<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement / / Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
Allied Capital Lending Corporation
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
Common Stock
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
4,377,334
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed pursuant to
Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is
calculated and state how it was determined):
N/A
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
N/A
- --------------------------------------------------------------------------------
(5) Total fee paid:
$125
- --------------------------------------------------------------------------------
/X/ Fee paid previously with preliminary materials.
- --------------------------------------------------------------------------------
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the form or schedule and the date of its filing.
(1) Amount previously paid:
- --------------------------------------------------------------------------------
(2) Form, schedule or registration statement no.:
- --------------------------------------------------------------------------------
(3) Filing party:
- --------------------------------------------------------------------------------
(4) Date filed:
- --------------------------------------------------------------------------------
<PAGE> 2
ALLIED CAPITAL LENDING CORPORATION
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To the Stockholders:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of
Allied Capital Lending Corporation (the "Company") will be held in the Severn
Room of the Hyatt Regency Hotel, One Bethesda Metro Center in Bethesda,
Maryland, on Thursday, November 9, 1995, at 2:00 p.m. Eastern Time. The
purpose of the Special Meeting is to consider and act upon the following
proposals, and to transact such other business as may properly come before the
Special Meeting or any adjournment thereof:
1. To amend the investment objective of the Company to describe
this objective as seeking to achieve a high level of current
income by investing in loans at least partially guaranteed by
the U.S. Small Business Administration, as well as loans made
in conjunction with such loans, and other loans.
2. To amend an investment policy of the Company so as to allow
the Company to make other types of investments in addition to
originating and holding loans that are at least partially
guaranteed by the U.S. Small Business Administration.
The Board of Directors of the Company has fixed the close of business
on Friday, September 22, 1995, as the record date for the determination of
stockholders entitled to notice of, and to vote at, the Meeting and any
adjournments thereof. The Company's stock transfer books will not be closed.
By order of the Board of Directors,
Thomas R. Salley
Secretary
September 29, 1995
YOUR VOTE IS IMPORTANT.
PLEASE RETURN YOUR PROXY CARD PROMPTLY.
AS A STOCKHOLDER OF THE COMPANY, YOU ARE INVITED TO ATTEND THE MEETING,
EITHER IN PERSON OR BY PROXY. IF YOU THINK YOU MAY BE UNABLE TO ATTEND THE
MEETING IN PERSON, PLEASE COMPLETE, SIGN, DATE, AND RETURN THE ENCLOSED PROXY
CARD IN THE POSTAGE-PREPAID ENVELOPE PROVIDED. YOUR PROMPT RETURN OF THE
PROXY CARD WILL HELP ASSURE THAT A QUORUM, WHICH IS REQUIRED TO CONDUCT
BUSINESS, IS PRESENT AT THE MEETING AND WILL AVOID ADDITIONAL EXPENSES TO
THE COMPANY IN CONNECTION WITH FURTHER SOLICITATION OF PROXIES. MAILING
YOUR PROXY CARD WILL NOT PREVENT YOU FROM ATTENDING THE MEETING AND VOTING
YOUR SHARES IN PERSON, IF YOU LATER CHOOSE TO DO SO.
<PAGE> 3
ALLIED CAPITAL LENDING CORPORATION
C/O
ALLIED CAPITAL ADVISERS, INC.
1666 K STREET, N.W., NINTH FLOOR
WASHINGTON, D.C. 20006
PROXY STATEMENT
This Proxy Statement is furnished in connection with the solicitation
of proxies by the Board of Directors of Allied Capital Lending Corporation, a
Maryland corporation ("Allied Lending" or the "Company"), for use at a Special
Meeting of Stockholders (the "Meeting") to be held at 2:00 p.m. Eastern Time on
Thursday, November 9, 1995 in the Severn Room of the Hyatt Regency Hotel, One
Bethesda Metro Center in Bethesda, Maryland, and at any adjournments thereof.
This Proxy Statement and the accompanying proxy card are first being sent to
stockholders on or about September 29, 1995.
If the accompanying proxy card is properly signed and dated and is
received in time for the Meeting, those shares held of record by you (e.g.,
those shares registered directly in your name) will be voted as specified on
that proxy card. If no instructions are given on that proxy card, the shares
covered thereby will be voted FOR the proposals listed in the accompanying
Notice of Special Meeting of Stockholders (the "Notice"). Stockholders of
record may revoke a proxy at any time before it is exercised by so notifying
the Secretary of the Company in writing at the above address, by submitting a
properly executed, later-dated proxy, or by voting in person at the Meeting.
Any stockholder of record attending the Meeting may vote in person whether or
not he or she has previously executed and returned a proxy card. If your
shares are held for your account by a broker, bank or other institution, or
nominee ("Broker Shares"), you may vote such shares at the Meeting only if you
obtain proper written authority from your institution or nominee and you
present such authority at the Meeting.
VOTING
On September 22, 1995, there were 4,377,334 shares of the Company's
common stock outstanding. The stockholders entitled to vote at the Meeting are
those of record as of the close of business on that date. Each share of the
Company's common stock is entitled to one vote. Allied Capital Corporation
("Allied I"), which owns approximately 28.5% of the shares entitled to vote at
the Meeting, has agreed to vote its shares, on all matters on which
stockholders are required to or permitted to vote, only in the same proportion
as the shares voted by the Company's other stockholders.
A majority of the shares entitled to vote at the Meeting constitutes a
quorum. If a share is represented in person or by proxy for any purpose at the
Meeting, it is deemed to be present for quorum purposes. Abstentions and
Broker Shares that are voted at the Meeting are included in determining the
presence of a quorum for the transaction of business at the commencement of the
Meeting and on those matters for which the broker, nominee, or fiduciary has
authority to vote. In the event that a quorum is not present at the
Meeting, or in the event that a quorum is present but sufficient votes to
approve a proposal are not received, the persons named as proxies may propose
one or more adjournments of the Meeting to permit further solicitation of
proxies. Any such adjournment will require the affirmative vote of a majority
of the shares represented at the Meeting in person or by proxy. The persons
named as proxies will vote those proxies for such adjournment unless marked to
be voted against any proposal for which an adjournment is sought to permit
further solicitation of proxies. Prior to any such adjournment, stockholder
action may be taken to transact such other business as may properly come before
the Meeting if sufficient affirmative votes have been received.
<PAGE> 4
Approval of the proposed amendment to the investment objective of the
Company requires the affirmative vote of the holders of a majority of the
shares represented at the Meeting in person or by proxy. Approval of the
proposed amendment to an investment policy of the Company requires the
affirmative vote of the holders of at least 67% of the shares represented at
the Meeting if more than 50% of the Company's outstanding shares are
represented at the Meeting in person or by proxy, or the affirmative vote of
the holders of at least a majority of the shares entitled to vote at the
Meeting, whichever is less. In the absence of definitive authority under
Maryland corporate law, votes that are withheld, abstentions, and Broker Shares
which the broker, nominee, or fiduciary has no authority to vote on such matter
will not be included in determining the number of votes cast regarding such
matter but may be included in the shares represented at the Meeting if such
shares were voted on other matters. This rule may make it more difficult to
obtain the requisite level of stockholder approval of certain proposals.
INFORMATION REGARDING THIS SOLICITATION
The expense of the Company's solicitation of proxies for the Meeting,
including the cost of preparing, printing, and mailing this Proxy Statement and
the accompanying Notice and proxy card, will be borne by the Company. The
Company will request that brokers, nominees, fiduciaries and other persons
holding shares in their names for others forward this Proxy Statement and the
form of proxy to their principals and request authority for the execution of
such proxy. The Company will reimburse such persons for their expenses in so
doing.
In addition to the solicitation of proxies by the use of the mails,
proxies may be solicited in person and by telephone, facsimile transmission, or
telegram by Directors or officers of the Company or by employees of Allied
Capital Advisers, Inc. ("Advisers"), the Company's investment adviser, without
special compensation therefor, or by a proxy solicitor. The Company expects to
retain Shareholder Communications Corporation to aid in the solicitation of
proxies for the Meeting at an estimated fee of $3,500 plus reimbursement of
out-of-pocket expenses.
BENEFICIAL OWNERSHIP OF COMMON STOCK
As of September 22, 1995, there were 4,377,334 shares of common stock
outstanding. The following table sets forth information as of such date with
respect to the beneficial ownership of the Company's common stock by each
person known by the Company to own beneficially more than 5% of such shares, by
each Director of the Company, and by all Directors and officers of the Company
as a group.
<TABLE>
<CAPTION>
Total Number of Shares Percent of Shares
Name of Beneficial Owner Beneficially Owned Outstanding
------------------------ ------------------ -----------
<S> <C> <C>
Allied Capital Corporation 1,244,914 28.5%
1666 K Street, N.W., Ninth Floor
Washington, D.C. 20006
David Gladstone (1) 28,194 *
George C. Williams (2) 23,028 *
Katherine C. Marien (3) 35,239 *
Jon W. Barker 227 *
Eleanor Deane Bierbower 1,064 *
Robert V. Fleming II 408 *
</TABLE>
2
<PAGE> 5
<TABLE>
<CAPTION>
Total Number of Shares Percent of Shares
Name of Beneficial Owner Beneficially Owned Outstanding
------------------------ ------------------ -----------
<S> <C> <C>
Anthony T. Garcia 6,839 *
Frank L. Langhammer 408 *
Arthur H. Keeney III 0 *
All Directors and officers as a 255,797 5.6%
group (21 in number) (4)
</TABLE>
---------------------
* The percentage of shares deemed beneficially owned
does not exceed 1% of the shares deemed to be outstanding
for the purpose of computing this percentage.
(1) Included in the total number of shares deemed
beneficially owned by Mr. Gladstone are 19,998 shares
underlying unexercised stock options that are exercisable
within 60 days of September 22, 1995.
(2) Included in the total number of shares deemed
beneficially owned by Mr. Williams are 13,332 shares
underlying unexercised stock options that are exercisable
within 60 days of September 22, 1995.
(3) Included in the total number of shares deemed
beneficially owned by Ms. Marien are 33,330 shares
underlying unexercised stock options that are exercisable
within 60 days of September 22, 1995.
(4) Included in the total number of shares deemed
beneficially owned by all Directors and officers as a group
are 219,978 shares underlying unexercised stock options
that are exercisable within 60 days of September 22, 1995.
THE PROPOSALS
The Board of Directors of the Company (the "Board") believes that
gaining the flexibility to participate in other SBA loan programs (including
those without government guaranties), as well as to originate non-SBA related
loans, is in the best interests of the Company and its stockholders. The Board
has unanimously adopted a resolution to seek stockholder approval to amend the
investment objective and the applicable investment policy of the Company, as
described herein.
BACKGROUND
Since 1977, the Company has engaged in the business of making loans to
small, private businesses through the general business loan program authorized
by Section 7(a) of the Small Business Investment Act of 1958, as amended, and
administered by the U.S. Small Business Administration (the "SBA"). Under the
"SBA 7(a) program," 70-90% of the principal amount of, and interest accrued on,
qualifying "7(a) loans" historically have carried an SBA guaranty which is
backed by the full faith and credit of the U.S. Government. In its 1993
initial public offering prospectus and a 1994 secondary offering prospectus
(the latter in the form of a distribution of its shares to stockholders of
Allied I), the Company acknowledged that its business then consisted of making
loans that are partially guaranteed by the SBA, and represented that it would
seek stockholder approval before making any investments (except temporary
investments) in securities other than those at least partially guaranteed by
the SBA.
3
<PAGE> 6
Recent changes in the 7(a) loan program have limited the size of the
loan that the SBA will guarantee, and have decreased the percentage of
principal and interest covered by the guaranty in many instances. In response
to these changes, the Company has researched alternative SBA loan programs that
could provide a similar income stream to stockholders while allowing the
Company to participate in larger investments. The "SBA 504 program," described
below, and companion loans to the Company's 7(a) loans and guaranteed loans
under the SBA 504 program, also described below, meet this criteria profile.
In addition, the Company believes that other loan opportunities exist, outside
of SBA programs altogether, which could provide rates of return similar to
those received by the Company in the past and which could do so with comparable
levels of risk. As a business development company under the federal securities
laws, the Company is permitted to make a wide variety of investments, as
described below.
As a lender that limits its business to making loans that are at least
partially guaranteed by the SBA, Allied Lending currently is exposed to the
possibility that Congress may eliminate funding for, reduce the scope of, or
otherwise severely downsize the SBA's guaranteed loan programs. By expressly
expanding its investment policy to allow participation in other SBA loan
programs, as well as origination of non-SBA related loans, the Company would be
less dependent on the SBA and its requirement for annual Congressional
appropriations, and the Company would be able to expand its "product line" and
thereby meet the evolving needs of the market for its small business financing
capabilities.
* * *
1. PROPOSAL TO AMEND THE INVESTMENT OBJECTIVE OF THE COMPANY TO DESCRIBE
THIS OBJECTIVE AS SEEKING TO ACHIEVE A HIGH LEVEL OF CURRENT INCOME BY
INVESTING IN LOANS AT LEAST PARTIALLY GUARANTEED BY THE U.S. SMALL BUSINESS
ADMINISTRATION, AS WELL AS LOANS MADE IN CONJUNCTION WITH SUCH LOANS, AND OTHER
LOANS
The Board has approved subject to stockholder approval, and recommends
that stockholders of the Company approve, the amendment of the Company's
investment objective to make it clear that its goal is the achievement of a
high level of current income. The purpose of this change is to avoid any
uncertainty as to the ability of the Company to pursue a range of investment
policies in the area of small business loans, including the one described
below.
The Company believes that stockholder approval for this proposed
amendment to the investment objective is not required by the federal securities
laws. However, the Company believes it is appropriate to submit the matter to
stockholder vote in light of the corresponding amendment to an investment
policy being submitted for such approval together herewith (see below).
PROPOSED AMENDED INVESTMENT OBJECTIVE. The Company has represented in
the 1993 Prospectus for its initial public offering and in the 1994 Prospectus
for a secondary offering (the latter in the form of a distribution of its
shares to stockholders of Allied I) that:
"The investment objective of the Company is to achieve a high current
income by providing small, privately-owned businesses with loans that
are guaranteed to the extent of 70% to 90% by the SBA."
4
<PAGE> 7
If the proposal to amend this investment objective is approved by the
stockholders, the investment objective would be as follows:
"The investment objective of the Company is to achieve a high level of
current income by investing in loans at least partially
guaranteed by the U.S. Small Business Administration, as well as loans
made in conjunction with such loans, and other loans."
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE PROPOSAL TO
AMEND THE INVESTMENT OBJECTIVE OF THE COMPANY TO DESCRIBE THIS OBJECTIVE AS
SEEKING TO ACHIEVE A HIGH LEVEL OF CURRENT INCOME BY INVESTING IN LOANS AT
LEAST PARTIALLY GUARANTEED BY THE U.S. SMALL BUSINESS ADMINISTRATION, AS WELL
AS LOANS MADE IN CONJUNCTION WITH SUCH LOANS, AND OTHER LOANS.
* * *
2. PROPOSAL TO AMEND AN INVESTMENT POLICY OF THE COMPANY SO AS TO ALLOW
THE COMPANY TO MAKE OTHER TYPES OF INVESTMENTS IN ADDITION TO ORIGINATING AND
HOLDING LOANS THAT ARE AT LEAST PARTIALLY GUARANTEED BY THE U.S. SMALL BUSINESS
ADMINISTRATION
The Board has approved subject to stockholder approval, and recommends
that stockholders of the Company approve, the amendment of one of the Company's
investment policies so as to allow the Company to make other types of
investments in addition to originating and holding loans that are at least
partially guaranteed by the SBA. The purpose of this change would be to make
the Company's business less vulnerable to possible changes in the scope and
size of SBA-sponsored programs in which the Company currently participates.
PROPOSED AMENDED INVESTMENT POLICY. The Company has represented in
the 1993 prospectus for its initial public offering and the 1994 prospectus for
a secondary offering (the latter in the form of a distribution of its shares to
stockholders of Allied I) that the following investment policy will not be
changed unless authorized by the vote of a majority of its outstanding voting
securities:
"Allied Lending's primary business function is to make loans to small
businesses that it deems credit worthy, but only to companies that
qualify for a SBA guaranty. Allied Lending may concentrate its loans
in a particular industry, although it has never done so in the past."
If the proposal to amend this investment policy is approved by the
stockholders, the investment policy would be as follows:
"Allied Lending's primary business function is to make loans to small
businesses that it deems credit worthy. Allied Lending may
concentrate its loans in a particular industry, although it has never
done so in the past."
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE PROPOSAL TO
AMEND AN INVESTMENT POLICY OF THE COMPANY SO AS TO ALLOW THE COMPANY TO MAKE
OTHER TYPES OF INVESTMENTS IN ADDITION TO ORIGINATING AND HOLDING LOANS THAT
ARE AT LEAST PARTIALLY GUARANTEED BY THE U.S. SMALL BUSINESS ADMINISTRATION.
* * *
5
<PAGE> 8
EFFECT OF STOCKHOLDER APPROVAL
As represented in its prospectuses, the Company currently may not make
any investments (except temporary investments) in securities other than loans
at least partially guaranteed by the SBA unless authorized by the SBA and the
vote of a majority of the Company's outstanding voting securities. The
proposed amendment to the investment policy would allow the Company to make
such non-SBA guaranteed investments in small businesses that the Board
determines to be in the best interest of the Company and that are permitted
under SBA and any other applicable government regulation. The Board believes
that the greater flexibility provided by the amended investment policy would
allow the Company to develop alternative lines of business, still within its
primary business function of small business lending, prior to any further
changes in federal policy toward SBA-guaranteed loan programs.
If the proposals to amend the Company's investment objective and one
of its investment policies are both approved by stockholders, Allied Lending
will be able to make other investments in addition to SBA-guaranteed loans, as
long as such investments remain within business development company ("BDC")
investment limitations, as described below, and are consistent with the
Company's investment objective and other investment policies. If either
proposal is not approved by stockholders, the Board will consider the
appropriate action to be taken in this regard.
BUSINESS DEVELOPMENT COMPANY LIMITATIONS
The Small Business Investment Incentive Act of 1980 included certain
amendments (the "1980 Amendments") to the Investment Company Act of 1940, as
amended (the "1940 Act"), permitting certain types of closed-end management
investment companies to elect to be regulated as a BDC rather than as a
registered investment company under the 1940 Act. Prior to its initial public
offering in 1993, the Company filed an election with the U.S. Securities and
Exchange Commission (the "SEC") to be regulated as a BDC. The Company's status
as a BDC does not in any way restrict its permissible investments to
originating and holding government-guaranteed loans.
Among the limitations imposed by the 1980 Amendments is a provision
prohibiting a BDC from acquiring any asset other than Qualifying Assets unless,
at the time the acquisition is made, Qualifying Assets represent at least 70%
of the value of the BDC's total assets. 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, which issuer is an eligible
portfolio company. An eligible portfolio company is defined in the
1980 Amendments as any issuer that:
(i) is organized under the laws of, and has its principal place
of business in, the United States;
(ii) is not an investment company; and
(iii) does not have any class of securities with respect to which a
broker may extend margin credit.
(2) Cash, cash items, government securities, or high quality debt
securities maturing in one year or less from the time of investment.
In addition, a BDC must have been organized (and have its principal
place of business) in the United States for the purpose of making investments
in the types of securities described in (1) above and, in order to count the
securities as a Qualifying Asset for the purpose of the 70% test, the BDC must
make available to the issuer of the securities significant managerial
assistance. Making available managerial assistance means, among other things,
any arrangement whereby the BDC, through its directors, officers, or employees,
offers to provide and, if accepted, does so provide, significant guidance and
counsel concerning the management, operations, or business objectives and
policies of a portfolio company.
6
<PAGE> 9
Under the 1980 Amendments, once the Company has elected to be
regulated as a BDC, it 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, as defined in the 1940 Act, of the Company's voting securities.
THE SBA 7(a) GUARANTEED LOAN PROGRAM AND THE SBA 504 CERTIFIED DEVELOPMENT
COMPANY PROGRAM
THE SBA
The SBA is an agency within the executive branch of the U.S.
Government that was created by act of Congress to protect and assist small
business. The SBA's mission is to stimulate and foster economic development
through small business. The agency has more than 100 offices across the nation
and a permanent staff of nearly 4000 employees.
THE SBA 7(a) GUARANTEED LOAN PROGRAM--PROGRAM DESCRIPTION
Allied Lending currently participates in the 7(a) guaranteed loan
program, which is the most widely used loan program offered by the SBA. This
program is designed to provide funds to existing or beginning businesses for
almost any legitimate business purpose, including land and building
acquisition, construction, machinery and equipment purchases, inventory
purchases, debt refinancing, or working capital needs. Under this program,
participating lenders, such as Allied Lending, provide the financing to a small
concern, and the SBA guarantees a portion of the amount financed. The
guaranteed loan program facilitates the leveraging of SBA's appropriated funds
with private-sector capital. In 1994 and 1993, respectively, Allied Lending
originated loans aggregating $44 million and $30 million through this program.
The SBA has guaranteed up to 90% of any qualified loan up to $155,000,
regardless of maturity, up to 85% of any loan over $155,000 with a maturity up
to 10 years, and up to 75% of any loan over $155,000 with a maturity over 10
years. Prior to January 1, 1995, the maximum guaranty for any single borrower
was $750,000 and, therefore, the maximum aggregate of loans to any one borrower
with a 75% guaranty was $1,000,000. The average size of loans originated by
Allied Lending over the past two years has approximated $500,000. Effective
January 1, 1995, the SBA reduced the maximum loan size under the 7(a) program
to $500,000 in an effort to conserve funds available for this program
and to provide assistance to as many borrowers as possible. Current
legislation, which would restore the program to parameters similar to
those in place before the loan limits were imposed in January, is currently
being considered by Congress.
7(a) LOAN SECURITIZATION AND THE SECONDARY MARKET
SBA regulations permit lenders to sell the guaranteed portions of
loans to investors, without recourse. A lender in the guaranteed loan program
can significantly increase its profits on SBA guaranteed loans through the sale
of the guaranteed portion to outside investors. An active secondary market
exists for SBA guaranteed loans, and substantial earnings can be generated by
taking part in it. The lender can sell the guaranteed portion of an individual
loan, or of a group of loans, directly to an investor; it can sell through a
broker, or it can sell to an organization which pools loans with similar
characteristics for sale to institutional investors. For the past three years,
Allied Lending has been an active participant in sales to the secondary market.
In 1994, Allied Lending sold guaranteed portions of loans aggregating $29
million and generating gains on sales of $2.3 million. The secondary market
provides an excellent means for a lender in the 7(a) program to finance the
origination of loans and to generate a gain which results from the sale and
retained servicing rights.
THE SBA 504 CERTIFIED DEVELOPMENT COMPANY PROGRAM--PROGRAM DESCRIPTION
Allied Lending has recently developed a mechanism in order to generate
loans under the SBA's 504 Certified Development Company Program or the "504
program" and has in fact originated such loans. Established in 1980, the 504
program provides a source of long-term financing of fixed assets for
profitable,
7
<PAGE> 10
expanding small businesses whose net worth does not exceed $6
million and two-year average net income does not exceed $2 million. Only
owner-users qualify for financing under this program.
The 504 program is administered through certified development
companies ("CDCs") which are licensed by the SBA. These non-profit
organizations can be sponsored either by private interests or by state and
local governments. There are more than 400 CDCs across the country.
The 504 program offers borrowers access to 90% financing for the
purchase of fixed assets. Qualifying transactions include: the purchase of the
land and construction of a building on the land; the purchase of an existing
building; the modernization, expansion, or renovation of existing land and
buildings; or the purchase of major equipment.
Originating a loan in the 504 program requires the participation of a
private lender, such as Allied Lending, a CDC, and the entrepreneur. A typical
504 project is structured as follows:
1. The entrepreneur provides 10% of the project cost in new
equity capital.
2. The private lender, such as Allied Lending, provides senior
financing for 50% of the project cost.
3. The CDC, through the SBA, provides a guaranteed debenture for
40% of the project cost. The debenture is subordinate to the
private lender's senior financing.
Financing through the 504 program is available in 10- or 20-year
maturities. Real estate is usually financed with a 20-year loan, and machinery
and equipment are typically financed with a 10-year loan. The maximum SBA
guaranty on the subordinated debenture is generally $750,000, thereby making
the typical project cost $1,875,000 (the maximum guaranty size of $750,000
divided by 40%, the portion provided by the CDC). However, there is no limit
on the amount of financing provided by the private lender, assuming credit
criteria are sound. There are no fee or rate restrictions on the lender's
portion of the financing and the lender's rate can be variable or fixed.
Interest rates on the CDC's 40% share are based on the current market rate for
5- to 10-year U.S. Treasury issues plus a spread based on market conditions.
Collateral usually includes: first and second mortgages on the land and
building being financed; liens on machinery, equipment, and fixtures; and
personal guaranties from all principals of the business with 20% or more
ownership interest.
Oftentimes, particularly when a project involves new construction, the
private lender making the 50% first mortgage loan also finances the CDC's 40%
portion of the financing once the SBA approves the credit. When the financing
is complete, the proceeds of the sale of the SBA guaranteed debentures serve as
permanent takeout financing for the 40% share. Debentures are typically pooled
on a monthly basis by investment bankers through a certificate mechanism and
sold publicly to investors. Debentures are 100% guaranteed by the SBA with a
"full faith and credit" guaranty issued by the U.S. Treasury.
Once the debenture is sold, the CDC services the subordinated
financing, and the lender services its 50% loan-to-value senior note. The
borrower makes two monthly payments, one to the senior lender and one to the
504 program's servicing agent for the subordinated debentures.
Active participation in the program provides Allied Lending with the
following benefits:
1. Allied Lending reduces its risk with a 50% loan-to-value (or
interest) in the total project, while having a first lien on 100%
of the assets being financed;
2. As previously noted, there are no fee restrictions on Allied
Lending's portion of the financing; and
8
<PAGE> 11
3. Allied Lending can make larger loans than those permitted under
the SBA's 7(a) guaranteed program, thereby expanding its customer
base.
To date, Allied Lending, through a limited partnership of which Allied
Lending is both the general partner and a limited partner, has made four such
loans in order to determine whether the 504 program was economically feasible
for the Company. If stockholders approve the proposals, the Company will
continue to originate such loans and will generally hold them, but will have
the opportunity to sell them if it chooses to do so.
PRIVATE LENDER FINANCING COMBINED WITH THE SBA 7(a) GUARANTEED LOAN
PROGRAM--"COMPANION LOANS"
Because of the recent changes in SBA regulations, which limit the
maximum loan size under the 7(a) program to $500,000, Allied Lending foresees
an opportunity to continue originating larger financings by splitting the
financing into two pieces, similar to the structure of the 504 program but
excluding the role of the CDC. For example, Allied Lending's proposed
structure would provide up to $1,000,000 in financing via an Allied Lending
senior first mortgage of $500,000 that is not guaranteed by the SBA and a
subordinated, 75% SBA guaranteed note of $500,000. The SBA guaranteed portion
of the subordinated note ($375,000) would be sold into the established 7(a)
secondary market, and Allied Lending would retain the $125,000 unguaranteed
portion of the subordinated note and the senior note of $500,000. The
Companion Loans would allow Allied Lending to continue to originate quality
small business loans up to $1,000,000 as it has for the past 17 years, even
though the SBA's participation would be limited to the $500,000 subordinated
note.
To date, Allied Lending, through its limited partnership affiliate
described above, has made four Companion Loans, again to determine whether this
product was economically feasible for the Company. If stockholders approve the
proposals, the Company will continue to originate such loans and will generally
hold them, but will have the opportunity to sell them if it chooses to do so.
OTHER NON-SBA RELATED LOANS
Allied Lending may also seek to originate new loans which are outside
of any of the programs provided or guaranteed by the SBA. If this proposal is
approved, the Company may provide or participate in providing senior financing,
management buyout financing, or growth financing to small businesses. These
investments may be made, at some point in the future, in conjunction with other
types of financing that may be provided by other investors, which may or may
not be affiliated with the Company. While the Board has not, at this time,
determined that the Company should engage in one or more of the various types
of non-SBA related loans, as described below, the Board believes that it could
be in the best interest of the Company to do so at a later date and would, at
that time, seek SBA and other necessary approvals to do so.
SENIOR FINANCING
The Company may participate in senior secured financing. Typically,
the securities issued for senior financing do not have equity features, are
secured by a first lien on the assets of the enterprise being financed, and are
required to be repaid before any substantial principal payments may be made on
junior debt securities or any distributions made on the enterprise's equity
securities.
GROWTH FINANCING
Generally, growth financings (investments in businesses that have a
tested product or service for which an established market exists and that
require capital for further expansion) will be structured as loans evidenced by
debt securities that are either convertible into or combined with warrants to
acquire common equity in the enterprise. Wherever possible, the loans will be
collateralized by a security interest in the assets of the enterprise, which is
usually subordinated to the security interest of the other institutional
lenders. The
9
<PAGE> 12
personal guaranty of the entrepreneur or other collateral may also be
required. The entrepreneur is generally required to make meaningful
commitment to the enterprise's success and to risk suffering significant
detriment from its failure.
MANAGEMENT BUYOUT FINANCING
The Company may participate in transactions involving the purchase by
an entrepreneur or management group of an existing business from other
individuals or from a larger company seeking to divest a division. Normally in
this type of transaction, an acquiring entity is organized with a small amount
of equity capital provided by the buyer or buying group. The entity then
borrows a substantial portion of the purchase price of the acquired business,
and an investor furnishes the remaining financing (sometimes referred to as the
"mezzanine financing") required to pay the balance of the purchase price, to
defray transaction costs, to provide the new entity with working capital, and
for similar purposes. As a result of this method of financing, the acquiring
entity will be highly leveraged. The Company will not generally participate in
the type of leveraged buyout in which the return of the investment depends
solely on dispositions or liquidations of business segments or productive
assets.
OTHER BUSINESS
The Board of Directors knows of no other business to be presented for
action at the Meeting. If any matters do come before the Meeting on which
action can properly be taken, it is intended that the proxies shall vote in
accordance with the judgment of the person or persons exercising the authority
conferred by the proxy at the Meeting.
1996 ANNUAL MEETING OF STOCKHOLDERS
The Company expects that the 1996 Annual Meeting of Stockholders will
be held in May 1996, but the exact date, time, and location of such meeting
have yet to be determined. A stockholder who intends to present a proposal at
that annual meeting must submit the proposal in writing to the Company at the
address of its investment adviser in Washington, D.C., no later than December
5, 1995, in order for the proposal to be considered for inclusion in the
Company's proxy statement for that meeting. The submission of a proposal does
not guarantee its inclusion in the Company's proxy statement or presentation at
the meeting unless certain securities law requirements are met.
10
<PAGE> 13
ALLIED CAPITAL LENDING CORPORATION
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints GEORGE C. WILLIAMS, DAVID GLADSTONE and
THOMAS R. SALLEY, or any of them acting by a majority if more than one be
present, proxy of proxies, each with power of substitution, to vote all the
shares of the undersigned at the Special Meeting of Stockholders of Allied
Capital Lending Corporation to be held in the Severn Room of the Hyatt Regency
Hotel, One Bethesda Metro Center, Bethesda, Maryland on November 9, 1995 at
2:00 P.M. and at all adjournments, with all powers the undersigned would
possess if personally present, hereby revoking all prior proxies:
(back of card)
1. FOR - AGAINST - ABSTAIN - A PROPOSAL TO AMEND THE INVESTMENT
OBJECTIVE OF THE COMPANY TO DESCRIBE THIS OBJECTIVE AS SEEKING TO ACHIEVE A
HIGH LEVEL OF CURRENT INCOME BY INVESTING IN LOANS AT LEAST PARTIALLY
GUARANTEED BY THE U.S. SMALL BUSINESS ADMINISTRATION, AS WELL AS LOANS MADE IN
CONJUNCTION WITH SUCH LOANS, AND OTHER LOANS;
2. FOR - AGAINST - ABSTAIN - A PROPOSAL TO AMEND AN INVESTMENT
POLICY OF THE COMPANY SO AS TO ALLOW THE COMPANY TO MAKE OTHER TYPES OF
INVESTMENTS IN ADDITION TO ORIGINATING AND HOLDING LOANS THAT ARE AT LEAST
PARTIALLY GUARANTEED BY THE U.S. SMALL BUSINESS ADMINISTRATION;
3. WITH THE POWER TO VOTE SAID SHARES UPON SUCH OTHER BUSINESS AS MAY
PROPERLY COME BEFORE THE MEETING.
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AS SPECIFIED ABOVE, BUT IF
NO SPECIFICATION IS MADE, THEY WILL BE VOTED FOR THE PROPOSALS.
Dated__________________________________
Signature______________________________________________________
Signature______________________________________________________
When signing as attorney, administrator, trustee, or
guardian, please give your full title as such. For
joint accounts, each owner must sign.
<PAGE> 14
ALLIED CAPITAL LENDING CORPORATION
September 1995
Dear Fellow Stockholder:
I am writing to let you know that a Special Meeting of Stockholders of
Allied Capital Lending Corporation (the "Company") will be held in November to
vote on two important proposals that affect the Company. As a stockholder, you
have the opportunity to voice your opinion on these matters. This package
contains information about the proposals and the materials to use when voting
by mail.
Please take the time to read the enclosed materials and cast your vote on
the proxy card. PLEASE VOTE PROMPTLY. NO MATTER HOW MANY SHARES YOU OWN,
RETURNING YOUR PROXY CARD IS EXTREMELY IMPORTANT.
Both of the proposals summarized below have been carefully reviewed by
Allied Capital Lending's Board of Directors (the "Board"). The Board believes
these proposals are in the best interest of stockholders and recommends that
you vote FOR each proposal.
Your early response will be appreciated and could save the Company the
substantial costs associated with a follow-up meeting. You may be contacted by
Shareholder Communications Corporation, which has been engaged to solicit
proxies on behalf of the Board. If signed proxy cards are not returned in
sufficient numbers to constitute a quorum, the Board intends to resolicit
proxies from stockholders who have not responded so that business can be
conducted at the Special Meeting. Such resolicitation would be a costly
process paid for by the Company.
HERE IS A BRIEF SUMMARY OF THE PROPOSALS:
PROPOSAL 1 is to amend the investment objective of the Company to
describe this objective as seeking to achieve a high level of current
income by investing in loans at least partially guaranteed by the
U.S. Small Business Administration, as well as loans made in
conjunction with such loans, and other loans.
PROPOSAL 2 is to amend an investment policy of the Company so as to
allow the Company to make other types of investments in addition to
originating and holding loans that are at least partially guaranteed
by the U.S. Small Business Administration.
VOTING BY MAIL IS QUICK AND EASY. EVERYTHING YOU NEED IS ENCLOSED.
We encourage you to exercise your right as a stockholder and to vote on
the proposal. To cast your vote, simply complete the proxy card enclosed in
this package. Of course, be sure to sign the card before mailing it in the
postage-paid envelope provided. EVEN IF YOU DO NOT PLAN TO ATTEND THIS SPECIAL
MEETING, PLEASE VOTE AS SOON AS POSSIBLE.
If you have any questions before you vote, please call our Investor
Relations department at (202) 973-6334. We'll be glad to help you get your
vote in quickly. Thank you for your participation in this important initiative
for the Company.
Sincerely,
David Gladstone
Chairman of the Board and Chief Executive Officer
