-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HcJFXv0KFGS25fzBzmhF6TGX/1SVrR0Ea50sUXSrkGDoHZ2xFI+8QnyD1Wl3UiCQ BK+wL2yNmf941X4MlcKpTA== 0000950123-01-502359.txt : 20010515 0000950123-01-502359.hdr.sgml : 20010515 ACCESSION NUMBER: 0000950123-01-502359 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALLEGHANY CORP /DE CENTRAL INDEX KEY: 0000775368 STANDARD INDUSTRIAL CLASSIFICATION: TITLE INSURANCE [6361] IRS NUMBER: 510283071 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-09371 FILM NUMBER: 1632008 BUSINESS ADDRESS: STREET 1: 375 PARK AVENUE STREET 2: SUITE 3201 CITY: NEW YORK STATE: NY ZIP: 10152 BUSINESS PHONE: 2127521356 MAIL ADDRESS: STREET 1: 375 PARK AVENUE STREET 2: SUITE 3201 CITY: NEW YORK STATE: NY ZIP: 10152 FORMER COMPANY: FORMER CONFORMED NAME: ALLEGHANY FINANCIAL CORP DATE OF NAME CHANGE: 19870115 10-Q 1 y49088e10-q.txt ALLEGHANY CORPORATION 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR QUARTER ENDED MARCH 31, 2001 COMMISSION FILE NUMBER 1-9371 ALLEGHANY CORPORATION --------------------- EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER DELAWARE -------- STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION 51-0283071 ---------- INTERNAL REVENUE SERVICE EMPLOYER IDENTIFICATION NUMBER 375 PARK AVENUE, NEW YORK, NEW YORK 10152 ----------------------------------------- ADDRESS OF PRINCIPAL EXECUTIVE OFFICE, INCLUDING ZIP CODE 212/752-1356 ------------ REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE NOT APPLICABLE -------------- FORMER NAME, FORMER ADDRESS, AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT 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 YES [X] NO [ ] INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASS OF COMMON STOCK, AS OF THE CLOSE OF THE PERIOD COVERED BY THIS REPORT: 7,263,018 --------- (AS OF MARCH 31, 2001) 2 ITEM 1. FINANCIAL STATEMENTS ALLEGHANY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000 (dollars in thousands, except share and per share amounts) (unaudited)
2001 2000*** ---------- ---------- REVENUES Net property and casualty premiums earned $ 76,447 $ 155,089 Interest, dividend and other income 55,413 54,356 Net mineral and filtration sales 50,158 49,106 Gain on sale of subsidiary 775,823 0 Net gain on investment transactions 1,065 394 ---------- ---------- Total revenues 958,906 258,945 ---------- ---------- COSTS AND EXPENSES Commissions and brokerage expenses 20,599 44,136 Salaries, administrative and other operating expenses 53,173 54,011 Property and casualty losses and loss adjustment expenses 63,670 166,004 Cost of mineral and filtration sales 38,913 34,658 Interest expense 4,014 7,699 Corporate administration 23,731 5,571 ---------- ---------- Total costs and expenses 204,100 312,079 ---------- ---------- Earnings (loss) from continuing operations, before income taxes 754,806 (53,134) Income taxes 294,331 (19,802) ---------- ---------- Earnings (loss) from continuing operations 460,475 (33,332) DISCONTINUED OPERATIONS (Loss) earnings from discontinued operations, net of tax (5,066) 8,626 ---------- ---------- Net earnings (loss) $ 455,409 ($24,706) ========== ========== BASIC EARNINGS PER SHARE OF COMMON STOCK ** Continuing operations $ 63.69 ($4.39) Discontinued operations (0.70) 1.14 ---------- ---------- Basic net earnings per share $ 62.99 ($3.25) ========== ========== DILUTED EARNINGS PER SHARE OF COMMON STOCK ** Continuing operations $ 62.75 ($4.39) Discontinued operations (0.69) 1.14 ---------- ---------- Diluted net earnings per share $ 62.06 ($3.25) ========== ========== Dividends per share of common stock * * ========== ========== Average number of outstanding shares of common stock ** 7,229,979 7,593,392 ========== ==========
* In March 2001, Alleghany declared a dividend consisting of one share of Alleghany common stock for every fifty shares outstanding. ** Adjusted to reflect the common stock dividend declared in March 2001. *** Amounts have been restated to reflect the elimination of the one-quarter lag in the reporting of Alleghany Underwriting's results. 3 ALLEGHANY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS MARCH 31, 2001 AND DECEMBER 31, 2000 (dollars in thousands, except share and per share amounts)
(Unaudited) March 31, December 31, 2001 2000 ---------- ------------ ASSETS Available for sale securities: 3/31/01 12/31/00 ------- -------- Fixed maturities (amortized cost $ 10,781 $ 8,882) $ 10,781 $ 8,882 Equity securities ( cost $247,053 $222,101) 612,020 535,377 Short-term investments 1,046,981 342,341 ---------- ---------- 1,669,782 886,600 Cash 8,824 10,247 Premium trust funds 431,233 312,610 Notes receivable 92,155 92,156 Funds held, accounts and other receivables 219,204 190,221 Property and equipment - at cost, less accumulated depreciation and amortization 162,605 165,819 Reinsurance receivable 524,639 462,387 Other assets 546,707 525,791 Net assets of discontinued operations 0 61,785 ---------- ---------- $3,655,149 $2,707,616 ========== ========== LIABILITIES AND COMMON STOCKHOLDERS' EQUITY Property and casualty losses and loss adjustment expenses $ 918,768 $ 855,905 Unearned premiums 257,017 217,754 Other liabilities 511,222 188,458 Long-term debt of subsidiaries 232,153 228,343 Net deferred tax liability 72,841 52,082 ---------- ---------- Total liabilities 1,992,001 1,542,542 Common stockholders' equity 1,663,148 1,165,074 ---------- ---------- $3,655,149 $2,707,616 ========== ========== Shares of common stock outstanding * 7,263,018 7,211,820 ========== ========== Common stockholders' equity per share * $ 228.99 $ 161.55 ========== ==========
* Adjusted to reflect the common stock dividend declared in March 2001. 4 ALLEGHANY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000 (dollars in thousands) (unaudited)
2001 2000 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net earnings from continuing operations $ 460,475 ($33,332) Adjustments to reconcile net earnings to cash provided by (used in) operations: Depreciation and amortization 3,979 5,322 Net gain on investment transactions (475,871) (475) Tax benefit on stock options exercised 622 141 Other charges, net 2,217 (27,240) Increase in funds held, accounts and other receivables (28,983) (129,871) Increase in reinsurance receivable (62,252) (113,002) Increase in property and casualty losses and loss adjustment expenses 62,863 199,362 Increase in unearned premium reserves 39,263 70,996 Increase in premium trust funds (118,623) (45,590) Increase in other assets (20,916) (46,624) Increase in other liabilities 322,764 129,553 --------- --------- Net adjustments (274,937) 42,572 --------- --------- Cash provided by operations 185,538 9,240 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of investments (71,410) (61,956) Maturities of investments 0 15,585 Sales of investments 45,823 30,397 Purchases of property and equipment (2,279) (2,148) Net change in short-term investments (704,640) 16,862 Other, net (2,289) 3,306 Proceeds from sale of AAM, net of cash disposed 531,477 0 --------- --------- Net cash (used in) provided by investing activities (203,318) 2,046 --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Principal payments on long-term debt (100,946) (8,000) Proceeds of long-term debt 106,847 4,841 Treasury stock acquisitions (316) (11,958) Net cash provided by discontinued operations 0 9,000 Other, net 10,772 718 --------- --------- Net cash provided (used in) by financing activities 16,357 (5,399) --------- --------- Net (decrease) increase in cash (1,423) 5,887 Cash at beginning of period 10,247 25,001 --------- --------- Cash at end of period $ 8,824 $ 30,888 ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period for: Interest $ 4,161 $ 3,948 Income taxes $ 938 $ 389
5 Notes to the Consolidated Financial Statements This report should be read in conjunction with the Annual Report on Form 10-K for the year ended December 31, 2000 (the "2000 Form 10-K") of Alleghany Corporation (the "Company"). The information included in this report is unaudited but reflects all adjustments which, in the opinion of management, are necessary to a fair statement of the results of the interim periods covered thereby. All adjustments are of a normal and recurring nature except as described herein. Comprehensive Income The Company's total comprehensive loss for the three months ended March 31, 2001 and 2000 was $488,959 thousand and $(41,392) thousand, respectively. Comprehensive loss includes the Company's net earnings adjusted for changes in unrealized appreciation (depreciation) of investments, which was $35.5 million and $(16.4) million, and cumulative translation adjustments, which was $(2.0) million and $(239) thousand, for the three months ended March 31, 2001 and 2000, respectively. 5 6 Segment Information Information concerning the Company's continuing operations by industry segment is summarized below:
For the three months ended -------------------------- March 31, March 31, 2001 2000 --------- --------- REVENUES Property and casualty insurance* $ 83,103 $179,591 Mining and filtration 50,057 48,795 Industrial fasteners 33,763 23,576 Corporate activities 791,983 6,983 -------- -------- Total $958,906 $258,945 ======== ======== EARNINGS (LOSS) FROM CONTINUING OPERATIONS Property and casualty insurance* $ (8,254) $(58,924) Mining and filtration 1,079 3,867 Industrial fasteners (3,888) 2,782 Corporate activities 765,869 (859) -------- -------- Total 754,806 (53,134) Income tax expense (benefit) 294,331 (19,802) -------- --------- Earnings (loss) from continuing operations $460,475 $(33,332) ======== ========= March 31, December 31, 2001 2000 --------- ------------ IDENTIFIABLE ASSETS Asset management $ - $ 61,785 Property and casualty insurance 1,854,508 1,193,459 Mining and filtration 305,537 301,390 Industrial fasteners 114,094 117,639 Corporate activities 1,381,010 1,033,343 ---------- ---------- Total $3,655,149 $2,707,616 ========== ==========
* Includes the operations of Underwriters Re Group until its sale to Swiss Re America Holding Corporation on May 10, 2000. 6 7 Contingencies The Company"s subsidiaries are parties to pending claims and litigation in the ordinary course of their businesses. Each such operating unit makes provisions on its books in accordance with generally accepted accounting principles for estimated losses to be incurred as a result of such claims and litigation, including related legal costs. In the opinion of management, such provisions are adequate as of March 31, 2001. ITEM 2. MANAGEMENT"S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION. The Company reported net earnings from continuing operations in the first quarter of 2001 of $460.5 million on revenues of $958.9 million, compared with net losses of $33.3 million on revenues of $258.9 million in the first quarter of 2000. The 2001 results include the gain on the disposition of Alleghany Asset Management, which merged into a wholly owned subsidiary of ABN AMRO North America Holding Company on February 1, 2001. Alleghany received cash proceeds of $825 million and recorded an after-tax gain of about $474.8 million, excluding certain expenses relating to the closing of the transaction. The tax on the gain is approximately $300 million, which is included in other liabilities on the Company's March 31, 2001 balance sheet. Net earnings including discontinued operations were $455.4 million in the first quarter of 2001, compared with net losses of $24.7 million in the 2000 period. Discontinued operations consist of the operations of Alleghany Asset Management prior to its disposition. Excluding the gain on the disposition of Alleghany Asset Management, net losses from continuing operations were $14.3 million in the 2001 first quarter, compared with net losses of $33.3 million in the 2000 first quarter. World Minerals Inc. ("World Minerals") recorded pre-tax earnings of $1.1 million in the 2001 first quarter, compared with pre-tax earnings of $3.9 million in the 2000 first quarter. North American energy costs, particularly in California, rose by an estimated 81 percent, or $3.0 million, compared with the first quarter of 2000 and were primarily responsible for the decline in earnings. In addition, interruptions in the supply of electricity at World Minerals' Lompoc, California plant contributed to production delays and a reduction in product shipped from that location. To mitigate the impact of high energy costs and unreliable electric service in California, World Minerals has switched from natural gas to oil at the Lompoc plant and, where possible, shifted production to other locations. World Minerals expects the electricity shortages and high energy costs to continue until the California energy crisis is resolved, which may take several years. 7 8 Alleghany Underwriting Holdings Ltd. ("Alleghany Underwriting") recorded pre-tax losses of $8.3 million on revenues of $83.1 million in the 2001 first quarter, compared with pre-tax losses of $47.4 million on revenues of $60.5 million in the corresponding 2000 period. The 2001 results reflect $8.4 million of pre-tax losses net of reinsurance relating to the Petrobras oil rig explosion off the coast of Brazil earlier in the year. The first quarter 2000 loss reflects strengthening of Alleghany Underwriting's loss reserves in the amount of $44.0 million pre-tax for the 1998, 1999 and 2000 years of account following the completion of a reserve study. The results of Alleghany Underwriting were reported on a one-quarter lag for a transitional period. The lag was eliminated in the Company's results for the year ended December 31, 2000, and the Company's results for the first quarter of 2000 have been restated to reflect such elimination. Heads & Threads International LLC ("Heads & Threads") recorded pre-tax losses of $3.9 million on revenues of $33.8 million in the 2001 first quarter, compared with pre-tax earnings of $2.8 million on revenues of $23.6 million in the 2000 first quarter, reflecting a material slowdown in the markets for its products and costs of assimilating the acquisitions made in 2000. Revenues increased in the first quarter of 2001, compared with the first quarter of 2000 due to the acquisitions made in 2000. The 2000 first quarter results include the gain on the sale of a warehouse property. Excluding the gain on the disposition of Alleghany Asset Management, net gains on investment transactions from continuing operations after taxes in the first quarter of 2001 totalled $0.7 million, compared with $0.3 million in the 2000 period. As of March 31, 2001, the Company beneficially owned approximately 17.95 million shares, or 4.6 percent, of the outstanding common stock of Burlington Northern Santa Fe Corporation, which had an aggregate market value on that date of approximately $545.3 million, or $30.38 per share, compared with a market value on December 31, 2000 of $508.2 million, or $28.3125 per share. The aggregate cost of such shares is approximately $201.3 million, or $11.21 per share. The Company has previously announced that it may purchase shares of its common stock in open market transactions from time to time. In the first quarter of 2001, the Company purchased an aggregate of 1,577 shares of its common stock for about $0.3 million, for an average cost of about $200.47 per share. As of March 31, 2001, the Company had 7,263,018 shares of its common stock outstanding. The Company's common stockholders' equity per share at March 31, 2001 was $228.99 per share, a 42 percent increase from common stockholders' equity per share of $161.55 as of December 31, 2000 (adjusted for the March 2001 stock dividend), primarily reflecting the gain on the disposition of Alleghany Asset Management. 8 9 The Company's results in the first three months of 2001 are not indicative of operating results in future periods. The Company and its subsidiaries have adequate internally generated funds and unused credit facilities to provide for the currently foreseeable needs of its and their businesses. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Market risk is the risk of loss from adverse changes in market prices and rates, such as interest rates, foreign currency exchange rates and commodity prices. The primary market risk related to the Company's non-trading financial instruments is the risk of loss associated with adverse changes in interest rates. The Company's 2000 Form 10-K provides a more detailed discussion of the market risks affecting its operations. Based on the Company's estimates as of March 31, 2001, no material change has occurred in its market risks, as compared to amounts disclosed in its 2000 Form 10-K. Forward-Looking Statements The "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Quantitative and Qualitative Disclosures About Market Risk" contain disclosures which are forward-looking statements. Forward-looking statements include all statements that do not relate solely to historical or current facts, and can be identified by the use of words such as "may," "will," "expect," "project," "estimate," "anticipate," "plan" or "continue." These forward-looking statements are based upon the Company's current plans or expectations and are subject to a number of uncertainties and risks that could significantly affect current plans, anticipated actions and the Company's future financial condition and results. The uncertainties and risks include, but are not limited to, those relating to conducting operations in a competitive environment; acquisition and disposition activities; and general economic conditions. As a consequence, current plans, anticipated actions and future financial condition and results may differ from those expressed in any forward-looking statements made by or on behalf of the Company. 9 10 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. Exhibit Number Description 10.1 Third Amendment dated as of March 19, 2001 to Credit Agreement dated as of April 3, 2000 among Heads & Threads International LLC, various lending institutions, and American National Bank and Trust Company of Chicago, as Agent (the "Heads & Threads Credit Agreement). (b) Reports on Form 8-K. The Company filed a report on Form 8-K dated February 16, 2001 to report in Item 2 that on February 1, 2001, the Company completed the merger of Alleghany Asset Management with a wholly owned subsidiary of ABN Amro North America Holding Company, and to provide in Item 7 pro forma financial information of the Company, which gives effect to the disposition of Alleghany Asset Management. 10 11 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ALLEGHANY CORPORATION Registrant Date: May 14, 2001 /s/ David B. Cuming -------------------- David B. Cuming Senior Vice President (and principal financial officer) 11 EX-10.1 2 y49088ex10-1.txt THIRD AMENDMENT TO CREDIT AGREEMENT 1 THIRD AMENDMENT TO CREDIT AGREEMENT DATED AS OF APRIL 3, 2000 (AS AMENDED FROM TIME TO TIME, THE "AGREEMENT"), BY AND BETWEEN HEADS & THREADS INTERNATIONAL LLC, A DELAWARE LIMITED LIABILITY COMPANY (THE "BORROWER"), AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO, LASALLE BANK NATIONAL ASSOCIATION AND SUMMIT BANK, AS LENDERS (THE "LENDERS"), AND AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO, AS AGENT (THE "AGENT") This Third Amendment to the Agreement ("Amendment") is entered into as of March 19, 2001 by and among the Borrower, the Lenders and the Agent. All capitalized terms stated in this Amendment and not defined herein shall have the same meaning as set forth in the Agreement. WHEREAS, the Lenders have made Loans to the Borrower pursuant to the Agreement; and WHEREAS, the Borrower and the Lenders have agreed to amend certain financial covenants as stated herein. Now, therefore, in consideration of the fulfillment of each of the terms and conditions set forth herein, the parties hereto agree as follows: Section 1. Amendments to Agreement. a. Section 1.1 of the Agreement is amended as follows: (i) The definition of "Capital Expenditures" is amended in its entirety to state the following: "Capital Expenditures" means, without duplication, any expenditures for any purchase or other acquisition of any asset which would be classified as a fixed or capital asset on a consolidated balance sheet of the Borrower and its Subsidiaries prepared in accordance with GAAP, provided that for purposes of Section 6.10.4 and for purposes of determining the Debt Service Coverage Ratio, Capital Expenditures shall include only such expenditures funded by cash flow internally generated by Borrower in the normal course of its business operations. (ii) A new definition of "Debt Service Coverage Ratio" is added to Section 1.1 of the Agreement as follows: 2 "Debt Service Coverage Ratio", for any period, means the ratio of (A) Net Income plus (a) (i) Interest Expense and (ii) depreciation and amortization, minus (b) (i) Capital Expenditures and (ii) dividends paid, plus (or minus) (c) the gain (or loss) on sale of assets, plus (or minus) (d) the increase (or decrease) in LIFO reserve to (B) Interest Expense plus (i) required principal payments upon the Obligations plus (ii) that portion of regularly scheduled payments under Capitalized Lease Obligations which are allocable to principal under GAAP. (iii) The definition of "Fixed Charge Coverage Ratio" is deleted. (iv) The definition of "Leverage Ratio" is deleted. (v) A new definition of "Tangible Net Worth" is added to Section 1.1 of the Agreement as follows: "Tangible Net Worth" means at any time Borrower's (a) total assets minus (b) total liabilities, Intangible Assets, notes receivable from Affiliates and prepaid expenses, all computed in accordance with GAAP. b. Section 6.10.1 of the Agreement is deleted. c. Section 6.10.2 of the Agreement is deleted and substituted therefor is the following: 6.10.2. Debt to Tangible Net Worth Ratio. The Borrower will maintain a ratio of Indebtedness to Tangible Net Worth at all times of not greater than (i) 2.00:1.00 on and before December 31, 2001 and (ii) 1.50:1.00 thereafter. d. Section 6.10.3 of the Agreement is deleted and substituted therefor is the following: 6.10.3 Debt Service Coverage Ratio. The Borrower will maintain a Debt Service Coverage Ratio, at all times of not less than (i) 1.00 to 1.00 on and before December 31, 2001 and (ii) 1.20:1.00 thereafter for each trailing twelve month period preceding the testing date, provided that the first test of such ratio shall be on June 30, 2001 at which time such ratio will be tested only for the Borrower's second fiscal quarter of 2001, and thereafter on September 30, 2001 and December 31, 2001 such ratio shall be tested on year to date performance from April 1, 2001. Section 2. Representations and Warranties. The Borrower represents and warrants that: -2- 3 a. The representations and warranties contained in the Agreement are true and correct in all material respects on and as of the date hereof as if such representations and warranties had been made on and as of the date hereof (except to the extent any such representation or warranty is stated to relate solely to an earlier date, in which case such representation or warranty is true and correct in all material respects on and as of such earlier date); and b. The Borrower is in compliance with all the terms and provisions set forth in the Agreement and no Default or Unmatured Default has occurred and is continuing. Section 3. Conditions to Effectiveness. This Amendment is subject to the satisfaction in full of the following conditions precedent: a. The Agent shall have received executed originals of this Amendment; b. The Agent shall have received payment of the fees provided in Section 6 of this Amendment; c. The Agent shall have received board resolutions from the Borrower authorizing the execution of this Amendment; and d. All legal matters incident to this Amendment shall be reasonably satisfactory to Neal, Gerber & Eisenberg, counsel for the Agent. Section 4. Full Force and Effect. Except as expressly amended and waived herein, the Agreement and the Loan Documents are hereby ratified and confirmed, and shall continue in full force and effect in accordance with the provisions thereof on the date hereof. As used in the Agreement and the Loan Documents, the terms "Agreement", "this Agreement", "herein", "hereafter", "hereto", "hereof", and words of similar import, shall, unless the context otherwise requires, mean the Agreement as amended prior to the date hereof and as amended by this Amendment. -3- 4 Section 5. APPLICABLE LAW. THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF ILLINOIS. Section 6. Expenses. The Borrower agrees to pay all out-of-pocket expenses incurred by Agent in connection with the preparation, execution and delivery of this Amendment and the other documents incident hereto, including, but not limited to, the reasonable fees and disbursements of Neal, Gerber & Eisenberg, counsel for the Agent. Section 7. Counterparts. This Amendment may be executed in two or more counterparts, each of which shall constitute an original, but all of which when taken together shall constitute one instrument. Section 8. Headings. The headings of this Amendment are for the purposes of reference only and shall not affect the construction of this Amendment. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed by their duly authorized officers, all as of the date and year first above written. BORROWER: HEADS & THREADS INTERNATIONAL LLC, A DELAWARE LIMITED LIABILITY COMPANY BY: /s/ STEVEN R. SCHONHOLTZ --------------------------------------- ITS: PRESIDENT --------------------------------------- LENDERS: AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO BY: /s/ LINDA K. MIKUTIS -------------------------------------- ITS: OFFICER -------------------------------------- -4- 5 LASALLE BANK NATIONAL ASSOCIATION BY: /s/ HENRY J. MUNEZ -------------------------------------- ITS: VICE PRESIDENT -------------------------------------- SUMMIT BANK BY: /s/ URI PILTZER -------------------------------------- ITS: VICE PRESIDENT -------------------------------------- AGENT: AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO BY: /s/ LINDA K. MIKUTIS -------------------------------------- ITS: OFFICER -------------------------------------- -5- -----END PRIVACY-ENHANCED MESSAGE-----