<PAGE> 1
FILE NO. 333-
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 26, 1997
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. [ ]
POST-EFFECTIVE AMENDMENT NO. [ ]
(CHECK APPROPRIATE BOX OR BOXES.)
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ALLIED CAPITAL LENDING CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
(202) 331-1112
(AREA CODE AND TELEPHONE NUMBER)
C/O ALLIED CAPITAL ADVISERS, INC.
1666 K STREET, N.W., 9TH FLOOR
WASHINGTON, D.C. 20006
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES; NUMBER, STREET, CITY, STATE, ZIP CODE)
WILLIAM L. WALTON,
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
C/O ALLIED CAPITAL ADVISERS, INC.
1666 K STREET, N.W., 9TH FLOOR
WASHINGTON, D.C. 20006
(NAME AND ADDRESS OF AGENT FOR SERVICE)
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Copy to:
STEVEN B. BOEHM, ESQ.
SUTHERLAND, ASBILL & BRENNAN LLP
1275 PENNSYLVANIA AVENUE, N.W.
WASHINGTON, D.C. 20004-2404
(APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING)
As Soon As Practicable After the Effective Date of This Registration Statement
CALCULATION OF THE REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF SECURITIES AMOUNT BEING OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION
BEING REGISTERED(1) REGISTERED UNIT PRICE FEE
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock,
$0.0001 par value
per share......... 46,606,867 shares Not applicable $709,712,323.69(2) $215,064.34(2)
================================================================================================
</TABLE>
(1) This Registration Statement relates to securities of the Registrant issuable
to holders of common stock of Allied Capital Corporation, a Maryland
corporation ("Allied I"), Allied Capital Corporation II, a Maryland
corporation ("Allied II"), Allied Capital Commercial Corporation, a Maryland
corporation ("Allied Commercial"), and Allied Capital Advisers, Inc., a
Maryland corporation ("Advisers"), in the proposed merger of Allied I,
Allied II, Allied Commercial, and Advisers into the Registrant (the
"Merger").
(2) Pursuant to Rule 457(f), the registration fee was computed on the basis of
the market value of the Allied I, Allied II, Allied Commercial, and Advisers
common stock to be exchanged in the Merger, computed in accordance with Rule
457(c) on the basis of the high and low prices per share of such stock on
the Nasdaq National Market on September 23, 1997.
------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY
DETERMINE.
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<PAGE> 2
CROSS REFERENCE SHEET
PURSUANT TO RULE 481(a) UNDER THE SECURITIES ACT OF 1933
------------------
SHOWING LOCATION OF INFORMATION REQUIRED BY FORM N-14 IN PART A (PROSPECTUS),
PART B
(STATEMENT OF ADDITIONAL INFORMATION), AND PART C (OTHER INFORMATION) OF THE
REGISTRATION STATEMENT
<TABLE>
<CAPTION>
ITEM OF FORM N-14 CAPTION(S) IN THE PROSPECTUS
------------------------------------------------- -------------------------------------
<C> <S> <C>
PART A: INFORMATION REQUIRED IN A PROSPECTUS
1. Beginning of the Registration Statement and
Outside Front Cover Page of the Prospectus..... Facing Page; Cross Reference Sheet;
Outside Front Cover Page
2. Beginning and Outside Back Cover Page of the
Prospectus..................................... Outside Front Cover Page
3. Fee Table, Synopsis Information, and Risk
Factors........................................ Proposal 1: The Merger
Proposal -- Fees and Expenses;
Summary; Summary -- Risk Factors;
Risk Factors
4. Information About the Transaction................ Proposal 1: The Merger Proposal --
Overview of the Merger
5. Information About the Registrant................. Proposal 1: The Merger
Proposal -- The Surviving Company:
ACC; Proposal 1: The Merger
Proposal -- the Merging
Companies -- Allied Lending
6. Information About the Companies Being Acquired... Proposal 1: The Merger
Proposal -- The Merging Companies
7. Voting Information............................... Outside Front Cover Page; The Special
Meetings; The Special Meetings --
Voting Information; The Special
Meetings -- Information Regarding
This Solicitation
8. Interest of Certain Persons and Experts.......... Proposal 1: The Merger Proposal --
Interests of Certain Persons in the
Merger; Experts; Financial Advisers
9. Additional Information Required for Reoffering by
Persons Deemed to be Underwriters.............. N/A
PART B: INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
10. Cover Page....................................... Cover Page
11. Table of Contents................................ Table of Contents
12. Additional Information About the Registrant...... Management
13. Additional Information About the Companies Being
Acquired....................................... Management
14. Financial Statements............................. N/A
</TABLE>
PART C: OTHER INFORMATION
Information required to be included in Part C is set forth under the appropriate
item, so numbered, in Part C to this registration statement.
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
PRELIMINARY JOINT PROXY STATEMENT/PROSPECTUS SUBJECT TO COMPLETION DATED
SEPTEMBER 26, 1997.
Dear Stockholder:
I am writing to you on behalf of your board of directors to ask for your
vote to approve the merger of the Allied Capital Companies. Allied Capital
Corporation, Allied Capital Corporation II, Allied Capital Commercial
Corporation, Allied Capital Lending Corporation and Allied Capital Advisers,
Inc. (each a "Company" and collectively, the "Companies") have signed an
Agreement and Plan of Merger that will consolidate the five Companies into one
single company committed to lending to growing businesses. The merger is
anticipated to take place on December 31, 1997, and the new company will be
named "Allied Capital Corporation" (referred to as ACC). Your affirmative vote
is essential in order to have the potential to realize the many benefits from
the merger, as outlined below.
This merger capitalizes on a timely opportunity to unite the Companies, and
positions ACC to become an industry leader in the field of small business
finance. Management and each board of directors believe that this merger should
create a company that is more competitive in the marketplace, as well as
increase stockholder value.
The Companies share the same management team, investment committee, and
commitment to providing strong returns to stockholders through the finance of
private, growing businesses nationwide. The merger will combine the Companies'
financial resources, and create opportunities for efficiency and cost-savings.
We believe the potential benefits for stockholders resulting from the merger
will include:
- ACC SHOULD BE POSITIONED TO GROW ITS ASSETS AND EARNINGS more quickly
than the individual Companies, due to greater efficiencies, portfolio
diversity, regulatory simplification and investment synergies across its
business units.
- ACC will have a significantly larger market capitalization than that of
any of the Companies. The LARGER MARKET CAPITALIZATION WILL MEAN
INCREASED LIQUIDITY FOR STOCKHOLDERS, and increased visibility in the
capital markets.
- As an investment company, ACC will not be subject to corporate taxation,
as is Allied Capital Advisers, Inc. PROFITS WILL FLOW THROUGH TO
STOCKHOLDERS.
- ACC will be an internally managed company with the same management team
that operates the Companies today. THERE WILL BE NO EXTERNAL MANAGEMENT
FEE; all operating expenses will be borne by ACC directly.
- As a result of ACC's increased size, improved mix of income, and
streamlined operations, ACC SHOULD BE POSITIONED TO INCREASE ITS EARNINGS
AVAILABLE FOR DIVIDENDS TO STOCKHOLDERS.
After careful consideration, the boards of the Companies, each assisted by
an independent financial adviser, have unanimously approved the merger. Your
board of directors recommends that you vote "FOR" the merger. A description of
the transaction and the related matters are described in the enclosed joint
proxy statement/prospectus. I urge you to read this in detail. We also have
provided you with a Q & A about the merger.
YOUR VOTE IS VERY IMPORTANT. FAILURE TO VOTE WILL BE COUNTED AS A VOTE
AGAINST THE MERGER. THE BENEFITS OF THE MERGER WILL NOT OCCUR UNLESS TWO-THIRDS
OF THE SHARES OUTSTANDING OF EACH OF THE COMPANIES VOTE IN FAVOR.
Please take a moment to sign and return your proxy card(s) in the enclosed,
postage paid return envelope. If you hold shares in more than one Allied Capital
Company, you have been provided with multiple proxy cards, one for each Company
in which you own shares and one for each account you maintain. PLEASE VOTE WITH
EACH PROXY CARD YOU RECEIVE. You may receive a telephone call from our proxy
solicitor, Shareholder Communications Corporation, reminding you to vote your
shares. If you have questions about the transaction, you are encouraged to call
them at (800)733-8481, extension 405.
Thank you for your prompt attention to this important matter. We look
forward to our future together as one Allied Capital.
Sincerely,
William L. Walton
Chief Executive Officer
<PAGE> 4
ALLIED CAPITAL CORPORATION
ALLIED CAPITAL CORPORATION II
ALLIED CAPITAL COMMERCIAL CORPORATION
ALLIED CAPITAL LENDING CORPORATION
ALLIED CAPITAL ADVISERS, INC.
QUESTIONS & ANSWERS ABOUT THE MERGER
The Allied Capital Companies, listed above, have agreed to merge. The
enclosed joint proxy statement/prospectus discusses the merger in detail. You
are encouraged to read the joint proxy statement/prospectus in its entirety. The
following questions and answers are intended to provide a brief overview of the
merger and the required stockholder approval.
1. WHY ARE THE ALLIED CAPITAL COMPANIES MERGING?
The board of directors of each of the Allied Capital Companies believes
that the five Companies, when combined, will result in a company that will be
stronger, more diverse and positioned for growth. The merged company will
continue all of the businesses in which the Companies are currently engaged, but
will do so with the combined financial resources of all of the Companies.
2. WHY SHOULD I VOTE FOR THE MERGER?
Your management team and board of directors believe that the merger creates
the best opportunity for the future growth of your Company, and resulting growth
of stockholder value. Considerable time has been spent weighing other strategic
alternatives for the future course of the Companies, and your board of directors
believes that the merger provides the most opportunities. The merged company
should have greater financial resources, reduced expenses, and reduced
regulatory constraints as a result of the merger of the five Companies. These
factors should provide the merged company greater flexibility to implement its
strategic business plan. The merged company should be positioned for greater
short- and long-term growth -- in total assets, stock price appreciation, and
earnings -- than any one of the Companies on a stand-alone basis.
In addition, the merged portfolio would be more diversified, by loan type,
size, geographic location and industry, than any of the Companies' portfolios
are on a stand-alone basis. For these reasons, your management and your board of
directors strongly recommend that you vote FOR the merger.
3. HOW WILL THE NEW COMPANY BE STRUCTURED?
The merged company will be named "Allied Capital Corporation" (referred to
as "ACC") and will trade on the Nasdaq National Market; the trading symbol will
be ALLC. ACC will specialize in financing private, growing businesses
nationwide, as all of the Companies currently do today, but will do so with
greater financial resources. The merger will create the single, largest public
business development company (BDC) in the United States. Congress authorized
BDCs to be a special type of investment company in order to foster the growth of
small businesses.
4. HOW WILL THE MERGED COMPANY'S BUSINESS BE DIFFERENT?
ACC will pursue the four strategic lines of business in which the Companies
are currently engaged: mezzanine finance (lending to growth companies),
commercial real estate finance, senior secured loans guaranteed by the Small
Business Administration, and investment advisory services for private funds.
Following the merger, ACC will be uniquely positioned as an industry leader in
the field of small business finance. ACC will continue the well-established
businesses of all of the merging Companies, but will have the size, economies of
scale, financial resources, and diversity of business lines to compete more
effectively in the marketplace. ACC will have a competitive advantage as an
investment adviser because of its financial resources as a principal investor.
<PAGE> 5
ACC also will have the combined income streams of the merged businesses.
ACC's earnings will be comprised of ordinary investment income from its diverse
portfolio of loans, capital gains from the sale of equity securities, and fee
income from its investment advisory services to private funds.
5. WHAT WILL I RECEIVE AS A RESULT OF THE MERGER?
Stockholders will receive shares of Allied Capital Lending Corporation in
exchange for shares of Allied Capital Corporation, Allied Capital Corporation
II, Allied Capital Commercial Corporation and Allied Capital Advisers, Inc.
Immediately following the merger, Allied Capital Lending Corporation will be
renamed "Allied Capital Corporation" (ACC). The Exchange Ratios have been
approved by each Company's board of directors, and were determined to be fair,
from a financial point of view, by an independent financial adviser engaged by
each board. The Exchange Ratios were determined using the market value of each
Company's stock as compared to the market value of Allied Capital Lending
Corporation's stock over a thirty-day period. Shares of Allied Capital Lending
Corporation will not be exchanged because it is the surviving company. Shares of
the other Companies will be exchanged as follows:
<TABLE>
<CAPTION>
WILL BE
EACH SHARE OF EXCHANGED FOR SHARES OF
- -------------------------------------- ------------- -----------------------------------
<S> <C> <C>
Allied Capital Corporation 1.07 Allied Capital Lending Corporation
Allied Capital Corporation II 1.40 Allied Capital Lending Corporation
Allied Capital Commercial Corporation 1.60 Allied Capital Lending Corporation
Allied Capital Advisers, Inc. 0.31 Allied Capital Lending Corporation
</TABLE>
6. HOW WERE THE EXCHANGE RATIOS DETERMINED?
Your board of directors engaged an independent financial adviser to
determine the fairness of the Exchange Ratio from a financial point of view.
They received an opinion that the Exchange Ratio is fair from a financial point
of view. In addition, the boards of directors of all of the Companies engaged
Morgan Stanley & Co. to be a common financial adviser, and to provide valuation
analyses of the Companies and recommend the Exchange Ratios. Morgan Stanley &
Co. has concluded that the Exchange Ratios are consistent with its valuation
analyses. The fairness opinions are attached in their entirety to this joint
proxy statement/prospectus.
Thus, your management and your board of directors believe that the merger
is in the best interests of the stockholders of each of the Companies.
7. WHAT IS REQUIRED FOR THE MERGER TO TAKE PLACE?
Two-thirds of the total shares outstanding for each of the Companies must
vote in favor of the merger proposal in order for it to occur. In addition, the
Companies must receive an order from the Securities and Exchange Commission to
permit the merger, as well as permission from the U.S. Small Business
Administration. Management anticipates that all regulatory approvals will be
granted. If all such approvals, including stockholder approvals, are achieved,
it is anticipated that the merger would be effective on December 31, 1997.
Each Company will hold a special meeting of stockholders on
to consider and approve the merger and other matters.
Stockholders of record on will be entitled to vote at the special
meeting. Stockholders should vote using the enclosed proxy card(s), and return
them promptly in the enclosed postage-paid envelope.
YOUR VOTE IS VERY IMPORTANT. FAILURE TO VOTE WILL HAVE THE SAME EFFECT AS A
VOTE AGAINST THE MERGER. THE BENEFITS OF THE MERGER WILL NOT OCCUR UNLESS
TWO-THIRDS OF THE SHARES OUTSTANDING OF EACH OF THE COMPANIES VOTE IN FAVOR OF
THE MERGER.
<PAGE> 6
The special meetings will be adjourned if the required two-thirds majority
vote has not been received, or if the required regulatory approvals have not
been received.
8. HOW WILL THE MERGED COMPANY BE MANAGED?
ACC will be internally managed by the same team that manages the Companies
today. In addition, all of the outside directors of the Companies will join the
board of directors of ACC. Thus, there will be no transition period, and ACC
immediately will begin implementation of its strategic business plan.
9. WHAT ARE THE TAX CONSEQUENCES OF THE MERGER? WHAT WILL BE THE COST BASIS OF
MY NEW SHARES?
The merger will be structured as a stock-for-stock, tax-free exchange.
Thus, there will be no tax consequences for a stockholder. However, any
distributions of income made in connection with or following the merger, as
always, will be treated for tax purposes as ordinary income or capital gain
income and will be taxable to a stockholder. Stockholders may wish to consult
with their own tax advisers.
The cost basis of each stockholder's shares will carry over to the new
shares. For instance, assume a stockholder holds 100 shares of Allied Capital
Corporation with an aggregate cost basis of $1,000. The per share cost basis is
therefore $10.00 ($1,000 divided by 100 shares). Following the merger and the
exchange of shares, the stockholder would hold 107 shares of ACC (100 shares
multiplied by the 1.07 Exchange Ratio), with an aggregate cost basis of $1,000.
The per share cost basis of the ACC shares would be $9.35 ($1,000 divided by 107
shares).
10. WILL THE MERGED COMPANY PAY DIVIDENDS?
ACC will be a regulated investment company (RIC), under Subchapter M of the
Internal Revenue Code, and as such will be required to distribute substantially
all of its ordinary income to stockholders each year. If ACC meets this
distribution requirement, ACC would pay no corporate level taxes on such income.
It is anticipated that ACC would pay dividends quarterly to stockholders.
We expect ACC to have a balanced and more diversified mix of income from
which to pay dividends than that of any of the individual Companies. ACC should
generate a consistent stream of ordinary income from its mezzanine, commercial
real estate, and senior loan portfolios. This income should be enhanced by
long-term capital gains arising from the sale of equity securities, and by
advisory fee income from investment advisory contracts with private investment
funds.
11. WHAT HAPPENS TO MY DIVIDENDS FOR 1997?
Each stockholder of Allied Capital Corporation, Allied Capital Corporation
II, Allied Capital Commercial Corporation and Allied Capital Lending Corporation
will receive his or her per share portion of 1997 taxable income. Stockholders
of the pre-merger Allied Capital Corporation will receive a single distribution
of shares of Allied Capital Lending Corporation held in Allied Capital
Corporation's portfolio, instead of their fourth quarter and annual extra
dividend. This distribution is necessary to achieve the merger under the laws of
the state of Maryland and may include a return of capital.
In addition, after the merger is completed, all stockholders of ACC will
receive a special one-time dividend representing any retained earnings of the
merging Companies on the date of merger.
12. HOW DO I EXCHANGE MY SHARES? WHAT IF I DO NOT EXCHANGE MY SHARES?
Stockholders of record on the day before the merger will receive a letter
of transmittal requesting that all existing stock certificates be returned
immediately to the Companies' transfer agent, who will act as the exchange agent
for this transaction. Once a stockholder delivers his or her stock certificates
to the exchange agent, he or she will receive a confirmation of the number of
whole and fractional shares of ACC that have been credited to the stockholder's
account according to the appropriate Exchange Ratio. Stock certificates for ACC
will not be distributed; rather, the transfer agent will hold all exchanged
shares in uncertificated form in the name of each individual stockholder, much
the same way that brokers and other nominees hold stock for
<PAGE> 7
their individual clients. Stock certificates will be distributed only upon
written request of the stockholder. If your shares are held by a broker or other
nominee, your broker or nominee will execute the exchange on your behalf.
Until a stockholder delivers his or her certificate(s), shares of the
Companies will represent shares of ACC (on an Exchange Ratio-adjusted basis).
The transfer agent will hold all dividends and distributions paid by ACC to
stockholders who have not yet exchanged their shares in escrow in a non-interest
bearing account until such time as the shares are exchanged. (This will not
apply to Allied Capital Lending Corporation stockholders who are not exchanging
shares.) Dividends will be taxable to stockholders in the year in which they
were declared by ACC, regardless of whether a stockholder has actually received
such dividends. Therefore, in order to receive your cash dividends, you must
return all outstanding certificates as soon as possible after the merger is
consummated. DO NOT FORWARD STOCK CERTIFICATES AT THIS TIME; YOU WILL BE
CONTACTED TO DO SO AFTER THE MERGER HAS BEEN CONSUMMATED.
13. WILL THE MERGED COMPANY PROVIDE A DIVIDEND REINVESTMENT PLAN OR DIRECT
DEPOSIT SERVICES FOR CASH DIVIDENDS?
ACC will offer an "opt-out" dividend reinvestment plan. All dividends will
be automatically reinvested into additional shares of ACC, unless a stockholder
specifically requests in writing to receive cash dividends. Stockholders
exchanging shares of Allied Capital Advisers, Inc., who have not had the
opportunity to participate in a dividend reinvestment plan prior to the merger,
will be automatically enrolled in the ACC dividend reinvestment plan unless they
otherwise instruct the transfer agent in writing.
Instructions concerning existing dividend reinvestment accounts, and
requests for cash payments or direct deposit that are already in place with the
Companies' transfer agent will be transferred on all exchanged shares for
registered stockholders of Allied Capital Corporation, Allied Capital
Corporation II, Allied Capital Commercial Corporation and Allied Capital Lending
Corporation. Stockholders may change their enrollment status at any time upon
written notice. Stockholders holding shares with a broker or other nominee
should consult their nominee to determine whether dividends will be paid in cash
or reinvested.
With respect to all of the Companies except Allied Capital Lending
Corporation, until a stockholder exchanges his or her shares, all dividends will
be paid in cash to an escrow account, and will not be eligible for dividend
reinvestment, regardless of any pre-existing elections to the contrary.
14. WHO DO I CONTACT IF I HAVE QUESTIONS ABOUT THE MERGER?
You are encouraged to contact the Companies' proxy solicitor regarding any
questions related to the merger:
SHAREHOLDER COMMUNICATIONS CORPORATION
(800) 733-8481, EXTENSION 405
ABOUT THE PROXY CARD
IF YOU HOLD SHARES IN MORE THAN ONE ALLIED CAPITAL COMPANY, YOU HAVE BEEN
PROVIDED WITH MULTIPLE PROXY CARDS, ONE FOR EACH COMPANY IN WHICH YOU OWN SHARES
AND ONE FOR EACH ACCOUNT YOU MAINTAIN.
PLEASE VOTE WITH EACH PROXY CARD YOU RECEIVE!
<PAGE> 8
ALLIED CAPITAL CORPORATION
ALLIED CAPITAL CORPORATION II
ALLIED CAPITAL COMMERCIAL CORPORATION
ALLIED CAPITAL LENDING CORPORATION
ALLIED CAPITAL ADVISERS, INC.
1666 K STREET, NW
WASHINGTON, D.C. 20006-2803
(202) 331-1112
NOTICE OF SPECIAL MEETINGS OF STOCKHOLDERS
NOTICE IS HEREBY GIVEN that special meetings of the stockholders (each, a
"Special Meeting" and collectively, the "Special Meetings") of Allied Capital
Corporation ("Allied I"), Allied Capital Corporation II ("Allied II"), Allied
Capital Commercial Corporation ("Allied Commercial"), Allied Capital Lending
Corporation ("Allied Lending"), and Allied Capital Advisers, Inc. ("Advisers")
(individually, a "Company," and collectively, the "Companies") will be held on
November , 1997 and will commence at the respective times set forth beside
each Company's name below:
<TABLE>
<CAPTION>
TIME (EASTERN
COMPANY STANDARD TIME)
- ------------------ --------------
<S> <C>
Allied I 8:00 a.m.
Allied II 10:00 a.m.
Allied Commercial 12:00 Noon
Allied Lending 2:00 p.m.
Advisers 4:00 p.m.
</TABLE>
All of the Special Meetings will be held at the Residence Inn by Marriott,
7335 Wisconsin Avenue, Bethesda, Maryland 20814. Stockholders will be asked at
the Special Meetings to consider and vote upon the following matters:
1. A proposal (the "Merger Proposal") to approve and adopt the
Agreement and Plan of Merger, dated as of August 14, 1997, as
amended and restated as of September 19, 1997 (the "Merger
Agreement"), by and among Allied I, Allied II, Allied Commercial,
Allied Lending, and Advisers and the transactions contemplated
thereby, including the merger of Allied I, Allied II, Allied
Commercial and Advisers with and into Allied Lending in a
stock-for-stock merger (the "Merger"); subject to approval and
consummation of the Merger the following corporate actions will be
taken:
(a) Allied Lending's charter will be amended to increase the number
of authorized shares of common stock, par value one-tenth of
One Mil ($0.0001) per share, from 20,000,000 to 100,000,000
shares, to change Allied Lending's name following the Merger to
"Allied Capital Corporation" ("ACC") and to effect certain
other changes as described in the accompanying Joint Proxy
Statement/Prospectus;
(b) ACC's board of directors will be expanded to include 23 members
so that each current director of each Company, except for
certain members of management, may serve as directors of ACC
following the Merger until the next annual meeting of
stockholders; and
(c) Arthur Andersen LLP will be selected by Allied Lending's board
of directors as the independent accountants for ACC until its
next annual meeting of stockholders.
A vote in favor of the Merger Proposal constitutes acceptance, approval,
and ratification of the foregoing corporate actions.
2. A proposal to adopt a stock option plan (the "ACC Plan") whereby
stock options may be granted to officers and directors of ACC after
the Merger (the "Plan Proposal") (ONLY ALLIED LENDING'S
STOCKHOLDERS WILL BE ASKED TO VOTE ON THIS PROPOSAL).
<PAGE> 9
3. Such other business as may properly come before a Company's Special
Meeting or any adjournment or postponement thereof, including,
without limitation, a motion to adjourn the Special Meeting.
The board of directors of each Company has fixed the close of business on
October , 1997 as the record date for determination of the stockholders
entitled to notice of, and to vote at, the Special Meeting of that Company and
any adjournments or postponements thereof. In the event that there are not
sufficient shares represented for a quorum or vote to approve the Merger
Proposal or otherwise at any Special Meeting, such Special Meeting may be
adjourned in order to permit further solicitation of proxies by the appropriate
Company.
The Merger is dependent upon the satisfaction or waiver of certain
conditions to the Merger, including: (a) the approval of the Merger by the
stockholders of each Company, voting separately, by the affirmative vote of at
least two-thirds of all the votes entitled to be cast on the Merger Proposal;
(b) the receipt of an exemptive order from the Securities and Exchange
Commission (the "Commission"), an application for which has been filed by the
Companies and certain of their subsidiaries; and (c) the approval of the Small
Business Administration ("SBA"), and certain other regulatory approvals. No
assurance can be given that such Commission exemptive order will be issued or
SBA approval will be received. If the Commission has not granted the order or if
the SBA has not granted permission by the date of the Special Meetings, then the
Companies will adjourn the Special Meetings, regardless of whether a quorum has
been achieved. The attached Joint Proxy Statement/Prospectus should be read
carefully before voting.
The Merger will be effected if the Merger Proposal is approved by the
stockholders of each Company and all other conditions to the Merger are
satisfied or waived, regardless of whether the Plan Proposal is approved or the
ACC Plan is adopted. The adoption of the ACC Plan is dependent upon the Merger,
as well as the approval of the Plan Proposal by the requisite majority of Allied
Lending's stockholders. Thus, if the Merger is not effected for any reason, the
ACC Plan will not be implemented, notwithstanding approval of the Plan Proposal
by Allied Lending's stockholders.
In connection with the Merger, Allied I has agreed to declare and pay to
its stockholders a special dividend consisting of all of the shares of common
stock of Allied Lending owned by Allied I, payable immediately prior to the
effective time of the Merger (the "Distribution"). (See "Proposal 1: The Merger
Proposal -- The Distribution -- Shares to be Received" for a discussion of the
Distribution.) However, Allied I may distribute some or all such shares of
common stock of Allied Lending in a distribution to its stockholders at any
time, even if the Merger is not effected for any reason. Furthermore, if the
Merger Agreement is terminated for any reason, Allied I would no longer be
obligated to distribute to its stockholders all of the shares of common stock of
Allied Lending owned by Allied I in a special dividend, except to the extent
required by an existing order of the Commission as described in the accompanying
Joint Proxy Statement/Prospectus.
<PAGE> 10
ALL STOCKHOLDERS ARE URGED TO SIGN, DATE AND MAIL THE ENCLOSED PROXY IN THE
ENCLOSED POSTAGE-PAID ENVELOPE. NO ADDITIONAL POSTAGE IS REQUIRED IF MAILED IN
THE UNITED STATES. ANY STOCKHOLDER MAY REVOKE HIS OR HER PROXY AT ANY TIME
BEFORE IT IS VOTED BY GIVING WRITTEN NOTICE TO THE SECRETARY OF THE APPROPRIATE
COMPANY AT THE ABOVE ADDRESS, BY SUBMITTING A PROPERLY EXECUTED, LATER-DATED
PROXY OR BY VOTING IN PERSON AT THE SPECIAL MEETING. ANY STOCKHOLDER OF RECORD
ATTENDING A SPECIAL MEETING MAY VOTE IN PERSON WHETHER OR NOT HE OR SHE HAS
PREVIOUSLY EXECUTED AND RETURNED A PROXY CARD. IF A STOCKHOLDER ATTENDS A
SPECIAL MEETING, HE OR SHE MAY VOTE IN PERSON EVEN THOUGH HE OR SHE PREVIOUSLY
SENT IN A PROXY.
By Order of each Board of Directors
Tricia Benz Daniels
Secretary
October , 1997
THE BOARD OF DIRECTORS OF EACH COMPANY RECOMMENDS THAT THE STOCKHOLDERS OF
THAT COMPANY VOTE "FOR" APPROVAL OF THE MERGER PROPOSAL. THE BOARD OF DIRECTORS
OF ALLIED LENDING RECOMMENDS THAT STOCKHOLDERS OF ALLIED LENDING VOTE "FOR"
APPROVAL OF THE PLAN PROPOSAL.
<PAGE> 11
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
PRELIMINARY JOINT PROXY STATEMENT/PROSPECTUS SUBJECT TO COMPLETION DATED
SEPTEMBER 26, 1997.
ALLIED CAPITAL CORPORATION
ALLIED CAPITAL CORPORATION II
ALLIED CAPITAL COMMERCIAL CORPORATION
ALLIED CAPITAL LENDING CORPORATION
ALLIED CAPITAL ADVISERS, INC.
1666 K STREET, NW
WASHINGTON, D.C. 20006
(202) 331-1112
JOINT PROXY STATEMENT/PROSPECTUS
SPECIAL MEETINGS OF STOCKHOLDERS
To be held November , 1997
This Joint Proxy Statement/Prospectus is being furnished to holders of
common stock (the "stockholders") of Allied Capital Corporation ("Allied I"),
Allied Capital Corporation II ("Allied II"), Allied Capital Commercial
Corporation ("Allied Commercial"), Allied Capital Lending Corporation ("Allied
Lending") and Allied Capital Advisers, Inc. ("Advisers") (each, a "Company," and
collectively, the "Companies") in connection with the solicitation of proxies by
the board of directors of each Company for use at a special meeting of its
stockholders (each, a "Special Meeting" and collectively, the "Special
Meetings"). The Special Meetings will be held on November , 1997 and will
commence at the following times and at any adjournment or postponement thereof:
Allied I--8:00 a.m.; Allied II--10:00 a.m.; Allied Commercial--12:00 (Noon);
Allied Lending--2:00 p.m.; and Advisers--4:00 p.m. All of the Special Meetings
will be held at the Residence Inn by Marriott, 7335 Wisconsin Avenue, Bethesda,
Maryland 20814. This Joint Proxy Statement/Prospectus and accompanying form of
proxy are first being mailed to stockholders on or about October , 1997.
Stockholders will be asked at the Special Meetings to consider and vote upon
a proposal (the "Merger Proposal") to approve and adopt the Agreement and Plan
of Merger, dated as of August 14, 1997, as amended and restated as of September
19, 1997 (the "Merger Agreement"), by and among Allied I, Allied II, Allied
Commercial, Allied Lending, and Advisers, and the transactions contemplated
thereby, including the merger of Allied I, Allied II, Allied Commercial and
Advisers (each, an "Acquired Company" and collectively the "Acquired Companies")
with and into Allied Lending in a stock-for-stock merger (the "Merger"). The
surviving company is referred to herein as ACC. Subject to approval and
consummation of the Merger, certain corporate actions will be taken, including
the amendment of Allied Lending's Charter, the expansion of ACC's board of
directors, and the selection of independent public accountants for ACC, all as
discussed in this Joint Proxy Statement/Prospectus. Allied Lending stockholders
will also be asked to vote on a stock option plan for ACC. FOR A DISCUSSION OF
CERTAIN RISK FACTORS AND OTHER CONSIDERATIONS THAT EACH STOCKHOLDER SHOULD
CONSIDER, SEE "RISK FACTORS" AND "PROPOSAL 1: THE MERGER PROPOSAL -- CERTAIN
CONSIDERATIONS" HEREIN.
The Merger would be effected through a conversion of each share of Acquired
Company common stock into the number of shares of Allied Lending common stock
determined pursuant to the following exchange ratios (each, an "Exchange Ratio"
and collectively, the "Exchange Ratios"): Allied I -- 1.07 shares; Allied
II -- 1.40 shares; Allied Commercial -- 1.60 shares; and Advisers -- 0.31
shares. Allied Lending's common stock outstanding prior to the Merger will
continue to be outstanding, and will not be converted or changed in the Merger.
The Allied Lending common stock outstanding after the Merger is consummated, and
any Allied Lending common stock issued in the Merger, is hereafter sometimes
referred to as ACC common stock. No stockholder will have appraisal rights in
connection with the Merger. Consummation of the Merger is subject to certain
conditions including approval by each Company's stockholders and certain
regulatory approvals. The Merger Agreement is attached hereto as Appendix A and
incorporated herein by reference.
This Joint Proxy Statement/Prospectus also constitutes a prospectus of
Allied Lending with respect to 46,606,867 shares of Allied Lending issuable to
the stockholders of Allied I, Allied II, Allied Commercial and Advisers.
Allied I, Allied II and Allied Lending are closed-end investment companies
that invest primarily in small businesses. Allied Commercial is a real estate
investment trust ("REIT") that invests in small businesses. Advisers is an
investment adviser to Allied I, Allied II, Allied Commercial, Allied Lending and
other companies. Each Company's shares are traded on the Nasdaq National Market.
THIS JOINT PROXY STATEMENT/PROSPECTUS SETS FORTH INFORMATION ABOUT THE
COMPANIES, AND ACC ON A PRO FORMA BASIS, THAT A PROSPECTIVE INVESTOR OUGHT TO
KNOW BEFORE INVESTING AND SHOULD BE RETAINED FOR FUTURE REFERENCE. Additional
information about the Companies, and ACC on a pro forma basis, including such
information contained in a Statement of Additional Information ("SAI") dated the
same date as this Prospectus, has been filed with the U.S. Securities and
Exchange Commission (the "Commission") and is available upon request and without
charge by contacting a Company, c/o Allied Capital Advisers, Inc., 1666 K
Street, N.W., Washington, D.C. 20006, Investor Relations, or by calling
1-888-818-5298. The Commission maintains a Web site (http://www.sec.gov) that
contains the SAI, material incorporated by reference and other information
regarding each Company. The SAI is incorporated in its entirety by reference
into this Prospectus.
NEITHER THIS TRANSACTION NOR THE SECURITIES TO BE ISSUED IN THE MERGER HAVE BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION. NEITHER THE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS PASSED UPON THE FAIRNESS OR MERITS OF THIS TRANSACTION OR UPON
THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Joint Proxy Statement/Prospectus dated , 1997
<PAGE> 12
TABLE OF CONTENTS
<TABLE>
<S> <C>
SUMMARY............................................................................... 1
The Special Meetings............................................................. 1
Proposal 1: The Merger Proposal.................................................. 2
Proposal 2: The Plan Proposal.................................................... 8
RISK FACTORS.......................................................................... 9
THE SPECIAL MEETINGS.................................................................. 11
Voting Information............................................................... 12
Outstanding Shares of Common Stock............................................... 13
Information Regarding This Solicitation.......................................... 15
PROPOSAL 1: THE MERGER PROPOSAL....................................................... 15
Overview of the Merger........................................................... 15
Reasons for the Merger........................................................... 17
Board Considerations............................................................. 21
Certain Considerations........................................................... 45
The Surviving Company: ACC....................................................... 47
The Merging Companies............................................................ 62
Selected Financial Data of the Companies......................................... 66
Management's Discussion and Analysis and Consolidated Financial Statements....... 79
Pro Forma Condensed Consolidated Financial Statements (Unaudited)................ 79
The Distribution................................................................. 89
Description of Common Stock of Each Company...................................... 91
Comparison of Rights of Stockholders............................................. 93
Market Prices and Dividend Data.................................................. 94
Interests of Certain Persons in the Merger....................................... 95
Beneficial Ownership of Common Stock............................................. 97
Fees and Expenses................................................................ 98
The Merger Agreement............................................................. 100
Other Issues Relating to the Merger.............................................. 106
Certain Federal Income Tax Consequences of the Merger............................ 107
Dissenters' Rights of Appraisal.................................................. 107
Certain Anti-Takeover Provisions................................................. 107
PROPOSAL 2: THE PLAN PROPOSAL......................................................... 109
General.......................................................................... 109
Description of ACC Plan.......................................................... 110
Termination of Existing Plans.................................................... 113
Other Plans:
Employee Stock Ownership Plan and Deferred Compensation Plan................... 113
STOCKHOLDERS' PROPOSALS............................................................... 113
EXPERTS............................................................................... 113
FINANCIAL ADVISERS.................................................................... 114
LEGAL MATTERS......................................................................... 114
OTHER BUSINESS........................................................................ 114
Appendix A -- Agreement and Plan of Merger
Appendix B -- Articles of Merger
Appendix C -- Opinion of Ferris, Baker, Watts, Incorporated
Appendix D -- Opinion of Interstate/Johnson Lane
Appendix E -- Opinion of Scott & Stringfellow, Inc.
Appendix F -- Opinion of Robert W. Baird & Co. Incorporated
Appendix G -- Opinion of Van Kasper & Company
Appendix H -- ACC Stock Option Plan
</TABLE>
ii
<PAGE> 13
AVAILABLE INFORMATION
Each of the Companies is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). In addition,
Allied I, Allied II, and Allied Lending are business development companies
("BDCs") subject to certain provisions of the Investment Company Act of 1940, as
amended (the "1940 Act"), and Advisers is a registered investment adviser
subject to the provisions of the Investment Advisers Act of 1940, as amended
(the "Advisers Act"). In accordance with the Exchange Act, each Company files
periodic reports, proxy statements and other information with the Commission.
Such reports, proxy statements and other information filed by any of the
Companies with the Commission can be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at certain of the Commission's Regional Offices
located at Suite 1400, 500 West Madison Street, Chicago, Illinois, 60661, and
Suite 1300, 7 World Trade Center, New York, New York 10006. Copies of these
materials may be obtained from the Public Reference Section of the Commission,
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Copies also
may be obtained through the Commission's EDGAR database on the Internet at
http://www.sec.gov, or directly from each Company, by writing to that Company,
c/o Allied Capital Advisers, Inc., 1666 K Street, N.W., Washington, D.C. 20006,
Attention: Investor Relations, or by calling 1-888-818-5298).
Allied Lending has filed with the Commission a Registration Statement under
the Securities Act of 1933, as amended (the "Securities Act") on Form N-14 with
respect to the Merger and the shares of ACC common stock to be issued in
connection with the Merger. This Joint Proxy Statement/Prospectus constitutes
the prospectus with respect to such shares of ACC common stock. This Joint Proxy
Statement/Prospectus does not contain all the information set forth in the
Registration Statement. Such additional information may be obtained from the
Commission.
In addition to the foregoing, stockholders should note that updated
financial information presented in each Company's Form 10-Q will be available on
or about November 14, 1997 and may be obtained by contacting Suzanne Sparrow,
Investor Relations, c/o Allied Capital Advisers, Inc., 1666 K Street, N.W.,
Washington, D.C. 20006, or by calling 1-888-818-5298.
All information contained in this Joint Proxy Statement/Prospectus relating
to a Company has been supplied by such Company.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
This Joint Proxy Statement/Prospectus incorporates by reference documents
which are not presented herein or delivered herewith. Any person securing a copy
of this Joint Proxy Statement/Prospectus may obtain without charge, upon written
or oral request, a copy of any of the documents incorporated by reference
herein, except for the exhibits to such documents (unless such exhibits are
specifically incorporated by reference into the documents which this Joint Proxy
Statement/Prospectus incorporates). Requests should be directed to the relevant
Company, c/o Allied Capital Advisers, Inc., 1666 K Street, NW, Washington, D.C.
20006, Attention: Investor Relations (telephone number 1-888-818-5298). Although
the Company will send stockholders copies of any such documents at any time, in
order to ensure timely delivery of the documents, it is suggested that any such
request be made by November , 1997.
The following documents, which have been filed by Allied I, Allied II,
Allied Commercial, Allied Lending, or Advisers pursuant to the Exchange Act
and/or the Investment Company Act of 1940, as amended (the "1940 Act") are
hereby incorporated by reference in this Joint Proxy Statement/Prospectus:
1. Each Company's Annual Report on Form 10-K for the year ended December
31, 1996.
2. The portions of each Company's definitive proxy statement dated March
24, 1997, in the case of Allied I, March 26, 1997, in the case of Allied
II, April 2, 1997, in the case of Allied Lending, April 4, 1997, in the
case of Allied Commercial and April 14, 1997, in the case of Advisers
that were incorporated by reference in that Company's Annual Report on
Form 10-K for the year ended December 31, 1996.
iii
<PAGE> 14
3. The portions of each Company's Annual Report to Stockholders dated
December 31, 1996 that were incorporated by reference in that Company's
Annual Report on Form 10-K for the year ended December 31, 1996.
4. Each Company's quarterly reports on Form 10-Q for the quarters ended
March 31, 1997 and June 30, 1997.
Any statements contained herein concerning the provisions of any contract,
agreement or other document are not necessarily complete and, in each instance,
reference is made to the copy of such contract, agreement or other document
filed as an exhibit to the Registration Statement or otherwise filed with the
Commission. Each such statement is qualified in its entirety by such reference.
No person is authorized to give any information or to make any
representation not contained in this Joint Proxy Statement/Prospectus, and, if
given or made, such information or representation should not be relied upon as
having been authorized. This Joint Proxy Statement/Prospectus does not
constitute an offer to sell, or a solicitation of an offer to purchase, the
securities offered by this Joint Proxy Statement/Prospectus, or the solicitation
of a proxy, in any jurisdiction to or from any person to whom it is unlawful to
make such an offer, or solicitation of an offer, or proxy solicitation in such
jurisdiction. Neither the delivery of this Joint Proxy Statement/Prospectus nor
any distribution of the securities being offered pursuant to this Joint Proxy
Statement/Prospectus shall, under any circumstances, create an implication that
there has been no change in the information set forth herein since the date of
this Joint Proxy Statement/Prospectus.
iv
<PAGE> 15
SUMMARY
The following is a summary of certain information contained elsewhere in this
Joint Proxy Statement/Prospectus. Reference is made to, and this summary is
qualified in its entirety by, the more detailed information contained elsewhere
herein, the appendices hereto and the documents referred to and incorporated by
reference herein. Stockholders are urged to read this Joint Proxy
Statement/Prospectus and the appendices hereto in their entirety.
THE SPECIAL MEETINGS
THE SPECIAL MEETINGS
See "Proposal 1: The
Merger Proposal" Special Meetings of all the Companies are scheduled
to be held on November , 1997. At the Special
Meetings, stockholders will be asked to consider
and vote upon the Merger Proposal. As discussed
below, approval of the Merger Proposal also
constitutes acceptance, approval, and
ratification of certain corporate actions,
summarized as follows: (a) amendment of Allied
Lending's Charter to (i) increase the number of
authorized shares of common stock from 20,000,000
to 100,000,000 shares, (ii) change Allied
Lending's name following the Merger to "Allied
Capital Corporation" and (iii) effect certain
other changes as described in this Joint Proxy
Statement/Prospectus; (b) expansion of ACC's
board of directors to include 23 members; and (c)
selection by Allied Lending's board of directors
of Arthur Andersen LLP as the independent
accountants for ACC until its next annual meeting
of stockholders.
See "Proposal 2: The
Plan Proposal" Stockholders of Allied Lending will be asked at the
Special Meeting to consider and vote upon the
Plan Proposal, which is a proposal to adopt the
ACC Plan, whereby stock options may be granted to
officers and directors of ACC after the Merger.
VOTING INFORMATION
See "Proposal 1:
The Merger
Proposal -- The
Special Meetings --
Voting" A Company's stockholders of record on October ,
1997, will be entitled to notice of, and to vote
at, that Company's Special Meeting and any
adjournments or postponements thereof. Each share
of a Company's common stock is entitled to one
vote. The presence, in person or by proxy, of
stockholders holding a majority of a Company's
shares will constitute a quorum, and in the event
that there are not sufficient shares represented
for a quorum or vote to approve the Merger
Proposal or otherwise at any Special Meeting,
such Special Meeting may be adjourned in order to
permit further solicitation of proxies by the
appropriate Company.
The affirmative vote of at least two-thirds of all
the votes entitled to be cast with respect to
each Company, voting separately, is required to
approve the Merger Proposal. The affirmative vote
of the holders of a majority of Allied Lending's
outstanding shares present or represented at the
Allied Lending Special Meeting, or any
adjournment thereof, is required to approve the
Plan Proposal. A failure to vote will have the
same effect as voting against the Merger
Proposal.
1
<PAGE> 16
PROPOSAL 1: THE MERGER PROPOSAL
OVERVIEW OF THE MERGER Stockholders are being asked to approve the merger
of Allied I, Allied II, Allied Commercial and
Advisers (each, an "Acquired Company," and
collectively, the "Acquired Companies") with and
into Allied Lending, which would be renamed
Allied Capital Corporation ("ACC"), an
internally-managed investment fund that would
operate as a business development company
("BDC"). The Merger is in effect a combination of
the existing businesses of all of the merging
Companies, and ACC is expected to continue the
business of each of the merging Companies.
See "Board
Considerations" The board of directors of each Company carefully
considered many issues before deciding to submit
the Merger Proposal to its stockholders,
including the reasons for and potential benefits
of the Merger, the terms of the Agreement and
Plan of Merger, dated as of August 14, 1997, as
amended and restated as of September 19, 1997
(the "Merger Agreement") (a copy of which is
attached hereto as Appendix A). The boards,
individually and collectively, engaged financial
advisers and legal counsel to assist them in
making their determinations. Based upon, among
other things, an opinion of its independent
financial adviser, each board of directors
unanimously recommends that its Company's
stockholders vote to approve the Merger Proposal.
See "Overview of the
Merger--Exchange of
Shares" The Merger would be effected through a conversion
of each share of Acquired Company common stock
into the number of shares of Allied Lending
common stock determined pursuant to the Exchange
Ratio set forth below with respect to each
Acquired Company:
<TABLE>
<CAPTION>
WILL BE
EACH SHARE OF EXCHANGED FOR SHARES OF
------------------------------ ------------- ----------------------
<S> <C> <C> <C>
Allied I 1.07 Allied Lending
Allied II 1.40 Allied Lending
Allied Commercial 1.60 Allied Lending
Advisers 0.31 Allied Lending
</TABLE>
Allied Lending's common stock would be neither
converted nor changed in the Merger. No
stockholder will have appraisal rights in
connection with the Merger. Stockholders are
exchanging their shares in order to continue the
businesses of the merging companies in a single,
larger company. Each board of directors
considered a number of factors, including an
opinion from its financial adviser and several
valuation analyses presented by its financial
adviser and the financial adviser to the Merger,
before concluding the Merger is fair to
stockholders.
See "Overview of the
Merger -- General
Structure of the Merger" If the Merger is effected, the separate existence
of each Acquired Company will cease, the shares
of common stock of each Acquired Company will
cease to exist, the assets of each Acquired
Company will be owned by ACC, and ACC will become
liable for all the debts and obligations of each
Acquired Company.
In connection with the Merger, the Companies and
their respective subsidiaries would engage in a
series of mergers and related transactions prior
to and after the Merger in order to facilitate
the post-Merger corporate structure of ACC and
its subsidiaries.
2
<PAGE> 17
See "Overview of the
Merger -- Request for
Exemptive
Relief " The Merger will be consummated only if it is
approved by the stockholders of each Company,
voting separately, by the affirmative vote of at
least two-thirds of all the votes entitled to be
cast on the Merger Proposal. In addition, the
Merger is contingent upon, among other
conditions, the Commission granting certain
exemptive relief that has been requested by the
Companies and certain related entities in an
application that has been submitted to the
Commission, and the approval of the SBA. If the
Commission has not granted the order or if the
SBA has not granted permission by the date of the
Special Meetings, then the Companies will adjourn
the Special Meetings, regardless of whether a
quorum has been achieved.
REASONS FOR THE MERGER The board of directors of each Company has
determined that a merger of all of the Companies
into a single, internally managed investment
company should result in a company with
characteristics superior to any one of the
Companies, and an opportunity to increase
stockholder value for that Company's
stockholders. The expected benefits of the Merger
are summarized below. There can be no assurance
that any such benefits will be achieved, or as to
the time frame for their achievement.
See "Reasons for the
Merger -- Increased Size" INCREASED SIZE. ACC, as the single post-Merger
public company, would be the single largest BDC
in the United States and would be significantly
larger than any one merging Company in terms of
total assets, total equity capital and total
market capitalization. A larger asset base is
expected to provide for an ability to make larger
investments in growing companies while
maintaining portfolio diversity. A larger equity
base is expected to provide for decreased costs
of debt financing and should establish an
improved foundation for growth. A larger market
capitalization is expected to provide for
increased stockholder liquidity and increased
visibility in the capital markets.
See "Reasons for the
Merger -- Improved Mix of
Income" IMPROVED MIX OF INCOME. It is anticipated that the
combined operations of the Companies would
provide for a more diverse and stable income
stream to provide dividends to stockholders. ACC
should have an improved blend of ordinary
investment, capital gain and fee income. ACC
would continue to be a regulated investment
company under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"),
and as a result, will continue to be required to
distribute substantially all of its ordinary
taxable income to stockholders. It is anticipated
that ACC would continue to distribute dividends
on a quarterly basis.
See "Reasons for the
Merger -- Single Entity
with
Focus on High Return
Investment
Opportunities" SINGLE ENTITY WITH FOCUS ON HIGH RETURN INVESTMENT
OPPORTUNITIES. ACC would operate as a single
entity with separate strategic business units
measured by contribution to returns on investor
equity. Operating as a single company should
enable ACC to expand and enhance its existing
businesses, improve its asset and liability
management and allocate resources more
effectively.
See "Reasons for the
Merger -- Internally
Managed" INTERNALLY MANAGED. The merger of Advisers into ACC
would result in a single company that is
internally managed by the same team that manages
all of the Companies today. Internal management
should create significant efficiencies in the
operation of ACC, including direct
3
<PAGE> 18
alignment of employee performance and incentive
compensation, elimination of costly redundant
processes and elimination of any perceived
conflicts of interest between an external adviser
and its clients.
ACC would be a registered investment adviser and is
expected to succeed to the advisory agreements
between Advisers and the private funds currently
managed by Advisers. ACC would seek to increase
its investment advisory business and assets under
management, both through existing private funds
under management and through new funds under
management.
See "Reasons for the
Merger -- Tax Benefits" TAX BENEFITS. The merger of Advisers into ACC
should result in a tax savings resulting from the
elimination of the corporate taxation of
Advisers' earnings resulting from its advisory
agreements with Allied I, Allied II, Allied
Commercial and Allied Lending. The profits of the
once-external adviser generally would inure to
the benefit of ACC, and ACC generally would incur
no federal corporate income tax, thereby
increasing earnings available for distribution to
stockholders.
See "Reasons for the
Merger -- Dividends" DIVIDENDS. As a result of ACC's increased size,
improved mix of income, and its expected ability
to streamline operations as a single entity, ACC
should be able to increase its earnings available
for dividends to stockholders. However, there can
be no assurance that ACC would be able to achieve
that result.
See "Reasons for the
Merger -- One Allied
Capital" ONE ALLIED CAPITAL. The existence of multiple
public Allied Capital entities has caused
confusion in the public equity markets and in the
financial media over the years. It is anticipated
that a single public Allied Capital would
eliminate this confusion, and ACC should enjoy
more accurate financial media coverage and
improved market visibility.
THE SURVIVING COMPANY: ACC If the Merger is effected, the Acquired Companies
would be merged with and into Allied Lending,
which would be renamed ACC. ACC would in
substance be a new entity that, together with its
subsidiaries, would be an amalgamation of the
five Companies and their subsidiaries, with an
investment objective and policies that encompass
the objective and policies of each Company. In
short, the range of investment opportunities and
advisory services currently offered by the
Companies would be distilled into ACC. ACC will
be traded on the Nasdaq National Market
("Nasdaq") under the symbol "ALLC".
See "The Surviving Company:
ACC -- The Business of
ACC" The investment objective of ACC would be to achieve
current income and capital gains. THERE CAN BE NO
ASSURANCE THAT ACC WOULD ACHIEVE ITS INVESTMENT
OBJECTIVE. ACC would seek to achieve this
objective by investing primarily in private,
growing businesses in a variety of industries and
in diverse geographic locations (primarily in the
United States). This investment objective and
strategy is broad enough to encompass each of the
current investment objectives and/or strategies
of the Companies:
See "The Merging
Companies -- Allied I" and
"Allied II" - Allied I and Allied II each currently seeks
to achieve both long-term growth in the
value of its net assets and current income
by providing debt, mezzanine, and equity
financing (in private transactions) for
small, privately owned growth companies.
4
<PAGE> 19
See "The Merging
Companies -- Allied
Commercial" - Allied Commercial primarily invests in
commercial loans to small businesses secured
by mortgages on real estate.
See "The Merging
Companies -- Allied
Lending" - Allied Lending seeks to achieve a high level
of current income by investing in loans at
least partially guaranteed by the SBA, as
well as loans made in conjunction with such
loans, and other loans.
See "The Merging
Companies -- Advisers" - Advisers is engaged primarily in the
business of providing investment advice and
related services to Allied I, Allied II,
Allied Commercial and Allied Lending as well
as to certain private investment funds.
See "The Surviving Company:
ACC -- The Business of ACC" ACC's investment portfolio, resulting from the
merger of the portfolios and businesses of the
Companies, would consist of small senior loans,
small and medium-sized subordinated loans with
equity features, and small and medium-sized
commercial mortgage loans. These portfolios will
not be realigned solely to effect the Merger. ACC
would initially operate in the following four
strategic lines of business:
See "The Surviving Company:
ACC -- The Business of
ACC -- Mezzanine Finance" MEZZANINE FINANCE. ACC, as successor to the
businesses and portfolios of Allied I and Allied
II, would provide debt, mezzanine, and equity
financing primarily for small, private companies
or small, thinly traded public companies that
lack access to capital. ACC would provide such
financing both directly and through its wholly
owned subsidiaries for growth, leveraged buyouts
of small companies, note purchases, loan
restructurings, acquisitions, recapitalizations,
and bridge financings for small businesses.
See "The Surviving Company:
ACC -- The Business of
ACC -- Commercial Real
Estate" COMMERCIAL REAL ESTATE FINANCE. As successor to the
business and portfolio of Allied Commercial, ACC
would invest in commercial loans to small
businesses secured by liens or mortgages on real
estate ("commercial mortgage loans"). ACC would
continue Allied Commercial's practice of
providing creative and flexible loan terms, and
would specialize in mortgage financing for
entrepreneurs whose business is a source of
revenue, in addition to the real estate
collateralizing the commercial mortgage loan. ACC
would derive income from interest on its
commercial mortgage loans and from discounts on
its portfolio of purchased commercial mortgage
loans. ACC also would provide other long-term
financing to businesses, such as sale-leaseback
financing.
See "The Surviving Company:
ACC -- The Business of
ACC -- Small Business
Lending" SMALL BUSINESS LENDING. As successor to the
business and portfolio of Allied Lending, ACC,
through a wholly owned subsidiary, Allied Capital
SBLC Corporation ("Allied SBLC"), would
participate in the SBA's Section 7(a) Loan
Program. As a Section 7(a) lender, ACC would make
loans that are partially guaranteed by the SBA to
small businesses. All of ACC's Section 7(a) loans
would, in fact, be originated by Allied SBLC.
See "The Surviving Company:
ACC -- The Business of
ACC -- Investment
Management" INVESTMENT MANAGEMENT. ACC would be a registered
investment adviser and is expected to succeed to
the advisory agreements between Advisers and its
private managed funds. ACC would seek to increase
its private assets under management. Private
funds under ACC's management would target
investment opportunities in certain geographic
locations or in specific industries.
5
<PAGE> 20
See "The Surviving Company:
ACC -- The Management of
ACC" As with each of the Companies, the business of ACC
would be managed under the supervision of its
board of directors. The responsibilities of each
member of ACC's board of directors would include,
among other things, oversight over its loan
approval process, the quarterly valuation of
ACC's assets, and oversight of ACC's financing
arrangements. These duties are similar to the
duties currently performed by the board of
directors of each of the Companies.
Allied Lending's board of directors, reconstituted
to include each of the current directors of
Allied I, Allied II, Allied Commercial, and
Advisers, other than certain directors who would
also be executive officers of ACC, would become
the board of directors of ACC following the
Merger.
DIVIDENDS AND
DISTRIBUTIONS
See "The Merging
Companies -- Dividends and
Distributions" If the Merger is approved, ACC is expected to pay
dividends as declared by the board of directors,
as Allied I, Allied II, Allied Commercial and
Allied Lending have done in the past. As a
stand-alone company, Advisers has never paid a
dividend and does not plan to pay dividends in
the foreseeable future. It is anticipated that
ACC would, after the Effective Time, also declare
a dividend in an amount equal to its total
current and accumulated earnings and profits,
including such earnings and profits to which ACC
succeeded in the Merger.
See "The Surviving Company:
ACC -- Dividend
Reinvestment
Plan" ACC will offer an "opt-out" dividend reinvestment
plan ("DRIP Plan"), which means that, for shares
held directly by a stockholder, all dividends
will be automatically reinvested into additional
shares of ACC, unless a stockholder specifically
requests in writing to receive cash dividends.
Stockholders exchanging shares of Advisers who
have not had the opportunity to participate in a
DRIP Plan prior to the Merger, will be
automatically enrolled in the ACC DRIP Plan
unless they otherwise instruct the transfer agent
in writing.
Instructions concerning existing dividend
reinvestment accounts, and requests for cash
payments or direct deposit that are already in
place with the Companies' transfer agent will be
transferred on all exchanged shares for
registered stockholders of Allied I, Allied II,
Allied Commercial and Allied Lending.
Stockholders may change their enrollment status
at any time upon written notice. Stockholders
holding shares with a broker or other nominee
should consult their nominee to determine whether
dividends will be paid in cash or reinvested.
See "The Merging
Companies -- Dividends and
Distributions -- Dividend
Reinvestment Plans" ACC's DRIP Plan would be different from Allied I's
current "opt-in" DRIP Plan, pursuant to which all
distributions are reinvested in whole and
fractional shares for the account of all
stockholders of record who choose to participate
in the Plan. Each of Allied II, Allied Commercial
and Allied Lending has adopted an "opt-out" DRIP
Plan.
See "The Distribution --
Background and Reasons for
the
Distribution" In connection with the Merger, Allied I has agreed
to declare and pay to its stockholders a special
dividend in lieu of its regular fourth quarter or
annual extra dividend for 1997 consisting of all
of the shares of common stock of Allied Lending
owned by Allied I, payable immediately prior to
the Effective Time. Allied I may distribute some
or all of the shares of common stock of Allied
Lending in a dividend to its stockholders at any
time, even if the Merger is not effected.
6
<PAGE> 21
FEDERAL INCOME TAX
CONSIDERATIONS
See "The Surviving Company:
ACC -- Federal Income Tax
Issues" and "The Merging
Companies -- Federal Income
Tax Issues" ACC intends to elect to be treated and to qualify
for federal income tax purposes as a "regulated
investment company" ("RIC") within the meaning of
Section 851 of the Code. Currently, each of
Allied I, Allied II and Allied Lending and their
respective subsidiaries is also treated for tax
purposes as a RIC. Allied Commercial has elected
to be treated as a REIT for tax purposes and
Advisers is a corporation taxable on its earnings
at the corporate level.
See "Certain Federal Income
Tax
Consequences of the Merger" The Merger has been structured with the intention
to qualify as a tax-free reorganization under
section 368(a)(1)(A) of the Code. Assuming that
the Merger so qualifies, no gain or loss should
be recognized by any of the Companies solely as a
result of the Merger, no gain or loss will be
recognized by the stockholders of any of the
Acquired Companies as a result of the Merger with
respect to shares of their common stock in the
Companies converted into shares of Allied Lending
common stock, and the tax basis of Allied Lending
common stock received by stockholders of the
Acquired Companies in the Merger will be the same
as the tax basis of the common stock of the
Acquired Companies deemed to be surrendered in
exchange therefor. In addition, the holding
period of the Allied Lending common stock
received in the Merger by the stockholders of the
Acquired Companies will include the period during
which the shares of common stock of the Acquired
Companies deemed surrendered in exchange therefor
were held. The Companies have received an opinion
of counsel that the Merger will qualify as a
tax-free reorganization.
TAX MATTERS ARE VERY COMPLICATED AND THE TAX
CONSEQUENCES OF THE MERGER TO A PARTICULAR
STOCKHOLDER WILL DEPEND ON THE FACTS OF THAT
STOCKHOLDER'S SITUATION. EACH STOCKHOLDER SHOULD
CONSULT HIS OR HER OWN TAX ADVISER FOR A FULL
UNDERSTANDING OF THE TAX CONSEQUENCES OF THE
MERGER TO HIM OR HER.
OTHER INFORMATION
See "The Merger
Agreement" Other information that may be material to
stockholders in considering the Merger Proposal
is contained herein, including information about
certain corporate transactions, the interests of
certain persons in the Merger, rights of
stockholders, and terms and conditions to the
Merger (including the required regulatory
approvals). All stockholders are encouraged to
read this Joint Proxy Statement/Prospectus in its
entirety before voting on the Merger Proposal.
7
<PAGE> 22
PROPOSAL 2: THE PLAN PROPOSAL
GENERAL Stockholders of Allied Lending are being asked to
approve a stock option plan for ACC (the "ACC
Plan") that would replace each Company's existing
stock option plan (each, an "Existing Plan").
DESCRIPTION OF ACC PLAN The ACC Plan is intended to advance the interests
of ACC by providing certain persons with
additional incentives to exert their best efforts
on behalf of ACC, to increase their proprietary
interest in the success of ACC, to reward
outstanding performance, and to attract and
retain persons of outstanding ability. The ACC
Plan would be administered and interpreted by
ACC's compensation committee. A complete
description of the ACC Plan, including its
purpose, authorization, administration, eligible
participants, the terms of awards and the federal
income tax consequences of awards under the ACC
Plan is contained under the caption "Description
of ACC Plan" herein. The form of the ACC Plan is
also attached hereto as Appendix H.
TERMINATION OF EXISTING
PLANS All unexercised vested and unvested options under
the Existing Plans would be canceled, and the
Existing Plans would each terminate, on the date
the Merger is effected.
8
<PAGE> 23
RISK FACTORS
As the successor to each Company, ACC, the surviving company, would be
subject to some or all of the risks associated with each of the Companies.
However, because ACC would be significantly larger than any one of the
Companies, and because ACC's investment portfolio would consist of a mix of the
portfolios of all of the Companies, any risk factor that affects only one
Company may have a lesser impact on ACC following the Merger. Specific risk
factors associated with each Company are discussed below. Certain risk factors
also are applicable to ACC's and each Company's subsidiaries that engage, or
will engage, in the types of activities and investments associated with those
risk factors.
The Companies have made forward-looking statements in this document that
are subject to risks and uncertainties. Forward-looking statements include the
information concerning possible or assumed future results of operations of each
Company individually or in the aggregate and those preceded by, followed by or
that include the words "believes," "expects," "anticipates," "should" or similar
expressions. A stockholder should understand that the following important
factors, in addition to those discussed elsewhere in this document and in the
documents which are incorporated by reference, could affect the future results
of the Companies or ACC, and could cause those results to differ materially from
those expressed in the forward-looking statements of the Companies or ACC:
material adverse changes in economic conditions in the markets served by the
Companies and ACC; a significant delay in the expected closing of the Merger;
and future regulatory actions and conditions in ACC's operating areas.
RISKS OF DEFAULT
Allied I, Allied II, Allied Commercial and Allied Lending each invests
primarily in, and Allied Commercial acquires loans made to, small businesses.
Loans to small businesses involve a high risk of default, and generally are not
rated by any nationally recognized statistical rating organization. Small
businesses usually 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. These businesses
typically depend for their success on the management talents and efforts of one
person or a small group of persons whose death, disability or resignation would
adversely affect the business. Because these businesses frequently have highly
leveraged capital structures, reduced cash flows resulting from adverse
competitive developments, a shift in customer preferences or an economic
downturn can severely affect the return on, or the recovery of, Allied I's,
Allied II's, Allied Commercial's or Allied Lending's investments in such
businesses. Investment in small companies therefore involves a high degree of
business and financial risk, which can result in substantial losses, and
accordingly, should be considered speculative.
LIMITED INFORMATION
There is generally little or no publicly available information about
investments in private companies, and each of Allied I, Allied II, Allied
Commercial and Allied Lending must depend upon the diligence of Advisers to
obtain information for its decision to invest in any growing business.
INTEREST RATE FLUCTUATIONS
Variable Rate Loans. Allied Lending invests primarily in, and each of
Allied I, Allied II and Allied Commercial may invest in, acquire or originate
variable rate loans. The return on investments in variable rate loans could
decline if market interest rates were to decline from current levels. There also
is a risk that during periods when market interest rates increase, variable rate
loans may appear unattractive to some borrowers. Moreover, rising interest rates
may tend to reduce the premium that Allied Lending would receive on sales of the
guaranteed portions of its loans. Any substantial increase in market interest
rates could result in greater rates of prepayments of or defaults on outstanding
variable rate loans, and may inhibit the expansion of the business of Allied I,
Allied II, Allied Commercial or Allied Lending, or reduce the profitability of
one or more of these entities.
9
<PAGE> 24
Fixed-Rate Loans. Each of Allied I, Allied II and Allied Commercial
originates or purchases loans with fixed rates of interest. Loans with fixed
interest rates that are financed with variable rate debt capital could expose
each such Company to reduced net margins on its loans as interest rates
increase. The value of investments in fixed rate loans tends to decrease when
interest rates rise and increase when interest rates fall. Each Company monitors
its ratio of variable rate debt to fixed rate assets, and will seek to hedge any
exposure when appropriate.
LOSS OF PASS-THROUGH TAX TREATMENT
Each of Allied I, Allied II and Allied Lending would cease to qualify for
pass-through tax treatment under Subchapter M if it is unable to comply with the
diversification or distribution requirements contained in Subchapter M of the
Code, or if it ceases to qualify as a BDC under the Code. Each such Company also
could be subject to a 4% excise tax (and, in certain cases, corporate level
income tax) if it fails to make certain distributions. Unavailability of
Subchapter M tax treatment could have a material adverse effect on the total
return, if any, obtainable from an investment in any such Company.
RISKS OF LEVERAGE
Each of Allied I, Allied Commercial and Allied Lending borrows funds from,
and issues senior debt securities to, banks or other lenders. Though they have
not engaged in such borrowings to date, Allied II and Advisers may do so in the
future. Lenders of these senior securities have fixed dollar claims on each such
Company's consolidated assets which are superior to the claims of that Company's
stockholders. If the value of a Company's consolidated assets increases, then
such leveraging techniques would cause the net asset value attributable to the
Company's common stock to increase more sharply than it would have had the
techniques not been utilized. Conversely, a decrease in the value of a Company's
consolidated assets would cause net asset value to decline more sharply than it
otherwise would if the senior funds had not been borrowed. Similarly, any
increase in a Company's consolidated income in excess of consolidated interest
payable on the borrowed funds would cause its net income to increase more than
it would without the leverage, while any decrease in its consolidated income
would cause net income to decline more sharply than it would had the funds not
been borrowed. Moreover, the costs of borrowing may exceed the income from the
portfolio securities purchased with the borrowed funds, and a decline in net
asset value may result if the investment performance of the additional
securities purchased fail to cover the Company's costs of borrowing to purchase
these additional securities. Such a decline could negatively affect the
Company's ability to make common stock dividend payments, and, in the case of
Allied I, Allied II and Allied Lending, if asset coverage for a class of senior
security representing indebtedness declines to less than 200%, the Company may
be required to sell a portion of its investments when it is disadvantageous to
do so. Leverage is generally considered a speculative investment technique. The
ability of a Company to achieve its investment objective may depend in part on
its continued ability to maintain a leveraged capital structure by borrowing
from banks or other lenders on favorable terms, and there can be no assurance
that such leverage can be maintained.
DEPENDENCE ON MANAGEMENT
Each of Allied I, Allied II, Allied Commercial and Allied Lending is wholly
dependent for the selection, structuring, closing and monitoring of its
investments on the diligence and skill of Advisers' officers and employees. If
the Merger is consummated, all of the officers and employees of Advisers
immediately prior to the Effective Time would become officers and employees,
respectively, of ACC and ACC would be internally managed. ACC would then be
dependent upon the efforts of its key personnel for its operations, and
therefore to the extent that key members of management were to leave ACC, the
company could be adversely affected.
COMPETITION
Many entities and individuals compete for investments similar to those in
which Allied I, Allied II, Allied Commercial and Allied Lending invest, some of
whom have greater resources than the Companies. Increased competition would make
it more difficult for the Companies to purchase or originate small business
loans at attractive prices. As a result of this competition, each such Company
may from time to time be precluded
10
<PAGE> 25
from making otherwise attractive investments on terms considered to be prudent
in light of the risks assumed. With its increased size and pooled resources,
however, ACC should be better able to compete for investments, although there is
no assurance that this result will occur.
LONG-TERM CHARACTER OF INVESTMENTS
It is expected that investments made in accordance with the investment
objective of Allied I and Allied II usually will 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 approximately three to eight years. There
can be no assurance that either a current return or capital gains will actually
be achieved.
ILLIQUIDITY OF INVESTMENTS
Allied I and Allied II each acquires securities directly from issuers in
private transactions, and the major portion of such investments is subject to
restrictions on resale or is otherwise illiquid. In particular, there is usually
no established trading market in which such securities could be sold. In
addition, most of these securities cannot be sold to the public without
registration under the Securities Act, which involves delay, uncertainty and
expense. Allied Lending's small business lending company ("SBLC") subsidiary is
required, under SBA regulations, to retain an economic interest in the
unguaranteed portions of its Section 7(a) loans until maturity, and thus a
portion of Allied Lending's investments are illiquid. Finally, the commercial
mortgage loans in which Allied Commercial invests are also private securities,
and there is no established trading market in which such loans can be sold.
GOVERNMENT REGULATION
Allied Lending's business is largely dependent upon the
government-sponsored SBA Section 7(a) Loan Program, discussed below. There can
be no assurance that government appropriations for this program will continue,
and the program is subject to changes in law or regulation that may have an
adverse impact on the operations of Allied Lending.
REMEDIES UPON DEFAULT
In the event of a default on a commercial mortgage loan or a small business
loan, Allied I, Allied II, Allied Commercial and Allied Lending may experience
significant delays in exercising its rights as a lender and incur substantial
costs in foreclosing on collateral and in taking other steps to protect its
investments. The ability to obtain payment beyond the collateral from the
borrower or guarantor might be limited by bankruptcy or similar laws, and there
can be no assurance that the Companies would ultimately collect the full amount
on a defaulted loan.
FOREIGN INVESTMENTS
Allied I's investments in small businesses that are qualified for
investment by the Overseas Private Investment Corporation ("OPIC") generally are
made in countries representing the world's emerging or developing markets.
Foreign investments involve risks not ordinarily associated with domestic
investing, including: (i) possible imposition of market controls; (ii) possible
seizure, expropriation or nationalization of assets; (iii) lower liquidity and
higher volatility in certain foreign markets; (iv) the impact of political,
social or diplomatic events; and (v) the possibility that a foreign government
could restrict the ability of an entity in which Allied I has invested from
meeting its obligations under borrowings or other arrangements. Allied I
attempts to reduce certain of these risks by diversifying its OPIC-related
investments by country and type of business.
THE SPECIAL MEETINGS
Special Meetings of all the Companies are scheduled to be held on November
1997 at the Residence Inn by Marriott, 7335 Wisconsin Avenue, Bethesda,
Maryland 20814. This Joint Proxy Statement/Prospectus
11
<PAGE> 26
is furnished in connection with the solicitation of proxies by the board of
directors of each Company for use at that Company's Special Meeting. At the
Special Meetings, stockholders will be asked to consider and vote upon the
Merger Proposal, which is a proposal to approve the Merger Agreement and other
related transactions. As proposed, the Merger is a stock-for-stock merger of
Allied I, Allied II, Allied Commercial, and Advisers with and into Allied
Lending.
As discussed above, approval of the Merger Proposal also constitutes
acceptance, approval, and ratification of certain corporate actions, summarized
as follows: (a) amendment of Allied Lending's Charter to (i) increase the number
of authorized shares of common stock from 20,000,000 to 100,000,000 shares, (ii)
change Allied Lending's name following the Merger to "Allied Capital
Corporation" and (iii) effect certain other changes as described in this Joint
Proxy Statement/Prospectus; (b) expansion of ACC's board of directors to include
23 members, encompassing all the current directors of the Companies, with the
exception of certain directors who are members of management; and (c) selection
by Allied Lending's board of directors of Arthur Andersen LLP as the independent
accountants for ACC until its next annual meeting of stockholders.
Stockholders of Allied Lending also will be asked at the Special Meeting to
consider and vote upon the Plan Proposal, which is a proposal to adopt the ACC
Plan, which is a stock option plan that permits stock options to be granted to
officers and directors of ACC after the Merger.
The Merger is dependent upon the satisfaction or waiver of certain
conditions to the Merger, including: (a) the approval of the Merger Proposal by
the stockholders of each Company, voting separately, by the affirmative vote of
at least two-thirds of all the votes entitled to be cast on the Merger Proposal;
and (b) the receipt of an exemptive order from Commission, SBA approval, and
certain other regulatory approvals and customary closing conditions.
Provided such conditions are satisfied or waived, the Merger will be
effected, regardless of whether the Plan Proposal is approved or the ACC Plan is
adopted. Conversely, the adoption of the ACC Plan is dependent upon the Merger,
as well as the approval of the Plan Proposal by the requisite majority of Allied
Lending's stockholders. Thus, if the Merger is not effected for any reason, the
ACC Plan will not be implemented, notwithstanding approval of the Plan Proposal
by Allied Lending's stockholders. In addition, in connection with the Merger,
Allied I has agreed to declare and pay to its stockholders a special dividend,
as discussed below under "Proposal 1 -- The Distribution -- Shares to be
Received."
VOTING INFORMATION
The board of directors of each Company has fixed the close of business on
October , 1997 as the record date for determination of the stockholders
entitled to notice of, and to vote at, that Company's Special Meeting and any
adjournments or postponements thereof. Each Company's common stock outstanding
on September 23, 1997 is set forth below under "Outstanding Shares of Common
Stock." The stockholders entitled to vote at the Special Meetings are those of
record on that date. Each share of a Company's common stock is entitled to one
vote. With respect to each Company's Special Meeting, the presence, in person or
by proxy, of stockholders holding a majority of such Company's shares will
constitute a quorum. In the event that there are not sufficient shares
represented for a quorum or vote to approve the Merger Proposal or otherwise at
any Special Meeting, or if the required regulatory approvals have not been
received, such Special Meeting may be adjourned. Any such adjournment will
require the affirmative vote of a majority of the shares represented at the
Special 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. A stockholder vote may be taken on one or more of the proposals on
which that stockholder is entitled to vote prior to any such adjournment if
sufficient votes have been received for approval.
The affirmative vote of at least two-thirds of all the votes entitled to be
cast with respect to each Company, voting separately, is required to approve the
Merger Proposal. The affirmative vote of the holders of
12
<PAGE> 27
a majority of Allied Lending's outstanding shares present or represented at the
Allied Lending Special Meeting, or any adjournment thereof, is required to
approve the Plan Proposal.
Abstentions and broker non-votes will be counted among those shares
represented at the Special Meeting for purposes of determining whether a quorum
is present. With respect to the Merger Proposal, shares that are voted as
abstentions and broker non-votes will have the effect, together with any other
shares not voted at the Special Meeting, of votes against the Merger Proposal.
With respect to the Plan Proposal, shares that are voted as abstentions will
have the effect of a vote against the Plan Proposal, and broker non-votes will
have no effect on the voting for such Plan Proposal.
IT IS IMPORTANT THAT ALL PROXIES BE RETURNED PROMPTLY. THEREFORE, WHETHER
OR NOT STOCKHOLDERS PLAN TO BE PRESENT IN PERSON AT THE SPECIAL MEETINGS, ALL
STOCKHOLDERS ARE ENCOURAGED TO VOTE, DATE AND SIGN THE ENCLOSED PROXY CARD AND
RETURN IT IN THE ENCLOSED ENVELOPE. THIS WILL NOT PREVENT ANY STOCKHOLDER FROM
VOTING IN PERSON IF SUCH STOCKHOLDER IS PRESENT AT THE APPROPRIATE SPECIAL
MEETING.
Any stockholder may revoke his or her proxy at any time before it is voted
by giving written notice to the Secretary of the appropriate Company at the
above address, by submitting a properly executed, later-dated proxy or by voting
in person at the Special Meeting. Any stockholder of record attending a Special
Meeting may vote in person whether or not he or she has previously executed and
returned a proxy card. If a stockholder's shares are held by a broker, bank or
other institution or nominee, that stockholder may vote such shares at the
Special Meeting only if he or she obtains proper written authority from his or
her institution or nominee and presents such written authority at the Special
Meeting.
OUTSTANDING SHARES OF COMMON STOCK
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK SHARES OF ACC
OUTSTANDING AT EXCHANGE RATIO COMMON
COMPANY SEPTEMBER 23, 1997 TO EFFECT THE MERGER STOCK(1)
- ------------------------------------------ ---------------------- -------------------- -------------
<S> <C> <C> <C>
Allied I.................................. 7,716,062 1.07 8,256,186
Allied II................................. 7,869,178 1.40 11,016,849
Allied Commercial......................... 14,639,877 1.60 23,423,803
Allied Lending............................ 5,188,780 N/A 5,188,780
Advisers.................................. 9,611,864 0.31 2,979,678
-------------
Total 50,865,297
===========
</TABLE>
- ---------------
(1) Shares of ACC common stock were computed by multiplying the outstanding
shares of common stock at September 23, 1997 by the applicable Exchange
Ratio. The Merger is currently contemplated to be effected on December 31,
1997, and as a result, the number of shares to be exchanged is expected to
be different than those shown in the table above.
The conversion of shares of Acquired Company common stock into ACC common
stock will occur automatically at the effective time of the Merger (the
"Effective Time"), which is expected to occur on December 31, 1997.
The Merger is dependent upon certain conditions, including, among others,
the approval by the stockholders of each Company, voting separately, by the
affirmative vote of at least two-thirds of all the votes entitled to be cast on
the Merger Proposal; the receipt of an exemptive order from the Commission, an
application for which has been filed by the Companies and certain of their
subsidiaries; and the approval of the SBA, as well as certain other customary
closing conditions. No assurance can be given that such Commission exemptive
order or SBA approval will be received.
The Merger will be effected if the Merger Proposal is approved by the
stockholders of each Company and all other conditions to the Merger are
satisfied or waived, regardless of whether the Plan Proposal is approved or the
ACC Plan is adopted. The adoption of the ACC Plan is dependent upon the Merger,
as well as the approval of the Plan Proposal by the requisite majority of Allied
Lending's stockholders. Thus, if the Merger is
13
<PAGE> 28
not effected for any reason, the ACC Plan will not be implemented,
notwithstanding approval of the Plan Proposal by Allied Lending's stockholders.
In the Merger Agreement, Allied I has agreed to declare and pay to its
stockholders a special dividend consisting of all of the shares of common stock
of Allied Lending owned by Allied I, which will be distributed pro rata and
payable immediately prior to the effective time of the Merger (the
"Distribution"). (See "-- The Distribution -- Shares to be Received" for a
discussion of the Distribution.) However, Allied I may distribute some or all of
the shares of common stock of Allied Lending in a special dividend to its
stockholders at any time, even if the Merger is not effected for any reason.
Furthermore, if the Merger Agreement is terminated for any reason, Allied I
would no longer be obligated to distribute to its stockholders all of the shares
of common stock of Allied Lending owned by Allied I in a special dividend,
except to the extent required by an existing order of the Commission as
described in this Joint Proxy Statement/Prospectus.
Fractional shares of common stock of the Acquired Companies will be
converted into Allied Lending common stock in proportion to the foregoing
Exchange Ratios. Fractions of shares of Allied Lending common stock will be
issued in the Merger as necessary (rounded to the nearest one-thousandth of a
share), and no cash will be paid to stockholders of the Acquired Companies by
reason of the Merger.
As soon as practicable after the Effective Time, American Stock Transfer &
Trust Company ("AST"), as the exchange agent for the Merger, will mail to each
holder of record of common stock of each Acquired Company as of the Effective
Time a transmittal letter to be used in forwarding such stockholder's
certificates representing such shares for surrender to AST. Upon such surrender,
AST will forward such holder a confirmation of ownership of the ACC common stock
that such stockholder received as a result of the Merger.
STOCKHOLDERS SHOULD NOT FORWARD STOCK CERTIFICATES TO AST UNTIL THEY HAVE
RECEIVED TRANSMITTAL LETTERS, NOR SHOULD THEY RETURN STOCK CERTIFICATES WITH THE
ENCLOSED PROXY.
Until surrendered to AST, outstanding stock certificates previously issued
by the Acquired Companies will, by virtue of the Merger, represent shares of ACC
common stock (on an Exchange Ratio-adjusted basis). All dividends and
distributions payable by ACC to holders of such ACC common stock who have not
yet surrendered their certificates will be paid to AST and will be held in
escrow in a non-interest bearing account until such time as such certificates
are surrendered. Dividends held in the escrow account will not be eligible for
dividend reinvestment, regardless of any pre-existing elections to the contrary.
Dividends will be taxable to stockholders in the year in which they were
declared by ACC, regardless of whether a stockholder has actually received such
dividends. Therefore, in order to receive cash and other dividends, a
stockholder should surrender all outstanding certificates previously issued by
the Acquired Companies as soon as possible after the Merger is consummated. When
such certificates are surrendered, any unpaid dividends will be distributed by
AST to the stockholder without interest, and the stockholder will receive a
confirmation as to the ACC common stock issued.
SHARES OF ACC COMMON STOCK WILL BE ISSUED IN BOOK ENTRY (I.E.,
UNCERTIFICATED) FORM ONLY; NO PHYSICAL CERTIFICATES WILL BE ISSUED IN CONNECTION
WITH THE MERGER. In lieu of physical certificates, AST will send to each person
who has surrendered to AST certificates representing an Acquired Company's
common stock, together with a properly completed transmittal letter, a
confirmation containing the information required under Maryland law regarding
the ACC shares issued to such person, including the name of the issuer (ACC) and
the number of shares of ACC common stock issued. Thereafter, persons holding ACC
common stock in uncertificated form at the Effective Time will be afforded the
opportunity to receive certificates representing such ACC common stock.
Acquired Company stockholders who hold shares in uncertificated form will
receive a confirmation as to the ACC common stock issuable in respect of such
Acquired Company common stock, and dividends paid on such ACC common stock will
be paid to such holders, without any action on the part of such holders.
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INFORMATION REGARDING THIS SOLICITATION
The expense of the Companies' solicitation of proxies for the Special
Meetings, including the cost of preparing, printing and mailing this Joint Proxy
Statement/Prospectus and the accompanying notice of the Special Meetings and
proxy card will be borne pro rata by the Companies on the basis of their
respective market capitalizations at the close of trading on August 13, 1997
(the day prior to the date that the Merger was announced). The Companies will
request that brokers, nominees, fiduciaries and other persons holding shares in
their names for others forward this Joint Proxy Statement/Prospectus and certain
accompanying material to their principals and request authority for the
execution of a proxy. The Companies 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 any Company or by regular employees of Advisers,
without special compensation therefor. The Company expects to retain Shareholder
Communications Corporation to aid in the solicitation of proxies for the Special
Meetings at an estimated fee of $100,000.
PROPOSAL 1: THE MERGER PROPOSAL
(ALL STOCKHOLDERS)
Each Company's stockholders are being asked to approve the merger of Allied
I, Allied II, Allied Commercial and Advisers with and into Allied Lending
pursuant to the Merger Agreement (as defined above, the "Merger Proposal").
With respect to each Company the affirmative vote of at least two-thirds of
all votes entitled to be cast is required to approve the Merger Proposal. Each
Company's stockholders will vote separately with respect to the Merger Proposal.
A failure to vote will have the effect of a vote against the Merger Proposal.
THE BOARD OF DIRECTORS OF EACH COMPANY UNANIMOUSLY RECOMMENDS THAT ITS
COMPANY'S STOCKHOLDERS VOTE "FOR" APPROVAL OF THE MERGER PROPOSAL.
OVERVIEW OF THE MERGER
Each Company has entered into the Merger Agreement, a copy of which is
attached hereto as Appendix A. Pursuant to the Merger Agreement, each share of
common stock of Allied I, Allied II, Allied Commercial and Advisers (as defined
above, the "Acquired Companies") outstanding immediately prior to the Effective
Time will be automatically converted into the number of fully paid and
non-assessable shares of Allied Lending common stock determined pursuant to the
Exchange Ratio set forth below with respect to each Acquired Company:
<TABLE>
<S> <C> <C> <C> <C>
Each share of Allied I would be exchanged for 1.07 shares of Allied Lending
Each share of Allied II would be exchanged for 1.40 shares of Allied Lending
Each share of Allied Commercial would be exchanged for 1.60 shares of Allied Lending
Each share of Advisers would be exchanged for 0.31 shares of Allied Lending
</TABLE>
Allied Lending's common stock would be neither converted nor changed in the
Merger. No stockholder will have appraisal rights in connection with the Merger.
The Acquired Companies will be merged with and into Allied Lending as the
surviving corporation (which will, as part of the Merger, be renamed "Allied
Capital Corporation" and is referred to herein as "ACC"). See "-- Overview of
the Merger -- General Structure of the Merger," below. The Merger is subject to
a number of conditions, including the approval of the Merger Proposal by the
stockholders of each Company. See "-- The Merger Proposal -- The Merger
Agreement -- Conditions to Merger."
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GENERAL STRUCTURE OF THE MERGER
If the Merger is consummated, each of Allied I, Allied II, Allied
Commercial and Advisers would merge with and into Allied Lending to form an
internally managed investment fund that would operate as a BDC. It is intended
that the Merger will be treated as a tax-free reorganization under Section
368(a)(1)(A) of the Code. Following the Merger, all of the officers and
employees of Advisers immediately prior to the Effective Time will become
officers and employees, respectively, of ACC.
As a result of the Merger, shares of Allied I, Allied II, Allied Commercial
and Advisers would be converted into shares of ACC. The Merger would be
structured as a statutory merger pursuant to the Maryland General Corporation
Law (the "Maryland Law"). Pursuant to the Maryland Law, the effects of the
Merger would be the following:
(i) the separate existence of each Company, except ACC, will cease;
(ii) the shares of common stock of each Company, except ACC, will
cease to exist;
(iii) the assets of each Company will be owned by ACC; and
(iv) ACC will become liable for all the debts and obligations of each
Company.
In connection with the Merger, the Companies and their respective
subsidiaries intend to engage in a series of mergers and related transactions
prior to and after the Merger in order to facilitate the post-Merger corporate
structure of ACC and its subsidiaries. With respect to the subsidiaries of
Allied I and Allied II, it is intended that immediately after the Merger, Allied
Investment Corporation II, a subsidiary of Allied II, would merge with and into
Allied Investment Corporation, a subsidiary of Allied I, with Allied Investment
Corporation surviving as the ACC subsidiary that is licensed by the SBA as a
small business investment company (an "SBIC") under Section 301(c) of the Small
Business Investment Act of 1958, as amended (the "1958 Act"). It also is
contemplated that immediately after the Merger, Allied Financial Corporation II,
a subsidiary of Allied II, would merge with and into Allied Capital Financial
Corporation, a subsidiary of Allied I, with Allied Capital Financial Corporation
surviving as the ACC subsidiary that is licensed by the SBA as a specialized
small business investment company (an "SSBIC") under Section 301(d) of the 1958
Act. It is intended that these transactions be effected as statutory mergers
pursuant to the Maryland Law. The effects of each subsidiary merger would be the
same as those outlined above for the Merger, as set forth in the Maryland Law.
With respect to Allied Lending, its subsidiary, Allied SBLC, would remain
intact as a subsidiary of ACC following the Merger. With respect to Allied
Commercial, prior to the Merger Allied Commercial intends to cause its three
subsidiaries to be merged, pursuant to applicable law, into two separate
single-member limited liability companies (each, an "LLC"). Allied Commercial
would be the sole member of each such LLC. Upon the consummation of the Merger
these two single-member LLCs ("Equity Holdings LLC" and "Acceptance LLC") would
remain intact with ACC as their sole member. Equity Holdings LLC will remain to
hold real property assets, and Acceptance LLC will remain to hold assets related
to a prior securitization transaction of Allied Commercial.
Prior to the Merger, Advisers intends to merge its wholly owned subsidiary,
Allied Capital Property Corporation, into a single-member LLC of which Advisers
would be the sole member. Upon the Merger, the single-member LLC ("Property
LLC") would remain intact with ACC as its sole member. Property LLC would hold
the office building in Northern Virginia currently held by Allied Capital
Property Corporation.
REQUEST FOR EXEMPTIVE RELIEF
The Merger will be consummated only if it is approved by the stockholders
of each Company, voting separately, by the affirmative vote of at least
two-thirds of all the votes entitled to be cast on the Merger Proposal, as well
as certain other closing conditions. In addition, the Merger is contingent upon
the Commission granting certain exemptive relief under the 1940 Act that has
been requested by the Companies and certain related entities in an application
that has been submitted to the Commission (the "Application"). In the
Application, the Companies and their relevant subsidiaries request an order (the
"Order") from the
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Commission permitting these entities to engage in a series of transactions that
result in the Merger and, in effect, restructure the Allied Capital family of
companies. These subsidiary co-applicants included: Allied Investment
Corporation and Allied Capital Financial Corporation (subsidiaries of Allied I);
Allied Investment Corporation II and Allied Financial Corporation II
(subsidiaries of Allied II); and Allied SBLC (a subsidiary of Allied Lending).
The Order also would permit the applicants existing after the Merger to
engage in certain activities for which similar relief has previously been
granted by the Commission under the 1940 Act in the context of those entities'
current structure. Specifically, once the Merger is consummated, relief would be
required to permit ACC and its subsidiaries to operate as one company for
purposes of the 1940 Act, engage in consolidated reporting, and effect certain
transactions.
The exemptive relief requested in the Application is expected to be granted
only after the solicitation of proxies from the stockholders of each Company has
begun. However, the board of directors of each Company expects that the relief
requested will be granted. The Commission previously has granted relief to
permit mergers that are similar to the Merger, and although there can be no
assurance that such relief would be granted in this case, there is no indication
that the Commission will decline to grant such relief. If the Commission has not
granted the Order by the date of the Special Meetings, then the Companies will
adjourn the Special Meetings, regardless of whether a quorum has been achieved.
REQUEST FOR SBA APPROVAL
The Merger, the merger of Allied Investment Corporation II into Allied
Investment Corporation, and the merger of Allied Financial Corporation II into
Allied Capital Financial Corporation require approval by the SBA. Allied
Investment Corporation, Allied Capital Financial Corporation, Allied Investment
Corporation II, Allied Financial Corporation II and Allied SBLC have all
requested the permission of the SBA to complete the Merger. The permission
requested from the SBA is expected to be granted only after the solicitation of
stockholders of each Company has begun. The board of directors of each Company
expects that the permission requested will be granted. However, there can be no
assurance that the SBA will grant such permission. If the SBA has not granted
permission by the date of the Special Meetings, then the Companies will adjourn
the Special Meetings, regardless of whether a quorum has been achieved.
See "-- The Merger Agreement," below, for a discussion of certain terms and
conditions to the Merger Agreement.
THE BOARD OF DIRECTORS OF EACH COMPANY RECOMMENDS THAT THE STOCKHOLDERS OF
THAT COMPANY VOTE "FOR" APPROVAL OF THE MERGER PROPOSAL.
REASONS FOR THE MERGER
THE FOLLOWING DISCUSSION IS A SUMMARY OF THE REASONS FOR THE MERGER.
STOCKHOLDERS ARE URGED TO READ THE MERGER AGREEMENT, A COPY OF WHICH IS ATTACHED
HERETO AS APPENDIX A, FOR A MORE COMPLETE UNDERSTANDING OF THE TERMS OF THE
MERGER.
The board of directors of each Company has determined that a merger of all
of the Companies into a single, internally managed investment company should
result in a company with characteristics superior to any one of the Companies,
and an opportunity to increase stockholder value for that Company's
stockholders. Each board of directors has carefully considered a number of
factors in determining that the Merger will benefit the stockholders of its
Company. These benefits are summarized as follows, and each is discussed more
fully below. There can be no assurance that any such benefits will be achieved,
or as to the time frame for their achievement.
- INCREASED SIZE. ACC, as the single post-Merger public company, would be
the single largest public BDC in the United States and would be
significantly larger than any one merging Company in terms of total
assets, total equity capital and total market capitalization. A larger
asset base is expected to
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provide for an ability to make larger investments in growing companies
while maintaining portfolio diversity. A larger equity base is expected
to provide for decreased costs of debt financing and establish an
improved foundation for growth. A larger market capitalization is
expected to provide for increased stockholder liquidity and increased
visibility in the capital markets.
- IMPROVED MIX OF INCOME. It is anticipated that the combined operations
of the Companies would provide for a more diverse and stable income
stream to provide dividends to stockholders. ACC should have an improved
blend of ordinary investment, capital gain and fee income. ACC would
continue to be a RIC under Subchapter M of the Code, and as a result,
will continue to be required to distribute substantially all of its
ordinary taxable income to stockholders. It is anticipated that ACC would
continue to distribute dividends on a quarterly basis.
- SINGLE ENTITY WITH FOCUS ON HIGH RETURN INVESTMENT OPPORTUNITIES. ACC is
expected to operate as a single entity with separate strategic business
units measured by contribution to returns on investor equity. Operating
as a single company should enable ACC to expand and enhance the
Companies' existing businesses, improve its asset and liability
management and allocate resources more effectively.
- INTERNALLY MANAGED. The merger of Advisers with and into ACC would
result in a single company that is internally managed by the same
management team that manages all of the Companies today. Internal
management should create significant efficiencies in the operation of
ACC, including direct alignment of employee performance and incentive
compensation, elimination of costly redundant processes and elimination
of any perceived conflicts of interest between an external adviser and
its clients. ACC would be a registered investment adviser and is expected
to succeed to the advisory agreements between Advisers and the private
funds currently managed by Advisers. ACC would seek to increase its
investment advisory business and assets under management, both through
existing private funds under management and through new funds under
management.
- TAX BENEFITS. The merger of Advisers into ACC should result in a tax
savings resulting from the elimination of the corporate taxation of
Advisers' earnings resulting from its advisory agreements with Allied I,
Allied I, Allied Commercial and Allied Lending. The profits of the
once-external adviser generally would inure to the benefit of ACC, and
ACC generally would incur no federal corporate income tax, thereby
increasing earnings available for distribution to stockholders.
- DIVIDENDS. As a result of ACC's increased size, improved mix of income,
and its expected ability to streamline operations as a single entity, ACC
should be able to increase its earnings available for dividends to
stockholders. However, there can be no assurance that ACC would be able
to achieve these results.
- ONE ALLIED CAPITAL. The existence of multiple public Allied Capital
entities has caused confusion in the public equity markets and in the
financial media over the years. It is anticipated that a single public
Allied Capital would eliminate this confusion, and the merged company
should enjoy more accurate financial media coverage and improved market
visibility.
INCREASED SIZE
ACC would have an estimated equity base of over $421 million and a total
combined market capitalization in excess of $732 million, assuming the Merger
occurred at June 30, 1997. The anticipated benefits resulting from an increase
in size are described below.
Larger, More Diverse Transactions. It is anticipated that ACC would have
the ability invest in larger transactions while still maintaining portfolio
diversity. ACC would still maintain its focus on growing businesses in need of
private financing, but ACC should have the capacity to meet the increasing
capital needs of high-growth smaller businesses. Increasing the transaction size
should enable ACC to invest funds at a faster pace and to seek larger, stronger
investment candidates with greater financing needs. ACC also should be able to
offer a variety of financing options to a single borrower, including a
combination of senior debt, subordinated debt and equity financing, and should
be able to finance and re-finance a single borrower as the borrower grows and
matures.
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Increased Regulatory Flexibility. It is expected that ACC would have an
enhanced ability to comply with the asset diversification requirements under the
Code. Fifty percent of a Subchapter M corporation's investment portfolio must
consist of investments whose values do not exceed 5% of the value of that
corporation's total assets. ACC's total assets would be significantly greater
than those of any one Company, and therefore ACC should be able to lend and
invest money in significantly larger transactions with fewer regulatory
constraints.
Lower Cost of Debt Capital. With its larger equity base, it is anticipated
that ACC may have access to lower-cost debt capital. ACC's increased equity base
should result in a stronger credit profile, which, in turn, should result in a
reduced cost of debt for ACC from its lenders, subject to market conditions.
Upon completion of the Merger, ACC should be able to consolidate the many credit
facilities of the merging Companies, and obtain debt capital more efficiently.
It is anticipated that ACC should be in a position to explore obtaining an
unsecured debt rating from a nationally recognized statistical rating
organization, which also could decrease ACC's cost of capital.
Larger Market Capitalization and Increased Liquidity. Upon completion of
the Merger, ACC would have a much larger market capitalization which should
increase liquidity and market depth for all stockholders. The relatively small
market capitalizations of the Companies on an individual basis have limited the
Companies' visibility in the capital markets.
IMPROVED MIX OF INCOME
ACC's portfolio would include a variety of types of investments in growing
businesses in a variety of industries and in diverse geographic locations
primarily in the United States. Merging the portfolios and businesses of Allied
I, Allied II, Allied Lending, and Allied Commercial would result in a portfolio
of small senior loans, small and medium-sized subordinated loans with equity
features, and small and medium-sized commercial real estate loans. ACC's
investment portfolio would immediately have greater diversification than that of
any one of the Companies, and ACC's potential for a more diversified business
operation should be greater. ACC's investment focus would be substantially
similar to that of the Companies in that ACC would focus on investing in private
growing businesses. It is expected that ACC would provide all of the types of
financing currently offered by each of the Companies and, accordingly, ACC's
portfolio and future operations should be better positioned to withstand
competitive, economic and regulatory changes in the marketplace.
ACC's diversified business operations should improve its mix of investment
earnings with respect to ordinary investment income, capital gain income and fee
income. The portfolios of Allied I and Allied II, which are largely composed of
mezzanine investments, generate capital gain income in addition to ordinary
investment income. The amount and timing of capital gains are difficult to
predict. The portfolios of Allied Lending and Allied Commercial rely on interest
income generated from their senior loans. Allied Lending also receives loan sale
premiums from the sale of portions of its SBA-guaranteed loans. ACC should
benefit from the combination of the strong recurring interest income from the
senior and mezzanine loan portfolios, enhanced by capital gains of the mezzanine
portfolios. ACC would also be a registered investment adviser managing private
investment funds. Thus, ACC would have recurring fee income resulting from its
investment advisory contracts with certain private funds.
If the Merger is consummated, ACC is expected to pay dividends, when and as
declared by the board of directors, as Allied I, Allied II, Allied Commercial
and Allied Lending have done in the past. ACC's balanced income stream would
include income from ordinary investment income, fee income and capital gains
from which to fund dividends.
SINGLE ENTITY WITH FOCUS ON HIGH RETURN INVESTMENT OPPORTUNITIES
ACC would be a single company managing four strategic business units:
mezzanine finance, commercial real estate finance, SBA lending and investment
management. The single company should be able to allocate capital and human
resources across business units to capture business opportunities as they arise.
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Mezzanine Finance. It is anticipated that ACC would continue the core
operations of Allied I and Allied II and originate small subordinated loans with
equity features to growing businesses across the United States. It is expected
that ACC would expand its mezzanine finance operations to accommodate larger
transactions, ranging in size from $10 million to $20 million, for businesses in
need of more growth capital.
Commercial Real Estate Finance. ACC would continue the operations of
Allied Commercial as an enterprise-value real estate lender. ACC would continue
to originate or purchase loans secured by mortgages on real property, where the
value of the business, as well as the value of the collateral, is considered in
the underwriting process.
SBA Lending. ACC would continue the operations of Allied Lending as an
active participant in the SBA Section 7(a) Guaranteed Loan Program. The
increased equity capital of ACC, as compared to Allied Lending on a stand-alone
basis, should lower the cost of debt capital, subject to market conditions, and
enable ACC to be more price competitive for prospective borrowers.
Investment Management. ACC would be a registered investment adviser and is
expected to succeed to the agreements between Advisers and the private funds
managed by Advisers. It is anticipated that ACC would continue to increase its
assets under management, both through existing private funds and through new
private fund creation.
INTERNALLY MANAGED
ACC would be internally managed like many other specialty finance
organizations and other BDCs. It is expected that internal management would
increase ACC's efficiency and would have several benefits with respect to
employee retention and recruitment.
The current structure of five separate Companies creates redundant
operations and related costs, such as multiple requirements for external
regulatory reporting, external audits, stockholder communication costs, and
legal expenses. A single internally managed entity should benefit from
elimination of these redundant processes and expenses.
TAX BENEFITS
Advisers charges each of Allied I, Allied II, Allied Commercial and Allied
Lending an asset-based fee. This fee covers Advisers' operating costs and
provides a profit, which is subject to federal and state income tax at the
corporate level. Within ACC's internally managed structure, the profits from the
fees previously charged to the other merging Companies would remain within ACC,
and ACC would not incur a corporate-level income tax. As a result, profits that
have previously been subject to corporate-level tax would instead be available
to ACC's stockholders.
DIVIDENDS
As a result of ACC's increased size, improved mix of income, and its
expected ability to streamline operations as a single entity, ACC should be able
to increase its earnings available for dividends to stockholders. However, there
can be no assurance that ACC would be able to achieve these results.
ONE ALLIED CAPITAL
It is anticipated that another benefit of the Merger would be the
elimination of the confusion caused by the multiple public Allied Capital
entities. All have similar names and trading symbols and, other than Advisers,
all have a similar investment objective that focuses on private investment in
growing businesses. This multiple-company structure has caused investor
confusion as well as errors by the financial media in reporting information
about the Allied Capital entities. It is anticipated that a single, consolidated
ACC should eliminate this confusion entirely, and should provide for improved
investor relations, stockholder communications and financial media coverage.
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BOARD CONSIDERATIONS
ORIGINS OF THE MERGER
For the reasons set forth above under "Reasons for the Merger," the idea of
a merger of all of the Companies has been considered at various levels within
the Companies for some time. Management of Advisers ("Management") has for some
time believed that a consolidation of the Companies would result in significant
operational efficiencies, and could potentially enhance stockholder value.
Management also was approached with the concept of consolidation by independent
third parties, including financial advisers, investment bankers, lenders, public
stockholders, and private investors.
Management began to explore the mechanics of effecting a merger of all the
Companies in April 1997. At that time, they began preparing preliminary
financial projections for a merged entity, researching and analyzing the various
Commission, SBA, and other regulatory considerations that could be implicated,
and considered the tax aspects of the proposal. The result was a preliminary
conclusion that Management's own views, and the general advice they had received
from third parties such as those identified above, were well-founded. While
alternative business combinations were considered, it was concluded that
significant benefits could be derived from a merger of all of the Companies into
a single, internally managed entity. These benefits include the combined
entity's ability to compete more effectively given its enhanced financial
resources and the possibility of achieving cost savings and operating
efficiencies, as well as other synergies which could result from combining the
Companies' operations. All of these benefits should enhance stockholder value.
THE PROCESS -- OVERVIEW
THE MAY 1997 BOARD MEETINGS
At its regularly scheduled quarterly meetings in May 1997, each Company's
board of directors held an executive session at which the possibility of a
merger of the Companies was discussed for the first time. At that time, the
boards tentatively concluded that the proposal, as a preliminary matter, made
sense for the reasons discussed above (and further discussed below). Each board
authorized Management to explore the willingness of the Commission and the SBA
to support the Merger by granting the regulatory approvals required for the
Merger. In that regard, the boards specifically authorized Management to prepare
and file an exemptive application with the Commission that would request relief
from certain provisions of the 1940 Act to allow the consummation of such a
transaction. Each board also authorized Management to begin searching for an
investment banking firm to serve as the financial adviser for the Merger
transaction. In this capacity, a firm would provide advice on, among other
things, the basis for valuation for purposes of determining an appropriate ratio
on which to exchange shares of the respective Companies. In addition, each of
the boards approved the idea of establishing a working group (the "Working
Group") consisting of one director from each Company who was neither an officer
of, nor otherwise affiliated with, any of the other Companies other than through
his directorship with the Company he was representing (an "Independent
Director") to coordinate the process of considering the possibility of the
Merger, and act as a liaison to his board. Management was instructed to contact
an Independent Director to serve as the member of the Working Group.
MEETINGS WITH REGULATORS
In May 1997, Management, together with representatives from the law firm of
Sutherland, Asbill & Brennan LLP ("Sutherland"), which serves as counsel to the
Companies in a variety of matters, met with members of the staff of the
Commission's Division of Investment Management (the "Staff") to discuss the
Staff's willingness to support the grant of exemptive relief necessary to effect
the Merger and permit the surviving entity to continue the business activities
of the Companies. After a presentation by Management on the reasons for and
potential benefits of the Merger, the Staff indicated that, as a preliminary
matter and subject to their further analysis upon review of the application,
they were favorably disposed to support an application for the required relief.
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Following the meeting with the Staff, an exemptive application was prepared
and submitted to the Staff in June 1997. The Staff provided comments on the
application on September , 1997. The application was filed with the Commission
on October , 1997. See "-- The Merger Agreement -- Conditions to the Merger."
In May and June 1997, Management met with representatives of the SBA to
discuss the Merger. The SBA's review of the proposed Merger was necessary in
light of the SBIC and SBLC licenses currently held by various subsidiaries of
the Companies, which would be held by subsidiaries of ACC following the Merger.
At their meetings, Management and the SBA discussed the process required to
obtain their approvals, and established a preliminary timetable. Management
indicated that it would submit formal request letters to the SBA related to the
proposed transaction if the Merger were to proceed. See "-- The Merger
Agreement -- Conditions to the Merger."
SELECTION OF MORGAN STANLEY AS FINANCIAL ADVISER TO TRANSACTION
In June 1997, Morgan Stanley & Co. Incorporated ("Morgan Stanley") was
retained by each of the Companies as the financial adviser to the Merger. After
considering a number of firms, Management determined to recommend Morgan Stanley
for the project in light of its extensive experience and depth of talent in
advising financial institutions, including BDCs engaged in businesses similar to
those of several of the Companies. Specifically, Morgan Stanley was retained to
provide advice and assistance with respect to defining objectives, performing
valuation analysis, structuring and planning the Merger, and coordinating with
the respective independent financial advisers to be retained by each of the
Companies in connection with fairness opinions to be rendered by them. Under the
terms of its engagement by the Companies, Morgan Stanley is entitled to receive
no more than $50,000 per month for its services, plus expenses, if the Merger is
not effected. If the Merger is effected, Morgan Stanley is entitled to receive
$2,500,000 (less monthly amounts previously paid), payable upon the closing of
the Merger (intended to be on December 31, 1997). The amounts payable to Morgan
Stanley will be apportioned pro rata among the Companies based on the respective
market capitalizations of each Company as determined on August 13, 1997 (the
date immediately prior to the original execution date of the Merger Agreement).
The engagement agreement with Morgan Stanley provides that each Company will
indemnify Morgan Stanley against certain liabilities it may incur in connection
with its services.
As part of its investment banking business, Morgan Stanley is regularly
engaged in the valuation of businesses and securities in connection with mergers
and acquisitions, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements and
valuation for estate, corporate and other purposes. In the ordinary course of
its business, Morgan Stanley and its affiliates may actively trade the debt and
equity securities of the Companies for their own account and for the accounts of
customers and, accordingly, may at any time hold a long or short position in
such securities.
THE WORKING GROUP
In mid-June 1997 at the direction of each respective board of directors,
Management contacted one of the Independent Directors of each board to serve as
the representative to the Working Group. The respective members of the boards
contacted to serve on the Working Group were Warren K. Montouri (Allied I),
Smith T. Wood (Allied II), Robert V. Fleming II (Allied Lending), Charles L.
Palmer (Allied Commercial), and Brooks H. Browne (Advisers). The selection of
the members of the Working Group was ratified by each board through unanimous
written consents.
The Working Group held its first meeting on June 26, 1997. The meeting was
attended by all members of the Working Group and Management, together with
Sutherland. At that meeting, the Working Group discussed the mechanics of the
Merger transactions, including the corporate and securities law issues to be
addressed, the reasons for the Merger, the regulatory issues to be addressed and
federal income tax considerations. The Working Group also discussed the role of
Morgan Stanley as financial adviser to the transaction, as well as the need for
each Company to retain an independent financial adviser to represent solely the
interests of that Company and its stockholders. It was determined that Morgan
Stanley would analyze the
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transaction as a whole and perform the requisite financial analysis to
preliminarily determine the valuation of each Company's shares for purposes of
arriving at the Exchange Ratio for each party to the Merger. It was also
determined that the role of the independent financial adviser to each Company
would be to render an opinion to the board of directors of that Company as to
the fairness of the relevant Exchange Ratio from a financial point of view to
that Company's stockholders. The Working Group also discussed the need for each
Company to obtain independent legal counsel to provide that Company's board of
directors with legal advice concerning the duties of each board member with
respect to consideration of the Merger Proposal, and matters relating to that
consideration. The Working Group concluded that it would be appropriate to have
Management make initial recommendations to the Working Group as to a "short
list" of financial advisers and law firms with whose work Management was
familiar.
Following their initial meeting and in conjunction with Management's
preliminary recommendations, the Working Group members each contacted a
representative from the law firm recommended to be their respective Company's
independent legal counsel to determine whether the firm should be engaged to
represent their respective Companies and boards of directors in connection with
the Merger.
SELECTION OF INDEPENDENT FINANCIAL ADVISERS AND INDEPENDENT LEGAL COUNSEL
On July 9, 1997 the Working Group held its second meeting, at which all of
its members were present. The principal purpose of that meeting was to confirm
selection of the independent legal counsel for purposes of the Merger and have
each member identify and recommend an independent financial adviser for each
Company. At this meeting, firms were identified as follows: for Allied I,
Ferris, Baker Watts, Incorporated ("Ferris") of Baltimore, Maryland, as
financial adviser and Miles & Stockbridge, a Professional Corporation ("Miles
and Stockbridge") also of Baltimore, as legal counsel; for Allied Commercial,
Scott & Stringfellow, Inc. ("Scott & Stringfellow") of Richmond, Virginia, as
financial adviser and Dickstein Shapiro Morin & Oshinsky LLP ("Dickstein") of
Washington, D.C., as legal counsel; for Allied Lending, Robert W. Baird & Co.
Incorporated ("Baird") of Milwaukee, Wisconsin, as financial adviser, and Piper
& Marbury L.L.P. ("Piper & Marbury") of Washington, D.C., as legal counsel; for
Advisers, Van Kasper & Company of Los Angeles ("Van Kasper") as financial
adviser and Sutherland as legal counsel; and for Allied II, Tucker, Flyer &
Lewis, a professional corporation ("Tucker") of Washington, D.C., as legal
counsel. No final decision as to the selection of a financial adviser for Allied
II had been made at the time of this meeting; however, Interstate/Johnson Lane
Corporation of Charlotte, North Carolina ("Interstate"), was subsequently
identified to serve in that capacity. During the following week, each director
serving in the Working Group arranged to interview by telephone the independent
financial adviser recommended as the adviser to his Company. It was also
determined at that time that each independent financial adviser should receive
$120,000 for its services to its client Company in connection with the Merger,
plus reimbursement of its expenses. Each Company further agreed to indemnify its
financial adviser against certain liabilities it may incur in connection with
the financial adviser's engagement.
Beginning on July 16, 1997, the recommended independent financial advisers
were interviewed by the appropriate member of the Working Group. Each of the
foregoing recommendations was approved by the full boards of directors of the
respective Companies by unanimous written consent obtained shortly after the
Working Group meeting.
THE LEGAL DUE DILIGENCE PROCESS
In a series of meetings throughout July 1997, Management and each
independent legal counsel developed a protocol to be followed for purposes of
performing legal due diligence in connection with the Merger. Management and
counsel determined that the following approach would be used in order to avoid
inefficiency and duplicative legal costs: (i) having only one law firm conduct
legal due diligence on any one Company, (ii) assigning due diligence tasks so
that a law firm would conduct legal due diligence only on Companies other than
its own client, so as to ensure that each investigation would be conducted on an
arm's length basis, and (iii) making the results of each due diligence
investigation available to the board of directors and the counsel of each of the
Companies.
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MEETINGS WITH MORGAN STANLEY
In a series of meetings throughout July 1997, Management met with Morgan
Stanley to develop their valuation model in order for Morgan Stanley to provide
certain advice with respect to alternative transaction structures, including the
pro forma impact of the transaction based upon a range of possible values for
each Company. Management also addressed Morgan Stanley's questions and
information requests, so that Morgan Stanley could conduct its due diligence on
the Companies and the financial information required for its analysis.
Management and Morgan Stanley also held discussions as to the strategic
rationale for the Merger, and Morgan Stanley reviewed Management's pro forma
business plan for the proposed consolidated entity.
THE INFORMATIONAL MEETINGS WITH THE INDEPENDENT ADVISERS
On July 22 and 23, 1997 informational meetings (the "Informational
Meetings") among all legal counsel, financial advisers, Morgan Stanley, and
Management were held to present the business plan for the Merger and to present
Morgan Stanley's valuation analysis including its views regarding the proposed
structure of the transaction, including pro forma financial results and
potential market reaction. (Interstate, the financial adviser to Allied II, was
not present at the July 22 and 23 meetings, but attended a separate
informational meeting on July 30, 1997 during which a substantially identical
presentation was made by Management and Morgan Stanley.) The Informational
Meetings of July 22 and 23 began with a joint presentation at which Management
distributed ACC's business plan, and described the current structure of the
Allied Capital entities, certain limitations imposed by the current structure,
the reasons for considering the Merger (See "-- Reasons for Merger"), and the
benefits that potentially could be derived by stockholders of all of the
Companies if the Merger were effected. Following the joint meeting, separate
meetings were held with Morgan Stanley, Management, and each Company's
respective independent financial adviser and legal counsel. The first two of
these meetings were held on July 22; the last three meetings were held on July
23. The purpose of the separate meetings was to allow Morgan Stanley to present
its valuation analysis on each Company in a forum at which the analysis could be
discussed in detail.
THE MORGAN STANLEY VALUATION ANALYSIS
In preparing its analyses, Morgan Stanley assumed and relied upon, without
independent verification, the accuracy and completeness of the information
provided by the Companies for the purposes of its valuation analysis. With
respect to the financial projections prepared by Management, Morgan Stanley's
presentations assumed they had been reasonably prepared on bases reflecting the
best currently available estimates and judgments of the future financial
performance of the Companies. Morgan Stanley has not made any independent
valuation or appraisal of the assets or liabilities of the Companies, nor has
Morgan Stanley been furnished with any such appraisals, and Morgan Stanley has
not examined any individual loan credit files of the Companies. In addition,
Morgan Stanley has assumed the Merger will be consummated in accordance with the
terms set forth in the Merger Agreement. Morgan Stanley's valuation is
necessarily based on economic, market and other conditions as in effect on, and
the information made available to it as of, the date of such valuation.
The following is a brief summary of the financial analyses performed by
Morgan Stanley and reviewed with the board of each Company in connection with
its consideration of the Merger.
At the Informational Meetings, Morgan Stanley distributed materials setting
forth its valuation analysis and described the process the firm used in
developing that analysis. Morgan Stanley represented that it approached this
five-party transaction as a "merger of equals." It indicated that in preparing
the analysis, Morgan Stanley, among other things, reviewed the strategic
rationale for the Merger; conducted due diligence sessions with Management;
analyzed the financial forecast for each of the stand-alone Companies as
projected by Management; developed an independent valuation model for each of
the Companies; developed stand-alone valuations of each of the Companies using,
among other things, market valuation parameters, discounted cash flow analysis
of projected cash flows and analysis of each Company's contribution to ACC; and
analyzed the pro forma impact of the Merger on each Company and its stockholders
in terms of contributable earnings and market value.
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Stand-Alone Valuations. As part of its financial analysis, Morgan Stanley
evaluated the Companies on a stand-alone basis, as described below:
Comparable Company Analysis. Comparable company analysis analyzes a
company's operating performance relative to a group of publicly traded peers.
Based on relative performance and outlook for a company versus its peers, this
analysis enables an implied unaffected market trading value to be determined.
Morgan Stanley compared the operating performance of Allied I, Allied II, Allied
Lending, Allied Commercial and Advisers to (i) a group of six venture capital
finance companies: Bando McGlocklin Capital Corp., Brantley Capital Corp.,
Medallion Financial Corp., PMC Capital, Inc., Silicon Valley Bancshares and
Sirrom Capital Corp. (the "Venture Capital Finance Group"); (ii) a group of five
real estate finance companies: Criimi Mae, Inc., Franchise Financial Corp. of
America, Ocwen Financial Corp., Pacific Crest Capital, Inc. and Wilshire
Financial Services Group, Inc. (the "Real Estate Finance Group"); (iii) a group
of four asset management companies: Alliance Capital Management Inc., New
England Investment Companies, L.P., PIMCO Advisors L.P. and T. Rowe Price
Associates, Inc. (the "Asset Management Group"); and (iv) two commercial finance
companies: Associates First Capital Corp. and Finova Group, Inc. (the
"Commercial Finance Group"). Historical financial information used in connection
with the ratios provided below with respect to the comparable companies is as of
March 31, 1997.
Morgan Stanley analyzed the relative performance and value of each Company
by comparing certain market trading statistics for that Company to the relevant
comparable group. For Allied I and Allied II, the Venture Capital Finance Group
and the Commercial Finance Group were used; for Allied Lending and Allied
Commercial, the Real Estate Finance Group was used; and for Advisers the Asset
Management Group was used. Market trading information used in the ratios
provided below is as of July 18, 1997. The market trading information used in
the valuation analysis was market price to last twelve months' earnings per
share (12.8x in the case of Allied I, 21.8x in the case of Allied II, 12.0x in
the case of Allied Commercial, 12.9x in the case of Allied Lending, 15.7x in the
case of Advisers, 20.6x in the case of the median of the Venture Capital Finance
Group, 14.3x in the case of the median of the Real Estate Finance Group, 16.8x
in the case of the median of the Asset Management Group, and 22.1x in the case
of the median of the Commercial Finance Group); market price to 1997 estimated
earnings per share (7.9x in the case of Allied I, 12.4x in the case of Allied
II, 10.7x in the case of Allied Commercial, 11.6x in the case of Allied Lending,
11.4x in the case of Advisers, 17.5x in the case of the median of the Venture
Capital Finance Group, 13.6x in the case of the median of the Real Estate
Finance Group, 15.4x in the case of the median of the Asset Management Group and
19.6x in the case of the median of the Commercial Finance Group); and dividends
per share for the last twelve months to market price (10.0% in the case of
Allied I, 9.6% in the case of Allied II, 8.8% in the case of Allied Commercial,
8.1% in the case of Allied Lending, 0.0% in the case of Advisers, 3.4% in the
case of the median of the Venture Capital Finance Group, 2.9% in the case of the
median of the Real Estate Finance Group, 0.9% in the case of the median of the
Commercial Finance Group, and 7.3% in the case of the median of the Asset
Management Group). Earnings per share estimates for the Companies, the Venture
Capital Finance Group, the Real Estate Finance Group, the Asset Management Group
and the Commercial Finance Group were based on the most recent available
Institutional Brokers Estimate System ("IBES") estimates. IBES is a data service
that monitors and publishes compilations of earnings estimates produced by
selected research analysts regarding companies of interest to institutional
investors. The implied ranges of values per share of the Companies' common stock
derived from the analysis of the market price to last twelve months' earnings
per share estimates were $21.83 to $24.26 for Allied I, $19.02 to $20.93 for
Allied II, $25.08 to $28.94 for Allied Commercial, $15.91 to $18.36 for Allied
Lending and $5.06 to $5.69 for Advisers. The implied ranges of values for the
Companies derived from the analysis of the dividends per share to market price
were $26.33 to $39.50 for Allied I, $33.67 to $50.50 for Allied II, $34.17 to
$51.25 for Allied Commercial, $22.00 to $33.00 for Allied Lending and $8.92 to
$13.37 for Advisers.
No company used in the comparable company analysis is identical to the
Companies. Accordingly, an analysis of the results of the foregoing necessarily
involves complex considerations and judgments concerning differences in
financial and operating characteristics of the Companies and other factors that
could affect the public trading value of the companies to which they are being
compared. Mathematical analysis (such as
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determining the median average) is not in and of itself a meaningful method of
using comparable company analysis.
Discounted Cash Flow Analysis. Morgan Stanley performed discounted cash
flow analyses to determine ranges of present values per share of the Companies'
common stock. The ranges were determined by adding (i) the present value of the
estimated future cash flows that each Company could generate over the five-year
period beginning in 1997 and ending in 2001 and (ii) the present value of the
"terminal value" of each Company at the end of 2001 less the outstanding debt
obligations of the Company. To determine a projected cash flow stream, Morgan
Stanley assumed a 7.5% growth rate in revenues for each Company, a specific
profit margin (earnings before interest expense, taxes, depreciation and
amortization ("EBITDA") to revenues) for each Company (75% in the case of Allied
I and Allied II, 90% in the case of Allied Commercial, 73% in the case of Allied
Lending and 30% in the case of Advisers) and annual realized gains as a
percentage of revenues for each Company (40% in the case of Allied I and Allied
II, 10% in the case of Allied Commercial and 0% in the case of Lending and
Advisers.) The terminal value of each Company at the end of the five-year period
was determined by applying price-to-EBITDA multiples (12x-14x for Allied I and
Allied II, 10x-12x for Allied Commercial and Allied Lending and 7x-9x for
Advisers) to year 2001 EBITDA using discount rates viewed as appropriate for
each Company based on its weighted average cost of capital (9%-11% for Allied I
and Allied Lending, 12%-14% for Allied II and Advisers and 8-10% for Allied
Commercial). The implied ranges of per share values for the Companies derived
from the discounted cash flow analysis were $24.42 to $31.93 for Allied I,
$23.52 to $28.18 for Allied II, $24.03 to $32.35 for Allied Commercial, $16.57
to $21.42 for Allied Lending and $7.07 to $8.49 for Advisers.
Summary Contribution Analysis. Morgan Stanley computed the contribution to
the combined entity's pro forma financial results attributable to each of the
Companies. The computation showed, among other things, that Allied I, Allied II,
Allied Commercial, Allied Lending and Advisers would contribute to the combined
entity approximately 15.8%, 21.8%, 45.5%, 11.3% and 5.6%, respectively, of net
market value as of July 18, 1997; 6.6%, 18.2%, 52.3%, 13.0% and 9.9%,
respectively, of net operating income (defined as income before realized and
unrealized gains for the last twelve months); 15.8%, 23.0%, 43.9%, 10.1% and
7.2%, respectively, of dividends paid for the last twelve months (in the case of
Advisers, dividends were assumed to be pre-tax earnings); 15.1%, 25.1%, 47.0%,
10.0% and 2.9%, respectively, of stockholders' equity as of March 31, 1997.
Morgan Stanley calculated that the application of the Exchange Ratios would
result in an allocation between the holders of Allied I, Allied II, Allied
Commercial, Allied Lending and Advisers common stock of pro forma ownership of
the combined entity equal to 15.9%, 21.6%, 46.5%, 10.4% and 5.7%, respectively.
Pro Forma Merger Analysis. The effects of the Merger on the Companies were
analyzed both qualitatively and quantitatively. Qualitative attributes of the
Merger included creation of a larger company, expansion into new business lines,
creation of a more efficient management structure, elimination of duplicative
functions and improvement of operational efficiency.
Morgan Stanley analyzed the financial impact of the Merger on the holders
of each Company's common stock, using for these purposes financial projections
prepared by Management for 1997 and 1998. This analysis showed that, after
giving effect to the Merger, before the impact of one-time Merger-related
charges, stockholders of Allied I, Allied II, Allied Commercial, Allied Lending
and Advisers would realize increases (decreases) in fully diluted realized
earnings per share (excluding unrealized gains) of approximately 11.9%, (1.4%),
14.2%, 13.5% and 66.4%, respectively, in 1997 and 8.8%, 19.4%, 24.4%, 2.4% and
35.9%, respectively, in 1998 versus expected earnings per share on a stand-alone
basis.
Morgan Stanley also performed a pro forma market valuation of the combined
entity to determine the potential increase in per share price for holders of
each Company's common stock. Using Management's 1998 earnings estimates before
and after the effect of the Merger and price-to-earnings multiples of 10.6x to
12.3x based on the comparable company analysis, potential per share common stock
market prices for Allied I, Allied II, Allied Commercial, Allied Lending and
Advisers ranged from $17.98 to $23.50, $21.29 to $27.83, $24.30 to $31.76,
$15.18 to $19.84 and $4.72 to $6.17, respectively.
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Historical Exchange Ratio and Stock Price Study. Morgan Stanley compared
the historical price movement of Allied I, Allied II, Allied Commercial, Allied
Lending and Advisers from July 22, 1994 through July 18, 1997. In addition,
Morgan Stanley also analyzed the ratio of closing prices per share of Allied I,
Allied II, Allied Commercial and Advisers versus Allied Lending during the
period from June 24, 1994 through July 18, 1997. Morgan Stanley observed that
such exchange ratios over the past six months, over the last twelve months, and
over the last two years had averaged 1.03, 1.03 and 1.01, respectively, for
Allied I; 1.33, 1.31 and 1.30, respectively, for Allied II; 1.57, 1.53 and 1.47,
respectively, for Allied Commercial; and 0.33, 0.38, and 0.41, respectively, for
Advisers.
This analysis was also performed for the period between June 16, 1997 and
July 15, 1997, and it was determined that such ratios over this thirty-day
period were not substantially different from those that were determined for the
foregoing periods.
Morgan Stanley advised Management and the board of each of the Companies
that the thirty-day period from June 16, 1997 to July 15, 1997 was the most
appropriate period over which to measure market value for purposes of developing
exchange ratios for each of the Companies relative to Allied Lending.
Specifically, during this thirty-day period, no unusual events had occurred that
could have influenced the movement of the Companies' stock prices. In addition,
July 15, 1997 was viewed as the appropriate ending date for the period since on
July 16, 1997, Management began to contact the independent financial advisers,
thus increasing the number of persons with knowledge of the proposed
transaction. The ratios developed based on the market prices for the stock of
the Companies from June 16, 1997 to July 15, 1997 formed the basis for Morgan
Stanley's recommendation on valuation, which became the respective Exchange
Ratios that were ultimately approved by the board of directors of each Company
to which it applied based upon, among other things, the opinion provided by each
Company's independent financial adviser.
The preparation of a valuation analysis is a complex process and is not
necessarily susceptible to a partial analysis or summary description. Morgan
Stanley believes that selecting any portion of its analyses, without considering
all analyses, would create an incomplete view of the process underlying its
valuation. In addition, Morgan Stanley may have deemed various assumptions more
or less probable than other assumptions, so that the ranges of valuations
resulting from any particular analysis described above should not be taken to be
Morgan Stanley's view of the actual values of the Companies. In performing its
analyses, Morgan Stanley made numerous assumptions with respect to industry
performance, general business and economic conditions and other matters, many of
which are beyond the control of the Companies. The analyses performed by Morgan
Stanley are not necessarily indicative of actual values, which may be
significantly more or less favorable than suggested by such analyses. Such
analyses were prepared solely as a part of Morgan Stanley's analysis of the
proposed Exchange Ratios.
As described above, the information provided by Morgan Stanley to the board
of each Company was one of a number of factors taken into consideration by the
boards in making their determinations to recommend approval of the Merger
Proposal. Consequently, the Morgan Stanley analyses described above should not
be viewed as determinative of the opinion of the board of any Company or the
view of the management of any Company with respect to the values of the
Companies.
At the conclusion of all of their procedures, Morgan Stanley represented
that it believed that the proposed Merger terms, i.e., the Exchange Ratios,
based on current market values for the respective Companies, were consistent
with its valuation analysis.
In the period beginning with due diligence meetings held on July 22 and 23,
1997, and continuing until September 1, 1997, in accordance with the terms of
the Merger Agreement independent legal counsel and the independent advisers
continued their diligence and analysis through review of relevant corporate
records and other information.
THE QUARTERLY BOARD MEETINGS
During the period beginning on July 30 and ending on August 5, each of the
Companies held its regular quarterly board of directors meeting, including a
session devoted exclusively to the Merger (the "Quarterly
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Board Meetings" and "Merger Sessions"). At each of the Merger Sessions, all
directors were provided with Management's business plan for ACC and a draft of
the proposed Merger Agreement. At those meetings, Management provided an
in-depth discussion of the Merger transactions, the reasons for the Merger (See
"-- Reasons for the Merger"), and the business plan for ACC. Management
reiterated the potential benefits to the stockholders of all of the Companies
with the consummation of the Merger. Following Management's presentation, Morgan
Stanley gave its report on its valuation analysis, which was substantially
similar to its presentation at the Informational Meetings.
Following the Morgan Stanley presentation at each Merger Session, the
respective Company's independent financial adviser provided its preliminary
views as to the fairness of the respective Exchange Ratio to the stockholders of
its client Company. Each independent financial adviser preliminarily indicated
that, based on available information provided through that date and subject to
further analyses and reviews, the applicable Exchange Ratio appeared to be fair
to the stockholders from a financial point of view.
Also during each Merger Session, the respective Company's independent legal
counsel made a presentation concerning the duties of the board of directors to
the applicable Company and its stockholders in connection with its consideration
of the Merger.
At the conclusion of the foregoing presentations, all persons other than
the Independent Directors, the independent legal counsel and the independent
financial advisers were excused from the meeting, so that the Merger could be
discussed solely among those persons (the "Executive Session"). In the Executive
Sessions, the Independent Directors had the opportunity to question their
advisers and offer their views as to the draft Merger Agreement. No formal
action on the Merger Proposal was sought or taken at these board meetings,
although in each case, the boards voiced support for the proposed Merger and
scheduled a time to reconvene to consider further and to take action with
respect to the proposal.
PREPARATION OF THE MERGER AGREEMENT
On August 6, 1997, representatives from each independent legal counsel,
along with Management, met to negotiate the terms of the draft Merger Agreement.
At the conclusion of the meeting all counsel were in substantial accord as to
the terms of that agreement, although the specific terms of certain provisions
remained subject to further discussion.
REVIEW OF COMPENSATION MATTERS AFFECTED BY THE MERGER
On August 6, 1997, the board of directors of Advisers, with respect to
Advisers' role as employer to all of the officers and employees managing the
Companies and in its role as investment adviser to the Companies, met to
consider specific issues related to the elimination and transition of several of
the existing compensation plans in connection with the Merger. Specifically,
Advisers' board reviewed the complexities involved in maintaining or merging the
existing stock option plans of each of the five Companies, and determined to
recommend to the respective boards of the Companies to terminate their
respective incentive stock option plans at the time of the Merger, so that ACC
would be able to develop its own new stock option plan and allow its board of
directors to determine stock option awards for officers and directors as it
deemed appropriate.
In order to effect the foregoing approach, Advisers' board also determined
that two separate formula bonuses, both contingent upon the consummation of the
Merger, would be required to compensate employees for options that would be
canceled when the stock option plans were terminated, and to balance stock
option awards among Advisers' employees to account for the deviations caused by
the existence of five plans supported by five different publicly traded stocks.
Advisers' board determined that a cut-off amount would be determined for each
employee with unvested options equal to the difference between the stock price
at the Merger announcement date less the exercise price of the options
multiplied by the number of options (the "Cut-off Award"). The Cut-off Award
would vest over the same period of time in which the employees' options would
have vested. The Cut-off Award was designed to cap the appreciated value in
unvested options at the Merger announcement date, in order to set the foundation
to balance option awards upon the Merger.
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Advisers' board then determined a separate cash award formula to balance
the option awards and to compensate employees for any increase in the value of
the potential merged entity from the date of the Merger announcement (i.e.,
August 14, 1997) through the day before the closing date of the Merger (the
"Formula Award"). This award was designed to compensate employees during a time
when their unvested options would cease to appreciate in value, but they would
not yet be able to receive options in ACC. The Formula Award would be equal to
six percent (6%) in the aggregate of the increase in the combined market
capitalizations of the Companies from the date of the Merger announcement until
one day before the closing of the Merger. The Formula Award would be awarded to
individual employees at the discretion of Advisers' compensation committee, and
would vest over three years in equal installments. The Formula Award would be
contributed to ACC's deferred compensation plan, and would be used to purchase
shares of ACC in the open market.
In a joint session on August 7, 1997, and in subsequent discussions on
August 8, 1997, the respective compensation committees of the Companies
considered the termination of the stock option plans and the Cut-off Award and
the Formula Award. At those meetings, the committee members discussed the
rationale for the approach suggested by Advisers' board and concurred that they
would recommend to their respective boards the termination of the option plans
contingent upon the closing of the Merger. The committee members also agreed
that Advisers should proceed with the Cut-off Award and the Formula Award in
order to keep employees' long-term incentive compensation in place and balance
any inequities among the various former plans.
APPROVAL OF THE MERGER AGREEMENT
Between August 11 and August 14, each Company's board of directors met
again to consider and approve the Merger Agreement. In addition to Management
and the directors of that Company, each meeting was attended by the respective
independent financial adviser and legal counsel for that Company. At the
meetings, the independent financial advisers presented their opinions as to the
fairness from a financial point of view of the Exchange Ratios to their
respective client Companies' stockholders. Counsel advised as to certain aspects
of the draft Merger Agreement and the due diligence process. Each board again
held an Executive Session for further deliberations by the Independent Directors
(except that, as discussed below, John Reilly and Anthony Garcia participated in
the Executive Session for Allied Commercial). After considering the presentation
of the respective independent financial adviser and after discussion, as more
fully described below, each of the boards unanimously approved its Company's
participation in the Merger and agreed to the terms of the Merger Agreement. The
Independent Directors separately noted their unanimous approvals of the
transaction in each case.
RECOMMENDATION TO STOCKHOLDERS
The board of directors of each Company, in independently considering the
merits of the Merger to the Company and its stockholders, considered, among
other things: (i) information concerning the financial performance and
condition, business operations, capital levels, asset quality and prospects of
each Company, and its projected future financial performance as a separate
entity and on a combined basis; (ii) current industry, economic and market
conditions and trends; (iii) the importance of significant scale and scope and
financial resources to its ability to compete effectively; (iv) the Merger's
structure as a tax-free merger of equals; (v) the possibility that achieving
cost savings, operating efficiencies and synergies as a result of consummating
the Merger at this time might not be available to the same degree to any of the
Companies on its own; (vi) the terms of the Merger Agreement including the
limited conditions to closing of the Merger and the ability of any of the
Companies to consider alternative business combination proposals; (vii) the
current and historical market prices of the common stock of each Company; (viii)
the opinions of the Companies' respective independent financial advisers as to
the fairness, from a financial point of view, of the respective Exchange Ratios;
(ix) the Companies' respective business, portfolio holdings, liabilities,
management, strategic objectives, competitive positions and prospects; (x) the
challenges of combining the businesses of five corporations the size of Allied
I, Allied II, Advisers, Allied Lending and Allied Commercial; and (xi) the
impact of the Merger on the stockholders and portfolios of each Company and on
the employees of Advisers.
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The foregoing discussion of the information and factors considered by the
boards of directors is not intended to be exhaustive. In view of the variety of
factors considered in connection with the boards of directors' evaluation of the
Merger and recommendation to the stockholders of the respective Companies to
approve the Merger, the board of directors did not assign any relative or
specific weight to the specific factors considered and individual directors may
have given differing weights to different factors.
The board of directors also considered its review of other strategic
alternatives, and determined that no other alternative (whether in the form of a
business combination or otherwise) could reasonably be expected to offer
advantages comparable to those presented by a business combination with the
Companies.
Each board authorized its Chairman to execute the Merger Agreement on
behalf of its Company. The boards unanimously approved the items that would be
necessary to include in this Joint Proxy Statement/Prospectus, which would be
submitted to each respective group of stockholders for approval in connection
with the Merger.
THE CONSIDERATIONS OF EACH COMPANY
ALLIED I
Selection of Independent Financial Adviser. Ferris was selected to act as
independent financial adviser to Allied I because of that firm's long history as
a market maker for the Company's stock, its familiarity with the Company's
business, and the experience and competence of its corporate finance group in
advising boards in similar circumstances.
The Quarterly Board Meeting and the Ferris Presentation. Allied I
conducted its Quarterly Board Meeting on July 30, 1997, at which all board
members were present. At that meeting Ferris shared with the board of directors
its preliminary views as to the fairness of the Exchange Ratio for the
stockholders of Allied I. Ferris provided both a written outline and oral
presentation. The presentation summarized their procedures and preliminary
findings. At the outset of the presentation, Ferris endorsed the analyses
performed by Morgan Stanley and confirmed that it, like Morgan Stanley, viewed
the Merger as a "merger of equals."
First, Ferris summarized the pro forma stockholders' ownership of ACC using
Exchange Ratios. The Ferris presentation emphasized the fact that in addition to
receiving 1.07 shares of Allied Lending stock for each share of Allied I stock
held by a stockholder, the Allied I stockholders would be receiving a
distribution of shares of Allied Lending held in the Allied I portfolio in a
taxable distribution (as defined above, the "Distribution"). See "-- The
Distribution."
Ferris determined four major issues to consider in performing its analysis:
(1) the market value of Allied I as compared to the potential market value of
Allied I's stockholders' pro forma interest in ACC; (2) the determination of the
intrinsic value of Allied I as a stand-alone entity as compared to the intrinsic
value of Allied I's stockholders' pro forma interest in ACC; (3) the premium
available to Allied I's stockholders from the transaction; and (4) whether the
Exchange Ratio was fair.
With respect to the first issue, Ferris determined that the average market
price for a share of Allied I for the period beginning June 16, 1997 and ending
July 15, 1997 was $15.78 per share. Ferris compared this with a pro forma market
value of a share of Allied I stock exchange-adjusted for the Merger (based on
total market capitalization of all the Companies at market prices during the
same period). Ferris determined the pro forma market value to be 8.8% higher
than the average actual of $15.78, or $17.18 per share.
With respect to the second issue, Ferris prepared a free discounted cash
flow valuation for Allied I, and arrived at an intrinsic value per share of
$18.08 based on Management projections of Allied I as a stand-alone entity.
Ferris then prepared a free discounted cash flow valuation for ACC based on
Management's projections for the combined entity, and arrived at an intrinsic
value per share adjusted for the Exchange Ratio and the taxable distribution of
$34.56. The increase in intrinsic value upon the Merger was attributed to the
tax savings on Advisers' earnings, the synergies and business expansion
resulting from the Merger, and the anticipated lower cost of capital for the
larger, merged entity.
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With respect to the third issue, Ferris compared the realized earnings
(investment income net of expenses plus realized capital gains) for Allied I for
the twelve months ended June 30, 1997 and for projected 1997 to pro forma
amounts for ACC for the same period, adding a projected tax savings on the
earnings of Advisers as the pro forma adjustment. The analysis showed that the
pro forma realized earnings would increase per share market value by between 12%
to 20%. Ferris showed that Allied I and the other Companies trade at a discount
to comparable publicly traded companies with respect to price/earnings
multiples. Ferris anticipated that, as a single entity with a substantially
larger market capitalization, ACC should reduce the discount. The increase in
pro forma realized earnings was then combined with an increased price/earnings
multiple for a comparable group of publicly traded companies, and the analysis
resulted in an increase in per share market value of between 70.5% to 72% of
publicly traded companies.
Based upon its analysis to date, Ferris preliminarily indicated that it
believed that the Exchange Ratio was appropriate, and further supported its
conclusion by performing a contribution analysis measuring market
capitalizations and total income.
The Executive Session. In the Executive Session, the Independent Directors
discussed the proposal of the Merger extensively among themselves and their
advisers. Certain factors taken into account by Ferris in reaching its
conclusions regarding fairness were explored in greater detail. The directors
were counseled further about their legal duties to the stockholders of Allied I.
Each of the Independent Directors expressed his support of continuing to pursue
the Merger and to negotiate a final Merger Agreement for consideration at the
next meeting.
Approval of the Merger Agreement. The board met again on August 13 to
consider the Merger Proposal and the other matters to be put before the
stockholders of Allied I in connection with the approval of the Merger Proposal.
With all board members present, the Merger Proposal was discussed further with
Management and financial and legal advisers. At the meeting, Ferris confirmed
the analysis presented at the Quarterly meeting. Ferris delivered to the board a
written opinion that the Exchange Ratio governing the Merger consideration to be
received by Allied I stockholders is fair from a financial point of view. Ferris
also indicated in its opinion its understanding that stockholders of Allied I
would receive, as a special dividend, the shares of Allied Lending currently
held in Allied I's portfolio. Miles & Stockbridge reported on the results of the
due diligence investigation of the third parties to the Merger. The provisions
of the Merger Agreement, a draft of which had been distributed prior to the
meeting, were discussed in detail. After further discussion was held in an
Executive Session, the entire board resolved unanimously that the Merger was
advisable and in the best interest of Allied I stockholders and directed that it
be submitted for approval by the Allied I stockholders. The Independent
Directors noted their unanimous approval of the Merger Proposal.
In connection with its fairness opinion, Ferris reviewed, among other
things, (i) the draft Merger Agreement in the form presented to the Allied I
board; (ii) the annual report to stockholders and the annual report on Form 10-K
of Allied I for the fiscal year ended December 31, 1996; (iii) quarterly reports
on Form 10-Q of Allied I for fiscal 1996 and the first and second (in draft
form) quarters for fiscal 1997; (iv) projected financial results for Allied I
through fiscal 1998; and (v) projected financial results for ACC through fiscal
2001. Ferris held discussions with the members of Management regarding
Management's past and current business operations, financial condition and
future prospects. Ferris reviewed the reported price and trading activity for
the shares of Allied I; compared certain financial and stock market information
concerning Allied I with similar information for certain other finance
companies, the securities of which are publicly traded; and performed such other
studies and analysis as Ferris considered appropriate. In rendering its opinion,
Ferris assumed and relied upon the accuracy and completeness of all financial
and other information reviewed by it for purposes of such opinion, whether
publicly available or provided to it by Allied I, and it has not assumed any
responsibility for the independent verification of such information.
The opinion expressed by Ferris was provided to the board of directors and
does not constitute a recommendation to any stockholder of Allied I as to how
any such stockholder should vote on the Merger.
STOCKHOLDERS ARE URGED TO READ THE OPINION OF FERRIS, ATTACHED HERETO AS
APPENDIX D, CAREFULLY AND IN ITS ENTIRETY FOR INFORMATION WITH RESPECT TO THE
PROCEDURES FOLLOWED, ASSUMPTIONS MADE, MATTERS
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CONSIDERED AND LIMITS OF THE REVIEW UNDERTAKEN BY FERRIS IN RENDERING ITS
OPINION.
ALLIED II
Selection of Independent Financial Adviser. The board of directors of
Allied II selected Interstate because of Interstate's familiarity with the
venture capital industry.
Meeting of Independent Directors. On July 31, 1997, the Independent
Directors of Allied II, Lawrence I. Hebert, John D. Firestone, John I. Leahy and
Mr. Wood, met with representatives of Tucker. Discussions focused on the
business plan presented by Management during the Informational Meetings and
whether the Merger was the appropriate method of accomplishing the goals of that
business plan. The independent directors actively discussed the benefits and
risks of the business plan and were actively involved in overseeing the
negotiation of the Merger Agreement in order to accomplish the business plan.
The Quarterly Board Meeting and the Interstate Presentation. Allied II
conducted its Quarterly Board Meeting on August 5, 1997, at which all board
members were present. At that meeting, as described in "The Quarterly Board
Meetings" above, the board of directors held its Merger Session to discuss the
possible transaction with the other Companies. At that meeting Interstate
representatives discussed with the board of directors its preliminary views as
to the fairness of the Exchange Ratio to the stockholders of Allied II from a
financial point of view. Interstate provided both a written outline and oral
presentation. The presentation summarized its procedures and preliminary
findings. At the outset of the presentation, Interstate confirmed that it, like
Morgan Stanley, viewed the Merger as a "merger of equals."
In connection with Interstate's preliminary analysis and presentation,
Interstate reviewed historical market price and volume data for the Companies;
reviewed the historical contribution of Allied II's market value relative to the
total market value of the Companies; reviewed the historical exchange ratio
between Allied II and Allied Lending; compared certain financial and stock
market data for Allied II with similar data for selected publicly held
comparable companies; discussed the business, financial condition and operating
results of each of the Companies with Management; reviewed and discussed ACC's
business plan with Management; discussed the strategic reasons for the Merger
with Management; reviewed and discussed financial projections of ACC with
Management; reviewed the draft Merger Agreement; reviewed and discussed the
Morgan Stanley analysis; and performed such other financial studies and analyses
as deemed appropriate.
Interstate's analysis was similar in many respects to that of Morgan
Stanley's and the analysis demonstrated similar relationships in the Companies'
stock prices and relative market values. The Interstate analysis revealed a
strong correlation of relative market values of the Companies over the
three-year period ended July 23, 1997. The standard deviation of Allied II's
market value contribution as a percentage of the total market value of the
companies over the three-year period ended July 23, 1997 was .72%.
Interstate also independently selected a group of comparable companies in
order to compare price/earnings and other ratios with those of Allied II and the
Companies. The group of comparable companies selected by Interstate was very
similar to the group of comparable companies identified by Morgan Stanley, and
therefore supported the comparable companies' analysis of both financial
advisers. Interstate's comparable companies' analysis indicated that the
Companies were generally valued based upon their dividend streams.
Interstate tentatively concluded that the Exchange Ratio based on the
thirty-day period was fair to the stockholders of Allied II from a financial
point of view, and observed that Allied II would benefit from the Merger
resulting from a lower cost and increased availability of capital and a
simplification of its operations.
The Executive Session. The Independent Directors continued to voice their
support of the business plan as a compelling idea, and continued to deliberate
with respect to the use of the Merger to accomplish the goals of the business
plan. The Independent Directors extensively questioned Interstate with respect
to the fairness, from a financial point of view, of the Exchange Ratio and its
methodology.
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Approval of the Merger Agreement. On August 12, 1997, the board of
directors met to discuss the terms of the Merger and the draft Merger Agreement,
with all board members present. Following the delivery of the written opinion of
Interstate to the board of directors to the effect that, as of such date, the
Exchange Ratio was fair, from a financial point of view, to the stockholders of
Allied II, the board of directors accepted the terms of the Merger Proposal,
including the terms contained in the draft Merger Agreement in the form
presented at the meeting which had been negotiated between the five parties and
their respective representatives during the course of the previous two weeks,
and authorized its Chairman to execute the Merger Agreement substantially in the
form presented at the meeting with such changes thereto as he deemed appropriate
having considered the comments and suggestions received from the board of
directors. Present at the Allied II meeting, in addition to all members of the
board of directors, were representatives of Tucker, Interstate and Morgan
Stanley.
In arriving at its opinion, Interstate (i) reviewed the draft Merger
Agreement in the form presented to the Allied II Board; (ii) reviewed annual
audited and interim unaudited financial statements through June 1997 for Allied
II and Allied Lending; (iii) reviewed publicly available information including
recent Commission filings for Allied II and Allied Lending; (iv) reviewed the
historical market value of Allied II shares compared to the historical market
value of the shares of the Companies; (v) compared the Exchange Ratio to the
historical relationship between the market price of Allied II shares and the
market price of Allied Lending shares; (vi) reviewed and compared historical
market price and volume data for the shares of Allied II and the shares of each
of the Companies; (vii) compared certain financial and stock market data for
Allied II and for each of the Companies with similar data for selected publicly
held companies; (viii) discussed with senior management the business, financial
condition and operating results of each of the Companies; (ix) reviewed,
discussed and tested the assumptions contained in the analysis of Morgan Stanley
relating to the Merger; and (x) performed such other financial studies and
analyses as it deemed appropriate.
In rendering its opinion, Interstate relied upon the accuracy and
completeness of all financial and other information furnished to Interstate by
or on behalf of Allied II and the Companies, other information used by
Interstate in arriving at its opinion, and other published information that
Interstate considered in its review. Interstate did not undertake to verify
independently the accuracy and completeness of such information. Interstate
relied upon the reasonableness of all projections and forecasts provided to
Interstate and assumed that they were prepared in accordance with accepted
practice on bases reflecting the best currently available estimates and good
faith judgments of Allied II and Management. Interstate's opinion was based upon
the circumstances existing and known to Interstate as of the date thereof.
Interstate did not make or obtain any independent evaluations or appraisals of
the assets or liabilities (contingent or otherwise) of either Allied II or the
Companies, nor was Interstate furnished with any such evaluations or appraisals.
Consequently, Interstate did not express any opinion regarding the value of any
of Allied II's or the Companies' specific individual assets. Interstate was not
requested to, and therefore did not, participate in the structuring or
negotiating of the Merger. Furthermore, Interstate did not express any opinion
as to the range of prices at which the Companies' shares would trade subsequent
to consummation of the Merger. Interstate did not inspect any of the assets or
properties of Allied II or any of the Companies and Interstate did not consider
the tax or accounting treatment or consequences of the Merger in connection with
its conclusions or their resulting effect on the balance sheet and statement of
operations of Allied II or the Companies. Interstate also did not consider or
evaluate any other alternatives that Allied II may have or wish to pursue, as
its engagement was strictly limited to opining on the fairness, from a financial
point of view, of the Exchange Ratio to the stockholders of Allied II.
Interstate, as part of its investment banking business, is engaged in the
valuation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwriting, competitive biddings, secondary
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes. Interstate received a fee
for its services in rendering its fairness opinion.
The opinion expressed by Interstate was provided to the board of directors
and does not constitute a recommendation to any stockholder of Allied II as to
how any such stockholder should vote on the Merger.
A copy of the full text of the written opinion of Interstate, which sets
forth assumptions made, matters considered and limits on the review undertaken,
is attached hereto as Appendix D and is incorporated herein
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by reference. This summary of the opinion of Interstate is qualified in its
entirety by reference to the full text of the opinion.
STOCKHOLDERS ARE URGED TO READ THE OPINION OF INTERSTATE, ATTACHED HERETO
AS APPENDIX D, CAREFULLY AND IN ITS ENTIRETY FOR INFORMATION WITH RESPECT TO THE
PROCEDURES FOLLOWED, ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITS OF THE
REVIEW UNDERTAKEN BY INTERSTATE IN RENDERING ITS OPINION.
Allied Commercial
Selection of Independent Financial Adviser. Scott & Stringfellow was
selected to serve as independent financial adviser to the board of Allied
Commercial and in that role to provide a written opinion as to the fairness,
from a financial point of view, to the stockholders of Allied Commercial of the
Exchange Ratio contemplated to be used in the proposed Merger for the common
stock of Allied Commercial. Scott & Stringfellow was chosen because of its
experience and expertise in the valuation and analysis of financial services
companies, including mortgage REITs, as well as its familiarity with Allied
Commercial, Allied I, Allied II, Allied Lending and Advisers. Scott &
Stringfellow is a market maker of Allied Commercial and Allied Lending common
stock.
The Quarterly Board Meeting and the Scott & Stringfellow
Presentation. Allied Commercial held its Quarterly Board Meeting on July 31,
1997. All of the directors were present except Laura W. van Roijen, who was
unable to participate.
Scott & Stringfellow discussed that its engagement was specifically to
provide a written opinion to the board of Allied Commercial as to the fairness,
from a financial point of view, to the stockholders of Allied Commercial of the
applicable Exchange Ratio. Scott & Stringfellow described certain of the
informational reviews and analyses it had conducted through July 31, 1997. Scott
& Stringfellow stated to the board that, based on its reviews and analyses to
date and subject to further reviews, analyses and investigations, its
preliminary opinion was that the Exchange Ratio proposed as of that date per
common share of Allied Commercial appeared to be fair, from a financial point of
view, to the holders of Allied Commercial common stock.
The Executive Session. The Independent Directors of Allied Commercial met
with representatives of Dickstein and Scott & Stringfellow to consider their
duties in evaluating the Merger, to receive the advice of such representatives
and to discuss their preliminary views as to the advisability of proceeding with
the Merger. Although no formal action was taken, it was the consensus of such
directors to authorize Management and the board's independent legal counsel to
proceed with the preparation of a definitive Merger Agreement, subject to
approval of the board. It also was the consensus of such directors, supported by
the advice of independent legal counsel, that Messrs. Garcia and Reilly would
participate in the deliberations and decisions with respect to the Merger
notwithstanding their role as members of the boards of directors of Allied
Lending and Allied II, respectively.
Approval of the Merger Agreement. The board reconvened on August 13 to
consider the Merger Proposal and the other matters to be put before the
stockholders of Allied Commercial in connection with the approval of the Merger
Proposal. All directors were present. At that meeting, the board, among other
things, reviewed the draft Merger Agreement and the transactions contemplated
thereby and received a report from Management concerning the negotiation of the
draft Merger Agreement and developments relating to the Merger since the board's
meeting on July 31, 1997. The board reviewed the terms of the draft Merger
Agreement with Management and independent legal counsel and received a report
from Scott & Stringfellow summarizing such independent financial adviser's
analyses and opinion concerning the fairness, from a financial point of view, of
the Exchange Ratio to Allied Commercial's stockholders.
Scott & Stringfellow rendered a written opinion to the Allied Commercial
board, dated August 13, 1997, that as of that date the Exchange Ratio as defined
in Scott & Stringfellow's written opinion was fair from a financial point of
view to the holders of Allied Commercial common stock. The full text of Scott &
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Stringfellow's opinion, which sets forth certain assumptions made, matters
considered, and limitations of the review undertaken, is attached as Appendix E
to this Joint Proxy Statement/Prospectus, is incorporated herein by reference
and should be read carefully and in its entirety in connection with this Joint
Proxy Statement/Prospectus. The summary of Scott & Stringfellow's opinion set
forth in this Joint Proxy Statement/Prospectus is qualified in its entirety by
reference to the opinion. Scott & Stringfellow's opinion is directed to the
Allied Commercial board with regard only to the fairness, from a financial point
of view, as of the date of the opinion, of the Exchange Ratio to the holders of
Allied Commercial common stock and does not constitute a recommendation to any
holders of Allied Commercial common stock as to how such holders of Allied
Commercial common stock should vote with respect to the Merger or with respect
to any other matter. Scott & Stringfellow's opinion does not address the
relative merits of the Merger as compared to any alternative business strategies
that might exist for Allied Commercial, nor does it address the effect of any
other business combination in which Allied Commercial might engage. Scott &
Stringfellow also was not engaged to and did not participate in the process in
which the Exchange Ratio was determined.
In developing its opinion, Scott & Stringfellow reviewed and analyzed,
among other things: (i) the August 8, 1997 draft of the Merger Agreement; (ii)
annual reports to stockholders, annual reports on Form 10-K and related audited
financial statements for the three years ended December 31, 1996 of the
Companies; (iii) quarterly reports on Form 10-Q and related unaudited financial
statements for the period ended March 31, 1997 of the Companies; (iv) draft
quarterly reports on Form 10-Q and related unaudited financial statements for
the period ended June 30, 1997 of the Companies; (v) certain internal
information, primarily financial in nature, concerning the business and
operations of the Companies, including certain financial analyses and forecasts,
prepared and furnished to Scott & Stringfellow by Management for purposes of its
analysis; (vi) certain pro forma financial projections for ACC prepared and
furnished to Scott & Stringfellow by Management for purposes of its analysis;
(vii) certain publicly available information concerning the estimates of the
future financial performance of the Companies prepared by financial analysts
unaffiliated with any of the entities; (viii) certain publicly available
information regarding historical market prices and trading activity of the
common stocks of the Companies; and (ix) certain publicly available information
with respect to certain financial services companies and REITs, as well as with
respect to certain merger transactions that Scott & Stringfellow deemed relevant
to its inquiry. Scott & Stringfellow has interviewed certain senior officers of
the Companies to discuss the foregoing as well as other matters Scott &
Stringfellow believed were relevant to its inquiry. Scott & Stringfellow also
reviewed certain information and analyses provided by Morgan Stanley, which is
providing certain financial advisory services in connection with the Merger, and
has met with officers of Morgan Stanley to review and discuss such information
and analyses. Finally, Scott & Stringfellow has conducted such other studies,
analyses and investigations and considered such other information as it deemed
appropriate.
In conducting its review and arriving at its opinion, Scott & Stringfellow
has relied upon and assumed the accuracy and completeness of all information
furnished to it or publicly available. Scott & Stringfellow has not attempted
independently to verify such information, nor has it made any independent
appraisal of the assets or liabilities of the Companies. Scott & Stringfellow
has relied upon the management of the Companies as to the reasonableness and
achievability of their financial and operational forecasts and projections, and
the assumptions and bases therefor, provided to Scott & Stringfellow, and Scott
& Stringfellow has assumed that such forecasts and projections reflect the best
currently available estimates and judgments of such management as to the
expected future financial performance of the Companies and ACC. Scott &
Stringfellow's opinion was necessarily based upon economic, market and other
conditions as they existed and could be evaluated at the date of the opinion,
information made available to Scott & Stringfellow through the date of the
opinion, and Scott & Stringfellow's experience in business valuation in general.
In connection with rendering its opinion to the Allied Commercial board,
Scott & Stringfellow performed a variety of financial analyses. The summary of
the analyses, as set forth below, does not purport to be a complete description
of such analyses. The preparation of fairness opinions is a complex process
involving various determinations as to the most appropriate and relevant methods
of financial analysis and the application of those methods in particular
circumstances and, therefore, such an opinion is not readily susceptible to
partial analysis or summary description. Moreover, the evaluation of the
fairness, from a
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financial point of view, as of the date of the opinion, of the Exchange Ratio to
holders of Allied Commercial common stock was to some extent a subjective one
based on the experience and judgment of Scott & Stringfellow and not merely the
result of mathematical analysis of financial data. Accordingly, notwithstanding
the separate factors summarized below, Scott & Stringfellow believes that its
analyses must be considered as a whole and that selecting portions of its
analyses and of the factors considered by it, without considering all analyses
and factors, could create an incomplete view of the processes underlying the
analyses conducted by Scott & Stringfellow and its opinion.
The ranges of valuations resulting from any particular analysis described
below should not be taken to be Scott & Stringfellow's view of the actual value
of Allied Commercial or ACC. Scott & Stringfellow's analyses involved numerous
assumptions and the use of management projections with respect to industry
performance, business and economic conditions and other matters, many of which
are beyond the control of the Companies or ACC. Any estimates and/or projections
contained in or used in the analyses performed by Scott & Stringfellow are not
necessarily indicative of actual values or future results, which may be
significantly more or less favorable than suggested by such analyses. In
addition, analyses relating to the values of businesses do not purport to be
appraisals of businesses. Because such estimates and/or projections involve
complex considerations and are inherently subject to uncertainty, Scott &
Stringfellow does not assume responsibility for their accuracy.
Scott & Stringfellow's opinion is just one of many factors taken into
consideration by the Allied Commercial board in determining to approve the
Merger Agreement. The following is a summary of the analyses performed by Scott
& Stringfellow in connection with its opinion.
Analysis of Allied Commercial's Contribution to and Ownership of the
Post-Merger Surviving Company. Scott & Stringfellow performed an analysis of
Allied Commercial's contribution to ACC of net income (using pre-tax income of
Advisers), net investment income before net unrealized appreciation
(depreciation) on investments (using pre-tax income of Advisers), distributions
to stockholders (using pre-tax income of Advisers), common stockholders' equity,
and market capitalization. The analysis showed a percentage contribution by
Allied Commercial to ACC of: (i) 45.0% and 47.4% of net income for the 12 months
ended June 30, 1997 and December 31, 1996, respectively; (ii) 43.5% and 40.7% of
net income before net unrealized appreciation (depreciation) on investments for
the 12 months ended June 30, 1997 and December 31, 1996, respectively; (iii)
44.1% and 44.6% of distributions to stockholders for the 12 months ended June
30, 1997 and December 31, 1996, respectively; (iv) 48.1% and 48.6% of common
stockholders' equity as of June 30, 1997 and December 31, 1996, respectively;
and (v) 46.4% and 45.0% of market capitalization as of August 11, 1997 and
December 31, 1996, respectively. Based on shares outstanding at August 8, 1997,
an Exchange Ratio of 1.60 shares of Allied Lending common stock for each share
of Allied Commercial common stock, and the respective Exchange Ratios proposed
for Allied I, Allied II, and Advisers, the holders of Allied Commercial common
stock would own 46.6% of ACC on a pro forma basis.
Analysis of Contribution and Ownership in Selected Financial Institution
"Merger-of-Equals" Transactions. Scott & Stringfellow performed an analysis of
10 selected "merger-of-equals" transactions involving financial institutions.
The ratios of pro forma percentage ownership of Allied Commercial's stockholders
in ACC relative to the percentage contribution of Allied Commercial to pro forma
ACC's net income (using pre-tax income of Advisers) and net investment income
before net unrealized appreciation (depreciation) on investments (using pre-tax
income of Advisers) for the 12 months ended June 30, 1997, common stockholders'
equity as of June 30, 1997, and market capitalization as of August 11, 1997 was
compared to the ratios of percentage ownership of stockholders in the merging
organization to latest 12 month net income, and most recently available common
stockholders' equity and market capitalization in the selected transactions. The
analysis yielded a range of ratios for the merging organization of: (i) 0.94 to
1.18 for net income (versus 1.04 for net income and 1.07 for net income before
net unrealized appreciation/depreciation on investments for Allied Commercial);
(ii) 0.90 to 1.17 for common stockholders' equity (versus 0.97 for Allied
Commercial); and (iii) 0.92 to 1.11 for market capitalization (versus 1.00 for
Allied Commercial).
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Pro forma Accretion (Dilution) Analysis of Earnings, Distributions, and
Common Stockholders' Equity Per Share. Scott & Stringfellow analyzed certain
projected income statement and other data provided by Management for the two
years ending December 31, 1997 and 1998, as well as draft, unaudited June 30,
1997 balance sheets for each Company. This analysis showed that, after giving
effect to the Merger on a pro forma basis, the proposed Merger would have the
following pro forma effect on Allied Commercial stockholders: (i) earnings per
share before net unrealized appreciation (depreciation) on investments would
increase 4.5% on a pro forma basis in 1997, excluding the impact of cost savings
and synergies projected to be realized, as well as excluding one-time Merger
expenses; (ii) distributions per share would increase 16.9% in 1997, including
the impact of an expected special distribution to stockholders at the end of
1997 and excluding the impact of cost savings and synergies projected to be
realized and one-time Merger costs; (iii) earnings per share before net
unrealized appreciation (depreciation) on investments and distributions per
share would increase 9.0% on a pro forma basis in 1998 under the most dilutive
scenario and 25.4% under the least dilutive scenario projected by Management,
including the impact of cost savings and synergies projected to be realized; and
(iv) after adjusting a combined, pro forma June 30, 1997 balance sheet for the
impact of an expected special dividend to stockholders at the end of 1997,
common stockholders' equity per share would decline by 5.3% on a pro forma
basis.
Discounted Projected Future Dividend (Distribution) Analysis. Scott &
Stringfellow prepared discounted projected future dividend analyses that
indicated theoretical value ranges of 1.0 share of Allied Commercial common
stock and 1.6 shares of common stock of ACC. For both Allied Commercial and ACC,
management projections were used for 1998-2001, and a 10% growth rate for net
income and dividends was assumed for 2002. For both Allied Commercial and ACC, a
terminal value was calculated for the end of the period by applying multiples
ranging from 10.0 to 12.5 times projected 2002 net income. The projected
dividend streams and terminal values calculated were then discounted to present
values using discount rates ranging from 8% to 10%. The indicated theoretical
value range for 1.0 share of Allied Commercial common stock was $22.69 to
$28.91, and the indicated theoretical value range of 1.6 shares of common stock
of ACC was $31.18 to $39.84.
Pro forma Common Stockholders' Equity to Total Assets Ratio. Scott &
Stringfellow compared the June 30, 1997 ratio of common stockholders' equity to
total assets of Allied Commercial, which was 43.8% based on a draft, unaudited
June 30, 1997 balance sheet provided by Management, to a pro forma ratio of
common stockholders' equity to total assets for ACC, which was 50.9%, assuming
the Merger occurred on June 30, 1997 and adjusting for the impact of an expected
special dividend to be paid at the end of 1997.
Comparison with Selected Publicly Traded Companies. Scott & Stringfellow
analyzed certain financial and market information of Allied Commercial, Allied
Lending, Allied I, Allied II and Advisers, comparing such information to
comparable information on the other Companies, as well as to comparable
information on selected groups of publicly traded companies. In connection with
this analysis, Scott & Stringfellow also reviewed certain publicly available
information concerning estimates of net income per share for 1997 and 1998
prepared by unaffiliated financial analysts (the "Analyst Estimates"). Market
information was calculated based on August 11, 1997 closing prices. Dividend
yields for these comparisons used annualized most recent quarterly dividends.
Scott & Stringfellow compared information of Allied Commercial to that of a
group of six publicly traded REITs -- Capstead Mortgage Corp., Commercial Net
Lease Realty Trust Inc., Criimi Mae Inc., Dynex Capital Corp., Franchise
Financial Corp. of America and Thornburg Mortgage Corp. (the "REIT
Group") -- and to that of Ocwen Financial Corp. Scott & Stringfellow compared
information of Allied I and Allied II to that of a group of five publicly traded
mezzanine/venture capital finance companies: Bando McGlockin Capital Corp.,
Medallion Financial Corp., PMC Capital Inc., Sirrom Capital Corp., and Silicon
Valley Bancshares (the "Mezzanine Group"). Scott & Stringfellow compared
information of Advisers to that of a group of six publicly traded asset
management companies: Alliance Capital Management Inc., Eaton Vance, New England
Investment Companies L.P., PIMCO Advisors L.P., T. Rowe Price Associates Inc.,
and United Asset Management (the "Asset Management Group"). Scott & Stringfellow
also analyzed information on two other publicly traded companies -- Associates
First Capital and Finova Group, Inc.
The REIT Group traded at average multiples of 11.9x latest 12 month
earnings per share, 11.0x average Analyst Estimates of 1997 earnings per share,
and 10.2x average Analyst Estimates of 1998 earnings per share
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(compared to 13.1x latest 12 month earnings per share and 11.1x and 10.2x
average Analyst Estimates of 1997 and 1998 earnings per share for Allied
Commercial). The REIT Group traded at an average price to common stockholders'
equity multiple of 1.72x and at an average dividend yield of 8.5% (compared to
1.77x and 8.7% for Allied Commercial). The Mezzanine Group traded at average
multiples of 17.4x latest 12 month earnings per share, 15.7x average Analyst
Estimates of 1997 earnings per share, and 13.4x average Analyst Estimates of
1998 earnings per share (compared to 12.9x and 10.6x latest 12 month net income
before unrealized net appreciation/depreciation on investments per share, 8.1x
and 12.6x average Analyst Estimates of 1997 earnings per share, and 7.7x and
10.0x average Analyst Estimates of 1998 earnings per share for Allied I and
Allied II, respectively). The Mezzanine Group traded at an average price to
common stockholders' equity multiple of 2.51x and at an average dividend yield
of 4.7% (compared to 1.87x and 1.52x, and 8.7% and 8.7%, for Allied I and Allied
II, respectively). The Asset Management Group traded at average multiples of
18.9x latest 12 month earnings per share, 17.7x average Analyst Estimates of
1997 earnings per share, and 17.4x average Analyst Estimates of 1998 earnings
per share (compared to 16.6x latest 12 month earnings per share and 11.9x and
9.9x average Analyst Estimates of 1997 and 1998 earnings per share for
Advisers). The Asset Management Group traded at an average price to common
stockholders' equity multiple of 4.95x and at an average dividend yield of 4.8%
(compared to 3.35x and 0.0% for Advisers). While Scott & Stringfellow did not
compare Allied Lending to any publicly traded company, it did calculate that
Allied Lending traded at 11.4x latest 12 month earnings before appreciation
(depreciation) on investments per share, 11.3x and 10.2x average Analyst
Estimates of 1997 and 1998 earnings per share, 1.93x June 30, 1997 common
stockholders' equity per share, and at a dividend yield of 8.1%. Scott &
Stringfellow did not consider any of the publicly traded companies selected for
this analysis to represent identical comparisons to any of the Companies.
The board then considered, with the advice of independent legal counsel,
the Merger Agreement and the transactions contemplated thereby. The Independent
Directors (including Messrs. Garcia and Reilly) then met in executive session
with representatives of Dickstein and Scott & Stringfellow and voted unanimously
to recommend the approval and adoption of the Merger Agreement and the
transactions contemplated thereby. The board then reconvened and unanimously
determined to approve and adopt the Merger Agreement and the transactions
contemplated thereby and to recommend approval by the stockholders.
STOCKHOLDERS ARE URGED TO READ THE OPINION OF SCOTT & STRINGFELLOW,
ATTACHED HERETO AS APPENDIX E, CAREFULLY AND IN ITS ENTIRETY FOR INFORMATION
WITH RESPECT TO THE PROCEDURES FOLLOWED, ASSUMPTIONS MADE, MATTERS CONSIDERED
AND LIMITS OF THE REVIEW UNDERTAKEN BY SCOTT & STRINGFELLOW IN RENDERING ITS
OPINION.
Allied Lending
Selection of the Independent Financial Adviser. Baird was selected as
independent financial adviser to Allied Lending because of its extensive
experience in serving the financial services industry, and its familiarity with
the business of Allied Lending. Throughout Allied Lending's history, Baird has
maintained an active investment banking relationship with Allied Lending with
regard to the SBA-guaranteed loan secondary market and portfolio financing
matters.
The Quarterly Board Meeting and the Baird Presentation. Allied Lending
held its Quarterly Board Meeting on August 4, 1997. All of the directors were
present. During the course of the meeting, Baird presented its preliminary
analysis of the proposed financial terms of the Merger.
Baird was retained to render an opinion as to whether or not the Exchange
Ratios in the contemplated Merger, taken as whole, are fair, from a financial
point of view, to Allied Lending. Baird noted that it considered the Merger to
be a "merger of equals" and accordingly did not consider the transaction to be a
change of control acquisition. Baird also noted that they believed that the
Companies were valued in the market today based upon their historical record of
dividend distributions (with the exception of Advisers). Baird indicated that it
was in the process of completing their analyses, and would present further data
to the board at the next board meeting. At the August 4 meeting, Baird stated
its belief, based upon its investigations to date (which were subject to
completion) and its preliminary analyses, that, if requested, Baird could be in
a
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position to render an opinion to the effect that the Exchange Ratios, taken as a
whole, were fair, from a financial point of view, to Allied Lending.
The Executive Session. The Independent Directors of Allied Lending then
met separately in an Executive Session with representatives of Piper & Marbury
and Baird. During the executive session, the Independent Directors received
information and advice from Piper & Marbury and Baird, and considered and
discussed their preliminary views as to the advisability of proceeding with the
Merger. The representatives of Piper & Marbury counseled the Independent
Directors regarding their fiduciary duties in connection with their
consideration of the Merger, and they reviewed and responded to questions
regarding regulatory and other matters. At the conclusion of the Executive
Session, it was the consensus of the Independent Directors that Management
should proceed with the steps necessary to present the Merger, the Merger
Agreement and other related materials to the board of directors for approval.
Approval of the Merger Agreement. The board of directors of Allied Lending
met again on August 14 to consider the Merger Proposal and the other matters to
be put before the stockholders of Allied Lending in connection with the approval
of the Merger Proposal. All of the directors attended the meeting. Management
reviewed and discussed the terms and conditions of the draft Merger Agreement
and the other matters presented for approval by the board in connection with the
Merger.
In conducting its investigation and analysis and in arriving at its opinion
herein, Baird reviewed such information and took into account such financial and
economic factors as it deemed relevant under the circumstances. In that
connection, Baird, among other things: (i) reviewed certain internal
information, primarily financial in nature, including projections, concerning
the business and operations of each of the Companies furnished to it for
purposes of its analysis, as well as publicly available information, including,
but not limited to, the Companies' recent filings with the Commission and equity
analyst research reports prepared by various investment banking firms; (ii)
reviewed the draft Merger Agreement in the form presented to Allied Lending's
board of directors; (iii) compared the historical market prices and trading
activity of each of the Companies' common stock with those of certain other
publicly traded companies Baird deemed relevant; (iv) compared the proposed
financial terms of the Merger with the financial terms of certain other business
combinations Baird deemed relevant; and (v) reviewed the potential pro forma
effects of the Merger on Allied Lending. Baird held discussions with members of
Management concerning each Company's historical and current financial condition
and operating results, as well as the future prospects of each of the Companies.
Baird also considered such other information, financial studies, analyses and
investigations and financial, economic and market criteria which it deemed
relevant for the preparation of its opinion.
In arriving at its opinion, Baird assumed and relied upon the accuracy and
completeness of all of the financial and other information that was publicly
available or provided to it by or on behalf of the Companies, and was not
engaged to independently verify any such information.
Baird assumed, with the consent of Allied Lending, (i) that all material
assets and liabilities (contingent or otherwise, known or unknown) of the
Companies are as set forth in the Companies' respective financial statements;
(ii) the Merger would be accounted for under the combination of companies under
common control method of accounting and (iii) the Merger would be consummated in
accordance with the terms of the Merger Agreement without any material amendment
thereto or waiver by the Companies of any condition to their respective
obligations (including without limitation the declaration and payment by ACC of
a special dividend pursuant to Section 6.05 thereof). Baird also assumed that
the financial forecasts examined by it were reasonably prepared on bases
reflecting the best available estimates and good faith judgments of Management
as to future performance of each of the Companies. In conducting its review,
Baird did not undertake nor obtain an independent evaluation or appraisal of any
of the assets or liabilities (contingent or otherwise) of any of the Companies,
nor did Baird make a physical inspection of the properties or facilities of any
of the Companies. Baird's opinion necessarily is based upon economic, monetary
and market conditions as they existed and could be evaluated on the date of the
opinion, and did not predict or take into account any changes which may occur,
or information which may become available, after the date thereof. Furthermore,
Baird expressed no opinion as to the price or trading range at which any
Company's securities would trade following the date thereof.
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Baird reviewed certain publicly available financial information as of the
most recently reported period and stock market information as of August 12, 1997
for the Companies and for certain selected publicly traded companies which Baird
deemed relevant (the "Comparable Companies"). The Comparable Companies were as
follows: for Allied Lending: Finova Group, Inc., Financial Federal Corp., Trans
Leasing International, Inc., Ocwen Financial Corporation, Pacific Crest Capital,
and Winthorp Resources Corporation; for Advisers: Alliance Capital Management
LP, New England Investment Companies LP, PIMCO Advisors LP and T. Rowe Price
Associates, Inc.; for both Allied I and Allied II: Brantley Capital Corp., Bando
McGlocklin Capital Corporation, PMC Capital, Inc., Sirrom Capital Corp. and
Medallion Financial Corp.; and for Allied Commercial: Capstone Capital
Corporation, Criimi Mae, Inc., Franchise Finance Corporation of America,
Commercial Net Lease Realty, Inc., Trinet Corporate Realty Trust, Inc. and Excel
Realty Trust, Inc. For each of the Companies, Baird examined the common stock
price and volume trading history for the prior two years. For each Company,
Baird also compared the stock trading history for such Company against an index
comprised of the Comparable Companies for such Company.
Baird conducted a discounted cash flow analysis based on estimates provided
by Management. These discounted cash flows were prepared for each of the
Companies on a stand-alone basis using estimates for the four and one-half years
ending December 31, 2001 and the terminal value for the year ended 2002. These
estimates did not take into account any cost savings and synergies that may be
realized following the Merger. In such analysis, Baird assumed terminal value
multiples ranges and ranges of discount rates for each of the Companies based on
calculation of Comparable Companies' ratios and calculations of each Company's
cost of equity, respectively. Such analysis produced implied values for each of
the Companies that were in excess of common stock trading prices (as of August
12, 1997) for each of the Companies. Baird noted that the discounted cash flow
analysis was included because it is a widely used valuation methodology, but
noted that the results of such methodology are highly dependent upon numerous
assumptions that must be made, including earnings growth rates, terminal values
and discount rates.
Baird also calculated a range of price to earnings ("P/E") multiples from
one standard deviation below the median P/E trading multiple for each of the
Comparable Company groups to one standard deviation above that median. Baird
applied these ranges of P/E multiples to earnings per share for each of the
Companies (adjusted for realized gains and unrealized appreciation
(depreciation) on investments by Allied I and Allied II). Such analyses produced
implied values for each of the Companies that were in excess of common stock
trading prices (as of August 12, 1997) for each of the Companies.
Baird used the results of the discounted cash flow and P/E analyses
described above to calculate each of the Companies' relative valuation to the
resulting pro forma ownership after giving effect to the Merger. Baird found
that Allied Lending's value was 10.27% of the combined value of each stand-alone
Company under the discounted cash flow analysis and 9.61% of the combined value
of each stand-alone Company under the P/E valuation. In comparison, Allied
Lending will receive 10.39% ownership in the pro forma combined entity.
Baird also reviewed certain balance sheet, income statement and market
value data for each of the Companies with the objective of analyzing the
relative contribution of each of the Companies to the combined entity on a pro
forma basis. The following measures were examined: (i) reported net income, (ii)
income net of unrealized appreciation (depreciation) on investments, (iii)
dividends paid, (iv) common equity or net assets, (v) total market
capitalization as of August 12, 1997 and (vi) total market capitalization using
an average closing price for the 30 days ending August 12, 1997. Baird compared
the pro forma ownership of each of the Companies to its relative contribution
based upon each of the above measures and found (i) Allied Lending stockholders
would own 10.39% of the pro forma combined entity while Allied Lending would
contribute between 9.82% and 11.79% based upon the above measures. Baird also
conducted such a contribution analysis based on reported data as of and for the
years ended December 31, 1996 and December 31, 1995. Baird noted no significant
variation from the above contribution except in the case of net income, where
realized and unrealized gains increased volatility in this measure.
Baird also reviewed the eight most recently announced "merger of equals"
transactions in the financial institutions industry as of August 12, 1997
(according to SNL Datasource). Baird developed implied exchange ratios that
would have resulted had the exchange ratios in the selected transactions been
based on
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(i) book value, (ii) earnings per share, (iii) market capitalization based on
common stock trading prices the day prior to announcement of the transaction and
(iv) market capitalization based on average common stock trading prices for the
thirty days prior to announcement of the transaction (the "30-Day Average
Exchange"). Baird compared these implied exchange ratios to the actual exchange
ratios announced and found the highest correlation (a 0.98 correlation
coefficient) between the 30-Day Average Exchange and the actual exchange ratios.
No other correlation coefficient was greater than 0.86.
Baird analyzed the potential pro forma financial effects of the Merger.
Using earnings estimates for each of the Companies on a stand-alone basis, as
provided by Management, Baird compared earnings per share on a stand alone basis
to the earnings per share of the combined Companies for 1997 and 1998 on a pro
forma basis. For 1997, transaction expenses were not included, nor were
synergies and cost savings estimated by Management to result from the Merger.
For 1998, however, the effects of expenses (paid in 1997) and synergies and cost
savings estimated by Management to result from the Merger were incorporated.
This analysis indicated that the Merger would be accretive to Allied Lending's
pro forma earnings per share in both 1997 and 1998.
Based upon and subject to the foregoing, Baird concluded that the Exchange
Ratios, taken as a whole, were fair from a financial point of view, to Allied
Lending.
The foregoing summary does not purport to be a complete description of the
analyses performed by Baird. The preparation of a fairness opinion is a complex
process and is not susceptible to partial analysis or a summary description.
Baird believes that its analyses must be considered as a whole and that
selecting portions of such analyses without considering all factors and analyses
would create an incomplete view of the processes underlying its opinion. In its
analyses, Baird relied upon numerous assumptions made by senior management of
the Companies with respect to industry performance, general business and
economic conditions, and other matters, many of which are beyond the control of
the Companies. Analyses based upon forecasts of future results are not
necessarily indicative of actual values, which may be significantly more or less
favorable than suggested by such analyses. No company or transaction used as a
comparison in the analyses is identical to any of the Companies or to the
Merger. Accordingly, an analysis of the results of the foregoing necessarily
involves complex considerations and judgements concerning financial and
operating characteristics of the Companies and other factors that could affect
the public trading volume of the Comparable Companies to which Allied Lending,
the other Companies and the Merger are being compared. Additionally, any
estimates included in Baird's analyses do not purport to be appraisals and are
not necessarily reflective of the prices at which businesses actually may be
sold. Because such estimates are inherently subject to uncertainty, Baird does
not assume responsibility for their accuracy.
The Executive Session. At the conclusion of Management's and Baird's
presentations, the Independent Directors met in an Executive Session with
representatives of Piper & Marbury and Baird. The Independent Directors
discussed the Merger Agreement and the other related matters presented by
Management. They also discussed Baird's presentation and fairness opinion.
At the conclusion of the Executive Session, the board meeting was
reconvened and the board of directors, including the Independent Directors
voting separately, unanimously determined to approve and adopt the Merger
Agreement and the transactions contemplated thereby and to recommend their
approval by the stockholders of Allied Lending.
THE FULL TEXT OF BAIRD'S OPINION, DATED AUGUST 14, 1997, WHICH SETS FORTH
THE ASSUMPTIONS MADE, GENERAL PROCEDURES FOLLOWED, MATTERS CONSIDERED AND
LIMITATIONS ON THE SCOPE OF REVIEW UNDERTAKEN BY BAIRD IN RENDERING ITS OPINION,
IS ATTACHED AS APPENDIX F TO THIS JOINT PROXY STATEMENT/PROSPECTUS AND IS
INCORPORATED HEREIN BY REFERENCE. BAIRD'S OPINION IS DIRECTED ONLY TO THE
FAIRNESS, AS OF THE DATE OF THE OPINION AND FROM A FINANCIAL POINT OF VIEW, OF
THE EXCHANGE RATIOS, TAKEN AS A WHOLE, TO ALLIED LENDING AND DOES NOT CONSTITUTE
A RECOMMENDATION TO ANY ALLIED LENDING STOCKHOLDER AS TO HOW SUCH STOCKHOLDER
SHOULD VOTE WITH RESPECT TO THE MERGER. BAIRD DID NOT MAKE ANY RECOMMENDATION TO
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ALLIED LENDING AS TO THE EXCHANGE RATIOS. THE SUMMARY OF BAIRD'S OPINION SET
FORTH ABOVE IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH
OPINION, ATTACHED HERETO AS APPENDIX F. ALLIED LENDING STOCKHOLDERS ARE URGED TO
READ THE OPINION CAREFULLY IN ITS ENTIRETY.
Advisers
Selection of Independent Financial Adviser. Van Kasper was selected as the
independent financial adviser to Advisers in light of its expertise in
evaluating restructuring proposals and its knowledge of the Company's business,
and the firm's active role as a market maker for Advisers' stock over many
years.
The Quarterly Board Meetings and the Van Kasper Presentation. Advisers
held its Quarterly Board Meeting on August 1, 1997. All of the directors were
present. During the course of the meeting, Van Kasper presented its preliminary
analysis of the transaction and its preliminary findings.
At the outset of Van Kasper's presentation, its representatives noted that,
while Van Kasper had not yet completed its analysis, there was nothing that had
come to its attention so far in its analysis of Morgan Stanley's valuation
approach and of the Merger in general which would suggest that the transaction
was not fair from a financial perspective to the stockholders of Advisers. In
its preliminary analysis, Van Kasper employed many methodologies including
discounted cash flow analysis; comparisons to selected publicly traded
comparable companies; a stock valuation analysis; and a merger and acquisition
transaction analysis. The Van Kasper representatives explained that they looked
both at Advisers on a standalone basis and on a combined basis following the
Merger. Furthermore, Van Kasper noted that its preliminary analysis suggested
that the Merger could enhance stockholder value to the extent it increases the
currently thin trading volume and limited analyst coverage of Advisers' stock.
The Executive Session. During the Executive Session, each of the
Independent Directors questioned Van Kasper and Sutherland on a number of
issues. In particular, Van Kasper was asked to further explain both its
methodology and understanding of the appropriateness of the methodology employed
by Morgan Stanley. In response to inquiries whether, in Van Kasper's view, there
were significant risks for Advisers in entering into the Merger, Van Kasper
responded that, in its preliminary analysis, it had not identified any
significant financial risks, and that the transaction could enhance stockholder
value to the extent that it increases the currently thin trading volume and
limited analyst coverage of Advisers' stock.
Approval of the Merger Agreement. The board met again on August 11, 1997
to consider the Merger Proposal and the other matters to be put before the
stockholders of Advisers in connection with the approval of the Merger Proposal.
All of the directors attended the meeting.
At the meeting of the board on August 11, 1997, Van Kasper delivered a
written opinion to the board of directors that, as of August 4, 1997, the terms
and conditions of the Merger were fair, from a financial point of view, to the
stockholders of Advisers. Van Kasper's opinion is limited to the fairness of the
terms and conditions of the Merger, from a financial point of view, to the
stockholders of Advisers and does not address Advisers' underlying business
decision to proceed with the Merger, nor does it express an opinion as to the
prices at which shares of Advisers' stock may trade if and when the Merger is
completed. The opinion does not constitute a recommendation to any stockholder
of Advisers as to how such stockholder should vote with respect to the Merger at
any meeting of the stockholders of Advisers.
For purposes of its opinion, Van Kasper, among other things: (i) discussed
the Merger and related matters with certain members of Management; (ii) reviewed
the proposed form of Merger Agreement; (iii) reviewed documents filed by each of
the Companies with the Commission for the years ended December 31, 1994, 1995
and 1996 and the three months ended March 31, 1997; (iv) reviewed audited
financial statements of the Companies at and for the three years ended December
31, 1994, 1995 and 1996, and unaudited financial statements of each of the
Companies at and for the three months ended March 31, 1997, and the accompanying
Reports of Independent Accountants; (v) reviewed projections for each of the
Companies, and for the Companies combined after the Merger, as prepared and
provided by Advisers; (vi) reviewed certain marketing materials provided by the
Companies; (vii) performed a discounted cash flow
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analysis using various discount rates based upon financial projections provided
by Advisers; (viii) compared publicly available recent information for companies
Van Kasper determined to be comparable; (ix) reviewed recent historical stock
prices for each of the Companies and other companies Van Kasper determined to be
comparable; (x) reviewed the financial terms of certain other recent business
combinations; and (xi) conducted such other studies, analyses and examinations
as Van Kasper deemed appropriate.
In conducting its review and rendering its opinion, Van Kasper, without any
independent verification, (i) assumed that the documents to be prepared and used
to effect the Merger will do so on the terms set forth in the proposed Merger
Agreement, without material modification; (ii) relied on the accuracy and
completeness of all the financial and other publicly available information
reviewed by them or that was furnished or otherwise communicated to them by
Advisers or the other Companies; and (iii) assumed that the projections for
Advisers and for each of the other Companies, and Advisers and the other
Companies after completion of the Merger, were reasonably prepared based on
assumptions reflecting good faith judgments of the Management preparing them as
to the most likely future performance of Advisers, the other Companies and
Advisers and the other Companies combined after the Merger and neither the
management of Advisers (with respect to projections of Advisers, any of the
other Companies and Advisers and all of the Companies combined) nor the
management of any of the Companies (with respect to the projections of any of
the Companies) has any information or belief that would make any such
projections misleading in any respect. Van Kasper was not retained to, and Van
Kasper did not, make any independent evaluation or appraisal of the assets,
liabilities or prospects of Advisers or any of the other Companies and was not
furnished with any such evaluation or appraisal.
Set forth below is a brief summary of the analyses performed by Van Kasper
in conjunction with delivering its written opinion that the Merger and the
issuance of securities in ACC to the stockholders of Advisers in the Merger is
fair to Advisers and the stockholders of Advisers from a financial point of
view.
Comparisons to Selected Publicly Traded Comparable Companies. Van Kasper
performed a valuation of Advisers using selected financial ratios and multiples
of four comparable publicly traded companies identified by Van Kasper
(consisting of Alliance Capital Management, Eaton Vance Corporation, New England
Investment Companies and PIMCO Advisors, Inc.) (the "Advisers Comparative
Group") as of or for the twelve months ended March 31, 1997. Such financial
information consisted of (i) market price as a multiple of projected net income
for the twelve months ended December 31, 1997; (ii) market capitalization (i.e.,
price times common shares outstanding) as a multiple of book value of equity as
of March 31, 1997; (iii) market value of invested capital (i.e., market
capitalization plus interest bearing debt) ("MVIC") as a multiple of revenues
for the twelve months ended March 31, 1997; and (iv) MVIC as a multiple of
earnings before interest, income taxes, depreciation and amortization ("EBITDA")
for the twelve months ended March 31, 1997.
The calculations from these comparisons yielded a range of multiples of
market price to projected net income for the Advisers Comparative Group for the
twelve months ended December 31, 1997 of 12.5 to 18.2, with an average of 15.0;
a range of multiples of market capitalization to book value of equity as of
March 31, 1997 of 2.6 to 5.8, with an average of 3.8; a range of multiples of
MVIC to revenues for the twelve months ended March 31, 1997 of 2.6 to 3.4, with
an average of 3.1; and a range of MVIC to EBITDA for the twelve months ended
March 31, 1997 of 5.2 to 10.7, with an average of 8.2. On the basis of these
average multiples, Van Kasper then calculated an approximate indicated equity
value of Advisers on a stand-alone basis of $45.4 million.
Van Kasper then performed a valuation of ACC on a pro forma combined basis
using the same types of financial ratios and multiples discussed above. Van
Kasper identified comparable companies in four business segment groups
corresponding to the expected lines of business of ACC and weighted the average
market value multiples of those companies based upon the projected contribution
of each such line of business to the results of ACC. Van Kasper used management
projections of ACC's revenues, EBITDA and net income in order to establish the
appropriate weightings. The four business segment groups consisted of (i) the
Advisers Comparative Group; (ii) the REIT/Mortgage Finance Comparative Group
(consisting of Capstead Mortgage Corporation, Criimi Mae Inc., Franchise Finance
Corporation and PMC Commercial Trust); (iii) the
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Mezzanine Finance Comparative Group (consisting of Finova Group, Inc., Medallion
Financial Corporation, PMC Capital, Inc. and Sirrom Capital Corporation); and
(iv) the Small Business Comparative Group (consisting of Bando McGlocklin
Capital Corporation and Pacific Crest Capital Inc.) (collectively, the "ACC
Comparative Group").
This analysis yielded weighted average multiples of market price to
projected net income for the twelve months ended December 31, 1997 of 13.7;
market capitalization to book value of equity as of March 31, 1997 of 2.4; MVIC
to revenues for the twelve months ended March 31, 1997 of 11.6; and MVIC to
EBITDA for the twelve months ended March 31, 1997 of 13.5. On the basis of these
weighted average multiples, Van Kasper calculated an approximate pro forma
indicated equity value of ACC of $820.2 million and an indicated equity value of
the proposed ownership interest in ACC to be held by the stockholders of
Advisers following the Merger of $46.3 million.
No company used in the above analyses as a comparison is identical to
Advisers or the combined ACC operations. Accordingly, an analysis of the results
of the foregoing is not purely mathematical; rather, it involves complex
considerations and judgments in financial and operating characteristics of the
companies and other factors that could affect the value of the companies to
which Advisers and ACC are being compared.
Discounted Cash Flow Analysis. Van Kasper performed a discounted cash flow
analysis of Advisers by utilizing the anticipated future cash flow streams that
Advisers would produce over the period from July 31, 1997 through December 31,
1999 if Advisers performed in accordance with forecasts provided by management
of Advisers. Van Kasper also estimated a terminal value of Advisers as of
December 31, 1999 by applying multiples ranging from 7.0 to 9.0 times Advisers'
projected fiscal year 1999 EBITDA. Van Kasper based the range of terminal value
multiples, in part, on the trading multiples of the Advisers Comparative Group.
The cash flow streams and terminal value were discounted to their present value
as of July 31, 1997 using a range of discount rates from 14.0% to 16.0%,
reflecting different assumptions regarding Advisers' weighted average cost of
capital. On the basis of these calculations, Van Kasper determined an
approximate indicated equity value of Advisers on a standalone basis of $45.2
million.
Van Kasper also performed a discounted cash flow analysis of ACC on a pro
forma combined basis by utilizing the future cash flow streams that ACC would
produce over the period from July 31, 1997 through December 31, 1999 if ACC
performed in accordance with forecasts provided by Management. For purposes of
this analysis, Van Kasper reduced ACC's projected cash flows for the 1998 and
1999 fiscal years by 15.0% and 25.0%, respectively, to reflect a more
conservative growth trend. Van Kasper also estimated a terminal value of ACC as
of December 31, 1999 by applying multiples ranging from 13.0 to 15.0 times ACC's
projected fiscal year 1999 EBITDA. Van Kasper based the range of terminal
multiples, in part, on the trading multiples for the ACC Comparative Group. The
cash flow streams and terminal value were discounted to their present values as
of July 31, 1997 using a range of discount rates from 9.0% to 11.0%, reflecting
different assumptions regarding ACC's weighted average cost of capital. On the
basis of these calculations, Van Kasper calculated an approximate pro forma
indicated equity value of ACC of $1.02 billion and an indicated equity value of
the proposed ownership interest in ACC to be held by the stockholders of
Advisers following the Merger of $57.9 million.
Stock Valuation Analysis. Van Kasper calculated the market capitalization
as of August 4, 1997 for each of the Companies to determine if the indicated
value of Advisers, relative to the combined group, was appropriate given the
Exchange Ratio applicable to the stockholders of Advisers in the Merger. Van
Kasper calculated that the market capitalization of Advisers as of August 4,
1997 was $41.0 million and the pro forma combined market capitalization of ACC
(determined by adding each of the individual market capitalizations as of August
4, 1997) was $729.4 million, reflecting a relative percentage market
capitalization of Advisers of 5.63%. Given the Exchange Ratio applicable to the
stockholders of Advisers of 0.31, the stockholders of Advisers would receive, in
the aggregate, 5.65% of the shares of ACC to be outstanding immediately after
the Merger.
Comparable Merger and Acquisition Transaction Analysis. Van Kasper
researched a variety of merger and acquisition transaction data sources,
including on-line databases, public filings, press releases and newspapers for
the time period from January 1, 1995 to the date of its analysis. Van Kasper
located over 70
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potentially comparable merger and acquisition transactions. However, only six
such transactions disclosed sufficient details to draw conclusions regarding
valuation. Upon further examination, these six transactions were eliminated for
a variety of reasons, including differences in lines of business, that the
comparable company was too large or too small, or that the data available was
too deficient to rely upon in making a value determination for Advisers. Van
Kasper concluded that there was insufficient comparable merger and acquisition
transaction data available to provide reliable guidance in valuing the Company
on this basis.
The summary set forth above describes the material analyses performed by
Van Kasper and does not purport to be a complete description of such analyses.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. In addition,
the evaluation of the fairness, from a financial point of view, as of the date
of the opinion of the Merger was to some extent a subjective one based on the
experience and judgment of Van Kasper, and not merely the result of mathematical
analysis of the financial data. Therefore, notwithstanding the separate factors
summarized above, Van Kasper believes that its analyses must be considered as a
whole and that selecting portions of its analyses, without considering all
factors and analyses, would create an incomplete view of the process underlying
the analyses by which Van Kasper reached its opinion.
In performing its analyses, Van Kasper made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, in addition to the financial assumptions described above, most of
which assumptions are beyond the control of Advisers. The analyses performed by
Van Kasper are not necessarily indicative of actual values or actual future
results, which may be significantly more or less favorable than those suggested
by such analyses. Such analyses were prepared solely as part of Van Kasper's
analysis of the Merger. The analyses do not purport to be appraisals or to
reflect the prices at which a company might be sold or the prices at which any
securities of ACC or Advisers may trade at any time in the future. Furthermore,
Van Kasper may have given certain analyses more or less weight than other
analyses and may have deemed various assumptions more or less probable than
other assumptions, so that the ranges of valuations resulting from any
particular analysis described above should not be taken to be Van Kasper's view
of the actual value of Advisers or ACC.
The board considered the presentation and opinion of Van Kasper and then
considered, with the advice of independent legal counsel, the draft Merger
Agreement and the transactions contemplated thereby. The Independent Directors
then met in Executive Session with representatives of Sutherland and Van Kasper
and voted unanimously to recommend the approval and adoption of the Merger
Agreement and the transactions contemplated thereby. The board then reconvened
and unanimously determined to approve and adopt the Merger Agreement and the
transactions contemplated thereby and to recommend approval by the stockholders.
STOCKHOLDERS ARE URGED TO READ THE OPINION OF VAN KASPER, ATTACHED HERETO
AS APPENDIX G, CAREFULLY AND IN ITS ENTIRETY FOR INFORMATION WITH RESPECT TO THE
PROCEDURES FOLLOWED, ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITS OF THE
REVIEW UNDERTAKEN BY VAN KASPER IN RENDERING ITS OPINION.
CERTAIN CONSIDERATIONS
In addition to the other information contained in this Joint Proxy
Statement/Prospectus, each Company's stockholders should carefully consider the
factors set forth below before voting with respect to the Merger.
FIXED EXCHANGE RATIO
The Exchange Ratios are fixed numbers and will not be adjusted in the event
of any increases or decreases in the price of the common stock of any Company.
The prices of a Company's stock at the Effective Time may vary from their
respective prices at the date of this Joint Proxy Statement/Prospectus and at
the date of the Special Meeting of Stockholders. Such variations may be the
result of changes in the business,
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operations or prospects of a Company, market assessments of the likelihood that
the Merger will be consummated, the timing thereof and the prospects of the
Merger and post-Merger operations, regulatory considerations, general market and
economic conditions and other factors. No assurance can be given as to the
market price of any Company's stock as of the Effective Time. Accordingly, the
market price of the shares of Allied Lending common stock that holders of any
Company's common stock will receive in the Merger may vary significantly from
the prices used to calculate the Exchange Ratios.
DIVIDENDS OF EARNINGS AND PROFITS
Allied Lending or ACC will comply with the requirements of Treasury
Regulation 1.852-12(b)(1) by declaring a dividend in an amount equal to ACC's
total current and accumulated earnings and profits, including any such earnings
and profits of any of the Companies to which ACC succeeds in the Merger under
the provisions of Section 381 of the Code and applicable Treasury Regulations
(but without regard to any deficits in earnings and profits of any of the
Companies).
Stockholders of each Company should be aware that payment of this dividend
means that any earnings and profits that have been retained by any of the
Companies as of the Effective Time will be payable to all stockholders of ACC
that are stockholders of record as of the close of business on the date of the
Merger, which is expected to be December 31, 1997. It is expected that the
majority of this dividend would result from the retained earnings and profits of
Advisers. The fact that a particular Company's retained earnings and profits
would be distributed to all of ACC's stockholders, and not just to the
stockholders of that Company, has been reflected in each Company's Exchange
Ratio. Stockholders of ACC receiving this dividend will be subject to taxation
on this dividend.
Stockholders of Advisers should note that if the Merger is approved, they
will become stockholders in a BDC that, in order to qualify as a regulated
investment company, is required, for tax purposes, to distribute substantially
all of its taxable income to stockholders on an annual basis. Stockholders of
each Company, and Advisers in particular, should note that they will likely
receive as future distributions by ACC a combination of ordinary and capital
gain income if the Merger is approved. (See "-- The Surviving Company: ACC --
Federal Income Tax Issues" and "Certain Federal Income Tax Consequences of the
Merger."
TAX MATTERS ARE VERY COMPLICATED AND THE TAX CONSEQUENCES OF THE MERGER TO
A PARTICULAR STOCKHOLDER WILL DEPEND ON THE FACTS OF THAT STOCKHOLDER'S
SITUATION. STOCKHOLDERS SHOULD CONSULT WITH THEIR TAX ADVISERS FOR A FULL
UNDERSTANDING OF THE TAX CONSEQUENCES OF THE MERGER.
DILUTION OF VOTING POWER
The Merger will be effected through the issuance of new shares of ACC in
exchange for the shares of the Acquired Companies. As a result, ACC will have
more shares outstanding than that of any of the Companies. Each stockholder of
each of the Companies will have a lesser percentage of ownership in ACC than he
or she had in any one Company prior to the Merger. Thus, the Merger will have a
dilutive effect on all stockholders' respective ownership percentages of ACC.
EFFECTS OF CERTAIN ANTI-TAKEOVER PROVISIONS
As discussed below under "The Surviving Company: ACC -- Staggered Board
Elections," if the Merger is consummated, the bylaws of ACC will be amended to
provide for a staggered system of electing directors. A staggered board may be
deemed to have an anti-takeover effect since it may create, under certain
circumstances, an impediment which would frustrate persons seeking to effect a
takeover or otherwise gain control of ACC.
If the Merger is consummated, Allied Lending's charter would be amended to
increase its authorized shares of common stock from 20,000,000 to 100,000,000
shares. An increase in the number of authorized and unissued shares means that
ACC would have an extended capability to reclassify authorized but unissued
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stock into one or more classes of stock, including preferred stock, which may
have attributes that could have anti-takeover effects.
CHANGE IN BUSINESS AND OBJECTIVES OF THE COMPANIES
As discussed below under "The Merging Companies," each Company has its own
investment objective and/or policies. Allied I, Allied II and Allied Lending
operate as BDCs, Allied Commercial is a REIT, and Advisers is a registered
investment adviser. If the Merger is approved, ACC would operate as a BDC, would
be a registered investment adviser, would have policies that incorporate those
of all the Companies, and its investment objective would be to achieve current
income and capital gains.
EXPENSES OF THE MERGER
It is expected that the costs and expenses incurred in connection with the
Merger will be allocated to and paid by the Companies pro rata on the basis of
the respective amounts of their market capitalization determined at the close of
trading on August 13, 1997 (the day prior to the date of the Merger Agreement).
However, each Company will pay the fees and expenses of the independent
financial advisers discussed in "Board Considerations," above, as being engaged
by such Company in connection with the Merger.
CAPITALIZATION
The table below sets forth the capitalization of the Companies and
indicates the pro forma combined capitalization of ACC as of June 30, 1997 as if
the Merger had occurred on that date. Each share of common stock of the
Companies will be converted into shares of common stock of ACC according to the
respective Exchange Ratios: Allied I -- 1.07 shares of Allied Lending common
stock for each Allied I share; Allied II -- 1.40 shares of Allied Lending common
stock for each Allied II share; Allied Commercial -- 1.60 shares of Allied
Lending common stock for each Allied Commercial share; and Advisers -- 0.31
share of Allied Lending common stock for each Advisers share. Allied Lending
common stock will not be converted or changed in the Merger.
(in thousands, except number of shares and per share amounts)
<TABLE>
<CAPTION>
NET ASSET NET ASSET
SHARES SHARES VALUE PER VALUE PER
NET ASSETS NET ASSETS OUTSTANDING OUTSTANDING SHARE BEFORE SHARE AFTER
COMPANY BEFORE MERGER AFTER MERGER BEFORE MERGER AFTER MERGER MERGER MERGER
- ---------------------- ------------- ------------ ------------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Allied I.............. $ 63,537 -- 7,367,052 -- $ 8.62 --
Allied II............. $ 107,595 -- 7,617,349 -- $14.13 --
Allied Commercial..... $ 198,553 -- 14,460,052 -- $13.73 --
Advisers.............. $ 12,746 -- 9,133,379 -- $ 1.40 --
Allied Lending........ $ 41,976 $421,934 5,143,782 49,658,247 $ 8.16 $8.50
</TABLE>
THE SURVIVING COMPANY: ACC
If the Merger is approved by stockholders of each Company and certain other
conditions are satisfied or waived, Allied I, Allied II, Allied Commercial and
Advisers will be merged with and into Allied Lending. The surviving company
would in substance be a new entity, and together with its subsidiaries would be
an amalgamation of the five Companies and their respective subsidiaries, with an
investment objective and policies that encompass the substantially similar
objective and/or policies of each Company. In short, the range of investment
opportunities and advisory services currently offered by the Companies would be
distilled into ACC. ACC will be traded on Nasdaq under the symbol "ALLC".
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THE BUSINESS OF ACC
The investment objective of ACC would be to achieve current income and
capital gains. There can be no assurance that ACC would achieve its investment
objective. ACC would seek to achieve its investment objective by investing
primarily in private, growing businesses in a variety of industries and in
diverse geographic locations (primarily in the United States). ACC's investment
portfolio, resulting from the merger of the portfolios and businesses of Allied
I, Allied II, Allied Commercial and Allied Lending, would consist of small
senior loans, small and medium-sized subordinated loans with equity features,
and small and medium-sized commercial mortgage loans. These portfolios will not
be realigned solely to effect the Merger. ACC would initially operate in four
strategic lines of business:
- Mezzanine Finance
- Commercial Real Estate Finance
- Small Business Lending
- Investment Management
MEZZANINE FINANCE
Generally. ACC, as successor to the businesses and portfolios of Allied I
and Allied II, would provide debt, mezzanine, and equity financing primarily for
small, privately owned and some publicly owned companies both directly and
through its wholly owned subsidiaries (unless otherwise indicated, all further
references herein to investments made by ACC or any Company include those made
by ACC's or such Company's subsidiaries). Investments of this type made by
Allied I and Allied II have historically ranged in size between $2 million and
$10 million for the purposes of growth or acquisition capital, and ACC's
mezzanine investments can be expected to fall within this range. ACC would
provide financing for growth, leveraged buyouts of small companies, note
purchases, loan restructurings, acquisitions, recapitalizations, and bridge
financings for small businesses.
ACC would generally invest in small, private companies or small, thinly
traded public companies that lack access to capital. In general, such companies
would 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.
ACC generally would require that its portfolio companies demonstrate sales
growth, positive cash flow, and profitability, although turnaround situations
also would be considered. In choosing investment opportunities, ACC would
emphasize the quality of management and would seek experienced entrepreneurs
with a management track record, relevant industry experience, and high
integrity. If the Merger is consummated, ACC would succeed to the existing
mezzanine portfolios of Allied I and Allied II, which include investments in,
among other industries, broadcasting, manufacturing, wholesale distribution, and
retail companies.
ACC's mezzanine investments would generally be structured as debt
securities that carry a relatively high fixed rate of interest, which may be
combined with equity features, such as conversion privileges, warrants or
options to purchase a portion of the company's common equity at a nominal price.
Such an investment, which would generally carry a fixed interest rate, would
typically have a maturity of 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 would likely vary.
ACC also would make senior loans without equity features, and such loans
generally would bear interest at a fixed rate.
ACC's current income from the mezzanine finance business unit would be
derived primarily from interest earned on its debt securities. Generally,
long-term growth in net asset value and realized capital gains, if any, would be
achieved through the equity portion of its mezzanine investments. ACC would seek
to structure its small business investments so that approximately one-half of
ACC's potential return is earned in the form of current interest payments, and
the balance is derived from capital gains that arise from the sale of ACC's
equity interest in the portfolio company.
In 1995, Allied I established a $20 million credit facility with OPIC,
pursuant to which Allied I began making investments in businesses that engage,
in whole or in part, in overseas operations, usually in countries representing
the world's emerging markets. OPIC's purpose is to promote economic growth in
developing
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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. As the successor to Allied I's
portfolio and credit facilities, ACC would continue to pursue OPIC-qualifying
investments, which would generally be structured similarly to ACC's U.S.-based
mezzanine financings. In addition, ACC would generally participate in
international mezzanine financings in syndicates with other investors including
significant equity investors.
The SBICs. Currently, Allied Investment Corporation ("Investment I") and
Allied Investment Corporation II ("Investment II") are subsidiaries of Allied I
and Allied II, respectively. Each is licensed by the SBA as a small business
investment company (as defined above, an "SBIC") under Section 301(c) of the
1958 Act. The investment objective of each of Investment I and Investment II is
to achieve both long-term growth in the value of its net assets and current
income by providing debt, mezzanine, and equity financing for small, privately
owned growth companies. Their investments are substantially similar in form to
those of Allied I and Allied II. If the Merger is consummated, Investment II
will be merged with and into Investment I, and Investment I will continue to
operate as a wholly owned subsidiary of ACC.
As SBICs, Investment I and Investment II provide capital to privately owned
small businesses primarily through subordinated debt investments with equity
features; investments in common or convertible preferred shares generally will
only be completed in conjunction with a debt security. 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, Investment I and Investment II
seek collateral for their respective loans, but their security interests in such
loans are usually subordinated to the security interests of other institutional
lenders.
Regulation of SBICs. SBICs are authorized to stimulate the flow of private
equity capital to eligible small businesses. Under present SBA regulations,
eligible small businesses are those that are not dominant in their industry,
have a net worth not exceeding $18 million and have average annual fully-taxed
profits not exceeding $6 million for the most recent two fiscal years. In
addition, an SBIC must devote 20% of its investment activity to "smaller"
concerns as defined by the SBA. A smaller concern is one that has a net worth
not exceeding $6 million and has average annual fully-taxed profits not
exceeding $2 million for the most recent two fiscal years. SBA regulations also
provide alternative criteria which depend on the industry in which the business
is engaged and are based on such factors as the number of employees and gross
sales.
According to SBA regulations, SBICs may make long-term loans to small
businesses, invest in the equity securities of such businesses, and provide them
with consulting and advisory services. Each of Investment I and Investment II
provides long-term loans to qualifying small businesses; equity investments and
consulting and advisory services are typically provided only in connection with
such loans.
The SSBICs. Allied Capital Financial Corporation ("Financial I") and
Allied Financial Corporation II ("Financial II") are the SSBIC subsidiaries of
Allied I and Allied II, respectively. Each is licensed by the SBA as a
specialized small business investment company (as defined above, an "SSBIC")
under Section 301(d) of the 1958 Act. The investment objective of each of
Financial I and Financial II is to achieve both long-term growth in the value of
its net assets and current income by providing debt, mezzanine and equity
financing for small, privately owned growth companies that are at least 50%
owned, controlled, or managed by a socially or economically disadvantaged
person, as defined by the SBA. If the Merger is consummated, Financial II will
be merged with and into Financial I, and Financial I would continue to operate
as a wholly owned subsidiary of ACC.
As SSBICs, Financial I and Financial II operate as SBICs 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 (e.g., urban ghettos, depressed
rural areas and areas of high unemployment
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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.
If the Merger is consummated, ACC would operate one SBIC subsidiary,
Investment I, and one SSBIC subsidiary, Financial I. Both Investment I and
Financial I intend to elect to be regulated as BDCs pursuant to the 1940 Act,
and both subsidiaries would continue to be regulated investment companies
pursuant to Subchapter M of the Code.
SBA Financing. ACC's SBIC and SSBIC subsidiaries would have the
opportunity to sell to the SBA subordinated debentures with a maturity of up to
ten years up to an aggregate principal amount calculated by a formula which
applies a multiple to their 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, Investment I and
Financial I would be deemed to be "associates" of one another. As a group,
Investment I and Financial I have received $68.3 million of subordinated
debenture and preferred stock investments from the SBA as of June 30, 1997; as a
result, the combined ability to apply for additional leverage from the SBA will
be limited to $21.7 million. ACC would be unable to predict the SBA's ability to
meet demands for leverage on an ongoing basis, as such funding may be affected
if Congress were to reduce the current limits on available leverage. Therefore,
there is no guaranty that Investment I and Financial I will be able to obtain
additional SBA leverage beyond what is currently held.
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 (relative to
the interest rate charged to SBICs) through the purchase or guarantee of
debentures.
COMMERCIAL REAL ESTATE FINANCE
Generally. As successor to the business and portfolio of Allied
Commercial, ACC would invest in commercial loans to small businesses secured by
liens or mortgages on real estate ("commercial mortgage loans"). Such loans
would be purchased or originated by ACC in accordance with the underwriting
criteria discussed below. ACC would focus on "enterprise value" commercial real
estate lending, meaning that the value of the investment is based on the ongoing
value of the commercial enterprise to which a loan is made, and not just on the
underlying real estate collateral.
ACC would continue Allied Commercial's practice of providing creative and
flexible loan terms, and would specialize in mortgage financing for
entrepreneurs whose business is a source of revenue in addition to the real
estate collateralizing the commercial mortgage loan. ACC would derive income
from interest on its commercial mortgage loans and from discounts on its
portfolio of purchased commercial mortgage loans. ACC also would provide other
long-term financing to businesses, such as sale-leaseback financing. Commercial
mortgage loans purchased or originated by ACC would not be intentionally
concentrated in any particular geographical area or region, and would be secured
by various properties, including hotels and motels, office buildings, retail
establishments, industrial warehouses and nursing homes.
Allied Commercial's existing portfolio contains loans that were purchased
from the Resolution Trust Corporation (the "RTC"), the Federal Deposit Insurance
Corporation (the "FDIC") and other third party sellers including life insurance
companies and banks. Allied Commercial generally purchased these loans at a
discount from the face amount of the notes. In 1994, Allied Commercial shifted
its focus to loan origination from loan purchases in order to meet growing
market demand and to supplement declining loan purchase opportunities. Allied
Commercial continues to originate and purchase mortgage loans, with a primary
focus on loan originations ranging in size from $1 million to $15 million.
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At June 30, 1997 approximately 64% of Allied Commercial's portfolio of
commercial mortgage loans carried a fixed rate of interest and approximately 36%
had adjustable rates of interest tied to various indices. Commercial mortgage
loans originated by Allied Commercial generally have a maturity of five to seven
years. Occasionally, these loans may require payments of interest only or level
payments of principal and interest calculated to amortize principal on a 10- to
30-year basis with a balloon payment at maturity. At June 30, 1997, the
effective yield on Allied Commercial's portfolio of commercial mortgage loans
was approximately 12.3%, which reflects amortization of discounts on loans over
the expected life of the loan and the stated interest rate.
Certain of the loans to which ACC would succeed were acquired or originated
in conjunction with Business Mortgage Investors, Inc. ("BMI"), a company
privately owned by institutional and other accredited investors, for which
Advisers serves as investment adviser. From January 1993 until January 1, 1997,
Allied Commercial generally participated in all loan purchases and originations
with BMI on a pro rata basis according to each entity's total equity. Allied
Commercial's participation in each loan varied over this period and ranged from
77% to 78%. Effective January 1, 1997, BMI is no longer purchasing or
originating mortgage loans.
Asset Securitization. Allied Commercial has securitized certain of its
commercial mortgage loans through its wholly owned limited purpose finance
subsidiary, ALCC Acceptance Corporation ("ALCC Acceptance"). To date, ALCC
Acceptance's activities have been limited to that of serving as one of the two
members of Allied Capital Funding, LLC ("Funding"). ALCC Acceptance owns 82% of
the common membership shares of Funding. Funding is a limited purpose finance
company, and in November 1995 Allied Commercial securitized approximately $121
million of its mortgage loans through Funding. This securitization enabled
Allied Commercial to achieve long-term financing on a portion of its loan
portfolio at a lower interest rate than was available under alternative
financing arrangements. At June 30, 1997, ALCC Acceptance had total assets of
approximately $63 million.
If the Merger is consummated, ALCC Acceptance's 82% ownership interest in
Funding would be transferred to ALCC Acceptance LLC, a single-member LLC, and
ALCC Acceptance would be dissolved. ACC would become the sole member of
Acceptance LLC, and substantially all of Acceptance LLC's assets would be
comprised of the majority-interest membership in Funding. The remaining 18%
ownership interest in Funding would continue to be owned by a limited purpose
finance subsidiary of BMI.
ACC will continue the practice of asset securitization for its commercial
real estate loans. Allied Commercial, together with BMI, intends to securitize a
significant portion of its assets during the first quarter of 1998. If the
Merger is consummated, ACC will assume Allied Commercial's plan to securitize
such assets. Since the securitization of these assets would be a sale of a
portion of the assets for financial reporting purposes, ACC's assets would be
reduced by the assets sold.
SMALL BUSINESS LENDING
Generally. As successor to the business and portfolio of Allied Lending,
ACC, through a wholly owned subsidiary, Allied Capital SBLC Corporation (as
defined above, "Allied SBLC"), would participate in the SBA's Section 7(a) Loan
Program pursuant to Section 7(a) of the Small Business Act (1958), as amended
(the "Small Business Act"). As a Section 7(a) lender, ACC would make loans that
are partially guaranteed by the SBA to small businesses. Allied SBLC would
survive the proposed Merger as a subsidiary of ACC and would continue to hold
its SBLC license. All of ACC's Section 7(a) loans would, in fact, be originated
by Allied SBLC.
The 7(a) Loan Program. Pursuant to Section 7(a) of the Small Business Act,
the SBA will guarantee 80% of any qualified loan up to $100,000 regardless of
maturity, and 75% of any such loan over $100,000 regardless of maturity, to a
maximum guarantee of $750,000 for any one borrower. SBA regulations define
qualified small businesses generally as businesses with no more than $5 million
in annual sales and no more than 500 employees.
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Allied Lending has historically, and ACC may continue, to charge interest
on loans at a variable rate, typically 2.25% to 2.75% per annum above the prime
rate, as published in The Wall Street Journal or other financial newspaper,
adjusted monthly. All loans would be payable in equal monthly installments of
principal and interest from the date on which the loan was made (or the first
day of the month following any month in which there occurs an interest rate
adjustment) to its maturity.
Section 7(a) loans may be made to qualifying small businesses for the
purposes of acquiring real estate, purchasing machinery or equipment or to
provide working capital. Such loans made to acquire real estate may have
maturities of up to 25 years; loans made for the purpose of purchasing machinery
and equipment may have maturities of up to 15 years; and loans made to provide
working capital may have maturities of up to seven years. These loans are
secured by a mortgage or other lien on the assets of the borrower and,
frequently, of its principals. ACC generally would not make unsecured working
capital loans. In all cases, the principals of the small businesses must
personally guarantee the payment of interest on and principal of the loans.
As permitted by SBA regulations, ACC would continue Allied Lending's
practice of selling to investors, without recourse, the guaranteed portion of
its loans while retaining the right to service 100% of such loans.
Like Allied Lending, ACC may, from time to time, concentrate its loans in
particular industries, but it is not expected to do so. Allied Lending has in
its portfolio, or is servicing loans to, among others, hotels and motels,
restaurants, manufacturers, retail shops, food stores, professional services,
laundries and cleaners, home furnishings concerns, gasoline stations, business
services firms, recreational services providers, automobile exhaust repair
shops, personal services providers and automotive repair concerns.
The Preferred Lender Program. The SBA designates certain participants in
the Section 7(a) Loan Program as "Preferred Lenders" in certain designated
markets. This designation allows a lender to make Section 7(a) loans in the
designated region without SBA credit approval, thus simplifying and expediting
the process of loan approval and disbursements. At June 30, 1997, Allied SBLC
was identified as a Preferred Lender in several regional markets; if the Merger
is consummated, ACC would be expected to continue as a Preferred Lender in these
markets. Applications for loan guarantees submitted by Preferred Lenders receive
expedited processing by the SBA.
INVESTMENT MANAGEMENT
As successor to Advisers, ACC would be internally managed and registered
with the Commission as an investment adviser under the Advisers Act. ACC also
would provide investment advisory and related services to outside entities,
including certain entities currently managed by Advisers that would not be
parties to the Merger, pursuant to a separate investment advisory agreement
between ACC and each such entity. More particularly, these entities would
include BMI, Allied Venture Partnership ("Allied Venture"), Allied Technology
Partnership ("Allied Technology"), and Allied Capital Midwest LLC ("Allied
Midwest"). Like ACC, each of these entities focuses primarily on investments in
small growing entrepreneurial companies, and specializes in financing for small,
private businesses through senior or subordinated debt and combinations of debt
and equity or, in the case of BMI, in commercial mortgage loans collateralized
by real estate. BMI, Allied Venture, Allied Technology, and Allied Midwest are
all privately held, primarily by large institutional investors or other
accredited investors.
In addition, ACC would seek to increase its investment advisory business
both through existing private funds under management, and through new funds
under management. ACC would be able to be an investor in, as well as a manager
to, private funds, which should give ACC an advantage in competing for
management contracts.
OTHER INVESTMENTS
ACC would invest otherwise uninvested cash in U.S. government or
agency-issued or guaranteed securities that are backed by the full faith and
credit of the United States ("U.S. Government Securities"), or in high quality,
short term repurchase agreements fully collateralized by such securities
("Interim Investments"). Typically, ACC would invest in U.S. Treasury bills or
in repurchase obligations of a "primary
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dealer" in government securities (as designated by the Federal Reserve Bank of
New York) or of any other dealer whose credit has been established to the
satisfaction of ACC's board of directors, in any case collateralized by
securities which carry the full faith and credit of the United States. A
repurchase agreement involves the purchase by an investor, such as ACC, of a
specified security and the simultaneous agreement by the seller to repurchase it
at an agreed-upon future date and at a price which is greater than the purchase
price by an amount that reflects an agreed-upon interest rate. Such interest
rate is effective for the period of time during which the investor's money is
invested in the arrangement and is related to current market interest rates
rather than the coupon rate on the purchased security. If a seller were to
default on its repurchase obligation, ACC might suffer a loss to the extent that
the proceeds from the sale of the collateral were less than the repurchase
price. A seller's bankruptcy could delay or prevent a sale of the collateral.
ACC's board of directors is expected to establish procedures which it will
review periodically requiring ACC to monitor the credit-worthiness of the
dealers with which ACC enters into repurchase agreement transactions.
LOAN SOURCING
To identify and pursue mezzanine investments, SBA loans, and commercial
real estate loans, ACC would contact and work with regional and boutique
investment banks, mezzanine and venture capital investors, and other
intermediaries, including business and mortgage brokers, national retail
financial services companies, banks, law firms and accountants for loan
referrals. Advisers has recently opened two regional offices in Chicago and San
Francisco to increase the scope of its loan sourcing activity.
In addition, the Companies have arrangements with certain financial
consulting organizations, or "regional associates," whereby the regional
associates refer to the Companies (primarily Allied Lending) potential loans to
small businesses located in designated areas. If and when a loan referred by a
regional associate is closed, such organization is compensated by an origination
fee calculated using a formula agreed upon by the Company and such regional
associate. The origination fees currently paid by the Companies to regional
associates range from 0.5% to 5.0% of the principal amount of each loan made
that was referred by the respective regional associate. The regional associates
from time to time may assist Advisers in monitoring any loans referred by them
or otherwise made in their areas.
THE MANAGEMENT OF ACC
The business of ACC would be managed under the supervision of its board of
directors. The responsibilities of each member of the board of directors would
include, among other things, the oversight of the loan approval process, the
quarterly valuation of ACC's assets, and oversight of ACC's financing
arrangements.
Allied Lending's board of directors will become the board of directors for
ACC following the Merger. Pursuant to the Maryland Law, it is anticipated that
Allied Lending's board of directors would appoint each of the current directors
of Allied I, Allied II, Allied Commercial, and Advisers, with the exception of
G. Cabell Williams III, John M. Scheurer, Joan M. Sweeney, and Katherine C.
Marien (each of whom is an officer of one or more Companies), to fill the
vacancies on Allied Lending's board created by expanding the number of
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directors on such board to 23. These appointments will take effect at the
Effective Time. The proposed ACC directors are listed below together with their
ages and their principal occupations during the past five years.
<TABLE>
<CAPTION>
COMPANIES FOR WHICH PRINCIPAL OCCUPATION
NAME AGE CURRENTLY SERVING AS DIRECTOR DURING PAST FIVE YEARS
- --------------------------- --- ----------------------------- ------------------------------------------
<S> <C> <C> <C>
William L. Walton(1)....... 48 Chairman: Chairman and Chief Executive Officer of
Allied I Allied Lending, Allied I, Allied II,
Allied II Allied Commercial and Advisers since
Allied Commercial February 1997; President of Allied II
Allied Lending since November 1996; Manager, Chairman and
Advisers Chief Executive Officer of Allied Midwest
since February 1997. 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. He has served as a
director of Advisers since 1986, a
director of Allied I from 1986 until 1991
and since February 1997, and a director of
Allied Lending, Allied Commercial, and
Allied II since February 1997.
Jon W. Barker.............. 53 Allied Lending Associate with Grubb & Ellis (commercial
real estate firm) from 1993 to 1997; Vice
President of Shannon & Luchs Company
(commercial real estate firm) from 1979 to
1993. He has served as a director since
1993.
Eleanor Deane Bierbower.... 40 Allied Lending Financial consultant since 1992; Managing
Partner of Deane Investment Company L.P.
(investment management) since 1992; Chief
Credit Officer of Palmer National Bank
from 1987 to 1992. She has served as a
director since 1993.
Brooks H. Browne........... 48 Advisers President of Environmental Enterprises
Assistance Fund since 1993; President,
Executive Vice President or Senior Vice
President of Advisers from 1984 to 1993;
Director of SEAF, International Fund for
Renewable Energy and Energy Efficiency,
Corporation Financiera Ambiental (Panama),
Empresas Ambientales de Centro America
(Costa Rica) and Yayasan Bina Usaha
Lingkungan (Indonesia) (environmental non-
profit or investment funds). He has served
as a director since 1990.
Joseph A. Clorety III...... 54 Allied I President of Clorety & Company, Inc.
(registered investment adviser) since
1987. He has served as a director since
1984.
</TABLE>
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<PAGE> 69
<TABLE>
<CAPTION>
COMPANIES FOR WHICH PRINCIPAL OCCUPATION
NAME AGE CURRENTLY SERVING AS DIRECTOR DURING PAST FIVE YEARS
- --------------------------- --- ----------------------------- ------------------------------------------
<S> <C> <C> <C>
Swep T. Davis.............. 52 Advisers President of Tyone Partners LLC
(management and financial advisory
services for environmental and energy
industries); President of the
Environmental Sciences Group of Applied
Biosciences International from 1992 to
1995; President and Chief Operating
Officer of Concord Resources Group from
1989 to 1992; President and Chief
Executive Officer of Environmental Testing
and Certification Corporation from 1986 to
1989; Chairman and Director of Astrix
Software and Technology, Inc.; and
Director, Puckett Laboratories. He has
served as a director since November 1996.
John D. Firestone.......... 53 Allied II Partner of Secor Group since 1978;
Director of BMI and Security Storage
Company of Washington, D.C.; Senior
Advisor to Gilbert Capital, Inc.;
Chairman, Secor Investments, Inc. from
1980 to 1993; and Director, Palmer
National Bank from 1988 to 1994. He has
served as a director since 1993.
Robert V. Fleming II....... 44 Allied Lending Principal of Hoskinson Davis & Fleming,
Inc. (real estate firm) since 1984; Member
of the Board of Consultants of The Riggs
National Bank of Washington, D.C.; Member
of the Associates Board of National
Rehabilitation Hospital. He has served as
a director since 1993.
Michael I. Gallie.......... 50 Allied I Principal of The Millennium Group Inc.
(financial and management consulting firm)
since 1991; Trustee and Chairman of The
Investment Committee of the District of
Columbia Retirement Board from 1991 to
1995. He has served as a director since
1994.
Anthony T. Garcia.......... 41 Allied Commercial Private investor since 1996. Senior Vice
Allied Lending President of Lehman Brothers Inc. from
1985 to 1996; Director of Allied
Commercial since 1992 and Allied Lending
since 1993.
Lawrence I. Hebert......... 50 Allied II Director and President of Perpetual
Corporation (a holding and management
company) since 1981; Vice Chairman (since
1983) and President (since 1984) of
Allbritton Communications Company;
President of Westfield News Advertiser,
Inc. since 1988; Vice Chairman from 1990
to 1993 and Director of Riggs National
Corporation since 1988; Vice President of
University Bancshares, Inc. since 1975;
Director of Riggs Bank Europe, Ltd.,
formerly Riggs AP Bank, Ltd. since 1986,
and Riggs Investment Management
Corporation (RIMCO) since 1990. He has
served as a director since 1989.
</TABLE>
55
<PAGE> 70
<TABLE>
<CAPTION>
COMPANIES FOR WHICH PRINCIPAL OCCUPATION
NAME AGE CURRENTLY SERVING AS DIRECTOR DURING PAST FIVE YEARS
- --------------------------- --- ----------------------------- ------------------------------------------
<S> <C> <C> <C>
Arthur H. Keeney III....... 53 Allied Lending President, Chief Executive Officer,
Chairman of the Executive Committee and
Director of The East Carolina Bank since
1995; Vice President and General Manager
of The OMG Company (manufacturer of
electronic training devices) from 1994 to
1995; Recruiting Consultant with Don
Richards and Associates, Inc. (personnel
services provider) from 1993 to 1994;
Executive Director of the American
Foundation for Urologic Disease from 1991
to 1993; Executive Vice President at
Signet Bank from 1983 to 1991. He has
served as a director since 1995.
John I. Leahy.............. 67 Allied II President of Management and Marketing
Associates (a management consulting firm)
since 1986; President and Group Executive
Officer, Western Hemisphere, Black &
Decker Corporation; Director of Kar Kraft
Systems, Inc., Cavanaugh Capital, Inc.,
Vision Hardware Group, The Wills Group,
Thulman-Eastern Company and Gallagher
Fluid Seals, Inc. He has served as a
director since 1994.
Robert E. Long............. 66 Advisers Managing Director, Goodwyn & Long
Investment Management, Inc.; President and
Chief Executive Officer, Business News
Network, Inc. since 1995; Chairman and
Chief Executive Officer of Southern Starr
Broadcasting Group, Inc. from 1991 to
1995; Director and President of Potomac
Asset Management, Inc. from 1983 to 1991;
Director of Ambase Inc., AHL Shipping
Company, Inc., CSC Scientific, Inc., and
Global Travel, Inc. He has served as a
director since 1972.
Robin B. Martin............ 48 Allied Lending President and Chief Executive Officer of
The Deer River Group (broadcasting
consulting firm) since 1978. Trustee,
Rensselaer Polytechnic Institute since
1986; Chairman Emeritus, The Corcoran
Gallery of Art. He has served as a
director since 1996.
Warren K. Montouri......... 68 Allied I Investor since 1958; Director of Franklin
National Bank. He has served as a director
since 1986.
</TABLE>
56
<PAGE> 71
<TABLE>
<CAPTION>
COMPANIES FOR WHICH PRINCIPAL OCCUPATION
NAME AGE CURRENTLY SERVING AS DIRECTOR DURING PAST FIVE YEARS
- --------------------------- --- ----------------------------- ------------------------------------------
<S> <C> <C> <C>
Charles L. Palmer.......... 55 Allied Commercial President/Managing General Partner of
North American Company Ltd. (venture
capital firm) for more than the past five
years; President and Chief Executive
Officer of North American Business
Development Companies, L.L.C. (venture
capital firm) for more than the past five
years; Chairman and Chief Executive
Officer of Sea Ranch Properties, Inc.
(real estate development); President and
Chief Executive Officer of Golden
Eagle/Satellite Archery, L.L.C., Director
of SunTrust Bank of South Florida, N.A.
and The Learning Company. He has served as
a director since 1992.
John D. Reilly............. 55 Allied II President of Reilly Investment Corporation
Allied Commercial (project finance and investment company)
since 1994; Executive Director of Reilly
Mortgage Group from 1992 to 1994; Chairman
of Reilly Mortgage Group from 1988 to
1992; Chairman of Board of Datavault
Corporation and Mexico Private Equity
Fund; Director of NHP Financial Services,
Market School and Victory Housing, Inc.;
Member of The Snite Museum of Art Advisory
Council of the University of Notre Dame.
Director of Allied II since 1989 and
Allied Commercial since 1992.
Guy T. Steuart II.......... 66 Allied I Director and President of Steuart
Investment Company (manages, operates, and
leases real and personal property and
holds stock in operating subsidiaries
engaged in various businesses) since 1960;
Trustee Emeritus of Washington and Lee
University. He has served as a director
since 1984.
T. Murray Toomey........... 73 Allied I Attorney at Law since 1949; Director of
The National Capital Bank of Washington;
Director of Federal Center Plaza
Corporation, and The Donohoe Companies,
Inc.; Trustee of The Catholic University
of America. He has served as a director
since 1959.
Laura W. van Roijen........ 45 Allied Commercial Private real estate investor since 1992.
Chairman of CWV & Associates (RTC
qualified contracting firm) since 1991;
Director and Treasurer of Black Possum
Inc. (retail concern) from 1994 to 1996;
President of Volta Place, Inc. ( real
estate advisory firm) from 1991 to 1994;
Vice President and Market Director of
Citicorp Real Estate, Inc. from 1989 to
1991. She has served as a director since
1992.
</TABLE>
57
<PAGE> 72
<TABLE>
<CAPTION>
COMPANIES FOR WHICH PRINCIPAL OCCUPATION
NAME AGE CURRENTLY SERVING AS DIRECTOR DURING PAST FIVE YEARS
- --------------------------- --- ----------------------------- ------------------------------------------
<S> <C> <C> <C>
George C. Williams(1)(2)... 71 Allied I Director of Allied Lending (since 1976),
Allied II Allied I (since 1964), Allied II (since
Allied Commercial 1989), Allied Commercial (since 1992), BMI
Allied Lending (since 1993) and Advisers (since 1964). He
Advisers has been affiliated with Advisers and its
managed entities from the later of 1959 or
the inception of the relevant entity. He
served as President or Chairman and Chief
Executive Officer of the Companies from
the later of 1964 or each Company's
inception until 1991, and is currently an
officer of all the Companies.
Smith T. Wood.............. 50 Allied II Director and President of CyberSERV, Inc.
(Internet systems and services) since
1995; Chairman of Seneca Corporation since
1995; President of Seneca Corporation from
1990-1995; Adjunct Professor at Georgetown
University. He has served as a director
since 1989.
</TABLE>
- ---------------
(1) Mr. Walton, as an officer of the Companies, and Mr. Williams, as a
stockholder of Advisers, are "interested persons" as defined in the 1940
Act.
(2) George C. Williams is the father of G. Cabell Williams III, an executive
officer of the Companies.
It is expected that the ACC board of directors will maintain the same
committees, including the Executive Committee, Audit Committee, Compensation
Committee, and Nominating Committee, that are currently maintained by the Allied
Lending board of directors. In addition, ACC may establish additional committees
in the future. Directors will be appointed to the committees upon consummation
of the Merger. It is expected that ACC will vote to cause some or all of its
directors to serve as directors of ACC's subsidiaries.
It is expected that all investment decisions for ACC will be made by a
management committee (the "Investment Committee") comprised of investment
professionals representing the most senior investment professionals currently
employed by Advisers. The investment decisions of all of the Companies are
currently made by the same Investment Committee. No one person is primarily
responsible for making recommendations to the Investment Committee.
If the Merger is consummated, the current officers and employees of
Advisers would become the officers and employees of ACC. Therefore, after the
Merger, ACC's portfolio of investments would be managed by the same investment
professionals that currently manage the investment portfolio of each Company.
These investment professionals have extensive experience in managing investments
in private growing businesses in a variety of industries and in diverse
geographic locations, and are familiar with the Allied Capital approach of
lending to and investing in entrepreneurial companies with growth potential. In
short, the manner in which each Company's portfolio of investments is managed
would remain unchanged if the proposed Merger is consummated. However, because
investment management services would be provided internally by employees of ACC,
rather than through contract with an outside adviser, ACC would pay no
investment advisory fees, but would assume the operating costs previously borne
by Advisers.
STAGGERED BOARD ELECTIONS
Generally. Each Company's directors have historically been elected
annually to hold office until the next annual meeting of stockholders or until
their successors had been elected and qualified. If the Merger is consummated,
the bylaws of ACC will be amended to provide that, effective at the annual
meeting of stockholders in May 1998, directors of ACC will be classified into
three approximately equal classes, with each being elected for three-year terms.
At the annual meeting of stockholders to be held in May 1998, Class I Directors
will be elected for one-year terms, Class II Directors will be elected for
two-year terms and Class III
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<PAGE> 73
Directors will be elected for the full three-year terms. Thereafter, Class I
Directors will be elected for a full three-year term commencing with the 1999
annual meeting of stockholders and Class II Directors will be elected for a full
three-year term commencing with the 2000 annual meeting of stockholders.
The election and removal of directors will be governed by ACC's bylaws,
which provide that ACC shall have no fewer than three and not more than 25
directors. After October 1, 1997, under the Maryland Law, a director serving on
a classified (i.e. staggered) board may be removed by a majority vote of the
stockholders only with cause, unless the charter provides otherwise. The Charter
of ACC will not provide otherwise.
Effects of Staggered Board Elections. The board of each Company believes
that a staggered system of electing directors would provide important benefits
to ACC. The staggered board system would help assure continuity of ACC's
business strategies and policies. Since at least two stockholder meetings would
generally be required to effect a change in control of the board, a majority of
directors at any given time will have prior experience as directors of ACC. In
addition, in the event of an unfriendly or unsolicited proposal to take over or
restructure ACC, the staggered board system would permit ACC time to negotiate
with the sponsor, to consider alternative proposals and to assure that
stockholder value is maximized.
A staggered board may be deemed to have an anti-takeover effect since it
may create, under certain circumstances, an impediment which would frustrate
persons seeking to effect a takeover or otherwise gain control of ACC. A
possible acquiror may decide not to proceed with a tender offer because it would
be difficult to obtain control of ACC's board for a period of at least two
years. No more than one-third of the sitting board would be up for election at
any annual meeting of stockholders. If the Merger is not effected, Allied
Lending will retain its current method of electing each director for a one-year
term at the annual meeting of stockholders. (See "-- Certain Anti-Takeover
Provisions.")
RISK FACTORS AND SPECIAL CONSIDERATIONS
As the successor to the Companies, ACC generally would be subject to
similar risks to which each Company is subject. See "-- Risk Factors," above,
for summaries of the risks associated with an investment in each Company.
OPERATIONS AS A BDC
As a BDC, ACC may not acquire any asset other than "Qualifying Assets"
unless, at the time the acquisition is made, Qualifying Assets represent at
least 70% of the value of ACC's total investment assets (the "70% test"). The
principal categories of Qualifying Assets relevant to the business of ACC are
the following:
(1) Securities purchased in transactions not involving any public
offering, the issuer of which 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 (ACC's
investments in and advances to Investment I, Financial I, Allied SBLC and
its REIT subsidiary would be Qualifying Assets), and (c) does not have any
class of publicly traded securities with respect to which a broker may
extend margin credit.
(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 include certain 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
counseling concerning the management, operations, or business objectives and
policies of a portfolio company or (ii) in the case of a small business
investment company,
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<PAGE> 74
making loans to a portfolio company. 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. ACC would provide managerial assistance on a continuing
basis to any portfolio company that requests it, whether or not difficulties are
perceived. ACC's directors and officers are highly experienced in providing such
managerial assistance to small businesses.
As a BDC, ACC would be entitled to issue senior securities in the form of
stock or senior securities representing indebtedness, as long as each class of
senior security has an asset coverage of at least 200%. This limitation is not
applicable to borrowings by ACC's SBIC, SSBIC or SBLC subsidiaries. See "-- Risk
Factors -- Leverage."
DIVIDEND REINVESTMENT PLAN
ACC would maintain an "opt-out" Dividend Reinvestment Plan ("DRIP Plan").
As such, distributions to a stockholder owning shares registered in his or her
own name would be automatically reinvested in additional shares of ACC common
stock by ACC's transfer agent, acting as reinvestment plan agent (the "Plan
Agent"). Stockholders should note that if the Merger is approved, instructions
concerning existing dividend reinvestment accounts, and requests for cash
payments that are already in place with the Plan Agent will be transferred on
all exchanged shares for registered stockholders of Allied I, Allied II, Allied
Commercial and Allied Lending. Stockholders exchanging shares of Advisers, who
have not had the opportunity to participate in a DRIP Plan prior to the Merger,
will be automatically enrolled in the ACC Dividend Reinvestment Plan unless they
otherwise instruct the transfer agent in writing.
Stockholders may change enrollment status in the DRIP Plan at any time by
contacting either the Plan Agent or ACC. A stockholder's ability to participate
in a DRIP Plan may be limited according to how the stockholder's shares are
registered. Beneficial owners holding shares in street name may be precluded
from participation by the nominee. Stockholders who wish to participate in a
DRIP Plan may need to register their shares in their own name. Stockholders will
be informed of their right to elect to receive cash in ACC's annual and
quarterly reports to stockholders. Stockholders whose shares are held in the
name of a nominee should contact the nominee for details. All distributions to
investors who do not participate (or whose nominee elects not to participate) in
the DRIP Plan will be paid by check mailed directly, or through a nominee, to
the record holder by or under the direction of the Plan Agent. See "-- The
Merging Companies -- Dividends and Distributions" below. The Plan Agent is
expected to remain the same for ACC as it is for the Companies. The Companies'
Plan Agent is AST, 40 Wall Street, New York, New York 10005. The telephone
number for AST is 800-937-5449.
AMENDMENTS TO CHARTER
To facilitate the Merger and ACC's operations following the Merger, the
Allied Lending charter would be amended primarily to effect: (a) an increase in
the number of authorized shares of Allied Lending common stock, par value
one-tenth of One Mil ($0.0001) per share, from 20,000,000 to 100,000,000 shares;
(b) a change in Allied Lending's name to "Allied Capital Corporation" and (c) a
conforming change to the indemnification provisions of Allied Lending's charter
to the corresponding charter provisions of the other Companies, and to add a
reference to the limitations imposed by the 1940 Act and all valid regulations
thereunder on the power to indemnify officers and directors. These charter
amendments will be set forth as articles of merger to be filed shortly before
the Effective Time under the Maryland Law, substantially in the form of Appendix
B (the "Articles of Merger"). The Merger Agreement is included as Appendix A to
this Joint Proxy Statement/Prospectus.
A vote in favor of the Merger Proposal constitutes the acceptance,
approval, and ratification of the amendments to Allied Lending's charter
provided for in the Articles of Merger. Allied Lending's charter, as so amended,
will be the charter of ACC if the Merger is effected.
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<PAGE> 75
THE INCREASE IN AUTHORIZED CAPITAL
Background and Reasons for the Increase. Allied Lending is currently
authorized to issue 20,000,000 shares of Allied Lending common stock, of which
approximately 5,143,782 were currently outstanding, and 511,560 were reserved
for issuance upon the exercise of employee and director stock options as of June
30, 1997.
As described above, Allied Lending will issue shares of its common stock to
the stockholders of Allied I, Allied II, Allied Commercial, and Advisers as
consideration for the tender of their shares of common stock in connection with
the Merger. See "-- The Merger Agreement -- Conversion of Shares." The primary
purpose of the charter amendment is to authorize an adequate number of shares of
Allied Lending common stock to be issued in connection with the Merger and to
provide for future issuance of shares. If the charter amendment is effected and
the number of authorized shares is increased, Allied Lending will be authorized
to issue 100,000,000 shares of common stock.
The Use of Authorized but Unissued Common Stock. The shares of authorized
but unissued common stock will be available for future public offerings,
financing and acquisition transactions, stock dividends or splits, and other
corporate purposes. Having shares available for issuance in the future would
give ACC greater flexibility to issue stock, including a class of preferred
stock, without the expense and delay of a special stockholders' meeting. Such
shares will be available without further action by Allied Lending's or ACC's
stockholders unless such action is required by applicable law or the rules of
the NASD applicable to the Nasdaq, on which the shares are expected to be
listed. The Nasdaq currently requires stockholder approval as a prerequisite to
listing shares in certain instances, including in connection with acquisition
transactions where the present or potential issuance of shares could result in
an increase in the voting power outstanding of at least 20% or where the number
of shares of common stock to be issued will equal or exceed 20% of the number of
shares of common stock outstanding before the issuance. The issuance of any
shares of authorized but unissued common stock could result in dilution of the
value of outstanding shares, depending upon the consideration received by ACC
upon the issuance of such shares. Stockholders should be aware that the increase
in the number of authorized and unissued shares means that ACC would have an
extended capability to reclassify authorized but unissued stock into one or more
classes of stock, including preferred stock, which may have attributes that
could have anti-takeover effects.
THE NAME CHANGE
The board of directors of each of the Companies believes that if the Merger
is effected, the combined entity should have the name Allied Capital
Corporation. Allied Capital Corporation is the name of the first and oldest of
the Companies, and is the most recognized name among the Allied Capital
entities. Therefore, if the Merger is consummated, Allied Lending would amend
its charter to change its name to Allied Capital Corporation.
AMENDMENTS TO INDEMNIFICATION PROVISIONS
Currently, the charter of each Company other than Allied Lending provides
that such Company shall indemnify its officers and directors to the full extent
permitted by the General Laws of the State of Maryland. The Allied Lending
charter contains a substantially identical provision, except that it is subject
to an additional charter provision ("Section C") that in large part sets forth
the text of the current section of the Maryland Law that addresses
indemnification, Section 2-418. Section C has the effect of limiting the power
of Allied Lending to indemnify officers and directors to the scope provided for
in Section 2-418 as currently in force (and as further limited by certain other
provisions of Section C), and would deprive Allied Lending of the power to grant
broader indemnification to officers and directors in the future if such broader
indemnification is permitted by future amendments to the Maryland Law. Moreover,
Section 2-418 provides by its terms that it is not exclusive of any other
rights, including indemnification rights, to which a director or officer may be
entitled under the charter or otherwise. Section C, however, precludes Allied
Lending from granting indemnification rights to officers and directors that are
broader than the rights provided for in Section 2-418, even if those broader
rights are consistent with Maryland case law.
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It is unclear the extent to which Maryland courts would uphold
indemnification by a Maryland corporation of officers and directors beyond the
scope of indemnification specifically provided for in Section 2-418. However,
the Companies believe that, in view of the critical importance of attracting and
retaining qualified individuals as officers and directors, ACC should provide in
its charter that it will indemnify officers and directors to the maximum extent
permitted under law, thereby taking advantage of the full scope of permissible
indemnification under Maryland statutory and case law as now in effect and
subsequently developed. This would give directors and officers of ACC the same
rights of indemnification currently applicable to directors and officers of each
Company other than Allied Lending. The Companies view this as an important
measure because all of the outside directors of each Company will be asked to
serve as directors of ACC. Accordingly, the Articles of Merger would amend the
charter of Allied Lending to delete the provisions of Section C.
The Articles of Merger would further amend the indemnification provisions
of the Allied Lending charter by clarifying that the power of ACC to indemnify
officers and directors is subject to the provisions of the 1940 Act and valid
rules, regulations or orders of the Commission thereunder. Section 17(h) of the
1940 Act, which is applicable to BDCs, effectively would preclude ACC from
providing in its charter or bylaws that it will indemnify any officer or
director against any liability to ACC or its stockholders to which he or she
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his or
her office.
FEDERAL INCOME TAX ISSUES
ACC intends to elect to be treated and to qualify for federal income tax
purposes as a "regulated investment company" or "RIC" within the meaning of
Section 851 of the Code. If ACC qualifies as a RIC and distributes to its
stockholders in a timely manner at least 90% of its "investment company taxable
income," as defined in the Code, each year, it will not be subject to federal
income tax on the portion of its taxable income and gains it distributes to
stockholders. In addition, if ACC distributes in a timely manner (or treats as
"deemed distributed") 98% of its capital gain net income for each one year
period ending on December 31 (pursuant to Section 4982(e)(4)(A) of the Code),
and distributes 98% of its ordinary income for each calendar year, it will not
be subject to the 4% nondeductible federal excise tax on certain undistributed
income of RICs. See "-- The Merging Companies -- Federal Income Tax Issues"
below for a more detailed discussion of the income tax treatment of a BDC.
REPORTS AND INDEPENDENT ACCOUNTANT
If the Merger is consummated, it is anticipated that the firm of Matthews,
Carter and Boyce, P.C. will resign as the independent accountant to Allied
Lending. In the event of such resignation, the board of directors of Allied
Lending would select Arthur Andersen LLP to serve as ACC's independent
accountant for the year ending December 31, 1997 and Arthur Andersen LLP will
serve as independent accountant for ACC until its next annual meeting of
stockholders.
SAFEKEEPING, TRANSFER AND DIVIDEND PAYING AGENT AND REGISTRAR
ACC's investments, as well as those of its subsidiaries, would be held in
safekeeping by Riggs Bank N.A. ("Riggs") at 808 17th Street, N.W., Washington,
D.C. 20006. LaSalle National Bank, located at 25 Northwest Point Boulevard,
Suite 800, Elk Grove Village, Illinois 60007, serves as trustee with respect to
assets of Allied Commercial held for securitization purposes. American Stock
Transfer & Trust Company, 40 Wall Street, 46th Floor, New York, New York 10005,
would act as ACC's transfer, dividend paying and reinvestment plan agent and
registrar.
THE MERGING COMPANIES
The business and investment policies of each of Allied I, Allied II, Allied
Commercial, Allied Lending and Advisers is discussed in detail above as part of
the discussion of ACC. The following is a brief discussion
62
<PAGE> 77
of the history and investment objective of each Company. The following reflects
current information for each Company, and may not necessarily discuss changes
that would occur if the Merger is approved.
ALLIED I
Allied I was incorporated under the laws of the District of Columbia on
October 3, 1958, completed its initial public offering ("IPO") in 1960, and was
reorganized as a Maryland corporation in 1991. It was registered with the
Commission in 1958 as a non-diversified closed-end management investment company
under the 1940 Act, and elected in 1991 to be regulated as a BDC under the 1940
Act. Allied I has two active wholly owned subsidiaries, Investment I and
Financial I, both Maryland corporations registered under the 1940 Act as
closed-end management investment companies. As discussed above, Investment I is
licensed by the SBA as an SBIC and Financial I is licensed by the SBA as an
SSBIC. Allied I also retains a significant ownership (approximately 16%)
interest in Allied Lending.
The investment objective of Allied I is to achieve both long-term growth in
the value of its net assets and current income by providing debt, mezzanine, and
equity financing (in private transactions) for small, privately owned growth
companies. Allied I's investment objective may be changed by its board of
directors without stockholder approval.
ALLIED II
Allied II is a non-diversified closed-end management investment company
that was organized under the laws of the District of Columbia on March 8, 1989
and elected in 1989 to be regulated as a BDC under the 1940 Act. The IPO of
Allied II's shares occurred in October 1989, and it was reorganized in 1990 as a
Maryland corporation and a holding company with two newly organized, wholly
owned registered investment company subsidiaries, Investment II and Financial
II, both Maryland corporations registered under the 1940 Act as closed-end
management investment companies. As discussed above, Investment II is licensed
by the SBA as an SBIC and Financial II is licensed by the SBA as an SSBIC.
Like Allied I, the investment objective of Allied II is to achieve both
long-term growth in the value of its net assets and current income by providing
debt, mezzanine, and equity financing (in private transactions) for small,
privately owned growth companies. This investment objective may be changed by
Allied II's board of directors without stockholder approval.
ALLIED COMMERCIAL
Allied Commercial was incorporated in Maryland in June 1992. Allied
Commercial's existence as a corporation is perpetual; however, stockholders
holding more than two-thirds of Allied Commercial's outstanding shares and
entitled to vote in the years 2000, 2003 or 2006 can elect to have Allied
Commercial's board of directors liquidate Allied Commercial.
Allied Commercial has elected to qualify as a REIT for federal income tax
purposes. As a result, Allied Commercial is not subject to the corporate income
tax with respect to its earnings. To qualify as a REIT, Allied Commercial must,
among other things, distribute annually at least 95% of its taxable income to
its stockholders. (See "-- The Surviving Company: ACC -- The Business of
ACC -- Commercial Real Estate Finance.")
ALLIED LENDING
Allied Lending was organized under the laws of the District of Columbia on
September 10, 1976 and was registered with the Commission on November 23, 1976,
as a non-diversified closed-end management investment company under the 1940
Act. On June 14, 1977, Allied Lending received approval from the SBA to
participate as an SBLC in the Section 7(a) Loan Program pursuant to Section 7(a)
of the Small Business Act. Allied Lending was reorganized as a Maryland
corporation in 1990 and elected in 1993, at the time of its IPO, to be regulated
as a BDC under the 1940 Act. Allied Lending operated as a wholly owned
subsidiary of Allied I until November 23, 1993 (the date of Allied Lending's
IPO).
63
<PAGE> 78
The investment objective of Allied Lending is to achieve a high level of
current income by investing in loans at least partially guaranteed by the SBA,
as well as loans made in conjunction with such loans, and other loans. This
investment objective may be changed by Allied Lending's Board of directors
without stockholder approval.
Allied I 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 condition in a 1993 order of the
Commission (the "1993 Order"), Allied I agreed to divest itself of all shares of
Allied Lending by December 31, 1998 by public offerings, private placements,
distributions to Allied I's stockholders or otherwise. Since the November 1993
offering, Allied I's share ownership in Allied Lending has declined to 844,914
shares or approximately 16%. These shares will be distributed as a special
dividend to Allied I's stockholders immediately prior to the Merger, provided
the Merger is approved by the stockholders of each Company.
ADVISERS
Advisers was incorporated under the laws of the District of Columbia in May
1964 and was reorganized as a Maryland corporation in September 1990. Advisers
is engaged primarily in the business of providing investment advice and related
services to the investment funds comprising the Allied Capital family of funds.
In 1989, Advisers registered as an investment adviser under the Advisers Act.
Until late 1990, Advisers was a wholly owned subsidiary of Allied I; thereafter
it became a public company upon the distribution of all of its then issued and
outstanding shares to the stockholders of Allied I.
As the investment adviser of the Allied Capital family of funds, Advisers
provides a variety of services in the management and servicing of those funds'
portfolios of investments in small growth-oriented businesses. Advisers
generally searches for and recommends investment opportunities to the investment
funds that it manages, services the portfolios under its management and provides
significant managerial assistance to portfolio companies of certain of the funds
that it manages. As the investments of its managed funds generally are in
private companies, management and servicing of the funds' portfolios is labor
intensive. Because the size of such investments generally is relatively small,
the labor intensity of Advisers' work is relatively high due to the number of
investments comprising the portfolios of its managed funds. In addition,
Advisers is required to monitor the compliance of certain of the managed funds
with regulations applicable to BDCs, SBICs, SSBICs, SBLCs, RICs and REITs. (See
"-- The Merging Companies -- Assets Under Management.")
CO-INVESTMENT GUIDELINES
In accordance with the conditions of several exemptive orders of the
Commission permitting co-investments (the "Co-investment Guidelines"), Allied I
and Allied II acquire and dispose of most of their respective investments
together, as co-investors in the same types of investments. In the past, each of
Allied I and Allied II also acquired certain investments in participation with
Allied Venture and Allied Technology; neither of Allied Venture and Allied
Technology is now making new investments.
The Co-investment Guidelines generally provide that Allied I and Allied II
and their respective 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 both Allied I and Allied II or their
respective wholly owned subsidiaries, to the extent proportionate to their
respective consolidated total assets. Securities purchased by each of Allied I
or Allied II or its respective wholly owned subsidiaries in a co-investment
transaction 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 Allied I's or Allied II's board of directors, as applicable,
including a majority of the relevant Company's independent directors. Allied I
will not make any investment in the securities of any issuers in which Allied
II, but not Allied I, has previously invested, and vice versa. The Co-investment
Guidelines also provide that Allied I and Allied II each will have the
opportunity to dispose of any securities in which it or its wholly owned
subsidiaries and the other Company or its wholly owned subsidiaries have
invested in proportion to their respective holdings of such securities, and
that, in any such disposition, Allied I and Allied II each will be required to
bear no more than its proportionate share of the transaction costs.
64
<PAGE> 79
ASSETS UNDER MANAGEMENT
At June 30, 1997, Advisers, as the investment adviser to each of the
Companies, as well as other private funds under management, managed total assets
valued at approximately $848 million. As of June 30, 1997 and December 31, 1996,
assets under Advisers' management with respect to, and the invested assets of,
the Companies, which represent all of Advisers' managed entities that generate
approximately 10% or more of Advisers' advisory fees, were as follows:
<TABLE>
<CAPTION>
AT JUNE 30, 1997 AT DECEMBER 31, 1996
------------------------------- -------------------------------
TOTAL ASSETS INVESTED ASSETS TOTAL ASSETS INVESTED ASSETS
------------ --------------- ------------ ---------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Allied I............................ $169 $ 117 $166 $ 109
Allied II........................... 108 78 107 88
Allied Lending...................... 67 64 68 67
Allied Commercial................... 453 447 370 356
</TABLE>
Advisers receives advisory fees, payable quarterly in arrears, as set forth
in the various advisory agreements it has with the Allied Capital funds. At June
30, 1997, December 31, 1996, 1995 and 1994, Advisers managed assets of
approximately $848 million, $764 million, $670 million, and $569 million,
respectively. Included in invested assets at June 30, 1997, December 31, 1996,
1995 and 1994, were approximately $44 million, $53 million, $60 million, and $37
million, respectively, in assets of a company (BMI) that is co-managed by an
unaffiliated investment adviser. Advisers pays one-third of its fees received
from this company to the co-manager.
Advisers from time to time will waive or adjust its advisory fees, given
certain regulatory or economic circumstances. Advisers believes that it is
prudent to waive or adjust its fees when market conditions dictate such an
adjustment, and such actions will enhance Advisers' investment advisory
performance overall. Advisers has adjusted its fee schedule with Allied
Commercial to provide a range of fees charged on new loans originated. The
current fees range from 0.5 percent to 3.5 percent per annum, computed on a
quarterly basis. Advisers maintains a quarterly cap on the fees for those assets
of 2.5 percent on an annual basis.
The weighted average advisory fees as a percent of average total assets
under management equaled 2.2 percent, 2.3 percent, and 2.2 percent for the years
ended December 31, 1996, 1995, and 1994, respectively, and 2.0 percent for the
six months ended June 30, 1997.
Advisers also provides advisory services to BMI, Allied Venture, Allied
Technology, and Allied Midwest. Allied Midwest is a newly formed fund and is in
the process of closing on investment subscriptions. Subscriptions for $50
million had been received by Allied Midwest as of June 30, 1997. With the
exception of Allied Venture, Allied Technology, and BMI, all of the funds
currently managed by Advisers provide opportunities for growth through leverage.
While the amount of leverage these funds are able to obtain will depend upon
various factors, including market conditions and the cost of capital, none of
the funds had exhausted its ability to obtain debt capital as of December 31,
1996, and the potential for growth in assets under management from debt capital
remains.
As of June 30, 1997, the stock of each Company was held by stockholders as
follows: Allied I's stock was held by approximately 6,100 beneficial
stockholders; Allied II's stock, by approximately 9,200 beneficial stockholders;
Allied Lending's stock, by approximately 7,000 beneficial stockholders; Allied
Commercial's stock, by approximately 16,800 beneficial stockholders; and
Advisers' stock, by approximately 2,800 beneficial stockholders.
65
<PAGE> 80
SELECTED FINANCIAL DATA OF THE COMPANIES
The following condensed consolidated financial information of the Companies
should be read in conjunction with the consolidated financial statements and
notes thereto incorporated by reference to this Joint Proxy
Statement/Prospectus.
Such condensed consolidated financial information as of and for the years
ended December 31, 1996, 1995, 1994, 1993 and 1992 for Allied I, Allied II, and
Allied Lending, and as of and for the years ended December 31, 1993 and 1992 for
Allied Commercial, and as of and for the year ended December 31, 1992 for
Advisers has been audited by the firm of Matthews, Carter and Boyce, P.C.
Consolidated financial information as of and for the years ended December 31,
1996, 1995 and 1994 for Allied Commercial and as of and for the years ended
December 31, 1996, 1995, 1994 and 1993 for Advisers, has been audited by the
firm of Arthur Andersen LLP.
The distribution for the six months ended June 30, 1997 does not indicate
the character of the income associated with such distributions. The character of
the distributions between ordinary and capital gain distributions for the six
months ended June 30, 1996 are based upon the final accounting for the year
ended December 31, 1996. All information for the six months ended June 30, 1997
and 1996 is unaudited.
ALLIED I
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30, FOR THE YEARS ENDED DECEMBER 31,
------------------- --------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
-------- ------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
DISTRIBUTIONS
Total tax distributions............... $ 4,921 $ 3,668 $ 10,726 $ 8,894 $ 8,595 $ 8,239 $ 8,027
Ordinary income per common
share.......................... $ 0.07 $ 0.20 $ 0.40 $ 0.31 $ -- $ 0.45
Net capital gains per common
share.......................... $ 0.46 $ 1.31 $ 1.04 $ 0.92 $ 1.35 $ 0.87
Return of capital per common
share.......................... $ -- $ -- $ -- $ 0.17 $ -- $ --
-------- ------- -------- -------- -------- -------- --------
Total tax distribution per
common share............... $ 0.67 $ 0.53 $ 1.51 $ 1.44 $ 1.40 $ 1.35 $ 1.32
========= ======== ========= ========= ========= ========= =========
OPERATIONS
Total investment income............... $ 7,868 $ 8,055 $ 15,865 $ 14,126 $ 12,216 $ 12,384 $ 11,335
Per common share.................. $ 1.06 $ 1.20 $ 2.29 $ 2.29 $ 1.99 $ 2.02 $ 1.85
Net investment income................. $ 2,087 $ 2,359 $ 4,395 $ 3,332 $ 2,126 $ 2,300 $ 3,055
Per common share.................. $ 0.28 $ 0.35 $ 0.63 $ 0.54 $ 0.35 $ 0.38 $ 0.50
Net realized gains on investments..... $ 614 $ 6,151 $ 10,497 $ 5,526 $ 3,394 $ 5,943 $ 4,507
Net unrealized appreciation
(depreciation) on investments....... $ 1,977 $(4,434) $ (3,499) $ 6,459 $ (5,296) $ 12,163 $ 694
Net realized gains and unrealized
appreciation (depreciation) on
investments......................... $ 2,591 $ 1,717 $ 6,998 $ 11,985 $ (1,902) $ 18,106 $ 5,201
Per common share.................. $ 0.35 $ 0.26 $ 1.01 $ 1.94 $ (0.31) $ 2.95 $ 0.85
Net increase in net assets resulting
from operations..................... $ 4,678 $ 4,076 $ 11,393 $ 15,317 $ 224 $ 20,406 $ 8,256
Per common share.................. $ 0.63 $ 0.61 $ 1.64 $ 2.48 $ 0.04 $ 3.33 $ 1.35
Preferred stock dividends............. $ 110 $ 110 $ 220 $ 220 $ 220 $ 220 $ 220
Per common share.................. $ 0.01 $ 0.02 $ 0.03 $ 0.03 $ 0.04 $ 0.04 $ 0.03
Net increase in net assets resulting
from operations available to common
shareholders........................ $ 4,568 $ 3,966 $ 11,173 $ 15,097 $ 4 $ 20,186 $ 8,036
Per common share.................. $ 0.62 $ 0.59 $ 1.61 $ 2.45 $ 0.00 $ 3.29 $ 1.32
Weighted average number of common
shares and common share equivalents
outstanding......................... 7,405 6,730 6,935 6,172 6,154 6,128 6,111
</TABLE>
66
<PAGE> 81
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30, FOR THE YEARS ENDED DECEMBER 31,
------------------- --------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
-------- ------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL POSITION
Investments at value.................. $124,815 $116,608 $123,184 $115,026 $ 94,630 $ 78,470
Investments at cost................... $118,766 $112,538 $115,615 $111,058 $ 88,224 $ 84,227
Total assets.......................... $168,931 $165,751 $148,268 $135,517 $134,606 $124,823
Total debt and redeemable preferred
stock............................... $ 96,450 $ 91,600 $ 83,800 $ 78,005 $ 70,800 $ 70,800
Shareholders' equity.................. $ 69,537 $ 68,320 $ 57,181 $ 49,987 $ 58,185 $ 45,991
Net asset value available to common
shareholders........................ $ 63,537 $ 62,320 $ 51,181 $ 43,987 $ 52,185 $ 39,991
Per common share.................. $ 8.62 $ 8.54 $ 8.26 $ 7.15 $ 8.54 $ 6.57
Per common share market value at end
of period........................... $ 16.00 $ 15.75 $ 13.63 $ 13.13 $ 14.75 $ 14.50
Common shares outstanding at end of
period.............................. 7,367 7,299 6,198 6,153 6,109 6,090
</TABLE>
ALLIED II
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30, FOR THE YEARS ENDED DECEMBER 31,
------------------- --------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
-------- ------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
DISTRIBUTIONS
Total tax distributions.......... $ 6,698 $ 4,900 $ 14,143 $ 11,206 $ 9,297 $ 8,454 $ 7,891
Ordinary income per share... $ 0.53 $ 1.49 $ 1.38 $ 1.25 $ 0.76 $ 0.97
Net capital gains per
share..................... $ 0.15 $ 0.43 $ 0.22 $ 0.09 $ 0.46 $ 0.18
-------- ------- -------- -------- -------- -------- --------
Total tax distributions
per share............ $ 0.88 $ 0.68 $ 1.92 $ 1.60 $ 1.34 $ 1.22 $ 1.15
======== ======= ======== ======== ======== ======== ========
OPERATIONS
Total investment income.......... $ 6,867 $ 6,133 $ 12,084 $ 11,539 $ 10,564 $ 7,770 $ 8,864
Per share................... $ 0.89 $ 0.85 $ 1.65 $ 1.65 $ 1.52 $ 1.12 $ 1.29
Net investment income............ $ 5,496 $ 4,528 $ 9,148 $ 8,350 $ 7,425 $ 5,315 $ 6,597
Per share................... $ 0.72 $ 0.63 $ 1.24 $ 1.20 $ 1.07 $ 0.77 $ 0.96
Net realized gains on
investments.................... $ 3,264 $ 5,457 $ 7,427 $ 3,621 $ 3,562 $ 148 $ 1,297
Net unrealized appreciation
(depreciation) on
investments.................... $ (210) $(1,824) $ (6,426) $ 2,762 $ (472) $ 5,011 $ 948
Net realized gains and unrealized
appreciation (depreciation) on
investments.................... $ 3,054 $ 3,633 $ 1,001 $ 6,383 $ 3,090 $ 5,159 $ 2,245
Per share................... $ 0.40 $ 0.50 $ 0.14 $ 0.91 $ 0.45 $ 0.74 $ 0.33
Net increase in net assets
resulting from operations...... $ 8,550 $ 8,161 $ 10,149 $ 14,733 $ 10,515 $ 10,474 $ 8,842
Per share................... $ 1.11 $ 1.13 $ 1.38 $ 2.11 $ 1.52 $ 1.51 $ 1.29
Weighted average number of shares
and share equivalents
outstanding.................... 7,677 7,239 7,343 6,979 6,940 6,951 6,875
</TABLE>
67
<PAGE> 82
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30, FOR THE YEARS ENDED DECEMBER 31,
------------------- --------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
-------- ------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL POSITION
Investments at value............. $ 75,860 $ 86,266 $ 99,207 $ 88,130 $ 70,716 $ 47,739
Investments at cost.............. $ 76,815 $ 87,011 $ 93,526 $ 85,211 $ 67,325 $ 49,359
Total assets..................... $108,280 $106,908 $107,169 $101,934 $100,151 $ 96,165
Shareholders' equity (net asset
value)......................... $107,595 $102,838 $101,981 $ 97,475 $ 96,225 $ 93,891
Per share................... $ 14.13 $ 13.62 $ 14.36 $ 14.05 $ 13.87 $ 13.60
Per share market value at end of
period......................... $ 21.00 $ 21.25 $ 17.13 $ 13.63 $ 14.25 $ 18.00
Shares outstanding at end of
period......................... 7,617 7,550 7,104 6,938 6,938 6,906
</TABLE>
ALLIED COMMERCIAL
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30, FOR THE YEARS ENDED DECEMBER 31,
------------------ ----------------------------------------------------
1997 1996 1996 1995 1994 1993 1992(1)
-------- ------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
DISTRIBUTIONS
Total distributions................. $ 14,777 $12,449 $ 27,734 $ 24,000 $ 19,043 $ 12,805 $ 5,113
Distributions per share (tax basis):
Ordinary income................ $ 0.79 $ 1.75 $ 1.62 $ 1.21 $ 0.93 $ 0.29
Capital gains.................. $ 0.11 $ 0.23 $ 0.16 $ 0.26 $ 0.07 $ 0.01
Return of capital.............. $ -- $ -- $ -- $ -- $ -- $ 0.10
-------- ------- -------- -------- -------- -------- --------
Total tax distributions
declared per share...... $ 1.03 $ 0.90 $ 1.98 $ 1.78 $ 1.47 $ 1.00 $ 0.40
======== ======= ======== ======== ======== ======== ========
Distribution in
cash............... $ 1.54 $ 1.29 $ 1.16 $ 1.00 $ 0.40
Distribution in stock through
the dividend reinvestment
plan......................... $ 0.44 $ 0.49 $ 0.31 $ -- $ --
INCOME STATEMENT
Total investment income............. $ 25,068 $21,359 $ 45,638 $ 33,542 $ 22,545 $ 14,505 $ 3,855
Net margin on investments........... $ 17,497 $15,933 $ 32,919 $ 28,305 $ 20,932 $ 14,450 $ 3,820
Operating expenses.................. $ 4,298 $ 4,025 $ 8,297 $ 6,582 $ 5,051 $ 3,111 $ 107
Gains from dispositions of real
estate loans...................... $ 790 $ 4,060 $ 5,706 $ 3,048 $ 2,433 $ 861 $ 70
Minority interest................... $ 588 $ 1,431 $ 2,427 $ 546 $ -- $ -- $ --
Net income.......................... $ 13,401 $14,537 $ 27,901 $ 24,225 $ 18,314 $ 12,200 $ 3,783
Net income per share................ $ 0.93 $ 1.05 $ 1.99 $ 1.80 $ 1.42 $ 0.95 $ 0.30
Weighted average number of shares
and share equivalents
outstanding....................... 14,446 13,873 14,048 13,453 12,934 12,846 12,788
BALANCE SHEET
Investments in real estate loans,
net............................... $445,878 $355,461 $273,510 $198,514 $112,255 $ 59,824
Total assets........................ $453,111 $370,304 $297,891 $233,555 $178,374 $176,714
Bonds payable....................... $ 31,439 $ 54,123 $ 98,625 $ -- $ -- $ --
Notes payable....................... $209,177 $107,131 $ -- $ 50,101 $ -- $ --
Shareholders' equity................ $198,553 $195,329 $186,724 $178,839 $175,960 $176,560
</TABLE>
- ---------------
(1) Represents operations from July 9, 1992 (date of inception) through December
31, 1992.
68
<PAGE> 83
ALLIED LENDING
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS
ENDED JUNE 30, FOR THE YEARS ENDED DECEMBER 31,
----------------- ---------------------------------------------------
1997 1996 1996 1995 1994 1993 1992(1)
------- ------ ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
DISTRIBUTIONS
Tax distributions declared subsequent to
the initial public offering(2)........ $ 3,296 $2,797 $ 6,381 $ 5,339 $ 4,718 $ 350 $ --
Per share.......................... $ 0.64 $ 0.60 $ 1.30 $ 1.22 $ 1.08 $ 0.08 $ --
Tax distributions declared prior to the
initial public offering(3)............ $ -- $ -- $ -- $ -- $ -- $ 2,422 $ 2,063
Per share.......................... $ -- $ -- $ -- $ -- $ -- $ 1.02 $ 0.87
OPERATIONS
Interest................................ $ 4,066 $3,259 $ 7,463 $ 5,966 $ 3,716 $ 2,260 $ 1,380
Premium income.......................... $ 1,481 $ 931 $ 2,563 $ 2,090 $ 2,349 $ 2,196 $ 1,958
Total investment income................. $ 5,547 $4,190 $10,026 $ 8,056 $ 6,065 $ 4,456 $ 3,338
Per share.......................... $ 1.08 $ 0.94 $ 2.10 $ 1.84 $ 1.39 $ 1.72 $ 1.40
Net investment income................... $ 3,258 $2,302 $ 6,250 $ 5,438 $ 4,878 $ 2,944 $ 2,011
Per share.......................... $ 0.63 $ 0.52 $ 1.31 $ 1.24 $ 1.12 $ 1.14 $ 0.84
Net realized losses and net unrealized
appreciation (depreciation) on
investments........................... $ (214) $ 174 $ 66 $ (186) $ (347) $ (270) $ (43)
Per share.......................... $ (0.04) $ 0.04 $ 0.01 $ (0.04) $ (0.08) $ (0.11) $ (0.01)
Net increase in net assets resulting
from operations....................... $ 3,044 $2,476 $ 6,316 $ 5,252 $ 4,531 $ 2,674 $ 1,968
Per share.......................... $ 0.59 $ 0.55 $ 1.32 $ 1.20 $ 1.04 $ 1.03 $ 0.83
Weighted average number of shares and
share equivalents outstanding......... 5,143 4,469 4,785 4,376 4,368 2,587 2,380
FINANCIAL POSITION
Investments at value.................... $56,149 $60,408 $47,147 $32,771 $21,793 $12,241
Investments at cost..................... $56,222 $60,311 $47,302 $32,935 $21,905 $12,421
Total assets............................ $66,984 $68,402 $55,480 $37,619 $34,953 $17,420
Total debt(4)........................... $22,102 $23,743 $18,914 $ 3,130 $ -- $ 7,860
Shareholders' equity (net asset
value)................................ $41,976 $41,971 $32,884 $32,788 $32,955 $ 5,505
Per share.......................... $ 8.16 $ 8.19 $ 7.50 $ 7.50 $ 7.54 $ 2.31
Per share market value at end of
period................................ $ 14.75 $ 15.25 $ 13.25 $ 10.38 $ 15.75 $ --
Shares outstanding at end of period..... 5,143 5,127 4,385 4,370 4,368 2,380
</TABLE>
- ---------------
(1) Prior to the 1993 initial public offering, the board of directors of Allied
I, which was Allied Lending's former parent and sole shareholder, approved
an increase in the authorized shares and a stock split which was effected in
the form of a stock dividend to the sole shareholder. All share data for
prior years presented have been restated to reflect the stock split.
(2) 1993 is based on 4,368,420 shares outstanding subsequent to the initial
public offering, and dividends for the three months ended December 31, 1993.
(3) 1993 is based on 2,380,000 shares outstanding prior to the initial public
offering, and dividends for the nine months ended September 30, 1993.
(4) Debt outstanding prior to 1993 represents borrowings from Allied I, Allied
Lending's former parent and sole shareholder.
69
<PAGE> 84
ADVISERS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30, FOR THE YEARS ENDED DECEMBER 31,
-------------------- --------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992(1)
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT
Total revenue.................. $ 8,723 $ 8,367 $ 17,070 $ 15,443 $ 12,152 $ 8,358 $ 5,187
Income (loss) before income
taxes........................ $ 2,563 $ 2,598 $ 4,747 $ 4,219 $ 1,966 $ 314 $ (951)
Per share.................. $ 0.27 $ 0.26 $ 0.48 $ 0.44 $ 0.21 $ 0.03 $ (0.14)
Net income (loss).............. $ 1,497 $ 1,520 $ 2,802 $ 2,435 $ 1,294 $ 143 $ (673)
Per share.................. $ 0.16 $ 0.15 $ 0.28 $ 0.25 $ 0.14 $ 0.02 $ (0.10)
Assets under management........ $848,000 $728,000 $764,000 $670,000 $569,000 $493,000 $436,000
Weighted average number of
shares and share equivalents
outstanding.................. 9,588 9,866 9,858 9,676 9,527 9,550 6,965
FINANCIAL POSITION
Total assets................... $ 17,598 $ 17,523 $ 14,776 $ 10,841 $ 7,888 $ 6,369
Deferred compensation.......... $ 2,831 $ 2,658 $ 2,377 $ 1,950 $ 1,614 $ 1,359
Total liabilities.............. $ 4,852 $ 6,472 $ 5,789 $ 4,981 $ 3,349 $ 2,882
Shareholders' equity(2)........ $ 12,746 $ 11,051 $ 8,987 $ 5,860 $ 4,539 $ 3,487
</TABLE>
- ---------------
(1) The financial statements prior to 1993 have been restated to reflect the
adoption of Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes."
(2) The Company has not paid any dividends to shareholders.
70
<PAGE> 85
QUARTERLY FINANCIAL HIGHLIGHTS (UNAUDITED)
ALLIED I
<TABLE>
<CAPTION>
1997
---------------------------------------
QTR 1 QTR 2
------ ------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C>
Total investment income................................. $3,734 $4,134
Net investment income................................... $ 909 $1,178
Net increase in net assets resulting from operations.... $1,956 $2,722
Preferred stock dividends............................... $ 55 $ 55
Net increase (decrease) in net assets resulting from
operations available to common shareholders........... $1,901 $2,667
Per common share........................................ $ 0.26 $ 0.36
</TABLE>
<TABLE>
<CAPTION>
1996
---------------------------------------
QTR 1 QTR 2 QTR 3 QTR 4
------ ------ ------ ------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<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 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
</TABLE>
<TABLE>
<CAPTION>
1995
---------------------------------------
QTR 1 QTR 2 QTR 3 QTR 4
------ ------ ------ ------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C>
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 (decrease) 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>
71
<PAGE> 86
ALLIED II
<TABLE>
<CAPTION>
1997
---------------------------------------
QTR 1 QTR 2
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C>
Total investment income.............................. $2,727 $4,140
Net investment income................................ $2,026 $3,470
Net increase in net assets resulting from
operations......................................... $3,033 $5,517
Per share............................................ $ 0.40 $ 0.72
</TABLE>
<TABLE>
<CAPTION>
1996
---------------------------------------
QTR 1 QTR 2 QTR 3 QTR 4
------ ------ ------ ------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C>
Total investment income.............................. $3,054 $3,079 $2,790 $3,161
Net investment income................................ $2,298 $2,230 $2,124 $2,496
Net increase in net assets resulting from
operations......................................... $5,949 $2,212 $2,548 $ (560)(1)
Per share............................................ $ 0.83 $ 0.30 $ 0.34 $(0.09)
</TABLE>
<TABLE>
<CAPTION>
1995
---------------------------------------
QTR 1 QTR 2 QTR 3 QTR 4
------ ------ ------ ------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C>
Total investment income.............................. $2,932 $2,808 $3,158 $2,641
Net investment income................................ $2,132 $1,979 $2,382 $1,857
Net increase in net assets resulting from
operations......................................... $2,943 $5,648 $6,211 $ (69)
Per share............................................ $ 0.42 $ 0.81 $ 0.89 $(0.01)
</TABLE>
- ---------------
(1) The net decrease in net assets resulting from operations for the fourth
quarter of 1996 is primarily due to the depreciation of two public company
investments of $2.4 million and one private company investment of $1.4
million from their value at September 30, 1996.
ALLIED COMMERCIAL
<TABLE>
<CAPTION>
1997
----------------------------------------
QTR 1 QTR 2
------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Total investment income................................. $11,987 $13,081
Net income.............................................. $ 6,636 $ 6,764
Net income per share.................................... $ 0.46 $ 0.47
</TABLE>
<TABLE>
<CAPTION>
1996
----------------------------------------
QTR 1 QTR 2 QTR 3 QTR 4
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Total investment income................................. $10,093 $11,266 $11,794 $12,485
Net income.............................................. $ 6,855 $ 7,683 $ 6,391 $ 6,972
Net income per share.................................... $ 0.50 $ 0.55 $ 0.45 $ 0.49
</TABLE>
<TABLE>
<CAPTION>
1995
----------------------------------------
QTR 1 QTR 2 QTR 3 QTR 4
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Total investment income................................. $7,280 $8,202 $8,765 $9,295
Net investment income................................... $5,877 $5,547 $6,333 $6,468
Net income per share.................................... $ 0.44 $ 0.41 $ 0.47 $ 0.47
</TABLE>
72
<PAGE> 87
ALLIED LENDING
<TABLE>
<CAPTION>
1997
---------------------------------------
QTR 1 QTR 2
------ ------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C>
Total investment income................................. $2,506 $3,041
Net investment income................................... $1,405 $1,853
Net increase in net assets resulting from operations.... $1,305 $1,739
Per share............................................... $ 0.25 $ 0.34
</TABLE>
<TABLE>
<CAPTION>
1996
---------------------------------------
QTR 1 QTR 2 QTR 3 QTR 4
------ ------ ------ ------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C>
Total investment income................................. $2,253 $1,937 $2,264 $3,572
Net investment income................................... $1,411 $ 891 $1,406 $2,542
Net increase in net assets resulting from operations.... $1,330 $1,146 $1,778 $2,062
Per share............................................... $ 0.30 $ 0.25 $ 0.35 $ 0.40
</TABLE>
<TABLE>
<CAPTION>
1995
---------------------------------------
QTR 1 QTR 2 QTR 3 QTR 4
------ ------ ------ ------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C>
Total investment income................................. $1,827 $1,771 $2,327 $2,131
Net investment income................................... $1,394 $1,231 $1,580 $1,233
Net increase in net assets resulting from operations.... $1,345 $1,248 $1,402 $1,257
Per share............................................... $ 0.31 $ 0.29 $ 0.32 $ 0.29
</TABLE>
ADVISERS
<TABLE>
<CAPTION>
1997
---------------------------------------
QTR 1 QTR 2
------ ------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C>
Total revenue........................................... $4,326 $4,396
Income before taxes..................................... $1,307 $1,257
Net income.............................................. $ 773 $ 725
Net income per share.................................... $ 0.08 $ 0.08
</TABLE>
<TABLE>
<CAPTION>
1996
---------------------------------------
QTR 1 QTR 2 QTR 3 QTR 4
------ ------ ------ ------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C>
Total revenue........................................... $4,173 $4,194 $4,382 $4,321
Income before taxes..................................... $1,244 $1,354 $1,372 $ 777
Net income.............................................. $ 732 $ 788 $ 807 $ 475
Net income per share.................................... $ 0.07 $ 0.08 $ 0.08 $ 0.05
</TABLE>
<TABLE>
<CAPTION>
1995
---------------------------------------
QTR 1 QTR 2 QTR 3 QTR 4
------ ------ ------ ------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C>
Total revenue........................................... $3,580 $3,874 $3,889 $4,100
Income before taxes..................................... $ 890 $1,042 $1,147 $1,140
Net income.............................................. $ 523 $ 611 $ 659 $ 642
Net income per share.................................... $ 0.06 $ 0.06 $ 0.07 $ 0.07
</TABLE>
73
<PAGE> 88
SENIOR SECURITIES
Certain information about the various classes of senior securities issued
by Allied I, Allied Commercial and Allied Lending is set forth as of the end of
the fiscal year ended December 31, 1996 and as of June 30, 1997, consolidated,
in the following tables. Allied II and Advisers have not issued any classes of
senior securities during the 10-year period from 1987 to 1996, or as of June 30,
1997. The "--" indicates information which the Commission expressly does not
require to be disclosed for certain types of senior securities.
Allied I
<TABLE>
<CAPTION>
TOTAL AMOUNT ASSET INVOLUNTARY AVERAGE
OUTSTANDING COVERAGE LIQUIDATING MARKET
EXCLUSIVE OF TREASURY PER PREFERENCE VALUE
CLASS AND YEAR(8)(9) SECURITIES(4) UNIT(5) PER UNIT(6) PER UNIT(7)
- -------------------------------------------- --------------------- -------- ----------- -----------
<S> <C> <C> <C> <C>
NOTES(1)
1987........................................ $ 0 $ 0 -- N/A
1988........................................ 0 0 -- N/A
1989........................................ 0 0 -- N/A
1990........................................ 0 0 -- N/A
1991........................................ 0 0 -- N/A
1992........................................ 20,000,000 1,673 -- N/A
1993........................................ 20,000,000 1,848 -- N/A
1994........................................ 20,000,000 1,662 -- N/A
1995........................................ 20,000,000 1,703 -- N/A
1996........................................ 20,000,000 1,765 -- N/A
1997 (at June 30)........................... 20,000,000 1,739 -- N/A
BANK LOAN (REVOLVING LINE OF CREDIT)
1987........................................ $ 2,000,000 $3,241 -- N/A
1988........................................ 5,000,000 2,812 -- N/A
1989........................................ 0 0 -- N/A
1990........................................ 0 0 -- N/A
1991........................................ 0 0 -- N/A
1992........................................ 0 0 -- N/A
1993........................................ 0 0 -- N/A
1994........................................ 2,205,000 1,662 -- N/A
1995........................................ 1,500,000 1,703 -- N/A
1996........................................ 0 0 -- N/A
1997 (at June 30)........................... 2,500,000 1,739 -- N/A
OVERSEAS PRIVATE INVESTMENT CORPORATION
LOAN(10)
1987........................................ $ 0 $ 0 -- N/A
1988........................................ 0 0 -- N/A
1989........................................ 0 0 -- N/A
1990........................................ 0 0 -- N/A
1991........................................ 0 0 -- N/A
1992........................................ 0 0 -- N/A
1993........................................ 0 0 -- N/A
1994........................................ 0 0 -- N/A
1995........................................ 0 0 -- N/A
1996........................................ 8,700,000 1,765 -- N/A
1997 (at June 30)........................... 8,700,000 1,739 -- N/A
</TABLE>
74
<PAGE> 89
<TABLE>
<CAPTION>
TOTAL AMOUNT ASSET INVOLUNTARY AVERAGE
OUTSTANDING COVERAGE LIQUIDATING MARKET
EXCLUSIVE OF TREASURY PER PREFERENCE VALUE
CLASS AND YEAR(8)(9) SECURITIES(4) UNIT(5) PER UNIT(6) PER UNIT(7)
- -------------------------------------------- --------------------- -------- ----------- -----------
<S> <C> <C> <C> <C>
UNSECURED NOTES(3)
1987........................................ $ 0 $ 0 -- N/A
1988........................................ 0 0 -- N/A
1989........................................ 0 0 -- N/A
1990........................................ 0 0 -- N/A
1991........................................ 0 0 -- N/A
1992........................................ 0 0 -- N/A
1993........................................ 0 0 -- N/A
1994........................................ 0 0 -- N/A
1995........................................ 0 0 -- N/A
1996........................................ 600,000 1,765 -- N/A
1997 (at June 30)........................... 3,950,000 1,739 -- N/A
SUBORDINATED DEBENTURES(2)
1987........................................ $13,700,000 $3,241 -- --
1988........................................ 24,350,000 2,812 -- --
1989........................................ 25,350,000 3,116 -- --
1990........................................ 40,450,000 2,232 -- --
1991........................................ 49,800,000 1,942 -- --
1992........................................ 49,800,000 1,673 -- --
1993........................................ 49,800,000 1,848 -- --
1994........................................ 54,800,000 1,662 -- --
1995........................................ 61,300,000 1,703 -- --
1996........................................ 61,300,000 1,765 -- --
1997 (at June 30)........................... 60,300,000 1,739 -- --
REDEEMABLE CUMULATIVE PREFERRED STOCK(2)
1987........................................ $ 0 $ 0 $ 0 N/A
1988........................................ 0 0 0 N/A
1989........................................ 0 0 0 N/A
1990........................................ 1,000,000 190 100 N/A
1991........................................ 1,000,000 170 100 N/A
1992........................................ 1,000,000 152 100 N/A
1993........................................ 1,000,000 168 100 N/A
1994........................................ 1,000,000 152 100 N/A
1995........................................ 1,000,000 157 100 N/A
1996........................................ 1,000,000 164 100 N/A
1997 (at June 30)........................... 1,000,000 162 100 N/A
</TABLE>
75
<PAGE> 90
<TABLE>
<CAPTION>
TOTAL AMOUNT ASSET INVOLUNTARY AVERAGE
OUTSTANDING COVERAGE LIQUIDATING MARKET
EXCLUSIVE OF TREASURY PER PREFERENCE VALUE
CLASS AND YEAR(8)(9) SECURITIES(4) UNIT(5) PER UNIT(6) PER UNIT(7)
- -------------------------------------------- --------------------- -------- ----------- -----------
<S> <C> <C> <C> <C>
NON-REDEEMABLE CUMULATIVE PREFERRED STOCK(2)
1987........................................ $ 2,000,000 $ 287 $ 100 N/A
1988........................................ 5,000,000 240 100 N/A
1989........................................ 6,000,000 252 100 N/A
1990........................................ 6,000,000 190 100 N/A
1991........................................ 6,000,000 170 100 N/A
1992........................................ 6,000,000 152 100 N/A
1993........................................ 6,000,000 168 100 N/A
1994........................................ 6,000,000 152 100 N/A
1995........................................ 6,000,000 157 100 N/A
1996........................................ 6,000,000 164 100 N/A
1997 (at June 30)........................... 6,000,000 162 100 N/A
</TABLE>
- ---------------
(1) Allied I itself was the obligor on $15 million of the senior notes. Allied
I's SBIC subsidiaries were the obligors on the remaining $5 million, which
is not subject to the asset coverage requirements of the 1940 Act.
(2) Issued by Allied I's SBIC subsidiaries to the SBA. These categories of
senior securities are not subject to the asset coverage requirements of the
1940 Act.
(3) Issued by Allied I's SBIC subsidiary to various banks. This category of
senior securities is not subject to the asset coverage requirements of the
1940 Act.
(4) Total amount of each class of senior securities outstanding at the end of
the year presented.
(5) The asset coverage ratio for a class of senior securities representing
indebtedness is calculated as Allied I's consolidated total assets less all
liabilities and indebtedness not represented by senior securities, divided
by senior securities representing indebtedness. This asset coverage ratio
is multiplied by $1,000 to determine the Asset Coverage Per Unit. The asset
coverage ratio for a class of senior securities that is preferred stock is
calculated as Allied I's consolidated total assets less all liabilities and
indebtedness not represented by senior securities, divided by senior
securities representing indebtedness, plus the involuntary liquidation
preference of the preferred stock (see footnote 6). The Asset Coverage Per
Unit is expressed in terms of dollar amounts per share.
(6) The amount to which such class of senior security would be entitled upon
the involuntary liquidation of the issuer in preference to any security
junior to it.
(7) Not applicable, as senior securities are not registered for public trading.
(8) This table does not include U.S. government agency guaranteed loans sold
under agreements to repurchase held by Allied Lending until November 23,
1993, for the years 1986 through 1993. This information is omitted as
Allied I no longer uses this type of financing for its operations and has
no intention of resuming this practice in the foreseeable future. (See
"-- Allied Lending," below.)
(9) Prior to Allied Lending's IPO in November 1993, Allied Lending was a wholly
owned subsidiary of Allied I. For the years ended 1987 through 1992, Allied
Lending's senior securities (except for the repurchase agreements held by
Allied Lending discussed in Note 8 above) are included in this table as
well as in the senior securities of table for Allied Lending below.
(10) Allied I has a loan agreement with the Overseas Private Investment
Corporation under which Allied I may borrow up to $20 million to provide
financing for international projects involving qualifying U.S. small
businesses.
76
<PAGE> 91
Allied Commercial
<TABLE>
<CAPTION>
TOTAL AMOUNT
OUTSTANDING ASSET AVERAGE
EXCLUSIVE OF COVERAGE MARKET VALUE
CLASS AND YEAR(2) TREASURY SECURITIES PER UNIT(1) PER UNIT(2)
- ----------------------------------------------------- ------------------- ----------- -------------
<S> <C> <C> <C>
BANK LOAN
1992................................................. $ 0 $ 0 N/A
1993................................................. 0 0 N/A
1994................................................. 26,891,000 4,570 N/A
1995................................................. 0 0 N/A
1996................................................. 21,356,000 2,211 N/A
1997 (at June 30).................................... 23,500,000 1,825 N/A
6.92% SERIES 1995-C1 COMMERCIAL MORTGAGE
COLLATERALIZED BONDS(3)
1992................................................. $ 0 $ 0 N/A
1993................................................. 0 0 N/A
1994................................................. 0 0 N/A
1995................................................. 98,625,000 2,893 N/A
1996................................................. 54,123,000 2,211 N/A
1997 (at June 30).................................... 31,439,000 1,825 N/A
MASTER REPURCHASE AGREEMENTS
1992................................................. $ 0 $ 0 N/A
1993................................................. 0 0 N/A
1994................................................. 23,210,000 4,570 N/A
1995................................................. 0 0 N/A
1996................................................. 85,775,000 2,211 N/A
1997 (at June 30).................................... 185,677,000 1,825 N/A
</TABLE>
- ---------------
(1) The asset coverage ratio for a class of senior securities representing
indebtedness is calculated as Allied Commercial's consolidated total assets
less all liabilities and indebtedness not represented by senior securities,
divided by senior securities representing indebtedness. This asset coverage
ratio is multiplied by $1,000 to determine the Asset Coverage Per Unit.
(2) Not applicable since Allied Commercial has no senior security that is listed
or actively traded.
(3) Allied Commercial is not a BDC and therefore is not subject to the asset
coverage requirements of the 1940 Act.
(4) The bonds were issued pursuant to a securitization transaction and are
nonrecourse to Allied Commercial. The bonds have been rated "AA" by Fitch
Investors Service, L.P. and are secured by a trust estate consisting of
loans that are secured by first liens on various types of commercial
properties.
77
<PAGE> 92
Allied Lending
<TABLE>
<CAPTION>
TOTAL AMOUNT
OUTSTANDING
EXCLUSIVE OF ASSET AVERAGE
TREASURY COVERAGE MARKET VALUE
CLASS AND YEAR(4) SECURITIES PER UNIT(1) PER UNIT(2)
- ----------------------------------------------------- ------------------- ----------- -------------
<S> <C> <C> <C>
BANK LOAN (UNSECURED REVOLVING LINE OF CREDIT)
1987................................................. $ 2,000,000 $ 1,396 N/A
1988................................................. 5,000,000 1,355 N/A
1989................................................. 0 0 N/A
1990................................................. 0 0 N/A
1991................................................. 0 0 N/A
1992................................................. 0 0 N/A
1993................................................. 0 0 N/A
1994................................................. 0 0 N/A
1995................................................. 1,055,000 2,739 N/A
1996................................................. 0 0 N/A
1997 (at June 30).................................... 0 0 N/A
BANK LOANS (SECURED REVOLVING LINES OF CREDIT)
1987................................................. $ 0 $ 0 N/A
1988................................................. 0 0 N/A
1989................................................. 0 0 N/A
1990................................................. 0 0 N/A
1991................................................. 0 0 N/A
1992................................................. 0 0 N/A
1993................................................. 0 0 N/A
1994................................................. 3,130,000 11,475 N/A
1995................................................. 18,914,000 2,739 N/A
1996................................................. 23,743,000 2,768 N/A
1997 (at June 30).................................... 22,102,000 2,899 N/A
REVERSE REPURCHASE AGREEMENTS(3)
1987................................................. $30,759,000 $ 1,396 N/A
1988................................................. 34,321,000 1,355 N/A
1989................................................. 29,386,000 1,681 N/A
1990................................................. 28,361,000 1,785 N/A
1991................................................. 2,761,000 4,583 N/A
1992................................................. 0 0 N/A
1993................................................. 0 0 N/A
1994................................................. 0 0 N/A
1995................................................. 0 0 N/A
1996................................................. 0 0 N/A
1997 (at June 30).................................... 0 0 N/A
</TABLE>
- ---------------
(1) The asset coverage ratio for a class of senior securities representing
indebtedness is calculated as Allied Lending's consolidated total assets
less all liabilities and indebtedness not represented by senior securities,
divided by senior securities representing indebtedness. This asset coverage
ratio is multiplied by $1,000 to determine the Asset Coverage Per Unit.
(2) Not applicable, as no class of senior securities of Allied Lending has been
listed for public trading.
(3) U.S. government agency-guaranteed loans sold under agreements to repurchase.
Allied Lending has been advised by the Staff of the Commission that these
reverse repurchase agreements are not considered a class of senior security
representing indebtedness and thus are not subject to the asset coverage
requirements of the 1940 Act.
(4) Prior to Allied Lending's IPO in November 1993, Allied Lending was a wholly
owned subsidiary of Allied I. For the years ended 1987 through 1992, Allied
Lending's senior securities (except for the reverse repurchase agreements
held by Allied Lending shown in the table above) are also included in the
senior securities table for Allied I above.
78
<PAGE> 93
MANAGEMENT'S DISCUSSION AND ANALYSIS
AND CONSOLIDATED FINANCIAL STATEMENTS
Management's discussion and analysis and the consolidated financial
statements for each Company is incorporated by reference from that Company's
Annual Report for the year ended December 31, 1996, and from that Company's
Forms 10-Q for the periods ended March 31 and June 30, 1997.
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Allied Capital Lending Corporation (ACC)
Pro Forma Condensed Consolidated Financial Statements
(unaudited)
The unaudited pro forma condensed consolidated financial statements are
presented as if Allied I, Allied II, Allied Commercial and Advisers merge with
and into Allied Lending to form ACC, an internally managed investment fund that
would operate as a business development company. It is intended that the Merger
would be treated as a tax-free reorganization under Section 368(a)(1)(A) of the
Code.
The unaudited pro forma condensed consolidated financial statements
presented herein are shown for illustrative purposes only and are not
necessarily indicative of future financial position or future results of
operations of Allied Lending that would have actually occurred had the
transaction been in effect as of the date or for the periods presented. In
addition, the pro forma condensed consolidated financial statements do not
reflect any changes in ACC's business that may have been made had the Companies
operated as a single entity over the periods presented.
The pro forma condensed consolidated balance sheet of Allied Lending as of
June 30, 1997 reflects the Merger as if it was consummated on June 30, 1997. The
pro forma condensed consolidated statement of operations for the year ended
December 31, 1996 and the six months ended June 30, 1997 assume that the Merger
occurred on January 1 of each period presented.
79
<PAGE> 94
ALLIED CAPITAL LENDING CORPORATION (ACC)
CONDENSED CONSOLIDATED PRO FORMA BALANCE SHEET (UNAUDITED)
AS OF JUNE 30, 1997
<TABLE>
<CAPTION>
AS REPORTED(1) COMBINATION(2) ADJUSTMENTS PRO FORMA
-------------- -------------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Investments at value:
Loans and debt securities...... $ 53,117 $607,791 $5,000(5) $ 665,908
Equity securities.............. 38,623 38,623
Loans held for sale............ 3,032 0 3,032
Other investments.............. 139 139
----------- --------- --------- ---------
Total investments......... 56,149 646,553 5,000 707,702
Cash and cash equivalents........... 2,636 46,792 (12,353)(6,10) 37,075
US government securities............ 0 29,031 29,031
Other assets........................ 8,199 25,544 (5,204)(3,4,7) 28,539
----------- --------- --------- ---------
Total assets................... $ 66,984 $747,920 $ (12,557) $ 802,347
=========== ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Revolving lines of credit........... $ 22,102 $211,677 $ 233,779
Debentures and notes payable........ 92,950 92,950
Bonds payable....................... 31,439 31,439
Investment advisory fee payable..... 411 3,331 $ (3,742)(3) 0
Other liabilities................... 2,495 19,092 (342)(4) 21,245
Redeemable preferred stock.......... 1,000 1,000
Preferred stock..................... 6,000 6,000
Common stock and additional paid-in
capital........................... 42,661 383,827 426,488
Notes receivable.................... (12,837) (12,837)
Net unrealized (depreciation)
appreciation on investments....... (73) 5,092 5,000(5) 10,019
Undistributed (distributions in
excess of) accumulated earnings... (612) 7,189 (13,473)(6,7,10) (6,896)
Treasury stock...................... (840) (840)
----------- --------- --------- ---------
Total shareholders' equity..... 41,976 388,431 (8,473) 421,934
----------- --------- --------- ---------
Total liabilities and
shareholders' equity......... $ 66,984 $747,920 $ (12,557) $ 802,347
=========== ========= ========= =========
</TABLE>
See Notes to Pro Forma Condensed Consolidated Financial Statements (Unaudited)
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ALLIED CAPITAL LENDING CORPORATION (ACC)
CONDENSED CONSOLIDATED PRO FORMA INCOME STATEMENT (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
AS REPORTED(1) COMBINATION(2) ADJUSTMENTS PRO FORMA
-------------- ----------- -------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Investment Income
Interest............................. $4,066 $36,478 $40,544
Premium.............................. 1,481 0 1,481
Advisory fees........................ 7,969 $ (7,337)(3) 632
Other................................ 4,079 4,079
------ ------- -------- -------
Total........................... 5,547 48,526 (7,337) 46,736
------ ------- -------- -------
Expenses
Interest............................. 1,125 11,206 12,331
Salary and employee benefits......... 4,206 4,206
Advisory fees........................ 858 6,479 (7,337)(3) 0
Other................................ 306 3,290 (400)(8) 3,196
------ ------- -------- -------
Total........................... 2,289 25,181 (7,737) 19,733
------ ------- -------- -------
Income before realized and unrealized
gains (losses).......................... 3,258 23,345 0 27,003
Realized gains (losses)................... (44) 4,668 4,624
Unrealized appreciation (depreciation).... (170) 1,767 1,597
------ ------- -------- -------
Income before minority interests and
taxes................................... 3,044 29,780 0 33,224
Minority interests........................ 0 588 588
------ ------- -------- -------
Income before income taxes................ 3,044 29,192 0 32,636
Income taxes.............................. 1,066 (1,066)(9)
------ ------- -------- -------
Net increase in net assets resulting from
operations.............................. $3,044 $28,126 $ (1,466) $32,636
====== ======= ======== =======
Earnings per share........................ $ 0.59 $ 0.65
====== =======
Weighted average shares outstanding....... 5,143 44,757(11) 49,900
====== ======== =======
</TABLE>
See Notes to Pro Forma Condensed Consolidated Financial Statements (Unaudited)
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<PAGE> 96
ALLIED CAPITAL LENDING CORPORATION (ACC)
CONDENSED CONSOLIDATED PRO FORMA INCOME STATEMENT (UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
AS REPORTED(1) COMBINATION(2) ADJUSTMENTS PRO FORMA
-------------- -------------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Investment Income
Interest........................ $ 7,463 $ 68,769 $76,232
Premium......................... 2,563 0 2,563
Advisory fees................... 15,827 $ (14,160)(3) 1,667
Other........................... 6,061 6,061
--------- ----------- ---------- --------
Total...................... 10,026 90,657 (14,160) 86,523
--------- ----------- ---------- --------
Expenses
Interest........................ 1,772 18,526 20,298
Salary and employee benefits.... 8,774 8,774
Advisory fees................... 1,520 12,640 (14,160)(3) 0
Other........................... 484 7,805 (800)(8) 7,489
--------- ----------- ---------- --------
Total...................... $ 3,776 $ 47,745 $ (14,960) $36,561
--------- ----------- ---------- --------
Income before realized and unrealized
gains (losses)..................... 6,250 42,912 0 49,962
Realized gains (losses).............. (186) 23,630 23,444
Unrealized appreciation
(depreciation)..................... 252 (9,925) (9,673)
--------- ----------- ---------- --------
Income before minority interests and
taxes.............................. 6,316 56,617 0 63,733
Minority interests................... 0 2,427 2,427
--------- ----------- ---------- --------
Income before income taxes........... 6,316 54,190 0 61,306
Income taxes......................... 1,945 (1,945)(9) 0
--------- ----------- ---------- --------
Net increase in net assets resulting
from operations.................... $ 6,316 $ 52,245 $ 2,745 $61,306
========= =========== ========= ========
Earnings per share................... $ 1.32 $ 1.27
========= ========
Weighted average shares
outstanding........................ 4,785 43,233(11) 48,018
========= ========= ========
</TABLE>
See Notes to Pro Forma Condensed Consolidated Financial Statements (Unaudited)
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<PAGE> 97
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) The As Reported column represents Allied Lending's historical consolidated
financial position as of June 30, 1997 and results of operations for the
six months ended June 30, 1997 and for the year ended December 31, 1996
prior to the effects of the proposed Merger.
(2) The Combination column included in the condensed consolidated balance sheet
summarizes the historical balance of assets, liabilities and shareholders'
equity of Allied I, Allied II, Allied Commercial and Advisers as of June
30, 1997 and assumes the Merger is consummated on such date.
The Combination column included in the condensed consolidated income
statement for the six months ended June 30, 1997 and for the year ended
December 31, 1996 summarizes the historical results of operations of Allied
I, Allied II, Allied Commercial, and Advisers for those periods. Earnings
reported for the six months ended June 30, 1997 of Allied I and Allied II
can be significantly impacted by the timing of recognizing realized gains
and changes in the valuation of portfolio investments; therefore, earnings
for the six months ended June 30, 1997 are not indicative of the expected
annual earnings.
(3) This adjustment reflects the elimination of the advisory fee receivable
recorded by Advisers and the advisory fee payable recorded by Allied I,
Allied II, Allied Commercial and Allied Lending at June 30, 1997
($3,742,000). It also eliminates the advisory fee expenses incurred by
Allied I, Allied II, Allied Commercial and Allied Lending as well as the
advisory fee income earned by Advisers, for the six months ended June 30,
1997 and for the year ended December 31, 1996.
(4) This adjustment reflects the elimination of accounts receivable and
accounts payable among Allied I, Allied II, Allied Commercial, Allied
Lending and Advisers as of June 30, 1997 ($342,000).
(5) Allied Commercial is a real estate investment trust. As such, generally
accepted accounting principles require Allied Commercial to record its
investment in real estate loans at their historical cost, less applicable
loan loss reserves. However, upon consummation of the Merger, ACC would be
required to adjust its investments in real estate loans to their fair
value. The carrying values of ACC's investments in real estate loans would
be required to be valued by the board of directors of ACC. For purposes of
these Condensed Consolidated Financial Statements, the interests in real
estate loans have been adjusted to reflect an estimate of fair value.
(6) Upon consummation of the Merger, ACC would be required to distribute all of
its accumulated earnings. This adjustment reflects the distribution of
accumulated earnings ($7,603,000) as of June 30, 1997.
(7) This adjustment reflects the write-off of the deferred tax asset related to
Advisers' deferred compensation plan ($1,120,000) because there is no
future benefit to ACC for financial statement purposes.
(8) This adjustment reduces stock record and auditing expenses for the six
months ended June 30, 1997 ($400,000) and for the year ended December 31,
1996 ($800,000).
(9) This adjustment reverses income tax expense recorded by Advisers for the
six months ended June 30, 1997 ($1,066,000) and for the year ended December
31, 1996 ($1,945,000). ACC would not be subject to federal and state income
taxes if certain asset diversification and income tests, pursuant to the
Code, are met.
(10) This adjustment reflects the estimated expenses incurred in connection with
the Merger transaction ($4,750,000).
(11) At the Effective Time, each share of common stock of Allied I, Allied II,
Allied Commercial and Advisers will be converted into the right to receive
shares of Allied Lending according to the following respective exchange
ratios:
(i) each share of Allied I will be converted to the right to receive
1.07 shares of Allied Lending;
(ii) each share of Allied II will be converted to the right to receive
1.40 shares of Allied Lending;
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<PAGE> 98
(iii) each share of Allied Commercial will be converted to the right
to receive 1.60 shares of Allied Lending;
(iv) each share of Advisers will be converted to the right to receive
0.31 shares of Allied Lending.
For the six months ended June 30, 1997, earnings per share calculations are
based upon the weighted average shares and share equivalents outstanding
converted using the exchange ratios described above:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE PRO FORMA WEIGHTED
SHARES AS REPORTED EXCHANGE AVERAGE SHARES AS OF
AT JUNE 30, 1997 RATIO JUNE 30, 1997
------------------ -------- --------------------
(SHARES ARE IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Allied I.................................. 7,405 X 1.07 = 7,923
Allied II................................. 7,677 X 1.40 = 10,748
Allied Commercial......................... 14,446 X 1.60 = 23,114
Advisers.................................. 9,588 X 0.31 = 2,972
Allied Lending............................ 5,143 X 1.00 = 5,143
-------
Total................................ 49,900
=======
</TABLE>
For the year ended December 31, 1996, earnings per share calculations are
based upon the weighted average shares and share equivalents outstanding
converted using the exchange ratios described above:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE PRO FORMA WEIGHTED
SHARES AS REPORTED EXCHANGE AVERAGE SHARES AS OF
AT DECEMBER 31, 1996 RATIO DECEMBER 31, 1996
-------------------- -------- --------------------
(SHARES ARE IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Allied I................................. 6,935 X 1.07 = 7,420
Allied II................................ 7,343 X 1.40 = 10,280
Allied Commercial........................ 14,048 X 1.60 = 22,477
Advisers................................. 9,858 X 0.31 = 3,056
Allied Lending........................... 4,785 X 1.00 = 4,785
-------
Total............................... 48,018
=======
</TABLE>
MANAGEMENT OF THE COMPANIES
The business of each Company is managed under the supervision of its board
of directors. With respect to each of Allied I, Allied II, Allied Commercial,
and Allied Lending the responsibilities of each board of directors include,
among other things, the oversight of the loan approval process, the quarterly
valuation of the Company's assets, and the approval of the terms of the
Company's borrowing or other leverage arrangements.
The board of directors or the stockholders of each of Allied I, Allied II,
Allied Commercial and Allied Lending and a majority of the directors who are not
parties to the applicable investment advisory agreement or interested persons of
any such party must, at least annually, approve the investment advisory
agreement with Advisers. Annually and subject to stockholder ratification, the
board of directors of each Company must select that Company's independent
accountant.
The compensation committees of the Companies' respective boards of
directors, which are comprised exclusively of noninterested directors, determine
option awards to the officers under each Company's stock option plan. The
Companies' stock option plans are discussed under "Proposal 2: The Plan
Proposal."
A discussion regarding the directors and management of each of the
Companies is provided at "The Surviving Company: ACC -- The Management of ACC."
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<PAGE> 99
DIVIDENDS AND DISTRIBUTIONS
Generally. Each of Allied I, Allied II, Allied Commercial and Allied
Lending has historically distributed substantially all of its net income and net
realized capital gains to stockholders quarterly, generally on the last business
day of March, June, September and December of each year.
Each such Company also has declared in October, November or December of any
year, for payment during the following January, an additional dividend to
distribute any net investment income and short-term capital gains (and long-term
capital gains, if any) realized by that Company during the year that had not
already been distributed through the quarterly dividends.
A dividend history for each of Allied I, Allied II, Allied Commercial and
Allied Lending is presented under "Selected Financial Data of the Companies"
above.
Distributions are taxable to stockholders as ordinary income or capital
gains; however, stockholders not subject to tax on income will not be required
to pay tax on amounts distributed to them by a Company. Stockholders receive
notification from the relevant Company at the end of the year as to the amount
and nature of the income or gains distributed to them for that year. The
distributions from a Company to a particular stockholder may be subject to the
alternative minimum tax under the provisions of the Code.
If a Company's investments do not generate sufficient income to make
distributions or dividend payments as determined by the board of directors, then
that Company may determine to liquidate a portion of its portfolio to fund the
distributions. Such payments may include a tax basis return of capital to the
stockholder, which, in turn and to that extent, would reduce a stockholder's
basis in his, her or its stock and have other tax consequences. See "-- Federal
Income Tax Issues," below, for a more detailed discussion of the taxation of
distributions to stockholders.
If the Merger is consummated, Allied Lending or ACC will comply with the
requirements of Treasury Regulation 1.852-12(b)(1) by declaring a dividend in an
amount equal to ACC's total current and accumulated earnings and profits,
including any such earnings and profits of any of the Companies to which ACC
succeeds in the Merger under the provisions of Section 381 and applicable
Treasury Regulations (but without regard to any deficits in earnings and profits
of any of the Companies).
Dividend Reinvestment Plans. Allied I has adopted a DRIP Plan pursuant to
which the transfer agent, acting as Plan Agent, reinvests all distributions in
whole and fractional shares for the account of all stockholders of record who
inform the Company or the Plan Agent of their preference to participate in this
plan before the record date of the distribution. This type of plan is sometimes
referred to as an "opt-in" plan.
Each of Allied II, Allied Commercial and Allied Lending has adopted a DRIP
Plan pursuant to which distributions to a stockholder owning shares registered
in his or her own name are automatically reinvested in additional shares of the
relevant entity by the Plan Agent, unless the stockholder elects, in writing, to
the Company, as appropriate, and such request is received prior to the
corresponding record date, to receive cash. Because shares are reinvested
automatically, such plans may be referred to as "opt-out" plans. If the Merger
is consummated, Allied Lending's current DRIP Plan will be terminated and ACC
will adopt a new "opt-out" DRIP Plan.
Stockholders may change enrollment status in a DRIP Plan at any time by
contacting either the Plan Agent or the relevant Company. A stockholder's
ability to participate in a DRIP Plan may be limited according to how the
stockholder's shares are registered. Beneficial owners holding shares in street
name may be precluded from participation by the nominee. Stockholders who wish
to participate in a DRIP Plan may need to register their shares in their own
name. Stockholders whose shares are held in the name of a nominee should inquire
with their nominee to determine whether distributions will be made in cash or in
additional shares.
Stockholders are informed of their right to elect to receive cash in a
Company's annual and quarterly reports to stockholders. All distributions to
investors who do not participate (or whose nominee elects not to participate) in
the DRIP Plan will be paid by check mailed directly, or through a nominee, to
the record holder by or under the direction of the Plan Agent.
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<PAGE> 100
When a Company declares a dividend or distribution, stockholders who are
participants in the relevant DRIP Plan will receive the dividend or
distribution, net of any applicable withholding taxes, in shares. The price used
to determine the number of shares to be received by a DRIP Plan participant will
differ depending on whether the shares to be received by DRIP Plan participants
are outstanding shares purchased in the market or are newly issued shares.
Each board of directors may declare a distribution to be paid to DRIP Plan
participants in newly issued shares. The price at which newly issued shares will
be issued will be equal to the average of the closing sales prices, as reported
in The Wall Street Journal, at which shares of the relevant entity were traded
on the last five days on which trading in the shares is reported to have taken
place on Nasdaq prior to the payment date of the dividend or distribution, but
shall not be less than 95% of the opening sales price on the payment date.
Notwithstanding a declaration by the board of directors to issue new shares
for DRIP Plan participants, the Plan Agent will buy shares in the open market,
on Nasdaq or elsewhere rather than issue new shares, for the accounts of the
DRIP Plan participants, if (i) the price at which newly issued shares are to be
credited does not exceed 110% of the relevant entity's last reported per share
net asset value or (ii) the relevant entity's directors or officers become aware
of events that indicate the possibility of a material change in per share net
asset value as a result of which the net asset value of the relevant entity
might be higher than the price at which the Plan Agent would credit newly issued
shares. The Plan Agent will reinvest all distributions as soon as practicable,
but in no event later than 30 days after the payment date of the distribution,
except to the extent necessary to comply with applicable provisions of the
federal securities laws. By the time the Plan Agent has completed its purchases,
the average per share purchase price paid by the Plan Agent, including
commissions, may exceed the price at which the newly issued shares would have
been credited or the shares' current net asset value. In that event, DRIP Plan
participants would receive fewer shares than if the dividend or distribution had
been paid in newly issued shares. If shares are purchased in the market, the
price will be the average actual cost of such shares, including any brokerage
commissions. There are no other charges payable in connection with a DRIP Plan.
The Plan Agent maintains all stockholder accounts in the DRIP Plan and
furnishes written confirmations of all transactions in the account, including
information needed by stockholders for personal and tax records. Shares in the
account of each DRIP Plan participant are held by the Plan Agent in
uncertificated form in the name of the participant, and each stockholder's proxy
would include shares purchased pursuant to the DRIP Plan. There is no charge to
participants for reinvesting dividends and capital gains distributions, except
to the extent that participants bear the cost of brokerage commissions on market
purchases.
The automatic reinvestment of distributions does not relieve participants
of any income tax which may be payable on distributions.
Each Company reserves the right to amend or terminate the relevant DRIP
Plan on at least 90 days' written notice to participants in the DRIP Plan.
Allied I, Allied II, Allied Commercial and Allied Lending each may place
limitations on participation in its DRIP Plan to assure the maintenance of BDC
status or REIT status, as applicable. Allied Commercial also may amend or
terminate its DRIP Plan without notice if necessary to preserve its status as a
real estate investment trust. Any stockholder who has questions about a DRIP
Plan may call 1-888-818-5298 and ask for Investor Relations, or may contact
American Stock Transfer & Trust Company, the Plan Agent, 40 Wall Street, 46th
Floor, New York, New York 10005, telephone (800) 937-5449.
Advisers has never paid a dividend and does not plan to pay any dividends
in the foreseeable future. Depending on future earnings and liquidity
requirements, the board of directors of Advisers may in due course declare
dividends in such amount as it may then determine. However, as discussed above,
if the Merger is consummated, Allied Lending or ACC will comply with the
requirements of Treasury Regulation 1.852-12(b)(1) by declaring a dividend in an
amount equal to ACC's total current and accumulated earnings and profits,
including any such earnings and profits of Advisers, to which ACC succeeded in
the Merger.
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<PAGE> 101
FEDERAL INCOME TAX ISSUES
The following discussion of the tax status of each Company is based on the
Code, judicial decisions, Treasury Regulations, rulings and other administrative
interpretations, all of which are subject to change.
Allied I, Allied II and Allied Lending
Each of Allied I, Allied II and Allied Lending and their respective
subsidiaries is treated for tax purposes as a "regulated investment company" or
"RIC" within the meaning of Section 851 of the Code. If each such BDC qualifies
as a RIC and distributes to its stockholders in a timely manner at least 90% of
its "investment company taxable income," as defined in the Code, each year, it
will not be subject to federal income tax on the portion of its taxable income
and gains it distributes to stockholders. In addition, if a RIC distributes in a
timely manner (or treats as "deemed distributed") 98% of its capital gain net
income for each one year period ending on December 31 (pursuant to Section
4982(e)(4)(A) of the Code), and distributes 98% of its ordinary income for each
calendar year, it will not be subject to the 4% nondeductible federal excise tax
on certain undistributed income of RICs.
In order to qualify as a RIC for federal income tax purposes, each of
Allied I, Allied II or Allied Lending must, among other things: (i) derive at
least 90% of its gross income from dividends, interest, payments with respect to
securities loans, gains from the sale of stock or other securities or other
income derived with respect to its business of investing in such stock or
securities; and (ii) diversify its holdings so that (a) at least 50% of the
value of the Company's assets consists of cash, cash items, government
securities and other securities if such other securities of any one issuer do
not represent more than 5% of the Company's assets and 10% of the outstanding
voting securities of the issuer, and (b) no more than 25% of the value of the
Company's assets are invested in securities of one issuer (other than U.S.
Government Securities), or of two or more issuers that are controlled by the
Company and are engaged in the same or similar or related trades or businesses.
Allied Commercial
Allied Commercial has elected to be treated as a REIT for tax purposes. In
general, as long as Allied Commercial qualifies as a REIT, it will not be
subject to federal income tax on income or gains that it distributes in a timely
manner to stockholders. This qualification depends on Allied Commercial
continuing to meet various requirements governing, among other things, the
ownership of its shares, the nature of its assets, sources of its income, and
the amount of its distributions to stockholders.
Advisers
Advisers is a corporation taxable on its earnings at the corporate level.
In addition, if Advisers were to make a distribution to its stockholders, such
distributions would be taxable to such stockholders as ordinary income to the
extent of Advisers earnings and profits, then as a return of capital (to the
extent of a stockholder's basis in its stock), and then as gain from the sale or
exchange of a capital asset.
Taxation of Stockholders
Distributions of Allied I, Allied II, Allied Commercial and Allied Lending
are taxable to stockholders as ordinary income or capital gains; however,
stockholders not subject to tax on income will not be required to pay tax on
amounts distributed to them by any such Company. Stockholders receive
notification from the relevant Company at the end of the year as to the amount
and nature of the income or gains distributed to them for that year. The
distributions from a Company to a particular stockholder may be subject to the
alternative minimum tax under the provisions of the Code.
Distributions of the ordinary income and net short-term capital gain of
each of Allied I, Allied II, Allied Commercial and Allied Lending, generally are
taxable to stockholders as ordinary income. Distributions of net capital gain,
if any, designated by any such Company as capital gain dividends generally will
be taxable to stockholders as long-term capital gain, regardless of the length
of time a stockholder has held the shares. All distributions are taxable,
whether invested in additional shares or received in cash. Dividends declared by
each
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<PAGE> 102
of these Companies and payable to stockholders of record in October, November or
December of a given year that are paid during the following January will be
treated as having been received by stockholders on December 31 of the year of
declaration.
Income from an investment in a Company normally will be characterized as
"portfolio," rather than "passive" income, and accordingly, a stockholder's
passive losses from a Company may not be used to offset income. Dividends of
Allied Commercial received by corporate stockholders will not qualify for the
dividend received deduction generally available to corporations. Dividends of
Allied I, Allied II, and Allied Lending, if characterized as ordinary income
dividends, will, if certain conditions are met, qualify for the dividends
received deduction generally available to corporations; capital gain dividends
are not eligible for the dividends received deduction.
In general, any gain or loss realized upon a taxable disposition of shares
of Allied I, Allied II, Allied Lending or Allied Commercial, or upon receipt of
a liquidating distribution by a stockholder who is not a dealer in securities,
will be treated as capital gain or loss. If gain is realized, it will be subject
to taxation at various tax rates depending on the length of time the taxpayer
has held such shares and other factors. The gain or loss will be short-term
capital gain or loss if the shares have been held for one year or less. If a
stockholder has received any capital gain dividends with respect to such shares,
any loss realized upon a taxable disposition of shares treated under the Code as
having been held for six months or less, to the extent of such capital gain
dividends, will be treated as a long-term capital loss. All or a portion of any
loss realized upon a taxable disposition of shares of a Company may be
disallowed if other shares of the Company are purchased (under a DRIP Plan or
otherwise) within 30 days before or after the disposition.
Each Company is required to withhold and remit to the Internal Revenue
Service (the "IRS") 31% of the dividends paid to any stockholder who (i) fails
to furnish the Company with a certified taxpayer identification number; (ii) has
underreported dividend or interest income to the IRS; or (iii) fails to certify
to the Company that he, she or it is not subject to backup withholding. In
addition, each Company may be required to withhold a portion of distributions
paid to non-U.S. stockholders who fail to certify their U.S. taxpayer
identification number or foreign status to the Company. (See also "-- The
Distribution -- Federal Income Tax Consequences of the Distribution" and
"Certain Federal Income Tax Consequences of the Merger," below.)
The above discussion is intended solely to summarize current U.S. federal
income tax provisions, and does not address state, local or foreign tax
consequences. EACH STOCKHOLDER SHOULD CONSULT HIS OR HER TAX ADVISER FOR A FULL
UNDERSTANDING OF THE TAX CONSEQUENCES OF THE MERGER TO HIM OR HER.
INDEPENDENT ACCOUNTANT
For the year ended December 31, 1997, the independent public accountants
engaged to audit the consolidated financial statements of each of Allied I,
Allied II, and Allied Lending is the firm of Matthews, Carter and Boyce, P.C.,
which has been each such Company's independent accountant since its inception.
For the year ending December 31, 1997, the independent public accountant engaged
to audit Allied Commercial's and Advisers' consolidated financial statements is
the firm of Arthur Andersen LLP. The selection of the independent accountant by
each Company's directors is subject to annual ratification by stockholders at
that Company's annual meeting. Each Company's directors' selection of that
Company's independent accountant for the year ending December 31, 1997 was
ratified by a majority of that Company's stockholders at the Company's 1997
annual meeting of stockholders.
It is anticipated that if the Merger is consummated, Matthews, Carter and
Boyce, P.C. would resign as independent accountants to Allied Lending. In the
event Matthews, Carter and Boyce, P.C. so resigns, the board of directors of
Allied Lending would accept such resignation, and would select the firm of
Arthur Andersen LLP as the independent accountant to ACC for the year ending
December 31, 1997, and Arthur Andersen LLP will serve as independent accountant
for ACC until its next annual meeting of stockholders. It is expected that the
board would select Arthur Andersen LLP based on the board's determination that
due to the expected magnitude and complexity of ACC, a nationally recognized
accounting firm should be selected to serve as the accountant to ACC.
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During the past two years, none of the accountants' reports on the
financial statements for Allied I, Allied II and Allied Lending contained an
adverse opinion or a disclaimer of opinion, or was qualified or modified as to
uncertainty, audit scope or accounting principles. During the past two years,
Allied I, Allied II and Allied Lending have had no disagreements with Matthews
Carter and Boyce, P.C. on any matter of accounting principles or processes,
financial statement disclosure or auditing scope or procedure.
The board of directors of Allied Lending would select Arthur Andersen LLP
as independent public accountants for ACC for the year ending December 31, 1997
(subject to the consummation of the Merger in the case of Allied I, Allied II
and Allied Lending); Arthur Andersen LLP will also be the independent public
accountants for all subsidiaries of ACC.
Arthur Andersen LLP has no financial interest in any of the Companies.
It is not expected that a representative of Arthur Andersen LLP will be
present or available to answer questions at the Special Meeting, but a
representative would have an opportunity to make a statement if in attendance.
A vote in favor of the Merger Proposal constitutes the acceptance,
approval, and ratification of the selection of Arthur Andersen LLP as the
independent public accountant for ACC for the year ending December 31, 1997. It
is expected that stockholders will be asked at the next annual meeting of ACC to
re-approve the selection of Arthur Andersen LLP as the independent public
accountant for ACC for 1998.
SAFEKEEPING, TRANSFER AND DIVIDEND PAYING AGENT AND REGISTRAR
Each of Allied I's, Allied II's, Allied Lending's and Allied Commercial's
investments, as well as those of its subsidiaries, are held in safekeeping by
Riggs Bank, N.A. at 808 17th Street, N.W., Washington, D.C. 20006. LaSalle
National Bank, located at 25 Northwest Point Boulevard, Suite 800, Elk Grove
Village, Illinois 60007, serves as trustee with respect to assets of Allied
Commercial held for securitization purposes. American Stock Transfer & Trust
Company, 40 Wall Street, 46th Floor, New York, New York 10005 acts as each
Company's transfer, dividend paying and reinvestment plan agent and registrar.
THE DISTRIBUTION
BACKGROUND AND REASONS FOR THE DISTRIBUTION
Generally. In connection with the Merger, Allied I has agreed to declare
and pay to its stockholders a special dividend consisting of all of the shares
of common stock of Allied Lending owned by Allied I, payable immediately prior
to the Effective Time, and in lieu of its 1997 regular fourth quarter and annual
extra dividend (as defined above, the "Distribution"). Allied I may distribute
some or all of the shares of common stock of Allied Lending in a dividend to its
stockholders at any time, even if the Merger is not effected. Furthermore, if
the Merger Agreement is terminated for any reason, Allied I would no longer be
obligated to distribute all of the shares of common stock of Allied Lending
owned by Allied I, except to the extent required by an existing order of the
Commission as described in the following paragraph.
The Distribution would serve two purposes. First, it would satisfy a
condition in the 1993 Order that Allied I divest itself of all its remaining
shares of Allied Lending by December 31, 1998. The 1993 Order and the condition
of divestment are described below. Second, it would serve to facilitate the
Merger by precluding the applicability to the Merger of a Maryland anti-takeover
statute. Maryland anti-takeover law places significant restrictions on "business
combinations" between a corporation and an interested stockholder. These
restrictions are described below under the caption "Special Statutory
Requirements for Certain Transactions -- Business Combination Statute."
As of June 30, 1997, Allied I owned 844,914 shares, or approximately 16% of
the outstanding shares of Allied Lending.
The 1993 Order. As described above under the caption "-- The Merging
Companies -- Allied Lending," Allied Lending was a wholly owned subsidiary of
Allied I until its initial public offering on
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<PAGE> 104
November 23, 1993. The initial public offering of Allied Lending common stock
was based, in part, on the 1993 Order which contained a condition that Allied I
divest itself of all its remaining shares of Allied Lending by December 31,
1998.
Shares to be Received. If the Distribution were effected, it is
anticipated that for each share of common stock owned, an Allied I stockholder
would receive shares of Allied Lending computed based on the following formula:
844,914 shares, divided by the number of total shares outstanding of Allied I at
the time of the Distribution.
MANNER OF EFFECTING THE DISTRIBUTION
In the Merger Agreement, Allied I has agreed, subject to the requirements
of Maryland law applicable to dividends, to make the Distribution. If the Merger
is approved by the stockholders of the Companies, the Allied I board of
directors will declare a special dividend consisting of a certain number of
shares of Allied Lending common stock to be payable on a certain date (the
"Distribution Date") to Allied I's stockholders of record as of a prior date
(the "Distribution Record Date"). The ratio of the number of shares of Allied
Lending common stock to be distributed for each share of Allied I common stock
owned on the Distribution Record Date will be based on the number of shares of
Allied I common stock outstanding on the Distribution Record Date and the number
of shares of Allied Lending common stock to be distributed.
If the Merger Proposal is approved by the stockholders of each Company,
Allied I intends to set a Distribution Record Date and a Distribution Date, and
intends to distribute all of its shares of Allied Lending common stock in the
Distribution. The Distribution Record Date will be set on a date that occurs
subsequent to the date on which stockholders of each Company approve the Merger.
Allied I currently anticipates that the Distribution Record Date will be two
business days prior to the Distribution Date, and that the Distribution Date
will occur on a date immediately prior to the Effective Time. If the Merger
Proposal is not approved or if the Merger is not, for any reason, effected,
Allied I may nevertheless distribute some or all of the shares of Allied Lending
common stock at any time prior to December 31, 1998.
No holder of Allied I common stock will be required to pay any cash or
other consideration for the shares of Allied Lending common stock received in
the Distribution.
Stockholders of Allied I with inquiries relating to the Distribution prior
to the Distribution Date should contact Allied I, c/o Allied Capital Advisers,
Inc., 1666 K Street, N.W., Washington, D.C. 20006, Attention: Investor
Relations, or by calling (888) 818-5298.
FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION
Allied I intends to treat each holder of Allied I common stock who receives
Allied Lending common stock as having received a distribution in an amount equal
to the fair market value of such Allied Lending common stock on the Distribution
Date. The Company intends to treat this distribution as a dividend (to the
extent of its current and accumulated earnings and profits). Furthermore, if
properly treated as a distribution, the tax basis of Allied Lending common stock
received in the Distribution would equal its fair market value on the
Distribution Date, the holding period of such stock would begin with and include
the day after the Distribution Date, and Allied I would recognize a taxable gain
on the Distribution. (See "-- The Merging Companies -- Federal Income Tax
Issues," and "Certain Federal Income Tax Consequences of the Merger," for a
discussion of other tax consequences.)
The foregoing summary of the anticipated principal federal income tax
consequences of the Distribution under current law is for general information
only and does not purport to cover all federal income tax consequences
(including those that may apply to particular categories of stockholders) or any
tax consequences that may arise under the tax laws of other jurisdictions.
Allied I has not requested any rulings or opinions with respect to the tax
consequences of the Distribution under the federal tax laws or the laws of any
state, local or foreign government. Each holder (including each corporate
holder) of Allied I's common stock should consult his or her tax adviser as to
the particular tax consequences of the Distribution, including
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<PAGE> 105
application of federal, state, local and foreign tax laws, and the effect of
possible changes in tax laws that may affect the tax consequences described
above.
FRAUDULENT TRANSFER CONSIDERATION; LEGAL DIVIDEND REQUIREMENTS
If a court in a lawsuit by an unpaid creditor or representative of
creditors, such as a trustee in bankruptcy, were to find that, at the time
Allied I effected the Distribution, Allied I (i) was insolvent, (ii) was
rendered insolvent by reason of the Distribution, (iii) was engaged in a
business or transaction for which Allied I's remaining assets, as the case may
be, constituted unreasonably small capital, or (iv) intended to incur, or
believed it would incur, debts beyond its ability to pay as such debts matured,
such court may be asked to void the Distribution (in whole or in part) as a
fraudulent conveyance and require that the stockholders return the Distribution
(in whole or in part) to Allied I, or require Allied I (or ACC as the successor
to Allied I after the Merger), to fund certain liabilities of the other
corporation for the benefit of creditors. The measure of insolvency for purposes
of the foregoing will vary depending upon the jurisdiction whose law is being
applied. Generally, however, Allied I would be considered insolvent if the fair
value of its assets was less than the amount of its liabilities or if it
incurred debt beyond its ability to repay such debt as it matures. In addition,
under the Maryland Law (which is applicable to Allied I in the Distribution), a
Maryland corporation generally may not make a distribution to its stockholders
if such distribution were to render it insolvent in a sense that is
substantially similar to the foregoing.
Allied I's board of directors and management believe that Allied I will be
solvent at the time of the Distribution (in accordance with the foregoing
definitions), will be able to repay its debts as they mature following the
Distribution and will have sufficient capital to carry on its businesses.
DESCRIPTION OF COMMON STOCK OF EACH COMPANY
ALLIED I COMMON STOCK
The authorized capital stock of Allied I is ten million (10,000,000) shares
of common stock, par value one dollar ($1.00) per share. As of September 23,
1997, there were 7,716,062 shares of common stock of Allied I outstanding. All
shares of common stock have equal rights as to earnings, assets, dividends, and
voting privileges and all outstanding shares of common stock are fully paid and
nonassessable. The shares of common stock have no preemptive, conversion, or
redemption rights and are freely transferable. In the event of liquidation, each
share of common stock is entitled to its proportion of Allied I's assets after
debts and expenses. Each share is entitled to one vote and does not have
cumulative voting rights, which means that holders of a majority of the shares,
if they so choose, could elect all of the directors, and holders of less than a
majority of the shares would, in that case, be unable to elect any director.
ALLIED II COMMON STOCK
The authorized capital stock of Allied II is twenty million (20,000,000)
shares of common stock, par value one dollar ($1.00) per share. As of September
23, 1997, there were 7,869,178 shares of common stock of Allied II outstanding.
All shares of common stock have equal rights as to earnings, assets, dividends,
and voting privileges and all outstanding shares of common stock are fully paid
and nonassessable. The shares of common stock have no preemptive, conversion, or
redemption rights and are freely transferable. In the event of liquidation, each
share of common stock is entitled to its proportion of Allied II's assets after
debts and expenses. Each share is entitled to one vote and does not have
cumulative voting rights, which means that holders of a majority of the shares,
if they so choose, could elect all of the directors, and holders of less than a
majority of the shares would, in that case, be unable to elect any director.
ALLIED COMMERCIAL COMMON STOCK
The authorized capital stock of Allied Commercial is fifty million
(50,000,000) shares of common stock, par value one-tenth of One Mil ($0.0001)
per share, and 5,000,000 shares of preferred stock, par value one-tenth of One
Mil ($0.0001) per share. As of September 23, 1997, there were 14,639,877 shares
of common
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<PAGE> 106
stock outstanding, and no shares of preferred stock of Allied Commercial
outstanding. All shares of common stock have equal rights as to earnings,
assets, dividends, and voting privileges and all outstanding shares of common
stock are fully paid and nonassessable. The shares of common stock have no
preemptive, conversion, or redemption rights and are freely transferable. In the
event of liquidation, each share of common stock is entitled to its proportion
of Allied Commercial's assets after debts and expenses. The board of directors
of Allied Commercial has set no special rights or preferences with respect to
the authorized preferred stock. Each share is entitled to one vote and does not
have cumulative voting rights, which means that holders of a majority of the
shares, if they so choose, could elect all of the directors, and holders of less
than a majority of the shares would, in that case, be unable to elect any
director.
No sale, transfer, assignment, pledge or other disposition, whether
voluntary or involuntary, of shares of capital stock of Allied Commercial may be
made except by registration of the transfer on Allied Commercial's books. The
board of directors of Allied Commercial may refuse a transfer if the proposed
transfer would, in the good faith judgment of the board, jeopardize Allied
Commercial's ability to qualify as a REIT by causing it to fail to meet
requirements under the Code regarding the number of holders of shares and
concentration of share ownership, as described above under "Federal Income Tax
Issues -- Allied Commercial." Allied Commercial's charter authorizes Allied
Commercial to redeem shares of particular stockholders, in accordance with the
provisions set forth in the Articles, to the extent necessary in the directors'
judgment to permit Allied Commercial to obtain, maintain or re-establish its
REIT status. Any stockholder may be required by Allied Commercial to execute
such instruments or certifications as are reasonably required by Allied
Commercial. Any transfer that causes Allied Commercial to be disqualified as a
REIT will be invalid ab initio and the transferee will be deemed never to have
had an interest in the shares transferred.
ALLIED LENDING COMMON STOCK
The authorized capital stock of Allied Lending is twenty million
(20,000,000) shares of common stock, par value one-tenth of One Mil ($0.0001)
per share. As of September 23, 1997, there were 5,188,780 shares of common stock
of Allied Lending outstanding. All shares of common stock have equal rights as
to earnings, assets, dividends, and voting privileges and all outstanding shares
of common stock are fully paid and nonassessable. The shares of common stock
have no preemptive, conversion, or redemption rights and are freely
transferable. In the event of liquidation, each share of common stock is
entitled to its proportion of Allied Lending's assets after debts and expenses.
Each share is entitled to one vote and does not have cumulative voting rights,
which means that holders of a majority of the shares, if they so choose, could
elect all of the directors, and holders of less than a majority of the shares
would, in that case, be unable to elect any director.
Allied I owned approximately 16.5% of Allied Lending's outstanding shares
of common stock at June 30, 1997. Pursuant to the 1993 Order, on matters
requiring a vote of Allied Lending's stockholders, Allied I has agreed to vote
its shares only in the same proportion as the shares voted by Allied Lending's
stockholders. If the Merger is approved by the stockholders of each Company,
Allied I intends to distribute to its stockholders the shares it owns in Allied
Lending prior to consummation of the Merger. (See "-- The Distribution," above.)
The board of directors may classify and reclassify any unissued shares of
capital stock of Allied Lending by setting or changing in one or more respects
the preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications, terms or conditions of redemption
or other rights of such shares of capital stock.
If the Merger is consummated, the number of authorized shares of common
stock of Allied Lending will be increased from 20,000,000 to 100,000,000 shares.
(See "-- The Surviving Company: ACC -- Amendments to Charter -- Increase in
Authorized Capital.")
ADVISERS COMMON STOCK
The authorized capital stock of Advisers is twenty million (20,000,000)
shares of common stock, par value One Mil ($0.001) per share. As of September
23, 1997, there were 9,611,864 shares of common stock of
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<PAGE> 107
Advisers outstanding. All shares of common stock have equal rights as to
earnings, assets, dividends, and voting privileges and all outstanding shares of
common stock are fully paid and nonassessable. The shares of common stock have
no preemptive, conversion, or redemption rights and are freely transferable. In
the event of liquidation, each share of common stock is entitled to its
proportion of Advisers' assets after debts and expenses. Each share is entitled
to one vote and does not have cumulative voting rights, which means that holders
of a majority of the shares, if they so choose, could elect all of the
directors, and holders of less than a majority of the shares would, in that
case, be unable to elect any director.
The board of directors may classify and reclassify any unissued shares of
capital stock of Advisers by setting or changing in one or more respects the
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications, terms or conditions of redemption
or other rights of such shares of capital stock.
COMPARISON OF RIGHTS OF STOCKHOLDERS
If the Merger is consummated, stockholders of each Company will become
holders of ACC common stock (a description of each Company's common stock is set
forth above). All of the Companies were incorporated in, and are duly existing
under the laws of, the State of Maryland and therefore there will be no changes
in the applicable state laws governing the rights of stockholders of ACC
following the Merger. However, there will be differences between the charter (as
amended, the "Charter") and bylaws of ACC and the charter and bylaws of each
Company, which also govern the rights of that Company's stockholders. The
principal differences between the charter and bylaws of each Company and the
Charter and bylaws of ACC are described below.
CHARTER
Allied Lending's charter, as amended, as described herein, which will
become the Charter of ACC if the Merger is effected, provides that the board of
directors may classify and reclassify any unissued shares of capital stock by
setting, in any one or more respects, the preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends,
qualifications, terms or conditions of redemption or other rights of such shares
of stock. The respective Articles of Allied I, Allied II and Allied Commercial
contain no such provision. Stockholders of Allied I, Allied II and Allied
Commercial should be aware that this provision permits the board of directors of
ACC, without stockholder approval, to issue ACC preferred stock with voting,
conversion or other rights in a manner intended to have an anti-takeover effect.
As discussed above in "The Surviving Company: ACC -- Amendment to Charter,"
ACC will have the authority to issue a larger number of shares of stock than are
currently authorized for each of the Companies individually, and therefore ACC
would have an expanded capability to reclassify authorized but unissued stock
into one or more classes of stock, including preferred stock, which may have
attributes that could have anti-takeover effects. In addition, see "-- The
Surviving Company: ACC -- Amendment to Indemnification Provisions" for a
discussion of proposed amendments to the indemnification provisions contained in
Allied Lending's charter.
BYLAWS
The bylaws of each Company provide that the directors of that Company are
elected annually to hold office until their successors are elected and
qualified. Accordingly, all directors of a Company are elected annually, at the
same time. In contrast, the bylaws of ACC would provide that the directors of
ACC are classified into three approximately equal classes, with each class being
elected for a three-year term. The terms will be staggered, meaning that each
year a different class of directors is to be elected. The difference in the
bylaws of each Company and the bylaws of ACC would have two effects. First,
under the bylaws of each Company, stockholders may remove a director by a
majority vote with or without cause. After October 1, 1997, under the Maryland
law, a director serving on a classified (i.e., staggered) board may be removed
by a majority vote of stockholders only with cause, unless the charter provides
otherwise. ACC's Charter will not
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<PAGE> 108
provide otherwise. Second, the staggered board provision may be deemed to have
an anti-takeover effect. (See "-- The Surviving Company: ACC -- Staggered Board
Elections.")
MARKET PRICES AND DIVIDEND DATA
The following tables set forth the high and low bid prices of each
Company's common stock by calendar quarter during the first six months of 1997
and for 1996 and 1995 and the distributions paid per share. These quotations
represent interdealer quotations and do not include markups, markdowns or
commissions and may not necessarily represent actual transactions. Shares of
each Company's common stock are traded on Nasdaq, under the trading symbols ALLC
(Allied I), ALII (Allied II), ALCL (Allied Lending), ALCC (Allied Commercial)
and ALLA (Advisers). Shares of ACC would be traded on Nasdaq under the trading
symbol "ALLC".
Stockholders are advised to obtain current market quotations for each of
the Companies' common stock. No assurance can be given as to the market price of
ACC at or after the Effective Time. It is expected that the market price of the
Companies will fluctuate between the date of this Joint Proxy
Statement/Prospectus and the date the Merger is consummated.
ALLIED I
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------- --------------------------------- ---------------------------------
DISTRIBUTIONS DISTRIBUTIONS DISTRIBUTIONS
HIGH LOW PER SHARE HIGH LOW PER SHARE HIGH LOW PER SHARE
------ ------ ------------- ------ ------ ------------- ------ ------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
First Quarter...... $16.25 $15.13 $0.33 $14.25 $13.00 $0.26 $13.50 $11.50 $0.20
Second Quarter..... $16.25 $15.13 $0.34 $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..... $0.67 $1.51 $1.44
===== ===== =====
</TABLE>
ALLIED II
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------- --------------------------------- ---------------------------------
DISTRIBUTIONS DISTRIBUTIONS DISTRIBUTIONS
HIGH LOW PER SHARE HIGH LOW PER SHARE HIGH LOW PER SHARE
------ ------ ------------- ------ ------ ------------- ------ ------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
First Quarter...... $21.50 $19.50 $0.43 $18.50 $16.25 $0.33 $14.75 $13.75 $0.25
Second Quarter..... $21.75 $18.00 $0.45 $18.50 $15.50 $0.35 $16.25 $14.00 $0.27
Third Quarter...... -- -- $ -- $20.25 $17.25 $0.38 $16.25 $15.00 $0.29
Fourth Quarter..... -- -- $ -- $21.88 $18.75 $0.41 $19.00 $15.75 $0.31
Annual Extra
Distribution..... $ -- $0.45 $0.48
----- ----- -----
Total
Distribution..... $0.88 $1.92 $1.60
===== ===== =====
</TABLE>
ALLIED COMMERCIAL
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------- --------------------------------- ---------------------------------
DISTRIBUTIONS DISTRIBUTIONS DISTRIBUTIONS
HIGH LOW PER SHARE HIGH LOW PER SHARE HIGH LOW PER SHARE
------ ------ ------------- ------ ------ ------------- ------ ------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
First Quarter...... $25.63 $22.50 $0.51 $20.00 $18.25 $0.44 $16.88 $14.75 $0.38
Second Quarter..... $25.00 $22.75 $0.52 $20.25 $18.63 $0.46 $17.75 $15.34 $0.40
Third Quarter...... -- -- $ -- $23.50 $19.63 $0.48 $19.13 $17.13 $0.41
Fourth Quarter..... -- -- $ -- $24.25 $21.50 $0.50 $19.88 $17.38 $0.42
Annual Extra
Distribution..... $ -- $0.10 $0.17
----- ----- -----
Total
Distribution..... $1.03 $1.98 $1.78
===== ===== =====
</TABLE>
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<PAGE> 109
ALLIED LENDING
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------- --------------------------------- ---------------------------------
DISTRIBUTIONS DISTRIBUTIONS DISTRIBUTIONS
HIGH LOW PER SHARE HIGH LOW PER SHARE HIGH LOW PER SHARE
------ ------ ------------- ------ ------ ------------- ------ ------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
First Quarter...... $17.00 $14.88 $0.32 $15.00 $12.75 $0.30 $12.75 $ 9.50 $ 0.27
Second Quarter..... $16.63 $13.88 $0.32 $15.00 $12.70 $0.30 $13.25 $12.00 $0.2825
Third Quarter...... -- -- $ -- $15.38 $13.13 $0.30 $13.00 $12.00 $ 0.29
Fourth Quarter..... -- -- $ -- $15.88 $14.00 $0.32 $13.25 $12.00 $ 0.30
Annual Extra
Distribution..... $ -- $0.08 $0.0775
----- ----- -------
Total
Distribution..... $0.64 $1.30 $ 1.22
===== ===== =======
</TABLE>
ADVISERS
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- --------------
HIGH LOW HIGH LOW HIGH LOW
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
First Quarter........................................................ $6.13 $5.00 $7.00 $5.06 $4.00 $3.25
Second Quarter....................................................... $5.38 $4.50 $7.75 $6.50 $5.00 $3.63
Third Quarter........................................................ -- -- $7.50 $6.88 $5.38 $4.63
Fourth Quarter....................................................... -- -- $7.00 $5.50 $5.38 $5.00
</TABLE>
INTERESTS OF CERTAIN PERSONS IN THE MERGER
OUTSTANDING OPTIONS AWARDS
Cut-off Award. As discussed below, if the Merger is approved, each
Company's existing stock option plan would be canceled, and certain of its
officers would be eligible to participate in ACC's stock option plan upon
consummation of the Merger. In the event the Merger is effected, Advisers would
declare two formula bonus awards to compensate officers for the effect of the
termination of the existing stock option plans, and to balance stock option
awards among Advisers' employees to account for the deviations caused by the
existence of five plans supported by five different publicly traded stocks. The
first award would be used to establish a cut-off dollar amount for all existing,
but unvested options as of the date of the Merger ("the Cut-off Award"). The
Cut-off Award would be payable contingent upon the Merger and the termination of
all existing stock option plans. The Cut-off Award would be computed for each
unvested option as of the Merger date. The Cut-off Award would be equal to the
difference between the market price at the date of the announcement of the
Merger of the share of stock underlying the option less the exercise price of
the option. The Cut-off Award would be payable for each unvested option upon the
future vesting date of that option. The Cut-off Award was designed to cap the
appreciated value in unvested options at the Merger announcement date, in order
to set the foundation to balance option awards upon the Merger. The Cut-Off
Award that will be paid to certain officers will be approximately $2.9 million
in the aggregate.
Formula Award. The second award (the "Formula Award") would be used to
compensate employees from the point when their unvested options would cease to
appreciate in value (the Merger announcement date), up until the time in which
they would be able to receive option awards in ACC (after the Merger becomes
effective). The Formula Award would also be contingent upon the consummation of
the Merger and the termination of the five existing stock option plans. In the
aggregate, the Formula Award would be equal to six percent (6%) of the
difference between an amount equal to the combined aggregate market
capitalizations of the Companies as of the close of the market on the day before
the Merger date less an amount equal to the combined aggregate market
capitalizations of the Companies as of the close of the market on the date of
the announcement of the Merger. The compensation committee of Advisers' board of
directors would allocate the Formula Award to individual officers. The Formula
Award for each officer would vest over a three-year period, on the anniversary
of the Merger date. The Formula Award would be contributed to ACC's deferred
compensation plan, and would be used to purchase shares of ACC in the open
market.
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<PAGE> 110
EMPLOYMENT AGREEMENTS.
On July 14, 1997, Advisers entered into substantially similar employment
agreements with certain executive officers of Advisers (including William L.
Walton, John M. Scheurer, Joan M. Sweeney, G. Cabell Williams III and 6 other
officers). The employment agreements will terminate either upon the consummation
of the Merger or, if the Merger is not consummated, on June 30, 1998. The
employment agreements provide that if the employee is terminated by Advisers,
the employee will receive severance pay equal to nine months of the employee's
then-current salary, and certain other benefits related to health insurance for
six months following separation. Pursuant to the employment agreements, if the
employee terminates his or her employment, the employee would be prohibited from
providing financial or investment advice or portfolio management services for
any entity then managed by Advisers. There is no cash payment or other benefit
payable under the employment agreements that is contingent upon the consummation
of the Merger.
OWNERSHIP OF SHARES OF THE COMPANIES
David P. Parker, an attorney with Dickstein, which served as independent
legal counsel to Allied Commercial, in connection with the Merger, owned 7,405
of shares of Allied I, 1,871 shares of Allied Commercial, 894 shares of Allied
Lending, and 199,054 shares of Advisers as of September 23, 1997. Dickstein has
advised the Companies that other Dickstein attorneys may be the beneficial
owners of a Company's and/or Companies' common stock having values,
individually, of less than $50,000.
96
<PAGE> 111
BENEFICIAL OWNERSHIP OF COMMON STOCK
The following table sets forth, with respect to each Company and ACC, as of
September 23, 1997 on a pro forma basis: (i) the number of outstanding shares of
common stock beneficially owned by each stockholder who owns beneficially more
than 5% of the outstanding common stock of such Company and the percentage of
the total number of outstanding shares of common stock of such Company
represented by such number; and (ii) the number of outstanding shares of common
stock beneficially owned, directly or indirectly, by all directors and officers
of each Company as a group and the percentage of the total number of outstanding
shares of common stock of such Company represented by such number.
<TABLE>
<CAPTION>
ALLIED ACC
ALLIED I ALLIED II COMMERCIAL ALLIED LENDING ADVISERS (PRO FORMA)
----------------- --------------- --------------- --------------- ----------------- -----------------
# OF % OF # OF % OF # OF % OF # OF % OF # OF % OF # OF % OF
SHARES CLASS SHARES CLASS SHARES CLASS SHARES CLASS SHARES CLASS SHARES CLASS
--------- ----- ------- ----- ------- ----- ------- ----- --------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Allied I (1).... N/A N/A 0 0 0 0 844,914 16.4% 0 0 * *
Allied Employee
Stock
Ownership Plan
(2)........... 0 0 0 0 * * * * 1,263,136 13.1% * *
1666 K Street,
N.W., 9th
Floor
Washington,
D.C. 20006
Fenimore Asset
Management,
Inc........... * * 0 0 0 0 0 0 503,300 5.2% * *
118 North
Grand Street,
P.O. Box 310
Cobleskill, NY
12043
Goldman Sachs
Asset
Management.... * * * * * * * * 977,668 10.2% * *
One New York
Plaza
New York, NY
10004
William L.
Walton(3)..... * * * * * * * * 1,334,281 13.9% * *
G. Cabell
Williams
III(3)........ * * * * * * * * 1,596,222 16.6% * *
David
Gladstone(5)... * * * * * * * * 1,044,899 10.3% * *
All directors
and officers
as a group (3)
(4) and (6)... 1,014,253 12.9% 537,659 6.7% 644,519 4.4% 273,104 5.1% 2,307,784 23.2% 3,934,843 7.6%
</TABLE>
- ---------------
* Less than 5%
(1) Allied I's ownership of shares of Allied Lending Common stock is the subject
of the Distribution. See "-- The Distribution."
(2) The ESOP is a qualified retirement plan. Each participant may direct the
ESOP trustees as to the voting of shares allocated to the participant's
account under the ESOP. William L. Walton and G. Cabell Williams III are
co-trustees of the ESOP and may be deemed to share voting and investment
power over shares allocated to the participant accounts under the ESOP.
Messrs. Walton and Williams III disclaim beneficial ownership of such
shares.
(3) Included in the shares listed are 1,263,136 shares held by the ESOP of which
Messrs. Walton and Williams III are co-trustees. Messrs. Walton and Williams
III disclaim beneficial ownership of such shares. Share ownership also
includes 14,000 shares which Mr. Williams III has options to purchase that
are exercisable within 60 days of September 23, 1997. Mr. Williams III has
176,056 shares that have been allocated to his account in the ESOP as of
June 30, 1997.
(4) Includes underlying stock options that are exercisable within 60 days of
September 23, 1997 which are assumed to be outstanding for the purpose of
calculating the group's percentage ownership; the stock options meeting this
criteria for Allied I, Allied II, Allied Commercial, Allied Lending and
Advisers are, 131,246; 115,017; 114,891; 211,600; and 327,790, respectively.
Included in share ownership for Advisers is 1,263,136 shares allocated to
participant accounts in the ESOP at June 30, 1997.
(5) Former Chairman and Chief Executive Officer of the Companies. With respect
to certain matters, the co-trustees of the ESOP will direct the voting of
the 443,427 shares of Advisers held in Mr. Gladstone's ESOP account. This
provision remains in effect until the earlier of Mr. Gladstone's sale of the
shares or March 1999.
(6) Total number of officers and directors as a group for Allied I, Allied II,
Allied Commercial, Allied Lending, Advisers and ACC are 28, 28, 33, 24, 43
and 63, respectively.
97
<PAGE> 112
FEES AND EXPENSES
<TABLE>
<CAPTION>
ALLIED ALLIED
ALLIED I ALLIED II LENDING COMMERCIAL ADVISERS(7) ACC
-------- --------- ------- ---------- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Stockholder Transaction Expenses
Sales Load (as a percentage of
offering price).................... none none none none none none
Dividend Reinvestment Plan Fees(1).... none none none none none none
Annual Expenses (as a percentage of
consolidated net assets attributable to
common shares(2))
Investment Advisory Fees(3)........... 6.21% 2.52% 4.00% 4.20% 0.00% 0.00%
Interest Payments on Borrowed
Funds(4)........................... 12.35% 0.00% 4.92% 8.59% 0.00% 6.36%
Other Expenses(5)..................... 2.01% 0.65% 1.67% 0.71% 101.33% 4.00%
------ ----- ------ ----- ------ -----
Total Annual Expenses(6)......... 20.57% 3.17% 10.59% 13.49% 101.33% 10.36%
===== ===== ====== ===== ====== =====
</TABLE>
- ---------------
(1) The expenses of each Company's Dividend Reinvestment Plan are included in
the respective Company's stock record expenses, a component of "Other
Expenses." None of the Companies has a cash purchase plan. Advisers does not
have a Dividend Reinvestment Plan.
(2) "Consolidated net assets attributable to common shares" equals net assets
(i.e., total assets less total liabilities) as of June 30, 1997.
(3) Pursuant to Commission requirements, "Investment Advisory Fees" in this
table are presented as a percentage of consolidated net assets attributable
to common shares; however, each Company's investment advisory fees are
determined using a formula based on total assets. The fees payable pursuant
to the respective investment advisory agreements (See "-- The Merging
Companies -- Assets under Management") for Allied I, Allied II and Allied
Lending are calculated as 0.625% per quarter (2.5% per annum) of the
quarter-end value of each Company's consolidated total assets, less
consolidated Interim Investments (i.e., short-term U.S. government agency
securities or repurchase agreements collateralized thereby), cash and cash
equivalents, and the value of the shares of Allied Lending owned by Allied
I, plus 0.125% per quarter (0.5% per annum) of the quarter-end value of
consolidated Interim Investments, cash and cash equivalents. With respect to
Allied Commercial, the fees payable are calculated as determined by the type
of asset from 0.125% to 0.75% per quarter (0.5% to 3% per annum) of the
Company's consolidated total assets, less its consolidated Interim
Investments, cash and cash equivalents, plus 0.125% per quarter (0.5% per
annum) of consolidated Interim Investments, cash and cash equivalents. Fees
are paid to Advisers, and therefore, Advisers has no investment advisory fee
expense. The investment advisory fee percentage in the table assumes that
none of the respective Company's consolidated total assets are in the form
of Interim Investments, cash or cash equivalents. The "Investment Advisory
Fees" percentage for Allied I, Allied II and Allied Lending was calculated
based on consolidated total assets at June 30, 1997, less the investment in
Allied Lending at June 30, 1997 for Allied I, multiplied by 2.5%, divided by
consolidated net assets attributable to common shares. The "Investment
Advisory Fees" percentage for Allied Commercial was calculated as
consolidated total assets at June 30, 1997, multiplied by the investment
advisory fee percentage ranging from 0.5% to 3%, divided by consolidated net
assets attributable to common shares. At June 30, 1997, approximately 24%,
28%, 4% and 0% of Allied I's, Allied II's, Allied Lending's and Allied
Commercial's consolidated total assets, respectively, were in the form of
Interim Investments, cash and cash equivalents.
(4) The "Interest Payments on Borrowed Funds" percentage is based on estimated
interest payments for the year ended December 31, 1997 divided by
consolidated net assets attributable to common shares. The estimated
interest payments for the year ended December 31, 1997 assume that the
outstanding borrowings of $95 million, $0, $22 million and $241 million for
Allied I, Allied II, Allied Lending and Allied Commercial, at June 30, 1997,
respectively, will remain outstanding for the full year and additional
borrowings will be made throughout the remainder of the year as needed. See
"Risk Factors -- Risks of Leverage."
98
<PAGE> 113
(5) The "Other Expenses" percentage is based on estimated amounts for the year
ending December 31, 1997 divided by consolidated net assets attributable to
common shares.
(6) "Total Annual Expenses" as a percentage of consolidated net assets
attributable to common shares for Allied I, Allied Lending and Allied
Commercial are higher than the total annual expenses percentage would be for
a company that is not leveraged. Allied I, Allied Lending and Allied
Commercial borrow money to leverage their net assets and increase their
total assets. The "Total Annual Expenses" percentage is required by the
Commission, to be calculated as a percentage of net assets, rather than the
total assets, including assets that have been funded with borrowed monies.
If the "Total Annual Expenses" percentage were calculated instead as a
percentage of consolidated total assets, "Total Annual Expenses" for Allied
I, Allied II, Allied Lending, Allied Commercial and ACC (on a pro forma
basis) would be 7.74%, 3.15%, 6.61%, 5.91% and 5.39%, respectively, of
consolidated total assets.
(7) With respect to Advisers, the amount reflected under "Other Expenses" (as a
percentage of net assets attributable to common shares) appears large when
compared to that shown for the other Companies because Advisers is not an
investment fund but is a registered investment adviser providing investment
advisory services. Advisers has fewer net assets than do the other
Companies, and Advisers incurs the operating expenses typically associated
with the operations of the Companies.
Example
You would pay the following expenses over the indicated period on a $1,000
investment, assuming a 5% annual return on total assets and Total Annual
Expenses for Allied I, Allied II, Allied Lending and Allied Commercial of 7.74%,
3.15%, 6.61% and 5.91%, respectively, and 5.39% for ACC (including expenses of
Advisers) on a pro forma basis (as a percentage of consolidated total assets):
<TABLE>
<CAPTION>
ALLIED ALLIED ACC
ALLIED I ALLIED II LENDING COMMERCIAL ADVISERS (PRO FORMA)
-------- --------- ------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
1 Year........................ $ 203 $ 32 $ 105 $ 134 N/A $ 103
3 Years....................... $ 592 $ 98 $ 310 $ 399 N/A $ 309
5 Years....................... $ 961 $ 166 $ 509 $ 659 N/A $ 513
10 Years...................... $ 1,797 $ 348 $ 978 $1,289 N/A $ 1,016
</TABLE>
The example should not be considered a representation of future expenses,
and the actual expenses may be greater or less than those shown.
The purpose of the above table, including the example, is to assist the
investor in understanding the various costs and expenses that an investor in any
one of the Companies will bear, both currently and (on a pro forma basis) after
the Merger, either directly or indirectly.
99
<PAGE> 114
THE MERGER AGREEMENT
Set forth below is a summary of the principal terms of the Merger
Agreement. The summary is qualified by reference to the full text of the Merger
Agreement, which is set forth in Appendix A.
The Merger will become effective upon the filing of, or at any subsequent
time stated in, the Articles of Merger to be filed with the State Department of
Assessments and Taxation of the State of Maryland (as defined above, the
"Effective Time"). It is anticipated that the Effective Time will be 9:00 a.m.
on December 31, 1997 if the conditions to closing set forth in the Merger
Agreement have been met prior to that date.
CONVERSION OF SHARES
At the Effective Time, each share of common stock of the Acquired Companies
will be converted into the number of fully paid and nonassessable shares of
Allied Lending common stock determined according to the following respective
Exchange Ratios:
(i) each share of Advisers common stock will be converted into 0.31
shares of Allied Lending common stock;
(ii) each share of Allied II common stock will be converted into 1.40
shares of Allied Lending common stock;
(iii) each share of Allied I common stock will be converted into 1.07
shares of Allied Lending common stock; and
(iv) each share of Allied Commercial common stock will be converted
into 1.60 shares of Allied Lending common stock.
The conversion of shares of Acquired Company common stock into Allied
Lending common stock will occur automatically at the Effective Time. Fractional
shares of common stock of the Acquired Companies will be converted into Allied
Lending common stock in proportion to the foregoing Exchange Ratios. Fractions
of shares of Allied Lending common stock will be issued in the Merger as
necessary (rounded to the nearest one-thousandth of a share), and no cash will
be paid to stockholders of the Acquired Companies by reason of the Merger.
As soon as practicable after the Effective Time, AST will mail to each
holder of record of common stock of Allied I, Allied II, Allied Commercial and
Advisers as of the Effective Time a transmittal letter to be used in forwarding
such holder's certificates representing such shares to AST. Upon such surrender,
AST will forward to such holder a confirmation of ownership of the ACC common
stock that such holder received as a result of the Merger. Such transmittal
letter will provide that risk of loss and title to the certificates being
surrendered shall pass only upon proper delivery of such certificates.
HOLDERS OF ALLIED I, ALLIED II, ALLIED COMMERCIAL AND ADVISERS COMMON STOCK
SHOULD NOT FORWARD STOCK CERTIFICATES TO AST UNTIL THEY HAVE RECEIVED
TRANSMITTAL LETTERS, NOR SHOULD THEY RETURN STOCK CERTIFICATES WITH THE ENCLOSED
PROXY.
Until the certificates formerly representing Acquired Company common stock
are surrendered for exchange after the Effective Time, holders of such
certificates will not be paid dividends on the ACC common stock into which such
shares have been converted. Any dividends so withheld from a certificate holder
will be paid to AST as nominee for such holder, and will be reported to the
Internal Revenue Service as having been paid to the certificate holder at the
time of payment to AST. When such certificates are surrendered, any unpaid
dividends will be distributed by AST to the certificate holder without interest,
and the certificate holder will receive a confirmation as to the ACC common
stock issued. For all other purposes, however, each certificate which represents
shares of Acquired Company common stock outstanding immediately prior to the
Effective Time will be deemed to evidence ownership of the shares of ACC common
stock into which those shares have been converted by virtue of the Merger.
100
<PAGE> 115
If any holder of common stock of a given Acquired Company shall at the
Effective Time hold all of such Acquired Company common stock in uncertificated
form, then such holder will receive a confirmation as to the ACC common stock
issuable in respect of such Acquired Company common stock without any action on
the part of such holder.
Shares of ACC common stock will be issued in book entry (i.e.,
uncertificated) form only; no physical certificates will be issued in connection
with the Merger. In lieu of physical certificates, AST will send to each person
who has surrendered to AST certificates representing Allied I, Allied II, Allied
Commercial or Advisers common stock, together with a properly completed
transmittal letter, a confirmation containing the information required under
Maryland law regarding the ACC shares issued to such person, including the name
of the issuer (ACC) and the number of shares of ACC common stock issued.
Thereafter, persons holding ACC common stock in uncertificated form will be
afforded the opportunity to receive certificates representing such ACC common
stock.
At the Effective Time, the stock transfer books of Allied I, Allied II,
Allied Commercial and Advisers shall be closed, and thereafter there shall be no
further registration of transfers of common stock of such Companies.
ACC shall not be liable to any holder of common stock of Allied I, Allied
II, Allied Commercial or Advisers for any amount required to be paid to a public
official pursuant to applicable abandoned property laws.
CONDITIONS TO THE MERGER
The obligation of each Company to consummate the Merger is subject to the
satisfaction (or, to the extent permitted under the Merger Agreement, waiver) of
certain conditions, including, among others:
(i) The representations and warranties of each other Company set forth
in the Merger Agreement and in any certificate or other writing delivered
by such other Company pursuant thereto that are qualified as to materiality
shall be true and correct, and the representations and warranties of such
other Company set forth in the Merger Agreement and in any certificate or
other writing delivered by that Company pursuant thereto that are not so
qualified shall be true and correct in all material respects.
(ii) Each other Company shall have performed in all material respects
all of its obligations that are required to be performed under the Merger
Agreement at or prior to the date of the closing provided for in the Merger
Agreement (the "Closing Date").
(iii) The registration statement for the shares to be issued by Allied
Lending in the Merger shall have become effective under the Securities Act
and not be the subject of any stop order or proceedings seeking a stop
order.
(iv) The Order shall have been issued by the Commission and shall not
contain any terms or conditions unacceptable to any Company. The Companies
anticipate that the Order will be issued upon the expiration of a specified
period, which typically is 25 days, commencing on the date the Commission
publishes a notice of the filing of the application in the Federal
Register, during which period interested persons will have an opportunity
to request a hearing. No assurance can be given that such notice will be
published, or that the Order will be issued, by the Commission.
(v) Any applicable waiting period (relating to pre-merger
notification) under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended (the "HSR Act"), shall have expired or terminated.
(vi) The Merger Proposal shall be duly approved by the stockholders of
each Company, voting separately, by the affirmative vote of at least
two-thirds of the votes entitled to be cast by the stockholders of such
Company with respect to the Merger Proposal.
(vii) Any required approval by the SBA and consents of other third
parties and certain agreements shall have been obtained.
101
<PAGE> 116
(viii) No provision of any statute, rule or regulation, and no
judgment, injunction, order or decree of any court or governmental agency
shall prohibit or restrain the consummation of the Merger.
(ix) Each Company shall have received the written opinion of its
independent financial adviser, dated on or about August 14, 1997, the date
of the Merger Agreement, in form and substance satisfactory to such
Company's board of directors, and such opinion shall not have been
withdrawn by such financial adviser. Copies of the fairness opinion
delivered by each such financial adviser are included as Appendices C
through G of this Joint Proxy Statement/Prospectus.
(x) Each Company shall have received a tax opinion from Sutherland,
Asbill & Brennan LLP, dated the Closing Date, as to the status of the
Merger as a tax-free reorganization for federal income tax purposes.
(xi) Each Company shall have received legal opinions from counsel to
each of the other Companies, as set forth in the Merger Agreement.
(xii) The shares of common stock to be issued in the Merger shall have
been approved for listing on the Nasdaq Stock Market.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties of
each Company relating to, among other things, (i) corporate organization and
similar matters; (ii) the execution, delivery and performance of the Merger
Agreement and related matters; (iii) governmental authorizations with respect to
the Merger; (iv) non-contravention of applicable law, court orders and
agreements; (v) capitalization; (vi) each Company's subsidiaries; (vii)
documents filed by each Company with the Commission and the accuracy of
information contained therein; (viii) the accuracy of information supplied by
each Company in connection with this Joint Proxy Statement/Prospectus; (ix)
absence of undisclosed liabilities; (x) taxes; (xi) finders' fees; (xii)
financial statements (including absence of material adverse changes); (xiii)
litigation; (xiv) governmental permits for the conduct of such Company's
business; (xv) employee benefit plans; and (xvi) environmental matters.
CERTAIN COVENANTS
Pursuant to the Merger Agreement, each Company has agreed to cooperate with
the other Companies and to use its best efforts to do, or cause to be done, all
things necessary to consummate the transactions contemplated by the Merger
Agreement. Such cooperation includes, among other things, each Company using its
best efforts to (i) cause the Exemptive Order to be issued; (ii) cause all the
necessary filings to be made under the HSR Act; (iii) cooperate with each other
Company in effecting requisite filings with government agencies and obtaining
requisite consents or approvals from third parties; and (iv) cause a meeting of
such Company's stockholders to be held for the purpose of voting on the approval
of the Merger Proposal.
Each Company also has agreed that, except as otherwise contemplated by the
Merger Agreement or consented to by each other Company in writing, until the
Effective Time, it will cause its business and the business of its subsidiaries
to be conducted in the ordinary course consistent with past practice and use its
best efforts to preserve its business organization and relationships and will
not, among other things, do or cause its subsidiaries to do any of the
following: (i) adopt or propose any change in its charter or bylaws (except for
the amendments to Allied Lending's charter, as contemplated in this Joint Proxy
Statement/Prospectus); (ii) merge or consolidate with any other person except as
described under "Other Offers" below and except for any merger solely between
such Company and one or more of its subsidiaries (provided that such Company is
the surviving Company in such merger) or solely between two or more of such
Company's subsidiaries; (iii) sell or otherwise dispose of any assets or
property (except in the ordinary course of business consistent with past
practice); (iv) amend any material contract, instrument or agreement, (v)
declare or pay any dividend or make any distribution on any such Company's
shares of common stock, or (otherwise than through the Allied Capital Deferred
Compensation Trust or through such Company's DRIP Plan) redeem,
102
<PAGE> 117
repurchase or otherwise acquire any such shares except (a) each Company may pay
any dividend declared prior to the date of the Merger Agreements; (b) Allied I
shall (unless prohibited by applicable law) declare prior to the Effective Time
with a record date prior to the Effective Time (1) a dividend consisting of an
in-kind distribution of all the remaining outstanding common stock of Allied
Lending held by Allied I, payable prior to the Effective Time and (2) if
necessary, one or more additional dividends payable no later than January 31,
1998, in an amount that, when aggregated with all dividends that were both
declared and paid by Allied I after January 31, 1997, is sufficient to reduce
its income and excise tax liabilities for 1997 to zero, (c) each of Allied II,
Allied Lending and Allied Commercial shall declare prior to the Effective Time
with a record date prior to the Effective Time one or more additional dividends
payable no later than January 31, 1998 in an amount that, when aggregated with
all dividends that were both declared and paid by the relevant Company after
January 31, 1997 is sufficient to reduce its income and excise tax liabilities
for 1997 to zero and (d) in the event the Priority Closing Date, as defined in
the Merger Agreement, is extended as provided therein, each of Allied I, Allied
II, Allied Lending and Allied Commercial shall be permitted after December 31,
1997 to declare and pay dividends in the ordinary course of their business and
consistent with past practice; (vi) incur any material liabilities or material
indebtedness except in the ordinary course of business consistent with past
practice; (vii) take any action that would make any such Company's
representations and warranties (other than any representation and warranty made
as of a specified date) inaccurate in any respect at, or as of any time prior
to, the Effective Time; or (viii) adopt, amend, modify or terminate any pension
plan or welfare plan if the effect would be a material increase in the
liabilities of such Company thereunder. In addition, the Merger Agreement
provides that (a) each of Allied I, Allied II and Allied Lending shall remain
qualified as a RIC under the Code, and (b) Allied Commercial shall remain
qualified as a REIT under the Code.
The Merger Agreement further provides that, from and after consummation of
the Merger, ACC shall indemnify any person who at the date of the Merger
Agreement, or had been at any time prior to such date or who becomes prior to
the Effective Time, an officer or director of Allied I, Allied II, Allied
Commercial or Advisers or any of their subsidiaries from any and all liabilities
resulting from their acts and omissions prior to the Effective Time to the full
extent permitted by Maryland Law and the 1940 Act, including but not limited to
acts and omissions arising out of or pertaining to the Merger, and shall
maintain in effect for at least 72 months directors' and officers' liability
insurance policies with respect to matters occurring prior to the Effective
Time.
NO SOLICITATION OF TRANSACTIONS
The Merger Agreement provides that each Company will not, without the
consent of each other Company (i) solicit, initiate or encourage submission of
proposals or offers for, or accept any offers for, or enter into negotiations or
discussion with, any other person with regard to any Acquisition Proposal(1),
(ii) furnish to any other person any information with respect to, or otherwise
cooperate in any way with, or assist, facilitate or encourage, any Acquisition
Proposal between such Company and any other person, or (iii) enter into a
transaction, or commitment with respect thereto (written or oral), with any
person concerning an Acquisition Proposal.
Notwithstanding the foregoing, to the extent required by the fiduciary
obligations of the board of directors of any Company, as determined by a
majority of the disinterested members thereof based on the advice of that
Company's outside counsel, such Company may, (i) in response to an unsolicited
request therefor, participate in discussions or negotiations with, afford access
to the properties, books or records of such Company to, or furnish information
with respect to such Company pursuant to a customary confidentiality agreement
to, any person in connection with any Acquisition Proposal with respect to such
Company; and (ii) approve or
- ---------------
1 "Acquisition Proposal" with respect to a Company means any proposal for a
merger or other business combination involving such Company or any of its
subsidiaries or any proposal or offer to acquire in any manner, directly or
indirectly, an equity interest in, any voting securities of, or a substantial
portion of the assets of the Company or any of its subsidiaries, other than
the transactions contemplated by the Merger Agreement and other than any
merger or other business combination solely between such Company and one or
more of its subsidiaries or solely between two or more of such Company's
subsidiaries.
103
<PAGE> 118
recommend (and, in connection therewith withdraw or modify its approval or
recommendation of the Merger Agreement or the Merger) a superior Acquisition
Proposa1(2) or enter into an agreement with respect to such superior Acquisition
Proposal. The Merger Agreement provides that a Company shall promptly notify
each other Company of any Acquisition Proposal or any request for non-public
information or access to properties, books or records of that Company by any
person that has advised that Company that it is considering making, or has made,
an Acquisition Proposal.
DIRECTORS OF ALLIED LENDING
The Merger Agreement provides that prior to the Effective Time, Allied
Lending shall take such action as may be necessary (i) to increase the size of
its board of directors to 23 and (ii) to cause the election or appointment of
each of the following persons as additional directors of Allied Lending (if such
person is willing to serve as a director of Allied Lending):
Joseph A. Clorety III
Michael I. Gallie
Warren K. Montouri
Guy T. Steuart II
T. Murray Toomey
John D. Firestone
Lawrence I. Hebert
John I. Leahy
John D. Reilly
Smith T. Wood
Charles L. Palmer
Laura W. van Roijen
Brooks H. Browne
Swep T. Davis
Robert E. Long
POST-MERGER DIVIDEND
Pursuant to the Merger Agreement, Allied Lending or ACC will comply with
the requirements of Treasury Regulation 1.852-12(b)(1) by declaring a dividend
in an amount equal to its total current and accumulated earnings and profits,
including any such earnings and profits of any of the Acquired Companies to
which the ACC succeeds in the Merger under the provisions of Section 381 of the
Code and applicable Treasury Regulations (but without regard to any deficits in
earnings and profits of any of the Acquired Companies). Such dividend shall have
a record date of the close of business on December 31, 1997 (subsequent to the
Effective Time) and shall be payable no later than January 31, 1998.
STOCK OPTIONS
Each Company shall take such action as shall be necessary to terminate,
effective immediately prior to the Effective Time, its Stock Option Plan (in the
case of Allied I, Allied II or Lending) or its Incentive Stock Option Plan (in
the case of Allied Commercial or Advisers) and shall use its reasonable efforts
to terminate, with the consent of the option holder, all options outstanding
thereunder. (See "-- Interests of Certain Persons in the Merger.")
EMPLOYEE BENEFIT PLANS
Advisers and ACC will take all actions necessary to ensure that, as of the
Effective Time, ACC effectively assumes sponsorship of The Allied Employee Stock
Ownership Plan. In addition, at the Effective Time, ACC will provide to each
person who is immediately prior to the Effective Time an employee of Advisers
(the "Employees") those employee benefits provided to the Employees by Advisers
immediately prior to the Effective Time, subject to ACC's right to amend, modify
or terminate the relevant benefit programs as it determines in its sole
discretion to be appropriate. Advisers and ACC will take all actions necessary
to ensure that the aforementioned employee benefits can be provided to Employees
at the Effective
- ---------------
2 "Superior Acquisition Proposal" with respect to a Company means a bona fide
Acquisition Proposal made by a third party with respect to such Company which
a majority of the disinterested members of the Board of directors of such
Company determines in its good faith judgment (based on the advice of such
Company's independent financial adviser) to be more favorable to such
Company's stockholders than the Merger, and for which financing, to the extent
required, is then committed or which, in the good faith judgment of a majority
of such disinterested members is reasonably capable of being financed by such
third party.
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<PAGE> 119
Time. (See "Proposal 2: The Plan Proposal -- Other Plans: Employee Stock
Ownership and Deferred Compensation Plan.")
OTHER EMPLOYEE MATTERS
At the Effective Time, each Employee will become an employee of ACC subject
to the termination of such employment by the employer, the employee, by mutual
consent of the employer and employee or in any other manner.
PAYMENTS OF FEES AND EXPENSES
The Merger Agreement provides that each Company will be responsible for a
pro rata portion, based on each Company's respective total market capitalization
at August 13, 1997, of the expenses incurred in connection with the Merger and
the other transactions associated with the Merger, except that each Company
shall pay the fees and expenses of the financial adviser engaged by such Company
as described under "Board Considerations."
TERMINATION
The Merger Agreement can be terminated and the Merger abandoned at any time
prior to the Effective Time (notwithstanding approval of the Merger Proposal by
the stockholders of the Companies):
(i) by the written mutual consent of the Companies;
(ii) by any Company if the Merger has not been consummated by December
31, 1997, provided that, in the event certain conditions to the Merger have
not been satisfied by such date, any Company (unless any failure by such
Company to perform its obligations under the Merger Agreement shall have
resulted in the failure of the Merger to be consummated by December 31,
1997) will have the right unilaterally to extend this date for an
additional period of up to 90 days;
(iii) by any Company if there is any law or regulation that makes
consummation of the Merger illegal or otherwise prohibited or any judgment,
injunction, order or decree enjoining any Company from consummation is
entered and becomes final and not appealable;
(iv) by any Company if the stockholders of any Company vote upon and
do not approve the Merger by the affirmative vote of two-thirds of the
entire number of votes entitled to be cast by the stockholders of such
Company;
(v) by any Company in the event that the board of directors, including
a majority of the disinterested directors, of such Company shall have
determined to enter into an agreement with respect to a superior
Acquisition Proposal.
If the Merger Agreement is terminated as permitted under its terms, none of
the Companies will be subject to any liability arising from the termination,
other than any expenses it may be responsible for pursuant to the terms of the
Merger Agreement.
ARTICLES OF MERGER
As soon as practicable after satisfaction or, to the extent permitted
thereunder, waiver of all conditions to the Merger specified in the Merger
Agreement, the Companies will execute and file the Articles of Merger with the
State Department of Assessments and Taxation of the State of Maryland and make
all other filings or recordings required by applicable law in connection with
the Merger. The Merger will become effective at such time as the Articles of
Merger are accepted for record by the Department of Assessments and Taxation of
the State of Maryland or at such later time as is specified in the Articles of
Merger. (See "-- Amendments to Charter," above, for a description of the
amendments to the charter of Allied Lending that are provided for in the
Articles of Merger.)
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OTHER ISSUES RELATING TO THE MERGER
REGISTRATION AND LISTING OF COMMON STOCK
Allied Lending has registered the shares of ACC common stock issuable in
the Merger pursuant to a filing with the Commission of a Registration Statement
on Form N-14 (together with any amendments thereto, the "Registration
Statement") under the Securities Act with respect to the issuance of such
shares. Allied Lending will use its best efforts to cause the ACC common stock
to be approved for listing on Nasdaq at or prior to the Effective Time. Such
listing is a condition to the obligations of each Company to consummate the
Merger. This Joint Proxy Statement/Prospectus constitutes the prospectus of ACC
filed as part of the Registration Statement.
Any Allied Lending common stock distributed to Allied I's stockholders
pursuant to the Distribution will be listed on Nasdaq upon its distribution to
Allied I's stockholders. The Distribution is not required to be registered under
the Securities Act, and all shares distributed in the Distribution will have the
same rights and preferences, including rights of transferability, as all other
Allied Lending common stock. (See "-- Market Prices and Dividend Data.")
ACCOUNTING TREATMENT
It is intended that the Merger will be treated as a tax-free reorganization
under Section 368(a)(1)(A) of the Internal Revenue Code of 1986, as amended. For
federal income tax purposes, the Acquired Companies will carry forward the
historical cost basis of their assets and liabilities to the surviving entity
(ACC).
For financial reporting purposes, the Acquired Companies will carry forward
the historical cost basis of their respective assets and liabilities at the time
the Merger is effected. The statement of operations would reflect the earnings
of ACC with all periods presented restated as if the Companies had merged as of
the beginning of the earliest period presented.
ANTITRUST PRE-MERGER NOTIFICATION
The HSR Act and regulations promulgated thereunder require that certain
information be filed with the Department of Justice and the Federal Trade
Commission (the "FTC") and a requisite waiting period under the HSR Act expire
or be terminated prior to the consummation of the Merger. The Companies intend
to file a Notification and Report Form with respect to the Merger under the HSR
Act.
SALES BY AFFILIATES
The shares of ACC common stock to be issued in the Merger will be
registered under the Securities Act and will be freely transferable under the
Securities Act, except for shares issued to a stockholder of any Company who is
an "affiliate" of that Company for purpose of Rule 145 under the Securities Act.
Affiliates may not sell their shares of ACC common stock acquired in connection
with the Merger except pursuant to an effective registration statement under the
Securities Act covering such shares or in compliance with Rule 145 or another
applicable exemption from the registration requirements of the Securities Act.
This Joint Proxy Statement/Prospectus does not cover any resales of ACC common
stock received by persons who may be deemed to be affiliates of one or more of
the Companies. Persons who may be deemed to be affiliates of one or more of the
Companies generally include individuals or entities that control, are controlled
by, or are under common control with one or more of the Companies, and may
include certain officers and directors as well as principal stockholders of
stockholders of one or more of the Companies.
Each Company has agreed in the Merger Agreement to use its best efforts to
cause each person who is an affiliate (for purposes of Rule 145 of the
Securities Act) of such party to deliver to ACC or written agreement intended to
ensure compliance with the Securities Act.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The Merger has been structured with the intention to qualify as a tax-free
reorganization under Section 368(a)(1)(A) of the Code. The IRS does not issue
private letter rulings regarding the qualification of statutory mergers under
section 368(a)(1)(A) of the Code. Consequently, based on certain representations
made by each of the Companies, the Companies will receive an opinion from
Sutherland, Asbill & Brennan LLP (and consummation of the Merger is subject to
the receipt of such opinion) with respect to the Merger to the effect that,
among other things, (i) the Merger will be treated for federal income tax
purposes as a reorganization within the meaning of section 368(a)(1)(A) of Code,
(ii) no gain or loss should be recognized by any of the Companies solely as a
result of the Merger, and (iii) no gain or loss will be recognized by the
stockholders of any of the Acquired Companies as a result of the Merger with
respect to shares of their stock in the Acquired Companies converted into shares
of Allied Lending common stock. Assuming that the Merger so qualifies, the tax
basis of Allied Lending common stock received by stockholders of the Acquired
Companies in the Merger will be the same as the tax basis of the stock of the
Acquired Companies surrendered in exchange therefor. In addition, the holding
period of the Allied Lending common stock received in the Merger by the
stockholders of the Acquired Companies will include the period during which the
shares of stock of the Acquired Companies surrendered in exchange therefor were
held.
A successful IRS challenge to the status of the Merger as a reorganization
within the meaning of section 368 of the Code would result in the stockholders
of the Acquired Companies recognizing gain or loss with respect to each share of
stock of the Acquired Companies surrendered in an amount equal to the difference
between the stockholder's basis in such share and the fair market value, as of
the time of the Merger, of the Allied Lending common stock received in exchange
therefor. In addition, each of the Acquired Companies would recognize gain or
loss in an amount equal to the difference between the fair market value and
adjusted bases of such Company's assets. (See also "-- The Merging
Companies -- Federal Income Tax Issues" and "The Distribution -- Federal Income
Tax Consequences of the Distribution," for a discussion of other tax
consequences.)
The discussion set forth above is included for general information only and
is based on currently existing provisions of the Code, existing and proposed
Treasury Regulations thereunder, and current administrative rulings and court
decisions. The foregoing are subject to change and any such change could affect
the continuing validity of the discussion. The discussion is not a complete
description of all the federal income tax consequences of the Merger and, in
particular, does not address tax considerations that may affect the treatment of
stockholders of the Companies who acquired their stock pursuant to the exercise
of employee stock options or otherwise as compensation or stockholders of the
Companies who are not citizens or residents of the United States. In addition,
no information is provided herein with respect to the tax consequences of the
Merger under applicable state, local, or foreign laws. Stockholders should
consult with their tax advisers for a full understanding of the tax consequences
to them of the Merger.
DISSENTERS' RIGHTS OF APPRAISAL
Under the Maryland Law, neither the stockholders of Allied I, Allied II,
Allied Commercial, Allied Lending nor Advisers will be entitled to dissenters'
rights of appraisal in connection with the Merger. Section 3-202 of the Maryland
Law denies such rights with respect to any stock designated as a national market
system security on an interdealer quotation system by the NASD.
CERTAIN ANTI-TAKEOVER PROVISIONS
BUSINESS COMBINATION STATUTE
Certain provisions of the Maryland Law establish special requirements with
respect to "business combinations" between Maryland corporations and "interested
stockholders" unless exemptions are applicable (the "Business Combination
Statute"). Among other things, the Business Combination Statute prohibits for a
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period of five years a merger or other specified transactions between a company
and an interested stockholder and requires a super-majority vote for such
transactions after the end of such five-year period.
"Interested stockholders" are all persons owning beneficially, directly or
indirectly, 10% or more of the outstanding voting stock of a Maryland
corporation. "Business combinations" include certain mergers or similar
transactions subject to a statutory vote and additional transactions involving
transfer of assets or securities in specified amounts to interested stockholders
or their affiliates. Unless an exemption is available, a "business combination"
may not be consummated between a Maryland corporation and an interested
stockholder or its affiliates for a period of five years after the date on which
the stockholder first became an interested stockholder and thereafter may not be
consummated unless recommended by the board of directors of the Maryland
corporation and approved by the affirmative vote of at least 80% of the votes
entitled to be cast by all holders of outstanding shares of voting stock and
66 2/3% of the votes entitled to be cast by all holders of outstanding shares of
voting stock other than the interested stockholder or its affiliates or
associates, unless, among other things, the corporation's stockholders receive a
minimum price (as defined in the Business Combination Statute) for their shares
and the consideration is received in cash or in the same form as previously paid
by the interested stockholder for its shares. A business combination with an
interested stockholder which is approved by the board of directors of a Maryland
corporation at any time before an interested stockholder first becomes an
interested stockholder is not subject to the five-year moratorium or special
voting requirements. An amendment to a Maryland corporation charter electing not
to be subject to the foregoing requirements must be approved by the affirmative
vote of at least 80% of the votes entitled to be cast by all holders of
outstanding shares of voting stock and 66 2/3% of the votes entitled to be cast
by holders of outstanding shares of voting stock who are not interested
stockholders. Any such amendment is not effective until 18 months after the vote
of stockholders and does not apply to any business combination of a corporation
with a stockholder who became an interested stockholder on or prior to the date
of such vote.
The Merger would not be a business combination as that term is defined in
the Business Combination Statute and will not be subject to the moratorium or
special voting requirements discussed above.
CONTROL SHARE ACQUISITION STATUTE
The Maryland Law imposes limitations on the voting rights of shares
acquired in a "control share acquisition." The control share statute defines a
"control share acquisition" to mean the acquisition, directly or indirectly, of
"control shares" subject to certain exceptions. "Control shares" of a Maryland
corporation are defined to be voting shares of stock which, if aggregated with
all other shares of stock previously acquired by the acquiror, would entitle the
acquiror to exercise voting power in electing directors with one of the
following ranges of voting power: (i) one-fifth or more but not less than
one-third, (ii) one-third or more but less than a majority or (iii) a majority
of all voting power. Control shares do not include shares which the acquiring
person is entitled to vote as a result of having previously obtained stockholder
approval. Control shares of a Maryland corporation acquired in a control share
acquisition have no voting rights except to the extent approved by a vote of
two-thirds of the votes entitled to be cast by stockholders in the election of
directors, excluding shares of stock as to which the acquiring person, officers
of the corporation and directors of the corporation who are employees of the
corporation are entitled to exercise or direct the exercise of the voting power
of the shares in the election of the directors. The control share statute also
requires Maryland corporations to hold a special meeting at the request of an
actual or proposed control share acquiror generally within 50 days after a
request is made with the submission of an "acquiring person statement," but only
if the acquiring person (i) gives a written undertaking and, if required by the
directors of the issuing corporation, posts a bond for the cost of the meeting
and (ii) submits definitive financing agreements for the acquisition of the
control shares to the extent that financing is not provided by the acquiring
person. In addition, unless the issuing corporation's charter or bylaws provide
otherwise, the control share statute provides that the issuing corporation,
within certain time limitations, shall have the right to redeem control shares
(except those for which voting rights have previously been approved) for "fair
value" as determined pursuant to the control share statue in the event (a) there
is a stockholder vote and the grant of voting rights is not approved, or (b) an
"acquiring person statement" is not delivered to the target within 10 days
following a control share acquisition. Moreover, unless the issuing
corporation's charter or bylaws provide otherwise, the control share
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statute provides that if, before a control share acquisition occurs, voting
rights are accorded to control shares which result in the acquiring person
having majority voting power, then all stockholders other than the acquiring
person have appraisal rights as provided under the Maryland Law. An acquisition
of shares may be exempted from the control share statute provided that a charter
or bylaw provision is adopted for such purpose prior to the control share
acquisition by any person with respect to ACC. The Merger would not result in a
control share acquisition by any person with respect to ACC. The control share
acquisition statute does not apply to shares acquired in a merger, consolidation
or share exchange to which the corporation is a party.
The partial summary of the foregoing statutes contained in this Joint Proxy
Statement/Prospectus is not intended to be complete and reference is made to the
full text of such statutes for their entire terms.
STAGGERED BOARD
As discussed above under "The Surviving Company: ACC -- Staggered Board
Elections," if the Merger is consummated, directors of ACC will be apportioned
into three classes, with each being elected for three-year terms. A staggered
board may be deemed to have an anti-takeover effect, since it may create, under
certain circumstances, an impediment which would frustrate persons seeking to
effect a takeover or otherwise gain control of ACC.
ISSUANCE OF PREFERRED STOCK
If the Merger is effected, the board of directors of ACC, without
stockholder approval, would have the authority to reclassify common stock as
preferred stock and to issue ACC preferred stock. Such stock could be issued
with voting, conversion or other rights designed to have an anti-takeover
effect. See "-- Certain Considerations," "The Surviving Company:
ACC -- Amendments to Charter" and "The Surviving Company: ACC -- The Increase in
Authorized Capital."
PROPOSAL 2: THE PLAN PROPOSAL
(ALLIED LENDING'S STOCKHOLDERS ONLY)
Allied Lending's stockholders are being asked to approve a stock option
plan for ACC (the "Plan Proposal").
The affirmative vote of the holders of a majority of Allied Lending's
outstanding shares present or represented at the Allied Lending Special Meeting,
or any adjournment thereof, is required to approve the Plan Proposal. The ACC
Plan will be implemented only if the Merger Proposal is duly approved by the
stockholders of each Company.
THE BOARD OF DIRECTORS OF ALLIED LENDING RECOMMENDS THAT STOCKHOLDERS OF
ALLIED LENDING VOTE "FOR" APPROVAL OF THE PLAN PROPOSAL.
GENERAL
Stockholders have been asked to approve a stock option plan for ACC (as
defined above, the "ACC Plan"). If stockholders approve the Merger, immediately
prior to the Effective Time each Company's existing stock option plan (each, an
"Existing Plan") and the underlying options will be terminated.
The terms of the ACC Plan are similar to those of the Existing Plans,
except that (i) the number of options to be authorized under the ACC Plan would
be different from the number authorized under each Existing Plan; (ii) each
Existing Plan provides that each non-employee director, upon his or her election
as a director, shall receive a one-time grant of options at a price equal to the
current fair market value of the shares at the time the option is granted; and
(iii) ACC's board of directors would be permitted to modify or revise certain
provisions of the ACC Plan without stockholder approval (except with respect to
the number of options authorized for issuance under the ACC Plan), and each
Existing Plan requires stockholder approval for certain amendments thereto. The
following discussion of the ACC Plan is qualified in its entirety by reference
to the ACC Plan, a copy of which is attached hereto as Appendix H.
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DESCRIPTION OF ACC PLAN
PURPOSE
The purpose of the ACC Plan would be to advance the interests of ACC by
providing non-officer directors and officers of ACC who have substantial
responsibility for the direction and management of ACC with additional
incentives to exert their best efforts to increase their proprietary interest in
the success of ACC, to reward outstanding performance, and to attract and retain
persons of outstanding ability.
AUTHORIZATION
Options may be granted from time to time on up to 6,250,000 shares which
represents approximately 12% of the shares that are anticipated to be
outstanding.
ADMINISTRATION
The ACC Plan would be administered by ACC's compensation committee (the
"Committee") comprised of at least two (2) members of the Company's board of
directors who each shall (a) be a non-employee director, as defined in Rule
16b-3 promulgated under the Exchange Act, (b) have no financial interest in
grants of stock options to officers of ACC under the ACC Plan and (c) not be an
"interested person," as defined in sec.2(a)(19) of the 1940 Act, of ACC. The
Committee will interpret the ACC Plan and, to the extent and in the manner
contemplated therein, will exercise the discretion reserved to it thereunder.
The Committee may prescribe, amend and rescind rules and regulations relating to
the ACC Plan and make all other determinations necessary for its administration.
The decision of the Committee on any interpretation of the ACC Plan or
administration thereof, if in compliance with the provisions of the 1940 Act and
regulations promulgated thereunder, shall be final and binding with respect to
ACC, any optionee or any person claiming to have rights as, or on behalf of, any
optionee.
The Committee's principal objective in awarding stock options to the
eligible officers and directors of ACC will be to align each optionee's
interests with the success of ACC and the financial interests of its
stockholders by linking a portion of such optionee's compensation with the
performance of ACC's stock and the value delivered to stockholders. Stock
options would be granted under the ACC Plan at a price not less than the
prevailing market value and will have value only if ACC's stock price increases.
The Committee will determine the amount and features of the stock options, if
any, to be awarded to optionees. It is contemplated that the Committee will
evaluate a number of criteria, including the past service of each such optionee
to ACC, the present and potential contributions of such optionee to the success
of ACC and such other factors as the Committee shall deem relevant in connection
with accomplishing the purposes of the ACC Plan; including the recipient's
current stock holdings, years of service, position with ACC and other factors.
It is not expected that the Committee will apply a formula assigning specific
weights to any of these factors when making its determination. The Committee
will award stock options on a subjective basis and such awards depend in each
case on the performance of the officer under consideration.
PARTICIPANTS
Officers. The Committee will determine and designate those officers of ACC
who are eligible to participate in the ACC Plan. The Committee also will
determine the number of options to be awarded to each optionee. In making these
determinations, the Committee will take into account the past service of the
optionee (either to ACC or one of the Companies) and potential contributions to
the success of ACC, and such other factors as the Committee deems relevant to
accomplish the purposes of the ACC Plan.
Non-Officer Directors. The Committee may grant options to directors who
are not officers or employees of ACC (non-officer directors). This provision to
allow options to be granted under the ACC Plan to non-officer directors is
contingent upon the approval of the Commission.
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It is contemplated that initially there will be approximately 50 persons
eligible to participate in the ACC Plan. Options will not be transferable other
than by the laws of descent and distribution or a qualified domestic relations
order, and during an optionee's lifetime are exercisable only by the optionee.
EXERCISE OF OPTIONS
Options will be exercisable at a price equal to the fair market value of
the shares at the time the option is granted, except with respect to options
that are intended to be incentive stock options (within the meaning of the Code)
and that are granted to any holder of 10% or more of ACC's outstanding shares,
in which case the exercise price will be not less than 110% of the then-current
fair market value. The day on which ACC approves the granting of an option will
be considered the date on which the option is granted. For purposes of the ACC
Plan, the fair market value of the shares is the closing sales price of the
shares as quoted on Nasdaq on the date on which the option is awarded.
Options may contain such other terms and conditions as the Committee deems
advisable, including, but not limited to, being exercisable only in
installments. Options granted to different optionees or at different times need
not contain similar provisions. Each option will state the period or periods of
time within which the option may be exercised by the optionee, which may not
exceed ten years from the date the option is granted. The option period may not
exceed five years if the option is intended to be an incentive stock option
(within the meaning of the Code) and the option is awarded to a holder of 10% or
more of ACC's outstanding shares.
All rights to exercise options terminate 60 days after an optionee ceases
to be (i) a non-officer director, (ii) both an officer and a director, if such
optionee serves in both capacities, or (iii) an officer (if such officer is not
also a director) of ACC for any cause other than death or total and permanent
disability. If an optionee's employment is terminated for any reason other than
death or total and permanent disability before expiration of his option and
before he has fully exercised it, the optionee has the right to exercise the
option during the balance of the 60-day period. If an optionee dies or becomes
totally and permanently disabled before expiration of the option without fully
exercising it, he or she or the executors or administrators or legatees or
distributees of the estate shall, as may be provided at the time of the grant,
have the right, within one year after the optionee's death or total and
permanent disability, to exercise the option in whole or in part before the
expiration of its term.
PAYMENT FOR SHARES
Full payment for shares purchased must be made at the time of exercising
the option in whole or in part. However, at the request of an officer-optionee,
the Committee may authorize ACC to lend to such officer-optionee, in whole or in
part as of the date of exercise, an amount equal to the exercise price of the
option. The loan will: (a) have a term of not more than ten years; (b) become
due within 60 days after the recipient ceases to be an officer of ACC; (c) bear
interest at a rate not less than the applicable federal rate under the Code at
the time the loan is made; and (d) be fully collateralized at all times, which
collateral may include securities issued by ACC. Loan terms and conditions may
be changed by the Committee to comply with applicable IRS and Commission
regulations or other relevant pronouncements.
EFFECT OF CHANGE IN SHARES SUBJECT TO THE ACC PLAN
If there is a change in the outstanding shares through the declaration of
stock dividends, stock splits, or combinations or exchanges of shares, or
otherwise, the number of shares available for option and the shares subject to
an option and the option prices shall be appropriately adjusted by the
Committee.
CHANGE OF CONTROL
In the event of a Change of Control (as hereinafter defined), all
outstanding options will become fully vested and exercisable as of the Change of
Control. For purposes of the ACC Plan, "Change of Control" means the sale of
substantially all of ACC's assets or the acquisition, whether directly,
indirectly, beneficially (within the meaning of Rule 13d-3 of the 1934 Act, or
of record, of securities of the Company representing twenty-five percent) (25%)
or more in the aggregate voting power of ACC's outstanding common stock by
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any "person" (within the meaning of Sections 13(d) and 14(d) of the 1934 Act),
including any corporation or group of associated persons acting in concert,
other than (i) ACC or its subsidiaries and/or (ii) any employee pension benefit
plan (within the meaning of Section 3(2) of the Employee Retirement Income
Security Act of 1974) of ACC or its subsidiaries, including a trust established
pursuant to any such plan.
AMENDMENT AND TERMINATION
The Committee may modify, revise or terminate the ACC Plan at any time.
While the board of directors may seek stockholder approval of an action
modifying a provision of the ACC Plan when deemed advisable, the board of
directors may make certain modifications without stockholder approval (except
with respect to the number of options authorized for issuance under the ACC
Plan). The ACC Plan will terminate when there have been granted options on the
total number of shares with respect to which options may be granted, or by
action of the Committee.
If the Committee determines that the listing, registration or qualification
of the shares subject to an option upon a 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 shares thereunder, the option may not be
exercised unless such listing, registration, qualification, consent or approval
has been effected or obtained free of any conditions not acceptable to the
Committee. No option will expire during any period when the right to exercise an
option is so suspended by the Committee. The Committee will extend its term for
a further period so as to afford the optionee a reasonable opportunity to
exercise the option, except that no option may be exercised more than ten years
after it was granted.
RESALE OF SHARES ACQUIRED PURSUANT TO OPTIONS
Optionees purchasing shares pursuant to options may resell the shares in
the over-the-counter market through brokers or dealers at prevailing market
prices. Any sales by optionees who may be deemed affiliates of ACC must be made
pursuant to registration under the Securities Act or pursuant to an exemption
therefrom.
FEDERAL TAX CONSEQUENCES OF THE ACC PLAN
The following is a summary of certain federal income tax consequences of
transactions under the ACC Plan based on current federal income tax laws. This
summary is not intended to be exhaustive and does not describe state, local or
other tax consequences.
Incentive Stock Options. In general, no income will be recognized by an
optionee and no deduction will be allowed to ACC with respect to the grant or
exercise of an incentive stock option granted under the ACC Plan. The difference
between the exercise price and the fair market value of the shares of common
stock on the date the option is exercised is, however, an adjustment item for
the participant for purposes of the alternative minimum tax. When the stock
received upon exercise of the option is sold, provided that the stock is held
for more than two years from the date of grant of the option and more than one
year from the date of exercise, the participant will recognize long-term capital
gain or loss equal to the difference between the amount realized and the
exercise price of the option related to such stock. If the above mentioned
holding period requirements of the Code are not satisfied, the subsequent sale
of stock received upon exercise of an incentive stock option is treated as a
"disqualifying disposition." In general, the participant will recognize taxable
income at the time of such disqualifying disposition as follows: (i) ordinary
income in an amount equal to the excess of (A) the lesser of the fair market
value of the shares of common stock on the date the incentive stock option is
exercised or the amount realized on such disqualifying disposition over (B) the
exercise price and (ii) capital gain to the extent of any excess of the amount
realized on such disqualifying disposition over the fair market value of the
shares of common stock on the date the incentive stock option is exercised (or
capital loss to the extent of any excess of the exercise price over the amount
realized on disposition). Any capital gain or loss recognized by the participant
will be long-term or short-term depending upon the holding period for the stock
sold. ACC may claim a deduction at the time of the disqualifying disposition
equal to the amount of ordinary income the participant recognizes. Note that the
tax treatment generally applies only to
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the extent that the optionee is an employee of ACC at the time of the grant of
the option and at all times during the period ending three months before the
date of exercise.
Non-qualified Stock Options. The grant of a non-qualified stock option
under the ACC Plan will not result in the recognition of taxable income to the
participant or in a deduction to ACC. In general, upon exercise, a participant
will recognize ordinary income in an amount equal to the excess of the fair
market value of the shares of common stock purchased over the exercise price.
ACC is required to withhold tax on the amount of income so recognized, and is
entitled to a tax deduction equal to the amount of such income. Gain or loss
upon a subsequent sale of any shares of common stock received upon the exercise
of a non-qualified stock option is taxed as capital gain or loss (long-term or
short-term, depending upon the holding period of the stock sold).
TERMINATION OF EXISTING PLANS
It is intended that unexercised stock options granted under the Existing
Plans to the officers and non-officer directors of each Company will be canceled
at the Effective Time if the Merger is consummated. Officers and non-officer
directors with vested but unexercised options will be able to exercise such
options pursuant to the terms of the Existing Plans up to the Effective Time.
All unexercised vested and unvested options will be canceled on the date that
the Merger is effected. (See also "Proposal 1: Merger Proposal -- Interests of
Certain Persons in the Merger -- Outstanding Options Awards" above, for a
discussion of the Cut-off Award and the Formula Award.)
OTHER PLANS:
EMPLOYEE STOCK OWNERSHIP PLAN AND DEFERRED COMPENSATION PLAN
In addition to the ACC Plan, all eligible employees of Advisers are, and if
the Merger is consummated, all eligible employees of ACC would be, participants
in the Allied Employee Stock Ownership Plan ("ESOP"). Pursuant to this qualified
plan, ACC will contribute 5% of each eligible participant's total cash
compensation for the year to a plan account on the participant's behalf, which
fully vests over a two-year period. The ESOP will use a portion of the cash
contributions to purchase shares of ACC, thus aligning every employee's
interests with those of ACC and its stockholders.
ACC will assume Advisers Deferred Compensation Plan (the "DC Plan"). Upon
assumption of the DC Plan, participants may elect to defer some of their
compensation and have such compensation credited to a participant account. All
amounts credited to a participant's account shall be credited solely for
purposes of accounting and computation and shall remain assets of ACC and
subject to the claims of ACC's general creditors. Amounts credited under the DC
Plan are at all times 100% vested and non-forfeitable. A participant's account
shall become distributable upon his or her separation from service, retirement,
disability, death, or at a future determined date. All DC Plan accounts will be
distributed in the event of a change of control of ACC or in the event of ACC's
insolvency. Amounts deferred by participants under the DC Plan are funded to a
trust, the trustee of which administers the DC Plan on behalf of ACC.
STOCKHOLDERS' PROPOSALS
It is presently anticipated that ACC will hold its next annual meeting of
stockholders in May 1998. Stockholders' proposals intended to be presented at
that meeting must be submitted by December 3, 1997 for consideration by ACC for
possible inclusion in the proxy materials for that meeting.
EXPERTS
The consolidated financial statements of each of Allied I, Allied II and
Allied Lending and their respective subsidiaries as of December 31, 1996 and
1995 and for each of the years in the three-year period ended December 31, 1996
included in the 1996 Form 10-K for each such Company, have been incorporated
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by reference herein and in the registration statement of which this Joint Proxy
Statement/Prospectus is a part in reliance upon the report of Matthews, Carter
and Boyce, P.C. independent public accountants, included in the respective 1996
Form 10-Ks for Allied I, Allied II and Allied Lending.
The consolidated financial statements of each of Allied Commercial and
Advisers and their respective subsidiaries as of December 31, 1996 and 1995 and
for each of the years in the three-year period ended December 31, 1996 included
in the 1996 Form 10-K for each such Company, have been incorporated by reference
herein and in the registration statement of which this Joint Proxy
Statement/Prospectus is a part in reliance upon the report of Arthur Andersen
LLP, independent public accountants, included in the respective 1996 Form 10-Ks
for Allied Commercial and Advisers.
FINANCIAL ADVISERS
Under the terms of its engagement by the Companies, Morgan Stanley is
entitled to receive no more than $50,000 per month for its services, plus
expenses, if the Merger is not effected. If the Merger is effected, Morgan
Stanley would receive $2,500,000, payable upon the consummation of the Merger
(intended to be on December 31, 1997). The amounts payable to Morgan Stanley
will be apportioned pro rata among the Companies based on the respective market
capitalizations of each Company as determined on the date immediately prior to
the August 14, 1997 date of the Merger Agreement. The engagement letter with
Morgan Stanley provides that each Company will indemnify Morgan Stanley against
certain liabilities incurred in connection with its services.
Ferris acted as financial adviser to Allied I, Interstate acted as
financial adviser to Allied II, Scott & Stringfellow acted as financial adviser
to Allied Commercial, Baird acted as financial adviser to Allied Lending and Van
Kasper acted as financial adviser to Advisers in connection with the Merger.
Pursuant to the terms of the Merger Agreement, each Company has paid its
financial adviser $120,000 for rendering its opinion as to the fairness, from a
financial point of view, of the Merger to stockholders of that Company. Each
Company also has agreed to pay the expenses of its financial adviser engaged
related to the Merger.
LEGAL MATTERS
The validity of the shares of Allied Lending common stock that will be
issued in the Merger will be passed upon for Allied Lending by Sutherland,
Asbill & Brennan LLP, Washington, DC (as defined above, "Sutherland"). In
addition, Sutherland will pass upon the tax-free nature of the Merger for each
of the Companies. No Company is a defendant in any material legal proceeding,
and no such material proceeding is known by a Company to be contemplated.
OTHER BUSINESS
The boards of directors of the Companies know of no other business to be
presented for action at the Special Meetings. If any matters do come before a
Special Meeting on which action can properly be taken, it is intended that the
proxies will be voted in accordance with the judgment of the person or persons
exercising the authority conferred by the proxies at the Special Meeting.
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APPENDIX A
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
ALLIED CAPITAL ADVISERS, INC., ALLIED CAPITAL CORPORATION,
ALLIED CAPITAL CORPORATION II,
ALLIED CAPITAL LENDING CORPORATION AND ALLIED CAPITAL COMMERCIAL CORPORATION
DATED AS OF AUGUST 14, 1997, AS AMENDED AND RESTATED AS OF SEPTEMBER 19, 1997
<PAGE> 130
TABLE OF CONTENTS
<TABLE>
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ARTICLE I. THE MERGER................................................................ 1
Section 1.01. The Merger........................................................ 1
Section 1.02. Conversion of Shares.............................................. 2
Section 1.03. Surrender......................................................... 2
ARTICLE II. THE SURVIVING COMPANY.................................................... 3
Section 2.01. Charter........................................................... 3
Section 2.02. Bylaws............................................................ 4
Section 2.03. Directors and Officers............................................ 4
ARTICLE III. REPRESENTATIONS AND WARRANTIES APPLICABLE TO ALL COMPANIES.............. 4
Section 3.01. Corporate Existence and Power..................................... 4
Section 3.02. Corporate Authorization........................................... 4
Section 3.03. Governmental Authorization........................................ 4
Section 3.04. Non-Contravention................................................. 5
Section 3.05. Binding Effect.................................................... 5
Section 3.06. Company Subsidiaries.............................................. 5
Section 3.07. Disclosure Documents.............................................. 5
Section 3.08. Finders' Fees..................................................... 6
Section 3.09. Absence of Undisclosed Liabilities................................ 6
Section 3.10. Financial Statements.............................................. 6
Section 3.11. Litigation........................................................ 7
Section 3.12. Regulatory Matters................................................ 7
ARTICLE IV. REPRESENTATIONS AND WARRANTIES APPLICABLE TO INDIVIDUAL COMPANIES........ 7
Section 4.01. Capitalization.................................................... 7
Section 4.02. Stock Options..................................................... 8
Section 4.03. SEC and SBA Filings............................................... 8
Section 4.04. Taxes............................................................. 9
Section 4.05. Non-Wholly Owned Subsidiaries..................................... 10
Section 4.06. Employee Benefit Plans; ERISA..................................... 10
Section 4.07. Environmental Matters............................................. 11
ARTICLE V. COVENANTS OF ALL COMPANIES................................................ 11
Section 5.01. Best Efforts...................................................... 11
Section 5.02. Exemptive Order................................................... 11
Section 5.03. Filings under HSR Act............................................. 11
Section 5.04. Certain Filings................................................... 11
Section 5.05. Joint Proxy Statement/Prospectus; Registration Statement.......... 12
Section 5.06. Access............................................................ 12
Section 5.07. Further Assurances................................................ 12
Section 5.08. Confidentiality................................................... 12
Section 5.09. Conduct of Each Company........................................... 12
Section 5.10. Stockholders' Meeting............................................. 13
Section 5.11. Other Offers...................................................... 13
Section 5.12. Notices of Certain Events......................................... 14
</TABLE>
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ARTICLE VI. COVENANTS OF INDIVIDUAL COMPANIES........................................ 14
Section 6.01. Indemnification of Officers and Directors of Each Acquired
Company......................................................................... 14
Section 6.02. Directors of Lending.............................................. 15
Section 6.03. Distributions..................................................... 15
Section 6.04. RIC and REIT Qualifications....................................... 16
Section 6.05. Post-Merger Dividend.............................................. 16
Section 6.06. Affiliates........................................................ 16
Section 6.07. Stock Options..................................................... 16
Section 6.08. Employee Benefit Plans............................................ 16
Section 6.09. Other Employee Matters............................................ 16
Section 6.10. Articles of Merger................................................ 16
ARTICLE VII. CONDITIONS TO THE MERGER................................................ 17
Section 7.01. Closing Date...................................................... 17
Section 7.02. Conditions to the Obligations of Each Company..................... 17
ARTICLE VIII. TERMINATION............................................................ 18
Section 8.01. Termination....................................................... 18
Section 8.02. Effect of Termination............................................. 19
ARTICLE IX. MISCELLANEOUS............................................................ 19
Section 9.01. Notices........................................................... 19
Section 9.02. Amendments; Waivers............................................... 20
Section 9.03. Expenses.......................................................... 20
Section 9.04. Successors and Assigns............................................ 20
Section 9.05. Governing Law..................................................... 20
Section 9.06. Survival.......................................................... 20
Section 9.07. Counterparts...................................................... 20
Section 9.08. Entire Agreement.................................................. 20
Section 9.09. Captions.......................................................... 20
Section 9.10. Parties in Interest............................................... 20
Section 9.11. No Dissenter's Rights............................................. 21
ANNEXES:
Annex I Articles of Merger
Annex II Form of Affiliate Letter
Annex III Legal Opinions
SCHEDULES:
Schedule 3.04 Consents, etc. under Agreements
Schedule 3.06(a) Subsidiaries of Each Company and Jurisdiction of Their
Organization
Schedule 3.06(b) Liens and Other Limitations and Restrictions on the
Subsidiaries' Outstanding Capital Stock, etc.
Schedule 3.08 Investment Bankers Retained by the Respective Companies as
Financial Advisor for the Merger
Schedule 3.11 Litigation
Schedule 4.03(a)(ii) Jurisdictions in Which Advisers is Registered as an
Investment Adviser
Schedule 4.03(a)(iv) Agreements between Advisers and Any of Its Directors or
Officers
Schedule 4.03(b)(ii) Agreements between Allied I, Allied II, or Lending and Any
of Its Directors or Officers
Schedule 4.03(c)(ii) Agreements between Commercial and Any of Its Directors or
Officers
</TABLE>
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<TABLE>
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INDEX OF DEFINITIONS: SECTION
1933 Act................................................................... 3.03
1934 Act................................................................... 3.03
1940 Act................................................................... 3.03
1958 Act................................................................... 3.03
Acquired Company........................................................... 1.01(a)
Acquired Company Shares.................................................... 1.02(b)
Acquisition Proposal....................................................... 5.11(a)
Advisers................................................................... Preamble
Advisers Act............................................................... 3.03
Affiliate.................................................................. 4.03(a)(iv)
affiliates................................................................. 6.06
Agreement.................................................................. Preamble
Allied I................................................................... Preamble
Allied II.................................................................. Preamble
Articles of Merger......................................................... 1.01(b)
Balance Sheet.............................................................. 3.09
BDC........................................................................ 4.03(a)(iii)
blue sky................................................................... 3.03
Closing.................................................................... 7.01
Closing Date............................................................... 7.01
Code....................................................................... 1.01(d)
Commercial................................................................. Preamble
Common Stock............................................................... 1.02(b)
Company.................................................................... Preamble
Company Securities......................................................... 4.01(f)
Conversion................................................................. 1.02(b)
disclosing party........................................................... 5.06
Disclosure Documents....................................................... 3.07(a)
Effective Time............................................................. 1.01(b)
Enumerated Provisions...................................................... 9.06
Environmental, Health and Safety Laws...................................... 4.07(b)
ERISA...................................................................... 4.06(a)
Exchange Agent............................................................. 1.03(a)
Exemptive Order............................................................ 3.03
Final Closing Date......................................................... 8.01(b)
Funding.................................................................... 4.05
GAAP....................................................................... 3.10
GCL........................................................................ 1.01(a)
Hazardous Substances....................................................... 4.07(b)
HSR Act.................................................................... 3.03
investigating party........................................................ 5.06
IRS........................................................................ 4.04(a)
Joint Proxy Statement/Prospectus........................................... 3.07(a)
Lending.................................................................... Preamble
Lien....................................................................... 3.06(b)
Material Adverse Effect.................................................... 3.01
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<TABLE>
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SECTION
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Merger..................................................................... 1.01(a)
Merger Consideration....................................................... 1.02(b)
Mortgage................................................................... 4.05
Part I..................................................................... 4.04(b)
Part II.................................................................... 4.04(c)
Pension Plan............................................................... 4.06(a)
person..................................................................... 3.01
Priority Closing Date...................................................... 8.01(b)
Registration Statement..................................................... 5.05
REIT....................................................................... 4.04(c)
RIC........................................................................ 4.04(b)
SBA........................................................................ 3.03
SEC........................................................................ 3.03
SEC Reports................................................................ 4.03(a)(i)
Small Business Act......................................................... 3.03
Stockholders' Meeting...................................................... 5.10
Subsidiary................................................................. 3.01
superior Acquisition Proposal.............................................. 5.11(b)
Surviving Company.......................................................... 1.01(a)
tax........................................................................ 4.04(a)
trading day................................................................ 9.03(a)
Welfare Plan............................................................... 4.06(b)
</TABLE>
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AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER dated as of August 14, 1997, as amended and
restated as of September 19, 1997 (this "Agreement"), by and among Allied
Capital Advisers, Inc. ("Advisers"), Allied Capital Corporation ("Allied I"),
Allied Capital Corporation II ("Allied II"), Allied Capital Lending Corporation
("Lending") and Allied Capital Commercial Corporation ("Commercial"), each a
Maryland corporation (individually, a "Company" and collectively, the
"Companies").
WHEREAS, the parties have previously executed and delivered the Agreement
and Plan of Merger dated as of August 14, 1997 (the "Original Agreement"); and
WHEREAS, the parties desire to amend and restate the Original Agreement to
make certain changes pertaining to, among other things, the certificates
representing Acquired Company Shares (as defined herein) and the rights
appertaining thereto prior to surrender thereof; and
WHEREAS, the parties do not intend by this amendment and restatement to
reaffirm as of any date subsequent to August 14, 1997, the representations and
warranties previously made herein, unless the context otherwise specifically
requires, and accordingly they agree that all references to "the date of this
Agreement", "the date hereof" and terms of similar import shall continue to
refer, unless the context otherwise specifically requires, to August 14, 1997,
the date of the execution and delivery of the Original Agreement;
NOW THEREFORE, pursuant to Section 9.02 of the Original Agreement and in
consideration of the foregoing and the respective representations, warranties,
covenants and agreements set forth herein, the Original Agreement, including the
annexes and schedules thereto, is hereby amended and restated so as to read in
its entirety as follows:
ARTICLE I.
THE MERGER
SECTION 1.01. THE MERGER. (a) Upon the terms and subject to the
conditions set forth in this Agreement, at the Effective Time (as defined in
Section 1.01(b)), each of Advisers, Allied I, Allied II and Commercial (each, an
"Acquired Company," and collectively, the "Acquired Companies") shall be merged
(the "Merger") with and into Lending in accordance with the Maryland General
Corporation Law (the "GCL"), whereupon the separate existence of each Acquired
Company shall cease, and Lending shall be the surviving corporation (the
"Surviving Company").
(b) As soon as practicable after satisfaction or, to the extent permitted
hereunder, waiver of all conditions to the Merger specified in Article VII, the
Companies will execute and file articles of merger substantially in the form of
Annex I hereto (the "Articles of Merger") with the State Department of
Assessments and Taxation of the State of Maryland and make all other filings or
recordings required by applicable law in connection with the Merger. The Merger
shall become effective at such time as the Articles of Merger are accepted for
record by the State Department of Assessments and Taxation of the State of
Maryland or at such later time as is specified in the Articles of Merger (the
"Effective Time").
(c) From and after the Effective Time, the Surviving Company shall possess
all of the purposes, powers and assets and be subject to all of the liabilities
and obligations of each Acquired Company and Lending, all as provided under
Section 3-114 of the GCL.
(d) The parties intend that the Merger qualify as a tax-free reorganization
under Section 368(a)(1)(A) of the Internal Revenue Code of 1986, as amended (the
"Code"). The parties also intend that this Agreement constitute a "plan of
reorganization" within the meaning of Treas. Reg. Section 1.368-1(c).
(e) The Articles of Merger provide for the amendment of the charter of
Lending: (i) to increase the authorized shares of common stock, par value
$0.0001 per share, of Lending from 20,000,000 to 100,000,000 shares; (ii) to
change the name of Lending as the Surviving Company to "Allied Capital
Corporation" and (iii) in certain other respects as set forth in the Articles of
Merger.
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SECTION 1.02. CONVERSION OF SHARES. At the Effective Time, by virtue of
the Merger and without any action on the part of the holder of any Acquired
Company Shares (as hereinafter defined):
(a) Each Acquired Company Share that is owned by any Acquired Company
or Lending or by any Subsidiary (as defined in Section 3.01) of any of them
shall automatically be canceled and retired and shall cease to exist, and
no consideration shall be delivered in exchange therefor.
(b) Each share of common stock of the respective Acquired Companies,
par value $0.001 per share in the case of Advisers, $1.00 per share in the
case of Allied I, $1.00 per share in the case of Allied II and $0.0001 per
share in the case of Commercial, outstanding immediately prior to the
Effective Time (collectively, the "Acquired Company Shares"), other than
Acquired Company Shares to be canceled in accordance with Section 1.02(a),
shall be converted (the "Conversion"), without any action on the part of
the holder, into fully paid and non-assessable shares of common stock, par
value $0.0001 per share, of Lending ("Common Stock") according to the
following respective conversion ratios (the "Merger Consideration"):
(i) each Acquired Company Share of Advisers shall be converted into
0.31 shares of Common Stock;
(ii) each Acquired Company Share of Allied I shall be converted
into 1.07 shares of Common Stock;
(iii) each Acquired Company Share of Allied II shall be converted
into 1.40 shares of Common Stock; and
(iv) each Acquired Company Share of Commercial shall be converted
into 1.60 shares of Common Stock.
(c) The Surviving Company shall issue fractional shares of Common
Stock to the extent the Conversion results in a fraction of a share, in
which case such fraction shall be rounded to the nearest one-thousandth of
a share (rounding upward from the mid-point between thousandths of a
share).
(d) All Acquired Company Shares shall cease to exist, and each
certificate previously representing Acquired Company Shares shall (subject
to Section 1.03(c)) thereafter represent for all corporate purposes the
shares of Common Stock into which such Acquired Company Shares have been
converted. Certificates previously representing Acquired Company Shares
shall be exchanged for a confirmation of ownership of Common Stock issued
in consideration therefor upon surrender in accordance with Section 1.03,
without interest.
(e) Except as provided in Section 1.02(d), the Surviving Company shall
issue shares of Common Stock to be issued in the Merger in uncertificated
form, and in accordance with Section 1.03 shall send to each person
entitled to receive such shares the information required under Section
2-210(c) of the GCL with respect to such shares (a "Confirmation").
SECTION 1.03. SURRENDER. (a) Prior to the Effective Time, Lending shall
appoint an agent reasonably acceptable to each Acquired Company (the "Exchange
Agent") for the purpose of exchanging certificates representing Acquired Company
Shares for Confirmations as to the Merger Consideration. Lending shall make
available to the Exchange Agent, as needed, the Merger Consideration and related
information to be delivered in respect of the Acquired Company Shares. Promptly
after the Effective Time, Lending shall send, or shall cause the Exchange Agent
to send, to each holder of Acquired Company Shares at the Effective Time a
letter of transmittal, in form and substance reasonably acceptable to the
Acquired Company in which that holder owns Acquired Company Shares, for use in
such exchange (which shall specify that the risk of loss and title to the
certificates representing the Acquired Company Shares shall pass only upon
proper delivery of the certificates representing such Acquired Company Shares to
the Exchange Agent).
(b) From and after the Effective Time, each holder of Acquired Company
Shares, upon surrender to the Exchange Agent of a certificate or certificates
representing such Acquired Company Shares, together with a
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properly completed letter of transmittal covering such Acquired Company Shares,
shall be entitled to receive a Confirmation as to the Merger Consideration
deliverable in respect of such Acquired Company Shares.
(c) No dividends or other distributions that have been declared or made in
respect of the Common Stock with a record date after the Effective Time shall be
paid to any person in respect of Common Stock such person receives in the Merger
unless such person has surrendered the certificates formerly representing all
Acquired Company Shares held by such person, together with a properly completed
letter of transmittal covering such certificates. Such dividends or other
distributions shall instead be paid to the Exchange Agent on behalf of, and as
nominee for, such person, and held by the Exchange Agent in a non-interest
bearing account. Upon surrender of any such certificates formerly representing
Acquired Company Shares, the Exchange Agent shall distribute to such person the
amount of dividends or other distributions in respect of Common Stock with a
record date after the Effective Time theretofore paid (but withheld pursuant to
the immediately preceding sentence), without interest.
(d) Holders of record immediately prior to the Effective Time of Acquired
Company Shares shall be entitled, at and after the Effective Time, to vote the
number of shares of Common Stock into which their Acquired Company Shares shall
have been converted so long as they remain record holders of such shares of
Common Stock, regardless of whether the certificates formerly representing such
Acquired Company Shares shall have been surrendered in accordance with this
Section 1.03 or a Confirmation with respect to such shares of Common Stock shall
have been issued.
(e) If any portion of the Merger Consideration is to be delivered to a
person other than the registered holder of the Acquired Company Shares
represented by the certificates surrendered in exchange therefor, it shall be a
condition to such delivery that the certificate or certificates so surrendered
shall be properly endorsed or otherwise be in proper form for transfer and that
the person requesting such delivery shall pay to the Exchange Agent any transfer
or other taxes required as a result of such delivery to a person other than the
registered holder of such Acquired Company Shares or establish to the
satisfaction of the Surviving Company that such taxes have been paid or are not
payable.
(f) The foregoing provisions of this Section 1.03 shall apply to Acquired
Company Shares of a given Acquired Company held by a person partly in
certificated form and partly in uncertificated form. If any holder of Acquired
Company Shares of a given Acquired Company shall at the Effective Time hold all
of such Acquired Company Shares in uncertificated form, then the foregoing
provisions of this Section 1.03 shall not apply to such Acquired Company Shares,
and such holder shall be entitled to receive a Confirmation as to the Merger
Consideration issuable in respect of such Acquired Company Shares without any
action on the part of such holder.
(g) At the Effective Time, the stock transfer books of each Acquired
Company shall be closed, and thereafter there shall be no further registration
of transfers of Acquired Company Shares. If, after the Effective Time,
certificates representing Acquired Company Shares are presented to the Surviving
Company, they shall be canceled and exchanged for the Merger Consideration in
accordance with the procedures set forth in this Article I.
(h) Any dividends or other distributions paid to the Exchange Agent
pursuant to Section 1.03(c) that remain unclaimed by the holders of Acquired
Company Shares shall not revert or be returned to the Surviving Company, and the
Surviving Company hereby waives any rights it may have to such assets. The
Surviving Company shall not be liable to any holder of Acquired Company Shares
for any amount required to be paid to a public official pursuant to applicable
abandoned property laws.
ARTICLE II.
THE SURVIVING COMPANY
SECTION 2.01. CHARTER. The charter of Lending in effect at the Effective
Time, as amended by the Articles of Merger, shall be the charter of the
Surviving Company until amended in accordance with applicable law.
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SECTION 2.02. BYLAWS. The bylaws of Lending in effect at the Effective
Time shall be the bylaws of the Surviving Company until amended in accordance
with applicable law.
SECTION 2.03. DIRECTORS AND OFFICERS. From and after the Effective Time,
until successors are duly elected or appointed and qualified in accordance with
applicable law and the charter and bylaws of the Surviving Company, the
directors of Lending at the Effective Time (giving effect to the election or
appointment of directors provided for in Section 6.02) shall be the directors of
the Surviving Company and (ii) the officers of Lending at the Effective Time
shall be the officers of the Surviving Company.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES APPLICABLE TO ALL COMPANIES
Each Company represents and warrants to each other Company that:
SECTION 3.01. CORPORATE EXISTENCE AND POWER. Such Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Maryland, and has all requisite corporate power and authority
required to carry on its business as now conducted. Such Company is duly
qualified to do business as a foreign corporation and is in good standing in
each jurisdiction where the character of the property owned or leased by it or
the nature of its activities makes such qualification necessary, except for
those jurisdictions where the failure to be so qualified could not reasonably be
expected, individually or in the aggregate, to have a material adverse effect on
the condition (financial or otherwise), business or results of operations of
such Company and its Subsidiaries, taken as a whole (other than any change or
effect resulting from any change in general economic conditions), or on the
ability of such Company to consummate the transactions contemplated by this
Agreement (a "Material Adverse Effect"). For purposes of this Agreement,
"Subsidiary" means, with respect to any person, any other person of which
securities or other ownership interests having ordinary voting power to elect a
majority of the board of directors or other persons performing similar functions
are at the time directly or indirectly owned by such person, and the term
"person" means any corporation, partnership, limited liability company, trust,
association, organization or other entity or natural person. Such Company has
heretofore delivered to each of the other Companies or its counsel true and
complete copies of such Company's charter and bylaws as currently in effect.
SECTION 3.02. CORPORATE AUTHORIZATION. The execution, delivery and
performance by such Company of this Agreement and the consummation by such
Company of the transactions contemplated hereby are within such Company's
corporate powers and, except for the approval by such Company's stockholders of
this Agreement and the Merger, have been duly authorized by all necessary
corporate action on the part of such Company.
SECTION 3.03. GOVERNMENTAL AUTHORIZATION. The execution, delivery and
performance by such Company of this Agreement and the consummation by such
Company of the transactions contemplated hereby require no action by or in
respect of, or filing with, any governmental body, agency, official or authority
other than (i) the filing of the Articles of Merger in accordance with the GCL
and appropriate documents with the relevant authorities of jurisdictions in
which such Company is qualified to do business as a foreign corporation; (ii)
compliance with any applicable requirements of the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 (the "HSR Act"); (iii) compliance with any applicable
requirements of the Securities Act of 1933, as amended, and the rules and
regulations promulgated thereunder (the "1933 Act"), the Securities Exchange Act
of 1934, as amended, and the rules and regulations promulgated thereunder (the
"1934 Act"), the Investment Company Act of 1940, as amended, and the rules and
regulations promulgated thereunder (the "1940 Act") and, with respect to
Advisers, the Investment Advisers Act of 1940, as amended, and the rules and
regulations promulgated thereunder (the "Advisers Act"); (iv) compliance with
any applicable state securities or "blue sky" laws; (v) compliance with any
applicable requirements of the Small Business Investment Act of 1958, as
amended, and the rules and regulations promulgated thereunder (the "1958 Act"),
the Small Business Act (1958), as amended, and the rules and regulations
promulgated thereunder (the "Small Business Act") and any other applicable
requirements, rules, or regulations of the U.S. Small Business Administration
(the "SBA"); (vi) the issuance by the U.S. Securities and Exchange Commission
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(the "SEC") of an order exempting the Merger from the provisions of Sections
17(a) and 57(a) of the 1940 Act (the "Exemptive Order"); and (vii) such other
actions or filings, the absence of which would not have a Material Adverse
Effect with respect to such Company.
SECTION 3.04. NON-CONTRAVENTION. The execution, delivery and performance
by such Company of this Agreement and the consummation by such Company of the
transactions contemplated hereby do not and will not (i) violate any provision
of applicable law or regulation (assuming compliance with the matters referred
to in Section 3.03) or of any judgment or order of any court of competent
jurisdiction, (ii) other than as set forth in Schedule 3.04, contravene or
constitute a default or require a consent of any person, or give rise to a right
of termination, cancellation or acceleration of any right or obligation of such
Company or to a loss of any benefit to which such Company is entitled, or result
in the creation or imposition of any Lien on any asset of such Company or any of
its Subsidiaries, under any agreement or other instrument binding on such
Company or any of its Subsidiaries, or (iii) violate any provision of the
charter or bylaws of such Company, except, in the case of clauses (i) and (ii)
above, for any such contravention, default, failure to obtain consent,
termination, cancellation, acceleration, loss or Lien that could not reasonably
be expected, individually or in the aggregate, to have a Material Adverse Effect
with respect to such Company.
SECTION 3.05. BINDING EFFECT. This Agreement has been duly executed and
delivered by, and constitutes a valid and binding obligation of, such Company,
enforceable against such Company in accordance with its terms except as such
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium, fraudulent conveyance or similar laws affecting the enforcement of
creditors' rights generally or by general equitable principles (regardless of
whether such enforcement is sought in a proceeding in equity or at law).
SECTION 3.06. COMPANY SUBSIDIARIES. (a) Each Subsidiary of such Company
is duly organized, validly existing and in good standing under the laws of its
jurisdiction of organization set forth in Schedule 3.06(a), has all corporate or
other powers and all material governmental licenses, authorizations, consents
and approvals required to carry on its business as now conducted and is duly
qualified to do business as a foreign entity and is in good standing in each
jurisdiction where the character of the property owned or leased by it or the
nature of its activities make such qualification necessary, except for those
jurisdictions where failure to be so qualified could not reasonably be expected,
individually or in the aggregate, to have a Material Adverse Effect with respect
to such Company. As of the date of this Agreement, the Subsidiaries of such
Company set forth in Schedule 3.06(a) are the only Subsidiaries of such Company.
(b) Except as specified in Schedule 3.06(b) or in Section 4.05, (i) all of
the outstanding capital stock or other voting securities or ownership interests
of each Subsidiary of such Company is owned by such Company, directly or
indirectly, free and clear of any Lien and free of any other limitation or
restriction (including any restriction on the right to vote, sell or otherwise
dispose of such capital stock or other voting securities or ownership
interests), (ii) there are no outstanding (A) securities of such Company or any
of its Subsidiaries convertible into or exchangeable for shares of capital stock
or other voting securities or ownership interests in any Subsidiary of such
Company, (B) options, warrants or other rights to acquire from such Company or
any of its Subsidiaries, or any other obligation of such Company or any of its
Subsidiaries to issue, any capital stock, voting securities or other ownership
interests in, or any securities convertible into or exchangeable for any capital
stock, voting securities or ownership interests in, any Subsidiary of such
Company, or (C) securities of any Subsidiary of such Company other than capital
stock, voting securities or other ownership interests in such Subsidiary, and
(iii) there are no outstanding obligations of such Company or any of its
Subsidiaries to repurchase, redeem or otherwise acquire any outstanding capital
stock, voting securities or other ownership interests of any such Subsidiary.
For purposes of this Agreement, "Lien" means, with respect to any asset, any
mortgage, lien, pledge, charge, security interest or encumbrance of any kind in
respect of such asset.
SECTION 3.07. DISCLOSURE DOCUMENTS. (a) Each document filed by such
Company with the SEC in connection with the transactions contemplated by this
Agreement (the "Disclosure Documents"), including, without limitation, the joint
proxy statement of the Companies also constituting the prospectus in respect of
the Common Stock to be issued in the Merger (the "Joint Proxy
Statement/Prospectus") to be sent to the
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stockholders of each Company, and any amendments or supplements thereto will,
when filed, comply as to form in all material respects with the applicable
requirements of the 1933 Act, the 1934 Act and the 1940 Act; provided that no
representation and warranty is made by any Company concerning statements or
omissions contained therein based upon information furnished or which should
have been furnished by any other Company specifically for use therein.
(b) At the time the Joint Proxy Statement/Prospectus or any amendment or
supplement thereto is first mailed to stockholders of any Company, at the time
such stockholders vote on approval of the Merger and at the Effective Time, with
respect to that Company the Joint Proxy Statement/Prospectus (as supplemented or
amended, if applicable) will not contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary in
order to make the statements made therein, in the light of the circumstances
under which they were made, not misleading. At the time of the filing by such
Company of any Disclosure Document other than the Joint Proxy
Statement/Prospectus and at the time of any distribution thereof, such
Disclosure Document will not contain any untrue statement of a material fact or
omit to state a material fact necessary in order to make the statements made
therein, in the light of the circumstances under which they were made, not
misleading. The representations and warranties by any Company contained in this
Section 3.07(b) will not apply to statements or omissions included in the
Disclosure Documents based upon information furnished or which should have been
furnished by any other Company specifically for use therein.
SECTION 3.08. FINDERS' FEES. Except for (i) Morgan Stanley & Co.
Incorporated, whose fees are to be paid in accordance with Section 9.03(a), and
(ii) the investment banker retained by each respective Company, as set forth in
Schedule 3.08, whose fees are to be paid by such Company, no investment banker,
broker, finder or other intermediary has been retained by or is authorized to
act on behalf of such Company who is entitled to any fee or commission from any
Company or any of its Subsidiaries upon consummation of the transactions
contemplated by this Agreement.
SECTION 3.09. ABSENCE OF UNDISCLOSED LIABILITIES. Except as and to the
extent reflected in the consolidated balance sheet of such Company as of
December 31, 1996 and included in such Company's audited consolidated financial
statements for the year ended December 31, 1996 (each a "Balance Sheet") or as
referred to or described in the notes to the Company's audited consolidated
financial statements for the year ended December 31, 1996, neither such Company
nor any of its Subsidiaries had as of December 31, 1996 any liabilities or
obligations of any nature (whether accrued, absolute, contingent or otherwise
and whether due or to become due) that were material to such Company and its
Subsidiaries, taken as a whole. Since the date of the Balance Sheet of such
Company, neither such Company nor any of its Subsidiaries has incurred any
liabilities or obligations of any nature (whether accrued, absolute, contingent
or otherwise, and whether due or to become due) that are material to such
Company and its Subsidiaries, taken as a whole, except for such as were incurred
in the ordinary course of business and consistent with past practice or in
furtherance of the transactions contemplated by this Agreement.
SECTION 3.10. FINANCIAL STATEMENTS. (a) Such Company's audited
consolidated financial statements for the fiscal years ended December 31, 1992
through December 31, 1996 included in its annual reports on Form 10-K and its
unaudited consolidated interim financial statements for the fiscal quarters
ended March 31, 1997 and June 30, 1997 included in its quarterly reports on Form
10-Q fairly present in all material respects, in conformity with generally
accepted accounting principles ("GAAP") applied on a consistent basis throughout
the periods indicated (except as may be indicated in the notes thereto), the
consolidated financial position of such Company and its consolidated
Subsidiaries as of the dates thereof and their consolidated results of
operations and changes in net assets, cash flows and selected per share data and
ratios for the periods then ended (subject to normal year-end adjustments in the
case of any unaudited consolidated interim financial statements).
(b) Since December 31, 1996 there has not been (i) any redemption, purchase
or other acquisition by such Company of any of such Company's Acquired Company
Shares or shares of Common Stock, as applicable (other than those transacted
through the Allied Capital Deferred Compensation Trust or through such Company's
dividend reinvestment plan), or any declaration or payment of any dividend by
such Company other than (A) as disclosed in such Company's reports on Form 10-Q
for the first and second
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quarters of 1997 and (B) dividends on such Company's Acquired Company Shares or
shares of Common Stock, as applicable, as permitted in Section 6.03, or (ii) any
event that has had or could reasonably be expected to have a Material Adverse
Effect on such Company.
SECTION 3.11. LITIGATION. Except as disclosed in such Company's SEC
Reports (as hereinafter defined) or Schedule 3.11, there is no suit, action or
proceeding pending or, to the knowledge of such Company, threatened against or
affecting such Company or any of its Subsidiaries that, individually or in the
aggregate, could reasonably be expected to (i) have a Material Adverse Effect
with respect to such Company or (ii) prevent the consummation of any of the
transactions contemplated by this Agreement, nor is there any judgment, decree,
injunction, rule or order of any governmental entity or arbitrator outstanding
against such Company or any of its Subsidiaries having, or which, insofar as
reasonably can be foreseen, in the future would have, any such effect.
SECTION 3.12. REGULATORY MATTERS. Such Company has all material permits,
licenses, approvals, orders, authorizations of and registrations with any
governmental entity or self-regulatory organization required by the Company to
carry on its business as presently conducted.
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES APPLICABLE TO INDIVIDUAL COMPANIES
SECTION 4.01. CAPITALIZATION. (a) Advisers represents and warrants to
each other Company that its authorized capital stock consists of 20,000,000
shares of common stock, par value $0.001 per share, and that, as of July 31,
1997 there were 9,133,379 shares of common stock of Advisers outstanding.
(b) Allied I represents and warrants to each other Company that its
authorized capital stock consists of 10,000,000 shares of common stock, par
value $1.00 per share, and that, as of July 31, 1997 there were 7,367,052 shares
of common stock of Allied I outstanding.
(c) Allied II represents and warrants to each other Company that its
authorized capital stock consists of 20,000,000 shares of common stock, par
value $1.00 per share, and that, as of July 31, 1997 there were 7,628,615 shares
of common stock of Allied II outstanding.
(d) Lending represents and warrants to each other Company that (i) its
authorized capital stock consists of 20,000,000 shares of common stock, par
value $0.0001 per share, which share amount shall be increased to 100,000,000
shares upon the effectiveness of the Articles of Merger, (ii) as of July 31,
1997 there were outstanding 5,150,448 shares of Common Stock, and (iii) subject
to the Articles of Merger becoming effective, the shares of Common Stock to be
issued in the Merger will, when issued, have been duly authorized and validly
issued and will be fully paid and nonassessable, and the issuance of such shares
in the Merger will not be subject to any preemptive or other similar rights.
(e) Commercial represents and warrants to each other Company that its
authorized capital stock consists of 50,000,000 shares of common stock, par
value $0.0001 per share, and 5,000,000 shares of preferred stock, par value
$0.0001 per share, and that, as of July 31, 1997 there were 14,476,997 shares of
common stock of Commercial outstanding, and no shares of such preferred stock of
Commercial outstanding.
(f) Each Company represents and warrants to each other Company that all of
its issued and outstanding shares of capital stock have been duly authorized and
validly issued and are fully paid and nonassessable and that, except as set
forth in this Section 4.01 or Section 4.02 and except for shares of Common Stock
issued after July 31, 1997 pursuant to such Company's dividend reinvestment plan
or upon exercise of options referred to in Section 4.02, there are no
outstanding (i) shares of capital stock or other voting securities of such
Company, or (ii) securities of such Company convertible into or exchangeable for
shares of capital stock or other voting securities of such Company, or (iii)
options, warrants or other rights to acquire from such Company, or any other
obligation of such Company to issue, any capital stock, voting securities or
securities convertible into or exchangeable for capital stock or voting
securities of such Company (the items referred to in clauses (i), (ii) and (iii)
with respect to any Company being referred to collectively as "Company
Securities"). Each Company represents and warrants to each other Company that
there are no outstanding
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obligations of such Company or any of its Subsidiaries to repurchase, redeem or
otherwise acquire any Company Securities of such Company.
SECTION 4.02. STOCK OPTIONS. (a) Advisers represents and warrants to each
other Company that as of July 31, 1997, pursuant to its Incentive Stock Option
Plan, there were outstanding options to purchase 1,632,126 shares of common
stock of Advisers.
(b) Allied I represents and warrants to each other Company that as of July
31, 1997, pursuant to its Stock Option Plan, there were outstanding options to
purchase 803,881 shares of common stock of Allied I.
(c) Allied II represents and warrants to each other Company that as of July
31, 1997, pursuant to its Stock Option Plan, there were outstanding options to
purchase 714,630 shares of common stock of Allied II.
(d) Lending represents and warrants to each other Company that as of July
31, 1997, pursuant to its Stock Option Plan, there were outstanding options to
purchase 504,894 shares of common stock of Lending.
(e) Commercial represents and warrants to each other Company that as of
July 31, 1997, pursuant to its Incentive Stock Option Plan, there were
outstanding options to purchase 729,669 shares of common stock of Commercial.
(f) Each Company represents to each other Company that it has reserved
sufficient shares of its common stock for issuance upon exercise of all
outstanding options issued by such Company.
SECTION 4.03. SEC AND SBA FILINGS. (a) Advisers represents and warrants
to each other Company that:
(i) It has heretofore timely filed all registration statements,
reports, proxy statements and other documents and information with the SEC
("SEC Reports") required to be filed by it pursuant to the 1933 Act, the
1934 Act, the 1940 Act and the Advisers Act since December 31, 1994. Such
SEC Reports, as of their respective dates, complied in all material
respects with the applicable requirements of the 1933 Act, the 1934 Act,
the 1940 Act and the Advisers Act, as the case may be, and none of such SEC
Reports, as of their respective dates, contained any untrue statement of a
material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. Such Company has
otherwise complied in all material respects with the 1933 Act, the 1934
Act, the 1940 Act and the Advisers Act.
(ii) It is duly registered as an investment adviser under the Advisers
Act and any other applicable law. Schedule 4.03(a)(ii) lists the
jurisdictions in which Advisers is registered as an investment adviser, and
each such registration is in full force and effect. Other than the
jurisdictions set forth in Schedule 4.03(a)(ii), Advisers is not required
to be registered as an investment adviser in any jurisdiction, except where
such non-registration, individually or in the aggregate, has not had and
would not have a Material Adverse Effect with respect to Advisers. Advisers
is not required to be registered under any applicable law as a transfer
agent or a broker-dealer.
(iii) Neither Advisers nor any "affiliated person" of Advisers (as
defined in the 1940 Act), as applicable, is ineligible pursuant to Section
9(a) or (b) of the 1940 Act to serve as an investment adviser (or in any
other capacity contemplated by the 1940 Act) to an investment company
registered under the 1940 Act or to a company which has elected to be a
"business development company" pursuant to Section 54 of the 1940 Act and
has not withdrawn its election (a "BDC"). Neither Advisers nor any "person
associated" (as defined in the Advisers Act) with Advisers, as applicable,
is ineligible pursuant to Section 203 of the Advisers Act to be an
investment adviser registered under the Advisers Act or person associated
with such a registered investment adviser.
(iv) Except as set forth in its reports and proxy statements,
including the exhibits thereto, filed with the SEC pursuant to the 1934
Act, the 1940 Act and/or the Advisers Act since December 31, 1994 or in
Schedule 4.03(a)(iv), there are no material employment, consulting,
benefit, severance or indemnification arrangements, agreements or
understandings between Advisers, on the one hand, and any directors or
officers of Advisers, on the other hand, and, except as so set forth, none
of such directors or officers or any
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Affiliate of Advisers has any interest (other than normal rights as a
stockholder of Advisers) in any material property, real or personal,
tangible or intangible, used in the business of Advisers. For purposes of
this Agreement, "Affiliate" means, with respect to any person, any other
person which, as of the time of determination, controls, is controlled by
or is under common control with such person.
(b) Each of Allied I, Allied II and Lending represents and warrants to each
other Company that, as to itself:
(i) It has heretofore timely filed all SEC Reports required to be
filed by it pursuant to the 1933 Act, the 1934 Act and the 1940 Act since
December 31, 1994. Such SEC Reports, as of their respective dates, complied
in all material respects with the applicable requirements of the 1933 Act,
the 1934 Act and the 1940 Act, as the case may be, and none of such SEC
Reports, as of their respective dates, contained any untrue statement of a
material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. Such Company has
otherwise complied in all material respects with the 1933 Act, the 1934 Act
and the 1940 Act.
(ii) Except as set forth in its reports and proxy statements,
including the exhibits thereto, filed with the SEC pursuant to the 1934 Act
and/or the 1940 Act since December 31, 1994 or in Schedule 4.03(b)(ii),
there are no material employment, consulting, benefit, severance or
indemnification arrangements, agreements or understandings between such
Company, on the one hand, and any directors or officers of such Company, on
the other hand, and, except as so set forth, none of such directors or
officers or any Affiliate of such Company has any interest (other than
normal rights as a stockholder of such Company) in any material property,
real or personal, tangible or intangible, used in the business of such
Company.
(iii) Such Company and each of its Subsidiaries has filed all material
reports and documents required to be filed pursuant to the 1958 Act, the
Small Business Act, and any other applicable SBA requirement, rule or
regulation.
(c) Commercial represents and warrants to each other Company:
(i) It has heretofore timely filed all SEC Reports required to be
filed by it pursuant to the 1933 Act and the 1934 Act since December 31,
1994. Such SEC Reports, as of their respective dates, complied in all
material respects with the applicable requirements of the 1933 Act and the
1934 Act, as the case may be, and none of such SEC Reports, as of their
respective dates, contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which
they were made, not misleading. Such Company has otherwise complied in all
material respects with the 1933 Act and the 1934 Act.
(ii) Except as set forth in its reports and proxy statements,
including the exhibits thereto, filed with the SEC pursuant to the 1934 Act
since December 31, 1994 or in Schedule 4.03(c)(ii), there are no material
employment, consulting, benefit, severance or indemnification arrangements,
agreements or understandings between Commercial, on the one hand, and any
directors or officers of Commercial, on the other hand, and, except as so
set forth, none of such directors or officers or any Affiliate of
Commercial has any interest (other than normal rights as a stockholder of
Commercial) in any material property, real or personal, tangible or
intangible, used in the business of Commercial.
SECTION 4.04. TAXES. (a) Each Company represents and warrants to each
other Company that such Company and each of its Subsidiaries has filed all tax
returns required to be filed and has paid, or has established an adequate
reserve for the payment of, all taxes required to be shown on such returns, and
the most recent Balance Sheet of such Company reflects an adequate reserve for
all such taxes accrued through the date of such Balance Sheet in accordance with
GAAP. No material deficiencies for any taxes have been proposed, asserted or
assessed against such Company or any of its Subsidiaries that are not adequately
reserved for in such Balance Sheet. The respective federal income tax returns of
such Company and its Subsidiaries (i) in the case of Allied I, Allied II,
Lending and Commercial have not been examined by the U.S. Internal Revenue
Service (the "IRS") during the period of five calendar years preceding the date
of this
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Agreement, and (ii) in the case of Advisers have, except with respect to claims
for refund, been examined and settled with the IRS for, or the statute of
limitations has expired (and no waiver extending the statute of limitations has
been requested or granted) with respect to, all periods through December 31,
1992. For the purposes of this Agreement, the term "tax" (including, with
correlative meaning, the terms "taxes" and "taxable") shall include, except
where the context otherwise requires, all federal, state, local and foreign
income, profits, franchise, gross receipts, payroll, sales, employment, use,
property, withholding, excise, occupancy and other taxes, duties or assessments
of any nature whatsoever, together with all interest, penalties and additions
imposed with respect to such amounts. Neither such Company nor any of its
Subsidiaries has taken any action or has any knowledge of any fact or
circumstance that is reasonably likely to prevent the Merger from qualifying as
a tax-free reorganization within the meaning of Section 368(a) of the Code.
(b) Each of Allied I, Allied II and Lending represents and warrants to each
other Company that, as to itself, (i) it is, and since its formation has elected
to be, treated as a "regulated investment company" within the meaning of Section
851 of the Code ("RIC"), and is and since its formation has been entitled to the
benefits available under the provisions of Part I of Subchapter M of Chapter 1
of the Code ("Part I") and (ii) during each of its taxable years it has paid
dividends in amounts sufficient to reduce its income and excise tax liabilities
for such years to zero.
(c) Commercial represents and warrants to each other Company that (i)
Commercial is, and since its formation has been, a "real estate investment
trust" within the meaning of Section 856(a) of the Code ("REIT"), and is, and
since its formation has been entitled to the benefits available under the
provisions of Part II of Subchapter M of Chapter 1 of the Code ("Part II") and
(ii) during each of its taxable years Commercial has paid dividends in amounts
sufficient to reduce its income and excise tax liabilities for such years to
zero.
SECTION 4.05. NON-WHOLLY OWNED SUBSIDIARIES. Commercial represents and
warrants to each other Company that, as of the date of this Agreement, it
directly owns 79% of the units of ownership interest in Allied Capital Mortgage
LLC ("Mortgage") and indirectly (through its wholly-owned subsidiary ALCC
Acceptance Corporation) owns 82% of the units of ownership interest in Allied
Capital Funding, L.L.C. ("Funding"), each a Delaware limited liability company
and each deemed to be an affiliated person (as such term is defined in the 1940
Act) of Commercial. Commercial represents and warrants that (i) the units of
ownership interest it owns in each of Mortgage and Funding are free and clear of
any Lien and free of any other limitation or restriction other than as set forth
in the respective limited liability company agreements of Mortgage and Funding
and (ii) there are no obligations of Commercial or any of its Subsidiaries to
repurchase, redeem or otherwise acquire any outstanding ownership interests of
Mortgage or Funding.
SECTION 4.06. EMPLOYEE BENEFIT PLANS; ERISA. Advisers represents and
warrants to each other Company that:
(a) No "employee pension benefit plan" (as defined in Section 3(2) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"))
(sometimes referred to herein as "Pension Plan") that Advisers maintains, or to
which Advisers is obligated to contribute had, as of the respective last annual
valuation date for each such Pension Plan, an "unfunded benefit liability" (as
such term is defined in Section 4001(a)(18) of ERISA), based on reasonable
actuarial assumptions utilized by Advisers. None of the Pension Plans has an
"accumulated funding deficiency" (as such term is defined in Section 302 of
ERISA or Section 412 of the Code), whether or not waived. No Pension Plan to
which Advisers is obligated to contribute with respect to any current or former
employee of Advisers is a "multiemployer plan" (as such term is defined in
Section 4001(a)(3) of ERISA).
(b) Each "employee welfare benefit plan" (as defined in Section 3(1) of
ERISA (sometimes referred to herein as "Welfare Plan")) that Advisers maintains
and that is a "group health plan", as such term is defined in Section 5000(b)(1)
of the Code, complies in all material respects with the applicable requirements
of Section 4980B(f) of the Code.
(c) Other than claims for benefits arising in the ordinary course of the
administration and operation of the Pension Plans and Welfare Plans, there are
no claims, investigations or arbitrations pending by or with
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respect to any current or former employees of Advisers against any Pension Plan
or Welfare Plan or against Advisers or any trust or arrangement created under or
as part of any Pension Plan or Welfare Plan, any trustee, fiduciary, custodian,
administrator or other person or entity holding or controlling assets of any
Pension Plan or Welfare Plan that, individually or in the aggregate, could
reasonably be expected to have a Material Adverse Effect with respect to
Advisers.
SECTION 4.07. ENVIRONMENTAL MATTERS. (a) Each Company represents and
warrants to each other Company that (i) except for commercially reasonable
quantities of leasing and office supplies, such Company has never generated,
transported, used, stored, treated, disposed of, or managed any Hazardous
Substance; and (ii) to the knowledge of such Company, (A) such Company does not
have any material liability under, nor has such Company ever violated in any
material respect, any Environmental, Health and Safety Law; (B) such Company is
in compliance in all material respects with all applicable Environmental, Health
and Safety Laws; and (C) such Company has never entered into nor been subject to
any judgment, consent decree, compliance order, or administrative order with
respect to any environmental or health and safety matter nor received any demand
letter, formal complaint or claim with respect to any environmental or health
and safety matter or the enforcement of any Environmental, Health and Safety
Law.
(b) For the purposes of this Section 4.07, "Environmental, Health and
Safety Laws" means the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, the Resource Conservation and Recovery Act of 1976, the
Clean Air Act, the Federal Water Pollution Control Act, the Safe Drinking Water
Act of 1974, the Toxic Substances Control Act, the Emergency Planning and
Community Right-to-Know Act of 1986, the Hazardous Materials Transportation Act,
and the Occupational Safety and Health Act of 1970, each as amended, together
with all other laws (including rules, regulations, codes, injunctions,
judgments, orders, decrees and rulings) of federal, state and local governments
(and all agencies thereof) concerning pollution or protection of the
environment, public health and safety, or employee health and safety, including
laws relating to emissions, discharges, releases, or threatened release of
pollutants, contaminants, or chemical, industrial, hazardous, or toxic materials
(including petroleum products and asbestos) or wastes into ambient air, surface
water, ground water, or lands or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport, or
handling of pollutants, contaminants, or chemical, industrial, hazardous, or
toxic materials or wastes ("Hazardous Substances").
ARTICLE V.
COVENANTS OF ALL COMPANIES
Each Company agrees that:
SECTION 5.01. BEST EFFORTS. Subject to the terms and conditions of this
Agreement, such Company shall use its best efforts to take, or cause to be
taken, all actions and to do, or cause to be done, all things necessary, proper
or advisable under applicable laws and regulations to consummate the
transactions contemplated by this Agreement.
SECTION 5.02. EXEMPTIVE ORDER. Such Company shall use its best efforts to
proceed as promptly as possible to cause the Exemptive Order to be issued and
shall negotiate in good faith with each other Company as to any amendment to
this Agreement that may be necessary to comply with any conditions of the
Exemptive Order that are inconsistent with this Agreement.
SECTION 5.03. FILINGS UNDER HSR ACT. Such Company shall use its best
efforts to proceed as promptly as possible to cause to be made the necessary
filings under the HSR Act with respect to the transactions contemplated by this
Agreement and shall thereafter use its best efforts to ensure that the related
waiting period expires or is otherwise terminated at the earliest possible time.
SECTION 5.04. CERTAIN FILINGS. Such Company (a) shall cooperate with each
other Company in determining whether any actions by or in respect of, or filings
with, any governmental body, agency, official or authority (other than such
actions or filings as are referred to in this Agreement) are required, or any
actions, consents, approvals or waivers are required to be obtained from third
parties to any material contracts, in
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connection with the consummation of the transactions contemplated by this
Agreement and (b) use its best efforts in seeking any such actions, consents,
approvals or waivers required by it or making any such filings, furnishing
information required in connection therewith and seeking timely to obtain any
such actions, consents, approvals or waivers.
SECTION 5.05. JOINT PROXY STATEMENT/PROSPECTUS; REGISTRATION
STATEMENT. Such Company shall cooperate in the preparation and filing with the
SEC by Lending of a registration statement on Form N-14 with respect to the
Common Stock to be issued in the Merger, which shall include the Joint Proxy
Statement/Prospectus (the "Registration Statement"), as soon as practicable
after the date hereof and shall use its best efforts to cause such Registration
Statement to be declared effective under the 1933 Act. Promptly after the
effectiveness of the Registration Statement, each Company shall cause the
definitive Joint Proxy Statement/Prospectus, together with appropriate proxies,
to be mailed to its stockholders, and, if necessary, after the definitive Joint
Proxy Statement/Prospectus shall have been mailed, promptly circulate amended,
supplemented or supplemental proxy materials. Such Company shall furnish each
other Company with all information concerning itself, its directors, officers,
stockholders and properties and such other matters as may be necessary or
advisable for the preparation of the Registration Statement, the Joint Proxy
Statement/Prospectus, and any filings under state blue sky laws in connection
with the transactions contemplated by this Agreement.
SECTION 5.06. ACCESS. Such Company (the "disclosing party") shall, after
receiving reasonable advance notice from any other Company (the "investigating
party"), afford the investigating party and its representatives reasonable
access to the disclosing party's books and records, licenses, agreements and
other information relating to the disclosing party. The investigating party may,
directly or through its representatives, make such investigation of the assets
of the disclosing party and its businesses as the investigating party may deem
necessary or advisable. No such investigation shall affect or limit the
representations and warranties of any Company contained herein.
SECTION 5.07. FURTHER ASSURANCES. At and after the Effective Time, the
officers and directors of the Surviving Company shall be authorized to execute
and deliver, in the name and on behalf of each Company, any deeds, bills of
sale, assignments or assurances and to take and do, in the name and on behalf of
such Company, any other actions and things to vest, perfect or confirm of record
or otherwise in the Surviving Company any and all right, title and interest in,
to and under any of the rights, properties or assets of each Acquired Company
acquired or to be acquired by the Surviving Company as a result of, or in
connection with, the Merger.
SECTION 5.08. CONFIDENTIALITY. Such Company shall use all reasonable
efforts to maintain the confidentiality of all non-public information concerning
each other Company and its Subsidiaries that is received by such Company or its
representatives in connection with the Merger, subject to the requirements of
applicable law and to judicial process.
SECTION 5.09. CONDUCT OF EACH COMPANY. From the date hereof until the
Effective Time, except as contemplated or specifically permitted by this
Agreement or with the prior written consent of each of the other Companies, such
Company shall cause the business of that Company and its Subsidiaries to be
conducted in the ordinary course consistent with past practice and shall use its
best efforts to preserve intact their business organizations and relationships
with third parties and to keep available the services of their present officers
and, if applicable, employees. Without limiting the generality of the foregoing,
from the date hereof until the Effective Time, such Company agrees that, without
such consent, it will not, and will not permit any of its Subsidiaries to, do or
agree to do any of the following:
(a) adopt or propose any change in its charter or bylaws;
(b) merge or consolidate with any other person except as provided in
Section 5.11 and except for any merger solely between such Company and one or
more of its Subsidiaries (provided such Company is the surviving company in such
merger) or solely between two or more of such Company's Subsidiaries;
(c) sell or otherwise dispose of any assets or property except in the
ordinary course of business consistent with past practice;
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(d) amend any material contract, instrument or other agreement;
(e) acquire any assets other than in the ordinary course of business;
(f) incur any material liabilities or any material indebtedness except in
the ordinary course of business consistent with past practice;
(g) take any action that would make any representation and warranty (other
than any representation and warranty made as of a specified date) of such
Company hereunder inaccurate in any respect at, or as of any time prior to, the
Effective Time; or
(h) adopt, amend, modify or terminate any Pension Plan or Welfare Plan if
the effect thereof, individually or in the aggregate, would be a material
increase in the liabilities of such Company thereunder.
SECTION 5.10. STOCKHOLDERS' MEETING. Such Company shall cause a meeting
of its stockholders (each, a "Stockholders' Meeting") to be duly called and held
as soon as reasonably practicable for the purpose of voting on the approval and
adoption of this Agreement and the Merger. The directors of such Company shall,
subject to the exercise of their fiduciary duties after consulting with outside
counsel, recommend approval and adoption of this Agreement and the Merger by
such Company's stockholders. In connection with such meeting, such Company (i)
will use its best efforts to obtain the necessary approvals by its stockholders
of this Agreement, the Merger and the transactions contemplated hereby (subject,
insofar as the duty to recommend approval and adoption of this Agreement and the
Merger is concerned, to the exercise of their fiduciary duties after consulting
with outside counsel) and (ii) will otherwise comply with all legal requirements
applicable to such meeting.
SECTION 5.11. OTHER OFFERS. (a) Subject to the provisions of Section
5.11(b), in consideration of the substantial expenditure of time, effort and
expense undertaken and to be undertaken by each Company in the investigation,
negotiation and preparation of documents and other activities related to the
Merger, each Company agrees that, during the term of this Agreement, it will
not, without the consent of each other Company:
(i) solicit, initiate or encourage submission of proposals or offers
for, or accept any offers for, or enter into negotiations or discussion
with, any other person with regard to any Acquisition Proposal;
(ii) furnish to any other person any information with respect to, or
otherwise cooperate in any way with, or assist, facilitate or encourage,
any Acquisition Proposal between such Company and any other person; or
(iii) enter into a transaction, or commitment with respect thereto
(written or oral), with any person concerning an Acquisition Proposal.
For purposes of this Agreement, "Acquisition Proposal" with respect to a Company
means any proposal for a merger or other business combination involving such
Company or any of its Subsidiaries or any proposal or offer to acquire in any
manner, directly or indirectly, an equity interest in, any voting securities of,
or a substantial portion of the assets of the Company or any of its
Subsidiaries, other than the transactions contemplated by this Agreement and
other than any merger or other business combination solely between such Company
and one or more of its Subsidiaries or solely between two or more of such
Company's Subsidiaries.
(b) Notwithstanding any other provisions of this Agreement to the contrary,
to the extent required by the fiduciary obligations of the board of directors of
any Company, as determined in good faith by a majority of the disinterested
members thereof based on the advice of that Company's outside counsel, such
Company may:
(i) in response to an unsolicited request therefor, participate in
discussions or negotiations with, afford access to the properties, books or
records of such Company to, or furnish information with respect to such
Company pursuant to a customary confidentiality agreement (as determined by
such Company's
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outside counsel) to, any person in connection with any Acquisition Proposal
with respect to such Company; and
(ii) approve or recommend (and, in connection therewith withdraw or
modify its approval or recommendation of this Agreement or the Merger) a
superior Acquisition Proposal (hereinafter defined) or enter into an
agreement with respect to such superior Acquisition Proposal.
For purposes of this Agreement, "superior Acquisition Proposal" with respect to
a Company means a bona fide Acquisition Proposal made by a third party with
respect to such Company which a majority of the disinterested members of the
board of directors of such Company determines in its good faith judgment (based
on the advice of such Company's independent financial advisor) to be more
favorable to such Company's stockholders than the Merger, and for which
financing, to the extent required, is then committed or which, in the good faith
judgment of a majority of such disinterested members (based on the advice of
such Company's independent financial advisor), is reasonably capable of being
financed by such third party.
(c) Each Company will promptly notify each other Company orally and in
writing of: (i) any Acquisition Proposal or any inquiry with respect to or which
could lead to any Acquisition Proposal and the identity of the person making any
such Acquisition Proposal; and (ii) any inquiry or any request for non-public
information relating to such Company or for access to the properties, books or
records of such Company by any person that has advised such Company that it is
considering making, or has made, an Acquisition Proposal. Each Company will keep
each other Company fully informed of the status and details of any such
Acquisition Proposal or inquiry.
(d) Nothing contained in this Agreement shall prohibit a Company or the
board of directors of such Company from (i) taking and disclosing a position
with respect to a tender offer by any person pursuant to Rules 14d-9 and 14e-2
under the 1934 Act and (ii) making such disclosures to such Company's
stockholders which in the judgment of the board of directors of such Company,
with the advice of outside counsel, may be required under applicable law.
SECTION 5.12. NOTICES OF CERTAIN EVENTS. Such Company shall promptly
notify each other Company of:
(a) any notice or other communication from any person alleging that the
consent of such person is or may be required in connection with the transactions
contemplated by this Agreement;
(b) any notice or other communication from any governmental or regulatory
agency or authority in connection with the transactions contemplated by this
Agreement; and
(c) any actions, suits, claims, investigations or proceedings commenced or,
to the best of its knowledge, threatened against, relating to or involving or
otherwise affecting such Company that, if adversely determined, would have a
Material Adverse Effect on such Company or that relate to the consummation of
the transactions contemplated by this Agreement.
ARTICLE VI.
COVENANTS OF INDIVIDUAL COMPANIES
SECTION 6.01. INDEMNIFICATION OF OFFICERS AND DIRECTORS OF EACH ACQUIRED
COMPANY. Lending agrees that:
(a) From and after the consummation of the Merger, Lending as the Surviving
Company shall indemnify, defend and hold harmless any person who is now, or has
been at any time prior to the date hereof or who becomes prior to the Effective
Time, an officer or director of an Acquired Company or any of its Subsidiaries
from any and all losses, liabilities, claims, damages, costs and expenses
(including reasonable attorneys' fees) resulting from their acts and omissions
occurring prior to the Effective Time to the full extent permitted by applicable
provisions of the GCL and the 1940 Act including, without limitation, in respect
of all actions or omissions to act or alleged actions or omissions to act
arising out of or pertaining to the Merger (including, without limitation, the
negotiation, execution and delivery of this
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Agreement), including rights to receive advance payment of fees and expenses in
defending any suits, actions or proceedings. The Surviving Company shall cause
to be maintained in effect for not less than 72 months from the Effective Time
policies of directors' and officers' liability insurance currently in force and
covering those persons who are directors of an Acquired Company as of the date
hereof (provided that the Surviving Company may substitute therefor policies
providing coverage in an aggregate amount of $2,500,000, the other terms and
conditions of which are no less advantageous to the insured than those contained
in the policies currently in force) with respect to matters occurring prior to
the Effective Time; provided, that, in the event any claim or claims are
asserted or made within such 72 months, such coverage in respect thereof shall
not be terminated until final disposition of all such claims.
(b) In the event any action, suit, proceeding or investigation relating
hereto or to the transactions contemplated hereby is commenced, whether before
or after the Effective Time, the Companies agree to cooperate and use their best
efforts to defend against and respond thereto.
(c) This Section 6.01, which shall survive the consummation of the Merger
at the Effective Time, and except as set forth herein, shall continue without
limit, is intended to benefit each present and former director or officer of
each Acquired Company and its Subsidiaries (who shall be entitled to enforce the
provisions hereof) and shall be binding on all successors and assigns of such
Acquired Company and the Surviving Company and shall be in addition to any other
rights such person may have under the charter or bylaws of the Surviving Company
or any of its Subsidiaries, under the GCL or otherwise. In the event that the
Surviving Company or any of its successors or assigns (i) consolidates with or
merges into any other person and shall not be the continuing or surviving
corporation or entity of such consolidation or merger or (ii) transfers all or
substantially all of its properties and assets to any person, then and in such
case, proper provisions shall be made so that the successors and assigns of the
Surviving Company assume the obligations set forth in this Section 6.01.
SECTION 6.02. DIRECTORS OF LENDING. Prior to the Effective Time, Lending
shall take such action as may be necessary (i) to increase the size of its board
of directors to twenty-three and (ii) to cause the election or appointment of
each of the following persons as additional directors of Lending (if such person
is willing to serve as a director of Lending):
<TABLE>
<S> <C> <C>
Joseph A. Clorety III John D. Firestone Charles L. Palmer
Michael I. Gallie Lawrence I. Hebert Laura W. van Roijen
Warren K. Montouri John I. Leahy Brooks H. Browne
Guy T. Steuart II John D. Reilly Swep T. Davis
T. Murray Toomey Smith T. Wood Robert E. Long
</TABLE>
SECTION 6.03. DISTRIBUTIONS. (a) Advisers agrees that it will not and
will not agree to declare or pay any dividend or make any distribution on any of
its shares of common stock, or (otherwise than through the Allied Capital
Deferred Compensation Trust or through Advisers' dividend reinvestment plan)
redeem, repurchase or otherwise acquire any such shares, prior to the Effective
Time.
(b) Allied I agrees that it will not and will not agree to declare or pay
any dividend or make any distribution on any of its shares of common stock or
(otherwise than through Allied I's dividend reinvestment plan) redeem,
repurchase or otherwise acquire any such shares, provided that this Section 6.03
shall not prohibit (i) the payment of any dividend declared prior to the date of
this Agreement or (ii) the declaration and payment of, and Allied I shall
(unless prohibited by applicable law) declare prior to the Effective Time with a
record date prior to the Effective Time, (A) a dividend consisting of an in-kind
distribution of all the remaining outstanding common stock of Lending held by
Allied I, payable prior to the Effective Time, and (B) if necessary, one or more
additional dividends payable no later than January 31, 1998, in an amount that,
when aggregated with all dividends that were both declared and paid by Allied I
after January 31, 1997, is sufficient to reduce its income and excise tax
liabilities for 1997 to zero.
(c) Each of Allied II, Lending and Commercial agrees that it will not and
will not agree to declare or pay any dividend or make any distribution on any of
its shares of common stock or (otherwise than through such Company's dividend
reinvestment plan) redeem, repurchase or otherwise acquire any such shares,
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provided that this Section 6.03 shall not prohibit (i) the payment of any
dividend declared prior to the date of this Agreement or (ii) the declaration
and payment of, and each such Company shall declare prior to the Effective Time
with a record date prior to the Effective Time, one or more additional dividends
payable no later than January 31, 1998 in an amount that, when aggregated with
all dividends that were both declared and paid by such Company after January 31,
1997, is sufficient to reduce its income and excise tax liabilities for 1997 to
zero.
(d) Notwithstanding the preceding subsections of this Section 6.03, in the
event the Priority Closing Date, as defined in Section 8.01, is extended
pursuant to such Section then, in addition to any dividend otherwise permitted
by this Section 6.03, each of Allied I, Allied II, Lending and Commercial shall
be permitted after December 31, 1997, to declare and pay dividends in the
ordinary course of their business consistent with past practice.
SECTION 6.04. RIC AND REIT QUALIFICATIONS. Until the Effective Time, each
of Allied I, Allied II and Lending agrees that it shall remain qualified as a
RIC entitled to the benefit of the provisions of Part I, and Commercial agrees
that it shall remain qualified as a REIT entitled to the benefit of the
provisions of Part II.
SECTION 6.05. POST-MERGER DIVIDEND. Lending or the Surviving Company
shall comply with the requirements of Treas. Reg. Section 1.852-12(b)(1) by
declaring a dividend in an amount equal to its total current and accumulated
earnings and profits, including any such earnings and profits of any of the
Acquired Companies to which the Surviving Company succeeded in the Merger under
the provisions of Section 381 of the Code and applicable Treasury Regulations
(but without regard to any deficits in earnings and profits of any of the
Acquired Companies). Such dividend shall have a record date of the close of
business on December 31, 1997, subsequent to the Effective Time, and shall be
payable no later than January 31, 1998.
SECTION 6.06. AFFILIATES. Each Acquired Company agrees that prior to the
Closing Date (as defined in Article VII) it shall deliver to Lending a letter
identifying all persons who are to such Acquired Company's knowledge, at the
time this Agreement is submitted for approval to the stockholders of such
Acquired Company, "affiliates" of such Acquired Company for purposes of Rule 145
under the 1933 Act. Such Acquired Company shall use its reasonable efforts to
cause each such person to deliver to Lending at or prior to the Closing Date a
written agreement substantially in the form attached as Annex II hereto.
SECTION 6.07. STOCK OPTIONS. Each Company shall take such action as shall
be necessary to terminate, immediately prior to the Effective Time, its Stock
Option Plan (in the case of Allied I, Allied II or Lending) or its Incentive
Stock Option Plan (in the case of Commercial or Advisers), and shall use its
reasonable efforts to terminate, with the consent of the option holder, all
options outstanding thereunder.
SECTION 6.08. EMPLOYEE BENEFIT PLANS. Advisers and the Surviving Company
will take all actions necessary to ensure that, as of the Effective Time, the
Surviving Company effectively assumes sponsorship of The Allied Employee Stock
Ownership Plan. In addition, at the Effective Time, the Surviving Company will
provide to each person described in Section 6.09 those employee benefits
provided to them by Advisers immediately prior to the Effective Time, subject to
the Surviving Company's right to amend, modify or terminate the relevant benefit
programs as it determines in its sole discretion to be appropriate. Advisers and
the Surviving Company will take all actions necessary to ensure that the
aforementioned employee benefits can be provided to these persons at the
Effective Time.
SECTION 6.09. OTHER EMPLOYEE MATTERS. At the Effective Time, each person
who is immediately prior to the Effective Time an employee of Advisers will
become an employee of the Surviving Company subject to the termination of such
employment by the employer, the employee, by mutual consent of the employer and
employee or in any other manner.
SECTION 6.10. ARTICLES OF MERGER. Subject to the satisfaction or, to the
extent permitted hereunder, waiver of the conditions set forth in Section 7.02,
each Company shall execute and deliver at the Closing the Articles of Merger.
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ARTICLE VII.
CONDITIONS TO THE MERGER
SECTION 7.01. CLOSING DATE. The closing of the Merger (the "Closing")
shall take place as promptly as practicable after the conditions set forth in
this Article VII have been satisfied or, to the extent permitted hereby, waived,
at the offices of Sutherland, Asbill & Brennan LLP or at such other time and
place as the Companies shall agree. The date on which the closing occurs is
herein referred to as the "Closing Date."
SECTION 7.02. CONDITIONS TO THE OBLIGATIONS OF EACH COMPANY. The
respective obligation of each Company to consummate the Merger is subject to the
satisfaction of the following conditions:
(a) Representations and Warranties. The representations and warranties of
each other Company set forth in this Agreement and in any certificate or other
writing delivered by such other Company pursuant hereto that are qualified as to
materiality shall be true and correct, and the representations and warranties of
such other Company set forth in this Agreement and in any certificate or other
writing delivered by such other Company pursuant hereto that are not so
qualified shall be true and correct in all material respects, in each case as of
the date of this Agreement and as of the Closing Date, as though made on and as
of each such time (provided that representations and warranties made as of a
specified date shall be required to be true and correct only as of such date),
and such other Company shall have delivered a certificate signed on behalf of
such other Company by its chief executive officer and chief financial officer to
such effect.
(b) Performance of Obligations. Each other Company shall have performed in
all material respects all of its respective obligations hereunder required to be
performed by it under this Agreement at or prior to the Closing Date, and such
other Company shall have delivered to each other Company a certificate dated the
Closing Date signed on behalf of such other Company by its chief executive
officer and chief financial officer to such effect.
(c) 1933 Act. The Registration Statement shall have become effective under
the 1933 Act and shall not be the subject of any stop order or proceedings
seeking a stop order.
(d) Exemptive Order. The Exemptive Order shall have been issued by the SEC
and shall not contain any terms or conditions that are (i) unacceptable to any
Company, in its reasonable discretion, or (ii) inconsistent with this Agreement.
(e) HSR Act. Any applicable waiting period under the HSR Act relating to
the transactions contemplated hereby shall have expired or been terminated.
(f) Stockholder Approval. This Agreement and the Merger shall have been
duly approved by the stockholders of each respective Company by a vote of at
least two-thirds of all the votes entitled to be cast with respect thereto in
accordance with the GCL and the 1940 Act.
(g) SBA and Other Approvals. Each Company and its Subsidiaries shall have
obtained by the Closing Date any required approvals by the SBA in connection
with the Merger.
(h) Consents of Third Parties. Each of the consents referred to in
Schedule 3.04 shall have been obtained.
(i) No Legal Prohibition. No provision of any statute, rule or regulation,
and no judgment, injunction, order or decree of any court or governmental agency
shall prohibit or restrain the consummation of the Merger.
(j) Fairness Opinion. Such Company shall have received the written opinion
of its financial advisor identified in Schedule 3.08, dated on or about the date
of this Agreement, in form and substance satisfactory to such Company's board of
directors, a copy of which opinion shall be included as an exhibit to the
definitive Joint Proxy Statement/Prospectus, and such opinion shall not have
been withdrawn by such financial advisor.
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(k) Tax Opinion. Each Company shall have received on the Closing Date a
tax opinion from Sutherland, Asbill & Brennan LLP, dated the Closing Date, as to
the status of the Merger as a tax-free reorganization for federal income tax
purposes, reasonably acceptable in form and substance to such Company.
(l) Distribution. Allied I shall have declared and paid the dividend
referred to in clause (ii)(A) of Section 6.03(b).
(m) Legal Opinions. Each Company shall have received on the Closing Date
an opinion from the legal counsel to each other Company, dated the Closing Date,
addressing the matters set forth in Annex III, reasonably satisfactory in form
and substance to such Company.
(n) Listing of Common Stock. The shares of Common Stock to be issued in
the Merger shall have been approved for listing by the Nasdaq Stock Market upon
official notice of issuance.
ARTICLE VIII.
TERMINATION
SECTION 8.01. TERMINATION. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time (notwithstanding
any approval of this Agreement and the Merger by the stockholders of the
Companies):
(a) by mutual written consent of each Company duly authorized by or on
behalf of their respective boards of directors;
(b) by any Company at any time after December 31, 1997 (the "Priority
Closing Date"), if the Merger has not been consummated on or prior to such date;
provided, however, that in the event any of the conditions set forth in Section
7.02 shall not have been satisfied on or prior to the Priority Closing Date, any
Company shall have the right, unilaterally, to extend the Priority Closing Date
for a period of up to 90 days after the Priority Closing Date (the last day of
such extension being referred to as the "Final Closing Date") at any time on or
prior to the Priority Closing Date upon written notice to the other parties, in
which event no party may terminate this Agreement pursuant to this Section
8.01(b) unless the Merger has not been consummated by the Final Closing Date;
and provided further that the right to terminate under this Section 8.01(b)
shall not be available to any Company whose failure to fulfill any obligation
under this Agreement has been the cause of, or resulted in, the failure of the
Merger to be consummated on or before such applicable date;
(c) by any Company if there shall be any law or regulation that makes
consummation of the Merger illegal or otherwise prohibited or if any judgment,
injunction, order or decree enjoining any Company from consummating the Merger
is entered and such judgment, injunction, order or decree shall become final and
nonappealable;
(d) by any Company if the stockholders of any Company shall have voted upon
and not approved the transactions contemplated by this Agreement;
(e) by any Company in the event that the board of directors, including a
majority of the disinterested directors, of such Company shall have determined
to enter into an agreement with respect to a superior Acquisition Proposal as
contemplated by Section 5.11(b); or
(f) by any Company on or prior to September 1, 1997, in the event a
majority of the disinterested members of the board of directors of such Company
shall determine in good faith that, based on its investigation of each other
Company, there is (i) any actual or potential liability of any other Company not
disclosed in the Schedules to this Agreement that would have a material effect
on the fairness of the conversion ratios set forth in Section 1.02(b) or (ii)
any matter involving such other Company that could reasonably be expected to
have a Material Adverse Effect with respect to such other Company.
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The party desiring to terminate this Agreement pursuant to clause (b), (c), (d),
(e) or (f) shall give notice of such termination to the other parties in the
manner specified in Section 9.01.
SECTION 8.02. EFFECT OF TERMINATION. If this Agreement is validly
terminated as permitted by Section 8.01, this Agreement will forthwith become
null and void and there will be no liability or obligation of any Company (or
any stockholder, director, officer, employee, agent, consultant or
representative of such Company) to any other Company except as provided in
Section 9.03 hereof; provided, however, that nothing contained in this Section
8.02 shall relieve any Company from liability for any breach of this Agreement,
including, but not limited to, any liability of such Company for any and all
damages, costs and expenses (including, but not limited to, reasonable counsel
fees) sustained or incurred by the other Companies as a result of such breach.
ARTICLE IX.
MISCELLANEOUS
SECTION 9.01. NOTICES. All notices, requests and other communications to
any Company hereunder shall be in writing (including telecopy or similar
writing), addressed to such Company and given at or sent to the following
address:
c/o Allied Capital Advisers, Inc. (omit this line if the addressee is
Advisers)
1666 K Street, N.W., 9th Floor
Washington, D.C. 20006-2803
Attention: William L. Walton
Telecopy: (202) 659-2053
with a copy to:
(a) in the case of notices to Advisers:
Sutherland, Asbill & Brennan LLP
1275 Pennsylvania Avenue, N.W.
Washington, D.C. 20004-2404
Attention: Steven B. Boehm, Esq.
Telecopy: (202) 637-3593
(b) in the case of notices to Allied I:
Miles & Stockbridge, a Professional Corporation
10 Light Street
Baltimore, Maryland 21202-1487
Attention: J. W. Thompson Webb, Esq.
Telecopy: (410) 385-3700
(c) in the case of notices to Allied II:
Tucker, Flyer & Lewis, a professional corporation
1615 L Street, N.W., Suite 400
Washington, D.C. 20036-5612
Attention: Jack L. Lewis, Esq
Telecopy: (202) 429-3231
(d) in the case of notices to Lending:
Piper & Marbury L.L.P.
1200 19th Street, N.W., 8th Floor
Washington, D.C. 20036-2430
Attention: Alan C. Porter, Esq.
Anthony H. Rickert, Esq.
Telecopy: (202) 223-2085
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(e) in the case of notices to Commercial:
Dickstein Shapiro Morin & Oshinsky LLP
2101 L Street, N.W.
Washington, D.C. 20037-1526
Attention: Matthew G. Maloney, Esq.
Telecopy: (202) 887-0689
or such other address or telecopy number as such Company may hereafter specify
for the purpose by notice to the other Companies. Each such notice, request or
other communication shall be effective (i) if given by telecopy, when such
telecopy is transmitted to the telecopy number specified in this Section 9.01
and the appropriate answer back is received or (ii) if given by any other means,
when delivered at the address specified in this Section 9.01.
SECTION 9.02. AMENDMENTS; WAIVERS. Any provision of this Agreement may be
amended or waived prior to the Effective Time, if, and only if, such amendment
or waiver is in writing and signed, in the case of an amendment, by each Company
or in the case of a waiver, by the party against whom the waiver is to be
effective; provided that after the adoption of this Agreement by the
stockholders of any Company, no such amendment or waiver shall, without the
further approval of such stockholders, alter or change (i) the amount or kind of
consideration to be received in exchange for any Acquired Company Shares, (ii)
any term of the charter of the Surviving Company or (iii) any of the terms or
conditions of this Agreement if such alteration or change would adversely affect
the holders of any Acquired Company Shares or shares of Common Stock.
SECTION 9.03. EXPENSES. (a) Except as otherwise provided in this
Agreement, all costs and expenses incurred in connection with this Agreement
shall be allocated to and paid by the Companies pro rata on the basis of the
respective amounts of their market capitalization determined at the close of the
trading day immediately prior to the date of this Agreement. A "trading day"
shall be any date on which the Nasdaq Stock Market's National Market is open for
business.
(b) Each Company shall pay the fees and expenses of the investment banking
firm identified in Schedule 3.08 as being engaged by such Company in connection
with the Merger.
SECTION 9.04. SUCCESSORS AND ASSIGNS. The provisions of this Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns, provided that no party may assign, delegate
or otherwise transfer any of its rights or obligations under this Agreement
without the consent of the other parties hereto.
SECTION 9.05. GOVERNING LAW. This Agreement shall be construed in
accordance with and governed by the law of the State of Maryland.
SECTION 9.06. SURVIVAL. The covenants, agreements, representations and
warranties of the parties contained herein, other than Sections 5.07, 6.01 and
6.05 (the "Enumerated Provisions"), shall not survive, and shall be extinguished
by, the consummation of the Merger. The Enumerated Provisions shall survive the
Closing and the consummation of the Merger.
SECTION 9.07. COUNTERPARTS. This Agreement may be signed in counterparts,
each of which shall be an original, with the same effect as if the signatures
thereto and hereto were upon the same instrument.
SECTION 9.08. ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement between the parties with respect to the subject matter hereof and
supersedes all prior agreements, understandings and negotiations, both written
and oral, between the parties with respect to the subject matter of this
Agreement. No representation, inducement, promise, understanding, condition or
warranty not set forth herein has been made or relied upon by either party
hereto.
SECTION 9.09. CAPTIONS. The captions herein are included for convenience
of reference only and shall be ignored in the construction or interpretation
hereof.
SECTION 9.10. PARTIES IN INTEREST. Nothing expressed or implied herein is
intended or shall be construed to confer upon any person, other than the parties
hereto (and except as otherwise provided pursuant to Section 6.01), any rights
or remedies under or by reason of this Agreement of the transactions
contemplated hereby.
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SECTION 9.11. NO DISSENTER'S RIGHTS. Pursuant to Section 3-202(c)(1) of
the GCL, no stockholder of any of the parties to this Agreement shall have the
right under Section 3-202 of the GCL arising from the Merger or the transactions
contemplated in this Agreement, to demand and receive payment of the fair value
of his or her stock from the Surviving Company.
* * *
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the day and year
first above written.
ALLIED CAPITAL ADVISERS, INC.
By: /s/ WILLIAM L. WALTON
---------------------------------------------
William L. Walton
Chairman of the Board and Chief Executive
Officer
ALLIED CAPITAL CORPORATION
By: /s/ WILLIAM L. WALTON
---------------------------------------------
William L. Walton
Chairman of the Board and Chief Executive
Officer
ALLIED CAPITAL CORPORATION II
By: /s/ WILLIAM L. WALTON
---------------------------------------------
William L. Walton
Chairman of the Board and Chief Executive
Officer
ALLIED CAPITAL LENDING CORPORATION
By: /s/ WILLIAM L. WALTON
---------------------------------------------
William L. Walton
Chairman of the Board and Chief Executive
Officer
ALLIED CAPITAL COMMERCIAL CORPORATION
By: /s/ WILLIAM L. WALTON
---------------------------------------------
William L. Walton
Chairman of the Board and Chief Executive
Officer
21
<PAGE> 155
APPENDIX B
ARTICLES OF MERGER
AMONG
ALLIED CAPITAL LENDING CORPORATION, ALLIED CAPITAL ADVISERS, INC.,
ALLIED CAPITAL CORPORATION, ALLIED CAPITAL CORPORATION II,
AND ALLIED CAPITAL COMMERCIAL CORPORATION
Pursuant to the provisions of Section 3-109 of the Maryland General
Corporation Law (the "GCL"), the undersigned corporations hereby certify that:
ARTICLE I.
AGREEMENT TO MERGE
1.01. Allied Capital Lending Corporation, a Maryland corporation
("Lending"), Allied Capital Advisers, Inc., a Maryland corporation ("Advisers"),
Allied Capital Corporation, a Maryland corporation ("Allied I"), Allied Capital
Corporation II, a Maryland corporation ("Allied II"), and Allied Capital
Commercial Corporation, a Maryland corporation ("Commercial," and together with
Advisers, Allied I, and Allied II, individually an "Acquired Company" and
collectively the "Acquired Companies"), each agree to the merger of the Acquired
Companies with and into Lending (the "Merger"), subject to the terms and
conditions set forth in the Agreement and Plan of Merger dated as of August 14,
1997, as amended and restated as of September 19, 1997, by and among Lending and
each Acquired Company (the "Merger Agreement"). At the Effective Time (as
hereinafter defined in Section 7.01) of the Merger, each Acquired Company will
be merged with and into Lending in accordance with the provisions of the GCL.
Lending shall be the surviving corporation (the "Surviving Company") and shall
continue in existence under its charter, as amended by these Articles of Merger,
and its bylaws, and the separate existence of each Acquired Company shall cease.
The terms and conditions of the Merger hereby agreed upon and the manner of
carrying the same into effect are hereinafter set forth. From and after the
Effective Time, the Surviving Company shall possess all the rights, privileges,
powers and franchises and be subject to all of the restrictions, liabilities,
obligations, disabilities and duties of each Acquired Company.
ARTICLE II.
PLACE OF INCORPORATION; PRINCIPAL OFFICES
2.01. The name and place of incorporation of each party to these Articles
is as follows:
<TABLE>
<CAPTION>
NAME PLACE
---------------------------------------------------------- ---------
<S> <C>
Allied Capital Lending Corporation Maryland
Allied Capital Advisers, Inc. Maryland
Allied Capital Corporation Maryland
Allied Capital Corporation II Maryland
Allied Capital Commercial Corporation Maryland
</TABLE>
2.02. The name and place of incorporation of the surviving corporation is
as follows:
<TABLE>
<CAPTION>
NAME PLACE
---------------------------------------------------------- ---------
<S> <C>
Allied Capital Lending Corporation Maryland
</TABLE>
2.03. The principal office of Lending is located in Baltimore City,
Maryland.
<PAGE> 156
2.04. The principal office of each Acquired Company is located in
Baltimore City, Maryland. No Acquired Company owns an interest in land in the
State of Maryland.
ARTICLE III.
APPROVALS
3.01. The terms and conditions of the transaction set forth in these
Articles were advised, authorized and approved by each corporation party to
these Articles in the manner and by the vote required by its charter and the
laws of the State of Maryland. The manner of approval was as follows:
(a) Lending
(i) The Board of Directors of Lending, at a meeting held on
, 1997, adopted a resolution which declared that the Merger
was advisable on substantially the terms and conditions set forth or
referred to in the resolution and directed that the Merger be submitted
for consideration at a special meeting of the stockholders of Lending.
(ii) Notice, which stated that a purpose of the special meeting of
stockholders was to act on the Merger, was given by Lending in the
manner required by the charter of Lending and the GCL to each
stockholder entitled to such notice.
(iii) The Merger was approved by the stockholders of Lending at a
special meeting of stockholders held on , 1997, by the
affirmative vote of at least two-thirds of all votes entitled to be cast
on the matter in accordance with the charter of Lending and the GCL.
(b) Advisers
(i) The Board of Directors of Advisers, at a meeting held on
, 1997, adopted a resolution which declared that the Merger
was advisable on substantially the terms and conditions set forth or
referred to in the resolution and directed that the Merger be submitted
for consideration at a special meeting of the stockholders of Advisers.
(ii) Notice, which stated that a purpose of the special meeting of
stockholders was to act on the Merger, was given by Advisers in the
manner required by the charter of Advisers and the GCL to each
stockholder entitled to such notice.
(iii) The Merger was approved by the stockholders of Advisers at a
special meeting of stockholders held on , 1997, by the
affirmative vote of at least two-thirds of all the votes entitled to be
cast on the matter in accordance with the charter of Advisers and the
GCL.
(c) Allied I
(i) The Board of Directors of Allied I, at a meeting held on
, 1997, adopted a resolution which declared that the Merger
was advisable on substantially the terms and conditions set forth or
referred to in the resolution and directed that the Merger be submitted
for consideration at a special meeting of the stockholders of Allied I.
(ii) Notice, which stated that a purpose of the special meeting of
stockholders was to act on the Merger, was given by Allied I in the
manner required by the charter of Allied I and the GCL to each
stockholder entitled to such notice.
(iii) The Merger was approved by the stockholders of Allied I at a
special meeting of stockholders held on , 1997, by the
affirmative vote of at least two-thirds of all the votes entitled to be
cast on the matter in accordance with the charter of Allied I and the
GCL.
(d) Allied II
(i) The Board of Directors of Allied II, at a meeting held on
, 1997, adopted a resolution which declared that the Merger
was advisable on substantially the terms and conditions
2
<PAGE> 157
set forth or referred to in the resolution and directed that the Merger
be submitted for consideration at a special meeting of the stockholders
of Allied II.
(ii) Notice, which stated that a purpose of the special meeting of
stockholders was to act on the Merger, was given by Allied II in the
manner required by the charter of Allied II and the GCL to each
stockholder entitled to such notice.
(iii) The Merger was approved by the stockholders of Allied II at a
special meeting of stockholders held on , 1997, by the
affirmative vote of at least two-thirds of all the votes entitled to be
cast on the matter in accordance with the charter of Allied II and the
GCL.
(e) Commercial
(i) The Board of Directors of Commercial, at a meeting held on
, 1997, adopted a resolution which declared that the Merger
was advisable on substantially the terms and conditions set forth or
referred to in the resolution and directed that the Merger be submitted
for consideration at a special meeting of the stockholders of
Commercial.
(ii) Notice, which stated that a purpose of the special meeting of
stockholders was to act on the Merger, was given by Commercial in the
manner required by the charter of Commercial and the GCL to each
stockholder entitled to such notice.
(iii) The Merger was approved by the stockholders of Commercial at
a special meeting of stockholders held on , 1997, by the
affirmative vote of at least two-thirds of all the votes entitled to be
cast on the matter in accordance with the charter of Commercial and the
GCL.
ARTICLE IV.
AMENDMENT TO THE CHARTER OF THE SURVIVING COMPANY
The following amendments to the charter of Lending are to be effected as
part of the Merger:
4.01. Article FIRST of the Amended and Restated Articles of Incorporation
of Lending shall be amended to read in its entirety as follows:
The name of the corporation (hereinafter referred to as the
"Corporation") is: Allied Capital Corporation.
4.02. Article SECOND, Section A, of the Amended and Restated Articles of
Incorporation of Lending shall be amended to read in its entirety as follows:
To operate under the Small Business Investment Act of 1958, as
amended, and the Small Business Act (1958), as amended, in the manner and
with the powers and responsibilities, and subject to the limitations
provided by, each such Act and the regulations issued by the U.S. Small
Business Administration thereunder;
4.03. Article SECOND, Sections B through E, of the Amended and Restated
Articles of Incorporation of Lending shall be redesignated as Article SECOND,
Sections C through F, respectively, and the following text shall be inserted
immediately after Article SECOND, Section A, of the Amended and Restated
Articles of Incorporation of Lending and shall comprise in its entirety and be
designated as Article SECOND, Section B:
To render advice and consulting services to corporations, individuals,
partnerships, limited liability companies, business trusts 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 any agencies and in any
jurisdictions; and to do all such other acts as may be related to or
incidental to the purposes of an investment adviser, merchant bank or
similar financial institution;
3
<PAGE> 158
4.04. Article THIRD of the Amended and Restated Articles of Incorporation
of Lending shall be amended to read in its entirety as follows:
The address of the principal office of the Corporation in the State of
Maryland is: 11 East Chase Street / Baltimore, Maryland 21202. The name and
address of the resident agent of the Corporation in the State of Maryland
is: The Prentice-Hall Corporation System, Maryland / 11 East Chase Street /
Baltimore, Maryland 21202.
4.05. The first sentence of Article FOURTH, Section A, of the Amended and
Restated Articles of Incorporation of Lending shall be amended to read in its
entirety as follows:
The total number of shares of stock of all classes which the
Corporation has authority to issue is one hundred million (100,000,000)
shares of capital stock, with a par value of One-Tenth of One Mil ($0.0001)
per share, amounting in aggregate to Ten Thousand Dollars ($10,000).
4.06. The following text shall be deleted from Article SIXTH, Section C,
of the Amended and Restated Articles of Incorporation of Lending:
, as such provisions are consistent with Section C of Article SEVENTH
4.07. The first sentence of Article SEVENTH, Section A, of the Amended and
Restated Articles of Incorporation of Lending shall be amended to read in its
entirety as follows:
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 (as limited by the Investment Company Act of 1940, as
amended, or by any valid rule, regulation or order of the Securities and
Exchange Commission thereunder, in each case as now or hereafter in force
(the "1940 Act")), 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.
4.08. The third sentence of Article SEVENTH, Section A, of the Amended and
Restated Articles of Incorporation of Lending shall be amended to read in its
entirety as follows:
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.
4.09. The first sentence of Article SEVENTH, Section B, of the Amended and
Restated Articles of Incorporation of Lending shall be amended to read in its
entirety as follows:
To the fullest extent permitted by Maryland statutory or decisional
law, as amended or interpreted and as limited by the 1940 Act, no director
or officer of the Corporation shall be personally liable to the Corporation
or its stockholders for money damages.
4.10. Article SEVENTH, Section C, of the Amended and Restated Articles of
Incorporation of Lending shall be deleted in its entirety.
4
<PAGE> 159
ARTICLE V.
CAPITALIZATION
5.01. The total number of shares of all classes and the total number of
shares and par value of each class, and the aggregate par value of all the
shares of all classes of which each party to these Articles has the authority to
issue are as follows, immediately before the Merger:
<TABLE>
<CAPTION>
NUMBER PAR VALUE AGGREGATE
NAME CLASS OF STOCK OF SHARES PER SHARE PAR VALUE
--------------------------- ------------------ ----------- --------- -----------
<S> <C> <C> <C> <C>
Lending Common Stock* 20,000,000 $0.0001 $ 2,000
Advisers Common Stock* 20,000,000 $0.001 $ 20,000
Allied I Common Stock 10,000,000 $1.00 $10,000,000
Allied II Common Stock 20,000,000 $1.00 $20,000,000
Commercial Common Stock 50,000,000 $0.0001 $ 5,000
Commercial Preferred Stock 5,000,000 $0.0001 $ 500
---------- -----------
Commercial TOTAL All Classes 55,000,000 $ 5,500
========== ===========
</TABLE>
- ---------------
* Subject to the right of the Board of Directors, in accordance with Section
2-208 of the GCL and the Articles of Incorporation, to reclassify unissued
stock.
5.02. The total number of shares of all classes and the total number of
shares and par value, if any, of each class, and the aggregate par value of all
the shares of all classes of which the Surviving Company has the authority to
issue, both immediately before and as changed by the Merger, are as follows:
<TABLE>
<CAPTION>
NUMBER PAR VALUE AGGREGATE
NAME CLASS OF STOCK OF SHARES PER SHARE PAR VALUE
-------------------- -------------- --------------------- --------- ---------
<S> <C> <C> <C> <C>
Before Merger
---------------
Lending Common Stock* 20,000,000 $0.0001 $ 2,000
As Changed by Merger
---------------------
Lending Common Stock* 100,000,000 $0.0001 $10,000
</TABLE>
- ---------------
* Subject to the right of the Board of Directors, in accordance with
Section 2-208 of the GCL and the Articles of Incorporation, to reclassify
unissued stock.
ARTICLE VI.
MANNER OF EFFECTUATING THE MERGER AND CONVERTING STOCK
6.01. The manner and basis of converting or exchanging issued stock of the
merging corporations into different stock of a corporation or for other
consideration and the treatment of any issued stock of the merging corporations
not to be converted or exchanged are as follows:
(a) Each share of common stock of each Acquired Company that is owned
by any Acquired Company or by Lending or by any Subsidiary of any of them
shall automatically be canceled and retired and shall cease to exist, and
no consideration shall be delivered in exchange therefor. The term
"Subsidiary" means, with respect to any person, any other person of which
securities or other ownership interests having ordinary voting power to
elect a majority of the board of directors or other persons performing
similar functions are at the time directly or indirectly owned by such
person, and the term "person" means any corporation, partnership, limited
liability company, trust, association, organization or other entity or
natural person.
(b) Each share of common stock of the respective Acquired Companies,
par value $0.001 per share in the case of Advisers, $1.00 per share in the
case of Allied I, $1.00 per share in the case of Allied II and $0.0001 per
share in the case of Commercial, outstanding immediately prior to the
Effective Time
5
<PAGE> 160
(collectively, the "Acquired Company Shares"), other than Acquired Company
Shares to be canceled in accordance with Section 6.01(a), shall be
converted (the "Conversion"), without any action on the part of such
holder, into fully paid and non-assessable shares of common stock, par
value $0.0001 per share, of Lending ("Common Stock") according to the
following respective conversion ratios:
(i) each Acquired Company Share of Advisers shall be converted into
0.31 shares of Common Stock;
(ii) each Acquired Company Share of Allied I shall be converted
into 1.07 shares of Common Stock;
(iii) each Acquired Company Share of Allied II shall be converted
into 1.40 shares of Common Stock; and
(iv) each Acquired Company Share of Commercial shall be converted
into 1.60 shares of Common Stock.
(c) The Surviving Company shall issue fractional shares of Common
Stock to the extent the Conversion results in a fraction of a share, in
which case such fraction shall be rounded to the nearest one-thousandth of
a share (rounding upward from the mid-point between thousandths of a
share).
(d) All Acquired Company Shares shall cease to exist, and each
certificate previously representing Acquired Company Shares shall (subject
to Section 6.01(f)), until properly surrendered, thereafter represent for
all corporate purposes the shares of Common Stock into which such Acquired
Company Shares have been converted.
(e) Except as provided in Section 6.01(d), the Surviving Company shall
issue shares of Common Stock to be issued in the Merger in uncertificated
form. Upon the proper surrender of the certificates formerly representing
the Acquired Company Shares in respect of which such Common Stock is
issued, the Surviving Company shall send to each person entitled to receive
such Common Stock the information required under Section 2-210(c) of the
GCL with respect to such shares (a "Confirmation").
(f) No dividends or other distributions that have been declared or
made in respect of the Common Stock with a record date after the Effective
Time shall be paid to any person in respect of Common Stock such person
receives in the Merger unless such person has properly surrendered the
certificates formerly representing all Acquired Company Shares held by such
person. Upon surrender of any such certificates formerly representing
Acquired Company Shares, there shall be paid to such person the amount of
dividends or other distributions in respect of Common Stock with a record
date after the Effective Time theretofore paid (but withheld pursuant to
the immediately preceding sentence).
(g) Holders of record immediately prior to the Effective Time of
Acquired Company Shares shall be entitled, at and after the Effective Time,
to vote the number of shares of Common Stock into which their Acquired
Company Shares shall have been converted so long as they remain record
holders of such shares of Common Stock, regardless of whether the
certificates formerly representing such Acquired Company Shares shall have
been surrendered or a Confirmation with respect to such shares of Common
Stock shall have been issued.
(h) The provisions of Sections 6.01(f) and (g) and the second sentence
of Section 6.01(e) shall apply to Acquired Company Shares of a given
Acquired Company held by a person partly in certificated form and partly in
uncertificated form. If any holder of Acquired Company Shares of a given
Acquired Company shall at the Effective Time hold all of such Acquired
Company Shares in uncertificated form, then such provisions shall not apply
to such Acquired Company Shares, and such holder shall be entitled to
receive a Confirmation as to the Common Stock issuable in respect of such
Acquired Company Shares without any action on the part of such holder.
6
<PAGE> 161
ARTICLE VII.
EFFECTIVE TIME OF MERGER
7.01. The Merger shall become effective as of the later of 9:00 a.m.
Eastern Standard Time on December 31, 1997 or the time the State Department of
Assessments and Taxation accepts these Articles of Merger for record (the
"Effective Time").
IN WITNESS WHEREOF, each of ALLIED CAPITAL LENDING CORPORATION, ALLIED
CAPITAL ADVISERS, INC., ALLIED CAPITAL CORPORATION, ALLIED CAPITAL CORPORATION
II, and ALLIED CAPITAL COMMERCIAL CORPORATION has caused these presents to be
signed in its name and on its behalf, on December , 1997, by its Chairman of
the Board and Chief Executive Officer who acknowledges these Articles of Merger
to be the corporate act of said corporation and hereby certifies that to the
best of his knowledge, information and belief the matters and facts set forth
herein with respect to the authorization and approval thereof are true in all
material respects under the penalties of perjury.
<TABLE>
<S> <C>
WITNESS: ALLIED CAPITAL LENDING CORPORATION
(a Maryland corporation)
- --------------------------------- By:
Tricia Benz Daniels ----------------------------------------------------
Secretary William L. Walton
Chairman of the Board and Chief Executive Officer
WITNESS: ALLIED CAPITAL ADVISERS, INC.
(a Maryland corporation)
- --------------------------------- By:
Tricia Benz Daniels ----------------------------------------------------
Secretary William L. Walton
Chairman of the Board and Chief Executive Officer
WITNESS: ALLIED CAPITAL CORPORATION
(a Maryland corporation)
- --------------------------------- By:
Tricia Benz Daniels ----------------------------------------------------
Secretary William L. Walton
Chairman of the Board and Chief Executive Officer
</TABLE>
7
<PAGE> 162
<TABLE>
<S> <C>
WITNESS: ALLIED CAPITAL CORPORATION II
(a Maryland corporation)
By:
- --------------------------------- ----------------------------------------------------
Tricia Benz Daniels William L. Walton
Secretary Chairman of the Board and Chief Executive Officer
WITNESS: ALLIED CAPITAL COMMERCIAL CORPORATION
(a Maryland corporation)
By:
- --------------------------------- ----------------------------------------------------
Tricia Benz Daniels William L. Walton
Secretary Chairman of the Board and Chief Executive Officer
</TABLE>
8
<PAGE> 163
Appendix C
[FERRIS BAKER WATTS LETTERHEAD]
August 14, 1997
Board of Directors
Allied Capital Corporation
1666 K Street N.W. 9th Floor
Washington, DC 20006
Ladies and Gentlemen:
You have requested a review of the proposed transaction
involving the merger of the Allied Capital family of funds, including Allied
Capital Corporation (the "Company"), Allied Capital Corporation II, Allied
Capital Commercial Corporation, Allied Capital Lending Corporation, and Allied
Capital Advisers, Inc. into a single entity, (the "Transaction").
Specifically, you have requested an opinion as to the fairness, from a
financial point of view, to the holders of the outstanding common stock of the
Company of the financial consideration to be paid to the Company's stockholders
in the Transaction. The Transaction is described in the August 14, 1997
Agreement and Plan of Merger by and among Allied Capital Advisers, Inc., Allied
Capital Corporation, Allied Capital Corporation II, Allied Capital Lending
Corporation, and Allied Capital Commercial Corporation (the "Agreement"). We
were retained by the Board of Directors of the Company to render an opinion and
commenced our investigation of the Company on July 22, 1997.
Pursuant to the Agreement, each shareholder of the Company
will receive 1.07 shares of Allied Capital Lending Corporation (the "Surviving
Company") for each share of the Company. Prior to the consummation of the
Transaction, each shareholder of the Company will receive a special dividend of
the shares of Allied Capital Lending Corporation currently held by the Company.
In connection with this opinion, we have reviewed, among other
things, (i) the Agreement, (ii) the annual report to shareholders and the
annual report on Form 10-K of the Company for the fiscal year ended December
31, 1996, (iii) quarterly reports on Form 10-Q of the Company for fiscal 1996
and the first and second (in draft form) quarters for fiscal 1997, (iv)
projected financial results for the Company through fiscal 1998, and (v)
projected financial results for the Surviving Company through fiscal 2001. We
held discussions with the members of the management of the Company regarding its
past and current business operations, financial condition and future prospects.
We have reviewed the reported price and trading activity for the shares of the
Company; compared certain financial and stock market information concerning the
Company with similar information
<PAGE> 164
for certain other finance companies, the securities of which are publicly
traded; and have performed other such studies and analysis as we considered
appropriate.
Currently, we make a market in the Company's common stock and
we periodically prepare research reports in the Company. Ferris, Baker Watts,
Incorporated, its clients, its officers or its employees, in the normal course
of business, may have a position in the common stock of the Company.
In rendering our opinion, we have assumed and relied upon the
accuracy and completeness of all financial and other information reviewed by us
for purposes of this opinion whether publicly available or provided to us by
the Company, and we have not assumed any responsibility for independent
verification of such information. We express no opinion as to the
consideration to be received by holders of shares who may perfect dissenters'
statutory fair appraisal remedies. Based upon the foregoing and based upon
other such matters that we consider relevant, it is our opinion that, as of the
date of this letter, the consideration to be received by the stockholders of
the Company pursuant to the Agreement (i.e. the 1.07 shares of stock of the
Surviving Company into which each share of stock of the Company will be
converted) is fair from a financial point of view. In addition, it is our
understanding that the shareholders of the Company will receive, as a special
dividend, the shares of Allied Capital Lending Corporation currently held in
the Company's portfolio. Our opinion is based upon economic, market and other
considerations as in effect on, and the information made available to us as of
the date of this letter. Our opinion is directed to the Board of Directors of
the Company and does not constitute a recommendation to any stockholder of the
Company as to how the stockholder should vote at the stockholders' meeting held
in connection with the Agreement.
Very truly yours,
/s/ FERRIS, BAKER WATTS, INC.
Ferris, Baker Watts, Inc.
<PAGE> 165
Appendix D
[INTERSTATE/JOHNSON LANE LETTERHEAD]
August 12, 1997
Board of Directors
Allied Capital Corporation II
1666 K Street, NW, 9th Floor
Washington, DC 20006
Gentlemen:
You have requested our opinion as to the fairness, from a financial point of
view, to holders of the outstanding common stock of Allied Capital Corporation
II ("Allied II") of the Exchange Ratio (as defined below) in the proposed
merger (the "Merger") of Allied II, Allied Capital Advisers, Inc., Allied
Capital Corporation and Allied Capital Commercial Corporation with and into
Allied Capital Lending Corporation ("Lending") (collectively the "Allied
Companies") pursuant to the terms and conditions of the proposed Merger as set
forth in the Agreement and Plan of Merger draft dated August 8, 1997 (the
"Agreement"). Pursuant to the Merger, each share of common stock of Allied II
will be converted into 1.40 shares of common stock of Lending (the "Exchange
Ratio").
In arriving at our opinion, we (i) reviewed the Agreement; (ii) reviewed annual
audited and interim unaudited financial statements through June 1997 for Allied
II and Lending; (iii) reviewed publicly available information including recent
Securities and Exchange Commission filings for Allied II and Lending; (iv)
reviewed the historical market value of Allied II common stock compared to the
historical market value of the common stock of the Allied Companies;
(v) compared the Exchange Ratio to the historical relationship between the
market price of Allied II common stock and the market price of Lending common
stock; (vi) reviewed and compared historical market price and volume data for
the common stock of Allied II and the common stock of each of the Allied
Companies; (vii) compared certain financial and stock market data for Allied II
and for each of the Allied Companies with similar data for selected publicly
held companies; (viii) discussed with senior management the business, financial
condition and operating results of each of the Allied Companies; (ix) reviewed,
discussed and tested the assumptions contained in the analysis of Morgan
Stanley & Co., relating to the Merger, and (x) performed such other financial
studies and analyses as we deemed appropriate.
In rendering this opinion, we have relied upon the accuracy and completeness of
all financial and other information furnished to us by or on behalf of Allied
II and the Allied Companies, other information used by us in arriving at our
opinion, and other published information that we considered in our review. We
have not undertaken to verify independently the accuracy and completeness of
such information. We have relied upon the reasonableness of all
<PAGE> 166
August 12, 1997
Board of Directors
Page Two
projections and forecasts provided to us and have assumed that they were
prepared in accordance with accepted practice on bases reflecting the best
currently available estimates and good faith judgments of Allied II and the
Allied Companies' managements. Our opinion herein is based upon the
circumstances existing and known to us as of the date hereof. We have not made
or obtained any independent evaluations or appraisals of the assets or
liabilities (contingent or otherwise) of either Allied II or the Allied
Companies, nor were we furnished with any such evaluations or appraisals.
Consequently, we do not express any opinion regarding the value of any of
Allied II's or the Allied Companies specific individual assets. We were not
requested to, and therefore did not, participate in the structuring or
negotiating of the Merger. Furthermore, we are not expressing any opinion
herein as to the range of prices at which the Allied Companies common stock
will trade subsequent to consummation of the Merger. We have not inspected any
of the assets or properties of Allied II or any of the Allied Companies and we
have not considered the tax or accounting treatment or consequences of the
Merger in connection with our conclusions or the resulting effect on the
Balance Sheet and Statement of Operations of Allied II or the Allied Companies.
We also have not considered or evaluated any other alternatives that Allied II
may have or wish to pursue, as our engagement is strictly limited to the
fairness, from a financial point of view, of the Exchange Ratio to the
shareholders of Allied II.
Interstate/Johnson Lane Corporation, as part of its investment banking
business, is engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwriting, competitive
biddings, secondary distributions of listed and unlisted securities, private
placements and valuations for estate, corporate and other purposes. Pursuant to
our engagement in connection with this fairness opinion, we will receive a fee
for our services in rendering said opinion.
The opinion expressed herein is provided to the Allied II Board of Directors and
does not constitute a recommendation to any shareholder of Allied II as to how
any such shareholder should vote on the Merger. The opinion, and any supporting
analysis or other material supplied by us may not be quoted, referred to, or
used in any public filing or in any written document without the prior written
approval of Interstate/Johnson Lane Corporation; provided that we hereby
consent to the inclusion of this opinion in its entirety in any filing with the
Securities and Exchange Commission in connection with the Merger.
Based upon the foregoing considerations, it is our opinion that as of the date
hereof the Exchange Ratio is fair, from a financial point of view, to the
shareholders of Allied II.
Sincerely,
INTERSTATE/JOHNSON LANE CORPORATION
/s/ INTERSTATE/JOHNSON LANE CORPORATION
<PAGE> 167
Appendix E
[SCOTT & STRINGFELLOW, INC. LETTERHEAD]
August 13, 1997
The Board of Directors
Allied Capital Commercial Corporation
1666 K Street, NW
9th Floor
Washington, D.C. 20006
Members of the Board:
Allied Capital Commercial Corporation (the "Company"), Allied
Capital Lending Corporation ("Allied Lending"), Allied Capital
Corporation ("Allied I"), Allied Capital Corporation II ("Allied II") and
Allied Capital Advisers, Inc. ("Allied Advisers") (with Allied I, Allied II,
and Allied Advisers hereafter collectively referred to as the "Other Allied
Companies"), have proposed to combine in a merger transaction (the "Merger")
pursuant to an Agreement and Plan of Merger (the "Merger Agreement"). The
transactions contemplated thereby include the merger of the Company and the
Other Allied Companies with and into Allied Lending, and a subsequent change of
Allied Lending's name following the merger to Allied Capital Corporation (the
"Surviving Company"). Upon consummation of the Merger, each share of common
stock of the Company and the Other Allied Companies outstanding immediately
prior to the effective date of the Merger will be converted into the right to
receive a certain number of shares of common stock of the Surviving Company
("New Shares") as follows: (i) 1.60 New Shares for each share of common stock
of the Company (the "Exchange Ratio"); (ii) 1.07 New Shares for each share of
common stock of Allied I; (iii) 1.40 New Shares for each share of common stock
of Allied II; and (iv) .31 New Shares for each share of common stock of Allied
Advisers.
You have asked us whether, in our opinion, the proposed
Exchange Ratio is fair, from a financial point of view, to the holders of
Company common stock.
As part of its investment banking business, Scott &
Stringfellow, Inc. ("S&S") is regularly engaged in the valuation of businesses
and their securities in connection with mergers and acquisitions, negotiated
underwritings, competitive biddings, secondary distributions of listed and
unlisted securities, private placements and valuations for estate, corporate
and other purposes. In the ordinary course of our business as a broker-dealer,
we may, from time to time, have a long or short position in, and buy or sell,
securities of the Company, Allied Lending or the Other Allied Companies for our
own account or for the accounts of our customers. S&S will also receive a fee
from the Company for rendering this opinion.
<PAGE> 168
Board of Directors
August 13, 1997
Page 2
In developing our opinion, we have, among other things,
reviewed and analyzed: (i) the August 8, 1997 draft of the Merger Agreement;
(ii) annual reports to shareholders, annual reports on Form 10-K and related
audited financial statements for the three years ended December 31, 1996 of the
Company, Allied Lending and the Other Allied Companies; (iii) quarterly reports
on Form 10-Q and related unaudited financial statements for the period ended
March 31, 1997 of the Company, Allied Lending and the Other Allied Companies;
(iv) draft quarterly reports on Form 10-Q and related unaudited financial
statements for the period ended June 30, 1997 of the Company, Allied Lending
and the Other Allied Companies; (v) certain internal information, primarily
financial in nature, concerning the business and operations of the Company,
Allied Lending and the Other Allied Companies, including certain financial
analyses and forecasts, prepared and furnished to us by management for purposes
of our analysis; (vi) certain pro forma financial projections for the Surviving
Company prepared and furnished to by management for purposes of our
analysis; (vii) certain publicly available information concerning the estimates
of the future financial performance of the Company, Allied Lending and the Other
Allied Companies prepared by financial analysts unaffiliated with any of the
entities; (viii) certain publicly available information regarding historical
market prices and trading activity of the common stocks of the Company, Allied
Lending and the Other Allied Companies; and (ix) certain publicly available
information with respect to certain financial services companies and real
estate investment trusts, as well as with respect to certain other merger
transactions that we deemed relevant to our inquiry. We have met with certain
senior officers of the Company, Allied Lending and the Other Allied Companies
to discuss the foregoing as well as other matters we believe relevant to our
inquiry. We have also reviewed certain information and analyses provided by
Morgan Stanley, Dean Witter, Discover & Co. ("Morgan Stanley"), which is
providing certain financial advisory services in connection with the Merger,
and have met with officers of Morgan Stanley to review and discuss such
information and analyses. Finally, we have conducted such other studies,
analyses and investigations and considered such other information as we deemed
appropriate.
In conducting our review and arriving at our opinion, we have
relied upon and assumed the accuracy and completeness of all information
furnished to us or publicly available. We have not attempted independently to
verify such information, nor have we made any independent appraisal of the
assets or liabilities of the Company, Allied Lending or the Other Allied
Companies. We have relied upon the management of the Company, Allied Lending
and the Other Allied Companies as to the reasonableness and achievability of
their financial and operational forecasts and projections, and the
<PAGE> 169
Board of Directors
August 13, 1997
Page 3
assumptions and bases therefor, provided to us, and we have assumed that such
forecasts and projections reflect the best currently available estimates and
judgments of such management as to the expected future financial performance of
the Company, Allied Lending, the Other Allied Companies and the Surviving
Company. Our opinion is necessarily based upon economic, market and other
conditions as they exist and can be evaluated at the date hereof, information
made available to us through the date hereof, and our experience in business
valuation in general.
Our opinion is directed to the Board of Directors with regard
only to the fairness, from a financial point of view, of the Exchange Ratio to
the holders of Company common stock and does not constitute a recommendation to
any shareholder of the Company as to how such shareholder should vote with
respect to the Merger. Our opinion does not address the relative merits of the
Merger as compared to any alternative business strategies that might exist for
the Company.
It is understood that this opinion may be included in its
entirety in the Joint Proxy Statement/Prospectus. This opinion may not,
however, be summarized, excerpted from or otherwise publicly referred to
without our prior written consent.
On the basis of our analysis and review and in reliance on the
accuracy and completeness of the information furnished to us and subject to the
conditions noted above, it is our opinion that, as of the date hereof, the
Exchange Ratio is fair from a financial point of view to the holders of
Company common stock.
Very truly yours,
SCOTT & STRINGFELLOW, INC.
By: /s/ HARRY W. LEATHERS, JR.
----------------------------
Harry W. Leathers, Jr.
Managing Director
<PAGE> 170
Appendix F
[BAIRD LETTERHEAD]
August 14, 1997
Board of Directors
Allied Capital Lending Corporation
1666 K Street, NW
9th Floor
Washington, DC 20006
Gentlemen and Madams:
Allied Capital Lending Corporation (the "Company" or "Lending")
proposes to enter into an Agreement and Plan of Merger (the "Agreement") with
Allied Capital Advisers, Inc. ("Advisers"), Allied Capital Corporation
("Allied I"), Allied Capital Corporation II ("Allied II"), and Allied Capital
Commercial Corporation ("Commercial" and, together with Advisers, Allied I,
Allied II and Commercial the "Acquired Companies"). Pursuant to the Agreement,
at the Effective Time (as defined in the Agreement) each Acquired Company will
be merged with and into Lending and (i) each outstanding share of common stock
of Advisers, par value $0.001, will be converted into shares or the right to
receive 0.31 shares of Lending common stock, par value $0.0001 per share (the
"Lending Common Stock"); (ii) each outstanding share of Allied I common stock,
par value $1.00 per share, will be converted into shares or the right to
receive 1.07 shares of Lending Common Stock; (iii) each outstanding share of
Allied II common stock, par value $1.00 per share, will be converted into
shares or the right to receive 1.40 shares of Lending Common Stock and (iv)
each outstanding share of Commercial common stock, par value $0.0001 per share,
will be converted into shares or the right to receive 1.60 shares of Lending
Common Stock. The conversion ratios set forth in clauses (i) through (iv) of
the preceding sentence are referred to herein as the "Conversion Ratios."
You have requested our opinion as to whether the Conversion
Ratios, taken as a whole, are fair, from a financial point of view, to the
Company.
Robert W. Baird & Co. Incorporated ("Baird"), as part of its
investment banking business, is engaged in the evaluation of businesses and
their securities in connection with mergers and acquisitions, negotiated
underwritings, competitive biddings, secondary distribution of listed and
unlisted securities, private placements, and valuations for estate, corporate
and other purposes.
In conducting our investigation and analysis and in arriving
at our opinion herein, we have reviewed such information and taken into account
such financial and economic factors as we have deemed relevant under the
circumstances. In that connection, we have among other
<PAGE> 171
Allied Capital Lending Corporation
August 14, 1997
Page 2
things: (i) reviewed certain internal information, primarily financial in
nature, including projections, concerning the business and operations of the
Company and each of the Acquired Companies furnished to us for purposes of our
analysis, as well as publicly available information, including, but not limited
to, the Company's and the Acquired Companies' recent filings with the
Securities and Exchange Commission and equity analyst research reports prepared
by various investment banking firms: (ii) reviewed the draft Agreement in the
form presented to the Company's Board of Directors; (iii) compared the
historical market prices and trading activity of Lending Common Stock and each
of the Acquired Companies' common stock with those of certain other publicly
traded companies we deemed relevant; (iv) compared the proposed financial terms
of the Merger with the financial terms of certain other business combinations
we deemed relevant; and (v) reviewed the potential pro forma effects of the
Merger on Lending. We have held discussions with members of the Company's and
the Acquired Companies' respective senior managements concerning the Company's
and the Acquired Companies' historical and current financial condition and
operating results, as well as the future prospects of the Company and each of
the Acquired Companies. We have also considered such other information,
financial studies, analysis and investigations and financial, economic and
market criteria which we deemed relevant for the preparation of this opinion.
In arriving at our opinion, we have assumed and relied upon the
accuracy and completeness of all of the financial and other information that was
publicly available or provided to us by or on behalf of the Company and the
Acquired Companies, and have not been engaged to independently verify any such
information. We have assumed, with your consent, (i) that all material assets
and liabilities (contingent or otherwise, known or unknown) of the Company and
the Acquired Companies are as set forth in the Company's and the Acquired
Companies' respective financial statements; (ii) the Merger will be accounted
for under the combination of companies under common control method of accounting
and (iii) the Merger will be consummated in accordance with the terms of the
Agreement without any material amendment thereto or waiver by the Company or any
of the Acquired Companies of any condition to their respective obligations
(including without limitation the declaration and payment by Lending of a
special dividend in the amount of approximately $8.03 million pursuant to
Section 6.05 thereof). We have also assumed that the financial forecasts
examined by us were reasonably prepared on bases reflecting the best available
estimates and good faith judgments of the Company's and the Acquired Companies'
respective senior management as to future performance of the Company and each of
the Acquired Companies, respectively. In conducting our review, we have not
undertaken nor obtained an independent evaluation or appraisal of any of the
assets or liabilities (contingent or otherwise) of the Company or any of the
Acquired Companies, nor have we made a physical inspection of the properties or
facilities of the Company or any of the Acquired Companies. Our opinion
necessarily is based upon economic, monetary and market conditions as they exist
and can be evaluated on the date hereof, and does not predict or take into
account any changes which may occur, or information which may become available,
after the date hereof. Furthermore, we express no opinion as to the price or
trading range at which the Company's or the Acquired Companies' securities will
trade following the date hereof.
<PAGE> 172
Allied Capital Lending Corporation
August 14, 1997
Page 3
Our opinion has been prepared at the request and for the
information of the Board of Directors of the Company, and shall not be used for
any other purpose or disclosed to any other party without the prior written
consent of Baird; provided, however, that this letter may be reproduced in full
in the Joint Proxy Statement-Prospectus to be provided to the holders of
Lending Common Stock and holders of any of the Acquired Companies' common
stocks in connection with the Merger. We hereby consent to the filing of this
opinion letter as an exhibit to the registration statement and to the reference
to our fairness opinion and the opinions set forth herein in the Joint Proxy
Statement-Prospectus. This opinion does not address the relative merits of the
Merger and any other potential transactions or business strategies considered
by the Company's Board of Directors, and does not constitute a recommendation
to any shareholder of the Company as to how any such shareholder should vote
with respect to the Merger. Baird will receive a fee for rendering this
opinion.
In the ordinary course of our business, we may from time to
time trade the securities of the Company or the Acquired Companies for our own
account or the accounts of our customers and, accordingly, may at any time hold
long or short positions in such securities.
Based upon and subject to the foregoing, we are of the opinion
that, as of the date hereof, the Conversion Ratios, taken as a whole, are fair,
from a financial point of view, to the Company.
Very truly yours,
ROBERT W. BAIRD & CO. INCORPORATED
By: /s/ STEVEN P. KENT
----------------------------------
Its: Managing Director
--------------------------------
<PAGE> 173
Appendix G
[VAN KASPER & COMPANY LETTERHEAD]
August 4, 1997
Board of Directors
Allied Capital Advisers, Inc.
1666 K Street, N.W., 9th Floor
Washington, D.C. 20006
Gentlemen:
You have requested our opinion, as investment bankers, as to
the fairness, from a financial point of view, to the shareholders of Allied
Capital Advisers, Inc. (the "Company") of the proposed merger of the Company
with Allied Capital Lending Corporation ("Lending"), Allied Capital
Corporation, Allied Capital Corporation II, and Allied Capital Commercial
Corporation (collectively, the "Funds") and the issuance of securities in
Lending, the surviving entity, to the shareholders of the Company based upon
the ratio of the stock price of the Company to the stock price of Lending
calculated using their average stock trading prices for the 30-day period ended
July 15, 1997 (the "Transaction").
In connection with our opinion, among other things, we have
(i) discussed the proposed Transaction and related matters with certain members
of the management of the Company, (ii) reviewed the proposed form of Agreement
and Plan of Merger that, we have been advised, is representative of the final
agreement among the parties, (iii) reviewed documents filed by the Company and
the Funds with the Securities and Exchange Commission for the years ended
December 31, 1994, 1995 and 1996 and the three months ended March 31, 1997,
(iv) reviewed audited financial statements of the Company and each of the Funds
at and for the three years ended December 31, 1994, 1995 and 1996, and
unaudited financial statements of the Company and each of the Funds at and for
the three months ended March 31, 1997, and the accompanying Reports of
Independent Accountants, (v) reviewed projections for the Company and for each
of the Funds, and for the Company and the Funds combined after the Transaction,
as prepared and provided to us by the Company, (vi) reviewed certain marketing
materials provided to us by the Company and the Funds, (vii) performed a
discounted cash flow analysis using various discount rates based upon financial
projections provided by the Company, (viii) compared publicly available recent
information for companies we determined to be comparable, (ix) reviewed recent
historical stock prices for the Company, the Funds and other companies we have
determined to be comparable and (x) reviewed the financial terms of certain
other recent business combinations.
<PAGE> 174
Board of Directors
Allied Capital Advisers, Inc.
August 4, 1997
Page 2
In connection with our opinion, with our permission and without
any independent verification, (a) we have assumed that the documents to be
prepared and used to effect the Transaction will do so on the terms set forth
in the proposed Agreement and Plan of Merger, without material modification and
(b) we have relied on the accuracy and completeness of all the financial and
other publicly available information reviewed by us or that was furnished or
otherwise communicated to us by the Company or the Funds. Independent of the
foregoing, we have assumed that the projections for the Company and for each of
the Funds, and the Company and the Funds after completion of the Transaction,
(i) were reasonably prepared based on assumptions reflecting good faith
judgments of the management preparing them as to the most likely future
performance of the Company, the Funds and the Company and the Funds combined
after the Transaction and (ii) neither the management of the Company (with
respect to projections of the Company, any of the Funds and the Company and the
Funds combined) nor the management of any of the Funds (with respect to the
projections of any of the Funds) has any information or belief that would make
any such projections misleading in any material respect. In this regard,
however, we have made certain adjustments to the financial projections of the
Company and the Company and the Funds combined provided to us, where we have
determined that it may have been appropriate to do so for purposes of our work
for this opinion. We have not independently verified the accuracy or
completeness of any of the information provided to us or obtained by us from
publicly available sources and do not take any responsibility with respect to
any such information. Also, we have not made an independent valuation or
appraisal of the assets or liabilities of the Company or the Funds and have
not been furnished with any such evaluation or appraisal.
Our opinion is based upon an analysis of the foregoing in light
of our assessment of general economic and financial market conditions as they
exist and can be evaluated by us as of the date hereof. In this regard, we have
assumed there has been no material change in the business, condition (financial
or other) or prospects of the Company or any of the Funds since the respective
dates of the information provided to us. We have not participated in the
negotiation of the Transaction, provided any legal or other advice with respect
to the Transaction or proposed any possible alternatives to the Transaction.
Based upon and subject to the foregoing, we are of the opinion
that, as of the date hereof, the Transaction is fair to the Company and the
shareholders of the Company from a financial point of view.
Very truly yours,
/s/ VAN KASPER & COMPANY
VAN KASPER & COMPANY
<PAGE> 175
APPENDIX H
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 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 ("ISOs"),
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 committee (the "Committee") comprised
of at least two (2) members of the Company's Board of Directors who each shall
(a) be a "non-employee director," as defined in Rule 16b-3 promulgated under the
Securities Exchange Act of 1934, as amended, unless administration of the Plan
by "non-employee directors" is not then required for exemptions under Rule 16b-3
to apply to transactions under the Plan, (b) not be an "interested person," as
defined in Section 2(a)(19) of the Investment Company Act of 1940, as amended
(the "Act"), and (c) be an "outside director" as defined under Section 162(m) of
the Code, unless the action taken pursuant to the Plan is not required to be
taken by "outside directors" to qualify for tax deductibility under Section
162(m) of the Code. 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 $.0001 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 6,250,000 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 and Directors. The Committee shall determine and designate
from time to time those directors and 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 director or officer to the Company, the present and potential
contributions of such director or 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
<PAGE> 176
of shares offered thereby and the terms of such option are in the best interests
of the Company and its shareholders. The date on which the Committee approves
the grant of any option 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 have no financial interest in such action and (B) a
majority of the Company's directors who are not "interested persons" (as defined
in Section 2(a)(19) of the Act) of the Company and (2) such approval is at such
time required by Section 61(a)(3)(B)(i)(I) or other applicable provision of the
Act, then the grant of any option by such action shall not be effective, and
there shall be no issuance of such option, until there has been approval of such
action by (A) a majority of the Company's directors who have no financial
interest in such action and (B) a majority of the Company's directors who are
not "interested persons" 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 date on which the Committee approves the grant of any option to a director
of the Company who is not also an officer or employee of the Company shall be
the date of issuance of such option; provided, however, that if (1) the proposal
to issue such options has not been approved by order of the U.S. Securities and
Exchange Commission (the "SEC") and (2) such approval is required at such time
by Section 61(a)(3)(B)(i)(II) or other applicable provision of the Act, then the
grant of any option by such action shall not be effective, and there shall be no
issuance of such option, until there has been approval of such proposal by order
of the SEC on the basis that the terms of the proposal are fair and reasonable
and do not involve overreaching of the Company or its shareholders, and the 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) Option Agreements. Agreements evidencing options granted to different
optionees or at different times need not contain similar provisions. Options
that are intended to be ISOs will be designated as such; any option not so
designated will be treated as a nonqualified stock option.
5. OPTION PRICE
Each option agreement shall state the price at which the subject option may
be exercised, which shall not be less than the current fair market value of the
shares at the date of issuance of an option; provided, that the exercise price
of any option that is intended to be an ISO and that is 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, in the case of an option that is intended to
be an ISO and that is granted to a holder of 10% or more of the Company's
shares, shall not exceed five years.
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.
<PAGE> 177
9. LOANS BY THE COMPANY
Upon the exercise of any option, the Company, at the request of an
officer-optionee, 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. Notwithstanding
the foregoing, however, where an optionee's service as a director or officer of
the Company terminates as a result of the optionee's death or his total and
permanent disability, the optionee 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 any portion of the option not previously exercised, in whole
or in part, as provided in the respective option agreement.
11. 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 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.
12. 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.
13. 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.
<PAGE> 178
(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. In the case of any discrepancy between the terms
of the Plan and the terms of any option agreement, the Plan provisions shall
control.
(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) 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 ISO is 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.
(f) 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.
(g) 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.
(h) 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.
(i) 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, NW, 9th Floor, Washington, D.C. 20006; and, if to an
optionee, in care of the optionee at his or her last known address.
(j) 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.
(k) All costs and expenses incurred in the operation and administration of
this Plan shall be borne by the Company.
14. CHANGE OF CONTROL
In the event of a Change of Control (as hereinafter defined), all
then-outstanding options will become fully vested and exercisable as of the
Change of Control. For purposes of the Plan, "Change of Control" means the sale
of substantially all of the Company's assets or the acquisition, whether
directly, indirectly, beneficially (within the meaning of Rule 13d-3 of the 1934
Act, or of record, of securities of the Company representing twenty-five percent
(25%) or more in the aggregate voting power of the Company's then-outstanding
Common Stock by any "person" (within the meaning of Sections 13(d) and 14(d) of
the 1934 Act), including any corporation or group of associated persons acting
in concert, other than (i) the Company or its subsidiaries and/or (ii) any
employee pension benefit plan (within the meaning of Section 3(2) of the
Employee Retirement Income Security Act of 1974) of the Company or its
subsidiaries, including a trust established pursuant to any such plan.
15. AMENDMENT AND TERMINATION
The Board of Directors may modify, revise or terminate this Plan at any
time and from time to time. While the Board of Directors may seek shareholder
approval of an action modifying a provision of the Plan where it is determined
that such shareholder approval is advisable under the provisions of applicable
law, the Board of Directors shall be permitted to make any modification or
revision to any provision of this Plan
<PAGE> 179
without shareholder approval (except with respect to the number of options
authorized for issuance). 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 ,
20 , whichever shall first occur.
16. 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.
<PAGE> 180
SUBJECT TO COMPLETION DATED SEPTEMBER 26, 1997. INFORMATION CONTAINED HEREIN
IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO
THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.
THESE SECURITIES MAY NOT BE SOLD NOR MAY ANY OFFERS TO BUY BE ACCEPTED PRIOR TO
THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS STATEMENT OF
ADDITIONAL INFORMATION DOES NOT CONSTITUTE A PROSPECTUS.
ALLIED CAPITAL LENDING CORPORATION
STATEMENT OF ADDITIONAL INFORMATION
October [__], 1997
This Statement of Additional Information ("SAI") is not a prospectus, and should
be read in conjunction with the prospectus dated October [__], 1997 relating to
this offering (the "Prospectus"). A copy of the Prospectus may be obtained by
calling Allied Capital Lending Corporation at (202) 331-1112 and asking for
Investor Relations. Terms not defined herein have the same meaning as given to
them in the Prospectus.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page in the Statement Location of
of Additional Related Disclosure
Information in the Prospectus
----------- -----------------
<S> <C> <C>
General Information and History. . . . . . . . . . . . . . . . . B-1 Proposal 1:
The Merger
Proposal--
The Merging
Companies
Investment Objectives and Policies . . . . . . . . . . . . . . . B-1 Proposal 1:
The Merger
Proposal--
The Merging
Companies
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . B-1 Proposal 1:
The Merger
Proposal:
The Management
of ACC
Executive Officers of the Companies . . . . . . . . . B-1 N/A
Directors of the Companies . . . . . . . . . . . . . B-3 Proposal 1:
The Merger
Proposal--
The Management
of ACC
Cash Compensation Paid to Officers
and Directors . . . . . . . . . . . . . . . B-4 N/A
Additional Information with respect
to the BDCs . . . . . . . . . . . . . . . . B-9 N/A
Control Persons and Principal Holders
of Securities . . . . . . . . . . . . . . . . . . . . B-12 Proposal 1:
The Merger
Proposal--
Beneficial
Ownership
of Common Stock
Investment Advisory Services . . . . . . . . . . . . . . . . . . B-13 Proposal 1:
The Merger
Proposal--
Advisers--
The Merging
Companies
Investment Advisory Agreements . . . . . . . . . . . . . . . . . B-13 Proposal 1:
The Merger
Proposal--
The Merging
Companies--
Assets Under
Management
</TABLE>
<PAGE> 181
<TABLE>
<S> <C> <C>
Safekeeping, Transfer and Dividend
Paying Agent and Registrar. . . . . . . . . . . . . . B-14 Proposal 1: The Merger Proposal--
The Merging Companies--
Safekeeping, Transfer and
Dividend Paying Agent and Registrar
Accounting Services . . . . . . . . . . . . . . . . . . . . . . B-15 Proposal 1: The Merger Proposal:
The Merging Companies--Independent
Accountant
Brokerage Allocation and Other Practices . . . . . . . . . . . . B-15 N/A
Tax Status . . . . . . . . . . . . . . . . . . . . . . . . . . . B-15 Proposal 1: The Merger Proposal--
The Merging Companies--Federal
Income Tax Issues
</TABLE>
<PAGE> 182
GENERAL INFORMATION AND HISTORY
This SAI contains information with respect to each of Allied I, Allied II,
Allied Commercial, Allied Lending and Advisers. As discussed in the Prospectus,
if the Merger is approved, each of Allied I, Allied II, Allied Commercial and
Advisers would be merged with and into Allied Lending. A detailed discussion of
the business and history of each Company is contained in the Prospectus.
Allied Lending changed its name from "Allied Lending Corporation" to "Allied
Capital Lending Corporation" in September 1993 in anticipation of its initial
public offering in November 1993. If the Merger is consummated, Allied Lending
would be re-named "Allied Capital Corporation." In addition, if the Merger is
consummated, Allied Lending would become a registered investment adviser.
INVESTMENT OBJECTIVES AND POLICIES
The investment objective and/or policies of each Company are discussed in detail
in the Prospectus. A discussion of the selected financial data, supplementary
financial information and management's discussion and analysis of financial
condition and results of operations also are included in the Prospectus.
MANAGEMENT
Executive Officers of the Companies
Certain officers of each Company, as of June 30, 1997, are listed below together
with their position with each Company and a brief statement of their principal
occupations during the last five years. Unless otherwise indicated, the address
of the officers of each Company is 1666 K Street, N.W., 9th Floor, Washington,
DC 20006-2803.
B-1
<PAGE> 183
<TABLE>
<CAPTION>
Position Currently Principal Occupations
Name and Address(1) Age Held with each Company During Past Five Years
- ------------------- --- ---------------------- ----------------------
<S> <C> <C> <C>
William L. Walton 48 President, Chairman and Employed by Advisers since 1997.
Chief Executive Officer Chairman and Chief Executive Officer of
Allied I, Allied II, Allied Commercial,
Allied Lending, Advisers and BMI;
President of Allied II since November
1996; Chairman of 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; Managing
Director of Butler Capital Corporation
from 1987 to 1991.
Jon A. DeLuca 35 Principal, Treasurer and Employed by Advisers since 1994.
Chief Financial Officer Principal, Treasurer and Chief Financial
Officer of Allied I, Allied II, Allied
Commercial, Allied Lending, Advisers and
BMI since 1994; Manager of
Entrepreneurial Services at Coopers &
Lybrand from 1986 to 1994.
Katherine C. Marien 48 Principal Employed by Advisers since 1992.
Principal of Allied I, Allied II, Allied
Commercial, Advisers and BMI since the
later of 1992 or the inception of the
relevant entity; President of Allied Lending
from 1992 to August 1997; Financial
consultant to Wilks & Schwartz
Broadcasting from 1990 to 1992; Financial
consultant to USA Mobile
Communications, Inc. from 1991 to 1992.
She has served as a director of Allied
Lending since 1995.
John M. Scheurer 45 Managing Director Employed by Advisers since 1991.
Managing Director of Allied I, Allied II,
Allied Commercial, Allied Lending,
Advisers and BMI; President of Allied
Commercial since 1993.
</TABLE>
B-2
<PAGE> 184
<TABLE>
<S> <C> <C> <C>
Joan M. Sweeney 37 Managing Director Employed by Advisers since 1993;
Managing Director of Allied I, Allied II,
Allied Commercial, Allied Lending,
Advisers and BMI; President of Advisers
from 1994 to May 1997; Senior Manager at
Ernst & Young from 1990 to 1993.
G. Cabell Williams III 43 Managing Director Employed by Advisers since 1981.
Managing Director of Allied I, Allied II,
Allied Commercial, Allied Lending,
Advisers and BMI; President of Allied I
from 1992 to May 1997.
</TABLE>
DIRECTORS OF THE COMPANIES
The proposed directors of ACC are listed in the Prospectus. It is expected that
if the Merger is approved, ACC would have 23 directors, consisting of all of the
current directors (except for G. Cabell Williams III, John M. Scheurer, Joan M.
Sweeney and Katherine C. Marien,) of the Companies. Information regarding each
of the current directors of the Companies who would become directors of ACC is
set forth in the Prospectus. Information with respect to each of the current
directors of the Companies who will not become directors of ACC (including Mr.
Williams, who serves as a director of Allied I, Mr. Scheurer, who serves as a
director of Allied Commercial, Ms. Sweeney, who serves as a director of
Advisers, and Ms. Marien, who serves as a director of Allied Lending) is set
forth above.
The board of directors of each Company has established an executive committee.
Each Company's executive committee has and may exercise those rights, powers and
authority of the board of directors of that Company as may be granted to it by
such Company's board of directors from time to time, except where action by the
entire board of directors is required by statute, by a Commission order, or by
the Company's charter or by-laws. The members of the respective executive
committees are as follows:
<TABLE>
<CAPTION>
Name of Executive Committee
Company Members
------- -------
<S> <C>
Allied I William L. Walton
G. Cabell Williams III
Michael I. Gallie
Guy T. Steuart II
T. Murray Toomey
</TABLE>
B-3
<PAGE> 185
<TABLE>
<S> <C>
Allied II William L. Walton
Lawrence I. Hebert
John D. Reilly
Smith T. Wood
Allied Commercial William L. Walton
John M. Scheurer
Charles L. Palmer
John D. Reilly
Allied Lending William L. Walton
Katherine C. Marien
Eleanor Deane Bierbower
Robert V. Fleming II
Robin B. Martin
Advisers William L. Walton
Joan M. Sweeney
George C. Williams
</TABLE>
Advisers has established an investment committee comprised of investment
professionals currently employed by Advisers. The investment committee makes all
investment decisions for the Managed Companies. The members of the investment
committee are William L. Walton, G. Cabell Williams III, John M. Scheurer,
Katherine C. Marien, Jon A. DeLuca, and George Stelljes III.
CASH COMPENSATION PAID TO OFFICERS AND DIRECTORS
Advisers pays cash compensation to its executive officers for serving in that
capacity and directors' fees to its directors, including those executive
officers who serve as directors. Advisers' executive officers, and certain of
its directors, also serve as directors or executive officers of certain or all
of the other Companies. However, such other Companies do not pay any cash
compensation to any of their officers, other than directors' fees.
Each director of a Company receives a fee of $1,000 for each meeting of the
board of directors of that Company or its wholly owned subsidiaries, $1,000 for
each committee meeting attended on a different day as a board meeting, and $500
for each committee meeting attended on the same day as a board meeting. The
directors of Allied Commercial also receive an annual retainer fee of $12,000.
There is no duplication of directors' fees and expenses even though some
directors also take action on behalf of a Company's wholly owned subsidiaries.
Aggregate directors' fees for 1996 for each of the Companies were as follows:
$65,500 for Allied I; $54,000 for Allied II; $58,000 for Allied Lending;
$128,000 for Allied Commercial; and $39,000 for Advisers.
B-4
<PAGE> 186
The following summary compensation table sets forth information concerning cash
compensation for services in all capacities awarded to, earned by or paid to
Advisers' four highest paid executive officers, with aggregate compensation from
Advisers for the most recently completed fiscal year in excess of $60,000,
during 1996. Advisers' Chairman and Chief Executive Officer, William L. Walton,
was elected by the Board of Directors on February 3, 1997. The 1996 Summary
Compensation Table does not reflect any payment of salary to Mr. Walton.
Information also is included in the summary compensation table with respect to
any director of Advisers who received cash compensation in 1996.
SUMMARY COMPENSATION TABLE: ADVISERS
<TABLE>
<CAPTION>
Pension or
Retirement
Aggregate Benefits Accrued Total
Compensa- as part of Estimated Annual Compensation
Name and tion Advisers Benefits upon from Advisers Paid
Principal Position from Advisers Expenses Retirement to Directors
- ------------------ ------------- -------- ---------- ------------
<S> <C> <C> <C> <C>
William L. Walton $21,050(1) $0 $0 $21,050(1)
Chairman and Chief
Executive Officer and
Director
Joan M. Sweeney $347,952(2) $0 $0 $347,952(2)
President and Director
G. Cabell Williams III $367,643(2) $0 $0 $367,643(2)
Executive Vice President
John M. Scheurer $437,509(2) $0 $0 $437,509(2)
Executive Vice President
Katherine C. Marien $261,511(2) $0 $0 $261,511(2)
Executive Vice President
George C. Williams $223,091(2) $0 $0 $223,091(2)
Director
Brooks H. Browne $4,000(1) $0 $0 $4,000(1)
Director
Robert E. Long $10,000(1) $0 $0 $10,000(1)
Director
</TABLE>
B-5
<PAGE> 187
<TABLE>
<CAPTION>
Pension or
Retirement
Aggregate Benefits Accrued Total
Compensa- as part of Estimated Annual Compensation
Name and tion Advisers Benefits upon from Advisers Paid
Principal Position from Advisers Expenses Retirement to Directors
- ------------------ ------------- -------- ---------- ------------
<S> <C> <C> <C> <C>
Swep T. Davis $1,000(1) $0 $0 $1,000(1)
Director
</TABLE>
- ------------
(1) Consists only of directors' fees paid by Advisers, except with respect to
Mr. Walton, who also received consulting fees totaling $11,050 during 1996
for certain management consulting services.
(2) Includes: (i) a cash contribution of $30,000 to the cash account of each of
Ms. Sweeney, Messrs. Williams III, Scheurer and Ms. Marien, and of $29,071
to the cash account of Mr. Williams, under the ESOP during 1996; (ii)
salaries for 1996 in the amounts of $117,633, $135,180, $139,322, $106,479,
and $76,203, respectively; (iii) bonuses for 1996 in the amounts of
$160,000, $160,000, $215,000, $105,000, and $0, respectively; (iv)
contributions to the respective Deferred Compensation Plan accounts (both
vested and unvested) of such individuals for 1996 in the amounts of
$34,167, $37,462, $48,471, $18,895, and $0, respectively (v) earnings on
accumulated deferred compensation in the amounts of $1,152, $5,001, $4,716,
$1,137, and $51,492 for Ms. Sweeney, Messrs. Williams III, Scheurer, Ms.
Marien, and Mr. Williams, respectively; directors' fees paid to Ms. Sweeney
in an amount of $5,000; consulting fees paid to Mr. Williams in an amount
of $62,325, and directors fees paid in an amount of $4,000.
The following summary compensation table sets forth information concerning cash
compensation paid by each of Allied I, Allied II and Allied Lending to their
respective directors during 1996. As BDCs, Allied I, Allied II and Allied
Lending may be deemed to be related to one another for purposes of computing
total cash compensation from any one "fund complex," meaning that they have a
common investment adviser. Note that Mr. Walton was not a director during 1996,
and therefore the summary compensation table does not reflect the payment of
directors' fees to Mr. Walton.
B-6
<PAGE> 188
SUMMARY COMPENSATION TABLE: THE BDCS (DIRECTORS)
<TABLE>
<CAPTION>
Pension or Total
Retirement compensa-
Aggregate Benefits Estimated tion from
Aggregate Aggregate compensation Accrued as Annual Allied I,
compensation compensation from part of Benefits Allied II
Name and from from Allied Company upon and Allied
Principal Position Allied I(1) Allied II(1) Lending(1) Expenses Retirement Lending(1)
- ------------------ ----------- ------------ ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
George C. Williams
Director of Allied I,
Allied II and Allied
Lending $5,000 $5,000 $5,000 $ 0 $ 0 $15,000
G. Cabell Williams III
Director of Allied I $7,000 N/A N/A $ 0 $ 0 $7,000
Joseph A. Clorety III
Director of Allied I $8,000 N/A N/A $ 0 $ 0 $8,000
Guy T. Steuart II
Director of Allied I $9,000 N/A N/A $ 0 $ 0 $9,000
Warren K. Montouri
Director of Allied I $7,500 N/A. N/A $ 0 $ 0 $7,500
T. Murray Toomey
Director of Allied I $7,000 N/A N/A $ 0 $ 0 $7,000
Michael I. Gallie
Director of Allied I $10,000 N/A N/A $ 0 $ 0 $10,000
John D. Firestone
Director of Allied II N/A $8,000 N/A $ 0 $ 0 $8,000
Lawrence I. Hebert
Director of Allied II N/A $8,000 N/A $ 0 $ 0 $8,000
John I. Leahy
Director of Allied II N/A $6,000 N/A $ 0 $ 0 $6,000
</TABLE>
B-7
<PAGE> 189
<TABLE>
<CAPTION>
Pension or Total
Retirement compensa-
Aggregate Benefits Estimated tion from
Aggregate Aggregate compensation Accrued as Annual Allied I,
compensation compensation from part of Benefits Allied II
Name and from from Allied Company upon and Allied
Principal Position Allied I(1) Allied II(1) Lending(1) Expenses Retirement Lending(1)
- ------------------ ----------- ------------ ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
John D. Reilly
Director of Allied II N/A $7,000 N/A $ 0 $ 0 $7,000
Smith T. Wood
Director of Allied II N/A $8,000 N/A $ 0 $ 0 $8,000
Jon W. Barker
Director of Allied
Lending N/A N/A $6,500 $ 0 $ 0 $6,500
Eleanor Deane
Bierbower
Director of Allied
Lending N/A N/A $8,000 $ 0 $ 0 $8,000
Robert V. Fleming II
Director of Allied
Lending N/A N/A $8,500 $ 0 $ 0 $8,500
Anthony T. Garcia
Director of Allied
Lending N/A N/A $6,500 $ 0 $ 0 $6,500
Arthur H. Keeney III
Director of Allied
Lending N/A N/A $6,500 $ 0 $ 0 $6,500
Robin B. Martin
Director of Allied
Lending N/A N/A $5,000 $ 0 $ 0 $5,000
</TABLE>
(1) Consists only of directors' fees.
The following summary compensation table sets forth information concerning cash
compensation paid by Allied Commercial to its directors during 1996. Note that
Mr. Walton was not a director during 1996, and therefore the summary
compensation table does not reflect the payment of directors' fees to Mr.
Walton.
B-8
<PAGE> 190
SUMMARY COMPENSATION TABLE: ALLIED COMMERCIAL (DIRECTORS)
<TABLE>
<CAPTION>
Pension or
Retirement Total
Aggregate Benefits Accrued Compensation
Compensation as part of Allied Estimated Annual from Allied
from Allied Commercial's Benefits upon Commercial Paid
Name Commercial(1) Expenses Retirement to Directors
- ---- ------------- -------- ---------- ------------
<S> <C> <C> <C> <C>
George C. Williams $17,000 $0 $0 $17,000
John M. Scheurer $18,000 $0 $0 $18,000
Anthony T. Garcia $18,000 $0 $0 $18,000
Charles L. Palmer $18,000 $0 $0 $18,000
John D. Reilly $20,000 $0 $0 $20,000
Laura W. van Roijen $20,000 $0 $0 $20,000
</TABLE>
- ------------
(1) Consists only of directors' fees.
ADDITIONAL INFORMATION WITH RESPECT TO THE BDCS
Under Commission rules applicable to BDCs, each of Allied I, Allied II and
Allied Lending is required to set forth certain information regarding
compensation paid from such Company during the last three fiscal years to the
three most highly compensated executive officers of the relevant Company with
aggregate compensation from such Company for the fiscal year ended December 31,
1996 in excess of $60,000 ("Compensated Persons"). As discussed above, each such
Company does not pay any cash compensation to any of its officers (other than
directors' fees to those of its officers who also are directors). All of the
executive officers of Allied I, Allied II and Allied Lending are employed by
Advisers, which pays all such officers' cash compensation.
B-9
<PAGE> 191
Each of Allied I, Allied II and Allied Lending, however, from time to time
grants stock options to its officers under the relevant Company's incentive
stock option plan (each, a "Stock Option Plan"). The terms of the Stock Option
Plans for these Companies, as well as of the Stock Option Plans for Allied
Commercial and Advisers and the proposed stock option plan for ACC, are
discussed in detail in the Prospectus.
The following chart summarizes the grants of options by each of Allied I, Allied
II and Allied Lending to each of Advisers' Compensated Persons1 during Allied
I's, Allied II's and Allied Lending's past three fiscal years, including the
securities underlying those options.
SUMMARY COMPENSATION TABLE: OPTIONS GRANTS
<TABLE>
<CAPTION>
Long-Term Compensation Awards
-----------------------------
Restricted
Stock
Awards Securities Payouts/LTIP
(Allied I, Securities Securities Underlying Payouts
Allied II Underlying Underlying Options (Allied I, Allied
Name and and Allied Options Options (Allied II and Allied
Principal Position Year Lending) (Allied I) (Allied II) Lending) Lending)
- ------------------ ---- -------- ---------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
John M. Scheurer 1996 0 0 0 0 $ 0
Managing Director 1995 0 8,080 7,272 6,666 0
1994 0 0 0 0 0
Joan M. Sweeney 1996 0 0 5,633 0 $ 0
Managing Director 1995 0 8,080 14,544 6,666 0
1994 0 0 7,271 0 0
G. Cabell Williams III 1996 0 21,618 11,266 0 $ 0
Managing Director 1995 0 40,400 7,272 6,666 0
1994 0 0 0 0 0
</TABLE>
The following tables set forth further details relating to option grants during
1996 from each of Allied I, Allied II and Allied Lending to each of Advisers'
Compensated Persons and the potential realizable value of each grant, prescribed
to be calculated by the Commission.
- --------
(1)The determination of which executive officers are Compensated Persons is
based upon compensation received from Advisers since Advisers is the only
Company that pays cash compensation.
B-10
<PAGE> 192
ALLIED I
<TABLE>
<CAPTION>
Potential realizable
value at assumed
annual rates of stock
Number of Percent of total price appreciation over
securities options granted Exercise 10-year term (1)
underlying to officers in price per ------------
Name options granted 1996 share Expiration date 5% ($) 10% ($)
---- --------------- ---- ----- --------------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
John M. Scheurer 0 -- -- -- -- --
Joan M. Sweeney 0 -- -- -- -- --
G. Cabell Williams III 21,618 13.3% $13.625 5/6/06 $185,238 $469,429
</TABLE>
ALLIED II
<TABLE>
<CAPTION>
Potential realizable value
at assumed annual rates
of stock price
Number of Percent of appreciation over
securities total options Exercise 10-year term (1)
underlying granted price per --------------------------
Name options granted in 1996 share Expiration date 5% 10%
---- --------------- ------- ----- --------------- -- ---
<S> <C> <C> <C> <C> <C> <C>
John M. Scheurer 0 -- -- -- -- --
Joan M. Sweeney 5,633 3.1% $17.75 5/9/06 $62,880 $159,351
G. Cabell Williams III 11,266 6.2% $17.75 5/9/06 $125,761 $318,703
</TABLE>
ALLIED LENDING
<TABLE>
<CAPTION>
Potential realizable value
at assumed annual rates
of stock price
Number of appreciation over
securities Percent of total Exercise 10-year term (1)
underlying options granted price per --------------------------
Name options granted 1996 share Expiration date 5% 10%
---- --------------- ---- ----- --------------- -- ---
<S> <C> <C> <C> <C> <C> <C>
John M. Scheurer 0 -- -- -- -- --
Joan M. Sweeney 0 -- -- -- -- --
G. Cabell Williams III 0 -- -- -- -- --
</TABLE>
B-11
<PAGE> 193
(1) Potential realizable value is net of the option exercise price but before
any tax liabilities that may be incurred. These amounts represent certain
assumed rates of appreciation, as mandated by the Commission. Actual gains,
if any, or stock option exercises are dependent on the future performance
of the shares, overall market conditions, and the continued employment by
Allied I, Allied II or Allied Lending, as applicable, of the option holder.
The potential realizable value will not necessarily be realized.
STOCK OPTIONS; DIRECTORS In addition to the stock option grants set forth in
the tables above, each Company's non-officer directors may receive one-time
grants of stock options under that Company's Stock Option Plan.
With respect to Allied I, on December 26, 1995 each non-officer director
(Messrs. Clorety, Steuart, Montouri, Toomey and Gallie) received a one-time
grant of options to purchase 10,000 shares at the then-current market price
($13.625) pursuant to the Allied I's Stock Option Plan, which vest over a two
year period in equal increments.
With respect to Allied II, on December 26, 1995 each non-officer director
(Messrs. Hebert, Reilly, Wood, Leahy and Firestone) received a one-time grant of
options to purchase 10,000 shares at the then-current market price ($17.75)
pursuant to Allied II's Stock Option Plan, which vest in equal increments over
two years.
With respect to Allied Lending, on December 26, 1995 each non-officer director
then serving (Ms. Bierbower and Messrs. Barker, Fleming, Garcia, and Keeney)
received a one-time grant of options to purchase 10,000 shares at $15.00 per
share, vesting over a two-year period in equal increments, pursuant to Allied
Lending's Stock Option Plan. Upon election as a director for the first time in
May 1996, Mr. Martin received a similar grant, also at $15.00 per share.
With respect to Advisers, on June 8, 1994 Messrs. Browne, Long and Walton each
received a one-time grant of options to purchase 13,333 shares at the
then-current market price of $3.75 per share. Mr. Davis received a one-time
grant of options on 13,333 shares at a price of $5.325 on March 19, 1997, which
was the date on which certain options to other participants canceled, and became
available for grant to Mr. Davis.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of July 31, 1997, there were 7,367,052 shares of common stock of Allied I
outstanding, 7,628,615 shares of common stock of Allied II outstanding,
14,476,997 shares of common stock of Allied Commercial outstanding, 5,150,448
shares of common stock of Allied Lending outstanding and 9,133,379 shares of
common stock of Advisers outstanding. The
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Prospectus contains a table, under "Beneficial Ownership of Common Stock," that
sets forth with respect to each Company: (i) the number of outstanding shares of
common stock beneficially owned by each stockholder who owns beneficially more
than 5% of the outstanding common stock of such Company and the percentage of
the total number of outstanding shares of common stock of such Company
represented by such number; and (ii) the number of outstanding shares of common
stock beneficially owned, directly or indirectly, by all directors and officers
of each Company as a group and the percentage of the total number of outstanding
shares of common stock of such Company represented by such number.
INVESTMENT ADVISORY SERVICES
Subject to the supervision and control of each Managed Company's board of
directors, the investments of each Managed Company are managed by Advisers. The
business of and investment advisory relationships with Advisers are discussed in
the Prospectus. Advisers currently has forty-six (46) investment and other
professionals, as well as thirty-five (35) other employees.
All investments of a Managed Company must be approved by Advisers' investment
committee, which is composed of senior investment professionals of Advisers.
Additionally, the board of directors of each Managed Company reviews and
approves or ratifies all loans and other investments made by that Company.
For the fiscal year ended December 31, 1996, each of the Managed Companies paid
investment advisory fees to Advisers as follows: Allied I -- $2.9 million in
investment advisory fees; Allied II -- $2.4 million in investment advisory fees;
Allied Lending -- $1.5 million in investment advisory fees; and Allied
Commercial -- $7.3 million in investment management fees.
INVESTMENT ADVISORY AGREEMENTS
The stockholders of each Managed Company have approved an investment advisory
agreement between that Company and Advisers. Each agreement remains in effect
from year to year as long as its continuance is approved at least annually by
the relevant board of directors or by the vote of a majority of the outstanding
voting securities of that Company, as defined in the 1940 Act, provided that the
continuance of such agreement is approved by a majority of directors who are not
parties to such contract or interested persons of any such party, at a meeting
called for the voting on such approval. Each agreement may, however, be
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terminated at any time on sixty (60) days' notice, without the payment of any
penalty, by the board of directors of the relevant Company or by vote of a
majority of the Company's outstanding voting securities, as defined, and will
terminate automatically in the event of its assignment.
Pursuant to each agreement, Advisers manages the investments of a Managed
Company, subject to the supervision and control of the board of directors of
that Managed Company. Specifically, Advisers identifies, evaluates, structures,
closes, and monitors the investments made by the Company. Each Managed Company
will not make any investments that have not been recommended by Advisers as long
as its current agreement remains in effect. Advisers has the authority to effect
acquisitions and dispositions of investments for each Company's account, subject
to approval by the Managed Company's board of directors.
Each agreement provides that the relevant Managed 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
investment officers and the cost of office space, equipment, and other personnel
necessary for day-to-day operations. The expenses that are paid by each Managed
Company include that Managed Company's share of transaction costs (including
legal and auditing) incident to the acquisition and disposition of investments,
regular legal and auditing fees and expenses, the fees and expenses of the
Managed Company's directors, the costs of printing and distributing proxy
statements and other communications to stockholders, the costs of promoting the
Company's stock, and the fees and expenses of the Company's custodian and
transfer agent.
Each Managed Company, rather than Advisers, also is required to pay expenses
associated with litigation and other extraordinary or non-recurring expenses
with respect to its operations and investments, as well as expenses of required
and optional insurance and bonding. Advisers is, however, 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
follow-on managerial assistance. Advisers will report to each Managed Company's
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 a current agreement.
SAFEKEEPING, TRANSFER AND DIVIDEND PAYING AGENT AND REGISTRAR
As discussed in the Prospectus, ACC's and its subsidiaries' investments would
be, and each Company's and its subsidiaries investments currently are, held in
safekeeping by Riggs Bank
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<PAGE> 196
N.A. ("Riggs") at 808 17th Street, N.W., Washington, D.C. 20006. LaSalle
National Bank, located at 25 Northwest Point Boulevard, Suite 800, Elk Grove
Village, Illinois 60007, serves as the trustee and custodian with respect to
assets of Allied Commercial held for securitization purposes. American Stock
Transfer & Trust Company, 40 Wall Street, 46th Floor, New York, New York 10005
acts as each Company's transfer, dividend paying and reinvestment plan agent and
registrar.
ACCOUNTING SERVICES
Matthews, Carter and Boyce, P.C., or its predecessor, has served as the
independent accountants to Allied I, Allied II and Allied Lending since their
respective inceptions and has no financial interest in these Companies. Arthur
Andersen LLP has served as the independent accountant to Advisers and Allied
Commercial since May 6, 1993 and September 23, 1994, respectively.
Neither Matthews, Carter and Boyce, P.C. nor Arthur Andersen LLP has a financial
interest in any Company.
BROKERAGE ALLOCATION AND OTHER PRACTICES
Since the Companies generally acquire and dispose of their respective
investments in privately negotiated transactions, they infrequently use brokers
in the normal course of business.
TAX STATUS
Each of Allied I, Allied II and Allied Lending has elected for each taxable year
to be treated as a "regulated investment company" or "RIC" under Subchapter M of
the Code and intends to continue to maintain that status. Each such Company
distributes to stockholders annually in a timely manner at least 90% of its
"investment company taxable income," as defined in the Code (i.e., net
investment income, including accrued original issue discount, and net short-
term capital gains) (the "90% Distribution Requirement"), and will not be
subject to federal income tax on the portion of its investment company taxable
income and net capital gains (net long-term capital gain in excess of net
short-term capital loss) distributed to stockholders as required under the Code.
In addition, if Allied I, Allied II or Allied Lending distributes in a timely
manner 98% of its capital gain net income for each one-year period ending on
December 31, and distributes 98% of its net ordinary income for each calendar
year (as well as any income not distributed in prior years), it will not be
subject to the 4% nondeductible federal excise tax imposed with respect to
certain undistributed income of RICs. Each of
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Allied I, Allied II and Allied Lending generally will endeavor to distribute to
stockholders all of its investment company taxable income and its net capital
gain, if any, for each taxable year so that such Company will not incur income
and excise taxes on its earnings.
In order to qualify as a RIC for federal income tax purposes, each of Allied I,
Allied II and Allied Lending must, among other things: (a) derive in each
taxable year at least 90% of its gross income from dividends, interest, payments
with respect to securities loans, gains from the sale of stock or securities, or
other income derived with respect to its business of investing in such stock or
securities (the "90% Income Test"); (b) for taxable years ending before January
1, 1998, derive in each taxable year less than 30% of its gross income from the
sale of stock or securities held for less than three months (the "30%
Limitation"); and (c) diversify its holdings so that at the end of each quarter
of the taxable year (i) at least 50% of the value of such Company's assets
consists of cash, cash items, U.S. government securities, and other securities
if such other securities of any one issuer do not represent more than 5% of the
Company's assets or 10% of the outstanding voting securities of the issuer, and
(ii) no more than 25% of the value of the Company's assets is invested in the
securities of one issuer (other than U.S. government securities and securities
of other RICs) or of two or more issuers that are controlled (as determined
under applicable Code rules) by the Company and are engaged in the same or
similar trades or businesses. The 30% Limitation will not apply for taxable
years beginning after December 31, 1997.
If Allied I, Allied II or Allied Lending acquires or is deemed to have acquired
debt obligations that were issued originally at a discount or that otherwise are
treated under applicable tax rules as having original issue discount, Allied I,
Allied II or Allied Lending, as applicable, will be required to include in
income each year a portion of the original issue discount that accrues over the
life of the obligation regardless of whether cash representing such income is
received by the relevant entity in the same taxable year and to make
distributions accordingly.
Although none presently expects to do so, each of Allied I, Allied II and Allied
Lending is authorized to borrow funds and to sell assets in order to satisfy
distribution requirements. However, under the 1940 Act, each such Company will
not be permitted to make distributions to stockholders while that Company's debt
obligations and other senior securities are outstanding unless certain "asset
coverage" tests are met. Moreover, each such Company's ability to dispose of
assets to meet its distribution requirements may be limited by other
requirements relating to its status as a RIC, including the 30% Limitation and
the diversification requirements. If Allied I, Allied II or Allied Lending
disposes of assets in order to meet distribution requirements, the relevant
Company may make such dispositions at times which, from an investment
standpoint, are not advantageous.
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If Allied I, Allied II or Allied Lending fails to satisfy the 90% Distribution
Requirement or otherwise fails to qualify as a RIC in any taxable year, it will
be subject to tax in such year on all of its taxable income, regardless of
whether the relevant Company makes any distributions to its stockholders. In
addition, in that case, all of that Company's distributions to its stockholders
will be characterized as ordinary income (to the extent of the Company's current
and accumulated earnings and profits). In contrast, as is explained below, if
the Company qualifies as a RIC, a portion of its distributions may be
characterized as long-term capital gain in the hands of stockholders.
Other than distributions properly designated as "capital gain dividends" as is
described below, dividends to stockholders of the investment company taxable
income of Allied I, Allied II or Allied Lending will be taxable as ordinary
income to stockholders to the extent of the relevant Company's current or
accumulated earnings and profits. Distributions of Allied I, Allied II or Allied
Lending's net capital gain properly designated by the relevant Company as
"capital gain dividends" will be taxable to stockholders as a long-term capital
gain regardless of the stockholder's holding period for his or her shares.
To the extent that Allied I, Allied II or Allied Lending retains any net capital
gain, it may designate such retained gain as "deemed distributions" and pay a
tax thereon for the benefit of its stockholders. In that event, the stockholders
will be required to report their share of retained net capital gain on their tax
returns as if it had been distributed to them and report a credit for the tax
paid thereon by the relevant Company. The amount of the deemed distribution net
of such tax will be added to the stockholder's cost basis for his or her shares.
Since each of Allied I, Allied II and Allied Lending expects to pay tax on net
capital gain at its regular corporate capital gain tax rate, and since that rate
is in excess of the maximum rate currently payable by individuals on net capital
gain, the amount of credit that individual stockholders may report will exceed
the amount of tax that they would be required to pay on net capital gain.
Stockholders who are not subject to federal income tax or tax on capital gains
should be able to file a Form 990T or an income tax return on the appropriate
form that allows them to recover the taxes paid on their behalf.
Any dividend declared by Allied I, Allied II or Allied Lending in October,
November, or December of any calendar year, payable to stockholders of record on
a specified date in such a month and actually paid during January of the
following year, will be treated as if it had been received by the stockholders
on December 31 of the year in which the dividend was declared.
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<PAGE> 199
Investors should be careful to consider the tax implications of buying shares
just prior to a distribution. Even if the price of the shares includes the
amount of the forthcoming distribution, the stockholder generally will be taxed
upon receipt of the distribution and will not be entitled to offset the
distribution against the tax basis in his or her shares.
A stockholder may recognize taxable gain or loss if he or she sells or exchanges
his or her shares. Any gain arising from (or, in the case of distributions in
excess of earnings and profits, treated as arising from) the sale or exchange of
shares generally will be a capital gain or loss except in the case of dealers or
certain financial institutions. This capital gain or loss normally will be
treated as a long-term capital gain or loss if the stockholder has held his or
her shares for more than one year; otherwise, it will be classified as
short-term capital gain or loss. However, any capital loss arising from the sale
or exchange of shares held for six months or less will be treated as a long-term
capital loss to the extent of the amount of capital gain dividends received with
respect to such shares and, for this purpose, the special rules of Section
246(c)(3) and (4) of the Code generally apply in determining the holding period
of shares. Net capital gain of noncorporate taxpayers is currently subject to a
maximum federal income tax rate of 28% (subject to reduction in many situations)
while other income may be taxed at rates as high as 39.6%. Corporate taxpayers
are currently subject to federal income tax on net capital gain at the maximum
35% rate also applied to ordinary income. Tax rates imposed by states and local
jurisdictions on capital gain and ordinary income may differ.
Each of Allied I, Allied II and Allied Lending may be required to withhold U.S.
federal income tax at the rate of 31% of all taxable dividends and distributions
payable to stockholders who fail to provide the relevant Company with their
correct taxpayer identification number or to make required certifications, or
regarding whom such Company has been notified by the IRS that they are subject
to backup withholding. Backup withholding is not an additional tax, and any
amounts withheld may be credited against a stockholder's U.S. federal income tax
liability.
Federal withholding taxes at a 30% rate (or a lesser treaty rate) may apply to
distributions to stockholders that are nonresident aliens or foreign
partnerships, trusts, or corporations. Foreign investors should consult their
tax advisers with respect to the possible U.S. federal, state, and local tax
consequences and foreign tax consequences of an investment in Allied I, Allied
II and/or Allied Lending, as applicable.
Each of Allied I, Allied II and Allied Lending will send to each of its
stockholders, as promptly as possible after the end of each fiscal year, a
notice detailing, on a per share and per distribution basis, the amounts
includible in such stockholder's taxable income for such year as ordinary income
and as long-term capital gain. In addition, the federal tax status of each
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year's distributions generally will be reported to the IRS. Distributions may
also be subject to additional state, local, and foreign taxes depending on a
stockholder's particular situation. Stockholders are advised to consult their
own tax advisers with respect to the particular tax consequences to them of an
investment in Allied I, Allied II and/or Allied Lending, including the possible
effect of any pending legislation or proposed regulation.
See the Prospectus for further discussion of the tax status of Allied I, Allied
II and Allied Lending, and for a discussion of the tax status of each of Allied
Commercial and Advisers.
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<PAGE> 201
PART C
OTHER INFORMATION
ITEM 15. INDEMNIFICATION.
The Annotated Code of Maryland, Corporations and Associations (the "Maryland
Law"), Section 2-418 provides that a Maryland corporation may indemnify any
director of the corporation and any person who, while a director of the
corporation, is or was serving at the request of the corporation as a director,
officer, partner, trustee, employee, or agent of another foreign or domestic
corporation, partnership, joint venture, trust, other enterprise or employee
benefit plan, made a party to any proceeding by reason of service in that
capacity unless it is established that the act or omission of the director was
material to the matter giving rise to the proceeding and was committed in bad
faith or was the result of active and deliberate dishonesty; or the director
actually received an improper personal benefit in money, property or services;
or, in the case of any criminal proceeding, the director had reasonable cause
to believe that the act or omission was unlawful. Indemnification may be made
against judgments, penalties, fines, settlements, and reasonable expenses
actually incurred by the director in connection with the proceeding, but if the
proceeding was one by or in the right of the corporation, indemnification may
not be made in respect of any proceeding in which the director shall have been
adjudged to be liable to the corporation. Such indemnification may not be made
unless authorized for a specific proceeding after a determination has been
made, in the manner prescribed by the law, that indemnification is permissible
in the circumstances because the director has met the applicable standard of
conduct. On the other hand, the director must be indemnified for expenses if he
or she has been successful in the defense of the proceeding or as otherwise
ordered by a court. The law also prescribes the circumstances under which the
corporation may advance expenses to, or obtain insurance or similar cover for,
directors.
The law also provides for comparable indemnification for corporate officers and
agents.
The Articles of Incorporation of Allied Capital Lending Corporation
("Registrant") provide that its directors and officers shall, and its agents in
the discretion of the Board of Directors may, be indemnified to the fullest
extent permitted from time to time by the laws of Maryland (with such power to
indemnify officers and directors limited to the scope provided for in Section
2-418 as currently in force). The Company's Bylaws, however, provide that the
Company may not indemnify any director or officer against liability to the
Registrant or its security holders to which he or she might otherwise be
subject by reason of such person's willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
or her office unless a determination is made by final decision of a court, by
vote of a majority of a quorum of directors who are disinterested, non-party
directors or by
<PAGE> 202
independent legal counsel that the liability for which indemnification is
sought did not arise out of such disabling conduct.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of
Registrant pursuant to the provisions described above, or otherwise. Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by Registrant of expenses incurred or
paid by a director, officer or controlling person in the successful defense of
an action, suit or proceeding) is asserted by a director, officer or
controlling person in connection with the securities being registered,
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of the
court of the issue.
Registrant, in conjunction with its investment adviser and other entities
managed thereby, carries liability insurance for the benefit of its directors
and officers on a claims-made basis of up to $2,500,000, subject to a $200,000
retention and the other terms thereof.
The Agreement and Plan of Merger (the "Merger Agreement") by and among Allied
Capital Advisers, Inc. ("Advisers"), Allied Capital Corporation ("Allied I"),
Allied Capital Corporation II ("Allied II"), Registrant and Allied Capital
Commercial Corporation ("Allied Commercial") provides that, from and after
consummation of the Merger (defined below), Registrant shall indemnify any
person who at the date of the Merger Agreement, or had been at any time prior
to such date or who becomes prior to the effective time of the Merger, an
officer or director of Allied I, Allied II, Allied Commercial or Advisers, or
any of their respective subsidiaries, from any and all liabilities resulting
from their acts and omissions prior to the effective time of the Merger to the
full extent permitted by Maryland Law and the Investment Company Act of 1940,
as amended, including but not limited to acts and omissions arising out of or
pertaining to the Merger, and shall maintain in effect for at least 72 months
directors' and officers' liability insurance policies with respect to matters
occurring prior to the effective time of the Merger.
ITEM 16. EXHIBITS.
(1) Articles of Amendment and Restatement to the Articles of
Incorporation of Registrant(1)
(2) By-laws of Registrant(2)
<PAGE> 203
(3) N/A
(4)(i) Agreement and Plan of Merger by and among Advisers, Allied I, Allied
II, Registrant and Allied Commercial, incorporated by reference to
Appendix A of the Joint Proxy Statement/Prospectus.
(4)(ii) Articles of Merger among Registrant, Advisers, Allied I, Allied II,
and Allied Commercial, incorporated by reference to Appendix B of the
Joint Proxy Statement/Prospectus.
(5) Instruments defining rights of security holders -- See Exhibits (1)
and (2).
(6) Investment Advisory Agreement between Registrant and Advisers, dated
May 9, 1995.(1)
(7) N/A
(8)(i) Stock Option Plan(3)
(8)(ii) ACC Stock Option Plan, incorporated by reference to Appendix H of the
Joint Proxy Statement/Prospectus.
(9) Custodian Agreement between Riggs Bank N.A. (formerly known as The
Riggs National Bank of Washington, D.C.) and Registrant, dated
February 27, 1987.(1)
(10) N/A
(11) Opinion and Consent of Sutherland, Asbill & Brennan LLP as to the
legality of securities being registered, and consent to the use of
such opinion.*
(12) Opinion and Consent of Sutherland, Asbill & Brennan LLP supporting
the tax matters and consequences to stockholders discussed in the
Prospectus, and consent to the use of such opinion.*
13(i) Credit Agreement, dated as of July 11, 1997, between Registrant and
Riggs Bank N.A.(2)
13(ii) Line of Credit, Security and Pledge Agreement, dated as of the 1st
day of January, 1997, between Allied Capital SBLC Corporation
("Allied SBLC") and Riggs Bank N.A.(2)
13(iii) Promissory Note for the amount of $25,000,000, dated January 1,
1997, from Allied SBLC and Riggs Bank N.A.(2)
13(iv) Promissory Note for the amount of $12,500,000, dated January 1,
1997, from Allied SBLC and Riggs Bank N.A.(2)
<PAGE> 204
13(v) Replacement Promissory Note for the amount of $15,000,000, dated
March 19, 1997, from Allied Capital Credit Corporation ("Allied
Credit") and Registrant to Riggs Bank N.A.(2)
13(vi) First Amendment to Line of Credit, Security and Pledge Agreement,
dated as of March 19, 1997, between Allied SBLC and Riggs Bank
N.A.(2)
13(vii) Second Amendment to Line of Credit, Security and Pledge Agreement,
dated as of April 16, 1997, between Allied SBLC and Riggs Bank
N.A.(2)
13(viii) Line of Credit, Security and Pledge Agreement, dated as of the 1st
day of January, 1997, between Allied Credit and Riggs Bank N.A.(2)
13(ix) First Amendment to Line of Credit, Security and Pledge Agreement,
dated as of March 19, 1997, between Allied Credit and Riggs Bank
N.A.(2)
14(i) Consent of Matthews, Carter and Boyce, P.C., independent accountant.*
14(ii) Consent of Arthur Andersen LLP, independent accountant.*
14(iii) Opinion of Ferris, Baker Watts, Incorporated, incorporated by
reference to Appendix C to the Joint Proxy Statement/Prospectus.
14(iv) Consent of Ferris, Baker Watts, Incorporated.*
14(v) Opinion of Interstate/Johnson Lane Corporation, incorporated by
reference to Appendix D to the Joint Proxy Statement/Prospectus.
14(vi) Consent of Interstate/Johnson Lane Corporation.*
14(vii) Opinion of Scott & Stringfellow, Inc., incorporated by reference to
Appendix E to the Joint Proxy Statement/Prospectus.
14(viii) Consent of Scott & Stringfellow, Inc.*
14(ix) Opinion of Robert W. Baird & Co., Incorporated, incorporated by
reference to Appendix F to the Joint Proxy Statement/Prospectus.
14(x) Consent of Robert W. Baird & Co., Incorporated.*
14(xi) Opinion of Van Kasper & Company, incorporated by reference to
Appendix G to the Joint Proxy Statement/Prospectus.
14(xii) Consent of Van Kasper & Company.*
14(xiii) Consent of Morgan Stanley & Co., Incorporated.*
(15) N/A
<PAGE> 205
(16) N/A
(17) N/A
---------------------
* Filed herewith.
(1) Incorporated by reference to such document filed as an exhibit of the
same name with the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1996.
(2) Incorporated by reference to such document filed as an exhibit of the
same name with the Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1997.
(3) Incorporated by reference to such document filed as Exhibit A to the
Registrant's Notice and Proxy Statement dated April 2, 1997.
ITEM 17. UNDERTAKINGS.
(1) The undersigned registrant agrees that prior to any public
reoffering of the securities registered through the use of a prospectus which
is a part of this registration statement by any person or party who is deemed to
be an underwriter within the meaning of Rule 145(c) of the Securities Act, the
reoffering prospectus will contain the information called for by the applicable
registration form for reofferings by persons who may be deemed underwriters, in
addition to the information called for by the other items of the applicable
form.
(2) The undersigned registrant agrees that every prospectus that is
filed under paragraph (1) above will be filed as part of an amendment to the
registration statement and will not be used until the amendment is effective,
and that, in determining any liability under the 1933 Act, each post-effective
amendment shall be deemed to be a new registration statement for the securities
offered therein, and the offering of the securities at that time shall be
deemed to be the initial bona fide offering of them.
<PAGE> 206
SIGNATURES
As required by the Securities Act of 1933, as amended, this
registration statement has been signed on behalf of Allied Capital Lending
Corporation, in the District of Columbia, on September 24, 1997.
ALLIED CAPITAL LENDING CORPORATION
By: /s/ William L. Walton
-----------------------------
William L. Walton
Director, Chairman and Chief Executive Officer
As required by the Securities Act of 1933, as amended, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Name Title Date
<S> <C> <C>
/s/ William L. Walton Director, Chairman and Chief September 24, 1997
- ----------------------------- Executive Officer (Principal
William L. Walton Executive Officer)
/s/ Katherine C. Marien Director, Principal September 24, 1997
- -----------------------------
Katherine C. Marien
/s/ Jon W. Barker Director September 24, 1997
- -----------------------------
Jon W. Barker
/s/ Eleanor Deane Bierbower Director September 24, 1997
- -----------------------------
Eleanor Deane Bierbower
/s/ Robert V. Fleming II Director September 24, 1997
- -----------------------------
Robert V. Fleming II
/s/ Arthur H. Keeney III Director September 24, 1997
- -----------------------------
Arthur H. Keeney III
/s/ Anthony T. Garcia Director September 24, 1997
- -----------------------------
Anthony T. Garcia
/s/ Robin B. Martin Director September __, 1997
- -----------------------------
Robin B. Martin
</TABLE>
<PAGE> 207
<TABLE>
<S> <C> <C>
/s/ George C. Williams Director September 25, 1997
- -----------------------------
George C. Williams
/s/ Jon A. DeLuca Principal, Treasurer and Chief September 25, 1997
- ----------------------------- Financial Officer
Jon A. DeLuca
</TABLE>
<PAGE> 208
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
EX-99.11 OPIN COUNSL
EX-99.12 TAX OPINION
EX-99.14(i) CONSENT OF MATTHEWS, CARTER AND BOYCE, P.C.
EX-99.14(ii) CONSENT OF ARTHUR ANDERSEN LLP
EX-99.14(iv) CONSENT OF FERRIS, BAKER WATTS, INCORPORATED
EX-99.14(vi) CONSENT OF INTERSTATE/JOHNSON LANE CORPORATION
EX-99.14(viii) CONSENT OF SCOTT & STRINGFELLOW, INC.
EX-99.14(x) CONSENT OF ROBERT W. BAIRD & CO., INCORPORATED
EX-99.14(xii) CONSENT OF VAN KASPER & COMPANY
EX-99.14(xiii) CONSENT OF MORGAN STANLEY & CO., INCORPORATED
</TABLE>
<PAGE> 1
EX-99.11
Sutherland, Asbill & Brennan LLP
1275 Pennsylvania Avenue, N.W.
Washington, D.C. 20004
Tel: (202) 383-0100
Fax: (202) 637-3593
September 25, 1997
VIA EDGAR TRANSMISSION
The Board of Directors
Allied Capital Lending Corporation
c/o Allied Capital Advisers, Inc.
1666 K Street, N.W.
Washington, D.C. 20006-2803
Ladies and Gentlemen:
We have acted as counsel to Allied Capital Lending Corporation, a
Maryland corporation (the "Company"), in connection with its filing of a
registration statement on Form N-14 (the "Registration Statement") with the
Securities and Exchange Commission relating to the Company's issuance of its
common stock, par value $0.0001 per share (the "Common Stock"), in the proposed
merger (the "Merger") of certain other Maryland corporations with and into the
Company pursuant to the Agreement and Plan of Merger dated as of August 14,
1997, as amended and restated as of September 19, 1997, among the Company and
such other corporations (the "Merger Agreement"), all as described in the
Registration Statement.
We have participated in the preparation of the Registration
Statement and have examined originals or copies, certified or otherwise
identified to our satisfaction by public officials or officers of the Company as
authentic copies of originals, of (i) the Company's Restated Articles of
Incorporation and its by-laws, (ii) resolutions of the board of directors of the
Company approving the Merger and the issuance of Common Stock in connection
therewith and (iii) such other documents as in our judgment were necessary to
enable us to render the opinions expressed below. In our review and examination
of all such documents, we have assumed the legal capacity of all natural
persons, the genuineness of all signatures, the authenticity of all documents
and records submitted to us as originals, and the conformity with authentic
originals of all documents and records submitted to us as originals, and the
conformity with authentic originals of all documents and records submitted to us
as copies. To the extent we have deemed appropriate, we have relied upon
certificates of public officials and certificates and statements of corporate
officers of the Company as to certain factual matters.
<PAGE> 2
This opinion is limited to the laws of the State of Maryland, and
we express no opinion with respect to the laws of any other jurisdiction. The
opinions expressed in this letter, insofar as they relate to matters governed by
the laws of the State of Maryland, are based on our review of the General
Corporation Law of Maryland.
Based upon and subject to the foregoing and our investigation of
such matters of law as we have considered advisable, we are of the opinion that:
1. The Company is a corporation duly incorporated and existing
under the laws of the State of Maryland.
2. Upon the consummation of the Merger in accordance with the
Merger Agreement, the shares of Common Stock issued in the Merger will be
legally issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion as an exhibit to
the Registration Statement and to the reference to our firm in the "Legal
Matters" section of the prospectus included in the Registration Statement. We do
not admit by giving this consent that we are in the category of persons whose
consent is required under Section 7 of the Securities Act of 1933, as amended.
Very truly yours,
SUTHERLAND, ASBILL & BRENNAN LLP
By: /s/ Steven B. Boehm
------------------------
Steven B. Boehm
<PAGE> 1
EX-99.12
Sutherland, Asbill & Brennan LLP
1275 Pennsylvania Avenue, N.W.
Washington, D.C. 20004
Tel: (202) 383-0100
Fax: (202) 637-3593
September 25, 1997
The Boards of Directors of
Allied Capital Advisers, Inc.
Allied Capital Corporation
Allied Capital Corporation II
Allied Capital Lending Corporation
Allied Capital Commercial Corporation
c/o Allied Capital Advisers, Inc.
1666 K Street, N.W., 9th Floor
Washington, D.C. 20006-2803
Ladies and Gentlemen:
This letter responds to your request for our opinion
concerning the principal United States federal income tax consequences to
Allied Capital Advisers, Inc., Allied Capital Corporation, Allied Capital
Corporation II, Allied Capital Lending Corporation, and Allied Capital
Commercial Corporation (the "Combining Corporations") from the transactions
outlined below. In preparing this opinion, we have relied solely on, and have
assumed the correctness of, (i) the facts set forth below, (ii) the
representations made to us by the Combining Corporations, and (iii) our
examination of certain agreements and other documents referenced herein.
Summary of Relevant Facts
I. The Entities
A. Allied Capital Advisers, Inc.
Allied Capital Advisers, Inc. ("Advisers") was initially
incorporated under the laws of the District of Columbia as "Allied Advisory,
Inc." on May 20, 1964, was reincorporated as a Maryland corporation on
September 12, 1990, and changed its name to "Allied Capital
<PAGE> 2
September 25, 1997
Page 2
Advisers, Inc." on November 13, 1990. From May 20, 1964 until December 31,
1990, Advisers was a wholly owned subsidiary of Allied Capital Corporation, at
which time Allied Capital Corporation distributed all the shares of Advisers to
the shareholders of Allied Capital Corporation in a taxable transaction (i.e.,
not in a transaction qualifying under section 355).(1) As a result of that
distribution, Advisers became and is presently a publicly held company, the
shares of which are traded over-the-counter on the Nasdaq National Market. As
of June 30, 1997, Advisers' stock was held by approximately 3,700 shareholders.
Advisers is registered as an investment adviser under the
Investment Advisers Act of 1940, as amended. Advisers provides, pursuant to
separate investment advisory agreements, investment advisory services to a
number of corporations, limited liability companies, and limited partnerships.
The investments of all of those entities consist largely of various forms of
loans to, and equity investments in, small, privately owned businesses.
As of June 30, 1997, Advisers had approximately $848 million
of total assets under its management. Its assets include all the issued and
outstanding stock of Allied Capital Property Corporation ("Property"), a
Maryland corporation that has been a wholly owned subsidiary of Advisers since
Property's incorporation on July 22, 1994. Property's primary asset is
improved real property located in northern Virginia. That real property, which
has an adjusted basis for federal income tax purposes of $2.3 million, secures
a purchase-money note (payable to Advisers') in the amount of $1.7 million.
The note is Property's only liability.
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(1)Unless indicated otherwise, all section references are to the Internal
Revenue Code of 1986, as amended (the "Code").
<PAGE> 3
September 25, 1997
Page 3
Both Advisers and Property are "C" corporations within the
meaning of section 1361(a)(2) that are not subject to the provisions of
Subchapter M of the Code. They join in filing a consolidated income tax return
for federal income tax purposes. Property is the sole subsidiary of Advisers,
and there are no deferred gains or income from intercompany transactions within
the Advisers consolidated group.
In early August 1997, the board of directors of Advisers, with
respect to Advisers' role as employer to all of the officers and employees
managing the Combining Corporations and in its role as investment adviser to
the other Combining Corporations, met to consider specific issues related to the
elimination and transition of several of the existing compensation plans in
connection with the Mergers (as defined below). Specifically, Advisers' board
reviewed the complexities involved in maintaining or merging the existing stock
option plans of each of the Combining Corporations and determined to recommend
to the respective boards of the Combining Corporations to terminate their
respective incentive stock option plans at the time of the Mergers, so that ACC
(as defined below) would be able to develop its own new stock option plan and
allow its board of directors to determine stock option awards for officers and
directors as it deemed appropriate.
To effect the foregoing approach, Advisers' board also
determined that two separate formula bonuses would be required to compensate
employees for options that would be canceled when the plans were terminated,
and to balance stock option awards among Advisers' employees to account for the
deviations caused by the existence of five plans supported by five different
publicly traded stocks. Advisers' board determined that a bonus (the "Cut-Off
Award")
<PAGE> 4
September 25, 1997
Page 4
would be determined for each employee with unvested options in an amount equal
to the product of (A) the difference between the stock price at the
announcement date of the Mergers and the exercise price of the options
multiplied by (B) the number of options. The Cut-off Award will vest with
respect to each employee over the same period of time during which their
options would have vested. The Cut-off Award was designed to limit the
appreciated value in unvested options at the announcement date of the Mergers,
in order to set the foundation to balance option awards upon the Mergers.
Advisers' board then determined a separate cash award formula
to balance the option awards and to compensate employees for any increase in
the value of the potential merged entity from the announcement date of the
Mergers (i.e., August 14, 1997) through the expected closing date of the
Mergers. This award (the "Contingent Award") is contingent upon the closing of
the Mergers and was designed to compensate employees during a time when their
unvested options would cease to appreciate in value, but they would not yet be
able to receive options in ACC. The Contingent Award will be equal to 6
percent, in the aggregate, of the increase in the combined market
capitalizations of the Combining Corporation from August 14, 1997 until one day
before the closing of the Mergers. The Contingent Award will be awarded to
individual employees at the discretion of Advisers' compensation committee and
will vest over three years in equal installments.
In early August 1997, the respective compensation committees
of the Combining Corporations met in a joint session to consider the
termination of the stock option plans and the availability of approving the
Cut-off Award and the Contingent Award. At that meeting, the
<PAGE> 5
September 25, 1997
Page 5
committee members discussed the rationale for the approach suggested by
Advisers' board and concurred that they would recommend to their respective
boards the termination of the option plans contingent upon the closing of the
Mergers. The committee members also agreed that Advisers should proceed with
the Cut-off Award and the Contingent Award in order to keep employees'
long-term incentive compensation in place and balance any inequities among the
various former plans.
B. The Allied I Companies
1. Allied Capital Corporation
Allied Capital Corporation ("Allied I") was incorporated under
the laws of the District of Columbia on October 3, 1958 and became a publicly
held company in January 1960. At all times during its existence, Allied I has
elected to be treated and has qualified as a regulated investment company
within the meaning of section 851(a) (a "RIC").
Directly and indirectly through its subsidiaries, Allied I
seeks to achieve both long-term growth in the value of its net assets and
current income by providing debt, mezzanine, and equity financing (in private
transactions) for small, privately owned growth companies and for
management-led buyouts of such companies. Typically, Allied I's investments
are in the form of debt securities that carry a relatively high fixed rate of
interest that may be combined with equity features such as conversion
privileges or warrants to subscribe for shares of common stock of the issuer.
Allied I also makes available significant managerial assistance to the
companies in which it owns interests (so-called "portfolio companies").
<PAGE> 6
September 25, 1997
Page 6
As of June 30, 1997, Allied I had consolidated total assets
valued at approximately $169 million, including consolidated total investments
in portfolio companies of approximately $125 million. Allied I has made
quarterly and year-end extra distributions without interruption since 1964.
Allied I maintains a dividend reinvestment plan (a "DRIP"), under which
reinvested amounts are properly included in income by Allied I's shareholders
and deducted by Allied I.(2) Allied I's shares are traded over-the-counter on
the Nasdaq National Market, and, as of June 30, 1997, Allied I's stock was held
by approximately 7,800 shareholders.
2. Allied Investment Corporation
Although dormant until April 1, 1977, Allied Investment
Corporation ("Investment I") was incorporated under the laws of the District of
Columbia on September 10, 1976. It was reincorporated as a Maryland
corporation in 1990. Investment I was capitalized in an exchange that
qualified under section 351 in which Allied I transferred a portion of its
investment portfolio and its license from the U.S. Small Business
Administration (the "SBA") to Investment I in exchange for all of the stock of
Investment I. At all times during its existence, Investment I has been a
wholly owned subsidiary of Allied I and has elected to be treated and has
qualified as a RIC. Investment I is licensed as a small business investment
company (an "SBIC") by the SBA.
Investment I seeks to achieve both long-term growth in the
value of its net assets and current income by providing debt, mezzanine, and
equity financing for small, privately owned growth companies and for
management-led buyouts of such companies. Its investments
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(2)See Rev. Rul. 72-410, 1972-2 C.B. 412; Rev. Rul. 65-89, 1965-1 C.B. 265.
For purpose of this opinion, all references to a corporation's DRIP assume that
reinvested amounts are properly deductible by the corporation and properly
included in income by its shareholders.
<PAGE> 7
September 25, 1997
Page 7
are similar to those of Allied I, and it routinely invests with Allied I,
Allied Capital Financial Corporation (described below), and Allied II
(described below) and its subsidiaries, in portfolio companies.
As of June 30, 1997, Investment I had total assets valued at
approximately $79 million, including total investments in portfolio companies
of approximately $61 million.
All the officers and directors of Investment I are officers
and directors of Allied I.
3. Allied Capital Financial Corporation
Allied Capital Financial Corporation ("Financial I") was
incorporated under the laws of the District of Columbia as "Allied Financial
Corporation" on January 11, 1983, was reincorporated as a Maryland corporation
in 1990, and changed its name to "Allied Financial Services Corporation" in
1990 and to "Allied Capital Financial Corporation" in 1994. Allied I owns all
of the common stock of Financial I. The SBA owns certain nonvoting redeemable
and nonredeemable cumulative preferred stock issued by Financial I.
At all times during its existence, Financial I has elected to
be treated and has qualified as a RIC. It is licensed as a specialized small
business investment company (an "SSBIC") by the SBA.
Financial I seeks to achieve current income and capital gains
by making medium- to long-term loans to, and investments in, small, privately
owned businesses that are each at least 50-percent owned, controlled, or
managed by a socially or economically disadvantaged person, as defined by the
SBA. Financial I's investments are similar in form to those of Allied I and
Investment I, and it routinely invests with them in portfolio companies.
<PAGE> 8
September 25, 1997
Page 8
As of June 30, 1997, Financial I had total assets valued at
approximately $41 million, including total investments in portfolio companies
of approximately $18 million.
All the officers and directors of Financial I are officers and
directors of Allied I.
4. Allied Development Corporation
Allied Development Corporation ("Development"), a wholly owned
subsidiary of Allied I, was incorporated under the laws of the District of
Columbia on July 3, 1980. Development is eligible to participate in the
Business and Industry Loan Program administered by the Rural Business and
Cooperative Development Service of the U.S. Department of Agriculture.
Development has elected to be treated and has qualified as a RIC for each year
it has been in existence.
Development has been inactive for at least 10 years, and its
only substantial asset is an account receivable from Allied I, which receivable
does not bear interest, is not evidenced by a note, constitutes a "receivable"
within the meaning of section 851(b)(4)(A)(i), and does not constitute a
"securit[y]" within the meaning of section 851(b)(4)(B). All of Development's
officers and directors are officers and directors of Allied I.
C. The Allied II Companies
1. Allied Capital Corporation II
Allied Capital Corporation II ("Allied II") was incorporated
under the laws of the District of Columbia on March 8, 1989 and, later in 1989,
was reincorporated as a Maryland corporation. Simultaneously with its
reincorporation in Maryland, Allied II formed Allied Investment Corporation II
and Allied Financial Corporation II (both described below) by
<PAGE> 9
September 25, 1997
Page 9
contributing a portion of its assets to those corporations in exchange for all
of their stock in transactions that qualified under section 351. Allied II has
been publicly held since 1989 and has elected to be treated and has qualified
as a RIC for its entire existence.
Allied II is a non-diversified closed-end management
investment company that seeks to achieve both long-term growth in the value of
its net assets and current income by providing, directly and through its
subsidiaries, debt, mezzanine, and equity financing (in private transactions)
for small, privately owned growth companies and for management-led buyouts of
such companies. Typically, its investments are in the form of debt securities
that carry a relatively high fixed rate of interest that may be combined with
equity features such as conversion privileges or warrants to subscribe for
shares of common stock of the issuer. Allied II also invests in
non-convertible debt securities, non-convertible or convertible preferred
stock, and common stock. In addition, Allied II makes available significant
managerial assistance to the issuers of such securities and routinely invests
with Allied I and its subsidiaries in portfolio companies.
Allied II has made quarterly and year-end extra distributions
without interruption since 1989. Allied II maintains a DRIP, under which
reinvested amounts are properly included in income by Allied II's shareholders
and deducted by Allied II. As of June 30, 1997, Allied II had consolidated
total assets valued at approximately $108 million, including total consolidated
investments in portfolio companies of approximately $76 million. Allied II's
shares are traded over the counter on the Nasdaq National Market, and, as of
June 30, 1997, Allied II's stock was held by approximately 11,000 shareholders.
<PAGE> 10
September 25, 1997
Page 10
2. Allied Investment Corporation II
Allied Investment Corporation II ("Investment II"), a wholly
owned subsidiary of Allied II, was incorporated under the laws of the State of
Delaware on November 21, 1989 and was reincorporated as a Maryland corporation
on December 3, 1990. Investment II is licensed as an SBIC by the SBA and at
all times since its formation has elected to be treated and has qualified as a
RIC.
Investment II seeks to achieve both long-term growth in the
value of its net assets and current income by providing debt, mezzanine, and
equity financing for small, privately owned growth companies and for
management-led buyouts of such companies. Investment II routinely invests with
Allied II and has also invested with Financial II in portfolio companies.
As of June 30, 1997, Investment II had total assets valued at
approximately $33 million, including total investments in portfolio companies
of approximately $29 million.
All the officers and directors of Investment II are officers
and directors of Allied II.
3. Allied Financial Corporation II
Allied Financial Corporation II ("Financial II"), a wholly
owned subsidiary of Allied II, was incorporated under the laws of the State of
Maryland on June 22, 1990 and is licensed to operate as an SSBIC by the SBA.
At all times since its formation, Financial II has elected to be treated and
has qualified as a RIC.
Financial II seeks to achieve current income and capital gains
by making medium- to long-term loans to and investments in small, privately
owned businesses that are
<PAGE> 11
September 25, 1997
Page 11
each at least 50-percent owned, controlled, or managed by a socially or
economically disadvantaged person, as defined by the SBA. Financial II has
invested with Allied II and Investment II in portfolio companies.
As of June 30, 1997, Financial II had total assets valued at
approximately $2.7 million, including total investments in portfolio companies
of approximately $500,000.
All the officers and directors of Financial II are officers
and directors of Allied II.
D. The Allied Lending Companies
1. Allied Capital Lending Corporation
Allied Capital Lending Corporation ("ACC") was incorporated
under the laws of the District of Columbia on September 10, 1976 as "Allied
Lending Corporation," was reincorporated as a Maryland corporation on
September 27, 1990, and changed its name to "Allied Capital Lending
Corporation" on September 15, 1993.(3) Until November 23, 1993, ACC was a
wholly owned subsidiary of Allied I, at which time Allied I sold a portion of
its shares in ACC to the public. On January 6, 1995, Allied I distributed a
portion of its remaining shares in ACC to Allied I's shareholders. Allied I
continues to own approximately 16.5 percent of the shares of ACC. At all times
since its formation, ACC has elected to be treated and has qualified as a RIC.
ACC makes medium- to long-term loans to small, privately owned
businesses. Those loans generally are secured by a mortgage or other lien on
assets of the borrower and its
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(3)In connection with the Mergers, Allied Capital Lending Corporation will
change its name to Allied Capital Corporation. For purposes of this opinion
letter, we will refer to Allied Capital Lending Corporation both before and
after the Mergers as ACC.
<PAGE> 12
September 25, 1997
Page 12
principals and are partially guaranteed by the SBA, which guarantee is backed
by the full faith and credit of the United States. ACC generally sells,
without recourse, the guaranteed portion of its loans, realizes substantial
short-term capital gains upon such sales, and continues to receive servicing
fee income on the guaranteed portion of the sold loans. In addition, it
receives interest income on the unsold, unguaranteed portion of the loans.
As of June 30, 1997, ACC had total consolidated assets valued
at approximately $67 million, including total outstanding loans of
approximately $56 million.
ACC's shares are traded over-the-counter on the Nasdaq
National Market. As of June 30, 1997, ACC's stock was held by approximately
8,600 shareholders, including Allied I. Due to certain nontax regulatory
reasons, Allied I has agreed to vote its shares of ACC in the same proportion
as the shares held by ACC's other shareholders are voted. It also has agreed
to divest itself of all its remaining shares in ACC not later than December 31,
1998. As is discussed below, shortly before the Mergers, Allied I will
distribute as a special dividend to its shareholders its remaining ACC shares.
ACC maintains a DRIP, under which reinvested amounts are
properly included in income by ACC's shareholders and deducted by ACC.
2. Allied Capital SBLC Corporation and Allied Capital
Credit Corporation
To afford ACC the flexibility to make investments other than
those expressly sponsored by the SBA, ACC recently reorganized its operations.
On January 1, 1997, ACC transferred a portion of its assets to Allied Capital
SBLC Corporation ("SBLC"), a Maryland
<PAGE> 13
September 25, 1997
Page 13
corporation incorporated on March 29, 1996,(4) in exchange for all of SBLC's
stock in a transaction that qualified under section 351. For 1997, SBLC will
elect to be treated and will qualify as a RIC.
In addition, on March 29, 1996, ACC incorporated Allied
Capital Credit Corporation ("Credit"), a Maryland corporation, but Credit only
has assets of approximately $10,000, and liabilities of approximately $9,000 (a
payable to ACC), and has been dormant since its formation.
E. The Commercial Companies
1. Allied Capital Commercial Corporation
Allied Capital Commercial Corporation ("Commercial") was
incorporated under the laws of the State of Maryland on May 7, 1992 and has
been publicly held since July 1992. Commercial has qualified as a real estate
investment trust (a "REIT") pursuant to section 856(a) for its entire
existence.
Commercial was established to invest primarily in first-lien
commercial mortgage loans that either have been purchased from unrelated third
parties or originated directly with the borrowers. Each mortgage loan is
secured by commercial real property. In addition, Commercial has jointly
invested in commercial real estate loans with another REIT, Business Mortgage
Investors, Inc. ("BMI"), a privately held Maryland corporation unrelated to
Commercial and the other Combining Corporations (although it is co-managed by
Advisers). Commercial and BMI have entered into various financial arrangements
with third parties to
- ----------------------------------
(4)SBLC remained dormant until January 1, 1997.
<PAGE> 14
September 25, 1997
Page 14
finance the joint origination and purchase or origination of commercial
mortgage loans, and Commercial has advanced funds to BMI to facilitate BMI's
joint purchase of commercial mortgage loans with Commercial. These advances
have been recorded as receivables on Commercial's books and constitute debt for
federal income tax purposes.
Commercial owns all of the stock of ALCC Holdings Inc., a
Maryland corporation incorporated on August 15, 1994 ("ALCC Holdings"), and
ALCC Equity Corporation, a Maryland corporation incorporated on May 23, 1997
("ALCC Equity"). Both ALCC Holdings and ALCC Equity are qualified REIT
subsidiaries within the meaning of section 856(i); each owns title to certain
real property, but neither conducts an active trade or business.
As of June 30, 1997, Commercial had total consolidated assets
valued at approximately $453 million, including outstanding mortgage loans of
approximately $446 million. Its shares are traded over-the-counter on the
Nasdaq National Market. As of June 30, 1997, Commercial's stock was held by
approximately 18,300 shareholders.
Commercial maintains a DRIP, under which reinvested amounts
are properly included in income by Commercial's shareholders and deducted by
Commercial.
As of the date of the Mergers, it is anticipated that there
will be an aggregate of approximately $5 million or less of market discount
(within the meaning of section 1278(a)(2)) that will have been accrued but not
recognized with respect to the loans held by Commercial.
<PAGE> 15
September 25, 1997
Page 15
2. ALCC Acceptance Corporation and Allied Capital
Funding, LLC
ALCC Acceptance Corporation ("ALCC Acceptance"), a wholly
owned limited purpose finance subsidiary of Commercial, was incorporated under
the laws of the State of Maryland on August 25, 1995 and is a qualified REIT
subsidiary within the meaning of section 856(i). ALCC Acceptance was
incorporated primarily to satisfy the request of investment bankers and rating
agencies that Commercial's interest in Allied Capital Funding, LLC ("Funding
I") be held through a special-purpose, bankruptcy-remote, state-law
corporation. In that connection, ALCC Acceptance is prohibited by its articles
of incorporation from engaging in activities other than those related or
similar to that purpose.
Funding I is a Delaware limited liability company formed on
August 30, 1995 that is classified as a partnership for federal income tax
purposes. It is a limited purpose finance company that is the issuer of a
single issue of 6.92 percent Series 1995 C-1 Commercial Mortgage Collateralized
Bonds due February 25, 2003, with an aggregate original principal amount of
approximately $99 million. The bonds are collateralized by a pool of
commercial mortgage loans originated or acquired by Commercial and BMI and
subsequently contributed to Funding I(5) in transactions that qualified under
section 721.
As of the date of this opinion, ALCC Acceptance owned
approximately 82 percent, and BMI owned approximately 18 percent, of the
capital and profits interests (within the meaning of section 708(b)(1)(B)) of
Funding I.
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(5)In the case of Commercial, such loans were contributed through ALCC
Acceptance. In the case of BMI, such loans were contributed through a
subsidiary of BMI.
<PAGE> 16
September 25, 1997
Page 16
As of June 30, 1997, ALCC Acceptance had net assets of
approximately $24 million, substantially all of which consisted of its
membership interest in Funding I.
F. Allied Capital Mortgage LLC
Allied Capital Mortgage LLC ("Allied Mortgage") was organized
under the laws the State of Delaware on August 15, 1996 as a limited liability
company and is classified as a partnership for federal income tax purposes.
It invests in small businesses primarily by purchasing nonperforming loans
secured by real estate, although it may make other investments with respect to
small businesses. Many of the loans involve first mortgages (or deeds of
trust) on real estate, as well as first liens on the operating assets of small
businesses. The assets of Allied Mortgage are managed by Advisers pursuant to
an investment advisory agreement.
As of the date of this opinion, Commercial owned approximately
79 percent, BMI owned approximately 14 percent, and unrelated parties owned
approximately 7 percent, of the capital and profits interests (within the
meaning of section 708(b)(1)(B)) of Allied Mortgage.
G. Allied REIT
Before the date of the Mergers, Allied REIT, Inc. ("Allied
REIT") will be incorporated under the laws of the State of Maryland. Allied
REIT will elect to be taxed as a REIT beginning with its 1997 taxable year.
Allied REIT will be formed to acquire market discount loans and to facilitate
the securitization of both those mortgage loans and loans acquired from ACC
(including certain loans acquired by ACC from Commercial in the Mergers).
Allied REIT will have both common and preferred stock
outstanding. The preferred stock will be issued for $1,000 per share (its per
share liquidation preference), will be
<PAGE> 17
September 25, 1997
Page 17
nonvoting, and will pay cumulative dividends at the rate of 8 percent per
annum. Allied REIT will have the right to redeem such preferred stock 20 years
and 5 days after its issuance for an amount equal to the liquidation preference
plus any accrued but unpaid dividends. ACC will own all of the common stock
and 500 shares of the preferred stock of Allied REIT, in exchange for which ACC
will contribute the Transferred Assets (defined below) to Allied REIT. One
hundred and twenty-five other persons (the "Other Shareholders") will own 125
shares (one share per person) of the preferred stock of Allied REIT, in
exchange for which they will contribute an aggregate of $125,000 in cash.
In addition to providing that no person other than ACC (or its
successor) may hold more than one share of the preferred stock of Allied REIT,
the articles of incorporation of Allied REIT will also contain customary
language designed to ensure that Allied REIT satisfies the stock ownership
rules of sections 856(a)(5) and (6), but all of Allied REIT's stock will
otherwise be freely transferable, subject to the provisions of federal and
state securities laws.
II. The Transactions
The Board of Directors of each of Advisers, Allied I, Allied
II, and Commercial (collectively, the "Merging Corporations") and ACC has
determined that there are substantial business reasons for combining the
operations of the Combining Corporations. These reasons include the following:
- ACC will have greater borrowing capacity at lower
cost than any of the Combining Corporations
separately.
- ACC will have the ability to undertake larger and
more varied transactions than any of the Combining
Corporations separately. This will have many
benefits, including (i) making it easier to comply
with the asset
<PAGE> 18
September 25, 1997
Page 18
diversification requirements of section 851(b)(4),
and (ii) enabling ACC to invest funds more quickly
and to seek larger, stronger investment candidates
than any of the Combining Corporations separately.
- ACC will be able to offer a variety of financing
options to a single borrower, such as senior debt,
subordinated debt, or equity financing, and will be
able to finance and refinance a single borrower as
the borrower grows and matures.
- The Mergers will eliminate the confusion caused by
the multiple public "Allied Capital" entities.
Currently, the Combining Corporations have similar
names and trading symbols(6) and, other than Advisers,
have similar investment objectives (i.e., private
investment in growing businesses). The result is
investor confusion, both as to which Allied Capital
entity is the best investment opportunity for a
particular investor and as to the identity of the
actual Allied Capital entity in which an investor has
invested. A single, consolidated corporation will
eliminate this confusion and should provide for
improved investor relations, shareholder
communications, and media coverage.
- The Mergers will also result in substantial cost
savings by eliminating the overhead imposed by
maintaining five separate public entities.
- As an employer, ACC will be positioned to provide a
more attractive career path to attract and retain
high quality professionals and to offer a more
simplified compensation structure than any of the
Combining Corporations separately.
- Unlike the Merging Corporations (other than
Advisers), ACC will be internally managed. Internal
management, which is common among specialty finance
organizations and other similar organizations,
eliminates
- ----------------------------------
(6)Currently, the stock market trading symbols for the various Allied
Capital entities are:
<TABLE>
<CAPTION>
Company Trading Symbol
------- --------------
<S> <C>
Allied I ALLC
Allied II ALII
ACC ALCL
Commercial ALCC
Advisers ALLA
</TABLE>
<PAGE> 19
September 25, 1997
Page 19
the perceived conflict between the interests of an
external investment adviser and the interests of the
adviser's client.
For these and other reasons, the Board of Directors of each of
the Combining Corporations has determined it to be in the best interests of
that corporation and its shareholders to combine with the other Combining
Corporations. Consequently, each of the Merging Corporations will merge under
Maryland law with and into ACC, with ACC surviving the merger. Each of those
mergers (the "Mergers") will take place pursuant to a single integrated
"Agreement and Plan of Merger," dated as of August 14, 1997 (the "Merger
Agreement"). In connection with the Mergers, various subsidiaries of the
Combining Corporations will be merged into their respective parent
corporations, merged into limited liability companies, or merged into existing
subsidiaries of one or more of the Combining Corporations. Pursuant to this
plan, the following transactions (the "Transactions") will occur in the
following order:
1. Before the Mergers, Allied REIT will be formed. The Other
Shareholders will contribute an aggregate of $125,000 cash to
Allied REIT in exchange for a total of 125 shares of preferred
stock of Allied REIT, and ACC will agree to contribute, after
the Mergers, assets (consisting primarily of certain loans,
including market discount bonds, that ACC will receive from
Commercial in the Mergers) with a combined net value of
approximately $90 million, but in no event less than
$12,625,000 (the "Transferred Assets") in exchange for all of
the common and at least 500 shares of the preferred stock of
Allied REIT.(7)
- ----------------------------------
(7)The Transferred Assets will represent a substantial percentage, but not
all, of the assets
(continued...)
<PAGE> 20
September 25, 1997
Page 20
2. In December 1997, Allied I will declare a dividend consisting
of all its ACC stock; such dividend will be paid before
December 31, 1997.
3. On or before December 31, 1997, ALCC Holdings and ALCC Equity
will each merge under state law into Allied H/E LLC, a
Delaware limited liability company that will be wholly owned
by Commercial and will be disregarded for federal income tax
purposes.
4. On or before December 31, 1997, ALCC Acceptance will merge
under state law into ALCC Acceptance LLC, a Delaware limited
liability company that will be wholly owned by Commercial and
will be disregarded for federal income tax purposes.
5. On or before December 31, 1997, pursuant to separate articles
of merger (each, a "SubMerger Agreement"), Credit and
Development (the "SubMerging Corporations") will merge into
their parent corporations, ACC and Allied I, respectively (the
"SubMerging Parents"), with each SubMerging Parent surviving
such mergers (the "SubMergers").
6. On or before December 31, 1997, Property will merge into
Allied Property LLC, a Delaware limited liability company that
will be wholly owned by Advisers and will be disregarded for
federal income tax purposes (the "Property Merger").
- ---------------------
(7)(...continued)
received by ACC from Commercial in the Merger.
<PAGE> 21
September 25, 1997
Page 21
7. In October, November, or December 1997, each of the Combining
Corporations other than Advisers will declare to its
shareholders of record as of a specified date prior to December
30, 1997 a dividend in an amount sufficient to reduce its
respective 1997 income and excise tax liabilities to zero.
That dividend will be paid by the declaring corporation not
later than December 30, 1997.
8. On or before December 31, 1997, ACC will declare to its
shareholders of record as of the close of business on December
31, 1997 (i.e., following the Mergers) a dividend in an amount
equal to all of its remaining current and accumulated earnings
and profits ("e&p"), including any e&p to which it will succeed
in the Mergers. ACC will pay such dividend not later than
January 31, 1998. That dividend will be paid to a transfer
agent as paying agent and as nominee for the shareholders.
The transfer agent will hold the dividend in a nominee account
on a per shareholder basis and will issue to each individual
shareholder a Form 1099-DIV indicating the amount of taxable
dividend each shareholder has constructively received. As each
shareholder of each of the Merging Corporations surrenders his
or her old certificates in exchange for confirmation of
ownership of new shares of ACC issued in the Merger, the
transfer agent will release to that shareholder his or her
portion of the dividend.(8) Any portion of the dividend not
released to a shareholder of the Merging Corporations will
escheat to the State of Maryland after the applicable statutory
period expires.
- ----------------------------------
(8) The transfer agent will automatically release the portion of the
dividend attributable to the historic shareholders of ACC.
<PAGE> 22
September 25, 1997
Page 22
9. On December 31, 1997, each of the Merging Corporations will
merge into ACC pursuant to the provisions of the Merger
Agreement, with ACC surviving. Shareholders of the Merging
Corporations will receive solely voting common stock of ACC.
There will be no dissenters rights or cash paid in lieu of
fractional shares.
10. Following the Mergers, Financial II will merge into Financial
I, with Financial I surviving (the "Financial Merger"). No
stock of Financial I will be issued in the merger, and only
nominal (i.e., not more than 5 cents) cash consideration will
be paid.(9)
11. Following the Mergers, Investment II will merge into
Investment I, with Investment I surviving (the "Investment
Merger"). No stock of Investment I will be issued in the
merger, and only nominal (i.e., not more than 5 cents) cash
consideration will be paid.(10)
12. In January 1998, ACC will contribute the Transferred Assets to
Allied REIT in satisfaction of ACC's obligation to make such
contribution. (See Step 1 above.)
After the Transactions have been completed, ACC will continue
to conduct the business ACC conducted before the Transactions and will also
conduct the businesses previously conducted by each of the Merging
Corporations.
- ----------------------------------
(9)The nominal cash consideration will be paid solely to comply with the
provisions of Maryland corporate law that require some consideration to be
exchanged in a merger.
(10)See note 9, above.
<PAGE> 23
September 25, 1997
Page 23
Opinions
Based on (i) the facts contained herein, (ii) the
representations made to us by the parties to the Transactions, (iii) our
examination of certain agreements and other documents referenced herein, and
(iv) the analysis set forth herein, in our opinion, for U.S. federal income tax
purposes:
Allied REIT
1. The transfer of the Transferred Assets and the cash by the
Transferors to Allied REIT should qualify under section 351 as a tax-free
transfer of assets by the Transferors in exchange for shares of Allied REIT.
Section 351(a).
2. No gain or loss should be recognized by the Transferors upon
the transfer of the Transferred Assets and the cash in exchange for shares of
Allied REIT, except to the extent ACC is required to recognize any market
discount (within the meaning of section 1278(a)(2)) accrued but unrecognized as
of the date of the exchange. Sections 351(a) and 1276(d).
3. No gain or loss should be recognized by Allied REIT upon its
receipt of the Transferred Assets and the cash from the Transferors in exchange
for shares of Allied REIT. Section 1032(a).
4. The basis of the shares of Allied REIT in the hands of ACC
should equal the basis of the Transferred Assets in the hands of ACC
immediately prior to the transfer, reduced by the amount of any liabilities of
ACC assumed by Allied REIT in such exchange, and increased by the amount of any
gain recognized by ACC in such exchange. Sections 358(a) and (d).
<PAGE> 24
September 25, 1997
Page 24
5. The basis of the shares of Allied REIT in the hands of the
Other Shareholders should equal the amount of money contributed by them in
exchange therefor. Section 358(a).
6. The basis of each of the Transferred Assets in the hands of
Allied REIT should equal the basis of such asset in the hands of ACC
immediately prior to the transfer, increased by the amount of gain recognized
by ACC in the transfer. Section 362(a)(1).
7. The holding period of each of the Transferred Assets in the
hands of Allied REIT should include the period during which such asset was held
by ACC immediately prior to the transfer, provided that such asset was a
capital asset to ACC. Section 1223(1).
8. Allied REIT should qualify as a REIT upon its formation.
Section 856(a).
Mergers of ALCC Holdings and ALCC Equity into Allied H/E LLC
9. The mergers of ALCC Holdings and ALCC Equity into ALCC H/E LLC
should not be treated as events for federal income tax purposes and should not
result in any federal income tax consequences.
Merger of ALCC Acceptance into ALCC Acceptance LLC
10. The merger of ALCC Acceptance into ALCC Acceptance LLC should
not be treated as an event for federal income tax purposes and should not
result in any federal income tax consequences.
The SubMergers
11. For federal income tax purposes, the SubMergers will be
treated as complete liquidations within the meaning of section 332(a). Treas.
Reg. Section 1.332-2(d).
<PAGE> 25
September 25, 1997
Page 25
12. Neither SubMerging Corporation will recognize gain or loss
upon the distribution of its assets to, and the assumption of all its
liabilities by, its respective SubMerging Parent. Section 337(a).
13. Neither SubMerging Parent will recognize gain or loss on
receipt of its SubMerging Corporation's assets in its SubMerger, provided all
the requirements of section 332(b) are met. Section 332(a).
14. The basis of the assets received by each SubMerging Parent
will be, in each instance, the same as the basis of those assets in the hands
of the respective SubMerging Corporation. Section 334(b).
15. The holding period of each asset received by each SubMerging
Parent will include, in each instance, the period during which that asset was
held by the respective SubMerging Corporation immediately prior to its
SubMerger. Section 1223(2).
16. Each SubMerging Parent will succeed to and take into account
the items of its SubMerging Corporation described in section 381(c). Section
381(a); Treas. Reg. Section 1.381(a)-1. Such items will be taken into account
by each SubMerging Parent subject to the conditions and limitations specified
in sections 381 through 384 and the regulations thereunder.
The Property Merger
17. For federal income tax purposes, the Property Merger should be
treated as a complete liquidation within the meaning of section 332(a). Treas.
Reg. Section 1.332-2(d).
18. Property should not recognize gain or loss upon the
distribution of its assets to, and the assumption of all its liabilities by,
Advisers. Section 337(a).
<PAGE> 26
September 25, 1997
Page 26
19. Advisers should not recognize gain or loss on receipt of
Property's assets in the Property Merger, provided all the requirements of
section 332(b) are met. Section 332(a).
20. The basis of each of the assets received by Advisers should be
the same as the basis of such asset in the hands of Property. Section 334(b).
21. The holding period of each of the assets received by Advisers
should include the holding period during which such asset was held by Property
immediately prior to the Property Merger. Section 1223(2).
22. Advisers should succeed to and take into account the items of
Property described in section 381(c). Section 381(a); Treas. Reg. Section
1.381(a)-1. Such items should be taken into account by Advisers subject to the
conditions and limitations specified in sections 381 through 384 and the
regulations thereunder.
Mergers
23. Each of the Mergers will constitute a reorganization within
the meaning of section 368(a)(1)(A), and each respective Merging Corporation
and ACC will be "a party to a reorganization" within the meaning of section
368(b).
24. Subject to opinion 32 below, no gain or loss will be
recognized by any of the Merging Corporations on the transfer of its assets to
ACC in a Merger solely for ACC voting stock. Section 361(a). In addition, no
gain or loss will be recognized by any of the Merging Corporations on the
distribution to its shareholders of the ACC stock received pursuant to the
Merger Agreement. Section 361(c).
<PAGE> 27
September 25, 1997
Page 27
25. No gain or loss will be recognized by ACC upon the receipt of
the assets of the Merging Corporations in the Mergers solely in exchange for
ACC voting stock, as described above. Section 1032(a).
26. No gain or loss will be recognized by the shareholders of the
Merging Corporation upon their receipt of ACC voting stock in exchange for
their stock in the Merging Corporations. Section 354(a).
27. The basis of each of the assets of the Merging Corporations
acquired by ACC will be the same as the basis of such asset in the hands of the
transferring Merging Corporation immediately prior to the Mergers. Section
362(b).
28. The basis of the ACC stock (including any fractional share
interests) received by each of the Merging Corporations' shareholders will be
the same as the basis of the Merging Corporation stock surrendered in exchange
therefor. Section 358(a)(1).
29. The holding period of each of the assets of each Merging
Corporation in the hands of ACC will include the period during which such asset
was held by the transferring Merging Corporation immediately prior to the
transaction. Section 1223(2).
30. The holding period of the ACC stock (including any fractional
share interests) received by each of the shareholders of the Merging
Corporations will include the period during which the shares of the Merging
Corporation stock surrendered in exchange therefor were held, provided that the
Merging Corporation stock so surrendered was held as a capital asset on the
date of the exchange. Section 1223(1).
<PAGE> 28
September 25, 1997
Page 28
31. ACC will succeed to and take into account the items of the
Merging Corporations described in section 381(c). Section 381(a); Treas. Reg.
Section 1.381(a)-1. Such items will be taken into account by ACC subject to
the conditions and limitations specified in sections 381 through 384 and the
regulations thereunder.
32. Advisers should not be required to recognize the built-in gain
inherent in its assets solely as a result of its Merger into ACC; instead, ACC
should be subject to rules similar to the rules of section 1374 with respect to
the assets received from Advisers in the Merger. Notice 88-19, 1988-1 C.B.
486.
33. If ACC pays in January 1998 the dividend it declares in
December equal to the current and accumulated e&p of ACC, including all e&p to
which ACC will succeed in the Mergers (without regard to any deficits to which
ACC will succeed in the Mergers), under the provisions of section 852(b)(7),
the dividend should be treated as having been paid on December 31, 1997. As a
result, ACC should not have any current or accumulated e&p as of the end of its
1997 taxable year, thereby satisfying the provisions of section 852(a)(2).
Section 312(a)(1).
Financial Merger
34. For federal income tax purposes, the Financial Merger should
be treated as the transfer of all the assets and liabilities of Financial II to
Financial I in constructive exchange for Financial I stock, followed by the
liquidation of Financial II.
35. As described in opinion 34, the deemed transfer by Financial
II of all of its assets to Financial I in exchange for deemed Financial I stock
and the assumption by Financial I of the liabilities of Financial II, followed
by the distribution of the deemed Financial I stock to ACC in
<PAGE> 29
September 25, 1997
Page 29
liquidation of Financial II should constitute a reorganization under section
368(a)(1)(D). Financial II and Financial I should each be "a party to a
reorganization" within the meaning of section 368(b).
36. Financial II should not recognize gain or loss on the transfer
of its assets to Financial I in exchange for deemed Financial I stock and the
assumption by Financial I of the liabilities of Financial II. Sections 361(a)
and 357(a). Financial II should not recognize gain or loss upon the deemed
distribution of Financial I stock. Section 361(c).
37. Financial I should not recognize gain or loss upon the receipt
of the assets from Financial II in exchange for deemed Financial I stock.
Section 1032(a).
38. No gain or loss should be recognized by ACC upon receipt of
the deemed Financial I stock in exchange for its Financial II stock. Section
354(a)(1).
39. The basis of each of the assets of Financial II in the hands
of Financial I should be the same as the basis of such asset in the hands of
Financial II immediately before the Financial Merger. Section 362(b).
40. ACC should increase its basis in its currently held shares of
Financial I in an amount equal to its basis in Financial II immediately prior
to the transfer. Section 358(a).
41. The holding period of each of the assets of Financial II in
the hands of Financial I should include the period during which such asset was
held by Financial II. Section 1223(2).
42. Financial I should succeed to and take into account the items
of Financial II described in section 381(c). Section 381(a); Treas. Reg.
Section 1.381(a)-1. Such items should be
<PAGE> 30
September 25, 1997
Page 30
taken into account by Financial I subject to the conditions and limitations
specified in sections 381 through 384 and the regulations thereunder.
Investment Merger
43. For federal income tax purposes, the Investment Merger should
be treated as the transfer of all the assets and liabilities of Investment II
to Investment I in constructive exchange for Investment I stock, followed by
the liquidation of Investment II.
44. As described in opinion 43, the deemed transfer by Investment
II of all of its assets to Investment I in exchange for deemed Investment I
stock and the assumption by Investment I of the liabilities of Investment II,
followed by the distribution of the deemed Investment I stock to ACC in
liquidation of Investment II should constitute a reorganization under section
368(a)(1)(D). Investment II and Investment I should each be "a party to a
reorganization" within the meaning of section 368(b).
45. Investment II should not recognize gain or loss on the
transfer of its assets to Investment I in exchange for deemed Investment I
stock and the assumption by Investment I of the liabilities of Investment II.
Sections 361(a) and 357(a). Investment II should not recognize gain or loss
upon the deemed distribution of Investment I stock. Section 361(c).
46. Investment I should not recognize gain or loss upon the
receipt of the assets from Investment II in exchange for deemed Investment I
stock. Section 1032(a).
47. No gain or loss should be recognized by ACC upon receipt of
the deemed Investment I stock in exchange for its Investment II stock. Section
354(a)(1).
<PAGE> 31
September 25, 1997
Page 31
48. The basis of each of the assets of Investment II in the hands
of Investment I should be the same as the basis of such asset in the hands of
Investment II immediately before the Investment Merger. Section 362(b).
49. ACC should increase its basis in its currently held shares of
Investment I in an amount equal to its basis in Investment II immediately prior
to the transfer. Section 358(a).
50. The holding period of each of the assets of Investment II in
the hands of Investment I should include the period during which such asset was
held by Investment II. Section 1223(2).
51. Investment I should succeed to and take into account the items
of Investment II described in section 381(c). Section 381(a); Treas. Reg.
Section 1.381(a)-1. Such items should be taken into account by Investment I
subject to the conditions and limitations specified in sections 381 through 384
and the regulations thereunder.
Ongoing Qualification of ACC
52. After the Mergers, ACC should continue to be eligible to be
treated as a RIC.
Discussion
I. Formation and Qualification of Allied REIT
A. Section 351
1. Generally
Section 351 provides in relevant part that no gain or loss
will be recognized by one or more transferors if property is transferred by the
transferors to a corporation solely in
<PAGE> 32
September 25, 1997
Page 32
exchange for stock of such transferee corporation and if, immediately after the
exchange, the transferors are in control of the transferee corporation within
the meaning of section 368(c).(11)
In our opinion, the transfer of cash and the Transferred
Assets in exchange for all of the common and preferred stock of Allied REIT
should satisfy the requirements of section 351. First, the cash and
Transferred Assets constitute "property" within the meaning of section 351.
Second, the cash and the Transferred Assets will be exchanged for Allied REIT
stock. Therefore, the requirement that the transfer of property be solely in
exchange for stock of the transferee corporation will be satisfied.(12) Third,
immediately after the transfer, ACC and the Other Shareholders (collectively,
ACC and the Other Shareholders are the "Transferors") will own in the aggregate
100 percent of the outstanding stock of Allied REIT and, thus, will "control"
Allied REIT for purposes of section 351.
2. Section 351(e)(1)
In reaching our conclusion, we have considered the potential
impact of the classification of Allied REIT as an "investment company" within
the meaning of section 351(e)(1). For the reasons discussed below, we believe
that section 351(e)(1) should not operate to disqualify the exchange with
Allied REIT from tax-free treatment under section 351.
- ----------------------------------
(11) Control for purposes of section 368(c) requires the ownership of at
least 80 percent of the total combined voting power of all classes of stock
entitled to vote and at least 80 percent of the total number of shares of all
other classes of stock of the corporation.
(12) We note that new section 351(g), enacted as section 1014(a) of the
Taxpayer Relief Act of 1997, Pub. L. 105-34, should not apply to treat the
preferred stock as "boot" because Allied REIT's right to redeem the preferred
stock will not be exercisable until 20 years and 5 days after the issuance of
such stock. See section 351(g)(2)(B).
<PAGE> 33
September 25, 1997
Page 33
Section 351(e)(1) provides that section 351 does not apply to
a transfer to an investment company. Notwithstanding the seemingly broad sweep
of section 351(e)(1), Treas. Reg. Section 1.351-1(c)(2) provides in pertinent
part that a transfer will be considered to be a transfer to an investment
company only if (i) the transferee is a REIT or another specified type of
entity and (ii) the transfer results in diversification of the transferors'
interests. As is discussed below, we understand that Allied REIT will elect to
be treated as a REIT under section 856(a). Accordingly, section 351(e)(1) will
apply to preclude application of section 351 only if the exchange results in
the diversification of the Transferors' interests.
In this regard, Treas. Reg. Section 1.351-1(c)(5) provides a
safe harbor from the application of section 351(e) that we believe should apply
to the formation of Allied REIT. Specifically, Treas. Reg. Section
1.351-1(c)(5) provides in pertinent part that
[a] transfer ordinarily results in the diversification of the
transferors' interests if two or more persons transfer
nonidentical assets to a corporation in the exchange. For
this purpose, if any transaction involves one or more
transferors of nonidentical assets which, taken in the
aggregate, constitute an insignificant portion of the total
value of the assets transferred, such transfers shall be
disregarded in determining whether diversification has
occurred. If there is only one transferor (or two or more
transferors of identical assets) to a newly organized
corporation, the transfer will generally be treated as not
resulting in diversification. . . .
For this purpose, 0.99 percent should be treated as constituting "an
insignificant portion" of the assets transferred. See Treas. Reg. Section
1.351-1(c)(7) Example 1. In the formation of Allied REIT, the Other
Shareholders will contribute $125,000 to Allied REIT in exchange for Allied
REIT preferred stock. ACC will contribute the Transferred Assets, which will
have a net value of approximately $60 million, but in no event less than
$12,625,000. Because the cash contributed
<PAGE> 34
September 25, 1997
Page 34
by the Other Shareholders to Allied REIT will not exceed 0.99 percent of the
Transferred Assets,(13) the transfers of cash by the Other Shareholders should
"be disregarded in determining whether diversification has occurred," Treas.
Reg. Section 1.351-1(c)(5), and ACC should be treated as the only transferor.
Accordingly, pursuant to Treas. Reg. Section 1.351-1(c)(5), section 351(e)
should not apply to ACC's contribution of the Transferred Assets to Allied REIT
in exchange for Allied REIT stock.(14)
3. Market Discount
Section 1276(c) provides that accrued market discount is not
recognized if a market discount bond is transferred in certain types of
nonrecognition transactions. Section 1276(d), however, provides that, "[u]nder
regulations prescribed by the Secretary," accrued
- ----------------------------------
(13) 125,000 = 0.0099
-----------
12,625,000
(14)We believe that, even if the Other Shareholders are not disregarded, a
strong argument can be made that section 351(e) should not apply to the
formation of Allied REIT. As was noted above, Treas. Reg. Section
1.351-1(c)(2) provides that section 351(e) will apply only if diversification
occurs as a result of the exchange. We understand that the Transferred Assets
will be "diversified" within the meaning of Treas. Reg. Section 1.351-1(c)(6) at
the time of their transfer. In that event, no diversification should be
treated as having occurred with respect to ACC, and section 351(e) therefore
should be inapplicable to its contribution of the Transferred Assets to Allied
REIT. See PLR 9328037 (Apr. 20, 1993) (section 721(b), the Subchapter K analog
to section 351(e)(1), inapplicable where one group of transferors transferred
diversified portfolio and another group transferred cash in excess of 5 percent
of the value of the diversified portfolio); PLR 9328036 (Apr. 20, 1993) (same);
PLR 9537013 (June 16, 1995) (section 351(e)(1) inapplicable where transferors
transferred diversified portfolio even though transferee corporation undertook
public offering at the time of the transfer); but see Treas. Reg. Section
1.351-1(c)(6)(i) (transfer will not result in diversification "if each
transferor transfers a diversified portfolio of stocks and securities").
Although a private letter ruling may be relied upon only by the taxpayer to
whom the ruling is addressed, the reasoning employed and conclusions reached by
the IRS are often instructive in determining how the IRS would view similar or
analogous situations.
<PAGE> 35
September 25, 1997
Page 35
market discount must be recognized when a bond with accrued market discount is
transferred in a section 351 transaction. Although no such regulations have
been promulgated, the IRS could assert that, notwithstanding the absence of
regulations under section 1276(d), section 1276(d) is "self-executing" and that
accrued market discount must therefore be recognized when market discount bonds
are contributed to a corporation in a section 351 transaction. Cf. Rev. Rul.
91-47, 1991-2 C.B. 16 (applying section 108(e)(4) in the absence of
regulations). In connection with the formation of Allied REIT, ACC will
contribute certain market discount bonds to Allied REIT. If the IRS were to
succeed in an assertion of the application of section 1276(d) to the
contribution, ACC would have to recognize the accrued but unrecognized market
discount to the extent of the unrecognized gain inherent in each bond, but not
in excess of the gain realized by ACC on the exchange.
4. No Gain or Loss to Allied REIT
Section 1032(a) provides in relevant part that no gain or loss
will be recognized by a corporation on its receipt of money or other property
in exchange for stock of such corporation. Since the Transferred Assets and
the cash are "property" for purposes of this provision, under section 1032
Allied REIT should not recognize gain or loss upon the issuance of its stock in
exchange for the Transferred Assets and the cash.
5. Ancillary Opinions
Our opinions numbered 4 through 7 are based on specific
provisions of the Code, the application of which follows directly from the
qualification of the transfers to Allied REIT under section 351.
<PAGE> 36
September 25, 1997
Page 36
B. REIT Qualification
1. General
To be treated as a qualified REIT for federal income tax
purposes, Allied REIT must satisfy certain requirements relating to (i) its
ownership structure and organization, (ii) its sources of gross income, (iii)
the composition of its assets, and (iv) the amount of its distributions to its
shareholders. In addition, Allied REIT must elect to be treated as a REIT.
2. Structural and Organizational Requirements
Section 856(a) provides that a REIT must be a corporation,
trust, or association: (i) that is managed by one or more trustees or directors,
(ii) the beneficial ownership of which is evidenced by transferable shares,
(iii) that, but for its election to be treated as a REIT, would be taxed as a
domestic corporation, (iv) that is neither a financial institution nor an
insurance company under the Code, (v) the beneficial ownership of which is held
by 100 or more persons, and (vi) that is not closely held (within the meaning of
section 856(h)). Based on the facts described above and representations made by
ACC, we believe that Allied REIT should satisfy all of the above structural and
organizational requirements following its formation.
a. Management by Board
Section 856(a)(1) requires that a REIT be managed by a trustee
or a board of directors. Because Allied REIT is a Maryland corporation that
will be managed by a board of directors, it should satisfy this requirement.
<PAGE> 37
September 25, 1997
Page 37
b. Transferability
Section 856(a)(2) requires that the beneficial ownership of a
REIT be represented by transferable shares. We believe that the shares of
Allied REIT should satisfy this requirement.
In reaching this conclusion, we have considered the impact of
the transfer restrictions applicable to the Allied REIT common stock and
preferred stock and have concluded that such restrictions should not cause the
common stock or the preferred stock to be nontransferable within the meaning of
section 856(a)(2). Treas. Reg. Section 1.856-1(d)(2) provides that the
provisions in a corporation's organizational documents "which permit the
trustee or directors to redeem shares or to refuse to transfer shares in any
case where the trustee or directors, in good faith, believe that a failure to
redeem shares or that a transfer of shares would result in the loss of status
as a real estate investment trust will not render the shares
'nontransferable.'" See PLR 9627017 (Apr. 5, 1996); PLR 9621032 (Feb. 26,
1996); PLR 9552047 (Sept. 29, 1995). We understand that the transfer
restrictions to be placed on the Allied REIT common stock and preferred stock
are designed to ensure that Allied REIT will continue to satisfy the technical
requirements for qualification as a REIT. Therefore, we believe that such
transfer restrictions should not cause Allied REIT to fail to qualify as a
REIT.
c. Taxation as a Domestic Corporation
Section 856(a)(3) requires that, to qualify as a REIT, the
organization must be an entity that, but for its election to be treated as a
REIT, would be taxed as a domestic corporation. Because Allied REIT will be a
Maryland corporation, it would, but for its election to be treated
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as a REIT, be taxed as a domestic corporation, Treas. Reg. Section
301.7701-2(b)(1), and therefore should satisfy this requirement.
d. Status as a Financial Institution or
Insurance Company
Section 856(a)(4) provides that a REIT may be neither a
"financial institution" within the meaning of section 582(c)(2) nor an
"insurance company" to which sections 801-848 of the Code apply. It has been
represented to us that Allied REIT will be neither a "financial institution"
nor an "insurance company."
e. 100 Shareholders
Section 856(a)(5) requires a REIT to have at least 100
shareholders, determined without regard to any attribution rules. Treas. Reg.
Section l.856-1(d)(2). Allied REIT will have 126 shareholders and should,
therefore, satisfy this requirement.(15)
In reaching this conclusion, we have considered the fact that
125 of the shareholders will own only Allied REIT preferred stock. We are not
aware of any authority that provides that preferred shareholders are not
properly treated as shareholders for purposes of section 856(a)(5). To the
contrary, the IRS has issued at least two private letter rulings approving of
the issuance of relatively nominal amounts of stock to shareholders in
circumstances that made it appear that the issuance of such stock was designed
to ensure compliance with the provisions of section 856(a)(5). See PLR 8342016
(July 13, 1983) (preferred stock issued to 125 individuals); PLR 8840018 (July
7, 1988) (issuance of "nominal
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(15)This conclusion should apply even if some of the shareholders are
minors, so long as each of the minor shareholders has the requisite attributes
of ownership in the stock of Allied REIT under relevant state law.
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Page 39
amounts" of stock to satisfy 100 shareholder requirement); GCM 39756 (Sept. 21,
1988) (underlying PLR 8840018). In both letter rulings, the IRS held that the
REIT at issue qualified as a REIT.
f. Closely Held
To qualify as a REIT, Allied REIT must not be "closely held"
within the meaning of section 856(h) after the first taxable year in which
Allied REIT elects to qualify as a REIT. Section 856(a)(5). Under section
856(h), which incorporates by reference section 542(a)(2), an entity is closely
held during a taxable year if at any time during the last half of the taxable
year more than 50 percent in value of its outstanding stock is owned, directly
or indirectly, by or for not more than five individuals.
All of Allied REIT's common stock and at least 80 percent of
Allied REIT's preferred stock will be owned by ACC and initially will represent
more than 99 percent of the value of all the stock of Allied REIT. This stock
will be treated under the relevant attribution rules as ultimately owned by
ACC's shareholders, which, assuming ACC's stock will be widely held after the
Mergers, will result in only a de minimis amount of Allied REIT's stock being
owned by any one shareholder through this chain of ownership. Similarly, the
Other Shareholders, both individually and collectively, will own only a de
minimis amount, by value, of Allied REIT's stock. In sum, by virtue of the
attribution rules of section 544 and section 856(h), only a de minimis amount
of Allied REIT's stock should be treated as owned by any single individual, and
Allied REIT should therefore not be "closely held" within the meaning of
section 856(a)(6).
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g. Multiple Classes of Stock
In reaching our conclusion that Allied REIT should satisfy the
requirements of section 856(a), we have considered the fact that there is no
statutory or regulatory authority specifically authorizing a REIT's use of
multiple classes of stock. We do not believe, however, that the use of
multiple classes of stock is in any way inconsistent with the rules relating to
REITs. In that regard, we note that the IRS has ruled that the use of two
different classes of stock by an unincorporated trust will not prevent such
trust from qualifying as a REIT. See Rev. Rul. 71-405, 1971-2 C.B. 263 (income
shares and capital shares); Rev. Rul. 69-610, 1969-2 C.B. 149 (preference
shares and common shares). Therefore, we believe that Allied REIT's use of
common stock and preferred stock should not cause Allied REIT to fail to
qualify as a REIT under section 856.
3. Income Tests
To qualify as a REIT, Allied REIT must satisfy two tests
regarding the sources and nature of its income. First, pursuant to section
856(c)(3), at least 75 percent of Allied REIT's annual gross income must be
derived from interest on obligations secured by mortgages on real property or
on interests in real property, gain from the sale or other disposition of real
property (including interests in real property and interests in mortgages on
real property), and qualified temporary investment income or other specified
income sources (the "75 Percent Income Test"). Qualified temporary investment
income is defined under section 856(c)(6)(D) as income that is (i) attributable
to stock or a debt instrument, (ii) attributable to the temporary investment of
new capital (i.e., amounts received by a REIT in exchange for its stock or
debt),
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September 25, 1997
Page 41
and (iii) received or accrued during the 1-year period beginning on the date
the REIT receives such capital. Second, pursuant to section 856(c)(2), at
least 95 percent of Allied REIT's annual gross income must, in relevant part,
be derived from dividends or interest from any source, qualify under certain
portions of the 75 Percent Income Test, or be derived from other specified
income sources (the "95 Percent Income Test"). Pursuant to section 856(f), for
purposes of the 75 Percent Income Test and the 95 Percent Income Test, the term
"interest" generally does not include amounts that depend in whole or in part
on the income of any person.
It has been represented to us that Allied REIT will derive 75
percent and 95 percent of its gross income from the requisite sources.
Accordingly, we believe that Allied REIT should satisfy both the 75 Percent
Income Test and the 95 Percent Income Test.
4. Asset Tests
To qualify as a REIT, in addition to satisfying the structural
and organizational requirements and income tests discussed above, Allied REIT
must also satisfy certain tests relating to the composition of its assets.
Pursuant to section 856(c)(5), on the last day of each quarter of Allied REIT's
taxable year, (i) at least 75 percent of the value of the total assets of
Allied REIT must consist of real estate assets, cash, and cash items (including
receivables), and government securities, and (ii) not more than 25 percent of
the value of Allied REIT's total assets may be represented by securities (other
than government securities). The term "real estate assets" means real property
(including interests in real property and interests in mortgages on real
property) and includes any property attributable to the temporary investment of
new capital,
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September 25, 1997
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but only if such property is stock or a debt instrument, and only for the
1-year period beginning on the date the REIT receives such new capital.
Section 856(c)(6)(B).
As a result of the formation of Allied REIT, Allied REIT's
principal assets will be the Transferred Assets. Based on the representations
made to us, those assets should qualify as real estate assets within the
meaning of section 856(c)(6)(B). Accordingly, Allied REIT should satisfy the
asset tests under section 856(c)(5).
5. Distribution Requirement
a. Generally
To maintain its REIT status, Allied REIT will be required to
distribute 95 percent of its REIT taxable income (determined without regard to
the dividends paid deduction and excluding any net capital gain). Section
857(a). We understand that it is anticipated that Allied REIT will distribute
to its shareholders approximately 100 percent (and in no event less than 95
percent) of its REIT taxable income each year. Assuming such distributions are
made, Allied REIT should satisfy the distribution requirement under section
857(a).
b. Eligibility for Dividends Paid Deduction
Although technically unrelated to the REIT distribution
requirements, we have also considered whether amounts distributed by Allied
REIT to its shareholders will be eligible for the dividends-paid deduction
allowed to a REIT under section 857(b)(2)(B) (assuming that
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such dividends are not attributable to "net income from foreclosure property"
within the meaning of section 856(b)(2)(D)).
The dividends-paid deduction is allowed under section 561,
subject to the rules set forth in section 562. Section 857(b)(2)(B). Section
562(a) defines the term dividend, subject to certain exceptions, by reference
to section 316. Section 316 defines the term "dividend" as any distribution of
property (including cash) made by a corporation to its shareholders out of its
current and accumulated e&p. Section 562(c) provides that for a distribution
to be treated as a dividend for purposes of the dividends-paid deduction, the
distribution of which such dividend is a part must be:
pro rata, with no preference to any share of stock as compared
with other shares of the same class, and with no preference to
one class of stock as compared with another class except to
the extent that the former is entitled (without reference to
waivers of their rights by shareholders) to such
preference.(16)
Section 562(c). Treas. Reg. Section 1.562-2(a) indicates that, as between
classes of stock, the determination of whether a "preferential" distribution
has been made is determined by reference to the rights inherent in the stock,
such that "[a] preference exists if any rights to preference inherent in any
class of stock are violated."
Because the distribution preferences and entitlements of the
Allied REIT common and preferred stock will be specified in its articles of
incorporation, distributions made in accordance with such preferences and
entitlements should not result in the recipient class
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(16)See PLR 9028043 (Apr. 10, 1990) (three separate "series" of preferred
stock with significant economic similarities were separate classes for purposes
of section 562(c)); PLR 8921067 (Feb. 28, 1989).
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September 25, 1997
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receiving "more or less than the amount to which it is entitled as compared
with any other class of stock," as determined by Allied REIT's articles of
incorporation. Treas. Reg. Section 1.562-2(a). Therefore, we believe that
dividends paid pro rata to all holders of Allied REIT common or preferred
stock, as the case may be, in accordance with the dividend rights set forth
with respect to such class in Allied REIT's articles of incorporation should
not be considered to be "preferen[tial]" within the meaning of section 562(c)
and should, therefore, qualify for the dividends-paid deduction of section
857(b)(2)(B) (assuming that such dividends are not attributable to "net income
from foreclosure property" within the meaning of section 856(b)(2)(D)).
6. "Successor Rule"
We have also considered whether the fact that the Transferred
Assets will previously have been held by Commercial could implicate the
so-called "successor rule" of section 856(g)(3). Section 856(g)(3) provides
that, subject to certain exceptions, if a corporation's election to be treated
as a REIT has been terminated or revoked, such corporation and any "successor
corporation" is not eligible to make an election to be treated as a REIT for
any taxable year prior to the fifth taxable year beginning after the first
taxable year for which such termination or revocation is effective.
A corporation is a "successor corporation" within the meaning
of section 856(g)(3) if it "meets both a continuity of ownership requirement
and a continuity of asset requirement with respect to the corporation . . .
whose election has been terminated . . . or revoked. . . ." Treas. Reg.
Section 1.856-8(c)(2). A corporation meets the continuity of ownership
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September 25, 1997
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requirement only if, at any time during the taxable year, the persons who own,
directly or indirectly, 50 percent or more in value of the outstanding shares
of the corporation owned, at any time during the first taxable year for which
the termination or revocation was effective, 50 percent or more in value of the
outstanding shares of the corporation whose election was terminated or revoked.
Id. A corporation meets the continuity of assets requirement only if either
(i) a substantial portion of its assets were the assets of the corporation
whose election was revoked or terminated or (ii) it acquires a substantial
portion of the assets of the corporation whose election was terminated or
revoked. Id.
If Allied REIT were considered the successor to Commercial,
section 856(g)(3) could be interpreted as precluding Allied REIT from electing
to be treated as a REIT.(17) It has been represented to us, however, that
persons who will own, directly or indirectly (including, for this purpose,
shareholders of ACC after the Mergers), 50 percent or more in value of the
outstanding shares of Allied REIT will not have owned, at any time, 50 percent
or more in value of the outstanding shares of Commercial. Therefore, Allied
REIT should not be treated as a
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(17)We note that it is not at all clear that section 856(g)(3) was intended
to apply to transactions like the merger of Commercial into ACC and the
formation of Allied REIT. Section 856(g)(3) was enacted because Congress
believed that, "since the net operating loss deduction and the alternative tax
with respect to capital gains have been made available to REITs, taxpayers
should not intentionally switch between REIT and regular corporate status." S.
Rep. 94-938, 94th Cong., 2d Sess. 478 (1976). There is no indication that
Congress intended section 856(g)(3) to preclude one REIT from transferring its
assets to another REIT merely because the transferring REIT does not survive
the transaction and the shareholders of the transferring REIT own more than 50
percent of the surviving REIT. (Indeed, if section 856(g)(3) would apply to
such a transaction, merely "reversing" the direction of the transaction would
avoid section 856(g)(3). It seems unlikely that Congress intended such a
result.) See PLR 8617091 (Jan. 29, 1986).
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September 25, 1997
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successor to Commercial, and the provisions of section 856(g)(3) should not
prevent Commercial from electing to be treated as a REIT.
III. Mergers of ALCC Holdings and ALCC Equity into Allied H/E LLC
ALCC Holdings and ALCC Acceptance are both qualified REIT
subsidiaries and are, as a result, disregarded for federal income tax purposes
as entities separate from Commercial. Section 856(i). Similarly, ALCC H/E LLC
will be disregarded for federal income tax purposes as an entity separate from
Commercial. Treas. Reg. Section 301.7701-2(b)(1)(ii). Although we are not
aware of any authority addressing the issue, we believe that where the same
taxpayer owns two non-entities and those non-entities merge, the merger should
not be treated as an event for federal income tax purposes and should not
result in any federal income tax consequences. Accordingly, we believe that
the mergers of ALCC Holdings and ALCC Acceptance into ALCC H/E LLC should not
be treated has an event for federal income tax purposes and should not have any
federal income tax consequences.(18)
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(18)Transactions involving single-member limited liability companies that
are disregarded for federal income tax purposes are relatively novel. (This
can best be explained by the fact that before the promulgation of the so-called
"check-the-box" entity classification regulations of Treas. Reg. Sections
301.7701-1, -2, and -3 there was some doubt regarding the proper federal income
tax classification of single-member noncorporate entities.) There is, however,
some authority addressing transactions involving qualified REIT subsidiaries,
which are also disregarded for federal income tax purposes, that lends indirect
support to our conclusion. See PLR 9409035 (Dec. 7, 1995) (merger of
partnership into qualified REIT subsidiary treated as merger into REIT); PLR
8903074 (Oct. 26, 1988) (merger of corporation into qualified REIT subsidiary
treated as a merger into REIT).
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IV. Merger of ALCC Acceptance into ALCC Acceptance LLC
For the reasons set forth in Part III, above, with respect to
the mergers of ALCC Holdings and ALCC Equity into ALCC H/E LLC, we believe that
the merger of ALCC Acceptance into ALCC Acceptance LLC should not be treated as
an event for federal income tax purposes and should not have any federal income
tax consequences.
V. The SubMergers
Credit and Development will each merge into their parent
corporations, ACC and Allied Capital, respectively, with each SubMerging Parent
surviving such mergers. As is discussed below, we believe that each of the
SubMergers will be treated for federal income tax purposes as a liquidation
within the meaning of section 332(a). Treas. Reg. Section 1.332-1(d).(19)
A. Section 332
Section 332(a) provides that no gain or loss shall be
recognized on the receipt by a corporation of property distributed in complete
liquidation of another corporation. For section 332(a) to apply, the
corporation receiving such property must own the stock of the liquidating
corporation that meets the requirements of section 1504(a)(2) on the date of
the adoption of the plan of liquidation and at all times until it receives the
property in liquidation.(20) Section
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(19)We believe that the SubMergers should also constitute tax-free
reorganizations under section 368(a)(1)(A). If, however, a transaction
constitutes both a reorganization and a liquidation, the transaction is treated
as a liquidation for federal income tax purposes. Treas. Reg. Section
1.332-2(d) and -2(e); see PLR 9651025 (Sept. 19, 1996); PLR 9650030 (Sept. 17,
1996); PLR 9649040 (Sept. 10, 1996).
(20)Section 1504(a)(2) requires the recipient corporation to own stock in
the liquidating corporation that (1) possesses at least 80 percent of the total
voting power of the stock of such
(continued...)
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332(b)(1). In addition, the liquidating distribution generally must occur
within the taxable year during which the plan of liquidation was adopted.
Section 332(b)(2).
In our opinion, the SubMergers will satisfy the requirements
of section 332. First, each SubMerging Parent has owned all of the stock of its
SubMerging Corporation for the entire existence of such corporation and will
continue to do so through the completion of the respective SubMerger.
Therefore, the stock ownership requirement will be satisfied. Second, each
SubMerger Agreement specifically provides that it is intended to constitute a
plan of complete liquidation within the meaning of section 332. Therefore, the
requirement that the liquidation occur pursuant to a plan of liquidation will
be satisfied. Third, each SubMerger will occur within the taxable year in
which the merger agreement was adopted, satisfying the provisions of section
332(b)(2).
B. Section 337
Because section 332 will apply to the SubMergers, and each
SubMerging Parent is the only transferee of the assets of its respective
SubMerging Corporation, neither SubMerging Corporation will recognize gain or
loss upon its SubMerger. Section 337(a).
C. Ancillary Opinions
Our opinions numbered 14 through 16 are based on specific
provisions of the Code, the application of which follows directly from the
qualification of the SubMergers under section 332(a).
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(20)(...continued)
corporation and (2) has at least 80 percent of the total value of the stock of
such corporation (except certain nonvoting stock that is limited and preferred
as to dividends).
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VI. The Property Merger
A. Section 332
In our opinion, the merger of Property into Allied Property
LLC should be treated as a complete liquidation and should satisfy the
requirements of section 332. First, Advisers has owned all of the stock of
Property for Property's entire existence and will continue to do so through the
completion of the Property Merger. Therefore, the stock ownership requirement
should be satisfied. Second, the merger agreement between Property and Allied
Property LLC specifically provides that it is intended to constitute a plan of
complete liquidation within the meaning of section 332. Therefore, the
requirement that the liquidation occur pursuant to a plan of liquidation should
be satisfied. Third, the merger will occur within the taxable year in which
such merger agreement was adopted, satisfying the provisions of section
332(b)(2).
In reaching our conclusion, we have considered the fact that
the liquidation will be effected by merging Property into Allied Property LLC,
a single member LLC that will be disregarded for federal income tax purposes.
For the reasons set forth in Part III above, we believe that the merger of
Property into Allied Property LLC should be treated as if Property liquidated
and transferred its assets directly to Advisers in exchange for all of
Adviser's stock in Property.
B. Section 337
Because section 332 should apply to the Property Merger and
Advisers is the only transferee of the assets of Property, Property should not
recognize gain or loss upon its merger into Allied Property LLC. Section
337(a).
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C. Ancillary Opinions
Our opinions numbered 20 through 22 are based on specific
provisions of the Code, the application of which follows directly from the
qualification of the transfer under section 332(a).
VII. The Mergers
A. Qualification Under Section 368(a)(1)(A)
To qualify as a reorganization under section 368(a)(1)(A), the
transaction literally must only be a merger or consolidation effected pursuant
to the corporation laws of the United States or a state or territory or the
District of Columbia. Section 368(a)(1)(A); Treas. Reg. Section 1.368-2(b)(1).
Notwithstanding this seemingly broad language, there are additional judicial
and judicially-inspired regulatory requirements for a merger or consolidation
to constitute a "reorganization." Specifically, the reorganization must be
"required by business exigencies" (i.e., there must be a business purpose for
the transaction). Treas. Reg. Section 1.368-1(b); Treas. Reg. Section
1.368-1(c). In addition, the reorganization provisions "are inapplicable
unless there is a plan of reorganization." Treas. Reg. Section 1.368-1(c).
Moreover, both continuity of business enterprise and continuity of shareholder
interest are required. Treas. Reg. Section 1.368-1(b).(21) Continuity of
business enterprise generally will be satisfied if the acquiring corporation
either (i) continues the merging corporation's historic business or (ii) uses a
significant portion of the merging
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(21)We note that Prop. Treas. Reg. Section 1.368-1(b), which would modify
the existing continuity regulations, provides that the existing regulations
will be effective until the new regulations are finalized. Even if the
proposed regulations were finalized before the effective date of the Mergers,
however, our opinion would not be changed, provided that such regulations are
finalized in the form in which they have been proposed.
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September 25, 1997
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corporation's assets in a business. Treas. Reg. Section 1.368-1(d)(2). For
this purpose, the acquiring corporation generally will be found to use a
significant portion of the acquired corporation's assets if the acquiring
corporation uses at least one-third of such assets in its business. Treas.
Reg. Section 1.368-1(d)(5) Example 1. Continuity of shareholder interest
generally will be satisfied if a substantial portion of the consideration paid
by the acquiring corporation constitutes equity in such corporation; for this
purpose, a "substantial portion" may be as little as 38 percent of the total
consideration paid. See John A. Nelson Co. v. Commissioner, 296 U.S. 374
(1935) (continuity found where stock represented only 38 percent of total
consideration); Rev. Rul. 66-224, 1966-2 C.B. 114 (50 percent equity
continuity of interest, by value, was adequate); Rev. Proc. 86-42, 1986-2 C.B.
722 (50 percent stock consideration required for ruling); Rev. Proc. 77-37,
1977-2 C.B. 568 (same).
We believe that each of the Mergers will satisfy all of the
requirements for a tax-free reorganization under section 368(a)(1)(A). First,
we understand that each Merger will be a valid merger under the corporation
laws of the State of Maryland, satisfying the literal provisions of the Code.
Second, we believe that eliminating administrative burdens, improving access to
capital markets, enhancing the ability to attract and retain qualified
employees, and achieving the other business purposes described above constitute
valid business purposes. See Laure v. Commissioner, 653 F.2d 253 (6th Cir.
1981), rev'g 70 T.C. 1087 (1978). Third, the Merger Agreement addresses the
business consequences of the Mergers and specifically states that it is
intended to constitute a "plan of reorganization." Fourth, it has been
represented to us that ACC will continue the historic business of each of the
Merging Corporations and will use the assets of
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the Merging Corporations in its business, unless and until those assets are
disposed of (i) in the ordinary course of ACC's business, (ii) as may be
necessary for ACC to maintain its status as a RIC, or (iii) in transfers
described in section 368(a)(2)(C), as is discussed in Part VII.F.1., below.
Therefore, each of the Mergers will satisfy the continuity of business
enterprise requirement. Fifth, the only consideration that will be exchanged
in the Mergers is ACC voting stock. Thus, the requirement that there be
continuity of shareholder interest will be satisfied.
In reaching this conclusion we have considered whether the
post-Merger transfer to Allied REIT of the Transferred Assets (which will
constitute a substantial percentage, but not all, of the assets transferred by
Commercial to ACC in the Merger) could cause the Merger of Commercial into ACC
to fail the continuity of business enterprise requirement. For a number of
reasons, we have concluded that it should not. First, ACC will continue the
business formerly conducted by Commercial. See Treas. Reg. Section
1.368-1(d)(3); see also Prop. Treas. Reg. Section 1.368-1(d)(5). Second, ACC
will retain a meaningful percentage of the assets received from Commercial.
See Treas. Reg. Section 1.368-1(d)(4). Third, the IRS has ruled that, where
the acquiring corporation in a merger contributes to a wholly owned subsidiary
all of the assets received in the merger, the continuity of business enterprise
rule will not prevent the merger from qualifying under sections 368(a)(1)(A)
and (a)(2)(C). Rev. Rul. 81-247, 1981-2 C.B. 87. Although the subsidiary in
Rev. Rul. 81-247 was wholly owned, the ruling explicitly noted that revenue
rulings on which the ruling relied were consistent with "the legislative intent
of section 368(a)(2)(C), which permits transactions to qualify as
reorganizations within the meaning of section 368(a)(1)(A) and 368(a)(1)(C)
whether any of the assets received by the acquiring
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corporation are transferred to corporations it controls." Moreover, Rev. Rul.
81-247 specifically held that the transactions discussed therein qualified
under sections 368(a)(1)(A) and (a)(2)(C) because the assets received in the
merger remained with the acquiring corporation "or corporations directly
controlled by" it. See also Rev. Rul. 68-261, 1968-1 C.B. 147; Rev. Rul.
64-73, 1964-1 (Part I) C.B. 142.
B. Nonrecognition by Merging Corporations
Section 361 generally provides that no gain or loss shall be
recognized to a corporation if such corporation is a party to a reorganization
and exchanges property, in pursuance of the plan or reorganization, solely for
stock or securities in another corporation a party to the reorganization.
Section 368(b) provides that the term "a party to a
reorganization" includes (i) a corporation resulting from a reorganization and
(ii) both corporations, in the case of a reorganization resulting from the
acquisition by one corporation of stock or properties of another.
Each of the Merging Corporations is "a party to a
reorganization" with respect to its Merger, as is ACC with respect to each
Merger. Accordingly, subject to the discussion at VII.F.3. below, no Merging
Corporation will recognize gain or loss when it transfers its assets to ACC in
the Mergers solely in exchange for common stock of ACC.
C. Nonrecognition by Shareholders of Merging Corporations
Section 354(a)(1) generally provides that no gain or loss
shall be recognized if stock or securities in a corporation are, in pursuance
of a plan of reorganization, exchanged
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solely for stock in such corporation or in another corporation a party to the
reorganization.
Because, as was noted above, each Combining Corporation is "a
party to a reorganization," the exchange of ACC stock for the stock of each of
the Merging Corporations will qualify for nonrecognition under section 354.
D. Nonrecognition by ACC
Section 1032(a) provides in relevant part that no gain or loss
will be recognized by a corporation on its receipt of money or other property
in exchange for stock of such corporation. Since ACC will issue its stock in
the Mergers in exchange for the assets of the Merging Corporations (and such
assets are "property" for purposes of this provision) ACC will not recognize
gain or loss upon the issuance of its stock in exchange for assets of the
Merging Corporations. Section 1032(a).
E. Ancillary Opinions
Our opinions numbered 27 through 31 are based on specific
provisions of the Code, the application of which follows directly from the
qualification of the Mergers as reorganizations under section 368(a)(1)(A).
F. Other Issues Considered
1. Effect of Post-Merger Asset Transfer to Allied REIT
In reaching our conclusion regarding the qualification of the
Merger of Commercial into ACC, we have considered the fact that, following that
Merger, ACC will contribute the Transferred Assets to Allied REIT. Section
368(a)(2)(C) provides that a transaction that qualifies under section
368(a)(1)(A) "shall not be disqualified by reason of the
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fact that part or all of the assets . . . which were acquired in the
transaction are transferred to a corporation controlled by the corporation
acquiring such . . . assets." We believe that section 368(a)(2)(C) will
prevent the contribution of the Transferred Assets to Allied REIT immediately
after the Merger from jeopardizing the Merger of Commercial into ACC.
2. Section 368(a)(2)(F)
We also have considered whether section 368(a)(2)(F) will be
applicable to the Mergers. Section 368(a)(2)(F) provides that if, immediately
before a reorganization, two or more parties to the reorganization were
investment companies, then the transaction will not be considered to be a
reorganization with respect to any such investment company (and its
shareholders) unless such investment company was a RIC, a REIT, or a
corporation that meets certain diversification requirements. The term
"investment company" means a RIC, a REIT, or a corporation 50 percent or more
the value of whose total assets are stock and securities and 80 percent or more
of the value of whose total assets are assets held for investment. Section
368(a)(2)(F)(ii). It has been represented to us that (i) Allied I, Allied II,
and ACC are all RICs, (ii) Commercial is a REIT, and (iii) Advisers is not an
investment company within the meaning of section 368(a)(2)(F)(iii) and (iv).
Therefore, section 368(a)(2)(F) will be inapplicable to the Mergers.
3. Notice 88-19
In 1988, the Treasury Department issued Notice 88-19.(22) In
Notice 88-19, the Treasury Department announced its intention to issue
regulations under section 337(d) that,
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(22)1988-1 C.B. 486.
<PAGE> 56
September 25, 1997
Page 56
[i]n the case of a C corporation that transfers property to a
RIC or REIT in a carryover basis transaction, the regulations
will require the transferor C corporation to recognize any net
built-in gain that would have been realized if the corporation
had liquidated on the day before the date of the transfer.
The Notice also provided that
[t]he regulations will permit the transferee RIC or REIT to
elect, in lieu of the treatment described above, to be subject
to rules similar to the rules of section 1374 of the Code . .
. . The built-in gains of electing RICs and REITs, and the
corporate-level tax imposed on such gains, will be subject to
rules similar to the rules relating to net income from
foreclosure property of REITs.
No regulations have been issued pursuant to Notice 88-19.
Because Advisers is a C corporation, the Merger of Advisers
into ACC implicates Notice 88-19. ACC has represented to us that ACC will make
an election pursuant to Notice 88-19 that it will attach to its tax return for
the year in which the Mergers occur. That election will be in substantially
the following form:
Allied Capital Corporation hereby elects to be subject to
rules similar to the rules of section 1374 of the Code with
respect to assets acquired from Allied Advisers, Inc. in
connection with a reorganization completed on [December 31,
1997]. This election is filed pursuant to Notice 88-19,
1988-1 C.B. 486.(23)
Such an election procedure has been sanctioned by numerous private letter
rulings. See, e.g., PLR 9718006 (Jan. 17, 1997); PLR 9717036 (Jan. 28, 1997);
PLR 9330002 (Apr. 13, 1993); PLR 9043040 (July 31, 1990). The election
language set forth above is drawn from PLR 9043040.
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(23)The statement making the election will also include the relevant
tax year, as well as ACC's name, address, and taxpayer identification number.
<PAGE> 57
September 25, 1997
Page 57
If ACC makes the election (in the form and manner) described
above, Advisers should not be required to recognize the built-in gain inherent
in its assets solely as a result of the Merger; rather, ACC should be subject
to rules similar to the rules of section 1374 with respect to such assets.(24)
G. Collateral Consequences of Mergers -- Partnership Terminations
Section 708(b)(1)(B) provides that a partnership terminates
if, in any 12-month period, there is a sale or exchange of 50 percent or more
of the capital and profits interests in the partnership. Section 761(e)
provides that the distribution of a partnership interest by a corporation is a
sale or exchange. Similarly, the IRS takes the position that the contribution
of a partnership interest to a corporation constitutes a sale or exchange.
Rev. Rul. 81-38, 1981-1 C.B. 386. The IRS also takes the position that, in
connection with corporate mergers, a partnership interest transferred from the
acquired corporation to the surviving corporation is treated as sold or
exchanged for purposes of section 708(b)(1)(B), unless the merger qualifies
under section 368(a)(1)(F). Rev. Rul. 87-110, 1987-2 C.B. 159; GCM 39673 (Oct.
23, 1987); PLR 8643062 (July 31, 1986).
The consequences of a termination under section 708(b)(1)(B)
are relatively insignificant for a partnership that does not hold material
amounts of depreciable property. The more notable consequences are as follows:
(i) the partnership's taxable year closes (section 706(c)(1); Treas. Reg.
Section 1.708-1(b)(1)(iii)); (ii) all partnership elections are terminated (see
Rev.
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(24)We have also considered whether the Notice could be implicated by the
Merger of Commercial into ACC. Because both of those corporations are
Subchapter M corporations, we do not believe the concerns raised by the Notice
are present.
<PAGE> 58
September 25, 1997
Page 58
Rul. 88-42, 1986-1 C.B. 265); and (iii) depreciation will begin anew (section
168(i)(7) (flush language)).
At the time of the Mergers, Commercial will own, through ALCC
Acceptance LLC, more than 50 percent of the profits and capital interests in
Funding I. In the Mergers, Commercial should be treated, for purposes of
section 708(b)(1)(B), as selling or exchanging its entire interest in Funding
I,(25) causing Funding I to terminate under section 708(b)(1)(B). Similarly, at
the time of the Mergers, Commercial will own more than 50 percent of the
profits and capital interests in Allied Mortgage. In the Mergers, Commercial
should be treated, for purposes of section 708(b)(1)(B), as selling or
exchanging its entire interest in Allied Mortgage, causing Allied Mortgage to
terminate under that section.
VIII. Post-Merger Dividend Payment
Section 852(a)(2) provides that a corporation will qualify as
a RIC in any taxable year only if either (i) the corporation was a RIC for its
entire existence (the "Entire Existence Test") or (ii) as of the close of each
taxable year, the corporation has no subchapter C e&p (the "e&p Test"). A
corporation will satisfy the Entire Existence Test only if both it and each
corporation to whose e&p the RIC has succeeded by the operation of section 381
were RICs for their entire existences. Treas. Reg. Section 1.852-12(a)(1).
Similarly, whether a corporation satisfies the e&p Test is determined by taking
into account e&p to which the corporation has succeeded by operation of section
381. Treas. Reg. Section 1.852-12(b)(1).
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(25)Because ALCC Acceptance LLC should be disregarded for federal income
tax purposes, Commercial should be treated for this purpose as owning ALCC
Acceptance LLC's interests in Funding I.
<PAGE> 59
September 25, 1997
Page 59
If a corporation merges into another corporation in a merger
that qualifies under section 368(a)(1)(A), the surviving corporation succeeds
to the e&p of the merging corporation as of the close of the merger date.
Sections 381(a)(2) and (c)(2)(A).
Section 852(b)(7) provides that if (i) a RIC declares a
dividend in October, November, or December of any calendar year that is payable
to shareholders of record on a specified date in such a month, and (ii) the RIC
actually pays the dividend during the January following such calendar year, the
dividend will be deemed to have been received by each shareholder and paid by
the RIC on December 31 of such calendar year.
After the Mergers, ACC will not satisfy the Entire Existence
Test because ACC will succeed to Advisers' e&p and Commercial's e&p,(26) and
neither Advisers nor Commercial is a RIC. Accordingly, to satisfy the
provisions of section 852(a)(2), ACC must satisfy the e&p Test.
ACC will be able to satisfy the e&p Test only by ensuring that
it has no non-RIC e&p as of the close of its taxable year. Toward that end,
ACC has represented to us that, in December 1997, ACC will declare a dividend
payable to its shareholders of record as of the close of business on December
31, 1997 (following the Mergers) in an amount equal to the current and
accumulated e&p of ACC, including all e&p to which ACC will succeed in the
Mergers (without regard to any deficits to which ACC will succeed in the
Mergers). ACC has represented to us that it will pay this dividend not later
than January 31, 1998. In that event,
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(26)We have engaged Arthur Andersen LLP ("AA") to assist us in determining
the e&p of each of the parties to the Mergers. Based on AA's e&p study, we
believe that Commercial has no current or accumulated e&p.
<PAGE> 60
September 25, 1997
Page 60
under the provisions of section 852(b)(7), the dividend should be treated as
having been paid on December 31, 1997. As a result, ACC should not have any
current or accumulated e&p as of the end of its 1997 taxable year, thereby
satisfying the provisions of section 852(a)(2). See section 312(a)(1).(27)
IX. Financial Merger
To qualify as a reorganization under section 368(a)(1)(D), a
corporation (the "target corporation") must transfer assets to another
corporation (the "acquiring corporation") that the target corporation or one or
more of its shareholders controls and, in pursuance of a plan of
reorganization, the stock or securities of the acquiring corporation must be
distributed in a transaction that qualifies under section 354. In addition,
just as with other types of reorganizations under section 368(a), to qualify as
a "D" reorganization, the transaction must be undertaken for valid business
reasons and must satisfy the continuity of business enterprise and continuity
of shareholder interest requirements, as was discussed above in Part VII.A.
Section 368(a)(2)(H) provides that, for purposes of section
368(a)(1)(D), the term control has the meaning given to such term by section
304(c). Under section 304(c), control means ownership of stock possessing at
least 50 percent of the total combined voting power of all classes of stock
entitled to vote or at least 50 percent of the total value of shares of all
classes
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(27)For purposes of the e&p Test, the entire dividend which ACC pays to the
transfer agent as paying agent should qualify as having been paid by ACC, even
though the transfer agent may not distribute all of the dividend to the
individual shareholders by January 31, 1998, since no part of the dividend can
return to ACC but instead will escheat to the State of Maryland if each
shareholder entitled to part of the dividend does not surrender his or her
shares within the applicable statutory period. See Rev. Rul. 72-410, 1972-2
C.B. 412; Rev. Rul. 65-89, 1965-1 C.B. 265.
<PAGE> 61
September 25, 1997
Page 61
of stock. For purposes of determining control under section 304(c), the
constructive ownership rules of section 318(a) apply with certain
modifications.
Section 354(a)(1) generally provides that no gain or loss
shall be recognized if stock or securities in a corporation are, in pursuance
of a plan of reorganization, exchanged solely for stock in such corporation or
in another corporation a party to the reorganization.
Section 354(b)(1) provides that the general rule in section
354(a) only applies to an exchange pursuant to a plan of reorganization under
section 368(a)(1)(D) if (A) the acquiring corporation acquires substantially
all of the assets of the target corporation and (B) the stock, securities and
other properties received by the target corporation, as well as the other
properties of such corporation, are distributed in pursuance of the plan of
reorganization.
We believe that the Financial Merger should satisfy each of the
requirements of, and should constitute a reorganization under, section
368(a)(1)(D).(28) First, Financial I and Financial II are parties to a
reorganization under section 368(b) because the Financial Merger should result
in the acquisition of assets and liabilities of Financial II by Financial I.
Section 368(b)(2). Second, as part of the Financial Merger, Financial I will
acquire all the assets of Financial II in exchange for deemed Financial I stock,
satisfying section 354(b)(1)(A).(29) (We believe that the nominal consideration
of five cents paid by Financial I to the sole shareholder of Financial II solely
to
- ----------------------------------
(28)We believe that the Financial Merger should also constitute a tax-free
reorganization under section 368(a)(1)(A). The IRS takes the position that if
a transaction constitutes both a "D" and an "A" reorganization, the transaction
must satisfy the more stringent requirements applicable to "D" reorganizations.
Rev. Rul. 75-161, 1975-1 C.B. 114.
(29)See Lessinger v. Commissioner, 872 F.2d 519, 522 (2d Cir. 1989); Rev.
Rul. 64-155, 1964-1 C.B. 138; TAM 8402001 (Aug. 16, 1983).
<PAGE> 62
September 25, 1997
Page 62
comply with the requirements of Maryland corporate law should be disregarded
for federal income tax purposes.) Third, because ACC owns all the voting stock
of Financial I (the SBA owns only nonvoting preferred stock), the "control"
requirement should be satisfied. Fourth, Financial II will distribute the
deemed Financial I stock to ACC in exchange for Financial II stock as required
by section 354(a) and (b)(1)(B). Fifth, we understand that the Financial
Merger will be undertaken for valid business reasons (viz., to reduce
operational redundancies). Sixth, because Financial I will acquire all of
Financial II's assets and will continue Financial II's business, the continuity
of business enterprise requirement should be satisfied. Finally, because there
will be no actual consideration paid in the Financial Merger (which is properly
treated as resulting in the deemed issuance of stock), the continuity of
shareholder interest requirement should be satisfied.
In reaching this conclusion, we have considered the effect on
the continuity of shareholder interest requirement of the fact that ACC will
have recently acquired its Financial II stock as a result of the Merger and
have concluded that it does not affect our conclusion. See PLR 9240026 (July
6, 1992); PLR 9253037 (Oct. 5, 1992).
Our opinions numbered 36 through 42 are based on specific
provisions of the Code, the application of which follows directly from the
qualification of the Financial Merger under section 368(a)(1)(D).
<PAGE> 63
September 25, 1997
Page 63
X. Investment Merger
We believe that the Investment Merger should also satisfy each
of the requirements of, and should constitute a reorganization under, section
368(a)(1)(D).(30) First, Investment I and Investment II are parties to a
reorganization under section 368(b) because the Investment Merger should result
in the acquisition of assets and liabilities of Investment II by Investment I.
Second, as part of the Investment Merger, Investment I will acquire all the
assets of Investment II in exchange for deemed Investment I stock, satisfying
section 354(b)(1)(A). (We believe that the nominal consideration of five cents
paid by Investment I to the sole shareholder of Investment II solely to comply
with the requirements of Maryland corporate law should be disregarded for
federal income tax purposes.) Third, because ACC owns all the stock of
Investment I, the "control" requirement should be satisfied. Fourth,
Investment II will distribute the deemed Investment I stock to ACC in exchange
for Investment II stock as required by section 354(a) and (b)(1)(B). Fifth, we
understand that the Investment Merger will be undertaken for valid business
reasons (viz., to reduce operational redundancies). Sixth, because Investment
I will acquire all of Investment II's assets and will continue Investment II's
business, the continuity of business enterprise requirement should be
satisfied. Finally, because there will be no actual consideration paid in the
Investment Merger (which is properly treated as resulting in the deemed
issuance of stock), the continuity of shareholder interest requirement should
be satisfied.
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(30)We believe that the Investment Merger should also constitute a tax-free
reorganization under section 368(a)(1)(A). See note 28, supra.
<PAGE> 64
September 25, 1997
Page 64
Our opinions numbered 45 through 51 are based on specific
provisions of the Code, the application of which follows directly from the
qualification of the Investment Merger under section 368(a)(1)(D).
XI. Post-Merger RIC Status of ACC
ACC has represented to us that it has elected to be treated,
and has qualified, as a RIC for each of its taxable years since its formation.
To continue to qualify as a RIC, ACC must (i) at all times during the taxable
year either be registered under the Investment Company Act of 1940, as amended,
or have in effect an election under such Act to be treated as a business
development company, (ii) derive at least 90 percent of its gross income from
the sources identified in section 851(b)(2), (iii) satisfy the so-called
"short-short test" of section 851(b)(3),(31) (iv) meet the asset diversification
tests of section 851(b)(4), and (v) distribute annually to its shareholders not
less than the amount required by section 852(a)(1).
Provided that ACC satisfies the requirements set forth in the
immediately preceding paragraph and based on the accuracy of (i) the facts set
forth herein and (ii) the representations made to us in connection with this
opinion letter (and our examination of certain
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(31)The short-short test was repealed, effective for taxable years beginning
after August 5, 1997. Pub. L. 105-34 Section 1271. Therefore, ACC must
satisfy such test for its taxable year ending December 31, 1997, but need not
do so thereafter.
<PAGE> 65
September 25, 1997
Page 65
agreements and documents referenced herein), we believe that ACC should
continue to be eligible to be treated as a RIC.
* * *
Our opinion reflects our interpretation of the provisions of
the Code as in effect as of the date hereof, judicial decisions, published and
private rulings issued by the IRS, and notices issued by the IRS and the
Treasury Department. In forming our opinions with respect to the matters
discussed herein, no rulings have been sought from the IRS. Unlike rulings
from the IRS, opinions of counsel are not binding on the IRS. We cannot
predict what the IRS may claim or what the courts will determine that may
affect the matters discussed herein. We cannot predict what the IRS and
Treasury may provide in regulations and rulings to be issued or how Congress
will change the tax laws (including those with retroactive effect) that may
affect the matters discussed herein. We have made no independent investigation
of the facts and assumptions set forth above, but have no reason to believe
they are incorrect.
We are furnishing this opinion letter at the request of the
entities listed on the first page of this letter. This letter is not to be
used, circulated, or quoted for any purpose without our written consent,
although we consent to its inclusion as an exhibit to the registration
statement filed on Securities and Exchange Commission Form N-14 by ACC. We
express no opinion on any matter except those set forth in the part of this
opinion letter entitled "Opinions." Specifically, we express no opinion on the
proper treatment of the distribution by Allied I of its ACC shares, nor do we
express any opinion regarding any state, local, foreign, or other tax or
<PAGE> 66
September 25, 1997
Page 66
nontax consequences. In addition, we undertake no obligation to revise or
update this letter to reflect changes in law after the date of this letter.
Sincerely yours,
SUTHERLAND, ASBILL & BRENNAN LLP
/s/ MICHAEL R. MILES
-------------------------------------------
Michael R. Miles
/s/ NOEL P. BROCK
-------------------------------------------
Noel P. Brock
<PAGE> 1
EX-99.14(i)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants we hereby consent to the incorporation by
reference in the registration statement on Form N-14 of our reports dated
February 4, 1997 incorporated by reference in Allied Capital Corporation and
Allied Capital Corporation II's Form 10-K and our report dated February 7, 1997
incorporated by reference in Allied Capital Lending Corporation's Form 10-K for
the years ended December 31, 1996 and 1995 and to all references to our firm
included in this registration statement.
/s/ MATTHEWS, CARTER AND BOYCE
McLean, VA
September 25, 1997
<PAGE> 1
EX-99.14(ii)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this registration statement of our reports dated February 6, 1997
and February 16, 1997 included in Allied Capital Commercial Corporation and
Allied Capital Advisers, Inc.'s Form 10-K, respectively, for the years ended
December 31, 1996 and 1995 and to all references to our Firm included in this
registration statement.
/s/ Arthur Andersen LLP
September 26, 1997
<PAGE> 1
EX-99.14(iv)
[FERRIS, BAKER WATTS, INCORPORATED LETTERHEAD]
Consent of Financial Adviser
We hereby consent to the use in this registration statement on Form
N-14 of our letter to the Board of Directors of Allied Capital Corporation
included as Appendix C to the Joint Proxy Statement/Prospectus that is part of
this Registration Statement, and to the references to such letter and to our
firm in such Joint Proxy Statement/Prospectus. In giving such consent we do
not thereby admit that we come within the category of persons whose consent is
required under Section 7 of the Securities Act of 1933 or the rules and
regulations of the Securities and Exchange Commission thereunder, nor do we
thereby admit that we are experts with respect to any part of such Registration
Statement within the meaning of the term "experts" as used in the Securities
Act of 1933, as amended, or the rules and regulations of the Securities and
Exchange Commission thereunder.
/s/ FERRIS, BAKER WATTS, INCORPORATED
Ferris, Baker Watts, Incorporated
September 24, 1997
<PAGE> 1
EX-99.14(vi)
CONSENT OF INTERSTATE/JOHNSON LANE CORPORATION
We hereby consent to the use in this registration statement on Form
N-14 of our letter to the Board of Directors of Allied Capital Corporation II
dated August 12, 1997 included as Appendix D to the Joint Proxy
Statement/Prospectus that is part of this Registration Statement, and to the
references to such letter and to our firm in such Joint Proxy
Statement/Prospectus. In giving such consent we do not thereby admit that we
come within the category of persons whose consent is required under Section 7
of the Securities Act of 1933 or the rules and regulations of the Securities
and Exchange Commission thereunder.
September 24, 1997
/s/ Interstate/Johnson Lane Corporation
- -----------------------------------------
Interstate/Johnson Lane Corporation
<PAGE> 1
EX-99.14(viii)
[SCOTT & STRINGFELLOW, INC. LETTERHEAD]
CONSENT OF FINANCIAL ADVISER
We hereby consent to the use in this registration statement on Form
N-14 of our letter to the Board of Directors of Allied Capital Corporation
included as Appendix E to the Joint Proxy Statement/Prospectus that is a part
of this Registration Statement, and to the references to such letter and to our
firm in such Joint Proxy Statement/Prospectus. In giving such consent we do
not hereby admit that we come within the category of persons whose consent is
required under Section 7 of the Securities Act of 1933 or the rules and
regulations of the Securities and Exchange Commission thereunder.
/s/ SCOTT & STRINGFELLOW, INC.
SCOTT & STRINGFELLOW, INC.
Richmond, Virginia
September 24, 1997
<PAGE> 1
EX-99.14(x)
[BAIRD LETTERHEAD]
Robert W. Baird & Co. Incorporated ("Baird") hereby consents to the inclusion in
the Joint Proxy Statement/Prospectus of Allied Capital Corporation, Allied
Capital Corporation II, Allied Capital Commercial Corporation, Allied Capital
Lending Corporation and Allied Capital Advisers, Inc., filed as a part of this
Registration Statement on Form N-14 of Allied Capital Lending Corporation, of
its opinion dated August 14, 1997, and to the references made to Baird in the
sections of such Proxy Statement/Prospectus entitled "The Merger Proposal--
Board Considerations--The Considerations of Each Company--Allied Lending" and
"Financial Advisers". In giving such consent, we do not thereby admit that we
come within the category of persons whose consent is required under Section 7
of the Securities Act of 1933 or the rules and regulations of the Securities
and Exchange Commission promulgated thereunder.
ROBERT W. BAIRD & CO. INCORPORATED
By: /s/ STEVEN P. KENT
---------------------------------------
September 25, 1997
<PAGE> 1
EX-99.14(xii)
CONSENT OF FINANCIAL ADVISER
We hereby consent to the use in this Registration Statement on Form
N-14 of our opinion to the Board of Directors of Allied Capital Advisers, Inc.,
dated August 4, 1997, included as Appendix G to the Joint Proxy Statement/
Prospectus that is a part of this Registration Statement, and to the references
to such opinion and to our firm in such Joint Proxy Statement/Prospectus. In
giving such consent, we do not thereby admit that we come within the category
of persons whose consent is required under Section 7 of the Securities Act of
1933 or the rules and regulations of the Securities and Exchange Commission
thereunder.
/s/ VAN KASPER & COMPANY
VAN KASPER & COMPANY
Los Angeles, California
September 24, 1997
<PAGE> 1
EX-99.14(xiii)
CONSENT OF
MORGAN STANLEY & CO. INCORPORATED
September 25, 1997
Allied Capital Lending Corporation
1666 K Street, N.W.
Washington, DC 20006
Dear Sirs:
We hereby consent to the references to our firm name included in the
Registration Statement of Allied Capital Lending Corporation ("Allied") on Form
N-14, with respect to the shares of Common Stock, par value $0.0001 per share.
In giving such consent, we do not thereby admit that we come within the
category of persons whose consent is required under Section 7 of the Securities
Act of 1933, as amended, or the rules and regulations adopted by the Securities
and Exchange Commission thereunder, nor do we admit that we are experts with
respect to any part of the Registration Statement within the meaning of the
term "experts" as used in the Securities Act of 1933, as amended, or the rules
and regulations of the Securities and Exchange Commission thereunder.
Very truly yours,
MORGAN STANLEY & CO. INCORPORATED
By /s/ KRISTEN S. HUNTLEY
------------------------------
Kristen S. Huntley
Managing Director
