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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NO. 0-22832
ALLIED CAPITAL LENDING CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
----
MARYLAND 52-1081052
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION) IDENTIFICATION NO.)
C/O ALLIED CAPITAL ADVISERS, INC.
1666 K STREET, NW, NINTH FLOOR 20006
WASHINGTON, D.C. (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (202) 331-1112
----
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
NONE NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.0001 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.[ ]
The aggregate market value of the registrant's common stock held other than by
officers and directors of the registrant, officers of its investment adviser,
and shares held by Allied Capital Corporation as of March 19, 1997 was
approximately $82,476,527 based upon the average bid and asked price for the
registrant's common stock on that date. As of March 19, 1997 there were
5,128,024 shares of the registrant's common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to Shareholders for the year ended
December 31, 1996 are incorporated by reference into Parts II and IV of this
Report. Portions of the registrant's definitive Proxy Statement for the Annual
Meeting of Stockholders to be held on May 12, 1997 are incorporated by
reference into Part III of this Report.
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PART I
ITEM 1. BUSINESS.
Allied Capital Lending Corporation (the "Company") was incorporated in
1976 and is engaged in the business of making loans to small businesses,
including loans that are partially guaranteed by the U.S. Small Business
Administration ("SBA") pursuant to the SBA's 7(a) loan program. Allied Capital
Advisers, Inc. ("Advisers") serves as the investment adviser of the Company
under an investment advisory agreement.
The Company is a closed-end management investment company that elected
in 1993 to be regulated as a business development company ("BDC") under the
Investment Company Act of 1940, as amended (the "1940 Act"). The Company is
licensed as a small business lending company ("SBLC") by the SBA, and in April
1995 formed ACLC Limited Partnership (the "Limited Partnership") in order to
participate in the SBA's 504 loan program and make other small business loans
to accompany its 7(a) Loans. In January 1997, the Company effected a
reorganization whereby Allied Capital SBLC Corporation ("SBLC") and Allied
Capital Credit Corporation ("Credit") became its subsidiaries.
Prior to consummation of the Company's initial public offering in
November 1993, the Company was a wholly owned subsidiary of Allied Capital
Corporation ("Allied I"). After that date, Allied I continued to hold a
significant number of the Company's shares, but agreed to divest itself of such
shares by December 31, 1998 through public offerings, private placements,
distributions to Allied I stockholders or otherwise. Allied I's holdings of the
Company's shares represented approximately 16% of the Company's shares
outstanding as of March 21, 1996.
Conduct of Business Through Subsidiaries
Until 1995, the Company's operations were entirely dependent upon the
SBA's 7(a) loan program (discussed below). In December 1994, in a move
unexpected by the Company, the SBA temporarily altered its regulations
concerning the Section 7(a) loan program and announced that it would place a
loan size cap of $500,000 on the loans that it would guarantee under the
Section 7(a) loan program. In late 1995, the SBA altered the regulations again
and restored the maximum guarantee to $750,000 for any one borrower, thus
effectively raising the maximum loan size with a 75% guarantee to $1 million.
The SBA's December 1994 reduction in the maximum loan size under the 7(a) loan
program had no significant impact on the Company's results of operations for
1995 because the Company had a substantial backlog of loans already approved
under prior rules.
The frequency of regulatory changes in 1994 and 1995 prompted the
Company to reevaluate its lending programs and expand its operations with
additional small business loan programs. The Company determined that investing
in loans generated under the SBA's Certified Development Company Program ("504
Loans"), and supplemental loans, not guaranteed by the SBA, to accompany the
Company's 7(a) loans ("7(a) Companion Loans"), would afford it significant
opportunities to diversify its operations and continue its growth. As an SBLC,
however, the Company was prohibited from making 504 Loans and 7(a) Companion
Loans. The Company formed the Limited Partnership to generate 504 Loans and
7(a) Companion Loans. During the fiscal year ended December 31, 1996, the
Limited Partnership participated in the SBA's Certified Development Company
Program and generated supplemental loans, not guaranteed by the SBA, to
accompany the Company's 7(a) Loans.
On January 1, 1997, the Company effected a reorganization of its
internal structure to provide a more effective corporate structure to support
the origination of 7(a) loans, 7(a) Companion Loans and 504 Loans. Pursuant to
this reorganization, the Company transferred, as a capital contribution, all or
substantially all of its assets related to 7(a) loan origination activity and
its SBA-issued license to SBLC in exchange for 100% of SBLC's common stock. The
Company dissolved the Limited Partnership and purchased the 1% limited
partnership interest not owned by the Company, and assumed all the
Partnership's assets and liabilities upon the dissolution.
SBLC and Credit were organized under the laws of Maryland on March 29,
1996. SBLC and Credit each elected to be regulated as a BDC pursuant to Section
54(a) of the 1940 Act on December 24, 1996. On January 1, 1997, SBLC and Credit
became wholly owned subsidiaries of the Company. The Company, SBLC and Credit
intend to operate
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as one company and engage in consolidated reporting. The Company continues to
explore other financial products and is actively pursuing entry into other loan
programs to diversify its portfolio.
The Section 7(a) Loan Program
Pursuant to Section 7(a) of the Small Business Act of 1958, as
amended, 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.
The SBA designates certain participants in the Section 7(a) loan
program as "preferred lenders" in designated markets. As of December 31, 1996,
the Company was a preferred lender in 47 regional markets. The SBA also
designates certain participants in the Section 7(a) loan program as "certified
lenders." Applications for loan guarantees submitted by preferred and certified
lenders receive expedited processing by the SBA. The SBA has designated the
Company as a certified lender in all markets in which it is a preferred lender.
As permitted by SBA regulations, the Company (currently through SBLC)
systematically sells to investors, without recourse, the guaranteed portion of
its loans. Under legislation adopted in 1993, a fee at the rate of 0.4% per
annum on the outstanding principal balance of such loans sold in the secondary
market is payable to the SBA. Such loan sales by the Company generally take
place approximately three months after the closing of the loan and, under
current market conditions, are made at a price of approximately 110% of the
principal amount of the portion of the loan sold. In October 1995, the SBA
amended its regulations and raised the annual fee on the guaranteed portion of
loans approved by the SBA after October 12, 1995 to 0.5% per annum regardless
of sale to the secondary market. The SBA also is entitled to a fee of 50% of
any cash premium in excess of 10% received on loan sales. The Company, through
SBLC, continues to service loans sold for a normal servicing fee of
approximately 0.4% per annum of the outstanding principal amount of such loans.
To the extent that the Company receives any higher servicing fee, the value of
such additional servicing fee is accrued as an excess servicing asset. At
December 31, 1996, the Company was servicing approximately $169 million
aggregate principal amount of loans, of which approximately 64% had been sold
to investors.
The Company requires capital to make loans, to carry those loans for
approximately three months until sale occurs, and to carry the unsold portion
of the principal amount of those loans to maturity. For the purpose of carrying
the guaranteed portions of such loans pending their sale, the Company has
obtained a line of credit aggregating $25 million from a commercial bank that
expires in May 1998.
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. The Company generally does not make
unsecured working capital loans. In all cases, the principals of the small
businesses must personally guarantee the payment of interest and principal on
the loans.
The Company may, from time to time, concentrate its loans in
particular industries, but the Company does not intend to concentrate its loans
in any industry. At December 31, 1996, the Company had in its portfolio or was
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.
At December 31, 1996, $17.6 million, or 29% of the Company's
outstanding loans, were invested in the hotel and motel industry (Hospitality
Loans). At December 31, 1996, Hospitality Loans included $4.1 million of loans
held for sale. Hospitality Loans not held for sale at December 31, 1996
represented 22% of the Company's outstanding loans. In the event of a downturn
in the hotel and motel industry, the ability of such borrowers to satisfy their
debt service obligations to the Company could be adversely affected. In
addition, existing competing establishments, new hotels or motel construction
which could saturate the market in a geographic area, or declining trends in
travel could adversely affect the ability of these borrowers to service their
debts to the Company.
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The interest on loans recently made by the Company generally is at a
variable rate, which is generally 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 are payable in equal monthly installments of principal and
interest from the dates on which the loans are made (or the first day of the
month following any month in which there occurs an interest rate adjustment) to
their respective maturities.
504 Loan Program and Companion Loans
During 1996, as part of the Company's efforts to diversify its lending
activities, the Company, through the Limited Partnership, continued its
participation in the SBA's 504 loan programs. In January 1997 the Company
succeeded to the Limited Partnership's 504 loans and Companion Loans business
and its portfolio of investments.
Under the SBA's 504 loan program, qualified small businesses can
purchase or build real estate with favorable long-term debt. Loans made under
this program are structured such that the entrepreneur provides at least 10% of
the project cost in equity, the Company (in 1996, through the Limited
Partnership, and beginning in 1997, through itself) provides 50% of the project
cost in a 20-year adjustable rate first mortgage and a local certified
development company ("CDC") provides a 20-year fixed rate second mortgage for
the remaining 40% of the project cost. Both loans are fully amortizing and the
total project cost can be as large as $2.5 million.
In addition to partnering with local CDCs to finance projects that
require up to $2.5 million in financing, beginning in 1995 the Company, through
the Limited Partnership or itself, as applicable, also provided companion or
"piggyback" loans in conjunction with traditional SBA 7(a) loans (i.e., the
7(a) Companion Loans). For this type of financing, the Company provides an
unguaranteed first mortgage loan for up to 50% of the real estate value and a
second mortgage loan through the 7(a) program with a 75% SBA guarantee. The
total of the two loans is generally 80% or less of the appraised value of the
real estate. The Company also partners with local banks by providing second
mortgage loans that are partially guaranteed by the SBA in conjunction with the
banks' conventional first mortgage loans to qualifying small businesses.
The Company finances its SBA 504 loans and 7(a) Companion Loans with a
line of credit from a commercial bank. The line of credit, as amended January
1, 1997, had a $15 million capacity of which $8.1 million had been borrowed.
The interest rate on this facility is equal to LIBOR plus 1.6% per annum, and
the facility expires May, 1998.
Loan Generation
The Company has made arrangements with certain financial consulting
organizations, or regional associates, to refer to the Company potential loans
to small businesses in certain designated territories. Any prospective loan
referred to the Company by any regional associate is reviewed by the Company's
portfolio manager and its credit committee and is not closed unless approved or
ratified by the Board of Directors of the Company and, in the case of Section
7(a) loans, by the SBA. 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 Company to its regional associates range
from 0.5% to 5% of the principal amount of each loan made by the Company that
was referred by the respective regional associate. The regional associates from
time to time may assist the Company in monitoring any loans referred by them or
otherwise made in their territories. For those services, the regional
associates are compensated with a fixed fee per visit.
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The Company's Operation as a BDC
As BDCs, the Company, SBLC and Credit may not acquire any investment
assets other than "Qualifying Assets" unless, at the time the acquisition is
made, Qualifying Assets represent at least 70% of the value of each such
entity's total investment assets. The principal categories of Qualifying Assets
relevant to the business of the Company, SBLC and Credit are the following:
(1) Securities purchased in transactions not involving any public offering
from the issuer of such securities, an affiliated person of the
issuer, or any other person (subject to Securities and Exchange
Commission rule-making), provided the issuer is an eligible portfolio
company. An eligible portfolio company is defined as any issuer that
(a) is organized and has its principal place of business in the United
States, (b) is not an investment company other than an SBIC wholly
owned by the BDC (the Company's investments in and advances to SBLC
and Credit are Qualifying Assets), and (C) either: (I) does not have
any class of publicly traded securities with respect to which a broker
may extend margin credit or (ii) is controlled by the BDC.
(2) Cash, cash items, government securities, or high quality debt
securities maturing in one year or less from the time of
investment.
In addition, to treat securities described in (1) above as a
Qualifying Asset 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, any
arrangement whereby the BDC, through its directors, officers or employees,
offers to provide, and, if accepted, does provide, significant guidance and
counsel concerning the management, operations or business objectives and
policies of a portfolio company. Managerial assistance is made available to the
portfolio companies by the Company's officers (who are also the officers of
SBLC and Credit) and the investment officers of Advisers who manage the
Company's investments. Each portfolio company is assigned for monitoring
purposes to an investment officer and is contacted and counseled if it appears
to be encountering business or financial difficulties. The Company (either
directly or through its subsidiaries) also provides management assistance and
counseling on a continuing basis to any portfolio company that requests it,
whether or not difficulties are perceived. The Company's officers and directors
are highly experienced in providing this type of managerial assistance to small
businesses. The Company, SBLC and Credit each may not change the nature of its
business so as to cease to be, or withdraw its election as, a BDC unless
authorized by vote of a majority (as defined in the 1940 Act) of the Company's
shares. As a BDC, the Company is entitled to borrow money and issue senior
securities representing indebtedness as long as its indebtedness representing
senior securities has asset coverage to the extent of at least 200%.
Competition
There are several other SBLCs (non-bank lenders) as well as a large
number of banks that participate in the Section 7(a) loan program. All of these
participants compete for the business of eligible borrowers. From time to time,
these competitors will offer loans at a lower rate of interest than the
2.75%-above-prime maximum rate permitted by the SBA, which is the rate at which
the Company generally offers loans. However, such lower-cost loans are
generally offered with shorter maturities than those which the Company is
prepared to offer for its loans. Moreover, unlike SBLCs such as the Company,
banks are frequently under different regulatory constraints on the types of
loans that they are able to offer.
Investment Adviser
Advisers is the investment adviser of the Company pursuant to an
investment advisory agreement. Under that agreement, Advisers manages the loans
made by the Company, subject to the supervision and control of the Board of
Directors of the Company, and evaluates, structures, closes and monitors those
loans made by the Company. The Company will not make any loan or other
investment that has not been recommended by Advisers. Except as to those
investment decisions that require specific approval by the Company's Board,
Advisers has the authority to effect loans and sales of portions of loans for
the Company's account. Some of the directors and officers of Advisers are also
directors and officers of the Company.
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The advisory agreement provides that the Company will pay all of its
own operating expenses, except those specifically required to be borne by
Advisers. The expenses paid by Advisers include the compensation of its
officers and the cost of office space, equipment, and other personnel necessary
for day-to-day operations. The expenses that are paid by the Company include
the 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 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. The
Company, rather than Advisers, is also 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. All fees paid by or for the account of an actual or
prospective portfolio company in connection with an investment transaction in
which the Company participates are treated as commitment fees or management
fees and are received by the Company, pro rata to its participation in such
transaction, rather than by Advisers. Advisers is, 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 management assistance. Advisers will report to the Board of
Directors not less often than quarterly all fees received by Advisers from any
source whatever and whether, in its opinion, any such fee is one that Advisers
is entitled to retain under the provisions of the advisory agreement. In the
event that any member of the Board of Directors should disagree, the matter
will be conclusively resolved by a majority of the Board of Directors,
including a majority of the independent Directors.
As compensation for its services to and the expenses paid for the
account of the Company, Advisers is entitled to be paid quarterly, in arrears,
a fee equal to 0.625% per quarter of the quarter-end value of the Company's
consolidated total assets (other than interim investments and cash) and 0.125%
per quarter of the quarter-end value of the Company's interim investments and
cash. Such fees on an annual basis equal approximately 2.5% of the Company's
consolidated total assets (other than interim investments and cash) and 0.5% of
the Company's interim investments and cash. For the purposes of calculating the
fee, the values of the Company's assets are determined as of the end of each
calendar quarter. The quarterly fee is paid as soon as practicable after the
values have been determined.
Because of the Company's practice of selling a significant portion of
the loans that it originates, the Company believes that the fees to Advisers
provided for by the existing advisory agreement are comparable to the fees paid
by other investment companies, notwithstanding the efforts and resources
devoted by Advisers to evaluating, structuring, closing and servicing the types
of private investments in which the Company specializes.
Change of Chairman and Chief Executive Officer
After 22 years with the Allied Capital companies, David Gladstone
stepped down as Chairman and Chief Executive Officer of the Company in early
1997, and the Board appointed William L. Walton to be the Company's new
Chairman and Chief Executive Officer. Mr. Gladstone also resigned as a director
on March 19, 1997 and will not stand for election to the board of directors.
Mr. Walton has been affiliated with the Allied Capital companies for more than
ten years, both as a director of Advisers and as a past director of Allied
Capital Corporation. Mr. Walton's extensive experience in the investment
industry combined with his performance as an entrepreneur provide an excellent
mix of talent for the Company. He previously served as Managing Director of New
York-based Butler Capital Corporation and was the personal venture capital
advisor for William S. Paley, founder and Chairman of CBS. More recently, Mr.
Walton founded two private companies dedicated to improving education for
children with a focus on reading and languages. Mr. Walton has been a
commercial banker, an investment banker with Lehman Brothers Kuhn Loeb, a
private investor and an entrepreneur, and throughout his career has been
involved in the growth and finance of small business.
Employees
The Company has no employees as all of its personnel are furnished by
Advisers.
ITEM 2. PROPERTIES.
The Company does not own or lease any properties or other tangible
assets.
ITEM 3. LEGAL PROCEEDINGS.
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The Company is not a defendant in any material pending legal
proceeding, and no such material proceedings are known by the Company to be
contemplated.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth the names, ages and positions of the
executive officers of the Company as of March 1, 1997, as well as certain other
information with respect to those persons:
<TABLE>
<CAPTION>
Positions Currently Principal Occupations
Name Age Held with the Company During Past Five Years
- ---- --- --------------------- ----------------------
<S> <C> <C> <C>
William L. Walton 47 Chairman and Chief Executive Employed by Advisers since 1997.
Officer Chairman and Chief Executive Officer of
Allied I, Allied Capital Corporation II
("Allied II"), Allied Capital Commercial
Corporation ("Allied Commercial"), and
Advisers; Manager of Allied Capital
Midwest LLC ("Allied Midwest"); Chief
Executive Officer of Success Lab, Inc.
(children's educational services) from 1993
to 1996; Chief Executive Officer of
Language Odyssey (educational publishing
and services) from 1992 to 1996; and
Managing Director of Butler Capital
Corporation from 1987 to 1991.
Katherine C. Marien 48 President and Chief Operating Employed by Advisers since 1992;
Officer Executive Vice President of Allied I, Allied
II, Allied Commercial, Business
Mortgage Investors, Inc. ("BMI"),
Allied Midwest and Advisers; Financial
Consultant with Wilks & Schwartz
Broadcasting from 1990 to 1992;
Financial Consultant to USA Mobile
Communications, Inc. from 1991 to 1992;
Senior Vice President of Communications
Equity Associates from 1989 to 1991.
Joan M. Sweeney 37 Executive Vice President Employed by Advisers since 1993;
President and Chief Operating
Officer of Advisers; Executive Vice
President of Allied I, Allied II,
Allied Commercial, BMI, Allied Capital
Mortgage, LLC ("Allied Mortgage") and
Allied Midwest; Senior Manager at Ernst
& Young from 1990 to 1993.
Jon A. DeLuca 34 Executive Vice President, Employed by Advisers since 1994;
Treasurer and Chief Financial Executive Vice President, Treasurer and
Officer Chief Financial Officer of Allied I,
Allied II, Allied Commercial, BMI,
Advisers, Allied Mortgage and Allied
Midwest. Manager of Entrepreneurial
Services at Coopers & Lybrand from 1986
to 1994.
</TABLE>
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<TABLE>
<S> <C> <C> <C>
G. Cabell Williams III 42 Executive Vice President Employed by Advisers since 1981; President
and Chief Operating Officer of Allied I;
Executive Vice President of Allied II, Allied
Commercial, Allied Midwest, Advisers and
BMI.
</TABLE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Information in response to this Item is incorporated by reference to
the "Shareholder Information" and "Quarterly Stock Price and Distributions to
Shareholders" sections of, and to Notes 6 and 8 of the Notes to Consolidated
Financial Statements contained in, the Company's Annual Report to Shareholders
for the year ended December 31, 1996 (the "1996 Annual Report").
ITEM 6. SELECTED FINANCIAL DATA.
Information in response to this Item is incorporated by reference to
the table in the "Consolidated Comparison of Financial Highlights" section of
the 1996 Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Information in response to this Item is incorporated by reference to
the "Management's Discussion and Analysis" section of the 1996 Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Information in response to this Item is incorporated by reference to
the Consolidated Financial Statements, notes thereto and Report of Independent
Accountants thereon contained in the 1996 Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information in response to this Item is incorporated by reference to
the identification of directors and nominees contained in the "Election of
Directors" section and the subsection captioned "Compliance with Reporting
Requirements of Section 16(a) of the Securities Exchange Act of 1934" of the
Company's definitive proxy statement in connection with its 1997 Annual Meeting
of Stockholders, scheduled to be held on May 12, 1997 (the "1997 Proxy
Statement"). Information in response to this Item also is included under the
caption "Executive Officers of the Registrant" of this Report.
ITEM 11. EXECUTIVE COMPENSATION.
Information in response to this Item is incorporated by reference to
the subsections captioned "Compensation of Executive Officers and Directors,"
"Incentive Stock Options" and "Compensation of Directors" of the 1997 Proxy
Statement.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information in response to this Item is incorporated by reference to
the subsection captioned "Beneficial Ownership of Common Stock" of the 1997
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information in response to this Item is incorporated by reference to
the subsection captioned "Certain Transactions" of the 1997 Proxy Statement.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this Report:
1. A. The following financial statements are incorporated by reference
to the 1996 Annual Report:
Consolidated Balance Sheet at December 31, 1996 and 1995.
Consolidated Statement of Operations for the years ended December
31, 1996, 1995 and 1994.
Consolidated Statement of Changes in Net Assets for the years ended
December 31, 1996, 1995 and 1994.
Consolidated Statement of Cash Flows for the years ended December
31, 1996, 1995, and 1994.
Consolidated Statement of Investments as of December 31, 1996.
Notes to Consolidated Financial Statements.
B. The Report of Independent Accountants with respect to the
financial statements listed in A. above is incorporated by reference
to the 1996 Annual Report.
2. No financial statement schedules of the Company are filed herewith
because (i) such schedules are not required or (ii) the information
required has been presented in the aforementioned financial
statements.
3. The following exhibits are filed herewith or incorporated by
reference as set forth below:
Exhibit
Number Description
- ------ -----------
3(i)* Articles of Amendment and Restatement to the Articles of
Incorporation
3(ii)(1) By-laws
4 Instruments defining rights of security holders -- See Exhibits
3(i) and 3(ii).
10.1* Investment Advisory Agreement between the Company and Allied
Capital Advisers, Inc., dated May 9, 1995.
10.2(2) Amended and Restated Line of Credit, Security and Pledge
Agreement, dated February 26, 1996 and as amended April 18,
1996, and Promissory Note dated February 26, 1996, between the
Company and Riggs Bank N.A.
10.3(2) Second Amendment to Amended and Restated Line of Credit,
Security and Pledge Agreement dated November 26, 1996 between
the Company and Riggs Bank N.A.
10.4(2) Line of Credit, Security and Pledge Agreement, and Promissory
Note, dated April 18, 1996 between ACLC Limited Partnership and
Riggs Bank N.A.
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10.5(2) First Amendment to the Line of Credit and Security and Pledge
Agreement, dated October 18, 1996 between ACLC Limited
Partnership and Riggs Bank N.A.
10.6(2) Second Amendment to the Line of Credit and Security and Pledge
Agreement, dated November 26, 1996 between ACLC Limited
Partnership and Riggs Bank N.A.
10.7* Form of regional associate agreement.
10.8* Stock Option Plan
10.9* Dividend Reinvestment Plan
11* Statement regarding computation of per share earnings.
13* Excerpts from the 1996 Annual Report to Shareholders.
21 Subsidiaries of the Company and jurisdiction of incorporation:
<TABLE>
<S> <C>
ACLC Limited Partnership Maryland
Allied Capital SBLC Corporation (Capitalized 1/1/97) Maryland
Allied Capital Credit Corporation (Capitalized 1/1/97) Maryland
</TABLE>
23* Consents of Matthews, Carter and Boyce, independent accountants.
27* Financial Data Schedule
- ------------------------
* Filed herewith.
(1) Incorporated by reference to such document filed as an exhibit of the
same name with the Company's Annual Report on Form 10-K for the year
ended December 31, 1995 (File No. 0-22832).
(2) Incorporated by reference to an exhibit of same name with the Company's
N-2, Pre-effective Amendment No. 3, dated December 19, 1996 (File No.
333-15709).
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed for the three months ended
December 31, 1996.
9
<PAGE> 11
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized on March 27, 1997.
/s/ WILLIAM L. WALTON
-------------------------------------------------
William L. Walton
Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Title
Signature (Capacity) Date
- --------- ---------- ----
<S> <C> <C>
/s/ WILLIAM L. WALTON Chairman and March 27, 1997
- ------------------------------------ Chief Executive Officer
William L. Walton (Principal Executive Officer)
/s/ GEORGE C. WILLIAMS Director March 27, 1997
- ------------------------------------
George C. Williams
/s/ KATHERINE C. MARIEN Director, President and March 27, 1997
- ------------------------------------ Chief Operating Officer
Katherine C. Marien
/s/ JON W. BARKER Director March 27, 1997
- ------------------------------------
Jon W. Barker
Director March , 1997
- ------------------------------------ --
Eleanor Deane Bierbower
/s/ ANTHONY T. GARCIA Director March 27, 1997
- ------------------------------------
Anthony T. Garcia
/s/ ROBERT V. FLEMING II Director March 27, 1997
- ------------------------------------
Robert V. Fleming II
/s/ ARTHUR H. KEENEY III Director March 27, 1997
- ------------------------------------
Arthur H. Keeney
/s/ ROBIN B. MARTIN Director March 27, 1997
- ------------------------------------
Robin B. Martin
/s/ JON A. DELUCA Executive Vice President, March 27, 1997
- ------------------------------------ Treasurer, and Chief Financial
Jon A. DeLuca Officer (Principal Financial
and Accounting Officer)
</TABLE>
<PAGE> 12
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
3(i) Articles of Amendment and Restatement to the Articles of
Incorporation
10.1 Investment Advisory Agreement between the Company and
Allied Capital Advisers, Inc., dated May 9, 1995.
10.7 Form of regional associate agreement.
10.8 Stock Option Plan
10.9 Dividend Reinvestment Plan
11 Statement regarding computation of per share earnings.
13 Excerpts from the 1996 Annual Report to Shareholders
23 Consents of Matthews, Carter and Boyce, independent
accountants.
27 Financial Data Schedule.
</TABLE>
<PAGE> 1
EXHIBIT 3(i)
ARTICLES OF AMENDMENT AND RESTATEMENT
TO THE
ARTICLES OF INCORPORATION
OF
ALLIED CAPITAL LENDING CORPORATION
(a Maryland Corporation)
FIRST: The name of the corporation (hereinafter referred to as the
"Corporation") is: Allied Capital Lending Corporation.
SECOND: The purposes for which the Corporation is organized are as
follows:
A. To operate under the Small Business Investment Act of
1958, as amended, in the manner and with the powers and
responsibilities, and subject to the limitations provided by, said Act
and the regulations issued by the Small Business Administration
thereunder;
B. To purchase, acquire, hold, own, improve, develop,
sell, convey, assign, release, mortgage, encumber, use, lease, hire,
manage, deal in and otherwise dispose of real property and personal
property of every name and nature or any interest therein, improved or
otherwise, including stocks and securities of other corporations; to
loan money; to take securities for the payment of all sums due the
Corporation; to sell, assign and release such securities;
C. To engage in, operate and acquire interests in any
kind of business, of whatever nature, which may be permitted by law;
D. To do any act or thing and exercise any power
suitable, convenient or proper for the accomplishment of any of the
purposes set forth herein or incidental to such purposes, or which at
any time may appear conducive to or expedient for the accomplishment
of any of such purposes; and
E. To have and exercise any and all powers and privileges
now or hereafter conferred by the general laws of the State
of Maryland upon corporations formed under such laws.
The foregoing enumeration of the purposes of the Corporation is made
in furtherance and not in limitation of the powers conferred upon the
Corporation by law. The mention of any particular purpose is not intended in
any manner to limit or restrict the generality of any other purpose
mentioned, or to limit or restrict any of the powers of the Corporation. The
Corporation shall have, enjoy and exercise all of the powers and rights now
or hereafter conferred by the laws of the State of Maryland upon corporations
of a similar character, it being the intention that the purposes set forth in
each of the paragraphs of this Article shall, except as otherwise expressly
provided, in nowise be limited or restricted by reference to or inference
from the terms of any other clause or paragraph of this or any other Article
of these Articles of Incorporation, or of any amendment thereto, and shall
each be regarded as independent, and construed as powers as well as purposes;
provided, however, that nothing herein contained shall be deemed to authorize
or permit the Corporation to carry on any business or exercise any power, or
do any act which a corporation formed under the general laws of the State of
Maryland may not at the time lawfully carry on or do.
<PAGE> 2
THIRD: The post office address of the principal office of the
Corporation in the State of Maryland is: 5422 Albia Road, Bethesda, Maryland
20816. The name and post office address of the resident agent of the
Corporation in the State of Maryland are: G. Cabell Williams III, 5422 Albia
Road, Bethesda (Montgomery County), Maryland 20816. Said resident agent is a
citizen of the State of Maryland and actually resides therein.
FOURTH:
A. The total number of shares of stock of all classes
which the Corporation has authority to issue is twenty million (20,000,000)
shares of capital stock, with a par value of One-Tenth of One Mil ($0.0001)
per share, amounting in aggregate par value to Two Thousand Dollars ($2,000).
All of such shares are initially classified as "Common Stock". The Board of
Directors may classify and reclassify any unissued shares of capital stock by
setting or changing 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.
B. The following is a description of the preferences,
conversion and other rights, voting powers, restrictions, limitations as to
dividends, qualifications and terms and conditions of redemption of the Common
Stock of the Corporation:
(1) Each share of Common Stock shall have one
vote, and, except as otherwise provided in respect of any class of stock
hereafter classified or reclassified, the exclusive voting power for all
purposes shall be vested in the holders of the Common Stock;
(2) Subject to the provisions of law and any
preferences of any class of stock hereafter classified or reclassified,
dividends, including dividends payable in shares of another class of the
Corporation's stock, may be paid on the Common Stock of the Corporation at
such time and in such amounts as the Board of Directors may deem advisable; and
(3) In the event of any liquidation, dissolution
or winding up of the Corporation, whether voluntary or involuntary, the holders
of the Common Stock shall be entitled, after payment or provision for payment
of the debts and other liabilities of the Corporation and the amount to which
the holders of any class of stock hereafter classified or reclassified having
a preference on distributions in the liquidation, dissolution or winding up
of the Corporation shall be entitled, together with the holders of any other
class of stock hereafter classified or reclassified not having a preference
on distributions in the liquidation, dissolution or winding up of the
Corporation, to share ratably in the remaining net of the Corporation.
C. Subject to the foregoing, the power of the Board of
Directors to classify and reclassify any of the shares of capital stock shall
include, without limitation, subject to the provisions of these Articles of
Incorporation, as they may subsequently be amended, authority to classify or
reclassify any unissued shares of such stock into a class or classes of
preferred stock, preference stock, special stock or other stock, and to
divide and classify shares of any class into one or more series of such
class, by determining, fixing, or altering one or more of the following:
(1) The distinctive designation of such class or
series and the number of shares to constitute such class or series; provided
that, unless otherwise prohibited by the terms of such or any other class or
series, the number of shares of any class or series may be decreased by the
Board of Directors in connection with any classification or reclassification
of unissued shares and the number of shares of such class or series may be
increased by the Board of Directors in connection with any such
classification or reclassification, and any shares of any class or series
which have been redeemed, purchased, otherwise acquired or converted into
shares of Common Stock or any other class or series shall become part of the
authorized capital stock and be subject to classification and
reclassification as provided in this sub-paragraph;
2
<PAGE> 3
(2) Whether or not and, if so, the rates, amount
and times at which, and the conditions under which, dividends shall be payable
on shares of such class or series, whether any such dividends shall rank
senior or junior to or on a parity with the dividends payable on any other
class or series of stock, and the status of any such dividends as cumulative,
cumulative to a limited extent, or non-cumulative and as participating or
non-participating;
(3) Whether or not shares of such class or
series shall have voting rights, in addition to any voting rights provided by
law and, if so, the terms of such voting rights;
(4) Whether or not shares of such class or
series shall have conversion or exchange privileges and, if so, the terms and
conditions thereof, including provision for adjustment of the conversion or
exchange rate in such events or at such times as the Board of Directors shall
determine;
(5) Whether or not shares of such class or
series shall be subject to redemption and, if so, the terms and conditions of
such redemption, including the date or dates upon or after which they shall be
redeemable and the amount per share payable in case of redemption, which amount
may vary under different conditions and at different redemption dates; and
whether or not there shall be any sinking fund or purchase account in respect
thereof, and if so, the terms thereof;
(6) The rights of the holders of shares of such
class or series upon the liquidation, dissolution or winding up of the affairs
of, or upon any distribution of assets of, the Corporation, which rights may
vary depending upon whether such liquidation, dissolution or winding up is
voluntary or involuntary and, if voluntary, may vary at different dates, and
whether such rights shall rank senior or junior to or on a parity with such
rights of any other class of series of stock;
(7) Whether or not there shall be any limitations
applicable, while shares of such class or series are outstanding, upon the
payment of dividends or making of distributions on, or the acquisition of, or
the use of moneys for purchase or redemption of, any stock of the Corporation,
or upon any other action of the Corporation, including action under this
sub-paragraph, and, if so, the terms and conditions thereof; and
(8) Any other preferences, rights, restrictions,
including restrictions on transferability, and qualifications of shares of such
class or series, not inconsistent with law and the Articles of Incorporation,
as they may subsequently be amended.
D. For the purposes hereof and of any Articles
Supplementary to these Articles of Incorporation providing for the
classification or reclassification of any shares of capital stock or of any
other charter document of the Corporation (unless otherwise provided in any
such articles or documents), any class or series of stock of the Corporation
shall be deemed to rank:
(1) prior to another class or series either as to
dividends or upon liquidation, if the holders of such class or series shall be
entitled to the receipt of dividends or of amounts distributable on
liquidation, dissolution or winding up, as the case may be, in preference or
priority to holders of such other class or series;
(2) on a parity with another class or series
either as to dividends or upon liquidation, whether or not the dividend rates,
dividend payment dates or redemption or liquidation price per share thereof be
different from those of such others, if the holders of such class or series of
stock shall be entitled to receipt of dividends or amounts distributable upon
liquidation, dissolution or winding up, as the case may be, in proportion to
their respective dividend rates or redemption or liquidation prices, without
preference or priority over the holders of such other class or series; and
3
<PAGE> 4
(3) junior to another class or series either as to
dividends or upon liquidation, if the rights of the holders of such class or
series shall be subject or subordinate to the rights of the holders of such
other class or series in respect of the receipt of dividends or the amounts
distributable upon liquidation, dissolution or winding up, as the case may be.
FIFTH: The number of directors of the Corporation shall be in
accordance with the provisions of the General Corporation Law of the State of
Maryland, which number may be changed pursuant to the provisions set forth in
the Bylaws of the Corporation, but shall never be less than the number
permitted by law. The number and names of those directors currently in office
are: George C. Williams, Jr., G. Cabell Williams, III, Joseph A. Clorety, III,
Wallace F. Holladay, T. Murray Toomey, George W. Siguler, Henry J. Kaufman,
Warren K. Montouri, Guy T. Steuart, II and David Gladstone.
SIXTH: The following provisions are hereby adopted for the purpose
of defining, limiting and regulating the powers of the Corporation and of the
Board of Directors and stockholders:
A. The Board of Directors of the Corporation is hereby
empowered to authorize and direct the issuance from time to time or at
any time or times of the shares of stock of the Corporation of any
class, now or hereafter authorized, any options or warrants for such
shares permitted by law, any rights to subscribe to or purchase such
shares and any other securities of the Corporation, for such
consideration as the Board of Directors may deem advisable, subject to
such limitations and restrictions, if any, as may be set forth in the
Bylaws of the Corporation.
B. Unless specifically provided elsewhere herein or in
any Articles Supplementary, no holder of shares of stock of the
Corporation of any class, now or hereafter authorized, shall have any
preferential or preemptive right to subscribe for, purchase or receive
(i) any shares of stock of the Corporation of any class, now or
hereafter authorized, (ii) any options or warrants for such shares
permitted by law, (iii) any rights to subscribe to or purchase such
shares, or (iv) any other securities of the Corporation which may at any
time or from time to time be issued, sold or offered for sale by the
Corporation.
C. The Board of Directors of the Corporation is hereby
empowered to adopt Bylaw provisions with respect to the indemnification
of officers, employees, agents and other persons and to make such other
indemnification as they shall deem expedient and in the best interests
of the Corporation, as such provisions are consistent with Section C of
Article SEVENTH and to the extent permitted by law.
D. The provisions relating to certain special voting
requirements set forth in Title 3, Subtitle 6 of the General
Corporation Law of the State of Maryland and the provisions relating
to certain control shares set forth in Title 3, Subtitle 7 of the
General Corporation Law of the State of Maryland shall not be
applicable, pursuant to Sections 3-603(e)(iii) and 3-702(b) thereof,
respectively, to the shares of the Corporation which are owned by, or
which shall in the future be issued to and owned by, any employee
stock ownership plan, incentive stock ownership plan or other similar
plan established now or in the future for the benefit of the
Corporation's directors, officers, employees or affiliates, and,
without limiting the foregoing, none of such shares owned by any such
plan shall, for purposes of such subtitles, be aggregated with any
shares owned individually by any beneficiaries of any such plan.
E. The Board of Directors of the Corporation is hereby
authorized to make, amend, alter, repeal or rescind the Bylaws of the
Corporation.
4
<PAGE> 5
F. The Corporation reserves the right to amend these
Articles of Incorporation in any way which alters the contract rights,
as expressly set forth in these Articles of Incorporation, of any
outstanding stock of the Corporation and substantially adversely affects
any of the rights of any of the holders of any outstanding stock of the
Corporation.
SEVENTH: A. Subject to Section C below, the Corporation shall indemnify
(i) its directors and officers, whether serving the Corporation or at its
request any other entity, to the full extent permitted by the General Laws of
the State of Maryland now or hereafter in force, including the advance of
expenses under the procedures and to the full extent permitted by law and (ii)
other employees and agents to such extent as shall be authorized by the Board
of Directors or the Corporation's Bylaws and be permitted by law. The
foregoing rights of indemnification shall not be exclusive of any other rights
to which those seeking indemnification may be entitled. The Board of Directors
may take such action as is necessary to carry out these indemnification
provisions and is expressly empowered to adopt, approve and amend from time to
time such Bylaws, resolutions or contracts implementing such provisions or such
further indemnification arrangements as are consistent with Section C below and
as may be permitted by law. No amendment to or repeal of this Article SEVENTH
shall limit or eliminate the right to indemnification provided hereunder with
respect to acts or omissions occurring prior to such amendment or repeal.
B. Subject to Section C below, to the fullest extent
permitted by Maryland statutory or decisional law, as amended or interpreted,
no director or officer of this Corporation shall be personally liable to the
Corporation or its stockholders for money damages. No amendment to or repeal
of this Article SEVENTH shall limit or eliminate the benefits provided to
directors and officers under this provision with respect to any act or
omission which occurred prior to such amendment or repeal.
C. Notwithstanding the foregoing Sections A and B of
this Article SEVENTH, the following limitations shall apply:
(a) In this Section the following words have the meaning indicated.
(a)(1) "Director" means any person who is or was a 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 corporation, partnership, joint venture,
other enterprise or employee benefit plan.
(a)(2) "Corporation" includes any predecessor entity of the Corporation
in a merger, consolidation or other transaction in which the predecessor's
existence ceased upon the consummation of the transaction.
(a)(3) "Expenses" include attorneys' fees.
(a)(4) "Official capacity" means the following:
(i) When used with respect to a director, the office of
director in the Corporation,; and
(ii) When used with respect to a person other than a
director as contemplated in subsection (j), the elective or appointive office
in the Corporation held by the officer, or the employment or agency
relationship undertaken by the employee or agent in behalf of the Corporation.
(iii) "Official capacity" does not include service, for any
other corporation or any partnership, joint venture, trust, other enterprise
or employee benefit plan.
(a)(5) "Party" includes a person who was, is, or is threatened to be
made a named defendant or respondent in a proceeding.
(a)(6) "Proceeding" means any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative.
(b) Subject to the limitations set forth in subsection (c) of this
section, (1) the Corporation shall indemnify any director made a party to any
proceeding by reason of service in that capacity unless it is established
that:
5
<PAGE> 6
(i) The act or omission of the director was material to
the matter giving rise to the proceeding; and
1. Was committed in bad faith; or
2. Was the result of active and deliberate
dishonesty; or
(ii) The director actually received an improper personal
benefit in money, property or services; or
(iii) In the case of any criminal proceeding, the director
had reasonable cause to believe that the act or omission was unlawful.
(b)(2)(i) Indemnification shall be against judgments, penalties, fines,
settlements and reasonable expenses actually incurred by the director in
connection with the proceeding.
(ii) However, 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.
(b)(3)(i) The termination of any proceeding by judgment, order
or settlement does not create a presumption that the director did not meet the
requisite standard of conduct set forth in this subsection.
(ii) The termination of any proceeding by conviction, or a
plea of nolo contendere or its equivalent, or an entry of an order of
probation prior to judgment, creates a rebuttable presumption that the director
did not meet that standard of conduct.
(c) A director may not be indemnified under subsection (b) of this
section in respect of any proceeding charging improper personal benefit to the
director, whether or not involving action in the director's official capacity,
in which the director was adjudged to be liable on the basis of an act or
omission (i) which such director did not reasonably believe to be in, or not
opposed to, the best interests of the Corporation, or that (ii) for which a
personal benefit was improperly received.
(d)(1) A director who has been successful, on the merits, in the
defense of any proceeding referred to in subsection (b) of this section (but
subject to the limitations of subsection (c) of this section) shall be
indemnified against reasonable expenses incurred by the director in connection
with the proceeding.
(d)(2) A court of appropriate jurisdiction, upon application of a
director and such notice as the court shall require, may order indemnification
in the following circumstances:
(i) If it determines a director is entitled to
reimbursement under paragraph (1) of this subsection, the court shall order
indemnification, in which case the director shall be entitled to recover the
expenses of securing such reimbursement; or
(ii) If it determines that the director is vindicated or
otherwise fairly and reasonably entitled to indemnification in view of all the
relevant circumstances, whether or not the director has met the standards of
conduct set forth in subsection (b) of this section or has been adjudged liable
under the circumstance described in subsection (c) of this section, the court
may order such indemnification as the court shall deem proper. However,
indemnification with respect to any proceeding by or in the right of the
Corporation or in which liability shall have been adjudged in the circumstances
described in subsection (c) shall be limited to expenses.
(d)(3) A court of appropriate jurisdiction may be the same court in
which the proceeding involving the director's liability took place.
(e)(1) Indemnification under subsection (b) of this section may not be
made by the Corporation unless authorized for a specific proceeding after a
determination has been made that indemnification of the director is permissible
in the circumstances because the director has met the standard of conduct set
forth in subsections (b) and (c) of this section.
(e)(2) Such determination shall be made:
(i) By the Board of Directors by a majority vote of a
quorum consisting of directors not parties to the proceeding, or, if such a
quorum cannot be obtained, then by a majority vote of a committee of the board
consisting solely of two or more directors not parties to such proceeding and
who were duly designated to act in the matter by a majority vote of the full
board in which the designated directors who are parties may participate; or
6
<PAGE> 7
(ii) By special legal counsel selected by the Board of
Directors or a committee of the board by vote as set forth in subparagraph (i)
of this paragraph, or, if the requisite quorum of the full board cannot be
obtained therefor and the committee cannot be established, by a majority vote
of the full board in which director who are parties may participate; or
(iii) By the stockholders.
(e)(3) Authorization of indemnification and determination as to
reasonableness of expenses shall be made in the same manner as the
determination that indemnification is permissible. However, if the
determination that indemnification is permissible is made by special legal
counsel, authorization of indemnification and determination as to
reasonableness of expenses shall be made in the manner specified in
subparagraph (ii) of paragraph (2) of this subsection for selection of such
counsel.
(e)(4) Shares held by directors who are parties to the proceeding may
not be voted on the subject matter under this subsection.
(f)(1) Reasonable expenses incurred by a director who is a party to a
proceeding may be paid or reimbursed by the Corporation in advance of the final
disposition of the proceeding upon receipt by the Corporation of:
(i) A written affirmation by the director of the
director's good faith belief that the standard of conduct necessary for
indemnification by the Corporation as authorized in this section has been met;
and
(ii) A written undertaking by or on behalf of the director
to repay the amount if it shall ultimately be determined that the standard of
conduct has not been met.
(f)(2) The undertaking required by subparagraph (ii) of paragraph (1) of
this subsection shall be an unlimited general obligation of the director but
need not be secured and may be accepted without reference to financial ability
to make the repayment.
(f)(3) Payments under this subsection shall be made as provided by the
Bylaws or contract or as specified in subsection (e) of this section.
(g) Subject to the standard of conduct set forth in subsections
(b) and (c) of this section, the indemnification and advancement of expenses
provided or authorized by this section may not be deemed exclusive of any other
rights, by indemnification or otherwise, to which a director may be entitled
under the Bylaws, a resolution of stockholders or directors, an agreement or
otherwise, both as to action in an official capacity and as to action in
another capacity while holding such office.
(h) This section does not limit the Corporation's power to pay or
reimburse expenses incurred by a director in connection with an appearance as a
witness in a proceeding at a time when the director has not been made a named
defendant or respondent in the proceeding.
(i) For purposes of this section;
(ii) The Corporation shall be deemed to have requested a
director to serve an employee benefit plan where the performance of the
director's duties to the Corporation also imposes duties on, or otherwise
involves services by, the director to the plan or participants or beneficiaries
of the plan:
(h)(2) Excise taxes assessed on a director with respect to an employee
benefit plan pursuant to applicable law shall be deemed fines; and
(h)(3) Action taken or omitted by the director with respect to an
employee benefit plan in the performance of the director's duties for a purpose
reasonably believed by the director to be in the best interest of the
participants and beneficiaries of the plan shall be deemed to be for a purpose
which is not opposed to the best interests of the Corporation.
(j)(1) An officer of the Corporation shall be indemnified as and to the
extent provided in subsection (d) of this section for a director and shall be
entitled, to the same extent as a director, to seek indemnification pursuant to
the provisions of subsection (d);
(j)(2) The Corporation shall indemnify and advance expenses to an
officer, employee or agent of the Corporation to the same extent that it
indemnifies directors under this section; and
7
<PAGE> 8
(j)(3) The Corporation, in addition, shall indemnify and advance
expenses to an officer, employee or agent who is not a director to such further
extent, consistent with law, as may be provided by its Bylaws, general or
specific action of its Board of Directors or contract.
(k)(1) The Corporation may purchase and maintain insurance on behalf of
any person who is or was a director, officer, employee or agent of the
Corporation, or who, while director, officer, employee or agent of the
Corporation, is or was serving at the request of the Corporation as a director,
officer, partner, employee or agent of another corporation, partnership, joint
venture, trust, other enterprise or employee benefit plan against any liability
asserted against and incurred by such person in any such capacity or arising
out of such person's position, whether or not the corporation would have the
power to indemnify against liability under the provisions of this section.
(k)(2) The Corporation may provide similar protection, including a
trust fund, letter of credit, or surety bond, not inconsistent with this
section.
(k)(3) The insurance or similar protection may be provided by a
subsidiary or an affiliate of the Corporation.
(l) Any indemnification of, or advance of expenses to, a director
in accordance with this section, if arising out of a proceeding by or in the
right of the Corporation, shall be reported in writing to the stockholders with
the notice of the next stockholders' meeting or prior to the meeting.
EIGHTH: The duration of the Corporation shall be perpetual.
8
<PAGE> 1
EXHIBIT 10.1
ALLIED CAPITAL LENDING CORPORATION
INVESTMENT ADVISORY AGREEMENT
THIS AGREEMENT, dated as of the last date set forth below, is made by and
between Allied Capital Lending Corporation, a Maryland corporation (together
with its investment company subsidiaries, the "Company"), and Allied Capital
Advisers, Inc., a Maryland corporation (the "Adviser").
1. PURPOSE OF THE COMPANY.
The Company is organized under the laws of the State of Maryland as a
closed-end investment company registered as such under Investment Company Act
of 1940 (the "ICA") and has elected under the ICA to be regulated as a business
development company. The Company also is a small business lending company
approved by the U.S. Small Business Administration ("SBA").
2. THE INVESTMENT ADVISER.
The Adviser is registered as an investment adviser under the Investment
Advisers Act of 1940, as amended, and has entered into this Agreement with the
Company to act as its investment adviser. The terms of this Agreement are as
follows:
3. OBLIGATIONS OF THE ADVISER.
The Company hereby engages the Adviser's services as the Company's
investment adviser. As such, the Adviser will:
(a) advise the Company as to the acquisition and disposition of
investments in accordance with the Company's investment policies;
(b) make available and, if requested by entities in the securities of
which the Company has invested or is proposing to invest, render
managerial assistance to, and exercise management rights in, such
entities;
(c) provide to the Company office space and facilities and the services to
the extent required of the Adviser's officers and employees;
(d) maintain the Company's books of account and other records and files;
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(e) report to the Company's Board of Directors, or to any committee or
officer of the Company acting pursuant to the authority of the Board, at
such times and in such detail as the Board deems appropriate in order to
enable the Company to determine that its investment policies are being
observed and implemented and that the Adviser's obligations hereunder are
being fulfilled. Any investment program undertaken by the Adviser pursuant
hereto and any other activities undertaken by the Adviser on the Company's
behalf shall at all times be subject to any directives of the Company's
Board of Directors or any duly constituted committee or officer of the
Company acting pursuant to authority of the Company's Board of Directors;
(f) subject to the Company's investment policies and any specific
directives from the Company's Board of Directors, effect acquisitions and
dispositions for the Company's account in Adviser's discretion and to
arrange for the documents representing investments acquired to be
delivered to a custodian of the Company; and
(g) on a continuing basis, monitor, manage and service the Company's loan
and/or investment portfolio.
4. EXPENSES TO BE PAID BY THE ADVISER.
The Adviser will pay for its own account all expenses incurred by the
Adviser in rendering the services to be rendered by the Adviser hereunder.
Without limiting the generality of the foregoing, the Adviser will pay the
salaries and other employee benefits of the persons in its organization whom
the Adviser may engage to render such services, including without limitation
persons who may from time to time act as the Company's officers.
Notwithstanding the foregoing, the Board of Directors of the Company may, in
its sole discretion, award to such officers options to acquire shares of the
Company's common stock, which shall not be deemed part of their salaries or
other employee benefits for the purpose of this paragraph.
5. EXPENSES TO BE PAID BY THE COMPANY.
The Company will reimburse the Adviser promptly, against the Adviser's
voucher, for any expenses incurred by the Adviser for the Company's account.
Without limitation, such expenses shall include all expenses of any offering
and sale by the Company of its shares and, except as otherwise specifically
provided above, all expenses of the Company's operations; the fees and
disbursements of the Company's counsel, accountants, custodian, transfer agent
and registrar; fees and expenses incurred in producing and effecting filings
with federal and state securities administrators; costs of the Company's
periodic reports to and other communications with the Company's shareholders;
costs of promoting the Company's stock; fees and expenses of members of the
Company's Board of Directors who are not directors, officers or employees of
the Adviser or of any entity affiliated with the Adviser, and fees of directors
who are such officers, directors or employees; premiums for the fidelity bond
maintained by the Company pursuant to ICA Section 17; and all transaction costs
incident to the acquisition and disposition of securities by the Company,
including, without limitation, legal and accounting fees and other professional
or technical fees and expenses (e.g., credit report,
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title search and delivery charges, costs of specialized consultants such as
accountants or industry- specific technical experts, and deal-specific travel
expenses) incurred in monitoring, negotiating and working-out such investments,
as well as responding to any litigation arising therefrom. If the Company for
its corporate purposes uses the services of attorneys or paraprofessionals on
the staff of the Adviser in lieu of outside counsel, the Company will reimburse
the Adviser for such services at hourly rates calculated to cover the cost of
such services, as well as for incidental disbursements. The Company will
reimburse the Adviser promptly, against the Adviser's voucher, for (a) any
origination fee with respect to any loan or investment made by the Company that
was identified or referred to the Company by any third party with which the
Company or the Adviser then has a written agreement or arrangement that
specifies the amount or rate of such fee or (b) any origination fee with
respect to any loan or investment made by the Company that was identified or
referred to the Company by any third party with which the Company or the
Adviser then does not have a written agreement or arrangement. All such
origination fees reimbursed to the Adviser will be reviewed as of the end of
each calendar quarter by the Company's Board of Directors.
6. RECEIPT OF FEES.
To the extent permitted under SBA regulations, all fees that may be paid
by or for the account of an entity in which the Company has invested or is
proposing to invest in connection with an investment transaction in which the
Company participates or provides follow-on managerial assistance will be
treated as commitment fees or management fees and will be received by the
Company, pro rata to the Company's participation in such transaction.
Nevertheless, the Adviser will be entitled to retain for its own account any
fees paid to the Adviser by or for the account of any entity, including an
entity in which the Company may have invested, for special investment banking
or consulting work performed for the entity which is not related to such
transaction or follow-on managerial assistance. The Adviser will report to the
Company's Board of Directors not less often than quarterly all fees received by
the Adviser from any source and whether, in its opinion, any such fee is one
that the Adviser is entitled to retain under the provisions of this paragraph.
In the event that any member of the Company's Board of Directors should
disagree, the matter shall be conclusively resolved by a majority of the
Company's Board of Directors, including a majority of its members who are not
interested persons of the Company.
7. COMPENSATION TO THE ADVISER.
As the Adviser's sole and exclusive compensation for its services to be
rendered pursuant to the terms set out above, the Company will, during the term
of this Agreement, pay to the Adviser, quarterly, an investment advisory fee
equal to (a) 0.625% per quarter of the quarter-end value of the Company's
consolidated total assets (less the company's Interim Investments and cash) and
(b) 0.125% per quarter of the quarter-end value of the Company's consolidated
Interim Investments and cash. As the Adviser's sole and exclusive compensation
for its services in identifying and referring to the Company any loan or
investment opportunity during the term hereof, the Company shall pay to the
Adviser an origination fee equal to the amount that would have been paid to an
independent
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third party with respect to any such loan or other investment originated by the
Company during the subject calendar quarter.
For this purpose "Interim Investments" are defined as short-term
securities issued or guaranteed by the U.S. government or an agency or
instrumentality thereof, or in repurchase agreements fully collateralized by
such securities.
For the purpose of calculating the investment advisory fee, the values of
the Company's assets will be determined as of the end of each calendar quarter
by the Board of Directors. For purposes of calculating the origination fee, the
aggregate principal amount of loans identified or referred to the Company by
the Adviser shall be reviewed as of the end of each calendar quarter by the
Board of Directors. The Company will pay the investment advisory fee and the
origination fee, if any, with respect to a calendar quarter as soon as
practicable after the values of the Company's assets have been determined for
such quarter and/or the aggregate principal amount of loans identified or
referred to the Company by the Adviser has been reviewed for such quarter. If
the termination of the Adviser's services hereunder does not coincide with the
last day of a calendar quarter, then any investment advisory fee determined in
accordance with this paragraph shall be multiplied by the ratio of the number
of days in such quarter during which Adviser rendered services to the total
number of days in such quarter.
8. INDEMNIFICATION OF THE ADVISER.
The Company confirms that in performing services hereunder the Adviser
will be an agent of the Company for the purpose of the indemnification
provisions of the Company's By-Laws, subject, however, to the same limitations
as though the Adviser were a director or officer of the Company. The Adviser
shall not be liable to the Company, its shareholders or its creditors except
for violations of law or for conduct which would preclude the Adviser from
being indemnified under such provisions.
9. APPROVAL OF THE AGREEMENT.
The Company represents that the Company's Board of Directors, including a
majority of its members who are not interested persons of the Company, approved
this Agreement at a meeting held on March 21, 1995 at which a quorum was
personally present, and a majority, as defined in the ICA, of the Company's
shareholders approved it at a meeting held on the date hereof. This Agreement
shall continue in effect until the annual meeting of the shareholders of the
Company to be held in 1996 and thereafter from year to year as long as such
continuance is specifically approved at least annually by the Company's Board
of Directors, including a majority of its members who are not interested
persons of the Company, or by vote of the holders of a majority, as defined in
the ICA, of the Company's outstanding voting securities.
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10. TERMINATION OF THE AGREEMENT.
The foregoing notwithstanding, this Agreement may be terminated by the
Company at any time, without payment of any penalty, on 60 days' written notice
to the Adviser if the decision to terminate has been made by the Company's Board
of Directors or by vote of the holders of a majority, as defined in the ICA, of
the Company's outstanding securities. This Agreement will terminate
automatically in the event of its assignment, as defined in the ICA. The
Adviser may also terminate this Agreement on 60 days' written notice to the
Company; provided, however, that the Adviser may not terminate this Agreement
unless another investment adviser has been approved by the vote of a majority,
as defined in the ICA, of the Company's outstanding securities and by the
Company's board of Directors, including a majority of its members who are not
parties to such agreement of interested persons of any such party.
11. JURISDICTION.
This Agreement shall be governed by the laws of the State of Maryland.
IN WITNESS WHEREOF, the parties have executed this Agreement on and as
of May 9th, 1995
ALLIED CAPITAL ADVISERS, INC. ALLIED CAPITAL LENDING
CORPORATION
By: /s/ JOAN M. SWEENEY By: /s/ KATHERINE C. MARIEN
-------------------------- ------------------------------
Joan M. Sweeney, President Katherine C. Marien, President
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EXHIBIT 10.7
REGIONAL ASSOCIATE AGREEMENT
This Regional Associate Agreement (this "Agreement") is made between
Allied Capital Lending Corporation, a Maryland corporation ("Allied"), and the
person identified in Schedule A hereto (the "RA").
Allied is a diversified financial services firm engaged in, among other
activities, the business of providing financing for commercial borrowers.
Allied desires to be introduced to prospective loan and other investment
opportunities, and the RA desires to submit such opportunities to Allied for
Allied's consideration.
In consideration of the foregoing, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the parties hereto, intending to be legally and equitably bound, hereby agree
as set forth below.
SECTION 1. TERMS OF ENGAGEMENT.
(a) INTRODUCTION AND ACCEPTANCE OF INVESTMENT OPPORTUNITIES. The RA shall
introduce to Allied any loan or other investment opportunity that the RA
reasonably believes will satisfy Allied's established investment criteria or
designated product line (each such prospective loan or other investment
opportunity, an "Investment Opportunity") by timely delivery to Allied of a
written description of such Investment Opportunity.
(b) RIGHTS OF FIRST REFUSAL. The RA shall use its good faith best efforts
to refer to Allied all Investment Opportunities that the RA reasonably believes
will satisfy Allied's established investment criteria and to assist Allied in
completing the transaction. Within ten (10) business days after receipt of a
written description of an Investment Opportunity from the RA, Allied will
notify the RA as to whether or not Allied intends to pursue the Investment
Opportunity. If Allied so accepts the Investment Opportunity, then the
following terms of this Agreement shall control; if not so accepted, then the
RA may refer the Investment Opportunity to other lenders.
(c) DUE DILIGENCE; DISCRETION. Allied will, to the extent it deems
necessary, perform its own due diligence investigation regarding each
Investment Opportunity, and Allied may enlist the RA's assistance in gathering
information about the Investment Opportunity and in preparing transaction
write-ups, in addition to that provided pursuant to Subsection (a) above.
Notwithstanding any other provisions of this Agreement, Allied may, in its
absolute discretion, refuse to consider any Investment Opportunity.
(d) SUBLICENSE AGREEMENT. As a condition of Allied entering into this
Agreement, the RA shall enter into a Sublicense Agreement substantially in the
form attached hereto as Exhibit A granting the RA the non- exclusive right to
use certain of Allied's trade names, service marks, logos, emblems and other
indicia of origin.
(e) MARKET AREA FOR SBA 7(a) AND 504 LOAN PRODUCTS ONLY: The RA may
actively solicit new business using the licensed marks set forth in the
Sublicense Agreement attached hereto as Exhibit A in the Market Area as defined
in Schedule A.
The RA may not solicit Investment Opportunities or otherwise pursue new
business using the Licensed Marks outside the Marketing Area, but may be
compensated for each Investment Opportunity closed by Allied outside of the
Marketing Area, if such Investment Opportunity was introduced to Allied by the
RA in accordance with the procedures of Section 1(a) above. At Allied's sole
discretion, Allied may
<PAGE> 2
require that for Investment Opportunities introduced
outside of the Marketing Area, the assistance of another RA be enlisted for Due
Diligence services as described in Section 1(C) above. In that case, any
compensation paid by Allied pursuant to the Investment Opportunity will be
shared by each RA, as they shall mutually agree.
Allied reserves the right to develop relationships with other
organizations who are not RA's and do not license the Allied Capital Licensed
Marks for the purpose of referral of small business investment opportunities
("Referral Relationship"). If an Investment Opportunity is introduced to Allied
through a Referral Relationship, Allied may request the assistance of another
RA to be enlisted for Due Diligence services as described in Section 1(C)
above. In that case, Allied will agree with the RA on the amount of
compensation to be shared with the Referral Relationship source, not to exceed
one percent (1%) of the loan amount.
Allied may have assigned other RA's that have sublicensed the Licensed
Marks to the Marketing Area as identified on Schedule A. These RA's may also
solicit within the Marketing Area. Allied will not assign any new RA that has
sublicensed the Licensed Marks other than those RA's named or to be named as
listed on Schedule A to the Marketing Area within the term of this Agreement if
the RA satisfies the Marketing Area Production Levels set forth in Schedule A.
(f) MARKETING AREA FOR NON-SBA 7(a) AND 504 LOAN PRODUCTS: Allied has not
identified specific marketing areas for loan products other than SBA 7(a) and
504 loan products, however, Allied reserves the right to restrict any RA's
solicitation activity using Licensed Marks to a specific geographic location
for non-SBA7(a) and 504 loan products at any time.
SECTION 2. COMPENSATION. For each Investment Opportunity Allied accepts
and thereafter actually closes and funds, Allied will pay to the RA the amounts
stated to be payable in accordance with the provisions set forth in the Loan
Fee Schedule, Payment Schedule and Rebate Provisions of Schedule A. The RA
shall not receive any commission, brokerage, finder's or other fee or
compensation from the borrower or other beneficiary in connection with any such
Investment Opportunity without Allied's prior written consent.
SECTION 3. COVENANTS.
(a) STANDARDS OF OPERATION. The RA shall at all times during the term of
this Agreement operate the RA's business in compliance with all applicable
laws, rules and regulations and shall maintain all licenses or other
authorizations necessary for the operation of such business. The RA will not
knowingly operate the RA's business in any way which adversely reflects upon
Allied.
(b) NO TRANSFERS. Neither this Agreement nor the RA's rights and duties
hereunder may be sold, assigned or delegated by the RA without the prior
written consent of Allied.
(c) CONFIDENTIALITY. The RA shall at all times use and maintain in
confidence any proprietary information provided to the RA from Allied. For this
purpose, "proprietary information" means any information, oral or written, that
is not generally known outside of Allied that relates to its marketing plans,
customer lists, pricing methods, general financial performance data, or to
Allied's borrowers, but does not include proprietary information which is
received by the RA from a third party without restriction. The RA will receive
and maintain all proprietary information in confidence using all reasonable
care and, except as
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provided herein, shall not use proprietary information for the RA's benefit or
disclose it in whole or in part to any third party except as may be required or
contemplated in the course of the engagement hereunder. The RA agrees to
maintain the confidentiality of all proprietary information during the term of
the Agreement and for a period of two (2) years after its termination.
(d) INDEPENDENT STATUS. The RA shall at all times be an independent
contractor hereunder, rather than a co-venturer, agent, employee, franchisee or
representative of Allied. The RA shall work independently without supervision
by Allied, shall be responsible for its own taxes, shall not be required to
work on a continuing daily basis or on any specific work schedule and shall not
be provided with office space or administrative support by Allied. Allied
hereby acknowledges and agrees that the RA may engage in other businesses and
ventures.
(e) INDEMNIFICATION. Each of the RA and Allied shall indemnify, defend and
hold harmless the other from and against any and all losses claims, damages,
liabilities and expenses whatsoever, joint or several, as incurred, as to which
such other party may become subject under any applicable federal or state law
or otherwise, related to or arising out of or based upon any act or omission of
the RA or Allied, as the case may be, in connection with a breach or
misrepresentation or omission by such party of such party's obligations
hereunder or the representations contained herein or in connection with any
transactions contemplated hereby, and will reimburse the other party for all
legal or other expenses (including, without limitation, attorneys' fees and
expenses) as they are incurred in connection with the investigation of,
preparation for or defense of any pending or threatened claim or any action or
proceeding arising therefrom, whether or not such other party is a named party
in any such claim, action or proceeding; provided, however, that no party shall
have liability to the other to the extent that any such loss, claim, damage,
liability or expense is found in a final judgment by a court of competent
jurisdiction to have resulted from such other party's willful misconduct or
gross negligence.
SECTION 4. DURATION OF AGREEMENT.
(a) TERM. This Agreement shall take effect as of the date of execution and
shall remain in effect through December 31, 1997. Thereafter, the term of this
Agreement may be renewed for an additional one year period if agreed to by both
parties.
(b) TERMINATION. Notwithstanding any other provision hereof, Allied may
terminate this Agreement upon thirty days' prior written notice to the RA on
occurrence of any of one or more of the following events:
1. UNAUTHORIZED LOAN COMMITMENTS RA indicates in any way that RA can cause
or commit ALLIED or any other entity now doing business using name that
includes words "Allied Capital", or any of their subsidiaries or
affiliates, to fund any loan or investment.
2. NON-PERFORMANCE RA fails to perform or breaches any covenant,
obligation, term, condition, warranty or certification herein and fails to
cure such noncompliance within thirty (30) days after ALLIED gives written
notice thereof; provided, however, that such opportunity to cure shall be
limited to no more than two (2) such instances in any twelve (12) month
period.
3. FALSEHOOD RA knowingly makes, or has made, any materially false
statement or report to ALLIED in connection with this Agreement or
otherwise.
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4. BREACH OF COVENANTS RA operates the business conducted hereunder in a
manner contrary to or inconsistent with the Licensed Marks or this
Agreement, and RA fails to cure such deficiency within thirty (30) days
after ALLIED gives written notice to cure.
5. UNAUTHORIZED TRANSFERS RA attempts to transfer, in any way, this
Agreement in violation of the terms hereof.
6. FAILURE TO OPERATE AND CONTROL RA abandons or surrenders control of or
fails to operate actively the business conducted under this Agreement for
seven (7) or more consecutive days, except for illness, normal vacations
and holidays.
7. CRIMINAL CONVICTION RA or any person owning an interest in or any key
employee of RA is convicted of a felony, a crime of moral turpitude, or
any other crime or offense relating to the financial services business.
8. VIOLATION OF LAW RA fails, for a period of ten (10) days after
notification of non-compliance, to comply with any law or regulation
applicable to its financial services business, including without
limitation the Investment Company Act of 1940, as amended, the Investment
Advisers Act of 1940, as amended, and all other applicable securities and
broker-dealer laws.
This Agreement shall automatically terminate in the event of a material
breach of any terms of this Agreement. The RA's right to receive any
compensation pursuant to an Investment Opportunity presented by the RA and duly
accepted by Allied before such termination shall remain undiminished by any
such notice of termination.
SECTION 5. MISCELLANEOUS.
(a) NOTICES. Any notice required to be given hereunder shall be sufficient
if in writing, and sent by certified or registered mail, return receipt
requested, first-class postage prepaid, if to the RA at the address listed in
Schedule A hereto, and if to Allied, to its office located at 1666 K Street,
N.W., 9th Floor, Washington, DC 20006.
(b) GOVERNING LAW. This Agreement, including any exhibits hereto, shall be
construed in accordance with and governed by the laws of the State of Maryland,
without regard to its principles of conflicts of law. Venue for any
adjudication hereof shall be only in the courts of the State of Maryland or the
federal courts in the State of Maryland, the jurisdiction of which courts both
parties hereby consent to as the agreement of the parties, as not inconvenient
and as not subject to review by any court other than such courts in Maryland.
Both parties intend and agree that the courts of the jurisdictions in which the
RA conducts business should afford full faith and credit to any judgment
rendered by a court of the State of Maryland against the RA, and should hold
that the Maryland courts have jurisdiction to enter a valid, in personam
judgment against the RA. The RA agrees that service of any summons and/or
complaint, and other process which may be served in any action, may be made by
mailing via registered mail or delivering a copy of such process to the RA at
its address specified below, and the RA agrees that this submission to
jurisdiction to consent to service of process are reasonable and made for the
express benefit of Allied.
(c) WAIVER OF JURY TRIAL. Each party to this Agreement agrees that any
suit, action or proceeding, whether claim or counterclaim, brought or
instituted by any party hereto or any successor or assign of any
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<PAGE> 5
party on or with respect to this Agreement which in any way relates, directly
or indirectly, to the subject matter hereof or any event, transaction or
occurrence arising out of or in any way connected with this Agreement or the
dealings of the parties with respect thereto, shall be tried only by a court
and not by a jury. EACH PARTY HEREBY EXPRESSLY WAIVES ANY RIGHT TO A TRIAL BY
JURY IN ANY SUCH SUIT, ACTION OR PROCEEDING. The RA acknowledges and agrees
that this Section is a specific and material aspect of this Agreement between
the parties and that Allied would not enter into this Agreement with the RA if
this waiver of jury trial section were not a part of this Agreement.
(d) ENTIRE AGREEMENT; MODIFICATIONS AND WAIVERS; SEVERABILITY. This
Agreement represents the entire agreement and understanding by and between
Allied and the RA with respect to the services herein referred to, and no
representations, promises, agreements or understandings, written or oral, not
herein contained shall be of any force or effect. No change or modification
hereof shall be valid or binding unless the same is in writing and signed by
the party against whom such waiver is sought to be enforced; moreover, no valid
waiver of any provision of this Agreement at any time shall be deemed a waiver
of any other provision of this Agreement at such time or will be deemed a valid
waiver of such provision at any other time. In the event any provision
contained herein shall be held to be invalid, illegal or unenforceable, it
shall not affect any other provision hereof, and this Agreement shall be
construed as if such invalid, illegal or unenforceable provision had never been
contained herein, unless to do so would cause this Agreement to fail of its
essential purpose.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
____________, 1997.
ALLIED CAPITAL LENDING CORPORATION
1666 K Street, N.W., 9th Floor, Washington, D.C. 20006
By:
--------------------------------------------
Joan M. Sweeney
Executive Vice President
REGIONAL ASSOCIATE
-----------------------------------------------
Name:
Title:
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EXHIBIT 10.8
ALLIED CAPITAL LENDING 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 Lending 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," 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 "disinterested person," as defined in Rule 16b-3 promulgated under the
Securities Exchange Act of 1934, as amended, (b) have no financial interest in
grants of stock options to officers of the Company under this Plan and (c) not
be an "interested person," as defined in ss.2(a)(19) of the Investment Company
Act of 1940, as amended (the "Act"), of the Company. The Committee shall
interpret this Plan and, to the extent and in the manner contemplated herein,
shall exercise the discretion reserved to it hereunder. The Committee may
prescribe, amend and rescind rules and regulations relating to this Plan and to
make all other determinations necessary for its administration. The decision of
the Committee on any interpretation of this Plan or administration hereof, if
in compliance with the provisions of the Act and regulations promulgated
thereunder, shall be final and binding with respect to the Company, any
optionee or any person claiming to have rights as, or on behalf of, any
optionee.
3. SHARES SUBJECT TO THE PLAN
The shares subject to option and the other provisions of this Plan shall
be shares of the Company's common stock, par value $.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 504,860 shares, which includes all
shares with respect to which options have been granted or surrendered for
payment in cash or other consideration pursuant to this Plan or predecessor
forms of this Plan. In the event any option shall cease to be exercisable in
whole or in part for any reason, the shares which were covered by such option,
but as to which the option had not been exercised, shall again be available
under this Plan. Shares may be made available from authorized, unissued or
reacquired stock or partly from each.
4. PARTICIPANTS
(a) Officers. The Committee shall determine and designate from time to
time those key officers of the Company who shall be eligible to participate in
this Plan. The Committee shall also determine the number of shares to be
offered from time to time to each optionee. In making these determinations, the
Committee shall take into account the past service of each such officer to the
Company, the present and potential contributions of such officer to the success
of the Company and such other factors as the Committee shall deem relevant in
connection with accomplishing the purposes of this Plan; provided that the
Committee shall determine that each grant of options to an optionee, the number
of shares offered
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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 each has no financial interest in such action and (B) a majority
of the Company's directors who each is not an "interested person" [as defined
in ss.2(a)(19) of the Act] of the Company and (2) such approval is then
required by ss.61(a)(3)(B)(I)(I) 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 each has no financial interest in such action and (B) a
majority of the Company's directors who each is not an "interested person" of
the Company, on the basis that such action is in the best interests of the
Company and its shareholders, and the last date on which such required approval
is obtained shall be the date of issuance of such option. The agreement
documenting the award of any option granted pursuant to this paragraph 4(a)
shall contain such terms and conditions as the Committee shall deem advisable,
including but not limited to being exercisable only in such installments as the
Committee may determine.
(b) Non-Officer Directors. A one-time grant of options in accordance with
the provisions of this paragraph (b) shall be made to each director of the
Company who is not an officer of the Company or of the Company's investment
adviser (a "non-officer director") who is serving at the later of (I) the date
on which the proposal to make grants of options to non-officer directors is
approved by the shareholders of the Company or (ii) the date on which the
issuance of options pursuant to this Plan to non-officer directors is approved
by order of the Securities and Exchange Commission pursuant to
ss.61(a)(3)(B)(I)(II) of the Act. After the later of such dates, a one-time
grant of options in accordance with the provisions of this paragraph (b) shall
be made to each non-officer director [other than any non-officer director who
received a grant pursuant to the first sentence of this paragraph (b)] upon his
or her initial election as a director of the Company. Each grant pursuant to
this paragraph (b) shall award the non-officer director an option to purchase
ten thousand (10,000) shares at a price equal to the current fair market value
of the shares at the date of issuance of such option; provided, that if any
non-officer director then holds ten percent (10%) or more of the outstanding
shares, the exercise price of such option shall not be less than one hundred
ten percent (110%) of such current fair market value. The agreement documenting
the award of any option granted pursuant to this paragraph 4(b) shall contain
such terms and conditions as the Committee shall deem advisable; provided,
however, that any such option shall vest in three annual installments (so that
the recipient can first exercise the option with respect to not more than 3,333
shares on or after the date of issuance of such option, can exercise the option
with respect to not more than an additional 3,333 shares on or after the first
anniversary of the date of issuance of such option and can exercise such option
with respect to the all of the shares covered thereby on or after the second
anniversary of the date of issuance of such option).
(c) General. Agreements evidencing options granted to different optionees
or at different times need not contain similar provisions.
5. OPTION PRICE
Shares shall be optioned from time to time at a exercise price not less
than the current fair market value of the shares at the date of issuance of an
option; provided, that the exercise price of any option granted to a holder of
10% or more of the Company's shares shall not be less than 110% of such current
fair market value. Notwithstanding the foregoing, the option price shall not be
below the original $15.00 offering price of the shares in the Company's initial
public offering.
2
<PAGE> 3
6. OPTION PERIOD
Each option agreement shall state the period or periods of time within
which the subject option may be exercised, in whole or in part, by the optionee
which shall be such period or periods of time as may be determined by the
Committee; provided, that the option period shall not exceed ten years from the
date of issuance of the option and shall not exceed five years if the option is
granted to a holder of 10% or more of the Company's shares.
7. PAYMENT FOR SHARES
Full payment for shares purchased shall be made at the time of exercising
the option in whole or in part. Payment of the purchase price shall be made in
cash (including check, bank draft or money order) or, if authorized pursuant to
paragraph 9 hereof, by a loan from the Company in accordance with paragraph 9.
8. TRANSFERABILITY OF OPTIONS
Options shall not be transferable other than by will or the laws of
descent and distribution, and during an optionee's lifetime shall be
exercisable only by the optionee.
9. LOANS BY THE COMPANY
Upon the exercise of any option, 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 ss.2(a)(19) of the Act] of the Company on the basis that such loan
is in the best interests of the Company and its stockholders (whether such
approval is by the Committee or otherwise), may lend to such officer- optionee,
as of the date of exercise, an amount equal to the exercise price of such
option; provided, that such loan (a) shall have a term of not more than ten
years, (b) shall become due within sixty days after the recipient of the loan
ceases to be an officer of the Company, (c) shall bear interest at a rate no
less than the prevailing rate applicable to 90-day United States Treasury bills
at the time the loan is made, and (d) shall be fully collateralized at all
times, which collateral may include securities issued by the Company. Loan
terms and conditions may be changed by the Committee to comply with applicable
IRS and SEC regulations.
10. TERMINATION OF OPTION
All rights to exercise options shall terminate sixty days after any
optionee ceases to be a director or an officer of the Company for any cause
other than death or total and permanent disability.
11. RIGHTS IN THE EVENT OF TERMINATION OF SERVICE
If an optionee's service as a director or officer is terminated for any
reason other than death or total and permanent disability prior to expiration
of his or her option and before such option is fully exercised, the optionee
shall have the right to exercise the options during the balance of the 60-day
period referred to in paragraph 10.
12. RIGHTS IN THE EVENT OF TOTAL AND PERMANENT DISABILITY OR DEATH
3
<PAGE> 4
If an optionee becomes totally and permanently disabled or dies prior to
expiration of the option without having fully exercised it, he or the executors
or administrators or legatees or distributees of the estate, as the case may
be, shall, have the right, from time to time within one year after the
optionee's total and permanent disability or death and prior to the expiration
of the term of the option, to exercise the option in whole or in part, as
provided in the respective option agreement.
13. EFFECT OF CHANGE IN STOCK SUBJECT TO THE PLAN
Subject to any required action by the shareholders of the Company and the
provisions of applicable corporate law, the number of shares of represented by
the unexercised portion of an option, the number of shares which has been
authorized or reserved for issuance hereunder, and the number of shares covered
by any applicable vesting schedule hereunder, as well as the exercise price of
a share represented by the unexercised portion of an option, shall be
proportionately adjusted for (a) a division, combination or reclassification of
any of the shares of common stock of the Company or (b) a dividend payable in
shares of common stock of the Company.
14. GENERAL RESTRICTION
Each option shall be subject to the requirement that, if at any time the
Board of Directors shall determine, at its discretion, that the listing,
registration or qualification of the shares subject to such option upon any
securities exchange or under any state or federal law, or the consent or
approval of any government regulatory body, is necessary or desirable as a
condition of, or in connection with, the granting of such option or the issue
or purchase of the shares thereunder, such option may not be exercised in whole
or in part unless such listing, registration, qualification, consent or
approval shall have been effected or obtained free of any conditions not
acceptable to the Company. Subject to the limitations of paragraph 6, no option
shall expire during any period when exercise of such option has been prohibited
by the Board of Directors, but shall be extended for such further period so as
to afford the optionee a reasonable opportunity to exercise his option.
15. MISCELLANEOUS PROVISIONS
(a) No optionee shall have rights as a shareholder with respect to shares
covered by his option until the date of exercise of his option.
(b) The granting of any option shall not impose upon the Company any
obligation to appoint or to continue to appoint as a director or officer any
optionee, and the right of the Company to terminate the employment of any
officer or other employee, or service of any director, shall not be diminished
or affected by reason of the fact that an option has been granted to such
optionee.
(c) Options shall be evidenced by stock option agreements in such form and
subject to the terms and conditions of this Plan as the Committee shall approve
from time to time, consistent with the provisions of this Plan. Such stock
option agreements may contain such other provisions as the Committee in its
discretion may deem advisable.
(d) For purposes of this Plan, the fair market value of the shares shall
be the closing sales price of the stock as quoted on the National Association
of Securities Dealers Automated Quotation System for the date of issuance of
such option, as provided herein. If the Company's shares are traded on an
exchange, the price shall be the closing price of the Company's stock as
reported in The Wall Street Journal for such date of issuance of an option.
4
<PAGE> 5
(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 incentive stock option 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 Lending
Corporation, 1666 K Street, N.W., 9th Floor, Washington, D.C. 20006; and, if to
an optionee, in care of the optionee at his or her last known address.
(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.
16. AMENDMENT AND TERMINATION
The Board of Directors may modify, revise or terminate this Plan at any
time and from time to time; provided, however, that no modification or revision
of any material provision of this Plan may be made without shareholder approval
except for such modifications or revisions which are necessary in order to
ensure the options issued as incentive stock options under this Plan comply
with Section 422 or any successor provision of the Code, applicable provisions
of the Act or any exemptive order therefrom issued to the Company in connection
with this Plan, Rule 16b-3 promulgated under the Securities Exchange Act of
1934, as amended, or other applicable law. This Plan shall terminate when all
shares reserved for issuance hereunder have been issued upon the exercise of
options, by action of the Board of Directors pursuant to this paragraph, or on
February 18, 2004, whichever shall first occur.
17. EFFECTIVE DATE OF THE PLAN
This Plan shall become effective upon (1) adoption by the Board of
Directors and (2) approval of this Plan by the shareholders of the Company.
18. AMENDMENT HISTORY
<TABLE>
<S> <C>
Date of plan adoption by the Board of Directors September 7, 1993
Date of original plan approval by shareholders September 7, 1993
Date of amendment adoption by the Board of Directors February 18, 1994
Date of amendment approval by shareholders May 20, 1994
Date of approval by Securities and Exchange Commission December 26, 1995
Date of amendment adoption by the Board of Directors February 15, 1996
</TABLE>
5
<PAGE> 1
EXHIBIT 10.9
ALLIED CAPITAL LENDING CORPORATION
DIVIDEND REINVESTMENT PLAN
Department of Investor Relations
Allied Capital Lending Corporation
1666 K Street, NW, 9th Floor
Washington, DC 20006
(202) 331-1112
PLAN ADMINISTRATOR:
American Stock Transfer and Trust Company
40 Wall Street
New York, NY 10005
(800) 937-5449
<PAGE> 2
The following is the Allied Capital Lending Corporation Dividend Reinvestment
Plan (the "Plan"). Further questions and correspondence should be directed to
either of the addresses listed on the front of the Plan:
1. WHAT IS THE PURPOSE OF THE PLAN?
The purpose of the Plan is to provide shareholders with a simple and
convenient method of investing cash dividends and distributions in
additional shares of Common Stock, $0.0001 par value, of Allied Capital
Lending Corporation (the "Company" or "Allied Lending") at the current
market price. Participants in the Plan may have cash dividends and
distributions automatically reinvested without charges for
record-keeping, and may take advantage of the custodial and reporting
services provided by American Stock Transfer and Trust Company ("AST")
at no additional cost.
2. WHAT DOES THE PLAN ADMINISTRATOR DO?
AST administers the Plan for participants, keeps records, sends
statement of accounts to participants, and performs other duties
relating to the Plan.
3. HOW DOES A SHAREHOLDER ENROLL?
If you are a shareholder of record, that is if the shares you own are
registered in your own name on the books of AST, no enrollment is
necessary. In that case, you are automatically a participant in the
Plan and AST, as the Plan Agent, will automatically reinvest for your
account all dividends and distributions that may be declared and paid on
your shares. If all of your shares of record are enrolled in the Plan,
you are considered to be an unlimited participant.
4. WHAT IF THE SHARES ARE HELD BY A BROKER, BANK OR NOMINEE?
If your shares are held on the books of AST in the name of a broker,
bank or other nominee (a "nominee"), you can participate in the Plan
only to the extent that the nominee participates on your behalf. Many
nominees do not provide that service and routinely request dividends and
distributions to be paid in cash on all shares registered in their
names. Therefore, if your shares are held for your account by a nominee,
you must either make appropriate arrangements for your nominee to
participate on your behalf, or you must become a shareholder of record
by having a part or all of your shares transferred to your own name.
5. WHAT IF A SHAREHOLDER WOULD RATHER RECEIVE CASH?
If you would rather receive cash, you may write a letter either to the
Company or to AST to communicate that you would like to terminate your
participation in the Plan, or return the attached Enrollment Status Card
to AST. Any communication by you expressing a preference for cash in
lieu of shares must be received by the Company or AST before the record
date of the next dividend or distribution.
6. WHAT IF A SHAREHOLDER WISHES TO RECEIVE CASH ON ONLY SOME OF HIS SHARES?
If you wish to receive dividends and distributions in cash on some of
your shares, and have the remaining dividends and distributions
reinvested, you must write to the Company or AST and give us notice to
that effect. You may also use the attached Enrollment Status Card for
this purpose. As a partial participant, you will receive your dividends
and distributions in cash only with respect to the number of shares that
you have specified. With respect to any other shares registered in your
name, and with respect to the shares credited to your account on the
books of AST, the corresponding dividends and distributions will be paid
in additional shares.
The number of shares on which you receive cash may be changed at any
time simply by writing to the Company or AST.
7. MAY A SHAREHOLDER ELECT TO REENROLL ONCE HE HAS TERMINATED PARTICIPATION
IN THE PLAN?
Yes. If a shareholder has previously elected to receive dividends and
distributions in cash and thus terminated participation in the Plan, and
later wishes to participate in the Plan, the shareholder may reenroll at
any time by writing to the Company. Any letter requesting enrollment
must be received by the Company prior to the dividend declaration date
in order for it to take effect as of the next dividend or distribution.
8. HOW DOES THE DIVIDEND REINVESTMENT PLAN WORK?
When the Board of Directors declares a dividend or distribution, all
non-participants will receive it in cash. Participants will have
credited to their Plan Accounts the number of full and fractional
shares (computed to three decimal places) that could be obtained, at
the price determined in accordance with the answers to Questions 9 and
10, with the cash, net of any applicable withholding taxes, that would
have been paid to them if they were not participants.
9. HOW ARE SHARES ALLOCATED UNDER THE PLAN?
The number of shares allocated to a participant's account will be
arrived at as follows. Except under the circumstances outlined below
in Question 10, AST will buy shares of Allied Capital Lending
Corporation in the open market, on NASDAQ or elsewhere, beginning
on or before the payment date of the dividend or distribution, until
it has expended for such
<PAGE> 3
purchases all of the cash that would otherwise be payable to the
participants. The number of shares that will then be credited to the
participants' Plan Accounts will be based on the average cost of the
shares so purchased, including brokerage commissions.
10. WILL NEWLY ISSUED SHARES EVER BE PAID TO PARTICIPANTS IN THE PLAN?
There may come a time when Allied Lending shares sell in the market at
a substantial premium over their net asset value. In that case, the
Company's Board of Directors may (but is not required to) declare a
dividend or distribution to be paid to Plan participants in newly
issued shares of Allied Lending. In that situation, the price of
newly issued shares issued to a participant's account will be equal to
the average of the closing sales prices reported for the shares in The
Wall Street Journal - NASDAQ National Market System listings for the
five days on which trading of shares takes place immediately prior to
the dividend payment date (but not less than 95% of the opening sales
price on that date).
Even if the Board of Directors has declared the dividend or
distribution to be payable to Plan participants in newly issued
shares, AST will be under standing instructions not to credit newly
issued shares, and instead to buy shares in the market, if (1) the
price at which newly issued shares are to be credited does not exceed
110% of the last determined net asset value of the Allied Lending
shares or (2) the Company has advised AST that since such net asset
value was last determined we have become aware of events that indicate
the possibility of a change in per share net asset value as a result
of which the net asset value of the Allied Lending shares on the
payment date might be higher than the price at which AST would credit
newly issued shares to the participants' Plan Accounts.
If, as would normally be the case, AST buys shares on the market, it
is possible that by the time AST has completed its purchases, the
average per share purchase price paid by AST may exceed the price at
which the newly issued shares would have been credited or the shares'
current net asset value. As a result, there would be credited to the
participants' Plan Accounts a smaller number of shares than would have
been credited if the dividend or distribution had been paid in newly
issued shares.
11. WHAT ACCOUNTS ARE MAINTAINED FOR PARTICIPANTS AND WHAT REPORTS ON
THESE ACCOUNTS DO PARTICIPANTS RECEIVE?
The Plan Administrator will maintain a separate account for each
participant. All shares issued to a participant under the Plan will
be credited to the participant's account. AST will mail to each
participant a statement confirming the issuance of shares within
fifteen days after the allocation of shares is made. The statement
will show the amount of the dividend or distribution, the price at
which shares were credited, the number of full and fractional shares
credited, the number of shares previously credited and the cumulative
total of shares credited. In addition, each participant will receive
copies of the Company's annual and quarterly reports to shareholders,
proxy statements and dividend income information for tax purposes.
The proxy card received by each participant will represent all shares
held of record, including shares held in the Plan Account.
12. WILL CERTIFICATES BE ISSUED FOR SHARES ISSUED UNDER THE PLAN?
No. Certificates for shares issued under the Plan will not be
furnished to you until your account is terminated or unless you
request certificates in writing for a specified number of shares
credited to your Plan Account. All written requests for certificates
should be directed to AST, allowing two weeks for processing. The
issuance of certificates for shares credited to a Plan Account will
not terminate your participation in the Plan. No certificate for a
fractional share will be issued. If you terminate your participation
in the Plan (see Question 15), AST will sell for your account any
fractional share and send you a check for the proceeds.
13. IN WHOSE NAME WILL CERTIFICATES BE REGISTERED WHEN ISSUED?
Accounts under the Plan are maintained in the name in which share
certificates of the participant were registered at the time the
participant entered the Plan. Certificates for whole shares issued at
the request of a participant will be similarly registered.
14. WHAT HAPPENS IF THE COMPANY ISSUES A STOCK DIVIDEND OR DECLARES A
STOCK SPLIT?
Any stock dividends or split shares distributed by the Company on
shares held by the Plan Administrator for the participant will be
credited to the participant's account.
15. WHAT HAPPENS IF A PARTICIPANT WISHES TO TERMINATE PARTICIPATION?
You may terminate participation in the Plan at any time by notifying
the Company or AST in writing. Within twenty days, and according to
your instructions, AST will either (1) issue certificates for the
whole shares credited to your Plan Account and a check representing
the value of any fractional shares or (2) sell the shares in the
market. The proceeds of the sale, less any brokerage commissions that
may be
<PAGE> 4
incurred, will be remitted to the shareholder at the address of record
at the time of liquidation. The address of record may not be changed
per telephone instruction, but rather must be changed in writing to
the Company or to AST. Notification for termination must be received
prior to the record date of any impending distribution in order for it
to take effect for that distribution.
If a participant sells or transfers all of the shares registered in
his name on the books of AST, participation in the Plan will continue
with respect to any shares credited to the participant's Plan Account
unless and until termination is requested.
16. WHAT IS THE TAX STATUS OF REINVESTED DIVIDENDS?
The automatic reinvestment of dividends and distributions will not
relieve you of any income tax burden that you might otherwise owe on
such dividends or distributions. A participant in the Plan will be
treated for federal income tax purposes as having received, on the
dividend payment date, a dividend or distribution in an equal amount
to the cash that the participant could have received instead of
shares. The tax basis of such shares will equal the amount of such
cash.
A participant will not realize any taxable income upon receipt of
certificates for whole shares credited to the participant's account
either upon the Participant's request for a specified number of
shares or upon termination of enrollment in the Plan.
Each participant in the Plan will receive early in each year a Form
1099 regarding the Federal income tax status of all dividends and
distributions paid during the previous year.
17. ARE THERE ANY CHARGES FOR PARTICIPATING IN THE PLAN?
No. AST's fees for administering Allied Lending's Dividend
Reinvestment Plan are included in the fees paid by the Company to AST
for acting as its transfer agent. The price at which shares are
credited to your account will, however, include your share of any
brokerage commissions incurred in connection with AST's open market
purchases of such shares. There will be no brokerage charges in
connection with any credit of newly issued shares.
18. MAY THE PLAN BE CHANGED?
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Plan may be amended or terminated by Allied Lending
or AST with at least 90 days' written notice to Plan participants.
ALLIED CAPITAL LENDING CORPORATION DIVIDEND REINVESTMENT PLAN
ENROLLMENT STATUS CARD
The undersigned shareholder of record of Allied Capital Lending Corporation
elects to:
[ ] TERMINATE enrollment in the Dividend Reinvestment Plan and receive
dividends and distributions in cash with respect to all shares of
Allied Capital Lending Corporation held of record or credited to the
undersigned's Plan account. CHECK ONE OF THE FOLLOWING:
[ ] Liquidate all Plan account shares and remit proceeds, or
[ ] Send certificate for whole shares in Plan account and liquidate
fractional shares.
[ ] PARTICIPATE in the Dividend Reinvestment Plan and receive dividends
and distributions in additional shares with respect to ALL Allied
Capital Lending Corporation shares held of record or credited to the
undersigned's Plan account.
[ ] PARTIALLY PARTICIPATE in the Dividend Reinvestment Plan with
respect to all Allied Capital Lending Corporation shares held of
record, including the shares subsequently credited to the
undersigned's Plan account, except ________ shares on which dividends
and distributions are to be paid in cash.
Termination and partial participation instructions will take effect on the
record date following receipt of this card by the Plan Administrator.
Enrollment instructions will take effect on the declaration date following
receipt of this card by the Plan Administrator.
<TABLE>
<S> <C>
- ---------------------------------------------------------- -----------------------------------------------------------
Tax identification number Signature
- ---------------------------------------------------------- -----------------------------------------------------------
Type or print name exactly as it appears on your share Signature (if a joint account, both signatures are required)
certificate(s).
</TABLE>
Please fold and staple for mailing.
<PAGE> 5
Post office will
not deliver
without stamp
AMERICAN STOCK TRANSFER & TRUST
40 Wall Street
New York, NY 10005
ATTN: Dividend Reinvestment
<PAGE> 6
Investor Relations
Allied Capital
1666 K Street, NW, 9th Floor
Washington, DC 20006
<PAGE> 1
Allied Capital Lending Corporation and Subsidiary EXHIBIT 11
Statement of Computation of Earnings Per Share
For the Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
For the Year Ended December 31,
----------------------------------------------
1996 1995 1994
----------------------------------------------
Primary Earnings Per Common Share:
<S> <C> <C> <C>
Net Increase in Net Assets Resulting
from Operations $6,316,000 $5,252,000 $4,531,000
==============================================
Weighted average number of
shares outstanding 4,784,797 4,375,876 4,368,425
Weighted average number of
shares issuable on exercise
of outstanding stock options - - -
==============================================
Weighted average number of shares and
share equivalents outstanding 4,784,797 4,375,876 4,368,425
==============================================
Earnings per Share $1.32 $1.20 $1.04
==============================================
Fully Diluted Earnings Per Common Share:
Net Increase in Net Assets Resulting
from Operations $6,316,000 $5,252,000 $4,531,000
==============================================
Weighted average number of
shares and share equivalents
outstanding as computed for
primary earnings per share 4,784,797 4,375,876 4,368,425
Weighted average of additional
shares issuable on exercise
of outstanding stock options 7,241 - -
---------------------------------------------
Weighted average of shares and
share equivalents outstanding, as
adjusted 4,792,038 4,375,876 4,368,425
=============================================
Earnings per Share $1.32 $1.20 $1.04
=============================================
</TABLE>
<PAGE> 1
Allied Capital Lending Corporation
SHAREHOLDER INFORMATION
CORPORATE OFFICE
c/o Allied Capital Advisers, Inc.
1666 K Street, NW, 9th Floor
Washington, DC 20006
Telephone: (202) 331-1112
Facsimile: (202) 659-2053
News-On-Demand: (888) 329-5519
Investor Relations: (202) 973-6334
Investor Relations E-mail: [email protected]
Marketing: (202) 331-2439
Marketing E-mail: [email protected]
Internet Address: http://www.alliedcapital.com
STOCK TRANSFER AGENT AND REGISTRAR
Inquiries on transferring securities, replacing a lost or stolen certificate,
participating in the Dividend Reinvestment Plan, requesting Direct Deposit
information or processing a change of address should be directed to:
American Stock Transfer & Trust Company
40 Wall Street, 46th Floor
New York, NY 10005
In the United States: (800) 937-5449
Outside the United States: (212) 936-5100
E-mail: [email protected]
Internet Address: http://www.amstock.com
FORM 10-K REPORT
A copy of the Company's Annual Report on Form 10-K for the year ended December
31, 1996, as filed with the Securities and Exchange Commission, will be
furnished without charge to shareholders upon written request to the Investor
Relations Department at the Company's corporate office. This information is also
available on Allied Capital's Internet site: http://www.alliedcapital.com
1997 ANNUAL MEETING OF SHAREHOLDERS
Montgomery Room at The Residence Inn by Marriott,
7335 Wisconsin Avenue, Bethesda, Maryland 20814
Monday, May 12, 1997
10 a.m. (EST)
All shareholders are welcome to attend.
INDEPENDENT ACCOUNTANTS
Matthews, Carter and Boyce, P.C.
McLean, VA
STOCK MARKET LISTING
Allied Capital Corporation common stock is quoted on the Nasdaq National Market
under the ticker symbol ALCL. Most newspapers list the Company's stock as
"AldCap." The Company has approximately 1,600 shareholders of record and 7,000
beneficial shareholders.
DIVIDENDS AND DISTRIBUTIONS
Generally, quarterly dividends on common stock are paid on the last business day
of each quarter. The Company has also paid a fifth distribution at year-end
since its initial public offering.
STOCK PRICE
<TABLE>
<CAPTION>
High Low Close
---- --- -----
<S> <C> <C> <C> <C>
1995 Q1 12.75 9.50 12.75
Q2 13.25 12.00 13.00
Q3 13.00 12.00 12.00
Q4 13.25 12.00 13.25
1996 Q1 15.00 12.75 14.50
Q2 15.00 12.70 13.13
Q3 15.38 13.13 14.63
Q4 15.88 14.00 15.25
</TABLE>
TOTAL DISTRIBUTIONS PER SHARE
<TABLE>
<CAPTION>
1993* 1994 1995 1996
---- ---- ---- ----
<S> <C> <C> <C>
$1.10 $1.08 $1.22 $1.30
</TABLE>
*Consisted of $1.02 per share distributed prior to the Company's IPO in
November 1993, and $0.08 per share distributed subsequent to the IPO.
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
Value of $10,000 Investment
from 11/23/93
------------------------------
Year-End Value
-------- -----
<S> <C>
1993 $10,541
1994 7,542
1995 10,588
1996 13,323
</TABLE>
A $10,000 investment in Allied Capital Lending Corporation at its initial
public offering on November 23, 1993, with all dividends reinvested, was worth
$13,323 at the end of 1996, a 9.7% average annual total return over this
period.
<PAGE> 2
Allied Capital Lending Corporation
COMPANY PROFILE
Allied Capital Lending Corporation offers shareholders the opportunity to
profit from a nationwide portfolio of senior secured loans to small businesses.
Managed by Allied Capital Advisers, Inc., the company seeks to provide current
income and long-term capital appreciation for its shareholders.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
December 31,
(in thousands, except per share amounts) 1996 1995
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Total Investments at Value $60,408 $47,147
Total Assets $68,402 $55,480
Shareholders' Equity (Net Asset Value) $41,971 $32,884
Net Increase in Net Assets Resulting from Operations $ 6,316 $ 5,252
Earnings Per Share $ 1.32 $ 1.20
Distributions Per Share $ 1.30 $ 1.22
Number of Shares Outstanding 5,127 4,385
</TABLE>
Allied Capital Lending Corporation
1
<PAGE> 3
Allied Capital Lending Corporation
CONSOLIDATED COMPARISON OF FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
For the Years Ended December 31,
(in thousands, except per share amounts) 1996 1995 1994 1993 1992(1)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DISTRIBUTIONS
Tax distributions declared subsequent to
the initial public offering(2) $ 6,381 $ 5,339 $ 4,718 $ 350 $ --
Per share $ 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 $ 7,463 $ 5,966 $ 3,716 $ 2,260 $ 1,380
Premium income $ 2,563 $ 2,090 $ 2,349 $ 2,196 $ 1,958
Total investment income $ 10,026 $ 8,056 $ 6,065 $ 4,456 $ 3,338
Per share $ 2.10 $ 1.84 $ 1.39 $ 1.72 $ 1.40
Net investment income $ 6,250 $ 5,438 $ 4,878 $ 2,944 $ 2,011
Per share $ 1.31 $ 1.24 $ 1.12 $ 1.14 $ 0.84
Net realized losses and net unrealized
appreciation (depreciation) on investments $ 66 $ (186) $ (347) $ (270) $ (43)
Per share $ 0.01 $ (0.04) $ (0.08) $ (0.11) $ 0.01)
Net increase in net assets resulting from operations $ 6,316 $ 5,252 $ 4,531 $ 2,674 $ 1,968
Per share $ 1.32 $ 1.20 $ 1.04 $ 1.03 $ 0.83
Weighted average number of shares and share
equivalents outstanding 4,785 4,376 4,368 2,587 2,380
- --------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION
Investments at value $ 60,408 $ 47,147 $ 32,771 $ 21,793 $ 12,241
Investments at cost $ 60,311 $ 47,302 $ 32,935 $ 21,905 $ 12,421
Total assets $ 68,402 $ 55,480 $ 37,619 $ 34,953 $ 17,420
Total debt(4) $ 23,743 $ 18,914 $ 3,130 $ -- $ 7,860
Shareholders' equity (net asset value) $ 41,971 $ 32,884 $ 32,788 $ 32,955 $ 5,505
Per share $ 8.19 $ 7.50 $ 7.50 $ 7.54 $ 2.31
Per share market value at end of year $ 15.25 $ 13.25 $ 10.38 $ 15.75 $ --
Shares outstanding at end of year 5,127 4,385 4,370 4,368 2,380
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Prior to the 1993 initial public offering, the Company's former Parent and
sole shareholder and board of directors approved an increase in the
authorized shares and a stock split 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 the Company's
former Parent.
Allied Capital Lending Corporation
9
<PAGE> 4
Allied Capital Lending Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion should be read in conjunction with the financial
statements and notes thereto included elsewhere in this report.
ORGANIZATION
Allied Capital Lending Corporation (Company), a Maryland corporation, is a
closed-end management investment company that has elected to be regulated as a
business development company under the Investment Company Act of 1940 (1940
Act).
The Company is licensed by the SBA as a small business lending company (SBLC)
and is a participant in the SBA Section 7(a) guaranteed loan program. The
Company also participates in the SBA Section 504 loan program and generates
companion loans to Section 7(a) loans. Until December 31, 1996, the Company
made these loans through its ownership in ACLC Limited Partnership
(Partnership), which was formed in April 1995. Until December 31, 1996, the
Company had a 1% general partnership interest and owned a 98% limited
partnership interest in the Partnership. Accordingly, the consolidated
financial statements of the Company for 1996 include the accounts of the
Company and the Partnership.
Effective January 1, 1997, the Company reorganized to provide the Company with
greater flexibility to generate loans and to better match its financing with
its investment opportunities, and to maximize the return on the Company's loans
(Reorganization). The Company formed two subsidiaries, Allied Capital SBLC
Corporation (Allied SBLC) and Allied Capital Credit Corporation (Allied
Credit). Both Allied SBLC and Allied Credit (Subsidiaries) are Maryland
corporations and closed-end management investment companies that have elected
to be regulated as business development companies (BDCs) under the 1940 Act.
Effective January 1, 1997, the Company assigned its SBLC license and
transferred all Section 7(a) loans and related assets and liabilities to Allied
SBLC in return for 100% of Allied SBLC's common stock. The Company dissolved
the Partnership and purchased the 1% limited partnership interest not owned by
the Company. The Company assumed all of the Partnership's assets and
liabilities upon the dissolution.
This Reorganization has not changed the Company's operations or its current
product lines. This new structure will allow the Company to operate more
effectively and to expand with new financial products to diversify its
consolidated portfolio.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital to make loans, to carry those loans until sale
occurs, and to carry the unsold portion of the principal amount of the loans to
maturity.
In conjunction with its Reorganization, the Company and the Subsidiaries have
restructured all lines of credit and entered into new financing arrangements
effective January 1, 1997. The new arrangements provide for two separate
secured lines of credit with available amounts totaling $40 million. The lines
have interest rates ranging from LIBOR plus 1.6% to LIBOR plus 2.2%. Interest
is payable monthly, and both lines expire in May 1998. The lines require an
annual fee of $80,000 in total.
During 1996, for the purpose of financing Section 7(a) loans, the Company had a
$20 million secured line of credit with a commercial bank. The Company was
paying an interest rate of 7.8% per annum on the $15.7 million borrowed under
the facility at December 31, 1996.
In addition, in 1996 the Partnership had a secured line of credit with a
commercial bank to borrow up to $15 million at a rate equal to the one-month
LIBOR plus 2.7% per annum to finance Section 504 loans and companion loans. At
December 31, 1996, the Partnership was paying interest of 8.3% per annum on the
$8.1 million borrowed under this agreement.
The Company offered a total of 628,909 shares of common stock pursuant to a
one-for-five non-transferrable rights offering (rights offering) in 1996, with
the right to increase the number of shares to be purchased by 15%, or 94,336
shares, for an aggregate total of 723,245 shares available under the offer.
Shareholders participating in the rights offering purchased 548,887 shares at
$13.04 per share. The Company received gross proceeds of $7.2 million from the
rights offering. The Company sold the 174,358 shares not sold in the rights
offering to a private buyer at a net price of $12.74 per share (private
offering). The Company received gross proceeds of $2.2 million from this sale.
Net proceeds from the rights offering and private offering combined were $8.9
million, after expenses of approximately $496,000, including commissions.
Management plans to continue to use leverage to finance the growth of the
Company. However as a BDC, the Company must maintain 200% asset coverage for
senior securities representing indebtedness, which will limit the Company's
ability to borrow on a consolidated basis. The Company will, however, be able
to increase its leverage in Allied SBLC beyond the 200% asset coverage limit,
subject to market availability. It is management's belief that the Company will
have access to the capital resources necessary to expand and develop its
business. The Company may seek to obtain funds through additional equity
offerings, debt financings, or loan sales. The Company anticipates that
adequate cash will be available to make new loans, fund its operating expenses,
satisfy debt service obligations and pay dividends over the next year.
Allied Capital Lending Corporation
10
<PAGE> 5
Allied Capital Lending Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
COMPARISON OF 1996 AND 1995
The Company originated $55.1 million in new loans during 1996. Net of loan
sales, repayments and changes in portfolio valuation, the Company's total loans
to small businesses increased by $13.3 million to $60.4 million at December 31,
1996 as compared to $47.1 million at December 31, 1995. At December 31, 1996,
loans to small businesses totaled 88% of the Company's total assets, compared
to 85% at December 31, 1995.
Net increase in net assets resulting from operations, which includes net
investment income, realized gains and losses, and unrealized appreciation and
depreciation in the portfolio, increased 20% to $6.3 million, or $1.32 per
share, for 1996 as compared to $5.2 million, or $1.20 per share, for the same
period in 1995. The 1996 per share amount reflects an increase of 9% in the
weighted average number of shares and share equivalents used to calculate
earnings per share because of the rights offering and the private offering.
Total investment income increased 24% to $10.0 million in 1996 as compared to
$8.1 million in 1995. Interest income increased 25% to $7.5 million in 1996
from $6.0 million in 1995. This increase is due to growth in the Company's
investments in small business concerns. Premium income for 1996 equaled $2.6
million, which represents a 23% increase over the comparable period in 1995.
This increase in premium income results from generating more sales of the
guaranteed portion of the Section 7(a) loans to the secondary market and the
sale of Section 504 and companion loans.
Total expenses for the year ended December 31, 1996 increased to $3.8 million
from $2.6 million for the same period in 1995. This increase in total expenses
is primarily due to increases in interest expense and the investment advisory
fee.
The Company partially funds its growth in investments to small business
concerns through borrowings on its existing credit lines. As the Company
continued to borrow funds to finance its portfolio, interest expense increased
85% in 1996 as compared to 1995. The Company pays investment advisory fees to
Advisers at an approximate annual rate of 2.5% on invested assets and 0.5% on
interim investments, cash and cash equivalents. Therefore, the investment
advisory fee grows commensurate with the growth in total assets. Total advisory
fees equaled $1.5 million and $1.1 million for 1996 and 1995, respectively.
Other expenses decreased to $484,000 for 1996 as compared to $519,000 for 1995.
At December 31, 1996 the Company held loans with a cost of $5.4 million for
sale to third-party purchasers. These loans have been valued at their estimated
net sales price of $5.8 million. These loans consisted of Section 7(a), Section
504 and companion loans. These loans are expected to be sold at net premiums
ranging from 3% to 9%, and, as a result, their unrealized appreciation is
included in the 1996 results from operations.
The Company declared and paid dividends equal to $1.30 per share in 1996. This
represents an increase of 7% on a per share basis over 1995 dividends. Taxable
income was greater than net investment income before net unrealized
appreciation on investments because of certain timing differences in the
recognition of income for federal income tax purposes. Dividends are based upon
the Company's taxable income and it has been the Company's objective to
distribute 100% of its taxable income.
COMPARISON OF 1995 TO 1994
For the year ended December 31, 1995, the net increase in net assets resulting
from operations was $5.2 million or $1.20 per share as compared to $4.5 million
or $1.04 per share for the year ended December 31, 1994, which represented a
16% increase. The net increase in net assets resulting from operations,
increased primarily due to continued growth in the Company's portfolio of loans
to small businesses.
Interest income increased by $2.3 million in 1995 over 1994 to $6.0 million.
This increase was directly related to the net increase in invested assets of
$14.4 million during the year. Premium income from the sale of loans in 1995
decreased 11% to $2.1 million as compared to $2.3 million in the prior year.
Overall, total investment income increased by $2 million in 1995 or 33%.
Investment advisory fees increased by $329,000 to $1.1 million in 1995 due to
the growth of investments upon which the investment advisory fee is based.
Interest expense increased $884,000 to $959,000 in 1995 compared to $75,000 in
1994 as a result of increased new borrowings. Total borrowings increased from
$3.1 million at December 31, 1994 to $18.9 million at December 31, 1995.
Other expenses increased 72% to $519,000 in 1995 from $301,000 in 1994. The
Company had a special shareholders' meeting in 1995 to expand the Company's
investment objective and policies. The Company also incurred higher
shareholders' costs because Allied Capital Corporation (former Parent), the
Company's former Parent, distributed 335,086 shares of the Company's common
stock to the former Parent's shareholders in lieu of a cash dividend in January
1995, thus increasing the number of the Company's shareholders.
Total dividends from taxable income for 1995 equaled $1.22 per share.
Allied Capital Lending Corporation
11
<PAGE> 6
Allied Capital Lending Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS
FACTORS AFFECTING THE COMPANY'S BUSINESS
Concentrations of Credit Risk. The Company may, from time to time, concentrate
its loans in particular industries, but generally the Company does not intend
to concentrate its loans in any industry. At December 31, 1996, the Company had
in its portfolio or was servicing loans to hotels and motels, restaurants,
manufacturers, retailers, gasoline service stations, broadcast stations and
other industries.
At December 31, 1996, $17.6 million, or 29% of the Company's outstanding loans,
were invested in the hotel and motel industry (Hospitality Loans). At December
31, 1996, Hospitality Loans included $4.1 million of loans held for sale.
Hospitality Loans not held for sale at December 31, 1996 represented 22% of the
Company's outstanding loans. In the event of a downturn in the hotel and motel
industry, the ability of such borrowers to satisfy their debt service
obligations to the Company could be adversely affected. In addition, existing
competing establishments, new hotel or motel construction which could saturate
the market in a geographic area, or declining trends in travel could adversely
affect the ability of these borrowers to service their debts to the Company.
Government-Sponsored Programs. The Company's business remains largely dependent
upon two government-sponsored SBA-administered loan programs, the Section 7(a)
guaranteed loan program and the Section 504 loan program. The Section 7(a) and
Section 504 loan programs are regulated by the SBA pursuant to laws passed by
Congress. There is no assurance that the government appropriations for these
programs or for the operations of the SBA will be continued. In addition, both
programs are subject to changes in law or regulation at any time that could
have an adverse impact on the Company's operations with regard to the programs.
Risks of Default. Loans to small businesses involve a high risk of default.
Small businesses usually have smaller product lines and market shares than
larger companies, and, therefore, may be more vulnerable to competition and
general economic conditions. The success of these businesses typically depend
upon 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 flow resulting from economic downturns can severely
impact the businesses' ability to meet their obligations. The unguaranteed
portions of Section 7(a) loans retained by the Company do not benefit directly
from any SBA guarantees in an event of default; however, the Company and the
SBA typically cooperate in collateral foreclosure or other work-out efforts and
the Company shares pari passu with the guaranteed portion holder in any
resulting collections. The Section 504 loans and the companion loans are not
guaranteed in any part by the SBA and, as a result, carry a higher risk of loss
from an event of default than do the Section 7(a) loans.
Illiquidity of Loans. SBLCs are required by SBA regulations to retain an
economic interest in the unguaranteed portions of the Section 7(a) loans made
by them until maturity. The Company may attempt at some time in the future to
obtain the SBA's consent to the sale of such loans, but there is no assurance
that such consent, if sought, will be forthcoming or that a market for such
loans could be found even if such consent were obtained.
Interest Rate Fluctuations. Since all loans made by the Company are currently
being made at variable rates of interest, the Company's investment return could
decline if market interest rates were to decline from their current levels.
Loans with variable interest rates may become unduly burdensome or unattractive
to some borrowers as market interest rates increase. Moreover, rising interest
rates may tend to reduce the premium that the Company receives on sales of the
guaranteed portions of Section 7(a) loans and Section 504 and companion loans.
Substantial changes in market interest rates could result in greater rates of
prepayments of or defaults on outstanding loans and may inhibit the expansion
of the Company's business and reduce its profitability.
Competition. There are several other SBLCs (non-bank lenders) as well as a
large number of banks that participate in the Section 7(a) guaranteed loan
program. All of these participants compete for the business of eligible
borrowers. From time to time, these competitors will offer loans at a lower
rate of interest than the 2.75%-above-prime maximum rate permitted by the SBA,
which is the rate at which the Company generally offers loans. However, such
lower-cost loans are generally offered with shorter maturities than those which
the Company is prepared to offer for its loans. Moreover, unlike SBLCs such as
the Company, banks are frequently under different regulatory constraints on the
types of loans that they are able to offer.
Statements included in this report concerning the Company's future
prospects are "forward looking statements" under the Federal securities
laws. There can be no assurance that future results will be achieved and
actual results could differ materially from forecasts and estimates.
Allied Capital Lending Corporation
12
<PAGE> 7
Allied Capital Lending Corporation
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
December 31,
(in thousands, except number of shares) 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments at Value:
Loans (cost: 1996--$54,867; 1995--$46,451) $54,613 $46,223
Loans held for sale (cost: 1996--$5,444; 1995--$851) 5,795 924
--------------------
Total investments 60,408 47,147
Cash and cash equivalents 1,316 3,020
Accrued interest receivable 861 732
Excess servicing asset 5,043 3,828
Other assets 774 753
--------------------
Total assets $68,402 $55,480
====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable $23,743 $18,914
Dividends and distributions payable 410 340
Accounts payable and accrued expenses 1,857 3,012
Investment advisory fee payable 421 330
--------------------
Total liabilities 26,431 22,596
--------------------
Commitments and Contingencies
Shareholders' Equity:
Common stock, $.0001 par value, 20,000,000 shares authorized; 5,126,905 and
4,384,921 shares issued and outstanding at December 31, 1996 and 1995 -- --
Additional paid-in capital 42,404 33,252
Net unrealized appreciation (depreciation) on investments 97 (155)
Distributions in excess of accumulated earnings (530) (213)
--------------------
Total shareholders' equity 41,971 32,884
--------------------
Total liabilities and shareholders' equity $68,402 $55,480
====================
</TABLE>
The accompanying notes are an integral part of these financial statements.
Allied Capital Lending Corporation
13
<PAGE> 8
Allied Capital Lending Corporation
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31,
(in thousands, except per share amounts) 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment Income:
Interest $ 7,463 $5,966 $3,716
Premium income 2,563 2,090 2,349
-------------------------------
Total investment income 10,026 8,056 6,065
-------------------------------
Operating Expenses:
Investment advisory fee 1,520 1,140 811
Interest expense 1,772 959 75
Legal and accounting fees 97 170 131
Other operating expenses 387 349 170
-------------------------------
Total expenses 3,776 2,618 1,187
-------------------------------
Net investment income 6,250 5,438 4,878
Net realized losses on investments (186) (195) (295)
-------------------------------
Net investment income before net unrealized appreciation (depreciation) on investments 6,064 5,243 4,583
Net unrealized appreciation (depreciation) on investments 252 9 (52)
-------------------------------
Net increase in net assets resulting from operations $ 6,316 $5,252 $4,531
===============================
Earnings per share $ 1.32 $ 1.20 $ 1.04
===============================
Weighted average number of shares and share equivalents outstanding 4,785 4,376 4,368
===============================
</TABLE>
The accompanying notes are an integral part of these financial statements.
Allied Capital Lending Corporation
14
<PAGE> 9
Allied Capital Lending Corporation
CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31,
(in thousands, except per share amounts) 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Increase in Net Assets Resulting from Operations:
Net investment income $ 6,250 $ 5,438 $ 4,878
Net realized losses on investments (186) (195) (295)
Net unrealized appreciation (depreciation) on investments 252 9 (52)
---------------------------------
Net increase in net assets resulting from operations 6,316 5,252 4,531
---------------------------------
Distributions to Shareholders from:
Net investment income (6,064) (5,243) (4,583)
Excess of net investment income (317) (96) (135)
---------------------------------
Net decrease in net assets resulting from distributions to shareholders (6,381) (5,339) (4,718)
---------------------------------
Capital Share Transactions:
Sale of common stock 8,883 -- --
Issuance of common stock in lieu of cash distributions 269 183 20
---------------------------------
Net increase in net assets resulting from capital share transactions 9,152 183 20
---------------------------------
Total increase (decrease) in net assets 9,087 96 (167)
Net assets at beginning of year 32,884 32,788 32,955
---------------------------------
Net assets at end of year $41,971 $32,884 $32,788
=================================
Net asset value per share $ 8.19 $ 7.50 $ 7.50
=================================
Shares outstanding at end of year 5,127 4,385 4,370
=================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
Allied Capital Lending Corporation
15
<PAGE> 10
Allied Capital Lending Corporation
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31,
(in thousands) 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net increase in net assets resulting from operations $ 6,316 $ 5,252 $ 4,531
Adjustments to reconcile net increase in net assets resulting from
operations to net cash provided by operating activities:
Premium income (2,563) (2,090) (2,349)
Amortization of loan discounts and fees (402) (286) (362)
Net realized losses on investments 186 195 295
Net unrealized (appreciation) depreciation on investments (252) (9) 52
Changes in assets and liabilities:
Accrued interest receivable (129) (281) (227)
Excess servicing asset (1,215) (1,128) (1,094)
Other assets (21) (353) (67)
Accounts payable and accrued expenses (1,155) 1,803 (372)
Investment advisory fee payable 91 100 163
-----------------------------------
Net cash provided by operating activities 856 3,203 570
-----------------------------------
Cash Flows from Investing Activities:
Loan originations (55,084) (48,213) (43,853)
Proceeds from the sale of loans 30,278 31,816 32,509
Collection of principal 14,576 4,211 2,728
-----------------------------------
Net cash used in investing activities (10,230) (12,186) (8,616)
-----------------------------------
Cash Flows from Financing Activities:
Dividends and distributions paid (6,042) (5,078) (4,785)
Sale of common stock 8,883 -- --
Net borrowings under revolving lines of credit 4,829 15,784 3,130
-----------------------------------
Net cash provided by (used in) financing activities 7,670 10,706 (1,655)
-----------------------------------
Net increase (decrease) in cash and cash equivalents (1,704) 1,723 (9,701)
Cash and cash equivalents, beginning of year 3,020 1,297 10,998
-----------------------------------
Cash and cash equivalents, end of year $ 1,316 $ 3,020 $ 1,297
===================================
Supplemental Disclosure of Cash Flow Information
Noncash investing and financing activities:
Issuance of common stock in lieu of cash distributions $ 269 $ 183 $ 20
Interest paid $ 1,696 $ 849 $ 70
</TABLE>
The accompanying notes are an integral part of these financial statements.
Allied Capital Lending Corporation
16
<PAGE> 11
Allied Capital Lending Corporation
CONSOLIDATED STATEMENT OF INVESTMENTS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
December 31, 1996
Type of Business Number Percent of
(in thousands, except number of loans and percentages) of Loans Cost Value Value
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Auto Services and Repair 46 $ 3,526 $ 3,526 5.8%
- --------------------------------------------------------------------------------------------------------------------------
Broadcast Stations 9 3,313 3,347 5.5
- --------------------------------------------------------------------------------------------------------------------------
Business Services 22 3,109 3,109 5.2
- --------------------------------------------------------------------------------------------------------------------------
Construction Companies 7 490 490 0.8
- --------------------------------------------------------------------------------------------------------------------------
Day Care Centers 9 1,128 1,146 1.9
- --------------------------------------------------------------------------------------------------------------------------
Gasoline Service Stations 42 8,216 8,291 13.7
- --------------------------------------------------------------------------------------------------------------------------
Grocery Stores 18 1,403 1,375 2.3
- --------------------------------------------------------------------------------------------------------------------------
Health Services 19 2,530 2,502 4.2
- --------------------------------------------------------------------------------------------------------------------------
Hotels and Motels 52 17,421 17,644 29.2
- --------------------------------------------------------------------------------------------------------------------------
Manufacturers 43 4,041 3,991 6.6
- --------------------------------------------------------------------------------------------------------------------------
Personal Services 29 1,177 1,170 1.9
- --------------------------------------------------------------------------------------------------------------------------
Printing and Publishing 12 1,940 1,940 3.2
- --------------------------------------------------------------------------------------------------------------------------
Recreational Sales and Services 16 2,151 2,145 3.6
- --------------------------------------------------------------------------------------------------------------------------
Restaurants 67 4,981 4,896 8.1
- --------------------------------------------------------------------------------------------------------------------------
Retailers 55 1,820 1,771 2.9
- --------------------------------------------------------------------------------------------------------------------------
Wholesalers 12 2,361 2,361 3.9
- --------------------------------------------------------------------------------------------------------------------------
Miscellaneous Businesses 13 704 704 1.2
- --------------------------------------------------------------------------------------------------------------------------
Total 471 $60,311 $60,408
==========================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
Allied Capital Lending Corporation
17
<PAGE> 12
Allied Capital Lending Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION. Allied Capital Lending Corporation (the Company) is a closed-end
management investment company that has elected to be regulated as a business
development company under the Investment Company Act of 1940 (1940 Act). The
Company is an authorized small business lending company (SBLC) and engages in
the business of originating loans to qualified small businesses throughout the
United States.
The Company has an investment advisory agreement with Allied Capital Advisers,
Inc. (Advisers), whereby Advisers manages the investments of the Company
subject to the supervision and control of the Company's board of directors.
Certain directors and officers of Advisers are also directors and officers of
the Company.
BASIS OF PRESENTATION. In April 1995, ACLC Limited Partnership (Partnership)
was formed so the Company could participate in the U.S. Small Business
Administration (SBA) 504 loan program and originate other types of small
business loans. The Company is the general partner and has a 99 percent
interest in the Partnership. Accordingly, the consolidated financial statements
of the Company include the accounts of the Company and this majority owned
Partnership. All significant intercompany accounts and transactions have been
eliminated in consolidation.
SUBSEQUENT EVENT. Effective January 1, 1997, the Company reorganized to provide
the Company with greater flexibility to generate loans (Reorganization). The
Company now has two subsidiaries, Allied Capital SBLC Corporation (Allied SBLC)
and Allied Capital Credit Corporation (Allied Credit). Both Allied SBLC and
Allied Credit (the Subsidiaries) are Maryland corporations and closed-end
management investment companies that have elected to be regulated as business
development companies (BDCs) under the 1940 Act. Effective January 1, 1997, the
Company assigned its SBLC license and transferred all Section 7(a) loans and
related assets and liabilities to Allied SBLC in return for 100% of Allied
SBLC's common stock. The Company dissolved the Partnership and purchased the 1%
limited partnership interest not owned by the Company. The Company assumed all
of the Partnership's assets and liabilities upon the dissolution.
NOTE 2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
VALUATION OF INVESTMENTS. Loans and the related excess servicing asset are
valued by the Company's board of directors. Generally, the board of directors
considers the fair value of the loans to approximate their carrying value or
amortized cost. Unrealized depreciation is recorded when the board of directors
determines that significant doubt exists as to the ultimate realization of the
loan.
Loans that are held for sale are valued by the board of directors based upon
the estimated gain that will result from the future sale of the loan. Loans are
generally classified as held for sale once the loans are fully funded and held
for at least 90 days.
INTEREST INCOME. Interest income is recorded on the accrual basis to the extent
that such amounts are expected to be collected. Interest income also includes
servicing fees on loans sold less the amortization of any excess servicing
asset.
PREMIUM INCOME. Premium income represents the difference between the net
proceeds from the sale of a loan and the carrying amount of the loan, plus the
value of the servicing rights retained in excess of a normal servicing fee.
REALIZED LOSSES AND UNREALIZED APPRECIATION OR DEPRECIATION ON INVESTMENTS.
Realized losses result when a loan is written off as uncollectible. Unrealized
appreciation or depreciation reflects the change in the valuation of the
portfolio.
DISTRIBUTIONS TO SHAREHOLDERS. Distributions to shareholders are recorded on
the ex-dividend date.
FEDERAL INCOME TAXES. The Company's objective is to comply with the
requirements of the Internal Revenue Code that are applicable to regulated
investment companies. The Company annually distributes all of its taxable
income to its shareholders, therefore, a federal income tax provision is not
required.
Allied Capital Lending Corporation
18
<PAGE> 13
Allied Capital Lending Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dividends declared by the Company in December to shareholders of record on a
specified date in such month, but paid during January of the following year,
are treated as if the dividends were received by the shareholder on December 31
of the year declared.
EARNINGS PER SHARE. Earnings are defined as the sum of net investment income,
net realized losses on investments and net unrealized appreciation or
depreciation on investments. The computation of earnings per share is based on
the weighted average number of shares and share equivalents outstanding during
the period.
CASH AND CASH EQUIVALENTS. Cash equivalents consist of highly liquid
investments with insignificant interest rate risk and original maturities of
three months or less at the acquisition date. At December 31, cash and cash
equivalents consisted of the following:
<TABLE>
<CAPTION>
- -----------------------------------------------------------
(in thousands) 1996 1995
- -----------------------------------------------------------
<S> <C> <C>
Cash $ 8 $ 214
Repurchase agreements 1,308 2,806
---------------
Total $1,316 $3,020
===============
- -----------------------------------------------------------
</TABLE>
On December 31, 1996, the Company had purchased $1,308,000 of overnight
repurchase agreements collateralized by U.S. government securities under
agreements to resell on January 2, 1997.
RECLASSIFICATIONS. Certain reclassifications have been made to the 1995 and
1994 financial statements to conform with the 1996 financial statement
presentation.
NOTE 3. INVESTMENTS
The Company and the Partnership originate loans to qualified small businesses
in conjunction with the SBA Section 7(a) guaranteed and SBA Section 504 loan
programs, respectively.
Under the SBA 7(a) guaranteed loan program, the Company originates loans that
are guaranteed by the SBA and are collateralized, generally with first liens on
real estate and/or personal property of the borrower. The SBA guarantees
repayment between 75 percent and 80 percent of up to a $1,000,000 face amount
and a maximum of three months of accrued interest on the guaranteed portion of
the loans originated. The Company generally sells the guaranteed portion of its
loans and retains the rights to service such loans. The loans generally provide
for an annual variable rate of interest equal to the prevailing prime rate, as
reported in The Wall Street Journal, plus up to 2.75 percent. The Wall Street
Journal prime interest rate was 8.25 percent and 8.5 percent at December 31,
1996 and 1995, respectively. The loans generally have a term of 7 to 25 years
and may be prepaid without penalty. The principal balance of the sold portions
of such loans serviced by the Company was approximately $109,000,000 and
$97,000,000 at December 31, 1996 and 1995, respectively.
The Partnership originates real estate loans to qualified small businesses
pursuant to the Section 504 loan program and originates companion loans to SBA
Section 7(a) guaranteed loans. Section 504 program loans are structured such
that the entrepreneur provides at least 10 percent of the project cost in
equity, the Partnership provides 50 percent of the project cost in a 20-year
floating rate first mortgage, and a local certified development company (CDC)
provides a 20-year fixed rate second mortgage loan for the remaining 40 percent
of the project cost. Both loans are fully amortizing and the Partnership loan
provides for an annual variable rate of interest equal to the prevailing prime
rate, as reported in The Wall Street Journal, plus up to 2.75 percent. The
Partnership also may originate senior loans secured by real estate as a
companion loan to the Section 7(a) guaranteed loans. The companion loan is
similar in terms to the Section 7(a) loan with the exception that the companion
loan is senior in debt priority to the Section 7(a) guaranteed loan, and
carries no government guarantee.
At December 31, 1996 and 1995, loans with a cost basis of $3,734,000 and
$3,835,000, respectively, were not performing and were not accruing interest.
Allied Capital Lending Corporation
19
<PAGE> 14
Allied Capital Lending Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, total investments consisted of the following:
<TABLE>
<CAPTION>
- ----------------------------------------------------------
(in thousands) 1996 1995
- ----------------------------------------------------------
<S> <C> <C>
At amortized cost:
Guaranteed portion under
Section 7(a) program $ 9,540 $10,275
Unguaranteed portion under
Section 7(a) program 32,854 33,223
Section 504 and
companion loans 17,917 3,804
----------------
Total $60,311 $47,302
================
At value:
Guaranteed portion under
Section 7(a) program $ 9,574 $10,275
Unguaranteed portion under
Section 7(a) program 32,600 33,068
Section 504 and
companion loans 18,234 3,804
----------------
Total $60,408 $47,147
================
- ----------------------------------------------------------
</TABLE>
For federal income tax purposes the unrealized depreciation for all securities,
based on cost, and the aggregate cost of total investments as of December 31,
1996 was $350,000 and $60,758,000 and as of December 31, 1995 was $368,000 and
$47,515,000, respectively.
NOTE 4. EXCESS SERVICING ASSET
When the Company sells the guaranteed portion of a Section 7(a) loan, it
retains the unguaranteed portion and the right to service the entire loan. The
Company recognizes premium income equal to the difference between the net
amount received from the sale and the carrying amount, plus the value of the
servicing rights retained in excess of a normal servicing fee (excess servicing
asset). The value of the excess servicing asset at the transaction date is
based on various factors including premiums realized on comparable transactions
in the secondary market and comparable market bids with normal servicing rates
on SBA loans.
NOTE 5. INVESTMENT ADVISORY AGREEMENT
The Company has entered into an investment advisory agreement with Advisers,
which is approved at least annually by the board of directors or by vote of a
majority of the outstanding voting securities of the Company. The agreement may
be terminated at any time on sixty days' notice, without penalty, by the board
of directors or by a vote of a majority of the outstanding voting securities
and will terminate automatically in the event of its assignment.
The Company pays all operating expenses, except those specifically required to
be borne by Advisers. The expenses paid by Advisers include the compensation of
the Company's officers and the cost of office space, equipment and other
personnel required for the Company's day-to-day operations. The expenses that
are paid by the Company include the Company's share of transaction costs
incident to investment activities, legal and accounting fees, the fees and
expenses of the Company's independent directors and the fees of its
officer-directors, the costs of printing and mailing proxy statements and
reports to shareholders, costs associated with promoting the Company's stock,
and the fees and expenses of the Company's custodian and transfer agent. The
Company is also required to pay expenses associated with litigation and other
extraordinary or non-recurring expenses, as well as expenses of required and
optional insurance and bonding. All fees paid by or for the account of an
actual or prospective borrower in connection with an investment are received by
the Company, rather than by Advisers. Advisers is entitled to retain for its
own account any fees paid by or for the account of a company, including a
portfolio company, for special investment banking or consulting work performed
for that company which is not related to such investment transaction or
management assistance.
As compensation for its services to and the expenses paid for the account of
the Company, Advisers is paid, quarterly in arrears, a fee equal to 0.625
percent per quarter of the quarter-end value of the Company's consolidated
total assets, less interim investments, cash and cash equivalents plus 0.125
percent per quarter of the quarter-end value of consolidated interim
investments, cash and cash equivalents. These fees on an annual basis
approximate 2.5 percent on consolidated invested assets, and 0.5 percent on
consolidated interim investments, cash and cash equivalents.
Allied Capital Lending Corporation
20
<PAGE> 15
Allied Capital Lending Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. DIVIDENDS AND DISTRIBUTIONS
The Company's board of directors declared and the Company paid dividends of
$0.32 per share for the fourth quarter and $0.30 per share for the first,
second and third quarters of 1996. The Company's board of directors also
declared an extra distribution in the fourth quarter of $0.08 per share, which
was paid to shareholders on January 31, 1997, for a total distribution in 1996
equal to $1.30 per share.
The distributions of taxable income declared by the board of directors for
1996, 1995 and 1994 were considered ordinary income for federal income tax
purposes.
The 1996 distributions of $1.30 per share were comprised of cash payments and
issuance of the Company's shares pursuant to the Company's dividend
reinvestment plan in the amounts of $1.24 and $0.06, per share, respectively.
The 1995 distributions of $1.22 per share, were comprised of cash payments and
issuance of the Company's common shares pursuant to the Company's dividend
reinvestment plan in the amounts of $1.18 and $0.04 per share, respectively.
The 1994 distributions of $1.08 per share were comprised of cash payments and
issuance of the Company's shares pursuant to the Company's dividend
reinvestment plan in the amounts of $1.07 and $0.01, respectively.
NOTE 7. NOTES PAYABLE
In conjunction with its Reorganization, the Company and its subsidiaries have
entered into new financing arrangements effective January 1, 1997. The new
arrangements provide for two separate secured lines of credit with available
amounts totaling $40,000,000. The lines have interest rates ranging from LIBOR
plus 1.6 percent to LIBOR plus 2.2 percent. Interest is payable monthly, and
both lines expire in May 1998. The lines require a total annual fee of $80,000
in total.
During 1996, the Company had a $20,000,000 secured revolving line of credit
with a bank. The interest rate associated with this line of credit was equal to
the one-month LIBOR plus 2.2 percent per annum, payable monthly. As of December
31, 1996 and 1995, the Company was paying interest at 7.76 percent and 7.95
percent per annum, respectively, on the amounts outstanding under this line.
The line of credit required a quarterly facility fee of 0.375 percent per annum
on the unused portion of the line of credit. As of December 31, 1996 and 1995,
the Company had outstanding borrowings under the secured line of credit equal
to $15,661,000 and $13,335,000, respectively.
During 1996, the Partnership had a secured revolving line of credit with a bank
to borrow up to $15,000,000 at a rate equal to one-month LIBOR plus 2.7 percent
per annum, payable monthly. As of December 31, 1996, the Partnership paid
interest of 8.26 percent on the amounts outstanding under this line. The
agreement required payment of a quarterly facility fee of 0.375 percent per
annum on the unused portion of the line. As of December 31, 1996, the
Partnership had outstanding borrowings under this secured line of credit equal
to $8,082,000.
The Company had a $2,000,000 unsecured line of credit with a bank, which
charged interest at The Wall Street Journal prime rate plus 0.25 percent per
annum, payable monthly. This unsecured line of credit was canceled in April
1996. As of December 31, 1995, the Company was paying interest at 8.75 percent
per annum on the amounts outstanding under this line. The line of credit
required a quarterly facility fee of 0.375 percent per annum on the unused
portion of the line of credit. As of December 31, 1995, the Company had
outstanding borrowings under the unsecured line of credit equal to $1,055,000.
The Partnership had a credit agreement with an investment bank whereby it could
borrow up to $20,000,000. This credit agreement charged interest at a rate
equal to one-month LIBOR plus 2 percent per annum, payable monthly, and expired
in September 1996. The agreement required a quarterly facility fee of 0.15
percent per annum on the unused portion of the line. The Partnership had total
borrowings under this agreement equal to $4,524,000 at December 31, 1995, at
interest rates ranging from 7.75 percent to 7.93 percent per annum.
NOTE 8. SHAREHOLDERS' EQUITY
The Company issued to common shareholders of record at the close of business on
April 26, 1996, non-transferable subscription rights that entitled record date
shareholders to subscribe for and purchase from the Company up to one
authorized, but unissued, share of the Company's common stock for each five
subscription rights held (rights offering). The Company offered a total of
628,909 shares of common
Allied Capital Lending Corporation
21
<PAGE> 16
Allied Capital Lending Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
stock pursuant to this offer, with the right to increase the number of shares
subject to be purchased by 15 percent, or 94,336 shares, for an aggregate total
of 723,245 shares available under the offer. Shareholders who fully exercised
their subscription rights were entitled to the additional privilege of
subscribing for shares from the offer not acquired by the exercise of
subscription rights.
Shareholders participating in the rights offering subscribed for 195,457 shares
though the primary subscription and 353,430 shares through the oversubscription
privilege for a total of 548,887 shares. The subscription price per common
share was $13.04, which equaled 95 percent of the average of the last reported
sale price of a share of common stock on the Nasdaq National Market on June 4,
1996 (the expiration date of the offer) and each of the four preceding business
days. The Company paid a 2.5 percent commission to eligible broker/dealers on
each share sold as a result of their soliciting efforts. The Company received
gross proceeds of $7,158,000 from the rights offering.
The Company reserved the right to offer and sell any shares not subscribed for
in the rights offering to one or more third parties. Therefore, in July 1996
the Company sold the 174,358 shares (including the additional 94,336 shares
added to the offer at the discretion of the Company) not sold in the rights
offering to a private buyer at a net price of $12.74 per share (private
offering). This price was determined as the $13.04 per share paid by
stockholders in the rights offering onJune 4, 1996, less the second quarter
dividend of $0.30 per share paid to shareholders of record on June 14, 1996.
This price allowed the buyer to purchase the stock in July 1996 at the same
price he would have paid if he had been a shareholder participating in the
rights offering prior to payment of the second quarter dividend. The
underwriter for this transaction received a 2.56% commission, or $0.326 per
share. The Company received gross proceeds of $2,221,000 from this sale.
Net proceeds from the rights offering and private offering combined were
$8,883,000, after expenses of approximately $496,000, including commissions.
The Company has a dividend reinvestment plan (the Plan). Shareholders of record
are automatically enrolled in the Plan, and the Plan is considered an "opt-out"
plan. The Company may instruct the stock transfer agent to buy shares in the
open market or the Company may issue new shares.
When the Company issues new shares, the price is equal to the average of the
closing sales prices reported for the shares for the five days on which trading
in the shares takes place immediately prior to and including the dividend
payment date. During 1996 and 1995, the Company issued 18,739 and 14,536 new
shares pursuant to the Plan at an average price of $14.35 and $12.60 per share,
respectively.
The Company has an incentive stock option plan (ISO plan) which provides for
the granting of stock options or shares to the Company's officers. A total of
504,860 shares of the Company's stock are available for option under the ISO
plan. Options may be granted under the ISO plan at a price not less than the
market value of the underlying shares on the date of the grant and in any event
not less than the original offering price of the Company's shares ($15) and are
generally exercisable over a ten-year period. The ISO plan also permits a
one-time grant of options to each member of the board of directors who is not
an employee of the investment adviser to purchase 10,000 shares of the
Company's common stock. Holders of ten percent or more of the Company's stock
must exercise their options within a five-year period.
Officers of the Company may borrow from the Company the funds necessary to
exercise vested options. There were no loans outstanding at December 31, 1996
or 1995.
A summary of the activity in the ISO plan is as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------
1996 1995 1994
- ----------------------------------------------------------
<S> <C> <C> <C>
Options outstanding
at January 1 493,290 283,310 266,640
Options granted 108,228 266,646 50,000
Options exercised -- -- --
Options canceled (96,658) (56,666) (33,330)
--------------------------
Options outstanding
at December 31 504,860 493,290 283,310
==========================
Options available for grant -- 11,570 221,550
Options exercisable 301,589 259,974 153,318
--------------------------
Option prices per share:
Granted $15.00 $15.00 $ 15.00
Exercised $ -- $ -- $ --
Canceled $15.00 $15.00 $ 15.00
--------------------------
- ----------------------------------------------------------
</TABLE>
Allied Capital Lending Corporation
22
<PAGE> 17
Allied Capital Lending Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company accounts for the ISO plan as required by APB Opinion No. 25, and no
compensation cost has been recognized. Had compensation cost for the plan been
determined consistent with SFAS No. 123, the Company's net increase in net
assets resulting from operations and earnings per share would have been reduced
to the following pro forma amounts for the years ended December 31:
<TABLE>
<CAPTION>
- ----------------------------------------------------------
(in thousands, except per share amounts) 1996 1995
- ----------------------------------------------------------
<S> <C> <C>
Net increase in net assets
resulting from operations:
As reported $6,316 $5,252
Pro forma (unaudited) $6,093 $4,926
Earnings per share:
As reported $ 1.32 $ 1.20
Pro forma (unaudited) $ 1.27 $ 1.13
- ----------------------------------------------------------
</TABLE>
Because the method of accounting required by SFAS No. 123 has not been applied
to options granted prior to January 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years. The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants: risk-free interest rates of 6 percent for both
1996 and 1995; expected dividend yield of 9 percent for 1996 and 1995; expected
life of 5 years for all options granted in 1996 and 1995, respectively; and
expected volatility of 46 percent for 1996 and 1995, respectively.
NOTE 9. COMMITMENTS AND CONTINGENCIES
The Company had total loan commitments outstanding at December 31, 1996 to
various qualified small businesses totaling $40,548,000.
The Company is party to certain lawsuits in connection with its business. While
the outcome of these legal proceedings cannot be predicted with certainty at
this time, management does not expect that these actions will have a material
effect upon the financial condition of the Company.
NOTE 10. CONCENTRATIONS OF CREDIT RISK
The Company and the Partnership place their cash in financial institutions and,
at times, cash held in checking accounts may be in excess of the FDIC insurance
limit.
NOTE 11. QUARTERLY FINANCIAL HIGHLIGHTS (UNAUDITED)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
1996
(in thousands, except per share amounts) QTR 1 QTR 2 QTR 3 QTR 4
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total investment income $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
- ------------------------------------------------------------------------------------------------------------------------
<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>
Allied Capital Lending Corporation
23
<PAGE> 18
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
Allied Capital Lending Corporation
We have audited the consolidated balance sheet of Allied Capital Lending
Corporation as of December 31, 1996 and 1995, including the consolidated
statement of investments as of December 31, 1996 and the related consolidated
statements of operations, changes in net assets and cash flows for each of the
three years in the period ended December 31, 1996 and the selected per share
data presented as financial highlights for each of the five years in the period
ended December 31, 1996. These financial statements and per share data are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and per share data based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and per share data
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included the examination or confirmation of
securities owned at December 31, 1996 and 1995. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements and selected per share
data referred to above present fairly, in all material respects, the
consolidated financial position of Allied Capital Lending Corporation as of
December 31, 1996 and 1995, and the consolidated results of their operations,
changes in net assets and cash flows for each of the three years in the period
ended December 31, 1996, and the selected per share data for each of the five
years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
As explained in Note 2, the consolidated financial statements include
securities valued at $60,408,000 as of December 31, 1996 and $47,147,000 as of
December 31, 1995, (88% and 85%, respectively, of total assets) whose values
have been estimated by the Board of Directors in the absence of readily
ascertainable market values. We have reviewed the procedures used by the Board
of Directors in arriving at its estimate of value of such securities and have
inspected underlying documentation, and, in the circumstances, we believe the
procedures are reasonable and the documentation appropriate. However, because
of the inherent uncertainty of valuation, those estimated values may differ
significantly from the values that would have been used had a ready market for
the securities existed, and the differences could be material.
/s/ MATTHEWS, CARTER AND BOYCE
McLean, Virginia
February 7, 1997
Allied Capital Lending Corporation
24
<PAGE> 19
Allied Capital Lending Corporation
DIRECTORS AND OFFICERS*
<TABLE>
<CAPTION>
DIRECTORS OFFICERS
<S> <C> <C>
William L. Walton(1) William L. Walton Christina L. DelDonna
Chairman of the Board & Chairman of the Board & Vice President & Assistant Controller
Chief Executive Officer Chief Executive Officer
Penni F. Roll
David Gladstone Katherine C. Marien Vice President, Controller &
Vice Chairman President & Chief Operating Officer Assistant Treasurer
Katherine C. Marien(1) Jon A. DeLuca Ruth J. Semple
President & Chief Operating Officer Executive Vice President, Treasurer & Vice President
Chief Financial Officer
Jon W. Barker(2) Suzanne V. Sparrow
Associate, Grubb & Ellis John M. Scheurer Vice President, Investor Relations &
Executive Vice President Assistant Secretary
Eleanor Deane Bierbower(1,3)
Managing Partner, Joan M. Sweeney Donald L. Benfer
Deane Investment Company L.P. Executive Vice President Assistant Vice President
Robert V. Fleming II(1,3) G. Cabell Williams III Kristine M. Lansing
Principal, Hoskinson Davis & Fleming, Inc. Executive Vice President Assistant Vice President &
Assistant Secretary
Anthony T. Garcia(2) Tricia B. Daniels
Financial Consultant Senior Vice President & Secretary Donna B. Natale
Assistant Vice President &
Arthur H. Keeney III(2) Mary E. Olson Assistant Secretary
Director, President & Chief Executive Officer, Senior Vice President
The East Carolina Bank Thomas R. Salley III
George Stelljes III Assistant Secretary
Robin B. Martin (1,3) Senior Vice President
President & Chief Executive Officer,
The Deer River Group Kelly A. Anderson
Vice President, Corporate Controller &
George C. Williams Assistant Treasurer
Financial Consultant
(1) Executive Committee
(2) Audit Committee
(3) Compensation Committee
*As of March 1, 1997
</TABLE>
QUARTERLY STOCK PRICE AND DISTRIBUTIONS TO SHAREHOLDERS
The following table sets forth the high and low bid prices of the Company's
common stock by calendar quarter during 1996 and 1995 and the distributions paid
per share. These quotations represent interdealer quotations and do not include
markups, markdowns or commissions and may not necessarily represent actual
transactions.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
1996 1995
DISTRIBUTIONS DISTRIBUTIONS
HIGH LOW PER SHARE HIGH LOW PER SHARE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FIRST QUARTER $15.00 $12.75 $0.30 $12.75 $ 9.50 $0.27
SECOND QUARTER $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 $1.30 $1.22
===== =======
</TABLE>
Designed by Curran & Connors, Inc.
<PAGE> 1
EXHIBIT 23
[MATTHEWS, CARTER AND BOYCE LETTERHEAD]
CONSENT OF INDEPENDENT ACCOUNTANTS
As independent accountants we hereby consent to the incorporation by reference
in this Form 10-K of our report dated February 7, 1997 included in Allied
Capital Lending Corporation's Annual Report to shareholders. It should be noted
that we have not audited any financial statements of the company subsequent to
December 31, 1996 or performed any audit procedures subsequent to the date of
our report.
/s/ MATTHEWS, CARTER AND BOYCE
McLean, Virginia
March 27, 1997
<PAGE> 2
EXHIBIT 23
[MATTHEWS, CARTER AND BOYCE LETTERHEAD]
CONSENT OF INDEPENDENT ACCOUNTANTS
As independent accountants we hereby consent to the incorporation by reference
in the registration statement on Form S-8 File No. 333-23761, of our report
dated February 7, 1997 incorporated by reference in Allied Capital Lending
Corporation's Form 10-K for the year ended December 31, 1996 and to all
references to our Firm included in such registration statement.
/s/ MATTHEWS, CARTER AND BOYCE
McLean, Virginia
March 27, 1997
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ALLIED
CAPITAL LENDING CORPORATION AND SUBSIDIARY'S CONSOLIDATED BALANCE SHEET AND
CONSOLIDATED STATEMENTS OF OPERATIONS, CHANGES IN NET ASSETS AND CASH FLOWS
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
INCORPORATED BY REFERENCE IN FORM 10-K.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 60,311
<INVESTMENTS-AT-VALUE> 60,408
<RECEIVABLES> 861
<ASSETS-OTHER> 774
<OTHER-ITEMS-ASSETS> 6,359
<TOTAL-ASSETS> 68,402
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 26,431
<TOTAL-LIABILITIES> 26,431
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 42,404
<SHARES-COMMON-STOCK> 5,127
<SHARES-COMMON-PRIOR> 4,385
<ACCUMULATED-NII-CURRENT> (530)
<OVERDISTRIBUTION-NII> (317)
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 97
<NET-ASSETS> 41,971
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 7,463
<OTHER-INCOME> 2,563
<EXPENSES-NET> 3,776
<NET-INVESTMENT-INCOME> 6,250
<REALIZED-GAINS-CURRENT> (186)
<APPREC-INCREASE-CURRENT> 252
<NET-CHANGE-FROM-OPS> 6,316
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 6,381
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 723
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 19
<NET-CHANGE-IN-ASSETS> 9,087
<ACCUMULATED-NII-PRIOR> (213)
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> (96)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,520
<INTEREST-EXPENSE> 1,772
<GROSS-EXPENSE> 3,776
<AVERAGE-NET-ASSETS> 37,427
<PER-SHARE-NAV-BEGIN> 7.50
<PER-SHARE-NII> 1.31
<PER-SHARE-GAIN-APPREC> 0.01
<PER-SHARE-DIVIDEND> 1.30
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.19
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 21,328
<AVG-DEBT-PER-SHARE> 4.16
</TABLE>
