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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NO. 811-00907
ALLIED CAPITAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
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MARYLAND 53-0245085
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION) IDENTIFICATION NO.)
C/O ALLIED CAPITAL ADVISERS, INC.
1666 K STREET, NW, NINTH FLOOR 20006
WASHINGTON, D.C. (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (202) 331-1112
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
NONE NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $1.00 PAR VALUE
(TITLE OF CLASS)
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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K [ ]
The aggregate market value of the registrant's common stock held other than by
directors and officers of the registrant and officers of its investment adviser
as of March 19, 1997 was approximately $107,020,154, based upon the average
bid and asked price for the registrant's common stock on that date. As of
March 19, 1997 there were 7,326,626 shares of the registrant's common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to Shareholders for the year ended
December 31, 1996 are incorporated by reference into Parts II and IV of this
Report. Portions of the registrant's definitive Proxy Statement for the Annual
Meeting of Stockholders to be held on May 1, 1997 are incorporated by reference
into Part III of this Report.
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PART I
ITEM 1. BUSINESS
Allied Capital Corporation (the "Company") was incorporated under the
laws of the District of Columbia in 1958 and was reorganized as a Maryland
corporation in 1991. It is a closed-end management investment company that
elected in 1991 to be regulated as a business development company ("BDC") under
the Investment Company Act of 1940, as amended (the "1940 Act"). The Company
has two active wholly owned subsidiaries, Allied Investment Corporation
("Allied Investment") and Allied Capital Financial Corporation ("Allied
Financial"). Allied Investment and Allied Financial are Maryland corporations
registered under the 1940 Act as closed-end management investment companies.
Allied Investment is licensed by the U.S. Small Business Administration (the
"SBA") as a small business investment company under Section 301(C) of the Small
Business Investment Act of 1958, as amended (an "SBIC"), and Allied Financial
is licensed by the SBA as a specialized small business investment company under
Section 301(d) of the Small Business Investment Act of 1958, as amended (an
"SSBIC"). As described below, the Company also has a significant ownership
interest in Allied Capital Lending Corporation ("Allied Lending"), a closed-end
management investment company that has elected to be regulated as a BDC and is
an SBA-approved small business lending company. Allied Capital Advisers, Inc.
("Advisers") serves as the investment adviser to the Company under an
investment advisory agreement.
The Company seeks to provide current income and long-term growth in
the value of its net assets by providing debt, mezzanine, and equity financing
primarily for small, privately owned companies. The Company invests primarily
in and lends primarily to small businesses, both directly and through its
wholly owned subsidiaries (unless otherwise indicated, all further references
herein to investments made by the Company include those made by its
subsidiaries). The investments made by the Company include providing financing
for growth, for leveraged buyouts of such companies, for note purchases and
loan restructurings, and for special situations, such as acquisitions, buyouts,
recapitalizations, and bridge financing of such companies.
The Company's investments generally take the form of loans with equity
features, such as warrants or conversion privileges, that entitle the Company
to acquire a portion of the equity in the entity in which the investment is
made. The typical maturity of such a loan made by the Company is seven years,
with interest-only payments in the early years and payments of both principal
and interest in the later years, although loan maturities and principal
amortization schedules vary. The Company also makes senior loans without
equity features. Loans generally bear interest at a fixed rate that the
Company believes is competitive in the venture capital marketplace. Current
income is derived primarily from interest earned on the loan element of the
Company's investments. Generally, long-term growth in net asset value and
realized capital gains, if any, from portfolio companies are achieved through
the equity obtained as a result of the Company's growth financing and leveraged
buyout activity. The Company seeks to structure its investments so that
approximately one-half of the potential return is earned in the form of monthly
or quarterly interest payments and the balance is derived from capital gains.
The Company's investments may be secured by the assets of the entity in which
the investment is made, which collateral interests may be subordinated in
certain instances to institutional lenders, such as banks. The Company makes
available significant managerial assistance to its portfolio companies.
Pending investment of its assets, the Company's funds are generally invested in
repurchase agreements fully collateralized by U.S. government securities.
The Company usually invests in privately held companies or small
public companies that are thinly traded and generally lack access to capital.
These companies generally have been in business for at least one year, have a
commercially proven product or service, and seek capital to finance expansion
or ownership changes. The Company generally requires that the companies in
which it invests demonstrate sales growth, positive cash flow, and
profitability, although turnaround situations are also considered. The Company
invests in businesses operating in a variety of different industries, such as
broadcasting, manufacturing, environmental technologies, wholesale
distribution, and retail operations. The Company emphasizes the quality of
management of the companies in which it invests, and seeks experienced
entrepreneurs with a management track record, relevant industry experience, and
high integrity.
Historically, all of the investments of the Company have been made in
domestic small businesses. In 1995, the Company established a $20 million
credit facility with the Overseas Private Investment Corporation ("OPIC"),
pursuant to which it makes investments in businesses that engage, in whole or
in part, in overseas operations, usually in countries representing the world's
emerging markets. OPIC is a self-sustaining federal agency the purpose of
which is to promote
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economic growth in developing countries by encouraging U.S. private investment
in those nations. Under OPIC regulations, investments generally may be made
only in companies that have some affiliation with a U.S.-based business entity.
In January 1996, the Company registered 885,448 shares of its stock to
be offered in connection with a rights offering to its existing shareholders.
Pursuant to the rights offering, the Company issued to the common stockholders
at the close of business on January 22, 1996, (the "Record Date"), one
non-transferable subscription right ("Subscription Right") for each share held
which entitled each record date stockholder to subscribe for and purchase from
the Company up to one authorized, but theretofore unissued share of the
Company's common stock for each seven Subscription Rights held (the "Primary
Subscription"). Stockholders who fully exercised their Subscription Rights
were entitled to the additional privilege of subscribing for shares from the
offering not acquired by exercise of Subscription Rights (the
"Over-Subscription Privilege"). In addition, the Company increased the number
of shares subject to subscription by 15%, or 132,817 shares, for an aggregate
total of 1,018,265 shares available under the offering.
The subscription price per common share was $13.11, which equaled 95%
of the average of the last reported sale price of a share of common stock on
the Nasdaq National Market on February 27, 1996 (the expiration date of the
rights offering) and each of the four preceding business days. Stockholders
participating in the offering subscribed for 411,961 shares through the Primary
Subscription and 251,749 shares through the Oversubscription Privilege for a
total of 663,710 shares. The Company received net proceeds of $8.3 million
from the rights offering after estimated expenses of $437,000, including a 2.5%
commission paid to eligible broker/dealers on each share sold as a result of
their soliciting efforts. In the registration statement relating to the rights
offering, the Company retained the right to offer and sell any unsubscribed-for
shares through a subsequent offering. Any such subsequent offering may be made
only through the use of a prospectus included in a post-effective amendment to
the registration statement.
The Company's Operation as a BDC
As a BDC, the Company may not acquire any investment assets other than
"Qualifying Assets" unless, at the time the acquisition is made, Qualifying
Assets represent at least 70% of the value of the Company's total investment
assets (the "70% test"). The principal categories of Qualifying Assets
relevant to the business of the Company are the following:
(1) Securities purchased in transactions not involving any public offering
from the issuer of such securities, an affiliated person of the
issuer, or any other person (subject to Securities and Exchange
Commission rule-making), provided the issuer is an eligible portfolio
company. An eligible portfolio company is defined to include any
issuer that (a) is organized and has its principal place of business
in the United States, (b) is not an investment company other than an
SBIC wholly owned by the BDC (the Company's investments in and
advances to Allied Investment and Allied Financial are Qualifying
Assets, but its investment in Allied Lending, which is neither wholly
owned nor an SBIC, is not) and (C) either (I) does not have any class
of publicly traded securities with respect to which a broker may
extend margin credit or (ii) is controlled by the BDC.
(2) Securities received in exchange for or distributed with respect to
securities described in (1) above, or pursuant to the exercise of
options, warrants or rights relating to such securities.
(3) Cash, cash items, government securities, or high quality debt
securities (within the meaning of the 1940 Act) maturing in one year
or less from the time of investment.
In addition, to treat securities described in (1) and (2) above as
Qualifying Assets for the purpose of the 70% test, a BDC must make available to
the issuer of those securities significant managerial assistance. Making
available significant managerial assistance means, among other things, (I) any
arrangement whereby the BDC, through its directors, officers or employees,
offers to provide, and, if accepted, does provide, significant guidance and
counsel concerning the management, operations or business objectives and
policies of a portfolio company or (ii) in the case of an SBIC, making loans to
a portfolio company. The Company makes available managerial assistance to its
portfolio companies through the Company's directors and officers, who are
employees of Advisers, the Company's investment adviser. Each portfolio
company is assigned for monitoring purposes to an investment officer and its
principals are contacted and counseled if the portfolio company appears to be
encountering business or financial difficulties. The Company also provides
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managerial assistance on a continuing basis to any portfolio company that
requests it, whether or not difficulties are perceived. The Company's officers
and directors are experienced in providing managerial assistance to small
businesses.
The Company may not change the nature of its business so as to cease
to be, or withdraw its election as, a BDC unless authorized by vote of a
"majority of the outstanding voting securities," as defined in the 1940 Act, of
the Company. Since the Company made its BDC election, it has not in practice
made any substantial change in its structure or, on a consolidated basis, in
the nature of its business, except for the disposition of its ownership
interest in Allied Lending, as described below, which is not a change that
results in the Company ceasing to be a BDC. As a BDC, the Company is entitled
to borrow money and issue senior securities representing indebtedness as long
as senior securities representing indebtedness have asset coverage of at least
200%. This limitation is not applicable to classes of senior securities
representing indebtedness of the Company's SBIC and SSBIC subsidiaries.
Co-Investment with Allied Capital Corporation II, Allied Venture Partnership,
and Allied Technology Partnership
In accordance with the conditions of several exemptive orders of the
Securities and Exchange Commission (the "Commission") permitting co-investments
(the "Co-investment Guidelines"), most of the Company's acquisitions and
dispositions of investments are made in participation with Allied Capital
Corporation II ("Allied II"). In the past, the Company also acquired certain
investments in participation with Allied Venture Partnership ("Allied Venture")
and Allied Technology Partnership ("Allied Technology"), both private venture
capital partnerships managed by Advisers, neither of which is now making new
investments. Allied II is a closed-end management investment company that has
elected to be regulated as a BDC and for which Advisers serves as its
investment adviser. At December 31, 1996, Allied II had total consolidated
assets of $106,908,000, compared to the Company's total consolidated assets of
$165,751,000 at that date.
The Co-investment Guidelines generally provide that the Company and
its wholly owned subsidiaries must be offered the opportunity to invest in any
investment, other than in interim investments or marketable securities, that
would be suitable for Allied II or its wholly owned subsidiaries and the
Company to the extent proportionate to their respective consolidated total
assets. Securities purchased by the Company or its wholly owned subsidiaries
in a co-investment transaction with any of Allied II or its wholly owned
subsidiaries, Allied Venture or Allied Technology, will consist of the same
class of securities, will have the same registration rights, if any, and other
rights related thereto, and will be purchased for the same unit consideration.
Any such co-investment transaction must be approved by the Company's Board of
Directors, including a majority of its independent directors. The Company will
not make any investment in the securities of any issuers in which Allied II,
Allied Venture or Allied Technology, but not the Company, has previously
invested. The Co-investment Guidelines also provide that the Company will have
the opportunity to dispose of any securities in which the Company or its wholly
owned subsidiaries and any of Allied II or its wholly owned subsidiaries,
Allied Venture or Allied Technology, have invested in proportion to their
respective holdings of such securities, and that, in any such disposition, the
Company will be required to bear no more than its proportionate share of the
transaction costs.
Allied Investment
Allied Investment, as an SBIC, provides capital to privately owned
small businesses primarily through loans, generally with equity features, and,
to a lesser extent, through the purchase of common or convertible preferred
shares. Loans with equity features are generally evidenced by a note or
debenture that is convertible into common stock, requiring the holder to make a
choice, prior to the loan's maturity, between accepting repayment and
maintaining its equity position, or purchasing, frequently for a nominal
consideration, common stock of the issuer even after the loan is repaid.
Wherever possible, Allied Investment seeks collateral for its loans, but its
security interest is usually subordinated to the security interest of other
institutional lenders.
As an SBIC, Allied Investment currently has the opportunity to sell to
the SBA subordinated debentures with a maturity of up to ten years up to an
aggregate principal amount determined by a formula which applies a multiple to
its private capital, but not in excess of $90 million (the "$90 million
limit"). The $90 million limit generally applies to all financial assistance
provided by the SBA to any licensee and its "associates," as that term is
defined in SBA regulations. For this purpose, Allied Investment and Allied
Financial would be deemed to be "associates" of one another and both may be
deemed to be "associates" of Allied Investment Corporation II ("Allied
Investment II") and Allied Financial Corporation II ("Allied Financial II"),
which are the SBIC and SSBIC subsidiaries of Allied II. As a group,
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Allied Investment and Allied Financial have received $68,300,000 in
subordinated debenture and preferred stock investments from the SBA as of
December 31, 1996; as a result, this combined ability to apply for additional
leverage from the SBA will be limited to $21,700,000 due to the $90 million
limit. This combined ability to obtain additional leverage assumes that Allied
Investment II and Allied Financial II do not obtain any SBA leverage. The
Company is unable to predict the SBA's ability to meet demands for leverage on
an ongoing basis, as such funding may be affected if Congress reduces
appropriations for the SBA, which may compel the SBA to allocate leverage or to
reduce the current limits on available leverage. Therefore, there is no
guaranty that Allied Investment or Allied Financial will be able to obtain
additional SBA leverage beyond what is currently held.
Allied Investment provides managerial assistance to its portfolio
companies by arranging syndicated financing, advising on major business
decisions, furnishing one of its executives to serve as a director or otherwise
participating in board meetings and assisting portfolio companies when they are
having operating difficulties.
Allied Financial
Allied Financial, as an SSBIC, operates as a small business investment
company specializing in the financing of small businesses controlled by
socially or economically disadvantaged persons. To determine whether the
owners of a small business are socially or economically disadvantaged, the SBA
relies on a composite of factors. Business owners who are members of the
following groups, among others, are considered socially disadvantaged: African
Americans, Hispanic Americans, Native Americans and Asian Pacific Americans.
In determining whether the owners of a small business are economically
disadvantaged, consideration may be given to factors such as levels of income,
location (for instance, urban ghettos, depressed rural areas and areas of high
unemployment or underemployment), education level, physical or other special
handicap, inability to compete in the marketplace because of prevailing or past
restrictive practices or Vietnam-era service in the armed forces, or any other
factors that may have contributed to disadvantaged conditions.
An SSBIC may sell preferred stock or long-term subordinated debt to
the SBA in an amount of up to 200% of its private capital. Beginning with the
SBA's 1996 fiscal year commencing on October 1, 1995, Congress discontinued
subsidized funding for the SBA's SSBIC program. Prior to this change, an SSBIC
was able to sell preferred stock and debentures which were issued with a rate
reduction or subsidy. Preferred stock sold to the SBA after November 1989 pays
dividends at an annual rate of four percent (4%) of par value and must be
redeemed within 15 years of issuance; preferred stock sold to the SBA before
November 1989 pays dividends at an annual rate of three percent (3%) of par
value and has no required redemption date. In addition to preferred stock, the
SBA had provided leverage to SSBICs at a reduced rate through the purchase or
guarantee of debentures. As of December 31, 1996, Allied Financial had
unsubsidized capital in the aggregate amount of $18,950,000 and subsidized
capital in the aggregate amount of $7,000,000, consisting of subordinated
debentures to the SBA in the amount of $18,950,000, 3% preferred stock of
$6,000,000 and 4% preferred stock of $1,000,000.
Allied Financial provides managerial assistance to its portfolio
companies by arranging syndicated financing, advising on major business
decisions, furnishing one of its executives to serve as a director or otherwise
participating in board meetings and assisting portfolio companies when they are
having operating difficulties.
The Company's Interest in Allied Lending
The Company owned 2,380,000 shares, or all of the outstanding capital
stock, of Allied Lending prior to consummation of the initial public offering
of Allied Lending's common stock in November 1993. As a result of that initial
public offering, the Company's ownership of Allied Lending's common stock was
reduced to 1,580,000 shares, or 36.2% of the Allied Lending shares outstanding
at December 31, 1993. The Company has agreed to divest itself of all shares of
Allied Lending by December 31, 1998 by public offerings, private placements,
distributions to the Company's stockholders or otherwise. As part of this
divestiture, the Company declared an extra distribution in December 1994 and
distributed in early January 1995 an aggregate of 335,086 Allied Lending
shares, which reduced its ownership of Allied Lending to 1,244,914 shares, or
28% of the Allied Lending common stock then outstanding. On December 20, 1996,
the Company commenced an underwritten offering of Allied Lending shares to the
public, reducing the Company's ownership interest in Allied Lending to 844,914
shares, or 16%, as of December 31, 1996.
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Until 1995, the business of Allied Lending consisted solely of making
small business loans which are partially guaranteed under the SBA's 7(a) Loan
Program ("7(a) guaranteed loans"). Allied Lending has been an active non-bank
lender in the 7(a) Loan Program. Most of the loans made by Allied Lending
historically have been made for the purpose of allowing portfolio companies to
acquire real estate-related assets, such as factories, workshops, or retail
premises, or to refinance outstanding loans made to acquire such real estate; a
smaller proportion of such loans has been made for the purpose of allowing
portfolio companies to purchase or refinance machinery and equipment. Allied
Lending, pursuant to stockholder approval at a Special Meeting of Stockholders
on November 9, 1995, expanded its ability to make loans to include, in addition
to 7(a) guaranteed loans, loans that are made in conjunction with 7(a)
guaranteed loans, and loans pursuant to the SBA 504 program.
Competition
A large number of entities and individuals compete for the opportunity
to make the kinds of investments made by the Company. Many of these entities
and individuals have greater financial resources than the combined resources
of the Company. As a result of this competition, the Company may from time to
time be precluded from making otherwise attractive investments on terms
considered to be prudent in light of the risks to be assumed.
Investment Adviser
Advisers is the investment adviser to the Company pursuant to an
investment advisory agreement. The advisory agreement will remain in effect
from year to year as long as its continuance is approved at least annually by
the Board of Directors, including a majority of the disinterested directors, or
by the "vote of a majority of the outstanding voting securities" (as defined in
the 1940 Act), of the Company. The advisory agreement may, however, be
terminated at any time on (60) sixty days' notice, without the payment of any
penalty, by the Board of Directors or by vote of a majority of the Company's
outstanding voting securities, as so defined, and will terminate automatically
in the event of its assignment.
Under the Agreement, Advisers manages the investments of the Company,
subject to the supervision and control of the Board of Directors.
Specifically, Advisers identifies, evaluates, structures, closes, and monitors
the investments made by the Company. The Company will not make any investments
that have not been recommended by Advisers as long as the advisory agreement
remains in effect. Advisers has the authority to effect acquisitions and
dispositions of investments for the Company's account, subject to approval by
the Company's Board of Directors.
The advisory agreement provides that the Company will pay all of its
own operating expenses, except those specifically required to be borne by
Advisers. The expenses paid by Advisers include the compensation of its
officers and the cost of office space, equipment and other personnel required
for the Company's day-to-day operations. The expenses that are paid by the
Company include the Company's share of transaction costs incident to the
acquisition and disposition of investments, legal and accounting fees, the fees
and expenses of the Company's independent directors and the fees of its
officer-directors, the costs of printing and mailing proxy statements and
reports to stockholders, costs associated with promoting the Company's stock,
and the fees and expenses of the Company's custodian and transfer agent. The
Company is also required to pay expenses associated with litigation and other
extraordinary or non-recurring expenses, as well as expenses of required and
optional insurance and bonding. All fees paid by or for the account of an
actual or prospective portfolio company in connection with an investment
transaction in which the Company participates are treated as commitment fees or
management fees and are received by the Company, pro rata to its participation
in such transaction, rather than by Advisers. Advisers is entitled to retain
for its own account any fees paid by or for the account of any company,
including a portfolio company, for special investment banking or consulting
work performed for that company which is not related to such investment
transaction or management assistance. Advisers will report to the Board of
Directors not less often than quarterly all fees received by Advisers from any
source whatever and whether, in its opinion, any such fee is one that Advisers
is entitled to retain under the provisions of the advisory agreement. In the
event that any member of the Board of Directors should disagree, the matter
will be conclusively resolved by a majority of the Board of Directors,
including a majority of the independent directors.
As compensation for its services to and the expenses paid for the
account of the Company, Advisers is entitled to be paid quarterly, in arrears,
a fee equal to 0.625% per quarter of the quarter-end value of the Company's
consolidated total assets, less the value of the shares of Allied Lending owned
by the Company, consolidated Interim Investments, cash and cash equivalents,
plus 0.125% per quarter of the quarter-end value of consolidated Interim
Investments, cash and cash
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equivalents. The advisory agreement provides specifically that the fee to
Advisers will not apply to the Company's investment in Allied Lending, as
required by the Commission's 1993 exemptive order permitting the spinoff of
Allied Lending. Such fees on an annual basis are approximately 2.5% of the
Company's consolidated total assets, less the Company's investment in Allied
Lending and consolidated Interim Investments, cash and cash equivalents, and
0.5% of the Company's consolidated Interim Investments, cash and cash
equivalents.
The fee to Advisers is substantially higher than that paid by most
investment companies because of the efforts and resources devoted by Advisers
to identifying, evaluating, structuring, closing, and monitoring the types of
private investments in which the Company specializes. The rate of compensation
paid by the Company to Advisers is substantially the same as that paid by
Allied II. The Company also understands that the fee to Advisers provided for
by the advisory agreement is not in excess of that frequently paid by private
investment funds engaged in similar types of investments. Such private funds
also typically allocate to management a substantial participation in profits.
Change of Chairman and Chief Executive Officer
After 22 years with the Allied Capital companies, David Gladstone
stepped down as Chairman and Chief Executive Officer of the Company in early
1997, and the Board appointed William L. Walton to be the Company's new
Chairman and Chief Executive Officer. Mr. Gladstone also resigned as a
director on March 19, 1997 and will not stand for election to the board of
directors. Mr. Walton has been affiliated with the Allied Capital companies
for more than ten years, both as a director of Advisers and as a past director
of the Company. Mr. Walton's extensive experience in the investment industry
combined with his performance as an entrepreneur provide an excellent mix of
talent for the Company. He previously served as Managing Director of New
York-based Butler Capital Corporation and was the personal venture capital
advisor for William S. Paley, founder and Chairman of CBS. More recently, Mr.
Walton founded two private companies dedicated to improving education for
children with a focus on reading and languages. Mr. Walton has been a
commercial banker, an investment banker with Lehman Brothers Kuhn Loeb, a
private investor and an entrepreneur, and throughout his career has been
involved in the growth and finance of small business.
Employees
The Company has no employees, as all of its personnel are furnished by
Advisers.
ITEM 2. PROPERTIES.
The Company does not own or lease any properties or other tangible
assets.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a defendant in any material pending legal
proceeding, and no such material proceedings are known by the Company to be
contemplated.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth the names, ages and positions of the
executive officers of the Company as of March 1, 1997, as well as certain other
information with respect to those persons:
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<TABLE>
<CAPTION>
Positions Currently
Held with the Principal Occupations
Name Age Company During Past Five Years
---- --- ---------------------- ----------------------
<S> <C> <C> <C>
William L. Walton 47 Chairman of the Board and Chief Employed by Advisers since
Executive Officer 1997; Chairman and Chief
Executive Officer of Allied
II, Allied Capital Commercial
Corporation ("Allied
Commercial"), Allied Lending
and Advisers; Manager of
Allied Capital Midwest LLC
("Allied Midwest"); Chief
Executive Officer of Success
Lab, Inc. (children's
educational services) from
1993 to 1996; Chief Executive
Officer of Language Odyssey
(educational publishing and
services) from 1992 to 1996;
and Managing Director of
Butler Capital Corporation
from 1987 to 1991.
G. Cabell Williams III 42 President and Chief Operating Employed by Advisers since
Officer 1981. Executive Vice
President of Allied II, Allied
Commercial, Allied Lending,
Business Mortgage Investors,
Inc. ("BMI"), Allied Midwest
and Advisers. He is the son
of George C. Williams, also a
director of the Company.
Jon A. DeLuca 34 Executive Vice President, Treasurer, Employed by Advisers since
and Chief Financial Officer 1994. Executive Vice
President, Treasurer and Chief
Financial Officer of Allied
II, Allied Commercial, Allied
Lending, BMI, Allied Capital
Mortgage, LLC ("Allied
Mortgage"), Allied Midwest and
Advisers. Manager of
Entrepreneurial Services at
Coopers & Lybrand from 1986 to
1994.
Joan M. Sweeney 37 Executive Vice President Employed by Advisers since
1993; President and Chief
Operating Officer of Advisers;
Executive Vice President of
Allied II, Allied Commercial,
Allied Lending, BMI, and
Allied Mortgage and Allied
Midwest; Senior Manager at
Ernst & Young from 1990 to
1993.
</TABLE>
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Information in response to this Item is incorporated by reference to
the "Shareholder Information" and "Quarterly Stock Price and Distributions to
Shareholders" sections of, and to Notes 4 and 7 of the Notes to Consolidated
Financial Statements contained in, the Company's Annual Report to Shareholders
for the year ended December 31, 1996 (the "1996 Annual Report").
ITEM 6. SELECTED FINANCIAL DATA.
Information in response to this Item is incorporated by reference to
the table in the "Consolidated Comparison of Financial Highlights" section of
the 1996 Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Information in response to this Item is incorporated by reference to
the "Management's Discussion and Analysis" section of the 1996 Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Information in response to this Item is incorporated by reference to
the Consolidated Financial Statements, notes thereto and Report of Independent
Accountants thereon contained in the 1996 Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information in response to this Item is incorporated by reference to
the identification of directors and nominees contained in the "Election of
Directors" section and the subsection captioned "Compliance with Reporting
Requirements of Section 16(a) of the Securities Exchange Act of 1934" of the
Company's definitive proxy statement in connection with its 1997 Annual Meeting
of Stockholders, scheduled to be held on May 1, 1997 (the "1997 Proxy
Statement"). Information in response to this Item also is included under the
caption "Executive Officers of the Registrant" included in Part I of this
Report.
ITEM 11. EXECUTIVE COMPENSATION.
Information in response to this Item is incorporated by reference to
the subsections captioned "Compensation of Executive Officers and Directors,"
"Incentive Stock Options" and "Compensation of Directors" of the 1997 Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information in response to this Item is incorporated by reference to
the subsection captioned "Beneficial Ownership of Common Stock" of the 1997
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information in response to this Item is incorporated by reference to
the subsections captioned "Certain Transactions" of the 1997 Proxy Statement.
8
<PAGE> 10
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this Report:
1. A. The following financial statements are incorporated by reference
from the 1996 Annual Report:
Consolidated Balance Sheet at December 31, 1996 and 1995.
Consolidated Statement of Operations for the years ended December 31,
1996, 1995 and 1994.
Consolidated Statement of Changes in Net Assets for the years ended
December 31, 1996, 1995 and 1994.
Consolidated Statement of Cash Flows for the years ended
December 31, 1996, 1995 and 1994.
Consolidated Statement of Loans and Investments at December 31, 1996.
Notes to Consolidated Financial Statements.
B. Report of Independent Accountants with respect to the financial
statements listed in A. above is incorporated by reference from the
1996 Annual Report.
2. No financial statement schedules are filed herewith because (i) such
schedules are not required or (ii) the information required has been
presented in the aforementioned financial statements.
3. The following exhibits are filed herewith or incorporated by
reference as set forth below:
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
<S> <C>
3(i)* Articles of Incorporation
3(ii)(1) By-Laws
4.1 Instruments defining the rights of security holders. See
Exhibits 3(i) and 3(ii).
4.2* Form of debenture between certain subsidiaries of the
Company and the U.S. Small Business Administration.
10.1(2) Note Agreement between the Company and certain subsidiaries
and Massachusetts Mutual Life Insurance Company, as
amended, dated April 30, 1992.
10.2(1) Loan Agreement between the Company and Overseas Private
Investment Corporation, dated April 10, 1995.
10.3* Unsecured Line of Credit Agreement between the Company and
certain subsidiaries and Riggs Bank N.A., dated December
20, 1996.
10.4* Unconditional Guaranty by the Company to and for the
benefit of Riggs Bank N.A., dated December 20, 1996.
10.5* Promissory notes between the Company and certain
subsidiaries and Riggs Bank N.A., dated December 20, 1996.
10.7* Investment Advisory Agreement between the Company and
Allied Capital Advisers, Inc., dated May 4, 1995.
10.8* Dividend Reinvestment Plan
10.9* Stock Option Plan
11* Statement regarding computation of per share earnings.
</TABLE>
9
<PAGE> 11
<TABLE>
<S> <C>
13* Excerpts from the 1996 Annual Report to Shareholders.
21 Subsidiaries of the Company and jurisdiction of
incorporation.
Allied Investment Corporation Maryland
Allied Capital Financial Corporation Maryland
Allied Development Corporation District of Columbia
23* Consents of Matthews, Carter and Boyce, independent
accountants.
27* Financial Data Schedule
28* Financial statements as of and for the year ended December
31, 1996 of Allied Investment Corporation and Allied
Capital Financial Corporation, in the form filed with the
U.S. Small Business Administration.
</TABLE>
- -------------------
* Filed herewith.
(1) Incorporated by reference to such Exhibit on Pre-Effective Amendment No. 2
filed with registration statement on Form N-2 on January 24, 1996 (File
No. 33-64629).
(2) Incorporated by reference to Exhibit (4)(D)(i) filed with the Company's
Annual Report on Form 10-K for the year ended December 31, 1992.
Amendments thereto are incorporated by reference to Exhibits (4)(D)(ii),
(4)(D)(iii) and (4)(D)(iv) to the Company's Form 8-K filed on December 9,
1993.
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed for the three months ended December
31, 1996.
10
<PAGE> 12
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized on March 27, 1997.
/s/ WILLIAM L. WALTON
---------------------
William L. Walton
Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Title
Signature (Capacity) Date
- --------- ---------- ----
<S> <C> <C>
/s/ WILLIAM L. WALTON Chairman and March 27, 1997
- -------------------------- Chief Executive Officer
William L. Walton (Principal Executive Officer)
/s/ GEORGE C. WILLIAMS Director March 27, 1997
- --------------------------
George C. Williams
/s/ G. CABELL WILLIAMS III Director and President March 27, 1997
- -------------------------- and Chief Operating Officer
G. Cabell Williams III
/s/ T. MURRAY TOOMEY Director March 27, 1997
- --------------------------
T. Murray Toomey
/s/ JOSEPH A. CLORETY Director March 27, 1997
- --------------------------
Joseph A. Clorety III
/s/ GUY T. STEUART II Director March 27, 1997
- --------------------------
Guy T. Steuart II
/s/ WARREN K. MONTOURI Director March 27, 1997
- --------------------------
Warren K. Montouri
/s/ MICHAEL I. GALLIE Director March 27, 1997
- --------------------------
Michael I. Gallie
/s/ JON A. DELUCA Executive Vice President, Treasurer, March 27, 1997
- -------------------------- and Chief Financial Officer
Jon A. DeLuca (Principal Financial
and Accounting Officer)
</TABLE>
11
<PAGE> 13
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
3(i) Articles of Incorporation
4.2 Form of debenture between the Company's subsidiaries and
the U.S. Small Business Administration.
10.3 Unsecured Line of Credit Agreement between the Company and
certain subsidiaries and Riggs Bank N.A., dated
December 20, 1996.
10.4 Unconditional Guaranty by the Company to and for the
benefit of Riggs Bank N.A., dated December 20, 1996.
10.5 Promissory notes between the Company and certain
subsidiaries and Riggs Bank N.A., dated December 20, 1996.
10.7 Investment Advisory Agreement between the Company and
Allied Capital Advisers, Inc., dated May 4, 1995.
10.8 Dividend Reinvestment Plan.
10.9 Stock Option Plan
11 Statement regarding computation of per share earnings.
13 Excerpts from the 1996 Annual Report to Shareholders.
23 Consents of Matthews, Carter and Boyce, independent
accountants.
27 Financial Data Schedule
28 Financial statements as of and for the year ended December
31, 1996 of Allied Investment Corporation and Allied
Capital Financial Corporation, in the form filed with the
U.S. Small Business Administration.
</TABLE>
12
<PAGE> 1
Exhibit 3(i)
ARTICLES OF INCORPORATION
ALLIED CAPITAL CORPORATION
(A MARYLAND CORPORATION)
The undersigned, Thomas R. Salley, III, whose post office address is 1666 K
Street, N.W., Suite 901, Washington, D.C. 20006, being at least eighteen (18)
years of age, does hereby form a corporation under the general laws of the
State of Maryland.
FIRST: The name of the corporation (hereinafter referred to as the
"Corporation") is: Allied Capital Corporation.
SECOND: The purposes for which the Corporation is organized are as
follows:
A. To render advice and consulting services to corporations,
individuals, partnerships and other business entities; to enter into
contracts with any of such entities for the purpose of carrying out such
advisory and consulting services; to register as an investment adviser
with such agencies and in such jurisdictions where such registration is
deemed appropriate; and to do all such other acts as may be related or
incidental to the purposes of an investment adviser, merchant bank or
similar financial institution;
B. To purchase, acquire, hold, own, improve, develop, sell, convey,
assign, release, mortgage, encumber, use, lease, hire, manage, deal in and
otherwise dispose of real property and personal property of every kind and
nature or any interest therein, improved or otherwise, including stocks
and securities of other corporations; to loan money; to take securities
for the payment of all sums due the Corporation; to sell, assign and
release such securities;
C. To equip, furnish, improve, develop and manage any property, real
or personal; to invest, trade and deal in any personal property; to
encumber or dispose of any personal property at any time held or owned by
the Corporation;
D. To engage in, operate and acquire interests in any kind of
business, of whatever nature, which may be permitted by law;
E. To import, export, produce, buy, sell and otherwise deal in and
with, goods, wares and merchandise of every kind, class and description;
F. To acquire all or any part of the good will, rights, property and
business of any individual association, partnership, joint venture,
corporation or other legal entity; to hold, utilize, enjoy and in any
manner dispose of the whole or any part of the rights, property and
business so acquired; to assume in connection therewith any liabilities of
any such individual association, partnership, joint venture, corporation
or other legal entity;
G. To acquire, by purchase, subscription or in any other manner,
take, receive, hold, use, employ, sell, assign, transfer, exchange,
pledge, mortgage, lease, dispose of and otherwise deal in and with any
shares of stock or other shares, voting trust certificates, bonds,
debentures, notes, mortgages or other obligations, securities or evidences
of indebtedness, and any certificates, receipts, warrants or other
instruments evidencing rights or options to receive, purchase or subscribe
for the same or representing any other rights or interests therein or in
any property or assets, issued or created by any individual, association,
partnership, joint venture, corporation, government (or subdivision or
agency thereof) or other legal entity, wherever organized and wherever
doing business; to possess and exercise in respect thereof any and all of
the rights, powers and privileges of individual holders including, without
limitation, the right to vote any shares of stock so held or owned and,
<PAGE> 2
upon a distribution of the assets or a division of the profits of the
Corporation, to distribute any such shares of stock or other shares,
voting trust certificates, bonds or other obligations, securities or
evidences of indebtedness (or the proceeds thereof) among the stockholders
of the Corporation;
H. To erect commercial buildings and other buildings, private or
public of all kinds, and to sell and rent the same; to contract, enlarge,
repair, grade, pave, dedicate, remodel or otherwise engage in any work
upon buildings of every nature, roads, avenues, highways, paths, walks,
parks, playgrounds and sidewalks; to engage in iron, steel, wood, brick,
concrete, stone, cement, masonry, glass and earth construction; to execute
contracts or to receive assignments of contracts therefor or relating
thereto; to manufacture and furnish the building materials and supplies
connected therewith;
I. To apply for, obtain, purchase or otherwise acquire any patents,
copyrights, licenses, trademarks, trade names, rights, processes, formulae
and the like; to use, exercise, develop and grant licenses in respect of,
sell and otherwise turn to account the same;
J. To purchase (or otherwise acquire), hold, sell, retire, reissue or
otherwise dispose of shares of its own stock of any class in any manner
now or hereafter authorized or permitted by law, and to pay therefor, with
cash or other property;
K. To borrow or raise money and to issue bonds, debentures, notes or
other obligations of any nature (and in any manner permitted by law) for
money so borrowed or in payment for property purchased, or for any other
lawful consideration, and to secure the payment thereof, and of the
interest thereon, by mortgage upon, pledge, conveyance or assignment in
trust of, the whole or any part of the property of the Corporation, real
or personal, including contract rights, whether at the time owned or
thereafter acquired; to sell, pledge, discount or otherwise dispose of
such bonds, debentures, notes or other obligations of the Corporation;
L. To aid, by loan, subsidy, guaranty or in any lawful manner
whatsoever, any individual, association, partnership, joint venture,
corporation or other legal entity whose stocks, bonds, notes, debentures
or other obligations, securities or evidences of indebtedness are in any
manner directly or indirectly held or guaranteed by the Corporation, or by
any corporation in which the Corporation may have an interest directly or
indirectly as stockholder, creditor, guarantor or otherwise, or whose
shares or securities are owned by the Corporation; to do any and all
lawful acts and things designed to protect, preserve, improve or enhance
the value of any stocks, bonds, notes, debentures or other obligations,
securities or evidences of indebtedness of any individual, association,
partnership, joint venture, corporation or other legal entity in which the
Corporation has an interest directly or indirectly as a stockholder,
creditor, guarantor or otherwise, or whose shares or securities are owned
by the Corporation, or to lend money with or without collateral security;
M. To guarantee the payment of dividend upon any shares of stock of
any other association or corporation; to guarantee the performance of any
contract by any individual, association, partnership, joint venture,
corporation or other legal entity; to endorse or otherwise guarantee the
payment of principal and interest, or either, of any bonds, debentures,
notes, securities or other evidences of indebtedness created or issued by
any such individual, association, partnership, joint venture, corporation
or other legal entity, it not being necessary that any such guaranty or
endorsement shall be intended to result in any benefit to the Corporation
(it being understood that in no way shall the Corporation act as a surety
company);
N. To carry out all or any part of the purposes set forth herein as
principal, broker, factor, agent, contractor or otherwise, either alone,
through or in conjunction with any individual, association, partnership,
corporation or other legal entity; to make, execute
2
<PAGE> 3
and perform any contracts or agreements and to do any other acts and
things for the accomplishment of any of the purposes set forth herein or
incidental to such purposes, or which at any time may appear conducive to
or expedient for the accomplishment of any such purposes;
O. To carry out all of the purposes set forth herein in any or all
states, territories districts, dependencies and possessions of the United
States of America and any foreign country; to maintain offices and
agencies in any or all states, territories, districts, dependencies and
possessions of the United States of America and any foreign country;
P. To organize, incorporate, reorganize, liquidate and dissolve any
association, partnership, joint venture, corporation (subsidiary,
affiliated or other) or other legal entity for any purpose permitted by
law; to invest in any manner in any association, partnership, joint
venture, corporation (subsidiary, affiliated or other) or other legal
entity;
Q. To do any act or thing and exercise any power suitable, convenient
or proper for the accomplishment of any of the purposes set forth herein
or incidental to such purposes or which at any time may appear conducive to
or expedient for the accomplishment of any of such purposes; and
R. To have and exercise any and all powers and privileges now or
hereafter conferred by the general laws of the State of Maryland upon
corporations formed under such laws.
The foregoing enumeration of the purposes of the Corporation is made in
furtherance and not in limitation of the powers conferred upon the Corporation
by law. The mention of any particular purpose is not intended in any manner to
limit or restrict the generality of any other purpose mentioned, or to limit or
restrict any of the powers of the Corporation. The Corporation shall have,
enjoy and exercise all of the powers and rights now or hereafter conferred by
the laws of the State of Maryland upon corporations of a similar character, it
being the intention that the purposes set forth in each of the paragraphs of
this Article shall, except as otherwise expressly provided, in nowise be
limited or restricted by reference to or inference from the terms of any other
clause or paragraph of this or any other Article of these Articles of
Incorporation, or of any amendment thereto, and shall each be regarded as
independent, and construed as powers as well as purposes; provided, however,
that nothing herein contained shall be deemed to authorize or permit the
Corporation to carry on any business or exercise any power, or do any act which
a corporation formed under the general laws of the State of Maryland may not at
the time lawfully carry on or do.
THIRD: The post office address of the principal office of the Corporation
in the State of Maryland is: 5422 Albia Road, Bethesda, Maryland 20816. The
name and post office address of the resident agent of the Corporation in the
State of Maryland are: G. Cabell Williams III, 5422 Albia Road, Bethesda
(Montgomery County), Maryland 20816. Said resident agent is a citizen of the
State of Maryland and actually resides therein.
FOURTH: The total number of shares of stock which the Corporation has
authority to issue is ten million (10,000,000) shares of Common Stock, with a
par value of One Dollar ($1.00) per share. The aggregate par value of all such
shares is Ten Million Dollars ($10,000,000.00).
FIFTH: The initial number of directors of the Corporation shall be three
(3) in accordance with the provisions of Section 2-402(a) of the General
Corporation Law of the State of Maryland, which number may be changed pursuant
to the provisions set forth in the Bylaws of the Corporation, but shall never
be less than the number permitted by law, and the names of the directors who
shall act until the first annual meeting of stockholders of the Corporation or
until their successors are duly chosen and qualify are: David Gladstone, David
P. Parker and Thomas R. Salley, III.
SIXTH: The following provisions are hereby adopted for the purpose of
defining, limiting and regulating the powers of the Corporation and of the
Board of Directors and stockholders:
3
<PAGE> 4
A. The Board of Directors of the Corporation is hereby empowered to
authorize and direct the issuance from time to time or at any time or
times of the shares of stock of the Corporation of any class, now or
hereafter authorized, any options or warrants for such shares permitted by
law, any rights to subscribe to or purchase such shares and any other
securities of the Corporation, for such consideration as the Board of
Directors may deem advisable, subject to such limitations and
restrictions, if any, as may be set forth in the Bylaws of the
Corporation.
B. No holder of shares of stock of the Corporation of any class, now
or hereafter authorized, shall have any preferential or preemptive right
to subscribe for, purchase or receive (i) any shares of stock of the
Corporation of any class, now or hereafter authorized, (ii) any options or
warrants for any such preferential or preemptive shares, (iii) any rights
to subscribe to or purchase any such shares, or (iv) any other securities
of the Corporation which may at any time or from time to time be issued,
sold or offered for sale by the Corporation.
C. The Board of Directors of the Corporation is hereby empowered to
adopt Bylaw provisions with respect to the indemnification of directors,
officers, employees, agents and other persons and to make such other
indemnification as it shall deem expedient and in the best interests of
the Corporation to the extent permitted by law and Article SEVENTH hereof.
D. The provisions relating to certain special voting requirements set
forth in Title 3, Subtitle 6 of the General Corporation Law of the State
of Maryland and the provisions relating to certain control shares set
forth in Title 3, Subtitle 7 of the General Corporation Law of the State
of Maryland shall not be applicable, pursuant to Sections 3-603(e)(iii)
and 3-702(b) thereof, respectively, to the shares of the Corporation which
are owned by, or which shall in the future be issued to and owned by, any
employee stock ownership plan, incentive stock ownership plan or other
similar plan established now or in the future for the benefit of the
Corporation's directors, officers, employees or affiliates, and, without
limiting the foregoing, none of such shares owned by any such plan shall,
for purposes of such subtitles, be aggregated with any shares owned
individually by any beneficiaries of any such plan.
E. The Board of Directors is expressly authorized to make, amend,
alter, repeal or rescind the Bylaws of the Corporation.
F. The Corporation reserves the right to amend these Articles of
Incorporation in any way which alters the contract rights, as expressly
set forth in these Articles of Incorporation, of any outstanding stock of
the Corporation and substantially adversely affects any of the rights of
any of the holders of any outstanding stock of the Corporation.
SEVENTH:
A. The Corporation shall indemnify (i) its directors and officers,
whether serving the Corporation or, at its request, any other entity, to the
full extent permitted by the general laws of the State of Maryland now or
hereafter in force, including the advance of expenses under the procedures and
to the full extent permitted by law and (ii) other employees and agents to such
extent as shall be authorized by the Board of Directors or the Corporation's
Bylaws and be permitted by law. The foregoing rights of indemnification shall
not be exclusive of any other rights to which those seeking indemnification may
be entitled. The Board of Directors may take such action as is necessary to
carry out these indemnification provisions and is expressly empowered to adopt,
approve and amend from time to time such Bylaws, resolutions or contracts
implementing such provisions or such further indemnification arrangements as
may be permitted by law. No amendment to or repeal of this Article SEVENTH
shall limit or eliminate the right to indemnification provided hereunder with
respect to acts or omissions occurring prior to such amendment or repeal.
4
<PAGE> 5
B. To the fullest extent permitted by Maryland statutory or
decisional law, as amended or interpreted, no director or officer of this
Corporation shall be personally liable to the Corporation or its stockholders
for money damages. No amendment to or repeal of this Article SEVENTH shall
limit or eliminate the benefits provided to directors and officers under this
provision with respect to any act or omission which occurred prior to such
amendment or repeal.
EIGHTH: The duration of the Corporation shall be perpetual.
IN WITNESS WHEREOF, I have signed these Articles of Incorporation on the
18th day of December 1990, and I acknowledge the same to be my act and deed and
that, to the best of my knowledge, information and belief, all matters and
facts stated herein are true in all material respects and that such statement
is made under the penalties of perjury.
SOLE INCORPORATOR:
/s/ T.R. Salley, III
------------------------------------
Thomas R. Salley, III
5
<PAGE> 1
Exhibit 4.2
OMB Approval No.: 3245-0081
Expiration Date: ________
Page 1 of 3
SBIC License No. Loan No.
------------ ------------
DEBENTURE
***************
$ Date of Issuance
--------------- ---------------
(the "Company")
- ---------------------------------------------------------
(Name of Licensee)
- -------------------------------------------------------------------------------
(Street) (City) (State) (Zip)
For value received, the Company hereby promises to pay to the order of Chemical
Bank, as Trustee (the "Trustee") under that certain Amended and Restated Trust
Agreement dated as of February 1, 1995, as same may be amended from time to
time, by and among the Trustee, the U.S. Small Business Administration ("SBA")
and SBIC Funding Corporation, and as the Holder hereof the principal sum
of_________________________________dollars ($___________) (the "Original
Principal Amount") on ______________(the "Maturity Date") at such location as
SBA, as guarantor of this debenture, may direct and to pay interest
semiannually on _______________1st and _______________lst (the "Payment Dates")
of each year, as herein provided, at the rate of ____________________% per
annum on the basis of a year of 365 days, for the actual number of days
(including the first day but excluding the last day) elapsed (the "Stated
Interest Rate"), on said principal sum from the date of the issuance hereof
until payment of such principal sum has been made or duly provided for. The
Company shall deposit all payments with respect to this debenture not later
than 12:00 noon (Washington, D.C. time) on the applicable Payment Date or the
next business day if the Payment Date is not a business day, all as directed by
SBA.
This debenture is issued by the Company and guaranteed by SBA, pursuant and
subject to Section 303 of the Small Business Investment Act of 1958, as amended
(the "Act") (15 U.S.C. Section 683). This debenture is subject to all of the
regulations promulgated under the Act, as amended from time to time, provided,
however, that 13 C.F.R. Sections 107.210(h) and 107.261 as in effect on the
date of this debenture are incorporated herein as if fully set forth.
SBA Form 444C (Revised 4-95)
<PAGE> 2
Page 2 of 3
The Company may elect to prepay this debenture, as a whole and not in part, on
any Payment Date, in the manner and at the price as next described. The
prepayment price (the "Prepayment Price") shall be an amount equal to the
outstanding principal balance of this debenture, plus interest accrued and
unpaid thereon to the Payment Date selected for prepayment, plus a prepayment
premium (the "Prepayment Premium"). The Prepayment Premium amount is calculated
as a declining percentage (the "Applicable Percentage") multiplied by the
Original Principal Amount of this debenture in accordance with the following
table:
CONSECUTIVE PAYMENT DATES APPLICABLE PERCENTAGE
1ST OR 2ND 5%
3RD OR 4TH 4%
5TH OR 6TH 3%
7TH OR 8TH 2%
9TH OR (10TH-IF NOT ALSO MATURITY DATE) 1%
No Prepayment Premium is required to repay this debenture on its Maturity Date.
No Prepayment Premium is required when the prepayment occurs on a Payment Date
that is on or after the 11th consecutive Payment Date of this debenture, if
this debenture has a 20 consecutive Payment Date term.
The amount of the Prepayment Price shall be sent to SBA or such agent as SBA
shall direct, by wire payment in immediately available funds, not less than
three business days prior to the regular payment date. Until the Company is
notified otherwise in writing by SBA, any Prepayment Price shall be paid to the
account maintained by the Trustee, entitled the SBA Prepayment Subaccount and
shall include an identification of the Company by name and SBA-assigned license
number, the loan number appearing on the face hereof, and such other
information as SBA or its agent may specify.
This debenture shall be deemed issued in the District of Columbia as of the
day, month, and year first stated above. The terms and conditions of this
debenture shall be construed in accordance with, and its validity and
enforcement governed by, federal law.
The warranties, representations, or certifications made to SBA on the SBA Form
1022 or the Company's application letter for an SBA commitment related to this
debenture are incorporated herein as if fully set forth.
SBA Form 444C (Revised 4-95)
<PAGE> 3
Page 3 of 3
Should any provision of this debenture or any of the documents incorporated by
reference herein be declared illegal or unenforceable by a court of competent
jurisdiction, the remaining provisions shall remain in full force and effect
and this debenture shall be construed as if said provisions were not contained
herein.
All notices to Company which are required or may be given under this debenture
shall be sufficient in all respects if sent to the above-noted address of the
Company. For the purposes of this debenture, the Company may change this
address only upon written approval of SBA.
COMPANY ORGANIZED AS CORPORATION
IN WITNESS WHEREOF, the Company has caused this debenture to be signed by its
duly authorized officer and its corporate seal to be hereunto affixed and
attested by its Secretary or Assistant Secretary as of the date of issuance
stated above.
CORPORATE SEAL
-----------------------------------
(Name of Licensee)
By:
--------------------------------
-----------------------------------
(Typed Name and Title)
ATTEST:
- --------------------------
Secretary or [Assistant
Secretary] (Strike One)
SBA Form 444C (Revised 4-95)
<PAGE> 1
EXHIBIT 10.3
UNSECURED LINE OF CREDIT AGREEMENT
THIS UNSECURED LINE OF CREDIT AGREEMENT, dated as of the 20th day of
December, 1996, is made by and between ALLIED CAPITAL CORPORATION, a Maryland
corporation ("Allied"), ALLIED INVESTMENT CORPORATION, a Maryland corporation
("AIC"), and ALLIED CAPITAL FINANCIAL CORPORATION, a Maryland corporation
("ACFC") (individually, a "Borrower" and collectively, the "Borrowers"), and
RIGGS BANK N.A., a national banking association (the "Bank"). The Bank has
agreed to extend credit to the Borrowers and the Borrowers have agreed to
obtain credit from the Bank on the terms and conditions set forth in this
Agreement. Accordingly, for good and valuable consideration, the receipt and
sufficiency of which are acknowledged, the Bank and the Borrowers agree as
follows:
ARTICLE 1
DEFINITIONS AND ACCOUNTING TERMS
SECTION 1.01. DEFINED TERMS. As used in this Agreement, the following
terms shall have the meanings assigned to them below, which meanings shall be
equally applicable to the singular and plural forms of the terms defined.
"ACFC NOTE" means a promissory note in the original principal amount
of Ten Million Dollars and no/100 ($10,000,000.00) evidencing the obligation of
ACFC to pay the principal amount of its borrowings hereunder, together with
interest thereon, as the same may be amended, modified or supplemented from
time to time. The term "ACFC Note" also shall include any promissory note
executed and delivered by ACFC in connection with an extension of the
Termination Date, an increase in the Maximum Amount or any other amendment to
this Agreement.
"ADC" means Allied Development Corporation, a District of Columbia
corporation.
"ADJUSTED SHAREHOLDERS' EQUITY" means, with respect to Allied,
Consolidated Shareholders' Equity less investments in AIC, ACFC and ADC as
shown on the equity method of accounting for unconsolidated subsidiaries in
accordance with GAAP.
"ADJUSTED TOTAL LIABILITIES" means, with respect to Allied, direct
liabilities of Allied only as shown on the equity method of accounting for
unconsolidated subsidiaries in accordance with GAAP.
"AFFILIATE" means with respect to any specified Person, any other
Person which, directly or indirectly, through one or more intermediaries,
controls or is controlled by, or is under common control with, such specified
Person. The term "control" means the possession, directly or indirectly, of the
power to direct or cause the direction of management and policies of a Person,
whether through ownership of common stock, by contract or otherwise.
"AGREEMENT" means this Unsecured Line of Credit Agreement, as the same
may be amended, modified or supplemented from time to time.
"AIC NOTE" means a promissory note in the original principal amount of
Ten Million Dollars and no/100 ($10,000,000.00) evidencing the obligation of
AIC to pay the principal amount of its
<PAGE> 2
borrowings hereunder, together with interest thereon, as the same may be
amended, modified or supplemented from time to time. The term "AIC Note" also
shall include any promissory note executed and delivered by AIC in connection
with an extension of the Termination Date, an increase in the Maximum Amount or
any other amendment to this Agreement.
"ALLIED NOTE" means a promissory note in the original principal amount
of Ten Million Dollars and no/100 ($10,000,000.00) evidencing the obligation of
Allied to pay the principal amount of its borrowings hereunder, together with
interest thereon, as the same may be amended, modified or supplemented from
time to time. The term "Allied Note" also shall include any promissory note
executed and delivered by Allied in connection with an extension of the
Termination Date, an increase in the Maximum Amount or any other amendment to
this Agreement.
"BUSINESS DAY" means any day other than a Saturday, Sunday or other
day on which commercial banks are authorized or required to close under the
laws of the District of Columbia.
"CAPITAL LEASE" means all leases which have been or should be
capitalized on the books of the lessee in accordance with GAAP.
"CONSOLIDATED" means, with reference to any term defined herein, that
term as applied to Allied and its Subsidiaries, consolidated in accordance with
GAAP.
"DEFAULT" means any event which with the giving of notice, the lapse
of time, or both, would constitute an Event of Default.
"EVENT OF DEFAULT" means any of the events specified as an "Event of
Default" under this Agreement, provided that any requirement for the giving of
notice, the lapse of time, or both, or any other condition, has been satisfied.
"GAAP" means generally accepted accounting principles consistently
applied.
"GUARANTY" means the guaranty agreement from Allied unconditionally
guaranteeing to the Bank the full repayment of the AIC Note and the ACFC Note
and all other obligations of AIC and ACFC hereunder, as the same may be
amended, modified or supplemented from time to time.
"INDEBTEDNESS" means (1) indebtedness or liability for borrowed money;
(2) obligations evidenced by bonds, debentures, notes, or other similar
instruments; (3) obligations for the deferred purchase price of property or
services (including trade obligations); (4) obligations as lessee under Capital
Leases; (5) current liabilities in respect of unfunded vested benefits under
Plans covered by ERISA; (6) obligations under letters of credit; (7)
obligations under acceptance facilities; (8) all guaranties, endorsements
(other than for collection or deposit in the ordinary course of business), and
other contingent obligations to purchase, to provide funds for payment, to
supply funds to invest in any Person, or otherwise to assure a creditor against
loss; and (9) obligations secured by any Liens, whether or not the obligations
have been assumed.
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<PAGE> 3
"INVESTMENTS" means all debt or equity securities or share,
participation, or other interest in any Person, which is, or is of a type,
dealt in or traded on financial markets, or which is recognized in any area in
which it is issued or dealt in as a medium for investment.
"LETTER OF CREDIT" means a letter of credit issued by the Bank on
behalf of a Borrower as described below in Section 2.05.
"LIEN" means any mortgage, deed of trust, pledge, security interest,
hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or
other), or preference, priority, or other security agreement or preferential
arrangement, charge, or encumbrance of any kind or nature whatsoever
(including, without limitation, any conditional sale or other title retention
agreement, any financing lease having substantially the same economic effect as
any of the foregoing, and the filing of any financing statement under the
Uniform Commercial Code or comparable law of any jurisdiction to evidence any
of the foregoing).
"LOAN DOCUMENTS" means this Agreement, the Notes, the Guaranty, and
any other document now or hereafter executed or delivered in connection with
the Obligations in evidence thereof or as security therefor, including, without
limitation, any life insurance assignment, pledge agreement, security
agreement, deed of trust, mortgage, promissory note or subordination agreement.
"LOANS" means the loans to be made to the Borrowers by the Bank
pursuant to this Agreement and the Letters of Credit.
"MAXIMUM AMOUNT" means (i) with respect to all Loans at any time
outstanding, Ten Million Dollars and no/100 ($10,000,000.00), and (ii) with
respect to all Letters of Credit at any time outstanding, One Million, Five
Hundred Thousand Dollars and no/100 ($1,500,000.00), each as may be reduced
from time to time pursuant to Section 2.01(d) of this Agreement.
"NET INCOME" means income after deduction of all expenses, taxes and
other proper charges, determined in accordance with GAAP and shall exclude all
realized and unrealized gains or losses on Investments.
"NOTES" means the Allied Note, the AIC Note and the ACFC Note.
"OBLIGATIONS" means the Loans, the Notes, all Indebtedness and
obligations of any Borrower under this Agreement and the other Loan Documents,
as well as all other Indebtedness of such Borrower to the Bank, now existing or
hereafter arising, of every kind and description, whether or not evidenced by
notes or other instruments, and whether such Indebtedness is direct or
indirect, fixed or contingent, liquidated or unliquidated, due or to become
due, secured or unsecured, joint, several or joint and several, related or
unrelated to the Loans, similar or dissimilar to the Indebtedness arising out
of this Agreement, of the same or a different class of Indebtedness as the
Indebtedness arising out of this Agreement, including, without limitation, any
overdrafts in any deposit account maintained by such Borrower with the Bank,
all obligations of such Borrower with respect to Letters of Credit, any
Indebtedness of such Borrower that is assigned to the Bank and any Indebtedness
of such Borrower to any assignee of this Agreement.
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<PAGE> 4
"PERSON" means an individual, partnership, corporation, business
trust, joint stock company, trust, unincorporated association, joint venture,
governmental authority or other entity of whatever nature.
"SHAREHOLDERS' EQUITY" means, at any date with respect to any Person,
shareholders' equity as computed in accordance with GAAP and reported in the
financial statements of such Person delivered to the Bank.
"SUBSIDIARY" means a corporation of which shares of stock having
ordinary voting power to elect a majority of the board of directors or other
managers of such corporation are at the time owned, or the management of which
is otherwise controlled, directly or indirectly, through one or more
intermediaries, or both, by any Person.
"TERMINATION DATE" means September 30, 1998, and any extension or
extensions thereof granted by the Bank in its sole discretion.
"TOTAL INTEREST EXPENSE" means, for any period with respect to any
Person, the aggregate amount of interest incurred during such period on all
Indebtedness of such Person outstanding during all or any part of such period,
including any fees incurred in connection with such Indebtedness.
"TOTAL LIABILITIES" means, with respect to any Person, the aggregate
amount of all liabilities of such Person (including tax and other proper
accruals), computed in accordance with GAAP.
SECTION 1.02. ACCOUNTING TERMS. All accounting terms used herein which
are not otherwise expressly defined in this Agreement shall have the meanings
respectively given to them in accordance with GAAP in effect on the date of
this Agreement. Except as otherwise provided herein, all financial computations
made pursuant to this Agreement shall be made in accordance with GAAP and all
balance sheets and other financial statements shall be prepared in accordance
with GAAP. Except as otherwise provided herein, whenever reference is made in
any provision of this Agreement to a balance sheet or other financial statement
or financial computation with respect to Allied, such terms shall mean a
consolidated balance sheet or other financial statement or financial
computation, as the case may be.
ARTICLE 2
TERMS OF THE LOANS
SECTION 2.01. AMOUNT AND BORROWING PROCEDURE.
(a) Subject to the terms and conditions of this Agreement, Allied,
AIC, and ACFC may, from time to time, until the Termination Date request Loans
from the Bank as provided herein in an aggregate principal amount under all
three of the Notes not to exceed at any one time outstanding the Maximum Amount
and the Bank will make such Loans on the terms provided herein and in the
Notes. Up to the aggregate Maximum Amount, Allied, AIC, and ACFC may borrow,
repay without penalty and re-borrow hereunder from the date of this Agreement
until the Termination Date.
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<PAGE> 5
(b) The unpaid principal balance of the Loans shall bear interest as
provided in the Notes.
(c) The respective obligations of the Borrowers to repay the Loans,
together with interest thereon, shall be evidenced by the Notes. The unpaid
principal balance of the Notes shall be payable on the Termination Date
together with all interest accrued and unpaid.
(d) The Borrowers may terminate or reduce the credit facility provided
for in Section 2.01(a) of this Agreement in whole or in part by giving at least
fifteen (15) Business Days' prior written notice of such termination or
reduction to the Bank. The termination or reduction of the credit facility
provided for in Section 2.01(a) of this Agreement shall not affect the rights
of the Bank with respect to any Obligations arising prior or subsequent to such
termination or reduction and the provisions of this Agreement shall remain in
full force and effect until the Obligations have been fully and completely paid
and discharged.
(e) The Borrowers and the Bank from time to time may agree to extend
the Termination Date or increase the amount of credit to be provided under this
Agreement, or both. During any such periods of extension, the remaining terms
and conditions of this Agreement shall remain in full force and effect, and the
Borrowers shall execute and deliver any amendments or modifications to the Loan
Documents as the Bank may require in connection with any such extension or
increase. Nothing in this Section 2.01(e) shall obligate the Bank to grant such
extensions or to increase the amount of credit provided under this Agreement.
(f) Notwithstanding any other provision herein or in any of the Loan
Documents, the Borrowers agree that during each calendar year, there shall be a
period of no less than sixty (60) consecutive days when no Loans are
outstanding.
SECTION 2.02. FEES. Allied agrees to pay to the Bank, in consideration
of its commitment to make the Loans, an annual fee of one eighth of one percent
(0.125%) per annum of the Maximum Amount, payable on each anniversary of the
date of this Agreement until the Termination Date. In addition, the Borrowers
agree to pay to the Bank, in consideration of its agreement to make the Loans,
an unused commitment fee of one eighth of one percent (0.125%) per annum of the
average daily amount of the difference between the Maximum Amount and the
aggregate unpaid principal amount of the Loans outstanding on each day during
the preceding quarter. The fee shall commence to accrue as of the date of this
Agreement and shall cease to accrue on the Termination Date and shall be paid
quarterly in arrears on last Business Day of March, June, September or December
and on the Termination Date, commencing with the first such date after the date
of this Agreement. If on the Termination Date the Bank has received an amount
as a facility fee greater than that accrued under this Section 2.02, then such
amount shall be applied to the amount due under the Notes or if no amount is
then due the Bank shall pay such amount to the Borrowers.
SECTION 2.03. PAYMENTS AND COMPUTATIONS. All payments due under this
Agreement (including any payment or prepayment of principal, interest, fees and
other charges) or with respect to the Notes or the Loans shall be made in
lawful money of the United States of America, in immediately available funds,
to the Bank at its office at 808 17th Street, N.W., Washington, D.C. 20006, or
at such other place as the Bank may designate, and shall be applied first to
accrued fees, next to accrued late charges, next to accrued interest and then
to principal. If any payment of principal, interest or fees is due on a day
which is not a Business Day, then the due date will
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<PAGE> 6
be extended to the next succeeding full Business Day and interest and fees will
be payable with respect to the extension. Upon the occurrence of an Event of
Default and during the continuation of such Event of Default, interest shall
accrue on the Loans at a per annum rate as provided in the Notes for such
event.
SECTION 2.04. LOAN ADVANCE PROCEDURES. Allied, AIC, and ACFC may at
any time or from time to time request a Loan provided that after such amount is
loaned the aggregate amount of all Loans shall not exceed the Maximum Amount.
Such request shall state the date on which the Loan is to be made which shall
be not less than one (1) Business Day after the receipt of such request by
Bank.
SECTION 2.05. LETTER OF CREDIT FACILITY. Subject to the terms of this
Agreement, Bank will issue standby letters of credit (each a "Letter of
Credit") on behalf of Allied, AIC, or ACFC. At no time, however, shall the
total face amount of all Letters of Credit outstanding, less any partial draws
paid under the Letters of Credit, exceed the Maximum Amount. Upon Bank's
request, Allied, AIC, or ACFC promptly shall pay to Bank issuance fees and such
other fees, commissions, costs, and any out-of-pocket expenses charged or
incurred by Bank with respect to any Letter of Credit. The commitment by Bank
to issue Letters of Credit shall, unless earlier terminated in accordance with
the terms of this Agreement, automatically terminate on the Termination Date
and no Letter of Credit shall expire on a date which is after the Termination
Date. Each Letter of Credit shall be in form and substance satisfactory to Bank
and in favor of beneficiaries satisfactory to Bank, provided that Bank may
refuse to issue a Letter of Credit due to the nature of the transaction or its
terms or in connection with any transaction where Bank, due to the beneficiary
or the nationality or residence of the beneficiary, would be prohibited by any
applicable law, regulation, or order from issuing such Letter of Credit. Prior
to the issuance of each Letter of Credit, and in all events prior to any daily
cutoff time Bank may have established for purposes thereof, Allied, AIC, or
ACFC shall deliver to Bank a duly executed form of Bank's standard form of
letter of credit reimbursement agreement and application for issuance of letter
of credit with proper insertions.
SECTION 2.06. USE OF PROCEEDS. The proceeds of the Loans hereunder
shall be used by the Borrowers for general corporate purposes and the obtaining
of Letters of Credit. The Borrowers will not, directly or indirectly, use any
part of such proceeds for the purpose of purchasing or carrying any margin
stock within the meaning of Regulation U of the Board of Governors of the
Federal Reserve System or to extend credit to any Person for the purpose of
purchasing or carrying any such margin stock, or for any purpose which
violates, or is inconsistent with, Regulation X of such Board of Governors.
ARTICLE 3
CONDITIONS PRECEDENT
SECTION 3.01. CONDITION PRECEDENT TO INITIAL LOAN. The obligation of
the Bank to make the initial Loan to any Borrower is subject to the condition
precedent that the Bank shall have received on or before the day of such Loan
each of the following, in form and substance satisfactory to the Bank and its
counsel:
(1) NOTES. The Notes duly executed by the Borrowers;
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<PAGE> 7
(2) GUARANTY. The Guaranty duly executed by Allied;
(3) EVIDENCE OF ALL CORPORATE ACTION BY THE BORROWERS. Certified (as
of the date of this Agreement) copies of all corporate action taken by the
Borrowers, including resolutions of its Board of Directors, authorizing the
execution, delivery, and performance of the Loan Documents to which it is a
party and each other document to be delivered pursuant to this Agreement;
(4) INCUMBENCY AND SIGNATURE CERTIFICATE OF THE BORROWERS. A
certificate (dated as of the date of this Agreement) of the Secretary of each
Borrower certifying the names and true signatures of the officers of the
Borrower authorized to sign the Loan Documents to which it is a party and the
other documents to be delivered by the Borrower under this Agreement;
(5) OPINION OF COUNSEL FOR THE BORROWERS. A favorable opinion of
counsel for the Borrowers as to such matters as the Bank may reasonably
request;
SECTION 3.02. CONDITIONS PRECEDENT TO ALL LOANS. The obligation of the
Bank to make each Loan (including the initial Loan) shall be subject to the
further conditions precedent that on the date of such Loan:
(1) The following statements shall be true and the Borrower's
request for a Loan shall be deemed a statement by such
Borrower dated the date of such Loan, that:
(a) The representations and warranties contained in
Article IV of this Agreement are correct on and as
of the date of such Loan as though made on and as of
such date; and
(b) No Default or Event of Default has occurred and is
continuing, or would result from such Loan; and
(2) The Bank shall have received such other approvals, opinions,
or documents as the Bank may reasonably request.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
Each Borrower represents and warrants that:
SECTION 4.01. INCORPORATION, GOOD STANDING AND DUE QUALIFICATION. Each
of AIC and ACFC are wholly-owned Subsidiaries of Allied. Allied has no other
Subsidiaries other than ADC; AIC, ACFC and ADC have no Subsidiaries. Borrower
(a) is a corporation duly organized, validly existing, and in good standing
under the laws of the jurisdiction of its incorporation; (b) has the corporate
power and authority to own its assets and to transact the business in which it
is now engaged or in which it is proposed to be engaged; and (c) is duly
qualified as a foreign corporation and in good standing under the laws of each
other jurisdiction in which such qualification is required except in such
instances which would not, in any one case or in the
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<PAGE> 8
aggregate, materially and adversely affect the financial condition, operations,
properties or business of the Borrower.
SECTION 4.02. CORPORATE POWER AND AUTHORITY. The execution, delivery
and performance by the Borrower of the Loan Documents to which it is a party
have been duly authorized by all necessary corporate action and do not and will
not (a) require any consent or approval of, or filing or registration with, any
governmental agency or authority or the stockholders of such corporation; (b)
contravene such corporation's charter or bylaws; (c) result in a breach of or
constitute a default under any agreement or instrument to which such
corporation is a party or by which it or its properties may be bound or
affected; (d) result in, or require, the creation or imposition of any lien
upon or with respect to any of the properties now owned or hereafter acquired
by such corporation; or (e) cause such corporation to be in default under any
law, rule, regulation, order, writ, judgment, injunction, decree, determination
or award applicable to such corporation.
SECTION 4.03. LEGALLY ENFORCEABLE AGREEMENT. This Agreement is, and
each of the other Loan Documents when delivered under this Agreement will be,
legal, valid and binding obligations of the Borrower enforceable against the
Borrower in accordance with their respective terms.
SECTION 4.04. FINANCIAL STATEMENTS. The most recent consolidated
financial statements of the Borrower which have been furnished to the Bank in
connection with this Agreement are complete and correct and fairly present the
financial condition of the Borrower as at the dates of such statements. Since
the dates of such statements, there has been no material adverse change in the
condition (financial or otherwise), business or operations of the Borrower.
SECTION 4.05. LITIGATION. Except as set forth in the Borrower's most
recent 10-Q and 10-K filed with the Securities and Exchange Commission, there
is no pending or threatened action or proceeding against or affecting the
Borrower, before any court, governmental agency or arbitrator, which may, in
any one case or in the aggregate, materially adversely affect the financial
condition, operations, properties or business of the Borrower.
SECTION 4.06. OTHER AGREEMENTS. The Borrower is not a party to any
indenture, loan, or credit agreement, or to any lease or other agreement or
instrument, or subject to any charter or corporate restriction, which has a
material adverse effect on the business, properties, assets, operations, or
conditions, financial or otherwise, of the Borrower, or the ability of the
Borrower to carry out its obligations under the Loan Documents to which it is a
party. The Borrower is not in default in any respect in the performance,
observance, or fulfillment of any of the obligations, covenants, or conditions
contained in any agreement or instrument material to its business to which it
is a party, except in such instances which would not, in any one case or in the
aggregate, materially and adversely affect the financial condition, operations,
properties or business of the Borrower.
SECTION 4.07. NO DEFAULTS ON OUTSTANDING JUDGMENTS OR ORDERS. The
Borrower has satisfied all judgments and is not in default with respect to any
judgment, writ, injunction, decree, rule, or regulation of any court,
arbitrator, or federal, state, municipal, or other governmental authority,
commission, board, bureau, agency or instrumentality, domestic or foreign.
8
<PAGE> 9
SECTION 4.08. OWNERSHIP AND LIENS. The Borrower has title to, or valid
leasehold interests in, all of its properties and assets, real and personal,
including the properties and assets and leasehold interests reflected in the
financial statements referred to in Section 4.04 (other than any properties or
assets disposed of in the ordinary course of business), and none of the
properties and assets owned by the Borrower and none of its leasehold interests
is subject to any Lien, except such as may be permitted pursuant to Section
6.01 of this Agreement.
SECTION 4.09. OPERATION OF BUSINESS. The Borrower possesses all
licenses, permits, franchises, patents, copyrights, trademarks, and trade
names, or rights thereto, to conduct its respective businesses substantially as
now conducted and as presently proposed to be conducted, and is not in
violation of any valid rights of others with respect to any of the foregoing,
except in such instances which would not, in any one case or in the aggregate,
materially and adversely affect the financial condition, operations, properties
or business of the Borrower.
SECTION 4.10. TAXES. The Borrower has filed all tax returns (federal,
state, and local) required to be filed and has paid all taxes, assessments, and
governmental charges and levies thereon to be due, including interest and
penalties.
SECTION 4.11. ENVIRONMENT. The Borrower has not received notice of,
nor knows of, or suspects facts which might constitute, any violations of any
federal, state, or local environmental, health, or safety laws, codes or
ordinances, and any rules or regulations promulgated thereunder with respect to
its businesses, operations, assets, equipment, property, leaseholds, or other
facilities.
ARTICLE 5
AFFIRMATIVE COVENANTS
Each Borrower covenants and agrees that:
SECTION 5.01. MAINTENANCE OF EXISTENCE. The Borrower will preserve and
maintain its corporate existence and good standing in the jurisdiction of its
incorporation, and qualify and remain qualified as a foreign corporation in
each jurisdiction in which such qualification is required, except if the
failure to so qualify would have, in any one case or in the aggregate, a
material and adverse effect on the financial condition, operations, properties
or business of the Borrower.
SECTION 5.02. MAINTENANCE OF RECORDS. The Borrower will keep adequate
records and books of account, in which complete entries will be made in
accordance with GAAP, reflecting all financial transactions of the Borrower.
The principal records and books of account, shall be kept at the chief
executive office of the Borrower's investment adviser at 1666 K Street, N.W.,
9th Floor, Washington, D.C. 20006. The Borrower will not move such records and
books of account or change such chief executive office or the name under which
it does business without giving the Bank at least thirty (30) days' prior
written notice.
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<PAGE> 10
SECTION 5.03. MAINTENANCE OF PROPERTIES. The Borrower will maintain,
keep, and preserve all of its properties (tangible and intangible) necessary or
useful in the proper conduct of its business in good working order and
condition, ordinary wear and tear excepted.
SECTION 5.04. CONDUCT OF BUSINESS. The Borrower will continue to
engage in an efficient and economical manner in a business of the same general
type as conducted by it on the date of this Agreement.
SECTION 5.05. COMPLIANCE WITH LAWS. The Borrower will comply in all
respects with all applicable laws, rules, regulations and orders (including,
without limitation, the Employee Retirement Income Security Act, as amended
from time to time), such compliance to include, without limitation, paying,
before the same become delinquent, all duly imposed taxes, assessments and
governmental charges imposed upon it or upon its property.
SECTION 5.06. MAINTENANCE OF INSURANCE. The Borrower will maintain
insurance with financially sound and reputable insurance companies or
associations in such amounts and covering such risks as are usually carried by
companies engaged in the same or a similar business and similarly situated.
SECTION 5.07. REPORTING REQUIREMENTS. The Borrower will furnish to the
Bank:
(a) Quarterly Financial Statements. As soon as available and, in any
event, within forty-five (45) days after the end of each of the quarters of
each fiscal year of the Borrower (i) unaudited financial statements consisting
of a consolidated balance sheet of the Borrower, as of the end of such quarter,
and consolidated statements of operations, changes in net assets and cash flows
of the Borrower for the period commencing at the end of the previous fiscal
year and ending with the end of such quarter, all in reasonable detail and
stating in comparative form the respective consolidated figures for the
corresponding date and period in the previous fiscal year and all prepared in
accordance with GAAP, and (ii) a certificate detailing a calculation of each of
the ratios and amounts referred to in the financial covenants of the Borrower
set forth in Sections 7.01 through 7.03 hereof, as may be applicable to such
Borrower. Such financial statements and certificate shall be certified to be
accurate by the chief financial officer of the Borrower (subject to year-end
adjustments);
(b) Annual Financial Statements. As soon as available and, in any
event, within one hundred twenty (120) days after the end of each fiscal year
of the Borrower audited financial statements consisting of a consolidated
balance sheet of the Borrower as of the end of such fiscal year, consolidated
statements of operations, changes in net assets, and cash flows of the Borrower
for such fiscal year, all in reasonable detail and stating in comparative form
the respective consolidated figures for the corresponding date and period in
the prior fiscal year and all prepared in accordance with GAAP. The
consolidated financial statements shall be accompanied by an opinion thereon
acceptable to the Bank of an independent certified public accounting firm
selected by the Borrower and acceptable to the Bank;
(c) Management Letters. Promptly upon receipt thereof, copies of any
reports submitted to the Borrower by independent certified public accountants
in connection with audit of the financial statements of the Borrower made by
such accountants;
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(d) Notice of Litigation. Promptly after the commencement thereof,
notice of all actions, suits and proceedings before any court or governmental
department, commission, board, bureau, agency or instrumentality, domestic or
foreign, affecting the Borrower, which, if determined adversely to the Borrower
could have a material adverse effect on the financial condition, properties or
operations of the Borrower;
(e) Notice of Defaults and Events of Default. As soon as possible and,
in any event, within 15 days after the occurrence of each Default and Event of
Default, a written notice setting forth the details of such Default or Event of
Default and the action which is proposed to be taken by the Borrower with
respect thereto;
(f) Proxy Statements, etc. Promptly after the sending or filing
thereof, copies of all proxy statements, financial statements and reports which
the Borrower sends to its stockholders, and copies of all regular, periodic and
special reports, and all material registration statements which the Borrower
files with the Securities and Exchange Commission or any governmental authority
which may be substituted therefor, or with any national securities exchange;
(g) General Information. Such other information respecting the
condition or operations, financial or otherwise, of the Borrower or any
Subsidiary as the Bank may from time to time reasonably request.
SECTION 5.08. ENVIRONMENT. The Borrower will be and remain in
compliance with the provisions of all federal, state, and local environmental,
health, and safety laws, codes and ordinances, and all rules and regulations
issued thereunder.
SECTION 5.09. INVESTMENT ADVISER. Allied Capital Advisers, Inc. will
remain the investment adviser for the Borrower.
SECTION 5.10. CORPORATE RELATIONSHIP. Each of AIC and ACFC will remain
wholly-owned subsidiaries of Allied.
SECTION 5.11. REFINANCING OF INDEBTEDNESS. With respect to any
Indebtedness (other than the Obligations) which matures prior to the
Termination Date, Borrower will refinance with a new maturity no earlier than
the Termination Date no less than seventy-five percent (75%) of such
Indebtedness; provided, however, that the amount of such required refinancing
shall be reduced by the amount, if any, of new equity raised by Borrower after
September 30, 1995.
ARTICLE 6
NEGATIVE COVENANTS
Each Borrower agrees that, without first obtaining the prior written
consent of the Bank:
SECTION 6.01. LIENS. The Borrower will not create, incur, assume or
permit to exist any Lien upon or with respect to any of its properties or
assets, now owned or hereafter acquired, except: (a) Liens in favor of the
Bank; (b) Liens which are incidental to the conduct of the business of the
Borrower, are not incurred in connection with the obtaining of credit and do
not
11
<PAGE> 12
materially impair the value or use of assets of the Borrower; and (c) Liens in
existence on the date of this Agreement and disclosed in writing to the Bank.
SECTION 6.02. INDEBTEDNESS. The Borrower will not create, incur,
assume or permit to exist Indebtedness, except (a) the Obligations; (b)
Indebtedness in existence on the date of this Agreement; (c) Indebtedness of
the Borrower subordinated to the Obligations on terms satisfactory to the Bank;
(d) Indebtedness of any Subsidiary to the Borrower or another Subsidiary; (e)
ordinary trade accounts payable; and (f) up to $50,000,000 of unsecured
debentures, the proceeds of which will be used by AIC or ACFC for investments
and loans to Community Reinvestment Act-qualified activities.
SECTION 6.03. MERGERS, ETC. The Borrower will not merge or consolidate
with any Person and will not permit any subsidiary to merge with any person
except that Borrower may merge with a Subsidiary and any Subsidiary may merge
with another Subsidiary.
SECTION 6.04. SALE AND LEASEBACK. The Borrower will not sell, transfer
or otherwise dispose of any real or personal property to any Person and
thereafter, in connection therewith, directly or indirectly, lease back the
same or similar property.
SECTION 6.05. SALE OF ASSETS. The Borrower will not sell, lease,
assign, transfer or otherwise dispose of any of its now owned or hereafter
acquired assets except: (a) for assets disposed of in the ordinary course of
business and (b) the sale or other disposition of assets no longer used or
useful in the conduct of its business.
SECTION 6.06. GUARANTIES, ETC. The Borrower will not assume,
guarantee, endorse or otherwise be or become directly or contingently
responsible or liable (including, but not limited to, any liability arising out
of any agreement to purchase any obligation, stock, assets, goods or services,
or to supply or advance any funds, assets, goods or services, or to maintain or
cause such Person to maintain a minimum working capital or net worth or
otherwise to assure the creditors of any Person against loss) for obligations
of any Person, or permit any such guaranties or liabilities to exist, except
(i) in favor of the Bank, (ii) with respect to Indebtedness in existence on the
date hereof and previously disclosed to the Bank in writing, (iii) guaranties
by endorsement of negotiable instruments for deposit or collection or similar
transactions in the ordinary course of business, and (iv) as may be implemented
in the ordinary course of Borrower's portfolio activities, provided, however,
that any such matter described in this clause (iv): (a) shall be treated as a
non-contingent liability for purposes of calculating the financial covenants
described below, and (b) if the aggregate amount thereof exceeds $100,000,
shall be itemized in a writing provided to the Bank along with the financial
statements described above.
SECTION 6.07. TRANSACTIONS WITH AFFILIATE. The Borrower will not enter
into any transaction, including, without limitation, the purchase, sale or
exchange of property or the rendering of any service, with any Affiliate,
except in the ordinary course of and pursuant to the reasonable requirements of
the Borrower's business and upon fair and reasonable terms no less favorable to
the Borrower than would be applicable in a comparable arm's-length transaction
with a Person not an Affiliate (provided that the investment advisory agreement
between Borrower and Allied Capital Advisers, Inc. shall not be deemed to
violate this provision).
12
<PAGE> 13
ARTICLE 7
FINANCIAL COVENANTS
So long as the Notes shall remain unpaid or the Bank shall have any
Commitment or outstanding Letter of Credit under this Agreement, the Borrowers
agree that:
SECTION 7.01. MAXIMUM LEVERAGE RATIO. Each of AIC and ACFC will
maintain at all times a ratio of Total Liabilities to Shareholders' Equity of
not greater than 5.0 to 1. Allied will maintain at all times (i) a ratio of
Consolidated Total Liabilities to Consolidated Shareholders' Equity of not
greater than 3.0 to 1, and (ii) a ratio of Adjusted Total Liabilities to
Adjusted Shareholders' Equity of not greater than 1.0 to 1.
SECTION 7.02. MINIMUM CONSOLIDATED SHAREHOLDERS' EQUITY. Allied will
maintain at all times Consolidated Shareholders' Equity of not less than Forty
Million Dollars ($40,000,000).
SECTION 7.03. CONSOLIDATED MINIMUM INTEREST COVERAGE. Allied will
maintain a ratio of (a) Consolidated Net Income plus Consolidated Total
Interest Expense to (b) Consolidated Total Interest Expense of not less than
1.5 to 1 as of the end of each calendar quarter for the previous four quarters.
With respect to the above covenants, no effect shall be given to the
contemplated credit facility from the Bank to Borrower consisting of a
cash-secured line of credit available only during the last ten (10) days of
each calendar quarter and to be repaid promptly thereafter.
ARTICLE 8
EVENTS OF DEFAULT
SECTION 8.01. EVENTS OF DEFAULT. Each of the following shall
constitute an Event of Default under this Agreement:
(a) Failure of a Borrower to pay any Obligation to the Bank,
including, without limitation, the principal of or interest on the Notes or any
of the Loans, when the same shall become due and payable, and such failure
shall continue for a period of five (5) days; or
(b) Failure of a Borrower to perform or observe any covenant set forth
in this Agreement (except any such failure resulting in the occurrence of
another Event of Default described in this section), or to perform or observe
any other term, condition, covenant, warranty, agreement or other provision
contained in this Agreement within thirty (30) days after receipt of notice
from the Bank specifying such failure; or
(c) Discovery that any representation or warranty by a Borrower in
this Agreement or any statement or representation made in any certificate,
report or opinion delivered pursuant to this Agreement or in connection with
any Loan under this Agreement was materially untrue in any material respect
provided, however, the Bank shall take no action based on a default under this
13
<PAGE> 14
paragraph unless such Borrower shall have been provided a reasonable
opportunity to render such misrepresentation or untruth immaterial; or
(d) If, as a result of default, any other obligation of a Borrower for
the payment of any debt in excess of $500,000.00 becomes or is declared to be
due and payable prior to the expressed maturity thereof, unless and to the
extent that the declaration is being contested in good faith in a court of
appropriate jurisdiction; or
(e) A Borrower makes an assignment for the benefit of creditors, files
a petition in bankruptcy, petitions or applies to any tribunal for any receiver
or any trustee of such Borrower or any substantial part of its property, or
commences any proceeding relating to such Borrower under any reorganization,
arrangement, readjustments of debt, dissolution or liquidation law or statute
of any jurisdiction, whether now or hereafter in effect; or
(f) If, within thirty (30) days after the filing of a bankruptcy
petition or the commencement of any proceeding against a Borrower seeking any
reorganization, arrangement, composition, readjustment, liquidation,
dissolution or similar relief under any present or future statute, law or
regulation, the proceeding shall not have been dismissed, or, if, within 30
days after the appointment, without the consent or acquiescence of such
Borrower, of any trustee, receiver or liquidator of such Borrower or of all or
any substantial part of the properties of such Borrower, the appointment shall
not have been vacated; or
(g) Any judgment against a Borrower in excess of $500,000.00 or any
attachment in excess of $500,000.00 against any property of a Borrower that
remains unpaid, undischarged, unbonded or undismissed for a period of thirty
(30) days, unless and to the extent that the judgment or attachment is appealed
in good faith in a court of higher jurisdiction and the appeal remains pending;
or
(h) The occurrence of an event of default (and the expiration of any
applicable cure period) under any other Loan Document.
SECTION 8.02. REMEDIES UPON DEFAULT. Upon the occurrence of an Event
of Default, the following provisions shall be applicable:
(a) The Bank may, at its option, terminate its obligation to make
Loans under this Agreement and declare all Obligations, whether incurred prior
to, contemporaneous with or subsequent to the date of this Agreement, and
whether represented in writing or otherwise, immediately due and payable and
may exercise all of it rights and remedies against the Borrowers.
(b) The Bank shall have such set-off rights as are provided by
applicable common law or statute.
(c) EACH BORROWER EXPRESSLY WAIVES ITS RIGHT TO A TRIAL BY JURY WITH
RESPECT TO ANY LITIGATION RELATING TO THIS AGREEMENT OR ANY OTHER LOAN
DOCUMENT.
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<PAGE> 15
(d) The Bank may itself perform or comply, or otherwise cause
performance or compliance, with the obligations of the Borrowers contained in
this Agreement. The reasonable expenses of the Bank incurred in connection with
such performance or compliance shall be payable by the Borrowers to the Bank on
demand and shall constitute Obligations.
(e) The Bank may, at its sole and absolute discretion and in addition
to any other remedies available to it under this Agreement or otherwise,
require a Borrower to pay immediately to Bank, for application against drawings
under any outstanding Letters of Credit issued for the account of such
Borrower, the outstanding principal amount of any such Letters of Credit which
have not expired. Such amount shall be held in an interest-bearing account
pledged to secure the Obligations. Any portion of the amount remaining in such
account which is not applied to satisfy draws under any such Letters of Credit
or any other Obligations of such Borrower to the Bank shall be repaid to such
Borrower.
ARTICLE 9
MISCELLANEOUS
SECTION 9.01. COLLECTION COSTS. The Borrowers shall pay all of the
reasonable costs and expenses incurred by the Bank in connection with the
enforcement of this Agreement and the other Loan Documents, including, without
limitation, reasonable attorneys' fees and expenses.
SECTION 9.02. MODIFICATION AND WAIVER. Except for the other documents
expressly referred to in this Agreement, this Agreement contains the entire
agreement between the parties and supersedes all prior agreements between the
Bank and the Borrowers concerning the unsecured line of credit and the Loans
hereunder. No modification or waiver of any provision of the Notes or this
Agreement and no consent by the Bank to any departure therefrom by the
Borrowers shall be effective unless such modification or waiver shall be in
writing and signed by an officer of the Bank with a title of vice president or
any higher office, and the same shall then be effective only for the period and
on the conditions and for the specific instances and purposes specified in such
writing. No notice to or demand on the Borrowers in any case shall entitle the
Borrowers to any other or further notice or demand in similar or other
circumstances. No failure or delay by the Bank in exercising any right, power
or privilege hereunder shall operate as a waiver thereof; nor shall any single
or partial exercise thereof preclude any other or further exercise thereof or
the exercise of any other right, power or privilege. The rights and remedies of
the Bank contained in this Agreement are cumulative and not exclusive of any
rights or remedies otherwise provided by law.
SECTION 9.03. NOTICES. All notices, requests, demands or other
communications provided for in this Agreement shall be in writing and shall be
delivered by hand, sent prepaid by Federal Express (or a comparable overnight
delivery service) or sent by the United States mail, certified, postage
prepaid, return receipt requested, to the Bank, at 808 17th Street, N.W.,
Washington, D.C. 20006 Attention: Executive Vice President, Commercial Lending,
or to the Borrowers at c/o Allied Capital Advisers, Inc., 1666 K Street, N.W.,
9th Floor, Washington, D.C. 20006, Attention: Chief Financial Officer. Any
notice, request, demand or other communication delivered or sent in the
foregoing manner shall be deemed given or made (as the case may be) upon the
earliest of (a) the date it is actually received, (b) on the business day after
the day on which it is properly delivered to Federal Express (or a comparable
overnight delivery service), or (c) on the third
15
<PAGE> 16
business day after the day on which it is deposited in the United States mail.
Any of the Borrowers or the Bank may change its address by notifying the other
party of the new address in any manner permitted by this Section 9.03.
SECTION 9.04. CAPTIONS. The captions of the various sections and
paragraphs of this Agreement have been inserted only for the purposes of
convenience; such captions are not a part of this Agreement and shall not be
deemed in any manner to modify, explain, enlarge or restrict any of the
provisions of this Agreement.
SECTION 9.05. SURVIVAL OF AGREEMENTS. All agreements, representations
and warranties made herein shall survive the delivery of this Agreement and the
making and renewal of the Loans hereunder.
SECTION 9.06. FEES AND EXPENSES. Whether or not any Loans are made
hereunder, the Borrowers shall pay on demand all reasonable out-of-pocket costs
and expenses incurred by the Bank in connection with the preparation,
negotiation, execution, delivery, filing, recording and administration of any
of the documents and instruments executed or delivered in connection herewith,
including, without limitation, the reasonable fees and expenses of counsel to
the Bank (including, the reasonable fees of salaried counsel employed by the
Bank or its affiliates), and local counsel who may be retained by the Bank,
with respect to such documents and any amendments thereof or of this Agreement
and any amendment hereof and with respect to advising the Bank as to its rights
and responsibilities hereunder or thereunder, provided, however, that the Bank
shall use reasonable efforts to notify the Borrowers prior to incurring any
costs or expenses chargeable to Borrowers under this section, unless the Bank
shall have determined in good faith, but at its sole and unfettered discretion,
that a delay or such notice may impair or adversely impact the rights,
remedies, claims or other interest of the Bank or the collectibility of the
Loans.
SECTION 9.07. USE OF DEFINED TERMS. All terms defined in this
Agreement shall have the defined meanings when used in certificates, reports or
other documents made or delivered pursuant to this Agreement, unless the
context shall otherwise require.
SECTION 9.08. SUCCESSORS AND ASSIGNS. This Agreement shall inure to
the benefit of and bind the respective parties hereto and their successors and
assigns; provided, however, that no Borrower may assign its rights hereunder
without the prior written consent of the Bank.
SECTION 9.09. INTERPRETATION. This Agreement and the rights and
obligations of the parties hereunder shall be construed and interpreted in
accordance with the laws of the District of Columbia, without reference to
conflicts of law principles.
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<PAGE> 17
IN WITNESS WHEREOF, the Borrowers and the Bank have caused this
Agreement to be signed by their duly authorized representatives all as of the
day and year first above written.
ALLIED CAPITAL CORPORATION
a Maryland corporation.
By:/s/ G. Cabell Williams, III
--------------------------------------------
Name: G. Cabell Williams, III
Title: President
ALLIED INVESTMENT CORPORATION
a Maryland corporation.
By:/s/ G. Cabell Williams, III
--------------------------------------------
Name: G. Cabell Williams, III
Title: President
ALLIED CAPITAL FINANCIAL CORPORATION
a Maryland corporation.
By:/s/ G. Cabell Williams, III
--------------------------------------------
Name: G. Cabell Williams, III
Title: President
RIGGS BANK N.A.,
a national banking association.
By:/s/ David H. Olson
--------------------------------------------
Name: David H. Olson
Title: Vice President
<PAGE> 1
EXHIBIT 10.4
UNCONDITIONAL GUARANTY
This Unconditional Guaranty (this "Guaranty"), made as of December 20,
1996, by ALLIED CAPITAL CORPORATION (the "Guarantor") to and for the benefit of
RIGGS BANK N.A. ("Riggs"), a national banking association.
In order to induce Riggs to extend and continue to extend credit, to
make and continue to make loans and advances and/or to forbear from exercising
any rights Riggs may have to require repayment of or security for any such
loans and advances heretofore made by Riggs, to ALLIED INVESTMENT CORPORATION
and ALLIED CAPITAL FINANCIAL CORPORATION (the "Borrower(s)"), the Guarantor:
(1) Guaranty of Payment. Unconditionally and absolutely guarantees the
punctual payment when due (whether at stated maturity, by acceleration of
maturity or otherwise) of all obligations of the Borrower(s) arising under the
Unsecured Line of Credit Agreement executed by and among the Borrower(s),
Guarantor and Riggs dated the date hereof, providing for loans in the principal
amount of up to $10,000,000.00 (the "Agreement"), and any promissory notes or
other documents and instruments executed by the Borrower(s) pursuant thereto,
and all renewals, extensions and modifications thereof, such obligations and
the interest thereon and all other sums payable with respect thereto being
referred to herein as the "Indebtedness" and all documents and instruments
executed by the Borrower(s) or any of them in connection therewith being
referred to as the "Loan Documents." This is a guaranty of payment and not of
collection and shall be binding upon the Guarantor irrespective of the
genuineness, validity or enforceability of any underlying obligations of the
Borrower(s) or any of them or the existence, validity, enforceability or
perfection of any security therefor, it being the intention of the Guarantor
that this Guaranty be absolute and unconditional in all events and not
dischargeable or affected by any circumstances which may constitute a legal or
equitable discharge. This Guaranty shall continue to be effective or be
reinstated, as the case may be, if at any time any payment of the Indebtedness
or any part thereof is rescinded or must otherwise be returned by Riggs upon
the insolvency, bankruptcy or reorganization of any Borrower or Guarantor, or
otherwise, all as though such payment had not been made.
(2) Waivers by Guarantor. Waives diligence, presentment, protest,
notice of dishonor, demand for payment under the Loan Documents, extension of
time of payment, notice of acceptance of this Guaranty, non-payment at maturity
and indulgences of every kind, and consent to any and all forbearances and
extensions of the time of payment of the Indebtedness, and to any and all
changes in the terms, agreements and conditions of the Indebtedness or any part
thereof hereafter made or granted, and to any and all substitutions and
exchanges or releases of all or any part of any collateral security given
therefor and any and all releases of any other party who is or may be liable
upon any of the Indebtedness.
(3) No Subrogation. Agrees that no payment by any Guarantor pursuant
to any provision of this Guaranty or other satisfaction of Guarantor's
obligations under this Guaranty shall entitle Guarantor, by subrogation to the
rights of Riggs, by right of contribution or indemnity or under any agreement
or otherwise, to any payment by the Borrower(s) or by any other party obligated
to Riggs for payment of the Indebtedness or
<PAGE> 2
out of the assets of the Borrower(s) or any such other party, except after
payment in full of the Indebtedness.
(4) No Waiver By Riggs; Remedies Cumulative. Agrees that no delay on
the part of Riggs in the exercise of any rights hereunder or failure to
exercise the same shall operate as a waiver of such rights, and that no notice
to or demand on the maker of any promissory note shall be deemed to be a waiver
of the obligation of the Guarantor or of the right of Riggs to take further
action without notice or demand as provided herein. Each right, power, and
remedy of Riggs against Borrower(s) or Guarantor arising hereunder or pursuant
to any of the Loan Documents or by law shall be cumulative and concurrent. The
exercise of any right, power or remedy or the failure or forbearance in the
exercise thereof against Borrower(s) or Guarantor shall not preclude or require
the exercise of any other right, power or remedy.
(5) No Suit or Claim Required. Agrees that it shall not be necessary
for Riggs, to enforce this contract of Guaranty, to first institute suit
against the Borrower(s) or any of them to recover the amount of the
Indebtedness or any part thereof. Riggs shall not be obligated to file any
claim relating to the Indebtedness in the event that the Borrower(s) or any of
them become subject to a bankruptcy, reorganization or similar proceeding, and
the failure of Riggs so to file shall not affect the Guarantor's obligations
hereunder.
(6) Expenses and Attorneys' Fees. Agrees that the Guarantor will
reimburse Riggs for all costs and expenses incurred by Riggs (including
reasonable attorneys' fees) in enforcing any rights under this Guaranty,
collecting any of the Indebtedness or protecting or realizing on any collateral
therefor. Attorneys' fees shall include, in the case of a staff attorney
employed by Riggs, the cost to Riggs of the services of such attorney, on an
hourly basis, as determined by Riggs.
(7) Representations of Guarantor. Represents and warrants and shall be
deemed to represent and warrant on each day that any of the Indebtedness is
outstanding that (a) all statements and information heretofore or hereafter
provided by the Guarantor in connection with this Guaranty or the Indebtedness
are and will be true and correct in all material respects and do not and will
not omit to state any material fact, (b) Guarantor is duly organized and
validly existing as such under the laws of its jurisdiction of incorporation or
organization, (c) Guarantor has full power and authority to execute, deliver
and perform this Guaranty and this Guaranty constitutes the legal, valid and
binding obligation of Guarantor enforceable against Guarantor in accordance
with its terms, (d) except as otherwise disclosed to Riggs in writing, there is
no suit, action, proceeding or investigation pending in which an adverse
decision could materially adversely affect the financial condition of
Guarantor, and (e) Guarantor has made its own credit analysis with respect to
the Borrower(s) and the Indebtedness and has not relied on Riggs for any
information with respect thereto.
(8) Acceleration of Maturity. Agrees that upon (a) a material breach
by Guarantor of any of its agreements, representations and warranties
hereunder, (b) an authorized and written denial by Guarantor of its liability
hereunder, (c) a failure by Guarantor to pay or
2
<PAGE> 3
perform when due any other material obligations of Guarantor to Riggs, or (d)
the dissolution, termination of existence, change of control, insolvency,
appointment of a receiver of any material part of the property of, commencement
of any bankruptcy or insolvency proceeding by or against (if not dismissed
within sixty (60) days of filing against), assignment of a material asset for
the benefit of creditors by, or issuance of an attachment, levy or execution
against a material part of the property of, Guarantor, all of the Indebtedness,
regardless of its terms, shall be deemed for purposes of this Guaranty to have
become matured and the Guarantor, at the election of Riggs, shall promptly pay
to Riggs all of the Indebtedness.
(9) Subordination. Agrees that all of the present and future
indebtedness of the Borrower(s) or any of them to the Guarantor shall be and
hereby is subordinated to the Indebtedness.
(10) Set Off. Agrees that, without limiting any other right of Riggs,
whenever Riggs has the right to declare any of the Indebtedness to be
immediately due and payable (whether or not it has so declared), Riggs and any
branch or affiliate acting on its behalf is hereby authorized at any time and
from time to time, to exercise all setoff rights to the fullest extent
permitted by law.
(11) Books and Records, etc. Agrees that the books and records of
Riggs or any schedule, certificate or statement provided for in any agreement
between Riggs and the Borrower(s) or any of them showing the amount owed by the
Borrower(s) or any of them to Riggs from time to time or the rate of interest
on such amount shall be admissible in any action or proceeding against
Guarantor hereunder and shall be binding upon the Guarantor to the same extent
as upon the Borrower(s) or any of them pursuant to any of the Loan Documents.
(12) Successors and Assigns. Agrees that this Guaranty shall inure to
the benefit of and may be enforced by Riggs, its successors and assigns and any
assignee from Riggs of the Indebtedness or any part thereof, and shall be
binding upon and enforceable upon the Guarantor and the successors, personal
representatives and assigns of the Guarantor including (a) any successor
person, association, partnership or corporation acquiring all or a substantial
part of the assets of Guarantor, (b) any successor partnership created by
reason of the admission of a new partner or the dissolution of an existing
partnership by reason of the death, resignation or other withdrawal of a
partner, and (c) any corporation into which Guarantor shall have been merged,
consolidated, reorganized or otherwise absorbed.
(13) Governing Law; Jurisdiction. Agrees that this Guaranty shall be
deemed to be a contract under the laws of the District of Columbia (except for
the conflict of law provisions thereof) and shall be governed by, and construed
in accordance with, the laws of such jurisdiction, except to the extent that
the rights and remedies of Riggs with respect to collateral located in any
other jurisdiction are governed by the laws of such jurisdiction and except
that in any legal proceeding in any other jurisdiction, Riggs shall be entitled
to the benefit of all legal remedies available under the laws of such
jurisdiction.
3
<PAGE> 4
Wherever possible each provision of this Guaranty shall be interpreted in such
manner as to be effective and valid under applicable law, but if any provision
of this Guaranty shall be prohibited by or invalid under such law, such
provision shall be ineffective to the extent of such prohibition or invalidity,
without invalidating the remainder of such provision or the remaining
provisions of this Guaranty. If any action arising out of this Guaranty is
commenced by Riggs in any District of Columbia court, or Federal court located
in the District of Columbia, Guarantor hereby consents to the jurisdiction of
any such court in any such action and to the laying of venue in the District of
Columbia. Any process in any such action shall be duly served upon Guarantor if
mailed by registered mail, postage prepaid, to Guarantor at its last known
residence or business address as shown by the records of Riggs or otherwise
served in accordance with law. The pleading of any statute of limitations and
any right of Guarantor to TRIAL BY JURY in any suit, action or proceeding in
connection herewith are hereby expressly WAIVED.
IN WITNESS WHEREOF, the Guarantor has executed this instrument the day
and year first above written.
(SEAL) ALLIED CAPITAL CORPORATION
ATTEST:
By:/s/Suzanne V. Sparrow By:/s/G. Cabell Williams, III
-------------------------- ---------------------------------
Name: Suzanne V. Sparrow Name: G. Cabell Williams, III
Title: Assistant Secretary Title: President
Address: 1666 K Street, N.W., 9th Floor
Washington, DC 20006
4
<PAGE> 1
EXHIBIT 10.5
PROMISSORY NOTE
$10,000,000.00 December 20, 1996
ALLIED CAPITAL CORPORATION, a corporation organized under the laws of
Maryland (the "Borrower"), for value received, hereby promises to pay to the
order of RIGGS BANK N.A. (the "Bank") at its office, 800 17th Street, N.W.,
Washington, D.C. 20006, in lawful money of the United States and in immediately
available funds the principal sum of Ten Million and no/100 Dollars
($10,000,000.00) or, if less, the aggregate unpaid principal amount of all
loans advanced or re-advanced by the Bank to the Borrower hereunder.
1. Payment of Principal and Interest; Prepayment; Etc.
(a) Principal Payments. The principal amount of each loan
hereunder shall be due and payable on the Termination Date (as defined in the
Credit Agreement, hereinafter defined).
(b) Interest Rate; Interest Payments. Except as otherwise
provided hereinafter, each borrowing under this Note shall bear interest on the
unpaid principal amount of such borrowing from time to time at a rate per annum
equal to LIBOR plus two and one-half percent (2.5%) (the "LIBOR Rate"). Each
change in the LIBOR Rate hereunder shall be effective without notice to the
Borrower on the first Business Day of each calendar month. Interest shall be
payable on the first of each calendar month commencing on the first such date
after each borrowing hereunder and at the Termination Date or earlier maturity
hereof. NOTICE: Under no circumstances will the interest rate on this Note be
more than the maximum rate allowed by applicable law. As used herein:
"LIBOR" means, with respect to any calendar month or portion thereof
during which any loan hereunder is outstanding, the rate per annum
(rounded upwards, if necessary, to the next higher 1/100 of 1%) which
is the average of interbank offered rates for U.S. dollar deposits in
the London interbank market for a period of one month, as reported to
the Bank on an On-Line Information Service at approximately 10:00 a.m.
(Washington, D.C. time)(the "Index") on the first Business Day of each
calendar month. If for any reason on such Business Day the Bank is
unable to access the Index or LIBOR is not reported by the Index, then
LIBOR shall be the London interbank offered rate for U.S. dollars
deposits for a period of one month as reported in The Wall Street
Journal on such Business Day. If LIBOR is not available, the Bank
shall use the most comparable rate at its sole discretion or may use
the average of the rates for the next shortest and next longest
maturities. The Borrower acknowledges and agrees that the
determination by the Bank of LIBOR shall be conclusive and binding on
the Borrower in the absence of manifest error. LIBOR is not
necessarily the rate at which the Bank offers or receives U.S. dollar
deposits in the London interbank market or elsewhere, and is not
necessarily the lowest rate charged by the Bank on loans.
"Business Day" means any day except a Saturday, Sunday or other day on
which commercial banks in the District of Columbia are generally
authorized to close.
"On-Line Information Service" means a textline or other on-line
information service provided to the Bank by any of Reuters Information
Services, Inc., Knight-Ridder
<PAGE> 2
Financial/Americas, Dow Jones Telerate, Inc. or Bloomberg Financial
Markets News Services.
(c) Post-Maturity Interest. After maturity, whether by
acceleration or otherwise, this Note shall bear interest payable on demand at a
variable rate per annum equal to 2% in excess of the LIBOR Rate. To the extent
permitted by law, any payment of interest on this Note not made when due shall
bear interest from the date when due until payment is made payable on demand,
at a rate per annum equal to 2% in excess of the LIBOR Rate.
(d) Prepayment. This Note may be prepaid in whole at any time
or in part from time to time without premium or penalty. This Note shall
immediately be prepaid to the extent that the principal amount hereof at any
time exceeds the Maximum Amount (as defined in the Credit Agreement).
(e) Advances; Evidence of Amounts Due. This Note is held by
the Bank as a master note against which loans may be advanced in lesser
amount(s) than the principal amount. The Borrower shall give the Bank a written
or telexed request or a telephonic request (to be promptly confirmed in
writing) no later than 1:00 p.m. (Washington, D.C. time) on the Business Day of
the desired borrowing, specifying: (i) the Business Day of the desired
borrowing, and (ii) the amount of such borrowing. The Bank shall, promptly upon
request, notify the Borrower telephonically of the LIBOR Rate. The Borrower
shall be liable only for so much of the principal amount as shall be equal to
the total of the amounts advanced or re-advanced against this Note to or for
the Borrower by the Bank from time to time, less all payments made by or for
the Borrower and applied by the Bank to principal. The Borrower shall also be
liable for interest on each such advance or re-advance as shown on the Bank's
books and records, provided that the rate of such interest is in accordance
with the applicable rate or rates specified in this Note. The Borrower
acknowledges that a statement signed by an officer of the Bank setting forth
the amount of principal and interest owed hereon as reflected in such books and
records shall be presumptive evidence of the facts stated therein and shall,
absent manifest error, be conclusive and binding. Any statement of account
delivered to the Borrower shall be deemed correct and accepted unless a written
statement of exceptions thereto is delivered to the Bank within thirty (30)
days after mailing of such statement of account. In making any advance or
re-advance hereunder, the Bank shall be entitled to rely upon any notice of
borrowing or other instructions, whether oral, written or by any form of
telecommunication, purporting to be made by a person designated to the Bank by
the Borrower as an Authorized Representative of the Borrower, and deposit of
the proceeds of an advance or re-advance hereunder in a deposit account in the
name of the Borrower or the remittance of any proceeds to persons designated in
such instructions shall conclusively establish that such loan was duly made
hereunder.
(f) Payments Due on Non-Business Days. If any installment of
principal on this Note becomes due and payable on a day which is not a Business
Day, the maturity thereof shall be extended to the next succeeding Business
Day, and interest shall be payable thereon at the rate herein specified during
such extension. If any payment of interest on any loan evidenced by this Note
becomes due and payable on a day which is not a Business Day, such payment
shall be made on the next succeeding Business Day, together with interest
accrued during such extension.
2
<PAGE> 3
2. Use of Loans. The loans made hereunder shall be used for the
purpose of carrying on a business or commercial activity within the meaning of
the District of Columbia Code Sections 28- 3301(d)(1)(B).
3. Events of Default, Remedies. The occurrence of any Event of Default
under the Credit Agreement shall constitute an Event of Default hereunder. Upon
the occurrence of an Event of Default, the Bank is entitled to exercise the
remedies set forth in the Credit Agreement.
4. Expenses. The Borrower agrees to pay all reasonable out-of-pocket
charges and expenses incurred by the Bank, including the reasonable fees and
expenses of its legal counsel (including the cost of the Bank's in-house
counsel as determined by the Bank) in connection with the negotiation,
preparation and execution of this Note and any amendments, waivers,
modifications or supplements hereto, and the enforcement of any provision of
this Note or any amendment, waiver, modification or supplement hereto and the
collection of this Note.
5. Additional Costs. In the event that at any time the Bank shall be
required to maintain reserves against "Eurocurrency Liabilities" under
Regulation D of the Board of Governors of the Federal Reserve System or in the
event that there shall occur any change in applicable law or regulation or in
the interpretation thereof by any governmental authority charged with the
administration thereof or the introduction of any law or regulation subjects
the Bank to any tax or governmental charge of any kind whatsoever with respect
to this Note, loans hereunder or U.S. dollar deposits held by the Bank, or
changes the basis of taxation of payments to the Bank of principal of or
interest payable with respect to this Note (except for changes in the rate of
tax based solely on the overall net income of the Bank) or imposes, modifies or
deems applicable any reserve, special deposit, capital ratio or similar
requirement against assets held by or deposits in or for the account of, or
loans by, the Bank or imposes on the Bank, directly or indirectly, any other
conditions affecting this Note or the cost of U.S. dollar deposits obtained by
the Bank in the domestic market or the London interbank market, and the result
of any of the foregoing is to increase the cost to the Bank of making or
maintaining loans hereunder, then the Bank shall notify the Borrower in writing
of the additional amount or amounts necessary to compensate the Bank for such
additional costs. A certificate of an officer of the Bank setting forth the
calculation of such costs shall be conclusive and binding, absent manifest
error. In the event the Borrower is unwilling to pay such additional costs,
during the thirty days following the receipt of such notice, the Bank and the
Borrower shall negotiate in good faith with a view toward modifying this Note
to provide a substitute basis for the interest rate provided above which is
financially a substantial equivalent of such rate. If, within such thirty-day
period, the Bank and the Borrower shall agree in writing upon such substitute
rate, then such substitute rate shall be retroactive to, and effective from,
the date of the aforesaid notice. If, within such thirty-day period, the Bank
and the Borrower shall fail to agree in writing upon such substitute rate, the
Borrower agrees that this Note shall bear interest retroactive to, and
effective from, the date of the aforesaid notice at a rate equal to the rate
reported by The Wall Street Journal in its column "Money Rates" as the prime
rate (the "Prime Rate"). If more than one rate or a range of rates is reported,
the Prime Rate shall be the higher or highest such rate. In the event The Wall
Street Journal fails to report a prime rate, the Prime Rate shall mean that
rate announced from time to time by the Bank as its prime rate of interest. The
Prime Rate, determined in either manner, is not necessarily the lowest rate
charged by the Bank on loans.
3
<PAGE> 4
6. Right of Setoff. Unless this Note be paid at its maturity, or
when otherwise due, as herein provided, the Bank shall have all setoff rights
provided by law.
7. Waivers and Consents. Except as otherwise expressly set forth
herein, the Borrower and all endorsers, guarantors, and sureties of this Note
(collectively the "Obligors") severally (a) waive all applicable exemption
rights, whether under the laws of the District of Columbia or otherwise, and
also waive, presentment for payment, protest, notice of protest, and diligence
in collecting this Note, (b) agree to the release of any party primarily or
secondarily liable hereon and agree that it will not be necessary for any
holder hereof, in order to enforce payment of this Note by any party, to first
institute suit against any other Obligor, and (c) consent to any one or more
extensions or postponements of time of payment of this Note on any terms or any
other indulgences with respect thereto. THE RIGHT OF THE BORROWER AND ANY
OBLIGOR TO TRIAL BY JURY IN ANY SUIT, ACTION OR PROCEEDING IN CONNECTION
HEREWITH, IS HEREBY EXPRESSLY WAIVED.
8. Governing Law, Jurisdiction, Notice, Etc. This Note is deemed to be
a contract under the laws of the District of Columbia (except for the conflict
of law provisions thereof) and shall be governed by, and construed in
accordance with, the laws of such jurisdiction. Wherever possible each
provision of this Note shall be interpreted in such manner as to be effective
and valid under applicable law, but if any provision of this Note shall be
prohibited by or invalid under such law, such provision shall be ineffective to
the extent of such prohibition or invalidity, without invalidating the
remainder of such provision or the remaining provisions of this Note. If any
action arising out of this Note is commenced in any District of Columbia or
Federal court located in the District of Columbia, each party signatory hereto
hereby consents to the jurisdiction of any such court in any such action and to
the laying of venue in the District of Columbia. Any process in such action
shall be duly served if mailed by registered mail, postage prepaid, to the
Borrower at its address given herein or its last known business address, or if
otherwise served in acceptance with law. Any other notice or demand hereunder
may be made by hand delivery or certified or registered mail, return receipt
requested, to such address, with the same effect as if delivered in person.
9. Incorporated Provisions. This Note is the Allied Note referred to
in an Unsecured Line of Credit Agreement dated as of the date hereof, between
the Borrower, Allied Investment Corporation, Allied Capital Financial
Corporation, and the Bank (the "Credit Agreement"), is subject to payment and
acceleration upon the terms specified therein, and hereby incorporates by
reference all of the provisions thereof.
ALLIED CAPITAL CORPORATION
By:/s/ G. Cabell Williams, III
----------------------------------
Name: G. Cabell Williams, III
Title: President
4
<PAGE> 5
PROMISSORY NOTE
$10,000,000.00 December 20, 1996
ALLIED INVESTMENT CORPORATION, a corporation organized under the laws
of Maryland (the "Borrower"), for value received, hereby promises to pay to the
order of RIGGS BANK N.A. (the "Bank") at its office, 800 17th Street, N.W.,
Washington, D.C. 20006, in lawful money of the United States and in immediately
available funds the principal sum of Ten Million and no/100 Dollars
($10,000,000.00) or, if less, the aggregate unpaid principal amount of all
loans advanced or re-advanced by the Bank to the Borrower hereunder.
1. Payment of Principal and Interest; Prepayment; Etc.
(a) Principal Payments. The principal amount of each loan
hereunder shall be due and payable on the Termination Date (as defined in the
Credit Agreement, hereinafter defined).
(b) Interest Rate; Interest Payments. Except as otherwise
provided hereinafter, each borrowing under this Note shall bear interest on the
unpaid principal amount of such borrowing from time to time at a rate per annum
equal to LIBOR plus two and one-half percent (2.5%) (the "LIBOR Rate"). Each
change in the LIBOR Rate hereunder shall be effective without notice to the
Borrower on the first Business Day of each calendar month. Interest shall be
payable on the first of each calendar month commencing on the first such date
after each borrowing hereunder and at the Termination Date or earlier maturity
hereof. NOTICE: Under no circumstances will the interest rate on this Note be
more than the maximum rate allowed by applicable law. As used herein:
"LIBOR" means, with respect to any calendar month or portion thereof
during which any loan hereunder is outstanding, the rate per annum
(rounded upwards, if necessary, to the next higher 1/100 of 1%) which
is the average of interbank offered rates for U.S. dollar deposits in
the London interbank market for a period of one month, as reported to
the Bank on an On-Line Information Service at approximately 10:00 a.m.
(Washington, D.C. time)(the "Index") on the first Business Day of each
calendar month. If for any reason on such Business Day the Bank is
unable to access the Index or LIBOR is not reported by the Index, then
LIBOR shall be the London interbank offered rate for U.S. dollars
deposits for a period of one month as reported in The Wall Street
Journal on such Business Day. If LIBOR is not available, the Bank
shall use the most comparable rate at its sole discretion or may use
the average of the rates for the next shortest and next longest
maturities. The Borrower acknowledges and agrees that the
determination by the Bank of LIBOR shall be conclusive and binding on
the Borrower in the absence of manifest error. LIBOR is not
necessarily the rate at which the Bank offers or receives U.S. dollar
deposits in the London interbank market or elsewhere, and is not
necessarily the lowest rate charged by the Bank on loans.
"Business Day" means any day except a Saturday, Sunday or other day on
which commercial banks in the District of Columbia are generally
authorized to close.
"On-Line Information Service" means a textline or other on-line
information service provided to the Bank by any of Reuters Information
Services, Inc., Knight-Ridder
1
<PAGE> 6
Financial/Americas, Dow Jones Telerate, Inc. or Bloomberg Financial
Markets News Services.
(c) Post-Maturity Interest. After maturity, whether by
acceleration or otherwise, this Note shall bear interest payable on demand at a
variable rate per annum equal to 2% in excess of the LIBOR Rate. To the extent
permitted by law, any payment of interest on this Note not made when due shall
bear interest from the date when due until payment is made payable on demand,
at a rate per annum equal to 2% in excess of the LIBOR Rate.
(d) Prepayment. This Note may be prepaid in whole at any time
or in part from time to time without premium or penalty. This Note shall
immediately be prepaid to the extent that the principal amount hereof at any
time exceeds the Maximum Amount (as defined in the Credit Agreement).
(e) Advances; Evidence of Amounts Due. This Note is held by
the Bank as a master note against which loans may be advanced in lesser
amount(s) than the principal amount. The Borrower shall give the Bank a written
or telexed request or a telephonic request (to be promptly confirmed in
writing) no later than 1:00 p.m. (Washington, D.C. time) on the Business Day of
the desired borrowing, specifying: (i) the Business Day of the desired
borrowing, and (ii) the amount of such borrowing. The Bank shall, promptly upon
request, notify the Borrower telephonically of the LIBOR Rate. The Borrower
shall be liable only for so much of the principal amount as shall be equal to
the total of the amounts advanced or re-advanced against this Note to or for
the Borrower by the Bank from time to time, less all payments made by or for
the Borrower and applied by the Bank to principal. The Borrower shall also be
liable for interest on each such advance or re-advance as shown on the Bank's
books and records, provided that the rate of such interest is in accordance
with the applicable rate or rates specified in this Note. The Borrower
acknowledges that a statement signed by an officer of the Bank setting forth
the amount of principal and interest owed hereon as reflected in such books and
records shall be presumptive evidence of the facts stated therein and shall,
absent manifest error, be conclusive and binding. Any statement of account
delivered to the Borrower shall be deemed correct and accepted unless a written
statement of exceptions thereto is delivered to the Bank within thirty (30)
days after mailing of such statement of account. In making any advance or
re-advance hereunder, the Bank shall be entitled to rely upon any notice of
borrowing or other instructions, whether oral, written or by any form of
telecommunication, purporting to be made by a person designated to the Bank by
the Borrower as an Authorized Representative of the Borrower, and deposit of
the proceeds of an advance or re-advance hereunder in a deposit account in the
name of the Borrower or the remittance of any proceeds to persons designated in
such instructions shall conclusively establish that such loan was duly made
hereunder.
(f) Payments Due on Non-Business Days. If any installment of
principal on this Note becomes due and payable on a day which is not a Business
Day, the maturity thereof shall be extended to the next succeeding Business
Day, and interest shall be payable thereon at the rate herein specified during
such extension. If any payment of interest on any loan evidenced by this Note
becomes due and payable on a day which is not a Business Day, such payment
shall be made on the next succeeding Business Day, together with interest
accrued during such extension.
2
<PAGE> 7
2. Use of Loans. The loans made hereunder shall be used for the
purpose of carrying on a business or commercial activity within the meaning of
the District of Columbia Code Sections 28- 3301(d)(1)(B).
3. Events of Default, Remedies. The occurrence of any Event of Default
under the Credit Agreement shall constitute an Event of Default hereunder. Upon
the occurrence of an Event of Default, the Bank is entitled to exercise the
remedies set forth in the Credit Agreement.
4. Expenses. The Borrower agrees to pay all reasonable out-of-pocket
charges and expenses incurred by the Bank, including the reasonable fees and
expenses of its legal counsel (including the cost of the Bank's in-house
counsel as determined by the Bank) in connection with the negotiation,
preparation and execution of this Note and any amendments, waivers,
modifications or supplements hereto, and the enforcement of any provision of
this Note or any amendment, waiver, modification or supplement hereto and the
collection of this Note.
5. Additional Costs. In the event that at any time the Bank shall be
required to maintain reserves against "Eurocurrency Liabilities" under
Regulation D of the Board of Governors of the Federal Reserve System or in the
event that there shall occur any change in applicable law or regulation or in
the interpretation thereof by any governmental authority charged with the
administration thereof or the introduction of any law or regulation subjects
the Bank to any tax or governmental charge of any kind whatsoever with respect
to this Note, loans hereunder or U.S. dollar deposits held by the Bank, or
changes the basis of taxation of payments to the Bank of principal of or
interest payable with respect to this Note (except for changes in the rate of
tax based solely on the overall net income of the Bank) or imposes, modifies or
deems applicable any reserve, special deposit, capital ratio or similar
requirement against assets held by or deposits in or for the account of, or
loans by, the Bank or imposes on the Bank, directly or indirectly, any other
conditions affecting this Note or the cost of U.S. dollar deposits obtained by
the Bank in the domestic market or the London interbank market, and the result
of any of the foregoing is to increase the cost to the Bank of making or
maintaining loans hereunder, then the Bank shall notify the Borrower in writing
of the additional amount or amounts necessary to compensate the Bank for such
additional costs. A certificate of an officer of the Bank setting forth the
calculation of such costs shall be conclusive and binding, absent manifest
error. In the event the Borrower is unwilling to pay such additional costs,
during the thirty days following the receipt of such notice, the Bank and the
Borrower shall negotiate in good faith with a view toward modifying this Note
to provide a substitute basis for the interest rate provided above which is
financially a substantial equivalent of such rate. If, within such thirty-day
period, the Bank and the Borrower shall agree in writing upon such substitute
rate, then such substitute rate shall be retroactive to, and effective from,
the date of the aforesaid notice. If, within such thirty-day period, the Bank
and the Borrower shall fail to agree in writing upon such substitute rate, the
Borrower agrees that this Note shall bear interest retroactive to, and
effective from, the date of the aforesaid notice at a rate equal to the rate
reported by The Wall Street Journal in its column "Money Rates" as the prime
rate (the "Prime Rate"). If more than one rate or a range of rates is reported,
the Prime Rate shall be the higher or highest such rate. In the event The Wall
Street Journal fails to report a prime rate, the Prime Rate shall mean that
rate announced from time to time by the Bank as its prime rate of interest. The
Prime Rate, determined in either manner, is not necessarily the lowest rate
charged by the Bank on loans.
3
<PAGE> 8
6. Right of Setoff. Unless this Note be paid at its maturity, or
when otherwise due, as herein provided, the Bank shall have all setoff rights
provided by law.
7. Waivers and Consents. Except as otherwise expressly set forth
herein, the Borrower and all endorsers, guarantors, and sureties of this Note
(collectively the "Obligors") severally (a) waive all applicable exemption
rights, whether under the laws of the District of Columbia or otherwise, and
also waive, presentment for payment, protest, notice of protest, and diligence
in collecting this Note, (b) agree to the release of any party primarily or
secondarily liable hereon and agree that it will not be necessary for any
holder hereof, in order to enforce payment of this Note by any party, to first
institute suit against any other Obligor, and (c) consent to any one or more
extensions or postponements of time of payment of this Note on any terms or any
other indulgences with respect thereto. THE RIGHT OF THE BORROWER AND ANY
OBLIGOR TO TRIAL BY JURY IN ANY SUIT, ACTION OR PROCEEDING IN CONNECTION
HEREWITH, IS HEREBY EXPRESSLY WAIVED.
8. Governing Law, Jurisdiction, Notice, Etc. This Note is deemed to be
a contract under the laws of the District of Columbia (except for the conflict
of law provisions thereof) and shall be governed by, and construed in
accordance with, the laws of such jurisdiction. Wherever possible each
provision of this Note shall be interpreted in such manner as to be effective
and valid under applicable law, but if any provision of this Note shall be
prohibited by or invalid under such law, such provision shall be ineffective to
the extent of such prohibition or invalidity, without invalidating the
remainder of such provision or the remaining provisions of this Note. If any
action arising out of this Note is commenced in any District of Columbia or
Federal court located in the District of Columbia, each party signatory hereto
hereby consents to the jurisdiction of any such court in any such action and to
the laying of venue in the District of Columbia. Any process in such action
shall be duly served if mailed by registered mail, postage prepaid, to the
Borrower at its address given herein or its last known business address, or if
otherwise served in acceptance with law. Any other notice or demand hereunder
may be made by hand delivery or certified or registered mail, return receipt
requested, to such address, with the same effect as if delivered in person.
9. Incorporated Provisions. This Note is the AIC Note referred to in
an Unsecured Line of Credit Agreement dated as of the date hereof, between the
Borrower, Allied Capital Corporation, Allied Capital Financial Corporation, and
the Bank (the "Credit Agreement"), is subject to payment and acceleration upon
the terms specified therein, and hereby incorporates by reference all of the
provisions thereof.
ALLIED INVESTMENT CORPORATION
By:/s/ G. Cabell Williams, III
-------------------------------------
Name: G. Cabell Williams, III
Title: President
4
<PAGE> 9
PROMISSORY NOTE
$10,000,000.00 December 20, 1996
ALLIED CAPITAL FINANCIAL CORPORATION, a corporation organized under
the laws of Maryland (the "Borrower"), for value received, hereby promises to
pay to the order of RIGGS BANK N.A. (the "Bank") at its office, 800 17th
Street, N.W., Washington, D.C. 20006, in lawful money of the United States and
in immediately available funds the principal sum of Ten Million and no/100
Dollars ($10,000,000.00) or, if less, the aggregate unpaid principal amount of
all loans advanced or re-advanced by the Bank to the Borrower hereunder.
1. Payment of Principal and Interest; Prepayment; Etc.
(a) Principal Payments. The principal amount of each loan
hereunder shall be due and payable on the Termination Date (as defined in the
Credit Agreement, hereinafter defined).
(b) Interest Rate; Interest Payments. Except as otherwise
provided hereinafter, each borrowing under this Note shall bear interest on the
unpaid principal amount of such borrowing from time to time at a rate per annum
equal to LIBOR plus two and one-half percent (2.5%) (the "LIBOR Rate"). Each
change in the LIBOR Rate hereunder shall be effective without notice to the
Borrower on the first Business Day of each calendar month. Interest shall be
payable on the first of each calendar month commencing on the first such date
after each borrowing hereunder and at the Termination Date or earlier maturity
hereof. NOTICE: Under no circumstances will the interest rate on this Note be
more than the maximum rate allowed by applicable law. As used herein:
"LIBOR" means, with respect to any calendar month or portion thereof
during which any loan hereunder is outstanding, the rate per annum
(rounded upwards, if necessary, to the next higher 1/100 of 1%) which
is the average of interbank offered rates for U.S. dollar deposits in
the London interbank market for a period of one month, as reported to
the Bank on an On-Line Information Service at approximately 10:00 a.m.
(Washington, D.C. time)(the "Index") on the first Business Day of each
calendar month. If for any reason on such Business Day the Bank is
unable to access the Index or LIBOR is not reported by the Index, then
LIBOR shall be the London interbank offered rate for U.S. dollars
deposits for a period of one month as reported in The Wall Street
Journal on such Business Day. If LIBOR is not available, the Bank
shall use the most comparable rate at its sole discretion or may use
the average of the rates for the next shortest and next longest
maturities. The Borrower acknowledges and agrees that the
determination by the Bank of LIBOR shall be conclusive and binding on
the Borrower in the absence of manifest error. LIBOR is not
necessarily the rate at which the Bank offers or receives U.S. dollar
deposits in the London interbank market or elsewhere, and is not
necessarily the lowest rate charged by the Bank on loans.
"Business Day" means any day except a Saturday, Sunday or other day on
which commercial banks in the District of Columbia are generally
authorized to close.
"On-Line Information Service" means a textline or other on-line
information service provided to the Bank by any of Reuters Information
Services, Inc., Knight-Ridder
<PAGE> 10
Financial/Americas, Dow Jones Telerate, Inc. or Bloomberg Financial
Markets News Services.
(c) Post-Maturity Interest. After maturity, whether by
acceleration or otherwise, this Note shall bear interest payable on demand at a
variable rate per annum equal to 2% in excess of the LIBOR Rate. To the extent
permitted by law, any payment of interest on this Note not made when due shall
bear interest from the date when due until payment is made payable on demand,
at a rate per annum equal to 2% in excess of the LIBOR Rate.
(d) Prepayment. This Note may be prepaid in whole at any time
or in part from time to time without premium or penalty. This Note shall
immediately be prepaid to the extent that the principal amount hereof at any
time exceeds the Maximum Amount (as defined in the Credit Agreement).
(e) Advances; Evidence of Amounts Due. This Note is held by
the Bank as a master note against which loans may be advanced in lesser
amount(s) than the principal amount. The Borrower shall give the Bank a written
or telexed request or a telephonic request (to be promptly confirmed in
writing) no later than 1:00 p.m. (Washington, D.C. time) on the Business Day of
the desired borrowing, specifying: (i) the Business Day of the desired
borrowing, and (ii) the amount of such borrowing. The Bank shall, promptly upon
request, notify the Borrower telephonically of the LIBOR Rate. The Borrower
shall be liable only for so much of the principal amount as shall be equal to
the total of the amounts advanced or re-advanced against this Note to or for
the Borrower by the Bank from time to time, less all payments made by or for
the Borrower and applied by the Bank to principal. The Borrower shall also be
liable for interest on each such advance or re-advance as shown on the Bank's
books and records, provided that the rate of such interest is in accordance
with the applicable rate or rates specified in this Note. The Borrower
acknowledges that a statement signed by an officer of the Bank setting forth
the amount of principal and interest owed hereon as reflected in such books and
records shall be presumptive evidence of the facts stated therein and shall,
absent manifest error, be conclusive and binding. Any statement of account
delivered to the Borrower shall be deemed correct and accepted unless a written
statement of exceptions thereto is delivered to the Bank within thirty (30)
days after mailing of such statement of account. In making any advance or
re-advance hereunder, the Bank shall be entitled to rely upon any notice of
borrowing or other instructions, whether oral, written or by any form of
telecommunication, purporting to be made by a person designated to the Bank by
the Borrower as an Authorized Representative of the Borrower, and deposit of
the proceeds of an advance or re-advance hereunder in a deposit account in the
name of the Borrower or the remittance of any proceeds to persons designated in
such instructions shall conclusively establish that such loan was duly made
hereunder.
(f) Payments Due on Non-Business Days. If any installment of
principal on this Note becomes due and payable on a day which is not a Business
Day, the maturity thereof shall be extended to the next succeeding Business
Day, and interest shall be payable thereon at the rate herein specified during
such extension. If any payment of interest on any loan evidenced by this Note
becomes due and payable on a day which is not a Business Day, such payment
shall be made on the next succeeding Business Day, together with interest
accrued during such extension.
2
<PAGE> 11
2. Use of Loans. The loans made hereunder shall be used for the
purpose of carrying on a business or commercial activity within the meaning of
the District of Columbia Code Sections 28- 3301(d)(1)(B).
3. Events of Default, Remedies. The occurrence of any Event of Default
under the Credit Agreement shall constitute an Event of Default hereunder. Upon
the occurrence of an Event of Default, the Bank is entitled to exercise the
remedies set forth in the Credit Agreement.
4. Expenses. The Borrower agrees to pay all reasonable out-of-pocket
charges and expenses incurred by the Bank, including the reasonable fees and
expenses of its legal counsel (including the cost of the Bank's in-house
counsel as determined by the Bank) in connection with the negotiation,
preparation and execution of this Note and any amendments, waivers,
modifications or supplements hereto, and the enforcement of any provision of
this Note or any amendment, waiver, modification or supplement hereto and the
collection of this Note.
5. Additional Costs. In the event that at any time the Bank shall be
required to maintain reserves against "Eurocurrency Liabilities" under
Regulation D of the Board of Governors of the Federal Reserve System or in the
event that there shall occur any change in applicable law or regulation or in
the interpretation thereof by any governmental authority charged with the
administration thereof or the introduction of any law or regulation subjects
the Bank to any tax or governmental charge of any kind whatsoever with respect
to this Note, loans hereunder or U.S. dollar deposits held by the Bank, or
changes the basis of taxation of payments to the Bank of principal of or
interest payable with respect to this Note (except for changes in the rate of
tax based solely on the overall net income of the Bank) or imposes, modifies or
deems applicable any reserve, special deposit, capital ratio or similar
requirement against assets held by or deposits in or for the account of, or
loans by, the Bank or imposes on the Bank, directly or indirectly, any other
conditions affecting this Note or the cost of U.S. dollar deposits obtained by
the Bank in the domestic market or the London interbank market, and the result
of any of the foregoing is to increase the cost to the Bank of making or
maintaining loans hereunder, then the Bank shall notify the Borrower in writing
of the additional amount or amounts necessary to compensate the Bank for such
additional costs. A certificate of an officer of the Bank setting forth the
calculation of such costs shall be conclusive and binding, absent manifest
error. In the event the Borrower is unwilling to pay such additional costs,
during the thirty days following the receipt of such notice, the Bank and the
Borrower shall negotiate in good faith with a view toward modifying this Note
to provide a substitute basis for the interest rate provided above which is
financially a substantial equivalent of such rate. If, within such thirty-day
period, the Bank and the Borrower shall agree in writing upon such substitute
rate, then such substitute rate shall be retroactive to, and effective from,
the date of the aforesaid notice. If, within such thirty-day period, the Bank
and the Borrower shall fail to agree in writing upon such substitute rate, the
Borrower agrees that this Note shall bear interest retroactive to, and
effective from, the date of the aforesaid notice at a rate equal to the rate
reported by The Wall Street Journal in its column "Money Rates" as the prime
rate (the "Prime Rate"). If more than one rate or a range of rates is reported,
the Prime Rate shall be the higher or highest such rate. In the event The Wall
Street Journal fails to report a prime rate, the Prime Rate shall mean that
rate announced from time to time by the Bank as its prime rate of interest. The
Prime Rate, determined in either manner, is not necessarily the lowest rate
charged by the Bank on loans.
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<PAGE> 12
6. Right of Setoff. Unless this Note be paid at its maturity, or
when otherwise due, as herein provided, the Bank shall have all setoff rights
provided by law.
7. Waivers and Consents. Except as otherwise expressly set forth
herein, the Borrower and all endorsers, guarantors, and sureties of this Note
(collectively the "Obligors") severally (a) waive all applicable exemption
rights, whether under the laws of the District of Columbia or otherwise, and
also waive, presentment for payment, protest, notice of protest, and diligence
in collecting this Note, (b) agree to the release of any party primarily or
secondarily liable hereon and agree that it will not be necessary for any
holder hereof, in order to enforce payment of this Note by any party, to first
institute suit against any other Obligor, and (c) consent to any one or more
extensions or postponements of time of payment of this Note on any terms or any
other indulgences with respect thereto. THE RIGHT OF THE BORROWER AND ANY
OBLIGOR TO TRIAL BY JURY IN ANY SUIT, ACTION OR PROCEEDING IN CONNECTION
HEREWITH, IS HEREBY EXPRESSLY WAIVED.
8. Governing Law, Jurisdiction, Notice, Etc. This Note is deemed to be
a contract under the laws of the District of Columbia (except for the conflict
of law provisions thereof) and shall be governed by, and construed in
accordance with, the laws of such jurisdiction. Wherever possible each
provision of this Note shall be interpreted in such manner as to be effective
and valid under applicable law, but if any provision of this Note shall be
prohibited by or invalid under such law, such provision shall be ineffective to
the extent of such prohibition or invalidity, without invalidating the
remainder of such provision or the remaining provisions of this Note. If any
action arising out of this Note is commenced in any District of Columbia or
Federal court located in the District of Columbia, each party signatory hereto
hereby consents to the jurisdiction of any such court in any such action and to
the laying of venue in the District of Columbia. Any process in such action
shall be duly served if mailed by registered mail, postage prepaid, to the
Borrower at its address given herein or its last known business address, or if
otherwise served in acceptance with law. Any other notice or demand hereunder
may be made by hand delivery or certified or registered mail, return receipt
requested, to such address, with the same effect as if delivered in person.
9. Incorporated Provisions. This Note is the ACFC Note referred to in
an Unsecured Line of Credit Agreement dated as of the date hereof, between the
Borrower, Allied Capital Corporation, Allied Investment Corporation, and the
Bank (the "Credit Agreement"), is subject to payment and acceleration upon the
terms specified therein, and hereby incorporates by reference all of the
provisions thereof.
ALLIED CAPITAL FINANCIAL CORPORATION
By:/s/ G. Cabell Williams, III
------------------------------------
Name: G. Cabell Williams, III
Title: President
4
<PAGE> 1
EXHIBIT 10.7
ALLIED CAPITAL CORPORATION
INVESTMENT ADVISORY AGREEMENT
THIS AGREEMENT, dated as of the last date set forth below, is made by
and between Allied Capital Corporation, a Maryland corporation (together with
its investment company subsidiaries, the "Company"), and Allied Capital
Advisers, Inc., a Maryland corporation (the "Adviser").
1. PURPOSE OF THE COMPANY.
The Company is organized under the laws of the State of Maryland as a
closed-end investment company registered as such under Investment Company Act
of 1940 (the "ICA") and has elected under the ICA to be regulated as a business
development company.
2. THE INVESTMENT ADVISER.
The Adviser is registered as an investment adviser under the
Investment Advisers Act of 1940, as amended, and has entered into this
Agreement with the Company to act as its investment adviser. The terms of this
Agreement are as follows:
3. OBLIGATIONS OF THE ADVISER.
The Company hereby engages the Adviser's services as the Company's
investment adviser. As such, the Adviser will:
(a) advise the Company as to the acquisition and disposition of
securities in accordance with the Company's investment policies;
(b) make available and, if requested by entities in the
securities of which the Company has invested or is proposing to
invest, render managerial assistance to, and exercise management
rights in, such entities;
(c) provide to the Company office space and facilities and the
services to the extent required of the Adviser's officers and
employees;
(d) maintain the Company's books of account and other records and
files;
(e) report to the Company's Board of Directors, or to any
committee or officer of the Company acting pursuant to the authority
of the Board, at such times and in such detail as the Board deems
appropriate in order to enable the Company to determine that its
investment policies are being observed and implemented and that the
Adviser's obligations hereunder are being fulfilled. Any investment
program undertaken by the Adviser pursuant hereto and any other
activities undertaken by the Adviser on the Company's
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<PAGE> 2
behalf shall at all times be subject to any directives of the
Company's Board of Directors or any duly constituted committee or
officer of the Company acting pursuant to authority of the Company's
Board of Directors; and
(f) cause to be offered to the Company opportunities to acquire or
dispose of securities in co-investment with other entities managed by
the Adviser in accordance with the co-investment guidelines set out
below. Except to the extent of acquisitions and dispositions that, in
accordance with such guidelines, require the specific approval of the
Company's Board of Directors, the Adviser is authorized to effect
acquisitions and dispositions of securities for the Company's account
in the Adviser's discretion. Where such approval is required, the
Adviser is authorized to effect such acquisitions and dispositions for
the Company's account upon and to the extent of such approval. The
Company will put the Adviser in funds whenever the Adviser requires
funds for an acquisition of securities in accordance with the
foregoing, and the Company will cause to be delivered in accordance
with the Adviser's instructions any securities disposed of in
accordance with the foregoing. The Adviser will arrange for the
certificates for any securities acquired to be delivered to the
Company's custodian.
4. CO-INVESTMENT GUIDELINES.
Most investments made by the Company will continue to be made in
participation with Allied Capital Corporation II ("Allied II") and Allied
Venture Partnership and Allied Technology Partnership (the "affiliated
partnerships"). The Securities and Exchange Commission exemptive orders
permitting such co-investment provide that the Company must be offered the
opportunity to invest in any investment that would be suitable for both Allied
II and the Company to the extent of an amount proportionate to their respective
consolidated assets (including, in the case of the Company, the combined assets
of the affiliated partnerships so long as they are not fully invested).
Securities purchased in a joint transaction by both the Company and Allied II
or an affiliated partnership will consist of the same class of securities,
including the same registrations rights, if any, and other rights related
thereto, and will be purchased for the same unit consideration, and the
approval of such transaction, including the determination by the Company's and
Allied II's non-interested directors, will take place during the same time
period. The Company recognizes that the Adviser, in turn, is obligated, subject
to specified exceptions, to allocate to Allied Venture Partnership one-half of
any investment opportunity made available to the Company, and to consider
Allied Technology Partnership for participation in any investment that is
otherwise made available for syndication, as long as these affiliated
partnerships have funds available for investment.
Notwithstanding the foregoing, the Company will not make any
investment in the securities of any issuer in which Allied II or either of the
affiliated partnerships, but not the Company, has previously invested, or vice
versa.
The Adviser will give the Company the opportunity to dispose of any
securities in which both Allied II or one or both of the affiliated
partnerships and the Company have invested in
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<PAGE> 3
proportion to their holdings of such securities. The Company will take
advantage of such opportunity except to the extent that a majority of the
members of its Board of Directors, including a majority of its non-interested
directors, determines otherwise. In connection with any such disposition, the
Company will be required to bear no more than its proportionate share of the
transaction costs related thereto.
The Company will participate in any investment in which Allied II may
also participate only to the extent that such participation is approved in
advance by a majority of the members of its Board of Directors, including a
majority of its non-interested directors.
The Adviser will give notice to the Company of any intention of Allied
II or one or both of the affiliated partnerships to exercise any conversion
privilege or other right to acquire equity securities of an issuer in the
securities of which both Allied II or one or both of the affiliated
partnerships and the Company have invested.
5. EXPENSES TO BE PAID BY THE ADVISER.
The Adviser will pay for its own account all expenses incurred by the
Adviser in rendering the services to be rendered by the Adviser hereunder.
Without limiting the generality of the foregoing, the Adviser will pay the
salaries and other employee benefits of the persons in its organization whom
the Adviser may engage to render such services, including without limitation
persons who may from time to time act as the Company's officers.
Notwithstanding the foregoing, the Board of Directors of the Company may, in
its sole discretion, award to such officers options to acquire shares of the
Company's common stock, which shall not be deemed part of their salaries or
other employee benefits for the purpose of this paragraph.
6. EXPENSES TO BE PAID BY THE COMPANY.
The Company will reimburse the Adviser promptly, against the Adviser's
voucher, for any expenses incurred by the Adviser for the Company's account.
Without limitation, such expenses shall include all expenses of any offering
and sale by the Company of its shares and, except as otherwise specifically
provided above, all expenses of the Company's operations; the fees and
disbursements of the Company's counsel, accountants, custodian, transfer agent
and registrar; fees and expenses incurred in producing and effecting filings
with federal and state securities administrators; costs of the Company's
periodic reports to and other communications with the Company's shareholders;
costs of promoting the Company's stock; fees and expenses of members of the
Company's Board of Directors who are not directors, officers or employees of
the Adviser or of any entity affiliated with the Adviser, and fees of directors
who are such officers, directors or employees; premiums for the fidelity bond
maintained by the Company pursuant to ICA Section 17; and all transaction costs
incident to the acquisition and disposition of securities by the Company in
proportion to the Company's participation therein, including, without
limitation, legal and accounting fees and other professional or technical fees
and expenses (e.g., credit report, title search and delivery charges, costs of
specialized consultants such as accountants or industryspecific technical
experts, and deal-specific travel expenses) incurred in monitoring, negotiating
3
<PAGE> 4
and working-out such investments, as well as responding to any litigation
arising therefrom. If the Company for its corporate purposes uses the services
of attorneys or paraprofessionals on the staff of the Adviser in lieu of
outside counsel, the Company will reimburse the Adviser for such services at
hourly rates calculated to cover the cost of such services, as well as for
incidental disbursements.
7. RECEIPT OF FEES.
All fees that may be paid by or for the account of an entity in which
the Company has invested or is proposing to invest in connection with an
investment transaction in which the Company participates or provides follow-on
managerial assistance will be treated as commitment fees or management fees and
will be received by the Company, pro rata to the Company's participation in
such transaction. Nevertheless, the Adviser will be entitled to retain for its
own account any fees paid to the Adviser by or for the account of any entity,
including an entity in which the Company may have invested, for special
investment banking or consulting work performed for the entity which is not
related to such transaction or follow-on managerial assistance. The Adviser
will report to the Company's Board of Directors not less often than quarterly
all fees received by the Adviser from any source and whether, in its opinion,
any such fee is one that the Adviser is entitled to retain under the provisions
of this paragraph. In the event that any member of the Company's Board of
Directors should disagree, the matter shall be conclusively resolved by a
majority of the Company's Board of Directors, including a majority of its
members who are not interested persons of the Company.
8. COMPENSATION TO THE ADVISER.
As the Adviser's sole and exclusive compensation for its services to
be rendered pursuant to the terms set out above, the Company will, during the
term of this Agreement, pay to the Adviser, quarterly, a fee equal to 0.625%
per quarter of the quarter-end value of the Company's consolidated total assets
(less the company's Interim Investments and cash and the Company's investment
in Allied Capital Lending Corporation) and 0.125% per quarter of the
quarter-end value of the Company's consolidated Interim Investments and cash.
For this purpose "Interim Investments" are defined as short-term
securities issued or guaranteed by the U.S. government or an agency or
instrumentality thereof, or in repurchase agreements fully collateralized by
such securities.
For the purpose of calculating the fee, the values of the Company's
assets will be determined as of the end of each calendar quarter by the Board
of Directors. The Company will pay the quarterly fee as soon as practicable
after the values for the applicable quarter have been determined. If the
termination of the Adviser's services hereunder does not coincide with the last
day of a calendar quarter, then any fee determined in accordance with this
paragraph shall be multiplied by the ratio of the number of days in such
quarter during which Adviser rendered services to the total number of days in
such quarter.
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<PAGE> 5
9. INDEMNIFICATION OF THE ADVISER.
The Company confirms that in performing services hereunder the Adviser
will be an agent of the Company for the purpose of the indemnification
provisions of the Company's By-Laws, subject, however, to the same limitations
as though the Adviser were a director or officer of the Company. The Adviser
shall not be liable to the Company, its shareholders or its creditors except
for violations of law or for conduct which would preclude the Adviser from
being indemnified under such provisions.
10. APPROVAL OF THE AGREEMENT.
The Company represents that the Company's Board of Directors,
including a majority of its members who are not interested persons of the
Company, approved this Agreement at a meeting held on March 9, 1995 at which a
quorum was personally present, and a majority, as defined in the ICA, of the
Company's shareholders approved it at a meeting held on the date hereof. This
Agreement shall continue in effect until the annual meeting of the shareholders
of the Company to be held in 1996 and thereafter from year to year as long as
such continuance is specifically approved at least annually by the Company's
Board of Directors, including a majority of its members who are not interested
persons of the Company, or by vote of the holders of a majority, as defined in
the ICA, of the Company's outstanding voting securities.
11. TERMINATION OF THE AGREEMENT.
The foregoing notwithstanding, this Agreement may be terminated by the
Company at any time, without payment of any penalty, on 60 days' written notice
to the Adviser if the decision to terminate has been made by the Company's
Board of Directors or by vote of the holders of a majority, as defined in the
ICA, of the Company's outstanding voting securities. This Agreement will
terminate automatically in the event of its assignment, as defined in the ICA.
The Adviser may also terminate this Agreement on 60 days' written notice to the
Company; provided, however, that the Adviser may not terminate this Agreement
unless another investment adviser has been approved by the vote of a majority,
as defined in the ICA, of the Company's outstanding securities and by the
Company's Board of Directors, including a majority of its members who are not
parties to such agreement or interested persons of any such party.
12. JURISDICTION.
This Agreement shall be governed by the laws of the State of Maryland.
IN WITNESS WHEREOF, the parties have executed this Agreement on and as
of May 4th, 1995.
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<PAGE> 6
ALLIED CAPITAL ADVISERS, INC. ALLIED CAPITAL CORPORATION
By: /s/ Joan M. Sweeney By: /s/ G. Cabell Williams, III
----------------------------- ----------------------------------
Joan M. Sweeney, President G. Cabell Williams, III, President
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<PAGE> 1
EXHIBIT 10.8
ALLIED CAPITAL CORPORATION
DIVIDEND REINVESTMENT PLAN
COMPANY CONTACT: PLAN ADMINISTRATOR:
Director, Shareholder Relations American Stock Transfer
Allied Capital Corporation and Trust Company
1666 K Street, NW, 9th Floor 40 Wall Street
Washington, DC 20006 New York, NY 10005
(202) 331-1112 (800) 937-5449
The following is the Allied Capital Corporation Dividend Reinvestment Plan (the
"Plan"). Further questions and correspondence should be directed to either of
the addresses listed above.
1. WHAT IS THE PURPOSE OF THE PLAN?
The purpose of the Plan is to provide shareholders with a
simple and convenient method of investing cash dividends and
distributions in additional shares of Common Stock, $1 par
value, of Allied Capital Corporation (the "Company") at the
current market price. Participants in the Plan may have cash
dividends and distributions automatically reinvested without
charges for record-keeping, and may take advantage of the
custodial and reporting services provided by the Plan
Administrator, at no additional cost.
2. WHAT DOES THE PLAN ADMINISTRATOR DO AND WHAT ARE ITS
RESPONSIBILITIES?
The Plan Administrator administers the Plan for participants,
keeps records, sends statements of accounts to participants,
and performs other duties relating to the Plan.
The Plan Administrator will not be liable under the Plan for
any act done in good faith, or for any good faith omission to
act, including without limitation, any claim of liability (i)
arising out of any such act or omission to act which occurs
prior to the termination of participation, and (ii) with
respect to the prices at which shares are credited to a
participant's account. Participants should recognize that
neither the Company nor the Plan Administrator can assure
participants of profits, or protect participants against
losses, on shares issued or held under the Plan.
3. HOW DOES A SHAREHOLDER PARTICIPATE?
Allied Capital Corporation's Dividend Reinvestment Plan is an
"opt-in" plan. Shareholders will receive cash dividends and
distributions with respect to all shares unless they choose to
enroll in the Plan. Any person who has shares registered in
his name may become a participant by sending to the Company or
the Plan Administrator a properly completed and signed
Enrollment Status Card in time to be received not less than
five days before the dividend declaration date.
A dividend declaration date is a date on which the Board of
Directors of the Company declares a dividend or distribution
to be paid and specifies the amount of such dividend
or distribution.
An Enrollment Status Card received after the declaration date
for a particular dividend or distribution will not take effect
until the next dividend or distribution. As a result, new
shareholders or shareholders who have previously terminated
participation in the Plan for all their shares, will receive a
particular dividend or distribution in cash unless the Company
receives an Enrollment Status Card before the declaration date
of that dividend or distribution.
4. WHAT IF THE SHARES ARE HELD BY A BROKER, BANK OR NOMINEE?
If a shareholder's shares are held in the name of a broker,
bank or other nominee (a "nominee"), he can participate in the
Plan only to the extent that the nominee participates on his
behalf. Many nominees do not provide that service and
routinely request dividends and distributions to be paid in
cash on all shares registered in their names. Therefore, if
shares are held for a shareholder's account by a nominee, the
shareholder must either make appropriate arrangements for the
nominee to participate on his behalf, or he must become a
shareholder of record by having part or all of his shares
transferred into his own name.
5. WHAT DO ENROLLMENT STATUS CARDS PROVIDE AND HOW DOES A
SHAREHOLDER USE THEM?
The Enrollment Status Card provides to the shareholder of
record the opportunity to elect either (i) to receive
dividends and distributions in shares with respect to all
shares registered in such shareholder's name (unlimited
participation), or (ii) to receive dividends and distributions
in shares with respect to all shares so registered except
those shares specified to be paid in cash (partial
participation).
<PAGE> 2
Enrollment Status Cards should be sent to the Company or the
Plan Administrator and will be given effect as to any
particular dividend or distribution (and all subsequent
dividends and distributions) if received not less than five
days before the declaration date for that dividend or
distribution.
A letter to the Company or the Plan Administrator clearly
stating a shareholder's intent to enroll or to increase or
decrease participation in the Plan may be used instead of an
Enrollment Status Card.
6. WHAT IS THE EFFECT OF UNLIMITED PARTICIPATION?
An unlimited participant will receive all dividends and
distributions in shares with respect to (i) all shares
registered in that participant's name for which the
participant holds certificates (including shares so registered
subsequent to initial enrollment), and (ii) all shares
credited to that participant's account on the books of the
Plan Administrator on any applicable record date. Thus, if an
unlimited participant wants to continue to receive his
dividends and distributions in shares, he need take no further
action.
7. WHAT IS THE EFFECT OF PARTIAL PARTICIPATION?
If an initially or subsequently enrolled participant has
indicated on his Enrollment Status Card or other notice that
he wants to participate in the Plan with respect to all shares
except those specified, he will be considered a partial
participant. A partial participant will receive dividends and
distributions in cash only with respect to the number of
shares that he has specified. With respect to any other
shares registered in his name, and with respect to shares
credited to his account on the books of the Plan Administrator
(see question 10), the corresponding dividends and
distributions will be paid in shares. The number of shares on
which dividends and distributions are paid in cash may be
changed at any time simply by writing to the Company or the
Plan Administrator.
8. HOW DOES THE DIVIDEND REINVESTMENT PLAN WORK AND HOW ARE
SHARES ALLOCATED UNDER THE PLAN?
When the Board of Directors declares a dividend or
distribution, all non-participants will receive such dividend
or distribution in cash. The number of shares allocated to a
participant's account will be arrived at as follows. Except
under the circumstances outlined in Question 9, the Plan
Administrator will buy shares of Allied Capital Corporation in
the open market, on NASDAQ or elsewhere, beginning on or
before the payment date of the dividend or distribution, until
it has expended for such purchases all of the cash that would
otherwise be payable to the participants. The number of
shares that will then be credited to the participants' Plan
accounts will be based on the average cost of the shares so
purchased, including brokerage commissions. Each
participant's account will be credited with a number of
shares, including fractional shares, equal to the total amount
of cash dividend or distribution, net of any applicable
withholding taxes, otherwise due to the participant, divided
by the price of the shares.
9. WILL NEWLY ISSUED SHARES EVER BE PAID TO PARTICIPANTS IN THE
PLAN?
The Company's Board of Directors may (but is not required to)
declare a dividend or distribution to be paid to Plan
participants in newly issued shares of Allied Capital
Corporation. In that situation, the price of newly issued
shares credited to a participant's account will be equal to
the average of the closing sales prices reported for the
shares in The Wall Street Journal NASDAQ National Market
System listings for the five days on which trading of shares
takes place immediately prior to the dividend payment date
(but not less than 95% of the opening sales price on that
date).
Even if the Board of Directors has declared the dividend or
distribution to be payable to Plan participants in newly
issued shares, the Plan Administrator will be under standing
instructions not to credit newly issued shares, and instead to
buy shares in the market, if (i) the price at which newly
issued shares are to be credited does not exceed 110% of the
last determined net asset value of the Allied Capital
Corporation shares or (ii) the Company has advised the Plan
Administrator that since such net asset value was last
determined it has become aware of events that indicate the
possibility of a change in per share net asset value as a
result of which the net asset value of the Allied Capital
Corporation shares on the payment date might be higher than
the price at which the Plan Administrator would credit newly
issued shares to the participants' Plan accounts.
If the Plan Administrator buys shares on the market, it is
possible that by the time the Plan Administrator has completed
its purchases, the average per share purchase price paid by
the Plan Administrator may exceed the price at which the newly
issued shares would have been credited, or the shares' current
net asset value. As a result, there would be credited to the
participants' Plan accounts a smaller number of shares than
would have been credited if the dividend or distribution had
been paid in newly issued shares.
<PAGE> 3
10. WHAT ACCOUNTS ARE MAINTAINED FOR PARTICIPANTS AND WHAT
REPORTS ON THESE ACCOUNTS DO PARTICIPANTS RECEIVE?
The Plan Administrator will maintain a separate account for
each participant. All shares issued to a participant under
the Plan will be credited to the participant's account. The
Plan Administrator will mail to each participant a statement
confirming the issuance of shares within fifteen days after
the allocation of shares is made. The statement will show the
amount of the dividend or distribution, the price at which
shares were credited, the number of full and fractional shares
credited, the number of shares previously credited and the
cumulative total of shares credited. In addition, each
participant will receive copies of the Company's annual and
quarterly reports to shareholders, proxy statements and
dividend income information for tax purposes.
11. WILL CERTIFICATES BE ISSUED FOR SHARES ISSUED UNDER THE PLAN?
No. Certificates for shares issued under the Plan will not be
furnished until an account is terminated or unless a
participant requests certificates in writing for a
specified number of shares credited to his Plan Account. All
written requests for certificates should be directed to the
Plan Administrator, allowing two weeks for processing. The
issuance of certificates for shares credited to a Plan account
will not terminate his participation in the Plan.
No certificate for a fractional share will be issued. If a
shareholder terminates participation in the Plan (see Question
14), the Plan Administrator will sell for his account any
fractional share and send him a check for the proceeds.
12. IN WHOSE NAME WILL CERTIFICATES BE REGISTERED WHEN ISSUED?
Accounts under the Plan are maintained in the name in which
share certificates of the participant were registered at the
time the participant entered the Plan. Certificates for whole
shares issued at the request of a participant will be
similarly registered.
13. WHAT HAPPENS IF THE COMPANY ISSUES A STOCK DIVIDEND OR
DECLARES A STOCK SPLIT?
Any stock dividends or split shares distributed by the Company
on shares held by the Plan Administrator for the participant
will be credited to the participant's account.
14. WHAT HAPPENS IF A PARTICIPANT WISHES TO TERMINATE
PARTICIPATION?
A participant may terminate his enrollment in the Plan at any
time by notifing the Company or the Plan Administrator in
writing. Within twenty days, and according to the
participant's instructions, the Plan Administrator will either
(i) issue certificates for the whole shares credited to the
participant's Plan account and send a check representing the
value of any fractional shares or (ii) sell all full and
fractional shares in the market. The proceeds of the sale,
less any brokerage commissions that may be incurred, will be
remitted to the shareholder at the address of record at the
time of liquidation. The address of record may not be changed
per telephone instruction, but rather must be changed in
writing to the Company or to the Plan Administrator.
Notification for termination must be received no later than
five business days prior to the record date of any impending
distribution in order for it to take effect for that
distribution.
Please note: If a participant sells or transfers all of the
shares registered in his name on the books of the Plan
Administrator, participation in the Plan will continue with
respect to any shares credited to the participant's Plan
account unless and until termination is requested.
15. HOW WILL A PARTICIPANT'S SHARES BE VOTED AT MEETINGS OF
SHAREHOLDERS?
The participant will receive a proxy card covering the total
number of shares held by the participant of record, including
shares credited to the participant's Plan account. If a proxy
card is returned properly signed, but without indicating
instructions as to the manner in which shares are to be voted
with respect to any item thereon, the corresponding shares
will be voted in accordance with the recommendation of the
Company's Board of Directors. If the proxy card is not
returned, or it is returned unexecuted or improperly executed,
the corresponding shares will not be voted unless the
participant or the participant's duly appointed representative
votes in person at the meeting.
16. WHAT IS THE TAX STATUS OF REINVESTED DIVIDENDS?
The automatic reinvestment of dividends and distributions will
not relieve a participant of any income tax liability
associated with such dividends or distributions. A
participant in the Plan will be treated for Federal income tax
purposes as having received, on the dividend payment date, a
dividend or distribution in an equal amount to the cash that
the participant could have received instead of shares. The
tax basis of such shares will equal the amount of such cash.
A participant will not realize any taxable income upon receipt
of certificates for whole shares credited to the participant's
account either upon
<PAGE> 4
the participant's request for a specified number of shares,
or upon termination of enrollment in the Plan.
Each participant in the Plan will receive early in each year a
Form 1099 regarding the Federal income tax status of all
dividends and distributions taxable during the previous year.
17. ARE THERE ANY CHARGES FOR PARTICIPATING IN THE PLAN?
No. The Plan Administrator's fees for administering Allied
Capital Corporation's Dividend Reinvestment Plan are included
in the fees paid by the Company to the Plan Administrator for
acting as its transfer agent. The price at which shares are
credited to a participant's acount will, however, include his
share of any brokerage commissions incurred in connection with
the open market purchases of such shares. There will be no
brokerage charges in connection with any credit of newly
issued shares.
18 . MAY THE PLAN BE CHANGED OR DISCONTIUNUED?
The Company and the Plan Administrator each reserves the right
to amend, suspend or terminate the Plan at any time. Notice
of any such amendment, suspension or termination will be sent
to all participants at least fifteen days prior to the
dividend declaration date for which the amendment, suspension
or termination is to be effective.
19. CAN A SUCCESSOR PLAN ADMINISTRATOR BE NAMED?
The Company may from time to time designate another bank or
trust company as successor Plan Administrator under the Plan.
ALLIED CAPITAL CORPORATION DIVIDEND REINVESTMENT PLAN
ENROLLMENT STATUS CARD
The undersigned shareholder of record of Allied Capital Corporation elects to:
[ ] PARTICIPATE in the Dividend Reinvestment Plan and
receive dividends and distributions in additional
shares with respect to ALL Allied Capital Corporation
shares held of record or credited to the
undersigned's Plan account.
[ ] TERMINATE enrollment in the Dividend Reinvestment
Plan and receive dividends and distributions in cash
with respect to all shares of Allied Capital
Corporation held of record or credited to the
undersigned's Plan account. CHECK ONE OF THE
FOLLOWING: [ ] Liquidate all Plan account shares and
remit proceeds, or [ ] Send certificate for whole
shares in Plan account and liquidate fractional
shares.
[ ] PARTIALLY PARTICIPATE in the Dividend Reinvestment
Plan with respect to all Allied Capital Corporation
shares held of record, including the shares
subsequently credited to the undersigned's Plan
account, except _____ shares on which dividends
and distributions are to be paid in cash.
Termination and partial participation instructions will take effect on the
record date following receipt of this card by the Plan Administrator.
Enrollment instructions will take effect on the declaration date following
receipt of this card by the Plan Administrator.
- -------------------------------------------------- --------------------------
Tax identification number Signature
- -------------------------------------------------- --------------------------
Type or print name exactly as it appears on your Signature
share certificate(s).
Please fold and staple for mailing.
<PAGE> 5
--------------------
Post office will
not deliver
without stamp
--------------------
AMERICAN STOCK TRANSFER & TRUST
40 Wall Street
New York, NY 10005
ATTN: Dividend Reinvestment
<PAGE> 6
Shareholder Relations
Allied Capital
1666 K Street, NW, 9th Floor
Washington, DC 20006
<PAGE> 1
EXHIBIT 10.9
ALLIED CAPITAL CORPORATION
STOCK OPTION PLAN
1. PURPOSE OF THE PLAN
The purpose of this Stock Option Plan (this "Plan") is to advance the
interests of Allied Capital Corporation (the "Company") by providing to
directors of the Company and to officers of the Company who have substantial
responsibility for the direction and management of the Company with additional
incentives to exert their best efforts on behalf of the Company, to increase
their proprietary interest in the success of the Company, to reward outstanding
performance and to provide a means to attract and retain persons of outstanding
ability to the service of the Company. It is recognized that the Company cannot
attract or retain these officers and directors without this compensation.
Options granted under this Plan may qualify as "incentive stock options," as
defined in Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code").
2. ADMINISTRATION
This Plan shall be administered by a Compensation Committee (the
"Committee") comprised of at least two (2) members of the Company's Board of
Directors who each shall (a) be a "disinterested person," as defined in Rule
16b-3 promulgated under the Securities Exchange Act of 1934, as amended, (b)
have no financial interest in grants of stock options to officers of the
Company under this Plan and (c) not be an "interested person," as defined in
Section 2(a)(19) of the Investment Company Act of 1940, as amended (the "Act"),
of the Company. The Committee shall interpret this Plan and, to the extent and
in the manner contemplated herein, shall exercise the discretion reserved to it
hereunder. The Committee may prescribe, amend and rescind rules and regulations
relating to this Plan and to make all other determinations necessary for its
administration. The decision of the Committee on any interpretation of this
Plan or administration hereof, if in compliance with the provisions of the Act
and regulations promulgated thereunder, shall be final and binding with respect
to the Company, any optionee or any person claiming to have rights as, or on
behalf of, any optionee.
3. SHARES SUBJECT TO THE PLAN
The shares subject to option and the other provisions of this Plan
shall be shares of the Company's common stock, par value $1.00 per share
("shares"). Subject to the provisions hereof concerning adjustment, the total
number of shares which may be purchased upon the exercise or surrender of stock
options granted under this Plan shall not exceed 1,350,000 shares, which
includes all shares with respect to which options have been granted or
surrendered for payment in cash or other consideration pursuant to this Plan or
predecessor forms of this Plan. In the event any option shall cease to be
exercisable in whole or in part for any reason, the shares which were covered
by such option, but as to which the option had not been exercised, shall again
be available under this Plan. Shares may be made available from authorized,
unissued or reacquired stock or partly from each.
4. PARTICIPANTS
(a) Officers. The Committee shall determine and designate from time to
time those key officers of the Company who shall be eligible to participate in
this Plan. The Committee shall also determine the number of shares to be
offered from time to time to each optionee. In making these determinations, the
Committee shall take into account the past service of each such officer to the
Company, the present and potential contributions of such officer to the success
of the Company and such other factors as the Committee shall deem relevant in
connection with accomplishing the purposes of this Plan; provided that the
Committee shall determine that each grant of options to an optionee, the number
of shares offered thereby and the terms of
1
<PAGE> 2
such option are in the best interests of the Company and its shareholders. The
date on which the Committee approves a grant of options to an officer of the
Company shall be the date of issuance of such option; provided, however, that
if (1) any such action by the Committee does not constitute approval thereof by
both (A) a majority of the Company's directors who each has no financial
interest in such action and (B) a majority of the Company's directors who each
is not an "interested person" [as defined in Section 2(a)(19) of the Act] of
the Company and (2) such approval is then required by Section 61(a)(3)(B)(I)(I)
of the Act, the grant of any option by such action shall not be effective until
there has been approval of such action by a majority of the Company's directors
who each has no financial interest in such action and a majority of the
Company's directors who each is not an "interested person" of the Company on
the basis that such action is in the best interests of the Company and its
shareholders, and the last date on which such required approval is obtained
shall be the date of issuance of such option. The agreement documenting the
award of any option granted pursuant to this paragraph 4(a) shall contain such
terms and conditions as the Committee shall deem advisable, including but not
limited to being exercisable only in such installments as the Committee may
determine.
(b) Non-Officer Directors. A one-time grant of options in accordance
with the provisions of this paragraph (b) shall be made to each director of the
Company who is not an officer of the Company or of the Company's investment
adviser (a "non-officer director") who is serving at the later of (i) the date
on which the proposal to make grants of options to non-officer directors is
approved by the shareholders of the Company or (ii) the date on which the
issuance of options pursuant to this Plan to non-officer directors is approved
by order of the Securities and Exchange Commission pursuant to Section
61(a)(3)(B)(I)(II) of the Act. After the later of such dates, a one-time grant
of options in accordance with the provisions of this paragraph (b) shall be
made to each non-officer director [other than any non-officer director who
received a grant pursuant to the first sentence of this paragraph (b)] upon his
or her initial election as a director of the Company. Each grant pursuant to
this paragraph (b) shall award the non-officer director an option to purchase
ten thousand (10,000) shares at a price equal to the current fair market value
of the shares at the date of issuance of such option; provided, that if any
non-officer director then holds ten percent (10%) or more of the outstanding
shares, the exercise price of such option shall not be less than one hundred
ten percent (110%) of such current fair market value. The agreement documenting
the award of any option granted pursuant to this paragraph 4(b) shall contain
such terms and conditions as the Committee shall deem advisable; provided,
however, that any such option shall vest in three annual installments (so that
the recipient can first exercise the option with respect to not more than 3,333
shares on or after the date of issuance of such option, can exercise the option
with respect to not more than an additional 3,333 shares on or after the first
anniversary of the date of issuance of such option and can exercise such option
with respect to the all of the shares covered thereby on or after the second
anniversary of the date of issuance of such option).
(c) General. Agreements evidencing options granted to different
optionees or at different times need not contain similar provisions.
5. OPTION PRICE
Shares shall be optioned from time to time at a exercise price not
less than the current fair market value [as defined in paragraph 15(d) of this
Plan] of the shares at the date of issuance of an option; provided, that the
exercise price of any option granted to a holder of 10% or more of the
Company's shares shall not be less than 110% of such current fair market value.
6. OPTION PERIOD
Each option agreement shall state the period or periods of time within
which the subject option may be exercised, in whole or in part, by the optionee
which shall be such period or periods of time as may be determined by the
Committee; provided, that the option period shall not exceed ten years from the
date of issuance of the option and shall not exceed five years if the option is
granted to a holder of 10% or more of
2
<PAGE> 3
the Company's shares.
7. PAYMENT FOR SHARES
Full payment for shares purchased shall be made at the time of
exercising the option in whole or in part. Payment of the purchase price shall
be made in cash (including check, bank draft or money order) or, if authorized
pursuant to paragraph 9 hereof, by a loan from the Company in accordance with
paragraph 9.
8. TRANSFERABILITY OF OPTIONS
Options shall not be transferable other than by will or the laws of
descent and distribution, and during an optionee's lifetime shall be
exercisable only by the optionee.
9. LOANS BY THE COMPANY
Upon the exercise of any option by an officer-optionee, the Company,
at the request of the officeroptionee, and subject to the approval of both (a)
a majority of the Company's directors who each has no financial interest in
such loan and (b) a majority of the Company's directors who each is not an
"interested person" [as defined in Section 2(a)(19) of the Act] of the Company,
on the basis that such loan is in the best interests of the Company and its
stockholders (whether such approval is by the Committee or otherwise), may lend
to such officer-optionee, as of the date of exercise, an amount equal to the
exercise price of such option; provided, that such loan (a) shall have a term
of not more than ten years, (b) shall become due within sixty days after the
recipient of the loan ceases to be an officer of the Company, (c) shall bear
interest at a rate no less than the prevailing rate applicable to 90-day United
States Treasury bills at the time the loan is made, and (d) shall be fully
collateralized at all times, which collateral may include securities issued by
the Company. Loan terms and conditions may be changed by the Committee to
comply with applicable IRS and SEC regulations.
10. TERMINATION OF OPTION
All rights to exercise options shall terminate sixty days after any
optionee ceases to be a director or an officer of the Company for any cause
other than death or total and permanent disability.
11. RIGHTS IN THE EVENT OF TERMINATION OF SERVICE
If an optionee's service as a director or officer is terminated for
any reason other than death or total and permanent disability prior to
expiration of his or her option and before such option is fully exercised, the
optionee shall have the right to exercise the option during the balance of the
60-day period referred to in paragraph 10.
12. RIGHTS IN THE EVENT OF TOTAL AND PERMANENT DISABILITY OR DEATH
If an optionee becomes totally and permanently disabled or dies prior
to expiration of the option without having fully exercised it, he or the
executors or administrators or legatees or distributees of the estate, as the
case may be, shall, have the right, from time to time within one year after the
optionee's total and permanent disability or death and prior to the expiration
of the term of the option, to exercise the option in whole or in part, as
provided in the respective option agreement.
13. EFFECT OF CHANGE IN STOCK SUBJECT TO THE PLAN
Subject to any required action by the shareholders of the Company and
the provisions of applicable
3
<PAGE> 4
corporate law, the number of shares represented by the unexercised portion of
an option, the number of shares which has been authorized or reserved for
issuance hereunder, and the number of shares covered by any applicable vesting
schedule hereunder, as well as the exercise price of a share represented by the
unexercised portion of an option, shall be proportionately adjusted for (a) a
division, combination or reclassification of any of the shares of common stock
of the Company or (b) a dividend payable in shares of common stock of the
Company.
14. GENERAL RESTRICTION
Each option shall be subject to the requirement that, if at any time
the Board of Directors shall determine, at its discretion, that the listing,
registration or qualification of the shares subject to such option upon any
securities exchange or under any state or federal law, or the consent or
approval of any government regulatory body, is necessary or desirable as a
condition of, or in connection with, the granting of such option or the issue
or purchase of the shares thereunder, such option may not be exercised in whole
or in part unless such listing, registration, qualification, consent or
approval shall have been effected or obtained free of any conditions not
acceptable to the Company. Subject to the limitations of paragraph 6, no option
shall expire during any period when exercise of such option has been prohibited
by the Board of Directors, but shall be extended for such further period so as
to afford the optionee a reasonable opportunity to exercise his option.
15. MISCELLANEOUS PROVISIONS
(a) No optionee shall have rights as a shareholder with respect to
shares covered by his option until the date of exercise of his option.
(b) The granting of any option shall not impose upon the Company any
obligation to appoint or to continue to appoint as a director or officer any
optionee, and the right of the Company to terminate the employment of any
officer or other employee, or service of any director, shall not be diminished
or affected by reason of the fact that an option has been granted to such
optionee.
(c) Options shall be evidenced by stock option agreements in such form
and subject to the terms and conditions of this Plan as the Committee shall
approve from time to time, consistent with the provisions of this Plan. Such
stock option agreements may contain such other provisions as the Committee in
its discretion may deem advisable.
(d) For purposes of this Plan, the fair market value of the shares
shall be the closing sales price of the stock as quoted on the National
Association of Securities Dealers Automated Quotation System for the date of
issuance of such option, as provided herein. If the Company's shares are traded
on an exchange, the price shall be the closing price of the Company's stock as
reported in The Wall Street Journal for such date of issuance of an option.
(e) Any option issued hereunder before January 1, 1987 shall not be
exercisable while there is outstanding any stock option which was granted
before the granting of such option to the same optionee to purchase shares of
the Company or of any corporation which (at the time of the granting of such
option) was a parent or subsidiary corporation of the Company, or any
predecessor of any of any such corporations.
(f) (1) The aggregate fair market value (determined as of the date of
issuance of an option) of the shares for which any optionee may be granted
options before January 1, 1987 in any calendar year (under all incentive stock
option plans of the Company and its parent and subsidiary corporations) shall
not exceed $100,000 plus any unused limit carryover to such year, calculated in
accordance with the provisions of Section 422A(c)(4) of the Code as it existed
before enactment of the Tax Reform Act of 1986, P.L. No. 99-514.
4
<PAGE> 5
(f) (2) The aggregate fair market value (determined as of the date of
issuance of an option) of the shares with respect to which an option, or
portion thereof, intended to be an incentive stock option and granted after
December 31, 1986 are exercisable for the first time by any optionee during any
calendar year (under all incentive stock option plans of the Company and
subsidiary corporations) shall not exceed $100,000.
(g) All options issued pursuant to this Plan shall be granted within
ten years from the earlier of the date of adoption of this Plan (or any
amendment thereto requiring shareholder approval pursuant to the Code) or the
date this Plan (or any amendment thereto requiring shareholder approval
pursuant to the Code) is approved by the shareholders of the Company.
(h) No option may be issued if exercise of all warrants, options and
rights of the Company outstanding immediately after issuance of such option
would result in the issuance of voting securities in excess of 20% of the
Company's outstanding voting securities.
(i) A leave of absence granted to an employee does not constitute an
interruption in continuous employment for purposes of this Plan as long as the
leave of absence does not extend beyond one year.
(j) Any notices given in writing shall be deemed given if delivered in
person or by certified mail; if given to the Company at Allied Capital
Corporation, 1666 K Street, N.W., 9th Floor, Washington, D.C. 20006; and, if to
an optionee, in care of the optionee at his or her last known address.
(k) This Plan and all actions taken by those acting under this Plan
shall be governed by the substantive laws of Maryland without regard to any
rules regarding conflict-of-law or choice-of-law.
(l) All costs and expenses incurred in the operation and
administration of this Plan shall be borne by the Company.
16. AMENDMENT AND TERMINATION
The Board of Directors may modify, revise or terminate this Plan at
any time and from time to time; provided, however, that no modification or
revision of any material provision of this Plan may be made without shareholder
approval except for such modifications or revisions which are necessary in
order to ensure the options issued as incentive stock options under this Plan
comply with Section 422 or any successor provision of the Code, applicable
provisions of the Act or any exemptive order therefrom issued to the Company in
connection with this Plan, Rule 16b-3 promulgated under the Securities Exchange
Act of 1934, as amended, or other applicable law. This Plan shall terminate
when all shares reserved for issuance hereunder have been issued upon the
exercise of options, by action of the Board of Directors pursuant to this
paragraph, or on February 16, 2004, whichever shall first occur.
17. EFFECTIVE DATE OF THE PLAN
This Plan shall become effective upon (1) adoption by the Board of
Directors and (2) approval of this Plan by the shareholders of the Company.
18. AMENDMENT HISTORY
Date of plan adoption by the Board of Directors May 6, 1983
Date of original plan approval by shareholders December 20, 1983
Date of amendment adoption by the Board of Directors November 12, 1987
Date of amendment adoption by the Board of Directors February 15, 1990
Date of amendment approval by shareholders May 17, 1990
5
<PAGE> 6
Date of amendment adoption by the Board of Directors February 17, 1993
Date of amendment approval by shareholders May 6, 1993
Date of amendment adoption by the Board of Directors February 16, 1994
Date of amendment approval by shareholders May 5, 1994
Date of approval of Securities and Exchange Commission December 26, 1995
Date of amendment adoption by the Board of Directors February 14, 1996
6
<PAGE> 1
EXHIBIT 11
Allied Capital Corporation and Subsidiaries
Statement of Computation of Earnings Per Common Share
For the Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
For the Year Ended December 31,
---------------------------------------
1996 1995 1994
---------------------------------------
<S> <C> <C> <C>
Primary Earnings Per Common Share:
Net Increase in Net Assets Resulting
from Operations $11,393,000 $15,317,000 $224,000
Less: Dividends for Preferred Stock (220,000) (220,000) (220,000)
---------------------------------------
Net Increase in Net Assets Resulting
from Operations Available to
Common Shareholders $11,173,000 $15,097,000 $4,000
=======================================
Weighted average number of common
shares outstanding 6,868,807 6,169,211 6,132,159
Weighted average number of common
shares issuable on exercise
of outstanding stock options 65,975 2,322 22,027
---------------------------------------
Weighted average number of common
shares and common share equivalents
outstanding 6,934,782 6,171,533 6,154,186
=======================================
Earnings per Common Share $1.61 $2.45 $0.00
=======================================
Fully Diluted Earnings Per Common Share:
Net Increase in Net Assets Resulting
from Operations $11,393,000 $15,317,000 $224,000
Less: Dividends for Preferred Stock (220,000) (220,000) (220,000)
---------------------------------------
Net Increase in Net Assets Resulting
from Operations Available to
Common Shareholders $11,173,000 $15,097,000 $4,000
=======================================
Weighted average number of common
shares and common share
equivalents outstanding as computed for
primary earnings per share 6,934,782 6,171,533 6,154,186
Weighted average of additional
shares issuable on exercise
of outstanding stock options 52,511 39,134 55
---------------------------------------
Weighted average number of common
shares and common share equivalents
outstanding, as adjusted 6,987,293 6,210,667 6,154,241
=======================================
Earnings per Common Share $1.60 $2.43 $0.00
=======================================
</TABLE>
<PAGE> 1
Allied Capital Corporation
SHAREHOLDER INFORMATION
CORPORATE OFFICE
c/o Allied Capital Advisers, Inc.
1666 K Street, NW, 9th Floor
Washington, DC 20006
Telephone: (202) 331-1112
Facsimile: (202) 659-2053
News-On-Demand: (888) 329-5519
Investor Relations: (202) 973-6334
Investor Relations E-mail: [email protected]
Marketing: (202) 331-2439
Marketing E-mail: [email protected]
Internet Address: http://www.alliedcapital.com
STOCK TRANSFER AGENT AND REGISTRAR
Inquiries on transferring securities, replacing a lost or stolen certificate,
participating in the Dividend Reinvestment Plan, requesting Direct Deposit
information or processing a change of address should be directed to:
American Stock Transfer & Trust Company
40 Wall Street, 46th Floor
New York, NY 10005
In the United States: (800) 937-5449
Outside the United States: (212) 936-5100
E-mail: [email protected]
Internet Address: http://www.amstock.com
FORM 10-K REPORT
A copy of the Company's Annual Report on Form 10-K for the year ended December
31, 1996, as filed with the Securities and Exchange Commission, will be
furnished without charge to shareholders upon written request to the Investor
Relations Department at the Company's corporate office. This information is also
available on Allied Capital's Internet site: http://www.alliedcapital.com
1997 ANNUAL MEETING OF SHAREHOLDERS
Montgomery Room at The Residence Inn by Marriott,
7335 Wisconsin Avenue, Bethesda, Maryland 20814
Thursday, May 1, 1997
10 a.m. (EST)
All shareholders are welcome to attend.
INDEPENDENT ACCOUNTANTS
Matthews, Carter and Boyce, P.C.
McLean, VA
STOCK MARKET LISTING
Allied Capital Corporation common stock is quoted on the Nasdaq National Market
under the ticker symbol ALLC. Most newspapers list the Company's stock as
"AlldCap." The Company has approximately 1,700 shareholders of record and 6,100
beneficial shareholders.
DIVIDENDS AND DISTRIBUTIONS
Generally, quarterly dividends on common stock are paid on the last business day
of each quarter. The Company has also paid a fifth distribution at year-end
since 1964.
STOCK PRICE
<TABLE>
<CAPTION>
High Low Close
---- --- -----
<S> <C> <C> <C>
1995
Q1 13.50 11.50 12.00
Q2 12 11.13 11.88
Q3 13.75 11.25 13.00
Q4 14.25 12.25 13.63
1996
Q1 14.25 13.00 13.25
Q2 14.38 13.00 13.75
Q3 16 13.50 15.38
Q4 16.63 15.25 15.75
</TABLE>
TOTAL DISTRIBUTIONS PER SHARE
<TABLE>
<CAPTION>
1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
1.30 1.32 1.35 1.40 1.44 1.51
</TABLE>
AVERAGE ANNUAL TOTAL RETURN (thousands)
<TABLE>
<CAPTION>
$10,000 Investment on January 1, 1960
-------------------------------------
Year end Value
-------- -----
<S> <C>
1960 $ 8,864
1961 7,023
1962 5,150
1963 6,972
1964 13,144
1965 17,802
1966 15,221
1967 19,820
1968 31,944
1969 34,467
1970 25,943
1971 38,783
1972 163,525
1973 80,801
1974 66,406
1975 80,075
1976 126,311
1977 132,028
1978 139,134
1979 174,350
1980 200,072
1981 206,417
1982 408,997
1983 792,568
1984 688,709
1985 839,079
1986 1,450,600
1987 1,460,738
1988 2,051,958
1989 2,244,823
1990 2,217,343
1991 2,897,497
1992 2,699,319
1993 2,932,000
1994 2,896,683
1995 3,351,479
1996 4,281,997
</TABLE>
A $10,000 investment in Allied Capital Corporation in 1960 at its initial
public offering, with all dividends reinvested, was worth $4,281,997 at the end
of 1996, a 17.8% average annual total return over this period.
<PAGE> 2
Allied Capital Corporation
COMPANY PROFILE
Allied Capital Corporation offers shareholders the opportunity to profit from a
portfolio of long-term debt and equity investments in growing businesses
nationwide. Managed by Allied Capital Advisers, Inc., the company seeks to
provide current income and long-term capital appreciation for its shareholders.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
December 31,
(in thousands, except per share amounts) 1996 1995
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Total Investments at Value $116,608 $123,184
Total Assets $165,751 $148,268
Total Debt and Redeemable Preferred Stock $ 91,600 $ 83,800
Shareholders' Equity (Net Asset Value) $ 68,320 $ 57,181
Net Asset Value Available to Common Shareholders $ 62,320 $ 51,181
Net Increase in Net Assets Resulting from Operations $ 11,393 $ 15,317
Earnings Per Common Share $ 1.61 $ 2.45
Distributions Per Common Share $ 1.51 $ 1.44
Number of Common Shares Outstanding 7,299 6,198
</TABLE>
Allied Capital Corporation
1
<PAGE> 3
Allied Capital Corporation
CONSOLIDATED COMPARISON OF FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31,
(in thousands, except per share amounts) 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DISTRIBUTIONS
Total tax distributions $ 10,726 $ 8,894 $ 8,595 $ 8,239 $ 8,027
Ordinary income per common share $ 0.20 $ 0.40 $ 0.31 $ -- $ 0.45
Net capital gains per common share 1.31 1.04 0.92 1.35 0.87
Return of capital per common share -- -- 0.17 -- --
-------------------------------------------------------------------
Total tax distributions per common share $ 1.51 $ 1.44 $ 1.40 $ 1.35 $ 1.32
- ---------------------------------------------------------------------------------------------------------------------------------
OPERATIONS
Total investment income $ 15,865 $ 14,126 $ 12,216 $ 12,384 $ 11,335
Per common share $ 2.29 $ 2.29 $ 1.99 $ 2.02 $ 1.85
Net investment income $ 4,395 $ 3,332 $ 2,126 $ 2,300 $ 3,055
Per common share $ 0.63 $ 0.54 $ 0.35 $ 0.38 $ 0.50
Net realized gains on investments $ 10,497 $ 5,526 $ 3,394 $ 5,943 $ 4,507
Net unrealized appreciation (depreciation) on investments $ (3,499) $ 6,459 $ (5,296) $ 12,163 $ 694
Net realized gains and unrealized appreciation
(depreciation) on investments $ 6,998 $ 11,985 $ (1,902) $ 18,106 $ 5,201
Per common share $ 1.01 $ 1.94 $ (0.31) $ 2.95 $ 0.85
Net increase in net assets resulting from operations $ 11,393 $ 15,317 $ 224 $ 20,406 $ 8,256
Per common share $ 1.64 $ 2.48 $ 0.04 $ 3.33 $ 1.35
Preferred stock dividends $ 220 $ 220 $ 220 $ 220 $ 220
Per common share $ 0.03 $ 0.03 $ 0.04 $ 0.04 $ 0.03
Net increase in net assets resulting from operations
available to common shareholders $ 11,173 $ 15,097 $ 4 $ 20,186 $ 8,036
Per common share $ 1.61 $ 2.45 $ 0.00 $ 3.29 $ 1.32
Weighted average number of common shares and
common share equivalents outstanding 6,935 6,172 6,154 6,128 6,111
- ---------------------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION
Investments at value $ 116,608 $123,184 $ 115,026 $ 94,630 $ 78,470
Investments at cost $ 112,538 $115,615 $ 111,058 $ 88,224 $ 84,227
Total assets $ 165,751 $148,268 $ 135,517 $134,606 $124,823
Total debt and redeemable preferred stock $ 91,600 $ 83,800 $ 78,005 $ 70,800 $ 70,800
Shareholders' equity $ 68,320 $ 57,181 $ 49,987 $ 58,185 $ 45,991
Net asset value available to common shareholders $ 62,320 $ 51,181 $ 43,987 $ 52,185 $ 39,991
Per common share $ 8.54 $ 8.26 $ 7.15 $ 8.54 $ 6.57
Per common share market value at end of year $ 15.75 $ 13.63 $ 13.13 $ 14.75 $ 14.50
Common shares outstanding at end of year 7,299 6,198 6,153 6,109 6,090
</TABLE>
Allied Capital Corporation
9
<PAGE> 4
Allied Capital Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion should be read in conjunction with the financial
statements and notes thereto included elsewhere in this report.
LIQUIDITY AND CAPITAL RESOURCES
In the first quarter of 1996, Allied Capital Corporation (Company) offered a
total of 885,448 shares of common stock pursuant to a one-for-seven
non-transferable rights offering. Shareholders participating in the rights
offering purchased 663,710 shares at $13.11 per share. The Company received net
proceeds of $8.3 million, net of expenses. During the year, the weighted average
shares outstanding increased by 12% as a result of this rights offering.
In order to fund its investments in small businesses, the Company has cash, a
line of credit with a commercial bank, a commitment from the Overseas Private
Investment Corporation (OPIC), a note with an insurance company, debentures from
the Small Business Administration (SBA) and other sources. The Company had total
cash available at year end 1996 of $44.9 million and available credit facilities
of $111.9 million, of which $90.6 million was outstanding. The underlying
agreements for $81.3 million of the Company's debt require prepayment penalties
if any principal payments are made prior to maturity, therefore the Company does
not intend to prepay this debt.
In 1997, $7 million of debentures payable to the SBA will mature. If the Company
has sufficient resources to meet its operating needs at the time the debentures
mature, the Company will repay this debt. If repaid, it is uncertain whether the
Company would be able to obtain additional financing from the SBA in the future,
as the Company is unable to predict the SBA's ability to meet demands for
leverage requests on an ongoing basis.
At December 31, 1996, outstanding commitments for future financings by the
Company were $5.1 million. Given the balance of cash available at December 31,
1996 and the available credit facilities, the Company believes that it has
adequate capital to continue to satisfy its operating needs, commitments and
other future investment opportunities that may arise throughout 1997.
RESULTS OF OPERATIONS
COMPARISON OF 1996 AND 1995
The net increase in net assets resulting from operations was $11.4 million, or
$1.61 per common share, for the year ended December 31, 1996, compared to $15.3
million, or $2.45 per common share, for the same period in 1995. Net realized
gains on investments were $10.5 million for 1996, a 90% increase over $5.5
million in 1995. During 1996, the Company successfully liquidated certain
equity investments and received early payoffs of loans in its portfolio. Since
net gains are realized when the Company sells or otherwise liquidates its
investments, profit from gains may vary significantly from year to year.
The investments that generated the 1996 net realized gains had previously been
valued by the board of directors such that the Company had recorded net
unrealized appreciation totaling $4.2 million, or $0.61 per common share. When
the investments were liquidated in 1996, the profit resulting from the net gains
was reduced by an offsetting decrease in net unrealized appreciation for the
$4.2 million previously recorded. The Company recorded portfolio appreciation of
$0.7 million for the year resulting from the valuations as determined by the
board of directors.
Total investment income increased 12% to $15.9 million for 1996 as compared to
$14.1 million for 1995. Interest income increased by $2.1 million, or 18%, to
$14.0 million in 1996, compared to $11.9 million in 1995, due to an increase in
loan discount amortization and the early recognition of loan fees on early
repayments. The Company also received prepayment penalties totaling $126,000 in
1996 as compared to $60,000 in 1995, which are included in other income.
Dividend income for 1996 increased 4% over 1995 primarily from an increased
dividend distribution from Allied Capital Lending Corporation (Allied Lending).
Other income for the year ended December 31, 1995 included non-recurring income
of $327,000 resulting from litigation costs incurred in prior periods which
were recovered during 1995.
Allied Capital Corporation
10
<PAGE> 5
Allied Capital Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS
Total expenses increased $0.7 million to $11.5 million in 1996 as compared to
$10.8 million in 1995. Interest expense increased 12% to $7.6 million in 1996
from $6.7 million in 1995 as a result of the Company's outstanding borrowings
increasing to $90.6 million at December 31, 1996 from $82.8 million at December
31, 1995. The Company's investment advisory fee of $2.9 million for 1996 was 5%
higher than the fee of $2.8 million for 1995. Other expenses decreased 23% for
1996 as compared to 1995. This decline resulted from a decline in legal costs
related to litigation that was resolved in late 1994.
Distributions to common shareholders for 1996 were $10.7 million. The Company's
taxable income of $1.51 per common share differed significantly from its net
investment income before net unrealized appreciation (depreciation) on
investments of $2.11 per common share due to timing differences in the
recognition of income for tax purposes versus financial reporting purposes. The
distributions were comprised of taxable ordinary and net capital gain income.
COMPARISON OF 1995 AND 1994
Net increase in net assets resulting from operations was $15.3 million for the
year ended December 31, 1995 as compared to $224,000 for the same period in
1994. Earnings per common share increased to $2.45 per common share from a
breakeven level for the same period in 1994.
Total investment income increased 16% from $12.2 million in 1994 to $14.1
million in 1995. Interest income increased by $1.5 million or 14% to $11.9
million in 1995, compared to $10.4 million in 1994, due to a net increase in
loans and debt securities outstanding. Dividend income declined by $190,000 or
11% to $1.5 million in 1995 as compared to $1.7 million in 1994, primarily due
to the distribution of 335,086 shares of Allied Lending stock in January 1995.
Total expenses increased 7% from $10.1 million in 1994 to $10.8 million in 1995.
Interest expense grew due to the net increase in SBA subordinated debentures of
$6.5 million in late September 1995 and a full year of interest charges on the
$7 million of similar debentures issued in September 1994. Investment advisory
fee expense increased due to the growth of the Company's portfolio of
investments and other assets upon which the investment advisory fee is based.
Legal and accounting fees in 1995 were down from the prior year as the Company
settled various legal matters in late 1994, which required significant legal
resources in that year.
Net realized gains on investments increased 63% to $5.5 million from $3.4
million for the years ended December 31, 1995 and 1994, respectively. The
increase in net realized gains resulted from the disposition of equity
securities and early payoffs of investments. Net unrealized appreciation was
$6.5 million in 1995 as compared to net unrealized depreciation of $5.3 million
in 1994.
Taxable distributions to common shareholders for 1995 of $8.9 million, or $1.44
per common share, approximated the net investment income before net unrealized
appreciation (depreciation) on investments. The distributions were comprised of
taxable ordinary and net capital gain income.
INVESTMENT PORTFOLIO
Total investments decreased by $6.6 million or 5% to $116.6 million at December
31, 1996 from $123.2 million at December 31, 1995. The Company invested $40.5
million in small business concerns in 1996, a 47% increase over the $27.6
million invested in 1995. New investments in 1996 included $8.7 million of debt
and equity financings for international projects. These financings were funded
with the Company's OPIC credit facility.
As a result of declining interest rates and the greater flow of capital into the
marketplace, investment exits and repayments totaled $43.6 million in 1996 as
compared to $25.9 million in 1995. For the year ended December 31, 1996, the
Company's portfolio experienced net depreciation of $3.5 million due to various
factors including the sale of certain investments which resulted in realized
gains.
The Company owns 844,914 shares, or approximately 16% of Allied Lending's common
stock outstanding at December 31, 1996. Prior to Allied Lending's public
offering in November 1993, Allied Lending was a wholly owned subsidiary of the
Company. The Company, pursuant to a condition of exemptive relief from the
Securities and Exchange Commission (Commission), must divest itself of the
currently owned shares by December 31, 1998 through public offerings, private
placements, distributions to the Company's shareholders or otherwise. Allied
Lending has registered the shares owned by the Company. The Company sold 400,000
shares of Allied Lending stock in 1996, and will continue its divestiture.
Allied Capital Corporation
11
<PAGE> 6
Allied Capital Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS
FACTORS AFFECTING THE COMPANY'S BUSINESS
Nature of Investments. Consistent with its operation as a business development
company, the Company's portfolio is expected to consist primarily of securities
issued by small and developing, privately-held companies. Typically, such
companies each depend for their success on the management talents and efforts of
one person, so that the death, disability or resignation of such person could
have a materially adverse impact on the companies. Moreover, smaller companies
frequently have narrower product lines and smaller market shares than larger
companies and therefore may be more vulnerable to competitors' actions and
market conditions, as well as general economic downturns. Because these
companies will generally have highly leveraged capital structures, reduced cash
flow resulting from an adverse competitive development, shift in customer
preferences, or an economic downturn may adversely affect the return on, or the
recovery of, the Company's investment in them. Investment in such companies
therefore involves a high degree of business and financial risk, which can
result in substantial losses and accordingly should be considered speculative.
Foreign Investments. The Company's investments in OPIC-qualifying small
businesses are generally made in countries representing the world's emerging or
developing markets. At December 31, 1996, 8% of the Company's total investments
were in foreign investments. Foreign investments involve risks not ordinarily
associated with domestic investing, including: (1) possible imposition of market
controls; (2) possible seizure, expropriation or nationalization of assets; (3)
lower liquidity and higher volatility in certain foreign markets; (4) the impact
of political, social or diplomatic events; and (5) the possibility that a
foreign government could restrict the ability of an entity in which the Company
has invested from meeting its obligations under borrowings or other
arrangements. The Company intends to take steps to reduce or eliminate certain
of the above risks by diversifying its OPIC-related investments by country and
type of business, as well as by purchasing insurance through OPIC to protect the
Company against many of these risks when deemed necessary.
Long-term Character of Investments. It is expected that investments made in
accordance with the Company's investment objective will usually yield a current
return from the time they are made, but will generally produce a profit, if any,
from an accompanying equity feature only after five to eight years. There can be
no assurance that either a current return or capital gains will actually be
achieved.
Illiquidity. Most of the Company's investments consist of securities acquired
directly from the issuers in private transactions. They are usually subject to
restrictions on resale or otherwise illiquid. There is usually no established
trading market for such securities into which they could be sold. In addition,
most of the securities are not eligible for sale to the public without
registration which would involve delay and expense.
Competition. A large number of entities and individuals compete for the
opportunity to make the kinds of investments made by the Company. Many of these
entities and individuals have greater financial resources than the combined
resources of the Company. As a result of this competition, the Company may from
time to time be precluded from making otherwise attractive investments on terms
considered to be prudent in light of the risks to be assumed.
Statements included in this report concerning the Company's future prospects
are "forward looking statements" under the Federal securities laws. There can
be no assurance that future results will be achieved and actual results could
differ materially from forecasts and estimates.
Allied Capital Corporation
12
<PAGE> 7
Allied Capital Corporation
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
December 31,
(in thousands, except number of shares) 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments at Value:
Loans and debt securities (cost: 1996--$97,805; 1995--$98,119) $ 90,581 $ 90,377
Equity securities (cost: 1996--$14,610; 1995--$15,039) 25,896 31,600
Other investment assets (cost: 1996--$123; 1995--$2,457) 131 1,207
----------------------
Total investments 116,608 123,184
Cash and cash equivalents 44,915 22,743
Other assets 4,228 2,341
----------------------
Total assets $165,751 $148,268
======================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Revolving line of credit $ -- $ 1,500
Debentures and notes payable 90,600 81,300
Dividends and distributions payable 2,988 3,808
Accrued interest payable 1,696 1,469
Investment advisory fee payable 742 722
Other liabilities 405 1,288
----------------------
96,431 90,087
----------------------
Redeemable preferred stock 1,000 1,000
----------------------
Commitments and Contingencies
Shareholders' Equity:
Preferred stock of wholly owned subsidiary, $100 par value, 200,000 shares authorized;
60,000 shares issued and outstanding at December 31, 1996 and 1995 6,000 6,000
Common Stock, $1 par value, 10,000,000 shares authorized; 7,299,091 and
6,198,138 shares issued and outstanding at December 31, 1996 and 1995 7,299 6,198
Additional paid-in capital 54,440 41,491
Notes receivable from sale of common stock (3,759) (401)
Net unrealized appreciation on investments 4,070 7,569
Undistributed (distributions in excess of) accumulated earnings 270 (3,676)
----------------------
Total shareholders' equity 68,320 57,181
----------------------
Total liabilities and shareholders' equity $165,751 $148,268
======================
</TABLE>
The accompanying notes are an integral part of these financial statements.
Allied Capital Corporation
13
<PAGE> 8
Allied Capital Corporation
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31,
(in thousands, except per share amounts) 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment Income:
Interest $ 13,996 $11,897 $ 10,401
Dividends 1,618 1,556 1,746
Other income 251 673 69
----------------------------------
Total investment income 15,865 14,126 12,216
----------------------------------
Expenses:
Interest expense 7,566 6,735 6,333
Investment advisory fee 2,933 2,799 2,356
Legal and accounting fees 552 654 977
Other operating expenses 419 606 424
----------------------------------
Total expenses 11,470 10,794 10,090
----------------------------------
Net investment income 4,395 3,332 2,126
Net realized gains on investments 10,497 5,526 3,394
----------------------------------
Net investment income before net unrealized appreciation (depreciation)
on investments 14,892 8,858 5,520
Net unrealized appreciation (depreciation) on investments (3,499) 6,459 (5,296)
----------------------------------
Net increase in net assets resulting from operations $ 11,393 $15,317 $ 224
==================================
Earnings per common share $ 1.61 $ 2.45 $ 0.00
==================================
Weighted average number of common shares and common share equivalents outstanding 6,935 6,172 6,154
==================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
Allied Capital Corporation
14
<PAGE> 9
Allied Capital Corporation
CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31,
(in thousands, except per share amounts) 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Increase in Net Assets Resulting from Operations:
Net investment income $ 4,395 $ 3,332 $ 2,126
Net realized gains on investments 10,497 5,526 3,394
Net unrealized appreciation (depreciation) on investments (3,499) 6,459 (5,296)
----------------------------------
Net increase in net assets resulting from operations 11,393 15,317 224
----------------------------------
Distributions to Shareholders from:
Net investment income (1,407) (2,110) (705)
Excess of net investment income -- (355) (1,216)
Net capital gains (9,319) (6,429) (4,595)
Excess of net capital gains -- -- (1,035)
Return of capital (tax) -- -- (1,044)
Preferred stock dividends (220) (220) (220)
----------------------------------
Net decrease in net assets resulting from distributions to shareholders (10,946) (9,114) (8,815)
----------------------------------
Capital Share Transactions:
Sale of common stock 8,264 -- --
Net (increase) decrease in notes receivable from sale of common stock (3,358) 415 (50)
Issuance of common stock upon the exercise of stock options 4,445 -- 200
Issuance of common stock in lieu of cash distributions 1,341 576 243
----------------------------------
Net increase in net assets resulting from capital share transactions 10,692 991 393
----------------------------------
Total increase (decrease) in net assets 11,139 7,194 (8,198)
Net assets at beginning of year 57,181 49,987 58,185
----------------------------------
Net assets at end of year 68,320 57,181 49,987
Preferred stock of wholly owned subsidiary (6,000) (6,000) (6,000)
----------------------------------
Net asset value available to common shareholders $ 62,320 $51,181 $43,987
==================================
Net asset value per common share $ 8.54 $ 8.26 $ 7.15
==================================
Common shares outstanding at end of year 7,299 6,198 6,153
==================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
Allied Capital Corporation
15
<PAGE> 10
Allied Capital Corporation
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31,
(in thousands) 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net increase in net assets resulting from operations $ 11,393 $ 15,317 $ 224
Adjustments to reconcile net increase in net assets resulting
from operations to net cash provided by operating activities:
Net unrealized (appreciation) depreciation on investments 3,499 (6,459) 5,296
Write-off of investments 6,685 3,337 2,006
Net realized gains on investments (17,182) (8,863) (5,400)
Interest income -- -- (1,159)
Amortization of loan discounts (982) (728) (409)
Changes in assets and liabilities:
Other assets (1,887) 1,331 (255)
Accrued interest payable 227 76 110
Investment advisory fee payable 20 64 249
Other liabilities (883) (276) 1,215
-------------------------------------
Net cash provided by operating activities 890 3,799 1,877
-------------------------------------
Cash Flows from Investing Activities:
Investments in small business concerns (40,496) (27,551) (35,748)
Purchase of U.S. government securities -- (14,957) (37,448)
Payments on loans and debt securities and other investment assets 35,252 19,111 12,504
Net proceeds from sale of equity securities 19,800 9,268 2,677
Redemption of U.S. government securities -- 25,208 39,281
Payments on notes receivable from sale of common stock 201 415 150
-------------------------------------
Net cash provided by (used in) investing activities 14,757 11,494 (18,584)
-------------------------------------
Cash Flows from Financing Activities:
Sale of common stock 9,150 -- --
Common dividends and distributions paid (10,205) (4,734) (8,027)
Preferred stock dividends (220) (220) (220)
Proceeds from issuance of long-term debt 9,300 14,000 7,000
Payments on long-term debt -- (7,500) (2,000)
Net borrowings under (payments on) revolving line of credit (1,500) (705) 2,205
-------------------------------------
Net cash provided by (used in) financing activities 6,525 841 (1,042)
-------------------------------------
Net increase (decrease) in cash and cash equivalents 22,172 16,134 (17,749)
Cash and cash equivalents, beginning of year 22,743 6,609 24,358
-------------------------------------
Cash and cash equivalents, end of year $ 44,915 $ 22,743 $ 6,609
=====================================
Supplemental Disclosure of Cash Flow Information
Noncash investing and financing activities:
Issuance of common stock upon the exercise of stock options $ 3,559 $ -- $ 200
Issuance of common stock in lieu of cash distributions $ 1,341 $ 576 $ 243
Issuance of Allied Capital Lending Corporation common stock in
lieu of cash distributions $ -- $ 3,686 $ --
Interest paid $ 7,339 $ 6,659 $ 6,223
</TABLE>
The accompanying notes are an integral part of these financial statements.
Allied Capital Corporation
16
<PAGE> 11
Allied Capital Corporation
CONSOLIDATED STATEMENT OF LOANS AND INVESTMENTS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Company's Name (State) December 31, 1996
(Type of Business) Investments Cost Value
- ------------------------------------------------------------------------------------------------------------------
(in thousands, except number of shares)
<S> <C> <C> <C>
Loans With Equity
- ---------------------------------------------------------------------------------------------------------------
Acme Paging, L.P. (IL) Loans and Debt Securities $ 4,116 $ 4,116
(South American paging service) Limited Partnership Interest (1.3%) 1,040 1,040
- ---------------------------------------------------------------------------------------------------------------
AGPAL Broadcasting, Inc. (OR) Loans and Debt Securities 928 928
(radio stations) Warrants 0 0
- ---------------------------------------------------------------------------------------------------------------
Allied Capital Lending Corporation (MD) (1,3) Common Stock (844,914 shares) (4) 2,045 11,375
(business development company)
- ---------------------------------------------------------------------------------------------------------------
American Barbecue & Grill (KS) Loans and Debt Securities 2,121 2,121
(restaurants) Warrants 71 71
- ---------------------------------------------------------------------------------------------------------------
ASW Holding Corporation (IL) Loans and Debt Securities 1,883 1,883
(steel wool manufacturer) Warrants 53 428
- ---------------------------------------------------------------------------------------------------------------
Au Bon Pain Co., Inc. (MA) (1) Loans and Debt Securities 3,432 3,432
(bakery, cafes) Warrants (4) 109 0
- ---------------------------------------------------------------------------------------------------------------
Bellefonte Lime Co. (PA) (3) Common Stock (2,869 shares) 16 800
(mineral quarry & production)
- ---------------------------------------------------------------------------------------------------------------
Brazos Sportswear, Inc. (OH) Loans and Debt Securities 1,871 1,871
(manufacturer and distributor of sportswear) Common Stock (27,137 shares) 198 198
Warrants 0 0
- ---------------------------------------------------------------------------------------------------------------
Celebrities, Inc. (FL) Loans and Debt Securities 388 388
(radio station) Warrants 12 12
- ---------------------------------------------------------------------------------------------------------------
CeraTech Holdings, Inc. (IL) Loans and Debt Securities 1,167 577
(ceramic plate manufacturer) Warrants 0 0
- ---------------------------------------------------------------------------------------------------------------
Cherry Tree Toys, Inc. (OH) Loans and Debt Securities 1,075 1,075
(direct marketer of woodcrafts) Common Stock (117 shares) 0 0
- ---------------------------------------------------------------------------------------------------------------
CitiPostal, Inc. (NY) Convertible Preferred Stock
(courier network) Series B (30,500 shares) 289 5
- ---------------------------------------------------------------------------------------------------------------
Consumer Health Services, Inc. (CO) Convertible Preferred Stock
(medical/dental consumer information service) (127,940 shares) 180 0
- ---------------------------------------------------------------------------------------------------------------
Convenience Corporation of America (NE) Loans and Debt Securities 4,127 4,127
(convenience stores) Warrants 0 0
- ---------------------------------------------------------------------------------------------------------------
Contemporary Media, Inc. (ID) Loans and Debt Securities 557 557
(radio stations) Warrants 204 263
- ---------------------------------------------------------------------------------------------------------------
Cooper Natural Resources, Inc. (TX) Loans and Debt Securities 2,058 2,058
(sodium sulfate producer) Warrants 0 0
- ---------------------------------------------------------------------------------------------------------------
Csabai Canning Factory Rt. (Hungary) Loans and Debt Securities 3,036 3,036
(canning factory) Common Stock (700,000 shares) 700 700
- ---------------------------------------------------------------------------------------------------------------
DEH Printed Circuits, Inc. (IL) Warrants 133 192
(circuit board manufacturer)
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Public company; (2) Interest not being accrued; (3) May be considered an
affiliate; (4) Restricted public security
The accompanying notes are an integral part of these financial statements.
Allied Capital Corporation
17
<PAGE> 12
Allied Capital Corporation
CONSOLIDATED STATEMENT OF LOANS AND INVESTMENTS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Company's Name (State) December 31, 1996
(Type of Business) Investments Cost Value
- ------------------------------------------------------------------------------------------------------------------
(in thousands, except number of shares)
<S> <C> <C> <C>
DeVlieg-Bullard, Inc. (CT) (1) Warrants (4) $ 207 $ 323
(tool manufacturer)
- ---------------------------------------------------------------------------------------------------------------
Directory Investment Corporation (DC) (3) Common Stock (470 shares) 0 0
(telephone directories)
- ---------------------------------------------------------------------------------------------------------------
Directory Lending Corporation (DC) (3) Common Stock Series A (1,031 shares) 1 0
(telephone directories) Common Stock Series B (188 shares) 961 0
Common Stock Series C (292 shares) 1,340 0
Preferred Stock Series A (798 shares) 400 585
Preferred Stock Series B (175 shares) 325 0
Preferred Stock Series C (58 shares) 0 0
- ---------------------------------------------------------------------------------------------------------------
DMI Furniture, Inc. (KY) (1) Convertible Preferred Stock
(furniture manufacturer) (199,920 shares) (4) 500 1,012
- ---------------------------------------------------------------------------------------------------------------
El Dorado Communications, Inc. (CA) Loans and Debt Securities 3,987 3,987
(radio stations) Warrants 0 0
- ---------------------------------------------------------------------------------------------------------------
Enviroplan, Inc. (NJ) (2) Loans and Debt Securities 2,464 513
(emissions monitoring systems) Warrants 0 0
- ---------------------------------------------------------------------------------------------------------------
Esquire Communications, Ltd. (NY) (1) Warrants (4) 3 0
(court reporting services)
- ---------------------------------------------------------------------------------------------------------------
Fairchild Industrial Products Company (NC) Loans and Debt Securities 3,367 3,367
(industrial controls and power transmissions) Warrants 168 168
- ---------------------------------------------------------------------------------------------------------------
Genoa Mine Acquisition Corp. (OH) (3) Common Stock (20 shares) 44 800
(limestone mining)
- ---------------------------------------------------------------------------------------------------------------
Grant Broadcasting Systems II (FL) Warrants 78 1,344
(television stations)
- ---------------------------------------------------------------------------------------------------------------
Grant Television, Inc. (FL) Loans and Debt Securities 4,107 4,107
(television stations) Warrants 0 0
- ---------------------------------------------------------------------------------------------------------------
Gulf South Medical Supply, Inc. (MS) (1) Loans and Debt Securities 334 334
(medical supplies distributor) Warrants (4) 65 65
- ---------------------------------------------------------------------------------------------------------------
Innotech, Inc. (VA) (1) Warrants (4) 29 0
(bifocal lens manufacturer)
- ---------------------------------------------------------------------------------------------------------------
Julius Koch USA, Inc. (MA) Loans and Debt Securities 2,745 2,745
(cord manufacturer) Warrants 194 194
- ---------------------------------------------------------------------------------------------------------------
Kirker Enterprises, Inc. (NJ) Loans and Debt Securities 2,078 2,078
(nail enamel manufacturer) Warrants 203 203
- ---------------------------------------------------------------------------------------------------------------
Kirkland's, Inc. (TN) Loans and Debt Securities 3,501 3,501
(retailer of home products) Warrants 54 54
- ---------------------------------------------------------------------------------------------------------------
Labor Ready, Inc. (WA) (1) Common Stock (165,242 shares) 1,477 2,183
(temporary labor services)
- ---------------------------------------------------------------------------------------------------------------
Liberty Business Forms & Systems, Inc. (NY) Loans and Debt Securities 1,904 1,904
(inventory control tags and forms) Warrants 57 57
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Public company; (2) Interest not being accrued; (3) May be considered an
affiliate; (4) Restricted public security
The accompanying notes are an integral part of these financial statements.
Allied Capital Corporation
18
<PAGE> 13
Allied Capital Corporation
CONSOLIDATED STATEMENT OF LOANS AND INVESTMENTS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Company's Name (State) December 31, 1996
(Type of Business) Investments Cost Value
- ---------------------------------------------------------------------------------------------------------------
(in thousands, except number of shares)
<S> <C> <C> <C>
Love Mortgage Co. (DC) Series D Preferred Stock (26,000 shares) $ 360 $ 297
(real estate mortgages) Warrants 200 0
- ---------------------------------------------------------------------------------------------------------------
Midview Associates, L.P. (VA) Loans and Debt Securities 199 199
(residential land development) Warrants 0 0
- ---------------------------------------------------------------------------------------------------------------
Mill-It Striping, Inc. (FL) Warrants 125 0
(highway paint striping)
- ---------------------------------------------------------------------------------------------------------------
MLX/SinterMet Corp. (GA) (1) Common Stock (5,835 shares-MLX) 241 78
(friction materials manufacturer)
- ---------------------------------------------------------------------------------------------------------------
Nobel Education Dynamics, Inc. (PA) (1) Preferred Stock (99,734 shares) (4) 750 855
(educational services) Warrants (4) 0 122
- ---------------------------------------------------------------------------------------------------------------
Old Mill Holdings, Inc. (PA) (2) Loans and Debt Securities 648 448
(custom embroidered apparel) Warrants 45 0
- ---------------------------------------------------------------------------------------------------------------
The Peerless Group, Inc. (TX) (1) Common Stock (126,235 shares) (4) 6 699
(commercial banking software development) Warrants (4) 4 1,001
- ---------------------------------------------------------------------------------------------------------------
PIATL Holdings, Inc. (NJ) (3) Loans and Debt Securities 190 190
(environmental consulting) Preferred Stock (276 shares) 160 90
Common Stock (36 shares) 0 0
- ---------------------------------------------------------------------------------------------------------------
Pico Products, Inc. (CA) (1) Loans and Debt Securities 3,000 3,000
(manufacturer of satellite/ Warrants (4) 0 0
television components)
- ---------------------------------------------------------------------------------------------------------------
Quality Software Products Holdings, Common Stock (52,908 shares) 504 188
PLC (UK) (1)
(accounting software)
- ---------------------------------------------------------------------------------------------------------------
Radio One of Atlanta, Inc. (GA) Loans and Debt Securities 2,457 2,457
(radio stations) Warrants 0 0
- ---------------------------------------------------------------------------------------------------------------
R-Tex Decoratives Company, Inc. (PA) Loans and Debt Securities 836 836
(decorative ribbon manufacturer) Warrants 32 32
- ---------------------------------------------------------------------------------------------------------------
Spa Lending Corporation (DC) (3) Preferred Stock Series A (5,826 shares) 423 423
(health spas)
- ---------------------------------------------------------------------------------------------------------------
Taco Tico, Inc. (KS) (2) Loans and Debt Securities 1,064 130
(Mexican fast food restaurant) Warrants 28 0
- ---------------------------------------------------------------------------------------------------------------
Total Foam, Inc. (CT) (2,3) Loans and Debt Securities 1,617 113
(packaging systems) Common Stock (910 shares) 57 0
- ---------------------------------------------------------------------------------------------------------------
Visu-Com, Inc. (MD) (3) Loans and Debt Securities 2,250 1,250
(visual communications products) Preferred Stock (22,425 shares) 223 0
Common Stock (135 shares) 54 0
- ---------------------------------------------------------------------------------------------------------------
West Virginia Radio Corporation (WV) Loans and Debt Securities 527 527
(radio station) Warrants 200 0
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Public company; (2) Interest not being accrued; (3) May be considered an
affiliate; (4) Restricted public security
The accompanying notes are an integral part of these financial statements.
Allied Capital Corporation
19
<PAGE> 14
Allied Capital Corporation
CONSOLIDATED STATEMENT OF LOANS AND INVESTMENTS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Company's Name (State) December 31, 1996
(Type of Business) Investments Cost Value
- ---------------------------------------------------------------------------------------------------------------
(in thousands, except number
of shares and number of loans)
<S> <C> <C> <C>
Williams Brothers Lumber Company (GA) Loans and Debt Securities $ 278 $ 278
(builders' supply yards) Warrants 15 15
- ---------------------------------------------------------------------------------------------------------------
Wincapp Broadcasting, Inc. (PA) Loans and Debt Securities 699 699
(radio station) Warrants 23 23
- ---------------------------------------------------------------------------------------------------------------
Z-Spanish Radio Network (CA) Loans and Debt Securities 7,161 7,161
(radio stations) Warrants 3 3
- ---------------------------------------------------------------------------------------------------------------
Subtotal $ 86,781 $ 91,891
- ---------------------------------------------------------------------------------------------------------------
Loans With No Equity By Industry
- ---------------------------------------------------------------------------------------------------------------
Auto Repair Shops (6 loans) $ 1,133 $ 1,133
- ---------------------------------------------------------------------------------------------------------------
Doughnut Shops (3 loans) 574 574
- ---------------------------------------------------------------------------------------------------------------
Drycleaners (2 loans) 485 485
- ---------------------------------------------------------------------------------------------------------------
Heating Contractor (1 loan) 267 267
- ---------------------------------------------------------------------------------------------------------------
Hotels/Motels (3 loans) 3,771 3,771
- ---------------------------------------------------------------------------------------------------------------
HVAC Distributor (1 loan) 439 439
- ---------------------------------------------------------------------------------------------------------------
Limestone Mining (1 loan) 659 992
- ---------------------------------------------------------------------------------------------------------------
Liquor Store (1 loan) 524 524
- ---------------------------------------------------------------------------------------------------------------
Moving/Storage Company (1 loan) 264 264
- ---------------------------------------------------------------------------------------------------------------
Pet Products Manufacturer (1 loan) 3,538 3,538
- ---------------------------------------------------------------------------------------------------------------
Pizza Shops (5 loans) 560 337
- ---------------------------------------------------------------------------------------------------------------
Radio Stations (8 loans) 8,264 8,264
- ---------------------------------------------------------------------------------------------------------------
Small Appliances Distributor (1 loan) 250 250
- ---------------------------------------------------------------------------------------------------------------
Sporting Goods Manufacturer (1 loan) 2,248 2,248
- ---------------------------------------------------------------------------------------------------------------
Cold Food Storage Warehouse (1 loan) (2) 1,309 538
- ---------------------------------------------------------------------------------------------------------------
Wholesale Food Distributor (1 loan) 232 232
- ---------------------------------------------------------------------------------------------------------------
Other (12 loans) 1,117 730
- ---------------------------------------------------------------------------------------------------------------
Subtotal $ 25,634 $ 24,586
- ---------------------------------------------------------------------------------------------------------------
Other Investment Assets (5) $ 123 $ 131
- ---------------------------------------------------------------------------------------------------------------
Total $112,538 $116,608
===============================================================================================================
</TABLE>
(1) Public company; (2) Interest not being accrued; (3) May be considered an
affiliate; (4) Restricted public security; (5) Non-income producing
The accompanying notes are an integral part of these financial statements.
Allied Capital Corporation
20
<PAGE> 15
Allied Capital Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION. Allied Capital Corporation (the Company) is a closed-end
management investment company that has elected to be regulated as a business
development company under the Investment Company Act of 1940 (1940 Act). The
Company seeks to achieve current income by providing debt, mezzanine and equity
financing primarily for small privately-owned growth companies, and through
long-term growth on the value of its net assets. The Company has two wholly
owned, registered investment company subsidiaries, Allied Investment Corporation
(Allied Investment) and Allied Capital Financial Corporation (Allied Financial).
Allied Investment and Allied Financial are licensed under the Small Business
Investment Act of 1958 as a Small Business Investment Company (SBIC) and a
Specialized Small Business Investment Company (SSBIC), respectively.
The Company has an investment advisory agreement with Allied Capital Advisers,
Inc. (Advisers) whereby Advisers manages the investments of the Company subject
to the supervision and control of the Company's board of directors. Certain
directors and officers of Advisers are also directors and officers of the
Company.
CO-INVESTMENTS. Investments made by the Company are made in participation with a
separately organized public closed-end management investment company and two
private venture capital partnerships, which are also managed by Advisers in
accordance with various exemptive orders issued to the Company by the Securities
and Exchange Commission (Commission) permitting co-investments.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries after elimination of
intercompany balances and transactions.
VALUATION OF INVESTMENTS. Investments are carried at value, as determined by the
board of directors.
Loans and debt securities, which are not publicly traded, and warrants and
stocks for which there is no public market are valued based on collateral, the
ability to make payments, the earnings of the investee and other pertinent
factors. The values assigned are considered to be amounts which could be
realized in the normal course of business or from an orderly sale or other
disposition of the investments. In the normal course of business, loans and debt
securities are held to maturity, and the amount realized, in addition to
interest, is the face value, which may equal or exceed cost.
Equity securities which are publicly traded are generally valued at their quoted
market price, less a discount to reflect the effects of restrictions on the sale
of such securities.
Cash and cash equivalents are carried at cost which approximates fair value.
INTEREST AND DIVIDEND INCOME. Interest income is recorded on the accrual basis
to the extent that such amounts are expected to be collected. Loan fees and
original issue discount are amortized into interest income using the effective
interest method. Dividend income is recognized on the ex-dividend date.
REALIZED GAINS OR LOSSES AND UNREALIZED APPRECIATION OR DEPRECIATION ON
INVESTMENTS. Realized gains or losses are measured by the difference between the
net proceeds from the sale and the cost basis of the investment without regard
to unrealized appreciation or depreciation previously recognized, and include
investments written off during the year, net of recoveries. Unrealized
appreciation or depreciation reflects the change in the valuation of the
portfolio.
DISTRIBUTIONS TO SHAREHOLDERS. Distributions to shareholders are recorded on the
ex-dividend date.
FEDERAL INCOME TAXES. The Company and its wholly owned subsidiaries' objectives
are to comply with the requirements of the Internal Revenue Code that are
applicable to regulated investment companies. The Company and its wholly owned
subsidiaries annually distribute all of their taxable income to their
shareholders; therefore, a federal income tax provision is not required.
Allied Capital Corporation
21
<PAGE> 16
Allied Capital Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In addition, no provision for deferred income taxes has been made for the
unrealized appreciation on investments since the Company and its wholly owned
subsidiaries intend to continue to annually distribute all of their taxable
income.
Dividends declared by the Company in December to shareholders of record on a
specified date in such month, but paid during January of the following year, are
treated as if the dividends were received by the shareholders on December 31 of
the year declared.
EARNINGS PER COMMON SHARE. Earnings are defined as the net investment income,
net realized gains on investments and net unrealized appreciation or
depreciation on investments and are reduced by the preferred stock dividend
requirements. The computation of earnings per common share is based on the
weighted average number of common shares and common share equivalents
outstanding during the period. Common share equivalents included in the
computation represent shares issuable upon assumed exercise of stock options
which would have a dilutive effect in years where there are earnings.
CASH AND CASH EQUIVALENTS. Cash equivalents consist of highly liquid investments
with insignificant interest rate risk and original maturities of three months or
less at the acquisition date. At December 31, cash and cash equivalents
consisted of the following:
<TABLE>
<CAPTION>
- ---------------------------------------------------------
(in thousands) 1996 1995
- ---------------------------------------------------------
<S> <C> <C>
Cash $ -- $ 802
Repurchase agreements 44,915 21,941
-------------------
Total $44,915 $22,743
===================
- ---------------------------------------------------------
</TABLE>
On December 31, 1996, the Company had purchased $44,915,000 of overnight
repurchase agreements collateralized by U.S. government securities under
agreements to resell on January 2, 1997. Due to the short-term nature of the
agreements, the Company did not take possession of the securities which were
instead held for the Company by the bank.
RECLASSIFICATIONS. Certain reclassifications have been made to the 1995 and 1994
financial statements to conform with the 1996 financial statement presentation.
NOTE 2. INVESTMENTS
Loans and debt securities have stated interest rates ranging generally from 8
percent to 16 percent, and are generally payable in installments with final
maturities from 5 to 10 years from date of issue. At December 31, 1996 and 1995,
loans and debt securities with a cost basis of $8,852,000 and $13,084,000,
respectively, were not accruing interest.
The investments of the Company and its subsidiaries consist primarily of
securities issued by privately-owned companies. A majority of the securities
held by the Company are subject to restrictions on their resale or are otherwise
illiquid and cannot be sold to the public without registration under the
Securities Act of 1933. All of the Company's equity securities are non-income
producing except for its investments in Allied Capital Lending Corporation
(Allied Lending), DMI Furniture Inc., and Quality Software Products Holdings,
PLC. Dividends from Allied Lending were $1,586,000, $1,519,000, and $1,706,000
for 1996, 1995 and 1994, respectively.
The following industries represent five percent or more of the total value of
the investments outstanding at December 31:
<TABLE>
<CAPTION>
- ------------------------------------------------------
1996 1995
- ------------------------------------------------------
<S> <C> <C>
Broadcasting 27% 23%
Manufacturing/construction 33% 24%
Business development company 10% 12%
Retail 14% 13%
Service 8% 18%
Software 2% 5%
- ------------------------------------------------------
</TABLE>
Allied Capital Corporation
22
<PAGE> 17
Allied Capital Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The net unrealized appreciation for all securities over cost for federal income
tax purposes at December 31:
<TABLE>
<CAPTION>
- ------------------------------------------------------
(in thousands) 1996 1995
- ------------------------------------------------------
<S> <C> <C>
Aggregate gross unrealized
appreciation in which there is
an excess of value over cost $ 17,444 $ 23,925
Aggregate gross unrealized
depreciation in which there is
an excess of cost over value (12,374) (18,257)
------------------
Net unrealized appreciation $ 5,070 $ 5,668
==================
- ------------------------------------------------------
</TABLE>
The aggregate cost of securities at December 31, 1996 and 1995 for federal
income tax purposes was $111,538,000 and $117,516,000, respectively.
NOTE 3. INVESTMENT ADVISORY AGREEMENT
The Company has an investment advisory agreement with Advisers that is approved
at least annually by the board of directors or by vote of the holders of a
majority of the outstanding shares of the Company. The agreement may be
terminated at any time on sixty days' notice, without penalty, by the Company's
board of directors or by vote of the holders of a majority of the Company's
outstanding common shares and will terminate automatically in the event of its
assignment.
The Company pays all operating expenses, except those specifically required to
be borne by Advisers. The expenses paid by Advisers include the compensation of
the Company's officers and the cost of office space, equipment and other
personnel required for the Company's day-to-day operations. The expenses that
are paid by the Company include the Company's share of transaction costs
incident to the acquisition and disposition of investments, legal and accounting
fees, the fees and expenses of the Company's independent directors and the fees
of its officer-directors, the costs of printing and mailing proxy statements and
reports to shareholders costs associated with promoting the Company's stock, and
the fees and expenses of the Company's custodian and transfer agent. The Company
is also required to pay expenses associated with litigation and other
extraordinary or non-recurring expenses, as well as expenses of required and
optional insurance and bonding. All fees paid by or for the account of an actual
or prospective portfolio company in connection with an investment transaction in
which the Company participates are received by the Company, pro rata to its
participation in such transaction, rather than by Advisers. Advisers is entitled
to retain for its own account any fees paid by or for the account of a company,
including a portfolio company, for special investment banking or consulting work
performed for that company which is not related to such investment transaction
or management assistance. As compensation for its services to and the expenses
paid for the account of the Company, Advisers is paid a fee, quarterly in
arrears. Beginning in the second quarter of 1995, a fee was paid equal to 0.625
percent per quarter of the quarter-end value of the Company's consolidated total
assets, less the value of the shares of Allied Lending owned by the Company,
interim investments (i.e., U.S. government securities) and cash and cash
equivalents, plus 0.125 percent per quarter of the quarter-end value of
consolidated interim investments, cash and cash equivalents. These fees on an
annual basis approximate 2.5 percent on consolidated invested assets and 0.5
percent on consolidated interim investments, cash and cash equivalents. In the
first quarter of 1995 and in 1994, Advisers was entitled to a fee equal to 0.625
percent per quarter of the quarter-end value of the Company's consolidated total
assets, less the value of the shares of Allied Lending owned by the Company and
consolidated cash and cash equivalents in excess of $2,000,000 in working
capital.
NOTE 4. DIVIDENDS AND DISTRIBUTIONS
The Company's board of directors declared and the Company paid a $0.31 per
common share dividend for the fourth quarter, a $0.29 per common share dividend
for the third quarter, a $0.27 per common share dividend for the second quarter
and a $0.26 per common share dividend for the first quarter of 1996. The
Company's board of directors also declared an extra distribution in the fourth
quarter of $0.38 per common share, which was paid to shareholders on January 31,
1997, for a total distribution in 1996 equal to $1.51 per common share.
Allied Capital Corporation
23
<PAGE> 18
Allied Capital Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of the dividends and distributions of taxable income declared by
the board of directors for 1996, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
1996 1995 1994
Per Per Per
(in thousands, except per share amounts) Amount Share Amount Share Amount Share
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Ordinary income $ 1,407 $0.20 $2,465 $0.40 $1,921 $0.31
Long-term capital gains 9,319 1.31 6,429 1.04 5,630 0.92
Return of capital (tax) -- -- -- -- 1,044 0.17
-------------------------------------------------------------
Total distributions $10,726 $1.51 $8,894 $1.44 $8,595 $1.40
=============================================================
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
The 1996 distributions of $1.51 per common share were comprised of cash payments
and issuance of the Company's common shares pursuant to the Company's dividend
reinvestment plan in the amounts of $1.34 and $0.17, respectively. The 1995
distributions of $1.44 per common share were comprised of cash payments and
issuance of the Company's common shares pursuant to the Company's dividend
reinvestment plan in the amounts of $1.28 and $0.16, respectively. The 1994
distributions of $1.40 per common share were comprised of cash payments,
issuance of the Company's common shares pursuant to the Company's dividend
reinvestment plan, and the distribution of shares of Allied Lending in the
amounts of $0.76, $0.04, and $0.60, respectively. Amounts represent the total of
the quarterly dividends and the year-end extra distribution declared by the
Company based on the actual common shares outstanding on the record date for
each dividend paid.
The following represents a reconciliation from taxable income to income for
financial reporting purposes for the years ended December 31:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
(in thousands) 1996 1995 1994
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Taxable income $10,946 $ 9,114 $ 7,771
Market discount amortization 807 -- (807)
Net realized gains (losses) 2,531 185 (1,049)
Net unrealized appreciation
(depreciation) on investments (3,499) 6,459 (5,296)
Other 608 (441) (395)
----------------------------------
Financial statement income 11,393 15,317 224
Preferred stock dividends (220) (220) (220)
----------------------------------
Amount available for
common stockholders $11,173 $15,097 $ 4
==================================
- --------------------------------------------------------------------------
</TABLE>
As required by the 1940 Act, the Company is not permitted to make distributions
to shareholders unless it meets certain asset coverage requirements with respect
to money borrowed and senior securities issued. The Company is in compliance
with these requirements.
The Company's wholly owned subsidiaries annually distribute all of their taxable
income to the Company. In order to make such distributions, the subsidiaries
must meet the minimum capital requirements as set forth by the SBA. The
subsidiaries are in compliance with these requirements.
NOTE 5. DEBT
LINE OF CREDIT. The Company has a revolving line of credit agreement with a bank
under which it may borrow up to $10,000,000, which bears interest at a rate of
one-month LIBOR plus 2.5 percent per annum, payable monthly, and expires on
September 30, 1998. As of December 31, 1996 and 1995, the interest on the line
of credit was 8.0 percent and 8.2 percent per annum, respectively. The Company
must pay an annual commitment fee of $12,500 and a quarterly facility fee of
0.125 percent per annum on the unused portion of the line of credit. As of
December 31, 1996, the Company had $10,000,000 available under the revolving
line of credit agreement.
NOTES. The Company has $20,000,000 of notes outstanding to an insurance company.
These notes bear interest at a rate of 9.15 percent per annum, payable
semi-annually. The notes are scheduled to mature over a five-year period
commencing in 1998 with annual principal payments of $4,000,000.
Allied Capital Corporation
24
<PAGE> 19
Allied Capital Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OVERSEAS PRIVATE INVESTMENT CORPORATION (OPIC) LOAN. On April 10, 1995, the
Company entered into a loan agreement with OPIC under which the Company may
borrow up to $20,000,000 (loan commitment) to provide financing for
international projects involving qualifying U.S. small businesses. Loans under
this agreement bear interest at the U.S. Treasury rate plus 0.5 percent for the
applicable period of the borrowing. In addition, OPIC is entitled to receive
from the Company a contingent fee at maturity of the loan equal to five percent
of the return generated by the OPIC-related investments in excess of seven
percent. There are no required principal payments until the OPICloans mature in
January 2006. The loan commitment expires on the earlier of the first date on
which the amount of the loans equal $20,000,000 or April 10, 1998. As of
December 31, 1996, the Company had $11,300,000 available under the loan
agreement.
SMALL BUSINESS ADMINISTRATION (SBA) DEBENTURES. Debentures are payable to the
SBA and represent amounts borrowed pursuant to the Small Business Investment Act
of 1958. The debentures require semi-annual interest payments at various
interest rates with the entire principal balance due at maturity. Principal
payments required on these debentures at December 31, 1996 were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------
Year Ending Amount
December 31, (in thousands)Interest Rates
- ------------------------------------------------------
<C> <C> <C>
1997 $ 7,000 7.950%-10.350%
1998 6,650 8.875%- 9.800%
1999 --
2000 17,300 8.700%- 9.600%
2001 9,350 9.080%
Thereafter 21,000 6.875%- 8.200%
-------
Total $61,300
=======
- ------------------------------------------------------
</TABLE>
Proceeds from the SBA debentures may only be used to finance investments in
qualifying small businesses.
NOTE 6. PREFERRED STOCK
As of December 31, 1996, Allied Financial had outstanding a total of 60,000
shares of $100 par value, 3 percent cumulative preferred stock and 10,000 shares
of $100 par value, 4 percent redeemable cumulative preferred stock issued to the
SBA pursuant to Section 303(c) of the Small Business Investment Act of 1958, as
amended. The 3 percent cumulative preferred stock does not have a required
redemption date. Allied Financial has the option to redeem in whole or in part
the preferred stock by paying the SBA the par value of such securities and any
dividends accumulated and unpaid to the date of redemption. The 4 percent
redeemable cumulative preferred stock has a required redemption date of June 4,
2005.
NOTE 7. SHAREHOLDERS' EQUITY
The Company issued to the common shareholders at the close of business on
January 22, 1996, the record date, non-transferable subscription rights that
entitled record date shareholders to subscribe for and purchase from the Company
up to one authorized, but unissued share of the Company's common stock for each
seven subscription rights held. The Company offered a total of 885,448 shares of
common stock pursuant to this offer. Shareholders who fully exercised their
subscription rights were entitled to the additional privilege of subscribing for
shares from the offering not acquired by exercise of subscription rights.
The subscription price per common share was $13.11, which equaled 95 percent of
the average of the last reported sale price of a share of common stock on the
Nasdaq National Market on February 27, 1996 (the expiration date of the offer)
and each of the four preceding business days. Shareholders participating in the
offering subscribed for 411,961 shares through the primary subscription and
251,749 shares through the oversubscription privilege for a total of 663,710
shares. The Company received net proceeds of $8,264,000 from the rights offering
after expenses of $437,000, including a 2.5 percent commission paid to eligible
broker/dealers on each share sold as a result of their soliciting efforts.
During 1994, the Company paid $1,044,000 in distributions that represented a
return of capital for tax purposes. This was charged to additional paid-in
capital.
The Company has a dividend reinvestment plan (the Plan). Shareholders of record
may enroll in the Plan at any time. The Company may instruct the stock transfer
agent to buy shares in the open market, or the Company may issue new shares.
When the Company issues new shares, the price is equal to the average of the
closing sales prices reported for the shares for the five days on which trading
in the shares
Allied Capital Corporation
25
<PAGE> 20
Allied Capital Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
takes place immediately prior to and including the dividend payment date. During
1996, the Company issued 93,254 shares at an average price of $14.38 per share.
During 1995, the Company issued 45,435 shares at an average price of $12.72 per
share.
The Company has an incentive stock option plan (the ISOplan) which allows the
granting of options to the Company's officers and directors. Under the ISO plan
as amended, a maximum of 1,350,000 options may be granted at a price not less
than the market value on the date of the grant and may be exercisable over a ten
year period.
Holders of ten percent or more of the Company's stock must exercise their
options within a five-year period.
Officers of the Company may borrow from the Company the funds necessary to
exercise vested stock options. The loans have varying terms not exceeding ten
years and bear interest at the applicable federal interest rate in effect at the
date of issue.
A summary of the activity in the plan is as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
1996 1995 1994
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Options outstanding
at January 1 839,387 701,473 686,847
Options granted 162,135 332,800 50,000
Options exercised (343,989) -- (25,382)
Options canceled (45,470) (194,886) (9,992)
-------------------------------------------------
Options outstanding
at December 31 612,063 839,387 701,473
=================================================
Options available
for grant 45,471 162,136 300,050
Options exercisable 379,357 602,824 521,487
-------------------------------------------------
Option prices per share:
Granted $ 13.63 $12.38-13.63 $ 14.13
Exercised $13.50-16.38 -- $ 7.34- 8.53
Canceled $12.38-13.63 $12.05-16.50 $14.00-16.50
-------------------------------------------------
- ---------------------------------------------------------------------------
</TABLE>
The Company accounts for the ISO plan as required by APB Opinion No. 25, and no
compensation cost has been recognized. Had compensation cost for the plan been
determined consistent with SFAS No. 123, the Company's net increase in net
assets resulting from operations and earnings per common share would have been
reduced to the following pro forma amounts for the years ended December 31:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
(in thousands, except per share amounts) 1996 1995
- -------------------------------------------------------------------
<S> <C> <C>
Net increase in net assets
resulting from operations:
As reported $11,393 $15,317
Pro forma (unaudited) $11,218 $14,861
Earnings per common share:
As reported $ 1.61 $ 2.45
Pro forma (unaudited) $ 1.59 $ 2.37
- -------------------------------------------------------------------
</TABLE>
Because the method of accounting required by SFAS No. 123 has not been applied
to options granted prior to January 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years. The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants; risk-free interest rates of 6.4 and 6.0 percent for
1996 and 1995; expected dividend yield of 9 percent for 1996 and 1995; expected
life of 5 years for all options granted in 1996 and 1995; expected volatility of
31 percent for 1996 and 1995, respectively.
NOTE 8. COMMITMENTS AND CONTINGENCIES
The Company had commitments outstanding to various prospective and existing
portfolio companies totaling $5,116,000 at December 31, 1996.
At December 31, 1996, the Company had standby letters of credit and third party
guarantees outstanding totaling $433,000. The conditional commitments under the
letters of credit have been issued by a financial institution on behalf of the
Company to guarantee performance of certain portfolio companies to third
parties. The Company's revolving line of credit has been used as collateral for
one of the letters of credit totaling $168,000.
Allied Capital Corporation
26
<PAGE> 21
Allied Capital Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company is party to certain lawsuits in connection with its business. While
the outcome of these legal proceedings cannot at this time be predicted with
certainty, management does not expect that these actions will have a material
effect upon the financial condition of the Company.
NOTE 9. CONCENTRATIONS OF CREDIT RISK
The Company and its subsidiaries place their cash in financial institutions and,
at times, cash held in checking accounts may be in excess of the FDIC insurance
limit.
NOTE 10. DISPOSITION OF SUBSIDIARY
The Company owned all of the outstanding capital stock of Allied Lending prior
to consummation of the initial public offering of Allied Lending shares in
November 1993. As a result of that initial public offering, the Company's
ownership of Allied Lending shares was reduced to 1,580,000 shares, or
approximately 36 percent of the Allied Lending shares outstanding at December
31, 1993. The Company declared an extra dividend in December 1994 and
distributed on January 6, 1995 an aggregate of 335,086 Allied Lending shares,
which reduced its ownership of Allied Lending shares to 1,244,914 shares, or
approximately 28 percent of the Allied Lending shares then outstanding. On
December 26, 1996 the Company sold 400,000 Allied Lending shares through a
private placement, which further reduced its ownership to 844,914 shares, or
approximately 16 percent of the Allied Lending shares then outstanding. The
Company will attempt to divest itself of all shares of Allied Lending by
December 31, 1998.
NOTE 11. QUARTERLY FINANCIAL HIGHLIGHTS (UNAUDITED)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
1996
(in thousands, except per share amounts) Qtr 1 Qtr 2 Qtr 3 Qtr 4
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total investment income $3,752 $ 4,303 $3,437 $4,373
Net investment income $ 982 $ 1,377 $ 748 $1,288
Net increase (decrease) in net assets resulting from operations $4,442 $ (366) $5,705 $1,612
Preferred stock dividends $ 55 $ 55 $ 55 $ 55
Net increase (decrease) in net assets resulting from operations
available to common shareholders $4,387 $ (421) $5,650 $1,557
Per common share $ 0.69 $ (0.06) $ 0.80 $ 0.22
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
1995
Qtr 1 Qtr 2 Qtr 3 Qtr 4
- ----------------------------------------------------------------------------------------------------------------------------
Total investment income $3,549 $ 3,229 $3,564 $3,784
Net investment income $ 881 $ 504 $ 899 $1,048
Net increase in net assets resulting from operations $2,134 $ 7,196 $3,089 $2,898
Preferred stock dividends $ 55 $ 55 $ 55 $ 55
Net increase in net assets resulting from operations
available to common shareholders $2,079 $ 7,141 $3,034 $2,843
Per common share $ 0.34 $ 1.16 $ 0.49 $ 0.46
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Allied Capital Corporation
27
<PAGE> 22
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders
Allied Capital Corporation
We have audited the consolidated balance sheet of Allied Capital Corporation and
its wholly owned subsidiaries as of December 31, 1996 and 1995, including the
consolidated statement of loans and investments as of December 31, 1996, and the
related consolidated statements of operations, changes in net assets and cash
flows for each of the three years in the period ended December 31, 1996, and the
selected per share data presented as financial highlights for each of the five
years in the period ended December 31, 1996. These financial statements and per
share data are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and per
share data based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and per share data
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included the examination or confirmation of securities owned at
December 31, 1996 and 1995. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included the examination or confirmation of securities owned at
December 31, 1996 and 1995. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements and selected per share
data referred to above present fairly, in all material respects, the financial
position of Allied Capital Corporation and its wholly owned subsidiaries as of
December 31, 1996 and 1995, and the consolidated results of their operations,
changes in net assets and cash flows for each of the three years in the period
ended December 31, 1996, and the selected per share data for each of the five
years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
As explained in Note 1, the consolidated financial statements include securities
valued at $116,608,000 as of December 31, 1996 and $123,184,000 as of December
31, 1995, (70 percent and 83 percent, respectively, of total assets) whose
values have been estimated by the Board of Directors in the absence of readily
ascertainable market values. We have reviewed the procedures used by the Board
of Directors in arriving at its estimate of value of such securities and have
inspected underlying documentation, and, in the circumstances, we believe the
procedures are reasonable and the documentation appropriate. However, because of
the inherent uncertainty of valuation, those estimated values may differ
significantly from the values that would have been used had a ready market for
the securities existed, and the differences could be material.
/s/ Matthews, Carter and Boyce
McLean, Virginia
February 4, 1997
Allied Capital Corporation
28
<PAGE> 23
Allied Capital Corporation
DIRECTORS AND OFFICERS*
<TABLE>
<CAPTION>
DIRECTORS OFFICERS
<S> <C> <C>
William L. Walton(1) William L. Walton Kelly A. Anderson
Chairman of the Board & Chairman of the Board & Vice President, Corporate Controller &
Chief Executive Officer Chief Executive Officer Assistant Treasurer
G. Cabell Williams III(1) G. Cabell Williams III Christina L. DelDonna
President & Chief Operating Officer President & Chief Operating Officer Vice President & Assistant Controller
Joseph A. Clorety III(2,3) Jon A. DeLuca Robert M. Monk
President, Clorety and Company, Inc. Executive Vice President, Treasurer & Vice President
Chief Financial Officer
Michael I. Gallie(1,2,3) Penni F. Roll
Principal, The Millennium Group Katherine C. Marien Vice President, Controller &
Executive Vice President Assistant Treasurer
David Gladstone
John M. Scheurer Suzanne V. Sparrow
Warren K. Montouri(2,3) Executive Vice President Vice President, Investor Relations &
Investor Assistant Secretary
George Stelljes III
Guy T. Steuart II(1,3) Executive Vice President Gay S. Truscott
President, Steuart Investment Company Vice President
Joan M. Sweeney
T. Murray Toomey(1) Executive Vice President Peter C. Fisher
Attorney at Law Assistant Vice President
Thomas H. Westbrook
George C. Williams Executive Vice President Kristine M. Lansing
Financial Consultant Assistant Vice President &
Tricia B. Daniels Assistant Secretary
(1) Executive Committee Senior Vice President &Secretary
(2) Audit Committee Donna B. Natale
(3) Compensation Committee Richard E. Fearon, Jr. Assistant Vice President &
Senior Vice President Assistant Secretary
*As of March 1, 1997
Philip A. McNeill Arthur S. Cooper
Senior Vice President Assistant Secretary
Carr T. Preston Thomas R. Salley III
Senior Vice President Assistant Secretary
</TABLE>
QUARTERLY STOCK PRICE AND DISTRIBUTIONS TO SHAREHOLDERS
The following table sets forth the high and low bid prices of the Company's
common stock by calendar quarter during 1996 and 1995 and the distributions per
common share. The quotations represent interdealer quotations and do not include
markups, markdowns or commissions and may not necessarily represent actual
transactions.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
1996 1995
DISTRIBUTIONS DISTRIBUTIONS
HIGH LOW PER SHARE HIGH LOW PER SHARE
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FIRST QUARTER $14.25 $13.00 $0.26 $13.50 $11.50 $0.20
SECOND QUARTER $14.38 $13.00 $0.27 $12.00 $11.13 $0.20
THIRD QUARTER $16.00 $13.50 $0.29 $13.75 $11.25 $0.22
FOURTH QUARTER $16.63 $15.25 $0.31 $14.25 $12.25 $0.24
ANNUAL EXTRA DISTRIBUTION $0.38 $0.58
----- -----
TOTAL DISTRIBUTION $1.51 $1.44
===== =====
</TABLE>
Designed by Curran & Connors, Inc.
<PAGE> 1
EXHIBIT 23
[MATTHEWS, CARTER AND BOYCE LETTERHEAD]
CONSENT OF INDEPENDENT ACCOUNTANTS
As independent accountants we hereby consent to the incorporation by reference
in the registration statement on Form S-8 File No. 33-78394, of our report
dated February 4, 1997 incorporated by reference in Allied Capital
Corporation's Form 10-K for the year ended December 31, 1996 and to all
references to our Firm included in such registration statement.
/s/ MATTHEWS, CARTER AND BOYCE
McLean, Virginia
March 27, 1997
<PAGE> 2
[MATTHEW, CARTER AND BOYCE LETTERHEAD]
CONSENT OF INDEPENDENT ACCOUNTANTS
As independent accountants we hereby consent to the incorporation by reference
in this Form 10-K of our report dated February 4, 1997 included in Allied
Capital Corporation's Annual Report to shareholders. It should be noted that we
have not audited any financial statements of the company subsequent to December
31, 1996 or performed any audit procedures subsequent to the date of our
report.
/s/ MATTHEWS, CARTER AND BOYCE
McLean, Virginia
March 27, 1997
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ALLIED
CAPITAL CORPORATION AND SUBSIDIARIES' CONSOLIDATED BALANCE SHEET AND
CONSOLIDATED STATEMENTS OF OPERATIONS, CHANGES IN NET ASSETS AND CASH FLOWS AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
INCORPORATED BY REFERENCE IN FORM 10-K.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 112,538
<INVESTMENTS-AT-VALUE> 116,608
<RECEIVABLES> 0
<ASSETS-OTHER> 4,228
<OTHER-ITEMS-ASSETS> 44,915
<TOTAL-ASSETS> 165,751
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 90,600
<OTHER-ITEMS-LIABILITIES> 5,831
<TOTAL-LIABILITIES> 96,431
<SENIOR-EQUITY> 13,299
<PAID-IN-CAPITAL-COMMON> 50,681
<SHARES-COMMON-STOCK> 7,299
<SHARES-COMMON-PRIOR> 6,198
<ACCUMULATED-NII-CURRENT> 270
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 4,070
<NET-ASSETS> 68,320
<DIVIDEND-INCOME> 1,618
<INTEREST-INCOME> 13,996
<OTHER-INCOME> 251
<EXPENSES-NET> 11,470
<NET-INVESTMENT-INCOME> 4,395
<REALIZED-GAINS-CURRENT> 10,497
<APPREC-INCREASE-CURRENT> (3,499)
<NET-CHANGE-FROM-OPS> 11,393
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1,627
<DISTRIBUTIONS-OF-GAINS> 9,319
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,008
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 93
<NET-CHANGE-IN-ASSETS> 11,139
<ACCUMULATED-NII-PRIOR> (3,676)
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 355
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,933
<INTEREST-EXPENSE> 7,566
<GROSS-EXPENSE> 11,470
<AVERAGE-NET-ASSETS> 62,750
<PER-SHARE-NAV-BEGIN> 8.26
<PER-SHARE-NII> 0.63
<PER-SHARE-GAIN-APPREC> 1.01
<PER-SHARE-DIVIDEND> 0.20
<PER-SHARE-DISTRIBUTIONS> 1.31
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.54
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 86,700
<AVG-DEBT-PER-SHARE> 11.88
</TABLE>
<PAGE> 1
EXHIBIT 28
OMB Approval No. 3245-0063
Expiration Date
ANNUAL FINANCIAL REPORT
ON SBA FORM 468
(CORPORATE SBICs)
- --------------------------------------------------------------------------------
NAME OF LICENSEE: Allied Investment Corporation 03/04-0003
- --------------------------------------------------------------------------------
STREET ADDRESS: 1666 K Street, N.W. - 9th Floor
- --------------------------------------------------------------------------------
CITY, STATE AND ZIP CODE: Washington DC 20006
- --------------------------------------------------------------------------------
COUNTY:
- --------------------------------------------------------------------------------
EMPLOYER ID NUMBER: 52-1081051
- --------------------------------------------------------------------------------
FOR THE FISCAL YEAR ENDED: 12/31/96
- --------------------------------------------------------------------------------
SUMMARY INFORMATION:
---------------
A B C
---------------
5 3 1
---------------
A - TOTAL ASSETS AT COST 1 = LESS THAN $1 MILLION
2 = $1 MILLION TO LESS THAN $2 MILLION
3 = $2 MILLION TO LESS THAN $5 MILLION
4 = $5 MILLION TO LESS THAN $10 MILLION
5 = $10 MILLION OR MORE
B - OWNERSHIP OWNED BY BANK OR BANK HOLDING COMPANY ("BHC"):
1 = AT LEAST 50% OWNED BY BANK OR BHC
2 = AT LEAST 10% AND LESS THAN 50% OWNED BY
BANK OR BHC
OWNED BY FINANCIAL CORPORATION (OTHER THAN BANK
OR BHC):
3 = PUBLICLY OWNED
4 = PRIVATELY OWNED
OWNED BY NON-FINANCIAL CORPORATION:
5 = PUBLICLY OWNED
6 = PRIVATELY OWNED
OWNED BY INDIVIDUALS:
7 = PUBLICLY OWNED
8 = PRIVATELY OWNED
OWNED BY PARTNERSHIP
9 = PUBLICLY OWNED
10 = PRIVATELY OWNED
C - INDUSTRY CONCENTRATION 1 = DIVERSIFIED
2 = NON-DIVERSIFIED (SIC CODE____)
NOTE: Public reporting burden for this collection of information is estimated
to average 17 hours per response, including time for reviewing instructions,
searching existing data sources, gathering and maintaining the data needed, and
completing and reviewing the form. Send comments regarding this burden
estimate or any other aspect of this collection of information, including
suggestions for reducing this burden, to: Chief, Administrative Information
Branch, U.S. Small Business Administration, Washington, DC 20416, and to the
Office of Information and Regulatory Affairs, Office of Management and Budget,
Washington, DC 20503.
SBA Form 468.1 (1-95) Previous editions obsolete Page 1C
<PAGE> 2
OMB Approval No. 3245-0063
Expiration Date
STATEMENT OF FINANCIAL POSITION
AS OF 12/31/96
(Amounts rounded to nearest dollar)
Name of Licensee Allied Investment Corporation License No. 03/04-0003
<TABLE>
<CAPTION>
UNREALIZED UNREALIZED
ASSETS COST DEPRECIATION APPRECIATION VALUE(1)
------ -----------------------------------------------------------
LOANS AND INVESTMENTS (Col.1) (Col.2) (Col.3) (Col.4)
- ---------------------
<S> <C> <C> <C> <C>
Portfolio Securities:
1 Loans 9,388,465 1 332,566 9,721,030
------------ ----------- ----------- ------------
2 Debt Securities 38,881,037 5,304,050 1 33,576,988
------------ ----------- ----------- ------------
3 Equity Securities 7,727,768 2,646,489 5,874,481 10,955,760
------------ ----------- ----------- ------------
4 TOTAL PORTFOLIO SECURITIES 55,997,270 7,950,540 6,207,048 54,253,778
------------ ----------- ----------- ------------
Assets Acquired in Liquidation of Portfolio Securities:
5 Receivables from Sale of Assets Acquired 0 0 0 0
------------ ----------- ----------- ------------
6 Assets Acquired 115,454 98,954 0 16,500
------------ ----------- ----------- ------------
7 TOTAL ASSETS ACQUIRED 115,454 98,954 0 16,500
------------ ----------- ----------- ------------
8 Operating Concerns Acquired 0 0 0 0
------------ ----------- ----------- ------------
9 Notes and Other Securities Received 1,462,410 376,862 107,369 1,192,917
------------ ----------- ----------- ------------
10 TOTAL LOANS AND INVESTMENTS 57,575,134 8,426,356 6,314,417 55,463,195
------------ ----------- ----------- ------------
11 Less Current Maturities 4,008,787
------------
12 Loans and Investments Net of Current Maturities 51,454,408
------------
Investment in 301(d) Licensee (2):
13 Name 0
----------------------------------- ------------
License No.
----------------
CURRENT ASSETS
--------------
14 Cash and Cash Equivalents 19,114,819
-----------
15 Invested Idle Funds 0 19,114,819
----------- -----------
16 Interest and Dividends Receivable 852,432
-----------
17 Notes and Accounts Receivable 363,615
-----------
18 Receivables from Parent or Other Associates 6,275
-----------
19 Less: Allowance for Losses (lines 16, 17 & 18) 82,554 1,139,768
----------- -----------
20 Current Maturities of Portfolio Securities 4,008,787
-----------
21 Current Maturities of Assets Acquired 0
-----------
22 Current Maturities of Operating
Concerns Acquired 0
-----------
23 Current Maturities of Other Securities 0 4,008,787
----------- -----------
24 Other (specify) 0
-------------------------- -----------
25 Other (specify) 0 24,263,374
------------------------- ----------- ------------
OTHER ASSETS
------------
26 a. Furniture and Equipment 0
-----------
b. Less: Accumulated Depreciation 0 0
------------ -----------
27 Other (specify) Loan Fees Unamortized 643,976
-------------------------- -----------
28 Other (specify) Prepaid Expenses & other 13,474 657,450
-------------------------- ----------- ------------
29 TOTAL ASSETS $76,375,232
------------
</TABLE>
(1) Column Headings apply to items 1 through 12 only. (Cost - Unrealized
Depreciation + Unrealized Appreciation = Value)
(2) A note to item 13 should include percent owned, cost basis and changes
resulting from equity method of accounting.
SBA Form 468.1 (1-95) Previous editions obsolete Page 2C
<PAGE> 3
OMB Approval No. 3245-0063
Expiration Date
STATEMENT OF FINANCIAL POSITION
AS OF 12/31/96
(Amounts rounded to nearest dollar)
Name of Licensee Allied Investment Corporation License No. 03/04-0003
<TABLE>
<S> <C> <C> <C> <C>
LIABILITIES AND CAPITAL
-----------------------
LONG-TERM DEBT (Net of Current Maturities)
- ------------------------------------------
30 Notes and Debentures Payable to or
Guaranteed by SBA 37,350,000
-----------
31 Notes and Debentures Payable to Others 3,433,334 40,783,334
----------- ------------
CURRENT LIABILITIES
- -------------------
32 Accounts Payable and Accrued Expenses 22,373
-----------
33 Due to Parent or Other Associates 45,951
-----------
34 Accrued Interest Payable 936,054
-----------
35 Accrued Taxes Payable 0
-----------
36 a. Current Maturities of Line 30 5,000,000
-----------
b. Current Maturities of Line 31 0 5,000,000
----------- -----------
37 Distributions Payable 2,394,096
-----------
38 Short-term Notes Payable/Lines of Credit 0
-----------
39 Other(specify) 0
------------------------- -----------
40 Other(specify) 0 8,398,474
------------------------- ----------- ------------
OTHER LIABILITIES
- -----------------
41 Deferred Credits 565,970
-----------
42 Other(specify) 0
------------------------- -----------
43 Other(specify) 0 565,970
------------------------- ----------- ------------
44 TOTAL LIABILITIES 49,747,778
------------
REDEEMABLE SECURITIES (guaranteed or purchased by SBA)
- ------------------------------------------------------
45 a. 4% Redeemable Preferred Stock (301(d) Licensees only) 0
-----------
b. Cumulative Undeclared 4% Dividends 0 0
----------- -----------
46 TOTAL REDEEMABLE SECURITIES 0
------------
CAPITAL
- -------
47 Capital Stock 61
------------
48 Paid-in Surplus 15,187,920 15,187,981
------------ -----------
49 Restricted Contributed Capital Surplus 0
-----------
50 Capital Stock and Surplus 15,187,981
-----------
51 3% Preferred Stock Purchased by SBA 0
-----------
52 Unrealized Gain (Loss) on Securities Held -2,111,940
-----------
53 Non-Cash Gains/Income 1,695,375
-----------
54 Undistributed Net Realized Earnings:
a. Restricted (Equal to Cost of Treasury Stock) 0
------------
b. Unrestricted 11,856,038
------------
c. Total (54a plus 54b) 11,856,038
-----------
55 Undistributed Realized Earnings (53 plus 54c) 13,551,413
-----------
56 Total 26,627,454
------------
57 Less: Cost of Treasury Stock 0
------------
58 TOTAL CAPITAL 26,627,454
------------
59 TOTAL LIABILITIES, REDEEMABLE SECURITIES
AND CAPITAL (lines 44 plus 46 plus 58) $76,375,232
------------
</TABLE>
SBA Form 468.1 (1-95) Previous editions obsolete Page 3C
<PAGE> 4
OMB Approval No. 3245-0063
Expiration Date
STATEMENT OF OPERATIONS REALIZED
FOR 12 MONTHS ENDED 12/31/96
(Amounts rounded to nearest dollar)
Name of Licensee Allied Investment Corporation License No. 03/04-0003
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
- -----------------
1 Interest Income 5,901,035
----------
2 Dividend Income 31,331
----------
3 Income (Loss) from Investments in Partnerships/Flow-through Entities 0
----------
4 Income (Loss) from Investment in Section 301(d) Licensee 0
----------
5 Fees for Management Services 0
----------
6 Processing and Other Fees 19,592
----------
7 Interest on Invested Idle Funds 825,813
----------
8 Income from Assets Acquired in Liquidation of
Loans and Investments (net of 0 Expenses) 0
-------- ----------
9 Other Income 6,665
----------
10 GROSS INVESTMENT INCOME 6,784,436
-----------
EXPENSES
- --------
11 Interest Expense 3,940,373
----------
12 Commitment Fees 0
----------
13 Other Financial Cost 0
----------
14 Officers' Compensation and Benefits 0
----------
15 Employee Compensation and Benefits 0
----------
16 Investment Advisory and Management Services 0
----------
17 Directors' and Stockholders' Meetings 0
----------
18 Advertising and Promotion 0
----------
19 Appraisal and Investigation 0
----------
20 Communication 0
----------
21 Travel 1,781
----------
22 Cost of Space Occupied 0
----------
23 Depreciation and Amortization 0
----------
24 Insurance 5,706
----------
25 Payroll Taxes 0
----------
26 Other Taxes (excluding income taxes) 1,307
----------
27 Provision for Losses on Receivables (excluding loans receivable) 343,876
----------
28 Legal Fees 98,444
----------
29 Audit and Examination Fees 16,591
----------
30 Miscellaneous Expenses (attach schedule) 8,041
----------
31 TOTAL EXPENSES 4,416,119
-----------
32 NET INVESTMENT INCOME (LOSS) BEFORE INCOME TAXES 2,368,317
-----------
33 NET REALIZED GAIN (LOSS) ON INVESTMENTS BEFORE INCOME TAXES (1) 761,856
-----------
34 NET INCOME (LOSS) BEFORE INCOME TAXES AND NONRECURRING ITEMS 3,130,173
-----------
35 Income Tax Expense (Benefit) 0
-----------
36 NET INCOME (LOSS) BEFORE NONRECURRING ITEMS $3,130,173
-----------
37 Extraordinary Item 0
-------------------- -----------
38 Cumulative Effect of Change in Accounting Principle 0
-----------
39 NET INCOME (LOSS) $3,130,173
-----------
</TABLE>
(1)Include CHARGE-OFFS (full or partial) of loans and investments which
represent realized losses. DO NOT INCLUDE valuation adjustments classified
as unrealized appreciation or depreciation. Provide supporting detail for
all realized gains and losses on page 14C of this form.
SBA Form 468.1 (1-95) Previous editions obsolete Page 4C
<PAGE> 5
OMB Approval No. 3245-0063
Expiration Date
STATEMENT OF CASH FLOWS
FOR 12 MONTHS ENDED 12/31/96
(page 1 of 2)
Name of Licensee Allied Investment Corporation License No. 03/04-0003
(Amounts rounded to nearest dollar)
<TABLE>
<S> <C> <C>
OPERATING ACTIVITIES:
- ---------------------
CASH INFLOWS:
1 Interest Received from Portfolio Concerns 4,473,547
----------
2 Dividends Received from Portfolio Concerns 23,831
----------
3 Other Returns on Capital Received from Portfolio Concerns 0
----------
4 Management Services and Other Fees Received 386,525
----------
5 Interest on Invested Idle Funds 827,175
----------
6 Cash Received from Assets Acquired in Liquidation 0
----------
7 Other Operating Cash Receipts 297,432
----------
CASH OUTFLOWS:
8 Interest Paid 3,788,348
----------
9 Commitment Fees and Other Financial Costs 0
----------
10 Investment Advisory and Management Fees 0
----------
11 Officers, Directors and Employees Compensation and Benefits 0
----------
12 Operating Expenditures (excluding compensation and benefits) 150,041
----------
13 Income Taxes Paid 0
----------
14 Other Operating Cash Disbursements 99,429
----------
15 NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 1,970,692
-----------
INVESTING ACTIVITIES:
- ---------------------
Cash Inflows:
16 Loan Principal Payments Received from Portfolio Concerns 20,433,368
----------
17 Returns of Capital Received from Portfolio Concerns 195,684
----------
18 Net Proceeds from Disposition of Portfolio Securities 5,077,541
----------
19 Liquidation of Idle Funds Investments 0
----------
20 Other (Specify) 0
------------------------- ----------
Cash Outflows:
21 Purchase of Portfolio Securities 2,142,559
----------
22 Loans to Portfolio Concerns 19,983,547
----------
23 Idle Funds Investments 0
----------
24 Other (Specify) 0
-------------------------- ----------
25 NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 3,580,487
-----------
FINANCING ACTIVITIES:
- ---------------------
Cash Inflows:
26 Proceeds from Issuance of SBA-Guaranteed Debentures 0
----------
27 Proceeds from Sale of 4% Preferred Stock 0
----------
28 Proceeds from Non-SBA Borrowing 600,000
----------
29 Proceeds from Sale of Stock 2,100,000
----------
30 Other (Specify) 0
-------------------------- ----------
Cash Outflows:
31 Principal Payments on SBA-Guaranteed Debentures 0
----------
32 Principal Payments on Non-SBA Borrowing 0
----------
33 Redemption of 4% Preferred Stock 0
----------
34 Redemption of 3% Preferred Stock 0
----------
35 Redemption of Stock (excluding 3% and 4% Preferred) 0
----------
36 Dividends Paid 1,833,519
----------
37 Other (Specify) 0
-------------------------- ----------
</TABLE>
SBA Form 468.1 (1-95) Previous editions obsolete Page 5C
<PAGE> 6
OMB Approval No. 3245-0063
Expiration Date
STATEMENT OF CASH FLOWS
FOR 12 MONTHS ENDED 12/31/96
(page 2 of 2)
Name of Licensee Allied Investment Corporation License No. 03/04-0003
(Amounts rounded to nearest dollar)
<TABLE>
<S> <C> <C>
38 NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 866,482
-----------
39 INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 6,417,661
-----------
40 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 12,697,158
-----------
41 CASH AND CASH EQUIVALENTS AT END OF PERIOD (line 14, page 2C) $19,114,819
-----------
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH PROVIDED
- --------------------------------------------------------
BY (USED IN) OPERATING ACTIVITIES:
- ----------------------------------
42 Net Income (Loss) (page 4C, line 39) 3,130,173
----------
Adjustments to Reconcile Net Income (Loss) to Net
Cash Provided by (Used in) Operating Activities:
43 Depreciation and Amortization 0
----------
44 Provision for Losses on Accounts Receivable 343,876
----------
45 Provision for Deferred Income Taxes 0
----------
46 (Income) Loss from Investments in Partnerships/Flow-through
Entities (excluding income received in cash) 0
----------
47 Realized (Gains) Losses on Investments -761,856
----------
48 Other (Specify) OID -301,672
------------------------- ----------
Changes in Operating Assets and Liabilities
Net of Noncash Items:
49 (Increase) Decrease in Interest and Dividends Receivable -836,516
----------
50 (Increase) Decrease in Other Current Assets 401,420
----------
51 Increase (Decrease) in Accounts Payable -18,170
----------
52 Increase (Decrease) in Accrued Interest Payable 49,136
----------
53 Increase (Decrease) in Accrued Taxes Payable 0
----------
54 Increase (Decrease) in Dividends Payable 0
----------
55 Increase (Decrease) in Other Current Liabilities -115,445
----------
56 Other (Specify) Deferred Credits 79,746
------------------------ ----------
57 Other (Specify) 0
------------------------ ----------
58 NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $1,970,692
----------
</TABLE>
Supplemental disclosure of non-cash financing and investing activities is
required. See FASB Statement No. 95, paragraph 32.
SBA Form 468.1 (1-95) Previous editions obsolete Page 6C
<PAGE> 7
ALLIED INVESTMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization. Allied Investment Corporation (the Company), a wholly owned
subsidiary of Allied Capital Corporation (Parent), is a closed-end management
investment company under the Investment Company Act of 1940. The Company is
licensed under the Small Business Investment Act of 1958 as a Small Business
Investment Company (SBIC). The Company seeks to achieve a high level of
current income by providing debt, mezzanine and equity financing for small
privately owned growth companies, and through long-term growth on the value of
its net assets.
Valuation of Investments. Investments are carried at value, as determined by
the board of directors. Loans and debt securities, which are not publicly
traded, and warrants and stocks for which there is no public market are valued
based on collateral, the ability to make payments, the earnings of the investee
and other pertinent factors. The values assigned are considered to be amounts
which could be realized in the normal course of business or from an orderly
sale or other disposition of the investments. In the normal course of
business, loans and debt securities are held to maturity, and the amount
realized, in addition to interest, is the face value, which may equal or exceed
cost.
Equity securities which are publicly traded are generally valued at their
quoted market price, less a discount to reflect the effects of restrictions on
the sale of such securities.
Cash and cash equivalents are carried at cost which approximates fair value.
Interest and Dividend Income. Interest income is recorded on the accrual basis
to the extent that such amounts are expected to be collected. When collection
of interest is in doubt, interest is not accrued or a reserve is established.
Loan fees and original issue discount are amortized into interest income using
the effective interest method. Dividend income is recognized on the
ex-dividend date.
Realized Gains or Losses and Unrealized Appreciation or Depreciation on
Investments. Realized gains or losses are measured by the difference between
the proceeds from the sale and the cost basis of the investment without regard
to unrealized appreciation or depreciation previously recognized, and include
investments written off during the year, net of recoveries. Unrealized
appreciation or depreciation reflects the change in the valuation of the
portfolio.
Distributions to the Parent. Distributions to the Parent are recorded on the
ex-dividend date.
Federal Income Taxes. The Company's objective is to comply with the
requirements of the Internal Revenue Code that are applicable to regulated
investment companies. The Company annually distributes all of its taxable
income to the Parent; therefore, a federal income tax provision is not
required.
<PAGE> 8
ALLIED INVESTMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
In addition, no provision for deferred income taxes has been made for the
unrealized appreciation on investments since the Company intends to continue to
annually distribute all of its taxable income.
Dividends declared by the Company in December, but paid during January of the
following year, are treated as if the dividends were received by the Parent on
December 31 of the year declared.
Cash and Cash Equivalents. Cash equivalents consist of highly liquid
investments with insignificant interest rate risk and original maturities of
three months or less at the acquisition date.
NOTE 2. INVESTMENTS
Loans and debt securities have stated interest rates ranging generally from 8
percent to 16 percent, and are generally payable in installments with final
maturities from 5 years to 10 years from date of issue.
There were no accrued interest reserves at December 31, 1996. The following
loans and debt securities were not accruing interest at December 31, 1996:
<TABLE>
<CAPTION>
AGGREGATE AMOUNT
OF INTEREST NOT
DATE INTEREST ACCRUED AT
ACCRUAL NET DECEMBER 31,
PORTFOLIO SECURITY DISCONTINUED COST 1996
------------------ ------------ ---- ----
<S> <C> <C> <C>
INTEREST NOT ACCRUED:
Enviroplan 7/1/96 $ 1,936,801 $ 358,613
Enviroplan 7/1/96 529,966 112,997
Medifit 11/1/94 123,109 223,389
Old Mill 9/22/95 542,577 95,087
Old Mill 9/22/95 114,952 19,352
SunStates Refrigerated Services 12/21/94 15,315 3,783
Total Foam 7/1/93 240,292 107,288
</TABLE>
<PAGE> 9
ALLIED INVESTMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
<TABLE>
<CAPTION>
AGGREGATE AMOUNT
OF INTEREST NOT
DATE INTEREST ACCRUED AT
ACCRUAL NET DECEMBER 31,
PORTFOLIO SECURITY DISCONTINUED COST 1996
------------------ ------------ ---- ----
<S> <C> <C> <C>
Total Foam 7/1/93 241,899 106,250
Total Foam 7/1/93 36,000 15,300
Total Foam 7/1/93 45,504 87,240
Total Foam 7/1/93 239,216 106,250
Total Foam 7/1/93 250,000 107,404
Total Foam 7/1/93 250,000 106,250
Total Foam 7/1/93 119,764 50,899
Total Foam 7/1/93 193,118 85,000
-------------- ---------------
Total $ 4,878,513 $ 1,585,102
============== ===============
</TABLE>
NOTE 3. INVESTMENT ADVISORY SERVICES
The Company's investments are managed by Allied Capital Advisers, Inc.
("Advisers"), an independent publicly traded registered investment adviser.
Certain officers of the Company are also officers in Advisers. Pursuant to an
advisory agreement with the Parent, Advisers manages the day-to-day activities
of the Parent and its wholly owned subsidiaries. The Company pays all
operating expenses, except those specifically required to be borne by Advisers.
The expenses paid by Advisers include the compensation of the Company's
officers and the cost of office space, equipment and other personnel required
for the Company's day-to-day operations. In exchange, Advisers is reimbursed
for its costs incurred in connection with the above through an investment
advisory fee paid by the Parent. The expenses that are paid by the Company
include the Company's share of transaction costs incident to the acquisition
and disposition of investments and legal and accounting fees. The Company is
required to pay expenses associated with litigation and other extraordinary or
non-recurring expenses, as well as expenses of required and optional insurance
and bonding. All fees paid by or for the account of an actual or prospective
portfolio company in connection with an investment transaction in
<PAGE> 10
ALLIED INVESTMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
which the Company participates are treated as commitment fees or management
fees and are received by the Company, pro rata to its participation in such
transaction, rather than by Advisers. Advisers is entitled to retain for its
own account any fees paid by or for the account of a company, including a
portfolio company, for special investment banking or consulting work performed
for that company which is not related to such investment transaction or
management assistance.
NOTE 4. DIVIDENDS
The Company's board of directors declared a dividend of $2,394,096 for the year
ended December 31, 1996, which was paid January 30, 1997. This represented all
of the Company's taxable income. Pursuant to SBA regulations, retained
earnings available for distribution at December 31, 1996 were sufficient to pay
this dividend.
NOTE 5. DEBT
Line of Credit. The Parent, the Company and Allied Capital Financial
Corporation have a joint revolving line of credit agreement with a bank under
which they may borrow up to a total of $10,000,000, which bears interest at a
rate of one-month LIBOR plus 2.5 percent per annum, payable monthly, and
expires on September 30, 1998. As of December 31, 1996 the interest on the
line of credit was 8.0 percent per annum. As of December 31, 1996, $10,000,000
was available under the revolving line of credit agreement.
Notes. The Company has $2,833,333 of notes outstanding to an insurance
company. These notes bear interest at a rate of 9.15 percent per annum,
payable semi-annually. The notes are scheduled to mature over a five-year
period commencing in 1998, with annual principal payments of $566,667.
Small Business Administration (SBA) Debentures. Debentures are payable to the
SBA and represent amounts borrowed pursuant to the Small Business Investment
Act of 1958. The debentures require semi-annual interest payments at various
interest rates with the entire principal balance due at maturity. Principal
payments required on these debentures at December 31, 1996 were as follows:
<PAGE> 11
ALLIED INVESTMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
<TABLE>
<CAPTION>
Year Amounts Interest Rates
---- ------- --------------
<S> <C> <C>
1997 $ 5,000,000 7.950% - 10.350%
1998 4,650,000 9.625% - 9.800%
1999 --- ---
2000 7,700,000 8.700% - 9.600%
2001 6,000,000 9.080%
thereafter 19,000,000 6.875% - 8.200%
-----------
$42,350,000
===========
</TABLE>
Proceeds from the SBA debentures may only be used to finance investments in
qualifying small businesses.
Unsecured Notes. The Company is offering up to $50,000,000 in unsecured notes
to banks ("Lender") which qualify as either a "community development loan" or a
"qualified investment" under Community Reinvestment Act (CRA) regulations. The
notes are being offered in multiples of $100,000 and the offering terminates
December 25, 1997. These unsecured notes expire five years from the date of
issuance and pay interest, quarterly in arrears, at the ninety day treasury
rate, adjusted monthly, from the date of issuance until the loan proceeds are
invested in a small business located in the Lender's CRA assessment area. Once
invested, the notes bear a fixed rate of interest equal to the five year
Treasury rate. In addition, the Lender is entitled to receive additional
interest equal to ten percent of the net realized profits generated by the
investment(s) made with the loan from that Lender. The additional interest is
calculated and paid annually. If the Company has not invested the note proceeds
in the Lender's CRA assessment area within two years of the note date, the
Lender's note will be repaid at par plus accrued and unpaid interest. At
December 31, 1996, the Company had outstanding borrowings of $600,000 which
were paying interest at 5.15 percent and will expire December 30, 2001.
NOTE 6. COMMITMENTS AND CONTINGENCIES
The Company had commitments outstanding to various prospective and existing
portfolio companies totaling $2,386,055 at December 31, 1996.
At December 31, 1996, the Company had standby letters of credit and third party
guarantees outstanding totaling $432,595. The conditional commitments under
the letters of credit have been issued by a financial institution on behalf of
the Company to guarantee performance of certain portfolio companies to third
parties. The Company's revolving line of credit has been used as collateral
for one of the letters of credit totaling $168,000.
The Company is party to certain lawsuits in connection with investments it has
made to small businesses. While the outcome of these legal proceedings cannot
at this time be predicted with certainty, management does not expect that these
actions will have a material effect upon the financial position of the Company.
NOTE 7. CONCENTRATIONS OF CREDIT RISK
The Company places its cash in financial institutions and, at times, cash held
in checking accounts may be in excess of the FDIC insurance limit.
<PAGE> 12
OMB Approval No. 3245-0063
Expiration Date
ANALYSIS OF STOCKHOLDERS' EQUITY
AS OF 12/31/96
(page 1 of 2)
Name of Licensee Allied Investment Corporation License No. 03/04-0003
(Amounts rounded to nearest dollar)
<TABLE>
<CAPTION>
Part I. CAPITAL STOCK AND PAID-IN SURPLUS CAPITAL PAID-IN
--------------------------------- STOCK SURPLUS TOTAL
(excluding capital contributed by SBA) ----- ------- -----
(pg 3C, line 47) (pg 3c, line 48)
<S> <C> <C> <C>
1 BALANCE AT BEGINNING OF PERIOD 56 16,198,920 16,198,976
------------ ----------- -----------
2 ADDITIONS:
a. Capital stock issued for cash 5 2,099,995 2,100,000
------------ ----------- -----------
b. Capital stock issued for services rendered 0 0 0
------------ ----------- -----------
c. Capital stock Issued for contributed non-cash assets 0 0 0
------------ ----------- -----------
d. Capitalization of Retained Earnings Available for Distribution 0 0 0
------------ ----------- -----------
e. Gain on sale of Treasury Stock 0 0 0
------------ ----------- -----------
f. Other credits (specify) 0 0 0
---------------- ------------ ----------- -----------
3 Total additions (sum of 2a through 2f) 5 2,099,995 2,100,000
------------ ----------- -----------
4 Subtotal (line 1 plus line 3) 61 18,298,915 18,298,976
------------ ----------- -----------
5 DEDUCTIONS:
a. Retirement of capital stock 0 0 0
------------ ----------- -----------
b. Distributions in partial liquidation 0 0 0
------------ ----------- -----------
c. Loss on sale of Treasury Stock 0 0 0
------------ ----------- -----------
d. Other debits (specify) Excess distributions 0 3,110,995 3,110,995
-------------------- ------------ ----------- -----------
6 Total Deductions (sum of 5a through 5d) 0 3,110,995 3,110,995
------------ ----------- -----------
7 BALANCE AT END OF PERIOD (line 4 minus line 6)--
totals must agree with lines 47 and 48, page 3C $61 $15,187,920 $15,187,981
------------ ----------- -----------
- -----------------------------------------------------------------------------------------------------------------------------------
Part II. UNDISTRIBUTED REALIZED EARNINGS NON-CASH UNDISTRIBUTED UNDISTRIBUTED
------------------------------- GAINS/ NET REALIZED REALIZED
INCOME EARNINGS EARNINGS
------ -------- --------
(1) (2) (1) + (2)
1 BALANCE AT BEGINNING OF PERIOD 1,580,357 8,123,984 9,704,341
------------ ----------- -----------
2 ADDITIONS:
a. Net investment income 122,001 2,246,316 2,368,317
------------ ----------- -----------
b. Realized gain (loss) on investments 611,433 150,423 761,856
------------ ----------- -----------
c. Gain on appreciation of securities distributed in kind 0 /////////// 0
------------ ----------- -----------
d. Other (specify) Excess distributions 0 3,110,995 3,110,995
-------------------- ------------ ----------- -----------
3 Total additions (sum of 2a through 2d) 733,434 5,507,734 6,241,168
------------ ----------- -----------
4 Subtotal (line 1 plus line 3) 2,313,791 13,631,718 15,945,509
------------ ----------- -----------
5 DEDUCTIONS:
a. Dividends--Cash //////////// 2,394,096 2,394,096
------------ ----------- -----------
b. Dividends--Stock //////////// 0 0
------------ ----------- -----------
c. Dividends--In-kind (at fair value) 0 0 0
------------ ----------- -----------
d. Capitalization of Retained Earnings Available for Distribution //////////// 0 0
------------ ----------- -----------
e. Other (specify) 0 0 0
-------------------- ------------ ----------- -----------
6 Total deductions (sum of 5a through 5e) 0 2,394,096 2,394,096
------------ ----------- -----------
7 Total before collection of non-cash gains/income (line 4 minus
line 6) 2,313,791 11,237,622 13,551,413
------------ ----------- -----------
8 ADJUSTMENT: Collection of non-cash gains/income -618,416 618,416 ///////////
------------ ----------- -----------
9 BALANCE AT END OF PERIOD (line 7 plus line 8)--
total must agree with lines 53, 54c, and 55, page 3C $1,695,375 $11,856,038 $13,551,413
------------ ----------- -----------
</TABLE>
SBA Form 468.1 (1-95) Previous editions obsolete Page 7C
<PAGE> 13
OMB Approval No. 3245-0063
Expiration Date
ANALYSIS OF STOCKHOLDERS' EQUITY
AS OF 12/31/96
(page 2 of 2)
Name of Licensee Allied Investment Corporation License No. 03/04-0003
(Amounts rounded to nearest dollar)
<TABLE>
<S> <C> <C> <C>
PART III. UNREALIZED GAIN (LOSS) ON SECURITIES HELD
-----------------------------------------
1 NET UNREALIZED APPRECIATION (DEPRECIATION)
AT BEGINNING OF PERIOD -4,069,306
-----------
2 INCREASE (DECREASE) IN UNREALIZED APPRECIATION
a. Portfolio securities:
(i) Increases 2,858,517
-----------
(ii) Decreases due to revaluation of securities -3,084,258
-----------
(iii) Decreases due to sale of securities -732,885
-----------
(iv) Decreases due to write-off of securities 0 -958,626
----------- -----------
b. Assets acquired in liquidation of portfolio securities 0
-----------
c. Operating concerns acquired 0
-----------
d. Notes and other securities received 107,369
-----------
3 TOTAL (sum of 2a through 2d) -851,257
-----------
4 Subtotal (line 1 plus line 3) -4,920,563
-----------
5 (INCREASE) DECREASE IN UNREALIZED DEPRECIATION
a. Portfolio securities
(i) Increases -2,261,707
-----------
(ii) Decreases due to revaluation of securities 375,296
-----------
(iii) Decreases due to sale of securities/repayment of principal 4,855,180
-----------
(iv) Decreases due to write-off of securities 83,751 3,052,520
----------- -----------
b. Assets Acquired in liquidation of portfolio securities 46,527
-----------
c. Operating concerns acquired 0
-----------
d. Notes and other securities received -290,424
-----------
6 TOTAL (sum of 5a through 5d) 2,808,623
-----------
7 NET UNREALIZED APPRECIATION (DEPRECIATION) AT
END OF PERIOD (line 4 plus line 6) -2,111,940
-----------
8 LESS: Estimated future tax expense (benefit)
on net unrealized appreciation (depreciation) 0
-----------
9 UNREALIZED GAIN (LOSS) ON SECURITIES HELD--
total must agree with line 52, page 3C $-2,111,940
-----------
</TABLE>
SBA Form 468.1 (1-95) Previous editions obsolete
Page 8C
<PAGE> 14
OMB Approval No. 3245-0063
Expiration Date
I. RETAINED EARNINGS AVAILABLE FOR DISTRIBUTION
II. REGULATORY AND LEVERAGEABLE CAPITAL
AS OF 12/31/96
{Amounts rounded to nearest dollar)
Name of Licensee Allied Investment Corporation License No. 03/04-0003
<TABLE>
<CAPTION>
PART I. RETAINED EARNINGS AVAILABLE FOR DISTRIBUTION OR CAPITALIZATION
--------------------------------------------------------------
<S> <C> <C>
1 Undistributed Net Realized Earnings--Unrestricted (line 54b, page 3C) 11,856,038
-------------
2 LESS: Unrealized Depreciation (line 10, column 2, page 2C) 8,426,356
-------------
3 ADD: Cumulative Undeclared Dividends on 4% Redeemable
Preferred Stock--Section 301(d) Licensees only {line 45b, page 3C) 0
-------------
4 RETAINED EARNINGS AVAILABLE FOR DISTRIBUTION OR CAPITALIZATION 3,429,682
-------------
- ---------------------------------------------------------------------------------------------------------------------------
PART II. SCHEDULE OF REGULATORY AND LEVERAGEABLE CAPITAL
-----------------------------------------------
1 Capital Stock and Paid-in Surplus (sum of lines 47 and 48, page 3C) 15,187,981
-------------
2 ADD: Unfunded binding commitments from Institutional Investors 0
-------------
3 LESS: Regulatory Deductions:
a. Organizational Expenses Not Approved by SBA (1) ( 0)
--------------
b. Capital Stock Issued for Services ( 0)
--------------
c. Capital Stock Issued for Non-cash Assests (unless approved by SBA
for inclusion in Regulatory Capital or converted to cash) ( 0)
--------------
d. Investment in 301(d) Licensee ( 0)
--------------
e. Treasury Stock at cost ( 0)
--------------
f. Other (specify) ( 0)
-------------------- --------------
4 Total Regulatory Deductions (Sum of 3a through 3f) ( 0)
--------------
5 REGULATORY CAPITAL (sum of lines 1, 2, and 4) 15,187,981
-------------
6 LESS: Unfunded binding commitments from Institutional Investors ( 0)
--------------
7 LESS: "Qualified non-private funds" invested by Federal agencies ( 0)
--------------
8 LESS: Non-cash assests included in Regulatory Capital, other than ( 0)
eligible investments in Small Concerns --------------
9 LESS: Other deductions (specify) 0
------------------- --------------
10 LEVERAGEABLE CAPITAL (sum of lines 5 through 8) 15,187,981
--------------
PART IIa. ADJUSTMENTS TO REGULATORY CAPITAL FOR CAPITAL
IMPAIRMENT AND OVERLINE PURPOSES
---------------------------------------------
</TABLE>
COMPLETE THIS PART IIa ONLY IF (1) LICENSEE HAS COMPLETED THE REPURCHASE OF ITS
3% PREFERRED STOCK FROM SBA, AND/OR (2) PURSUANT TO 13 CFR 107.303(c), LICENSEE
WISHES TO INCREASE ITS OVERLINE LIMITATION BY THE AMOUNT OF ITS NET UNREALIZED
GAINS ON MARKETABLE SECURITIES (see note (2) below).
<TABLE>
<S> <C>
11 REGULATORY CAPITAL (Part II, line 5) 15,187,981
-------------
12 ADD: Restricted Contributed Capital Surplus {line 49, page 3C) 0
-------------
13 ADJUSTED REGULATORY CAPITAL FOR IMPAIRMENT PURPOSES (line 11 plus 0
line 12 if line 12 greater than O) -------------
14 ADD: Net Unrealized Gains on Marketable Securities (3) 0
-------------
15 ADJUSTED REGULATORY CAPITAL FOR OVERLINE PURPOSES (line 13 plus line 14 $0
if line 12 or line 14 greater than O) -------------
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Deduct only those organizational expenses which were not accepted as
reasonable by SBA and which have not been amortized. See example in
"Instructions for Preparation of SBA Form 468."
(2) Licensee must have positive Retained Earnings Available for Distribution in
order to establish an increased overline limit pursuant to
13 CFR 107.303(c).
(3) As defined in 13 CFR 107,303(c). Attach a schedule showing the following for
each marketable security: name of Small Business Concern, market in which
traded, names of market makers for companies not listed on a stock exchange
or NASDAQ, class of security, cost, valuation, and unrealized gain or loss
in accordance with the requirements of Section 107.303(c).
SBA Form 468.1 (1-95) Previous editions obsolete Page 9C
<PAGE> 15
OMB Approval No. 3245-0063
Expiration Date
ANNUAL FINANCIAL REPORT
ON SBA FORM 468
(CORPORATE SBICs)
- --------------------------------------------------------------------------------
NAME OF LICENSEE: Allied Capital Financial Corporation 03/03-5163
- --------------------------------------------------------------------------------
STREET ADDRESS: 1666 K Street, NW 9th Floor
- --------------------------------------------------------------------------------
CITY, STATE AND ZIP CODE: Washington DC 20006
- --------------------------------------------------------------------------------
COUNTY:
- --------------------------------------------------------------------------------
EMPLOYER ID NUMBER: 52-1278855
- --------------------------------------------------------------------------------
FOR THE FISCAL YEAR ENDED: 12/31/96
- --------------------------------------------------------------------------------
SUMMARY INFORMATION:
---------------
A B C
---------------
5 3 1
---------------
A - TOTAL ASSETS AT COST 1 = LESS THAN $1 MILLION
2 = $1 MILLION TO LESS THAN $2 MILLION
3 = $2 MILLION TO LESS THAN $5 MILLION
4 = $5 MILLION TO LESS THAN $10 MILLION
5 = $10 MILLION OR MORE
B - OWNERSHIP OWNED BY BANK OR BANK HOLDING COMPANY ("BHC"):
1 = AT LEAST 50% OWNED BY BANK OR BHC
2 = AT LEAST 10% AND LESS THAN 50% OWNED BY
BANK OR BHC
OWNED BY FINANCIAL CORPORATION (OTHER THAN BANK
OR BHC):
3 = PUBLICLY OWNED
4 = PRIVATELY OWNED
OWNED BY NON-FINANCIAL CORPORATION:
5 = PUBLICLY OWNED
6 = PRIVATELY OWNED
OWNED BY INDIVIDUALS:
7 = PUBLICLY OWNED
8 = PRIVATELY OWNED
OWNED BY PARTNERSHIP
9 = PUBLICLY OWNED
10 = PRIVATELY OWNED
C - INDUSTRY CONCENTRATION 1 = DIVERSIFIED
2 = NON-DIVERSIFIED (SIC CODE____)
NOTE: Public reporting burden for this collection of information is estimated
to average 17 hours per response, including time for reviewing instructions,
searching existing data sources, gathering and maintaining the data needed, and
completing and reviewing the form. Send comments regarding this burden
estimate or any other aspect of this collection of information, including
suggestions for reducing this burden, to: Chief, Administrative Information
Branch, U.S. Small Business Administration, Washington, DC 20416, and to the
Office of Information and Regulatory Affairs, Office of Management and Budget,
Washington, DC 20503.
SBA Form 468.1 (1-95) Previous editions obsolete Page 1C
<PAGE> 16
OMB Approval No. 3245-0063
Expiration Date
STATEMENT OF FINANCIAL POSITION
AS OF 12/31/96
(Amounts rounded to nearest dollar)
Name of Licensee Allied Captial Financial Corporation License No. 03/03-5163
<TABLE>
<CAPTION>
UNREALIZED UNREALIZED
ASSETS COST DEPRECIATION APPRECIATION VALUE(1)
------ -----------------------------------------------------------
LOANS AND INVESTMENTS (Col.1) (Col.2) (Col.3) (Col.4)
- ---------------------
<S> <C> <C> <C> <C>
Portfolio Securities:
1 Loans 17,394,318 352,857 3 17,041,464
------------ ----------- ----------- ------------
2 Debt Securities 7,926,705 0 0 7,926,705
------------ ----------- ----------- ------------
3 Equity Securities 410,370 281,727 0 128,643
------------ ----------- ----------- ------------
4 TOTAL PORTFOLIO SECURITIES 25,731,393 634,584 3 25,096,812
------------ ----------- ----------- ------------
Assets Acquired in Liquidation of Portfolio Securities:
5 Receivables from Sale of Assets Acquired 235,000 0 0 235,000
------------ ----------- ----------- ------------
6 Assets Acquired 0 0 0 0
------------ ----------- ----------- ------------
7 TOTAL ASSETS ACQUIRED 235,000 0 0 235,000
------------ ----------- ----------- ------------
8 Operating Concerns Acquired 0 0 0 0
------------ ----------- ----------- ------------
9 Notes and Other Securities Received 0 0 0 0
------------ ----------- ----------- ------------
10 TOTAL LOANS AND INVESTMENTS 25,966,393 634,584 3 25,331,812
------------ ----------- ----------- ------------
11 Less Current Maturities 4,092,137
------------
12 Loans and Investments Net of Current Maturities 21,239,675
------------
Investment in 301(d) Licensee (2):
13 Name 0
----------------------------------- ------------
License No.
----------------
CURRENT ASSETS
--------------
14 Cash and Cash Equivalents 17,585,081
-----------
15 Invested Idle Funds 0 17,585,081
----------- -----------
16 Interest and Dividends Receivable 704,105
-----------
17 Notes and Accounts Receivable 829,063
-----------
18 Receivables from Parent or Other Associates 2,791
-----------
19 Less: Allowance for Losses (lines 16, 17 & 18) 139,294 1,396,665
----------- -----------
20 Current Maturities of Portfolio Securities 4,092,137
-----------
21 Current Maturities of Assets Acquired 0
-----------
22 Current Maturities of Operating
Concerns Acquired 0
-----------
23 Current Maturities of Other Securities 0 4,092,137
----------- -----------
24 Other (specify) 0
-------------------------- -----------
25 Other (specify) 0 23,073,883
------------------------- ----------- ------------
OTHER ASSETS
------------
26 a. Furniture and Equipment 0
-----------
b. Less: Accumulated Depreciation 0 0
----------- -----------
27 Other (specify) Loan Fees Unamortized 133,451
-------------------------- -----------
28 Other (specify) Prepaid Expenses & Other 2,297 135,748
-------------------------- ----------- ------------
29 TOTAL ASSETS $44,449,306
------------
</TABLE>
(1) Column Headings apply to items 1 through 12 only. (Cost - Unrealized
Depreciation + Unrealized Appreciation = Value)
(2) A note to item 13 should include percent owned, cost basis and changes
resulting from equity method of accounting.
SBA Form 468.1 (1-95) Previous editions obsolete Page 2C
<PAGE> 17
OMB Approval No. 3245-0063
Expiration Date
STATEMENT OF FINANCIAL POSITION
AS OF 12/31/96
(Amounts rounded to nearest dollar)
Name of Licensee Allied Capital Financial Corporation License No. 03/03-5163
<TABLE>
<S> <C> <C> <C> <C>
LIABILITIES AND CAPITAL
-----------------------
LONG-TERM DEBT (Net of Current Maturities)
- ------------------------------------------
30 Notes and Debentures Payable to or
Guaranteed by SBA 16,950,000
-----------
31 Notes and Debentures Payable to Others 2,166,667 19,116,667
----------- ------------
CURRENT LIABILITIES
- -------------------
32 Accounts Payable and Accrued Expenses 17,457
-----------
33 Due to Parent or Other Associates 102,750
-----------
34 Accrued Interest Payable 310,065
-----------
35 Accrued Taxes Payable 0
-----------
36 a. Current Maturities of Line 30 2,000,000
-----------
b. Current Maturities of Line 31 0 2,000,000
----------- -----------
37 Distributions Payable 4,339,930
-----------
38 Short-term Notes Payable/Lines of Credit 0
-----------
39 Other(specify) 0
------------------------- -----------
40 Other(specify) 0 6,770,202
------------------------- ----------- ------------
OTHER LIABILITIES
- -----------------
41 Deferred Credits 158,268
-----------
42 Other(specify) 0
------------------------- -----------
43 Other(specify) 0 158,268
------------------------- ----------- ------------
44 TOTAL LIABILITIES 26,045,137
------------
REDEEMABLE SECURITIES (guaranteed or purchased by SBA)
- ------------------------------------------------------
45 a. 4% Redeemable Preferred Stock (301(d) Licensees only) 1,000,000
-----------
b. Cumulative Undeclared 4% Dividends 0 1,000,000
----------- -----------
46 TOTAL REDEEMABLE SECURITIES 1,000,000
------------
CAPITAL
- -------
47 Capital Stock 0
------------
48 Paid-in Surplus 9,350,000 9,350,000
------------ -----------
49 Restricted Contributed Capital Surplus 273,681
-----------
50 Capital Stock and Surplus 9,623,681
-----------
51 3% Preferred Stock Purchased by SBA 6,000,000
-----------
52 Unrealized Gain (Loss) on Securities Held -634,584
-----------
53 Non-Cash Gains/Income 446,543
-----------
54 Undistributed Net Realized Earnings:
a. Restricted (Equal to Cost of Treasury Stock) 0
------------
b. Unrestricted 1,968,529
------------
c. Total (54a plus 54b) 1,968,529
-----------
55 Undistributed Realized Earnings (53 plus 54c) 2,415,072
-----------
56 Total 17,404,169
------------
57 Less: Cost of Treasury Stock 0
------------
58 TOTAL CAPITAL 17,404,169
------------
59 TOTAL LIABILITIES, REDEEMABLE SECURITIES
AND CAPITAL (lines 44 plus 46 plus 58) $44,449,306
------------
</TABLE>
SBA Form 468.1 (1-95) Previous editions obsolete Page 3C
<PAGE> 18
OMB Approval No. 3245-0063
Expiration Date
STATEMENT OF OPERATIONS REALIZED
FOR 12 MONTHS ENDED 12/31/96
(Amounts rounded to nearest dollar)
Name of Licensee Allied Capital Financial Corporation License No. 03/03-5163
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
- -----------------
1 Interest Income 3,957,097
----------
2 Dividend Income 0
----------
3 Income (Loss) from Investments in Partnerships/Flow-through Entities 0
----------
4 Income (Loss) from Investment in Section 301(d) Licensee 0
----------
5 Fees for Management Services 0
----------
6 Processing and Other Fees 18,360
----------
7 Interest on Invested Idle Funds 588,154
----------
8 Income from Assets Acquired in Liquidation of
Loans and Investments (net of 0 Expenses) 0
-------- ----------
9 Other Income 57,360
----------
10 GROSS INVESTMENT INCOME 4,620,971
-----------
EXPENSES
- --------
11 Interest Expense 1,858,935
----------
12 Commitment Fees 0
----------
13 Other Financial Cost 0
----------
14 Officers' Compensation and Benefits 0
----------
15 Employee Compensation and Benefits 0
----------
16 Investment Advisory and Management Services 0
----------
17 Directors' and Stockholders' Meetings 0
----------
18 Advertising and Promotion 0
----------
19 Appraisal and Investigation 0
----------
20 Communication 0
----------
21 Travel 0
----------
22 Cost of Space Occupied 0
----------
23 Depreciation and Amortization 0
----------
24 Insurance 3,564
----------
25 Payroll Taxes 0
----------
26 Other Taxes (excluding income taxes) 1,540
----------
27 Provision for Losses on Receivables (excluding loans receivable) 90,972
----------
28 Legal Fees 207,927
----------
29 Audit and Examination Fees 12,601
----------
30 Miscellaneous Expenses (attach schedule) 19,051
----------
31 TOTAL EXPENSES 2,194,590
-----------
32 NET INVESTMENT INCOME (LOSS) BEFORE INCOME TAXES 2,426,381
-----------
33 NET REALIZED GAIN (LOSS) ON INVESTMENTS BEFORE INCOME TAXES (1) 2,341,111
-----------
34 NET INCOME (LOSS) BEFORE INCOME TAXES AND NONRECURRING ITEMS 4,767,492
-----------
35 Income Tax Expense (Benefit) 0
-----------
36 NET INCOME (LOSS) BEFORE NONRECURRING ITEMS $4,767,492
-----------
37 Extraordinary Item 0
-------------------- -----------
38 Cumulative Effect of Change in Accounting Principle 0
-----------
39 NET INCOME (LOSS) $4,767,492
-----------
</TABLE>
(1)Include CHARGE-OFFS (full or partial) of loans and investments which
represent realized losses. DO NOT INCLUDE valuation adjustments classified
as unrealized appreciation or depreciation. Provide supporting detail for
all realized gains and losses on page 14C of this form.
SBA Form 468.1 (1-95) Previous editions obsolete Page 4C
<PAGE> 19
OMB Approval No. 3245-0063
Expiration Date
STATEMENT OF CASH FLOWS
FOR 12 MONTHS ENDED 12/31/96
(page 1 of 2)
Name of Licensee Allied Capital Financial Corporation License No. 03/03-5163
(Amounts rounded to nearest dollar)
<TABLE>
<S> <C> <C>
OPERATING ACTIVITIES:
- ---------------------
CASH INFLOWS:
1 Interest Received from Portfolio Concerns 3,422,104
----------
2 Dividends Received from Portfolio Concerns 0
----------
3 Other Returns on Capital Received from Portfolio Concerns 0
----------
4 Management Services and Other Fees Received 0
----------
5 Interest on Invested Idle Funds 588,154
----------
6 Cash Received from Assets Acquired in Liquidation 0
----------
7 Other Operating Cash Receipts 232,949
----------
CASH OUTFLOWS:
8 Interest Paid 1,769,581
----------
9 Commitment Fees and Other Financial Costs 0
----------
10 Investment Advisory and Management Fees 0
----------
11 Officers, Directors and Employees Compensation and Benefits 0
----------
12 Operating Expenditures (excluding compensation and benefits) 311,993
----------
13 Income Taxes Paid 0
----------
14 Other Operating Cash Disbursements 0
----------
15 NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 2,161,633
-----------
INVESTING ACTIVITIES:
- ---------------------
Cash Inflows:
16 Loan Principal Payments Received from Portfolio Concerns 5,661,536
----------
17 Returns of Capital Received from Portfolio Concerns 43,890
----------
18 Net Proceeds from Disposition of Portfolio Securities 4,536,162
----------
19 Liquidation of Idle Funds Investments 0
----------
20 Other (Specify) 0
------------------------- ----------
Cash Outflows:
21 Purchase of Portfolio Securities 558,877
----------
22 Loans to Portfolio Concerns 0
----------
23 Idle Funds Investments 0
----------
24 Other (Specify) 0
-------------------------- ----------
25 NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 9,682,711
-----------
FINANCING ACTIVITIES:
- ---------------------
Cash Inflows:
26 Proceeds from Issuance of SBA-Guaranteed Debentures 0
----------
27 Proceeds from Sale of 41 Preferred Stock 0
----------
28 Proceeds from Non-SBA Borrowing 0
----------
29 Proceeds from Sale of Stock 0
----------
30 Other (Specify) 0
-------------------------- ----------
Cash Outflows:
31 Principal Payments on SBA-Guaranteed Debentures 0
----------
32 Principal Payments on Non-SBA Borrowing 0
----------
33 Redemption of 4% Preferred Stock 0
----------
34 Redemption of 3% Preferred Stock 0
----------
35 Redemption of Stock (excluding 3% and 4% Preferred) 0
----------
36 Dividends Paid 3,617,165
----------
37 Other (Specify) 0
-------------------------- ----------
</TABLE>
SBA Form 468.1 (1-95) Previous editions obsolete Page 5C
<PAGE> 20
OMB Approval No. 3245-0063
Expiration Date
STATEMENT OF CASH FLOWS
FOR 12 MONTHS ENDED 12/31/96
(page 2 of 2)
Name of Licensee Allied Capital Financial Corporation License No. 03/03-5163
(Amounts rounded to nearest dollar)
<TABLE>
<S> <C> <C>
38 NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES -3,617,165
-----------
39 INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 8,227,179
-----------
40 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 9,357,901
-----------
41 CASH AND CASH EQUIVALENTS AT END OF PERIOD (line 14, page 2C) $17,585,080
-----------
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH PROVIDED
- --------------------------------------------------------
BY (USED IN) OPERATING ACTIVITIES:
- ----------------------------------
42 Net Income (Loss) (page 4C, line 39) 4,767,492
----------
Adjustments to Reconcile Net Income (Loss) to Net
Cash Provided by (Used in) Operating Activities:
43 Depreciation and Amortization 0
----------
44 Provision for Losses on Accounts Receivable 90,972
----------
45 Provision for Deferred Income Taxes 0
----------
46 (Income) Loss from Investments in Partnerships/Flow-through
Entities (excluding income received in cash) 0
----------
47 Realized (Gains) Losses on Investments -2,341,111
----------
48 Other (Specify) OID and fee amortized -121,696
------------------------- ----------
Changes in Operating Assets and Liabilities
Net of Noncash Items:
49 (Increase) Decrease in Interest and Dividends Receivable -301,970
----------
50 (Increase) Decrease in Other Current Assets 144,269
----------
51 Increase (Decrease) in Accounts Payable 6,597
----------
52 Increase (Decrease) in Accrued Interest Payable 18,923
----------
53 Increase (Decrease) in Accrued Taxes Payable 0
----------
54 Increase (Decrease) in Dividends Payable 0
----------
55 Increase (Decrease) in Other Current Liabilities 27,843
----------
56 Other (Specify) Defr Cred -129,686
------------------------ ----------
57 Other (Specify) 0
------------------------ ----------
58 NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $2,161,633
----------
</TABLE>
Supplemental disclosure of non-cash financing and investing activities is
required. See FASB Statement No. 95, paragraph 32.
SBA Form 468.1 (1-95) Previous editions obsolete Page 6C
<PAGE> 21
ALLIED CAPITAL FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization. Allied Capital Financial Corporation (the Company), a wholly
owned subsidiary of Allied Capital Corporation (Parent), is a closed-end
management investment company under the Investment Company Act of 1940. The
Company is licensed under the Small Business Investment Act of 1958 as a
Specialized Small Business Investment Company (SSBIC). The Company seeks to
achieve a high level of current income by providing debt, mezzanine and equity
financing for small privately owned growth companies, and through long-term
growth on the value of its net assets.
Valuation of Investments. Investments are carried at value, as determined by
the board of directors. Loans and debt securities, which are not publicly
traded, and warrants and stocks for which there is no public market are valued
based on collateral, the ability to make payments, the earnings of the investee
and other pertinent factors. The values assigned are considered to be amounts
which could be realized in the normal course of business or from an orderly
sale or other disposition of the investments. In the normal course of
business, loans and debt securities are held to maturity, and the amount
realized, in addition to interest, is the face value, which may equal or exceed
cost.
Equity securities which are publicly traded are generally valued at their
quoted market price, less a discount to reflect the effects of restrictions on
the sale of such securities.
Cash and cash equivalents are carried at cost which approximates fair value.
Interest Income. Interest income is recorded on the accrual basis to the
extent that such amounts are expected to be collected. When collection of
interest is in doubt, interest is not accrued or a reserve is established.
Loan fees and original issue discount are amortized into interest income using
the effective interest method.
Realized Gains or Losses and Unrealized Appreciation or Depreciation on
Investments. Realized gains or losses are measured by the difference between
the proceeds from the sale and the cost basis of the investment without regard
to unrealized appreciation or depreciation previously recognized, and include
investments written off during the year, net of recoveries. Unrealized
appreciation or depreciation reflects the change in the valuation of the
portfolio.
Distributions to the Parent. Distributions to the Parent are recorded on the
ex-dividend date.
Federal Income Taxes. The Company's objective is to comply with the
requirements of the Internal Revenue Code that are applicable to regulated
investment companies. The Company annually distributes all of its taxable
income to the Parent; therefore, a federal income tax provision is not
required.
<PAGE> 22
ALLIED CAPITAL FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
In addition, no provision for deferred income taxes has been made for the
unrealized appreciation on investments, if any, since the Company intends to
continue to annually distribute all of its taxable income.
Dividends declared by the Company in December, but paid during January of the
following year, are treated as if the dividends were received by the Parent on
December 31 of the year declared.
Cash and Cash Equivalents. Cash equivalents consist of highly liquid
investments with insignificant interest rate risk and original maturities of
three months or less at the acquisition date.
NOTE 2. INVESTMENTS
Loans and debt securities have stated interest rates ranging generally from 8
percent to 16 percent, and are generally payable in installments with final
maturities from 5 to 10 years from date of issue.
The following loans and debt securities had accrued interest that was fully
reserved, or were not accruing interest at December 31, 1996:
<TABLE>
<CAPTION>
AGGREGATE AMOUNT
OF INTEREST RESERVED
OR NOT
DATE INTEREST ACCRUED AT
ACCRUAL DECEMBER 31,
PORTFOLIO SECURITY DISCONTINUED NET COST 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
ACCRUED INTEREST FULLY
RESERVED:
Benfield Services $ 363,161 $ 19,734
Dye, William 220,316 45,653
-------------- --------------
Total $ 583,477 $ 65,387
============== ==============
</TABLE>
<PAGE> 23
ALLIED CAPITAL FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
<TABLE>
<CAPTION>
AGGREGATE AMOUNT
OF INTEREST RESERVED
OR NOT
DATE INTEREST ACCRUED AT
ACCRUAL DECEMBER 31,
PORTFOLIO SECURITY DISCONTINUED NET COST 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST NOT ACCRUED:
In the Dough 4/11/94 $ 47,768 $ 26,415
SerpCo, Inc. 7/1/90 161,677 0
Benfield Services 7/27/95 363,161 69,225
Dye, William 8/1/95 220,316 40,477
ECM Enterprises 2/8/95 35,957 6,939
Family Investments 2/8/95 137,614 63,883
In the Dough 4/11/94 67,398 39,186
Patriotic Pizza 8/1/95 76,107 4,222
Randhawa Brothers 2/8/95 105,933 36,516
Randhawa Brothers 2/8/95 121,109 45,814
Randhawa Brothers 2/8/95 95,968 29,403
-------------- --------------
Total $ 1,433,008 $ 362,080
============== ==============
</TABLE>
NOTE 3. INVESTMENT ADVISORY SERVICES
The Company's investments are managed by Allied Capital Advisers, Inc.
("Advisers"), an independent publicly traded registered investment adviser.
Certain officers of the Company are also officers in Advisers. Pursuant to an
advisory agreement with the Parent, Advisers manages the day-to-day activities
of the Parent and its wholly owned subsidiaries. The Company pays all
operating expenses, except those specifically required to be borne by Advisers.
The expenses paid by Advisers include the compensation of the Company's
officers and the cost of office space, equipment and other personnel required
for the Company's day-to-day operations. In exchange, Advisers is reimbursed
for its costs incurred in connection with the above through an
<PAGE> 24
ALLIED CAPITAL FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
investment advisory fee paid by the Parent. The expenses that are paid by the
Company include the Company's share of transaction costs incident to the
acquisition and disposition of investments and legal and accounting fees. The
Company is required to pay expenses associated with litigation and other
extraordinary or non-recurring expenses, as well as expenses of required and
optional insurance and bonding. All fees paid by or for the account of an
actual or prospective portfolio company in connection with an investment
transaction in which the Company participates are treated as commitment fees or
management fees and are received by the Company, pro rata to its participation
in such transaction, rather than by Advisers. Advisers is entitled to retain
for its own account any fees paid by or for the account of a company, including
a portfolio company, for special investment banking or consulting work
performed for that company which is not related to such investment transaction
or management assistance.
NOTE 4. DIVIDENDS
The Company's board of directors declared a common stock dividend of $4,119,930
and a preferred stock dividend of $220,000 for the year ended December 31,
1996, which were paid January 30, 1997. Both dividends combined represented
all of the Company's taxable income. Pursuant to SBA regulations, retained
earnings available for distribution at December 31, 1996 were sufficient to pay
these dividends.
NOTE 5. DEBT
Line of Credit. The Parent, the Company and Allied Investment Corporation have
a joint revolving line of credit agreement with a bank under which they may
borrow up to a total of $10,000,000, which bears interest at a rate of
one-month LIBOR plus 2.5 percent per annum, payable monthly, and expires on
September 30, 1998. As of December 31, 1996 the interest on the line of credit
was 8.0 percent per annum. As of December 31, 1996, $10,000,000 was available
under the revolving line of credit agreement.
Notes. The Company has $2,166,667 of notes outstanding to an insurance
company. These notes bear interest at a rate of 9.15 percent per annum,
payable semi-annually. The notes are scheduled to mature over a five-year
period commencing in 1998, with annual principal payments of $433,333.
Small Business Administration (SBA) Debentures. Debentures are payable to the
SBA and represent amounts borrowed pursuant to the Small Business Investment
Act of 1958. The debentures require semi-annual interest payments at various
interest rates with the entire principal balance due at maturity. Principal
payments required on these debentures at December 31, 1996 were as follows:
<PAGE> 25
ALLIED CAPITAL FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
<TABLE>
<CAPTION>
YEAR AMOUNTS INTEREST RATES
---- ------- --------------
<S> <C> <C>
1997 $ 2,000,000 8.500%
1998 2,000,000 8.875% - 9.000%
1999 --- ---
2000 9,600,000 8.700% - 8.875%
2001 3,350,000 9.080%
thereafter 2,000,000 6.875%
------------
$ 18,950,000
============
</TABLE>
Proceeds from the SBA debentures may only be used to finance investments in
qualifying small businesses.
NOTE 6. PREFERRED STOCK
As of December 31, 1996, the Company had outstanding a total of 60,000 shares
of $100 par value, 3 percent cumulative preferred stock and 10,000 shares of
$100 par value, 4 percent redeemable cumulative preferred stock issued to the
SBA pursuant to Section 303(c) of the Small Business Investment Act of 1958, as
amended. The 3 percent cumulative preferred stock does not have a required
redemption date. The Company has the option to redeem in whole or in part the
preferred stock by paying the SBA the par value of such securities and any
dividends accumulated and unpaid to the date of redemption. The 4 percent
redeemable cumulative preferred stock has a required redemption date of June 4,
2005.
NOTE 7. COMMITMENTS AND CONTINGENCIES
The Company had a commitment outstanding to an existing portfolio company
totaling $200,000 at December 31, 1996.
The Company is party to certain lawsuits in connection with investments it has
made to small businesses. While the outcome of these legal proceedings cannot
at this time be predicted with certainty, management does not expect that these
actions will have a material effect upon the financial position of the Company.
NOTE 8. CONCENTRATIONS OF CREDIT RISK
The Company places its cash in financial institutions and, at times, cash held
in checking accounts may be in excess of the FDIC insurance limit.
<PAGE> 26
OMB Approval No. 3245-0063
Expiration Date
ANALYSIS OF STOCKHOLDERS' EQUITY
AS OF 12/13/96
(page 1 of 2)
Name of Licensee Allied Capital Financial Corporation License No. 03/03-5163
(Amounts rounded to nearest dollar)
<TABLE>
<CAPTION>
PART I. CAPITAL STOCK AND PAID IN SURPLUS CAPITAL PAID-IN
--------------------------------- STOCK SURPLUS TOTAL
(excluding capital contributed by SBA) ----- ------- -----
(pg 3C, line 47) (pg 3C, line 48)
<S> <C> <C> <C>
1 BALANCE AT BEGINNING OF PERIOD 0 9,623,681 9,623,681
------------ ---------- ----------
2 ADDITIONS:
a. Capital stock issued for cash 0 0 0
------------ ---------- ----------
b. Capital stock issued for services rendered 0 0 0
------------ ---------- ----------
c. Capital stock Issued for contributed non-cash sssets 0 0 0
------------ ---------- ----------
d. Capitalization of Retained Earnings Available for Distribution 0 0 0
------------ ---------- ----------
e. Gain on sale of Treasury Stock 0 0 0
------------ ---------- ----------
f. Other credits (specify) 0 0 0
----------------- ------------ ---------- ----------
3 Total additions (sum of 2a through 2f) 0 0 0
------------ ---------- ----------
4 Subtotal (line 1 plus line 3) 0 9,623,681 9,623,681
------------ ---------- ----------
5 DEDUCTIONS:
a. Retirement of capital stock 0 0 0
------------ ---------- ----------
b. Distributions in partial liquidation 0 0 0
------------ ---------- ----------
c. Loss on sale of Treasury Stock 0 0 0
------------ ---------- ----------
d. Other debits (specify) Rcls non-cash contrb 0 273,681 273,681
---------------------- ------------ ---------- ----------
6 Total Deductions (sum of 5a through 5d) 0 273,681 273,681
------------ ---------- ----------
7 BALANCE AT END OF PERIOD (line 4 minus line 6)--
totals must agree with lines 47 and 48, page 3C $0 $9,350,000 $9,350,000
------------ ---------- ----------
- ------------------------------------------------------------------------------------------------------------------------------
PART II. UNDISTRIBUTED REALIZED EARNINGS NON-CASH UNDISTRIBUTED UNDISTRIBUTED
------------------------------- GAINS/ NET REALIZED REALIZED
INCOME EARNINGS EARNINGS
------ -------- --------
(1) (2) (1) + (2)
1 BALANCE AT BEGINNING OF PERIOD 57,804 1,921,605 1,979,409
------------ ---------- ----------
2 ADDITIONS:
a. Net investment income 108,927 2,317,455 2,426,382
------------ ---------- ----------
b. Realized gain (loss) on investments 364,795 1,976,316 2,341,111
------------ ---------- ----------
c. Gain on appreciation of securities distributed in kind 0 ////////// 0
------------ ---------- ----------
d. Other (specify) 0 8,100 8,100
-------------------- ------------ ---------- ----------
3 Total additions (sum of 2a through 2d) 473,722 4,301,871 4,775,593
------------ ---------- ----------
4 Subtotal (line 1 plus line 3) 531,526 6,223,476 6,755,002
------------ ---------- ----------
5 DEDUCTIONS:
a. Dividends--Cash //////////// 4,339,930 4,339,930
------------ ---------- ----------
b. Dividends--Stock //////////// 0 0
------------ ---------- ----------
c. Dividends--In-kind (at fair value) 0 0 0
------------ ---------- ----------
d. Capitalization of Retained Earnings Available for Distribution //////////// 0 0
------------ ---------- ----------
e. Other (specify) 0 0 0
--------------------- ------------ ---------- ----------
6 Total deductions (sum of 5a through 5e) 0 4,339,930 4,339,930
------------ ---------- ----------
7 Total before collection of non-cash gains/income (line 4 minus
line 6) 531,526 1,883,546 2,415,072
------------ ---------- ----------
8 ADJUSTMENT: Collection of non-cash gains/income -84,984 84,984 //////////
------------ ---------- ----------
9 BALANCE AT END OF PERIOD (line 7 plus line 8)--
total must agree with lines 53, 54c, and 55, page 3C $446,542 $1,968,530 $2,415,072
------------ ---------- ----------
</TABLE>
SBA Form 468.1 (1-95) Previous editions obsolete Page 7C
<PAGE> 27
OMB Approval No. 3245-0063
Expiration Date
ANALYSIS OF STOCKHOLDERS' EQUITY
AS OF 12/31/96
(page 2 of 2)
Name of Licensee Allied Capital Financial Corporation License No. 03/03-5163
(Amounts rounded to nearest dollar)
<TABLE>
<S> <C> <C> <C>
PART III. UNREALIZED GAIN (LOSS) ON SECURITIES HELD
-----------------------------------------
1 NET UNREALIZED APPRECIATION (DEPRECIATION) 792,193
AT BEGINNING OF PERIOD ----------
2 INCREASE (DECREASE) IN UNREALIZED APPRECIATION
a. Portfolio securities
(i) Increases 0
------------
(ii) Decreases due to revaluation of securities 0
------------
(iii) Decreases due to sale of securities -2,274,764
------------
(iv) Decreases due to write-off of securities 0 -2,274,764
------------ ----------
b. Assets Acquired in liquidation of portfolio securities 0
----------
c. Operating concerns acquired 0
----------
d. Notes and other securities received 0
----------
3 TOTAL (sum of 2a through 2d) -2,274,764
----------
4 Subtotal (line 1 plus line 3) -1,482,571
----------
5 (INCREASE) DECREASE IN UNREALIZED DEPRECIATION
a. Portfolio securities
(i) Increases -112,712
------------
(ii) Decreases due to revaluation of securities 325,000
------------
(iii) Decreases due to sale of securities/repayment of principal 258,310
------------
(iv) Decreases due to write-off of securities 83,986 554,584
------------ ----------
b. Assets Acquired in liquidation of portfolio securities 293,404
----------
c. Operating concerns acquired 0
----------
d. Notes and other securities received 0
----------
6 TOTAL (sum of 5a through 5d) 847,988
----------
7 NET UNREALIZED APPRECIATION (DEPRECIATION) AT
END OF PERIOD (line 4 plus line 6) -634,583
----------
8 LESS: Estimated future tax expense (benefit) on
net unrealized appreciation (depreciation) 0
----------
9. UNREALIZED GAIN (LOSS) ON SECURITIES HELD--
total must agree with line 52, page 3C $-634,583
----------
</TABLE>
SBA Form 468.1 (1-95) Previous editions obsolete Page 8C
<PAGE> 28
OMB Approval No. 3245-0063
Expiration Date
I. RETAINED EARNINGS AVAILABLE FOR DISTRIBUTION
II. REGULATORY AND LEVERAGEABLE CAPITAL
AS OF 12/31/96
(Amounts rounded to nearest dollar)
Name of Licensee Allied Capital Financial Corporation License No. 03/03-5163
<TABLE>
<CAPTION>
PART I. RETAINED EARNINGS AVAILABLE FOR DISTRIBUTION OR CAPITALIZATION
--------------------------------------------------------------
<S> <C> <C>
1 Undistributed Net Realized Earnings--Unrestricted (line 54b, page 3C) 1,968,529
-------------
2 LESS: Unrealized Depreciation (line 10, column 2, page 2C) 634,584
-------------
3 ADD: Cumulative Undeclared Dividends on 4% Redeemable
Preferred Stock--Section 301(d) Licensees only {line 45b, page 3C) 0
-------------
4 RETAINED EARNINGS AVAILABLE FOR DISTRIBUTION OR CAPITALIZATION 1,333,945
-------------
- ---------------------------------------------------------------------------------------------------------------------------
PART II. SCHEDULE OF REGULATORY AND LEVERAGEABLE CAPITAL
-----------------------------------------------
1 Capital Stock and Paid-in Surplus (sum of lines 47 and 48, page 3C) 9,350,000
-------------
2 ADD: Unfunded binding commitments from Institutional Investors 0
-------------
3 LESS: Regulatory Deductions:
a. Organizational Expenses Not Approved by SBA (1) ( 0)
--------------
b. Capital Stock Issued for Services ( 0)
--------------
c. Capital Stock Issued for Non-cash Assests (unless approved by SBA
for inclusion in Regulatory Capital or converted to cash) ( 0)
--------------
d. Investment in 301(d) Licensee ( 0)
--------------
e. Treasury Stock at cost ( 0)
--------------
f. Other (specify) ( 0)
-------------------- --------------
4 Total Regulatory Deductions (Sum of 3a through 3f) ( 0)
--------------
5 REGULATORY CAPITAL (sum of lines 1, 2, and 4) 9,350,000
-------------
6 LESS: Unfunded binding commitments from Institutional Investors ( 0)
--------------
7 LESS: "Qualified non-private funds" invested by Federal agencies ( 0)
--------------
8 LESS: Non-cash assests included in Regulatory Capital, other than ( 0)
eligible investments in Small Concerns --------------
9 LESS: Other deductions (specify) 0
------------------------------- --------------
10 LEVERAGEABLE CAPITAL (sum of lines 5 through 8) 9,350,000
--------------
PART IIa. ADJUSTMENTS TO REGULATORY CAPITAL FOR CAPITAL IMPAIRMENT AND OVERLINE PURPOSES
------------------------------------------------------------------------------
</TABLE>
COMPLETE THIS PART IIa ONLY IF (1) LICENSEE HAS COMPLETED THE REPURCHASE OF ITS
3% PREFERRED STOCK FROM SBA, AND/OR (2) PURSUANT TO 13 CFR 107.303(c),
LICENSEE WISHES TO INCREASE ITS OVERLINE LIMITATION BY THE AMOUNT OF ITS NET
UNREALIZED GAINS ON MARKETABLE SECURITIES (see note (2) below).
<TABLE>
<S> <C>
11 REGULATORY CAPITAL (Part II, LIie 5) 9,350,000
-------------
12 ADD: Restricted Contributed Capital Surplus {line 49, page 3C) 0
-------------
13 ADJUSTED REGULATORY CAPITAL FOR IMPAIRMENT PURPOSES (line 11 plus line 12 if line 12 is 0
greater than 0) -------------
14 ADD: Net Unrealized Gains on Marketable Securities (3) 0
-------------
15 ADJUSTED REGULATORY CAPITAL FOR OVERLINE PURPOSES (line 13 plus line 14 if line 12 or line $0
14 is greater than 0) -------------
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Deduct only those organizational expenses which were not accepted as
reasonable by SBA and which have not been amortized. See example in
"Instructions for Preparation of SBA Form 468."
(2) Licensee must have positive Retained Earnings Available for Distribution in
order to establish an increased overline limit pursuant to
13 CFR 107.303(c).
(3) As defined in 13 CFR 107.303(c). Attach a schedule showing the following for
each marketable security: name of Small Business Concern, market in which
traded, names of market makers for companies not listed on a stock exchange
or NASDAQ, class of security, cost, valuation, and unrealized gain or loss
in accordance with the requirements of Section 107.303(c).
SBA Form 468.1 (1-95) Previous editions obsolete Page 9C
