SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarter Ended September 30, 1999.
/ / Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission File Number: 814-00149
AMERICAN CAPITAL STRATEGIES, LTD.
(Exact name of registrant as specified in its charter)
Delaware 52-145-1377
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2 Bethesda Metro Center, 14th Floor
Bethesda, Maryland 20814
(Address of principal executive office)
(301) 951-6122
(Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes |X|. No |_|.
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date. The number of shares
of the issuer's Common Stock, $.01 par value, outstanding as of November 10,
1999 was 18,223,789.
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets as of September 30, 1999 and December 31, 1998.................................1
Schedules of Investments as of September 30, 1999 and December 31, 1998.......................2
Statements of Operations for the three and nine months ended
September 30, 1999 and 1998..........................................................5
Statement of Shareholders' Equity for the nine months ended
September 30, 1999 and 1998..........................................................6
Statements of Cash Flows for the nine months ended
September 30, 1999 and 1998..........................................................7
Financial Highlights for the nine months ended
September 30, 1999 and 1998..........................................................8
Notes to Financial Statements.................................................................9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation
Overview......................................................................................13
Results of Operations.........................................................................14
Financial Condition, Liquidity and Capital Resources..........................................16
Portfolio Credit Quality......................................................................17
Impact of the Year 2000.......................................................................17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..........................................................................19
Item 2. Changes in Securities......................................................................19
Item 3. Defaults upon Senior Securities............................................................19
Item 4. Submission of Matters to a Vote of Security Holders........................................19
Item 5. Other Information..........................................................................19
Item 6. Exhibits and Reports on Form 8-K...........................................................19
Signature..............................................................................................20
</TABLE>
i
<PAGE>
PART I. FINANCIAL INFORMATION
AMERICAN CAPITAL STRATEGIES, LTD.
BALANCE SHEETS
(Unaudited)
(In thousands except per share data)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
Assets
Investments at fair value (cost of $256,577 and $252,718, respectively) $ 264,921 $ 254,983
Cash and cash equivalents 45,186 6,149
Investment in unconsolidated operating subsidiary 5,233 6,386
Due from unconsolidated operating subsidiary 2,345 778
Interest receivable 3,082 1,561
Notes Receivable from employees 1,269 --
Other 4,198 162
--------- ---------
Total assets $ 326,234 $ 270,019
========= =========
Liabilities and Shareholders' Equity
Accounts payable and accrued liabilities $ 255 $ 126
Accrued dividends payable 7,572 1,222
Notes payable -- 85,948
Revolving credit facility 69,840 30,000
--------- ---------
Total liabilities 77,667 117,296
Shareholders' equity:
Undesignated preferred stock, $0.01 par value, 5,000 shares authorized,
0 issued and outstanding -- --
Common stock, $.01 par value, 70,000 shares authorized, and 18,215 and
11,081 issued and outstanding, respectively 182 111
Capital in excess of par value 257,331 145,245
Notes receivable from sale of common stock (22,746) (300)
Undistributed (distributions in excess of) net realized earnings (60) (116)
Unrealized appreciation of investments 13,860 7,783
--------- ---------
Total shareholders' equity 248,567 152,723
--------- ---------
Total liabilities and shareholders' equity $ 326,234 $ 270,019
========= =========
</TABLE>
See accompanying notes.
1
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1999
(Unaudited)
(In thousands except per share data)
<TABLE>
<CAPTION>
Industry Cost Fair Value
-------- ---- ----------
<S> <C> <C> <C>
Senior Debt--12.08%
- -------------------
BIW Connector Systems, LLC Manufacturing $ 3,404 $ 3,404
Chance Coach, Inc. (2) Bus Manufacturer 1,125 1,125
JAG Industries, Inc. (2) Manufacturing 1,200 1,200
Cycle Gear, Inc. Motor Cycle Accessories 750 750
Euro-Caribe, Inc. (2) Meat Processing 6,705 6,705
Patriot Medical Technologies, Inc. (2) Repair Services 3,250 3,250
Tube City Olympic of Ohio, Inc. Mill Services 9,700 9,700
MBT International Inc. Musical Instrument Distributor 4,500 4,500
Caswell-Massey Holdings Corp. Toiletries 2,000 2,000
--------- ---------
Subtotal 32,634 32,634
Subordinated Debt--66.25%
- -------------------------
BIW Connector Systems, LLC. Manufacturing 6,799 6,799
Westwind Group Holdings, Inc. Restaurant 2,970 2,970
JAG Industries, Inc. (2) Manufacturing 2,371 2,371
Specialty Transportation Services, Inc. Waste Hauler 462 462
Chance Coach, Inc. (2) Bus Manufacturer 7,389 7,389
The L.A. Studios, Inc. Audio Production 2,448 2,448
Decorative Surfaces International, Inc. (2) Decorative Paper & Vinyl Mfg. 5,574 5,574
New Piper Aircraft, Inc. Aircraft Manufacturing 17,979 17,979
Electrolux, LLC Vacuum Cleaner 7,726 7,726
Cycle Gear, Inc. Motor Cycle Accessories 2,254 2,254
Confluence Holdings Corp. Canoes & Kayaks 8,783 8,783
Euro-Caribe, Inc. (2) Meat Processing 8,954 8,954
ConStar International, Inc. Electrical 18,867 18,867
Centennial Broadcasting, Inc. Radio Stations 16,465 16,465
Lion Brewery, Inc. (2) Malt Beverages 5,967 5,967
Auxi-Health, Inc. Home Health Care 10,110 10,110
Patriot Medical Technologies, Inc. (2) Repair Services 2,483 2,483
Tube City, Inc. . Mill Services 5,924 5,924
Erie County Plastics Corporation Molded Plastic Manufacturing 8,844 8,844
Aeriform Corporation Packaged Industrial Gas 7,637 7,637
MBT International, Inc. (2) Musical Instrument Distributor 6,764 6,764
Dixie Trucking Company, Inc. (2) Overnight Shorthaul Delivery 4,060 4,060
Caswell-Massey Holdings Corp. Toiletries 1,664 1,664
Transcore Holdings, Inc. (2) Transportation Services 5,387 5,387
The Inca Group (2) Manufacturing 11,097 11,097
--------- ---------
Subtotal 178,978 178,978
Convertible Preferred Stock--2.58%
- ----------------------------------
Chance Coach, Inc. (2) 12% dividend convertible into 20% of Co. Bus Manufacturer 2,000 2,687
Decorative Surfaces International, Inc. (2) prime rate
plus 4% dividend convertible into 2.9% of Co. Decorative Paper & Vinyl Mfg. 727 727
Patriot Medical Technologies, Inc. (2) 8% dividend convertible
into 16.9% of Co. Repair Services 1,000 1,000
MBT International, Inc. (2) convertible into 53.1% of Co. Musical Instrument Distributor 2,250 2,250
Transcore Holdings, Inc. (2) 8% dividend convertible
into 1.24% of Co. Transportation Service 300 300
--------- ---------
Subtotal 6,277 6,964
</TABLE>
2
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1999
(Unaudited)
(In thousands except per share data)
<TABLE>
<CAPTION>
Industry Cost Fair Value
-------- ---- ----------
<S> <C> <C> <C>
Common Stock and Membership Interest Warrants(1)--14.77%
- --------------------------------------------------------
BIW Connector Systems, LLC 8% of LLC Manufacturing 652 451
Westwind Group Holdings, Inc. 5% of Co. Restaurant 350 244
JAG Industries, Inc. (2) 75% of Co. Manufacturing 505 429
Specialty Transportation Services, Inc. up to 40% of Co. Waste Hauler 694 1,500
Chance Coach, Inc. (2) 43.7% of Co. Bus Manufacturer 4,041 5,656
The L.A. Studios, Inc. 17% of Co. Audio Production 902 802
Decorative Surfaces International, Inc. (2) 42.3% of Co. Decorative Paper & Vinyl Mfg. 4,571 6,804
New Piper Aircraft, Inc. 4% of Co. Aircraft Manufacturing 2,231 2,884
Cycle Gear, Inc. 16.5% of Co. Motor Cycle Accessories 374 374
Confluence Holdings Corp. 18% of Co. Canoes & Kayaks 1,319 1,217
Euro-Caribe, Inc. (2) 37% of Co. Meat Processing 1,110 1,046
ConStar International, Inc. 17.5% of Co. Electrical 3,914 3,914
Lion Brewery, Inc. (2) 54% of Co. Malt Beverages 675 1,397
Auxi Health, Inc. 20% of Co. Home Health Care 2,599 2,599
Patriot Medical Technologies, Inc. (2) 17% of Co. Repair Services 612 612
Tube City, Inc. 14.75% of Co. Mill Services 2,523 2,523
Erie County Plastics Corporation 8% of Co. Molded Plastic Manufacturing 1,170 1,170
MBT International, Inc. (2) 30.6% of Co. Musical Instrument Distributor 846 846
Dixie Trucking Company, Inc. (2) 32% of Co. Overnight Shorthaul Delivery 141 141
Caswell-Massey Holdings Corp. 24% of Co. Toiletries 552 552
Transcore Holdings, Inc. (2) 30.6% of Co. Transportation Services 1,694 1,694
The Inca Group (2) 66.5% of Co. Manufacturing 3,060 3,060
--------- ---------
Subtotal 34,535 39,915
Common Stock and Membership Interests(1) - 2.45%
- ------------------------------------------------
Specialty Transportation Services, Inc. 9.1% of Co. Waste Hauler $ 500 $ 1,500
Chance Coach, Inc. (2) 18.3% of Co. Bus Manufacturer 1,896 2,687
Electrolux, LLC 2.5% of Co. Vacuum Cleaner 246 957
Confluence Holdings Corp. 0.7% of Co. Canoes & Kayaks 45 17
ConStar International, Inc. 2.8% of Co. Electrical 616 616
The Inca Group (2) 18.5% of Co. Manufacturing 850 850
--------- ---------
Subtotal 4,153 6,627
--------- ---------
Subtotal--non-publicly traded securities--98.13% 256,577 265,118
<CAPTION>
Interest Rate Basis Swap Agreements--(0.07)%
- --------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
No. of Contracts Notional Amount Expiration Date Receive Rate Pay Rate
- ---------------- --------------- --------------- ------------ --------
4 $ 61,325 4/10/04 Floating Floating $ -- $ (197)
--------- ---------
Total Investments 256,577 264,921
<CAPTION>
Investment in Unconsolidated Operating Subsidiary--1.94%
- --------------------------------------------------------
<S> <C> <C> <C>
ACS Capital Investments Corporation(1)(2)100% of Co. Investment Banking 403 5,233
--------- ---------
Totals $ 256,980 $ 270,154
========= =========
</TABLE>
(1) Non-income producing
(2) Affiliate
See accompanying notes.
3
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1998
(Unaudited)
(In thousands except per share data)
<TABLE>
<CAPTION>
Industry Cost Fair Value
-------- ---- ----------
<S> <C> <C> <C>
Senior Debt--9.47%
- ------------------
Four S Baking Company (2) Baking $ 1,266 $ 1,266
BIW Connector Systems, LLC Manufacturing 3,404 3,404
Chance Coach, Inc. (2) Bus Manufacturer 1,286 1,286
JAG Industries, Inc. (2) Manufacturing 1,200 1,200
Confluence Holdings Corp. Canoes & Kayaks 9,675 9,675
Cycle Gear, Inc. Motor Cycle Accessories 750 750
Euro-Caribe, Inc. (2) Meat Processing 7,181 7,181
--------- ---------
Subtotal 24,762 24,762
Subordinated Debt--41.37%
- -------------------------
Four S Baking Company (2) Baking 1,588 1,588
BIW Connector Systems, LLC. Manufacturing 6,710 6,710
Westwind Group Holdings, Inc. Restaurant 2,932 2,932
JAG Industries, Inc. (2) Manufacturing 2,335 2,335
Specialty Transportation Services, Inc. (2) Waste Hauler 7,368 7,368
Chance Coach, Inc. (2) Bus Manufacturer 7,060 7,060
The L.A. Studios, Inc. Audio Production 2,393 2,393
Decorative Surfaces International, Inc. (2) Decorative Paper & Vinyl Mfg. 10,490 10,490
New Piper Aircraft, Inc. Aircraft Manufacturing 17,858 17,858
Electrolux, LLC Vacuum Cleaner 7,264 7,264
Cycle Gear, Inc. Motor Cycle Accessories 633 633
Confluence Holdings Corp. Canoes & Kayaks 4,701 4,701
Euro-Caribe, Inc. (2) Meat Processing 8,905 8,905
Starcom Holdings, Inc. Electrical 12,839 12,839
Centennial Broadcasting, Inc. Radio Stations 15,040 15,040
--------- ---------
Subtotal 108,116 108,116
Convertible Preferred Stock--2.10%
- ----------------------------------
Four S Baking Company (2) 15% dividend convertible into 10.89% of Co. Baking 2,756 2,756
Chance Coach, Inc. (2) 12% dividend convertible into 20% of Co. Bus Manufacturer 2,000 2,079
Decorative Surfaces International, Inc. (2) prime rate
plus 4% dividend convertible into 2.9% of Co. Decorative Paper & Vinyl Mfg. 646 646
--------- ---------
Subtotal 5,402 5,481
Common Stock and Membership Interests Warrants(1)--8.43%
- --------------------------------------------------------
Four S Baking Company (2) 3.26% of Co. Baking 462 600
BIW Connector Systems, LLC 8% of LLC Manufacturing 652 540
Westwind Group Holdings, Inc. 5% of Co. Restaurant 350 421
JAG Industries, Inc. (2) 75% of Co. Manufacturing 505 465
Specialty Transportation Services, Inc. (2) Up to 39.1% of Co. Waste Hauler 694 784
Chance Coach, Inc. (2) 43.7% of Co. Bus Manufacturer 4,041 4,543
The L.A. Studios, Inc. 17% of Co. Audio Production 902 857
Decorative Surfaces International, Inc. (2) 42.3% of Co. Decorative Paper & Vinyl Mfg. 4,571 5,596
New Piper Aircraft, Inc. 4% of Co. Aircraft Manufacturing 2,231 2,231
Cycle Gear, Inc. 16.5% of Co. Motor Cycle Accessories 374 374
Confluence Holdings Corp. 18% of Co. Canoes & Kayaks 1,319 1,319
Euro-Caribe, Inc. (2) 37% of Co. Meat Processing 1,110 1,110
Starcom Holdings, Inc. 17.5% of Co. Electrical 3,171 3,171
--------- ---------
Subtotal 20,382 22,011
Common Stock and Membership Interests(1) - 1.78%
- ------------------------------------------------
Four-S Baking Company (2) 5.5% of Co. Baking 966 1,004
Specialty Transportation Services, Inc. (2) 9.1% of Co. Waste Hauler 500 784
Chance Coach, Inc. (2) 18.3% of Co. Bus Manufacturer 1,896 2,131
Electrolux, LLC 2.5% of Co. Vacuum Cleaner 246 246
ConStar International, Inc. 2.8% Electrical 500 500
--------- ---------
Subtotal 4,108 4,665
--------- ---------
Subtotal--non-publicly traded securities--63.15% 162,770 165,035
Government Securities--34.41%
- -----------------------------
FHLB Discount Note due 1/4/99 89,948 89,948
--------- ---------
Total Investments 252,718 254,983
Investment in Unconsolidated Operating Subsidiary--2.44%
- --------------------------------------------------------
ACS Capital Investments Corporation(1)(2)--100% of Co. Investment Banking 403 6,386
--------- ---------
Totals $ 256,980 $ 270,154
========= =========
</TABLE>
(1) Non-income producing
(2) Affiliate
See accompanying notes.
4
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except per share data)
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Operating income:
Interest and dividend income $ 8,414 $ 4,090 $ 20,758 $ 9,931
Loan fees 729 672 2,060 1,806
-------- -------- -------- --------
Total operating income 9,143 4,762 22,818 11,737
Operating expenses:
Salaries and benefits 411 250 909 628
General, administrative and other 382 246 1,035 682
Interest 1,349 -- 3,245 --
-------- -------- -------- --------
Total operating expenses 2,142 496 5,189 1,310
Operating income before equity in loss of
unconsolidated operating subsidiary 7,001 4,266 17,629 10,427
Equity in loss of unconsolidated operating
subsidiary (337) (366) (1,153) (154)
-------- -------- -------- --------
Net operating income 6,664 3,900 16,476 10,273
Net realized gain on investments -- -- 867 --
Increase in unrealized appreciation of investments 3,570 924 6,077 943
-------- -------- -------- --------
Net increase in shareholders' equity resulting
from operations $ 10,234 $ 4,824 $ 23,420 $ 11,216
======== ======== ======== ========
Net operating income per share:
Basic $ 0.45 $ 0.35 $ 1.33 $ 0.93
Diluted $ 0.43 $ 0.34 $ 1.28 $ 0.89
Earnings per common share:
Basic $ 0.69 $ 0.44 $ 1.89 $ 1.01
Diluted $ 0.66 $ 0.42 $ 1.81 $ 0.97
Weighted average shares of Basic 14,869 11,070 12,395 11,069
Common stock outstanding Diluted 15,619 11,461 12,920 11,544
</TABLE>
See accompanying notes.
5
<PAGE>
AMERICAN CAPITAL STRATEGIES, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
(In thousands except per share data)
<TABLE>
<CAPTION>
(Distributions
Notes in excess of)
Capital in Receivable Net Realized Unrealized Total
Common Stock Excess of From Sale of Undistributed Appreciation Shareholders'
Shares Amount Par Value Common Stock Earnings of Investments Equity
------ ------ --------- ------------ ------------- -------------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 11,069 $ 111 $ 144,940 $ -- $ (55) $ 5,656 $ 150,652
Issuance of common stock under
the 1997 Stock Option Plan 8 -- 96 -- -- -- 96
Net increase in shareholders'
equity resulting from -- -- -- -- 10,273 943 11,216
operations
Distributions -- -- -- -- (9,522) -- (9,522)
------ --------- --------- --------- --------- --------- ---------
Balance at September 30, 1998 11,077 $ 111 $ 145,036 $ -- $ 696 $ 6,599 $ 152,442
====== ========= ========= ========= ========= ========= =========
Balance at December 31, 1998 11,081 $ 111 $ 145,245 $ (300) $ (116) $ 7,783 $ 152,723
Issuance of common stock 5,605 56 89,150 89,206
Issuance of common stock under
the 1997 Stock Option Plan 1,499 15 22,431 -- -- -- 22,446
Issue of common stock under the
Dividend Reinvestment Plan 20 -- 339 -- -- -- 339
Issuance of restricted stock 10 -- 166 -- -- -- 166
Issuance of notes receivable
from sale of common stock -- -- -- (22,446) -- -- (22,446)
Net increase in shareholders'
equity resulting from -- -- -- -- 17,343 6,077 23,420
operations
Distributions -- -- -- -- (17,287) -- (17,287)
------ --------- --------- --------- --------- --------- ---------
Balance at September 30, 1999 18,215 $ 182 $ 257,331 $ (22,746) $ (60) $ 13,860 $ 248,567
====== ========= ========= ========= ========= ========= =========
</TABLE>
See accompanying notes.
6
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands except per share data)
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
September 30, September 30,
1999 1998
------------- -------------
<S> <C> <C>
Operating activities
Net increase in shareholders' equity resulting from operations $ 23,420 $ 11,216
Adjustments to reconcile net increase in shareholders' equity resulting
from operations to net cash provided by operating activities:
Unrealized appreciation of investments (6,077) (943)
Net realized gain on investments (867) --
Net amortization of securities -- (1,347)
Accretion of loan discounts (1,613) (563)
Amortization of deferred finance costs 554 --
Increase in interest receivable (1,521) (1,291)
Increase in accrued payment-in-kind dividend and interest (2,068) --
(Increase) decrease in due from unconsolidated subsidiary (1,567) 833
Increase (decrease) in other assets (2,579) 26
Increase in accounts payable and accrued liabilities 129 91
Equity in loss of unconsolidated operating subsidiary 1,153 154
--------- ---------
Net cash provided by operating activities 8,964 8,176
Investing activities
Proceeds from sale or maturity of investments 28,885 161,580
Principal repayments 26,092 1,313
Purchase of investments (122,338) (91,337)
Issuance of employee notes receivable (1,269) --
Purchase of securities (12,900) (117,308)
--------- ---------
Net cash used in investing activities (81,530) (45,752)
Financing activities
Drawings on revolving credit facilities, net 39,840 --
Proceeds from notes payable -- 45,037
Repayments of notes payable (5,000) --
Increase in deferred financing costs (2,011) --
Issuance of common stock 89,372 96
Distributions paid (10,598) (9,522)
--------- ---------
Net cash provided by financing activities 111,603 35,611
--------- ---------
Net increase (decrease) in cash and cash equivalents 39,037 (1,965)
Cash and cash equivalents at beginning of period 6,149 8,862
--------- ---------
Cash and cash equivalents at end of period $ 45,186 $ 6,897
========= =========
Non-cash financing activities:
- ------------------------------
Issuance of common stock in conjunction with dividend reinvestment $ 339 $ --
Notes receivable issued in exchange for common stock 22,446 --
Net repayment of margin borrowings through sale of securities 80,948 --
</TABLE>
See accompanying notes.
7
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
FINANCIAL HIGHLIGHTS
(Unaudited)
(In thousands except per share data)
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1999 September 30, 1998
------------------ ------------------
<S> <C> <C>
Per Share Data(1)
Net asset value at beginning of the period $ 13.80 $ 13.61
Net operating income 1.33 0.93
Increase in unrealized appreciation on investments 0.56 0.08
--------- ---------
Net increase in shareholders' equity from operations $ 1.89 $ 1.01
Issuance of common stock 0.71 --
Dividends declared (1.27) (0.86)
Effect of Dilution from exercise of stock options (1.49) --
--------- ---------
Net asset value at end of period $ 13.64 $ 13.76
Per share market value at beginning of period $ 17.250 $ 18.125
Per share market value at end of period $ 18.500 $ 16.188
Total return (2) 14.62% (5.94)%
Shares outstanding at end of period 18,215 11,077
Ratio/Supplemental Data
Net assets at end of period $ 248,508 $ 152,442
Ratio of operating expenses to average net assets 2.59% 0.86%
Ratio of net operating income to average net assets 8.24% 6.78%
</TABLE>
(1) Basic per share data.
(2) Amounts were not annualized for the results of the nine month periods ended
September 30, 1999 and 1998.
See accompanying notes.
8
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(In thousands except per share data)
Note 1. Unaudited Interim Financial Statements
Interim financial statements of American Capital Strategies, Ltd. (the
"Company") are prepared in accordance with generally accepted accounting
principles ("GAAP") for the interim financial information and pursuant to the
requirements for reporting on Form 10-Q and Article 10 of Regulation S-X.
Accordingly, certain disclosures accompanying annual financial statements
prepared in accordance with GAAP are omitted. In the opinion of management, all
adjustments, consisting solely of normal recurring accruals, necessary for the
fair presentation of financial statements for the interim periods have been
included. The current period's results of operations are not necessarily
indicative of results that ultimately may be achieved for the year. The interim
financial statements and notes thereto should be read in conjunction with the
financial statements and notes thereto included in the Company's Form 10-K/A for
the year ended December 31, 1998, as filed with the Securities and Exchange
Commission.
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses and disclosure of contingent assets and liabilities. Actual results
could differ from those estimates.
Note 2. Organization
American Capital Strategies, Ltd., a Delaware corporation (the
"Company"), was incorporated in 1986 to provide financial advisory services to
and invest in middle market companies. On August 29, 1997, the Company completed
an initial public offering ("IPO") of 10,382,437 shares of common stock ("Common
Stock"), and became a non-diversified closed end investment company that has
elected to be treated as a business development company ("BDC") under the
Investment Company Act of 1940, as amended ("1940 Act"). On October 1, 1997, the
Company began operations so as to qualify to be taxed as a regulated investment
company ("RIC") as defined in Subtitle A, Chapter 1, under Subchapter M of the
Internal Revenue Code of 1986 as amended (the "Code"). As contemplated by these
transactions, the Company materially changed its business plan and format from
structuring and arranging financing for buyout transactions on a fee for
services basis to primarily being a lender to and investor in middle market
companies. The Company's investment objectives are to achieve current income
from the collection of interest and dividends, as well as long-term growth in
its shareholders' equity through appreciation in value of the Company's equity
interests. The Company provides financial advisory services to businesses
through ACS Capital Investments Corporation ("CIC"), a wholly-owned subsidiary.
The Company is headquartered in Bethesda, Maryland, and has offices in New York,
Boston, Pittsburgh, San Francisco, Chicago, and Dallas.
Note 3. Investment in Unconsolidated Operating Subsidiary
As discussed in Note 2, CIC is an operating subsidiary of the Company
and is accounted for under the equity method effective October 1, 1997. The
investment in CIC is carried at fair value as determined by the Board of
Directors.
Condensed financial information for CIC is as follows:
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
Assets
Investments in portfolio companies, at fair value $10,365 $10,837
Other assets, net 2,399 1,359
------- -------
Total assets $12,764 $12,196
======= =======
Liabilities and Shareholder's Equity
Deferred income taxes $ 2,205 $ 2,921
Due to parent 2,390 778
Other liabilities 2,936 2,111
Shareholder's equity 5,233 6,386
------- -------
Total liabilities and shareholder's equity $12,764 $12,196
======= =======
</TABLE>
9
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(In thousands except per share data)
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Operating income $ 1,528 $ 901 $ 3,543 $ 4,782
Operating expense 2,257 1,628 6,082 5,090
------- ------- ------- -------
Net operating loss (729) (727) (2,539) (308)
Realized gains on investments -- -- 925 --
Increase (decrease) in unrealized
appreciation of investments 186 187 (246) 57
Other income 206 174 707 97
------- ------- ------- -------
Net loss $ (337) $ (366) $(1,153) $ (154)
======= ======= ======= =======
</TABLE>
Note 4. Notes Payable
As of March 31, 1999, the Company closed a maximum $100,000 debt
funding facility; on September 17, 1999, the facility was increased to a maximum
of $125,000. In connection with the closing, the Company established ACS Funding
Trust I (the "Trust"), an affiliated business trust and contributed or sold to
the Trust approximately $157,000 in loans. The Company subsequently contributed
an additional $55 million in loans to the Trust. Subject to the continued
satisfaction of certain conditions, the Company will remain servicer of the
loans. Simultaneously with the initial contribution, the Trust entered into a
loan agreement with First Union Capital Markets Corp., as deal agent, and
certain other parties providing for loans in an amount up to 50% of the eligible
loan balance subject to certain concentration limits. The term of the facility
is two years and interest on borrowings will be charged at LIBOR plus 2.50%. The
full amount of principal is due at the end of the term and interest is payable
monthly. The transfer of assets to the Trust and the related borrowings by the
Trust have been treated as a financing arrangement by the Company under
Statement of Financial Accounting Standards No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities." As of
September 30, 1999, the Company has $69,840 of borrowings outstanding under this
facility.
Due to the short term of the borrowings, the fair value of the notes
payable approximates cost.
Note 5. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share for the three and nine months ended September 30, 1999 and
1998.
10
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(In thousands except per share data)
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Numerator for basic and diluted net
increase in shareholders'
equity resulting from
operations $10,234 $ 4,824 $23,420 $11,216
Denominator for basic-weighted
average shares 14,869 11,070 12,395 11,069
Employee stock options 70 304 185 359
Contingently issuable shares 598 -- 268 --
Warrants 82 87 72 116
------- ------- ------- -------
Dilutive potential shares 750 391 525 475
Denominator for diluted 15,619 11,461 12,920 11,544
------- ------- ------- -------
Basic earnings per share $ 0.69 $ 0.44 $ 1.89 $ 1.01
Diluted earnings per share $ 0.66 $ 0.42 $ 1.81 $ 0.97
</TABLE>
Note 6. Realized Gain on Investments
During March, 1999, the Company sold its investment in Four S Baking
Company ("Four S"). The Company's investment included senior debt, subordinated
debt, preferred stock, common stock and common stock warrants. The Company
received $7.2 million in total proceeds from the sale and recognized a net
realized gain of $316. The realized gain was comprised of a $331 realization of
unamortized loan discounts on the subordinated debt and a net loss of $15 on the
common stock and warrants. In addition, the Company earned prepayment fees of
$87 from the early repayment of the senior and subordinated debt. In conjunction
with the sale, the Company also recorded $177 of unrealized depreciation to
reverse previously recorded unrealized appreciation.
During June, 1999, the Company received a prepayment of subordinated
debt from Specialty Transportation Services, Inc. ("STS") in the amount of
$7,500. In conjunction with the repayment, the Company received prepayment fees
of $225 and recognized a realized gain of $551 from the realization of
unamortized original issue discount. At September 30, 1999, the Company's
subordinated debt investment in STS was $462. (See Note 10)
Note 7. Interest Rate Risk Management
The Company enters into interest rate swap agreements with major banks
as part of its strategy to manage interest rate risks and to fulfill its
obligation under the terms of its debt funding facility. The Company uses
interest rate swap agreements for hedging and risk management only and not for
speculative purposes. During the nine months ended September 30, 1999, the
Company entered into four interest rate basis swap agreements with an aggregate
notional amount of $61,325. Pursuant to these swap agreements, the Company pays
a variable rate equal to the prime lending rate (8.25% at September 30, 1999)
and receives a weighted average rate of the 30-day LIBOR (5.38% at September 30,
1999) plus 2.70%. The swaps have a remaining weighted average maturity of more
than four years. At September 30, 1999, the fair value of the interest rate
basis swap agreements represented a liability of $197.
11
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(In thousands except per share data)
Note 8. Related Party Transactions
The Company has provided loans to employees, including the three
executive officers discussed below, for the exercise of options under the 1997
Stock Option Plan. The loans require the current payment of interest at the
applicable federal interest rate in effect at the date of issue, have varying
terms not exceeding nine years and have been recorded as a reduction of
shareholders' equity. The loans are evidenced by full recourse notes that are
due upon termination of employment and the shares of common stock purchased with
the proceeds of the loan are posted as collateral. During the nine months ended
September 30, 1999, the Company issued $23,715 in loans to employees for the
exercise of options. The Company recognized interest income from these loans of
$265 and $314 during the three and nine months ended September 30, 1999.
In addition to the above, the Company entered into agreements to
purchase split dollar life insurance for three executive officers. The aggregate
cost of the split dollar life insurance is $2,638. The cost to the Company will
generally be amortized over a period equal to ten years as long as each
executive officer continues employment. During the period the loans are
outstanding, the Company will have a collateral interest in the cash value and
death benefit of these policies as additional security for the loans.
Additionally, as long as the policy premium is not fully amortized, the Company
will have a collateral interest in such items generally equal to the unamortized
cost of the policies. In the event of an individual's termination of employment
with the Company prior to the end of such ten year period, or, his election not
to be bound by non compete agreements, such individual must reimburse the
company the unamortized cost of his policy.
Note 9. Capital Transactions
On August 11, 1999, the Company issued 5,000 shares of common stock for
an aggregate purchase price of $85,000 and granted the underwriters the option
to purchase up to 750 additional shares of common stock within thirty days for
an aggregate purchase price of $12,750. The net proceeds from the sale of the
5,000 shares of common stock were $79,512. On September 10, 1999, the
underwriters' exercised their option to acquire 605 shares from the Company. The
net proceeds from the issuance of the 605 shares of common stock were $9,694.
The Company used the proceeds from the offerings to repay outstanding borrowings
under its revolving debt funding facility.
Note 10. Subsequent Events
During October 1999, the Company sold its investments in STS. The
Company received $3,000 for its common stock and common stock warrants. In
addition, STS repaid the $500 of subordinated debt owned by the Company. As a
result of these transactions, the Company recorded a realized gain of $1,806 on
the sale of the common stock and warrants and $38 on the early repayment of the
subordinated debt. In addition, STS paid CIC $1,000 in fees for the termination
of an investment banking agreement and paid the Company $15 in prepayment
penalties.
12
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(In thousands except per share data)
All statements contained herein that are not historical facts
including, but not limited to, statements regarding anticipated activity are
forward looking in nature and involve a number of risks and uncertainties.
Actual results may differ materially. Among the factors that could cause actual
results to differ materially are the following: changes in the economic
conditions in which the Company operates negatively impacting the financial
resources of the Company; certain of the Company's competitors with
substantially greater financial resources than the Company reducing the number
of suitable investment opportunities offered to the Company or reducing the
yield necessary to consummate the investment; increased costs related to
compliance with laws, including environmental laws; general business and
economic conditions and other risk factors described in the Company's reports
filed from time to time with the Securities and Exchange Commission. The Company
cautions readers not to place undue reliance on any such forward looking
statements, which statements are made pursuant to the Private Securities
Litigation Reform Act of 1995 and, as such, speak only as of the date made.
The following analysis of the financial condition and results of
operations of the Company should be read in conjunction with the Company's
financial statements and the notes thereto, included elsewhere in this report
and in the Company's annual report on Form 10-K/A for the year ended December
31, 1998.
Overview
The Company's primary business is investing in and lending to
privately-owned businesses through investments in senior debt, subordinated debt
with detachable equity warrants, preferred stock, and common stock. The total
portfolio value of investments in non-publicly traded securities was $265,118
and $165,035 at September 30, 1999 and December 31, 1998, respectively. During
the three months ended September 30, 1999 (the "Third Quarter 1999"), the
Company originated investments totaling $48,384 and advanced $8,400 previously
committed under working capital facilities. During the nine months ended
September 30, 1999 (the "1999 YTD Period"), the Company originated investments
totaling $118,113 and advanced $4,275 previously committed under working capital
facilities. During the 1999 YTD Period, the Company also received repayments of
loans of $26.1 million and, in conjunction with the sale of one portfolio
company, the Company sold warrants of $0.6 million, common stock of $1.0
million, preferred stock of $2.9 million, and received repayment of senior and
subordinated debt of $2.8 million. As a result, the total portfolio increased by
61% from December 31, 1998 to September 30, 1999. The weighted average effective
interest rate on the investment portfolio was 13.8% and 13.0%, respectively, at
September 30, 1999 and December 31, 1998. A summary of the composition of the
Company's portfolio of non-publicly traded securities at September 30, 1999 and
December 31, 1998 is shown in the following table:
September 30, 1999 December 31, 1998
------------------ -----------------
Senior debt 12.3% 15.0%
Subordinated debt 67.5% 65.5%
Convertible preferred stock 2.6% 3.3%
Common stock warrants 15.1% 13.4%
Common stock 2.5% 2.8%
The Company expects its portfolio composition for the remainder of 1999
to be similar to its portfolio composition at September 30, 1999 and at December
31, 1998. The Company will continue to weight heavily its portfolio composition
toward investments in subordinated debt with detachable warrants.
13
<PAGE>
The following table shows the portfolio composition by industry
grouping:
September 30, 1999 December 31, 1998
------------------ -----------------
Manufacturing 61.0% 66.1%
Health Care 4.8% --
Media 6.2% 9.1%
Construction 8.8% 10.0%
Wholesale & Retail 9.5% 7.4%
Transportation 2.9% 5.4%
Service 6.8% 2.0%
Management expects that the largest percentage of its investments will
continue to be in manufacturing companies, however, the Company intends to
continue to diversify its portfolio and will explore new investment
opportunities in a variety of industries.
Results of Operations
The Company's financial performance, as reflected in its Statements of
Operations, is composed of three primary elements. The first element is "Net
operating income," which is primarily the interest and dividends earned from
investing in debt and equity securities and the equity in earnings of its
unconsolidated operating subsidiary less the operating expenses of the Company.
The second element is "Change in unrealized appreciation of investments," which
is the net change in the estimated fair value of the Company's portfolio assets
at the end of the period compared with their estimated fair values at the
beginning of the period or their stated costs, as appropriate. The third element
is "Realized gain on investments," which reflects the difference between the
proceeds from a sale or maturity of a portfolio investment and the cost basis of
the investment. In addition, the Company operates so as to qualify to be taxed
as a RIC. As long as the Company qualifies as a RIC, it will be able to take a
deduction against its otherwise taxable income for certain dividends it pays,
allowing it to substantially reduce or eliminate its corporate-level tax
liability. As a result, the provisions for income taxes are expected to be
minimal.
As a RIC, the Company is required to account for investments in
operating subsidiaries under the equity method, regardless of ownership
interest. Accordingly, the Company's investment in CIC is presented on the
equity method and, consistent with the equity method of accounting, the
portfolio companies owned by CIC are not reported separately by the Company.
14
<PAGE>
The operating results for the three and nine months ended September 30,
1999 and September 30, 1998 are as follows:
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
1999 1999 1998 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Operating income $ 9,143 $ 4,762 $ 22,818 $ 11,737
Operating expenses 2,142 496 5,189 1,310
Equity in loss of unconsolidated
operating subsidiary
(337) (366) (1,153) (154)
-------- -------- -------- --------
Net operating income 6,664 3,900 16,476 10,273
Net realized gain on investments
-- -- 867 --
Increase in unrealized
appreciation of investments 3,570 924 6,077 943
-------- -------- -------- --------
Net increase in shareholders'
equity resulting from
operations $ 10,234 $ 4,824 $ 23,420 $ 11,216
======== ======== ======== ========
</TABLE>
Total operating income for the Third Quarter 1999 and the 1999 YTD
Period increased $4,381, or 92%, and $11,081, or 94%, respectively, compared to
the three and nine months ended September 30, 1998 (the "Third Quarter 1998" and
the "1998 YTD Period"). The increase in operating income is a result of the
Company closing 21 investments in private companies totaling $161 million
between September 30, 1998 and September 30, 1999. For the Third Quarter 1999,
operating income consisted of $729 in loan fees, $8,060 in interest and
dividends on non-publicly traded securities and $354 in interest on government
agency securities, bank deposits, repurchase agreements and shareholder loans;
for the Third Quarter 1998, operating income consisted of $672 in loan fees,
$3,393 in interest and dividends on non-publicly traded securities and $697 in
interest on government agency securities, bank deposits and repurchase
agreements. For the 1999 YTD Period, operating income consisted of $2,060 in
loan fees, $20,193 in interest and dividends on non-publicly traded securities
and $565 in interest on government agency securities, bank deposits repurchase
agreements and shareholder loans; for the 1998 YTD Period, operating income
consisted of $1,806 in loan fees, $6,763 in interest and dividends on
non-publicly traded securities and $3,168 in interest on government agency
securities, bank deposits and repurchase agreements. As the Company increases
its investment portfolio of non-publicly traded securities, the interest and
dividends the Company realizes on these securities will also increase.
Operating expenses for the Third Quarter 1999 increased $1,646, or
332%, over the same period in 1998. For the 1999 YTD Period, operating expenses
increased $3,879, or 296% over the nine months ended September 30, 1999. The
increase for both periods is primarily due to the increase in interest expense
from $0 in the Third Quarter 1998 and the 1998 YTD Period to $1,349 and $3,245
for the three and nine months ended September 30, 1999, respectively. The
increase in interest expense resulted from the Company's $69.8 million in net
borrowings under credit facilities between September 30, 1998 and September 30,
1999. The weighted average interest rate on borrowings at September 30, 1999 was
7.9%. In addition operating expenses also increased for the 1999 YTD Period due
to the increase in salaries and benefits from $628 for the nine months ended
September 30, 1998 to $909 in 1999. The Company had 36 and 30 employees at
September 30, 1999 and 1998, respectively. The increase in salary and benefit
expense is directly attributable to the increase in the number of employees. The
Company intends to continue hiring new professionals in 1999 and 2000 to support
anticipated portfolio growth.
Equity in loss of unconsolidated operating subsidiary, which represents
CIC's results, decreased from a loss of $366 for Third Quarter 1998 to a loss of
$337 for Third Quarter 1999. For the nine months ended September 30, 1999,
equity in loss of unconsolidated operating subsidiary decreased $999 from the
1998 YTD Period. For the three months ended September 30, 1999, CIC's results
included $1,528 of operating income, $2,257 of operating expenses, $186 of
unrealized appreciation of investments, and $206 in other income. For the three
months ended September 30, 1998, CIC's results included $901 of operating
income, $1,628 of
15
<PAGE>
operating expenses, $187 of unrealized appreciation of investments, and $174 of
other income. For the 1999 YTD Period, CIC's results included $3,543 of
operating income, $6,082 of operating expenses, $925 of realized gains, $246 of
unrealized depreciation of investments, and $707 of other income. The realized
gain was a result of the sale of CIC's common stock investment in Four S Baking
Company and the unrealized depreciation was due to the reversal of previously
recorded unrealized appreciation of CIC's Four S Baking Company investment,
netted against unrealized gains on other investments. For the nine months ended
September 30, 1998, CIC recorded $4,782 in operating income, $5,090 in operating
expenses, $57 in unrealized appreciation of investments, and $97 of other
income. The decrease in CIC's earnings for the 1999 YTD Period was primarily
attributable to the lower investment banking fees generated during the Third
Quarter 1999 and the higher operating expenses resulting from the increase in
employees from 30 to 36, which resulted in a decrease in operating income of
$2,231 for the nine month period ended September 30, 1999.
During the 1999 YTD Period, the Company recorded a realized gain of
$551 from the prepayment of $7.5 million of subordinated debt by STS, and a
realized gain of $316 on the sale of its investment in Four S. Total proceeds
from the sale of the Four S securities, which included senior debt, subordinated
debt, preferred stock, common stock warrants, and common stock, were $7.2
million. The realized gains for the STS and Four S transactions were comprised
of the realization of unamortized loan discounts.
The increase in unrealized appreciation of investments is based on
portfolio asset valuations determined by the Company's Board of Directors. The
increase in unrealized appreciation of investments for the Third Quarter 1999
increased $2,646 over the Third Quarter 1998. The increase for Third Quarter
1999 was comprised of aggregate valuation increases of $4,090 at eight portfolio
companies and aggregate valuation decreases of $323 at seven portfolio companies
and $197 related to interest rate basis swaps used to manage interest rate risk.
The increase in unrealized appreciation for the 1999 YTD Period increased $5,134
due to aggregate valuation increases of $7,002 at six portfolio companies and
aggregate valuation decreases of $728 at seven portfolio companies and $197
related to interest rate basis swaps used to manage interest rate risk.
Financial Condition, Liquidity, and Capital Resources
At September 30, 1999, the Company had $45,186 in cash and cash
equivalents. In addition, the Company had outstanding debt secured by assets of
the Company of $69,840 in borrowings under credit facilities; the maximum amount
available under this facility is $125,000. During 1998, the Company's primary
source of funding was the proceeds received in connection with its IPO. The
Company completed investing the proceeds of its IPO during 1998 and began
funding its investments with proceeds from a line of credit and short term
borrowings. On August 11, 1999, the Company completed a fully underwritten
public offering of its common stock and received net proceeds of approximately
$79,500 in exchange for 5,000 common shares. On September 10, 1999, the Company
issued 605 shares of its common stock pursuant to the underwriter's
overallotment option granted on Auguest 11, 1999 and received net proceeds of
approximately $9,600.
As of March 31, 1999, the Company closed a maximum $100,000 debt
funding facility; this facility was increased to a $125,000 on September 17,
1999. In connection with the closing, the Company established ACS Funding Trust
I (the "Trust"), an affiliated business trust and contributed or sold to the
Trust approximately $157,000 in loans. The Company subsequently contributed an
additional $55,000 in loans to the Trust. Subject to the continuing satisfaction
of certain conditions, the Company will remain servicer of the loans.
Simultaneously with the initial contribution, the Trust entered into a loan
agreement with First Union Capital Markets Corp., as deal agent, and certain
other parties providing for loans in an amount up to 50% of the eligible loan
balance, subject to certain concentration limits. The term of the facility is
two years and interest on borrowings will be charged at LIBOR plus 2.50%. The
full amount of principal is due at the end of the term and interest is payable
monthly. The Company has used borrowings under this facility to repay debt and
to make investments in the debt and equity securities of middle market
companies; the Company intends to continue to use the facility to make
investments and for general working capital purposes. In order to manage
interest rate risk associated with the floating rate borrowings and fulfill its
obligations under the terms of its debt funding facility, the Company has
entered into interest rate basis swap agreements. The Company intends to use
derivative instruments for non-trading and non-speculative purposes only.
As a RIC, the Company is required to distribute annually 90% or more of
its net operating income and net realized short-term capital gains to
shareholders. In addition to the above noted equity offerings and borrowings,
the Company anticipates having to issue additional debt or equity to expand its
investments in middle market companies. The terms of the future debt and equity
issuances can not be determined and there can be no assurances that the debt or
equity markets will be available to the Company on terms it deems favorable.
16
<PAGE>
Portfolio Credit Quality
The Company has implemented a system under which it grades all
investments on a scale of 1 to 4. This system is intended to reflect the
performance of the borrower's business, the collateral coverage of the loans and
other factors considered relevant. Under this system, management believes that
investments with a grade of 4 involve the least amount of risk in the Company's
portfolio. The borrower is performing above expectations and the trends and risk
factors are generally favorable. Management believes that investments graded 3
involve an acceptable level of risk that is similar to the risk at the time of
origination. The borrower is performing as expected and the risk factors are
neutral to favorable. All new investments are initially graded 3.
Investments graded 2 involve a borrower performing below expectations
and the investment risk has increased since origination. The borrower may be out
of compliance with debt covenants, however, loan payments are not more than 120
days past due. For investments graded 2, the Company's management will increase
procedures to monitor the borrower and will write down the fair value of the
loan if it is deemed to be impaired. An investment grade of 1 indicates that the
borrower is performing materially below expectations and the loan risk has
substantially increased since origination. Some or all of the debt covenants are
out of compliance and payments are delinquent. Loans graded 1 are not
anticipated to be repaid in full and the Company will reduce the fair market
value of the loan to the amount it anticipates will be recovered.
To monitor and manage the investment portfolio risk, management tracks
the weighted average portfolio grade. The weighted average investment grade was
3.2, 3.1, 3.1 and 3.2 at September 30, 1999, June 30, 1999, March 31, 1999 and
December 31, 1998, respectively. In addition, all of the Company's outstanding
loans are performing and paying as agreed as of September 30, 1999. At September
30, June 30, and March 31, 1999 the Company's investment portfolio was graded as
follows:
<TABLE>
<CAPTION>
September 30, 1999 June 30, 1999 March 31, 1999
------------------ ------------- --------------
Percentage Percentage Percentage
Investments at of Total Investments at of Total Investments at of Total
Grade Value Portfolio Value Portfolio Value Portfolio
----- ----- --------- ----- --------- ----- ---------
<S> <C> <C> <C> <C> <C> <C>
4 $ 48,696 18.4% $ 31,070 9.0% $ 30,709 16.8%
3 212,422 80.1% 181,820 84.6% 142,938 78.3%
2 4,000 1.5% 1,920 0.9% 8,851 4.9%
1 -- -- -- -- -- --
------- ----- ------- ----- -------- -----
265,118 100.0% 214,810 100.0% $182,498 100.0%
</TABLE>
Impact of the Year 2000
The "Year 2000 Issue" is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs or hardware that have date-sensitive software or
embedded chips may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations causing
disruption of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities. The Company created a Year 2000 Compliance Committee to address the
Year 2000 compliance of the Company's information technology and non-information
technology systems, the systems of third parties, and the systems of the
portfolio companies. The Company has also engaged outside technology consultants
to assist with its Year 2000 project.
All of the software used by the Company in its information technology
systems is provided by outside vendors. The Company has taken an inventory of
all of its information technology systems and is in the process of obtaining
Year 2000 compliance designation from the vendors and internally conducting
compliance testing. Based on its assessment of its information technology
systems, management has identified the general ledger software package as the
significant system that is Year 2000 non-compliant. As such, the Company will
replace its accounting software with a new, Year 2000 compliant software
package. The new accounting software and all necessary modifications to other
information technology systems will be completed by November, 1999.
The Company has also evaluated the Year 2000 compliance of its
non-information technology systems, consisting of office equipment other than
computers and communications equipment. The Company has contacted the office
equipment vendors to obtain Year 2000 compliance designation. The Company has
completed the remediation, testing and implementation of these non-information
technology systems and believes there is not a material exposure.
17
<PAGE>
The Company has contacted third parties that do not share information
systems with the Company ("external agents"). These third parties include the
Company's banks, landlords, utility companies, telecommunication providers and
other vendors. To date, the Company is not aware of any external agent Year 2000
issue that would materially impact the Company's results of operations,
liquidity, or capital resources. However, the Company has no means of ensuring
that external agents will be Year 2000 ready. The inability of external agents
to complete their Year 2000 resolution process in a timely fashion could
materially impact the Company. The effect of non-compliance by external agents
is not determinable.
The Company has also evaluated the Year 2000 readiness of its portfolio
companies. Since the summer of 1998, the Company has required that each
portfolio company expressly warrant in its loan agreement that it is or will be
Year 2000 compliant prior to December 31, 1999. The Company has also submitted
questionnaires to all of its portfolio companies acquired by the Company prior
to June 30, 1999 to determine their exposure to the Year 2000 problem and the
adequacy of their plans to address the issues. All of the portfolio companies
have responded to the questionnaire. For investments subsequent to June 30,
1999, the Company has performed Year 2000 readiness evaluations as part of its
due diligence process. Based on the correspondence received from the portfolio
companies and the due diligence procedures performed by the Company, management
believes that its portfolio companies have either no material exposure to the
Year 2000 issue or are adequately carrying out their plans to address their
exposure. The Company intends to make additional inquiriesof its portfolio
companies to determine if they have completed their compliance plan by November
1999.
The Company will continue to address any issues of Year 2000
non-compliance and further develop its contingency plan to mitigate business
interuptions in the event of systems failure in the Year 2000. The Company is
utilizing both internal and external resources to reprogram or replace, test,
and implement the software and other systems for Year 2000 modifications. The
Company estimates that the cost of its Year 2000 project will be less than $125.
This amount includes the cost of additional software, reviewing the portfolio
companies' readiness, and outside systems professionals working on the Company's
Year 2000 compliance.
The Company's plans to complete the Year 2000 modifications are based
on management's best estimates, which were derived utilizing numerous
assumptions of future events including the continued availability of certain
resources, estimates on the status of completion and the total expected costs.
However, there can be no guarantee that these estimates will be achieved and
actual results could differ materially from those plans. Specific issues that
might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and similar uncertainties. Significant
systems failures at the Company, a third party, or the portfolio companies could
have a materially adverse effect on the Company's business. While the Company
believes that its portfolio companies are adequately addressing the Year 2000
issue, no assurance can be given that some of its portfolio companies will not
suffer material adverse effects from Year 2000 issues. Management believes that
the most likely worst case Year 2000 scenario is a material decrease in interest
income and an impairment in the valuation of the Companies investment portfolio.
The magnitude of these material adverse effects on the portfolio companies and
the operating results and financial of the Company cannot be determined at this
time.
18
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Neither the Company, nor any of the Company's subsidiaries, is
currently subject to any material litigation nor, to the Company's knowledge, is
any material litigation threatened against the Company or any subsidiary, other
than routine litigation and administrative proceedings arising in the ordinary
course of business. Such proceedings are not expected to have a material adverse
effect on the business, financial conditions, or results of operation of the
Company or any subsidiary.
Item 2. Changes in Securities
Not Applicable.
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
Item 5. Other Information
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit
Number Description
- ------ -----------
10.1 Second Amended and Restated Employment Agreement of David J.
Gladstone
10.2 Stock Option Exercise Agreement with David J. Gladstone
10.3 Purchase Note by David J. Gladstone
10.4 Split Dollar Agreement with David J. Gladstone
27 Financial Data Schedule
(b) The registrant has not filed any reports on a Current Report on
Form 8-K during the quarter for which this report 10-Q is filed.
19
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AMERICAN CAPITAL STRATEGIES, LTD.
By: /s/ John R. Erickson
-------------------------------
John R. Erickson
Vice President and
Chief Financial Officer
Date: November 15, 1999
20
Exhibit 10.1
EXECUTION COPY
SECOND AMENDED AND RESTATED EMPLOYMENT AGREEMENT
THIS SECOND AMENDED AND RESTATED EMPLOYMENT AGREEMENT (the "Agreement")
is entered into as of August 6, 1999 (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 and the Employee entered into an Employment
Agreement dated as of April 2, 1997 and an Amended and Restated Employment
Agreement dated as of August 18, 1997 [sic] (collectively, the "Old Agreement")
pursuant to which the Company employed the Employee on the terms and conditions
set forth therein; and
WHEREAS, the Company and the Employee desire to amend and restate the
Old Agreement in its entirety, 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 1
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.
"Confidential Information" shall have the meaning specified in Section
5.1(a).
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"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 6.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Executive Officers" shall refer to the President, the Chairman of the
Board, the Vice-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, 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;
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(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 that 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 as of August 28, 1997;
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 the initial underwritten public offering of the
securities of the Company, which became effective on August 29, 1997.
"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."
"Notice of Discontinuance" shall have the meaning specified in Section
2.2.
"Notice of Employment Continuation" shall mean a notice delivered in
accordance with Section 4.11.
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"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.
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 2
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.
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2.2. Term of Employment
Unless sooner terminated pursuant to Article 4, the term of Employee's
employment under this Agreement (the "Term") shall continue until the fifth
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 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 at 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
Vice-Chairman of the Board of Directors of the Company. The duties as
Vice-Chairman shall be (i) to serve as Chairman of the Board of Directors in the
Chairman's absence or inability to serve, (ii) to introduce other Executive
Officers of the Company to and facilitate communications with principal
stockholders and prospective stockholders of the Company, (iii) to serve as a
member of the Executive Committee of the Board of Directors and the Company's
Credit Committee and (iv) such additional duties and responsibilities
commensurate with such office as from time to time may be reasonably assigned to
him by the Board of Directors; provided, that such additional duties and
additional duties that may be assigned to the Employee pursuant to the Company's
By-laws shall not be inconsistent with or impose material additional duties on
the Employee than the duties set forth in clauses (i)-(iii) above. 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 that 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) and a nonvoting ex officio member all other
committees, other than the Compensation Committee, at all times during the Term.
(c) While employed hereunder, Employee shall devote such portion
of his business time, attention, skill and efforts as is necessary to complete
the faithful and efficient performance of his duties hereunder. It is
acknowledged and agreed that Employee serves as the Chairman of the Board and
Chief Executive Officer of American Security Inc., a Delaware corporation
("AMSE"), and that, in connection with the initial public offering of AMSE,
Employee will enter into an Employment Agreement
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whereunder Employee shall be required to devote a substantial portion of his
business time, attention, skill and efforts to the faithful and efficient
performance of his duties thereunder and not accept employment with any Person
(other than the Company). Accordingly, the Company agrees that Employee's
undertakings with respect to AMSE are authorized and consistent with Employee's
undertakings to the Company (as the same are amended hereby), and that the
Company hereby releases Employee from any obligation to the Company not
expressly set forth in this Agreement. In addition, 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 and subject to his rights under
Section 2.3(c), 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 3
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 or its Compensation Committee shall review the Base
Salary at least annually and may adjust the amount of the Base Salary at any
time as the Board of Directors or the Compensation Committee may deem
appropriate in their sole discretion.
(b) 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
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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
The Company has established the 1997 Stock Option Plan (as amended from
time to time, the "ISO Plan"), which provides key employees of the Company with
ownership interests in the Company (the "ISO Plan"). Under the ISO Plan,
Employee was granted options to purchase 608,782 shares of common stock. To the
extent permissible, such options shall be characterized as Incentive Stock
Options as defined in Section 422 of the Code. In addition, as of even date
herewith, the Company and the employee have entered into an Option Exercise
Agreement (the "Option Exercise Agreement") and a Split Dollar Agreement (the
"Split Dollar Agreement") pursuant to which the Employee exercised such options,
the Company lent certain amounts to the Employee used in connection with such
exercise and a split dollar variable life insurance policy program was
established to provide collateral for such loans and to provide further benefits
to the Employee. 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.
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 four weeks 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
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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.
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 4
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
Chairman of 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
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the Company deliver a Notice of Termination, the Employee may within five days
of such notice resign in lieu of being terminated, but such resignation shall
otherwise be treated as a termination by the Company for purposes of this
Article 4.
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.
(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
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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 loans to the Employee in connection with the
prior exercise of any options under the ISO Plan (or similar plan) shall be due
and payable within 60 days of employment termination.
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 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
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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) that have not vested as of Employee's Termination Date shall vest
and shall become immediately exercisable. All loans to the Employee in
connection with the prior exercise of any options under the ISO Plan (or similar
plan) shall be due and payable within 60 days of employment termination.
(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) that have not vested as of Employee's death and that 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 60 days following the Employee's
death and their original term.
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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:
Options. All loans to the Employee in connection with the prior exercise of any
options under the ISO Plan (or similar plan) be due and payable within 60 days
of employment termination.
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 previously vested options under the ISO Plan
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 60 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 or a Notice of Employment Continuation from
the Employee specifying that Good Reason exists, provide notice to the other
party that a dispute exists concerning the circumstances set forth in such
notice, in which event such dispute shall be resolved in accordance with Article
6. 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
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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 or a Notice of Employment
Continuation specifying that Good Reason exists and (ii) the Company disputes
that Good Reason exists 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 6, 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. The period for the delivery of a
Notice of Employment Continuation shall be extended in the event of the delivery
of a notice in accordance with the first sentence of this Section 4.10 until
thirty (30) days following the resolution of such dispute.
4.11. Employment Continuation.
If the Employee has a "Purchase Note" outstanding under the Exercise
Agreement, the Employee is entitled to receive Deferred Payments under Section
5.3(c) of the Exercise Agreement or the "Unamortized Premium Payment" under the
Split Dollar Agreement is greater than zero, the Employee shall have the right
either (i) in lieu of delivering a Notice of Termination in accordance with
Section 4.1 or (ii) within thirty (30) days of the Company's delivery of a
Notice of Termination in accordance with Section 4.2 (other than in connection
with a Termination for Employee's Misconduct), to deliver a Notice of Employment
Continuation. If applicable, the Employee may specify in such Notice of
Employment Continuation that Good Reason exists. The period for delivery of a
Notice of Employment Continuation shall be subject to extension in accordance
with Section 4.10. Upon the delivery of a Notice of Employment Continuation,
this Agreement shall terminate and be of no further force or effect and
Employee's employment with the Company shall be governed instead by a
Supplemental Employment Agreement in the form of Exhibit 4.11 hereto that will
be executed and delivered by the Company and the Employee immediately upon the
delivery of such Notice of Employment Continuation.
ARTICLE 5
Confidential Information and Non-Solicitation
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
<PAGE>
-14-
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 or for the benefit of another
Person with whom Employee is affiliated 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 Subject Investments (as
defined herein, but excluding for purposes of this Section 5.1 information
concerning US Investigations Services, Inc. ("USIS") or information provided by
USIS); 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, (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
or (z) with regard to Subject Investments, is or becomes known or available to
Employee other than by or through 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 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. Covenant Not to Compete or Solicit
(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
<PAGE>
-15-
4.5 (the "Restricted Period"), Employee, unless he receives the prior written
consent of the Board of Directors shall not 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 (each, a "Subject Person") (i)
that competes with the Company or any wholly-owned subsidiary of the Company in
investing or consulting with small or medium sized businesses in the United
States with regard to change in control transactions, a result of which is an
employee stock ownership plan that owns more than 15% of the subject business or
(ii) that solicits, for the purpose of providing debt or equity financing, or
provides debt or equity financing to any Person (each, a "Subject Investment")
(A) who is listed on Appendix A hereto, (B) to whom the Company or a
wholly-owned subsidiary of the Company is currently a lender or in which the
Company or a subsidiary of the Company is currently an investor other than as a
result of the ownership of publicly-traded securities or (C) where the Employee
first learns of a lending or investing opportunity with regard to such Person
from or through the Company. The Board of Directors shall not unreasonably
withhold its consent to a transaction whereby a Subject Person would purchase a
controlling interest in a Subject Investment, provided that in connection with
such a purchase, the Company receives an aggregate fee (whether from the efforts
of Employee or otherwise) computed at the sum of three-quarters of one percent
(0.75%) of the purchase consideration up to a maximum of $1,750,000.
(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, except for those employees who the Company and Employee agree are
exempt from the applicability of this paragraph at the time of hiring.
(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>
-16-
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 5 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 5 or such other relief as may required to
specifically enforce any of the covenants contained in this Article 5. Employee
agrees to and hereby does submit to in personam jurisdiction before each and
every such court for that purpose.
ARTICLE 6
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.
(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.
<PAGE>
-17-
(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 6 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 6.
(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.
<PAGE>
-18-
(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.
ARTICLE 7
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 6(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
<PAGE>
-19-
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.
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
<PAGE>
-20-
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.
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.
<PAGE>
-21-
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>
-22-
IN WITNESS WHEREOF, the parties have executed this Agreement effective
as of the date first above written.
AMERICAN CAPITAL STRATEGIES, LTD.
By: /s/
-------------------------
Malon Wilkus, President
EMPLOYEE:
/s/
---------------------------
David Gladstone
1161 Crest Lane
McLean, VA 22101
<PAGE>
-23-
APPENDIX A
CERTAIN SUBJECT INVESTMENTS
US Investigations Services, Inc.
Arrow Shirt Company
Gans Tire, Inc.
National Forge Co.
Those entities listed below from the Company deal stream report dated August __,
1998:
7-Iron - 02
Piedmont - 91
Porky - 54
Bike - 97
Fast - 63
Tyco - 59
Bicycle - 22
Cowboy
Knish
Cats
Blue Angel - 18
Expansion - 82
Tonka - 25
Shamu
On Time - 30
Horse
Sweepstakes
Nightlight - 5
Portage - 94
Knights - 57
Cheese
Laurel - 17
Homestead
Spurs - 98
Wire - 65
Upstream - 87
Robinson
Suround - 62
Dough - 53
Bridge - 92
<PAGE>
EXHBIT 4.5(d)
RELEASE AGREEMENT
THIS RELEASE AGREEMENT (the "Agreement"), is made as of the ____
day of ______, _____, by and between AMERICAN CAPITAL STRATEGIES, LTD., a
Delaware corporation with its principal place of business at 3 Bethesda Metro
Center, Suite 860, Bethesda, Maryland (the "Corporation"), and DAVID J.
GLADSTONE, an individual residing at 1161 Crest Lane, McLean, Virginia 22101
("Gladstone").
W I T N E S S E T H:
WHEREAS, the parties hereto are parties to a certain Second Amended
and Restated Employment Agreement dated as of August 6, 1999 (the "Employment
Agreement"); and
WHEREAS, the execution and delivery of this Release Agreement as of
the date hereof is a requirement of Section 4.5(d) thereof.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
agreements and covenants herein contained, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties agree as follows:
1. Mutual Release.
(a) Gladstone, on his own behalf and on behalf of his heirs,
representatives and assigns, hereby waives, releases, and forever and
irrevocably discharges the Corporation, and its agents, attorneys, officers,
directors, employees, successors and assigns (collectively, the "Corporation
Released Parties") from any and all obligations, debts, demands, claims and
liabilities of every kind and nature, either in law or in equity, that Gladstone
may now have, may in the future have or may ever have had, against the
Corporation Released Parties arising in any manner from or in any manner
related, directly or indirectly, to Gladstone's service or employment as a
director, officer and/or an employee of the Corporation including, without
limitation, the circumstances relating to the termination thereof; excepting
only the continuing obligations of the Corporation resulting from the provisions
of the Employment Agreement, and the Option Exercise Agreement and the Split
Dollar Agreement, each entered into by and among the parties hereto bearing the
date of August 6, 1999 (collectively, the "Surviving Agreements").
(b) The Corporation, on its own behalf and on behalf of its
successors and assigns, hereby waives, releases, and forever and irrevocably
discharges Gladstone, and his agents, attorneys, heirs, representatives and
assigns (collectively, the "Gladstone Released Parties") from any and all
obligations, debts,
<PAGE>
-25-
demands, claims and liabilities of every kind and nature, either in law or in
equity, that the Corporation may now have, may in the future have or may ever
have had against the Gladstone Released Parties arising in any manner from or in
any manner related to, directly or indirectly, Gladstone's service or employment
as a director, officer and/or an employee of the Corporation including, without
limitation, the circumstances relating to the termination thereof; excepting
only the continuing obligations of Gladstone resulting from the provisions of
the Surviving Agreements.
2. Miscellaneous. This Agreement constitutes the entire agreement
between the parties hereto with regard to the subject matter hereof and
supersedes all prior negotiations, representations and agreements, either
written or oral, between them except for the Surviving Agreements. There are no
conditions, agreements, or representations between the parties except those
expressed herein. This Agreement may be altered, modified, amended, or repealed
only by a duly executed written instrument signed by the parties hereto. This
Agreement shall be governed by the law of the State of Maryland, without giving
effect to the conflicts of laws provisions thereof. Each party binds himself or
itself and his or its heirs, successors, legal representatives and assigns in
respect to all covenants and agreements contained herein. Except as specifically
contemplated herein, nothing herein shall be construed as giving any right or
benefit hereunder to anyone other than the parties hereto.
<PAGE>
-26-
IN WITNESS WHEREOF, the parties have executed this Agreement under
seal as of the date first hereinabove written.
GLADSTONE:
WITNESS:
- ------------------ --------------------------------- (Seal)
David J. Gladstone
AMERICAN CAPITAL STRATEGIES, LTD.,
A Delaware Corporation
By: (Seal)
---------------------------------
Name:
---------------------------
Title
---------------------------
<PAGE>
Exhibit 4.11
SUPPLEMENTAL EMPLOYMENT AGREEMENT
THIS SUPPLEMENTAL EMPLOYMENT AGREEMENT (the "Agreement") is entered
into as of _______, ____ (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 and the Employee are parties to a Second Amended
and Restated Employment Agreement dated as of August 6, 1999 (the "Old
Agreement"), pursuant to which the Company employed the Employee on the terms
and conditions set forth therein;
WHEREAS, the Employee delivered a Notice of Employment Continuation
pursuant to the Old Agreement and pursuant thereto the Old Agreement was
terminated and this Agreement became effective and the parties desire to amend
and restate the Old Agreement in its entirety, on the terms and conditions
herein set forth; and
WHEREAS, the parties hereto are also parties to an Option Exercise
Agreement dated as of August 6, 1999 ( the "Option Exercise Agreement"), and a
Split Dollar Agreement dated as of ______, 1999 (the "Split Dollar Agreement").
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 1
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:
"Base Salary" shall have the meaning specified in Section 3.1.
"Board of Directors" shall mean the Board of Directors of the Company.
<PAGE>
"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
3.4(a).
"Dispute" shall have the meaning specified in Article 6.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Executive Officers" shall refer to the President, the Chairman of the
Board, the Vice-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.
"ISO Plan" shall have the meaning specified in Section 3.3.
"Misconduct" shall mean the conviction of Employee for commission of a
felony that is injurious to the Company (monetarily or otherwise) in any
material respect.
"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 10 days (one (1) day in the case of a termination by the Company for
Misconduct).
"Person" shall mean and include an individual, a partnership, a joint
venture, a corporation, a trust and an unincorporated organization.
"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
-2-
<PAGE>
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 2
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 4, the term of Employee's
employment under this Agreement (the "Term") shall continue until the later to
occur of (i) repayment in full of all Payment Notes (as defined in and issued
pursuant to the Option Exercise Agreement), (ii) such date as the Employer's
Interest in the Policy (as such terms are defined in the Split Dollar Agreement)
is zero and (iii) the expiration of the Continuation Period.
2.3. Positions and Duties
(a) While employed hereunder, Employee shall serve as the
Assistant Secretary of the Company. The Employee's duties as Assistant Secretary
shall be limited to providing consulting services to the Company with regard to
matters previously attended to by the Employee as an employee of the
Corporation. Nothing herein shall obligate the Employee to spend more than 10
hours per year on Company business. While employed hereunder, Employee shall
report to the Board of Directors or such person as is designated by the Board of
Directors.
(b) The Company agrees to use its reasonable best efforts to cause
Employee to be elected or appointed as an Assistant Secretary of the Company.
(c) While employed hereunder, Employee shall be entitled to
undertake other employment not otherwise in violation of the terms of this
Agreement. It is acknowledged and agreed that Employee serves as the chairman of
the Board and Chief Executive Officer of American Security, Inc., a Delaware
corporation ("AMSE"), and that, in connection with the initial public offering
of AMSE, Employee will enter into an Employment Agreement whereunder Employee
shall be required to devote a substantial portion of his business time,
attention, skill and efforts to the faithful and efficient performance of his
duties thereunder and not accept employment with any Person (other
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than the Company). Accordingly, the Company agrees that Employee's undertakings
with respect to AMSE are authorized and consistent with Employee's undertakings
to the Company (as the same are amended hereby), and that the Company hereby
releases Employee from any obligation to the Company not expressly set forth in
this Agreement.
ARTICLE 3
Compensation and Benefits
3.1. Base Salary
For services rendered by Employee under this Agreement, the Company
shall pay to Employee an annual base salary ("Base Salary") of $200.
3.2. Other Benefits
(a) Employee shall not be entitled to receive any employee
benefits, fringe benefits and other perquisites that may be offered by the
Company to its officers or employees except as specifically provided herein
except that Employee shall be entitled to continue participation in the benefits
provided under the Split Dollar Agreement and Option Exercise Agreement.
(b) 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 an officer 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 permitted by law.
3.3. Payment of Accrued Base Salary, Vacation Pay, etc.
The Company shall pay to Employee a lump sum amount for (i) any unpaid
Base Salary earned under the Old Agreement prior to the Effective Date, (ii) all
unused vacation time accrued by Employee as of the Effective Date in accordance
with Section 3.4 of the Old Agreement, (iii) all unpaid benefits earned or
vested, as the case may be, by Employee as of the Effective 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 of the Old Agreement as of the
Effective Date.
3.4. Additional Rights in Connection With Disability
In the event that prior to the delivery by the Employee of his Notice
of Employment Continuation, the Company had delivered a Notice of Termination to
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Employee stating that such Termination was for reason of a Disability, the
Employee shall be entitled to the benefits and payments set forth in this
Section 3.4:
(a) Base Salary and Target Bonus. The Company shall continue to
pay to Employee the Base Salary under the Old Agreement in effect as of the date
on which the Notice of Termination was delivered for two (2) years following the
Effective 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 (as defined in the Old Agreement) for two (2) years
following the Effective Date with the second anniversary of the Effective Date
being the Expiration Date for purposes of Section 3.2 of the Old Agreement.
(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) End of Disability. Should the Employee's Disability (as
defined in the Old Agreement) end during the pendency of the payments and
benefits contemplated under this Section 3.4, the Company may discontinue such
payments and benefits if it offers to reemploy Employee under the terms of the
Old Agreement.
3.5. 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 delivered a statement with his Notice of
Employment Continuation that Good Reason (as defined in the Old Agreement)
exists or if the Company delivered a Notice of Termination pursuant to Section
4.2 of the Old Agreement and did not specify that Misconduct or a Disability
exists, the Employee shall also be entitled to the payments and benefits set
forth in this Section 3.5:
(a) Base Salary and Target Bonus. The Company shall continue to
pay to Employee the Base Salary under the Old Agreement in effect as of the
Effective Date for the Continuation Period. In addition, the Employee shall be
entitled to continue to
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participate in the Annual Bonus Plan for two (2) years following the Effective
Date with the second anniversary of the Effective Date being the Expiration Date
for purposes of Section 3.2 of the Old Agreement. 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) Release. Notwithstanding anything in this Section 3.5 to the
contrary, as a condition to the receipt of any benefit under this Section 3.5,
Employee must first execute and deliver to the Company a mutual release as set
out in Exhibit 35(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 on or prior to the Effective Date, but
excluding any claims and causes of action that Employee may have arising under
or based upon this Agreement.
ARTICLE 4
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
Chairman of the Board of Directors.
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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 such notice may be delivered
only if the Employee has committed Misconduct.
4.3. Company to Pay Benefits During Pendency of Dispute
The Employee, within ten (10) days after its receipt of a Notice of
Termination given by the Company, provide notice to the Company that a dispute
exists concerning the occurrence of Misconduct, in which event such dispute
shall be resolved in accordance with Article 6. Notwithstanding the pendency of
any such dispute and notwithstanding any provision herein to the contrary, the
Company will (i) continue to pay Employee all 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. If
such dispute is finally resolved in favor of the Company in accordance with
Article 6, the Employee shall be required to repay to the Company amounts paid
to Employee under this Section 4.3 (including the value of benefits received).
4.4. 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 that are vested benefits or that 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 Effective
Date shall be payable in accordance with such plan, policy, practice or program
or contract or agreement except as explicitly modified by this Agreement.
ARTICLE 5
Confidential Information and Non-Solicitation
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
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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 or for the benefit of another
Person with whom Employee is affiliated 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 Subject Investments (as
defined herein, but excluding for purposes of this Section 5.1 information
concerning US Investigations Services, Inc. ("USIS") or information provided by
USIS)); 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, (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
or (z) with regard to Subject Investments, is or becomes known or available to
Employee other than by or through 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 and his domain name "DAVIDGLADSTONE.COM" on the Company's 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.
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5.2. Covenant Not to Compete or Solicit
(a) At the election of the Employee, for one (1) year after the
Effective Date (the "Restricted Period"), Employee, unless he receives the prior
written consent of the Board of Directors shall not 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 (each, a "Subject Person") (i)
that competes with the Company or any wholly-owned subsidiary of the Company in
investing or consulting with small or medium sized businesses in the United
States with regard to change in control transactions, a result of which is an
employee stock ownership plan that owns more than 15% of the subject business or
(ii) that solicits, for the purpose of providing debt or equity financing, or
provides debt or equity financing to any Person (each, a "Subject Investment")
(A) who is listed on Appendix B hereto, (B) to whom the Company or a
wholly-owned subsidiary of the Company is currently a lender or in which the
Company or a subsidiary of the Company is currently an investor other than as a
result of the ownership of publicly-traded securities or (C) where the Employee
first learns of a lending or investing opportunity with regard to such Person
from or through the Company. The Board of Directors shall not unreasonably
withhold its consent to a transaction whereby a Subject Person would purchase a
controlling interest in a Subject Investment, provided that in connection with
such a purchase, the Company receives an aggregate fee (whether from the efforts
of Employee or otherwise) computed at the sum of three-quarters of one percent
(0.75%) of the purchase consideration up to a maximum of $1,750,000. The
Employee may only elect to be subject to this Section 5.2 by providing written
notice of such election to the Company before the Effective Date or within
thirty (30) days thereafter and may be renewed for successive additional one (1)
year periods by providing written notice to the Company not less than twenty
(20) days before the expiration of the Restricted Period then in effect.
(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, except for those employees who the Company and Employee agree are
exempt from the applicability of this paragraph at the time of hiring.
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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 5 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 5 or such other relief as may required to
specifically enforce any of the covenants contained in this Article 5. Employee
agrees to and hereby does submit to in personam jurisdiction before each and
every such court for that purpose.
ARTICLE 6
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.
(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
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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 6 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 6.
(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
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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.
ARTICLE 7
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 6(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
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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.
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.
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
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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, except
with regard to such definitions as are set forth in the Old Agreement and are
specifically referenced herein, no agreements, oral, written or otherwise,
express or implied, with respect to the subject matter hereof have been made by
either party that 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
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APPENDIX A
CERTAIN SUBJECT INVESTMENTS
US Investigations Services, Inc.
Arrow Shirt Company
Gans Tire, Inc.
National Forge Co.
Those entities listed below from the Company deal stream report dated August __,
1998:
7-Iron - 02
Piedmont - 91
Porky - 54
Bike - 97
Fast - 63
Tyco - 59
Bicycle - 22
Cowboy
Knish
Cats
Blue Angel - 18
Expansion - 82
Tonka - 25
Shamu
On Time - 30
Horse
Sweepstakes
Nightlight - 5
Portage - 94
Knights - 57
Cheese
Laurel - 17
Homestead
Spurs - 98
Wire - 65
Upstream - 87
Robinson
Suround - 62
Dough - 53
Bridge - 92
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EXHIBIT 3.5(d)
RELEASE AGREEMENT
THIS RELEASE AGREEMENT (the "Agreement"), is made as of the ____
day of ______, _____, by and between AMERICAN CAPITAL STRATEGIES, LTD., a
Delaware corporation with its principal place of business at 3 Bethesda Metro
Center, Suite 860, Bethesda, Maryland (the "Corporation"), and DAVID J.
GLADSTONE, an individual residing at 1161 Crest Lane, McLean, Virginia 22101
("Gladstone").
W I T N E S S E T H:
WHEREAS, the parties hereto are parties to a certain Supplemental
Employment Agreement dated as of ________ (the "Employment Agreement"); and
WHEREAS, the execution and delivery of this Release Agreement as of
the date hereof is a requirement of Section 3.5(d) thereof.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
agreements and covenants herein contained, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties agree as follows:
1. Mutual Release.
(a) Gladstone, on his own behalf and on behalf of his heirs,
representatives and assigns, hereby waives, releases, and forever and
irrevocably discharges the Corporation, and its agents, attorneys, officers,
directors, employees, successors and assigns (collectively, the "Corporation
Released Parties") from any and all obligations, debts, demands, claims and
liabilities of every kind and nature, either in law or in equity, that Gladstone
may now have, may in the future have or may ever have had, against the
Corporation Released Parties arising in any manner from or in any manner
related, directly or indirectly, to Gladstone's service or employment as a
director, officer and/or an employee of the Corporation including, without
limitation, the circumstances relating to the termination thereof; excepting
only the continuing obligations of the Corporation resulting from the provisions
of the Employment Agreement, and the Option Exercise Agreement and the Split
Dollar Agreement, each entered into by and among the parties hereto bearing the
date of _________ (collectively, the "Surviving Agreements").
(b) The Corporation, on its own behalf and on behalf of its
successors and assigns, hereby waives, releases, and forever and irrevocably
discharges Gladstone, and his agents, attorneys, heirs, representatives and
assigns (collectively, the "Gladstone Released Parties") from any and all
obligations, debts, demands, claims and liabilities of every kind and nature,
either in law or in equity, that the Corporation may now have, may in the future
have or may ever have had against the Gladstone Released Parties arising in any
manner from or in any manner related to, directly or indirectly, Gladstone's
service
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<PAGE>
or employment as a director, officer and/or an employee of the Corporation
including, without limitation, the circumstances relating to the termination
thereof; excepting only the continuing obligations of Gladstone resulting from
the provisions of the Surviving Agreements.
2. Miscellaneous. This Agreement constitutes the entire agreement
between the parties hereto with regard to the subject matter hereof and
supersedes all prior negotiations, representations and agreements, either
written or oral, between them except for the Surviving Agreements. There are no
conditions, agreements, or representations between the parties except those
expressed herein. This Agreement may be altered, modified, amended, or repealed
only by a duly executed written instrument signed by the parties hereto. This
Agreement shall be governed by the law of the State of Maryland, without giving
effect to the conflicts of laws provisions thereof. Each party binds himself or
itself and his or its heirs, successors, legal representatives and assigns in
respect to all covenants and agreements contained herein. Except as specifically
contemplated herein, nothing herein shall be construed as giving any right or
benefit hereunder to anyone other than the parties hereto.
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement under
seal as of the date first hereinabove written.
GLADSTONE:
WITNESS:
- ------------------ --------------------------------- (Seal)
David J. Gladstone
AMERICAN CAPITAL STRATEGIES, LTD.,
A Delaware Corporation
By: (Seal)
---------------------------------
Name:
---------------------------
Title
---------------------------
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Exhibit 10.2
OPTIONEE: David J. Gladstone
DATE OF EXERCISE: August 6, 1999
OPTION PRICE: $15.00
COVERED SHARES: 608,782
AMERICAN CAPITAL STRATEGIES, LTD.
1997 STOCK OPTION PLAN
* * *
STOCK OPTION EXERCISE AGREEMENT
1. Definitions. In this Agreement, except where the context otherwise
indicates, the following definitions apply:
1.1. "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").
1.2. "Aggregate Purchase Price" shall have the meaning set forth
in Section 4.
1.3. "Agreement" means this Stock Option Exercise Agreement.
1.4. "Board" means the Board of Directors of the Company.
1.5. "Code" means the Internal Revenue Code of 1986, as amended.
1.6. "Collateral" has the meaning set forth in Section 5.3(b).
1.7. "Collateral Value" has the meaning set forth in Section
5.3(b).
1.8. "Committee" means the committee charged, pursuant to the
provisions of the Plan, with the administration of the Plan. Unless otherwise
determined by the Board, the Compensation Committee of the Board shall be the
Committee.
1.9. "Common Stock" means the common stock, par value $0.01 per
share, of the Company.
<PAGE>
1.10. "Company" means American Capital Strategies, Ltd., a
Delaware corporation.
1.11. "Covered Shares" means the number of Shares subject to the
Option set forth as the "Covered Shares" on page 1 of this Agreement.
1.12. "Date of Exercise" means the date hereof.
1.13. "Employment" means the Optionee's employment with the
Company and its Affiliates.
1.14. "Employment Agreement" means the Optionee's Second Amended
and Restated Employment Agreement with the Company, as such may be amended,
extended or supplemented from time to time including, without limitation, any
Supplemental Employment Agreement.
1.15. "Events of Default". An Event of Default shall mean the
occurrence of one or more of the following described events:
(a) the Optionee shall default in the payment of (i)
interest on the Purchase Note within five (5) days of its due date or (ii)
principal of the Purchase Note within five (5) days of its due date, whether at
maturity, upon any scheduled payment date or by acceleration or otherwise; and
(b) the principal amount of the Purchase Note shall, for
more than thirty (30) successive days, exceed the aggregate Collateral Value of
all of the Collateral.
1.16. "Exchange Act" means the Securities Exchange Act of 1934, as
amended. 1.17. "Exercise Shares" shall have the meaning set forth in Section 2.
1.18. "Fair Market Value" means, as of any particular date, the
most recent closing price for a Share on the NASDAQ National Market System as
reported by such source as the Committee may select or, if such price is not so
reported, then the fair market value of a Share as determined by the Committee
pursuant to a reasonable method adopted in good faith for such purpose.
1.19. "Investment Company Act" means the Investment Company Act of
1940, as amended.
1.20. "Life Insurance" shall have the meaning set forth in Section
5.3(c).
1.21. "Net Aggregate Purchase Price" shall have the meaning set
forth in Section 4.
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<PAGE>
1.22. "Net Asset Value" means the net asset value of a Share, as
determined by the Company for purposes of the Exchange Act and the Investment
Company Act.
1.23. "Note Interest Rate" shall have the meaning set forth in
Section 5.1.
1.24. "Option" means the stock options granted to the Optionee
pursuant to the Plan.
1.25. "Option Price" means the dollar amount per Share set forth
as the "Option Price" on page 1 of this Agreement.
1.26. "Optionee" means the person identified as the "Optionee" on
page 1 of this Agreement.
1.27. "Plan" means the American Capital Strategies, Ltd., 1997
Stock Option Plan.
1.28. "Purchase Note" means the promissory note substantially in
the form of Exhibit A hereto subject to the terms and conditions set forth in
this Agreement.
1.29. "Securities Act" means the Securities Act of 1933, as
amended.
1.30. "Share" means a share of Common Stock.
1.31. "Split-Dollar Agreement" shall mean the Split-Dollar
Agreement related to the Life Insurance to be entered into between the Optionee
and the Company and substantially in the form of Exhibit B retroactive to the
date hereof, when the Life Insurance is in force.
1.32. "Supplemental Employment Agreement" shall mean an Employment
Agreement substantially in the form of Exhibit 4.11 to the Amended and Restated
Employment Agreement dated as of even date herewith between the Optionee and the
Company.
1.33. "UCC" means the Uniform Commercial Code as in effect at any
time in the State of Maryland.
2. Exercise of Option. Pursuant to the Plan and subject to the terms of
this Agreement, the Optionee hereby exercises the Option to purchase 608,782 of
the Covered Shares (the "Exercise Shares"). This exercise shall not affect the
other Covered Shares subject to the Option.
3. Reserved.
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<PAGE>
4. Payment of Exercise Price. The "Aggregate Purchase Price" for the
Exercise Shares shall be the Option Price multiplied by the Exercise Shares. The
Aggregate Purchase Price shall be payable by the cash payment to the Company of
the aggregate par value of the Exercise Shares and by the delivery of the
Purchase Note for the balance of the Aggregate Purchase Price (the "Net
Aggregate Purchase Price").
5. Purchase Note. The Purchase Note shall have the terms and conditions
as set forth in this Section 5.
5.1. Principal Amount and Terms. The principal amount of the
Purchase Note shall be $9,466,232.91 which shall equal the (i) the Net Aggregate
Purchase Price plus (ii) $334,502.91 for the payment of taxes associated with
the exercise of the Option. Optionee will provide an affidavit or other evidence
reasonably satisfactory to the Committee of the basis for computing the amount
set forth in clause (ii) of the preceding sentence. Following consultation with
the Optionee, the Company shall be entitled to withhold from the loan proceeds
(and if sufficient loan proceeds in excess of the Net Aggregate Purchase Price
do not exist, from Optionee's salary) and to deliver to taxing authorities such
tax withholding amounts as may be required by law. The Purchase Note shall
accrue interest at the rate of 4.89% per annum (the "Note Interest Rate"),
payable in cash, quarterly in arrears, on each March 31, June 30, September 30
and December 31, beginning June 30, 1999, until the principal amount and all
other amounts due under the Purchase Note are paid in full. Interest shall be
computed on the basis of a year with twelve 30-day months, and the actual days
elapsed. The principal amount of the Purchase Note, together with all accrued
but unpaid interest and all other amounts due thereunder, shall be payable in
full on August 6, 2002, unless earlier accelerated in accordance with the terms
of this Agreement or the Purchase Note. Upon the request of the Optionee, and at
the sole and absolute discretion of the Committee, such date may be extended,
but shall not in any case be extended beyond the tenth anniversary of the Date
of Exercise hereof. The payment of the Purchase Note shall be accelerated and
all amounts due thereunder shall be immediately payable (i) sixty days following
the termination of the Optionee's Employment or (ii) in the event the Fair
Market Value of the Exercise Shares shall, for twenty consecutive trading days,
equal or exceed $50.00 per share, as adjusted for stock splits, stock dividends
or similar occurrences, as determined by the Committee, after the date hereof.
5.2. Acceleration. If an Event of Default shall occur, the unpaid
balance of the Purchase Note and interest accrued thereon and all other
liabilities of the Optionee to the Company hereunder and thereunder shall be
immediately due and payable, without presentment, demand, protest or notice of
any kind, all of which are hereby expressly waived.
5.3. Collateral. The Purchase Note shall be secured by the
Collateral as provided in this Section 5.3.
(a) In order to secure the full and timely payment in full
of the Purchase Note, the Optionee hereby grants, assigns and conveys unto the
Company a lien on and continuing security interest in and to, the Collateral
together with all products,
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<PAGE>
proceeds, dividends, distributions, or returns of capital or
other moneys and other rights, moneys, property or securities of any nature
(including, without limitation, rights, voting rights, moneys or securities
arising from consolidation or subdivision of capital, redemption or conversion
of shares, reduction of capital, liquidation or a similar plan or arrangement),
all of which at any time (whether now or in the future) are attributable to or
are arising from the Collateral.
(b) The "Collateral" shall be deemed to consist of the sum
of (i) the Exercise Shares, (ii) all interest of the Optionee in the Life
Insurance and (iii) any additional insurance or other property designated by the
Optionee and accepted by the Company as Collateral hereunder. In determining the
"Collateral Value" of the Collateral, the Company shall consider the value (i)
of the Exercise Shares at any time to be the greater of their Fair Market Value
and their Net Asset Value, (ii) of the Life Insurance to be equal to the
expected actuarial death benefit at the actuarially anticipated date of death as
owned by the Optionee under the Life Insurance, as determined by the issuer of
the Life Insurance, discounted to the present at the Note Interest Rate, minus
the Employer's Interest (as defined in the Split-Dollar Agreement) in the Life
Insurance; provided, however, that for so long as the Optionee has provided and
there remains in force a term life insurance policy (the "Term Policy")
collaterally assigned to the Company or naming the Company as beneficiary with a
death benefit of not less than the Employer's Interest and the Term Policy is
reasonably acceptable to the Committee, the Employer's Interest shall not be
deducted in determining the Collateral Value and (iii) of any other Collateral
to be that determined in good faith from time to time by the Committee. For so
long as the Optionee is an Employee, the Company shall pay the cost of the Term
Policy, which amount shall be reported as compensation to the Optionee, if
required by applicable tax laws.
(c) The Company agrees that, as specified in and subject to
the terms of the Split-Dollar Agreement, it shall purchase a split dollar
variable life insurance policy (the "Life Insurance") for the benefit of
Optionee. In the event that the Life Insurance is not in force as contemplated
by the preceding sentence by December 31, 1999, or in the event that the Company
and the Optionee are otherwise advised by AON Risk Management that Life
Insurance satisfactory to the Committee for use as Collateral is not available
for the Optionee, the Company will make to the Optionee ten annual compensation
payments, but only as long as the Optionee's Employment continues (the "Deferred
Payments"), each in the amount of $182,500, with the first such payment to be
made on January 15, 2000, and the last such payment on January 15, 2009. The
Optionee's right to the Deferred Payments will be additional Collateral.
Additionally, in the event that the Optionee elects to have his Employment
continue under a Supplemental Employment Agreement, the Optionee's right to such
payments will continue only so long as the Optionee is obligated under Section
5.2 of such agreement.
(d) Upon execution and delivery of this Agreement, the
Company will instruct its transfer agent to issue stock certificates evidencing
the Exercise Shares (which shall contain appropriate legends regarding the
restrictions set forth in this Agreement) and the Optionee shall deliver to the
Company or its designated agent such certificates with a transfer executed in
blank. If at any time the Company shall issue any
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<PAGE>
additional or substitute shares of stock or stock certificates, or any other
instruments evidencing an interest in such entity or an obligation of such
entity, the Optionee shall promptly pledge, mortgage and deposit (or cause to be
pledged, mortgaged or deposited) in favor of or with the Company such additional
certificates, instruments or documents as additional Collateral.
(e) Unless an Event of Default shall have occurred and be
continuing (and in such case, all dividends and distributions described herein
shall be Collateral), notwithstanding Section 5.3(a), the Optionee shall have
the right to receive and to retain cash dividends and other cash distributions
that are paid on account of the Exercise Shares; provided, however, that if at
any time the aggregate Collateral Value is 105% or less of the principal amount
of the Purchase Note, all such dividends and other distributions shall be
delivered directly to the Company for application: first, to any interest then
accrued and unpaid under the Purchase Note; second, for the payment of any
income taxes then owed by the Optionee as a result of such dividend; and third,
at the direction of the Optionee, for the payment of principal on the Purchase
Note or for the purchase of additional Collateral meeting the requirements of
Section 5.3(b). If any such dividends or other distributions are paid to the
Optionee following an Event of Default or in circumstances subject to the
proviso in the preceding sentence, such dividends or other distributions shall
be held in trust by the Optionee for the benefit of the Company, and the
Optionee shall immediately notify the Company in writing, and shall, if the
Company so instructs, immediately pay over such dividends or other distributions
to the Company as Collateral.
(f) Upon the occurrence of and during the continuation of
any Event of Default:
(i) The Company shall have all rights and remedies of
a secured creditor under the UCC and other applicable laws including the right
to sell, use, utilize or otherwise dispose of the Collateral as permitted
thereunder; provided, however, that in any foreclosure of the Optionee's
interest of the Exercise Shares, the proceeds realized by the Company therefrom
shall be deemed to be not less than the greater of the Fair Market Value and the
Net Asset Value as of the date of foreclosure.
(ii) The Company, in its discretion, and without
notice to the Optionee, may take any one or more of the following actions
without liability except to account for property actually received by it: (A)
transfer to or register in its name or the name of its nominee any stock
certificates or any other evidence of the Collateral, with or without indication
of the security interest herein created, and whether or not so transferred or
registered, receive the income, dividends and other distributions thereon and
hold them as additional Collateral or apply them to the obligations of the
Optionee secured hereby in any order of priority; (B) exercise or cause to be
exercised all voting and corporate powers with respect to any of the Collateral,
including (1) all rights to call or require stockholders meetings and to remove
or elect directors, and (2) all rights of proxy appointments, conversion,
exchange, subscription or any other rights, privileges or options pertaining to
such Collateral, as if the absolute owner thereof; (C) exchange any of the
Collateral for other property upon a reorganization, recapitalization,
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<PAGE>
reclassification or other readjustment and, in connection therewith, deposit any
of the Collateral with any depository upon such terms as the Company may
determine; and (D) in its name or in the name of the Optionee, demand, sue for,
collect or receive any money or property at any time payable or receivable on
account of or in exchange for any of the Collateral, and Company further shall
have the right during any time to sign and endorse the name of the Optionee upon
any such stock certificate, stock power, check, draft, money order, or any other
documents of title or evidence of payment with respect to the Collateral, in the
name of the Optionee, it being the intention of the Optionee to grant to the
Company the right to sell any portion or all of the Collateral and the proceeds
therefrom, upon the occurrence of an Event of Default hereunder.
(iii) If Company in good faith believes that the
Securities Act, or any other state or federal law prohibits or restricts the
customary manner of sale or distribution of any of the Collateral, the Company
may sell such Collateral privately or in any other manner deemed advisable by
the Company at such price or prices as the Company determines in its sole
discretion. The Optionee recognizes that such prohibition or restriction may
cause the Collateral to have less value than it otherwise would have and that,
consequently, such sale or disposition by the Company may result in a lower
sales price than if the sale were otherwise held. The Company may sell the
Collateral in Bethesda, Maryland or elsewhere, in one or more sales or parcels,
for cash, credit or future delivery, and with or without the use of a
stockbroker, as the Company may deem advisable. The Company may be the purchaser
of any or all of the Collateral.
(g) Upon the repayment in full of the Purchase Note and the
satisfaction of all obligations thereunder, the Company shall take such actions
as the Optionee may reasonably request (at the Company's expense) to terminate
all interests of the Company in the Collateral and reconvey the Collateral to
Optionee or his designee.
6. Restrictions on Transfer. Except by will or the laws of descent and
distribution, for so long as the Purchase Note is outstanding, neither the
Exercise Shares nor, except as specifically provided in the Split Dollar
Agreement, any other Collateral may be sold, transferred, assigned, pledged or
otherwise disposed of or encumbered by the Optionee, and any attempt to do so
shall be null and void. The Optionee agrees that he is acquiring the Purchased
Shares for investment only and not with a view to resale, and that he will not
sell, pledge or otherwise dispose of such shares so issued unless and until (a)
the Purchased Shares have been registered for resale under the Securities Act
and registered or qualified for resale under all other applicable state and
federal laws or (b) exemptions from such registration and qualification exist;
provided, however, that the Company may request an opinion of counsel to the
Optionee or other reasonable evidence of such exemptions. The Company agrees to
take such steps as are reasonably necessary to maintain adequate public
information with regard to the Company as contemplated by Rule 144(c) under the
Securities Act or similar provisions of any replacement rule. The Company has
filed a registration statement on Form S-8 under the Securities Act with regard
to the Exercise Shares and to the extent legally necessary to allow for resale
of the Exercise Shares by Optionee, the Company agrees to take reasonable steps
to keep such registration statement effective. Other than as specified in the
preceding two sentences, the Company is not obligated hereby to file any such
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<PAGE>
registrations or applicable notifications with regard to the Exercise Shares or
their disposition. The Optionee further agrees that under such circumstances the
Company may place a legend embodying such restriction on the certificates
evidencing such shares.
7. Tax Matters. The Company agrees to take tax reporting positions with
regard to the events and transactions contemplated hereby that are consistent
with the terms of this Agreement and the Optionee agrees to take tax reporting
positions that are consistent with those positions taken by the Company. In
consideration thereof, the Company agrees to indemnify, defend and hold harmless
the Optionee from any liabilities for additional taxes or penalties owed as a
result of complying with the preceding sentence.
8. Employment. The exercise of the Option as contemplated by this
Agreement, the acceptance of the Purchase Note by the Company or any term or
provision of this Agreement shall not constitute or, except as is specifically
provided in a Supplemental Employment Agreement, be evidence of any
understanding, express or implied, on the part of the Company or any of its
Affiliates to employ the Optionee (or have the Optionee serve as a director) for
any period. 9. Notice. All notices or other communications that are required or
permitted hereunder shall be in writing and sufficient if delivered personally,
by facsimile or sent by overnight express or by registered or certified mail,
postage prepaid, addressed as follows:
If to the Company to:
American Capital Strategies, Ltd.
3 Bethesda Metro Center, Suite 860
Bethesda, MD 20814
Attention: Chief Financial Officer
Facsimile: 301-654-6714
If to the Optionee, to the address set forth beneath the Optionee's signature on
the signature page hereof.
All deliveries of notice shall be deemed effective when received by the
person entitled to such receipt or when delivery has been attempted but refused
by such person. Any party may change the person or address to which such
deliveries shall be made with respect to such party by delivering notice thereof
to the other party hereto in accordance with this Section 7.
10. Termination. This Agreement shall terminate and the security
interest of the Company in the Collateral shall be released upon the payment and
satisfaction in full of the Optionee's obligations relating to the Purchase
Notes.
11. Governing Law; Submission to Jurisdiction. This Agreement and the
Purchase Note shall be governed by and construed and interpreted in accordance
with the
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laws of the State of Maryland, without regard to its conflict of laws
principles. All judicial actions, suits or proceedings brought against the
Optionee with respect to its obligations, liabilities or any other matter under
or arising out of or in connection with this Agreement or any transaction
contemplated hereby or for recognition or enforcement of any judgment rendered
in any such proceedings may be brought in a state or federal court of competent
jurisdiction in the State of Maryland. By execution and delivery of this
Agreement, the Optionee accepts, generally and unconditionally, the jurisdiction
of the aforesaid courts and irrevocably agrees to be bound by any final judgment
rendered thereby in connection with this Agreement or any transaction
contemplated hereby from which no appeal has been taken or is available. The
Optionee irrevocably agrees that all process in any proceeding or any court
arising out of or in connection with this Agreement may be effected by mailing a
copy thereof by registered or certified mail or any substantially similar form
of mail, postage prepaid, to the Optionee at the addresses referred to in
Section 7 or such other address of which the Company shall have been notified
pursuant to said paragraph. Such service shall be effective five (5) days after
such mailing. The Optionee hereby acknowledges that such service will be
effective and binding service in every respect.
12. Complete Agreement; Conflicts. This Agreement, the Plan and
the Employment Agreement contain the entire agreement between the parties hereto
with respect to the transactions contemplated herein and supersede all previous
oral and written and all contemporaneous oral negotiations, commitments,
writings and understandings. In the event of a conflict between the terms of
this Agreement and the Plan or the Employment Agreement, the terms of this
Agreement shall control.
13. Amendments and Waivers. This Agreement may be amended only by
a writing signed by the Optionee and the Company. No delay or omission on the
part of any party hereto in exercising any right hereunder shall operate as a
waiver of such right or any other right hereunder or operate to constrain the
rights of any other parties hereunder. No waiver of any one right shall operate
as a waiver of any subsequent right.
14. Interpretation. The headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
15. Severability. If any provision of this Agreement shall be held
to be invalid, illegal or unenforceable in any material respect, such provision
shall be replaced with a provision which is as close as possible in effect to
such invalid, illegal or unenforceable provision, and still be valid, legal and
enforceable, and the validity, legality and enforceability of the remainder of
this Agreement shall not in any way be affected or impaired thereby, unless the
parties otherwise so provide.
16. Further Assurances. The parties agree to execute and deliver
promptly such further instruments and documents and to take such other actions
as reasonably necessary to implement the terms of this Agreement. Without
limiting the foregoing, the Optionee agrees, from time to time, at the Company's
expense, to execute and deliver promptly all further instruments and documents
as the Company may reasonably require
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<PAGE>
in order to perfect, confirm and ratify the security interests granted hereby,
including, without limitation, the execution and delivery of such financing
statements or continuation statements, and amendments thereto, and assignments
of Life Insurance as may be necessary or desirable, or as the Company may
request in order to perfect and preserve the security interests granted hereby.
The Optionee hereby authorizes the Company or its agent to file such financing
statements and/or such continuation statements and amendments thereto relating
to all or any part of the Collateral without its signature, where permitted by
law. A carbon, photographic or other reproduction of this Agreement or any
financing statement covering the collateral granted hereby or any part thereof
shall be sufficient as a financing statement where permitted by law.
17. Indemnification. The Company agrees to indemnify, defend and hold
harmless the Optionee from any loss, liability or expense incurred by Optionee
as a result of a breach by the Company of its specific obligations under this
Agreement. At the election of the Company, the Company may satisfy its
obligations under this Section 17 by delivering to the Optionee additional
Options pursuant to the Plan in an amount equal to the Company's liabilities
hereunder. The Company shall be deemed to have satisfied its right and
obligation to deliver additional Options pursuant to the preceding sentence if
it shall have used its best efforts to do so by the date thirty (30) days
following the next succeeding annual meeting of the stockholders of the Company
that it is at least three months after the liability of the Company under this
Section 17 is determined.
IN WITNESS WHEREOF, the Optionee and the Company have caused this
Agreement to be signed on its behalf effective as of the Date of Exercise.
AMERICAN CAPITAL STRATEGIES, LTD.
By: /s/
-------------------------------
Malon Wilkus
/s/
----------------------------------
OPTIONEE
Address: 1161 Crest Lane
McLean, Virginia 22101
Facsimile: (703)528-6693
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<PAGE>
EXHIBIT A
PURCHASE NOTE
August 6, 1999
$
-----------
FOR VALUE RECEIVED, the undersigned, DAVID J. GLADSTONE (the
"Optionee"), hereby promises to pay to AMERICAN CAPITAL STRATEGIES, LTD., and
its successors and assigns (the "Holder"), the principal sum of
___________________DOLLARS ($__________), with interest thereon, on the terms
and conditions set forth in the Exercise Agreement (as defined herein).
Payments of the principal of and interest on this Note are to be made
in lawful money of the United States of America by check mailed and addressed to
the Holder hereof at the address shown in the Exercise Agreement or such other
address as may be provided thereunder.
Notwithstanding any provision to the contrary in this Note, the
Exercise Agreement or any other agreement, the Optionee shall not be required to
pay, and the Holder shall not be permitted to contract for, take, reserve,
charge or receive, any compensation which constitutes interest under applicable
law in excess of the maximum amount of interest permitted by law.
This Note is the Purchase Note (herein called the "Note") issued
pursuant to the Stock Option Exercise Agreement, dated as of August 6, 1999 (as
from time to time amended, the "Exercise Agreement"), between the Holder and the
Optionee and is entitled to the benefits thereof. All terms used herein shall
have the meanings ascribed to them in the Exercise Agreement.
If an Event of Default as defined in the Exercise Agreement occurs and
is continuing, the unpaid principal of this Note shall become due and payable in
the manner, at the price and with the effect provided in the Exercise Agreement.
This Note and the rights and obligations of the parties hereto shall be
deemed to be contracts under the laws of the State of Maryland and for all
purposes shall be governed by and construed and enforced in accordance with the
laws of said State, except for its rules relating to the conflict of laws.
IN WITNESS WHEREOF, this Note is delivered as of the date set forth
above.
---------------------------------
<PAGE>
EXHIBIT B
SPLIT DOLLAR AGREEMENT
This SPLIT DOLLAR AGREEMENT (this "Agreement") is entered into as of
_______, 1999, by and among DAVID J. GLADSTONE (the "Insured"), DAVID J.
GLADSTONE IRREVOCABLE INSURANCE TRUST (the "Owner") and AMERICAN CAPITAL
STRATEGIES, LTD., a Delaware corporation (the "Employer").
R E C I T A L S
WHEREAS, the Insured and the Employer have entered into a Stock Option
Exercise Agreement dated as of August 6, 1999 (the "Exercise Agreement")
pursuant to which they have agreed to enter into and consummate this Agreement;
and
WHEREAS, Owner will be the owner and possessor of the Policy (as
defined herein) and will assign an interest in the Policy's death benefit and
cash value to the Employer as collateral to secure repayment of Employer's
premium payments with respect to the Policy pursuant to the Exercise Agreement;
and
WHEREAS, it is the intent of the Employer, the Insured and Owner to
define the extent of the Employer's security interest in the Policy;
NOW, THEREFORE, the parties hereto, in consideration of the foregoing
and intending to be legally bound hereby, agree as follows:
1. Interests in the Policy. The Policy that is the subject of this
Split Dollar Agreement is ________________ (the "Insurer") Policy Number
______________ on the life of the Owner (the "Policy"). The Employer's interest
in the cash value and death benefits of the Policy (the "Employer's Interest")
as of any date, shall be equal to the Unamortized Premium Payment (as defined
herein) as of such date accumulated at interest at
-2-
<PAGE>
a rate of 4.5% per annum. The Owner's interest in the cash value and death
benefits of the Policy (the "Owner's Interest") shall be equal to the remaining
cash value and death benefits of the Policy, if any, in excess of the Employer's
Interest, reduced by any distributions made to the Owner or the Insured prior to
such date.
2. Premium Payments. The Employer will, contemporaneously with the
execution and delivery of this Agreement, pay as a single cash payment, the sum
of $1,825,000 representing the entire premium (the "Premium Payment") due with
regard to the Policy. The Owner shall have imputed income each year in an amount
equal to (a) the annual cost of current death benefit protection on the life of
the Insured, measured by the lower of (i) the PS 58 rate, as set forth in
Revenue Ruling 55-747 (or the corresponding applicable provision of any future
Revenue Ruling), or (ii) the Insurer's current published premium rate for
annually renewable term insurance for standard risks plus, without duplication,
(b) one-tenth of the Premium Payment. The "Unamortized Premium Payment" shall
initially equal the Premium Payment, and shall be reduced by 2.5% of the Premium
Payment on each October 1, January 1, March 1 and July 1 during the term of this
Agreement.
3. Death Benefit Amounts.
a. In the event of the Insured's death prior to the termination of
this Agreement, the death benefit payable to the Employer (or the Employer's
designated beneficiaries) under this Agreement shall be equal to the Employer's
Interest in the Policy at the time of the Insured's death minus the amount
payable to the Employer under the Term Insurance, as defined in Section 5.3(b)
of the Exercise Agreement.
-3-
<PAGE>
b. In the event of the Insured's death prior to the termination of
this Agreement, the death benefit payable to the Owner (or the Owner's
designated beneficiaries) shall be the excess of the total death proceeds under
the Policy less the amount payable to the Employer (or the Employer's designated
beneficiaries), reduced by the amount payable to the Employer under the Term
Policy. Following the termination of this Agreement and upon the satisfaction of
the Employer's Interest in the Policy, the Owner's death benefit will be equal
to the total death benefit provided by the Policy.
c. Owner and Insured understand that sufficiency of cash value in
the Policy to provide expected amounts of death benefit under this Agreement may
vary as a result of Policy performance and duration of premium payments and this
is in no event guaranteed by the Employer or the Insurer.
4. Ownership and Rights in the Policy.
a. The Policy will be owned exclusively by the Owner. While this
Agreement is in effect, the Employer has a security interest in the Policy under
this Agreement limited exclusively to the Employer's Interest in the Policy;
provided, however, this paragraph 4 shall not in any way limit or affect the
obligations or rights of the parties under that Exercise Agreement.
b. The Owner shall have the right to make any investment choices
permitted by the Policy and that appear on Exhibit A hereto with respect to the
cash value of the Policy. Any other investment choices will require the consent
of the Employer.
c. The Owner's rights shall also include the right to select and
change beneficiaries to receive Owner's death benefits. The Owner will not be
permitted to
-4-
<PAGE>
borrow against, or partially or totally surrender the Policy as long as the
Collateral Assignment remains in force, except as provided in the Exercise
Agreement. Any other rights in the Policy other than those specifically
mentioned in this Agreement must be exercised with the written consent of the
Insured, Owner and the Employer.
5. Assignment of Policy to Secure Employer's Payments. To secure
Employer's Interest in the Policy under this Agreement, Owner will collaterally
assign the Policy to the Employer by signing the separate Collateral Assignment.
The Collateral Assignment cannot be altered without the Employer's, Owner's and
Insurer's consent.
6. Termination of Split Dollar Agreement. This Agreement will terminate
upon the earliest to occur of the following:
a. Death of the Insured and the payment to Employer of all amounts
due it hereunder;
b. Written agreement of both the Owner, Insured and the Employer
to terminate this Agreement;
c. Termination of Insured's employment; provided however, that if
the Employer and Insured are parties to a Supplemental Employment Agreement
substantially in the form of Exhibit 4.11 to the Second Amended and Restated
Employment Agreement dated as of August 6, 1999, between Employer and Insured,
Owner shall be deemed to be employed by Employer only if Employee has elected to
be bound by Section 5.2(a) thereof; or
d. A release of the Collateral Assignment pursuant to Section 7
herein. Upon termination of this Agreement, the Employer shall receive the
Employer's Interest in the Policy as soon as is practical, but in no event shall
receipt be later than sixty (60)
-5-
<PAGE>
days from the earliest of the dates listed above. In the event of termination of
this Agreement for reason other than the death of the Insured, the payment of
the Employer's Interest in the Policy and under this Agreement shall be
satisfied either directly from the cash value of the Policy or by direct payment
by the Owner, at the discretion of the Owner. In this event, the recovery of the
Employer's Interest shall be limited to the cash value of the Policy at that
time. In the event of termination of this Agreement by reason of the death of
the Insured, the Employer's Interest in the Policy and under this Agreement
shall be satisfied through direct payment from the Insurer from the Policy
proceeds less the amount payable to Employer under the Term Policy.
7. Release of Collateral Assignment. Upon receipt of the Employer's
Interest in the Policy, as provided above, either whether from the Policy, or
from the Owner, the Employer will release the Collateral Assignment. Upon
satisfaction of the Employer's Interest in the Policy, the Owner shall have
unrestricted ownership to the Policy, subject to the terms of the Exercise
Agreement.
8. Miscellaneous.
a. Not an Employment Agreement. This Agreement does not in any way
constitute an employment agreement, and the Employer reserves the right to
terminate Insured's employment to the same extent as though this Agreement did
not exist. This Agreement may be amended at any time by written agreement signed
on behalf of the Employer and by the Owner and the Insured.
b. Binding Effect. This Agreement shall be binding upon and inure
to the benefit of the Employer and its
-6-
<PAGE>
successors and assigns, to the Owner and its successors and permitted assignes,
and to the Insured and the Insured's heirs, executor or personal representative
and beneficiaries.
c. Notices. Any notice, consent or demand required or permitted
under this Agreement shall be made in writing and shall be signed by the party
making the notice, consent, or demand. Such notice shall be sent by United
States certified mail, postage pre-paid and shall be sent to the other party's
last known address as shown on the records of the Employer. The date of such
mailing shall be deemed to be the date of such notice, consent or demand.
d. Governing Law. This Agreement shall be governed by and be
construed in accordance with the laws of the State of Maryland, without
reference to the conflicts of laws provisions thereof.
9. Claims Procedures.
a. Claimants. Any person or entity claiming a benefit, requesting
an interpretation or ruling under the Plan (hereinafter referred to as
"Claimant") shall present the request in writing to the Employer, which shall
respond in writing as soon as practicable. If the claim or request is denied,
the written notice of denial shall state the reason for denial, with specific
reference to the provisions on which the denials is based, a description of any
additional material or information required and an explanation of why it is
necessary, and an explanation of the program's claims review procedure.
b. Review of Claim. Any Claimant whose claim or request is denied
or who has not received a response within sixty (60) days may request a review
by notice given in writing to the Employer. Such request must be made within
sixty (60) days after receipt by the Claimant of the written notice of denial,
or in the event Claimant has not
-7-
<PAGE>
received a response sixty (60) days after receipt by the Employer of Claimant's
claim or request. The claim or request shall be reviewed by the Employer which
may, but shall not be required to, grant the Claimant a hearing. On review, the
Claimant may have representation, examine pertinent documents, and submit issues
and comments in writing.
c. Final Decision. The decision or review shall normally be made
within sixty (60) days after the Employer's receipt of Claimant's claim or
request. If an extension of time is required for a hearing or other special
circumstances, the Claimant shall be notified and the time limit shall be one
hundred twenty (120) days. The decision shall be in writing and shall state the
reason and the relevant provisions. All decisions on review shall be final and
bind all parties concerned.
-8-
<PAGE>
IN WITNESS WHEREOF, the Employer, the Insured and the Owner have
executed and delivered this Split Dollar Agreement, which is effective as of the
effective date of the Policy described herein.
AMERICAN CAPITAL STRATEGIES. LTD.
By: ______________________________
Name:__________________________
Title: ________________________
_______________________________, AS
TRUSTEE OF DAVID J. GLADSTONE
IRREVOCABLE INSURANCE TRUST
OWNER
__________________________________
____________________________
Witness
Exhibit 10.3
PURCHASE NOTE
August 6, 1999
$9,466,232.91
FOR VALUE RECEIVED, the undersigned, DAVID J. GLADSTONE (the
"Optionee"), hereby promises to pay to AMERICAN CAPITAL STRATEGIES, LTD., and
its successors and assigns (the "Holder"), the principal sum of NINE MILLION
FOUR HUNDRED SIXTY-SIX THOUSAND TWO HUNDRED THIRTY-TWO AND 91/100 DOLLARS
($9,466,232.91), with interest thereon, on the terms and conditions set forth in
the Exercise Agreement (as defined herein).
Payments of the principal of and interest on this Note are to be made
in lawful money of the United States of America by check mailed and addressed to
the Holder hereof at the address shown in the Exercise Agreement or such other
address as may be provided thereunder.
Notwithstanding any provision to the contrary in this Note, the
Exercise Agreement or any other agreement, the Optionee shall not be required to
pay, and the Holder shall not be permitted to contract for, take, reserve,
charge or receive, any compensation which constitutes interest under applicable
law in excess of the maximum amount of interest permitted by law.
This Note is the Purchase Note (herein called the "Note") issued
pursuant to the Stock Option Exercise Agreement, dated as of August 6, 1999 (as
from time to time amended, the "Exercise Agreement"), between the Holder and the
Optionee and is entitled to the benefits thereof. All terms used herein shall
have the meanings ascribed to them in the Exercise Agreement.
If an Event of Default as defined in the Exercise Agreement occurs and
is continuing, the unpaid principal of this Note shall become due and payable in
the manner, at the price and with the effect provided in the Exercise Agreement.
This Note and the rights and obligations of the parties hereto shall be
deemed to be contracts under the laws of the State of Maryland and for all
purposes shall be governed by and construed and enforced in accordance with the
laws of said State, except for its rules relating to the conflict of laws.
IN WITNESS WHEREOF, this Note is delivered as of the date set forth
above.
/s/
---------------------------------
Exhibit 10.4
SPLIT DOLLAR AGREEMENT
This SPLIT DOLLAR AGREEMENT (this "Agreement") is entered into as of
September 7, 1999, by and among DAVID J. GLADSTONE (the "Insured"), THE DAVID J.
GLADSTONE IRREVOCABLE INSURANCE TRUST, LORNA GLADSTONE, TRUSTEE (the "Owner"),
and AMERICAN CAPITAL STRATEGIES, LTD., a Delaware corporation (the "Employer").
R E C I T A L S
WHEREAS, the Insured and the Employer have entered into a Stock Option
Exercise Agreement dated as of August 6, 1999 (the "Exercise Agreement")
pursuant to which they have agreed to enter into and consummate this Agreement;
and
WHEREAS, Owner will be the owner and possessor of the Policy (as
defined herein) and will assign an interest in the Policy's death benefit and
cash value to the Employer as collateral to secure repayment of Employer's
premium payments with respect to the Policy pursuant to the Exercise Agreement;
and
WHEREAS, it is the intent of the Employer, the Insured and Owner to
define the extent of the Employer's security interest in the Policy;\
NOW, THEREFORE, the parties hereto, in consideration of the foregoing
and intending to be legally bound hereby, agree as follows:
1. Interests in the Policy. The Policy that is the subject of this
Split Dollar Agreement is Security Life of Denver Insurance Company (the
"Insurer") Policy Number 610014592 on the life of the Owner (the "Policy"). The
Employer's interest in the cash value and death benefits of the Policy (the
"Employer's Interest") as of any date, shall be equal to the Unamortized Premium
Payment (as defined herein) as of such date
<PAGE>
accumulated at interest at a rate of 4.5% per annum. The Owner's interest in the
cash value and death benefits of the Policy (the "Owner's Interest") shall be
equal to the remaining cash value and death benefits of the Policy, if any, in
excess of the Employer's Interest, reduced by any distributions made to the
Owner or the Insured prior to such date.
2. Premium Payments. The Employer will, contemporaneously with the
execution and delivery of this Agreement, pay as a single cash payment, the sum
of $1,825,000 representing the entire premium (the "Premium Payment") due with
regard to the Policy. The Insured shall have imputed income each year in an
amount equal to the greater of (a) the annual cost of current death benefit
protection on the life of the Insured, measured by the lower of (i) the PS 58
rate, as set forth in Revenue Ruling 55-747 (or the corresponding applicable
provision of any future Revenue Ruling), or (ii) the Insurer's current published
premium rate for annually renewable term insurance for standard risks plus,
without duplication, and (b) one-tenth of the Premium Payment. The "Unamortized
Premium Payment" shall initially equal the Premium Payment, and shall be reduced
by 2.5% of the Premium Payment on each October 1, January 1, March 1 and July 1
during the term of this Agreement.
3. Death Benefit Amounts.
a. In the event of the Insured's death prior to the termination of this
Agreement, the death benefit payable to the Employer (or the Employer's
designated beneficiaries) under this Agreement shall be equal to the Employer's
Interest in the Policy at the time of the Insured's death minus the amount
payable to the Employer under the Term Insurance, as defined in Section 5.3(b)
of the Exercise Agreement.
-2-
<PAGE>
b. In the event of the Insured's death prior to the termination of
this Agreement, the death benefit payable to the Owner (or the Owner's
designated beneficiaries) shall be the excess of the total death proceeds under
the Policy less the amount payable to the Employer (or the Employer's designated
beneficiaries), reduced by the amount payable to the Employer under the Term
Policy. Following the termination of this Agreement and upon the satisfaction of
the Employer's Interest in the Policy, the Owner's death benefit will be equal
to the total death benefit provided by the Policy.
c. Owner and Insured understand that sufficiency of cash value in
the Policy to provide expected amounts of death benefit under this Agreement may
vary as a result of Policy performance and duration of premium payments and this
is in no event guaranteed by the Employer or the Insurer.
4. Ownership and Rights in the Policy.
a. The Policy will be owned exclusively by the Owner. While this
Agreement is in effect, the Employer has a security interest in the Policy under
this Agreement limited exclusively to the Employer's Interest in the Policy;
provided, however, this paragraph 4 shall not in any way limit or affect the
obligations or rights of the parties under that Exercise Agreement.
b. The Owner shall have the right to make any investment choices
permitted by the Policy and that appear on Exhibit A hereto with respect to the
cash value of the Policy. Any other investment choices will require the consent
of the Employer.
c. The Owner's rights shall also include the right to select and
change beneficiaries to receive Owner's death benefits. The Owner will not be
permitted to
-3-
<PAGE>
borrow against, or partially or totally surrender the Policy as long as the
Collateral Assignment remains in force, except as provided in the Exercise
Agreement. Any other rights in the Policy other than those specifically
mentioned in this Agreement must be exercised with the written consent of the
Insured, Owner and the Employer.
5. Assignment of Policy to Secure Employer's Payments. To secure
Employer's Interest in the Policy under this Agreement, Owner will collaterally
assign the Policy to the Employer by signing the separate Collateral Assignment.
The Collateral Assignment cannot be altered without the Employer's, Owner's and
Insurer's consent.
6. Termination of Split Dollar Agreement. This Agreement will terminate
upon the earliest to occur of the following:
a. Death of the Insured and the payment to Employer of all amounts
due it hereunder;
b. Written agreement of both the Owner, Insured and the Employer
to terminate this Agreement;
c. Termination of Insured's employment; provided however, that if
the Employer and Insured are parties to a Supplemental Employment Agreement
substantially in the form of Exhibit 4.11 to the Second Amended and Restated
Employment Agreement dated as of August 6, 1999, between Employer and Insured,
Owner shall be deemed to be employed by Employer only if Employee has elected to
be bound by Section 5.2(a) thereof; or
d. A release of the Collateral Assignment pursuant to Section 7
herein. Upon termination of this Agreement, the Employer shall receive the
Employer's Interest in the Policy as soon as is practical, but in no event shall
receipt be later than sixty (60)
-4-
<PAGE>
days from the earliest of the dates listed above. In the event of termination of
this Agreement for reason other than the death of the Insured, the payment of
the Employer's Interest in the Policy and under this Agreement shall be
satisfied either directly from the cash value of the Policy or by direct payment
by the Owner, at the discretion of the Owner. In this event, the recovery of the
Employer's Interest shall be limited to the cash value of the Policy at that
time. In the event of termination of this Agreement by reason of the death of
the Insured, the Employer's Interest in the Policy and under this Agreement
shall be satisfied through direct payment from the Insurer from the Policy
proceeds less the amount payable to Employer under the Term Policy.
7. Release of Collateral Assignment. Upon receipt of the Employer's
Interest in the Policy, as provided above, either whether from the Policy, or
from the Owner, the Employer will release the Collateral Assignment. Upon
satisfaction of the Employer's Interest in the Policy, the Owner shall have
unrestricted ownership to the Policy, subject to the terms of the Exercise
Agreement.
8. Miscellaneous.
a. Not an Employment Agreement. This Agreement does not in any way
constitute an employment agreement, and the Employer reserves the right to
terminate Insured's employment to the same extent as though this Agreement did
not exist. This Agreement may be amended at any time by written agreement signed
on behalf of the Employer and by the Owner and the Insured.
b. Binding Effect. This Agreement shall be binding upon and inure
to the benefit of the Employer and its successors and assigns, to the Owner and
its
-5-
<PAGE>
successors and permitted assignes, and to the Insured and the Insured's heirs,
executor or personal representative and beneficiaries.
c. Notices. Any notice, consent or demand required or permitted
under this Agreement shall be made in writing and shall be signed by the party
making the notice, consent, or demand. Such notice shall be sent by United
States certified mail, postage pre-paid and shall be sent to the other party's
last known address as shown on the records of the Employer. The date of such
mailing shall be deemed to be the date of such notice, consent or demand.
d. Governing Law. This Agreement shall be governed by and be
construed in accordance with the laws of the State of Maryland, without
reference to the conflicts of laws provisions thereof.
9. Claims Procedures.
a. Claimants. Any person or entity claiming a benefit, requesting
an interpretation or ruling under the Plan (hereinafter referred to as
"Claimant") shall present the request in writing to the Employer, which shall
respond in writing as soon as practicable. If the claim or request is denied,
the written notice of denial shall state the reason for denial, with specific
reference to the provisions on which the denials is based, a description of any
additional material or information required and an explanation of why it is
necessary, and an explanation of the program's claims review procedure.
b. Review of Claim. Any Claimant whose claim or request is denied
or who has not received a response within sixty (60) days may request a review
by notice given in writing to the Employer. Such request must be made within
sixty (60) days after receipt by the Claimant of the written notice of denial,
or in the event Claimant has not
-6-
<PAGE>
received a response sixty (60) days after receipt by the Employer of Claimant's
claim or request. The claim or request shall be reviewed by the Employer which
may, but shall not be required to, grant the Claimant a hearing. On review, the
Claimant may have representation, examine pertinent documents, and submit issues
and comments in writing.
c. Final Decision. The decision or review shall normally be made
within sixty (60) days after the Employer's receipt of Claimant's claim or
request. If an extension of time is required for a hearing or other special
circumstances, the Claimant shall be notified and the time limit shall be one
hundred twenty (120) days. The decision shall be in writing and shall state the
reason and the relevant provisions. All decisions on review shall be final and
bind all parties concerned.
-7-
<PAGE>
IN WITNESS WHEREOF, the Employer, the Insured and the Owner have
executed and delivered this Split Dollar Agreement, which is effective as of the
effective date of the Policy described herein.
AMERICAN CAPITAL STRATEGIES. LTD.
By: /s/
-------------------------------------
Name:
------------------------------
Title:
------------------------------
THE DAVID J. GLADSTONE IRREVOCABLE
INSURANCE TRUST, LORNA GLADSTONE,
TRUSTEE
/s/
----------------------------------------
DAVID J. GLADSTONE
/s/
----------------------------------------
- ------------------------------
Witness
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000817473
<NAME> American Capital Strategies, ltd.
<MULTIPLIER> 1000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> DEC-31-1998
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1.000
<INVESTMENTS-AT-COST> 256,577
<INVESTMENTS-AT-VALUE> 264,921
<RECEIVABLES> 6,696
<ASSETS-OTHER> 4,198
<OTHER-ITEMS-ASSETS> 50,419
<TOTAL-ASSETS> 326,234
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 69,840
<OTHER-ITEMS-LIABILITIES> 7,827
<TOTAL-LIABILITIES> 77,667
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 158,568
<SHARES-COMMON-STOCK> 18,215
<SHARES-COMMON-PRIOR> 11,081
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (927)
<ACCUMULATED-NET-GAINS> 867
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 13,960
<NET-ASSETS> 248,567
<DIVIDEND-INCOME> 362
<INTEREST-INCOME> 20,396
<OTHER-INCOME> 2,060
<EXPENSES-NET> 5,189
<NET-INVESTMENT-INCOME> 16,476
<REALIZED-GAINS-CURRENT> 867
<APPREC-INCREASE-CURRENT> 6,077
<NET-CHANGE-FROM-OPS> 23,420
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 17,287
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 7,114
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 20
<NET-CHANGE-IN-ASSETS> 23,420
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> (116)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 3,245
<GROSS-EXPENSE> 5,189
<AVERAGE-NET-ASSETS> 200,645
<PER-SHARE-NAV-BEGIN> 13.80
<PER-SHARE-NII> 1.33
<PER-SHARE-GAIN-APPREC> 0.56
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 1.27
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 13.64
<EXPENSE-RATIO> 0.026
[AVG-DEBT-OUTSTANDING] 92,894
[AVG-DEBT-PER-SHARE] 6.25
</TABLE>
