<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FORM 10-Q
------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
<TABLE>
<S> <C>
FOR THE QUARTERLY PERIOD COMMISSION FILE NUMBER:
ENDED SEPTEMBER 30, 1998 0-22832
</TABLE>
------------------
ALLIED CAPITAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
MARYLAND 52-1081052
(STATE OR JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
------------------
1919 PENNSYLVANIA AVENUE, N.W.
WASHINGTON, DC 20006
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
Registrant's telephone number, including area code: (202) 331-1112
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 12 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods as 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 [ ]
On November 6, 1998 there were 52,298,351 shares outstanding of the
Registrant's common stock, $0.0001 par value.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
ALLIED CAPITAL CORPORATION
FORM 10-Q INDEX
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet as of September 30,
1998 and December 31, 1997......................... 1
Consolidated Statement of Operations -- For the
Three and Nine Months Ended September 30, 1998 and
1997............................................... 2
Consolidated Statement of Changes in Net
Assets -- For the Nine Months Ended September 30,
1998 and 1997...................................... 3
Consolidated Statement of Cash Flows -- For the
Nine Months Ended September 30, 1998 and 1997...... 4
Consolidated Statement of Investments as of
September 30, 1998 and December 31, 1997........... 5
Notes to Consolidated Financial Statements......... 15
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations......... 24
Item 3. Quantitative and Qualitative Disclosures about
Market Risk........................................... 36
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................. 37
Item 2. Changes in Securities and Use of Proceeds...... 37
Item 3. Defaults Upon Senior Securities................ 37
Item 4. Submission of Matters to a Vote of Security
Holders............................................... 37
Item 5. Other Information.............................. 37
Item 6. Exhibits and Reports on Form 8-K............... 37
Signatures............................................. 40
</TABLE>
<PAGE> 3
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES) (UNAUDITED)
<S> <C> <C>
ASSETS
Portfolio at value:
Commercial mortgage loans (cost: 1998-$302,811;
1997-$447,016; 1996-$373,378)........................ $302,773 $447,244
Mezzanine loans and debt securities (cost:
1998-$272,621; 1997-$181,184; 1996-$178,664)......... 254,813 167,842
Small Business Administration 7(a) loans (cost:
1998-$50,084; 1997-$41,103; 1996-$42,351)............ 48,505 40,709
Interest in securitization pool of commercial mortgage
loans (cost: 1998-$85,290; 1997-$0; 1996-$0)......... 83,790 --
Equity interests in portfolio companies (cost:
1998-$23,977; 1997-$20,050; 1996-$18,521)............ 46,968 39,906
Other portfolio assets
(cost: 1998-$3,089; 1997-$1,367; 1996-$362)......... 3,009 1,320
-------- --------
Total portfolio at value.......................... 739,858 697,021
-------- --------
Cash and cash equivalents................................... 43,622 70,437
U.S. government securities.................................. -- 11,091
Other assets................................................ 31,997 29,226
-------- --------
Total assets...................................... $815,477 $807,775
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Debentures and notes payable.......................... $291,650 $308,821
Revolving lines of credit............................. 70,000 38,842
Accounts payable and other liabilities................ 28,112 23,984
Dividends and distributions payable................... -- 9,068
-------- --------
389,762 380,715
-------- --------
Commitments and contingencies
Preferred stock issued to Small Business Administration..... 7,000 7,000
Shareholders' equity:
Common stock, $0.0001 par value, 100,000,000 shares
authorized; 52,298,351, 52,047,318 and 48,237,621
issued and outstanding at September 30, 1998,
December 31, 1997 and 1996, respectively............. 5 5
Additional paid-in capital............................ 456,332 451,044
Common stock held in deferred compensation trust;
808,348 shares at September 30, 1998................. (19,431) --
Notes receivable from sale of common stock............ (23,900) (29,611)
Net unrealized appreciation (depreciation) on
portfolio............................................ 864 1,301
Undistributed (distributions in excess of) earnings... 4,845 (2,679)
-------- --------
Total shareholders' equity........................ 418,715 420,060
-------- --------
Total liabilities and shareholders' equity........ $815,477 $807,775
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
1
<PAGE> 4
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED FOR THE NINE MONTHS
SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
1998 1997 1998 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) -------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Interest and related portfolio income:
Interest.......................................... $20,183 $22,099 $58,428 $62,844
Net premiums from loan dispositions............... 865 1,997 2,913 5,225
Net gain on securitization of commercial mortgage
loans........................................... -- -- 14,812 --
Investment advisory fees and other income......... 1,498 1,015 4,611 3,352
------- ------- ------- -------
Total interest and related portfolio income... 22,546 25,111 80,764 71,421
------- ------- ------- -------
Expenses:
Interest on indebtedness.......................... 5,709 7,379 14,539 19,718
Salaries and employee benefits.................... 2,737 2,302 8,254 6,507
General and administrative........................ 3,093 3,337 8,970 7,040
------- ------- ------- -------
Total operating expenses...................... 11,539 13,018 31,763 33,265
Formula and cut-off awards........................ 1,606 -- 5,532 --
------- ------- ------- -------
Portfolio income before realized and unrealized gains... 9,401 12,093 43,469 38,156
------- ------- ------- -------
Net realized and unrealized gains:
Net realized gains................................ 6,207 2,901 20,001 7,526
Net unrealized gains (losses)..................... 883 2,878 (437) 4,787
------- ------- ------- -------
Total net realized and unrealized gains....... 7,090 5,779 19,564 12,313
------- ------- ------- -------
Income before minority interests and income taxes....... 16,491 17,872 63,033 50,469
Minority interests...................................... -- 361 -- 950
Income tax expense...................................... 1,585 365 1,585 1,431
------- ------- ------- -------
Net increase in net assets resulting from operations.... $14,906 $17,146 $61,448 $48,088
======= ======= ======= =======
Basic earnings per common share......................... $ 0.29 $ 0.35 $ 1.19 $ 0.98
======= ======= ======= =======
Diluted earnings per common share....................... $ 0.29 $ 0.34 $ 1.19 $ 0.97
======= ======= ======= =======
Weighted average basic common shares outstanding........ 51,373 49,316 51,502 48,759
======= ======= ======= =======
Weighted average diluted common shares outstanding...... 51,377 49,759 51,712 49,287
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE> 5
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
--------------------
1998 1997
-------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
<S> <C> <C>
Operations:
Portfolio income before realized and unrealized
gains................................................. $ 43,469 $ 38,156
Net realized gains..................................... 20,001 7,526
Net unrealized gains (losses).......................... (437) 4,787
Minority interests and income tax expense.............. (1,585) (2,381)
-------- --------
Net increase in net assets resulting from
operations...................................... 61,448 48,088
-------- --------
Shareholder distributions:
Portfolio income....................................... (54,727) (44,683)
Preferred stock dividend............................... (165) (165)
-------- --------
Net decrease in net assets resulting from
shareholder distributions....................... (54,892) (44,848)
-------- --------
Capital share transactions:
Net decrease (increase) in notes receivable from sale
of common stock....................................... 5,711 (7,619)
Issuance of common stock upon the exercise of stock
options............................................... 222 16,653
Issuance of common stock in lieu of cash
distributions......................................... 4,097 7,362
Purchase of common stock by deferred compensation
trust................................................. (19,431) --
Other.................................................. 1,500 739
-------- --------
Net (decrease) increase in net assets resulting
from capital share transactions................. (7,901) 17,135
-------- --------
Total (decrease) increase in net assets..................... (1,345) 20,375
-------- --------
Net assets at beginning of period........................... 420,060 402,134
-------- --------
Net assets at end of period................................. $418,715 $422,509
======== ========
Net asset value per common share............................ $ 8.13 $ 8.42
======== ========
Common shares outstanding at end of period.................. 51,490 50,188
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 6
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
----------------------
1998 1997
(IN THOUSANDS) --------- ---------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net increase in net assets resulting from operations...... $ 61,448 $ 48,088
Adjustments
Net unrealized gains................................... (286) (4,787)
Net gain on securitization of commercial mortgage
loans................................................. (14,812) --
Depreciation and amortization.......................... 523 348
Amortization of loan discounts and fees................ (3,237) (7,081)
Deferred income taxes.................................. -- 404
Minority interests..................................... -- 949
Changes in other assets and liabilities................ 6,206 8,146
--------- ---------
Net cash provided by operating activities............ 49,842 46,067
--------- ---------
Cash flows from investing activities:
Investments in small business concerns.................... (349,586) (262,169)
Collections of investment principal....................... 75,817 142,515
Proceeds from the sale of loans........................... 28,957 37,954
Proceeds from securitization of commercial mortgage
loans.................................................. 223,401 --
Net (purchase) redemption of U.S. government securities... 11,091 (24,933)
Collections of notes receivable from sale of common
stock.................................................. 5,411 6,356
Other investing activities................................ (1,431) (903)
--------- ---------
Net cash used in investing activities................ (6,340) (101,180)
--------- ---------
Cash flows from financing activities:
Sale of common stock...................................... 222 2,659
Purchase of common stock by deferred compensation trust... (19,431) --
Common dividends and distributions paid................... (51,107) (45,273)
Special undistributed earnings distribution paid.......... (8,261) --
Preferred stock dividends................................. (385) (220)
Net borrowings under (payments on) debentures and notes
payable................................................ (17,171) 85,531
Net borrowings under (payments on) revolving lines of
credit................................................. 31,158 4,255
Net payments on government securities available for
sale................................................... -- --
Other financing activities................................ (5,342) (2,667)
--------- ---------
Net cash provided by (used in) financing
activities.......................................... (70,317) 44,285
--------- ---------
Net decrease in cash and cash equivalents................... $ (26,815) $ (10,828)
Cash and cash equivalents at beginning of period............ $ 70,437 $ 71,841
--------- ---------
Cash and cash equivalents at end of period.................. $ 43,622 $ 61,013
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 7
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INVESTMENTS
<TABLE>
<CAPTION>
PORTFOLIO COMPANY SEPTEMBER 30, 1998
(IN THOUSANDS, EXCEPT NUMBER -------------------
OF SHARES) INVESTMENT(2) COST VALUE
- ----------------------------- --------------------------------------------------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
MEZZANINE LOANS AND DEBT SECURITIES AND EQUITY INTERESTS IN PORTFOLIO COMPANIES
Acme Paging, L.P. Debt Securities $ 6,204 $ 6,204
Partnership Interests 1,456 2,600
- -------------------------------------------------------------------------------------------------------
American Barbecue & Grill, Loans 1,555 1,555
Inc. Debt Securities 2,186 2,186
Warrants 125 125
- -------------------------------------------------------------------------------------------------------
Arlington Square, L.P. Cash Flow Participation -- 750
- -------------------------------------------------------------------------------------------------------
Arnold Moving Co., Inc. Loans 620 620
- -------------------------------------------------------------------------------------------------------
ARS, Inc. Debt Securities 9,748 9,748
Warrants 171 768
- -------------------------------------------------------------------------------------------------------
ASW Holding Corporation Warrants 25 25
- -------------------------------------------------------------------------------------------------------
Au Bon Pain Co., Inc.(1) Debt Securities 7,415 7,415
Warrants 227 --
- -------------------------------------------------------------------------------------------------------
Brazos Sportswear, Inc.(1) Common Stock (342,938 shares) 330 412
- -------------------------------------------------------------------------------------------------------
Calendar Broadcasting, Inc. Debt Securities 3,815 3,815
Warrants 150 650
- -------------------------------------------------------------------------------------------------------
Candlewood Hotel Company(1) Preferred Stock (3,250 shares) 3,250 3,250
- -------------------------------------------------------------------------------------------------------
Celebrities, Inc. Debt Securities 345 345
Warrants 12 12
- -------------------------------------------------------------------------------------------------------
CeraTech Holdings Corporation Debt Securities 1,990 270
Warrants -- --
- -------------------------------------------------------------------------------------------------------
Cherry Tree Toys, Inc. Debt Securities 1,597 1,597
Common Stock (220 shares) 1 --
- -------------------------------------------------------------------------------------------------------
Convenience Corporation of Debt Securities 8,388 2,774
America Series A Preferred Stock (31,521 shares) 337 --
Warrants -- --
- -------------------------------------------------------------------------------------------------------
Cooper Natural Resources, Debt Securities 3,448 3,448
Inc. Warrants -- 1,138
- -------------------------------------------------------------------------------------------------------
Cosmetic Manufacturing Debt Securities 2,946 2,946
Resources, LLC Options -- --
- -------------------------------------------------------------------------------------------------------
Coverall North America Loan 8,912 8,912
- -------------------------------------------------------------------------------------------------------
Csabai Canning Factory Rt. Hungarian Quotas (9.2%) 700 700
- -------------------------------------------------------------------------------------------------------
DEH Printed Circuits, Inc. Warrants 250 950
- -------------------------------------------------------------------------------------------------------
DeVlieg-Bullard, Inc.(1) Warrants 350 231
- -------------------------------------------------------------------------------------------------------
</TABLE>
(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are
generally non-income producing and restricted.
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE> 8
<TABLE>
<CAPTION>
PORTFOLIO COMPANY SEPTEMBER 30, 1998
(IN THOUSANDS, EXCEPT NUMBER -------------------
OF SHARES) INVESTMENT(2) COST VALUE
- ----------------------------- --------------------------------------------------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Directory Investment Common Stock (470 shares) $ -- $ 100
Corporation
- -------------------------------------------------------------------------------------------------------
Directory Lending Corporation Series A Common Stock (1,031 shares) -- 386
Series B Common Stock (188 shares) 235 70
Series C Common Stock (292 shares) 656 109
Series A Preferred Stock (214 shares) 307 214
Series B Preferred Stock (175 shares) 931 175
Series C Preferred Stock (58 shares) 58 58
- -------------------------------------------------------------------------------------------------------
DMI Furniture, Inc.(1) Common Stock (100,840 shares) 126 253
- -------------------------------------------------------------------------------------------------------
Drilltech Patents & Loans 9,902 9,902
Technologies Co., Inc.
- -------------------------------------------------------------------------------------------------------
ECM Enterprises Loan 34 4
- -------------------------------------------------------------------------------------------------------
EDM Consulting, LLC Loans 30 30
Debt Securities 1,875 431
Equity Interest -- --
- -------------------------------------------------------------------------------------------------------
El Dorado Communications, Loans 306 306
Inc.
- -------------------------------------------------------------------------------------------------------
Eparfin S.A. Loan 29 29
- -------------------------------------------------------------------------------------------------------
Esquire Communications Warrants 6 180
Ltd.(1)
- -------------------------------------------------------------------------------------------------------
Everything Yogurt Loan 42 42
- -------------------------------------------------------------------------------------------------------
Ex Terra Funding, LLC Series A Preferred Stock (500 shares) 497 497
Common Stock (2,500 shares) 3 3
Warrants -- --
- -------------------------------------------------------------------------------------------------------
Fairchild Industrial Products Debt Securities 5,690 5,690
Company Warrants 280 3,629
- -------------------------------------------------------------------------------------------------------
FHM Distributions, Inc. Loan 200 200
- -------------------------------------------------------------------------------------------------------
Gibson Guitar Corporation Debt Securities 14,918 14,918
Warrants 525 1,000
- -------------------------------------------------------------------------------------------------------
Ginsey Industries, Inc. Loans 5,000 5,000
Convertible Debentures 500 500
Warrants -- --
- -------------------------------------------------------------------------------------------------------
Golden Eagle/Satellite Loans 1,392 1,392
Archery, LLC Convertible Debentures 2,248 2,242
- -------------------------------------------------------------------------------------------------------
Grant Broadcasting System II Warrants 139 3,600
- -------------------------------------------------------------------------------------------------------
Grant Television, Inc. Debt Securities 9,046 9,046
Warrants -- --
- -------------------------------------------------------------------------------------------------------
Han Hie Loan 512 512
- -------------------------------------------------------------------------------------------------------
H.B.N. Communications, Inc. Loan 240 240
- -------------------------------------------------------------------------------------------------------
Hotelevision Preferred Stock (1,000,000 shares) 1,000 1,000
- -------------------------------------------------------------------------------------------------------
In the Dough, Inc. Loan 2 2
- -------------------------------------------------------------------------------------------------------
</TABLE>
(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are
generally non-income producing and restricted.
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE> 9
<TABLE>
<CAPTION>
PORTFOLIO COMPANY SEPTEMBER 30, 1998
(IN THOUSANDS, EXCEPT NUMBER -------------------
OF SHARES) INVESTMENT(2) COST VALUE
- ----------------------------- --------------------------------------------------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
IndeNet Corporation(1) Debt Securities $ 14,872 $ 14,872
(Enterprise Software, Inc.) Common Stock (121,875 shares) 986 649
Warrants -- --
- -------------------------------------------------------------------------------------------------------
Jeff & Chris Mufflers, Inc. Loan 102 102
- -------------------------------------------------------------------------------------------------------
JRI Industries, Inc. Debt Securities 2,361 2,361
Warrants 74 74
- -------------------------------------------------------------------------------------------------------
Julius Koch USA, Inc. Debt Securities 4,676 4,676
Warrants 324 2,100
- -------------------------------------------------------------------------------------------------------
Kirker Enterprises, Inc. Loans 3,739 3,739
Debt Securities 2,687 2,687
Warrants 348 3,500
Equity Interest 3 3
- -------------------------------------------------------------------------------------------------------
Kirkland's, Inc. Debt Securities 6,275 6,275
Warrants 96 2,850
- -------------------------------------------------------------------------------------------------------
KZSF Broadcasting, Inc. Loan 884 884
- -------------------------------------------------------------------------------------------------------
Liberty-Pittsburgh Systems, Debt Securities 3,395 3,395
Inc. Common Stock (60,000 shares) 100 100
- -------------------------------------------------------------------------------------------------------
Lingcomm, Inc. Loan 207 207
- -------------------------------------------------------------------------------------------------------
Love Funding Corporation Series D Preferred Stock (26,000 shares) 359 213
Warrants 200 --
- -------------------------------------------------------------------------------------------------------
Magic Auto Loan 3 3
- -------------------------------------------------------------------------------------------------------
May Investments Loan 47 --
- -------------------------------------------------------------------------------------------------------
Meigher Communications Loan 2,913 2,913
- -------------------------------------------------------------------------------------------------------
Mid Atlantic Telcom Plus, LLC Loan 10,342 10,342
- -------------------------------------------------------------------------------------------------------
MidSouth Data Systems, Inc. Debt Securities 7,586 7,586
Warrants 348 348
- -------------------------------------------------------------------------------------------------------
Midview Associates, L.P. Debt Securities 257 257
Options -- --
- -------------------------------------------------------------------------------------------------------
Mihadas Loan 287 287
- -------------------------------------------------------------------------------------------------------
Mill-It Striping, Inc. Common Stock (18 shares) 250 --
- -------------------------------------------------------------------------------------------------------
MLX/Morton Industrial Common Stock (5,835 shares) 241 77
Group(1)
- -------------------------------------------------------------------------------------------------------
Monitoring Solutions, Inc. Loans 33 33
Debt Securities 1,823 219
Common Stock (33,333 shares) -- --
Warrants -- --
- -------------------------------------------------------------------------------------------------------
Nobel Education Dynamics, Debt Securities 9,402 9,402
Inc.(1) Series D Convertible Preferred Stock
(265,957 shares) 2,000 2,000
Warrants 575 575
- -------------------------------------------------------------------------------------------------------
</TABLE>
(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are
generally non-income producing and restricted.
The accompanying notes are an integral part of these consolidated financial
statements.
7
<PAGE> 10
<TABLE>
<CAPTION>
PORTFOLIO COMPANY SEPTEMBER 30, 1998
(IN THOUSANDS, EXCEPT NUMBER -------------------
OF SHARES) INVESTMENT(2) COST VALUE
- ----------------------------- --------------------------------------------------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Norman's Yogurt, Inc. Loan $ 12 $ 12
- -------------------------------------------------------------------------------------------------------
Nortek Aviation Support, Inc. Debt Securities 12,500 12,500
Warrants -- --
- -------------------------------------------------------------------------------------------------------
Northeast Broadcasting Group, Debt Securities 420 420
L.P.
- -------------------------------------------------------------------------------------------------------
New York Donut Corporation Loan 73 73
- -------------------------------------------------------------------------------------------------------
Nursefinders, Inc. Debt Securities 10,829 10,829
Warrants 900 900
- -------------------------------------------------------------------------------------------------------
Old Mill Holdings, Inc. Debt Securities 589 289
Warrants 77 --
- -------------------------------------------------------------------------------------------------------
PAL Liberty, Inc. Loan 234 234
- -------------------------------------------------------------------------------------------------------
Peerless Group, Inc.(1) Common Stock (379,475 shares) 17 2,163
Warrants 4 1,031
- -------------------------------------------------------------------------------------------------------
David Peters Loan 165 55
- -------------------------------------------------------------------------------------------------------
PIATL Holdings, Inc. Loans 107 107
Preferred Stock (276 shares) 160 178
Common Stock (36 shares) -- --
- -------------------------------------------------------------------------------------------------------
Pico Products, Inc.(1) Debt Securities 4,091 4,091
Common Stock (208,000 shares) 59 69
Warrants -- --
- -------------------------------------------------------------------------------------------------------
Precision Industrial Co. Debt Securities 9,550 9,550
(formerly Herr-Voss Common Stock (132,507 shares) 1,050 1,616
Industries, Inc.)
- -------------------------------------------------------------------------------------------------------
Progressive International Debt Securities 3,678 3,678
Corporation Preferred Stock (500 shares) 500 500
Warrants -- --
- -------------------------------------------------------------------------------------------------------
Quality Software Products Common Stock (94,479 shares) 901 653
Holdings, PLC(1)
- -------------------------------------------------------------------------------------------------------
Radio One of Atlanta, Inc. Loans 102 102
Debt Securities 11,968 11,968
Common Stock (1,430 shares) -- 2,000
- -------------------------------------------------------------------------------------------------------
Randhawa Brothers Loan 117 117
Enterprises, Inc.
- -------------------------------------------------------------------------------------------------------
R.L. Singletary Loan 101 101
- -------------------------------------------------------------------------------------------------------
Seasonal Expressions Debt Securities 540 540
Preferred Stock 993 993
Warrants -- --
- -------------------------------------------------------------------------------------------------------
SerpCo., Inc. Loan 182 182
- -------------------------------------------------------------------------------------------------------
Spa Lending Corporation Preferred Stock (28,625 shares) 399 306
Common Stock (6,208 shares) 24 --
- -------------------------------------------------------------------------------------------------------
SunStates Refrigerated Loans 1,557 68
Services, Inc. Debt Securities 4,263 676
- -------------------------------------------------------------------------------------------------------
Total Foam, Inc. Debt Securities 1,570 113
Common Stock (910 shares) 57 --
- -------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
8
<PAGE> 11
<TABLE>
<CAPTION>
PORTFOLIO COMPANY SEPTEMBER 30, 1998
(IN THOUSANDS, EXCEPT NUMBER -------------------
OF SHARES AND INVESTMENTS) INVESTMENT(2) COST VALUE
- ----------------------------- --------------------------------------------------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Unitel, Inc. Debt Securities $ 3,562 $ 3,562
Warrants 360 360
- -------------------------------------------------------------------------------------------------------
Vickar Industries, Inc. Loan 6,098 6,098
- -------------------------------------------------------------------------------------------------------
Vidon, Inc. Loans 260 260
- -------------------------------------------------------------------------------------------------------
Weathertech Distributing Loans 92 92
Company, Inc.
- -------------------------------------------------------------------------------------------------------
West Virginia Radio Debt Securities 887 887
Corporation Warrants 400 400
of Clarksburg, Inc.
- -------------------------------------------------------------------------------------------------------
William R. Dye Loan 266 266
- -------------------------------------------------------------------------------------------------------
Williams Brothers Lumber Warrants 24 24
Company
- -------------------------------------------------------------------------------------------------------
Wilton Industries, Inc. Loan 12,000 12,000
- -------------------------------------------------------------------------------------------------------
WYCB Acquisition Corporation Loan 3,783 3,783
- -------------------------------------------------------------------------------------------------------
Total mezzanine loans and debt securities and equity
interests in portfolio companies (94 investments) $296,598 $301,781
- -------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
INTEREST NUMBER OF -------------------
RATE RANGES INVESTMENTS COST VALUE
---------------- ----------- -------- --------
<S> <C> <C> <C> <C>
COMMERCIAL MORTGAGE LOANS
Up to 6.99% 7 $ 2,498 $ 2,125
7.00%- 8.99% 49 138,856 138,856
9.00%-10.99% 109 93,284 93,349
11.00%-12.99% 54 54,905 55,175
13.00%-14.99% 4 9,682 9,682
15.00% and above 2 3,586 3,586
- ------------------------------------------------------------------------------------------------
Total commercial mortgage loans 225 $302,811 $302,773
- ------------------------------------------------------------------------------------------------
SMALL BUSINESS ADMINISTRATION 7(A) LOANS
Up to 6.99% 11 $ 156 $ 153
7.00%- 8.99% 13 138 54
9.00%-10.99% 42 9,311 9,198
11.00%-12.99% 376 40,251 38,887
13.00%-14.99% 4 228 213
15.00% and above -- -- --
- ------------------------------------------------------------------------------------------------
Total Small Business Administration
7(a) loans 446 $ 50,084 $ 48,505
- ------------------------------------------------------------------------------------------------
Interest in securitization pool of
commercial mortgage loans 1 $ 85,290 $ 83,790
- ------------------------------------------------------------------------------------------------
Other portfolio assets 6 $ 3,089 $ 3,009
- ------------------------------------------------------------------------------------------------
Total portfolio 772 $737,872 $739,858
- ------------------------------------------------------------------------------------------------
</TABLE>
(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are
generally non-income producing and restricted.
The accompanying notes are an integral part of these consolidated financial
statements.
9
<PAGE> 12
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INVESTMENTS
<TABLE>
<CAPTION>
PORTFOLIO COMPANY DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT NUMBER -------------------
OF SHARES) INVESTMENT(2) COST VALUE
- ----------------------------- --------------------------------------------------- -------- --------
<S> <C> <C> <C>
MEZZANINE LOANS AND DEBT SECURITIES AND EQUITY INTERESTS IN PORTFOLIO COMPANIES
Acme Paging, L.P. Debt Securities $ 5,993 $ 5,993
Partnership Interests 1,456 2,600
- -------------------------------------------------------------------------------------------------------
AGPAL Broadcasting, Inc. Debt Securities 928 928
Warrants -- --
- -------------------------------------------------------------------------------------------------------
American Barbecue & Grill, Loans 1,499 1,499
Inc. Debt Securities 2,250 2,250
Warrants 125 125
- -------------------------------------------------------------------------------------------------------
Arnold Moving Co., Inc. Loans 713 713
- -------------------------------------------------------------------------------------------------------
ARS, Inc. Debt Securities 9,723 9,723
Warrants 171 171
- -------------------------------------------------------------------------------------------------------
ASW Holding Corporation Warrants 25 25
- -------------------------------------------------------------------------------------------------------
Au Bon Pain Co., Inc.(1) Debt Securities 7,355 7,355
Warrants 227 234
- -------------------------------------------------------------------------------------------------------
Brazos Sportswear, Inc.(1) Common Stock (342,938 shares) 330 1,547
- -------------------------------------------------------------------------------------------------------
Broadcast Holdings, Inc. Debt Securities 2,696 2,696
Warrants -- 1,054
- -------------------------------------------------------------------------------------------------------
Calendar Broadcasting, Inc. Debt Securities 3,780 3,780
Warrants 144 144
- -------------------------------------------------------------------------------------------------------
Candlewood Hotel Company(1) Preferred Stock (3,250 shares) 3,250 3,250
- -------------------------------------------------------------------------------------------------------
Celebrities, Inc. Debt Securities 365 365
Warrants 12 12
- -------------------------------------------------------------------------------------------------------
CeraTech Holdings Corporation Debt Securities 1,983 253
Warrants -- --
- -------------------------------------------------------------------------------------------------------
Cherry Tree Toys, Inc. Debt Securities 1,776 1,776
Common Stock (220 shares) 1 --
- -------------------------------------------------------------------------------------------------------
Chungsan Corporation Loan 78 78
- -------------------------------------------------------------------------------------------------------
Convenience Corporation of Loans 1,226 1,226
America Debt Securities 8,370 6,245
Series A Preferred Stock (22,797 shares) 265 --
Warrants -- --
- -------------------------------------------------------------------------------------------------------
Cooper Natural Resources, Debt Securities 3,440 3,440
Inc. Warrants -- --
- -------------------------------------------------------------------------------------------------------
Csabai Canning Factory Rt. Debt Securities 3,140 3,140
Hungarian Quotas (9.2%) 700 700
- -------------------------------------------------------------------------------------------------------
DEH Printed Circuits, Inc. Warrants 250 1,440
- -------------------------------------------------------------------------------------------------------
DeVlieg-Bullard, Inc.(1) Warrants 350 760
- -------------------------------------------------------------------------------------------------------
</TABLE>
(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are
generally non-income producing and restricted.
The accompanying notes are an integral part of these consolidated financial
statements.
10
<PAGE> 13
<TABLE>
<CAPTION>
PORTFOLIO COMPANY DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT NUMBER -------------------
OF SHARES) INVESTMENT(2) COST VALUE
- ----------------------------- --------------------------------------------------- -------- --------
<S> <C> <C> <C>
Directory Investment Common Stock (470 shares) $ -- $ 83
Corporation
- -------------------------------------------------------------------------------------------------------
Directory Lending Corporation Series A Common Stock (1,031 shares) -- 862
Series B Common Stock (188 shares) 235 157
Series C Common Stock (292 shares) 656 245
Series A Preferred Stock (214 shares) 307 192
Series B Preferred Stock (175 shares) 931 158
Series C Preferred Stock (58 shares) 58 52
- -------------------------------------------------------------------------------------------------------
DMI Furniture, Inc.(1) Convertible Preferred Stock (199,920 shares) 500 982
- -------------------------------------------------------------------------------------------------------
ECM Enterprises Loan 36 4
- -------------------------------------------------------------------------------------------------------
EDM Consulting, LLC Loans 30 30
Debt Securities 1,875 428
Equity Interest -- --
- -------------------------------------------------------------------------------------------------------
El Dorado Communications, Warrants -- 585
Inc.
- -------------------------------------------------------------------------------------------------------
Esquire Communications Warrants 6 1,000
Ltd.(1)
- -------------------------------------------------------------------------------------------------------
Everything Yogurt Loan 65 65
- -------------------------------------------------------------------------------------------------------
Ex Terra Funding, LLC Loan 1,960 1,960
- -------------------------------------------------------------------------------------------------------
Fairchild Industrial Products Debt Securities 5,653 5,653
Company Warrants 280 280
- -------------------------------------------------------------------------------------------------------
FHM Distributions, Inc. Loan 200 200
- -------------------------------------------------------------------------------------------------------
Gibson Guitar Corp. Debt Securities 14,475 14,475
Warrants 525 525
- -------------------------------------------------------------------------------------------------------
Golden Eagle/Satellite Loans 550 550
Archery, LLC Convertible Debentures 2,248 2,248
- -------------------------------------------------------------------------------------------------------
Grant Broadcasting System II Warrants 139 3,600
- -------------------------------------------------------------------------------------------------------
Grant Television, Inc. Debt Securities 7,866 7,866
Warrants -- --
- -------------------------------------------------------------------------------------------------------
Han Hie Loan 518 518
- -------------------------------------------------------------------------------------------------------
H.B.N. Communications, Inc. Loan 262 262
- -------------------------------------------------------------------------------------------------------
Herr-Voss Industries, Inc. Debt Securities 9,500 9,500
Common Stock (132,507 shares) 1,050 1,050
- -------------------------------------------------------------------------------------------------------
HFC Acquisition Sub I, Inc. Loans 232 232
- -------------------------------------------------------------------------------------------------------
In the Dough, Inc. Loan 2 --
- -------------------------------------------------------------------------------------------------------
Jeff & Chris Mufflers, Inc. Loan 128 128
- -------------------------------------------------------------------------------------------------------
JRI Industries, Inc. Debt Securities 2,343 2,343
Warrants 74 74
- -------------------------------------------------------------------------------------------------------
Julius Koch USA, Inc. Debt Securities 4,630 4,630
Warrants 323 2,099
- -------------------------------------------------------------------------------------------------------
</TABLE>
(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are
generally non-income producing and restricted.
The accompanying notes are an integral part of these consolidated financial
statements.
11
<PAGE> 14
<TABLE>
<CAPTION>
PORTFOLIO COMPANY DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT NUMBER -------------------
OF SHARES) INVESTMENT(2) COST VALUE
- ----------------------------- --------------------------------------------------- -------- --------
<S> <C> <C> <C>
Kirker Enterprises, Inc. Loans $ 800 $ 800
Debt Securities 2,784 2,784
Warrants 348 2,350
Equity Interest 40 40
- -------------------------------------------------------------------------------------------------------
Kirkland's, Inc. Debt Securities 6,250 6,250
Warrants 96 96
- -------------------------------------------------------------------------------------------------------
Kjellberg's Incorporated Loan 3,146 3,146
- -------------------------------------------------------------------------------------------------------
Kurlancheek Loan 311 311
- -------------------------------------------------------------------------------------------------------
Labor Ready, Inc.(1) Common Stock (247,863 shares) 1,477 4,308
- -------------------------------------------------------------------------------------------------------
Liberty-Pittsburgh Systems, Debt Securities 3,370 3,370
Inc. Common Stock (60,000 shares) 100 100
- -------------------------------------------------------------------------------------------------------
Lingcomm, Inc. Loan 235 235
- -------------------------------------------------------------------------------------------------------
Love Funding Corporation Series D Preferred Stock (26,000 shares) 360 214
Warrants 200 --
- -------------------------------------------------------------------------------------------------------
Magic Auto Loan 17 17
- -------------------------------------------------------------------------------------------------------
MidSouth Data Systems, Inc. Debt Securities 7,550 7,550
Warrants 348 348
- -------------------------------------------------------------------------------------------------------
Midview Associates, L.P. Debt Securities 326 326
Options -- --
- -------------------------------------------------------------------------------------------------------
Mihadas Loan 290 290
- -------------------------------------------------------------------------------------------------------
Mill-It Striping, Inc. Common Stock (18 shares) 250 --
- -------------------------------------------------------------------------------------------------------
MLX/SinterMet Corp.(1) Common Stock (5,835 shares) 241 109
- -------------------------------------------------------------------------------------------------------
Monitoring Solutions, Inc. Loans 33 33
Debt Securities 1,822 219
Common Stock (33,333 shares) -- --
Warrants -- --
- -------------------------------------------------------------------------------------------------------
Radio City Mobil Home Park Loan 1,361 1,361
- -------------------------------------------------------------------------------------------------------
Nobel Education Dynamics, Series D Convertible Preferred Stock (265,957
Inc.(1) shares) 2,000 2,000
Warrants -- --
- -------------------------------------------------------------------------------------------------------
Norman's Yogurt, Inc. Loan 30 30
- -------------------------------------------------------------------------------------------------------
Northeast Broadcasting Group, Debt Securities 483 483
L.P.
- -------------------------------------------------------------------------------------------------------
New York Donut Corporation Loan 106 106
- -------------------------------------------------------------------------------------------------------
Old Mill Holdings, Inc. Debt Securities 1,115 888
Warrants 77 --
- -------------------------------------------------------------------------------------------------------
OMA, Inc. Loans 1,931 1,931
- -------------------------------------------------------------------------------------------------------
PAL Liberty, Inc. Loan 323 323
- -------------------------------------------------------------------------------------------------------
Peerless Group, Inc.(1) Common Stock (379,475 shares) 17 1,405
Warrants 4 667
- -------------------------------------------------------------------------------------------------------
</TABLE>
(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are
generally non-income producing and restricted.
The accompanying notes are an integral part of these consolidated financial
statements.
12
<PAGE> 15
<TABLE>
<CAPTION>
PORTFOLIO COMPANY DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT NUMBER -------------------
OF SHARES) INVESTMENT(2) COST VALUE
- ----------------------------- --------------------------------------------------- -------- --------
<S> <C> <C> <C>
David Peters Loan $ 169 $ 55
- -------------------------------------------------------------------------------------------------------
PIATL Holdings, Inc. Loans 107 107
Preferred Stock (276 shares) 160 175
Common Stock (36 shares) -- --
- -------------------------------------------------------------------------------------------------------
Pico Products, Inc.(1) Debt Securities 5,669 5,669
Common Stock (248,000 shares) 71 336
Warrants -- --
- -------------------------------------------------------------------------------------------------------
Quality Software Products Common Stock (94,479 shares) 901 344
Holdings, PLC(1)
- -------------------------------------------------------------------------------------------------------
Radio One of Atlanta, Inc. Loans 341 341
Debt Securities 9,951 9,951
Common Stock (1,430 shares) -- --
- -------------------------------------------------------------------------------------------------------
Randhawa Brothers Loans 217 217
Enterprises, Inc.
- -------------------------------------------------------------------------------------------------------
R-Tex Decoratives Company, Debt Securities 1,513 1,170
Inc. Warrants 58 --
- -------------------------------------------------------------------------------------------------------
R.L. Singletary Loan 112 112
- -------------------------------------------------------------------------------------------------------
Saturn Chemicals, Inc. Loan -- --
- -------------------------------------------------------------------------------------------------------
SerpCo., Inc. Loan 182 182
- -------------------------------------------------------------------------------------------------------
Spa Lending Corporation Preferred Stock (28,625 shares) 398 322
Common Stock (6,208 shares) 22 --
- -------------------------------------------------------------------------------------------------------
SunStates Refrigerated Loans 1,557 68
Services, Inc. Debt Securities 4,262 1,486
- -------------------------------------------------------------------------------------------------------
Total Foam, Inc. Debt Securities 1,582 129
Common Stock (910 shares) 57 --
- -------------------------------------------------------------------------------------------------------
University Village Mobile Loan 157 157
Homes
- -------------------------------------------------------------------------------------------------------
Vidon, Inc. Loans 262 262
- -------------------------------------------------------------------------------------------------------
Waterview Limited Partnership Option -- 3,050
- -------------------------------------------------------------------------------------------------------
Weathertech Distributing Loans 291 291
Company, Inc.
- -------------------------------------------------------------------------------------------------------
West Virginia Radio Debt Securities 962 962
Corporation Warrants 400 --
of Clarksburg, Inc.
- -------------------------------------------------------------------------------------------------------
William R. Dye Loan 270 270
- -------------------------------------------------------------------------------------------------------
Williams Brothers Lumber Loans 720 720
Company Debt Securities 308 308
Warrants 24 24
- -------------------------------------------------------------------------------------------------------
Z-Spanish Radio Network, Inc. Loans 11,636 11,636
Debt Securities 750 750
Warrants 6 6
- -------------------------------------------------------------------------------------------------------
Total mezzanine loans and debt securities and equity
interests in portfolio companies (89 investments) $201,234 $207,748
- -------------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE> 16
<TABLE>
<CAPTION>
DECEMBER 31, 1997
INTEREST NUMBER OF -------------------
RATE RANGES INVESTMENTS COST VALUE
---------------- ----------- -------- --------
<S> <C> <C> <C> <C>
COMMERCIAL MORTGAGE LOANS
Up to 6.99% 6 $ 6,129 $ 6,129
7.00%- 8.99% 49 108,313 108,313
9.00%-10.99% 156 259,203 259,221
11.00%-12.99% 72 61,681 61,891
13.00%-14.99% 8 8,196 8,196
15.00% and above 1 3,494 3,494
- -------------------------------------------------------------------------------------------------
Total commercial mortgage loans 292 $447,016 $447,244
- -------------------------------------------------------------------------------------------------
SMALL BUSINESS ADMINISTRATION 7(A) LOANS
Up to 6.99% 10 $ 111 $ 111
7.00%- 8.99% 16 192 107
9.00%-10.99% 24 2,636 2,673
11.00%-12.99% 378 38,072 37,739
13.00%-14.99% 4 92 79
15.00% and above -- -- --
- -------------------------------------------------------------------------------------------------
Total Small Business Administration
7(a) loans 432 $ 41,103 $ 40,709
- -------------------------------------------------------------------------------------------------
Other portfolio assets 6 $ 1,367 $ 1,320
- -------------------------------------------------------------------------------------------------
Total portfolio at value 819 $690,720 $697,021
- -------------------------------------------------------------------------------------------------
</TABLE>
(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are
generally non-income producing and restricted.
The accompanying notes are an integral part of these consolidated financial
statements.
14
<PAGE> 17
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. MERGER
On December 31, 1997, Allied Capital Corporation ("Allied I"), Allied
Capital Corporation II ("Allied II"), Allied Capital Commercial Corporation
("Allied Commercial"), and Allied Capital Advisers, Inc. ("Advisers"), merged
with and into Allied Capital Lending Corporation ("Allied Lending") (each a
"Predecessor Company" and collectively the "Predecessor Companies") pursuant to
an Agreement and Plan of Merger, dated as of August 14, 1997, as amended and
restated as of September 19, 1997 in a stock-for-stock exchange (the "Merger").
Immediately following the Merger, Allied Lending changed its name to Allied
Capital Corporation ("ACC" or the "Company").
The Merger was effected through a conversion of each share of Predecessor
Company common stock into the number of shares of Allied Lending common stock
determined pursuant to the following exchange ratios: Allied I -- 1.07 shares;
Allied II -- 1.40 shares; Allied Commercial -- 1.60 shares; and Advisers -- 0.31
shares. Allied Lending's common stock outstanding prior to the Merger continues
to be outstanding, and was not converted or changed in the Merger. On December
31, 1997, subsequent to the exchange of shares, the Company had 52,047,318
shares outstanding.
The Merger was treated as a tax-free reorganization under Section 368
(a)(1)(A) of the Internal Revenue Code of 1986, as amended (the "Code"). For
federal income tax purposes, the Predecessor Companies carried forward the
historical cost basis of their assets and liabilities to the surviving entity
(ACC). For financial reporting purposes, the Predecessor Companies also carried
forward the historical cost basis of their respective assets and liabilities at
the time the Merger was effected. The consolidated financial statements reflect
the operations of ACC with all periods presented restated as if the Predecessor
Companies had merged as of the beginning of the earliest period presented.
To facilitate the Merger, Allied Lending's charter was amended primarily to
effect: (a) an increase in the number of authorized shares of common stock, par
value one-tenth of one mil ($0.0001) per share, from 20,000,000 to 100,000,000
shares; and (b) a change in Allied Lending's name to "Allied Capital
Corporation."
Prior to the Merger, Allied I owned approximately 16 percent of Allied
Lending's total shares outstanding. These shares were distributed to the Allied
I shareholders in a dividend immediately prior to the Merger at a rate of
0.107448 shares of Allied Lending for each share of Allied I held on the record
date. For financial reporting purposes, Allied I's ownership of Allied Lending
has been eliminated for all periods presented.
NOTE 2. ORGANIZATION
Allied Capital Corporation, a Maryland corporation, is a closed-end
management investment company that has elected to be regulated as a business
development company ("BDC") under the Investment Company Act of 1940 ("1940
Act"). Allied Capital Corporation has two wholly owned subsidiaries that have
also elected to be regulated as BDCs. Allied Investment Corporation is licensed
under the Small Business Investment Act of 1958 as a Small Business Investment
Company ("SBIC"). Allied Investment Corporation is the result of the merger of
the Company's two SBIC subsidiaries in July 1998 whereby Allied Investment
Corporation merged with and into Allied Capital Financial Corporation ("Allied
Financial"). Allied Financial then changed its name to Allied Investment
Corporation ("Allied Investment"). Allied Capital SBLC Corporation ("Allied
SBLC") is licensed by the SBA as a Small Business Lending Company and is a
participant in the SBA Section 7(a) Guaranteed Loan Program. In addition, the
Company has also established a real estate investment trust subsidiary, Allied
Capital REIT, Inc. ("Allied REIT"). ACC also has several single-member limited
liability companies established primarily to hold real estate properties.
Allied Capital Corporation and its subsidiaries, collectively, are
hereinafter referred to as the "Company" or "ACC."
15
<PAGE> 18
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2. ORGANIZATION, CONTINUED
The investment objective of the Company is to achieve current income and
capital gains. In order to achieve this objective, the Company invests primarily
in private, growing businesses in a variety of industries and in diverse
geographic locations (primarily in the United States).
NOTE 3. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated
financial statements of the Company contain all adjustments (consisting of only
normal recurring accruals) necessary to present fairly the financial position of
the Company as of September 30, 1998 and the results of operations, changes in
net assets, and cash flows for the periods indicated. Certain information and
footnote disclosures normally included in the consolidated financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. The consolidated financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's December 31, 1997 Annual Report. The results of operations for the
nine months ended September 30, 1998 are not necessarily indicative of the
operating results to be expected for the full year.
The consolidated financial statements for the periods presented have been
restated to include the accounts of the Predecessor Companies for all periods
presented. Transaction fees and expenses related to the Merger were expensed in
the fourth quarter of 1997. The consolidated financial statements include the
accounts of the Company or its wholly owned or majority owned subsidiaries. All
intercompany accounts and transactions have been eliminated in consolidation.
Certain reclassifications have been made to the 1997, 1996 and 1995 balances to
conform with the 1998 financial statement presentation.
NOTE 4. PORTFOLIO
The Company lends and invests in growing businesses through three primary
products: mezzanine loans and debt and equity securities, commercial mortgage
loans, and SBA Section 7(a) loans.
MEZZANINE FINANCE
Mezzanine investments are generally structured as loans that carry a
relatively high fixed rate of interest, which may be combined with equity
features, such as conversion privileges, warrants or options to purchase a
portion of the portfolio company's equity at a nominal price. Such an investment
would typically have a maturity of five to ten years, with interest-only
payments in the early years and payments of both principal and interest in the
later years, although loan maturities and principal amortization schedules vary.
At September 30, 1998 and December 31, 1997, respectively, approximately 100
percent and 98 percent of the Company's mezzanine loan portfolio was composed of
fixed interest rate loans. The weighted average yield (at value) on the
mezzanine portfolio at September 30, 1998 and December 31, 1997 equaled 14.0
percent and 12.6 percent, respectively. At September 30, 1998 and December 31,
1997, mezzanine loans and debt securities with a cost basis of $22,725,000 and
$13,661,000, respectively, were not accruing interest.
At September 30, 1998 and December 31, 1997, approximately 35 percent and
29 percent, 26 percent and 27 percent, 24 percent and 17 percent, 7 percent and
13 percent, and 5 percent and 8 percent of the Company's mezzanine portfolio was
located in the mid-atlantic, southeast, midwest, west, and northeast regions,
respectively. In addition, 3 percent and 6 percent, respectively, of the
mezzanine portfolio was located in other countries. Loans to businesses in the
industrial/manufacturing, broadcasting/communications, retail/wholesale, and
services industries equaled approximately 43 percent and 43 percent, 17 percent
and 26 percent, 14 percent and 15 percent, and 21 percent and 12 percent,
respectively, or 95 percent and 96 percent of the Company's mezzanine portfolio
as of September 30, 1998 and December 31, 1997, respectively.
16
<PAGE> 19
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4. PORTFOLIO, CONTINUED
Equity investments consist primarily of securities issued by privately
owned companies and may be subject to restrictions on their resale or otherwise
illiquid. Equity securities generally do not produce a current return, but are
held for investment appreciation and ultimate gain on sale.
COMMERCIAL REAL ESTATE FINANCE
The commercial real estate portfolio contains loans that were originated by
the Company or were purchased from the Resolution Trust Corporation, the Federal
Deposit Insurance Corporation and other third party sellers including life
insurance companies and banks.
At September 30, 1998 and December 31, 1997, approximately 70 percent and
30 percent, and 73 percent and 27 percent of the Company's commercial mortgage
loan portfolio was composed of fixed and adjustable interest rate loans,
respectively. At September 30, 1998 and December 31, 1997, approximately 34
percent and 38 percent, 18 percent and 18 percent, 25 percent and 18 percent, 17
percent and 14 percent, and 6 percent and 12 percent of the Company's commercial
real estate portfolio was located in the mid-atlantic, midwest, west, southeast,
and northeast regions, respectively. In addition, commercial mortgage loans
secured by hospitality, office, retail, recreation and other properties equaled
approximately 40 percent and 33 percent, 31 percent and 31 percent, 9 percent
and 14 percent, 3 percent and 3 percent, and 17 percent and 19 percent,
respectively, of the Company's commercial real estate portfolio at September 30,
1998 and December 31, 1997, respectively.
The weighted average yield (at value) on the real estate portfolio as of
September 30, 1998 and December 31, 1997 equaled 10.1 percent and 11.4 percent,
respectively. As of September 30, 1998 and December 31, 1997, loans with a cost
basis of $9,466,000 and $11,987,000, respectively, were not accruing interest.
SMALL BUSINESS LENDING
The Company, through its wholly owned subsidiary, Allied SBLC, participates
in the SBA's Section 7(a) Guaranteed Loan Program.
Pursuant to Section 7(a) of the Small Business Act of 1958, the SBA will
guarantee 80 percent of any qualified loan up to $100,000 regardless of
maturity, and 75 percent 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 Company charges interest on these loans at a variable rate, typically
1.75 percent to 2.75 percent 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 date on
which the loan was made to its maturity. At September 30, 1998 and December 31,
1997, approximately 94 percent and 92 percent of the Company's portfolio of 7(a)
loans were variable interest rate loans.
As permitted by SBA regulations, the Company sells to investors, without
recourse, the guaranteed portion of its loans while retaining the right to
service 100 percent of such loans.
As of September 30, 1998 and December 31, 1997, 7(a) loans with a cost
basis of $8,761,000 and $4,346,000, respectively, were not accruing interest.
At September 30, 1998 and December 31, 1997, approximately 36 percent and
36 percent, 29 percent and 29 percent, 15 percent and 18 percent, 8 percent and
10 percent, and 12 percent and 7 percent of the Company's 7(a) loan portfolio
was located in the midwest, mid-atlantic, southeast, northeast, and west
17
<PAGE> 20
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4. PORTFOLIO, CONTINUED
regions, respectively. In addition, loans to businesses in the hospitality,
automotive services, broadcasting/communications, restaurant/food services,
industrial/manufacturing, services, and retail/wholesale industries equaled 30
percent and 25 percent, 27 percent and 21 percent, 6 percent and 10 percent, 12
percent and 9 percent, 6 percent and 7 percent, 6 percent and 6 percent, and 3
percent and 6 percent, respectively, or 90 percent and 84 percent of the
Company's 7(a) loan portfolio as of September 30, 1998 and December 31, 1997.
INTEREST IN SECURITIZATION POOL OF COMMERCIAL MORTGAGE LOANS
On January 30, 1998, the Company in conjunction with Business Mortgage
Investors, Inc. ("BMI"), a private REIT managed by the Company, completed a $310
million asset securitization, whereby bonds totaling $239 million were sold in
three classes rated "AAA", "AA" and "A" by Standard & Poor's Rating Services and
Fitch IBCA, Inc. in a private placement. The Company and BMI sold a pool of 97
commercial mortgage loans totaling $310 million to a special purpose, bankruptcy
remote entity which transferred the assets to a trust which issued the bonds.
The Company contributed approximately 95%, or $295 million, of the total assets
securitized, and received cash proceeds, net of costs of approximately $223
million. The Company retained a trust certificate for its residual interest (the
"residual interest") in the loan pool sold, and will receive interest income
from this residual interest as well as receive the net spread of the interest
earned on the loans sold less the interest paid on the bonds over the life of
the bonds (the "residual securitization spread"). The mortgage loan pool had an
approximate weighted average stated interest rate of 9.6%. The three bond
classes sold have an aggregate weighted average interest rate of approximately
6.38%.
The Company accounted for the securitization in accordance with Statement
of Financial Accounting Standards No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." As a result,
the Company recorded a gain of approximately $14.8 million net of the costs of
the securitization and the cost of settlement of interest rate swaps. The gain
arises from the difference between the carrying amount of the loans and the fair
market value of the assets received--cash, residual securitization spread,
residual interest and a servicing asset. The value of the residual
securitization spread, $17.0 million, was determined based on the future
expected cash flows, assuming a constant prepayment rate for the mortgage loan
pool of 10%, discounted at 16%. The value of the residual interest was
determined to be $66.5 million and was based on the future expected cash flows
less projected losses of approximately $3.0 million. The projected losses were
based upon the attributes of the portfolio sold and the underlying collateral
values. The weighted average loan to collateral value of the 97 loans sold was
68.3%. The expected future cash flow from the residual interest was discounted
at 9.6%. The servicing asset was valued at $227,000 assuming a net servicing fee
of 0.04% and was discounted at a rate of 10%.
The Company will continue to earn interest income from the residual
interest, and will receive the actual net spread from the portion of the loans
sold represented by the bonds issued. As the net spread is received, a portion
will be allocated to interest income with the remainder applied to reduce the
carrying amount of the residual securitization spread. The residual interest and
the residual securitization spread have been and will continue to be valued each
quarter using updated prepayment and loss estimates.
18
<PAGE> 21
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5. DEBT
At September 30, 1998 and December 31, 1997, the Company had the following
available credit facilities:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------- -------------------
FACILITY AMOUNT FACILITY AMOUNT
AMOUNT DRAWN AMOUNT DRAWN
-------- -------- -------- --------
<S> <C> <C> <C> <C>
(UNAUDITED)
(IN THOUSANDS)
Debentures and notes payable:
Unsecured long-term notes payable...... $180,000 $180,000 $ -- $ --
Master repurchase agreement............ 250,000 1,300 250,000 202,705
Master loan and security agreement..... 250,000 56,000 250,000 23,116
Senior note payable.................... -- -- 20,000 20,000
OPIC loan.............................. 5,700 5,700 20,000 8,700
SBA debentures......................... 48,650 48,650 54,300 54,300
-------- -------- -------- --------
Total debentures and notes
payable......................... 734,350 291,650 594,300 308,821
-------- -------- -------- --------
Revolving lines of credit................... 200,000 70,000 80,000 38,842
-------- -------- -------- --------
Total debt........................ $934,350 $361,650 $674,300 $347,663
======== ======== ======== ========
</TABLE>
UNSECURED LONG-TERM NOTES PAYABLE
In June 1998 the Company issued three classes of unsecured long-term notes
held by private institutional investors. The notes have terms of 5 or 7 years
with an aggregate principal balance of $180,000,000. The weighted average
interest rate on the notes is 7.2% and interest only is payable semi-annually
until maturity. The notes may be prepaid in whole or in part together with an
interest premium as stipulated in the note agreement.
MASTER REPURCHASE AGREEMENT
The Company and Business Mortgage Investors, Inc. ("BMI") can borrow up to
$250,000,000, of which $100,000,000 is committed, through repurchase agreements
using its commercial mortgage loans as collateral. The Company pledges
commercial mortgage loans as collateral for the facility such that the amount
borrowed is approximately equal to 75 percent to 80 percent of the value of the
collateral pledged. The terms of the master repurchase agreement require
interest only payments with all principal due at maturity. The master repurchase
agreement bears interest at the one-month London Inter Bank Offered Rate
("LIBOR") plus 1.13 percent, or 6.7 percent and 6.8 percent at September 30,
1998 and December 31, 1997, respectively. The facility requires an annual
commitment fee equal to 0.25 percent of the committed amount. The average debt
outstanding under the master repurchase agreement for the nine months ended
September 30, 1998 and the year ended December 31, 1997 was $22,632,000 and
$166,362,000, respectively. The maximum amount borrowed under this facility was
$202,705,000 and $209,591,000 during the nine months ended September 30, 1998
and the year ended December 31, 1997, respectively. The weighted average
interest rate for this facility during the nine months ended September 30, 1998
and the year ended December 31, 1997 was 6.8 percent and 6.6 percent,
respectively. The master repurchase agreement matures on January 31, 1999.
MASTER LOAN AND SECURITY AGREEMENT
During 1997, the Company, again in conjunction with BMI, established a
facility to borrow up to $250,000,000, of which $100,000,000 is committed, using
its commercial mortgage loans as collateral under the agreement. At September
30, 1998 and December 31, 1997, the Company's recorded investment in these
19
<PAGE> 22
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5. DEBT, CONTINUED
loans pledged as collateral totaled $56,000,000 and $29,193,000, which
approximated their market value. The agreement generally requires interest only
payments with all principal due at maturity. The agreement bears interest at the
one-month LIBOR plus 1.0 percent, or 6.4 and 6.7 percent, at September 30, 1998
and December 31, 1997, respectively. The average debt outstanding under this
facility for the nine months ended September 30, 1998 and the year ended
December 31, 1997 was $19,066,000 and $17,899,000, respectively. The maximum
amount borrowed under this facility was $56,000,000 during the nine months ended
September 30, 1998 and $23,116,000 for the year ended December 31, 1997. The
weighted average interest rate for this facility during the nine months ended
September 30, 1998 and the year ended December 31, 1997 was 6.6 percent and 6.7
percent, respectively. The agreement matured on October 15, 1998, and has
subsequently been renewed for an additional one year term.
SENIOR NOTE PAYABLE
At December 31, 1997 the Company had a $20,000,000 unsecured senior note
payable to an insurance company with interest at a fixed rate of 9.15 percent,
payable semi-annually.
OVERSEAS PRIVATE INVESTMENT CORPORATION (OPIC) LOAN
The Company has a loan agreement with OPIC to provide financing for
international projects involving qualifying U.S. small businesses. Loans under
this agreement bear interest at the U.S. Treasury rate plus 0.5 percent for the
applicable period of the borrowing, or 6.6 percent at September 30, 1998. In
addition, OPIC is entitled to receive from the Company a contingent fee at
maturity of the loan equal to 5 percent of the return generated by the
OPIC-related investments in excess of 7 percent. There are no required principal
payments until the OPIC loans mature in January 2006.
SBA DEBENTURES
At September 30, 1998, the Company had debentures totaling $48,650,000
payable to the SBA at interest rates ranging from 6.9 percent to 9.6 percent,
with scheduled maturity dates as follows: 1998 -- $1,000,000; 1999 -- $0;
2000 -- $17,300,000; 2001 -- $9,350,000; 2002 -- $0; and $21,000,000 thereafter.
At December 31, 1997, the Company had outstanding debentures totaling
$54,300,000 at interest rates ranging from 6.9 percent to 9.8 percent. The
debentures require semi-annual interest-only payments with all principal due
upon maturity. The SBA debentures are subject to prepayment penalties if paid
prior to maturity.
REVOLVING LINES OF CREDIT
Subsequent to the Merger, the Company repaid all of its previous unsecured
revolving lines of credit and entered into a new $200,000,000 unsecured
revolving line of credit as amended and restated. The new facility bears
interest at LIBOR plus 1.25 percent, or 6.6 percent at September 30, 1998, and
requires a commitment fee equal to 0.2 percent of the committed amount, and a
facility fee equal to 0.15 percent of the initial commitment. The new line
expires June 30, 1999. The new line of credit requires monthly payments of
interest and all principal is due upon its expiration.
At December 31, 1997, the Company had several revolving lines of credit
totaling $80,000,000 under which the Company had outstanding borrowings totaling
$38,842,000. The lines of credit charged interest at rates ranging from LIBOR
plus 1.35 percent to 2.5 percent. At December 31, 1997 the weighted average
interest rate on the facilities was 7.7 percent. The lines required various
commitment and other fees equal to 0.39 percent of the outstanding borrowings at
December 31, 1997.
The average debt outstanding on the revolving lines of credit was
$50,311,000 and $30,033,000 for the nine months ended September 30, 1998 and the
year ended December 31, 1997, respectively. The maximum
20
<PAGE> 23
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5. DEBT, CONTINUED
amount borrowed under these facilities was $105,000,000 and $45,759,000 during
the same periods, respectively. The weighted average interest rate for these
facilities during the nine months ended September 30, 1998 and the year ended
December 31, 1997 was 6.9 percent and 8.1 percent, respectively.
NOTE 6. INCOME TAXES
For the nine months ended September 30, 1998 and for the year ended
December 31, 1997, the Company's effective tax rate was 2.5 percent and 2.3
percent, respectively.
For the nine months ended September 30, 1998, the Company incurred income
tax expense of $1.6 million which resulted from the built-in gains tax
associated with the $4.0 million gain from the sale of an office building
previously owned by Advisers prior to the Merger.
For the year ended December 31, 1997, the Company's income subject to
federal and state taxes relates to the income generated by the pre-Merger
operations of Advisers. The income generated by the other Predecessor Companies
is not subject to federal and state income taxes because these companies qualify
as RICs or REITs. Therefore, no additional income tax expense is expected to be
incurred in 1998.
NOTE 7. SHAREHOLDERS' EQUITY
For the nine months ended September 30, 1998, the Company's compensation
committee granted a total of 3,740,446 options to officers of the Company under
the Company's stock option plan. The options awarded to officers were generally
non-qualified stock options that vest over a five-year period from the grant
date. The stock options have been granted at the market price on the date of
grant with an average exercise price equal to $21.05 per share. At September 30,
1998, options for 643,000 shares were exercisable into common stock. Options
were exercised for 10,408 shares, and 64,708 shares were canceled during the
nine months ended September 30, 1998.
The Company has a dividend reinvestment plan, whereby the Company may buy
shares of its common stock in the open market or issue new shares in order to
satisfy dividend reinvestment requests. If the Company issues new shares, the
issue price is equal to the average of the closing sales prices reported for the
Company's common stock for the five days on which trading in the shares takes
place immediately prior to the dividend payment date. For the nine months ended
September 30, 1998 and the year ended December 31, 1997, the Company issued
177,290 and 550,971 shares, respectively, at an average price per share of
$21.51 and $15.67 per share, respectively.
21
<PAGE> 24
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8. EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
PER COMMON
INCOME SHARES SHARE AMOUNT
-------- ------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
Net increase in net assets resulting from operations... $14,906
Less: Preferred stock dividends........................ (55)
-------
Income available to common shareholders................ $14,851
=======
BASIC EARNINGS PER COMMON SHARE........................ 51,373 $0.29
=====
Options outstanding to officers........................ 4
------
DILUTED EARNINGS PER COMMON SHARE...................... 51,377 $0.29
====== =====
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
Net increase in net assets resulting from operations... $17,146
Less: Preferred stock dividends........................ (55)
-------
Income available to common shareholders................ $17,091
=======
BASIC EARNINGS PER COMMON SHARE........................ 49,316 $0.35
=====
Options outstanding to officers........................ 443
------
DILUTED EARNINGS PER COMMON SHARE...................... 49,759 $0.34
====== =====
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
Net increase in net assets resulting from operations... $61,448
Less: Preferred stock dividends........................ (165)
-------
Income available to common shareholders................ $61,283
=======
BASIC EARNINGS PER COMMON SHARE........................ 51,502 $1.19
=====
Options outstanding to officers........................ 210
------
DILUTED EARNINGS PER COMMON SHARE...................... 51,712 $1.19
====== =====
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
Net increase in net assets resulting from operations... $48,088
Less: Preferred stock dividends........................ (165)
-------
Income available to common shareholders................ $47,923
=======
BASIC EARNINGS PER COMMON SHARE........................ 48,759 $0.98
=====
Options outstanding to officers........................ 528
------
DILUTED EARNINGS PER COMMON SHARE...................... 49,287 $0.97
====== =====
</TABLE>
Basic earnings per common share was computed by dividing the net increase
in net assets resulting from operations, after deducting preferred stock
dividends, by the weighted average number of common shares outstanding each
period.
Diluted earnings per common share was computed by dividing the net increase
in net assets resulting from operations, after deducting preferred stock
dividends, by the weighted average number of common shares outstanding plus
common shares issuable upon assumed exercise of stock options outstanding each
period.
NOTE 9. CUT-OFF AWARD AND FORMULA AWARD
The Predecessor Companies' existing stock option plans were canceled and
the Company established a cut-off dollar amount for all existing, but unvested
options as of the date of the Merger (the "Cut-off Award"). The Cut-off Award is
computed for each unvested option as of the Merger date. The Cut-off Award is
equal to the difference between the market price on August 14, 1997 (the Merger
announcement date) of the shares of stock underlying the option less the
exercise price of the option. The Cut-off Award is payable for each unvested
option upon the future vesting date of that option. The Cut-off Award was
designed to cap the
22
<PAGE> 25
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9. CUT-OFF AWARD AND FORMULA AWARD, CONTINUED
appreciated value in unvested options at the Merger announcement date, in order
to set the foundation to balance option awards upon the Merger. The Cut-off
Award approximates $2.9 million in the aggregate and will be expensed as the
Cut-off Award vests. For the nine months ended September 30, 1998, $783,000 of
the Cut-off Award vested.
The Formula Award was established to compensate employees from the point
when their unvested options would cease to appreciate in value (the Merger
announcement date), up until the time at which they would be able to receive
option awards in ACC post-Merger. In the aggregate, the Formula Award equaled 6
percent of the difference between an amount equal to the combined aggregated
market capitalizations of the Predecessor Companies as of the close of the
market on the day before the Merger date (December 30, 1997), less an amount
equal to the combined aggregate market capitalizations of the Predecessor
Companies as of the close of the market on the Merger announcement date (August
14, 1997). Advisers' compensation committee allocated the Formula Award to
individual officers on December 30, 1997. The amount of the Formula Award as
computed at December 30, 1997 approximated $19 million. For the nine month
period ended September 30, 1998, the Company funded the DC Plan with
approximately $19 million in cash in connection with the Formula Award. The
Trustee of the DC Plan has used those funds to acquire the Company's stock in
the open market. As of September 30, 1998, the Trustee had purchased 790,195
shares of the Company's stock with an aggregate cost of $19,020,000. The
purchase of these shares has been reflected in shareholders' equity. The Formula
Award will vest equally in three installments on December 31, 1998, 1999 and
2000; provided, however, that such Formula Award vests immediately upon a change
in control of the Company. The Formula Award will be expensed in each year in
which it vests. Formula Award expense for the nine months ended September 30,
1998 was $4,749,000.
NOTE 10. INTEREST RATE SWAPS
The Company uses interest rate swap agreements to protect against
fluctuation in interest costs on its variable rate short-term credit facilities.
Amounts paid or received on the settlement of interest rate swap agreements are
recognized as an adjustment to interest expense. In January 1998, the Company
settled its interest rate swap agreements in connection with the asset
securitization transaction which resulted in a loss of $5,767,000 which has been
recorded against the gain on the securitization of commercial mortgage loans in
the first quarter of 1998. As of December 31, 1997, the Company had interest
swap agreements with an aggregate notional amount of $145,000,000. Pursuant to
the swap agreements, the Company paid a weighted average fixed rate equal to 6.8
percent and received payments with a weighted average variable rate equal to the
30-day LIBOR. The swap agreements had a remaining weighted average maturity of
approximately four years from December 31, 1997. As of December 31, 1997, the
Company recorded an estimated unrealized loss of $5,000,000 related to the swap
agreements in connection with the January 1998 asset securitization transaction.
The estimated unrealized loss was subsequently reversed upon consummation of the
securitization.
NOTE 11. DIVIDENDS AND DISTRIBUTIONS
The Company's Board of Directors declared and the Company paid a $1.05 per
common share dividend, or $54,727,000, for the nine months ended September 30,
1998.
NOTE 12. COMMITMENTS AND CONTINGENCIES
The Company is party to certain lawsuits in connection with its business.
While the outcome of these legal proceedings cannot at this time be predicted
with certainty, management does not expect that these proceedings will have a
material effect upon the financial condition of the Company.
23
<PAGE> 26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following analysis of the financial condition and results of operations
of the Company should be read in conjunction with the Company's Consolidated
Financial Statements and the Notes thereto included herein. This Management's
Discussion and Analysis contains certain forward-looking statements. These
statements include the plans and objectives of management for future operations
and financial objectives, loan portfolio growth and availability of funds. These
forward-looking statements are subject to the inherent uncertainties in
predicting future results and conditions. Certain factors that could cause
actual results and conditions to differ materially from those projected in these
forward-looking statements are set forth below in the Investment Considerations
section. Other factors that could cause actual results to differ materially
include the uncertainties of economic, competitive and market conditions, and
future business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the control of the Company. Although the
Company believes that the assumptions underlying the forward-looking statements
included herein are reasonable, any of the assumptions could be inaccurate and
therefore, there can be no assurance that the forward-looking statements
included herein will prove to be accurate. Therefore, the inclusion of such
information should not be regarded as a representation by the Company or any
other person that the objectives and plans of the Company will be achieved.
The Merger was treated as a tax-free reorganization under Section
368(a)(1)(A) of the Code. For federal income tax purposes, the Predecessor
Companies carried forward the historical cost basis of their assets and
liabilities to the surviving entity (Allied Capital Corporation). For financial
reporting purposes, the Predecessor Companies also carried forward the
historical cost basis of their respective assets and liabilities at the time the
Merger was effected. For financial reporting purposes, Allied I's ownership of
Allied Lending has been eliminated for all periods presented. The financial
information reflects the operations of the Company with all periods restated as
if the Predecessor Companies had merged as of the beginning of the earliest
period presented.
OVERVIEW
The Company's primary business is investing in and lending to private small
and medium-sized businesses in three areas: mezzanine finance, commercial real
estate finance, and 7(a) lending. In addition, the Company earns advisory fees
from the management of private investment funds.
The Company's earnings depend primarily on the level of interest and
related portfolio income and net realized and unrealized gain income earned on
these three investment types after deducting interest paid on borrowed capital
and operating expenses. Interest income results from the stated interest rate
paid on a loan, the amortization of loan origination points and original issue
discount and the amortization of any market discount arising from purchased
loans. The level of interest income is directly related to the balance of the
investment portfolio multiplied by the effective yield on the portfolio. The
Company's ability to generate interest income is dependent on economic,
regulatory and competitive factors that influence interest rates, loan
originations, and the Company's ability to secure financing for its investment
activities. The Company's financial results on a quarterly basis may fluctuate
significantly due to the timing of gain recognition and the timing of
securitization transactions, among other factors. As a result, quarterly
financial information may not be indicative of annual results.
The Company's portfolio is managed in three parts: mezzanine loans, debt
securities and equity interests; commercial mortgage loans and equity interests;
and 7(a) loans.
The total portfolio at value was $739.9 million, $697.0 million and $607.4
million at September 30, 1998, and December 31, 1997 and 1996, respectively.
During the nine months ended September 30, 1998 the Company originated loans
totaling $349.6 million and received repayments of $75.8 million. In addition in
January 1998, the Company completed an asset securitization of approximately
$295 million in commercial mortgage loans. As a result, the total portfolio
increased by 6% from December 31, 1997 to September 30, 1998. The portfolio
increased approximately 15% for the year ended December 31, 1997.
24
<PAGE> 27
A summary of the composition of the Company's total assets, including its
loan portfolios at September 30, 1998 and December 31, 1997 is shown in the
following table:
<TABLE>
<CAPTION>
AT AT
SEPTEMBER 30, DECEMBER 31,
ASSET COMPOSITION 1998 1997
----------------- ------------- ------------
<S> <C> <C>
Mezzanine investments............................... 37% 25%
Commercial mortgage loans(1)........................ 48 56
7(a) loans.......................................... 6 5
Cash and other assets............................... 9 14
--- ---
100% 100%
=== ===
</TABLE>
- ---------------
(1) Includes residual interests in a securitized pool of mortgage loans and real
estate investments.
Mezzanine loans, debt securities and equity interests were $301.9 million,
$207.7 million and $191.2 million at September 30, 1998, and December 31, 1997
and 1996, respectively. The effective yield on the mezzanine portfolio was 14.0%
and 12.6% at September 30, 1998 and December 31, 1997, respectively. Mezzanine
loan originations were $44.3 million for the quarter ended September 30, 1998
and $127.2 million for the first nine months of 1998. Mezzanine loan
originations were $66.7 million for the year ended December 31, 1997. Mezzanine
loan repayments were $4.9 million for the quarter ended September 30, 1998 and
$23.9 million for the first nine months of 1998. During the year ended December
31, 1997, mezzanine loan repayments and sales of equity interests were
approximately equal to originations, which kept the level of the portfolio
relatively constant.
In the nine months ended September 30, 1998, the Company has made thirteen
new mezzanine investments with an average investment size of $8.8 million. On
average, these new portfolio companies had revenues of $63 million, cash flows
of $7.2 million and had been in business for approximately 18 years.
Prior to the Merger, mezzanine loan originations were made through Allied I
and Allied II, which originated small ($2 million - $10 million) mezzanine loans
in order to maintain appropriate portfolio diversity for regulated investment
company purposes. Pursuant to the terms of a Commission exemptive order, Allied
I and Allied II loan originations were made pursuant to a co-investment formula,
based on relative total assets, which required identical terms for each loan
originated. As a result, Allied I and Allied II were unable to originate larger
loans or price loans based on their own capital structures. These inefficiencies
limited the ability of Allied I and Allied II to compete effectively in the
marketplace.
Subsequent to the Merger, the Company's larger overall portfolio size
enables it to compete for larger mezzanine loans while maintaining adequate
diversity within the portfolio. As a result, the Company is actively pursuing
mezzanine loans in sizes ranging from $5 million to $25 million. The Company
also is able to price its mezzanine loans using a single capital structure,
which enables the Company to price its loans more competitively. The Company
believes that its post-Merger strategies have enabled the Company to increase
mezzanine loan originations in 1998.
Commercial mortgage loans were $302.8 million, $447.2 million and $373.7
million at September 30, 1998, and December 31, 1997 and 1996, respectively. The
commercial mortgage loan portfolio declined by 32% during the first nine months
of 1998 due to the sale through securitization of approximately $295 million in
commercial mortgage loans. The Company added to its commercial mortgage loan
portfolio during the third quarter of 1998 through the origination of new loans
and investments totaling $46.3 million and decreased its portfolio due to
repayments of loans totaling $15.3 million. For the nine months ended September
30, 1998, the Company originated new commercial mortgage loans of $182.7 million
and received repayments of $48.8 million. The commercial mortgage loan portfolio
increased by 20% for the year ended December 31, 1997. Commercial mortgage loan
originations were $249.0 million and grew by 41% in 1997. Commercial mortgage
loan repayments were $154.5 million for 1997.
The Company experienced a high rate of commercial mortgage loan repayments
in 1997 as many loans that had been purchased in earlier years and originated
without substantial prepayment prohibitions were
25
<PAGE> 28
repaid due to a favorable interest rate environment. The Company now generally
originates its commercial real estate loans to require prepayment premiums,
which generally take the form of a fixed percentage of the loan amount that
declines as the loan matures.
The weighted average current stated interest rate on the commercial real
estate portfolio at September 30, 1998 and at December 31, 1997 was 9.6%. The
weighted average yield on the commercial real estate portfolio was 10.1% and
11.4% at September 30, 1998 and December 31, 1997, respectively. The effective
yield on the commercial mortgage loan portfolio is higher than the stated
interest rate due to the amortization of original issue discount and market
discount on purchased loans.
The Company generally prices its commercial mortgage loans based on a fixed
spread over comparable U.S. Treasury rates given the term of the loan. During
1997 and 1998, interest rates on U.S. Treasury bonds have declined
significantly, and the spreads charged by commercial real estate lenders in the
marketplace have narrowed. As a result, the Company began to reevaluate its
strategy regarding commercial real estate lending given the fact that this type
of loan was being priced very inexpensively in the marketplace. Early in the
third quarter of 1998, the Company significantly reduced its commercial real
estate loan origination activity for its own portfolio, and began exploring an
opportunity to originate commercial real estate loans for sale to third parties.
The Company is currently pursuing various loan sale opportunities and plans to
continue to originate commercial real estate loans for sale. The Company will
also originate commercial real estate loans for its own portfolio, if such loans
meet certain threshold yield requirements.
The 7(a) loan portfolio was $48.5 million, $40.7 million and $42.1 million
at September 30, 1998 and December 31, 1997 and 1996, respectively. 7(a) loan
originations were $10.2 million for the quarter ended September 30, 1998, $39.6
million for the first nine months of 1998, and $49.2 million for the year ended
December 31, 1997. Sales of the guaranteed portions of 7(a) loan originations
were $7.4 million in the third quarter of 1998, $26.8 for the nine months ended
September 30, 1998, and $43.4 million for the year ended December 31, 1997. 7(a)
loans are originated with variable interest rates priced at spreads ranging from
1.75% to 2.75% over the prime lending rate.
RESULTS OF OPERATIONS
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Net increase in net assets resulting from operations ("NIA") was $61.4
million, or $1.19 per share, and $48.1 million, or $0.97 per share, for the nine
months ended September 30, 1998 and 1997, respectively. NIA results from total
interest and related portfolio income earned, less total expenses incurred, plus
net realized and unrealized gains or losses. The NIA for the nine months ended
September 30, 1998 also includes a gain of $14.8 million, or $0.28 per share,
resulting from a commercial mortgage loan securitization transaction that was
completed in January 1998.
On January 30, 1998, the Company, in conjunction with Business Mortgage
Investors, Inc. ("BMI"), a private REIT managed by the Company, completed a $310
million asset securitization, whereby bonds totaling $239 million were sold in
three classes rated "AAA", "AA" and "A" by Standard & Poor's Ratings Services
and Fitch IBCA, Inc. in a private placement. The Company and BMI sold a pool of
97 commercial mortgage loans totaling $310 million to a special purpose,
bankruptcy remote entity which transferred the assets to a trust which issued
the bonds. The Company contributed approximately 95%, or $295 million, of the
total assets securitized, and received cash proceeds, net of costs, of
approximately $223 million. The Company retained a trust certificate for its
residual interest (the "residual interest") in the loan pool sold, and will
receive interest income from this residual interest as well as receive the net
spread of the interest earned on the loans sold less the interest paid on the
bonds over the life of the bonds (the "residual securitization spread"). The
mortgage loan pool had an approximate weighted average stated interest rate of
9.6%. The three bond classes sold have an aggregate weighted average interest
rate of approximately 6.38%.
The Company accounted for the securitization in accordance with Statement
of Financial Accounting Standards No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." As a result,
the Company recorded a gain of approximately $14.8 million net of the costs of
the
26
<PAGE> 29
securitization and the cost of settlement of interest rate swaps. The gain
arises from the difference between the carrying amount of the loans and the fair
market value of the assets received -- cash, residual securitization spread,
residual interest and a servicing asset. The value of the residual
securitization spread, $17.0 million, was determined based on the future
expected cash flows, assuming a constant prepayment rate for the mortgage loan
pool of 10%, discounted at 16%. The value of the residual interest was
determined to be $66.5 million and was based on the future expected cash flows
less projected losses of approximately $3.0 million. The projected losses were
based upon the attributes of the portfolio sold and the underlying collateral
values. The weighted average loan to collateral value of the 97 loans sold was
68.3%. The expected future cash flow from the residual interest was discounted
at 9.6%. The servicing asset was valued at $0.2 million, assuming a net
servicing fee of 0.04%, and was discounted at a rate of 10%. The Company has
evaluated the residual interest and the residual securitization spread as of
September 30, 1998 and believes these assets are fairly valued.
The Company will continue to earn interest income from the residual
interest, and will receive the actual net spread from the portion of the loans
sold represented by the bonds issued. As the net spread is received, a portion
will be allocated to interest income with the remainder applied to reduce the
carrying amount of the residual securitization spread. The residual interest and
the residual securitization spread have been and will continue to be valued each
quarter using updated prepayment, interest rate and loss estimates.
As discussed above, the Company is currently pursuing a strategy of
originating commercial real estate loans for sale to third parties, and the
Company believes that because of this new strategy, in the future, it will use
asset securitization as a means to increase its liquidity on an infrequent
basis.
Interest income totaled $58.4 million and $62.8 million for the nine months
ended September 30, 1998 and 1997, respectively. Interest income declined on a
year to year comparison because of the assets sold through securitization. The
Company's average loan portfolio was approximately $581.3 million and
approximately $628.2 million during the nine months ended September 30, 1998 and
1997, respectively. The weighted average yield on the total loan portfolio at
September 30, 1998 and 1997 was approximately 11.8%.
Net premiums from loan dispositions were $2.9 million and $5.2 million for
the nine months ended September 30, 1998 and 1997, respectively. Net premiums
from loan dispositions include premiums on the sale of the guaranteed portion of
the Company's 7(a) loans into the secondary market of $2.1 million and $1.7
million for the nine months ended September 30, 1998 and 1997, respectively. The
premiums resulted from the Company's sale of 7(a) loans totaling $26.6 million
and $20.2 million for the nine months ended September 30, 1998 and 1997,
respectively. Also included in net premiums from loan dispositions were
premiums, resulting from the early repayment of loans, totaling $0.7 million and
$3.0 million for the nine months ended September 30, 1998 and 1997,
respectively.
Investment advisory fees and other income were $4.6 million and $3.4
million for the nine months ended September 30, 1998 and 1997, respectively.
Investment advisory fees totaled $1.5 million and $1.0 million for the nine
months ended September 30, 1998 and 1997, respectively. Three of the Company's
private managed funds are no longer making new investments and are actively
distributing fund assets to their investors. In January 1998, however, the
Company entered into an agreement with Kreditanstalt fur Wiederaufbau (KfW), the
state-owned public development bank of Germany, to manage a fund of
approximately DM 160 million (approximately $95.0 million at September 30,
1998). Advisory fees increased as new fees from the German fund offset the
decline in fees from liquidating funds.
Total operating expenses were $31.8 million and $33.3 million for the nine
months ended September 30, 1998 and 1997, respectively. Operating expenses
include interest on indebtedness, salaries and employee benefits, and other
general and administrative expenses.
Interest expense on indebtedness totaled $14.5 million and $19.7 million
for the nine months ended September 30, 1998 and 1997, respectively. The
decrease in interest expense is the result of the Company repaying amounts
outstanding under its short-term credit facilities with the proceeds received
from the securitization. Average outstanding indebtedness for the nine months
ended September 30, 1998 and 1997 was
27
<PAGE> 30
$252.5 million and $326.5 million, respectively. The weighted average interest
rate for the Company's combined indebtedness was 7.2% and 7.3% at September 30,
1998 and 1997, respectively.
Salaries and employee benefits totaled $8.3 million and $6.5 million for
the nine months ended September 30, 1998 and 1997, respectively. At September
30, 1998 and 1997, total employees were approximately 96 and 82, respectively.
The increase in salaries and benefits reflects the increase in total employees,
combined with wage increases, and the experience level of employees hired. The
Company was an active recruiter in 1997 for experienced investment and
operational personnel and the Company continues to actively recruit and hire new
professionals to support anticipated portfolio growth.
During the quarter ended September 30, 1998, salaries and employee benefits
were decreased by $297,000, as the result of consolidating the Company's
deferred compensation plan's rabbi trust. As is required by EITF 97-14, the
Company records the investment income, capital gains, and unrealized
appreciation and depreciation of the assets owned by the rabbi trust in its
earnings as an increase or decrease to compensation expense with a corresponding
increase or decrease to other income and unrealized appreciation. During the
third quarter of 1998, due to an overall decline in stock market values, the
trust decreased in value by $297,000, and the result was a decrease in
compensation expense of $297,000, a decrease in other income of $57,000 and a
decrease in unrealized appreciation of $152,000. The effects of consolidating
the rabbi trust in previous quarters have had an immaterial effect on the
Company's consolidated statement of operations.
General and administrative expenses include the lease for the Company's
headquarters in Washington, DC, leases established in 1997 for the Company's new
offices in Chicago and San Francisco, travel costs, stock record expenses, legal
and accounting fees, directors' fees and various other expenses. General and
administrative expenses totaled $9.0 million and $7.0 million, respectively, for
the nine months ended September 30, 1998 and 1997. The approximate $2.0 million
increase was partially due to certain post-Merger integration expenses incurred
in the first quarter of 1998, totaling $0.2 million. These post-Merger
integration expenses included primarily the costs of legal and accounting advice
as well as the use of certain outside consultants. The remaining $1.8 million
increase in general and administrative expenses results from continued growth of
the Company, including nine full months of costs associated with the two new
offices which were established in the third and fourth quarters of 1997.
During the first quarter of 1998, the Company began to expense a portion of
the formula and cut-off awards that were established in connection with the
Merger. Prior to the Merger, each of the Predecessor Companies had a stock
option plan (the "Old Plans"). In preparation for the Merger, the Compensation
Committees of the Predecessor Companies determined that the Old Plans should be
terminated upon the Merger, so that the new merged Company would be able to
develop a new incentive compensation plan for all officers and directors with a
single equity security. The existence of the Old Plans had resulted in certain
inequities in option grants among the various officers of the Predecessor
Companies simply because of the differences in the underlying equity securities.
To balance stock option awards among the employees, and to account for the
deviations caused by the existence of five plans supported by five different
publicly traded stocks, Advisers developed two special awards to be granted in
lieu of options under the Old Plans that would be foregone upon the cancellation
of the Old Plans.
Cut-Off Award. The first award established a cut-off dollar amount as of
the date of the announcement of the Merger (August 14, 1997) that would be
computed for all outstanding, but unvested options that would be canceled as of
the date of the Merger. The cut-off award was designed to cap the appreciated
value in unvested options at the Merger announcement date in order to set the
foundation to balance option awards upon the Merger. The cut-off award was
designed to be equal to the difference between the market prices of the shares
of stock underlying the canceled options under the Old Plans at August 14, 1997,
less the exercise prices of the options. The cut-off award was computed to be
$2.9 million in the aggregate and will be payable for each canceled option as
the canceled options would have vested. The cut-off award will only be payable
if the award recipient is employed by the Company on a future vesting date. The
cut-off award totaled $783,000 during the nine months ended September 30, 1998
with approximately $25,000 remaining to be vested during 1998.
28
<PAGE> 31
Formula Award. The formula award was designed to compensate officers from
the point when their unvested options would cease to appreciate in value
pursuant to the mechanics of the cut-off award (i.e., August 14, 1997) up until
the time in which they would be able to receive option awards in the Company
after the Merger became effective. In the aggregate, the formula award equaled
six percent of the difference between the combined aggregate market
capitalizations of the Predecessor Companies as of the close of the market on
December 30, 1997, and the combined aggregate market capitalizations of the
Predecessor Companies on August 14, 1997.
The formula award was designed as a long-term incentive compensation
program that would replace canceled stock options and would balance share
ownership among key officers for past and prospective service.
The terms of the formula award require that the award be contributed to the
Company's deferred compensation plan, and be used to purchase shares of the
Company in the open market. The formula award will vest over a three-year
period, on the anniversary date of the Merger, beginning on December 31, 1998.
In the aggregate, the market capitalizations of the predecessor companies
increased by approximately $319 million from August 14, 1997 to December 30,
1997, and the total formula award was computed to be approximately $19 million.
Assuming all officers who received a formula award remain with the Company over
the vesting period, the Company will expense the formula award during 1998, 1999
and 2000 in an annual amount of approximately $6.4 million. The Company recorded
approximately $4.7 million during the nine months ended September 30, 1998.
The total expense recorded as a result of the cut-off and formula awards
during the first nine months of 1998 was $5.5 million, or $0.11 per share.
Net realized gains were $20.0 million and $7.5 million for the nine months
ended September 30, 1998 and 1997, respectively. The net gains resulted from the
sale of equity securities associated with certain mezzanine loans, the sale of
real estate and the realization of unamortized discount resulting from the
payoff of mezzanine and commercial mortgage loans, offset by losses on
investments. Realized gains totaled $20.8 million and $8.5 million for the nine
months ended September 30, 1998 and 1997, respectively. Realized losses during
the nine months ended September 30, 1998 and 1997 totaled $0.8 million and $1.0
million, respectively. Net realized gains during the first nine months of 1998
were largely due to the disposition of securities of seven portfolio companies,
DMI Furniture ($0.5 million), Virginia Beach Associates ($2.4 million), Labor
Ready, Inc. ($5.0 million), Broadcast Holdings, Inc. ($1.1 million), Waterview
($3.0 million), Z Spanish Radio Network, Inc. ($2.7 million) and El Dorado
Communications, Inc. ($0.8 million). Gains resulting from investments in these
seven companies totaled $15.5 million. The Company also realized a gain of $4.0
million from the sale of an office building and incurred an income tax liability
related to that gain of approximately $1.6 million. The office building was
previously owned by Allied Capital Advisers, Inc. ("Advisers"), a predecessor
company to the merged Allied Capital.
The Company will realize gains when market conditions are favorable or when
dictated by other parties to the transaction. Therefore, the realization of
gains is unpredictable on a quarterly basis and quarterly results may not be
indicative of annual results.
The Company recorded net unrealized losses of $0.4 million for the nine
months ended September 30, 1998 as a result of valuation changes resulting from
the board of directors' valuation of the Company's assets, the effect of
valuation of interest rate swap agreements and the effect of reversals of
appreciation resulting from realized gains. At September 30, 1998, net
unrealized appreciation in the portfolio totaled $864,000, and was composed of
unrealized appreciation of $28.0 million resulting primarily from appreciated
equity interests in portfolio companies, and unrealized depreciation of $27.1
million resulting primarily from under-performing investments in the portfolio.
Grade 5 mezzanine investments, or those investments the Company has
identified as assets for which some loss of investment principal is expected,
totaled $6.9 million at value at September 30, 1998, or 0.9% of the Company's
total portfolio based on the quarterly valuation of the Board of Directors. The
value of these Grade 5 loans has been reduced from an aggregate cost of $25.0
million in order to reflect the Company's estimate of the net realizable value
of these investments upon disposition. This reduction in value has been
29
<PAGE> 32
recorded previously as unrealized depreciation over several years in the
Company's earnings. The Company continues to follow its historical practices of
working with a troubled portfolio company in order to recover the maximum amount
of the Company's investment, but records unrealized depreciation for a
substantial amount of the potential exposure when such exposure is identified.
The population of Grade 5 mezzanine investments remained constant with prior
periods in 1998, and the Company currently does not see any additional credit
concerns in its mezzanine portfolio.
Prior to the third quarter, the Company had employed two separate grading
systems for its mezzanine and commercial real estate loans, and did not use a
grading system for its SBA 7(a) loan portfolio. To provide greater consistency
in reporting credit quality to the Company's investors, during the third quarter
of 1998 the Company moved the real estate and SBA 7(a) loan portfolios to the
same grading system used for the mezzanine portfolio. The mezzanine grading
scale now used for the entire portfolio provides for the following
classifications. Grade 1 is used for those loans from which a capital gain is
expected. Grade 2 is used for loans performing in accordance with plan. Grade 3
is used for loans that require closer monitoring; however, no loss of interest
or principal is expected. Grade 4 is used for loans for which some loss of
contractually due interest is expected, but no loss of principal is expected.
Grade 5 is used for loans for which some loss of principal is expected and the
loan is marked down to net realizable value.
At September 30, 1998, commercial real estate Grade 5 loans totaled $1.6
million at value. The value of these Grade 5 loans has been reduced from an
aggregate cost of $2.1 million in order to reflect the Company's estimate of the
net realizable value of the underlying collateral. A Grade 5 classification for
a commercial real estate loan prior to the use of the uniform grading system
meant that the loan was in workout. Because of the collateral securing these
loans, however, few previous Grade 5 loans were ever expected to result in loss
of principal. Of the loans included in Grade 5 at June 30, 1998, only four loans
totaling $2.1 million at cost were expected to incur any loss of principal, and
these loans were valued at $1.4 million at June 30, 1998.
Grade 5 SBA 7(a) loans totaled $4.8 million at value at September 30, 1998,
and have been reduced from an aggregate cost basis of $6.3 million.
For the portfolio as a whole at September 30, 1998, Grade 5 investments
totaled $13.3 million or 1.8% of the total portfolio; Grade 4 investments
totaled $8.4 million, or 1.1% of the total portfolio; Grade 3 investments
totaled $25.6 million, or 3.5% of the total portfolio; Grade 2 investments
totaled $541.3 million, or 73.2% of the total portfolio; and Grade 1 investments
totaled $151.3 million, or 20.4% of the total portfolio.
For the total portfolio, loans greater than 120 days delinquent were $21.2
million at value at September 30, 1998, or 2.9% of the total portfolio. Included
in this category are loans valued at $16.4 million that are fully secured by
real estate. Loans greater than 120 days delinquent generally do not accrue
interest. Loans greater than 120 days delinquent at June 30, 1998, were $19.5
million at value or 2.9% of the total portfolio.
The Company incurred income tax expense of $1.6 million for the nine months
ended September 30, 1998, which resulted from the built-in gains tax associated
with the $4.0 million gain from the sale of the office building previously owned
by Advisers, prior to the Merger. The Company incurred income tax expense of
$1.4 million for nine months ended September 30, 1997, which resulted from the
operations of Advisers, prior to the Merger. It is the Company's current
intention to distribute all of its taxable income, and therefore no provision
for ordinary income taxes has been made for the nine months ended September 30,
1998.
The weighted average common shares outstanding used to compute basic
earnings per common share for the nine months ended September 30, 1998 were 51.5
million as compared to 48.8 million for the nine months ended September 30,
1997. The increase in weighted average shares is primarily due to the exercise
of stock options. Total shares outstanding at September 30, 1998 were 52.3
million. The weighted average shares and the total shares outstanding are
reduced by the approximately 0.8 million shares held in the Company's deferred
compensation plan resulting primarily from the formula award.
For the nine months ended September 30, 1998, the Company's compensation
committee granted a total of 3.7 million new stock options to certain of the
Company's officers. The shares under option have been included in the
calculation of weighted average shares used to compute diluted earnings per
share. All per
30
<PAGE> 33
share amounts included in this management's discussion and analysis have been
computed using the weighted average shares used to compute diluted earnings per
share.
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Net increase in net assets resulting from operations ("NIA") was $14.9
million, or $0.29 per share, and $17.1 million, or $0.34 per share, for the
three months ended September 30, 1998 and 1997, respectively. NIA results from
total interest and related portfolio income earned, less total expenses
incurred, plus net realized and unrealized gains or losses.
Interest income totaled $20.2 million and $22.1 million for the three
months ended September 30, 1998 and 1997, respectively. The comparison of
interest income on a quarter to quarter basis is effected by the asset
securitization that took place in the first quarter of 1998. The weighted
average loan portfolio outstanding during the third quarter of 1997 was $671.6
million. Subsequent to the securitization, the weighted average loan portfolio
outstanding during the third quarter of 1998 was $638.4 million. The Company
originated loans totaling $100.8 million in the third quarter of 1998 as
compared to $69.1 million during the third quarter of 1997, and received
repayments on its loan portfolio totaling $21.5 million and $52.7 million for
the quarters ended September 30, 1998 and 1997, respectively.
Net premiums from loan dispositions were $0.9 million and $2.0 million for
the three months ended September 30, 1998 and 1997, respectively. Net premiums
in the third quarter of 1998 and 1997 included prepayment premiums of
approximately $0.1 million and $1.6 million. Overall prepayment experience in
1998 has been less than that of 1997, and prepayment premiums have declined
accordingly. Net premiums from the sales of 7(a) guaranteed loans increased in
the third quarter of 1998 to $0.8 from $0.6 in the third quarter of 1997, due to
the timing of loan sales.
Investment advisory fees and other income were $1.5 million and $1.0
million for the three months ended September 30, 1998 and 1997, respectively.
Advisory fees increased as new fees from the German fund offset the decline in
fees from liquidating funds.
Total operating expenses were $11.5 million and $13.0 million for the three
months ended September 30, 1998 and 1997, respectively. Operating expenses
include interest on indebtedness, salaries and employee benefits, and other
general and administrative expenses.
Interest expense on indebtedness totaled $5.7 million and $7.4 million for
the three months ended September 30, 1998 and 1997, respectively. The decrease
in interest expense is again due to the effect of the securitization which
reduced the Company's outstanding borrowings and due to a decrease in the
weighted average interest rate for the Company's combined indebtedness. Average
outstanding indebtedness for the quarters ended September 30, 1998 and 1997 was
$313.0 million and $368.7 million, respectively. The weighted average interest
rate for the Company's combined indebtedness was 7.2% and 7.3% at September 30,
1998 and 1997, respectively.
Salaries and employee benefits totaled $2.7 million and $2.3 million for
the three months ended September 30, 1998 and 1997, respectively. The increase
in salaries and benefits reflects the increase in total employees, combined with
wage increases, and the experience level of employees hired.
General and administrative expenses totaled $3.1 million and $3.3 million,
respectively, for the three months ended September 30, 1998 and 1997. The
approximate $0.2 million decrease results from the timing of general and
administrative expenses recognized in 1997.
The total expense recorded as a result of the cut-off and formula awards
during the third quarter of 1998 was $1.6 million or $0.03 per share.
Net realized gains were $6.2 million and $2.9 million for the three months
ended September 30, 1998 and 1997, respectively. The net gains resulted from the
sale of equity securities associated with certain mezzanine loans, the sale of
real estate and the realization of unamortized discount resulting from the
payoff of mezzanine and commercial mortgage loans, offset by losses on
investments. Realized gains totaled $6.9 million and $3.0 million for the
quarters ended September 30, 1998 and 1997, respectively. Realized losses
totaled
31
<PAGE> 34
$0.7 million and $0.1 million for the quarters ended September 30, 1998 and
1997. Net realized gains during the third quarter of 1998 were largely due to
the disposition of securities of two portfolio investments, DMI Furniture ($0.5
million) and Virginia Beach Associates ($2.4 million). The Company also realized
a gain of $4.0 million from the sale of an office building. Because these gains
were realized, the Company reversed previously recorded unrealized appreciation
of $0.4 million. Upon completion of the Company's third quarter portfolio
valuation, the company recorded additional unrealized appreciation related to
equity securities and loans held for sale of $6.5 million, and depreciation of
$4.7 million. In total, the company recorded net unrealized appreciation of $0.9
million for the quarter ended September 30, 1998. Unrealized appreciation is a
non-cash adjustment to income.
The Company will realize gains when market conditions are favorable or when
dictated by other parties to the transaction. Therefore, the realization of
gains is unpredictable on a quarterly basis and quarterly results may not be
indicative of annual results.
The weighted average common shares outstanding used to compute basic
earnings per common share for the quarter ended September 30, 1998, were 51.4
million as compared to 49.3 million for the quarter ended September 30, 1997.
The increase in weighted average shares is primarily due to the exercise of
stock options. The weighted average shares outstanding to compute diluted
earnings per share were 51.4 million and 49.8 million for the quarters ended
September 30, 1998 and 1997, respectively, include the potential dilutive effect
of outstanding stock options. "See Note 7 to the Consolidated Financial
Statements."
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
CASH AND CASH EQUIVALENTS
At September 30, 1998, the Company had $43.6 million in cash and cash
equivalents. ACC invests otherwise uninvested cash in U.S. government or
agency-issued or guaranteed securities that are backed by the full faith and
credit of the United States, or in high quality, short term repurchase
agreements fully collateralized by such securities. The Company closed the third
quarter of 1998 with a substantial cash balance due to the timing of a loan
origination which closed two days after the quarter end, and due to certain
repayments that were received on September 30, 1998. The Company's objective is
to manage to a very low cash balance, and fund new originations with its lines
of credit.
INDEBTEDNESS
The Company had outstanding indebtedness at September 30, 1998 (unaudited)
as follows:
<TABLE>
<CAPTION>
AMOUNT ANNUAL
CLASS OUTSTANDING INTEREST RATE(1)
----- ----------- ----------------
(IN THOUSANDS)
<S> <C> <C>
Debentures and notes payable:
Unsecured long-term notes payable..................... $180,000 7.21%
Master loan and security agreement.................... 56,000 6.38
OPIC Loan............................................. 5,700 6.57
SBA debentures........................................ 48,650 8.23
Master repurchase agreement........................... 1,300 7.24
-------- ----
Total debentures and notes payable............... $291,650 7.21%
======== ====
Revolving line of credit................................... $ 70,000 7.21%
======== ====
</TABLE>
- ---------------
(1) The annual interest rate includes the cost of commitment fees and other
facility fees.
Unsecured Long-term Notes Payable. The Company obtained $180 million in
financing through the issuance of unsecured long-term notes with private
institutional lenders, primarily insurance companies. The terms of the notes
include five or seven year maturities, priced at approximately 7.2%. The notes
require payment of interest semiannually, and all principal is due upon
maturity.
32
<PAGE> 35
Master Loan and Security Agreement. The Company, in conjunction with a
private REIT managed by the Company, has a facility to borrow up to $250
million, of which $100 million is committed, using its commercial mortgage loans
as collateral. The agreement generally requires interest-only payments with all
principal due at maturity. The agreement bears interest at one-month London
Inter Bank Offered Rate ("LIBOR") plus 1.0%. The facility matured on October 15,
1998, and has subsequently been renewed for an additional one year term.
SBA Debentures. The Company, through its SBIC subsidiaries, has debentures
totaling $48.7 million payable to the SBA, at interest rates ranging from 6.9%
to 9.6% with scheduled maturity dates as follows: 1998 -- $1.0 million;
1999 -- $0; 2000 -- $17.3 million; 2001 -- $9.4 million; 2002 -- $0; and $21.0
million thereafter. The debentures require semi-annual interest-only payments
with all principal due upon maturity. During 1997, Congress increased the
maximum leverage available to an SBIC to $101.0 million, and the Company intends
to continue to borrow under the SBIC program as the situation warrants.
Master Repurchase Agreement. The Company and a private REIT managed by the
Company are co-borrowers under a master repurchase agreement whereby the two
entities can borrow up to $250 million, of which $100 million is committed,
through repurchase agreements using commercial mortgage loans as collateral. The
Company pledges commercial mortgage loans as collateral for the facility such
that the amount borrowed is approximately equal to 75% to 80% of the value of
the collateral pledged. The terms of the master repurchase agreement require
interest-only payments with all principal due at maturity. The master repurchase
agreement bears interest at one-month LIBOR plus 1.13% and requires an annual
commitment fee of 0.25% of the amount committed. The master repurchase agreement
matures on January 31, 1999.
Revolving Line of Credit. The Company has a $200 million unsecured
revolving line of credit. The facility bears interest at LIBOR plus 1.25% and
requires a commitment fee equal to 0.2% of the committed unused amount. The
facility also has a facility fee equal to 0.15% of the initial commitment. The
line of credit requires monthly payments of interest, and all principal is due
upon maturity. The facility matures in June 30, 1999.
FUTURE DEBT OR EQUITY OFFERINGS
The Company plans to secure additional debt and equity capital for
continued investment in growing businesses. Because the Company is a regulated
investment company, it distributes substantially all of its income and requires
external capital for growth. Because the Company is a business development
company, it is limited in the amount of debt capital it may use to fund its
growth, since it is generally required to maintain a ratio of 200% of total
assets to total borrowings.
The Company's cash flow from operations was $49.8 million for the nine
months ended September 30, 1998 and $58.9 million for the year ended December
31, 1997. The Company plans to maintain a strategy of financing its operations,
dividend requirements and future investments with cash from operations,
long-term debt, asset sales or securitizations or through use of its equity
capital. The Company will utilize its short-term credit facilities only as a
means to bridge to long-term financing. The Company evaluates its interest rate
exposure on an ongoing basis and may hedge variable and short-term interest rate
exposure through interest rate swaps, treasury locks and other techniques when
appropriate. The Company believes that it has access to capital sufficient to
fund its ongoing investment and operating activities, and from which to pay
dividends.
Because of recent turmoil in the capital markets, the Company foresees
certain unique opportunities to purchase debt instruments in both the corporate
high yield market and in the commercial mortgage-backed securities market at
significant discounts. These purchase opportunities have the potential to
increase the Company's recurring investment income in the future. Given the
magnitude of this unique opportunity the Company is presently exploring
additional debt and equity capital alternatives, so that it can aggressively
pursue this opportunity.
33
<PAGE> 36
FINANCIAL OBJECTIVES
The merged Company has set forth certain financial objectives that it
intends to use in allocating its resources and in selecting new investment
opportunities. Management's goal is to increase NIA annually by 15% to 20% and
to result in a ratio of NIA to average shareholders' equity of 18% to 20%.
Management believes that the Company will be able to achieve these goals over
the next three to five years. Factors that may impede the achievement of these
objectives include those described under "Investment Considerations" and also
include other factors such as changes in the economy, competitive and market
conditions, and future business decisions.
YEAR 2000
The Company has reviewed its exposure to the risks associated with the Year
2000 issue, and has determined that there is no material risk of business
interruption as a result of errors or inefficiencies in the Company's internal
computer systems. The Company exclusively uses purchased software and has been
informed by its vendors that the software will be Year 2000 compatible; however,
there is no assurance that such software will indeed address all Year 2000
compatibility issues. The Company is in the process of developing a series of
tests to validate its readiness for the Year 2000. The Company is also assessing
the viability of contingent courses of action if necessary including the
purchase of new hardware and software applications. At the present time, the
Company does not believe that it will be adversely affected by this issue. In
addition, the Company has not made significant expenditures in anticipation of
the Year 2000 issue outside of its routine information technology budget. The
Company is currently assessing the risk that its portfolio companies may have
regarding this issue. For all new loans originated, the Company includes in its
credit review a Year 2000 compatibility assessment, and will monitor particular
portfolio companies as needed.
NEW GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
Statement of Financial Accounting Standards Nos. 130 and 131, "Reporting
Comprehensive Income" and "Disclosures about Segments of an Enterprise and
Related Information," respectively, were issued in June 1997. SFAS 130 requires
that certain financial activity typically disclosed in shareholders' equity be
reported in the financial statements as an adjustment to net income in
determining comprehensive income. SFAS 131 requires the reporting of selected
segmented information in quarterly and annual reports. SFAS No. 130 did not
materially impact the Company's financial statements, and the Company does not
anticipate any material financial impact from the implementation of SFAS 131.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." The Statement establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. SFAS No. 133
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. The Company does not
anticipate that the adoption of SFAS No. 133 will have any material impact to
the financial statements.
INVESTMENT CONSIDERATIONS
RISKS OF DEFAULT
ACC invests in and lends to small businesses. Loans to small businesses
involve a high risk of default and generally are not rated by any nationally
recognized statistical rating organization. Small businesses usually have
narrower product lines and smaller market shares than larger companies and
therefore may be more vulnerable to competitors' actions and market conditions,
as well as general economic downturns. These businesses typically depend for
their success on the management talents and efforts of one person or a small
group of persons whose death, disability or resignation would adversely affect
the business. Because these businesses frequently have highly leveraged capital
structures, reduced cash flows resulting from adverse competitive developments,
a shift in customer preferences or an economic downturn can severely affect the
34
<PAGE> 37
return on, or the recovery of, the Company's investments in such businesses. The
Company recently has begun originating larger loans, and as a result, any
individual event of default may have a more significant impact on the Company or
its operations.
LOSS OF PASS-THROUGH TAX TREATMENT
The Company qualifies as a regulated investment company ("RIC") under
Subchapter M of the Code and, provided it meets certain requirements under the
Code, qualifies for pass-through tax treatment. The Company would cease to
qualify for pass-through tax treatment if it is unable to comply with the
diversification or distribution requirements contained in Subchapter M of the
Code, or if it ceases to qualify as a BDC under the 1940 Act. The Company also
could be subject to a 4% excise tax (and, in certain cases, corporate level
income tax) if it fails to make certain distributions. The lack of Subchapter M
tax treatment could have a material adverse effect on the total return, if any,
obtainable from an investment in the Company.
COMPETITION
Many entities and individuals compete for investments similar to those made
by the Company, some of whom have greater resources than ACC. Increased
competition would make it more difficult for the Company to purchase or
originate loans at attractive prices. As a result of this competition, ACC may
from time to time be precluded from making otherwise attractive investments on
terms considered to be prudent in light of the risks assumed.
LONG-TERM CHARACTER OF INVESTMENTS
It is generally expected that mezzanine loans will yield a current return
from the time they are made, but also will produce a realized gain, if any, from
an accompanying equity feature after approximately three to eight years. There
can be no assurance that either a current return or capital gains will actually
be achieved.
ILLIQUIDITY OF INVESTMENTS
The Company acquires securities directly from issuers in private
transactions, and the major portion of such investments ordinarily is subject to
restrictions on resale or is otherwise illiquid. In particular, there is usually
no established trading market in which such securities could be sold. In
addition, securities generally cannot be sold to the public without registration
under the Securities Act, which involves delay, uncertainty and expense.
GOVERNMENT REGULATIONS
The Company is subject to regulation by the Commission and the SBA. In
addition, the Company's business may be significantly impacted by changes in the
laws or regulations that govern BDCs, RICs, real estate investment trusts
("REITs"), small business investment companies ("SBICs"), and small business
lending companies ("SBLCs"). Laws and regulations may be changed from time to
time and the interpretations of the relevant law and regulations also are
subject to change. Any change in the laws or regulations that govern the Company
could have a material impact on the Company or its operations.
INTEREST RATE RISK
The Company's income is materially dependent upon the "spread" between the
rate at which it borrows funds and the rate at which it loans these funds. The
Company anticipates using a combination of long-term and short-term borrowings
to finance its lending activities and may engage in interest rate risk
management techniques. At September 30, 1998, the Company's net interest spread
was 4.6% (460 basis points), which represents the weighted average yield of the
combined portfolio less the weighted average cost of funds. There can be no
assurance that the Company will maintain this net interest spread or that a
significant change in market interest rates will not have a material adverse
effect on the Company's profitability.
35
<PAGE> 38
LIMITED INFORMATION
Consistent with its operation as a BDC, the Company's portfolio is expected
to consist primarily of securities issued by small and developing privately held
companies. There is generally little or no publicly available information about
such companies, and the Company must rely on the diligence of its officers and
directors to obtain the information necessary for the Company's decision to
invest in them.
FLUCTUATIONS IN QUARTERLY RESULTS
The Company could experience fluctuations in quarterly operating results
due to a number of factors including, among others, the completion of a
securitization transaction in a particular calendar quarter, the interest rates
on the securities issued in connection with its securitization transactions,
variations in the volume of loans originated by the Company, variations in and
the timing of the recognition of realized and unrealized gains, the degree to
which the Company encounters competition in its markets and general economic
conditions. As a result of these factors, results for any one quarter should not
be relied upon as being indicative of performance in future quarters.
RISKS OF LEVERAGE
ACC borrows funds from, and issues senior debt securities to, banks and
other lenders. Lenders of these senior securities have fixed dollar claims on
the Company's consolidated assets which are superior to the claims of the
Company's shareholders. Leverage magnifies the potential for gain and loss on
amounts invested and, therefore, increases the risks associated with an
investment in the Company's securities. If the value of the Company's
consolidated assets increases, then such leveraging techniques would cause the
net asset value attributable to the Company's Common Stock to increase more
sharply than it would have had the techniques not been utilized. Conversely, a
decrease in the value of the Company's consolidated assets would cause net asset
value to decline more sharply than it otherwise would if the amounts had not
been borrowed. Similarly, any increase in the Company's consolidated income in
excess of consolidated interest payable on the borrowed funds would cause its
net income to increase more than it would without the leverage, while any
decrease in its consolidated income would cause net income to decline more
sharply than it would have had the funds not been borrowed. Such a decline could
negatively affect the Company's ability to make Common Stock dividend payments,
and, if asset coverage for a class of senior security representing indebtedness
declines to less than 200%, the Company may be required to sell a portion of its
investments when it is disadvantageous to do so. Leverage is generally
considered a speculative investment technique. As of September 30, 1998, the
Company's debt as a percentage of total liabilities and shareholders' equity was
44.3%. The ability of the Company to achieve its investment objective may depend
in part on its continued ability to maintain a leveraged capital structure by
borrowing from banks or other lenders on favorable terms, and there can be no
assurance that such leverage can be maintained.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
36
<PAGE> 39
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is party to certain lawsuits. While the outcome of these legal
proceedings cannot at this time be predicted with certainty, management does not
expect that these actions will have a material effect upon the consolidated
financial position of the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the first nine months of 1998 and the years ended December 31, 1997
and 1996, ACC issued a total of 177,290, 550,971 and 913,206 shares,
respectively, pursuant to a dividend reinvestment plan. This plan is not
registered and relies on an exemption from registration in the Securities Act of
1933.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
In accordance with recent amendments to the shareholder proposal rules set
forth in Rules 14a-4 and 14a-8 under the Securities and Exchange Act of 1934, as
amended, written notice of shareholder proposals submitted outside the processes
of Rule 14a-8 for consideration at the 1999 Annual Meeting of Shareholders must
be received by the Company on or before February 17, 1999, in order to be
considered timely for purposes of Rule 14a-4. The persons designated in the
Company's proxy statement shall be granted discretionary authority with respect
to any shareholder proposal of which the Company does not receive timely notice.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3(i)(1) Articles of Amendment and Restatement of the Articles of
Incorporation.
3(ii)(2) Articles of Merger.
3(iii)(3) Bylaws.
4.1(10) Specimen certificate of the Company's Common Stock, par
value $0.0001, the rights of holders of which are defined in
Exhibits 3(i), 3(ii) and 3(iii).
4.2(4) Form of debenture between certain subsidiaries of ACC and
the U.S. Small Business Administration.
10.1(10) Second Amended and Restated Credit Agreement dated as of
June 4, 1998 (the "1998 Credit Agreement") between the
Company, as Borrower, each of the financial institutions
initially a signatory thereto, as Lenders, and BankBoston,
N.A., as disbursing agent, First Union National Bank, as
syndication agent and Riggs Bank N.A., as managing agent and
NationsBank of Texas, N.A., as Co-Agent.
10.2(10) Note Agreement dated as of April 30, 1998.
10.3(5) Loan Agreement between Allied I and Overseas Private
Investment Corporation, dated April 10, 1995. Letter dated
December 11, 1997 evidencing assignment of Loan Agreement
from Allied I to the Company.
</TABLE>
37
<PAGE> 40
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.4(3) Amended and Restated Master Repurchase Agreement dated March
22, 1996 among Allied Commercial, BMI and Merrill Lynch
Mortgage Capital Inc. Letter evidencing the assignment of
this facility to the Company dated November 6, 1997.
10.5* Amended and restated Master Loan & Security Agreement dated
October 7, 1998 among Allied Capital, BMI and Morgan Stanley
Mortgage Capital, Inc.
10.6(9) Sale and Servicing Agreement dated, as of January 1, 1998,
among Allied Capital CMT, Inc., Allied Capital Commercial
Mortgage Trust 1998-1 and Allied Capital Corporation and
LaSalle National Bank and ABN AMRO Bank N.V.
10.7(9) Indenture dated as of January 1, 1998, between the Allied
Capital Commercial Mortgage Trust 1998-1 and LaSalle
National Bank.
10.8(9) Amended and Restated Trust Agreement, dated January 1, 1998
between Allied Capital CMT, LaSalle National Bank Inc. and
Wilmington Trust Company.
10.9(9) Guaranty dated as of January 1, 1998 by Allied Capital
Corporation.
10.10(3) Employee Stock Ownership Plan, as amended on December 31,
1997.
10.10a(10) First Amendment to the Allied Capital Corporation Employee
Stock Ownership Plan dated April 30, 1998.
10.11(3) Deferred Compensation Plan, as amended January 1, 1998.
10.11a(10) First Amendment to the Allied Capital Corporation Deferred
Compensation Plan dated April 30, 1998.
10.12(8) Stock Option Plan.
10.12a(9) Form of Custody Agreement with Riggs Bank N.A. with respect
to safekeeping.
10.12b(9) Form of Custody Agreement with LaSalle National Bank.
10.13(6) Investment Management Agreement among Advisers, Mitchell
Hutchins Institutional Investors Inc. and BMI, dated January
4, 1993 (the "MH Management Agreement"). Assignment of the
MH Agreement from Mitchell Hutchins Institutional Investors
Inc. to Siguler Guff & Company LLC on August 8, 1995. Waiver
dated December 31, 1997 evidencing assignment of MH
Management Agreement from Advisers to the Company.
10.14(6) Agreement between the Company and Mitchell Hutchins
Institutional Investors Inc., dated January 4, 1993 ("MH
Agreement") Assignment of MH Agreement from Mitchell
Hutchins Institutional Investors, Inc. to Siguler Guff &
Company LLC on August 8, 1995. Assignment of MH Management
Agreement from Advisers to the Company on December 31, 1997.
Consent to assign MH Agreement to the Company.
10.15(7) Lease Agreement between 1620 K Street Associates Limited
Partnership and Advisers dated February 17, 1993 (the "1620
K Street Lease Agreement"). Assignment of Lease and
Landlord's consent to Assignment dated January 5, 1998
evidencing assignment of the 1620 K Street Lease Agreement
from Advisers to the Company.
10.16(3) Form of Regional Associate Agreement.
10.17(3) Dividend Reinvestment Plan.
11 Statement regarding computation of per share earnings is
incorporated by reference to Note 7 to the Company's Notes
to the Consolidated Financial Statements filed herein as
Item 1.
27* Financial Data Schedule
</TABLE>
- ---------------
* Filed herewith.
(1) Incorporated by reference to Exhibit 3(i) with Allied Lending's Annual
Report on Form 10-K for the year ended December 31, 1996 (File No.
0-22832).
(2) Incorporated by reference from Appendix B to the Company's registration
statement on Form N-14 filed on the Company's behalf with the Commission on
September 26, 1997 (File No. 333-36459).
(3) Incorporated by reference to the exhibit of the same name filed with the
Company's report on Form 10-K for the year ended December 31, 1997 (File
No. 0-22832).
38
<PAGE> 41
(4) Incorporated by reference to Exhibit 4.2 filed with Allied I's Annual
Report on Form 10-K for the year ended December 31, 1996 (File No.
811-00907).
(5) Incorporated by reference to Exhibit 10.2 of Allied I's Pre-Effective
Amendment No. 2 filed with the registration statement on Form N-2 on
January 24, 1996 (File No. 33-64629). Assignment to the Company is
incorporated by reference to Exhibit 10.3 of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997 (File No. 0-22832).
(6) Agreement incorporated by reference to the exhibit of the same name to
Advisers' Report on Form 10-K for the year ended December 31, 1992.
Assignment to the Company is incorporated by reference to the exhibit of
the same name filed with Advisers' Report on Form 10-K for the year ended
December 31, 1995. (File No. 0-18826). Waiver and consent to assign to the
Company for each agreement is incorporated by reference to the exhibit of
the same name filed with the Company's Annual Report on Form 10-K for the
year ended December 31, 1997 (File No. 0-22832).
(7) Incorporated by reference to an exhibit of the same name filed with the
Company's Annual Report on Form 10-K for the year ended December 31, 1994
(File No. 0-22832). Incorporated by reference to the exhibit of the same
name filed with the Company's Annual Report on Form 10-K for the year ended
December 31, 1997 (File No. 0-22832).
(8) Incorporated by reference to Exhibit 4 of the Allied Capital Corporation
Stock Option Plan registration statement on Form S-8, filed on behalf of
such Plan on February 3, 1998 (File No. 333-45525).
(9) Incorporated by reference to exhibit of the same description to the
Company's registration statement on Form N-2 filed on the Company's behalf
with the Commission on May 5, 1998.
(10) Incorporated by reference to exhibit of same name filed with the Company's
report on Form 10-Q for the quarterly period ended June 30, 1998 (File No.
0-22832).
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the quarter ended September
30, 1998.
39
<PAGE> 42
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunder duly authorized.
ALLIED CAPITAL CORPORATION
(Registrant)
Dated: November 9, 1998 /s/ Penni F. Roll
-------------------------------------
Principal and Chief Financial Officer
40
<PAGE> 1
Execution Copy
================================================================================
AMENDED AND RESTATED MASTER LOAN AND SECURITY AGREEMENT
-----------------------------
DATED AS OF OCTOBER 7, 1998
------------------------------
ALLIED CAPITAL CORPORATION,
AS A BORROWER
AND
BUSINESS MORTGAGE INVESTORS, INC.
AS A BORROWER
COLLECTIVELY, THE BORROWERS
AND
MORGAN STANLEY MORTGAGE CAPITAL INC.
AS LENDER
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
RECITALS 1
SECTION 1. DEFINITIONS AND ACCOUNTING MATTERS....................................................................1
1.01 Certain Defined Terms...............................................................................1
1.02 Accounting Terms and Determinations................................................................10
SECTION 2. LOANS, NOTE AND PREPAYMENTS..........................................................................10
2.01 Loans............................................................................................. 10
2.02 Notes ...........................................................................................10
2.03 Procedure for Borrowing............................................................................11
2.04 Limitation on Types of Loans; Illegality...........................................................11
2.05 Repayment of Loans; Interest.......................................................................12
2.06 Mandatory Prepayments or Pledge....................................................................12
2.07 Indemnity..........................................................................................13
2.08 Extension of Termination Date......................................................................13
SECTION 3. PAYMENTS; COMPUTATIONS; ETC..........................................................................13
3.01 Payments...........................................................................................13
3.02 Computations.......................................................................................13
3.03 Requirements of Law................................................................................13
SECTION 4. COLLATERAL SECURITY..................................................................................14
4.01 Collateral; Security Interest......................................................................14
4.02 Further Documentation..............................................................................15
4.03 Changes in Locations, Name, etc....................................................................16
4.04. Lender's Appointment as Attorney-in-Fact..........................................................16
4.05. Performance by Lender of Borrower's Obligations...................................................17
4.06. Proceeds..........................................................................................17
4.07. Remedies..........................................................................................17
4.08. Limitation on Duties Regarding Presentation of Collateral.........................................18
4.09. Powers Coupled with an Interest...................................................................18
4.10 Release of Security Interest.......................................................................18
SECTION 5. CONDITIONS PRECEDENT.................................................................................19
5.01 Initial Loan.......................................................................................19
5.02 Initial and Subsequent Loans.......................................................................19
SECTION 6. REPRESENTATIONS AND WARRANTIES.......................................................................21
6.01 Existence..........................................................................................21
6.02 Financial Condition................................................................................21
</TABLE>
-i-
<PAGE> 3
<TABLE>
<S> <C>
6.03 Litigation.........................................................................................22
6.04 No Breach..........................................................................................22
6.05 Action ...........................................................................................22
6.06 Approvals..........................................................................................22
6.07 Margin Regulations.................................................................................22
6.08 Taxes ...........................................................................................22
6.09 Investment Company Act.............................................................................22
6.10 Collateral; Collateral Security....................................................................23
6.11 Chief Executive Office.............................................................................23
6.12 Location of Books and Records......................................................................23
6.13 Hedging ...........................................................................................23
6.14 True and Complete Disclosure.......................................................................23
6.15 Consolidated Shareholders' Equity..................................................................24
6.16 ERISA ............................................................................................24
SECTION 7. COVENANTS OF THE BORROWER............................................................................24
7.01 Financial Statements...............................................................................24
7.02 Litigation.........................................................................................25
7.03 Existence, etc.....................................................................................25
7.04 Prohibition of Fundamental Changes.................................................................25
7.05 Borrowing Base Deficiency..........................................................................26
7.06 Notices ...........................................................................................26
7.07 Hedging ...........................................................................................26
7.08 Reports ...........................................................................................26
7.09 Underwriting Guidelines............................................................................27
7.10 Transactions with Affiliates.......................................................................27
7.11 Limitation on Liens................................................................................27
7.12 Limitation on Distributions........................................................................27
7.13 Consolidated Shareholders' Equity..................................................................27
7.14 Maintenance of Ratio of Total Indebtedness to Tangible Net Worth...................................27
7.15 Maintenance of Profitability.......................................................................27
7.16 Servicing Tape.....................................................................................27
7.17 Interest Rate Protection Agreements................................................................28
7.18 Required Filings...................................................................................28
7.19 No Adverse Selection...............................................................................28
7.20 ERISA ...........................................................................................28
7.21 Remittance of Prepayments..........................................................................28
7.22 Lender's Right to Purchase.........................................................................28
7.23 Securitizations....................................................................................28
7.24 Exit Fee ..........................................................................................28
</TABLE>
-ii-
<PAGE> 4
<TABLE>
<S> <C>
SECTION 8. EVENTS OF DEFAULT....................................................................................28
SECTION 9. REMEDIES UPON DEFAULT................................................................................30
SECTION 10. NO DUTY OF LENDER...................................................................................31
SECTION 11. MISCELLANEOUS.......................................................................................31
11.01 Waiver ...........................................................................................31
11.02 Notices ..........................................................................................31
11.03 Indemnification and Expenses......................................................................31
11.04 Amendments........................................................................................32
11.05 Successors and Assigns............................................................................32
11.06 Survival..........................................................................................32
11.07 Captions..........................................................................................33
11.08 Counterparts......................................................................................33
11.09 Loan Agreement Constitutes Security Agreement; Governing Law......................................33
11.10 Submission to Jurisdiction; Waivers...............................................................33
11.11 Waiver of Jury Trial..............................................................................33
11.12 Acknowledgments...................................................................................34
11.13 Hypothecation or Pledge of Loans..................................................................34
11.14 Servicing.........................................................................................34
11.15 Periodic Due Diligence Review.....................................................................35
11.16 Set-Off ..........................................................................................35
11.17 Intent ...........................................................................................36
11.18 Joint and Several Liability.......................................................................36
</TABLE>
SCHEDULES
SCHEDULE 1 Representations and Warranties re: Mortgage Loans
SCHEDULE 2 Filing Jurisdictions and Offices
EXHIBITS
EXHIBIT A Form of Amended and Restated Promissory Note
EXHIBIT B Form of Amended and Restated Custodial Agreement
EXHIBIT C Form of Opinion of Counsel to Borrower
EXHIBIT D Form of Request for Borrowing
EXHIBIT E-1 Form of Borrower's Release Letter
EXHIBIT E-2 Form of Warehouse Lender's Release Letter
EXHIBIT F Underwriting Guidelines
-iii-
<PAGE> 5
AMENDED AND RESTATED MASTER LOAN AND SECURITY AGREEMENT
AMENDED AND RESTATED MASTER LOAN AND SECURITY AGREEMENT, dated
as of October 7, 1998, among ALLIED CAPITAL CORPORATION, a Maryland corporation
successor by merger to Allied Capital Commercial Corporation, as a Borrower and
BUSINESS MORTGAGE INVESTORS, INC., a Maryland corporation, as a Borrower (each a
"Borrower" collectively, the "Borrowers") and MORGAN STANLEY MORTGAGE CAPITAL
INC., a New York corporation (the "Lender").
RECITALS
The Borrowers and the Lender entered into the Master Loan and
Security Agreement, dated August 21, 1997, as amended by Amendment No. 1 to
Master Loan and Security Agreement, dated March 18, 1998 (the "Existing
Agreement") whereby the Lender agreed to, from time to time, make revolving
credit loans to the Borrowers to finance certain multifamily and commercial
mortgage loans owned by either Borrower upon the terms and conditions of the
Existing Agreement.
On December 31, 1997, Allied Capital Commercial Corporation
merged with Allied Capital Corporation, Allied Capital Corporation II, Allied
Capital Lending Corporation, and Allied Capital Advisers, Inc., each a Maryland
corporation, pursuant to an Agreement and Plan of Merger dated as of August 14,
1997, as amended and restated as of September 19, 1997, whereupon the separate
existence of each of the above named corporations (other than Allied Capital
Lending Corporation) ceased and the surviving corporation, Allied Capital
Lending Corporation changed its name to Allied Capital Corporation and succeeded
by operation of law to the debts and obligations of Allied Capital Commercial
Corporation, the original borrower under the Existing Agreement, as reflected in
Amendment No. 1 to the Existing Agreement.
Each Borrower and the Lender desire to amend and restate the
Existing Agreement to provide terms and conditions under which the Lender is
prepared to make further revolving credit loans to the Borrowers from and after
the date hereof.
NOW, THEREFORE, the Existing Agreement is hereby amended and
restated in its entirety, as provided in the heading and recitals hereto, to
read in its entirety as follows:
Section 1. Definitions and Accounting Matters.
1.01 Certain Defined Terms. As used herein, the following
terms shall have the following meanings (all terms defined in this Section 1.01
or in other provisions of this Loan Agreement in the singular to have the same
meanings when used in the plural and vice versa):
"Affiliate" shall mean, (i) with respect to any Person, any
"affiliate" of such Person as such term is defined in the United States
Bankruptcy Code.
"Allied" shall mean ALLIED CAPITAL CORPORATION, successor by
merger to Allied Capital Commercial Corporation.
-1-
<PAGE> 6
"Applicable Collateral Percentage" shall mean (a) with respect
to all Eligible Mortgage Loans that can be readily deposited in a Standard
Securitization Transaction, 85% to 88%, as determined by the Lender and (b) with
respect to all Eligible Mortgage Loans that are not readily deposited in a
Standard Securitization Transaction, as determined by the Lender on a
case-by-case basis.
"Applicable Margin" shall mean 100 basis points (1%).
"Bailee Agreement" shall mean a Bailee Agreement, among the
Borrower, the Lender and a Settlement Agent, in form and substance acceptable to
the Lender.
"Bankruptcy Code" shall mean the United States Bankruptcy Code
of 1978, as amended from time to time.
"Borrower" or "Borrowers" shall have the meaning provided in
the heading hereof.
"Borrowing Base" shall mean the aggregate Collateral Value of
all Eligible Mortgage Loans.
"Borrowing Base Deficiency" shall have the meaning provided in
Section 2.06 hereof.
"Business Day" shall mean any day other than (i) a Saturday or
Sunday or (ii) a day on which the New York Stock Exchange, the Federal Reserve
Bank of New York or the Custodian is authorized or obligated by law or executive
order to be closed.
"Business Development Company" shall mean an investment
company that has elected to be regulated as a `business development company'
under the 1940 Act.
"Capital Lease Obligations" shall mean, for any Person, all
obligations of such Person to pay rent or other amounts under a lease of (or
other agreement conveying the right to use) Property to the extent such
obligations are required to be classified and accounted for as a capital lease
on a balance sheet of such Person under GAAP, and, for purposes of this Loan
Agreement, the amount of such obligations shall be the capitalized amount
thereof, determined in accordance with GAAP.
"Code" shall mean the Internal Revenue Code of 1986, as
amended from time to time.
"Collateral" shall have the meaning provided in Section
4.01(b) hereof.
"Collateral Value" shall mean, with respect to each Mortgage
Loan, the lesser of (a) the Applicable Collateral Percentage of the Market Value
of such Mortgage Loan, and (b) the outstanding principal balance of such
Mortgage Loan; provided, that:
(i) the Collateral Value shall be deemed to be zero with
respect to each Mortgage Loan (1) in respect of which there is a breach of a
representation and warranty set forth on Schedule 1 (assuming each
representation and warranty is made as of the date Collateral Value is
determined), (2) in respect of which there is a delinquency in the payment of
principal and/or interest which continues for a period 30 days or more (without
regard to any applicable grace periods), (3) which remains pledged to the Lender
hereunder later than 365 days after the date on which it is first included in
the Collateral, unless otherwise waived by the Lender, (4) which has been
released from the possession of the Custodian under the Custodial Agreement to
the Borrower for a period in excess of 14 days; or (5) a Table-Funded Mortgage
Loan for which the Custodian has failed to receive the original Mortgage Loan
Documents by 10:00 a.m., New York time on the fourth Business Day following the
applicable Funding Date; and
-2-
<PAGE> 7
(ii) the aggregate Collateral Value of Eligible Mortgage Loans
which are Table-Funded Mortgage Loans may not exceed $30,000,000, unless
otherwise approved by the Lender in its sole discretion.
"Committed Loan" shall have the meaning assigned thereto in
Section 2.01(a) hereof.
"Consolidated Shareholders' Equity" shall mean, as of the date
of determination thereof, the total shareholders' equity of Allied and its
Consolidated Subsidiaries as the same would be required to appear on a
consolidated balance sheet of Allied and its Consolidated Subsidiaries prepared
as of such date in accordance with GAAP, including, in any case, common stock of
Allied (valued at cost) held in the Allied Capital Corporation Deferred
Compensation Trust and Permitted Preferred Stock of Allied and its Consolidated
Subsidiaries but excluding any stock, common or preferred, not both issued and
outstanding.
"Consolidated Subsidiaries" shall mean any Subsidiary which is
required to be consolidated on financial statements of Allied prepared
accordance with GAAP.
"Custodial Agreement" shall mean the Amended and Restated
Custodial Agreement, dated as of the date hereof, among the Borrowers, the
Custodian and the Lender, substantially in the form of Exhibit B hereto, as the
same shall be modified and supplemented and in effect from time to time.
"Custodian" shall mean LaSalle National Bank, as custodian
under the Custodial Agreement, and its successors and permitted assigns
thereunder.
"Default" shall mean an Event of Default or an event that with
notice or lapse of time or both would become an Event of Default.
"Dollars" and "$" shall mean lawful money of the United States
of America.
"Due Diligence Fee" shall have the meaning provided in Section
5.01(h) hereof.
"Due Diligence Review" shall mean the performance by the
Lender of any or all of the reviews permitted under Section 11.15 hereof with
respect to any or all of the Mortgage Loans, as desired by the Lender from time
to time.
"Effective Date" shall mean the date upon which the conditions
precedent set forth in Section 5.01 shall have been satisfied.
"Eligible Mortgage Loans" shall mean the collective reference
to (a) any Mortgage Loan secured by a first mortgage lien on a retail, office,
hotel or other commercial property and (b) any Mortgage Loan secured by a first
mortgage lien on a five-or-more family residential property; provided, however,
that, in each case, with respect to each Mortgage Loan either (A) (i) the
representations and warranties in Section 6.10 and Part I of Schedule 1 hereof
are correct in all material respects (ii) each Mortgage Loan is underwritten in
accordance with the Borrowers' Underwriting Guidelines and (iii) each Mortgage
Loan is eligible for inclusion in a Standard Securitized Transaction or (B) each
Mortgage Loan is otherwise expressly approved as an Eligible Mortgage Loan
-3-
<PAGE> 8
by the Lender in writing; provided that, in no event shall any Mortgage Loan the
pledge of which under this Loan Agreement constitutes a pledge of a security
under the 1934 Act or the foreclosure upon which would constitute the
acquisition of a security under the 1934 Act be considered an Eligible Mortgage
Loan for purposes hereof.
"Equity Issuance" shall mean any issuance or sale by a Person
of its capital stock or other similar equity security, or any warrants, options
or similar rights to acquire, or securities convertible into or exchangeable
for, such capital stock or other similar equity security.
"ERISA" shall mean the Employee Retirement Income Security Act
of 1974, as amended from time to time.
"ERISA Affiliate" shall mean any corporation or trade or
business that is a member of any group of organizations (i) described in Section
414(b) or (c) of the Code of which either Borrower is a member and (ii) solely
for purposes of potential liability under Section 302(c)(11) of ERISA and
Section 412(c)(11) of the Code and the lien created under Section 302(f) of
ERISA and Section 412(n) of the Code, described in Section 414(m) or (o) of the
Code of which either Borrower is a member.
"Eurodollar Rate" shall mean with respect to each day during
each Interest Period pertaining to such Loan, the rate per annum equal to the
rate appearing at page 5 of the Telerate Screen, on the first day of such
Interest Period, for the one-month term corresponding to such Interest Period,
and if such rate shall not be so quoted, the rate per annum at which the Lender
is offered Dollar deposits at or about 10:00 A.M., New York City time, on the
first day of such Interest Period, by prime banks in the interbank eurodollar
market where the eurodollar and foreign currency and exchange operations in
respect of its Loans are then being conducted for delivery on the first day of
such Interest Period for the number of days comprised therein and in an amount
comparable to the amount of the Loans to be outstanding during such Interest
Period.
"Event of Default" shall have the meaning set forth in Section
8 hereof.
"Federal Funds Rate" shall mean, for any day, the weighted
average of the rates on overnight federal funds transactions with members of the
Federal Reserve System arranged by federal funds brokers, as published on the
next succeeding Business Day by the Federal Reserve Bank of New York, or, if
such rate is not so published for any day which is a Business Day, the average
of the quotations for the day of such transactions received by the Lender from
three federal funds brokers of recognized standing selected by it.
"Funding Date" shall mean the date on which a Loan is made
hereunder.
"GAAP" shall mean generally accepted accounting principles as
in effect from time to time in the United States.
"Governmental Authority" shall mean any nation or government,
any state or other political subdivision thereof, any entity exercising
executive, legislative, judicial, regulatory or administrative functions of or
pertaining to government and any court or arbitrator having jurisdiction over
either Borrower, any of their Subsidiaries, or any of their properties.
"Guarantee" shall mean, as to any Person, any obligation of
such Person directly or indirectly guaranteeing any Indebtedness of any other
Person or in any manner providing for the payment of any Indebtedness of any
other Person or otherwise protecting the holder of such
-4-
<PAGE> 9
Indebtedness against loss (whether by virtue of partnership arrangements, by
agreement to keep-well, to purchase assets, goods, securities or services, or to
take-or-pay or otherwise); provided that the term "Guarantee" shall not include
(i) endorsements for collection or deposit in the ordinary course of business,
or (ii) obligations to make servicing advances for delinquent taxes and
insurance or other obligations in respect of a Mortgaged Property, to the extent
required by the Lender. The amount of any Guarantee of a Person shall be deemed
to be an amount equal to the stated or determinable amount of the primary
obligation in respect of which such Guarantee is made or, if not stated or
determinable, the maximum reasonably anticipated liability in respect thereof as
determined by such Person in good faith. The terms "Guarantee" and "Guaranteed"
used as verbs shall have correlative meanings.
"Indebtedness" shall mean, for any Person: (a) obligations
created, issued or incurred by such Person for borrowed money (whether by loan,
the issuance and sale of debt securities or the sale of Property to another
Person subject to an understanding or agreement, contingent or otherwise, to
repurchase such Property from such Person); (b) obligations of such Person to
pay the deferred purchase or acquisition price of Property or services, other
than trade accounts payable (other than for borrowed money) arising, and accrued
expenses incurred, in the ordinary course of business so long as such trade
accounts payable are payable within 90 days of the date the respective goods are
delivered or the respective services are rendered; (c) Indebtedness of others
secured by a Lien on the Property of such Person, other than the respective
Indebtedness so secured that has not been assumed by such Person; (d)
obligations (contingent or otherwise) of such Person in respect of letters of
credit or similar instruments issued or accepted by banks and other financial
institutions for account of such Person; (e) Capital Lease Obligations of such
Person; (f) obligations of such Person under repurchase agreements,
sale/buy-back agreements or like arrangements; (g) Indebtedness of others
Guaranteed by such Person; (h) all obligations of such Person incurred in
connection with the acquisition or carrying of fixed assets by such Person; and
(i) Indebtedness of general partnerships of which such Person is a general
partner.
"Interest Period" shall mean, with respect to any Loan, (a)
initially, the period commencing on the applicable Funding Date to but excluding
the first Payment Date; and (b) thereafter, each period commencing on a Payment
Date to but excluding the next Payment Date; provided that, notwithstanding the
foregoing, (i) an Interest Period may be for a term of fewer days as mutually
agreed upon between the Borrower and the Lender and (ii) no Interest Period may
end after the Termination Date.
"Interest Rate Protection Agreement" shall mean, any interest
rate swap, cap or collar agreement or similar arrangements providing for
protection against fluctuations in interest rates or the exchange of nominal
interest obligations, either generally or under specific contingencies, entered
into by either Borrower and reasonably acceptable to the Lender.
"Lender" shall have the meaning provided in the heading
hereto.
"Lien" shall mean any mortgage, lien, pledge, charge, security
interest or similar encumbrance.
"Loan" shall mean any Committed Loan or Uncommitted Loan, as
applicable, and collectively "Loans" shall mean the sum of all Committed Loans
and Uncommitted Loans.
"Loan Agreement" shall mean this Amended and Restated Master
Loan and Security Agreement, as the same may be amended, supplemented or
otherwise modified from time to time.
-5-
<PAGE> 10
"Loan Documents" shall mean, collectively, this Loan
Agreement, the Note and the Custodial Agreement.
"Market Value" shall mean, as of any date in respect of an
Eligible Mortgage Loan, the price at which such Eligible Mortgage Loan could
readily be sold as determined in good faith by the Lender, which price may be
determined to be zero. The Lender's determination of Market Value shall be
conclusive upon the parties absent manifest error on the part of the Lender.
"Material Adverse Effect" shall mean a material adverse effect
on (a) the Property, business, operations, financial condition or prospects of
either Borrower, (b) the status of Allied as a Business Development Company or
such Borrower's compliance with the 1940 Act, (c) the ability of either Borrower
to perform its obligations under any of the Loan Documents to which it is a
party, (d) the validity or enforceability of any of the Loan Documents, (e) the
rights and remedies of the Lender under any of the Loan Documents, (f) the
timely payment of the principal of or interest on the Loans or other amounts
payable in connection therewith or (g) the Collateral.
"Maximum Committed Amount" shall mean $100,000,000.
"Maximum Credit" shall mean the sum of the Maximum Committed
Amount and the Maximum Uncommitted Amount, which shall equal $250,000,000.
"Material Subsidiary" shall mean, as of the date of any
determination thereof, any Subsidiary which has total assets having a value
(determined in accordance with the market valuation method pursuant to GAAP)
greater than or equal to $20,000,000.
"Maximum Uncommitted Amount" shall mean $150,000,000.
"Mortgage" shall mean the mortgage, deed of trust or other
instrument securing a Mortgage Note, which creates a first lien on the fee in
real property securing the Mortgage Note and the assignment of rents and leases
related thereto.
"Mortgage File" shall have the meaning assigned thereto in the
Custodial Agreement.
"Mortgage Loan" shall mean a mortgage loan which the Custodian
has been instructed to hold for the Lender pursuant to the Custodial Agreement,
and which Mortgage Loan includes, without limitation, (i) a Mortgage Note and
related Mortgage and (ii) all right, title and interest of the Borrower in and
to the Mortgaged Property covered by such Mortgage.
"Mortgage Loan Documents" shall mean, with respect to a
Mortgage Loan, the documents comprising the Mortgage File for such Mortgage
Loan.
"Mortgage Loan Schedule" shall have the meaning assigned
thereto in the Custodial Agreement.
"Mortgage Loan Schedule and Exception Report" shall mean the
mortgage loan schedule and exception report prepared by the Custodian pursuant
to the Custodial Agreement.
"Mortgage Loan Tape" shall mean a computer-readable magnetic
tape with respect to each Mortgage Loan, to be delivered by each Borrower to the
Lender pursuant to Section 2.03(a) hereof, containing tape fields as shall be
mutually agreed upon by each Borrower and the Lender.
-6-
<PAGE> 11
"Mortgage Note" shall mean the original executed promissory
note or other evidence of the indebtedness of a mortgagor/borrower with respect
to a Mortgage Loan.
"Mortgaged Property" shall mean the real property (including
all improvements, buildings, fixtures, building equipment and personal property
thereon and all additions, alterations and replacements made at any time with
respect to the foregoing) and all other collateral securing repayment of the
debt evidenced by a Mortgage Note.
"Mortgagor" shall mean the obligor on a Mortgage Note.
"MS & Co." shall mean Morgan Stanley & Co. Incorporated, a
registered broker-dealer.
"Multiemployer Plan" shall mean a multiemployer plan defined
as such in Section 3(37) of ERISA to which contributions have been or are
required to be made by either Borrower or any ERISA Affiliate and that is
covered by Title IV of ERISA.
"Net Income" shall mean, for any period, the net income of
each Borrower for such period as determined in accordance with GAAP.
"Net Proceeds" shall mean, with respect to an Equity Issuance
by a Person, the aggregate amount of all cash received by such Person in respect
of such Equity Issuance net of investment banking fees, legal fees, accountants
fees, underwriting discounts and commissions and other customary fees and
expenses actually incurred by such Person in connection with such Equity
Issuance.
"1940 Act" shall mean the Investment Company Act of 1940, as
amended.
"1934 Act" shall mean the Securities and Exchange Act of 1934,
as amended.
"Note" shall have the meaning provided in Section 2.02(a)
hereof.
"Other Relevant Subsidiary" shall mean any Subsidiary,
individually or together with other Subsidiaries, the occurrence of any of the
events described in Section 9 hereof, with respect to which could reasonably be
expected to have a Material Adverse Effect.
"Payment Date" shall mean (a) the first Business day of each
calendar month, commencing with the first Business Day of the month following
the month in which the first Funding Date occurs, and (b) the Termination Date.
"PBGC" shall mean the Pension Benefit Guaranty Corporation or
any entity succeeding to any or all of its functions under ERISA.
"Person" shall mean any individual, corporation, company,
voluntary association, partnership, joint venture, limited liability company,
trust, unincorporated association or government (or any agency, instrumentality
or political subdivision thereof).
"Permitted Preferred Stock" shall mean (i) preferred stock
that is issued from time to time by a Subsidiary to the United States Small
Business Administration having an aggregate stated value not exceeding
$7,000,000 at any one time outstanding, or (ii) preferred stock that is issued
from
-7-
<PAGE> 12
time to time by a Subsidiary for the purpose of qualifying such Subsidiary
as a real estate investment trust under Section 856 through 860 of the Internal
Revenue Code and having an aggregate stated value not exceeding $500,000 at any
one time outstanding, provided that in any event Permitted Preferred Stock shall
not include any Voting Stock.
"Plan" shall mean an employee benefit or other plan
established or maintained by the Borrower or any ERISA Affiliate and covered by
Title IV of ERISA, other than a Multiemployer Plan.
"Prepayment" shall mean for any Mortgage Loan, any unscheduled
payment of principal due thereunder.
"Post-Default Rate" shall mean, in respect of any principal of
any Loan or any other amount under this Loan Agreement, the Note or any other
Loan Document that is not paid when due to the Lender (whether at stated
maturity, by acceleration, by optional or mandatory prepayment or otherwise), a
rate per annum during the period from and including the due date to but
excluding the date on which such amount is paid in full equal to 2% per annum
plus the Prime Rate.
"Prime Rate" shall mean the prime rate announced to be in
effect from time to time, as published as the average rate in The Wall Street
Journal.
"Property" shall mean any right or interest in or to property
of any kind whatsoever, whether real, personal or mixed and whether tangible or
intangible.
"Regulations T, U and X" shall mean Regulations T, U and X of
the Board of Governors of the Federal Reserve System (or any successor), as the
same may be modified and supplemented and in effect from time to time.
"Requirement of Law" shall mean as to any Person, the
certificate of incorporation and by-laws or other organizational or governing
documents of such Person, and any law, treaty, rule or regulation or
determination of an arbitrator or a court or other Governmental Authority, in
each case applicable to or binding upon such Person or any of its property or to
which such Person or any of its property is subject.
"Responsible Officer" shall mean, as to any Person, the chief
executive officer, managing director or treasurer, or with respect to financial
matters, the chief financial officer of such Person.
"Secured Obligations" shall have the meaning provided in
Section 4.01(c) hereof.
"Servicer" shall have the meaning provided in Section 11.14(c)
hereof.
"Servicing Agreement" shall have the meaning provided in
Section 11.14(c) hereof.
"Servicing Records" shall have the meaning provided in Section
11.14(b) hereof.
"Settlement Agent" shall mean, with respect to any Loan, the
entity approved by the Lender, in its sole good-faith discretion (which may be a
title company, escrow company or attorney in accordance with local law and
practice in the jurisdiction where the related Table-Funded Mortgage Loan is
being originated) to which the proceeds of such Loan are to be wired pursuant to
the instructions of the Lender.
-8-
<PAGE> 13
"Standard Securitization Transaction" shall mean a
securitization transaction backed by Mortgage Loans underwritten or placed on
behalf of either Borrower which transaction has received an investment grade
rating from any nationally-recognized rating agency and otherwise conforms to
the current standards of institutional securitization applicable to mortgage
loans substantially similar in nature to the Mortgage Loans.
"Subsidiary" shall mean, with respect to any Person, any
corporation, partnership or other entity of which at least a majority of the
securities or other ownership interests having by the terms thereof ordinary
voting power to elect a majority of the board of directors or other persons
performing similar functions of such corporation, partnership or other entity
(irrespective of whether or not at the time securities or other ownership
interests of any other class or classes of such corporation, partnership or
other entity shall have or might have voting power by reason of the happening of
any contingency) is at the time directly or indirectly owned or controlled by
such Person or one or more Subsidiaries of such Person or by such Person and one
or more Subsidiaries of such Person Notwithstanding the foregoing, the term
"Subsidiary," when used with respect to either Borrower, shall not include any
Person if the securities or other ownership interests of such Person held by
such Borrower (directly or through one or more Subsidiaries of such Borrower)
would be required under GAAP to be accounted for on a consolidated balance sheet
of such Borrower as portfolio investments.
"Table-Funded Mortgage Loan" shall mean a Mortgage Loan which
is pledged to the Lender simultaneously with the origination thereof by either
Borrower, which origination is financed in part or in whole with proceeds of
Loans advanced directly to a Settlement Agent and which Table-Funded Mortgage
Loan is held by the Settlement Agent pursuant to a Bailee Agreement.
"Termination Date" shall mean October 7, 1999 or such earlier
date on which this Loan Agreement shall terminate in accordance with the
provisions hereof or by operation of law provided that such Termination Date may
be extended from time to time pursuant to Section 2.08 hereof.
"Test Period" shall have the meaning provided in Section 7.15
hereof.
"Total Indebtedness" shall mean, for any period, the aggregate
Indebtedness of the Borrower during such period less the amount of any
nonspecific balance sheet reserves maintained in accordance with GAAP.
"Uncommitted Loan" shall have the meaning assigned thereto in
Section 2.01(b) hereof.
"Underwriting Guidelines" shall mean the underwriting
guidelines attached as Exhibit F hereto.
"Uniform Commercial Code" shall mean the Uniform Commercial
Code as in effect on the date hereof in the State of New York; provided that if
by reason of mandatory provisions of law, the perfection or the effect of
perfection or non-perfection of the security interest in any Collateral is
governed by the Uniform Commercial Code as in effect in a jurisdiction other
than New York, "Uniform Commercial Code" shall mean the Uniform Commercial Code
as in effect in such other jurisdiction for purposes of the provisions hereof
relating to such perfection or effect of perfection or non-perfection.
-9-
<PAGE> 14
"Voting Stock" shall mean securities of any class or classes,
the holders of which are ordinarily, in the absence of contingencies, entitled
to elect a majority of the corporate directors (or persons performing similar
functions).
1.02 Accounting Terms and Determinations. Except as otherwise
expressly provided herein, all accounting terms used herein shall be
interpreted, and all financial statements and certificates and reports as to
financial matters required to be delivered to the Lender hereunder shall be
prepared, in accordance with GAAP.
Section 2. Loans, Note and Prepayments.
2.01 Loans.
(a) Subject to the fulfillment of the conditions
precedent set forth in Sections 5.01 and 5.02 hereof, and provided that no
Default shall have occurred and be continuing hereunder, the Lender agrees, from
time to time, on the terms and conditions of this Loan Agreement, to make loans
(individually, a "Committed Loan" and, collectively, the "Committed Loans") to
the Borrower in Dollars, from and including the Effective Date to and including
the Termination Date in an aggregate principal amount at any one time
outstanding up to but not exceeding the Maximum Committed Amount as in effect
from time to time. To the extent that a Mortgage Loan is an Eligible Loan solely
as a result of clause (B) of the definition thereof, the Lender may make Loans
secured by such Eligible Mortgage Loans, in its sole discretion and on an
uncommitted basis.
(b) In addition to the foregoing, the Lender may from time to
time in its sole discretion, on the terms and conditions of this Loan Agreement,
make loans (individually, an "Uncommitted Loan"; collectively, the "Uncommitted
Loans") to the Borrower in Dollars during the period from and including the
Effective Date to and including the Termination Date in an aggregate principal
amount at any one time outstanding up to but not exceeding the Maximum
Uncommitted Amount as in effect from time to time. In determining whether Loans
outstanding secured by Eligible Mortgage Loans are Committed Loans or
Uncommitted Loans, such Loans shall first be deemed Committed Loans up to the
Maximum Committed Amount, and then the remainder shall be deemed Uncommitted
Loans.
(c) Subject to the terms and conditions of this Loan
Agreement, during such period the Borrower may borrow, repay and reborrow
hereunder.
(d) In no event shall a Loan be made when any Default or
Event of Default has occurred and is continuing.
2.02 Notes.
(a) The Loans made by the Lender shall be evidenced by a
single amended and restated promissory note of the Borrowers substantially in
the form of Exhibit A hereto (the "Note"), dated August 21, 1997, as amended and
restated as of the date hereof, payable to the Lender in a principal amount
equal to the amount of the Maximum Credit as originally in effect and otherwise
duly completed. The Lender shall have the right to have its Note subdivided, by
exchange for promissory notes of lesser denominations or otherwise.
-10-
<PAGE> 15
(b) The date, amount and interest rate of each Loan made
by the Lender to the Borrowers, and each payment made on account of the
principal thereof, shall be recorded by the Lender on its books and, prior to
any transfer of the Note, endorsed by the Lender on the schedule attached to the
Note or any continuation thereof; provided that the failure of the Lender to
make any such recordation or endorsement shall not affect the obligations of the
Borrowers to make a payment when due of any amount owing hereunder or under the
Note in respect of the Loans.
2.03 Procedure for Borrowing.
(a) The Borrowers may request a borrowing hereunder, on
any Business Day during the period from and including the Effective Date to and
including the Termination Date, by delivering to the Lender, with a copy to the
Custodian, a written request for borrowing, substantially in the form of Exhibit
D attached hereto, which request must be received by the Lender prior to 11:00
a.m., New York City time, one (l) Business Day prior to the requested Funding
Date. Such request for borrowing shall (i) attach a schedule identifying the
Eligible Mortgage Loans that the Borrower proposes to pledge to the Lender and
to be included in the Borrowing Base in connection with such borrowing, (ii)
specify the requested Funding Date and the requested Loan amount, (iii) include
a Mortgage Loan Tape containing information with respect to the Eligible
Mortgage Loans that the applicable Borrower proposes to pledge to the Lender and
to be included in the Borrowing Base in connection with such borrowing, and (iv)
attach an officer's certificate signed by a Responsible Officer of the
respective Borrower as required by Section 5.02(b) hereof.
(b) Upon the Borrower's request for a borrowing pursuant
to Section 2.03(a), the Lender shall, assuming all conditions precedent set
forth in Section 5.01 and 5.02 have been met and provided no Default shall have
occurred and be continuing, make a Committed Loan to the Borrower on the
requested Funding Date, in the amount so requested.
(c) Upon the Borrower's request for a borrowing pursuant
to Section 2.03(a), the Lender may at its sole option, assuming all conditions
precedent set forth in Section 5.01 and 5.02 have been met and provided no
Default shall have occurred and be continuing, make an Uncommitted Loan to the
Borrower on the requested Funding Date, in the amount so requested.
(d) The requesting Borrower shall release to the
Custodian no later than 12:00 p.m., New York City time, one (1) Business Day
prior to the requested Funding Date, the Mortgage File pertaining to each
Eligible Mortgage Loan to be pledged to the Lender and included in the Borrowing
Base on such requested Funding Date, in accordance with the terms and conditions
of the Custodial Agreement.
(e) Pursuant to the Custodial Agreement, the Custodian
shall deliver to the Lender and the Borrowers, no later than 11:00 a.m. on a
Funding Date, a Trust Receipt (as defined in the Custodial Agreement) in respect
of all Eligible Mortgage Loans (other than a Table-Funded Mortgage Loan) pledged
to the Lender on such Funding Date, and a Mortgage Loan Schedule and Exception
Report. Subject to Section 5 hereof, such borrowing will then be made available
to the Borrowers by the Lender transferring, via wire transfer, with respect to
Loans secured by Mortgage Loans other than Table-Funded Mortgage Loans, to the
following account of the Borrowers: Nationsbank ABA 052-001633 Acct #
391-897-3064, and, with respect to Loans secured by Table-Funded Mortgage Loans,
to the Settlement Agent in accordance with the Borrower's instructions.
-11-
<PAGE> 16
2.04 Limitation on Types of Loans; Illegality. Anything herein
to the contrary notwithstanding, if, on or prior to the determination of any
Eurodollar Rate:
(a) the Lender determines, which determination shall be
conclusive, that quotations of interest rates for the relevant deposits referred
to in the definition of "Eurodollar Rate" in Section 1.01 hereof are not being
provided in the relevant amounts or for the relevant maturities for purposes of
determining rates of interest for Loans as provided herein; or
(b) the Lender determines, which determination shall be
conclusive, that the relevant rate of interest referred to in the definition of
"Eurodollar Rate" in Section 1.01 hereof upon the basis of which the rate of
interest for Loans is to be determined is not likely adequately to cover the
cost to the Lender of making or maintaining Loans; or
(c) it becomes unlawful for the Lender to honor its
obligation to make or maintain Loans hereunder using a Eurodollar Rate;
then the Lender shall give the Borrowers prompt notice thereof
and, so long as such condition remains in effect, the Lender shall be under no
obligation to make additional Loans (provided that the Borrowers and the Lender
will use their best efforts to mutually agree upon an interest rate for future
Loans, and upon such agreement, the Lender shall be obligated to make such
additional Loans hereunder bearing such interest rate), and the Borrowers shall
at Borrowers' option, either prepay all such Loans as may be outstanding,
without penalty or premium, or pay interest on such Loans at a rate per annum
equal to the Federal Funds Rate plus 1.5%.
2.05 Repayment of Loans; Interest.
(a) The Borrowers hereby promise to repay in full on the
Termination Date the then aggregate outstanding principal amount of the Loans.
Prepayments on one or more of the Mortgage Loans may occur at any time and from
time to time without penalty or premium.
(b) The Borrowers hereby promise to pay to the Lender
interest on the unpaid principal amount of each Loan for the period from and
including the date of such Loan to but excluding the date such Loan shall be
paid in full, at a rate per annum equal to the Eurodollar Rate plus the
Applicable Margin. Notwithstanding the foregoing, the Borrowers hereby promise
to pay to the Lender interest at the applicable Post-Default Rate on any
principal of any Loan and on any other amount payable by the Borrowers hereunder
or under the Note that shall not be paid in full when due (whether at stated
maturity, by acceleration or by mandatory prepayment or otherwise) for the
period from and including the due date thereof to but excluding the date the
same is paid in full. Accrued interest on each Loan shall be payable on each
Payment Date, except that interest payable at the Post-Default Rate shall accrue
daily and shall be payable upon such accrual. Promptly after the determination
of any interest rate provided for herein or any change therein, the Lender shall
give notice thereof to the Borrowers.
(c) It is understood and agreed that, unless and until a
Default shall have occurred and be continuing, the Borrowers shall be entitled
to the proceeds of the Mortgage Loans, including interest and principal payments
thereunder and proceeds from the sale thereof, pledged to the Lender hereunder.
-12-
<PAGE> 17
2.06 Mandatory Prepayments or Pledge.
If at any time the aggregate outstanding principal amount of
Loans exceeds the Borrowing Base (a "Borrowing Base Deficiency"), as determined
by the Lender and notified to the Borrowers on any Business Day, the Borrowers
shall no later than one (1) Business Day after receipt of such notice, either
prepay the Loans in part or in whole or pledge additional Eligible Mortgage
Loans (which Collateral shall be in all respects acceptable to the Lender) to
the Lender, such that after giving effect to such prepayment or pledge the
aggregate outstanding principal amount of the Loans does not exceed the
Borrowing Base.
2.07 Indemnity. If either Borrower makes a prepayment of the
Loans on any day which is not a Payment Date, the Borrower shall indemnify the
Lender and hold the Lender harmless from any actual loss or expense which the
Lender may sustain or incur arising from the reemployment of funds obtained by
the Lender to maintain the Loans hereunder or from fees payable to terminate the
deposits from which such funds were obtained. This Section 2.07 shall survive
termination of this Agreement and payment of the Note.
2.08 Extension of Termination Date. At the request of the
Borrowers made at least thirty (30) days, but in no event earlier than ninety
(90) days, prior to the then current Termination Date, the Lender may in its
sole discretion extend the Termination Date for a period to be determined by
Lender in its sole discretion by giving written notice of such extension to the
Borrowers no later than twenty (20) days, but in no event earlier than thirty
(30) days, prior to the then current Termination Date. Any failure by the Lender
to deliver such notice of extension shall be deemed to be the Lender's
determination not to extend the then current Termination Date.
Section 3. Payments; Computations; Etc.
3.01 Payments.
(a) Except to the extent otherwise provided herein, all
payments of principal, interest and other amounts to be made by the Borrowers
under this Loan Agreement and the Note, shall be made in Dollars, in immediately
available funds, without deduction, set-off or counterclaim, to the Lender at
the following account maintained by the Lender: Account No. 40615114, for the
A/C of MSMCI, Citibank, N.A., ABA #021000089, not later than 1:00 p.m., New York
City time, on the date on which such payment shall become due (and each such
payment made after such time on such due date shall be deemed to have been made
on the next succeeding Business Day). The Borrowers acknowledge that it has no
rights of withdrawal from the foregoing account.
(b) Except to the extent otherwise expressly provided
herein, if the due date of any payment under this Loan Agreement or the Note
would otherwise fall on a day that is not a Business Day, such date shall be
extended to the next succeeding Business Day, and interest shall be payable for
any principal so extended for the period of such extension.
3.02 Computations. Interest on the Loans shall be computed on
the basis of a 360-day year for the actual days elapsed (including the first day
but excluding the last day) occurring in the period for which payable.
3.03 Requirements of Law.
(a) If any Requirement of Law enacted and in effect after
the date of this Agreement (other than with respect to any amendment made to the
Lender's certificate of incorporation and by-laws or other organizational or
governing documents) or any change in the interpretation or application thereof
or compliance by the Lender with any request or directive (whether or not having
the force of law) from any central bank or other Governmental Authority made
subsequent to the date hereof:
-13-
<PAGE> 18
(i) shall subject the Lender to any tax of any kind whatsoever
with respect to this Loan Agreement, the Note or any Loan made
by it (excluding net income taxes) or change the basis of
taxation of payments to the Lender in respect thereof;
(ii) shall impose, modify or hold applicable any reserve,
special deposit, compulsory Loan or similar requirement
against assets held by, deposits or other liabilities in or
for the account of, advances, Loans or other extensions of
credit by, or any other acquisition of funds by, any office of
the Lender which is not otherwise included in the
determination of the Eurodollar Rate hereunder;
(iii) shall impose on the Lender any other condition;
and the result of any of the foregoing is to increase the cost to the Lender, by
an amount which the Lender deems to be material, of making, continuing or
maintaining any Loan or to reduce any amount due or owing hereunder in respect
thereof, then, in any such case, the Borrowers shall promptly pay the Lender
such additional amount or amounts as will compensate the Lender for such
increased cost or reduced amount receivable.
(b) If the Lender shall have determined that the adoption
of or any change in any Requirement of Law (other than with respect to any
amendment made to the Lender's certificate of incorporation and by-laws or other
organizational or governing documents) regarding capital adequacy or in the
interpretation or application thereof or compliance by the Lender or any
corporation controlling the Lender with any request or directive regarding
capital adequacy (whether or not having the force of law) from any Governmental
Authority made subsequent to the date hereof shall have the effect of reducing
the rate of return on the Lender's or such corporation's capital as a
consequence of its obligations hereunder to a level below that which the Lender
or such corporation (taking into consideration the Lender's or such
corporation's policies with respect to capital adequacy) by an amount deemed by
the Lender to be material, then from time to time, the Borrowers shall promptly
pay to the Lender such additional amount or amounts as will compensate the
Lender for such reduction.
(c) If the Lender becomes entitled to claim any
additional amounts pursuant to this Section, it shall promptly notify the
Borrowers of the event by reason of which it has become so entitled. A
certificate as to any additional amounts payable pursuant to this Section
submitted by the Lender to the Borrowers shall be conclusive in the absence of
manifest error.
Section 4. Collateral Security.
4.01 Collateral; Security Interest.
(a) Pursuant to the Custodial Agreement, the Custodian
shall hold the Mortgage Loan Documents as exclusive bailee and agent for the
Lender pursuant to terms of the Custodial Agreement and shall deliver to the
Lender Trust Receipts (as defined in the Custodial Agreement) each to the effect
that it has reviewed such Mortgage Loan Documents in the manner and to the
extent required by the Custodial Agreement and identifying any deficiencies in
such Mortgage Loan Documents as so reviewed.
-14-
<PAGE> 19
(b) All of each Borrower's right, title and interest in,
to and under each of the following items of property, whether now owned or
hereafter acquired, now existing or hereafter created and wherever located, is
hereinafter referred to as the "Collateral":
(i) all Mortgage Loans;
(ii) all Mortgage Loan Documents, including without limitation
all promissory notes, and all Servicing Records (as defined in Section
11.14(b) below), servicing agreements and any other collateral pledged
or otherwise relating to such Mortgage Loans, together with all files,
documents, instruments, surveys, certificates, correspondence,
appraisals, computer programs, computer storage media, accounting
records and other books and records relating thereto;
(iii) all mortgage guaranties and insurance (issued by
governmental agencies or otherwise) and any mortgage insurance
certificate or other document evidencing such mortgage guaranties or
insurance relating to any Mortgage Loan and all claims and payments
thereunder;
(iv) all other insurance policies and insurance proceeds
relating to any Mortgage Loan or the related Mortgaged Property;
(v) all collateral, however defined, under any other agreement
between any Borrowers or any of their Affiliates on the one hand and
the Lender or any of its Affiliates on the other hand;
(vi) all "general intangibles" as defined in the Uniform
Commercial Code relating to or constituting any and all of the
foregoing; and
(vii) any and all replacements, substitutions, distributions
on or proceeds of any and all of the foregoing.
(c) Each Borrower hereby assigns, pledges and grants a
security interest in all of its right, title and interest in, to and under the
Collateral to the Lender to secure the repayment of principal of and interest on
all Loans and all other amounts owing to the Lender hereunder, under the Note
and under the other Loan Documents (collectively, the "Secured Obligations").
Each Borrower agrees to mark its computer records and tapes to evidence the
interests granted to the Lender hereunder.
4.02 Further Documentation. At any time and from time to time,
upon the written request of the Lender, and at the sole expense of the
Borrowers, the Borrowers will promptly and duly execute and deliver, or will
promptly cause to be executed and delivered, such further instruments and
documents and take such further action as the Lender may reasonably request for
the purpose of obtaining or preserving the full benefits of this Loan Agreement
and of the rights and powers herein granted, including, without limitation, the
filing of any financing or continuation statements under the Uniform Commercial
Code in effect in any jurisdiction with respect to the Liens created hereby.
Each Borrower also hereby authorizes the Lender to file any such financing or
continuation statement without the signature of such Borrower to the extent
permitted by applicable law. A carbon, photographic or other reproduction of
this Loan Agreement shall be sufficient as a financing statement for filing in
any jurisdiction.
-15-
<PAGE> 20
4.03 Changes in Locations, Name, etc. No Borrower shall (a)
change the location of its chief executive office/chief place of business from
that specified in Section 6 hereof or (b) change its name, identity or corporate
structure (or the equivalent) or change the location where it maintains its
records with respect to the Collateral unless it shall have given the Lender at
least 30 days prior written notice thereof and shall have delivered to the
Lender all Uniform Commercial Code financing statements and amendments thereto
as the Lender shall request and taken all other actions deemed necessary by the
Lender to continue its perfected status in the Collateral with the same or
better priority.
4.04. Lender's Appointment as Attorney-in-Fact.
(a) Each Borrower hereby irrevocably constitutes and
appoints the Lender and any officer or agent thereof, with full power of
substitution, as its true and lawful attorney-in-fact with full irrevocable
power and authority in the place and stead of such Borrower and in the name of
such Borrower or in its own name, from time to time during the continuance of a
Default in the Lender's discretion, for the purpose of carrying out the terms of
this Loan Agreement, to take any and all appropriate action and to execute any
and all documents and instruments which may be necessary or desirable to
accomplish the purposes of this Loan Agreement, and, without limiting the
generality of the foregoing, each Borrower hereby gives the Lender the power and
right, on behalf of the Borrower, without assent by, but with notice to, such
Borrower, if an Event of Default shall have occurred and be continuing, to do
the following:
(i) in the name of such Borrower or its own name, or
otherwise, to take possession of and endorse and collect any checks,
drafts, notes, acceptances or other instruments for the payment of
moneys due under any mortgage insurance or with respect to any other
Collateral and to file any claim or to take any other action or
proceeding in any court of law or equity or otherwise deemed
appropriate by the Lender for the purpose of collecting any and all
such moneys due under any such mortgage insurance or with respect to
any other Collateral whenever payable;
(ii) to pay or discharge taxes and Liens levied or placed on
or threatened against the Collateral; and
(iii) (A) to direct any party liable for any payment under any
Collateral to make payment of any and all moneys due or to become due
thereunder directly to the Lender or as the Lender shall direct; (B) to
ask or demand for, collect, receive payment of and receipt for, any and
all moneys, claims and other amounts due or to become due at any time
in respect of or arising out of any Collateral; (C) to sign and endorse
any invoices, assignments, verifications, notices and other documents
in connection with any of the Collateral; (D) to commence and prosecute
any suits, actions or proceedings at law or in equity in any court of
competent jurisdiction to collect the Collateral or any thereof and to
enforce any other right in respect of any Collateral; (E) to defend any
suit, action or proceeding brought against such Borrower with respect
to any Collateral; (F) to settle, compromise or adjust any suit, action
or proceeding described in clause (E) above and, in connection
therewith, to give such discharges or releases as the Lender may deem
appropriate; and (G) generally, to sell, transfer, pledge and make any
agreement with respect to or otherwise deal with any of the Collateral
-16-
<PAGE> 21
as fully and completely as though the Lender were the absolute owner
thereof for all purposes, and to do, at the Lender's option and such
Borrower's expense, at any time, and from time to time, all acts and
things which the Lender deems necessary to protect, preserve or realize
upon the Collateral and the Lender's Liens thereon and to effect the
intent of this Loan Agreement, all as fully and effectively as such
Borrower might do.
The Borrower hereby ratifies all that said attorneys shall lawfully do or cause
to be done by virtue hereof. This power of attorney is a power coupled with an
interest and shall be irrevocable.
(b) The Borrowers also authorize the Lender, at any time
and from time to time, to execute, in connection with any sale provided for in
Section 4.07 hereof, any endorsements, assignments or other instruments of
conveyance or transfer with respect to the Collateral.
(c) The powers conferred on the Lender are solely to
protect the Lender's interests in the Collateral and shall not impose any duty
upon the Lender to exercise any such powers. The Lender shall be accountable
only for amounts that it actually receives as a result of the exercise of such
powers, and neither the Lender nor any of its officers, directors, or employees
shall be responsible to either Borrower for any act or failure to act hereunder,
except for its own gross negligence or willful misconduct.
4.05. Performance by Lender of Borrowers' Obligations. If
either Borrower fails to perform or comply with any of its agreements contained
in the Loan Documents, upon ten (10) days prior notice to such Borrower and the
Lender may itself perform or comply, or otherwise cause performance or
compliance, with such agreement, the expenses of the Lender incurred in
connection with such performance or compliance, together with interest thereon
at a rate per annum equal to the Post-Default Rate, shall be payable, subject to
Section 11.18 hereof, by the Borrowers to the Lender on demand and shall
constitute Secured Obligations.
4.06. Proceeds. If an Event of Default shall occur and be
continuing, (a) all proceeds of Collateral received by either Borrower
consisting of cash, checks and other near-cash items shall be held by such
Borrower in trust for the Lender, segregated from other funds of such Borrower,
and shall forthwith upon receipt by such Borrower be turned over to the Lender
in the exact form received by the Borrower (duly endorsed by such Borrower to
the Lender, if required) and (b) any and all such proceeds received by the
Lender (whether from a Borrower or otherwise) may, in the sole discretion of the
Lender, be held by the Lender as collateral security for, and/or then or at any
time thereafter may be applied by the Lender against, the Secured Obligations
(whether matured or unmatured), such application to be in such order as the
Lender shall elect. Any balance of such proceeds remaining after the Secured
Obligations shall have been paid in full and this Loan Agreement shall have been
terminated shall be paid over to the Borrowers or to whomsoever may be lawfully
entitled to receive the same. For purposes hereof, proceeds shall include, but
not be limited to, all principal and interest payments, all prepayments and
payoffs, insurance claims, condemnation awards, sale proceeds, real estate owned
rents and any other income and all other amounts received with respect to the
Collateral.
4.07. Remedies. If an Event of Default shall occur and be
continuing, the Lender may exercise, in addition to all other rights and
remedies granted to it in this Loan Agreement and in any other instrument or
agreement securing, evidencing or relating to the Secured Obligations, all
rights and remedies of a secured party under the Uniform Commercial Code.
Without limiting the generality of the foregoing, the Lender without demand of
performance or other demand, presentment, protest, advertisement or notice of
any kind (except any notice required by law referred to below) to or upon
-17-
<PAGE> 22
the Borrowers or any other Person (each and all of which demands, presentments,
protests, advertisements and notices are hereby waived), may in such
circumstances forthwith collect, receive, appropriate and realize upon the
Collateral, or any part thereof, and/or may forthwith sell, lease, assign, give
option or options to purchase, or otherwise dispose of and deliver the
Collateral or any part thereof (or contract to do any of the foregoing), in one
or more parcels or as an entirety at public or private sale or sales, at any
exchange, broker's board or office of the Lender or elsewhere upon such terms
and conditions as it may deem advisable and at such prices as it may deem best,
for cash or on credit or for future delivery without assumption of any credit
risk. The Lender shall have the right upon any such public sale or sales, and,
to the extent permitted by law, upon any such private sale or sales, to purchase
the whole or any part of the Collateral so sold, free of any right or equity of
redemption in the Borrowers, which right or equity is hereby waived or released.
The Borrowers further agree, at the Lender's request, to assemble the Collateral
and make it available to the Lender at places which the Lender shall reasonably
select, whether at the Borrowers' premises or elsewhere. The Lender shall apply
the net proceeds of any such collection, recovery, receipt, appropriation,
realization or sale, after deducting all reasonable costs and expenses incurred
therein or incidental to the care or safekeeping of any of the Collateral or in
any way relating to the Collateral or the rights of the Lender hereunder,
including without limitation reasonable attorneys' fees and disbursements, to
the payment in whole or in part of the Secured Obligations, in such order as the
Lender may elect, and only after such application and after the payment by the
Lender of any other amount required or permitted by any provision of law,
including without limitation Section 9-504(1)(c) of the Uniform Commercial Code,
need the Lender account for the surplus, if any, to the Borrowers. To the extent
permitted by applicable law, the Borrowers waive all claims, damages and demands
they may acquire against the Lender arising out of the exercise by the Lender of
any of its rights hereunder, other than those claims, damages and demands
arising from the gross negligence or willful misconduct of the Lender. If any
notice of a proposed sale or other disposition of Collateral shall be required
by law, such notice shall be deemed reasonable and proper if given at least 10
days before such sale or other disposition. The Borrowers shall remain liable
for any deficiency (plus accrued interest thereon as contemplated pursuant to
Section 2.05(b) hereof) if the proceeds of any sale or other disposition of the
Collateral are insufficient to pay the Secured Obligations and the fees and
disbursements of any attorneys employed by the Lender to collect such
deficiency.
4.08. Limitation on Duties Regarding Preservation of
Collateral. The Lender's duty with respect to the custody, safekeeping and
physical preservation of the Collateral in its possession, under Section 9-207
of the Uniform Commercial Code or otherwise, shall be to deal with it in the
same manner as the Lender deals with similar property for its own account.
Neither the Lender nor any of its directors, officers or employees shall be
liable for failure to demand, collect or realize upon all or any part of the
Collateral or for any delay in doing so or shall be under any obligation to sell
or otherwise dispose of any Collateral upon the request of either Borrower or
otherwise.
4.09. Powers Coupled with an Interest. All authorizations and
agencies herein contained with respect to the Collateral are irrevocable and
powers coupled with an interest.
4.10 Release of Security Interest. Upon termination of this
Loan Agreement and repayment to the Lender of all Secured Obligations and the
performance of all obligations under the Loan Documents the Lender shall release
its security interest in any remaining Collateral.
-18-
<PAGE> 23
Section 5. Conditions Precedent.
5.01 Initial Loan. The obligation of the Lender to make its
initial Loan hereunder is subject to the satisfaction, immediately prior to or
concurrently with the making of such Loan, of the condition precedent that the
Lender shall have received all of the following, each of which shall be
reasonably satisfactory to the Lender and its counsel in form and substance:
(a) Loan Documents.
(i) Note. The Note, duly completed and executed; and
(ii) Custodial Agreement. The Custodial Agreement, duly
executed and delivered by the Borrower and the Custodian. In addition,
the Borrower shall have taken such other action as the Lender shall
have requested in order to perfect the security interests created
pursuant to the Loan Agreement;
(b) Organizational Documents. A good standing certificate and
certified copies of the charter and by-laws (or equivalent documents)
of each Borrower and of all corporate or other authority for each
Borrower with respect to the execution, delivery and performance of the
Loan Documents and each other document to be delivered by each Borrower
from time to time in connection herewith (and the Lender may
conclusively rely on such certificate until it receives notice in
writing from each Borrower to the contrary);
(c) Legal Opinion. A legal opinion of outside counsel to the
Borrowers, substantially in the form attached hereto as Exhibit C;
(d) Trust Receipt and Mortgage Loan Schedule and Exception
Report. A Trust Receipt, substantially in the form of Annex 2 of the
Custodial Agreement and Mortgage Loan Schedule and Exception Report,
dated the Effective Date, from the Custodian, duly completed, with a
Mortgage Loan Schedule and Exception Report attached thereto;
(e) Servicing Agreement(s). Any Servicing Agreement, certified
as a true, correct and complete copy of the original, with the letter
of the applicable Servicer consenting to termination of such Servicing
Agreement upon the occurrence of an Event of Default attached; and
(f) Other Documents. Such other documents as the Lender may
reasonably request.
5.02 Initial and Subsequent Loans. The making of each Loan to
the Borrowers (including the initial Loan) on any Business Day is subject to the
satisfaction of the following further conditions precedent, both immediately
prior to the making of such Loan and also after giving effect thereto and to the
intended use thereof:
(a) no Default or Event of Default shall have occurred and be
continuing;
(b) both immediately prior to the making of such Loan and also
after giving effect thereto and to the intended use thereof, the representations
and warranties made by the Borrowers in Section 6 hereof, and elsewhere in each
of the Loan Documents, shall be true, correct and complete on and as of the date
of the making of such Loan in all material respects (in the case of the
representations
-19-
<PAGE> 24
and warranties in Section 6.10 and Schedule 1, solely with respect to Mortgage
Loans included in the Borrowing Base) with the same force and effect as if made
on and as of such date (or, if any such representation or warranty is expressly
stated to have been made as of a specific date, as of such specific date). The
Lender shall have received an officer's certificate signed by a Responsible
Officer of each Borrower certifying as to the truth, accuracy and completeness
of the above, which certificate shall specifically include a statement that such
Borrower is in compliance with all governmental licenses and authorizations and
is qualified to do business and in good standing in all required jurisdictions
and that such borrowing does not violate restrictions imposed upon each Borrower
as a Business Development Company or otherwise.
(c) the aggregate outstanding principal amount of the Loans
shall not exceed the Borrowing Base;
(d) subject to the Lender's right to perform one or more Due
Diligence Reviews pursuant to Section 11.15 hereof, the Lender shall
have completed its due diligence review of the Mortgage Loan Documents
for each Loan and such other documents, records, agreements,
instruments, mortgaged properties or information relating to such Loans
as the Lender in its sole discretion deems appropriate to review and
such review shall be satisfactory to the Lender in its sole discretion;
(e) the Lender shall have received from the Custodian a
Mortgage Loan Schedule with exceptions as are acceptable to the Lender
in its sole discretion in respect of Eligible Mortgage Loans to be
pledged hereunder on such Business Day;
(f) Bailee Agreement. A Bailee Agreement in respect of
Table-Funded Mortgage Loans to be pledged to hereunder on such Business
Day, duly executed by the parties thereto;
(g) the Lender shall have received from the Borrower a
Warehouse Lender's Release Letter substantially in the form of Exhibit
E-2 hereto (or such other form acceptable to the Lender) or a Seller's
Release Letter substantially in the form of Exhibit E-1 hereto (or such
other form acceptable to the Lender) covering each Mortgage Loan to be
pledged to the Lender;
(h) none of the following shall have occurred and/or be
continuing:
(i) an event or events shall have occurred resulting in the
effective absence of a "repo market" or comparable "lending market" for
financing debt obligations secured by mortgage loans or securities (or
reasonably expected to be) or an event or events shall have occurred
resulting in the Lender not being able to finance any Mortgage Loans
through the "repo market" or "lending market" with traditional
counterparties at rates which would have been reasonable prior to the
occurrence of such event or events;
(ii) an event or events shall have occurred resulting in the
effective absence of a "securities market" for securities backed by
mortgage loans (or reasonably expected to be) or an event or events
shall have occurred resulting in the Lender not being able to sell
securities backed by mortgage loans at prices which would have been
reasonable prior to such event or events; or
-20-
<PAGE> 25
(iii) there shall have occurred a material adverse change in
the financial condition of the Lender which effects (or can reasonably
be expected to effect) materially and adversely the ability of the
Lender to fund its obligations under this Loan Agreement;
(iv) there shall have occurred any action, suit, arbitration,
investigation (including, without limitation, any of the foregoing
which are pending or threatened) or other legal or arbitrable
proceeding affecting the Borrowers or affecting any of the Property of
any of them before any Governmental Authority (i) as to which
individually or in the aggregate there is a reasonable likelihood of an
adverse decision which would be reasonably likely to have a material
adverse effect on their Property, business or financial condition or
prospects or, (ii) makes a claim or claims in an aggregate amount
greater than $5,000,000.00, (ii) which, individually or in the
aggregate, if adversely determined, could be reasonably likely to have
a Material Adverse Effect, or (iii) which requires filing with the
Securities and Exchange Commission in accordance with the 1934 Act or
any rules thereunder.
Each request for a borrowing by the Borrowers hereunder shall constitute a
certification by the Borrowers that all the conditions set forth in this Section
5 (other than Sections 5(d) and 5(h)) have been satisfied (both as of the date
of such notice, request or confirmation and as of the date of such borrowing).
Section 6. Representations and Warranties. The Borrowers
represent and warrant to the Lender that throughout the term of this Loan
Agreement:
6.01 Existence. Each Borrower (a) is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization, (b) has all requisite corporate or other
power, and has all governmental licenses, authorizations, consents and approvals
necessary to own its assets and carry on its business as now being or as
proposed to be conducted, except where the lack of such licenses,
authorizations, consents and approvals would not be reasonably likely to have a
material adverse effect on its Property, business or financial condition or
prospects; and (c) is qualified to do business and is in good standing in all
other jurisdictions in which the nature of the business conducted by it makes
such qualification necessary, except where failure so to qualify would not be
reasonably likely (either individually or in the aggregate) to have a Material
Adverse Effect.
6.02 Financial Condition. Each Borrower has heretofore
furnished to the Lender a copy of (a) the consolidated balance sheets of such
Borrower and its consolidated Subsidiaries for the first two quarterly fiscal
periods of the fiscal year of such Borrower ended December 31, 1998 and the
related consolidated statements of operations and changes in net assets and of
cash flows for such Borrower and its consolidated Subsidiaries for such
quarterly fiscal periods, setting forth in each case in comparative form the
figures for the previous year, (b) the consolidated balance sheets of such
Borrower and its consolidated Subsidiaries for the 1997 fiscal year and the
related consolidated statements of operations and changes in net assets and of
cash flows for such Borrower and its consolidated Subsidiaries for such fiscal
year, setting forth in each case in comparative form the figures for the
previous year, with the opinion thereon of Arthur Andersen LLP. All such
financial statements are complete and correct and fairly present, in all
material respects, the consolidated financial condition of such Borrower and its
consolidated Subsidiaries and the consolidated results of its operations as at
such dates and for such fiscal periods, all in accordance with GAAP applied on a
consistent basis. Since June 30, 1998, there has been no material adverse change
in the consolidated business, operations or financial condition of the Borrowers
from that set forth in said financial statements.
-21-
<PAGE> 26
6.03 Litigation. There are no actions, suits, arbitrations,
investigations (including, without limitation, any of the foregoing which are
pending or threatened) or other legal or arbitrable proceedings affecting the
Borrowers or affecting any of the Property of any of them before any
Governmental Authority (i) as to which individually or in the aggregate there is
a reasonable likelihood of an adverse decision which would be reasonably likely
to have a material adverse effect on their Property, business or financial
condition or prospects or, (ii) makes a claim or claims in an aggregate amount
greater than $5,000,000.00, (ii) which, individually or in the aggregate, if
adversely determined, could be reasonably likely to have a Material Adverse
Effect, or (iii) which requires filing with the Securities and Exchange
Commission in accordance with the 1934 Act or any rules thereunder.
6.04 No Breach. Neither (a) the execution and delivery of the
Loan Documents nor (b) the consummation of the transactions therein contemplated
in compliance with the terms and provisions thereof will conflict with or result
in a breach of the charter or by-laws of either Borrower, or any applicable law,
rule or regulation, or any order, writ, injunction or decree of any Governmental
Authority, or any Servicing Agreement or other material agreement or instrument
to which either Borrower is a party or by which either Borrower or any of its
Property is bound or to which it is subject, or constitute a default under any
such material agreement or instrument or result in the creation or imposition of
any Lien (except for the Liens created pursuant to this Loan Agreement) upon any
Property of such Borrower pursuant to the terms of any such agreement or
instrument.
6.05 Action. Each Borrower has all necessary corporate or
other power, authority and legal right to execute, deliver and perform its
obligations under each of the Loan Documents; the execution, delivery and
performance by such Borrower of each of the Loan Documents have been duly
authorized by all necessary corporate or other action on its part; and each Loan
Document has been duly and validly executed and delivered by such Borrower and
constitutes a legal, valid and binding obligation of such Borrower, enforceable
against such Borrower in accordance with its terms subject to bankruptcy laws
and other similar laws of general application affecting rights of creditors and
subject to the rules of equity including those respecting the availability of
specific performance.
6.06 Approvals. No authorizations, approvals or consents of,
and no filings or registrations with, any Governmental Authority or any
securities exchange are necessary for the execution, delivery or performance by
either Borrower of the Loan Documents or for the legality, validity or
enforceability thereof, except for filings and recordings in respect of the
Liens created pursuant to this Loan Agreement.
6.07 Margin Regulations. Neither the making of any Loan
hereunder, nor the use of the proceeds thereof, will violate or be inconsistent
with the provisions of Regulations T, U or X.
6.08 Taxes. Each Borrower and each of their Subsidiaries has
filed all Federal income tax returns and all other material tax returns or
necessary extensions that are required to be filed by any of them and have paid
all taxes due pursuant to such returns or pursuant to any assessment received by
any of them, except for any such taxes as are being appropriately contested in
good faith by appropriate proceedings diligently conducted and with respect to
which adequate reserves have been provided. The charges, accruals and reserves
on the books of each Borrower and their Subsidiaries in respect of taxes and
other governmental charges are, in the opinion of such Borrower, adequate.
-22-
<PAGE> 27
6.09 Investment Company Act. Business Mortgage Investors, Inc.
is not an "investment company", or a company "controlled" by an "investment
company," within the meaning of the 1940 Act. Allied has elected to be regulated
as a Business Development Company. The execution, delivery and performance by
Allied of this Agreement and the other Loan Documents and each borrowing by
Allied hereunder do and will not violate or conflict with, or require any
consent of any Governmental Authority under, such Act.
6.10 Collateral; Collateral Security.
(a) Neither Borrower has assigned, pledged, or otherwise
conveyed or encumbered any Mortgage Loan to any other Person, and immediately
prior to the pledge of such Mortgage Loan to the Lender, each Borrower was the
sole owner of such Mortgage Loan and had good and marketable title thereto, free
and clear of all Liens, in each case except for Liens to be released
simultaneously with the Liens granted in favor of the Lender hereunder. No
Mortgage Loan pledged to the Lender hereunder was acquired (by purchase or
otherwise) by either Borrower from an Affiliate of such Borrower, other than the
acquisition of one or more Mortgage Loans by one Borrower from the other
Borrower, or such other acquisition approved in writing by the Lender at the
Lender's sole discretion.
(b) The provisions of this Loan Agreement are effective
to create in favor of the Lender a valid security interest in all right, title
and interest of each Borrower in, to and under the Collateral.
(c) Upon receipt by the Custodian of each Mortgage Note,
endorsed in blank by a duly authorized officer of each Borrower, the Lender
shall have a fully perfected first priority security interest therein, in the
Mortgage Loan evidenced thereby and in such Borrower's interest in the related
Mortgaged Property.
(d) Upon the filing of financing statements on Form UCC-1
naming the Lender as "Secured Party" and each Borrower as "Debtor", and
describing the Collateral, in the jurisdictions and recording offices listed on
Schedule 2 attached hereto, the security interests granted hereunder in the
Collateral will constitute fully perfected first priority security interests
under the Uniform Commercial Code in all right, title and interest of the
Borrower in, to and under such Collateral which can be perfected by filing under
the Uniform Commercial Code.
6.11 Chief Executive Office. Each Borrower's chief executive
office on the Effective Date, is located at 1919 Pennsylvania Avenue, N.W.,
Washington, D.C. 20006.
6.12 Location of Books and Records. The location where each
Borrower keeps its books and records, including all computer tapes and records
relating to the Collateral is its chief executive office.
6.13 Hedging. Allied will enter into Interest Rate Protection
Agreements pursuant to Allied's variable rate debt having terms with respect to
protection against fluctuations in interest rates pursuant to Allied's policies
and procedures reasonably acceptable to the Lender.
6.14 True and Complete Disclosure. All written information
furnished after the date hereof by or on behalf of each Borrower to the Lender
in connection with this Loan Agreement and the other Loan Documents and the
transactions contemplated hereby and thereby will be true, complete and accurate
in every material respect, or (in the case of projections) based on reasonable
estimates, on the date as of which such information is stated or certified.
There is no fact known to a Responsible Officer of either Borrower, after due
inquiry, that could reasonably be expected to have a Material
-23-
<PAGE> 28
Adverse Effect that has not been disclosed herein, in the other Loan Documents
or in a report, financial statement, exhibit, schedule, disclosure letter or
other writing furnished to the Lender for use in connection with the
transactions contemplated hereby or thereby.
6.15 Consolidated Shareholders' Equity. On the Effective Date,
the Consolidated Shareholders' Equity is not less than (i) $375,000,000 plus
(ii) 75% of the Net Proceeds of any Equity Issuance effected by Allied or any of
its Subsidiaries as of April 30, 1998 (excluding the Net Proceeds of any Equity
Issuance by a Subsidiary to Subsidiaries or to Allied).
6.16 ERISA. Neither Borrower has established or
contributed to a Plan or Multiemployer Plan.
Section 7. Covenants of the Borrower. Each Borrower covenants
and agrees with the Lender that, so long as any Loan is outstanding and until
payment in full of all Secured Obligations:
7.01 Financial Statements. Each Borrower shall deliver to the
Lender:
(a) as soon as available and in any event within 45 days after
the end of each of the first three quarterly fiscal periods of each
fiscal year of such Borrower, the unaudited consolidated balance sheets
of such Borrower and its consolidated Subsidiaries as at the end of
such period and the related unaudited consolidated statements of
operations and changes in net assets and of cash flows for such
Borrower and its consolidated Subsidiaries for such period and the
portion of the fiscal year through the end of such period, setting
forth in each case in comparative form the figures for the previous
year, accompanied by a certificate of a Responsible Officer of such
Borrower, which certificate shall state that said consolidated
financial statements fairly present the consolidated financial
condition and results of operations of such Borrower and its
consolidated Subsidiaries in accordance with GAAP, consistently
applied, as at the end of, and for, such period (subject to normal
year-end audit adjustments);
(b) as soon as available and in any event within 120 days
after the end of each fiscal year of such Borrower, the consolidated
balance sheets of such Borrower as at the end of such fiscal year and
the related consolidated statements of operations and changes in net
assets and of cash flows for such Borrower for such year, setting forth
in each case in comparative form the figures for the previous year,
accompanied by an opinion thereon of independent certified public
accountants of recognized national standing, which opinion shall not be
qualified as to scope of audit or going concern and shall state that
said consolidated financial statements fairly present the consolidated
financial condition and results of operations of such Borrower and its
consolidated Subsidiaries as at the end of, and for, such fiscal year
in accordance with GAAP;
(c) from time to time such other information regarding the
financial condition, operations, or business of the Borrowers as the
Lender may reasonably request; and
Each Borrower will furnish to the Lender, at the time it furnishes each
set of financial statements pursuant to paragraphs (a) and (b) above, a
certificate of a Responsible Officer of such Borrower to the effect that, to the
best of such Responsible Officer's knowledge, such Borrower during such fiscal
period or year has observed or performed all of its covenants and other
agreements, and satisfied every condition, contained in this Loan Agreement and
the other Loan Documents to be observed, performed or satisfied by it, and that
such Responsible Officer has obtained no knowledge of any Default or Event
-24-
<PAGE> 29
of Default except as specified in such certificate (and, if any Default or Event
of Default has occurred and is continuing, describing the same in reasonable
detail and describing the action such Borrower has taken or proposes to take
with respect thereto).
7.02 Litigation. Each Borrower will, promptly, and in any
event within 10 days after service of process on any of the following, give to
the Lender notice of all litigation, actions, suits, arbitrations,
investigations (including, without limitation, any of the foregoing which are
pending or threatened) or other legal or arbitrable proceedings affecting such
Borrower or affecting any of the Property of any of them before any Governmental
Authority (i) as to which individually or in the aggregate there is a reasonable
likelihood of an adverse decision which would be reasonably likely to have a
material adverse effect on their Property, business or financial condition or
prospects, (ii) which makes a claim or claims in an aggregate amount greater
than $5,000,000.00, (iii) which, individually or in the aggregate, if adversely
determined, could be reasonably likely to have a Material Adverse Effect, or
(iii) which requires filing with the Securities and Exchange Commission in
accordance with the 1934 Act and any rules thereunder.
7.03 Existence, etc. Each Borrower will:
(a) preserve and maintain its legal existence and all of its
material rights, privileges, licenses and franchises including Allied's
election to be regulated as a Business Development Company, (provided
that nothing in this Section 7.03(a) shall prohibit any transaction
expressly permitted under Section 7.04 hereof);
(b) comply with the requirements of all applicable laws,
rules, regulations and orders of Governmental Authorities (including,
without limitation, all environmental laws) if failure to comply with
such requirements would be reasonably likely (either individually or in
the aggregate) to have a material adverse effect on its Property,
business or financial condition, or prospects;
(c) keep adequate records and books of account, in which
complete entries will be made in accordance with GAAP consistently
applied;
(d) not move its chief executive office from the address
referred to in Section 6.11 unless it shall have provided the Lender 30
days' prior written notice of such change;
(e) pay and discharge all taxes, assessments and governmental
charges or levies imposed on it or on its income or profits or on any
of its Property prior to the date on which penalties attach thereto,
except for any such tax, assessment, charge or levy the payment of
which is being contested in good faith and by proper proceedings and
against which adequate reserves are being maintained; and
(f) permit representatives of the Lender, during normal
business hours and upon reasonable advance notice, to examine, copy and
make extracts from its books and records, to inspect any of its
Properties, and to discuss its business and affairs with its officers,
all to the extent reasonably requested by the Lender.
7.04 Prohibition of Fundamental Changes. Allied shall not
enter into any transaction of merger or consolidation or amalgamation, or
liquidate, wind up or dissolve itself (or suffer any liquidation, winding up or
dissolution) or sell all or substantially all of its assets; provided, that
-25-
<PAGE> 30
either Borrower may merge or consolidate with (a) any wholly owned subsidiary of
such Borrower, or (b) any other Person if the Borrower is the surviving
corporation; and provided further, that if after giving effect thereto, no
Default would exist hereunder.
7.05 Borrowing Base Deficiency. If at any time there exists a
Borrowing Base Deficiency the Borrowers shall cure same in accordance with
Section 2.06 hereof.
7.06 Notices. The Borrowers shall give notice to the Lender:
(a) promptly upon receipt of notice or knowledge of the
occurrence of any Default or Event of Default;
(b) with respect to any Mortgage Loan pledged to the Lender
hereunder, within two Business Days upon receipt of any principal
prepayment other than scheduled payments (in full or partial) of such
pledged Mortgage Loan;
(c) with respect to any Mortgage Loan pledged to the Lender
hereunder, immediately upon receipt of notice or knowledge that the
underlying Mortgaged Property has been damaged by waste, fire,
earthquake or earth movement, windstorm, flood, tornado or other
casualty, or otherwise damaged so as to affect adversely the Collateral
Value of such pledged Mortgage Loan; and
(d) promptly upon receipt of notice or knowledge of (i) any
default related to any Collateral, (ii) any Lien or security interest
(other than security interests created hereby or by the other Loan
Documents) on, or claim asserted against, any of the Collateral or
(iii) any event or change in circumstances which could reasonably be
expected to have a material adverse effect on the Property, business or
financial condition or prospects of either Borrower.
(e) promptly upon receipt of notice or knowledge that Allied
may not be in compliance with the requirements of the 1940 Act for a
Business Development Company.
Each notice pursuant to this Section shall be accompanied by a statement of a
Responsible Officer of such Borrower setting forth details of the occurrence
referred to therein and stating what action such Borrower has taken or proposes
to take with respect thereto.
7.07 Hedging. Allied will at all times maintain Interest Rate
Protection Agreements, pursuant to Allied's variable rate debt having terms with
respect to protection against fluctuations in interest rates pursuant to
Allied's policies and procedures reasonably acceptable to the Lender. Allied
shall deliver to the Lender quarterly (unless requested more frequently by the
Lender), a written summary of the notional amount of all outstanding Interest
Rate Protection Agreements.
7.08 Reports. Each Borrower shall provide the Lender with a
quarterly report, which report shall include, among other items, a summary of
such Borrower's delinquency and loss experience with respect to mortgage loans
held by such Borrower, plus any such additional reports as the Lender may
reasonably request with respect to such Borrower's or any Servicer's servicing
portfolio or pending originations of mortgage loans. Each Borrower shall provide
the Lender with information, promptly upon such Borrower's receipt, with respect
to each Mortgaged Property related to each Mortgage Loan pledged to the Lender
hereunder, including without limitation, the operating statements, rent roll (if
applicable and which may be provided on a quarterly basis if not available on a
monthly basis) and occupancy status of such Mortgaged Property and property
level information.
-26-
<PAGE> 31
7.09 Underwriting Guidelines. Without the prior written
consent of the Lender, neither Borrower shall amend materially or otherwise
modify materially the Underwriting Guidelines. Notwithstanding the preceding
sentence, in the event that either Borrower makes any amendment or modification
to its Underwriting Guidelines, such Borrower shall promptly deliver to the
Lender a complete copy of the amended or modified Underwriting Guidelines.
7.10 Transactions with Affiliates. Neither Borrower will enter
into any transaction, including without limitation any purchase, sale, lease or
exchange of property or the rendering of any service, with any Affiliate unless
such transaction is (a) otherwise permitted under this Loan Agreement, (b) in
the ordinary course of such Borrower's business and (c) upon fair and reasonable
terms no less favorable to such Borrower than it would obtain in a comparable
arm's length transaction with a Person which is not an Affiliate, or make a
payment that is not otherwise permitted by this Section 7.10 to any Affiliate.
In no event shall either Borrower pledge to the Lender hereunder any Mortgage
Loan acquired by such Borrower from an Affiliate of such Borrower other than
acquisitions by one Borrower from the other Borrower, or such other acquisition
approved in writing by the Lender at the Lender's sole discretion.
7.11 Limitation on Liens. Each Borrower will defend the
Collateral against, and will take such other action as is necessary to remove,
any Lien, security interest or claim on or to the Collateral, other than the
security interests created under this Loan Agreement, and each Borrower will
defend the right, title and interest of the Lender in and to any of the
Collateral against the claims and demands of all persons whomsoever.
7.12 Limitation on Distributions. After the occurrence and
during the continuation of any Event of Default under Section 8(a), (b), (f),
(g) or (h), or clause (i) or (ii) of (k) hereof, the Borrowers shall not make
any payment on account of, or set apart assets for a sinking or other analogous
fund for the purchase, redemption, defeasance, retirement or other acquisition
of any equity or partnership interest of the Borrower, whether now or hereafter
outstanding, or make any other distribution in respect of any of the foregoing
or to any shareholder or equity owner of the Borrowers in their capacity as
such, either directly or indirectly, whether in cash or property or in
obligations of the Borrowers or any of their consolidated Subsidiaries.
7.13 Consolidated Shareholders' Equity. Allied shall not
permit the Consolidated Shareholders' Equity to be less than (i) $375,000,000
plus (ii) 75% of the Net Proceeds of all Equity Issuance effected by Allied or
any of its Subsidiaries at any time after April 30, 1998 (excluding the Net
Proceeds of any Equity Issuance by a Subsidiary to Subsidiaries or to Allied).
7.14 Maintenance of Ratio of Total Indebtedness to Tangible
Net Worth. Allied shall not permit the ratio of Total Indebtedness with respect
to recourse obligations to Tangible Net Worth at any time to be greater than
3:1.
7.15 Maintenance of Profitability. The Borrowers shall not
permit, for any period of two consecutive fiscal quarters (each such period, a
"Test Period"), Net Income for such Test Period, before income taxes for such
Test Period and distributions made during such Test Period, to be less than
$1.00.
7.16 Servicing Tape. Each Borrower shall provide to the Lender
on the twelfth (12th) Business Day of each month a computer readable file
containing servicing information, including without limitation those fields
specified by the Lender from time to time, on a loan-by-loan basis and in the
aggregate, with respect to the Mortgage Loans serviced hereunder by such
Borrower or any Servicer.
-27-
<PAGE> 32
7.17 Interest Rate Protection Agreements. The Borrower shall
not pledge, hypothecate, encumber or permit any Lien to exist on any Interest
Rate Protection Agreement.
7.18 Required Filings. The Borrowers shall promptly provide
the Lender with copies of all documents which the Borrowers or any Subsidiary of
the Borrowers is required to file with the Securities and Exchange Commission in
accordance with the 1934 Act or any rules thereunder.
7.19 No Adverse Selection. The Borrowers have not selected the
Collateral in a manner so as to adversely affect the Lender's interests.
7.20 ERISA. Neither Borrower shall establish or contribute to
a Plan or Multiemployer Plan.
7.21 Remittance of Prepayments. The Borrower shall remit, with
sufficient detail to enable the Lender to appropriately identify the Mortgage
Loan to which any amount remitted applies, to the Lender on each Thursday (or
the next Business Day if such Thursday is not a Business Day) all Prepayments
that the Borrower has received during the previous week.
7.22 Lender's Right to Purchase. Prior to any whole loan sale
of any Mortgage Loan to a bona-fide third party purchaser, the Borrowers shall
first provide the Lender with the opportunity to submit a bid on said Mortgage
Loans.
7.23 Securitizations. The Borrowers agree that MS&Co. shall
retain the exclusive option to act as sole lead underwriter or sole lead
placement agent in connection with the consummation of the next securitization
of any Mortgage Loans by either Borrower or any of the Borrowers' Subsidiaries
following the Effective Date.
7.24 Exit Fee. The Borrowers shall agree to pay the Lender an
exit fee in connection with those Mortgage Loans subject to this Loan Agreement,
which fee shall be agreed upon in good faith by the Borrowers and the Lender on
or prior to December 31, 1998.
Section 8. Events of Default. Each of the following events
shall constitute an event of default (an "Event of Default") hereunder:
(a) the Borrowers shall default in the payment of any
principal of or interest on any Loan when due (whether at stated
maturity, upon acceleration or at mandatory or optional prepayment); or
(b) the Borrowers shall default in the payment of any other
amount payable by it hereunder or under any other Loan Document after
notification by the Lender of such default, and such default shall have
continued unremedied for five Business Days; or
(c) any representation, warranty or certification made or
deemed made herein or in any other Loan Document by either Borrower or
any certificate furnished to the Lender pursuant to the provisions
hereof or thereof shall prove to have been false or misleading in any
material respect as of the time made or furnished other than the
representations and warranties set forth in Schedule 1, which shall be
considered solely for the purpose of determining the
-28-
<PAGE> 33
Collateral Value of the Mortgage Loans; unless (i) the applicable
Borrower shall have made any such representations and warranties with
knowledge that they were materially false or misleading at the time
made, or (ii) any such representations and warranties have been
determined by the Lender in its sole discretion to be materially false
or misleading on a regular basis); or
(d) either Borrower shall fail to comply with the requirements
of Section 7.03(a), Section 7.04, Section 7.06, or Sections 7.09
through 7.21 hereof; or either Borrower shall default in the
performance of its obligations under Section 7.05 hereof and such
default shall continue unremedied for a period of one (1) Business Day;
or the Borrower shall otherwise fail to comply with the requirements of
Section 7.03 hereof and such default shall continue unremedied for a
period of five Business Days; or either Borrower shall fail to observe
or perform any other covenant or agreement contained in this Loan
Agreement or any other Loan Document and such failure to observe or
perform shall continue unremedied for a period of seven Business Days;
or
(e) a final judgment or judgments for the payment of money in
excess of $20,000,000 in the aggregate shall be rendered against either
Borrower or any of their Subsidiaries by one or more courts,
administrative tribunals or other bodies having jurisdiction and the
same shall not be satisfied, discharged (or provision shall not be made
for such discharge) or bonded, or a stay of execution thereof shall not
be procured, within 60 days from the date of entry thereof, and the
applicable Borrower or any such Subsidiary shall not, within said
period of 60 days, or such longer period during which execution of the
same shall have been stayed or bonded, appeal therefrom and cause the
execution thereof to be stayed during such appeal; or
(f) either Borrower shall admit in writing its inability to
pay its debts as such debts become due; or
(g) either Borrower or any of their Material Subsidiaries or
any of their Other Relevant Subsidiaries shall (i) apply for or consent
to the appointment of, or the taking of possession by, a receiver,
custodian, trustee, examiner or liquidator or the like of itself or of
all or a substantial part of its property, (ii) make a general
assignment for the benefit of its creditors, (iii) commence a voluntary
case under the Bankruptcy Code, (iv) file a petition seeking to take
advantage of any other law relating to bankruptcy, insolvency,
reorganization, liquidation, dissolution, arrangement or winding-up, or
composition or readjustment of debts, (v) fail to controvert in a
timely and appropriate manner, or acquiesce in writing to, any petition
filed against it in an involuntary case under the Bankruptcy Code or
(vi) take any corporate or other action for the purpose of effecting
any of the foregoing; or
(h) a proceeding or case shall be commenced, without the
application or consent of either Borrower or any of its Material
Subsidiaries or any of its Other Relevant Subsidiaries, in any court of
competent jurisdiction, seeking (i) its reorganization, liquidation,
dissolution, arrangement or winding-up, or the composition or
readjustment of its debts, (ii) the appointment of, or the taking of
possession by, a receiver, custodian, trustee, examiner, liquidator or
the like of either Borrower or any such Material Subsidiary or Other
Relevant Subsidiary or of all or any substantial part of its property,
or (iii) similar relief in respect of either Borrower or any such
Material Subsidiary or Other Relevant Subsidiary under any law relating
to bankruptcy, insolvency, reorganization, liquidation, dissolution,
arrangement or
-29-
<PAGE> 34
winding-up, or composition or adjustment of debts, and such proceeding
or case shall continue undismissed, or an order, judgment or decree
approving or ordering any of the foregoing shall be entered and
continue unstayed and in effect, for a period of 60 or more days; or an
order for relief against either Borrower or any such Material
Subsidiary or Other Relevant Subsidiary shall be entered in an
involuntary case under the Bankruptcy Code; or
(i) the Custodial Agreement or any Loan Document shall for
whatever reason be terminated or cease to be in full force and effect,
or the enforceability thereof shall be contested by either Borrower;
(j) either Borrower shall grant, or suffer to exist, any Lien
on any Collateral except the Liens contemplated hereby; or the Liens
contemplated hereby shall cease to be first priority perfected Liens on
the Collateral in favor of the Lender or shall be Liens in favor of any
Person other than the Lender;
(k) (i) either Borrower or any of such Borrower's Subsidiaries
shall fail to pay when due and payable the principal of, or interest on, any
Indebtedness (other than the Loans) having an aggregate outstanding principal
amount of $5,000,000 or more, (ii) the maturity of any Indebtedness (other than
the Loans) of either Borrower or any of such Borrower's Subsidiaries having an
aggregate outstanding principal amount of $5,000,000 or more shall have (x) been
accelerated in accordance with the provisions of any indenture, contract or
instrument evidencing, providing for the creation of or otherwise concerning
such Indebtedness or (y) been required to be prepaid prior to the stated
maturity thereof; or (iii) any other event shall have occurred and be continuing
with respect to any Indebtedness (other than the Loans) of either Borrower or
any of such Borrower's Subsidiaries having an aggregate outstanding principal
amount of $5,000,000 or more which, with or without the passage of time, the
giving of notice, or otherwise, would permit any holder or holders of such
Indebtedness, any trustee or agent acting on behalf of such holder or holders or
any other Person, to accelerate the maturity of any such Indebtedness or require
any such Indebtedness to be prepaid prior to its stated maturity;
(l) any materially adverse change in the Property, business,
financial condition or prospects of either Borrower or any of such Borrower's
Material Subsidiaries or Other Related Subsidiaries shall occur, in each case as
determined by the Lender in its sole discretion, or any other condition shall
exist which, in the Lender's sole discretion, constitutes a material impairment
of either Borrower's ability to perform its obligations under this Loan
Agreement, the Note or any other Loan Document; or
(m) the discovery by the Lender of a condition or event which
existed at or prior to the execution hereof and which the Lender, in its sole
discretion, determines materially and adversely affects; (i) the condition
(financial or otherwise) of either Borrower, any of their Affiliates; or (ii)
the ability of either the Borrowers or the Lender to fulfill its respective
obligations under this Loan Agreement.
Section 9. Remedies Upon Default.
(a) Upon the occurrence of one or more Events of Default other
than those referred to in Section 8(g) or (h), the Lender may immediately
declare the principal amount of the Loans then outstanding under the Note to be
immediately due and payable, together with all interest thereon and fees and
expenses accruing under this Loan Agreement. Upon the occurrence of an Event of
Default referred to in Sections 8(g) or (h), such amounts shall immediately and
automatically become
-30-
<PAGE> 35
due and payable without any further action by any Person. Upon such declaration
or such automatic acceleration, the balance then outstanding on the Note shall
become immediately due and payable, without presentment, demand, protest or
other formalities of any kind, all of which are hereby expressly waived by the
Borrowers.
(b) Upon the occurrence of one or more Events of Default, the
Lender shall have the right to obtain physical possession of the Servicing
Records and all other files of the Borrower relating to the Collateral and all
documents relating to the Collateral which are then or may thereafter come in to
the possession of either Borrower or any third party acting for either Borrower
and either Borrower shall deliver to the Lender such assignments as the Lender
shall request. The Lender shall be entitled to specific performance of all
agreements of the Borrowers contained in this Loan Agreement.
Section 10. No Duty of Lender. The powers conferred on the
Lender hereunder are solely to protect the Lender's interests in the Collateral
and shall not impose any duty upon it to exercise any such powers. The Lender
shall be accountable only for amounts that it actually receives as a result of
the exercise of such powers, and neither it nor any of its officers, directors,
employees or agents shall be responsible to the Borrowers for any act or failure
to act hereunder, except for its or their own gross negligence or willful
misconduct.
Section 11. Miscellaneous.
11.01 Waiver. No failure on the part of the Lender to exercise
and no delay in exercising, and no course of dealing with respect to, any right,
power or privilege under any Loan Document shall operate as a waiver thereof,
nor shall any single or partial exercise of any right, power or privilege under
any Loan Document preclude any other or further exercise thereof or the exercise
of any other right, power or privilege. The remedies provided herein are
cumulative and not exclusive of any remedies provided by law.
11.02 Notices. Except as otherwise expressly permitted by this
Loan Agreement, all notices, requests and other communications provided for
herein and under the Custodial Agreement (including without limitation any
modifications of, or waivers, requests or consents under, this Loan Agreement)
shall be given or made in writing (including without limitation by telex or
telecopy) delivered to the intended recipient at the "Address for Notices"
specified below its name on the signature pages hereof or thereof); or, as to
any party, at such other address as shall be designated by such party in a
written notice to each other party, by overnight courier, personal delivery,
telecopy or certified mail return receipt requested. All notices, requests and
other communications shall be deemed to have been duly given, upon receipt, in
each case given or addressed as aforesaid. All notices given or made pursuant to
this Section 11.02 to either Borrower shall be deemed to be effective notice to
both Borrowers.
11.03 Indemnification and Expenses.
(a) Each Borrower agrees to hold the Lender, and its
Affiliates and their officers, directors, employees, agents and advisors (each
an "Indemnified Party") harmless from and indemnify any Indemnified Party
against all liabilities, losses, damages, judgments, costs and expenses of any
kind which may be imposed on, incurred by or asserted against such Indemnified
Party (collectively, the "Costs") relating to or arising out of this Loan
Agreement, the Note, any other Loan Document or any transaction contemplated
hereby or thereby, or any amendment, supplement or modification of, or any
waiver or consent under or in respect of, this Loan Agreement, the Note, any
other Loan
-31-
<PAGE> 36
Document or any transaction contemplated hereby or thereby, that, in each case,
results from anything other than any Indemnified Party's gross negligence or
willful misconduct. Without limiting the generality of the foregoing, the
Borrowers agree to hold any Indemnified Party harmless from and indemnify such
Indemnified Party against all Costs with respect to (i) Table-Funded Mortgage
Loans relating to or arising out of any breach, violation or alleged breach or
violation of any consumer credit laws, including without limitation the Truth in
Lending Act and/or the Real Estate Settlement Procedures Act and (ii) all
Mortgage Loans relating to or arising out of any violation or alleged violation
of any environmental law, rule or regulation that, in each case, results from
anything other than such Indemnified Party's gross negligence or willful
misconduct. In any suit, proceeding or action brought by an Indemnified Party in
connection with any Mortgage Loan for any sum owing thereunder, or to enforce
any provisions of any Mortgage Loan, the Borrowers will save, indemnify and hold
such Indemnified Party harmless from and against all expense, loss or damage
suffered by reason of any defense, set-off, counterclaim, recoupment or
reduction or liability whatsoever of the account debtor or obligor thereunder,
arising out of a breach by either Borrower of any obligation thereunder or
arising out of any other agreement, indebtedness or liability at any time owing
to or in favor of such account debtor or obligor or its successors from the
Borrowers. The Borrowers also agree to reimburse an Indemnified Party as and
when billed by such Indemnified Party for all such Indemnified Party's costs and
expenses incurred in connection with the enforcement or the preservation of such
Indemnified Party's rights under this Loan Agreement, the Note, any other Loan
Document or any transaction contemplated hereby or thereby, including without
limitation the reasonable fees and disbursements of its counsel. The Borrowers
hereby acknowledge that, notwithstanding the fact that the Note is secured by
the Collateral, the obligation of the Borrowers under the Note is a recourse
obligation of the Borrowers.
(b) The Borrower agrees to pay as and when billed by the
Lender all of the out-of-pocket costs and expenses incurred by the Lender in
connection with the development, preparation and execution of, and any
amendment, supplement or modification to, this Loan Agreement, the Note, any
other Loan Document or any other documents prepared in connection herewith or
therewith (up to the amount of $25,000).
11.04 Amendments. Except as otherwise expressly provided in
this Loan Agreement, any provision of this Loan Agreement may be modified or
supplemented only by an instrument in writing signed by each Borrower and the
Lender and any provision of this Loan Agreement may be waived by the Lender.
11.05 Successors and Assigns . This Loan Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns.
11.06 Survival. The obligations of each Borrower under
Sections 3.04 and 11.03 hereof shall survive the repayment of the Loans and the
termination of this Loan Agreement. In addition, each representation and
warranty made or deemed to be made by a request for a borrowing, herein or
pursuant hereto shall survive the making of such representation and warranty,
and the Lender shall not be deemed to have waived, by reason of making any Loan,
any Default that may arise because any such representation or warranty shall
have proved to be false or misleading, notwithstanding that the Lender may have
had notice or knowledge or reason to believe that such representation or
warranty was false or misleading at the time such Loan was made.
-32-
<PAGE> 37
11.07 Captions. The table of contents and captions and section
headings appearing herein are included solely for convenience of reference and
are not intended to affect the interpretation of any provision of this Loan
Agreement.
11.08 Counterparts. This Loan Agreement may be executed in any
number of counterparts, all of which taken together shall constitute one and the
same instrument, and any of the parties hereto may execute this Loan Agreement
by signing any such counterpart.
11.09 Loan Agreement Constitutes Security Agreement; Governing
Law. This Loan Agreement shall be governed by New York law without reference to
choice of law doctrine, and shall constitute a security agreement within the
meaning of the Uniform Commercial Code.
11.10 SUBMISSION TO JURISDICTION; WAIVERS. LENDER AND EACH
BORROWER HEREBY IRREVOCABLY AND UNCONDITIONALLY:
(A) SUBMITS FOR ITSELF AND ITS PROPERTY IN ANY LEGAL ACTION OR
PROCEEDING RELATING TO THIS LOAN AGREEMENT, THE NOTE AND THE OTHER LOAN
DOCUMENTS, OR FOR RECOGNITION AND ENFORCEMENT OF ANY JUDGMENT IN
RESPECT THEREOF, TO THE NON-EXCLUSIVE GENERAL JURISDICTION OF THE
COURTS OF THE STATE OF NEW YORK, THE FEDERAL COURTS OF THE UNITED
STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK, AND APPELLATE
COURTS FROM ANY THEREOF;
(B) CONSENTS THAT ANY SUCH ACTION OR PROCEEDING MAY BE BROUGHT
IN SUCH COURTS AND, TO THE EXTENT PERMITTED BY LAW, WAIVES ANY
OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH
ACTION OR PROCEEDING IN ANY SUCH COURT OR THAT SUCH ACTION OR
PROCEEDING WAS BROUGHT IN AN INCONVENIENT COURT AND AGREES NOT TO PLEAD
OR CLAIM THE SAME;
(C) AGREES THAT SERVICE OF PROCESS IN ANY SUCH ACTION OR
PROCEEDING MAY BE EFFECTED BY MAILING A COPY THEREOF BY REGISTERED OR
CERTIFIED MAIL (OR ANY SUBSTANTIALLY SIMILAR FORM OF MAIL), POSTAGE
PREPAID, TO ITS ADDRESS SET FORTH UNDER ITS SIGNATURE BELOW OR AT SUCH
OTHER ADDRESS OF WHICH THE LENDER SHALL HAVE BEEN NOTIFIED; AND
(D) AGREES THAT NOTHING HEREIN SHALL AFFECT THE RIGHT TO
EFFECT SERVICE OF PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL
LIMIT THE RIGHT TO SUE IN ANY OTHER JURISDICTION.
11.11 WAIVER OF JURY TRIAL. EACH OF THE BORROWER AND THE
LENDER HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE
LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF
OR RELATING TO THIS LOAN AGREEMENT, ANY OTHER LOAN DOCUMENT OR THE TRANSACTIONS
CONTEMPLATED HEREBY OR THEREBY.
-33-
<PAGE> 38
11.12 Acknowledgments. Each Borrower hereby acknowledges that:
(a) it has been advised by counsel in the negotiation,
execution and delivery of this Loan Agreement, the Note and the other
Loan Documents;
(b) the Lender has no fiduciary relationship to the Borrowers,
and the relationship between the Borrowers and the Lender is solely
that of debtor and creditor; and
(c) no joint venture exists between the Lender and the
Borrowers.
11.13 Hypothecation or Pledge of Loans. The Lender shall have
free and unrestricted use of all Collateral and nothing in this Loan Agreement
shall preclude the Lender from engaging in repurchase transactions with the
Collateral or otherwise pledging, repledging, transferring, hypothecating, or
rehypothecating the Collateral. Nothing contained in this Loan Agreement shall
obligate the Lender to segregate any Collateral delivered to the Lender by the
Borrowers, however the Lender shall be obligated to deliver the Collateral back
to the Borrowers in accordance with, and subject to, the provisions of this Loan
Agreement.
11.14 Servicing.
(a) Each Borrower covenants to maintain or cause the servicing
of the Mortgage Loans to be maintained in conformity with accepted and prudent
servicing practices in the industry for the same type of mortgage loans as the
Mortgage Loans and in a manner at least equal in quality to the servicing such
Borrower provides for mortgage loans which it owns. In the event that the
preceding language is interpreted as constituting one or more servicing
contracts, each such servicing contract shall terminate automatically upon the
earliest of (i) an Event of Default, (ii) the date on which all the Secured
Obligations have been paid in full or (iii) the transfer of servicing approved
by the Borrower.
(b) If the Mortgage Loans are serviced by either Borrower, (i)
such Borrower agrees that the Lender is the collateral assignee of all servicing
records, including but not limited to any and all servicing agreements, files,
documents, records, data bases, computer tapes, copies of computer tapes, proof
of insurance coverage, insurance policies, appraisals, other closing
documentation, payment history records, and any other records relating to or
evidencing the servicing of Mortgage Loans (the "Servicing Records"), and (ii)
such Borrower grants the Lender a security interest in all servicing fees and
rights relating to the Mortgage Loans and all Servicing Records to secure the
obligation of such Borrower or its designee to service in conformity with this
Section and any other obligation of such Borrower to the Lender. Each Borrower
covenants to safeguard such Servicing Records and to deliver them promptly to
the Lender or its designee (including the Custodian) at the Lender's request.
(c) If the Mortgage Loans are serviced by a third party
servicer (the "Servicer"), such Borrower (i) shall provide a copy of the
servicing agreement to the Lender, which shall be in form and substance
acceptable to the Lender (the "Servicing Agreement"); and (ii) hereby
irrevocably assigns to the Lender and the Lender's successors and assigns all
right, title, interest of such Borrower in, to and under, and the benefits of,
any Servicing Agreement with respect to the Mortgage Loans. Any successor to the
Servicer shall be approved in writing by the Lender prior to such successor's
assumption of servicing obligations with respect to the Mortgage Loans.
-34-
<PAGE> 39
(d) If the servicer of the Mortgage Loans is either
Borrower or the Servicer is an Affiliate of such Borrower, such Borrower shall
provide to the Lender a letter from such Borrower or the Servicer, as the case
may be, to the effect that upon the occurrence of an Event of Default and
acceleration of the debt outstanding pursuant to Section 9 hereof, the Lender
may terminate any Servicing Agreement and transfer servicing to its designee, at
no cost or expense to the Lender, it being agreed that such Borrower will pay
any and all fees required to terminate the Servicing Agreement and to effectuate
the transfer of servicing to the designee of the Lender.
(e) After the Funding Date, until the pledge of any Mortgage
Loan is relinquished by the Custodian, the Borrowers will have no right to
modify or alter the terms of such Mortgage Loan and the Borrowers will have no
obligation or right to repossess such Mortgage Loan or substitute another
Mortgage Loan, except as provided in the Custodial Agreement.
(f) In the event either Borrower or its Affiliate is servicing
the Mortgage Loans, such Borrower shall permit the Lender to inspect such
Borrower's or its Affiliate's servicing facilities, as the case may be, for the
purpose of satisfying the Lender that such Borrower or its Affiliate, as the
case may be, has the ability to service the Mortgage Loans as provided in this
Loan Agreement.
11.15 Periodic Due Diligence Review. Each Borrower
acknowledges that the Lender has the right to perform continuing due diligence
reviews with respect to the Mortgage Loans, for purposes of verifying compliance
with the representations, warranties and specifications made hereunder, or
otherwise, and each Borrower agrees that upon reasonable (but no less than five
Business Days prior notice, unless a Default shall have occurred, in which case
no notice shall be required) to either Borrower, the Lender or its authorized
representatives will be permitted during normal business hours to examine,
inspect, and make copies and extracts of, the Mortgage Files and any and all
documents, records, agreements, instruments or information relating to such
Mortgage Loans in the possession or under the control of the Borrower and/or the
Custodian. The Borrowers also shall make available to the Lender, on a
reasonable basis, a knowledgeable financial or accounting officer for the
purpose of answering questions respecting the Mortgage Files and the Mortgage
Loans. Without limiting the generality of the foregoing, each Borrower
acknowledges that the Lender may make Loans to such Borrower based solely upon
the information provided by such Borrower to the Lender in the Mortgage Loan
Tape and the representations, warranties and covenants contained herein, and
that the Lender, at its option, has the right at any time to conduct a partial
or complete due diligence review on some or all of the Mortgage Loans securing
such Loan, including without limitation ordering new credit reports and new
appraisals on the related Mortgaged Properties and otherwise re-generating the
information used to originate such Mortgage Loan. The Lender may underwrite such
Mortgage Loans itself or engage a mutually agreed upon third party underwriter
to perform such underwriting. Each Borrower agrees to cooperate with the Lender
and any third party underwriter in connection with such underwriting, including,
but not limited to, providing the Lender and any third party underwriter with
access to any and all documents, records, agreements, instruments or information
relating to such Mortgage Loans in the possession, or under the control, of such
Borrower. Each Borrower further agrees that if a Default shall have occurred,
the Borrowers shall reimburse the Lender for any and all out-of-pocket costs and
expenses incurred by the Lender in connection with the Lender's activities
pursuant to this Section 11.15 performed following such Default.
11.16 Set-Off. In addition to any rights and remedies of the
Lender provided by this Loan Agreement and by law, the Lender shall have the
right, without prior notice to the Borrowers, any such notice being expressly
waived by the Borrowers to the extent permitted by applicable law, upon any
amount becoming due and payable by the Borrowers hereunder (whether at the
stated
-35-
<PAGE> 40
maturity, by acceleration or otherwise) to set-off and appropriate and
apply against such amount any and all deposits (general or special, time or
demand, provisional or final), in any currency, and any other credits,
indebtedness or claims, in any currency, in each case whether direct or
indirect, absolute or contingent, matured or unmatured, at any time held or
owing by the Lender or any Affiliate thereof to or for the credit or the account
of the Borrowers. The Lender agrees promptly to notify the Borrowers after any
such set-off and application made by the Lender; provided that the failure to
give such notice shall not affect the validity of such set-off and application.
11.17 Intent. The parties recognize that each Loan is a
"securities contract" as that term is defined in Section 741 of Title 11 of the
United States Code, as amended.
11.18 Joint and Several Liability. Allied hereby acknowledges
and agrees that it shall be jointly and severally liable for all
representations, warranties, covenants, obligations and indemnities of the
Borrowers hereunder. Business Mortgage Investors, Inc. hereby acknowledges and
agrees that it shall be liable for all representations, warranties, covenants,
obligations and indemnities of the Borrowers hereunder only to the extent of its
pro rata portion of the Secured Obligations.
[SIGNATURE PAGE FOLLOWS]
-36-
<PAGE> 41
IN WITNESS WHEREOF, the parties hereto have caused this Loan
Agreement to be duly executed and delivered as of the day and year first above
written.
BORROWERS
ALLIED CAPITAL CORPORATION
By /s/ Kelly A. Anderson
---------------------------------------
Name: Kelly A. Anderson
Title: Principal & Treasurer
Address for Notices:
1919 Pennsylvania Avenue, N.W.
Washington, D.C. 20006
Attention: Ms. Kelly A. Anderson
Telecopier No.: (202) 659-2053
Telephone No: (202) 973-6328
BUSINESS MORTGAGE INVESTORS, INC.
By /s/ Kelly A. Anderson
---------------------------------------
Name: Kelly A. Anderson
Title: Principal & Treasurer
Address for Notices:
1919 Pennsylvania Avenue, N.W.
Washington, D.C. 20006
Attention: Ms. Kelly A. Anderson
Telecopier No.: (202) 659-2053
Telephone No: (202) 973-6328
-37-
<PAGE> 42
LENDER
MORGAN STANLEY MORTGAGE
CAPITAL INC.
By /s/ Kevin L. Rodman
---------------------------------------
Name: Kevin L. Rodman
Title: Vice President
Address for Notices:
1585 Broadway
New York, New York 10036
Attention: Mr. Andy Neuberger
Telecopier No.: 212-761-0093
Telephone No.: 212-761-2408
-38-
<PAGE> 43
SCHEDULE 1
REPRESENTATIONS AND WARRANTIES RE: MORTGAGE LOANS
Part I. Eligible Mortgage Loans
As to each Eligible Mortgage Loan included in the Borrowing Base on a
Funding Date (and the related Mortgage, Mortgage Note, Assignment of Mortgage
and Mortgaged Property), the Borrower shall be deemed to make the following
representations and warranties to the Lender as of such date and as of each date
Collateral Value is determined (certain defined terms used herein and not
otherwise defined in the Loan Agreement appearing in Part III to this Schedule
1, except as otherwise set forth on an Officer's Certificate (as defined in the
Custodial Agreement) delivered on or prior to Funding Date or otherwise
disclosed in writing to the Lender.
(a) Mortgage Loans as Described. The information set forth in the
Mortgage Loan Schedule with respect to the Mortgage Loan is complete, true and
correct in all material respects.
(b) No Outstanding Charges. There are no material defaults in
complying with the terms of the Mortgage securing the Mortgage Loan, and to the
best of the Borrower's knowledge, all taxes, governmental assessments, required
insurance premiums, water, sewer and municipal charges, leasehold payments or
ground rents which previously became due and owing have been paid. Neither the
Borrower nor to the best of the Borrower's knowledge, the Qualified Originator
from which the Borrower acquired the Mortgage Loan has advanced funds, or
induced, solicited or knowingly received any advance of funds by a party other
than the Mortgagor, directly or indirectly, for the payment of any amount
required under the Mortgage Loan, except for interest accruing from the date of
the Mortgage Note or date of disbursement of the proceeds of the Mortgage Loan,
whichever is earlier, to the day which precedes by one month the Due Date of the
first installment of principal and interest thereunder.
(c) Original Terms Unmodified. The terms of the Mortgage Note and
Mortgage have not been impaired, waived, altered or modified in any respect,
from the date of origination except by a written instrument which has been
recorded, if necessary to protect the interests of the Lender, and which has
been delivered to the Custodian and the terms of which are reflected in the
Mortgage Loan Schedule. The substance of any such waiver, alteration or
modification has been approved by the title insurer, to the extent required, and
its terms are reflected on the Mortgage Loan Schedule. No Mortgagor in respect
of the Mortgage Loan has been released, in whole or in part, except in
connection with an assumption agreement approved by the title insurer, to the
extent required, and which assumption agreement is part of the Mortgage File
delivered to the Custodian and the terms of which are reflected in the Mortgage
Loan Schedule (to the extent such terms affect the information on the Mortgage
Loan Schedule).
(d) No Defenses. To the best of the Borrowers' knowledge, the Mortgage
Loan is not subject to any right of rescission, set-off, counterclaim or
defense, including without limitation the defense of usury, nor will the
operation of any of the terms of the Mortgage Note or the Mortgage, or the
exercise of any right thereunder, render either the Mortgage Note or the
Mortgage unenforceable,
Schedule 1, Page 1
<PAGE> 44
in whole or in part and no such right of rescission, set-off, counterclaim or
defense has been asserted with respect thereto. The Borrower has no knowledge
nor has it received any notice that any Mortgagor in respect of the Mortgage
Loan is a debtor in any state or federal bankruptcy or insolvency proceeding.
(e) Hazard Insurance. The Mortgaged Property is insured by a fire and
extended perils insurance policy, issued by a Qualified Insurer, and such other
hazards as are customary in the area where the Mortgaged Property is located,
and to the extent required by the Borrower as of the date of origination
consistent with the Underwriting Guidelines, against earthquake and other risks
insured against by Persons operating like properties in the locality of the
Mortgaged Property, in an amount not less than the greatest of (i) 100% of the
replacement cost of all improvements to the Mortgaged Property, (ii) the
outstanding principal balance of the Mortgage Loan, or (iii) the amount
necessary to avoid the operation of any co-insurance provisions with respect to
the Mortgaged Property, and consistent with the amount that would have been
required as of the date of origination in accordance with the Underwriting
Guidelines. If any portion of the Mortgaged Property is in an area identified by
any federal Governmental Authority as having special flood hazards, and flood
insurance is available, a flood insurance policy meeting the current guidelines
of the Federal Insurance Administration is in effect with a generally acceptable
insurance carrier, in an amount representing coverage not less than the lesser
of (1) the full insurable value of the Mortgaged Property, and (2) the maximum
amount of insurance available under the Flood Disaster Protection Act of 1973,
as amended. All such insurance policies (collectively, the "hazard insurance
policy") contain a standard mortgagee clause naming the Borrower, its successors
and assigns (including without limitation, subsequent owners of the Mortgage
Loan), as mortgagee, and may not be reduced, terminated or canceled without 30
days' prior written notice to the mortgagee. No such notice has been received by
the Borrower. All premiums on such insurance policy have been paid. The related
Mortgage obligates the Mortgagor to maintain all such insurance and, at such
Mortgagor's failure to do so, authorizes the mortgagee to maintain such
insurance at the Mortgagor's cost and expense and to seek reimbursement therefor
from such Mortgagor. Where required by state law or regulation, the Mortgagor
has been given an opportunity to choose the carrier of the required hazard
insurance, provided the policy is not a "master" or "blanket" hazard insurance
policy covering a condominium, or any hazard insurance policy covering the
common facilities of a planned unit development. To the best of the Borrowers'
knowledge, the hazard insurance policy is the valid and binding obligation of
the insurer and is in full force and effect. The Borrower has not engaged in,
and to the best of the Borrower's knowledge, the Mortgagor has not engaged in,
any act or omission which would impair the coverage of any such policy, the
benefits of the endorsement provided for herein, or the validity and binding
effect of either including, without limitation, no unlawful fee, commission,
kickback or other unlawful compensation or value of any kind has been or will be
received, retained or realized by any attorney, firm or other Person, and no
such unlawful items have been received, retained or realized by the Borrower.
The Mortgagor maintains (A) rental continuation coverage sufficient to protect
against loss for a period of up to 12 months, under a policy issued by a
Qualified Insurer and (B) ordinance or law coverage if applicable under the
terms and conditions of the Underwriting Guidelines.
(f) Compliance with Applicable Laws. With respect to Mortgage Loans
originated by the Borrower, and to the best of the Borrower's knowledge with
respect to Mortgage Loans acquired by the Borrower, (i) any and all requirements
of any federal, state or local law including, without limitation, usury, or
disclosure laws applicable to the Mortgage Loan have been complied with, and
(ii) the consummation of the transactions contemplated hereby will not involve
the violation of any such laws or regulations, and the Borrower shall maintain
or shall cause its agent to maintain in its
Schedule 1, Page 2
<PAGE> 45
possession, available for the inspection of the Lender, and shall deliver to the
Lender, upon demand, evidence of compliance with all such requirements.
(g) No Satisfaction of Mortgage. The Mortgage has not been satisfied,
canceled, subordinated or rescinded, in whole or in part, and the Mortgaged
Property has not been released from the lien of the Mortgage, in whole or in
part, nor has any instrument been executed that would effect any such release,
cancellation, subordination or rescission.
(h) Location and Type of Mortgaged Property. The Mortgaged Property is
located in an Acceptable State as identified in the Mortgage Loan Schedule and
consists of real property upon which is located one or more commercial or
multifamily structures; provided, however, that any commercial or multifamily
property shall conform with the Underwriting Guidelines. The Mortgaged Property
is being used for the purpose set forth in the Mortgagor's loan application,
unless otherwise notified by the Mortgagor.
(i) Valid First Lien. The Mortgage is a valid, subsisting, enforceable
and perfected first lien on the real property included in the Mortgaged
Property, including all buildings on the Mortgaged Property and all
installations and mechanical, electrical, plumbing, heating and air conditioning
systems located in or annexed to such buildings, and all additions, alterations
and replacements made at any time with respect to the foregoing. The lien of the
Mortgage is subject only to: (1) the lien of current real property taxes and
assessments not yet due and payable; (2) covenants, conditions and restrictions,
rights of way, easements and other matters of the public record as of the date
of recording acceptable to prudent mortgage lending institutions generally and
specifically referred to in the lender's title insurance policy delivered to the
originator of the Mortgage Loan and (a) referred to or otherwise considered in
the appraisal made for the originator of the Mortgage Loan or (b) which do not
materially and adversely affect the Appraised Value of the Mortgaged Property
set forth in such appraisal; and (3) other matters to which like properties are
commonly subject which do not materially interfere with the benefits of the
security intended to be provided by the Mortgage or the use, enjoyment, value or
marketability of the related Mortgaged Property. Any security agreement, chattel
mortgage or equivalent document related to and delivered in connection with the
Mortgage Loan establishes and creates a valid, subsisting and enforceable first
lien and first priority security interest on the property described therein and
the Borrower has full right to pledge and assign the same to the Lender. The
Mortgaged Property was not, as of the date of origination of the Mortgage Loan,
subject to a mortgage, deed of trust, deed to secure debt or other security
instrument creating a lien subordinate to the lien of the Mortgage.
(j) Validity of Mortgage Documents. The Mortgage Note and the Mortgage
and any other agreement executed and delivered by a Mortgagor or guarantor, if
applicable, in connection with a Mortgage Loan are genuine, and each is the
legal, valid and binding obligation of the maker thereof enforceable in
accordance with its terms subject to bankruptcy laws and other similar laws of
general application affecting rights of creditors and subject to the application
of the rules of equity, including those respecting the availability of specific
performance.
(k) Full Disbursement of Proceeds. The Mortgage Loan has been closed
and the proceeds of the Mortgage Loan have been fully disbursed and there is no
further requirement for future advances thereunder, and either (i) any and all
requirements as to completion of any on-site or off-site improvement and as to
disbursements of any escrow funds therefor have been complied with or (ii) an
escrow of funds for the completion of any on-site or off-site improvements has
been established in an amount sufficient to make all repairs required by the
Qualified Originator to the Mortgaged Property.
Schedule 1, Page 3
<PAGE> 46
All costs, fees and expenses incurred in making or closing the Mortgage Loan and
the recording of the Mortgage were paid, and the Mortgagor is not entitled to
any refund of any amounts paid or due under the Mortgage Note or Mortgage. To
the best of the Borrower's knowledge, all costs, fees and expenses incurred in
making or closing the Mortgage Loan and the recording of the Mortgage were paid,
and the Mortgagor is not entitled to any refund of any amounts paid or due under
the Mortgage Note or Mortgage.
(l) Ownership. Either Borrower is the sole owner and holder of the
Mortgage Loan or is a co-owner and co-holder of the Mortgage Loan with the other
Borrower. The Mortgage Loan is not assigned or pledged, and the Borrower has
good, indefeasible and marketable title thereto, and has full right to transfer,
pledge and assign the Mortgage Loan to the Lender free and clear of any
encumbrance, equity, participation interest, lien, pledge, charge, claim or
security interest, and has full right and authority subject to no interest or
participation of, or agreement with, any other party, to assign, transfer and
pledge each Mortgage Loan pursuant to this Loan Agreement and following the
pledge of each Mortgage Loan, the Lender will hold such Mortgage Loan free and
clear of any encumbrance, equity, participation interest, lien, pledge, charge,
claim or security interest except any such security interest created pursuant to
the terms of this Loan Agreement.
(m) Doing Business. To the best of the Borrower's knowledge, all
parties which have had any interest in the Mortgage Loan, whether as mortgagee,
assignee, pledgee or otherwise, are (or, during the period in which they held
and disposed of such interest, were) (i) in compliance with any and all
applicable licensing requirements of the laws of the state wherein the Mortgaged
Property is located, and (ii) either (A) organized under the laws of such state,
(B) qualified to do business in such state, (C) a federal savings and loan
association, a savings bank or a national bank having a principal office in such
state, or (D) not doing business in such state.
(n) Loan-to-Value Ratio and Debt Service Ratio. The Loan-to-Value
Ratio for the Mortgage Loan is not greater than that set forth in the
Underwriting Guidelines. The Debt Service Ratio for the Mortgage Loan is not
less than that set forth in the Underwriting Guidelines.
(o) Title Insurance. The Mortgage Loan is covered by either (i) an
attorney's opinion of title and abstract of title, the form and substance of
which is acceptable to prudent mortgage lending institutions making mortgage
loans in the area wherein the Mortgaged Property is located or (ii) an ALTA
lender's title insurance policy or other generally acceptable form of policy or
insurance and each such title insurance policy is issued by a title insurer
qualified to do business in the jurisdiction where the Mortgaged Property is
located, insuring the Borrower, its successors and assigns, as to the first
priority lien of the Mortgage in the original principal amount of the Mortgage
Loan, subject only to the exceptions contained in clauses (1), (2) and (3) of
paragraph (i) of this Schedule 1. Where required by state law or regulation, the
Mortgagor has been given the opportunity to choose the carrier of the required
mortgage title insurance. Additionally, such lender's title insurance policy
affirmatively insures ingress and egress and against encroachments by or upon
the Mortgaged Property or any interest therein. The title policy does not
contain any special exceptions (other than the standard exclusions) for zoning
and uses and has been marked to delete the standard survey exception or to
replace the standard survey exception with a specific survey reading. The
Borrower, its successors and assigns, are the sole insureds of such lender's
title insurance policy, and such lender's title insurance policy is valid and
remains in full force and effect and will be in force and effect upon the
consummation of the transactions contemplated by this Loan Agreement. No claims
have been made under such lender's title insurance policy. The title policy has
been marked to delete the intervening
Schedule 1, Page 4
<PAGE> 47
lien exception and all premiums for such policy, including any premiums for
endorsements and special endorsements, have been paid.
(p) No Defaults. To the best of the Borrower's knowledge, there is no
default, breach, violation or event of acceleration existing under the Mortgage
or the Mortgage Note and no event has occurred which, with the passage of time
or with notice and the expiration of any grace or cure period, to the best of
the Borrower's knowledge, would constitute a default, breach, violation or event
of acceleration, and neither the Borrower nor its predecessors have waived any
default, breach, violation or event of acceleration.
(q) No Mechanics' Liens. To the best of the Borrower's knowledge,
there are no mechanics' or similar liens or claims which have been filed for
work, labor or material (and no rights are outstanding that under the law could
give rise to such liens) affecting the Mortgaged Property which are or may be
liens prior to, or equal or coordinate with, the lien of the Mortgage.
(r) Location of Improvements; No Encroachments. To the best of the
Borrower's knowledge, all improvements which were considered in determining the
Appraised Value of the Mortgaged Property lie wholly within the boundaries and
building restriction lines of the Mortgaged Property, and no improvements on
adjoining properties encroach upon the Mortgaged Property or the Lender's title
insurance policy referenced in (o) above affirmatively insures such
encroachments. To the best of the Borrower's knowledge, no improvement located
on or being part of the Mortgaged Property is in violation of any applicable
zoning and building law, ordinance or regulation.
(s) Origination; Payment Terms. Principal payments on the Mortgage
Loan commenced no more than 60 days after funds were disbursed in connection
with the Mortgage Loan. The Mortgage Note is payable monthly with interest
calculated and payable in arrears, sufficient to amortize the Mortgage Loan
fully by the stated maturity date, or otherwise providing for a balloon payment
in accordance with the Underwriting Guidelines over an original term of not more
than 30 years from commencement of amortization.
(t) Customary Provisions. The Mortgage Note has a stated maturity. The
Mortgage contains customary and enforceable provisions such as to render the
rights and remedies of the holder thereof adequate for the realization against
the Mortgaged Property of the benefits of the security provided thereby,
including, (i) in the case of a Mortgage designated as a deed of trust, by
trustee's sale, and (ii) otherwise by power of sale or judicial foreclosure. The
Mortgage or the laws of the applicable state in which the Mortgaged Property is
located provides for the appointment of a receiver for rents in the event of an
institution of foreclosure proceedings, or allows the Mortgagee to enter into
possession to collect rents to the extent permitted by applicable law.
(u) Conformance with Underwriting Guidelines. The Mortgage Loan was
underwritten in accordance with the Underwriting Guidelines.
(v) Occupancy of the Mortgaged Property. To the best of the Borrower's
knowledge, as of the Funding Date the Mortgaged Property is lawfully occupied
under applicable law. To the best of the Borrower's knowledge, all inspections,
licenses and certificates required to be made or issued with respect to all
occupied portions of the Mortgaged Property and, with respect to the use and
occupancy of the same, including but not limited to, certificates of occupancy
and fire underwriting certificates, have been made or obtained from the
appropriate authorities. To the best of the Borrower's knowledge, the Borrower
has not received notification from any governmental authority
Schedule 1, Page 5
<PAGE> 48
that the Mortgaged Property is in material non-compliance with such laws or
regulations, is being used, operated or occupied unlawfully or has failed to
have or obtain such inspection, licenses or certificates, as the case may be.
The Borrower has not received notice of any violation or failure to conform with
any such law, ordinance, regulation, standard, license or certificate.
(w) Deeds of Trust. In the event the Mortgage constitutes a deed of
trust, a trustee, authorized and duly qualified under applicable law to serve as
such has been properly designated and currently so serves and is named in the
Mortgage, and no fees or expenses are or will become payable by the Custodian or
the Lender to the trustee under the deed of trust, except in connection with a
trustee's sale after default by the Mortgagor.
(x) Delivery of Mortgage Documents. The Mortgage Note, the Mortgage,
the Assignment of Mortgage and any other documents required to be delivered
under the Custodial Agreement for each Mortgage Loan have been delivered to the
Custodian. The Borrower or its agent is in possession of a complete, true and
accurate Mortgage File in compliance with the Custodial Agreement, except for
such documents the originals of which have been delivered to the Custodian.
(y) Transfer of Mortgage Loans. The Assignment of Mortgage is in
recordable form and is acceptable for recording under the laws of the
jurisdiction in which the Mortgaged Property is located.
(z) No Buydown Provisions; No Graduated Payments or Contingent
Interests. The Mortgage Loan does not contain provisions pursuant to which
Monthly Payments are paid or partially paid with funds deposited in any separate
account established by the Borrower, the Mortgagor, or anyone on behalf of the
Mortgagor, or paid by any source other than the Mortgagor nor does it contain
any other similar provisions which may constitute a "buydown" provision. The
Mortgage Loan is not a graduated payment mortgage loan and the Mortgage Loan
does not have a shared appreciation or other contingent interest feature.
(aa) Mortgaged Property Undamaged. To the best of the Borrower's
knowledge, the Mortgaged Property is undamaged by waste, fire, earthquake or
earth movement, windstorm, flood, tornado or other casualty so as to affect
materially and adversely the value of the Mortgaged Property as security for the
Mortgage Loan or the use for which the premises were intended and each Mortgaged
Property is in good repair. To the best of the Borrower's knowledge, there have
not been any condemnation proceedings commenced with respect to the Mortgaged
Property and the Borrower has no knowledge of any such proceedings.
(bb) Collection Practices; Escrow Deposits. The origination and
collection practices used by the originator, each servicer of the Mortgage Loan
and the Borrower with respect to the Mortgage Loan have been in all material
respects in compliance with Accepted Servicing Practices, applicable laws and
regulations, and have been in all material respects legal. With respect to
escrow deposits and Escrow Payments, all such payments are in the possession of,
or under the control of, the Borrower and there exist no deficiencies in
connection therewith for which customary arrangements for repayment thereof have
not been made. All Escrow Payments have been collected in full compliance with
state and federal law.
(cc) Other Insurance Policies. To the best of the Borrower's
knowledge, no action, inaction or event has occurred and no state of facts
exists or has existed that has resulted or will result in the exclusion from,
denial of, or defense to coverage under any applicable special hazard insurance
Schedule 1, Page 6
<PAGE> 49
policy or bankruptcy bond, irrespective of the cause of such failure of
coverage. In connection with the placement of any such insurance, no commission,
fee, or other compensation has been or will be received by the Borrower or by
any officer, director, or employee of the Borrower or any designee of the
Borrower or any corporation in which the Borrower or any officer, director, or
employee had a financial interest at the time of placement of such insurance.
(dd) Appraisal. The Mortgage File contains an appraisal of the related
Mortgaged Property signed (to the best of the Borrower's knowledge, prior to the
date a commitment to fund such Mortgage Loan becomes binding) by a qualified
appraiser, duly appointed by the Borrower, who had no interest, direct or
indirect in the Mortgaged Property or in any loan made on the security thereof,
and whose compensation is not affected by the approval or disapproval of the
Mortgage Loan.
(ee) Capitalization of Interest. The Mortgage Note does not by its
terms provide for the capitalization or forbearance of interest; provided that
the Mortgage Note may have been restructured, and at the time of such
restructuring, outstanding interest may have been capitalized.
(ff) No Equity Participation. No document relating to the Mortgage
Loan provides for any contingent or additional interest in the form of
participation in the cash flow of the Mortgaged Property or a sharing in the
appreciation of the value of the Mortgaged Property. The indebtedness evidenced
by the Mortgage Note is not convertible to an ownership interest in the
Mortgaged Property or the Mortgagor and the Borrower has not financed nor does
it own directly or indirectly, any equity of any form in the Mortgaged Property
or the Mortgagor.
(gg) Proceeds of Mortgage Loan. Except as expressly previously
disclosed to the Lender, the proceeds of the Mortgage Loan have not been and
shall not be used to satisfy, in whole or in part, any debt owed or owing by the
Mortgagor to the Borrower or any Affiliate or correspondent of the Borrower
except in each case, fees and expenses incurred in the origination of the
Mortgage Loan.
(hh) Withdrawn Mortgage Loans. If the Mortgage Loan has been released
to the Borrower pursuant to a Request for Release and Receipt as permitted under
Section 5 of the Custodial Agreement, then, the promissory note relating to the
Mortgage Loan was returned to the Custodian within 10 days of release (or if
such tenth day is not a Business Day, the next succeeding Business Day).
(ii) No Exception. The Custodian has not noted any material exceptions
on an Exception Report (as defined in the Custodial Agreement) with respect to
the Mortgage Loan which would materially adversely affect the Mortgage Loan or
the Lender's security interest, granted by the Borrower, in the Mortgage Loan.
(jj) Qualified Originator. The Mortgage Loan has been originated by,
and, if applicable, purchased by the Borrower from, a Qualified Originator.
(kk) Title Survey; Improvements. To the best of the Borrower's
knowledge, the Mortgage File includes a title survey, certified to the Borrower
or the Qualified Originator, its successors and assigns, and the title insurance
company, in accordance with most recent minimum standards for title surveys as
determined by the American Land Title Association, with the signature and seal
of a licensed engineer or surveyor affixed thereto.
Schedule 1, Page 7
<PAGE> 50
(ll) Inspection. The Borrower or the Qualified Originator or their
agents, has inspected or has caused to be inspected each related Mortgaged
Property in connection with the origination thereof no earlier than six months
prior to the related Funding Date.
(mm) Access Routes. To the best of the Borrower's knowledge, at the
time of origination, the Mortgaged Property was (i) contiguous to a physically
open, dedicated all-weather public street, (ii) had all necessary permits and
approvals for ingress and egress, (iii) was adequately serviced by public or
private water, public or private sewer systems and utilities, and (iv) was on a
separate tax parcel, separate and apart from any other property owned by the
Mortgagor or any other Person.
(nn) Mortgagor is Landlord under Leases. Each Mortgagor is the owner
and holder of the landlord's interest under any lease for use and occupancy of
all or any portion of the related Mortgaged Property. Neither the Borrower nor,
to the best of the Borrower's knowledge, the Mortgagor, has made any assignments
of the landlord's interest in any such lease or any portion of the rents,
additional rents, charges, issues or profits due and payable or to become due
and payable under any such lease (other than an assignment in favor of the
Borrower or in favor of the Lender) which assignments are presently outstanding.
The assignment of leases and/or rents and any security agreement, chattel
mortgage or equivalent document related to and delivered in connection with the
Mortgage Loan establishes and creates a valid and enforceable first lien or
first priority security interest on the leases affecting the Mortgaged Property
except as enforceability may be limited by bankruptcy or other laws affecting
creditor's rights generally or by the application of the rules of equity.
(oo) Mortgaged Property Leased to Tenants. To the best of the
Borrower`s knowledge as to each Mortgage Loan secured by Mortgaged Property
which is leased to tenants: (i) the Mortgaged Property is not subject to any
leases other than the leases described in the rent roll contained in the
Mortgage Loan File (hereinafter referred to as the "Leases"), and such rent roll
is accurate and complete in all material respects, including description of the
rent and term. (ii) no Person has any possessory interest in the Mortgaged
Property or right to occupy the same except under and pursuant to the provisions
of the Leases and except those possessory interests set forth in clauses (2) and
(3) of paragraph (i) of this Schedule 1, Part I, (iii) each Lease of all or any
portion of the Mortgaged Property is subordinate to the Mortgage, unless
otherwise approved by the Borrower; (iv) with respect to any Lease having the
benefit of a non-disturbance or similar recognition agreement, there are no
circumstances or conditions with respect to the Mortgage, the Mortgaged
Property, and Mortgagor, any tenant (alone or considered with other tenants) of
the Mortgaged Property, or the Mortgagor's or any tenant's credit standing that
would cause prudent mortgage lenders making loans similar to the Mortgage Loan
in the area in which the Mortgaged Property is located to refuse to grant such
non-disturbance or similar recognition agreement; are no recorded assignments of
the Leases or of any portion of the rents, additional rents, charges, issues or
profits due and payable or to become due and payable thereunder (hereinafter
collectively referred to as the "Rents") to anyone other than the Mortgagor or a
mortgagee which are now outstanding; (v) no Leases contain any option to
purchase, any right of first refusal to lease or purchase, any express right to
terminate the Lease or vacate the premises prior to expiration of the lease
term, or any express right to abate or defer rent or any other similar
provisions which materially adversely affect the Mortgaged Property or which
might materially, adversely affect the rights of any holder of the Mortgage
Loan; (vi) of the Leases are in full force and effect and have not been modified
or amended other than by documents contained in the Mortgage File, and the
Mortgage File contains true and complete copies of the Leases; (vii) The
Mortgagor has certified that all rents due and payable under the Leases have
been paid in full and no such rents have been paid more than one month in
advance of the Due Date; and (viii) the Mortgagor has certified that
Schedule 1, Page 8
<PAGE> 51
neither the Mortgagor (landlord) nor any tenant under the Leases is in default
under any of the terms, covenants or provisions of the Leases and the Borrower
knows of no event which, but for the passage of time or the giving of notice or
both, would constitute an event of default under any of the Leases.
(pp) Organization. If not an individual, to the best of the Borrower's
knowledge, the Mortgagor has been duly organized and is validly existing and in
good standing under the laws of the jurisdiction of its formation. To the best
of the Borrower's knowledge based on the Mortgagor's representations and
warranties, the Mortgagor has requisite power and authority to (i) own its
properties, (ii) transact the business in which it is now engaged, (iii) execute
and deliver the Mortgage Note, the Mortgage and the other Mortgage and the other
Mortgage Loan Documents and (iv) consummate the transactions contemplated hereby
and thereby. To the best of the Borrower's knowledge based on the Mortgagor's
representations and warranties, the Mortgagor is duly qualified to do business
and is in good standing in the jurisdiction where it is required to be so
qualified in connection with the ownership, maintenance, management and
operation of the Mortgaged Property. The Mortgagor has represented, warranted
and covenanted that it shall (1) own no assets, and will not engage in any
business, other than ownership, operation and management of its respective
Mortgaged Property except as scheduled and identified to the Lender (2) not
enter into any contract or agreement with any affiliate except upon terms and
conditions that are intrinsically fair and substantially similar to those that
would be available on an arms-length basis with persons other than such
affiliate; (3) not incur any indebtedness or obligation, secured or unsecured,
direct or indirect, absolute or contingent (including guaranteeing any
obligation), other than pursuant to the Mortgage Loan Document and other known
liens or other trade payables; (4) not make any loans or advances to any third
party, and shall not acquire obligations or securities of its affiliates; (5)
pay its debts and liabilities (including, as applicable, shared personnel and
overhead expenses) only from its own assets; (6) comply with the provisions of
its organizational documents; (7) do all things necessary to observe
organizational formalities and to preserve its existence, and will not amend,
modify or otherwise change its organizational documents, or suffer same to be
amended, modified or otherwise changed, without the prior written consent of the
Lender; (8) maintain all of its books, records, financial statements and bank
accounts separate from those of its Affiliates; (9) be, and at all times will
hold itself out to the public as, a legal entity separate and distinct from any
other entity (including any affiliate), shall correct any known misunderstanding
regarding its status as a separate entity, shall conduct business in its own
name, shall not identify itself or any of its affiliates as a division or part
of the other and shall maintain and utilize separate stationery, invoices and
checks; (10) maintain adequate capital for the normal obligations reasonably
foreseeable in a business of its size and character and in light of its
contemplated business operations; (11) not engage in or suffer any change of
ownership, dissolution, winding up, liquidation, consolidation or merger in
whole or in part; (12) not commingle its funds or other assets with those of any
affiliate or any other Person; (13) maintain its assets in such a manner that it
will not be costly or difficult to segregate, ascertain or identify its
individual assets from those of any affiliate or any other person; and (14) not
and will not hold itself out to be responsible for the debts or obligations of
any other Person.
(qq) Mortgagor Properly Licensed and in Compliance With Terms of
Mortgage Loan Documents. To the best of the Borrower's knowledge based on the
Mortgagor's representations and warranties, (i) the Mortgagor was at the time of
origination in possession of all licenses, permits and other authorizations
necessary and required by applicable law for the conduct of its business; (ii)
all such licenses, permits and authorizations are valid and in full force and
effect and (iii) all material conditions on the Mortgagor's part to be fulfilled
under the terms of any lease of the Mortgaged Property have been satisfied.
Schedule 1, Page 9
<PAGE> 52
(rr) No Conflicts. To the best of the Borrower's knowledge based on
the Mortgagor's representations and warranties, (i) the execution, delivery and
performance of the Mortgage Note, the Mortgage, and the other Mortgage Loan
Documents by the Mortgagor do not conflict with or constitute a default under,
or result in the creation or imposition of any lien (other than pursuant to the
Mortgage Loan Documents) mortgage, deed of trust, loan agreement, partnership
agreement, or other agreement or instrument to which the Mortgagor is a party or
to which the Mortgaged Property is subject, nor will such action result in any
violation of the provisions of any statute or any jurisdiction over the
Mortgagor or the Mortgaged Property, and (ii) any qualification of or with any
Governmental Authority required for the execution, deliver, and performance by
the Mortgagor of the Mortgage Note, the Mortgage, or the other Mortgage Loan
Documents has been obtained as is in full force and effect.
(ss) Litigation. To the best of the Borrower's knowledge based on the
Mortgagor's representations and warranties, there are no actions, suits, or
proceedings at law or in equity by or before any Governmental Authority now
pending or threatened against or affecting the Mortgagor or the Mortgaged
Property, which actions, suits or proceedings, if determined against the
Mortgagor or the Mortgaged Property, might materially adversely affect the
condition (financial or otherwise) or business of the Mortgagor or the condition
or ownership of the Mortgaged Property.
(tt) No Violation of Environmental Laws. To the best of the Borrower's
knowledge, there is no pending action or proceeding directly involving the
Mortgaged Property in which compliance with any environmental law, rule or
regulation is an issue; and to the best of the Borrower's knowledge, nothing
further remains to be done to satisfy in full all requirements of each such law,
rule or regulation constituting a prerequisite to use and enjoyment of said
property.
(uu) Agreements. To the best of the Borrower's knowledge based on the
Mortgagor's representations and warranties, the Mortgagor is not a party to any
agreement or instrument or subject to any restriction which might adversely
affect the Mortgagor. To the best of the Borrower's knowledge based on the
Mortgagor's representations and warranties, the Mortgagor is not in default in
any material respect in the performance, observance, or fulfillment of any of
the obligations, covenants or conditions contained in any agreement or
instrument to which it is a party or by which the Mortgagor or the Mortgaged
Property is bound.
(vv) No Bankruptcy Filing. To the best of the Borrower's knowledge
based on the Mortgagor's representations and warranties, the Mortgagor is not
contemplating either the filing of a petition by it under any state or federal
bankruptcy or insolvency laws or the liquidation of all or a major portion of
the Mortgagor's assets or the Mortgaged Property.
(ww) Full and Accurate Disclosure. To the best of the Borrower's
knowledge based on the Mortgagor's representations and warranties, no statement
of fact made by the Mortgagor in the Mortgage Loan Documents contains any untrue
statement of a material fact or omits to state any material fact necessary to
make statements contained herein or therein not misleading.
(xx) No Plan Assets. To the best of the Borrower's knowledge based on
the Mortgagor's representations and warranties, the Mortgagor is not an
"employee benefit plan," as defined in Sections 3 (3) of ERISA, subject to Title
I of ERISA, and none of the assets of the Mortgagor constitutes or will
constitute "plan assets" of one or more such plans within the meaning of 29
C.F.R. Section 2510.3-101.
Schedule 1, Page 10
<PAGE> 53
(yy) Compliance. To the best of the Borrower's knowledge, the
Mortgagor and the Mortgaged Property and the use thereof comply in all material
respects with all applicable legal requirements, including, without limitation,
parking requirements. To the best of the Borrower's knowledge based on the
Mortgagor's representations and warranties, the Mortgagor is not in default or
violation of any order, writ, injunction, decree or demand of any Governmental
Authority, the violation of which might materially adversely affect the
condition (financial or otherwise) or business of the Mortgagor.
(zz) Contracts. To the best of the Borrower's knowledge based on the
Mortgagor's representations and warranties, there are no material contracts
(other than management contracts) affecting the Mortgaged Property that are not
terminable on one month's notice or less without cause and without penalty or
premium.
(aaa) Financial Information. To the best of the Borrower's knowledge,
based upon the Mortgagor's representations and warranties, all financial data,
including, without limitation the statements of cash flow and income and
operating expense, that have been delivered to the Qualified Originator (i) are
true, complete, and correct in all material respects, and (ii) accurately
represent the financial condition of the Mortgaged Property and the persons
covered thereby as of the date of such reports.
(bbb) Not a Foreign Person. To the best of the Borrowers knowledge
based upon the Mortgagor's representations and warranties, the Mortgagor is not
a "foreign person" within the meaning of Section 1445(f)(3) of the Code.
(ccc) Separate Lots. To the best of the Borrower's knowledge based on
the Mortgagor's representations and warranties, the Mortgaged Property is not
assessed jointly with any other real property constituting a separate tax lot or
with any other real property constituting a separate tax lot or with any
personal property not constituting part of such Mortgaged Property such that the
lien of any taxes which may be levied against such personal property shall be
assessed or levied or charged as a lien on the Mortgaged Property.
(ddd) Assessments. To the best of the Borrower's knowledge based upon
the Mortgagor's representations and warranties, there are no pending or proposed
special or other assessments for public improvements or otherwise affecting the
Mortgaged Property, nor to the best of the Borrower's knowledge based upon the
Mortgagor's representations and warranties are there any contemplated
improvements to the Mortgaged Property that may result in such special or other
assessments.
(eee) Mortgage Submitted for Recordation. The Mortgage either has been
or will promptly be submitted for recordation in the appropriate governmental
recording office of the jurisdiction where the Mortgaged Property is located.
(fff) The Ground Lease. To the best of the Borrowers knowledge based
upon the Mortgagor's representations and warranties with respect to each ground
lease to which the Mortgaged Property is subject (a "Ground Lease"): (i) the
Mortgagor is the owner of a valid and subsisting interest as tenant under the
Ground Lease; (ii) the Ground Lease is unmodified and not supplemented by any
writing or otherwise (other than as disclosed in the Mortgage File) and is in
full force and effect; (iii) all rent, additional rent and other charges
reserved therein have been paid to the extent they are payable to the date
hereof; (iv) the Mortgagor enjoys the quiet and peaceful possession of the
estate demised
Schedule 1, Page 11
<PAGE> 54
thereby, subject to any sublease; (v) the Mortgagor is not in default under any
of the terms thereof and there are no circumstances which, with the passage of
time or the giving of notice or both, would constitute an event of default
thereunder; (vii) the lessor under the Ground Lease is not in default under any
of the terms or provisions thereof on the part of the lessor to be observed or
performed; (vii) the lessor under the Ground Lease has satisfied all of its
repair or construction obligations, if any, to date pursuant to the terms of the
Ground Lease; and (ix) the execution, delivery and performance of the Mortgage
do not require the consent (other than those consents which have been obtained
and are in full force and effect) under, and will not contravene any provision
of or cause a default under, the Ground Lease.
(ggg) Table-Funded Mortgage Loans. With respect to each Mortgage Loan
that is a Table-Funded Mortgage Loan, the Settlement Agent has entered into a
Bailee Agreement agreeing to hold the related Mortgage Loan Documents as agent
and bailee for the Lender and to promptly forward such Mortgage Loan Documents
to the Custodian for receipt by the fourth (4th) Business Day following the
applicable Funding Date.
Schedule 1, Page 12
<PAGE> 55
Part II. Eligible Commercial Mortgage Loans that are Secured by Hotels
As to each Eligible Commercial Mortgage Loan secured by a Hotel
included in the Borrowing Base on a Funding Date (and the related Mortgage,
Mortgage Note, Assignment of Mortgage and Mortgaged Property), the Borrower
shall be deemed to make the following representations and warranties to the
Lender as of such date (certain defined terms used herein and not otherwise
defined in the Agreement appearing in Part III to this Schedule 1, except as
otherwise set forth on an Officer's Certificate (as defined in the Custodial
Agreement) delivered on or prior to Funding Date or otherwise disclosed in
writing to the Lender.
(a) To the best of the Borrower's knowledge, the Franchise Agreement,
if any, is in full force and effect and there is no default, breach or violation
existing thereunder by any party thereto and no event (other than payments due
but not yet delinquent) which, with the passage of time or with notice and the
expiration of any grace or cure period would constitute a default, breach or
violation by any party thereunder;
(b) To the best of the Borrower's knowledge, the Management Agreement,
if any, is in full force and effect and there is no default, breach or violation
existing thereunder by any party thereto and no event (other than payments due
but not yet delinquent) which, with the passage of time or with notice and the
expiration of any grace or cure period would constitute a default, breach or
violation by any party thereunder;
(c) To the best of the Borrower's knowledge, the Mortgagor owns/and or
possesses, and holds free from burdensome restrictions or known conflicts with
the rights of others, all material licenses, registrations, permits,
certificates, authorizations and approvals necessary for the operation of the
Mortgaged Property as a Hotel; and
(d) Neither the execution and delivery of the Mortgage Loan Documents,
the Mortgagor's performance thereunder, the recordation of the Mortgage, will
materially and adversely affect (x) the Mortgagor's rights under either the
Franchise Agreement, if any, or the Management Agreement, if any, or (y) the
licenses, registration, permits, certificates, authorizations and approvals
necessary for the operation of the Hotel; provided, however, in the case of
clause (y) the Borrower's knowledge is limited to the Borrower's actual
knowledge based on (1) a review of such items and (2) reliance on an opinion of
counsel from the Mortgagor's counsel.
Schedule 1, Page 13
<PAGE> 56
Part III. Defined Terms
In addition to terms defined elsewhere in the Loan Agreement, the
following terms shall have the following meanings when used in this Schedule 1:
"Acceptable State" shall mean any state for which approval has not
been revoked by the Lender in its sole discretion, any such notice of revocation
to be given no later than 10 Business Days prior to its intended effective date.
"Accepted Servicing Practices" shall mean, with respect to any
Mortgage Loan, those mortgage servicing practices of prudent mortgage lending
institutions which service mortgage loans of the same type as such Mortgage
Loans in the jurisdiction where the related Mortgaged Property is located.
"ALTA" means the American Land Title Association.
"Appraised Value" shall mean the value set forth in an appraisal made
in connection with the origination of the related Mortgage Loan as the value of
the Mortgaged Property.
"Assignment of Mortgage" shall mean an assignment of the Mortgage,
notice of transfer or equivalent instrument in recordable form, sufficient under
the laws of the jurisdiction wherein the related Mortgaged Property is located
to reflect the transfer of the Mortgage.
"Best's" means Best's Key Rating Guide, as the same shall be amended
from time to time.
"Cut-off Date" means the first day of the month in which the related
Funding Date occurs.
"Debt Service Ratio" means as of any date of determination and for any
period, the applicable "Debt Service Coverage" ratio determined in accordance
with, and defined in, the Underwriting Guidelines.
"Due Date" means the day of the month on which the Monthly Payment is
due on a Mortgage Loan, exclusive of any days of grace.
"Escrow Payments" means with respect to any Mortgage Loan, the amounts
constituting ground rents, taxes, assessments, water rates, sewer rents,
municipal charges, mortgage insurance premiums, fire and hazard insurance
premiums, condominium charges, and any other payments required to be escrowed by
the Mortgagor with the mortgagee pursuant to the Mortgage or any other document.
"FHLMC" means the Federal Home Loan Mortgage Corporation, or any
successor thereto.
"FNMA" means the Federal National Mortgage Association, or any
successor thereto.
Schedule 1, Page 14
<PAGE> 57
"Gross Margin" means with respect to each adjustable rate Mortgage
Loan, the fixed percentage amount set forth in the related Mortgage Note.
"Ground Lease" means a lease for all or any portion of the real
property comprising the Mortgaged Property, the lessee's interest in which is
held by the Mortgagor of the related Mortgage Loan.
"Ground Lessee" shall mean the ground lessee under a Ground Lease.
"Hotel" shall mean a real estate development owned by the Mortgagor or
for which the Mortgagor is a Ground Lessee, which constitutes a full operational
hotel or motel, including all land, amenities and improvements, with individual
rooms principally for short-term rental to tenants occupying same, as more
particularly described in the Underwriting Guidelines.
"Index" means with respect to each adjustable rate Mortgage Loan, the
index set forth in the related Mortgage Note for the purpose of calculating the
interest rate thereon.
"Insurance Proceeds" means with respect to each Mortgage Loan,
proceeds of insurance policies insuring the Mortgage Loan or the related
Mortgaged Property.
"Interest Rate Adjustment Date" means with respect to each adjustable
rate Mortgage Loan, the date, specified in the related Mortgage Note and the
Mortgage Loan Schedule, on which the Mortgage Interest Rate is adjusted.
"Loan-to-Value Ratio" or "LTV" means with respect to any Mortgage
Loan, the ratio of the original outstanding principal amount of the Mortgage
Loan to the lesser of (a) the Appraised Value of the Mortgaged Property at
origination or (b) if the Mortgaged Property was purchased within 12 months of
the origination of the Mortgage Loan, the purchase price of the Mortgaged
Property.
"Monthly Payment" means the scheduled monthly payment of principal and
interest on a Mortgage Loan as adjusted in accordance with changes in the
Mortgage Interest Rate pursuant to the provisions of the Mortgage Note for an
adjustable rate Mortgage Loan.
"Mortgage Interest Rate" means the annual rate of interest borne on a
Mortgage Note, which shall be adjusted from time to time with respect to
adjustable rate Mortgage Loans.
"Mortgage Interest Rate Cap" means with respect to an adjustable rate
Mortgage Loan, the limit on each Mortgage Interest Rate adjustment as set forth
in the related Mortgage Note.
"Mortgagee" means the Borrower or any subsequent holder of a Mortgage
Loan.
"Origination Date" shall mean, with respect to each Mortgage Loan, the
date of the Mortgage Note relating to such Mortgage Loan, unless such
information is not provided by the Borrower with respect to such Mortgage Loan,
in which case the Origination Date shall be deemed to be the date that is 40
days prior to the date of the first payment under the Mortgage Note relating to
such Mortgage Loan.
"PMI Policy" or "Primary Insurance Policy" means a policy of primary
mortgage guaranty insurance issued by a Qualified Insurer.
Schedule 1, Page 15
<PAGE> 58
"Qualified Insurer" means an insurance company duly qualified as such
under the laws of the states in which the Mortgaged Property is located, duly
authorized and licensed in such states to transact the applicable insurance
business and to write the insurance provided, and approved as an insurer by FNMA
and FHLMC and whose claims paying ability is rated in the two highest rating
categories by any of the rating agencies with respect to primary mortgage
insurance and in the two highest rating categories by Best's with respect to
hazard and flood insurance.
"Qualified Originator" means an originator of Mortgage Loans
reasonably acceptable to the Lender.
"Servicing File" means with respect to each Mortgage Loan, the file
retained by the Borrower consisting of originals of all documents in the
Mortgage File which are not delivered to a Custodian and copies of the Mortgage
Loan Documents set forth in Section 2 of the Custodial Agreement.
Schedule 1, Page 16
<PAGE> 59
Execution Copy
SCHEDULE 2
FILING JURISDICTIONS AND OFFICES
DISTRICT OF COLUMBIA RECORDER OF DEEDS
<PAGE> 60
EXHIBIT A
[FORM OF AMENDED AND RESTATED PROMISSORY NOTE]
$[_____________] Dated August 21, 1997,
as amended and restated as of October 7, 1998
New York, New York
FOR VALUE RECEIVED, ALLIED CAPITAL CORPORATION, a Maryland
corporation, as a Borrower and BUSINESS MORTGAGE INVESTORS, INC., a Maryland
corporation, as a Borrower (each a "Borrower", collectively, the "Borrowers"),
hereby promise to pay to the order of MORGAN STANLEY MORTGAGE CAPITAL INC. (the
"Lender"), at the principal office of the Lender at 1585 Broadway, New York, New
York, 10036, in lawful money of the United States, and in immediately available
funds, the principal sum of [______________] DOLLARS ($________) (or such lesser
amount as shall equal the aggregate unpaid principal amount of the Loans made by
the Lender to the Borrowers under the Loan Agreement, hereinafter defined) on
the dates and in the principal amounts provided in the Loan Agreement, and to
pay interest on the unpaid principal amount of each such Loan, at such office,
in like money and funds, for the period commencing on the date of such Loan
until such Loan shall be paid in full, at the rates per annum and on the dates
provided in the Loan Agreement.
The date, amount and interest rate of each Loan made by the
Lender to the Borrowers, and each payment made on account of the principal
thereof, shall be recorded by the Lender on its books and, prior to any transfer
of this Note, endorsed by the Lender on the schedule attached hereto or any
continuation thereof; provided, that the failure of the Lender to make any such
recordation or endorsement shall not affect the obligations of the Borrowers to
make a payment when due of any amount owing under the Loan Agreement or
hereunder in respect of the Loans made by the Lender.
This Amended and Restated Promissory Note is the Note referred
to in the Master Loan and Security Agreement dated as of August 21, 1997 as
amended by the Amended and Restated Master Loan and Security Agreement dated as
of October 7, 1998 (as amended, supplemented or otherwise modified and in effect
from time to time, the "Loan Agreement") The Borrowers agree to pay all the
Lender's costs of collection and enforcement (including reasonable attorneys'
fees and disbursements of Lender's counsel) in respect of this Note when
incurred, including, without limitation, reasonable attorneys' fees through
appellate proceedings.
Notwithstanding the pledge of the Collateral, the Borrowers
hereby acknowledge, admit and agree that the Borrowers' obligations under this
Note are recourse obligations of each Borrower (subject to the limitations set
forth below) to which such Borrower pledges its full faith and credit.
The Borrowers, and any indorsers or guarantors hereof, (a)
severally waive diligence, presentment, protest and demand and also notice of
protest, demand, dishonor and nonpayments of this Note, (b) expressly agree that
this Note, or any payment hereunder, may be extended from time to time, and
consent to the acceptance of further Collateral, the release of any Collateral
for this Note, the release of any party primarily or secondarily liable hereon,
and (c) expressly agree that it will not be necessary for the Lender, in order
to enforce payment of this Note, to first institute or exhaust the Lender's
remedies against the Borrowers or any other party liable hereon or against any
Collateral for
<PAGE> 61
this Note. No extension of time for the payment of this Note, or any installment
hereof, made by agreement by the Lender with any person now or hereafter liable
for the payment of this Note, shall affect the liability under this Note of the
Borrowers, even if the Borrowers are not a party to such agreement; provided,
however, that the Lender and the Borrowers, by written agreement among them, may
affect the liability of the Borrowers.
Any reference herein to the Lender shall be deemed to include
and apply to every subsequent holder of this Note. Reference is made to the Loan
Agreement for provisions concerning optional and mandatory prepayments,
Collateral, acceleration and other material terms affecting this Note.
This Amended and Restated Promissory Note amends and restates
in its entirety the Promissory Note dated August 21, 1997 (the "Existing
Promissory Note") and is given as a continuation, rearrangement and extension,
and not a novation, release or satisfaction, of the Existing Promissory Note.
The Borrowers hereby acknowledge and agree that simultaneously with the
Borrowers' execution and delivery of this Amended and Restated Promissory Note
to the Lender, the Lender has delivered to the Borrowers the Existing Promissory
Note.
Allied hereby acknowledges and agrees that it shall be jointly
and severally liable for all representations, warranties, covenants, obligations
and indemnities of the Borrowers hereunder. Business Mortgage Investors, Inc.
hereby acknowledges and agrees that it shall be liable for all representations,
warranties, covenants, obligations and indemnities of the Borrowers hereunder
only to the extent of its pro rata portion of the Secured Obligations.
THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED UNDER THE LAWS OF
THE STATE OF NEW YORK (WITHOUT REFERENCE TO CHOICE OF LAW DOCTRINE) WHOSE LAWS
THE BORROWERS EXPRESSLY ELECT TO APPLY TO THIS NOTE. THE BORROWERS AGREE THAT
ANY ACTION OR PROCEEDING BROUGHT TO ENFORCE OR ARISING OUT OF THIS NOTE MAY BE
COMMENCED IN THE SUPREME COURT OF THE STATE OF NEW YORK, BOROUGH OF MANHATTAN,
OR IN THE DISTRICT COURT OF THE UNITED STATES FOR THE SOUTHERN DISTRICT OF NEW
YORK.
ALLIED CAPITAL CORPORATION
By:
--------------------------------------
Name:
Title:
BUSINESS MORTGAGE INVESTORS, INC.
By:
--------------------------------------
Name:
Title
A-2
<PAGE> 62
SCHEDULE OF LOANS
This Note evidences Loans made under the within-described Loan
Agreement to the Borrower, on the dates, in the principal amounts and bearing
interest at the rates set forth below, and subject to the payments and
prepayments of principal set forth below:
<TABLE>
<CAPTION>
UNCOMMITTED
LOAN (U) OR PRINCIPAL
COMMITTED AMOUNT AMOUNT PAID UNPAID PRINCIPAL NOTATION
DATE MADE LOAN (C) OF LOAN INTEREST RATE OR PREPAID AMOUNT MADE BY
- --------- ----------- --------- ------------- ---------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
</TABLE>
A-3
<PAGE> 63
EXHIBIT B
AMENDED AND RESTATED CUSTODIAL AGREEMENT]
<PAGE> 64
EXHIBIT C
OPINION OF COUNSEL TO BORROWERS
(date)
Morgan Stanley Mortgage Capital Inc.
1585 Broadway
New York, New York 10036
Dear Sirs and Mesdames:
You have requested [our] [my] opinion, as counsel to ALLIED CAPITAL
CORPORATION ("Allied") a Maryland corporation, as a Borrower and BUSINESS
MORTGAGE INVESTORS, INC., ("BMI") a Maryland corporation (each a "Borrower"
collectively, the "Borrowers"), with respect to certain matters in connection
with that certain Amended and Restated Master Loan and Security Agreement, dated
as of October 7, 1998 (the "Loan and Security Agreement"), by and between the
Borrower and Morgan Stanley Mortgage Capital Inc. (the "Lender"), being executed
contemporaneously with an Amended and Restated Promissory Note dated October __,
1998 from the Borrower to the Lender (the "Note"), and an Amended and Restated
Custodial Agreement, dated as of October __, 1998 (the "Custodial Agreement"),
by and among the Borrower, LaSalle National Bank (the "Custodian"), and the
Lender. Capitalized terms not otherwise defined herein have the meanings set
forth in the Loan and Security Agreement.
[We] [I] have examined the following documents:
1. the Loan and Security Agreement;
2. the Note;
3. Custodial Agreement;
4. unfiled copies of the financing statements listed on
Schedule 1 (collectively, the "Financing Statements") naming
the Borrower as Debtor and the Lender as Secured Party and
describing the Collateral (as defined in the Loan and
Security Agreement) as to which security interests may be
perfected by filing under the Uniform Commercial Code of the
States listed on Schedule 1 (the "Filing Collateral"), which
I understand will be filed in the filing offices listed on
Schedule 1 (the "Filing Offices");
5. the reports listed on Schedule 2 as to UCC financing
statements (collectively, the "UCC Search Report"); and
6. such other documents, records and papers as we have deemed
necessary and relevant as a basis for this opinion.
To the extent [we] [I] have deemed necessary and proper, [we] [I] have
relied upon the representations and warranties of the Borrower contained in the
Loan and Security Agreement. [We]
<PAGE> 65
[I] have assumed the authenticity of all documents submitted to me as originals,
the genuineness of all signatures, the legal capacity of natural persons and the
conformity to the originals of all documents.
Based upon the foregoing, it is [our] [my] opinion that:
1. Allied is a Maryland corporation duly organized, validly existing
and in good standing under the laws of Maryland and is qualified to transact
business in, and is in good standing under, the laws of the state of Maryland.
BMI is a Maryland corporation duly organized, validly existing and
in good standing under the laws of Maryland and is qualified to transact
business in, and is in good standing under, the laws of the state of Maryland.
2. Each Borrower has the corporate power to engage in the transactions
contemplated by the Loan and Security Agreement, the Note, and the Custodial
Agreement and all requisite corporate power, authority and legal right to
execute and deliver the Loan and Security Agreement, the Note, and the Custodial
Agreement and observe the terms and conditions of such instruments. Each
Borrower has all requisite corporate power to borrow under the Loan and Security
Agreement and to grant a security interest in the Collateral pursuant to the
Loan and Security Agreement.
3. The execution, delivery and performance by each Borrower of the
Loan and Security Agreement, the Note, and the Custodial Agreement, and the
borrowings by such Borrower and the pledge of the Collateral under the Loan and
Security Agreement have been duly authorized by all necessary corporate action
on the part of such Borrower. Each of the Loan and Security Agreement, the Note
and the Custodial Agreement have been executed and delivered by each Borrower
and are legal, valid and binding agreements enforceable in accordance with their
respective terms against the Borrower, subject to bankruptcy laws and other
similar laws of general application affecting rights of creditors and subject to
the application of the rules of equity, including those respecting the
availability of specific performance, none of which will materially interfere
with the practical realization of the benefits provided thereunder or with the
Lender's security interest in the Mortgage Loans.
4. No consent, approval, authorization or order of, and no filing or
registration with, any court or governmental agency or regulatory body is
required on the part of any Borrower for the execution, delivery or performance
by each Borrower of the Loan and Security Agreement, the Note and the Custodial
Agreement or for the borrowings by each Borrower under the Loan and Security
Agreement or the granting of a security interest to the Lender in the
Collateral, pursuant to the Loan and Security Agreement.
5. The execution, delivery and performance by each Borrower of, and
the consummation of the transactions contemplated by, the Loan and Security
Agreement, the Note and the Custodial Agreement do not and will not (a) violate
any provision of such Borrower's charter or by-laws, (b) violate any applicable
law, rule or regulation, (c) to the best of our knowledge violate any order,
writ, injunction or decree of any court or governmental authority or agency or
any arbitral award applicable to such Borrower of or (d) to the best of our
knowledge result in a breach of or constitute a default under any agreement or
instrument to which such Borrower is a party or by which it is bound or to which
it is subject, or (except for the Liens created pursuant to the Loan and
Security Agreement) result in the creation or imposition of any Lien upon any
Property of such Borrower pursuant to the terms of any such agreement or
instrument.
6. There is no action, suit, proceeding or investigation pending or,
to the best of [our] [my] knowledge, threatened against either Borrower which,
in [our] [my] judgment, either in any one instance or in the aggregate, would be
reasonably likely to result in any material adverse change in
C-2
<PAGE> 66
the properties, business or financial condition, or prospects of either Borrower
or in any material impairment of the right or ability of either Borrower to
carry on its business substantially as now conducted or in any material
liability on the part of any Borrower or which would draw into question the
validity of the Loan and Security Agreement, the Note, the Custodial Agreement
or the Mortgage Loans or of any action taken or to be taken in connection with
the transactions contemplated thereby, or which would be reasonably likely to
impair materially the ability of either Borrower to perform under the terms of
the Loan and Security Agreement, the Note, the Custodial Agreement or the
Mortgage Loans.
7. The Loan and Security Agreement is effective to create, in favor of
the Lender, a valid security interest under the Uniform Commercial Code in all
of the right, title and interest of the Borrowers in, to and under the
Collateral as collateral security for the payment of the Secured Obligations (as
defined in the Loan and Security Agreement), except that (a) such security
interests will continue in Collateral after its sale, exchange or other
disposition only to the extent provided in Section 9-306 of the Uniform
Commercial Code, (b) the security interests in Collateral in which the Borrower
acquires rights after the commencement of a case under the Bankruptcy Code in
respect of the Borrower may be limited by Section 552 of the Bankruptcy Code.
8. When the Mortgage Notes are delivered to the Custodian, endorsed in
blank by a duly authorized officer of the Borrowers, the security interest
referred to in paragraph 7 above in the Mortgage Notes will constitute a fully
perfected first priority security interest in all right, title and interest of
the Borrowers therein, in the Mortgage Loan evidenced thereby and in the
Borrowers' interest in the related Mortgaged Property.
9. (a) Upon the filing of financing statements on Form UCC-1 naming
the Lender as "Secured Party" and the Borrower as "Debtor", and describing the
Collateral, in the jurisdictions and recording offices listed on Schedule 1
attached hereto, the security interests referred to in paragraph 7 above (except
with respect to the Mortgage Notes) will constitute fully perfected security
interests under the Uniform Commercial Code in all right, title and interest of
the Borrower in, to and under such Collateral, which can be perfected by filing
under the Uniform Commercial Code.
(b) The UCC Search Report sets forth the proper filing offices and the
proper debtors necessary to identify those Persons who have on file in the
jurisdictions listed on Schedule 1 financing statements covering the Filing
Collateral as of the dates and times specified on Schedule 2. Except for the
matters listed on Schedule 2, the UCC Search Report identifies no Person who has
filed in any Filing Office a financing statement describing the Filing
Collateral prior to the effective dates of the UCC Search Report.
10. The Assignments of Mortgage are in recordable form, except for the
insertion of the name of the assignee, and upon the name of the assignee being
inserted, are acceptable for recording under the laws of the state where each
related Mortgaged Property is located.
Very truly yours,
C-3
<PAGE> 67
EXHIBIT D
FORM OF REQUEST FOR BORROWING
Amended and Restated Master Loan and Security Agreement, dated as of
October __, 1998 (the "Loan and Security Agreement"), by and between
Life Bank and Morgan Stanley Mortgage Capital Inc. (the "Lender"),
Lender: Morgan Stanley Mortgage Capital Inc.
Borrower: [ALLIED CAPITAL CORPORATION]
[BUSINESS MORTGAGE INVESTORS, INC.]
Requested Fund Date: _____________________________________
Transmission Date: _____________________________________
Transmission Time:
Type of Funding:
(Wet or Dry) _____________________________________
Number of Mortgage
Loans to be Pledged: _____________________________________
UPB: $____________________________________
Requested Wire Amount: $____________________________________
Wire Instructions:
Requested by:
[ALLIED CAPITAL CORPORATION]
[BUSINESS MORTGAGE INVESTORS, INC.]
By:________________________________
Name:
Title:
D-1
<PAGE> 68
EXHIBIT E-1
FORM OF BORROWER'S RELEASE LETTER
[Date]
Morgan Stanley Mortgage Capital Inc.
1585 Broadway
New York, New York 10036
Attention: ____________________
Facsimile: ____________________
Re: Amended and Restated Master Loan and Security Agreement, dated
as of October __, 1998 (the "Loan and Security Agreement"), by
and among ALLIED CAPITAL CORPORATION and Business Mortgage
Investors, Inc. as a Borrower (each a "Borrower", collectively,
the "Borrowers") and Morgan Stanley Mortgage Capital Inc. (the
"Lender")
Ladies and Gentlemen:
With respect to the mortgage loans described in the attached
Schedule A (the "Mortgage Loans") (a) we hereby certify to you that the Mortgage
Loans are not subject to a lien of any third party and (b) we hereby release all
right, interest or claim of any kind with respect to such Mortgage Loans, such
release to be effective automatically without further action by any party upon
payment from Morgan Stanley Mortgage Capital Inc., of the amount of the Loan
contemplated under the Loan and Security Agreement (calculated in accordance
with the terms thereof) in accordance with the wiring instructions set forth in
the Loan and Security Agreement.
Very truly yours,
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
1
<PAGE> 69
EXHIBIT E-2
FORM OF WAREHOUSE LENDER'S RELEASE LETTER
(Date)
Morgan Stanley Mortgage Capital Inc.
1585 Broadway
New York, New York 10036
Attention: ________________
Facsimile: ________________
Re: Certain Mortgage Loans Identified on Schedule A hereto and owned
by Allied Capital Corporation.
The undersigned hereby releases all right, interest, lien or claim of
any kind with respect to the mortgage loan(s) described in the attached Schedule
A, such release to be effective automatically without any further action by any
party upon payment in one or more installments, in immediately available funds
of $__________________, in accordance with the following wire instructions:
------------------------
------------------------
Very truly yours,
[WAREHOUSE LENDER]
By:
-----------------------------
Name:
---------------------------
Title:
--------------------------
1
<PAGE> 70
EXHIBIT F
UNDERWRITING GUIDELINES
[Stored as Separate Document]
1
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ALLIED
CAPITAL CORPORATION AND SUBSIDIARIES' CONSOLIDATED BALANCE SHEET AND
CONSOLIDATED STATEMENTS OF OPERATIONS, CHANGES IN NET ASSETS AND CASH FLOWS AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
INCORPORATED BY REFERENCE IN FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 739,858
<INVESTMENTS-AT-VALUE> 737,872
<RECEIVABLES> 0
<ASSETS-OTHER> 31,997
<OTHER-ITEMS-ASSETS> 43,622
<TOTAL-ASSETS> 815,477
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 291,650
<OTHER-ITEMS-LIABILITIES> 70,000
<TOTAL-LIABILITIES> 389,762
<SENIOR-EQUITY> 5
<PAID-IN-CAPITAL-COMMON> 456,332
<SHARES-COMMON-STOCK> 51,490
<SHARES-COMMON-PRIOR> 52,047
<ACCUMULATED-NII-CURRENT> 4,845
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 864
<NET-ASSETS> 418,715
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 58,428
<OTHER-INCOME> 22,336
<EXPENSES-NET> 37,295
<NET-INVESTMENT-INCOME> 43,469
<REALIZED-GAINS-CURRENT> 20,001
<APPREC-INCREASE-CURRENT> (437)
<NET-CHANGE-FROM-OPS> 61,448
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 54,892
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 10
<NUMBER-OF-SHARES-REDEEMED> 808
<SHARES-REINVESTED> 177
<NET-CHANGE-IN-ASSETS> (1,345)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 2,679
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,125
<INTEREST-EXPENSE> 14,539
<GROSS-EXPENSE> 37,295
<AVERAGE-NET-ASSETS> 419,388
<PER-SHARE-NAV-BEGIN> 8.07
<PER-SHARE-NII> 0.84
<PER-SHARE-GAIN-APPREC> 0.38
<PER-SHARE-DIVIDEND> 1.06
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 8.13
<EXPENSE-RATIO> 0.12
<AVG-DEBT-OUTSTANDING> 354,657
<AVG-DEBT-PER-SHARE> 6.89
</TABLE>
