FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-19509
EQUUS II INCORPORATED
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 76-0345915
---------------------------------- -------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2929 Allen Parkway, Suite 2500
HOUSTON, TEXAS 77019-2120
---------------------------------- -------------------------
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: (713) 529-0900
-----------------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange
on which registered
COMMON STOCK NEW YORK STOCK EXCHANGE
------------------- -----------------------
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Approximate aggregate market value of common stock held by non-affiliates of the
registrant: $66,103,073 computed on the basis of $15.56 per share, closing price
of the common stock on the New York Stock Exchange Inc. on August 10, 1999. For
the purpose of calculating this amount only, all directors and executive
officers of the registrant have been treated as affiliates. There were 4,954,304
shares of the registrant's common stock, $.001 par value, outstanding, as of
August 10, 1999. The net asset value of a share at June 30, 1999 was $23.29.
Documents incorporated by reference: None
<PAGE>
EQUUS II INCORPORATED
(A Delaware Corporation)
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Balance Sheets
-June 30, 1999 and December 31, 1998..........................1
Statements of Operations
- For the three months ended June 30, 1999 and 1998...........2
- For the six months ended June 30, 1999 and 1998.............3
Statements of Changes in Net Assets
- For the six months ended June 30, 1999 and 1998.............4
Statements of Cash Flows
- For the six months ended June 30, 1999 and 1998.............5
Selected Per Share Data and Ratios
- For the six months ended June 30, 1999 and 1998 ............7
Schedule of Portfolio Securities
- June 30, 1999...............................................8
Notes to Financial Statements................................14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................19
Item 3. Quantitative and Qualitative Disclosure about Market Risk..23
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders..23
Item 6. Exhibits and Reports on Form 8-K .........................24
SIGNATURE ................................................................. 24
ii
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EQUUS II INCORPORATED
BALANCE SHEETS
JUNE 30, 1999 AND DECEMBER 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
ASSETS
Investments in portfolio securities at fair value
(cost $112,464,784 and $109,937,121, respectively) . 137,638,600 $ 154,248,818
Temporary cash investments, at cost which
approximates fair value ............................ 50,085,008 60,214,266
Cash .................................................... -- 39,724
Accounts receivable ..................................... 755,000 393,235
Accrued interest receivable ............................. 1,541,986 675,851
Commitment fees ......................................... 12,500 31,250
------------- -------------
Total assets .................................. 190,033,094 215,603,144
------------- -------------
LIABILITIES AND NET ASSETS
Liabilities:
Accounts payable ................................... 696,307 367,341
Due to management company .......................... 577,049 580,775
Notes payable to bank .............................. 73,350,000 98,500,000
------------- -------------
Total liabilities ............................. 74,623,356 99,448,116
------------- -------------
Commitments and contingencies
Net assets:
Preferred stock, $.001 par value, 5,000,000 shares
authorized, no shares issued .................... -- --
Common stock, $.001 par value, 10,000,000 shares
authorized, 4,954,304 shares outstanding ........ 4,954 4,954
Additional paid-in capital ......................... 77,917,681 78,407,776
Undistributed net investment income ................ -- --
Undistributed net capital gains (losses) ........... 12,313,287 (6,569,399)
Unrealized appreciation of portfolio securities, net 25,173,816 44,311,697
------------- -------------
Total net assets .............................. $ 115,409,738 $ 116,155,028
============= =============
Net assets per share .......................... $ 23.29 $ 23.45
============= =============
</TABLE>
The accompanying notes are an
integral part of these financial statements
1
<PAGE>
EQUUS II INCORPORATED
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Investment income:
Income from portfolio securities ........................ $ 1,308,100 $ 706,691
Interest from temporary cash investments ................ 13,316 8,104
------------ ------------
Total investment income ............................ 1,321,416 714,795
------------ ------------
Expenses:
Management fees ......................................... 577,049 761,169
Director fees and expenses .............................. 86,500 72,271
Professional fees ....................................... 57,295 183,600
Administrative fees ..................................... 12,500 12,500
Mailing, printing and other expenses .................... 13,635 71,351
Interest expense ........................................ 769,078 347,047
Franchise taxes ......................................... 62,069 73,978
------------ ------------
Total expenses ..................................... 1,578,126 1,521,916
------------ ------------
Net investment loss .......................................... (256,710) (807,121)
------------ ------------
Realized gain on sales of portfolio securities, net........... 15,949,882 4,228,636
------------ ------------
Unrealized appreciation of portfolio securities, net:
End of period ........................................... 25,173,816 70,045,805
Beginning of period ..................................... 32,733,681 73,948,287
------------ ------------
Decrease in unrealized appreciation, net ................ (7,559,865) (3,902,482)
Total increase (decrease) in net assets from operations 8,133,307 $ (480,967)
============================================================== ============ ============
</TABLE>
The accompanying notes are an
integral part of these financial statements
2
<PAGE>
EQUUS II INCORPORATED
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Investment income:
Income from portfolio securities ...................... $ 2,460,887 $ 1,884,619
Interest from temporary cash investments .............. 36,366 25,028
------------ ------------
Total investment income .......................... 2,497,253 1,909,647
------------ ------------
Expenses:
Management fees ....................................... 1,113,393 1,524,709
Director fees and expenses ............................ 138,175 131,390
Professional fees ..................................... 119,676 266,762
Administrative fees ................................... 25,000 25,000
Mailing, printing and other expenses .................. 37,666 97,812
Interest expense ...................................... 1,487,248 664,678
Franchise taxes ....................................... 73,690 89,878
------------ ------------
Total expenses ................................... 2,994,848 2,800,229
------------ ------------
Net investment loss ........................................ (497,595) (890,582)
------------ ------------
Realized gain on sales of portfolio securities, net ........ 18,882,686 4,494,379
------------ ------------
Unrealized appreciation of portfolio securities, net:
End of period ......................................... 25,173,816 70,045,805
Beginning of period ................................... 44,311,697 65,893,353
------------ ------------
Increase (decrease) in unrealized appreciation ........ (19,137,881) 4,152,452
------------ ------------
Total increase (decrease) in net assets from operations $ (752,790) $ 7,756,249
============ ============
</TABLE>
The accompanying notes are an
integral part of these financial statements
3
<PAGE>
EQUUS II INCORPORATED
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Operations:
Net investment loss ............................. $ (497,595) $ (890,582)
Realized gain on sales of portfolio
securities, net .............................. 18,882,686 4,494,379
Increase (decrease) in unrealized appreciation of
portfolio securities, net .................... (19,137,881) 4,152,452
------------- -------------
Increase (decrease) in net assets from operations .... (752,790) 7,756,249
------------- -------------
Capital Transactions:
Increase from director options .................. 7,500 --
------------- -------------
Increase in net assets from capital transactions ..... 7,500 --
------------- -------------
Total increase (decrease) in net assets ......... (745,290) 7,756,249
Net assets at beginning of period .................... 116,155,028 144,470,752
------------- -------------
Net assets at end of period .......................... $ 115,409,738 $ 152,227,001
============= =============
</TABLE>
The accompanying notes are an
integral part of these financial statements
4
<PAGE>
EQUUS II INCORPORATED
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Interest and dividends received ................. $ 922,460 $ 883,749
Cash paid to management company, directors,
bank and suppliers ........................... (2,643,358) (2,522,192)
------------- -------------
Net cash used by operating activities ........ (1,720,898) (1,638,443)
------------- -------------
Cash flows from investing activities:
Purchase of portfolio securities ................ (17,528,079) (22,557,596)
Proceeds from sales of portfolio securities ..... 31,349,601 8,399,880
Principal payments from portfolio companies ..... 2,704,877 1,012,576
Advance to portfolio company .................... (74,483) --
Repayment from portfolio company ................ 250,000 --
------------- -------------
Net cash provided (used) by investing activies 16,701,916 (13,145,140)
------------- -------------
Cash flows from financing activities:
Advances from bank .............................. 120,550,000 175,800,000
Repayments to bank .............................. (145,700,000) (160,250,000)
Dividend payments ............................... -- (828,556)
------------- -------------
Net cash provided (used) by financing activies (25,150,000) 14,721,444
Net decrease in cash and cash equivalents ............ (10,168,982) (62,139)
Cash and cash equivalents at beginning of period ..... 60,253,990 75,180,742
------------- -------------
Cash and cash equivalents at end of period ........... $ 50,085,008 $ 75,118,603
============= =============
</TABLE>
The accompanying notes are an
integral part of these financial statements
5
<PAGE>
EQUUS II INCORPORATED
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(Unaudited)
(Continued)
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Reconciliation of increase (decrease) in net assets from
operations to net cash used by operating activities:
Increase (decrease) in net assets from operations ............. $ (752,790) $ 7,756,249
Adjustments to reconcile increase (decrease) in net assets from
operations to net cash used by operating activities:
Realized gain on sale of portfolio securities, .............. (18,882,686) (4,494,379)
(Increase) decrease in unrealized appreciation, ............. 19,137,881 (4,152,452)
Accrued interest and dividends exchanged for
portfolio securities ...................................... (703,797) (1,066,016)
Increase in accounts receivable ............................. (4,861) --
Decrease (increase) in accrued interest receivable .......... (866,135) 40,118
Amortization of commitment fee .............................. 18,750 18,750
Decrease in accounts payable ................................ 328,966 220,506
Increase (decrease) in due to management company ............ (3,726) 38,781
Non-cash compensation expense for director options .......... 7,500 --
------------ ------------
Net cash used by operating activities ......................... $ (1,720,898) $ (1,638,443)
============ ============
</TABLE>
The accompanying notes are an
integral part of these financial statements
6
<PAGE>
EQUUS II INCORPORATED
SUPPLEMENTAL INFORMATION - SELECTED PER SHARE DATA AND RATIOS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Investment income ........................................ $ 0.50 $ 0.40
Expenses ................................................. 0.60 0.58
-------- --------
Net investment loss ................................. (0.10) (0.18)
Realized gain on sale of portfolio securities, net ....... 3.81 0.93
Increase (decrease) in unrealized appreciation
of portfolio securities, net ....................... (3.87) 0.86
-------- --------
Increase (decrease) in net assets from operations ... (0.16) 1.61
Net assets at beginning of period ........................ 23.45 29.92
-------- --------
Net assets at end of period .............................. $ 23.29 $ 31.53
======== ========
Ratio of expenses to average net assets .................. 2.59% 1.89%
Ratio of net investment loss to average net assets ....... (0.43)% (0.06)%
Ratio of increase (decrease) in net assets from operations
to average net assets ............................... (0.65)% 5.23%
</TABLE>
The accompanying notes are an
integral part of these financial statements
7
<PAGE>
EQUUS II INCORPORATED
SCHEDULE OF PORTFOLIO SECURITIES
JUNE 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
DATE OF
INITIAL
PORTFOLIO COMPANY INVESTMENT COST FAIR VALUE
----------------- ------------- ----------- -----------
<S> <C> <C>
A. C. Liquidating Corporation ..................... February 1985
-10% secured promissory notes ................... $ 188,014 $ --
Allied Waste Industries, Inc. (NYSE - AW) ......... March 1989
-775,000 shares of common stock ................. 2,496,565 14,847,063
-Warrants to buy up to 125,000 shares of common
stock at $5 per share through August 1999 .... -- 1,214,219
Atlas Acquisition, Inc. ........................... May 1997
-Junior participation in prime + 1.5% note ...... 850,000 225,000
Carruth-Doggett Industries, Inc. .................. December 1995
-10% senior subordinated promissory note ........ 2,250,000 2,250,000
-Warrant to buy up to 33,333 shares of common
stock at $0.01 per share through December 2005 -- 4,250,000
-Warrant to buy up to 249 shares of common
stock of CDE Corp. at $0.01 per share through
December 2005 ................................ -- --
CDI Rental Services ............................... February 1999
-10% senior subordinated promissory note ........ 2,000,000 2,000,000
-Warrant to buy up to 12,500 shares of common
stock at $0.01 per share through February 2009 -- --
-Warrant to buy up to 21,250 shares of common
stock at $0.0127 per share through February 2009 -- --
Champion Window, Inc. ............................. May 1999
-1,400,000 shares of common stock ............... 1,400,000 1,400,000
-20,000 shares of preferred stock ............... 2,000,000 2,000,000
-12% Subordinated promissory note ............... 3,500,000 3,500,000
</TABLE>
The accompanying notes are an
integral part of these financial statements
8
<PAGE>
EQUUS II INCORPORATED
SCHEDULE OF PORTFOLIO SECURITIES
JUNE 30, 1999
(Unaudited)
(Continued)
<TABLE>
<CAPTION>
DATE OF
INITIAL
PORTFOLIO COMPANY INVESTMENT COST FAIR VALUE
----------------- ------------- ----------- -----------
<S> <C> <C>
Container Acquisition, Inc. ..................... February 1997
-1,370,000 shares of common stock ............. $ 1,370,000 $ 1,370,000
-56,792 shares of preferred stock ............. 5,679,200 5,679,200
-Warrant to buy up to 370,588 shares of common
stock at $0.01 per share through June 2003 . 1,000 1,000
CRC Holdings, Corp. ............................. June 1997
-59,891 shares of common stock ................ 5,474,037 20,961,850
-12% subordinated promissory note ............. 959,700 959,700
The Drilltec Corporation ........................ August 1998
-1,400,000 shares of common stock ............ 1,400,000
-62,450 shares of preferred stock ............ 6,245,000 --
-Prime + 9.75% demand note ................... 124,000 124,000
Drypers Corporation (NASDAQ - DYPR) ............. July 1991
-3,677,906 shares of common stock ............. 9,328,556 7,552,202
Equicom, Inc. ................................... July 1997
-452,000 shares of common stock ............... 141,250 --
-648,061 shares of preferred stock ............ 6,480,610 4,621,860
-10% promissory note .......................... 1,638,500 1,638,500
Garden Ridge Corporation (NASDAQ - GRDG) ........ July 1992
-474,942 shares of common stock ............... 685,030 2,255,975
GCS RE, Inc. .................................... February 1989
-1,000 shares of common stock ................. 132,910 300,000
Hot & Cool Holdings, Inc. ....................... March 1996
-9% increasing rate subordinated
promissory note ............................ 1,120,000 1,120,000
-10% subordinated notes ....................... 2,200,000 2,200,000
-12% senior unsecured promissory note ......... 1,000,000 1,000,000
-12% promissory note .......................... 500,000 500,000
-12,147 shares of Series A 8% preferred stock . 485,897 485,897
-6,000 shares of Series B 8% preferred stock .. 300,000 300,000
-Warrants to buy up to 14,942 shares of common
stock at $0.01 per share through March 2006 . -- 280,000
-Warrants to buy up to 16,316 shares of common
stock at $26.00 per share through April, 2007 -- --
</TABLE>
The accompanying notes are an
integral part of these financial statements
9
<PAGE>
EQUUS II INCORPORATED
SCHEDULE OF PORTFOLIO SECURITIES
JUNE 30, 1999
(Unaudited)
(Continued)
<TABLE>
<CAPTION>
DATE OF
INITIAL
PORTFOLIO COMPANY INVESTMENT COST FAIR VALUE
----------------- --------------- ---------- ----------
<S> <C> <C>
NCI Building Systems, Inc. (NYSE - NCS) ............... April 1989
-200,000 shares of common stock ..................... $ 159,784 $4,275,000
Paracelsus Healthcare Corporation (NYSE - PLS) December 1990
-1,263,058 shares of common stock ................... 5,278,748 1,539,316
Petrocon Engineering, Inc. ............................ September 1998
-887,338 shares of common stock ..................... 635 635
-8% Series B junior subordinated promissory note .... 2,659,332 2,659,332
-12% promissory note ................................ 4,663,356 4,663,356
-Warrant to buy up to 1,552,571 shares of common
stock at $0.01 per share through March 2009 ....... -- --
Raytel Medical Corporation (NASDAQ - RTEL) ............ August 1997
-33,073 shares of common stock ...................... 330,730 152,963
The ServiceMaster Company (NYSE - SVM) ............... May 1999
-Warrants to buy up to 29,411 shares of common
stock at $51 per share through September 2001 ..... -- --
Sovereign Business Forms, Inc. ........................ August 1996
-14,010 shares of preferred stock ................... 1,401,000 1,401,000
-15% promissory notes ............................... 800,000 800,000
-Warrant to buy 551,894 shares of common
stock at $1 per share through August 2006 ......... -- 1,440,818
-Warrant to buy 25,070 shares of common stock
at $1.25 per share through October 2007 ........... -- 59,182
Stephen L. LaFrance Holdings, Inc. .................... September 1997
-2,498,452 shares of preferred stock ................ 2,498,452 2,498,452
-Warrant to buy 269 shares of common stock
for $0.01 per share through September 2007 ........ -- 2,000,000
</TABLE>
The accompanying notes are an
integral part of these financial statements
10
<PAGE>
EQUUS II INCORPORATED
SCHEDULE OF PORTFOLIO SECURITIES
JUNE 30, 1999
(Unaudited)
(Continued)
<TABLE>
<CAPTION>
DATE OF
INITIAL
PORTFOLIO COMPANY INVESTMENT COST FAIR VALUE
----------------- --------------- ---------- -----------
<S> <C> <C> <C>
Strategic Holdings, Inc. ......................... September 1995
-3,089,751 shares of common stock .............. $3,088,389 $1,795,035
-3,822,157 shares of Series B preferred stock .. 3,820,624 3,820,624
-15% promissory note ........................... 6,750,000 6,750,000
-Warrants to buy 225,000 shares of common
stock at $0.4643 per share through August 1005 -- 26,249
-Warrant to buy 100,000 shares of common stock
at $1.50 per share through August 2005 ....... -- --
-Warrant to buy 2,219,237 shares of common
stock at $0.01 per share through November 1005 -- 1,267,105
-1,000 shares of SMIP, Inc. common stock ....... 150,000 150,000
-15% promissory note of SMIP, Inc. ............. 175,000 175,000
Summit/DPC Partners, L.P. ........................ October 1995
-36.11% limited partnership interest ........... 2,600,000 5,500,000
Travis International, Inc. ....................... December 1986
-21,947 shares of common stock ................. 5,398 1,000,000
-10% promissory notes .......................... 479,849 479,849
Tulsa Industries, Inc. ........................... December 1997
-27,500 shares of common stock ................. 33,846 --
-546,615 shares of Series A preferred stock .... 5,466,154 --
-8.75% junior participation in promissory no1e . 655,769 655,769
-Warrants to buy 31,731 shares of common
stock at $0.001 per share .................... -- --
Turfgrass America, Inc. .......................... May 1999
-3,167,756 shares of common stock ............. 600,000 600,000
-12% Subordinated promissory note ............. 3,400,000 3,400,000
</TABLE>
The accompanying notes are an
integral part of these financial statements
11
<PAGE>
EQUUS II INCORPORATED
SCHEDULE OF PORTFOLIO SECURITIES
JUNE 30, 1999
(Unaudited)
(Continued)
<TABLE>
<CAPTION>
DATE OF
INITIAL
PORTFOLIO COMPANY INVESTMENT COST FAIR VALUE
----------------- --------------- ------------ ------------
<S> <C> <C> <C>
United Industrial Services, Inc. ......... July 1998
-35,000 shares of preferred stock ...... $ 3,500,000 $ 3,500,000
-Warrants to buy 63,637 shares of common
stock at $0.01 through June 2008 ..... 100 100
VRPI Spin Off, Inc. ...................... January 1988
-100 shares of common stock ............ 250,000 250,000
-10% secured promissory note ........... 2,672,349 2,672,349
-12% secured promissory note ........... 1,050,000 1,050,000
-10,000 shares of common stock of
Equus Video Corporation .............. 25,000 20,000
------------ ------------
Total ............................... $112,464,784 $137,638,600
============ ============
</TABLE>
The accompanying notes are an
integral part of these financial statements
12
<PAGE>
EQUUS II INCORPORATED
SCHEDULE OF PORTFOLIO SECURITIES
JUNE 30, 1999
(Unaudited)
(Continued)
Substantially all of the Fund's portfolio securities are restricted from
public sale without prior registration under the Securities Act of 1933. The
Fund negotiates certain aspects of the method and timing of the disposition of
the Fund's investment in each portfolio company, including registration rights
and related costs.
In connection with the investments in Allied Waste Industries, Inc.
Container Acquisition, Inc., CRC Holdings, Corp., The Drilltec Corporation,
Drypers Corporation, Hot & Cool Holdings, Inc., Sovereign Business Forms, Inc.,
Strategic Holdings, Inc., Turfgrass America, Inc. and United Industrial
Services, Inc. rights have been obtained to demand the registration of such
securities under the Securities Act of 1933, providing certain conditions are
met. The Fund does not expect to incur significant costs, including costs of any
such registration, in connection with the future disposition of its portfolio
securities.
As defined in the Investment Company Act of 1940, at June 30, 1999, the
Fund was considered to have a controlling interest in Champion Window Inc.,
Container Acquisition, Inc., CRC Holdings, Corp., The Drilltec Corporation,
Drypers Corporation, Equicom, Inc., Petrocon Engineering, Inc., Sovereign
Business Forms, Inc., Strategic Holdings, Inc., Tulsa Industries, Inc., United
Industrial Services, Inc. and VRPI Spin Off, Inc. The fair values of certain of
the Fund's investments in publicly traded securities include discounts from the
closing market prices to reflect the estimated effects of restrictions on the
sale of such securities at June 30, 1999. Such discounts, shown in the following
table, total $3,884,141 or $0.78 per share as of June 30, 1999.
Discounted from
Market Value
---------------
Allied Waste Industries, Inc. ............................ $ 1,088,719
Drypers Corporation ...................................... 2,676,975
Paracelsus Healthcare Corporation ........................ 118,447
---------------
Total Discount......................................... 3,884,141
===============
Income was earned in the amount of $1,738,426 and $1,401,678 for the six
months ended June 30, 1999 and 1998, respectively, on portfolio securities of
companies in which the Fund had a controlling interest.
As defined in the Investment Company Act of 1940, all of the Fund's
investments are in eligible portfolio companies. The Fund provides significant
managerial assistance to all of the portfolio companies in which it has
invested, except Garden Ridge Corporation, Raytel Medical Corporation and
Summit/DPC Partners, L.P. The Fund provides significant managerial assistance to
portfolio companies that comprise 94% of the total value of the investments in
portfolio companies at June 30, 1999.
The accompanying notes are an
integral part of these financial statements
13
<PAGE>
EQUUS II INCORPORATED
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
(Unaudited)
(1) ORGANIZATION AND BUSINESS PURPOSE
Equus II Incorporated (the "Fund"), a Delaware corporation, seeks to
achieve capital appreciation by making investments in equity and equity-oriented
securities issued by privately-owned companies in transactions negotiated
directly with such companies ("Portfolio Companies"). The Fund seeks to invest
primarily in companies which intend to acquire other businesses, including
leveraged buyouts. The Fund may also invest in recapitalizations of existing
businesses or special situations from time to time. The Fund's investments in
Portfolio Companies consist principally of equity securities such as common and
preferred stock, but also include other equity-oriented securities such as debt
convertible into common or preferred stock or debt combined with warrants,
options or other rights to acquire common or preferred stock. Current income is
not a significant factor in the selection of investments. The Fund has elected
to be treated as a business development company under the Investment Company Act
of 1940, as amended. The shares of the Fund trade on the New York Stock Exchange
under the symbol EQS.
(2) MANAGEMENT
The Fund has entered into a management agreement with Equus Capital
Management Corporation, a Delaware corporation (the "Management Company").
Pursuant to such agreement, the Management Company performs certain services,
including certain management and administrative services necessary for the
operation of the Fund. The Management Company receives a management fee at an
annual rate of 2% of the net assets of the Fund, paid quarterly in arrears. The
Management Company also receives compensation for providing certain investor
communication services, of which $25,000 is included in the accompanying
Statements of Operations for each of the six months ended June 30, 1999 and
1998.
The Management Company is controlled by a privately-owned corporation.
As compensation for services rendered to the Fund, each director who is
not an officer of the Fund receives an annual fee of $25,000 paid quarterly in
arrears, a fee of $3,000 for each meeting of the Board of Directors attended in
person, a fee of $1,500 for participation in each telephonic meeting of the
Board of Directors and for each committee meeting attended ($500 for each
committee meeting if attended on the same day as a Board Meeting), and
reimbursement of all out-of-pocket expenses relating to attendance at such
meetings. In addition, each director who is not an officer of the Fund is
granted incentive stock options to purchase shares of the Fund's stock from time
to time. (See Note 10). Certain officers and directors of the Fund serve as
directors of Portfolio Companies, and may receive and retain fees, including
non-employee director stock options from such Portfolio Companies, in
consideration for such service.
(3) SIGNIFICANT ACCOUNTING POLICIES
Valuation of Investments - Portfolio investments are carried at fair value
with the net change in unrealized appreciation or depreciation included in the
determination of net assets. Investments in companies whose securities are
publicly traded are valued at their quoted market price, less a discount to
reflect the estimated effects of restrictions on the sale of such securities
("Valuation Discount"), if applicable. Cost is used to approximate fair value of
other investments until significant developments
14
<PAGE>
affecting an investment provide a basis for use of an appraisal valuation.
Thereafter, portfolio investments are carried at appraised values as determined
quarterly by the Management Company, subject to the approval of the Board of
Directors. The fair market values of debt securities, which are generally held
to maturity, are determined on the basis of the terms of the debt securities and
the financial conditions of the issuer. Because of the inherent uncertainty of
the valuation of portfolio securities which do not have readily ascertainable
market values, amounting to $130,954,662 (including $25,152,798 in
publicly-traded securities, net of a $3,884,141 Valuation Discount) and
$143,689,403 (including $40,505,183 in publicly-traded securities, net of a
$4,382,822 Valuation Discount) at June 30, 1999 and December 31, 1998,
respectively, the Fund's estimate of fair value may significantly differ from
the fair value that would have been used had a ready market existed for the
securities. Appraised values do not reflect brokers' fees or other normal
selling costs which might become payable on disposition of such investments.
On a daily basis, the Fund adjusts its net asset value for the changes in
the value of its publicly held securities and material changes in the value of
its private securities and reports those amounts to Lipper Analytical Services,
Inc. Weekly and daily net asset values appear in various publications, including
BARRON'S and THE WALL STREET JOURNAL and the Fund's website, www.equuscap.com.
Investment Transactions - Investment transactions are recorded on the
accrual method. Realized gains and losses on investments sold are computed on a
specific identification basis.
Cash Flows - For purposes of the Statements of Cash Flows, the Fund
considers all highly liquid temporary cash investments purchased with an
original maturity of three months or less to be cash equivalents.
Income Taxes - No provision for federal income taxes has been made in the
accompanying financial statements as the Fund has qualified for pass-through
treatment as a "regulated investment company" under Subchapter M of the Internal
Revenue Code of 1986. As such, all net income is allocable to the stockholders
for inclusion in their respective tax returns. Net capital losses are not
allocable to the shareholders but can be carried over to offset future earnings
of the Fund.
(4) BOOK TO TAX RECONCILIATION
The Fund accounts for dividends in accordance with Statement of Position
93-2 which relates to the amounts distributed by the Fund as net investment
income or net capital gains, which are often not equal to the corresponding
income or gains shown in the Fund's financial statements. The Internal Revenue
Service approved the Fund's request, effective October 31, 1998, to change its
year-end for determining capital gains for federal income tax purposes from
December 31 to October 31, which allows current year dividends to be paid prior
to the end of the calendar year. For tax purposes, the Fund distributed net
capital gains of $3,127,756 for the ten months ended October 31, 1998 in
December 1998. The Fund had $6,558,635 in undistributed net capital losses for
the period from November 1, 1998 to December 31, 1998. For the six months ended
June 30, 1999, the Fund realized net capital gains of $18,882,686. Therefore,
for tax purposes, the Fund had net capital gains of $12,324,051 for the eight
months ended June 30, 1999 of the 1999 tax year. The Fund had a net investment
loss for tax purposes for the six months ended June 30, 1999 and 1998, therefore
no investment income was distributed.
15
<PAGE>
The following is a reconciliation of the difference in the Fund's net
realized gain or loss on the sale of portfolio securities for book and tax
purposes for the six months ended June 30, 1999 and 1998.
1999 1998
------------ ------------
Net Realized gain on the sales
of portfoilio securities, book ........... $ 18,882,686 $ 4,494,379
Undistributed 1998 net capital losses ..... (6,558,635) --
------------ ------------
Net realized gain on the sales
of portfolio securities, tax ............. $ 12,324,051 $ 4,494,379
============ ============
(5) DIVIDENDS
The Fund declared no dividends during the six months ended June 30, 1999
and 1998, respectively. The Fund has adopted a policy to make dividend
distributions of at least $0.50 per share on an annual basis. In the event that
taxable income, including realized capital gains, exceeds $0.50 per share in any
year, additional dividends may be declared to distribute such excess.
Distributions can be made payable by the Fund either in the form of a cash
distribution or a stock dividend. The Fund has not adopted any set policy
concerning whether dividends will be paid only in cash, or in stock or cash by
specific election. If the Fund does not have available cash to pay the minimum
dividends, it may borrow the required funds or sell some of its portfolio
investments.
(6) TEMPORARY CASH INVESTMENTS
Temporary cash investments, which represent the short-term utilization of
cash prior to investment in securities of portfolio companies, distributions to
the shareholders, payment of expenses, or payment of notes payable to the bank
consist of $50,085,008 in money market accounts with Bank of America, N.A.
earning interest at a rate of 3.24% at June 30, 1999.
(7) ACCOUNTS RECEIVABLE
Accounts receivable at June 30, 1999 and December 31, 1998 included
$19,760 in proceeds from the 1998 liquidation of Restaurant Development Group,
Inc. The balance at June 30, 1999 also included $74,483 in receivables due from
portfolio companies as reimbursement for expenses related to such investments
and $659,430 in additional proceeds due from the sale of WMW Industries, Inc..
The remaining balance in "Accounts receivable" at December 31, 1998 consisted
primarily of a $250,000 cash advance to Tulsa Industries which was repaid to the
Fund in March 1999, and $122,148 in escrow related to the 1997 sale of the
Fund's investment in Industrial Equipment Rentals which was received in January
1999.
(8) PORTFOLIO SECURITIES
During the six months ended June 30, 1999, the Fund invested $12,900,000
in three new companies and made follow-on investments of $5,811,725 in ten
portfolio companies. These follow-on investments include $703,797 in accrued
interest and dividends received in the form of additional portfolio securities
and accretion of original issue discount on a promissory note. In addition, the
Fund realized net capital gains of $18,882,686 during the six months ended June
30, 1999.
16
<PAGE>
During the six months ended June 30, 1998, the Fund made follow-on
investments of $19,637,632 in ten portfolio companies, including $1,066,016 in
accrued interest and dividends received in the form of additional portfolio
securities. In addition, the Fund realized a net capital gain of $4,494,379
during the six months ended June 30, 1998.
(9) NOTES PAYABLE TO BANK
The Fund has a $100,000,000 line of credit promissory note with Bank of
America, N.A., with interest payable at 1/2% over the rate earned in its money
market account. The Fund had $50,000,000 and $60,000,000 outstanding on such
note at June 30, 1999 and December 31, 1998, respectively, that was fully
secured by the Fund's temporary cash investments. The Fund paid $37,500 in
commitment fees in November 1998, which were capitalized and are being amortized
over the commitment period. Effective June 1, 1999, the Fund extended the line
of credit promissory note to June 1, 2000.
The Fund has a $40,000,000 revolving line of credit with Bank of America,
N.A. that expires on June 1, 2000. The Fund had $23,350,000 and $38,500,000
outstanding under such line of credit at June 30, 1999 and December 31, 1998,
respectively, which is secured by the Fund's investments in portfolio
securities. The interest rate ranges from prime - 1/2 % to prime + 1/4% or libor
+ 1.65%. The Fund also pays 1/4% interest on the unused portion of the line of
credit.
The average daily balances outstanding on the Fund's notes payable during
the six months ended June 30, 1999 and 1998, were $37,972,099 and $16,352,210,
respectively.
(10) STOCK OPTION PLAN
The Equus II Incorporated 1997 Stock Incentive Plan ("Stock Incentive
Plan") authorizes the Fund to issue options to the directors and officers of the
Fund in an aggregate amount of up to 20% of the outstanding shares of common
stock of the Fund.
The Stock Incentive Plan also provides that each director who is not an
officer of the Fund be granted an incentive stock option to purchase 5,000
shares of the Fund's common stock. In addition, annually beginning with the 1998
annual meeting of shareholders, each director who is not an officer of the Fund
is, on the first business day following the annual meeting, granted an incentive
stock option to purchase 2,000 shares of the Fund's common stock.
Under the Stock Incentive Plan, options to purchase 951,131 and 939,131
shares of the Fund's common stock were outstanding at June 30, 1999 and 1998,
respectively. Outstanding options at June 30, 1999 have exercise prices ranging
from $15.56 to $27.44 and expire in May 2007 through May 2009. During the six
months ended June 30, 1999 and 1998, no options were exercised. As of June 30,
1999, all outstanding options, except for the 12,000 options issued to the
non-employee directors in May 1999, were "out of the money" and would have an
anti-dilutive effect on net assets per share if exercised, assuming the fund
would use the proceeds from the exercise of such options to repurchase shares at
the market price pursuant to the treasury stock method. The 12,000 options
issued to non-employee directors are accounted for as variable options and
resulted in $7,500 of compensation expense during the six months ended June 30,
1999. If all options granted had been exercised as of June 30, 1998, there would
have been dilution of net assets per share of approximately $1.86 per share, or
5.9%, as a result of such exercise, using the treasury stock method.
17
<PAGE>
(11) COMMITMENTS AND CONTINGENCIES
The Fund has made a commitment to invest, under certain circumstances, up
to $876,000 in the Drilltec Corporation.
The Fund and certain of the portfolio companies are involved in asserted
claims and have the possibility for unasserted claims which may ultimately
affect the fair value of the Fund's portfolio investments. In the opinion of
Management, the financial position or operating results of the Fund will not be
materially affected by these claims.
(12) SUBSEQUENT EVENTS
Subsequent to June 30, 1999, the Fund repaid a net $62,400,000 of notes
payable to the bank.
On July 26, 1999, the Fund exercised its warrant to buy 125,000 shares of
common stock of Allied Waste Industries, Inc. for $625,000.
In July 1999, the Fund sold its interest in CRC Holdings, Inc. ("CRC") for
total consideration of over $28 million to LG&E Energy Corp (NYSE - LGE). In
addition, the Fund was repaid its $959,700 promissory note due from CRC. The
Fund will receive up to $17 million in cash and stock of LGE by October 31,
1999, of which $11,033,652 in cash and 111,504 shares of LGE common stock valued
at $2,446,398, has been received to date. In addition, the Fund has 104,094
shares of LGE Common Stock which is in escrow to support representations and
warranties made by the Fund in the sale agreement. The Fund is eligible for
additional consideration of approximately $11 million pursuant to an earn-out
agreement that is based on the performance of CRC over its last two and the next
three fiscal years.
18
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, the Fund had $137,638,600 of its assets invested in
portfolio securities of 28 companies, and has committed to invest up to an
additional $876,000 in one portfolio company under certain conditions. Current
temporary cash investments, anticipated future investment income, proceeds from
borrowings and proceeds from the sale of existing portfolio securities are
believed to be sufficient to finance these commitments. At June 30, 1999, the
Fund had $23,350,000 outstanding on a $40,000,000 revolving line of credit loan
from a bank.
Net cash used by operating activities, including interest expense, was
$1,720,898 and $1,638,443 for the six months ended June 30, 1999 and 1998,
respectively.
At June 30, 1999, the Fund had $50,085,008 of its total assets of
$190,033,093 invested in temporary cash investments consisting of money market
securities. This amount includes proceeds of $50,000,000 from a $100,000,000
note payable to a bank that is utilized to enable the Fund to achieve adequate
diversification to maintain its pass-through tax status as a regulated
investment company. Such amount was repaid to the bank on July 1, 1999.
The Fund has the ability to borrow funds and issue forms of senior
securities representing indebtedness or stock, such as preferred stock, subject
to certain restrictions. Net investment income and net realized gains from the
sales of portfolio investments are intended to be distributed at least annually,
to the extent such amounts are not reserved for payment of contingencies or to
make follow-on or new investments. Management believes that the availability
under its line of credit, as well as the ability to sell its investments in
publicly traded securities, are adequate to provide payment for any expenses and
contingencies of the Fund.
The Fund reserves the right to retain net long-term capital gains in
excess of net short-term capital losses for reinvestment or to pay contingencies
and expenses. Such retained amounts, if any, will be taxable to the Fund as
long-term capital gains and stockholders will be able to claim their
proportionate share of the federal income taxes paid by the Fund on such gains
as a credit against their own federal income tax liabilities. Stockholders will
also be entitled to increase the adjusted tax basis of their Fund shares by the
difference between their undistributed capital gains and their tax credit.
RESULTS OF OPERATIONS
INVESTMENT INCOME AND EXPENSE
Net investment loss after all expenses, including interest expense,
amounted to $497,595 and $890,582 for the six months ended June 30, 1999 and
1998, respectively. The decrease in net investment loss in 1999 as compared to
1998 was primarily attributed to the increase in income from portfolio
securities from $1,909,647 in 1998 to $2,497,253 in 1999. Income from portfolio
companies increased due to the increase in the amounts invested in portfolio
securties with a current yield during the six months ended June 30, 1999.
Professional fees decreased to $119,676 during the six months ended June
30, 1999 as compared to $266,762 during 1998, due primarily to lower fees
incurred by the Fund from its transfer agent and safekeeping agent.
19
<PAGE>
Interest expense increased to $1,487,248 in 1999 as compared to $664,678
in 1998, due to the increase of the average daily balances outstanding on the
lines of credit to $37,972,099 during the six months ended June 30, 1999, from
$16,352,210 in 1998.
The Management Company receives management fee compensation at an annual
rate of 2% of the net assets of the Fund, paid quarterly in arrears. Such fees
amounted to $1,113,393 and $1,524,709 during the six months ended June 30, 1999
and 1998, respectively. The decrease was due primarily to a reduction in the
total net assets of the Fund from $152,227,001 at June 30, 1998 to $115,409,738
at June 30, 1999.
REALIZED GAINS AND LOSSES ON SALES OF PORTFOLIO SECURITIES
During the six months ended June 30, 1999, the Fund realized net capital
gains of $18,882,686 from the sale of securities of six Portfolio Companies. The
Fund sold its investment of 54,334 shares of common stock in United Rentals,
Inc. for $1,738,036, realizing a capital gain of $1,737,639, 135,472 common
shares of United States Filter Corporation ("US Filter") for $3,884,978,
realizing a capital gain of $2,324,700, 100,000 shares of Allied Waste
Industries, Inc. common stock for $1,832,122 realizing a capital gain of
$1,357,966, 1,125,000 shares of American Residential Services, Inc. for
$6,468,750 realizing a capital gain of $3,468,478, 149,337 shares of Travis
International, Inc. for $6,668,987, realizing a capital gain of $6,114,095 and
its investment in HTD Corporation for $12,760,806, realizing a capital gain of
$3,225,238. In addition, the Fund realized a capital gain due to the receipt of
$654,570 in additional compensation from the escrow account related to the 1998
sale of WMW Industries, Inc.
During the six months ended June 30, 1998, the Fund realized net capital
gains of $4,494,379 from the sale of securities of five Portfolio Companies. The
Fund sold 143,112 shares of Coach USA, Inc. common stock for $6,620,305,
realizing a capital gain of $4,756,947 and 32,128 shares of US Filter common
stock for $1,059,464 realizing a capital gain of $679,112. In addition, the Fund
realized a capital gain due to the receipt of $6,825 in additional compensation
from the escrow account related to the 1997 sale of Cardiovascular Ventures,
Inc.
UNREALIZED APPRECIATION AND DEPRECIATION OF PORTFOLIO SECURITIES
Net unrealized appreciation on investments decreased $19,137,881 during
the six months ended June 30, 1999, from $44,311,697 to $25,173,816. Such net
decrease resulted from decreases in the estimated fair value of securities of
eight of the Fund's Portfolio Companies aggregating $10,822,988, an increase in
the estimated fair value of securities of four Portfolio Companies of
$4,236,296, and the transfer of $12,551,189 in net unrealized appreciation to
net realized gains from the sale of investments in six Portfolio Companies.
Net unrealized appreciation on investments increased $4,152,452 during the
six months ended June 30, 1998, from $65,893,353 to $70,045,805. Such net
increase resulted from increases in the estimated fair value of securities of
twelve of the Fund's portfolio companies aggregating $16,740,448, a decrease in
the estimated fair value of securities of five portfolio companies of $9,800,930
and the transfer of $2,787,066 in net unrealized appreciation to net realized
gains from the sale of investments in one Company.
DIVIDENDS
The Fund declared no dividends during the six months ended June 30, 1999
and 1998.
20
<PAGE>
PORTFOLIO INVESTMENTS
During the six months ended June 30, 1999, the Fund invested $12,900,000
in three new companies and made follow-on investments of $5,811,725 in ten
portfolio companies. These follow-on investments include $703,797 in accrued
interest and dividends received in the form of additional portfolio securities
and accretion of original issue discount on a promissory note.
On January 29, 1999, Brazos Sportswear, Inc. filed voluntary petitions
under Chapter 11 of the Bankruptcy Code. The Fund's investment in Brazos
Sportswear, Inc. was written off as of December 31, 1998.
In February 1999, co-investors in Equicom, Inc. ("Equicom") purchased
48,000 shares of Equicom's common stock at its original cost of $15,000 from the
Fund. Co-investors in Equicom also purchased $1,043,500 of the $2,682,000 in
principal in its 10% promissory note due to the Fund. The Fund then invested
$1,048,310 in Equicom and received 104,831 shares of preferred stock.
In February 1999, the Fund invested $2,000,000 in CDI Rental Services,
Inc., a company primarily focused on acquiring existing construction equipment
rental businesses. The Fund's investment consisted of a 10% senior subordinated
promissory note and warrants to buy up to 12,500 and 21,250 shares of common
stock for $0.01 and $0.0127 per share, respectively, through February 2009.
In March 1999, OEI International, Inc. ("OEI") merged into Petrocon
Engineering, Inc. ("Petrocon"). The Fund exchanged its investment in OEI of
$2,500,000 in a promissory note and accrued interest of $159,332, its investment
in Petrocon of $2,500,000 in a promissory note and accrued interest of $163,356,
warrants to purchase 1,000,000 common shares of Petrocon and $2,000,000 in a
cash advance for a 12% senior subordinated note from Petrocon in the amount of
$4,663,356, $2,659,332 in an 8% series B junior subordinated note and warrants
to purchase 1,552,571 shares of Petrocon common stock. The Fund also exchanged
its investment in 566,201 common shares of OEI for 887,338 shares of Petrocon
common stock.
In March 1999, the Fund acquired 499 common shares of Champion Window,
Inc. ("Champion") for $499. Champion was formed to acquire the assets of a
company that manufactures aluminum windows for residential use. In May 1999,
such acquisition was completed and the Fund acquired 1,399,501 shares of common
stock and 20,000 shares of preferred stock of Champion for $1,399,501 and
$2,000,000 respectively. In addition, the Fund advanced $3,500,000 to Champion
in exchange for a 12% subordinated promissory note.
In March 1999, the Fund received 5,172 in additional common shares of U.S.
Filter related to a purchase price adjustment from the 1998 sale of WMW
Industries, Inc. to U.S. Filter. The transaction with U.S. Filter in 1998 was a
tax-free exchange; therefore the Fund did not realize a capital gain from the
receipt of these additional common shares. In June 1999, US Filter released
$654,570 of additional escrow to the fund which was received by the Fund in July
1999. Such amount was recorded as a capital gain upon release by US Filter.
In the first quarter of 1999, the Fund acquired 6,000 shares of series B
8% preferred stock from Hot & Cool Holdings, Inc. for $300,000. During the
second quarter of 1999, The Fund advanced $500,000 to Hot & Cool Holdings, Inc.
in exchange for a 12% subordinated promissory note.
In April 1999, the Fund sold its interest in American Residential
Services, Inc. ("ARS"), to The ServiceMaster Company ("SVM") and in conjunction
with such sale, the Fund's warrants to buy 100,000 shares of ARS for $15 per
share were converted into warrants to buy 29,411 shares of SVM for $51 per
21
<PAGE>
share through September 2001.
During the quarter ended March 31, 1999, the Fund advanced $655,769 to
Tulsa Industries, Inc. pursuant to a 8.75% junior participation in a promissory
note.
Through June 30, the Fund received an additional 2,714 and 610 shares of
preferred stock of Container Acquisition, Inc. and Sovereign Business Forms,
Inc. in payment of $271,400 and $61,000 in dividends, respectively.
In May 1999, the Fund acquired 3,167,756 shares of Turfgrass America, Inc.
("Turfgrass") common stock for $600,000 and advanced $3,400,000 in exchange for
a 12% subordinated promissory note, with a face value at maturity of $4,000,000
from Turfgrass. Turfgrass grows, sells and installs warm season turfgrasses,
commonly referred to as "sod", for residential, commercial and sports
applications.
During the six months ended June 30, 1999, the original issue discount
accretion for the discounted $2,025,000 non-interest bearing note due from HTD
Corporation ("HTD") amounted to $33,037. Such original issue discount was being
accreted over the life of the note, but the remaining balance was recognized as
a capital gain during the second quarter as a result of the sale of HTD and
payment on the note.
Of the companies in which the Fund has investments at June 30, 1999, only
AW, DYPR, GRDG, NCS, PLS, and RTEL are publicly held. The others each have a
small number of shareholders and do not generally make financial information
available to the public. However, each company's operations and financial
information are reviewed by Management to determine the proper valuation of the
Fund's investment.
YEAR 2000
Many computer software systems in use today cannot properly process
date-related information from and after January 1, 2000. Should any of the
computer systems employed by the Management Company, any of the Fund's other
major service providers, or companies in which the Fund has an investment, fail
to process this type of information properly, that could have a negative impact
on the Fund's operations and the services provided to the Fund's stockholders.
The Management Company has identified its computer systems to be replaced
and modified for Year 2000 compliance with installation anticipated to be
completed by September 30, 1999. In addition, the Fund has made inquiries of its
major service providers as well as its Portfolio Companies to determine if they
are in the process of reviewing their systems for Year 2000 compliance. The Fund
has received assurances from all of its major service providers that they are
preparing for Year 2000. The Fund has received assurances from a majority of its
Portfolio Companies, representing approximately 87% of the Fund's total value in
portfolio securities at June 30, 1999, and is continuing its process of
obtaining assurances from the remaining Portfolio Companies. While the Fund has
received assurances from major services providers and a majority of the
Portfolio Companies regarding Year 2000 compliance, there can be no guarantee
that Year 2000 problems originating from these third parties, whose systems
affect the Fund, will not occur. The Fund does not expect to incur any expenses
related to Year 2000 issues, as such costs are primarily the responsibility of
the Management Company. The Fund will develop a contingency plan if significant
risks related to Year 2000 are identified.
SUBSEQUENT EVENTS
Subsequent to June 30, 1999, the Fund repaid a net $62,400,000 of notes
payable to the bank.
22
<PAGE>
On July 26, 1999, the Fund exercised its warrant to buy 125,000 shares of
common stock of Allied Waste Industries, Inc. for $625,000.
In July 1999, the Fund sold its interest in CRC Holdings, Inc. ("CRC") for
consideration of over $28 million to LG&E Energy Corp (NYSE - LGE). In addition,
the Fund was repaid its $959,700 promissory note due from CRC. The Fund will
receive up to $17 million in cash and stock of LGE by October 31, 1999, of which
$11,033,652 in cash and 111,504 shares of LGE common stock valued at $2,446,398,
has been received to date. In addition, the Fund has 104,094 shares of LGE
common stock which is being held in escrow to support representations and
warranties made by the Fund in the sale agreement. The Fund is eligible for
additional consideration of approximately $11 million pursuant to an earn-out
agreement that is based on the performance of CRC over its last two and the next
three fiscal years.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
There have been no material changes in the disclosure set forth in Item 7A
of the Funds Annual Report on Form 10-K for fiscal year ended December 31, 1998.
PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Fund held its annual meeting of shareholders on May 6, 1999. At the
meeting, shareholders voted on the election of the persons named in the Proxy
Statement as Directors of the Fund for the terms described therein and the
ratification of the selection of Arthur Andersen LLP as the Fund's independent
auditors for the fiscal year ending December 31, 1999.
The table set forth below shows, with respect to each nominee, the number
of shares voted for such nominee and shares for which authority was withheld:
NAME OF NOMINEE FOR WITHHELD
---------------------- --------- --------
Sam P. Douglass 3,624,529 79,302
Gregory J. Flanagan 3,625,904 77,927
Robert L. Knauss 3,611,098 92,733
Nolan Lehmann 3,625,596 78,235
Gary R. Petersen 3,626,904 76,927
John W. Storms 3,625,904 77,927
Dr. Francis D. Tuggle 3,625,552 77,068
Dr. Edward E. Williams 3,626,763 77,068
The table below sets forth, as to the other matter voted upon, the number
of shares voted for the proposal, against the proposal and shares that
abstained.
PROPOSAL FOR AGAINST ABSTAIN
------------------------ --------- ------- -------
Ratification of auditors 3,651,444 26,442 25,945
All nominees to the Registrant's Board of Directors were elected and the
Fund's selection of
23
<PAGE>
independent auditors was ratified.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
10. Material Contracts
Second Amendment and Restated Loan Agreement by and between
Equus II Incorporated and Nations Bank, N.A., d/b/a Bank of Am.,
N.A dated June 1, 1999............................................25
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Fund during the period for
which this report is filed.
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has caused this report to be signed by the
undersigned, thereunto duly authorized.
EQUUS II INCORPORATED
/S/ NOLAN LEHMANN
--------------------------------------
Nolan Lehmann
President and Principal Financial
Date: August 11, 1999 and Accounting Officer
24
<PAGE>
EXHIBIT 10
SECOND AMENDED AND RESTATED LOAN AGREEMENT
BY AND BETWEEN
EQUUS II INCORPORATED
("Borrower")
and
NATIONSBANK, N.A., d/b/a BANK OF AMERICA, N.A.
("Lender")
Dated as of the 1st day of June, 1999
<PAGE>
AMENDED AND RESTATED LOAN AGREEMENT
TABLE OF CONTENTS
CAPTION PAGE
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Section 1. General Terms....................................................1
1.1 INDEBTEDNESS.....................................................1
1.2 CERTAIN DEFINITIONS; USE OF DEFINED TERMS; ACCOUNTING TERMS;
SINGULAR OR PLURAL...............................................1
1.3 REVOLVING FACILITY A.............................................8
1.4 REVOLVING FACILITY B............................................12
1.5 FACILITY C......................................................13
1.6 REPAYMENT SCHEDULE..............................................13
1.7 PREPAYMENT......................................................14
Section 2. Representations and Warranties..................................14
2.1 CORPORATE EXISTENCE.............................................14
2.2 CORPORATE AUTHORITY.............................................14
2.3 FINANCIAL CONDITION.............................................15
2.4 INVESTMENTS, LOANS, ADVANCES AND GUARANTEES.....................15
2.5 LIABILITIES AND LITIGATION......................................15
2.6 NO DEFAULT......................................................16
2.7 TAXES...........................................................16
2.8 COMPLIANCE......................................................16
2.9 PENSION REFORM ACT..............................................16
2.10 ENVIRONMENTAL LAWS..............................................16
2.11 FULL DISCLOSURE.................................................17
2.12 CREDIT AGREEMENTS...............................................17
2.13 INVESTMENT COMPANY ACT..........................................17
2.14 PUBLIC UTILITY HOLDING COMPANY ACT..............................17
Section 3. Affirmative Covenants...........................................18
3.1 REPORTING REQUIREMENTS..........................................18
3.2 TAXES AND OTHER LIENS...........................................19
3.3 MAINTENANCE.....................................................20
3.4 FURTHER ASSURANCES..............................................20
3.5 PERFORMANCE OF OBLIGATIONS......................................20
3.6 REIMBURSEMENT OF COSTS AND EXPENSES.............................20
3.7 CERTIFICATE OF COMPLIANCE.......................................21
3.8 LITIGATION......................................................21
3.9 SECURITY........................................................21
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3.10 BORROWING BASE..................................................22
Section 4. Negative Covenants..............................................24
4.1 GUARANTEES AND DEBTS............................................24
4.2 DIVIDENDS AND REDEMPTION........................................24
4.3 MERGERS, ETC....................................................24
4.4 ENCUMBRANCES....................................................24
4.5 SALE OF ASSETS..................................................25
4.6 TRANSACTIONS WITH AFFILIATES....................................25
4.7 VALUATION PROCEDURES............................................25
Section 5. Events of Default and Remedies..................................25
5.1 EVENTS OF DEFAULT...............................................25
5.2 REMEDIES........................................................27
Section 6. Closing.........................................................27
6.1 COUNSEL TO LENDER...............................................27
6.2 REQUIRED DOCUMENTS..............................................27
6.3 OTHER CONDITIONS................................................27
Section 7. Miscellaneous...................................................27
7.1 SURVIVAL OF VARIOUS MATTERS.....................................27
7.2 NOTICES.........................................................28
7.3 SUCCESSORS AND ASSIGNS..........................................29
7.4 RENEWALS........................................................29
7.5 NO WAIVER.......................................................29
7.6 GOVERNING LAW...................................................29
7.7 NON-SUBORDINATION...............................................29
7.8 EXHIBITS........................................................29
7.9 PAYMENT ON NON-BUSINESS DAYS....................................30
7.10 SEVERABILITY....................................................30
7.11 CONTROLLING DOCUMENT............................................30
7.12 SAVINGS CLAUSE..................................................30
7.13 INVESTMENT......................................................30
7.14 SET OFF.........................................................31
7.15 INDEMNITY.......................................................31
7.16 ARBITRATION.....................................................31
7.17 CHANGE OF ADVISORS..............................................31
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CAPTION PAGE
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7.18 WAIVER OF JURY TRIAL, ETC.......................................31
Exhibits
"1.3.1" Borrowing Application
"1.3.2" Form of Revolving Note-A
"1.4" Form of Revolving Note-B
"1.5" Form of Facility C Note
"2.4" Portfolio Investment Summary
"3.7" Certificate of Compliance
"3.10" Borrowing Base Report
"6.2" Closing Requirements
"7.16" Arbitration Program
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SECOND AMENDED AND RESTATED LOAN AGREEMENT
THIS SECOND AMENDED AND RESTATED LOAN AGREEMENT made and entered into as
of the 1st day of June, 1999 by and between EQUUS II Incorporated, a Delaware
corporation, with offices and place of business at 2929 Allen Parkway, Suite
2500, Houston, Texas 77019 (hereinafter called "Borrower"), and NATIONSBANK,
N.A., d/b/a BANK OF AMERICA, N.A., a national banking association, with offices
at 700 Louisiana, Houston, Texas 77002 (hereinafter called "Lender").
AGREEMENT
Whereas, on March 18, 1996, Borrower and Lender executed that certain Loan
Agreement ("Original Loan Agreement");
Whereas, on March 29, 1996, Borrower and Lender executed that certain
Amended and Restated Loan Agreement ("Prior Loan Agreement") to amend and
restate said Original Loan Agreement to provide for an additional credit
facility;
Whereas, Borrower and Lender agree that upon the execution of this Second
Amended and Restated Loan Agreement, its terms shall govern and control the
transactions contemplated hereby and the Original Loan Agreement and the Prior
Loan Agreement shall be superseded with respect to such transactions after the
date hereof;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, Borrower and Lender agree as follows:
SECTION 1. GENERAL TERMS
1.1 INDEBTEDNESS. Upon the terms and conditions hereinafter set forth, the
Lender agrees to lend to and/or issue letters of credit for the account of
Borrower in an aggregate of up to $15,000,000.00 outstanding at any time as
evidenced by Revolving Facility A to be extended to the Borrower by the Lender
as more specifically described in Section 1.3, $25,000,000.00 outstanding at any
time as evidenced by Revolving Facility B to be extended to the Borrower by the
Lender as more specifically described in Section 1.4, and $100,000,000.00
outstanding at any time as evidenced by Facility C to be extended to the
Borrower by the Lender as more specifically described in Section 1.5.
1.2 CERTAIN DEFINITIONS; USE OF DEFINED TERMS; ACCOUNTING TERMS; SINGULAR
OR PLURAL. (a) As used herein:
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(1) "Affiliate" shall mean with respect to any Person any
other Person directly or indirectly controlling, controlled by or
under common control with, such Person.
(2) "Agreement" shall mean this Second Amended and Restated Loan
Agreement as it may be amended or supplemented from time to time.
(3) "Borrowing Base A" shall mean the borrowing base as calculated
pursuant to Section 3.10(a).
(4) "Borrowing Base B" shall mean the borrowing base as calculated
pursuant to Section 3.10(b).
(5) "Borrowing Base Report" shall mean the report in the form set
forth in Exhibit "3.10."
(6) "Business Day" shall mean any weekday on which Lender is open
for business.
(7) "Cash Collateral Account" shall mean Account No. 266-521-2337
with Lender or such other account as Borrower and Lender designate in
writing.
(8) "Cash Collateral Account Rate" shall mean the actual rate of
return on the assets maintained in the Cash Collateral Account securing
the advances pursuant to Facility C.
(9) "Certificate of Compliance" shall mean the certificate described
in Section 3.7 of this Agreement.
(10) "Collateral" shall mean the property described in Section 3.9
of this Agreement, securing payment of the Indebtedness and performance of
the Obligations.
(11) "Commitment Fee" means fees payable by Borrower to Lender on
the average daily unused portion of the Revolving Facility A and Revolving
Facility B from and including the date of this Agreement to the Maturity
Date, at the rate of one-quarter of one percent (1/4%) per annum based on
a 365 or 366 day year as applicable and the actual number of days elapsed,
payable on the last day of each March, June, September and December,
commencing on June 30, 1999. For purposes of calculation of the Commitment
Fee the unused portion of the Revolving Facility A on any day will be
equal to the amount of the Revolving Facility A on such day less the
aggregate amount of Loans outstanding
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under Revolving Facility A and the undrawn amount of all Credits on such
date. For the purposes of calculation of the Commitment Fee, the unused
portion of Revolving Facility B on any day will equal the amount of
Revolving Facility B on such day less the amount of Loans outstanding
under Revolving Facility B on such date.
(12) "Commitment Fee-Facility C" shall mean a fee in the amount of
$10,000.00, payable upon execution of this Agreement.
(13) "Credit" means any irrevocable standby or documentary letter of
credit issued by Lender for Borrower's account which shall have an expiry
date of not later than 5:00 p.m. Houston, Texas time on the LOC Expiration
Date, and shall be in a form acceptable to Lender.
(14) "Credit Facility" shall mean the credit facilities described in
Section 1.3 and Section 1.4, the Revolving Facility A and Revolving
Facility B, respectively.
(15) "Credit Facility Commitment Period" means the period from the
date of the satisfaction of all the closing conditions in this Agreement
until the Maturity Date.
(16) "Credit Fees" means with respect to each Credit a per annum fee
of one and one-half percent (1.5%) of the face amount of such Credit;
provided, however, that the minimum fee per Credit shall not be less than
$500; provided, further, that all Credit Fees shall be due and payable at
the time of the issuance of each Credit and shall be fully earned and
non-refundable when paid.
(17) "Current Fair Market Value" means for any day (i) with respect
to any Eligible Public Security which is listed or admitted to trading on
one or more domestic stock exchanges the average of the last sales prices
on the preceding day on all domestic stock exchanges on which such
Eligible Public Security is then listed or admitted to trading or if no
sale took place on such preceding day on any such exchange, the average of
the closing bid and asked prices on such day as officially quoted on such
exchanges, (ii) with respect to any Eligible Public Security which is not
then listed or admitted to trading on any domestic stock exchange, the
average of the reported bid and asked prices on the preceding day in the
over-the-counter market, as furnished by the National Quotation Bureau,
Inc. or, if such firm is not engaged at the time in the business of
reporting such prices, as furnished by any similar firm then engaged in
such business and selected by Borrower and acceptable to Lender or if
there is no such firm, as furnished by any reputable member of the
National Association of Securities Dealers, Inc. selected by Borrower and
acceptable to Lender and (iii) with respect to any Eligible Other
Securities, the value of such securities determined by or on behalf of
Borrower in good faith and consistent with the calculation of such values
for
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purposes of the calculation of Net Asset Value discounted in accordance
with Borrower's valuation methodology.
(18) "Custody Account" means that certain custody account of
Borrower with Lender (Account #3004400-0074724) in which the Portfolio
Investments of Borrower shall be maintained in accordance with the terms
of this Agreement and the Security Instruments. Borrower shall pay Lender
an annual fee of $10,000 to defray costs of such account ("Custody Account
Fee"), payable in advance on March 18th of each year this Agreement is in
effect, with the next payment due March 18, 2000.
(19) "Debt" shall mean with respect to any Person all items of
indebtedness, obligation or liability, whether matured or unmatured,
liquidated or unliquidated, direct or contingent, joint or several,
including, but without limitation:
(a) All indebtedness guaranteed, directly or indirectly, in
any manner, or endorsed (other than for collection or deposit in the
ordinary course of business) or discounted with recourse;
(b) All indebtedness in effect guaranteed, directly or
indirectly, through agreements, contingent or otherwise: (1) to
purchase such indebtedness; or (2) to purchase, sell or lease (as
lessee) property, products, materials or supplies or to purchase or
sell services, primarily for the purpose of enabling the obligor to
make payment of such indebtedness or to assure the owner of the
indebtedness against loss; or (3) to supply funds to or in any other
manner invest in the obligor; and
(c) All indebtedness secured by (or for which the holder of
such indebtedness has an existing right, contingent or otherwise, to
be secured by) any mortgage, deed of trust, pledge, lien, security
interest or other charge or encumbrance upon property owned or
acquired subject to such mortgage, deed of trust, pledge, lien,
security interest, charge or encumbrance, whether or not the
liabilities secured thereby have been assumed.
(20) "Default" shall mean an event which with the giving of notice,
the lapse of time, or both, constitutes an Event of Default.
(21) "Defined Benefit Pension Plan," shall have the same meaning as
is given to that term in ERISA.
(22) "Eligible Other Securities" shall mean the aggregate of all
Portfolio Investments owned by Borrower other than (i) Eligible Public
Securities and (ii) Portfolio
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Investments which are debt securities which are more than 90 days past due
as a result of a payment default unless Lender approves in writing the
inclusion of such debt securities as "Eligible Other Securities."
(23) "Eligible Public Securities" shall mean the aggregate of all
publicly traded Portfolio Investments owned by Borrower that can be sold
by Borrower either without restriction or pursuant to Rule 144 within
twelve (12) months of the date in question.
(24) "ERISA" means the Employee Retirement Income Security Act of
1974, as the same may be amended from time to time.
(25) "Eurodollar Daily Floating Rate" shall mean on any day the
fluctuating rate of interest equal to the one-month London Interbank
Offered Rate as published in the "Money Rates" section of the Wall Street
Journal on the immediately preceding Business Day, as adjusted from time
to time in Lender's sole discretion for then applicable reserve
requirements, deposits insurance assessment rates and other regulatory
costs. Interest will accrue on any day which is not a Business Day at the
rate in effect on the immediately preceding Business Day. If no such
quotes are generally available for such amount, then the Lender shall be
entitled to determine the Eurodollar Daily Floating Rate by estimating in
its reasonable judgment the per annum rate (as described above) that would
be applicable if such quotes were generally available.
(26) "Event of Default" shall mean any event specified in Section 5
of this Agreement provided that any requirement for the giving of notice,
the lapse of time, or the happening of any condition, event or act has
been satisfied.
(27) "Excluded Portfolio Investments" shall mean at any time all
notes receivable, common and preferred stocks, options, warrants and other
investment property, instruments, chattel paper and general intangibles
owned by Borrower which, at such time, are designated as `Excluded
Portfolio Investments' pursuant to Section 3.10(e) of this Agreement.
(28) "Facility C" shall mean the credit facility more fully
described in Section 1.5.
(29) Facility C Note" shall mean that certain promissory note in the
maximum principal amount of $100,000,000 issued pursuant to Section 1.5 of
this Agreement in the form attached as Exhibit "1.5."
(30) "Financial Statements" shall mean the audit report, annual
financial statements, and interim statements described or referred to in
Section 3.1 of this Agreement.
(31) "Funded Debt" shall mean with respect to any Person all items
of indebtedness for borrowed money.
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(32) "Indebtedness" shall mean all sums owed or to be owed by the
Borrower to Lender pursuant to this Agreement whether principal or
interest, including principal and interest on the Notes, reimbursement of
advances pursuant to any Credit, and reimbursement of monies advanced by
Lender pursuant to Section 3.6 hereof.
(33) "Investment" shall mean an investment in the debt or equity of
any Person.
(34) "Letter of Credit Request" means a standby or documentary
letter of credit application in the form prescribed by Lender, with all
the blanks appropriately completed, and showing Borrower as the account
party.
(35) "Lipper Report" shall mean the report of closed end fund
distributions, Net Asset Value and market price information which Borrower
provides from time to time to Lipper Analytical Services, Inc.
(36) "Loan" shall mean any advance pursuant to the Credit Facility.
(37) "LOC Expiration Date" means April 2, 2002.
(38) "Maturity Date" means June 1, 2000.
(39) "Net Asset Value" shall mean all assets of Borrower (other than
Excluded Portfolio Investments), less all liabilities of Borrower which,
in accordance with generally accepted accounting principles, would be
required to be reflected on a balance sheet of Borrower.
(40) "Notes" shall mean the Revolving Notes and the Facility C Note.
(41) "Obligations" means all present and future obligations, duties,
and liabilities, now or hereafter owed to Lender by Borrower, arising from
or pursuant to the Revolving Notes, this Agreement or any of the Security
Instruments, together with all interest accruing thereon and costs,
expenses, and attorneys' fees incurred in the enforcement thereof or
collection of amounts due thereunder.
(42) "Permitted Encumbrances" shall mean the encumbrances and liens
allowed pursuant to Section 4.4.
(43) "Person" shall mean any individual, corporation, partnership,
association, joint-stock company, trust, unincorporated organization,
joint venture, court, government or political subdivision or agency
thereof.
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(44) "Portfolio Investments" shall mean all notes receivable, common
and preferred stock, options, warrants, and other investment property,
instruments, chattel paper and general intangibles owned by Borrower from
time to time and included in the Borrower's computation of Net Asset
Value. The Portfolio Investments include, but are not limited to, (i) all
publicly traded securities sold or issued by the companies listed on
EXHIBIT 2.4 to this Agreement owned by the Borrower and pledged to the
Lender, including all income from, and all proceeds of, such securities
and (ii) all of the privately held securities issued or sold by the
companies listed on EXHIBIT 2.4 to this Agreement owned by the Borrower
and pledged to the Lender, including all income from, and all proceeds of,
such securities.
(45) "Portfolio Lender" shall mean at any date, any Person who, at
such date, is making, or proposes to make, one or more loans to or
investments in a Person or Persons which have issued, or propose to issue,
directly or indirectly, to Borrower one or more notes receivable, common
or preferred stock, options, warrants or other investment property
instruments, chattel paper or general intangibles.
(46) "Portfolio Valuation Summary" shall mean at any date an
evaluation of the Borrower's Portfolio Investments as of such date,
including both Eligible Public Securities and Eligible Other Securities.
(47) "Prime Rate" shall mean the variable rate of interest announced
by Lender from time to time as its prime rate of interest and, without
notice to the Borrower or any other person, such rate of interest shall
change as and when changes in that prime rate of interest are announced.
The prime rate is set by Lender as a general reference rate of interest,
taking into account such factors as Lender may deem appropriate, it being
understood that many of the Lender's commercial or other loans are priced
in relation to such rate, that it is not necessarily the lowest or best
rate of interest actually charged on any loan, and that Lender may make
various commercial or other loans at rates of interest having no
relationship to the prime rate. If at any time the "prime rate" of Lender
is no longer available, the owner of the Note ("Owner") will designate as
"Prime Rate" a different variable rate of interest announced by a national
banking association of Owner's choice.
(48) "Prior Financial Statements" shall mean the audited financial
statements for the Borrower for the period ended December 31, 1998, and as
at such dates.
(49) "Revolving Facility A" shall mean the revolving line of credit
pursuant to Section 1.3.
(50) "Revolving Facility B" shall mean the revolving line of credit
pursuant to Section 1.4.
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(51) "Revolving Notes" shall mean the promissory notes of the
Borrower (i) in the original principal amount of $15,000,000.00 issued
pursuant to Section 1.3 of this Agreement in the form attached as Exhibit
"1.3.2" to this Agreement ("Revolving Note-A"), and (ii) in the original
principal amount of $25,000,000.00 issued pursuant to Section 1.4 of this
Agreement in the form attached as Exhibit "1.4" to this Agreement
("Revolving Note- B").
(52) "Security Agreements" shall mean the Security Agreement Pledge,
the Security Agreement - Pledge (Facility C), and any other security
agreements of the Borrower granting Lender a security interest in the
Collateral described in Section 3.9.
(53) "Security Instruments" shall mean the instruments described or
referred to in Section 3.9 of this Agreement, including but not limited to
the Security Agreements and any and all instruments now or hereafter
executed as security for the Notes.
(b) All terms defined in this Agreement shall have the meanings defined
herein when used in any note, certificate, report, or other document made or
delivered pursuant to this Agreement, unless the context specifically requires
otherwise. All accounting terms not specifically defined herein shall be
construed in accordance with generally accepted accounting principles.
(c) Terms in the singular shall include the plural and those in the plural
shall include the singular unless the context shall otherwise require.
1.3 REVOLVING FACILITY A. The Lender, during the period from the date of
this Agreement until the Maturity Date, subject to the terms and conditions of
this Agreement, and subject to the condition that at the time of each borrowing
and the issuance of each Credit hereunder no Default or Event of Default has
occurred and is then continuing and that the representations and warranties
given by the Borrower in Section 2 as of the date of this Agreement shall remain
true and correct in all material respects (except for representations and
warranties (i) which are made as of a particular date or (ii) as to which the
facts which gave rise to the representation or warranty have changed as a result
of circumstances or transactions which are contemplated or permitted pursuant to
this Agreement):
(a) agrees to make Loans to Borrower pursuant to a revolving
line of credit up to but not in excess of an aggregate principal
amount outstanding at any time of $15,000,000.00, provided the
aggregate amount of Loans outstanding pursuant to this Section 1.3,
when combined with the amount of outstanding Credits, shall not
exceed Borrowing Base A. Borrower shall make written request for
each Loan pursuant to Revolving Facility A pursuant to a loan
request in substantially the form of Exhibit "1.3.1" attached
hereto. If Borrower's written request therefor is received by 1:00
p.m., Lender shall make each such Loan available to Borrower on the
same Business Day Lender receives such request. If Borrower's loan
request
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with respect to any such Loan is received after 1:00 p.m., Lender
may defer the making of such Loan to the next Business Day. Each
Loan shall be in an amount of not less than $100,000.
(b) (1) agrees to open one or more Credits during the Credit
Facility Commitment Period for Borrower's account, provided the
maximum amount of Credits outstanding at any time shall not exceed
$6,000,000. Borrower shall submit to Lender a Letter of Credit
Request with respect to each Credit to be opened by Lender, in
accordance with the terms hereof and the other letter of credit
agreements in effect, if any. Lender at its option may accept
telecopy requests for the issuance of Credits, provided that such
acceptance shall not constitute a waiver of Lender's right to
require delivery of a written Letter of Credit Request in connection
with the issuance of a Credit. If Lender receives a request for a
Credit issuance under the Revolving Facility A satisfying the
conditions thereof prior to 10:00 a.m. Houston, Texas time on a
Business Day, Lender shall use reasonable efforts to issue such
Credit prior to 5:00 p.m. Houston, Texas time on the next Business
Day, otherwise Lender shall issue such Credit before 5:00 p.m. on
the second Business Day following submission of the request
(provided that the other conditions of the Revolving Facility A have
been satisfied). No Credit shall be issued (i) for a period ending
after the LOC Expiration Date or (ii) after the expiration of the
Credit Facility Commitment Period. Borrower will be required to pay
to Lender a Credit Fee for the issuance of each Credit. Each Credit
shall be issued on substantially the terms as Borrower may request
and such Letter of Credit Request must be in the form and substance
satisfactory to Lender. The sum of the outstanding face amount of
all Credits when added to the sum of the outstanding Loans pursuant
to Section 1.3 shall not exceed Borrowing Base A.
(2) Additional Agreements Regarding Credits:
(i) Prior to the earlier to occur of the occurrence of an
Event of Default or the end of the Credit Facility Commitment
Period, if Borrower does not provide Lender with funds in the amount
and on the date necessary to settle Lender's obligations under any
draft drawn or demand made under any outstanding Credit, Lender may,
in Lender's sole discretion, make, and Borrower shall accept, a Loan
under the Revolving Facility A in the amount necessary to settle
Lender's obligations under such draft or demand, such Loan to be
made as of the date such draft or demand is honored by the Bank.
Borrower's obligations and indebtedness to Lender pursuant to such
Loans shall be evidenced by the Revolving Note A and this Agreement.
(ii) At the end of the Credit Facility Commitment Period,
and upon the occurrence and during the continuance of an Event of
Default, if one or
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more Credits are then outstanding, Borrower agrees (1) to deposit in
a cash collateral account opened by Lender at its principal office
in Houston, Texas an amount equal to the aggregate undrawn amount of
all such Credits, and (2) to the extent Borrower has not deposited
funds pursuant to Clause (1) above with respect to such Credits to
reimburse Lender by paying to Lender in immediately available funds
(which amounts Lender may draw from such cash collateral account) at
Lender's principal office in Houston, Texas, upon its demand, the
amount necessary to settle Lender's obligations under any draft
drawn or demand made under a Credit issued by Lender which has not
been paid by the proceeds of Loans made pursuant to the immediately
preceding paragraph hereof. Borrower's obligations and indebtedness
to Lender pursuant to such draws or demands made on any Credit shall
be evidenced by this Agreement, the Letter of Credit Requests and
the other letter of credit agreements relating to the subject
Credit. After the expiry date of a Credit and after the Obligations
related thereto are paid in full, Lender shall release the portion
of cash collateral in excess of the undrawn amount of the remaining
outstanding Credits for the account of Borrower.
(iii) Borrower agrees that (1) Lender shall not be
responsible or liable for, and Borrower's obligation to reimburse
Lender for any payment made by Lender under such Credit shall not be
affected by (x) the validity, enforceability or genuineness of any
draft or other document (or endorsement thereof) if such is proven
to be invalid, unenforceable, fraudulent or forged, or (y) any
dispute between Borrower and the beneficiary under such Credit, and
(2) any action taken or omitted to be taken by Lender in connection
with such Credit, if taken with reasonable care, shall be binding
upon Borrower and shall not create any liability for Lender to
Borrower.
(iv) In case of any conflict between the terms of any
Letter of Credit Request or other letter of credit agreement and the
terms of this Agreement, the terms of this Agreement shall control.
Any additional provisions of each Letter of Credit Request and other
letter of credit agreement shall be cumulative and in addition to
the terms of this Agreement.
(v) Neither Lender nor any of Lender's correspondents
shall be responsible for: (1) the failure of any draft to bear any
reference or adequate reference to any Credit, or the failure of any
other Person to surrender or to take up any Credit or the failure of
any other Person to note the amount of any instrument on any Credit,
(2) errors, omissions, interruptions, or delays in transmission or
delivery of any messages, in person, by mail, cable, telegraph,
wireless or otherwise whether or not they may be in cipher, (3) any
use which may be made of any Credit or any acts or omissions of the
beneficiary thereof in connection therewith, or (4) the validity or
genuineness of documents, or any endorsement(s) thereon, even if
such
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document should in fact prove to be in any and all respects invalid,
insufficient, fraudulent or forged, provided that none of the
foregoing shall relieve the Lender or any of its correspondents from
liability for review of documents submitted for conformity with the
requirements of a Credit. Lender shall not be responsible for any
act, error, neglect, default, omission, insolvency, or failure in
business of any of its correspondents (including without limitation
negligent acts and omissions, but expressly excluding gross
negligence and willful misconduct), and the happening of any one or
more of the contingencies referred to in this sentence or the
preceding sentence shall not affect, impair, or prevent the vesting
of any of Lender's rights or powers under the Revolving Notes, this
Agreement and the Security Instruments. Lender and/or any of its
correspondents may receive, accept, or pay as complying with the
terms of any Credit, any drafts or other documents, otherwise in
order, which may be signed by, or issued to, the administrator or
executor of, or the trustee in bankruptcy of, or the receiver for
any of the property of, the party in whose name any Credit provides
that any drafts or any other documents should be drawn or issued. It
is hereby further agreed that any action, inaction, or omission
taken or suffered by Lender, or by any of its correspondents, under
or in connection with any Credit or any drafts or documents
referenced therein, if in conformity with such foreign or domestic
laws and customs or other regulations as Lender or any of Lender's
correspondents may deem to be applicable thereto, shall be binding
upon Borrower and shall not place Lender or any of Lender's
correspondents under any resulting liability to Borrower.
(c) The Borrower's obligation to repay the Revolving Facility
A shall be evidenced by a promissory note of the Borrower in
substantially the form attached as Exhibit "1.3.2", payable to the
order of Lender. The Revolving Note-A shall bear interest, at
Borrower's option (to be exercised as set forth in Section 1.3(d)
below) (i) at a variable interest rate of one-half of one percent
(0.5%) below the Prime Rate per annum or (ii) the Eurodollar Daily
Floating Rate plus one and 65/100ths percent (1.65%) per annum, not
to exceed, in the case of either clause (i) or clause (ii), the
maximum non-usurious interest rate permitted by applicable law with
the balance of principal plus accrued and unpaid interest due and
payable on or before the Maturity Date.
(d) BORROWER'S INTEREST RATE ELECTION.
No later than the last Business Day prior to the first day of
each month, Borrower shall elect whether interest on loans made
pursuant to Revolving Facility A are to bear interest commencing on
the first day of such month based upon the Prime Rate as provided in
clause (i) of Section 1.3(c) (the "Prime Rate Option") or based upon
the Eurodollar Daily Floating Rate as provided in clause (ii) of
Section 1.3(c) (the "Eurodollar Option"). Each such election shall
be made in writing, shall be
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irrevocable and shall be provided by Borrower to Lender pursuant to
the notice procedures set forth under Section 7.2 hereof. Each such
election shall continue to govern the interest rate on loans made
under Revolving Facility A unless and until the Borrower provides to
Lender a new notice changing such election from the Prime Rate
Option to the Eurodollar Option or VICE VERSA. If Borrower fails to
provide Lender with a notice of Borrower's election hereunder,
Borrower shall be deemed to have elected the Prime Rate Option for
the next succeeding month.
1.4 REVOLVING FACILITY B.
(a) The Lender, during the period from the date of this Agreement until
the Maturity Date, subject to the terms and conditions of this Agreement, and
subject to the condition that at the time of each borrowing hereunder no Default
or Event of Default has occurred and is then continuing and that the
representations and warranties given by the Borrower in Section 2 as of the date
of this Agreement shall remain true and correct in all material respects (except
for representations and warranties (i) which are made as of a particular date or
(ii) as to which the facts which gave rise to the representation or warranty
have changed as a result of circumstances or transactions which are contemplated
or permitted pursuant to this Agreement), agrees to make Loans to Borrower
pursuant to a revolving line of credit up to but not in excess of an aggregate
principal amount outstanding at any time of $25,000,000.00, provided the
aggregate amount outstanding pursuant to this Section 1.4 shall not exceed
Borrowing Base B. Borrower shall make written request for each Loan pursuant to
Revolving Facility B pursuant to a loan request in substantially the form of
Exhibit "1.3.1" attached hereto. If Borrower's written request therefor is
received by 1:00 p.m., Lender shall make each such Loan available to Borrower on
the same Business Day Lender receives such request. If Borrower's loan request
with respect to any such Loan is received after 1:00 p.m., Lender may defer the
making of such Loan to the next Business Day. Each Loan shall be in an amount of
not less than $100,000.
(b) The Borrower's obligation to repay the Revolving Facility B shall be
evidenced by a promissory note of the Borrower in substantially the form
attached as Exhibit "1.4", payable to the order of Lender. The Revolving Note-B
shall bear interest at a variable interest rate of one quarter of one percent
(1/4%) over the Prime Rate per annum not to exceed the maximum non-usurious
interest rate permitted by applicable law with the balance of principal plus
accrued and unpaid interest due and payable on or before the Maturity Date.
(c) In the event the Borrower completes an equity offering, Borrower shall
either (i) repay the outstanding principal balance of Revolving Facility B in
full or (ii) if the net proceeds are less than the outstanding principal balance
of Revolving Facility B, apply 100% of the net proceeds of such offering to
Revolving Facility B within ten (10) days following completion of such offering
and no advances shall be permitted pursuant to Revolving Facility B for a period
of one (1) Business Day following such repayment.
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1.5 FACILITY C. (a) The Lender, during the period from the date of this
Agreement until June 1, 2000, subject to the terms and conditions of this
Agreement, and subject to the condition that at the time of each borrowing
issuance hereunder no Default or Event of Default has occurred and is then
continuing to occur and that the representations and warranties given by the
Borrower in Section 2 as of the date of this Agreement shall remain true and
correct in all material respects (except for representations and warranties (i)
which are made as of a particular date or (ii) as to which the facts which gave
rise to the representation or warranty have changed as a result of circumstances
or transactions which are contemplated or permitted pursuant to this Agreement),
agrees to make a loan to Borrower up to but not in excess of an aggregate
principal amount outstand ing at any time of $100,000,000, on the same Business
Day upon receipt from Borrower on or before 1:00 p.m. Houston time of written
applications for the loan hereunder in the form attached as Exhibit "1.3.1".
(b) The Borrower's obligation to repay Facility C shall be evidenced by a
promissory note of the Borrower in substantially the form attached as Exhibit
"1.5" hereto, payable to the order of Lender. The Facility C Note shall bear
interest at a variable interest rate of one half of one percent (1/2%) over the
Cash Collateral Account Rate per annum not to exceed the maximum non-usurious
interest rate permitted by applicable law with principal amounts due on or
before the fifth (5th) Business Day after each principal advance, interest due
monthly on the 15th of each month and concurrently with principal payments, and
the balance of principal plus accrued and unpaid interest due and payable on or
before the June 1, 2000.
(c) The proceeds of advances under Facility C shall be placed in the Cash
Collateral Account, and shall secure the amounts owing pursuant to Facility C.
The amount in the Cash Collateral Account shall never be less than the
outstanding principal balance of the Facility C Note. Upon the written request
of Borrower, amounts in the Cash Collateral Account may be applied to the
outstanding balance of Facility C. The funds in such Cash Collateral Account may
only be invested, as designated by Borrower, in interest bearing deposits with
Lender or U.S. Treasury Bills with maturities of less than ninety (90) days. In
the event Borrower selects U.S. Treasury Bills, the interest rate on the
Facility C Note will be adjusted to be the Prime Rate. In the event Borrower
makes such election, Borrower will execute such documentation as Lender may
reasonably require to perfect its security interest in such U.S. Treasury Bills.
1.6 REPAYMENT SCHEDULE. Borrower hereby agrees to pay, and authorizes
and directs Lender to collect:
(a) Credit Fees (at the time of the issuance of a Credit) and the
Commitment Fee (at closing and quarterly, commencing on the last day of
June, 1999 and thereafter on the last day of each September, December,
March and June and on the Maturity Date), and the Custody Account Fee (on
March 18th of each year) both payable by Borrower by debit to Borrower's
Operating Account Nos. 577-222-2982 or 266-521-2311 at Lender;
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(b) the amount of any drawing under a Credit not otherwise
reimbursed to Lender by advance under the Revolving Notes by debit to
Borrower's Operating Account Nos. 577- 222-2982 or 266-521-2311 at Lender
or any other of Borrower's accounts at Lender, including any account
containing cash collateral required pursuant to this Agreement; and
(c) advances under the Revolving Notes on the Maturity Date, and
accrued interest on the advances under the Revolving Notes quarterly
commencing on the last day of June, 1999 and thereafter on the last day of
each September, December, March and June and on the Maturity Date, such
amounts to be paid by debit to Borrower's Operating Account Nos.
577-222-2982 or 266-521-2311 at Lender or any other of Borrower's accounts
at Lender.
(d) advances pursuant to the Facility C Note five (5) Business Days
after each advance and accrued interest thereon on the 15th day of each
month and simultaneously with each principal payment, such amounts to be
paid first by debit to the Cash Collateral Account, and to the extent such
Cash Collateral Account does not contain sufficient amounts, thereafter by
debit to Borrower's other accounts at Lender.
(e) Commitment Fee-Facility C shall be payable by debit to
Borrower's Operating Account Nos. 577-222-2982 or 266-521-2311.
(f) Lender shall use reasonable efforts to notify Borrower
concurrently with any debit pursuant to this Section 1.6.
1.7 PREPAYMENT. The Borrower shall have the right to prepay without
premium at any time any amount owing on the Notes.
SECTION 2. REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants to the Lender that:
2.1 CORPORATE EXISTENCE. The Borrower is a corporation duly organized,
legally existing and in good standing under the laws of the jurisdiction in
which it is incorporated and duly qualified as a foreign corporation in all
jurisdictions wherein the property owned or the business transacted by it makes
such qualification necessary and where failure to qualify will have a material
adverse effect upon Borrower.
2.2 CORPORATE AUTHORITY. The Borrower is duly authorized and empowered to
create and issue the Notes, and to execute and deliver this Agreement. The
Borrower is duly authorized and empowered to execute and deliver the Security
Instruments to which it is a party, and all other instruments referred to or
mentioned herein to which Borrower is a party, and all corporate action
requisite for the due creation, issuance and delivery of the Notes and the due
execution and delivery of this Agreement and the Security Instruments has been
duly and effectively taken. This
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Agreement, the Notes, and the Security Instruments to which the Borrower is a
party when executed and delivered will be valid and binding obligations of the
Borrower, enforceable in accordance with their terms (subject to any applicable
bankruptcy, insolvency or other laws generally affecting the enforcement of
creditors' rights). This Agreement, the Notes, and the Security Instruments do
not violate any provisions of the Borrower's corporate charter or bylaws, or any
contract, agreement, law or regulation to which the Borrower is subject, and the
same do not require the consent or approval of any regulatory authority or
governmental body of the United States or any state.
2.3 FINANCIAL CONDITION. The Prior Financial Statements which have been
delivered to Lender, are complete and correct in all material respects, have
been prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods involved, and fairly present the
financial condition and results of the operations of the Borrower as at the
dates and for the periods indicated. No material adverse change has occurred
since the date of the Prior Financial Statements in the condition, financial or
otherwise, of the Borrower.
2.4 INVESTMENTS, LOANS, ADVANCES AND GUARANTEES. The Borrower has not made
Investments in, loans or advances to or guarantees of the obligations of any
Person, except as disclosed in the Prior Financial Statements and except for
Investments made since that date in the ordinary course of business. The
Portfolio Investments of Borrower on the date hereof and relevant terms and
conditions related thereto are set forth on Exhibit "2.4". The Borrower (a) is
the legal, record and beneficial owner of, and has good title to, the Portfolio
Investments, subject to no pledge, lien, mortgage, hypothecation, security
interest, charge, option or other encumbrance whatsoever, except the Permitted
Encumbrances; (b) has full power, authority and legal right to pledge all the
Portfolio Investments pursuant to this Agreement; and (c) requires no material
consent of any non-governmental party (including, without limitation,
shareholders or creditors of the Borrower and the entities which have issued the
Portfolio Investments) and requires no material consent, license, permit,
approval or authorization of, exemption by, notice or report to, or
registration, filing or declaration with, any governmental authority, domestic
or foreign, be obtained by the Borrower in connection with the execution,
delivery or performance of this Agreement. The execution, delivery and
performance of this Agreement will not result in the creation or imposition of
any lien, charge or encumbrance on, or security interest in, any of the assets
of the Borrower, except as contemplated by this Agreement. To the best of
Borrower's knowledge, all the shares of stock included in the Portfolio
Investments have been duly and validly issued, are fully paid and
non-assessable. The pledge, assignment and delivery of the Portfolio Investments
pursuant to this Agreement creates a valid first lien on and a perfected
security interest in the Portfolio Investments, and the proceeds thereof subject
only to the Permitted Encumbrances.
2.5 LIABILITIES AND LITIGATION. No litigation, legal or administrative
proceedings, investigation or other action is pending or to the Borrower's
knowledge threatened against or affecting the Borrower which is likely to
adversely affect the business or the assets of the Borrower or the Borrower's
ability to carry on its business as now conducted, except as disclosed in the
Prior Financial Statements. To the best of Borrower's knowledge, no unusual or
unduly burdensome
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restriction, restraint or hazard exists by contract, law, governmental
regulation or otherwise relative to the business or the assets of the Borrower.
2.6 NO DEFAULT. No Default or Event of Default exists under this
Agreement. To the best of Borrower's knowledge, Borrower is not in default in
any respect under any contract, agreement or instrument to which Borrower is a
party related to a Portfolio Investment, the breach of which is likely to have a
material adverse effect on Portfolio Investments, taken as a whole, or a
material Portfolio Investment. Borrower is not aware of any default under any
contract, agreement or instrument the breach of which is likely to have a
material adverse effect on the ability of the Borrower to perform its
obligations under the Notes, this Agreement, or any of the Security Instruments
or on its ability to conduct its business as now conducted.
2.7 TAXES. The Borrower has filed all Federal and State income tax returns
which are required to be filed as of the date of this Agreement and each has
paid all taxes and all assessments received by each to the extent such taxes
have become due. Federal income tax liabilities of the Borrower have not been
examined and reported on by the Internal Revenue Service for any fiscal year.
2.8 COMPLIANCE. The Borrower has complied in all material respects with
all valid and applicable statutes, rules and regulations of each jurisdiction to
which it is subject the violation of which would have a material, adverse effect
on the financial condition or operations of Borrower.
2.9 PENSION REFORM ACT. The Borrower has no Defined Benefit Pension Plan.
2.10 ENVIRONMENTAL LAWS. To Borrower's knowledge, and except as would not
have a material adverse effect on the operations or financial condition of
Borrower or on Borrower's ability to perform and pay the Indebtedness and
Obligations:
(a) Borrower, and all of its properties, assets, and operations are
in compliance with all Environmental Laws (as hereinafter defined).
(b) Borrower (i) has no liability for remedial or corrective action
or response costs under any Environmental Law, (ii) has not received any
request for information by any governmental authority with respect to the
condition, use, or operation of any of its properties or assets, and (iii)
has not received any notice from any governmental authority or other
person with respect to any violation of or liability under any
Environmental Law.
"Environmental Laws" means any and all federal, state and local
environmental laws, regulations, and ordinances applicable to Borrower or
Borrower's operations, including without limitation the Resource Conservation
and Recovery Act, as amended, the Comprehensive Environmental Response,
Compensation and Liability Act, as amended, the Superfund Amendment and
Reauthorization Act of 1986, as amended, the Federal Water Pollution Control Act
and the Oil
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Pollution Act. "Hazardous Substances" shall mean any item defined as hazardous
under the Environmental Laws.
2.11 FULL DISCLOSURE. Neither this Agreement nor any certificate or
written statement or any other factual data furnished by the Borrower or any of
its officers in writing in connection with the negotiation of this Agreement or
the transactions contemplated hereby contains any statement of a material fact
which is untrue in any respect or omits a material fact known to the Borrower to
be necessary to make the statements contained herein or therein, taken as a
whole, not misleading in any material respect.
2.12 CREDIT AGREEMENTS. Borrower has no agreements in effect providing for
or relating to extensions of credit in respect of which Borrower is or may
become directly or contingently obligated except for obligations of Borrower
undertaken on behalf of companies which have issued securities which are
Portfolio Investments, and has not signed any security agreement that is
currently outstanding except as disclosed in the Prior Financial Statements.
2.13 INVESTMENT COMPANY ACT. Borrower is in compliance with the applicable
provisions of the Investment Company Act of 1940, as amended in all material
respects and, to the best of Borrower's knowledge, is in compliance with or is
correcting any non-material non-compliance with such Act.
2.14 PUBLIC UTILITY HOLDING COMPANY ACT. Borrower is not a "holding
company" or a "subsidiary company" of a "holding company," or an "affiliate" of
a "holding company" or of a "subsidiary company" within the meaning of the
Public Utility Holding Company Act of 1935, as amended.
2.15 YEAR 2000
1. Borrower has (i) begun analyzing the operations of Borrower and its
subdivisions and affiliates that could be adversely affected by
failure to become Year 2000 compliant (that is, that computer
applications, imbedded microchips and other systems will be able to
perform date-sensitive functions prior to and after December 31,
1999)and; (ii) developed a plan for becoming Year 2000 compliant in
a timely manner, the implementation of which is on schedule in all
material respects. Borrower reasonably believes that it will become
Year 2000 compliant for its operations and those of its subsidiaries
and affiliates on a timely basis except to the extent that a failure
to do so could not be reasonably be expected to have a material
adverse effect upon the financial condition of Borrower.
2. Borrower reasonably believes any suppliers and vendors that are
material to the operations of Borrower or its subsidiaries and
affiliates will be Year 2000 compliant for their own computer
applications except to the extent that a failure to do so could
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not reasonably be expected to have a material adverse effect upon
the financial condition of Borrower.
3. Borrower will promptly notify Bank in the event Borrower determines
that any computer application which is material to the operations of
Borrower, its subsidiaries or any of its material vendors or
suppliers will not be fully Year 2000 compliant on a timely basis,
except to the extent that such failure could not reasonably be
expected to have a material adverse effect upon the financial
condition of Borrower.
SECTION 3. AFFIRMATIVE COVENANTS
Until the Indebtedness of the Borrower to the Lender has been paid and so
long as the Lender has a commitment to the Borrower hereunder:
3.1 REPORTING REQUIREMENTS. The Borrower will promptly furnish to the
Lender from time to time the following information regarding the business
affairs and financial condition of the Borrower:
(a) as soon as practicable and in any event within thirty (30)
calendar days after obtaining knowledge of the occurrence of each Default
or Event of Default, the statement of the president or chief financial
officer of the Borrower setting forth details of such Default or Event of
Default and the action which the Borrower proposes to take with respect
thereto;
(b) as soon as available and in any event within one hundred and
twenty (120) days after the end of each fiscal year:
(i) the balance sheet of the Borrower as at the end of such
year and the statements of operations, changes in net assets and
cash flows of the Borrower for such year, together, with comparative
figures for the preceding fiscal year, certified, without
qualification except in a manner similar to the qualification in the
Prior Financial Statements, by Arthur Andersen LLP or other
independent certified public accountants acceptable to the Lender;
and
(ii) the Form 10-K of Borrower as filed with the Securities
and Exchange Commission;
(c) as soon as available, and in any event, within forty-five (45)
days after the last day of each fiscal quarter for the first three fiscal
quarters of each fiscal year:
(i) the balance sheet of the Borrower as of the end of each
such fiscal quarter, the statement of operations for such fiscal
quarter, signed by the president or chief financial officer of the
Borrower; and
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(ii) the Form 10-Q of Borrower as filed with the Securities
and Exchange Commission; and
(iii)a Portfolio Valuation Summary as of the end of the end of
such fiscal quarter;
(d) as soon as available, and in any event, within thirty (30) days
following the last day of each month (the "Reporting Date"), the Borrowing
Base Report as of the Reporting Date, in form and substance satisfactory
to Lender;
(e) as soon as available, and in any event within forty-five (45)
days following the end of each fiscal quarter, the certificate described
in Section 3.7 of this Agreement;
(f) as soon as available, and in any event within five(5) days
following the end of each week, the Lipper Report as of the end of such
week, together with a confirmation of Borrower's compliance with the
Borrowing Base based upon the values indicated in such Lipper Report, in
form and substance satisfactory to Lender;
(g) upon Lender's written request, but no more frequently than
quarterly, Borrower will provide Lender updated summary information
regarding the Portfolio Investments in form and substance satisfactory to
Lender, indicating information as of a current date relating to buy-sell
rights and obligations, funding obligations, restrictions on transfer,
voting agreements, registration rights and such similar information as
Lender may reasonably request.
(h) such other information as the Lender may reasonably request from
time to time at reasonable intervals under the then applicable
circumstances.
The Financial Statements shall fairly present the financial position of
Borrower and other reports shall be complete and correct in all material
respects. The Financial Statements shall be prepared in accordance with
generally accepted accounting principles, consistently applied (except that
interim financial statements may be subject to customary non-material year-end
adjustments and may omit footnote disclosures).
Upon the reasonable request of Lender the Borrower grants to the Lender
the right to send the Lender's own representatives and/or employees during
normal business hours to inspect and copy the books of the Borrower. Borrower
will provide Lender and its counsel reasonable access to or copies of the
documentation governing the Portfolio Investments upon Lender's reasonable
request.
3.2 TAXES AND OTHER LIENS. The Borrower will pay all taxes, assessments,
governmental charges, claims for labor, supplies, rent and other obligations
which if unpaid, might become a lien (other than a Permitted Encumbrance)
against the property of the Borrower, provided that Borrower
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shall have the right to diligently contest any such taxes, assessments, charges
or claims in good faith by appropriate proceedings if appropriate reserves under
generally accepted accounting principles are established and upon stay of levy
and execution thereon.
3.3 MAINTENANCE. Borrower will maintain its corporate existence, remain in
or become a corporation in good standing in each jurisdiction in which it is
required to be qualified when the failure to qualify would have a material
adverse effect on Borrower, and comply in all respects with all valid and
applicable statutes, rules and regulations the violation of which would have a
material, adverse effect on the financial condition or operations of Borrower,
including without limitation the Investment Company Act of 1940, as amended.
3.4 FURTHER ASSURANCES. Borrower will promptly, at Lender's request, cure
any defects in the execution and delivery of this Agreement, the Notes, the
Security Instruments and any other instrument or instruments referred to or
mentioned herein for the benefit of Lender. Borrower will promptly, and in any
event within ten (10) days of Lender's request, execute and deliver to Lender
upon request all security agreements, financing statements, stock powers,
endorsements, consent letters, instruction letters, or any other instrument
required to accomplish the covenants and agreements of Borrower under this
Agreement and the Security Instruments. The Borrower covenants and agrees that
it will defend the Lender's security interest in and to the Portfolio
Investments and the proceeds thereof against the claims and demands of all
persons whomsoever; and covenants and agrees that it will have like title to and
right to pledge any other property at any time hereafter pledged to the Lender
as collateral hereunder and will likewise defend the Lender's security interest
therein.
3.5 PERFORMANCE OF OBLIGATIONS. Borrower will pay the Notes according to
the reading, tenor and effect thereof and will do and perform every act and
discharge all of the Obligations provided to be performed and discharged by it
under this Agreement, the Notes, the Security Instruments and any and all of the
instruments referred to or mentioned herein for the benefit of Lender to which
it is a party. The Borrower will perform all obligations to be performed by it,
pursuant to the terms of each indenture, agreement, contract, and other
instrument by which the Borrower or its properties are bound in all material
respects, including without limitation all agreements between Borrower and the
entities in which Borrower has invested.
3.6 REIMBURSEMENT OF COSTS AND EXPENSES. The Borrower will pay the
reasonable fees and expenses of counsel for the Lender in connection with this
Agreement and all transactions pursuant hereto. The Borrower will, upon request
by Lender, within ten (10) days from said request, reimburse the Lender for all
amounts expended, advanced or incurred by the Lender to satisfy any obligation
of the Borrower under this Agreement, to protect the Portfolio Investments of
the Borrower, expenses incurred to collect the Notes or to enforce the rights of
the Lender under this Agreement or any other instrument referred to or mentioned
herein for the benefit of Lender or executed or to be executed in connection
herewith, which amounts will include all court costs, attorneys' fees, fees of
auditors and accountants, and investigation expenses reasonably incurred by the
Lender in connection with any such matters, and any and all amounts expended by
Lender after
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the occurrence of a Default or an Event of Default and during the continuation
thereof as a result of the provisions of Environmental Laws, together with
interest at the greater of two percent (2%) over the Prime Rate per annum or 10%
per annum, not to exceed the maximum non-usurious interest rate permitted by
applicable law, on each such amount from the date that the same is due and
payable to the Lender until the date it is repaid to the Lender. All amounts
advanced in connection herewith shall be secured by the Collateral more fully
described in Section 3.9. Except for expenses advanced by Lender after (i)
occurrence of an Event of Default, (ii) to maintain insurance or (iii) to
protect and preserve the Collateral, Lender shall provide Borrower not less than
five (5) days prior notice of any advance hereunder.
3.7 CERTIFICATE OF COMPLIANCE. Within forty-five (45) days after the end
of each fiscal quarter, there shall be furnished to the Lender a certificate in
the form attached as Exhibit "3.7" signed by an authorized officer of the
Borrower (1) stating that a review of the activities of the Borrower during such
quarter or as of the end of such quarter has been made under his supervision
with a view to determining whether the Borrower has kept, observed, performed
and fulfilled all of its obligations under this Agreement, the Notes, and
Security Instruments, (2) containing an updated list of the Portfolio
Investments of Borrower as of the end of such fiscal quarter, and (3) stating
that to the best knowledge and belief of such officer of Borrower the Borrower
has kept, observed, performed and fulfilled each and every covenant and
condition contained in the Notes, this Agreement and the Security Instruments
and to the best knowledge and belief of such officer of Borrower is not at the
time in default in the observance, performance or fulfillment of any such
covenants and conditions or if the Borrower shall be in default, specifying any
such default, the nature and status thereof, and what action, if any, has been
taken to remedy the default or defaults.
3.8 LITIGATION. As soon as possible and in any event, within thirty (30)
calendar days of a president or chief financial officer of Borrower obtaining
knowledge thereof, Borrower shall give written notice to Lender of commencement
of litigation (other than litigation being defended by an insurance carrier
without reservation as to coverage claiming amounts within said coverage) in
which the Borrower is reasonably expected to have liability in excess of
$100,000 and of all proceedings before any governmental or regulatory agency
affecting Borrower in which an adverse decision is reasonably expected to
involve amounts in excess of $100,000.
3.9 SECURITY. The Indebtedness and Obligations of the Borrower under this
Agreement and the Security Instruments shall be secured by the following:
(a) As to the Indebtedness and Obligations evidenced by the Revolving
Notes:
(i) a first and prior security interest in Borrower's Portfolio
Investments, whether now owned or hereafter acquired;
(ii) a first and prior security interest in the Custody Account;
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(iii) without limiting any of the foregoing, all of Borrower's
books, records, business records, warranties, and indemnities, related to
the Portfolio Investments, whether now owned or hereafter acquired; and
(iv) all proceeds of (a)(i) through (a)(iii) above.
(b) As to the Indebtedness and Obligations evidenced by the Facility C
Note:
(i) the Cash Collateral Account;
(ii) all Portfolio Investments acquired with the proceeds of
the Facility C Note; and
(iii) all proceeds of (b)(i) and (b)(ii) above.
3.10 BORROWING BASE REQUIREMENTS.
(a) The aggregate indebtedness pursuant to Revolving Facility A and the
amount of outstanding Credits shall never exceed Borrowing Base A. Borrowing
Base A is the lesser of (i) $15,000,000 and (ii) fifty percent (50%) of the
Current Fair Market Value of Borrower's Eligible Public Securities, provided
that the sum of (x) indebtedness pursuant to Revolving Facility A plus (y)
outstanding Credits plus (z) indebtedness pursuant to Revolving Facility B shall
not exceed thirty-three percent (33%) of Borrower's Net Asset Value.
(b) The aggregate indebtedness pursuant to Revolving Facility B shall
never exceed the Borrowing Base B. Borrowing Base B is the lesser of (i)
$25,000,000, and (ii) twenty-five percent (25%) of the Current Fair Market Value
of Eligible Other Securities plus the amount, if any, by which fifty percent
(50%) of the Current Fair Market Value of Borrower's Eligible Public Securities
exceeds $15,000,000, provided that the sum of (x) indebtedness pursuant to
Revolving Facility A plus (y) outstanding Credits plus (z) indebtedness pursuant
to Revolving Facility B shall not exceed thirty-three percent (33%) of
Borrower's Net Asset Value.
(c) In accordance with Section 3.1(d), Borrower shall provide the Lender a
calculation of Borrowing Base A on the Borrowing Base Report. In the event, at
any time, the aggregate unpaid principal balance of Loans plus the outstanding
Credits pursuant to Revolving Facility A exceeds Borrowing Base A calculated as
described in 3.10(a) above, (i) in the event such excess is occasioned by the
sale of one or more Portfolio Investments, the Borrower will cause the proceeds
of such sale to be applied to reduce the Revolving Facility A until the amount
of such excess is eliminated and (ii) in the event such excess is not occasioned
by the sale of Portfolio Investments, the Borrower will promptly, but in any
event no later than within twenty (20) Business Days, reduce the indebtedness
under the Revolving Facility A until the amount of such excess is eliminated,
provided that in the event the outstanding balance pursuant to Revolving
Facility A exceeds 75%
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<PAGE>
of the Current Fair Market Value of the Eligible Public Securities, Borrower
shall be required to repay such excess within ten (10) Business Days of the
occurrence of such event.
(d) In accordance with Section 3.1(d), Borrower shall provide the Lender a
calculation of Borrowing Base B on the Borrowing Base Report. In the event, at
any time, the aggregate unpaid principal balance of Loans pursuant to Revolving
Facility B exceeds the Borrowing Base B calculated as described in 3.10(b)
above, (i) in the event such excess is occasioned by the sale of one or more
Portfolio Investments, the Borrower will cause the proceeds of such sale to be
applied to reduce the Revolving Facility B until the amount of such excess is
eliminated and (ii) in the event such excess is not occasioned by the sale of
Portfolio Investments, the Borrower will promptly, but in any event no later
than within twenty (20) Business Days, reduce the indebtedness under the
Revolving Facility B until the amount of such excess is eliminated, provided
that in the event the outstanding balance pursuant to Revolving Facility B
exceeds 50% of the Current Fair Market Value of the Eligible Other Securities,
Borrower shall be required to repay such excess within ten (10) Business Days of
the occurrence of such event.
(e) If the Borrower (i) is required by any Portfolio Lender to pledge or
otherwise encumber any note receivable, common or preferred stock, option,
warrant or other investment property, instrument, chattel paper or general
intangible owned by Borrower and issued by the Person to whom the Portfolio
Lender has made, or proposes to make, a loan or loans (or a Person (other than
the Borrower) which owns, or is owned by, such Person) or (ii) is prohibited by
any Portfolio Lender from pledging any such note receivable, common or preferred
stock, option, warrant or other investment property instrument, chattel paper or
general intangible to the Lender, the Borrower, by notice in writing to the
Lender, may designate such asset as an Excluded Portfolio Investment; provided,
however, that if such requirement and such prohibition terminate, such asset
will no longer be an Excluded Portfolio Investment; provided, further, that no
such asset may be designated as an Excluded Portfolio Investment if as a result
of such designation (x) the aggregate indebtedness incurred pursuant to
Revolving Facility A exceeds Borrowing Base A or the aggregate indebtedness
incurred pursuant to Revolving Facility B exceeds Borrowing Base B or (y) (I)
the aggregate investment made by the Borrower in Excluded Portfolio Investments
outstanding on the date of such designation plus the aggregate investment made
or to be made in such assets as of such date would exceed (II) 20% of the sum of
the amount in clause (I) above plus the Net Asset Value as of such date (or for
the most recent date for which Net Asset Value has been calculated by the
Borrower). For the purposes of clause (y)(I) above, each investment shall be
valued at its original cost without taking into account any subsequent increase
or decrease in the carrying value of such investment as a result of income or
loss attributable to such investment after the time of its acquisition.
Notwithstanding any other provision of this Agreement or any Security
Instruments to the contrary, Lender shall not have a lien or a security interest
in any Excluded Portfolio Investment and shall execute such instruments as
Borrower or any Portfolio Lender may reasonably request to reflect that the
Lender has no interest therein.
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SECTION 4. NEGATIVE COVENANTS
------------------------------
In the absence of a written consent from Lender (in the manner hereinafter
provided), so long as any part of the Indebtedness shall remain unpaid or the
Lender has a commitment to the Borrower hereunder:
4.1 GUARANTEES AND DEBTS. The Borrower will not incur any Funded Debt or
guarantee any Debt, except that the foregoing restrictions shall not apply to:
(a) the Notes, Credits, and other obligations or liabilities
pursuant to this Agreement or the Security Instruments;
(b) indebtedness for borrowed money and capitalized lease
obligations not to exceed, in the aggregate, $500,000 outstanding at any
time; and
(c) guaranties of obligations of Persons who have issued one or more
of the Portfolio Investments.
4.2 DIVIDENDS AND REDEMPTION. The Borrower will not declare or pay
dividends (other than a dividend payable solely in stock of the Borrower) or
make any other distribution on account of, or purchase, acquire, redeem or
retire any stock of the Borrower other than retirement of outstanding common
stock of the Borrower upon conversion to other common or preferred stock of the
Borrower, whether now or hereafter outstanding other than (i) the payment of
cash dividends in an amount not to exceed the greater of (y) the sum of
Borrower's taxable net investment income plus Borrower's taxable net capital
gains in any fiscal year and (z) $.50 per share in any fiscal year, and (ii)
purchase, acquisition, redemption or retirement of outstanding common stock
provided that neither before nor after the payment of such cash dividend or such
purchase, acquisition, redemption or retirement a Default or Event of Default
exists hereunder.
4.3 MERGERS, ETC. The Borrower will not merge or consolidate with any
other corporation. The Borrower will not liquidate or dissolve.
4.4 ENCUMBRANCES. The Borrower will not create, incur, assume or permit to
exist any mortgage, pledge, lien or encumbrance on any of the Portfolio
Investments except that the foregoing restrictions shall not apply to:
(a) liens for taxes not yet due or which are being diligently
contested in good faith by appropriate proceedings;
(b) liens required by this Agreement or any of the Security
Instruments;
(c) judgments in existence less than 30 days after the entry thereof
or with respect to which execution has been properly stayed; and
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(d) encumbrances consisting of trading restrictions imposed by law
and restrictions imposed by contract upon the ability of Borrower to
dispose of the Collateral without complying with one or more requirements
regarding the sale thereof.
As to the liens and encumbrances permitted pursuant to paragraph (a)
above, Borrower's right to contest diligently in good faith by appropriate
proceedings is conditioned upon the Borrower setting up appropriate reserves
under generally accepted accounting principles and upon stay of levy and
execution thereon.
4.5 SALE OF ASSETS. The Borrower will not sell, transfer or otherwise
dispose of any of its assets except in the ordinary course of business (which
shall specifically include the disposition of Portfolio Investments from time to
time, but not in bulk). Notwithstanding any provision hereof or of the Security
Instruments to the contrary, so long as neither before nor after such sale no
Default or Event of Default exists or would exist, Borrower may sell Portfolio
Investments in the ordinary course of business, and upon any such sale the
security interest granted to Lender in such Portfolio Investments shall
terminate and be of no further force and effect, and Lender shall deliver to
Borrower (or to a broker designated by Borrower) the certificate or certificates
representing such Portfolio Investments and, at Borrower's request and expense,
shall execute such releases and other instruments as Borrower may reasonably
request to reflect the release of such Portfolio Investments from the lien and
security interest created hereby provided that to the extent proceeds are
required to be applied to the Revolving Notes pursuant to Section 3.10(c) or
Section 3.10(d), such proceeds are so applied.
4.6 TRANSACTIONS WITH AFFILIATES. Borrower will not enter into
transactions with an Affiliate (other than a Person in whom the Borrower has
made an Investment) which is not in an arms-length basis comparable to the terms
which would apply to a transaction with a bona-fide third party.
4.7 VALUATION PROCEDURES. Unless otherwise required by the Securities and
Exchange Commission or by generally accepted accounting principles, Borrower
will not change, in any material respect, its methodology for determining the
fair market value of Eligible Other Securities and Eligible Public Securities.
SECTION 5. EVENTS OF DEFAULT AND REMEDIES
------------------------------------------
5.1 EVENTS OF DEFAULT. Any of the following events which shall occur and
be continuing shall be considered an Event of Default as that term is used
herein:
(a) Borrower does not (i) pay within five (5) days of when due any
installment of principal or interest of the Revolving Notes (ii) pay when
due any amount owing pursuant to the Facility C Note, (iii) pay when due
any amount due pursuant to Section 3.10(c) and 3.10(d), or (iv) provide
cash collateral to fully secure unexpired Credits on the Maturity Date;
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<PAGE>
(b) Borrower does not pay at the scheduled maturity (but after
expiration of any grace period applicable to such maturity) or when due
whether by acceleration or otherwise (subject to applicable grace periods)
all or any part of any Funded Debt of the Borrower to any other person or
entity;
(c) The Borrower shall fail or refuse to furnish to the Lender any
information, data, certificate, or other document required by Section 3.1
(b) through (f) of this Agreement at the times required thereby and such
failure or refusal continues for ten (10) days (as to the information
required by Section 3.1(d) or 3.1(f)) or for thirty (30) days as to
information required by the balance of such section or Borrower fails or
refuses to provide any other information, data, certificate or other
document within thirty (30) days after Lender's request therefor;
(d) The Borrower does not comply with or fails in the performance of
any covenant contained in Section 3 of this Agreement (other than delivery
of information which shall be governed by Section 5.1(c) hereof and the
provisions of Section 3.10 which shall be governed by Section 5.1(a)), or
contained in any of the Security Instruments to be kept or performed by
the Borrower or any Subsidiary for a period of more than thirty (30) days
after written notice of such violation is given by Lender to Borrower;
(e) The Borrower does not comply with or fails in the performance of
any covenant contained in Section 4 of this Agreement to be kept or
performed by the Borrower;
(f) Any representation or warranty made by the Borrower herein or in
any of the Security Instruments proves to have been untrue in any material
respect, or any representation, statement (including financial
statements), certificate or data furnished or prepared and made available
by the Borrower to Lender hereunder proves to have been untrue in any
material respect, as of the date as of which the facts therein set forth
were stated or certified;
(g) The Borrower shall discontinue business, or the Borrower shall
(i) make a general assignment for the benefit of creditors, or (ii) apply
for or consent to the appointment of a receiver, a trustee or liquidator
of itself or of all or a substantial part of its assets, or (iii) be
adjudicated a bankrupt or insolvent, or (iv) file a voluntary petition in
bankruptcy or file a petition or answer seeking reorganization or an
arrangement with creditors or seeking to take advantage of any other law
(whether federal or state) relating to relief of debtors, or admit (by
answer, by default or otherwise) the material allegations of a petition
filed against it in any bankruptcy, reorganization, arrangement,
insolvency or other proceedings (whether federal or state) relating to
relief of debtors, or (v) suffer or permit to continue unstayed and in
effect for sixty (60) consecutive days any judgment, decree or order,
entered by a court of competent jurisdiction, which approves a petition
seeking reorganization of the Borrower or appoints a receiver, trustee or
liquidator of the Borrower or of all or a substantial part of
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<PAGE>
its assets, or (vi) take or omit to take any action for the purpose or
with the result of effecting or permitting any of the foregoing.
5.2 REMEDIES. Upon the happening of an Event of Default specified in
Section 5.1(g), immediately and without notice, and upon the happening and
during the continuance of any other Default or Event of Default specified in
Section 5.l, at the option of the Lender, without notice to Borrower, Lender may
declare any commitment hereunder cancelled and cease advances thereunder, and/or
upon the happening of an Event of Default specified in Section 5.1(g),
immediately and without notice, and otherwise, at the option of the Lender, upon
notice to Borrower, Lender may declare the entire aggregate principal amount of
the Notes then outstanding and the interest accrued thereon immediately due and
payable without further notice and without presentment, demand, protest, notice
of protest or other notice of default or dishonor of any kind, all of which are
hereby expressly waived by the Borrower and require Borrower to cash secure all
outstanding Credits.
SECTION 6. CLOSING
-------------------
The closing of the loans and the commencement of advances pursuant to the
Credit Facility contemplated hereby shall be subject to the satisfaction of the
following conditions:
6.1 COUNSEL TO LENDER. All legal matters incident to the transactions
herein contemplated shall be satisfactory to Gardere Wynne Sewell & Riggs, LLP,
counsel to the Lender.
6.2 REQUIRED DOCUMENTS. The Lender shall have received executed copies of
the following closing documentation:
(a) This Agreement;
(b) The Revolving Note A
(c) The Revolving Note B;
(d) The Facility C Note;
(e) The Ratification of Security Agreement;
(f) The Notice of Final Agreement; and
(g) Such other documentation as Lender may require, including
without limitation the documentation set forth on Exhibit
"6.2".
6.3 OTHER CONDITIONS. Other conditions and/or documentation have been
completed and/or executed in a manner satisfactory to Lender in its sole
discretion.
SECTION 7. MISCELLANEOUS
7.1 SURVIVAL OF VARIOUS MATTERS. All representations and warranties of the
Borrower and its Subsidiaries herein shall be deemed remade as of the date of
any borrowing hereunder, and all covenants and agreements herein not fully
performed before the date of this Agreement, shall survive such date.
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<PAGE>
7.2 NOTICES. All notices, requests, demands and other communications
required or permitted hereunder shall be in writing and may be personally served
or sent by telex, telecopier, mail or the express mail service of the United
States Postal Service, Federal Express or other equivalent overnight or
expedited delivery service and (i) if given by personal service, telex
(confirmed by telephone) or telecopier (confirmed by telephone), it shall be
deemed to have been given upon receipt, (ii) if sent by telex or telecopier
without telephone confirmation, it shall be deemed to have been given
twenty-four (24) hours after being sent, (iii) if sent by mail, it shall be
deemed to have been given upon receipt and (iv) if sent by Federal Express, the
Express Mail Service of the United States Postal Service or other equivalent
overnight or expedited delivery service, it shall be deemed given twenty-four
(24) hours after delivery to such overnight or expedited delivery service,
delivery charges prepaid and properly addressed to Borrower or Lender, as the
case may be. For purposes hereof, the address of Borrower and Lender shall be as
follows:
BORROWER:
Equus II Incorporated
2727 Allen Parkway Suite 2500
Houston, Texas 77019
Attention: Nolan Lehmann
Fax No.: (713) 529-9545
with a copy to:
Porter & Hedges, LLP
700 Louisiana, Suite 3500
Houston, Texas 77002
Attention: William W. Wiggins, Jr.
Fax No.: (713) 228-4935
LENDER:
NATIONSBANK, N.A., d/b/a BANK OF AMERICA, N.A.
700 Louisiana
Houston, Texas 77002
Attention: Larry B. Bell
Fax No.: (713) 247-7150
with a copy to:
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<PAGE>
Gardere Wynne Sewell & Riggs, LLP
1000 Louisiana, Suite 3400
Houston, Texas 77002
Attention: Mr. Robert W. Bramlette
Fax No.: (713) 276-5555
Any party may, by proper written notice hereunder to the other parties, change
the address to which notices shall thereafter be sent to it.
7.3 SUCCESSORS AND ASSIGNS. All covenants and agreements herein contained
by or on behalf of the Borrower shall bind its successors and assigns and shall
inure to the benefit of the Lender and its successors and assigns and all
covenants and agreements herein contained by or on behalf of the Lender shall
bind the Lender and its successors and assigns.
7.4 RENEWALS. All provisions of this Agreement relating to the Notes shall
apply with equal force and effect to each and all promissory notes hereafter
executed which in whole or in part represent a renewal, extension or
rearrangement of any part of the Indebtedness originally represented by the
Notes.
7.5 NO WAIVER. No course of dealing on the part of the Lender or its
officers or employees, or any failure or delay by the Lender with respect to
exercising any right, power or privilege of the Lender under this Agreement, the
Notes, or Security Instruments, shall operate as a waiver thereof. The rights
and remedies of the Lender under this Agreement, the Notes, and the Security
Instruments shall be cumulative and the exercise or partial exercise of any such
right or remedy shall not preclude the exercise of any other right or remedy.
7.6 GOVERNING LAW. This Agreement and the Notes which may be issued
hereunder shall be deemed to be contracts made under and shall be construed in
accordance with and governed by the laws of the State of Texas.
7.7 NON-SUBORDINATION. The Notes shall never be in a position subordinate
to any indebtedness owing to any other creditor of the Borrower or its
Subsidiaries, except to the extent that such other creditor may hold a lien or
liens on specific assets of the Borrower or its Subsidiaries pursuant to the
terms hereof or with the knowledge and written consent of the Lender.
7.8 EXHIBITS. The Exhibits attached to this Agreement are incorporated
herein for all purposes, and shall be considered a part of this Agreement. Those
exhibits are: Borrowing Application - Exhibit "1.3.1"; Revolving Note-A Exhibit
"1.3.2"; Revolving Note-B - "Exhibit "1.4"; Facility C Note - Exhibit "1.5";
Portfolio Investments - Exhibit "2.4"; Certificate of Compliance Exhibit "3.7";
Borrowing Base Report - Exhibit "3.10"; and Closing Requirements Exhibit "6.2".
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<PAGE>
7.9 PAYMENT ON NON-BUSINESS DAYS. Whenever (i) any payment to be made
hereunder or under the Notes or (ii) any certificate, report or financial
statement is due on a day that is a Saturday, Sunday or banking holiday under
the laws of the State of Texas, such payment shall be made on the next
succeeding day which is not a Saturday, Sunday or banking holiday under the laws
of the State of Texas and such extension of time shall be included in the
computation of interest due with such payment.
7.10 SEVERABILITY. In the event any one or more of the provisions
contained in this Agreement, the Notes, or the Security Instruments, or in any
other instrument referred to herein or executed in connection with or as
security for the Notes shall, for any reason, be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provision of this Agreement, the Notes, or the
Security Instruments, or any other instrument referred to herein or executed in
connection with or as security for the Notes. Furthermore, in lieu of such
invalid, illegal or unenforceable provision, there shall automatically be added
a provision as similar in terms to such invalid, illegal or unenforceable
provision as may be possible and as may be valid, legal and enforceable.
7.11 CONTROLLING DOCUMENT. Should a direct conflict exist between the
specific terms of the Notes, this Agreement or any of the Security Instruments,
the Notes shall control over this Agreement and the Security Instruments, and
this Agreement shall control over the Security Instruments and the exhibits
attached to this Agreement.
7.12 SAVINGS CLAUSE. Nothing contained in this Agreement or in the Notes
or in any other agreement or undertaking relating hereto shall be construed to
obligate Borrower, under any circumstances whatsoever, to pay interest in excess
of the maximum rate that Borrower may pay pursuant to applicable law and in
regard to which Borrower would be prohibited from successfully raising the claim
or defense of usury (the "Maximum Rate"). In the event that any sums received
from Borrower are at any time under applicable law deemed or held to provide a
rate of interest in excess of the Maximum Rate, the effective rate of interest
on the loans hereunder shall be deemed reduced to and shall be the Maximum Rate
and the Borrower and all sureties, endorsers and guarantors shall accept as
their sole remedy under such circumstances either the return of any sums of
interest which may have been collected and which produced a rate in excess of
the Maximum Rate, or the application of those sums as a credit against the
unpaid principal amount of the loan, whichever remedy may be elected by Lender.
In addition, in the event that the Notes are prepaid or the maturity of the
Notes is accelerated by reason of election by Lender hereunder, then all
unearned interest shall either be cancelled or, if theretofore paid, shall
either be returned to Borrower or credited on the unpaid principal amount due
under the Notes, whichever action may be elected by Lender.
7.13 INVESTMENT. Lender represents that it is the present intention of
Lender to acquire the Notes for its own account for the purpose of investment
and not with a view to the distribution or sale thereof, subject, nevertheless,
to the necessity that Lender remain in control at all times of the disposition
of property held by it for its own account; it being understood that the
foregoing
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<PAGE>
representation shall not affect the character of the loans pursuant to this
Agreement as commercial lending transactions, and that Lender may grant a
participation interest in the Notes in the ordinary course of business.
7.14 SET OFF. Upon the occurrence and during the continuance of any Event
of Default, the Lender is hereby authorized at any time and from time to time,
without notice to the Borrower (any such notice being expressly waived by the
Borrower), to set off and apply any and all deposits (general or special, time
or demand, provisional or final) at any time held and other indebtedness at any
time owing by the Lender to or for the credit or the account of the Borrower
against any and all of the Indebtedness, irrespective of whether or not the
Lender shall have made any demand under this Agreement and although such
obligations may be unmatured. The Lender agrees promptly to notify the Borrower
after any such set off and application made by the Lender, provided that the
failure to give such notice shall not affect the validity of such set off and
application. The rights of the Lender under this Section are in addition to
other rights and remedies (including, without limita tion, other rights of set
off) which the Lender may have.
7.15 INDEMNITY. BORROWER AGREES TO INDEMNIFY AND HOLD LENDER AND ITS
OFFICERS, EMPLOYEES, DIRECTORS AND AGENTS HARMLESS AGAINST ALL CLAIMS, DAMAGES,
LIABILITIES AND EXPENSES WHICH MAY BE ASSERTED AGAINST LENDER IN CONNECTION WITH
OR ARISING OUT OF ANY INVESTIGATION, LITIGATION OR PROCEEDING RELATED TO THIS
AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OTHER THAN CLAIMS ARISING FROM
SUCH INDEMNIFIED PARTY'S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT.
7.16 ARBITRATION. If any dispute arises among Borrower and Lender under
this Agreement or under any of the Security Documents, then such dispute shall
be resolved by binding arbitration in accordance with the Arbitration Program
described on Exhibit "7.16" attached hereto.
7.17 CHANGE OF ADVISORS. If, at any time while the Notes have any amount
outstanding or the Lender has a commitment hereunder, either Equus Capital
Management Corporation or Equus Capital Corporation cease to serve in their
current management and advisory capacities; a "Change of Advisors" shall be
deemed to have occurred. The Borrower shall promptly, but in any event within
ten (10) days give written notice to Lender upon obtaining knowledge of an event
which is or would constitute the occurrence of a Change of Advisors. Lender
shall, upon the happening of a Change of Advisors, have the privilege of
declaring the Revolving Note to be due and payable on a date not earlier than
sixty (60) days from the date of the exercise of said privilege. All Notes then
outstanding shall thereupon become due and payable on the date specified in the
notice sent to the Borrower by Lender including the principal amount thereof
plus accrued interest thereon to the accelerated maturity date and any amounts
owed by Borrower to Lender pursuant to this Agreement or the Security
Instruments and all Credits shall be required to be secured by cash collateral.
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<PAGE>
7.18 WAIVER OF JURY TRIAL, ETC.
EACH PARTY HERETO HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM,
DEMAND, ACTION OR CAUSE OF ACTION ARISING UNDER THIS AGREEMENT OR ANY OF THE
OTHER DOCUMENTS RELATED TO THIS AGREEMENT OR IN ANY WAY CONNECTED WITH OR
RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO IN RESPECT OF THIS
AGREEMENT OR ANY OF THE OTHER DOCUMENTS RELATED TO THIS AGREEMENT OR THE
TRANSACTIONS RELATED HERETO OR THERETO IN EACH CASE WHETHER NOW EXISTING OR
HEREAFTER ARISING, AND WHETHER IN CONTRACT, TORT, EQUITY OR OTHERWISE. EACH
PARTY HERETO MAY FILE AN ORIGINAL COUNTERPART OF A COPY OF THIS AGREEMENT AS
WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF THEIR
RIGHT TO TRIAL BY JURY.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
duly executed in multiple counterparts, each of which is an original instrument
for all purposes, all as of the day and year first above written.
THE WRITTEN LOAN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE
BORROWER AND THE LENDER AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREE MENTS OF THE BORROWER AND THE LENDER.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE LENDER AND THE BORROWER.
EQUUS II INCORPORATED, a Delaware
corporation
By /s/ PATRICK M. CAHILL
Patrick M. Cahill
Vice President
NATIONSBANK, N.A., d/b/a BANK OF
AMERICA, N.A.
By /s/ LARRY B. BELL
Larry B. Bell
Senior Vice President
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<PAGE>
EXHIBIT "1.3.1"
LOAN APPLICATION
___________, 19___
TO: ____________________________________________
FROM: __________________
1. Reference is made to that certain Loan Agreement, dated as of June 1,
1999 (the "Agreement"), between Equus II Incorporated, as Borrower, and
NATIONSBANK, N.A. d/b/a BANK OF AMERICA, N.A. as Lender. All terms defined in
such Agreement shall have the same meaning herein.
2. Please be advised that during normal banking hours on ______, 19__ ,
Borrower shall borrow from Lender the aggregate principal sum of $ which, when
borrowed, will cause the total outstanding principal amount of indebtedness
pursuant to the Credit Facility plus outstanding Letters of Credit to be
$_______.
3. Borrower has not acquired knowledge of any event which would make any
representation or warranty set forth in Section 2 of the Agreement untrue in any
material respect except as such may have been superseded by information
previously furnished to Lender, representations relating expressly to a given
date and as follows:
4. No Event of Default exists, and no event has occurred which with the
lapse of time or notice or both could become an Event of Default.
5. Please deposit the amount borrowed to Account #_____________________.
Very truly yours,
__________________________________
<PAGE>
Exhibit "1.3.2"
P R O M I S S O R Y N O T E
[REVOLVING NOTE-A]
$15,000,000 June 1, 1999
FOR VALUE RECEIVED, after date, without grace, in the manner, on the dates
and in the amounts so herein stipulated, the undersigned, EQUUS II INCORPORATED,
a Delaware corporation, acting by and through its duly authorized officer,
("Borrower"), PROMISES TO PAY TO THE ORDER OF NATIONSBANK, N.A. d/b/a BANK OF
AMERICA, N.A. ("Lender"), in Houston, Harris County, Texas, the sum of FIFTEEN
MILLION AND 00/100 DOLLARS ($15,000,000) or, if less, the aggregate unpaid
principal amount of advances made by Lender to Borrower pursuant to this Note,
in lawful money of the United States of America, which shall be legal tender in
payment of all debts and dues, public and private, at the time of payment, and
to pay interest on the unpaid principal amount from date until maturity at a
rate equal to, at Borrower's option (a) Lender's Prime Rate minus one-half of
one percent (0.5%) per annum, floating daily (as defined in the Loan Agreement
described herein) or (b) the Eurodollar Daily Floating Rate (as defined in the
Loan Agreement described herein) plus 1.65% per annum (each the "Stated Rate"),
not to exceed the maximum non-usurious interest rate permitted by applicable law
from time to time in effect as such law may be interpreted, amended, revised,
supplemented or enacted ("Maximum Rate"), provided that if at any time the
Stated Rate exceeds the Maximum Rate then interest hereon shall accrue at the
Maximum Rate. In the event the Stated Rate subsequently decreases to a level
which would be less than the Maximum Rate or if the Maximum Rate applicable to
this Note should subsequently be changed, then interest hereon shall accrue at a
rate equal to the applicable Maximum Rate until the aggregate amount of interest
so accrued equals the aggregate amount of interest which would have accrued at
the Stated Rate without regard to any usury limit, at which time interest hereon
shall again accrue at the Stated Rate. This Note is payable as follows:
Interest shall be due and payable quarterly as it accrues, on the
last day of June, September, December and March, commencing June 30, 1999
and on the 1st day of June, 2000, when the entire balance of principal and
accrued interest shall be due and payable.
It is agreed that time is of the essence of this agreement. In the event
of default in the payment of any installment of principal or interest when due
or in the event of any other default hereunder, Lender may accelerate and
declare this Note immediately due and payable without notice. Any failure to
exercise this option shall not constitute a waiver by Lender of the right to
exercise the same at any other time.
In the event of default in the making of any payment herein provided,
either of principal or interest, or in the event this Note is declared due,
interest shall accrue at the Prime Rate plus 2% not to exceed the Maximum Rate.
1
<PAGE>
Borrower hereby agrees to pay all expenses incurred, including reasonable
attorneys' fees, all of which shall become a part of the principal hereof, if
this Note is placed in the hands of an attorney for collection or if collected
by suit or through any probate, bankruptcy or any other legal proceedings.
Interest charges will be calculated on amounts advanced hereunder on the
actual number of days these amounts are outstanding on the basis of a 360-day
year, except for calculations of the Maximum Rate which will be on the basis of
a 365-day or 366-day year, as is applicable. It is the intention of the parties
hereto to comply with all applicable usury laws; accordingly, it is agreed that
notwithstanding any provision to the contrary in this Note, or in any of the
documents securing payment hereof or otherwise relating hereto, no such
provision shall require the payment or permit the collection of interest in
excess of the Maximum Rate. If any excess of interest in such respect is
provided for, or shall be adjudicated to be so provided for, in this Note or in
any of the documents securing payment hereof or otherwise relating hereto, then
in such event (1) the provisions of this paragraph shall govern and control, (2)
neither Borrower, endorsers or guarantors, nor their heirs, legal
representatives, successors or assigns nor any other party liable for the
payment hereof, shall be obligated to pay the amount of such interest to the
extent that it is in excess of the Maximum Rate, (3) any such excess which may
have been collected shall be either applied as a credit against the then unpaid
principal amount hereof or refunded to Borrower, and (4) the provisions of this
Note and any documents securing payment of this Note shall be automatically
reformed so that the effective rate of interest shall be reduced to the Maximum
Rate. For the purpose of determining the Maximum Rate, all interest payments
with respect to this Note shall be amortized, prorated and spread throughout the
full term of the Note so that the effective rate of interest on account of this
Note is uniform throughout the term hereof.
Borrower agrees that the Maximum Rate to be charged or collected pursuant
to this Note shall be the applicable indicated rate ceiling as defined in the
Texas Finance Code, as supplemented by Article 5069-1D.003 of the Texas Credit
Title, provided that Lender may rely on other applicable laws, including without
limitation laws of the United States, for calculation of the Maximum Rate if the
application thereof results in a greater Maximum Rate. Except as provided above,
the provi sions of this Note shall be governed by the laws of the State of
Texas.
Each maker, surety, guarantor and endorser (i) waives demand, grace,
notice, presentment for payment, notice of intention to accelerate the maturity
hereof, notice of acceleration of the maturity hereof and protest, (ii) agrees
that this Note and the liens securing its payment may be renewed, and the time
of payment extended from time to time, without notice and without releasing any
of the foregoing, and (iii) agrees that without notice or consent from any
maker, surety, guarantor, or endorser, Lender may release any collateral which
may from time to time be pledged to secure repayment of this Note, or may
release any party who might be liable for this Note. Borrower grants to Lender a
lien on any of Borrower's funds which may from time to time be deposited with
Lender.
2
<PAGE>
Borrower may prepay this Note, in whole or in part, at any time prior to
maturity without penalty, and interest shall cease on any amount prepaid. Any
partial prepayment shall be applied toward the payment of the principal
installments last maturing on the Note, that is, in the inverse order of
maturity, without reducing the amount or time of payment of the remaining
installments.
The principal of this Note represents funds which Lender will advance to
Borrower from time to time upon request of Borrower. Any part of the principal
may be repaid by Borrower and thereafter reborrowed, provided the outstanding
principal amount of this Note shall never exceed the face amount of this Note.
Each advance shall constitute a part of the principal hereof and shall bear
interest from the date of the advance. The provisions of Tex. Rev. Civ. Stat.
Ann. art. 5069-15.01, ET SEQ., as may be amended, shall not apply to this Note
or to any of the security documents executed in connection with this Note.
This Note is the Revolving Note-A referred to in, is subject to, and is
entitled to the benefits of, the Second Amended and Restated Loan Agreement
dated June 1, 1999 between Borrower and Lender, as that Second Amended and
Restated Loan Agreement may be amended, modified or supplemented from time to
time (the "Loan Agreement"). The Loan Agreement contains, among other things,
provisions for the acceleration of the maturity hereof upon the occurrence of
certain stated events. This Note is given in renewal and extension of that
certain promissory note of Borrower dated April 1, 1999 in favor of Lender and
in the principal amount of $22,500,000, which was given in replacement,
extension and reduction of that certain promissory note of Borrower dated
November 5, 1998 in favor of Lender and in the principal amount of $22,500,000,
which was given in replacement, extension and reduction of that certain
promissory note of Borrower dated March 31, 1998 in favor of Lender and in the
original principal amount of $30,000,000, which was given in increase,
replacement and extension of that certain promissory note of the Borrower dated
March 26, 1997, in favor of the Lender and in the original principal amount of
$22,500,000, which was given in increase, replacement and extension of that
certain promissory note of the Borrower dated March 18, 1996, in favor of the
Lender and in the original principal amount of $12,500,000, and the liens
securing payment thereof are not released but are hereby ratified and carried
forward to secure this Note.
This Note is entitled to the benefits of and security afforded by the
Security Agreement- Pledge dated March 18, 1996 between Borrower and Lender, as
that Security Agreement-Pledge may be ratified, amended, modified or
supplemented from time to time. This Note is subject to the provisions contained
in the foregoing security instrument which, among other things, provides for
acceleration of the maturity hereof upon the occurrence of certain events.
3
<PAGE>
Borrower represents and warrants that this loan is for business,
commercial, investment or similar purpose and not primarily for personal,
family, household or agricultural use, as such terms are used in Chapter One of
the Texas Credit Code.
EQUUS II INCORPORATED,
A DELAWARE CORPORATION
By:___________________________________
Patrick M. Cahill, Vice President
4
<PAGE>
Exhibit "1.4"
P R O M I S S O R Y N O T E
[REVOLVING NOTE - B]
$25,000,000 June 1, 1999
FOR VALUE RECEIVED, after date, without grace, in the manner, on the dates
and in the amounts so herein stipulated, the undersigned, EQUUS II INCORPORATED,
a Delaware corporation, acting by and through its duly authorized officer
("Borrower"), PROMISES TO PAY TO THE ORDER OF NATIONSBANK, N.A. d/b/a BANK OF
AMERICA, N.A. ("Lender"), in Houston, Harris County, Texas, the sum of
TWENTY-FIVE MILLION AND 00/100 DOLLARS ($25,000,000) or, if less, the aggregate
unpaid principal amount of advances made by Lender to Borrower pursuant to this
Note, in lawful money of the United States of America, which shall be legal
tender in payment of all debts and dues, public and private, at the time of
payment, and to pay interest on the unpaid principal amount from date until
maturity at a rate equal to Lender's Prime Rate (as defined in the Loan
Agreement described herein) plus one quarter percent (1/4%) per annum, floating
daily ("Stated Rate"), not to exceed the maximum non-usurious interest rate
permitted by applicable law from time to time in effect as such law may be
interpreted, amended, revised, supplemented or enacted ("Maximum Rate"),
provided that if at any time the Stated Rate exceeds the Maximum Rate then
interest hereon shall accrue at the Maximum Rate. In the event the Stated Rate
subsequently decreases to a level which would be less than the Maximum Rate or
if the Maximum Rate applicable to this Note should subsequently be changed, then
interest hereon shall accrue at a rate equal to the applicable Maximum Rate
until the aggregate amount of interest so accrued equals the aggregate amount of
interest which would have accrued at the Stated Rate without regard to any usury
limit, at which time interest hereon shall again accrue at the Stated Rate. This
Note is payable as follows:
Interest shall be due and payable quarterly as it accrues, on the
last day of June, September, December and March, commencing June 30, 1999
and on the 1st day of June, 2000, when the entire balance of principal and
accrued interest shall be due and payable.
It is agreed that time is of the essence of this agreement. In the event
of default in the payment of any installment of principal or interest when due
or in the event of any other default hereunder, Lender may accelerate and
declare this Note immediately due and payable without notice. Any failure to
exercise this option shall not constitute a waiver by Lender of the right to
exercise the same at any other time.
In the event of default in the making of any payment herein provided,
either of principal or interest, or in the event this Note is declared due,
interest shall accrue at Prime Rate plus 2% not to exceed the Maximum Rate.
Borrower hereby agrees to pay all expenses incurred, including reasonable
attorneys' fees, all of which shall become a part of the principal hereof, if
this Note is placed in the hands of an attorney for collection or if collected
by suit or through any probate, bankruptcy or any other legal proceedings.
-1-
<PAGE>
Interest charges will be calculated on amounts advanced hereunder on the
actual number of days these amounts are outstanding on the basis of a 360-day
year, except for calculations of the Maximum Rate which will be on the basis of
a 365-day or 366-day year, as is applicable. It is the intention of the parties
hereto to comply with all applicable usury laws; accordingly, it is agreed that
notwithstanding any provision to the contrary in this Note, or in any of the
documents securing payment hereof or otherwise relating hereto, no such
provision shall require the payment or permit the collection of interest in
excess of the Maximum Rate. If any excess of interest in such respect is
provided for, or shall be adjudicated to be so provided for, in this Note or in
any of the documents securing payment hereof or otherwise relating hereto, then
in such event (1) the provisions of this paragraph shall govern and control, (2)
neither Borrower, endorsers or guarantors, nor their heirs, legal
representatives, successors or assigns nor any other party liable for the
payment hereof, shall be obligated to pay the amount of such interest to the
extent that it is in excess of the Maximum Rate, (3) any such excess which may
have been collected shall be either applied as a credit against the then unpaid
principal amount hereof or refunded to Borrower, and (4) the provisions of this
Note and any documents securing payment of this Note shall be automatically
reformed so that the effective rate of interest shall be reduced to the Maximum
Rate. For the purpose of determining the Maximum Rate, all interest payments
with respect to this Note shall be amortized, prorated and spread throughout the
full term of the Note so that the effective rate of interest on account of this
Note is uniform throughout the term hereof.
Borrower agrees that the Maximum Rate to be charged or collected pursuant
to this Note shall be the applicable indicated rate ceiling as defined in the
Texas Finance Code, as supplemented by Article 50691D.003 of the Texas Credit
Title, provided that Lender may rely on other applicable laws, including without
limitation laws of the United States, for calculation of the Maximum Rate if the
application thereof results in a greater Maximum Rate. Except as provided above,
the provisions of this Note shall be governed by the laws of the State of Texas.
Each maker, surety, guarantor and endorser (i) waives demand, grace,
notice, presentment for payment, notice of intention to accelerate the maturity
hereof, notice of acceleration of the maturity hereof and protest, (ii) agrees
that this Note and the liens securing its payment may be renewed, and the time
of payment extended from time to time, without notice and without releasing any
of the foregoing, and (iii) agrees that without notice or consent from any
maker, surety, guarantor, or endorser, Lender may release any collateral which
may from time to time be pledged to secure repayment of this Note, or may
release any party who might be liable for this Note. Borrower grants to Lender a
lien on any of Borrower's funds which may from time to time be deposited with
Lender.
Borrower may prepay this Note, in whole or in part, at any time prior to
maturity without penalty, and interest shall cease on any amount prepaid. Any
partial prepayment shall be applied toward the payment of the principal
installments last maturing on the Note, that is, in the inverse order of
maturity, without reducing the amount or time of payment of the remaining
installments.
The principal of this Note represents funds which Lender will advance to
Borrower from time to time upon request of Borrower. Any part of the principal
may be repaid by Borrower and thereafter reborrowed, provided the outstanding
principal amount of this Note shall never exceed the face amount of this Note.
-2-
<PAGE>
Each advance shall constitute a part of the principal hereof and shall bear
interest from the date of the advance. The provisions of Tex. Rev. Civ. Stat.
Ann. art. 5069-15.01, ET SEQ., as may be amended, shall not apply to this Note
or to any of the security documents executed in connection with this Note.
This Note is the Revolving Note-B referred to in, is subject to, and is
entitled to the benefits of, the Second Amended and Restated Loan Agreement
dated June 1, 1999 between Borrower and Lender, as that Second Amended and
Restated Loan Agreement may be amended, modified or supplemented from time to
time (the "Loan Agreement"). The Loan Agreement contains, among other things,
provisions for the acceleration of the maturity hereof upon the occurrence of
certain stated events. This Note is given in replacement of that certain
promissory note of Borrower dated April 1, 1999 in favor of Lender and in the
principal amount of $27,500,000, which was given in replacement, extension and
increase of that certain promissory note of Borrower dated November 5, 1998 in
favor of Lender and in the principal amount of $27,500,000, which was given in
replacement, extension and increase of that certain promissory note of Borrower
dated August 14, 1998 in favor of Lender and in the original principal amount of
$20,000,000, which was given in replacement, extension and increase of that
certain promissory note of Borrower dated March 31, 1998 in favor of Lender and
in the original principal amount of $10,000 000, which was given in replacement
and extension of that certain promissory note of the Borrower dated March 26,
1997 in favor of the Lender and in the original principal amount of $7,500,000,
which was given in replacement and extension of that certain promissory note of
the Borrower dated March 18, 1996 in favor of the Lender and in the original
principal amount of $7,500,000, and the liens securing the payment thereof are
not released but are hereby ratified and carried forward to secure this Note.
This Note is entitled to the benefits of and security afforded by the
Security Agreement-Pledge dated March 18, 1996 between Borrower and Lender, as
that Security Agreement-Pledge may be ratified, amended, modified or
supplemented from time to time. This Note is subject to the provisions contained
in the foregoing security instrument which, among other things, provides for
acceleration of the maturity hereof upon the occurrence of certain events.
Borrower represents and warrants that this loan is for business,
commercial, investment or similar purpose and not primarily for personal,
family, household or agricultural use, as such terms are used in Chapter One of
the Texas Credit Code.
EQUUS II INCORPORATED,
A DELAWARE CORPORATION
By: ____________________________________
Patrick M. Cahill, Vice President
-3-
<PAGE>
Exhibit "1.5"
P R O M I S S O R Y N O T E
[FACILITY C NOTE]
$100,000,000 June 1, 1999
FOR VALUE RECEIVED, after date, without grace, in the manner, on the dates
and in the amounts so herein stipulated, the undersigned, EQUUS II INCORPORATED,
a Delaware corporation, acting by and through its duly authorized officer
("Borrower"), PROMISES TO PAY TO THE ORDER OF NATIONSBANK, N.A. d/b/a BANK OF
AMERICA, N.A. ("Lender"), in Houston, Harris County, Texas, the sum of ONE
HUNDRED MILLION AND NO/100 DOLLARS ($100,000,000) or, if less, the aggregate
unpaid principal amount of advances made by Lender to Borrower pursuant to this
Note, in lawful money of the United States of America, which shall be legal
tender in payment of all debts and dues, public and private, at the time of
payment, and to pay interest on the unpaid principal amount from date until
maturity at a rate equal to Cash Collateral Account Rate plus one-half of one
percent (0.5%) per annum, floating daily (as defined in, and subject to
adjustment as set forth in Section 1.5(c) of, the Loan Agreement) ("Stated
Rate"), not to exceed the maximum non-usurious interest rate permitted by
applicable law from time to time in effect as such law may be interpreted,
amended, revised, supplemented or enacted ("Maximum Rate"), provided that if at
any time the Stated Rate exceeds the Maximum Rate then interest hereon shall
accrue at the Maximum Rate. In the event the Stated Rate subsequently decreases
to a level which would be less than the Maximum Rate or if the Maximum Rate
applicable to this Note should subsequently be changed, then interest hereon
shall accrue at a rate equal to the applicable Maximum Rate until the aggregate
amount of interest so accrued equals the aggregate amount of interest which
would have accrued at the Stated Rate without regard to any usury limit, at
which time interest hereon shall again accrue at the Stated Rate. This Note is
payable as follows:
Interest shall be payable on the 15th day of each month and
simultaneously with repayment of principal. Principal shall be payable on
the fifth (5th) Business Day following each advance in an amount equal to
such advance.
The entire balance of principal and accrued interest shall be due
and payable on June 1, 2000.
It is agreed that time is of the essence of this agreement. In the event
of default in the payment of any installment of principal or interest when due
or in the event of any other default hereunder, Lender may accelerate and
declare this Note immediately due and payable without notice. Any failure to
exercise this option shall not constitute a waiver by Lender of the right to
exercise the same at any other time.
In the event of default in the making of any payment herein provided,
either of principal or interest, or in the event this Note is declared due,
interest shall accrue at Prime Rate plus two percent (2%) not to exceed the
Maximum Rate.
-1-
<PAGE>
Borrower hereby agrees to pay all expenses incurred, including reasonable
attorneys' fees, all of which shall become a part of the principal hereof, if
this Note is placed in the hands of an attorney for collection or if collected
by suit or through any probate, bankruptcy or any other legal proceedings.
Interest charges will be calculated on amounts advanced hereunder on the
actual number of days these amounts are outstanding on the basis of a 360-day
year, except for calculations of the Maximum Rate which will be on the basis of
a 365-day or 366-day year, as is applicable. It is the intention of the parties
hereto to comply with all applicable usury laws; accordingly, it is agreed that
notwithstanding any provision to the contrary in this Note, or in any of the
documents securing payment hereof or otherwise relating hereto, no such
provision shall require the payment or permit the collection of interest in
excess of the Maximum Rate. If any excess of interest in such respect is
provided for, or shall be adjudicated to be so provided for, in this Note or in
any of the documents securing payment hereof or otherwise relating hereto, then
in such event (1) the provisions of this paragraph shall govern and control, (2)
neither Borrower, endorsers or guarantors, nor their heirs, legal
representatives, successors or assigns nor any other party liable for the
payment hereof, shall be obligated to pay the amount of such interest to the
extent that it is in excess of the Maximum Rate, (3) any such excess which may
have been collected shall be either applied as a credit against the then unpaid
principal amount hereof or refunded to Borrower, and (4) the provisions of this
Note and any documents securing payment of this Note shall be automatically
reformed so that the effective rate of interest shall be reduced to the Maximum
Rate. For the purpose of determining the Maximum Rate, all interest payments
with respect to this Note shall be amortized, prorated and spread throughout the
full term of the Note so that the effective rate of interest on account of this
Note is uniform throughout the term hereof.
Borrower agrees that the Maximum Rate to be charged or collected pursuant
to this Note shall be the applicable indicated rate ceiling as defined in the
Texas Finance Code, as supplemented by Article 5069- 1D.003 of the Texas Credit
Code, provided that Lender may rely on other applicable laws, including without
limitation laws of the United States, for calculation of the Maximum Rate if the
application thereof results in a greater Maximum Rate. Except as provided above,
the provisions of this Note shall be governed by the laws of the State of Texas.
As used in this Note, the term "Cash Collateral Account Rate" shall mean
the interest rate actually earned by Borrower on investments in that certain
Cash Collateral Account (as such term is defined in the Loan Agreement) during
the period principal amounts are owed pursuant to this Note.
Each maker, surety, guarantor and endorser (i) waives demand, grace,
notice, presentment for payment, notice of intention to accelerate the maturity
hereof, notice of acceleration of the maturity hereof and protest, (ii) agrees
that this Note and the liens securing its payment may be renewed, and the time
of payment extended from time to time, without notice and without releasing any
of the foregoing, and (iii) agrees that without notice or consent from any
maker, surety, guarantor, or endorser, Lender may release any collateral which
may from time to time be pledged to secure repayment of this Note, or may
release any party who might be liable for this Note. Borrower grants to Lender a
lien on any of Borrower's funds which may from time to time be deposited with
Lender.
-2-
<PAGE>
Borrower may prepay this Note, in whole or in part, at any time prior to
maturity without penalty, and interest shall cease on any amount prepaid. Any
partial prepayment shall be applied toward the payment of the principal
installments last maturing on the Note, that is, in the inverse order of
maturity, without reducing the amount or time of payment of the remaining
installments.
The principal of this Note represents funds which Lender will advance to
Borrower from time to time upon request of Borrower. Any part of the principal
may be repaid by Borrower and thereafter reborrowed, provided the outstanding
principal amount of this Note shall never exceed the face amount of this Note.
Each advance shall constitute a part of the principal hereof and shall bear
interest from the date of the advance. The provisions of Tex. Rev. Civ. Stat.
Ann. art. 5069-15.01, ET SEQ., as may be amended, shall not apply to this Note
or to any of the security documents executed in connection with this Note.
This Note is the Facility C Note referred to in, is subject to, and is
entitled to the benefits of, the Second Amended and Restated Loan Agreement
dated June 1, 1999 between Borrower and Lender, as that Second Amended and
Restated Loan Agreement may be amended, modified or supplemented from time to
time (the "Loan Agreement"). The Loan Agreement contains, among other things,
provisions for the acceleration of the maturity hereof upon the occurrence of
certain stated events. This Note is given in replacement and extension of that
certain promissory Note of the Borrower dated April 1, 1999 in favor of the
Lender in the original principal amount of $150,000,000, which was given in
replacement and extension of that certain promissory Note of the Borrower dated
March 31, 1998 in favor of the Lender in the original principal amount of
$150,000,000, which was given in replacement and extension of that certain
promissory Note of the Borrower dated September __, 1997 in favor of the Lender
in the original principal amount of $150,000,000, which was given in replacement
and extension of that certain promissory Note of the Borrower dated June 30,
1997 in favor of the Lender in the original principal amount of $90,000,000,
which was given in replacement and extension of that certain promissory Note of
the Borrower dated March 28, 1997 in favor of the Lender in the original
principal amount of $65,000,000, which was given in replacement and extension of
that certain promissory Note of the Borrower dated March 29, 1996 in favor of
the Lender in the original principal amount of $65,000,000, and the liens
securing the payment thereof are not released but are hereby ratified and
carried forward as security for this Note.
This Note is entitled to the benefits of and security afforded by the
Security Agreement-Pledge (Facility C) dated March 29, 1996, between Borrower
and Lender, as that Security Agreement-Pledge (Facility C) may be amended,
modified or supplemented from time to time. This Note is subject to the
provisions contained in the foregoing security instrument which, among other
things, provides for acceleration of the maturity hereof upon the occurrence of
certain events.
-3-
<PAGE>
Borrower represents and warrants that this loan is for business,
commercial, investment or similar purpose and not primarily for personal,
family, household or agricultural use, as such terms are used in Chapter One of
the Texas Credit Code.
EQUUS II INCORPORATED,
A DELAWARE CORPORATION
By: __________________________________
Patrick M. Cahill, Vice President
-4-
<PAGE>
EXHIBIT 2.4
-----------
PORTFOLIO INVESTMENTS - PUBLIC CORPORATIONS
-------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
DIRECTOR POSITIONS HELD NUMBER OF SHARES OF STOCK NUMBER OF
BY REPRESENTATIVE OF SHARES OF AUTHORIZED TO SHARES OF
NAME OF ISSUING BORROWER OR ITS STOCK BE ISSUED STOCK HELD BY
CORPORATION CLASSES OF STOCK AFFILIATES OUTSTANDING (BY CLASS) BORROWER
- --------------- ---------------- ----------------------- ----------- ----------------- -------------
<S><C> <C> <C> <C> <C> <C>
</TABLE>
[TO BE PROVIDED BY EQUUS]
<PAGE>
EXHIBIT 2.4
-----------
PORTFOLIO INVESTMENTS - PUBLIC CORPORATIONS (CONT'D)
----------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF SHARES
NUMBER OF CURRENT PUBLIC OF STOCK SOLD BY
REGISTERED INFORMATION BORROWER OR
DATE STOCK SHARES OF STOCK EXCHANGE REQUIREMENTS AVERAGE WEEKLY AFFILIATE WITHIN
WAS ACQUIRED STOCK HELD (IF ANY) OR OF RULE 144 TRADED VOLUME OF PRECEDING THREE ADDITIONAL
BY BORROWER BY BORROWER NASDAQ SATISFIED STOCK MONTHS INFORMATION
- ------------ ----------- -------------- -------------- ---------------- ---------------- -----------
<S><C> <C> <C> <C> <C> <C> <C>
</TABLE>
<PAGE>
EXHIBIT 2.4
-----------
PORTFOLIO INVESTMENTS - PRIVATE COMPANIES
-----------------------------------------
<TABLE>
<CAPTION>
DIRECTOR POSITIONS
HELD BY REPRESENTA- NUMBER OF SHARES OF
NAME OF ISSUING TIVE OF BORROWER OR ITS NUMBER OF SHARES STOCK AUTHORIZED TO BE
CORPORATION AFFILIATES CLASSES OF STOCK STOCK OUTSTANDING ISSUED (BY CLASS)
- --------------- ----------------------- ---------------- ----------------- ------------------------
<S><C> <C> <C> <C> <C>
</TABLE>
[TO BE PROVIDED BY EQUUS]
<PAGE>
EXHIBIT 2.4
-----------
PORTFOLIO INVESTMENTS - PRIVATE COMPANIES (CONT'D)
--------------------------------------------------
NUMBER OF SHARES OF
STOCK HELD BY DATE STOCK WAS ADDITIONAL
BORROWER ACQUIRED BY BORROWER INFORMATION
- ------------------- -------------------- -----------
<PAGE>
EXHIBIT "3.7"
CERTIFICATE OF COMPLIANCE
-------------------------
In accordance with Section 3.7 of the Loan Agreement ("Loan Agreement")
dated June 1, 1999, between NATIONSBANK, N.A. d/b/a BANK OF AMERICA, N.A.
("Lender") and Equus II Incorporated, ("Borrower"), I,_________________ ,
_____________of the Borrower do hereby certify that the following is true and
correct as of _________, 19_______.
1. To the best of my knowledge and belief, that the Borrower is not in
default under the Loan Agreement, the Notes, and the Security Instruments.
2. Attached is a list of Borrower's Portfolio Investments as of the end of
the preceding fiscal quarter.
The foregoing terms are used as defined in the Loan Agreement.
----------------------------------
(Signature of Certifying Officer)
<PAGE>
EXHIBIT "3.10"
BORROWING BASE REPORT
FORM OF
BORROWING BASE CERTIFICATE
NO. ____________________ Dated ____________, 19_______
In accordance with a loan agreement ("Agreement") dated June 1, 1999
between NATIONSBANK, N.A., d/b/a BANK OF AMERICA, N.A. ("Lender") and Equus II
Incorporated ("Borrower"), I, ____________________________ of the Borrower
hereby certify and warrant that the following schedule accurately states
Borrower's Eligible Public Securities and Eligible Other Securities and
Borrower's Borrowing Base A and Borrowing Base B as of the date hereof:
Borrowing Base A
1. Eligible Public Securities $________________
x .50
2. Adjusted Eligible Public Securities $________________
3. Lesser of $15,000,000 and Line 2 $________________
4. Outstanding Principal Balance - Revolving Facility A $________________
5. Face Amount, Unexpired Credits - Revolving Facility A $________________
6. Sum of 4 + 5 $________________
7. Availability - Revolving Facility A (Line 3 minus Line 6)$________________
Borrowing Base B
8. Eligible Other Securities $________________
x .25
9. Adjusted Eligible Other Securities $________________
10. Amount by which Line 2 exceed $15,000,000 $________________
11. Line 9 plus Line 10 $________________
12. Lesser of $25,000,000 and Line 11 $________________
13. Outstanding Principal Balance - Revolving Facility B $________________
14. Availability - Revolving Facility B
(Line 12 minus Line 13) $________________
15. Overall Facility Availability $40,000,000
16. Net Asset Value $________________
<PAGE>
x. .33
17. Adjusted Net Asset Value $________________
18. Lesser of Line 15 and Line 17 $________________
19. Outstanding Usage Facility A (Line 6) $________________
20. Outstanding Balance Facility B (Line 12) $________________
21. Total Usage (Line 19 + 20) $________________
22. Availability - Overall Facility (Line 18 minus Line 21) $________________
23. Availability - A (Lesser of 7 and 22) $________________
24. Availability - B (Lesser of 14 and 22) $________________
The Undersigned further certifies and covenants that there has been no
material adverse change in the financial condition of Borrower from that shown
by the financial statements furnished to Lender and to the best of his knowledge
that no default under the Agreement is existing on the date of this certificate,
and that the foregoing report is true and correct as of the date, and that the
items mentioned herein constitute collateral in accordance with the terms of the
Agreement.
--------------------------------------
Signature of Certifying Officer
Title:________________________________
<PAGE>
Exhibit "6.2"
CLOSING REQUIREMENTS
--------------------
DOCUMENT RESPONSIBILITY
-------- --------------
1. Promissory Note - A ($15,000,000.00) ..........................GWS&R
2. Promissory Note - B ($25,000,000.00) ..........................GWS&R
3. Promissory Note - C ($100,000,000.00)..........................GWS&R
4. Second Amended and Restated Loan Agreement ....................GWS&R
5. Ratification of Security Agreement-Pledge .....................GWS&R
6. Certified Resolutions/Incumbency ..............................EII
a. Articles of Incorporation ..................................EII
b. By-Laws ....................................................EII
c. Resolution .................................................EII
d. Incumbency .................................................EII
7. Certificate of Existence and Good Standing - Deleware .........P&H
8. Certificate of Authority - Texas ..............................P&H
9. Notice of Final Agreement .....................................GWS&R
10. Opinion of Counsel ...........................................P&H
11. Delivery of Collateral .......................................EII/BA
12. Stock Powers .................................................EII/BA
13. Regulation U-1 ...............................................BA
14. Updated Exhibit 2.4 ..........................................BA
GWS&R - Gardere Wynne Sewell & Riggs L.L.P.
BA - NationsBank, N.A. d/b/a Bank of America, N.A.
EII - Equus II Incorporated
P&H - Porter & Hedges
<PAGE>
Exhibit "7.16"
ARBITRATION PROGRAM
----------------------
MANDATORY ARBITRATION. Any controversy or claim between or among the parties
hereto including but not limited to those arising out of or relating to this
Agreement or any related agreements or instruments, including any claim based on
or arising from an alleged tort, shall be determined by binding arbitration in
accordance with the Federal Arbitration Act (or if not applicable, the
applicable state law), the Rules of Practice and Procedure for the Arbitration
of Commercial Disputes of Judicial Arbitration and Mediation Services, Inc.
(J.A.M.S.), and the "Special Rules" set forth below. In the event of any
inconsistency, the Special Rules shall control. Judgment upon any arbitration
award may be entered in any court having jurisdiction. Any party to this
Agreement may bring an action, including a summary or expedited proceeding, to
compel arbitration of any controversy or claim to which this agreement applies
in any court having jurisdiction over such action.
1. SPECIAL RULES. The arbitration shall be conducted in the city of the
Borrower's domicile at time of this Agreement's execution and administered by
J.A.M.S. who will appoint an arbitrator; if J.A.M.S. is unable or legally
precluded from administering the arbitration, then the American Arbitration
Association will serve. All arbitration hearings will be commenced within 90
days of the demand for arbitration; further, the arbitrator shall only, upon a
showing of cause, be permitted to extend the commencement of such hearing for up
to an additional 60 days.
2. RESERVATIONS OF RIGHTS. Nothing in this Agreement shall be deemed to
(i) limit the applicability of any otherwise applicable statutes of limitation
or repose and any waivers contained in this Agreement; or (ii) be a waiver by
Lender of the protection afforded to it by 12 U.S.C. Sec. 91 or any
substantially equivalent state law; or (iii) limit the right of Lender (A) to
exercise self help remedies such as (but not limited to) setoff, or (B) to
foreclose against any real or personal property collateral, or (C) to obtain
from a court provisional or ancillary remedies such as (but not limited to)
injunctive relief or the appointment of a receiver. Lender may exercise such
self help rights, foreclose upon such property, or obtain such provisional or
ancillary remedies before, during or after the pendency of any arbitration
proceeding brought pursuant to this Agreement. At Lender's option, foreclosure
under a deed of trust or mortgage may be accomplished by any of the following:
the exercise of a power of sale under the deed of trust or mortgage, or by
judicial sale under the deed of trust or mortgage, or by judicial foreclosure.
Neither the exercise of self help remedies nor the institution or maintenance of
an action for foreclosure or provisional or ancillary remedies shall constitute
a waiver of the right of any party, including the claimant in any such action,
to arbitrate the merits of the controversy or claim occasioning resort to such
remedies.
No provision in the Security Documents regarding submission to
jurisdiction and/or venue in any court is intended or shall be construed to be
in derogation of the provisions in any Loan Document for arbitration of any
controversy or claim.
Page 1 of 1
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<INVESTMENTS-AT-COST> 162,549,792
<INVESTMENTS-AT-VALUE> 187,723,608
<RECEIVABLES> 2,296,986
<ASSETS-OTHER> 12,500
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 190,033,094
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 73,350,000
<OTHER-ITEMS-LIABILITIES> 1,273,356
<TOTAL-LIABILITIES> 74,623,356
<SENIOR-EQUITY> 4,954
<PAID-IN-CAPITAL-COMMON> 77,917,681
<SHARES-COMMON-STOCK> 4,954,304
<SHARES-COMMON-PRIOR> 4,954,304
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 12,313,287
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 25,173,816
<NET-ASSETS> 115,409,738
<DIVIDEND-INCOME> 457,473
<INTEREST-INCOME> 2,039,780
<OTHER-INCOME> 0
<EXPENSES-NET> 2,994,848
<NET-INVESTMENT-INCOME> (497,595)
<REALIZED-GAINS-CURRENT> 18,882,686
<APPREC-INCREASE-CURRENT> (19,137,881)
<NET-CHANGE-FROM-OPS> (752,790)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (752,790)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (6,569,399)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,113,393
<INTEREST-EXPENSE> 1,487,248
<GROSS-EXPENSE> 2,994,848
<AVERAGE-NET-ASSETS> 115,762,383
<PER-SHARE-NAV-BEGIN> 23.45
<PER-SHARE-NII> (0.10)
<PER-SHARE-GAIN-APPREC> (0.06)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 23.29
<EXPENSE-RATIO> 2.59
[AVG-DEBT-OUTSTANDING] 37,972,099
[AVG-DEBT-PER-SHARE] 7.66
</TABLE>
