-----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, F7jQwOSc0n27w8BqBRc3FZ9PIcLoo9yHv2kBA2vLamIazED9yvCjl1Y7kQyf/z2c IJhdI/JlHUN+9Tn4vBGgtg== 0000890566-96-000426.txt : 19960517 0000890566-96-000426.hdr.sgml : 19960517 ACCESSION NUMBER: 0000890566-96-000426 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960515 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: EQUUS II INC ET AL CENTRAL INDEX KEY: 0000878932 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 760345915 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 814-00098 FILM NUMBER: 96565587 BUSINESS ADDRESS: STREET 1: 2929 ALLEN PKWY STE 2500 CITY: HOUSTON STATE: TX ZIP: 77019 BUSINESS PHONE: 7135290900 MAIL ADDRESS: STREET 1: 2929 ALLEN PARKWAY STREET 2: STE 2500 CITY: HOUSTON STATE: TX ZIP: 77019 10-Q 1 QUARTERLY REPORT FOR THE PERIOD ENDED 3/31/96 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 March 31, 1996 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 AMERICAN 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: $45,147,755 computed on the basis of $14.625 per share, closing price of the common stock on the American Stock Exchange, Inc. on May 7, 1996. There were 3,138,575 shares of the registrant's common stock, $.001 par value, outstanding, as of May 7, 1996. The net asset value of a share at March 31, 1996 was $23.29. Documents incorporated by reference: None EQUUS II INCORPORATED (A Delaware Corporation) INDEX PART I. FINANCIAL INFORMATION PAGE Item 1. Financial Statements Balance Sheets - March 31, 1996 and December 31, 1995 ........................ 1 Statements of Operations - For the three months ended March 31, 1996 and 1995 .......... 2 Statements of Changes in Net Assets - For the three months ended March 31, 1996 and 1995 .......... 3 Statements of Cash Flows - For the three months ended March 31, 1996 and 1995 .......... 4 Selected Per Share Data and Ratios - For the three months ended March 31, 1996 and 1995 .......... 6 Schedule of Portfolio Securities - March 31, 1996 .............................................. 7 Notes to Financial Statements ................................. 12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ............................. 18 PART II OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders ............. 21 Item 6. Exhibits and Reports on Form 8-K ................................ 22 SIGNATURE ............................................................... 22 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS EQUUS II INCORPORATED BALANCE SHEETS MARCH 31, 1996 AND DECEMBER 31, 1995 (Unaudited)
1996 1995 ------------ ------------ ASSETS Investments in portfolio securities at fair value (cost $74,803,845 and $63,635,092, respectively) ............................ $ 95,846,513 $ 71,610,360 Temporary cash investments, at cost which approximates fair value ..................................................... 58,174,832 60,232,594 Cash ............................................................................. 6,146 7,267 Accounts receivable .............................................................. 7,085 1,326 Accrued interest receivable ...................................................... 697,418 525,939 Commitment fees .................................................................. 70,000 37,500 Deferred reorganization costs .................................................... 29,325 35,190 ------------ ------------ Total assets ............................................................ 154,831,319 132,450,176 ------------ ------------ LIABILITIES AND NET ASSETS Liabilities: Accounts payable ............................................................ 196,809 242,286 Due to management company ................................................... 464,661 309,266 Deferred management incentive fee ........................................... 7,066,824 4,295,335 Notes payable to bank ....................................................... 74,002,477 65,750,000 ------------ ------------ Total liabilities ....................................................... 81,730,771 70,596,887 ------------ ------------ Commitments and contingencies Net assets: Preferred stock, $.001 par value, 5,000,000 shares authorized, no shares issued or outstanding ............................... -- -- Common stock, $.001 par value, 10,000,000 shares authorized, 3,138,575 shares issued and outstanding ............................................................... 3,139 3,139 Additional paid-in capital .................................................. 48,185,700 51,291,676 Undistributed net investment income ......................................... -- -- Undistributed net capital gains ............................................. 3,869,041 2,583,206 Unrealized appreciation of portfolio securities, net ........................ 21,042,668 7,975,268 ------------ ------------ Total net assets ........................................................ $ 73,100,548 $ 61,853,289 ============ ============ Net assets per share .................................................... $ 23.29 $ 19.71 ============ ============
The accompanying notes are an integral part of these financial statements. EQUUS II INCORPORATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 (Unaudited)
1996 1995 Investment income: Income from portfolio securities .............................................. $ 479,888 $ 496,244 Interest from temporary cash investments ...................................... 29,471 31,628 ------------ ------------ Total investment income .................................................... 509,359 527,872 ------------ ------------ Expenses: Management fee ................................................................ 365,503 302,779 Management incentive fee ...................................................... 99,158 -- Deferred management incentive fee ............................................. 2,771,489 (125,633) Director fees and expenses .................................................... 50,649 46,483 Professional fees ............................................................. 27,064 41,707 Administrative fees ........................................................... 12,500 12,500 Mailing, printing and other expenses .......................................... 36,212 64,874 Interest expense .............................................................. 240,555 65,751 Franchise taxes ............................................................... 6,340 8,115 Amortization .................................................................. 5,865 5,865 ------------ ------------ Total expenses ............................................................. 3,615,335 422,441 ------------ ------------ Net investment income (loss) ..................................................... (3,105,976) 105,431 ------------ ------------ Realized gain on sales of portfolio securities, net ............................................................... 1,285,835 1,476,179 ------------ ------------ Unrealized appreciation of portfolio securities, net: End of period ................................................................. 21,042,668 7,151,473 Beginning of period ........................................................... 7,975,268 9,255,817 ------------ ------------ Increase (decrease) in unrealized appreciation, net ........................ 13,067,400 (2,104,344) ------------ ------------ Total increase (decrease) in net assets from operations .................................................................... $ 11,247,259 $ (522,734) ============ ============
The accompanying notes are an integral part of these financial statements. -2- EQUUS II INCORPORATED STATEMENTS OF CHANGES IN NET ASSETS FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 (Unaudited)
1996 1995 ------------ ------------ Operations: Net investment income (loss) .............................................. $ (3,105,976) $ 105,431 Realized gain on sales of portfolio securities, net .............................................. 1,285,835 1,476,179 Increase (decrease) in unrealized appreciation of portfolio securities, net ........................................... 13,067,400 (2,104,344) ------------ ------------ Increase (decrease) in net assets from operations ...................................................... 11,247,259 (522,734) ------------ ------------ Capital transactions: Stock repurchased and retired under common stock repurchase plan ..................................... -- (104,567) ------------ ------------ Decrease in net assets from capital share transactions ................................................... -- (104,567) ------------ ------------ Net increase (decrease) in net assets ........................................ 11,247,259 (627,301) Net assets at beginning of period ............................................ 61,853,289 60,880,364 ------------ ------------ Net assets at end of period .................................................. $ 73,100,548 $ 60,253,063 ============ ============
The accompanying notes are an integral part of these financial statements. -3- EQUUS II INCORPORATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 (Unaudited)
1996 1995 ------------ ------------ Cash flows from operating activities: Interest and dividends received ...................................................... $ 245,624 $ 408,677 Cash paid to management company, directors, bank and suppliers ................................................................. (760,563) (544,701) ------------ ------------ Net cash used by operating activities .............................................. (514,939) (136,024) ------------ ------------ Cash flows from investing activities: Purchase of portfolio securities ..................................................... (11,640,000) -- Proceeds from sales of portfolio securities .......................................... 1,843,579 885,938 Principal payments from portfolio companies .......................................... -- 21,520 ------------ ------------ Net cash provided (used) by investing activities ................................... (9,796,421) 907,458 ------------ ------------ Cash flows from financing activities: Advances from bank ................................................................... 70,152,477 96,200,000 Repayments to bank ................................................................... (61,900,000) (92,600,000) ------------ ------------ Net cash provided by financing activities .......................................... 8,252,477 3,600,000 ------------ ------------ Net increase (decrease) in cash and cash equivalents ............................... (2,058,883) 4,371,434 Cash and cash equivalents at beginning of period, excluding $300,000 of temporary cash investments with original maturities of greater than three months at December 31, 1994 ................................................................. 60,239,861 45,175,967 ------------ ------------ Cash and cash equivalents at end of period, excluding $300,000 of temporary cash investments with original maturities of greater than three months at March 31, 1995 ............................................................. $ 58,180,978 $ 49,547,401 ============ ============
The accompanying notes are an integral part of these financial statements. -4- EQUUS II INCORPORATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 (Unaudited) (Continued)
1996 1995 ------------ ------------ Reconciliation of increase (decrease) in net assets from operations to net cash used by operating activities: Increase (decrease) in net assets from operations .......................................... $ 11,247,259 $ (522,734) Adjustments to reconcile increase (decrease) in net assets from operations to net cash used by operating activities: Realized gain on sale of portfolio securities, net .................................................................. (1,285,835) (1,476,179) Decrease (increase) in unrealized appreciation, net ................................ (13,067,400) 2,104,344 Increase in accounts receivable .................................................... (5,759) (289) Accrued interest exchanged for portfolio security .................................. (86,497) -- Increase in accrued interest receivable ............................................ (171,479) (118,906) Amortization of commitment fee ..................................................... 37,500 14,062 Commitment fees paid ............................................................... (70,000) -- Amortization of reorganization costs ............................................... 5,865 5,865 Decrease in accounts payable ....................................................... (45,477) (17,568) Increase (decrease) in due to management company ............................................................... 2,926,884 (124,619) ------------ ------------ Net cash used by operating activities ...................................................... $ (514,939) $ (136,024) ============ ============
The accompanying notes are an integral part of these financial statements. EQUUS II INCORPORATED SUPPLEMENTAL INFORMATION - SELECTED PER SHARE DATA AND RATIOS FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 (Unaudited)
1996 1995 --------- --------- Investment income ................................................................ $ 0.16 $ 0.17 Expenses ......................................................................... 1.15 0.14 --------- --------- Net investment income (loss) ..................................................... (0.99) 0.03 Realized gain on sale of portfolio securities, net ................................................... 0.41 0.49 Increase (decrease) in unrealized appreciation of portfolio securities, net ................................................ 4.16 (0.69) --------- --------- Increase (decrease) in net assets from operations .................................................................. 3.58 (0.17) --------- --------- Capital transactions: Effect of common stock repurchases ............................................. -- 0.02 --------- --------- Net increase in net assets from capital transactions ................................................................ -- 0.02 --------- --------- Net increase (decrease) in net assets ............................................ 3.58 (0.15) Net assets at beginning of period ................................................ 19.71 19.94 --------- --------- Net assets at end of period ...................................................... $ 23.29 $ 19.79 ========= ========= Ratio of expenses to average net assets .......................................... 5.36% 0.70% Ratio of net investment income (loss) to average net assets ...................................................... (4.60)% 0.17% Ratio of increase (decrease) in net assets from operations to average net assets .................................................................. 16.67% (0.86)%
The accompanying notes are an integral part of these financial statements. -6- EQUUS II INCORPORATED SCHEDULE OF PORTFOLIO SECURITIES MARCH 31, 1996 (Unaudited)
DATE OF PORTFOLIO COMPANY INITIAL INVESTMENT COST FAIR VALUE A.C. Liquidating Corporation February 1985 -4,885 shares of 10% Series C cumulative preferred stock $ 488,500 $ - -10% secured promissory notes 188,014 188,014 Allied Waste Industries, Inc. (NASDAQ - AWIN) March 1989 -1,327,698 shares of common stock 4,965,075 10,839,517 -Warrants to buy up to 125,000 and 15,000 shares of common stock at $5.00 and $13.50 per share, respectively through August 1999 and February 1997, respectively - 116,406 American Residential Services, Inc. December 1995 -Prime+1/4% convertible promissory note 375,000 375,000 -Warrants to buy up to 100,000 shares of common stock at a price to be determined - - BSI Holdings, Inc. February 1989 -166,250 shares of common stock 1,330,000 1,800,000 -12% senior subordinated debenture 3,350,000 3,350,000 -10% subordinated promissory note 178,500 178,500 -Warrants to buy up to 64,715 shares of common stock at $0.01 per share through December 2004 - 700,000 -1,000 shares of common stock of GCS RE, Inc. 132,910 132,910 Cardiovascular Ventures, Inc. November 1991 -150,000 shares of Series A convertible preferred stock 375,000 375,000 -214,286 shares of Series B convertible preferred stock 750,001 750,001 -56,717 shares of Series C convertible preferred stock 248,137 248,137 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 14, 2005 - - -Warrant to buy up to 333 shares of common stock of CDE Corp at $0.01 per share through December 14, 2005 - -
The accompanying notes are an integral part of these financial statements. -7- EQUUS II INCORPORATED SCHEDULE OF PORTFOLIO SECURITIES MARCH 31, 1996 (Unaudited) (Continued)
DATE OF PORTFOLIO COMPANY INITIAL INVESTMENT COST FAIR VALUE Champion Healthcare Corporation (AMEX - CHC) December 1990 -1,038,944 shares of common stock $ 3,371,395 $ 7,878,064 -3,601 shares of Series C convertible preferred stock 64,818 64,818 -83,333 shares of Series D convertible preferred stock 1,499,994 1,499,994 -11% senior subordinated note 1,500,000 1,500,000 -Warrants to buy up to 5,246 shares of common stock at $5.90 per share through June 1, 1999 - - -Warrants to buy up to 45,000 shares of common stock at $9 per share through December 31, 2003 - - David's Supermarkets, Inc. February 1990 -735,000 shares of common stock 735,000 450,000 -333,445 shares of 3.5% junior preferred stock 3,334,450 3,334,450 -Warrants to buy up to 538,462 shares of common stock at $1 per share through April 21, 2000 - - Drypers Corporation (NASDAQ - DYPR) July 1991 -1,096,892 shares of common stock 6,400,132 2,850,434 -25,000 shares of 7.5% convertible preferred stock 2,500,000 5,687,500 -Warrants to buy up to 6,634 shares of common stock at $4 per share through June 30, 1998 - - Enterprises Holding Company March 1996 -24,810 shares of Series A preferred stock 2,481,000 2,481,000 -190 shares of Series B preferred stock 19,000 19,000 -12% promissory note 4,800,000 4,800,000 Garden Ridge Corporation (NASDAQ - GRDG) July 1992 -333,471 shares of common stock 1,061,018 14,042,426
The accompanying notes are an integral part of these financial statements. -8- EQUUS II INCORPORATED SCHEDULE OF PORTFOLIO SECURITIES MARCH 31, 1996 (Unaudited) (Continued)
DATE OF PORTFOLIO COMPANY INITIAL INVESTMENT COST FAIR VALUE Hot & Cool Holdings, Inc. March 1996 -12% subordinated promissory note $ 1,300,000 $ 1,300,000 -Warrants to buy up to 14,942 shares of common stock at $.01 per share through March 2006 - - Industrial Equipment Rentals, Inc. June 1993 -182,230 shares of common stock 1,822 1,822 -5,371 shares of junior preferred stock 537,100 537,100 -67,500 shares of Series B senior convertible preferred stock 250,050 250,050 -12% subordinated debenture 1,077,778 1,077,778 -9% senior subordinated debenture 499,950 499,950 Midway Airlines Corporation August 1993 -452,392 shares of Class C common stock 1,195,616 - -274,761 shares of junior preferred stock 2,747,610 500,000 -12% subordinated note 271,000 271,000 -Warrants to buy up to 203,250 shares of Class C common stock at $.01 per share through April 2002 - - NCI Building Systems, Inc. (NASDAQ - BLDG) April 1989 -100,000 shares of common stock 159,783 3,425,000 Restaurant Development Group, Inc. June 1987 -610,909 shares of Class A common stock 2,891,156 800,000 -14% promissory note, face amount $350,000 275,000 350,000 -Prime +2% promissory note 639,122 639,122 -Warrants to buy up to 150,000 and 62,500 shares of common stock at $2.80 and $3 per share through November 1996 and April 1998, respectively - -
The accompanying notes are an integral part of these financial statements. -9- EQUUS II INCORPORATED SCHEDULE OF PORTFOLIO SECURITIES MARCH 31, 1996 (Unaudited) (Continued)
DATE OF PORTFOLIO COMPANY INITIAL INVESTMENT COST FAIR VALUE Strategic Holdings, Inc. September 1995 -2,986,408 shares of common stock $ 2,986,408 $ 2,986,408 -3,705,900 shares of Series B preferred stock 3,705,900 3,705,900 -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 2,600,000 Travis International, Inc. December 1986 -66,784 shares of common stock 534,589 1,502,640 -104,500 shares of Class A common stock 25,701 2,351,250 Video Rental of Pennsylvania, Inc. January 1988 -125,000 shares of common stock 125,000 500,000 -125,000 shares of 9% redeemable preferred stock 125,000 125,000 -10% secured promissory note 2,525,000 2,525,000 -12% secured promissory note 215,000 215,000 -10,000 shares of common stock of Equus Video Corporation 25,000 25,000 Williams & Mettle Co. October 1989 -657,895 shares of common stock 6,579 - -138,475 shares of Series A convertible preferred stock 553,900 - -237,126 shares of Series B convertible preferred stock 396,000 396,000 -12% subordinated promissory note 763,746 763,746 -Junior participation in prime + 1.75% note 512,576 512,576 -Warrant to buy 456,718 shares of common stock at $0.01 per share through December 21, 1999 - -
The accompanying notes are an integral part of these financial statements. -10- EQUUS II INCORPORATED SCHEDULE OF PORTFOLIO SECURITIES MARCH 31, 1996 (Unaudited) (Continued)
DATE OF PORTFOLIO COMPANY INITIAL INVESTMENT COST FAIR VALUE Yellow Cab Service Corporation December 1985 -1,006,701 shares of common stock $ 51,432 $ - -3% subordinated promissory note, face amount aggregating $1,655,014 1,566,000 - -3% subordinated promissory note 3,517,083 1,750,000 ------------ ------------ Total $74,803,845 $95,846,513 =========== ===========
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., American Residential Services, Inc., BSI Holdings, Inc., Cardiovascular Ventures, Inc., Champion Healthcare Corporation, Drypers Corporation, Enterprises Holding Company and Hot & Cool Holdings, Inc., Industrial Equipment Rentals, Inc., and Strategic Holdings, Inc. investment 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, the Fund is considered to have a controlling interest in A.C. Liquidating Corporation, BSI, Holdings, Inc., Industrial Equipment Rentals, Inc., Restaurant Development Group, Inc., Strategic Holdings, Inc., Video Rental of Pennsylvania, Inc. and Williams & Mettle Co. In addition, Cardiovascular Ventures, Inc., David's Supermarkets, Inc., Drypers Corporation and Travis International, Inc. are considered to be affiliated entities of the Fund. The fair value of the investments in Allied Waste Industries, Inc., Champion Healthcare Corporation, Drypers Corporation and Garden Ridge Corporation include discounts from closing market prices of $1,674,947, $2,251,637, $4,051,188 and $1,213,872, respectively, to reflect the effects of restrictions on the sale of such securities at March 31, 1996. Such discounts total $9,191,644 or $2.93 per share as of March 31, 1996. Income was earned in the amount of $357,571 and $267,129 for the three months ended March 31, 1996 and 1995, respectively, on portfolio securities of companies in which the Fund has 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 Cardiovascular Ventures, Inc., Midway Airlines Corporation, Summit/DPC Partners, L.P. and Yellow Cab Service Corporation. The Fund provides significant managerial assistance to portfolio companies that comprise 93% of the total value of the investments in portfolio companies at March 31, 1996. The accompanying notes are an integral part of these financial statements. -11- EQUUS II INCORPORATED NOTES TO FINANCIAL STATEMENTS MARCH 31, 1996 AND 1995 (Unaudited) (1) ORGANIZATION AND BUSINESS PURPOSE Equus II Incorporated (the "Fund"), a Delaware corporation, was formed by Equus Investments II, L.P. (the "Partnership") on August 16, 1991. On July 1, 1992, the Partnership was reorganized and all of the assets and liabilities of the Partnership were transferred to the Fund in exchange for shares of common stock of the Fund. The shares of the Fund trade on the American Stock Exchange under the symbol EQS. The Fund 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. 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 has elected to be treated as a business development company under the Investment Company Act of 1940, as amended. (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 entered into a Sub-Adviser Agreement with Equus Capital Corporation, a Delaware corporation (the "Sub-Adviser"), pursuant to which the Sub-Adviser provides certain investment advisory services for the Fund, including preparing the Fund's quarterly net asset valuations. 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 $12,500, is included in the accompanying Statements of Operations for the three months ended March 31, 1996 and 1995. The Management Company also receives or must reimburse a management incentive fee equal to 20% of net realized capital gains less unrealized capital depreciation, computed on a cumulative basis over the life of the Fund. The Sub-Adviser receives a fee from the Management Company equal to 50% of the Management Company's net management incentive fee. The management incentive fee is paid or reimbursed quarterly in arrears. Included in "Due to Management Company" in the accompanying Balance Sheet at March 31, 1996, is $99,158 of such management incentive fees. Included in "Deferred management incentive fees" in the accompanying Balance Sheets are $7,066,824 and $4,295,335 of accrued management incentive fees at March 31, 1996 and December 31, 1995, respectively. Such fees are calculated on the net unrealized appreciation of investments in portfolio securities and will not be paid until such appreciation is realized. Deferred management incentive fee expense (income) for the three months ended March 31, 1996 and 1995 totaled $2,771,489 and $(125,633), respectively. The deferred management incentive fee is reflected as an expense of the Fund when there is an increase in the Fund's net unrealized appreciation of portfolio securities and is reflected as a reduction in expense to the Fund when there is a decrease in the Fund's net appreciation of portfolio securities. Current management incentive fee expense of $99,158 is included in the accompanying Statement of Operations for the three months ended March 31, 1996. -12- The Sub-Adviser is a wholly-owned subsidiary of the Management Company and 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 $20,000 paid quarterly in arrears, a fee of $2,000 for each meeting of the Board of Directors attended in person, a fee of $1,000 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. Certain officers and directors of the Fund serve as directors of Portfolio Companies, and receive and retain fees in consideration for such service. (3) SIGNIFICANT ACCOUNTING POLICIES Interim Financial Statements - The financial statements included herein have been prepared without audit and include all adjustments which management considers necessary for fair presentation. 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 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 Sub-Adviser, 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 condition of the issuer. Because of the inherent uncertainty of the valuation of portfolio securities which do not have readily ascertainable market values, $92,421,513 (including $42,979,159 in publicly-traded securities, net of a $9,191,644 Valuation Discount) and $68,098,481 (including $26,862,806 in publicly-traded securities, net of a $5,642,282 Valuation Discount) at March 31, 1996 and December 31, 1995, respectively, the Sub-Adviser'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 or management incentive fees which might become payable on disposition of such investments. Such management incentive fees are recorded in total on the Fund's Balance Sheets. See Note 2 above. 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 Fund had net -13- investment income during 1995 of $188,304 for tax purposes. A dividend of such income will be declared and distributed during 1996. The Fund had a net investment loss for tax purposes for the three months ended March 31, 1996, and therefore has no net investment income to distribute for 1996. The Fund, for book purposes, has undistributed net capital gains of $3,869,041 in the accompanying Balance Sheet at March 31, 1996. However, for tax purposes, the Fund has distributed all of its net realized capital gains except for $1,196,672 which the Fund anticipates will be distributed in 1996. The $1,196,672 is comprised of $1,186,677 of net realized capital gains for the three months ended March 31, 1996 and $9,995 in net realized capital gains from 1995 which have not yet been distributed. The following is a reconciliation of the difference in the Fund's net realized capital gain on the sale of portfolio securities for book and tax purposes for the three months ended March 31, 1996 and 1995, respectively. 1996 1995 ----------- ----------- Net realized gain on the sales of portfolio securities, book ............................. $ 1,285,835 $ 1,476,179 Management incentive fee ....................... (99,158) -- Utilization of capital loss carryforwards ...... -- (1,476,179) ----------- ----------- Net realized gain on the sales of portfolio securities, tax .................... $ 1,186,677 $ -- =========== =========== (5) DIVIDENDS The Fund declared no dividends during the three months ended March 31, 1996 and 1995. The Fund adopted a policy effective in 1995 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, only 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 or payment of expenses, consist of money market accounts earning interest at rates ranging from 3.50% to 4.84% at March 31, 1996. The following is a list of temporary cash investments at March 31, 1996 and December 31, 1995: 1996 1995 ----------- ----------- Broadcort Money Plus ......................... $ 1,353 $ 1,338 Dreyfus Cash Management Fund ................. 201 58,141 Dreyfus Treasury Cash Management Fund ........ -- 60,026,074 First Interstate Bank of Texas, N.A .......... 75,809 85,353 Great Hall Money Market ...................... 8,304 8,211 NationsBank of Texas, N.A .................... 58,035,220 -- Pitkin County Bank ........................... 53,945 53,477 ----------- ----------- Total money market accounts .............. $58,174,832 $60,232,594 =========== =========== -14- (7) PORTFOLIO SECURITIES During the three months ended March 31, 1996, the Fund invested $8,600,000 in two new companies and made follow-on investments of $3,876,497 in five portfolio companies, including $86,497 in accrued interest received in the form of additional portfolio securities and $750,000 of common stock received through the net exercise of common stock warrants. In addition, the Fund realized net capital gains of $1,285,835 during the three months ended March 31, 1996. During the three months ended March 31, 1995, the Fund made no investments in portfolio securities, but sold 92,200 shares of NCI Building Systems, Inc. common stock for $1,623,500 realizing a capital gain of $1,476,179. (8) DEFERRED REORGANIZATION COSTS The Fund paid $117,300 in expenses related to the formation of the Fund and is amortizing such amount over 5 years. Accumulated amortization of such expenses totaled $87,975 and $82,110 at March 31, 1996 and December 31, 1995, respectively. (9) NOTES PAYABLE TO BANK The Fund had a $60,000,000 line of credit promissory note with a bank, with interest payable at the prime rate, at December 31, 1995. The prime rate was 8.5% at December 31, 1995. The Fund had $60,000,000 outstanding on such note at December 31, 1995, that was secured by $60,000,000 of the Fund's temporary cash investments. The Fund paid a $75,000 commitment fee on such note in 1995, which was deferred and amortized over the commitment period. Amortization expense related to such fees is included in "Interest expense" in the accompanying Statements of Operations for the three months ended March 31, 1995. In March 1996, the Fund entered into a new $65,000,000 line of credit promissory note with a bank, with interest payable at 1% over the rate earned in its money market account. The Fund had $58,000,000 outstanding on such note at March 31, 1996, that was secured by $58,000,000 of the Fund's temporary cash investments. The Fund paid a $50,000 commitment fee in 1996, which was deferred and is being amortized over the commitment period. The note matures on April 4, 1997. The Fund also had a $13,000,000 revolving line of credit from a bank, with interest payable at prime, of which $5,750,000 was outstanding at December 31, 1995. The Fund paid facility fees of $3,125 and $6,250 to the bank for such revolving line of credit during 1995 and 1994, respectively, which are included in interest expense for the years ended December 31, 1995 and 1994. The line of credit was secured by a portion of the Fund's investment in Allied Waste Industries, Inc., Champion Healthcare Corporation, Drypers Corporation, Garden Ridge Corporation and NCI Building Systems, Inc. On March 18, 1996, the Fund entered into a new $20,000,000 revolving line of credit with another bank which replaced its $13,000,000 line of credit. The Fund had $16,002,477 outstanding under such line of credit at March 31, 1996, which is secured by the Fund's investments in portfolio securities. The Fund paid a $20,000 commitment fee in connection with such loan which was deferred and will be amortized over the commitment period which ends April 4, 1997. The outstanding balance on the loan bears interest at prime + 1/4% to 3/4%. 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 three months ended March 31, 1996 and 1995, were $9,626,728 and $2,369,231, respectively. -15- (10) STOCK REPURCHASE PLAN During 1995, the Board of Directors of the Fund authorized the repurchase of additional shares of the Fund's common stock, and during the three months ended March 31, 1995, the Fund repurchased and cancelled 8,200 shares of its stock for $104,667. The stock repurchased in 1995 was repurchased at an average discount of 33.65% from its net asset value. (11) RIGHTS OFFERING On March 5, 1996, the Fund filed a registration statement with the Securities and Exchange Commission for a rights offering. Under the rights offering, the Fund issued each shareholder of record as of April 10, 1996, one right for each share owned, which rights were exercisable to buy one share of stock for every three rights received. The exercise price for shares in the rights offering was $12.75 per share, a 19.7% discount from the market price at the beginning of the offering period which commenced on April 10, 1996. The proceeds from the rights offering will be used to repay debt and to fund the commitments the Fund has made for new and follow-on investments (12) COMMITMENTS AND CONTINGENCIES The Fund has made commitments to invest, under certain circumstances, up to an additional $1,225,000 in American Residential Services, Inc., $5,000,000 in BSI Holdings, Inc., $565,500 in GCS RE, Inc., $67,830 in Williams & Mettle Co. and $985,000 in Video Rental of Pennsylvania, Inc. In connection with its commitment to GCS RE, Inc., the Fund has committed to a bank to maintain at least $380,000 in temporary cash investments to fund such commitment. In addition, the Fund has committed to invest up to $1,650,000 in a new company. On April 1, 1996, an action was filed in federal district court in Houston Texas by two stockholders of the Fund against the directors of the Fund, the Management Company, and the Fund, as nominal defendant, asserting that by approving the rights offering the Management Company and the directors of the Fund violated their fiduciary duties to the Fund's stockholders under the Investment Company Act of 1940 and Delaware common law, that the Fund and the Management Company aided and abetted the breaches of fiduciary duties, and that the directors' approval of the rights offering constitutes unratifiable ULTRA VIRES and illegal conduct. The plaintiffs seek to have the action certified as a class action on behalf of all of the stockholders of the Fund but do not specify the amount of any damages that have been suffered. No answers have been filed to the complaint, but the Fund and the Management Company intend to vigorously defend against this action, and management of the Fund believes that ultimate resolution of such complaint will not have a material adverse effect on the Fund's financial position or results of operations. 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. (13) SUBSEQUENT EVENTS Subsequent to March 31, 1996, the Fund sold 96,000 shares of Garden Ridge Corporation for $4,719,360, realizing a net capital gain of $4,312,188 on such sale. In April 1996, in connection with its commitment discussed above, the Fund advanced an additional $250,000 to American Residential Services, Inc. under a $1,600,000 prime + 1/4% convertible promissory note. In addition, on April 10, 1996, the Fund acquired an additional 40,617 shares of Series B convertible preferred stock of Williams & Mettle Co. for $67,830. -16- Subsequent to March 31, 1996, the Fund repaid $58,000,000 of notes payable to the bank. On May 8, 1996, the Fund completed its rights offering discussed above, which was over-subscribed by almost 2 to 1. The Fund issued a total of 1,046,191 shares at $12.75 per share and raised $13,338,935 before expenses, which are estimated to be approximately $220,000. -17- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. LIQUIDITY AND CAPITAL RESOURCES Equus II Incorporated (the "Fund"), a Delaware corporation and business development company, was formed as a successor to Equus Investments II, L.P. (the "Partnership" or "Predecessor Entity") pursuant to a reorganization in which all of the assets and liabilities of the Partnership were transferred to the Fund on July 1, 1992, in exchange for 1,866,132 shares of common stock of the Fund (the "Exchange"). Such shares were then distributed on a pro rata basis to the partners of the Partnership, effectively liquidating the Partnership. Each Limited Partner received one share of common stock of the Fund for each unit of partnership interest owned. The Fund has qualified for pass-through tax treatment as a "regulated investment company" under Subchapter M of the Internal Revenue Code of 1986 each year since its organization. On September 11, 1992, the Fund's shares of common stock were listed for trading on the American Stock Exchange, under the symbol "EQS". At March 31, 1996, the Fund had $95,846,513 of its assets invested in portfolio securities of 22 companies, and has committed to invest up to an additional $7,843,330 in four of such companies and $1,650,000 in a new company under certain conditions. Current temporary cash investments, anticipated future investment income, proceeds from borrowings, proceeds from the sale of existing portfolio securities and proceeds from a rights offering of additional common stock which closed on May 8, 1996, are believed to be sufficient to finance these commitments. At March 31, 1996, the Fund had $16,002,477 outstanding on a $20,000,000 revolving line of credit loan from a bank. The Fund issued transferable subscription rights to existing shareholders of record as of April 10, 1996. Under the rights offering, the Fund issued each shareholder one right for each share owned, which rights were exercisable to buy one share of stock for every three rights received. The shares were offered at $12.75 per share, a 19.7% discount from the market price at the beginning of the offering period, which commenced on April 10, 1996. Net cash used by operating activities was $514,939 and $136,024 for the three months ended March 31, 1996 and 1995. A decrease in interest and dividends received from portfolio companies in 1996 of $163,053 and increased interest expenses of $237,882 paid during 1996 accounted for the majority of the increase in cash used by operating activities. At March 31, 1996, the Fund had $58,174,832 of its total assets of $154,831,319 invested in temporary cash investments consisting of money market securities. This amount includes proceeds from a $58,000,000 revolving line of credit 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 April 1, 1996. The Fund has the ability to borrow funds and issue forms of indebtedness, 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. 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 shareholders 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. -18- RESULTS OF OPERATIONS INVESTMENT INCOME AND EXPENSE Net investment income (loss) after all expenses amounted to $(3,105,976) and $105,431 for the three months ended March 31, 1996 and 1995, respectively. The net investment loss in 1996 was primarily attributable to the accrual of $99,158 in management incentive fees and $2,771,489 in deferred management incentive fees related to the realized gains from the sales of portfolio securities of $1,285,835 and the increase in the net unrealized appreciation of portfolio securities of $13,067,400 in 1996, respectively. Income from portfolio securities decreased to $479,888 in 1996 as compared to $496,244 in 1995, due to the decrease in amounts invested in dividend-bearing portfolio securities during 1996 as compared to 1995 due to conversion of preferred stock to common stock in December 1995. Interest expense increased to $240,555 in 1996 as compared to $65,751 in 1995, due to the increase of the average daily balances outstanding on the lines of credit to $9,626,728 during the three months ended March 31, 1996, from $2,369,231 in 1995. The Management Company receives management fee compensation at an annual rate of 2% of the net assets of the Fund. Such fees amounted to $365,503 and $302,779 for the three months ended March 31, 1996 and 1995, respectively. The Management Company also receives or must reimburse a management incentive fee equal to 20% of net realized capital gains less unrealized capital depreciation, computed on a cumulative basis over the life of the Fund. Management incentive fees of $99,158 were accrued during the three months ended March 31, 1996. Deferred management incentive fee expense (income) for the three months ended March 31, 1996 and 1995 totaled $2,771,489 and $(125,633), respectively. The deferred management incentive fee is reflected as an expense of the Fund where there is an increase in the Fund's net unrealized appreciation of portfolio securities and is reflected as a reduction in expense to the Fund when there is a decrease in the Fund's net appreciation of the portfolio securities. The deferred management incentive fees are not paid until such appreciation is realized. REALIZED GAINS AND LOSSES ON SALES OF PORTFOLIO SECURITIES During the three months ended March 31, 1996, the Fund realized net capital gains of $1,285,835 from the sale or disposition of securities of three Portfolio Companies. The Fund sold 233,044 shares of Allied Waste Industries, Inc. common stock for $1,563,678, realizing a capital gain of $461,919 and 32,789 shares of Tech-Sym Corporation for $1,029,901, realizing a capital gain of $911,656. In addition, the Fund realized a capital loss of $87,740 on its investment in Sports & Leisure, Inc. which filed for Chapter 11 bankruptcy during February 1996. During the three months ended March 31, 1995, the Fund sold 92,200 shares of NCI for $1,623,500 realizing a net capital gain of $1,476,179. UNREALIZED APPRECIATION AND DEPRECIATION OF PORTFOLIO SECURITIES Net unrealized appreciation on investments increased $13,067,400 during the three months ended March 31, 1996, from $7,975,268 to $21,042,668. Such net increase resulted from increases in the estimated fair value of securities of seven of the Fund's Portfolio Companies aggregating $14,040,424, and the transfer of $973,024 in net unrealized appreciation to net realized gains from the sale of investments in three companies. Net unrealized appreciation on investments decreased $2,104,344 during the three months ended March 31, 1995, from $9,255,817 to $7,151,573. Such net decrease resulted from increases in the -19- estimated fair value of securities of six of the Fund's portfolio companies aggregating $2,318,305, a decrease in the estimated fair value of securities of one portfolio company of $2,979,520 and the transfer of $1,443,129 in net unrealized appreciation to net realized gains. DIVIDENDS The Fund declared no dividends during the three months ended March 31, 1996 and 1995. PORTFOLIO INVESTMENTS During the three months ended March 31, 1996, the Fund invested $8,600,000 in two new Portfolio Companies and made follow-on investments in five Portfolio Companies of $3,876,497, including $86,497 in accrued interest of Williams & Mettle Co. received in the form of additional portfolio securities and $750,000 of common stock received through the net exercise of common stock warrants. On January 2, 1996, the Fund exercised its warrants to acquire 163,044 shares of AWIN on a net exercise basis. This resulted in the Fund receiving 56,054 shares of AWIN valued at $750,000, which were paid for by tendering the remaining 106,990 shares to AWIN. In February 1996, the Fund acquired 25,000 shares of 7.5% convertible preferred stock of Drypers Corporation for $2,500,000. The preferred stock converts into 2,500,000 shares of common stock of Drypers Corporation. In March 1996, the Fund acquired 24,810 shares of Series A preferred stock and 190 shares of Series B preferred stock of Enterprises Holding Company ("EHC"), for $2,481,000 and $19,000, respectively. In addition, the Fund invested $4,800,000 in a 12% promissory note of EHC. EHC was formed to acquire Crown Services, Inc., a company which provides plumbing, heating and air conditioning and electrical services in Houston, Texas. During March 1996, the Fund invested $1,300,000 in Hot & Cool Holdings, Inc. ("Hot & Cool"), in exchange for a 12% subordinated promissory note. In addition, the Fund received warrants to buy 14,942 shares of common stock of Hot & Cool for $.01 per share through March 8, 2006. Hot & Cool manufactures automotive radiators in South Texas and Mexico. During 1996 the Fund advanced an additional $325,000 on a $1,600,000 prime + 1/4% convertible promissory note to American Residential Services, Inc., a company formed to acquire existing businesses which provide plumbing, heating and air conditioning and electrical services to the residential community. In March 1996, the Fund committed to invest up to an additional $1,200,000 in Video Rental of Pennsylvania in exchange for a 12% promissory note. The Fund had advanced $215,000 on such note through March 31, 1996. During the three months ended March 31, 1995, the Fund made no additional investments in portfolio securities. For a description of the business of each Portfolio Company in which the Fund has invested, see "Current Portfolio Companies". Of the companies in which the Fund has investments at March 31, 1996, only Allied Waste Industries, Inc., Champion Healthcare Corporation, Inc., Drypers Corporation, Garden Ridge Corporation and NCI Building Systems, Inc. are publicly held. The others each have a small number -20- 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. SUBSEQUENT EVENTS Subsequent to March 31, 1996, the Fund sold 96,000 shares of Garden Ridge Corporation for $4,719,360, realizing a net capital gain of $4,312,188 on such sale. In April 1996, in connection with its commitment discussed above, the Fund advanced an additional $250,000 to American Residential Services, Inc. under a $1,600,000 prime + 1/4% convertible promissory note. In addition, on April 10, 1996, the Fund acquired an additional 40,617 shares of Series B convertible preferred stock of Williams & Mettle Co. for $67,830. Subsequent to March 31, 1996, the Fund repaid $58,000,000 of notes payable to the bank. On May 8, 1996, the Fund completed its rights offering, which was over subscribed by almost 2 to 1. The Fund issued a total of 1,046,191 shares at $12.75 per share and raised $13,338,935 before expenses, which are estimated to be approximately $220,000. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Fund held its annual meeting of shareholders on May 10, 1996. 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, 1996. 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 2,055,262 94,863 Gregory J. Flanagan 2,057,010 93,115 Robert L. Knauss 2,054,240 95,885 Nolan Lehmann 2,053,947 96,178 Gary R. Petersen 2,057,827 92,298 John W. Storms 2,058,227 91,898 Dr. Francis D. Tuggle 2,057,440 92,685 Dr. Edward E. Williams 2,058,560 91,565 The table below sets forth, as to all other matters voted upon, the number of shares voted for the proposal, against the proposal and shares that abstained. PROPOSAL FOR AGAINST ABSTAIN Ratification of auditors 2,075,940 39,038 35,147 All nominees to the Registrant's Board of Directors were elected and the Fund's selection of independent auditors was ratified. -21- ITEM 6. EXHIBITS AND REPORTS ON FORM 8K (a) Exhibits 10. Material Contracts (g) Amended and restated loan agreement by and between Equus II Incorporated and NationsBank of Texas, N.A., dated March 29, 1996. (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. SIGNATURE 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 By:/S/NOLAN LEHMANN Nolan Lehmann, President, Principal Financial and Accounting Officer Date: May 14, 1996 -22- EX-10.G 2 LOAN AGREEMENT EQUUS II AND NATIONSBANK AMENDED AND RESTATED LOAN AGREEMENT BY AND BETWEEN EQUUS II INCORPORATED ("BORROWER") AND NATIONSBANK OF TEXAS, N.A. ("LENDER") DATED AS OF THE 29TH DAY OF MARCH, 1996 EXECUTION COPY AMENDED AND RESTATED LOAN AGREEMENT TABLE OF CONTENTS CAPTION PAGE ------- ---- 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 .............................................. 7 1.4 REVOLVING FACILITY B ............................................... 11 1.5 REPAYMENT SCHEDULE ................................................. 11 1.6 PREPAYMENT ......................................................... 12 1.7 FACILITY C ......................................................... 12 SECTION 2. REPRESENTATIONS AND WARRANTIES ................................... 13 2.1 CORPORATE EXISTENCE ................................................ 13 2.2 CORPORATE AUTHORITY ................................................ 13 2.3 FINANCIAL CONDITION ................................................ 14 2.4 INVESTMENTS, LOANS, ADVANCES AND GUARANTEES ........................ 14 2.5 LIABILITIES AND LITIGATION ......................................... 14 2.6 NO DEFAULT ......................................................... 14 2.7 TAXES .............................................................. 15 2.8 COMPLIANCE ......................................................... 15 2.9 PENSION REFORM ACT ................................................. 15 2.10 ENVIRONMENTAL LAWS ................................................. 15 2.11 FULL DISCLOSURE .................................................... 15 2.12 CREDIT AGREEMENTS .................................................. 16 2.13 INVESTMENT COMPANY ACT ............................................. 16 2.14 PUBLIC UTILITY HOLDING COMPANY ACT ................................. 16 SECTION 3. AFFIRMATIVE COVENANTS ............................................ 16 3.1 REPORTING REQUIREMENTS ............................................. 16 3.2 TAXES AND OTHER LIENS .............................................. 18 3.3 MAINTENANCE ........................................................ 18 3.4 FURTHER ASSURANCES ................................................. 18 3.5 PERFORMANCE OF OBLIGATIONS ......................................... 18 3.6 REIMBURSEMENT OF COSTS AND EXPENSES ................................ 19 3.7 CERTIFICATE OF COMPLIANCE .......................................... 19 3.8 LITIGATION ......................................................... 19 3.9 SECURITY ........................................................... 20 3.10 BORROWING BASE...................................................... 20 (ii) SECTION 4. NEGATIVE COVENANTS............................................... 21 4.1 GUARANTEES AND DEBTS ............................................... 21 4.2 DIVIDENDS AND REDEMPTION ........................................... 22 4.3 MERGERS, ETC ....................................................... 22 4.4 ENCUMBRANCES ....................................................... 22 4.5 SALE OF ASSETS ..................................................... 22 4.6 TRANSACTIONS WITH AFFILIATES ....................................... 23 4.7 VALUATION PROCEDURES ............................................... 23 SECTION 5. EVENTS OF DEFAULT AND REMEDIES ................................... 23 5.1 EVENTS OF DEFAULT .................................................. 23 5.2 REMEDIES ........................................................... 24 SECTION 6. CLOSING .......................................................... 25 6.1 COUNSEL TO LENDER .................................................. 25 6.2 REQUIRED DOCUMENTS ................................................. 25 6.3 OTHER CONDITIONS ................................................... 25 SECTION 7. MISCELLANEOUS .................................................... 25 7.1 SURVIVAL OF VARIOUS MATTERS ........................................ 25 7.2 NOTICES ............................................................ 25 7.3 SUCCESSORS AND ASSIGNS ............................................. 26 7.4 RENEWALS ........................................................... 27 7.5 NO WAIVER .......................................................... 27 7.6 GOVERNING LAW ...................................................... 27 7.7 NON-SUBORDINATION .................................................. 27 7.8 EXHIBITS ........................................................... 27 7.9 PAYMENT ON NON-BUSINESS DAYS ....................................... 27 7.10 SEVERABILITY........................................................ 27 7.11 CONTROLLING DOCUMENT................................................ 28 7.12 SAVINGS CLAUSE...................................................... 28 7.13 INVESTMENT.......................................................... 28 (ii) 7.14 SET OFF............................................................. 28 7.15 INDEMNITY........................................................... 29 7.16 ARBITRATION......................................................... 29 7.17 CHANGE OF ADVISORS.................................................. 29 EXHIBITS "1.3.1" BORROWING APPLICATION "1.3.2" FORM OF REVOLVING NOTE-A "1.3.3" FORM OF REVOLVING NOTE-B "1.7" 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 (iii) AMENDED AND RESTATED LOAN AGREEMENT THIS AMENDED AND RESTATED LOAN AGREEMENT made and entered into as of the 29th day of March, 1996 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 of Texas, 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 ("Prior Loan Agreement") and have agreed to amend and restate said Prior Loan Agreement to provide for an additional credit facility; Whereas, Borrower and Lender agree that upon the execution of this Amended and Restated Loan Agreement, its terms shall govern and control the transactions contemplated hereby 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 $20,000,000.00 outstanding at any time as evidenced by the Credit Facility to be extended to the Borrower by the Lender as more specifically described in Section 1.3 and Section 1.4 hereof. 1.2 CERTAIN DEFINITIONS; USE OF DEFINED TERMS; ACCOUNTING TERMS; SINGULAR OR PLURAL. (a) As used herein: (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 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 3.10 of this Agreement, securing payment of the Indebtedness and performance of the Obligations. (11) "Commitment Fee" means fees payable by Borrower to Lender (i) in an amount equal to $10,000.00 payable upon execution of this Agreement and (ii) on the average daily unused portion of the Credit Facility (use shall include the face amount of Credits and the principal amount of Loans outstanding) 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 March 31, 1996. (12) "Commitment Fee-Facility C" shall mean a fee in the amount of $50,000, payable upon execution of this Agreement. 2 (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 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 on the date of this Agreement. 3 (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 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 securities 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. 4 (25) "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. (26) "Facility C" shall mean the credit facility more fully described in Section 1.7. (27) Facility C Note" shall mean that certain promissory note in the maximum principal amount of $65,000,000 issued pursuant to Section 1.7 of this Agreement in the form attached as Exhibit "1.7." (28) "Financial Statements" shall mean the audit report, annual financial statements, and interim statements described or referred to in Section 3.1 of this Agreement. (29) "Funded Debt" shall mean with respect to any Person all items of indebtedness for borrowed money. (30) "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. (31) "Investment" shall mean an investment in the debt or equity of any Person. (32) "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. (33) "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. (34) "Loan" shall mean any advance pursuant to the Credit Facility. (35) "LOC Expiration Date" means April 2, 2002. (36) "Maturity Date" means April 3, 1997. (37) "Net Asset Value" shall mean all assets of Borrower, 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. 5 (38) "Notes" shall mean the Revolving Notes and the Facility C Note. (39) "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. (40) "Permitted Encumbrances" shall mean the encumbrances and liens allowed pursuant to Section 4.4. (41) "Person" shall mean any individual, corporation, partnership, association, joint-stock company, trust, unincorporated organization, joint venture, court, government or political subdivision or agency thereof. (42) "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. (43) "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. (44) "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. 6 (45) "Prior Financial Statements" shall mean the audited financial statements for the Borrower for the period ended December 31, 1995 and 1994, and as at such dates. (46) "Revolving Facility A" shall mean the revolving lines of credit pursuant to Section 1.3. (47) "Revolving Facility B" shall mean the revolving lines of credit pursuant to Section 1.4. (48) "Revolving Notes" shall mean the promissory notes of the Borrower (i) in the original principal amount of $12,500,000.00 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 $7,500,000.00 issued pursuant to Section 1.4 of this Agreement in the form attached as Exhibit "1.3.3" to this Agreement ("Revolving Note-B"). (49) "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. (50) "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 7 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 $12,500,000.00, 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 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: 8 (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 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 9 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 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" hereto, payable to the order of Lender. The Revolving Note - A shall bear interest at a variable interest rate of one quarter percent (1/4%) over the Prime Rate per annum not to exceed the maximum non- 10 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. 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 $7,500,000.00, 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 "1.3.3" hereto, payable to the order of Lender. The Revolving Note - B shall bear interest at a variable interest rate of three quarters of one percent (3/4%) 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 ninety (90) consecutive days following such repayment. 1.5 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, 1996 and thereafter on the last day of each September, December, March and June and on the Maturity Date), and the Custody Account Fee (at closing and on March 18th of each year) both 11 payable by Borrower by debit to Borrower's Operating Account Nos. 266-521-2329 or 266-521-2311 at Lender; (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. 266-521-2329 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, 1996 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. 266-521-2329 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. 266-521-2329 or 266-521-2311. 1.6 PREPAYMENT . The Borrower shall have the right to prepay without premium at any time any amount owing on the Notes. 1.7 FACILITY C . (a) The Lender, during the period from the date of this Agreement until April 1, 1997, 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 outstanding at any time of $65,000,000, 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 "1.7" hereto, payable to the 12 order of Lender. The Facility C Note shall bear interest at a variable interest rate of one percent (1%) 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 April 4, 1997. (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. 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 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. 13 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 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 14 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 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. 15 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. 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 16 (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: (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 (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 with 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 the form and substance satisfactory to Lender; (g) on or before March 31, 1996, Borrower will provide Lender summary information regarding the Portfolio Investments in form and substance satisfactory to Lender, indicating information 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). 17 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 against the property of the Borrower, provided that Borrower 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. 18 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 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. 19 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; (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 investment property 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 the Borrowing Base A. The Borrowing Base A is the lesser of (i) $12,500,000 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. The Borrowing Base B is the least of (i) $7,500,000, (ii) the sum of (y) twenty-five percent (25%) of the Current Fair Market Value of the Other Pledged Securities plus (z) the amount, if any, by which fifty percent (50%) of the Current Fair Market Value of Borrower's Eligible Public Securities exceeds $12,500,000 and (iii) 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. 20 (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% 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. 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 not to exceed $500,000 outstanding at any time; and (c) guaranties of obligations of Persons who have issued one or more of the Portfolio Investments. 21 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 (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 22 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; (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 23 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 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. 24 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 Security Agreement; (f) The Custody Agreement; (g) The Notice of Final Agreement; and (h) 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. 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 25 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 of Texas, N.A. 700 Louisiana Houston, Texas 77002 Attention: Larry B. Bell Fax No.: (713) 247-7150 with a copy to: Gardere Wynne Sewell & Riggs, LLP 333 Clay Avenue, Suite 800 Houston, Texas 77002 Attention: Mr. Robert W. Bramlette Fax No.: (713) 308-5555 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. 26 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 "1.3.3"; Facility C Note - Exhibit "1.7"; Portfolio Investments - Exhibit "2.4"; Certificate of Compliance - Exhibit "3.7"; Borrowing Base Report - Exhibit "3.10"; and Closing Requirements - - Exhibit "6.2". 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 auto- 27 matically 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 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 addi- 28 tion to other rights and remedies (including, without limitation, 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. 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. 29 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 AGREEMENTS 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 OF TEXAS, N.A. By /s/LARRY B. BELL Larry B. Bell Senior Vice President 30 EXHIBIT "1.3.1" LOAN APPLICATION ______________, 19__ TO: ____________________________________________ FROM: ____________________________________________ 1. Reference is made to that certain Loan Agreement, dated as of March __, 1996 (the "Agreement"), between Equus II Incorporated, as Borrower, and NationsBank of Texas, 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, --------------------------- Exhibit "1.3.2" REVOLVING NOTE-A P R O M I S S O R Y N O T E [Revolving Facility A] $12,500,000 March 18, 1996 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 of Texas, N.A. ("Lender"), in Houston, Harris County, Texas, the sum of Twelve Million Five Hundred Thousand DOLLARS ($12,500,000) 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 Prime Rate 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 and December of 1996 and on the 3rd day of April, 1997, 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 two percent (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. 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 TEX. REV. CIV. STAT. ANN. Art. 5069-1.04, 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 "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 maker of this Note 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 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 -2- 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, then the owner of this Note ("Owner") will designate a different "Prime Rate" as announced by a national banking association of Owner's choice. 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. 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 Loan Agreement of even date herewith between Borrower and Lender, as that 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 entitled to the benefits of and security afforded by the Security Agreement-Pledge of even date herewith between Borrower and Lender, as that Security Agreement-Pledge 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- 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- Exhibit "1.3.3" REVOLVING NOTE-B P R O M I S S O R Y N O T E [Revolving Facility B] $7,500,000 March 18, 1996 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 of Texas, N.A. ("Lender"), in Houston, Harris County, Texas, the sum of Seven Million Five Hundred Thousand DOLLARS ($7,500,000) 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 Prime Rate plus three-quarters of one percent (3/4%) 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 and December of 1996 and on the 3rd day of April, 1997, 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 two percent (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. 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 TEX. REV. CIV. STAT. ANN. Art. 5069-1.04, 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 "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 maker of this Note 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 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, then the owner of this Note ("Owner") will designate a different "Prime Rate" as announced by a national banking association of Owner's choice. - -------- Initials 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. 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 Loan Agreement of even date herewith between Borrower and Lender, as that 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 entitled to the benefits of and security afforded by the Security Agreement-Pledge of even date herewith between Borrower and Lender, as that Security Agreement-Pledge 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- 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- Exhibit "1.7" FACILITY C NOTE P R O M I S S O R Y N O T E [Facility C Note] $65,000,000 March 29, 1996 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 of Texas, N.A. ("Lender"), in Houston, Harris County, Texas, the sum of Sixty-Five Million and No/100 DOLLARS ($65,000,000) 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 percent (1%) per annum, floating daily (subject to adjustment as set forth in Section 1.7(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 April 4, 1997. 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. 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 TEX. REV. CIV. STAT. ANN. Art. 5069-1.04, 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 -2- 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. 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 Amended and Restated Loan Agreement of even date herewith between Borrower and Lender, as that 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 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- 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- EXHIBIT 2.4 PORTFOLIO INVESTMENTS - PUBLIC CORPORATIONS
DIRECTOR POSITIONS NUMBER OF HELD BY NUMBER OF SHARES OF STOCK NUMBER OF REPRESENTATIVE OF SHARES OF AUTHORIZED TO SHARES OF NAME OF ISSUING BORROWER OR ITS STOCK BE ISSUED (BY STOCK HELD BY CORPORATION CLASSES OF STOCK AFFILIATES OUTSTANDING CLASS) BORROWER --------------- ---------------- ------------------ ----------- ---------------- ------------- [TO BE PROVIDED BY EQUUS]
EXHIBIT 2.4 PORTFOLIO INVESTMENTS - PUBLIC CORPORATIONS (CONT'D)
NUMBER OF SHARES NUMBER OF CURRENT PUBLIC OF STOCK SOLD BY REGISTERED INFORMATION BORROWER OR DATE STOCK WAS SHARES OF STOCK EXCHANGE REQUIREMENTS AVERAGE WEEKLY AFFILIATE WITHIN ACQUIRED BY STOCK HELD (IF ANY) OR OF RULE 144 TRADED VOLUME OF PRECEDING THREE ADDITIONAL BORROWER BY BORROWER NASDAQ SATISFIED STOCK MONTHS INFORMATION -------- ----------- ------ --------- ----- ------ -----------
EXHIBIT 2.4 PORTFOLIO INVESTMENTS - PRIVATE COMPANIES
DIRECTOR POSITIONS HELD BY REPRESENTATIVE OF NUMBER OF SHARES OF NAME OF ISSUING BORROWER OR ITS NUMBER OF SHARES OF STOCK AUTHORIZED TO BE CORPORATION AFFILIATES CLASSES OF STOCK STOCK OUTSTANDING ISSUED (BY CLASS) --------------- ------------------ ---------------- ------------------- ---------------------- [TO BE PROVIDED BY EQUUS]
EXHIBIT 2.4 PORTFOLIO INVESTMENTS - PRIVATE COMPANIES (CONT'D) NUMBER OF SHARES OF DATE STOCK WAS ADDITIONAL STOCK HELD BY BORROWER ACQUIRED BY BORROWER INFORMATION - ---------------------- -------------------- ----------- EXHIBIT "3.7" CERTIFICATE OF COMPLIANCE In accordance with Section 3.7 of the Loan Agreement ("Loan Agreement") dated March __, 1996, between NationsBank of Texas, 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) EXHIBIT "3.10" BORROWING BASE REPORT FORM OF BORROWING BASE CERTIFICATE NO. ____________________ Dated ____________, 19_______ In accordance with a loan agreement ("Agreement") dated March __, 1996 between NationsBank of Texas, 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.Outstanding Principal Balance - Revolving Facility A $___________ 4.Face Amount, Unexpired Credits - Revolving Facility A $___________ 5.Sum of 3 + 4 $___________ 6.Availability - Revolving Facility A (Line 2 minus Line 5) $___________ Borrowing Base B 7.Eligible Other Securities $___________ x .25 8.Adjusted Eligible Other Securities $___________ 9.Lesser of Line 8 and Line 2 $___________ 10.Outstanding Principal Balance - Revolving Facility B $___________ 11.Availability - Revolving Facility B (Line 9 minus Line 10) $___________ 12.Overall Facility Availability $20,000,000 13.Net Asset Value $___________ x. .33 14.Adjusted Net Asset Value $___________ 15.Lesser of Line 12 and Line 14 $___________ 16.Outstanding Usage Facility A (Line 5) $___________ 17.Outstanding Balance Facility B (Line 10) $___________ 18.Total Usage (Line 16 + 17) $___________ 19.Availability - Overall Facility (Line 15 minus Line 18)$___________ 20.Availability - A (Lesser of 6 and 19) $___________ 21.Availability - B (Lesser of 11 and 19) $___________ 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:________________________________ Exhibit "6.2" CLOSING REQUIREMENTS 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. EX-27 3 FINANCIAL DATA SCHEDULE
6 insert legend here 1,000 3-MOS DEC-31-1996 MAR-31-1996 74,803,845 95,846,513 704,503 58,280,303 0 154,831,319 0 0 81,730,771 81,730,771 0 48,188,839 3,138,575 3,138,575 0 0 3,869,041 0 21,042,668 73,100,548 34,808 438,830 6,250 3,615,335 (3,105,976) 1,285,835 13,067,400 11,247,259 0 0 0 0 0 0 0 11,247,259 0 2,583,206 0 0 3,236,150 240,555 3,615,335 67,476,918 19.71 (.99) 4.57 0 0 0 23.29 .053 9,626,728 3.07
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