----------------------------
<S> <C>
Erie Forge and Steel, Inc.................................................. $ --
Good Stuff Food Company, Inc............................................... 355,675
Indiana Steel & Wire Corporation........................................... --
Martino's Bakery, Inc...................................................... 20,000
Mobile Tool International, Inc............................................. 557,089
Biddeford Textile Corporation 4,399,605
----------------------------
Total Unrealized Appreciation of Investments............................... $ 5,332,369
----------------------------
----------------------------
</TABLE>
Provision for Income Taxes
The Company recorded provisions for income taxes of $2.2 million for the
six months ended June 30, 1997 and $149,000 for the six months ended June 30,
1996. As stated above, this provision is determined based on GAAP pretax income,
which includes unrealized appreciation (depreciation).
FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
At June 30, 1997, the Company had $726,000 in cash and cash equivalents.
The Company's sources of funds have historically been operating cash flows and
borrowings from NCBDC, a finance company. At June 30, 1997, the Company had a
term loan commitment from the finance company in the amount of $1.0 million
which is subject to a two-year draw-down period ending in May 1999. During the
draw-down period, individual draws can be made in increments of a minimum of
$100,000 for the purpose of making investments in small and medium sized
businesses. Each draw on the loan is payable over a five year term from the date
of the draw. The interest rate is the finance company's base rate plus 3%. This
arrangement is secured by accounts receivable, furniture, fixtures, equipment,
and the Company's investments in shares of common stock in the Portfolio
Companies. As of June 30, 1997, the outstanding balance on this facility was
$636,000 and the interest rate was 11.50%.
At June 30, 1997, the Company also had a five year credit arrangement with
the same finance company which is a line of credit with a term conversion
provision. During only the first two years of the agreement, which commenced in
December 1996, the Company has the ability to borrow up to $500,000 with
interest payable monthly. The balance outstanding after the initial two-year
period is payable in equal monthly installments of principal plus accrued
interest over the remaining three years. The interest rate is the finance
company's base rate plus 1.5%. This arrangement is secured by accounts
receivable, furniture, fixtures, equipment, and 56,270 shares of common stock in
Erie Forge and Steel, one of the Company's investments, and is subject to
cross-collateralization and cross-default arrangements with the Company's other
credit facility from the finance company. At June 30, 1997, the outstanding
balance on this facility was approximately $383,000 and the interest rate was
10%. The facility was fully retired on July 15, 1997. The credit facilities
require that the Company receive the finance company's consent before, among
other things, encumbering its assets, merging, or consolidating with another
entity. In addition, the realization of gains on the Company's investment
portfolio may trigger repayment obligations with respect to the credit
facilities. At June 30, 1997, the Company also had a demand note payable to its
President in the amount of approximately $40,000. The note bears interest at the
rate of 4% over the prime rate of interest; the interest rate on the note was
12.25% at June 30, 1997. This note was paid in full on August 4, 1997.
The Company intends to repay its remaining credit facility with a portion
of the proceeds of the Offering, and to cancel it at that time. See 'Use of
Proceeds.' The credit facility does not contain a prepayment penalty.
Immediately subsequent to the Offering, the Company expects to have cash
resources in excess of $100 million, and no indebtedness. Because it is a
business development company, the Company is required to distribute quarterly
90% or more of its interest income and net realized short-term capital gains.
While the Company will provide stockholders with the option of reinvesting their
distributions in the Company, the Company anticipates having to borrow to obtain
liquidity after the proceeds of the Offering have been fully invested. See
'Distributions,' 'Business--Leverage,' and 'Reinvestment Plan.'
20
<PAGE>
BUSINESS
American Capital is a specialty finance company that has been principally
engaged in arranging commercial loans for small and medium sized businesses
throughout the United States and has made equity investments in certain of these
businesses. While the Company has historically not made loans because it lacked
the financial resources to do so, after the Offering, the Company plans to make
senior and subordinated commercial loans to small and medium sized businesses at
relatively high interest rates, accompanied by warrants or stock ownership. The
Company was founded in 1986, is headquartered in Bethesda, Maryland, a suburb of
Washington, D.C., and has professionals based in or near New York, Pittsburgh,
San Francisco, Savannah and Boston.
The Company has significant expertise in arranging financing from banks and
financing companies for small and medium sized businesses. Since its formation
in 1986, the Company has arranged 29 financings aggregating over $400 million.
In addition, David Gladstone, the Company's Chairman, has over 22 years
experience in making loans to and investing at Allied Capital. While either
Chairman or President of Allied Capital, Mr. Gladstone oversaw, during the years
1992 through 1997, in excess of $850 million of financing for many small and
medium sized businesses and raised, during the years 1985 through 1997, seven
funds totalling over $430 million in equity. The Company currently has twelve
professionals who are involved in structuring and arranging financing for small
and medium sized businesses, and upon completion of the Offering, the Company
plans to hire an additional four professionals with business lending experience.
The Company believes that this expertise will help it to be successful in
lending to small and medium sized businesses.
The Company has 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, Inc., Union Carbide Corporation, National
Forge Company, Inc., Air Products & Chemicals, Inc., General Cable Corporation,
PPG Industries, Inc., GenCorp, Inc., American Maize-Products Company, Ampco-
Pittsburgh Corporation, and British Petroleum Company. In most of the ESOP
transactions structured by the Company, the employees agree to restructure their
wages and benefits so that overall cash compensation is reduced in favor of
contribution of stock to an ESOP. The Company structures the resulting company
so that the fair market value of stock contributed to the employees' 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. Principals of the Company have served on the
boards of directors of 18 ESOP companies.
The Company has also provided financial advisory services to the following
entities or to parties involved in transactions with such entities: AMR
Corporation (parent of American Airlines, Inc.), Massachusetts Financial
Services Company, Wings Holdings, Inc. (then parent of Northwest Airlines,
Inc.), Northwestern Steel and Wire Company, Goldendale Aluminum Company, Inc.,
Columbia Aluminum Corporation, Flair Corporation, Bidermann Industries
Corporation, Simmons Company, John Morrell & Company, Inc., The Circle K
Corporation, and H.P. Hood, Inc.
The Company believes that, through its current business, it has established
an extensive referral network comprised of venture capitalists, investment
bankers, attorneys, commercial bankers and business and financial brokers. While
the Company plans to continue structuring ESOP transactions, it also intends to
utilize its referral network to expand the Company's operations by making loans
to ESOP Companies and by financing small and medium sized businesses without
ESOPs. The Company's referral network includes relationships with Riggs Bank and
NCBDC under which they, in certain instances, will refer small and medium sized
business financing opportunities to the Company. The Company intends to enter
into similar referral arrangements with other financial institutions, but no
assurance can be given that it will be able to do so.
Since 1990, the Company made equity investments in eight of the businesses
that it assisted. The Company's Board of Directors has determined the value of
its equity investments based on valuations by independent firms that were
conducted as of dates between December 31, 1996 and June 30, 1997. Based on
those six valuations and the net realized gains from the Company's other two
investments, the return on the Company's equity investment from August 20, 1990
to June 30, 1997 was 47.0% per annum. As of June 30, 1997, the Company retained
six of its equity interests with an aggregate value of $9.7 million.
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STRATEGY
The Company intends to make loans at favorable interest rates to small and
medium sized businesses that are underserved by traditional lenders. The Company
plans to use its established network of loan referral sources to make senior and
subordinated loans to selected businesses that do not have sufficient access to
traditional sources of lending. The Company's business strategy contemplates
that (i) the net capital gains from the sale of the warrants or stock it
receives in connection with its lending activities will exceed any losses it may
experience from loan defaults, (ii) the fee income it derives from its lending
will provide the Company with a source of revenue in excess of its general and
administrative expenses (excluding interest expense), and (iii) the Company will
derive additional income from its financial advisory services. No assurance can
be given that the Company will achieve its investment objectives or that its
business strategy will be successful.
The Company believes that many opportunities exist to provide loans to
small and medium sized businesses and plans to take advantage of these
opportunities. According to the Small Business Administration, small businesses
employed 53% of the private work force, contributed 47% of all sales in the
United States, and were responsible for 50% of the private gross domestic
product in 1995. Small businesses produced an estimated 75% of the 2.5 million
new jobs created during 1995 and had total revenues of $449.2 billion in 1995.
The number of small businesses has increased 49% from 1982 to 1995. As of 1994,
there were approximately 22.1 million non-farm businesses in the United States,
of which 99% are small businesses. The Company believes that the market for
commercial loans to these small and medium sized businesses is underserved for a
number of reasons. First, traditional lenders such as commercial banks and
savings and loans, generally are burdened with an overhead and administrative
structure and operate in a regulatory environment that hinders them from lending
effectively to these businesses. Second, consolidation in the banking industry
during the past decade decreased the number of banks willing to lend to small
and medium sized businesses, as the larger acquiring banks sought to limit both
the credit exposure and monitoring costs associated with loans to these
businesses. Third, the banking and savings and loan industries have experienced
structural and regulatory changes that have greatly affected the ability of
traditional financial institutions to make funds available for loans to small
and medium sized businesses. Additionally, the Company believes that many small
and medium sized businesses prefer to obtain financing from non-bank finance
companies rather than federally insured financial institutions that are
perceived to be subject to regulatory pressure to demand the repayment of loans
when a borrower encounters a period of economic difficulties.
The Company believes that it is well positioned to provide financing to
small and medium sized businesses. The Company is not burdened with the capital
and other regulatory requirements of the banking and savings and loan industries
and has relatively low overhead and administrative expenses. At the same time,
the Company believes that it has the experience and expertise to satisfy the
financing needs of small and medium sized businesses. In particular, the Company
intends to utilize its expertise in corporate spinoffs and ESOP transactions as
well as Mr. Gladstone's twenty-two years of experience in financing small to
medium sized businesses to realize a competitive advantage. The Company plans to
use its established network of loan referral sources, the relationships of its
Chairman David Gladstone and its referral arrangements with Riggs Bank and NCBDC
to generate opportunities to make senior and subordinated loans to selected
businesses that do not have sufficient access to traditional sources of lending.
Moreover, the Company's strategy of making equity investments in its borrowers
is intended to closely align the interests of the Company and its borrowers,
thereby reducing transaction costs, conveying the Company's commitment to its
borrowers and enhancing the Company's attractiveness as a financing source.
The Company will target small and medium sized businesses that meet certain
criteria, including the potential for growth, adequate assets for loan
collateral, experienced management teams with significant ownership interest in
the business, profitable or near profitable operations and potential
opportunities for the Company to realize appreciation and gain liquidity in its
equity position. Liquidity can be achieved through a sale of a business, a
public offering by the business or by the Company exercising its rights to
require the business to buy back the Company's warrants or stock. The Company
expects to serve businesses that need funds to finance growth, restructure their
balance sheet or effect a change of control. In a change of control situation,
the Company will continue to use ESOP buyouts or traditional buyouts. ESOP
buyouts will typically be used instead of traditional buyouts in circumstances
where total labor costs are significant in relationship to operating income.
ESOP buyouts will also be used where sellers qualify for certain ESOP related
tax advantages.
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The Company will continue to make available significant managerial
assistance to its borrowers and other portfolio companies. Such assistance will
typically involve closely monitoring the operations of each company,
participating in its board and management meetings, being available for
consultation with its officers, and providing organizational and financial
guidance.
The Company's loans to these businesses typically will range from $1
million to $10 million, mature in five to seven years, and require monthly
interest payments at an annualized variable rate that exceeds the prime rate.
The Company will also make fixed rate loans. Amortization of principal will
generally be deferred for several years. The Company will focus on making loans
accompanied by warrants or stock ownership. The warrants will typically have a
nominal exercise price while the loans generally will be collateralized by a
security interest in assets of the borrower. The Company expects to make both
senior and subordinated loans. From time to time, a company in which the Company
has invested may request additional financing, providing additional lending or
investing opportunities for the Company. Requests for additional financing will
be considered under the criteria established for acquisition of investments, and
debt and equity securities issued in such follow-on financing are expected to
have characteristics comparable to those issued in the original financing.
Follow-on investments generally will not be made merely to enhance the quality
of the earlier investment or to preserve the Company's proportionate ownership
interest. In some situations, the Company's failure or inability to make a
follow-on investment may be detrimental to the operations or survival of the
portfolio company involved and thus jeopardize the Company's investment in that
company.
The Company's equity interests in privately-owned small and medium sized
businesses will be made with the intention of disposing of such interests within
three to seven years. If a financing is successful, not only will the debt
securities acquired by the Company in such financing have been repaid with
interest, but the Company will be in a position to realize a gain on the
accompanying equity interests. The opportunity to realize such gain may occur if
the business is sold to new owners or the business makes a public offering. In
most cases, the Company will not have the right to require that a business
undergo an initial public offering by registering securities under the
Securities Act, but the Company generally will have the right to sell its equity
interests in any subsequent public offering by the business. Even when public
offerings occur, underwriters frequently insist that large holders of equity
securities retain all or a substantial portion of their position, at least for a
time, even if they have the right to participate in the offering. Moreover, the
Company may decide not to sell an equity position even when it has the right and
the opportunity to do so. Thus, although the Company expects to dispose of an
equity interest after a certain time, situations may arise in which it may hold
equity securities for a longer period. In most cases, the Company will receive
the right to require the business to purchase the warrants or stock held by the
Company ('Put Rights'). When no public offering is available the Company may use
its Put Rights to dispose of its equity interest in a business. Similarly, it is
anticipated that the Company usually will obtain the right to require that the
business purchase the Company's warrants or stock if there is an offer for the
business ('Unlocking Rights'). The Unlocking Rights may allow the Company to
sell its equity interests back to the business at the price offered by the
potential acquiror.
To develop new lending opportunities, the Company plans to use its
established network of loan referral sources, capitalize on its ESOP expertise
with prospective and existing ESOP companies, and add four professionals with
substantial lending experience and six additional support staff to its seventeen
employees. The Company has relationships with Riggs Bank and NCBDC under which
they, in certain instances, will refer certain small and medium sized business
financing opportunities to the Company. The Company intends to enter into
similar arrangements with other financial institutions, but no assurance can be
given that it will be able to do so.
SELECTION OF LOAN AND INVESTMENT OPPORTUNITIES
The Company has identified certain characteristics that it believes are
important to profitable small and medium sized business lending. The criteria
listed below will provide a general guidepost for the Company's lending and
investment decisions, although not all of such criteria may be followed in each
instance:
Growth. In addition to generating sufficient cash flow to service its
debt, a potential borrower generally will be required to establish its ability
to grow its cash flow. Anticipated growth will be a key factor in determining
the value ascribed to the warrants and equity interests acquired by the Company
in connection with its loans.
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Liquidation Value of Assets. Although the Company does not intend to
operate as an asset-based lender, liquidation value of the assets
collateralizing the Company's loans will be an important factor in each credit
decision. Emphasis will be 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 will generally require that each
borrower have or promptly obtain a management team that is experienced and
properly incentivized through a significant ownership interest in the borrower.
The Company generally will require that a borrower have, at a minimum, a strong
chief executive officer and chief financial officer who have demonstrated the
ability to accomplish the borrower's objectives and implement its business plan.
Profitable or Near Profitable Operations. The Company will focus on
borrowers that are profitable or near profitable at the operating level. The
Company does not intend typically to lend to or invest in start-up or other
early stage companies.
Exit Strategy. Prior to making an investment, the Company will analyze the
potential for the borrower to experience a liquidity event that will allow the
Company to realize value for its equity position. Liquidity events include,
among other things, an initial public offering, a private sale of the Company's
financial interest, a sale of the borrower, or a purchase by the borrower or one
of its stockholders of the Company's equity position in the borrower.
OPERATIONS
Origination Process. The Company has twelve professionals responsible for
originating loans and investments and providing financial assistance to small
and medium sized businesses. Upon completion of the Offering, the Company plans
to hire four additional professionals with substantial business lending
experience, who will operate out of the Company's headquarters in Bethesda,
Maryland and with the Company's existing professionals based in or near New
York, Pittsburgh, San Francisco, Savannah and Boston. To originate loans, these
lending officers will use an extensive referral network comprised of venture
capitalists, investment bankers, attorneys, accountants, commercial bankers,
business brokers and prospective or existing ESOP companies. The referral
network includes the Company's relationships with Riggs Bank and NCBDC under
which they, in certain instances, will refer certain small and medium sized
business financing opportunities to the Company. The Company also has an
extensive set of internet sites that it uses to attract financing opportunities.
Approval Process. The Company's financial professionals will review
informational packages in search of potential financing opportunities and will
conduct a due diligence investigation of each applicant that passes an initial
screening process. This due diligence investigation generally will include 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. Upon completion of the due diligence
investigation, the financial professional will create a borrower profile
summarizing its historical financial statements, industry and management team
and analyzing its conformity to the Company's general investment criteria. The
financial professional will then present this profile to the Company's Credit
Committee, which will initially be comprised of David Gladstone, Malon Wilkus
and Adam Blumenthal. The Company's Credit Committee and the Company's Board of
Directors must approve each financing.
Support Services. The Company has entered into an agreement with Riggs
Bank pursuant to which the bank will provide certain loan accounting
administrative services for the Company's loans. Riggs Bank also will act as the
custodian of the Company's portfolio assets pursuant to a Custodian Services
Agreement and in accordance with the 1940 Act.
Merger and Acquisition Advisory Services. Prior to the Offering, the
Company has obtained fee income by performing merger and acquisition and other
financial advisory services for small and medium sized companies. These advisory
services operations and the assets related thereto will be moved into a wholly
owned subsidiary of the Company at the successful completion of the Offering.
This subsidiary will continue to focus on providing advisory services to small
and medium sized companies throughout the United States that are similar in size
to the Company's target financing market. The Company's past clients have
included corporate sellers, and the buying groups of subsidiaries, divisions and
product lines of large corporations, as well as privately owned businesses. The
typical engagement includes a monthly retainer and a performance fee contingent
upon closing
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the transaction. Management believes that future growth of this subsidiary is
attainable through adding additional professionals, by gaining additional market
share and by realizing the benefits of its rapidly increasing client base, which
should expand as a result of its relationship with the Company. However, no
assurance can be given that such growth can be achieved. This subsidiary is
expected to be a significant source of financing opportunities for the Company.
COMPETITION
The Company's primary competitors will include financial institutions and
venture capital firms and other nontraditional lenders. Many of these entities
have greater financial and managerial resources than the Company will have.
EMPLOYEES
The Company currently has seventeen employees, twelve of whom are
professionals working on financings for small and medium sized businesses. Upon
completion of the Offering, the Company intends to hire eleven additional
employees, four of whom will be professionals with business lending experience.
The Company believes that its relations with its employees are excellent. The
Company intends to maintain a relatively low overhead by outsourcing most job
functions not directly related to marketing or underwriting its investments and
the executive management of the Company.
TEMPORARY INVESTMENTS
Pending investment in the types of debt and equity securities described
above, the Company will invest at least 70% of its otherwise uninvested cash in
U.S. government or agency issued or guaranteed securities that represent the
full faith and credit of the U.S. government and mature in one year or less when
purchased or high quality repurchase agreements, the underlying instruments of
which are such securities. Typically, the Company will invest in U.S. Treasury
bills or 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 will
require 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. The Company's Board of Directors has
established procedures, which it will review periodically, requiring the Company
to monitor the credit-worthiness of the dealers with which the Company enters
into repurchase agreement transactions.
LEVERAGE
For the purpose of making investments other than Temporary Investments and
to take advantage of favorable interest rates, the Company intends to issue
Senior Debt Securities, up to the maximum amount permitted by the 1940 Act,
which currently permits the Company 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 would
become exposed to the risks of leverage. See 'Risk Factors--Leverage.' The
Company does not, however, intend to leverage itself so long as it holds cash or
Temporary Investments in an amount sufficient to fund the amount of investments
(other than Temporary Investments) projected to be made in the forthcoming 12
months. Although the Company has no current intention to do so, it has retained
the right to issue preferred stock. See 'Description of Capital Stock--
Preferred Stock' and 'Regulation.' As permitted by the 1940 Act, the Company
may, in addition, borrow amounts up to 5% of its total assets for temporary or
emergency purposes.
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<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The Company's investment objectives are to achieve a high level of current
income from the collection of interest and advisory fees, as well as long-term
growth in its stockholders' equity through the appreciation in value of the
Company's equity interests in the companies in which it invests. The following
restrictions, along with these investment objectives, are the Company's only
fundamental policies--that is, policies which may not be changed without the
approval of the holders of the majority, as defined in the 1940 Act, of the
Company's outstanding voting securities. The percentage restrictions set forth
below other than the restriction pertaining to the issuance of Senior
Securities, as well as those contained elsewhere in this Prospectus, apply at
the time a transaction is effected, and a subsequent change in a percentage
resulting from market fluctuations or any cause other than an action by the
Company will not require the Company to dispose of portfolio securities or to
take other action to satisfy the percentage restriction.
The Company will at all times conduct its business so as to retain its
status as a business development company. In order to retain that status, the
Company may not acquire any assets (other than non-investment assets necessary
and appropriate to its operations as a business development company) if after
giving effect to such acquisition the value of its 'Qualifying Assets' amounts
to less than 70% of the value of its total assets. For a summary definition of
'Qualifying Assets,' see 'Regulation.' The Company believes that the securities
it proposes to acquire (provided that the Company controls, or through its
officers or other participants in the financing transaction, makes significant
managerial assistance available to the issuers of these securities), as well as
Temporary Investments, will generally be Qualifying Assets. Securities of public
companies, on the other hand, are generally not Qualifying Assets unless they
were acquired in a distribution, in exchange for or upon the exercise of a right
relating to securities that were Qualifying Assets.
The Company may invest up to 100% of its assets in securities acquired
directly from issuers in privately-negotiated transactions. With respect to such
securities, the Company may, for the purpose of public resale, be deemed an
'underwriter' as that term is defined in the 1933 Act. The Company may invest up
to 50% of its assets to acquire securities of issuers for the purpose of
acquiring control (up to 100% of the voting securities) of such issuers. The
Company will not concentrate its investments in any particular industry or group
of industries. Therefore, the Company will not acquire any securities (except
upon the exercise of a right related to previously acquired securities) if, as a
result, 25% or more of the value of its total assets consists of securities of
companies in the same industry.
The Company may issue Senior Securities to the extent permitted by the 1940
Act for the purpose of making investments, to fund share repurchases, or for
temporary or emergency purposes. A business development company may issue Senior
Securities up to an amount so that the asset coverage, as defined in the 1940
Act, is at least 200% immediately after each issuance of Senior Securities. For
the risks associated with the resulting leverage, see 'Risk Factors--Leverage.'
The Company will not (i) act as an underwriter of securities of other
issuers (except to the extent that it may be deemed an 'underwriter' of
securities purchased by it that must be registered under the 1933 Act before
they may be offered or sold to the public); (ii) purchase or sell real estate or
interests in real estate or real estate investment trusts (except that the
Company may purchase and sell real estate or interests in real estate in
connection with the orderly liquidation of investments and may own the
securities of companies or participate in a partnership or partnerships that are
in the business of buying, selling or developing real estate); (iii) sell
securities short; (iv) purchase securities on margin (except to the extent that
it may purchase securities with borrowed money); (v) write or buy put or call
options (except to the extent of warrants or conversion privileges in connection
with its acquisition financing or other investments, and rights to require the
issuers of such investments or their affiliates to repurchase them under certain
circumstances); (vi) engage in the purchase or sale of commodities or commodity
contracts, including futures contracts (except where necessary in working out
distressed loan or investment situations); or (vii) acquire more than 3% of the
voting stock of, or invest more than 5% of its total assets in any securities
issued by, any other investment company, except as they may be acquired as part
of a merger, consolidation or acquisition of assets. With regard to that portion
of the Company's investments in securities issued by other investment companies
it should be noted that such investments may subject the Company's stockholders
to additional expenses.
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INVESTMENT ADVISOR
The Company has no investment advisor and is internally managed by its
executive officers under the supervision of the Board of Directors.
PORTFOLIO COMPANIES
The following table sets forth certain information regarding each portfolio
company in which the Company currently has an equity investment. Unless
otherwise noted in the table or the descriptions that follow the table, the only
relationship between each portfolio company and the Company is the Company's
investment. The investments listed below are the Company's only present
investments, but in the aggregate they will represent no more than 8.5% of the
Company's assets and no single investment will represent more than 4.0% upon
completion of the Offering. While the Company may make loans to or additional
investments in these companies, the Company has no present plans to make any
such loans or investments that would raise the Company's investment in any one
such company above 5% of total assets. Any such loans and investments will be
made in accordance with the Company's investment policies and procedures.
<TABLE>
<CAPTION>
TOTAL ANNUAL %
SALES FOR THE OWNED COST OR VALUE OF
NATURE YEAR ENDED ON ON A INITIAL INVESTMENT
NAME AND ADDRESS OF OF THE DATE TYPE OF FULLY DILUTED VALUE OF AS OF
PORTFOLIO COMPANY BUSINESS INDICATED(1) SECURITY BASIS(2) INVESTMENT JUNE 30, 1997(3)
- ------------------------------ ------------------ ------------- -------- ------------- ---------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Erie Forge and Steel, Inc. Steel Forging $62.3 million Common 16.7% $500,000 $2,736,418
1341 West 16th Street 9/29/96 Stock
Erie, PA 16152
Indiana Steel and Wire Corp. Wire Mfg. $37.8 million Common 1.3% 42,914 58,869
2200 East Jackson Street 12/31/96 Stock
Muncie, IN 47307
Good Stuff Food Company, Inc. Commercial Bakery $32.3 million Common 8.3% 226,125 1,000,050
1771 Blake Ave. 4/26/97 Stock
Los Angeles, CA 90031
Martino's Bakery, Inc. Sweet Goods Bakery $14.6 million Common 12.5% 120,750 279,000
901 W. Alameda 8/31/96 Stock
Burbank, CA 91506
Mobile Tool Lift Truck Mfg. $63.6 million Common 2.7% 246,349 1,069,237
International, Inc. 6/30/96 Stock
56000 West 88th Avenue
Westminster, CO 80030
Biddeford Textile Corporation Blanket Mfg. $37.0 million Common 19.8% 592,500 4,542,105
PO Box 624 12/31/96 Stock
2 Main Street
Biddeford, ME 04005
</TABLE>
- ------------------
(1) Based upon information provided by management of the portfolio companies.
(2) Fully-Diluted basis includes equity securities to be issued (i) upon the
exercise or conversion of any outstanding options, warrants or rights, or
(ii) pursuant to contractual commitments to issue equity securities,
including any such commitments to an ESOP.
(3) These valuations were determined by the Company's Board of Directors based
on valuations by independent firms that were conducted as of dates between
December 31, 1996 and June 30, 1997.
The following is a summary of certain additional information concerning
each portfolio company. The Company's equity interest in each portfolio company
is held through a wholly-owned subsidiary of the Company, other than its
interest in Erie Forge and Steel, Inc. which is held directly by the Company.
For additional information relating to the value of the Company's investments in
its portfolio companies, see the Company's consolidated financial statements as
of June 30, 1997 appearing elsewhere in this Prospectus.
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<PAGE>
ERIE FORGE AND STEEL, INC.
In 1990, the Company purchased common stock of Erie Forge and Steel, Inc.
('Erie') which purchased the assets of Erie from National Forge, Inc. Erie is a
leading producer of high alloy ingots and billets and large scale, complex,
open-die steel forging. In the fiscal year ended September 29, 1996, Erie had
revenue of approximately $62 million, of which greater than one-half represented
the sale of ingots and billets and one-third represented steel forging products.
Erie Forge is the leading manufacturer of large ship propeller shafting for the
U.S. Navy and has a significant share of the ingot and billet market. Erie is
fully integrated which enables it to produce steel, heat treat and machine very
large forgings in one facility. Erie is located in Erie, PA where its
predecessor companies have been in business since 1872. The employees of Erie
are part owners of the company through an ESOP that owns approximately 73% of
Erie. Malon Wilkus, the President of the Company, is a member of the Erie Board
of Directors. Following the Offering, the Company intends to contribute the Erie
common stock to a wholly owned subsidiary.
MOBILE TOOL INTERNATIONAL, INC.
In 1995, the Company purchased the stock of Mobile Tool International
('Mobile Tool') from Pennsylvania Company, a subsidiary of American Premier
Underwriters (formerly Penn Central Corporation). Mobile Tool is a manufacturer
of lift trucks sold to telephone, cable and electric utilities as well as air
dryers and air purification units used in various applications by utilities. In
the fiscal year ended June 30, 1996, the company had approximately $63.6 million
in annual revenue and large shares of its target markets. It has three principal
manufacturing facilities located in Westminster, CO, Fort Wayne, IN and
Frederick, MD. Mobile Tool's predecessors began business in the early 1950s. The
employees of Mobile Tool are part owners of the company through an ESOP that
will eventually own approximately 76% of the company. Adam Blumenthal, Executive
Vice President of the Company, is a member of the Mobile Tool Board of Directors
and the Company is performing financial advisory services for Mobile Tool.
INDIANA STEEL & WIRE CORPORATION
In 1993, the Company purchased the stock of Indiana Steel & Wire Company
(which was renamed Indiana Steel & Wire Corporation ('IS&W')) from a subsidiary
of General Cable Corporation. With annual sales of approximately $37.8 million
in the fiscal year ended December 31, 1996, IS&W accounts for a significant
portion of the U.S. galvanized steel strand and core wire markets. The company
is located in Muncie, IN. Roland Cline, a Vice President of the Company, is a
member of the Board of Directors of IS&W.
GOOD STUFF FOOD COMPANY, INC.
In 1994, the Company purchased the assets of Good Stuff Food Company, Inc.
('GSFC') pursuant to a bankruptcy plan of reorganization. GSFC is a leading
manufacturer of bread in the Los Angeles metropolitan area for the institutional
market, with approximately $32.3 million in sales in the fiscal year ended April
26, 1997. Malon Wilkus, Adam Blumenthal, Roland Cline and Angela Atherton, the
President, Executive Vice President, Vice President, and a principal of the
Company, respectively, are members of the Board of Directors of GSFC and the
Company is performing financial advisory services for GSFC.
MARTINO'S BAKERY, INC.
In 1994, the Company purchased the assets of Martino's Bakery, Inc.
('Martino's') from a subsidiary of Campbell Soup Company ('Campbell'). Martino's
is a sweet goods bakery located in Burbank, California, with approximately $14.6
million in sales in the fiscal year ended August 31, 1996. Martino's continues
to supply Pepperidge Farm, a subsidiary of Campbell, with significant amounts of
frozen product, in addition to maintaining a Los Angeles brand presence. Malon
Wilkus, Adam Blumenthal and Roland Cline, the President, Executive Vice
President, and Vice President of the Company, respectively, are members of the
Board of Directors of Martino's and the Company is performing financial advisory
services for Martino's.
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BIDDEFORD TEXTILE CORPORATION
In May 1997, the Company purchased the assets of Biddeford from Sunbeam
Products, Inc. ('Sunbeam'). Biddeford's predecessor business had annual sales of
approximately $37 million in the fiscal year ended December 31, 1996. Biddeford
has the exclusive right to manufacture the blanket portion of Sunbeam's electric
blankets under a long term supply agreement with Sunbeam. The blankets are
shipped to Sunbeam's Mississippi operation where they are wired and packaged and
then distributed to customers. Sunbeam currently supplies 100% of the electric
blankets sold in North America. Malon Wilkus and John Ireland, the President and
a principal of the Company, respectively, are members of the Board of Directors
of Biddeford and the Company is performing financial advisory services for
Biddeford.
MANAGEMENT
The business and affairs of the Company are managed under the direction of
its Board of Directors. The Board of Directors will have nine members, six of
whom are not 'interested persons' of the Company as defined in Section 2(a)(19)
of the 1940 Act (the 'Independent Directors'). The Board of Directors elects the
Company's officers who serve at the pleasure of the Board of Directors.
EXECUTIVE OFFICERS AND DIRECTORS
The persons that are executive officers and directors of the Company and
their positions are set forth below:
<TABLE>
<CAPTION>
NAME AGE POSITIONS
- --------------------------------------------- --- ---------------------------------------------
<S> <C> <C>
David Gladstone.............................. 55 Chairman of the Board of Directors(1)
Malon Wilkus................................. 45 President and Director(1)
Adam Blumenthal.............................. 36 Executive Vice President and Director(1)
Stephen L. Hester............................ 59 Vice President and General Counsel
Roland Cline................................. 49 Vice President
Robert L. Allbritton......................... 28 Director(2)
Landon Butler................................ 55 Director(2)
Neil M. Hahl................................. 48 Director(2)
Philip R. Harper............................. 53 Director(2)
Stan Lundine................................. 58 Director(2)
Stephen P. Walko............................. 45 Director(2)
</TABLE>
- ------------------
(1) Interested person as defined in Section 2(a)(19) of the 1940 Act.
(2) To be elected as a Director prior to the Offering.
The following is a summary of certain biographical information concerning
the Company's executive officers and directors:
David Gladstone. Mr. Gladstone has served as Chairman of the Board of the
Company since June 1997. From 1974 to February 1997, Mr. Gladstone held various
positions, including Chairman and Chief Executive officer, with Allied Capital
Corporation, Allied Capital Corporation II, Allied Capital Lending Corporation,
Allied Capital Commercial Corporation and Allied Capital Advisors Inc. From 1992
to 1997, Mr. Gladstone served as a Director and President and Chief Executive
Officer of Business Mortgage Investors. Mr. Gladstone served as a Director of
The Riggs National Corporation (the parent of Riggs Bank) from 1993 to May 1997
and of Riggs Bank from 1991 to 1993. He currently serves as a Trustee of The
George Washington University. He is also a member of the Listings and Hearings
Committee of the National Association of Securities Dealers, Inc. and a member
of the Business Development Group of the Women's Growth Capital Fund. Mr.
Gladstone holds an MBA degree from the Harvard Business School, a MA from
American University and a BA from the University of Virginia. Mr. Gladstone has
authored two books on financing for small and medium sized businesses, Venture
Capital Handbook and Venture Capital Investing (both published by
Prentice-Hall).
Malon Wilkus. Mr. Wilkus founded the Company in 1986 and has served as the
Company's President since that time. Mr. Wilkus previously served as Chairman
and is a Director of the National Center for Employee Ownership. Mr. Wilkus is a
member of the Board of Governors of the ESOP Association. Mr. Wilkus is a
29
<PAGE>
Director of Erie Forge & Steel, Inc., Oakmont Steel, Inc., Good Stuff Food
Company, Inc., Biddeford Textile Corporation and Martino's Bakery, Inc.
Adam Blumenthal. Mr. Blumenthal has served as the Company's Executive Vice
President since 1995. From 1990 to 1995, Mr. Blumenthal served as a Vice
President of the Company. Mr. Blumenthal currently serves as a Director of
Mobile Tool International, Martino's Bakery, Inc., the Good Stuff Food Company,
Inc. and the Yale School of Management Alumni Association. Mr. Blumenthal holds
a Masters of Public and Private Management degree from the Yale School of
Management and a AB from Harvard College.
Stephen L. Hester. Mr. Hester currently serves as the Company's Vice
President and General Counsel. Mr. Hester has been employed by the Company since
1994. From 1973 to 1993, Mr. Hester was a Partner in the law firm of Arnold &
Porter. Mr. Hester is currently a Director of Copper Range Company and U.S.
Investigations Services, Inc. and is a Trustee of Northwest Airlines' Employee
Stock Ownership Plan.
Roland Cline. Mr. Cline has been employed by the Company since 1991 and
has served as a Vice President of the Company since 1990. Mr. Cline is a
Director of Indiana Steel and Wire Corporation, Martino's Bakery, Inc. and Good
Stuff Food Company, Inc. Mr. Cline has an MBA degree from the University of
Wisconsin.
Robert L. Allbritton. Mr. Allbritton will be elected as a Director prior
to completion of the Offering. Mr. Allbritton has served as the Executive Vice
President and Chief Operating Officer of Allbritton Communications Company since
1994 and as a Director of that Company since 1992. Mr. Allbritton is currently a
Director of Riggs National Corporation, Perpetual Corporation, Allbritton
Jacksonville, Inc., and University Bankshares, Inc.
Landon Butler. Mr. Butler will be elected as a Director prior to
completion of the Offering. Mr. Butler is currently President of Landon Butler &
Co., an investment management firm, a post he has held since 1981. Mr. Butler is
currently Vice Chairman of Poland Partners Management Company and a Member of
the Policy Board of Multi-Employer Property Trust.
Neil M. Hahl. Mr. Hahl will be elected as a Director prior to completion
of the Offering. Mr. Hahl has been President of The Weitling Group, a business
consulting firm, since 1996. From 1995 to 1996, Mr. Hahl served as Senior Vice
President of the American Financial Group. From 1982 to 1996, Mr. Hahl served as
Senior Vice President and CFO of Penn Central Corporation. Mr. Hahl is currently
a Director of Buckeye Management Company and American Financial Enterprises.
Philip R. Harper. Mr. Harper will be elected as a Director prior to
completion of the Offering. Since July 1996, Mr. Harper has served as President,
Chief Executive Officer and a Director of U.S. Investigations Services, Inc.
From 1991 to 1995, Mr. Harper served as President of Wells Fargo Alarm Services.
From 1988 to 1991, Mr. Harper served as President of Wells Fargo's Burns Western
Business Unit.
Stan Lundine. Mr. Lundine will be elected as a Director prior to
completion of the Offering. Mr. Lundine has served as Of Counsel for the law
firm of Sotir and Goldman since 1995. From 1987 to 1994, he was the Lieutenant
Governor of the State of New York. Mr. Lundine is a Director of U.S.
Investigations Services, Inc. and National Forge Holdings. From 1976 to 1986,
Mr. Lundine served as a member of the U.S. House of Representatives.
Stephen P. Walko. Mr. Walko will be elected as a Director prior to
completion of the Offering. Mr. Walko is President and a Director of
Textileather Corporation, a manufacturer of vinyl products, posts he has held
since 1990. Mr. Walko is a Director of Mobile Tool International, Inc. and Bliss
Salem Steel Corp.
COMPENSATION
The following table sets forth certain information concerning the
compensation paid to the Company's three highest paid executive officers for the
fiscal year ended December 31, 1996. No director who was not also an officer of
the Company received compensation in excess of $60,000 for the fiscal year 1996.
The Company has no pension plan, other than the Company ESOP. The Company ESOP
will be amended in connection with completion of the Offering so that it will be
a money purchase pension plan under the Code pursuant to which the Company will
make annual contributions in an amount generally equal to 3.0% of each
employee's compensation.
30
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
CAPACITIES IN WHICH AGGREGATE CASH ESOP
NAME OF INDIVIDUAL OR IDENTITY OF GROUP COMPENSATION WAS RECEIVED COMPENSATION(1) CONTRIBUTION(2)
- ------------------------------------------------ ------------------------- --------------- ---------------
<S> <C> <C> <C>
Malon Wilkus.................................... President $ 150,000 $30,000
Adam Blumenthal................................. Executive Vice President, 135,000 30,000
Chief Financial Officer
and Secretary
Roland Cline.................................... Vice President 127,500 30,000
</TABLE>
- ------------------
(1) Comprised solely of salary.
(2) Represents the value of Common Stock allocated to the indicated executive
officer's Company ESOP account in 1996.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with certain officers
including Messrs. Gladstone, Wilkus, Blumenthal, Cline and Hester (the
'Executive Officers'). The employment agreements of the Executive Officers,
which generally will become effective only upon completion of the Offering, but
in the case of Mr. Gladstone, retroactive to April 1, 1997, each provide for a
five-year term. However, two years before expiration of each agreement, its term
will be automatically renewed for an additional year, unless either party has
given six months advance written notice that the automatic extensions are to
cease.
The base salary under the employment agreements of Messrs. Gladstone,
Wilkus and Hester is $150,000 per year, while under those of Messrs. Blumenthal
and Cline, it is $135,000 and $132,500 per year, respectively, subject to
certain geographic cost of living adjustments. Mr. Hester's base salary is
subject to adjustment for part-time status. The Board of Directors will have the
right to increase the base salary during the term and also, generally, to
decrease it, but not below the original base salary. The employment agreements
provide that the Executive Officers are entitled to participate in a performance
based bonus program under which each will receive up to 200% of his base salary
depending on the Company's performance against certain criteria to be
established annually by the Compensation Committee of the Board of Directors.
Each Executive Officer will be entitled to receive 5% of this bonus regardless
of the Company's performance.
The Executive Officers will also be contractually entitled to participate
in the Company's 1997 Stock Option Plan, described below, effective with the
completion of the Offering. The employment agreements provide that Messrs.
Gladstone, Wilkus, Blumenthal, Cline and Hester will receive options equal to
5.5%, 0.4%, 2.7%, 1.6% and 0.3%, respectively, of the Company's outstanding
Common Stock as of the completion of the Offering and the Direct Offering,
adjusted for any exercise of the Over-Allotment Option. These stock options will
vest over three years from the date of grant, with one-third of the granted
options vesting each year. However, an Executive Officer may accelerate such
vesting by agreeing to exercise options immediately upon vesting and then
agreeing for the period through the date on which the option would have
originally vested not to sell, assign or convey any stock so purchased (other
than by laws of descent or distribution) and to grant to the Company a call
option to repurchase any such stock at the option exercise price if the options
would have been forfeited prior to their original vesting date as a result of
the Executive Officer's subsequent termination of employment under the
circumstances noted below.
If the Company should terminate an Executive Officer's employment by reason
of the Executive Officer's disability, the Executive Officer would be entitled
to receive from the Company for two years the difference between his base salary
plus annual bonus and any long-term disability benefits. Additionally, the
Executive Officer's unvested options which would have vested within one year of
the disability termination would vest. Vested options would expire unless
exercised (and all outstanding loans resulting from the prior exercise of any
options would have to be repaid) within 18 months of the termination date. If
the Company should terminate an Executive Officer's employment for any reason
other than a disability or misconduct, the Executive Officer, would be entitled
to receive his base salary and bonus for two years, although the Executive
Officer could choose to forgo the payments and thus obtain a release from
non-compete provisions applicable during this period. These payments would also
be made if the Executive Officer resigned with good reason, which generally
includes conduct by the Company materially and adversely changing the
executive's responsibilities and duties, a material breach by the Company of the
employment agreement or a change in control of the Company. Mr. Gladstone's
31
<PAGE>
contract also defines good reason as determination by him of a material
difference with the Board of Directors. Additionally, the Executive Officer's
unvested stock options would generally vest upon his termination of employment.
If the Executive Officer dies, his estate will be entitled to receive the
annual bonus in the year of death. Additionally, he will be considered to have
vested on the date of death in those options which would vest within one year of
the date of death, and would forfeit any unvested options. All such vested
options would expire unless exercised (and all outstanding loans resulting from
the prior exercise of any options would have to be repaid) within 18 months of
the date of death.
In the event that the Company should terminate an Executive Officer's
employment as a result of the Executive Officer's misconduct or in the event
that the Executive Officer voluntarily terminates his employment for other than
good reason, all unvested stock options would be forfeited (except that in the
case of a voluntary termination by Mr. Gladstone, 30% of such options would be
considered to have vested six months after the date of grant, 30% more would be
considered to have vested one year after the date of grant, and 20% more would
be considered to have vested on the second anniversary of the date of grant) and
the Executive Officer would have no more than 90 days to exercise any
unexercised options (and to repay any outstanding loans resulting from the prior
exercise of any options).
Upon termination of employment, an Executive Officer would be subject to
certain non-compete covenants. These covenants would generally apply for two
years, although should the Executive Officer resign without good reason, the
covenants would apply for only one year following resignation. The covenants
applicable to Mr. Gladstone are generally shorter although in essentially all
cases, Mr. Gladstone would be prohibited from competing with the Company for at
least one year from the completion of the Offering. As noted above, during
periods when Executive Officers are receiving severance payments from the
Company, they may terminate covenants prohibiting competition by foregoing such
payments.
Each of the employment agreements also provides that the Executive Officer
will maintain the confidentiality of the Company's confidential information.
BOARD OF DIRECTORS
Pursuant to the terms of the Company's Second Amended and Restated
Certificate of Incorporation, the directors are divided into three classes. One
class will hold office initially for a term expiring at the annual meeting of
stockholders to be held in 1998, a second class will hold office initially for a
term expiring at the annual meeting of stockholders to be held in 1999 and a
third class will hold office initially for a term expiring at the annual meeting
of stockholders to be held in 2000. Each director will hold office for the term
to which he or she is elected and until his or her successor is duly elected and
qualified. Messrs. Gladstone, Allbritton and Butler will have terms expiring in
1998, Messrs. Blumenthal, Hahl and Lundine will have terms expiring in 1999, and
Messrs. Wilkus, Harper and Walko will have terms expiring in 2000. At each
annual meeting of the stockholders of the Company, the successors to the class
of directors whose terms expire at such meeting will be elected to hold office
for a term expiring at the annual meeting of stockholders held in the third year
following the year of their election.
COMMITTEES OF THE BOARD OF DIRECTORS
Executive Committee. Prior to the consummation of the Offering, the Board
of Directors will establish an executive committee (the 'Executive Committee').
Membership of the Executive Committee initially will be comprised of Messrs.
Gladstone, Wilkus and Blumenthal. The Executive Committee will have the
authority to exercise all powers of the Board of Directors except for actions
that must be taken by the full Board of Directors under the Delaware General
Corporation Law.
Audit Committee. Prior to the consummation of the Offering, the Board of
Directors will establish an audit committee (the 'Audit Committee'). Membership
of the Audit Committee initially will be comprised of Messrs. Hahl, Walko and
Lundine, each of whom is an Independent Director. The Audit Committee will make
recommendations concerning the engagement of independent public accountants,
review with the independent public accountants the plans and results of the
audit engagement, approve professional services provided by the independent
public accountants, review the independence of the independent public
accountants and review the adequacy of the Company's internal accounting
controls.
32
<PAGE>
Compensation Committee. Prior to the consummation of the Offering, the
Board of Directors will establish a compensation committee (the 'Compensation
Committee'). Membership of the Compensation Committee initially will be
comprised of Messrs. Butler, Hahl and Harper, each of whom is an Independent
Director. The Compensation Committee will determine compensation for the
Company's executive officers, in addition to administering initially the
Company's Stock Option Plan.
STOCK OPTION PLAN
The Company has established the 1997 Stock Option Plan (the '1997 Plan')
for the purpose of attracting and retaining executive officers, directors and
other key employees.
Initially, a maximum of 1,134,381 shares of Common Stock may be issued in
the aggregate under the 1997 Plan to employees and directors. Such number of
shares will be increased by 12% of the number of shares sold by the Company
under the Over-Allotment Option. Options granted under the 1997 Plan may be
exercised for a period of no more than ten years from the date of grant. Unless
sooner terminated by the Company's Board of Directors, the 1997 Plan will
terminate on August , 2007 and no additional awards may be made under the 1997
Plan after that date. The maximum number of shares that may be covered by
Options granted under the Plan for a single participant is 519,925.
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, and
entitle the optionee, upon exercise, to purchase shares of Common Stock from the
Company at a specified exercise price per share. Only employees of the Company
and its subsidiaries are eligible to receive incentive stock options under the
1997 Plan. Incentive stock options must have a per share exercise price of no
less than the fair market value or, if the optionee owns or is treated as owning
(under Section 424(d) of the Code) more than 10% of the total combined voting
power of all classes of stock of the Company, 110% of the fair market value of a
share of Common Stock 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 of a share of Common Stock on the date of the grant.
Options will not be transferable other than by laws of descent and distribution
and will generally be exercisable during an optionee's lifetime only by the
optionee.
The Compensation Committee will administer the 1997 Plan and have the
authority, subject to the provisions of the 1997 Plan, to determine who will
receive awards under the 1997 Plan and the terms of such awards. The
Compensation Committee will have the authority to adjust the number of shares
available for options, the number of shares subject to outstanding options and
the exercise price for options following the occurrence of events such as stock
splits, dividends, distributions and recapitalizations.
The Compensation Committee may provide that the exercise price of an option
may be paid in Common Stock. The Compensation Committee may also permit a
'cashless exercise' arrangement whereby an optionee, without payment of the
exercise price, receives upon exercise, shares having an aggregate fair market
value equal to the product of (i) the excess of the fair market value of a share
on the exercise date over the exercise price and (ii) the number of shares
covered by the option.
The Compensation Committee may also provide with respect to any
nonstatutory stock option (as defined in the 1997 Plan) that if an employee
delivers shares of Common Stock in full or partial payment of the exercise price
of the nonstatutory stock option, the employee will be granted a 'reload stock
option' to purchase that number of shares of Common Stock delivered by the
employee.
CERTAIN TRANSACTIONS
As of December 31, 1996, the Company had a note payable to Malon Wilkus,
the Company's President, with an outstanding principal amount of approximately
$74,000. Since that date, the Company has repaid the loan.
As of June 23, 1997, the Company sold an aggregate of 9.2% of its interest
in Biddeford to Stephen L. Hester, its Vice President and General Counsel, and
John L. Ireland, a principal of the Company, for the aggregate price of $60,000,
in cash, the price paid by the Company for that portion of its interest.
33
<PAGE>
PRINCIPAL STOCKHOLDERS
Of the 20,000,000 shares of Common Stock to be authorized under the
Company's Second Amended and Restated Certificate of Incorporation, there will
be 686,330 shares of Common Stock outstanding and five holders of record prior
to completion of the Offering. The Company will have no other shares of Capital
Stock outstanding. The following table sets forth certain ownership information
with respect to the Common Stock for (i) those persons who directly or
indirectly own, control or hold with the power to vote, 5% or more of the
outstanding Common Stock and (ii) all officers and directors, as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF COMMON
STOCK OUTSTANDING
-----------------------
TYPE OF SHARES BEFORE AFTER
NAME AND ADDRESS OWNERSHIP OWNED(1) OFFERING OFFERING(2)
- ----------------------------------------------------------------- ---------- -------- -------- -----------
<S> <C> <C> <C> <C>
Malon Wilkus .................................................... Record and 521,417 (3) 76.0% 7.1%(4)
c/o American Capital Strategies, Ltd. Beneficial
3 Bethesda Metro Center, Suite 860
Bethesda, Maryland 20814
American Capital Strategies, Ltd. % %
Employee Stock Ownership Plan Trust(5) ........................ Record 205,272 29.9 2.5
3 Bethesda Metro Center, Suite 860
Bethesda, Maryland 20814
Adam Blumenthal ................................................. Beneficial 36,591 (6) 5.3% 0.4%
c/o American Capital Strategies, Ltd.
3 Bethesda Metro Center, Suite 860
Bethesda, Maryland 20814
Roland Cline .................................................... Beneficial 36,442 (6) 5.3% 0.4%
c/o American Capital Strategies, Ltd.
3 Bethesda Metro Center, Suite 860
Bethesda, Maryland 20814
Officers and directors as a group (5 persons)....................
607,035 88.4% 9.0%(7)
</TABLE>
- ------------------
(1) Reflects the stock dividend whereby each share of Common Stock will be
effectively converted into 29.859 shares, which will be completed prior to
completion of the Offering.
(2) Does not reflect Common Stock reserved for issuance upon exercise of the
Underwriters' Warrants, the Over-Allotment Option or stock options to be
issued under the 1997 Plan, but does reflect the sales of all 686,330 shares
to be offered through the Direct Offering.
(3) Includes 43,673 shares allocated to the account of Mr. Wilkus as a
participant in the Company ESOP over which Mr. Wilkus has voting power under
the terms of the Company ESOP.
(4) Includes the purchase of 71,685 shares in the Direct Offering.
(5) The trustees of the Company ESOP are Adam Blumenthal, Roland Cline and Kathy
Stock.
(6) Reflects only shares allocated to the accounts of Messrs. Blumenthal and
Cline, respectively, as participants in the Company ESOP and over which they
have voting power under the terms of the Company ESOP but not other shares
legally owned by the Company ESOP for which Messrs. Blumenthal and Cline are
among the trustees.
(7) Includes the purchase of 143,370 shares in the Direct Offering.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of the Company's outstanding shares shall be
determined quarterly, as soon as practicable after and as of the end of each
calendar quarter, by dividing the value of total assets minus liabilities by the
total number of shares outstanding at the date as of which the determination is
made.
In calculating the value of the Company's total assets, securities that are
traded in the over-the-counter market or on a stock exchange are valued at the
prevailing bid price on the valuation date, unless the investment
34
<PAGE>
is subject to a restriction that requires a discount from such price, which is
determined by the Board of Directors. All other investments are valued at fair
market value as determined in good faith by the Board of Directors. In making
such determination, the Board of Directors will value loans and non-convertible
debt securities for which there exists no public trading market at cost plus
amortized original issue discount, if any, unless adverse factors lead to a
determination of a lesser value. In valuing convertible debt securities, equity
or other types of securities for which there exists no public trading market,
the Board of Directors will determine fair market value on the basis of
collateral, the issuer's ability to make payments, its earnings and other
pertinent factors.
A substantial portion of the Company's assets will consist of securities
carried at fair market values determined by its Board of Directors.
Determination of fair market values involves subjective judgment not susceptible
to substantiation by auditing procedures. Accordingly, under current auditing
standards, the notes to the consolidated financial statements refer to the
uncertainty with respect to the possible effect of such valuations on the
financial statements.
REINVESTMENT PLAN
Pursuant to the Company's Reinvestment Plan (the 'Plan'), a stockholder
whose shares are registered in his own name will have all distributions
reinvested automatically in additional shares by , the plan
administrator (the 'Plan Administrator'). Stockholders whose shares are held in
the name of a broker or other nominee will have distributions reinvested
automatically by the broker or the nominee in additional shares under the Plan,
unless such a service is not provided by the broker or the nominee or the
stockholder elects not to participate in the Plan. Stockholders whose shares are
held in the name of a broker or other nominee should contact the broker or
nominee for details. A stockholder may terminate participation in the Plan at
any time by delivering written notice to the Plan Administrator before the
record date of the next dividend or distribution. All distributions to
stockholders who do not participate in the Plan will be paid by check mailed
directly to the record holder by or under the direction of the Plan
Administrator.
When the Company declares a dividend or distribution, stockholders who are
participants in the Plan will receive the equivalent of the amount of the
dividend or distribution in shares of the Common Stock. The Plan Administrator
will buy shares in the open market, on the Nasdaq National Market or elsewhere.
Alternatively, the Board of Directors may choose to contribute newly issued
shares of Common Stock to the Plan, in lieu of the payment of cash dividends on
shares held in the Plan. The Plan Administrator will apply all cash received on
account of a dividend or distribution as soon as practicable, but in no event
later than 30 days, after the payment date of the dividend or distribution
except to the extent necessary to comply with applicable provisions of the
federal securities laws. The number of shares to be received by the Plan
participants on account of the dividend or distribution will be calculated on
the basis of the average price of all shares purchased for that 30 day period,
including brokerage commissions, and will be credited to their accounts as of
the payment date of the dividend or distribution.
The Plan Administrator will maintain all stockholder accounts in the Plan
and will furnish written confirmations of all transactions in the account,
including information needed by stockholders for personal and tax records.
Shares in the account of each Plan participant will be held by the Plan
Administrator in non-certificated form in the name of the participant, and each
stockholder's proxy will include shares purchased pursuant to the Plan.
There is no charge to participants for reinvesting dividends and capital
gains distributions. The fees of the Plan Administrator for handling the
reinvestment of dividends and capital gains distributions will be included in
the fee to be paid by the Company to its transfer agent. There will be no
brokerage charges with respect to shares issued directly by the Company as a
result of dividends or capital gains distributions payable either in shares or
in cash. However, each participant will bear a pro rata share of brokerage
commissions incurred with respect to the Plan Administrator's open market
purchases in connection with the reinvestment of distributions.
The automatic reinvestment of distributions will not relieve participants
of any income tax which may be payable on distributions. See 'Tax Status.'
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Company reserves the right to amend or terminate the Plan as
applied to any distribution paid subsequent to written notice of the change sent
to participants in the Plan at least 90 days before the record date for the
distribution. The Plan also may be amended or terminated by the Plan
Administrator with the Company's prior written consent, on at least 90 days'
35
<PAGE>
written notice to participants in the Plan. All correspondence concerning the
Plan should be directed to the Plan Administrator by mail at or
by phone at 1-800- .
TAX STATUS
The following discussion is a general summary of the principal material
federal income tax considerations applicable to the Company and to an investment
in Common Stock and does not purport to be a complete description of the tax
considerations applicable to such an investment. Prospective stockholders should
consult their own tax advisors with respect to the tax considerations which
pertain to their purchase of the Common Stock. This summary is based on the
Code, Treasury regulations thereunder, and administrative and judicial
interpretations thereof, each as of the date hereof, all of which are subject to
change, possibly on a retroactive basis. This summary does not discuss all
aspects of federal income taxation relevant to holders of the Common Stock in
light of their particular circumstances, or to certain types of holders subject
to special treatment under federal income tax laws, including foreign taxpayers.
This summary does not discuss any aspects of foreign, state, or local tax laws.
CONVERSION TO RIC STATUS
The Company was formed in 1986, and since that time has been subject to tax
as an ordinary corporation under Subchapter C of the Code. After the Offering,
the Company intends to qualify for and elect to be treated as a RIC under
Subchapter M of the Code. If 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. One requirement to qualify as a RIC is that by the end of its first
taxable year as a RIC the Company must have no earnings and profits accumulated
while the Company was taxable under Subchapter C. Therefore, to qualify for RIC
status, before the close of its first taxable year as a RIC the Company must
eliminate through the payment of dividends any remaining earnings and profits
accumulated while it was taxable under Subchapter C.
As of the date of the Offering, the Company held substantial assets whose
fair market value exceeded their basis ('built-in gain'). In Notice 88-19,
1988-1 C.B. 486 (the 'Notice'), the IRS announced its intention to promulgate
regulations requiring corporations that convert from taxation under Subchapter C
to taxation as a RIC to recognize all their built-in gain before they may
qualify for taxation as a RIC. The Notice states that, in general, the
regulations would treat a corporation electing RIC status as having sold all of
its assets at their fair market value as of the final day of the last year in
which it was taxable under Subchapter C. Such a deemed sale would be subject to
corporate level tax and would create earnings and profits that would be treated
as arising while the corporation was taxable under Subchapter C. To qualify as a
RIC, a corporation would have to eliminate such earnings and profits, typically
through the payment of dividends.
The Notice further provides, however, that the regulations will permit
corporations converting to RIC status to elect to be subject to rules similar to
the rules of section 1374 of the Code, which governs the tax treatment of
built-in gain on assets held by a corporation taxable under Subchapter C that
converts to taxation under Subchapter S. Such a conversion ordinarily eliminates
corporate-level tax. Section 1374 generally imposes corporate-level tax on
built-in gain on assets held when such a corporation converted to Subchapter S
status, if the gain is recognized within ten years of the conversion.
The IRS has not issued any of the regulations described in the Notice. The
Company has requested a private letter ruling from the IRS which, if favorable,
would allow it to be subject to rules similar to those of section 1374 on its
built-in gain. If the Company receives such a favorable ruling, it will not be
deemed to have sold its assets. The Company's basis in its assets will remain
below their fair market value, and if the Company disposes of any of those
assets within 10 years of the Offering it will be liable for corporate level tax
on such built-in gain. There can be no prediction whether the IRS will issue
such a ruling or when such a ruling would be issued.
If the Company does not receive a favorable ruling from the IRS by the due
date (including extensions) of its final return as a Subchapter C corporation,
it will compute its taxable income for that final return as if it had sold all
of its assets at fair market value on the last day of its taxable year. Based on
the Company's June 30, 1997 financial results, such a deemed sale would increase
the Company's tax liability by approximately $3.1 million. As a result of the
deemed sale the Company would have a basis in its assets equal to their fair
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market value. The Company would then pay a taxable dividend to its stockholders
equal to the additional earnings and profits created by the deemed sale of
assets. Based on the Company's June 30, 1997 financial results, the dividend
should be approximately $5.9 million. Such a dividend should eliminate the
Company's remaining earnings and profits accumulated while the Company was
taxable under Subchapter C. If the Company does not eliminate all of the
earnings and profits accumulated while taxable under Subchapter C, it will not
qualify for tax treatment as a RIC.
TAXATION AS A RIC
If the Company qualifies as a RIC and distributes to stockholders each year
in a timely manner at least 90% of its 'investment company taxable income,' as
defined in the Code (i.e., net investment income and net short-term capital
gains), it will not be subject to federal income tax on the portion of its
taxable income and gains it distributes to stockholders. In addition, if the
Company distributes in a timely manner (or treats as 'deemed distributed' as
described below) 98% of its capital gain net income for each one year period
ending October 31, and distributes 98% of its ordinary income for each calendar
year (as well as any income not distributed in prior years), it will not be
subject to a 4% nondeductible federal excise tax on certain undistributed income
of a RIC.
In order to qualify as a RIC for federal income tax purposes, the Company
must, among other things, (a) derive at least 90% of its gross income from
dividends, interest, payments with respect to securities loans, gains from the
sale of stock or securities, or other income derived with respect to its
business of investing in such stock or securities, and (b) diversify its
holdings so that (i) at least 50% of the value of the Company's assets consists
of cash, cash items, government securities 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), 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.
TREATMENT OF BUILT-IN GAIN
Stockholders should carefully consider the tax implications of the
carryover tax basis of assets owned by the Company before the Offering that will
exist if the Company obtains a favorable ruling from the IRS. As a result of the
tax-free nature of the Company's conversion to RIC status, the basis of the
Company in its assets will equal the basis of the assets before the Offering.
This basis will be approximately $9.0 million less than the market value of the
assets, based on the Company's June 30, 1997 financial results. This represents
a potential capital gain attributable to appreciation in value prior to the
Offering. If the Company recognizes that built-in gain within ten years of the
Offering, it will be liable for corporate-level tax on that gain. The current
corporate tax rate on capital gain income is 35%. Any capital gain recognized by
the Company when these assets are sold will either be distributed or deemed
distributed to the stockholders (net of corporate-level tax), and in either case
will be taxable to the stockholders. In the case of a deemed distribution, each
stockholder is entitled to the credit for taxes paid by the Company as described
below.
TAXATION OF STOCKHOLDERS
For any period during which the Company qualifies as a RIC for tax
purposes, dividends to stockholders of the Company's ordinary income and any
distributions of net short-term capital gain generally will be taxable as
ordinary income to stockholders to the extent of the Company's current or
accumulated earnings and profits. Distributions of the Company's net long-term
capital gains (designated by the Company as capital gain dividends) will be
taxable to stockholders as long-term capital gain regardless of the
stockholder's holding period in his shares. The Company will report to
stockholders the portion of such gains attributable to the disposition of assets
held by the Company for more than one year but not for more than 18 months and
the portion attributable to the disposition of assets held for more than 18
months.
To the extent that the Company retains any capital gains, it may designate
them as 'deemed distributions' and pay a tax thereon for the benefit of its
stockholders. In that event, the stockholders report their share of retained
realized capital gains on their tax returns as if it had been received, and
report a credit for the tax paid thereon by the Company. The amount of the
deemed distribution net of such tax is then added to the stockholder's cost
basis for his shares. Since the Company expects to pay tax on capital gains at
the regular corporate tax rate of 35% and the maximum rate payable by
individuals on such gains is substantially lower, the
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amount of credit that individual stockholders may report will exceed the amount
of tax that they would be required to pay on capital gains. Stockholders who are
not subject to federal income tax or tax on capital gains should be able to file
a Form 990T or an income tax return on the appropriate form that allows them to
recover the taxes paid on their behalf.
Any dividend declared by the Company in October, November or December of a
year, payable to stockholders of record on a specified date in such month and
actually paid during January of the following year, will be treated as if it
were received by the stockholders on December 31 of the year it was declared.
Investors should be careful to consider the tax implications of buying
shares just prior to the record date for a distribution. Even if the price of
the shares includes the amount of the forthcoming distribution, the stockholder
will be taxed upon receipt of the distribution and will not be entitled to
offset the distribution against tax basis in the shares.
A stockholder may recognize taxable gain or loss if he sells, exchanges or
redeems his shares. Any gain or loss arising from (or, in the case of
distributions in excess of earnings and profits, treated as arising from) the
sale, exchange or redemption of shares generally will be a capital gain or loss,
except in the case of a stockholder who is a securities dealer. This capital
gain or loss will be treated as long-term capital gain or loss if the
stockholder has held his shares for more than one year. The maximum tax rate on
capital gains received by individuals from the sale or disposition of
investments (other than collectibles) held for more than 18 months is 20
percent. If an individual holds an investment for more than one year, but not
for more than 18 months, the maximum rate is 28 percent. Finally, the top
capital gains tax rate for individuals will drop to 18 percent for assets
purchased after January 1, 2000, and held for more than five years. Pursuant to
a special rule, however, any capital loss arising from the sale, exchange or
redemption of shares held for six months or less will be treated as a long-term
capital loss to the extent of the amount of capital gain dividends received with
respect to such shares.
The Company may be required to withhold U.S. federal income tax at the rate
of 31% of all taxable dividends and distributions payable to stockholders who
fail to provide the Company with their correct taxpayer identification number or
to make required certifications, or regarding whom the Company has been notified
by the IRS that they are subject to backup withholding. Backup withholding is
not an additional tax and any amounts withheld may be credited against a
stockholder's U.S. federal income tax liability.
Federal withholding taxes at a 30% rate (or a lesser treaty rate) may apply
to distributions to stockholders that are nonresident aliens or foreign
partnerships, trusts or corporations. Foreign investors should consult their tax
advisers with respect to the possible U.S. federal, state and local and foreign
tax consequences of an investment in the Company.
The Company will mail to each stockholder, as promptly as possible after
the end of each fiscal year, a notice detailing, on a per share and per
distribution basis, the amounts includable in such stockholder's taxable income
for such year as net investment income, as net realized capital gains (if
applicable), as 'deemed' distributions of capital gains and as taxes paid by the
Company with respect thereto. In addition, the federal tax status of each year's
distributions will be reported to the IRS. Distributions may also be subject to
additional state, local and foreign taxes depending on each stockholder's
particular situation. Stockholders are advised to consult their own tax advisers
with respect to particular tax consequences to them of an investment in the
Company.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 20,000,000 shares
of Common Stock, $0.01 par value per share and 5,000,000 shares of preferred
stock, par value $0.01 per share (the 'Preferred Stock,' the Preferred Stock and
the Common Stock are collectively referred to as the 'Capital Stock'). The
following summary of the Company's Capital Stock does not purport to be complete
and is subject to, and qualified in its entirety by, the Company's Second
Amended and Restated Certificate of Incorporation. Reference is made to the
Company's Second Amended and Restated Certificate of Incorporation for a
detailed description of the provisions summarized below.
COMMON STOCK
All shares of Common Stock, have equal rights as to earnings, assets,
dividends and voting privileges and, when issued, will be duly authorized,
validly issued, fully paid and nonassessable. Distributions may be paid to the
holders of Common Stock if and when declared by the Board of Directors of the
Company out of funds
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legally available therefor. Shares of Common Stock have no preemptive,
conversion or redemption rights and are freely transferable. In the event of
liquidation dissolution or winding up of the Company, each share of Common Stock
is entitled to share ratably in all assets of the Company that are legally
available for distribution after payment of all debts and other liabilities and
subject to any prior rights of holders of Preferred Stock, if any, then
outstanding. Each share of Common Stock is entitled to one vote and does not
have cumulative voting rights, which means that holders of a majority of such
shares, if they so choose, could elect all of the directors, and holders of less
than a majority of such shares would, in that case, be unable to elect any
director.
The Common Stock has been approved for listing on the Nasdaq National
Market (symbol ACAS).
PREFERRED STOCK
In addition to shares of Common Stock, the Company's Second Amended and
Restated Certificate of Incorporation authorizes the issuance of shares of
Preferred Stock. The Board of Directors is authorized to provide for the
issuance of Preferred Stock with such preferences, powers, rights and privileges
as the Board deems appropriate; except that, such an issuance must adhere to the
requirements of the 1940 Act. The 1940 Act requires, among other things, that
(i) immediately after issuance and before any distribution is made with respect
to Common Stock, the Preferred Stock, together with all other Senior Securities,
must not exceed an amount equal to 50% of the Company's total assets and (ii)
the holders of shares of Preferred Stock, if any are issued, must be entitled as
a class to elect two directors at all times and to elect a majority of the
directors if dividends on the Preferred Stock are in arrears by two years or
more. The Company has no present plans to issue any shares of Preferred Stock,
but believes the availability of such stock will provide the Company with
increased flexibility in structuring future financings and acquisitions.
WARRANTS
In connection with the Offering, the Company will issue the Underwriters'
Warrants. See 'Underwriting.'
LIMITATION ON LIABILITY OF DIRECTORS
The Company has adopted provisions in its Second Amended and Restated
Certificate of Incorporation limiting the liability of directors and officers of
the Company for monetary damages. The effect of this provision in the Second
Amended and Restated Certificate of Incorporation is to eliminate the rights of
the Company and its stockholders (through stockholders' derivative suits on
behalf of the Company) to recover monetary damages against a director or
officers for breach of the fiduciary duty of care as a director or officer
(including breaches resulting from negligent or grossly negligent behavior)
except in certain limited situations. This provision does not limit or eliminate
the rights of the Company or any stockholder to seek nonmonetary relief such as
an injunction or rescission in the event of a breach of a director's or
officer's duty of care. These provisions will not alter the liability of
directors or officers under federal securities laws.
CERTAIN PROVISIONS OF THE SECOND AMENDED AND RESTATED CERTIFICATE OF
INCORPORATION AND THE SECOND AMENDED AND RESTATED BY-LAWS
The Second Amended and Restated Certificate of Incorporation and the Second
Amended and Restated By-Laws of the Company contain certain provisions that
could make more difficult the acquisition of the Company by means of a tender
offer, a proxy contest or otherwise. These provisions are expected to discourage
certain types of coercive takeover practices and inadequate takeover bids and to
encourage persons seeking to acquire control of the Company to negotiate first
with the Board of Directors. The Company believes that the benefits of these
provisions outweigh the potential disadvantages of discouraging such proposals
because, among other things, negotiation of such proposals might result in an
improvement of their terms. The description set forth below is intended as a
summary only and is qualified in its entirety by reference to the Second Amended
and Restated Certificate of Incorporation and the Second Amended and Restated
By-Laws.
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CLASSIFIED BOARD OF DIRECTORS
The Second Amended and Restated Certificate of Incorporation provides for
the Board of Directors to be divided into three classes of directors serving
staggered three-year terms, with each class to consist as nearly as possible of
one-third of the directors then elected to the Board. A classified board may
render more difficult a change in control of the Company or removal of incumbent
management. The Company believes, however, that the longer time required to
elect a majority of a classified Board of Directors will help to ensure
continuity and stability of the Company's management and policies.
NUMBER OF DIRECTORS; REMOVAL; FILING VACANCIES
The Second Amended and Restated Certificate of Incorporation provides that
the number of directors will be determined pursuant to the By-Laws. In addition,
the Second Amended and Restated By-Laws provide that the number of directors
shall not be increased by 50% or more in any 12-month period without the
approval of at least 66 2/3% of the members of the Board of Directors then in
office. The Second Amended and Restated Certificate of Incorporation provides
that any vacancies will be filled by the vote of a majority of the remaining
directors, even if less than a quorum, and the directors so appointed shall hold
office until the next election of the class for which such directors have been
chosen and until their successors are elected and qualified. Accordingly, the
Board of Directors could temporarily prevent any stockholder from enlarging the
Board of Directors and filling the new directorships with such stockholder's own
nominees.
The Second Amended and Restated Certificate of Incorporation also provides
that, except as may be provided in a resolution or resolution designating any
class or series of Preferred Stock, the directors may only be removed for cause
by the affirmative vote of 75% of the voting power of all of the shares of
capital stock of the Company then entitled to vote generally in the election of
directors, voting together as a single class.
NO STOCKHOLDER ACTION BY WRITTEN CONSENT
The Second Amended and Restated Certificate of Incorporation and the Second
Amended and Restated By-Laws provide that stockholder action can be taken only
at an annual or special meeting of Stockholders. They also prohibit stockholder
action by written consent in lieu of a meeting. These provisions may have the
effect of delaying consideration of a stockholder proposal until the next annual
meeting.
ADVANCE NOTICE PROVISIONS FOR STOCKHOLDER NOMINATIONS AND STOCKHOLDER
PROPOSALS
The Second Amended and Restated By-Laws establish an advance notice
procedure for stockholders to make nominations of candidates for election as
directors or to bring other business before an annual meeting of stockholders of
the Company (the 'Stockholder Notice Procedure').
The Stockholder Notice Procedure provides that (i) only persons who are
nominated by, or at the direction of, the Board of Directors, or by a
stockholder who has given timely written notice containing specified information
to the Secretary of the Company prior to the meeting at which directors are to
be elected, will be eligible for election as directors of the Company and (ii)
at an annual meeting only such business may be conducted as has been brought
before the meeting by, or at the direction of, the Board of Directors or by a
stockholder who has given timely written notice to the Secretary of the Company
of such stockholder's intention to bring such business before the meeting.
Except for stockholder proposals submitted in accordance with the Federal proxy
rules as to which the requirements specified therein shall control, notice of
stockholder nominations or business to be conducted at a meeting must be
received by the Company not less than 60 days or more than 90 days prior to the
first anniversary of the previous year's annual meeting if the notice is to be
submitted at an annual stockholders meeting or no later than 10 days following
the day on which notice of the date of a special meeting of stockholders was
given if the notice is to be submitted at a special stockholders meeting.
The purpose of requiring stockholders to give the Company advance notice of
nominations and other business is to afford the Board of Directors a meaningful
opportunity to consider the qualifications of the proposed nominees and the
advisability of the other proposed business and, to the extent deemed necessary
or
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desirable by the Board of Directors, to inform stockholders and make
recommendations about such qualifications or business, as well as to provide a
more orderly procedure for conducting meetings of stockholders. Although the
Second Amended and Restated By-Laws do not give the Board of Directors any power
to disapprove stockholder nominations for the election of directors or proposals
for action, they may have the effect of precluding a contest for the election of
directors or the consideration of stockholder proposals if proper procedures are
not followed and of discouraging or deterring a third party from conducting a
solicitation of proxies to elect its own slate of directors or to approve its
own proposal without regard to whether consideration of such nominees or
proposals might be harmful or beneficial to the Company and its stockholders.
AMENDMENT OF CERTIFICATE OF INCORPORATION AND BY-LAWS
The Company's Second Amended and Restated Certificate of Incorporation
provides that the provisions therein relating to the classified Board of
Directors, the number of directors, vacancies on the Board of Directors and
removal of directors may be amended, altered, changed or repealed only by the
affirmative vote of the holders of at least 75% of the voting power of all of
the shares of capital stock of the Company then entitled to vote generally in
the election of directors voting together as a single class.
The Company's Second Amended and Restated Certificate of Incorporation also
provides that the other provisions of such Certificate may be amended, altered,
changed or repealed, subject to the resolutions providing for any class or
series of Preferred Stock, only by the affirmative vote of both a majority of
the members of the Board of Directors then in office and a majority of the
voting power of all of the shares of capital stock of the Company entitled to
vote generally in the election of directors, voting together as a single class.
The Company's Second Amended and Restated Certificate of Incorporation also
provides that the Second Amended and Restated By-Laws may be adopted, amended,
altered, changed or repealed by the affirmative vote of the majority of the
Board of Directors then in office. Any action taken by the stockholders with
respect to adopting, amending, altering, changing or repealing the Second
Amended and Restated By-Laws may be taken only by the affirmative vote of the
holders of at least 75% of the voting power of all of the shares of capital
stock of the Company then entitled to vote generally in the election of
directors, voting together as a single class.
These provisions are intended to make it more difficult for stockholders to
circumvent certain other provisions contained in the Company's Second Amended
and Restated Certificate of Incorporation and Second Amended and Restated
By-Laws, such as those that provide for the classification of the Board of
Directors. These provisions, however, also will make it more difficult for
stockholders to amend the Second Amended and Restated Certificate of
Incorporation or Second Amended and Restated By-Laws without the approval of the
Board of Directors, even if a majority of the stockholders deems such amendment
to be in the best interests of all stockholders.
REGULATION
The Company is a closed-end, non-diversified, management investment company
that has elected to be regulated as a business development company under Section
54 of the 1940 Act and, as such, is subject to regulation under that Act. The
1940 Act contains prohibitions and restrictions relating to transactions between
business development companies and their affiliates, principal underwriters and
affiliates of those affiliates or underwriters and requires that a majority of
the directors be persons other than 'interested persons,' as defined in the 1940
Act. In addition, the 1940 Act provides that the Company may not change the
nature of its business so as to cease to be, or to withdraw its election as, a
business development company unless so authorized by the vote of a majority, as
defined in the 1940 Act, of its outstanding voting securities.
The Company is permitted, under specified conditions, to issue multiple
classes of indebtedness and one class of stock senior to the shares offered
hereby if its asset coverage, as defined in the 1940 Act, is at least 200%
immediately after each such issuance. In addition, while Senior Securities are
outstanding, provision must be made to prohibit any distribution to stockholders
or the repurchase of such securities or shares unless the Company meets the
applicable asset coverage ratios at the time of the distribution or repurchase.
The Company may also borrow amounts up to 5% of the value of its total assets
for temporary or emergency purposes.
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Under the 1940 Act, a business development company may not acquire any
asset other than assets of the type listed in Section 55(a) of the 1940 Act
('Qualifying Assets') unless, at the time the acquisition is made, Qualifying
Assets represent at least 70% of the company's total assets. The principal
categories of Qualifying Assets relevant to the proposed business of the Company
are the following:
(1) 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 in the 1940 Act
as any issuer which:
(a) is organized under the laws of, 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 business development company; and
(c) does not have any class of securities with respect to which a
broker or dealer may extend margin credit.
(2) Securities of any eligible portfolio company which is controlled
by the business development company.
(3) Securities received in exchange for or distributed on or with
respect to securities described in (1) or (2) above, or pursuant to the
exercise of options, warrants or rights relating to such securities.
(4) Cash, cash items, government securities, or high quality debt
securities maturing in one year or less from the time of investment.
In addition, a business development company must have been organized (and
have its principal place of business) in the United States and must be operated
for the purpose of making investments in the types of securities described in
(1) or (2) above. However, in order to count portfolio securities as Qualifying
Assets for the purpose of the 70% test, the business development company must
either control the issuer of the securities or must offer to make available to
the issuer of the securities significant managerial assistance; except that,
where the business development company purchases such securities in conjunction
with one or more other persons acting together, one of the other persons in the
group may make available such managerial assistance. Making available
significant managerial assistance means, among other things, any arrangement
whereby the business development company, through its directors, officers or
employees, offers to provide, and, if accepted, does so provide, significant
guidance and counsel concerning the management, operations or business
objectives and policies of a portfolio company.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering and assuming that shares offered through
the Direct Offering are sold in full, the Company will have outstanding
8,403,176 shares of Common Stock, based on the number of shares outstanding on
September 1, 1997, and assuming (i) no exercise of the Over-Allotment Option,
and (ii) no exercise of the Underwriters' Warrants. Of these shares, the
7,716,846 shares of Common Stock sold in the Offering and the Direct Offering
will be freely tradable without restriction or limitation under the Securities
Act, except to the extent such shares are subject to the agreement with the
Representative of the Underwriters described below. Of the remaining 686,330
shares, the 481,058 shares not owned by the Company ESOP (the 'Restricted
Shares') will be subject to lockup agreements in favor of the Representative of
the Underwriters which generally provide that none of such shares may, without
the prior written consent of the Representative of the Underwriters, be sold or
otherwise disposed of for a period of 180 days from the date of this Prospectus.
The Company ESOP, which owns 205,272 shares, is legally prohibited from entering
into such lockup agreements. Nevertheless, under the terms of the Company ESOP,
only in the event of the death or disability of a participant, would the Company
ESOP make distributions of shares to ESOP participants during the term of such
lockup agreements. Similarly, Company ESOP participants cannot legally enter
into such lockup agreements with regard to shares allocated to their accounts
under the Company ESOP. The Representative of the Underwriters may, in its sole
discretion and at any time without notice, release all or any portion of the
securities subject to the lockup agreements.
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SHARE REPURCHASES
Shares of closed-end investment companies frequently trade at discounts
from net asset value, especially shortly after the completion of the initial
public offering. The Company cannot predict whether its shares will trade above,
at or below net asset value. The market price of the Company's shares will be
determined by, among other things, the supply and demand for the Company's
shares, the Company's investment performance and investor perception of the
Company's overall attractiveness as an investment as compared with alternative
investments. The Board of Directors has authorized officers of the Company in
their discretion, subject to compliance with the 1940 Act and other applicable
law, to purchase on the open market or in privately negotiated transactions,
outstanding shares of the Company in the event that the shares trade at a
discount to net asset value. There is no assurance that any such open market
purchases will be made and such authorization may be terminated at any time. In
addition, if at any time after the second anniversary of this Offering the
Company's shares publicly trade for a substantial period of time at a
substantial discount from the Company's then current net asset value per share,
the Company's Board of Directors will consider authorizing periodic repurchases
of the Company's shares or other actions designed to eliminate the discount. The
Board of Directors would consider all relevant factors in determining whether to
take any such actions, including the effect of such actions on the Company's
status as a RIC under the Code and the availability of cash to finance these
repurchases in view of the restrictions on the Company's ability to borrow. No
assurance can be given that any share repurchases will be made or that if made,
they will reduce or eliminate market discount. Should any such repurchases be
made in the future, it is expected that they would be made at prices at or below
the current net asset value per share. Any such repurchase would cause the
Company's total assets to decrease, which may have the effect of increasing the
Company's expense ratio. The Company may borrow money to finance the repurchase
of shares subject to the limitations described in this Prospectus. Any interest
on such borrowing for this purpose will reduce the Company's net income.
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UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement, the Company has agreed to sell to each of the underwriters named
below (the 'Underwriters') and each of the Underwriters, for whom Friedman,
Billings, Ramsey & Co., Inc., is acting as representative (the
'Representative'), has severally agreed to purchase, the number of shares of
Common Stock offered hereby set forth below opposite its name.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ------------------------------------------------------------------------------------------- ---------
<S> <C>
Friedman, Billings, Ramsey & Co., Inc......................................................
---------
Total................................................................................. 7,000,000
---------
---------
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to purchase all the shares of Common Stock offered
hereby if any are purchased.
The Underwriters propose initially to offer the shares of Common Stock
directly to the public at the public offering price set forth on the cover page
of this Prospectus and to certain dealers at such offering price less a
concession not to exceed $[ ] per share of Common Stock. The Underwriters may
allow and such dealers may reallow a concession not to exceed $[ ] per share of
Common Stock to certain other dealers. After the shares of Common Stock are
released for sale to the public, the offering price and other selling terms may
be changed by the Underwiters.
The Company has granted to the Underwriters the Over-Allotment Option,
which is an option exercisable during a 30-day period after the date hereof to
purchase, at the initial offering price less underwriting discounts and
commissions, up to an additional 1,050,000 shares of Common Stock for the sole
purpose of covering Over-Allotments, if any. To the extent that the Underwriters
exercise the Over-Allotment Option, each Underwriter will be committed, subject
to certain conditions, to purchase a number of the additional shares of Common
Stock proportionate to such Underwriter's initial commitment.
The Company has agreed, subject to the approval prior to completion of the
Offering, of the stockholders and a majority of the disinterested directors, to
issue on the date of this Prospectus to the Representative and/or its designees
the Underwriters' Warrants, which are warrants to purchase up to 336,127 shares
of Common Stock (378,127 shares if the Over-Allotment Option is exercised),
representing 4% of the shares of Common Stock outstanding after completion of
the Offering and the Direct Offering, at a purchase price equal to the initial
offering price per share. The Underwriters' Warrants may not be sold,
transferred, assigned or hypothecated for one year following the date of this
Prospectus, except to officers, directors, and shareholders of the
Representative. The Underwriters' Warrants are immediately exercisable and have
a term of five years from the date of this Prospectus (the 'Warrant Exercise
Term'). The Company has also agreed to register the shares of Common Stock
underlying the Underwriters' Warrants. During the Warrant Exercise Term, the
Representative is given the opportunity to profit from a rise in market price of
the shares of Common Stock. To the extent that the Underwriters' Warrants are
exercised, dilution to the interests of the holders of the Common Stock will
occur. In addition, the terms upon which the Company will be able to obtain
additional equity capital may be adversely affected because the holders of the
Underwriters' Warrants can be expected to exercise them at a time when the
Company likely would be able to obtain any needed capital on terms more
favorable to the Company than those provided in the Underwriters' Warrants.
The Company has agreed to pay to the Underwriters an accountable expense
allowance of up to $200,000.
The Company has agree to indemnify the several Underwriters against certain
civil liabilities under the Securities Act, or to contribute to payments the
Underwriters may be required to make in respect thereof.
Prior to the Offering, there has been no public market for the shares of
Common Stock. The initial public offering price has been determined by
negotiation between the Company and the Representative of the Underwrtiers.
Among the factors considered in making such determination were the history of,
and the prospects
44
<PAGE>
for, the industry in which the Company will compete, an assessment of
management, the Company's prospects for future earnings, the general conditions
of the economy and the securities market and the prices of offerings by similar
issuers. There can, however, be no assurance that the price at which the shares
of Common Stock will sell in the public market after the Offering will not be
lower than the price at which they are sold by the Underwriters.
The Representative has informed the Company that the Underwriters do not
intend to confirm sales of the shares offered hereby to any accounts over which
they exercise discretionary authority.
Until the distribution of the Common Stock is completed, the rules of the
Commission may limit the ability of the Underwriters and certain selling group
members to bid for or purchase the Common Stock. As an exception to these rules,
the Representative is permitted to engage in certain transactions that stabilize
the price of the Common Stock. Such transactions consist of bids or purchases
for the purpose of pegging, fixing or maintaining the price of the Common Stock.
If the Underwriters create a short position in the Common Stock in
connection with the Offering, i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus, the Representative may
reduce that short position by purchasing shares of Common Stock in the open
market. The Representative may also elect to reduce any short position by
exercising all or part of the Over-Allotment Option described above.
The Representative may also impose a penalty bid on certain Underwriters
and selling group members. This means that if the Representative purchases
Common Stock in the open market to reduce the Underwriters' short position or to
stabilize the price of the Common Stock, it may reclaim the amount of the
selling concession from the Underwriters and selling group members who sold that
Common Stock as part of the Offering.
In general, purchases of securities for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor any of the Underwriters makes any representation that the
Representative will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
The Company, each person purchasing in the Direct Offering and the existing
stockholders of the Company other than the Company ESOP have agreed not to
offer, sell or contract to sell or otherwise dispose any of its Common Stock
without the prior consent of the Representative for a period of 180 days from
the date of this Prospectus. The Company ESOP is legally prohibited from
entering into such an agreement.
DIRECT OFFERING
Concurrently with the offering by the Underwriters, the Company is, by
means of this Prospectus, making the Direct Offering of up to 716,846 shares of
Common Stock to directors, officers and employees of the Company and certain
associated persons and entities at a price equal to $15.00 per share less the
sales load payable with respect to the shares offered to the public. The
obligation of the investors to purchase shares in the Direct Offering is
contingent on the purchase of shares by the Underwriters. There is no minimum
number of shares to be purchased in the Direct Offering. Any proceeds from the
sale of shares in the Direct Offering will be held in escrow until the closing
of the underwritten offering and will be refunded to the investors if the
Underwriters do not purchase shares in the underwritten offering. Such investors
have agreed not to resell any shares so purchased by them for at least 180 days
from the date of this Prospectus without the consent of the Underwriters. If the
Company sells shares to the Underwriters and to the investors in the Direct
Offering, the proceeds of such sales will be used only for the purposes
described in this Prospectus.
45
<PAGE>
CUSTODIAN, TRANSFER AND DIVIDEND PAYING AGENT AND REGISTRAR
The Company's securities are held under a custodian agreement by Riggs
Bank. The address of the custodian is 808 17th Street, N.W., Washington, D.C.
20006. The Company's assets are held under bank custodianship in compliance with
the 1940 Act. will act as the Company's transfer and dividend paying
agent and registrar. The principal business address of is
.
LEGAL MATTERS
The legality of the shares of Common Stock offered hereby will be passed
upon for the Company by Arnold & Porter, Washington, D.C. Certain legal matters
will be passed upon for the Underwriters by Gibson, Dunn & Crutcher LLP,
Washington, D.C.
EXPERTS
The consolidated financial statements of the Company at December 31, 1996
and 1995, and for each of the three years in the period ended December 31, 1996
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
46
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Auditors............................................................................. F-2
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 1996 and 1995............................................. F-3
Consolidated Schedules of Investments as of December 31, 1996 and 1995................................... F-4
Consolidated Statements of Income for the years ended December 31, 1996, 1995, and 1994.................. F-5
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996,
1995, and 1994........................................................................................ F-6
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995, and 1994.............. F-7
Notes to Consolidated Financial Statements............................................................... F-8
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets (Unaudited) as of June 30, 1997 and 1996..................................... F-14
Consolidated Schedules of Investments (Unaudited) as of June 30, 1997 and 1996........................... F-15
Consolidated Statements of Income (Unaudited) for the six months ended June 30, 1997
and 1996.............................................................................................. F-16
Consolidated Statements of Stockholders' Equity (Unaudited) for the six months ended June 30, 1997 and
1996.................................................................................................. F-17
Consolidated Statements of Cash Flows (Unaudited) for the six months ended June 30, 1997 and 1996........ F-18
Notes to Unaudited Consolidated Financial Statements..................................................... F-19
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
American Capital Strategies, Ltd.
We have audited the accompanying consolidated balance sheets of American Capital
Strategies, Ltd. (the Company), including the consolidated schedules of
investments, as of December 31, 1996 and 1995, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 respects, the consolidated financial position of the Company at
December 31, 1996 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996 in conformity
with generally accepted accounting principles.
As discussed in Note 1, in 1994 the Company changed its method of accounting for
preferred stock issued to the employee stock ownership plan.
ERNST & YOUNG LLP
Washington, D.C.
June 11, 1997, except as to Note 12, as to which the date is August , 1997
- --------------------------------------------------------------------------------
The foregoing report is in the form that will be signed upon the completion of
the restatement of capital accounts described in Note 12 to the consolidated
financial statements.
ERNST & YOUNG LLP
Washington, D.C.
August 8, 1997
F-2
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1996
---------- ----------
<S> <C> <C>
ASSETS
Investments' at fair value (cost or initial value of $831,414, and $905,748,
respectively)....................................................................... $3,422,422 $3,980,421
Cash and cash equivalents............................................................. 359,029 322,664
Accounts receivable (net of allowance for doubtful accounts of $302,283, and $249,609,
respectively)....................................................................... 276,643 917,625
Income taxes receivable............................................................... 153,147 52,225
Property and equipment:
Computer equipment.................................................................. 124,953 154,182
Office furniture and equipment...................................................... 94,304 96,827
Less: accumulated depreciation...................................................... (100,099) (130,495)
---------- ----------
119,158 120,514
Other assets.......................................................................... 52,595 38,816
---------- ----------
Total assets.......................................................................... $4,382,994 $5,432,265
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities.............................................. $ 94,322 $ 322,252
Due to related parties................................................................ 72,222 78,142
Deferred taxes........................................................................ 1,109,958 1,230,536
Notes payable......................................................................... 160,833 429,684
---------- ----------
Total liabilities..................................................................... 1,437,335 2,060,614
Stockholders' equity:
Preferred stock, $.01 par value, 100,000 shares authorized and 6,857 issued and
outstanding...................................................................... 1,419,399 1,419,399
Unearned ESOP shares................................................................ (332,551) (116,668)
Common stock, $.01 par value, 20,000,000 shares authorized, 480,312 and 481,058
shares issued and outstanding in 1995 and 1996, respectively..................... 4,804 4,811
Capital in excess of par value...................................................... 9,444 10,407
Retained earnings................................................................... 1,844,563 2,053,702
---------- ----------
Total stockholders' equity............................................................ 2,945,659 3,371,651
---------- ----------
Total liabilities and stockholders' equity............................................ $4,382,994 $5,432,265
---------- ----------
---------- ----------
</TABLE>
See accompanying notes.
F-3
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
CONSOLIDATED SCHEDULES OF INVESTMENTS
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------------------------
NUMBER OF COST OR INITIAL
COMMON STOCK SHARES VALUE FAIR VALUE
- ----------------------------------------------------------------------- ---------- --------------- ----------
<S> <C> <C> <C>
Manufacturing--100%
Erie Forge and Steel, Inc............................................ 120,773 $ 500,000 $2,736,418
Good Stuff Food Company, Inc......................................... 27,000 67,750 486,000
Indiana Steel & Wire Corporation..................................... 7,547 42,914 58,869
Martino's Bakery, Inc................................................ 50,000 120,750 259,000
Mobile Tool International, Inc....................................... 6,130 174,334 440,134
--------------- ----------
$ 905,748 $3,980,421
--------------- ----------
--------------- ----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-------------------------------------------
NUMBER OF COST OR INITIAL
COMMON STOCK SHARES VALUE FAIR VALUE
- ----------------------------------------------------------------------- ---------- --------------- ----------
<S> <C> <C> <C>
Manufacturing--100%
Erie Forge and Steel, Inc............................................ 120,773 $ 500,000 $2,532,610
Good Stuff Food Company, Inc......................................... 27,000 67,750 567,000
Indiana Steel & Wire Corporation..................................... 7,547 42,914 49,812
Martino's Bakery, Inc................................................ 50,000 120,750 102,500
Mobile Tool International, Inc....................................... 5,000 100,000 170,500
--------------- ----------
$ 831,414 $3,422,422
--------------- ----------
--------------- ----------
</TABLE>
See accompanying notes.
F-4
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
REVENUE
Financial advisory fees................................................. $1,433,891 $1,148,752 $1,738,295
Financial performance fees.............................................. 708,377 1,288,797 649,030
Other................................................................... 355,963 268,083 359,097
---------- ---------- ----------
Total revenue...................................................... 2,498,231 2,705,632 2,746,422
OPERATING EXPENSES
Salaries and benefits................................................... 1,350,909 1,484,833 1,067,315
General and administrative.............................................. 523,233 573,102 926,502
Other operating......................................................... 345,056 278,212 355,693
Provision for doubtful accounts......................................... -- 302,283 224,329
Interest................................................................ 36,001 37,037 32,959
Depreciation and amortization........................................... 33,198 35,415 39,016
ESOP contribution....................................................... 317,361 216,827 215,883
---------- ---------- ----------
Total operating expenses........................................... 2,605,758 2,927,709 2,861,697
---------- ---------- ----------
Net operating loss before investment activity........................... (107,527) (222,077) (115,275)
Unrealized appreciation of investments.................................. 956,294 370,696 483,665
Realized gain (loss) on investments..................................... (22,784) 66,148 --
---------- ---------- ----------
Income before income taxes.............................................. 825,983 214,767 368,390
Provision for income taxes.............................................. 421,664 57,381 159,251
---------- ---------- ----------
Net income......................................................... $ 404,319 $ 157,386 $ 209,139
---------- ---------- ----------
---------- ---------- ----------
SUPPLEMENTAL EARNINGS (LOSS) PER SHARE:
Net operating loss before investment activity......................... $ (0.17)
Net income............................................................ 0.30
Weighted average shares outstanding................................... 686,330
</TABLE>
See accompanying notes.
F-5
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CAPITAL
UNEARNED COMMON STOCK IN EXCESS
PREFERRED ESOP ---------------- OF PAR RETAINED
STOCK SHARES SHARES AMOUNT VALUE EARNINGS TOTAL
---------- --------- ------- ------ --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993........ $1,419,399 $(932,307) 479,864 $4,800 $ 8,692 $1,349,925 $1,850,509
Net income........................ -- -- -- -- -- 404,319 404,319
Dividends......................... -- -- -- -- -- (67,067) (67,067)
Sale of common stock to
employees....................... -- -- 448 4 752 -- 756
ESOP shares earned................ -- 382,929 -- -- -- -- 382,929
---------- --------- ------- ------ --------- ---------- ----------
Balance at December 31, 1994........ 1,419,399 (549,378) 480,312 4,804 9,444 1,687,177 2,571,446
Net income........................ -- -- -- -- -- 157,386 157,386
ESOP shares earned................ -- 216,827 -- -- -- -- 216,827
---------- --------- ------- ------ --------- ---------- ----------
Balance at December 31, 1995........ 1,419,399 (332,551) 480,312 4,804 9,444 1,844,563 2,945,659
Net income........................ -- -- -- -- -- 209,139 209,139
Options exercised................. -- -- 746 7 963 -- 970
ESOP shares earned................ -- 215,883 -- -- -- -- 215,883
---------- --------- ------- ------ --------- ---------- ----------
Balance at December 31, 1996........ $1,419,399 $(116,668) 481,058 $4,811 $10,407 $2,053,702 $3,371,651
---------- --------- ------- ------ --------- ---------- ----------
---------- --------- ------- ------ --------- ---------- ----------
</TABLE>
See accompanying notes.
F-6
<PAGE>
AMERICAN CAPITAL STRATEGIES LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1994 1995 1996
-------- -------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income................................................................. $404,319 $157,386 $ 209,139
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization......................................... 33,198 35,415 39,016
Unrealized appreciation of investments................................ (956,294) (370,696) (483,665)
Realized (gain) loss on investments................................... 22,784 (66,148) --
Amortization of deferred finance costs................................ 3,024 7,332 11,088
Provision for deferred income taxes................................... 495,483 115,485 120,578
Loss on disposal of property and equipment............................ 1,498 91 629
ESOP contribution..................................................... 382,929 216,827 215,883
Provision for doubtful accounts....................................... -- 302,283 224,329
Increase in accounts receivable....................................... (54,867) (182,056) (865,311)
(Increase) decrease in income taxes receivable........................ (100,894) (32,822) 100,922
Decrease (increase) in other assets................................... (11,082) (3,554) 5,665
Increase (decrease) in accounts payable and accrued liabilities....... (35,834) 29,538 227,930
-------- -------- ---------
Net cash provided by (used in) operating activities........................ $184,264 $209,081 $(193,797)
-------- -------- ---------
-------- -------- ---------
INVESTING ACTIVITIES
Proceeds from sale of investments.......................................... -- 66,148 --
Purchase of investments.................................................... -- (6,674) (74,640)
Purchases of property and equipment, net of disposals...................... (72,561) (20,304) (39,669)
-------- -------- ---------
Net cash provided by (used in) investing activities.......................... (72,561) 39,170 (114,309)
FINANCING ACTIVITIES
Proceeds from notes payable................................................ -- -- 429,684
Principal payments of notes payable........................................ (71,667) (77,500) (160,833)
Increase in deferred finance costs......................................... -- (25,849) (4,000)
Increase (decrease) in due to related parties.............................. (165) 10,893 5,920
Sale of common stock....................................................... 756 -- --
Options exercised.......................................................... -- -- 970
Dividends paid............................................................. (67,067) -- --
-------- -------- ---------
Net cash provided by (used in) financing activities.......................... (138,143) (92,456) 271,741
-------- -------- ---------
Net increase (decrease) in cash and cash equivalents......................... (26,440) 155,795 (36,365)
Cash and cash equivalents at beginning of year............................... 229,674 203,234 359,029
-------- -------- ---------
Cash and cash equivalents at end of year..................................... $203,234 $359,029 $ 322,664
-------- -------- ---------
-------- -------- ---------
</TABLE>
See accompanying notes.
F-7
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Organization
American Capital Strategies, Ltd. (the Company) is a specialty finance
company that assists small and medium sized businesses in raising financing and
has made equity investments in certain of these businesses. It also provides
other financial services to these companies. It has focused on structuring,
raising financing, and investing in management and employee buyouts of
subsidiaries, divisions, and product lines being divested by larger corporations
utilizing employee stock ownership plans (ESOPs). The Company is headquartered
in Bethesda, Maryland and has offices in New York, Boston, Pittsburgh, San
Francisco, and Savannah.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company's majority owned subsidiaries. All intercompany transactions and
balances have been eliminated in consolidation. Labor Research, Inc. and ACS
Capital Investment Corporation are the only active Company subsidiaries included
in consolidated balances. The Company's remaining majority owned subsidiaries
are inactive.
Cash and Cash Equivalents
For the purpose of reporting cash flows, the Company has defined cash and
cash equivalents as cash and investments in mutual funds.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Investments
Investments are comprised of investments in equity securities and are
recorded at estimated market value. Market value is determined by either
independent third party appraisals or by estimates of the Company's management
made in consultation with managements of the companies in which equity
investments have been made. However, because of the inherent uncertainty of
valuation, those estimated values 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.
Property and Equipment
Property and equipment is carried at cost and is depreciated using the
straight-line method over the estimated useful lives of the related assets
ranging from five to seven years.
Revenue Recognition
Financial advisory fees represent amounts received for providing advice and
analysis to small and medium sized businesses and are recognized as earned based
on hours incurred. Financial performance fees represent amounts received that
are earned on a contingent basis for structuring, financing, and executing
transactions and are recognized as earned when the transaction is completed.
F-8
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Employee Stock Ownership Plan (ESOP)
Beginning January 1, 1994, the Company prospectively adopted the provisions
of AICPA Statement of Position 93-6, 'Employers' Accounting for Employee Stock
Ownership Plans,' (SOP 93-6). SOP 93-6 requires that ESOP contribution expense
for ESOP shares acquired after 1992 and not committed to be released before the
beginning of 1994, be measured based on the fair value of those shares when
committed to be released to employees, rather than based on their original cost.
Additionally, under SOP 93-6, dividends on unallocated shares of preferred stock
are recorded as ESOP contribution expense. As a result of this change, net
income in 1994 has been reduced by $110,358. Through December 31, 1993, the
Company accounted for ESOP shares in accordance with AICPA Statement of Position
76-3.
Income Taxes
During the years ended December 31, 1996, 1995, and 1994, the Company
operated under Subchapter C of the Internal Revenue Code. The Company calculates
its tax provision pursuant to Statement of Financial Accounting Standards No.
109. Deferred income taxes are determined based on the differences between
financial reporting and tax basis of assets and liabilities.
New Accounting Pronouncements
In October 1995, Statement of Financial Accounting Standards No. 123,
'Accounting for Stock-Based Compensation' (SFAS 123), was issued. SFAS 123
requires entities that have followed Accounting Principles Board Opinion No. 25,
'Accounting for Stock Issued to Employees' (APB 25) and related Interpretations
to either adopt a fair value method of accounting for stock-based compensation
(as described by SFAS 123) or continue to follow APB 25 and provide additional
pro forma disclosures in the footnotes to the financial statements.
The Company has elected to follow APB 25 and related Interpretations in
accounting for its employee stock options because the alternative fair value
accounting provided for under SFAS 123 requires the use of valuation methods
that were not developed for use in valuing employee stock options. Under APB 25,
because the exercise price of the Company's employee stock options approximates
the market price of the underlying stock on the date of grant, no compensation
expense is recognized.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, 'Earnings Per Share,' (SFAS 128) which is required to be adopted on
December 31, 1997. At that time, the Company will change the method currently
used to compute earnings per share and to restate all prior years. The impact of
SFAS 128 on the calculation of fully diluted earnings per share for these years
is not expected to be material.
2. NOTES PAYABLE
At December 31, 1995, the Company had two notes payable to a finance
company, which were approximately $146,000 and $15,000. The interest rates were
adjusted monthly at the finance company's base rate plus 2% and the finance
company's base rate plus 2.5%, respectively, and were 10.75% and 11.25%,
respectively, as of December 31, 1995. The notes payable were secured by a
certificate of deposit, inventory, accounts receivable, equipment, and an
investment in shares of common stock of the Company's investments. These notes
were extinguished in December 1996.
As of December 31, 1996, the Company has a five-year credit arrangement
with the finance company which is a line of credit with a term conversion
provision. During only the first two years of the agreement, the Company has the
ability to borrow up to $500,000 with interest payable monthly. The balance
outstanding after the initial two-year period is payable in equal monthly
installments of principal plus accrued interest over the remaining three years.
The interest rate is the finance company's base rate plus 1.5%. This arrangement
is
F-9
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. NOTES PAYABLE--(CONTINUED)
secured by accounts receivable, furniture, fixtures, equipment, and 56,270
shares of common stock in Erie Forge and Steel, one of the Company's
investments. At December 31, 1996, the outstanding balance was approximately
$283,000, and the interest rate was 9.75%. This amount is payable in monthly
installments over a three year period beginning in December 1998.
As of December 31, 1996, the Company had a term loan commitment with the
finance company in the amount $750,000 which was subject to a two-year drawn
down period ending in October 1997. During the draw down period, individual
draws could be made in increments of a minimum of $100,000 and a maximum of
$250,000. Each draw on the loan was payable over a five-year term from the date
of the draw. The interest rate was the finance company's base rate plus 3%. This
arrangement was secured by accounts receivable, furniture, fixtures, equipment,
and the Company's investments in shares of common stock. At December 31, 1996,
the outstanding balance was approximately $146,000, and the interest rate was
11.25%. This amount was due in 2001.
On May 30, 1997, certain terms of the above described loan were amended.
The term loan commitment was increased from $750,000 to $1,000,000. The draw
down period was extended until May 1999. The aforementioned restrictions
regarding the amount of individual draws were removed. Interest only will be
assessed over a four year term from the date of the draw, and thereafter,
monthly payments of principal and interest are payable until all outstanding
amounts become fully due in May 2004.
During the years ended December 31, 1996, 1995, and 1994, the cash paid for
interest was approximately $43,000, $36,000, $33,000, respectively. The weighted
average interest rates, including amortization of deferred finance costs, for
the years ended December 31, 1996, 1995, and 1994 were 17.3%, 13.7%, and 10.5%,
respectively.
3. INCOME TAXES
Significant components of the Company's deferred tax liabilities and assets
were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1996
---------- ----------
<S> <C> <C>
Deferred tax liabilities:
Investments..................................................... $1,120,196 $1,303,911
Depreciation.................................................... 18,392 21,393
---------- ----------
1,138,588 1,325,304
Deferred tax assets:
Net operating loss carryforward................................. 28,630 63,085
Alternative minimum tax......................................... 25,509 25,509
Other........................................................... -- 6,174
---------- ----------
54,139 94,768
Valuation allowance............................................... (25,509) --
---------- ----------
Net deferred tax liabilities.................................... $1,109,958 $1,230,536
---------- ----------
---------- ----------
</TABLE>
The components of the income tax provision were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Current provision (benefit)........................................ $(73,819) $(58,104) $ 38,673
Deferred provision................................................. 495,483 115,485 120,578
-------- -------- --------
$421,664 $ 57,381 $159,251
-------- -------- --------
-------- -------- --------
</TABLE>
F-10
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. INCOME TAXES--(CONTINUED)
The differences between the Federal statutory tax rate and the effective
tax rate were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Statutory rate..................................................... $280,834 $ 73,021 $125,253
State taxes........................................................ 96,714 8,589 14,747
ESOP dividends..................................................... (31,370) -- --
Change in valuation allowance...................................... 44,639 (19,130) (25,509)
Other.............................................................. 30,847 (5,099) 44,760
-------- -------- --------
Effective rate..................................................... $421,664 $ 57,381 $159,251
-------- -------- --------
-------- -------- --------
</TABLE>
During the years ended December 31, 1996, 1995, and 1994, cash paid for
income taxes was approximately $1,000, $45,000, and $17,000, respectively.
At December 31, 1996, the Company had a net operating loss carryforward of
approximately $166,000 which expires during 2010 and 2011.
The aggregate gross and net unrealized appreciation over the cost for
Federal income tax purposes was $3,399,423 and $2,915,758 as of December 31,
1996 and 1995, respectively. The aggregate cost of securities for Federal income
tax purposes were $580,998 and $506,664 as of December 31, 1996 and 1995,
respectively.
4. LEASE COMMITMENTS
The Company has noncancelable operating leases for office space and office
equipment. The leases expire over the next four years and contain provisions for
certain annual rental escalations.
Rent expense for operating leases for the years ended December 31, 1996,
1995, and 1994 was approximately $101,000, $95,000, and $78,000, respectively.
Future minimum lease payments under noncancelable operating leases at
December 31, 1996 were as follows:
<TABLE>
<S> <C>
1997.......................................................... $106,133
1998.......................................................... 106,540
1999.......................................................... 10,350
2000.......................................................... 3,150
2001.......................................................... 1,575
--------
$227,748
--------
--------
</TABLE>
5. EMPLOYEE STOCK OWNERSHIP PLAN
The Company maintains an ESOP, which includes all employees and is fully
funded by the Company. Contributions are made at the Company's discretion up to
$30,000 or 25% of annual compensation expense for each employee. Employees are
not fully vested until completing five years of service.
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.
Unearned ESOP shares are allocated annually at the end of the year to
employees over a five year period, based on compensation levels. As of December
31, 1996, the ESOP held 6,857 shares of preferred stock, of which 6,293 shares
were allocated to employees and 564 shares remain to be allocated.
F-11
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. STOCK OPTION PLAN
On December 31, 1992, the Board of Directors of the Company adopted the
Employee Stock Option Plan (the Stock Option Plan), which provides employees,
including eligible officers of the Company, the opportunity to purchase
restricted common stock. The number of options granted employees under the Stock
Option Plan is based on years of service and compensation level. The options
generally vest immediately and expire after a short-term period. The Company has
not authorized or reserved any shares of its common stock for future grants
under this plan.
As of December 31, 1994, the Company had 35,025 outstanding options with an
exercise price of $1.30, which is the Company's estimate of market value. During
1995, these options expired. During 1996, the Company granted 35,502 options
with an exercise price of $1.28, which is the Company's estimate of market
value. Of these options, 746 were exercised and 34,756 expired during the year.
Pro forma net income information required by SFAS 123 is not provided since
the net impact of the option activity in 1996 and 1995 was not material.
7. PREFERRED STOCK
The Company has two classes of preferred stock, Class A Convertible
Preferred Stock (Class A) and Undesignated Preferred Stock. The Class A shares
have a par value of $50 and pay a cumulative dividend at 12.5% per annum. The
Company's ESOP is the sole owner of the Class A shares. The dividends paid on
the Class A shares may be reduced by the amount of any contributions by the
Company to the ESOP. There are 10,000 shares authorized and 6,857 outstanding as
of December 31, 1996 and 1995. Holders of the Class A shares are entitled to
voting rights and the holders may only as a group convert the Class A shares to
the equivalent number of common stock shares. The Class A holders are entitled
to a liquidation preference equal to $207 per share plus all accrued and unpaid
dividends. Dividends paid on the Class A shares for the year ended December 31,
1994 were $67,067. No dividends were paid on the Class A shares for the years
ended December 31, 1996 and 1995.
There are 90,000 shares of Undesignated Preferred Stock authorized with a
par value of $.01. No shares were issued as of December 31, 1996 or 1995.
8. SUPPLEMENTAL EARNINGS PER SHARE
Supplemental earnings per share for the year ended December 31, 1996 was
calculated on a pro forma basis using weighted average outstanding shares of
common stock of 686,330 as adjusted for the stock split effected in the form of
a stock dividend and the conversion of preferred stock described in Note 12. For
all other periods, earnings per share was not presented since it was not
considered to be meaningful.
9. CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CLIENTS
At December 31, 1996, an investment in shares of stock in one company
comprised 69% of the Company's investments.
At December 31, 1996, 74% of the Company's accounts receivable, net of
allowance for doubtful accounts, were from three clients.
During 1996, 46% of the Company's combined financial advisory fee and
financial performance fee revenue was from three clients.
10. RELATED PARTY TRANSACTIONS
As of December 31, 1996 and 1995, the Company had a note payable to its
president for approximately $74,000 and $66,000, respectively. The interest rate
was based on prime plus 4% and was 12.25% and 12.5% as
F-12
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. RELATED PARTY TRANSACTIONS--(CONTINUED)
of December 31, 1996 and 1995, respectively. The related interest expense for
each of the years ended December 31, 1996, 1995, and 1994, was approximately
$8,000, $8,000, and $6,000, respectively.
During 1996, the Company purchased investments in shares of common stock
from several of its employees. The aggregate amount paid in these transactions
was $9,000.
During 1996, the Company incurred consulting fees from a former employee
that were approximately $195,000. Of this amount, approximately $164,000 was
included in accounts payable and accrued liabilities at December 31, 1996.
In addition, included in due to related parties was approximately $4,000
and $6,000, which was payable to employees at December 31, 1996 and 1995,
respectively.
11. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Investments are carried at their estimated market value determined as
described in Note 1. The carrying values of cash and cash equivalents, accounts
receivable, income taxes receivable, accounts payable and accrued liabilities,
due to related parties, and notes payable approximate fair value.
12. SUBSEQUENT EVENTS
In July 1997, the Company repaid the outstanding balance of the $500,000
line of credit previously secured by accounts receivable, furniture, fixtures,
equipment, and 56,270 shares of common stock in Erie Forge and Steel.
In July 1997, the remaining unearned ESOP shares became earned and
distributed to the employees. Pursuant to the Company's preferred stock
declaration, the 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 repaid the note payable to its president.
In August 1997, the Company increased its authorized shares of common stock
to 20,000,000.
On August , 1997, the Company declared a stock split 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.
F-13
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30,
-------------------------
1996 1997
---------- -----------
<S> <C> <C>
ASSETS
Investments (cost or initial value of $631,414 and $1,728,638, respectively)......... $3,820,920 $ 9,685,679
Cash and cash equivalents............................................................ 312,001 726,086
Accounts receivable (net of allowance for doubtful accounts of $402,533 and $0,
respectively)...................................................................... 444,201 672,213
Income taxes receivable.............................................................. 146,599 --
Property and equipment:
Computer equipment................................................................. 140,173 171,552
Office furniture and equipment..................................................... 95,000 99,825
Less: accumulated depreciation..................................................... (117,783) (151,623)
---------- -----------
117,390 119,754
Other................................................................................ 49,463 165,951
---------- -----------
Total assets......................................................................... $4,890,574 $11,369,683
---------- -----------
---------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities............................................. $ 155,002 $ 120,189
Due to related parties............................................................... 69,960 39,612
Deferred taxes....................................................................... 1,259,410 3,327,273
Notes payable........................................................................ 122,083 1,019,309
---------- -----------
Total liabilities.................................................................... 1,606,455 4,506,383
Stockholders' equity:
Preferred stock, $.01 par value, 100,000 shares authorized and 6,857 issued and
outstanding..................................................................... 1,419,399 1,419,399
Unearned ESOP shares............................................................... (229,223) (27,956)
Common stock, $.01 par value, 20,000,000 shares authorized and 481,058 issued and
outstanding..................................................................... 4,811 4,811
Capital in excess of par value..................................................... 10,407 10,407
Retained earnings.................................................................. 2,078,725 5,456,639
---------- -----------
Total stockholders' equity........................................................... 3,284,119 6,863,300
---------- -----------
Total liabilities and stockholders' equity........................................... $4,890,574 $11,369,683
---------- -----------
---------- -----------
</TABLE>
See accompanying notes.
F-14
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
CONSOLIDATED SCHEDULES OF INVESTMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, 1997
------------------------------------------
NUMBER OF COST OR INITIAL
COMMON STOCK SHARES VALUE FAIR VALUE
- ------------------------------------------------------------------------ --------- --------------- ----------
<S> <C> <C> <C>
Manufacturing--100%
Erie Forge and Steel, Inc............................................. 120,773 $ 500,000 $2,736,418
Good Stuff Food Company, Inc.......................................... 33,335 226,125 1,000,050
Indiana Steel & Wire Corporation...................................... 7,547 42,914 58,869
Martino's Bakery, Inc................................................. 50,000 120,750 279,000
Mobile Tool International, Inc........................................ 7,133 246,349 1,069,237
Biddeford Textile Corporation......................................... 118,500 592,500 4,542,105
--------------- ----------
$ 1,728,638 $9,685,679
--------------- ----------
--------------- ----------
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
------------------------------------------
NUMBER OF COST OR INITIAL
COMMON STOCK SHARES VALUE FAIR VALUE
- ------------------------------------------------------------------------ --------- --------------- ----------
<S> <C> <C> <C>
Manufacturing--100%
Erie Forge and Steel, Inc............................................. 120,773 $ 300,000 $2,634,663
Good Stuff Food Company, Inc.......................................... 27,000 67,750 540,000
Indiana Steel & Wire Corporation...................................... 7,547 42,914 54,340
Martino's Bakery, Inc................................................. 50,000 120,750 232,917
Mobile Tool International, Inc........................................ 5,000 100,000 359,000
--------------- ----------
$ 631,414 $3,820,920
--------------- ----------
--------------- ----------
</TABLE>
See accompanying notes.
F-15
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------
1996 1997
---------- ----------
<S> <C> <C>
REVENUE
Financial advisory fees............................................................... $ 838,625 $ 860,431
Financial performance fees............................................................ 240,980 743,600
Other................................................................................. 212,435 337,658
---------- ----------
Total revenue.................................................................... 1,292,040 1,941,689
OPERATING EXPENSES
Salaries and benefits................................................................. 514,807 619,851
General and administrative............................................................ 374,500 700,006
Other operating expenses.............................................................. 184,464 425,316
Provision for doubtful accounts....................................................... 100,250 (177,198)
Interest.............................................................................. 11,223 41,709
Depreciation and amortization......................................................... 18,350 21,832
ESOP contribution..................................................................... 103,328 7,296
---------- ----------
Total operating expenses.............................................................. 1,306,922 1,638,812
---------- ----------
Net operating income (loss) before investment activity................................ (14,882) 302,877
Unrealized appreciation of investments................................................ 398,498 5,332,369
---------- ----------
Income before income taxes............................................................ 383,616 5,635,246
Provision for income taxes............................................................ 149,454 2,150,893
---------- ----------
Net income....................................................................... $ 234,162 $3,484,353
---------- ----------
---------- ----------
SUPPLEMENTAL EARNINGS PER SHARE:
Net operating income before investment activity..................................... $ 0.44
Net income.......................................................................... 5.08
Weighted average shares outstanding................................................. 686,330
</TABLE>
See accompanying notes.
F-16
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK CAPITAL TOTAL
PREFERRED UNEARNED ---------------- IN EXCESS RETAINED STOCKHOLDERS'
STOCK ESOP SHARES SHARES AMOUNT OF PAR VALUE EARNINGS EQUITY
---------- ----------- ------- ------ ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995........... $1,419,399 $(332,551) 480,312 $4,804 $ 9,444 $1,844,563 $ 2,945,659
Net income........................... -- -- -- -- -- 234,162 234,162
Options exercised.................... -- -- 746 7 963 -- 970
ESOP shares earned................... -- 103,328 -- -- -- -- 103,328
---------- ----------- ------- ------ ------------ ---------- -------------
Balance at June 30, 1996............... $1,419,399 $(229,223) 481,058 $4,811 $ 10,407 $2,078,725 $ 3,284,119
---------- ----------- ------- ------ ------------ ---------- -------------
---------- ----------- ------- ------ ------------ ---------- -------------
Balance at December 31, 1996........... $1,419,399 $(116,668) 481,058 $4,811 $ 10,407 $2,053,702 $ 3,371,651
Net income........................... -- -- -- -- -- 3,484,353 3,484,353
ESOP shares earned................... -- 88,712 -- -- -- -- 88,712
Dividends............................ -- -- -- -- -- (81,416) (81,416)
---------- ----------- ------- ------ ------------ ---------- -------------
Balance at June 30, 1997............... $1,419,399 $ (27,956) 481,058 $4,811 $ 10,407 $5,456,639 $ 6,863,300
---------- ----------- ------- ------ ------------ ---------- -------------
---------- ----------- ------- ------ ------------ ---------- -------------
</TABLE>
See accompanying notes.
F-17
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------
1996 1997
-------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income.............................................................................. $234,162 $3,484,353
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization......................................................... 18,350 21,832
Unrealized appreciation of investments................................................ (398,498) (5,332,369)
Amortization of deferred finance costs................................................ 4,097 2,525
Provision for deferred income taxes................................................... 149,452 2,096,737
ESOP shares earned.................................................................... 103,328 7,296
Provision for doubtful accounts....................................................... 100,250 (177,198)
Increase (decrease) in accounts receivable............................................ (267,808) 422,610
Decrease in income taxes receivable................................................... 6,548 52,225
Increase in other assets.............................................................. (965) (129,660)
Increase (decrease) in accounts payable and accrued liabilities....................... 60,680 (202,063)
-------- ----------
Net cash provided by operating activities............................................... 9,596 246,288
INVESTING ACTIVITIES
Purchases of investments.............................................................. -- (432,889)
Sale of investment.................................................................... -- 60,000
Purchase of property and equipment, net of disposals.................................. (16,582) (21,072)
-------- ----------
Net cash used in investing activities................................................... (16,582) (393,961)
FINANCING ACTIVITIES
Proceeds from notes payable........................................................... -- 589,625
Principal payments of notes payable................................................... (38,750) --
Decrease in due to related parties.................................................... (2,262) (38,530)
Options exercised..................................................................... 970 --
-------- ----------
Net cash (used in) provided by financing activities..................................... (40,042) 551,095
-------- ----------
Net (decrease) increase in cash and cash equivalents.................................... (47,028) 403,422
Cash and cash equivalents at beginning of period........................................ 359,029 322,664
-------- ----------
Cash and cash equivalents at end of period.............................................. $312,001 $ 726,086
-------- ----------
-------- ----------
SUPPLEMENTAL DISCLOSURE:
Non-cash transaction:
Dividends on preferred stock declared................................................. $ 81,416
</TABLE>
See accompanying notes.
F-18
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Organization
American Capital Strategies, Ltd. (the Company) is a specialty finance
company that assists small and medium-sized businesses in raising financing and
has made equity investments in certain of these businesses. It also provides
other financial services to these companies. It has focused on structuring,
raising financing, and investing in management and employee buyouts of
subsidiaries, divisions, and product lines being divested by larger corporations
utilizing employee stock ownership plans (ESOPs). The Company is headquartered
in Bethesda, Maryland and has offices in New York, Boston, Pittsburgh, San
Francisco, and Savannah.
New Accounting Pronouncement
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, 'Earnings Per Share,' (SFAS 128) which is required to be adopted on
December 31, 1997. At that time, the Company will change the method currently
used to compute earnings per share and to restate all prior periods. The impact
of SFAS 128 on the calculation of fully diluted earnings per share for these
periods is not expected to be material.
2. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form N-2 and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments, consisting
of normal recurring accruals, considered necessary for a fair presentation have
been included.
The footnotes to the audited consolidated financial statements included in
this registration statement should be read in conjunction with the accompanying
interim financial statements.
3. NOTES PAYABLE
On May 30, 1997, the Company amended one of its notes payable. The term
loan commitment was increased from $750,000 to $1,000,000. The draw down period
was extended until May 1999. Certain restrictions regarding the amount of
individual draws were removed. Interest only will be assessed over a four-year
term from the date of the draw, and thereafter, monthly payments of principal
and interest are payable until all outstanding amounts become fully due in May
2004.
4. SUPPLEMENTAL EARNINGS PER SHARE
Supplemental earnings per share for the six months ended June 30, 1997 was
calculated on a pro forma basis using weighted average outstanding shares of
common stock of 686,330 as adjusted for the stock split effected in the form of
a stock dividend and the conversion of preferred stock described in Note 5. For
all other periods, earnings per share was not presented since it was not
considered to be meaningful.
5. SUBSEQUENT EVENTS
In July 1997, the Company repaid the outstanding balance of the $500,000
line of credit previously secured by accounts receivable, furniture, fixtures,
equipment, and 56,270 shares of common stock in Erie Forge and Steel.
In July 1997, the remaining unearned ESOP shares became earned and
distributed to the employees. Pursuant to the Company's preferred stock
declaration, the 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 repaid the note payable to its president.
F-19
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. SUBSEQUENT EVENTS--(CONTINUED)
In August 1997, the Company increased its authorized shares of common stock
to 20,000,000.
On August , 1997, the Company declared a stock split 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.
F-20
<PAGE>
================================================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED IN CONNECTION
WITH THE OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES
OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE
SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Additional Information......................... 2
Prospectus Summary............................. 3
Fees and Expenses.............................. 7
Summary Consolidated Financial and Other
Data......................................... 8
Risk Factors................................... 9
Use of Proceeds................................ 12
Distributions.................................. 13
Capitalization................................. 13
Selected Consolidated Financial and Other
Data......................................... 14
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 16
Business....................................... 21
Investment Objectives and Policies............. 26
Portfolio Companies............................ 27
Management..................................... 29
Certain Transactions........................... 33
Principal Stockholders......................... 34
Determination of Net Asset Value............... 34
Reinvestment Plan.............................. 35
Tax Status..................................... 36
Description of Capital Stock................... 38
Regulation..................................... 41
Shares Eligible for Future Sale................ 42
Share Repurchases.............................. 43
Underwriting................................... 44
Direct Offering................................ 45
Custodian, Transfer and Dividend Paying Agent
and Registrar................................ 46
Legal Matters.................................. 46
Experts........................................ 46
Index to Consolidated Financial Statements..... F-1
</TABLE>
------------------------
UNTIL , 1997, ALL DEALERS EFFECTING
TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
================================================================================
<PAGE>
================================================================================
7,000,000 SHARES
AMERICAN
CAPITAL
STRATEGIES, LTD.
[LOGO]
Common Stock
------------------------
PROSPECTUS
------------------------
FRIEDMAN, BILLINGS,
RAMSEY & CO., INC.
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON , 1997
================================================================================
<PAGE>
PART C - OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
1. Financial Statements:
Included in Parts A and B of the Registration Statement:
AMERICAN CAPITAL STRATEGIES, LTD.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors..................................... F-2
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 1996 and 1995..... F-3
Consolidated Schedules of Investments as of December 31, 1996
and 1995....................................................... F-4
Consolidated Statements of Income for the years ended December
31, 1996, 1995, and 1994....................................... F-5
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1996, 1995, and 1994........................ F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995, and 1994.............................. F-7
Notes to Consolidated Financial Statements....................... F-8
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets (Unaudited) as of June 30, 1997
and 1996....................................................... F-14
Consolidated Schedules of Investments (Unaudited) as of June
30, 1997 and 1996.............................................. F-15
Consolidated Statements of Income (Unaudited) for the six
months ended June 30, 1997 and 1996........................... F-16
Consolidated Statements of Stockholders' Equity (Unaudited) for
the six months ended June 30, 1997 and 1996................. F-17
Consolidated Statements of Cash Flows (Unaudited) for the six
months ended June 30, 1997 and 1996........................... F-18
Notes to Unaudited Consolidated Financial Statements............. F-19
2. Exhibits:
a. Second Amended and Restated Certificate of Incorporation
b. Second Amended and Restated Bylaws
d.1 Instruments defining the rights of holders of securities: See
Article IV of the Company's Second Amended and Restated
Certificate of Incorporation.
d.2 Instruments defining the rights of holders of securities: See
Section I of the Company's Second Amended and Restated Bylaws.
*e. Dividend Reinvestment Plan
*h.1 Form of Underwriting Agreement
*h.2 Form of Agreement Among Underwriters
*h.3 Form of Selected Dealers Agreement
i.1 Form of American Capital Strategies, Ltd. First Amended and
Restated Employee Stock Ownership Plan
i.2 Form of American Capital Strategies, Ltd. 1997 Stock Option Plan
i.3 Form of Employment Agreement between the Company and David Gladstone
i.4 Form of Employment Agreement between the Company and Malon Wilkus
i.5 Form of Employment Agreement between the Company and Adam Blumenthal
i.6 Form of Employment Agreement between the Company and Stephen L. Hester
i.7 Form of Employment Agreement between the Company and Roland Cline
j.1 Form of Loan Accounting Agreement between the Company and Riggs Bank,
N.A.
*j.2 Custodial Agreement between the Company and Riggs Bank, N.A.
k.1 Form of Referral Agreement between the Company and Riggs Bank, N.A.
k.2 Form of Referral Agreement between the Company and NCB Development
Corporation.
*l. Opinion of Arnold & Porter
*n.1 Consent of Arnold & Porter
n.2 Consent of Ernst & Young LLP
r. Financial Data Schedule
- -----------
*To be filed by amendment.
II-2
<PAGE>
ITEM 25. MARKETING ARRANGEMENTS
The information contained under the heading "Underwriting" on pages
____ through ____ of the Prospectus and under the heading "Shares Eligible for
Future Sale" on pages ___ through ___ of the Prospectus is incorporated herein
by this reference.
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
SEC Registration Fee.......................... $ 41,000
NASD Fee...................................... 13,000
Nasdaq additional listing fee................. 10,000
Blue Sky fees and expenses.................... 25,000
Accounting fees and expenses.................. 150,000
Legal fees and expenses....................... 200,000
Printing and engraving........................ 50,000
Registrar and transfer agent's fees........... 10,000
Miscellaneous fees and expenses............... 51,000
Total................................ $550,000
========
Note: All listed amounts are estimates.
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL
1) ACS Capital Investments Corporation, a Delaware corporation;
100% of stock owned by the Company.
2) American Capital Strategies Labor Research, Inc., a Delaware
corporation; 85% of stock owned by the Company.
Note: Both subsidiaries are included in the Company's consolidated
financial statements.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES
<TABLE>
Number of Record
Holders as of
TITLE OF CLASS the date hereof
- -------------- ----------------
<S> <C>
Common Stock, par value
$0.01 per share 5
</TABLE>
ITEM 29. INDEMNIFICATION
See Article VII of the Second Amended and Restated Certificate of
Incorporation and Section VI of the Second Amended and Restated Bylaws.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Not applicable.
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS
The Company will maintain at its principal office physical possession
of each account, book or other document required to be maintained by Section
31(a) of the 1940 Act.
ITEM 32. MANAGEMENT SERVICES
Not applicable
II-3
<PAGE>
ITEM 33. UNDERTAKINGS
The Registrant hereby undertakes:
(1) To suspend the offering of shares until the Prospectus is
amended if (i) subsequent to the effective date of this Registration
Statement, its net asset value declines more than ten percent from its
net asset value as of the effective date of this Registration Statement
or (ii) the net asset value increases to an amount greater than its net
proceeds as stated in the Prospectus.
(2) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933:
(ii) To reflect in the prospectus any acts or
elements arising after the effective date of
the registration statement (or the most
recent post-effective amendment thereof)
which, individually or in the aggregate,
represent a fundamental change in the
information set forth in the registration
statement; and
(iii) To include any material information with
respect to the plan of distribution not
previously disclosed in the registration
statement or any material change to such
information in the registration statement.
(3) That, for the purpose of determining any liability under
the 1933 Act, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered
therein and the offering of those securities at that time shall be
deemed to be the initial bona fide offering thereof.
(4) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold
at the termination of the offering.
(5) That for the purpose of determining any liability under
the Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this registration statement in reliance
upon Rule 430A and contained in a form of prospectus filed by the
Registrant under 497(h) under the Securities Act of 1933 shall be
deemed to be part of this Registration Statement as of the time it was
declared effective.
(6) That for the purpose of determining any liability under
the Securities Act of 1933, each post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City Washington and District of Columbia, on the 12th day of
August, 1997.
AMERICAN CAPITAL STRATEGIES, LTD.
By: /s/ Malon Wilkus
-------------------------
Malon Wilkus
President and Director
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ David Gladstone Chairman of the Board of August 12, 1997
- ---------------------- Directors
David Gladstone
/s/ Malon Wilkus President and Director August 12, 1997
- ----------------------
Malon Wilkus
/s/ Adam Blumenthal Executive Vice President, Chief Financial
- ---------------------- Officer, Secretary and Director August 12, 1997
Adam Blumenthal
</TABLE>
Exhibit 2.a
SECOND AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
AMERICAN CAPITAL STRATEGIES, LTD.
The undersigned, the President and the Secretary of American
Capital Strategies, Ltd. (the "Corporation"), a corporation existing under and
pursuant to the provisions of the General Corporation Law of the State of
Delaware (the "General Corporation Law"), do hereby certify:
That the original Certificate of Incorporation of the Corporation
was filed with the Delaware Secretary of State on February 10, 1986.
That on December 9, 1992, the Corporation filed with the Delaware
Secretary of State, a Restated Certificate of Incorporation.
That this Second Amended and Restated Certificate of
Incorporation has been duly adopted in accordance with the provisions of
Sections 242 and 245 of the General Corporation Law.
That the text of the Certificate of Incorporation of the
Corporation is hereby further amended and restated to read in full as follows:
ARTICLE I
NAME
The name of the corporation is American Capital Strategies, Ltd.
(the "Corporation").
ARTICLE II
ADDRESS OF REGISTERED OFFICE;
NAME OF REGISTERED AGENT
The address of the registered office of the Corporation in the
State of Delaware is c/o Corporation Trust Company, 1209 Orange Street,
Wilmington, New Castle County, Delaware, and the name of its registered agent is
Corporation Trust Company.
ARTICLE III
PURPOSE AND POWERS
The purpose of the Corporation is to engage in any lawful act or
activity for which a corporation now or hereafter may be organized under the
General Corporation Law. It shall have all powers that now or hereafter may be
lawful for a corporation to exercise under the General Corporation Law.
<PAGE>
-2-
ARTICLE IV
CAPITAL STOCK
Section 4.1. Total Number of Shares of Capital Stock. The total
number of shares of capital stock of all classes that the Corporation shall have
authority to issue is 25,000,000 shares. The authorized stock is divided into
5,000,000 shares of Preferred Stock, with the par value of $0.01 each (the
"Preferred Stock"), and 20,000,000 shares of voting common stock, with the par
value of $0.01 each (the "Common Stock").
Section 4.2. Preferred Stock. Authority is hereby expressly granted
to the Board of Directors of the Corporation, subject to the provisions of this
Article IV and to the limitations prescribed by the General Corporation Law, to
authorize the issue of one or more classes of Preferred Stock and, with respect
to each such class, to fix by resolution or resolutions providing for the issue
of such class the voting powers, full or limited, if any, of the shares of such
class, the designations, preferences and relative, participating, optional or
other special rights, and qualifications, limitations or restrictions thereof.
The authority of the Board of Directors with respect to each class thereof shall
include, but not be limited to, the determination or fixing of the following:
(i) the designation of such class;
(ii) the number of shares to compose such class, which
number the Board of Directors may thereafter (except where
otherwise provided in a resolution designating a particular class)
increase (but not above the total number of authorized shares of
the class) or decrease (but not below the number of shares thereof
then outstanding);
(iii) the dividend rate of such class, the conditions and
dates upon which such dividends shall be payable, the relation
which such dividends shall bear to the dividends payable on any
other class or classes of capital stock of the Corporation and
whether such dividends shall be cumulative or noncumulative;
(iv) whether the shares of such class shall be subject to
redemption by the Corporation and, if made subject to such
redemption, the times, prices and other terms and conditions of
such redemption;
(v) the terms and amount of any sinking fund provided for
the purchase or redemption of the shares of such class;
(vi) whether the shares of such class shall be
convertible into or exchangeable for shares of any other class or
classes of any capital stock or any other securities of the
Corporation, and, if provision is made for conversion or exchange,
the times, prices, rates, adjustments and other terms and
conditions of such conversion or exchange;
<PAGE>
-3-
(vii) the extent, if any, to which the holders of shares
of such class shall be entitled to vote with respect to the
election of directors or otherwise;
(viii) the restrictions, if any, on the issue or reissue
of any additional Preferred Stock;
(ix) the rights of the holders of the shares of such
class upon the dissolution of, voluntary or involuntary
liquidation, winding up or upon the distribution of assets of the
Corporation; and
(x) the manner in which any facts ascertainable outside
the resolution or resolutions providing for the issue of such class
shall operate upon the voting powers, designations, preferences,
rights and qualifications, limitations or restrictions of such
class.
Section 4.3. Common Stock. (a) Subject to all of the rights of the
holders of Preferred Stock provided for by resolution or resolutions of the
Board of Directors pursuant to this Article IV or by the General Corporation
Law, each holder of Common Stock shall have one vote per share of Common Stock
held by such holder on all matters on which holders of Common Stock are entitled
to vote and shall have the right to receive notice of and to vote at all
meetings of the stockholders of the Corporation.
(b) The holders of Common Stock shall have the right to
receive dividends as and when declared by the Board of Directors in its sole
discretion, subject to any limitations on the declaring of dividends imposed by
the General Corporation Law or the rights of holders of Preferred Stock provided
for by resolution or resolutions of the Board of Directors pursuant to this
Article IV.
(c) Stockholders shall not have preemptive rights to acquire
additional shares of stock of any class which the Corporation may elect to issue
or sell.
Section 4.4. Issuance of Rights to Purchase Securities and Other
Property. Subject to all of the rights of the holders of Preferred Stock
provided for by resolution or resolutions of the Board of Directors pursuant to
this Article IV or by the General Corporation Law, the Board of Directors is
hereby authorized to create and to authorize and direct the issuance (on either
a pro rata or a non-pro rata basis) by the Corporation of rights, options and
warrants for the purchase of shares of capital stock of the Corporation, other
securities of the Corporation or shares or other securities of any successor in
interest of the Corporation (a "Successor"), at such times, in such amounts, to
such persons, for such consideration (if any), with such form and content
(including without limitation the consideration for which any shares of capital
stock of the Corporation, other securities of the Corporation or shares or other
securities of any Successor are to be issued) and upon such terms and conditions
as it may from time to time determine, subject only to the restrictions,
limitations, conditions and requirements imposed by the General Corporation Law,
other applicable laws and this Certificate.
<PAGE>
-4-
ARTICLE V
BOARD OF DIRECTORS
Section 5.1. Power of the Board of Directors. The business and
affairs of the Corporation shall be managed by or under the direction of its
Board of Directors. In furtherance, and not in limitation, of the powers
conferred by the General Corporation Law, the Board of Directors is expressly
authorized to:
(a) adopt, amend, alter, change or repeal the Bylaws of the
Corporation (the "Bylaws"); provided, however, that no Bylaws hereafter adopted
shall invalidate any prior act of the directors that was valid at the time such
action was taken;
(b) determine the rights, powers, duties, rules and
procedures that affect the power of the Board of Directors to manage and direct
the business and affairs of the Corporation, including the power to designate
and empower committees of the Board of Directors to elect, appoint and empower
the officers and other agents of the Corporation, and to determine the time and
place of, and the notice requirements for, Board meetings, as well as quorum and
voting requirements for, and the manner of taking, Board action; and
(c) exercise all such powers and do all such acts as may be
exercised or done by the Corporation, subject to the provisions of the General
Corporation Law, this Certificate, and the Bylaws.
Section 5.2. Number of Directors. The number of directors
constituting the Board of Directors shall be as specified in the Bylaws of the
Corporation.
Section 5.3. Classes, Election and Term. The Board of Directors
shall be divided into three classes, with each class to be as nearly equal in
number as reasonably possible, and with the initial term of office of the first
class of directors to expire at the annual meeting of stockholders to be held
after the end of the Corporation's 1998 fiscal year, the initial term of office
of the second class of directors to expire at the annual meeting of stockholders
to be held after the end of the Corporation's 1999 fiscal year and the initial
term of office of the third class of directors to expire at the annual meeting
of stockholders to be held after the end of the Corporation's 2000 fiscal year.
Commencing with the annual meeting of stockholders to be held after the end of
the Corporation's 1998 fiscal year, directors elected to succeed those directors
whose terms have thereupon expired shall be elected for a term of office to
expire at the third succeeding annual meeting of stockholders after their
election, and upon the election and qualification of their successors. If the
number of directors is changed, any increase or decrease shall be apportioned
among the classes so as to maintain or attain, if possible, the number of
directors in each class as nearly equal as reasonably possible, but in no case
will a decrease in the number of directors shorten the term of any incumbent
director. The provisions of this Section 5.3 shall become effective as of the
completion of the first Board of Directors meeting held after the filing of this
<PAGE>
-5-
Second Amended and Restated Certificate of Incorporation (the "First BOD
Meeting"). At the First BOD Meeting, the Board of Directors by resolution shall
establish and determine the classes into which the directors in office as of the
completion of such First BOD Meeting shall be divided.
Section 5.4. Vacancies. Any vacancies in the Board of Directors for
any reason and any newly created directorships resulting by reason of any
increase in the number of directors may be filled only by the Board of
Directors, acting by a majority of the remaining directors then in office,
although less than a quorum, or by a sole remaining director, and any directors
so appointed shall hold office until the next election of the class for which
such directors have been chosen and until their successors are elected and
qualified.
Section 5.5. Removal of Directors. Except as may be provided in a
resolution or resolutions providing for any class of Preferred Stock pursuant to
Article IV hereof, with respect to any directors elected by the holders of such
class, any director, or the entire Board of Directors, may be removed from
office at any time for cause by the affirmative vote of the holders of at least
75% of the voting power of all of the shares of capital stock of the Corporation
then entitled to vote generally in the election of directors, voting together as
a single class.
ARTICLE VI
STOCKHOLDER ACTIONS
Except as may be provided in a resolution or resolutions providing
for any class of Preferred Stock pursuant to Article IV hereof, any action
required or permitted to be taken by the stockholders of the Corporation must be
effected at a duly called annual or special meeting of such holders and may not
be effected by any consent in writing by such holders. Elections of directors
need not be by written ballot, unless otherwise provided in the Bylaws of the
Corporation.
ARTICLE VII
INDEMNIFICATION
Section 7.1. Right to Indemnification. Each person who was or is
made a party or is threatened to be made a party to or is otherwise involved in
any action, suit or proceeding, whether civil, criminal, administrative or
investigative (hereinafter a "proceeding"), by reason of the fact:
(a) that he or she is or was a director or officer of the
Corporation, or
(b) that he or she, being at the time a director or officer
of the Corporation, is or was serving at the request of
the Corporation as a director, trustee, officer, employee
or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including
<PAGE>
-6-
service with respect to an employee benefit plan
(collectively, "another enterprise" or "other
enterprise"),
whether either in case (a) or in case (b) the basis of such proceeding is
alleged action or inaction (x) in an official capacity as a director or officer
of the Corporation, or as a director, trustee, officer, employee or agent of
such other enterprise, or (y) in any other capacity related to the Corporation
or such other enterprise while so serving as a director, trustee, officer,
employee or agent, shall be indemnified and held harmless by the Corporation to
the fullest extent not prohibited by Section 145 of the General Corporation Law
(or any successor provision or provisions) as the same exists or may hereafter
be amended (but, in the case of any such amendment, with respect to actions
taken prior to such amendment, only to the extent that such amendment permits
the Corporation to provide broader indemnification rights than permitted prior
thereto), against all expense, liability and loss (including, without
limitation, attorneys' fees, judgments, fines, ERISA excise taxes or penalties
and amounts paid in settlement) reasonably incurred or suffered by such person
in connection therewith if such person satisfied the applicable level of care to
permit such indemnification under the General Corporation Law. The persons
indemnified by this Article VII are hereinafter referred to as "indemnitees."
Such indemnification as to such alleged action or inaction shall continue as to
an indemnitee who has after such alleged action or inaction ceased to be a
director or officer of the Corporation, or director, officer, employee or agent
of another enterprise; and shall inure to the benefit of the indemnitee's heirs,
executors and administrators. The right to indemnification conferred in this
Article VII: (i) shall be a contract right; (ii) shall not be affected adversely
as to any indemnitee by any amendment of this Certificate with respect to any
action or inaction occurring prior to such amendment; and (iii) shall, subject
to any requirements imposed by law and the Bylaws, include the right to be paid
by the Corporation the expenses incurred in defending any such proceeding in
advance of its final disposition.
Section 7.2. Relationship to Other Rights and Provisions Concerning
Indemnification. The rights to indemnification and to the advancement of
expenses conferred in this Article VII shall not be exclusive of any other right
which any person may have or hereafter acquire under any statute, this
Certificate, Bylaws, agreement, vote of stockholders or disinterested directors
or otherwise. The Bylaws may contain such other provisions concerning
indemnification, including provisions specifying reasonable procedures relating
to and conditions to the receipt by indemnitees of indemnification, provided
that such provisions are not inconsistent with the provisions of this Article
VII.
Section 7.3. Agents and Employees. The Corporation may, to the
extent authorized from time to time by the Board of Directors, grant rights to
indemnification, and to the advancement of expenses, to any employee or agent of
the Corporation (or any person serving at the Corporation's request as a
director,
<PAGE>
-7-
trustee, officer, employee or agent of another enterprise) or to persons who are
or were a director, officer, employee or agent of any of the Corporation's
affiliates, predecessor or subsidiary corporations or of a constituent
corporation absorbed by the Corporation in a consolidation or merger or who is
or was serving at the request of such affiliate, predecessor or subsidiary
corporation or of such constituent corporation as a director, officer, employee
or agent of another enterprise, in each case as determined by the Board of
Directors to the fullest extent of the provisions of this Article VII in cases
of the indemnification and advancement of expenses of directors and officers of
the Corporation, or to any lesser extent (or greater extent, if permitted by
law) determined by the Board of Directors.
ARTICLE VIII
LIMITATION ON LIABILITY OF DIRECTORS
A director of the Corporation shall, to the maximum extent now or
hereafter permitted by Section 102(b)(7) of the General Corporation Law (or any
successor provision or provisions), have no personal liability to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director.
ARTICLE IX
COMPROMISE
Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them and/or between this
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this Corporation under
the provisions of Section 291 of the General Corporation Law, trustees in
dissolution or of any receiver or receivers appointed for this Corporation under
the provisions of Section 279 of the General Corporation Law, order a meeting of
the creditors or class of creditors, and/or of the stockholders or class of
stockholders of this Corporation, as the case may be, to be summoned in such
manner as the said court directs. If a majority in number representing
three-fourths in value of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of this Corporation, as the case may be,
agree to any compromise or arrangement and to any reorganization of this
Corporation as consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all the stockholders or class of
stockholders, of this Corporation, as the case may be, and also on this
Corporation.
ARTICLE X
AMENDMENT OF BYLAWS
<PAGE>
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The Board of Directors shall have power to adopt, amend, alter,
change and repeal any Bylaws by a vote of the majority of the Board of Directors
then in office. In addition to any requirements of the General Corporation Law
(and notwithstanding the fact that a lesser percentage may be specified by the
General Corporation Law), any adoption, amendment, alteration, change or repeal
of any Bylaws by the stockholders of the Corporation shall require the
affirmative vote of the holders of at least seventy-five percent (75%) of the
combined voting power of all of the shares of all classes of capital stock of
the Corporation then entitled to vote generally in the election of directors.
ARTICLE XI
AMENDMENT OF CERTIFICATE OF INCORPORATION
The Corporation hereby reserves the right to amend, alter, change
or repeal any provision contained in this Certificate. Except as may be provided
in a resolution or resolutions providing for any class of Preferred Stock
pursuant to Article IV hereof and which relate to such class of Preferred Stock
and except as provided in Article IV hereof, any such amendment, alteration,
change or repeal shall require the affirmative vote of both (a) a majority of
the members of the Board of Directors then in office and (b) a majority of the
combined voting power of all of the shares of all classes of capital stock of
the Corporation then entitled to vote generally in the election of directors.
By a vote of the majority of the Board of Directors then in office,
the Board may adopt a resolution providing that at any time prior to the filing
of the amendment with the Secretary of State, notwithstanding authorization of
the proposed amendment by the stockholders, the Board of Directors may abandon
such proposed amendment without further action by the stockholders.
Notwithstanding anything contained in this Certificate to the
contrary, the affirmative vote of the holders of at least seventy-five percent
(75%) of the combined voting power of all of the shares of all classes of
capital stock of the Corporation then entitled to vote shall be required to
amend, repeal or adopt any provision inconsistent with Article V herein.
THE UNDERSIGNED hereby executes this Amended and Restated
Certificate of Incorporation this 12th day of August, 1997.
AMERICAN CAPITAL STRATEGIES, LTD.
By ___________________________
Malon Wilkus
President
<PAGE>
-9-
Attest:
__________________________
Adam Blumenthal
Secretary
Exhibit 2.b
SECOND AMENDED AND RESTATED BYLAWS OF
AMERICAN CAPITAL STRATEGIES, LTD.
(as amended on August 12, 1997)
SECTION I
CAPITAL STOCK
Section 1.1. Certificates. Every holder of stock in American Capital
Strategies, Ltd. (the "Corporation") shall be entitled to have a certificate
signed in the name of the Corporation by the Chairman of the Board of Directors
or the President or a Vice President, and by the Treasurer or an Assistant or
Deputy Treasurer or the Secretary or an Assistant or Deputy Secretary of the
Corporation certifying the number of shares in the Corporation owned by such
holder. If such certificate is countersigned (a) by a transfer agent other than
the Corporation or its employee, or (b) by a registrar other than the
Corporation or its employee, any signature on the certificate may be a
facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent or registrar before such certificate is
issued, it may be issued by the Corporation with the same effect as if such
person were such officer, transfer agent or registrar at the date of issue.
Section 1.2. Record Ownership. A record of the name and address of the
holder of each certificate, the number of shares represented thereby and the
date of issue thereof shall be made on the Corporation's books. The Corporation
shall be entitled to treat the holder of record of any share of stock as the
holder in fact thereof, and accordingly shall not be bound to recognize any
equitable or other claim to or interest in any share on the part of any other
person, whether or not it shall have express or other notice thereof, except as
required by the laws of the State of Delaware.
Section 1.3. Transfer of Record Ownership. Transfers of stock shall be
made on the books of the Corporation only by direction of the person named in
the certificate or such person's attorney, lawfully constituted in writing, and
only upon the surrender of the certificate therefor and a written assignment of
the shares evidenced thereby, which certificate shall be cancelled before the
new certificate is issued.
Section 1.4. Lost Certificates. Any person claiming a stock certificate
in lieu of one lost, stolen or destroyed shall give the Corporation an affidavit
as to such person's ownership of the certificate and of the facts which go to
prove its loss, theft or destruction. Such person shall also, unless waived by
an authorized officer of the Corporation, give the Corporation a bond, in such
form as may be approved by the Corporation, sufficient to indemnify the
Corporation against any claim that may be made against it on account of the
alleged loss of the certificate or the issuance of a new certificate.
<PAGE>
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Section 1.5. Transfer Agents; Registrars; Rules Respecting
Certificates. The Board of Directors may appoint, or authorize any officer or
officers to appoint, one or more transfer agents and one or more registrars. The
Board of Directors may make such further rules and regulations as it may deem
expedient concerning the issue, transfer and registration of stock certificates
of the Corporation.
Section 1.6. Record Date. The Board of Directors may fix in advance a
future date, not exceeding sixty days (nor, in the case of a stockholders'
meeting, less than ten days) preceding the date of any meeting of stockholders,
payment of dividend or other distribution, allotment of rights, or change,
conversion or exchange of capital stock or for the purpose of any other lawful
action, as the record date for determination of the stockholders entitled to
notice of and to vote at any such meeting and any adjournment thereof, or to
receive any such dividend or other distribution or allotment of rights, or to
exercise the rights in respect of any such change, conversion or exchange of
capital stock, or to participate in any such other lawful action, and, in such
case, such stockholders and only such stockholders as shall be stockholders of
record on the date so fixed shall be entitled to such notice of and to vote at
such meeting and any adjournment thereof, or to receive such dividend or other
distribution or allotment of rights, or to exercise such rights, or to
participate in any such other lawful action, as the case may be, notwithstanding
any transfer of any stock on the books of the Corporation after any such record
date fixed as aforesaid.
<PAGE>
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SECTION II
MEETINGS OF STOCKHOLDERS
Section 2.1. Annual Meetings. The annual meeting of stockholders for
the election of directors and the transaction of such other proper business
shall be held on the first Tuesday in the month of February, unless otherwise
specified by resolution adopted by the Board of Directors, and at the time and
place, within or without Delaware, as determined by the Board of Directors.
Section 2.2. Special Meetings. Special meetings of stockholders for any
purpose or purposes may be called by the Board of Directors and shall be called
by the Chairman of the Board of Directors at the request of holders of not less
than twenty-five percent (25%) of all the outstanding shares of the Corporation
entitled to vote at the meeting. Special meetings may be held at any place,
within or without Delaware, as determined by the Chairman of the Board of
Directors. The only business which may be conducted at such a meeting, other
than procedural matters and matters relating to the conduct of the meeting,
shall be the matter or matters described in the notice of the meeting.
Section 2.3. Notice. Written notice of each meeting of stockholders,
stating the date, hour, place and, in the case of a special meeting, the purpose
thereof, shall be given as provided by law by the Secretary or an Assistant or
Deputy Secretary not less than ten days nor more than sixty days before such
meeting (unless a different time is specified by law) to every stockholder
entitled by law to notice of such meeting.
Section 2.4. List of Stockholders. A complete list of the stockholders
entitled to vote at any meeting of stockholders, arranged in alphabetical order,
and showing the address of each stockholder and the number of shares registered
in the name of each stockholder, shall be prepared by the Secretary and shall be
open to the examination of any stockholder, for any purpose germane to the
meeting, during ordinary business hours, either at a place within the city where
the meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held,
for at least ten days before the meeting and at the place of the meeting during
the whole time of the meeting.
Section 2.5. Quorum. The holders of at least a majority of the votes
entitled to be cast by the issued and outstanding stock of the Corporation
entitled to vote on the matters at issue, present in person or represented by
proxy, shall constitute a quorum, except as otherwise required by the Delaware
General Corporation Law (the "GCL"). In the event of a lack of a quorum, the
chairman of the meeting or a majority in interest of the stockholders present in
person or represented by proxy may adjourn the meeting from time to time without
notice other than an announcement at the meeting, until a quorum shall be
obtained. At any such adjourned meeting at which there is a quorum, any business
may be transacted that might have been transacted at the meeting originally
called.
<PAGE>
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Section 2.6. Organization. The Chairman of the Board, or, in the
absence of the Chairman of the Board, the President, or, in the absence of the
Chairman of the Board and the President, any Executive Vice President, shall
preside at meetings of stockholders. The Secretary of the Corporation shall act
as secretary, but in the absence of the Secretary, the presiding officer may
appoint a secretary.
Section 2.7. Stockholder Nominations and Proposals. (a) No proposal for
a stockholder vote shall be submitted by a stockholder (a "Stockholder
Proposal") to the Corporation's stockholders unless the stockholder submitting
such proposal (the "Proponent") shall have filed a written notice setting forth
with particularity (i) the names and business addresses of the Proponent and all
Persons (as such term is defined in Section 3(a)(9) of the Securities Exchange
Act of 1934, as amended through the date of adoption of these Bylaws) acting in
concert with the Proponent; (ii) the names and addresses of the Proponent and
the Persons identified in clause (i), as they appear on the Corporation's books
(if they so appear); (iii) the class and number of shares of the Corporation
beneficially owned by the Proponent and the Persons identified in clause (i);
(iv) a description of the Stockholder Proposal containing all material
information relating thereto; and (v) such other information as the Board of
Directors reasonably determines is necessary or appropriate to enable the Board
of Directors and stockholders of the Corporation to consider the Stockholder
Proposal. Upon receipt of the Stockholder Proposal and prior to the stockholder
meeting at which such Stockholder Proposal will be considered, if the Board of
Directors or a designated committee or the officer who will preside at the
stockholders meeting determines that the information provided in a Stockholder
Proposal does not satisfy the informational requirements of these Bylaws or is
otherwise not in accordance with law, the Secretary of the Corporation shall
promptly notify such Proponent of the deficiency in the notice. Such Proponent
shall have an opportunity to cure the deficiency by providing additional
information to the Secretary within the period of time, not to exceed five days
from the date such deficiency notice is given to the Proponent, determined by
the Board of Directors, such committee or such officer. If the deficiency is not
cured within such period, or if the Board of Directors, such committee or such
officer determines that the additional information provided by the Proponent,
together with the information previously provided, does not satisfy the
requirements of this Section 2.7, then such proposal shall not be presented for
action at the meeting in question.
(b) Only persons who are selected and recommended by the Board of
Directors or the Nominating Committee thereof, or who are nominated by
stockholders in accordance with the procedures set forth in this Section 2.7,
shall be eligible for election, or qualified to serve, as directors. Nominations
of individuals for election to the Board of Directors of the Corporation at any
annual meeting or any special meeting of stockholders at which directors are to
be elected may be made by any stockholder of the Corporation entitled to vote
for the election of directors at that meeting by compliance with the procedures
set forth in this Section 2.7. Nominations by stockholders shall be made by
written
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notice (a "Nomination Notice"), which shall set forth (i) as to each
individual nominated, (A) the name, date of birth, business address and
residence address of such individual; (B) the business experience during the
past five years of such nominee, including his or her principal occupations and
employment during such period, the name and principal business of any
corporation or other organization in which such occupations and employment were
carried on and such other information as to the nature of his or her
responsibilities and level of professional competence as may be sufficient to
permit assessment of his or her prior business experience; (C) whether the
nominee is or has ever been at any time a director, officer or owner of 5% or
more of any class of capital stock, partnership interests or other equity
interest of any corporation, partnership or other entity; (D) any directorships
held by such nominee in any company with a class of securities registered
pursuant to section 12 of the Securities Exchange Act of 1934, as amended, or
subject to the requirements of section 15(d) of such Act or any company
registered as an investment company under the Investment Company Act of 1940, as
amended; and (E) whether, in the last five years, such nominee has been
convicted in a criminal proceeding or has been subject to a judgment, order,
finding or decree of any federal, state or other governmental entity, concerning
any violation of federal, state or other law, or any proceeding in bankruptcy,
which conviction, judgment, order, finding, decree or proceeding may be material
to an evaluation of the ability or integrity of the nominee; and (ii) as to the
Person submitting the Nomination Notice and any Person acting in concert with
such Person, (x) the name and business address of such Persons, (y) the name and
address of such Persons and as they appear on the Corporation's books (if they
so appear) and (z) the class and number of shares of the Corporation which are
beneficially owned by such Persons. A written consent to being named in a proxy
statement as a nominee, and to serve as a director if elected, signed by the
nominee, shall be filed with any Nomination Notice. If the presiding officer at
any stockholders meeting determines that a nomination was not made in accordance
with the procedures prescribed by these Bylaws, he shall so declare to the
meeting and the defective nomination shall be disregarded.
(c) Nomination Notices and Stockholder Proposals shall be delivered to
the Secretary at the principal executive office of the Corporation not less than
sixty and not more than ninety days prior to the date of the meeting of
stockholders if such Nomination Notice or Stockholder Proposal is to be
submitted at an annual stockholders meeting (provided, however, that if such
annual meeting is called to be held before the date specified in Section 2.1
hereof, such Nomination Notice or Stockholder Proposal shall be so delivered no
later than the close of business on the tenth day following the day on which
notice of the date of the annual stockholders meeting was given). Nomination
Notices and Stockholder Proposals shall be delivered to the Secretary at the
principal executive office of the Corporation no later than the close of
business on the tenth day following the day on which notice of the date of a
special meeting of stockholders was given if the Nomination Notice or
Stockholder Proposal is to be submitted at a special stockholders meeting.
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Section 2.8. Voting. Unless otherwise provided in a resolution or
resolutions providing for any class or series of Preferred Stock pursuant to
Article IV of the Certificate of Incorporation, by any other provision of the
Certificate of Incorporation or by the GCL, each stockholder shall be entitled
to one vote, in person or by written proxy, for each share held of record by
such stockholder which is entitled to vote generally in the election of
directors. All elections for the Board of Directors shall be decided by a
plurality of the votes cast and all other questions shall be decided by a
majority of the votes cast, except as otherwise required by the GCL or as
provided for in the Certificate of Incorporation or these Bylaws. Abstentions
shall not be considered to be votes cast.
Section 2.9. Inspectors. Votes by written ballot at any meeting of
stockholders may be conducted by one or more inspectors, appointed for that
purpose, either by the Board of Directors or by the chairman of the meeting. The
inspector or inspectors may decide upon the qualifications of voters and the
validity of proxies, and may count the votes and declare the result.
SECTION III
BOARD OF DIRECTORS
Section 3.1. Number and Qualifications. The business and affairs of the
Corporation shall be managed by or under the direction of its Board of
Directors. The number of, retirement age of and other restrictions and
qualifications for directors constituting the Board of Directors shall be as
authorized from time to time exclusively by a majority vote of the members of
the Board of Directors then in office, provided that no amendment to the Bylaws
decreasing the number of directors shall have the effect of shortening the term
of any incumbent director and provided that the number of directors shall not be
increased by fifty percent (50%) or more in any twelve-month period without the
approval by at least sixty-six and two-thirds percent (66 2/3%) of the members
of the Board of Directors then in office. Each director shall hold office until
his successor is elected and qualified or until his earlier death, removal or
resignation pursuant to Section 3.2 hereof.
Section 3.2. Resignation. A director may resign at any time by giving
written notice to the Chairman of the Board, to the President or to the
Secretary. Unless otherwise stated in such notice of resignation, the acceptance
thereof shall not be necessary to make it effective; and such resignation shall
take effect at the time specified therein or, in the absence of such
specification, it shall take effect upon the receipt thereof.
Section 3.3. Regular Meetings. Regular meetings of the Board of
Directors may be held without further notice at such time as shall from time to
time be determined by the Board of Directors.
Section 3.4. Special Meetings. Special meetings of the Board of
Directors may be called by the Chairman of the Board, the
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Chairman of the Executive Committee, the Vice Chairman of the Board or the
President, or at the request in writing of a majority of the members of the
Board of Directors then in office.
Section 3.5. Notice of Special Meetings. Notice of the date, time and
place of each special meeting shall be (i) mailed by regular mail to each
director at his designated address at least six days before the meeting, (ii)
sent by overnight courier to each director at his designated address at least
two days before the meeting (with delivery scheduled to occur no later than the
day before the meeting), or (iii) given orally by telephone or other means, or
by telegraph or telecopy, or by any other means comparable to any of the
foregoing, to each director at his designated address at least twenty-four hours
before the meeting. The notice of the special meeting shall state the general
purpose of the meeting, but other routine business may be conducted at the
special meeting without such matter being stated in the notice.
Section 3.6. Place of Meetings. The Board of Directors may hold their
meetings and have an office or offices outside of Delaware. Each regular meeting
of the Board of Directors shall be held at the location specified in the notice
with respect to such meeting or if no such notice is provided or no location is
specified therein, at the principal executive offices of the Corporation. A
meeting of the Board of Directors for the election of officers and the
transaction of such other business as may come before it may be held without
notice immediately following the annual meeting of stockholders.
Section 3.7. Telephonic Meetings and Participation. Any or all of the
directors may participate in a meeting of the Board of Directors or any
committee thereof by conference telephone or similar communications equipment by
means of which all persons participating in the meeting can hear each other.
Section 3.8. Action by Directors Without a Meeting. Unless otherwise
restricted by the Certificate of Incorporation or these Bylaws, any action
required or permitted to be taken at any meeting of the Board of Directors, or
of any committee thereof, may be taken without a meeting if all members of the
Board or of such committee, as the case may be, consent thereto in writing, and
the writing or writings are filed with the minutes of proceedings of the Board
or committee.
Section 3.9. Quorum and Adjournment. A majority of the number of the
directors then holding office shall constitute a quorum. Whether or not a quorum
is present to conduct a meeting, any meeting of the Board of Directors
(including an adjourned meeting) may be adjourned by a majority of the directors
present, to reconvene at a specific time and place. It shall not be necessary to
give to the directors present at the adjourned meeting notice of the reconvened
meeting or of the business to be transacted, other than by announcement at the
meeting that was adjourned; provided, however, that notice of such reconvened
meeting, stating the date, time, and place of the reconvened meeting, shall be
given to the directors not present at the adjourned meeting in accordance with
the requirements of Section 3.5 hereof.
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Section 3.10. Organization. The Chairman of the Board, or, in the
absence of the Chairman of the Board, the Chairman of the Executive Committee,
or in the absence of the Chairman of the Executive Committee, the Vice Chairman
of the Board, or, in the absence of the Vice Chairman of the Board, the
President, or in the absence of the President, a member of the Board selected by
the members present, shall preside at meetings of the Board. The Secretary of
the Corporation or an Assistant Secretary, as designated by the Chairman of the
Board or other presiding officer, shall act as secretary and record the minutes
of such meeting.
Section 3.11. Compensation of Directors. Directors shall receive such
compensation for their services as the Board of Directors may determine. Any
director may serve the Corporation in any other capacity and receive
compensation therefor.
Section 3.12. Presumption of Assent. A director of the Corporation who
is present at a meeting of the Board of Directors when a vote on any matter is
taken is deemed to have assented to the action taken unless he votes against or
abstains from the action taken, or unless at the beginning of the meeting or
promptly upon arrival, the director objects to the holding of the meeting or the
transacting of specified business at the meeting. Any such dissenting votes,
abstentions or objections shall be entered in the minutes of the meeting.
Section 3.13. Voting. Except as otherwise provided in the Certificate
of Incorporation, these Bylaws and the GCL, all actions taken by the Board of
Directors shall be taken by a majority vote of the members then in office.
SECTION IV
EXECUTIVE AND OTHER COMMITTEES
Section 4.1. Executive Committee. The Board shall, by resolution passed
by a majority of the members of the Board of Directors then in office, designate
an Executive Committee to consist of three or more members of the Board.
Section 4.2. Vacancies. By a vote of the majority of the members of the
Board of Directors then in office, the Board of Directors shall have the power
to change the membership of the Executive Committee at any time, to fill
vacancies therein and to discharge the Executive Committee or to remove any
member thereof (including the Chairman thereof) at any time.
Section 4.3. Procedure. Meetings of the Executive Committee shall be
held at such times and places as the Chairman of the Executive Committee may
determine. The Executive Committee may fix its rules of procedure, determine its
manner of acting and specify what notice, if any, of meetings shall be given,
except as the Board of Directors by a vote of sixty-six and two-thirds percent
(66 2/3%) shall by resolution otherwise provide. Unless otherwise provided by
the Board of Directors or the Executive
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Committee, quorum, voting and other procedures shall be the same as those
applicable to actions taken by the Board of Directors.
Section 4.4. Powers. (a) Except as otherwise provided by law or the
Certificate of Incorporation or these Bylaws, the Executive Committee shall have
and may exercise all the powers of the Board of Directors in the management of
the business and affairs of the Corporation in the intervals between meetings of
the Board of Directors.
(b) The authority of the Executive Committee shall specifically
include, but not be limited to, the power to declare a dividend, to authorize
the issuance of stock, and to adopt a certificate of ownership and merger of the
Corporation with a subsidiary pursuant to Section 253 of the GCL.
Section 4.5 Nominating Committee. The Board shall, by resolution passed
by a majority of the members of the Board of Directors then in office, designate
a Nominating Committee to consist of two or more members of the Board. A
majority of the Board of Directors then in office shall have the power to change
the membership of the Nominating Committee, fill vacancies therein or remove any
members thereof, either with or without cause, at any time. Unless otherwise
provided by the Board of Directors or the Nominating Committee, quorum, voting,
and other procedures of the Nominating Committee shall be the same as those
applicable to actions taken by the Board of Directors. The Nominating Committee
may fix its rules of procedure, determine its manner of acting and fix the time
and place, whether within or without the State of Delaware, of its meetings and
specify what notice thereof, if any, shall be given, unless the majority of the
Board of Directors shall otherwise by resolution provide.
Section 4.6. Other Committees. The Board of Directors may, by
resolutions passed by a majority of the members of the Board of Directors then
in office, designate members of the Board of Directors to constitute other
committees which shall in each case consist of such number of directors, and
shall have and may execute such powers as may be determined and specified in the
respective resolutions appointing them. Any such committee may fix its rules of
procedure, determine its manner of acting and fix the time and place, whether
within or without the State of Delaware, of its meetings and specify what notice
thereof, if any, shall be given, unless the Board of Directors shall otherwise
by resolution provide. Unless otherwise provided by the Board of Directors or
such committee, quorum, voting and other procedures shall be the same as those
applicable to actions taken by the Board of Directors. A majority of the members
of the Board of Directors then in office shall have the power to change the
membership of any such committee at any time, to fill vacancies therein and to
discharge any such committee or to remove any member thereof, either with or
without cause, at any time.
SECTION V
OFFICERS
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Section 5.1. Designation. The officers of the Corporation shall be a
Chairman of the Board, any Vice Chairman of the Board, a President, one or more
Vice Presidents in such gradations as the Board of Directors may determine, a
Treasurer, one or more Assistant or Deputy Treasurers, a Secretary and one or
more Assistant or Deputy Secretaries. The Board of Directors also may elect or
appoint, or provide for the appointment of, such other officers or agents as may
from time to time appear necessary or advisable in the conduct of the business
and affairs of the Corporation.
Section 5.2. Election and Term. At its first meeting after each annual
meeting of stockholders, the Board of Directors shall elect the officers or
provide for the appointment thereof. Subject to Section 5.3 and Section 5.4
hereof, the term of each officer elected by the Board of Directors shall be
until the first meeting of the Board of Directors following the next annual
meeting of stockholders and until such officer's successor is chosen and
qualified.
Section 5.3. Resignation. Any officer may resign at any time by giving
written notice to any member of the Office of the Chairman or the Secretary.
Unless otherwise stated in such notice of resignation, the acceptance thereof
shall not be necessary to make it effective; and such resignation shall take
effect at the time specified therein or, in the absence of such specification,
it shall take effect upon the receipt thereof.
Section 5.4. Removal. Any officer may be removed at any time with or
without cause by the affirmative vote of sixty-six and two-thirds percent (66
2/3%) of the members of the Board of Directors then in office. Any officer
appointed by another officer may be removed with or without cause by such
officer.
Section 5.5. Vacancies. A vacancy in any office may be filled for the
unexpired portion of the term by the Board of Directors or, in the case of
offices held by officers who may be appointed by other officers, by any officer
authorized to appoint such officer.
Section 5.6. Chief Executive and Chief Operating Officers. The Chairman
of the Board shall initially be the Chief Executive Officer of the Corporation
and thereafter, at such time as the Board of Directors shall determine, the
Chief Executive Officer shall be such officer as the Board of Directors shall
designate from time to time. The Chief Executive Officer shall be responsible
for carrying out the policies adopted by the Board of Directors. The Board of
Directors shall also designate a Chief Operating Officer. The Chief Operating
Officer shall have general authority and supervision over the operations of the
Corporation and shall consult with the Chief Executive Officer as to matters
within the scope of the authority of the Chief Executive Officer.
Section 5.7. Chairman of the Board. The Chairman of the Board shall
have such powers and perform such duties as may be provided for herein and as
may be incident to the office and as may be assigned by the Board of Directors.
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Section 5.8. Chairman of the Executive Committee. The Chairman of the
Executive Committee shall preside at all meetings of the Executive Committee of
the Board of Directors and shall have such other powers and perform such other
duties as may be provided for herein or assigned by the Board of Directors.
Section 5.9. Vice Chairman of the Board. Any Vice Chairman of the Board
shall, except as otherwise provided in these Bylaws or by the Board of
Directors, in the absence of the Chairman, have the powers and perform the
duties of the Chairman, and shall have such other powers and perform such other
duties as may be provided for herein and as may be incident to the office and as
may be assigned by the Board of Directors.
Section 5.10. President. The President shall have such powers and
perform such duties as may be provided for herein and as may be incident to the
office and as may be assigned from time to time by the Board of Directors.
Section 5.11. Vice Presidents. Each Vice President shall have such
powers and perform such duties as may be provided for herein and as may be
assigned by the Chairman of the Board, the President or the Board of Directors.
Section 5.12. Treasurer. The Treasurer shall have charge of all funds
of the Corporation and shall perform all acts incident to the position of
Treasurer, subject to the control of the Board of Directors.
Section 5.13. Assistant or Deputy Treasurers. Each Assistant or Deputy
Treasurer shall have such powers and perform such duties as may be assigned by
the Treasurer or the Board of Directors.
Section 5.14. Secretary. The Secretary shall give notices of all
meetings of stockholders and directors and of such committees as directed by the
Board of Directors. The Secretary shall have charge of such books and papers as
the Board of Directors may require. The Secretary or any Assistant Secretary is
authorized to certify copies of extracts from minutes and of documents in the
Secretary's charge and anyone may rely on such certified copies to the same
effect as if such copies were originals and may rely upon any statement of fact
concerning the Corporation certified by the Secretary (or any Assistant
Secretary). The Secretary shall perform all acts incident to the office of
Secretary, subject to the control of the Board of Directors.
Section 5.15. Assistant or Deputy Secretaries. Each Assistant or Deputy
Secretary shall have such powers and perform such duties as may be assigned by
the Secretary or the Board of Directors.
Section 5.16. Compensation of Officers. The officers of the Corporation
shall receive such compensation for their services as the Board of Directors may
determine. The Board of Directors may delegate its authority to determine
compensation to a committee or designated officers of the Corporation.
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Section 5.17. Execution of Instruments. Checks, notes, drafts, other
commercial instruments, assignments, guarantees of signatures and contracts
(except as otherwise provided herein or by law) shall be executed by the
Chairman of the Board, any Vice Chairman of the Board, the President, any Vice
President or such officers or employees or agents as the Board of Directors or
any of such designated officers may direct.
Section 5.18. Mechanical Endorsement. The Chairman of the Board, any
Vice Chairman of the Board, the President, any Vice President or the Secretary
may authorize any endorsement on behalf of the Corporation to be made by such
mechanical means or stamps as any of such officers may deem appropriate.
SECTION VI
INDEMNIFICATION
Section 6.1. Indemnification Provisions in Certificate of
Incorporation. The provisions of this Section VI are intended to supplement
Article VII of the Certificate of Incorporation pursuant to Section 7.2 of the
Certificate of Incorporation. To the extent that this Section VI contains any
provisions inconsistent with said Article VII, the provisions of the Certificate
of Incorporation shall govern. Terms defined in such Article VII shall have the
same meaning in this Section VI.
Section 6.2. Undertakings for Advances of Expenses. If and to the
extent the GCL requires, an advancement by the Corporation of expenses incurred
by an indemnitee pursuant to clause (iii) of the last sentence of Section 7.1 of
the Certificate of Incorporation (hereinafter an "advancement of expenses")
shall be made only upon delivery to the Corporation of an undertaking
(hereinafter an "undertaking"), by or on behalf of such indemnitee, to repay all
amounts so advanced if it shall ultimately be determined by final judicial
decision from which there is no further right to appeal (hereinafter a "final
adjudication") that such indemnitee is not entitled to be indemnified for such
expenses under Article VII of the Certificate of Incorporation or otherwise.
Section 6.3. Claims for Indemnification. If a claim for indemnification
under Section 7.1 of the Certificate of Incorporation is not paid in full by the
Corporation within sixty days after it has been received in writing by the
Corporation, except in the case of a claim for an advancement of expenses, in
which case the applicable period shall be twenty days, the indemnitee may at any
time thereafter bring suit against the Corporation to recover the unpaid amount
of the claim. If successful in whole or in part in any such suit, or in a suit
brought by the Corporation to recover an advancement of expenses pursuant to the
terms of an undertaking, the indemnitee shall be entitled to be paid also the
expense of prosecuting or defending such suit. In any suit brought by the
indemnitee to enforce a right to indemnification hereunder (but not in a suit
brought by the indemnitee to enforce a right to an advancement of expenses) it
shall be a defense that, and in any suit by the Corporation to
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recover an advancement of expenses pursuant to the terms of an undertaking, the
Corporation shall be entitled to recover such expenses only upon a final
adjudication that, the indemnitee has not met the applicable standard of conduct
set forth in Section 145 of the GCL (or any successor provision or provisions).
Neither the failure of the Corporation (including the Board of Directors,
independent legal counsel or its stockholders) to have made a determination
prior to the commencement of such suit that indemnification of the indemnitee is
proper in the circumstances because the indemnitee has met the applicable
standard of conduct set forth in Section 145 of the GCL (or any successor
provision or provisions), nor an actual determination by the Corporation
(including the Board of Directors, independent legal counsel, or its
stockholders) that the indemnitee has not met such applicable standard of
conduct, shall create a presumption that the indemnitee has not met the
applicable standard of conduct or, in the case of such a suit brought by the
indemnitee, be a defense to such suit. In any suit brought by the indemnitee to
enforce a right to indemnification or to an advancement of expenses hereunder,
or by the Corporation to recover an advancement of expenses pursuant to the
terms of an undertaking, the burden of proving that the indemnitee is not
entitled to be indemnified, or to have or retain such advancement of expenses,
under Article VII of the Certificate of Incorporation or this Section VI or
otherwise, shall be on the Corporation.
Section 6.4. Insurance. The Corporation may maintain insurance, at its
expense, to protect itself and any director, trustee, officer, employee or agent
of the Corporation or another enterprise against any expense, liability or loss,
whether or not the Corporation would have the power to indemnify such person
against such expense, liability or loss under the GCL.
Section 6.5. Severability. In the event that any of the provisions of
this Section VI (including any provision within a single section, paragraph or
sentence) is held by a court of competent jurisdiction to be invalid, void or
otherwise unenforceable, the remaining provisions are severable and shall remain
enforceable to the full extent permitted by law.
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SECTION VII
MISCELLANEOUS
Section 7.1. Seal. The corporate seal shall have inscribed upon it the
name of the Corporation, the year "1993" and the words "Corporate Seal" and
"Delaware." The Secretary shall be in charge of the seal and may authorize a
duplicate seal to be kept and used by any other officer or person.
Section 7.2. Waiver of Notice. Whenever any notice is required to be
given, a waiver thereof in writing, signed by the person or persons entitled to
the notice, whether before or after the time stated therein shall be deemed
equivalent thereto. Attendance of a person at a meeting shall constitute a
waiver of notice of such meeting, except when the person attends a meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened.
Section 7.3. Voting of Stock Owned by the Corporation. Powers of
attorney, proxies, waivers of notice of meeting, consents and other instruments
relating to securities owned by the Corporation may be executed in the name of
and on behalf of the Corporation by the Chairman of the Board, the Chairman of
the Executive Committee, the Vice Chairman of the Board, the President, any Vice
President or such officers or employees or agents as the Board of Directors or
any of such designated officers may direct. Any such officer may, in the name of
and on behalf of the Corporation, take all such action as any such officer may
deem advisable to vote in person or by proxy at any meeting of security holders
of any corporation in which the Corporation may own securities and at any such
meeting shall possess and may exercise any and all rights and powers incident to
the ownership of such securities and which, as the owner thereof, the
Corporation might have exercised and possessed if present. The Board of
Directors may from time to time confer like powers upon any other person or
persons.
Section 7.4. Executive Office. The principal executive office of the
Corporation shall be located in Columbia, Maryland or such other location as may
be specified by the Board of Directors. The books of account and records shall
be kept in such office. The Corporation also may have offices at such other
places, both within and without Delaware, as the Board of Directors from time to
time shall determine or the business and affairs of the Corporation may require.
ARTICLE VIII
AMENDMENT OF BYLAWS
These Bylaws of the Corporation may be amended, altered, changed,
adopted and repealed by a vote of the majority of the Board of Directors then in
office at any regular or special meeting. The stockholders also shall have the
power to amend, alter, change, adopt and repeal the Bylaws of the Corporation at
any annual or special meeting pursuant to the requirements of the Certificate of
Incorporation.
Exhibit 2.i.1
AMERICAN CAPITAL STRATEGIES, LTD.
FIRST AMENDED AND RESTATED
EMPLOYEE STOCK OWNERSHIP PLAN
Effective August __, 1997
<PAGE>
TABLE OF CONTENTS
SECTION PAGE
1. Nature of the Plan....................................
2. Definitions...........................................
3. Eligibility and Participation.........................
4. Plan Contributions....................................
5. Participant Contributions.............................
6. Investment of Trust Assets............................
7. Allocations to Participants' Accounts.................
8. Vesting of Participants' Accounts.....................
9. Expenses of the Plan and Trust........................
10. Rights with Respect to Voting and
Responding to Offers to Purchase
or Exchange Company Stock.............................
11. Disclosure to Participants............................
12. Distributions of Capital Accumulation.................
13. In-Service Distributions..............................
14. Distributions Following Termination
of Service............................................
15. Deferrals of Distributions and
Mandatory Distributions...............................
16. Manner of Distribution of Capital
Accumulation..........................................
17. Rights, Restrictions and Options
on Company Stock......................................
18. No Assignment of Benefits.............................
19. Administration........................................
20. Claims Procedure......................................
21. No Duties or Rights Except
as Provided in the Plan...............................
22. "Top-Heavy" Contingency Provisions....................
23. Future of the Plan....................................
24. Governing Law.........................................
25. Successors and Assigns................................
<PAGE>
SECTION PAGE
26. Execution.............................................
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
FIRST AMENDED AND RESTATED
EMPLOYEE STOCK OWNERSHIP PLAN
INTRODUCTION:
As of January 1, 1992, American Capital Strategies, Ltd., a Delaware
corporation, established the American Capital Strategies, Ltd. Employee Stock
Ownership Plan. The Corporation now wishes to amend and modify the plan and
hereby adopts the following First Amended and Restated Employee Stock Ownership
Plan as a restatement in its entirety of the prior plan, effective as of August
__, 1997:
1. Nature of the Plan.
The purpose of this Plan is to enable participating Employees to share
in the growth and prosperity of the Company and to provide them with an
opportunity to accumulate capital for their future economic security. Therefore,
the Trust under the Plan is designed to invest primarily in Company Stock. The
Plan is intended to be permanent and to benefit Employees of the Company on the
Effective Date as well as Employees entering into the Service of the Company
thereafter. Pursuant to the terms of the Plan, the Plan may be used to provide
Plan Participants with beneficial ownership of Company stock and to receive
loans (or other extensions of credit) to finance the acquisition of Company
Stock, with such loans to be repaid by contributions from the Company to the
Trust and from other legally permissible sources (such as dividends on Company
Stock).
The Plan is a combination stock bonus plan and money purchase pension
plan which together constitute an employee stock ownership plan. The Plan is
intended to be qualified under Section 401(a) of the Internal Revenue Code of
1986, as amended (the "Code") and under Section 4975(e)(7) of the Code. The
Trust holding the Trust Assets is intended to be exempt from taxation under
Section 501(a) of the Code.
All Trust Assets held under the Plan and Trust will be administered,
distributed and otherwise governed by the provisions of this Plan and the
related Trust Agreement. The Plan is to be administered by the Administrative
Committee for the exclusive benefit of Participants and their Beneficiaries.
2. Definitions.
(a) In this Plan, whenever the context so indicates, the
singular or plural number and the masculine or feminine gender shall be deemed
to include the other, the terms "he," "his" and "him" shall refer to a
Participant or Beneficiary, as the case may be, and the capitalized terms shall
have the following meanings:
Account.......................... One of several accounts
maintained to record the
interest of a Participant or
his or her Beneficiary in the
Plan.
<PAGE>
-2-
Acquisition Loan................. A loan (or other extension of
credit, including an
installment obligation to a
party in interest) used by
the Administrative Committee
to finance the acquisition of
Company Stock, which loan may
constitute an extension of
credit to the Trust from a
party in interest (as defined
in ERISA Section 3(14)). See
Section 6.
Administrative Committee......... The two-person committee
appointed pursuant to
Section 19 to administer the
Plan.
Anniversary Date................. The last day of each Plan
Year.
Beneficiary...................... The person (or persons)
entitled to receive any
benefit under the Plan in the
event of a Participant's
death.
Board of Directors............... The Board of Directors of
American Capital Strategies,
Ltd.
Break in Service................. A Plan Year during which a
Participant has not been
credited 51 Hours of
Service. For the purposes of
determining whether a
Participant has incurred a
Break in Service, if the
Participant is absent by
reason of the pregnancy of
the Participant, the birth of
a child of the Participant,
the placement of a child with
the Participant in connection
with the adoption of the
child, or for the purposes of
caring for such child
immediately following such
birth or placement, a
Participant will be credited
with hours equivalent to the
hours missed up to 51 Hours
of Service in the Plan Year
in which such absence begins,
if such crediting will
prevent him or her from
incurring a Break in Service,
or in the next following Plan
Year.
<PAGE>
-3-
Capital Accumulation............. A Participant's vested
(nonforfeitable) interest in
his or her Accounts under the
Plan.
Cash Account..................... The Account of a Participant
or Beneficiary which reflects
his or her interest under the
Plan attributable to Trust
Assets other than Company
Stock. See Section 7.
Code............................. The Internal Revenue Code of
1986, as amended.
Company.......................... American Capital Strategies,
Ltd., a Delaware corporation,
any successors or assigns of
the Company, through merger,
consolidation,
reorganization, change of
name, sale of assets or
assignment of rights and
liabilities of the Company,
any other entity which adopts
this Plan, and, as
applicable, each subsidiary
of the Company whose
employees are Participants in
the Plan.
Company Common Stock............. Shares of any class of common
stock of the Company, such
shares constituting employer
securities within the meaning
of Section 409(1) of the Code.
Company Stock.................... Company Common Stock of any
class or series
Company Stock Account............ The Account(s) of a
Participant or Beneficiary
that reflects his or her
interest in Company Stock
held under the Plan. See
Section 7.
Compensation..................... The sum, without duplication,
of (a) all amounts paid to an
Employee by the Company in a
Plan Year for services
performed as reportable on
Internal Revenue Service
Form W-2; (b) regardless of
whether includible in any
Employee's gross income, any
amounts paid on account of
workers' compensation,
sickness, accident or
disability and which are
described in
<PAGE>
-4-
Sections 104(a)(1),
104(a)(3), 105(a) and 105(h)
of the Code; (c) any other
amounts which may be included
in compensation under Code
Section 415 or Treas. Reg.
ss. 1.415-2(d); and (d) the
Company's contribution
pursuant to a salary
reduction agreement which is
not includable in the gross
income of the Participant
under Section 125, 402(e)(3),
402(h) or 403(b) of the
Code. Amounts in excess of
$150,000 (adjusted as set
forth in Section 415(d) of
the Code) shall be
disregarded.
Direct Rollover.................. A payment by the Plan to the
Eligible Retirement Plan
specified by the Distributee.
Disability....................... The inability to engage in
any substantial gainful
activity by reason of a
medically determinable
impairment expected to last
at least 12 months or to end
in death as defined in
Section 72(m)(7) of the Code
and Title II and Title XVI of
the Social Security Act.
Distributee...................... A distributee includes an
Employee or former Employee.
In addition, the Employee's
or former Employee's
surviving spouse and the
Employee's or former
Employee's spouse or former
spouse who is the alternate
payee under a qualified
domestic relations order, as
defined in section 414(p) of
the Code, are Distributees
with regard to the interest
of the spouse or former
spouse.
Effective Date................... January 1, 1992; except in
the context of the First
Amended and Restated American
Capital Strategies, Ltd.
Employee Stock Ownership
Plan, the Effective Date of
which is August __, 1997
Eligible Retirement Plan......... An individual retirement
account described in
<PAGE>
-5-
section 408(a) of the Code,
an individual retirement
annuity described in
section 408(b) of the Code,
an annuity plan described in
section 403(a) of the Code,
or a qualified trust
described in section 401(a)
of the Code, that accepts the
Distributee's Eligible
Rollover Distribution.
However, in the case of an
Eligible Rollover
Distribution to the surviving
spouse, an eligible
retirement plan is an
individual retirement account
or individual retirement
annuity.
Eligible Rollover
Distribution................... An eligible rollover
distribution is any
distribution of all or any
portion of the balance to the
credit of the distributee,
except that an eligible
rollover distribution does
not include: any
distribution that is one of a
series of substantially equal
periodic payments (not less
frequently than annually)
made for the life (or life
expectancy) of the
distributee or the joint
lives (or joint life
expectancies) of the
distributee and the
distributee's designated
beneficiary, or for a
specified period of ten years
or more; any distribution to
the extent such distribution
is required under
section 401(a)(9) of the
Code; and the portion of any
distribution that is not
includible in gross income
(determined without regard to
the exclusion for net
unrealized appreciation with
respect to employer
securities).
Employee......................... Any person who is employed by
the Company on the Effective
Date or thereafter; the term
Employee shall not include a
leased employee within the
meaning of section 414(n)(2)
of the Code. In addition, the
<PAGE>
-6-
term Employee shall
include persons employed by
subsidiaries of the Company
if by resolution, the Board
of Directors has designated
one or more groups of such
persons as Employees.
Employment....................... Employee status, in any form,
with the Company.
ERISA............................ The Employee Retirement
Income Security Act of 1974,
as amended.
ESOP Loan........................ Any loan between the Plan and
a lender which meets the
requirements of Code section
4975 and the regulations
thereunder.
ESOP Trustee..................... The individual(s) and/or
entity appointed pursuant to
the Trust Agreement to invest
and hold Plan assets.
Hours of Service................. (i) Each hour for which an
Employee is paid, or entitled
to payment, for the
performance of duties for the
Company. These hours shall
be credited to the Employee
for the computation period or
periods in which the duties
are performed. (ii) Each
hour for which an Employee is
paid or entitled to payment
by the Company or its insurer
(but not payment for
unemployment insurance) on
account of a period of time
during which no duties are
performed due to vacation,
holiday, excused nonwork or
work related illness,
incapacity (including
Disability), lay-off, jury
duty, military duty, or leave
of absence but not including
any payment made or due an
Employee solely in
reimbursement of medical or
medically-related expenses;
provided, however, that not
more than 51 Hours of Service
shall be credited for a
single continuous period
during which an Employee
does not perform any duties and an
Employee
<PAGE>
-7-
shall be credited no
more than eight hours per day
and forty hours a week during
any such period. Hours under
this paragraph shall be
calculated and credited
pursuant to
Section 2530.200b-2 of the
Department of Labor
Regulations which are
incorporated herein by this
reference. (iii) Each hour
for which back pay,
irrespective of mitigation of
damages, is either awarded or
agreed to by the Company to
the extent such award or
agreement is intended to
compensate an employee for
periods during which the
employee would have been
engaged in the performance of
duties for the Company.
Participant...................... Any Employee who is
participating in the Plan or
any other person with an
account balance under the
Plan. See Section 3.
Plan............................. The American Capital
Strategies, Ltd. Employee
Stock Ownership Plan, as
amended from time to time.
Plan Administrator............... The Administrative Committee
appointed pursuant to
Section 19 to administer the
Plan.
Plan Contributions............... Payments, in cash or in kind,
including the forgiveness of
indebtedness, made to the
Trust by the Company. See
Section 4.
Plan Year........................ The twelve-month period
corresponding to the fiscal
year of the Company.
Prime Rate....................... The rate of interest
identified as such under the
heading "Money Rates" in the
Eastern Edition of The Wall
Street Journal and, if a
range of rates is listed, the
lowest such rate. In the
event that the practice of
listing such a rate is
discontinued, such other
indication of the
<PAGE>
-8-
generally accepted prime rate of
interest as may be designated
by the Board of Directors.
Retirement....................... Termination of Service upon
the attainment by the
Participant of age 65,
provided that the Employee
has been a Participant for at
least five years.
Service.......................... Employment with the Company.
Termination of Service........... Retirement or other
termination of an Employee's
Employment with the Company.
Trust............................ The American Capital
Strategies, Ltd. Employee
Stock Ownership Plan Trust,
created by the Trust
Agreement.
Trust Agreement.................. The American Capital
Strategies, Ltd. Employee
Stock Ownership Plan Trust
Agreement between the Company
and the ESOP Trustee,
establishing the Trust and
specifying the duties and
powers of the ESOP Trustee.
Trust Assets..................... The Company Stock and other
assets held in the Trust for
the benefit of Participants.
See Section 6.
Year of Service.................. Any Plan Year in which a
Participant completes 100
Hours of Service, provided
that if any Plan Year has
fewer than 12 calendar
months, such amount of 100
Hours of Service shall be
prorated accordingly.
(a) The terms listed below have the meanings set forth in the
following Sections: defined benefit plan fraction (Section 7), defined
contribution plan fraction (Section 7), Eligible Participant (Section 7),
qualified domestic relations order (Section 19), Top-heavy (Section 23), Key
Employee (Section 23), Required Aggregation Group (Section 23), Permissive
Aggregation Group (Section 23), Top-heavy Compensation (Section 23),
Determination Date (Section 23), Determination Period (Section 23), Non-key
Employee (Section 23), Top-heavy Ratio (Section 23) and Valuation Date (Section
23).
3. Eligibility and Participation.
<PAGE>
-9-
(a) Each person who is an Employee on the Effective Date,
shall become a Participant as of that date. Each other person who becomes an
Employee shall become a Participant upon completion of a 30-day employment
probationary period. Upon becoming a Participant in accordance with the
preceding sentence, each Participant shall be deemed to have been a Participant
retroactive to the first day of the Plan Year in which eligibility requirements
are satisfied.
(b) A former Participant who is reemployed by the Company as
an Employee shall become a Participant as of the date of his or her
reemployment.
(c) A Participant's active participation in the
Plan shall continue until such Employee's Termination of Service, although such
Employee shall continue to be a Participant until the complete distribution of
his or her Accounts, as provided in Sections 13, 14, 15 and 16.
4. Plan Contributions.
(a) Plan Contributions shall be made by the Company to the
ESOP Trust for each Plan Year in cash or in Company Stock in a sum at least
equal to the following: (i) in an amount which will be sufficient to credit each
Participant's Accounts under the Plan with Company Stock or cash equal to 3% of
such Participant's Compensation for such Plan Year, (ii) in such additional
amounts as may be deemed appropriate by the Board of Directors and allocated in
accordance with Section 7(b)(i) and (iii) subject to Section 7(b), at such times
and in such amounts as may be needed to permit the ESOP Trustee to meet the
obligations of the Trust under any Acquisition Loan.
(b) Plan Contributions under the Plan for each Plan Year shall
be paid to the ESOP Trust by the Anniversary Date of the Plan Year for which the
Plan Contributions are made or as soon as practicable thereafter, but not later
than the due date for filing the Company's federal income tax return for that
Plan Year, including any extensions of such due date; provided, however, that
Plan Contributions shall be made at such times as to enable the Plan to meet its
repayment obligations under any Acquisition Loan.
(c) In the event that Plan Contributions are paid to the Trust
by reason of a mistake of fact as determined in good faith by the Company, upon
the Company's request made within one year after the payment to the Trust, the
Administrative Committee shall promptly direct the ESOP Trustee to return such
Plan Contributions to the Company. All contributions to the Plan are conditioned
upon their deductibility.
5. Participant Contributions.
No Participant shall be required or permitted to make contributions to
the Trust.
6. Investment of Trust Assets.
<PAGE>
-10-
(a) The Trust Assets shall be held for the exclusive benefit
of Participants and their Beneficiaries, and shall be used solely to pay
benefits to such persons. The Trust Assets shall not revert to the benefit of
the Company, except as provided in Section 4(c).
(b) Trust Assets under the Plan shall be invested primarily in
shares of Company Stock. The Administrative Committee may also direct the ESOP
Trustee to invest Trust Assets in other investments as described in Paragraph C
of the Trust Agreement. All purchases of shares of Company Stock by the Trust
from a party in interest (as defined in Section 3(14) of ERISA) shall be made at
a price which does not exceed adequate consideration (as defined in Section
3(18) of ERISA). All sales of shares of Company Stock by the Trust to a party in
interest (as defined in Section 3(14) of ERISA) shall be made at a price which
does not constitute an amount less than adequate consideration (as defined in
Section 3(18) of ERISA). The Administrative Committee may direct the ESOP
Trustee to invest and hold up to 100% of the Trust Assets in Company Stock.
(c) The Administrative Committee may direct the ESOP Trustee
to incur Acquisition Loans from time to time to effect the acquisition of
Financed Shares under the Plan, or to repay a prior Acquisition Loan. An
Acquisition Loan shall be for a specific term; shall, if required to bear
interest, bear a reasonable rate of interest; and shall not be payable on
demand.
(d) No event shall constitute a default by the Trust under any
Acquisition Loan from the Company, except the failure of the Trust to use Plan
Contributions made under Section 4(a) to satisfy the obligations of the Trust.
With respect to any Acquisition Loan from a party in interest, as defined in
Section 3(14) of ERISA, other than the Company, a default shall occur only upon
the failure of the Administrative Committee to make a payment when due under the
terms of such Acquisition Loan. A default under an Acquisition Loan from a party
in interest (as defined in Section 3(14) of ERISA) shall be only with respect to
such past due payment and shall entitle any person having a right to payment
under the Acquisition Loan only to a transfer of Trust Assets the value of which
is no greater than the amount in default.
(e) All assets acquired with the proceeds of an Acquisition
Loan shall be held in a Loan Suspense Account and shall be released annually as
of the Anniversary Date based on the ratio that the principal payments made on
the respective Acquisition Loan with respect to the Plan Year bears to the sum
of such principal payments and the amount of any principal payments to be made
in succeeding Plan Years under the Acquisition Loan. All Financed Shares
released from a Loan Suspense Account are to be allocated to Participants'
Company Stock Accounts as provided in Section 7.
(f) An Acquisition Loan may be secured by a pledge of the
Financed Shares acquired with the proceeds of such Acquisition Loan (or acquired
with the proceeds of a prior Acquisition Loan that is being refinanced). No
other Trust Assets may be pledged as collateral for an Acquisition Loan, and no
<PAGE>
-11-
lender shall have recourse against Trust Assets other than against any Financed
Shares remaining subject to pledge, Plan Contributions made to the Trust to
enable the Trust to meet its obligations under the Acquisition Loan, and
earnings attributable to the investment of such Plan Contributions. Financed
Shares shall be released from the pledge in the same proportion and to the same
extent as such Financed Shares are released from the Loan Suspense Account in
accordance with the preceding paragraph of this Section 6. Repayments of
principal and interest (if any) on any Acquisition Loan shall be made by the
Administrative Committee only from Plan Contributions paid in cash to enable the
Administrative Committee to repay such Acquisition Loan, from earnings
attributable to shares of Company Stock or through the forgiveness of
indebtedness.
7. Allocations to Participants' Accounts.
(a) Separate Accounts shall be maintained to reflect the
interest of each Participant under the Plan, as follows:
(i) The Company Stock Account maintained for each
Participant shall be credited annually with his or her allocable share
of Company Stock (in full and fractional shares) purchased and paid
for by the ESOP Trustee, at the direction of the Administrative
Committee, or contributed in kind.
(ii) The Cash Account maintained for each Participant
shall be credited (or debited) annually with his share of Plan
Contributions and any net income (or loss) of the Trust, including any
cash dividends on shares of Company Common Stock allocated to the
Participant's Company Stock Account and the Participant's share of
Plan Contributions made in cash. It shall be debited for all
distributions and payments properly made from the Accounts, including
but not limited to dividends, its proportionate share of any cash
payments made under the Plan for the purchase of shares of Company
Stock or for the repayment of principal and interest on any
Acquisition Loan.
(b) The allocations to Participants' Accounts for each Plan
Year shall be made as described in the following subsections of this Section 7.
(i) Except as otherwise provided in this Section 7(b)(i),
all Plan Contributions made under Section 4 (other than Section
4(a)(i)) with respect to a Plan Year and all forfeitures incurred
under Section 8(c) with respect to the Plan Year shall be allocated
once each Plan Year under this Section 7(b)(i) as of the Anniversary
Date of such Plan Year to Stock Accounts and Cash Accounts (as may be
required, respectively) of Participants. With respect to each Plan
Year, all such Plan Contributions and forfeitures incurred with
respect to that Plan Year shall be allocated to the Accounts of each
Participant in the ratio that the Compensation paid to each Eligible
<PAGE>
Participant (as defined in Section 7(b)(vi) below) in the Plan Year
bears to the total Compensation paid to all Eligible Participants for
such Plan Year. All Plan Contributions made under Section 4(a)(i)
shall be allocated in accordance with such clause.
(ii) Notwithstanding anything else in this Plan to the
contrary, Plan Contributions shall not be made to the extent such
contributions cannot be allocated to any Participant's Account by
reason of the limitations in this Section 7(b)(ii).
(A) The total amount of Plan Contributions
allocated to the Accounts of Participants in any Plan Year may
not exceed the lesser of:
(1) 25% of his or her Compensation; or
(2) The dollar amount described in Section
415(c)(1)(A) of the Code. In the event these limitations
would be exceeded with respect to any participant,
allocations of Plan Contributions under this Plan shall be
reduced with respect to such participant to the extent
necessary to ensure such limitations are not exceeded.
(B) If no more than one-third of the Plan
Contributions with respect to such Plan Year are allocated to
highly compensated employees (as defined in Section 414(q) of
the Code), forfeitures of employer securities (to the extent
provided under Section 415(c)(6)(C) of the Code) and interest
payments on an Acquisition Loan (to the extent provided under
Section 415(c)(6)(A) of the Code) shall not be counted for the
purposes of Subsection 7(b)(ii)(A), above.
(C) In addition, Plan Contributions may not be
allocated to the Accounts under this Plan of any Participant who
is covered under a defined benefit plan sponsored by the Company
in amounts that would cause the sum of the defined benefit plan
fraction and the defined contribution plan fraction with respect
to such Participant to exceed 1.0 in any Plan Year. For this
purpose, the terms "defined benefit plan fraction" and "defined
contribution plan fraction" shall be determined in accordance
with Section 415(e) of the Code. In the event these limitations
would be exceeded as to any Participant, allocations of Plan
Contributions under this Plan shall be reduced with respect to
such Participant to ensure that the sum of the defined benefit
fraction and defined contribution fraction does not exceed 1.0.
For Plan Years in which the Company contributes amounts on
behalf of Participants covered by this Plan to other defined
contribution plans (as
<PAGE>
-13-
defined in Section 414(i) of the Code), the limitations set
forth in this paragraph shall be applied in the aggregate to
this Plan and such other plans and reductions shall be made
first under such other defined contribution plan and then under
this Plan.
(D) Any Plan Contributions that cannot be allocated
to a Participant's Accounts as a result of the limitations in
Sections 7(b)(ii)(A) or (B) shall be allocated and reallocated
among the Accounts of all other Eligible Participants to whose
Accounts an allocation is made for such Plan Year under Section
7(a)(i) to the extent such reallocations are not in excess of
the limitations contained in Sections 7(b)(ii)(A) or (B);
provided, however, that reallocations of Plan Contributions
under this clause that cannot be made to any Participant's
Account without exceeding the limitations of Sections
7(b)(ii)(A) or (B) shall, instead, be contributed in the
following Plan Year or in succeeding Plan Years to the extent
that such amounts when allocated in addition to the amounts
described in Section 4(b) do not exceed the limitations
described in Sections 7(b)(ii)(A) or (B) with respect to such
Plan Year.
(iii) The net income (or loss) of the Trust for each Plan
Year will be determined as of the Anniversary Date for such Plan Year.
Each Participant's share of the Trust's net income (other than
dividends allocated in accordance with Section 7(b)(iv)) or loss will
be allocated to his or her Cash Account in the ratio which the total
balances of his or her Accounts under the Plan on the preceding
Anniversary Date bears to the total of such Account balances for all
Participants as of that date. The net income (or loss) of the Trust
includes the increase (or decrease) in the fair market value of Trust
Assets (other than shares of Company Stock), interest income,
dividends and other income and gains (or losses) attributable to Trust
Assets (other than any dividends allocated in accordance with Section
7(b)(iv)) since the preceding Anniversary Date. The computation of net
income (or loss) of the Trust shall not take into account any interest
paid by the Trust on an Acquisition Loan.
(iv) Dividends declared on shares of Company Stock held by
the Trust shall be allocated under this Section 7(b)(iv).
(A) Any cash dividend received on shares of Company
Stock allocated to a Participant's Company Stock Account as of
the record date of the dividend shall, in the sole discretion of
the Administrative Committee, be allocated to the Participant's
Cash Account, and shall be distributed in accordance with
<PAGE>
-14-
Section 13(a) or used by the ESOP Trustee to make payments on an
Acquisition Loan. Any cash dividends received on unallocated
shares of Company Stock shall, in the sole discretion of the
Administrative Committee, be allocated among the Cash Accounts
of Participants in the ratio (determined as of the record date
with respect to the dividend) that the number of shares of
Company Stock allocated to each such Participant's Company Stock
Account bears to the total number of shares of Company Stock
allocated to all Participants' Company Stock Accounts, and
distributed in accordance with Section 13(a) or used by the ESOP
Trustee to make payments on an Acquisition Loan. No dividend on
shares of Company Stock shall be applied to make payments on an
Acquisition Loan unless the proceeds of such loan were used to
acquire the shares of Company Stock with respect to which such
dividend was paid. No dividend paid with respect to shares of
Company Stock allocated to any Participant's Account shall be
used to make payments on an Acquisition Loan in accordance with
this section unless Company Stock with a fair market value of
not less than the amount of such dividend is allocated to such
Participant's Account for that year in accordance with the
requirements of section 404(k) of the Code.
(B) Any stock dividend received on allocated shares
of Company Stock shall be credited to the stock account to which
the Company Stock on which such dividend was declared was
allocated (the Company Stock Account).
(v) The Administrative Committee shall establish
accounting procedures for the purpose of making the allocations to
Participants' Accounts provided for in this Section 7. The
Administrative Committee shall maintain adequate records of the cost
basis of shares of Company Stock allocated to each Participant's
Company Stock Account. From time to time, the Administrative Committee
may modify its accounting procedures for the purposes of achieving
equitable and nondiscriminatory allocations among the Accounts of
Participants, in accordance with the provisions of this Section 7 and
the applicable requirements of the Code and ERISA. In accordance with
Section 19, the Administrative Committee may delegate the above
responsibilities to the ESOP Trustee and others.
(vi) For purposes of this Section 7, an Eligible
Participant is a Participant who has satisfied the eligibility
requirements of Section 3.
8. Vesting of Participants' Accounts.
(a) A Participant shall become vested and nonforfeitable in his
or her Accounts in accordance with the following schedule:
<PAGE>
-15-
Years of Service Vested Percentage
---------------- -----------------
Less then One Year 0%
One Year 0%
Two Years 0%
Three Years 60%
Four Years 80%
Five Years 100%
(b) Notwithstanding paragraph (a), a Participant shall become
100% vested in his or her Accounts without regard to his or her Years of Service
if he or she (i) is employed by the Company on or after the date he or she
satisfies the age requirement for Retirement; (ii) incurs a Disability while
employed by the Company, or (iii) dies while employed by the Company.
(c) In the case of a Participant who incurs one or more, but
less than five, consecutive Breaks in Service, all of the Participant's Service
with the Company prior to and after such Breaks in Service shall be taken into
account in determining the Participant's vested percentage in all amounts
credited to his or her Accounts.
(d) In the case of a Participant who, when he is less than 100%
vested in his or her Accounts, incurs at least five consecutive Breaks in
Service, the nonvested balances in his or her Accounts shall be forfeited on the
Anniversary Date of the Plan Year in which the Participant incurs such five
consecutive Breaks in Service and shall be reallocated in accordance with
Section 7(b)(i). Service with the Company prior to such consecutive Breaks in
Service shall not be taken into account in determining the Participant's vested
percentage in the amounts credited to his or her Accounts prior to such
consecutive Breaks in Service, but shall be taken into account in determining
the Participant's vested percentage in amounts credited to his Accounts after
such consecutive Breaks in Service.
(e) If a Participant Terminates Service when he has a vested
percentage of zero, the Participant shall be deemed to have received a
distribution of his or her vested Account balances, and his or her nonvested
Account balances shall be forfeited. If such Participant returns to Service
prior to incurring five consecutive Breaks in Service, his or her forfeited
Account balances shall be restored to him or her.
9. Expenses of the Plan and Trust.
All expenses reasonably and properly incurred for the benefit of Plan
Participants in connection with administration of the Plan and Trust (including
ESOP Trustee fees and legal fees and financial advisory fees) shall be charged
to and paid by the Company.
10. Rights with Respect to Voting and Responding to
Offers To Purchase or Exchange Company Stock.
<PAGE>
-16-
(a) On any corporate matter which involves the voting of the
Company Stock held in the Trust, each Participant shall have the right to direct
the Administrative Committee as to the manner in which it is to direct the ESOP
Trustee to vote securities allocated to his or her Accounts under the Plan. The
Administrative Committee shall direct the Trustee to vote Company Stock
allocated to Accounts in accordance with such directions. As to Company Stock
for which the Administrative Committee does not receive timely and proper
directions (including unallocated shares), the Administrative Committee shall
direct the Trustee to vote such stock in the same proportion as it directs the
Trustee to vote Company Stock as to which timely and proper directions are
received.
(b) With respect to any offer for the purchase or exchange of
Company Stock held in the Trust, the Administrative Committee shall direct the
ESOP Trustee to respond to such purchase or exchange offer with respect to
allocated shares of Company Stock held in the Trust in accordance with
directions received from each Participant with respect to shares of Company
Stock allocated to his or her Accounts under the Plan. As to Company stock for
which the Administrative Committee does not receive timely and proper directions
(including unallocated shares), the Administrative Committee shall direct the
Trustee to respond to such offer in the same proportion as it directs the
Trustee to respond with regard to the Company Stock as to which timely and
proper directions are received.
(c) The Administrative Committee shall promptly distribute to
all Participants all notices of Company shareholder meetings and any other
notices, reports or materials distributed by the Company to shareholders. On any
matter in which a Participant is entitled to direct the Administrative Committee
hereunder, the Administrative Committee shall solicit such directions by
distributing to each Participant to whose Accounts Company Stock has been
allocated, such information as shall be distributed to stockholders of the
Company generally in connection with the matter, together with any additional
information the Administrative Committee deems appropriate in order for each
Participant to give proper directions to the Administrative Committee. The
directions received from any Participant shall be held in confidence by the
Administrative Committee and the ESOP Trustee and shall not be individually
divulged or released to any person, including officers or employees of the
Company. Any proper and reasonable costs incurred in connection with obtaining
directions shall be treated as expenses of the Plan for the purposes of Section
9. The Section 10 shall not be deemed to apply to dissenters rights created
under state law.
11. Disclosure to Participants.
(a) The Administrative Committee shall furnish each Participant
with a summary plan description of the Plan, as required by Sections 102(a)(1)
and 104(b)(1) of ERISA and the regulations thereunder. Such summary plan
description shall be updated from time to time as required by ERISA and
Department of Labor regulations thereunder.
<PAGE>
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(b) Within 90 days after each Anniversary Date, or such later
date as is permitted under ERISA and the regulations thereunder, the
Administrative Committee shall furnish each Participant with a summary annual
report of the Plan required by Section 104(b)(3) of ERISA, in the form
prescribed in regulations of the Department of Labor.
(c) As soon as practicable after each Anniversary Date, the
Administrative Committee shall furnish each Participant with a statement
reflecting the following information:
(i) The balance (if any) in his or her
Accounts as of the beginning of the Plan Year.
(ii) The amounts of Plan Contributions, forfeitures,
dividends and net income (or loss) allocated to his or her Accounts
for the Plan Year.
(iii) The new balance in his or her Accounts as of that
Anniversary Date, including the number of shares of Company Stock
allocated and the present fair market value of Company Stock.
(d) The Administrative Committee shall make available for
examination by any Participant copies of the Plan, the Trust Agreement and the
latest annual report of the Plan filed (on Form 5500) with the Internal Revenue
Service. Upon written request of any Participant, the Administrative Committee
shall furnish copies of such documents, and may make a reasonable charge to
cover the cost of furnishing such copies, as provided in regulations of the
Department of Labor.
12. Distributions of Capital Accumulation.
A Participant's vested (nonforfeitable) interest under the Trust is
called his or her Capital Accumulation. Distributions to Participants prior to
Termination of Service shall be governed by Section 13. A Participant or his or
her Beneficiary shall be eligible for a distribution of his or her Capital
Accumulation upon Termination of Service in accordance with Section 14. A
Participant may defer the commencement of his or her distribution in accordance
with Section 15. Notwithstanding anything in this Plan to the contrary, no
distribution of Capital Accumulation may commence later than the time set forth
in Section 16. Notwithstanding any provision of the Plan to the contrary that
would otherwise limit a Distributee's election hereunder, a Distributee may
elect, at the time and in the manner prescribed by the Administrative Committee,
to have any portion of an Eligible Rollover Distribution paid directly to an
Eligible Retirement Plan specified by the Distributee in a Direct Rollover.
13. In-Service Distributions.
(a) Any cash dividends received by the Trust on shares of
Company Stock and which are allocated to Participants' Cash Accounts in
accordance with Section 7(a)(ii) shall be paid as soon as possible (but not
later than the time permitted under Section 404(k) of the Code) in cash to such
Participants;
<PAGE>
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provided, however, that the Administrative Committee may direct the Company to
pay directly to the Participants entitled to such a distribution any cash
dividends which would otherwise be allocated to the respective Cash Accounts in
accordance with Section 7(b)(iv).
(b) Any Participant shall be eligible for and shall take a
distribution of his or her Accounts on April 1 following the calendar year in
which the Participant attains age 70 1/2 if he or she has not experienced a
Termination of Employment at such date. Distribution of the Accounts in the case
of such Participant who has not terminated Service with the Company shall be
according to the provisions of Section 16.
(c) Any Participant who has attained age 55 and has 10 years of
participation under the Plan may elect to make a withdrawal under this
paragraph. Throughout the period beginning with the Plan Year in which such
Participant has attained age 55 and has 10 years of Participation and ending
with the Plan Year in which the Participant terminates Service, such Participant
shall be entitled to request, within 90 days after the close of each Plan Year,
a withdrawal of up to 25% of the balance of his or her credit under the Plan. A
Participant will be entitled to withdraw amounts under this section only to the
extent 25% of the balance to his or her credit under the Plan exceeds amounts
previously withdrawn under this section. Beginning with the sixth Plan Year in
such period, the preceding sentence shall be applied by substituting "50%" for
"25%." In the case of a Participant who has made one or more elections during
the period under this paragraph, the extent to which a subsequent election under
this paragraph exceeds the amount to which any prior election under this
paragraph applies shall be: (i) in the case of the Participant's Cash Account,
(A) 25% or 50%, as the case may be, of the sum of the balance of his or her
credit as of the Anniversary Date of the Plan Year with respect to which the
subsequent election is made, the amounts distributed pursuant to prior elections
and the amounts allocated to his or her Cash Account since such prior election;
less (B) the amounts distributed pursuant to prior elections; and (ii) in the
case of the Participant's Company Stock Account, (A) 25% or 50%, as the case may
be, of the sum of the number of shares of Company Stock in the Participant's
Company Stock Account as of the Anniversary Date of the Plan Year with respect
to which the subsequent election is made, the number of shares distributed
pursuant to prior elections and the number of shares of Company Stock allocated
to his or her Company Stock Account since such prior election; less (B) the
number of shares of Company Stock distributed pursuant to prior elections. For
the purposes of this Section 13, fractional shares which the Participant might
be entitled to receive shall be rounded to the nearest whole share. A withdrawal
under this Section will be paid within 90 days following the 90-day period in
which the Participant made his or her request.
(d) All distributions or withdrawals under Section 13 shall be
paid in the form of a lump-sum payment of whole shares of Company Stock plus the
cash distribution from the Participant's Cash Account.
14. Distributions Following Termination of Service.
<PAGE>
-19-
(a) Eligibility for distributions shall be governed by this
Section 14, and distributions shall be made in accordance with Section 16.
(b) A Participant (or his or her Beneficiary, as the case may
be) shall be eligible to receive a distribution of his or her Capital
Accumulation under this Section 14 on the following dates:
(i) In the case of a Participant who experiences a
Termination of Service by reason of Retirement, Disability or death,
as soon as practicable after the termination of Service; and
(ii) In the case of a Participant who experiences a
Termination of Service for any reason other than Retirement,
Disability or death, as soon as practicable after the five-year
anniversary of the close of the Plan Year following the Plan Year in
which the Participant terminates Service (except that a Participant
who resumes Service before such period shall not be eligible for a
distribution at that time).
(c) Upon application for a distribution by a Participant or
Beneficiary eligible for a distribution under this Section 14, a Participant
shall receive a distribution of his or her Capital Accumulation in the form of
one lump sum payment of shares of Company Stock allocated to his or her Company
Stock Account, cash representing the value of any Fractional Shares and any cash
allocated to his or her Cash Account.
15. Deferrals of Distributions and Mandatory Distributions.
(a) A Participant who terminates Service may elect to defer the
distribution of his or her Capital Accumulation under Section 14 for a period
not extending beyond the date on which the distribution of his or her Capital
Accumulation is required to commence under Section 15(b) or 15(c), whichever is
applicable.
(b) Notwithstanding any provision in this Plan to the contrary,
unless a Participant elects to defer the commencement of the distribution of his
or her Capital Accumulation, distribution of his or her Capital Accumulation
shall commence not later than 60 days after the Anniversary Date coinciding with
or next following the later of (A) his or her 65th birthday; (B) the tenth
anniversary of the date he or she commenced participation in the Plan; or (C)
the date of his or her Termination of Service.
(c) Notwithstanding any provision in this Plan to the contrary,
regardless of whether a Participant elects to defer the commencement of a
distribution, the distribution of a Participant's Capital Accumulation will be
made no later than April 1 of the calendar year following the calendar year in
which the Participant attains age 70 1/2. If the distribution of the
Participant's Capital Accumulation has begun under either Section 14 or 15 and
the Participant dies before receiving a
<PAGE>
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complete distribution of his or her Capital Accumulation, the remaining portion
(if any) of the Participant's Capital Accumulation shall be distributed to his
or her Beneficiary at least as rapidly as it would have been distributed to the
Participant under Section 14 or 15. If the Participant dies prior to the time
the distribution of his or her Capital Accumulation has commenced, his or her
Capital Accumulation will be distributed to his or her Beneficiary within one
year of the death of such Participant.
(d) If the amount of the Capital Accumulation to which a
Participant is entitled cannot be determined by the date on which such
distribution should commence under Sections 13, 14 or 15, or if the Participant
cannot be located, distribution of his or her Accounts shall commence within 60
days after the date on which his or her Capital Accumulation can be determined
or after the date on which the Administrative Committee locates the Participant.
(e) If any part of a Participant's Accounts is retained in the
Trust after his or her Termination of Service, his or her Accounts will continue
to be treated as provided in Section 7. However, such Accounts will not be
credited with any additional Plan Contributions, except with respect to the Plan
Year in which the Termination of Service occurs.
16. Manner of Distribution of Capital Accumulation.
(a) Except with respect to distributions required under Sections
13(b) and 15(c), distributions and withdrawals of Capital Accumulations will
only be made upon a Participant's (or Beneficiary's) application for benefits.
An appropriate form for the application for benefits shall be distributed to
each Participant (or Beneficiary, as the case may be) by the Administrative
Committee upon the Participant's Termination of Service. No Capital Accumulation
with a value that has ever exceeded $3,500 shall be distributed (under Sections
13, 14, or 15) to a Participant prior to the attainment by the Participant of
age 65 or the death of the Participant without the written consent of the
Participant.
(b) Distributions shall be made to the Participant, if living,
and, if not, to his or her Beneficiary. Except as otherwise provided herein, a
Participant's Beneficiary shall be his or her spouse. A Participant may
designate a Beneficiary (and contingent Beneficiaries) other than his or her
spouse upon becoming a Participant (and may change such designation at any time)
by filing a written designation with the Administrative Committee. Such
designation (and any changes in designation) will be valid only if: (i) the
spouse to whom the Participant was married for one year preceding the
Participant's death has consented in writing to the designation of that
Beneficiary; (ii) the consent acknowledges the effect of the designation; and
(iii) the consent is witnessed by a notary public or Plan representative.
Changes in Beneficiaries must be accompanied by a spousal consent that meets the
requirements stated above. The Administrative Committee or its designee may ask
an unmarried Participant (or a Participant who cannot locate
<PAGE>
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his or her spouse) to provide proof that such Participant is unmarried (or
cannot locate his or her spouse, as the case may be) before accepting a
Beneficiary designation.
(c) The Administrative Committee shall withhold income tax from
the distribution, if required, in accordance with applicable provisions of the
Code.
17. Rights, Restrictions and Options on Company Stock.
(a) If Company Stock is not readily tradeable on an established
market (within the meaning of Section 409(h) of the Code), any Participant
receiving a distribution of shares of Company Stock from the Trust shall have
the right to require the Company to purchase such shares of Company Stock (the
"Put Option") at any time during the two periods described below, at the then
fair market value, such fair market value to be determined annually as of the
respective Anniversary Date by an independent appraiser selected by the
Administrative Committee in accordance with Section 19. The first period during
which the Put Option may be exercised shall be the 60-day period beginning on
the date the Company Stock to be purchased was distributed to the Participant.
The second period during which the Put Option may be exercised shall be the
60-day period beginning after mailing of written notice to the Participant of
the next following determination of the fair market value of Company Stock.
(b) The Company shall pay for the Company Stock sold pursuant to
this Section 17 by making payment in one lump sum, or, if the Board of Directors
determines that financial considerations of the Company so necessitate, by
substantially equal periodic (not less frequently than monthly) payments over a
period beginning not later than 30 days after the exercise of the Put Option and
not exceeding 5 years; provided, however, that the Company provides adequate
security and pays reasonable interest with respect to the remaining
installments. However, reasonable interest on installment payments shall be
deemed to be equal to the Prime Rate plus two percentage points and adequate
security shall be deemed to be a pledge of the Company Stock sold pursuant to
Section 17. If installment payments are not elected by the Company, the payment
for shares of Company Stock sold pursuant to such Put Option shall be made in a
lump sum, within 30 days after exercise of the Put Option.
(c) At any time Company Stock is not readily tradable on an
established market, any shares distributed pursuant to this Plan shall be
subject to a "right of first refusal" and shall not be transferable by any
holder to any person until and unless the Company has been offered an
opportunity to acquire all of the holder's shares. Prior to any transfer, the
holder shall offer the Company Stock to the Company, at the appraised fair
market value determined under Section 19(g) as of the Anniversary Date
coinciding with or preceding such offer. Alternatively, a bona fide written
offer from an independent prospective buyer (as reasonably determined by the
Administrative Committee) shall be deemed to be the fair market value of such
Company Stock for the purposes of the right of first refusal. Upon receipt of a
copy of the written offer, the Company will then have 14 days to exercise
<PAGE>
-22-
the right of first refusal. In the event that such right of first refusal is
exercised in response to a bona fide written offer from an independent
prospective buyer, it shall be exercised upon the same terms or terms
constituting substantially the same economic value as those offered by such
prospective buyer. The Administrative Committee shall determine whether a
written offer from a prospective buyer is made in good faith.
(d) Except as provided in this Section 17, no security acquired
with the proceeds of an Acquisition Loan shall be subject to a put or call
option, or buy-sell agreement or similar arrangement while held by and when
distributed by the plan. The provisions of this Section 17 shall continue to be
applicable to shares of Company Stock held or distributed by the Administrative
Committee even if the Plan ceases to be an employee stock ownership plan under
Section 4975(e)(7) of the Code.
18. No Assignment of Benefits.
Except to the extent provided in Section 13, a Participant shall not
receive any payment, withdrawal or distribution under the Plan during his or her
Service with the Company; nor may his or her interest in the Plan as a
Participant, or after his or her participation has ended, or that of his or her
Beneficiary, be assigned or alienated by voluntary or involuntary assignment
except pursuant to a "qualified domestic relations order" as determined in
accordance with procedures established by the Administrative Committee and with
Section 414(p) of the Code. Such procedures shall provide for the segregation in
a separate account of any amounts to be paid to an alternate payee. Any attempt
by a Participant (or Beneficiary) to assign or alienate his or her interest
under the Plan, or any attempt to subject his or her interest to attachment,
execution, garnishment or other legal or equitable process, shall be void.
19. Administration.
(a) The Plan will be administered by a two-member Administrative
Committee which shall be appointed by the Board of Directors. The Board of
Directors shall reserve one such seat for a Participant elected by majority vote
of the Participants to serve a term set by the Board of Directors. Each
Administrative Committee member may be removed at any time in the manner he or
she was appointed and replaced in the same manner. All actions taken by the
Administrative Committee shall require a vote of three members of the
Administrative Committee unless two or fewer members are then serving in which
case unanimity shall be required.
(b) An Administrative Committee member who is an individual
receiving compensation as a full-time Employee of the Company shall not be paid
compensation for serving as an Administrative Committee member, except to the
extent necessary to compensate the Employee at his or her regular rates of pay
for time spent on Administrative Committee matters. An Administrative Committee
member who is not receiving compensation as an Employee of the Company shall be
paid reasonable compensation by the Company for such services. The Company shall
pay expenses
<PAGE>
-23-
properly and actually incurred by the Administrative Committee members in the
performance of their duties.
(c) The Administrative Committee shall be the Named Fiduciary
(as defined in ERISA Section 402(a)(2)) with authority to control and manage the
operation and administration of the Plan and Trust. The Administrative Committee
shall be the Plan Administrator under Section 414(g) of the Code (and as defined
in ERISA Section 3(16)(A)). Subject to the provisions of the Plan and to such
restrictions as the Board of Directors may impose, the Committee shall have the
discretionary power to interpret and construe the provisions of the Plan, to
determine eligibility for benefits under the Plan, to supply omissions herein,
and to establish rules and regulations for the interpretation and administration
of the Plan and transaction of its business, including, among other things,
provisions for determining who are Participants, what constitutes a Year of
Service and Compensation, allocation to Participants of Employer Contributions,
forfeitures and income (or loss) and other monies received by the Plan and
valuation of the Trust Assets.
(d) The Administrative Committee shall meet from time to time.
Minutes of each meeting of the Administrative Committee shall be kept. The
Administrative Committee shall make such rules (including, but not limited to,
procedures for determining whether a state court order is a qualified domestic
relations order under Section 414(p) of the Code), regulations, computations,
interpretations and decisions, as may be necessary to administer the Plan in a
nondiscriminatory manner for the exclusive benefit of the Participants (and
their Beneficiaries), pursuant to the applicable requirements of the Code and
ERISA.
(e) The Administrative Committee shall establish Company Stock
and Cash Accounts for each Participant or Beneficiary under the Plan. The
Administrative Committee shall maintain separate records showing the amount of
each contribution by the Company, the number of shares of Company Stock
purchased or contributed and the cost basis of such Company Stock, forfeitures,
and any earnings (including dividends). Upon receipt of any Plan Contributions,
the Administrative Committee shall direct the ESOP Trustee to allocate such
contribution to the Accounts of each Participant so entitled to an allocation
under the Plan. The Administrative Committee shall maintain records indicating
the balance in each Account, the Anniversary Date with respect to which an
allocation was made to a Participant's Account, the date and amount of any
distribution. The Company shall provide the Administrative Committee with
whatever records are necessary for the Administrative Committee to make
allocations to Accounts.
(f) The Administrative Committee may allocate fiduciary
responsibilities between themselves and may designate other persons to carry out
fiduciary responsibilities (other than voting responsibilities) under the Plan,
with the written consent of such other persons. The Administrative Committee may
delegate to other persons, including the ESOP Trustee and the Company (with the
ESOP Trustee's and the Company's written consent, respectively), the
responsibility for maintaining records of Accounts, for making allocations to
Accounts, and any responsibility imposed by this Plan or law on the Plan
<PAGE>
-24-
Administrator. The Administrative Committee may delegate the responsibility for
investing the Trust Assets other than Company Stock. The Administrative
Committee shall establish a policy for investing the Trust Assets for the
benefit of Participants in a manner consistent with the objectives of the Plan
and the requirements of ERISA.
(g) To the extent reasonably necessary, the Administrative
Committee is empowered, on behalf of the Plan and Trust, to employ investment
managers (as defined in Section 3(38) of ERISA), accountants, legal counsel (for
the members of the Administrative Committee, individually or collectively) and
other agents to assist it in the performance of its duties under the Plan. As
soon as practicable after each Anniversary Date occurring in a Plan Year in
which Company Stock is not readily tradable on an established market (as defined
in Section 409(h) of the Code), the Administrative Committee shall obtain an
appraisal of the fair market value of the Company Stock held by the Trust from
an independent appraiser who meets the requirements of the regulations
promulgated under Section 170(a)(1) of the Code. The compensation and expenses
of any trustee, investment manager, accountant, legal counsel, independent
appraiser, agent or other service provider retained by the Administrative
Committee shall be paid by the Company.
(h) The Company shall secure fidelity bonding for the
fiduciaries of the Plan, as required by Section 412 of ERISA. The Company shall
indemnify each member of the Administrative Committee, where applicable, against
any personal liability or expense, except such liability or expense as may
result from willful gross misconduct. In addition, the Plan may purchase
insurance in accordance with Section 410(b) of ERISA, with the cost of such
insurance to be treated as an expense of administering the Plan under Section 9.
20. Claims Procedure.
(a) A Participant (or Beneficiary) may present a claim to the
Administrative Committee for any unpaid benefits. All questions and claims
regarding benefits under the Plan shall be acted upon by the Administrative
Committee. Each Participant (or Beneficiary) who wishes to file a claim for
benefits with the Administrative Committee shall do so in writing, addressed to
the Administrative Committee. If the claim for benefits is wholly or partially
denied, the Administrative Committee shall notify the Participant (or
Beneficiary) in writing of such denial of benefits within 90 days after the
Administrative Committee initially received the benefit claim.
(b) Any notice of a denial of benefits shall advise the
Participant (or Beneficiary) of:
(i) the specific reason or reasons for the denial;
(ii) the specific provisions of the Plan
on which the denial is based;
<PAGE>
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(iii) any additional material or
information necessary for the Participant (or
Beneficiary) to perfect his or her claim and an
explanation of why such material or information is
necessary; and
(iv) the steps which the Participant (or
Beneficiary) must take to have his or her claim for
benefits reviewed.
(c) Each Participant (or Beneficiary) whose claim for benefits
has been denied shall have the opportunity to file a written request for a full
and fair review of his or her claim by the Administrative Committee, to review
all documents pertinent to his or her claim and to submit a written statement
regarding issues relative to his or her claim. Such written request for review
of his or her claim must be filed by the Participant (or Beneficiary) within 60
days after receipt of written notification of the denial of his or her claim.
The decision of the Administrative Committee will be made within 30 days
thereafter and shall be communicated in writing to the claimant. Such written
notice shall set forth the specific reasons and specific Plan provisions on
which the Administrative Committee based its decision.
(d) All notices by the Administrative Committee denying a claim
for benefits, and all decisions on requests for a review of the denial of a
claim for benefits, shall be written in a manner calculated to be understood by
the Participant (or Beneficiary) filing the claim or requesting the review.
21. No Duties or Rights Except as Provided in the Plan.
(a) All benefits under the Plan will be paid only from the Trust
Assets, and neither the Company, the Administrative Committee nor any of its
members nor any other person shall have any duty or liability to furnish the
Trust with any funds, securities or other assets, except as expressly provided
in the Plan.
(b) The adoption and maintenance of the Plan shall not be deemed
to constitute a contract of Employment between the Company and any Employee, or
to be in consideration for any Employment.
22. "Top-Heavy" Contingency Provisions.
(a) The provisions of this Section 22 are included in the Plan
pursuant to Section 401(a)(10)(B)(ii) of the Code and shall become applicable
only if the Plan becomes a "top-heavy plan" under Section 416(g) of the Code for
any Plan Year.
(b) The Plan shall be "top-heavy" only if the total Account
balances of "Key Employees" as of the Determination Date exceed 60% of the total
Account balances for all Participants. For years in which a "Key Employee" is a
Participant in the Plan, the determination of whether the Plan is
<PAGE>
-26-
top-heavy will be made on the basis of the Plan's "Required Aggregation Group."
In years in which no Key Employee is a Participant in the Plan, the
determination may be made on the basis of the Plan's "Permissive Aggregation
Group."
(c) For any Plan Year in which the Plan is "top-heavy," each
Participant who is an Employee on the Anniversary Date (and who is not a "Key
Employee") shall receive a minimum allocation of Plan Contributions and
forfeitures which is equal to the lesser of:
(i) 3% of his or her Top-Heavy
Compensation; or
(ii) the same percentage of his or her Top-Heavy
Compensation as the allocation to the "Key Employee" for whom the
percentage is the highest for that Plan Year.
(d) For any Plan Year in which the Plan is "top-heavy," each
Participant who is not a "Key Employee" but is an Employee on the Anniversary
Date and who is also a Participant in a defined benefit plan sponsored by the
Company or a member of its Controlled Group, shall receive a minimum allocation
of Plan Contributions and forfeitures equal to 5% of his or her Top-Heavy
Compensation; provided, however, that if such Participant is entitled to receive
a benefit under such defined benefit plan equal to such Participant's highest
average annual Top-Heavy Compensation for up to five top-heavy years multiplied
by the lesser of (i) 2% times Years of Service, or (ii) 20%, then the
Participant shall receive a minimum allocation as set forth in Section 22(c),
above.
(e) For any Plan Year in which the Plan is "top-heavy," the
additional limitation provided under Section 7 for that Plan Year shall be
determined by substituting 1.0 for 1.25 in the calculation of the defined
benefit fraction and the defined contribution fraction in Section 6.
(f) For any Plan Year in which the Plan is "top-heavy," the
portion of a Participant's Accounts that is vested and nonforfeitable on any
specified date during such Plan Year shall be determined on the basis of his or
her Years of Service as of such date in accordance with the following schedule:
Years of Service Percent Vested
---------------- --------------
One 0%
Two 20%
Three 40%
Four 80%
Five or More 100%
If the plan shall cease to be "top-heavy" for any succeeding
Plan Year following a Plan Year in which the Plan was "top-heavy," the portion
of a Participant's Accounts that is vested shall be determined according to the
vesting schedule set forth in Section 8(a), provided that all portions of a
Participant's Accounts that became vested during a Plan Year in
<PAGE>
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which the Plan was "top-heavy" shall continue to be vested, notwithstanding
application of the vesting schedule set forth in Section 8(a).
(g) For the purposes of Section 22, the following definitions
apply:
(i) "Top-Heavy Compensation" will mean the average
compensation of the Participant not exceeding $150,000, determined
using his or her five highest consecutive years of Compensation. For
the purpose of the preceding sentence, years beginning after the close
of the last Plan Year in which the Plan was a top-heavy plan will be
disregarded.
(ii) "Determination Date" means, with respect to the Plan,
the last day of the preceding Plan Year for any Plan Year subsequent
to the first Plan Year. For the first Plan Year of the Plan, it means
the last day of the Plan Year.
(iii) "Key Employee" means an individual (and the
Beneficiaries of such individual) who at any time during the
Determination Period had Compensation greater than 50% of the amount
in effect under Section 415(b)(1)(A) of the Code (as adjusted after
1985 pursuant to Section 415(d)(1)(B) of the Code) while an officer of
the Company, an owner (or considered an owner under Section 318 of the
Code) of one of the ten largest interests in the Company if such
individual's annual Compensation exceeds the dollar limitation under
Section 415(c)(1)(A) of the Code (as adjusted after 1985 pursuant to
Section 415(d)(1)(B) of the Code), a 5% owner of the Company, or a 1%
owner of the Company who has annual Compensation of more than
$150,000.
(iv) "Determination Period" means the Plan Year containing
the Determination Date and the four preceding Plan Years.
(v) "Non-Key Employee" means any Employee who is not a
"Key Employee."
(vi) "Permissive Aggregation Group" means each plan in the
Required Aggregation Group and any other qualified plan(s) selected by
the Company if such group of plans would meet the requirements of
Sections 401(a)(4) and 410 of the Code.
(vii) "Required Aggregation Group" means (A) each
qualified plan of the Company in which at least one Key Employee
participates and (B) any other qualified plan of a member of the
Company which enables any plan described in (A) to meet the
requirements of Section 401(a)(4) or 410 of the Code.
(viii) "Top-Heavy Ratio" means the fraction used to
determine if the Plan is top-heavy under Section 22(b). It is a
fraction, the numerator of which
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is the sum of the Key Employees' Account balances under the applicable
defined contribution plans and the present value of the Key Employees'
accrued benefits under the applicable defined benefit plans, and the
denominator of which is the sum of all Participants' Account balances
under the applicable defined contribution plans and the present value
of all Participants' benefits under the applicable defined benefit
plans. Both the numerator and the denominator of this fraction shall
be adjusted to include Plan distributions made to Participants in the
five-year period ending on the Determination Date (including
distributions under a terminated plan which, if it had not been
terminated, would have been part of a required aggregation group) and
in the case of defined contribution plans any contributions due but
unpaid as of the Determination Date. The value of Account balances and
the present value of accrued benefits will be determined as of the
most recent Valuation Date that falls within or ends with the 12-month
period ending on the Determination Date. The Account balances and
accrued benefits of an individual who is not a Key Employee but who
was a Key Employee in a prior year will be disregarded, and the
Account balance of any individual who has not performed any services
for any employer maintaining a plan to which this Section 22 applies
(other than benefits under such a plan) at any time during the five
years preceding the Determination Date shall be disregarded. The
calculation of the Top-Heavy Ratio, and the extent to which
distributions, rollovers, and transfers are taken into account will be
made in accordance with Section 416 of the Code and the regulations
thereunder. When more than one plan is being considered, the value of
Account balances and accrued benefits will be calculated with
reference to the Determination Dates that fall within the same
calendar year.
(ix) "Valuation Date" means, for the purpose of valuing
Account balances under this Section 22, the Anniversary Date falling
in the same Plan Year as the Determination Date.
23. Future of the Plan.
(a) Amendments to the Plan or the Trust Agreement may be adopted
by majority vote of the Company's Board of Directors.
(b) The Plan or the Trust Agreement may be terminated (in whole
or in part) by majority vote of the Board of Directors.
(c) Neither amendment nor termination of the Plan shall
retroactively reduce the vested rights of Participants nor permit any part of
the Trust Assets to be diverted or used for any purpose other than for the
exclusive benefit of the Participants (and their Beneficiaries).
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(d) If the Plan is terminated (or partially terminated),
participation of all Participants affected by the termination will end and the
Accounts of such Participants shall become 100% vested and nonforfeitable, to
the extent funded. After termination of the Plan, the Trust will be maintained
until the Accounts of all Participants have been distributed. Accounts may be
distributed following termination of the Plan as promptly as administratively
feasible.
(e) In the event of the merger or consolidation of this Plan
with another plan, or the transfer of Trust Assets (or liabilities) to another
plan, the Account balances of each Participant immediately after such merger,
consolidation or transfer must be at least as great as immediately before such
merger, consolidation or transfer (as if the Plan had then terminated).
24. Governing Law.
The provisions of this Plan shall be construed, administered and
enforced in accordance with the laws of the State of Delaware to the extent such
laws are not superseded by ERISA.
25. Successors and Assigns.
In the event of the dissolution, merger, consolidation, or
reorganization, or change of name of the Company, this Plan shall be binding on
the successor entity arising out of the dissolution, merger, consolidation or
reorganization. Such successor entity shall be deemed to have assumed all
liabilities of the Company under this Plan and to have succeeded to all of the
powers, duties, liabilities, and responsibilities of the Company under this
Plan.
26. Execution.
To record the adoption of this First Amended and Restated Plan, the
undersigned duly authorized officers of the Company have caused this document to
be executed and to bear the corporate seal of the Company, all as of the
Effective Date.
AMERICAN CAPITAL STRATEGIES, LTD.
Dated: August __, 1997 By:__________________________
President
ATTEST: _________________
Secretary
[SEAL]
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Exhibit 2.i.2
AMERICAN CAPITAL STRATEGIES, LTD.
1997 STOCK OPTION PLAN
1 Definitions
In this Plan, except where the context otherwise indicates, the
following definitions apply:
.1. "Affiliate" means parent or subsidiary corporations of the Company,
as defined in Sections 424(e) and (f) of the Code (but substituting "the
Company" for "employer corporation"), including parents or subsidiaries of the
Company which become such after adoption of the Plan.
.2. "Agreement" means a written agreement granting an Option that is
executed by the Company and the Optionee.
.3. "Board" means the Board of Directors of the Company.
.4. "Code" means the Internal Revenue Code of 1986, as amended.
.5. "Committee" means the committee of the Board appointed by the Board
to administer the Plan. Unless otherwise determined by the Board, the
Compensation Committee of the Board shall be the Committee.
.6. "Common Stock" means the common stock, par value $.01 per share, of
the Company.
.7. "Company" means American Capital Strategies, Ltd., a Delaware
corporation.
.8. "Date of Exercise" means the date on which the Company receives
notice of the exercise of an Option in accordance with the terms of Article 7.
.9. "Date of Grant" means the date on which an Option is granted under
the Plan.
.10. "Director" means a member of the Board of Directors of the Company
or any Affiliate.
.11. "Eligible Individual" means (i) any Employee or Director or (ii)
any consultant or advisor to the Company or an Affiliate who renders bona fide
services to the Company or an Affiliate other than services in connection with
the offer or sale of securities in a capital raising transaction.
.12. "Employee" means any employee of the Company or an Affiliate or
any person who has been hired to be an employee of the Company or an Affiliate.
.13. "Fair Market Value" means the fair market value of a Share as
determined by the Committee pursuant to a reasonable method adopted in good
faith for such purpose.
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.14. "Incentive Stock Option" means an Option granted under the Plan
that qualifies as an incentive stock option under Section 422 of the Code and
that the Company designates as such in the Agreement evidencing the Option.
.15. "Nonstatutory Stock Option" means an Option granted under the Plan
that is not an Incentive Stock Option.
.16. "Option" means an option to purchase Shares granted under the
Plan.
.17. "Option Period" means the period during which an Option may be
exercised.
.18. "Option Price" means the price per Share at which an Option may be
exercised. The Option Price shall be determined by the Committee, provided,
however, that, in the case of Incentive Stock Options the Option Price shall not
be less than the Fair Market Value as of the Date of Grant. Notwithstanding the
foregoing, in the case of an Incentive Stock Option granted to an Optionee who
(applying the rules of Section 424(d) of the Code) owns stock possessing more
than ten percent of the total combined voting power of all classes of stock of
the Company or an Affiliate (a "Ten-Percent Stockholder"), the Option Price
shall not be less than one hundred and ten percent (110%) of the Fair Market
Value on the Date of Grant. The Option Price of any Option shall be subject to
adjustment to the extent provided in Article 9 hereof.
.19. "Optionee" means an Eligible Individual to whom an Option has been
granted.
.20. "Plan" means the American Capital Strategies, Ltd. 1997 Stock
Option Plan.
.21. "Share" means a share of Common Stock.
2 Purpose
The Plan is intended to assist the Company and its Affiliates in
attracting and retaining Eligible Individuals of outstanding ability and to
promote the identification of their interests with those of the stockholders of
the Company.
3 Administration
The Committee shall administer the Plan and shall have plenary
authority, in its discretion, to award Options to Eligible Individuals, subject
to the provisions of the Plan. The Committee shall have plenary authority and
discretion, subject to the provisions of the Plan, to determine the terms (which
terms need not be identical) of all Options including, but not limited to, which
Eligible Individuals shall be granted Options, the time or times at which
Options are granted, the Option Price, the number of Shares subject to an
Option, whether an Option shall be an Incentive Stock Option or a Nonstatutory
Stock Option, any
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provisions relating to vesting, any circumstances in which Options terminate or
Shares may be repurchased by the Company, the period during which Options may be
exercised and any other restrictions on Options. In making these determinations,
the Committee may take into account the nature of the services rendered by the
Optionees, their present and potential contributions to the success of the
Company and its Affiliates, and such other factors as the Committee in its
discretion shall deem relevant. Subject to the provisions of the Plan, the
Committee shall have plenary authority to construe and interpret the Plan and
the Agreements, to prescribe, amend and rescind rules and regulations relating
to the Plan and to make all other determinations deemed necessary or advisable
for the administration of the Plan, including, but not limited to, any
determination to accelerate the vesting of outstanding Options. The
determinations of the Committee on the matters referred to in this Article 3
shall be binding and final.
4 Eligibility
Options may be granted only to Eligible Individuals, provided, however,
that only Employees shall be eligible to receive Incentive Stock Options.
5 Stock Subject to the Plan
.1. Subject to adjustment as provided in Article 9, the maximum number
of Shares that may be issued under the Plan is _________ Shares.
.2. If an Option expires or terminates for any reason without having
been fully exercised, the unissued Shares which had been subject to such Option
shall become available for the grant of additional Options.
6 Options
.1. Options granted under the Plan shall be either Incentive Stock
Options or Nonstatutory Stock Options, as designated by the Committee. Each
Option granted under the Plan shall be clearly identified either as an Incentive
Stock Option or a Nonstatutory Stock Option and shall be evidenced by an
Agreement that specifies the terms and conditions of the grant. Options granted
to Eligible Individuals shall be subject to the terms and conditions set forth
in this Article 6 and such other terms and conditions not inconsistent with this
Plan as the Committee may specify. All Incentive Stock Options shall comply with
the provisions of the Code governing incentive stock options and with all other
applicable rules and regulations.
.2. The Option Period for Options granted to Eligible Individuals shall
be determined by the Committee and specifically set forth in the Agreement,
provided, however, that an Option shall not be exercisable after ten years (five
years in the case of an Incentive Stock Option granted to a Ten-Percent
Stockholder) from its Date of Grant.
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.3. The maximum number of Shares that may be covered by Options granted
to any Employee during the ten-year terms of this Plan may not exceed _________.
7 Exercise of Options
.1. An Option may, subject to the terms of the applicable Agreement
under which it is granted, be exercised in whole or in part by the delivery to
the Company of written notice of the exercise, in such form as the Committee may
prescribe, accompanied by full payment of the Option Price for the Shares with
respect to which the Option is exercised as provided in Section 7.2 hereof.
.2. Payment of the aggregate Option Price for the Shares with respect
to which an Option is being exercised shall be made in cash; provided, however,
that the Committee, in its sole discretion, may provide in an Agreement that
part or all of such payment may be made by the Optionee in one or more of the
following manners: (a) by delivery (including constructive delivery) to the
Company of Shares valued at Fair Market Value on Date of Exercise; (b) by
delivery on a form prescribed by the Committee of a properly executed exercise
notice and irrevocable instructions to a registered securities broker approved
by the Committee to sell Shares and promptly deliver cash to the Company; (c) by
delivery of a promissory note as provided in Section 7.3 hereof; or (d) by
surrender to the Company of an Option (or a portion thereof) that has become
exercisable and the receipt from the Company upon such surrender, without any
payment to the Company (other than required tax withholding amounts), of (x)
that number of Shares (equal to the highest whole number of Shares) having an
aggregate Fair Market Value as of the date of surrender equal to that number of
Shares subject to the Option (or portion thereof) being surrendered multiplied
by an amount equal to the excess of (i) the Fair Market Value on the date of
surrender over (ii) the Option Price, plus (y) an amount of cash equal to the
Fair Market Value of any fractional Share to which the Optionee would be
entitled but for the parenthetical in clause (x) above relating to whole number
of Shares.
.3. To the extent provided in an Option Agreement and permitted by
applicable law, the Committee may accept as payment of the Option Price a
promissory note executed by the Optionee evidencing his or her obligation to
make future cash payment thereof; provided, however, that in no event may the
Committee accept a promissory note for an amount in excess of the difference
between the aggregate Option Price and the par value of the Shares. Promissory
notes made pursuant to this Section 7.3 shall be payable upon such terms as may
be determined by the Committee, shall be secured by a pledge of the Shares
received upon exercise of the Option and shall bear interest at a rate fixed by
the Committee.
8 Restrictions on Transfer
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Options shall not be transferable other than by will or the laws of
descent and distribution, except as otherwise provided in an Agreement. An
Option may be exercised during the Optionee's lifetime only by the Optionee or,
in the event of his or her legal disability, by his or her legal representative.
The Shares acquired pursuant to the Plan shall be subject to such restrictions
and agreements regarding sale, assignment, encumbrances, or other transfers or
dispositions thereof (i) as are in effect among the stockholders of the Company
at the time such Shares are acquired, (ii) as the Committee shall deem
appropriate and (iii) as are required by applicable law.
9 Capital Adjustments
In the event of any change in the outstanding Common Stock by reason of
any stock dividend, cash dividend, split-up (or reverse stock split),
recapitalization, reclassification, reorganization, reincorporation, combination
or exchange of shares, merger, consolidation, liquidation or similar change in
corporate structure, the Committee may, in its discretion, provide for a
substitution for or adjustment in (i) the number and class of Shares subject to
outstanding Options, (ii) the Option Price of outstanding Options, and (iii) the
aggregate number and class of Shares that may be issued under the Plan.
10 Termination or Amendment
The Board may amend, alter, suspend or terminate the Plan in any
respect at any time; provided, however, that after the Plan has been approved by
the stockholders of the Company, no amendment, alteration, suspension or
termination of the Plan shall be made by the Board without approval of (i) the
Company's stockholders to the extent stockholder approval is required by
applicable law or regulations and (ii) each affected Optionee if such amendment,
alteration, suspension or termination would adversely affect his or her rights
or obligations under any Option granted prior to the date of such amendment,
alteration, suspension or termination. No Option may be granted nor any Shares
issued under the Plan during any suspension or after termination of the Plan.
11 Modification, Extension and Renewal of Options;
Substituted Options
.1. Subject to the terms and conditions of the Plan, the Committee may
modify, extend or renew the terms of any outstanding Options, or accept the
surrender of outstanding Options granted under the Plan or options and stock
appreciation rights granted under any other plan of the Company or an Affiliate
(to the extent not theretofore exercised) and authorize the granting of new
Options in substitution therefor (to the extent not theretofore exercised). Any
such substituted Options may specify a lower exercise price than the surrendered
options and stock appreciation rights, a longer term than the surrendered
options and stock appreciation rights, or have any other provisions that are
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authorized by the Plan. Notwithstanding the foregoing, however, no modification
of an Option shall, without the consent of the Optionee, alter or impair any of
the Optionee's rights or obligations under such Option.
.2. Anything contained herein to the contrary notwithstanding, Options
may, at the discretion of the Committee, be granted under the Plan in
substitution for stock appreciation rights and options to purchase shares of
capital stock of another corporation which is merged into, consolidated with, or
all or a substantial portion of the property or stock of which is acquired by,
the Company or one of its Affiliates. The terms and conditions of the substitute
Options so granted may vary from the terms and conditions set forth in this Plan
to such extent as the Committee may deem appropriate in order to conform, in
whole or part, to the provisions of the options and stock appreciation rights in
substitution for which they are granted.
12 Effectiveness of the Plan
The Plan and any amendment thereto shall be effective on the date on
which it is adopted by the Board, provided that any such adoption requiring
stockholder approval is subject to approval by vote of the stockholders of the
Company within 12 months after such adoption by the Board. Options may be
granted prior to stockholder approval of the Plan, and the date on which any
such Option is granted shall be the Date of Grant for all purposes provided that
(a) each such Option shall be subject to stockholder approval of the Plan, (b)
no Option may be exercised prior to such stockholder approval, and (c) any such
Option shall be void ab initio if such stockholder approval is not obtained.
13 Withholding
The Company's obligation to deliver Shares or pay any amount pursuant
to the terms of any Option shall be subject to the satisfaction of applicable
federal, state and local tax withholding requirements. To the extent provided in
the applicable Agreement and in accordance with rules prescribed by the
Committee, an Optionee may satisfy any such withholding tax obligation by any of
the following means or by a combination of such means: (i) tendering a cash
payment, (ii) authorizing the Company to withhold Shares otherwise issuable to
the Optionee, or (iii) delivering to the Company already owned and unencumbered
Shares.
14 Term of the Plan
Unless sooner terminated by the Board pursuant to Section 10, the Plan
shall terminate on April 11, 2007, and no Options may be granted after such
date. The termination of the Plan shall not affect the validity of any Option
outstanding on the date of termination.
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15 Indemnification of Committee
In addition to such other rights of indemnification as they may have as
Directors or as members of the Committee, the members of the Committee shall be
indemnified by the Company against the reasonable expenses, including attorneys'
fees, actually and reasonably incurred in connection with the defense of any
action, suit or proceeding, or in connection with any appeal therein, to which
they or any of them may be a party by reason of any action taken or failure to
act under or in connection with the Plan or any Option granted hereunder, and
against all amounts reasonably paid by them in settlement thereof or paid by
them in satisfaction of a judgment in any such action, suit or proceeding, if
such members acted in good faith and in a manner which they believed to be in,
and not opposed to, the best interests of the Company.
16 General Provisions
.1. The establishment of the Plan shall not confer upon any Eligible
Individual any legal or equitable right against the Company, any Affiliate or
the Committee, except as expressly provided in the Plan.
.2. The Plan does not constitute inducement or consideration for the
employment or service of any Eligible Individual, nor is it a contract between
the Company or any Affiliate and any Eligible Individual. Participation in the
Plan shall not give an Eligible Individual any right to be retained in the
service of the Company or any Affiliate.
.3. Neither the adoption of this Plan nor its submission to the
stockholders, shall be taken to impose any limitations on the powers of the
Company or its Affiliates to issue, grant, or assume options, warrants, rights,
or restricted stock, otherwise than under this Plan, or to adopt other stock
option or restricted stock plans or to impose any requirement of stockholder
approval upon the same.
.4. The interests of any Eligible Individual under the Plan are not
subject to the claims of creditors and may not, in any way, be assigned,
alienated or encumbered except as provided in an Agreement.
.5. The Plan shall be governed, construed and administered in
accordance with the laws of the State of Delaware and it is the intention of the
Company that Incentive Stock Options granted under the Plan qualify as such
under Section 422 of the Code.
.6. The Committee may require each person acquiring Shares pursuant to
Options hereunder to represent to and agree with the Company in writing that
such person is acquiring the Shares without a view to distribution thereof. The
certificates for such Shares may include any legend which the Committee deems
appropriate to reflect any restrictions on transfer. All
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certificates for Shares issued pursuant to the Plan shall be subject to such
stock transfer orders and other restrictions as the Committee may deem advisable
under the rules, regulations and other requirements of the Securities and
Exchange Commission, any stock exchange or interdealer quotation system upon
which the Common Stock is then listed or quoted, and any applicable federal or
state securities laws. The Committee may place a legend or legends on any such
certificates to make appropriate reference to such restrictions. The
certificates for Shares acquired pursuant to an Option may also include any
legend which the Committee deems appropriate to reflect restrictions contained
in this Plan or in the applicable Agreement or to comply with the Delaware
General Corporation Law.
.7. The Company shall not be required to issue any certificate or
certificates for Shares upon the exercise of Options, or record any person as a
holder of record of such Shares, without obtaining, to the complete satisfaction
of the Committee, the approval of all regulatory bodies deemed necessary by the
Committee, and without complying to the Committee's complete satisfaction, with
all rules and regulations, under federal, state or local law deemed applicable
by the Committee.
Exhibit 2.i.3
DRAFT (7/30/97)
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is entered into as of
April 2, 1997 (the "Effective Date") by and between AMERICAN CAPITAL STRATEGIES,
LTD., a Delaware corporation (the "Company"), and DAVID GLADSTONE (the
"Employee").
W I T N E S S E T H:
WHEREAS, the Company desires to employ Employee as of April 2,
1997; and
WHEREAS, Employee desires to accept such employment, on the
terms and conditions herein set forth;
NOW, THEREFORE, in consideration of the mutual covenants,
representations, warranties and agreements contained herein, and for other
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto agree as follows:
ARTICLE I
Definitions and Interpretations
1.1. Definitions
For purposes of this Agreement, except as otherwise expressly
provided or unless the context otherwise requires, the following terms shall
have the following respective meanings:
"Annual Bonus Plan" shall have the meaning specified in Section 3.2.
"Base Salary" shall have the meaning specified in Section 3.1.
"Board of Directors" shall mean the Board of Directors of the
Company.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Compensation Committee" shall mean the Compensation Committee of the
Board of Directors or such other entity as may be designated for a particular
function by the Board of Directors.
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"Confidential Information" shall have the meaning specified in
Section 5.1(a).
"Continuation Period" shall have the meaning specified in Section
4.4(b).
"Disability" shall mean a physical or mental condition of Employee
that, in the good faith judgment of not less than a majority of the entire
membership of the Board of Directors, prevents Employee from being able to
perform the services required under this Agreement and which results in the
Employee becoming eligible for long-term disability benefits (if such benefits
are provided by the Company). If any dispute arises as to whether a Disability
has occurred, or whether a Disability has ceased and the Employee is able to
resume duties, then such dispute shall be referred to a licensed physician
appointed by the president of the Medical Society or similar organization in
Washington, D.C., at the request of either party. The Employee shall submit to
such examinations and provide information as such physician may request and the
determination of such physician as to the Employee's physical or mental
condition shall be binding and conclusive on the parties. The Company shall pay
the cost of any such physician and examination.
"Dispute" shall have the meaning specified in Article VI.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Executive Officers" shall refer to the President, the Chairman of
the Board, all Executive Vice Presidents and all other officers designated as
Executive Officers by the Board of Directors.
"Expiration Date" shall have the meaning specified in Section 2.2.
"Good Reason" shall mean any of the following:
(1) without Employee's express written consent, a material
adverse alteration in the nature or status of Employee's position,
functions, duties or responsibilities with the Company;
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(2) a material breach by the Company of any material provision
of this Agreement which, if capable of being remedied, remains
unremedied for more than 15 days after written notice thereof is
given by Employee to the Company;
(3) without Employee's express written consent, the relocation
of the principal executive offices of the Company outside the greater
Washington, D.C. area or the Company's requiring Employee to be based
other than at such principal executive offices;
(4) any purported termination by the Company of Employee's
employment not in accordance with the provisions of this Agreement;
(5) the failure of the Company to obtain any assumption
agreement required by Section 7.5(a);
(6) the amendment, modification or repeal of any provision of
the Company's Certificate of Incorporation or by-laws, if such
amendment, modification or repeal would materially adversely affect
Employee's rights to indemnification by the Company;
(7) change of control of the Company following any IPO which
would result in the control of 25% or more of the Company's voting
shares by one Person or a group of Persons acting in concert other
than such entities as may own voting securities on the date hereof;
or
(8) the determination by the Employee that there exists a
significant difference between the Employee and the Board of
Directors regarding either the method of operating the Company or the
direction of the Company.
"IPO" shall mean an initial underwritten public offering of
securities of the Corporation pursuant to a Securities and Exchange Commission
registration statement other than Form S-8 or Form S-14.
"ISO Plan" shall have the meaning specified in Section 3.3.
"Misconduct" shall mean (1) the willful and continued failure by
Employee to perform substantially his duties described in Section 2.3 (other
than any such failure resulting from Employee's incapacity due to physical or
mental illness) after two (2) written notices of such failure have been given to
Employee by the Company's Board of Directors and Employee has had a reasonable
period (not to exceed 15 days from the second notice) to correct such failure;
or (2) the commission by Employee of acts that are dishonest and demonstrably
injurious to the Company (monetarily or otherwise) in any material respect. For
purposes of this definition, (i) no act or failure to act on Employee's part
shall be considered "Misconduct" if done or omitted to be done by Employee in
good faith and in the reasonable belief that such act or failure to act was in
the best interest of the Company or in furtherance of Employee's duties and
responsibilities described in Section 2.3 and (ii) no disagreements between the
Board of Directors and the Employee regarding the direction or the operations of
the Company shall be construed as "Misconduct" and, further, material breaches
or violations by Employee of any material provision of this Agreement or any
material violation by the Employee of the Company's employment policy manual
shall be defined as "Misconduct."
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"Notice of Discontinuance" shall have the meaning specified in
Section 2.2.
"Notice of Termination" shall mean a notice purporting to terminate
Employee's employment in accordance with Section 4.1 or 4.2. Such notice shall
specify the effective date of such termination, which date shall not be less
than 30 (one (1) day in the case of a termination by the Company for Misconduct)
or more than 60 days after the date such notice is given. If such termination is
by Employee for Good Reason or by the Company for Disability or Misconduct, such
notice shall set forth in reasonable detail the reason for such termination and
the facts and circumstances claimed to provide a basis therefor. Any notice
purporting to terminate Employee's employment which is not in compliance with
the requirements of this definition shall be ineffective.
"Person" shall mean and include an individual, a partnership, a joint
venture, a corporation, a trust and an unincorporated organization.
"Target Bonus" shall have the meaning specified in Section 3.2.
"Term" shall have the meaning specified in Section 2.2.
"Termination Date" shall mean the termination date specified in a
Notice of Termination delivered in accordance with this Agreement.
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1.2. Interpretations
(a) In this Agreement, unless a clear contrary intention
appears, (i) the words "herein," "hereof" and "hereunder" and other words of
similar import refer to this Agreement as a whole and not to any particular
Article, Section or other subdivision, (ii) reference to any Article or Section,
means such Article or Section hereof, (iii) the words "including" (and with
correlative meaning "include") means including, without limiting the generality
of any description preceding such term, and (iv) where any provision of this
Agreement refers to action to be taken by either party, or which such party is
prohibited from taking, such provision shall be applicable whether such action
is taken directly or indirectly by such party.
(b) The Article and Section headings herein are for
convenience only and shall not affect the construction hereof.
ARTICLE II
Employment: Term, Positions and Duties, Etc.
2.1. Employment
The Company agrees to employ Employee and Employee agrees to accept
employment with the Company, in each case on the terms and conditions set forth
in this Agreement.
2.2. Term of Employment
(a) Unless sooner terminated pursuant to Article IV, the
term of Employee's employment under this Agreement (the "Term") shall commence
on the Effective Date and shall continue until the first anniversary of the IPO
(the "Expiration Date"); provided, however, that on the third anniversary of the
IPO and on each anniversary thereafter (each such anniversary being an
"Extension Anniversary"), the Expiration Date shall be automatically extended
one additional year unless, at least six months prior to an Extension
Anniversary, (i) either party shall give written notice to the other (a "Notice
of Discontinuance") that no such automatic extension shall occur on the next
succeeding Extension Anniversary and
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each Extension Anniversary thereafter, or (ii) either party shall give a Notice
of Termination to the other party pursuant to Section 4.1 or 4.2, as the case
may be. No Notice of Discontinuance given by the Company shall be effective
unless given pursuant to instructions set forth in a resolution duly adopted by
the affirmative vote of a least a majority of the entire membership of the Board
of Directors.
(b) Except for the reimbursement of expenses under Section
3.5, this Agreement shall not become effective until the Company has completed
an IPO, but it shall be considered to then have become effective retroactive to
April 2, 1997.
2.3. Positions and Duties
(a) While employed hereunder, Employee shall serve as an
Executive Officer of the Company and, following an IPO, as the Chairman of the
Board of Directors of the Company and all of its subsidiaries, and shall have
and may exercise all of the powers, functions, duties and responsibilities
normally attributable to such offices, including (without limitation) such
duties and responsibilities as are set forth with respect to such offices in the
Company's Certificate of Incorporation and By-laws (as from time to time in
effect). Employee shall have such additional duties and responsibilities
commensurate with such offices as from time to time may be reasonably assigned
to him by the Board of Directors. While employed hereunder, Employee shall (i)
report directly to the Board of Directors of the Company and (ii) observe and
comply with all lawful policies, directions and instructions of the Board of
Directors which are consistent with the foregoing provisions of this paragraph
(a).
(b) The Company agrees to use its reasonable best efforts to
cause Employee to be elected or appointed, or re-elected or re-appointed, as a
member of the Board of Directors and the Executive Committee of the Board of
Directors (if such a committee exists) nonvoting and a ex officio member all
other committees other than the Compensation Committee, at all times during the
Term.
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(c) While employed hereunder, Employee shall (i) devote
substantially all of his business time, attention, skill and efforts to the
faithful and efficient performance of his duties hereunder and (ii) not accept
employment with any Person other than with the Company. Notwithstanding the
foregoing, Employee may engage in the following activities: (i) serve on
corporate, civic, religious, educational or charitable boards or committees and
(ii) manage his personal investments including being a consultant, board member
or adviser, to such investments and activities.
(d) While employed hereunder, Employee shall conduct himself
in such a manner as not to knowingly prejudice, in any material respect, the
reputation of the Company in the fields of business in which it is engaged or
with the investment community or the public at large.
2.4. Place of Employment
Employee's place of employment hereunder shall be at the Company's
principal executive offices in the greater Washington, D.C. area or such other
area that is mutually agreeable to both parties.
ARTICLE III
Compensation and Benefits
3.1. Base Salary
(a) For services rendered by Employee under this Agreement,
the Company shall pay to Employee an annual base salary ("Base Salary") of
$150,000. The Board of Directors shall review the Base Salary at least annually
and, subject to paragraph (b) below, may adjust the amount of the Base Salary at
any time as the Board of Directors may deem appropriate in their sole
discretion.
(b) The amount of the Base Salary may not be decreased
without the prior written approval of the Employee except that if the Board of
Directors increases the Base Salary as provided in the last sentence of
paragraph (a) above, the Board of Directors may thereafter decrease the Base
Salary by an amount not to exceed the amount of such increase, but only if a
proportionally similar decrease is made to the base compensation of all other
Executive Officers of the Company; provided, however, that in no event may the
Base Salary be decreased below $150,000, without the prior written consent of
Employee.
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(c) The Base Salary shall be payable in accordance with the
Company's payroll practice for Executive Officers as earned.
3.2 Annual Bonus Plan
During the Term, the Company shall maintain and the Employee shall be
entitled to participate in an incentive bonus plan (the "Annual Bonus Plan")
which will be determined by the Board of Directors, which will provide for the
payment of cash bonuses to eligible executives of the Company at specified times
during the year and within 90 days of the end of each fiscal year based on the
Company's financial performance and other appropriate factors for that year or a
portion thereof. Under the Annual Bonus Plan, Employee shall be eligible to earn
a target bonus (the "Target Bonus") each year equal to 200% of Employee's Base
Salary for such year based on criteria established by the Compensation
Committee, and the performance of the Company against such criteria. The
establishment of such criteria and of the necessary performance targets for
partial or full earning of the Target Bonus shall be at the sole reasonable
discretion of the Compensation Committee; provided, however, that Employee shall
be entitled to a Target Bonus each year equal to at least five percent (5%) of
the maximum Target Bonus. During the calendar year 1997 and the year in which
the Expiration Date occurs, the Target Bonus which would be payable shall be
prorated and paid based on the number of days in such year actually occurring
during the Term.
3.3 Long-term Incentive Compensation
Upon the closing of the IPO, the Company shall have established a
long-term incentive compensation plan, which provides key employees of the
Company with ownership interests in the Company, as substantially set forth in
Attachment A hereto (the "ISO Plan"). Under the ISO Plan, Employee shall be
granted options to purchase 5.5% of the stock outstanding as of the IPO adjusted
upward for the additional shares issued pursuant to the exercise of any
underwriter's over-allotment option within thirty (30) days of the IPO.
One-third of such options will vest and become exercisable on each of the first
three anniversaries of the effectiveness of the IPO; provided, however, that
Employee may accelerate the vesting of any such options by agreeing to exercise
such options immediately and that for a period through the date on which such
options would have vested, not to sell, assign or convey any stock so purchased
(other than by laws of descent or distribution) and to grant the Company a call
option to repurchase such stock at the option exercise price if the options
would have been forfeited prior to their original vesting date as a result of
the Employee's subsequent termination of employment with the Company. To the
extent permissible, such options shall be characterized as Incentive Stock
Options as defined in Section 422 of the Code. The employee shall participate in
all other long-term compensation incentive plans of the Company in accordance
with their terms, except that while other Executive Officers may receive
additional options under the ISO Plan and other long-term incentive stock
options, stock appreciation rights and other similar programs adopted subsequent
to the IPO, Employee has no expectation of or right to additional options or
participation in such plans.
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3.4. Vacation
While employed hereunder, Employee shall be entitled to vacation
benefits in accordance with the vacation policy adopted by the Company from time
to time for senior executives in general, but in no event shall Employee's
annual vacation be less than 20 business days or such greater number of vacation
days as the Board of Directors may approve from time to time in its sole
discretion. Employee shall not be entitled to accumulate and carryover unused
vacation time from year to year, except to the extent permitted in accordance
with the Company's vacation policy for senior executives in general, nor shall
Employee be entitled to compensation for unused vacation time except as provided
in Section 4.3(a).
3.5. Business Expenses
The Company shall, in accordance with the rules and policies that it
may establish from time to time for senior executives, reimburse Employee for
business expenses reasonably incurred in the performance of Employee's duties.
Requests for reimbursement for such expenses must be accompanied by appropriate
documentation. Examples of reimbursable expenses include parking, mileage
charges, air fares and hotel accommodations while traveling on Company business.
3.6. Other Benefits
Employee shall be entitled to receive all employee benefits, fringe
benefits and other perquisites that may be offered by the Company to its
Executive Officers as a group, including, without limitation, (i) participation
by Employee and, where applicable, Employee's dependents, in the various
employee benefit plans or programs (including, without limitation, pension
plans, profit sharing plans, stock plans, health plans, life insurance, parking
and disability insurance) generally provided to Executive Officers of the
Company, subject to meeting the eligibility requirements with respect to each of
such benefit plans or programs, (ii) club memberships, (iii) automobile
allowances, and (iv) financial planning allowances. However, nothing in this
Section 3.6 shall be deemed to prohibit the Company from making any changes in
any of the plans, programs or benefits described herein, provided such changes
apply to all similarly situated Executive Officers.
<PAGE>
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3.7. Indemnification
The Company agrees to defend, indemnify and hold harmless the
Employee from and against any liability and expenses arising by reason of
Employee's acting as a director or officer of the Company or any Company
subsidiary or affiliate, or any portfolio company of the Company, in accordance
with and to the fullest extent permitted by law. The Company shall maintain
Directors and Officers liability insurance for the Employee in such amounts of
coverage as are reasonably available to the Company and to the extent such is
attainable at reasonable cost and are permitted by law.
ARTICLE IV
Termination of Employment
4.1. Termination by Employee
Employee may, at any time prior to the Expiration Date, terminate his
employment hereunder for any reason by delivering a Notice of Termination to the
Board of Directors.
4.2. Termination by the Company
The Company may, at any time prior to the Expiration Date, terminate
Employee's employment hereunder for any reason by delivering a Notice of
Termination to Employee; provided, however, that in no event shall the Company
be entitled to terminate Employee's employment prior to the Expiration Date
unless the Board of Directors shall duly adopt, by the affirmative vote of at
least a majority of the entire membership of the Board of Directors, a
resolution authorizing such termination. Should the board adopt such a
resolution, the Employee may resign in lieu of being terminated, but such
resignation shall otherwise be treated as a termination by the Company for
purposes of this Article IV.
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4.3. Payment of Accrued Base Salary, Vacation Pay, etc.
(a) Promptly upon the termination of Employee's employment
for any reason (including death), the Company shall pay to Employee (or his
estate) a lump sum amount for (i) any unpaid Base Salary earned hereunder prior
to the Termination Date, (ii) all unused vacation time accrued by Employee as of
the Termination Date in accordance with Section 3.4, (iii) all unpaid benefits
earned or vested, as the case may be, by Employee as of the Termination Date
under any and all incentive or deferred compensation plans or programs of the
Company and (iv) any amounts in respect of which Employee has requested, and is
entitled to, reimbursement in accordance with Section 3.5.
(b) A termination of Employee's employment in accordance
with this Agreement shall not alter or impair any of Employee's accrued rights
or benefits as of the Termination Date under any employee benefit plan or
program maintained by the Company, in each case except as provided therein or in
any written agreement entered into between the Company and Employee pursuant
thereto.
4.4. Additional Rights in Connection With Disability
In the event that the Company terminates an Employee by
delivering a Notice of Termination to Employee stating that such Termination is
by reason of a Disability, the Employee shall be entitled to the benefits and
payments set forth in this Section 4.4 in addition to such other applicable
rights as may be provided elsewhere in this Agreement:
(a) Base Salary and Target Bonus. The Company shall continue
to pay to Employee the Base Salary in effect as of the date on which the Notice
of Termination was delivered for two (2) years following the Termination Date
(but in no event less than 365 days) (such period being the "Continuation
Period") which amount shall be reduced by any amount payable to Employee under
any disability plan maintained by the Company for the benefit of Employee. In
addition, the Employee shall be entitled to continue to participate in the
Annual Bonus Plan for two (2) years following the Termination Date with the
second anniversary of the Termination Date being the Expiration Date for
purposes of Section 3.2.
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(b) Insurance Benefits, etc. The Company shall at all times
during the Continuation Period, without charge to Employee or Employee's
dependents, cause Employee and Employee's eligible dependents to be covered by
and to participate in, to the fullest extent allowable under the terms thereof,
all life, accidental death and dismemberment and health insurance plans and
programs that may be offered to the senior officers of the Company so that
Employee will receive, at all times during the Continuation Period, the same
benefits under such plans and programs as Employee would have been entitled to
receive had he remained an Executive Officer of the Company. In no event shall
Employee's continuation period for purposes of Part 6 of Title I of the Employee
Retirement Income Security Act of 1974, as amended ("COBRA"), begin prior to the
end of Employee's coverage under the Company's group health plan as provided in
this paragraph (b).
(c) Options. All options of the Employee under the ISO Plan
(or similar plan) which have not vested as of Employee's Termination Date and
which would vest within one year of Employee's Termination Date shall vest and
shall become immediately exercisable. The Company shall issue to the Employee
within 30 days of the Termination Date an amount of new options as separate
securities in exchange for and in an amount equal to the Employee's vested ISO
Plan options. Such new options shall have the same exercise price and other
terms as the ISO Plan options including a requirement that these options be
registered under applicable securities laws if the ISO Plan options are
registered. All loans to the Employee in connection with the prior exercise of
any options under the ISO Plan (or similar plan) shall remain unaffected and
will remain on their original terms.
Should the Employee's Disability end during the pendency of the Term,
the Company may discontinue the payments contemplated by this Section 4.4 if it
offers to reemploy Employee under the terms of this Agreement, but no such offer
shall affect the terms of Section 4.4(c) above.
<PAGE>
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4.5. Additional Rights in Connection With Terminations
by Employee for Good Reason or by the Company for
Other than Misconduct or Disability
In the event that Employee terminates his employment
pursuant to Section 4.1 for Good Reason or if the Company terminates Employee's
employment with the Company pursuant to Section 4.2 for other than Misconduct or
a Disability, the Employee shall be entitled to the payments and benefits set
forth in this Section 4.5 in addition to such other applicable rights as may be
provided elsewhere in this Agreement:
(a) Base Salary and Target Bonus. The Company shall continue
to pay to Employee the Base Salary in effect as of the date on which the Notice
of Termination for the Continuation Period. In addition, the Employee shall be
entitled to continue to participate in the Annual Bonus Plan for two (2) years
following the Termination Date with the second anniversary of the Termination
Date being the Expiration Date for purposes of Section 3.2. The amount payable
to Employee under this paragraph (a) is in lieu of, and not in addition to, any
severance payment due to or become due to Employee under any separate agreement
or contract between Employee and the Company or pursuant to any severance
payment plan, program or policy of the Company.
(b) Insurance Benefits, etc. The Company shall at all times
during the Continuation Period, without charge to Employee or Employee's
dependents, cause Employee and Employee's eligible dependents to be covered by
and to participate in, to the fullest extent allowable under the terms thereof,
all life, accidental death and dismemberment and health insurance plans and
programs that may be offered to the senior officers of the Company so that
Employee will receive, at all times during the Continuation Period, the same
benefits under such plans and programs as Employee would have been entitled to
receive had he remained an Executive Officer of the Company; provided, however,
in the event Employee becomes covered during the Continuation Period by another
employer's group plan or programs which provide benefits to Employee and his
dependents comparable to those being provided to Employee under this paragraph
(b) (provided with respect to any such group health plan, such plan does not
contain any exclusion or limitation with respect to any pre-existing
conditions), then the Company's similar plans and programs shall no longer be
liable for any benefits under this paragraph (b). In no event shall Employee's
COBRA continuation period begin prior to the end of Employee's coverage under
the Company's group health plan as provided in this paragraph (b).
<PAGE>
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(c) Options. All options of the Employee under the ISO Plan
(or similar plan) which have not vested as of Employee's Termination Date shall
vest and shall become immediately exercisable. The Company shall issue to the
Employee within 30 days of the Termination Date an amount of new options as
separate securities in exchange for and in an amount equal to the Employee's
vested ISO Plan options. Such new options shall have the same exercise price and
other terms as the ISO Plan options including a requirement that these options
be registered under applicable securities laws if the ISO Plan options are
registered. All loans to the Employee in connection with the prior exercise of
any options under the ISO Plan (or similar plan) shall remain unaffected and
will remain on their original terms.
(d) Release. Notwithstanding anything in this Section 4.5 to
the contrary, as a condition to the receipt of any benefit under this Section
4.5, Employee must first execute and deliver to the Company a mutual release as
set out in exhibit 4.5(d) hereto (which the Company shall be obligated to
execute upon Employee's delivery thereof), releasing the Company, its officers,
Board of Directors, employees and agents from any and all claims and from any
and all causes of action of any kind or character that Employee may have arising
out of Employee's employment with the Company or the termination of such
employment, but excluding any claims and causes of action that Employee may have
arising under or based upon this Agreement.
4.6. Additional Rights in the Event of Death
In the event that the Employee's employment is terminated as a result
of his death, the Employee's estate and/or his beneficiaries shall be entitled
to the payments and benefits set forth in this Section 4.6 in addition to such
other applicable rights as may be set forth elsewhere in this Agreement:
(a) Target Bonus. The Employee's estate shall be entitled to
receive the Target Bonus that the deceased employee would have been entitled to
have received in the year in which the death occurred.
<PAGE>
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(b) Insurance Benefits, etc. The Company shall pay the cost
for dependents of the Employee for insurance coverage that they are entitled to
obtain from the Company following the Employee's death pursuant to COBRA but not
less than 18 months.
(c) Options. All options of the Employee under the ISO Plan
(or similar plan) which have not vested as of Employee's death and which would
vest within one year thereof shall vest immediately upon the Employee's death
and shall remain exercisable by the Employee's estate for the shorter of 18
months following the Employee's death and their original term. All loans to the
Employee in connection with the prior exercise of any options under the ISO Plan
(or similar plan) shall be due the earlier of 18 months following the Employee's
death and their original term.
4.7. Additional Rights in the Event of Termination by
Resignation Other than for Good Reason
In the event that the Employee terminates his employment pursuant to
Section 4.1 without Good Reason, he shall be entitled to the rights set forth in
this Section 4.7 in addition to such other applicable rights as may be set forth
elsewhere in this Agreement:
(a) Options. Options of the Employee under the ISO Plan (or
similar plan) shall vest as of Employee's Termination Date and shall become
immediately exercisable so that the indicated percentage of the total options
which have been granted shall have vested based on the elapsed time between the
date of Initial Public Offering and the Termination Date.
Elapsed Time Total % Vested
------------ --------------
Less than six months 0%
At least six months and less 30%
than one year
At least one year and less 60%
than two years
At least two years and less 80%
than three years
At least three years 100%
The Company shall issue to the Employee within 30 days of the Termination Date
an amount of new options as separate securities in exchange for and in an amount
equal to the Employee's vested ISO Plan options. Such new options shall have the
same exercise price and other terms as the ISO Plan options including a
requirement that these options be registered under applicable securities laws if
the ISO Plan options are registered. All loans to the Employee in connection
with the prior exercise of any options under the ISO Plan (or similar plan)
shall remain unaffected and will remain on their original terms.
<PAGE>
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4.8. Additional Rights in the Event of
Termination for Employee's Misconduct
In the event that the Company terminates Employee's employment with
the Company pursuant to Section 4.2 for Employee's Misconduct, Employee shall be
entitled to the rights set forth in this Section 4.8 in addition to such other
applicable rights as may be set forth elsewhere in this Agreement:
(a) Options. All options of the Employee under the ISO Plan
(or similar plan) which have not vested as of employee's Termination Date shall
lapse and shall not be exercisable. All previously vested options shall remain
exercisable for the shorter of 90 days following the Termination Date and their
original term. All loans to the Employee in connection with the prior exercise
of any options under the ISO Plan (or similar plan) shall be due the earlier of
90 days following the Employee's Termination Date and their original term.
4.9 Non-exclusivity of Rights
Nothing in this Agreement shall prevent or limit Employee's
continuing or future participation in any plan, program, policy or practice
provided by the Company for which Employee may qualify, nor shall anything
herein limit or otherwise affect such rights as Employee may have under any
other contract or agreement with the Company. Amounts which are vested benefits
or which Employee is otherwise entitled to receive under any plan, policy,
practice or program of or any contract or agreement with the Company at or
subsequent to the Termination Date shall be payable in accordance with such
plan, policy, practice or program or contract or agreement except as explicitly
modified by this Agreement.
4.10. Company to Pay Benefits During Pendency of Dispute
Either party may, within ten (10) days after its receipt of a Notice
of Termination given by the other party, provide notice to the other party that
a dispute exists concerning the termination, in which event such dispute shall
be resolved in accordance with Article VI. Notwithstanding the pendency of any
such dispute and notwithstanding any provision herein to the contrary, the
Company will (i) continue to pay Employee the Base Salary in effect when the
notice giving rise to the dispute was given and (ii) continue Employee as a
participant in all compensation and benefit plans in which Employee was
participating when the notice giving rise to the dispute until the dispute is
finally resolved or, with respect to a Notice of Employee, the date of
<PAGE>
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termination specified in such notice, if earlier, but, in each case, not past
the Expiration Date. If (x)(i) the Company gives a Notice of Termination to
Employee and (ii) Employee disputes the termination as contemplated by this
Section 4.10, or (y)(i) the Employee gives a Notice of Termination for Good
Reason and (ii) the Company disputes such termination as contemplated by this
Section 4.10, and, in either case, (z) such dispute is finally resolved in favor
of the Company in accordance with Article VI, then Employee shall be required to
repay to the Company amounts paid to Employee under this Section 4.10 (including
the value of benefits received) but only if, and to the extent, Employee is not
otherwise entitled to receive such amounts under this Agreement.
ARTICLE V
Confidential Information and Non-Competition
5.1. Confidential Information
(a) Employee recognizes that the services to be performed by
him hereunder are special, unique, and extraordinary and that, by reason of his
employment with the Company, he may acquire Confidential Information concerning
the operation of the Company, the use or disclosure of which would cause the
Company substantial loss and damages which could not be readily calculated and
for which no remedy at law would be adequate. Accordingly, Employee agrees that
he will not (directly or indirectly) at any time, whether during or after his
employment hereunder, (i) knowingly use for an improper personal benefit any
Confidential Information that he may learn or has learned by reason of his
employment with the Company or (ii) disclose any such Confidential Information
to any Person except (A) in the performance of his obligations to the Company
hereunder, (B) as required by applicable law, (C) in connection with the
enforcement of his rights under this Agreement, (D) in connection with any
disagreement, dispute or litigation (pending or threatened) between Employee and
the Company or (E) with the prior written consent of the Board of Directors. As
used herein, "Confidential Information" includes information with respect to the
Company's products, facilities and methods, research and development, trade
secrets and other intellectual property, systems, patents and patent
applications, procedures, manuals, confidential reports, product price lists,
customer lists, financial information, business plans, prospects or
opportunities; provided, however, that such term, shall not include any
information that (x) is or becomes generally known or available other than as a
result of a disclosure by Employee or (y) is or becomes known or available to
Employee on a non-confidential basis from a source (other than the Company)
which, to Employee's knowledge, is not prohibited from disclosing such
information to Employee by a legal, contractual, fiduciary or other obligation
to the Company.
<PAGE>
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(b) Employee confirms that all Confidential Information is
the exclusive property of the Company. All business records, papers and
documents kept or made by Employee while employed by the Company relating to the
business of the Company shall be and remain the property of the Company at all
times. Upon the request of the Company at any time, Employee shall promptly
deliver to the Company, and shall retain no copies of, any written materials,
records and documents made by Employee or coming into his possession while
employed by the Company concerning the business or affairs of the Company other
than personal materials, records and documents (including notes and
correspondence) of Employee not containing proprietary information relating to
such business or affairs. Notwithstanding the foregoing, Employee shall be
permitted to retain copies of, or have access to, all such materials, records
and documents relating to any disagreement, dispute or litigation (pending or
threatened) between Employee and the Company.
(c) The Company recognizes that the Employee maintains his
contacts and his domain name "DAVIDGLADSTONE.COM" on the computer system and
that the list of contacts and his domain name will remain the exclusive
ownership of the Employee and that information shall not be deemed confidential
or subject to the terms of sections 5.1 or 5.2.
5.2. Non-Competition
(a) While employed hereunder and for the period of (i) one
(1) year thereafter or (ii) two (2) years after the Termination Date, if this
Agreement is terminated earlier and the Employee is entitled to receive
compensation and benefits under Section 4.5 (the "Restricted Period"), Employee
shall not, unless he receives the prior written consent of the Board of
Directors, own an interest in, manage, operate, join, control, lend money or
render financial or other assistance to or participate in or be connected with,
as an officer, employee, partner, stockholder, consultant or otherwise, any
Person which competes with the Company in investing or consulting with small and
medium sized businesses in the United States; provided, however, that the
foregoing restriction shall apply only to (i) those areas where the Company was
actually doing business on the Termination Date and (ii) those areas in respect
of which the Company actively and diligently conducted at any time during the
12-month period ended on the Termination Date an analysis to determine whether
or not it would commence doing business in such areas but, in the case of each
such area, only if the Company (A) retains on the Termination Date a reasonable
prospect of doing business in such areas and (B) gives Employee written notice
of the name and location of such county within 15 days after the Termination
Date and, provided finally, that the foregoing restriction shall not apply to
any areas where the Company ceases to actively conduct business. Without
limiting the generality of the foregoing, during the Restricted Period, Employee
shall not, unless he receives the prior written consent of the Board of
Directors, own an interest in, manage, operate, join, control, lend money or
render financial or other assistance to or participate in or be connected with,
as an officer, employee, partner, stockholder, consultant or otherwise, (A) any
Person (x) which competes with the Company in investing or consulting with small
<PAGE>
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and medium sized businesses in the United States with regard to change of
control transactions in which the transaction utilizes employee stock ownership
plans, or (y) which provides or proposes to provide services to any Person which
is a client of the Company as of the Termination Date or to which the Company
has outstanding loans or in which the Company then has investments (including
warrants or options), or (B) any potential client of the Company with which the
Company has discussed a client, loan or investment relationship within 12 months
prior to, as applicable, the end of Employee's employment or the Termination
Date. Notwithstanding the foregoing, in the event (i) Employee is entitled to
receive compensation and benefits under Section 4.5, Employee may terminate this
Section 5.2(a) by renouncing and releasing the obligation of the Company to pay
any future compensation or benefits under Sections 4.5 (a) and (b), but such
termination shall not apply to any other provision of this Agreement including,
without limitation, Section 5.1; (ii) the Company terminates the Employee for
Misconduct, this Section 5.2(a) shall not apply; and (iii) the Employee
terminates his employment without Good Reason, this Section 5.2(a) shall apply
for one year from the Closing of the IPO. Nothing under this Section 5.2(a)
shall be deemed to limit the Employee from conducting activities permitted
pursuant to Section 2.3(c) hereof.
(b) In addition to the restrictions set forth in Section
5.2(a), for one year from the closing of the IPO, in the event that (i) the
Company terminates the Employee for Misconduct or (ii) the Employee terminates
his employment pursuant to Section 4.1 without Good Reason, Employee shall not,
unless he receives the prior written consent of the Board of Directors, own an
interest in, manage, operate, join, control, lend money or render financial or
other assistance to or participate in or be connected with, as an officer,
employee, partner, stockholder, consultant or otherwise, (A) any Person (x)
which competes with the Company in investing or consulting with small and medium
sized businesses in the United States with regard to change of control
transactions in which the transaction utilizes employee stock ownership plans,
or (y) which provides or proposes to provide services to any Person which is a
client of the Company as of the Termination Date or to which the Company has
outstanding loans or in which the Company then has investments (including
warrants or options), or (B) any potential client of the Company with which the
Company has discussed a client, loan or investment relationship within 12 months
prior to, as applicable, the end of Employee's employment or the Termination
Date. Nothing under this Section 5.2(b) shall be deemed to limit the Employee
from conducting activities permitted pursuant to Section 2.3(c) hereof.
(c) Employee has carefully read and considered the
provisions of this Section 5.2 and, having done so, agrees that the restrictions
set forth in this Section 5.2 (including the Restricted Period, scope of
activity to be restrained and the geographical scope) are fair and reasonable
and are reasonably required for the protection of the interests of the Company,
its officers, directors, employees, creditors and shareholders. Employee
understands that the restrictions contained in this Section 5.2 may limit his
ability to engage in a business similar to the Company's business, but
acknowledges that he will receive sufficiently high remuneration and other
benefits from the Company hereunder to justify such restrictions.
<PAGE>
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(d) During the Restricted Period, Employee shall not,
whether for his own account or for the account of any other Person (excluding
the Company), intentionally (i) solicit, endeavor to entice or induce any
employee of the Company to terminate his employment with the Company or accept
employment with anyone else or (ii) interfere in a similar manner with the
business of the Company, except for those employees who the Company and Employee
agree are exempt from the applicability of this paragraph at the time of hiring.
(e) In the event that any provision of this Section 5.2
relating to the Restricted Period or the areas of restriction shall be declared
by a court of competent jurisdiction to exceed the maximum time period or areas
such court deems reasonable and enforceable, the Restricted Period or areas of
restriction deemed reasonable and enforceable by the court shall become and
thereafter be the maximum time period and/or areas.
5.3. Stock Ownership
Nothing in this Agreement shall prohibit Employee from acquiring or
holding any issue of stock or securities of any Person that has any securities
registered under Section 12 of the Exchange Act, listed on a national securities
exchange or quoted on the automated quotation system of the National Association
of Securities Dealers, Inc. so long as (i) Employee is not deemed to be an
"affiliate" of such Person as such term is used in paragraphs (c) and (d) of
Rule 145 under the Securities Act of 1933, as amended, and (ii) Employee and
members of his immediate family do not own or hold more than 3% of any voting
securities of any such Person.
5.4. Injunctive Relief
Employee acknowledges that a breach of any of the covenants contained
in this Article V may result in material irreparable injury to the Company for
which there is no adequate remedy at law, that it will not be possible to
measure damages for such injuries precisely and that, in the event of such a
breach, any payments remaining under the terms of this Agreement shall cease and
the Company shall be entitled to obtain a temporary restraining order or a
preliminary or permanent injunction restraining Employee from engaging in
activities prohibited by this Article V or such other relief as may required to
specifically enforce any of the covenants contained in this Article V. Employee
agrees to and hereby does submit to in personam jurisdiction before each and
every such court for that purpose.
ARTICLE VI
Dispute Resolution
In the event a dispute shall arise between the parties as to whether
the provisions of this Agreement have been complied with (a "Dispute"), the
parties agree to resolve such Dispute in accordance with the following
procedure:
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(a) A meeting shall be held promptly between the Parties,
attended by (in the case of the Company) by one or more individuals with
decision-making authority regarding the Dispute, to attempt in good faith to
negotiate a resolution of the Dispute.
(b) If, within 10 days after such meeting, the parties have
not succeeded in negotiating a resolution of the Dispute, the parties agree to
submit the Dispute to mediation in accordance with the Commercial Mediation
Rules of the American Arbitration Association except that Disputes with regard
to the existence of a Disability shall be resolved in accordance with the
definition of the term "Disability" above.
(c) The parties will jointly appoint a mutually acceptable
mediator, seeking assistance in such regard from the American Arbitration
Association if they have been unable to agree upon such appointment within 10
days following the 10-day period referred to in clause (b) above.
(d) Upon appointment of the mediator, the parties agree to
participate in good faith in the mediation and negotiations relating thereto for
15 days.
(e) If the parties are not successful in resolving the
Dispute through mediation within such 15-day period, the parties agree that the
Dispute shall be settled by arbitration in accordance with the Expedited
Procedures of the Commercial Arbitration Rules of the American Arbitration
Association.
(f) The fees and expenses of the mediator/arbitrators shall
be borne solely by the non-prevailing party or, in the event there is no clear
prevailing party, as the mediator/arbitrators deem appropriate.
(g) The Company shall reimburse Employee, on a current
basis, for 50% of all reasonable legal fees and expenses, if any, incurred by
Employee in connection with any Dispute; provided, however, that in the event
the resolution of such Dispute in accordance with this Article VI includes a
finding denying, in all material respects, Employee's claims in such Dispute,
Employee shall be required to reimburse the Company, over a period not to exceed
12 months from the date of such resolution, for all sums advanced to Employee
with respect to such Dispute pursuant to this paragraph (g).
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(h) Except as provided above, each party shall pay its own
costs and expenses (including, without limitation, attorneys' fees) relating to
any mediation/arbitration proceeding conducted under this Article VI.
(i) All mediation/arbitration conferences and hearings
will be held in the greater Washington, D.C. area.
(j) In the event there is any disputed question of law
involved in any arbitration proceeding, such as the proper legal interpretation
of any provision of this Agreement, the arbitrators shall make separate and
distinct findings of all facts material to the disputed question of law to be
decided and, on the basis of the facts so found, express their conclusion of the
question of law. The facts so found shall be conclusive and binding on the
parties, but any legal conclusion reached by the arbitrators from such facts may
be submitted by either party to a court of law for final determination by
initiation of a civil action in the manner provided by law. Such action, to be
valid, must be commenced within 20 days after receipt of the arbitrators'
decision. If no such civil action is commenced within such 20-day period, the
legal conclusion reached by the arbitrators shall be conclusive and binding on
the parties. Any such civil action shall be submitted, heard and determined
solely on the basis of the facts found by the arbitrators. Neither of the
parties shall, or shall be entitled to, submit any additional or different facts
for consideration by the court. In the event any civil action is commenced under
this paragraph (b), the party who prevails or substantially prevails (as
determined by the court) in such civil action shall be entitled to recover from
the other party all costs, expenses and reasonable attorneys' fees incurred by
the prevailing party in connection with such action and on appeal.
(k) Except as limited by paragraph (b) above, the parties
agree that judgment upon the award rendered by the arbitrators may be entered in
any court of competent jurisdiction. In the event legal proceedings are
commenced to enforce the rights awarded in an arbitration proceeding, the party
who prevails or substantially prevails in such legal proceeding shall be
entitled to recover from the other party all costs, expenses and reasonable
attorneys' fees incurred by the prevailing party in connection with such legal
proceeding and on appeal.
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(l) Except as provided above, (i) no legal action may be
brought by either party with respect to any Dispute and (ii) all Disputes shall
be determined only in accordance with the procedures set forth above.
ARTICLE VII
Miscellaneous
7.1. No Mitigation or Offset
The provisions of this Agreement are not intended to, nor shall they
be construed to, require that Employee mitigate the amount of any payment
provided for in this Agreement by seeking or accepting other employment, nor
shall the amount of any payment provided for in this Agreement be reduced by any
compensation earned by Employee as the result of employment by another employer
or otherwise. Without limitation of the foregoing, the Company's obligations to
make the payments to Employee required under this Agreement and otherwise to
perform its obligations hereunder shall not be affected by any set off,
counterclaim, recoupment, defense or other claim, right or action that the
Company may have against Employee, except that the Company may deduct from any
amount required to be reimbursed to the Company by Employee under Section 4.7 or
Article VI(a) the amount of any payment which the Company is then required to
make to Employee hereunder.
7.2. Assignability
The obligations of Employee hereunder are personal and may not be
assigned or delegated by Employee or transferred in any manner whatsoever, nor
are such obligations subject to involuntary alienation, assignment or transfer.
The Company shall have the right to assign this Agreement and to delegate all
rights, duties and obligations hereunder as provided in Section 7.5.
7.3. Notices
All notices and all other communications provided for in the
Agreement shall be in writing and addressed (i) if to the Company, at its
principal office address or such other address as it may have designated by
written notice to Employee for purposes hereof, directed to the attention of the
Board of Directors with a copy to the Secretary of the Company and (ii) if to
Employee, at his residence address on the records of the Company or to such
other address as he may have designated to the Company in writing for purposes
hereof. Each such notice or other communication shall be deemed to have been
duly given when delivered or mailed by United States registered mail, return
receipt requested, postage prepaid, except that any notice of change of address
shall be effective only upon receipt.
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7.4. Severability
The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provision of this
Agreement, which shall remain in full force and effect.
7.5. Successors: Binding Agreement
(a) The Company will require any successor (whether direct
or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business or assets of the Company, by agreement in form
and substance reasonable acceptable to Employee, to expressly assume and agree
to perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession had taken place.
Failure of the Company to obtain such agreement prior to the effectiveness of
any such succession shall be a breach of this Agreement. As used herein, the
term "Company" shall include any successor to its business and/or assets as
aforesaid which executes and delivers the Agreement provided for in this Section
7.5 or which otherwise becomes bound by all terms and provisions of this
Agreement by operation of law.
(b) This Agreement and all rights of Employee hereunder
shall inure to the benefit of and be enforceable by Employee's personal or legal
representatives, executors, administrators, successors, heirs, distributes,
devisees and legatees. If Employee should die while any amounts would be payable
to him hereunder if he had continued to live, all such amounts, unless otherwise
provided herein, shall be paid in accordance with the terms of this Agreement to
Employee's devisee, legatee, or other designee or, if there be no such designee,
to Employee's estate.
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7.6. Tax Matters
(a) The Company shall withhold from all payments hereunder
all applicable taxes (federal, state or other) which it is required to withhold
therefrom unless Employee has otherwise paid (or made other arrangements
satisfactory) to the Company the amount of such taxes.
(b) Notwithstanding anything to the contrary in this
Agreement, in the event that any payment or distribution by Company or any
affiliate of Company to or for the benefit of Employee, whether paid or payable
or distributed or distributable pursuant to the terms of this Agreement or
otherwise (a "Payment"), would be subject to the excise tax imposed by Section
4999 of the Internal Revenue Code of 1986, as amended, or any interest or
penalties with respect to such excise tax (such excise tax, together with any
such interest or penalties, are hereinafter collectively referred to as the
"Excise Tax"), Company shall pay to Employee an additional payment (a "Gross-up
Payment") in an amount such that after payment by Employee of all taxes
(including any interest or penalties imposed with respect to such taxes),
including any Excise Tax imposed on any Gross-up Payment, Employee retains an
amount of the Gross-up Payment equal to the Excise Tax imposed upon the
Payments. Company and Employee shall make an initial determination as to whether
a Gross-up Payment is required and the amount of any such Gross-up Payment.
Employee shall notify Company immediately in writing of any claim by the
Internal Revenue Service which, if successful, would require Company to make a
Gross-up Payment (or a Gross-up Payment in excess of that, if any, initially
determined by Company and Employee) promptly and in any event within 15 days of
the receipt of such claim. Company shall notify Employee in writing at least
five days prior to the due date of any response required with respect to such
claim if it plans to contest the claim. If Company decides to contest such
claim, Employee shall cooperate fully with Company in such action; provided,
however, Company shall bear and pay directly or indirectly all costs and
expenses (including additional interest and penalties) incurred in connection
with such action and shall indemnify and hold Employee harmless, on an after-tax
basis, for any Excise Tax or income tax, including interest and penalties with
respect thereto, imposed as a result of Company's action. If, as a result of
Company's action with respect to a claim, Employee receives a refund of any
amount paid by Company with respect to such claim, Employee shall promptly pay
such refund to Company. If Company fails to timely notify Employee whether it
will contest such claim or Company determines not to contest such claim, then
Company shall immediately pay to Employee the portion of such claim, if any,
which it has not previously paid to Employee.
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7.7 Amendments and Waivers
No provision of this Agreement may be modified, waived or discharged
unless such waiver, modification or discharge is agreed to in writing and signed
by Employee and such member of the Board of Directors as may be specifically
authorized by the Board of Directors. No waiver by either party hereto at any
time of any breach by the other party hereto of, or in compliance with, any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time.
7.8. Entire Agreement, Termination of Other Agreements
This Agreement is an integration of the parties' agreement and no
agreement or representations, oral or otherwise, express or implied, with
respect to the subject matter hereof have been made by either party which are
not set forth expressly in this Agreement.
7.9. Governing Law
THE VALIDITY, INTERPRETATION, CONSTRUCTION AND PERFORMANCE OF THIS
AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF MARYLAND WITHOUT REGARD
TO ITS CONFLICT OF LAWS PROVISION.
7.10. Counterparts
This Agreement may be executed in or more counterparts, each of which
shall be deemed to be an original, but all of which together will constitute one
and the same instrument.
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IN WITNESS WHEREOF, the parties have executed this Agreement
effective as of the date first above written.
AMERICAN CAPITAL STRATEGIES, LTD.
By: ____________________________
Malon Wilkus, President
EMPLOYEE:
__________________________________
David Gladstone
1161 Crest Lane
McLean, VA 22101
Exhibit 2.i.4
DRAFT (8/12/97)
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is entered into as of
August __, 1997 (the "Effective Date") by and between AMERICAN CAPITAL
STRATEGIES, LTD., a Delaware corporation (the "Company"), and MALON WILKUS (the
"Employee").
W I T N E S S E T H:
WHEREAS, Employee is the President of the Company; and
WHEREAS, it is in the interests of the Corporation that Employee's
service continue to be available to the Corporation.
NOW, THEREFORE, in consideration of the mutual covenants,
representations, warranties and agreements contained herein, and for other
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto agree as follows:
ARTICLE I
Definitions and Interpretations
1.1. Definitions
For purposes of this Agreement, except as otherwise expressly
provided or unless the context otherwise requires, the following terms shall
have the following respective meanings:
"Annual Bonus Plan" shall have the meaning specified in Section 3.2.
"Base Salary" shall have the meaning specified in Section 3.1.
"Board of Directors" shall mean the Board of Directors of the
Company.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Compensation Committee" shall mean the Compensation Committee of the
Board of Directors or such other entity as may be designated for a particular
function by the Board of Directors.
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"Confidential Information" shall have the meaning specified in
Section 5.1(a).
"Continuation Period" shall have the meaning specified in Section
4.4(a).
"Disability" shall mean a physical or mental condition of Employee
that, in the good faith judgment of not less than a majority of the entire
membership of the Board of Directors, prevents Employee from being able to
perform the services required under this Agreement and which results in the
Employee becoming eligible for long-term disability benefits (if such benefits
are provided by the Company). If any dispute arises as to whether a Disability
has occurred, or whether a Disability has ceased and the Employee is able to
resume duties, then such dispute shall be referred to a licensed physician
appointed by the president of the Medical Society or similar organization in
Washington, D.C., at the request of either party. The Employee shall submit to
such examinations and provide information as such physician may request and the
determination of such physician as to the Employee's physical or mental
condition shall be binding and conclusive on the parties. The Company shall pay
the cost of any such physician and examination.
"Dispute" shall have the meaning specified in Article VI.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Executive Officers" shall refer to the President, the Chairman of
the Board, all Executive Vice Presidents and all other officers designated as
Executive Officers by the Board of Directors.
"Expiration Date" shall have the meaning specified in Section 2.2.
"Good Reason" shall mean any of the following:
(1) without Employee's express written consent, a material
adverse alteration in the nature or status of Employee's position,
functions, duties or responsibilities with the Company;
(2) a material breach by the Company of any material provision
of this Agreement which,
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if capable of being remedied, remains unremedied for more than 15
days after written notice thereof is given by Employee to the
Company;
(3) any purported termination by the Company of Employee's
employment not in accordance with the provisions of this Agreement;
(4) the failure of the Company to obtain any assumption
agreement required by Section 7.5(a);
(5) the amendment, modification or repeal of any provision of
the Company's Certificate of Incorporation or by-laws, if such
amendment, modification or repeal would materially adversely affect
Employee's rights to indemnification by the Company; or
(6) change of control of the Company following an IPO which
would result in the control of 25% or more of the Company's voting
shares by one Person or a group of Persons acting in concert other
than such entities as may own voting securities on the date hereof.
"IPO" shall mean an initial underwritten public offering of
securities of the Corporation pursuant to a Securities and Exchange Commission
registration statement other than Form S-8 or Form S-14.
"ISO Plan" shall have the meaning specified in Section 3.3.
"Misconduct" shall mean one or more of the following:
(i) the willful and continued failure by Employee to perform
substantially his duties described in Section 2.3 (other than any
such failure resulting from Employee's incapacity due to physical or
mental illness) after two (2) written notices of such failure have
been given to Employee by the Company and Employee has had a
reasonable period (not to exceed 15 days from the second notice) to
correct such failure;
(ii) the commission by Employee of acts that are dishonest and
demonstrably injurious to the Company (monetarily or otherwise) in
any material respect; or
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(iii) a material breach or violation by Employee of (a) any
material provision of this Agreement or (b) any material Company
employment policy, including its Stock Trading Policies and
Procedures which the Company will publish from time to time, which,
if capable of being remedied, remains unremedied for more than 15
days after written notice thereof is given to Employee by the
Company.
For purposes of this definition, no act or failure to act on
Employee's part shall be considered "Misconduct" if done or omitted to be done
by Employee in good faith and in the reasonable belief that such act or failure
to act was in the best interest of the Company or in furtherance of Employee's
duties and responsibilities described in Section 2.3.
"Notice of Discontinuance" shall have the meaning specified in
Section 2.2.
"Notice of Termination" shall mean a notice purporting to terminate
Employee's employment in accordance with Section 4.1 or 4.2. Such notice shall
specify the effective date of such termination, which date shall not be less
than 30 (one (1) day in the case of a termination by the Company for Misconduct)
or more than 60 days after the date such notice is given. If such termination is
by Employee for Good Reason or by the Company for Disability or Misconduct, such
notice shall set forth in reasonable detail the reason for such termination and
the facts and circumstances claimed to provide a basis therefor. Any notice
purporting to terminate Employee's employment which is not in compliance with
the requirements of this definition shall be ineffective.
"Person" shall mean and include an individual, a partnership, a joint
venture, a corporation, a trust and an unincorporated organization.
"Target Bonus" shall have the meaning specified in Section 3.2.
"Term" shall have the meaning specified in Section 2.2.
"Termination Date" shall mean the termination date specified in a
Notice of Termination delivered in accordance with this Agreement.
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1.2. Interpretations
(a) In this Agreement, unless a clear contrary intention
appears, (i) the words "herein," "hereof" and "hereunder" and other words of
similar import refer to this Agreement as a whole and not to any particular
Article, Section or other subdivision, (ii) reference to any Article or Section,
means such Article or Section hereof, (iii) the words "including" (and with
correlative meaning "include") means including, without limiting the generality
of any description preceding such term, and (iv) where any provision of this
Agreement refers to action to be taken by either party, or which such party is
prohibited from taking, such provision shall be applicable whether such action
is taken directly or indirectly by such party.
(b) The Article and Section headings herein are for
convenience only and shall not affect the construction hereof.
ARTICLE II
Employment: Term, Positions and Duties, Etc.
2.1. Employment
The Company agrees to employ Employee and Employee agrees to accept
employment with the Company, in each case on the terms and conditions set forth
in this Agreement.
2.2. Term of Employment
Unless sooner terminated pursuant to Article IV, the term of
Employee's employment under this Agreement (the "Term") shall commence on the
Effective Date and shall continue until the fifth anniversary of the Effective
Date (the "Expiration Date"); provided, however, that on the third anniversary
of the Effective Date, and on each anniversary thereafter (each such anniversary
being an "Extension Anniversary"), the Expiration Date shall be automatically
extended one additional year unless, at least six months prior to an Extension
Anniversary, (i) either party shall give written notice to the other (a "Notice
of Discontinuance") that no such automatic extension shall occur on the next
succeeding Extension Anniversary and each Extension Anniversary thereafter, or
(ii) either party shall give a Notice of Termination to the other party pursuant
to Section 4.1 or 4.2, as the case may
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be. No Notice of Discontinuance given by the Company shall be effective unless
given pursuant to instructions set forth in a resolution duly adopted by the
affirmative vote of a least a majority of the entire membership of the Board of
Directors.
2.3. Positions and Duties
(a) While employed hereunder, Employee shall serve as the
President of the Company, and shall have and may exercise all of the powers,
functions, duties and responsibilities normally attributable to such office,
including (without limitation) such duties and responsibilities as are set forth
with respect to such office in the Company's Certificate of Incorporation and
By-laws (as from time to time in effect). Employee shall have such additional
duties and responsibilities commensurate with such offices as from time to time
may be reasonably assigned to him by the Board of Directors. While employed
hereunder, Employee shall (i) report directly to the Board of Directors of the
Company and (ii) observe and comply with all lawful policies, directions and
instructions of the Board of Directors which are consistent with the foregoing
provisions of this paragraph (a).
(b) The Company agrees to use its reasonable best efforts to
cause Employee to be elected or appointed, or re-elected or re-appointed, as a
member of the Board of Directors and a member of its Executive Committee (if
such a committee exists), at all times during the Term.
(c) While employed hereunder, Employee shall (i) devote
substantially all of his business time, attention, skill and efforts to the
faithful and efficient performance of his duties hereunder and (ii) not accept
employment with any Person other than with the Company. Notwithstanding the
foregoing, Employee may engage in the following activities so long as they do
not interfere in any material respect with the performance of Employee's duties
and responsibilities hereunder: (i) serve on corporate, civic, religious,
educational or charitable boards or committees and (ii) manage his personal
investments.
(d) While employed hereunder, Employee shall conduct himself
in such a manner as not to knowingly prejudice, in any material respect, the
reputation of the Company in the fields of business in
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which it is engaged or with the investment community or the public at large.
2.4. Place of Employment
Employee's place of employment hereunder shall be at the Company's
offices in the greater Washington, D.C. area or such other area that is mutually
agreeable to both parties.
ARTICLE III
Compensation and Benefits
3.1. Base Salary
(a) For services rendered by Employee under this Agreement,
the Company shall pay to Employee an annual base salary ("Base Salary") of
$150,000. The Board of Directors shall review the Base Salary at least annually
and, subject to paragraph (b) below, may adjust the amount of the Base Salary at
any time as the Board of Directors may deem appropriate in their sole
discretion.
(b) The amount of the Base Salary may not be decreased
without the prior written approval of the Employee except that if the Board of
Directors increases the Base Salary as provided in the last sentence of
paragraph (a) above, the Board of Directors may thereafter decrease the Base
Salary by an amount not to exceed the amount of such increase, but only if a
proportionally similar decrease is made to the base compensation of all other
Executive Officers of the Company; provided, however, that in no event may the
Base Salary be decreased below $150,000, without the prior written consent of
Employee.
(c) The Base Salary shall be payable in accordance with the
Company's payroll practice for Executive Officers as earned.
3.2 Annual Bonus Plan
During the Term, the Company shall maintain and the Employee shall be
entitled to participate in an incentive bonus plan (the "Annual Bonus Plan"),
which will provide for the payment of cash bonuses to eligible executives of the
Company at specified times during the year and within 90 days of the end of each
fiscal year based on the Company's financial performance and other appropriate
factors for that year or a portion thereof.
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Under the Annual Bonus Plan, Employee shall be eligible to earn a target bonus
(the "Target Bonus") each year equal to 200% of Employee's Base Salary for such
year based on criteria established by the Compensation Committee, and the
performance of the Company against such criteria. The establishment of such
criteria and of the necessary performance targets for partial or full earning of
the Target Bonus shall be at the sole reasonable discretion of the Compensation
Committee; provided, however, that Employee shall be entitled to a Target Bonus
each year equal to at least five percent (5%) of the maximum Target Bonus.
During the calendar year 1997 and the year in which the Expiration Date occurs,
the Target Bonus which would be payable shall be prorated and paid based on the
number of days in such year actually occurring during the Term.
3.3 Long-term Incentive Compensation
Upon the closing of the IPO, the Company shall have established a
long-term incentive compensation plan, which provides key employees of the
Company with ownership interests in the Company, as substantially set forth in
Attachment A hereto (the "ISO Plan"). Under the ISO Plan, Employee shall be
granted options to purchase ___% of the stock outstanding as of the IPO adjusted
upward for the additional shares issued pursuant to the exercise of any
underwriter's over-allotment option within thirty (30) days of the IPO.
One-third of such options will vest and become exercisable on each of the first
three anniversaries of the effectiveness of the IPO; provided, however, that
Employee may accelerate the vesting of any such options by agreeing to exercise
such options immediately and that for a period through the date on which such
options would have vested, not to sell, assign or convey any stock so purchased
(other than by laws of descent or distribution) and to grant the Company a call
option to repurchase such stock at the option exercise price if the options
would have been forfeited prior to their original vesting date as a result of
the Employee's subsequent termination of employment with the Company. To the
extent permissible, such options shall be characterized as Incentive Stock
Options as defined in Section 422 of the Code. The employee shall participate in
all other long-term compensation incentive plans of the Company in accordance
with their terms.
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3.4. Vacation
While employed hereunder, Employee shall be entitled to vacation
benefits in accordance with the vacation policy adopted by the Company from time
to time for senior executives in general, but in no event shall Employee's
annual vacation be less than 30 business days or such greater number of vacation
days as the Board of Directors may approve from time to time in its sole
discretion. Employee shall not be entitled to accumulate and carryover unused
vacation time from year to year, except to the extent permitted in accordance
with the Company's vacation policy for senior executives in general, but
Employee shall be entitled to compensation for unused accrued vacation time at
the end of each year.
3.5. Business Expenses
The Company shall, in accordance with the rules and policies that it
may establish from time to time for senior executives, reimburse Employee for
business expenses reasonably incurred in the performance of Employee's duties.
Requests for reimbursement for such expenses must be accompanied by appropriate
documentation. Examples of reimbursable expenses include parking, mileage
charges, air fares and hotel accommodations while traveling on Company business.
3.6. Other Benefits
Employee shall be entitled to receive all employee benefits, fringe
benefits and other perquisites that may be offered by the Company to its
Executive Officers as a group, including, without limitation, (i) participation
by Employee and, where applicable, Employee's dependents, in the various
employee benefit plans or programs (including, without limitation, pension
plans, profit sharing plans, stock plans, health plans, life insurance, parking
and disability insurance) generally provided to Executive Officers of the
Company, subject to meeting the eligibility requirements with respect to each of
such benefit plans or programs, (ii) club memberships, (iii) automobile
allowances, and (iv) financial planning allowances. However, nothing in this
Section 3.6 shall be deemed to prohibit the Company from making any changes in
any of the plans, programs or benefits described herein, provided such changes
apply to all similarly situated Executive Officers.
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3.7. Indemnification
The Company agrees to defend, indemnify and hold harmless the
Employee from and against any liability and expenses arising by reason of
Employee's acting as a director or officer of the Company or any Company
subsidiary or affiliate, or any portfolio company of the Company, in accordance
with and to the fullest extent permitted by law. The Company shall maintain
Directors and Officers liability insurance for the Employee in such amounts of
coverage as are reasonably available to the Company and to the extent such is
attainable at reasonable cost and are permitted by law.
ARTICLE IV
Termination of Employment
4.1. Termination by Employee
Employee may, at any time prior to the Expiration Date, terminate his
employment hereunder for any reason by delivering a Notice of Termination to the
Board of Directors.
4.2. Termination by the Company
The Company may, at any time prior to the Expiration Date, terminate
Employee's employment hereunder for any reason by delivering a Notice of
Termination to Employee; provided, however, that in no event shall the Company
be entitled to terminate Employee's employment prior to the Expiration Date
unless the Board of Directors shall duly adopt, by the affirmative vote of at
least a majority of the entire membership of the Board of Directors, a
resolution authorizing such termination. Should the board adopt such a
resolution, the Employee may resign in lieu of being terminated, but such
resignation shall otherwise be treated as a termination by the Company for
purposes of this Article IV.
4.3. Payment of Accrued Base Salary, Vacation Pay, etc.
(a) Promptly upon the termination of Employee's employment
for any reason (including death), the Company shall pay to Employee (or his
estate) a lump sum amount for (i) any unpaid Adjusted Base Salary earned
hereunder prior to the Termination Date, (ii) all unused vacation time accrued
by Employee as of the Termination Date in accordance with Section 3.4, (iii)
<PAGE>
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all unpaid benefits earned or vested, as the case may be, by Employee as of the
Termination Date under any and all incentive or deferred compensation plans or
programs of the Company and (iv) any amounts in respect of which Employee has
requested, and is entitled to, reimbursement in accordance with Section 3.5.
(b) A termination of Employee's employment in accordance
with this Agreement shall not alter or impair any of Employee's accrued rights
or benefits as of the Termination Date under any employee benefit plan or
program maintained by the Company, in each case except as provided therein or in
any written agreement entered into between the Company and Employee pursuant
thereto.
4.4. Additional Rights in Connection With Disability
In the event that the Company terminates an Employee by
delivering a Notice of Termination to Employee stating that such Termination is
by reason of a Disability, the Employee shall be entitled to the benefits and
payments set forth in this Section 4.4 in addition to such other applicable
rights as may be provided elsewhere in this Agreement:
(a) Base Salary and Target Bonus. The Company shall continue
to pay to Employee the Adjusted Base Salary in effect as of the date on which
the Notice of Termination was delivered for two (2) years following the
Termination Date (but in no event less than 365 days) (such period being the
"Continuation Period") which amount shall be reduced by any amount payable to
Employee under any disability plan maintained by the Company for the benefit of
Employee. In addition, the Employee shall be entitled to continue to participate
in the Annual Bonus Plan for two (2) years following the Termination Date with
the second anniversary of the Termination Date being the Expiration Date for
purposes of Section 3.2.
(b) Insurance Benefits, etc. The Company shall at all times
during the Continuation Period, without charge to Employee or Employee's
dependents, cause Employee and Employee's eligible dependents to be covered by
and to participate in, to the fullest extent allowable under the terms thereof,
all life, accidental death and dismemberment and health insurance plans and
programs that may be offered to the senior officers of the Company so that
Employee will receive, at all times
<PAGE>
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during the Continuation Period, the same benefits under such plans and programs
as Employee would have been entitled to receive had he remained an Executive
Officer of the Company. In no event shall Employee's continuation period for
purposes of Part 6 of Title I of the Employee Retirement Income Security Act of
1974, as amended ("COBRA"), begin prior to the end of Employee's coverage under
the Company's group health plan as provided in this paragraph (b).
(c) Options. All options of the Employee under the ISO Plan
(or similar plan) which have not vested as of Employee's Termination Date and
which would vest within one year of Employee's Termination Date shall vest and
shall become immediately exercisable. The Company shall issue to the Employee
within 30 days of the Termination Date an amount of new options as separate
securities in exchange for and in an amount equal to the Employee's vested ISO
Plan options. Such new options shall have the same exercise price and other
terms as the ISO Plan options including a requirement that these options be
registered under applicable securities laws if the ISO Plan options are
registered. All loans to the Employee in connection with the prior exercise of
any options under the ISO Plan (or similar plan) shall remain unaffected and
will remain on their original terms.
Should the Employee's Disability end during the pendency of the Term,
the Company may discontinue the payments contemplated by this Section 4.4 if it
offers to reemploy Employee under the terms of this Agreement, but no such offer
shall affect the terms of Section 4.4(c) above.
4.5. Additional Rights in Connection With Terminations
by Employee for Good Reason or by the Company for
Other than Misconduct or Disability
In the event that Employee terminates his employment
pursuant to Section 4.1 for Good Reason or if the Company terminates Employee's
employment with the Company pursuant to Section 4.2 for other than Misconduct or
a Disability, the Employee shall be entitled to the payments and benefits set
forth in this Section 4.5 in addition to such other applicable rights as may be
provided elsewhere in this Agreement:
(a) Base Salary and Target Bonus. The Company shall continue
to pay to Employee the Adjusted
<PAGE>
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Base Salary in effect as of the date on which the Notice of Termination for the
Continuation Period. In addition, the Employee shall be entitled to continue to
participate in the Annual Bonus Plan for two (2) years following the Termination
Date with the second anniversary of the Termination Date being the Expiration
Date for purposes of Section 3.2. The amount payable to Employee under this
paragraph (a) is in lieu of, and not in addition to, any severance payment due
to or become due to Employee under any separate agreement or contract between
Employee and the Company or pursuant to any severance payment plan, program or
policy of the Company.
(b) Insurance Benefits, etc. The Company shall at all times
during the Continuation Period, without charge to Employee or Employee's
dependents, cause Employee and Employee's eligible dependents to be covered by
and to participate in, to the fullest extent allowable under the terms thereof,
all life, accidental death and dismemberment and health insurance plans and
programs that may be offered to the senior officers of the Company so that
Employee will receive, at all times during the Continuation Period, the same
benefits under such plans and programs as Employee would have been entitled to
receive had he remained an Executive Officer of the Company; provided, however,
in the event Employee becomes covered during the Continuation Period by another
employer's group plan or programs which provide benefits to Employee and his
dependents comparable to those being provided to Employee under this paragraph
(b) (provided with respect to any such group health plan, such plan does not
contain any exclusion or limitation with respect to any pre-existing
conditions), then the Company's similar plans and programs shall no longer be
liable for any benefits under this paragraph (b). In no event shall Employee's
COBRA continuation period begin prior to the end of Employee's coverage under
the Company's group health plan as provided in this paragraph (b).
(c) Options. All options of the Employee under the ISO Plan
(or similar plan) which have not vested as of Employee's Termination Date and
which would vest within one year of Employee's Termination Date shall vest and
shall become immediately exercisable. The Company shall issue to the Employee
within 30 days of the Termination Date an amount of new options as separate
securities in exchange for and in an amount equal to the Employee's vested ISO
Plan options. Such new options shall have the same exercise price and other
<PAGE>
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terms as the ISO Plan options including a requirement that these options be
registered under applicable securities laws if the ISO Plan options are
registered. All loans to the Employee in connection with the prior exercise of
any options under the ISO Plan (or similar plan) shall remain unaffected and
will remain on their original terms.
(d) Release. Notwithstanding anything in this Section 4.5 to
the contrary, as a condition to the receipt of any benefit under this Section
4.5, Employee must first execute and deliver to the Company a mutual release as
set out in exhibit 4.5(d) hereto (which the Company shall be obligated to
execute upon Employee's delivery thereof), releasing the Company, its officers,
Board of Directors, employees and agents from any and all claims and from any
and all causes of action of any kind or character that Employee may have arising
out of Employee's employment with the Company or the termination of such
employment, but excluding any claims and causes of action that Employee may have
arising under or based upon this Agreement.
4.6. Additional Rights in the Event of Death
In the event that the Employee's employment is terminated as a result
of his death, the Employee's estate and/or his beneficiaries shall be entitled
to the payments and benefits set forth in this Section 4.6 in addition to such
other applicable rights as may be set forth elsewhere in this Agreement:
(a) Target Bonus. The Employee's estate shall be entitled to
receive the Target Bonus that the deceased employee would have been entitled to
have received in the year in which the death occurred.
(b) Insurance Benefits, etc. The Company shall pay the cost
for dependents of the Employee for insurance coverage that they are entitled to
obtain from the Company following the Employee's death pursuant to COBRA but not
less than 18 months.
(c) Options. All options of the Employee under the ISO Plan
(or similar plan) which have not vested as of Employee's death and which would
vest within one year thereof shall vest immediately upon the Employee's death
and shall remain exercisable by the Employee's estate for the shorter of 18
months following the Employee's death and their original term. All loans to the
Employee in connection with the prior exercise of any options under the ISO Plan
(or similar plan) shall
<PAGE>
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be due the earlier of 18 months following the Employee's death and their
original term.
4.7. Additional Rights in the Event of Termination by
Resignation Other than for Good Reason
In the event that the Employee terminates his employment pursuant to
Section 4.1 without Good Reason, he shall be entitled to the rights set forth in
this Section 4.7 in addition to such other applicable rights as may be set forth
elsewhere in this Agreement:
(a) Options. All options of the Employee under the ISO Plan
(or similar plan) which have not vested as of employee's Termination Date shall
lapse and shall not be exercisable. All previously vested options shall remain
exercisable for the shorter of 90 days following the Termination Date and their
original term. All loans to the Employee in connection with the prior exercise
of any options under the ISO Plan (or similar plan) shall be due the earlier of
90 days following the Employee's death and their original term. The Company
shall issue to the Employee within 30 days of the Termination Date an amount of
new options as separate securities in exchange for and in an amount equal to the
Employee's vested ISO Plan options. Such new options shall have the same
exercise price and other terms as the ISO Plan options including a requirement
that these options be registered under applicable securities laws if the ISO
Plan options are registered. All loans to the Employee in connection with the
prior exercise of any options under the ISO Plan (or similar plan) shall remain
unaffected and will remain on their original terms.
4.8. Rights in the Event of Termination
for Employee's Misconduct
In the event that the Company terminates Employee's employment with
the Company pursuant to Section 4.2 for Employee's Misconduct, Employee shall be
entitled to the rights set forth in this Section 4.8 in addition to such other
applicable rights as may be set forth elsewhere in this Agreement:
(a) Options. All options of the Employee under the ISO Plan
(or similar plan) which have not vested as of employee's Termination Date shall
lapse and shall not be exercisable. All previously vested options shall remain
exercisable for the shorter of 90 days
<PAGE>
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following the Termination Date and their original term. All loans to the
Employee in connection with the prior exercise of any options under the ISO Plan
(or similar plan) shall be due the earlier of 90 days following the Employee's
death and their original term.
4.9 Non-exclusivity of Rights
Nothing in this Agreement shall prevent or limit Employee's
continuing or future participation in any plan, program, policy or practice
provided by the Company for which Employee may qualify, nor shall anything
herein limit or otherwise affect such rights as Employee may have under any
other contract or agreement with the Company. Amounts which are vested benefits
or which Employee is otherwise entitled to receive under any plan, policy,
practice or program of or any contract or agreement with the Company at or
subsequent to the Termination Date shall be payable in accordance with such
plan, policy, practice or program or contract or agreement except as explicitly
modified by this Agreement.
4.10. Company to Pay Benefits During Pendency of Dispute
Either party may, within ten (10) days after its receipt of a Notice
of Termination given by the other party, provide notice to the other party that
a dispute exists concerning the termination, in which event such dispute shall
be resolved in accordance with Article VI. Notwithstanding the pendency of any
such dispute and notwithstanding any provision herein to the contrary, the
Company will (i) continue to pay Employee the Adjusted Base Salary in effect
when the notice giving rise to the dispute was given and (ii) continue Employee
as a participant in all compensation and benefit plans in which Employee was
participating when the notice giving rise to the dispute until the dispute is
finally resolved or, with respect to a Notice of Employee, the date of
termination specified in such notice, if earlier, but, in each case, not past
the Expiration Date. If (x)(i) the Company gives a Notice of Termination to
Employee and (ii) Employee disputes the termination as contemplated by this
Section 4.10, or (y)(i) the Employee gives a Notice of Termination for Good
Reason and (ii) the Company disputes such termination as contemplated by this
Section 4.10, and, in either case, (z) such dispute is finally resolved in favor
of the Company in accordance with Article VI, then Employee shall be required to
repay to the Company
<PAGE>
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amounts paid to Employee under this Section 4.10 (including the value of
benefits received) but only if, and to the extent, Employee is not otherwise
entitled to receive such amounts under this Agreement.
ARTICLE V
Confidential Information and Non-Competition
5.1. Confidential Information
(a) Employee recognizes that the services to be performed by
him hereunder are special, unique, and extraordinary and that, by reason of his
employment with the Company, he may acquire Confidential Information concerning
the operation of the Company, the use or disclosure of which would cause the
Company substantial loss and damages which could not be readily calculated and
for which no remedy at law would be adequate. Accordingly, Employee agrees that
he will not (directly or indirectly) at any time, whether during or after his
employment hereunder, (i) knowingly use for an improper personal benefit any
Confidential Information that he may learn or has learned by reason of his
employment with the Company or (ii) disclose any such Confidential Information
to any Person except (A) in the performance of his obligations to the Company
hereunder, (B) as required by applicable law, (C) in connection with the
enforcement of his rights under this Agreement, (D) in connection with any
disagreement, dispute or litigation (pending or threatened) between Employee and
the Company or (E) with the prior written consent of the Board of Directors. As
used herein, "Confidential Information" includes information with respect to the
Company's products, facilities and methods, research and development, trade
secrets and other intellectual property, systems, patents and patent
applications, procedures, manuals, confidential reports, product price lists,
customer lists, financial information, business plans, prospects or
opportunities; provided, however, that such term, shall not include any
information that (x) is or becomes generally known or available other than as a
result of a disclosure by Employee or (y) is or becomes known or available to
Employee on a non-confidential basis from a source (other than the Company)
which, to Employee's knowledge, is not prohibited from disclosing such
information to Employee by a legal, contractual, fiduciary or other obligation
to the Company.
<PAGE>
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(b) Employee confirms that all Confidential Information is
the exclusive property of the Company. All business records, papers and
documents kept or made by Employee while employed by the Company relating to the
business of the Company shall be and remain the property of the Company at all
times. Upon the request of the Company at any time, Employee shall promptly
deliver to the Company, and shall retain no copies of, any written materials,
records and documents made by Employee or coming into his possession while
employed by the Company concerning the business or affairs of the Company other
than personal materials, records and documents (including notes and
correspondence) of Employee not containing proprietary information relating to
such business or affairs. Notwithstanding the foregoing, Employee shall be
permitted to retain copies of, or have access to, all such materials, records
and documents relating to any disagreement, dispute or litigation (pending or
threatened) between Employee and the Company.
(c) The Company recognizes that the Employee maintains his
contacts on the computer system and that the list of contacts will remain the
exclusive ownership of the employee.
5.2. Non-Competition
(a) While employed hereunder and for the (i) a period of one
(1) year thereafter or (ii) the period of two (2) years after the Termination
Date, if this Agreement is terminated and the Employee is entitled to receive
compensation and benefits under either Section 4.5 or Section 4.7 (the
"Restricted Period"), Employee shall not, unless he receives the prior written
consent of the Board of Directors, own an interest in, manage, operate, join,
control, lend money or render financial or other assistance to or participate in
or be connected with, as an officer, employee, partner, stockholder, consultant
or otherwise, (A) any Person (x) which competes with the Company in investing or
consulting with small and medium sized businesses in the United States with
regard to change of control transactions in which the transaction utilizes
employee stock ownership plans, or (y) which provides or proposes to provide
services to any Person which is a client of the Company as of the Termination
Date or to which the Company has outstanding loans or in which the Company then
has investments (including warrants or options), or (B) any potential client of
the Company with which the Company has discussed a client, loan or
<PAGE>
-19-
investment relationship within 12 months prior to, as applicable, the end of
Employee's employment or the Termination Date. Notwithstanding the foregoing,
(i) in the event Employee is entitled to receive compensation and benefits under
Section 4.5, Employee may terminate this Section 5.2(a) by renouncing and
releasing the obligation of the Company to pay any future compensation or
benefits under Section 4.5, but such termination shall not apply to any other
provision of this Agreement including, without limitation, Section 5.1 and (ii)
in the event that the Employee terminates his employment pursuant to Section 4.1
without Good Reason, this Section 5.1 shall apply for only one (1) year after
the Termination Date.
(b) Employee has carefully read and considered the
provisions of this Section 5.2 and, having done so, agrees that the restrictions
set forth in this Section 5.2 (including the Restricted Period, scope of
activity to be restrained and the geographical scope) are fair and reasonable
and are reasonably required for the protection of the interests of the Company,
its officers, directors, employees, creditors and shareholders. Employee
understands that the restrictions contained in this Section 5.2 may limit his
ability to engage in a business similar to the Company's business, but
acknowledges that he will receive sufficiently high remuneration and other
benefits from the Company hereunder to justify such restrictions.
(c) During the Restricted Period, Employee shall not,
whether for his own account or for the account of any other Person (excluding
the Company), intentionally (i) solicit, endeavor to entice or induce any
employee of the Company to terminate his employment with the Company or accept
employment with anyone else or (ii) interfere in a similar manner with the
business of the Company.
(d) In the event that any provision of this Section 5.2
relating to the Restricted Period or the areas of restriction shall be declared
by a court of competent jurisdiction to exceed the maximum time period or areas
such court deems reasonable and enforceable, the Restricted Period or areas of
restriction deemed reasonable and enforceable by the court shall become and
thereafter be the maximum time period and/or areas.
<PAGE>
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5.3. Stock Ownership
Nothing in this Agreement shall prohibit Employee from acquiring or
holding any issue of stock or securities of any Person that has any securities
registered under Section 12 of the Exchange Act, listed on a national securities
exchange or quoted on the automated quotation system of the National Association
of Securities Dealers, Inc. so long as (i) Employee is not deemed to be an
"affiliate" of such Person as such term is used in paragraphs (c) and (d) of
Rule 145 under the Securities Act of 1933, as amended, and (ii) Employee and
members of his immediate family do not own or hold more than 3% of any voting
securities of any such Person.
5.4. Injunctive Relief
Employee acknowledges that a breach of any of the covenants contained
in this Article V may result in material irreparable injury to the Company for
which there is no adequate remedy at law, that it will not be possible to
measure damages for such injuries precisely and that, in the event of such a
breach, any payments remaining under the terms of this Agreement shall cease and
the Company shall be entitled to obtain a temporary restraining order or a
preliminary or permanent injunction restraining Employee from engaging in
activities prohibited by this Article V or such other relief as may required to
specifically enforce any of the covenants contained in this Article V. Employee
agrees to and hereby does submit to in personam jurisdiction before each and
every such court for that purpose.
ARTICLE VI
Dispute Resolution
In the event a dispute shall arise between the parties as to whether
the provisions of this Agreement have been complied with (a "Dispute"), the
parties agree to resolve such Dispute in accordance with the following
procedure:
(a) A meeting shall be held promptly between the Parties,
attended by (in the case of the Company) by one or more individuals with
decision-making authority regarding the Dispute, to attempt in good faith to
negotiate a resolution of the Dispute.
<PAGE>
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(b) If, within 10 days after such meeting, the parties have
not succeeded in negotiating a resolution of the Dispute, the parties agree to
submit the Dispute to mediation in accordance with the Commercial Mediation
Rules of the American Arbitration Association except that Disputes with regard
to the existence of a Disability shall be resolved in accordance with the
definition of the term "Disability" above.
(c) The parties will jointly appoint a mutually acceptable
mediator, seeking assistance in such regard from the American Arbitration
Association if they have been unable to agree upon such appointment within 10
days following the 10-day period referred to in clause (b) above.
(d) Upon appointment of the mediator, the parties agree to
participate in good faith in the mediation and negotiations relating thereto for
15 days.
(e) If the parties are not successful in resolving the
Dispute through mediation within such 15-day period, the parties agree that the
Dispute shall be settled by arbitration in accordance with the Expedited
Procedures of the Commercial Arbitration Rules of the American Arbitration
Association.
(f) The fees and expenses of the mediator/arbitrators shall
be borne solely by the non-prevailing party or, in the event there is no clear
prevailing party, as the mediator/arbitrators deem appropriate.
(g) The Company shall reimburse Employee, on a current
basis, for 50% of all reasonable legal fees and expenses, if any, incurred by
Employee in connection with any Dispute; provided, however, that in the event
the resolution of such Dispute in accordance with this Article VI includes a
finding denying, in all material respects, Employee's claims in such Dispute,
Employee shall be required to reimburse the Company, over a period not to exceed
12 months from the date of such resolution, for all sums advanced to Employee
with respect to such Dispute pursuant to this paragraph (g).
(h) Except as provided above, each party shall pay its own
costs and expenses (including, without limitation, attorneys' fees) relating to
any mediation/arbitration proceeding conducted under this Article VI.
<PAGE>
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(i) All mediation/arbitration conferences and hearings
will be held in the greater Washington, D.C. area.
(j) In the event there is any disputed question of law
involved in any arbitration proceeding, such as the proper legal interpretation
of any provision of this Agreement, the arbitrators shall make separate and
distinct findings of all facts material to the disputed question of law to be
decided and, on the basis of the facts so found, express their conclusion of the
question of law. The facts so found shall be conclusive and binding on the
parties, but any legal conclusion reached by the arbitrators from such facts may
be submitted by either party to a court of law for final determination by
initiation of a civil action in the manner provided by law. Such action, to be
valid, must be commenced within 20 days after receipt of the arbitrators'
decision. If no such civil action is commenced within such 20-day period, the
legal conclusion reached by the arbitrators shall be conclusive and binding on
the parties. Any such civil action shall be submitted, heard and determined
solely on the basis of the facts found by the arbitrators. Neither of the
parties shall, or shall be entitled to, submit any additional or different facts
for consideration by the court. In the event any civil action is commenced under
this paragraph (b), the party who prevails or substantially prevails (as
determined by the court) in such civil action shall be entitled to recover from
the other party all costs, expenses and reasonable attorneys' fees incurred by
the prevailing party in connection with such action and on appeal.
(k) Except as limited by paragraph (b) above, the parties
agree that judgment upon the award rendered by the arbitrators may be entered in
any court of competent jurisdiction. In the event legal proceedings are
commenced to enforce the rights awarded in an arbitration proceeding, the party
who prevails or substantially prevails in such legal proceeding shall be
entitled to recover from the other party all costs, expenses and reasonable
attorneys' fees incurred by the prevailing party in connection with such legal
proceeding and on appeal.
(l) Except as provided above, (i) no legal action may be
brought by either party with respect to any Dispute and (ii) all Disputes shall
be determined only in accordance with the procedures set forth above.
<PAGE>
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ARTICLE VII
Miscellaneous
7.1. No Mitigation or Offset
The provisions of this Agreement are not intended to, nor shall they
be construed to, require that Employee mitigate the amount of any payment
provided for in this Agreement by seeking or accepting other employment, nor
shall the amount of any payment provided for in this Agreement be reduced by any
compensation earned by Employee as the result of employment by another employer
or otherwise. Without limitation of the foregoing, the Company's obligations to
make the payments to Employee required under this Agreement and otherwise to
perform its obligations hereunder shall not be affected by any set off,
counterclaim, recoupment, defense or other claim, right or action that the
Company may have against Employee, except that the Company may deduct from any
amount required to be reimbursed to the Company by Employee under Section 4.10
or Article VI(a) the amount of any payment which the Company is then required to
make to Employee hereunder.
7.2. Assignability
The obligations of Employee hereunder are personal and may not be
assigned or delegated by Employee or transferred in any manner whatsoever, nor
are such obligations subject to involuntary alienation, assignment or transfer.
The Company shall have the right to assign this Agreement and to delegate all
rights, duties and obligations hereunder as provided in Section 7.5.
7.3. Notices
All notices and all other communications provided for in the
Agreement shall be in writing and addressed (i) if to the Company, at its
principal office address or such other address as it may have designated by
written notice to Employee for purposes hereof, directed to the attention of the
Board of Directors with a copy to the Secretary of the Company and (ii) if to
Employee, at his residence address on the records of the Company or to such
other address as he may have designated to the Company in writing for purposes
hereof. Each such notice or other communication shall be deemed to have been
duly given when delivered or mailed by United States registered mail, return
receipt requested,
<PAGE>
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postage prepaid, except that any notice of change of address shall be effective
only upon receipt.
7.4. Severability
The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provision of this
Agreement, which shall remain in full force and effect.
7.5. Successors: Binding Agreement
(a) The Company will require any successor (whether direct
or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business or assets of the Company, by agreement in form
and substance reasonable acceptable to Employee, to expressly assume and agree
to perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession had taken place.
Failure of the Company to obtain such agreement prior to the effectiveness of
any such succession shall be a breach of this Agreement. As used herein, the
term "Company" shall include any successor to its business and/or assets as
aforesaid which executes and delivers the Agreement provided for in this Section
7.5 or which otherwise becomes bound by all terms and provisions of this
Agreement by operation of law.
(b) This Agreement and all rights of Employee hereunder
shall inure to the benefit of and be enforceable by Employee's personal or legal
representatives, executors, administrators, successors, heirs, distributes,
devisees and legatees. If Employee should die while any amounts would be payable
to him hereunder if he had continued to live, all such amounts, unless otherwise
provided herein, shall be paid in accordance with the terms of this Agreement to
Employee's devisee, legatee, or other designee or, if there be no such designee,
to Employee's estate.
7.6. Tax Matters
The Company shall withhold from all payments hereunder all applicable
taxes (federal, state or other) which it is required to withhold therefrom
unless Employee has otherwise paid (or made other arrangements satisfactory) to
the Company the amount of such taxes.
<PAGE>
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7.7 Amendments and Waivers
No provision of this Agreement may be modified, waived or discharged
unless such waiver, modification or discharge is agreed to in writing and signed
by Employee and such member of the Board of Directors as may be specifically
authorized by the Board of Directors. No waiver by either party hereto at any
time of any breach by the other party hereto of, or in compliance with, any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time.
7.8. Entire Agreement, Termination of Other Agreements
This Agreement is an integration of the parties' agreement and no
agreement or representations, oral or otherwise, express or implied, with
respect to the subject matter hereof have been made by either party which are
not set forth expressly in this Agreement.
7.9. Governing Law
THE VALIDITY, INTERPRETATION, CONSTRUCTION AND PERFORMANCE OF THIS
AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF MARYLAND WITHOUT REGARD
TO ITS CONFLICT OF LAWS PROVISION.
7.10. Counterparts
This Agreement may be executed in or more counterparts, each of which
shall be deemed to be an original, but all of which together will constitute one
and the same instrument.
<PAGE>
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IN WITNESS WHEREOF, the parties have executed this Agreement
effective as of the date first above written.
AMERICAN CAPITAL STRATEGIES, LTD.
By: ______________________________
David Gladstone, Chairman
EMPLOYEE:
__________________________________
Malon Wilkus
Exhibit 2.i.5
DRAFT (7/30/97)
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is entered into as of August
__, 1997 (the "Effective Date") by and between AMERICAN CAPITAL STRATEGIES,
LTD., a Delaware corporation (the "Company"), and ADAM BLUMENTHAL (the
"Employee").
W I T N E S S E T H:
WHEREAS, Employee is the Executive Vice President of the Company; and
WHEREAS, it is in the interests of the Corporation that Employee's
service continue to be available to the Corporation.
NOW, THEREFORE, in consideration of the mutual covenants,
representations, warranties and agreements contained herein, and for other
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto agree as follows:
ARTICLE I
Definitions and Interpretations
1.1. Definitions
For purposes of this Agreement, except as otherwise expressly provided or
unless the context otherwise requires, the following terms shall have the
following respective meanings:
"Adjusted Base Salary" shall have the meaning specified in Section 3.1.
"Annual Bonus Plan" shall have the meaning specified in Section 3.2.
"Base Salary" shall have the meaning specified in Section 3.1.
"Board of Directors" shall mean the Board of Directors of the Company.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
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"Compensation Committee" shall mean the Compensation Committee of the
Board of Directors or such other entity as may be designated for a particular
function by the Board of Directors.
"Confidential Information" shall have the meaning specified in Section
5.1(a).
"Continuation Period" shall have the meaning specified in Section 4.4(a).
"Disability" shall mean a physical or mental condition of Employee that,
in the good faith judgment of not less than a majority of the entire membership
of the Board of Directors, prevents Employee from being able to perform the
services required under this Agreement and which results in the Employee
becoming eligible for long-term disability benefits (if such benefits are
provided by the Company). If any dispute arises as to whether a Disability has
occurred, or whether a Disability has ceased and the Employee is able to resume
duties, then such dispute shall be referred to a licensed physician appointed by
the president of the Medical Society or similar organization in Washington,
D.C., at the request of either party. The Employee shall submit to such
examinations and provide information as such physician may request and the
determination of such physician as to the Employee's physical or mental
condition shall be binding and conclusive on the parties. The Company shall pay
the cost of any such physician and examination.
"Dispute" shall have the meaning specified in Article VI.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Executive Officers" shall refer to the President, the Chairman of the
Board, all Executive Vice Presidents and all other officers designated as
Executive Officers by the Board of Directors.
"Expiration Date" shall have the meaning specified in Section 2.2.
"Good Reason" shall mean any of the following:
(1) without Employee's express written consent, a material
adverse alteration in the nature or status of Employee's position,
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functions, duties or responsibilities with the Company;
(2) a material breach by the Company of any material provision
of this Agreement which, if capable of being remedied, remains
unremedied for more than 15 days after written notice thereof is
given by Employee to the Company;
(3) any purported termination by the Company of Employee's
employment not in accordance with the provisions of this Agreement;
(4) the failure of the Company to obtain any assumption
agreement required by Section 7.5(a);
(5) the amendment, modification or repeal of any provision of
the Company's Certificate of Incorporation or by-laws, if such
amendment, modification or repeal would materially adversely affect
Employee's rights to indemnification by the Company; or
(6) change of control of the Company following an IPO which
would result in the control of 25% or more of the Company's voting
shares by one Person or a group of Persons acting in concert other
than such entities as may own voting securities on the date hereof.
"IPO" shall mean an initial underwritten public offering of securities of
the Corporation pursuant to a Securities and Exchange Commission registration
statement other than Form S-8 or Form S-14.
"ISO Plan" shall have the meaning specified in Section 3.3.
"Misconduct" shall mean one or more of the following:
(i) the willful and continued failure by Employee to perform
substantially his duties described in Section 2.3 (other than any
such failure resulting from Employee's incapacity due to physical or
mental illness) after two (2) written notices of such failure have
been given to Employee by the Company and Employee has had a
reasonable period (not to exceed 15 days from the second notice) to
correct such failure;
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(ii) the commission by Employee of acts that are dishonest and
demonstrably injurious to the Company (monetarily or otherwise) in
any material respect; or
(iii) a material breach or violation by Employee of (a) any
material provision ofthis Agreement or (b) any material Company
employment policy, including its Stock Trading Policies and
Procedures which the Company will publish from time to time, which,
if capable of being remedied, remains unremedied for more than 15
days after written notice thereof is given to Employee by the
Company.
For purposes of this definition, no act or failure to act on Employee's
part shall be considered "Misconduct" if done or omitted to be done by Employee
in good faith and in the reasonable belief that such act or failure to act was
in the best interest of the Company or in furtherance of Employee's duties and
responsibilities described in Section 2.3.
"Notice of Discontinuance" shall have the meaning specified in Section
2.2.
"Notice of Termination" shall mean a notice purporting to terminate
Employee's employment in accordance with Section 4.1 or 4.2. Such notice shall
specify the effective date of such termination, which date shall not be less
than 30 (one (1) day in the case of a termination by the Company for Misconduct)
or more than 60 days after the date such notice is given. If such termination is
by Employee for Good Reason or by the Company for Disability or Misconduct, such
notice shall set forth in reasonable detail the reason for such termination and
the facts and circumstances claimed to provide a basis therefor. Any notice
purporting to terminate Employee's employment which is not in compliance with
the requirements of this definition shall be ineffective.
"Person" shall mean and include an individual, a partnership, a joint
venture, a corporation, a trust and an unincorporated organization.
"Target Bonus" shall have the meaning specified in Section 3.2.
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"Term" shall have the meaning specified in Section 2.2.
"Termination Date" shall mean the termination date specified in a Notice
of Termination delivered in accordance with this Agreement.
1.2. Interpretations
(a) In this Agreement, unless a clear contrary intention appears,
(i) the words "herein," "hereof" and "hereunder" and other words of similar
import refer to this Agreement as a whole and not to any particular Article,
Section or other subdivision, (ii) reference to any Article or Section, means
such Article or Section hereof, (iii) the words "including" (and with
correlative meaning "include") means including, without limiting the generality
of any description preceding such term, and (iv) where any provision of this
Agreement refers to action to be taken by either party, or which such party is
prohibited from taking, such provision shall be applicable whether such action
is taken directly or indirectly by such party.
(b) The Article and Section headings herein are for convenience
only and shall not affect the construction hereof.
ARTICLE II
Employment: Term, Positions and Duties, Etc.
2.1. Employment
The Company agrees to employ Employee and Employee agrees to accept
employment with the Company, in each case on the terms and conditions set forth
in this Agreement.
2.2. Term of Employment
Unless sooner terminated pursuant to Article IV, the term of
Employee's employment under this Agreement (the "Term") shall commence on the
Effective Date and shall continue until the fifth anniversary of the Effective
Date (the "Expiration Date"); provided, however, that on the third anniversary
of the Effective Date, and on each anniversary thereafter (each such anniversary
being an "Extension Anniversary"), the Expiration Date shall be automatically
extended one additional year unless, at least six months prior to an Extension
Anniversary, (i) either party shall give
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written notice to the other (a "Notice of Discontinuance") that no such
automatic extension shall occur on the next succeeding Extension Anniversary and
each Extension Anniversary thereafter, or (ii) either party shall give a Notice
of Termination to the other party pursuant to Section 4.1 or 4.2, as the case
may be. No Notice of Discontinuance given by the Company shall be effective
unless given pursuant to instructions set forth in a resolution duly adopted by
the affirmative vote of a least a majority of the entire membership of the Board
of Directors.
2.3. Positions and Duties
(a) While employed hereunder, Employee shall serve as an Executive
Vice President of the Company, and shall have and may exercise all of the
powers, functions, duties and responsibilities normally attributable to such
office, including (without limitation) such duties and responsibilities as are
set forth with respect to such office in the Company's Certificate of
Incorporation and By-laws (as from time to time in effect). Employee shall have
such additional duties and responsibilities commensurate with such offices as
from time to time may be reasonably assigned to him by the Board of Directors.
While employed hereunder, Employee shall (i) report directly to the President of
the Company and (ii) observe and comply with all lawful policies, directions and
instructions of the President which are consistent with the foregoing provisions
of this paragraph (a).
(b) The Company agrees to use its reasonable best efforts to cause
Employee to be elected or appointed, or re-elected or re-appointed, as a member
of the Board of Directors and a member of its Executive Committee (if such a
committee exists), at all times during the Term.
(c) While employed hereunder, Employee shall (i) devote
substantially all of his business time, attention, skill and efforts to the
faithful and efficient performance of his duties hereunder and (ii) not accept
employment with any Person other than with the Company. Notwithstanding the
foregoing, Employee may engage in the following activities so long as they do
not interfere in any material respect with the performance of Employee's duties
and responsibilities hereunder: (i) serve on corporate, civic, religious,
educational or charitable boards or committees and (ii) manage his personal
investments.
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(d) While employed hereunder, Employee shall conduct himself in
such a manner as not to knowingly prejudice, in any material respect, the
reputation of the Company in the fields of business in which it is engaged or
with the investment community or the public at large.
2.4. Place of Employment
Employee's place of employment hereunder shall be at the Company's
offices in the greater New York, New York area or such other area that is
mutually agreeable to both parties.
ARTICLE III
Compensation and Benefits
3.1. Base Salary
(a) For services rendered by Employee under this Agreement, the
Company shall pay to Employee an annual base salary ("Base Salary") of $135,000.
The Board of Directors shall review the Base Salary at least annually and,
subject to paragraph (b) below, may adjust the amount of the Base Salary at any
time as the Board of Directors may deem appropriate in their sole discretion.
(b) The amount of the Base Salary may not be decreased without the
prior written approval of the Employee except that if the Board of Directors
increases the Base Salary as provided in the last sentence of paragraph (a)
above, the Board of Directors may thereafter decrease the Base Salary by an
amount not to exceed the amount of such increase, but only if a proportionally
similar decrease is made to the base compensation of all other Executive
Officers of the Company; provided, however, that in no event may the Base Salary
be decreased below $135,000, without the prior written consent of Employee.
(c) For so long as Employee is based at the Company's New York, New
York office, Employee shall be entitled to a location adjustment equal to 25% of
the Base Salary (the Base Salary as so adjusted
being the "Adjusted Base Salary").
(d) The Adjusted Base Salary shall be payable in accordance with
the Company's payroll practice for Executive Officers as earned.
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3.2 Annual Bonus Plan
During the Term, the Company shall maintain and the Employee shall be
entitled to participate in an incentive bonus plan (the "Annual Bonus Plan"),
which will provide for the payment of cash bonuses to eligible executives of the
Company at specified times during the year and within 90 days of the end of each
fiscal year based on the Company's financial performance and other appropriate
factors for that year or a portion thereof. Under the Annual Bonus Plan,
Employee shall be eligible to earn a target bonus (the "Target Bonus") each year
equal to 200% of Employee's Adjusted Base Salary for such year based on criteria
established by the Compensation Committee, and the performance of the Company
against such criteria. The establishment of such criteria and of the necessary
performance targets for partial or full earning of the Target Bonus shall be at
the sole reasonable discretion of the Compensation Committee; provided, however,
that Employee shall be entitled to a Target Bonus each year equal to at least
five percent (5%) of the maximum Target Bonus. During the calendar year 1997 and
the year in which the Expiration Date occurs, the Target Bonus which would be
payable shall be prorated and paid based on the number of days in such year
actually occurring during the Term.
3.3 Long-term Incentive Compensation
Upon the closing of the IPO, the Company shall have established a
long-term incentive compensation plan, which provides key employees of the
Company with ownership interests in the Company, as substantially set forth in
Attachment A hereto (the "ISO Plan"). Under the ISO Plan, Employee shall be
granted options to purchase ___% of the stock outstanding as of the IPO adjusted
upward for the additional shares issued pursuant to the exercise of any
underwriter's over-allotment option within thirty (30) days of the IPO.
One-third of such options will vest and become exercisable on each of the first
three anniversaries of the effectiveness of the IPO; provided, however, that
Employee may accelerate the vesting of any such options by agreeing to exercise
such options immediately and that for a period through the date on which such
options would have vested, not to sell, assign or convey any stock so purchased
(other than by laws of descent or distribution) and to grant the Company a call
option to repurchase such stock at the option exercise price if the options
would have been forfeited prior to their
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original vesting date as a result of the Employee's subsequent termination of
employment with the Company. To the extent permissible, such options shall be
characterized as Incentive Stock Options as defined in Section 422 of the Code.
The employee shall participate in all other long-term compensation incentive
plans of the Company in accordance with their terms.
3.4. Vacation
While employed hereunder, Employee shall be entitled to vacation benefits
in accordance with the vacation policy adopted by the Company from time to time
for senior executives in general, but in no event shall Employee's annual
vacation be less than 30 business days or such greater number of vacation days
as the Board of Directors may approve from time to time in its sole discretion.
Employee shall not be entitled to accumulate and carryover unused vacation time
from year to year, except to the extent permitted in accordance with the
Company's vacation policy for senior executives in general, but Employee shall
be entitled to compensation for unused accrued vacation time at the end of each
year.
3.5. Business Expenses
The Company shall, in accordance with the rules and policies that it may
establish from time to time for senior executives, reimburse Employee for
business expenses reasonably incurred in the performance of Employee's duties.
Requests for reimbursement for such expenses must be accompanied by appropriate
documentation. Examples of reimbursable expenses include parking, mileage
charges, air fares and hotel accommodations while traveling on Company business.
3.6. Other Benefits
Employee shall be entitled to receive all employee benefits, fringe
benefits and other perquisites that may be offered by the Company to its
Executive Officers as a group, including, without limitation, (i) participation
by Employee and, where applicable, Employee's dependents, in the various
employee benefit plans or programs (including, without limitation, pension
plans, profit sharing plans, stock plans, health plans, life insurance, parking
and disability insurance) generally provided to Executive Officers of the
Company, subject to meeting the eligibility requirements with respect to each of
such
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benefit plans or programs, (ii) club memberships, (iii) automobile allowances,
and (iv) financial planning allowances. However, nothing in this Section 3.6
shall be deemed to prohibit the Company from making any changes in any of the
plans, programs or benefits described herein, provided such changes apply to all
similarly situated Executive Officers.
3.7. Indemnification
The Company agrees to defend, indemnify and hold harmless the Employee
from and against any liability and expenses arising by reason of Employee's
acting as a director or officer of the Company or any Company subsidiary or
affiliate, or any portfolio company of the Company, in accordance with and to
the fullest extent permitted by law. The Company shall maintain Directors and
Officers liability insurance for the Employee in such amounts of coverage as are
reasonably available to the Company and to the extent such is attainable at
reasonable cost and are permitted by law.
ARTICLE IV
Termination of Employment
4.1. Termination by Employee
Employee may, at any time prior to the Expiration Date, terminate his
employment hereunder for any reason by delivering a Notice of Termination to the
Board of Directors.
4.2. Termination by the Company
The Company may, at any time prior to the Expiration Date, terminate
Employee's employment hereunder for any reason by delivering a Notice of
Termination to Employee; provided, however, that in no event shall the Company
be entitled to terminate Employee's employment prior to the Expiration Date
unless the Board of Directors shall duly adopt, by the affirmative vote of at
least a majority of the entire membership of the Board of Directors, a
resolution authorizing such termination. Should the board adopt such a
resolution, the Employee may resign in lieu of being terminated, but such
resignation shall otherwise be treated as a termination by the Company for
purposes of this Article IV.
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4.3. Payment of Accrued Base Salary, Vacation Pay, etc.
(a) Promptly upon the termination of Employee's employment for any
reason (including death), the Company shall pay to Employee (or his estate) a
lump sum amount for (i) any unpaid Adjusted Base Salary earned hereunder prior
to the Termination Date, (ii) all unused vacation time accrued by Employee as of
the Termination Date in accordance with Section 3.4, (iii) all unpaid benefits
earned or vested, as the case may be, by Employee as of the Termination Date
under any and all incentive or deferred compensation plans or programs of the
Company and (iv) any amounts in respect of which Employee has requested, and is
entitled to, reimbursement in accordance with Section 3.5.
(b) A termination of Employee's employment in accordance with this
Agreement shall not alter or impair any of Employee's accrued rights or benefits
as of the Termination Date under any employee benefit plan or program maintained
by the Company, in each case except as provided therein or in any written
agreement entered into between the Company and Employee pursuant thereto.
4.4. Additional Rights in Connection With Disability
In the event that the Company terminates an Employee by delivering
a Notice of Termination to Employee stating that such Termination is by reason
of a Disability, the Employee shall be entitled to the benefits and payments set
forth in this Section 4.4 in addition to such other applicable rights as may be
provided elsewhere in this Agreement:
(a) Base Salary and Target Bonus. The Company shall continue to pay
to Employee the Adjusted Base Salary in effect as of the date on which the
Notice of Termination was delivered for two (2) years following the Termination
Date (but in no event less than 365 days) (such period being the "Continuation
Period") which amount shall be reduced by any amount payable to Employee under
any disability plan maintained by the Company for the benefit of Employee. In
addition, the Employee shall be entitled to continue to participate in the
Annual Bonus Plan for two (2) years following the Termination Date with the
second anniversary of the Termination Date being the Expiration Date for
purposes of Section 3.2.
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(b) Insurance Benefits, etc. The Company shall at all times during
the Continuation Period, without charge to Employee or Employee's dependents,
cause Employee and Employee's eligible dependents to be covered by and to
participate in, to the fullest extent allowable under the terms thereof, all
life, accidental death and dismemberment and health insurance plans and programs
that may be offered to the senior officers of the Company so that Employee will
receive, at all times during the Continuation Period, the same benefits under
such plans and programs as Employee would have been entitled to receive had he
remained an Executive Officer of the Company. In no event shall Employee's
continuation period for purposes of Part 6 of Title I of the Employee Retirement
Income Security Act of 1974, as amended ("COBRA"), begin prior to the end of
Employee's coverage under the Company's group health plan as provided in this
paragraph (b).
(c) Options. All options of the Employee under the ISO Plan (or
similar plan) which have not vested as of Employee's Termination Date and which
would vest within one year of Employee's Termination Date shall vest and shall
become immediately exercisable. The Company shall issue to the Employee within
30 days of the Termination Date an amount of new options as separate securities
in exchange for and in an amount equal to the Employee's vested ISO Plan
options. Such new options shall have the same exercise price and other terms as
the ISO Plan options including a requirement that these options be registered
under applicable securities laws if the ISO Plan options are registered. All
loans to the Employee in connection with the prior exercise of any options under
the ISO Plan (or similar plan) shall remain unaffected and will remain on their
original terms.
Should the Employee's Disability end during the pendency of the Term, the
Company may discontinue the payments contemplated by this Section 4.4 if it
offers to reemploy Employee under the terms of this Agreement, but no such offer
shall affect the terms of Section 4.4(c) above.
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4.5. Additional Rights in Connection With Terminations by
Employee for Good Reason or by the Company for Other
than Misconduct or Disability
In the event that Employee terminates his employment pursuant to
Section 4.1 for Good Reason or if the Company terminates Employee's employment
with the Company pursuant to Section 4.2 for other than Misconduct or a
Disability, the Employee shall be entitled to the payments and benefits set
forth in this Section 4.5 in addition to such other applicable rights as may be
provided elsewhere in this Agreement:
(a) Base Salary and Target Bonus. The Company shall continue to pay
to Employee the Adjusted Base Salary in effect as of the date on which the
Notice of Termination for the Continuation Period. In addition, the Employee
shall be entitled to continue to participate in the Annual Bonus Plan for two
(2) years following the Termination Date with the second anniversary of the
Termination Date being the Expiration Date for purposes of Section 3.2. The
amount payable to Employee under this paragraph (a) is in lieu of, and not in
addition to, any severance payment due to or become due to Employee under any
separate agreement or contract between Employee and the Company or pursuant to
any severance payment plan, program or policy of the Company.
(b) Insurance Benefits, etc. The Company shall at all times during
the Continuation Period, without charge to Employee or Employee's dependents,
cause Employee and Employee's eligible dependents to be covered by and to
participate in, to the fullest extent allowable under the terms thereof, all
life, accidental death and dismemberment and health insurance plans and programs
that may be offered to the senior officers of the Company so that Employee will
receive, at all times during the Continuation Period, the same benefits under
such plans and programs as Employee would have been entitled to receive had he
remained an Executive Officer of the Company; provided, however, in the event
Employee becomes covered during the Continuation Period by another employer's
group plan or programs which provide benefits to Employee and his dependents
comparable to those being provided to Employee under this paragraph (b)
(provided with respect to any such group health plan, such plan does not contain
any exclusion or limitation with respect to any pre-existing conditions), then
the Company's similar plans and programs shall no
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longer be liable for any benefits under this paragraph (b). In no event shall
Employee's COBRA continuation period begin prior to the end of Employee's
coverage under the Company's group health plan as provided in this paragraph
(b).
(c) Options. All options of the Employee under the ISO Plan (or
similar plan) which have not vested as of Employee's Termination Date and which
would vest within one year of Employee's Termination Date shall vest and shall
become immediately exercisable. The Company shall issue to the Employee within
30 days of the Termination Date an amount of new options as separate securities
in exchange for and in an amount equal to the Employee's vested ISO Plan
options. Such new options shall have the same exercise price and other terms as
the ISO Plan options including a requirement that these options be registered
under applicable securities laws if the ISO Plan options are registered. All
loans to the Employee in connection with the prior exercise of any options under
the ISO Plan (or similar plan) shall remain unaffected and will remain on their
original terms.
(d) Release. Notwithstanding anything in this Section 4.5 to the
contrary, as a condition to the receipt of any benefit under this Section 4.5,
Employee must first execute and deliver to the Company a mutual release as set
out in exhibit 4.5(d) hereto (which the Company shall be obligated to execute
upon Employee's delivery thereof), releasing the Company, its officers, Board of
Directors, employees and agents from any and all claims and from any and all
causes of action of any kind or character that Employee may have arising out of
Employee's employment with the Company or the termination of such employment,
but excluding any claims and causes of action that Employee may have arising
under or based upon this Agreement.
4.6. Additional Rights in the Event of Death
In the event that the Employee's employment is terminated as a result of
his death, the Employee's estate and/or his beneficiaries shall be entitled to
the payments and benefits set forth in this Section 4.6 in addition to such
other applicable rights as may be set forth elsewhere in this Agreement:
(a) Target Bonus. The Employee's estate shall be entitled to
receive the Target Bonus that the deceased employee would have been entitled to
have received in the year in which the death occurred.
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(b) Insurance Benefits, etc. The Company shall pay the cost for
dependents of the Employee for insurance coverage that they are entitled to
obtain from the Company following the Employee's death pursuant to COBRA but not
less than 18 months.
(c) Options. All options of the Employee under the ISO Plan (or
similar plan) which have not vested as of Employee's death and which would vest
within one year thereof shall vest immediately upon the Employee's death and
shall remain exercisable by the Employee's estate for the shorter of 18 months
following the Employee's death and their original term. All loans to the
Employee in connection with the prior exercise of any options under the ISO Plan
(or similar plan) shall be due the earlier of 18 months following the Employee's
death and their original term.
4.7. Additional Rights in the Event of Termination by Resignation
Other than for Good Reason
In the event that the Employee terminates his employment pursuant to
Section 4.1 without Good Reason, he shall be entitled to the rights set forth in
this Section 4.7 in addition to such other applicable rights as may be set forth
elsewhere in this Agreement:
(a) Options. All options of the Employee under the ISO Plan (or
similar plan) which have not vested as of employee's Termination Date shall
lapse and shall not be exercisable. All previously vested options shall remain
exercisable for the shorter of 90 days following the Termination Date and their
original term. All loans to the Employee in connection with the prior exercise
of any options under the ISO Plan (or similar plan) shall be due the earlier of
90 days following the Employee's death and their original term. The Company
shall issue to the Employee within 30 days of the Termination Date an amount of
new options as separate securities in exchange for and in an amount equal to the
Employee's vested ISO Plan options. Such new options shall have the same
exercise price and other terms as the ISO Plan options including a requirement
that these options be registered under applicable securities laws if the ISO
Plan options are registered. All loans to the Employee in connection with the
prior exercise of any options under the ISO Plan (or similar plan) shall remain
unaffected and will remain on their original terms.
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4.8. Rights in the Event of Termination for
Employee's Misconduct
In the event that the Company terminates Employee's employment with the
Company pursuant to Section 4.2 for Employee's Misconduct, Employee shall be
entitled to the rights set forth in this Section 4.8 in addition to such other
applicable rights as may be set forth elsewhere in this Agreement:
(a) Options. All options of the Employee under the ISO Plan (or
similar plan) which have not vested as of employee's Termination Date shall
lapse and shall not be exercisable. All previously vested options shall remain
exercisable for the shorter of 90 days following the Termination Date and their
original term. All loans to the Employee in connection with the prior exercise
of any options under the ISO Plan (or similar plan) shall be due the earlier of
90 days following the Employee's death and their original term.
4.9 Non-exclusivity of Rights
Nothing in this Agreement shall prevent or limit Employee's continuing or
future participation in any plan, program, policy or practice provided by the
Company for which Employee may qualify, nor shall anything herein limit or
otherwise affect such rights as Employee may have under any other contract or
agreement with the Company. Amounts which are vested benefits or which Employee
is otherwise entitled to receive under any plan, policy, practice or program of
or any contract or agreement with the Company at or subsequent to the
Termination Date shall be payable in accordance with such plan, policy, practice
or program or contract or agreement except as explicitly modified by this
Agreement.
4.10. Company to Pay Benefits During Pendency of Dispute
Either party may, within ten (10) days after its receipt of a Notice of
Termination given by the other party, provide notice to the other party that a
dispute exists concerning the termination, in which event such dispute shall be
resolved in accordance with Article VI. Notwithstanding the pendency of any such
dispute and notwithstanding any provision herein to the contrary, the Company
will (i) continue to pay Employee the Adjusted Base Salary in effect when the
notice giving rise to the dispute was given and (ii) continue Employee
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as a participant in all compensation and benefit plans in which Employee was
participating when the notice giving rise to the dispute until the dispute is
finally resolved or, with respect to a Notice of Employee, the date of
termination specified in such notice, if earlier, but, in each case, not past
the Expiration Date. If (x)(i) the Company gives a Notice of Termination to
Employee and (ii) Employee disputes the termination as contemplated by this
Section 4.10, or (y)(i) the Employee gives a Notice of Termination for Good
Reason and (ii) the Company disputes such termination as contemplated by this
Section 4.10, and, in either case, (z) such dispute is finally resolved in favor
of the Company in accordance with Article VI, then Employee shall be required to
repay to the Company amounts paid to Employee under this Section 4.10 (including
the value of benefits received) but only if, and to the extent, Employee is not
otherwise entitled to receive such amounts under this Agreement.
ARTICLE V
Confidential Information and Non-Competition
5.1. Confidential Information
(a) Employee recognizes that the services to be performed by him
hereunder are special, unique, and extraordinary and that, by reason of his
employment with the Company, he may acquire Confidential Information concerning
the operation of the Company, the use or disclosure of which would cause the
Company substantial loss and damages which could not be readily calculated and
for which no remedy at law would be adequate. Accordingly, Employee agrees that
he will not (directly or indirectly) at any time, whether during or after his
employment hereunder, (i) knowingly use for an improper personal benefit any
Confidential Information that he may learn or has learned by reason of his
employment with the Company or (ii) disclose any such Confidential Information
to any Person except (A) in the performance of his obligations to the Company
hereunder, (B) as required by applicable law, (C) in connection with the
enforcement of his rights under this Agreement, (D) in connection with any
disagreement, dispute or litigation (pending or threatened) between Employee and
the Company or (E) with the prior written consent of the Board of Directors. As
used herein, "Confidential Information" includes information with respect to the
Company's products, facilities and methods, research and development, trade
secrets and other intellectual property, systems, patents and patent
applications,
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procedures, manuals, confidential reports, product price lists, customer lists,
financial information, business plans, prospects or opportunities; provided,
however, that such term, shall not include any information that (x) is or
becomes generally known or available other than as a result of a disclosure by
Employee or (y) is or becomes known or available to Employee on a
non-confidential basis from a source (other than the Company) which, to
Employee's knowledge, is not prohibited from disclosing such information to
Employee by a legal, contractual, fiduciary or other obligation to the Company.
(b) Employee confirms that all Confidential Information is the
exclusive property of the Company. All business records, papers and documents
kept or made by Employee while employed by the Company relating to the business
of the Company shall be and remain the property of the Company at all times.
Upon the request of the Company at any time, Employee shall promptly deliver to
the Company, and shall retain no copies of, any written materials, records and
documents made by Employee or coming into his possession while employed by the
Company concerning the business or affairs of the Company other than personal
materials, records and documents (including notes and correspondence) of
Employee not containing proprietary information relating to such business or
affairs. Notwithstanding the foregoing, Employee shall be permitted to retain
copies of, or have access to, all such materials, records and documents relating
to any disagreement, dispute or litigation (pending or threatened) between
Employee and the Company.
(c) The Company recognizes that the Employee maintains his contacts
on the computer system and that the list of contacts will remain the exclusive
ownership of the employee.
5.2. Non-Competition
(a) While employed hereunder and for the (i) a period of one (1)
year thereafter or (ii) the period of two (2) years after the Termination Date,
if this Agreement is terminated and the Employee is entitled to receive
compensation and benefits under either Section 4.5 or Section 4.7 (the
"Restricted Period"), Employee shall not, unless he receives the prior written
consent of the Board of Directors, own an interest in, manage, operate, join,
control, lend money or render financial or other assistance to or
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participate in or be connected with, as an officer, employee, partner,
stockholder, consultant or otherwise, (A) any Person (x) which competes with the
Company in investing or consulting with small and medium sized businesses in the
United States with regard to change of control transactions in which the
transaction utilizes employee stock ownership plans, or (y) which provides or
proposes to provide services to any Person which is a client of the Company as
of the Termination Date or to which the Company has outstanding loans or in
which the Company then has investments (including warrants or options), or (B)
any potential client of the Company with which the Company has discussed a
client, loan or investment relationship within 12 months prior to, as
applicable, the end of Employee's employment or the Termination Date.
Notwithstanding the foregoing, (i) in the event Employee is entitled to receive
compensation and benefits under Section 4.5, Employee may terminate this Section
5.2(a) by renouncing and releasing the obligation of the Company to pay any
future compensation or benefits under Section 4.5, but such termination shall
not apply to any other provision of this Agreement including, without
limitation, Section 5.1 and (ii) in the event that the Employee terminates his
employment pursuant to Section 4.1 without Good Reason, this Section 5.1 shall
apply for only one (1) year after the Termination Date.
(b) Employee has carefully read and considered the provisions of
this Section 5.2 and, having done so, agrees that the restrictions set forth in
this Section 5.2 (including the Restricted Period, scope of activity to be
restrained and the geographical scope) are fair and reasonable and are
reasonably required for the protection of the interests of the Company, its
officers, directors, employees, creditors and shareholders. Employee understands
that the restrictions contained in this Section 5.2 may limit his ability to
engage in a business similar to the Company's business, but acknowledges that he
will receive sufficiently high remuneration and other benefits from the Company
hereunder to justify such restrictions.
(c) During the Restricted Period, Employee shall not, whether for
his own account or for the account of any other Person (excluding the Company),
intentionally (i) solicit, endeavor to entice or induce any employee of the
Company to terminate his employment with the Company or accept employment with
anyone else or (ii) interfere in a similar manner with the business of the
Company.
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(d) In the event that any provision of this Section 5.2 relating to
the Restricted Period or the areas of restriction shall be declared by a court
of competent jurisdiction to exceed the maximum time period or areas such court
deems reasonable and enforceable, the Restricted Period or areas of restriction
deemed reasonable and enforceable by the court shall become and thereafter be
the maximum time period and/or areas.
5.3. Stock Ownership
Nothing in this Agreement shall prohibit Employee from acquiring or
holding any issue of stock or securities of any Person that has any securities
registered under Section 12 of the Exchange Act, listed on a national securities
exchange or quoted on the automated quotation system of the National Association
of Securities Dealers, Inc. so long as (i) Employee is not deemed to be an
"affiliate" of such Person as such term is used in paragraphs (c) and (d) of
Rule 145 under the Securities Act of 1933, as amended, and (ii) Employee and
members of his immediate family do not own or hold more than 3% of any voting
securities of any such Person.
5.4. Injunctive Relief
Employee acknowledges that a breach of any of the covenants contained in
this Article V may result in material irreparable injury to the Company for
which there is no adequate remedy at law, that it will not be possible to
measure damages for such injuries precisely and that, in the event of such a
breach, any payments remaining under the terms of this Agreement shall cease and
the Company shall be entitled to obtain a temporary restraining order or a
preliminary or permanent injunction restraining Employee from engaging in
activities prohibited by this Article V or such other relief as may required to
specifically enforce any of the covenants contained in this Article V. Employee
agrees to and hereby does submit to in personam jurisdiction before each and
every such court for that purpose.
ARTICLE VI
Dispute Resolution
In the event a dispute shall arise between the parties as to whether the
provisions of this Agreement have been complied with (a "Dispute"), the parties
agree
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to resolve such Dispute in accordance with the following procedure:
(a) A meeting shall be held promptly between the Parties, attended
by (in the case of the Company) by one or more individuals with decision-making
authority regarding the Dispute, to attempt in good faith to negotiate a
resolution of the Dispute.
(b) If, within 10 days after such meeting, the parties have not
succeeded in negotiating a resolution of the Dispute, the parties agree to
submit the Dispute to mediation in accordance with the Commercial Mediation
Rules of the American Arbitration Association except that Disputes with regard
to the existence of a Disability shall be resolved in accordance with the
definition of the term "Disability" above.
(c) The parties will jointly appoint a mutually acceptable
mediator, seeking assistance in such regard from the American Arbitration
Association if they have been unable to agree upon such appointment within 10
days following the 10-day period referred to in clause (b) above.
(d) Upon appointment of the mediator, the parties agree to
participate in good faith in the mediation and negotiations relating thereto for
15 days.
(e) If the parties are not successful in resolving the Dispute
through mediation within such 15-day period, the parties agree that the Dispute
shall be settled by arbitration in accordance with the Expedited Procedures of
the Commercial Arbitration Rules of the American Arbitration Association.
(f) The fees and expenses of the mediator/arbitrators shall be
borne solely by the non-prevailing party or, in the event there is no clear
prevailing party, as the mediator/arbitrators deem appropriate.
(g) The Company shall reimburse Employee, on a current basis, for
50% of all reasonable legal fees and expenses, if any, incurred by Employee in
connection with any Dispute; provided, however, that in the event the resolution
of such Dispute in accordance with this Article VI includes a finding denying,
in all material respects, Employee's claims in such Dispute, Employee shall be
required to reimburse the Company, over a period not to exceed 12 months from
the date of such
<PAGE>
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resolution, for all sums advanced to Employee with respect to such Dispute
pursuant to this paragraph (g).
(h) Except as provided above, each party shall pay its own costs
and expenses (including, without limitation, attorneys' fees) relating to any
mediation/arbitration proceeding conducted under this Article VI.
(i) All mediation/arbitration
conferences and hearings will be held in the greater
Washington, D.C. area.
(j) In the event there is any disputed question of law involved in
any arbitration proceeding, such as the proper legal interpretation of any
provision of this Agreement, the arbitrators shall make separate and distinct
findings of all facts material to the disputed question of law to be decided
and, on the basis of the facts so found, express their conclusion of the
question of law. The facts so found shall be conclusive and binding on the
parties, but any legal conclusion reached by the arbitrators from such facts may
be submitted by either party to a court of law for final determination by
initiation of a civil action in the manner provided by law. Such action, to be
valid, must be commenced within 20 days after receipt of the arbitrators'
decision. If no such civil action is commenced within such 20-day period, the
legal conclusion reached by the arbitrators shall be conclusive and binding on
the parties. Any such civil action shall be submitted, heard and determined
solely on the basis of the facts found by the arbitrators. Neither of the
parties shall, or shall be entitled to, submit any additional or different facts
for consideration by the court. In the event any civil action is commenced under
this paragraph (b), the party who prevails or substantially prevails (as
determined by the court) in such civil action shall be entitled to recover from
the other party all costs, expenses and reasonable attorneys' fees incurred by
the prevailing party in connection with such action and on appeal.
(k) Except as limited by paragraph (b) above, the parties agree
that judgment upon the award rendered by the arbitrators may be entered in any
court of competent jurisdiction. In the event legal proceedings are commenced to
enforce the rights awarded in an arbitration proceeding, the party who prevails
or substantially prevails in such legal proceeding shall be entitled to recover
from the other party all costs, expenses and reasonable attorneys' fees incurred
by the
<PAGE>
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prevailing party in connection with such legal proceeding and on appeal.
(l) Except as provided above, (i) no legal action may be brought by
either party with respect to any Dispute and (ii) all Disputes shall be
determined only in accordance with the procedures set forth above.
ARTICLE VII
Miscellaneous
7.1. No Mitigation or Offset
The provisions of this Agreement are not intended to, nor shall they be
construed to, require that Employee mitigate the amount of any payment provided
for in this Agreement by seeking or accepting other employment, nor shall the
amount of any payment provided for in this Agreement be reduced by any
compensation earned by Employee as the result of employment by another employer
or otherwise. Without limitation of the foregoing, the Company's obligations to
make the payments to Employee required under this Agreement and otherwise to
perform its obligations hereunder shall not be affected by any set off,
counterclaim, recoupment, defense or other claim, right or action that the
Company may have against Employee, except that the Company may deduct from any
amount required to be reimbursed to the Company by Employee under Section 4.10
or Article VI(a) the amount of any payment which the Company is then required to
make to Employee hereunder.
7.2. Assignability
The obligations of Employee hereunder are personal and may not be
assigned or delegated by Employee or transferred in any manner whatsoever, nor
are such obligations subject to involuntary alienation, assignment or transfer.
The Company shall have the right to assign this Agreement and to delegate all
rights, duties and obligations hereunder as provided in Section 7.5.
7.3. Notices
All notices and all other communications provided for in the Agreement
shall be in writing and addressed (i) if to the Company, at its principal office
address or such other address as it may have designated by written notice to
Employee for purposes hereof, directed
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to the attention of the Board of Directors with a copy to the Secretary of the
Company and (ii) if to Employee, at his residence address on the records of the
Company or to such other address as he may have designated to the Company in
writing for purposes hereof. Each such notice or other communication shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, except that any
notice of change of address shall be effective only upon receipt.
7.4. Severability
The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provision of this
Agreement, which shall remain in full force and effect.
7.5. Successors: Binding Agreement
(a) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business or assets of the Company, by agreement in form
and substance reasonable acceptable to Employee, to expressly assume and agree
to perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession had taken place.
Failure of the Company to obtain such agreement prior to the effectiveness of
any such succession shall be a breach of this Agreement. As used herein, the
term "Company" shall include any successor to its business and/or assets as
aforesaid which executes and delivers the Agreement provided for in this Section
7.5 or which otherwise becomes bound by all terms and provisions of this
Agreement by operation of law.
(b) This Agreement and all rights of Employee hereunder shall inure
to the benefit of and be enforceable by Employee's personal or legal
representatives, executors, administrators, successors, heirs, distributes,
devisees and legatees. If Employee should die while any amounts would be payable
to him hereunder if he had continued to live, all such amounts, unless otherwise
provided herein, shall be paid in accordance with the terms of this Agreement to
Employee's devisee, legatee, or other designee or, if there be no such designee,
to Employee's estate.
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7.6. Tax Matters
The Company shall withhold from all payments hereunder all applicable
taxes (federal, state or other) which it is required to withhold therefrom
unless Employee has otherwise paid (or made other arrangements satisfactory) to
the Company the amount of such taxes.
7.7 Amendments and Waivers
No provision of this Agreement may be modified, waived or discharged
unless such waiver, modification or discharge is agreed to in writing and signed
by Employee and such member of the Board of Directors as may be specifically
authorized by the Board of Directors. No waiver by either party hereto at any
time of any breach by the other party hereto of, or in compliance with, any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time.
7.8. Entire Agreement, Termination of Other Agreements
This Agreement is an integration of the parties' agreement and no
agreement or representations, oral or otherwise, express or implied, with
respect to the subject matter hereof have been made by either party which are
not set forth expressly in this Agreement.
7.9. Governing Law
THE VALIDITY, INTERPRETATION, CONSTRUCTION AND PERFORMANCE OF THIS
AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF MARYLAND WITHOUT REGARD
TO ITS CONFLICT OF LAWS PROVISION.
7.10. Counterparts
This Agreement may be executed in or more counterparts, each of which
shall be deemed to be an original, but all of which together will constitute one
and the same instrument.
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IN WITNESS WHEREOF, the parties have executed this Agreement effective as
of the date first above written.
AMERICAN CAPITAL STRATEGIES, LTD.
By: ____________________________
Malon Wilkus, President
EMPLOYEE:
________________________________
Adam Blumenthal
Exhibit 2.i.6
DRAFT (7/31/97)
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is entered into as of
August __, 1997 (the "Effective Date") by and between AMERICAN CAPITAL
STRATEGIES, LTD., a Delaware corporation (the "Company"), and STEPHEN L. HESTER
(the "Employee").
W I T N E S S E T H:
WHEREAS, Employee is a Vice President of the Company; and
WHEREAS, it is in the interests of the Corporation that Employee's
service continue to be available to the Corporation.
NOW, THEREFORE, in consideration of the mutual covenants,
representations, warranties and agreements contained herein, and for other
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto agree as follows:
ARTICLE I
Definitions and Interpretations
1.1. Definitions
For purposes of this Agreement, except as otherwise expressly
provided or unless the context otherwise requires, the following terms shall
have the following respective meanings:
"Annual Bonus Plan" shall have the meaning specified in Section 3.2.
"Base Salary" shall have the meaning specified in Section 3.1.
"Board of Directors" shall mean the Board of Directors of the
Company.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Compensation Committee" shall mean the Compensation Committee of the
Board of Directors or such other entity as may be designated for a particular
function by the Board of Directors.
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"Confidential Information" shall have the meaning specified in
Section 5.1(a).
"Continuation Period" shall have the meaning specified in Section
4.4(a).
"Disability" shall mean a physical or mental condition of Employee
that, in the good faith judgment of not less than a majority of the entire
membership of the Board of Directors, prevents Employee from being able to
perform the services required under this Agreement and which results in the
Employee becoming eligible for long-term disability benefits (if such benefits
are provided by the Company). If any dispute arises as to whether a Disability
has occurred, or whether a Disability has ceased and the Employee is able to
resume duties, then such dispute shall be referred to a licensed physician
appointed by the president of the Medical Society or similar organization in
Washington, D.C., at the request of either party. The Employee shall submit to
such examinations and provide information as such physician may request and the
determination of such physician as to the Employee's physical or mental
condition shall be binding and conclusive on the parties. The Company shall pay
the cost of any such physician and examination.
"Dispute" shall have the meaning specified in Article VI.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Executive Officers" shall refer to the President, the Chairman of
the Board, all Executive Vice Presidents, the Employee and all other officers
designated as Executive Officers by the Board of Directors.
"Expiration Date" shall have the meaning specified in Section 2.2.
"Good Reason" shall mean any of the following:
(1) without Employee's express written consent, a material
adverse alteration in the nature or status of Employee's position,
functions, duties or responsibilities with the Company;
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(2) a material breach by the Company of any material provision
of this Agreement which, if capable of being remedied, remains
unremedied for more than 15 days after written notice thereof is
given by Employee to the Company;
(3) any purported termination by the Company of Employee's
employment not in accordance with the provisions of this Agreement;
(4) the failure of the Company to obtain any assumption
agreement required by Section 7.5(a);
(5) the amendment, modification or repeal of any provision of
the Company's Certificate of Incorporation or by-laws, if such
amendment, modification or repeal would materially adversely affect
Employee's rights to indemnification by the Company; or
(6) change of control of the Company following an IPO which
would result in the control of 25% or more of the Company's voting
shares by one Person or a group of Persons acting in concert other
than such entities as may own voting securities on the date hereof.
"IPO" shall mean an initial underwritten public offering of
securities of the Corporation pursuant to a Securities and Exchange Commission
registration statement other than Form S-8 or Form S-14.
"ISO Plan" shall have the meaning specified in Section 3.3.
"Misconduct" shall mean one or more of the following:
(i) the willful and continued failure by Employee to perform
substantially his duties described in Section 2.3 (other than any
such failure resulting from Employee's incapacity due to physical or
mental illness) after two (2) written notices of such failure have
been given to Employee by the Company and Employee has had a
reasonable period (not to exceed 15 days from the second notice) to
correct such failure;
(ii) the commission by Employee of acts that are dishonest and
demonstrably injurious to
<PAGE>
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the Company (monetarily or otherwise) in any material respect; or
(iii) a material breach or violation by Employee of (a) any
material provision of this Agreement or (b) any material Company
employment policy, including its Stock Trading Policies and
Procedures which the Company will publish from time to time, which,
if capable of being remedied, remains unremedied for more than 15
days after written notice thereof is given to Employee by the
Company.
For purposes of this definition, no act or failure to act on
Employee's part shall be considered "Misconduct" if done or omitted to be done
by Employee in good faith and in the reasonable belief that such act or failure
to act was in the best interest of the Company or in furtherance of Employee's
duties and responsibilities described in Section 2.3.
"Notice of Discontinuance" shall have the meaning specified in
Section 2.2.
"Notice of Termination" shall mean a notice purporting to terminate
Employee's employment in accordance with Section 4.1 or 4.2. Such notice shall
specify the effective date of such termination, which date shall not be less
than 30 (one (1) day in the case of a termination by the Company for Misconduct)
or more than 60 days after the date such notice is given. If such termination is
by Employee for Good Reason or by the Company for Disability or Misconduct, such
notice shall set forth in reasonable detail the reason for such termination and
the facts and circumstances claimed to provide a basis therefor. Any notice
purporting to terminate Employee's employment which is not in compliance with
the requirements of this definition shall be ineffective.
"Person" shall mean and include an individual, a partnership, a joint
venture, a corporation, a trust and an unincorporated organization.
"Target Bonus" shall have the meaning specified in Section 3.2.
"Term" shall have the meaning specified in Section 2.2.
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"Termination Date" shall mean the termination date specified in a
Notice of Termination delivered in accordance with this Agreement.
1.2. Interpretations
(a) In this Agreement, unless a clear contrary intention
appears, (i) the words "herein," "hereof" and "hereunder" and other words of
similar import refer to this Agreement as a whole and not to any particular
Article, Section or other subdivision, (ii) reference to any Article or Section,
means such Article or Section hereof, (iii) the words "including" (and with
correlative meaning "include") means including, without limiting the generality
of any description preceding such term, and (iv) where any provision of this
Agreement refers to action to be taken by either party, or which such party is
prohibited from taking, such provision shall be applicable whether such action
is taken directly or indirectly by such party.
(b) The Article and Section headings herein are for
convenience only and shall not affect the construction hereof.
ARTICLE II
Employment: Term, Positions and Duties, Etc.
2.1. Employment
The Company agrees to employ Employee and Employee agrees to accept
employment with the Company, in each case on the terms and conditions set forth
in this Agreement.
2.2. Term of Employment
Unless sooner terminated pursuant to Article IV, the term of
Employee's employment under this Agreement (the "Term") shall commence on the
Effective Date and shall continue until the fifth anniversary of the Effective
Date (the "Expiration Date"); provided, however, that on the third anniversary
of the Effective Date, and on each anniversary thereafter (each such anniversary
being an "Extension Anniversary"), the Expiration Date shall be automatically
extended one additional year unless, at least six months prior to an Extension
Anniversary, (i) either party shall give written notice to the other (a "Notice
of Discontinuance") that no such automatic extension shall occur on the next
succeeding Extension Anniversary and
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each Extension Anniversary thereafter, or (ii) either party shall give a Notice
of Termination to the other party pursuant to Section 4.1 or 4.2, as the case
may be. No Notice of Discontinuance given by the Company shall be effective
unless given pursuant to instructions set forth in a resolution duly adopted by
the affirmative vote of a least a majority of the entire membership of the Board
of Directors.
2.3. Positions and Duties
(a) While employed hereunder, Employee shall serve as a Vice
President of the Company, and shall have and may exercise all of the powers,
functions, duties and responsibilities normally attributable to such office,
including (without limitation) such duties and responsibilities as are set forth
with respect to such office in the Company's Certificate of Incorporation and
By-laws (as from time to time in effect). Employee shall have such additional
duties and responsibilities commensurate with such offices as from time to time
may be reasonably assigned to him by the Board of Directors. While employed
hereunder, Employee shall (i) report directly to the President of the Company
and (ii) observe and comply with all lawful policies, directions and
instructions of the President which are consistent with the foregoing provisions
of this paragraph (a).
(b) While employed hereunder, Employee shall (i) devote
substantially all of his business time, attention, skill and efforts to the
faithful and efficient performance of his duties hereunder and (ii) not accept
employment with any Person other than with the Company. Notwithstanding the
foregoing, Employee may engage in the following activities so long as they do
not interfere in any material respect with the performance of Employee's duties
and responsibilities hereunder: (i) serve on corporate, civic, religious,
educational or charitable boards or committees and (ii) manage his personal
investments. In addition, if the Employee is on part time status as contemplated
by Section 3.1(a), Employee's business time commitment to the Company shall be
reduced proportionately to the adjustment in his Base Salary as provided by
Section 3.1(a) and Employee shall be entitled to accept other employment on a
part time basis, provided that such employment does not interfere with
Employee's performance of his duties hereunder and no such employment shall be
with an entity that in any manner
<PAGE>
-7-
competes with the Company or its subsidiaries in any of their respective lines
of business.
(c) While employed hereunder, Employee shall conduct himself
in such a manner as not to knowingly prejudice, in any material respect, the
reputation of the Company in the fields of business in which it is engaged or
with the investment community or the public at large.
2.4. Place of Employment
Employee's place of employment hereunder shall be at the Company's
offices in the greater Washington, D.C. area or such other area that is mutually
agreeable to both parties.
ARTICLE III
Compensation and Benefits
3.1. Base Salary
(a) For services rendered by Employee under this Agreement,
the Company shall pay to Employee an annual base salary ("Base Salary") of
$150,000; provided, however, that it is agreed that Employee is currently
employed on a part-time basis by the Company whereby Employee has agreed to
devote one-half of his working time to the Company and that for so long as such
arrangement continues, his Base Salary shall be $75,000. The Board of Directors
shall review the Base Salary at least annually and, subject to paragraph (b)
below, may adjust the amount of the Base Salary at any time as the Board of
Directors may deem appropriate in their sole discretion.
(b) The amount of the Base Salary may not be decreased
without the prior written approval of the Employee except that if the Board of
Directors increases the Base Salary as provided in the last sentence of
paragraph (a) above, the Board of Directors may thereafter decrease the Base
Salary by an amount not to exceed the amount of such increase, but only if a
proportionally similar decrease is made to the base compensation of all other
Executive Officers of the Company; provided, however, that in no event may the
Base Salary be decreased below $150,000 (adjusted, if applicable, for Employee's
part time status), without the prior written consent of Employee.
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(c) The Base Salary shall be payable in accordance with the
Company's payroll practice for Executive Officers as earned.
3.2 Annual Bonus Plan
During the Term, the Company shall maintain and the Employee shall be
entitled to participate in an incentive bonus plan (the "Annual Bonus Plan"),
which will provide for the payment of cash bonuses to eligible executives of the
Company at specified times during the year and within 90 days of the end of each
fiscal year based on the Company's financial performance and other appropriate
factors or a portion thereof. Under the Annual Bonus Plan, Employee shall be
eligible to earn a target bonus (the "Target Bonus") each year equal to 200% of
Employee's Base Salary for such year based on criteria established by the
Compensation Committee, and the performance of the Company against such
criteria. The establishment of such criteria and of the necessary performance
targets for partial or full earning of the Target Bonus shall be at the sole
reasonable discretion of the Compensation Committee; provided, however, that
Employee shall be entitled to a Target Bonus each year equal to at least five
percent (5%) of the maximum Target Bonus. During the calendar year 1997 and the
year in which the Expiration Date occurs, the Target Bonus which would be
payable shall be prorated and paid based on the number of days in such year
actually occurring during the Term.
3.3 Long-term Incentive Compensation
Upon the closing of the IPO, the Company shall have established a
long-term incentive compensation plan, which provides key employees of the
Company with ownership interests in the Company, as substantially set forth in
Attachment A hereto (the "ISO Plan"). Under the ISO Plan, Employee shall be
granted options to purchase ___% of the stock outstanding as of the IPO adjusted
upward for the additional shares issued pursuant to the exercise of any
underwriter's over-allotment option within thirty (30) days of the IPO.
One-third of such options will vest and become exercisable on each of the first
three anniversaries of the effectiveness of the IPO; provided, however, that
Employee may accelerate the vesting of any such options by agreeing to exercise
such options immediately and that for a period through the date on which such
options would have vested, not to sell, assign or convey any stock so purchased
(other than by laws of descent or
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distribution) and to grant the Company a call option to repurchase such stock at
the option exercise price if the options would have been forfeited prior to
their original vesting date as a result of the Employee's subsequent termination
of employment with the Company. To the extent permissible, such options shall be
characterized as Incentive Stock Options as defined in Section 422 of the Code.
The employee shall participate in all other long-term compensation incentive
plans of the Company in accordance with their terms.
3.4. Vacation
While employed hereunder, Employee shall be entitled to vacation
benefits in accordance with the vacation policy adopted by the Company from time
to time for senior executives in general, but in no event shall Employee's
annual vacation be less than 30 business days or such greater number of vacation
days as the Board of Directors may approve from time to time in its sole
discretion. Employee shall not be entitled to accumulate and carryover unused
vacation time from year to year, except to the extent permitted in accordance
with the Company's vacation policy for senior executives in general, but
Employee shall be entitled to compensation for unused accrued vacation time at
the end of each year.
3.5. Business Expenses
The Company shall, in accordance with the rules and policies that it
may establish from time to time for senior executives, reimburse Employee for
business expenses reasonably incurred in the performance of Employee's duties.
Requests for reimbursement for such expenses must be accompanied by appropriate
documentation. Examples of reimbursable expenses include parking, mileage
charges, air fares and hotel accommodations while traveling on Company business.
3.6. Other Benefits
Employee shall be entitled to receive all employee benefits, fringe
benefits and other perquisites that may be offered by the Company to its
Executive Officers as a group, including, without limitation, (i) participation
by Employee and, where applicable, Employee's dependents, in the various
employee benefit plans or programs (including, without limitation, pension
plans, profit sharing plans, stock plans, health plans, life insurance, parking
and
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disability insurance) generally provided to Executive Officers of the Company,
subject to meeting the eligibility requirements with respect to each of such
benefit plans or programs, (ii) club memberships, (iii) automobile allowances,
and (iv) financial planning allowances. However, nothing in this Section 3.6
shall be deemed to prohibit the Company from making any changes in any of the
plans, programs or benefits described herein, provided such changes apply to all
similarly situated Executive Officers.
3.7. Indemnification
The Company agrees to defend, indemnify and hold harmless the
Employee from and against any liability and expenses arising by reason of
Employee's acting as a director or officer of the Company or any Company
subsidiary or affiliate, or any portfolio company of the Company, in accordance
with and to the fullest extent permitted by law. The Company shall maintain
Directors and Officers liability insurance for the Employee in such amounts of
coverage as are reasonably available to the Company and to the extent such is
attainable at reasonable cost and are permitted by law.
ARTICLE IV
Termination of Employment
4.1. Termination by Employee
Employee may, at any time prior to the Expiration Date, terminate his
employment hereunder for any reason by delivering a Notice of Termination to the
Board of Directors.
4.2. Termination by the Company
The Company may, at any time prior to the Expiration Date, terminate
Employee's employment hereunder for any reason by delivering a Notice of
Termination to Employee; provided, however, that in no event shall the Company
be entitled to terminate Employee's employment prior to the Expiration Date
unless the Board of Directors shall duly adopt, by the affirmative vote of at
least a majority of the entire membership of the Board of Directors, a
resolution authorizing such termination. Should the board adopt such a
resolution, the Employee may resign in lieu of being terminated, but such
resignation shall otherwise be treated as a termination by the Company for
purposes of this Article IV.
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4.3. Payment of Accrued Base Salary, Vacation Pay, etc.
(a) Promptly upon the termination of Employee's employment
for any reason (including death), the Company shall pay to Employee (or his
estate) a lump sum amount for (i) any unpaid Adjusted Base Salary earned
hereunder prior to the Termination Date, (ii) all unused vacation time accrued
by Employee as of the Termination Date in accordance with Section 3.4, (iii) all
unpaid benefits earned or vested, as the case may be, by Employee as of the
Termination Date under any and all incentive or deferred compensation plans or
programs of the Company and (iv) any amounts in respect of which Employee has
requested, and is entitled to, reimbursement in accordance with Section 3.5.
(b) A termination of Employee's employment in accordance
with this Agreement shall not alter or impair any of Employee's accrued rights
or benefits as of the Termination Date under any employee benefit plan or
program maintained by the Company, in each case except as provided therein or in
any written agreement entered into between the Company and Employee pursuant
thereto.
4.4. Additional Rights in Connection With Disability
In the event that the Company terminates an Employee by
delivering a Notice of Termination to Employee stating that such Termination is
by reason of a Disability, the Employee shall be entitled to the benefits and
payments set forth in this Section 4.4 in addition to such other applicable
rights as may be provided elsewhere in this Agreement:
(a) Base Salary and Target Bonus. The Company shall continue
to pay to Employee the Adjusted Base Salary in effect as of the date on which
the Notice of Termination was delivered for two (2) years following the
Termination Date (but in no event less than 365 days) (such period being the
"Continuation Period") which amount shall be reduced by any amount payable to
Employee under any disability plan maintained by the Company for the benefit of
Employee. In addition, the Employee shall be entitled to continue to participate
in the Annual Bonus Plan for two (2) years following the Termination Date with
the second anniversary of the
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Termination Date being the Expiration Date for purposes of Section 3.2.
(b) Insurance Benefits, etc. The Company shall at all times
during the Continuation Period, without charge to Employee or Employee's
dependents, cause Employee and Employee's eligible dependents to be covered by
and to participate in, to the fullest extent allowable under the terms thereof,
all life, accidental death and dismemberment and health insurance plans and
programs that may be offered to the senior officers of the Company so that
Employee will receive, at all times during the Continuation Period, the same
benefits under such plans and programs as Employee would have been entitled to
receive had he remained an Executive Officer of the Company. In no event shall
Employee's continuation period for purposes of Part 6 of Title I of the Employee
Retirement Income Security Act of 1974, as amended ("COBRA"), begin prior to the
end of Employee's coverage under the Company's group health plan as provided in
this paragraph (b).
(c) Options. All options of the Employee under the ISO Plan
(or similar plan) which have not vested as of Employee's Termination Date and
which would vest within one year of Employee's Termination Date shall vest and
shall become immediately exercisable. The Company shall issue to the Employee
within 30 days of the Termination Date an amount of new options as separate
securities in exchange for and in an amount equal to the Employee's vested ISO
Plan options. Such new options shall have the same exercise price and other
terms as the ISO Plan options including a requirement that these options be
registered under applicable securities laws if the ISO Plan options are
registered. All loans to the Employee in connection with the prior exercise of
any options under the ISO Plan (or similar plan) shall remain unaffected and
will remain on their original terms.
Should the Employee's Disability end during the pendency of the Term,
the Company may discontinue the payments contemplated by this Section 4.4 if it
offers to reemploy Employee under the terms of this Agreement, but no such offer
shall affect the terms of Section 4.4(c) above.
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4.5. Additional Rights in Connection With Terminations
by Employee for Good Reason or by the Company for Other
than Misconduct or Disability
In the event that Employee terminates his employment
pursuant to Section 4.1 for Good Reason or if the Company terminates Employee's
employment with the Company pursuant to Section 4.2 for other than Misconduct or
a Disability, the Employee shall be entitled to the payments and benefits set
forth in this Section 4.5 in addition to such other applicable rights as may be
provided elsewhere in this Agreement:
(a) Base Salary and Target Bonus. The Company shall continue
to pay to Employee the Adjusted Base Salary in effect as of the date on which
the Notice of Termination for the Continuation Period. In addition, the Employee
shall be entitled to continue to participate in the Annual Bonus Plan for two
(2) years following the Termination Date with the second anniversary of the
Termination Date being the Expiration Date for purposes of Section 3.2. The
amount payable to Employee under this paragraph (a) is in lieu of, and not in
addition to, any severance payment due to or become due to Employee under any
separate agreement or contract between Employee and the Company or pursuant to
any severance payment plan, program or policy of the Company.
(b) Insurance Benefits, etc. The Company shall at all times
during the Continuation Period, without charge to Employee or Employee's
dependents, cause Employee and Employee's eligible dependents to be covered by
and to participate in, to the fullest extent allowable under the terms thereof,
all life, accidental death and dismemberment and health insurance plans and
programs that may be offered to the senior officers of the Company so that
Employee will receive, at all times during the Continuation Period, the same
benefits under such plans and programs as Employee would have been entitled to
receive had he remained an Executive Officer of the Company; provided, however,
in the event Employee becomes covered during the Continuation Period by another
employer's group plan or programs which provide benefits to Employee and his
dependents comparable to those being provided to Employee under this paragraph
(b) (provided with respect to any such group health plan, such plan does not
contain any exclusion or limitation with respect to any pre-existing
conditions), then the Company's similar plans and programs shall
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no longer be liable for any benefits under this paragraph (b). In no event shall
Employee's COBRA continuation period begin prior to the end of Employee's
coverage under the Company's group health plan as provided in this paragraph
(b).
(c) Options. All options of the Employee under the ISO Plan
(or similar plan) which have not vested as of Employee's Termination Date and
which would vest within one year of Employee's Termination Date shall vest and
shall become immediately exercisable. The Company shall issue to the Employee
within 30 days of the Termination Date an amount of new options as separate
securities in exchange for and in an amount equal to the Employee's vested ISO
Plan options. Such new options shall have the same exercise price and other
terms as the ISO Plan options including a requirement that these options be
registered under applicable securities laws if the ISO Plan options are
registered. All loans to the Employee in connection with the prior exercise of
any options under the ISO Plan (or similar plan) shall remain unaffected and
will remain on their original terms.
(d) Release. Notwithstanding anything in this Section 4.5 to
the contrary, as a condition to the receipt of any benefit under this Section
4.5, Employee must first execute and deliver to the Company a muutual release as
set out in exhibit 4.5(d) hereto (which the Company shall be obligated to
execute upon Employee's delivery thereof), releasing the Company, its officers,
Board of Directors, employees and agents from any and all claims and from any
and all causes of action of any kind or character that Employee may have arising
out of Employee's employment with the Company or the termination of such
employment, but excluding any claims and causes of action that Employee may have
arising under or based upon this Agreement.
4.6. Additional Rights in the Event of Death
In the event that the Employee's employment is terminated as a result
of his death, the Employee's estate and/or his beneficiaries shall be entitled
to the payments and benefits set forth in this Section 4.6 in addition to such
other applicable rights as may be set forth elsewhere in this Agreement:
(a) Target Bonus. The Employee's estate shall be entitled to
receive the Target Bonus that the deceased employee would have been entitled to
have received in the year in which the death occurred.
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(b) Insurance Benefits, etc. The Company shall pay the cost
for dependents of the Employee for insurance coverage that they are entitled to
obtain from the Company following the Employee's death pursuant to COBRA but not
less than 18 months.
(c) Options. All options of the Employee under the ISO Plan
(or similar plan) which have not vested as of Employee's death and which would
vest within one year thereof shall vest immediately upon the Employee's death
and shall remain exercisable by the Employee's estate for the shorter of 18
months following the Employee's death and their original term. All loans to the
Employee in connection with the prior exercise of any options under the ISO Plan
(or similar plan) shall be due the earlier of 18 months following the Employee's
death and their original term.
4.7. Additional Rights in the Event of Termination by
Resignation Other than for Good Reason
In the event that the Employee terminates his employment pursuant to
Section 4.1 without Good Reason, he shall be entitled to the rights set forth in
this Section 4.7 in addition to such other applicable rights as may be set forth
elsewhere in this Agreement:
(a) Options. All options of the Employee under the ISO Plan
(or similar plan) which have not vested as of employee's Termination Date shall
lapse and shall not be exercisable. All previously vested options shall remain
exercisable for the shorter of 90 days following the Termination Date and their
original term. All loans to the Employee in connection with the prior exercise
of any options under the ISO Plan (or similar plan) shall be due the earlier of
90 days following the Employee's death and their original term. The Company
shall issue to the Employee within 30 days of the Termination Date an amount of
new options as separate securities in exchange for and in an amount equal to the
Employee's vested ISO Plan options. Such new options shall have the same
exercise price and other terms as the ISO Plan options including a requirement
that these options be registered under applicable securities laws if the ISO
Plan options are registered. All loans to the Employee in connection with the
prior exercise of any options under the ISO Plan (or similar plan) shall remain
unaffected and will remain on their original terms.
<PAGE>
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4.8. Rights in the Event of Termination
for Employee's Misconduct
In the event that the Company terminates Employee's employment with
the Company pursuant to Section 4.2 for Employee's Misconduct, Employee shall be
entitled to the rights set forth in this Section 4.8 in addition to such other
applicable rights as may be set forth elsewhere in this Agreement:
(a) Options. All options of the Employee under the ISO Plan
(or similar plan) which have not vested as of employee's Termination Date shall
lapse and shall not be exercisable. All previously vested options shall remain
exercisable for the shorter of 90 days following the Termination Date and their
original term. All loans to the Employee in connection with the prior exercise
of any options under the ISO Plan (or similar plan) shall be due the earlier of
90 days following the Employee's death and their original term.
4.9 Non-exclusivity of Rights
Nothing in this Agreement shall prevent or limit Employee's
continuing or future participation in any plan, program, policy or practice
provided by the Company for which Employee may qualify, nor shall anything
herein limit or otherwise affect such rights as Employee may have under any
other contract or agreement with the Company. Amounts which are vested benefits
or which Employee is otherwise entitled to receive under any plan, policy,
practice or program of or any contract or agreement with the Company at or
subsequent to the Termination Date shall be payable in accordance with such
plan, policy, practice or program or contract or agreement except as explicitly
modified by this Agreement.
4.10. Company to Pay Benefits During Pendency of Dispute
Either party may, within ten (10) days after its receipt of a Notice
of Termination given by the other party, provide notice to the other party that
a dispute exists concerning the termination, in which event such dispute shall
be resolved in accordance with Article VI. Notwithstanding the pendency of any
such dispute and notwithstanding any provision herein to the contrary, the
Company will (i) continue to pay Employee the Adjusted Base Salary in effect
when the notice giving rise to the dispute was given and (ii) continue Employee
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as a participant in all compensation and benefit plans in which Employee was
participating when the notice giving rise to the dispute until the dispute is
finally resolved or, with respect to a Notice of Employee, the date of
termination specified in such notice, if earlier, but, in each case, not past
the Expiration Date. If (x)(i) the Company gives a Notice of Termination to
Employee and (ii) Employee disputes the termination as contemplated by this
Section 4.10, or (y)(i) the Employee gives a Notice of Termination for Good
Reason and (ii) the Company disputes such termination as contemplated by this
Section 4.10, and, in either case, (z) such dispute is finally resolved in favor
of the Company in accordance with Article VI, then Employee shall be required to
repay to the Company amounts paid to Employee under this Section 4.10 (including
the value of benefits received) but only if, and to the extent, Employee is not
otherwise entitled to receive such amounts under this Agreement.
ARTICLE V
Confidential Information and Non-Competition
5.1. Confidential Information
(a) Employee recognizes that the services to be performed by
him hereunder are special, unique, and extraordinary and that, by reason of his
employment with the Company, he may acquire Confidential Information concerning
the operation of the Company, the use or disclosure of which would cause the
Company substantial loss and damages which could not be readily calculated and
for which no remedy at law would be adequate. Accordingly, Employee agrees that
he will not (directly or indirectly) at any time, whether during or after his
employment hereunder, (i) knowingly use for an improper personal benefit any
Confidential Information that he may learn or has learned by reason of his
employment with the Company or (ii) disclose any such Confidential Information
to any Person except (A) in the performance of his obligations to the Company
hereunder, (B) as required by applicable law, (C) in connection with the
enforcement of his rights under this Agreement, (D) in connection with any
disagreement, dispute or litigation (pending or threatened) between Employee and
the Company or (E) with the prior written consent of the Board of Directors. As
used herein, "Confidential Information" includes information with respect to the
Company's products, facilities and methods, research and development, trade
secrets and other intellectual property, systems, patents and patent
applications,
<PAGE>
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procedures, manuals, confidential reports, product price lists, customer lists,
financial information, business plans, prospects or opportunities; provided,
however, that such term, shall not include any information that (x) is or
becomes generally known or available other than as a result of a disclosure by
Employee or (y) is or becomes known or available to Employee on a
non-confidential basis from a source (other than the Company) which, to
Employee's knowledge, is not prohibited from disclosing such information to
Employee by a legal, contractual, fiduciary or other obligation to the Company.
(b) Employee confirms that all Confidential Information is
the exclusive property of the Company. All business records, papers and
documents kept or made by Employee while employed by the Company relating to the
business of the Company shall be and remain the property of the Company at all
times. Upon the request of the Company at any time, Employee shall promptly
deliver to the Company, and shall retain no copies of, any written materials,
records and documents made by Employee or coming into his possession while
employed by the Company concerning the business or affairs of the Company other
than personal materials, records and documents (including notes and
correspondence) of Employee not containing proprietary information relating to
such business or affairs. Notwithstanding the foregoing, Employee shall be
permitted to retain copies of, or have access to, all such materials, records
and documents relating to any disagreement, dispute or litigation (pending or
threatened) between Employee and the Company.
(c) The Company recognizes that the Employee maintains his
contacts on the computer system and that the list of contacts will remain the
exclusive ownership of the employee.
5.2. Non-Competition
(a) While employed hereunder and for the (i) a period of one
(1) year thereafter or (ii) the period of two (2) years after the Termination
Date, if this Agreement is terminated and the Employee is entitled to receive
compensation and benefits under either Section 4.5 or Section 4.7 (the
"Restricted Period"), Employee shall not, unless he receives the prior written
consent of the Board of Directors, own an interest in, manage, operate, join,
control, lend money or render financial or other assistance to or
<PAGE>
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participate in or be connected with, as an officer, employee, partner,
stockholder, consultant or otherwise, (A) any Person (x) which competes with the
Company in investing or consulting with small and medium sized businesses in the
United States with regard to change of control transactions in which the
transaction utilizes employee stock ownership plans, or (y) which provides or
proposes to provide services to any Person which is a client of the Company as
of the Termination Date or to which the Company has outstanding loans or in
which the Company then has investments (including warrants or options), or (B)
any potential client of the Company with which the Company has discussed a
client, loan or investment relationship within 12 months prior to, as
applicable, the end of Employee's employment or the Termination Date.
Notwithstanding the foregoing, (i) in the event Employee is entitled to receive
compensation and benefits under Section 4.5, Employee may terminate this Section
5.2(a) by renouncing and releasing the obligation of the Company to pay any
future compensation or benefits under Section 4.5, but such termination shall
not apply to any other provision of this Agreement including, without
limitation, Section 5.1 and (ii) in the event that the Employee terminates his
employment pursuant to Section 4.1 without Good Reason, this Section 5.1 shall
apply for only one (1) year after the Termination Date.
(b) Employee has carefully read and considered the
provisions of this Section 5.2 and, having done so, agrees that the restrictions
set forth in this Section 5.2 (including the Restricted Period, scope of
activity to be restrained and the geographical scope) are fair and reasonable
and are reasonably required for the protection of the interests of the Company,
its officers, directors, employees, creditors and shareholders. Employee
understands that the restrictions contained in this Section 5.2 may limit his
ability to engage in a business similar to the Company's business, but
acknowledges that he will receive sufficiently high remuneration and other
benefits from the Company hereunder to justify such restrictions.
(c) During the Restricted Period, Employee shall not,
whether for his own account or for the account of any other Person (excluding
the Company), intentionally (i) solicit, endeavor to entice or induce any
employee of the Company to terminate his employment with the Company or accept
employment with anyone else or (ii) interfere in a similar manner with the
business of the Company.
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(d) In the event that any provision of this Section 5.2
relating to the Restricted Period or the areas of restriction shall be declared
by a court of competent jurisdiction to exceed the maximum time period or areas
such court deems reasonable and enforceable, the Restricted Period or areas of
restriction deemed reasonable and enforceable by the court shall become and
thereafter be the maximum time period and/or areas.
5.3. Stock Ownership
Nothing in this Agreement shall prohibit Employee from acquiring or
holding any issue of stock or securities of any Person that has any securities
registered under Section 12 of the Exchange Act, listed on a national securities
exchange or quoted on the automated quotation system of the National Association
of Securities Dealers, Inc. so long as (i) Employee is not deemed to be an
"affiliate" of such Person as such term is used in paragraphs (c) and (d) of
Rule 145 under the Securities Act of 1933, as amended, and (ii) Employee and
members of his immediate family do not own or hold more than 3% of any voting
securities of any such Person.
5.4. Injunctive Relief
Employee acknowledges that a breach of any of the covenants contained
in this Article V may result in material irreparable injury to the Company for
which there is no adequate remedy at law, that it will not be possible to
measure damages for such injuries precisely and that, in the event of such a
breach, any payments remaining under the terms of this Agreement shall cease and
the Company shall be entitled to obtain a temporary restraining order or a
preliminary or permanent injunction restraining Employee from engaging in
activities prohibited by this Article V or such other relief as may required to
specifically enforce any of the covenants contained in this Article V. Employee
agrees to and hereby does submit to in personam jurisdiction before each and
every such court for that purpose.
ARTICLE VI
Dispute Resolution
In the event a dispute shall arise between the parties as to whether
the provisions of this Agreement have been complied with (a "Dispute"), the
parties agree
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to resolve such Dispute in accordance with the following procedure:
(a) A meeting shall be held promptly between the Parties,
attended by (in the case of the Company) by one or more individuals with
decision-making authority regarding the Dispute, to attempt in good faith to
negotiate a resolution of the Dispute.
(b) If, within 10 days after such meeting, the parties have
not succeeded in negotiating a resolution of the Dispute, the parties agree to
submit the Dispute to mediation in accordance with the Commercial Mediation
Rules of the American Arbitration Association except that Disputes with regard
to the existence of a Disability shall be resolved in accordance with the
definition of the term "Disability" above.
(c) The parties will jointly appoint a mutually acceptable
mediator, seeking assistance in such regard from the American Arbitration
Association if they have been unable to agree upon such appointment within 10
days following the 10-day period referred to in clause (b) above.
(d) Upon appointment of the mediator, the parties agree to
participate in good faith in the mediation and negotiations relating thereto for
15 days.
(e) If the parties are not successful in resolving the
Dispute through mediation within such 15-day period, the parties agree that the
Dispute shall be settled by arbitration in accordance with the Expedited
Procedures of the Commercial Arbitration Rules of the American Arbitration
Association.
(f) The fees and expenses of the mediator/arbitrators shall
be borne solely by the non-prevailing party or, in the event there is no clear
prevailing party, as the mediator/arbitrators deem appropriate.
(g) The Company shall reimburse Employee, on a current
basis, for 50% of all reasonable legal fees and expenses, if any, incurred by
Employee in connection with any Dispute; provided, however, that in the event
the resolution of such Dispute in accordance with this Article VI includes a
finding denying, in all material respects, Employee's claims in such Dispute,
Employee shall be required to reimburse the Company, over a period not to exceed
12 months from the date of such
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resolution, for all sums advanced to Employee with respect to such Dispute
pursuant to this paragraph (g).
(h) Except as provided above, each party shall pay its own
costs and expenses (including, without limitation, attorneys' fees) relating to
any mediation/arbitration proceeding conducted under this Article VI.
(i) All mediation/arbitration conferences and hearings
will be held in the greater Washington, D.C. area.
(j) In the event there is any disputed question of law
involved in any arbitration proceeding, such as the proper legal interpretation
of any provision of this Agreement, the arbitrators shall make separate and
distinct findings of all facts material to the disputed question of law to be
decided and, on the basis of the facts so found, express their conclusion of the
question of law. The facts so found shall be conclusive and binding on the
parties, but any legal conclusion reached by the arbitrators from such facts may
be submitted by either party to a court of law for final determination by
initiation of a civil action in the manner provided by law. Such action, to be
valid, must be commenced within 20 days after receipt of the arbitrators'
decision. If no such civil action is commenced within such 20-day period, the
legal conclusion reached by the arbitrators shall be conclusive and binding on
the parties. Any such civil action shall be submitted, heard and determined
solely on the basis of the facts found by the arbitrators. Neither of the
parties shall, or shall be entitled to, submit any additional or different facts
for consideration by the court. In the event any civil action is commenced under
this paragraph (b), the party who prevails or substantially prevails (as
determined by the court) in such civil action shall be entitled to recover from
the other party all costs, expenses and reasonable attorneys' fees incurred by
the prevailing party in connection with such action and on appeal.
(k) Except as limited by paragraph (b) above, the parties
agree that judgment upon the award rendered by the arbitrators may be entered in
any court of competent jurisdiction. In the event legal proceedings are
commenced to enforce the rights awarded in an arbitration proceeding, the party
who prevails or substantially prevails in such legal proceeding shall be
entitled to recover from the other party all costs, expenses and reasonable
attorneys' fees incurred by the
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prevailing party in connection with such legal proceeding and on appeal.
(l) Except as provided above, (i) no legal action may be
brought by either party with respect to any Dispute and (ii) all Disputes shall
be determined only in accordance with the procedures set forth above.
ARTICLE VII
Miscellaneous
7.1. No Mitigation or Offset
The provisions of this Agreement are not intended to, nor shall they
be construed to, require that Employee mitigate the amount of any payment
provided for in this Agreement by seeking or accepting other employment, nor
shall the amount of any payment provided for in this Agreement be reduced by any
compensation earned by Employee as the result of employment by another employer
or otherwise. Without limitation of the foregoing, the Company's obligations to
make the payments to Employee required under this Agreement and otherwise to
perform its obligations hereunder shall not be affected by any set off,
counterclaim, recoupment, defense or other claim, right or action that the
Company may have against Employee, except that the Company may deduct from any
amount required to be reimbursed to the Company by Employee under Section 4.10
or Article VI(a) the amount of any payment which the Company is then required to
make to Employee hereunder.
7.2. Assignability
The obligations of Employee hereunder are personal and may not be
assigned or delegated by Employee or transferred in any manner whatsoever, nor
are such obligations subject to involuntary alienation, assignment or transfer.
The Company shall have the right to assign this Agreement and to delegate all
rights, duties and obligations hereunder as provided in Section 7.5.
7.3. Notices
All notices and all other communications provided for in the
Agreement shall be in writing and addressed (i) if to the Company, at its
principal office address or such other address as it may have designated by
written notice to Employee for purposes hereof, directed
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to the attention of the Board of Directors with a copy to the Secretary of the
Company and (ii) if to Employee, at his residence address on the records of the
Company or to such other address as he may have designated to the Company in
writing for purposes hereof. Each such notice or other communication shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, except that any
notice of change of address shall be effective only upon receipt.
7.4. Severability
The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provision of this
Agreement, which shall remain in full force and effect.
7.5. Successors: Binding Agreement
(a) The Company will require any successor (whether direct
or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business or assets of the Company, by agreement in form
and substance reasonable acceptable to Employee, to expressly assume and agree
to perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession had taken place.
Failure of the Company to obtain such agreement prior to the effectiveness of
any such succession shall be a breach of this Agreement. As used herein, the
term "Company" shall include any successor to its business and/or assets as
aforesaid which executes and delivers the Agreement provided for in this Section
7.5 or which otherwise becomes bound by all terms and provisions of this
Agreement by operation of law.
(b) This Agreement and all rights of Employee hereunder
shall inure to the benefit of and be enforceable by Employee's personal or legal
representatives, executors, administrators, successors, heirs, distributes,
devisees and legatees. If Employee should die while any amounts would be payable
to him hereunder if he had continued to live, all such amounts, unless otherwise
provided herein, shall be paid in accordance with the terms of this Agreement to
Employee's devisee, legatee, or other designee or, if there be no such designee,
to Employee's estate.
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7.6. Tax Matters
The Company shall withhold from all payments hereunder all applicable
taxes (federal, state or other) which it is required to withhold therefrom
unless Employee has otherwise paid (or made other arrangements satisfactory) to
the Company the amount of such taxes.
7.7 Amendments and Waivers
No provision of this Agreement may be modified, waived or discharged
unless such waiver, modification or discharge is agreed to in writing and signed
by Employee and such member of the Board of Directors as may be specifically
authorized by the Board of Directors. No waiver by either party hereto at any
time of any breach by the other party hereto of, or in compliance with, any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time.
7.8. Entire Agreement, Termination of Other Agreements
This Agreement is an integration of the parties' agreement and no
agreement or representations, oral or otherwise, express or implied, with
respect to the subject matter hereof have been made by either party which are
not set forth expressly in this Agreement.
7.9. Governing Law
THE VALIDITY, INTERPRETATION, CONSTRUCTION AND PERFORMANCE OF THIS
AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF MARYLAND WITHOUT REGARD
TO ITS CONFLICT OF LAWS PROVISION.
7.10. Counterparts
This Agreement may be executed in or more counterparts, each of which
shall be deemed to be an original, but all of which together will constitute one
and the same instrument.
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IN WITNESS WHEREOF, the parties have executed this Agreement
effective as of the date first above written.
AMERICAN CAPITAL STRATEGIES, LTD.
By: ____________________________
Malon Wilkus, President
EMPLOYEE:
__________________________________
Stephen L. Hester
Exhibit 2.i.7
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is entered into as of
August __, 1997 (the "Effective Date") by and between AMERICAN CAPITAL
STRATEGIES, LTD., a Delaware corporation (the "Company"), and ROLAND CLINE (the
"Employee").
W I T N E S S E T H:
WHEREAS, Employee is a Vice President of the Company; and
WHEREAS, it is in the interests of the Corporation that Employee's
service continue to be available to the Corporation.
NOW, THEREFORE, in consideration of the mutual covenants,
representations, warranties and agreements contained herein, and for other
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto agree as follows:
ARTICLE I
Definitions and Interpretations
1.1. Definitions
For purposes of this Agreement, except as otherwise expressly
provided or unless the context otherwise requires, the following terms shall
have the following respective meanings:
"Adjusted Base Salary" shall have the meaning specified in
Section 3.1.
"Annual Bonus Plan" shall have the meaning specified in
Section 3.2.
"Base Salary" shall have the meaning specified in Section 3.1.
"Board of Directors" shall mean the Board of Directors of the
Company.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Compensation Committee" shall mean the Compensation Committee of
the Board of Directors or such
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other entity as may be designated for a particular function by the Board of
Directors.
"Confidential Information" shall have the meaning specified in
Section 5.1(a).
"Continuation Period" shall have the meaning specified in
Section 4.4(a).
"Disability" shall mean a physical or mental condition of Employee that, in the
good faith judgment of not less than a majority of the entire membership of the
Board of Directors, prevents Employee from being able to perform the services
required under this Agreement and which results in the Employee becoming
eligible for long-term disability benefits (if such benefits are provided by the
Company). If any dispute arises as to whether a Disability has occurred, or
whether a Disability has ceased and the Employee is able to resume duties, then
such dispute shall be referred to a licensed physician appointed by the
president of the Medical Society or similar organization in Washington, D.C., at
the request of either party. The Employee shall submit to such examinations and
provide information as such physician may request and the determination of such
physician as to the Employee's physical or mental condition shall be binding and
conclusive on the parties. The Company shall pay the cost of any such physician
and examination.
"Dispute" shall have the meaning specified in Article VI.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Executive Officers" shall refer to the President, the Chairman of
the Board, all Executive Vice Presidents, the Employee and all other officers
designated as Executive Officers by the Board of Directors.
"Expiration Date" shall have the meaning specified in Section 2.2.
"Good Reason" shall mean any of the following:
(1) without Employee's express written consent, a material adverse
alteration in the nature or status of Employee's position,
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functions, duties or responsibilities with the Company;
(2) a material breach by the Company of any material provision of
this Agreement which, if capable of being remedied, remains unremedied for more
than 15 days after written notice thereof is given by Employee to the Company;
(3) any purported termination by the Company of Employee's
employment not in accordance with the provisions of this Agreement;
(4) the failure of the Company to obtain any assumption agreement
required by Section 7.5(a);
(5) the amendment, modification or repeal of any provision of the
Company's Certificate of Incorporation or by-laws, if such amendment,
modification or repeal would materially adversely affect Employee's rights to
indemnification by the Company; or
(6) change of control of the Company following an IPO which would
result in the control of 25% or more of the Company's voting shares by one
Person or a group of Persons acting in concert other than such entities as may
own voting securities on the date hereof.
"IPO" shall mean an initial underwritten public offering of
securities of the Corporation pursuant to a Securities and Exchange Commission
registration statement other than Form S-8 or Form S-14.
"ISO Plan" shall have the meaning specified in Section 3.3.
"Misconduct" shall mean one or more of the following:
(i) the willful and continued failure by Employee to perform
substantially his duties described in Section 2.3 (other than any such failure
resulting from Employee's incapacity due to physical or mental illness) after
two (2) written notices of such failure have been given to Employee by the
Company and Employee has had a reasonable period (not to exceed 15 days from the
second notice) to correct such failure;
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(ii) the commission by Employee of acts that are dishonest and
demonstrably injurious to the Company (monetarily or otherwise) in any material
respect; or
(iii) a material breach or violation by Employee of (a) any
material provision ofthis Agreement or (b) any material Company employment
policy, including its Stock Trading Policies and Procedures which the Company
will publish from time to time, which, if capable of being remedied, remains
unremedied for more than 15 days after written notice thereof is given to
Employee by the Company.
For purposes of this definition, no act or failure to act on
Employee's part shall be considered "Misconduct" if done or omitted to be done
by Employee in good faith and in the reasonable belief that such act or failure
to act was in the best interest of the Company or in furtherance of Employee's
duties and responsibilities described in Section 2.3.
"Notice of Discontinuance" shall have the meaning specified in
Section 2.2.
"Notice of Termination" shall mean a notice purporting to terminate
Employee's employment in accordance with Section 4.1 or 4.2. Such notice shall
specify the effective date of such termination, which date shall not be less
than 30 (one (1) day in the case of a termination by the Company for Misconduct)
or more than 60 days after the date such notice is given. If such termination is
by Employee for Good Reason or by the Company for Disability or Misconduct, such
notice shall set forth in reasonable detail the reason for such termination and
the facts and circumstances claimed to provide a basis therefor. Any notice
purporting to terminate Employee's employment which is not in compliance with
the requirements of this definition shall be ineffective.
"Person" shall mean and include an individual, a partnership, a
joint venture, a corporation, a trust and an unincorporated organization.
"Target Bonus" shall have the meaning specified in Section 3.2.
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"Term" shall have the meaning specified in Section 2.2.
"Termination Date" shall mean the termination date specified in a
Notice of Termination delivered in accordance with this Agreement.
1.2. Interpretations
(a) In this Agreement, unless a clear contrary intention
appears, (i) the words "herein," "hereof" and "hereunder" and other words of
similar import refer to this Agreement as a whole and not to any particular
Article, Section or other subdivision, (ii) reference to any Article or Section,
means such Article or Section hereof, (iii) the words "including" (and with
correlative meaning "include") means including, without limiting the generality
of any description preceding such term, and (iv) where any provision of this
Agreement refers to action to be taken by either party, or which such party is
prohibited from taking, such provision shall be applicable whether such action
is taken directly or indirectly by such party.
(b) The Article and Section headings herein are for
convenience only and shall not affect the construction hereof.
ARTICLE II
Employment: Term, Positions and Duties, Etc.
2.1. Employment
The Company agrees to employ Employee and Employee agrees to accept
employment with the Company, in each case on the terms and conditions set forth
in this Agreement.
2.2. Term of Employment
Unless sooner terminated pursuant to Article IV, the term
of Employee's employment under this Agreement (the "Term") shall commence on the
Effective Date and shall continue until the fifth anniversary of the Effective
Date (the "Expiration Date"); provided, however, that on the third anniversary
of the Effective Date, and on each anniversary thereafter (each such anniversary
being an "Extension Anniversary"), the Expiration Date shall be automatically
extended one additional year unless, at least six months prior to an Extension
Anniversary, (i) either party shall give
<PAGE>
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written notice to the other (a "Notice of Discontinuance") that no such
automatic extension shall occur on the next succeeding Extension Anniversary and
each Extension Anniversary thereafter, or (ii) either party shall give a Notice
of Termination to the other party pursuant to Section 4.1 or 4.2, as the case
may be. No Notice of Discontinuance given by the Company shall be effective
unless given pursuant to instructions set forth in a resolution duly adopted by
the affirmative vote of a least a majority of the entire membership of the Board
of Directors. 2.3. Positions and Duties
(a) While employed hereunder, Employee shall serve as a
Vice President of the Company, and shall have and may exercise all of the
powers, functions, duties and responsibilities normally attributable to such
office, including (without limitation) such duties and responsibilities as are
set forth with respect to such office in the Company's Certificate of
Incorporation and By-laws (as from time to time in effect). Employee shall have
such additional duties and responsibilities commensurate with such offices as
from time to time may be reasonably assigned to him by the Board of Directors.
While employed hereunder, Employee shall (i) report directly to the President of
the Company and (ii) observe and comply with all lawful policies, directions and
instructions of the President which are consistent with the foregoing provisions
of this paragraph (a).
(b) While employed hereunder, Employee shall (i) devote
substantially all of his business time, attention, skill and efforts to the
faithful and efficient performance of his duties hereunder and (ii) not accept
employment with any Person other than with the Company. Notwithstanding the
foregoing, Employee may engage in the following activities so long as they do
not interfere in any material respect with the performance of Employee's duties
and responsibilities hereunder: (i) serve on corporate, civic, religious,
educational or charitable boards or committees and (ii) manage his personal
investments.
(c) While employed hereunder, Employee shall conduct
himself in such a manner as not to knowingly prejudice, in any material respect,
the reputation of the Company in the fields of business in which it is engaged
or with the investment community or the public at large.
<PAGE>
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2.4. Place of Employment
Employee's place of employment hereunder shall be at the Company's
offices in the greater San Francisco, California area or such other area that is
mutually agreeable to both parties.
ARTICLE III
Compensation and Benefits
3.1. Base Salary
(a) For services rendered by Employee under this
Agreement, the Company shall pay to Employee an annual base salary ("Base
Salary") of $132,500. The Board of Directors shall review the Base Salary at
least annually and, subject to paragraph (b) below, may adjust the amount of the
Base Salary at any time as the Board of Directors may deem appropriate in their
sole discretion.
(b) The amount of the Base Salary may not be decreased
without the prior written approval of the Employee except that if the Board of
Directors increases the Base Salary as provided in the last sentence of
paragraph (a) above, the Board of Directors may thereafter decrease the Base
Salary by an amount not to exceed the amount of such increase, but only if a
proportionally similar decrease is made to the base compensation of all other
Executive Officers of the Company; provided, however, that in no event may the
Base Salary be decreased below $132,500, without the prior written consent of
Employee.
(c) For so long as Employee is based at the Company's San
Francisco, California area office, Employee shall be entitled to a location
adjustment equal to 25% of the Base Salary (the Base Salary as so adjusted being
the "Adjusted Base Salary").
(d) The Adjusted Base Salary shall be payable in
accordance with the Company's payroll practice for Executive Officers as earned.
3.2 Annual Bonus Plan
During the Term, the Company shall maintain and the Employee shall
be entitled to participate in an incentive bonus plan (the "Annual Bonus Plan"),
which will provide for the payment of cash bonuses to eligible
<PAGE>
- 8 -
executives of the Company at specified times during the year and within 90 days
of the end of each fiscal year based on the Company's financial performance and
other appropriate factors for that year or a portion thereof. Under the Annual
Bonus Plan, Employee shall be eligible to earn a target bonus (the "Target
Bonus") each year equal to 200% of Employee's Adjusted Base Salary for such year
based on criteria established by the Compensation Committee, and the performance
of the Company against such criteria. The establishment of such criteria and of
the necessary performance targets for partial or full earning of the Target
Bonus shall be at the sole reasonable discretion of the Compensation Committee;
provided, however, that Employee shall be entitled to a Target Bonus each year
equal to at least five percent (5%) of the maximum Target Bonus. During the
calendar year 1997 and the year in which the Expiration Date occurs, the Target
Bonus which would be payable shall be prorated and paid based on the number of
days in such year actually occurring during the Term.
3.3 Long-term Incentive Compensation
Upon the closing of the IPO, the Company shall have established a
long-term incentive compensation plan, which provides key employees of the
Company with ownership interests in the Company, as substantially set forth in
Attachment A hereto (the "ISO Plan"). Under the ISO Plan, Employee shall be
granted options to purchase ___% of the stock outstanding as of the IPO adjusted
upward for the additional shares issued pursuant to the exercise of any
underwriter's over-allotment option within thirty (30) days of the IPO.
One-third of such options will vest and become exercisable on each of the first
three anniversaries of the effectiveness of the IPO; provided, however, that
Employee may accelerate the vesting of any such options by agreeing to exercise
such options immediately and that for a period through the date on which such
options would have vested, not to sell, assign or convey any stock so purchased
(other than by laws of descent or distribution) and to grant the Company a call
option to repurchase such stock at the option exercise price if the options
would have been forfeited prior to their original vesting date as a result of
the Employee's subsequent termination of employment with the Company. To the
extent permissible, such options shall be characterized as Incentive Stock
Options as defined in Section 422 of the Code. The employee shall participate in
all other long-term compensation incentive plans of the Company in accordance
with their terms.
<PAGE>
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3.4. Vacation
While employed hereunder, Employee shall be entitled to vacation
benefits in accordance with the vacation policy adopted by the Company from time
to time for senior executives in general, but in no event shall Employee's
annual vacation be less than 30 business days or such greater number of vacation
days as the Board of Directors may approve from time to time in its sole
discretion. Employee shall not be entitled to accumulate and carryover unused
vacation time from year to year, except to the extent permitted in accordance
with the Company's vacation policy for senior executives in general, but
Employee shall be entitled to compensation for unused accrued vacation time at
the end of each year.
3.5. Business Expenses
The Company shall, in accordance with the rules and policies that
it may establish from time to time for senior executives, reimburse Employee for
business expenses reasonably incurred in the performance of Employee's duties.
Requests for reimbursement for such expenses must be accompanied by appropriate
documentation. Examples of reimbursable expenses include parking, mileage
charges, air fares and hotel accommodations while traveling on Company business.
3.6. Other Benefits
Employee shall be entitled to receive all employee benefits, fringe
benefits and other perquisites that may be offered by the Company to its
Executive Officers as a group, including, without limitation, (i) participation
by Employee and, where applicable, Employee's dependents, in the various
employee benefit plans or programs (including, without limitation, pension
plans, profit sharing plans, stock plans, health plans, life insurance, parking
and disability insurance) generally provided to Executive Officers of the
Company, subject to meeting the eligibility requirements with respect to each of
such benefit plans or programs, (ii) club memberships, (iii) automobile
allowances, and (iv) financial planning allowances. However, nothing in this
Section 3.6 shall be deemed to prohibit the Company from making any changes in
any of the plans, programs or benefits described herein, provided such changes
apply to all similarly situated Executive Officers.
<PAGE>
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3.7. Indemnification
The Company agrees to defend, indemnify and hold harmless the
Employee from and against any liability and expenses arising by reason of
Employee's acting as a director or officer of the Company or any Company
subsidiary or affiliate, or any portfolio company of the Company, in accordance
with and to the fullest extent permitted by law. The Company shall maintain
Directors and Officers liability insurance for the Employee in such amounts of
coverage as are reasonably available to the Company and to the extent such is
attainable at reasonable cost and are permitted by law.
ARTICLE IV
Termination of Employment
4.1. Termination by Employee
Employee may, at any time prior to the Expiration Date, terminate
his employment hereunder for any reason by delivering a Notice of Termination to
the Board of Directors.
4.2. Termination by the Company
The Company may, at any time prior to the Expiration Date,
terminate Employee's employment hereunder for any reason by delivering a Notice
of Termination to Employee; provided, however, that in no event shall the
Company be entitled to terminate Employee's employment prior to the Expiration
Date unless the Board of Directors shall duly adopt, by the affirmative vote of
at least a majority of the entire membership of the Board of Directors, a
resolution authorizing such termination. Should the board adopt such a
resolution, the Employee may resign in lieu of being terminated, but such
resignation shall otherwise be treated as a termination by the Company for
purposes of this Article IV.
4.3. Payment of Accrued Base Salary, Vacation Pay, etc.
(a) Promptly upon the termination of Employee's
employment for any reason (including death), the Company shall pay to Employee
(or his estate) a lump sum amount for (i) any unpaid Adjusted Base Salary earned
hereunder prior to the Termination Date, (ii) all unused vacation time accrued
by Employee as of the
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Termination Date in accordance with Section 3.4, (iii) all unpaid benefits
earned or vested, as the case may be, by Employee as of the Termination Date
under any and all incentive or deferred compensation plans or programs of the
Company and (iv) any amounts in respect of which Employee has requested, and is
entitled to, reimbursement in accordance with Section 3.5.
(b) A termination of Employee's employment in accordance
with this Agreement shall not alter or impair any of Employee's accrued rights
or benefits as of the Termination Date under any employee benefit plan or
program maintained by the Company, in each case except as provided therein or in
any written agreement entered into between the Company and Employee pursuant
thereto.
4.4. Additional Rights in Connection With Disability
In the event that the Company terminates an Employee by
delivering a Notice of Termination to Employee stating that such Termination is
by reason of a Disability, the Employee shall be entitled to the benefits and
payments set forth in this Section 4.4 in addition to such other applicable
rights as may be provided elsewhere in this Agreement:
(a) Base Salary and Target Bonus. The Company shall
continue to pay to Employee the Adjusted Base Salary in effect as of the date on
which the Notice of Termination was delivered for two (2) years following the
Termination Date (but in no event less than 365 days) (such period being the
"Continuation Period") which amount shall be reduced by any amount payable to
Employee under any disability plan maintained by the Company for the benefit of
Employee. In addition, the Employee shall be entitled to continue to participate
in the Annual Bonus Plan for two (2) years following the Termination Date with
the second anniversary of the Termination Date being the Expiration Date for
purposes of Section 3.2.
(b) Insurance Benefits, etc. The Company shall at all
times during the Continuation Period, without charge to Employee or Employee's
dependents, cause Employee and Employee's eligible dependents to be covered by
and to participate in, to the fullest extent allowable under the terms thereof,
all life, accidental death and dismemberment and health insurance plans and
programs that may be offered to the senior officers of
<PAGE>
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the Company so that Employee will receive, at all times during the Continuation
Period, the same benefits under such plans and programs as Employee would have
been entitled to receive had he remained an Executive Officer of the Company. In
no event shall Employee's continuation period for purposes of Part 6 of Title I
of the Employee Retirement Income Security Act of 1974, as amended ("COBRA"),
begin prior to the end of Employee's coverage under the Company's group health
plan as provided in this paragraph (b).
(c) Options. All options of the Employee under the ISO
Plan (or similar plan) which have not vested as of Employee's Termination Date
and which would vest within one year of Employee's Termination Date shall vest
and shall become immediately exercisable. The Company shall issue to the
Employee within 30 days of the Termination Date an amount of new options as
separate securities in exchange for and in an amount equal to the Employee's
vested ISO Plan options. Such new options shall have the same exercise price and
other terms as the ISO Plan options including a requirement that these options
be registered under applicable securities laws if the ISO Plan options are
registered. All loans to the Employee in connection with the prior exercise of
any options under the ISO Plan (or similar plan) shall remain unaffected and
will remain on their original terms.
Should the Employee's Disability end during the pendency of the
Term, the Company may discontinue the payments contemplated by this Section 4.4
if it offers to reemploy Employee under the terms of this Agreement, but no such
offer shall affect the terms of Section 4.4(c) above.
4.5. Additional Rights in Connection With Terminations by Employee
for Good Reason or by the Company for Other than Misconduct or
Disability
In the event that Employee terminates his employment
pursuant to Section 4.1 for Good Reason or if the Company terminates Employee's
employment with the Company pursuant to Section 4.2 for other than Misconduct or
a Disability, the Employee shall be entitled to the payments and benefits set
forth in this Section 4.5 in addition to such other applicable rights as may be
provided elsewhere in this Agreement:
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(a) Base Salary and Target Bonus. The Company shall
continue to pay to Employee the Adjusted Base Salary in effect as of the date on
which the Notice of Termination for the Continuation Period. In addition, the
Employee shall be entitled to continue to participate in the Annual Bonus Plan
for two (2) years following the Termination Date with the second anniversary of
the Termination Date being the Expiration Date for purposes of Section 3.2. The
amount payable to Employee under this paragraph (a) is in lieu of, and not in
addition to, any severance payment due to or become due to Employee under any
separate agreement or contract between Employee and the Company or pursuant to
any severance payment plan, program or policy of the Company.
(b) Insurance Benefits, etc. The Company shall at all
times during the Continuation Period, without charge to Employee or Employee's
dependents, cause Employee and Employee's eligible dependents to be covered by
and to participate in, to the fullest extent allowable under the terms thereof,
all life, accidental death and dismemberment and health insurance plans and
programs that may be offered to the senior officers of the Company so that
Employee will receive, at all times during the Continuation Period, the same
benefits under such plans and programs as Employee would have been entitled to
receive had he remained an Executive Officer of the Company; provided, however,
in the event Employee becomes covered during the Continuation Period by another
employer's group plan or programs which provide benefits to Employee and his
dependents comparable to those being provided to Employee under this paragraph
(b) (provided with respect to any such group health plan, such plan does not
contain any exclusion or limitation with respect to any pre-existing
conditions), then the Company's similar plans and programs shall no longer be
liable for any benefits under this paragraph (b). In no event shall Employee's
COBRA continuation period begin prior to the end of Employee's coverage under
the Company's group health plan as provided in this paragraph (b).
(c) Options. All options of the Employee under the ISO
Plan (or similar plan) which have not vested as of Employee's Termination Date
and which would vest within one year of Employee's Termination Date shall vest
and shall become immediately exercisable. The Company shall issue to the
Employee within 30 days of the Termination Date an amount of new options as
separate securities in exchange for and in an amount
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equal to the Employee's vested ISO Plan options. Such new options shall have the
same exercise price and other terms as the ISO Plan options including a
requirement that these options be registered under applicable securities laws if
the ISO Plan options are registered. All loans to the Employee in connection
with the prior exercise of any options under the ISO Plan (or similar plan)
shall remain unaffected and will remain on their original terms.
(d) Release. Notwithstanding anything in this Section 4.5
to the contrary, as a condition to the receipt of any benefit under this Section
4.5, Employee must first execute and deliver to the Company a mutual release as
set out in exhibit 4.5(d) hereto (which the Company shall be obligated to
execute upon Employee's delivery thereof), releasing the Company, its officers,
Board of Directors, employees and agents from any and all claims and from any
and all causes of action of any kind or character that Employee may have arising
out of Employee's employment with the Company or the termination of such
employment, but excluding any claims and causes of action that Employee may have
arising under or based upon this Agreement.
4.6. Additional Rights in the Event of Death
In the event that the Employee's employment is terminated as a
result of his death, the Employee's estate and/or his beneficiaries shall be
entitled to the payments and benefits set forth in this Section 4.6 in addition
to such other applicable rights as may be set forth elsewhere in this Agreement:
(a) Target Bonus. The Employee's estate shall be entitled
to receive the Target Bonus that the deceased employee would have been entitled
to have received in the year in which the death occurred.
(b) Insurance Benefits, etc. The Company shall pay the
cost for dependents of the Employee for insurance coverage that they are
entitled to obtain from the Company following the Employee's death pursuant to
COBRA but not less than 18 months.
(c) Options. All options of the Employee under the ISO
Plan (or similar plan) which have not vested as of Employee's death and which
would vest within one year thereof shall vest immediately upon the Employee's
death and shall remain exercisable by the Employee's estate for the shorter of
18 months following the Employee's death and their original term. All loans to
the Employee in connection with the prior exercise of
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any options under the ISO Plan (or similar plan) shall be due the earlier of 18
months following the Employee's death and their original term.
4.7. Additional Rights in the Event of Termination by Resignation
Other than for Good Reason
In the event that the Employee terminates his employment pursuant
to Section 4.1 without Good Reason, he shall be entitled to the rights set forth
in this Section 4.7 in addition to such other applicable rights as may be set
forth elsewhere in this Agreement:
(a) Options. All options of the Employee under the ISO
Plan (or similar plan) which have not vested as of employee's Termination Date
shall lapse and shall not be exercisable. All previously vested options shall
remain exercisable for the shorter of 90 days following the Termination Date and
their original term. All loans to the Employee in connection with the prior
exercise of any options under the ISO Plan (or similar plan) shall be due the
earlier of 90 days following the Employee's death and their original term. The
Company shall issue to the Employee within 30 days of the Termination Date an
amount of new options as separate securities in exchange for and in an amount
equal to the Employee's vested ISO Plan options. Such new options shall have the
same exercise price and other terms as the ISO Plan options including a
requirement that these options be registered under applicable securities laws if
the ISO Plan options are registered. All loans to the Employee in connection
with the prior exercise of any options under the ISO Plan (or similar plan)
shall remain unaffected and will remain on their original terms.
4.8. Rights in the Event of Termination for Employee's Misconduct
In the event that the Company terminates Employee's employment with
the Company pursuant to Section 4.2 for Employee's Misconduct, Employee shall be
entitled to the rights set forth in this Section 4.8 in addition to such other
applicable rights as may be set forth elsewhere in this Agreement:
(a) Options. All options of the Employee under the ISO
Plan (or similar plan) which have not vested as of employee's Termination Date
shall lapse and shall not be exercisable. All previously vested options
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shall remain exercisable for the shorter of 90 days following the Termination
Date and their original term. All loans to the Employee in connection with the
prior exercise of any options under the ISO Plan (or similar plan) shall be due
the earlier of 90 days following the Employee's death and their original term.
4.9 Non-exclusivity of Rights
Nothing in this Agreement shall prevent or limit Employee's
continuing or future participation in any plan, program, policy or practice
provided by the Company for which Employee may qualify, nor shall anything
herein limit or otherwise affect such rights as Employee may have under any
other contract or agreement with the Company. Amounts which are vested benefits
or which Employee is otherwise entitled to receive under any plan, policy,
practice or program of or any contract or agreement with the Company at or
subsequent to the Termination Date shall be payable in accordance with such
plan, policy, practice or program or contract or agreement except as explicitly
modified by this Agreement.
4.10. Company to Pay Benefits During Pendency of Dispute
Either party may, within ten (10) days after its receipt of a
Notice of Termination given by the other party, provide notice to the other
party that a dispute exists concerning the termination, in which event such
dispute shall be resolved in accordance with Article VI. Notwithstanding the
pendency of any such dispute and notwithstanding any provision herein to the
contrary, the Company will (i) continue to pay Employee the Adjusted Base Salary
in effect when the notice giving rise to the dispute was given and (ii) continue
Employee as a participant in all compensation and benefit plans in which
Employee was participating when the notice giving rise to the dispute until the
dispute is finally resolved or, with respect to a Notice of Employee, the date
of termination specified in such notice, if earlier, but, in each case, not past
the Expiration Date. If (x)(i) the Company gives a Notice of Termination to
Employee and (ii) Employee disputes the termination as contemplated by this
Section 4.10, or (y)(i) the Employee gives a Notice of Termination for Good
Reason and (ii) the Company disputes such termination as contemplated by this
Section 4.10, and, in either case, (z) such dispute is finally resolved in favor
of the Company in accordance with Article VI, then
<PAGE>
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Employee shall be required to repay to the Company amounts paid to Employee
under this Section 4.10 (including the value of benefits received) but only if,
and to the extent, Employee is not otherwise entitled to receive such amounts
under this Agreement.
ARTICLE V
Confidential Information and Non-Competition
5.1. Confidential Information
(a) Employee recognizes that the services to be performed
by him hereunder are special, unique, and extraordinary and that, by reason of
his employment with the Company, he may acquire Confidential Information
concerning the operation of the Company, the use or disclosure of which would
cause the Company substantial loss and damages which could not be readily
calculated and for which no remedy at law would be adequate. Accordingly,
Employee agrees that he will not (directly or indirectly) at any time, whether
during or after his employment hereunder, (i) knowingly use for an improper
personal benefit any Confidential Information that he may learn or has learned
by reason of his employment with the Company or (ii) disclose any such
Confidential Information to any Person except (A) in the performance of his
obligations to the Company hereunder, (B) as required by applicable law, (C) in
connection with the enforcement of his rights under this Agreement, (D) in
connection with any disagreement, dispute or litigation (pending or threatened)
between Employee and the Company or (E) with the prior written consent of the
Board of Directors. As used herein, "Confidential Information" includes
information with respect to the Company's products, facilities and methods,
research and development, trade secrets and other intellectual property,
systems, patents and patent applications, procedures, manuals, confidential
reports, product price lists, customer lists, financial information, business
plans, prospects or opportunities; provided, however, that such term, shall not
include any information that (x) is or becomes generally known or available
other than as a result of a disclosure by Employee or (y) is or becomes known or
available to Employee on a non-confidential basis from a source (other than the
Company) which, to Employee's knowledge, is not prohibited from disclosing such
information to Employee by a legal, contractual, fiduciary or other obligation
to the Company.
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(b) Employee confirms that all Confidential Information
is the exclusive property of the Company. All business records, papers and
documents kept or made by Employee while employed by the Company relating to the
business of the Company shall be and remain the property of the Company at all
times. Upon the request of the Company at any time, Employee shall promptly
deliver to the Company, and shall retain no copies of, any written materials,
records and documents made by Employee or coming into his possession while
employed by the Company concerning the business or affairs of the Company other
than personal materials, records and documents (including notes and
correspondence) of Employee not containing proprietary information relating to
such business or affairs. Notwithstanding the foregoing, Employee shall be
permitted to retain copies of, or have access to, all such materials, records
and documents relating to any disagreement, dispute or litigation (pending or
threatened) between Employee and the Company.
(c) The Company recognizes that the Employee maintains
his contacts on the computer system and that the list of contacts will remain
the exclusive ownership of the employee.
5.2. Non-Competition
(a) While employed hereunder and for the (i) a period of
one (1) year thereafter or (ii) the period of two (2) years after the
Termination Date, if this Agreement is terminated and the Employee is entitled
to receive compensation and benefits under either Section 4.5 or Section 4.7
(the "Restricted Period"), Employee shall not, unless he receives the prior
written consent of the Board of Directors, own an interest in, manage, operate,
join, control, lend money or render financial or other assistance to or
participate in or be connected with, as an officer, employee, partner,
stockholder, consultant or otherwise, (A) any Person (x) which competes with the
Company in investing or consulting with small and medium sized businesses in the
United States with regard to change of control transactions in which the
transaction utilizes employee stock ownership plans, or (y) which provides or
proposes to provide services to any Person which is a client of the Company as
of the Termination Date or to which the Company has outstanding loans or in
which the Company then has investments (including warrants or options), or (B)
any potential client of the Company with which the Company has discussed a
client, loan or
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investment relationship within 12 months prior to, as applicable, the end of
Employee's employment or the Termination Date. Notwithstanding the foregoing,
(i) in the event Employee is entitled to receive compensation and benefits under
Section 4.5, Employee may terminate this Section 5.2(a) by renouncing and
releasing the obligation of the Company to pay any future compensation or
benefits under Section 4.5, but such termination shall not apply to any other
provision of this Agreement including, without limitation, Section 5.1 and (ii)
in the event that the Employee terminates his employment pursuant to Section 4.1
without Good Reason, this Section 5.1 shall apply for only one (1) year after
the Termination Date.
(b) Employee has carefully read and considered the
provisions of this Section 5.2 and, having done so, agrees that the restrictions
set forth in this Section 5.2 (including the Restricted Period, scope of
activity to be restrained and the geographical scope) are fair and reasonable
and are reasonably required for the protection of the interests of the Company,
its officers, directors, employees, creditors and shareholders. Employee
understands that the restrictions contained in this Section 5.2 may limit his
ability to engage in a business similar to the Company's business, but
acknowledges that he will receive sufficiently high remuneration and other
benefits from the Company hereunder to justify such restrictions.
(c) During the Restricted Period, Employee shall not,
whether for his own account or for the account of any other Person (excluding
the Company), intentionally (i) solicit, endeavor to entice or induce any
employee of the Company to terminate his employment with the Company or accept
employment with anyone else or (ii) interfere in a similar manner with the
business of the Company.
(d) In the event that any provision of this Section 5.2
relating to the Restricted Period or the areas of restriction shall be declared
by a court of competent jurisdiction to exceed the maximum time period or areas
such court deems reasonable and enforceable, the Restricted Period or areas of
restriction deemed reasonable and enforceable by the court shall become and
thereafter be the maximum time period and/or areas.
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5.3. Stock Ownership
Nothing in this Agreement shall prohibit Employee from acquiring or
holding any issue of stock or securities of any Person that has any securities
registered under Section 12 of the Exchange Act, listed on a national securities
exchange or quoted on the automated quotation system of the National Association
of Securities Dealers, Inc. so long as (i) Employee is not deemed to be an
"affiliate" of such Person as such term is used in paragraphs (c) and (d) of
Rule 145 under the Securities Act of 1933, as amended, and (ii) Employee and
members of his immediate family do not own or hold more than 3% of any voting
securities of any such Person.
5.4. Injunctive Relief
Employee acknowledges that a breach of any of the covenants
contained in this Article V may result in material irreparable injury to the
Company for which there is no adequate remedy at law, that it will not be
possible to measure damages for such injuries precisely and that, in the event
of such a breach, any payments remaining under the terms of this Agreement shall
cease and the Company shall be entitled to obtain a temporary restraining order
or a preliminary or permanent injunction restraining Employee from engaging in
activities prohibited by this Article V or such other relief as may required to
specifically enforce any of the covenants contained in this Article V. Employee
agrees to and hereby does submit to in personam jurisdiction before each and
every such court for that purpose.
ARTICLE VI
Dispute Resolution
In the event a dispute shall arise between the parties as to
whether the provisions of this Agreement have been complied with (a "Dispute"),
the parties agree to resolve such Dispute in accordance with the following
procedure:
(a) A meeting shall be held promptly between the Parties,
attended by (in the case of the Company) by one or more individuals with
decision-making authority regarding the Dispute, to attempt in good faith to
negotiate a resolution of the Dispute.
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(b) If, within 10 days after such meeting, the parties
have not succeeded in negotiating a resolution of the Dispute, the parties agree
to submit the Dispute to mediation in accordance with the Commercial Mediation
Rules of the American Arbitration Association except that Disputes with regard
to the existence of a Disability shall be resolved in accordance with the
definition of the term "Disability" above.
(c) The parties will jointly appoint a mutually
acceptable mediator, seeking assistance in such regard from the American
Arbitration Association if they have been unable to agree upon such appointment
within 10 days following the 10-day period referred to in clause (b) above.
(d) Upon appointment of the mediator, the parties agree
to participate in good faith in the mediation and negotiations relating thereto
for 15 days.
(e) If the parties are not successful in resolving the
Dispute through mediation within such 15-day period, the parties agree that the
Dispute shall be settled by arbitration in accordance with the Expedited
Procedures of the Commercial Arbitration Rules of the American Arbitration
Association.
(f) The fees and expenses of the mediator/arbitrators
shall be borne solely by the non-prevailing party or, in the event there is no
clear prevailing party, as the mediator/arbitrators deem appropriate.
(g) The Company shall reimburse Employee, on a current
basis, for 50% of all reasonable legal fees and expenses, if any, incurred by
Employee in connection with any Dispute; provided, however, that in the event
the resolution of such Dispute in accordance with this Article VI includes a
finding denying, in all material respects, Employee's claims in such Dispute,
Employee shall be required to reimburse the Company, over a period not to exceed
12 months from the date of such resolution, for all sums advanced to Employee
with respect to such Dispute pursuant to this paragraph (g).
(h) Except as provided above, each party shall pay its
own costs and expenses (including, without limitation, attorneys' fees) relating
to any mediation/arbitration proceeding conducted under this Article VI.
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(i) All mediation/arbitration conferences and hearings
will be held in the greater Washington, D.C. area.
(j) In the event there is any disputed question of law
involved in any arbitration proceeding, such as the proper legal interpretation
of any provision of this Agreement, the arbitrators shall make separate and
distinct findings of all facts material to the disputed question of law to be
decided and, on the basis of the facts so found, express their conclusion of the
question of law. The facts so found shall be conclusive and binding on the
parties, but any legal conclusion reached by the arbitrators from such facts may
be submitted by either party to a court of law for final determination by
initiation of a civil action in the manner provided by law. Such action, to be
valid, must be commenced within 20 days after receipt of the arbitrators'
decision. If no such civil action is commenced within such 20-day period, the
legal conclusion reached by the arbitrators shall be conclusive and binding on
the parties. Any such civil action shall be submitted, heard and determined
solely on the basis of the facts found by the arbitrators. Neither of the
parties shall, or shall be entitled to, submit any additional or different facts
for consideration by the court. In the event any civil action is commenced under
this paragraph (b), the party who prevails or substantially prevails (as
determined by the court) in such civil action shall be entitled to recover from
the other party all costs, expenses and reasonable attorneys' fees incurred by
the prevailing party in connection with such action and on appeal.
(k) Except as limited by paragraph (b) above, the parties
agree that judgment upon the award rendered by the arbitrators may be entered in
any court of competent jurisdiction. In the event legal proceedings are
commenced to enforce the rights awarded in an arbitration proceeding, the party
who prevails or substantially prevails in such legal proceeding shall be
entitled to recover from the other party all costs, expenses and reasonable
attorneys' fees incurred by the prevailing party in connection with such legal
proceeding and on appeal.
(l) Except as provided above, (i) no legal action may be
brought by either party with respect to any Dispute and (ii) all Disputes shall
be determined only in accordance with the procedures set forth above.
<PAGE>
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<PAGE>
ARTICLE VII
Miscellaneous
7.1. No Mitigation or Offset
The provisions of this Agreement are not intended to, nor shall
they be construed to, require that Employee mitigate the amount of any payment
provided for in this Agreement by seeking or accepting other employment, nor
shall the amount of any payment provided for in this Agreement be reduced by any
compensation earned by Employee as the result of employment by another employer
or otherwise. Without limitation of the foregoing, the Company's obligations to
make the payments to Employee required under this Agreement and otherwise to
perform its obligations hereunder shall not be affected by any set off,
counterclaim, recoupment, defense or other claim, right or action that the
Company may have against Employee, except that the Company may deduct from any
amount required to be reimbursed to the Company by Employee under Section 4.10
or Article VI(a) the amount of any payment which the Company is then required to
make to Employee hereunder.
7.2. Assignability
The obligations of Employee hereunder are personal and may not be
assigned or delegated by Employee or transferred in any manner whatsoever, nor
are such obligations subject to involuntary alienation, assignment or transfer.
The Company shall have the right to assign this Agreement and to delegate all
rights, duties and obligations hereunder as provided in
Section 7.5.
7.3. Notices
All notices and all other communications provided for in the
Agreement shall be in writing and addressed (i) if to the Company, at its
principal office address or such other address as it may have designated by
written notice to Employee for purposes hereof, directed to the attention of the
Board of Directors with a copy to the Secretary of the Company and (ii) if to
Employee, at his residence address on the records of the Company or to such
other address as he may have designated to the Company in writing for purposes
hereof. Each such notice or other communication shall be deemed to have been
duly given when delivered or mailed by United States registered mail, return
receipt requested,
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postage prepaid, except that any notice of change of address shall be effective
only upon receipt.
7.4. Severability
The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement, which shall remain in full force and effect.
7.5. Successors: Binding Agreement
(a) The Company will require any successor (whether
direct or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business or assets of the Company, by agreement in form
and substance reasonable acceptable to Employee, to expressly assume and agree
to perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession had taken place.
Failure of the Company to obtain such agreement prior to the effectiveness of
any such succession shall be a breach of this Agreement. As used herein, the
term "Company" shall include any successor to its business and/or assets as
aforesaid which executes and delivers the Agreement provided for in this Section
7.5 or which otherwise becomes bound by all terms and provisions of this
Agreement by operation of law.
(b) This Agreement and all rights of Employee hereunder
shall inure to the benefit of and be enforceable by Employee's personal or legal
representatives, executors, administrators, successors, heirs, distributes,
devisees and legatees. If Employee should die while any amounts would be payable
to him hereunder if he had continued to live, all such amounts, unless otherwise
provided herein, shall be paid in accordance with the terms of this Agreement to
Employee's devisee, legatee, or other designee or, if there be no such designee,
to Employee's estate.
7.6. Tax Matters
The Company shall withhold from all payments hereunder all
applicable taxes (federal, state or other) which it is required to withhold
therefrom unless Employee has otherwise paid (or made other arrangements
satisfactory) to the Company the amount of such taxes.
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7.7 Amendments and Waivers
No provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in writing
and signed by Employee and such member of the Board of Directors as may be
specifically authorized by the Board of Directors. No waiver by either party
hereto at any time of any breach by the other party hereto of, or in compliance
with, any condition or provision of this Agreement to be performed by such other
party shall be deemed a waiver of similar or dissimilar provisions or conditions
at the same or at any prior or subsequent time.
7.8. Entire Agreement, Termination of Other Agreements
This Agreement is an integration of the parties' agreement and no
agreement or representations, oral or otherwise, express or implied, with
respect to the subject matter hereof have been made by either party which are
not set forth expressly in this Agreement.
7.9. Governing Law
THE VALIDITY, INTERPRETATION, CONSTRUCTION AND PERFORMANCE OF THIS
AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF MARYLAND WITHOUT REGARD
TO ITS CONFLICT OF LAWS PROVISION.
7.10. Counterparts
This Agreement may be executed in or more counterparts, each of
which shall be deemed to be an original, but all of which together will
constitute one and the same instrument.
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IN WITNESS WHEREOF, the parties have executed this Agreement
effective as of the date first above written.
AMERICAN CAPITAL STRATEGIES, LTD.
By:
-----------------------------
Malon Wilkus, President
EMPLOYEE:
----------------------------------
Roland Cline
Exhibit 2.j.1
RIGGS BANK N.A.
Contractor
and
AMERICAN CAPITAL STRATEGIES, LTD.
Owner
LOAN ACCOUNTING AGREEMENT
Dated as of __________________, 19 ____
<PAGE>
This LOAN ACCOUNTING AGREEMENT, dated _________________________, 1997 is
executed by RIGGS BANK N.A., ("Contractor"), and AMERICAN CAPITAL STRATEGIES,
LTD., a Delaware corporation ("Owner").
The Owner is in the business of originating Loans (hereinafter defined).
The Contractor is in the business of collecting loan payments and
accounting for loans.
From time to time Owner will request that Contractor provide certain
loan accounting services with respect to the Loans. The Owner and the Contractor
wish to prescribe the terms of such services with respect to the Loans.
In consideration of the premises and the mutual agreements hereinafter
set forth, the Owner and the Contractor agree as follows:
ARTICLE I
DEFINITIONS
Section 1.01 Defined Terms.
Whenever used in this Agreement, the following words and phrases shall
have the following meaning specified in this Article:
"Agreement": This Loan Accounting Agreement including all exhibits
hereto, amendments hereof and supplements hereto.
"Business Day": Any day other than (i) a Saturday or Sunday, or (ii) a
day on which banking or savings and loan institutions in the District of
Columbia are authorized or obligated by law or executive order to be closed.
"Contractor": Riggs Bank N.A., or its successor in interest or any
successor under this Agreement appointed as herein provided.
"Custodial Account": The separate custodial account or accounts created
and maintained pursuant to this Agreement which shall be entitled "Riggs Bank
N.A., as custodian for the Owner of Loans under Loan Accounting Agreement dated
as of ____________________________, 19 _____."
"Custodian Agreement": The separate Custodian Agreement of even date
herewith between Owner and Contractor.
<PAGE>
"Due Date": With respect to any Loan, the day of the month on which each
Monthly Payment is due thereon, exclusive of any days of grace.
"Event of Default": Any one of the conditions or circumstances
enumerated in Section 7.01.
"Loan": An individual commercial loan, including but not limited to all
documents included in the Loan File, and any and all rights, benefits, proceeds
and obligations arising therefrom or in connection therewith, and which is the
subject of this Agreement from time to time; provided, however, the Contractor
shall have the right to reject any loan which, due to its payment or pricing
terms, cannot readily be accommodated by the Contractor's accounting system, or
if the Loan File is incomplete.
"Loan File": The loan documents pertaining to a particular Loan which
are delivered to the Contractor hereto and any additional documents which may be
added to the Loan File pursuant to this Agreement.
"Monthly Payment": The scheduled monthly payment of principal and
interest on a Loan which is payable by a Obligor under the related Note on every
Due Date.
"Note": The note or other evidence of the indebtedness of an Obligor.
"Obligor": The obligor on a Note.
"Owner": __________________________________________________, and any
subsequent owner of any Loans.
"Person": Any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, incorporated organization or government
or any agency or political subdivision thereof.
"Principal Prepayment": Any payment or other recovery of principal on a
Loan which is received in advance of its scheduled Due Date, including any
prepayment penalty or premium thereon, which is not accompanied by an amount of
interest representing scheduled interest due on any date or dates in any month
or months subsequent to the month of prepayment.
"Remittance Date": The _________________ and ___________ days of any
month, or if any such ____________ day is not a Business Day, the first Business
Day immediately following such day.
"Servicing Fee": The annual fee, payable monthly to the Contractor out
of the interest portion of the Monthly Payment received on each Loan. The
Servicing Fee with respect to each Loan for any calendar month (or a portion
thereof) shall be the product of (a) the principal balance of the Loan and (b)
the Servicing Fee Rate.
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<PAGE>
"Servicing Fee Rate": A rate per annum equal to _______%.
ARTICLE II
APPOINTMENT OF CONTRACTOR; POSSESSION OF LOAN FILES;
DELIVERY OF LOAN DOCUMENTS; CUSTODIAL AGREEMENT.
Section 2.01 Appointment of Contractor.
The Owner hereby appoints the Contractor as its contractor for the
purpose of performing certain loan accounting services, subject and limited to
the terms and conditions contained in this Agreement. The Owner shall, with
respect to all Loans contemplated by this Agreement, be fully responsible for
the full payment and discharge of all costs and expenses incurred by it in
connection with the solicitation, origination, processing, packaging, closing,
and funding of Loans, including without limitation all costs and expenses
incurred and payable to third parties in connection with the Loan. The Owner
hereby agrees to indemnify and hold Contractor harmless from and against any and
all such costs and expenses.
Notwithstanding anything to the contrary contained in this Agreement,
the Contractor shall not at any time be deemed or represented to be, or
represent itself to be, an agent of the Owner for any purpose, and the
Contractor shall not have any right, title, or interest in or to the Loans. The
Contractor shall at all times act as an independent contractor.
Section 2.02 Record Title and Possession of Loan Files.
All rights arising out of the Loans including, but not limited to, all
funds received on or in connection with a Loan shall be received and held by the
Contractor as custodian for the benefit of the Owner as the owner of the Loans.
The contents of each Loan File delivered to the Contractor as custodian are and
shall be held by the Contractor as custodian for the benefit of the Owner as the
owner thereof pursuant to the terms of the Custodian Agreement and the
Contractor's possession of the contents of each Loan File so retained is at the
will of the Owner for the sole purpose of providing accounting services with
respect to the related Loan, and such retention and possession by the Contractor
is in a custodial capacity only. Each Loan File shall be segregated from the
other books and records of the Contractor and shall be appropriately marked to
clearly reflect the ownership of each Loan by the Owner. The Contractor shall
release its custody of the contents of any Loan File only in accordance with
written instructions from the Owner.
Section 2.03 Delivery of Loan Documents Custodial Agreement.
Owner shall deliver to Contractor originals (or conformed copies of
documents being recorded) of all of the documents described on Exhibit A
relating to each Loan subject to this Agreement. The Contractor shall have the
sole responsibility to document the Loans as the
3
<PAGE>
Contractor deems appropriate. Neither the acceptance or receipt of delivery of
documents by Contractor pursuant to the terms of the Custodian Agreement shall
constitute any acknowledgment on the part of Contractor that such Loans and/or
documents are enforceable or conform to any industry standards.
The Owner and any subsequent holder of a Loan, in its sole discretion,
may designate a custodian other than Contractor to take custody of any or all of
the Loan documents contained in the Loan File for such Loan. The Owner shall
provide the Contractor with prior written notice of any such designation, and
the Owner and shall pay all fees and expenses of the Contractor in surrendering
the Loan documents to the replacement custodian.
Section 2.04 Transfer of Loans.
The Owner shall have the right, without the consent of the Contractor,
at any time and from time to time, to assign all or any part of the existing
Loans and all or any part of its interest under this Agreement as it relates to
such Loans and designate any person to exercise any rights of the Owner
hereunder with respect thereto, and the assignee or designee shall accede to the
rights and obligations hereunder of the Owner with respect to such existing
Loans. All of the provisions of this Agreement shall inure to the benefit of the
Owner and any such assignee or designee. All references to the Owner shall be
deemed to include any assignee or designee. Notwithstanding the foregoing, in
the event there are more than one holder of Loans at any time, an agent shall be
designated to receive, on behalf of such holders, any remittances, statements,
reports and notices which the Contractor may be obligated to deliver hereunder.
ARTICLE III
ACCOUNTING OF LOANS
Section 3.01 Collection of Loan Payments and Accounting Services.
Continuously from the date hereof until the principal and interest on
all Loans which are subject to this Agreement from time to time are paid in
full, unless this Agreement is earlier terminated as provided herein, the
Contractor will account for all principal and interest payments made to
Contractor hereunder for each Loan and shall maintain permanent accounting
records with respect to the Loans capable of producing the date and amount of
each Monthly Payment, the installment Due Date, variances and delinquencies, and
the outstanding balances. The Owner bears all risk of loss for nonpayment of any
Loan by the Obligor.
Contractor shall, for each Loan subject to this Agreement from time to
time, bill the Obligor for each installment payment becoming due, issue a
past-due reminder no later than days after the Due Date for any delinquent
payment, and issue any rate change notification required by the related loan
documents.
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<PAGE>
Section 3.02 Administration of Loans.
The Contractor, as independent contractor, shall perform its services
under this Agreement in accordance with the normal and usual standards of
practice of prudent lenders, and shall have full power and authority, acting
alone, to do or cause to be done any and all things in connection with such
services which the Contractor may deem necessary or desirable and consistent
with the terms of this Agreement and applicable law.
Section 3.03 Establishment of Custodial Account; Deposits in Custodial
Account.
Pending disbursement to the Owner of Loan payments received by the
Contractor, the Contractor shall segregate and hold all funds collected and
received pursuant to each Loan separate and apart from any of its own funds and
general assets. All such payments received shall be held by the Contractor as
custodian for the Owner. Such funds shall not be subject to any liens or charges
of any kind in favor of Contractor or any person claiming through Contractor,
other than the payment of Contractors Servicing Fee pursuant to the terms of
Section 5.01 hereof.
Section 3.04 Contractor Not Responsible.
The Contractor shall have no responsibility or obligation to (i) realize
upon defaulted Loans, expend its own funds toward the restoration of any damaged
loan property, seek recovery of insurance proceeds or liquidation proceeds from
the related collateral, issue any demand for payment or default notice, commence
foreclosure proceedings, initiate any legal proceeding for the collection of the
Loans, or take any other remedial action of any kind with respect to a defaulted
Loan; (ii) prepare or process any satisfaction or release with respect to any
fully repaid Loan; (iii) account for, ascertain or estimate any annual ground
rents, taxes, assessments, water rates, fire and hazard insurance premiums, loan
insurance premiums, or any other charges that will become due and payable; (iv)
communicate with any Obligor regarding billings, payments, rates, Loan
documentation, releases, or any other matter relating to the Loan; (v) monitor
or inspect any collateral securing the Loans, or determine the Obligor's
compliance with any collateral coverage, financial or other covenants, (vi)
monitor any collateral filings, or prepare or file any UCC continuation
statements; or (v) do or perform any other duty or obligation not specified
herein.
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<PAGE>
ARTICLE IV
PAYMENTS AND REPORTS TO THE OWNER
Section 4.01 Actual/Actual Remittances.
On each Remittance Date, the Contractor shall remit to the Owner all
amounts credited to the Custodial Account as of the close of business on the
last Business Day of the preceding bimonthly period, net of charges against the
Custodial Account pursuant to this Agreement. With respect to any Principal
Prepayment of $10,000.00 or more, the Contractor shall remit such Principal
Prepayment to the Owner on the earlier of (i) the next succeeding Remittance
Date, or
(ii) the second Business Day following receipt of such Principal
Prepayment.
All remittances made to the Owner under this Section will be made to
the Owner by deposit into the account of Owner maintained with the Contractor
or, if the Owner so notifies the Contractor, by check mailed to the address of
Owner.
Section 4.02 Statements to the Owner.
Not later than each Remittance Date, the Contractor will furnish to the
Owner a Remittance Advice in the form of Exhibit B hereto, as to the preceding
remittance and the period ending on the last Business Day of the preceding
month. Such statement shall include information as to the aggregate of the
outstanding principal balances of all of the Loans, the scheduled amortization
of all of the Loans and the amount of any Principal Prepayment of the Loans as
of date of the Remittance Advice.
Not later than the _______________ Business Day of each calendar month,
the Contractor will furnish to the Owner a Monthly Trial Balance as of the last
Business Day of the immediately preceding calendar month. Such statement shall
include information regarding the Loans as required by Owner, including Owner's
loan number, Contractor's loan number (if any), name of Obligor, unpaid
principal balance, interest rate, date of Monthly Payment, and any delinquent
amounts.
Section 4.03 Other Information as Reasonably Required.
The Contractor shall furnish to the Owner during the term of this
Agreement such periodic, special or other reports, information or documentation,
whether or not provided for herein, as shall be necessary, reasonable or
appropriate in respect to Owner, or otherwise in respect to the purposes of this
Agreement, including any reports, information or documentation reasonably
required to comply with any regulations of any governmental agency or body
having jurisdiction over the Owner, all such reports or information to be as
provided by and in accordance with such applicable instructions and directions
as the Owner may reasonably request, and at the expense of Owner.
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ARTICLE V
GENERAL PROCEDURES
Section 5.01 Compensation.
As compensation for its services hereunder, the Contractor shall be
entitled to retain from interest payments on the Loans the amounts provided for
as the Contractor's Servicing Fee. The Servicing Fee in respect of a Loan for a
particular month shall become payable only upon the receipt by the Contractor
from the Obligor of the Monthly Payment in respect of such Loan.
Section 5.02 Owners Right to Examine Contractor's Records.
The Owner shall have the right to examine and audit, during business
hours or at such other times as might be reasonable under applicable
circumstances, upon reasonable notice any and all of the books, records,
documentation or other information of the Contractor, or held by another for the
Contractor or on its behalf or otherwise, which may be relevant to the
performance or observance by the Contractor of the terms, covenants or
conditions of this Agreement, including without limitation, any documentation
regarding the Loans.
Section 5.03 Release for Foreclosure or Special Servicing.
From time to time and as appropriate for the foreclosure or special
servicing of any of the Loans, the Owner may, by written request to the
Contractor of a request for release of documents, obtain the release from the
Contractor of the documents set forth in such request.
Upon receipt by the Contractor of the Owner's request for release of
documents, the Contractor shall promptly release the documents requested for
release to the Owner.
ARTICLE VI
THE CONTRACTOR
Section 6.01 Indemnification: Third Party Claims.
The Owner agrees to indemnify and hold harmless the Contractor against
any and all claims, losses, penalties, fines, forfeitures, legal fees and
related costs, judgments, and any other costs, fees and expenses that Contractor
may sustain in any way related to the performance by Contractor under the terms
of this Agreement, unless caused directly by the gross negligence or
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willful misconduct of Contractor. The Contractor shall immediately notify the
Owner if a claim is made by a third party with respect to this Agreement or the
Loans, and the Owner shall immediately assume the defense of any such claim with
counsel reasonably acceptable to the Contractor and pay all expenses in
connection therewith, including counsel fees, and promptly pay, discharge and
satisfy any judgment or decree which may be entered against the Contractor in
respect of such claim. The obligations of the Owner under this Section shall
survive the expiration or termination of this Agreement.
Section 6.02 Merger or Consolidation of the Contractor.
The Contractor will keep in full effect its existence, rights and
franchises as a corporation under the laws of the state of its incorporation,
and will obtain and preserve its qualification to do business as a foreign
corporation in each jurisdiction in which such qualification is or shall be
necessary to protect the validity and enforceability of this Agreement, or any
of the Loans and to perform its duties under this Agreement.
Any Person into which the Contractor may be merged or consolidated, or
any corporation resulting from any merger, conversion or consolidation to which
the Contractor shall be a party, or any Person succeeding to the business of the
Contractor, shall be the successor of the Contractor hereunder, without the
execution or filing of any paper or any further act on the part of any of the
parties hereto, anything herein to the contrary notwithstanding.
Section 6.03 Limitation on Liability of the Contractor and Others.
Neither the Contractor nor any of the officers, employees or agents of
the Contractor shall be under any liability to Owner for any action taken or for
refraining from the taking of any action in good faith pursuant to this
Agreement, or for errors in judgment; provided, however, that this provision
shall not protect the Contractor or any such person against its own gross
negligence or willful misconduct. Neither the Contractor nor any of the
directors, officers, employees or agents of the Contractor shall be under any
liability to Owner for any action taken or for refraining from the taking of any
action in good faith in order to comply with applicable law. The Contractor and
any officer, employee or agent of the Contractor may rely in good faith on any
document of any kind prima facie properly executed and submitted by any Person
respecting any matters arising hereunder. The Contractor shall not be under any
obligation to appear in, prosecute or defend any legal action which is not
incidental to its duties to service the Loans in accordance with this Agreement
and which in its opinion may involve it in any expenses or liability.
Section 6.04 No Transfer of Services.
With respect to the retention of the Contractor hereunder, the
Contractor acknowledges that the Owner has acted in reliance upon the
Contractors independent status, the adequacy of its facilities, plan, personnel,
records and procedures, its integrity, reputation and financial standing and the
continuance thereof. Without in any way limiting the generality of this Section,
the
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Contractor shall not either assign this Agreement or delegate its rights or
duties hereunder or any portion thereof without the prior written approval of
the Owner.
ARTICLE VII
DEFAULT
Section 7.01 Events of Default.
In case one or more of the following Events of Default by the Contractor
shall occur and be continuing:
(i) any failure by the Contractor to remit to the Owner any
payment required to be made under the terms of this Agreement
which continues unremedied for a period of two days after the
date upon which written notice of such failure, requiring the
same to be remedied, shall have been given to the Contractor by
Owner; or
(ii) failure on the part of the Contractor duly to observe or
perform in any material respect any other of the covenants or
agreements on the part of the Contractor set forth in this
Agreement which continues unremedied for a period of fifteen days
after the date on which written notice of such failure, requiring
the same to be remedied, shall have been given to the Contractor
by Owner; or
(iii) a decree or order of a court or agency or supervisory
authority having jurisdiction for the appointment of a
conservator or receiver or liquidator in any insolvency,
readjustment of debt, marshaling of assets and liabilities or
similar proceedings, or for the winding-up or liquidation of its
affairs, shall have been entered against the Contractor and such
decree or order shall have remained in force undischarged or
unstayed for a period of sixty days; or
(iv) the Contractor shall consent to the appointment of a
conservator or receiver or liquidator in any insolvency,
readjustment of debt, marshaling of assets and liabilities or
similar proceedings of or relating to the Contractor or of or
relating to all or substantially all of its property; or
(v) the Contractor shall admit in writing its inability to pay
its debts generally as they become due, file a petition to take
advantage of any applicable insolvency or reorganization statute,
make an assignment for the benefit of its creditors, or
voluntarily suspend payment of its obligations; or
(vi) the Contractor shall, for any reason, become incapacitated
to perform its duties and obligations under this Agreement by
operation or law or otherwise;
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then, and in each and every such case, so long as an Event of Default shall not
have been remedied, the Owner, by notice in writing to the Contractor may, in
addition to whatever rights the Owner may have at law or in equity to damages,
including injunctive relief and specific performance, terminate all the rights
and obligations of the Contractor under this Agreement and in and to the Loans
and the proceeds thereof; provided, that upon the occurrence of an event
specified in (iii), (iv) or (v) above, this Agreement shall automatically
terminate without notice. On or after the receipt by the Contractor of such
written notice, all authority and power of the Contractor under this Agreement
shall cease, whether with respect to the Loans or otherwise. Upon written
request from the Owner, the Contractor shall prepare, execute and deliver any
and all documents and other instruments, and do or accomplish all other acts or
things necessary or appropriate to effect the purposes of such notice of
termination. The Contractor agrees to cooperate with the Owner in effecting the
termination of the Contractor's responsibilities and rights hereunder,
including, without limitation, the transfer to the Owner or its designee for
administration by it of all cash amounts which shall at the time be credited by
the Contractor to the Custodial Account or thereafter received with respect to
the Loans.
ARTICLE VIII
TERMINATION
Section 8.01 Termination.
This Agreement and the respective obligations and responsibilities of
the Owner and the Contractor shall terminate: (i) upon the later of the final
Loan payment and the remittance of all funds due hereunder; or (ii) by mutual
consent of the Contractor and Owner in writing.
Section 8.02 Termination Without Cause.
Either party may, at its sole option, terminate this Agreement and the
respective obligations and responsibilities of the Owner and the Contractor
hereunder, without cause, upon 60 days written notice by written notice of
termination delivered to the other party as provided in this Agreement. Upon any
such termination, (i) the Contractor shall (a) at the expense of the Owner,
deliver all Loan Files to the Owner, (b) remit all sums held in the Custodial
Account or thereafter received by the Contractor with respect to any Loan, and
(c) account for all Loan payments received up to the termination date in the
manner required under this Agreement, and (ii) the Owner shall (a) pay to the
Contractor all sums due to the Contractor under the terms of this Agreement, and
(b) if the Owner is the party which gave notice of termination, pay to the
Contractor, in addition to all other sums due to the Contractor hereunder, a
termination fee of ______________________________.
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ARTICLE IX
MISCELLANEOUS PROVISIONS
Section 9.01 Governing Law.
This Agreement shall be governed by and construed in accordance with the
laws of the District of Columbia.
Section 9.02 Notices.
Any notices or other communications permitted or required hereunder
shall be in writing and shall be deemed conclusively to have been given if
personally delivered at or mailed by certified or registered mail, postage
prepaid, and return receipt requested or transmitted by telex, telegraph or
telecopier and confirmed by a similar mailed writing, to (i) in the case of the
Contractor, 808 17th Street, N.W., Washington, D.C., Attention: _______________,
or such other address as may hereafter be furnished to the Owner in writing by
the Contractor and (ii) in the case of the Owner, 3 Bethesda Metro Center, Suite
860, Bethesda, MD 20814, Attention: Chief Financial Officer, or such other
address as may hereafter be furnished.
Section 9.03 Severability of Provisions.
If any one or more of the covenants, agreements, provisions or terms of
this Agreement shall be for any reason whatsoever held invalid, the invalidity
of any such covenant, agreement, provision or term of this Agreement shall in no
way affect the validity or enforceability of the other provisions of this
Agreement.
Section 9.04 Exhibits.
The exhibits to this Agreement are hereby incorporated and made a part
hereof and are an integral part of this Agreement.
Section 9.05 General Interpretive Principles.
For purposes of this Agreement, except as otherwise expressly provided
or unless the context otherwise requires: (i) the terms defined in this
Agreement have the meanings assigned to them in this Agreement and include the
plural as well as the singular, and the use of any gender herein shall be deemed
to include the other gender; (ii) accounting terms not otherwise defined herein
have the meanings assigned to them in accordance with generally accepted
accounting principles; (iii) references herein to "Articles", "Sections",
"Subsections", "Paragraphs", and other subdivisions without reference to a
document are to designated Articles, Sections, Subsections, Paragraphs and other
subdivisions of this Agreement; (iv) a reference to a Subsection without
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further reference to a Section is a reference to such Subsection as contained in
the same Section in which the reference appears, and this rule shall also apply
to Paragraphs and other subdivisions; (v) the words "herein", "hereof",
"hereunder" and other words of similar import refer to this Agreement as a whole
and not to any particular provision; and (vi) the term "include" or "including"
shall mean without limitation by reason of enumeration.
Section 9.06 Waivers and Amendments: Etc.
This Agreement may be amended, superseded, canceled, renewed or extended
and the terms hereof may be waived, only by a written instrument signed by
authorized representatives of the parties or, in the case of a waiver, by an
authorized representative of the party waiving compliance. No such written
instrument shall be effective unless it expressly recites that it is intended to
amend, supersede, cancel, renew or extend this Agreement or to waive compliance
with one or more of the terms hereof, as the case may be. No delay on the part
of any party in exercising any right, power or privilege hereunder shall operate
as a waiver thereof, nor shall any waiver on the part of any party of any such
right, power or privilege, or any single or partial exercise of any such right,
power or privilege, preclude any further exercise thereof or the exercise of any
other such right, power or privilege. The rights and remedies herein provided
are cumulative and are not exclusive of any rights or remedies that any party
may otherwise have at law or in equity.
Section 9.07 Counterparts.
This Agreement may be executed by the parties hereto in separate
counterparts, each of which when so executed and delivered shall be an original,
but all such counterparts shall together constitute one and the same instrument.
Section 9.08 Entire Agreement.
This Agreement (including the Exhibits) contains the entire agreement
between the parties with respect to the transactions contemplated hereby and
supersedes all prior agreements, written or oral, with respect thereto.
IN WITNESS WHEREOF, the Contractor and the Owner have caused their names
to be signed hereto by their respective officers thereunto duly authorized as of
the day and year first above written.
ATTEST:
AMERICAN CAPITAL STRATEGIES, LTD.
By: ____________________________ By: _____________________________
Name:__________________________ Name:____________________________
Title: __________________________ Title:___________________________
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RIGGS BANK N.A.
By: ____________________________ By: _____________________________
Name:__________________________ Name:____________________________
Title: __________________________ Title:___________________________
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EXHIBIT A
CONTENTS OF LOAN FILE
<PAGE>
EXHIBIT B
FORM OF MONTHLY REMITTANCE ADVICE
Exhibit 2.k.1
REFERRAL AGREEMENT
This Referral Agreement (this "Agreement") is made between American
Capital Strategies, Ltd. ("ACS"), a Delaware corporation and the Riggs Bank N.A,
(the "Referral Party").
ACS is a diversified financial services firm engaged in, among other
activities, the business of providing financing for commercial borrowers. ACS
desires to be introduced to prospective loan and other investment opportunities,
and the Referral Party desires to submit such opportunities to ACS for ACS's
consideration.
In consideration of the foregoing, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto, intending to be legally and equitably bound, hereby agree as set
forth below.
Section 1. Terms of Engagement.
(a) Introduction and Acceptance of Investment Opportunities. The
Referral Party shall introduce to ACS any loan or other investment opportunity
that the Referral Party reasonably believes will satisfy ACS's established
investment criteria or designated product line (each such prospective loan or
other investment opportunity, an "Investment Opportunity") by timely delivery to
ACS of a written description of an Investment Opportunity. Within ten (10)
business days after receipt of a written description of an Investment
Opportunity from the Referral Party, ACS will notify the Referral Party as to
whether or not ACS intends to pursue the Investment Opportunity. If ACS so
accepts the Investment Opportunity, then the following terms of this Agreement
shall control; if not so accepted, then the Referral Party may refer the
Investment Opportunity to other lenders.
(b) Due Diligence; Discretion. ACS will, to the extent it deems
necessary, perform its own due diligence investigation regarding each Investment
Opportunity, and ACS may enlist the Referral Party's assistance in gathering
information about the Investment Opportunity and in preparing transaction
write-ups, in addition to the information provided pursuant to Subsection (a)
above. Notwithstanding any other provisions of this Agreement, ACS may, in its
absolute discretion, refuse to consider any Investment Opportunity.
Section 2. Compensation. For each Investment Opportunity ACS accepts
and thereafter actually closes and funds, ACS will pay to the Referral Party the
amounts stated to be payable in accordance with the provisions set forth in the
Loan Fee Schedule and the Payment Schedule of Schedule A hereto. The Referral
Party shall not receive any commission, brokerage, finder's or other fee or
compensation from the borrower or other beneficiary in connection with any such
Investment Opportunity without ACS's prior written consent.
<PAGE>
Section 3. Covenants
(a) Standards of Operation. The Referral Party shall at all times
during the term of this Agreement operate the Referral Party's business in
compliance with all applicable laws, rules and regulations and shall maintain
all licenses or other authorizations necessary for the operation of each
business. The Referral Party will not knowingly operate the Referral Party's
business in any way which adversely reflects upon ACS.
Similarly, ACS shall at all times during the term of this Agreement
operate its business in compliance with all applicable laws, rules and
regulations and shall maintain all licenses or other authorizations necessary
for the operation of such business. ACS will not knowingly operate ACS's
business in any way which adversely reflects upon the Referral Party.
(b) No Transfers. Neither this Agreement nor the Referral Party's
rights and duties hereunder may be sold, assigned or delegated by the Referral
Party without the prior written consent of ACS.
Neither this Agreement nor ACS's rights and duties hereunder may be
sold, assigned or delegated by ACS without the prior written consent of the
Referral Party.
(c) Confidentiality. The Referral Party shall at all times use and
maintain in confidence any proprietary materials provided to the Referral Party
from ACS. For this purpose, "proprietary materials" does not include the name of
a borrower or the amount and the terms of a loan introduced by the Referral
Party and funded by ACS unless specifically indicated to the contrary by ACS.
ACS shall at all times use and maintain in confidence any proprietary
materials provided to ACS from the Referral Party.
(d) Independent Status. The Referral Party shall at all times be an
independent contractor hereunder, rather than a co-venturer, agent, employee,
franchisee or representative of ACS. The Referral Party shall work independently
without supervision by ACS, shall be responsible for its own taxes, shall not be
required to work on a continuing daily basis or on any specific work schedule
and shall not be provided with office space or administrative support by ACS.
ACS hereby acknowledges and agrees that the Referral Party may engage in other
businesses and ventures.
(e) Indemnification. Each of the Referral Party and ACS shall
indemnify, defend and hold harmless the other from and against any and all
losses claims, damages, liabilities and expenses whatsoever, joint or several,
as incurred, as to which such other party may become subject under any
applicable federal or state law or otherwise, related to or arising out of or
based upon any act or omission of the Referral Party or ACS, as the case may be,
in connection with a breach or misrepresentation or omission by such party of
such party's obligations hereunder or the representations contained herein or in
connection with any
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transactions contemplated hereby, and will reimburse the other party for all
legal or other expenses (including, without limitation, attorney's fees and
expenses) as they are incurred in connection with the investigation of,
preparation for or defense of any pending or threatened claim or any action or
proceeding arising therefrom, whether or not such other party is a named party
in any such claim, action or proceeding; provided, however, that no party shall
have liability to the other to the extent that any such loss, claim, damage,
liability or expense is found in a final judgment by a court of competent
jurisdiction to have resulted from such other party's willful misconduct or
gross negligence.
Section 4. Duration of Agreement.
(a) Term. This Agreement shall take effect as of the date of execution
and shall remain in effect for one year from date of execution. Thereafter, the
term of this Agreement may be renewed for an additional one year period if
agreed to in writing by both parties.
(b) Termination. Notwithstanding any other provisions hereof, either
party may terminate this Agreement upon sixty days' prior written notice to the
other party. The Referral Party's right to receive any compensation pursuant to
an Investment Opportunity presented by the Referral Party and duly accepted by
ACS before such termination shall remain undiminished by any such notice of
termination.
Section 5. Miscellaneous.
(a) Notices. Any notice required to be given hereunder shall be
sufficient if in writing, and sent by certified or registered mail, return
receipt requested, first-class postage prepaid, if to the Referral Party at the
address listed in Schedule A hereto, and if to ACS to its office located at 3
Bethesda Metro Center, Suite 860, Bethesda, Maryland 20814.
(b) Governing Law. This Agreement, including any exhibits hereto, shall
be construed in accordance with and governed by the laws of the District of
Columbia, without regard to its principles of conflicts of law. Venue for any
adjudication hereof shall be only in the courts of the District of Columbia or
the federal courts in the District of Columbia, the jurisdiction of which courts
both parties hereby consent to as the agreement of the parties, as not
inconvenient and as not subject to review by any court other than such courts in
the District of Columbia. Both parties intend and agree that the courts of the
jurisdictions in which the Referral Party conducts business should afford full
faith and credit to any judgment rendered by a court of the District of Columbia
against the Referral Party, and should hold that the District of Columbia courts
have jurisdiction to enter a valid, in personam judgment against the Referral
Party. The Referral Party agrees that service of any summons and/or complaint,
and other process which may be served in any action, may be may be made by
mailing via registered mail or delivering a copy of such process to the Referral
Party at its address specified below, and the Referral Party agrees that this
submission to jurisdiction to consent to service of process are reasonable and
made for the express benefit of ACS.
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(c) Waiver of Jury Trial. Each party to this Agreement agrees that any
suit, action or proceeding, whether claim or counterclaim, brought or instituted
by any party hereto or any successor or assign of any party on or with respect
to this Agreement which in any way related, directly, or indirectly, to the
subject matter hereof or any event, transaction or occurrence arising out of or
in any way connected with this Agreement or the dealings of the parties with
respect thereto, shall be tried only by a court and not by a jury. EACH PARTY
HEREBY EXPRESSLY WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY SUCH SUIT, ACTION OR
PROCEEDING. The Referral Party acknowledges and agrees that this Section is a
specific and material aspect of this Agreement between the parties and that ACS
would not enter into this Agreement with the Referral Party if this waiver of
jury trial section were not a part of this Agreement.
(d) Entire Agreement; Modifications and Waivers; Severability. This
Agreement represents the entire agreement and understanding by and between ACS
and the Referral Party with respect to the services herein referred to, and no
representations, promises, agreements or understandings, written or oral, not
herein contained shall be of any force or effect. No change or modification
hereof shall be valid or binding unless the same is in writing and signed by the
party against whom such waiver is sought to be enforced; moreover, no valid
waiver of any provision of this Agreement at any time shall be deemed a waiver
of any other provision of this Agreement at such time or will be deemed a valid
waiver of such provision at any other time. In the event any provision contained
herein shall be held to be invalid, illegal or unenforceable, it shall not
affect any other provision hereof, and this Agreement shall be construed as if
such invalid, illegal or unenforceable provision had never been contained
herein, unless to do so would cause this Agreement to fail of its essential
purpose.
IN WITNESS WHEREOF, the parties have duly executed this Agreement
as of , 19 .
American Capital Strategies, Ltd.
By:
------------------------------
Name:
Title:
REFERRAL PARTY
By:
-------------------------------
Name: Margaret Mary Scelzo
Title: Senior Vice President
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SCHEDULE A TO REFERRAL AGREEMENT
Name of Referral Party: Riggs Bank N.A.
Address, including telephone and telecopy numbers, of Referral Party's principal
place of business:
808 17th Street, N.W.
Washington, D.C. 20006
Telephone: (202) 835-5082
Telecopy: (202) 835-5982
LOAN FEE AND PAYMENT SCHEDULE
Presentation of summary memo with financial statements: 1/2%
An application packages includes sufficient information for American Capital
Strategies, Ltd. to follow up with the applicant. The Referral Party shall
submit, when applicable, a one or two page summary memorandum, applicant's
financial statements, and other selected information.
All fees paid at time of initial closing on loan, based on the total committed
amount.
5
Exhibit 2.k.2
REFERRAL AGREEMENT
This Referral Agreement (this "Agreement") is made between American
Capital Strategies, Ltd. ("ACS"), a Delaware corporation and NCB Development
Corporation, a District of Columbia non-profit corporation (the "Referral
Party").
ACS is a diversified financial services firm engaged in, among other
activities, the business of providing financing for commercial borrowers. ACS
desires to be introduced to prospective loan and other investment opportunities,
and the Referral Party desires to submit such opportunities to ACS for ACS's
consideration.
In consideration of the foregoing, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto, intending to be legally and equitably bound, hereby agree as set
forth below.
Section 1. Terms of Engagement.
(a) Introduction and Acceptance of Investment Opportunities. The
Referral Party shall introduce to ACS any loan or other investment opportunity
that the Referral Party reasonably believes will satisfy ACS's established
investment criteria or designated product line (each such prospective loan or
other investment opportunity, an "Investment Opportunity") by timely delivery to
ACS of a written description of an Investment Opportunity. Within ten (10)
business days after receipt of a written description of an Investment
Opportunity from the Referral Party, ACS will notify the Referral Party as to
whether or not ACS intends to pursue the Investment Opportunity. If ACS so
accepts the Investment Opportunity, then the following terms of this Agreement
shall control; if not so accepted, then the Referral Party may refer the
Investment Opportunity to other lenders.
(b) Due Diligence; Discretion. ACS will, to the extent it deems
necessary, perform its own due diligence investigation regarding each Investment
Opportunity, and ACS may enlist the Referral Party's assistance in gathering
information about the Investment Opportunity and in preparing transaction
write-ups, in addition to the information provided pursuant to Subsection (a)
above. Notwithstanding any other provisions of this Agreement, ACS may, in its
absolute discretion, refuse to consider any Investment Opportunity.
Section 2. Compensation. For each Investment Opportunity ACS accepts
and thereafter actually closes and funds, ACS will pay to the Referral Party the
amounts stated to be payable in accordance with the provisions set forth in the
Loan Fee Schedule and the Payment Schedule of Schedule A hereto. The Referral
Party shall not receive any commission, brokerage, finder's or other fee or
compensation from the borrower or other beneficiary in connection with any such
Investment Opportunity without ACS's prior written consent.
<PAGE>
Section 3. Covenants
(a) Standards of Operation. The Referral Party shall at all times
during the term of this Agreement operate the Referral Party's business in
compliance with all applicable laws, rules and regulations and shall maintain
all licenses or other authorizations necessary for the operation of each
business. The Referral Party will not knowingly operate the Referral Party's
business in any way which adversely reflects upon ACS.
Similarly, ACS shall at all times during the term of this Agreement
operate its business in compliance with all applicable laws, rules and
regulations and shall maintain all licenses or other authorizations necessary
for the operation of such business. ACS will not knowingly operate ACS's
business in any way which adversely reflects upon the Referral Party.
(b) No Transfers. Neither this Agreement nor the Referral Party's
rights and duties hereunder may be sold, assigned or delegated by the Referral
Party without the prior written consent of ACS.
Neither this Agreement nor ACS's rights and duties hereunder may be
sold, assigned or delegated by ACS without the prior written consent of the
Referral Party.
(c) Confidentiality. The Referral Party shall at all times use and
maintain in confidence any proprietary materials provided to the Referral Party
from ACS. For this purpose, "proprietary materials" does not include the name of
a borrower or the amount and the terms of a loan introduced by the Referral
Party and funded by ACS unless specifically indicated to the contrary by ACS.
ACS shall at all times use and maintain in confidence any proprietary
materials provided to ACS from the Referral Party.
(d) Independent Status. The Referral Party shall at all times be an
independent contractor hereunder, rather than a co-venturer, agent, employee,
franchisee or representative of ACS. The Referral Party shall work independently
without supervision by ACS, shall be responsible for its own taxes, shall not be
required to work on a continuing daily basis or on any specific work schedule
and shall not be provided with office space or administrative support by ACS.
ACS hereby acknowledges and agrees that the Referral Party may engage in other
businesses and ventures.
(e) Indemnification. Each of the Referral Party and ACS shall
indemnify, defend and hold harmless the other from and against any and all
losses claims, damages, liabilities and expenses whatsoever, joint or several,
as incurred, as to which such other party may become subject under any
applicable federal or state law or otherwise, related to or arising out of or
based upon any act or omission of the Referral Party or ACS, as the case may be,
in connection with a breach or misrepresentation or omission by such party of
such party's obligations hereunder or the representations contained herein or in
connection with any
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transactions contemplated hereby, and will reimburse the other party for all
legal or other expenses (including, without limitation, attorney's fees and
expenses) as they are incurred in connection with the investigation of,
preparation for or defense of any pending or threatened claim or any action or
proceeding arising therefrom, whether or not such other party is a named party
in any such claim, action or proceeding; provided, however, that no party shall
have liability to the other to the extent that any such loss, claim, damage,
liability or expense is found in a final judgment by a court of competent
jurisdiction to have resulted from such other party's willful misconduct or
gross negligence.
Section 4. Duration of Agreement.
(a) Term. This Agreement shall take effect as of the date of execution
and shall remain in effect for one year from date of execution. Thereafter, the
term of this Agreement may be renewed for an additional one year period if
agreed to in writing by both parties.
(b) Termination. Notwithstanding any other provisions hereof, either
party may terminate this Agreement upon sixty days' prior written notice to the
other party. The Referral Party's right to receive any compensation pursuant to
an Investment Opportunity presented by the Referral Party and duly accepted by
ACS before such termination shall remain undiminished by any such notice of
termination.
Section 5. Miscellaneous.
(a) Notices. Any notice required to be given hereunder shall be
sufficient if in writing, and sent by certified or registered mail, return
receipt requested, first-class postage prepaid, if to the Referral Party at the
address listed in Schedule A hereto, and if to ACS to its office located at 3
Bethesda Metro Center, Suite 860, Bethesda, Maryland 20814.
(b) Governing Law. This Agreement, including any exhibits hereto, shall
be construed in accordance with and governed by the laws of the District of
Columbia, without regard to its principles of conflicts of law. Venue for any
adjudication hereof shall be only in the courts of the District of Columbia or
the federal courts in the District of Columbia, the jurisdiction of which courts
both parties hereby consent to as the agreement of the parties, as not
inconvenient and as not subject to review by any court other than such courts in
the District of Columbia. Both parties intend and agree that the courts of the
jurisdictions in which the Referral Party conducts business should afford full
faith and credit to any judgment rendered by a court of the District of Columbia
against the Referral Party, and should hold that the District of Columbia courts
have jurisdiction to enter a valid, in personam judgment against the Referral
Party. The Referral Party agrees that service of any summons and/or complaint,
and other process which may be served in any action, may be may be made by
mailing via registered mail or delivering a copy of such process to the Referral
Party at its address specified below, and the Referral Party agrees that this
submission to jurisdiction to consent to service of process are reasonable and
made for the express benefit of ACS.
3
<PAGE>
(c) Waiver of Jury Trial. Each party to this Agreement agrees that any
suit, action or proceeding, whether claim or counterclaim, brought or instituted
by any party hereto or any successor or assign of any party on or with respect
to this Agreement which in any way related, directly, or indirectly, to the
subject matter hereof or any event, transaction or occurrence arising out of or
in any way connected with this Agreement or the dealings of the parties with
respect thereto, shall be tried only by a court and not by a jury. EACH PARTY
HEREBY EXPRESSLY WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY SUCH SUIT, ACTION OR
PROCEEDING. The Referral Party acknowledges and agrees that this Section is a
specific and material aspect of this Agreement between the parties and that ACS
would not enter into this Agreement with the Referral Party if this waiver of
jury trial section were not a part of this Agreement.
(d) Entire Agreement; Modifications and Waivers; Severability. This
Agreement represents the entire agreement and understanding by and between ACS
and the Referral Party with respect to the services herein referred to, and no
representations, promises, agreements or understandings, written or oral, not
herein contained shall be of any force or effect. No change or modification
hereof shall be valid or binding unless the same is in writing and signed by the
party against whom such waiver is sought to be enforced; moreover, no valid
waiver of any provision of this Agreement at any time shall be deemed a waiver
of any other provision of this Agreement at such time or will be deemed a valid
waiver of such provision at any other time. In the event any provision contained
herein shall be held to be invalid, illegal or unenforceable, it shall not
affect any other provision hereof, and this Agreement shall be construed as if
such invalid, illegal or unenforceable provision had never been contained
herein, unless to do so would cause this Agreement to fail of its essential
purpose.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
, 19 .
American Capital Strategies, Ltd.
By:
-------------------------------
Name:
Title:
NCB Development Corporation
By:
-------------------------------
Name:
Title:
4
<PAGE>
SCHEDULE A TO REFERRAL AGREEMENT
Name of Referral Party: NCB Development Corporation
Address, including telephone and telecopy numbers, of Referral Party's principal
place of business:
1401 Eye Street, N.W., Suite 700
Washington, D.C. 20005
Telephone: (202) 336-
Telecopy: (202) 336-7803
LOAN FEE AND PAYMENT SCHEDULE
Presentation of summary memo with financial statements: 1/2%
An application packages includes sufficient information for American Capital
Strategies, Ltd. to follow up with the applicant. The Referral Party shall
submit, when applicable, a one or two page summary memorandum, applicant's
financial statements, and other selected information.
All fees paid at time of initial closing on loan, based on the total committed
amount.
5
Exhibit 2.n.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption 'Experts' and to the
use of our report dated June 11, 1997, except as to Note 12, as to which the
date is August , 1997, in the Registration Statement (Form N-2) and related
Prospectus of American Capital Strategies, Ltd. dated August 12, 1997.
ERNST & YOUNG LLP
Washington, D.C.
August , 1997
- --------------------------------------------------------------------------------
The foregoing consent is in the form that will be signed upon the completion of
the restatement of capital accounts described in Note 12 to the consolidated
financial statements.
ERNST & YOUNG LLP
Washington, D.C.
August 8, 1997
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains financial information extracted from the consolidated
financial statements of American Capital Strategies, Ltd. for the year ended
December 31, 1996 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<CIK> 0000817473
<NAME> American Capital Strategies, Ltd.
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
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<INVESTMENTS-AT-COST> 905,748
<INVESTMENTS-AT-VALUE> 3,980,421
<RECEIVABLES> 969,850
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<OTHER-ITEMS-ASSETS> 443,178
<TOTAL-ASSETS> 5,432,265
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<SENIOR-LONG-TERM-DEBT> 429,684
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<PAID-IN-CAPITAL-COMMON> 10,407
<SHARES-COMMON-STOCK> 481,058
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<EXPENSES-NET> 3,020,948
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<APPREC-INCREASE-CURRENT> 483,665
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<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
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